Filed pursuant to Rule 424(b)(5)
Registration Statement No.: 333-277271
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 22, 2024)
TWO HARBORS INVESTMENT CORP.
15,000,000 Shares
Common Stock
On July 30, 2024,
we amended our equity distribution agreement with Citizens JMP Securities, LLC, which we refer to as the sales agent,
relating to shares of our common stock offered by this prospectus supplement. In accordance with the terms of the amended equity distribution
agreement, we may offer and sell up to 15,000,000 shares of our common stock from time to time through the sales agent.
Our common stock is listed on
the New York Stock Exchange, or NYSE, under the symbol “TWO.” The closing price of our common stock on the NYSE on July 29,
2024 was $13.68 per share.
Sales of shares of our common
stock, if any, under this prospectus supplement may be made in negotiated transactions or transactions that are deemed to be “at
the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on
the NYSE or sales made to or through a market maker other than on an exchange. The sales agent will make all sales using commercially
reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between the sales agent and us.
The sales agent will be entitled
to total compensation of up to 2% of the gross proceeds from the sale of the shares of common stock sold under the equity distribution
agreement, as further described herein under the caption “Plan of Distribution.” In connection with the sale of shares of
common stock on our behalf, the sales agent may be deemed to be an “underwriter” within the meaning of the Securities Act
of 1933, as amended, and the compensation of the sales agent may be deemed to be underwriting commissions or discounts.
We have elected to be taxed
as a real estate investment trust, or REIT, for U.S. federal income tax purposes. To assist us in qualifying as a REIT, among other purposes,
ownership of shares of our common stock by any person is limited, with certain exceptions, to 9.8% by value or by number of shares, whichever
is more restrictive, of the outstanding shares of our common stock and 9.8% by value or by number of shares, whichever is more restrictive,
of the aggregate of the outstanding shares of our capital stock. In addition, our charter contains various other restrictions on the
ownership and transfer of our stock.
Investing in our common stock
involves certain risks. See “Risk Factors” beginning on page S-5 of this prospectus supplement and in the reports
we file with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, incorporated by reference in this
prospectus supplement and the accompanying prospectus, to read about factors you should consider before making an investment in our common
stock.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement
or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Citizens JMP
The date of this prospectus supplement is July 30,
2024
TABLE OF CONTENTS
You should rely only on the
information contained in or incorporated by reference in this prospectus supplement, the accompanying prospectus, or any free writing
prospectus that we may provide you. Neither we nor the sales agent have authorized anyone to provide you with information that is different.
None of this prospectus supplement, the accompanying prospectus or any free writing prospectus we may provide you constitutes, or may
be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this prospectus supplement,
the accompanying prospectus or any free writing prospectus we may provide you by any person in any jurisdiction in which it is unlawful
for such person to make such an offer or solicitation. The information in this prospectus supplement, the accompanying prospectus, any
free writing prospectus, and the documents incorporated by reference is accurate only as of their respective dates.
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement and
the accompanying prospectus are part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission,
or SEC, using a “shelf” registration process. This prospectus supplement is a supplement to the accompanying prospectus that
is also a part of this document. In the accompanying prospectus, we provide you with a general description of the securities we may offer
from time to time under our shelf registration statement. This prospectus supplement contains specific information about us and the terms
on which we are offering and selling shares of our common stock pursuant to the equity distribution agreement. Both this prospectus supplement
and the accompanying prospectus include or incorporate by reference important information about us, our common stock, our debt securities
and other information you should know before investing. This prospectus supplement also adds, updates, and changes information contained
in the accompanying prospectus. To the extent that any statement made in this prospectus supplement is inconsistent with statements made
in the accompanying prospectus, the statements made in the accompanying prospectus will be deemed modified or superseded by those made
in this prospectus supplement. Before you purchase shares of our common stock, you should carefully read this prospectus supplement,
the accompanying prospectus and the registration statement, together with the documents incorporated by reference in this prospectus
supplement and the accompanying prospectus.
When used in this prospectus
supplement, the terms “Two Harbors,” “company,” “issuer,” “registrant,” “our,”
and “us” refer to Two Harbors Investment Corp. and its consolidated subsidiaries, unless otherwise specified.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement,
the accompanying prospectus and the documents incorporated herein or therein, contain not only historical information, but also forward-looking
statements 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, or the Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking
statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections
and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements
are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,”
“should,” “expect,” “target,” “believe,” “intend,” “seek,” “plan,”
“goals,” “future,” “likely,” “may,” and similar expressions or their negative forms,
or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including,
among other things, the information referred to in this prospectus supplement under the caption “Risk Factors.” Other risks,
uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described
from time to time in reports we file with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, as well as in the other information contained or incorporated by reference in this prospectus supplement
and the accompanying prospectus. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to
update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.
Important factors, among others,
that may affect our actual results include:
| · | changes
in interest rates and the market value of our target assets; |
| · | changes
in prepayment rates of mortgages underlying our target assets; |
| · | the
state of the credit markets and other general economic conditions, particularly as they affect
the price of earning assets, the credit status of borrowers and home prices; |
| · | legislative
and regulatory actions affecting our business; |
| · | the
availability and cost of our target assets; |
| · | the
availability and cost of financing for our target assets, including repurchase agreement
financing, revolving credit facilities and convertible notes; |
| · | the
impact of any increases in payment delinquencies and defaults on the mortgages comprising
and underlying our target assets, including additional servicing costs and servicing advance
obligations on the MSR assets we own; |
| · | changes
in liquidity in the market for real estate securities, the re-pricing of credit risk in the
capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades
of securities, and increases in the supply of real estate securities available-for-sale; |
| · | changes
in the values of securities we own and the impact of adjustments reflecting those changes
on our consolidated statements of comprehensive income (loss) and balance sheets, including
our stockholders’ equity; |
| · | our
ability to generate cash flow from our target assets; |
| · | our
ability to effectively execute and realize the benefits of strategic transactions and initiatives
we have pursued or may in the future pursue; |
| · | our
ability to recognize the benefits of our acquisition of RoundPoint Mortgage Servicing LLC
and to manage the risks associated with operating a mortgage loan servicer and originator; |
| · | our
decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation
related to such termination; |
| · | changes
in the competitive landscape within our industry, including changes that may affect our ability
to attract and retain personnel; |
| · | our
exposure to legal and regulatory claims, penalties or enforcement activities, including those
arising from our ownership and management of MSR and prior securitization transactions; |
| · | our
exposure to counterparties involved in our MSR business and prior securitization transactions
and our ability to enforce representations and warranties made by them; |
| · | our
ability to acquire MSR and successfully operate our seller-servicer subsidiaries; |
| · | our
ability to manage various operational and regulatory risks associated with our business; |
| · | interruptions
in or impairments to our communications and information technology systems; |
| · | our
ability to maintain appropriate internal controls over financial reporting; |
| · | our
ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; |
| · | our
ability to maintain our REIT qualification for U.S. federal income tax purposes; and |
| · | limitations
imposed on our business due to our REIT status and our status as exempt from registration
under the 1940 Act. |
All forward-looking statements
included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations
to update these forward-looking statements to reflect events or circumstances after the date of this prospectus supplement or to reflect
the occurrence of unanticipated events. Before you make an investment decision, you should be aware that the occurrence of the events
described in the “Risk Factors” section and elsewhere in this prospectus supplement, the accompanying prospectus and the
documents incorporated herein or therein by reference, may adversely affect us.
RISK FACTORS
An investment in shares of
our common stock involves a high degree of risk. You should consider carefully the following risk factors and the risk factors included
in our 2023 Annual Report on Form 10-K and other information that we file from time to time with the SEC. Such risks are not the
only risks we face. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial, also may become important
factors that affect us. If any of these risks occurs, our business, financial condition or results of operations could be materially
and adversely affected. In that case, the value of your investment could decline.
Risks Related to the Securities of Two Harbors
Future issuances and sales of shares of our
common stock may depress the market price of our common stock or have adverse consequences for our stockholders.
We have 175,000,000 authorized
shares of common stock and we may increase our authorized common stock without stockholder approval. As of July 26, 2024, 103,622,787
shares of common stock were issued and outstanding. Our 2021 Equity Incentive Plan (the “Plan”) was adopted by our board
of directors and approved by our stockholders for the purpose of enabling the company to provide equity compensation to attract and retain
qualified directors, officers, advisers, consultants and other personnel. As of July 26, 2024, an aggregate of 3,593,160 shares
of common stock remained available for issuance pursuant to the Plan. Additionally, shares of our common stock have also been reserved
for issuance in connection with the conversion of our 6.25% convertible senior notes due January 2026, our 8.125% Series A
Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, our 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred
Stock, and our 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock.
We cannot predict the effect,
if any, of future issuances or sales of our common stock on the market price of our common stock. We also cannot predict the amounts
and timing of restricted and other stock-based awards to be issued pursuant to our benefit plans, nor can we predict the amount and timing
of any conversions of our convertible notes or our preferred stock into shares of our common stock. Any stock awards or conversions resulting
in the issuance of substantial amounts of common stock, or the perception that such awards or conversions could occur, may adversely
affect the market price for our common stock.
Also, we may issue additional
shares in subsequent public offerings or private placements to acquire new assets or for other purposes. We are not required to offer
any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate
in such future share issuances, which may dilute the existing stockholders’ interests.
Any future offerings of our securities could
dilute our existing stockholders and may rank senior for purposes of dividend and liquidating distributions.
In order to grow our business,
we may rely on additional issuances of securities which may rank senior and/or be dilutive to our stockholders. For example, we have
issued preferred stock and convertible notes. Any election by holders of our convertible notes to convert their notes into shares of
our common stock will dilute the interests of other stockholders. In addition, our outstanding preferred stock is convertible into our
common stock in certain circumstances. In addition, upon liquidation, holders of our debt securities and any other senior preferred stock
would receive a distribution of our available assets before holders of our common shares.
In the future, we may again
elect to raise capital through the issuance of convertible or non-convertible debt or equity securities. Upon liquidation, holders of
our debt securities and preferred stock, if any, and lenders with respect to other borrowings will be entitled to our available assets
prior to the holders of our common stock. Convertible debt and convertible preferred stock may have anti-dilution provisions which are
unfavorable to our common stockholders. Additional equity offerings, including offerings through our at-the-market offering program,
may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Any preferred stock, if
issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay
dividends to our stockholders or favorable conversion rights. Sales of substantial amounts of our common stock or the sale of securities
which have rights and preferences that are superior to our common stock, or the perception that these sales could occur, may have a material
adverse effect on the price of our common stock. 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, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting the
value of their holdings.
We have not established a minimum distribution
payment level and we cannot assure you of our ability to pay distributions in the future.
We intend to continue to pay
quarterly distributions and to make distributions to our stockholders in an amount such that we distribute all or substantially all of
our REIT taxable income in each year, subject to certain adjustments. We have not established a minimum distribution payment level and
our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described or incorporated
by reference herein. All distributions will be made, subject to Maryland law, at the discretion of our board of directors and will depend
on our earnings, our financial condition, any debt covenants, maintenance of our REIT qualification and other factors as our board of
directors may deem relevant from time to time. We cannot assure you that we will achieve results that will allow us to make a specified
level of cash distributions and distributions in future periods may be lower than in prior quarterly periods.
The market price of our common stock could
fluctuate and could cause you to lose a significant part of your investment.
The market price of our common
stock may be highly volatile and subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. The stock market has experienced and may in the future experience extreme price and volume
fluctuations affecting the market price of many companies in industries similar or related to ours and that have been unrelated to these
companies’ operating performances. If the market price of our common stock declines significantly, you may be unable to resell
your shares of our common stock at a gain. Further, fluctuations in the trading price of our common stock may adversely affect the liquidity
of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability
to raise such equity capital. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly
in the future.
The market price of our common
stock may be influenced by many factors, some of which are beyond our control, including those described above and the following:
| · | changes
in financial estimates by analysts; |
| · | fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived
to be similar to us; |
| · | general
economic conditions; |
| · | changes
in market valuations of similar companies; |
| · | regulatory
developments in the United States; and |
| · | additions
or departures of key personnel. |
Resulting fluctuations in the
market price of our common stock could cause you to lose a significant part of your investment.
The market price for our common
stock has varied between a high of $14.59 and a low of $9.83 in the twelve-month period ending on July 26, 2024. This volatility
may affect the price at which you could sell your common stock.
The allocation of the net proceeds
of this offering among our target assets, and the timing of the deployment of these proceeds is subject to, among other things, then
prevailing market conditions and the availability of target assets.
Our allocation of the net proceeds
of this offering among our target assets is subject to our investment guidelines and our REIT qualification. Management will make determinations
as to the percentage of the net proceeds of this offering that will be invested in each of our target assets and the timing of the deployment
of the net proceeds of this offering. These determinations will depend on then prevailing market conditions and may change over time
in response to opportunities available in different interest rate, economic and credit environments. Until appropriate assets can be
identified, management may decide to use the net proceeds of this offering to pay down our short-term debt or to invest the net proceeds
in interest-bearing short-term investments, including funds which are consistent with our REIT election. These investments are expected
to provide a lower net return than we seek to achieve from our target assets. Prior to the time we have fully used the net proceeds of
this offering to acquire our target assets, we may fund our quarterly dividends out of such net proceeds.
USE OF PROCEEDS
We intend to use the net proceeds received from
the sale of the securities offered by this prospectus for general corporate purposes. General corporate purposes may include the purchase
of our target assets, including MSR, Agency RMBS and other financial assets, in each case subject to our investment guidelines, and to
the extent consistent with maintaining our REIT qualification, the refinancing or repayment of debt, the repurchase or redemption of
our common and preferred equity securities, and other capital expenditures.
PLAN OF DISTRIBUTION
We have entered into an equity
distribution agreement with Citizens JMP Securities, LLC, which we refer to as the sales agent, relating to shares of our common stock
offered by this prospectus supplement. Upon its acceptance of written instructions from us, the sales agent will use its commercially
reasonable efforts consistent with its sales and trading practices to solicit offers to purchase shares of our common stock, under the
terms and subject to the conditions set forth in the equity distribution agreement. We will instruct the sales agent as to the amount
of common stock to be sold by it. We may instruct a sales agent not to sell common stock if the sales cannot be effected at or above
the price designated by us in any instruction. We or the sales agent may suspend the offering of common stock upon proper notice and
subject to other conditions.
The sales agent will provide
written confirmation to us no later than the opening of the trading day on the New York Stock Exchange following the trading day in which
shares of our common stock are sold under the equity distribution agreement. Each confirmation will include the number of shares sold
on the preceding day, the net proceeds to us and the compensation payable by us to the sales agent in connection with the sales.
We will pay the sales agent
commissions for its services in acting as agent in the sale of common stock. The aggregate compensation payable by us to the sales agent
may be up to 2% of the gross proceeds from such sales. The sales agent has agreed to reimburse us for certain expenses.
We estimate that the total expenses
for the offering, excluding compensation payable to the sales agent under the terms of the equity distribution agreement, will be approximately
$150,000.
Settlement for sales of common
stock will occur on the second trading day following the date on which any sales are made, or on some other date that is agreed upon
by us and a sales agent in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement
for funds to be received in an escrow, trust or similar arrangement.
We will report at least quarterly
the number of shares of common stock sold through the sales agent under the equity distribution agreement, the net proceeds to us and
the compensation paid or payable by us to the sales agent in connection with the sale of common stock.
The sales agent and its affiliates
have provided, and may in the future provide, various investment banking and advisory services for us from time to time for which they
have received, and may in the future receive, customary fees and expenses. The sales agent and its affiliates may from time to time engage
in other transactions with and perform services for us in the ordinary course of business.
In connection with the sale
of the common stock on our behalf, the sales agent may be deemed to be an “underwriter” within the meaning of the Securities
Act, and the compensation of the sales agent may be deemed to be underwriting commissions or discounts. We have agreed to indemnify the
sales agent against specified liabilities, including liabilities under the Securities Act, or to contribute to payments that the sales
agent may be required to make because of those liabilities.
The offering of shares of our
common stock pursuant to the equity distribution agreement will terminate upon the earlier of (1) the sale of all common stock subject
to the equity distribution agreement or (2) termination of the equity distribution agreement. The equity distribution agreement
may be terminated by the sales agent or us at any time upon one day’s notice to the other party, or by the sales agent at any time
in certain circumstances.
LEGAL MATTERS
Certain legal matters relating
to this offering will be passed upon for us by Stinson LLP, Minneapolis, Minnesota. Certain legal matters in connection with this offering
will also be passed upon for us by Sidley Austin LLP, New York, New York, including the qualification of our company as a REIT for U.S.
federal income tax purposes. Certain legal matters relating to this offering will be passed upon for the sales agent by Ropes &
Gray LLP.
EXPERTS
The consolidated financial statements
of Two Harbors incorporated by reference in Two Harbors’ Annual Report (Form 10-K) for the year ended December 31, 2023
and the effectiveness of Two Harbors’ internal control over financial reporting as of December 31, 2023 have been audited
by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein,
and incorporated herein by reference. Such consolidated financial statements as of December 31, 2023 are incorporated herein by
reference in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a
registration statement on Form S-3 under the Securities Act with respect to the securities offered by this prospectus supplement.
As allowed by SEC rules, this prospectus supplement does not contain all of the information set forth in the registration statement and
the exhibits thereto. We refer you to the registration statement and the exhibits thereto for further information. This prospectus supplement
is qualified in its entirety by such other information.
We file annual, quarterly and
current reports, proxy statements and other information with the SEC. Our SEC filings, including the registration statement of which
this prospectus supplement and the accompanying prospectus forms a part, are available to you via our website on the Internet with the
address of www.twoharborsinvestment.com where you can also find additional information. All internet addresses provided in this prospectus
supplement or the accompanying prospectus are for information purposes only and are not intended to be hyperlinks. We are not incorporating
by reference into this prospectus supplement or the accompanying prospectus the information on our website or any other website, and
you should not consider our website or any other website to be a part of this prospectus supplement, the accompanying prospectus, or
other offering materials.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC’s rules allow
us to “incorporate by reference” information into this prospectus supplement and the accompanying prospectus, which means
that we can disclose important information to you by referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus supplement and the accompanying prospectus from the date of filing
those documents. Any reports filed by us with the SEC on or after the date of this prospectus supplement will automatically update and,
where applicable, supersede any information contained in this prospectus supplement, the accompanying prospectus or in the documents
listed below that are incorporated by reference. We have filed the documents listed below with the SEC under the Exchange Act and these
documents are incorporated herein by reference (other than information in such documents that is furnished and not deemed to be filed):
| · | The
information specifically incorporated by reference into our Annual Report on Form 10-K
for the year ended December 31, 2023 from our Definitive Proxy Statement on Schedule 14A filed with the SEC on April 3, 2024; |
| · | The
description of our common stock included in our Registration Statement on Form 8-A filed
on February 10, 2011, as amended by the Form 8-A/A filed on November 2, 2017,
as further amended by the Form 8-A/A filed on November 2, 2022; |
All documents we file (but not
furnish) pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this prospectus supplement and
prior to the termination of the offering of the securities to which this prospectus supplement relates (other than information in such
documents that is furnished and not deemed to be filed) shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the date of filing of those documents.
We will provide to each person,
including any beneficial owner, to whom a copy of this prospectus supplement is delivered, a copy of any or all of the information that
has been incorporated by reference in this prospectus supplement but not delivered with this prospectus supplement (other than the exhibits
to such documents which are not specifically incorporated by reference therein); we will provide this information at no cost to the requester
upon written or oral request to: Secretary, Two Harbors Investment Corp., 1601 Utica Avenue South, Suite 900, St. Louis Park, MN,
55416, (612) 453-4100.
PROSPECTUS
TWO HARBORS INVESTMENT CORP.
Common Stock
Preferred Stock
Depositary Shares
Debt Securities
We may offer, issue and sell,
from time to time, shares of our common stock, preferred stock, depositary shares and debt securities, which may consist of debentures,
notes, or other types of debt, in one or more offerings. We will provide specific terms of each issuance of these securities in supplements
to this prospectus. We may offer and sell these securities to or through one or more underwriters, dealers and agents, or directly to
purchasers, on a continuous or delayed basis. In addition, selling securityholders may sell these securities, from time to time, on terms
described in the applicable prospectus supplement. You should read this prospectus and any supplement carefully before you decide to
invest. This prospectus may not be used to consummate sales of these securities unless it is accompanied by a prospectus supplement.
Our common stock is listed on the New York
Stock Exchange, or NYSE, under the symbol “TWO.”
We have elected to be taxed as
a real estate investment trust, or REIT, for U.S. federal income tax purposes. To assist us in qualifying as a REIT, among other purposes,
ownership of shares of our common stock by any person is limited, with certain exceptions, to 9.8% by value or by number of shares, whichever
is more restrictive, of the outstanding shares of our common stock and 9.8% by value or by number of shares, whichever is more restrictive,
of the aggregate of the outstanding shares of our capital stock. In addition, our charter contains various other restrictions on the
ownership and transfer of our stock.
Our principal office is located
at 1601 Utica Avenue South, Suite 900, St. Louis Park, MN 55416. Our telephone number is (612) 453-4100.
Investing in our securities
involves risk. You should carefully consider the information referred to under the caption “Risk Factors” on page 5
before you invest.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus
is truthful or complete. Any representation to the contrary is a criminal offense.
The date
of this prospectus is February 22, 2024
TABLE OF CONTENTS
You should rely only on the
information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information
that is different. This document may only be used where it is legal to sell these securities. The information in this document may only
be accurate on the date of this document.
ABOUT THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities and Exchange Commission, or SEC or Commission, using
a “shelf” registration process. Under this shelf registration process, we may sell the securities described in this prospectus
in one or more offerings. This prospectus provides you with a general description of the securities we may offer. Each time we offer
to sell securities, we will provide a supplement to this prospectus that will contain specific information about the terms of that offering.
The prospectus supplement may also add, update or change information contained in this prospectus. It is important for you to consider
the information contained in this prospectus and any prospectus supplement together with additional information described under the heading
“Where You Can Find More Information.”
You should rely only on the information
incorporated by reference or set forth in this prospectus or the applicable prospectus supplement. We have not authorized anyone else
to provide you with additional or different information. You should not assume that the information in this prospectus, the applicable
prospectus supplement or any other offering material is accurate as of any date other than the dates on the front of those documents.
When used in this prospectus,
the terms “Two Harbors,” “company,” “issuer,” “registrant,” “we,” “our,”
and “us” refer to Two Harbors Investment Corp. and its consolidated subsidiaries, unless otherwise specified.
NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains, or
incorporates by reference, not only historical information, but also forward- looking statements 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, or the
Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking statements involve numerous risks and
uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should
not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature
and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,”
“target,” “believe,” “intend,” “seek,” “plan,” “goals,” “future,”
“likely,” “may,” and similar expressions or their negative forms, or by references to strategy, plans, or intentions.
These forward-looking statements are subject to risks and uncertainties, including, among other things, the information referred to on
page 5 of this prospectus under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause
actual results to differ materially from those projected are described below and may be described from time to time in reports we file
with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as well as in the other information contained or incorporated by reference in this prospectus or in any prospectus supplement. Forward-looking
statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements,
whether as a result of new information, future events, or otherwise.
Important factors, among others, that may
affect our actual results include:
| · | changes
in interest rates and the market value of our target assets; |
| · | changes
in prepayment rates of mortgages underlying our target assets; |
| · | the
state of the credit markets and other general economic conditions, particularly as they affect
the price of earning assets, the credit status of borrowers and home prices; |
| · | legislative
and regulatory actions affecting our business; |
| · | the
availability and cost of our target assets; |
| · | the
availability and cost of financing for our target assets, including repurchase agreement
financing, revolving credit facilities, term notes and convertible notes; |
| · | the
impact of any increases in payment delinquencies and defaults on the mortgages comprising
and underlying our target assets, including additional servicing costs and servicing advance
obligations on the MSR assets we own; |
| · | changes
in liquidity in the market for real estate securities, the re-pricing of credit risk in the
capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades
of securities, and increases in the supply of real estate securities available-for-sale; |
| · | changes
in the values of securities we own and the impact of adjustments reflecting those changes
on our consolidated statements of comprehensive income (loss) and balance sheets, including
our stockholders’ equity; |
| · | our
ability to generate cash flow from our target assets; |
| · | our
ability to effectively execute and realize the benefits of strategic transactions and initiatives
we have pursued or may in the future pursue; |
| · | our
ability to recognize the benefits of our acquisition of RoundPoint Mortgage Servicing LLC
and to manage the risks associated with operating a mortgage loan servicer; |
| · | our
decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation
related to such termination; |
| · | changes
in the competitive landscape within our industry, including changes that may affect our ability
to attract and retain personnel; |
| · | our
exposure to legal and regulatory claims, penalties or enforcement activities, including those
arising from our ownership and management of MSR and prior securitization transactions; |
| · | our
exposure to counterparties involved in our MSR business and prior securitization transactions
and our ability to enforce representations and warranties made by them; |
| · | our
ability to acquire MSR and successfully operate our seller-servicer subsidiaries and oversee
the activities of our subservicers; |
| · | our
ability to manage various operational and regulatory risks associated with our business; |
| · | interruptions
in or impairments to our communications and information technology systems; |
| · | our
ability to maintain appropriate internal controls over financial reporting; |
| · | our
ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; |
| · | our
ability to maintain our REIT qualification for U.S. federal income tax purposes; and |
| · | limitations
imposed on our business due to our REIT status and our status as exempt from registration
under the 1940 Act. |
All forward-looking statements
included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligations
to update these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence
of unanticipated events. Before you make an investment decision, you should be aware that the occurrence of the events described in the
“Risk Factors” section and elsewhere in this prospectus and the documents incorporated herein by reference, may adversely
affect us.
PROSPECTUS SUMMARY
This summary highlights
selected information about us. It may not contain all the information that may be important to you in deciding whether to invest in our
securities. You should read this entire prospectus, together with the information incorporated by reference, including the risk factors,
financial data and related notes, before making an investment decision.
Our Company
We are a Maryland
corporation that invests in, finances and manages MSR, Agency RMBS, and, through our operational platform, RoundPoint Mortgage Servicing
LLC, is one of the largest servicers of conventional loans in the country. We are structured as an internally-managed REIT and our common
stock is listed on the NYSE under the symbol “TWO.”
We seek to leverage
our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS.
Our investment portfolio is designed to deliver stable performance across changing market environments, and we are acutely focused on
creating sustainable stockholder value over the long term.
Effective September 30,
2023, one of our wholly owned subsidiaries, Matrix, acquired RoundPoint from Freedom Mortgage Corporation after the completion of customary
closing conditions and receiving the required regulatory and GSE approvals. Upon closing, all servicing and origination licenses and
operational capabilities remained with RoundPoint, and RoundPoint became a wholly owned subsidiary of Matrix. Management believes this
acquisition will add value for stakeholders of Two Harbors through cost savings achieved by bringing the servicing of our MSR portfolio
in-house, greater control over our MSR portfolio and the associated cash flows, and the ability to participate more fully in the mortgage
finance space as opportunities arise.
Our Agency RMBS portfolio
is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans. All of our principal
and interest Agency RMBS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or
Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of these securities
consist of whole pools in which we own all of the investment interests in the securities.
Matrix holds the requisite
approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a
mortgage loan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee
for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those
payments to the owner of the loan. We acquire MSR from high-quality originators through flow and bulk purchases. On October 1,
2023, we began directly servicing the majority of the mortgage loans underlying our MSR through our newly acquired subsidiary,
RoundPoint. We also contract with appropriately licensed third-party subservicers to handle servicing functions in the name of the
subservicer for a portion of the loans underlying our MSR, although we expect our use of third-party subservicers will decline to
minimal levels in 2024 as we continue to transfer the servicing of our MSR portfolio to RoundPoint. As the servicer of record on our
MSR portfolio, we remain accountable to the GSEs for all servicing matters and, accordingly, provide substantial oversight of each
of our subservicers. We believe MSR are a natural fit for our portfolio over the long term. Our MSR business leverages our core
competencies in prepayment and interest rate risk analytics and the MSR assets may provide offsetting risks to our Agency RMBS,
hedging both interest rate and mortgage spread risk.
We seek to deploy
moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured
as repurchase agreements. We also finance our MSR through revolving credit facilities, repurchase agreements, term notes payable and
convertible senior notes.
We have elected to
be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we are required to meet certain investment and operating
tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the
extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain
our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying
income for REIT purposes. We have designated certain of our subsidiaries as a taxable REIT subsidiaries, or TRSs, as defined in the Code,
to engage in such activities, and we may form additional TRSs in the future. We also operate our business in a manner that will permit
us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act.
Our headquarters are
located at 1601 Utica Avenue South, Suite 900, St. Louis Park, Minnesota 55416, and our telephone number is (612) 453-4100. We maintain
a website at www.twoharborsinvestment.com; however, the information found on our website is not a part of this prospectus supplement
or the accompanying prospectus.
RISK FACTORS
Investing
in our securities involves a number of risks. Before making an investment decision, you should carefully read and consider the information
set forth under the heading “Risk Factors” in our most recent Annual Report on Form 10-K, any subsequent
Quarterly Reports on Form 10-Q and any subsequent Current Reports on Form 8-K (which descriptions are incorporated by reference
herein), as well as the other information contained or incorporated by reference in this prospectus or in any prospectus supplement hereto
before making a decision to invest in our securities. See “Where You Can Find More Information,” below.
USE OF PROCEEDS
Unless otherwise indicated in
an accompanying prospectus supplement, we intend to use the net proceeds received from the sale of the securities offered by this prospectus
for general corporate purposes. General corporate purposes may include the purchase of our target assets, including MSR, Agency RMBS
and other financial assets, in each case subject to our investment guidelines, and to the extent consistent with maintaining our REIT
qualification, the refinancing or repayment of debt, the repurchase or redemption of our common and preferred equity securities, and
other capital expenditures.
Unless otherwise indicated in
an accompanying prospectus supplement, we will not receive any proceeds from the sale of securities by selling securityholders.
DESCRIPTION OF CAPITAL
STOCK
The following is a summary
of the rights and preferences of our capital stock. While we believe that the following descriptions cover the material terms of our
capital stock, the descriptions may not contain all of the information that is important to you. We encourage you to read carefully this
entire prospectus, our charter and bylaws and the other documents we refer to for a more complete understanding of our capital stock.
Copies of our charter and bylaws are incorporated by reference as exhibits to the registration statement of which this prospectus is
a part. See “Where You Can Find More Information.”
General
Our charter provides that we
may issue up to 175,000,000 shares of common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value
per share. Our charter authorizes our board of directors, with the approval of a majority of the entire board, to amend our charter to
increase or decrease the aggregate number of authorized shares of stock or the number of shares of stock of any class or series without
stockholder approval. As of February 21, 2024, there were 103,427,329 shares of common stock, 5,085,268 shares of Series A
Preferred Stock, 10,439,260 shares of Series B Preferred Stock, and 9,831,898 shares of Series C Preferred Stock issued and
outstanding. Under Maryland law, stockholders are not generally liable for our debts or obligations.
Shares of Common Stock
All issued and outstanding shares
of our common stock are duly authorized, validly issued, fully paid and non-assessable. Subject to the preferential rights of any other
class or series of shares of stock and to the provisions of our charter regarding the restrictions on ownership and transfer of shares
of stock, holders of shares of common stock are entitled to receive dividends on such shares of common stock out of assets legally available
therefor if, as and when authorized by our board of directors and declared by us, and the holders of shares of our common stock are entitled
to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or
winding up after payment of or adequate provision for all our known debts and liabilities.
All issued and outstanding shares
of our common stock have been issued by us. Further, the shares are not a deposit or other obligation of any bank, are not an insurance
policy of any insurance company and are not insured or guaranteed by the Federal Deposit Insurance Company, any other governmental agency
or any insurance company. The shares of common stock do not benefit from any insurance guaranty association coverage or any similar protection.
Subject to the provisions of
our charter regarding the restrictions on ownership and transfer of shares of stock and except as may otherwise be specified in the terms
of any class or series of shares of preferred stock or common stock, each outstanding share of common stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as provided with respect to
any other class or series of shares of stock, the holders of such shares of common stock will possess the exclusive voting power. There
is no cumulative voting in the election of our board of directors, and directors are elected by a majority of all votes cast at a meeting
of stockholders duly called and at which a quorum is present, which means that the holders of a majority of the outstanding shares of
common stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect
any directors. However, our Bylaws provide that, in the event that the company’s Secretary determines that, as of the record date
for the stockholders’ meeting, the number of nominees exceeds the number of directors to be elected, then directors will be elected
by a plurality of the votes cast at a meeting of stockholders duly called and at which a quorum is present. In such case, each share
may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be cast.
Holders of shares of our common
stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe
for any of our securities. Subject to the provisions of our charter regarding the restrictions on ownership and transfer of shares of
stock, shares of common stock will have equal dividend, liquidation and other rights.
Under the Maryland General Corporation
Law, or MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge with another entity, transfer all or substantially
all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved
by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a
lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation’s
charter. Our charter provides that these matters (other than certain amendments to the provisions of our charter related to the removal
of directors, the restrictions on ownership and transfer of shares of our stock and the requirement of a two-thirds vote for amendment
to these provisions) may be approved by a majority of all of the votes entitled to be cast on the matter.
Transfer Agent and Registrar
The transfer agent and registrar for our
common stock is Equiniti Trust Company.
Shares of Preferred Stock
The following description sets
forth general terms and provisions of the preferred stock to which any prospectus supplement may relate. The statements below describing
the preferred stock are in all respects subject to and qualified in their entirety by reference to our charter, as amended and restated,
bylaws, as amended and restated, and any articles supplementary to our charter, designating terms of a series of preferred stock. The
preferred stock, when issued, will be validly issued, fully paid, and non-assessable. Because our board of directors has the power to
establish the preferences, powers and rights of each series of preferred stock, our board of directors may afford the holders of any
series of preferred stock preferences, powers and rights, voting or otherwise, senior to the rights of our common stockholders.
The rights, preferences, privileges
and restrictions of each series of preferred stock will be fixed by the articles supplementary to our charter relating to the series.
A prospectus supplement, relating to each series, will specify the terms of the preferred stock, as follows:
| · | the
title and stated value of the preferred stock; |
| · | the
voting rights of the preferred stock, if applicable; |
| · | the
preemptive rights of the preferred stock, if applicable; |
| · | the
restrictions on alienability of the preferred stock, if applicable; |
| · | the
number of shares offered, the liquidation preference per share and the offering price of
the shares; |
| · | liability
to further calls or assessment of the preferred stock, if applicable; |
| · | the
dividend rate(s), period(s) and payment date(s) or method(s) of calculation
applicable to the preferred stock; |
| · | the
date from which dividends on the preferred stock will accumulate, if applicable; |
| · | the
procedures for any auction and remarketing for the preferred stock; |
| · | the
provision for a sinking fund, if any, for the preferred stock; |
| · | the
provision for and any restriction on redemption, if applicable, of the preferred stock; |
| · | the
provision for and any restriction on repurchase, if applicable, of the preferred stock; |
| · | any
listing of the preferred stock on any securities exchange; |
| · | the
terms and provisions, if any, upon which the preferred stock will be convertible into common
stock, including the conversion price (or manner of calculation) and conversion period; |
| · | the
terms under which the rights of the preferred stock may be modified, if applicable; |
| · | any
other specific terms, preferences, rights, limitations or restrictions of the preferred stock; |
| · | a
discussion of certain material federal income tax considerations applicable to the preferred
stock; |
| · | the
relative ranking and preferences of the preferred stock as to dividend rights and rights
upon the liquidation, dissolution or winding-up of our affairs; |
| · | any
limitation on issuance of any series of preferred stock ranking senior to or on a parity
with the series of preferred stock as to dividend rights and rights upon the liquidation,
dissolution or winding-up of our affairs; and |
| · | any
limitations on direct or beneficial ownership and restrictions on transfer of the preferred
stock, in each case as may be appropriate to preserve our qualification as a REIT. |
Power to Reclassify Our Unissued Shares of Stock
Our charter authorizes our board
of directors to classify and reclassify any unissued shares of common or preferred stock into other classes or series of shares of stock.
Prior to issuance of shares of each class or series, our board of directors is required by Maryland law and by our charter to set, subject
to our charter restrictions on ownership and transfer of shares of stock and to the express terms of any class or series of stock outstanding
at the time, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or series. Therefore, among other things, our board could authorize
the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing
a change in control or other transaction that might involve a premium price for shares of our common stock or otherwise be in the best
interest of our stockholders.
Power to Increase or Decrease Authorized Shares
of Common Stock and Issue Additional Shares of Common and Preferred Stock
We believe that the power of
our board of directors to amend our charter to increase or decrease the number of authorized shares of stock, to issue additional authorized
but unissued shares of common or preferred stock and to classify or reclassify unissued shares of common or preferred stock and thereafter
to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the shares of common stock,
will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors does
not intend to do so, the board could authorize us to issue a class or series that could, depending upon the terms of the particular class
or series, delay, defer or prevent a change in control or other transaction that might involve a premium price for shares of our common
stock or otherwise be in the best interest of our stockholders.
DESCRIPTION
OF DEPOSITARY SHARES
General
We may issue depositary shares,
each of which would represent a fractional interest of a share of a particular series of preferred stock. We will deposit shares of preferred
stock represented by depositary shares under a separate deposit agreement among the company, a preferred stock depositary and the holders
of the depositary shares. Subject to the terms of the deposit agreement, each owner of a depositary share will possess, in proportion
to the fractional interest of a share of preferred stock represented by the depositary share, all the rights and preferences of the preferred
stock represented by the depositary shares. Depositary receipts will evidence the depositary shares issued pursuant to the deposit agreement.
Immediately after the company issues and delivers preferred stock to a preferred stock depositary, the preferred stock depositary will
issue the depositary receipts.
Dividends and Other Distributions
The depositary will distribute
all cash dividends on the preferred stock to the record holders of the depositary shares. Holders of depositary shares generally must
file proofs, certificates and other information and pay charges and expenses of the depositary in connection with distributions. If a
distribution on the preferred stock is other than in cash and it is feasible for the depositary to distribute the property it receives,
the depositary will distribute the property to the record holders of the depositary shares. If such a distribution is not feasible, the
depositary, with our approval, may sell the property and distribute the net proceeds from the sale to the holders of the depositary shares.
Withdrawal of Stock
Unless we have previously called
the underlying preferred stock for redemption or the holder of the depositary shares has converted such shares, a holder of depositary
shares may surrender them at the corporate trust office of the depositary in exchange for whole or fractional shares of the underlying
preferred stock together with any money or other property represented by the depositary shares. Once a holder has exchanged the depositary
shares, the holder may not redeposit the preferred stock and receive depositary shares again. If a depositary receipt presented for exchange
into preferred stock represents more shares of preferred stock than the number to be withdrawn, the depositary will deliver a new depositary
receipt for the excess number of depositary shares.
Redemption of Depositary Shares
Whenever we redeem shares of
preferred stock held by a depositary, the depositary will redeem the corresponding amount of depositary shares with funds it receives
from us for the preferred stock. The depositary will notify the record holders of the depositary shares to be redeemed not less than
30 days nor more than 60 days before the date fixed for redemption at the holders’ addresses appearing in the depositary’s
books. The redemption price per depositary share will be equal to the applicable fraction of the redemption price and any other amounts
payable with respect to the preferred stock. If we intend to redeem less than all of the underlying preferred stock, we and the depositary
will select the depositary shares to be redeemed on as nearly a pro rata basis as practicable without creating fractional depositary
shares or by any other equitable method determined by us that preserves our REIT status.
On the redemption date:
| · | all
dividends relating to the shares of preferred stock called for redemption will cease to accrue; |
| · | we
and the depositary will no longer deem the depositary shares called for redemption to be
outstanding; and |
| · | all
rights of the holders of the depositary shares called for redemption will cease, except the
right to receive any money payable upon the redemption and any money or other property to
which the holders of the depositary shares are entitled upon redemption. |
Voting of the Preferred Stock
When a depositary receives notice
regarding a meeting at which the holders of the underlying preferred stock have the right to vote, it will mail that information to the
holders of the depositary shares. Each record holder of depositary shares on the record date may then instruct the depositary to exercise
its voting rights for the amount of preferred stock represented by that holder’s depositary shares. The depositary will vote in
accordance with these instructions. The depositary will abstain from voting to the extent it does not receive specific instructions from
the holders of depositary shares. A depositary will not be responsible for any failure to carry out any instruction to vote, or for the
manner or effect of any vote, as long as any action or non-action is in good faith and does not result from negligence or willful misconduct
of the depositary.
Liquidation Preference
In the event of our liquidation,
dissolution or winding up, a holder of depositary shares will receive the fraction of the liquidation preference accorded each share
of underlying preferred stock represented by the depositary share.
Conversion of Preferred Stock
Depositary shares will not themselves
be convertible into common stock or any other securities or property of the company. However, if the underlying preferred stock is convertible,
holders of depositary shares may surrender them to the depositary with written instructions to convert the preferred stock represented
by their depositary shares into whole shares of common stock, other shares of our preferred stock or other shares of stock, as applicable.
Upon receipt of these instructions and any amounts payable in connection with a conversion, we will convert the preferred stock using
the same procedures as those provided for delivery of preferred stock. If a holder of depositary shares converts only part of its depositary
shares, the depositary will issue a new depositary receipt for any depositary shares not converted. We will not issue fractional shares
of common stock upon conversion. If a conversion will result in the issuance of a fractional share, we will pay an amount in cash equal
to the value of the fractional interest based upon the closing price of the common stock on the last business day prior to the conversion.
Amendment and Termination of a Deposit Agreement
We and the depositary may amend
any form of depositary receipt evidencing depositary shares and any provision of a deposit agreement. However, unless the existing holders
of at least two-thirds of the applicable depositary shares then outstanding have approved the amendment, we and the depositary may not
make any amendment that:
| · | would
materially and adversely alter the rights of the holders of depositary shares; or |
| · | would
be materially and adversely inconsistent with the rights granted to the holders of the underlying
preferred stock. |
Subject to exceptions in the
deposit agreement and except in order to comply with applicable law, no amendment may impair the right of any holders of depositary shares
to surrender their depositary shares with instructions to deliver the underlying preferred stock and all money and other property represented
by the depositary shares. Every holder of outstanding depositary shares at the time any amendment becomes effective who continues to
hold the depositary shares will be deemed to consent and agree to the amendment and to be bound by the amended deposit agreement.
We
may terminate a deposit agreement upon not less than 30 days’ prior written notice to the depositary if:
| |
· |
the termination is necessary to preserve our REIT status; or |
| |
· |
a majority of each series of preferred stock affected by the termination consents to the termination. In addition, a deposit
agreement will automatically terminate if: |
| · | we
have redeemed all underlying preferred stock subject to the agreement; |
| · | a
final distribution of the underlying preferred stock in connection with any liquidation,
dissolution or winding up has occurred, and the depositary has distributed the distribution
to the holders of the depositary shares; or |
| · | each
share of the underlying preferred stock has been converted into other capital stock of the
company not represented by depositary shares. |
Expenses of a Preferred Stock Depositary
We will pay all transfer and
other taxes and governmental charges and expenses arising in connection with a deposit agreement. In addition, we will generally pay
the fees and expenses of a depositary in connection with the performance of its duties. However, holders of depositary shares will pay
the fees and expenses of a depositary for any duties requested by the holders that the deposit agreement does not expressly require the
depositary to perform.
Resignation and Removal of Depositary
A depositary may resign at any
time by delivering to us notice of its election to resign. We may also remove a depositary at any time. Any resignation or removal will
take effect upon the appointment of a successor depositary. We will appoint a successor depositary within 60 days after delivery of the
notice of resignation or removal. The successor must be a bank or trust company with its principal office in the U.S. and have a combined
capital and surplus of at least $50 million.
Miscellaneous
The depositary will forward to
the holders of depositary shares any reports and communications from us with respect to the underlying preferred stock. Neither the depositary
nor the company will be liable if any law or any circumstances beyond their control prevent or delay them from performing their obligations
under a deposit agreement. The obligations of the company and a depositary under a deposit agreement will be limited to performing their
duties in good faith and without negligence and, in regard to voting of preferred stock, gross negligence or willful misconduct. Neither
the company nor a depositary will be required to prosecute or defend any legal proceeding with respect to any depositary shares or the
underlying preferred stock unless they are furnished with satisfactory indemnity.
We and any depositary may rely
on the written advice of counsel or accountants, or information provided by persons presenting shares of preferred stock for deposit,
holders of depositary shares or other persons they believe in good faith to be competent, and on documents they believe in good faith
to be genuine and signed by a proper party. In the event a depositary receives conflicting claims, requests or instructions from us and
any holders of depositary shares, the depositary will be entitled to act on the claims, requests or instructions received from us.
Depositary
The prospectus supplement will identify
the depositary for the depositary shares.
Listing of the Depositary Shares
The applicable prospectus supplement
will specify whether or not the depositary shares will be listed on any securities exchange.
DESCRIPTION OF DEBT SECURITIES
General
The following description of
the terms of our senior debt securities and subordinated debt securities, together, referred to as the debt securities, sets forth
certain general terms and provisions of the debt securities to which any prospectus supplement may relate. Unless otherwise noted,
the general terms and provisions of our debt securities discussed below apply to both our senior debt securities and our
subordinated debt securities. Our debt securities may be issued from time to time in one or more series. The particular terms of any
series of debt securities and the extent to which the general provisions may apply to a particular series of debt securities will be
described in the prospectus supplement relating to that series.
The
senior debt securities will be issued under an indenture between us and The Bank of New York Mellon Trust Company, N.A., as “Senior
Indenture Trustee,” referred to as the senior indenture. The subordinated debt securities will be issued under an indenture between
us and a Subordinated Indenture Trustee, referred to as the subordinated indenture and, together with the senior indenture, the indentures.
The Senior Indenture Trustee and the Subordinated Indenture Trustee are both referred to, individually, as the Trustee. The senior debt
securities will constitute our unsecured and unsubordinated obligations and the subordinated debt securities will constitute our unsecured
and subordinated obligations. A detailed description of the subordination provisions is provided below under the caption “—
Ranking and Subordination — Subordination.” In general, however, if we declare bankruptcy, holders of the senior debt
securities will be paid in full before the holders of subordinated debt securities will receive anything.
The statements set forth below
are brief summaries of certain provisions contained in the indentures, which summaries do not purport to be complete and are qualified
in their entirety by reference to the indentures, which are filed as exhibits to the registration statement of which this prospectus
forms a part. Terms used herein that are otherwise not defined shall have the meanings given to them in the indentures. Such defined
terms shall be incorporated herein by reference.
The indentures will not limit
the amount of debt securities that may be issued under the applicable indenture, and debt securities may be issued under the applicable
indenture up to the aggregate principal amount that may be authorized from time to time by us. Any such limit applicable to a particular
series will be specified in the prospectus supplement relating to that series.
The prospectus supplement relating
to any series of debt securities in respect of which this prospectus is being delivered will contain the following terms, among others,
for each such series of debt securities:
| · | the
title of the debt securities of such series; |
| · | the
person to whom any interest on a debt security of such series is payable, if other than the
registered holder at the close of business on the regular record date for such interest; |
| · | the
date or dates on which the principal amount of the debt securities of such series is payable; |
| · | the
rate or rates (or manner of calculation thereof) at which the debt securities of such series
will bear interest, if any, the date or dates from which interest will accrue and the interest
payment dates and regular record dates for the debt securities of such series; |
| · | the
place or places where the principal of and any premium and interest on debt securities of
such series is payable; |
| · | the
period or periods within which the redemption price or prices or the repayment price or prices,
as the case may be, at which, and the terms and conditions upon which, the debt securities
of such series may be redeemed or repaid at the company’s option or the option of the
holder of such debt securities; |
| · | the
obligation, if any, of the company to purchase the debt securities of such series pursuant
to any sinking fund or analogous provisions or at the option of a holder of such debt securities
and the period or periods within which, the price or prices at which and the terms and conditions
upon which such debt securities of such series will be purchased, in whole or in part, pursuant
to such obligation; |
| · | if
other than denominations of $1,000 and any integral multiple thereof, the denominations in
which the debt securities of such series will be issuable; |
| · | provisions,
if any, with regard to the conversion or exchange of the debt securities of such series,
at the option of the holders of such debt securities or the company, as the case may be,
for or into new securities of a different series or other securities; |
| · | if
other than U.S. dollars, the currency or currencies or units based on or related to currencies
in which the debt securities of such series will be denominated and in which payments of
principal of, and any premium and interest on, such debt securities shall or may be payable; |
| · | if
the principal of (and premium, if any) or interest, if any, on the debt securities of such
series are to be payable, at the election of the company or a holder of such debt securities,
in a currency (including a composite currency) other than that in which such debt securities
are stated to be payable, the period or periods within which, and the terms and conditions
upon which, such election may be made; |
| · | if
the amount of payments of principal of (and premium, if any) or interest, if any, on the
debt securities of such series may be determined with reference to an index based on a currency
(including a composite currency) other than that in which such debt securities are stated
to be payable, the manner in which such amounts shall be determined; |
| · | any
limit upon the aggregate principal amount of the debt securities of such series which may
be authenticated and delivered under the applicable indenture; |
| · | provisions,
if any, related to the exchange of the debt securities of such series, at the option of the
holders of such debt securities, for other securities of the same series of the same aggregate
principal amount or of a different authorized series or different authorized denomination
or denominations, or both; |
| · | provisions,
if any, relating to the appointment by us of an authenticating agent other than in the location
of the office of the Trustee, with power to act on behalf of the Trustee with respect to
the authentication and delivery of a series of debt securities in connection with such transactions
as are specified in the indenture or any prospectus supplement; |
| · | the
portion of the principal amount of the debt securities of such series, if other than the
principal amount thereof, which shall be payable upon declaration of acceleration of the
maturity thereof or provable in bankruptcy, as more fully described under the section “—
Events of Default, Notice and Waiver” below; |
| · | any
event of default with respect to the debt securities of such series, if not set forth in
the applicable indenture, and any additions, deletions or other changes to the events of
default set forth in the applicable indenture that shall be applicable to the debt securities
of such series; |
| · | any
covenant solely for the benefit of the debt securities of such series and any additions,
deletions or other changes to the provisions of the applicable indenture more fully described
under the section “— Consolidation, Merger, Conveyance or Transfer on Certain
Terms” below, under the section “— Certain Covenants”
below, the section of the applicable indenture containing the defined terms or any definitions
relating to such provisions of the applicable indenture that would otherwise be applicable
to the debt securities of such series; |
| · | if
the provisions of the applicable indenture more fully described under the section “—
Defeasance” below will not be applicable to the debt securities of such
series, and if such provisions shall be applicable to any covenant or event of default specified
in the prospectus supplement relating to such series of debt securities that has not already
been established in the applicable indenture; |
| · | whether
the debt securities of such series will be issued in whole or in part in the form of global
securities and, if so, the identity of the depositary with respect to such global securities
and the terms and conditions, if any, upon which such global securities may be exchanged
for other securities; |
| · | if
the debt securities of such series will be guaranteed, the terms and conditions of such guarantees
and provisions for the accession of the guarantors to certain obligations under the applicable
indenture; |
| · | with
respect to subordinated debt securities only, the amendment or modification of the subordination
provisions in the subordinated indenture with respect to the debt securities of such series;
and |
| · | any
other specific terms. |
We may issue debt securities
of any series at various times and we may reopen any series for further issuances from time to time without notice to existing holders
of securities of that series.
In addition, the prospectus supplement
will include a discussion of certain material U.S. federal income tax considerations applicable to the debt securities.
Unless we specify otherwise in
the applicable prospectus supplement relating to such series of debt securities, the covenants contained in the indentures will not provide
special protection to holders of debt securities if we enter into a highly leveraged transaction, recapitalization or restructuring.
Unless otherwise set forth in
the prospectus supplement relating to such series of debt securities, interest on outstanding debt securities will be paid to holders
of record on the regular record date as specified in the applicable debt security. Unless otherwise specified in the prospectus supplement,
debt securities will be issued in fully registered form only. Unless otherwise specified in the prospectus supplement, the principal
amount of the debt securities will be payable at the corporate trust office of the Trustee in New York, New York. The debt securities
may be presented for transfer or exchange at such office unless otherwise specified in the prospectus supplement, subject to the limitations
provided in the applicable indenture, without any service charge, but we may require payment of a sum sufficient to cover any tax or
other governmental charges payable in connection therewith.
Ranking and Subordination
General
The debt securities and the related
guarantees will effectively rank junior in right of payment to any of our or the guarantors’ current and future secured obligations
to the extent of the value of the assets securing such obligations. The debt securities and the guarantees will be effectively subordinated
to all existing and future liabilities, including indebtedness and trade payables, of our non-guarantor subsidiaries. Unless otherwise
set forth in the prospectus supplement relating to such series of debt securities, the indentures will not limit the amount of unsecured
indebtedness or other liabilities that can be incurred by our non- guarantor subsidiaries.
Ranking of Debt Securities
The senior debt securities described
in this prospectus will be unsecured, senior obligations of the company and will rank equally with the company’s other unsecured
and unsubordinated obligations. Any guarantees of the senior debt securities will be unsecured and senior obligations of each of the
guarantors, and will rank equally with all other unsecured and unsubordinated obligations of such guarantors. The subordinated debt securities
will be unsecured, subordinated obligations of the company and any guarantees of the subordinated debt securities will be unsecured and
subordinated obligations of each of the guarantors.
Subordination
If issued, the indebtedness evidenced
by the subordinated debt securities will be subordinate to the prior payment in full of all our Senior Indebtedness (as defined below).
During the continuance beyond any applicable grace period of any default in the payment of principal, premium, interest or any other
payment due on any of our Senior Indebtedness, we may not make any payment of principal of, or premium, if any, or interest on the subordinated
debt securities, except for certain sinking fund payments made in connection with the redemption of debt securities prior to such default
and except for payments made in connection with a defeasance with monies deposited with the Trustee prior to such default. In addition,
upon any payment or distribution of our assets to creditors upon any dissolution, winding up, liquidation or reorganization, the payment
of the principal of, or premium, if any, and interest on the subordinated debt securities will be subordinated to the extent provided
in the subordinated indenture in right of payment to the prior payment in full of all our Senior Indebtedness. Because of this subordination,
if we dissolve or otherwise liquidate, holders of our subordinated debt securities may receive less, ratably, than holders of our Senior
Indebtedness. The subordination provisions do not prevent the occurrence of an event of default under the subordinated indenture.
The subordination provisions
also apply in the same way to any guarantor with respect to the Senior Indebtedness of such guarantor.
The term “Senior Indebtedness”
of a person means with respect to such person the principal of, premium, if any, interest on, and any other payment due pursuant to any
of the following, whether outstanding on the date of the subordinated indenture or incurred by that person in the future:
| · | all
of the indebtedness of that person for borrowed money, including any indebtedness secured
by a mortgage or other lien which is (1) given to secure all or part of the purchase
price of property subject to the mortgage or lien, whether given to the vendor of that property
or to another lender, or (2) existing on property at the time that person acquires it; |
| · | all
of the indebtedness of that person evidenced by notes, debentures, bonds or other similar
instruments sold by that person for money; |
| · | all
of the lease obligations which are capitalized on the books of that person in accordance
with generally accepted accounting principles; |
| · | all
indebtedness of others of the kinds described in the first two bullet points above and all
lease obligations of others of the kind described in the third bullet point above, in each
case, that the person, in any manner, assumes or guarantees or that the person in effect
guarantees through an agreement to purchase, whether that agreement is contingent or otherwise;
and |
| · | all
renewals, extensions or refundings of indebtedness of the kinds described in the first, second
or fourth bullet points above and all renewals or extensions of leases of the kinds described
in the third or fourth bullet points above; unless, in the case of any particular indebtedness,
lease, renewal, extension or refunding, the instrument or lease creating or evidencing it
or the assumption or guarantee relating to it expressly provides that such indebtedness,
lease, renewal, extension or refunding is not superior in right of payment to the subordinated
debt securities. |
Our senior debt securities, and
any unsubordinated guarantee obligations of ours or any guarantor to which we and the guarantors are a party, including the guarantors’
guarantees of our debt securities and other indebtedness for borrowed money, constitute Senior Indebtedness for purposes of the subordinated
indenture.
Pursuant to the subordinated
indenture, the subordinated indenture may not be amended, at any time, to alter the subordination provisions of any outstanding subordinated
debt securities without the consent of the requisite holders of each outstanding series or class of Senior Indebtedness (as determined
in accordance with the instrument governing such Senior Indebtedness) that would be adversely affected thereby.
Consolidation, Merger, Conveyance or Transfer on
Certain Terms
Except as
described in the applicable prospectus supplement relating to such debt securities, we will not consolidate with or merge into any other
entity or convey or transfer our properties and assets substantially as an entirety to any entity, unless:
| · | the
entity formed by such consolidation or into which we are merged or the entity that acquires
by conveyance or transfer our properties and assets substantially as an entirety shall be
organized and existing under the laws of the U.S. or any State or the District of Columbia,
and will expressly assume, by supplemental indenture, executed and delivered to the Trustee,
in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal
of (and premium, if any) and interest on all the debt securities and the performance of every
covenant of the applicable indenture (as supplemented from time to time) on our part to be
performed or observed; |
| · | immediately
after giving effect to such transaction, no Event of Default (as defined below), and no event
which, after notice or lapse of time, or both, would become an Event of Default, shall have
happened and be continuing; and |
| · | we
have delivered to the Trustee an officers’ certificate and an opinion of counsel each
stating that such consolidation, merger, conveyance or transfer and such supplemental indenture
comply with the requirements set forth in the first two bullet points above and that all
conditions precedent relating to such transaction have been complied with. |
Upon any consolidation or merger,
or any conveyance or transfer of our properties and assets substantially as an entirety as set forth above, the successor person formed
by such consolidation or into which we are merged or to which such conveyance or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of ours under the applicable indenture with the same effect as if such successor had been
named in the applicable indenture. In the event of any such conveyance or transfer, we, as the predecessor, shall be discharged from
all obligations and covenants under the applicable indenture and the debt securities issued under such indenture and may be dissolved,
wound up or liquidated at any time thereafter.
Certain Covenants
Any covenants pertaining to a
series of debt securities will be set forth in a prospectus supplement relating to such series of debt securities.
Except as described in the prospectus
and any applicable prospectus supplement relating to such series of debt securities, the indentures and the debt securities do not contain
any covenants or other provisions designed to afford holders of debt securities protection in the event of a recapitalization or highly
leveraged transaction involving us.
Certain Definitions
The following are certain of the terms
defined in the indentures:
“Significant
Subsidiary” means any Subsidiary which would be a “significant subsidiary” as defined in Article 1, Rule 1-02
of Regulation S-X, promulgated pursuant to the Securities Act, as in effect on the date of the applicable indenture.
“Subsidiary”
means, with respect to any person, any corporation more than 50% of the voting stock of which is owned directly or indirectly by such
person, and any partnership, association, joint venture or other entity in which such person owns more than 50% of the equity interests
or has the power to elect a majority of the board of directors or other governing body.
Redemption
Unless we specify otherwise in
the applicable prospectus supplement, we may redeem any of the debt securities as a whole at any time or in part from time to time, at
our option, on at least 15 days, but not more than 45 days, prior notice mailed to the registered address of each holder of the debt
securities to be redeemed, at the price specified in the debt security at which it is to be redeemed. If specified in the applicable
prospectus supplement for a series of debt securities, we may rescind the redemption of such debt securities upon the occurrence of any
of the following: (a) a general suspension of trading or limitation on prices for securities on the securities exchange on which
the shares of our stock are traded for more than 6.5 consecutive trading hours; (b) the decline of the Dow Jones Industrial Average
or the S&P 500 (or any successor index) by more than certain percentages; (c) a banking moratorium or suspension of payments
in respect of banks declared by federal or state authorities; or (d) an act of terrorism or commencement of war or armed hostilities
or other national or international calamity involving the United States which in our reasonable judgment could have a material adverse
effect on the market for our common stock.
On and after the redemption date,
interest will cease to accrue on the debt securities or any portion thereof called for redemption, unless we default in the payment of
the Redemption Price, and any right to convert such debt securities shall terminate. On or before the redemption date, we shall deposit
with a paying agent or the applicable Trustee, or segregate and hold in trust, money sufficient to pay the Redemption Price of the debt
securities to be redeemed on such date. If we elect to redeem less than all of the debt securities of a series, then the Trustee will
select the particular debt securities of such series to be redeemed in a manner it deems appropriate and fair.
Defeasance
Except as otherwise set forth
in the prospectus supplement relating to such series of debt securities, each indenture will provide that, at our option:
(a) we
and any applicable guarantors will be discharged from any and all obligations in respect of any series of debt securities (except in
each case for certain obligations to register the transfer or exchange of debt securities, replace stolen, lost or mutilated debt securities,
maintain paying agencies and hold monies for payment in trust); or
(b) (i) we
need not comply with certain covenants contained in the indenture and any prospectus supplement relating to such debt securities, including
covenants relating to maintaining our legal existence and complying with certain restrictions on our ability to consolidate or merger
with, or transfer our properties and assets substantially as an entirety to, another person, (ii) the guarantors will be released
from the guarantees and (iii) certain Events of Default (other than those arising out of the failure to pay interest or principal
on the debt securities of that series and certain events of bankruptcy, insolvency and reorganization) will no longer constitute Events
of Default with respect to such series of debt securities,
in each case, if:
| · | we
deposit with the Trustee, in trust, money or the equivalent in securities of the government
which issued the currency in which the debt securities are denominated or government agencies
backed by the full faith and credit of such government, or a combination thereof, which through
the payment of interest thereon and principal thereof in accordance with their terms will
provide money in an amount sufficient to pay all the principal (including any mandatory sinking
fund payments) of, and interest on, such series on the dates such payments are due in accordance
with the terms of such series; |
| · | no
event of default or event (including such deposit) which with notice or lapse of time would
become an event of default with respect to the debt securities of such series shall have
occurred and be continuing on the date of such deposit (other than an event of default resulting
from the borrowing of funds to be applied to such deposit); |
| · | we
deliver to the Trustee an opinion of counsel to the effect that the deposit and related defeasance
would not cause the holders of such series to recognize income, gain or loss for federal
income tax purposes and, in the case of a discharge pursuant to clause (a) above, accompanied
by a ruling to such effect received from or published by the U.S. Internal Revenue Service,
or IRS; |
| · | we
deliver to the Trustee an officers’ certificate stating that such deposit was not made
by us with the intent of preferring the holders over other creditors of ours or with the
intent of defeating, hindering, delaying or defrauding creditors of ours or others; |
| · | we
deliver to the Trustee an officers’ certificate stating that all conditions precedent
set forth in the indenture relating to the satisfaction and discharge of the indenture with
respect to the debt securities of such series have been satisfied; and |
| · | we
deliver to the Trustee an opinion of counsel to the effect that the satisfaction and discharge
of the indenture with respect to the debt securities of such series is authorized and permitted
under the indenture and all conditions precedent set forth in the indenture relating to such
satisfaction and discharge have been satisfied. |
Events of Default, Notice and Waiver
Except
as otherwise set forth in the prospectus supplement relating to such series of debt securities, each indenture will provide that, if
an Event of Default specified therein with respect to any series of debt securities issued thereunder shall have happened and be continuing,
either the Trustee thereunder or the holders of 331∕3%
in aggregate principal amount of the outstanding debt securities of such series (or 331∕3%
in aggregate principal amount of all outstanding debt securities under such indenture, in the case of certain Events of Default affecting
all series of debt securities issued under such indenture) may declare the principal of all the debt securities of such series to be
due and payable; provided, that upon the occurrence of an event of default due to bankruptcy or insolvency proceedings, such amounts
shall be immediately due and payable without action by the Trustee or the holders of such series of debt securities.
Except as otherwise set forth
in the prospectus supplement relating to such series of debt securities, an “Event of Default” in respect of any series will
be defined in the indentures as being any one of the following events:
| · | default
for 30 days in payment of any interest with respect to such series; |
| · | default
in payment of principal of, or premium, if any, on, or any sinking or purchase fund or analogous
obligation with respect to, debt securities of such series when due at their stated maturity,
by declaration or acceleration, when called for redemption or otherwise; |
| · | default
for 90 days after written notice to us by the Trustee thereunder or to us and the Trustee
by holders of 331∕3%
in aggregate principal amount of the outstanding debt securities of such series in the performance,
or breach, of any covenant or warranty pertaining to debt securities of such series; |
| · | certain
events of bankruptcy, insolvency and reorganization with respect to us or any Significant
Subsidiary of ours which is organized under the laws of the U.S. or any political sub-division
thereof or the entry of an order ordering the winding up or liquidation of our affairs; and |
| · | any
other event of default specified in the prospectus supplement for a series of debt securities. |
Each indenture will provide that
the Trustee thereunder will, within 90 days after the occurrence of a default with respect to the debt securities of any series issued
under such indenture, give to the holders of the debt securities of such series notice of all uncured and unwaived defaults known to
it; provided, however, that, except in the case of default in the payment of principal of, premium, if any, or interest, if any, on any
of the debt securities of such series, the Trustee will be protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders of the debt securities of such series. The term “default” for
the purpose of this provision means any event which is, or after notice or lapse of time or both would become, an Event of Default with
respect to debt securities of such series.
Each indenture will contain provisions
entitling the Trustee under such indenture, subject to the duty of the Trustee during an Event of Default to act with the required standard
of care, to be indemnified to its reasonable satisfaction by the holders of the debt securities before proceeding to exercise any right
or power under the applicable indenture at the request of holders of such debt securities.
Each indenture will provide that
the holders of a majority in aggregate principal amount of the outstanding debt securities of any series issued under such indenture
may direct the time, method and place of conducting proceedings for remedies available to the Trustee or exercising any trust or power
conferred on the Trustee in respect of such series, subject to certain conditions.
Except as otherwise set forth
in the prospectus supplement relating to the debt securities, in certain cases, the holders of a majority in principal amount of the
outstanding debt securities of any series may rescind, on behalf of the holders of all debt securities of such series, a declaration
of acceleration resulting from an Event of Default with respect to the debt securities of such series except, among other things, a declaration
of acceleration resulting from an Event of Default not theretofore cured in payment of the principal of, or premium, if any, or interest,
if any, on any of the senior debt securities of such series or payment of any sinking or purchase fund or analogous obligations with
respect to such senior debt securities.
Each indenture will include a
covenant that we will file annually with the Trustee a certificate of no default or specifying any default that exists.
Modification of the Indentures
Except as set forth in the prospectus
supplement relating to the debt securities, we and the Trustee may, without the consent of the holders of the debt securities issued
under the indenture governing such debt securities, enter into indentures supplemental to the applicable indenture for, among others,
one or more of the following purposes:
| · | to
evidence the succession of another person to us or to a guarantor, if any, and the assumption
by such successor of our or the guarantor’s obligations under the applicable indenture
and the debt securities of any series; |
| · | to
add to our covenants or those of any guarantor, if any, or to surrender any of our rights
or powers or those of any guarantor for the benefit of the holders of debt securities of
any or all series issued under such indenture; |
| · | to
cure any ambiguity, to correct or supplement any provision in the applicable indenture which
may be inconsistent with any other provision therein, or to make any other provisions with
respect to matters or questions arising under such indenture; |
| · | to
add to the applicable indenture any provisions that may be expressly permitted by the Trust
Indenture Act of 1939, as amended, or the TIA, excluding the provisions referred to in Section 316(a)(2) of
the TIA as in effect at the date as of which the applicable indenture was executed or any
corresponding provision in any similar federal statute hereafter enacted; |
| · | to
establish the form or terms of any series of debt securities to be issued under the applicable
indenture, to provide for the issuance of any series of debt securities and/or to add to
the rights of the holders of debt securities; |
| · | to
evidence and provide for the acceptance of any successor Trustee with respect to one or more
series of debt securities or to add or change any of the provisions of the applicable indenture
as shall be necessary to facilitate the administration of the trusts thereunder by one or
more trustees in accordance with the applicable indenture; |
| · | to
provide any additional Events of Default; |
| · | to
provide for uncertificated securities in addition to or in place of certificated securities;
provided that the uncertificated securities are issued in registered form for certain federal
tax purposes; |
| · | to
provide for the terms and conditions of converting those debt securities that are convertible
into common stock or another such similar security; |
| · | to
secure any series of debt securities; |
| · | to
add guarantees in respect of any series or all of the debt securities; |
| · | to
make any change necessary to comply with any requirement of the SEC in connection with the
qualification of the applicable indenture or any supplemental indenture under the TIA; and |
| · | to
make any other change that does not adversely affect the rights of the holders of the debt
securities. |
No supplemental indenture for
the purpose identified in clauses second, third or fifth bullet points above may be entered into if to do so would adversely affect the
rights of the holders of debt securities of any series issued under the same indenture in any material respect.
Except as set forth in the prospectus
supplement relating to such series of debt securities, each indenture will contain provisions permitting us and the Trustee under such
indenture, with the consent of the holders of a majority in principal amount of the outstanding debt securities of all series issued
under such indenture to be affected voting as a single class, to execute supplemental indentures for the purpose of adding any provisions
to or changing or eliminating any of the provisions of the applicable indenture or modifying the rights of the holders of the debt securities
of such series to be affected, except that no such supplemental indenture may, without the consent of each of the holders of affected
debt securities, among other things:
| · | change
the maturity of the principal of, or the maturity of any premium on, or any installment of
interest on, any such debt security, or reduce the principal amount or the interest or any
premium of any such debt securities, or change the method of computing the amount of principal
or interest on any such debt securities on any date or change any place of payment where,
or the currency in which, any debt securities or any premium or interest thereon is payable,
or impair the right to institute |
| · | suit
for the enforcement of any such payment on or after the maturity of principal or premium,
as the case may be, or alter the provisions of the indenture so as to adversely affect the
terms, if any, of conversion of any series of debt securities into our common stock or other
marketable securities; |
| · | reduce
the percentage in principal amount of any such debt securities the consent of whose holders
is required for any supplemental indenture, waiver of compliance with certain provisions
of the applicable indenture or certain defaults under the applicable indenture; |
| · | modify
any of the provisions of the applicable indenture related to (i) the requirement that
the holders of debt securities issued under such indenture consent to certain amendments
of the applicable indenture, (ii) the waiver of past defaults and (iii) the waiver
of certain covenants, except to increase the percentage of holders required to make such
amendments or grant such waivers; |
| · | amend
or modify certain provisions of the indenture relating to guarantees, if any, and the obligations
of guarantors thereunder; or |
| · | impair
or adversely affect the right of any holder to institute suit for the enforcement of any
payment on, or with respect to, such senior debt securities on or after the maturity of such
debt securities. |
| · | In
addition, the subordinated indenture will provide that we may not make any change in the
terms of the subordination of the subordinated debt securities of any series in a manner
adverse in any material respect to the holders of any series of subordinated debt securities
without the consent of each holder of subordinated debt securities that would be adversely
affected. |
The Trustee
The Trustee shall be named in the applicable
prospectus supplement.
Governing Law
The indentures will be governed
by, and construed in accordance with, the laws of the State of New York.
Global Securities
We may issue debt securities
through global securities. A global security is a security, typically held by a depositary, that represents the beneficial interests
of a number of purchasers of the security. If we do issue global securities, the following procedures will apply.
We will deposit global securities
with the depositary identified in the prospectus supplement. After we issue a global security, the depositary will credit on its book-entry
registration and transfer system the respective principal amounts of the debt securities represented by the global security to the accounts
of persons who have accounts with the depositary. These account holders are known as “participants.” The underwriters or
agents participating in the distribution of the debt securities will designate the accounts to be credited. Only a participant or a person
who holds an interest through a participant may be the beneficial owner of a global security. Ownership of beneficial interests in the
global security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the depositary
and its participants.
We and the Trustee will treat
the depositary or its nominee as the sole owner or holder of the debt securities represented by a global security. Except as set forth
below, owners of beneficial interests in a global security will not be entitled to have the debt securities represented by the global
security registered in their names. They also will not receive or be entitled to receive physical delivery of the debt securities in
definitive form and will not be considered the owners or holders of the debt securities.
Principal, any premium and any
interest payments on debt securities represented by a global security registered in the name of a depositary or its nominee will be made
to the depositary or its nominee as the registered owner of the global security. None of us, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests
in the global security or maintaining, supervising or reviewing any records relating to the beneficial ownership interests.
We expect that the depositary,
upon receipt of any payments, will immediately credit participants’ accounts with payments in amounts proportionate to their respective
beneficial interests in the principal amount of the global security as shown on the depositary’s records. We also expect that payments
by participants to owners of beneficial interests in the global security will be governed by standing instructions and customary practices,
as is the case with the securities held for the accounts of customers registered in “street names,” and will be the responsibility
of the participants.
If the depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not appointed by us within 90 days, we will issue registered
securities in exchange for the global security. In addition, we may at any time in our sole discretion determine not to have any of the
debt securities of a series represented by global securities. In that event, we will issue debt securities of that series in definitive
form in exchange for the global securities.
RESTRICTIONS
ON OWNERSHIP AND TRANSFER
In order for us to qualify as
a REIT under the Code, shares of our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year
of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter
taxable year. Also, not more than 50% of the value of the outstanding shares of stock may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year
for which an election to be a REIT has been made).
Our charter contains restrictions
limiting the ownership and transfer of shares of our common stock and other outstanding shares of stock. The relevant sections of our
charter provide that, subject to the exceptions described below, no person or entity may own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Code, more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding
shares of common stock (the common share ownership limit), or 9.8 % by value or number of shares, whichever is more restrictive,
of the aggregate of the outstanding shares of our capital stock (the aggregate share ownership limit). The common share ownership limit
and the aggregate share ownership limit are collectively referred to herein as the “ownership limits.” A person or entity
that becomes subject to the ownership limits by virtue of a violative transfer that results in a transfer to a trust, as set forth below,
is referred to as a “purported beneficial transferee” if, had the violative transfer been effective, the person or entity
would have been a record owner and beneficial owner or solely a beneficial owner of shares of our stock, or is referred to as a “purported
record transferee” if, had the violative transfer been effective, the person or entity would have been solely a record owner of
shares of our stock.
The constructive ownership rules under
the Code are complex and may cause shares of stock owned actually or constructively by a group of related individuals and/or entities
to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% by value or number of shares,
whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive,
of our outstanding capital stock (or the acquisition of an interest in an entity that owns, actually or constructively, shares of our
stock) by an individual or entity, could, nevertheless, cause that individual or entity, or another individual or entity, to own constructively
in excess of 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by
value or number of shares, whichever is more restrictive, of our outstanding capital stock and thereby subject the shares of common stock
or total shares of stock to the applicable ownership limit.
Our board of directors may, in
its sole discretion, exempt a person from the above-referenced ownership limits. However, the board of directors may not exempt any person
whose ownership of our outstanding stock would result in our being “closely held” within the meaning of Section 856(h) of
the Code or otherwise would result in our failing to qualify as a REIT. In order to be considered by the board of directors for exemption,
a person also must not own, directly or indirectly, an interest in any tenant (or a tenant of any entity which we own or control) that
would cause us to own, directly or indirectly, more than a 9.9% interest in the tenant. The person seeking an exemption must represent
to the satisfaction of our board of directors that such person will not violate these two restrictions. The person also must agree that
any violation or attempted violation of these restrictions will result in the automatic transfer of the shares of stock causing the violation
to a trust for the benefit of a charitable beneficiary. As a condition of its waiver, our board of directors may require an opinion of
counsel or IRS ruling satisfactory to the board of directors with respect to our qualification as a REIT.
In connection with an exemption
from the ownership limits or at any other time, our board of directors may from time to time increase the ownership limits for one or
more persons or entities and decrease the ownership limits for all others; provided, however, that any decrease will not be effective
as to existing holders who own common stock or total shares of stock, as applicable, in excess of such decreased ownership limit as described
below; and provided further that the ownership limit may not be increased if, after giving effect to such increase, five or fewer individuals
could own or constructively own in the aggregate, more than 49.9% in value of the shares then outstanding. Prior to the modification
of the ownership limit, our board of directors may require such opinions of counsel, affidavits, undertakings or agreements as the board
may deem necessary or advisable in order to determine or ensure our qualification as a REIT. A reduced ownership limit will not apply
to any person or entity whose percentage ownership in shares of our common stock or total shares of stock, as applicable, is in excess
of such decreased ownership limit until such time as such person’s or entity’s percentage of shares of our common stock or
total shares of stock, as applicable, equals or falls below the decreased ownership limit, but any further acquisition of shares of our
common stock or total shares of stock, as applicable, in excess of such percentage ownership of shares of our common stock or total shares
of stock will be in violation of such ownership limit.
Our charter provisions further prohibit:
| · | any
person from beneficially or constructively owning, applying certain attribution rules of
the Code, shares of our stock that would result in our being “closely held” under
Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT;
and |
| · | any
person from transferring shares of our stock if such transfer would result in shares of our
stock being beneficially owned by fewer than 100 persons (determined without reference to
any rules of attribution). |
Any person who acquires or attempts
or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate any of the foregoing restrictions
on transferability and ownership will be required to give written notice of such event to us immediately or, in the case of a proposed
or attempted transaction, at least 15 days prior to such proposed or attempted transaction, and provide us with such other information
as we may request in order to determine the effect of such transfer on our qualification as a REIT. The foregoing provisions on transferability
and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or
to continue to qualify, as a REIT.
Pursuant to our charter, if any
transfer of shares of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons, such transfer
will be null and void and the intended transferee will acquire no rights in such shares. In addition, if any purported transfer of shares
of our stock or any other event would otherwise result in any person violating the ownership limits or such other limit established by
our board of directors or in our being “closely held” under Section 856(h) of the Code or otherwise failing to
qualify as a REIT, then that number of shares (rounded up to the nearest whole share) that would cause such person to violate such restrictions
will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected
by us and the intended transferee will acquire no rights in such shares. The automatic transfer will be effective as of the close of
business on the business day prior to the date of the purported transfer or other event that results in a transfer to the trust. Any
dividend or other distribution paid to the purported record transferee, prior to our discovery that the shares had been automatically
transferred to a trust as described above, must be repaid to the trustee upon demand for distribution to the charitable beneficiary by
the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the
applicable ownership limit or our being “closely held” under Section 856(h) of the Code or otherwise failing to
qualify as a REIT, then our charter provides that the transfer of the shares will be null and void and the intended transferee will acquire
no rights in such shares.
Shares of stock transferred to
the trustee are deemed offered for sale to us, or our designee, at a price per share equal to the lesser of (1) the price paid by
the purported record transferee for the shares (or, if the event that resulted in the transfer to the trust did not involve a purchase
of such shares of stock at market price, the last reported sales price reported on the NYSE (or other applicable exchange) on the day
of the event which resulted in the transfer of such shares of stock to the trust) and (2) the market price on the date we or our
designee accepts such offer. We have the right to accept such offer until the trustee has sold the shares of stock held in the trust
pursuant to the clauses discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold terminates,
the trustee must distribute the net proceeds of the sale to the purported record transferee and any dividends or other distributions
held by the trustee with respect to such shares of stock will be paid to the charitable beneficiary.
If we do not buy the shares,
the trustee must, within 20 days of receiving notice from us of the transfer of shares to the trust, sell the shares to a person or entity
designated by the trustee who could own the shares without violating the ownership limits or such other limit as established by our board
of directors. After that, the trustee must distribute to the purported record transferee an amount equal to the lesser of (1) the
price paid by the purported record transferee for the shares (or, if the event which resulted in the transfer to the trust did not involve
a purchase of such shares at market price, the last reported sales price reported on the NYSE (or other applicable exchange) on the day
of the event which resulted in the transfer of such shares of stock to the trust) and (2) the sales proceeds (net of commissions
and other expenses of sale) received by the trust for the shares. Any net sales proceeds in excess of the amount payable to the purported
record transferee will be immediately paid to the charitable beneficiary, together with any dividends or other distributions thereon.
In addition, if prior to discovery by us that shares of stock have been transferred to a trust, such shares of stock are sold by a purported
record transferee, then such shares will be deemed to have been sold on behalf of the trust and to the extent that the purported record
transferee received an amount for or in respect of such shares that exceeds the amount that such purported record transferee was entitled
to receive, such excess amount must be paid to the trustee upon demand. The purported beneficial transferee or purported record transferee
has no rights in the shares held by the trustee.
The trustee will be
designated by us and will be unaffiliated with us and with any purported record transferee or purported beneficial transferee. Prior
to the sale of any shares by the trust, the trustee will receive, in trust for the beneficiary, all dividends and other
distributions paid by us with respect to the shares held in trust and may also exercise all voting rights with respect to the shares
held in trust. These rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other
distribution paid prior to our discovery that shares of stock have been transferred to the trust will be paid by the recipient to
the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the trustee.
Subject to Maryland law, effective
as of the date that the shares have been transferred to the trust, the trustee will have the authority, at the trustee’s sole discretion:
| · | to
rescind as void any vote cast by a purported record transferee prior to our discovery that
the shares have been transferred to the trust; and |
| · | to
recast the vote in accordance with the desires of the trustee acting for the benefit of the
charitable beneficiary of the trust. |
However, if we have already taken
irreversible action, then the trustee may not rescind and recast the vote.
If our board of directors determines
in good faith that a proposed transfer would violate the restrictions on ownership and transfer of shares of our stock set forth in the
charter, the board of directors will take such action as it deems advisable to refuse to give effect to or to prevent such transfer,
including, but not limited to, causing us to redeem the shares of stock, refusing to give effect to the transfer on our books or instituting
proceedings to enjoin the transfer.
Every owner of more than 5% (or
such lower percentage as required by the Code or the regulations promulgated thereunder) of our stock, within 30 days after the end of
each taxable year, is required to give us written notice, stating the name and address of such owner, the number of shares of our capital
stock which he, she or it beneficially owns and a description of the manner in which the shares are held. Each such owner shall provide
us with such additional information as we may request in order to determine the effect, if any, of such beneficial ownership on our status
as a REIT and to ensure compliance with the aggregate share ownership limit. In addition, each stockholder shall upon demand be required
to provide us with such information as we may request in good faith in order to determine our status as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to determine such compliance.
These ownership limits could
delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be
in the best interests of the stockholders.
CERTAIN PROVISIONS
OF THE MARYLAND GENERAL CORPORATION LAW AND TWO HARBORS’ CHARTER AND BYLAWS
The following summary description
of certain provisions of the MGCL and our charter and bylaws does not purport to be complete and is subject to and qualified in its entirety
by reference to the MGCL and the actual provisions of our charter and our bylaws, copies of which are incorporated by reference as exhibits
to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
Our Board of Directors
Our charter
and bylaws provide that the number of directors we have may be established by our board of directors but may not be less than the minimum
number required by the MGCL, nor more than 15. Our bylaws currently provide that any vacancy may be filled only by a majority of the
remaining directors. Any individual elected to fill such vacancy will serve until the next annual meeting of stockholders and until a
successor is duly elected and qualifies.
Pursuant to our bylaws, each
of our directors is elected by our common stockholders entitled to vote to serve until the next annual meeting of stockholders and until
his or her successor is duly elected and qualified. Holders of shares of common stock will have no right to cumulative voting in the
election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of common stock
entitled to vote will be able to elect all of our directors. However, our Bylaws provide that, in the event that the company’s
Secretary determines that, as of the record date for the stockholders’ meeting, the number of nominees exceeds the number of directors
to be elected, then directors will be elected by a plurality of the votes cast at a meeting of stockholders duly called and at which
a quorum is present. In such case, each share may be voted for as many individuals as there are directors to be elected and for whose
election the share is entitled to be cast.
Removal of Directors
Our charter provides that a director
may be removed, with or without cause, only by the affirmative vote of the holders of shares entitled to cast at least two-thirds of
all the votes of common stockholders entitled to be cast generally in the election of directors. This provision, when coupled with the
power of our board of directors to fill vacancies on the board of directors, precludes stockholders from (1) removing incumbent
directors except upon a substantial affirmative vote and (2) filling the vacancies created by such removal with their own nominees.
Business Combinations
Under the MGCL, certain “business
combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and an interested stockholder (defined generally as any person
who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or
an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation) or an affiliate of such an
interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested
stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved
by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding voting shares of stock of
the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares
held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate
or associate of the interested stockholder, unless, among other conditions, the corporation’s common stockholders receive a minimum
price (as described in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by
the interested stockholder for its shares.
These provisions of the MGCL
do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the most recent date on
which the interested stockholder became an interested stockholder. Our board of directors may provide that the board’s approval
is subject to compliance with any terms and conditions determined by the board. Consequently, the five-year prohibition and the supermajority
vote requirements will not apply to business combinations between us and such persons. As a result, any person described above may be
able to enter into business combinations with us that may not be in the best interest of our stockholders without compliance by us with
the supermajority vote requirements and other provisions of the statute.
The business combination statute
may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Control Share Acquisitions
The MGCL provides that holders
of “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights
except to the extent approved at a special meeting of stockholders by the affirmative vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of stock in a corporation in respect of which any of the following persons is entitled to exercise
or direct the exercise of the voting power of such shares in the election of directors: (1) a person who makes or proposes to make
a control share acquisition, (2) an officer of the corporation or (3) an employee of the corporation who is also a director
of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise or direct the exercise of voting power in electing directors
within one of the following ranges of voting power: (A) one-tenth or more but less than one-third; (B) one-third or more but
less than a majority; or (C) a majority or more of all voting power. Control shares do not include shares that the acquiring person
is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means
the acquisition of control shares or of the power to direct the exercise of voting power of control shares, subject to certain exceptions.
A person who has made or proposes
to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an
“acquiring person statement” as described in the MGCL), may compel our board of directors to call a special meeting of stockholders
to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation
may itself present the question at any stockholders meeting.
If voting rights are not approved
at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares,
as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value
of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer
in the control share acquisition.
The control share acquisition
statute does not apply to (a) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the
transaction or (b) acquisitions approved or exempted by the charter or bylaws of the corporation.
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 is no assurance
that such provision will not be amended or eliminated at any time in the future.
Subtitle 8
Subtitle 8 of Title 3 of the
MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent
directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding
any contrary provision in the charter or bylaws, to any or all of five provisions:
| · | a
two-thirds vote requirement for removing a director; |
| · | a
requirement that the number of directors be fixed only by vote of the directors; |
| · | a
requirement that a vacancy on the board be filled only by the remaining directors in office
and for the remainder of the full term of the class of directors in which the vacancy occurred;
and |
| · | a
majority requirement for the calling of a special meeting of stockholders. |
Our charter provides that, pursuant
to Subtitle 8, vacancies on the board may be filled only by the affirmative vote of a majority of the remaining directors in office,
even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder
of the full term of the directorship in which the vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle
8, we already (1) require the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast
on the matter for the removal of any director from the board, which removal will be allowed with or without cause, (2) vest in the
board the exclusive power to fix the number of directorships and (3) require, unless called by the chairman of the board, chief
executive officer, president or the board of directors, the written request of stockholders of not less than a majority of all the votes
entitled to be cast at such a meeting to call a special meeting.
Meetings of Stockholders
Pursuant to our bylaws, a meeting
of our stockholders for the election of directors and the transaction of any business will be held annually on a date and at the time
set by our board of directors. In addition, the chairman of the board, chief executive officer, president or board of directors may call
a special meeting of our stockholders. Subject to the provisions of our bylaws, a special meeting of our stockholders will also be called
by the secretary upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to
be cast at the meeting.
Amendment to Our Charter and Bylaws
Except for amendments related
to removal of directors, the restrictions on ownership and transfer of shares of our stock and the requirement of a two-thirds vote for
amendments to these provisions (each of which require the affirmative vote of the holders of not less than two-thirds of all the votes
entitled to be cast on the matter and the approval of our board of directors), our charter may be amended only with the approval of the
board of directors and the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter.
Our board of directors has the
exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws. In addition, our stockholders may alter
or repeal any provision of our bylaws and adopt new bylaws if any such alteration, repeal or adoption is approved by the affirmative
vote of a majority of the votes entitled to be cast on the matter.
Dissolution of Two Harbors
Our dissolution must be approved
by a majority of the entire board of directors and the affirmative vote of holders of not less than a majority of all of the votes entitled
to be cast on the matter.
Advance Notice of Director Nominations and New
Business
Our bylaws provide that, with
respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors and the proposal of other
business to be considered by stockholders may be made only:
| · | pursuant
to our notice of the meeting; |
| · | by
or at the direction of our board of directors; or |
| · | by
a stockholder who was a stockholder of record both at the time of giving his notice and at
the time of the meeting and who is entitled to vote at the meeting on the election of directors
or on the proposal of other business, as the case may be, and has complied with the advance
notice provisions set forth in our bylaws. |
| · | With
respect to special meetings of stockholders, only the business specified in our notice of
meeting may be brought before the meeting. Nominations of individuals for election to our
board of directors may be made only: |
| · | by
or at the direction of our board of directors; or |
| · | provided
that the board of directors has determined that directors will be elected at such meeting,
by a stockholder who was a stockholder of record both at the time of giving his notice and
at the time of the meeting and who is entitled to vote at the meeting and has complied with
the advance notice provisions set forth in our bylaws. |
Anti-takeover Effect of Certain Provisions of Maryland
Law and of Our Charter and Bylaws
Our charter and bylaws and Maryland
law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for
shares of our common stock or otherwise be in the best interests of our stockholders, including business combination provisions, supermajority
vote requirements and advance notice requirements for director nominations and stockholder proposals. Likewise, if the provision in the
bylaws opting out of the control share acquisition provisions of the MGCL were rescinded or if we were to opt into the classified board
or other provisions of Subtitle 8, these provisions of the MGCL could have similar anti-takeover effects.
Exclusive Forum
Our bylaws provide that, unless
we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does
not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, shall be the sole and exclusive
forum for the following: any derivative action or proceeding brought on behalf of Two Harbors; any action asserting a claim of breach
of any duty owed by any of our directors or officers or our other employees to us or to our stockholders; any action asserting a claim
against us or any of our directors or officers or our other employees arising pursuant to any provision of the MGCL or our charter or
bylaws; or any action asserting a claim against us or any of our directors or officers or our employees that is governed by the internal
affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the
stockholder believes is favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against
us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our bylaws inapplicable to,
or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated
with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Indemnification and Limitation of Directors’
and Officers’ Liability
Maryland law permits a Maryland
corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property
or services or active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. Our charter
contains such a provision that eliminates such liability to the maximum extent permitted by Maryland law.
The MGCL
requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful,
on the merits or otherwise, 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 in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established
that:
| · | the
act or omission of the director or officer was material to the matter giving rise to the
proceeding and (1) was committed in bad faith or (2) was the result of active and
deliberate dishonesty; |
| · | the
director or officer actually received an improper personal benefit in money, property or
services; or |
| · | in
the case of any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. |
However, under the MGCL, a
Maryland corporation may not indemnify a director or officer in a suit by or in the right of the corporation in which the director
or officer was adjudged liable to the corporation or in a proceeding in which the director or officer was adjudged liable on the
basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer
is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of
conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse
judgment in a suit by us or in our right, or for a judgment of liability on the basis that personal benefit was improperly received,
is limited to expenses.
In addition, the MGCL permits
a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:
| · | a
written affirmation by the director or officer of his or her good faith belief that he or
she has met the standard of conduct necessary for indemnification by the corporation; and |
| · | a
written undertaking by the director or officer or on the director’s or officer’s
behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined
that the director or officer did not meet the standard of conduct. |
Our charter authorizes us to
obligate ourselves and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify
and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses
in advance of final disposition of a proceeding to:
| · | any
present or former director or officer of ours who is made or threatened to be made a party
to the proceeding by reason of his or her service in that capacity; or |
| · | any
individual who, while a director or officer of ours and at our request, serves or has served
another corporation, REIT, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee of such corporation, REIT, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made or threatened
to be made a party to the proceeding by reason of his or her service in that capacity. |
Our charter and bylaws also permit
us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any
employee or agent of ours or a predecessor of ours.
We have entered into indemnification
agreements with each of our directors and executive officers that provide for indemnification to the maximum extent permitted by Maryland
law. In addition, the operating agreements of our subsidiaries provide that we, as managing member, and our officers and directors are
indemnified to the fullest extent permitted by law.
Insofar
as the foregoing provisions permit indemnification of directors, officers or persons controlling us for liability arising under the Securities
Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
REIT Qualification
Our charter provides that our
board of directors may revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it
is no longer in our best interests to continue to qualify as a REIT.
U.S.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of
the material U.S. federal income tax considerations relating to the qualification and taxation of Two Harbors as a REIT and the acquisition,
holding and disposition of our common stock. For purposes of this section, references to “Two Harbors,” “our,”
“us” or “we” mean only Two Harbors Investment Corp. and not any of its subsidiaries or other lower-tier entities
except as otherwise indicated. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, or the
Treasury Regulations, current administrative interpretations and practices of the Internal Revenue Service, or IRS, (including administrative
interpretations and practices expressed in private letter rulings which are binding on the IRS only with respect to the particular taxpayers
who requested and received those rulings) and judicial decisions, all as currently in effect and all of which are subject to differing
interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court
would not sustain, a position contrary to any of the tax considerations described below. No advance ruling has been or will be sought
from the IRS regarding any matter discussed in this summary. The summary is also based upon the assumption that our operation, and the
operation of our subsidiaries and other lower-tier and affiliated entities will, in each case, be in accordance with such entity’s
applicable organizational documents. This summary does not discuss the impact that U.S. state and local taxes and taxes imposed by non-U.S.
jurisdictions could have on the matters discussed in this summary. This summary is for general information only, and does not purport
to discuss all aspects of U.S. federal income taxation that may be important to a particular stockholder in light of its investment or
tax circumstances or to stockholders subject to special tax rules, such as:
| · | persons
who mark-to-market our common stock; |
| · | subchapter
S corporations; |
| · | U.S.
stockholders (as defined below) whose functional currency is not the U.S. dollar; |
| · | regulated
investment companies, or RICs; |
| · | holders
who receive our common stock through the exercise of employee stock options or otherwise
as compensation; |
| · | persons
holding our common stock as part of a “straddle,” “hedge,” “conversion
transaction,” “synthetic security” or other integrated investment; |
| · | persons
subject to the alternative minimum tax provisions of the Code; |
| · | persons
holding their interest in us through a partnership or similar pass-through entity; |
| · | persons
holding a 10% or more (by vote or value) beneficial interest in us; |
| · | tax-exempt
organizations; and |
| · | non-U.S.
stockholders (as defined below, and except as otherwise discussed below). |
This summary assumes that holders
hold our common stock as capital assets, which generally means as property held for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT
OF HOLDERS OF OUR COMMON STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S.
FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE U.S. FEDERAL INCOME TAX TREATMENT
OF HOLDING OUR COMMON STOCK TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE
URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN
LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF TWO HARBORS COMMON STOCK.
| U.S. | Federal Income Tax Considerations of Two Harbors as a REIT |
Taxation of Two Harbors — General
We have elected to be taxed as
a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2009. We believe that we
have been organized and we intend to operate in a manner that allows us to continue to qualify for taxation as a REIT under the Code.
The law firm of Sidley Austin
LLP has acted as our special counsel for tax matters in connection with this registration. We have received an opinion of Sidley Austin
LLP to the effect that we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT
under the Code, and our actual method of operation has enabled, and our proposed method of operation will continue to enable us, to meet
the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that the opinion of Sidley Austin LLP
is based on various assumptions relating to our organization and operation, including that all factual representations and statements
set forth in all relevant documents, records and instruments are true and correct and that we will at all times operate in accordance
with the method of operation described in our organizational documents and this document. Additionally, the opinion of Sidley Austin
LLP is conditioned upon factual representations and covenants made by our management, regarding our organization, assets, present and
future conduct of our business operations and other items regarding our ability to continue to meet the various requirements for qualification
as a REIT, and assumes that such representations and covenants are accurate and complete and that we will take no action that could adversely
affect our qualification as a REIT. While we believe we are organized and intend to continue to 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 or applicable law, no assurance can be given by Sidley Austin LLP or us that we will so qualify
for any particular year. Sidley Austin LLP will have no obligation to advise us or the holders of our shares of common stock of any subsequent
change in the matters stated, represented or assumed or of any subsequent change in the applicable law. You should be aware that opinions
of counsel are not binding on the IRS, or any court, and no assurance can be given that the IRS will not challenge the conclusions set
forth in such opinions.
Qualification and taxation as
a REIT depend on our ability to meet, on a continuing basis, through actual results of operations, distribution levels, diversity of
share ownership and various qualification requirements imposed upon REITs by the Code, the compliance with which will not be reviewed
by Sidley Austin LLP. In addition, our ability to qualify as a REIT may depend in part upon the operating results, organizational structure
and entity classification for U.S. federal income tax purposes of certain entities in which we invest. Our ability to qualify as a REIT
also requires that we satisfy certain asset and income tests, some of which depend upon the fair market values of assets directly or
indirectly owned by us or which serve as security for loans made by us. Such values may not be susceptible to a precise determination.
Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy the requirements for
qualification and taxation as a REIT.
Taxation of REITs in General
As
indicated above, qualification and taxation as a REIT depend on our ability to meet, on a continuing basis, through actual results of
operations, distribution levels, diversity of share ownership and various qualification requirements imposed upon REITs by the Code.
The material qualification requirements are summarized below, under “— Requirements for Qualification as a REIT.”
While we believe that we will continue to operate so that we qualify as a REIT, no assurance can be given that the IRS will not challenge
our qualification as a REIT or that we will be able to continue to operate in accordance with the REIT requirements in the future. See
“— Failure to Qualify.”
Provided
that we qualify as a REIT, we will generally be entitled to a deduction for dividends that we pay and, therefore, will not be subject
to U.S. federal corporate income tax on our net taxable income that is currently distributed to our stockholders. This treatment substantially
eliminates the “double taxation” at the corporate and stockholder levels that results generally from investment in a corporation.
Rather, income generated by a REIT and distributed to its stockholders generally is taxed only at the stockholder level, upon a distribution
of dividends by the REIT. See “— Taxation of Taxable U.S. Stockholders.”
Individuals
who are stockholders of corporations that are not REITs are generally taxed on qualifying corporate dividends at a maximum rate of 20%,
thereby substantially reducing, though not completely eliminating, the double taxation that has historically applied to corporate dividends.
With limited exceptions, however, dividends received by individual U.S. stockholders from us or from other entities that are taxed as
REITs are taxed at rates applicable to ordinary income, which will be as high as 37%. However, under the Tax Cuts and Jobs Act, or TCJA,
dividends received by individual U.S. stockholders from us that are neither attributable to “qualified dividend income” nor
designated as “capital gain dividends” will be eligible for a deduction equal to 20% of the amount of such dividends in taxable
years beginning before January 1, 2026, provided that the U.S. stockholder satisfies certain holding period requirements. Net operating
losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to the stockholders of the REIT, subject
to special rules for certain items, such as capital gains, recognized by REITs. See “— Taxation of Taxable
U.S. Stockholders.”
Even if we qualify for taxation
as a REIT, however, we will be subject to U.S. federal income taxation as follows:
| · | We
will be taxed at the regular U.S. federal corporate income tax rate (currently 21%) on any
undistributed income, including undistributed net capital gains. |
| · | If
we have net income from prohibited transactions, which are, in general, sales or other dispositions
of property held primarily for sale to customers in the ordinary course of business, other
than foreclosure property, such income will be subject to a 100% tax. See “—
Prohibited Transactions” and “— Foreclosure Property”
below. |
| · | If
we elect to treat property that we acquire in connection with a foreclosure of a mortgage
loan or from certain leasehold terminations as “foreclosure property,” we may
thereby avoid (a) the 100% tax on gain from a resale of that property (if the sale would
otherwise constitute a prohibited transaction) and (b) the inclusion of any income from
such property not qualifying for purposes of the REIT gross income tests discussed below,
but the income from the sale or operation of the property may be subject to income tax at
the corporate tax rate. |
| · | If
we fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below,
but nonetheless maintain our qualification as a REIT because other requirements are met,
we will be subject to a 100% tax on an amount equal to (a) the greater of (1) the
amount by which we fail the 75% gross income test or (2) the amount by which we fail
the 95% gross income test, as the case may be, multiplied by (b) a fraction intended
to reflect our profitability. |
| · | If
we fail to satisfy any of the REIT asset tests, as described below, other than a failure
of the 5% or 10% REIT asset tests that does not exceed a statutory de minimis amount
as described more fully below, but our failure is due to reasonable cause and not due to
willful neglect and we nonetheless maintain our REIT qualification because of specified cure
provisions, we will be required to pay a tax equal to the greater of $50,000 or the corporate
tax rate of the net income generated by the non-qualifying assets during the period in which
we failed to satisfy the asset tests. |
| · | If
we fail to satisfy any provision of the Code that would result in our failure to qualify
as a REIT (other than a gross income or asset test requirement) and the violation is due
to reasonable cause and not willful neglect, we may retain our REIT qualification but we
will be required to pay a penalty of $50,000 for each such failure. |
| · | If
we fail to distribute during each calendar year at least the sum of (a) 85% of our REIT
ordinary income for such year, (b) 95% of our REIT capital gain net income for such
year and (c) any undistributed taxable income from prior periods (the foregoing sum
is referred to as the required distribution), we will be subject to a 4% excise tax on the
excess of the required distribution over the sum of (1) the amounts actually distributed
(taking into account excess distributions from prior years), plus (2) retained amounts
on which income tax is paid at the corporate level. |
| · | We
may be required to pay monetary penalties to the IRS in certain circumstances, including
if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating
to the composition of our stockholders, as described below in “— Requirements
for Qualification as a REIT.” |
| · | A
100% excise tax may be imposed on some items of income and expense that are directly or constructively
paid between us and any TRSs we may own if and to the extent that the IRS successfully adjusts
the reported amounts of these items. |
| · | If
we acquire appreciated assets from a corporation that is not a REIT in a transaction in which
the adjusted tax basis of the assets in our hands is determined by reference to the adjusted
tax basis of the assets in the hands of the non-REIT corporation, we will be subject to tax
on such appreciation at the corporate income tax rate then applicable if we subsequently
recognize gain on a disposition of any such assets during the 5-year period following their
acquisition from the non-REIT corporation. The results described in this paragraph assume
that the non-REIT corporation will not elect, in lieu of this treatment, to be subject to
an immediate tax when the asset is acquired by us. |
| · | We
will generally be subject to tax on the portion of any excess inclusion income derived from
an investment in residual interests in real estate mortgage investment conduits, or REMICs,
to the extent our stock is held by specified tax-exempt organizations not subject to tax
on unrelated business taxable income. Similar rules will apply if we own an equity interest
in a taxable mortgage pool. To the extent that we own a REMIC residual interest or a taxable
mortgage pool through a TRS, we will not be subject to this tax. |
| · | We
may elect to retain and pay income tax on our net long-term capital gain. In that case, a
stockholder would include its proportionate share of our undistributed long-term capital
gain (to the extent we make a timely designation of such gain to the stockholder) in its
income, would be deemed to have paid the tax that we paid on such gain, and would be allowed
a credit for its proportionate share of the tax deemed to have been paid, and an adjustment
would be made to increase the stockholder’s basis in our common stock. Stockholders
that are U.S. corporations will also appropriately adjust their earnings and profits for
the retained capital gains in accordance with Treasury Regulations to be promulgated. |
| · | We
may have subsidiaries or own interests in other lower-tier entities that are subchapter C
corporations, the earnings of which would be subject to U.S. federal corporate income tax. |
In addition, we may be subject
to a variety of taxes other than U.S. federal income tax, including payroll taxes and state and local income, franchise property and
other taxes. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation,
trust or association:
| · | that
is managed by one or more trustees or directors; |
| · | the
beneficial ownership of which is evidenced by transferable shares or by transferable certificates
of beneficial interest; |
| · | that
would be taxable as a domestic corporation but for the special Code provisions applicable
to REITs; |
| · | that
is neither a financial institution nor an insurance company subject to specific provisions
of the Code; |
| · | the
beneficial ownership of which is held by 100 or more persons during at least 335 days of
a taxable year of 12 months, or during a proportionate part of a taxable year of less than
12 months; |
| · | in
which, during the last half of each taxable year, not more than 50% in value of the outstanding
stock is owned, directly or indirectly, by five or fewer “individuals” (as defined
in the Code to include specified entities); |
| · | which
meets other tests described below, including with respect to the nature of its income and
assets and the amount of its distributions; and |
| · | that
makes an election to be a REIT for the current taxable year or has made such an election
for a previous taxable year that has not been terminated or revoked. |
The Code provides that the first
through fourth conditions must be met during the entire taxable year, and that the fifth condition must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. The fifth and sixth conditions do not need
to be satisfied for the first taxable year for which an election to become a REIT has been made. Our charter provides restrictions regarding
the ownership and transfer of our stock, which are intended, among other purposes, to assist in satisfying the share ownership requirements
described in the fifth and sixth conditions. For purposes of the sixth condition, an “individual” generally includes a supplemental
unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable
purposes, but does not include a qualified pension plan or profit sharing trust.
To monitor compliance with the
share ownership requirements, we are generally required to maintain records regarding the actual ownership of our shares. To do so, we
must demand written statements each year from the record holders of significant percentages of our shares of stock, in which the record
holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the dividends paid
by us). A list of those persons failing or refusing to comply with this demand must be maintained as part of our records. Failure by
us to comply with these record-keeping requirements could subject us to monetary penalties. If we satisfy these requirements and after
exercising reasonable diligence would not have known that the sixth condition is not satisfied, we will be deemed to have satisfied such
condition. A stockholder that fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with
its tax return disclosing the actual ownership of the shares and other information.
In addition, a corporation generally
may not elect to become a REIT unless its taxable year is the calendar year. We satisfy this requirement.
Effect of Subsidiary Entities
Ownership of Partnership Interests
In
the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT is deemed to own its proportionate
share of the partnership’s assets and to earn its proportionate share of the partnership’s gross income based on its pro
rata share of capital interests in the partnership for purposes of the asset and gross income tests applicable to REITs, as described
below. However, solely for purposes of the 10% value test, described below, the determination of a REIT’s interest in partnership
assets will be based on the REIT’s proportionate interest in any securities issued by the partnership, excluding for these purposes,
certain excluded securities as described in the Code. In addition, the assets and gross income of the partnership generally are deemed
to retain the same character in the hands of the REIT. Thus, our proportionate share of the assets and items of income of partnerships
in which we own an equity interest is treated as an asset and as an item of income for us for purposes of applying the REIT requirements
described below. Consequently, to the extent that we directly or indirectly hold a preferred or other equity interest in a partnership,
the partnership’s assets and operations may affect our ability to qualify as a REIT, even though we may have no control or only
limited influence over the partnership.
Disregarded Subsidiaries
If a REIT owns a corporate subsidiary
that is a “qualified REIT subsidiary,” that subsidiary is disregarded for U.S. federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income, deduction
and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs, as summarized below. A
qualified REIT subsidiary is any corporation, other than a TRS, that is wholly owned by a REIT, by other disregarded subsidiaries or
by a combination of the two. Single member limited liability companies that are wholly owned by a REIT are also generally disregarded
as separate entities for U.S. federal income tax purposes, including for purposes of the REIT gross income and asset tests. Disregarded
subsidiaries, along with partnerships in which we hold an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”
In
the event that a disregarded subsidiary ceases to be wholly owned by us (for example, if any equity interest in the subsidiary is acquired
by a person other than us or another disregarded subsidiary of ours), the subsidiary’s separate existence would no longer be disregarded
for U.S. federal income tax purposes. Instead, it would have multiple owners and would be treated as either a partnership or a taxable
corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross
income tests applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of
the value or voting power of the outstanding securities of another corporation. See “— Asset Tests” and
“— Gross Income Tests.”
Taxable REIT Subsidiaries
A REIT, in general, may jointly
elect with a subsidiary corporation, whether or not wholly owned, to treat the subsidiary corporation as a TRS. The separate existence
of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax
purposes. Accordingly, such an entity would generally be subject to corporate income tax on its earnings, which may reduce the cash flow
generated by us and our subsidiaries in the aggregate and our ability to make distributions to our stockholders.
We and one of our subsidiaries
have jointly elected for such subsidiary to be treated as a TRS. This election allows such subsidiary to invest in assets and engage
in activities that could not be held or conducted directly by us without jeopardizing our qualification as a REIT. While we currently
only have one TRS, we may make joint elections for additional subsidiaries to be treated as TRSs in the future.
A REIT is not treated as holding
the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued
by the subsidiary is an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if any, that it receives
from the subsidiary. This treatment can affect the gross income and asset test calculations that apply to the REIT, as described below.
Because a parent REIT does not include the assets and income of such subsidiary corporations in determining the parent’s compliance
with the REIT requirements, such entities may be used by the
parent REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through pass-through
subsidiaries or render commercially unfeasible (for example, activities that give rise to certain categories of income such as non-qualifying
hedging income or inventory sales). If dividends are paid to us by one or more TRSs we may own, then a portion of the dividends that
we distribute to stockholders who are taxed at individual rates generally will be eligible for taxation at preferential qualified dividend
income tax rates rather than at ordinary income rates. See “— Taxation of Taxable U.S. Stockholders”
and “— Annual Distribution Requirements.”
Certain restrictions imposed
on TRSs are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. If amounts are
paid to a REIT or deducted by a TRS due to transactions between a REIT, its tenants and/or the TRS, that exceed the amount that would
be paid to or deducted by a party in an arm’s-length transaction, the REIT generally will be subject to an excise tax equal to
100% of such excess. In addition, under Section 163(j) of the Code, a TRS generally may not deduct “business interest”
expense (i.e., business interest expense in excess of the TRS’s business interest income for the tax year) to the extent such interest
exceeds 30% of the TRS’s “adjusted taxable income” (as defined under Section 163(j) of the Code). Any amount
disallowed is carried forward and treated as business interest expense paid or accrued in the succeeding tax year.
Gross Income Tests
In order to maintain our qualification
as a REIT, we must annually satisfy two gross income tests. First, at least 75% of our gross income for each taxable year, excluding
gross income from sales of inventory 36 or dealer property in “prohibited transactions” and certain hedging and foreign currency
transactions, must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property
or mortgage loans on real property or qualified temporary investment income. Qualifying income for purposes of the 75% gross income test
generally includes:
| · | rents
from real property; |
| · | interest
on debt secured by a mortgage on real property or on interests in real property; |
| · | dividends
or other distributions on, and gain from the sale of, stock in other REITs; |
| · | gain
from the sale of real estate assets (other than a nonqualified publicly offered REIT debt
instrument); |
| · | income
and gain derived from foreclosure property; |
| · | amounts,
such as commitment fees, received in consideration for entering into an agreement to make
a loan secured by real property, unless such amounts are determined by income and profits; |
| · | income
derived from a REMIC in proportion to the real estate assets held by the REMIC, unless at
least 95% of the REMIC’s assets are real estate assets, in which case all of the income
derived from the REMIC; and |
| · | income
derived from certain kinds of temporary investments. |
Second, at least 95% of our gross
income in each taxable year, excluding gross income from prohibited transactions and certain hedging and foreign currency transactions,
must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends,
interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.
For purposes of the 75% and
95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any
limited liability company treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which share
is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified
REIT subsidiary or other disregarded subsidiary for U.S. federal income tax purposes.
Interest Income
Interest income constitutes qualifying
mortgage interest for purposes of the 75% gross income test to the extent that the obligation is secured by a mortgage on real property.
If we receive interest income with respect to a mortgage loan that is secured by both real property and other property and the highest
principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we
acquired the mortgage loan, the interest income will be apportioned between the real property and the other property, and our income
from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the
real property. Even if a loan is not secured by real property or is under secured, the income that it generates may nonetheless qualify
for purposes of the 95% gross income test.
We may invest in Agency RMBS
whose principal and interest payments are guaranteed by a U.S. government agency, such as Ginnie Mae, or a government sponsored entity,
or GSE, that are pass-through certificates. We expect that these agency pass-through certificates will be treated as interests in grantor
trusts for federal income tax purposes. Consequently, we will be treated as owning an undivided beneficial interest in the mortgage loans
held by the grantor trust. The interest on such mortgage loans will be qualifying income for purposes of the 75% and 95% gross income
tests to the extent that the obligation is secured by real property, as discussed above.
We may invest in RMBS that are
not issued or guaranteed by a U.S. government agency or a GSE. We expect that our investments in non-agency RMBS will be treated as interests
in REMICs for federal income tax purposes. In the case of a non-agency RMBS treated as an interest in a REMIC, such interest will generally
qualify as a real estate asset. Income derived from REMIC interests will generally be treated as qualifying income for purposes of the
75% and 95% gross income tests described above. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined
as if we held such assets), only the income derived from the REMIC in proportion to the real estate assets held by the REMIC would be
qualifying income for purposes of the 75% gross income test. In addition, some REMIC securitizations include embedded interest rate swap
or cap contracts or other derivative instruments that potentially could produce non-qualifying income.
We expect that the interest income
that we receive from our mortgage-related securities generally will be qualifying income for purposes of both the 75% and 95% gross income
tests. However, to the extent that we own non-REMIC collateralized mortgage obligations, or CMOs, or other debt instruments secured by
mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities that are not secured by mortgages
on real property or interests in real property, the interest income received with respect to such securities generally will be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income test.
Dividend Income
We may receive distributions
from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions are generally classified as dividend
income to the extent of the earnings and profits of the distributing corporation. Such distributions generally constitute qualifying
income for purposes of the 95% gross income test, but not the 75% gross income test. Any dividends received by us from a REIT will be
qualifying income in our hands for purposes of both the 95% and 75% gross income tests.
TBAs
We may use “to-be-announced”,
or TBA, forward contracts as a means of investing and financing Agency RMBS. There is no direct authority with respect to the qualifications
of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests
in mortgages on real property) or other qualifying income for purposes of the 75% gross income test. We intend to treat income and gains
from our TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Sidley Austin
LLP substantially to the effect that, for purposes of the 75% gross income test, any gain recognized by us in connection with the settlement
of TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS. Such opinions of counsel are not binding
on the IRS, and there can be no assurance that the IRS will not successfully challenge the conclusions set forth therein. In addition,
the opinion of Sidley Austin LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations
and covenants made by our management regarding our TBAs. If the IRS were to successfully challenge the opinion of Sidley Austin LLP,
we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of
TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
Excess MSRs
We may invest in excess MSRs.
Based upon IRS guidance, we intend to treat interest received from excess MSRs as interest on obligations, secured by mortgages on real
property and, therefore, as qualifying for purposes of the 75% gross income test. However, it is possible that the IRS could assert that
such interest income is not qualifying income under the 75% gross income test. In the event that such income was determined not to be
qualifying income for the 75% gross income test, we could be subject to a penalty tax or we could fail to remain qualified as a REIT
if a sufficient portion of our assets consists of excess MSRs or a sufficient portion of our income consists of income or gains from
excess MSRs.
Hedging Transactions
We may enter into hedging transactions
with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate
swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments.
Except to the extent provided by Treasury Regulations, any income from a hedging transaction we enter into (i) in the normal course
of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or
to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as
specified in Treasury Regulations before the close of the day on which it was acquired, originated, or entered into, including gain from
the sale or disposition of such a transaction, or (ii) primarily to manage risk of currency fluctuations with respect to any item
of income or gain that would be qualifying income under the 75% or 95% income tests, which is clearly identified as such before the close
of the day on which it was acquired, originated, or entered into, will not constitute gross income for purposes of the 75% or 95% gross
income test. In addition, income from certain new hedging transactions that counteract prior qualifying hedging transactions described
in (i) and (ii) above may not constitute gross income for purposes of the 75% and 95% gross income tests. To the extent that
we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income
for purposes of both of the 75% and 95% gross income tests. We intend to structure any hedging transactions in a manner that does not
jeopardize our qualification as a REIT.
Failure to Satisfy the Gross Income
Tests
We intend to monitor our sources
of income, including any non-qualifying income received by us, so as to ensure our compliance with the gross income tests. If we fail
to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may still qualify as a REIT for the year if we are
entitled to relief under applicable provisions of the Code. These relief provisions will generally be available if our failure to meet
these tests was due to reasonable cause and not due to willful neglect and, following the identification of such failure, we set forth
a description of each item of our gross income that satisfies the gross income tests in a schedule for the taxable year filed in accordance
with the Treasury Regulations. It is not possible to state whether we would be entitled to the benefit of these relief provisions in
all circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will not qualify
as a REIT. As discussed above under “— Taxation of REITs in General,” even where these relief provisions apply,
a tax would be imposed upon the profit attributable to the amount by which we fail to satisfy the particular gross income test.
Phantom Income
Due to the nature of the assets
in which we will invest, we may be required to recognize taxable income from certain of our assets in advance of our receipt of cash
flow on or proceeds from disposition of such assets, and we may be required to report taxable income in early periods that exceeds the
economic income ultimately realized on such assets.
We may acquire mortgage-backed
securities in the secondary market for less than their face amount. For example, it is likely that we will invest in assets, including
mortgage-backed securities, requiring us to accrue original issue discount, or OID, or recognize market discount income, 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.” We may also be required under the terms of the indebtedness that we incur 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.
Due to each of these potential
differences between income recognition or expense deduction and related cash receipts or disbursements, there is a significant risk that
we may have taxable income substantially in excess of cash available for distribution. In that event, we may need to borrow funds or
take other actions to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized.
See “— Annual Distribution Requirements.”
Asset Tests
We, at the close of each calendar
quarter, must also satisfy four tests relating to the nature of our assets.
| · | First,
at least 75% of the value of our total assets must be represented by some combination of: |
| · | U.S.
government securities; |
| · | interests
in real property; |
| · | interests
in mortgage loans secured by real property; |
| · | stock
(or transferable certificates of beneficial interest) in other REITs; |
| · | debt
instruments issued by publicly offered REITs; and |
| · | regular
or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consist
of assets that are qualifying real estate-related assets under the U.S. federal income tax
laws, determined as if we held such assets, we will be treated as holding our proportionate
share of the assets of such REMIC. |
| · | Second,
the value of any one issuer’s securities owned by us may not exceed 5% of the value
of our assets. |
| · | Third,
we may not own more than 10% of any one issuer’s outstanding securities, as measured
by either voting power or value. |
| · | Fourth,
the aggregate value of all securities of TRSs held by us may not exceed 20% of the value
of our gross assets. |
| · | Fifth,
debt instruments issued by publicly offered REITs, if they would not otherwise qualify as
“real estate assets,” cannot exceed 25% of the value of our total assets. |
The 5% and 10% asset tests do
not apply to securities of TRSs and qualified REIT subsidiaries and securities that satisfy the 75% asset test. The 10% value test does
not apply to certain “straight debt” and other excluded securities, as described in the Code, including but not limited to
any loan to an individual or an estate, any obligation to pay rents from real property and any security issued by a REIT. In addition,
(i) a REIT’s interest as a partner in a partnership is not considered a security for purposes of applying the 10% value test;
(ii) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a
security issued by the partnership if at least 75% of the partnership’s gross income is derived from sources that would qualify
for the 75% REIT gross income test; and (iii) any debt instrument issued by a partnership (other than straight debt or other excluded
security) will not be considered a security issued by the partnership to the extent of the REIT’s interest as a partner in the
partnership.
For purposes of the 10% value
test, “straight debt” means a written unconditional promise to pay on demand on a specified date a sum certain in money if:
| · | the
debt is not convertible, directly or indirectly, into stock; |
| · | the
interest rate and interest payment dates are not contingent on profits, the borrower’s
discretion, or similar factors other than certain contingencies relating to the timing and
amount of principal and interest payments, as described in the Code; and |
| · | in
the case of an issuer that is a corporation or a partnership, securities that otherwise would
be considered straight debt will not be so considered if we, and any of our “controlled
taxable REIT subsidiaries” as defined in the Code, hold any securities of the corporate
or partnership issuer that: |
| · | are
not straight debt or other excluded securities (prior to the application of this rule); and |
| · | have
an aggregate value greater than 1% of the issuer’s outstanding securities (including,
for the purposes of a partnership issuer, its interest as a partner in the partnership). |
After initially meeting the asset
tests at the close of any quarter, we will not lose our qualification as a REIT for failure to satisfy the asset tests at the end of
a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire or increase our
ownership interest in securities during a quarter, we can cure this failure by disposing of sufficient non-qualifying assets within 30
days after the close of that quarter. If we fail the 5% asset test, or the 10% vote or value asset tests at the end of any quarter and
such failure is not cured within 30 days thereafter, we may dispose of sufficient assets (generally within six months after the last
day of the quarter in which our identification of the failure to satisfy these asset tests occurred) to cure such a violation that does
not exceed the lesser of 1% of our assets at the end of the relevant quarter or $10,000,000. If we fail any of the other asset tests
or our failure of the 5% and 10% asset tests is in excess of the de minimis amount described above, as long as such failure was
due to reasonable cause and not willful neglect, we may be permitted to avoid disqualification as a REIT, after the 30 day cure period,
by taking steps including the disposition of sufficient assets to meet the asset test (generally within six months after the last day
of the quarter in which our identification of the failure to satisfy the REIT asset test occurred) and paying a tax equal to the greater
of $50,000 or the corporate income tax rate (currently 21%) of the net income generated by the non-qualifying assets during the period
in which we failed to satisfy the asset test.
We may invest in Agency RMBS
whose principal and interest payments are guaranteed by a U.S. government agency, such as Ginnie Mae, or a GSE that are pass-through
certificates. We expect that these agency pass-through certificates will be treated as interests in grantor trusts. Consequently, we
will be treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust, and, therefore,
we will treat the Agency RMBS as qualifying assets for purposes of the 75% asset test.
We may invest in RMBS that are
not issued or guaranteed by a U.S. government agency or GSE. We expect that our investments in non-agency RMBS will be treated as interests
in REMICs for U.S. federal income tax purposes. In the case of an RMBS treated as an interest in a REMIC, such interest will generally
qualify as a real estate asset for purposes of the 75% asset test. If less than 95% of the assets of a REMIC are real estate assets,
however, then only a proportionate part of our interest in the REMIC would qualify for purposes of the 75% asset test.
We expect that the assets and
mortgage-related securities that we own generally will be qualifying assets for purposes of the 75% asset test. However, to the extent
that we own non-REMIC CMOs or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real
estate assets, or debt securities that are not secured by mortgages on real property, those securities may not be qualifying assets for
purposes of the 75% asset test.
TBAs
We may use TBA, forward contracts
as a means of investing and financing Agency RMBS. There is no direct authority with respect to the qualification of TBAs as real estate
assets or U.S. government securities for purposes of the 75% asset test. We intend to treat our TBAs as qualifying assets for purposes
of the 75% asset test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of
the 75% asset test, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS. Such opinion of counsel is not
binding on the IRS, and there can be no assurance that the IRS will not successfully challenge the conclusions set forth therein. In
addition, the opinion of Sidley Austin LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations
and covenants made by our management regarding our TBAs. If the IRS were to successfully challenge the opinion of Sidley Austin LLP,
we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of
TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
Excess MSRs
We may invest in excess MSRs.
Based on IRS guidance, we intend to treat excess MSRs as obligations secured by mortgages on real property and, therefore, as qualifying
for purposes of the 75% asset test. However, it is possible that the IRS could assert that such excess MSRs are not qualifying assets
under the 75% asset test. In the event that such excess MSRs were determined not to be qualifying assets for the 75% asset test, we could
be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of excess MSRs
or a sufficient portion of our income consists of income or gains from excess MSRs.
Repurchase Agreements
In order to finance some of the
assets that we hold or acquire, we may enter into repurchase agreements under which we will nominally sell certain of our assets to a
counterparty and simultaneously enter into an agreement to repurchase the sold assets. Although the tax treatment of repurchase transactions
is unclear, we take the position that, for U.S. federal income tax purposes, we are the owner of those assets that are the subject of
any such repurchase agreement notwithstanding that we may transfer record ownership of those assets to the counterparty during the term
of any such agreement. Because we enter into repurchase agreements, the tax treatment of which is unclear, 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.
Annual Distribution Requirements
In order to qualify as a REIT,
we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to:
| · | 90%
of our “REIT taxable income” (computed without regard to the deduction for dividends
paid and our net capital gains); and |
| · | 90%
of the net income (after tax), if any, from foreclosure property (as described below); minus |
| · | the
sum of specified items of non-cash income that exceeds a percentage of our income. |
These distributions must be paid
in the taxable year to which they relate or in the following taxable year if such distributions are declared in October, November or
December of the taxable year, are payable to stockholders of record on a specified date in any such month and are actually paid
before the end of January of the following year. Such distributions are treated as both paid by us and received by each stockholder
on December 31 of the year in which they are declared. In addition, at our election, a distribution for a taxable year may be declared
before we timely file our tax return for the year and be paid with or before the first regular dividend payment after such declaration,
provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable
to our stockholders in the year in which paid, even though the distributions relate to our prior taxable year for purposes of the 90%
distribution requirement.
Except
for distributions by “publicly offered REITs”, distributions must not be “preferred dividends” in order for such
distributions to be counted towards the distribution requirement. A dividend is not a preferential dividend if it is pro rata
among all outstanding shares of stock within a particular class and is in accordance with the preferences among different classes
of stock as set forth in the organizational documents. We believe that we are and will continue to be a publicly offered REIT and, therefore,
will not be subject to this limitation.
To the extent that we distribute
at least 90%, but less than 100%, of our “REIT taxable income,” as adjusted, we will be subject to tax at the regular corporate
tax rate on the retained portion. In addition, we may elect to retain, rather than distribute, our net long-term capital gains and pay
tax on such gains. In this case, we could elect to have our stockholders include their proportionate share of such undistributed long-term
capital gains in income and receive a corresponding credit for their proportionate share of the tax paid by us. Our stockholders would
then increase the adjusted basis of their stock in us by the difference between the designated amounts included in their long-term capital
gains and the tax deemed paid with respect to their proportionate shares.
If we fail to distribute during each calendar
year at least the sum of:
| · | 85%
of our REIT ordinary income for such year; |
| · | 95%
of our REIT capital gain net income for such year; and |
| · | any
undistributed taxable income from prior periods, |
we will be subject to a 4% excise tax on the excess
of such required distribution over the sum of (i) the amounts actually distributed (taking into account excess distributions from
prior periods) and (ii) the amounts of income retained on which we have paid corporate income tax. We intend to make timely distributions
so that we are not subject to the 4% excise tax.
It is possible that we, from
time to time, may not have sufficient cash to meet the distribution requirements due to timing differences between (i) the actual
receipt of cash, including receipt of distributions from our subsidiaries and (ii) the inclusion of items in income by us for U.S.
federal income tax purposes. For example, we may acquire debt instruments or notes whose stated redemption price may exceed its issue
price as determined for U.S. federal income tax purposes (such excess, OID), such that we will be required to include in our income a
portion of the OID each year that the instrument is held before we receive any corresponding cash. In the event that such timing differences
occur, in order to meet the distribution requirements, it might be necessary to arrange for short-term, or possibly long-term, borrowings
or to pay dividends in the form of taxable in-kind distributions of property, including taxable stock dividends. In the case of a taxable
stock dividend, stockholders would be required to include the dividend as income and would be required to satisfy the tax liability associated
with the distribution with cash from other sources including sales of our common stock. Both a taxable stock distribution and sale of
common stock resulting from such distribution could adversely affect the price of our common stock.
We may be able to rectify a failure
to meet the distribution requirements for a year by paying “deficiency dividends” to stockholders in a later year, which
may be included in our deduction for dividends paid for the earlier year. In this case, we may be able to avoid losing our qualification
as a REIT or being taxed on amounts distributed as deficiency dividends.
However, we will be required
to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
We are required to maintain records
and request on an annual basis information from specified stockholders. These requirements are designed to assist us in determining the
actual ownership of our outstanding stock and maintaining our qualifications as a REIT.
Prohibited Transactions
Net income we derive from a prohibited
transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of
property (other than foreclosure property) that is held as inventory or primarily for sale to customers, in the ordinary course of a
trade or business by a REIT, by a lower-tier partnership in which the REIT holds an equity interest or by a borrower that has issued
a shared appreciation mortgage or similar debt instrument to the REIT. We intend to conduct our operations so that no asset owned by
us or our pass-through subsidiaries will be held as inventory or primarily for sale to customers, and that a sale of any assets owned
by us directly or through a pass-through subsidiary will not be in the ordinary course of business. However, whether property is held
as inventory or “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular
facts and circumstances. No assurance can be given that any particular asset in which we hold a direct or indirect interest will not
be treated as property held as inventory or primarily for sale to customers or that certain safe harbor provisions of the Code that prevent
such treatment will apply. The 100% tax will not apply to gains from the sale of property that is held through a TRS or other taxable
corporation, although such income will be subject to tax in the hands of the corporation at the regular corporate income tax rate.
Foreclosure Property
Foreclosure property is real property and
any personal property incident to such real property:
| · | that
is acquired by a REIT as a result of the REIT having bid on the property at foreclosure or
having otherwise reduced the property to ownership or possession by agreement or process
of law after there was a default (or default was imminent) on a lease of the property or
a mortgage loan held by the REIT and secured by the property; |
| · | for
which the related loan or lease was acquired by the REIT at a time when default was not imminent
or anticipated; and |
| · | for
which such REIT makes a proper election to treat the property as foreclosure property. REITs
generally are subject to tax at the corporate tax rate (currently 21%) on any net income
from foreclosure property, including any gain from the disposition of the foreclosure property,
other than income that would otherwise be qualifying income for purposes of the 75% gross
income test. Any gain from the sale of property for which a foreclosure property election
has been made will not be subject to the 100% tax on gains from prohibited transactions described
above, even if the property would otherwise constitute inventory or dealer property in the
hands of the selling REIT. We do not anticipate that we will receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income test, but, if
we do receive any such income, we intend to elect to treat the related property as foreclosure
property. |
Failure to Qualify
In the event that we violate
a provision of the Code that would result in our failure to qualify as a REIT, we may nevertheless continue to qualify as a REIT. Specified
relief provisions will be available to us to avoid such disqualification if:
| · | the
violation is due to reasonable cause and not due to willful neglect; |
| · | we
pay a penalty of $50,000 for each failure to satisfy a requirement for qualification as a
REIT; and |
| · | the
violation does not include a violation under the gross income or asset tests described above
(for which other specified relief provisions are available). |
This cure provision reduces the
instances that could lead to our disqualification as a REIT for violations due to reasonable cause. If we fail to qualify for taxation
as a REIT in any taxable year and none of the relief provisions of the Code apply, we will be subject to tax on our taxable income at
the regular corporate rate. Distributions to our stockholders in any year in which we are not a REIT will not be deductible by us, nor
will they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, and, subject to limitations
of the Code, distributions to our stockholders will generally be taxable in the case of our stockholders who are individual U.S. stockholders
(as defined below) at a maximum rate of 20% and dividends in the hands of our corporate U.S. stockholders may be eligible for the dividends
received deduction. In addition, distributions to individual U.S. stockholders during any year in which we are not a REIT will not be
eligible for the deduction equal to 20% of the amount of such dividends. Unless we are entitled to relief under specific statutory provisions,
we will also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether, in all circumstances, we will be entitled to statutory relief.
Taxation of Taxable U.S. Stockholders
This section
summarizes the taxation of U.S. stockholders who hold our stock that are not tax-exempt organizations. For these purposes, a U.S. stockholder
is a beneficial owner of our stock who for U.S. federal income tax purposes is:
| · | a
citizen or resident of the U.S.; |
| · | a
corporation (including an entity treated as a corporation for U.S. federal income tax purposes)
created or organized in or under the laws of the U.S. or of a political subdivision thereof
(including the District of Columbia); |
| · | an
estate whose income is subject to U.S. federal income taxation regardless of its source;
or |
| · | any
trust if (i) a U.S. court is able to exercise primary supervision over the administration
of such trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust or (ii) it has a valid election in place to be treated as a U.S.
person. |
If an entity or arrangement treated
as a partnership for U.S. federal income tax purposes holds our stock, the U.S. federal income tax treatment of a partner generally will
depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding our common stock should
consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition
of our stock by the partnership.
Distributions
Provided that we qualify as a
REIT, distributions made to our taxable U.S. stockholders out of our current or accumulated earnings and profits, and not designated
as capital gain dividends, will generally be taken into account by them as ordinary dividend income and will not be eligible for the
dividends received deduction for corporations.
In determining the extent to
which a distribution with respect to our common stock constitutes a dividend for U.S. federal income tax purposes, our earnings and profits
will be allocated first to distributions with respect to our preferred stock, if any, and then to our common stock. Dividends received
from REITs are generally not eligible to be taxed at the preferential qualified dividend income rates applicable to individual U.S. stockholders
who receive dividends from taxable subchapter C corporations.
In addition, distributions from
us that are designated as capital gain dividends will be taxed to U.S. stockholders as long-term capital gains, to the extent that they
do not exceed our actual net capital gain for the taxable year, without regard to the period for which the U.S. stockholder has held
our stock. To the extent that we elect under the applicable provisions of the Code to retain our net capital gains, U.S. stockholders
will be treated as having received, for U.S. federal income tax purposes, our undistributed capital gains as well as a corresponding
credit for taxes paid by us on such retained capital gains. U.S. stockholders will increase their adjusted tax basis in our common stock
by the difference between their allocable share of such retained capital gain and their share of the tax paid by us. Long-term capital
gains are generally taxable at maximum federal rates of 20% in the case of U.S. stockholders who are individuals and 21% for corporations.
Distributions in excess of our
current and accumulated earnings and profits will not be taxable to a U.S. stockholder to the extent that they do not exceed the adjusted
tax basis of the U.S. stockholder’s shares in respect of which the distributions were made, but rather will reduce the adjusted
tax basis of those shares. To the extent that such distributions exceed the adjusted tax basis of an individual U.S. stockholder’s
shares, they will be included in income as long-term capital gain, or short-term capital gain if the shares have been held for one year
or less. In addition, any dividend declared by us in October, November or December of any year and payable to a U.S. stockholder
of record on a specified date in any such month will be treated as both paid by us and received by the U.S. stockholder on December 31
of such year, provided that the dividend is actually paid by us before the end of January of the following calendar year.
With respect to U.S. stockholders
who are taxed at the rates applicable to individuals, we may elect to designate a portion of our distributions paid to such U.S. stockholders
as “qualified dividend income.” A portion of a distribution that is properly designated as qualified dividend income is taxable
to non-corporate U.S. stockholders at the same rates as capital gain, provided that the U.S. stockholder has held the common stock with
respect to which the distribution is made for more than 60 days during the 121-day period beginning on the date that is 60 days before
the date on which such common stock became ex-dividend with respect to the relevant distribution. The maximum amount of our distributions
eligible to be designated as qualified dividend income for a taxable year is equal to the sum of:
| · | the
qualified dividend income received by us during such taxable year from non-REIT C corporations
(including any TRS in which we may own an interest); |
| · | the
excess of any “undistributed” REIT taxable income recognized during the immediately
preceding year over the U.S. federal income tax paid by us with respect to such undistributed
REIT taxable income; and |
| · | the
excess of any income recognized during the immediately preceding year attributable to the
sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the U.S. federal income tax paid by us with respect to such built-in
gain. |
In addition, the total amount
of dividends that we may designate as “qualified dividend income” or “capital gain dividends” may not exceed
our dividends paid for the taxable year. Generally, dividends that we receive will be treated as qualified dividend income for purposes
of the first bullet above if the dividends are received from a domestic C corporation (other than a REIT or a RIC), any TRS we may form,
or a “qualifying foreign corporation” and specified holding period requirements and other requirements are met.
Under the TCJA, dividends received
by individual U.S. stockholders from us that are neither attributable to “qualified dividend income” nor designated as “capital
gain dividends” will be eligible for a deduction equal to 20% of the amount of such dividends in taxable years beginning before
January 1, 2026, provided that the U.S. stockholders satisfies certain holding period requirements.
To the extent that we have available
net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that
must be made in order to comply with the REIT distribution requirements. See “U.S. Federal Income Tax Considerations of Two
Harbors as a REIT — Taxation of Two Harbors — General” and “U.S. Federal Income Tax Considerations of
Two Harbors as a REIT — Annual Distribution Requirements.” Such losses, however, are not passed through to U.S. stockholders
and do not offset income of U.S. stockholders from other sources, nor do they affect the character of any distributions that are actually
made by us, which are generally subject to tax in the hands of U.S. stockholders to the extent that we have current or accumulated earnings
and profits.
Dispositions of Our Common Stock
In general, a U.S. stockholder
will realize gain or loss upon the sale, redemption or other taxable disposition of our common stock in an amount equal to the difference
between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. stockholder’s
adjusted tax basis in the common stock at the time of the disposition. In general, a U.S. stockholder’s adjusted tax basis will
equal the U.S. stockholder’s acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. stockholder
(discussed above) less tax deemed paid on such gain and reduced by returns of capital. In general, capital gains recognized by individuals
and other non-corporate U.S. stockholders upon the sale or disposition of shares of our common stock will be subject to a maximum
U.S. federal income tax rate of 20%, if our common
stock is held for more than one year, and will be taxed at ordinary income rates (of up to 37%) if our common stock is held for one year
or less. Gains recognized by U.S. stockholders that are corporations are subject to U.S. federal income tax at a rate of 21%, whether
or not classified as long-term capital gains. U.S. stockholders are advised to consult with their tax advisors with respect to their
capital gain tax liability. Capital losses recognized by a U.S. stockholder upon the disposition of our common stock held for more than
one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain
income of the U.S. stockholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income
each year). In addition, any loss upon a sale or exchange of shares of our common stock by a U.S. stockholder who has held the shares
for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions
received from us that were required to be treated by the U.S. stockholder as long-term capital gain.
Passive Activity Losses and Investment Interest
Limitations
Distributions made by us and
gain arising from the sale or exchange by a U.S. stockholder of our common stock will not be treated as passive activity income. As a
result, U.S. stockholders will not be able to apply any “passive losses” against income or gain relating to our common stock.
Distributions made by us, to the extent they do not constitute a return of capital, generally will be treated as investment income for
purposes of computing the investment interest limitation. A U.S. stockholder that elects to treat capital gain dividends, capital gains
from the disposition of stock or qualified dividend income as investment income for purposes of the investment interest limitation will
be taxed at ordinary income rates on such amounts.
Medicare Tax
Certain U.S. stockholders, who
are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on dividends
and other income, including capital gain from the sale or disposition of our common stock.
Taxation of Tax-Exempt U.S. Stockholders
U.S. tax-exempt entities, including
qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income
taxation. However, they are subject to taxation on their unrelated business taxable income, or UBTI. While many investments in real estate
may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on
that ruling, and provided that:
| · | a
tax-exempt U.S. stockholder has not held our common stock as “debt financed property”
within the meaning of the Code (i.e., where the acquisition or holding of the
property is financed through a borrowing by the tax-exempt stockholder), |
| · | our
common stock is not otherwise used in an unrelated trade or business, and |
| · | we
do not hold an asset that gives rise to excess inclusion income, |
distributions from us and income from the sale of
our common stock generally should not give rise to UBTI to a tax-exempt U.S. stockholder.
Tax-exempt U.S. stockholders
that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services
plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject
to different UBTI rules, which generally will require them to characterize distributions from us as UBTI unless they are able to properly
claim a deduction for amounts set aside or placed in reserve for specific purposes so as to offset the income generated by its investment
in our common stock. These prospective investors should consult their tax advisors concerning these “set aside” and reserve
requirements.
In certain circumstances, a pension
trust that (i) is described in Section 401(a) of the Code, (ii) is tax exempt under Section 501(a) of the
Code, and (iii) owns more than 10% of our stock could be required to treat a percentage of the dividends from us as UBTI if we are
a “pension-held REIT.” We will not be a pension- held REIT unless (i) either (a) one pension trust owns more than
25% of the value of our stock, or (b) a group of pension trusts, each individually holding more than 10% of the value of our stock,
collectively owns more than 50% of such stock; and (ii) we would not have qualified as a REIT but for the fact that Section 856(h)(3) of
the Code provides that stock owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value
of the outstanding stock of a REIT is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code
to include certain entities), as owned by the beneficiaries of such trusts. Certain restrictions limiting ownership and transfer of our
stock should generally prevent a tax-exempt entity from owning more than 10% of the value of our stock, or us from becoming a pension-held
REIT.
Tax-exempt U.S. stockholders
are urged to consult their tax advisors regarding the U.S. federal, state and local tax consequences of owning our stock.
Taxation of Non-U.S. Stockholders
The following is a summary of
certain U.S. federal income tax consequences of the acquisition, ownership and disposition of our common stock applicable to non-U.S.
stockholders of our common stock. For these purposes, a non-U.S. stockholder is a beneficial owner of our stock who is neither a U.S.
stockholder nor an entity that is treated as a partnership for U.S. federal income tax purposes.
The discussion
is based on current law and is for general information only. It addresses only selective and not all aspects of U.S. federal income taxation
of non-U.S. stockholders. In addition, this discussion assumes that:
| · | you
will not have held more than 10% of our common stock (taking into account applicable constructive
ownership rules) at any time during the five-year period ending on the date on which you
dispose of our common stock or receive distributions from us; |
| · | our
common stock is and will continue to be “regularly traded” on an established
securities market located in the United States within the meaning of the Foreign Investment
in Real Property Tax Act of 1980, or FIRPTA, although there can be no assurance that this
will continue to be the case; and |
| · | you
are not a “qualified shareholder”, as defined in Section 897(k)(3)(A) of
the Code, which describes certain partnerships and other collective investment vehicles that
satisfy various recordkeeping, administrative and other requirements. |
If you are a non-U.S. stockholder
as to which any of these assumptions is not accurate, and in particular if you are a “qualified shareholder” within the meaning
of FIRPTA, you should consult your own tax advisor concerning the tax consequence to you of sales of our stock and the receipt of dividends
and other distributions from us.
General
For most foreign investors, investment
in a REIT that invests principally in mortgage loans and mortgage- backed securities is not the most tax-efficient way to invest in such
assets. That is because receiving distributions of income derived from such assets in the form of REIT dividends subjects most foreign
investors to withholding taxes that direct investment in those asset classes, and the direct receipt of interest and principal payments
with respect to them, would not. The principal exceptions are foreign sovereigns and their agencies and instrumentalities, which may
be exempt from withholding taxes on certain REIT dividends under the Code, and certain foreign pension funds or similar entities able
to claim an exemption from withholding taxes on REIT dividends under the terms of a bilateral tax treaty between their country of residence
and the United States.
Ordinary Dividends
The portion of dividends received
by non-U.S. stockholders payable out of our earnings and profits that are not effectively connected with a U.S. trade or business of
the non-U.S. stockholder will generally be subject to U.S. federal withholding tax at the rate of 30%, unless reduced or eliminated by
an applicable income tax treaty. Under some treaties, however, lower rates generally applicable to dividends do not apply to dividends
from REITs. In addition, any portion of the dividends paid to non-U.S. stockholders that are treated as excess inclusion income will
not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. In the case of a taxable stock dividend with respect
to which any withholding tax is imposed, we may have to withhold or dispose of part of the shares otherwise distributable in such dividend
and use such shares or the proceeds of such disposition to satisfy the withholding tax imposed.
In general, non-U.S. stockholders
will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our stock. In cases where the
dividend income from a non-U.S. stockholder’s investment in our common stock is, or is treated as, effectively connected with the
non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to U.S. federal
income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends, and may also be subject
to the 30% branch profits tax on the income after the application of the income tax in the case of a non-U.S. stockholder that is a corporation.
Non-Dividend Distributions
Unless either (i) the non-U.S.
stockholder’s investment in our common stock is effectively connected with a U.S. trade or business conducted by such non-U.S.
stockholder (in which case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain)
or (ii) the non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable
year and has a “tax home” in the U.S. (in which case the non-U.S. stockholder will be subject to a 30% tax on the individual’s
net capital gain for the year), distributions by us which are not dividends out of our earnings and profits will not be subject to U.S.
federal income tax. If we cannot determine at the time at which a distribution is made whether or not the distribution will exceed current
and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the
non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was,
in fact, in excess of our current and accumulated earnings and profits.
Capital Gain Dividends
Capital gain dividends received by a non-U.S.
stockholder from a REIT are generally not subject to U.S. federal income or withholding tax, unless either (i) the non-U.S. stockholder’s
investment in our common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder (in which
case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain) or (ii) the
non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has
a “tax home” in the U.S. (in which case the non-U.S. stockholder will be subject to a 30% tax on the individual’s net
capital gain for the year). In addition,under FIRPTA, a distribution made by us to a non-U.S. stockholder, to the extent attributable
to a gain from disposition of a “U.S. real property interest” held by us directly or through pass-through subsidiaries, will
be treated as a distribution subject to the rules discussed above under “— Taxation of Non-U.S. Stockholders —
Ordinary Dividends.”
Dispositions of Our Common Stock
Gain from the sale of our common
stock will be taxable in the U.S. to a non-U.S. stockholder, in two cases: (i) if the non-U.S. stockholder’s investment in
our common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder, the non-U.S. stockholder
will be subject to the same treatment as a U.S. stockholder with respect to such gain, or (ii) if the non-U.S. stockholder is a
nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home”
in the U.S., the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.
Other U.S. Federal Income Tax Withholding and
Reporting Requirements
The Foreign Account Tax
Compliance Act provisions of the Code currently impose a 30% withholding tax on U.S.-source dividends, interest and other income
items paid to (i) foreign financial institutions that do not agree to comply with certain diligence, reporting and withholding
obligations with respect to their U.S. accounts and (ii) non-financial foreign entities that do not identify (or confirm the
absence of) substantial U.S. owners. The withholding tax of 30% would apply to dividends paid to certain foreign entities unless
various information reporting requirements are satisfied. Recently issued proposed Treasury regulations, which non-U.S. stockholders
may rely on, eliminate the FATCA withholding tax on gross proceeds, but such regulations are currently only in proposed form and are
subject to change. For these purposes, a foreign financial institution generally is defined as any non-U.S. entity that
(i) accepts deposits in the ordinary course of a banking or similar business, (ii) is engaged in the business of holding
financial assets for the account of others, or (iii) is engaged or holds itself out as being engaged primarily in the business
of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such assets.
Backup Withholding and Information Reporting
We will report to our U.S. stockholders
and the IRS the amount of dividends paid during each calendar year and the amount of any tax withheld. Under the backup withholding rules,
a U.S. stockholder may be subject to backup withholding with respect to dividends paid unless the stockholder is a corporation or comes
within other exempt categories and, when required, demonstrates this fact or provides a taxpayer identification number or social security
number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. stockholder that does not provide his or her correct taxpayer identification number or social security number
may also be subject to penalties imposed by the IRS. In addition, we may be required to withhold a portion of capital gain distributions
to any U.S. stockholder who fails to certify its non-foreign status.
We must report annually to the
IRS and to each non-U.S. stockholder the amount of dividends paid to such holder and the tax withheld with respect to such dividends,
regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the non-U.S. stockholder resides under the provisions of an applicable
income tax treaty. A non-U.S. stockholder may be subject to backup withholding unless applicable certification requirements are met.
Payment of the proceeds of a
sale of our common stock within the U.S. is subject to both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a non-U.S. stockholder (and the payor does not have actual knowledge or reason to know
that the beneficial owner is a U.S. person) or the stockholder otherwise establishes an exemption. Payment of the proceeds of a sale
of our common stock conducted through certain U.S. related financial intermediaries is subject to information reporting (but not backup
withholding) unless the financial intermediary has documentary evidence in its records that the beneficial owner is a non-U.S. stockholder
and specified conditions are met or an exemption is otherwise established.
Backup withholding is not an
additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such stockholder’s
U.S. federal income tax liability provided the required information is furnished to the IRS.
State and Local Taxes
We and our stockholders may be
subject to state or local taxation in various jurisdictions, including those in which we or they transact business, own property or reside.
The state or local tax treatment of us and our stockholders may not conform to the U.S. federal income tax treatment discussed above.
Prospective stockholders should consult their tax advisors regarding the application and effect of state and local income and other tax
laws on an investment in our common stock.
Future legislative or regulatory
changes to the U.S. federal income tax laws could adversely affect REITs and their stockholders and therefore could adversely affect
us and our stockholders.
Future legislative or regulatory
tax changes to the U.S. federal income tax laws could adversely affect REITs and their stockholders and therefore could adversely affect
us and our stockholders. In addition, the 20% deduction for ordinary REIT dividends that a REIT distributes on its common stock to individual
U.S. stockholders will expire at the end of 2025 unless the deduction is extended by future legislation. See “— Taxation
of Taxable U.S. Stockholders — Distributions” above. Additionally, the REIT rules are constantly under review
by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury, which may result in revisions
to regulations and interpretations in addition to legislative changes.
SELLING SECURITYHOLDERS
Selling securityholders are persons
or entities that, directly or indirectly, have acquired or will from time to time acquire from us common stock, preferred stock, depositary
shares or debt securities, as applicable, in various private transactions. Such selling securityholders may be parties to registration
rights agreements with us, or we otherwise may have agreed or will agree to register their securities for resale. The initial purchasers
of our securities, as well as their transferees, pledgees, donees or successors, all of whom we refer to as “selling securityholders,”
may from time to time offer and sell the securities pursuant to this prospectus and any applicable prospectus supplement.
Unless otherwise set forth in
the applicable prospectus supplement, we will not receive any proceeds from the sale of the securities by the selling securityholders,
but in certain cases we may pay fees and expenses relating to the registration or an offering of such securities, such as registration
and filing fees, fees and expenses for complying with federal and state securities laws and NYSE rules and regulations, and fees
and expenses incurred in connection with a listing, if any, of any of the securities on any securities exchange or association.
The selling securityholders may
offer for sale all or some portion of the securities that they hold. To the extent that any of the selling securityholders are brokers
or dealers, they are deemed to be, under interpretations of the SEC, “underwriters” within the meaning of the Securities
Act.
The applicable prospectus supplement
will set forth the name of each of the selling securityholders, the number and classes of our securities beneficially owned by such selling
securityholders that are covered by such prospectus supplement, the amount to be offered for the selling securityholder’s account,
and the amount and (if one percent or more) the percentage of the class to be owned by such selling securityholder after completion of
the offering. The applicable prospectus supplement will also disclose whether any of the selling securityholders has held any position
or office with, has been employed by or otherwise has had a material relationship with us during the three years prior to the date of
the prospectus supplement.
PLAN OF DISTRIBUTION
We and any selling securityholders
may sell the securities offered by this prospectus from time to time in one or more transactions, including without limitation:
| · | to
or through underwriters or dealers; |
| · | in
“at the market” offerings, within the meaning of Rule 415(a)(4) of
the Securities Act to or through a market maker or into an existing trading market on an
exchange or otherwise; |
| · | to
purchasers through agents; |
| · | through
a combination of these methods; or |
| · | through
any other method permitted by applicable law and described in a prospectus supplement. |
In addition, we may issue the
securities offered by this prospectus as a dividend or distribution to our existing stockholders or other securityholders.
The prospectus supplement with
respect to any offering of securities will include the following information:
| · | the
terms of the offering; |
| · | the
names of any underwriters or agents; |
| · | the
name or names of any managing underwriter or underwriters; |
| · | the
public offering price or purchase price of the securities and the net proceeds to be received
by us or the selling securityholders from the sale; |
| · | any
delayed delivery arrangements; |
| · | any
underwriting discounts or commissions or agency fees and other items constituting underwriters’
or agents’ compensation; |
| · | any
discounts or concessions allowed or reallowed or paid to dealers; and |
| · | any
securities exchange on which the securities may be listed. |
Sale through Underwriters or Dealers
If underwriters are used in the
sale, the underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of sale. Underwriters may offer securities to the public either
through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters.
Unless we inform you otherwise in the applicable prospectus supplement, the obligations of the underwriters to purchase the securities
will be subject to certain conditions, and the underwriters will be obligated to purchase all of the offered securities if they purchase
any of them. The underwriters may change from time to time any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers.
We will describe the name or
names of any underwriters, dealers or agents and the purchase price of the securities in a prospectus supplement relating to the securities.
In connection with the sale of
the securities, underwriters may receive compensation from us or from purchasers of the securities, for whom they may act as agents,
in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers, and these dealers may
receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers
for whom they may act as agents, which is not expected to exceed that customary in the types of transactions involved. Underwriters,
dealers and agents that participate in the distribution of the securities may be deemed to be underwriters, and any discounts or commissions
they receive from us, and any profit on the resale of the securities they realize may be deemed to be underwriting discounts and commissions,
under the Securities Act. The prospectus supplement will identify any underwriter or agent and will describe any compensation they receive
from us.
Underwriters could make sales
in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an “at-the-market”
offering, sales made directly on the NYSE, the existing trading market for our shares of common stock, or sales made to or through a
market maker other than on an exchange. The name of any such underwriter or agent involved in the offer and sale of our shares of common
stock, the amounts underwritten, and the nature of its obligations to take our shares of common stock will be described in the applicable
prospectus supplement.
Unless otherwise specified in
the prospectus supplement, each series of the securities will be a new issue with no established trading market, other than our shares
of common stock, which are currently listed on the NYSE. We currently intend to list any shares of common stock sold pursuant to this
prospectus on the NYSE. We may elect to list any series of shares of preferred stock on an exchange, but are not obligated to do so.
It is possible that one or more underwriters may make a market in a series of the securities, but underwriters will not be obligated
to do so and may discontinue any market making at any time without notice. Therefore, we can give no assurance about the liquidity of
the trading market for any of the securities.
Under agreements we may enter
into, we may indemnify underwriters, dealers, and agents who participate in the distribution of the securities against certain liabilities,
including liabilities under the Securities Act, or contribute with respect to payments that the underwriters, dealers or agents may be
required to make.
To facilitate the offering of
securities, certain persons participating in the offering may engage in transactions that stabilize, maintain, or otherwise affect the
price of the securities. This may include over- allotments or short sales of the securities, which involve the sale by persons participating
in the offering of more securities than we sold to them. In these circumstances, these persons would cover such over-allotments or short
positions by making purchases in the open market or by exercising their over-allotment option, if any. In addition, these persons may
stabilize or maintain the price of the securities by bidding for or purchasing securities in the open market or by imposing penalty bids,
whereby selling concessions allowed to dealers participating in the offering may be reclaimed if securities sold by them are repurchased
in connection with stabilization transactions. The effect of these transactions may be to stabilize or maintain the market price of the
securities at a level above that which might otherwise prevail in the open market. These transactions may be discontinued at any time.
From time to time, we may engage in transactions with these underwriters, dealers, and agents in the ordinary course of business.
If indicated in the prospectus
supplement, we may authorize underwriters or other persons acting as our agents to solicit offers by institutions to purchase securities
from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which we may make these delayed
delivery contracts include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable
institutions and others. The obligations of any purchaser under any such delayed delivery contract will be subject to the condition that
the purchase of the securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which the purchaser
is subject. The underwriters and other agents will not have any responsibility with regard to the validity or performance of these delayed
delivery contracts.
Direct Sales and Sales through Agents
We may sell the securities directly.
In this case, no underwriters or agents would be involved. We may also sell the securities through agents designated by us from time
to time. In the applicable prospectus supplement, we will name any agent involved in the offer or sale of the offered securities, and
we will describe any commissions payable to the agent. Unless we inform you otherwise in the applicable prospectus supplement, any agent
will agree to use its reasonable best efforts to solicit purchases for the period of its appointment.
We may sell the securities directly
to institutional investors or others who may be deemed to be underwriters within the meaning of the Securities Act with respect to any
sale of those securities. We will describe the terms of any sales of these securities in the applicable prospectus supplement.
Remarketing Arrangements
Securities may also be offered
and sold, if so indicated in the applicable prospectus supplement, in connection with a remarketing upon their purchase, in accordance
with a redemption or repayment pursuant to their terms, or otherwise, by one or more remarketing firms, acting as principals for their
own accounts or as agents for us. Any remarketing firm will be identified and the terms of its agreements, if any, with us and its compensation
will be described in the applicable prospectus supplement.
General
We may have agreements with the
underwriters, dealers, agents and remarketing firms to indemnify them against certain civil liabilities, including liabilities under
the Securities Act, or to contribute with respect to payments that the underwriters, dealers, agents or remarketing firms may be required
to make. Underwriters, dealers, agents and remarketing firms may be customers of, engage in transactions with or perform services for
us in the ordinary course of their businesses.
LEGAL MATTERS
Certain legal matters in connection
with this prospectus will be passed upon for us by Stinson LLP, Minneapolis, Minnesota, including the validity of the offered securities.
Certain legal matters in connection with this prospectus will also be passed upon for us by Sidley Austin LLP, including the qualification
of our company as a REIT for U.S. federal income tax purposes.
EXPERTS
The consolidated financial statements
of Two Harbors incorporated by reference in Two Harbors’ Annual Report (Form 10-K) for the year ended December 31, 2023,
and the effectiveness of Two Harbors’ internal control over financial reporting as of December 31, 2023 have been audited
by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein,
and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such
reports given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We
file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the
public on the SEC’s website at www.sec.gov. We also maintain a website at www.twoharborsinvestment.com where you can find
additional information. All internet addresses provided in this prospectus or any prospectus supplement are for information purposes
only and are not intended to be hyperlinks. We are not incorporating by reference into this prospectus or any prospectus supplement the
information on our website or any other website, and you should not consider our website or any other website to be a part of this prospectus,
any prospectus supplement or other offering materials.
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE
The SEC’s rules allow
us to “incorporate by reference” information into this prospectus, which means that we can disclose important information
to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be
part of this prospectus from the date of filing those documents. Any reports filed by us with the SEC on or after the date of this prospectus
will automatically update and, where applicable, supersede any information contained in this prospectus or incorporated by reference
in this prospectus. We have filed the documents listed below with the SEC under the Securities Exchange Act of 1934, or the Exchange
Act, and these documents are incorporated herein by reference (other than information in such documents that is furnished and not deemed
to be filed):
| · | The
information specifically incorporated by reference into our Annual Report on Form 10-K
for the year ended December 31, 2023 from our Definitive Proxy Statement on Schedule 14A filed with the SEC on April 4, 2023; |
| · | The
description of our common stock included in our Registration Statement on Form 8-A filed
on February 10, 2011, as amended by the Form 8-A/A filed on November 2, 2017,
as further amended by the Form 8-A/A filed on November 2, 2022; |
All documents we file (but not
furnish) pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this prospectus and prior to
the termination of the offering of the securities to which this prospectus relates (other than information in such documents that is
furnished and not deemed to be filed) shall be deemed to be incorporated by reference into this prospectus and to be a part hereof from
the date of filing of those documents.
We will provide to each person,
including any beneficial owner, to whom a copy of this prospectus is delivered, a copy of any or all of the information that has been
incorporated by reference in this prospectus but not delivered with this prospectus (other than the exhibits to such documents which
are not specifically incorporated by reference therein); we will provide this information at no cost to the requester upon written or
oral request to: Secretary, Two Harbors Investment Corp., 1601 Utica Avenue South, Suite 900, St. Louis Park, MN 55416, or (612)
453-4100.
Exhibit 107
Calculation of Filing Fee Tables
424(b)(5)
(Form Type)
Two Harbors Investment Corp.
(Exact Name of Registrant as Specified in its
Charter)
Table 1: Newly Registered and Carry Forward
Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Security
Type |
Security
Class
Title |
Fee
Calculation
or Carry
Forward
Rule |
Amount
Registered |
Proposed
Maximum
Offering
Price Per
Unit |
Maximum
Aggregate
Offering
Price |
Fee
Rate |
Amount of
Registration
Fee |
Carry
Forward
Form
Type |
Carry
Forward
File
Number |
Carry
Forward
Initial
Effective
Date |
Filing
Fee
Previously
Paid In
Connection
with Unsold
Securities to
be Carried
Forward |
| |
| Newly
Registered Securities |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees to Be Paid |
(1) |
Equity |
Common
shares,
$0.01 par
value per
share |
457(r) |
11,180,594 |
$13.6275 |
$152,363,545 |
0.0001476 |
$22,489 |
|
|
|
|
|
Fees
Previously Paid |
|
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
|
|
|
|
| |
| Carry
Forward Securities |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carry
Forward Securities |
(2) |
Equity |
Common
shares,
$0.01 par
value per
share |
415(a)(6) |
3,819,406 |
|
$57,878,441 |
|
N/A |
S-3 |
333-253606 |
February 26,
2021 |
$6,368 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total
Offering Amounts |
|
$210,241,986 |
|
$22,489 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total
Fees Previously Paid |
|
|
|
N/A |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Total
Fee Offsets |
|
|
|
N/A |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Net
Fee Due |
|
|
|
$22,489 |
|
|
|
|
| (1) |
The filing fee is
calculated in accordance with Rule 457(c) and Rule 457(r) of the Securities Act of 1933 (the “Securities
Act”). Payment of the registration fee at the time of filing of the registrant’s registration statement on Form S-3,
filed with the Securities and Exchange Commission on February 22, 2024 (File No. 333-277271) (the “Registration Statement”),
was deferred pursuant to Rules 456(b) and 457(r) under the Securities Act. This paragraph shall be deemed to update
the “Calculation of Registration Fee” table in the Registration Statement. |
| |
|
|
Estimated
solely for purposes of computing the registration fee on the basis of the average of the high and low prices for Two Harbors Investment
Corp.'s (the “Company”) shares of common stock, par value $0.01 per share (“Common Stock”) as reported on
the New York Stock Exchange on July 24, 2024, in accordance with Rule 457(c) under the Securities Act. |
| |
|
| (2) | Pursuant
to Rule 415(a)(6) under the Securities Act, the securities included in this prospectus supplement include 3,819,406 of unsold
shares of common stock (the “Unsold Securities”) previously registered pursuant to the Registration Statement on Form S-3
(File No. 333-253606), which was automatically effective on February 26, 2021 (the “Prior Registration Statement”).
The Prior Registration Statement registered 11,000,000 shares of common stock under an equity distribution agreement with Citizens JMP
Securities, LLC with a proposed maximum aggregate offering price of $241,127,200. The registrant sold an aggregate of 7,180,594 shares
of such securities under the Prior Registration Statement, leaving the balance of 3,819,406 shares of Unsold Securities, in respect of
which the registrant paid an aggregate registration fee of $6,368. Pursuant to Rule 415(a)(6), the filing fee of $6,368 associated
with the offering of the Unsold Securities is hereby carried forward to be applied to the Unsold Securities included hereunder, and as
a result, no additional filing fee is due with respect to the Unsold Securities included in this prospectus supplement. Pursuant to Rule 415(a)(6),
the offering of securities under the Prior Registration Statement has been terminated. |
Grafico Azioni Two Harbors Investment (NYSE:TWO-C)
Storico
Da Dic 2024 a Gen 2025
Grafico Azioni Two Harbors Investment (NYSE:TWO-C)
Storico
Da Gen 2024 a Gen 2025
