OUR BUSINESS

Strategy

Investment Strategy

Our investment strategy is designed to:

• Build an investment portfolio consisting exclusively of agency securities that seeks to generate attractive risk-adjusted returns
• Manage financing, interest and prepayment rate risks
• Capitalize on discrepancies in the relative valuations in the agency securities market
• Provide regular quarterly distributions to stockholders
• Qualify as a REIT
• Remain exempt from the requirements of the Investment Company Act

We employ the expertise and experience of American Capital's RMBS investment team to build an investment portfolio consisting exclusively of agency securities that incorporates our understanding and outlook of the RMBS market. We seek to capitalize on changes in the prepayment and interest rate environment both currently, due to disruptions throughout the mortgage market, and going forward as future trends emerge.

Our investment philosophy is based on, what we feel are, the three pillars of successful MBS investing: Relative Value, Underwriting and Prudent Use of Leverage.

Financing Strategy

As part of our investment strategy, we borrow against our investment portfolio using repurchase agreements. Our borrowings generally have maturities that range from 30 to 90 days, but may have maturities up to 364 days. We expect our leverage will range between five to 10 times the amount of our stockholder's equity (calculated in accordance with GAAP). Our investment guidelines limit our leverage to 10 times our stockholders' equity.

Hedging Strategy

As part of our risk management strategy, we may hedge our exposure to interest rate and prepayment risk given our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT. We may enter into interest rate caps, collars, floors, forward contracts, futures or swap agreements to attempt to mitigate the risk of the cost of our variable rate liabilities increasing at a faster rate than the earnings on our assets during a period of rising interest rates.

Investment Committee

The investment committee of our Manager consists of Malon Wilkus, John R. Erickson, Samuel A. Flax, Robert K. Grunewald and Thomas A. McHale, each of whom is affiliated with American Capital. The investment committee meets monthly to discuss diversification of our investment portfolio, hedging and financing strategies and compliance with the investment guidelines.

Investment guidelines are:

• No investment shall be made in any non-agency securities
• Our leverage may not exceed 10 times our stockholders' equity (as computed in accordance with GAAP), which we refer to as our leverage threshold. In the event that our leverage inadvertently exceeds the leverage threshold, we may not utilize additional leverage without prior approval from our Board of Directors until we are once again in compliance with the leverage threshold
• No investment shall be made that would cause us to fail to qualify as a REIT for federal income tax purposes
• No investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act
• Prior to entering into any proposed investment transaction with American Capital or any of its affiliates, a majority of our independent directors must approve the terms of the transaction