(Amounts in thousands - except share and per share data)

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Section. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control. These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company's industry, interest rates, real estate values, the debt securities markets, the U.S. housing market or the general economy or the demand for residential mortgage loans; the Company's business and investment strategy; the Company's operating results and potential asset performance; actions and initiatives of the U.S. Government and changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies; the state of the U.S. economy generally or in specific geographic regions; economic trends and economic recoveries; the Company's ability to obtain and maintain financing arrangements, including securitizations; the favorable Agency RMBS return dynamics available; the level of government involvement in the U.S. mortgage market; the anticipated default rates on non-Agency RMBS; the return of the non-Agency RMBS securitization market; general volatility of the securities markets in which the Company participates; changes in the value of the Company's assets; the Company's expected portfolio of assets; the Company's expected investment and underwriting process; interest rate mismatches between the Company's target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company's target assets; prepayment rates on the Company's target assets; effects of hedging instruments on the Company's target assets; rates of default or decreased recovery rates on the Company's target assets; the degree to which the Company's hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company's ability to maintain the Company's qualification as a REIT for U.S. federal income tax purposes; the Company's ability to maintain its exemption from registration under the 1940 Act; availability of opportunities to acquire Agency RMBS, non-Agency RMBS, residential mortgage loans and other residential mortgage assets; availability of qualified personnel; estimates relating to the Company's ability to make distributions to its stockholders in the future; and the Company's understanding of its competition.

The forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See Item "1A-Risk Factors" of the Company's annual report on Form 10-K for the year ended December 31, 2011. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with the Company's consolidated financial statements and the accompanying notes to the Company's consolidated financial statements, which are included in Item 1 of this Quarterly Report on Form 10-Q, as well as the information contained in the Company's annual report on Form 10-K filed for the year ended December 31, 2011.

Overview

The Company, organized as a Maryland corporation, is structured as a holding company and conducts its businesses primarily through ARM Operating, LLC and its other operating subsidiaries. The Company intends to elect and qualify as a REIT for U.S. federal income tax purposes commencing with the Company's taxable year ended December 31, 2011. The Company operates its business in a manner that it believes permits it not to register as an investment company under the 1940 Act. The Company is externally managed and advised by the Manager, an indirect subsidiary of Apollo.

On July 27, 2011, the Company completed its IPO, pursuant to which it sold 10,000,000 shares of its common stock to the public at a price of $20.00 per share generating gross proceeds of $200,000. Concurrently with the closing of the IPO, the Company completed a private placement in which the Company sold 250,000 shares of its common stock to certain affiliates and personnel of Apollo at a price of $20.00 per share. The Company received gross proceeds of $5,000 from the concurrent private placement. In connection with the IPO, $8,000 in underwriting discounts and commissions were paid by the Manager. The Company did not pay any underwriting discounts or commissions in connection with the IPO or the private placement. Net proceeds from the Company's IPO and concurrent private placement, after the payment of offering costs of approximately $1,939, were approximately $203,061. On April 20, 2012, the Company completed a follow-on public offering of 13,900,000 shares of common stock at a price of $18.00 per share, raising net proceeds of approximately $249,719.

The Company invests in residential mortgage assets throughout the United States. The Company's portfolio is currently comprised of: (i) Agency RMBS, which include pass-through securities (whose underlying collateral includes fixed-rate mortgages and ARMs), Agency IOs and Agency IIOs, and (ii) non-Agency RMBS. Over time, the Company expects that it may invest in residential mortgage loans and other residential mortgage related assets, including mortgage servicing rights. The Company refers, collectively, to the assets it targets for acquisition as its "target assets". At June 30, 2012, the Company's portfolio was comprised of approximately $2,642,146 Agency RMBS and $367,825 non-Agency RMBS.

The Company uses leverage, currently comprised of borrowings under repurchase agreements, as part of its business strategy in order to increase potential returns to stockholders. As of June 30, 2012, the Company had entered into master repurchase agreements with 19 counterparties representing $7.1 billion of potential funding capacity, and, as a matter of routine business continues to have discussions with additional financial institutions with respect to expanding its repurchase agreement capacity. As of June 30, 2012, the Company had $2,631,101 of borrowings outstanding under its repurchase agreements collateralized by $2,493,361 Agency RMBS and $339,146 non-Agency RMBS. At June 30, 2012, the Company had Swaps of $995,000, which effectively fix the floating interest rate for a corresponding amount of borrowings under its repurchase agreements.

Factors Impacting the Company's Operating Results

The Company's results of operations are primarily driven by, among other things, its net interest income, the market value of its assets, the supply and demand for RMBS in the market place, the terms and availability of adequate financing, general economic and real estate conditions (both on national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of its non-Agency RMBS. The Company's net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing rates which impact interest expense and prepayment speeds on the Company's RMBS, the behavior of which involves various risks and uncertainties. Interest rates and constant prepayment rates ("CPR") (which measure the amount of unscheduled principal prepayment on a bond as a percentage of the bond balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. In addition, the Company's borrowing costs and credit lines are further affected by the collateral pledged and general conditions in the credit market. The Company's overall performance is affected by a number of factors, many of which are beyond its control.

Premiums arise when the Company purchases a security at a price in excess of the principal balance of the mortgages securing such RMBS (i.e., par value). Conversely, discounts arise when the Company purchases RMBS at a price below the principal balance of the mortgages securing such RMBS. Premiums paid on the Company's

RMBS are amortized against interest income and accretable purchase discounts are accreted to interest income over the life of the security. The speeds at which premiums are amortized and discounts accreted are significantly impacted by the CPR for each security. CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, the CPR reflects conditional repayment rates (or CRR), which measures voluntary prepayments of mortgages collateralizing a particular RMBS, and the conditional default rates (or CDR), which measures involuntary prepayments resulting from defaults. CPRs on Agency RMBS and non-Agency RMBS may differ significantly.

Recent Market Conditions and the Company's Strategy

On April 20, 2012, the Company completed a follow-on public offering of its common stock, issuing 13,900,000 shares, generating net proceeds of $249,719, after expenses. Using the proceeds of this transaction the Company grew its Agency RMBS and non-Agency RMBS portfolio, as reflected in the increase in the RMBS portfolios to $3,009,971 at June 30, 2012, from $1,336,536 at March 31, 2012.

During the three months ended June 30, 2012, the Company primarily invested in fixed-rate Agency RMBS, non-Agency RMBS and Agency IOs, purchasing $2,084,331, $199,984, and $25,286, respectively. The Company continued to execute its strategy of investing in certain lower coupon Agency RMBS with the objective of mitigating prepayment risk in the portfolio as market interest rates continued to move lower during the quarter. Consistent with this strategy, the Company sold $612,452 Agency RMBS, primarily comprised of higher coupon securities, realizing net gains of $11,510, and generally invested such proceeds in lower coupon Agency RMBS and in non-Agency RMBS.

Market prices for Agency RMBS generally increased during the second quarter of 2012, and mortgage spreads continued to tighten. While Agency RMBS continue to trade at historically high premiums, prepayments have remained low with respect to the Company's portfolio relative to the overall marketplace, which the Company believes reflects the Company's selective asset acquisition strategy. The Company continued to find value in Agency RMBS that are backed by pools of loans with underlying characteristics expected to mitigate prepayments, such as low loan balance and high loan-to-value.

With respect to its Agency IOs, the Company receives only the interest payments generated from such securities' underlying mortgage payments. Unlike Agency RMBS, the market value of Agency IOs generally have a positive correlation to increases in interest rates. Generally, as market interest rates increase, prepayments on the mortgages underlying an Agency IO will decrease, which in turn will increase the cash flow and the value of such securities; the inverse results apply with respect to decreases in market interest rates. The Company views its Agency IOs as an economic hedge against the impact that an increase in market interest rates would have on its Agency RMBS. Agency IOs comprise a relatively small portion of the Company's RMBS portfolio at June 30, 2012, comprising $25,974, or 0.9% of the RMBS portfolio.

Over the course of the second quarter of 2012, the Company opportunistically reallocated a portion of its newly raised capital, which was initially invested in Agency RMBS, to non-Agency RMBS. With respect to non-Agency RMBS, the Company has increased its investments in securities backed by Alt-A mortgage loans, and mortgages that provide the mortgagee payment options, which may initially include a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment or a 30-year fully amortizing payment ("Option ARMs").

During the second quarter of 2012, the Company continued its strategy of investing in certain non-Agency RMBS that it believes exhibit sufficient credit enhancement in the form of subordination, equity in the underlying property values or market discount to support the Company's investment objectives. In particular, the Company continued to focus on non-Agency RMBS at the top of the capital structure, rather than second and third pay non-Agency RMBS, which the Company believes provide greater cash flow in the near term. During the three months ended June 30, 2012, the Company purchased non-Agency RMBS at a weighted average purchase price of 62.7% of par value. While the Company believes attractive non-Agency RMBS remain available in the marketplace, discounts to par have generally narrowed in the second quarter of 2012. Despite higher market prices and lower yields, the Company expects that loss-adjusted returns on non-Agency RMBS will continue to represent attractive investment opportunities.

Repurchase agreement funding for both Agency RMBS and non-Agency RMBS remained available at attractive market terms from an increasing number of counterparties during the second quarter of 2012. Typically, due to the credit risk inherent in non-Agency RMBS, repurchase agreement funding involving non-Agency RMBS is available from fewer counterparties, at terms requiring higher collateralization and higher interest rates, compared to repurchase agreement borrowings secured by Agency RMBS. At June 30, 2012, the Company had borrowings under repurchase agreements with 17 counterparties resulting in an overall debt-to-equity multiple of 5.5 times.

In general, the Company believes that Agency RMBS market remained strong during the second quarter of 2012, despite elevated risks associated with the continuing sovereign debt issues in Europe and continued risk of policy changes by government sponsored entities, the Federal Reserve and various state and federal regulatory bodies, which may adversely impact the residential mortgage market. The Company believes that the perceived credit quality of Agency RMBS along with relatively stable prepayments allowed the Company's Agency RMBS to maintain their market value. To date, the Federal Reserve has continued with its accommodative stance with respect to monetary policy aimed at keeping interest rates low, and in June 2012 announced that the maturity extension program ("Operation Twist"), scheduled to end in June 2012, would be continued through December 2012.

Target Assets

The following is a summary of the assets that the Company targets for
investment:



Asset Classes                       Principal Assets

Agency RMBS                         Agency RMBS, primarily comprised of whole pool RMBS,
                                    collateralized mortgage obligations, Agency IO, Agency IIO
                                    and Agency principal only ("Agency PO") securities.

Non-Agency RMBS                     Non-Agency RMBS, including highly rated, as well as
                                    non-investment grade and unrated, tranches backed by Alt-A
                                    mortgage loans, subprime mortgage loans and prime mortgage
                                    loans, which may be adjustable-rate, hybrid or fixed-rate.

Residential Mortgage Loans          Prime mortgage loans, jumbo mortgage loans, Alt-A mortgage
                                    loans, Option ARMs and subprime mortgage loans. These may
                                    be performing, sub-performing or non-performing and may be
                                    adjustable-rate, hybrid or fixed-rate.

Other Residential Mortgage Assets   Non-Agency RMBS comprised of Interest Only ("IO"),
                                    Principal Only ("PO"), floating rate Inverse Interest Only
                                    ("IIO"), and floating rate securities, and other Agency
                                    and non-Agency RMBS derivative securities, as well as
                                    other financial assets, including, but not limited to,
                                    common stock, preferred stock and debt of other real
                                    estate-related entities.

Additionally, in the future the Company may invest in assets other than its target assets, in each case subject to maintaining its qualification as a REIT for U.S. federal income tax purposes and its exemption from registration under the 1940 Act.

Financing Strategy

The Company uses leverage primarily for the purposes of financing its portfolio and increasing potential returns to stockholders and not for speculative purposes. The amount of leverage the Company chooses to employ for particular assets will depend upon the Manager's assessment of a variety of factors, which include the availability of particular types of financing and the Manager's assessment of the credit, liquidity, price volatility and other risks of those assets and the creditworthiness of its financing counterparties.

During the quarter ended June 30, 2012, the Company financed its Agency RMBS with repurchase agreements employing, in the aggregate, debt-to-equity of approximately eight-to-one leverage. During the quarter ended June 30, 2012, the Company financed its non-Agency RMBS with repurchase agreements generally employing, in the aggregate, debt-to-equity of approximately three-to-one leverage. The Company had aggregate debt-to-equity of 5.5 times and 5.3 times at June 30, 2012 and December 31, 2011, respectively. In the future, the Company may, however, be limited or restricted in the amount of leverage it may employ by the terms and provisions of any financing or other agreements, and is subject to margin calls as a result of its financing activity.

The Company has financed its RMBS with repurchase agreement borrowings, the term of which are typically one to three months, but in some cases have terms up to twelve months. At June 30, 2012, the Company had entered into master repurchase agreements with 19 counterparties representing $7.1 billion of potential funding capacity, and, as a matter of routine business continues to have discussions with additional financial institutions with respect to expanding its repurchase agreement capacity. As of June 30, 2012, the Company had $2,631,101 of borrowings outstanding under its repurchase facilities with 17 counterparties. Over time, as market conditions change, in addition to repurchase borrowings, the Company may use other forms of leverage, including, but not limited to, warehouse facilities, securitizations, resecuritizations, bank credit facilities (including term loans and revolving facilities), and public and private equity and debt issuances, in addition to transaction or asset-specific funding arrangements.

Hedging Strategy

Subject to maintaining the Company's qualification as a REIT for U.S. federal income purposes, the Company pursues various hedging strategies to seek to reduce its exposure to adverse changes in interest rates. The U.S. federal income tax rules applicable to REITs may require the Company to implement certain of these techniques through a domestic taxable REIT subsidiary that is fully subject to federal corporate income taxation. The Company's hedging activity may vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. As of June 30, 2012, the Company had entered into Swaps designed to mitigate the effects of increases in interest rates under a portion of its repurchase agreements. These Swaps effectively fix the floating interest rates on $995,000 of borrowings under repurchase agreements as of June 30, 2012. To date, the Company has not elected to apply hedge accounting for its Swaps and, as a result, records the change in estimated fair value of its Swaps and the associated Swap interest in earnings.

Critical Accounting Policies

A summary of the Company's accounting policies was set forth in its annual report on Form 10-K for the year ended December 31, 2011 under Item 7 - Management Discussion and Analysis - Critical Accounting Policies.

Results of Operations

The following discussion of the Company's results of operations highlights the Company's performance for the three and six months ended June 30, 2012. The Company commenced operations on July 27, 2011, as such, no discussion for comparative prior periods has been provided.

The Company had net income available to common stock and participating securities of $26,400, or $1.24 per basic and diluted common share for the second quarter of 2012 and $46,520, or $2.94 per basic and diluted common share for the six months ended June 30, 2012. The Company's investment activity for the second quarter of 2012 increased significantly reflecting the investment of $249,719 of equity capital, on a leveraged basis, in Agency and non-Agency RMBS, which increased net income.

Investment Activity

During the three months and six months ended June 30, 2012, the Company acquired $2,109,617 and $2,514,451 of Agency RMBS and $199,984 and $301,131 of non-Agency RMBS, respectively, of which $166,155 were unsettled at June 30, 2012. Principal reductions on the RMBS portfolios, comprised primarily of scheduled

amortization and prepayments, were $32,897 and $56,508 for Agency and $14,559 and $22,869 for non-Agency RMBS during the three and six months ended June 30, 2012, respectively. Proceeds from sales received during the three and six months ended June 30, 2012 were $612,452 and $967,179 for Agency RMBS and $1,850 and $38,058 for non-Agency RMBS, respectively.

As of June 30, 2012, the Company's Agency RMBS consisted primarily of RMBS which the Manager believes exhibit prepayment mitigation attributes. The Company's Agency RMBS portfolio had a weighted average monthly CPR of 3.7% and 4.4% for the three and six months ended June 30, 2012, respectively.

As of June 30, 2012, the Company's non-Agency RMBS consisted primarily of RMBS comprised of seasoned sub-prime mortgages and, to a lesser extent, RMBS comprised of Alt-A mortgages and Option ARMs. The average cost basis of the Company's non-Agency RMBS portfolio was 65.4% of par as of June 30, 2012. (For additional information about the Company's RMBS portfolios as June 20, 2012, see Note 4 - Residential Mortgage-Backed Securities to the consolidated financial statements included in this quarterly report on Form 10-Q.)

The Company records the associated liability for RMBS purchased that have not yet settled as an investment related payable. As of June 30, 2012, the Company had investment related payables for unsettled trades of $166,155 of which no items were outstanding greater than 30 days.

Financing Activity

Repurchase agreements are used to finance a substantial majority of the Company's Agency RMBS and non-Agency RMBS with such securities pledged as collateral to secure such borrowings. Repurchase agreements bear interest at rates that have historically moved in close relationship to LIBOR. At June 30, 2012, the Company had outstanding repurchase agreement borrowings with 17 counterparties totaling $2,631,101. The table below presents certain information about the Company's borrowings under repurchase agreements for the periods presented:

                                            Repurchase Agreements
                                                                    Maximum Balance at
                        Quarterly Average       End of Period        Month-End During
   Quarter Ended             Balance               Balance              the Period
   June 30, 2012 (1)   $         1,646,007     $     2,631,101     $          2,631,101
   March 31, 2012      $         1,099,145     $     1,171,177     $          1,177,701

(1) On April 20, 2012, the Company raised net equity of $249,719, which was invested on a leveraged basis and, as a result, increased the Company's borrowings under repurchase agreements.

The following table presents information with respect to the Company's repurchase agreement borrowings by type of collateral pledged as of June 30, 2012, and the respective effective cost of funds for the three and six month periods then ended:

                                                         Three Months Ended June 30,                Six Months Ended June 30,
                                                                    2012                                      2012
                                   Balance at                                Effective                                 Effective
                                    June 30,           Cost of                Cost of             Cost of               Cost of
Collateral                            2012              Funds                Funds (1)             Funds               Funds (1)
Agency RMBS                        $ 2,376,543                0.4 %                  0.7 %              0.4 %                 0.7 %
Non-Agency RMBS                        254,558                1.9                    1.9                1.9                   1.9

Total                              $ 2,631,101                0.5 %                  0.8 %              0.5 %                 0.8 %

. . .