Ready Capital Corporation · NYSE:RC
Ready Capital — ZAIS Financial — Merger or Acquisition (June 2016)
28 slides from Ready Capital's merger presentation, Jun 21, 2016
Slide 1: Investor Presentation June 2016
Investor Presentation June 2016
Slide 2: Disclaimer: Forward-Looking Statements
Disclaimer Forward - Looking Statements ▪ This presentation contains statements that constitute “forward - looking statements,” as such term is defined in Section 27A of th e Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements a
Slide 3: Executive Summary – Transaction Overview
▪ In October 2015, ZAIS Financial Corp. (“ZFC”) launched a strategic review of its business and with the assistance of Houlihan Lokey contacted 63 potential strategic and financial buyers ▪ ZFC and Sutherland Asset Management (“SAM”) entered into a definitive merger agreement dated April 6, 2016, as
Slide 4: Combined company overview and business segments
▪ ZFC will become a diversified commercial mortgage REIT with a unique focus on small balance commercial (“SBC”) conventional and owner occupied loans including Small Business Administration (“SBA”) ▪ The combined company will operate four primary segments: 1) SAM: acquires and manages distressed SB
Slide 5: Summary of ZFC Strategic Review
Summary of ZFC Strategic Review 5 ▪ As part of the ZFC strategic review beginning in October 2015, ZFC conducted a full process, with the assistance of Houlihan Lok ey, which involved a targeted group of potential strategic and financial buyers ▪ Contacted 63 potential strategic and financial buyers
Slide 6: Situation Overview
Situation Overview 6 ▪ Given a variety of factors, we believe that the merger with SAM is the more compelling option for ZFC stockholders: ▪ Net liquidation proceeds are estimated to return 52.3% - 80.5% of book value whereas a merger with SAM will provide 87.5% of boo k value (1) ▪ Provides a 7% -
Slide 7: Liquidation Analysis
100.0% 55.6% 20.9% 1.5% 8.5% 13.5% Book Value of Common Equity (12/31/15) Liquidation Costs of Assets & Liabilities - ZFC Transaction Expenses Payments Related to Contingent Consideration, Litigation & Other Costs of GMFS Sale Total Net Realizable Value 100.0% 80.5% 6.1% 1.5% 8.5% 3.4% Book Value of
Slide 8: The Merger Transitions ZFC into a Commercial Mortgage REIT
8.4% 8.6% 8.8% 9.3% 9.3% 10.4% 11.1% 11.2% ACRE LADR BXMT STWD CLNY SAM ZFC ARI 11.1% 10.8% 9.0% 9.0% 8.6% 8.1% 8.0% 7.8% (2.9%) 1.00x 0.87x 0.60x 0.80x 1.00x 1.20x Jun - 13 Jan - 14 Sep - 14 Apr - 15 Nov - 15 Jun - 16 Commercial Residential Commercial 3 - Year Average: 1.07x Residential 3 - Year Av
Slide 9: SAM Delivering Strong Returns Relative to Peers
Source: SNL Financial. Note: Commercial includes STWD, CLNY ARI, ACRE and BXMT. Residential includes: AGNC, CYS, CMO, ARR, ORC, NLY, TWO, CIM, MFA, IVR, MTGE, NYMT, EFC, ANH, MITT, WMC, DX, AI, ZFC, EARN and OAKS. Figures represent the median of each respective peer set. All figures represent holdin
Slide 10: SAM Economics by Business Line
10 SAM Economics by Business Line Acquired Portfolio Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Unlevered yield 8.5% 9.9% 8.9% 9.7% 9.1% Cost of funds 4.4 % 4.1 % 4.1 % 4.0 % 4.5 % Net interest spread 4.1 % 5.8 % 4.8 % 3.7 % 4.6 % Leverage ratio 3.3x 2.6x 2.8x 2.2x 2.0x Levered yield 22.2% 25.0% 22.3%
Slide 11: SAM Return on Equity – Q1 2016
11 SAM Return on Equity – Q1 2016 (1) Core Earnings is a non - GAAP measure. Please refer to page 28 in the Appendix for a reconciliation of GAAP to Core Earnings. (2) ROE based on annualized return for quarter ended March 31, 2016. Business Line Levered Yield Equity Allocation Net ROE Core Earnings
Slide 12: Illustrative Pro Forma Return on Average Equity
(% of average equity) SAM LTM PF LTM Net interest income 12.6% 12.2% Realized gains 6.4 5.3 Total 19.0 17.5 Unrealized loss (0.6) (0.5) Other income -- 1.0 Operating expenses (9.4) (7.3) Return on average equity (%) 9.0% 10.8% Balance Sheet Averages ($mm) Assets $2,208 $2,506 Liabilities 1,718 1,914
Slide 13: Management Fee comparison
Management Fee Mgmt. Fee Basis Incentive Fee Incentive Fee Hurdle Incentive Fee Payment Structure Termination Fee 1.5% on SE ≤ $500 million plus 1.0% on SE > $500 million Stockholders’ equity 15.0% 8.0% 50% stock / 50% cash 3x the average annual base management fee and incentive fee received during
Slide 14: Appendix
Appendix SUTHERLAND) ZF‘ — Asset Management in
Slide 15: Transaction Structure Summary
▪ As per SAM, the combined company will use the remaining cash proceeds from the sale of ZFC’s remaining assets to invest in Commercial Real Estate Assets Transaction Structure Summary Waterfall Asset Management SAM Pro Forma Combined Company ZAIS REIT Management ZFC Management Agreement Pre - Trans
Slide 16: Calculation of Exchange Ratio and Tender Offer Price
Calculation of Exchange Ratio and Tender Offer Price Source: ZFC S - 4 dated 6/20/16. (1) Per merger agreement. 16 ZFC (as of 3/31/16) ZFC Book Value $170,842,741 Less: Transaction costs (3,500,000) Less: Book Value Adjustment (15,000,000) ZFC Adjusted Book Value $152,342,741 Shares Outstanding 8,89
Slide 17: Management Team of the Combined Company
Name Background Thomas E. Capasse Jack J. Ross Frederick C. Herbst, CPA Thomas Buttacavoli Management Team of the Combined Company ▪ CEO and Chairman of SAM ▪ Manager and Co - Founder of Waterfall Asset Management ▪ 34 years of structured credit experience globally ▪ Co - founded Merrill Lynch’s ABS
Slide 18: Board of Directors of the Combined Company
Board of Directors of the Combined Company Name Background Thomas E. Capasse Jack J. Ross Frank P. Filipps Todd M. Sinai J. Mitchell Reese David L. Holman ▪ Manager and Co - Founder of Waterfall Asset Management ▪ 34 years of structured credit experience globally ▪ Co - founded Merrill Lynch’s ABS g
Slide 19: SAM Company Overview
SAM Company Overview SUTHERLAND) ZFC Asset Management
Slide 20: SBC Market Offers Compelling Risk-adjusted Returns
Residential Housing Large Balance Commercial Loans Small Balance Commercial Loans Average Initial Principal Balance ~$225,000 At least $20 million ~$2.0 million Loan To Value ~80% ~65% ~60% Yield ~4.0% ~4.0% ~7.0% Debt Service Coverage Ratio N/A ~1.4x ~1.6x Cap Rate ~5.0% ~6.0% ~8.0% Personal Guaran
Slide 21: Small Balance Commercial Property Overview
21 Small Balance Commercial Property Overview Investor owned retail strip mall – 10 unit property, Snellville, GA Owner - occupied franchise – 2,400 sqft, Daytona, FL Investor owned multifamily - 10 unit property, Los Angeles, CA Owner - occupied medical office – 3,100 sqft, Arlington, TX
Slide 22: SAM Business Overview
SAM Business Overview 22 Loan Acquisition Business Origination Business(es) Conventional Loans Bridge Loans Freddie Mac SBL Program SBA 7(a) Booking Entity: Sutherland ReadyCap Commercial ReadyCap Lending Principal Business Activity / Secured by: Acquires pools of performing, sub - performing, and n
Slide 23: Sourcing Strategy: Acquisition and Origination
Sourcing Strategy: Acquisition and Origination Acquired Loans ▪ Top 5 acquirer of SBC loans since crisis ▪ ~$1.3 billion acquisition pipeline from a variety of sources including regional banks, SBC special servicers, specialty finan ce financial firms, etc. ▪ Reviewed over $142 billion of UPB, repre
Slide 24: Loan resolution decision tree
Yes No Borrower - Based Resolution Asset - Based Resolution Is Borrower Willing and Able to Pay? Borrower Becomes Delinquent Preferred Outcomes 88% ▪ Refinance ▪ Modification / discounted p ayoff ▪ Paid in full ▪ Short sale / note sale ▪ Foreclosure Decision Tree ▪ 100% of loans bid assuming foreclo
Slide 25: Geographically diversified SBC loan origination platform
25 Geographically diversified SBC loan origination platform to drive future growth NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor NY008HT3 / 807214_1.wor N
Slide 26: Diversified Investment Portfolio
14% 12% 10% 8% 6% 5% 5% 3% 3% 34% Texas California Florida New York Arizona Georgia North Carolina Virginia Pennslyvania Other Portfolio Yield Analysis – Q1 2016 Investment Type Avg. Carrying Value (1) Gross Yield (2) Avg. Debt Cost (1) Debt Cost ROE Acquired portfolio $568,073 8.5% $437,030 4.4% 22
Slide 27: SBA 7(a) Loan Sale Transaction Economics – An Example
SBA 7(a) Loan Sale Transaction Economics – An Example (1) Credit losses are shared pari passu with SBA guaranteed versus unguaranteed %. (2) Premiums above 10% split 50/50 with SBA. The average gross premium from RCL’s 2016 guaranteed sales is 13.96%. The additiona l 3 .96% (13.96% - 10%) is split w
Slide 28: SAM GAAP to Core Earnings Reconciliation
SAM GAAP to Core Earnings Reconciliation 28 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Net income - U.S. GAAP after income taxes $13,236 $13,823 $9,742 $12,721 $13,387 $8,919 $9,113 Reconciling items: Unrealized (gain) loss on mortgage-backed securities 252 (415) (143) (377) 1,301 3,754 (2,001) Gain