Ready Capital Corporation · NYSE:RC
Ready Capital — ZAIS Financial — Merger or Acquisition (July 2016)
34 slides from Ready Capital's merger presentation, Jul 29, 2016
Slide 1: Investor Presentation July 2016
Investor Presentation July 2016 Exhibit 99.1
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: Combined Business Overview and Transaction Highlights
▪ 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 4: Executive Summary (cont'd)
Executive Summary (cont’d) 4 ▪ In October 2015, ZAIS Financial Corp (“ZFC”) launched a strategic review and conducted a full process, with the assistance of Ho ulihan Lokey ▪ The process resulted in ZFC and Sutherland Asset Management (“SAM”) entering a definitive merger agreement on April 6, 2016,
Slide 5: Executive Summary (cont'd)
Executive Summary (cont’d) 5 ▪ Certain ZFC assets can be liquidated with cash proceeds distributed to shareholders (via a dividend); liquidation of other as set s is more challenging ▪ As of March 31, 2016, ~40% of ZFC equity value is in its Residential Mortgage Banking Segment, operating through GM
Slide 6: Investor Concern #1
11.8% 11.3% 10.4% 9.1% 8.9% 8.6% 8.4% 8.1% ZFC ARI SAM CLNY STWD BXMT LADR ACRE 1.03x 0.89x 0.60x 0.80x 1.00x 1.20x Jul - 13 Mar - 14 Oct - 14 May - 15 Dec - 15 Jul - 16 Commercial Residential Commercial 3 - Year Average: 1.07x Residential 3 - Year Average: 0.86x Investor Concern #1 6 The analysis o
Slide 7: Investor Concern #2
Investor Concern #2 7 Zais management has not adequately considered other strategic alternatives which would result in greater value and more certainty for shareholders . We calculate $ 16 of distributable cash is available at present to ZFC shareholders . Investor Concern # 2 : Response : ▪ In Octo
Slide 8: Investor Concern #2 (cont'd): Illustrative Liquidation Proceeds
$1.82 $10.39 $9.19 $19.19 $10.65 $4.90 ($6.98) ($1.21) $4.27 $2.80 $0.00 $4.00 $8.00 $12.00 $16.00 $20.00 Cash on Balance Sheet Cash from RPL Sale Other ZFC Net Assets Repayment of Senior Exchan. Notes Total ZFC before Expenses Transaction Expenses Total ZFC - Excluding Mortgage Banking Segment Liqu
Slide 9: Investor Concern #2 (cont'd)
Investor Concern #2 (cont’d) 9 Note: All figures in thousands except for per share amounts. (1) Based on pro forma 3/31/16 financials. Value Per Share figures represent the average consideration received per share. (2) Represents the book value received by ZFC stockholders. (3) Based on pro forma co
Slide 10: Investor Concern #2 (cont'd)
Investor Concern #2 (cont’d) 10 ▪ Time needed to liquidate the trust and resolve potential claims is highly uncertain ▪ Based on similar sub - prime RMBS litigation cases, legal resolution may be a multi - year process ▪ Spinning GMFS off as a standalone public company may impair its value ▪ Under l
Slide 11: Investor Concern #3
Investor Concern #3 11 Zais Board and management are conflicted in recommending the merger as the management company stands to benefit at shareholder’s expense . ▪ There is no conflict of interest as a termination fee is payable to ZFC’s manager in the event of a liquidation or the propos ed transac
Slide 12: ZFC vote process and merger rationale
▪ The ZFC vote process has been constructed in strict compliance with Maryland law and the Company’s Articles of Incorporation ▪ The merger transaction is subject to a vote by ZFC stockholders on whether they authorize the issuance of shares – they have the right to vote as they choose ▪ ZFC will be
Slide 13: Investor Concern #4 (cont'd): Pro Forma Assumptions
Note: LTM as of 3/31/16. (1) Assumes a tax rate of 35% on GMFS earnings. Investor Concern #4 (cont’d) 13 Pro Forma Assumptions ▪ Liquidation of ZFC assets ex - GMFS (post - tender) and reinvest proceeds at SAM’s historical gross leveraged return of 15% ▪ Reduction in SAM operating expenses by $3 mil
Slide 14: Investor Concern #4 (cont'd): Total Economic Return
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 15: Investor Concern #5
Investor Concern #5 15 The mortgage litigation risk Sutherland is inheriting from GMFS will likely cause Sutherland to trade at a greater discount to book value . Investor Concern # 5 : Response : ▪ On a pro - forma basis, GMFS will represent only 10% of combined company equity so will have a limite
Slide 16: Investor Concern #6
Investor Concern #6 16 The new manager is proposing to significantly increase management fees by adding an incentive fee whereby management will receive 15 % of the annual return in excess of 8 % . The increase in management fees will likely cause Sutherland to trade at a larger discount, further er
Slide 17: Investor Concern #7
Investor Concern #7 17 ZFC expects shareholders to incur over $ 6 million in costs to complete the merger, greater than 5 % of the ZFC market capitalization . Investor Concern # 7 : ▪ As of March 31, 2016, ZFC has already incurred $2.8 million in Merger related costs with remaining transaction fees
Slide 18: Appendix
Appendix
Slide 19: 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 SAM Pro Forma Combined Company ZAIS REIT Management ZFC Management Agreement Pre - Transaction Post - Tra
Slide 20: Calculation of Exchange Ratio and Tender Offer Price
Calculation of Exchange Ratio and Tender Offer Price Source: ZFC S - 4 dated 7/18/16. (1) Per merger agreement. 20 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 21: 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 22: 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 23: SAM Company Overview
SAM Company Overview SUTHERLAND |, —
Slide 24: 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 25: Small Balance Commercial Property Overview
25 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 26: SAM Business Overview
SAM Business Overview 26 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 27: SAM Economics by Business Line
27 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 28: Sourcing Strategy: Acquisition and Origination
Sourcing Strategy: Acquisition and Origination Acquired Loans ▪ Top 5 acquirer of SBC loans since crisis ▪ Since 2008 and through March 31, 2016, Waterfall has reviewed approximately 254,000 performing, sub - performing and non - performing SBC and SBA loans, priced approximately 129,000 of these lo
Slide 29: Loss mitigation 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 30: Geographically diversified SBC loan origination platform
30 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 31: Diversified Investment Portfolio and Portfolio Yield Analysis
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 32: 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 33: SAM Return on Equity – Q1 2016
33 SAM Return on Equity – Q1 2016 (1) Core Earnings is a non - GAAP measure. Please refer to page 33 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 34: SAM GAAP to Core Earnings Reconciliation
SAM GAAP to Core Earnings Reconciliation 34 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