Business Context and Reporting Period
This Form 8-K, filed on April 6, 2016, by ZAIS Financial Corp. (ZFC), announces the entry into a definitive merger agreement with Sutherland Asset Management Corporation (SAM). The filing details the proposed combination of the two mortgage REITs, the termination of ZFC's existing advisory agreement, and the appointment of a new investment advisor.
Key Financial Metrics and Transaction Terms
The filing does not provide standard operating financial metrics such as revenue, profit, or cash flow for the reporting period. Instead, it outlines specific financial terms of the proposed transaction:
- Exchange Ratio: Sutherland shareholders will receive ZFC common stock based on the ratio of Sutherland's adjusted book value per share to ZFC's adjusted book value per share.
- Book Value Adjustment: An additional $15 million reduction will be applied to ZFC's book value to derive its adjusted book value for the exchange calculation.
- Cash Tender Offer: ZFC plans a cash tender offer for up to $64.3 million at a price equal to 95% of ZFC's adjusted book value, further adjusted for specific payments.
- Termination Fee (Advisor): ZFC will pay $8 million to ZAIS REIT Management, LLC upon closing the merger.
- Termination Fee (Merger): A $4 million fee is payable by either party if the Merger Agreement is terminated under certain specified circumstances.
Material Changes and Strategic Shifts
The filing represents a material change in ZFC's corporate structure and operations:
- Corporate Name and Ticker: Following the merger, the company will change its name to Sutherland Asset Management Corporation and trade under the symbol "SLD" on the NYSE.
- Portfolio Restructuring: A condition of the merger is the consummation of the sale of ZFC's entire mortgage loan portfolio.
- Management Change: The current advisory agreement with ZAIS REIT Management, LLC will be terminated. Waterfall Asset Management, LLC will become the new investment advisor effective upon closing.
- Board Composition: The post-merger Board of Directors will consist of the current directors of Sutherland and one current director of ZFC (David Holman).
Outlook, Risks, and Contingencies
The transaction is subject to several material conditions and risks:
- Conditions to Closing: Completion requires stockholder approval, regulatory approvals, the successful completion or withdrawal of the cash tender offer, and the sale of ZFC's mortgage loan portfolio.
- Forward-Looking Risks: Management highlights risks including the failure to consummate the merger, fluctuations in adjusted book value, disruption of business operations, and changes in interest rates or prepayment rates.
- Contingencies: The new Management Agreement and the Termination Agreement with the current advisor are contingent upon the closing of the merger; they will automatically terminate if the merger does not close.
Key Facts for Investor Verification
- Verify the final adjusted book value per share for both ZFC and SAM to determine the exact exchange ratio.
- Confirm the status and terms of the sale of ZFC's whole mortgage loan portfolio, a mandatory condition for the merger.
- Review the upcoming joint proxy statement/prospectus (Form S-4) for detailed risk factors and financial pro forma information.
- Monitor the outcome of the cash tender offer, which is capped at $64.3 million.
- Assess the impact of the $8 million advisory termination fee and the $4 million potential merger termination fee on liquidity.