Ready Capital Corporation (NYSE: RC), a real estate finance company, announced a definitive agreement to acquire non-listed real estate investment trust United Development Funding IV, or UDF IV. Shareholders of UDF IV may receive up to $5.89 per share through a combination of pre-closing distributions, Ready Capital shares, and contingent value rights.
According to the company, the merger between Ready Capital and UDF IV is anticipated to create significant value for both companies’ shareholders by combining their complementary strengths and producing a combined entity that “will be well-positioned to navigate the real estate landscape and potentially deliver superior returns to investors.”
A spokesperson for NexPoint Real Estate Opportunities LLC, which is waging a proxy battle to elect members to the UDF IV board, issued the following statement regarding the proposed transaction: “NexPoint is pleased that our multiyear agitation and litigation efforts have conferred a potential benefit to long-suffering UDF IV shareholders in the form of a proposed transaction that would provide much-needed liquidity. Shareholders should note that the $5.89 capped per share value proposed is significantly below the $9.47 per share book value endorsed by the company for the year ended 2023, and that there is an alarming lack of information and detail about the current proposal.
“We continue to urge UDF IV shareholders to support NexPoint’s nominees following nearly a decade of this board overseeing fraud and disclosure violations resulting in poor performance, lack of transparency and illiquidity. If elected, we expect NexPoint’s highly qualified nominees to carefully review and seriously consider the proposed transaction and ultimately pursue the best outcome for shareholders.”
The proposed transaction has been approved by the board of directors of Ready Capital and the board of trustees of UDF IV, acting upon the unanimous recommendation of a special committee of UDF IV’s independent trustees. The transaction is expected to close in the first half of 2025, subject to the approval of UDF IV shareholders and other customary closing conditions.
Ready Capital originates, acquires, finances, and services lower-to-middle-market investor and owner-occupied commercial real estate loans. UDF IV is a REIT providing capital solutions to residential real estate developers and regional homebuilders.
Under the terms of the merger agreement, UDF IV will be permitted to distribute up to $75 million of cash on its pre-closing balance sheet to its shareholders prior to the transaction closing, representing value distributed by UDF IV to its shareholders of up to $2.44 per share.
Following such distribution and as part of the merger consideration, each share of UDF IV common stock will then be converted into 0.416 shares of Ready Capital common stock, i.e., the exchange ratio, with UDF IV shareholders receiving a total of approximately 12.8 million shares of Ready Capital common stock. According to Ready Capital, the exchange ratio was negotiated to reflect an adjustment for the expected pre-closing distribution, as well as other valuation adjustments. Based on Ready Capital’s closing share price on Nov. 29, 2024, the implied value of the Ready Capital shares expected to be issued in connection with this closing is approximately $94 million, or $3.07 per UDF IV share. At closing, UDF IV shareholders are expected to own approximately 7% of Ready Capital’s outstanding shares.
In addition, as part of the merger consideration, UDF IV shareholders will be entitled to receive additional stock consideration after closing under contingent value rights to be issued by Ready Capital, which UDF IV management estimates will generate payments of up to $0.38 per UDF IV share over time before any accrued dividends related to such Ready Capital shares are paid.
“The UDF IV transaction will allow us to scale our portfolio and expand our core business, unlocking exciting growth and value creation opportunities,” said Thomas Capasse, chairman and chief executive officer of Ready Capital. “The acquisition of UDF IV will further differentiate our ability to provide investors and borrowers with a range of financing solutions, and we expect to leverage our resources to drive growth in the land development vertical.”
“This transaction marks an exciting milestone for UDF IV that will provide significant value and liquidity to our shareholders,” said James Kenney, managing trustee and CEO of UDF IV. “The transaction enables us to make a meaningful cash distribution to our shareholders, who will also benefit from ownership in a scaled, diversified and publicly traded industry leader.”
The combined company will continue to operate under the name Ready Capital and its shares are expected to continue trading on the New York Stock Exchange under the RC ticker symbol. Waterfall Asset Management LLC will continue to manage the combined company.
With the merger, Ready Capital said it is acquiring a portfolio of pure-play residential land loans concentrated in Dallas-Fort Worth, a top performing U.S. residential market, which is well-positioned to benefit from significant unmet housing supply. Further, Ready Capital and Waterfall have a lengthy history with UDF IV and its affiliates, having funded more than $110 million of loans over the last 10 years with all loans to date having paid off.
Upon completion of the merger, Capasse will continue to lead the company and Ready Capital executives Jack Ross, Andrew Ahlborn, Gary Taylor, and Adam Zausmer will remain in their current roles. The combined company will remain headquartered in New York.
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