Ready Capital has agreed to acquire embattled United Development Funding IV in a transaction that could be worth $181 million.
UDF IV, a real estate investment trust that provides capital to residential real estate investors and regional homebuilders, is currently fighting a proxy battle with NexPoint Real Estate Opportunities, which is looking to replace several members of its board of directors.
UDF IV's annual meeting is scheduled for Dec. 10. An updated proxy supplement for the meeting, FAQ and letter to shareholders from UDF IV have been filed with the Securities and Exchange Commission under Ready Capital's registration; these are also available on a UDF IV website.
"We believe that it is critical that you vote FOR ONLY the Board's four nominees…to help ensure that you realize the compelling value that we expect the Merger will provide," the proxy supplement said.
The tensions between the two sides go back several years. In 2016, law enforcement investigated an affiliate,
"First and foremost, the Board has serious concerns about engaging in any commercial discussions with NexPoint and its affiliates, due to your significant connections with Kyle Bass and Hayman Capital, the perpetrators of a 'short and distort' scheme against the Trust, as well as a planned scheme to acquire the Trust's well-positioned assets after the perpetrators had caused the Trust distress," the letter said.
A request for comment from NexPoint regarding the Ready Capital agreement has not been returned by press time.
In 2020, the SEC revoked UDF IV and two affiliated companies' registration for all classes of their securities for failure to comply with the government's rules, including when it came to financial reports.
During 2023, UDF IV lost $28.1 million, compared with $4.5 million one-year prior, its annual report posted in July said. According to those financial statements, the REIT has 14 loans totaling $135.7 million on non-accrual status, or 51% of the portfolio, said a flash note on the transaction from Jade Rahmani, an analyst at Keefe, Bruyette & Woods. Its allowance for credit losses totaled $46.2 million.
While UDF IV had no debt at the end of last year, Ready Capital plans to put leverage on its portfolio, Rahmani noted.
Ready Capital provides financing for investor and
The transaction is broken down into three components. In the first portion, UDF IV will be permitted to distribute up to $75 million of its own cash to shareholders prior to the transaction closing, valued at up to $2.44 per share.
After that takes place, each UDF IV share will be converted into 0.416 shares of Ready Capital common stock. Based on Ready Capital's Nov. 29 closing price, the implied value is approximately $94 million or $3.07 per UDF IV share.
Ready Capital closed at $7.37 per share on Nov. 29. At noon on Dec. 2, it was up to $7.46 per share. UDF IV is not publicly traded.
Finally, UDF IV shareholders can receive contingent value rights, which its management said could be worth an additional 38 cents per share before any accrued dividends related to the Ready Capital shares are paid.
"This transaction marks an exciting milestone for UDF IV that will provide significant value and liquidity to our shareholders," said James Kenney, its managing trustee and CEO said in a press release. "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 companies are promoting that the transaction gives UDF IV shareholders liquidity in a New York Stock Exchange-traded security.
When the deal is completed, UDF IV shareholders should own approximately 7% of Ready Capital.
"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 CEO 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."
Capasse, who is also the chief investment officer for Ready Capital, will remain in his roles, as will other Ready Capital executives: Jack Ross, president; Andrew Ahlborn, chief financial officer; Gary Taylor, chief operating officer; and Adam Zausmer, chief credit officer.
Residential
Piper Sandler & Co. is financial advisor to Ready Capital while Alston & Bird is the legal advisor.
For UDF IV, Moelis & Company is the financial advisor, with Dunn & Crutcher as legal advisor. Holland & Knight is serving as the legal advisor for the special committee of the UDF IV board of trustees.
