Scott Kennedy’s Notes on Ready Capital Acquiring UDF IV

Disclosure: Scott Kennedy and Michael VanLoon (CWMF) are long RC.

Hi subscribers, I had a chance to review the proposed Ready Capital (RC) and United Development Funding IV (UDF IV) merger announced on 12/2/2024.

I believe there are a couple positives and negatives to this proposed merger of Ready Capital and UDF IV.

UDF IV is a non-traded REIT (previously delisted back in 2016) that invests in secured loans with underlying collateral in various residential-related forms. This includes, but is not limited to, plots of land that are eventually used for the development of residential homes and/or communities.

Positives

Let us first discuss the positives.

First, I like the fact these are residential loans (for residential land plots and eventually housing). Unlike the Broadmark acquisition, these are not commercial mortgage loans (as we have continued to see the trouble in that sub-sector of the mortgage/real estate market). Between distressed residential and commercial loans, I would currently generally prefer residential.

Second, RC is acquiring UDF IV at a steep discount to BV. As of 12/31/2023, UDF IV had a BV of $9.47 per common share. UDF IV’s adjusted tangible BV, after excluding a proposed special pre-merger cash distribution of ~($75) million to common shareholders, was $6.92 per common share as of 9/30/2024.

RC is proposing to acquire UDF IV, prior to any potential post-merger target bonuses, at only $3.07 per common share. When calculated, a (56%) discount.

Third, UDF IV has no outstanding borrowing/debt. This is beneficial from a net interest income/adjusted core earnings perspective. Simply put, all loans/investments were funded through previously-raised capital/equity as opposed to debt/liabilities.

Negatives

Now, let us discuss a few negative aspects to the proposed merger.

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