Independent Proxy Advisory Recommends NexPoint Nominees for UDF IV Board

In the ongoing dispute between the parties, alternative investments firm NexPoint Real Estate Opportunities LLC announced that independent proxy advisory firm Egan-Jones has recommended that United Development Funding IV shareholders vote for long overdue change to the UDF IV board of trustees.

Specifically, Egan-Jones recommends that UDF IV shareholders vote “for” all NexPoint nominees: Paul S. Broaddus, Edward N. Constantino, John A. Good, and Julie Silcock; and “withhold” on UDF IV’s incumbent trustees: Lawrence S. Jones, Phillip K. Marshall, Steven J. Finkle, and J. Heath Malone.

The independent proxy advisory statement immediately follows the news that real estate finance company Ready Capital Corporation (NYSE: RC) announced a definitive agreement to acquire the non-listed real estate investment trust. 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.

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.

Despite NexPoint’s praise for the potential acquisition, “a proposed transaction that would provide much-needed liquidity to shareholders,” NexPoint cited an “alarming lack of information and detail about the current proposal,” and the still critical need to support NexPoint’s nominees.

In support of its recommendation, Egan-Jones cited the absence of an annual shareholders’ meeting for eight years in a row as a likely disenfranchisement of shareholders’ rights, and the lack of transparency and inadequate disclosure controls as concealing UDF IV’s “true condition.”

“While the proposed merger may appear to offer liquidity to shareholders, we believe it reflects a reactionary response by the company… Our concerns include the lack of transparency regarding the due diligence process and the potential shopping of companies during the merger decision,” said Egan-Jones in its latest statement.

Egan-Jones continued: “Post the conviction era, we believe the board should have refreshed its composition to enhance the company’s reputation. It is concerning that four trustees … who all served on the board during the fraud investigations, sanctions, and the subsequent conviction of the former UDF IV executives remained in office … failed to restore the company’s reputation and address the erosion of shareholder value. … [T]o restore shareholder trust and confidence, we believe that UDF IV urgently needs a refreshed board to strengthen its strategy and address the erosion of company value caused by mismanagement, excessive capital spending, and poor loan portfolio allocation and management.”

Under the terms of the merger agreement with Ready Capital, 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.

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