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ZAIS Financial to combine with commercial mortgage REIT Sutherland Asset Management

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ZAIS Financial to combine with commercial mortgage REIT Sutherland Asset Management

ZAIS FinancialCorp. said April 7 that it will combine with Sutherland Asset Management Corp. nearly a month after that it was engaged indiscussions with a potential counterparty regarding a potential merger or sale transaction.

Following the merger, the combined entity will be renamed SutherlandAsset Management Corp., and its shares will continue to be listed on the NYSE underthe symbol SLD. Sutherland Asset Management will be externally managed by , itscurrent external manager.

ZAIS Financial stockholders will continue to be stockholdersof the surviving corporation and will be eligible to receive cash aggregating approximately$64 million in a tender offer to be made by the company following stockholder approvalof the transaction. Sutherland Asset Management stockholders will receive newlyissued ZAIS Financial shares, and holders of operating partnership units of SutherlandAsset Management will receive operating partnership units in the surviving company.

The number of ZAIS Financial shares to be received by SutherlandAsset Management stockholders will be based on an exchange ratio determined by dividingthe Sutherland Asset Management adjusted book value per share by the ZAIS Financialadjusted book value per share. Adjusted book value per share equals total consolidatedstockholders' equity divided by each respective company's common stock and operatingpartnership units issued and outstanding, as modified for transaction expenses andafter giving pro-forma effect to any dividends or other distributions. An additional$15 million reduction will be applied to ZAIS Financial's book value to derive itsadjusted book value.

As of Dec. 31, 2015, Sutherland Asset Management's and ZAIS Financial'sadjusted book value per share, on a pro-forma basis, would have been $14.32 and$18.29, before transaction expenses, respectively, representing an exchange ratioof 0.7829, with every share of Sutherland Asset Management being exchanged for 0.7829ZAIS Financial share. For illustrative purposes, under a pro forma exchange ratio,as of Dec. 31, 2015, Sutherland Asset Management stockholders would receive approximately26.2 million ZAIS Financial shares, which would value ZAIS Financial at approximately91.6% of book value or $18.29 per share of common stock and operating partnershipunit.

Following stockholder approval of the transaction but prior tothe closing of the merger, ZAIS Financial will make a cash tender offer to its stockholdersfor aggregate cash proceeds of up to $64.3 million. The tender offer will be madeat a price per share equal to 95% of its adjusted book value, further adjusted byits pro-rata share of an $8 million contractual termination payment to , its managing adviser;and approximately $4 million related to intangible assets, or for illustrative purposes,$17.05 per share as of Dec. 31, 2015. Based on the illustrative pro forma tenderoffer price as of Dec. 31, 2015, and assuming the tender offer is fully subscribed,following the merger ZAIS Financial stockholders would continue to own approximately16% of the combined entity. The tender offer will be financed through the sale ofcertain mortgage loans from ZAIS Financial's residential mortgage investments segment.The final exchange ratio and the per-share cash tender offer price will be subjectto adjustment based on fluctuations in both companies' book values, as per the termsof the merger agreement.

Sutherland Asset Management, a privately held commercial mortgageREIT, acquires, manages, services, finances, and through its subsidiaries originates,primarily small balance commercial loans. As of Dec. 31, 2015, it had assets of$2.3 billion and total stockholders' equity of $480 million. For the year endedDec. 31, 2015, Sutherland Asset Management earned net income of $44.8 million. Italso invests in asset-backed securities where the underlying pool of assets consistsprimarily of small balance commercial loans, or small balance commercial asset-backedsecurities, and other real estate-related investments.

The transaction is expected to close in the third quarter, subjectto the satisfaction of certain customary conditions, and approval of the stockholdersof both the companies.

Houlihan Lokey Inc. is serving as independent financial adviserand Alston & Bird LLP is serving as independent legal adviser to ZAIS Financial.Bank of America Merrill Lynch is serving as financial adviser and Sidley AustinLLP is serving as legal adviser to Sutherland Asset Management.