We estimate that our net proceeds from this offering, after deducting estimated
offering expenses of $1.2 million, will be $118.9 million (based on the offering
price of $21.25 per share, which is the initial public offering price shown on
the cover page of this prospectus). The underwriting fee incurred in this
offering will be paid by our Advisor. Our Advisor has also agreed to pay any
expenses in connection with this offering in excess of $1.2 million. We will
not be obligated to repay our Advisor for any of these costs. We estimate that
our net proceeds will be $136.9 million if the underwriters exercise their
overallotment option in full.
We plan to use the net proceeds from this offering, together with additional
borrowings, to purchase our target assets such that, over time, our equity is
allocated 50% to 60% to whole loans, 30% to 40% to non-agency RMBS, 5% to 10% to
MSRs, other real-estate related and financial assets and cash, and 0% to 5% to
agency RMBS. Until appropriate investments can be identified, our Advisor may
invest the net proceeds from this offering in our target asset classes in
different allocations than indicated above, and/or interest-bearing, short-term
investments, including money market accounts and/or funds, that are consistent
with our intention to qualify as a REIT and maintain our exemption from
registration under the 1940 Act, or may elect to pay-down outstanding repurchase
agreements. These initial investments, if any, are expected to provide a lower
net return than we will seek to achieve from investments in non-Agency RMBS,
Agency RMBS, residential mortgage loans and our other target assets. In
addition, we will use the net proceeds from this offering to redeem 133 shares
of our 12.5% Series A Cumulative Non-Voting Preferred Stock outstanding for an
aggregate redemption price of $146,300.
Prior to the time we have fully used the proceeds of this offering to acquire
non-Agency RMBS, Agency RMBS, residential mortgage loans and our other target
assets, we may fund our quarterly distributions out of such proceeds.
Our success depends, in large part, on our ability to acquire assets at
favorable spreads over our borrowing costs and our ability to efficiently manage
our portfolio risks. In acquiring our target assets and establishing hedge
positions, we compete with other existing mortgage REITs (both internally and
externally managed), government sponsored enterprises, mortgage finance and
specialty finance companies, savings and loan associations, banks, mortgage
bankers, insurance companies, hedge funds (including those managed by ZAIS),
mutual funds, institutional investors, investment banking firms, governmental
bodies and other companies with similar asset acquisition objectives, and others
which may be organized in the future. Some of our competitors may have
greater financial resources and access to lower cost of capital than we have,
including the U.S. Department of the Treasury and the Federal Reserve both of
which have recently become dominant players in the RMBS markets. These
competitors may not be subject to the same regulatory constraints (such as
REIT compliance or maintaining an exemption under the 1940 Act) as we are. The
effect of the existence of additional REITs and other market participants may
be to increase competition for the available supply of mortgage assets suitable
for purchase, as well as the amount of financing available to us in the
repurchase agreement market.
In the face of this competition, we have access to our Advisor's
professionals and their industry expertise, which may provide us with a
competitive advantage to help us assess risks and determine appropriate pricing
for certain potential asset acquisitions. We expect that these relationships
will enable us to compete more effectively for attractive asset acquisition
opportunities. In addition, we believe that current market conditions may have
adversely affected the financial condition of certain competitors. However, we
may not be able to achieve our business goals or expectations due to the
competitive risks that we face.
mortgage-backed
securities (or RMBS), including RMBS that are not issued or guaranteed by a
federally chartered corporation, such as the Federal National Mortgage
Association (or Fannie Mae), or the Federal Home Loan Mortgage Corporation (or
Freddie Mac), or an agency of the U.S. Government, such as the Government
National Mortgage Association (or Ginnie Mae) (or non-Agency RMBS), as well as
RMBS that are issued or guaranteed by a federally chartered corporation or a
U.S. Government agency (or Agency RMBS). Our RMBS strategy focuses on non-Agency
RMBS with an emphasis on securities that, when originally issued, were rated in
the highest rating category by one or more of the nationally recognized
statistical rating organizations, as well as Agency RMBS. Our strategy will also
emphasize the purchase of performing and re-performing residential whole loans.
We will also have the discretion to invest in other real estate-related and
financial assets, including mortgage servicing rights (or MSRs), interest only
strips created from RMBS (or IOs), commercial mortgage-backed securities (or
CMBS) and asset-backed securities (or ABS).
Our income is generated primarily by the net spread between the income we
earn on our assets and the cost of our financing and hedging activities. Our
objective is to provide attractive risk-adjusted returns to our stockholders,
primarily through quarterly distributions and secondarily through capital
appreciation.
We are externally managed and advised by ZAIS REIT Management, LLC (or our
Advisor), a subsidiary of ZAIS Group, LLC (or ZAIS). ZAIS was established in
1997 and is an investment adviser registered with the U.S. Securities and
Exchange Commission (or SEC) and specializing in structured credit, including
residential whole loans, RMBS and ABS. As of September 30, 2012, ZAIS estimates
that it had approximately $5.5 billion of assets under management (comprised of
the net asset value of managed funds, and the aggregate principal balance of
collateralized debt obligation (or CDO) vehicles and other entities, which do
not mark their securities to fair market value under U.S. generally accepted
accounting principles (or U.S. GAAP) and has built long-term relationships with
a global investor base, including public and private pension funds,
endowment/foundations, insurance companies, family offices, fund of funds,
sovereign wealth funds and investment advisors. ZAIS possesses a comprehensive
analytics and technology infrastructure, credit modeling, loan and securities
valuation, loan data management and servicing oversight capabilities and
significant structuring and securitization experience. As of September 30,
2012, ZAIS's team included 123 professionals in the United States, Europe and
Asia. ZAIS is the managing member of our Advisor and ZAIS and its employees
support our Advisor in providing services to us pursuant to the terms of
a shared facilities and services agreement between ZAIS and our Advisor. We
rely on our Advisor and ZAIS to provide or obtain on our behalf the personnel
and services necessary for us to conduct our business, and we have no
employees of our own.
We completed our formation transaction and commenced operations on July 29,
2011. The formation transaction involved the exchange by investors in two funds
from the Matrix VI series of funds (or the Matrix VI Funds) of cash and RMBS
assets for an aggregate of 3,022,617 shares of our common stock. We received
$60.5 million in this transaction, including $8.65 million from certain current
and former employees of ZAIS and relatives of such persons as well as current
and former members and owners of ZAIS (or, collectively, the ZAIS Parties) and
deployed the cash together with additional borrowings to build a diversified
portfolio of RMBS assets. As part of the initial formation transactions, we
anticipated completing our initial public offering on or prior to August 3, 2012
and viewed our initial public offering as a means for our stockholders to
achieve liquidity in their investments. We determined, due to our assessment of
market conditions, to delay the initial public offering beyond August 3, 2012.
In connection with our delay of the initial public offering, we offered to
repurchase shares from our stockholders who desired to achieve liquidity around
the time of the original August 3, 2012 time frame. Accordingly, on October 11,
2012, we repurchased 668,525 shares of common stock from our existing
stockholders at the per share book value as of July 31, 2012. On January 24,
2013, we also repurchased 265,245 shares of our common stock from one of our
institutional stockholders. We paid to such stockholder approximately
$5.2 million, which represents 90% of the repurchase amount based on the
estimated book value per share as of December 31, 2012, the remaining 10% of the
repurchase price will be paid following the completion of our December 31,
2012 year-end audit. In October of 2012, we also completed a private placement
in which we sold 195,458 shares of common stock and 22,492 Operating Partnership
units (or OP units) at a price per share equal to the per share book value as of
August 31, 2012. Subsequently, in December of 2012, we completed another private
placement in which we sold 36,581 shares of common stock and 904,422 OP units at
a price per share equal to the per share book value as of November 30, 2012. As
a consequence of these transactions, we currently have outstanding 2,320,886
shares of common stock and 926,914 OP units.
As of September 30, 2012, we held a diversified portfolio of RMBS assets
with an estimated fair market value of $163.4 million, consisting primarily of
senior tranches of non-Agency RMBS that were originally highly rated but
subsequently downgraded, and Agency RMBS collateralized by either fixed rate
loans or adjustable rate mortgages (or ARMs). The borrowings we used to fund the
purchase of our portfolio totaled approximately $110.1 million as of
September 30, 2012 under master repurchase agreements with two counterparties.
As of September 30, 2012, we had entered into master repurchase agreements with
three counterparties and had outstanding borrowings with two of these
counterparties. We are also in discussions with other financial institutions in
order to potentially provide us with additional repurchase agreement capacity.
We have elected to be taxed as a real estate investment trust (or REIT) for
U.S. federal income tax purposes commencing with our taxable year ended
December 31, 2011. We are organized in a traditional umbrella partnership real
estate investment trust (or UpREIT) format pursuant to which we serve as the
general partner of, and conduct substantially all of our business through, our
Operating Partnership subsidiary, ZAIS Financial Partners, L.P., a Delaware
limited partnership. We also expect to operate our business so that we are not
required to register as an investment company under the Investment Company Act
of 1940, as amended (or the 1940 Act).
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Our principal executive offices are located at Two Bridge Avenue, Suite 322,
Red Bank, New Jersey 07701-1106. Our telephone number is (732) 978-7518.