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Business Combinations

6 Months Ended

Jun. 30, 2022

Note 5. Business Combinations

On March 16, 2022, the Company acquired the Mosaic Funds, a group of privately held, real estate structured finance opportunities funds, with a focus on construction lending. See Note 1 for more information about the Mosaic Mergers. The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the acquisition.


(in thousands)	March 16, 2022
Assets
Cash and cash equivalents	$	100,236
Restricted cash		23,330
Loans, net		432,779
Investments held to maturity (including $17,053 held at fair value)		165,302
Real estate owned, held for sale		78,693
Other assets		25,761
Total assets acquired	$	826,101
Liabilities
Secured borrowings		66,202
Loan participations sold		73,656
Due to third parties		24,634
Accounts payable and other accrued liabilities		38,182
Total liabilities assumed	$	202,674
Net assets acquired	$	623,427
Non-controlling interests		(82,257)
Net assets acquired, net of non-controlling interests	$	541,170

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.


(in thousands)
Fair value of net assets acquired	$	541,170

Consideration transferred based on the value of Class B shares issued		437,311
Consideration transferred based on the value of OP units issued		20,745
Fair value of CERs issued		84,348
Total consideration transferred	$	542,404

Goodwill	$	1,234

The table above includes contingent consideration in the form of CERs valued at approximately $84.3 million or $2.79 per CER. See Note 7 for more information about the valuation of the CER.

On July 31, 2021, the Company acquired Red Stone, a privately owned real estate finance and investment company that provides innovative financial products and services to multifamily affordable housing. See Note 1 for more information about the Red Stone acquisition. The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the acquisition.


(in thousands)	July 31, 2021
Assets
Cash and cash equivalents	$	1,553
Restricted cash		6,994
Investment in unconsolidated joint ventures		20,793
Servicing rights		30,503
Other assets:
Intangible Assets		9,300
Other		1,330
Total assets acquired	$	70,473
Liabilities
Accounts payable and other accrued liabilities		9,082
Total liabilities assumed	$	9,082
Net assets acquired	$	61,391

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.


(in thousands)
Fair value of net assets acquired	$	61,391

Cash paid		63,000
Contingent consideration		12,400
Total consideration transferred	$	75,400

Goodwill	$	14,009

In the table above, the future value of the contingent consideration is dependent on the probability of the acquiree achieving certain financial performance targets using earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a metric. The increase in value during the three months ended June 30, 2022 was due to a higher probability of achieving projected EBITDA at the measurement date.

On March 19, 2021, the Company completed a merger with Anworth, a specialty finance company that focused primarily on residential mortgage-backed securities and loans that are either rated “investment grade” or are guaranteed by federally sponsored enterprises. See Note 1 for more information about the Anworth Merger. The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used and key assumptions made to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the merger.


(in thousands)	March 19, 2021
Assets
Cash and cash equivalents	$	110,545
Mortgage-backed securities, at fair value		2,010,504
Loans, held for sale, at fair value		102,798
Real estate owned, held for sale		26,107
Accrued interest		8,183
Other assets		38,216
Total assets acquired	$	2,296,353
Liabilities
Secured borrowings		1,784,047
Corporate debt, net		36,250
Derivative instruments, at fair value		60,719
Accounts payable and other accrued liabilities		4,811
Total liabilities assumed	$	1,885,827
Net assets acquired	$	410,526

In the table above, the gross contractual unpaid principal amount for acquired loans held for sale, at fair value was $98.3 million, all of which is expected to be collected.

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.


(in thousands, except per share data)
Fair value of net assets acquired	$	410,526

Anworth shares outstanding at March 19, 2021		99,374
Exchange ratio	x	0.1688
Shares issued		16,774
Market price as of March 19, 2021	$	14.28
Consideration transferred based on value of common shares issued	$	239,537

Cash paid per share	$	0.61
Cash paid based on outstanding Anworth shares	$	60,626

Preferred Stock, Series B Issued		1,919,378
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series B issued	$	47,984

Preferred Stock, Series C Issued		779,743
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series C issued	$	19,494

Preferred Stock, Series D Issued		2,010,278
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series D issued	$	50,257
Total consideration transferred	$	417,898
Goodwill	$	7,372

In a business combination, the initial allocation of the purchase price is considered preliminary and therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of the acquisition date. Because the measurement period is still open for the Mosaic Mergers and the Red Stone acquisition, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received. As of June 30, 2022, the goodwill recorded in connection with the Mosaic Mergers, Anworth Merger and Red Stone acquisition have been allocated to the SBC Lending and Acquisitions segment.

The following pro-forma income and earnings (unaudited) of the combined company are presented as if the Mosaic Mergers had occurred on January 1, 2022 and January 1, 2021.


		Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)		2022	2021			2022	2021
Selected Financial Data
Interest income	$	153,671	$	121,420	$	291,137	$	212,238
Interest expense		(80,827)		(60,702)		(144,769)		(116,322)
Recovery of (provision for) loan losses		4,390		(5,517)		2,848		(5,509)
Non-interest income		50,766		75,855		139,240		164,853
Non-interest expense		(57,345)		(79,133)		(133,272)		(156,890)
Income before provision for income taxes	$	70,655	$	51,923	$	155,184	$	98,370
Income tax expense		(10,318)		(6,995)		(28,167)		(15,676)
Net income	$	60,337	$	44,928	$	127,017	$	82,694

Non-recurring pro-forma transaction costs directly attributable to the Mosaic Mergers were $1.4 million and $7.1 million for the three and six months ended June 30, 2022, respectively and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the Mosaic Mergers.

Due to the relative size of the Red Stone business acquisition, pro forma financial information is considered not material.