SC 13D

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

(Rule 13d-101)

INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT

TO § 240.13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO

§ 240.13d-2(a)

(Amendment No.  )1

ZAIS Financial Corp.

(Name of Issuer)

Common Stock, par value $0.0001 per share

(Title of Class of Securities)

98886K108

(CUSIP Number)

RONALD MASS

341 Alma Real Drive

Pacific Palisades, California 90272

ADAM FINERMAN, ESQ.

OLSHAN FROME WOLOSKY LLP

1325 Avenue of the Americas

New York, New York 10019

(212) 451-2300

(Name, Address and Telephone Number of Person

Authorized to Receive Notices and Communications)

June 15, 2016

(Date of Event Which Requires Filing of This Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box x.

Note:  Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits.  See § 240.13d-7 for other parties to whom copies are to be sent.

_______________

1              The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP NO. 98886K108

1	NAME OF REPORTING PERSON ALMITAS OPPORTUNITY FUND LP
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) o   (b) o
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)		¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH	7	SOLE VOTING POWER 603,089*
	8	SHARED VOTING POWER - 0 -
	9	SOLE DISPOSITIVE POWER 603,089*
	10	SHARED DISPOSITIVE POWER - 0 -
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 603,089*
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES		o
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 7.4%
14	TYPE OF REPORTING PERSON PN

* Includes Shares underlying certain exchangeable senior notes.

2

CUSIP NO. 98886K108

1	NAME OF REPORTING PERSON ALMITAS CAPITAL LLC
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) o   (b) o
3	SEC USE ONLY
4	SOURCE OF FUNDS AF
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)		¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH	7	SOLE VOTING POWER 603,089*
	8	SHARED VOTING POWER - 0 -
	9	SOLE DISPOSITIVE POWER 603,089*
	10	SHARED DISPOSITIVE POWER - 0 -
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 603,089*
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES		o
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 7.4%
14	TYPE OF REPORTING PERSON IA, OO

* Includes Shares underlying certain exchangeable senior notes.

3

CUSIP NO. 98886K108

1	NAME OF REPORTING PERSON RONALD MASS
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP		(a) o   (b) o
3	SEC USE ONLY
4	SOURCE OF FUNDS OO
5	CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)		¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION USA
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH	7	SOLE VOTING POWER 603,089*
	8	SHARED VOTING POWER - 0 -
	9	SOLE DISPOSITIVE POWER 603,089*
	10	SHARED DISPOSITIVE POWER - 0 -
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 603,089*
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES		o
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 7.4%
14	TYPE OF REPORTING PERSON IN

* Includes Shares underlying certain exchangeable senior notes.

4

CUSIP NO. 98886K108

The following constitutes the Schedule 13D filed by the undersigned (the “Schedule 13D”).

Item 1. Security and Issuer.

This statement relates to the common stock, par value $0.0001 per share (the “Shares”), of ZAIS Financial Corp., a Maryland corporation(the “Issuer”).  The address of the principal executive offices of the Issuer is Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701.

Item 2. Identity and Background.

(a)           This statement is filed by:

(i) Almitas Opportunity Fund LP, a Delaware limited partnership (“Almitas Opportunity”), with respect to the Shares directly and beneficially owned by it;

(ii) Almitas Capital LLC (“Almitas Capital”), as the general partner of Almitas Opportunity; and

(iii) Ronald Mass, as the Managing Principal of Almitas Capital.

Each of the foregoing is referred to as a “Reporting Person” and collectively as the “Reporting Persons.”  Each of the Reporting Persons is party to that certain Joint Filing Agreement, as further described in Item 6.  Accordingly, the Reporting Persons are hereby filing a joint Schedule 13D.

(b)           The address of the principal officer of each of Almitas Opportunity and Almitas Capital, and Mr. Mass is 4640 Admiralty Way, Suite 500, Marina Del Rey, California 90292.

(c)           The principal business of Almitas Opportunity is acquiring, investing, holding and disposing of securities and other investments. Almitas Capital is a registered investment advisor and serves as the general partner of Almitas Opportunity.  Mr. Mass is the Managing Principal of Almitas Capital.

(d)           No Reporting Person has, during the last five (5) years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e)           No Reporting Person has, during the last five (5) years, been party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f)           Almitas Opportunity and Almitas Capital are organized under the laws of the State of Delaware.  Mr. Mass is a citizen of the United States of America.

Item 3. Source and Amount of Funds or Other Consideration.

The Shares purchased by Almitas Opportunity were purchased with working capital (which may, at any given time, include margin loans made by brokerage firms in the ordinary course of business) in open market purchases.  The aggregate purchase price of the 603,089 Shares beneficially owned by the Reporting Persons is approximately $9,713,816, including brokerage commissions.  Such aggregate purchase price includes $4,002,596, which is the purchase price of $4,000,000 principal amount of Notes (as defined below) convertible into 217,241 Shares.

5

CUSIP NO. 98886K108

Item 4. Purpose of Transaction.

The Reporting Persons purchased the Shares and Notes based on the Reporting Persons’ belief that the Shares and Notes, when purchased, were undervalued and represented an attractive investment opportunity.  On June 23, 2016, the Reporting Persons delivered a letter to the Chief Executive Officer of the Issuer, outlining the Reporting Persons significant concerns with the proposed merger agreement dated April 6, 2016, as amended on May 9, 2016 (the “Merger”), pursuant to which the Issuer would combine with Sutherland Asset Management Corporation, a privately held commercial mortgage REIT (“Sutherland”).  In the Reporting Persons’ view, the Merger is not in the best interest of the Issuer’s stockholders for numerous reasons, and the Reporting Persons believe that a liquidation strategy rather than a merger would lead to greater shareholder value.  The full text of the letter is attached hereto as Exhibit 99.2 and is incorporated herein by reference.  Accordingly, the Reporting Persons intend to withhold their proxies at the Issuer’s upcoming special meeting in order to prevent the occurrence of a quorum at the special meeting, and encourage all of the Issuer’s stockholders to similarly withhold their proxies.

Depending upon overall market conditions, other investment opportunities available to the Reporting Persons, and the availability of Shares or Notes at prices that would make the purchase or sale of Shares or Notes desirable, the Reporting Persons may endeavor to increase or decrease their position in the Issuer through, among other things, the purchase or sale of Shares or Notes on the open market or in private transactions or otherwise, on such terms and at such times as the Reporting Persons may deem advisable.

No Reporting Person has any present plan or proposal which would relate to or result in any of the matters set forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon or in connection with completion of, or following, any of the actions discussed herein.  The Reporting Persons intend to review their investment in the Issuer on a continuing basis.  Depending on various factors including, without limitation, the Issuer’s financial position and investment strategy, the price levels of the Shares and the Notes, conditions in the securities markets and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, engaging in communications with management and the Board of Directors of the Issuer and/or Sutherland, engaging in discussions with stockholders of the Issuer and others about the Issuer and the proposed Merger, purchase additional Shares or Notes, sell some or all of their Shares of Notes, engage in short selling of or any hedging or similar transaction with respect to the Shares or the Notes, or changing their intention with respect to any and all matters referred to in Item 4.

Item 5. Interest in Securities of the Issuer.

The aggregate percentage of Shares reportedly owned by each person named herein is calculated using as the numerator the respective shares held by each Reporting Person, including Shares issuable upon conversion of the Notes, and as the denominator 7,970,886 Shares outstanding, as of May 9, 2016, which is the total number of Shares outstanding as reported in the Issuer’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2016, plus the number of Shares issuable upon conversion of the Notes held by such Reporting Person.

6

CUSIP NO. 98886K108

A. Almitas Opportunity

(a) As of the close of business on June 23, 2016, Almitas Opportunity beneficially owned 603,089 Shares, including 217,241 Shares underlying the Notes.

Percentage: Approximately 7.4%

(b) 1. Sole power to vote or direct vote: 603,089

2. Shared power to vote or direct vote: 0

3. Sole power to dispose or direct the disposition: 603,089

4. Shared power to dispose or direct the disposition: 0

(c) The transactions in the Shares by Almitas Opportunity during the past sixty days are set forth in Schedule A and are incorporated herein by reference.

B. Almitas Capital

(a) Almitas Capital, as the general partner of Almitas Opportunity, may be deemed the beneficial owner of the 603,089 Shares owned by Almitas Opportunity.

Percentage: Approximately 7.4%

(b) 1. Sole power to vote or direct vote: 603,089

2. Shared power to vote or direct vote: 0

3. Sole power to dispose or direct the disposition: 603,089

4. Shared power to dispose or direct the disposition: 0

(c) Almitas Capital has not entered into any transactions in the Shares during the past sixty days.

C. Mr. Mass

(a) Mr. Mass, as the Managing Principal of Almitas Capital, may be deemed the beneficial owner of the 603,089 Shares owned by Almitas Opportunity.

Percentage: Approximately 7.4%

(b) 1. Sole power to vote or direct vote: 603,089

2. Shared power to vote or direct vote: 0

3. Sole power to dispose or direct the disposition: 603,089

4. Shared power to dispose or direct the disposition: 0

(c) Mr. Mass has not entered into any transactions in the Shares during the past sixty days.

As of the close of business on June 23, 2016, the Reporting Persons collectively beneficially owned an aggregate of 603,089 Shares, constituting approximately 7.4% of the Shares outstanding.

Each Reporting Person, as a member of a “group” with the other Reporting Persons for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, may be deemed the beneficial owner of the Shares directly owned by the other Reporting Persons.  Each Reporting Person disclaims beneficial ownership of such Shares except to the extent of his or its pecuniary interest therein.

7

CUSIP NO. 98886K108

(d) No person other than the Reporting Persons is known to have the right to receive, or the power to direct the receipt of dividends from, or proceeds from the sale of, the Shares.

(e) Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.

On June 23, 2016, the Reporting Persons entered into a Joint Filing Agreement in which, among other things, the Reporting Persons agreed to the joint filing on behalf of each of them of statements on Schedule 13D with respect to the securities of the Issuer.  The Joint Filing Agreement is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

From December 11, 2015 through April 26, 2016, the Reporting Persons purchased an aggregate of $4,000,000 principal amount of 8.0% percent exchangeable senior notes due November 2016 of the Issuer (the “Notes”). The Notes are convertible at an initial conversion rate of 52.5417 Shares of the Issuer’s common stock per $1,000 principal amount of the Notes (representing an initial conversion price of approximately $16.55 per Share), subject to adjustment in certain circumstances, and will mature on November 15, 2016.  The Reporting Persons may convert their Notes at their option, at any time prior to the close of business on the business day immediately preceding November 15, 2016.

Item 7. Material to be Filed as Exhibits.

99.1 Joint Filing Agreement by and among Almitas Opportunity Fund LP, Almitas Capital LLC, and Ronald Mass, dated June 23, 2016.

99.2 Letter to the Board of Directors, dated June 23, 2016.

8

CUSIP NO. 98886K108

SIGNATURES

After reasonable inquiry and to the best of his knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct.

Dated:  June 23, 2016

Almitas Opportunity Fund LP
By:	Almitas Capital LLC
	General Partner
By:	/s/ Ronald Mass
	Name:	Ronald Mass
	Title:	Managing Principal

Almitas Capital LLC
By:	/s/ Ronald Mass
	Name:	Ronald Mass
	Title:	Managing Principal

/s/ Ronald Mass

Ronald Mass

9

CUSIP NO. 98886K108

SCHEDULE A

Transactions in the Shares During the Past Sixty Days

Shares of Common Stock Purchased/(Sold) Price Per Share($) Date of Purchase

ALMITAS OPPORTUNITY FUND LP

54,310*	--	04/26/2016
(34,218)	14.1465	06/02/2016
800	14.1063	06/02/2016
1,130	14.1800	06/03/2016
2,426	14.1720	06/06/2016

* Represents Shares underlying certain exchangeable senior notes.

EX-99.1

Exhibit 99.1

JOINT FILING AGREEMENT

In accordance with Rule 13d-1(k)(1)(iii) under the Securities Exchange Act of 1934, as amended, the persons named below agree to the joint filing on behalf of each of them of a Statement on Schedule 13D (including additional amendments thereto) with respect to the shares of common stock, $0.0001 par value, of ZAIS Financial Corp., a Maryland corporation.  This Joint Filing Agreement shall be filed as an Exhibit to such Statement.

Dated:  June 23, 2016

Almitas Opportunity Fund LP
By:	Almitas Capital LLC
	General Partner
By:	/s/ Ronald Mass
	Name:	Ronald Mass
	Title:	Managing Principal

Almitas Capital LLC
By:	/s/ Ronald Mass
	Name:	Ronald Mass
	Title:	Managing Principal

/s/ Ronald Mass

Ronald Mass

EX-99.2

Exhibit 99.2

ALMITAS CAPITAL LLC

June 23, 2016

Mr. Michael Szymanski, Chief Executive Officer

ZAIS Financial Corp.

Two Bridge Avenue, Suite 322

Red Bank, New Jersey 07701-1106

Dear Mr. Szymanski,

My name is Ron Mass, Managing Principal and founder of Almitas Capital, and my firm has been a holder of ZAIS Financial Corp. (“ZFC”) since 2013. I have been a prominent investor in the mortgage market for over 25 years, having managed over $100 billion in mortgage related assets in my past role. I am reaching out today because I am concerned that the proposed merger of ZFC with Sutherland Asset Management Corp. (“Sutherland”) is not in the best interest of ZFC’s shareholders. This merger would completely change the investment strategy, significantly increase management fees, change the investment manager, and effectively sell ZFC’s assets at a significant discount to book value, all without seeking shareholder approval for the merger. As one of ZFC’s largest shareholders, I oppose this proposed merger for the reasons described in this letter.   Accordingly, I intend to withhold my vote in order to prevent a quorum at the meeting, and encourage all ZFC shareholders to take similar action.

The decline in price of ZFC shares since the merger announcement clearly supports the conclusion that other shareholders agree with our view. ZFC shares are down 4% since the transaction was announced, and now trade at over a 25% discount to the most recently reported book value, one of the widest discounts in the entire Mortgage REIT market. This is in sharp contrast to the other three Mortgage REIT mergers announced this year, which have on average gained almost 25% since the announcement of those mergers.1 In each one of those three cases the discount to book value narrowed significantly after the announcement; conversely, ZFC has seen its discount widen. Equally troubling, the broader Mortgage REIT market is up 7% since the ZFC merger was announced, in sharp contrast to the 4% decline in the ZFC share price.2

I have a number of concerns with the announced merger, which are outlined below. I ultimately believe that liquidation, rather than a merger, would be in the best interest of shareholders and have detailed my reasoning for this conclusion in the following points. Further detail can also be found in the footnotes to this letter.

1. The assumption in the S-4 filing and Investor Presentation that the new entity Sutherland will trade at book value is based upon overly optimistic and unrealistic assumptions. Recent block trades and offerings of Sutherland stock, the Bank of America Merrill Lynch fairness opinion in the proxy statement, the prior failed IPO of Sutherland, and feedback from well-respected Wall Street REIT analysts all support our view that the new entity will trade substantially below ZFC’s assumptions and likely below the current ZFC share price.3

2. ZAIS management has not adequately considered other strategic alternatives which would result in greater value and more certainty for shareholders. With over $12 per share in cash and liquid securities at ZFC and more than $4 in cash value of Mortgage Servicing Rights (“MSR”) at GMFS, a wholly-owned mortgage-originating subsidiary, we calculate $16 of distributable cash is available at present to ZFC shareholders.4

3. ZAIS Board and management are conflicted in recommending the merger as the management company stands to benefit at shareholder’s expense. ZAIS management stands to earn a large termination fee of $8 million, or 7% of ZFC’s current market value. Should the REIT have its assets liquidated, investors will earn higher proceeds, but ZAIS management would likely earn a lower termination fee. Considering that ZFC shareholders have lost 6% on their investment since inception while the overall Mortgage REIT market has improved over 5% and the stock and bond markets have performed even better, I question the merit of this fee.5

4. ZFC is effectively being merged into a REIT three times its size with the surviving entity, Sutherland, having a completely different investment strategy and new investment manager. This transaction has been cleverly structured so as not to require ZFC shareholder approval and shareholders are instead being asked to increase the number of shares outstanding. This method requires a much lower threshold to pass, yet is of material importance to current shareholders. Shareholders should have a voice in approving such significant changes or an opportunity to redeem their investment close to book value. If put to a vote, we question whether this transaction would be approved by ZFC’s shareholders.6

5. The mortgage litigation risk Sutherland is inheriting from GMFS will likely cause Sutherland to trade at a greater discount to book value. ZFC’s difficulty in attracting bids was due in large part to bidders’ concerns about litigation risk facing GMFS. Waterfall Asset Management (“Waterfall”), Sutherland’s parent, sold GMFS to ZFC in late 2014 and is now buying GMFS back, inheriting this $1 billion in potential litigation risk. As the overhang from litigation risk negatively impacted ZFC, there is every reason to expect that it will adversely impact Sutherland.7

6. The new manager is proposing to significantly increase management fees by adding an incentive fee whereby management will receive 15% of the annual return in excess of 8%. The new entity will have one of the highest management fees among Mortgage Reits with the exception of some of the best known and respected Commercial Mortgage Reits. With Sutherland’s new 3-year management agreement and a 3 times management termination fee in the new advisory agreement, Sutherland is all but assured six years of high management fees. As Mortgage Reits with incentive fees and high expense ratios tend to trade at larger discounts due to lack of institutional sponsorship, the increase in management fees will likely cause Sutherland to trade at a larger discount, further eroding shareholder value.8

7. ZFC expects shareholders to incur over $6 million in merger related costs, greater than 5% of the ZFC market capitalization. By liquidating assets, ZFC could avoid incurring this large cost.

It is my strong belief that a liquidation strategy rather than a merger will lead to greater shareholder value. I therefore urge you to terminate the merger with Sutherland. I appreciate your urgent attention to this matter, and am available at your convenience if you have any questions.

Sincerely,

/s/ Ron Mass

Ron Mass

Managing Principal

Almitas Capital LLC

4640 Admiralty Way

Marina Del Rey, CA 90292

(310) 573-4343

##

Cc: Thomas E. Capasse, CEO and Chairman, Sutherland REIT, and Principal and Co-Founder, Waterfall Asset Management

Source:

Almitas Capital, LLC

FOOTNOTES

____________________ 

1 The three other Mortgage Reits acquired in 2016 are Apollo Residential Mortgage (“AMTG”), Javelin Mortgage Investment (“JMI”), and Hatteras Financial (“HTS”). All three increased by double digits since the merger announcement and the average increase was over 24% from announcement date to June 21, 2016.

 

2 Ishares Mortgage REIT ETF (“REM”), the most liquid Mortgage REIT ETF, is used by many as a proxy for the overall market. The total return from April 6, 2016 through June 21, 2016 of REM is 7.1%.

 

3 ZFC’s primary rationale in favor of the merger seems to be their financial advisor Houlihan Lokey’s (“HL”) assumption that the newly merged entity will trade close to book value. Based on HL’s peer group analysis, they conclude that the new entity will trade at 85% - 95% of book value based on peers such as Starwood Property Trust and Colony Capital. The peer group chosen by HL is not realistic as many of these Reits are much better known, have longer established track records, and are much larger in size than Sutherland. There are many Mortgage Reits of similar size and class to Sutherland which trade at discounts to book of 20% or more, including well respected names like Angelo Gordon’s AG Mortgage Investment Trust and American Capital Mortgage Investment Corporation. In fact, the financial advisor to Sutherland, Bank of America Merrill Lynch suggested an appropriate valuation of Sutherland in the range of 78 – 83% of book value, representing a 17% - 22% discount. This analysis was in the same S-4 proxy as the HL analysis. Similarly, recent trades over the past six months of 144A shares of Sutherland have occurred at discounts to book of around 25%. On March 29, a block of 700,000 shares of Sutherland traded in the 144A market at a 25% discount to the most recently available book value. Large quantities of Sutherland shares are currently offered at a discount of 23% to book value. Additionally, well-respected REIT analysts I have spoken to cite concerns about pent up selling pressure from converting ZFC and existing Sutherland shareholders. Sutherland tried to go public in 2015 in an Initial Public Offering (“IPO”) led by JPM Morgan which was poorly received by the market. As Sutherland would have had to complete the IPO at a significant discount to book value, they decided to pull the transaction.

Based on the above, we expect the merged Sutherland entity to trade in the range of 20 – 25% discount to book. This would result in a value to current ZFC shareholders at or below the most recent share price. Had HL used the valuation cited by Bank of America Merrill Lynch, the actual discount based on recent trades of Sutherland shares, or the valuations suggested by well-respected REIT analysts, we believe that HL and ZFC’s board would have concluded that liquidation was a better alternative than the merger. The value to shareholders is less than $13 if a shareholder does not tender their shares pre-merger and $14 if the shareholder does tender the maximum number of shares based on a discount to book value of 25%.

4 The wide range of liquidation values presented in the S-4 and Investor Presentation dated June 21, 2016 are based on old and misleading information. As the majority of ZFC’s assets have already been sold, the liquidation outcome is much more certain and at the higher end of the range. The Re-performing Loan portfolio sale to Citigroup has since been completed, resulting in proceeds of $362 million, or $94.8 million after paying off associated liabilities. This represents $10.70 per ZFC share. The ZFC portfolio of Non-Agency Mortgage Securities is very liquid and could be sold in a single day through a bid list.  With a stated value of $87 million as of March 31, 2016, these securities could be sold for $28 million net of the associated financing of $59 million. This represents more than $3 per share. Net of all liabilities, there is distributable cash after the sale of non-agency mortgage securities of over $12 per share.

As of March 31st, ZFC values the MSRs at GMFS at $45 million, or over $5 per share. As these MSRs are on post crisis, high quality government agency loans from Fannie Mae, Freddie Mac, and Ginnie Mae, these MSRs are highly marketable and could be sold or financed. The MSRs are sub-serviced by a large, well-known, and respected servicer which makes a sale or a financing that much easier. With liquidity for MSR trading and financing improving over the past couple years, industry professionals we have spoken with indicate that the MSRs could be financed with an advance rate of 60%, freeing up $27 million, or over $3 per share to ZFC shareholders. In fact, in the recent Investor Presentation dated June 21, 2016, the company’s projections assume that the MSRs will be financed and the cash will be freed up outside of GMFS for new investment opportunities.

Alternatively, the MSRs could be sold at their current book value of $5 per share. Given the minimum net worth requirements at GMFS of only $6 million to transact with the Government Agencies - Fannie Mae, Freddie Mac, and Ginnie Mae - GMFS has ample excess liquidity which could be distributed to shareholders once a sale or financing of MSRs is completed. Furthermore, GMFS is a highly profitable mortgage originator, generating average after-tax core income of over $1.8 million per quarter, or $7.5 million annually. This equates to about $0.85 per annum in after-tax income. Given the ability to distribute $12 from cash and liquid assets at ZFC, an additional $3 or more from the same or financing of MSRs, and almost $1 per annum in after-tax income at GMFS, a liquidation of ZFC and distribution of cash would result in significantly greater value to ZFC shareholders than a merger. In order to reduce costs, ZAIS could de-list and / or terminate the REIT, and then distribute the GMFS as a public or private entity. GMFS could then continue to operate profitably and be sold or wound down after litigation is settled.

 

5 ZAIS management is receiving a termination fee approximately equal to three times the average annual advisory fee earned during the prior 24-month period prior to such termination. This termination fee is based on the equity of ZFC including items such as goodwill and intangibles even though ZFC is trading at a substantial discount to this book value of equity and is selling itself to Sutherland at an adjusted book value which eliminates these items. If ZAIS was instead to distribute cash to investors and sell GMFS after the pending litigation is resolved, this would result in the termination fee to management being significantly lower even though value to ZFC shareholders would be significantly higher. This creates a clear conflict where a scenario which maximizes value to shareholders would result in management receiving lower fees. Investment returns are based on total returns since the ZAIS IPO and the Ishares Mortgage REIT ETF is used as a proxy for the total return of Mortgage Reits.

 

6 Based on ZFC’s bylaws and Maryland Corporate Law, a merger would require at least a majority approval by ZFC’s outstanding shareholders.

 

7 The primary difficulty in selling ZFC to prospective buyers stems from pending litigation against ZFC’s taxable REIT subsidiary GMFS, a mortgage origination company. While the portfolio holdings of ZFC were fairly liquid and are now even more so after the sale of the re-performing loan portfolio, prospective buyers were hesitant to purchase ZFC while litigation is pending against GMFS. The ability to sell GMFS and the proceeds realizable should greatly improve once this litigation is resolved. GMFS is being sued by a party who purchased $1 billion of loans from GMFS between 1999 and 2006. ZFC has over $19 million available to settle this claim from holdbacks and reserves, a sum that should be more than adequate based on conversations with industry professionals. In the 2015 10-K, ZFC said that it intends to seek reimbursement of any litigation settlement from the prior owners, Waterfall and GMFS management, from whom ZFC purchased GMFS in October 2014 at a significant premium to tangible book. ZFC is currently holding back over $15 million in funds consisting of over $11 million in contingent consideration and over $4 million in escrow payments pending litigation settlement. ZFC is now selling GMFS back to Waterfall at a discount to tangible book via its subsidiary Sutherland. The holdback of $15 million plus other possible reimbursements from Waterfall provide a significant benefit to GMFS and ZFC. However, once the merger is completed and GMFS is sold back to a Waterfall controlled entity, the value of GMFS is likely significantly diminished as Sutherland is unlikely to sue its own parent and manager, Waterfall, to recoup any litigation losses. This loss of recourse back to Waterfall will likely be to the detriment of Sutherland shareholders and to the benefit of Waterfall.

 

8 The new Sutherland management agreement is for an initial term of 3-years after which the agreement renews annually for one year terms. The agreement can be terminated after the initial three year period for a fee equal to three times the base and incentive fees earned over the prior 24 months. This effectively locks in a minimum of 6-years of base and incentive fees for Sutherland. Sutherland also will receive its stock based incentive fee at the then current stock price which provides an incentive to have the stock trade at as wide of a discount as possible. Prior to this new agreement, Sutherland received its stock based incentive at book value which provided management with an incentive to have the stock trade closer to book value. Sutherland has agreed to lower the base management fee to 1% on equity over $500 million. However at the current discount to book, it is unlikely that new funds will be raised at the lower fee structure unless Sutherland raises dilutive equity.