Exhibit (b)(2)
[LETTERHEAD OF ROBERT A. STANGER & CO., INC.]
September 13, 1999
Special Committee of the Board of Directors
Imperial Credit Commercial Mortgage Investment Corp.
11601 Wilshire Boulevard, Suite 2080
Los Angeles, CA 90025
Gentlemen:
The Special Committee of the Board of Directors (the "Special Committee")
of Imperial Credit Commercial Mortgage Investment Corp. (the "Company") has
advised us that the Company and ICCMIC Acquisition Corp. (the "Merger Sub"), a
wholly owned subsidiary of Imperial Credit Industries, Inc. ("Imperial Credit")
have entered into a merger agreement (the "Merger Agreement") pursuant to which
the Merger Sub will merge with and into the Company with the Company continuing
as the surviving corporation (the "Merger"). We have also been advised that
Imperial Credit Commercial Asset Management Corporation (the "Management
Company"), a subsidiary of Imperial Credit, manages the assets of and provides
administrative services to the Company pursuant to a management agreement (the
"Management Agreement") and that such Management Agreement will be terminated
pursuant to the Merger Agreement. We have been advised that the Merger
Agreement contemplates that the Company and Imperial Credit will obtain an
independent appraisal of the value of the termination fee, if any, that would be
payable to the Management Company pursuant to Section 15 of the Management
Agreement if the Management Agreement was not renewed and terminated on October
22, 1999 (the "Management Agreement Amount").
You have requested that Robert A. Stanger & Co., Inc. ("Stanger") perform
an appraisal of the estimated value of the Management Agreement Amount based
upon Stanger's independent review of the Management Agreement and Merger
Agreement and such other matters as Stanger deems appropriate. This report and
the accompanying exhibits hereto (the "Report") is prepared in connection with
that agreement dated as of August 13, 1999 between the Company and Stanger.
Background on Robert A. Stanger & Co., Inc.
1
Stanger, founded in 1978, has provided investment banking and consulting
services to clients located throughout the United States, including major New
York Stock Exchange member firms and insurance companies and over seventy
companies engaged in the management and operation of real estate and real estate
related assets. The investment banking activities of Stanger include financial
advisory services, asset and securities valuations, industry and company
research and analysis, litigation support and expert witness services, and due
diligence investigations in connection with both publicly registered and
privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, and reorganizations and for estate, tax, corporate and other
purposes. In particular, Stanger's valuation practice involves the valuation of
real estate mortgages secured by real estate, real estate management companies
and related management contracts and other real estate related assets.
Identification of Asset to be Valued
The asset to be valued in connection with this Report is the termination
fee, if any, that would be payable to the Management Company pursuant to Section
15 of the Management Agreement if the Management Agreement was not renewed by
the Company and terminated on October 22,1999, which is herein referred to as
the Management Agreement Amount. The Management Agreement is dated as of
October 22, 1997.
Purpose of Report
The purpose of this Report is to estimate the value of the Management
Agreement Amount based upon market conditions as of September 13, 1999.
Function of Report
The function of the Report is to provide an estimate of the value of the
Management Agreement Amount solely for the use of the Special Committee.
Stanger understands that this Report will be utilized as one of the two initial
appraisal reports to be obtained in connection with the determination of the
Management Agreement Amount pursuant to Section 15 of the Management Agreement.
Date of Valuation
The date of the valuation pursuant to this Report is September 13, 1999.
Value Definition
2
Value, as used in this Report, is defined as the most probable price, as of
the date specified herein, in cash, in terms equivalent to cash, or in other
precisely revealed terms, for which the specified rights should sell after
reasonable exposure in a competitive market under all conditions requisite to a
fair sale, with the buyer and seller each acting prudently, knowledgeably and
for self-interest, and assuming that neither party is under undue duress.
Valuation Methodology and Analysis
In connection with our analysis in support of the conclusion set forth
herein, we have reviewed, among other things: (i) the Management Agreement; (ii)
the prospectus for the initial public offering of common shares of the Company;
(iii) Policies and Guidelines of the Company as set by the Board of Directors;
(iv) quarterly and annual financial statements for the Company for 1998 and
1999, as available; (v) a summary of fees paid to the Management Company during
1998 and the first six months of 1999; (vi) management agreements for comparable
real estate investment trusts investing in mortgages ("Mortgage REITs"); (vii)
fees charged by comparable Mortgage REITs; (viii) the financial performance of
comparable Mortgage REITs; (ix) actual operating performance of the Management
Company for the year ended December 31, 1998 and the six months ended June 30,
1999 as reported by the Management Company; (x) annualized 1999 and budgeted
2000 operating performance of the Management Company, as estimated by the
Management Company; (xi) offers for the Management Company received during the
past two years; (xii) the Merger Agreement; ( xiii) a memorandum prepared by
legal counsel to the Special Committee; (xiv) the financial terms of comparable
transactions involving similar companies; and (xv) certain other data provided
by the Company and the Special Committee. In addition, we have interviewed
certain representatives of the Special Committee, its legal and financial
advisor; representatives of the Management Company and Imperial Credit; a
representative of legal counsel to the Company; and a representative of
Friedman, Billings, Ramsey & Co., Inc., the dealer manager for the initial
public offering for the Company.
In arriving at a value estimate for the Management Agreement Amount, we
considered, among others, three valuation analyses. A summary of the valuation
analyses considered is as follows.
Cost Analysis
We considered the utilization of a Cost Analysis to value the Management
Agreement Amount. Cost Analysis is premised upon the assumption that no prudent
buyer would pay more for a property than the cost required to develop or create
such property. In our view, Cost Analysis is not an appropriate method of
analysis with respect to the Management Agreement Amount for the following
reasons, among others: (i) specific costs are not easily ascribable to the
development of a contract right such as the Management Agreement Amount; (ii)
Cost Analysis is not a commonly used criteria by buyers of management companies
or management contract rights; and (iii) cost
3
analysis is generally considered the least reliable indicator of value. For the
reasons set forth above, among others, a Cost Analysis was not prepared in
connection with the valuation of the Management Agreement Amount.
Discounted Cash Flow Analysis
We considered the utilization of a Discounted Cash Flow Analysis to value
the Management Agreement Amount. Discounted Cash Flow Analysis is premised upon
the assumption that no prudent investor would pay more than the present value,
at a target rate of return, of the estimated cash flow to be derived from an
investment. Discounted Cash Flow Analysis requires the development of proforma
statements of cash flow over a multi-year period of operations, numerous
assumptions regarding the revenues to be derived from assets under management,
and expenses associated with the management of such assets and the estimation of
the value of such cash flow at the end of the projection period (the "Reversion
Value"). In addition, a Discounted Cash Flow Analysis requires the development
of an appropriate discount rate which reflects the risks associated with the
related income stream. Discounted Cash Flow Analysis is most commonly used in
circumstances where a current level of cash flow is not indicative of
prospective levels of cash flow, such as a contractual change in management or
other fees which raises or lowers the fees and corresponding cash flow. In our
view, the Discounted Cash Flow Analysis is not an appropriate method of analysis
for the value of the Management Agreement Amount for the following reasons,
among others: (i) numerous assumptions are required regarding future events
relating to the assets under management and the fees derived therefrom which
would produce a wide range of cash flows which, in turn I would require a wide
range of Residual Value estimates upon the termination of the projection period
and a wide range of discount rates to be applied to such income streams in order
to estimate value; (ii) comparable transaction data with respect to discount
rates and Reversion Value parameters is not generally available and therefore
renders the Discounted Cash Flow Analysis inherently less reliable in this
situation; and (iii) Discounted Cash Flow Analysis is not a primary valuation
technique used by buyers of management companies or management agreements. For
the reasons set forth above, among others, a Discounted Cash Flow Analysis was
not prepared in connection with the valuation of the Management Agreement
Amount.
Capitalization of Earnings Analysis
We considered the utilization of a Capitalization of Earnings Analysis to
value the Management Agreement Amount. Capitalization of Earnings Analysis
requires the development of an estimate of earnings before interest, taxes,
depreciation and amortization ("EBITDA") and the capitalization of such earnings
based upon an earnings multiple (the "EBITDA Multiple") derived from comparable
transactions. In our view, the Capitalization of Earnings Analysis is an
appropriate method of analysis for the Management Agreement Amount for the
following reasons, among others: (i) EBITDA, as adjusted for normalized
operations, is readily determinable from the information available with respect
to the Management Agreement Amount; (ii) sufficient data from
4
comparable transactions is available to derive an appropriate EBITDA Multiple;
and (iii) Capitalization of Earnings Analysis is a commonly used valuation
technique in determining the value of a management company and related contract
rights by buyers and sellers of such companies and rights. For the reasons set
forth above, among others, a Capitalization of Earnings Analysis was prepared in
connection with the Valuation of the Management Agreement Amount.
Valuation Analysis
Utilizing the Capitalization of Earnings Analysis, we first established a
normalized level of EBITDA based upon a review of the historical results of the
Management Company. We noted that, for the year ended December 31, 1998, the
Management Company reported EBITDA of $3,350,000 during a period of substantial
investment activity by the Company. We further noted that the Management
Company reported EBITDA of S 1,995,000 for the six months ended June 30, 1999
and the Management Company has estimated full year 1999 EBITDA of $4,407,000.
In addition, the Management Company estimated EBITDA for the year ending 2000 at
$11,113,000 based upon substantial growth from fees associated with a
substantial increase in assets of the Company (from approximately $700 million
to more than $1.4 billion of average invested assets).
In our view, it is appropriate to establish a base level of EBITDA based
upon the current level of assets under management. The Management Agreement
provides for termination, which in our view, precludes consideration of growth
in Company assets under the management of the Management Company. Furthermore,
the Merger Agreement appears to limit transactions other than in the ordinary
course of business thereby minimizing, at this time, opportunities to reduce
assets under management. As such, we have estimated the stabilized management
fee based upon invested assets as of June 30, 1999. As of June 30, l999, we
have estimated average invested assets at $717.2 million and the related
management fee of 1% at $7,172,000.
With respect to operating expenses, we have observed that actual Management
Company operating expenses were reported at $2,990,000 for 1998 and $1,768,000
for the six months ended June 30, 1999. The Management Company has estimated
operating expenses for the full year 1999 at $3,080,000 and for the year 2000 at
$3,530,000, predicated on increases in assets under management. We also note
that expenses of the Management Company are broadly chargeable to Company in
accordance with Section 9 of the Management Agreement and that the prospectus
for the initial public offering (the "IPO Prospectus") indicates that
compensation to officers and employees of the Company shall not be paid by the
Company. Although the Management Agreement appears to clearly indicate that
expenses of the Management Company incurred on behalf of the Company are
chargeable to the Company, it is not clear from the IPO prospectus and other
information we reviewed, that general and administrative expenses such as rent
are chargeable to the Company. We have been advised that expenses such as rent
have been charged to and paid by the Company. Based upon our review of the
matters set forth above with respect to expenses of the Management Company and
our experience in the evaluation of management companies, we have
5
calculated a stabilized level of operating expenses equal to 50% of revenues or
$3,586,000.
Based upon our estimate of the management fee at $7,172,000 and our
estimate of operating expenses of $3,586,000 we have estimated the stabilized
level of EBITDA for the Management Company derived from the Management Agreement
at $3,586,000.
In order to establish an appropriate EBITDA Multiple we considered two
primary sources or comparable data. First we considered EBITDA multiples for
public companies in the real estate services business such as Jones Lang
LaSalle, Trammel Crow, CB Richard Ellis and Grubb & Ellis. However, we concluded
that such companies (i) generally were much larger than the value ascribable to
the Management Agreement Amount; (ii) generally had more diverse sources of
revenue; and (iii) possessed few attributes which could be deemed comparable to
the Management Company's cash flow from the Management Agreement. Second, we
considered selected transactions involving the acquisition. of private
management companies in connection with consolidation transactions involving
assets managed by such management companies. We observed that such
transactions: (i) involved the valuation of management agreements which are
terminable; (ii) involved, generally, management agreements which cover the
management of assets owned by a limited number of ownership interests; and (iii)
involved transactions wherein investor approval was sought or will be sought and
obtained and wherein subsequent trading of the security resulting from the
transaction confirmed the reasonableness of the overall value utilized in
connection with such valuation. For the aforementioned reasons, we concluded
that the EBITDA Multiple data derived from private management company
transactions provides a reasonable and supportable range of data from which to
derive an appropriate EBITDA Multiple.
Our review of private management company transactions indicates that EBITDA
Multiples have ranged from 5.0 to 11.4 during the past five years and such range
has narrowed during the last three years to 5.0 to 8.76 with an average of 7.0.
We attribute the narrowing of this range primarily to a general lowering of
expectations with respect to management companies and the real estate related
assets managed by them. We believe that the appropriate EBITDA Multiple for the
Management Agreement Amount should be at the low end of the range for several
factors, among others, as follows: (i) the Management Agreement, like others in
this industry, is terminable; (ii) growth expectations for the Management
Company, the Company and the Mortgage REIT industry are low as the financial
performance of such industry has been negative during the past two years; (iii)
the Management Company does not directly or indirectly control the Company as a
controlling stockholder or as a general partner of a partnership; (iv) the
language contained in Section 15 of the Management Agreement regarding the
determination of the termination fee is vague; (v) the level of expense
reimbursements to be received by the Management Company pursuant to the
Management Agreement is unclear; and (vi) the Board of Directors of the Company
has the authority to revise the Policies and Guidelines of the Company and
reduce the level of assets under management, in the absence of the Merger
Agreement. Based upon our review of the above factors, among others, we believe
that an appropriate EBITDA Multiple for the determination of the
6
Management Agreement Amount would be in the range of 4.5 to 5.5 and we have
concluded an EBITDA Multiple of 5.0. We note that this multiple is at the low
end of the overall range due to the aforementioned factors.
Our value conclusion therefore, is based upon our estimate of EBITDA
associated with the Management Agreement of $3,586,000 and an EBITDA Multiple of
5.0 resulting in a value of $17,930,000 which we have rounded to $18,000,000.
We note further that this concluded value for the Management Agreement Amount
represents a revenue multiple of 2.5. We note that comparable Mortgage REIT's
provide for termination fees indicating an implied revenue multiple range of 1.0
to an indeterminate amount for those transactions which provide for a
termination fee assuming continuous renewal of the Management Agreement. In our
view, those transactions providing for a termination fee based upon continuous
renewal would not likely be valued at an EBITDA multiple exceeding the high-end
of the EBITDA multiple range described above of 8.76, adjusted to reflect
general declines in industry outlook of 20% to 30% resulting in an adjusted
high-end EBITDA Multiple range of 6.1 to 7.0 and, assuming a 50% expense ratio,
an adjusted revenue multiple of 3.0 to 3.5. We note that the derived revenue
multiple for the Management Agreement Amount of 2.5 falls within the range of
1.0 and 3.5 established by our review of comparable Mortgage REIT management
agreements.
Assumptions and Limitations
In preparing and rendering this Report, we have relied, without independent
verification, on the completeness and accuracy, in all material respects, of all
financial and other information furnished or otherwise communicated to us by the
Company, the Management Company and or their respective agents, advisors or
representatives. With respect to information provided to us by the Company, the
Management Company and or their respective agents, advisors, and
representatives, we have assumed that: (i) data provided to us was accurate and
complete in all material respects; (ii) all budgets and projections provided to
us were reasonably prepared on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgements; (iii) no material changes have occurred in the information reviewed
between the date the information was provided to us and the date of this Report,
and (iv) the Company, the Management Company and or their respective agents,
advisors and representatives are not aware of any information of facts that
would cause the information supplied to us to be incomplete or misleading in a
material respect.
In preparing and rendering this Report we have advised the Company and the
Special Committee that we are not attorneys. We have advised the Company and
the Special Committee, that in determining the Management Agreement Amount and
preparing this Report, we have made certain assumptions regarding the
interpretation of certain terms of the Management Agreement and other
agreements. The Company and the Special Committee have authorized Stanger to
make such assumptions and the Company and the Special Committee have been
advised that such assumptions
7
made by Stanger may have affected the Management Agreement Amount conclusion
reached by Stanger in this Report. Stanger has been authorized by the Company
and the Special Committee to provided this estimate of value based on such
assumptions.
Among the assumptions made by Stanger in reaching the value conclusions
herein are the following: (i) no action or inaction on the part of the Company
or the Management Company have occurred or will occur in the near future which
would enable the Company to terminate the Management Agreement for cause and
without the payment of a termination fee; (ii) the Management Agreement does not
require that the termination fee payable pursuant to Section 15 of the
Management Agreement to be determined on the basis of an assumed liquidation of
the assets of the Company and an immediate payment of liquidation proceeds to
the shareholders of the Company; (iii) the Company or the Board of Directors
does not have the authority to unilaterally change the terms of the Management
Agreement to reduce the charges thereunder without the consent of the Management
Company and the Management Company has not agreed and does not intend to agree
to a reduction in fees payable pursuant to the Management Agreement; (iv) all
fees paid by the Company to the Management Company are proper and consistent
with the terms of the Management Agreement; (v) the Company or its Board of
Directors has not altered the Policies and Guidelines of the Company and has not
adopted a plan of liquidation; (vi) the Company and the Management Company at
all relevant times desired to pay, upon termination of the Management Agreement,
a termination fee based upon the assets then under management using reasonable
valuation parameters and techniques determined by independent parties and
without regard to the actual financial performances of the Company prior to the
time of such termination; and (vii) neither the Management Agreement, Merger
Agreement or any other agreement, whether written, oral or otherwise serves to
define, limit or otherwise determine the amount of the Management Agreement
Amount, other than Section 15 of the Management Agreement and Section 1.8 of the
Merger Agreement.
We hereby advise the Company and the Special Committee that we have not
been requested to and therefore do not: (i) render any opinion as to the
fairness, from a financial point of view, or reasonableness of the terms of, the
Management Agreement (including without limitation Section 15 thereof) and the
Merger Agreement (including without limitation Section 1.8 thereof); (ii) make
any recommendation to the Special Committee, the Board of Directors of the
Company, the Company or its shareholders with respect to (a) whether to approve
or reject the Merger; (b) alternatives to the Merger; (c) the tax consequences
of the Merger; or (d) any other aspect of the Management Agreement or the Merger
Agreement other than our estimate of the value of the Management Agreement
Amount.
Certain information requested by this firm was not provided in connection
with this assignment including information relating to the valuation of the
termination fee and the report of experts representing the Management Company.
We were not provided with access to such information and we were not permitted
to review our preliminary findings or conclusions with
8
representatives of the experts representing the Management Company nor were such
experts preliminary findings or conclusions communicated to us. Such
information, if made available to us, could affect the conclusions reached
herein.
This Report is a summary report and does not purport to be a complete
description of the analyses performed or the matters considered in reaching the
conclusion herein. The analyses and summary set forth herein must be considered
as a whole, and selecting portions of such summary or analyses, without
considering all factors and analyses, could create an incomplete view of the
process underlying the determination of the Management Agreement Amount. In
rendering this Report, judgment was applied to a variety of complex analyses and
assumptions. The assumptions made and the judgements applied in rendering the
conclusion herein may not be readily susceptible to partial analysis in summary
description. The fact that a specific analysis is referred to herein is not
meant to indicate that such analysis was given greater weight than any other
analysis.
Value Conclusion
This estimate of the value of the Management Agreement Amount is based upon
the economic, market and other conditions in effect on, and the information made
available to us as of, the date hereof. Our review was undertaken solely for
the purpose of providing an opinion of value and we make no representation as to
the adequacy of such review for any other purpose.
This Report is only an estimate of the value of the Management Agreement
Amount as of September 13, 1999 and should not be relied upon as being the
equivalent of the price that would necessarily be received in the event of a
sale or other disposition of the Management Agreement or the Management Company.
Changes in corporate financing rates or changes in real estate markets may
result in higher or lower values of the Management Agreement Amount. The use of
other valuation methodologies might produce a higher or lower value. Our
opinion is subject to the assumptions and limiting conditions set forth herein.
We have used methods and assumptions deemed appropriate in our professional
judgment; however, future events may demonstrate that the assumptions were
incorrect or that other, different methods or assumptions may have been more
appropriate.
Based upon the review described in this Report and the assumptions and
limiting conditions stated herein, it is our opinion that the value of the
Management Agreement Amount as of September 13, 1999 is:
EIGHTEEN MILLION DOLLARS
========================
$18,000,000
===========
This report is respectfully submitted to the Special Committee of the Board
of Directors of
9
Imperial Credit Commercial Mortgage Investment Corp.
Sincerely,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
September 13, 1999
10