EXHIBIT (b)(4)
EASTDIL
10100 Santa Monica Boulevard
Suite 2430
Los Angeles, California 90067
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(310) 277-3232 Fax: (310) 277-0692
October 22, 1999
Mr. H. Wayne Snavely Mr. Joseph A. Jaconi, Jr.
Chairman of the Board Chairman
Imperial Credit Commercial Asset Special Committee of the Board of Directors
Management Corp Imperial Credit Commercial Mortgage
23550 Hawthorne Boulevard Investment Corp.
Building 1, Suite 110 11601 Wilshire Boulevard, Suite 2080
Torrance, CA 90505 Los Angeles, CA 90025
Mr. Mark Karlan Mr. Kenneth Munkacy
President and Chief Executive Officer Vice Chairman
Imperial Credit Commercial Asset Special Committee of the Board of Directors
Management Corp. Imperial Credit Commercial Mortgage
11601 Wilshire Boulevard Investment Corp.
Los Angeles, CA 90025 11601 Wilshire Boulevard, Suite 2080
Los Angeles, CA 90025
Gentlemen:
We understand the following with respect to Imperial Credit Industries, Inc.,
("ICII"), Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"), and
Imperial Credit Commercial Asset Management Corp., ("Manager"), a wholly-owned
subsidiary of ICII. ICII currently owns approximately nine percent of ICCMIC,
and the remainder of ICCMIC is owned by various public stockholders (including
certain officers and directors of ICCMIC, Manager, and ICII). Further, we
understand that ICII owns Manager and that Manager entered into a management
agreement (the "Management Agreement") with ICCMIC dated as of October 22, 1997,
pursuant to which Manager formulates operating strategies and provides certain
managerial and administrative functions for ICCMIC. We further understand that
ICCMIC has no employees and currently relies upon Manager to operate its
business on a day-to-day basis pursuant to the Management Agreement. The
Management Agreement has certain provisions that allow ICCMIC to terminate or
not renew the services of Manager on or after October 22, 1999. The Management
Agreement contemplates that such a termination or non-renewal requires the
payment of a "Termination Fee" to Manager pursuant to Section 15 of the
Management Agreement (the "Termination Fee").
Eastdil Realty Co., LLC
Imperial Credit Commercial Mortgage Corp.
Imperial Credit Commercial Asset Management Corp.
Page 2
We understand that on July 22, 1999 ICII entered into a merger agreement (the
"Merger Agreement") with ICCMIC whereby ICII would tender for all of the ICCMIC
shares which it does not already own for consideration of approximately $11.50
cash per share or aggregate consideration of approximately $337 million. It is
our understanding that ICII and ICCMIC have agreed in the Merger Agreement to:
(i) terminate the Management Agreement, (ii) obtain an appraisal of the
Termination Fee payable in connection with the termination of the Management
Agreement, and (iii) increase the price to be paid to the ICCMIC stockholders
dollar for dollar in the event that the Termination Fee is appraised at an
amount less than $35 million. In the event that the appraised amount of the
Termination Fee exceeds $35 million, there is no price adjustment because
Manager has agreed to cap the Termination Fee at $35 million. We understand that
ICCMIC has hired Prudential Securities Incorporated to assist it in its
negotiations with ICII and other third parties and in the evaluation of
potentially superior proposals, and Prudential Securities Incorporated will
render a fairness opinion on the ultimate merger transaction, if any, including
the terms of any Termination Fee payment.
Background
We understand that Manager retained Houlihan Lokey Howard & Zukin ("Houlihan
Lokey") to appraise the Termination Fee, and Houlihan Lokey's appraised value is
$45 million. We understand that the Special Committee of the Board of Directors
of ICCMIC retained Robert A. Stanger Co., Inc., ("Stanger") to appraise the
Termination Fee, and Stanger's appraised value is $18 million. Because the
Houlihan Lokey and Stanger appraised values differ by more than 20% of the
higher amount, the Management Agreement requires a third appraisal to be
conducted which shall determine the final appraised value of the Termination Fee
in an amount not less than Stanger's $18 million value or more than Houlihan
Lokey's $45 million value (subject to the $35 million cap). Houlihan Lokey and
Stanger have recommended that Eastdil Realty Company L.L.C. ("Eastdil") conduct
the third appraisal which will determine the final value of the Termination Fee
(the "Valuation").
Assignment Limitations
The Valuation is being completed pursuant to the terms of Eastdil's October 6,
1999 retention agreement with you. This letter comprises the complete written
Valuation report which is made as of the date of this letter. While we have
used methodologies and financial analysis techniques believed to be established
and generally accepted, this letter may not conform to various professional
guidelines, compliance standards, or industry presentation formats. The value
expressed in this Valuation is the most likely cash (or equivalent) price that
Manager subject to the Management Agreement would bring in a competitive and
open marketing process with buyer and seller both willing and knowledgeable of
all material factors affecting price.
In formulating the Valuation, we have relied upon information listed in Exhibit
I ("Information"). We have also interviewed key ICCMIC and Manager personnel and
Imperial Credit Commercial Mortgage Corp.
Imperial Credit Commercial Asset Management Corp.
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representatives of Houlihan Lokey, Stanger, and Prudential Securities
Incorporated. The accuracy or completeness of the Information has not been
verified, and we assume no liability regarding any Information errors,
misstatements, or material changes that may have occurred after the Information
was received. We have not physically inspected any assets owned by ICCMIC or
managed by Manager. This Valuation does not incorporate any "Y2K" factors that
could potentially affect value. With the Information and interview results, we
have completed various studies and analyses that were determined to be
appropriate based on our experience and knowledge of current market
fundamentals. We have not completed any legal analysis or engaged counsel to
interpret the terms or conditions of any Information items.
Assumptions
The Valuation is derived on a going-concern basis according to the terms and
conditions contained in the Management Agreement. We assume that no undisclosed
or unreported changes have occurred in: 1) policy, 2) authority, 3) agreements
between ICCMIC and Manager, or 4) the Merger Agreement that would affect the
Valuation. Consistent with past practice and the terms of the Management
Agreement, we have assumed that Manager is reimbursed for all ICCMIC expenses
including all general and administrative expenses.
Valuation Methodology
We have predominantly examined three methods to derive the Valuation: 1)
analysis of revenue multiples based on recent comparable transactions; 2)
analysis of recent bona fide offers to purchase Manager from credible investors;
3) analysis of EBITDA (earnings before interest, taxes, depreciation, and
amortization) multiples based on comparable transactions (EBITDA capitalization
method). To determine if a relevant revenue or EBITDA multiple should be above
or below the average of its set, we have analyzed the following factors among
others: 1) ICCMIC's share value and sector performance (relative to other
mortgage REITs) to assess Manager's professional staff quality, investment
policies, and corresponding value to comparable entities; 2) the ability to
increase Manager income by increasing ICCMIC's asset base through investment of
existing liquidity or the ability to obtain new and incremental debt and equity
commitments in the current capital market.
Revenue and EBITDA Estimates
Actual and projected revenue and expense figures of Manager were analyzed to
estimate 1999 EBITDA. Annual revenue has been estimated by multiplying the most
recent actual quarter by four (after considering adjustment for any
extraordinary or seasonal items). This annual estimating method accounts for
current asset levels and corresponding revenue. To estimate 1999 revenue, we
have subtracted the $41,000 incentive fee component from second quarter 1999
actual revenue of $1,837,000 for an adjusted second quarter actual revenue
amount of $1,796,000. There was no incentive fee paid in first quarter 1999.
Adjusted second quarter revenue is multiplied by four to arrive at total
estimated 1999
Imperial Credit Commercial Mortgage Corp.
Imperial Credit Commercial Asset Management Corp.
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revenue of $7,184,000. Based on analysis of actual and projected operating
expenses of Manager, we have estimated 1999 operating expenses (not including
extraordinary expenses due to the merger and related activity) at $3,100,000;
this operating expense estimate includes a $75,000 contingency factor but does
not include the $91,000 corporate offices litigation settlement. Therefore,
1999 EBITDA is estimated to be $4,084,000.
Revenue Multiple Value
We have analyzed eight external management company transactions and determined
that two transactions which were completed in 1999 are most comparable for
purposes of this Valuation. These two comparable transactions have verified
price and revenue data but have no EBITDA data available. The revenue multiples
for these comparable transactions are 5.44 and 6.66 based on actual second
quarter 1999 revenue multiplied by four to estimate the annual amount. The
simple average of these two multiples is 6.05. Based on a revenue multiple of 6
applied to estimated 1999 revenue of $7,184,000, Manager would have a value of
approximately $43 million.
Value Indication from Offers to Purchase
We have analyzed seven offers to purchase Manager. Based on offeror financial
capability and due diligence completed during the offer process, we have
determined that four of the seven offers are credible and contain terms and
conditions that are generally acceptable. These credible offers range in value
from $45,000,000 to $50,000,000 and are dated between November 1998 and April
1999. While it is significant that these offers were received subsequent to the
capital market turmoil of third quarter 1998, each of these offers was tendered
in the context of a bid for ICCMIC. In our opinion, this larger transaction
context placed an upward bias on value allocated to Manager by these offers.
EBITDA Capitalization Value
We have analyzed 13 private real estate related management company transactions
and determined that six of these transactions are relevant for consideration in
this Valuation. These six transactions have EBITDA multiples ranging from 6.5
to 8.75 with an average of 7.65.
We have also reviewed current EBITDA multiples of seven public real estate
service companies. Given ICCMIC's superior sector performance, we have
determined that three of the four public real estate companies which lead their
sector (in terms of current EBITDA multiples and recent performance) are
relevant to this Valuation. We have not adjusted the multiples of these public
companies to account for their significant brokerage revenue component, which
has been cited as one of the major reasons for this sector's lagging
performance. The three public companies determined to be comparable have
current estimated EBITDA multiples ranging from 7.3 to 8.7 with an average of
7.8.
Imperial Credit Commercial Mortgage Corp.
Imperial Credit Commercial Asset Management Corp.
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We believe that EBITDA capitalization should be based on an EBITDA multiple that
exceeds the average of the particular sample set being considered for the
following reasons: 1) ICCMIC relative share value and performance have
consistently lead the mortgage REIT sector; 2) the ability to grow the asset
base with ICCMIC's cash balance (estimated to be approximately $115 million as
of the date of this letter) allows a new owner to increase Manager profitability
on a disproportionate basis to EBITDA growth due the high fixed cost structure
of Manager (and comparable firms). However, the ability to increase Manager
revenue with new and incremental capital commitments is severely limited given
current capital market conditions.
Based on our analysis of factors affecting comparable EBITDA multiples, we have
concluded that an EBITDA multiple of 8.0 is appropriate for determining manager
value. Based on estimated 1999 EBITDA of $4,084,000, Manager value would be
$32,672,000.
Valuation Reconciliation
Most buyers and sellers value service companies such as manager on an EBITDA
capitalization basis. Therefore, we rely on EBITDA capitalization for the
Valuation. Based on the value levels indicated by the revenue multiple method,
and based on prior credible offers to purchase Manager, we round the EBITDA
capitalized value to $33,000,000.
EASTDIL'S VALUATION IS $33,000,000.
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Limitations
This letter is intended for use by ICCMIC and Manager. The Valuation and
conclusions contained in this letter should not be relied upon by any parties
other than those to whom this letter is addressed. This letter is a summary
document and is not intended to be a complete description of the analyses
performed and information considered in arriving at the Valuation conclusion.
Very truly yours,
/s/ Kevin Dretzka /s/ Steven McKenzie
Kevin Dretzka Steven McKenzie
Managing Director Managing Director
EXHIBIT I
INFORMATION
1) Copies of Prudential Securities Inc. confidential presentations to the
Imperial Credit Commercial Mortgage Corp. ("ICCMIC") Board of Directors
dated June 25, 1999, May 3, 1999, and March 16, 1999 summarizing and
analyzing various merger proposals and offers to acquire ICCMIC and to
terminate the Management Agreement.
2) ICCMIC offering memorandum prepared by Prudential Securities, Inc.
3) Minutes of the meetings of the Board of ICCMIC and committees thereof from
July 31, 1997 through May 18, 1999.
4) A copy of the Board Book provided in connection with the fourth quarter
1998 regular meeting of the Board of Directors of ICCMIC held on December
14, 1998 and a copy of the Board Book provided in connection with the
second quarter 1999 regular meeting of the Board of Directors held on June
18, 1999.
5) The initial public offering ("IPO") prospectus for ICCMIC.
6) The Imperial Credit Commercial Asset Management Corp. ("Manager")
management agreement.
7) The organization documents for ICCMIC.
8) Communications relating to the management agreement.
9) Calculations of management fees paid since inception.
10) Offers to acquire or merge with ICCMIC.
11) Merger agreement with Imperial Credit Industries, Inc.
12) Information relating to negotiations of merger agreement.
13) ICCMIC business plans.
14) Communications relating to ICCMIC business plans.
15) Estimates of the liquidation value of the ICCMIC.
16) Organization chart for ICCMIC.
17) General correspondence to investors for 1997, 1998, and 1999.
18) 1999 and 2000 ICCMIC budgets and reconciliation to actual performance.
19) Various management reports and board reports.
20) Analyses which have been utilized as support for approval of the management
agreement by the Board of Directors.
INFORMATION
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21) Manager budgets and operating statements.
22) Manager business plans prepared from inception to 8/6/99.
23) Organization chart for Manager.
24) Organization documents for Manager.
25) Schedule of management fees received by Manager.
26) Resumes for key employees.
27) Schedule of compensation for Manager employees.
28) Schedule indicating ownership by person of Manager debt or equity.
29) Offers to purchase Manager.
30) Information relating to Manager value.
31) A summary of General & Administrative Expenses & Management Fees by quarter
which has been updated to include the quarter ended June 30, 1999.
32) A copy of the Everen Securities, Inc. Appraisal Report dated July 13, 1999
appraising the value of the RAI Advisors, LLC external management agreement
with the IMPAC Commercial Mortgage REIT (NYSE:ICH) which was acquired by
Fortress for $6 million cash.
33) A copy of the Stifel, Nicolaus & Company Fairness Opinion Presentation to
the Special Committee of the Board of Directors of the IMPAC Mortgage
Holding REIT (NYSE: IMH) dated December 19, 1997 on the $44 million
termination fee paid in connection with the termination of the Imperial
Credit Advisors, Inc. external management agreement.
34) A copy of certain pages from the Confidential Presentation to the ICCMIC
Board of Directors from Merrill Lynch dated December 4, 1998 in connection
with the potential merger ("Project Stanley Cup") between ICCMIC and
NorthStar Capital Investment Corp. regarding Merrill Lynch's valuation
analysis of Manager.
35) A copy of a spreadsheet prepared from public EDGAR filings on 11 commercial
mortgage REITs and one residential mortgage REIT and their external
management companies which include, for each mortgage REIT, a column of
information describing: (1) the base and incentive management fee
compensation structure, (2) the termination fee language in the management
agreement, if any, (3) the actual termination fee paid to terminate the
external management agreement for five of the REITs, (4) the amount of IPO
stock options in the REIT granted to the management company or its
officers, and (5) the quarterly base and incentive management fees earned
from 1999Q2 back to 1998Q1.
INFORMATION
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36) Offer letters from Anthracite Capital, Inc. dated February 1, 1999 and
February 8, 1999.
37) A copy of the ICCMIC Investment Policies and Guidelines (as amended on
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December 14, 1998).
38) Various ICCMIC and Manager projections.
39) Report to the Special Committee of the Board of Directors of ICCMIC dated
September 13, 1999 prepared by Robert A. Stanger & Co., Inc.
40) Management Agreement Termination Fee Valuation report dated September 10,
1999 and letter dated September 14, 1999 prepared by Houlihan Lokey Howard
and Zukin Financial Advisors, Inc.
41) Preliminary Proxy Statement.