Terra Property Trust delivers new merger proposal to Western Asset Mortgage

Terra Property Trust released the below letter sent to the board of directors of Western Asset Mortgage: “I write to you on behalf of Terra Property Trust, Inc. (“TPT” or “we”) to reaffirm our commitment to consummating a merger with Western Asset Mortgage Capital Corporation (“WMC” or “you”). We firmly believe that a merger between TPT and WMC is the best path to maximizing value for WMC stockholders because it provides for, among other things, enhanced scale, a more diversified portfolio, and a stronger balance sheet. With that context in mind, we are pleased to submit an enhanced cash-and-stock proposal (the “TPT Enhanced Proposal”) on terms that are clearly superior to the AG Mortgage Investment Trust, Inc. (“MITT”) bid. We trust that you will thoroughly and objectively evaluate the TPT Enhanced Proposal in accordance with both the terms of our Merger Agreement and your fiduciary duties as directors. Relative to MITT’s unsolicited bid, you will find that the TPT Enhanced Proposal delivers significantly greater overall value to WMC stockholders by providing more cash, perpetually reduced management fees, and greater certainty of closing. A TPT-WMC merger also positions stockholders to benefit from what you acknowledged is “the partnership of a well-capitalized institutional partner in TPT, which brings a proven track record and has developed broad and deep expertise investing across cycles, property types, and markets.” Through the contemplated merger, TPT plans to set a new standard in the mortgage REIT industry by better aligning the external manager’s incentives with stockholders’ interests. Specifically, we propose a structure that reduces fixed management fees and incentivizes performance. Our proposal seeks to correct the misalignment of interests between external managers and stockholders that MITT has exemplified by charging stockholders high fees that are paid to its external manager, AG REIT Management, LLC, a subsidiary of Angelo, Gordon & Co., L.P. (“Angelo Gordon”). WMC’s stockholders deserve better. Notable terms of the TPT Enhanced Proposal include the following: Total Value: TPT is offering WMC stockholders $15.96 per share (including $1.43 per share / $8.75 million in cash), significantly exceeding the total $10.60 per share (including $1.06 per share / $7.0 million in cash)2 that MITT is offering.3 Furthermore, the cash component of MITT’s unsolicited bid is uncertain and exposes stockholders to downside risk, as MITT has noted that its cash offer is subject to reduction and is capped at 9.9% of the merger consideration to avoid having to repurchase the outstanding WMC convertible notes. Management Fee: TPT proposes to reduce the asset management fee paid to the external manager to 1.25% of stockholders’ equity, compared to the 1.50% proposed by MITT. MITT’s proposed one-time $2.4 million management fee waiver is diminished by the following: (a) the waiver does not even offset the $3.0 million termination fee that WMC would be required to pay to TPT and (b) less than one-third of the waiver goes to WMC stockholders.5 In contrast, the TPT Enhanced Proposal provides perpetual savings, initially of $1.0 million per annum (or ~$10.0 million over 10 years), which will become increasingly meaningful as the combined entity’s equity grows. Our proposed 1.25% management fee would be the third lowest among 24 externally managed mortgage REIT peers.6 We are putting excess cash where it belongs: in stockholders’ hands. Public Market Test: MITT’s suggestion that its stock is more attractive than TPT’s is deeply flawed for the following reasons: It would be challenging for TPT-WMC to perform as poorly in the public sphere as MITT has. Since the end of 2019, MITT has (a) suffered more than 80% declines in book value and share price, (b) faced widespread margin calls, (c) completed dilutive equity raises, and (d) traded at substantial discounts to book value and peers. Despite MITT’s association with a large asset manager, the reality is that TPT’s book value exceeds MITT’s by more than 40%,7 a critical difference to WMC stockholders given the importance of scale in the mortgage REIT industry. The misalignment between MITT’s external manager and its stockholders is evident by Angelo Gordon, a firm with $73 billion of AUM, owning less than $2 million of MITT shares. TPT, by contrast, owns more than triple that amount of MITT’s shares. We have been an SEC reporting company since 2019 and have two bond offerings that trade publicly on the NYSE. The reverse merger structure considered in the TPT-WMC merger agreement has a precedent of success, including the mergers of Ready Capital / ZAIS Financial and Benefit Street / Capstead, both of which trade, on a price-to-book value basis, at the higher end of mortgage REIT comps and at substantial premiums to where MITT trades. Post-Merger Trading: The TPT-WMC merger proposal protects WMC stockholders by subjecting TPT (but not WMC) stockholders to staggered conversion rights in the combined company (in equal 6-, 12-, and 18-month increments after the merger), which will mitigate potential selling pressure. The MITT Competing Proposal contains no such protections, making the potential MITT-WMC entity vulnerable to substantial selling pressure post-merger. Certainty of Closing & Timing: We are prepared to file the S-4 proxy statement for the TPT-WMC in the upcoming days and anticipate closing the merger by Q4 of this year. In contrast, a merger with MITT is much less likely to close this year given MITT trails TPT in diligence and filing the S-4. The TPT-WMC merger is also more likely to win stockholder approval, as 80% of TPT shares have agreed to vote in favor of the TPT-WMC merger pursuant to an executed voting agreement.11 Conversely, MITT stockholder approval of a potential MITT-WMC merger is questionable due to MITT having no such voting commitment. The table in Appendix A simplifies the comparison between the TPT Enhanced Proposal and MITT’s bid, showing how the TPT Enhanced Proposal is superior for WMC stockholders in every regard. While we respect that you need to uphold your fiduciary duties by considering the MITT bid, we also believe the facts now speak for themselves when it comes to the best path forward for WMC’s stockholders. We are prepared to take all necessary steps to protect our interests and position stockholders for the best future. We look forward to a speedy and orderly completion of our transaction.”