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| REXI > SEC Filings for REXI > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
This report contains certain forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology. Such statements are subject to the risks and uncertainties more particularly described in Item 1A, under the caption "Risk Factors," in our Annual Report on Form 10-K/A for the period ended September 30, 2007. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
Restatement of Previously Issued Financial Results
On May 19, 2008, we filed Amendment No. 1 to our Annual Report on Form 10-K/A, or the Amendment, that included restated quarterly financial information for the periods ended December 31, 2006, March 31, 2007 and June 30, 2007, which was originally filed on February 11, 2008. Our consolidated statements of operations, shareholders' equity and cash flows for the three and nine months ended June 30, 2007, including the applicable notes as presented in this report reflect that restatement.
For more detailed information about the restatement, please see Note 2, "Restatement of Consolidated Financial Statements for the fiscal year ended September 30, 2007 and as of and for the three and nine months ended June 30, 2007" in the accompanying consolidated financial statements and "Restatement of Previously Issued Financial Results" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this report.
The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.
Overview of the Three and Nine Months Ended June 30, 2008 and 2007
We are a specialized asset management company that uses industry specific expertise to generate and administer investment opportunities in the commercial finance, real estate and financial fund management sectors. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services. We typically maintain an investment in the investment vehicles we sponsor. As of June 30, 2008, we managed $18.8 billion of assets.
We limit our services to asset classes in which we have specific expertise. We believe this strategy enhances the return on investment we can achieve. In our commercial finance operations, we focus on originating small and middle-ticket equipment leases and commercial notes secured by business-essential equipment, including technology, commercial and industrial equipment and medical equipment. In our real estate operations, we concentrate on investments in distressed real estate loans, the ownership, operation and management of multi-family and commercial real estate, and originating or purchasing real estate mortgage loans including whole loans, first priority interests in commercial mortgage loans (known as A notes) and, to a lesser extent, subordinated interests in first mortgage loans and mezzanine loans. In our financial fund management operations, we concentrate on trust preferred securities of banks, bank holding companies, insurance companies and other financial companies, bank loans and asset-backed securities. We have continued to develop our existing operations with the sponsorship of new investment funds and have expanded the distribution of our products through a large broker/dealer/financial planner network that we have developed.
During the later half of 2007 and continuing in 2008, credit markets in the United States and throughout much of the rest of the world have been extremely volatile and challenging. We believe that such credit market conditions have created opportunities for us, principally in our commercial finance and real estate businesses, as demonstrated by the acquisitions we have made since June 2007 totaling $990.1 million.
Due to the current status of global credit markets, we continue to believe that the collateralized debt obligation, or CDO, markets have slowed substantially in 2008, limiting our ability to generate additional assets under management through this channel. Our CDO vehicles have been significantly affected by these conditions and, in particular, have been impacted by continued credit market turbulence and reduction in global liquidity. Specifically, two secured warehouse credit facilities which we consolidated under FIN 46-R were impacted. Accordingly, we determined to end these facilities on their expiration dates in January 2008. We had provided limited guarantees totaling $18.8 million under these facilities which were supported by escrow deposits of $14.8 million. The expiration of these facilities necessitated the sale of the loans securing them in late January and early February 2008 which resulted in a reclassification and caused us to record a $11.2 million charge, net of tax, in the quarter ended December 31, 2007 which triggered our guarantee. As a result, our escrow deposits were retained by the warehouse lenders and we paid an additional $5.4 million to cover our guarantee through July 2008. As of June 30, 2008, we have no further commitments under these credit facilities.
In addition, the five Trapeza partnerships in which we made an original investment of $8.4 million, owns 8% of the limited partner interests and owns a 50% interest in the general partner, were adversely impacted by credit market turbulence and reduction in global liquidity which affected market spreads and impacted underlying issuers. This resulted in a reduction in revenues from limited and general partners' interests of $8.9 million and $16.9 million in the three and nine months ended June 30, 2008, respectively. The after-tax impact of these credit market conditions to increase the net loss by $5.1 million and $10.3 million for the three and nine months ended June 30, 2008. We expect that the turbulence in the credit markets may continue to impact our future operating results.
Assets Under Management
We increased our assets under management by $2.0 billion to $18.8 billion at June 30, 2008 from $16.8 billion at June 30, 2007. The growth in our assets under management was the result of:
· an increase in the financial fund management assets we manage on behalf of individual and institutional investors, Resource Capital Corp, or RCC, and us, both in the United States and in Europe;
· an increase in real estate assets managed on behalf of RCC, joint ventures and limited partnerships and Tenant in Common, or TIC, property interests that we sponsor; and
· an increase in commercial finance assets managed on behalf of the limited partnerships we sponsor and RCC.
The following table sets forth information relating to our assets under management by operating segment and their growth from June 30, 2007 to June 30, 2008 (in millions):
As of June 30, Increase
2008 2007 Amount Percentage
Financial fund management $ 15,375 $ 14,211 $ 1,164 8%
Real estate 1,750 1,497 253 17%
Commercial finance 1,630 1,069 561 52%
$ 18,755 $ 16,777 $ 1,978 12%
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Our assets under management are primarily managed through various investment vehicles including CDOs, public and private limited partnerships, TIC property interests, a real estate investment trust, and other investment funds. The following table sets forth the number of entities we manage by operating segment:
Limited TIC Property Other Investment
CDOs Partnerships Interests Funds
As of June 30, 2008 (1)
Financial fund management 35 13 - -
Real estate 2 6 7 5
Commercial finance - 3 - -
37 22 7 5
As of June 30, 2007 (1)
Financial fund management 28 12 - -
Real estate 2 6 7 -
Commercial finance - 3 - 1
30 21 7 1
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As of
As of June 30, 2008 June 30, 2007
Institutional and
Individual
Investors RCC Company Total Total
Trust preferred securities (1) $ 5,032 $ - $ - $ 5,032 $ 5,114
Bank loans (1) 3,209 964 226 4,399 3,305
Asset-backed securities (1) 5,497 377 - 5,874 5,439
Real properties (2) 613 - - 613 499
Mortgage and other real
estate-related loans (2) - 948 189 1,137 998
Commercial finance assets (3) 1,232 92 306 1,630 1,069
REIT trust preferred securities - - - - 267
Private equity and hedge fund
assets (1) 70 - - 70 86
$ 15,653 $ 2,381 $ 721 $ 18,755 $ 16,777
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(1) Structured finance assets at their amortized cost.
(2) Real estate assets as the sum of (a) the amortized cost of our commercial real estate loans; (b) the book value of real estate and other assets held by our real estate investment partnerships and tenant-in-common, or TIC, property interests; (c) the amount of our outstanding legacy loan portfolio; and (d) the book value of our interests in real estate.
(3) Commercial finance assets as the sum of the book value of the equipment and notes and future receivable advances financed by us.
Employees
As of June 30, 2008, we employed 817 full-time workers, an increase of 426, or
109%, from 391 employees at June 30, 2007. The following table summarizes our
employees by operating segment:
Financial Fund Commercial
Total Management Real Estate Finance Corporate/ Other
June 30, 2008
Investment professionals 192 41 27 119 5
Other 625 18 243 (1) 325 39
Total 817 59 270 444 (2) 44
June 30, 2007
Investment professionals 129 43 31 53 2
Other 262 24 16 184 38
Total 391 67 47 237 40
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(2) Reflects the additional employees hired in connection with the acquisitions of NetBank and Dolphin Capital Corp.
Revenues
The revenues in each of our business segments are generated by the fees we earn
for structuring and managing the investment vehicles we sponsor on behalf of
individual and institutional investors and RCC and the income produced by the
assets and investments we manage for our own account. The following table sets
forth certain information related to the revenues we have recognized in each of
these revenue categories (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
Fund management revenues
(1) $ 10,361 $ 21,094 $ 44,539 $ 48,536
Finance and rental revenues (2) 16,564 14,450 67,384 33,790
RCC management fees 1,162 2,016 4,107 5,749
Gains on resolutions of loans and other
property interests (3) - 280 1,633 2,991
Net gains on sale of TIC property
interests (4) - 229 373 315
Other (5) 1,359 382 5,850 3,725
$ 29,446 $ 38,451 $ 123,886 $ 95,106
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(2) Includes interest income on bank loans from our financial fund management, interest and accreted discount income from our real estate operations, interest and rental income from our commercial finance operations and revenues from certain real estate assets.
(3) Includes the resolution of loans we hold in our real estate segment.
(4) Reflects net gains recognized by our real estate segment on the sale of TIC interests to outside investors.
(5) Includes the equity compensation we earned in connection with the formation of RCC and the disposition of leases and loans as well as other charges in our commercial finance operations.
A detailed discussion of the revenues generated by each of our business segments can be found under "Results of Operations: Financial Fund Management", "Real Estate" and "Commercial Finance."
Results of Operations: Commercial Finance
During the three and nine months ended June 30, 2008, our commercial finance operations increased assets under management to $1.6 billion as compared to $1.1 billion at June 30, 2007, an increase of $561.0 million (52%). Originations of new equipment financing for the three and nine months ended June 30, 2008 were $147.9 million and $1.0 billion, respectively, as compared to $396.9 million and $655.9 million for the three and nine months ended June 30, 2007, respectively, a decrease of $249.0 million (63%) and an increase of $391.0 million (60%), respectively. We have not yet commenced marketing LEAF Equipment Finance Fund 4, L.P. to investors. LEAF Fund III closed its offering in April 2008. Our growth for the nine months ended June 30, 2008 was driven by our first quarter fiscal 2008 acquisitions of the net business assets of Dolphin Capital Corp and NetBank Business Finance, or NetBank, our continued growth in new and existing vendor programs, the introduction of new commercial finance products and the expansion of our sales staff. As of June 30, 2008, we managed approximately 96,000 leases and notes that had an average original finance value of $24,000 with an average term of 50 months.
In November 2007, we also acquired a $412.5 million portfolio, at a discount, comprised of over 10,000 leases and small business loans originated by NetBank Business Finance, the equipment leasing division of NetBank, which was being operated in receivership by the Federal Deposit Insurance Corporation, or FDIC. In addition, we hired approximately 70 of the former NetBank employees in Columbia, South Carolina. These employees have further expanded our third party funding business unit which we established with our June 2007 acquisition of the leasing division of PCB. Financing for this acquisition was provided principally by Morgan Stanley Bank, or Morgan Stanley. We completed the sale of the NetBank portfolio to LEAF Fund III in April 2008. Until then, we carried the leases and loans and related debt on our consolidated balance sheets, thereby increasing our investment in commercial finance assets, borrowings, finance revenues, interest expense and provision for credit losses during that period of time.
The November 2007 acquisition of Dolphin Capital Corp., an equipment finance subsidiary of Lehman Brothers Bank, significantly expanded our commercial finance operations origination capability and assets under management. The total purchase price of $170.5 million included a $169.0 million portfolio of small ticket leases acquired directly by LEAF Fund III. In addition, we retained Dolphin Capital Corp.'s team of 70 highly experienced personnel, including senior management, origination and operations. Originations from 2007 include the acquisition of $169.0 million of net assets from PCB.
The following table sets forth information related to our commercial finance assets managed (in millions):
As of June 30,
2008 2007
LEAF Financial $ 289 $ 314
Merit Capital Advance 17 -
LEAF I 109 89
LEAF II 320 350
LEAF Fund III 803 222
RCC 92 83
Other - 11
$ 1,630 $ 1,069
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The revenues from our commercial finance operations consist primarily of finance revenues from leases and notes held by us prior to being sold; asset acquisition fees which are earned when commercial finance assets are sold to one of our investment partnerships and asset management fees earned over the life of the lease or loan after it is sold. The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our commercial finance operations (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
Revenues: (1)
Finance revenues - LEAF $ 8,863 $ 4,269 $ 40,353 $ 10,991
Finance revenues - Merit 1,177 12 5,453 12
Acquisition fees 5,249 5,019 16,702 7,252
Fund management fees 5,242 3,209 14,059 8,656
Other 1,272 299 5,867 1,550
$ 21,803 $ 12,808 $ 82,434 $ 28,461
Costs and expenses:
LEAF costs and expenses $ 10,162 $ 4,696 $ 29,135 $ 12,650
Merit costs and expenses 805 720 3,616 957
$ 10,967 $ 5,416 $ 32,751 $ 13,607
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Revenues increased $9.0 million (70%) and $54.0 million (190%) for the three and nine months ended June 30, 2008, respectively, as compared to the prior year period. We attribute these increases to the following:
· a $4.6 million (108%) and $29.4 million (267%) increase, respectively, in LEAF commercial finance revenues primarily as a result of the NetBank assets acquired and the growth in lease originations. In January and April 2008, we sold 49% and 51%, respectively, of the NetBank portfolio to LEAF Fund III. As a result of these sales, our finance revenues and interest expense will decrease significantly; however, we will earn ongoing fund asset management fees;
· Merit Capital Advance, or Merit, provides small businesses through a credit card receipt advance program. For the three and nine months ended June 30, 2008, Merit posted revenues of $1.2 million and $5.5 million. No revenues were recorded for the nine months ended June 30, 2007.
· a $230,000 (5%) and $9.5 million (130%) increase, respectively, in asset acquisition fees resulting from the increase in leases sold. Sales of leases increased by $148.0 million (56%) to $409.9 million and $775.5 million (193%) to $1.2 billion for the three and nine months ended June 30, 2008, respectively, principally related to commercial assets sold to our investment entities as a result of the NetBank and Dolphin Capital Corp. portfolio acquisitions;
· a $2.0 million (63%) and $5.4 million (62%) increase, respectively, in fund management fees resulting from the $561.0 million increase in assets under management; and
· a $973,000 (325%) and a $4.3 million (279%) increase, respectively, in other income, primarily reflecting net gains on equipment finance dispositions, which typically vary widely from period to period, but increased as a result of holding the NetBank acquired lease portfolio on our books.
Costs and Expenses - Three and Nine Months Ended June 30, 2008 as Compared to the Three and Nine Months Ended June 30, 2007
Costs and expenses from our commercial finance operations increased $5.6 million (102%) and $19.1 million (141%), respectively. We attribute this increase primarily to the following:
· an increase of $5.1 million (134%) and $14.4 million (146%) in wages and benefit costs, respectively. The number of full-time employees increased to 444 as of June 30, 2008 from 237 as of June 30, 2007 due to our recent acquisitions and to support our expanding operations; and
· an increase of $419,000 (26%) and $4.8 million (128%) in operating expenses, respectively, as a result of our increase in origination capabilities, primarily due to our recent acquisitions.
Results of Operations: Real Estate
In our real estate segment, we manage five classes of assets:
· commercial real estate debt, principally A notes, whole loans, mortgage participations, B notes, mezzanine debt and related commercial real estate securities;
· real estate investment fund assets, primarily multifamily apartments;
· a portfolio of real estate assets acquired through joint ventures with institutional investors;
· real estate loans, owned assets and ventures, known collectively as our legacy portfolio; and
· a portfolio of distressed real estate loans, acquired at a discount, primarily from the U.S. Department of Housing and Urban Development, or HUD.
As of June 30,
2008 2007
(in millions)
Assets under management:
Commercial real estate debt $ 953 $ 899
Real estate investment funds and programs 498 412
Institutional portfolios 116 87
Legacy portfolio 112 99
Distressed portfolios (including HUD portfolio) 71 -
$ 1,750 $ 1,497
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