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RSO > SEC Filings for RSO > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for RESOURCE CAPITAL CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RESOURCE CAPITAL CORP.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion provides information to assist you in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements. Actual results could differ materially from those expressed in or implied by those forward-looking statements. Please see "Forward-Looking Statements" and "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of certain risks, uncertainties and assumptions associated with those statements.

Overview
We are a specialty finance company that focuses primarily on commercial real estate and commercial finance. We are organized and conduct our operations to qualify as a real estate investment trust, or REIT, under Subchapter M of the Internal Revenue Code of 1986, as amended. Our objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategy. We invest in a combination of real estate-related assets and, to a lesser extent, higher-yielding commercial finance assets. We have financed a substantial portion of our portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of our financings with the maturities and repricing dates of those investments, and have sought to mitigate interest rate risk through derivative instruments.
We are externally managed by Resource Capital Manager, Inc., or the Manager, a wholly-owned indirect subsidiary of Resource America, Inc. (NASDAQ: REXI), or Resource America, a specialized asset management company that uses industry-specific expertise to evaluate, originate, service and manage investment opportunities through its commercial real estate, commercial finance and financial fund management operating segments. As of June 30, 2012, Resource America managed approximately $15.0 billion of assets in these sectors. To provide its services, the Manager draws upon Resource America, its management team and their collective investment experience.
We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance the purchase of those assets, from management of assets and from hedging interest rate risks. We generate revenues from the interest and fees we earn on our whole loans, A notes, B notes, mezzanine debt, commercial mortgage-backed securities, or CMBS, bank loans, other asset-backed securities, or ABS, and structured note investments. We also generate revenues from the rental and other income from real properties we own, from management of externally originated bank loans and from our investment in an equipment leasing business. Historically, we have used a substantial amount of leverage to enhance our returns and we have financed each of our different asset classes with different degrees of leverage. The cost of borrowings to finance our investments is a significant part of our expenses. Our net income depends on our ability to control these expenses relative to our revenue. In our bank loan, commercial mortgage-backed securities, or CMBS and asset-backed securities, or ABS portfolios, we historically have used warehouse facilities as a short-term financing source and collateralized debt obligations, or CDOs, and, to a lesser extent, other term financing as long-term financing sources. In our commercial real estate loan portfolio, we historically have used repurchase agreements as a short-term financing source, and CDOs and, to a lesser extent, other term financing as long-term financing sources. Our other term financing has consisted of long-term match-funded financing provided through long-term bank financing and asset-backed financing programs, depending upon market conditions and credit availability.
Although economic conditions in the United States have had some modest improvements, ongoing conditions in real estate and credit markets continue to impact both us and a number of our commercial real estate borrowers. We have entered into loan modifications with 27 of our commercial real estate loans. During the past three years, we have increased our provision for loan losses to reflect the effect of these conditions on our borrowers and have recorded both temporary and other than temporary impairments in the market valuation of the commercial mortgage-backed securities, or CMBS, and asset-backed securities, or ABS, in our investment portfolio. While we believe we have appropriately valued the assets in our investment portfolio at September 30, 2012, we cannot assure you that further impairments will not occur or that our assets will otherwise not be adversely affected by market conditions.
Prior to mid-2010, events occurring in the credit markets impacted our financing and investing strategies and, as a result, our ability to originate new investments and to grow. The market for securities issued by new securitizations collateralized by assets similar to those in our investment portfolio as well as other forms of lending with respect to such assets largely disappeared until mid-2010. During 2011, we began to see a loosening of the credit markets and were able to take advantage of the situation by establishing several new financing arrangements continuing into early 2012. We continue to engage in discussions with potential financing sources about providing commercial real estate term financing to augment and cautiously grow our loan portfolio. We caution investors that even as credit through these markets becomes more available, we may not be able to obtain economically favorable terms.

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In light of previous economic conditions and credit availability, our principal strategies have been to manage our liquidity and originate new assets primarily through capital recycling as loan payoffs and paydowns occurred and through existing capacities within our completed securitizations. We have exhausted our investment capacity in two of our bank loan collaterized loan obligation issuers, or CLOs, and two real estate CDOs with reinvestment periods ending in July 2011 through June 2012. We continue to have reinvestment capacity in two bank loan CLOs (Apidos Cinco and Apidos CLO VIII) where the reinvestment periods continue to May 2014 and October 2014, respectively. We intend to use the existing capacity in our CMBS and commercial real estate, or CRE, credit facilities with Wells Fargo of $42.0 million and $121.1 million, respectively, as of October 31, 2012 to help finance new investments.
In an effort to augment our credit facilities' capacity and our liquidity, we have also sold $50.4 million of common stock through our dividend reinvestment and stock purchase plan and obtained $55.6 million additional capital through a follow-on offering of common stock in September 2012. In addition, we supplemented our common equity capital raises with issuances of preferred stock in 2012. First, in June 2012 we sold $6.0 million 8.5% Series A cumulative preferred shares, or Series A. We also entered into an at-the-market sales agreement and sold $9.8 million of Series A through September 30, 2012. In October 2012, we issued $24.2 million of 8.25% Series B preferred shares, or Series B. This brought our total equity raised through our capital market efforts to $145.4 million, after underwriting commissions and other expenses related to these efforts.
We have used recycled capital in our bank loan CLO structures to make new investments at discounts to par. We expect that the reinvested capital and related discounts will produce additional income as the discounts are accreted into interest income. In addition, the purchase of these investments at discounts allows us to build collateral in the CLO structures since we receive credit in these structures for these investments at par. From net discounts of approximately $17.8 million at September 30, 2012, we expect to recognize income of approximately $1.5 million in our bank loan CLO portfolio for the remaining three months of 2012 and approximately $7.3 million in calendar year 2013. Beginning in October 2010 through September 30, 2012, we have underwritten 22 new CRE loans for a total of $268.3 million, most of which were financed by using capital recycled through our two real estate CDO securitizations. We also purchased 42 newly underwritten CMBS for $174.6 million beginning in February 2011 through September 30, 2012, most of which were financed with a Wells Fargo facility. Due to these recent investments, our increased ability to access credit markets, our recent capital markets efforts and our investment of a significant portion of our available unrestricted and restricted cash balances during 2012, we expect to continue to modestly increase our net interest income during the balance of 2012 and into 2013. However, because we believe that economic conditions in the United States are fragile, and could be significantly harmed by occurrences over which we have no control, we cannot assure you that we will be able to meet our expectations, or that we will not experience net interest income reductions.
As of September 30, 2012, we had invested 70% of our portfolio in CRE assets, 20% in commercial bank loans and 10% in other assets. As of December 31, 2011, we had invested 63% of our portfolio in CRE assets, 31% in commercial bank loans, 6% in other investments.
Results of Operations - Three and Nine Months Ended September 30, 2012 as compared to
Three and Nine Months Ended September 30, 2011 Our net income allocable to common shares for the three and nine months ended September 30, 2012 was $18.2 million, or $0.20 per share (basic and diluted) and $49.1 million, or $0.58 per share-basic ($0.57 per share-diluted), respectively, as compared to net income of $14.9 million, or $0.20 per share (basic and diluted) and $37.3 million, or $0.55 per share-basic ($0.54 per share-diluted) for the three and nine months ended September 30, 2011, respectively.

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Interest Income
The following tables set forth information relating to our interest income
recognized for the periods presented (in thousands, except percentages):
                                            Three Months Ended                      Three Months Ended
                                            September 30, 2012                      September 30, 2011
                                                    Weighted Average                        Weighted Average
                                   Interest                                 Interest
                                    Income       Yield        Balance        Income       Yield       Balance
Interest income:
Interest income from loans:
Bank loans                        $  13,666      4.63%     $ 1,152,678     $  10,992      4.65%     $ 907,340
Commercial real estate loans         10,464      5.74%     $   714,841         7,871      4.83%     $ 644,769
Total interest income from loans     24,130                                   18,863
Interest income from securities:
CMBS-private
placement                             3,089      5.20%     $   233,287         2,363      5.72%     $ 163,177
ABS                                     373      4.51%     $    31,743           430      5.15%     $  33,083
Residential mortgage-backed
securities or
RMBS                                    295      5.47%     $    21,583           590      6.52%     $  36,181
Total interest income from
securities                            3,757                                    3,383
Interest income - other:
Preference payments on structured
notes (1)                             2,159      15.44%    $    55,941         3,840      26.62%    $  57,101
Temporary investment in
over-night repurchase agreements         59       N/A           N/A               59       N/A          N/A
Total interest income - other         2,218                                    3,899
Total interest
income                            $  30,105                                $  26,145



                                            Nine Months Ended                       Nine Months Ended
                                            September 30, 2012                      September 30, 2011
                                                    Weighted Average                        Weighted Average
                                   Interest                                 Interest
                                    Income       Yield        Balance        Income       Yield       Balance
Interest income:
Interest income from loans:
Bank loans                        $  43,242      4.83%     $ 1,175,976     $  38,486      5.66%     $ 891,340
Commercial real estate loans         27,515      5.22%     $   692,894        22,218      4.56%     $ 637,585
Total interest income from loans     70,757                                   60,704
Interest income from securities:
CMBS-private
placement                             8,957      5.19%     $   228,910         6,927      5.62%     $ 162,404
ABS                                   1,241      4.99%     $    32,624         1,173      4.79%     $  32,450
RMBS                                    895      2.96%     $    40,284           998      4.56%     $  29,206
Total interest income from
securities                           11,093                                    9,098
Interest income - other:
Preference payments on structured
notes (1)                             8,040      18.72%    $    57,264         6,602      18.74%    $  46,976
Temporary investment in
over-night repurchase agreements        164       N/A           N/A              232       N/A          N/A
Total interest income - other         8,204                                    6,834
Total interest
income                            $  90,054                                $  76,636

(1) Yields on these quarterly payers reflect payments for full distribution periods and in some cases, we owned the position for only a portion of that period.

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The following table summarizes certain information relating to interest income for the periods indicated (in thousands, except percentages):

                             Coupon        Unamortized        Net Amortization/      Interest
    Type of Security        Interest   (Discount) Premium         Accretion           Income           Fee Income       Total
Three Months Ended
September 30, 2012
Bank loans                   4.35%     $      (20,110 )      $           2,717     $   10,606   (1)  $        343     $ 13,666
Commercial real estate
loans                        5.18%     $         (135 )                      8          9,494                 962       10,464
Total interest income
from loans                                                               2,725         20,100               1,305       24,130
CMBS-private placement       3.54%     $      (12,238 )                    715          2,374                   -        3,089
ABS                          2.36%     $       (3,304 )                    169            204                   -          373
RMBS                                                                         -            295                   -          295
Total interest income
from securities                                                            884          2,873                   -        3,757
Preference payments on
structured notes                                                             -          2,159                   -        2,159
Other                                                                        -             59                   -           59
Total interest income -
other                                                                        -          2,218                   -        2,218
Total interest income                                        $           3,609     $   25,191        $      1,305     $ 30,105
Three Months Ended
September 30, 2011
Bank loans                   3.76%     $      (28,582 )      $           1,794     $    8,966   (1)  $        232     $ 10,992
Commercial real estate
loans                        4.73%     $         (167 )                      7          7,832                  32        7,871
Total interest income
from loans                                                               1,801         16,798                 264       18,863
CMBS-private placement       3.89%     $      (13,942 )                    731          1,632                   -        2,363
ABS                          2.57%     $       (3,051 )                    139            291                   -          430
RMBS                                                                         -            590                   -          590
Total interest income
from securities                                                            870          2,513                   -        3,383
Preference payments on
structured notes                                                             -          3,840                   -        3,840
Other                                                                        -             59                   -           59
Total interest income -
other                                                                        -          3,899                   -        3,899
Total interest income                                        $           2,671     $   23,210        $        264     $ 26,145

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                             Coupon        Unamortized        Net Amortization/      Interest
    Type of Security        Interest   (Discount) Premium         Accretion           Income           Fee Income       Total
Nine Months Ended
September 30, 2012
Bank loans                   4.23%     $      (20,110 )      $          10,714     $   31,469   (1)  $      1,059     $ 43,242
Commercial real estate
loans                        5.08%     $         (135 )                     24         26,332               1,159       27,515
Total interest income
from loans                                                              10,738         57,801               2,218       70,757
CMBS-private placement       3.72%     $      (12,238 )                  1,912          7,045                   -        8,957
ABS                          2.48%     $       (3,304 )                    531            710                   -        1,241
RMBS                                                                         -            895                   -          895
Total interest income
from securities                                                          2,443          8,650                   -       11,093
Preference payments on
structured notes                                                             -          8,040                   -        8,040
Other                                                                        -            164                   -          164
Total interest income -
other                                                                        -          8,204                   -        8,204
Total interest income                                        $          13,181     $   74,655        $      2,218     $ 90,054
Nine Months Ended
September 30, 2011
Bank loans                   3.69%     $      (28,582 )      $          11,517     $   26,893        $         76     $ 38,486
Commercial real estate
loans                        4.50%     $         (167 )                      4         22,099                 115       22,218
Total interest income
from loans                                                              11,521         48,992                 191       60,704
CMBS-private placement       3.48%     $      (13,942 )                  2,471          4,456                   -        6,927
ABS                          2.60%     $       (3,051 )                    377            796                   -        1,173
RMBS                                                                         -            998                   -          998
Total interest income
from securities                                                          2,848          6,250                   -        9,098
Preference payments on
structured notes                                                             -          6,602                   -        6,602
Other                                                                        -            232                   -          232
Total interest income -
other                                                                        -          6,834                   -        6,834
Total interest income                                        $          14,369     $   62,076        $        191     $ 76,636

(1) Amount excludes $2.3 million and $6.6 million of interest income on bank loans on Apidos CLO VIII for three months and nine months ended September 30, 2012, respectively. We own 43% of the outstanding subordinated debt. The remaining 57% of the subordinated debt is owned by an unrelated third party.

Aggregate interest income increased $4.0 million (15%) and $13.5 million (18%) to $30.1 million and $90.1 million for the three and nine months ended September 30, 2012, respectively, from $26.1 million and $76.6 million for the three and nine months ended September 30, 2011, respectively. We attribute these increases to the following:
Interest Income from Loans. Aggregate interest income from loans increased $5.3 million (28%) and $10.1 million (17%) to $24.1 million and $70.8 million for the three and nine months ended September 30, 2012, respectively, from $18.9 million and $60.7 million for the three and nine months ended September 30, 2011, respectively, as a result of the following:
Interest income on bank loans increased $2.7 million (24%) and $4.7 million (12%) to $13.7 million and $43.2 million for the three and nine months ended September 30, 2012, respectively, from $11.0 million and $38.5 million for the three and nine months ended September 30, 2011, respectively. These increases resulted primarily from increases in the weighted average loan balances of $245.3 million and $284.6 million to $1.2 billion for both the three and nine months ended September 30, 2012, respectively, from $907.3 million and $891.3 million for the three and nine months ended September 30, 2011, respectively principally as a result of our new CLO, Apidos CLO VIII, which we began acquiring assets for in July 2011. This increase in weighted average balance was partially offset by a decrease in the loan balance at Apidos I and III as they have each reached the end of their reinvestment period and are now required to use principal proceeds from bank loan payoffs and paydowns to repay outstanding debt.

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The increase in the weighted average bank loan balance was also partially offset by a decrease in the weighted average yield to 4.80% for the nine months ended September 30, 2012 as compared to 5.66% for the nine months ended September 30, 2011, primarily as a result of the decrease in accretion income caused by the timing of paydowns and payoffs, which sped up the recognition of the discount accretion during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, Apidos I, Apidos III and Apidos Cinco had paydowns of $236.4 million as compared to $312.5 million in paydowns during the nine months ended September 30, 2011. This decline in paydowns of $76.1 million and resulting decline in discount accretion income recognition was partially offset by increased accretion income generated by our new CLO during the nine months ended September 30, 2012.
Interest income on CRE loans increased $2.6 million (33%) and $5.3 million (24%) to $10.5 million and $27.5 million for the three and nine months ended September 30, 2012, respectively, as compared to $7.9 million and $22.2 million for the three and nine months ended September 30, 2011. These increases are a result of the following:

         An increase of $70.0 million and $55.3 million in the weighted average
          loan balance to $714.8 million and $692.9 million for the three and
          nine months ended September 30, 2012, respectively, from $644.8 million
          and $637.6 million for the three and nine months ended September 30,
          2011, respectively, as we began to reinvest proceeds from payoffs and
          paydowns, classified as restricted CDO cash on our balance sheet,
          during the fourth quarter of 2011, with the majority of these proceeds
          being reinvested during the second and third quarters of 2012. In
          addition, we have begun to originate new loans financed by our Wells
          Fargo CRE credit facility coupled with new equity raised in 2012.


         An increase in the weighted average yield to 5.74% and 5.22% during the
          three and nine months ended September 30, 2012, respectively, from
          4.83% and 4.56% during the three and nine months ended September 30,
          2011, respectively, as a result of newer real estate loans with higher
          stated interest rates than our legacy portfolio and as a result of an
          acceleration of fees on one loan that paid off in August 2012.

Interest Income from Securities. Aggregate interest income from securities increased $374,000 (11%) and $2.0 million (22%) to $3.8 million and $11.1 million for the three and nine months ended September 30, 2012, respectively, from $3.4 million and $9.1 million for the three and nine months ended September 30, 2011, respectively. The increases in interest income from securities resulted principally from the following:
Interest income on CMBS-private placement increased $726,000 (31%) and $2.1 million (29%) to $3.1 million and $9.0 million for the three and nine months ended September 30, 2012, respectively, as compared to $2.4 million and $6.9 million for the three and nine months ended September 30, 2011, respectively. These increases resulted from increases in the weighted average balance of assets of $70.1 million and $66.5 million during the three and nine months ended September 30, 2012, respectively, primarily as a result of the purchase of assets on our Wells Fargo CMBS facility beginning in February 2011. The increases in interest income on CMBS-private placement as a result of the increase in the weighted average balance were partially offset by a decrease in the weighted average yield of assets to 5.20% and 5.19% for the three and nine months ended September 30, 2012, respectively, from 5.72% and 5.62% for the three and nine months ended September 30, 2011, respectively, primarily as a result of the decrease in accretion income during the three and nine months ended September 30, 2011 from the different mix of assets purchased in 2012 at a net premium as opposed to the net discount the securities were typically purchased at in prior years.
Interest Income - Other. Aggregate interest income-other decreased $1.7 million (44%) and increased $1.4 million (22%) to $2.2 million and $8.2 million for the three and nine months ended September 30, 2012, respectively, as compared to $3.9 million and $6.8 million for the three and nine months ended September 30, 2011, respectively, and is primarily related to our trading securities investment program with Resource Capital Markets, Inc., a wholly-owned subsidiary of Resource America that invests up to $13.0 million of our funds . . .

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