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RSO > SEC Filings for RSO > Form 10-K on 18-Mar-2013All Recent SEC Filings

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

Form 10-K for RESOURCE CAPITAL CORP.


18-Mar-2013

Annual Report


ITEM 7 . 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 this Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of certain risks, uncertainties and assumptions associated with those statements.
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 December 31, 2012, Resource America managed approximately $15.3 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, CMBS and ABS portfolios, we historically have used warehouse facilities as a short-term financing source and 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.
During 2011 and 2012, the economic environment became more positive in the United States which has resulted in several positive operating developments for us. Our ability to access the capital markets improved, as we have sold $73.0 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 December 31, 2012. In October 2012, we issued $24.2 million of 8.25% Series B preferred shares, or Series B. We also entered into an at-the-market sales agreement and sold $17.9 million of Series B through February 28, 2013. This brought our total equity raised through our capital market efforts to $170.5 million, after underwriting commissions and other expenses related to these efforts.
Beginning in 2011, we also began to see a loosening of the credit markets and were able to take advantage of the situation by establishing several new financing arrangements, a trend that continued in 2012 when we closed two financing facilities totaling $250.0 million with Wells Fargo Bank. We continue to engage in discussions with potential financing sources about providing commercial real estate term financing to augment and cautiously grow our loan and security portfolio. We have expanded our borrowings with the use of term and additional repurchase agreements used primarily to finance newly underwritten commercial real estate loans and the purchase of highly rated CMBS. We anticipate replacing these short-term borrowings with longer term financing in the form of securitization borrowings as that market becomes more accessible and affordable to us. We expect to be able to grow our portfolio to a critical amount required to begin exploring these opportunities during 2013. 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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Also during 2012, we saw the credit quality in our portfolio stabilize which resulted in decreases in provisions for loan losses and asset impairments on a combined basis when compared to the combined amount for 2011 ($16.8 million in 2012 from $20.8 million in 2011). We also saw a marked improvement in other comprehensive income with respect to our available for sale securities portfolio and interest rate derivatives (to a loss of $27.1 million at December 31, 2012 from a loss of $46.3 million at December 31, 2011). While we believe we have appropriately valued the assets in our investment portfolio at December 31, 2012, we cannot assure you that further impairments will not occur or that our assets will otherwise not be adversely affected by market conditions. In terms of our investments and investment portfolio growth, we continued to see increased opportunities to deploy our capital. Beginning in October 2010 through December 31, 2012, we have underwritten 26 new CRE loans for a total of $314.8 million, most of which were financed by using capital recycled through our two real estate CDO securitizations. We also purchased 31 newly underwritten CMBS for $119.2 million beginning in February 2011 through December 31, 2012, all of which were financed with a Wells Fargo facility. We also purchased eight CMBS bonds for $34.5 million that were financed by our two CRE CDOs beginning in February 2011 through December 31, 2012. In addition, we purchased four CMBS bonds for $19.7 million that were financed by short-term repurchase agreements and also purchased nine CMBS bonds for $43.5 million where no debt financing sources were utilized. 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 $27.1 million at December 31, 2012, we recognized income of approximately $18.5 million in our bank loan CLO portfolio for 2012 and expect to accrete approximately $7.7 million into income in calendar year 2013. However, we have no further capacity in two of our bank loan collaterized loan obligation issuers, or CLOs, and two real estate CDOs have ended their reinvestment periods. 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, term credit facilities with Wells Fargo of $40.4 million and $56.9 million, respectively, as of February 28, 2013 to help finance new investments.
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 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 December 31, 2012, we had invested 83% of our portfolio in CRE assets, 15% in commercial bank loans and 2% in other assets. As of December 31, 2011, we had invested 69% of our portfolio in CRE assets, 15% in commercial bank loans, 16% in other investments.
Results of Operations
Our net income allocable to common shares for the year ended December 31, 2012 was $63.2 million, or $0.71 per share (basic and diluted) as compared to December 31, 2011 was $37.7 million, or $0.54 per share-basic ($0.53 per share-diluted), and as compared to net income for the year ended December 31, 2010 of $19.4 million, or $0.41 per share (basic and diluted).

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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):
                                                                Years Ended
                                                                December 31,
                                                     2012           2011           2010
Interest income:
 Interest income from loans:
  Bank loans                                     $   71,511     $   54,833     $   44,828
  Commercial real estate loans                       37,519         31,906         32,866
    Total interest income from loans                109,030         86,739         77,694

 Interest income from securities:
  CMBS-private placement                             11,358          9,290          9,768
  ABS                                                 1,631          1,613          1,466
  Corporate bonds                                       240              -              -
  Residential mortgage-backed securities, or
RMBS                                                  1,067          1,521              -
  Other ABS                                               -              -            200
    Total interest income from securities            14,296         12,424         11,434

Leasing                                                   -              -         11,306

Interest income - other:
  Preference payments on structured notes (1)         9,773         10,432          3,112
  Temporary investment in over-night
repurchase agreements                                   231            279            365
   Total interest income - other                     10,004         10,711          3,477
Total interest income                            $  133,330     $  109,874     $  103,911



                                    Year Ended                Year Ended               Year Ended
                                 December 31, 2012        December 31, 2011        December 31, 2010
                                 Weighted Average          Weighted Average         Weighted Average
                               Yield       Balance       Yield       Balance      Yield       Balance
Interest income:
 Interest income from
loans:
  Bank loans                   5.94%    $ 1,189,898      5.63%     $ 963,427      4.91%     $ 907,582
  Commercial real estate
loans                          5.25%    $   701,836      4.95%     $ 646,121      4.68%     $ 694,153

Interest income from
securities:
 CMBS-private placement        5.22%    $   216,460      5.65%     $ 160,593      6.97%     $ 140,377
 ABS                           5.02%    $    32,087      4.85%     $  32,879      4.12%     $  35,295
 Corporate bonds               3.33%    $     7,229       N/A          N/A         N/A          N/A
 RMBS                          3.10%    $    34,396      2.93%     $  51,844       N/A          N/A
 Other ABS                      N/A          N/A          N/A          N/A        8.71%     $   2,300

Leasing                         N/A          N/A          N/A          N/A       15.61%     $  75,008

Preference payments on
structured notes              19.07%    $    51,239     32.95%     $  31,663     37.69%     $   8,257

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The following tables summarize interest income for the years indicated (in thousands, except percentages):

                                          Unamortized           Net
                              Coupon       (Discount)       Amortization/     Interest        Fee
     Type of Security        Interest       Premium          Accretion         Income       Income        Total
Year Ended December 31,
2012:
Bank loans                      4.25 %   $    (24,465 )   $       17,784     $  51,580     $ 2,147     $  71,511
Commercial real estate
loans                           5.05 %   $       (127 )               33        35,759       1,727        37,519
  Total interest income
from loans                                                        17,817        87,339       3,874       109,030
CMBS-private placement          3.60 %   $     (8,011 )            2,635         8,723           -        11,358
RMBS                                                                   -         1,067           -         1,067
ABS                             2.41 %   $     (3,145 )              718           913           -         1,631
Corporate bonds                 3.69 %   $        479                (26 )         266           -           240
Other ABS                                                              -             -           -             -
  Total interest income
from securities                                                    3,327        10,969           -        14,296
Leasing                                                                -             -           -             -
Preference payments on
structured notes                                                       -         9,773           -         9,773
Other                                                                  -           231           -           231
  Total interest income -
other                                                                  -        10,004           -        10,004
Total interest income                                     $       21,144     $ 108,312     $ 3,874     $ 133,330
Year Ended December 31,
2011:
Bank loans                      3.76 %   $    (31,787 )   $       15,539     $  36,932     $ 2,362     $  54,833
Commercial real estate
loans                           4.64 %   $       (160 )               12        30,249       1,645        31,906
  Total interest income
from loans                                                        15,551        67,181       4,007        86,739
CMBS-private placement          3.60 %   $    (13,391 )            3,270         6,020           -         9,290
RMBS                                                                   -         1,521           -         1,521
ABS                             2.60 %   $     (3,812 )              524         1,089           -         1,613
Other ABS                                                              -             -           -             -
  Total interest income
from securities                                                    3,794         8,630           -        12,424
Leasing                                                                -             -           -             -
Preference payments on
structured notes                                                       -        10,432           -        10,432
Other                                                                  -           279           -           279
  Total interest income -
other                                                                  -        10,711           -        10,711
Total interest income                                     $       19,345     $  86,522     $ 4,007     $ 109,874
Year Ended December 31,
2010:
Bank loans                      3.24 %   $    (26,568 )   $       13,919     $  30,051     $   858     $  44,828
Commercial real estate
loans                           4.50 %   $       (171 )              (15 )      32,163         718        32,866
  Total interest income
from loans                                                        13,904        62,214       1,576        77,694
CMBS-private placement          3.79 %   $    (20,932 )            4,359         5,409           -         9,768
Securities
held-to-maturity                2.45 %   $     (2,844 )              409         1,057           -         1,466
Other ABS                                                              -           200           -           200
  Total interest income
from securities                                                    4,768         6,666           -        11,434
Leasing                                                                -        11,306           -        11,306
Preference payments on
structured notes                                                       -         3,112           -         3,112
Other                                                                  -           365           -           365
  Total interest income -
other                                                                  -         3,477           -         3,477
Total interest income                                     $       18,672     $  83,663     $ 1,576     $ 103,911

Year Ended December 31, 2012 as compared to Year Ended December 31, 2011 Aggregate interest income increased $23.5 million (21%) to $133.3 million for the year ended December 31, 2012, from $109.9 million for the year ended December 31, 2011. We attribute this increase to the following:
Interest Income from Loans. Aggregate interest income from loans increased $22.3 million (26%) to $109.0 million for the year ended December 31, 2012 from $86.7 million for the year ended December 31, 2011.

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Interest income on bank loans increased $16.7 million (30%) to $71.5 million for the year ended December 31, 2012 from $54.8 million for the year ended December 31, 2011. This increase resulted primarily from the following combination of factors:

         an increase in the weighted average loan balance of $226.5 million to
          $1.2 billion for the year ended December 31, 2012 from $963.4 million
          for the year ended December 31, 2011, principally as a result of our
          new CLO, Apidos CLO VIII , for which we began acquiring assets in July
          2011, and Whitney CLO I ,which we began consolidating in October 2012
          when we acquired a controlling interest. The increase in the weighted
          average balance was partially offset by a decrease in the loan asset
          balances at Apidos I and III as both have 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. For the year
          ended December 31, 2012, Apidos I and III paid down a total of $151.2
          million par value of CLOs; and


         an increase in the weighted average yield to 5.94% for the year ended
          December 31, 2012 as compared to 5.63% for the year ended December 31,
          2011, primarily as a result of the increase in accretion income from
          Apidos CLO VIII for which we began acquiring assets in July 2011. The
          increase in accretion income from Apidos VIII was partially offset by a
          decrease in accretion income from Apidos I and Apidos III as those CLOs
          have decreasing asset and discount balances as both have reached the
          end of their reinvestment periods.

Interest income on CRE loans increased $5.6 million (18%) to $37.5 million for the year ended December 31, 2012, as compared to $31.9 million for the year ended December 31, 2011. This increase is a result of the following combination of factors:

         an increase of $55.7 million in the weighted average loan balance to
          $701.8 million for the year ended December 31, 2012 from $646.1 million
          for the year ended December 31, 2011 as we reinvested proceeds from
          payoffs and paydowns, classified as restricted CDO cash on our balance
          sheet, beginning in the fourth quarter of 2011, with the majority of
          these proceeds being reinvested during the second and third quarters of
          2012. In addition, we began to originate new loans financed by our
          Wells Fargo CRE credit facility coupled with new equity raised in 2012;
          and


         an increase in the weighted average yield to 5.25% during the year
          ended December 31, 2012 from 4.95% during the year ended December 31,
          2011 as a result of newly originated 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 $1.9 million (15%) to $14.3 million for the year ended December 31, 2012 from $12.4 million for the year ended December 31, 2011. The increase in interest income from securities resulted principally from the following:
Interest income on CMBS-private placement increased $2.1 million (22%) to $11.4 million for the year ended December 31, 2012 as compared to $9.3 million for the year ended December 31, 2011. The increase resulted from an increase in the weighted average balance of assets of $55.9 million during the year ended December 31, 2012 to $216.5 million from $160.6 million for the year ended December 31, 2011 primarily as a result of the purchase of assets on our Wells Fargo CMBS facility beginning in February 2011 as well as purchases using proceeds from our stock offerings in 2012. 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 5.22% for the year ended December 31, 2012 from 5.65% for the year ended December 31, 2011 primarily as a result of the decrease in accretion income during the year ended December 31, 2012. In 2012, securities were purchased at a net premium as opposed to the net discount of our purchases in prior years.
Interest Income - Other. Aggregate interest income-other decreased $707,000 (7%) to $10.0 million for the year ended December 31, 2012 as compared to $10.7 million for the year ended December 31, 2011 and is primarily related to our trading securities investment program with Resource Capital Markets, Inc., a wholly-owned subsidiary of Resource America that invested $13.0 million of our funds under an investment management agreement. The payments vary from period to period and are based on cash flows from the underlying securities rather than on a contractual interest rate. The decrease for the year ended December 31, 2012 was primarily related to the sale of 12 securities in September 2012, which meant preference share payments related to those securities ceased as of their disposition.
Year Ended December 31, 2011 as compared to Year Ended December 31, 2010 Aggregate interest income increased $6.0 million (6%) to $109.9 million for the year ended December 31, 2011, from $103.9 million for the year ended December 31, 2010. We attribute this increase to the following:
Interest Income from Loans. Aggregate interest income from loans increased $9.0 million (12%) to $86.7 million for the year ended December 31, 2011 from $77.7 million for the year ended December 31, 2010.

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Interest income on bank loans increased $10.0 million (22%) to $54.8 million for the year ended December 31, 2011 from $44.8 million for the year ended December 31, 2010. The increase for the year ended December 31, 2011 resulted primarily from the following:

         an increase in the weighted average balance of $55.8 million to $963.4
          million for the year ended December 31, 2011 from $907.6 million for
          the year ended December 31, 2010, principally as a result of our new
          CLO, for which we began acquiring assets in July 2011;


         an increase in the weighted average rate to 3.76% on bank loans for the
          year ended December 31, 2011 from 3.24% for the year ended December 31,
          2010 primarily because of the increase in spread on these assets; and


         timing of paydowns and payoffs which caused us to accelerate discounts
          into income in prior years. The bank loan market experienced increased
          prepayment speeds beginning in the third quarter of 2010 which have
          slowed considerably since the second quarter of 2011.

The interest income on bank loans was partially offset by CRE loans which produced $31.9 million of interest income for the year ended December 31, 2011 as compared to $32.9 million for the year ended December 31, 2010, a decrease of $960,000 (3%). This decrease is primarily related to the decrease of $48.0 million in weighted average balance of loans to $646.1 million for the year ended December 31, 2011 from $694.2 million for the year ended December 31, 2010 as a result of the sale of $131.6 million (par value) of loans, conversions of loans to equity investments in real estate of $39.6 million (par value) and the payoff and paydown of $14.4 million (par value) of loans from April 2010 through December 2011. We began to reinvest these proceeds, classified as restricted cash on our balance sheet, during the fourth quarter of 2010, with the majority of it being reinvested during the second and third quarters of 2011.
Interest Income from Securities. Aggregate interest income from securities increased $990,000 (9%) to $12.4 million for the year ended December 31, 2011 from $11.4 million for the year ended December 31, 2010. The increase in interest income from securities resulted principally from the following:
Interest income from RMBS was $1.5 million for the year ended December 31, 2011 . . .

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