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REXI > SEC Filings for REXI > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for RESOURCE AMERICA, INC.


8-May-2013

Quarterly Report


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

Overview
We are a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through our real estate, financial fund management and commercial finance subsidiaries as well as our joint ventures. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, our sponsored investment funds. We typically maintain an investment in the funds we sponsor. As of March 31, 2013, we managed $15.3 billion of assets.
We limit our fund development and management services to asset classes where we own existing operating companies or have specific expertise. We believe this strategy enhances the return on investment we can achieve for our funds. In our real estate operations, we concentrate on the ownership, operation and management of multifamily and commercial real estate and real estate mortgage loans including whole mortgage loans, first priority interests in commercial mortgage loans, known as A notes, subordinated interests in first mortgage loans, known as B notes, mezzanine loans, investments in discounted and distressed real estate loans and investments in "value-added" properties (properties which, although not distressed, need substantial improvements to reach their full investment potential). In our financial fund management operations, we concentrate on bank loans, trust preferred securities of banks, bank holding companies, insurance companies and other financial companies, and asset backed securities, or ABS.
In our real estate segment, we have focused our efforts primarily on acquiring and managing a diversified portfolio of commercial real estate and real estate related debt that has been significantly discounted due to the effects of current economic conditions and high levels of leverage. We expect to continue to expand this business by raising investor funds through our retail broker channel for investment programs, principally through Resource Real Estate Opportunity REIT, Inc., which we refer to as RRE Opportunity REIT. During the three months ended March 31, 2013, we launched Resource Real Estate Diversified Income Fund , or RREDX, a publicly-offered, diversified, closed-end management investment company. Its focus will be to invest at least 80% of assets in real estate and real estate related industry securities, primarily in income-producing equity and debt securities. We purchased 10,000 shares of RREDX during the quarter for $100,000.
In our financial fund management segment, our recent focus has primarily been the sponsorship and management of collateralized debt and loan obligations, or CDOs and CLOs. In addition, on April 17, 2012, we completed the sale of 100% of our equity interests in Apidos Capital Management, LLC, or Apidos, our CLO management subsidiary, to CVC Capital Partners SICAV-FIS, S.A., a private equity firm, or CVC. In connection with the transaction, we received $25.0 million in cash before transaction costs and partnership interests in a joint venture, CVC Credit Partners, L.P., or CVC Credit Partners, that includes the Apidos portfolios as well as the portfolios contributed by CVC. Additionally, we retained a preferred equity interest in Apidos, which entitles us to receive 75% of the incentive management fees from the legacy Apidos portfolios that were previously managed by us and are now managed by CVC Credit Partners. We recorded a $54.5 million net gain on the sale during fiscal 2012. Through our new joint venture, we closed Apidos CLO IX ($409.8 million of par value) in July 2012, Apidos CLO X ($450 million of par value) in November 2012, Apidos CLO XI ($400 million of par value) in January 2013 and Apidos CLO XII ($523 million of par value) in April 2013. For fiscal 2013, we expect to continue to focus on managing our existing assets as well as to continue to expand our CLO business through our joint venture.
We currently account for our interests in LEAF Commercial Capital, Inc., or LEAF, as an equity method investment. In addition, we have recorded provisions for credit losses of $2.9 million and $7.4 million during the three and six months ended March 31, 2013 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows. During the three months ended March 31, 2013, we sold our 10% interest in a real estate joint venture for $3.0 million. In conjunction with the sale, we recognized a gain of $1.6 million and reversed a $1.0 million provision for credit losses related to receivables from the joint venture that were previously deemed to be uncollectible. In addition, during the quarter ended March 31, 2013, we reversed a $1.5 million provision related to the collectability of receivables from other real estate investment entities due to improvements in the projected cash flows from the fund investments.
We recorded consolidated net income attributable to common shareholders of $744,000 during the three months ended March 31, 2013 and a net loss attributable to common shareholders of $703,000 for the six months ended March 31, 2013.

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Assets Under Management
We increased our assets under management by $2.3 billion to $15.3 billion at
March 31, 2013 from $13.0 billion at March 31, 2012. The following table sets
forth information relating to our assets under management by operating segment
(in millions, except percentages) (1):
                                 March 31, 2013         Increase (Decrease)
                                2013        2012        Amount     Percentage
Financial fund management (2) $ 12,988    $ 10,868    $  2,120        20%
Real estate                      1,822       1,633         189        12%
Commercial finance                 527         537         (10 )      (2)%
                              $ 15,337    $ 13,038    $  2,299        18%

(1) We describe how we calculate assets under management in the notes to the third table of this section.

(2) The increase is primarily due to the $2.0 billion addition of the CVC portfolio contributed in the April 2012 formation of CVC Credit Partners, in which we own a 33% interest, the issuance of three new Apidos CLOs (totaling $1.3 billion). These increases were offset, in part, by reductions in the eligible collateral bases of our ABS ($231.1 million), corporate loan ($680.7 million) and trust preferred portfolios ($247.5 million) resulting from redemptions, defaults, paydowns, sales and calls.

Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public and private limited partnerships, tenant-in-common, or TIC, property interest programs, two real estate investment trusts, or REITs, and other investment funds. All of our operating segments manage assets on behalf of Resource Capital Corp., or RSO. The following table sets forth the number of entities we manage by operating segment:

                                                                                     Other
                                                       Limited                     Investment
                                     CDOs and CLOs   Partnerships   TIC Programs     Funds
As of March 31, 2013
Financial fund management                 44              13             -             3
Real estate                                2              9              6             5
Commercial finance                         -              4              -             2
                                          46              26             6             10
As of March 31, 2012
Financial fund management                 38              13             -             1
Real estate                                2              8              6             5
Commercial finance                         -              4              -             2
                                          40              25             6             8

As of March 31, 2013 and 2012, we managed assets in the following classes for the accounts of institutional and individual investors, RSO, and for our own account (in millions):

                                                     March 31, 2013                               March 31, 2012
                            Institutional and
                          Individual Investors        RSO           Company          Total             Total
Bank loans (1)            $             5,569     $    2,593     $          -     $    8,162     $         5,570
Trust preferred
securities (1)                          3,536              -                -          3,536               3,784
Asset-backed securities
(1)                                     1,160              -                -          1,160               1,391
Mortgage and other real
  estate-related loans
(2)                                         2            990                -            992                 908
Real properties (2)                       746             68               16            830                 725
Commercial finance assets
(3)                                       527              -                -            527                 537
Private equity and other
assets (1)                                107             23                -            130                 123
                          $            11,647     $    3,674     $         16     $   15,337     $        13,038

(1) We value these assets at their amortized cost.

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(2) We value our managed real estate assets as the sum of: (i) the amortized cost of our commercial real estate loans; and (ii) the book value of each of the following: (a) real estate and other assets held by our real estate investment entities, (b) our outstanding legacy loan portfolio, and (c) our interests in real estate.

(3) We value our commercial finance assets as the sum of the book value of the financed equipment and leases and loans.

Employees
As of March 31, 2013, we had 608 full-time employees, an increase of 45 or (8%),
from 563 employees at March 31, 2012, reflecting the increase by 51 employees at
our property management subsidiary. The following table summarizes our employees
by operating segment:
                                               Financial Fund   Corporate/
                         Total   Real Estate   Management (1)   Other (2)
March 31, 2013
Investment professionals  56         42              11             3
Other                     69         19              13             37
                          125        61              24             40
Property management       483        483             -              -
Total                     608        544             24             40

March 31, 2012
Investment professionals  65         38              25             2
Other                     66         19              12             35
                          131        57              37             37
Property management       432        432             -              -
Total                     563        489             37             37

(1) Decrease due to the April 2012 deconsolidation of Apidos as a result of the transaction with CVC.

(2) As a result of the November 2011 deconsolidation of LEAF, we no longer have any commercial finance employees.

The revenues in each of our operating segments are generated by the fees we earn for structuring and managing the investment entities we sponsored on behalf of individual and institutional investors and RSO, and the income produced by the assets and investments we manage for our own account. The following table sets forth information about our revenue sources (in thousands):

                                     Three Months Ended         Six Months Ended
                                         March 31,                 March 31,
                                      2013         2012         2013        2012
Fund management revenues (1)      $     7,968    $  9,397    $  15,196    $ 17,846
Finance and rental revenues (2)         2,005       1,986        4,507       8,085
RSO management fees                     2,574       3,376        7,233       7,065
Gains on sale of investments (3)        1,606           -        2,437          60
Other revenues (4)                      1,296          21        1,781         388
                                  $    15,449    $ 14,780    $  31,154    $ 33,444

(1) Includes fees from each of our real estate, financial fund management and commercial finance operations and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.

(2) Includes rental income, revenues from certain real estate assets and interest income on bank loans from our financial fund management operations. For periods prior to November 2011, includes interest and rental income from our commercial finance operations.

(3) Includes the resolution of loans we hold in our real estate segment.

(4) Includes gains (losses) on trading securities. For periods prior to November 2011, primarily includes insurance fees, documentation fees and other charges earned by our commercial finance operations.

We provide a more detailed discussion of the revenues generated by each of our business segments under
"-Results of Operations: ":Real Estate", ":Financial Fund Management", and ":Commercial Finance."

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Results of Operations: Real Estate
Through our real estate segment, we focus on four different areas:
the acquisition, ownership and management of portfolios of discounted real estate and real estate related debt, which we have acquired through three sponsored real estate investment entities as well as through joint ventures with institutional investors;

         the management of sponsored real estate investment entities that
          principally invest in multifamily housing;


         the management, principally for RSO, of general investments in
          commercial real estate debt, including first mortgage debt, whole
          loans, mortgage participations, B notes, mezzanine debt and related
          commercial real estate securities; and


         to a significantly lesser extent, the management and resolution of a
          portfolio of real estate loans and property interests that we acquired

at various times between 1991 and 1999, which we collectively refer to as our legacy portfolio.

The following table sets forth information related to real estate assets managed
(1) (in millions):

                                               March 31,
                                            2013       2012
Assets under management (1):
Commercial real estate debt               $   938    $   801
Real estate investment funds and programs     582        577
RRE Opportunity REIT                          150         66
Distressed portfolios                          57         94
Properties managed for RSO                     64         60
Institutional portfolios                       15         15
Legacy portfolio                               16         20
                                          $ 1,822    $ 1,633

(1) For information on how we calculate assets under management, see "Assets under Management", above.

We support our real estate investment funds by making long-term investments in them. In addition, from time to time, we make bridge investments in the funds to facilitate acquisitions. We record losses on these equity method investments primarily as a result of depreciation and amortization expense recorded by the property interests. Fee income can be highly variable and, for fiscal 2013, will depend upon the success of RRE Opportunity REIT and the timing of its acquisitions.

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The following table sets forth information relating to the revenues recognized and costs and expenses incurred in our real estate operations (in thousands):

                                           Three Months Ended                Six Months Ended
                                                March 31,                       March 31,
                                           2013             2012           2013            2012
Revenues:
Management fees:
Asset management fees                $     2,594        $    1,847     $     4,818     $    3,694
Resource Residential property
management fees                            2,233             1,570           4,258          3,207
RSO management fees                        2,193             2,007           6,860          3,390
                                           7,020             5,424          15,936         10,291
Other:
Rental property income and revenues
of consolidated VIE (1)                      949               946           2,378          2,259
Master lease revenues                      1,056             1,040           2,129          2,059
Fee income from sponsorship of
investment entities                          689             2,271           1,573          3,072
Gains and fees on resolution of
loans and other property interests         1,606                 -           2,437             60
Equity in earnings of unconsolidated
entities                                      20                35              41            641
                                     $    11,340        $    9,716     $    24,494     $   18,382
Costs and expenses:
General and administrative expenses  $     4,693        $    3,760     $     8,861     $    7,507
Resource Residential property
management expenses                        2,355             1,748           4,444          3,346
Master lease expenses                      1,579             1,042           2,652          2,058
Rental property expenses and
expenses of consolidated VIE (1)             813               857           1,481          1,688
                                     $     9,440        $    7,407     $    17,438     $   14,599

(1) We generally consolidate a variable interest entity, or VIE, when we are deemed to be the primary beneficiary of the entity.

Revenues - Three and Six Months Ended March 31, 2013 as Compared to Three and
Six Months Ended March 31, 2012
Revenues from our real estate operations increased $1.6 million and $6.1 million
for the three and six months ended March 31, 2013, respectively.  We attribute
the increases primarily to the following:
Management fees - increased by $1.6 million and $5.6 million, respectively,
principally due to the following:
         a $747,000 and $1.1 million increase, respectively, in asset management
          fees, reflecting a $626,000 and $1.2 million increase in broker-dealer
          manager fees earned in conjunction with an increase in the funds raised
          for RRE Opportunity REIT;


         a $663,000 and $1.1 million increase, respectively, in property
          management fees earned by our property manager, Resource Residential,
          reflecting a 2,484 unit increase (15%) in multifamily units under
          management to 18,997 units at March 31, 2013 from 16,513 units at
          March 31, 2012; and


         a $186,000 and $3.5 million increase, respectively, in RSO management
          fees. The base management fee increased by $668,000 and $1.3 million,
          respectively, due to the increase in the equity of RSO upon which this
          fee is based. We also earned incentive management fees of $2.6 million
          during the six months ended March 31, 2013 as compared to $482,000 for
          the same period last year. The incentive management fees are based on
          the adjusted operating earnings of RSO, which varies from period to
          period.

Other revenues

         a $1.6 million and $2.4 million increase, respectively, in gains and
          fees on resolution of loans and investment entities. In January 2013,
          we sold our 10% interest in a real estate joint venture and recognized
          a gain of $1.6 million. In October 2012, we sold a commercial property
          located in Elkins, West Virginia, which was consolidated through a VIE,
          recognizing a gain of $831,000 (of which $793,000 was attributable to
          noncontrolling interests);

These increases were offset, in part, by:
a $1.6 million and $1.5 million decrease, respectively, in fee income in connection with the purchase and third-party financing of properties through our real estate investment entities, as follows:

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               during the three and six months ended March 31, 2013, we earned
                $689,000 and $1.6 million, respectively, in fees primarily from
                the following activities:


                     the acquisition of two and seven properties (valued at
                      $18.6 million and $47.5 million, respectively); and


                     the sale of two and three properties (valued at $13.0
                      million and $29.1 million, respectively).

In comparison, during the three and six months ended March 31, 2012, we earned $2.3 million and $3.1 million, respectively, in fees primarily from the following activities:

                     the acquisition of two properties and two loans (valued at
                      $38.2 million) during the three months ended March 31, 2012
                      and three properties and two loans (valued at $46.5
                      million) during the six months ended March 31, 2012; and


                     the sale of one property, including a promoted return of
                      $1.2 million for the three months ended March 31, 2012 and
                      the sale of two properties and two loans for the six months
                      ended March 31, 2012.


         a $15,000 and $600,000 decrease, respectively, in the equity in
          earnings of unconsolidated entities. During the three and six months
          ended March 31, 2013, we earned equity income of $20,000 and $41,000,
          respectively. The six months ended March 31, 2012 included a $750,000
          gain in conjunction with the release of funds from escrow related to
          the fiscal 2011 sale of a Washington, DC office building held by one of
          our legacy portfolio investments.

Costs and Expenses - Three and Six Months Ended March 31, 2013 as Compared to
Three and Six Months Ended March 31, 2012
Costs and expenses of our real estate operations increased $2.0 million (27%)
and $2.8 million (19%), respectively. We attribute these changes primarily to
the following:
         a $933,000 and $1.4 million increase, respectively, in general and
          administrative expenses principally related to an $827,000 and $1.1
          million increase, respectively, in wages and benefits. During the three
          months ended March 31, 2013, we allocated an additional $513,000 of
          corporate wages and benefits to our real estate segment in conjunction
          with the increase in its operating activities. In addition, these
          increases in wages and benefits reflect the additional staffing
          required to manage the increased properties under management as well as
          the additional personnel hired at our broker-dealer, Resource
          Securities, to enhance our fundraising capabilities; and


         a $607,000 and $1.1 million increase, respectively, in Resource
          Residential expenses primarily due to increased wages and benefits,
          principally in conjunction with the additional personnel needed to
          operate and manage the increased number of properties under management.

Results of Operations: Financial Fund Management General. We conduct our financial fund management operations primarily through six separate operating entities:

         CVC Credit Partners, a joint venture between us and CVC, finances,
          structures and manages investments in bank loans, high yield bonds and
          equity investments through CLO issuers, managed accounts and a credit
          opportunities fund. Prior to April 17, 2012, we conducted these
          operations through our Apidos subsidiary;


         Trapeza Capital Management, LLC, or TCM, a joint venture between us and
          an unrelated third party, manages investments in trust preferred
          securities and senior debt securities of banks, bank holding companies,
          insurance companies and other financial companies through CDO issuers
          and related partnerships. TCM, together with the Trapeza CDO issuers
          and Trapeza partnerships, are collectively referred to as Trapeza;


         Resource Financial Institutions Group, Inc., or RFIG, serves as the
          general partner for seven company-sponsored affiliated partnerships
          which invest in financial institutions;


         Ischus Capital Management, LLC, or Ischus, finances, structures and
          manages investments in ABS including residential mortgage-backed
          securities, or RMBS, and commercial mortgage-backed securities, or
          CMBS;


         Resource Capital Markets, Inc., or Resource Capital Markets, through
          our registered broker-dealer subsidiary, Resource Securities, Inc., or
          Resource Securities, acts as an agent in the primary and secondary
          markets for structured finance securities and manages accounts for
          institutional investors; and


         Resource Capital Manager, Inc., or RCM, an indirect wholly-owned
          subsidiary, provides investment management and administrative services
          to RSO under a management agreement between us, RCM and RSO.

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The following table sets forth information relating to assets managed by our financial fund management operating entities on behalf of institutional and individual investors and RSO (in millions) (1):

                                        Institutional and
                                      Individual Investors       RSO       Total by Type
March 31, 2013
CVC Credit Partners (2)              $                5,569    $ 2,593    $         8,162
Trapeza                                               3,536          -              3,536
. . .
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