ACRES Commercial Realty Corp. - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
xANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the
fiscal year ended December 31, 2005
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the
transition period from _________ to __________
Commission
file number: 1-32733
RESOURCE
CAPITAL CORP.
(Exact
name of registrant as specified in its charter)
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Maryland
(State
or other jurisdiction
of
incorporation or organization)
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20-2287134
(I.R.S.
Employer
Identification
No.)
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712
5th
Avenue, 10th
Floor
New
York,
NY
(Address
of principal executive offices)
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10019
(Zip
Code)
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Registrant’s
telephone number, including area code: 212-506-3870
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $.001 par value
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New
York Stock Exchange (NYSE)
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. ¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. ¨
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x
Yes
¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one).
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). ¨
Yes
x
No
The
aggregate market value of the voting common equity held by non-affiliates of
the
registrant, based on the closing price of such stock on the last business day
of
the registrant’s most recently completed second fiscal quarter (June 30, 2005)
was approximately $195,640,005.
The
number of outstanding shares of the registrant’s common stock on March 20, 2006
was 17,813,096
shares.
DOCUMENTS
INCORPORATED BY REFERENCE
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
INDEX
TO ANNUAL REPORT
ON
FORM 10-K
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Page
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PART
I
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3
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3
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10
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30
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31
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31
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31
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PART
II
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31
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34
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35
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62
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65
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92
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92
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92
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PART
III
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93
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97
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98
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100
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101
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PART
IV
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102
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103
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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.
The
forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us or are within our control. If a change occurs, our business,
financial condition, liquidity and results of operations may vary materially
from those expressed in our forward-looking statements. These forward-looking
statements are subject to various risks and uncertainties that could cause
actual results to vary from our forward-looking statements,
including:
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·
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changes
in our industry, interest rates, the debt securities markets or the
general economy;
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increased
rates of default and/or decreased recovery rates on our
investments;
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increased
prepayments of the mortgage and other loans underlying our mortgage-backed
or other asset-backed securities;
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general
volatility of the securities markets in which we
invest;
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changes
in our business strategy;
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availability,
terms and deployment of capital;
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availability
of qualified personnel;
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·
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changes
in governmental regulations, tax rates and similar
matters;
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·
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availability
of investment opportunities in real estate-related and commercial
finance
assets;
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the
degree and nature of our
competition;
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the
adequacy of our cash reserves and working capital;
and
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the
timing of cash flows, if any, from our
investments.
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PART
I
General
We
are a
specialty finance company that
intends to qualify and will elect to be taxed as a real estate investment trust,
or REIT, for federal income tax purposes commencing with our taxable year ended
December 31, 2005. Our investment strategy focuses on real estate-related assets
and, to a lesser extent, higher-yielding commercial finance assets with a
concentration on the following asset classes: commercial real estate-related
assets such as B-notes, mezzanine debt and commercial mortgage-backed
securities, or CMBS, residential real estate-related assets such as residential
mortgage-backed securities, or RMBS, and commercial finance assets such as
other
asset-backed securities, or ABS, syndicated bank loans, equipment leases and
notes, trust preferred securities and private equity investments .
We
are
externally managed by Resource Capital Manager, Inc., which we refer to as
the
Manager, a wholly-owned indirect subsidiary of Resource America, Inc. (Nasdaq:
REXI), a specialized asset management company that uses industry specific
expertise to generate and administer investment opportunities for its own
account and for outside investors in the financial fund management, real
estate,
and equipment finance sectors. As of December 31, 2005, Resource America
managed
approximately $8.6 billion of assets in these sectors. To provide its services,
the Manager draws upon Resource America, its management team and their
collective investment experience.
Our
Business Strategy
Our
principal business 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 believe
we can achieve those objectives through the following business
strategies:
Disciplined
credit underwriting and active risk management. The
core
of our investment process is credit analysis and active risk management. Senior
management of our Manager and Resource America has extensive experience in
underwriting the credit risk associated with our targeted asset classes, and
conducts detailed due diligence on all credit-sensitive investments, including
the use of proprietary credit stratifications and collateral
stresses.
Investment
in higher-yielding assets. A
portion
of our portfolio is and will be comprised of assets such as B notes, mezzanine
loans, RMBS and CMBS rated below AAA, and syndicated loans, which generally
have
higher yields than more senior obligations or agency RMBS.
Diversification
of investments.
We
believe that our diversification strategy will allow us to allocate our capital
to sectors that offer the possibility of enhancing the returns we will be able
to achieve, while reducing the overall risk of our portfolio through the
non-correlated nature of these various asset classes. The percentage of assets
that we may invest in certain of our targeted asset classes is subject to the
federal income tax requirements for REIT qualification and the requirements
for
exclusion from Investment Company Act regulation.
Use
of leverage. We
use
leverage to increase the potential returns to our stockholders, and seek to
achieve leverage consistent with our analysis of the risk profile of the
investments we finance and the borrowing sources available to us.
Active
management of interest rate risk and liquidity risk. We
finance a substantial portion of our portfolio investments on a long-term basis
through borrowing strategies that seek to match the maturity and repricing
dates
of our investments with the maturity and repricing dates of our financing.
These
strategies allow us to mitigate our interest rate and liquidity risk, resulting
in more stable and predictable cash flows and include the use of collateralized
debt obligations, which we refer to as CDOs, structured for us by our Manager.
Our
Operating Policies and Strategies
Investment
guidelines. We
have
established investment policies, procedures and guidelines that are reviewed
and
approved by our investment committee and board of directors. The investment
committee meets as frequently as necessary to monitor the execution of our
investment strategies and our progress in achieving our investment objectives.
As a result of our investment strategies and targeted asset classes, we acquire
our investments primarily for income. We do not have a policy that requires
us
to focus our investments in one or more particular geographic
areas.
Financing
policies. We
use
leverage in order to increase potential returns to our stockholders and for
financing our portfolio. We do not speculate on changes in interest rates.
While
we have identified our leverage targets for each of our targeted asset classes,
our investment policies require no minimum or maximum leverage and our
investment committee will have the discretion, without the need for further
approval by our board of directors, to increase the amount of leverage we incur
above our targeted range for individual asset classes.
We
typically accumulate investments in our warehouse facilities or through
repurchase agreements and, upon our acquisition of the assets in those
facilities, refinance them with CDOs. We are not limited to CDOs for our
refinancing needs, and may use other forms of term financing if we believe
the
market conditions make it appropriate.
Hedging
and interest rate management strategy. We
may
from time to time use derivative financial instruments to hedge all or a portion
of the interest rate risk associated with our borrowings. Under the federal
income tax laws applicable to REITs, we generally will be able to enter into
certain transactions to hedge indebtedness that we may incur, or plan to incur,
to acquire or carry real estate assets, provided that our total gross income
from such hedges and other non-qualifying sources must not exceed 25% of our
total gross income. These hedging transactions may include interest rate swaps,
collars, caps or floors, puts and calls and options.
Credit
and risk management policies. Our
Manager focuses its attention on credit and risk assessment from the earliest
stage of the investment selection process. In addition, the Manager screens
and
monitors all potential investments to determine their impact on maintaining
our
REIT qualification under federal income tax laws and our exclusion from
investment company status under the Investment Company Act of 1940. Risks
related to portfolio management, including the management of risks related
to
credit losses, interest rate volatility, liquidity and counterparty credit
are
generally managed on a portfolio-by-portfolio basis by each of Resource
America’s asset management divisions, although there is often interaction and
cooperation between divisions in this process.
Our
Investment Strategy
Commercial
Real Estate-Related Investments
Subordinate
interests in whole loans (B notes).
We
invest in subordinate interests in whole loans, referred to as B notes, from
third parties. B notes are loans secured by a first mortgage and subordinated
to
a senior interest, referred to as an A note. The subordination of a B note
is
generally evidenced by a co-lender or participation agreement between the
holders of the A note and the B note. In some instances, the B note lender
may
require a security interest in the stock or partnership interest of the borrower
as part of the transaction. B note lenders have the same obligations, collateral
and borrower as the A note lender, but typically are subordinated in recovery
upon default. B notes share certain credit characteristics with second mortgages
in that both are subject to greater credit risk with respect to the underlying
mortgage collateral than the corresponding first mortgage or A note. Our B
note
investments typically have loan-to-value, or LTV, ratios of between 60% and
80%.
Typical B note investments will have terms of three to five years and are
generally structured with an original term of up to three years, with two one
year extensions that bring the loan to a maximum term of five years. We expect
to hold our B note investments to their maturity.
In
addition to the interest payable on the B note, we may earn fees charged to
the
borrower under the note or additional income by receiving principal payments
in
excess of the discounted price (below par value) we paid to acquire the note.
Our ownership of a B note with controlling class rights may, in the event the
financing fails to perform according to its terms, cause us to elect to pursue
our remedies as owner of the B note, which may include foreclosure on, or
modification of, the note.
Mezzanine
financing. We
invest
in mezzanine loans that are senior to the borrower’s equity in, and subordinate
to a first mortgage loan on, a property. These loans are secured by pledges
of
ownership interests, in whole or in part, in entities that directly own the
real
property. In addition, we may require other collateral to secure mezzanine
loans, including letters of credit, personal guarantees of the principals of
the
borrower, or collateral unrelated to the property. We may structure our
mezzanine loans so that we receive a stated fixed or variable interest rate
on
the loans as well as a percentage of gross revenues and a percentage of the
increase in the fair market value of the property securing the loan, payable
upon maturity, refinancing or sale of the property. Our mezzanine loans may
also
have prepayment lockouts, penalties, minimum profit hurdles and other mechanisms
to protect and enhance returns in the event of premature repayment. Our
mezzanine investments are expected to have LTVs between 70% and 85%. Typically,
our mezzanine investments will have terms of three to five years. We expect
to
hold our mezzanine investments to their maturity.
CMBS.
We
invest
in CMBS, which are securities that are secured by or evidenced by interests
in a
pool of mortgage loans secured by commercial properties. These securities may
be
senior or subordinate and may be either investment grade or non-investment
grade. We expect that the majority of our CMBS investments will be rated by
at
least one nationally recognized agency.
The yields on CMBS depend on the timely payment of interest and principal due
on
the underlying mortgage loans and defaults by the borrowers on such loans may
ultimately result in deficiencies and defaults on the CMBS. In the event of
a
default, the trustee for the benefit of the holders of CMBS has recourse only
to
the underlying pool of mortgage loans and, if a loan is in default, to the
mortgaged property securing such mortgage loan. After the trustee has exercised
all of the rights of a lender under a defaulted mortgage loan and the related
mortgaged property has been liquidated, no further remedy will be available.
However, holders of relatively senior classes of CMBS will be protected to
a
certain degree by the structural features of the securitization transaction
within which such CMBS were issued, such as the subordination of the relatively
more junior classes of the CMBS.
Residential
Real Estate-Related Investments
Agency
RMBS. We invest in adjustable rate and hybrid adjustable
rate agency RMBS, which are securities representing interests in mortgage loans
secured by residential real property in which payments of both principal and
interest are generally made monthly, net of any fees paid to the issuer,
servicer or guarantor of the securities. In agency RMBS, the mortgage loans
in
the pools are guaranteed as to principal and interest by federally chartered
entities such as the Federal National Mortgage Association, known as Fannie
Mae,
the Federal Home Loan Mortgage Corporation, known as Freddie Mac, and the
Government National Mortgage Association, known as Ginnie Mae. In general,
our
agency RMBS will carry implied AAA ratings and will consist of mortgage pools
in
which we hold the entire interest.
Adjustable
rate RMBS, or ARMs, have interest rates that reset periodically (typically
monthly, semi-annually or annually) over their term. Because the interest rates
on ARMs fluctuate based on market conditions, ARMs tend to have interest rates
that do not deviate from current market rates by a large amount. This in turn
can mean that ARMs have less price sensitivity to interest rate
changes.
Hybrid
ARMs have interest rates that have an initial fixed period (typically two,
three, five, seven or ten years) and reset at regular intervals after that
in a
manner similar to traditional ARMs. Before the first interest rate reset date,
hybrid ARMs have a price sensitivity to interest rates similar to that of a
fixed-rate mortgage with a maturity equal to the period before the first reset
date. After the first interest rate reset date occurs, the price sensitivity
of
a hybrid ARM resembles that of a non-hybrid ARM.
The
investment characteristics of pass-through RMBS differ from those of traditional
fixed-income securities. The major differences include the payment of interest
and principal on the RMBS and the possibility that principal may be prepaid
on
the RMBS at any time due to prepayments on the underlying mortgage loans. These
differences can result in significantly greater price and yield volatility
than
is the case with traditional fixed-income securities. On the other hand, the
guarantees on agency RMBS by Fannie Mae, Freddie Mac and, in the case of Ginnie
Mae, the US government, provide reasonable assurance that the investor will
be
ultimately repaid the principal face amount of the security.
Mortgage
prepayments are affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage, and other
social and demographic conditions. Generally, prepayments on pass-through RMBS
increase during periods of falling mortgage interest rates and decrease during
periods of stable or rising mortgage interest rates. Reinvestment of prepayments
may occur at higher or lower interest rates than the original investment, thus
affecting the yield on our portfolio.
Non-agency
RMBS. We also invest in non-agency RMBS. The principal
difference between agency RMBS and non-agency RMBS is that the mortgages
underlying the non-agency RMBS do not conform to agency guidelines as a result
of documentation deficiencies, high LTV ratios or credit quality issues. We
expect that our non-agency RMBS will include loan pools with home equity loans
(loans that are secured by subordinate liens), residential B/C loans (loans
where the borrower’s FICO score, a measure used to rate the financial strength
of the borrower, is low, generally below 625), “Alt-A” loans (where the
borrower’s FICO score is between 675 and 725) and “high LTV” loans (loans where
the LTV is 95% or greater).
Commercial
Finance Investments
Syndicated
bank loans. We
acquire senior and subordinated, secured and unsecured loans made by banks
or
other financial entities. Syndicated bank loans may also include revolving
credit facilities, under which the lender is obligated to advance funds to
the
borrower under the credit facility as requested by the borrower from time to
time. We expect that some amount of these loans will be secured by real estate
mortgages or liens on other assets. Certain of these loans may have an
interest-only payment schedule, with the principal amount remaining outstanding
and at risk until the maturity of the loan.
Equipment
leases and notes.We
invest
in small- and middle-ticket equipment leases and notes. Under full payout
leases
and notes, the payments we receive over the term of the financing will return
our invested capital plus an appropriate return without consideration of
the
residual and the obligor will acquire the equipment at the end of the payment
term. We focus on leased equipment and other assets that are essential for
businesses to conduct their operations so that end users will be highly
motivated to make required monthly payments.
Other
asset-backed securities. We
invest
in other ABS, principally CDOs backed by small business loans and trust
preferred securities of financial institutions such as banks, savings and thrift
institutions, insurance companies, holding companies for these institutions
and
REITs.
Trust
preferred securities.
We
intend to invest in trust preferred securities, with an emphasis on securities
of small- to middle-market financial institutions, including banks, savings
and
thrift institutions, insurance companies and holding companies for these
institutions and REITS. Our focus will be to invest in trust preferred
securities originated by financial institutions that have favorable
characteristics with respect to market demographics, cash flow stability and
franchise value.
Private
equity investments. We
invest
in private equity investments. These investments may include direct purchases
of
private equity as well as purchases of interests in private equity
funds.
Competition
Our
net
income depends, in large part, on our ability to acquire assets at favorable
spreads over our borrowing costs. In acquiring real estate-related assets,
we
compete with other mortgage REITs, specialty finance companies, savings and
loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, other lenders, governmental
bodies and other entities. In addition, there are numerous REITs which invest
in
mortgage loans or mortgage-backed securities, or MBS, with similar asset
acquisition objectives, and others may be organized in the future. The effect
of
the existence of additional REITs may be to increase competition for the
available supply of mortgage assets suitable for purchase. Many of our
competitors are significantly larger than us, have access to greater capital
and
other resources and may have other advantages over us.
Management
Agreement
We
have a
management agreement with Resource Capital Manager, Inc. and Resource America,
Inc. dated as of March 8, 2005, under which the Manager provides the day-to-day
management of our operations. The
management agreement requires the Manager to manage our business affairs in
conformity with the policies and the investment guidelines established by our
board of directors. The Manager’s role as manager is under the supervision and
direction of our board of directors. The Manager is responsible for (i) the
selection, purchase and sale of our portfolio investments, (ii) our financing
activities, and (iii) providing us with investment advisory services. The
Manager receives fees and is reimbursed for its expenses as follows:
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A
monthly base management fee equal to 1/12th of the amount of our
equity
multiplied by 1.50%. Under the management agreement, ‘‘equity’’ is equal
to the net proceeds from any issuance of shares of common stock less
offering related costs, plus or minus our retained earnings (excluding
non-cash equity compensation incurred in current or prior periods)
less
any amounts we have paid for common stock repurchases. The calculation
is
adjusted for one-time events due to changes in generally accepted
accounting principles in the United States, which we refer to as
GAAP, as
well as other non-cash charges, upon approval of our independent
directors.
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Incentive
compensation based on the product of (i) 25% of the dollar amount
by
which, (A) our net income (determined in accordance with GAAP) per
common
share (before non-cash equity compensation expense and incentive
compensation), but after the base management fee, for a quarter (based
on
the weighted average number of shares outstanding) exceeds, (B) an
amount
equal to (1) the weighted average share price of shares of common
stock in
our offerings, multiplied by, (2) the greater of (a) 2.00% or (b)
0.50%
plus one-fourth of the Ten Year Treasury rate (as defined in the
management agreement) for such quarter, multiplied by, (ii) the weighted
average number of common shares outstanding for the quarter. The
calculation may be adjusted for one-time events due to changes in
GAAP as
well as other non-cash charges upon approval of our independent directors.
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Reimbursement
of out-of-pocket expenses and certain other costs incurred by the
Manager
that relate directly to us and our
operations.
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Incentive
compensation will be paid quarterly. Seventy-five percent (75%) of the incentive
compensation will be paid in cash and twenty-five percent (25%) will be paid
in
the form of a stock award. The Manager may elect to receive more than 25% of
its
incentive compensation in stock. All shares are fully vested upon issuance.
However, the Manager may not sell such shares for one year after the incentive
compensation becomes due and payable unless the management agreement is
terminated. Shares payable as incentive compensation are valued as
follows:
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if
such shares are traded on a securities exchange, at the average of
the
closing prices of the shares on such exchange over the thirty day
period
ending three days prior to the issuance of such
shares;
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if
such shares are actively traded over-the-counter, at the average
of the
closing bid or sales price as applicable over the thirty day period
ending
three days prior to the issuance of such shares;
and
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if
there is no active market for such shares, the value shall be the
fair
market value thereof, as reasonably determined in good faith by our
board
of directors.
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The
initial term of the management agreement expires on March 31, 2008 and will
be
automatically renewed for a one-year term on each anniversary date thereafter.
Our board of directors will review the Manager’s performance annually. After the
initial term, the management agreement may be terminated annually upon the
affirmative vote of at least two-thirds of our independent directors, or by
the
affirmative vote of the holders of at least a majority of the outstanding shares
of our common stock, based upon unsatisfactory performance that is materially
detrimental to us or a determination by our independent directors that the
management fees payable to the Manager are not fair, subject to the Manager’s
right to prevent such a compensation termination by accepting a mutually
acceptable reduction of management fees. Our board of directors must provide
180
days’ prior notice of any such termination. The Manager will be paid a
termination fee equal to four times the sum of the average annual base
management fee and the average annual incentive compensation earned by the
Manager during the two 12-month periods immediately preceding the date of
termination, calculated as of the end of the most recently completed fiscal
quarter before the date of termination.
We
may
also terminate the management agreement for cause with 30 days’ prior written
notice from our board of directors. No termination fee is payable with respect
to a termination for cause. The management agreement defines cause
as:
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the
Manager’s continued material breach of any provision of the management
agreement following a period of 30 days after written notice
thereof;
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the
Manager’s fraud, misappropriation of funds, or embezzlement against
us;
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the
Manager’s gross negligence in the performance of its duties under the
management agreement;
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the
bankruptcy or insolvency of the Manager, or the filing of a voluntary
bankruptcy petition by the Manager;
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the
dissolution of the Manager;
and
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a
change of control (as defined in the management agreement) of the
Manager
if a majority of our independent directors determines, at any point
during
the 18 months following the change of control, that the change of
control
was detrimental to the ability of the Manager to perform its duties
in
substantially the same manner conducted before the change of
control.
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Cause
does not include unsatisfactory performance that is materially detrimental
to
our business.
The
management agreement will terminate at the Manager’s option, without payment of
the termination fee, in the event we become regulated as an investment company
under the Investment Company Act, with such termination deemed to occur
immediately before such event.
Regulatory
Aspects of Our Investment Strategy: Exclusion from Regulation Under the
Investment Company Act.
We
operate our business so as to be excluded from regulation under the Investment
Company Act. Because we conduct our business through wholly-owned subsidiaries,
we must ensure not only that we qualify for an exclusion from regulation under
the Investment Company Act, but also that each of our subsidiaries so qualifies.
We
believe that RCC Real Estate, Inc., our wholly-owned subsidiary formed to hold
all of our real estate-related investments, is excluded from Investment Company
Act regulation under Sections 3(c)(5)(C) and 3(c)(6), provisions designed for
companies that do not issue redeemable securities and are primarily engaged
in
the business of purchasing or otherwise acquiring mortgages and other liens
on
and interests in real estate. To qualify for this exclusion, at least 55% of
RCC
Real Estate’s assets must consist of mortgage loans and other assets that are
considered the functional equivalent of mortgage loans for purposes of the
Investment Company Act, which we refer to as “qualifying real estate assets.”
Moreover, an additional 25% of RCC Real Estate’s assets must consist of
qualifying real estate assets and other real estate-related assets.
We
consider agency whole pool certificates to be qualifying real estate assets.
An
agency whole pool certificate is a certificate issued or guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae that represents the entire beneficial interest
in
the underlying pool of mortgage loans. An agency certificate that represents
less than the entire beneficial interest in the underlying mortgage loans is
not
considered to be a qualifying asset under the 55% test, but constitutes a real
estate-related asset for purposes of the 25% test.
We
generally do not expect that investments in non-agency RMBS, CMBS and B notes
will constitute real estate assets for the 55% test, unless we determine that
those investments are the “functional equivalent” of owning mortgage loans,
which will depend, among other things, on whether we have unilateral foreclosure
rights with respect to the underlying real estate collateral. Instead, these
investments generally will be classified as real estate-related assets for
purpose of the 25% test. We generally consider mezzanine loans to be real
estate-related assets for purposes of the 25% test, although we may treat some
or all of these assets as qualifying real estate assets for purposes of the
55%
test if the Securities and Exchange Commission or its staff express the view
that mezzanine loans do so qualify.
We
do not
expect that investments in CDOs, other ABS, syndicated bank loans, equipment
leases and notes, trust preferred securities and private equity will constitute
qualifying real estate assets. Moreover, to the extent that these investments
are not backed by mortgage loans or other interests in real estate, they will
not constitute real estate-related assets. Instead, they will constitute
miscellaneous assets, which can constitute nor more than 20% of RCC Real
Estate’s assets.
We
do not
expect that our other subsidiaries, RCC Commercial, Inc. and Resource TRS,
will
qualify for this exclusion. However, we do expect them to qualify for another
exclusion under Section 3(c)(7). Accordingly, as required by that exclusion,
we
will not allow either entity to make, or propose to make, a public offering
of
its securities, and we will require that each owner of securities issued by
those entities be a “qualified purchaser” so that those entities are not
investment companies subject to regulation under the Investment Company Act.
Moreover, we must ensure that Resource Capital Corp. itself qualifies for an
exclusion from regulation under the Investment Company Act. We will do so by
monitoring the value of our interests in our subsidiaries. At all times, we
must
ensure that no more than 40% of our assets, on an unconsolidated basis,
excluding government securities and cash, are “investment securities” as defined
in the Investment Company Act. Our interest in RCC Real Estate does not
constitute an “investment security” for these purposes, but our interests in RCC
Commercial and Resource TRS do constitute “investment securities.” Accordingly,
we must monitor the value of our interest in these two subsidiaries to ensure
that the value of our interests in them never exceeds 40% of the value of our
total assets on an unconsolidated basis. We will monitor the value of our
interest in Resource TRS for tax purposes as well; the applicable tax rules
require us to ensure that the total value of the stock and other securities
of
Resource TRS and any other TRS held directly or indirectly by us does not exceed
20% of the value of our total assets. These requirements may limit our
flexibility in acquiring assets in the future.
Employees
We
have
no direct employees. Under our management agreement, the Manager provides us
with all management and support personnel and services necessary for our
day-to-day operations. We are dependent upon the Manager and Resource America
for personnel and administrative infrastructure. To provide its services, the
Manager draws upon the expertise and experience of Resource America which,
as of
December 31, 2005, had 175 employees involved in asset management, including
61
asset management professionals and 114 asset management support
personnel.
Corporate
Governance and Internet Address
We
emphasize the importance of professional business conduct and ethics through
our
corporate governance initiatives. Our board of directors consists of a majority
of independent directors; the audit, compensation and nominating/corporate
governance committees of our board of directors are composed exclusively of
independent directors. We have adopted corporate governance guidelines and
a
code of business conduct and ethics, which delineate our standards for our
officers and directors, and employees of our manager.
Our
internet address is www.resourcecapitalcorp.com. We make available, free
of charge through a link on our site, all reports filed with the SEC as soon
as
reasonably practicable after such filing. Our site also contains our code of
business conduct and ethics, corporate governance guidelines and the charters
of
the audit committee, nominating and governance committee and compensation
committee of our board of directors.
This
section describes material risks affecting our business. In connection with
the
forward-looking statements that appear in this annual report, you should
carefully review the factors discussed below and the cautionary statements
referred to in “Forward-Looking Statements.”
Risks
Related to Our Business
We
have a limited operating history. We may not be able to operate our business
successfully or generate sufficient revenue to make distributions to our
stockholders.
We
are a
recently-organized REIT that has only a limited operating history. We are
subject to all of the business risks and uncertainties associated with any
new
business, including the risk that we will not be able to execute our investment
strategy or achieve our investment objectives and that the value of your
investment could decline substantially. Our ability to achieve returns for
our
stockholders depends on our ability both to generate sufficient cash flow to
pay
distributions and to achieve capital appreciation, and we cannot assure you
that
we will do either.
We
depend on the Manager and Resource America and may not find suitable
replacements if the management agreement terminates.
We
have
no employees. Our officers, portfolio managers, administrative personnel and
support personnel are employees of Resource America. We have no separate
facilities and completely rely on the Manager and, because the Manager has
no
direct employees, Resource America, which have significant discretion as to
the
implementation of our operating policies and investment strategies. If our
management agreement terminates, we may be unable to find a suitable replacement
for them. Moreover, we believe that our success depends to a significant extent
upon the experience of the Manager’s and Resource America’s executive officers
and senior portfolio managers and, in particular, Edward E. Cohen, Jonathan
Z.
Cohen, Steven J. Kessler, Jeffrey D. Blomstrom, Thomas C. Elliott, Christopher
D. Allen, Gretchen Bergstresser, David Bloom, Crit DeMent, Alan F. Feldman
and
Andrew P. Shook, whose continued service is not guaranteed. The
departure of any of the executive officers or senior portfolio managers could
harm our investment performance.
Termination
of our management agreement is an event of default under the repurchase
agreements financing our agency RMBS.
Under
our
repurchase agreements with Credit Suisse Securities (USA) LLC, which has
financed our purchase of agency RMBS and had an aggregate amount of outstanding
indebtedness of approximately $947.1 million as of December 31, 2005, it will
be
an event of default if the Manager ceases to be our manager. Such an event
of
default would cause a termination event, which would give Credit Suisse
Securities (USA) LLC, the option to terminate all repurchase transactions
existing with us and make any amount due by us to the institution payable
immediately. If the Manager terminates the management agreement and Credit
Suisse Securities (USA) LLC, terminates the repurchase agreement with us, we
may
be unable to find another counterparty for our repurchase agreements and, as
a
result, may be required to sell a substantial portion or all of our agency
RMBS.
Consequently, we may be unable to execute our business plan and may suffer
losses, impairing or eliminating our ability to make distributions to our
stockholders. Moreover, a sale of all or a substantial portion of our agency
RMBS might result in a loss of our exclusion from regulation under the
Investment Company Act.
The
Manager and Resource America have only limited prior experience managing a
REIT
and we cannot assure you that their past experience will be sufficient to
successfully manage our business.
The
federal income tax laws impose numerous constraints on the operations of REITs.
The executive officers of the Manager and Resource America have only limited
prior experience managing assets under these constraints, which may hinder
the
Manager’s ability to achieve our investment objectives.
We
must pay the Manager the base management fee regardless of the performance
of
our portfolio.
The
Manager is entitled to receive a monthly base management fee equal to 1/12
of
our equity, as defined in the management agreement, times 1.5%, regardless
of
the performance of our portfolio. The Manager’s entitlement to substantial
non-performance based compensation might reduce its incentive to devote its
time
and effort to seeking profitable opportunities for our portfolio. This, in
turn,
could hurt our ability to make distributions to our stockholders.
The
incentive fee we pay the Manager may induce it to make riskier
investments.
In
addition to its base management fee, the Manager will receive incentive
compensation, payable quarterly, equal to 25% of the amount by which our net
income, as defined in the management agreement, exceeds the weighted average
prices for our common stock in all of our offerings multiplied by the greater
of
2.00% or 0.50% plus one-fourth of the average 10-year treasury rate for such
quarter, multiplied by the weighted average number of common shares outstanding
during the quarter. In evaluating investments and other management strategies,
the opportunity to earn incentive compensation based on net income may lead
the
Manager to place undue emphasis on the maximization of net income at the expense
of other criteria, such as preservation of capital, in order to achieve higher
incentive compensation. Investments with higher yields generally have higher
risk of loss than investments with lower yields.
The
Manager manages our portfolio pursuant to very broad investment guidelines
and
our Board of Directors does not approve each investment decision, which may
result in our making riskier investments.
The
Manager manages our portfolio pursuant to very broad investment guidelines.
While our Board of Directors periodically review our investment guidelines
and
our investment portfolio, they do not review all of our proposed investments.
In
addition, in conducting periodic reviews, the Board of Directors may rely
primarily on information provided to them by the Manager. Furthermore, the
Manager may use complex strategies, and transactions entered into by the Manager
may be difficult or impossible to unwind by the time they are reviewed by the
Board of Directors. The Manager has great latitude within the broad investment
guidelines in determining the types of investments it makes for us. Poor
investment decisions could impair our ability to make distributions to our
stockholders.
We
may change our investment strategy without stockholder consent, which may result
in riskier investments than those currently targeted.
We
have
not adopted a policy as to the amounts to be invested in each of our intended
investments, including securities rated below investment grade. Subject to
maintaining our qualification as a REIT and our exclusion from regulation under
the Investment Company Act, we may change our investment strategy, including
the
percentage of assets that may be invested in each class, or in the case of
securities, in a single issuer, at any time without the consent of our
stockholders, which could result in our making investments that are different
from, and possibly riskier than, the investments described in this report.
A
change in our investment strategy may increase our exposure to interest rate
and
real estate market fluctuations, all of which may reduce the market price of
our
common stock and impair our ability to make distributions to you. Furthermore,
a
change in our asset allocation could result in our making investments in asset
categories different from those described in this report.
Our
management agreement was not negotiated at arm’s-length and, as a result, may
not be as favorable to us as if it had been negotiated with a third
party.
Our
officers and two of our directors, Edward E. Cohen and Jonathan Z. Cohen, are
officers or directors of the Manager and Resource America. As a consequence,
our
management agreement was not the result of arm’s-length negotiations and its
terms, including fees payable, may not be as favorable to us as if it had been
negotiated with an unaffiliated third party.
Termination
of the management agreement by us without cause is difficult and could be
costly.
Termination
of our management agreement without cause is difficult and costly. We may
terminate the management agreement without cause only annually following its
initial term upon the affirmative vote of at least two-thirds of our independent
directors or by a vote of the holders of at least a majority of our outstanding
common stock, based upon unsatisfactory performance by the Manager that is
materially detrimental to us or a determination that the management fee payable
to the Manager is not fair. Moreover, with respect to a determination that
the
management fee is not fair, the Manager may prevent termination by accepting
a
mutually acceptable reduction of management fees. We must give not less than
180
days’ prior notice of any termination. Upon any termination without cause, the
Manager will be paid a termination fee equal to four times the sum of the
average annual base management fee and the average annual incentive compensation
earned by it during the two 12-month periods immediately preceding the date
of
termination, calculated as of the end of the most recently completed fiscal
quarter before the date of termination.
The
Manager and Resource America may engage in activities that compete with
us.
Our
management agreement does not prohibit the Manager or Resource America from
investing in or managing entities that invest in asset classes that are the
same
as or similar to our targeted asset classes, except that they may not raise
funds for, sponsor or advise any new publicly-traded REIT that invests primarily
in domestic MBS in the United States. The Manager’s policies regarding
resolution of conflicts of interest may be varied by it if economic, market,
regulatory or other conditions make their application economically inefficient
or otherwise impractical. Moreover, our officers, other than our chief financial
officer, and the officers, directors and employees of Resource America who
provide services to us are not required to work full time on our affairs, and
anticipate devoting significant time to the affairs of Resource America.
As a result, there may be significant conflicts between us, on the one hand,
and
the Manager and Resource America on the other, regarding allocation of the
Manager’s and Resource America’s resources to the management of our investment
portfolio.
Our
Manager’s liability is limited under the management agreement, and we have
agreed to indemnify our Manager against certain
liabilities.
Our
Manager will not assume any responsibility under the management agreement other
than to render the services called for under it, and will not be responsible
for
any action of our board of directors in following or declining to follow its
advice or recommendations. Resource America, the Manager, their directors,
managers, officers, employees and affiliates will not be liable to us, any
subsidiary of ours, our directors, our stockholders or any subsidiary’s
stockholders for acts performed in accordance with and pursuant to the
management agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of their duties under the
management agreement. We have agreed to indemnify the parties for all damages
and claims arising from acts not constituting bad faith, willful misconduct,
gross negligence, or reckless disregard of duties, performed in good faith
in
accordance with and pursuant to the management agreement.
Our
investment portfolio is heavily concentrated in agency RMBS and we cannot assure
you that we will be successful in achieving a more diversified
portfolio.
As
of
December 31, 2005, 50.5% of our investment portfolio, based on the vair value
of
our assets, consisted of agency RMBS. One of our key strategies in
accomplishing our business objectives is to seek a diversified investment
portfolio. We may not be successful in diversifying our investment portfolio
and, even if we are successful in diversifying our investment portfolio, it
is
likely that up to 30% of our fully-leveraged assets will be agency RMBS. If
we
are unable to achieve a more diversified portfolio, we will be particularly
exposed to the investment risks that relate to investments in agency RMBS and
we
may suffer losses if investments in agency RMBS decline in value.
We
leverage our portfolio, which may reduce the return on our investments and
cash
available for distribution.
We
currently leverage our portfolio through repurchase agreements, warehouse
facilities and CDOs. In addition, we expect to use additional forms of financing
when appropriate. We are not limited in the amount of leverage we may use.
As of
December 31, 2005, our outstanding indebtedness was $1.8 billion and our
leverage ratio was 9.4 times. The amount of leverage we use will vary depending
on the availability of credit facilities, our ability to structure and market
CDOs and other securitizations, the asset classes we leverage and the cash
flows
from the assets being financed. Our use of leverage subjects us to risks
associated with debt financing, including the risk that:
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the
cash provided by our operating activities will not be sufficient
to meet
required payments of principal and
interest;
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the
cost of financing will increase relative to the income from the assets
financed, reducing the income we have available to pay distributions;
and
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our
investments may have maturities that differ from the maturities of
the
related financing and, consequently, the risk that the terms of any
refinancing we obtain will not be as favorable as the terms of existing
financing. If we are unable to secure refinancing on acceptable terms,
we
may be forced to dispose of some of our assets at disadvantageous
terms or
to obtain financing at unfavorable terms, either of which may result
in
losses to us or reduce the cash flow available to meet our debt service
obligations or to pay
distributions.
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Financing
that we obtain, and particularly securitization financing such as CDOs, may
require us to maintain a specified ratio of the amount of the financing to
the
value of the assets financed. A decrease in the value of these assets may lead
to margin calls or calls for the pledge of additional assets which we will
have
to satisfy. We may not have sufficient funds or unpledged assets to satisfy
any
such calls.
Growth
in our business operations may strain the infrastructure of the Manager and
Resource America, which could increase our costs, reduce our profitability
and
reduce our cash available for distribution and our stock price. Failure to
grow
may harm our ability to achieve our investment
objectives.
Our
ability to achieve our investment objectives depends on our ability to grow,
which will depend on the ability of the Manager to identify and invest in
securities that meet our investment criteria and to obtain financing on
acceptable terms. Our ability to grow also depends upon the ability of the
Manager and Resource America to successfully hire, train, supervise and manage
any personnel needed to discharge their duties to us under our management
agreement. Our business operations may strain Resource’s management
infrastructure, which could increase our costs, reduce our profitability and
reduce either or both of the distributions we can pay or the price at which
our
common stock trades.
We
operate in a highly competitive market for investment opportunities, which
may
result in higher prices, lower yields and a narrower net interest spread for
our
investments, and may inhibit the growth or delay the diversification of our
portfolio.
A
number
of entities compete with us to make the types of investments that we seek to
make. We will compete with other REITs, public and private investment funds,
commercial and investment banks, commercial finance companies and other
debt-oriented investors. Many of our competitors are substantially larger and
have considerably greater financial, technical and marketing resources than
we
do. Other REITs have recently raised, or are expected to raise, significant
amounts of capital, and may have investment objectives substantially similar
to
ours. Some of our competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments,
which
could allow them to consider a wider variety of investments or establish more
relationships than us. As a result of this competition, we may not be able
to
take advantage of attractive investment opportunities from time to time or
be
able to identify and make investments that are consistent with our investment
objectives. Competition for desirable investments may result in higher prices,
lower yields and a narrower net interest spread, and may delay or impair our
ability to execute our investment strategies or acquire assets in our targeted
asset classes. If competition has these effects, our earnings and ability to
pay
distributions could be reduced.
Failure
to procure adequate capital and funding may decrease our profitability and
our
ability to make distributions, reducing the market price of our common
stock.
We
depend
upon the availability of adequate financing and capital for our operations.
As a
REIT, we must distribute annually at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid and excluding
net
capital gain, to our stockholders and are therefore not able to retain
significant amounts of our earnings for new investments. Moreover, although
Resource TRS, our taxable REIT subsidiary, or TRS, may retain earnings as new
capital, we are subject to REIT qualification requirements which limit the
relative value of TRS stock and securities to the other assets owned by a REIT.
Consequently, we will depend upon the availability of financing and additional
capital to execute our investment strategy. If sufficient financing or capital
is not available to us on acceptable terms, we may not be able to achieve
anticipated levels of profitability either due to the lack of funding or an
increase in funding costs and our ability to make distributions and the price
of
our common stock may decline.
We
finance our investments in significant part through CDOs in which we retain
the
equity. CDO equity receives distributions from the CDO only if the CDO generates
enough income to first pay the holders of its debt securities and its
expenses.
We
finance our non-agency RMBS, CMBS and commercial finance assets through CDOs
in
which we will retain the equity interest. A CDO is a special purpose vehicle
that purchases collateral that is expected to generate a stream of interest
or
other income. The CDO issues various classes of securities that participate
in
that income stream, typically one or more classes of debt instruments and a
class of equity securities. The equity interests are subordinate in right of
payment to all other securities issued by the CDO. The equity is usually
entitled to all of the income generated by the CDO after the CDO pays all of
the
interest due on the debt securities and other expenses. However, there will
be
little or no income available to the CDO equity if there are excessive defaults
by the issuers of the underlying collateral. In that event, the value of our
investment in the CDO’s equity could decrease substantially. In addition, the
equity securities of CDOs are generally illiquid, and because they
represent a leveraged investment in the CDO’s assets, the value of the equity
securities will generally have greater fluctuations than the value of the
underlying collateral.
The
use of CDO financings with over-collateralization requirements may reduce our
cash flow.
The
terms
of CDOs we use to finance our portfolio typically require the principal amount
of the assets forming the collateral pool to exceed the principal balance of
the
CDOs, commonly referred to as “over-collateralization.” Typically, in a CDO if
the delinquencies or losses exceed specified levels, which are generally
established based on the analysis by the, rating agencies or a financial
guaranty insurer of the characteristics of the assets collateralizing the CDOs
debt obligations, the amount of over-collateralization required increases or
may
be prevented from decreasing from what would otherwise be permitted if losses
or
delinquencies did not exceed those levels. Other tests, based on delinquency
levels or other criteria, may restrict our ability to receive net income from
assets collateralizing the obligations. Before structuring any CDO issuances,
we
will not know the actual terms of the delinquency tests, over-collateralization
terms, cash flow release mechanisms or other significant terms. If our assets
fail to perform as anticipated, we may be unable to comply with these terms,
which would reduce or eliminate our cash flow from our CDO financings and,
as a
result, our net income and ability to make distributions.
Declines
in the market values of our investments may reduce periodic reported results,
credit availability and our ability to make
distributions.
We
classify a substantial portion of our assets for accounting purposes as
“available-for-sale.” As a result, changes in the market values of those assets
are directly charged or credited to stockholders’ equity. A decline in these
values will reduce the book value of our assets. Moreover, if the decline in
value of an available-for-sale asset is other than temporary, such decline
will
reduce earnings.
A
decline
in the market value of our assets may also adversely affect us in instances
where we have borrowed money based on the market value of those assets. If
the
market value of those assets declines, the lender may require us to post
additional collateral to support the loan. If we were unable to post the
additional collateral, we could have to sell the assets under adverse market
conditions. As a result, a reduction in credit availability may reduce our
earnings and, in turn, cash available to make distributions.
Loss
of our exclusion from regulation under the Investment Company Act would require
significant changes in our operations and could reduce the market price of
our
common stock and our ability to make distributions.
In
order
to be excluded from regulation under the Investment Company Act, we must comply
with the requirements of one or more of the exclusions from the definition
of
investment company. Because we conduct our business through wholly-owned
subsidiaries, we must ensure not only that we qualify for an exclusion from
regulation under the Investment Company Act, but also that each of our
subsidiaries so qualifies. If we fail to qualify for an exclusion, we could
be
required to restructure our activities or register as an investment company.
Either alternative would require significant changes in our operations and
could
reduce the market price of our common stock. For example, if the market value
of
our investments in assets other than real estate or real estate-related assets
were to increase beyond the levels permitted under the Investment Company Act
exclusion, we might have to sell those assets in order to maintain our
exclusion. The sale could occur under adverse market conditions. If we were
required to register as an investment company, our use of leverage to fund
our
investment strategies would be significantly limited, which would limit our
profitability and ability to make distributions, and we would become subject
to
substantial regulation concerning management, operations, transactions with
affiliated persons, portfolio composition, including restrictions with respect
to diversification and industry concentration, and other matters.
Rapid
changes in the values of our RMBS, CMBS or other real-estate related investments
may make it more difficult for us to maintain our qualification as a REIT or
exclusion from regulation under the Investment Company
Act.
If
the
market value or income potential of our RMBS, CMBS or other real estate-related
investments declines as a result of increased interest rates, prepayment rates
or other factors, we may need to increase our
real
estate-related investments and income and/or liquidate our non-qualifying assets
in order to maintain our REIT qualification or exclusion from the Investment
Company Act. If the decline in real estate asset values and/or income occurs
quickly, this may be especially difficult to accomplish. This difficulty may
be
exacerbated by the illiquid nature of many of our non-real estate assets. We
may
have to make investment decisions that we otherwise would not make absent REIT
qualification and Investment Company Act considerations.
We
are highly dependent on information systems. Systems failures could
significantly disrupt our business.
Our
business is highly dependent on communications and information systems. Any
failure or interruption of our systems or those of the Manager could cause
delays or other problems in our securities trading activities which could harm
our operating results, cause the market price of our common stock to decline
and
reduce our ability to make distributions.
If
we issue senior securities, their terms may restrict our ability to make cash
distributions, require us to obtain approval to sell our assets or otherwise
restrict our operations in ways which could make it difficult to execute our
investment strategy and achieve our investment
objectives.
If
we
issue senior securities, they will likely be governed by an indenture or other
instrument containing covenants restricting our operating flexibility. Holders
of senior securities may be granted the right to hold a perfected security
interest in certain of our assets, to accelerate payments due under the
indenture, to restrict distributions, and to require approval to sell assets.
These covenants could make it more difficult to execute our investment strategy
and achieve our investment objectives. Additionally, any convertible or
exchangeable securities that we issue may have rights, preferences and
privileges more favorable than those of our common stock. We, and indirectly
our
stockholders, will bear the cost of issuing and servicing such
securities.
Terrorist
attacks and other acts of violence or war may affect the market for our common
stock, the industry in which we conduct our operations and our
profitability.
Terrorist
attacks may harm our results of operations and your investment. We cannot assure
you that there will not be further terrorist attacks against the United States
or U.S. businesses. These attacks or armed conflicts may directly impact the
property underlying our ABS securities or the securities markets in general.
Losses resulting from these types of events are uninsurable.
More
generally, any of these events could cause consumer confidence and spending
to
decrease or result in increased volatility in the United States and worldwide
financial markets and economy. Adverse economic conditions could harm the value
of the property underlying our ABS or the securities markets in general which
could harm our operating results and revenues and may result in the volatility
of the value of our securities.
Risks
Related to Our Investments
Increases
in interest rates and other factors could reduce the value of our investments,
result in reduced earnings or losses and reduce our ability to pay
distributions.
A
significant risk associated with our investment in RMBS, CMBS and other debt
instruments is the risk that either or both long-term and short-term interest
rates increase significantly. If long-term rates increase, the market value
of
our assets would decline. Even if the mortgages underlying the RMBS we own
are
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, those guarantees do not
protect against declines in market value of the related RMBS caused by interest
rate changes. At the same time, because of the short-term nature of the
financing we expect to use to acquire our investments and to hold RMBS, an
increase in short-term interest rates would increase our interest expense,
reducing our net interest spread. This could result in reduced profitability
and
distributions.
We
remain subject to losses on our mortgage portfolio despite our strategy of
investing in highly-rated RMBS.
At
December 31, 2005, approximately 98% of our RMBS were, and we anticipate that
substantially all of our RMBS will be, either agency-backed or rated investment
grade by at least one rating agency. While highly-rated RMBS are generally
subject to a lower risk of default than lower credit quality RMBS and may
benefit from third-party credit enhancements such as insurance or corporate
guarantees, there is no assurance that the RMBS will not be subject to credit
losses. Furthermore, ratings are subject to change over time as a result of
a
number of factors, including greater than expected delinquencies, defaults
or
credit losses, or a deterioration in the financial strength of corporate
guarantors, any of which may reduce the market value of such securities.
Furthermore, ratings do not take into account the reasonableness of the issue
price, interest rate risk, prepayment risk, extension risk or other risks
associated with the RMBS. As a result, while we attempt to mitigate our exposure
to credit risk in our real estate-related portfolio on a relative basis by
focusing on highly-rated RMBS, we cannot completely eliminate credit risk and
remain subject to other risks to our investment portfolio that could cause
us to
suffer losses, which may harm the market price of our common stock.
We
invest in RMBS backed by sub-prime residential mortgage loans which are subject
to higher delinquency, foreclosure and loss rates than mid-prime or prime
residential mortgage loans, which could result in losses to
us.
Sub-prime
residential mortgage loans are made to borrowers who have poor or limited credit
histories and, as a result, do not qualify for traditional mortgage products.
Because of their credit histories, sub-prime borrowers have materially higher
rates of delinquency, foreclosure and loss compared to mid-prime and prime
credit quality borrowers. As a result, investments in RMBS backed by sub-prime
residential mortgage loans may have higher risk of loss than investments in
RMBS
backed by mid-prime and prime residential mortgage loans.
Investing
in mezzanine debt and mezzanine or other subordinated tranches of CMBS,
syndicated bank loans and other ABS involves greater risks of loss than senior
secured debt investments.
Subject
to maintaining our qualification as a REIT, we invest in mezzanine debt and
expect to invest in mezzanine or other subordinated tranches of CMBS, syndicated
bank loans and other ABS. These types of investments carry a higher degree
of
risk of loss than senior secured debt investments such as our RMBS investments
because, in the event of default and foreclosure, holders of senior liens will
be paid in full before mezzanine investors and, depending on the value of the
underlying collateral, there may not be sufficient assets to pay all or any
part
of amounts owed to mezzanine investors. Moreover, our mezzanine and other
subordinate debt investments may have higher loan to value ratios than
conventional senior lien financing, resulting in less equity in the collateral
and increasing the risk of loss of principal. If a borrower defaults or declares
bankruptcy, we may be subject to agreements restricting or eliminating our
rights as a creditor, including rights to call a default, foreclose on
collateral, accelerate maturity or control decisions made in bankruptcy
proceedings. In addition, the prices of lower credit quality securities are
generally less sensitive to interest rate changes than more highly rated
investments, but more sensitive to economic downturns or individual issuer
developments. An economic downturn, for example, could cause a decline in the
price of lower credit quality securities because the ability of obligors of
instruments underlying the securities to make principal and interest payments
may be impaired. In such event, existing credit support relating to the
securities’ structure may not be sufficient to protect us against loss of our
principal.
The
B notes in which we invest may be subject to additional risks relating to the
privately negotiated structure and terms of the transaction, which may result
in
losses to us.
A
B note
is a mortgage loan typically secured by a first mortgage on a single large
commercial property or group of related properties and subordinated to a senior
note secured by the same first mortgage on the same collateral. As a result,
if
a borrower defaults, there may not be sufficient funds remaining for B note
owners after payment to the senior note owners. B notes reflect similar credit
risks to comparably rated CMBS. However, since each transaction is privately
negotiated, B notes can vary in their structural characteristics and risks.
For
example, the rights of holders of B notes to control the process following
a
borrower default may be limited in certain investments. We cannot predict the
terms of each B note investment
we will make. Further, B notes typically are secured by a single property,
and
so reflect the increased risks associated with a single property compared to
a
pool of properties. B notes also are less liquid than CMBS, thus we may be
unable to dispose of underperforming or non-performing investments. The higher
risks associated with our subordinate position in our B note investments could
subject us to increased risk of losses.
Our
assets likely will include trust preferred securities of financial institutions,
or CDOs collateralized by these securities, which may have greater risks of
loss
than senior secured loans.
Subject
to maintaining our qualification as a REIT, we expect that we will invest in
the
trust preferred securities of financial institutions or CDOs collateralized
by
these securities. Investing in these securities involves a higher degree of
risk
than investing in senior secured loans, including the following:
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Trust
preferred securities, which are issued by a special purpose trust,
typically are collateralized by a junior subordinated debenture of
the
financial institution and that institution’s guarantee, and thus are
subordinate and junior in right of payment to most of the financial
institution’s other debt.
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Trust
preferred securities often will permit the financial institution
to defer
interest payments on its junior subordinated debenture, deferring
dividend
payments by the trust on the trust preferred securities, for specified
periods.
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If
trust preferred securities are collateralized by junior subordinated
debentures issued by the financial institution’s holding company, dividend
payments may be affected by regulatory limitations on the amount
of
dividends, other distributions or loans a financial institution can
make
to its holding company, which typically are the holding company’s
principal sources of funds for meeting its obligations, including
its
obligations under the junior subordinated
debentures.
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As
a
result, a holder of trust preferred securities may be limited in its ability
both to enforce its payment rights and to recover its investment upon default.
Moreover, any deferral of dividends on the trust preferred securities in which
we may invest will reduce the funds available to us to make distributions which,
in turn, could reduce the market price of our common stock.
We
may invest in small- and middle-ticket equipment leases and notes which may
have
greater risks of default than senior secured loans.
Subject
to maintaining our qualification as a REIT, we invest in small- and
middle-ticket equipment leases and notes. Many of the obligors are small-
to
mid-size businesses. As a result, we may be subject to higher risks of lease
default than if our obligors were larger businesses. While we will seek to
repossess and re-lease or sell the equipment subject to a defaulted lease
or
note, we may not be able to do so on advantageous terms. If an obligor files
for
protection under the bankruptcy laws, we may experience difficulties and
delays
in recovering the equipment. Moreover, the equipment may be returned in poor
condition and we may be unable to enforce important lease provisions against
an
insolvent obligor, including the contract provisions that require the obligor
to
return the equipment in good condition. In some cases, an obligor’s
deteriorating financial condition may make trying to recover what the obligor
owes impractical. The costs of recovering equipment upon an obligor’s default,
enforcing the obligor’s obligations under the lease or note, and transporting,
storing, repairing and finding a new obligor or purchaser for the equipment
may
be high. Higher than expected defaults will result in a loss of anticipated
revenues. These losses may impair our ability to make distributions and reduce
the market price of our common stock.
Private
equity investments involve a greater risk of loss than traditional debt
financing.
Private equity
investments are subordinate to debt financing and are not secured. Should the
issuer default on our investment, we would only be able to proceed against
the
entity that issued the private equity in accordance with the terms of
the private security, and not any property owned by the entity.
Furthermore, in the event of bankruptcy or foreclosure, we would only be able
to
recoup our investment after any lenders to the entity are paid. As a result,
we
may not recover some or all of our investment, which could result in
losses.
Some
of our portfolio investments will be recorded at fair value as estimated by
our
management and reviewed by our board of directors and, as a result, there will
be uncertainty as to the value of these investments.
Some
of
our portfolio investments will be in the form of securities that are not
publicly traded, including the securities of Resource TRS. The fair value of
securities and other investments that are not publicly traded may not be readily
determinable. We will value these investments quarterly at fair value as
determined under policies approved by our board of directors. Because such
valuations are inherently uncertain, may fluctuate over short periods of time
and may be based on estimates, our determinations of fair value may differ
materially from the values that would have been used if a ready market for
these
securities existed. The value of our common stock would likely decrease if
our
determinations regarding the fair value of these investments were materially
higher than the values that we ultimately realize upon their
disposal.
Some
of our investments may be illiquid, which may result in our realizing less
than
their recorded value should we need to sell such investments
quickly.
We
have
made investments, and expect to make additional investments, in securities
that
are not publicly traded. A portion of these securities may be subject to legal
and other restrictions on resale or will otherwise be less liquid than publicly
traded securities. If we are required to liquidate all or a portion of our
portfolio quickly, we may realize significantly less than the value at which
we
have previously recorded our investments. In addition, we may face other
restrictions on our ability to liquidate an investment in a business entity
to
the extent that we, the Manager or Resource America has or could be attributed
with material non-public information regarding such business
entity.
We
enter into warehouse agreements in connection with our planned investment in
the
equity securities of CDOs and if the investment in the CDO is not consummated,
the warehoused collateral will be sold and we must bear any loss resulting
from
the purchase price of the collateral exceeding the sale
price.
In
connection with our investment in CDOs that the Manager structures for us,
we
enter into warehouse agreements with investment banks or other financial
institutions, pursuant to which the institutions initially finance the purchase
of the collateral that will be transferred to the CDOs. The Manager selects
the
collateral. If the CDO transaction is not consummated, the institution would
liquidate the warehoused collateral and we would have to pay any amount by
which
the original purchase price of the collateral exceeds its sale price, subject
to
negotiated caps, if any, on our exposure. In addition, regardless of whether
the
CDO transaction is consummated, if any of the warehoused collateral is sold
before the consummation, we will have to bear any resulting loss on the sale.
The amount at risk in connection with the warehouse agreements supporting our
CDO investments generally is the amount that we have agreed to invest in the
equity securities of the CDO.
We
may not be able to acquire eligible securities for a CDO issuance, or may not
be
able to issue CDO securities on attractive terms, which may require us to seek
more costly financing for our investments or to liquidate
assets.
We
intend
to use CDOs to provide long-term financing for a significant portion of the
assets we acquire. During the period that we are acquiring these assets,
however, we intend to finance our purchases through warehouse facilities until
we accumulate a sufficient quantity to permit a CDO issuance. The warehouse
facility is typically with a bank or other financial institution that will
be
the lead manager of the CDO issuance. We direct the warehouse provider to
purchase the securities and contribute cash and other collateral which the
warehouse provider holds in escrow as security for our commitment to purchase
equity in the CDO and to cover our share of losses should securities need to
be
liquidated. As a result, during the accumulation period, we are subject to
the
risk that we will not be able to acquire a sufficient amount of eligible assets
to maximize the efficiency of a CDO issuance. In addition, conditions in the
capital markets may make the issuance of CDOs less attractive to us when we
do
have a sufficient pool of collateral. If we are unable to issue a CDO to finance
these assets, we may have to seek other forms of potentially less attractive
financing or otherwise to liquidate the assets at a price that could result
in a
loss of all or a portion of the cash and other collateral backing our purchase
commitment.
We
may have to repurchase assets that we have sold in connection with CDOs and
other securitizations.
If
any of
the assets that we originate or acquire and sell or securitize does not comply
with representations and warranties that we make about their characteristics,
the borrowers and the underlying assets, we may have to purchase these assets
from the CDO or securitization vehicle, or replace them with substitute loans
or
securities. In addition, in the case of loans or securities that we have sold
instead of retained, we may have to indemnify purchasers for losses or expenses
incurred as a result of a breach of a representation or warranty. Any
significant repurchases or indemnification payments could materially reduce
our
liquidity, earnings and ability to make distributions.
An
increase in our borrowing costs relative to the interest we receive on our
assets may impair our profitability, and thus our cash available for
distribution to our stockholders.
As
our
repurchase agreements and other short-term borrowings mature, we will be
required either to enter into new borrowings or to sell certain of our
investments at times when we might otherwise not choose to do so. At December
31, 2005, our repurchase agreements had a weighted average maturity of 17 days
and our warehouse facility had a weighted average maturity of 90 days. An
increase in short-term interest rates at the time that we seek to enter into
new
borrowings would reduce the spread between the income on our assets and the
cost
of our borrowings, which would reduce earnings and, in turn, cash available
for
distribution to our stockholders.
Termination
events contained in our repurchase agreements increase the possibility that
we
will be unable to maintain adequate capital and funding and may reduce cash
available for distribution.
As
of
December 31, 2005 we had outstanding $1.1 billion of repurchase agreements,
representing 58% of our total debt. The occurrence of an event of default under
our repurchase agreements may cause transactions to be terminated early. Events
of default include failure to complete an agreed upon repurchase transaction,
failure to comply with margin and margin repayment requirements, the
commencement by us of a bankruptcy, insolvency or similar proceeding or filing
of a petition against us under bankruptcy, insolvency or similar laws, or
admission of an inability to, or intention not to, perform a party’s obligation
under the agreement. Our repurchase agreement with Credit Suisse Securities
(USA) LLC, which held $947.1 million of our repurchase agreements at December
31, 2005, includes provisions that establish termination events if:
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we
incur a net asset value decline of 20% on a monthly basis, 30% on
a
quarterly basis, 40% on an annual basis, or 50% or more from the
highest
net asset value since the inception of the repurchase
agreement;
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we
fail to maintain a minimum net asset value of $100 million;
or
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the
Manager ceases to be our manager.
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The
occurrence of an event of default or termination event would give our
counterparty the option to terminate all repurchase transactions existing with
us and make any amount due by us to the counterparty payable immediately. If
we
are required to terminate outstanding repurchase transactions and are unable
to
negotiate more favorable funding terms, our financing costs will increase.
This
may reduce the amount of capital we have available to invest and/or may impair
our ability to make distributions. In addition, we may have to sell assets
at a
time when we might not otherwise choose to do so.
A
prolonged economic slowdown, recession or decline in real estate values could
impair our investments and harm our operating
results.
Many
of
our investments may be susceptible to economic slowdowns or recessions, which
could lead to financial losses on our investments and a decrease in revenues,
net income and assets. Unfavorable economic conditions also could increase
our
funding costs, limit our access to the capital markets or result in a decision
by lenders not to extend credit to us. These events could prevent us from
increasing investments and reduce or eliminate our earnings and ability to
make
distributions.
We
may be exposed to environmental liabilities with respect to properties to which
we take title.
In
the
course of our business, we may take title to real estate through foreclosure
on
collateral underlying real estate securities. If we do take title to any
property, we could be subject to environmental liabilities with respect to
it.
In such a circumstance, we may be held liable to a governmental entity or to
third parties for property damage, personal injury, investigation, and clean-up
costs they incur as a result of environmental contamination, or may have to
investigate or clean up hazardous or toxic substances, or chemical releases
at a
property. The costs associated with investigation or remediation activities
could be substantial and could reduce our income and ability to make
distributions.
We
will lose money on our repurchase transactions if the counterparty to the
transaction defaults on its obligation to resell the underlying security back
to
us at the end of the transaction term, or if the value of the underlying
security has declined as of the end of the term or if we default on our
obligations under the repurchase agreement.
When
we
engage in a repurchase transaction, we generally sell securities to the
transaction counterparty and receive cash from the counterparty. The
counterparty must resell the securities back to us at the end of the term of
the
transaction, which is typically 30-90 days. Because the cash we receive from
the
counterparty when we initially sell the securities to the counterparty is less
than the market value of those securities, typically about 97% of that value,
if
the counterparty defaults on its obligation to resell the securities back to
us
we will incur a loss on the transaction. We will also incur a loss if the value
of the underlying securities has declined as of the end of the transaction
term,
as we will have to repurchase the securities for their initial value but would
receive securities worth less than that amount. Any losses we incur on our
repurchase transactions could reduce our earnings, and thus our cash available
for distribution to our stockholders.
If
we
default on one of our obligations under a repurchase transaction, the
counterparty can terminate the transaction and cease entering into any other
repurchase transactions with us. In that case, we would likely need to establish
a replacement repurchase facility with another repurchase dealer in order to
continue to leverage our portfolio and carry out our investment strategy. There
is no assurance we would be able to establish a suitable replacement
facility.
Our
hedging transactions may not completely insulate us from interest rate risk
and
may result in poorer overall investment performance than if we had not engaged
in any hedging transactions.
Subject
to maintaining our qualification as a REIT, we may pursue various hedging
strategies to seek to reduce our exposure to losses from adverse changes in
interest rates. Our interest rate hedging activity will vary in scope depending
upon market conditions relating to, among other factors, the level and
volatility of interest rates and the type of assets we hold. There are practical
limitations on our ability to insulate our portfolio from all of the negative
consequences associated with changes in short-term interest rates,
including:
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Available
interest rate hedges may not correspond directly with the interest
rate
risk against which we seek
protection.
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The
duration of the hedge may not match the duration of the related
liability.
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Interest
rate hedging can be expensive, particularly during periods of rising
and
volatile interest rates. Hedging costs may include structuring and
legal
fees and fees payable to hedge counterparties to execute the hedge
transaction.
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Losses
on a hedge position may reduce the cash available to make distributions
to
stockholders, and may exceed the amounts invested in the hedge
position.
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The
amount of income that a REIT may earn from hedging transactions,
other
than through a TRS, is limited by federal tax provisions governing
REITs.
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The
credit quality of the party owing money on the hedge may be downgraded
to
such an extent that it impairs our ability to sell or assign our
side of
the hedging transaction.
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The
party owing money in the hedging transaction may default on its obligation
to pay.
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We
have
adopted written policies and procedures governing our hedging activities. Under
these policies and procedures, our board of directors is responsible for
approving the types of hedging instruments we may use, absolute limits on the
notional amount and term of a hedging instrument and parameters for the
credit-worthiness of hedge counterparties. The senior managers responsible
for
each of our targeted asset classes are responsible for executing transactions
using the services of independent interest rate risk management consultants,
documenting the transactions, monitoring the valuation and effectiveness of
the
hedges, and providing reports concerning our hedging activities and the
valuation and effectiveness of our hedges, to the audit committee of our board
of directors no less often than quarterly. Our guidelines also require us to
engage one or more experienced third party advisors to provide us with
assistance in the identification of interest rate risks, the analysis, selection
and timing of risk protection strategies, the administration and negotiation
of
hedge documentation, settlement or disposition of hedges, compliance with hedge
accounting requirements and measurement of hedge effectiveness and
valuation.
Hedging
against a decline in the values of our portfolio positions does not eliminate
the possibility of fluctuations in the values of the positions or prevent losses
if the values of the positions decline. Hedging transactions may also limit
the
opportunity for gain if the values of the portfolio positions should increase.
Moreover, we may not be able to hedge against an interest rate fluctuation
that
is generally anticipated by the market.
The
success of our hedging transactions will depend on the Manager’s ability to
correctly predict movements of interest rates. Therefore, unanticipated changes
in interest rates may result in poorer overall investment performance than
if we
had not engaged in any such hedging transactions. In addition, the degree of
correlation between price movements of the instruments used in a hedging
strategy and price movements in the portfolio positions being hedged may vary.
Moreover, for a variety of reasons, we may not seek to establish a perfect
correlation between such hedging instruments and the portfolio holdings being
hedged. Any such imperfect correlation may prevent us from achieving the
intended hedge and expose us to risk of loss.
Hedging
instruments often are not traded on regulated exchanges, guaranteed by an
exchange or its clearing house, or regulated by any U.S. or foreign governmental
authorities and involve risks of default by the hedging counterparty and
illiquidity.
Subject
to maintaining our qualification as a REIT, we expect to use puts and calls
on
securities or indices of securities, interest rate swaps, caps and collars,
including options and forward contracts, and interest rate lock agreements,
principally Treasury lock agreements, to seek to hedge against mismatches
between the cash flows from our assets and the interest payments on our
liabilities. Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no requirements with
respect to record keeping, financial responsibility or segregation of customer
funds and positions. Furthermore, the enforceability of agreements underlying
derivative transactions may depend on compliance with applicable statutory
and
commodity and other regulatory requirements and, depending on the identity
of
the counterparty, applicable international requirements. The business failure
of
a counterparty with whom we enter into a hedging transaction will most likely
result in a default. Default by a party with whom we entered into a hedging
transaction may result in the loss of unrealized profits and force us to cover
our resale commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our hedging positions,
we may not always be able to dispose of or close out a hedging position without
the consent of the hedging counterparty, and we may not be able to enter into
an
offsetting contract in order to cover our risk. A liquid secondary market may
not exist for hedging instruments purchased or sold, and we may have to maintain
a position until exercise or expiration, which could result in
losses.
We
may enter into hedging instruments that could expose us to unexpected losses
in
the future.
We
may
enter into hedging instruments that require us to fund cash payments in the
future under certain circumstances, for example, upon the early termination
of
the instrument caused by an event of default or other early termination event,
or the decision by a counterparty to request margin securities it is
contractually owed under the terms of the instrument. The amount due would
be
equal to the unrealized loss of the open positions with the counterparty and
could also include other fees and charges. These losses will be reflected in
our
financial results of operations, and our ability to fund these obligations
will
depend on the liquidity of our assets and access to capital at the time, and
the
need to fund these obligations could adversely impact our financial
condition.
Increased
levels of prepayments on our MBS might decrease our net interest income or
result in a net loss.
Pools
of
mortgage loans underlie the MBS that we acquire. The payments we receive on
our
MBS are derived from the payments by these underlying mortgage loans. When
we
acquire MBS, we anticipate that the underlying mortgages will prepay at a
projected rate generating an expected yield. When borrowers prepay their
mortgage loans faster than expected, this results in corresponding prepayments
on the mortgage-related securities and may reduce the expected yield. Prepayment
rates generally increase when interest rates fall and decrease when interest
rates rise, but changes in prepayment rates are difficult to predict. Prepayment
rates also may be affected by other factors, including conditions in the housing
and financial markets, general economic conditions and the relative interest
rates on adjustable-rate and fixed-rate mortgage loans. No strategy can
completely insulate us from prepayment or other such risks. As a result, in
periods of declining rates, owners of MBS may have more money to reinvest than
anticipated and be required to invest it at the lower prevailing market rates.
Conversely, in periods of rising rates, owners of MBS may have less money to
invest than anticipated at the higher prevailing rates. This volatility in
prepayment rates also may affect our ability to maintain targeted amounts of
leverage on our MBS portfolio and may result in reduced earnings or losses
for
us and reduce or eliminate cash available for distribution.
The
obligations underlying our RMBS, CMBS and B notes will be subject to
delinquency, foreclosure and loss, which could result in losses to
us.
The
RMBS,
CMBS and B notes in which we invest will be secured by underlying mortgage
loan
obligations. Accordingly, our investments in our portfolio will be subject
to
all of the risks of the underlying obligations.
Residential
mortgage loans are secured by single-family residential property and are subject
to risks of delinquency and foreclosure, and risks of loss. The ability of
a
borrower to repay these loans is dependent upon the borrower’s income or assets.
A number of factors, including a national, regional or local economic downturn,
acts of God, terrorism, social unrest and civil disturbances, may impair
borrowers’ abilities to repay their loans. Economic problems specific to a
borrower, such as loss of a job or medical problems, may also impair a
borrower’s ability to repay his or her loan.
Commercial
mortgage loans are secured by multifamily or commercial property and are subject
to risks of delinquency and foreclosure, and risks of loss, that are greater
than similar risks associated with loans made on the security of single-family
residential property. The ability of a borrower to repay a loan secured by
an
income-producing property typically depends primarily upon the successful
operation of the property rather than upon the existence of independent income
or assets of the borrower. If the net operating income of the property is
reduced, the borrower’s ability to repay the loan may be impaired. Net operating
income of an income producing property can be affected by, among other
things:
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tenant
mix, success of tenant businesses and property management decisions,
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property
location and condition,
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competition
from comparable types of properties,
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changes
in laws that increase operating expense or limit rents that may be
charged,
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any
need to address environmental contamination at the property,
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the
occurrence of any uninsured casualty at the property,
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changes
in national, regional or local economic conditions and/or specific
industry segments,
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declines
in regional or local real estate values,
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declines
in regional or local rental or occupancy rates,
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increases
in interest rates, real estate tax rates and other operating expenses,
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changes
in governmental rules, regulations and fiscal policies, including
environmental legislation, and
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acts
of God, terrorism, social unrest and civil
disturbances.
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In
the
event of any default under a mortgage loan held directly by us, we will bear
a
risk of loss of principal to the extent of any deficiency between the value
of
the collateral and the principal and accrued interest of the mortgage loan,
which would reduce our cash flow from operations. Foreclosure of a mortgage
loan
can be an expensive and lengthy process which could reduce our return on the
foreclosed mortgage loan. In the event of the bankruptcy of a mortgage loan
borrower, the mortgage loan will be deemed to be secured only to the extent
of
the value of the underlying collateral at the time of bankruptcy as determined
by the bankruptcy court, and the lien securing the mortgage loan will be subject
to the avoidance powers of the bankruptcy trustee or debtor-in-possession to
the
extent the lien is unenforceable under state law.
Our
assets include syndicated bank loans, other ABS and private equity investments,
which will carry higher risks of loss than our real estate-related
portfolio.
Subject
to maintaining our qualification as a REIT, we invest in syndicated bank loans,
other ABS and private equity. Our syndicated bank loan investments or our other
ABS investments, which are principally backed by small business and bank
syndicated loans, may not be secured by mortgages or other liens on assets
or
may involve higher loan-to-value ratios than our RMBS or CMBS. Our syndicated
bank loan investments, and our ABS backed by loans, may involve one or more
loans that have an interest-only payment schedule or a schedule that does not
fully amortize principal over the term of the loan, which will make repayment
of
the loan depend upon the borrower’s liquidity or ability to refinance the loan
at maturity. Numerous factors affect a borrower’s ability to repay or refinance
loans at maturity, including national and local economic conditions, a downturn
in a borrower’s industry, loss of one or more principal customers and conditions
in the credit markets. A deterioration in a company’s financial condition or
prospects may be accompanied by a deterioration in the collateral for the
syndicated bank loan or any ABS backed by such company’s loans.
In
addition, private equity investments may also have a greater risk of loss than
senior secured or other financing since such investments are subordinate to
debt
of the issuer, are not secured by property underlying the investment and may
be
illiquid, depending upon the existence of a market for the issuer’s securities,
the length of time we have held the investment and any rights we may have to
require registration under the Securities Act.
Our
due diligence may not reveal all of an entity’s liabilities and other weaknesses
in its business.
Before
investing in the securities of any issuer, we will assess the strength and
skills of the issuer’s management, the value of any collateral securing debt
securities, the ability of the issuer and the collateral to service the debt
and
other factors that we believe are material to the performance of the investment.
In making the assessment and otherwise conducting customary due diligence,
we
will rely on the resources available to us and, in some cases, an investigation
by third parties. This process is particularly important and subjective with
respect to newly-organized entities because there may be little or no
information publicly available about the entities or, with respect to debt
securities, any underlying collateral. Our due diligence processes, however,
may
not uncover all facts that may be relevant to an investment
decision.
Risks
Related to Our Organization and Structure
Our
charter and bylaws contain provisions that may inhibit potential acquisition
bids that you and other stockholders may consider favorable, and the market
price of our common stock may be lower as a result.
Our
charter and bylaws contain provisions that may have an anti-takeover effect
and
inhibit a change in our board of directors. These provisions include the
following:
|
·
|
There
are ownership limits and restrictions on transferability and ownership
in
our charter. For purposes of assisting us in maintaining our REIT
qualification under the Internal Revenue Code, our charter generally
prohibits any person from beneficially or constructively owning more
than
9.8% in value or number of shares, whichever is more restrictive,
of any
class or series of our outstanding capital stock. This restriction
may:
|
|
·
|
discourage
a tender offer or other transactions or a change in the composition
of our
board of directors or control that might involve a premium price
for our
shares or otherwise be in the best interests of our stockholders;
or
|
|
·
|
result
in shares issued or transferred in violation of such restrictions
being
automatically transferred to a trust for a charitable beneficiary,
resulting in the forfeiture of those
shares.
|
|
·
|
Our
charter permits our board of directors to issue stock with terms
that may
discourage a third party from acquiring us. Our board of directors
may amend our charter without stockholder approval to increase the
total
number of authorized shares of stock or the number of shares of any
class
or series and issue common or preferred stock having preferences,
conversion or other rights, voting powers, restrictions, limitations
as to
distributions, qualifications, or terms or conditions of redemption
as
determined by our board. Thus, our board could authorize the issuance
of
stock with terms and conditions that could have the effect of discouraging
a takeover or other transaction in which holders of some or a majority
of
our shares might receive a premium for their shares over the
then-prevailing market price.
|
|
·
|
Our
charter and bylaws contain other possible anti-takeover provisions.
Our charter and bylaws contain other provisions that may have the
effect
of delaying or preventing a change in control of us or the removal
of
existing directors and, as a result, could prevent our stockholders
from
being paid a premium for their common stock over the then-prevailing
market price.
|
Maryland
takeover statutes may prevent a change in control of us, and the market price
of
our common stock may be lower as a result.
Maryland
Control Share Acquisition Act. Maryland law provides that “control shares”
of a corporation acquired in a “control share acquisition” will have no voting
rights except to the extent approved by a vote of two-thirds of the votes
eligible to be cast on the matter under the Maryland Control Share Acquisition
Act. The act defines “control shares” as voting shares of stock that, if
aggregated with all other shares of stock owned by the acquiror or in respect
of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror
to
exercise voting power in electing directors within one of the following ranges
of voting power: one-tenth or more but less than one-third, one-third or more
but less than a majority, or a majority or more of all voting power. A “control
share acquisition” means the acquisition of control shares, subject to specific
exceptions.
If
voting
rights or control shares acquired in a control share acquisition are not
approved at a stockholders’ meeting or if the acquiring person does not deliver
an acquiring person statement as required by the Maryland Control Share
Acquisition Act then, subject to specific conditions and limitations, the issuer
may redeem any or all of the control shares for fair value. If voting rights
of
such control shares are approved at a stockholders’ meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. Our bylaws contain a provision
exempting acquisitions of our shares from the Maryland Control Share Acquisition
Act. However, our board of directors may amend our bylaws in the future to
repeal this exemption.
Business
combinations. Under Maryland law, “business combinations” between a
Maryland corporation and an interested stockholder or an affiliate of an
interested stockholder are prohibited for five years after the most recent
date
on which the interested stockholder becomes an interested stockholder. These
business combinations include a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transferor issuance or
reclassification of equity securities. An interested stockholder is defined
as:
|
·
|
any
person who beneficially owns ten percent or more of the voting power
of
the corporation’s shares; or
|
|
·
|
an
affiliate or associate of the corporation who, at any time within
the
two-year period before the date in question, was the beneficial owner
of
ten percent or more of the voting power of the then outstanding voting
stock of the corporation.
|
A
person
is not an interested stockholder under the statute if the board of directors
approved in advance the transaction by which such person otherwise would have
become an interested stockholder. However, in approving a transaction, the
board
of directors may provide that its approval is subject to compliance, at or
after
the time of approval, with any terms and conditions determined by the
board.
After
the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
|
·
|
80%
of the votes entitled to be cast by holders of outstanding shares
of
voting stock of the corporation;
and
|
|
·
|
two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder
with whom
or with whose affiliate the business combination is to be effected
or held
by an affiliate or associate of the interested
stockholder.
|
These
super-majority vote requirements do not apply if the corporation’s common
stockholders receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously
paid by the interested stockholder for its shares.
The
statute permits exemptions from its provisions, including business combinations
that are exempted by the board of directors before the time that the interested
stockholder becomes an interested stockholder.
Our
rights and the rights of our stockholders to take action against our directors
and officers are limited, which could limit your recourse in the event of
actions not in your best interests.
Our
charter limits the liability of our directors and officers to us and our
stockholders for money damages, except for liability resulting
from:
| · |
actual
receipt of an improper benefit or profit in money, property or services;
or
|
| · |
a
final judgment based upon a finding of active and deliberate dishonesty
by
the director or officer that was material to the cause of action
adjudicated.
|
In addition, our charter authorizes us to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.
26
Our
right to take action against the Manager is limited.
The
obligation of the Manager under
the management agreement is to render its services in good faith. It will
not be
responsible for any action taken by our board of directors or investment
committee in following or declining to follow its advice and recommendations.
Furthermore, as discussed above under “—Risks Related to Our Business,” it will
be difficult and costly for us to terminate the management agreement without
cause. In addition, we will indemnify the Manager, Resource America and
their
officers and affiliates for any actions taken by them in good
faith.
We
have not established a minimum distribution payment level and we cannot assure
you of our ability to make distributions in the future. We may in the future
use
uninvested offering proceeds or borrowed funds to make
distributions.
We
expect
to make quarterly distributions to our stockholders in amounts such that we
distribute all or substantially all of our taxable income in each year, subject
to certain adjustments. We have not established a minimum distribution payment
level, and our ability to make distributions may be impaired by the risk factors
described in this prospectus. All distributions will be made at the discretion
of our board of directors and will depend on our earnings, our financial
condition, maintenance of our REIT qualification and other factors as our board
of directors may deem relevant from time to time. We may not be able to make
distributions in the future. In addition, some of our distributions may include
a return of capital. To the extent that we decide to make distributions in
excess of our current and accumulated taxable earnings and profits, such
distributions would generally be considered a return of capital for federal
income tax purposes. A return of capital is not taxable, but it has the effect
of reducing the holder’s tax basis in its investment. Although we currently do
not expect that we will do so, we may also use uninvested offering proceeds
or
borrowed funds to make distributions. Previously, we funded our first
distribution in July 2005 out of uninvested proceeds from our March 2005 private
offering. The distribution exceeded GAAP net income for the period from
inception of operations through June 30, 2005 by $905,000. If we use uninvested
offering proceeds to pay distributions in the future, we will have less funds
available for investment and, as a result, our earnings and cash available
for
distribution would be less than we might otherwise have realized had such funds
been invested. Similarly, if we borrow to fund distributions, our future
interest costs would increase, thereby reducing our earnings and cash available
for distribution from what they otherwise would have been.
Tax
Risks
Complying
with REIT requirements may cause us to forego otherwise attractive
opportunities.
To
qualify as a REIT for federal income tax purposes, we must continually satisfy
various tests regarding the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our stockholders
and
the ownership of our common stock. In order to meet these tests, we may be
required to forego investments we might otherwise make. Thus, compliance with
the REIT requirements may hinder our investment performance.
We
may realize excess inclusion income that would increase our tax liability and
that of our stockholders.
If
we
realize excess inclusion income and allocate it to stockholders, this income
cannot be offset by net operating losses of the stockholders. If the stockholder
is a tax-exempt entity, then this income would be fully taxable as unrelated
business taxable income under Section 512 of the Internal Revenue Code. If
the
stockholder is a foreign person, it would be subject to federal income tax
withholding on this income without reduction or exemption pursuant to any
otherwise applicable income tax treaty.
Excess
inclusion income could result if we hold a residual interest in a real estate
mortgage investment conduit, or REMIC. Excess inclusion income also could be
generated if we issue debt obligations, such as certain CDOs, with two or more
maturities and the terms of the payments on these obligations bore a
relationship to the payments that we received on our mortgage related securities
securing those debt obligations, i.e., if we were to own an interest in a
taxable mortgage pool. However, the Department of Treasury has not issued
regulations regarding the allocation of excess inclusion income to stockholders
of a REIT that owns an interest in a taxable mortgage pool. While we do not
expect to acquire significant
amounts of residual interests in REMICs, we will own residual interests in
taxable mortgage pools, which means that we will likely generate significant
amounts of excess inclusion income.
If
we
realize excess inclusion income, we may be taxable at the highest corporate
income tax rate on a portion of such income that is allocable to the percentage
of our stock held by “disqualified organizations,” which are generally
cooperatives, governmental entities and tax-exempt organizations that are exempt
from unrelated business taxable income. Although the law on the matter is
unclear, we may also be taxable at the highest corporate income tax rate on
a
portion of excess inclusion income arising from a taxable mortgage pool that
is
allocable to the percentage of our stock held by disqualified organizations.
We
expect that disqualified organizations will own our stock. Because this tax
would be imposed on us, all of our investors, including investors that are
not
disqualified organizations, would bear a portion of the tax cost associated
with
the classification of us or a portion of our assets as a taxable mortgage
pool.
Failure
to qualify as a REIT would subject us to federal income tax, which would reduce
the cash available for distribution to our
stockholders.
We
operate in a manner that is intended to cause us to qualify as a REIT for
federal income tax purposes commencing with our taxable year ending on December
31, 2005. However, the federal income tax laws governing REITs are extremely
complex, and interpretations of the federal income tax laws governing
qualification as a REIT are limited. Qualifying as a REIT requires us to meet
various tests regarding the nature of our assets and our income, the ownership
of our outstanding stock, and the amount of our distributions on an ongoing
basis.
If
we
fail to qualify as a REIT in any calendar year and we do not qualify for certain
statutory relief provisions, we will be subject to federal income tax, including
any applicable alternative minimum tax on our taxable income, at regular
corporate rates. Distributions to stockholders would not be deductible in
computing our taxable income. Corporate tax liability would reduce the amount
of
cash available for distribution to our stockholders. Under some circumstances,
we might need to borrow money or sell assets in order to pay that tax.
Furthermore, if we fail to maintain our qualification as a REIT and we do not
qualify for the statutory relief provisions, we no longer would be required
to
distribute substantially all of our REIT taxable income, determined without
regard to the dividends paid deduction and not including net capital gains,
to
our stockholders. Unless our failure to qualify as a REIT were excused under
federal tax laws, we could not re-elect to qualify as a REIT until the fifth
calendar year following the year in which we failed to qualify. In addition,
if
we fail to qualify as a REIT, our taxable mortgage pool securitizations will
be
treated as separate corporations for U.S. federal income tax
purposes.
Failure
to make required distributions would subject us to tax, which would reduce
the
cash available for distribution to our stockholders.
In
order
to qualify as a REIT, in each calendar year we must distribute to our
stockholders at least 90% of our REIT taxable income, determined without regard
to the deduction for dividends paid and excluding net capital gain. To the
extent that we satisfy the 90% distribution requirement, but distribute less
than 100% of our taxable income, we will be subject to federal corporate income
tax on our undistributed income. In addition, we will incur a 4% nondeductible
excise tax on the amount, if any, by which our distributions in any calendar
year are less than the sum of:
|
·
|
85%
of our ordinary income for that
year;
|
|
·
|
95%
of our capital gain net income for that year;
and
|
|
·
|
100%
our undistributed taxable income from prior
years.
|
We
intend
to make distributions to our stockholders in a manner intended to satisfy the
90% distribution requirement and to distribute all or substantially all of
our
net taxable income to avoid both corporate income tax and the 4% nondeductible
excise tax. There is no requirement that a domestic TRS distribute its after-tax
net income to its parent REIT or their stockholders and Resource TRS may
determine not to make any distributions to us. However, foreign non-U.S. TRSs,
such as Apidos CDO I, will generally be deemed to distribute their earnings
to
us on an annual basis for federal income tax purposes, regardless of whether
such TRSs actually distribute their earnings.
Our
taxable income may substantially exceed our net income as determined by GAAP
because, for example, realized capital losses will be deducted in determining
our GAAP net income but may not be deductible in computing our taxable income.
In addition, we may invest in assets that generate taxable income in excess
of
economic income or in advance of the corresponding cash flow from the assets,
referred to as phantom income. Although some types of phantom income are
excluded to the extent they exceed 5% of our REIT taxable income in determining
the 90% distribution requirement, we will incur corporate income tax and
the 4%
nondeductible excise tax with respect to any phantom income items if we do
not
distribute those items on an annual basis. As a result, we may generate less
cash flow than taxable income in a particular year. In that event, we may
be
required to use cash reserves, incur debt, or liquidate non-cash assets at
rates
or times that we regard as unfavorable in order to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in that year.
If
we make distributions in excess of our current and accumulated earnings and
profits, they will be treated as a return of capital, which will reduce the
adjusted basis of your stock. To the extent such distributions exceed your
adjusted basis, you may recognize a capital gain.
Unless
you are a tax-exempt entity, distributions that we make to you generally will
be
subject to tax as ordinary income to the extent of our current and accumulated
earnings and profits as determined for federal income tax purposes. If the
amount we distribute to you exceeds your allocable share of our current and
accumulated earnings and profits, the excess will be treated as a return of
capital to the extent of your adjusted basis in your stock, which will reduce
your basis in your stock but will not be subject to tax. To the extent the
amount we distribute to you exceeds both your allocable share of our current
and
accumulated earnings and profits and your adjusted basis, this excess amount
will be treated as a gain from the sale or exchange of a capital asset. For
risks related to the use of uninvested offering proceeds or borrowings to fund
distributions to stockholders, see “Item 1A − Risks Factors − Risk Related to
Our Organization and Structure − We have not established a minimum distribution
payment level and we cannot assure you of our ability to make distributions
in
the future.”
Our
ownership of and relationship with our TRS will be limited and a failure to
comply with the limits would jeopardize our REIT qualification and may result
in
the application of a 100% excise tax.
A
REIT
may own up to 100% of the securities of one or more TRSs. A TRS may earn
specified types of income or hold specified assets that would not be qualifying
income or assets if earned or held directly by the parent REIT. Both the
subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
A
corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a TRS.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock
or securities of one or more TRSs. A TRS will pay federal, state and local
income tax at regular corporate rates on any income that it earns, whether
or
not it distributes that income to us. In addition, the TRS rules limit the
deductibility of interest paid or accrued by a TRS to its parent REIT to assure
that the TRS is subject to an appropriate level of corporate taxation. The
rules
also impose a 100% excise tax on certain transactions between a TRS and its
parent REIT that are not conducted on an arm’s-length basis.
Resource
TRS will pay federal, state and local income tax on its taxable income, and
its
after-tax net income is available for distribution to us but is not required
to
be distributed to us. Income that is not distributed to us by Resource TRS
will
not be subject to the REIT 90% distribution requirement and therefore will
not
be available for distributions to our stockholders. We anticipate that the
aggregate value of the securities of Resource TRS, together with the securities
we hold in our other TRSs, including Apidos CDO I, will be less than 20% of
the
value of our total assets, including our TRS securities. We will monitor the
compliance of our investments in TRSs with the rules relating to value of assets
and transactions not on an arm’s-length basis. We cannot assure you, however,
that we will be able to comply with such rules.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The
REIT
provisions of the Internal Revenue Code substantially limit our ability to
hedge
mortgage-backed securities and related borrowings. Under these provisions,
our
annual gross income from qualifying and non-qualifying hedges of our borrowings,
together with any other income not generated from qualifying real estate assets,
cannot exceed 25% of our gross income. In addition, our aggregate gross income
from non-qualifying hedges, fees and certain other non-qualifying sources cannot
exceed 5% of our annual gross income determined without regard to income from
qualifying hedges. As a result, we might have to limit our use of advantageous
hedging techniques or implement those hedges through Resource TRS. This could
increase the cost of our hedging activities or expose us to greater risks
associated with changes in interest rates than we would otherwise want to
bear.
The
tax on prohibited transactions will limit our ability to engage in transactions,
including certain methods of securitizing mortgage loans, that would be treated
as sales for federal income tax purposes.
A
REIT’s
net income from prohibited transactions is subject to a 100% tax. In general,
prohibited transactions are sales or other dispositions of property, other
than
foreclosure property, but including mortgage loans, held primarily for sale
to
customers in the ordinary course of business. We might be subject to this tax
if
we were able to sell or securitize loans in a manner that was treated as a
sale
of the loans for federal income tax purposes. Therefore, in order to avoid
the
prohibited transactions tax, we may choose not to engage in certain sales of
loans and may limit the structures we utilize for our securitization
transactions even though such sales or structures might otherwise be beneficial
to us.
Tax
law changes could depress the market price of our common
stock.
The
federal income tax laws governing REITs or the administrative interpretations
of
those laws may be amended at any time. We cannot predict when or if any new
federal income tax law or administrative interpretation, or any amendment to
any
existing federal income tax law or administrative interpretation, will become
effective and any such law or interpretation may take effect retroactively.
Tax
law changes could depress our stock price or restrict our
operations.
Dividends
paid by REITs do not qualify for the reduced tax rates provided for under
current law.
Dividends
paid by REITs are generally not eligible for the reduced 15% maximum tax rate
for dividends paid to individuals under recently enacted tax legislation. The
more favorable rates applicable to regular corporate dividends could cause
stockholders who are individuals to perceive investments in REITs to be
relatively less attractive than investments in the stock of non-REIT
corporations that pay dividends to which more favorable rates apply, which
could
reduce the value of the stocks of REITs.
The
tax treatment of income inclusions from our foreign TRSs or other corporations
that are not REITs or qualified REIT subsidiaries is unclear for purposes of
the
gross income requirements for REITs.
We
may be
required to include in our income, even without the receipt of actual
distributions, earnings from our foreign TRSs or other corporations that are
not
REITs or qualified REIT subsidiaries, including from our current and
contemplated equity investments in CDOs, such as our investment in Apidos CDO
I
and Apidos CDO III. We intend to treat these income inclusions as qualifying
income for purposes of the 95% gross income test applicable to REITs but not
for
purposes of the REIT 75% gross income test. Because there is no clear precedent
with respect to the qualification of such income for purposes of the REIT gross
income tests, we cannot assure you that the IRS will not assert a contrary
position. In the event that such income was determined not to qualify for the
95% gross income test, we could fail to qualify as a REIT. Even if such income
does not cause us to fail to qualify as a REIT because of relief provisions,
we
would be subject to a penalty tax with respect to such income to the extent
it,
together with any other non-qualifying income, exceeds 5% of our gross
income.
None.
Our
manager leases principal executive and administrative offices at 712 Fifth
Avenue, 10th
Floor,
New York, NY 10019 under a lease that expires in March 2010. Its telephone
number is (212) 506-3870. Resource America’s principal executive office is
located at 1845 Walnut St, 10th
Floor,
Philadelphia, PA 19103. Its telephone number is (215) 546-5005.
We
are
not a party to any material legal proceedings.
No
matter
was submitted to a vote of our security holders during the fourth quarter
of
2005.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock has been listed on the New York Stock Exchange under the symbol
“RSO” since our initial public offering in February 2006. The following table
sets forth for the indicated periods the high, low and last sales price for
our
common stock, as reported on the New York Stock Exchange, and the dividends
declared and paid with respect to such periods:
|
High
|
Low
|
Last
|
Dividends
Declared
|
|
|
Fiscal
2005 (1)
|
||||
|
First
Quarter
|
N/A
|
N/A
|
N/A
|
N/A
|
|
Second
Quarter
|
N/A
|
N/A
|
N/A
|
$0.20
|
|
Third
Quarter
|
N/A
|
N/A
|
N/A
|
$0.30
|
|
Fourth
Quarter
|
N/A
|
N/A
|
N/A
|
$0.36
|
|
(1)
|
We
were formed in January 2005 as a Maryland corporation and became
a
publicly-traded company following our initial public offering in
February
2006.
|
We
are
organized and conduct our operation to qualify as a real estate investment
trust, or a REIT, which requires that we distribute at least 90% of our REIT
taxable income. Therefore, we intend to continue to declare quarterly
distributions on our common stock. No assurance, however, can be given as to
the
amounts or timing of future distributions as such distributions are subject
to
our earnings, financial condition, capital requirements and such other factors
as our board of directors seems relevant.
As
of
March 20, 2006, there were 17,813,096 common shares outstanding held by 37
persons of record and 2,122 beneficial owners.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
On
January 31, 2005, in connection with our incorporation, we issued 1,000 shares
of our common stock to Resource America for $1,000. Such issuance was exempt
from the registration requirements of the Securities Act of 1933, as amended,
which we refer to as the Securities Act, pursuant to Section 4(2) thereof.
These
shares of common stock were redeemed upon completion of our March 2005 private
offering.
On
March
8, 2005, we sold shares of our common stock to Credit Suisse Securities (USA)
LLC, as initial purchaser. We issued these shares of common stock to the
initial
purchaser in reliance on the exemption from the registration requirements
of the
Securities Act provided by Section 4(2) of the Securities Act. The initial
purchaser paid us a purchase price of $13.95 per share, for total proceeds
of
approximately $122.1 million. The initial purchaser resold all of these shares
of common stock to (i) qualified institutional buyers (as defined in Rule
144A
under the Securities Act) in reliance on the exemption from the registration
requirements of the Securities Act provided by Rule 144A under the Securities
Act and (ii) investors outside the United States in reliance on the exemption
from the registration requirements of the Securities Act provided by Regulation
S under the Securities Act. The offering price per share of common stock
to
qualified institutional buyers under Rule 144A and non-United States persons
under Regulation S was $15.00 per share for gross proceeds of approximately
$131.3 million. The initial purchaser’s discount and commission was $9.2
million.
On
March
8, 2005, we sold 6,578,372 shares of common stock in a concurrent private
placement to 207 “accredited investors” (as defined in Rule 501 under the
Securities Act) in reliance on the exemption from the registration requirements
of the Securities Act provided by Rule 506 of Regulation D under the Securities
Act, with the initial purchaser acting as placement agent. The initial purchaser
received a placement fee of $1.05 per share with respect to 5,221,206 of
these
shares of common stock. No placement fee was paid with respect to 1,357,166
of
these shares. The offering resulted in gross proceeds of approximately $93.2
million and total placement fees paid to the placement agents of approximately
$5.5 million.
On
March
8, 2005, we granted a total of 345,000 restricted shares of common stock
to the
Manager pursuant to our 2005 Stock Incentive Plan. Additionally, on each
of
March 8, 2005 and March 8, 2006, we granted, in the aggregate, 4,000 restricted
shares of common stock and 4,224 restricted shares of common stock,
respectively, to our non-employee directors pursuant to the Incentive Plan.
Such
grants were exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
On
March
8, 2005, we granted options to acquire 651,666 shares of common stock at
a price
of $15.00 per share, to the Manager pursuant to the Incentive Plan. The options
become exercisable in three annual installments beginning on the first
anniversary of the date of grant and expire on the tenth anniversary of the
date
of grant. Such grant was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
In
accordance with the provisions of the management agreement, on January 31,
2006
we issued 5,738 shares of common stock to the Manager. These shares represented
25% of the Manager’s quarterly incentive compensation fee that accrued for the
three months ended December 31, 2005. The issuance of these shares was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
On
February 10, 2006, we completed the initial public offering of our common
stock
pursuant to a registration statement declared effective February 6, 2006
(Registration No. 333-126517). We offered 2,120,800 shares of our common
stock,
all of which were sold, and certain of our stockholders offered and sold
a total
of 1,879,200 shares of our common stock. All shares sold in the initial
public
offering were sold at a price to the public of $15.00 per share. We received
net
proceeds of approximately $27.6 million after payment of underwriting
discounts
and commissions of approximately $2.1 million and other offering expenses
of
approximately $2.1 million. All of such payments were to non-affiliated
third
parties. The net proceeds of the offering were added to our working capital
for
use as described in Item 1 - “Business.” We did not receive any proceeds from
the sale of shares by the selling stockholders. The managing underwriters
for
the offering were Credit Suisse Securities (USA) LLC, Friedman, Billings,
Ramsey
& Co., Inc., Citigroup Global Markets, Inc., J.P. Morgan Securities Inc.,
Piper Jaffray & Co. and Flagstone Securities LLC.
SELECTED
CONSOLIDATED FINANCIAL INFORMATION OF
RESOURCE
CAPITAL CORP AND SUBSIDIARIES
The
following selected financial and operating information should be read in
conjunction with Item 7 - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our financial statements, including
the notes, included elsewhere herein (in thousands, except share
data).
|
As
of and for the
Period
from March 8, 2005
(date
operations commenced) to
December
31, 2005
|
||||
|
Consolidated
Income Statement Data
|
||||
|
Revenues:
|
||||
|
Net
interest income:
|
||||
|
Interest
income
|
$
|
61,387
|
||
|
Interest
expense
|
43,062
|
|||
|
Net
interest income
|
18,325
|
|||
|
Other
revenue:
|
||||
|
Net
realized gain on investments
|
311
|
|||
|
Expenses:
|
||||
|
Management
fee expense - related party
|
3,012
|
|||
|
Equity
compensation expense − related party
|
2,709
|
|||
|
Professional
services
|
516
|
|||
|
Insurance
expense
|
395
|
|||
|
General
and administrative
|
1,096
|
|||
|
Total
expenses
|
7,728
|
|||
|
Net
income
|
$
|
10,908
|
||
|
Net
income per share − basic
|
$
|
0.71
|
||
|
Net
income per share − diluted
|
$
|
0.71
|
||
|
Weighted
average number of shares outstanding − basic
|
15,333,334
|
|||
|
Weighted
average number of shares outstanding - diluted
|
15,405,714
|
|||
|
Consolidated
Balance Sheet Data:
|
||||
|
Cash
and cash equivalents
|
$
|
17,729
|
||
|
Restricted
cash
|
23,592
|
|||
|
Available-for-sale
securities, pledged as collateral, at fair value
|
1,362,392
|
|||
|
Available-for-sale
securities, at fair value
|
28,285
|
|||
|
Loans,
net of allowances of $0
|
570,230
|
|||
|
Total
assets
|
2,045,547
|
|||
|
Repurchase
agreements (including accrued interest of $2,104)
|
1,068,277
|
|||
|
CDOs
|
687,407
|
|||
|
Warehouse
agreements
|
62,961
|
|||
|
Total
liabilities
|
1,850,214
|
|||
|
Total
stockholders’ equity
|
195,333
|
|||
| Other Data: | ||||
| Dividends declard per common share | $ | 0.86 | ||
The
following discussion provides information to assist 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 ‘‘Special Note Regarding
Forward-Looking Statements’’ and ‘‘Risk Factors’’ for a discussion of certain
risks, uncertainties and assumptions associated with those
statements.
Overview
We
are a
specialty finance company that intends to qualify and will elect to be taxed
as
a REIT for federal income tax purposes commencing with our taxable year ending
December 31, 2005. Our objective is to provide attractive risk-adjusted total
returns over time to our stockholders through both stable quarterly
distributions and capital appreciation. We make investments in a combination
of
real estate-related assets and, to a lesser extent, higher-yielding commercial
finance assets. We finance 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 to mitigate interest rate risks through derivative instruments.
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 and hedge
interest rate risks. We generate revenues from the interest we earn on our
agency and non-agency RMBS, CMBS, mezzanine debt, B notes, other ABS, syndicated
bank loans, dividend payments on trust preferred securities and private equity
investments and payments on equipment leases and notes. We use a substantial
amount of leverage to enhance our returns and we finance each of our different
asset classes with different degrees of leverage. The cost of borrowings to
finance our investments comprises a significant part of our expenses. Our net
income will depend on our ability to control these expenses relative to our
revenue. In our non-agency RMBS, CMBS, other ABS, syndicated bank loans,
equipment leases and notes, private equity investments and trust preferred
asset
classes we use warehouse facilities as a short-term financing source and CDOs
and, to a lesser extent, other term financing as a long-term financing source.
In our commercial real estate loan portfolio, we use repurchase agreements
as a
short-term financing source and CDOs and, to a lesser extent, other term
financing as a long-term financing source. We expect that our other term
financing will consist of long-term match-funded financing provided through
long-term bank financing and asset-backed financing programs. In our agency
RMBS
portfolio, we finance the acquisition of our investments with short-term
repurchase arrangements. We seek to mitigate the risk created by any mismatch
between the maturities and repricing dates of our agency RMBS and the maturities
and repricing dates of the repurchase agreements we use to finance them through
derivative instruments, principally floating-to-fixed interest rate swap
agreements and interest rate cap agreements.
On
March
8, 2005, we received net proceeds of $214.8 million from a private placement
of
15,333,334 shares of common stock. Our investment portfolio as of December
31,
2005 reflects our initial investment of substantially all of the $214.8 million
of net proceeds from the private offering. As of December 31, 2005, we had
invested 10.0% of our portfolio in commercial real estate-related assets, 50.5%
in agency RMBS, 17.0% in non-agency RMBS and 22.5% in commercial finance assets.
We intend to diversify our portfolio over our targeted asset classes during
the
next 12 months as follows: between 20% and 25% in commercial real estate-related
assets, between 25% and 30% in agency RMBS, between 15% and 20% in non-agency
RMBS, and between 30% and 35% in commercial finance assets, subject to the
availability of appropriate investment opportunities and changes in market
conditions. We expect that diversifying our portfolio by shifting the mix
towards higher-yielding assets will increase our earnings, subject to
maintaining the credit quality of our portfolio. If we are unable to maintain
the credit quality of our portfolio, however, our earnings will decrease.
Because the amount of leverage we intend to use will vary by asset class, our
asset allocation may not reflect the relative amounts of equity capital we
have
invested in the respective classes.
We are externally managed by the Manager, an indirect wholly-owned subsidiary
of
Resource America, a publicly traded specialized asset management company that
uses industry specific expertise to generate and administer investment
opportunities for its own account and for institutional and sophisticated
individual investors in financial fund management (primarily RMBS, CMBS and
other ABS), real estate and equipment finance. As of December 31, 2005, Resource
America managed approximately $8.6 billion of assets, including approximately
$4.1 billion of assets in CDOs.
As
we
develop our investment portfolio, we expect that our ability to achieve our
objectives, as well as to operate profitably, will be affected by a variety
of
economic and industry factors. These factors include:
|
·
|
our
ability to maintain a positive spread between our MBS and the borrowings
we use to fund the purchase of our MBS, which may be adversely affected
by
a rising interest rate environment such as existed in the period
from
commencement of our operations to December 31,
2005;
|
|
·
|
the
difference between actual prepayment speeds on mortgages underlying
our
MBS and the prepayment speeds that we projected when we acquired
the MBS;
typically, prepayment speeds increase in periods of declining interest
rates and decrease in periods of rising interest rates such as existed
in
the period from commencement of our operations to December 31,
2005.
|
|
·
|
our
ability to obtain funding and our borrowing capacity, which affects
our
ability to acquire assets;
|
|
·
|
our
intended use of leverage;
|
|
·
|
our
borrowing costs, which affect our cost of acquiring and holding our
assets;
|
|
·
|
our
ability to obtain suitable hedging for our interest rate risks and
the
extent and cost of that hedging;
|
|
·
|
the
market value of our investments;
|
|
·
|
our
need to comply with REIT and Investment Company Act requirements,
which
will affect the nature and composition of our investment portfolio
and the
amount of revenues we derive from it;
and
|
|
·
|
other
market developments.
|
We expect to face increased competition for our targeted investments. This
increased competition could result in our having to pay increased prices for
our
investments, receiving lower yields on invested capital, or both, which could
reduce the net interest spread on our portfolio and, as a result, our net
income. While we expect that the size and growth of the market for our targeted
investments will continue to provide us with a variety of investment
opportunities, increased competition may make it more difficult to identify
and
acquire investments that are consistent with our investment objectives. However,
we also believe that bank lenders will continue their historic lending practices
of requiring low loan-to-value ratios and high debt service coverage ratios,
which will provide lending opportunities to us.
Results
of Operations
We
made
our first investment on March 14, 2005 and we believe that we will fully deploy
and leverage, consistent with our financing strategy, the capital raised in
our
March 2005 private placement by the end of the first quarter of 2006, subject
to
market conditions. As of December 31, 2005, we had approximately $17.7 million
of equity capital that we had not deployed and leveraged.
Our initial portfolio investments have been comprised of commercial real estate
loans, agency RMBS, non-agency RMBS, other ABS, syndicated bank loans, private
equity and equipment leases and notes. We have financed our agency RMBS
portfolio and commercial real estate loan portfolio through short-term
repurchase agreements and our non-agency RMBS, other ABS and syndicated bank
loans through warehouse facilities as a short-term financing source.
We intend to use CDOs and other secured borrowings as a long-term
financing source for our non-agency RMBS, other ABS, syndicated bank loans
and
commercial real estate loans. We closed our initial two CDO financings during
the period from March 8, 2005 to December 31, 2005 and entered into arrangements
with respect to a third CDO financing. In general, to the extent that we do
not
hedge the interest rate exposure within our agency RMBS portfolio, rising
interest rates (particularly short-term rates) such as those that existed in
the
period from March 8, 2005 to December 31, 2005, will decrease our net interest
income from levels that might otherwise be expected, as the cost of our
repurchase agreements will rise faster than the yield on our agency RMBS. In
addition, our agency
36
RMBS
are
subject to interest rate caps while the short-term repurchase agreements
we use
to finance them are not. As a result, if interest rates rise to the point
where
increases in our interest income are limited by these caps, our net interest
income could be reduced or, possibly, we could incur losses. As of December
31,
2005, we had entered into interest rate swaps that seek to hedge a substantial
portion of the risks associated with increasing interest rates with maturities
ranging from April 2006 through August 2006. In January 2006, we entered
into an
amortizing swap agreement that will extend the period of time we have hedged
the
risks on our agency RMBS portfolio through October 2007.
The yield on our RMBS may be affected by a difference between the actual
prepayment rates of the underlying mortgages and those that we projected when
we
acquired the RMBS. See ‘‘Risk Factors − Risks Related to Our Investments −
Increased levels of prepayments on our MBS might decrease our net interest
income or result in a net loss.’’ In periods of declining interest rates,
prepayments will likely increase. If we are unable to reinvest the proceeds
of
such repayments at comparable yields, our net interest income may suffer. In
a
rising interest rate environment, prepayment rates on our assets will likely
slow, causing their expected lives to increase. This may cause our net interest
income to decrease as our borrowing and hedging costs may rise while our
interest income on these assets will remain constant.
As
we
seek to diversify our investment portfolio from our initial investment position
in agency RMBS, we will seek to execute our match-funding strategy for
non-agency RMBS, commercial real estate-related assets and commercial finance
assets. However, we may not be able to execute this strategy fully, or at all.
We expect that, for any period in which we do not match fund these assets,
they
will reprice more slowly than their related funding. In a rising interest rate
environment, such as existed in the period from March 8, 2005 to December 31,
2005, our net interest income could be reduced from levels that might otherwise
be expected, or we could incur losses.
For
the Period from March 8, 2005 (Date Operations Commenced) to December 31,
2005
Summary
Our
net
income for the period from March 8, 2005 to December 31, 2005 was $10.9 million,
or $0.71 per weighted-average common share-diluted.
Net
Interest Income
Net
interest income for the period totaled $18.3 million. Investment income totaled
$61.4 million and was comprised of $31.1 million of interest income on our
agency RMBS portfolio, $13.1 million of interest income on our non-agency RMBS,
CMBS and other ABS portfolio, $11.9 million of interest income on our
syndicated loan portfolio, $2.8 million of interest income on our commercial
real estate loan portfolio, $628,000 of interest income from our private equity
and leasing portfolios and $1.9 million of income from our temporary investment
of offering proceeds in over-night repurchase agreements. Our interest income
was offset by $43.1 million of interest expense, consisting of $23.3 million
on
our repurchase agreements, $12.8 million on our CDO senior notes, $4.9 million
on our warehouse agreements, $1.1 million on our commercial real estate loan
portfolio, $516,000 related to interest rate swap agreements, $461,000 of
amortization of debt issuance costs related to our two CDO offerings and $47,000
on our corporate credit facility.
Other
Gains and Losses
Net
realized gain on investments for the period was $311,000 and was related to
gains on sales of bank loans and other ABS.
Non-Investment
Expenses
Non-investment
expenses for the period totaled $7.7 million. Management fees for the period
totaled $3.0 million, of which $2.7 million was related to base management
fees
and $344,000 was related to incentive management fees due to the Manager
pursuant to our management agreement. Equity compensation expense-related party
totaled $2.7 million and consisted of amortization related to the March 8,
2005
grant of restricted common stock to the Manager and our independent directors
and the grant of options to the Manager to purchase common stock. Professional
services totaled $516,000 and consisted of audit, tax and legal costs. Insurance
expense of $395,000 was the amortization related to our purchase of directors’
and officers’ insurance. General and administrative expenses totaled $1.1
million which includes $797,000 of expense reimbursements due to the Manager
and
$75,000 of rating agency expenses.
Income
Taxes
We
do not
pay federal income tax on income we distribute to our stockholders, subject
to
our compliance with REIT qualification requirements. However, Resource TRS,
our
domestic TRS, is taxed as a regular subchapter C corporation under the
provisions of the Internal Revenue Code. As of December 31, 2005, we did
not conduct any of our operations through Resource TRS.
Apidos
CDO I, our foreign TRS, was formed to complete a securitization transaction
structured as a secured financing. Apidos CDO I is organized as an exempt
company incorporated with limited liability under the laws of the Cayman Islands
and is generally exempt from federal and state income tax at the corporate
level
because its activities in the United States are limited to trading in stock
and
securities for its own account. Therefore, despite its status as a TRS, it
generally will not be subject to corporate tax on its earnings and no provision
for income taxes is required; however, we generally will be required to include
Apidos CDO I’s current taxable income in our calculation of REIT taxable income.
We also intend to make an election to treat Apidos CDO III as a TRS. Apidos
CDO
III was formed to complete a securitization transaction and is expected to
close
during 2006.
Financial
Condition
Summary
All
of
our assets at December 31, 2005 were acquired with net proceeds from our March
2005 private placement and our use of leverage.
Investment
Portfolio
The
table
below summarizes the amortized cost and estimated fair value of our investment
portfolio as of December 31, 2005, classified by interest rate type. The table
below includes both (i) the amortized cost of our investment portfolio and
the
related dollar price, which is computed by dividing amortized cost by par
amount, and (ii) the estimated fair value of our investment portfolio and the
related dollar price, which is computed by dividing the estimated fair value
by
par amount (in thousands, except percentages):
|
Amortized
cost
|
Dollar
price
|
Estimated
fair value
|
Dollar
price
|
Estimated
fair value less amortized cost
|
Dollar
price
|
||||||||||||||
|
Floating
rate
|
|||||||||||||||||||
|
Agency
RMBS
|
$
|
−
|
0.00
|
%
|
$
|
−
|
0.00
|
%
|
$
|
−
|
0.00
|
%
|
|||||||
|
Non-agency
RMBS
|
340,460
|
99.12
|
%
|
331,974
|
96.65
|
%
|
(8,486
|
)
|
-2.47
|
%
|
|||||||||
|
CMBS
|
458
|
100.00
|
%
|
459
|
100.22
|
%
|
1
|
0.22
|
%
|
||||||||||
|
Other
ABS
|
18,731
|
99.88
|
%
|
18,742
|
99.94
|
%
|
11
|
0.06
|
%
|
||||||||||
|
B
notes
|
121,945
|
100.00
|
%
|
121,945
|
100.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Mezzanine
loans
|
44,500
|
100.00
|
%
|
44,500
|
100.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Syndicated
bank loans
|
398,536
|
100.23
|
%
|
399,979
|
100.59
|
%
|
1,443
|
0.36
|
%
|
||||||||||
|
Equipment
leases and notes
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Private
equity
|
1,984
|
99.20
|
%
|
1,954
|
97.70
|
%
|
(30
|
)
|
-1.50
|
%
|
|||||||||
|
Total
floating rate
|
$
|
926,614
|
99.77
|
%
|
$
|
919,553
|
99.01
|
%
|
$
|
(7,061
|
)
|
-0.76
|
%
|
||||||
|
Hybrid
rate
|
|||||||||||||||||||
|
Agency
RMBS
|
$
|
1,014,575
|
100.06
|
%
|
$
|
1,001,670
|
98.79
|
%
|
$
|
(12,905
|
)
|
-1.27
|
%
|
||||||
|
Non-agency
RMBS
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
CMBS
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Other
ABS
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
B
notes
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Mezzanine
loans
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Syndicated
bank loans
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Equipment
leases and notes
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Private
equity
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Total
hybrid rate
|
$
|
1,014,575
|
100.06
|
%
|
$
|
1,001,670
|
98.79
|
%
|
$
|
(12,905
|
)
|
-1.27
|
%
|
||||||
|
Fixed
rate
|
|||||||||||||||||||
|
Agency
RMBS
|
$
|
−
|
0.00
|
%
|
$
|
−
|
0.00
|
%
|
$
|
−
|
0.00
|
%
|
|||||||
|
Non-agency
RMBS
|
6,000
|
100.00
|
%
|
5,771
|
96.18
|
%
|
(229
|
)
|
-3.82
|
%
|
|||||||||
|
CMBS
|
27,512
|
98.63
|
%
|
26,904
|
96.45
|
%
|
(608
|
)
|
-2.18
|
%
|
|||||||||
|
Other
ABS
|
3,314
|
99.97
|
%
|
3,203
|
96.62
|
%
|
(111
|
)
|
-3.35
|
%
|
|||||||||
|
B
notes
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Mezzanine
loans
|
5,000
|
100.00
|
%
|
5,000
|
100.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Syndicated
bank loans
|
249
|
99.60
|
%
|
246
|
98.40
|
%
|
(3
|
) |
-1.20
|
%
|
|||||||||
|
Equipment
leases and notes
|
23,317
|
100.00
|
%
|
23,317
|
100.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Private
equity
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
−
|
0.00
|
%
|
||||||||||
|
Total
fixed rate
|
$
|
65,392
|
99.42
|
%
|
$
|
64,441
|
97.97
|
%
|
$
|
(951
|
)
|
-1.45
|
%
|
||||||
|
Grand
total
|
$
|
2,006,581
|
99.90
|
%
|
$
|
1,985,664
|
98.86
|
%
|
$
|
(20,917
|
)
|
-1.04
|
%
|
Credit
Review
We
actively monitor the quality of the investments underlying our portfolio by
utilizing specialized, proprietary risk management systems and performing
detailed credit analysis. When applicable, we monitor the credit rating of
our
investment portfolio through the use of both Moody’s and Standard & Poor’s
ratings and Moody’s WARF. WARF is the quantitative equivalent of Moody’s
traditional rating categories and is used by Moody’s in its credit enhancement
calculations for securitization transactions. We use WARF because the credit
enhancement levels of our CDOs are computed using WARF and we have included
the
WARF in the tables that follow. By monitoring both Moody’s and Standard &
Poor’s ratings and Moody’s WARF we can monitor trends and changes in the credit
ratings of our investment portfolio. For RMBS we monitor the credit quality
of
the underlying borrowers by monitoring trends and changes in the underlying
borrower’s FICO scores. Borrowers with lower FICO scores default more frequently
than borrowers with higher FICO scores. For residential RMBS we also monitor
trends and changes in LTV ratios. Increases in LTV ratios are likely to result
in higher realized credit losses when borrowers default.
For
commercial real estate mortgage loans we monitor trends and changes in elements
which impact the borrower’s ability to continue making payments in accordance
with the terms of the obligations or to repay the obligation with proceeds
raised through a refinancing. These elements include debt-service-coverage
ratios, or DSCR, original LTV ratios, property valuations and overall real
estate market conditions.
For
equipment leases, we monitor and analyze contractual delinquencies, economic
conditions and trends, industry statistics and lease portfolio characteristics.
We also include factors such as the Manager’s historical loss experience in the
asset class.
We
performed an allowance for loans losses analysis as of December 31, 2005 and
have made the determination that no allowance for loan losses was required
for
either our securities available-for-sale portfolio or our loan portfolio. As
of
December 31, 2005, all of our investments are current with respect to the
scheduled payments of principal and interest and we did not own any real estate
properties that we had acquired through foreclosure actions.
Residential
Mortgage-Backed Securities
We
invest
in adjustable rate and hybrid adjustable rate agency RMBS and non-agency RMBS
and to a lesser extent, fixed rate non-agency RMBS, which are securities
representing interests in mortgage loans secured by residential real property
in
which payments of both principal and interest are generally made monthly, net
of
any fees paid to the issuer, servicer or guarantor of the securities. In agency
RMBS, the mortgage loans in the pools are guaranteed as to principal and
interest by federally chartered entities such as Fannie Mae, Freddie Mac and
Ginnie Mae. In general, our agency RMBS will carry implied AAA ratings and
will
consist of mortgage pools in which we have the entire interest.
Adjustable
rate RMBS have interest rates that reset periodically (typically monthly,
semi-annually or annually) over their term. Because the interest rates on ARMs
fluctuate based on market conditions, ARMs tend to have interest rates that
do
not deviate from current market rates by a large amount. This in turn can mean
that ARMs have less price sensitivity to interest rates.
Hybrid
ARMs have interest rates that have an initial fixed period (typically two,
three, five, seven or ten years) and reset at regular intervals after that
in a
manner similar to traditional ARMs. Before the first interest rate reset date,
hybrid ARMs have a price sensitivity to interest rates similar to that of a
fixed-rate mortgage with a maturity equal to the period before the first reset
date. After the first interest rate reset date occurs, the price sensitivity
of
a hybrid ARM resembles that of a non-hybrid ARM.
At
December 31, 2005, the mortgages underlying our hybrid adjustable rate agency
RMBS had fixed interest rates for a weighted average of approximately 52 months,
after which time the rates reset and become adjustable. The average length
of
time until maturity of those mortgages was 29.1 years. These mortgages are
also
subject to interest rate caps that limit both the amount that the applicable
interest rate can increase during any year, known as an annual cap, and the
amount that it can rise through maturity of the mortgage, known as a lifetime
cap. After the interest rate reset date, interest rates on our hybrid adjustable
rate agency RMBS float based on spreads over various LIBOR indices. The weighted
average lifetime cap for our portfolio is an increase of 6%; the weighted
average maximum annual increase is 2%.
The
following table summarizes our hybrid adjustable rate agency RMBS portfolio
as
of December 31, 2005 (dollars in thousands):
|
|
Weighted
average
|
||||||||||||
|
Security
description
|
Amortized
cost
|
Estimated
fair value
|
Coupon
|
Months
to reset(1)
|
|
||||||||
|
3-1
hybrid adjustable rate RMBS
|
$
|
405,047
|
$
|
400,807
|
4.16
|
%
|
25.2
|
||||||
|
5-1
hybrid adjustable rate RMBS
|
178,027
|
176,051
|
4.73
|
%
|
54.3
|
||||||||
|
7-1
hybrid adjustable rate RMBS
|
431,501
|
424,812
|
4.81
|
%
|
75.6
|
||||||||
|
Total
|
$
|
1,014,575
|
$
|
1,001,670
|
4.54
|
%
|
51.7
|
||||||
|
(1)
|
Represents
number of months before conversion to floating
rate.
|
At
December 31, 2005, we held $1.0 billion of agency RMBS, at fair value,
which is
based on market prices provided by dealers, net of unrealized gains of
$13,000
and unrealized losses of $12.9 million. As of December 31, 2005, our agency
RMBS
portfolio had a weighted-average amortized cost of 100.06%. Our agency
RMBS were
purchased at a premium of $594,000 and are valued below par at December
31, 2005
because the weighted-average coupon of 4.54% and the corresponding interest
rates of loans underlying our agency RMBS are below prevailing market rates.
In
the current increasing interest rate environment, we expect that the fair
value
of our RMBS will continue to decrease, thereby increasing our net unrealized
losses.
At
December 31, 2005, we held $337.7 million of non-agency RMBS, at fair value,
which is based on market prices provided by dealers, net of unrealized gains
of
$370,000 and unrealized losses of $9.1 million. As of December 31, 2005,
our
non-agency RMBS portfolio had a weighted-average amortized cost of 99.13%.
As of
December 31, 2005, our non-agency RMBS are valued below par, in the
aggregate, because of a widening in credit spreads during the fourth
quarter ended December 31, 2005. If credit spreads continue to trend higher,
we
expect that the fair value of our non-agency RMBS will continue to decrease,
thereby increasing our net unrealized losses.
At
December 31, 2005, none of the securities whose fair market value was below
amortized cost had been downgraded by a credit rating agency and 76.9% were
guaranteed by either Freddie Mac or Fannie Mae. We intend and have the ability
to hold these securities until maturity to allow for the anticipated recovery
in
fair value of the securities held as they reach maturity.
|
|
Agency
RMBS
|
Non-agency
RMBS
|
Total
RMBS
|
|||||||
|
RMBS,
gross
|
$
|
1,013,981
|
$
|
349,484
|
$
|
1,363,465
|
||||
|
Unamortized
discount
|
(777
|
)
|
(3,188
|
)
|
(3,965
|
)
|
||||
|
Unamortized
premium
|
1,371
|
164
|
1,535
|
|||||||
|
Amortized
cost
|
1,014,575
|
346,460
|
1,361,035
|
|||||||
|
Gross
unrealized gains
|
13
|
370
|
383
|
|||||||
|
Gross
unrealized losses
|
(12,918
|
)
|
(9,085
|
)
|
(22,003
|
)
|
||||
|
Estimated
fair value
|
$
|
1,001,670
|
$
|
337,745
|
$
|
1,339,415
|
||||
|
Percent
of total
|
74.8
|
%
|
25.2
|
%
|
100.0
|
%
|
The
table
below describes the terms of our RMBS portfolio as of December 31, 2005 (dollars
in thousands). Dollar price is computed by dividing amortized cost by par
amount.
|
Amortized
cost
|
Dollar
price
|
||||||
|
Moody’s
ratings category:
|
|||||||
|
Aaa
|
$
|
1,014,575
|
100.06
|
%
|
|||
|
A1
through A3
|
42,172
|
100.23
|
%
|
||||
|
Baa1
through Baa3
|
281,929
|
99.85
|
%
|
||||
|
Ba1
through Ba3
|
22,359
|
89.20
|
%
|
||||
|
Total
|
$
|
1,361,035
|
99.82
|
%
|
|||
|
S&P
ratings category:
|
|||||||
|
AAA
|
$
|
1,014,575
|
100.06
|
%
|
|||
|
AA+
through AA-
|
2,000
|
100.00
|
%
|
||||
|
A+
through A-
|
59,699
|
99.55
|
%
|
||||
|
BBB+
through BBB-
|
262,524
|
98.99
|
%
|
||||
|
BB+
through BB-
|
1,199
|
94.78
|
%
|
||||
|
No
rating provided
|
21,038
|
100.00
|
%
|
||||
|
Total
|
$
|
1,361,035
|
99.82
|
%
|
|||
|
Weighted
average rating factor
|
104
|
||||||
|
Weighted
average original FICO (1)
|
633
|
||||||
|
Weighted
average original LTV (1)
|
80.02
|
%
|
|
(1)
|
Weighted
average only reflects the 25.2% of the RMBS in our portfolio that
are
non-agency.
|
The
stated contractual final maturity of the mortgage loans underlying our portfolio
ranges up to 30 years; however, the expected maturities are subject to change
based on the prepayments of the underlying mortgage loans.
The
actual maturities of RMBS are generally shorter than stated contractual
maturities. Actual maturities of our RMBS are affected by the contractual lives
of the underlying mortgages, periodic scheduled payments of principal and
prepayments of principal. See Item 1A. − “Risk Factors − Risks Related to Our
Investments − Increased levels of prepayments on our MBS might decrease our net
interest income or result in a net loss.”
The
constant prepayment rate to balloon, or CPB, on our RMBS for the period from
March 8, 2005 to December 31, 2005 was 15%. CPB attempts to predict the
percentage of principal that will repay over the next 12 months based on
historical principal paydowns. As interest rates rise, the rate of refinancing
typically declines, which we believe may result in lower prepayment rates and,
as a result, a lower portfolio CPB.
The
following table summarizes our RMBS as of December 31, 2005 according to
estimated weighted-average life classifications (in thousands, except average
coupon):
|
Weighted
average life
|
Fair
value
|
Amortized
cost
|
Average
coupon
|
|||||||
|
Less
than one year
|
$
|
−
|
$
|
−
|
−
|
%
|
||||
|
Greater
than one year and less than five years
|
1,333,507
|
1,355,035
|
4.89
|
%
|
||||||
|
Greater
than five years
|
5,908
|
6,000
|
5.73
|
%
|
||||||
|
Total
|
$
|
1,339,415
|
$
|
1,361,035
|
4.89
|
%
|
The
estimated weighted-average lives of our RMBS as of December 31, 2005 in the
table above are based upon data provided through subscription-based financial
information services, assuming constant principal prepayment factors to the
balloon or reset date for each security. The prepayment model considers current
yield, forward yield, steepness of the yield curve, current mortgage rates,
mortgage rate of the outstanding loan, loan age, margin and volatility. The
actual weighted-average lives of the RMBS in our investment portfolio could
be
longer or shorter than the estimates in the table above depending on the actual
prepayment factors experienced over the lives of the applicable securities
and
are sensitive to changes in both prepayment factors and interest
rates.
Commercial
Mortgage-Backed Securities
We
invest
in CMBS, which are securities that are secured by or evidence interests in
a
pool of mortgage loans secured by commercial properties.
The
yields on CMBS depend on the timely payment of interest and principal due on
the
underlying mortgages loans and defaults by the borrowers on such loans may
ultimately result in deficiencies and defaults on the CMBS. In the event of
a
default, the trustee for the benefit of the holders of CMBS has recourse only
to
the underlying pool of mortgage loans and, if a loan is in default, to the
mortgaged property securing such mortgage loan. After the trustee has exercised
all of the rights of a lender under a defaulted mortgage loan and the related
mortgaged property has been liquidated, no further remedy will be available.
However, holders of relatively senior classes of CMBS will be protected to
a
certain degree by the structural features of the securitization transaction
within which such CMBS were issued, such as the subordination of the relatively
more junior classes of the CMBS.
At
December 31, 2005, we held $27.4 million of CMBS at fair value, which is based
on market prices provided by dealers, net of unrealized gains of $1,000 and
unrealized losses of $608,000. In the aggregate, we purchased the CMBS at a
discount. As of December 31, 2005, the remaining discount to be accreted into
income over the remaining lives of the securities was $380,000. These securities
are classified as available-for-sale and as a result are carried at their fair
market value.
The
table
below describes the terms of our CMBS as of December 31, 2005 (dollars in
thousands). Dollar price is computed by dividing amortized cost by par
amount.
|
Amortized
cost
|
Dollar
price
|
||||||
|
Moody’s
ratings category:
|
|||||||
|
Baa1
through Baa3
|
$
|
27,970
|
98.66
|
%
|
|||
|
Total
|
$
|
27,970
|
98.66
|
%
|
|||
|
S&P
ratings category:
|
|||||||
|
BBB+
through BBB-
|
$
|
12,225
|
98.98
|
%
|
|||
|
No
rating provided
|
15,745
|
98.41
|
%
|
||||
|
Total
|
$
|
27,970
|
98.66
|
%
|
|||
|
Weighted
average rating factor
|
346
|
Other
Asset-Backed Securities
We
invest
in other ABS, principally CDOs backed by small business loans and trust
preferred securities of financial institutions such as banks, savings and thrift
institutions, insurance companies, holding companies for these institutions
and
REITs.
At
December 31, 2005, we held $21.9 million of other ABS at fair value, which
is
based on market prices provided by dealers net of unrealized gains of $24,000
and unrealized losses of $124,000. In the aggregate, we purchased the other
ABS
at a discount. As of December 31, 2005, the remaining discount to be accreted
into income over the remaining lives of securities was $25,000. These securities
are classified as available-for-sale and as a result are carried at their fair
market value.
The
table
below describes the terms of our other ABS as of December 31, 2005 (dollars
in
thousands). Dollar price is computed by dividing amortized cost by par
amount.
|
Amortized
cost
|
Dollar
price
|
||||||
|
Moody’s
ratings category:
|
|||||||
|
Baa1
through Baa3
|
$
|
22,045
|
99.89
|
%
|
|||
|
Total
|
$
|
22,045
|
99.89
|
%
|
|||
|
S&P
ratings category:
|
|||||||
|
BBB+
through BBB-
|
$
|
19,091
|
99.87
|
%
|
|||
|
No
rating provided
|
2,954
|
100.00
|
%
|
||||
|
Total
|
$
|
22,045
|
99.89
|
%
|
|||
|
Weighted
average rating factor
|
398
|
Private
Equity Investments
At
December 31, 2005, we held one private equity investment with a fair value
of
$2.0 million, which was based on market prices provided by dealers net of our
unrealized loss of $30,000. We invest in trust preferred securities
and private equity investments with an emphasis on securities of small- to
middle-market financial institutions, including banks, savings and thrift
institutions, insurance companies, holding companies for these institutions
and
REITS. Trust preferred securities are issued by a special purpose trust that
holds a subordinated debenture or other debt obligation issued by a company
to
the trust.
The
table
below describes the terms of our other private equity investments as of December
31, 2005 (dollars in thousands). Dollar price is computed by dividing amortized
cost by par amount.
|
Amortized
cost
|
Dollar
price
|
||||||
|
Moody’s
ratings category:
|
|||||||
|
Ba1
through Ba3
|
$
|
1,984
|
99.19
|
%
|
|||
|
Total
|
$
|
1,984
|
99.19
|
%
|
|||
|
S&P
ratings category:
|
|||||||
|
BB+
through BB-
|
$
|
1,984
|
99.19
|
%
|
|||
|
Total
|
$
|
1,984
|
99.19
|
%
|
|||
|
Weighted
average rating factor
|
940
|
Commercial
Loans
We
purchase subordinate interests, referred to as B notes, and mezzanine loans
from
third parties. B notes are loans secured by a first mortgage and subordinated
to
a senior interest, referred to as an A note. The subordination of a B note
is
generally evidenced by a co-lender or participation agreement between the
holders of the A note and the B note. In some instances, the B note lender
may
require a security interest in the stock or partnership interests of the
borrower as part of the transaction. B note lenders have the same obligations,
collateral and borrower as the A note lender, but typically are subordinated
in
recovery upon a default. B notes share certain credit characteristics with
second mortgages in that both are subject to greater credit risk with respect
to
the underlying mortgage collateral than the corresponding first mortgage or
A
note. B note investments are generally structured with an original term of
up to
three years, with one year extensions that bring the loan to a maximum term
of
five years. We expect to hold our B note investments to their
maturity.
Mezzanine
loans are loans that are senior to the borrower’s equity in, and subordinate to
a first mortgage loan on, a property. These loans are secured by pledges of
ownership interests, in whole or in part, in entities that directly own the
real
property. In addition, we may require other collateral to secure mezzanine
loans, including letters of credit, personal guarantees of the principals of
the
borrower, or collateral unrelated to the property. We may structure our
mezzanine loans so that we receive a stated fixed or variable interest rate
on
the loan as well as a percentage of gross revenues and a percentage of the
increase in the fair market value of the property securing the loan, payable
upon maturity, refinancing or sale of the property. Our mezzanine loans may
also
have prepayment lockouts, penalties, minimum profit
hurdles and other mechanisms to protect and enhance returns in
the event
of
premature repayment. We expect the stated maturity of our mezzanine financings
to range from three to five years. Mezzanine loans may have maturities that
match the maturity of the related mortgage loan but may have shorter or longer
terms. We expect to hold these investments to maturity.
At December 31, 2005, our commercial real estate loan portfolio consisted of
seven B notes with an amortized cost of $121.9 million which bear interest
at
floating rates ranging from LIBOR plus 2.15% to LIBOR plus 6.25% and have
maturity dates ranging from January 2007 to April 2008 and four mezzanine
loans consisting of $44.5 million floating rate loans, which bear interest
between LIBOR plus 2.25% and 4.50%, with maturity dates ranging from August
2007
to July 2008 and a $5.0 million fixed rate loan, which bears interest at 9.50%
and matures May 2010.
On
at
least a quarterly basis, we evaluate our loan positions on an individual basis
and determine whether an impairment has occurred. When a loan is impaired,
the
allowance for loan losses is increased by the amount of the excess of the
amortized cost basis of the loan over its fair value. As of December 31, 2005,
we did not record an allowance for credit losses for our commercial real estate
loan portfolio.
Syndicated
Bank Loans
We
acquire senior and subordinated, secured and unsecured loans or syndicated
bank
loans made by banks or other financial entities. Syndicated bank loans may
also
include revolving credit facilities, under which the lender is obligated to
advance funds to the borrower under the credit facility as requested by the
borrower from time to time. We expect that some amount of these loans will
be
secured by real estate mortgages or liens on other assets. Certain of these
loans may have an interest-only payment schedule, with the principal amount
remaining outstanding and at risk until the maturity of the loan.
At
December 31, 2005, we held a total of $400.2 million of syndicated loans at
fair
value, of which $337.2 million are held by and secure the debt issued by
Apidos CDO I. We own 100% of the equity issued by Apidos CDO I, which we have
determined is a variable interest entity, or VIE, and are therefore deemed
to be
its primary beneficiary. In addition, $63.0 million of our syndicated loans
are
financed and held on our Apidos CDO III warehouse facility. Upon review of
the
transaction, we determined that Apidos CDO III is a VIE and we are the primary
beneficiary of the VIE. As a result, we consolidated Apidos CDO I and also
consolidated Apidos CDO III as of December 31, 2005, even though we do not
yet
own any of the equity of Apidos CDO III. We accrued interest income based on
the
contractual terms of the loans and recognized interest expense in accordance
with the terms of the warehouse agreement in our consolidated statement of
operations.
The
table
below describes the terms of our syndicated bank loan investments as of December
31, 2005 (dollars in thousands). Dollar price is computed by dividing amortized
cost by par amount.
|
Amortized
cost
|
Dollar
price
|
||||||
|
Moody’s
ratings category:
|
|||||||
|
Ba1
through Ba3
|
$
|
155,292
|
100.24
|
%
|
|||
|
B1
through B3
|
243,493
|
100.23
|
%
|
||||
|
Total
|
$
|
398,785
|
100.23
|
%
|
|||
|
S&P
ratings category:
|
|||||||
|
BBB+
through BBB-
|
$
|
15,347
|
100.20
|
%
|
|||
|
BB+
through BB-
|
131,607
|
100.22
|
%
|
||||
|
B+
through B-
|
246,335
|
100.24
|
%
|
||||
|
CCC+
through CCC-
|
5,496
|
100.37
|
%
|
||||
|
Total
|
$
|
398,785
|
100.23
|
%
|
|||
|
Weighted
average rating factor
|
2,089
|
Equipment
Leases and Notes
We
invest
in small- and middle-ticket equipment leases and notes. Under full payout
leases
and notes, the payments we receive over the term of the financing will return
our invested capital plus an appropriate return without consideration of
the
residual and the obligor will acquire the equipment at the end of the payment
term. We focus on leased equipment and other assets that are essential for
businesses to conduct their operations so that end users will be highly
motivated to make required monthly payments. At December 31, 2005, we held
$23.3
million of equipment leases and notes on a cost basis, net of unearned
income.
Investments
in direct financing leases and notes as of December 31, 2005 are as follows
(in
thousands):
|
As
of
December
31, 2005
|
||||
|
Direct
financing leases
|
$
|
18,141
|
||
|
Notes
receivable
|
5,176
|
|||
|
Total
|
$
|
23,317
|
Interest
Receivable
At
December 31, 2005, we had interest receivable of $9.5 million, which consisted
of $9.2 million of interest on our securities, loans and equipment leases and
notes, $172,000 of purchased interest that had been accrued when our securities
and loans were purchased and $98,000 of interest earned on escrow and sweep
accounts.
Other
Assets
Other
assets at December 31, 2005 of $1.1 million, consisted primarily of $89,000
of
prepaid directors’ and officers’ liability insurance, $1.2 million of prepaid
costs, principally professional fees, associated with the preparation and filing
with the SEC of a registration statement for our initial public offerings and
$34,000 of prepaid costs associated with the structuring of our hedging
transactions. These were partially offset by $164,000 of deferred loan
origination fees associated with our commercial real estate loan
portfolio.
Hedging
Instruments
Hedging
involves risk and typically involves costs, including transaction costs. The
costs of hedging can increase as the length of time covered by the hedges
increases and during periods of rising and volatile interest rates. We may
increase our hedging activity and, thus, increase our hedging costs during
periods when interest rates are volatile and rising. We generally intend to
hedge as much of our interest rate risk as the Manager determines is in the
best
interest of our stockholders, after considering the cost of such hedging
transactions and our need to maintain our qualification as a REIT. Our policies
do not contain specific requirements as to the percentages or amounts of
interest rate risk that we must hedge. We cannot assure you that our hedging
activities will have the desired beneficial impact on our results of operations
or financial condition. In addition, no hedging activity can completely insulate
us from the risks associated with changes in interest rates and prepayment
rates. See Item 1A − ‘‘Risk Factors − Risks Related to Our Investments − Our
hedging transactions may not completely insulate us from interest rate risk
and
may result in poorer overall investment performance than if we had not engaged
in any hedging transactions.’’
As
of
December 31, 2005, we had entered into hedges with a notional amount of $987.2
million. Interest rate hedges entered into during the period from March 8,
2005
to December 31, 2005 and our expected future interest rate hedging will
typically consist of interest rate swaps and interest rate caps as a means
of
adding stability to our interest expense and to manage our exposure to interest
rate movements or other identified risks. An interest rate swap is a contractual
agreement entered into between two counterparties under which each agrees to
make periodic payment to the other for an agreed period of time based upon
a
notional amount of principal. The principal amount is notional because there
is
no need
to
exchange actual amounts of principal in a single currency transaction: there
is
no foreign exchange component to take into account. However, a notional amount
of principal is required in order to compute the actual cash amounts that will
be periodically exchanged. An interest cap is a contractual agreement entered
into between two counterparties under which the cap reduces the exposure to
variability in future cash outflows attributable to changes in
LIBOR.
Under
the
most common form of interest rate swaps, a series of payments calculated by
applying a fixed rate of interest to a notional principal amount is exchanged
for a stream of payments similarly calculated but using a floating rate of
interest. This is a fixed-for-floating interest rate swap. Our hedges at
December 31, 2005 were fixed-for-floating interest rate swap agreements whereby
we swapped the floating rate of interest on the liabilities we hedged for a
fixed rate of interest. The maturities of these hedges range from April 2006
to
June 2014. At December 31, 2005, the unrealized gain on our interest rate swap
agreements was $2.8 million. We intend to continue to seek such hedges for
our
floating rate debt in the future.
Liabilities
We
have
entered into repurchase agreements to finance our agency RMBS and commercial
real estate loans. These agreements are secured by our agency RMBS and
commercial real estate loans and bear interest rates that have historically
moved in close relationship to the London Interbank Offered Rate, or LIBOR.
At
December 31, 2005, we had established nine borrowing arrangements with various
financial institutions and had utilized three of these arrangements, principally
our arrangement with Credit Suisse Securities (USA) LLC. None of the
counterparties to these agreements are affiliates of the Manager or
us.
We
seek
to renew our repurchase agreements as they mature under the then-applicable
borrowing terms of the counterparties to our repurchase agreements. Through
December 31, 2005, we have encountered no difficulties in effecting renewals
of
our repurchase agreements.
At
December 31, 2005, we had outstanding $947.1 million of repurchase agreements
secured by our agency RMBS with Credit Suisse Securities (USA) LLC with a
weighted-average current borrowing rate of 4.34%, all of which matured in less
than 30 days. At December 31, 2005, the repurchase agreements were secured
by
agency RMBS with an estimated fair value of $975.3 million and had a
weighted-average maturity of 17 days. The net amount at risk, defined as the
sum
of the fair value of securities sold plus accrued interest income minus the
sum
of repurchase agreement liabilities plus accrued interest expense, was $31.2
million at December 31, 2005.
In
August
2005, we also entered into a master repurchase agreement with Bear, Stearns
International Limited to finance the purchase of commercial real estate loans.
The maximum amount of our borrowing under the repurchase agreement is $150.0
million. Each repurchase transaction specifies its own terms, such as
identification of the assets subject to the transaction, sales price, repurchase
price, rate and term. At December 31, 2005, we had outstanding $80.6 million
of
repurchase agreements with a weighted average current borrowing rate of 5.51%,
all of which matured in less than 30 days. At December 31, 2005, the repurchase
agreements were secured by commercial real estate loans with an estimated fair
value of $116.3 million and had a weighted average maturity of 17 days. The
net
amount of risk was $36.0 million at December 31, 2005.
In
December 2005, we entered into a master repurchase agreement with Deutsche
Bank
AG, Cayman Islands Branch to finance the purchase of commercial real estate
loans. The maximum amount of our borrowing under the repurchase agreement is
$300.0 million. Each repurchase transaction specifies its own terms, such as
identification of the assets subject to the transaction, sales price, repurchase
price, rate and term. At December 31, 2005, we had outstanding $38.5 million
of
repurchase agreements with a weighted average current borrowing rate of 5.68%,
all of which matured in less than 30 days. At December 31, 2005, the repurchase
agreements were secured by commercial real estate loans with an estimated fair
value of $55.0 million and had a weighted average maturity of 18 days. The
net
amount of risk was $16.7 million at December 31, 2005.
47
In December 2005, we entered into a $15.0 million corporate credit facility
with
Commerce Bank, N.A. The unsecured revolving credit facility permits us to
borrow
up to the lesser of the facility amount and the sum of 80% of the sum of
our
unsecured assets rated higher than Baa3 or better by Moody’s and BBB- or better
by Standard and Poor’s plus our interest receivables plus 65% of our unsecured
assets rated lower than Baa3 by Moody’s and BBB- from Standard and Poor’s. Up to
20% of the borrowings under the facility may be in the form of standby letters
of credit. At December 31, 2005, $15.0 million was outstanding under this
facility at an interest rate of 6.37%.
As of December 31, 2005, we had executed two CDO transactions. In July 2005,
we
closed Ischus CDO II, a $400.0 million CDO transaction that provided financing
for mortgage-backed and other asset-backed securities. The investments held
by
Ischus CDO II collateralize $376.0 million of senior notes issued by the CDO
vehicle. In August 2005, we closed Apidos CDO I, a $350.0 million CDO
transaction that provided financing for syndicated bank loans. The investments
held by Apidos CDO I collateralize $321.5 million of senior notes issued by
the
CDO vehicle.
Also
during the period from March 8, 2005 to December 31, 2005, we formed Apidos
CDO
III and began borrowing on a warehouse facility provided by Citigroup Financial
Products, Inc. to purchase syndicated loans. At December 31, 2005, $63.0 million
was outstanding under the facility. The facility bears interest at a rate of
LIBOR plus 0.25%, which was 4.61% at December 31, 2005.
Stockholders’
Equity
Stockholders’
equity at December 31, 2005 was $195.3 million and included $22.4 million
of net
unrealized losses on securities classified as available-for-sale offset by
$2.8
million of unrealized gains on cash flow hedges, shown as a component of
accumulated other comprehensive loss. The unrealized losses consist of $12.9
million of net unrealized losses on our agency RMBS portfolio, $9.4 million
of
net unrealized losses on our non-agency RMBS portfolio and a $30,000 unrealized
loss on a private equity investment. At December 31, 2005, the weighted average
coupon of our agency RMBS portfolio is below prevailing market rates and
credit
spreads widened on our non-agency RMBS portfolio.
As
a
result of our ‘‘available-for-sale’’ accounting treatment, unrealized
fluctuations in market values of assets do not impact our income determined
in
accordance with GAAP, or our taxable income, but rather are reflected on our
balance sheet by changing the carrying value of the asset and stockholders’
equity under ‘‘Accumulated Other Comprehensive Income (Loss).’’ By accounting
for our assets in this manner, we hope to provide useful information to
stockholders and creditors and to preserve flexibility to sell assets in the
future without having to change accounting methods.
REIT
Taxable Income and Investment Company Act Matters
At
December 31, 2005, we believe that we qualified as a REIT under the provisions
of the Internal Revenue Code. The Internal Revenue Code requires that, as of
the
close of each quarter, at least 75% of our total assets must be ‘‘real estate
assets’’ as defined in the Internal Revenue Code. The Internal Revenue Code also
requires that, for each taxable year, at least 75% of our gross income come
from
real estate sources and 95% of our gross income come from real estate sources
and certain other sources itemized in the Internal Revenue Code, such as
dividends and interest. As of December 31, 2005, we believe that we were in
compliance with such requirements. We also believe that we met all of the REIT
requirements regarding ownership of our common stock as of December 31,
2005.
We
are
subject to federal income taxation at corporate rates on our net taxable income;
however, we are allowed a deduction for the distributions we make to our
stockholders, thereby subjecting the net income we distribute to taxation at
the
stockholders’ level only. To qualify as a REIT, we must meet various tax law
requirements, including, among others, requirements relating to the nature
of
our assets, the sources of our income, the timing and amount of distributions
that we make and the composition of our stockholders. As a REIT, we generally
are not subject to federal income tax on our net taxable income that we
distribute to our stockholders on a current basis. If we fail to qualify as
a
REIT in any taxable year and are not eligible for specified relief provisions,
we will be subject to federal income tax at regular corporate rates, and we
may
be precluded from qualifying as a REIT for the four taxable years following
the
year during which we lost our qualification. Further, even to the extent that
we
qualify as a REIT, we will be subject to tax at normal corporate rates on
net
income
or capital gains not distributed to our
stockholders, and we may be subject to other taxes, including payroll taxes,
and
state and local income, franchise, property, sales and other taxes. Moreover,
a
domestic TRS, such as Resource TRS, is subject to federal income taxation and
to
various other taxes. Since we, as a REIT, expect to make distributions based
on
taxable earnings, we expect that our distributions may at times be more or
less
than our reported earnings. REIT taxable income is not a presentation made
in
accordance with GAAP, and does not purport to be an alternative to net income
(loss) determined in accordance with GAAP as a measure of operating performance
or to cash flows from operating activities determined in
accordance with GAAP as a measure of liquidity. Total taxable income is the
aggregate amount of taxable income generated by us and by our domestic and
foreign taxable REIT subsidiaries. REIT taxable income excludes the
undistributed taxable income of our domestic taxable REIT subsidiary, if any
such income exists, which is not included in REIT taxable income until
distributed to us. There is no requirement that our domestic taxable REIT
subsidiary distribute its earning to us. REIT taxable income, however, includes
the taxable income of our foreign taxable REIT subsidiaries because we will
generally be required to recognize and report their taxable income on a current
basis. We believe that a presentation of REIT taxable income provides useful
information to investors regarding our financial condition and results of
operations as this measurement is used to determine the amount of dividends
that
we are required to declare to our stockholders in order to maintain our status
as a REIT for federal income tax purposes. We use REIT taxable income for this
purpose. Because not all companies use identical calculations, this presentation
of REIT taxable income may not be comparable to other similarly-titled measures
of other companies. The following table reconciles our REIT taxable income
to
our net income (in thousands).
|
Period
from March 8, 2005
(date
operations commenced) to December 31,
2005
|
||||
|
Net
income
|
$
|
10,908
|
||
|
Additions:
|
||||
|
Share-based
compensation to related parties
|
2,709
|
|||
|
Incentive
management fee expense to related parties paid in shares
|
86
|
|||
|
REIT
taxable income
|
$
|
13,703
|
We
intend
to operate our business so that we are not regulated as an investment company
under the Investment Company Act because the regulatory requirements imposed
upon registered investment companies would make it difficult to implement our
investment strategies. Among other restrictions, the Investment Company Act
imposes restrictions on a company’s use of leverage. In order to qualify for
exclusion from regulation under the Investment Company Act, at all times no
more
than 40% of our assets, on an unconsolidated basis, excluding government
securities and cash, may be ‘‘investment securities’’ as defined in the
Investment Company Act. For these purposes, the equity securities of a
majority-owned subsidiary which is not itself an investment company would not
constitute investment securities. As of December 31, 2005, we had three
subsidiaries, RCC Real Estate, RCC Commercial and Resource TRS. The equity
interests of RCC Commercial and Resource TRS will constitute investment
securities and must be monitored to ensure that their fair value does not exceed
the 40% test. As of December 31, 2005, we had invested approximately $60.5
million of our equity in RCC Commercial where we held $400.2 million of
commercial loans, $23.3 million of direct financing leases and notes and a
$2.0 million private equity investment. As of December 31, 2005, we had invested
approximately $159.4 million of our equity in RCC Real Estate, where we held
$1.0 billion of agency RMBS, $337.7 million of non-agency RMBS, $27.4 million
of
CMBS, $21.9 million of other ABS and $171.4 million of mezzanine loans and
B
notes. At December 31, 2005, we had made no investment in Resource TRS and
it
held no assets. We intend to operate RCC Real Estate, which as of December
31,
2005 held a significant portion of our investments, so that it qualifies for
the
exclusion from regulation under Section 3(c)(5)(C) of the Investment Company
Act. If it qualifies for the exclusion, the equity interests we hold in it
will
not be deemed to be investment securities and, as a result, we will meet the
40%
test. Section 3(c)(5)(C) and 3(c)(6) exclude from regulation as an investment
company those companies that do not issue redeemable securities and that are
‘‘primarily engaged’’ in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate.’’ In order to
maintain this exclusion, at least 55% of RCC Real Estate’s assets must be
‘‘qualifying real estate assets’’ such as whole mortgage loans, whole pool MBS,
MBS and B notes with respect to which we have unilateral foreclosure rights
on
the underlying mortgages. Other MBS may or may not constitute qualifying real
estate assets, depending on their characteristics, including whether the
securities are subject to risk of loss and the rights that RCC Real Estate
has
with respect to the underlying loans. To qualify for Section 3(c)(5)(C)
exclusion from regulation, not only must RCC Real Estate maintain 55% of its
assets in qualifying real estate assets, but it must also maintain at least
an
additional 25% of its assets in real estate-related assets, such as MBS that
do
not constitute qualifying real estate assets for the 55% test, or additional
qualifying real estate assets. At December 31, 2005, RCC Real Estate met both
the 55% and 25% tests.
Liquidity
and Capital Resources
Through
December 31, 2005, our principal sources of funds were the net proceeds from
our
March 2005 private placement, repurchase agreements totaling $1.1 billion,
including accrued interest of $2.1 million with a weighted average current
borrowing rate of 4.48%, CDO financings totaling $687.4 million with a weighted
average current borrowing rate of 4.62% and warehouse agreements totaling $63.0
million with a weighted average current borrowing rate of 4.29%. We expect
to
continue to borrow funds in the form of repurchase agreements to finance our
agency RMBS and commercial real estate loan portfolios and through warehouse
agreements to finance our non-agency RMBS, CMBS and other ABS, syndicated bank
loans, trust preferred securities, private equity investments and equipment
leases and notes prior to the execution of CDOs and other term financing
vehicles.
We
held
cash and cash equivalents of $17.7 million at December 31, 2005. We also held
$28.3 million of available-for-sale securities that had not been pledged as
collateral under our repurchase agreements.
We
anticipate that, upon repayment of each borrowing under a repurchase agreement,
we will immediately use the collateral released by the repayment as collateral
for borrowing under a new repurchase agreement. We also anticipate that our
borrowings under our warehouse credit facility will be refinanced through the
issuance of CDOs. Our leverage ratio may vary as a result of the various funding
strategies we expect to utilize in the future. As of December 31, 2005, our
leverage ratio was 9.4 times, which is consistent with our target of eight
to 12
times. We expect to have fully invested the net proceeds from our March 2005
private placement by March 31, 2006. Our leverage ratio should remain within
our
target range upon full investment.
We
have
entered into master repurchase agreements with Credit Suisse Securities (USA)
LLC, Barclays Capital Inc., J.P. Morgan Securities Inc., Countrywide Securities
Corporation, Deutsche Bank Securities Inc., Morgan Stanley & Co.
Incorporated, Goldman Sachs & Co., Bear, Stearns International Limited and
UBS Securities LLC. As of December 31, 2005, we had $947.1 million outstanding
under our agreement with Credit Suisse Securities (USA) LLC to finance our
agency RMBS portfolio. Each such agreement is a standard form providing as
follows:
|
·
|
The
parties may from time to time enter into repurchase transactions.
The
agreement for a repurchase transaction may be oral or in writing.
None of
the master repurchase agreements specifies a maximum amount for repurchase
transactions with us.
|
|
·
|
Each
repurchase transaction will be entered into by agreement between
the
parties specifying the terms of the transaction, including identification
of the assets subject to the transaction, sale price, repurchase
price,
rate, term and margin maintenance
requirements.
|
|
·
|
We
must cover margin deficits by depositing cash or additional securities
reasonably acceptable to our counterparty with it, but have the option
to
obtain payment from our counterparty of the amount by which the market
value of the securities subject to a transaction exceeds the applicable
margin amount for the transaction, either in cash or by delivery
of
securities.
|
|
·
|
We
are entitled to receive all income paid on or with respect to the
securities subject to a transaction, provided that the counterparty
may
apply income received to reduce our repurchase
price.
|
It
is an
event of default under the agreement if:
|
-
|
we
fail to transfer or our counterparty fails to purchase securities
after we
reach an agreement with respect to a particular
transaction;
|
|
-
|
either
party fails to comply with the margin and margin repayment
requirements;
|
|
-
|
the
counterparty fails to pay to us or credit us with income from the
securities subject to a
transaction;
|
|
-
|
either
party commences a proceeding or has a proceeding commenced against
it,
under any bankruptcy, insolvency or similar laws;
or
|
|
-
|
either
party shall admit its inability to, or intention not to, perform
any of
its obligations under the master repurchase
agreement.
|
|
·
|
Upon
an event of default, the non-defaulting party may accelerate the
repurchase date for the transaction and all income paid upon the
securities will belong to the non-defaulting party. If we are the
defaulting party, our counterparty may sell the securities or give
us
credit for the value of the securities on the date of default, and
we
would remain liable for any deficit. If our counterparty is the defaulting
party, we may purchase replacement securities, or elect to be deemed
to
have purchased replacement securities, with our counterparty being
liable
for the cost of the replacement securities or the amount by which
the
deemed repurchase price exceeds the stated repurchase price. We may
also,
by tender of the repurchase price, be deemed to have the securities
automatically transferred to us. The defaulting party will also be
liable
to the non-defaulting party for all costs, expenses and damages,
including
the costs of entering into or terminating hedge transactions, of
the
non-defaulting party, plus interest at the rate specified in the
repurchase agreement.
|
The master repurchase agreement may be terminated by either party without cause
upon written notice, but will remain in effect as to any transactions then
outstanding.
Our
repurchase agreement with Credit Suisse Securities (USA) LLC also provides
that
it will terminate if:
|
·
|
our
net asset value declines 20% on a monthly basis, 30% on a quarterly
basis,
40% on an annual basis, or 50% or more from the highest net asset
value
since the inception of the repurchase
agreement;
|
|
·
|
we
fail to maintain a minimum net asset value of $100
million;
|
|
·
|
the
Manager ceases to be our manager;
|
|
·
|
we
fail to qualify as a REIT; or
|
|
·
|
we
fail to deliver specified documents, including financial statements
or
financial information due annually, quarterly or monthly, or an estimate
of net asset values.
|
We
have
also entered into a master repurchase agreement with Bear, Stearns International
Limited. As of December 31, 2005, we had $80.6 million outstanding under this
agreement. The agreement provides as follows:
|
·
|
Bear,
Stearns International Limited, in its sole discretion, will purchase
assets from us, and will transfer those assets back to us at a particular
date or on demand;
|
|
·
|
the
maximum aggregate amount of outstanding repurchase transactions is
$150.0
million;
|
|
·
|
each
repurchase transaction will be entered into by agreement between
the
parties specifying the terms of the transaction, including identification
of the assets subject to the transaction, sale price, repurchase
price,
rate, term and margin maintenance requirements;
and
|
|
·
|
if
we control the servicing of the purchased assets, we must service
the
assets for the benefit of Bear, Stearns International
Limited.
|
It
is an
event of default under the agreement if:
|
·
|
Bear,
Stearns International Limited is not granted a first priority security
interest in the assets;
|
|
·
|
we
fail to repurchase securities, we fail to pay any price differential
or we
fail to make any other payment after we reach an agreement with respect
to
a particular transaction;
|
|
·
|
any
governmental or regulatory authority takes any action materially
adverse
to our business operations;
|
|
·
|
Bear,
Stearns International Limited determines, in good
faith,
|
|
-
|
that
there has been a material adverse change in our corporate structure,
financial condition or
creditworthiness;
|
|
-
|
that
we will not meet or we have breached any of our obligations;
or
|
|
-
|
that
a material adverse change in our financial condition may occur due
to
pending legal actions;
|
|
·
|
we
have commenced a proceeding, or had a proceeding commenced against
us,
under any bankruptcy, insolvency, reorganization or similar
laws;
|
|
·
|
we
make a general assignment for the benefit of
creditors;
|
|
·
|
we
admit in writing our inability to pay our debts as they become
due;
|
|
·
|
we
have commenced a proceeding, or had a proceeding commenced against
us,
under the provisions of the Securities Investor Protection Act of
1970,
which we consent to or do not timely contest and which results in
the
entry of an order for relief, or is not dismissed within 15
days;
|
|
·
|
a
final judgment is rendered against us in an amount greater than $1.0
million and remains undischarged or unpaid for 90
days;
|
|
·
|
we
have defaulted or failed to perform under any other note, indenture,
loan,
guaranty, swap agreement or any other contract to which we are a
party
which results in:
|
|
-
|
a
final judgment involving the failure to pay an obligation in excess
of
$1.0 million or
|
|
-
|
a
final judgment permitting the acceleration of the maturity of obligations
in excess of $1.0 million by any other party to or beneficiary of
such
note, indenture, loan, guaranty, swap agreement or any other contract;
or
|
|
·
|
we
breach any representation, covenant or condition, fail to perform,
admit
inability to perform or state our intention not to perform our obligations
under the repurchase agreement or in respect to any repurchase
transaction.
|
Upon
an
event of default, Bear, Stearns International Limited may accelerate the
repurchase date for each transaction. Unless we have tendered the repurchase
price for the assets, Bear, Stearns International Limited may sell the assets
and apply the proceeds first to its costs and expenses in connection with our
breach, including legal fees; second, to the repurchase price of the assets;
and
third, to any of our other outstanding obligations.
The
repurchase agreement also provides that we shall not, without the prior written
consent of Bear, Stearns International Limited,
|
·
|
permit
our net worth at any time to be less than the sum of 80% of our net
worth
on the date of the agreement and 75% of the amount received by us
in
respect of any equity issuance after the date of the
agreement;
|
|
·
|
permit
our net worth to decline by more than 15% in any calendar quarter
or more
than 30% during any trailing consecutive twelve month
period;
|
|
·
|
permit
our ratio of total liabilities to net worth to exceed 14:1;
or
|
|
·
|
permit
our consolidated net income, determined in accordance with GAAP,
to be
less than $1.00 during the period of any four consecutive calendar
months.
|
We
have a
warehouse facility with Citigroup Financial Products, Inc., an affiliate of
Citigroup Global Markets, Inc., pursuant to which it will provide up to $200.0
million of financing for the acquisition of syndicated bank loans to be sold
to
Apidos CDO III, subject to an increase in the total amount of bank loans to
be
financed by Citigroup Financial Products, Inc. upon mutual agreement of the
parties. Apidos serves as the collateral manager for the loans and has the
right
to select the loans and direct Apidos CDO III to purchase them.
Under
the
terms of the facility, loans that Apidos CDO III acquires through funding
provided by the facility are assigned to Citigroup Financial Products, Inc.,
which holds them until the facility terminates or the loans are sold. Apidos
CDO
III has granted Citigroup Financial Products, Inc. a first priority security
interest in all of its assets as further security for the facility. The facility
will terminate on the earlier to occur of the date on which Apidos CDO III
first
issues CDO securities or May 16, 2006. The facility may be terminated
earlier by either party on 10 days’ notice, except that if Citigroup
Financial Products, Inc. will be required to bear any losses upon termination
(effectively, losses in excess of $20.0 million, as referred to below), it
must
consent to the termination.
Upon
consummation of its offering of CDO securities, Apidos CDO III has the right
to
repurchase the loans held in the facility at a price equal to:
|
·
|
the
repurchase price, which is generally the sum of the original purchase
price of the loans plus any additional amounts paid by Citigroup
Financial
Products, Inc. with respect to the loans, plus all accrued but unpaid
interest, minus principal payments with respect to the loans;
minus
|
|
·
|
sales
proceeds from any loan sales; plus
|
|
·
|
an
interest rate factor, pro rated over the time the loans were held
in the
facility, equal to one-month LIBOR, reset daily, plus 0.25% per year;
minus
|
|
·
|
administration
fees, such as fees payable to brokers;
minus
|
|
·
|
excess
interest, which is defined as the difference between the interest
received
by Citigroup Financial Products, Inc. with respect to the loans and
the
sum of the interest rate factor and warehousing fee, referred to
below.
|
If
the
Apidos CDO III offering of CDO securities is not consummated, or if Apidos
CDO
III otherwise fails to repurchase one or more loans held in the facility,
Citigroup Financial Products, Inc. will liquidate the portfolio. We must
reimburse Citigroup Financial Products, Inc. for any collateral losses upon
liquidation up to a maximum of $20.0 million. Upon any liquidation of the
portfolio, we have the right to purchase the entire portfolio at the repurchase
price described above.
For
providing the warehouse facility, Citigroup Financial Products, Inc. receives
a
daily warehousing fee equal to the aggregate purchase price of the loans held
in
the facility on that day, plus any additional amounts paid by Citigroup
Financial Products, Inc. with respect to the loans, less principal payments
and
the proceeds of any loan sales, multiplied by the product of 0.25% and 1/360.
The fee is payable from the proceeds of Apidos CDO III’s offering of CDO
securities.
At
December 31, 2005, approximately $63.0 million had been funded through
the
facility at a weighted average interest rate of 4.29%.
We
have
also entered into a master repurchase agreement with Deutsche Bank AG,
Cayman
Islands Branch, an affiliate of Deutsche Bank Securities, Inc. As of December
31, 2005, we had $38.5 million outstanding under this agreement. The agreement
provides as follows:
|
·
|
Deutsche
Bank will purchase assets from us and will transfer those assets
back to
us on a particular date;
|
|
·
|
the
maximum aggregate amount of outstanding repurchase is $300.0
million;
|
|
·
|
each
repurchase transaction will be entered into by written agreement
between
the parties including identification of the assets subject to the
transaction, sale price, repurchase price, rate, term and margin
maintenance requirements; and
|
|
·
|
we
must cover margin deficits by depositing cash or additional securities
acceptable to Deutsche Bank in its sole
discretion.
|
It
is an
event of default under the agreement if:
|
·
|
we
fail to repurchase or Deutsche Bank fails to transfer assets after
we
reach an agreement with respect to a particular
transaction;
|
|
·
|
any
governmental, regulatory, or self-regulatory authority takes any
action
with has a material adverse effect on our financial condition or
business;
|
|
·
|
we
have commenced a proceeding under any bankruptcy, insolvency,
reorganization or similar laws;
|
|
·
|
we
have commenced a proceeding, or had a proceeding commenced against
us,
under the provisions of the Securities Investor Protection Act of
1970,
which we consent to or do not timely contest, results in the entry
of an
order for relief, or is not dismissed within 60
days;
|
|
·
|
we
make a general assignment for the benefit of
creditors;
|
|
·
|
we
admit in writing our inability to pay our debts as they become
due;
|
|
·
|
a
final judgment is rendered against us in an amount greater than $5.0
million and remains unpaid for a period of 60
days;
|
|
·
|
we
have defaulted or failed to perform under any note, indenture, loan
agreement, guaranty, swap agreement or any other contract agreement
or
transaction to which we are a party which results
in:
|
|
-
|
the
failure to pay a monetary obligation in excess of $1 million
or
|
|
-
|
the
acceleration of the maturity of obligations in excess of $1 million
by any
other party to a note, indenture, loan agreement, guaranty, swap
agreement
or other contract agreement; or
|
|
·
|
we
breach or fail to perform under the repurchase
agreement.
|
Upon
our
event of default, Deutsche Bank may accelerate the repurchase date for each
transaction. Unless we have tendered the repurchase price for the assets,
Deutsche Bank may sell the assets and apply the proceeds first to cover its
actual out-of-pocket costs and expenses; second to cover its actual
out-of-pocket costs to cover hedging transactions; third to the repurchase
price
of the assets; fourth to pay an exit fee and other of our obligations; and
fifth, to return to us any excess.
We
are
entitled to terminate a repurchase transaction without cause upon written notice
to Deutsche Bank and the repayment of the repurchase price plus
fees.
In
October 2005, we entered into one interest rate swap agreement with AIG
Financial Products Corp., whereby we swap a floating rate of interest in the
liability we are hedging for a fixed rate of interest and one interest rate
cap,
reducing our exposure to the variability of future cash flows attributable
to
changes in LIBOR. The notional amount of these agreements are $13.2 million
and
$15.0 million, respectively. The fixed rate we paid on our interest rate swap
was 4.49% as of December 31, 2005.
In
2005, we entered into a $15.0 million corporate credit facility with Commerce
Bank, N.A. The unsecured revolving credit facility provides borrowings of up
to
an amount equal to the lesser of the facility amount and the sum of 80% of
the
sum of our unsecured assets rated higher than Baa3 or better from Moody’s and
BBB- or better from Standards and Poor’s plus our interest receivables plus 65%
of our unsecured assets rated lower than our Baa3 by Moody’s and BBB- from
Standard and Poor’s. Up to 20% of the borrowings of the facility may be in the
form of standby letters of credit. At December 31, 2005, $15.0 million was
outstanding under this facility.
Loans
under the facility bear interest at one of the following two rates, at our
election:
|
·
|
the
base rate plus the applicable margin;
or
|
|
·
|
the
adjusted London Interbank Offered Rate, or LIBOR, plus the applicable
margin.
|
The
base
rate for any day equals the greater of the prime rate as published in the Wall
Street Journal or the federal funds rate plus 0.50%. The applicable margin
is as
follows:
|
·
|
where
our leverage ratio is less than 7.00:1.00, the applicable margin
is 0.50%
for base rate loans and 1.50% for LIBOR
loans;
|
|
·
|
where
our leverage ratio is greater than or equal to 7.00:1.00, but less
than
8.00:1.00, the applicable margin is 0.75% for base rate loans and
1.75%
for LIBOR loans;
|
|
·
|
where
our leverage ratio is greater than or equal to 8.00:1.00, but less
than
9.00:1.00, the applicable margin is 1.00% for base rate loans and
2.00%
for LIBOR loans;
|
|
·
|
where
our leverage ratio is greater than or equal to 9.00:1.00, but less
than
10.00:1.00, the applicable margin is 1.25% for base rate loans and
2.25%
for LIBOR loans;
|
|
·
|
where
our leverage ratio is greater than or equal to 10.00:1.00, the applicable
margin is 1.52% and 2.50%.
|
At
December 31, 2005, the interest rate on the outstanding borrowings under the
facility was 6.37%.
The
Commerce facility requires us to maintain a specified net worth, specified
maximum leverage ratio and a specified ratio of debt to earnings better
interest, taxes, deprecation, amortization and non-cash equity compensation
expense. As of December 31, 2005, the Company complied with all debt covenants
relating to its exiting borrowings under this facility.
Our
liquidity needs consist principally of funds to make investments, make
distributions to our stockholders and pay our operating expenses, including
our
management fees. Our ability to meet our liquidity needs will be subject to
our
ability to generate cash from operations and, with respect to our investments,
our ability to obtain additional debt financing and equity capital. We may
increase our capital resources through offerings of equity securities (possibly
including common stock and one or more classes of preferred stock), CDOs or
other forms of term financing. Such financing will depend on market conditions.
If we are unable to renew, replace or expand our sources of financing on
substantially similar terms, we may be unable to implement our investment
strategies successfully and may be required to liquidate portfolio investments.
If required, a sale of portfolio investments could be at prices lower than
the
carrying value of such assets, which would result in losses and reduced
income.
In
order
to maintain our qualification as a REIT and to avoid corporate-level income
tax
on the income we distribute to our stockholders, we intend to make regular
quarterly distributions of all or substantially all of our net taxable income
to
holders of our common stock. This requirement can impact our liquidity and
capital resources.
During
the period from March 8, 2005 to December 31, 2005, we declared and paid
dividends of $13.5 million or $0.86 per common share, including the declaration
of a quarterly distribution by the board of directors on December 29, 2005
of $0.36 per share of common stock, $5.6 million in the aggregate, which was
paid on January 17, 2006 to stockholders of record as of December 30,
2005.
Contractual
Obligations and Commitments
The
table
below summarizes our contractual obligations as of December 31, 2005. The table
below excludes contractual commitments related to our derivatives, which we
discuss in Item 7A − “Quantitative and Qualitative Disclosures about Market
Risk,” and the management agreement that we have with our Manager, which we
discuss in Item 1 − “Business” − and Item 13 − “Certain Relationships and
Related Transactions” because
those contracts do not have fixed and determinable payments.
|
Contractual
commitments
(dollars
in thousands)
|
||||||||||||||||
|
Payments
due by period
|
||||||||||||||||
|
Total
|
Less
than 1 year
|
1
- 3 years
|
3
- 5 years
|
More
than 5 years
|
||||||||||||
|
Repurchase
agreements(1)
|
$
|
1,068,277
|
$
|
1,068,277
|
$
|
−
|
$
|
−
|
$
|
−
|
||||||
|
Warehouse
agreements
|
62,961
|
62,961
|
−
|
−
|
−
|
|||||||||||
|
CDOs
|
687,407
|
−
|
−
|
−
|
687,407
|
|||||||||||
|
Unsecured
revolving credit facility
|
15,000
|
15,000
|
−
|
−
|
−
|
|||||||||||
|
Base
management fees(2)
|
3,263
|
3,263
|
−
|
−
|
−
|
|||||||||||
|
Total
|
$
|
1,836,908
|
$
|
1,149,501
|
$
|
−
|
$
|
−
|
$
|
687,407
|
||||||
|
(1)
|
Includes
accrued interest of $2.1 million.
|
|
(2)
|
Calculated
only for the next 12 months based on our current equity, as defined
in our
management agreement. As adjusted to give effect to the sale of common
stock in our IPO completed February 6, 2006, the total amount and
the
amount due in less than one year would be $3.7
million.
|
At
December 31, 2005, we had six interest rate swap contracts with a notional
value
of $972.2 million. These contracts are fixed-for-floating interest rate swap
agreements under which we contracted to pay a fixed rate of interest for the
term of the hedge and will receive a floating rate of interest. As of December
31, 2005, the average fixed pay rate of our interest rate hedges was 3.89%
and
our receive rate was one-month and three-month LIBOR, or 4.26%.
At
December 31, 2005, we also had one interest rate cap with a notional value
of
$15.0 million. This cap reduces our exposure to the variability in future cash
flows attributable to changes in LIBOR.
Off-Balance
Sheet Arrangements
As
of
December 31, 2005, we did not maintain any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities or variable interest entities,
established for the purpose of facilitating off-balance sheet arrangements
or
contractually narrow or limited purposes. Further, as of December 31, 2005,
we
had not guaranteed any obligations of unconsolidated entities or entered into
any commitment or intent to provide additional funding to any such
entities.
Recent
Developments
On
February 10, 2006, we completed the initial public offering of 4,000,000 shares
of our common stock (including 1,879,200 shares sold by certain selling
stockholders) at a price of $15.00 per share. The offering generated gross
proceeds of approximately $31.8 million and net proceeds, after deducting the
underwriters’ discounts and commissions and estimated offering expenses, of
approximately $27.6 million. We did not receive any proceeds from the shares
sold by the selling stockholders.
On
March
16, 2006, our board of directors declared a quarterly distribution of $0.33
per
share of common stock, $5.9 million in the aggregate, which will be paid on
April 10, 2006 to stockholders of record as of March 27, 2006.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared by management in accordance
with
GAAP. Note 3 to our financial statements, ‘‘Summary of Significant Accounting
Policies,’’ includes a detailed description of our significant accounting
policies. Our significant accounting policies are fundamental to understanding
our financial condition and results of operations because some of these policies
require that we make significant estimates and assumptions that may affect
the
value of our assets or liabilities and our financial results. We believe that
certain of our policies are critical because they require us to make difficult,
subjective and complex judgments about matters that are inherently uncertain.
The critical policies summarized below relate to classifications of investment
securities, revenue recognition, accounting for derivative financial instruments
and hedging activities, and stock-based compensation. We have reviewed these
accounting policies with our board of directors and believe that all of the
decisions and assessments upon which our financial statements are based were
reasonable at the time made based upon information available to us at the time.
We rely on the Manager’s experience and analysis of historical and current
market data in order to arrive at what we believe to be reasonable
estimates.
Classifications
of Investment Securities
Statement
of Financial Accounting Standards, or SFAS, No. 115, ‘‘Accounting for Certain
Investments in Debt and Equity Securities,’’ requires us to classify our
investment portfolio as either trading investments, available-for-sale
investments or held-to-maturity investments. Although we generally plan to
hold
most of our investments to maturity, we may, from time to time, sell any of
our
investments due to changes in market conditions or in accordance with our
investment strategy. Accordingly, SFAS No. 115 requires us to classify all
of
our investment securities as available-for-sale. We report all investments
classified as available-for-sale at fair value, based on market prices provided
by dealers, with unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss) in stockholders’ equity. As of
December 31, 2005, we had aggregate unrealized losses on our available-for-sale
securities of $22.8 million, which if not recovered, may result in the
recognition of future losses.
We
evaluate our available-for-sale investments for other-than-temporary impairment
charges on available-for-sale securities under SFAS No. 115 in accordance with
Emerging Issues Task Force, or EITF, 03-1, ‘‘The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments.’’ SFAS No. 115 and EITF
03-1 requires an investor to determine when an investment is considered impaired
(i.e., decline in fair value below its amortized cost), evaluate whether the
impairment is other than temporary (i.e., the investment value will not be
recovered over its remaining life), and, if the impairment is other than
temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value. The guidance also includes accounting
considerations subsequent to the recognition of other-than-temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. EITF 03-1 also includes
disclosure requirements for investments in an unrealized loss position for
which
other-than-temporary impairments have not been recognized.
We
record
investment securities transactions on the trade date. We record purchases of
newly issued securities when all significant uncertainties regarding the
characteristics of the securities are removed, generally shortly before
settlement date. We determine realized gains and losses on investment securities
on the specific identification method.
Repurchase
Agreements
We
finance the acquisition of our agency RMBS solely through the use of repurchase
agreements. In addition, we intend to use repurchase agreements as a short-term
financing source for our commercial real estate loan portfolio prior to the
execution of a CDO. Although structured as a sale and purchase obligation,
a
repurchase agreement operates as a financing under which we pledge our
securities as collateral to secure a loan which is equal in value to a specified
percentage of the estimated fair value of the pledged collateral, while we
retain beneficial ownership of the pledged collateral. We carry these repurchase
agreements at their contractual amounts, as specified in the respective
agreements. We recognize interest expense on all borrowings on an accrual
basis.
In
certain circumstances, we have purchased debt investments from a counterparty
and subsequently financed the acquisition of those debt investments through
repurchase agreements with the same counterparty. We currently record the
acquisition of the debt investments as assets and the related repurchase
agreements as financing liabilities gross on the consolidated balance sheets.
Interest income earned on the debt investments and interest expense incurred
on
the repurchase obligations are reported gross on the consolidated income
statements. However, under a certain technical interpretation of FASB Statement
No. 140, or SFAS 140, such transactions may not qualify as a purchase by us.
We
believe, and it is industry practice, that we are accounting for these
transactions in an appropriate manner. However, the result of this
technical interpretation would prevent us from presenting the debt investments
and repurchase agreements and the related interest income and interest expense
on a gross basis on our financial statements. Instead, we would present the
net
investment in these transactions with the counterparty and a derivative with
the
corresponding change in fair value of the derivative being recorded through
earnings. The value of the derivative would reflect changes in the value of
the
underlying debt investments and changes in the value of the underlying credit
provided by the counterparty. As of December 31, 2005, we had 19 transactions
where debt instruments were financed with the same counterparty aggregating
approximately $307.3 million in MBS and $294.2 million in financings under
related repurchase agreements. As of March 28, 2006, we had one of these
transactions remaining comprised of $19.4 million of MBS and $18.8 million
in
financings under related repurchase agreements. It is anticipated that this
transaction will no longer be financed with the same counterparty as of March
31, 2006.
Interest
Income Recognition
We
accrue
interest income on our MBS, commercial real estate loans, other ABS, syndicated
bank loans, equipment leases and notes and private equity investments using
the
effective yield method based on the actual coupon rate and the outstanding
principal amount of the underlying mortgages or other assets. We amortize or
accrete into interest income premiums and discounts over the lives of
the investments also using the effective yield method (or a method that
approximates effective yield), adjusted for the effects of estimated prepayments
based on SFAS No. 91, ‘‘Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases.’’ For
investment purchased at par, the effective yield is the contractual interest
rate on the investment. If the investment is purchased at a discount or at
a
premium, the effective yield is computed based on the contractual interest
rate
increased for the accretion of a purchase discount or decreased for the
amortization of a purchase premium. The effective yield method requires that
we
make estimates of future prepayment rates for our investments that can be
contractually prepaid before their contractual maturity date so that the
purchase discount can be accreted, or the purchase premium can be amortized,
over the estimated remaining life of the investment. The prepayment estimates
that we use directly impact the estimated remaining lives or our investments.
We
review and adjust our prepayment estimates as of each quarter end or more
frequently if we become aware of any material information that would lead us
to
believe that an adjustment is necessary. If our estimate of prepayments is
incorrect, we may have to adjust the amortization or accretion of premiums
and
discounts, which would have an impact on future income.
We
use
both our experience and judgment and third-party prepayment projections when
developing our estimates of future prepayment rates. Prepayment rates for
residential mortgage loans and their related RMBS are very difficult to predict
accurately because the underlying borrowers have the option to prepay their
mortgages at any time before the contractual maturity date of their mortgages,
generally without incurring any prepayment penalties. Prepayment models attempt
to predict borrower behavior under different interest rate scenarios and the
related projected prepayment rates. The experience of the Manager’s managers
indicates that prepayment models are less accurate during periods when there
are
material interest rate changes and material changes in the shape of the interest
rate yield curves.
If
we
experience material differences between our projected prepayment rates and
the
actual prepayment rates that we realize, the remaining estimated lives of our
investments may change and result in greater earnings volatility and/or lower
net income than originally estimated. We may mitigate this risk by minimizing
the amount of purchase premium and purchase discount on our investment portfolio
and by purchasing investments where the underlying borrowers have no or fewer
prepayment options. As of December 31, 2005, the aggregate amount of unamortized
purchase premium on our RMBS portfolio totaled approximately $1.5 million and
the aggregate amount of unamortized purchase discount totaled
approximately
$4.0 million. Net purchase discount and purchase premium accretion totaled
approximately $450,000 for the period from March 8, 2005 to December 31,
2005.
Accounting
for Derivative Financial Instruments and Hedging Activities
Our
policies permit us to enter into derivative contracts, including interest rate
swaps and interest rate caps forwards, as a means of mitigating our interest
rate risk on forecasted interest expense associated with the benchmark rate
on
forecasted rollover/reissuance of repurchase agreements or the interest rate
repricing of repurchase agreements, or other similar hedged items, for a
specified future time period.
As
of
December 31, 2005, we had engaged in six interest rate swaps and one interest
rate cap with a notional value of $987.2 million and a fair value of $3.0
million to seek to mitigate our interest rate risk for specified future time
periods as defined in the terms of the hedge contracts. The contracts we have
entered into have been designated as cash flow hedges and are evaluated at
inception and on an ongoing basis in order to determine whether they qualify
for
hedge accounting under SFAS No. 133, ‘‘Accounting for Derivative Instruments and
Hedging Activities,’’ as amended and interpreted. The hedge instrument must be
highly effective in achieving offsetting changes in the hedged item attributable
to the risk being hedged in order to qualify for hedge accounting. A hedge
instrument is highly effective if changes in the fair value of the derivative
provide an offset to at least 80% and not more than 125% of the changes in
fair
value or cash flows of the hedged item attributable to the risk being hedged.
The futures and interest rate swap contracts are carried on the balance sheet
at
fair value. Any ineffectiveness which arises during the hedging relationship
must be recognized in interest expense during the period in which it arises.
Before the end of the specified hedge time period, the effective portion of
all
contract gain and losses (whether realized or unrealized) is recorded in other
comprehensive income or loss. Realized gains and losses on futures contracts
are
reclassified into earnings as an adjustment to interest expense during the
specified hedge time period. Realized gains and losses on the interest rate
hedges are reclassified into earnings as an adjustment to interest expense
during the period after the swap repricing date through the remaining maturity
of the swap. For REIT taxable income purposes, realized gains and losses on
futures and interest rate cap and swap contracts are reclassified into earnings
over the term of the hedged transactions as designated for tax.
We
are
not required to account for derivative contracts using hedge accounting as
described above. If we decided not to designate the derivative contracts as
hedges and to monitor their effectiveness as hedges, or if we entered into
other
types of financial instruments that did not meet the criteria to be designated
as hedges, changes in the fair values of these instruments would be recorded
in
the statement of operations, potentially resulting in increased volatility
in
our earnings.
Income
Taxes
We
expect
to operate in a manner that will allow us to qualify and be taxed as a REIT
and
to comply with the provisions of the Code with respect thereto. A REIT is
generally not subject to federal income tax on that portion of its REIT taxable
income which is distributed to its stockholders, provided, that at least 90%
of
Taxable Income is distributed and certain other requirements are met. If we
fail
to meet these requirements and does not qualify for certain statutory relief
provisions, it would be subject to federal income tax. We have a wholly-owned
domestic subsidiary, Resource TRS, that we and Resource TRS have elected to
be
treated as a taxable REIT subsidiary. For financial reporting purposes, current
and deferred taxes are provided for on the portion of earnings recognized by
the
us with respect to our interest in Resource TRS, a domestic taxable REIT
subsidiary, because it is taxed as a regular subchapter C corporation under
the
provisions of the Code. As of December 31, 2005, Resource TRS did not have
any
taxable income. Apidos CDO I, our foreign taxable REIT subsidiary is organized
as an exempted company incorporated with limited liability under the laws of
the
Cayman Islands, and is generally exempt from federal and state income tax at
the
corporate level because its activities in the United States are limited to
trading in stock and securities for its own account. Therefore, despite its
status as a taxable REIT subsidiary, it generally will not be subject to
corporate tax on it’s earnings and no provision from income taxes is required;
however because it is a “controlled foreign corporation,” we will generally be
required to include its current taxable income in our calculation of REIT
taxable income. We also intend to make an election to treat Apidos CDO III
as a
taxable REIT subsidiary.
Loans
Our
investments in corporate leveraged loans and commercial real estate loans are
held for investment and, therefore, we record them on our balance sheet
initially at their purchase price less any origination fees applied at closing
and subsequently account for them based on their outstanding principal plus
or
minus unamortized premiums or discounts. In certain instances when the credit
fundamentals underlying a particular loan have changed in such a manner that
our
expected return on investment may decrease, we may sell a loan held for
investment. Since the determination has been made that we will no longer hold
the loan for investment, we will account for the loan at the lower of amortized
cost or market value.
Direct
Financing Leases and Notes
We
invest
in small- and middle-ticket equipment leases and notes. Investments in leases
are recorded in accordance with SFAS No. 13, “Accounting for Leases,” as amended
and interpreted. Direct financing leases and notes transfer substantially
all
benefits and risks of equipment ownership to the customer. Our investment
in
direct financing leases consists of the sum of the total future minimum lease
payments receivable, less unearned finance income. Unearned finance income,
which is recognized over the term of the lease by utilizing the effective
interest method, represents the excess of the total future minimum lease
payments over the cost of the related equipment. Our investment in notes
receivable consists of the sum of the total future minimum loan payments
receivable less unearned finance income. Unearned finance income, which is
recognized as revenue over the term of the financing by the effective interest
method, represents the excess of the total future minimum contract
payments over the cost of the related equipment.
Loan
Interest Income Recognition
Interest
income on loans includes interest at stated rates adjusted for amortization
or
accretion of premiums and discounts. Premiums and discounts are amortized or
accreted into income using the effective yield method. When we purchase a loan
or pool of loans at a discount, we consider the provisions of AICPA Statement
of
Position (‘‘SOP’’) 03-3 ‘‘Accounting for Certain Loans or Debt Securities
Acquired in a Transfer’’ to evaluate whether all or a portion of the discount
represents accretable yield. If a loan with a premium or discount is prepaid,
we
immediately recognize the unamortized portion as a decrease or increase to
interest income.
Stock
Based Compensation
Pursuant
to our 2005 Stock Incentive Plan, we granted 345,000 shares of restricted stock
and options to purchase 651,666 shares of common stock to the Manager. Holders
of the restricted shares have all of the rights of a stockholder, including
the
right to vote and receive dividends. We account for the restricted stock and
stock options granted in accordance with the consensus in Issue 1 of EITF 96-18,
‘‘Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,’’ and SFAS No.
123, ‘‘Accounting for Stock-Based Compensation.’’ In accordance with EITF 96-
18, we recorded the stock and options in stockholders’ equity at fair value
through an increase to additional paid-in-capital and an off-setting entry
to
deferred equity compensation (a contra-equity account). We will amortize the
deferred compensation over a three year graded vesting period with the
amortization expense reflected as equity compensation expense. The unvested
stock and options are adjusted quarterly to reflect changes in fair value as
performance under the agreement is completed. We reflect change in fair value
in
stockholders’ equity in the equity compensation expense recognized in that
quarter and in future quarters until the stock and options are fully
vested.
We
also
issued 4,000 shares of stock to our directors on March 8, 2005. The stock awards
vest in full one year after the date of the grant. We account for this issuance
using the fair value based methodology prescribed by SFAS No. 123. Pursuant
to
SFAS No. 123, we measured the fair value of the award on the grant date and
recorded this value in stockholders’ equity through an increase to additional
paid-in capital and an offsetting entry to deferred equity compensation. This
amount is not remeasured under the fair value-based method. The deferred
compensation is amortized and included in equity compensation
expense.
Incentive
Compensation
Our management agreement with the Manager also provides for incentive
compensation if our financial performance exceeds certain benchmarks. Under
the
management agreement, the incentive compensation will be paid up to 75% in
cash
and at least 25% in stock. The cash portion of the incentive fee is accrued
and
expensed during the period for which it is calculated and earned. In accordance
with SFAS No. 123 and EITF 96-18, the restricted stock portion of the incentive
fee is also accrued and expensed during the period for which it is calculated
and earned. Shares granted in connection with the incentive fee will vest
immediately. For the period from March 8, 2005 to December 31, 2005, the Manager
earned an incentive management fee of $344,000.
Variable
Interest Entities
In
December 2003, the Financial Accounting Standards Board, or FASB, issued FIN
46-R. FIN 46-R addresses the application of Accounting Research Bulletin No.
51,
‘‘Consolidated Financial Statements,’’ to a VIE and requires that the assets,
liabilities and results of operations of a VIE be consolidated into the
financial statements of the enterprise that has a controlling financial interest
in it. The interpretation provides a framework for determining whether an entity
should be evaluated for consolidation based on voting interests or significant
financial support provided to the entity which we refer to as variable
interests. We considers all counterparties to a transaction to determine whether
a counterparty is a VIE and, if so, whether our involvement with the entity
results in a variable interest in the entity. If we determine that we have
a
variable interest in the entity, we perform analysis to determine whether we
are
the primary beneficiary. As of December 31, 2005, we determined that Ischus
CDO
II, Apidos CDO I and Apidos CDO III were VIEs and that we were the primary
beneficiary of the VIEs. We own 100% of the equity interests of Ischus CDO
II
and Apidos CDO I and have provided a guarantee of the first $20.0 million in
losses on the portfolio of bank loans financed by the Apidos CDO III warehouse
agreement. Accordingly, we consolidated these entities.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123-R, which is a revision of SFAS
No.
123, ‘‘Accounting for Stock-Based Compensation.’’ SFAS No. 123-R supersedes
Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to
Employees,’’ and amends SFAS No. 95, ‘‘Statement of Cash Flows.’’ Generally, the
approach to accounting in Statement 123-R requires all share-based payments
to
employees, including grants of employee stock options, to be recognized in
the
issuer’s financial statements based on their fair value. We are required to
adopt the provisions of the standard for the annual period beginning
after June 15, 2005. We do not expect that the adoption of SFAS No. 123-R
will
have a material effect on our financial condition, results of operation or
liquidity.
In
May
2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error
Corrections,’’ which replaces Accounting Principles Board Opinion No. 20,
‘‘Accounting Changes’’ and SFAS No. 3, ‘‘Reporting Accounting Changes in Interim
Financial Statements — An Amendment of APB Opinion No. 28.’’ SFAS 154 provides
guidance on the accounting for, and reporting of, accounting changes and error
corrections. It established retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle
and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
Inflation
Virtually
all of our assets and liabilities are interest rate sensitive in nature. As
a
result, interest rates and other factors influence our performance far more
so
than does inflation. Changes in interest rates do not necessarily correlate
with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our distributions are determined by our
board of directors based primarily by our net income as calculated for tax
purposes; in each case, our activities and balance sheet are measured with
reference to historical cost and/or fair market value without considering
inflation.
As
of
December 31, 2005, the primary component of our market risk was interest rate
risk, as described below. While we do not seek to avoid risk completely, we
do
seek to assume risk that can be quantified from historical experience, to
actively manage that risk, to earn sufficient compensation to justify assuming
that risk and to maintain capital levels consistent with the risk we undertake
or to which we are exposed.
Interest
Rate Risk
We
are
subject to interest rate risk in conjunction with our investments in fixed
rate,
adjustable rate and hybrid adjustable rate agency RMBS and our related debt
obligations, which, as of December 31, 2005, were generally repurchase
agreements of limited duration that are periodically refinanced at current
market rates, and our derivative contracts.
Effect
on Net Interest Income
We
invest
in hybrid adjustable-rate agency RMBS. Hybrid adjustable-rate agency RMBS have
interest rates that are fixed for the first few years of the loan (typically
three, five, seven or 10 years) and thereafter their interest rates reset
periodically on the same basis as adjustable-rate agency RMBS. We compute the
projected weighted-average life of our hybrid adjustable-rate agency RMBS based
on the market’s assumptions regarding the rate at which the borrowers will
prepay the underlying mortgages. When we acquire a hybrid adjustable-rate agency
RMBS with borrowings, we may, but are not required to, enter into an interest
rate swap agreement or other hedging instrument that effectively fixes our
borrowing costs for a period close to the anticipated average life of the
fixed-rate portion of the related agency RMBS. This strategy is designed to
protect us from rising interest rates because the borrowing costs are fixed
for
the duration of the fixed-rate portion of the related RMBS. However, if
prepayment rates decrease in a rising interest rate environment, the life of
the
fixed-rate portion of the related RMBS could extend beyond the term of the
swap
agreement or other hedging instrument. This situation could negatively impact
us
as borrowing costs would no longer be fixed after the end of the hedging
instrument while the income earned on the hybrid adjustable-rate agency RMBS
would remain fixed. This results in a narrowing of the net interest spread
between the related assets and borrowings and may even result in losses. This
situation may also cause the market value of our hybrid adjustable-rate agency
RMBS to decline with little or no offsetting gain from the related hedging
transactions. In certain situations, we may be forced to sell assets and incur
losses to maintain adequate liquidity.
Hybrid
Adjustable-Rate Agency RMBS Interest Rate Cap Risk
We
also
invest in hybrid adjustable-rate agency RMBS which are based on mortgages that
are typically subject to periodic and lifetime interest rate caps and floors,
which limit the amount by which an adjustable-rate or hybrid adjustable-rate
agency RMBS’s interest yield may change during any given period. However, our
borrowing costs pursuant to our repurchase agreements will not be subject to
similar restrictions. Therefore, in a period of increasing interest rates,
interest rate costs on our borrowings could increase without limitation by
caps,
while the interest-rate yields on our adjustable-rate and hybrid adjustable-rate
agency RMBS would effectively be limited by caps. This problem will be magnified
to the extent we acquire adjustable-rate and hybrid adjustable-rate agency
RMBS
that are not based on mortgages which are fully-indexed. In addition, the
underlying mortgages may be subject to periodic payment caps that result in
some
portion of the interest being deferred and added to the principal outstanding.
This could result in our receipt of less cash income on our adjustable-rate
and
hybrid adjustable-rate agency RMBS than we need in order to pay the interest
cost on our related borrowings. These factors could lower our net interest
income or cause a net loss during periods of rising interest rates, which would
negatively impact our financial condition, cash flows and results of
operations.
Interest
Rate Mismatch Risk
We
intend
to fund a substantial portion of our acquisitions of hybrid adjustable-rate
agency RMBS with borrowings that have interest rates based on indices and
repricing terms similar to, but of shorter maturities than, the interest rate
indices and repricing terms of the RMBS. Thus, we anticipate that in most cases
the interest rate indices and repricing terms of our mortgage assets and our
funding sources will not be identical, thereby creating an interest rate
mismatch between assets and liabilities. Therefore, our cost of funds would
likely rise or fall more quickly than would our earnings rate on assets. During
periods of changing interest rates, such interest rate mismatches could
negatively impact our financial condition, cash flows and results of
operations.
Our
analysis of risks is based on management’s experience, estimates, models and
assumptions. These analyses rely on models which utilize estimates of fair
value
and interest rate sensitivity. Actual economic conditions or implementation
of
investment decisions by the Manager may produce results that differ
significantly from our expectations.
Prepayment
Risk
Prepayments
are the full or partial repayment of principal prior to the original term to
maturity of a mortgage loan and typically occur due to refinancing of the
mortgage loan. Prepayment rates for existing RMBS generally increase when
prevailing interest rates fall below the market rate existing when the
underlying mortgages were originated. In addition, prepayment rates on
adjustable-rate and hybrid adjustable rate agency RMBS generally increase when
the difference between long-term and short-term interest rates declines or
becomes negative. Prepayments of RMBS could harm our results of operations
in
several ways. Some adjustable-rate mortgages underlying our adjustable-rate
agency RMBS may bear initial ‘‘teaser’’ interest rates that are lower than their
‘‘fully-indexed’’ rates, which refers to the applicable index rates plus a
margin. In the event that such an adjustable-rate mortgage is prepaid prior
to
or soon after the time of adjustment to a fully-indexed rate, the holder of
the
related mortgage-backed security would have held such security while it was
less
profitable and lost the opportunity to receive interest at the fully-indexed
rate over the expected life of the adjustable-rate mortgage-backed security.
Although we currently do not own any adjustable-rate agency RMBS with ‘‘teaser’’
rates, we may obtain some in the future which would expose us to this prepayment
risk. Additionally, we currently own RMBS that were purchased at a premium.
The
prepayment of such RMBS at a rate faster than anticipated would result in a
write-off of any remaining capitalized premium amount and a consequent reduction
of our net interest income by such amount. Finally, in the event that we are
unable to acquire new RMBS to replace the prepaid RMBS, our financial condition,
cash flow and results of operations could be negatively impacted.
Effect
on Fair Value
Another
component of interest rate risk is the effect changes in interest rates will
have on the market value of our assets. We face the risk that the market value
of our assets will increase or decrease at different rates than that of our
liabilities, including our hedging instruments.
We
primarily assess our interest rate risk by estimating the duration of our assets
and the duration of our liabilities. Duration essentially measures the market
price volatility of financial instruments as interest rates change. We generally
calculate duration using various financial models and empirical data. Different
models and methodologies can produce different duration numbers for the same
securities.
The
following sensitivity analysis table shows, at December 31, 2005, the estimated
impact on the fair value of our interest rate-sensitive investments and
repurchase agreement liabilities of changes in interest rates, assuming rates
instantaneously fall 100 basis points and rise 100 basis points (dollars in
thousands):
|
Interest
rates
fall
100
basis
points
|
Unchanged
|
Interest
rates
rise
100
basis
points
|
||||||||
|
Hybrid
adjustable-rate agency RMBS and other ABS(1)
|
||||||||||
|
Fair
value
|
$
|
1,067,628
|
$
|
1,038,878
|
$
|
1,011,384
|
||||
|
Change
in fair value
|
$
|
28,750
|
$
|
−
|
$
|
(27,494
|
)
|
|||
|
Change
as a percent of fair value
|
2.77
|
%
|
−
|
2.65
|
%
|
|||||
|
Repurchase
and warehouse agreements (2)
|
||||||||||
|
Fair
value
|
$
|
1,131,238
|
$
|
1,131,238
|
$
|
1,131,238
|
||||
|
Change
in fair value
|
$
|
−
|
$
|
−
|
$
|
−
|
||||
|
Change
as a percent of fair value
|
−
|
−
|
−
|
|||||||
|
Hedging
instruments
|
||||||||||
|
Fair
value
|
$
|
(4,651
|
)
|
$
|
3,006
|
$
|
4,748
|
|||
|
Change
in fair value
|
$
|
(7,657
|
)
|
$
|
−
|
$
|
1,742
|
|||
|
Change
as a percent of fair value
|
n/m
|
−
|
n/m
|
|
(1)
|
Includes
the fair value of other available-for-sale investments that are sensitive
to interest rate changes.
|
|
(2)
|
The
fair value of the repurchase agreements and warehouse agreements
would not
change materially due to the short-term nature of these
instruments.
|
For
purposes of the table above, we have excluded our investments with variable
interest rates that are indexed to LIBOR. Because the variable rates on these
instruments are short-term in nature, we are not subject to material exposure
to
movements in fair value as a result of changes in interest rates.
It
is
important to note that the impact of changing interest rates on fair value
can
change significantly when interest rates change beyond 100 basis points from
current levels. Therefore, the volatility in the fair value of our assets could
increase significantly when interest rates change beyond 100 basis points from
current levels. In addition, other factors impact the fair value of our interest
rate-sensitive investments and hedging instruments, such as the shape of the
yield curve, market expectations as to future interest rate changes and other
market conditions. Accordingly, in the event of changes in actual interest
rates, the change in the fair value of our assets would likely differ from
that
shown above and such difference might be material and adverse to our
stockholders.
Risk
Management
To
the
extent consistent with maintaining our status as a REIT, we seek to manage
our
interest rate risk exposure to protect our portfolio of RMBS and related debt
against the effects of major interest rate changes. We generally seek to manage
our interest rate risk by:
| · |
monitoring
and adjusting, if necessary, the reset index and interest rate related
to
our mortgage-backed securities and our
borrowings;
|
| · |
attempting
to structure our borrowing agreements for our RMBS to have a range
of
different maturities, terms, amortizations and interest rate adjustment
periods; and
|
| · |
using
derivatives, financial futures, swaps, options, caps, floors and
forward
sales, to adjust the interest rate sensitivity of our RMBS and our
borrowing.
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders of
Resource
Capital Corp.
We
have
audited the accompanying consolidated balance sheet of Resource Capital Corp.
and subsidiaries (the “Company”) as of December 31, 2005, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the period from March 8, 2005 (Date Operations Commenced) to December
31, 2005. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Resource Capital Corp.
and
subsidiaries as of December 31, 2005, and the results of their operations,
and
their cash flows for the period from March 8, 2005 (Date Operations Commenced)
to December 31, 2005 in conformity with accounting principles generally accepted
in the United States of America.
/s/
Grant
Thornton LLP
New
York,
New York
March
15,
2006
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
(in
thousands, except share and per share data)
|
December
31,
2005
|
||||
|
ASSETS
|
||||
|
Cash
and cash equivalents
|
$
|
17,729
|
||
|
Restricted
cash
|
23,592
|
|||
|
Due
from broker
|
525
|
|||
|
Available-for-sale
securities, pledged as collateral, at fair value
|
1,362,392
|
|||
|
Available-for-sale
securities, at fair value
|
28,285
|
|||
|
Loans,
net of allowances of $0
|
570,230
|
|||
|
Direct
financing leases and notes, net
|
23,317
|
|||
|
Derivatives,
at fair value
|
3,006
|
|||
|
Interest
receivable
|
9,520
|
|||
|
Principal
paydowns receivables
|
5,805
|
|||
|
Other
assets
|
1,146
|
|||
|
Total
assets
|
$
|
2,045,547
|
||
|
LIABILITIES
|
||||
|
Repurchase
agreements, including accrued interest of $2,104
|
$
|
1,068,277
|
||
|
Collateralized
debt obligations (“CDOs”)
|
687,407
|
|||
|
Warehouse
agreements
|
62,961
|
|||
|
Unsecured
revolving credit facility
|
15,000
|
|||
|
Distribution
payable
|
5,646
|
|||
|
Accrued
interest expense
|
9,514
|
|||
|
Management
fee payable − related party
|
896
|
|||
|
Accounts
payable and accrued liabilities
|
513
|
|||
|
Total
liabilities
|
1,850,214
|
|||
|
STOCKHOLDERS’
EQUITY
|
||||
|
Preferred
stock, par value $0.001: 100,000,000 shares authorized; no shares
issued
and outstanding
|
-
|
|||
|
Common
stock, par value $0.001: 500,000,000 shares authorized;
15,682,334
shares issued and outstanding (including 349,000 restricted shares)
|
16
|
|||
|
Additional
paid-in capital
|
220,161
|
|||
|
Deferred
equity compensation
|
(2,684
|
)
|
||
|
Accumulated
other comprehensive loss
|
(19,581
|
)
|
||
|
Distributions
in excess of earnings
|
(2,579
|
)
|
||
|
Total
stockholders’ equity
|
$
|
195,333
|
||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
2,045,547
|
See
accompanying notes to consolidated financial statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
(in
thousands, except share and per share data)
|
Period
from
March
8, 2005
(Date
Operations Commenced) to
December
31,
2005
|
||||
|
REVENUES
|
||||
|
Net
interest income:
|
||||
|
Interest income from securities available-for-sale
|
$
|
44,247
|
||
|
Interest
income from loans
|
14,662
|
|||
|
Interest
income − other
|
2,478
|
|||
|
Total
interest income
|
61,387
|
|||
|
Interest
expense
|
43,062
|
|||
|
Net
interest income
|
18,325
|
|||
|
OTHER
REVENUE
|
||||
|
Net
realized gain on investments
|
311
|
|||
|
EXPENSES
|
||||
|
Management
fee expense − related party
|
3,012
|
|||
|
Equity
compensation expense − related party
|
2,709
|
|||
|
Professional
services
|
516
|
|||
|
Insurance
expense
|
395
|
|||
|
General
and administrative
|
1,096
|
|||
|
Total
expenses
|
7,728
|
|||
|
NET
INCOME
|
$
|
10,908
|
||
|
NET
INCOME PER SHARE - BASIC
|
$
|
0.71
|
||
|
NET
INCOME PER SHARE - DILUTED
|
$
|
0.71
|
||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
− BASIC
|
15,333,334
|
|||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
− DILUTED
|
15,405,714
|
|||
|
DIVIDENDS
DECLARED PER SHARE
|
$
|
0.86
|
See
accompanying notes to consolidated financial statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Period
from March 8, 2005 (Date Operations Commenced) to December 31,
2005
(in
thousands, except share and per share data)
|
|
Common
Stock
|
Additional
Paid-In
|
Deferred
Equity
|
Accumulated
Other
Comprehensive
|
|
|
Retained
|
|
|
Distributions
in
Excess of
|
|
|
Comprehensive
|
|
|
Total
Stockholders’
|
||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
||||||||||
|
Common
shares issued
|
15,333,334
|
$
|
15
|
$
|
215,310
|
$
|
|
$
|
$
|
|
$
|
215,325
|
||||||||||||||||
|
Offering
costs
|
(541
|
)
|
(541
|
)
|
||||||||||||||||||||||||
|
Stock
based compensation
|
349,000
|
1
|
5,392
|
(5,393
|
)
|
−
|
||||||||||||||||||||||
|
Amortization of stock based compensation
|
2,709
|
2,709
|
||||||||||||||||||||||||||
|
Net
income
|
10,908
|
10,908
|
10,908
|
|||||||||||||||||||||||||
|
Available-for-sale
securities, fair
value
adjustment
|
(22,357
|
)
|
(22,357
|
)
|
(22,357
|
)
|
||||||||||||||||||||||
|
Designated
derivatives, fair value adjustment
|
2,776
|
2,776
|
2,776
|
|||||||||||||||||||||||||
|
Distributions
- Common
Stock
|
(10,908
|
)
|
(2,579
|
)
|
(13,487
|
)
|
||||||||||||||||||||||
|
Comprehensive loss
|
$
|
(8,673
|
)
|
|||||||||||||||||||||||||
|
Balance, December
31, 2005
|
15,682,334
|
$
|
16
|
$
|
220,161
|
$
|
(2,684
|
)
|
$
|
(19,581
|
)
|
$
|
−
|
$
|
(2,579
|
)
|
$
|
195,333
|
||||||||||
See
accompanying notes to consolidated financial statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in
thousands)
|
Period
from
March
8, 2005
(Date
Operations Commenced) to
December
31,
2005
|
||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||
|
Net
income
|
$
|
10,908
|
||
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||
|
Depreciation
and amortization
|
5
|
|||
|
Amortization
of premium (discount) on available-for-sale securities
|
(362
|
)
|
||
|
Amortization
of debt issuance costs
|
461
|
|||
|
Amortization
of stock based compensation
|
2,709
|
|||
|
Non-cash
incentive compensation to the manager
|
86
|
|||
|
Net
realized gain on investments
|
(311
|
)
|
||
|
Changes
in operating assets and liabilities:
|
||||
| Increase in restricted cash | (23,592 | ) | ||
|
Increase
in interest receivable, net of purchased interest
|
(9,339
|
)
|
||
|
Increase
in due from broker
|
(525
|
)
|
||
|
Increase
in principal paydowns receivable
|
(5,805
|
)
|
||
|
Increase
in management fee payable
|
810
|
|||
|
Increase
in accounts payable and accrued liabilities
|
501
|
|||
|
Increase
in accrued interest expense
|
11,595
|
|||
|
Increase
in other assets
|
(1,365
|
)
|
||
|
Net
cash used in operating activities
|
(14,224
|
) | ||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||
|
Purchase of securities available-for-sale
|
(1,557,752
|
)
|
||
|
Principal
payments received on securities available-for-sale
|
136,688
|
|||
|
Proceeds
from sale of securities available-for-sale
|
8,483
|
|||
|
Purchase
of loans
|
(696,320
|
)
|
||
|
Principal
payments received on loans
|
35,130
|
|||
|
Proceeds
from sale of loans
|
91,023
|
|||
|
Purchase
of direct financing leases and notes
|
(25,097
|
)
|
||
|
Payments
received on direct financing leases and notes
|
1,780
|
|||
|
Purchase
of property and equipment
|
(5
|
)
|
||
|
Net
cash used in investing activities
|
(2,006,070
|
)
|
||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||
|
Net
proceeds from issuance of common stock (net of offering costs of
$541)
|
214,784
|
|||
|
Proceeds
from borrowings:
|
||||
|
Repurchase
agreements
|
8,446,739
|
|||
|
Warehouse agreements
|
600,633
|
|||
|
Collateralized
debt obligations
|
697,500
|
|||
|
Unsecured
revolving credit facility
|
15,000
|
|||
|
Payments
on borrowings:
|
||||
|
Repurchase
agreements
|
(7,380,566
|
)
|
||
|
Warehouse
agreements
|
(537,672
|
)
|
||
|
Payment
of debt issuance costs
|
(10,554
|
)
|
||
|
Distributions
paid on common stock
|
(7,841
|
)
|
||
|
Net
cash provided by financing activities
|
2,038,023
|
|||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
17,729
|
|||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
−
|
|||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
17,729
|
||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||
|
Distributions
on common stock declared but not paid
|
$
|
5,646
|
||
|
Issuance
of restricted stock
|
$
|
5,393
|
||
|
SUPPLEMENTAL
DISCLOSURE:
|
||||
|
Interest
expense paid in cash
|
$
|
46,268
|
See
accompanying notes to consolidated financial statements.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005
NOTE
1 - ORGANIZATION
Resource
Capital Corp. and subsidiaries (the ‘‘Company’’) was incorporated in Maryland on
January 31, 2005 and commenced its operations on March 8, 2005 upon receipt
of
the net proceeds from a private placement of shares of its common stock. The
Company’s principal business activity is to purchase and manage a diversified
portfolio of real estate-related assets and commercial finance assets. The
Company’s investment activities are managed by Resource Capital Manager, Inc.
(the ‘‘Manager’’) pursuant to a management agreement (the ‘‘Management
Agreement’’) (see Note 9).
The
Company intends to elect to be taxed as a real estate investment trust
(‘‘REIT’’) for federal income tax purposes effective for its initial taxable
year ending December 31, 2005 and to comply with the provisions of the Internal
Revenue Code of 1986, as amended (the ‘‘Code’’) with respect thereto. See Note 3
for further discussion on income taxes.
The
Company has three wholly-owned subsidiaries: RCC Real Estate, Inc. (“RCC Real
Estate”), RCC Commercial, Inc. (“RCC Commercial”) and Resource TRS, Inc.
(“Resource TRS”). RCC Real Estate holds all of the Company’s real estate
investments, including commercial and residential real estate-related securities
and real estate loans. RCC Commercial holds all of the Company’s syndicated loan
investments, equipment leases and notes and private equity investments. RCC
Real Estate owns 100% of the equity interest in Ischus CDO II, Ltd. (“Ischus CDO
II”), a Cayman Islands limited liability company and qualified REIT subsidiary
(“QRS”). Ischus CDO II was established to complete a collateralized debt
obligation (“CDO”) issuance secured by a portfolio of mortgage-backed and other
asset-backed securities. RCC Commercial owns 100% of the equity interest in
Apidos CDO I, Ltd. (“Apidos CDO I”), a Cayman Islands limited liability company
and taxable REIT subsidiary (“TRS”). Apidos CDO I was established to complete a
CDO secured by a portfolio of syndicated bank loans. As of December 31, 2005,
the Company had also formed Apidos CDO III, Ltd. (“Apidos CDO III”), a Cayman
Islands limited liability company that the Company has elected to treat as
a
TRS. RCC Commercial intends to purchase 100% of the equity interest in Apidos
CDO III. Apidos CDO III was established to complete a CDO that will be secured
by a portfolio of syndicated bank loans. As of December 31, 2005, there was
no
activity in Resource TRS.
NOTE
2 - BASIS OF PRESENTATION
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”). The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and entities which are variable
interest entities (“VIE’s”) in which the Company is the primary beneficiary
under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R,
“Consolidation of Variable Interest Entities” (“FIN 46-R”). In general, FIN 46-R
requires an entity to consolidate a VIE when the entity holds a variable
interest in the VIE and is deemed to be the primary beneficiary of the VIE.
An
entity is the primary beneficiary if it absorbs a majority of the VIE’s expected
losses, receives a majority of the VIE’s expected residual returns, or both.
Ischus
CDO II, Apidos CDO I and Apidos CDO III are VIEs and are not considered to
be
qualifying special-purpose entities as defined by Statement of Financial
Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, (“SFAS No. 140”). The
Company owns 100% of the equity (“preference shares”) issued by Ischus CDO
II and Apidos CDO I and has provided a guarantee of the first $20.0 million
in
losses for Apidos CDO III. As a result, the Company has determined it is the
primary beneficiary of these entities and has included the accounts of these
entities in the consolidated financial statements. See Note 3 for a further
discussion of our VIEs.
All
significant intercompany balances and transactions have been eliminated in
consolidation.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates affecting the accompanying consolidated financial statements include
the fair values of the Company’s investments and derivatives and the estimated
life used to calculate amortization and accretion of premiums and discounts,
respectively, on investments.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash on hand and all highly liquid investments with
original maturities of three months or less (temporary cash investments) at
the
time of purchase, which are held at financial institutions.
Restricted
Cash
Restricted
cash consists of $5.0 million of cash held in escrow in conjunction with a
CDO
transaction to be closed in 2006 and $18.6 million of cash held in two completed
CDO offerings
Due
from Broker
Amounts
due from broker generally represent cash balances held with brokers as part
of
margin requirements related to hedging agreements.
Securities
Available for Sale
SFAS
No.
115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’
(‘‘SFAS No. 115’’), requires the Company to classify its investment portfolio as
either trading investments, available-for-sale investments or held-to-maturity
investments. Although the Company generally plans to hold most of its
investments to maturity, it may, from time to time, sell any of its investments
due to changes in market conditions or in accordance with its investment
strategy. Accordingly, SFAS No. 115 requires the Company to classify all of
its
investment securities as available-for sale. All investments classified as
available-for-sale are reported at fair value, based on market prices provided
by dealers, with unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss) in stockholders’ equity.
The
Company evaluates its available-for-sale investments for other-than-temporary
impairment charges under SFAS No. 115, in accordance with Emerging Issues Task
Force (‘‘EITF’’) 03-1, ‘‘The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments.’’ SFAS No. 115 and EITF 03-1 requires an
investor to determine when an investment is considered impaired (i.e., a decline
in fair value below its amortized cost), evaluate whether that impairment is
other than temporary (i.e., the investment value will not be recovered over
its
remaining life), and, if the impairment is other than temporary, recognize
an
impairment loss equal to the difference between the investment’s cost and its
fair value. SFAS No. 115 also includes accounting considerations subsequent
to the recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Securities
Available for Sale − (Continued)
Investment
securities transactions are recorded on the trade date. Purchases of newly
issued securities are recorded when all significant uncertainties regarding
the
characteristics of the securities are removed, generally shortly before
settlement date. Realized gains and losses on investment securities are
determined on the specific identification method.
Interest
Income Recognition
Interest
income on the Company’s mortgage-backed and other asset-backed securities is
accrued using the effective yield method based on the actual coupon rate and
the
outstanding principal amount of the underlying mortgages or other assets.
Premiums and discounts are amortized or accreted into interest income over
the
lives of the securities also using the effective yield method (or a method
that
approximates effective yield), adjusted for the effects of estimated prepayments
based on SFAS No. 91, ‘‘Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases.’’ For an
investment purchased at par, the effective yield is the contractual interest
rate on the investment. If the investment is purchased at a discount or at
a
premium, the effective yield is computed based on the contractual interest
rate
increased for the accretion of a purchase discount or decreased for the
amortization of a purchase premium. The effective yield method requires the
Company to make estimates of future prepayment rates for its investments that
can be contractually prepaid before their contractual maturity date so that
the
purchase discount can be accreted, or the purchase premium can be amortized,
over the estimated remaining life of the investment. The prepayment estimates
that the Company uses directly impact the estimated remaining lives of its
investments. Actual prepayment estimates are reviewed as of each quarter end
or
more frequently if the Company becomes aware of any material information that
would lead it to believe that an adjustment is necessary. If prepayment
estimates are incorrect, the amortization or accretion of premiums and discounts
may have to be adjusted, which would have an impact on future
income.
Loans
The
Company purchases participations in corporate leveraged loans and commercial
real estate loans in the secondary market and through syndications of newly
originated loans. Loans are held for investment; therefore, the Company
initially records them at their purchase prices, and subsequently accounts
for
them based on their outstanding principal plus or minus unamortized premiums
or
discounts. In certain instances, where the credit fundamentals underlying a
particular loan have changed in such a manner that the Company’s expected return
on investment may decrease, the Company may sell a loan held for investment
due
to adverse changes in credit fundamentals. Once the determination has been
made
by the Company that it no longer will hold the loan for investment, the Company
will account for the loan at the lower of amortized cost or market
value.
Loan
Interest Income Recognition
Interest
income on loans includes interest at stated rates adjusted for amortization
or
accretion of premiums and discounts. Premiums and discounts are amortized or
accreted into income using the effective yield method. When the Company
purchases a loan or pool of loans at a discount, it considers the provisions
of
AICPA Statement of Position (‘‘SOP’’) 03-3 ‘‘Accounting for Certain Loans or
Debt Securities Acquired in a Transfer’’ to evaluate whether all or a portion of
the discount represents accretable yield. If a loan with a premium or discount
is prepaid, the Company immediately recognizes the unamortized portion as a
decrease or increase to interest income.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Allowance
and Provision for Loan Losses
To
estimate the allowance for loan losses, the Company first identifies impaired
loans. Loans are generally evaluated for impairment individually, but loans
purchased on a pooled basis with relatively smaller balances and substantially
similar characteristics may be evaluated collectively for impairment. The
Company considers a loan to be impaired when, based on current information
and
events, management believes it is probable that the Company will be unable
to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is impaired, the allowance for loan losses is increased
by the amount of the excess of the amortized cost basis of the loan over its
fair value. Fair value may be determined based on market price, if available;
the fair value of the collateral less estimated disposition costs; or the
present value of estimated cash flows. Increases in the allowance for loan
losses are recognized in the statements of operations as a provision for loan
losses. A charge-off or write-down of a loan is recorded, and the allowance
for
loan losses is reduced, when the loan or a portion thereof is considered
uncollectible and of such little value that further pursuit of collection is
not
warranted.
An
impaired loan may be left on accrual status during the period the Company is
pursuing repayment of the loan; however, the loan is placed on non-accrual
status at such time as: (1) management believes that scheduled debt service
payments will not be met within the coming 12 months; (2) the loan becomes
90
days delinquent; (3) management determines the borrower is incapable of, or
has
ceased efforts toward, curing the cause of the impairment; or (4) the net
realizable value of the loan’s underlying collateral approximates the Company’s
carrying value of such loan. While on non-accrual status, interest income is
recognized only upon actual receipt.
As
of
December 31, 2005, the Company had not recorded an allowance for loan losses.
At
December 31, 2005, all of the Company’s loans are current with respect to the
scheduled payments of principal and interest. In reviewing the portfolio of
loans and the observable secondary market prices, the Company did not identify
any loans that exhibit characteristics indicating that impairment has
occurred.
Direct
Financing Leases and Notes
The
Company invests in small- and middle-ticket equipment leases and notes.
Investments in leases are recorded in accordance with SFAS No. 13, “Accounting
for Leases,” as amended and interpreted. Direct financing leases and notes
transfer substantially all benefits and risks of equipment ownership to the
customer. The Company’s investment in direct financing leases consists of the
sum of the total future minimum lease payments receivable, less unearned
finance
income. Unearned finance income, which is recognized over the term of the
lease
by utilizing the effective interest method, represents the excess of the
total
future minimum lease payments over the cost of the related equipment. The
Company’s investment in notes receivable consists of the sum of the total future
minimum loan payments receivable less unearned finance income. Unearned finance
income, which is recognized as revenue over the term of the financing by
the
effective interest method, represents the excess of the total future minimum
contract payments over the cost of the related equipment.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Credit
and Market Risk
The
Company’s investments as of December 31, 2005, consist of mortgage-backed and
other asset-backed securities, participations in corporate leveraged loans
and
commercial real estate loans, equipment leases and notes and private equity
investments. The mortgage-backed and other asset-backed securities are
securities that pass through collections of principal and interest from either
underlying mortgages or other secured assets. Therefore, these securities
may
bear some exposure to credit loss. The Company mitigates some of this risk
by
holding a significant portion of its assets in securities that are issued
by the
Federal Home Loan Mortgage Corporation (‘‘FHLMC’’) and the Federal National
Mortgage Association (‘‘FNMA’’). The payment of principal and interest on these
securities is guaranteed by the respective issuing agencies. In addition,
the
Company’s leveraged loans and commercial real estate loans may bear exposure to
credit loss.
The
Company bears certain other risks typical in investing in a portfolio of
mortgage-backed and other asset-backed securities. Principal risks potentially
affecting the Company’s consolidated financial position, consolidated results of
operations and consolidated cash flows include the risks that: (a) interest
rate
changes can negatively affect the market value of the Company’s mortgage-backed
and other asset-backed securities, (b) interest rate changes can influence
decisions made by borrowers on the mortgages underlying the securities to prepay
those mortgages, which can negatively affect both cash flows from, and the
market value of, the securities, and (c) adverse changes in the market value
of
the Company’s mortgage-backed securities and/or the inability of the Company to
renew short-term borrowings can result in the need to sell securities at
inopportune times and incur realized losses.
Borrowings
The
Company finances the acquisition of its investments, including securities
available-for-sale and loans, primarily through the use of secured borrowings
in
the form of repurchase agreements, warehouse agreements, CDOs and an unsecured
revolving credit facility. The Company may use other forms of secured borrowing
in the future. The Company recognizes interest expense on all borrowings on
an
accrual basis.
Accounting
for Certain MBS and Related Repurchase Agreements
In
certain circumstances, the Company has purchased debt investments from a
counterparty and subsequently financed the acquisition of those debt investments
through repurchase agreements with the same counterparty. The Company currently
records the acquisition of the debt investments as assets and the related
repurchase agreements as financing liabilities gross on the consolidated balance
sheets. Interest income earned on the debt investments and interest expense
incurred on the repurchase obligations are reported gross on the consolidated
income statements. However, under a certain technical interpretation of SFAS
140, such transactions may not qualify as a purchase. The Company believes,
and
it is industry practice, that it is accounting for these transactions in an
appropriate manner. However, the result of this technical interpretation
would prevent the Company from presenting the debt investments and repurchase
agreements and the related interest income and interest expense on a gross
basis
on the Company’s financial statements. Instead, the Company would present the
net investment in these transactions with the counterparty and a derivative
with
the corresponding change in fair value of the derivative being recorded through
earnings. The value of the derivative would reflect changes in the value of
the
underlying debt investments and changes in the value of the underlying credit
provided by the counterparty. As of December 31, 2005, the Company had 19
transactions where debt instruments were financed with the same counterparty
aggregating approximately $307.3 million in MBS and $294.2 million in financings
under related repurchase agreements. As of March 28, 2006, the Company had
one
of these transactions remaining comprised of $19.4 million of MBS and $18.8
million in financings under related repurchase agreements. It is anticipated
that this transaction will no longer be financed with the same counterparty
as
of March 31, 2006.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Comprehensive
Income
Comprehensive
income for the Company includes net income and the change in net unrealized
gains/ (losses) on available-for-sale securities and derivative instruments
used
to hedge exposure to interest rate fluctuations and protect against declines
in
the market-value of assets resulting from general trends in debt
markets.
Income
Taxes
The
Company expects to operate in a manner that will allow it to qualify and be
taxed as a REIT and to comply with the provisions of the Code with respect
thereto. A REIT is generally not subject to federal income tax on that portion
of its REIT taxable income (‘‘Taxable Income’’) which is distributed to its
stockholders, provided that at least 90% of Taxable Income is distributed and
certain other requirements are met. If the Company fails to meet these
requirements and does not qualify for certain statutory relief provisions,
it
would be subject to federal income tax. The Company has a wholly-owned domestic
subsidiary, Resource TRS, that the Company and Resource TRS have elected to
be
treated as a taxable REIT subsidiary (“TRS”). For financial reporting purposes,
current and deferred taxes are provided for on the portion of earnings
recognized by the Company with respect to its interest in Resource TRS, a
domestic taxable REIT subsidiary, because it is taxed as a regular subchapter
C
corporation under the provisions of the Code. As of December 31, 2005, Resource
TRS did not have any taxable income. Apidos CDO I, the Company’s foreign TRS is
organized as an exempted company incorporated with limited liability under
the
laws of the Cayman Islands, and is generally exempt from federal and state
income tax at the corporate level because its activities in the United States
are limited to trading in stock and securities for its own account. Therefore,
despite its status as a TRS, it generally will not be subject to corporate
tax
on its earnings and no provision for income taxes is required; however because
it is a “controlled foreign corporation,” the Company will generally be required
to include Apidos CDO I’s current taxable income in its calculation of REIT
taxable income. The Company also intends to make an election to treat Apidos
CDO
III as a TRS.
Stock
Based Compensation
Pursuant
to its 2005 Stock Incentive Plan (see Note 15), the Company granted 345,000
shares of restricted stock and options to purchase 651,666 shares of common
stock to its Manager. A holder of the restricted shares has all of the rights
of
a stockholder of the Company, including the right to vote such shares and
receive dividends. The Company accounts for the restricted stock and stock
options in accordance with EITF 96-18, ‘‘Accounting for Equity Instruments that
are issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,’’ (‘‘EITF 96-18’’) and SFAS No. 123, ‘‘Accounting
for Stock-Based Compensation,’’ (‘‘SFAS No. 123’’). In accordance with EITF
96-18, the stock and options are recorded in stockholders’ equity at fair value
through an increase to additional paid-in-capital and an off-setting entry
to
deferred equity compensation (a contra-equity account). The deferred
compensation is amortized over a three year graded vesting period with the
amortization expense reflected as equity compensation expense. The unvested
stock and options are adjusted quarterly to reflect changes in fair value as
performance under the agreement is completed. Any change in fair value is
reflected in the equity compensation expense recognized in that quarter and
in
future quarters until the stock and options are fully vested.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Stock
Based Compensation - (Continued)
The
Company also issued 4,000 shares of restricted stock to its directors on
March
8, 2005. The stock awards vest in full one year after the date of the grant.
The
Company accounts for this issuance using the fair value based methodology
prescribed by SFAS No. 123. Pursuant to SFAS No. 123, the fair value of the
award is measured on the grant date and recorded in stockholders’ equity through
an increase to additional paid-in capital and an offsetting entry to deferred
equity compensation (a contra-equity account). This amount is not remeasured
under the fair value based method. The deferred compensation is amortized
and
included in equity compensation expense.
Incentive
Compensation
The
Management Agreement provides for incentive compensation if the Company’s
financial performance exceeds certain benchmarks. See Note 9 for further
discussion on the specific terms of the computation and payment of the incentive
fee.
The
incentive fee will be paid up to 75% in cash and at least 25% in restricted
stock. The cash portion of the incentive fee is accrued and expensed during
the
period for which it is calculated and earned. In accordance with SFAS No. 123
and EITF 96-18, the restricted stock portion of the incentive fee is also
accrued and expensed during the period for which it is calculated and earned.
Shares granted in connection with the incentive fee will vest immediately.
For
the period from March 8, 2005 to December 31, 2005, the Manager earned an
incentive management fee of $344,000. Based on the terms of the Management
Agreement, the Manager will be paid its incentive management fee partially
by
the issuance of 5,738 of common shares and partially in cash totaling
approximately $258,000. The incentive fee is payable in February
2006.
Net
Income Per Share
In
accordance with the provisions of SFAS No. 128, ‘‘Earnings per Share,’’ the
Company calculates basic income per share by dividing net income for the period
by weighted-average shares of its common stock, including vested restricted
stock, outstanding for that period. Diluted income per share takes into account
the effect of dilutive instruments, such as stock options and unvested
restricted stock, but uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted-average
number of shares outstanding (see Note 8).
Derivative
Instruments
The
Company’s policies permit it to enter into derivative contracts, including
interest rate swaps and interest rate caps to add stability to its interest
expense and to manage its exposure to interest rate movements or other
identified risks.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Derivative
Instruments−
(Continued)
The
Company designates its derivative instruments as cash flow hedges and evaluates
them at inception and on an ongoing basis in order to determine whether they
qualify for hedge accounting. The hedge instrument must be highly effective
in
achieving offsetting changes in the hedged item attributable to the risk
being
hedged in order to qualify for hedge accounting. A hedge instrument is highly
effective if changes in the fair value of the derivative provide an offset
to at
least 80% and not more than 125% of the changes in fair value or cash flows
of
the hedged item attributable to the risk being hedged. In accordance with
SFAS
No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ as
amended and interpreted, the Company recognizes all derivatives as either
assets
or liabilities in the consolidated balance sheet and measures those instruments
at their fair values. Any ineffectiveness which arises during the hedging
relationship is recognized in interest expense during the period in which
it
arises. Before the end of the specified hedge time period, the effective
portion
of all contract gain and losses (whether realized or unrealized) is recorded
in
other comprehensive income or loss. Realized gains and losses on futures
contracts are reclassified into earnings as an adjustment to interest expense
during the specified hedge time period. Realized gains and losses on interest
rate swap contracts are reclassified into earnings as an adjustment to interest
expense during the period after the swap repricing date through the remaining
maturity of the swap.
If
the
Company determines not to designate the interest rate swap and cap contracts
as
hedges and to monitor their effectiveness as hedges, or if the Company enters
into other types of financial instruments that do not meet the criteria for
designation as hedges, changes in the fair values of these instruments will
be
recorded in the statement of operations, potentially resulting in increased
volatility in the Company’s earnings.
Variable
Interest Entities
In
December 2003, the FASB issued FIN 46-R. FIN 46-R addresses the application
of
Accounting Research Bulletin No. 51, ‘‘Consolidated Financial Statements,’’ to a
VIE and requires that the assets, liabilities and results of operations of
a VIE
be consolidated into the financial statements of the enterprise that has a
controlling financial interest in it. The interpretation provides a framework
for determining whether an entity should be evaluated for consolidation based
on
voting interests or significant financial support provided to the entity
(‘‘variable interests’’). The Company considers all counterparties to the
transaction to determine whether a counterparty is a VIE and, if so, whether
the
Company’s involvement with the entity results in a variable interest in the
entity. If the Company is determined to have a variable interest in the entity,
an analysis is performed to determine whether the Company is the primary
beneficiary.
During
April 2005, the Company entered into warehouse and master participation
agreements with an affiliate of Credit Suisse Securities (USA) LLC (“CS”)
providing that CS would fund the purchase of loans by Apidos CDO I during the
warehouse period in return for a participation interest in the interest earned
on the loans of LIBOR plus 0.25%. In addition, the agreements provided for
a
guarantee by the Company to CS of the first $24.0 million in losses on the
portfolio of bank loans. Upon review of the transaction, the Company determined
that Apidos CDO I was a VIE under FIN 46-R and the Company was the primary
beneficiary of the VIE. As a result, the Company consolidated Apidos CDO I
at
June 30, 2005. On August 4, 2005, the CS agreements were terminated and the
warehouse funding liability was replaced with the issuance of long-term debt
by
Apidos CDO I. The Company owns 100% of the equity issued by Apidos CDO I and
is
deemed to be the primary beneficiary. As a result, the Company
consolidated Apidos CDO I at December 31, 2005.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES −
(Continued)
Variable
Interest Entities - (Continued)
On
July
29, 2005, the Company terminated its Ischus CDO II warehouse agreement with
CS
and the warehouse funding liability was replaced with the issuance of long-term
debt by Ischus CDO II. The Company owns 100% of the equity issued by Ischus
CDO
II and is deemed to be the primary beneficiary. As a result, the Company
consolidated Ischus CDO II at December 31, 2005.
During
July 2005, the Company entered into warehouse and master participation
agreements with an affiliate of Citigroup Global Markets Inc. (“Citigroup”)
providing that Citigroup will fund the purchase of loans by Apidos CDO III
during the warehouse period in return for a participation interest in the
interest earned on the loans of LIBOR plus 0.25%. In addition, the agreements
provide for a guarantee by the Company to Citigroup of the first $20.0 million
in losses on the portfolio of bank loans. As of December 31, 2005, the Company
has $5.0 million held in an escrow account in connection with the CDO. Upon
review of the transaction, the Company determined that Apidos CDO III is
a VIE
under FIN 46-R and the Company is the primary beneficiary of the VIE. As
a
result, the Company consolidated Apidos CDO III as of December 31, 2005,
even
though the Company does not own any of its equity. The impact of the
consolidation of this VIE on the December 31, 2005 balance sheet was
to:
| · |
increase
loans, net of allowance, by $63.0 million, which represents bank
loans
held by Apidos CDO III; and
|
| · |
increase
warehouse agreements by $63.0 million, which represents the settlement
of
Apidos CDO III bank loans.
|
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123-R, which is a revision of SFAS
No.
123, ‘‘Accounting for Stock-Based Compensation.’’ SFAS No. 123-R supersedes
Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to
Employees,’’ and amends SFAS No. 95, ‘‘Statement of Cash Flows.’’ Generally, the
approach to accounting in Statement 123-R requires all share-based payments
to
employees, including grants of employee stock options, to be recognized
in the
issuer’s financial statements based on their fair value. The Company is required
to adopt the provisions of the standard for the annual period
beginning after June 15, 2005. The Company does not expect that the adoption
of
SFAS No. 123-R will have a material effect on the Company’s financial condition,
results of operation or liquidity.
In
May
2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error
Corrections,’’ (‘‘SFAS 154’’) which replaces Accounting Principles Board Opinion
No. 20, ‘‘Accounting Changes’’ and SFAS No. 3, ‘‘Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28.’’ SFAS 154
provides guidance on the accounting for, and reporting of, accounting changes
and error corrections. It established retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not currently expect that the new
guidance will have a material impact on the Company’s financial condition,
results of operations or cash flows.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
4 - SECURITIES AVAILABLE-FOR-SALE
The
following table summarizes the Company's mortgage-backed securities, other
asset-backed securities and private equity investments, including those pledged
as collateral, classified as available-for-sale as of December 31, 2005,
which
are carried at fair value (in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Estimated
Fair
Value
|
||||||||||
|
Agency
residential mortgage-backed
|
$
|
1,014,575
|
$
|
13
|
$
|
(12,918
|
)
|
$
|
1,001,645
|
||||
|
Non-agency
residential mortgage-backed
|
346,460
|
370
|
(9,085
|
)
|
337,745
|
||||||||
|
Commercial
mortgage-backed
|
27,970
|
1
|
(608
|
)
|
27,363
|
||||||||
|
Other
asset-backed
|
22,045
|
24
|
(124
|
)
|
21,945
|
||||||||
|
Private
equity
|
1,984
|
−
|
(30
|
)
|
1,954
|
||||||||
|
Total
fair value
|
$
|
1,413,034
|
$
|
408
|
$
|
(22,765
|
)
|
$
|
1,390,677
|
(1) |
| (1) |
Other
than $26.3 million in agency RMBS and $2.0 million in private equity
investments, all securities are pledged as collateral as of December
31,
2005.
|
The
actual maturities of mortgage-backed securities are generally shorter than
stated contractual maturities. Actual maturities of the Company's
mortgage-backed securities are affected by the contractual lives of the
underlying mortgages, periodic scheduled payments of principal, and prepayments
of principal, which are presented in “principal paydowns receivable” in the
Company’s consolidated balance sheet.
The
following table summarizes the estimated maturities of the mortgage-backed
securities, other asset-backed securities and private equity investments as
of December 31, 2005 according to their estimated weighted-average life
classifications (in thousands, except percentages):
|
Weighted
Average Life
|
Fair
Value
|
Amortized
Cost
|
Average
Coupon
|
|||||||
|
Less
than one year
|
$
|
−
|
$
|
−
|
−
|
%
|
||||
|
Greater
than one year and less than five years
|
1,355,910
|
1,377,537
|
4.91
|
%
|
||||||
|
Greater
than five years
|
34,767
|
35,497
|
5.60
|
%
|
||||||
|
Total
|
$
|
1,390,677
|
$
|
1,413,034
|
4.92
|
%
|
The
estimated weighted-average lives of the Company’s mortgage-backed and other
asset-backed securities as of December 31, 2005 in the table above are based
upon data provided through subscription-based financial information services,
assuming constant principal prepayment factors to the balloon or reset date
for
each security. The prepayment model considers current yield, forward yield,
steepness of the yield curve, current mortgage rates, mortgage rate of the
outstanding loan, loan age, margin and volatility. The actual weighted-average
lives of the agency residential mortgage-backed securities in the Company's
investment portfolio could be longer or shorter than the estimates in the table
above depending on the actual prepayment factors experienced over the lives
of
the applicable securities and are sensitive to changes in both prepayment
factors and interest rates.
80
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
4 - SECURITIES AVAILABLE-FOR-SALE -
(Continued)
The
following table shows the Company's investments' fair value and gross unrealized
losses, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December
31,
2005 (in thousands):
|
|
Less
than 12 Months
|
Total
|
|||||||||||
|
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
|||||||||
|
Agency
residential mortgage-backed
|
$
|
978,570
|
$
|
(12,918
|
)
|
$
|
978,570
|
$
|
(12,918
|
)
|
|||
|
Non-agency
residential mortgage-backed
|
294,359
|
(9,085
|
)
|
294,359
|
(9,085
|
)
|
|||||||
|
Commercial
mortgage-backed
|
26,905
|
(608
|
)
|
26,905
|
(608
|
)
|
|||||||
|
Other
asset-backed
|
12,944
|
(124
|
)
|
12,944
|
(124
|
)
|
|||||||
|
Private
equity
|
1,954
|
(30
|
)
|
1,954
|
(30
|
)
|
|||||||
|
Total
temporarily impaired securities
|
$
|
1,314,732
|
$
|
(22,765
|
)
|
$
|
1,314,732
|
$
|
(22,765
|
)
|
|||
The
temporary impairment of the available-for-sale securities results from the
fair
value of the securities falling below the amortized cost basis and is solely
attributed to changes in interest rates. As of December 31, 2005, none of
the
securities held by the Company had been downgraded by a credit rating agency
since their purchase. The Company intends and has the ability to hold the
securities until the fair value of the securities held is recovered, which
may
be maturity if necessary. As such, the Company does not believe any of the
securities held are other-than-temporarily impaired at December 31,
2005.
NOTE
5 - LOANS
The
following is a summary of the Company’s loans at December 31, 2005 (in
thousands).
|
Loan
Description
|
Principal
|
Unamortized
Premium
|
Net
Amortized
Cost
|
|||||||
|
Syndicated
loans
|
$
|
397,869
|
$
|
916
|
$
|
398,785
|
||||
|
B
notes
|
121,945
|
−
|
121,945
|
|||||||
|
Mezzanine
loans
|
49,500
|
−
|
49,500
|
|||||||
|
Total
|
$
|
569,314
|
$
|
916
|
$
|
570,230
|
At
December 31, 2005, the Company’s syndicated loan portfolio consisted of $398.5
million of floating rate loans, which bear interest between LIBOR plus 1.00%
and
7.00% with maturity dates ranging from April 2006 to October 2020, and a
$250,000 fixed rate loan, which bears interest at 6.25% with a maturity date
of
August 2015.
At
December 31, 2005, the Company’s commercial real estate loan portfolio consisted
of seven B notes with an amortized cost of $121.9 million which bear interest
at
floating rates ranging from LIBOR plus 2.15% to LIBOR plus 6.25% and have
maturity dates ranging from January 2007 to April 2008, and four mezzanine
loans
consisting of $44.5 million of floating rate loans, which bear interest between
LIBOR plus 2.25% and 4.50% with maturity dates ranging from August 2007 to
July
2008, and a $5.0 million fixed rate loan, which bears interest at 9.50% and
matures May 2010.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
5 - LOANS − (Continued)
As
of
December 31, 2005, the Company had not recorded an allowance for loan losses.
At
December 31, 2005, all of the Company’s loans are current with respect to the
scheduled payments of principal and interest. In reviewing the portfolio
of
loans and the observable secondary market prices, the Company did not identify
any loans with characteristics indicating that impairment had
occurred.
NOTE
6 - INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
The
Company’s direct financing leases have an initial lease term of 54 months. The
interest rates on notes receivable range from 8% to 9%. Investments in direct
financing leases and notes as of December 31, 2005 are as follows (in
thousands):
|
As
of
December
31,
2005
|
||||
|
Direct
financing leases
|
$
|
18,141
|
||
|
Notes
receivable
|
5,176
|
|||
|
Total
|
$
|
23,317
|
The
components of the net investment in direct financing leases as of December
31,
2005 are as follows (in thousands):
|
As
of
December
31,
2005
|
||||
|
Total
future minimum lease payments
|
$
|
21,370
|
||
|
Unearned
rental income
|
(3,229
|
)
|
||
|
Total
|
$
|
18,141
|
The
future minimum lease payments and related rental payments expected to be
received on non-cancelable direct financing leases and notes at December 31,
2005 are as follows (in thousands):
|
Years
Ending
December
31,
|
Direct
Financing
Leases
|
Notes
|
Total
|
|||||||
|
2006
|
$
|
6,717
|
$
|
424
|
$
|
7,141
|
||||
|
2007
|
6,180
|
459
|
6,639
|
|||||||
|
2008
|
4,856
|
500
|
5,356
|
|||||||
|
2009
|
2,085
|
543
|
2,628
|
|||||||
|
2010
|
1,431
|
591
|
2,022
|
|||||||
|
Thereafter
|
101
|
2,659
|
2,760
|
|||||||
|
$
|
21,370
|
$
|
5,176
|
$
|
26,546
|
82
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
7 - BORROWINGS
The
Company finances the acquisition of its investments, including securities
available-for-sale and loans, primarily through the use of secured borrowings
in
the form of repurchase agreements, warehouse facilities, CDO’s and other secured
borrowings. The Company recognizes interest expense on all borrowings on an
accrual basis.
Certain
information with respect to the Company’s borrowings as of December 31, 2005 is
summarized in the following table (dollars in thousands):
|
Repurchase
Agreements
|
Ischus
CDO
II
Senior
Notes(1)
|
|
Apidos
CDO
I
Senior
Notes(2)
|
|
Apidos
CDO
III
Warehouse
Agreement
|
Unsecured
Revolving Credit Facility
|
Total
|
||||||||||||
|
Outstanding
borrowings
|
$
|
1,068,277
|
$
|
370,569
|
$
|
316,838
|
$
|
62,961
|
$
|
15,000
|
$
|
1,833,645
|
|||||||
|
Weighted-average
borrowing
rate
|
4.48
|
%
|
4.80
|
%
|
4.42
|
%
|
4.29
|
%
|
6.37
|
%
|
4.54
|
%
|
|||||||
|
Weighted-average
remaining
maturity
|
17
days
|
34.6
years
|
11.6
years
|
90
days
|
3.0
years
|
||||||||||||||
|
Value
of the collateral
|
$
|
1,146,711
|
$
|
387,053
|
$
|
335,831
|
|
$
|
62,954
|
$
|
45,107
|
$
|
1,977,656
|
|
(1)
|
Amount
represents principal outstanding of $376.0 million less unamortized
issuance costs of $5.4 million.
|
|
(2)
|
Amount
represents principal outstanding of $321.5 million less unamortized
issuance costs of $4.7 million.
|
At
December 31, 2005, the Company had repurchase agreements with the following
counterparties (dollars in thousands):
|
Amount
at
Risk
(1)
|
Weighted-Average
Maturity in Days
|
Weighted-Average
Interest Rate at
December
31, 2005
|
||||||||
|
Credit
Suisse Securities (USA) LLC
|
$
|
31,158
|
17
|
4.34
|
%
|
|||||
|
Bear,
Stearns International Limited
|
$
|
36,044
|
17
|
5.51
|
%
|
|||||
|
Deutsche
Bank AG, Cayman Islands Branch
|
$
|
16,691
|
18
|
5.68
|
%
|
|
(1)
|
Equal
to the fair value of securities or loans sold, plus accrued interest
income, minus the sum of repurchase agreement liabilities plus accrued
interest expense.
|
In
July
2005, the Company closed Ischus CDO II, a $400.0 million CDO transaction
that
provides financing for mortgage-backed and other asset-backed securities.
The
investments held by Ischus CDO II collateralize the debt issued by the
transaction and, as a result, those investments are not available to the
Company, its creditors or stockholders. Ischus CDO II issued a total of $376.0
million of senior notes at par to investors and RCC Real Estate purchased
a
$27.0 million equity interest representing 100% of the outstanding preference
shares. The equity interest is subordinate in right-of-payment to all other
securities issued by the CDO.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
7 - BORROWINGS − (Continued)
The
senior notes issued to investors by Ischus CDO II consist of the following
classes: (i) $214.0 million of class A-1A notes bearing interest at 1-month
LIBOR plus 0.27%; (ii) $50.0 million of class A-1B delayed draw notes bearing
interest on the drawn amount at 1-month LIBOR plus 0.27%; (iii) $28.0 million
of
class A-2 notes bearing interest at 1-month LIBOR plus 0.45%; (iv) $55.0 million
of class B notes bearing interest at 1-month LIBOR plus 0.58%; (v) $11.0 million
of class C notes bearing interest at 1-month LIBOR plus 1.30%; and (vi) $18.0
million of class D notes bearing interest at 1-month LIBOR plus 2.85%. All
of
the notes issued mature on August 6, 2040, although the Company has the right
to
call the notes at par any time after August 6, 2009 until maturity.
In
August
2005, the Company closed Apidos CDO I, a $350.0 million CDO transaction that
provides financing for syndicated bank loans. The investments held by Apidos
CDO
I collateralize the debt issued by the transaction, and as a result, the
investments are not available to the Company, its creditors or stockholders.
Apidos CDO I issued a total of $321.5 million of senior notes at par to
investors and RCC Commercial purchased a $28.5 million equity interest
representing 100% of the outstanding preference shares. The equity interest
is
subordinated in right-of-payment to all other securities issued by the
CDO.
The
senior notes issued to investors by Apidos CDO I consists of the following
classes: (i) $265.0 million of class A-1 notes bearing interest at 3-month
LIBOR
plus 0.26%; (ii) $15.0 million of class A-2 notes bearing interest at 3-month
LIBOR plus 0.42%; (iii) $20.5 million of class B notes bearing interest at
3-month LIBOR plus 0.75%; (iv) $13.0 million of class C notes bearing interest
at 3-month LIBOR plus 1.85%; and (v) $8.0 million of class D notes bearing
interest at a fixed rate of 9.251%. All of the notes issued mature on July
27,
2017, although the Company has the right to call the notes anytime after July
27, 2010 until maturity.
In
July
2005, the Company formed Apidos CDO III and began borrowing on a warehouse
facility provided by a major financial institution to purchase syndicated loans
to include in Apidos CDO III. At December 31, 2005, Apidos CDO III had borrowed
$63.0 million. The facility allows borrowings of up to $200.0 million which
can
be increased upon mutual agreement of the parties. The facility bears interest
at a rate of LIBOR plus 0.25%, which was 4.61% at December 31, 2005. RCC
Commercial intends to purchase 100% of the equity interest in Apidos CDO III
upon execution of the CDO transaction.
The
Company entered into a master repurchase agreement with CS to finance the
purchase of agency RMBS securities. Each repurchase transaction specifies its
own terms, such as identification of the assets subject to the transaction,
sales price, repurchase price, rate and term. At December 31, 2005, the Company
had borrowed $947.1 million with a weighted average interest rate of
4.34%.
In
August
2005, the Company entered into a master repurchase agreement with Bear, Stearns
International Limited to finance the purchase of commercial real estate loans.
The maximum amount of the Company’s borrowing under the repurchase agreement is
$150.0 million. Each repurchase transaction specifies its own terms, such
as
identification of the assets subject to the transaction, sales price, repurchase
price, rate and term. At December 31, 2005, the Company had borrowed $80.6
million with a weighted average interest rate of LIBOR plus 1.14%, which
was
5.51% at December 31, 2005.
In
December 2005, the Company entered into a master repurchase agreement with
Deutsche Bank AG to finance the purchase of commercial real estate loans.
The
maximum amount of the Company’s borrowing under the repurchase agreement is
$300.0 million. Each repurchase transaction specifies its own terms, such
as
identification of the assets subject to the transaction, sales price, repurchase
price, rate and term. At December 31, 2005, the Company had borrowed $38.5
million with a weighted average interest rate of LIBOR plus 1.32%, which
was
5.68% at December 31, 2005.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
7 - BORROWINGS − (Continued)
In
December 2005, the Company entered into a $15.0 million unsecured revolving
credit facility with Commerce Bank, N.A. Outstanding borrowings bear interest
at
one of two rates elected at the Company’s option; (i) the lender’s prime rate
plus a margin ranging from 0.50% to 1.50% based upon the Company’s leverage
ratio; or (ii) LIBOR plus a margin ranging from 1.50% to 2.50% based upon the
Company’s leverage ratio. The facility expires in December 2008. As of December
31, 2005, the balance outstanding was $15.0 million at an interest rate of
6.37%.
NOTE
8 - CAPITAL STOCK AND EARNINGS PER SHARE
The
Company had 500,000,000 shares of common stock par value $0.001 per share
authorized and 15,682,334 shares (including 349,000 restricted shares)
outstanding as of December 31, 2005. The Company had 100,000,000 shares of
par
value $0.001 preferred stock authorized and none issued and outstanding as
of
December 31, 2005.
On
March
8, 2005, the Company completed a private placement of 15,333,334 shares of
common stock, $0.001 par value at an offering price of $15.00 per share,
including the sale of 666,667 shares of common stock pursuant to the
over-allotment option of the initial purchasers/placement agents. The Company
received proceeds from these transactions in the amount of $214.8 million,
net
of underwriting discounts and commissions, placement agent fees and other
offering costs.
On
March
8, 2005, the Company granted 345,000 shares of restricted common stock, par
value $0.001 and options to purchase 651,666 common shares at an exercise price
of $15.00 per share, to the Manager (see Note 15). The restrictions with respect
to the restricted common stock lapse and full rights of ownership vest for
one-third of the shares and options on the first anniversary of the grant date,
for one-third of the shares on the second anniversary and for the last one-third
of the shares on the third anniversary. Vesting is predicated on the continuing
involvement of the Manager in providing services to the Company. In addition,
the Company granted 4,000 shares of restricted common stock to the Company’s
non-employee directors as part of their annual compensation. These shares vest
in full on the first anniversary of the date of the grant.
The
fair
value of the shares of restricted stock granted, including shares issued
to the
directors, was $5,235,000, of which $2.6 million was expensed for the period
from March 8, 2005 to December 31, 2005. The fair value of the total options
granted was $158,300, of which approximately $79,000 was expensed for the
period
from March 8, 2005 to December 31, 2005. The fair value of each option
grant at
December 31, 2005 is $0.243, estimated on the measurement date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions as of December 31, 2005: dividend yield of 12.00 percent; expected
volatility of 20.11%, risk-free interest rate of 4.603%; and expected life
of 10
years.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
8 - CAPITAL STOCK AND EARNINGS PER SHARE − (Continued)
The
following table presents a reconciliation of basic and diluted earnings per
share for the period from March 8, 2005 (date operations commenced) to December
31, 2005 (in thousands, except share and per share amounts):
|
Period
from
March
8, 2005
(Date
Operations Commenced) to
December
31,
2005
|
||||
|
Basic:
|
||||
|
Net
income
|
$
|
10,908
|
||
|
Weighted-average
number of shares outstanding
|
15,333,334
|
|||
|
Basic
net income per share
|
$
|
0.71
|
||
|
Diluted:
|
||||
|
Net
income
|
$
|
10,908
|
||
|
Weighted-average
number of common shares outstanding
|
15,333,334
|
|||
|
Additional
shares due to assumed conversion of dilutive
instruments
|
72,380
|
|||
|
Adjusted
weighted-average number of common shares outstanding
|
15,405,714
|
|||
|
Diluted
net income per share
|
$
|
0.71
|
NOTE
9 - THE MANAGEMENT AGREEMENT
On
March
8, 2005, the Company entered into a Management Agreement pursuant to which
the
Manager will provide the Company investment management, administrative and
related services. The Manager receives fees and is reimbursed for its expenses
as follows:
|
·
|
A
monthly base management fee equal to 1/12th of the amount of the
Company’s
equity multiplied by 1.50%. Under the Management Agreement, ‘‘equity’’ is
equal to the net proceeds from any issuance of shares of common stock
less
other offering related costs plus or minus the Company’s retained earnings
(excluding non-cash equity compensation incurred in current or prior
periods) less any amounts the Company paid for common stock repurchases.
The calculation may be adjusted for one-time events due to changes
in GAAP
as well as other non-cash charges, upon approval of the independent
directors of the Company.
|
|
|
·
|
Incentive
compensation calculated as follows: (i) 25% of the dollar amount
by which,
(A) the Company’s net income (determined in accordance with GAAP) per
common share (before non-cash equity compensation expense and incentive
compensation) for a quarter (based on the weighted average number
of
shares outstanding) exceeds, (B) an amount equal to (1) the weighted
average share price of shares of common stock in the offerings of
the
Company, multiplied by, (2) the greater of (A) 2.00% or (B) 0.50%
plus
one-fourth of the Ten Year Treasury rate as defined in the Management
Agreement for such quarter, multiplied by, (ii) the weighted average
number of common shares outstanding for the quarter. The calculation
may
be adjusted for one-time events due to changes in GAAP as well as
other
non-cash charges upon approval of the independent directors of the
Company.
|
|
·
|
Reimbursement
of out-of-pocket expenses and certain other costs incurred by the
Manager
that relate directly to the Company and its
operations.
|
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
9 - THE MANAGEMENT AGREEMENT − (Continued)
Incentive
compensation is paid quarterly. Up to 75% of the incentive compensation is
paid
in cash and at least 25% is paid in the form of a stock award. The Manager
may
elect to receive more than 25% of its incentive compensation in stock. All
shares are fully vested upon issuance. However, the Manager may not sell
such
shares for one year after the incentive compensation becomes due and payable.
Shares payable as incentive compensation are valued as
follows:
|
·
|
if
such shares are traded on a securities exchange, at the average of
the
closing prices of the shares on such exchange over the thirty day
period
ending three days prior to the issuance of such
shares;
|
|
·
|
if
such shares are actively traded over-the-counter, at the average
of the
closing bid or sales price as applicable over the thirty day period
ending
three days prior to the issuance of such shares;
and
|
|
·
|
if
there is no active market for such shares, the value shall be the
fair
market value thereof, as reasonably determined in good faith by the
board
of directors of the Company.
|
The
initial term of the Management Agreement ends March 31, 2008. The Management
Agreement automatically renews for a one year term at the end of the initial
term and each renewal term. With a two-thirds vote of the independent directors,
the independent directors may elect to terminate the Management Agreement
because of the following:
|
·
|
unsatisfactory
performance; and/or
|
|
·
|
unfair
compensation payable to the Manager where fair compensation cannot
be
agreed upon by the Company (pursuant to a vote of two-thirds of the
independent directors) and the
Manager.
|
In
the
event that the Agreement is terminated based on the provisions disclosed above,
the Company must pay the Manager a termination fee equal to four times the
sum
of the average annual base management fee and the average annual incentive
during the two 12-month periods immediately preceding the date of such
termination. The Company is also entitled to terminate the Management Agreement
for cause (as defined therein) without payment of any termination
fee.
The
base
and incentive management fees for the period from March 8, 2005 to December
31,
2005 were approximately $2.7 million and $344,000, respectively.
NOTE
10 - RELATED-PARTY TRANSACTIONS
At
December 31, 2005, the Company was indebted to the Manager for base and
incentive management fees of approximately $552,000 and $344,000, respectively,
and reimbursement of expenses of approximately $143,000. These amounts are
included in management fee payable and accounts payable and accrued liabilities,
respectively.
At
December 31, 2005, the Company was indebted to LEAF Financial Corporation
for
servicing fees in connection with our equipment finance portfolio of
approximately $41,000.
At
December 31, 2005, the corporate parent of the Manager owned a 6.4% ownership
interest in the Company, consisting of 1,000,000 shares purchased in the
private
placement. Certain officers of the Manager and its affiliates purchased 232,167
shares of the Company’s common stock in the Company’s private placement for $3.5
million, constituting 1.5% of the outstanding shares of the Company’s common
stock as of December 31, 2005. All such shares were purchased at the same
price
at which shares were purchased by other third party
investors.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
10 - RELATED-PARTY TRANSACTIONS -
(Continued)
Until
1996, the Company’s Chairman, Edward Cohen, was of counsel to Ledgewood Law
Firm. The Company paid Ledgewood $876,000 during the period from March 8, 2005
to December 31, 2005. Mr. Cohen receives certain debt service payments from
Ledgewood related to the termination of his affiliation with Ledgewood and
its
redemption of his interest.
NOTE
11 - DISTRIBUTIONS
In
order
to qualify as a REIT, the Company must currently distribute at least 90% of
its
taxable income. In addition, the Company must distribute 100% of its taxable
income in order not to be subject to corporate federal income taxes on retained
income. The Company anticipates it will distribute substantially all of its
taxable income to its stockholders. Because taxable income differs from cash
flow from operations due to non-cash revenues or expenses (such as
depreciation), in certain circumstances, the Company may generate operating
cash
flow in excess of its distributions or, alternatively, may be required to borrow
to make sufficient distribution payments.
During
the year ended December 31, 2005, the Company declared and paid distributions
totaling $13.5 million, or $0.86 per share, including a distribution of $0.36
per share of common stock, including holders of restricted stock, $5.6 million
in the aggregate, declared on December 29, 2005 and paid on January 17, 2006
to
stockholders of record as of December 30, 2005. For tax purposes, 100% of
the
distributions declared in 2005 have been classified as ordinary income.
NOTE
12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS
No.
107, “Disclosure About Fair Value of Financial Instruments,” requires
disclosure of the fair value of financial instruments for which it is
practicable to estimate value. The fair value of available-for-sale securities,
derivatives and direct financing leases and notes is equal to their respective
carrying value presented in the consolidated balance sheet. The fair value
of
loans held for investment was $571.7 million as of December 31, 2005. The
fair
value of cash and cash equivalents, restricted cash, interest receivable,
due
from broker, principal paydowns receivables, repurchase agreements (including
accrued interest), warehouse agreements liability, distribution payable,
management fee payable, accounts payable and accrued liabilities approximates
carrying value as of December 31, 2005 due to the short-term nature of
these
instruments.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
13 - INTEREST RATE RISK
The
primary market risk to the Company is interest rate risk. Interest rates are
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations
and
other factors beyond the Company’s control. Changes in the general level of
interest rates can affect net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with the interest-bearing liabilities, by affecting
the
spread between the interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of the
Company’s interest-earning assets and the Company’s ability to realize gains
from the sale of these assets. A decline in the value of the Company’s
interest-earning assets pledged as collateral for borrowings under repurchase
agreements could result in the counterparties demanding additional collateral
pledges or liquidation of some of the exiting collateral to reduce borrowing
levels.
The
Company seeks to manage the extent to which net income changes as a function
of
changes in interest rates by matching adjustable-rate assets with variable-rate
borrowings. During periods of changing interest rates, interest rate mismatches
could negatively impact the Company’s consolidated financial condition,
consolidated results of operations and consolidated cash flows. In addition,
the
Company mitigates the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in its investment portfolio by entering into
interest rate hedging agreements such as interest rate caps and interest rate
swaps.
Changes
in interest rates may also have an effect on the rate of mortgage principal
prepayments and, as a result, prepayments on mortgage-backed securities of
the
type in the Company’s investment portfolio. The Company seeks to mitigate the
effect of changes in the mortgage principal repayment rate by balancing assets
purchased at a premium with assets purchased at a discount. At December 31,
2005, the aggregate discount exceeded the aggregate premium on the Company’s
mortgage-backed securities by approximately $2.8 million.
NOTE
14 - DERIVATIVE INSTRUMENTS
The
Company uses derivative financial instruments to hedge all or a portion of
the
interest rate risk associated with its borrowings. The principal objective
of
such arrangements is to minimize the risks and/or costs associated with the
Company’s operating and financial structure as well as to hedge specific
anticipated transactions. The counterparties to these contractual arrangements
are major financial institutions with which the Company and its affiliates
may
also have other financial relationships. In the event of nonperformance by
the
counterparties, the Company is potentially exposed to credit loss. However,
because of their high credit ratings, the Company does not anticipate that
any
of the counterparties will fail to meet their obligations. On the date the
Company enters into a derivative contract, the derivative is designated as
either: (1) designated as a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset
or liability (‘‘cash flow’’ hedge) or (2) a contract not designated as a hedge
for hedge accounting (‘‘free standing’’ derivative).
At
December 31, 2005, the Company had entered into six interest rate swap contracts
whereby the Company will pay an average fixed rate of 3.89% and receive a
variable rate equal to one-month and three-month LIBOR. The aggregate notional
amount of these contracts is $972.2 million. In addition, the Company had
purchased one interest rate cap agreement whereby it reduced its exposure
to
variability in future cash out flows attributable to changes in LIBOR. The
aggregate notional amount of this contract is $15.0 million.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
14 - DERIVATIVE INSTRUMENTS -
(Continued)
The
interest rate swap and cap agreements (‘‘hedge instruments’’) were entered into
to hedge the Company’s exposure to variable cash flows from forecasted variable
rate financing transactions and, pursuant to SFAS No. 133, the hedge instruments
were designated as cash flow hedges. The hedge instruments were evaluated at
inception and the Company concluded that each hedge instrument is expected
to be
highly effective pursuant to the rules of SFAS No. 133, as amended and
interpreted. As such, the Company accounts for the hedge instruments using
hedge
accounting and records them at their fair market value each accounting period
with any changes in fair market value being recorded in accumulated other
comprehensive income. The hedge instruments will be evaluated on an ongoing
basis to determine whether they continue to qualify for hedge accounting. Each
hedge instrument must be highly effective in achieving offsetting changes in
the
hedged item attributable to the risk being hedged in order to qualify for hedge
accounting. Should there be any ineffectiveness in the future, the amount of
the
ineffectiveness will be recorded in the Company’s
consolidated
statements of operations.
The
fair
value of the Company’s interest rate swaps and interest rate cap was $3.0
million as of December 31, 2005. The Company had an aggregate unrealized
gain of $2.8 million on the interest rate swap agreements and interest rate
cap
agreement, as of December 31, 2005, which is recorded in accumulated other
comprehensive loss.
NOTE
15 - STOCK INCENTIVE PLAN
Upon
formation of the Company, the 2005 Stock Incentive Plan (the “Plan”) was adopted
for the purpose of attracting and retaining executive officers, employees,
directors and other persons and entities that provide services to the Company.
The Plan authorizes the issuance of options to purchase common stock and the
grant of stock awards, performance shares and stock appreciation
rights.
Up
to
1,533,333 shares of common stock are available for issuance under the Plan.
The
share authorization, the incentive stock option limit and the terms of
outstanding awards will be adjusted as the board of directors determines is
appropriate in the event of a stock dividend, stock split, reclassification
of
shares or similar events. Upon completion of the March 2005 private placement,
the Company granted the Manager 345,000 shares of restricted stock and options
to purchase 651,666 shares of common stock with an exercise price of $15.00
per
share under the Plan, none of which were exercisable as of December 31, 2005.
The Company’s non-employee directors were also granted 4,000 shares of
restricted stock as part of their annual compensation.
NOTE
16 - INCOME TAXES
The
Company intends to elect to be taxed as a REIT for federal income tax purposes
effective for its initial taxable year ending December 31, 2005. Accordingly,
the Company and its qualified REIT subsidiaries are not subject to federal
income tax to the extent that their distributions to stockholders satisfy
the
REIT requirements and certain asset, income and ownership tests. The
Company may retain up to 10% of its REIT taxable income and pay corporate
income
taxes on this retained income while continuing to maintain its REIT
status. The Company intends to distribute 100% of its 2005 ordinary REIT
taxable income and, accordingly, the Company has not recorded a provision
for
income taxes. The Company may be subject to franchise taxes in certain
states that impose taxes on REITs.
Apidos
CDO I and Apidos CDO III, the Company’s foreign taxable REIT subsidiaries, are
organized as exempted companies incorporated with limited liability under
the
laws of the Cayman Islands, and are generally exempt from federal and state
income tax at the corporate entity level because they restrict their activities
in the United States to trading in stock and securities for their own account.
Therefore, despite their status as taxable REIT subsidiaries, they generally
will not be subject to corporate income tax on their earnings, and no provisions
for income taxes are required; however, the Company will generally be required
to include their current taxable income in its calculation of REIT taxable
income.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 − (Continued)
NOTE
16 - INCOME TAXES -
(Continued)
Resource
TRS, a domestic taxable REIT subsidiary is subject to corporate income tax
on
its earnings. Resource TRS is inactive and as a result no provision for
income taxes has been recorded. In addition, Resource TRS does not have
any items which give rise to temporary differences between the GAAP consolidated
financial statements and the federal income tax basis of assets and liabilities
as of the consolidated balance sheet date. Accordingly, Resource TRS has
no deferred income tax assets and liabilities recorded.
NOTE
17 - QUARTERLY RESULTS
The
following is a presentation of the quarterly results of operations for the
year
ended December 31, 2005:
|
Period
from March 8 to March 31
|
June
30
|
September
30
|
December
31
|
||||||||||
|
(audited)
|
(audited)
|
(unaudited)
|
(audited)
|
||||||||||
|
(in
thousands, except per share data)
|
|||||||||||||
|
Interest
income
|
$
|
694
|
$
|
12,399
|
$
|
21,596
|
$
|
26,698
|
|||||
|
Interest
expense
|
210
|
7,930
|
15,595
|
19,327
|
|||||||||
|
Net
interest income
|
484
|
4,469
|
6,001
|
7,371
|
|||||||||
|
Other
revenue (loss)
|
−
|
(14
|
)
|
192
|
133
|
||||||||
|
Expenses
|
532
|
2,175
|
2,417
|
2,604
|
|||||||||
|
Net
(loss) income
|
$
|
(48
|
)
|
$
|
2,280
|
$
|
3,776
|
$
|
4,900
|
||||
|
Net
income (loss) per share − basic
|
$
|
(0.00
|
)
|
$
|
0.15
|
$
|
0.25
|
$
|
0.32
|
||||
|
Net
income (loss) per share − diluted
|
$
|
(0.00
|
)
|
$
|
0.14
|
$
|
0.24
|
$
|
0.32
|
||||
NOTE
18 - SUBSEQUENT EVENTS
On
February 10, 2006, the Company completed the initial public offering of
4,000,000 shares of its common stock (including 1,879,200 shares sold by certain
selling stockholders of the Company) at a price of $15.00 per share. The
offering generated gross proceeds to the Company of approximately $31.8 million
and net proceeds to the Company, after deducting the underwriters’ discounts and
commissions and estimated offering expenses, of approximately $27.6 million.
The
Company did not receive any proceeds from the shares sold by the selling
stockholders.
On
March
16, 2006, the board of directors declared a quarterly distribution of $0.33
per
share of common stock, $5.9 million in the aggregate, which will be paid on
April 10, 2006 to stockholders of record as of March 27, 2006.
None.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate,
to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed and operated,
can
provide only reasonable assurance of achieving the desired control objectives,
and our management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
Under
the
supervision of our Chief Executive Officer and Chief Financial Officer, we
have
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective.
There
have been no significant changes in our internal controls over financial
reporting that has partially affected, or are reasonably likely to materially
affect, our internal control over financial reporting during our most
recent fiscal year.
None.
PART
III
All
members of the Board of Directors are elected for a term of one year or until
their successors are elected and qualified. Information
is set forth below regarding the principal occupation of each of our directors.
There are no family relationships among the directors and executive officers
except that Jonathan Z. Cohen, our Chief Executive Officer, President and a
director, is a son of Edward E. Cohen, our Chairman of the Board.
Names
of Directors, Principal Occupation and Other Information
Edward
E. Cohen,
age 67,
has been our Chairman since March 2005. Mr. Cohen is Chairman of Resource
America, Inc. (Nasdaq: REXI), a position he has held since 1990. He was Resource
America’s Chief Executive Officer from 1988 to 2004 and its President from 2000
to 2003. He is Chairman, Chief Executive Officer and President of Atlas America,
Inc., a publicly-traded (NASDAQ: ATLS) energy company, a position he has held
since 2000, and Chairman of the Managing Board of Atlas Pipeline Partners GP,
LLC, a wholly-owned subsidiary of Atlas America that is the general partner
of
Atlas Pipeline Partners, L.P., a publicly-traded (NYSE: APL) natural gas
pipeline company. He is also a director of TRM Corporation, a publicly-traded
(NASDAQ: TRMM) consumer services company, and Chairman of Brandywine
Construction & Management, Inc., a privately-held real estate management
company. From 1981 to 1999 he was Chairman of the Executive Committee of
JeffBanks, Inc., a bank holding company acquired by Hudson United
Bancorporation. From 1969 to 1989 he was Chairman of the Executive Committee
of
State National Bank of Maryland (now a part of Wachovia Bank). Mr. Cohen is
the
father of Jonathan Z. Cohen.
Jonathan
Z. Cohen,
age 35,
has been our Chief Executive Officer and President and a director since March
2005. Mr. Cohen has been President since 2003, Chief Executive Officer since
2004 and a Director since 2002 of Resource America. He was Executive Vice
President of Resource America from 2001 to 2003, and Senior Vice President
from
1999 to 2001. He has been Vice Chairman of the Managing Board of Atlas Pipeline
Partners GP since its formation in 1999 and Vice Chairman of Atlas America
since
2000. He has been the Vice Chairman of RAIT Investment Trust, a publicly-traded
(NYSE: RAS) real estate investment trust, since 2003, and Secretary and Trustee
since its formation in 1997. Since 2003 he has been the general partner of
Castine Partners, L.P., a financial services hedge fund. Mr. Cohen is a son
of
Edward E. Cohen.
Walter
T. Beach,
age 39,
has been a director since March 2005. Mr. Beach has been Managing Director
of
Beach Investment Counsel, Inc., an investment management firm, since 1997.
From
1993 to 1997, Mr. Beach was a Senior Analyst and Director of Research at
Widmann, Siff and Co., Inc., an investment management firm where, beginning
in
1994, he was responsible for the firm’s investment decisions for its principal
equity product. Mr. Beach has served as a director of The Bancorp, Inc., a
publicly-traded (NASDAQ: TBBK) Delaware bank holding company, and its subsidiary
bank, The Bancorp Bank, since 1999.
William
B. Hart,
age 62,
has been a director since March 2005. Mr. Hart was Chairman of the Board of
Trustees of the National Trust for Historic Preservation from 1999 to 2004.
He
was also a director of Anthem, Inc. (now Wellpoint, Inc.), a publicly-held
health insurance company, from 2000 to 2004. Mr. Hart was Director of SIS
Bancorp (now Banknorth Massachusetts, a division of Banknorth, N.A.) from 1995
to 2000. From 1988 to 1999, Mr. Hart served in various positions with Blue
Cross/Blue Shield of New Hampshire, ending as Chairman of the Audit Committee
and Chairman of the Board of Directors from 1996 to 1999. He also served as
President of the Foundation for the National Capital Region, Washington, DC,
from 1993 to 1996 and President of The Dunfey Group, a private investment firm,
from 1986 to 1998. From 1986 to 1994 he was also a director of First NH Banks
where he was Chairman of the Audit Committee from 1992 to 1994.
Murray
S. Levin,
age 62,
has been a director since March 2005. Mr. Levin is a senior litigation partner
at Pepper Hamilton LLP, a law firm with which he has been associated since
1970.
Mr. Levin served as the first American president of the Association
Internationale des Jeunes Avocats (Young Lawyers International Association),
headquartered in Western Europe. He is a past president of the American Chapter
and a member of the board of directors of the Union Internationale des Avocats
(International Association of Lawyers), a Paris-based
93
organization
that is the world’s oldest international lawyers association. Mr. Levin was a
member of the managing board of Atlas Pipeline Partners GP from 2001 to March
2005.
P. Sherrill Neff,
age 54,
has been a director since March 2005. Mr. Neff is a founder of Quaker
BioVentures, Inc., a life sciences venture fund, and has been Managing Partner
since 2002. He was a director of Resource America from 1998 to March 2005.
From
1994 to 2002 he was President and Chief Financial Officer, and from 1994 to
2003, a director of Neose Technologies, Inc., a publicly-traded life sciences
company. Mr. Neff was also a director of The Bancorp from its formation in
1999
until 2002.
Stockholders
Communications to Directors
Stockholders
may communicate with the Company’s board of directors, or any director or
committee chairperson, by writing to such parties in care of Michael S. Yecies,
Chief Legal Officer and Secretary, Resource Capital Corp., 1845 Walnut Street,
Suite 1000, Philadelphia, PA 19103. Communications addressed to the board
generally will be forwarded either to the appropriate committee chairperson
or
to all directors. Communications may be submitted confidentially and
anonymously. Under certain circumstances, the Company may be required by law
to
disclose the information or identity of the person submitting the communication.
There were no material actions taken by the Board of Directors as a result
of
communications received during fiscal 2005 from stockholders. Certain concerns
communicated to the Company’s board of directors also may be referred to the
Company’s internal auditor or its Chief Legal Officer, in accordance with the
Company’s regular procedures for addressing such concerns. The chairman of the
Company’s board of directors, or the chairman of the Company’s Audit Committee
may direct that concerns be presented to the Audit Committee, or to the full
board, or that they otherwise receive special treatment, including retention
of
external counsel or other advisors.
Non-Director
Executive Officers
The
Board
of Directors anticipates appointing officers each year at its annual meeting
following the annual stockholders meeting and from time to time as
necessary.
Jeffrey
D. Blomstrom,
age 37,
has been our Senior Vice President − CDO Structuring since March 2005. Mr.
Blomstrom has been President and Managing Director of Resource Financial Fund
Management, or RFFM, a wholly-owned subsidiary of Resource America, since 2003.
Mr. Blomstrom also serves as the head of collateral origination and as a member
of the credit committee for Trapeza Capital Management. From 2001 to 2003 Mr.
Blomstrom was a Managing Director at Cohen Bros. and Company, an investment
bank
specializing in the financial services sector. From 2000 to 2001 he was Senior
Vice President of iATMglobal.net, Inc., an ATM software development company.
Mr.
Blomstrom was, from 1999 to 2000, an associate at Covington & Burling, a law
firm, where he focused on mergers and acquisitions and corporate
governance.
David
E. Bloom,
age 41,
has been our Senior Vice President − Real Estate Investments since March 2005.
Mr. Bloom has been Senior Vice President of Resource America since 2001. He
has
also been President of Resource Real Estate since 2004 and President of Resource
Capital Partners since 2002, both wholly-owned subsidiaries of Resource America.
From 2001 to 2002 he was President of Resource Properties. Before that he was
Senior Vice President at Colony Capital, LLC, an international real estate
opportunity fund, from 1999 to 2001. From 1998 to 1999 he was Director at
Sonnenblick-Goldman Company, a real estate investment bank. From 1995 to 1998
he
was an attorney at the law firm of Willkie Farr & Gallagher,
LLP.
Thomas
C. Elliott,
age 32,
has been our Chief Financial Officer, Chief Accounting Officer and Treasurer
since September 2005. He was Senior Vice President − Assets and Liabilities
Management from June 2005 until September 2005 and, before that, served as
Vice
President − Finance from March 2005. Mr. Elliott has been Senior Vice President
since 2005 and was Vice President − Finance from 2001 to 2005 of Resource
America. He has also been Chief Financial Officer of RFFM since 2004. From
1997 to 2001 Mr. Elliott was a Vice President at Fidelity Leasing, Inc. where
he
managed all capital market functions, including the negotiation of all
securitizations and credit and banking facilities in the U.S. and Canada. Mr.
Elliott also oversaw the financial controls and budgeting
departments.
Steven
J. Kessler,
age 63,
has been our Senior Vice President − Finance since September 2005 and, before
that, served as our Chief Financial Officer, Chief Accounting Officer and
Treasurer from March 2005. Mr. Kessler has been Executive Vice President since
2005 and Chief Financial Officer since 1997 and was Senior Vice President from
1997 to 2005 of Resource America. He was Vice President − Finance and
Acquisitions at Kravco Company, a national shopping center developer and
operator, from 1994 to 1997. He has been a Trustee of GMH Communities Trust,
a
publicly-traded specialty housing real estate investment trust, since 2004.
From
1983 to 1993 he was employed by Strouse Greenberg & Co., a regional full
service real estate company, ending as Chief Financial Officer and Chief
Operating Officer. Before that, he was a partner at Touche Ross & Co. (now
Deloitte & Touche LLP), independent public accountants.
Other
Significant Employees
The
following sets forth certain information regarding other significant
employees:
Christopher
D. Allen,
age 36,
has been our Senior Vice President − Commercial Lending since March 2005. Mr.
Allen has been a Managing Director of RFFM since 2003. At RFFM, Mr. Allen is
in
charge of identifying, implementing and overseeing new CDO products. He is
a
member of the investment committee of Ischus Capital Management and is also
a
member of the investment committee of Apidos Capital Management, or Apidos,
a
subsidiary of Resource America that invests, in finances and manages syndicated
bank loans, where he serves as the Chief Operating Officer and Director of
Product Management. Before joining RFFM, from 2002 to 2003 he was a Vice
President at Trenwith Securities, the investment banking arm of BDO Seidman,
LLP, where he was in charge of corporate finance, mergers and acquisitions
and
restructuring transactions. From 1994 to 1997 he was an Associate with Citicorp
Venture Capital working on leveraged buyout and recapitalization
transactions.
Gretchen
L. Bergstresser,
age 43,
has been our Senior Vice President − Syndicated Loans since March 2005. Ms.
Bergstresser has been the President and Senior Portfolio Manager of Apidos
since
2005. Before joining Apidos, from 2003 to 2005 she was a Managing Director
and
Portfolio Manager of MJX Asset Management, a greater than $1.5 billion boutique
asset management firm managing leveraged loans across five structured vehicles.
From 1996 to 2003 Ms. Bergstresser was CDO Portfolio Manager and Head Par Loan
Trader at Eaton Vance Management, an investment management company. From 1995
to
1996 she was a Vice President in the Diversified Finance Division of Bank of
Boston. From 1991 to 1995 she was a Vice President at ING (U.S.) Capital
Markets, an investment banking firm.
John
R. Boyt,
age 31,
has been our Vice President − Director of Loan Originations since January 2006.
He has also been Senior Vice President of Resource Real Estate, Inc., a
wholly-owned subsidiary of Resource America that originates, finances and
manages investments in real estate and real estate loans, since 2005. From
2004
to 2005 he was a principal of Structured Property Advisors, LLC, a CMBS
investment advisory firm. From 1998 to 2004 he was an Associate Director of
Bear, Stearns & Co. Inc., where he was a senior member of the commercial
mortgage group involved in loan origination, underwriting, and CMBS sales.
Before that, from 1997 to 1998, Mr. Boyt worked for Bankers Trust Company within
their mortgage backed securities services unit, focusing on MBS and whole loan
sales.
Crit
DeMent,
age 53,
has been our Senior Vice President − Equipment Leasing since March 2005. Mr.
DeMent has been Chairman and Chief Executive Officer of LEAF Financial
Corporation, the equipment finance subsidiary of Resource America, since 2001.
Mr. DeMent was Chairman and Chief Executive Officer of its subsidiary, LEAF
Asset Management, Inc., from 2002 until 2004. From 2000 to 2001 he was President
of the Small Ticket Group, an equipment leasing division of European American
Bank. Before that, he was President and Chief Operating Officer of Fidelity
Leasing, Inc., a former equipment leasing subsidiary of Resource America, and
its successor, the Technology Finance Group of CitiCapital Vendor Finance from
1996 to 2000. From 1987 to 1996 he was Vice President of Marketing for Tokai
Financial Services, an equipment leasing firm.
Alan
F. Feldman,
age 42,
has been our Senior Vice President − Real Estate Investments since March 2005.
Mr. Feldman has been Senior Vice President of Resource America since 2002.
He
has also been Chief Executive Officer of Resource Real Estate since 2004. From
1998 to 2002, Mr. Feldman was Vice President at Lazard Freres & Co., an
investment banking firm, specializing in real estate mergers and acquisitions,
asset and portfolio sales and recapitalization. From 1992 through 1998, Mr.
Feldman was Executive Vice President of PREIT-
RUBIN, Inc. the management subsidiary of Pennsylvania Real Estate Investment Trust, a publicly-traded REIT, and its predecessor, The Rubin Organization. Before that, from 1990 to 1992 he was a Director at Strouse, Greenberg & Co., a regional full service real estate company.
Kevin
M. Finkel,
age 34,
has been our Vice President − Real Estate Investments since January 2006. He has
also been Vice President and Director of Acquisitions of Resource Capital
Partners, Inc. since 2003. Mr. Finkel has also been with Resource Real Estate
since 2004, and is currently its Senior Vice President and Director of
Acquisitions. In 2000, Mr. Finkel was an Associate at Lehman Brothers, a global
investment banking firm. From 1998 to 1999, Mr. Finkel was an Associate at
Barclays Capital, the investment banking division of Barclays Bank PLC. From
1994 to 1998, Mr. Finkel was an investment banker at Deutsche Bank Securities,
the investment banking division of Deutsche Bank AG.
Andrew
P. Shook,
age 36,
has been our Senior Vice President − RMBS and CMBS since March 2005.
Mr. Shook has been the President, Chief Investment Officer and Senior
Portfolio Manager of Ischus Capital Management LLC, a wholly-owned subsidiary
of
Resource America that invests in, finances, structures and manages RMBS, CMBS
and other ABS investments, since 2004. In 2001 Mr. Shook founded and ran HSBC
Bank USA’s structured finance credit arbitrage book until 2004. Before that, Mr.
Shook worked domestically and in London for Bank of America from 1996 to 2001.
From 1994 to 1996 he was a Senior Securities Analyst at Hyperion Capital
Management, a commercial and residential mortgage related fixed income
investment advisor.
Victor
Wang,
age 44,
has been our Vice President − Director of Asset Management since January 2006.
He has also been Vice President − Director of Asset Management of Resource Real
Estate since 2002. From 2000 to 2002, Mr. Wang was Vice President, Financing
and
Dispositions at Sonnenblick-Goldman Company, a real estate investment bank.
From
1998 to 1999, Mr. Wang was a Senior Asset Manager at NorthStar Presidio
Management Company, an asset management arm of Northstar Capital Investment
Corp. Before that, from 1994 to 1998, Mr. Wang was an Asset Manager and Senior
Analyst at Newkirk and Odin Management Companies, an asset management company
specializing in the management of highly leveraged net lease and operating
real
estate.
Michael
S. Yecies,
age 38,
has been our Chief Legal Officer and Secretary since March 2005. Mr. Yecies
has
been Senior Vice President since 2005, Chief Legal Officer and Secretary since
1998 and was Vice President of Resource America from 1998 to 2005. From 1994
to
1998 he was an attorney at the law firm of Duane Morris LLP.
Information
Concerning the Audit Committee
Our
Board
of Directors has a standing Audit Committee. Our Board of Directors has
determined that all the members of the Audit Committee satisfy the independence
requirements of the New York Stock Exchange and the SEC, and that Messrs. Beach
and Neff are audit committee financial experts as defined by SEC rules. The
Audit Committee reviews the scope and effectiveness of audits by the independent
accountants, is responsible for the engagement of independent accountants,
and
reviews the adequacy of the Company's internal controls. The Committee did
not
hold any meetings during fiscal 2005 because we were not a public company in
fiscal 2005. Members of the Committee are Messrs. Neff (Chairman), Beach and
Hart.
Code
of Ethics
We
have
adopted a code of business conduct and ethics applicable to all directors,
officers and employees. We will provide to any person without charge, upon
request, a copy of our code of conduct. Any such request should be directed
to
us as follows: Resource Capital Corp., 1845 Walnut Street, Suite 1000,
Philadelphia, PA 19103, Attention: Secretary. Our code of conduct is also
available on our website: www.resourcecapitalcorp.com.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors
and persons who own more than ten percent of a registered class of our equity
securities to file reports of ownership and changes in ownership with the SEC
and to furnish us with copies of all such reports. Based solely on our review
of
the reports received by us, or written representations from certain reporting
persons that no filings were required for those persons, we believe that, during
fiscal 2005, our officers, directors and greater than ten percent stockholders
complied with all applicable filing requirements.
Executive
Officer Compensation
Because
our management agreement provides that our Manager assumes principal
responsibility for managing our affairs, our executive officers, who are
employees of Resource America, do not receive cash compensation from us for
serving as our executive officers. However, in their capacities as officers
or
employees of our Manager, or its affiliates, they devote a portion of their
time
to our affairs as is required for the performance of the duties of our Manager
under the management agreement.
We
may
from time to time, at the discretion of the Resource America Compensation
Committee, grant shares of our common stock or options to purchase shares of
our
common stock to our officers pursuant to our 2005 Stock Incentive Plan. The
following table sets forth certain information concerning the compensation
paid
or accrued since our inception in fiscal 2005 for our Chief Executive Officer
and each of our four other most highly compensated executive officers whose
aggregate salary and bonus (including amounts of salary and bonus foregone
to
receive non-cash compensation) exceeded $100,000:
Summary
Compensation Table
|
Annual
Compensation
|
Long
Term Compensation
|
|||||||||||||||||||||
|
Awards
|
||||||||||||||||||||||
|
Fiscal
|
Restricted
Stock
|
Securities
Underlying
|
All
Other Compen-
|
|||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Other
|
Awards(1)
|
|
Options
|
sation
|
||||||||||||||
|
Edward
E. Cohen
Chairman
of the Board
|
2005
|
−
|
|
|
−
|
|
|
−
|
|
|
70,000
|
|
|
−
|
|
|
−
|
|||||
|
Jonathan
Z. Cohen
Chief
Executive Officer,
President
and Director
|
2005
|
−
|
|
|
−
|
|
|
−
|
|
|
100,000
|
|
|
−
|
|
|
−
|
|||||
|
Thomas
C. Elliott
Chief
Financial Officer,
Chief
Accounting Officer
and
Treasurer
|
2005
|
−
|
|
|
−
|
|
|
−
|
|
|
20,000
|
|
|
−
|
|
|
−
|
|||||
|
Jeffrey
D. Blomstrom
Senior
Vice President -
CDO
Structuring
|
2005
|
−
|
|
|
−
|
|
|
−
|
|
|
10,000
|
|
|
−
|
|
|
−
|
|||||
|
Steven
J. Kessler
Senior
Vice President −
Finance
|
2005
|
−
|
|
|
−
|
|
|
−
|
|
|
7,500
|
|
|
−
|
|
|
−
|
|||||
|
(1)
|
In
consideration for services rendered, our executive officers received
grants of restricted stock of Resource Capital Corp. on March 8,
2005. The
shares vest one-third per year commencing on March 8, 2006. The number
of
restricted shares held and the value of those restricted shares (in
the
aggregate, and valued at the date of grant) are: Mr. E. Cohen − 70,000
shares ($1,050,000); Mr. J. Cohen − 100,000 shares ($1,500,000); Mr.
Elliott − 20,000 shares ($300,000); Mr. Blomstrom − 10,000 shares
($150,000); and Mr. Kessler − 7,500 shares ($112,500). Cash dividends, as
and when authorized by our Board of Directors, have been and will
continue
to be paid on the restricted
shares.
|
Option/SAR
Grants and Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
We
did
not grant any stock options or stock appreciation rights to any of our named
executive officers in fiscal 2005. No stock options or stock appreciation rights
were exercised or held by any of our named executive officers in fiscal
2005.
Employment
Agreements
We
do not
have any employees, nor do we have any employment agreements with any of our
named executive officers.
Director
Compensation
Any
member of our board of directors who is also an employee of the Manager or
Resource America does not receive additional compensation for serving on our
board of directors. Each other director receives an annual retainer of $35,000
for service on our board. In addition, we grant each non-employee director
annual stock award under our Stock Incentive Plan equal to $15,000 divided
by
the fair market value of our common stock on the date of grant. The stock awards
vest one year after the date of grant. We also reimburse our directors for
their
travel expenses incurred in connection with their attendance at board and
committee meetings.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee of the Board of Directors consists of Messrs. Beach,
Levin and Neff. Mr. Beach is the chairman of the Committee. None of such persons
was an officer or employee of ours or any of our subsidiaries during fiscal
2005
or was formerly an officer of ours or any of our subsidiaries. None of our
executive officers has been a director or executive officer of any entity of
which any member of the Compensation Committee has been a director or executive
officer during the year ended December 31, 2005, except that Mr. Neff formerly
served on the Board of Directors of Resource America, and Mr. Levin formerly
served on the Managing Board of Atlas Pipeline Partners GP, LLC. Mr. E. Cohen
is
the Chairman of the Board and Mr. J. Cohen is the Chief Executive Officer and
President and a director of Resource America. Mr. E. Cohen is the Chairman
of
the Managing Board and Chief Executive Officer and Mr. J. Cohen is a Managing
Board member of Atlas Pipeline Partners GP, LLC.
RELATED STOCKHOLDERS MATTERS
The
following table sets forth the number and percentage of shares of common stock
owned, as of March 20, 2006, by (a) each person who, to our knowledge, is the
beneficial owner of more than 5% of the outstanding shares of common stock,
(b)
each of our present directors, (c) each of our executive officers and (d) all
of
our named executive officers and directors as a group. This information is
reported in accordance with the beneficial ownership rules of the Securities
and
Exchange Commission under which a person is deemed to be the beneficial owner
of
a security if that person has or shares voting power or investment power with
respect to such security or has the right to acquire such ownership within
60
days. Shares of common stock issuable pursuant to options or warrants are deemed
to be outstanding for purposes of computing the percentage of the person or
group holding such options or warrants but are not deemed to be outstanding
for
purposes of computing the percentage of any other person. Unless
otherwise indicated in footnotes to the table, each person listed has sole
voting and dispositive power with respect to the securities owned by such
person.
|
Common
Stock
|
|||||||
|
Beneficial
Owner
|
Amount
and Nature of Beneficial
Ownership
|
Percent
of Class
|
|||||
|
Directors (1)
|
|||||||
|
Walter
T. Beach (2)
(3)
|
272,589
|
1.53
|
%
|
||||
|
Edward
Cohen (4)
|
238,333
|
1.33
|
%
|
||||
|
Jonathan
Cohen (4)
|
235,000
|
1.31
|
%
|
||||
|
William
B. Hart (3)
|
12,056
|
*
|
|||||
|
Murray
S. Levin (3)
|
6,056
|
*
|
|||||
|
P.
Sherrill Neff (3)
|
2,056
|
*
|
|||||
|
Non-Director
Executive Officers (1)
|
|||||||
|
Jeffrey
D. Blomstrom (4)
|
12,666
|
*
|
|||||
|
David
E. Bloom (4)
|
11,666
|
*
|
|||||
|
Thomas
C. Elliott (4)
|
21,500
|
*
|
|||||
|
Steven
J. Kessler (4)
|
12,500
|
*
|
|||||
|
All
named executive officers and directors as a group (10
persons)
|
824,422
|
4.56
|
%
|
||||
|
Other
Owners of More Than 5% of Outstanding Shares
|
|||||||
|
Resource
America, Inc. (5)
|
2,123,881
|
11.92
|
%
|
||||
|
Elliott
& Associates, Inc. (6)
|
1,467,400
|
8.24
|
%
|
||||
|
Omega
Advisors, Inc. (7)
|
2,219,467
|
12.46
|
%
|
||||
|
Rockbay
Capital Advisors, Inc. (8)
|
1,000,000
|
5.61
|
%
|
|
*
|
Less
than 1%.
|
|
(1)
|
The
address for all of our executive officers and directors is c/o Resource
Capital Corp., 712 Fifth Avenue, 10th Floor, New York, New York
10019.
|
|
(2)
|
Includes
270,533 shares purchased by Beach Investment Counsel, Inc., an investment
management firm for which Mr. Beach acts as managing director and
possesses investment and/or voting power over the 270,533 shares.
The
address for Beach Investment Counsel, Inc. is Three Radnor Corporate
Center, Suite 410, Radnor, Pennsylvania
19087.
|
|
(3)
|
Includes
1,056 restricted shares issued to each non-employee director on March
8,
2006 in connection with their compensation for service as a director.
Each
non-employee director has the right to receive distributions on and
vote,
but not to transfer, such shares. All such shares vest in the recipient
on
March 8, 2007.
|
|
(4)
|
Includes
shares originally issued to the Manager as part of the 345,000 shares
of
restricted stock we granted to it in connection with our March 2005
private offering, and transferred by it, without consideration, as
follows: E. Cohen − 70,000; J. Cohen − 133,333; S. Kessler − 7,500; J.
Blomstrom − 11,666; T. Elliott − 20,000; and D. Bloom − 6,666. Each such
person has the right to receive distributions on and vote, but not
to
transfer, such shares. One-third of the grant amount vests in the
recipient each year, commencing March 8, 2006, except that the vesting
period for 33,333 of the shares transferred to J. Cohen; 1,666 shares
transferred to J. Blomstrom and 1,666 shares transferred to D. Bloom
commences January 3, 2007.
|
|
(5)
|
This
information is based on Schedule 13D filed with the SEC on February
21,
2006. Includes 2,123,881 shares as to which shared voting power is
claimed, and 2,123,267 shares as to which shared dispositive power
is
claimed. The address for Resource America is 1845 Walnut Street,
Philadelphia, Pennsylvania 19103.
|
|
(6)
|
This
information is based on Schedule 13G filed with the SEC on March
6, 2006.
The address for Elliott & Associates, Inc. is 712 Fifth Avenue,
36th
Floor, New York, New York 10019.
|
|
(7)
|
This
information is based on a Form 4 filed with the SEC on February 15,
2006.
The address for Omega Advisors, Inc. is 88 Pine Street, Wall Street
Plaza
- 31st
Floor, New York, New York 10005.
|
|
(8)
|
This
information is based on our Registration Statement filed with the
SEC on
February 6, 2006. The address for Rockbay Capital Advisors, Inc.
is 1211
Avenue of the Americas, New York, New York
10036-8701.
|
Equity
Compensation Plan Information
The
following table summarizes certain information about our compensation plans,
in
the aggregate, as of December 31, 2005:
|
(a)
|
(b)
|
(c)
|
|
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options,
warrants
and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans excluding securities reflected in column
(a)
|
|
Equity
compensation plans
approved
by security
holders:
|
|||
|
Options
|
651,666
|
$15.00
|
|
|
Restricted
shares
|
349,000
|
n/a
|
|
|
Total
|
1,000,666
|
532,667
|
We
have
entered into a management agreement under which the Manager receives substantial
fees. We describe these fees in Item 1 − “Business − Management Agreement.” From
March 8, 2005, the date we commenced operations, to December 31, 2005, the
Manager had earned base management fees of approximately $2.7 million. For
the
period from March 8, 2005 to December 31, 2005, the Manager earned an incentive
management fee of $344,000. The Manager is an indirect wholly-owned subsidiary
of Resource America. Edward E. Cohen, the Chairman of Resource America and
the
Manager, and Jonathan Z. Cohen, the Chief Executive Officer and President of
Resource America and the Manager, in the aggregate beneficially owned
approximately 22% of Resource America’s common stock as of March 1, 2006. This
information is reported in accordance with the beneficial ownership rules of
the
SEC under which a person is deemed to be the beneficial owner of a security
if
that person has or shares voting power or investment power with respect to
such
security or has the right to acquire such ownership within 60 days.
Employees
of Resource America act as our officers and employees. Two of our directors,
Edward E. Cohen and Jonathan Z. Cohen, are also directors of Resource America,
and our chief executive officer, Jonathan Cohen, is also the chief executive
officer of Resource America. We reimburse the Manager and Resource America
for
expenses, including compensation expenses for employees of Resource America
who
perform legal, accounting, due diligence and other services that outside
professionals or consultants would otherwise perform. From March 8, 2005, the
date we commenced operations, through December 31, 2005, the Manager had
incurred and been reimbursed for $797,000 of expenses.
Resource
America, entities affiliated with it and our officers and directors collectively
own 3,421,332 shares of common stock, representing approximately 17.1% of
our
common stock on a fully-diluted basis, including 1,000,000 shares purchased
in
our March 2005 private offering, 900,000 shares purchased in our February
2006
initial public offering, 278,000 shares purchased by our officers and directors
in our March 2005 private offering, 70,000 shares purchased by our officers
and
directors in our February 2006 initial public offering, 345,000 shares of
restrictive stock and options to purchase 651,666 shares of our common stock
granted to the Manager upon completion of our March 2005 private offering,
8,224
shares of restricted stock granted to our directors, 5,738 shares of common
stock issued to the Manager as incentive compensation and warrants to purchase
162,704 shares of our common stock received by Resource America, entities
affiliated with it and our officers and directors in connection with our
January
2006 special dividend.
Audit
Fees
The
aggregate fees paid to our independent auditors, Grant Thornton LLP, for
professional services rendered for the audit of our annual financial statements
for the period from March 8, 2005 to December 31, 2005 were approximately
$141,000.
Audit−Related
Fees
The
aggregate fees paid Grant Thornton LLP for audit-related services in connection
with the filing of our registration statement and amended registration
statements with the Securities and Exchange Commission in connection with our
initial public offering of our common stock were approximately $608,000 for
the
period from March 8, 2005 to December 31, 2005.
Tax
Fees
There
were no fees paid to Deloitte Tax LLP for professional services related to
tax
compliance, tax advice and tax planning for the period from March 8, 2005 to
December 31, 2005.
All
Other Fees
We
did
not incur fees in 2005 for other services not included above.
Audit
Committee Pre-Approval Policies and Procedures
The
Audit
Committee will, on at least an annual basis, review audit and non-audit services
performed by Grant Thornton, LLP as well as the fees charged by Grant Thornton,
LLP for such services. Our policy is that all audit and non-audit services
must
be pre-approved by the Audit Committee. All of such services and fees were
pre-approved during the year ended December 31, 2005.
PART
IV
|
(a)
|
The
following documents are filed as part of this Annual Report on Form
10-K:
|
|
1.
|
Financial
Statements
|
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheet at December 31, 2005
Consolidated
Statement of Income for the period ended December 31, 2005
Consolidated
Statement of Changes in Stockholders’ Equity for the period ended December 31,
2005
Consolidated
Statement of Cash Flows for the period ended December 31, 2005
Notes
to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules
|
None
|
3.
|
Exhibits
|
Exhibit
No. Description
|
3.1
(1)
|
Restated
Certificate of Incorporation of Resource Capital Corp.
|
|
|
3.2
(1)
|
Amended
and Restated Bylaws of Resource Capital Corp.
|
|
|
4.1
(2)
|
Form
of Certificate for Common Stock for Resource Capital
Corp.
|
|
|
10.1
(1)
|
Registration
Rights Agreement among Resource Capital Corp. and Credit Suisse Securities
(USA) LLC for the benefit of certain holders of the common stock
of
Resource Capital Corp., dated as of March 8, 2005.
|
|
|
10.2
(1)
|
Management
Agreement between Resource Capital Corp., Resource Capital Manager,
Inc.
and Resource America, Inc. dated as of March 8, 2005.
|
|
|
10.3
(1)
|
2005
Stock Incentive Plan
|
|
|
10.4
(1)
|
Form
of Stock Award Agreement
|
|
|
10.5
(1)
|
Form
of Stock Option Agreement
|
|
|
10.6
(1)
|
Form
of Warrant to Purchase Common Stock
|
|
|
21.1
(1)
|
List
of Subsidiaries of Resource Capital Corp.
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
|
32.1
|
Section
1350 Certification
|
|
|
32.2
|
Section
1350 Certification
|
|
|
(1)
|
Filed
previously as an exhibit to the Company’s registration statement on Form
S-11, Registration 333-126517.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
RESOURCE CAPITAL CORP. (Registrant)
March
29,
2006 By: /s/
Jonathan Z. Cohen
Chief
Executive Officer and President
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/
Edward E. Cohen
|
Chairman
of the Board
|
March
29, 2006
|
|
EDWARD
E. COHEN
|
||
|
/s/
Jonathan Z. Cohen
|
Director,
President and
|
March
29, 2006
|
|
JONATHAN
Z. COHEN
|
Chief
Executive Officer
|
|
|
/s/
Walter T. Beach
|
Director
|
March
29, 2006
|
|
WALTER
T. BEACH
|
||
|
/s/
William B. Hart
|
Director
|
March
29, 2006
|
|
WILLIAM
B. HART
|
||
|
/s/
Murray S. Levin
|
Director
|
March
29, 2006
|
|
MURRAY
S. LEVIN
|
||
|
/s/
P. Sherrill Neff
|
Director
|
March
29, 2006
|
|
P.
SHERRILL NEFF
|
||
|
/s/
Thomas C. Elliott
|
Chief
Financial Officer,
|
March
29, 2006
|
|
THOMAS
C. ELLIOTT
|
Chief
Accounting Officer and Treasurer
|
|
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