ACRES Commercial Realty Corp. - Quarter Report: 2010 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended March 31, 2010
OR
¨ 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)
|
Maryland
|
20-2287134
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
|
|
712
5th
Avenue, 10th
Floor
|
||
|
New
York, New York
|
10019
|
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
|
(Registrant’s
telephone number, including area code): 212-506-3870
|
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. Yes R No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
|
¨
|
Accelerated
filer
|
R
|
|
|
Non-accelerated
filer
|
¨
|
(Do
not check if a smaller reporting Company)
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No R
The
number of outstanding shares of the registrant’s common stock on May 3, 2010 was
41,403,172 shares.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON
FORM 10-Q
|
PAGE
|
||
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
Item 1.
|
Financial
Statements
|
|
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
Item 2.
|
28
|
|
|
Item 3.
|
45
|
|
|
Item 4.
|
47
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
Item 2.
|
48
|
|
|
Item 5.
|
48
|
|
|
50
|
||
PART
I. FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements
|
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
(in
thousands, except share and per share data)
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
(Unaudited)
|
|||||||
|
Cash and cash equivalents
|
$ | 27,650 | $ | 51,991 | ||||
|
Restricted cash
|
82,176 | 85,125 | ||||||
|
Investment securities
available-for-sale, pledged as collateral, at fair value
|
46,086 | 39,304 | ||||||
|
Investment securities
available-for-sale, at fair value
|
5,238 | 5,238 | ||||||
|
Investment securities
held-to-maturity, pledged as collateral
|
31,559 | 31,401 | ||||||
|
Loans, pledged as collateral and
net of allowances of $37.9 million and $47.1
million
|
1,555,593 | 1,558,687 | ||||||
|
Loans held for sale
|
2,376 | 8,050 | ||||||
|
Direct financing leases and
notes, net of allowances of $650,000 and
$1.1 million and net of
unearned income
|
10,325 | 927 | ||||||
|
Loans receivable – related
party
|
10,000 | − | ||||||
|
Investments in unconsolidated
entities
|
4,040 | 3,605 | ||||||
|
Interest receivable
|
5,367 | 5,754 | ||||||
|
Other assets
|
4,735 | 3,878 | ||||||
|
Total assets
|
$ | 1,785,145 | $ | 1,793,960 | ||||
|
LIABILITIES
|
||||||||
|
Borrowings
|
$ | 1,517,330 | $ | 1,536,500 | ||||
|
Distribution payable
|
10,053 | 9,170 | ||||||
|
Accrued interest expense
|
1,551 | 1,516 | ||||||
|
Derivatives, at fair value
|
13,267 | 12,767 | ||||||
|
Accounts payable and other
liabilities
|
3,297 | 5,177 | ||||||
|
Total liabilities
|
1,545,498 | 1,565,130 | ||||||
|
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;
40,079,753 and 36,545,737
shares issued and outstanding
(including 566,575 and 437,319
unvested restricted shares)
|
40 | 36 | ||||||
|
Additional paid-in capital
|
424,584 | 405,517 | ||||||
|
Accumulated other comprehensive
loss
|
(61,761 | ) | (62,154 | ) | ||||
|
Distributions in excess of
earnings
|
(123,216 | ) | (114,569 | ) | ||||
|
Total stockholders’ equity
|
239,647 | 228,830 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 1,785,145 | $ | 1,793,960 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
(in
thousands, except share and per share data)
(Unaudited)
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
REVENUES
|
||||||||
|
Net interest
income:
|
||||||||
|
Loans
|
$ | 18,267 | $ | 22,620 | ||||
|
Securities
|
2,874 | 1,422 | ||||||
|
Leases
|
235 | 2,233 | ||||||
|
Interest income − other
|
197 | 347 | ||||||
|
Total interest income
|
21,573 | 26,622 | ||||||
|
Interest expense
|
7,937 | 13,877 | ||||||
|
Net interest income
|
13,636 | 12,745 | ||||||
|
OPERATING
EXPENSES
|
||||||||
|
Management fees − related
party
|
1,152 | 1,001 | ||||||
|
Equity compensation − related
party
|
724 | 88 | ||||||
|
Professional services
|
819 | 964 | ||||||
|
Insurance expense
|
212 | 172 | ||||||
|
General and administrative
|
645 | 405 | ||||||
|
Income tax expense (benefit)
|
105 | (45 | ) | |||||
|
Total expenses
|
3,657 | 2,585 | ||||||
|
NET
OPERATING INCOME
|
9,979 | 10,160 | ||||||
|
OTHER
INCOME (EXPENSES)
|
||||||||
|
Impairment losses on investment
securities
|
− | (5,620 | ) | |||||
|
Recognized in other
comprehensive loss
|
− | − | ||||||
|
Net impairment losses
recognized in earnings
|
− | (5,620 | ) | |||||
|
Net realized gains on loans and
investments
|
146 | 237 | ||||||
|
Provision for loan and lease
losses
|
(15,371 | ) | (16,951 | ) | ||||
|
Gain on the extinguishment of
debt
|
6,628 | − | ||||||
|
Other income
|
24 | 22 | ||||||
|
Total expenses
|
(8,573 | ) | (22,312 | ) | ||||
|
NET
INCOME (LOSS)
|
$ | 1,406 | $ | (12,152 | ) | |||
|
NET
INCOME (LOSS) PER SHARE – BASIC
|
$ | 0.04 | $ | (0.50 | ) | |||
|
NET
INCOME (LOSS) PER SHARE – DILUTED
|
$ | 0.04 | $ | (0.50 | ) | |||
|
WEIGHTED
AVERAGE NUMBER OF SHARES
OUTSTANDING − BASIC
|
37,987,192 | 24,467,408 | ||||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES
OUTSTANDING − DILUTED
|
38,150,605 | 24,467,408 | ||||||
|
DIVIDENDS
DECLARED PER SHARE
|
$ | 0.25 | $ | 0.30 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
THREE
MONTHS ENDED MARCH 31, 2010
(in
thousands, except share and per share data)
(Unaudited)
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Distributions
in
Excess of Earnings
|
Treasury
Shares
|
Total
Stockholders’ Equity
|
Comprehensive
Income
|
||||||||||||||||||||||||||||
|
Balance,
January 1, 2010
|
36,545,737 | $ | 36 | $ | 405,517 | $ | (62,154 | ) | $ | − | $ | (114,569 | ) | $ | − | $ | 228,830 | |||||||||||||||||||
|
Proceeds
from dividend
reinvestment and
stock
purchase plan
|
3,127,357 | 3 | 18,032 | − | − | − | − | 18,035 | ||||||||||||||||||||||||||||
|
Offering
costs
|
− | − | (64 | ) | − | − | − | − | (64 | ) | ||||||||||||||||||||||||||
|
Stock
based compensation
|
406,659 | 1 | 375 | − | − | − | − | 376 | ||||||||||||||||||||||||||||
|
Amortization
of stock
based compensation
|
− | − | 724 | − | − | − | − | 724 | ||||||||||||||||||||||||||||
|
Net
income
|
− | − | − | − | 1,406 | − | − | 1,406 | $ | 1,406 | ||||||||||||||||||||||||||
|
Securities
available-for-sale,
fair value adjustment,
net
|
− | − | − | 724 | − | − | − | 724 | 724 | |||||||||||||||||||||||||||
|
Designated
derivatives, fair
value adjustment
|
− | − | − | (331 | ) | − | − | − | (331 | ) | (331 | ) | ||||||||||||||||||||||||
|
Distributions
on common
stock
|
− | − | − | − | (1,406 | ) | (8,647 | ) | − | (10,053 | ) | |||||||||||||||||||||||||
|
Comprehensive
income
|
− | − | − | − | − | − | − | − | $ | 1,799 | ||||||||||||||||||||||||||
|
Balance,
March 31, 2010
|
40,079,753 | $ | 40 | $ | 424,584 | $ | (61,761 | ) | $ | − | $ | (123,216 | ) | $ | − | $ | 239,647 | |||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
(in
thousands)
(Unaudited)
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income (loss)
|
$ | 1,406 | $ | (12,152 | ) | |||
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating
activities:
|
||||||||
|
Provision for loan and lease
losses
|
15,371 | 16,951 | ||||||
|
Depreciation and amortization
of term facilities
|
181 | 187 | ||||||
|
Accretion of net discounts on
investments
|
(4,044 | ) | (988 | ) | ||||
|
Amortization of discount on
notes of CDOs
|
13 | 48 | ||||||
|
Amortization of debt issuance
costs on notes of CDOs
|
1,067 | 823 | ||||||
|
Amortization of stock based
compensation
|
724 | 88 | ||||||
|
Amortization of terminated
derivative instruments
|
133 | 120 | ||||||
|
Non-cash incentive
compensation to the Manager
|
− | (1 | ) | |||||
|
Unrealized losses on
non-designated derivative instruments
|
36 | 92 | ||||||
|
Net realized gains on
investments
|
(146 | ) | (237 | ) | ||||
|
Net impairment losses
recognized in earnings
|
− | 5,620 | ||||||
|
Gain on the extinguishment of
debt
|
(6,628 | ) | − | |||||
|
Changes in operating assets
and liabilities:
|
(1,556 | ) | 3,297 | |||||
|
Net cash provided by operating
activities
|
6,557 | 13,848 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Increase in restricted
cash
|
(5,002 | ) | (3,162 | ) | ||||
|
Purchase of securities
available-for-sale
|
(4,923 | ) | − | |||||
|
Investment in unconsolidated
entity
|
(435 | ) | − | |||||
|
Purchase of loans
|
(69,825 | ) | (36,680 | ) | ||||
|
Principal payments received on
loans
|
55,592 | 27,131 | ||||||
|
Proceeds from sale of loans
|
17,988 | 8,376 | ||||||
|
Purchase of direct financing
leases and notes
|
(10,333 | ) | − | |||||
|
Payments received on direct
financing leases and notes
|
397 | 6,825 | ||||||
|
Proceeds from sale of direct
financing leases and notes
|
465 | 506 | ||||||
|
Investment in loans – related
parties
|
(10,000 | ) | − | |||||
|
Net cash (used in) provided by
investing activities
|
(26,076 | ) | 2,996 | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Net proceeds from issuances of
common stock (net of offering costs
of $64 and $0)
|
(64 | ) | − | |||||
|
Net proceeds from dividend
reinvestment and stock purchase plan (net of
offering costs of $0 and
$0)
|
18,035 | 44 | ||||||
|
Repurchase of common stock
|
− | (2,800 | ) | |||||
|
Payments on
borrowings:
|
||||||||
|
Repurchase agreements
|
− | (1,054 | ) | |||||
|
Secured term facility
|
− | (7,003 | ) | |||||
|
Repurchase of debt
|
(13,623 | ) | − | |||||
|
Distributions paid on common
stock
|
(9,170 | ) | (9,946 | ) | ||||
|
Net cash used in financing
activities
|
(4,822 | ) | (20,759 | ) | ||||
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(24,341 | ) | (3,915 | ) | ||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
51,991 | 14,583 | ||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 27,650 | $ | 10,668 | ||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Distributions on common stock
declared but not paid
|
$ | 10,053 | $ | 7,529 | ||||
|
Issuance of restricted stock
|
$ | 333 | $ | 217 | ||||
|
SUPPLEMENTAL
DISCLOSURE:
|
||||||||
|
Interest expense paid in
cash
|
$ | 7,978 | $ | 13,933 | ||||
The
accompanying notes are an integral part of these financial
statements
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
MARCH
31, 2010
(Unaudited)
NOTE
1 – ORGANIZATION AND BASIS OF QUARTERLY PRESENTATION
Resource Capital Corp. and
subsidiaries’ (collectively the ‘‘Company’’) principal business activity is to
purchase and manage a diversified portfolio of commercial real estate-related
assets and commercial finance assets. The Company’s investment
activities are managed by Resource Capital Manager, Inc. (‘‘Manager’’) pursuant
to a management agreement (the ‘‘Management Agreement’’). The Manager
is a wholly-owned indirect subsidiary of Resource America, Inc. (“Resource
America”) (NASDAQ-GS: REXI). The following subsidiaries are
consolidated on the Company’s financial statements:
|
|
·
|
RCC
Real Estate, Inc. (“RCC Real Estate”) holds real estate investments,
including commercial real estate loans and commercial real estate-related
securities. RCC Real Estate owns 100% of the equity of the
following variable interest entities
(“VIEs”):
|
|
|
-
|
Resource
Real Estate Funding CDO 2006-1 (“RREF CDO 2006-1”), a Cayman Islands
limited liability company and qualified real estate investment trust
(“REIT”) subsidiary (“QRS”). RREF CDO 2006-1 was established to
complete a collateralized debt obligation (“CDO”) issuance secured by a
portfolio of commercial real estate loans and commercial mortgage-backed
securities.
|
|
|
-
|
Resource
Real Estate Funding CDO 2007-1 (“RREF CDO 2007-1”), a Cayman Islands
limited liability company and QRS. RREF CDO 2007-1 was
established to complete a CDO issuance secured by a portfolio of
commercial real estate loans and commercial
mortgage-backed securities.
|
|
|
·
|
RCC
Commercial, Inc. (“RCC Commercial”) holds bank loan investments and
commercial real estate-related securities. RCC Commercial owns
100% of the equity of the following
VIEs:
|
|
|
-
|
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 bank
loans.
|
|
|
-
|
Apidos
CDO III, Ltd. (“Apidos CDO III”), a Cayman Islands limited liability
company and TRS. Apidos CDO III was established to complete a
CDO secured by a portfolio of bank
loans.
|
|
|
-
|
Apidos
Cinco CDO, Ltd. (“Apidos Cinco CDO”), a Cayman Islands limited liability
company and TRS. Apidos Cinco CDO was established to complete a
CDO secured by a portfolio of bank
loans.
|
|
|
·
|
Resource
TRS, Inc. (“Resource TRS”), the Company’s directly-owned TRS, holds all
the Company’s direct financing leases and
notes.
|
The consolidated financial statements
and the information and tables contained in the notes to the consolidated
financial statements are unaudited. However, in the opinion of
management, these interim financial statements include all adjustments necessary
to fairly present the results of the interim periods presented. The
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009. The results of operations for the three months ended March 31,
2010 may not necessarily be indicative of the results of operations for the full
fiscal year ending December 31, 2010.
NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has a 100% interest valued
at $1.5 million in the common shares (three percent of the total equity) in two
trusts, Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”).
The Company completed a qualitative analysis to determine whether or not it is
the primary beneficiary of the VIE. The Company does not have the power to
direct the activities of either trust, nor do they have the obligation to absorb
losses or recognize benefits of these trusts. Therefore, the Company is
not deemed to be the primary beneficiary of either trust and they are not
consolidated into the Company’s consolidated financial statements. The
Company records its investments in RCT I and RCT II’s common shares of $774,000
each as investments in unconsolidated trusts using the cost method and records
dividend income upon declaration by RCT I and RCT II. For the three months
ended March 31, 2010 and 2009, the Company recognized $875,000 and $765,000,
respectively, of interest expense with respect to the subordinated debentures it
issued to RCT I and RCT II which included $74,000 and $37,000, respectively, of
amortization of deferred debt issuance costs. The Company will continue to
do a continuous reassessment as to whether or not they are deemed to be the
primary beneficiary of the trusts.
All inter-company transactions and
balances have been eliminated.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Investment
Securities Available-for-Sale
The Company classifies its investment
portfolio as either trading investments, available-for-sale or
held-to-maturity. 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. The Company’s available-for-sale securities are
reported at fair value which for the Company’s securities purchased during 2009
is based on dealer quotes due to their higher ratings and more active markets
and for the Company’s securities purchased prior to 2009 is based on taking a
weighted average of the following three measures:
|
|
·
|
an
income approach utilizing an appropriate current risk-adjusted yield, time
value and projected estimated losses from default assumptions based on
analysis of underlying loan
performance;
|
|
|
·
|
quotes
on similar-vintage, higher rate, more actively traded commercial
mortgage-backed securities (“CMBS”) adjusted as appropriate for the lower
subordination level of the Company’s securities;
and
|
|
|
·
|
dealer
quotes on the Company’s securities for which there is not an active
market.
|
On a quarterly basis, the Company
evaluates its investments for other-than-temporary impairment. An
investment is impaired when its fair value has declined below its amortized cost
basis. An impairment is considered other-than-temporary when the
amortized cost basis of the investment value will not be recovered over its
remaining life. In addition, the Company’s intent to sell as well as
the likelihood that the Company will be required to sell the security before the
recovery of the amortized cost basis is considered. Where credit
quality is believed to be the cause of the other-than-temporary impairment, that
component of the impairment is recognized as an impairment loss in the statement
of operations. Where other market components are believed to be the
cause of the impairment, that component of the impairment is recognized on the
balance sheet as other comprehensive loss.
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.
Allowance
for Loan and Lease Losses
The Company maintains an allowance for
loan and lease losses. Loans and leases held for investment are first
individually evaluated for impairment so specific reserves can be
applied. Loans for which a specific reserve was not applicable are
then evaluated for impairment as a homogeneous pool of loans with substantially
similar characteristics so that a general reserve can be established, if
needed. The reviews are performed at least quarterly.
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 the present value of estimated cash flows; on
market price, if available; or on the fair value of the collateral less
estimated disposition costs. When a loan, or a portion thereof, is
considered uncollectible and pursuit of collection is not warranted, the Company
will record a charge-off or write-down of the loan against the allowance for
loan and lease losses.
The balance of impaired loans and
leases was $120.6 million and $100.1 million at March 31, 2010 and December 31,
2009, respectively. The total balance of impaired loans and leases
with a valuation allowance at March 31, 2010 and December 31, 2009 was $65.9
million and $82.2 million, respectively. The total balance of
impaired loans and leases without a specific valuation allowance was $54.7
million and $17.9 million at March 31, 2010 and December 31, 2009,
respectively. The specific valuation allowance related to these
impaired loans and leases was $20.9 million and $31.0 million at March 31, 2010
and December 31, 2009, respectively. The Company did not recognize
any income on impaired loans and leases during the three months ended March 31,
2010 and the year ended December 31, 2009 once each individual loan or lease
became impaired unless cash was received.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Allowance
for Loan and Lease Losses – (Continued)
An impaired loan or lease may remain on
accrual status during the period in which the Company is pursuing repayment of
the loan or lease; however, the loan or lease would be placed on non-accrual
status at such time as (i) management believes that scheduled debt service
payments will not be met within the coming 12 months; (ii) the loan or lease
becomes 90 days delinquent; (iii) management determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment;
or (iv) the net realizable value of the loan’s underlying collateral
approximates the Company’s carrying value of such loan. While on
non-accrual status, the Company recognizes interest income only when an actual
payment is received.
Recent
Accounting Pronouncements
In February 2010, the Financial
Accounting Standards Board (“FASB”) issued guidance which removes the
requirement for an U.S. Securities and Exchange Commission filer to disclose a
date through which subsequent events have been evaluated in both issued and
revised financial statements. Revised financial statements include
financial statements revised as a result of either a correction of error or
retrospective application of U.S. GAAP. This guidance was effective
upon issuance.
In January 2010, the FASB issued
guidance for fair value measurements and disclosures. The guidance
requires new disclosures for transferring in and out of Level 1 and Level 2
amounts and clarifies existing disclosures regarding levels of disaggregation
and inputs surrounding valuation techniques. This guidance will be
effective for interim and annual periods beginning after December 15,
2009. The adoption did not have a material impact on its consolidated
financial statements. In addition, this guidance requires new
disclosure surrounding activity in Level 3 fair value measurements, to present
separately information about purchases, sales, issuances and
settlements. This guidance will be effective for interim and annual
periods beginning after December 15, 2010. Adoption will require
additional disclosure to delineate such categories in the notes to the Company’s
consolidated financial statements (see Note 14).
In January 2010, the FASB issued
guidance that requires new disclosures and clarifies some existing disclosure
requirements about fair value measurements. The new pronouncement
requires a reporting entity: (1) to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers; and (2) to present separately
information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable
inputs. In addition, it clarifies the requirements of the following existing
disclosures: (1) for purposes of reporting fair value measurement for each
class of assets and liabilities, a reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities, and (2) a
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. The new guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the
rollforward of activity in Level 3 fair value measurements which will be
effective for the Company in fiscal 2011.
In
December 2009, the FASB issued guidance for improving financial reporting for
enterprises involved with VIEs regarding power to direct the activities of a VIE
as well as obligations to absorb the losses. This guidance is
effective for interim and annual periods beginning after November 15,
2009. The Company has evaluated the potential impact of adopting this
statement. The Company’s evaluation indicated that the adoption of
this accounting guidance will not have an impact on its consolidated financial
statements.
In June 2009, the FASB issued guidance
for consolidation of VIEs which changes the consolidation guidance applicable to
a VIE and amends the guidance governing the determination of whether an
enterprise is the primary beneficiary of a VIE and therefore, required to
consolidate an entity, by requiring a qualitative analysis rather than a
quantitative analysis. This standard also requires continuous
reassessment of whether an enterprise is the primary beneficiary of a VIE as
well as enhanced disclosures about an enterprise’s involvement with a
VIE. This guidance is effective for interim and annual periods
beginning after November 15, 2009. The Company has evaluated the
potential impact of adopting this statement and concluded that it will continue
to consolidate its VIEs that it identified in Note 1 to the consolidated
financial statements. The Company will do a continuous reassessment
of its conclusion as stipulated in this statement.
In June 2009, the FASB issued guidance
for accounting for transfers of financial assets. The guidance
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets and requires greater
transparency of related disclosures. This statement is effective for
fiscal years beginning after November 15, 2009. Adoption did not
have a material impact on the consolidated financial statements.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Reclassifications
Certain reclassifications have been
made to the 2009 consolidated financial statements to conform to the 2010
presentation. The adoption of these new accounting standards did not
have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The following table summarizes the
Company's mortgage-backed securities (“MBS”) and asset-backed securities
(“ABS”), including those pledged as collateral and classified as
available-for-sale, which are carried at fair value (in thousands):
|
Amortized
Cost
(1)
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
(1)
|
|||||||||||||
|
March 31,
2010:
|
||||||||||||||||
|
Commercial mortgage-backed
private placement
|
$ | 98,169 | $ | 4,954 | $ | (51,823 | ) | $ | 51,300 | |||||||
|
Other asset-backed
|
24 | − | − | 24 | ||||||||||||
|
Total
|
$ | 98,193 | $ | 4,954 | $ | (51,823 | ) | $ | 51,324 | |||||||
|
December 31,
2009:
|
||||||||||||||||
|
Commercial mortgage-backed
private placement
|
$ | 92,110 | $ | 2,622 | $ | (50,214 | ) | $ | 44,518 | |||||||
|
Other asset-backed
|
24 | − | − | 24 | ||||||||||||
|
Total
|
$ | 92,134 | $ | 2,622 | $ | (50,214 | ) | $ | 44,542 | |||||||
|
(1)
|
As
of March 31, 2010 and 2009, $47.0 million and $39.3 million, respectively,
of securities were pledged as collateral security under related
financings.
|
The following table summarizes the
estimated maturities of the Company’s MBS and other ABS according to their
estimated weighted average life classifications (in thousands, except
percentages):
|
Weighted
Average Life
|
Fair
Value
|
Amortized
Cost
|
Weighted
Average Coupon
|
|||||||||
|
March 31,
2010:
|
||||||||||||
|
Less than one year
|
$ | 9,022 | (1) | $ | 25,044 | 1.59% | ||||||
|
Greater than one year and less
than five years
|
3,648 | 9,432 | 2.91% | |||||||||
|
Greater than five years
|
38,654 | 63,717 | 5.80% | |||||||||
|
Total
|
$ | 51,324 | $ | 98,193 | 4.45% | |||||||
|
December
31, 2009:
|
||||||||||||
|
Less than one year
|
$ | 7,503 | $ | 20,043 | 1.50% | |||||||
|
Greater than one year and less
than five years
|
4,346 | 12,728 | 2.24% | |||||||||
|
Greater than five years
|
32,693 | 59,363 | 5.76% | |||||||||
|
Total
|
$ | 44,542 | $ | 92,134 | 4.35% | |||||||
|
(1)
|
All
of the $9.0 million of CMBS maturing in these categories are
collateralized by floating-rate loans and are expected to extend for up to
a minimum of two additional years as the loans in the floating-rate
structures have a contractual right to extend with options ranging from
two one-year options to three one-year
options.
|
The contractual maturities of the
investment securities available-for-sale range from January 2011 to October
2017.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE – (Continued)
The following table shows the fair
value and gross unrealized losses, aggregated by investment category and length
of time, of those individual investment securities that have been in a
continuous unrealized loss position (in thousands):
|
Less
than 12 Months
|
More
than 12 Months
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
|||||||||||||||||||
|
March 31,
2010:
|
||||||||||||||||||||||||
|
Commercial
mortgage-
backed private
placement
|
$ | 8,527 | $ | (1,207 | ) | $ | 13,191 | $ | (50,616 | ) | $ | 21,718 | $ | (51,823 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 8,527 | $ | (1,207 | ) | $ | 13,191 | $ | (50,616 | ) | $ | 21,718 | $ | (51,823 | ) | |||||||||
|
December
31, 2009:
|
||||||||||||||||||||||||
|
Commercial
mortgage-
backed private
placement
|
$ | 11,193 | $ | (1,073 | ) | $ | 14,588 | $ | (49,141 | ) | $ | 25,781 | $ | (50,214 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 11,193 | $ | (1,073 | ) | $ | 14,588 | $ | (49,141 | ) | $ | 25,781 | $ | (50,214 | ) | |||||||||
The Company holds 18 and 13 investment
securities available-for-sale that have been in a loss position for more than 12
months as of March 31, 2010 and December 31, 2009, respectively. The
unrealized losses in the above table are considered to be temporary impairments
due to market factors and are not reflective of credit
deterioration.
The determination of
other-than-temporary impairment is a subjective process, and different judgments
and assumptions could affect the timing of loss realization. The
Company reviews its portfolios monthly and the determination of
other-than-temporary impairment is made at least quarterly. The
Company considers the following factors when determining if there is an
other-than-temporary impairment on a security:
|
|
·
|
the
length of time the market value has been less than amortized
cost;
|
|
|
·
|
the
severity of the impairment;
|
|
|
·
|
the
expected loss of the security as generated by third party
software;
|
|
|
·
|
credit
ratings from the rating agencies;
|
|
|
·
|
underlying
credit fundamentals of the collateral backing the securities;
and
|
|
|
·
|
the
Company’s intent is more likely than not to sell the security before
the recovery of the amortized cost
basis.
|
At March 31, 2010 and December 31,
2009, the Company held $51.3 million and $44.5 million, respectively, net of
unrealized losses of $46.9 million and $47.6 million, respectively, of CMBS at
fair value which, for the Company’s positions purchased after 2009, is based on
dealer quotes due to their higher ratings and more active markets and, for
the Company’s positions purchased during 2009, is based on taking a
weighted average of the following three measures:
|
|
·
|
an
income approach utilizing an appropriate current risk-adjusted yield, time
value and projected estimated losses from default assumptions based on
historical analysis of underlying loan
performance;
|
|
|
·
|
quotes
on similar-vintage, higher rated, more actively traded CMBS securities
adjusted for the lower subordination level of its securities;
and
|
|
|
·
|
dealer
quotes on its securities for which there is not an active
market.
|
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE – (Continued)
During the three months ended March 31,
2009, a collateral position that supported the Company’s other-ABS investment
weakened to the point that default of that position became
probable. As a result, the Company recognized a $5.6 million
other-than-temporary impairment on its other-ABS investment as of March 31, 2009
and an additional $45,000 of other-than-temporary impairment on this investment
during the three months ended June 30, 2009 bringing the fair value to
$0. During the three months ended December 31, 2009, two collateral
positions that supported the Company’s CMBS portfolio weakened to the point that
default of these positions became probable. The assumed default of
these collateral positions in the Company’s cash flow model yielded a value of
less than full recovery of the Company’s cost basis. The Company
recognized a $6.9 million other-than-temporary impairment on its CMBS
investments as of December 31, 2009 bringing the combined fair value to
$206,000. All of the Company's other-than-temporary impariment losses
are related to credit losses.
While the Company’s remaining
securities classified as available-for-sale have continued to decline in fair
value, the decline continues to be temporary. The Company performs an
on-going review of third-party reports and updated financial data on the
underlying property financial information to analyze current and projected loan
performance. All securities but the ones described above are current
with respect to interest and principal payments. Rating agency
downgrades are considered with respect to the Company’s income approach when
determining other-than-temporary impairment and when inputs are stressed, the
resulting projected cash flows reflect a full recovery of
principal. The Company does not believe that any other of its
securities classified as available-for-sale were other-than-temporarily impaired
as of March 31, 2010.
Changes in interest rates may also have
an effect on the rate of mortgage principal prepayments and, as a result,
prepayments on MBS 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 March 31, 2010, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $30.8
million. At December 31, 2009, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $29.1
million.
NOTE
4 – INVESTMENT SECURITIES HELD-TO-MATURITY
The following table summarizes the
Company's securities held-to-maturity which are carried at amortized cost (in
thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
March 31,
2010:
|
||||||||||||||||
|
Collateralized loan obligation
securities
|
$ | 31,559 | $ | 314 | $ | (8,684 | ) | $ | 23,189 | |||||||
|
Total
|
$ | 31,559 | $ | 314 | $ | (8,684 | ) | $ | 23,189 | |||||||
|
December
31, 2009:
|
||||||||||||||||
|
Collateralized loan obligation
securities
|
$ | 31,401 | $ | 267 | $ | (10,348 | ) | $ | 21,320 | |||||||
|
Total
|
$ | 31,401 | $ | 267 | $ | (10,348 | ) | $ | 21,320 | |||||||
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
4 – INVESTMENT SECURITIES HELD-TO-MATURITY – (Continued)
The following table summarizes the
estimated maturities of the Company’s securities held-to-maturity according to
their contractual lives (in thousands):
|
Contractual
Life
|
Fair
Value
|
Amortized
Cost
|
Weighted
Average
Coupon
|
|||||||||
|
March 31,
2010:
|
||||||||||||
|
Greater than five years and less
than ten years
|
$ | 16,536 | $ | 19,725 | 3.03% | |||||||
|
Greater than ten years
|
6,653 | 11,834 | 4.13% | |||||||||
|
Total
|
$ | 23,189 | $ | 31,559 | ||||||||
|
December
31, 2009:
|
||||||||||||
|
Greater than five years and less
than ten years
|
$ | 15,628 | $ | 19,667 | 3.06% | |||||||
|
Greater than ten years
|
5,692 | 11,734 | 4.14% | |||||||||
|
Total
|
$ | 21,320 | $ | 31,401 | ||||||||
The following table shows the fair
value and gross unrealized losses, aggregated by investment category and length
of time, of those individual investment securities that have been in a
continuous unrealized loss position (in thousands):
|
Less
than 12 Months
|
More
than 12 Months
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
|
March 31,
2010:
|
||||||||||||||||||||||||
|
Collateralized loan
obligations
|
$ | 3,751 | $ | (44 | ) | $ | 12,747 | $ | (8,640 | ) | $ | 16,498 | $ | (8,684 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 3,751 | $ | (44 | ) | $ | 12,747 | $ | (8,640 | ) | $ | 16,498 | $ | (8,684 | ) | |||||||||
|
December
31, 2009:
|
||||||||||||||||||||||||
|
Collateralized loan
obligations
|
$ | 2,530 | $ | (44 | ) | $ | 10,980 | $ | (10,304 | ) | $ | 13,510 | $ | (10,348 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 2,530 | $ | (44 | ) | $ | 10,980 | $ | (10,304 | ) | $ | 13,510 | $ | (10,348 | ) | |||||||||
The
Company holds 14 investment securities held-to-maturity that have been in a loss
position for more than 12 months at both March 31, 2010 and December 31,
2009. The unrealized losses in the above table are considered to be
temporary impairments due to market factors and are not reflective of credit
deterioration.
During the year ended December 31,
2009, based on a credit rating downgrade and the cash flow analysis performed, a
collateral position that supported the investments held-to-maturity became
impaired as the Company’s cash flow model yielded a value of less than full
recovery of the Company’s cost basis. As a result, the Company recognized
an $895,000 other-than-temporary impairment on one of its investments
held-to-maturity as of December 31, 2009. Because of the impairment
charges, the cost of this security was written down to fair value through net
impairment losses recognized in earnings in the consolidated statements of
operations. The Company does not believe that any other of its
investments classified as held-to-maturity were other-than-temporarily impaired
as of March 31, 2010.
During the year ended December 31,
2009, based on the downgrading of the issuers’ published credit rating, the
Company sold three securities classified as held-to-maturity. The
Company is more likely than not to hold its remaining securities until
maturity.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
5 – LOANS HELD FOR INVESTMENT
The following is a summary of the
Company’s loans (in thousands):
|
Loan
Description
|
Principal
|
Unamortized
(Discount)
Premium
|
Carrying
Value
(1)
|
|||||||||
|
March 31, 2010:
|
||||||||||||
|
Bank loans (2)
|
$ | 904,325 | $ | (29,864 | ) | $ | 874,461 | |||||
|
Commercial real estate
loans:
|
||||||||||||
|
Whole loans
|
457,535 | (157 | ) | 457,378 | ||||||||
|
B notes
|
81,303 | 18 | 81,321 | |||||||||
|
Mezzanine loans
|
182,523 | 159 | 182,682 | |||||||||
|
Total commercial real estate
loans
|
721,361 | 20 | 721,381 | |||||||||
|
Subtotal loans before
allowances
|
1,625,686 | (29,844 | ) | 1,595,842 | ||||||||
|
Allowance for loan loss
|
(37,873 | ) | − | (37,873 | ) | |||||||
|
Total
|
$ | 1,587,813 | $ | (29,844 | ) | $ | 1,557,969 | |||||
|
December
31, 2009:
|
||||||||||||
|
Bank loans (2)
|
$ | 893,183 | $ | (27,682 | ) | $ | 865,501 | |||||
|
Commercial real estate
loans:
|
||||||||||||
|
Whole loans
|
484,464 | (269 | ) | 484,195 | ||||||||
|
B notes
|
81,450 | 27 | 81,477 | |||||||||
|
Mezzanine loans
|
182,523 | 163 | 182,686 | |||||||||
|
Total commercial real estate
loans
|
748,437 | (79 | ) | 748,358 | ||||||||
|
Subtotal loans before
allowances
|
1,641,620 | (27,761 | ) | 1,613,859 | ||||||||
|
Allowance for loan loss
|
(47,122 | ) | − | (47,122 | ) | |||||||
|
Total
|
$ | 1,594,498 | $ | (27,761 | ) | $ | 1,566,737 | |||||
|
(1)
|
Substantially
all loans are pledged as collateral under various borrowings at March 31,
2010 and December 31, 2009,
respectively.
|
|
(2)
|
Amounts
include $2.4 million and $8.1 million of loans held for sale as of March
31, 2010 and December 31, 2009,
respectively.
|
At March 31, 2010, the Company’s bank
loan portfolio consisted of $862.7 million (net of allowance of $11.9 million)
of floating rate loans, which bear interest ranging between the London Interbank
Offered Rate (“LIBOR”) plus 0.50% and LIBOR plus 17.25% with maturity dates
ranging from March 2011 to March 2017.
At December 31, 2009, the Company’s
bank loan portfolio consisted of $847.7 million (net of allowance of $17.8
million) of floating rate loans, which bear interest ranging between the LIBOR
plus 0.50% and LIBOR plus 18.25% with maturity dates ranging from June 2011 to
August 2022.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
5 – LOANS HELD FOR INVESTMENT – (Continued)
The following is a summary of the
Company’s commercial real estate loans (in thousands):
|
Description
|
Quantity
|
Amortized
Cost
|
Contracted
Interest
Rates
|
Maturity Dates (3)
|
|||||||
|
March 31,
2010:
|
|||||||||||
|
Whole loans, floating
rate (1)
|
35 | $ | 398,562 |
LIBOR
plus 1.50% to
LIBOR
plus 4.50%
|
May
2010 to
February
2017
|
||||||
|
Whole loans, fixed
rate (1)
|
4 | 58,816 |
6.98%
to 10.00%
|
June
2011 to
August
2012
|
|||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR
plus 2.50% to
LIBOR
plus 3.01%
|
July
2010 to
October
2010
|
|||||||
|
B notes, fixed rate
|
3 | 54,821 |
7.00%
to 8.68%
|
July
2011 to
July
2016
|
|||||||
|
Mezzanine loans, floating
rate
|
10 | 124,048 |
LIBOR
plus 2.15% to
LIBOR
plus 3.45%
|
May
2010 to
January
2013
|
|||||||
|
Mezzanine loans, fixed
rate
|
5 | 58,634 |
8.14%
to 11.00%
|
May
2010 to
September
2016
|
|||||||
|
Total (2)
|
60 | $ | 721,381 | ||||||||
|
December
31, 2009:
|
|||||||||||
|
Whole loans, floating
rate (1)
|
32 | $ | 403,890 |
LIBOR
plus 1.50% to
LIBOR
plus 4.40%
|
May
2010 to
February
2017
|
||||||
|
Whole loans, fixed
rate (1)
|
6 | 80,305 |
6.98%
to 10.00%
|
May
2010 to
August
2012
|
|||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR
plus 2.50% to
LIBOR
plus 3.01%
|
July
2010 to
October
2010
|
|||||||
|
B notes, fixed rate
|
3 | 54,977 |
7.00%
to 8.68%
|
July
2011 to
July
2016
|
|||||||
|
Mezzanine loans, floating
rate
|
10 | 124,048 |
LIBOR
plus 2.15% to
LIBOR
plus 3.45%
|
May
2010 to
January
2013
|
|||||||
|
Mezzanine loans, fixed
rate
|
5 | 58,638 |
8.14%
to 11.00%
|
May
2010 to
September
2016
|
|||||||
|
Total (2)
|
59 | $ | 748,358 | ||||||||
|
(1)
|
Whole
loans had $5.6 million and $5.6 million in unfunded loan commitments as of
March 31, 2010 unchanged from December 31, 2009. These
commitments are funded as the loans require additional funding and
the related borrowers have satisfied the requirements to obtain this
additional funding.
|
|
(2)
|
The
total does not include an allowance for loan losses of $26.0 million and
$29.3 million recorded as of March 31, 2010 and December 31, 2009,
respectively.
|
|
(3)
|
Excludes
one floating rate whole loan which matured in July 2009 and is in
foreclosure.
|
The
following table shows the changes in the allowance for loan loss (in
thousands):
|
Allowance
for loan loss at January 1, 2010
|
$ | 47,122 | ||
|
Allowance charged to
expense
|
15,285 | |||
|
Loans charged-off
|
(24,534 | ) | ||
|
Recoveries
|
− | |||
|
Allowance
for loan loss at March 31, 2010
|
$ | 37,873 |
As of March 31, 2010, the Company had
recorded an allowance for loan losses of $37.9 million consisting of a $11.9
million allowance on the Company’s bank loan portfolio and a $26.0 million
allowance on the Company’s commercial real estate portfolio as a result of the
Company deeming five bank loans and eight commercial real estate loans impaired
as well as the establishment of a general reserve on these
portfolios.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
5 – LOANS HELD FOR INVESTMENT – (Continued)
As of December 31, 2009, the Company
had recorded an allowance for loan loss of $47.1 million consisting of a $17.8
million allowance on the Company’s bank loan portfolio and a $29.3 million
allowance on the Company’s commercial real estate portfolio as a result of the
Company having seven bank loans and three commercial real estate loan that were
deemed impaired as well as the establishment of a general reserve on these
portfolios.
NOTE
6 –DIRECT FINANCING LEASES AND NOTES
The Company’s direct financing leases
and notes have weighted average initial lease and note terms of 54 months and 65
months as of March 31, 2010 and December 31, 2009, respectively. The
interest rates on notes receivable range from 8.8% to 14.0% and from 8.0% to
15.0% as of March 31, 2010 and December 31, 2009,
respectively. Investments in direct financing leases and notes, net
of unearned income, were as follows (in thousands):
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Direct
financing leases, net of unearned income
|
$ | 4,915 | $ | 1,397 | ||||
|
Operating
leases
|
384 | − | ||||||
|
Notes
receivable
|
5,676 | 670 | ||||||
|
Subtotal
|
10,975 | 2,067 | ||||||
|
Allowance
for lease losses
|
(650 | ) | (1,140 | ) | ||||
|
Total
|
$ | 10,325 | $ | 927 | ||||
The components of net investment in
direct financing leases are as follows (in thousands):
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Total
future minimum lease payments
|
$ | 5,616 | $ | 1,610 | ||||
|
Unguaranteed
residual
|
160 | − | ||||||
|
Unearned
income
|
(861 | ) | (213 | ) | ||||
|
Total
|
$ | 4,915 | $ | 1,397 | ||||
The components of net investment in
operating leases are as follows (in thousands):
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Investment
in operating leases
|
$ | 486 | $ | − | ||||
|
Accumulated
depreciation
|
(102 | ) | − | |||||
|
Total
|
$ | 384 | $ | − | ||||
The Company evaluates the adequacy of
the allowance for credit losses in commercial finance based upon, among other
factors, management’s historical experience with the commercial finance
portfolios it manages, an analysis of contractual delinquencies, economic
conditions and trends, industry statistics and equipment finance portfolio
characteristics, as adjusted for expected recoveries. In evaluating
historic performance of leases and loans, the Company performs a migration
analysis, which estimates the likelihood that an account progresses through
delinquency stages to ultimate write-off. As a result, the Company
had recorded a provision for lease losses of $86,000. The Company
also recorded a charge-off to the general reserve of $581,000 during the three
months ended March 31, 2010 and recorded provisions of $86,000 to bring the
total general reserve to $650,000 at March 31, 2010. At December 31,
2009, the Company had recorded an allowance for lease losses of $1.1
million.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
6 –DIRECT FINANCING LEASES AND NOTES - (Continued)
The following
table shows the changes in the allowance for lease loss (in
thousands):
|
Allowance
for lease loss at January 1, 2010
|
$ | 1,140 | ||
|
Provision for lease loss
|
86 | |||
|
Leases charged-off
|
(581 | ) | ||
|
Recoveries
|
5 | |||
|
Allowance
for lease loss at March 31, 2010
|
$ | 650 |
NOTE
7 – BORROWINGS
The Company has financed the
acquisition of its investments, including securities available-for-sale, loans
and equipment leases and notes, primarily through the use of secured and
unsecured borrowings in the form of CDOs, repurchase agreements, a secured term
facility, warehouse facilities, trust preferred securities issuances and other
secured and unsecured borrowings. Certain information with respect to
the Company’s borrowings at March 31, 2010 and December 31, 2009 is summarized
in the following table (in thousands, except percentages):
|
Outstanding
Borrowings
|
Weighted
Average Borrowing Rate
|
Weighted
Average
Remaining
Maturity
|
Value
of Collateral
|
||||||||||
|
March 31,
2010:
|
|||||||||||||
|
RREF CDO 2006-1 Senior Notes
(1)
|
$ | 220,656 | 1.17% |
36.4
years
|
$ | 249,998 | |||||||
|
RREF CDO 2007-1 Senior Notes
(2)
|
346,637 | 0.80% |
36.5
years
|
445,392 | |||||||||
|
Apidos CDO I Senior Notes (3)
|
319,264 | 0.83% |
7.3 years
|
307,955 | |||||||||
|
Apidos CDO III Senior Notes
(4)
|
260,289 | 0.71% |
10.2
years
|
247,170 | |||||||||
|
Apidos Cinco CDO Senior Notes
(5)
|
318,936 | 0.76% |
10.1
years
|
313,894 | |||||||||
|
Unsecured Junior Subordinated
Debentures (6)
|
51,548 | 6.22% |
26.4 years
|
− | |||||||||
|
Total
|
$ | 1,517,330 | 1.02% |
20.0 years
|
$ | 1,564,409 | |||||||
|
December
31, 2009:
|
|||||||||||||
|
RREF CDO 2006-1 Senior Notes
(1)
|
$ | 240,227 | 1.11% |
36.6
years
|
$ | 267,153 | |||||||
|
RREF CDO 2007-1 Senior Notes
(2)
|
346,673 | 0.81% |
36.8
years
|
435,225 | |||||||||
|
Apidos CDO I Senior Notes (3)
|
319,103 | 0.86% |
7.6 years
|
290,578 | |||||||||
|
Apidos CDO III Senior Notes
(4)
|
260,158 | 0.71% |
10.5
years
|
237,499 | |||||||||
|
Apidos Cinco CDO Senior Notes
(5)
|
318,791 | 0.78% |
10.4
years
|
299,874 | |||||||||
|
Unsecured Junior Subordinated
Debentures (6)
|
51,548 | 6.19% |
26.7 years
|
− | |||||||||
|
Total
|
$ | 1,536,500 | 1.02% |
20.4 years
|
$ | 1,530,329 | |||||||
|
(1)
|
Amount
represents principal outstanding of $223.5 million and $243.5 million less
unamortized issuance costs of $2.9 million and $3.3 million as of March
31, 2010 and December 31, 2009, respectively. This CDO
transaction closed in August 2006.
|
|
(2)
|
Amount
represents principal outstanding of $351.0 million less unamortized
issuance costs of $4.4 million as of March 31, 2010 and principal
outstanding of $351.2 million less unamortized issuance costs of $4.6
million as of December 31, 2009. This CDO transaction closed in
June 2007.
|
|
(3)
|
Amount
represents principal outstanding of $321.5 million less unamortized
issuance costs of $2.2 million as of March 31, 2010 and $2.4 million as of
December 31, 2009. The CDO transaction closed in August
2005.
|
|
(4)
|
Amount
represents principal outstanding of $262.5 million less unamortized
issuance costs of $2.2 million as of March 31, 2010 and $2.3 million as of
December 31, 2009. This CDO transaction closed in May
2006.
|
|
(5)
|
Amount
represents principal outstanding of $322.0 million less unamortized
issuance costs of $3.1 million as of March 31, 2010 and $3.3 million as of
December 31, 2009. This CDO transaction closed in May
2007.
|
|
(6)
|
Amount
represents junior subordinated debentures issued to Resource Capital Trust
I and RCC Trust II in May 2006 and September 2006,
respectively.
|
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
7 – BORROWINGS − (Continued)
Collateralized
Debt Obligations
Resource
Real Estate Funding CDO 2007-1
During the three months ended March 31,
2010, the Company repurchased $250,000 of the Class J note in RREF CDO 2007-1 at
a weighted average price of 9.00% to par which resulted in a $228,000 gain,
reported as a gain on the extinguishment of debt in the consolidated statements
of operations. During the year ended December 31, 2009, the Company
repurchased $33.5 million of the Class E, F, G and J notes in RREF CDO 2007-1 at
a weighted average price of 25.66% to par which resulted in a $24.9 million
gain, reported as a gain on the extinguishment of debt in the consolidated
statements of operations.
Resource
Real Estate Funding CDO 2006-1
During the three months ended March 31,
2010, the Company repurchased $20.0 million of the Class A-1 note in RREF CDO
2006-1 at a weighted average price of 68.0% to par which resulted in a $6.4
million gain, reported as a gain on the extinguishment of debt in the
consolidated statements of operations. During the year ended December
31, 2009, the Company repurchased $22.0 million of the Class D, E, and F notes
in RREF CDO 2006-1 at a weighted average price of 10.80% to par which resulted
in a $19.6 million gain, reported as a gain on the extinguishment of debt in its
consolidated statements of operations.
NOTE
8 – SHARE ISSUANCE AND REPURCHASE
Under a dividend reinvestment plan
authorized by the board of directors on June 12, 2008, the Company was
authorized to issue up to 5.5 million shares of common stock. During
the three months ended March 31, 2010, the Company issued 3.1 million shares of
common stock through this plan at a weighted-average share price of $5.91 per
share and received proceeds of $18.0 million (net of
costs). Including 1.9 million shares of common stock issued in 2009,
through March 31, 2010, the Company has issued an aggregate of 5.0 million
shares through this plan.
On March 22, 2010, the Company filed a
prospectus to issue up to 8.0 million shares through an updated dividend
reinvestment plan with similar terms, including the unused 500,000 shares under
the previous plan, which are incorporated into the new plan. The new
plan became effective on April 7, 2010.
Under a share repurchase plan
authorized by the board of directors on July 26, 2007, the Company is authorized
to repurchase up to 2.5 million of its outstanding common shares. No
shares were repurchased during the three months ended March 31,
2010. The Company has repurchased a total of 1,663,000 shares under
this program as of March 31, 2010.
NOTE
9 – SHARE-BASED COMPENSATION
The following table summarizes
restricted common stock transactions:
|
Non-Employee
Directors
|
Non-Employees
|
Total
|
||||||||||
|
Unvested
shares as of January 1, 2009
|
52,632 | 384,687 | 437,319 | |||||||||
|
Issued
|
16,939 | 315,905 | 332,844 | |||||||||
|
Vested
|
(52,632 | ) | (150,956 | ) | (203,588 | ) | ||||||
|
Forfeited
|
− | − | − | |||||||||
|
Unvested
shares as of March 31, 2010
|
16,939 | 549,636 | 566,575 | |||||||||
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
9 – SHARE-BASED COMPENSATION – (Continued)
The Company is required to value any
unvested shares of restricted common stock granted to non-employees at the
current market price. The estimated fair value of the unvested shares
of restricted stock granted during the three months ended March 31, 2020 and
2009, including shares issued to the five non-employee directors, was $1.8
million and $624,000, respectively.
On January 14, 2010, the Company issued
173,404 shares of restricted common stock under its 2007 Omnibus Equity
Compensation Plan. These restricted shares will vest 33.3% on January
22, 2011. The balance will vest annually thereafter through January
22, 2013.
On February 1, 2010 and March 8, 2010,
the Company granted 4,083 and 12,856 shares of restricted stock, respectively,
under its 2005 Stock Incentive Plan and 2007 Omnibus Equity Compensation Plan,
respectively, 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 grant.
On February 10, 2010, the Company
issued 142,501 shares of restricted common stock under its 2005 Stock Incentive
Plan and 2007 Omnibus Equity Compensation Plan. These restricted
shares will vest 33.3% on February 10, 2011. The balance will vest
annually thereafter through February 10, 2013.
The following table summarizes stock
option transactions:
|
Number
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|||||||||||||
|
Outstanding
as of January 1, 2010
|
607,666 | $ | 14.99 | |||||||||||||
|
Granted
|
− | − | ||||||||||||||
|
Exercised
|
− | − | ||||||||||||||
|
Forfeited
|
(5,000 | ) | 15.00 | |||||||||||||
|
Outstanding
as of March 31, 2010
|
602,666 | $ | 14.99 | 5 | $ | 1,006 | ||||||||||
|
Exercisable
at March 31, 2010
|
582,666 | $ | 15.00 | 5 | $ | 951 | ||||||||||
The stock options have a remaining
contractual term of five years. Upon exercise of options, new shares
are issued.
The following table summarizes the
status of the Company’s unvested stock options as of March 31,
2010:
|
Unvested Options
|
Options
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||
|
Unvested
at January 1, 2010
|
21,666 | $ | 14.88 | |||||
|
Granted
|
− | − | ||||||
|
Vested
|
(1,666 | ) | $ | 18.37 | ||||
|
Forfeited
|
− | − | ||||||
|
Unvested
at March 31, 2010
|
20,000 | $ | 14.59 | |||||
The weighted average period the Company
expects to recognize the remaining expense on the unvested stock options is
approximately one year.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
9 – SHARE-BASED COMPENSATION – (Continued)
The
following table summarizes the status of the Company’s vested stock options as
of March 31, 2010:
|
Vested Options
|
Number
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|||||||
|
Vested
as of January 1, 2010
|
586,000 | $ | 14.99 | ||||||||
|
Vested
|
1,666 | $ | 18.37 | ||||||||
|
Exercised
|
− | − | |||||||||
|
Forfeited
|
(5,000 | ) | $ | 15.00 | |||||||
|
Vested
as of March 31, 2010
|
582,666 | $ | 15.00 |
5
|
$ 951
|
||||||
The stock option transactions are
valued using the Black-Scholes model using the following
assumptions:
|
As
of March 31,
|
||||
|
2010
|
||||
|
Expected
life
|
7
years
|
|||
|
Discount
rate
|
3.40% | |||
|
Volatility
|
112.34% | |||
|
Dividend
yield
|
15.08% | |||
The estimated fair value of each option
granted for the three months ended March 31, 2010 and the year ended December
31, 2009 was $1.632 and $0.897, respectively. For the three months
ended March 31, 2010 and 2009, the components of equity compensation expense
were as follows (in thousands):
|
Three
Month Ended
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Options
granted to Manager and non-employees
|
$ | 20 | $ | (1 | ) | |||
|
Restricted
shares granted to Manager and non-employees
|
676 | 61 | ||||||
|
Restricted
shares granted to non-employee directors
|
28 | 28 | ||||||
|
Total
equity compensation expense
|
$ | 724 | $ | 88 | ||||
During the three months ended March 31,
2010 and 2009, the Manager received 73,815 and 26,097 shares as incentive
compensation valued at $1.5 million and $98,000, respectively pursuant to the
Management Agreement. The incentive management fee is paid one
quarter in arrears.
Apart from incentive compensation
payable under the Management Agreement, the Company has established no formal
criteria for equity awards as of March 31, 2010. All awards are
discretionary in nature and subject to approval by the compensation
committee.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
10 –EARNINGS PER SHARE
The following table presents a
reconciliation of basic and diluted earnings per share for the periods presented
as follows (in thousands, except share and per share amounts):
|
Three
Months Ended
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Basic:
|
||||||||
|
Net income (loss)
|
$ | 1,406 | $ | (12,152 | ) | |||
|
Weighted average number of shares
outstanding
|
37,987,192 | 24,467,408 | ||||||
|
Basic net income (loss) per
share
|
$ | 0.04 | $ | (0.50 | ) | |||
|
Diluted:
|
||||||||
|
Net income (loss)
|
$ | 1,406 | $ | (12,152 | ) | |||
|
Weighted average number of shares
outstanding
|
37,987,192 | 24,467,408 | ||||||
|
Additional shares due to assumed
conversion of dilutive instruments
|
163,413 | − | ||||||
|
Adjusted weighted-average number
of common shares outstanding
|
38,150,605 | 24,467,408 | ||||||
|
Diluted net income (loss) per
share
|
$ | 0.04 | $ | (0.50 | ) | |||
Potentially dilutive shares relating to
163,413 and 242,464 shares of restricted stock are not included in the
calculation of diluted net loss per share for the three months ended March 31,
2010 and 2009, respectively, because the effect was
anti-dilutive.
NOTE
11 – RELATED PARTY TRANSACTIONS
Relationship
with Resource America and Certain of its Subsidiaries
At March 31, 2010, Resource America
owned 2,265,824 shares, or 5.7%, of the Company’s outstanding common
stock. In addition, Resource America held 2,166 options to purchase
restricted stock.
The Company is managed by the Manager
pursuant to the management agreement that provides for both base and incentive
management fees. For the three months ended March 31, 2010 and 2009,
the Manager earned base management fees of approximately $1.2 million and $1.0
million, respectively. The Company also reimburses the Manager and
Resource America for expenses and employees of Resource America who perform
legal, accounting, due diligence and other services that outside professionals
or consultants would otherwise perform. On October 16, 2009, the
Company entered into an amendment to the management
agreement. Pursuant to the amendment, the Manager must provide the
Company with a Chief Financial Officer and three accounting professionals, each
of whom will be exclusively dedicated to the operations of the
Company. The Manager must also provide the Company with a director of
investor relations who will be 50% dedicated to the Company’s
operations. The Company will bear the expense of the wages, salaries
and benefits of the Chief Financial Officer and three accounting professionals
and 50% of the salary and benefits of the director of investor
relations. For the three months ended March 31, 2010 and 2009, the
Company paid the Manager $440,000 and $146,000, respectively, as expense
reimbursements.
At March
31, 2010, the Company was indebted to the Manager for base management fees of
$402,000 and for the reimbursement of expenses of $276,000. At
December 31, 2009, the Company was indebted to the Manager for base management
fees of $371,000, incentive management fees of $1.5 million and expense
reimbursements of $129,000. These amounts are included in accounts
payable and other liabilities.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
11 – RELATED PARTY TRANSACTIONS – (Continued)
Relationship
with Resource America and Certain of its Subsidiaries – (Continued)
The
Company purchased a membership interest in RRE VIP Borrower, LLC (an
unconsolidated VIE that holds the Company’s interests in a real estate joint
venture) from Resource America at book value. This joint venture, which is
structured as a credit facility with Värde Investment Partners, LP acting as
lender, finances the acquisition of distressed properties and mortgage loans and
has the objective of repositioning both the directly owned properties and the
properties underlying the mortgage loans to enhance their value. The
Company acquired the membership interests for $2.1 million. The
agreement requires the Company to contribute 3% of the total funding required
for each asset acquisition on a monthly basis. The investment balance
of $2.5 million and $2.1 million at March 31, 2010 and December 31, 2009,
respectively, is recorded as an investment in unconsolidated entities on the
Company’s consolidated balance sheet.
On January 15, 2010, the Company loaned
$2.0 million to Resource Capital Partners, Inc. so that it could acquire a 5.0%
limited partnership interest in Resource Real Estate Opportunity Fund,
L.P. The loan is secured by Resource Capital Partner’s partnership
interest in the Resource Real Estate Opportunity Fund, L.P. The
promissory note bears interest at a fixed rate of 8.0% per annum on the unpaid
principal balance. In the event of default, interest will accrue and be
payable at a rate of 5.0% in excess of the fixed rate. Interest payments
are due quarterly commencing on April 15, 2010. Mandatory principal
payments must also be made to the extent distributable cash or other proceeds
from the partnership represents a return of Resource Capital Partners, Inc.’s
capital. The term of the loan ends on January 14, 2015, with an option to
extend for two additional 12-month periods each.
On March 5, 2010, the Company entered
into a Promissory Note with Lease Equity Appreciation Fund II, L.P. (“LEAF II”),
that allows for an $8.0 million facility, of which all $8.0 million was funded
by March 31, 2010, for a one year term at 12% payable quarterly, with a 1% loan
origination fee and 20% amortization, which is secured by the all assets of LEAF
II, including its entire ownership interest in LEAF II Receivables Funding,
LLC. The loan is to be fully repaid by March 3,
2011.
Relationship
with LEAF
LEAF Financial Corp. (“LEAF”), a
majority-owned subsidiary of Resource America, originates and manages equipment
leases and notes on the Company’s behalf. The Company purchases its
equipment leases and notes from LEAF at a price equal to their book value plus a
reimbursable origination cost not to exceed 1% to compensate LEAF for its
origination costs. For the three months ended March 31, 2010, the
Company had acquired $10.2 million of equipment lease and note investments from
LEAF, including $102,000 of origination cost reimbursements. In
addition, the Company pays LEAF an annual servicing fee, equal to 1% of the book
value of managed assets, for servicing the Company’s equipment leases and
notes. At March 31, 2010 and December 31, 2009, the Company was
indebted to LEAF for servicing fees in connection with the Company’s equipment
finance portfolio of $9,000 and $8,000, respectively. LEAF servicing
fees for the three months ended March 31, 2010 and 2009 were $18,000 and
$253,000, respectively.
During the three months ended March 31,
2010, the Company sold two equipment notes back to LEAF at a price equal to
their book value. The total proceeds received on the sale of the
outstanding notes receivable were $140,000. During three months ended
March 31, 2009, the Company sold two equipment notes back to LEAF at a price
equal to their book value. The total proceeds received on the sale of
the outstanding notes receivable were $822,000.
Relationship
with Resource Real Estate
Resource Real Estate, a subsidiary of
Resource America, originates, finances and manages the Company’s commercial real
estate loan portfolio, including whole loans, A notes, B notes and mezzanine
loans. The Company reimburses Resource Real Estate for loan
origination costs associated with all loans originated. At March 31,
2010 and December 31, 2009, the Company had no indebtedness to Resource Real
Estate for loan origination costs in connection with the Company’s commercial
real estate loan portfolio.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
11 – RELATED PARTY TRANSACTIONS – (Continued)
Relationship
with Law Firm
Until 1996, director Edward E. Cohen, a
director who was the Company’s Chairman from its inception until November 2009,
was of counsel to Ledgewood, P.C., a law firm. In addition, one of the
Company’s executive officers, Jeffrey F. Brotman, was employed by Ledgewood
until 2007. For the three months ended March 31, 2010 and 2009, the
Company paid Ledgewood approximately $24,000 and $15,000, respectively, for
legal services. Mr. Cohen receives certain debt service payments from
Ledgewood related to the termination of his affiliation with Ledgewood and its
redemption of his interest in the firm. Mr. Brotman also receives certain
debt service payments from Ledgewood related to the termination of his
affiliation with Ledgewood.
NOTE
12 – 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 provisions for loan and lease losses and 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.
The Company’s 2010 dividends will be
determined by the Company’s board which will also consider the composition of
any dividends declared, including the option of paying a portion in cash and the
balance in additional common shares. Generally, dividends payable in
stock are not treated as dividends for purposes of the deduction for dividends,
or as taxable dividends to the recipient. The Internal Revenue
Service, in Revenue Procedures 2009-15 and 2010-12, has given guidance with
respect to certain stock distributions by publicly traded
REITs. These Revenue Procedures apply to distributions made on or
after January 1, 2008 and declared with respect to a taxable year ending on or
before December 31, 2011. They provide that publicly-traded REITs can
distribute stock (common shares in the Company’s case) to satisfy their REIT
distribution requirements if stated conditions are met. These
conditions include that at least 10% of the aggregate declared distributions be
paid in cash and the shareholders be permitted to elect whether to receive cash
or stock, subject to the limit set by the REIT on the cash to be distributed in
the aggregate to all shareholders. The Company did not use these
Revenue Procedures with respect to any distributions for its 2008 and 2009
taxable years, but may do so for distributions with respect to 2010 and
2011.
On March 18, 2010, the Company declared
a quarterly distribution of $0.25 per share of common stock, $10.1 million in
the aggregate, which was paid on April 27, 2010 to stockholders of record on
March 31, 2010.
NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. The Company determines fair value based on quoted prices when
available or, if quoted prices are not available, through the use of alternative
approaches, such as discounting the expected cash flows using market interest
rates commensurate with the credit quality and duration of the
investment. The hierarchy followed defines three levels of inputs
that may be used to measure fair value:
Level 1 - Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.
Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset and
liability or can be corroborated with observable market data for substantially
the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
The determination of where an asset or
liability falls in the hierarchy requires significant judgment. The
Company evaluates its hierarchy disclosures each quarter; depending on various
factors, it is possible that an asset or liability may be classified differently
from quarter to quarter. However, the Company expects that changes in
classifications between levels will be rare.
Certain assets and liabilities are
measured at fair value on a recurring basis. The following is a
discussion of these assets and liabilities as well as the valuation techniques
applied to each for fair value measurement.
The Company classifies all of its
investment securities as available-for-sale and reports them at fair value
which, for the Company’s positions purchased in the three months ended March 31,
2010, is based on dealer quotes due to their higher ratings and more active
markets and, for the Company’s positions purchased prior to the three months
ended March 31, 2010, is based on taking a weighted average of the following
three measures:
|
|
·
|
an
income approach utilizing an appropriate current risk-adjusted yield, time
value and projected estimated losses from default assumptions based on
analysis of underlying loan
performance;
|
|
|
·
|
quotes
on similar-vintage, higher rate, more actively traded CMBS adjusted as
appropriate for the lower subordination level of the Company’s securities;
and
|
|
|
·
|
dealer
quotes on the Company’s securities for which there is not an active
market.
|
Derivatives (interest rate swap
contracts), both assets and liabilities, are valued by a third-party pricing
agent using an income approach and utilizing models that use as their primary
basis readily observable market parameters. This valuation process
considers factors including interest rate yield curves, time value, credit
factors and volatility factors. Although the Company has determined
that the majority of the inputs used to value its derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates
of current credit spreads, to evaluate the likelihood of default by the Company
and its counterparties. The Company has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its
derivative positions and has determined that the credit valuation adjustments
are not significant to the overall valuation of its derivatives. As a
result, the Company has determined that its derivative valuations in their
entirety are classified in Level 2 of the fair value
hierarchy.
The following table presents
information about the Company’s assets (including derivatives that are presented
net) measured at fair value on a recurring basis as of March 31, 2010 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value (in thousands):
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Investment securities
available-for-sale
|
$ | − | $ | − | $ | 51,324 | $ | 51,324 | ||||||||
|
Total assets at fair value
|
$ | − | $ | − | $ | 51,324 | $ | 51,324 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives (net)
|
$ | − | $ | 13,267 | $ | − | $ | 13,267 | ||||||||
|
Total liabilities at fair
value
|
$ | − | $ | 13,267 | $ | − | $ | 13,267 | ||||||||
The following table presents additional
information about assets which are measured at fair value on a recurring basis
for which the Company has utilized Level 3 inputs (in thousands):
|
Level
3
|
||||
|
Beginning
balance, January 1, 2010
|
$ | 44,542 | ||
|
Total
gains or losses (realized/unrealized):
|
||||
|
Included in earnings
|
1,080 | |||
|
Purchases
|
4,978 | |||
|
Unrealized gains – included in
accumulated other comprehensive income
|
724 | |||
|
Ending
balance, March 31, 2010
|
$ | 51,324 | ||
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
The Company did not have any losses
included in earnings due to the other-than-temporary impairment charges during
the three months ended March 31, 2010.
Loans held for sale consist of bank
loans identified for sale due to credit issues. Interest on loans held for
sale is recognized according to the contractual terms of the loan and included
in interest income on loans. The fair value of loans held for sale and
impaired loans is based on what secondary markets are currently offering for
these loans. As such, the Company classifies loans held for sale and
impaired loans as recurring Level 2. The amount of the adjustment for fair
value for loans held for sale for the three months ended March 31, 2010 was
$14,818 and is included in the consolidated statement of operations as realized
losses on loans and investments. For loans where there is no market,
the loans are measured using cash flows and other valuation techniques and these loans are
classified as nonrecurring Level 3. The amount of nonrecurring fair value
losses for impaired loans for the three months ended March 31, 2010 was $15.1
million and is included in the consolidated statement of operations as provision
for loan and lease loss.
The
following table summarizes the financial assets and liabilities measured at fair
value on a nonrecurring basis as of March 31, 2010 and indicates the fair value
hierarchy of the valuation techniques utilized by the Company to determine such
fair value (in thousands):
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Loans held for sale
|
$ | − | $ | 2,376 | $ | − | $ | 2,376 | ||||||||
|
Impaired loans
|
− | 8,606 | 88,651 | 97,257 | ||||||||||||
|
Total assets at fair value
|
$ | − | $ | 10,982 | $ | 88,651 | $ | 99,633 | ||||||||
The Company is required to disclose the
fair value of financial instruments for which it is practicable to estimate that
value. The fair value of short-term financial instruments such as
cash and cash equivalents, restricted cash, interest receivable, other assets,
repurchase agreements, warehouse lending facilities and accrued interest expense
approximates their carrying value on the consolidated balance
sheet. The fair value of the Company’s investment securities
available-for-sale is reported in Note 3. The fair value of
the Company’s derivative instruments is reported in Note 14.
The fair values of the Company’s
remaining financial instruments that are not reported at fair value on the
consolidated statement of financial position are reported below.
|
Fair Value of Financial
Instruments
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
March
31, 2010
|
December
31, 2009
|
|||||||||||||||
|
Carrying
value
|
Fair
value
|
Carrying
value
|
Fair
value
|
|||||||||||||
|
Investment
securities held-to-maturity
|
$ | 31,559 | $ | 23,189 | $ | 31,401 | $ | 21,320 | ||||||||
|
Loans
held-for-investment
|
$ | 1,555,593 | $ | 1,538,290 | $ | 1,558,687 | $ | 1,515,626 | ||||||||
|
CDO
notes
|
$ | 1,465,782 | $ | 862,106 | $ | 1,484,952 | $ | 857,262 | ||||||||
|
Junior
subordinated notes
|
$ | 51,548 | $ | 18,042 | $ | 51,548 | $ | 18,042 | ||||||||
NOTE
14 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS
At March 31, 2010, the Company had 11
interest rate swap contracts outstanding whereby the Company will pay an average
fixed rate of 5.16% and receive a variable rate equal to one-month
LIBOR. The aggregate notional amount of these contracts was $195.5
million at March 31, 2010. In addition, the Company also has one
interest rate cap agreement with a notional of $14.8 million outstanding whereby
it reduced its exposure to variability in future cash flows attributable to
LIBOR. The interest rate cap is a non-designated cash flow hedge and,
as a result, the change in fair value is recorded through the consolidated
statement of operations.
At December 31, 2009, the Company had
13 interest rate swap contracts outstanding whereby the Company will pay an
average fixed rate of 5.18% and receive a variable rate equal to one-month
LIBOR. The aggregate notional amount of these contracts was $217.9
million at December 31, 2009.
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
14 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS – (Continued)
The estimated fair value of the
Company’s interest rate swaps was ($13.3) million and ($12.8) million as of
March 31, 2010 and December 31, 2009, respectively. The Company had
aggregate unrealized losses of $14.9 million and $14.6 million on the interest
rate swap agreements as of March 31, 2010 and December 31, 2009, respectively,
which is recorded in accumulated other comprehensive loss. In
connection with the August 2006 close of RREF CDO 2006-1, the Company realized a
swap termination loss of $119,000, which is being amortized over the life of
RREF CDO 2006-1. The amortization is reflected in interest expense in
the Company’s consolidated statements of operations. In connection
with the June 2007 close of RREF CDO 2007-1, the Company realized a swap
termination gain of $2.6 million, which is being amortized over the life of RREF
CDO 2007-1. The accretion is reflected in interest expense in the
Company’s consolidated statements of operations. In connection with
the termination of a $53.6 million swap related to RREF CDO 2006-1 during the
nine months ended September 30, 2008, the Company realized a swap termination
loss of $4.2 million, which is being amortized over the life of a new $45.0
million swap. The amortization is reflected in interest expense in
the Company’s consolidated statements of operations. In connection
with the payoff of a fixed-rate commercial real estate loan during the three
months ended September 30, 2008, the Company terminated a $12.7 million swap and
realized a $574,000 swap termination loss, which is being amortized over the
life of the terminated swap and the amortization is reflected in interest
expense in the Company’s consolidated statements of operations.
The
following tables present the fair value of the Company’s derivative financial
instruments as well as their classification on the balance sheet as of March 31,
2010 and on the consolidated statement of operations for the three months ended
March 31, 2010:
|
Fair
Value of Derivative Instruments as of March 31, 2010
(in
thousands)
|
|||||||||
|
Liability
Derivatives
|
|||||||||
|
Notional
Amount
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
Derivatives
not designated as hedging instruments under
SFAS 133
|
|||||||||
|
Interest
rate cap agreement
|
$ | 14,841 |
Derivatives,
at fair value
|
$ | 10 | ||||
|
Derivatives
designated as hedging instruments under
SFAS 133
|
|||||||||
|
Interest
rate swap contracts
|
$ | 195,459 |
Derivatives,
at fair value
|
$ | (13,277 | ) | |||
|
Accumulated
other comprehensive loss
|
$ | 13,277 | |||||||
|
The
Effect of Derivative Instruments on the Statement of Operations for
the
Three
Months Ended March 31, 2010
(in
thousands)
|
|||||||||
|
Liability
Derivatives
|
|||||||||
|
Notional
Amount
|
Statement
of Operations Location
|
Unrealized
Loss (1)
|
|||||||
|
Derivatives
not designated as hedging instruments under
SFAS 133
|
|||||||||
|
Interest
rate cap agreement
|
$ | 14,841 |
Interest
expense
|
$ | 36 | ||||
|
(1)
|
Negative
values indicate a decrease to the associated balance sheet or consolidated
statement of operations line items.
|
RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH
31, 2010
(Unaudited)
NOTE
15 – SUBSEQUENT EVENTS
The Company has evaluated subsequent
events through the filing of this form and determined that there have not been
any events that have occurred that would require adjustments to or disclosures
in the unaudited consolidated financial statements, other than listed
below.
On April 7, 2010, the Company, as
borrower, entered into a Loan and Security Agreement with Resource TRS, as
guarantor, The Bancorp Bank, as lender, and LEAF Financial Corporation, as
collateral servicer. The loan, in the principal amount of $6.5
million with a fixed rate of 6.0% and a loan fee of 1.0%, matures in 30
months, is secured by small business equipment leases serviced by LEAF Financial
Corporation, and was made in the ordinary course of the bank’s
business on the same terms as those prevailing for comparable transactions with
other lenders. Our President is the brother of the Chairman of the Board
and son of the Chief Executive Officer of the bank’s parent, The Bancorp,
Inc. One of our directors is the father of the Chairman of the Board
and the spouse of the Chief Executive Officer of Bancorp. One of our
directors also serves as a director of Bancorp, and an additional
Bancorp director serves as a director of Resource America. All of the
directors with related interests in the loan did not vote or participate in any
way in the loan approval.
On April 12, 2010, the Company
repurchased $26.6 million of debt issued by RREF CDO 2006-1.
The Company received $9.0 million in
proceeds related to the issuance of 1,318,524 shares of common stock on the
Company’s dividend reinvestment plan during April 2010.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
The following discussion provides
information to assist you in understanding our financial condition and results
of operations. This discussion should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
report. This discussion contains forward-looking
statements. Actual results could differ materially from those
expressed in or implied by those forward looking statements. Please
see “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2009 for a discussion of certain risks,
uncertainties and assumptions associated with those statements.
Overview
We are a specialty finance company that
focuses primarily on commercial real estate and commercial
finance. We are organized and conduct our operations to qualify as a
REIT under Subchapter M of the Internal Revenue Code of 1986, as
amended. Our objective is to provide our stockholders with total
returns over time, including quarterly distributions and capital appreciation,
while seeking to manage the risks associated with our investment
strategy. We invest in a combination of real estate-related assets
and, to a lesser extent, higher-yielding commercial finance
assets. We have financed a substantial portion of our portfolio
investments through borrowing strategies seeking to match the maturities and
repricing dates of our financings with the maturities and repricing dates of
those investments, and have sought to mitigate interest rate risk through
derivative instruments.
We are externally managed by Resource
Capital Manager, Inc., a wholly-owned indirect subsidiary of Resource America,
Inc. (NASDAQ-GS: REXI), or Resource America, 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
commercial finance, real estate, and financial fund management
sectors. As of March 31, 2010, Resource America managed approximately
$13.1 billion of assets in these sectors. To provide its services,
the Manager draws upon Resource America, its management team and their
collective investment experience.
We generate our income primarily from
the spread between the revenues we receive from our assets and the cost to
finance the purchase of those assets and hedge interest rate
risks. We generate revenues from the interest and fees we earn on our
whole loans, senior interest in first mortgage loans, or A notes, junior
interests in first mortgage loans, or B notes, mezzanine debt, commercial
mortgage-backed securities, or CMBS, bank loans, payments on equipment leases
and notes and other asset-backed securities, or ABS. Historically, we
have used a substantial amount of leverage to enhance our returns and we have
financed each of our different asset classes with different degrees of
leverage. The cost of borrowings to finance our investments comprises
a significant part of our expenses. Our net income depends on our
ability to control these expenses relative to our revenue. In our
bank loans, CMBS, equipment leases and notes and other ABS, we historically have
used warehouse facilities as a short-term financing source and collateralized
debt obligations, or CDOs, and, to a lesser extent, other term financing as a
long-term financing source. In our commercial real estate loan
portfolio, we historically have used repurchase agreements as a short-term
financing source, and CDOs and, to a lesser extent, other term financing as a
long-term financing source. Our other term financing has consisted of
long-term match-funded financing provided through long-term bank financing and
asset-backed financing programs, depending upon market conditions and credit
availability.
Ongoing problems in real estate and
credit markets continue to impact our operations, particularly our ability to
generate capital and financing to execute our investment strategies. These
problems have also affected a number of our commercial real estate borrowers
and, with respect to 31 of our commercial real estate, or CRE, loans, caused us
to enter into loan modifications. We have increased our provision for
loan and lease losses to reflect the effect of these conditions on our borrowers
and have recorded both temporary and other than temporary impairments in the
market valuation of the CMBS and other ABS in our investment portfolio.
While we believe we have appropriately valued the assets in our investment
portfolio at March 31, 2010, we cannot assure you that further impairments will
not occur or that our assets will otherwise not be adversely affected by market
conditions.
The events occurring in the credit
markets have impacted our financing and investing strategies and, as a result,
our ability to originate new investments and to grow. The market for
securities issued by new securitizations collateralized by assets similar to
those in our investment portfolio has largely disappeared. Since our
sponsorship in June 2007 of Resource Real Estate Funding CDO 2007-1, or RREF CDO
2007-1, we have not sponsored any new securitizations and we do not expect to be
able to sponsor new securitizations for the foreseeable
future. Short-term financing through warehouse lines of credit and
repurchase agreements had been largely unavailable and unreliable as increasing
volatility in the valuation of assets similar to those we originate had
increased the risk of margin calls. However, we now see signs of the
CRE term financing market opening and have seen the bank loan financing market
open in 2010.
Credit market conditions and the
recessionary economy have also resulted in an increasing number of loan
modifications, particularly in our commercial real estate
loans. Borrowers have experienced deterioration in the performance of
the properties we have financed or delays in implementing their business
plans. In order to assist our borrowers in effectuating their
business plans, including the leasing and repositioning of the underlying
assets, we have been willing to enter into loan modifications that would adapt
our financing to their particular situations. The most common loan
modifications have included term extensions and modest interest rate reductions
through the lowering of London Interbank Offered Rate, or LIBOR, floors, offset
by increased interest rate spreads over LIBOR. In exchange for the
loan modifications, we have received partial principal paydowns, new equity
investment commitments in the properties from the borrowers or their principals,
additional fees and other structural improvements and enhancements to the
loans. Since the beginning of 2008 through March 31, 2010, we have
modified 31 CRE loans. Management determined that seven of these
modifications were due to financial distress of the borrowers and accordingly,
qualified as troubled debt restructurings. We expect that we may have
more CRE loan modifications in the future.
Currently, we seek to manage our
liquidity and originate new assets primarily through capital recycling as loan
payoffs and paydowns occur and through existing capacities within our completed
securitizations. The following is a summary of repayments we received
during the three months ended March 31, 2010:
|
|
·
|
$17.1
million of commercial real estate loan principal
repayments;
|
|
|
·
|
$38.5
million of bank loan principal repayments;
and
|
|
|
·
|
$18.0
million of bank loan sale proceeds.
|
We have used recycled capital in our
CRE CDO and bank loan CLO structures to make new investments at discounts to
par. This reinvested capital and the related discount will produce
additional income as the discount is accreted through interest
income. In addition, the purchase of these investments at discounts
allows us to build collateral in the CDO and CLO structures since we receive
credit in these structures for these investments at par. During 2010
and 2009, we purchased CMBS with a combined par value of $59.4 million with a
discount to par of 45.9% and bank loans of $358.9 million with a discount to par
of 11.1%. From the net discounts of approximately $27.3 million and
$40.0 million, we expect to recognize income from accretion of these discounts
of approximately $4.6 million and $8.6 million in our CMBS and bank loan
portfolio, respectively, through 2010.
As of March 31, 2010, we had no
outstanding repurchase agreements.
We expect to continue to generate net
investment income from our current investment portfolio and generate dividends
for our shareholders.
As of March 31, 2010, we had invested
74.6% of our portfolio in CRE assets, 22.5% in commercial bank loans and 2.9% in
direct financing leases and notes. As of December 31, 2009, we had
invested 76.4% of our portfolio in CRE assets, 23.2% in commercial bank loans
and 0.4% in direct financing leases and notes. We invested $10.3
million in direct financing leases and notes during the March 2010 period and
subsequent to quarter end obtained financing for this
investment. Therefore, the shift in equity allocation from December
31, 2009 to March 31, 2010 is a temporary one as we expect the equity allocation
to move back toward the December 31, 2009 percentages after giving effect to the
financing transaction on our equipment leasing portfolio.
Critical
Accounting Policies
The discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of our assets, liabilities, revenues
and cost and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates,
including those related to the provision for credit losses, recovery of deferred
tax assets, fair value of investment securities, potential impairment of
intangible assets and goodwill, guarantees and certain accrued
liabilities. We base our estimates on historical experience and on
various other assumptions that we believe reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
For a complete discussion of our
critical accounting policies and estimates, see the discussion of our Annual
Report on Form 10-K for the year ended December 31, 2009 under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations −
Critical Accounting Policies and Estimates.”
Results
of Operations − Three Months
Ended March 31, 2010 as compared to Three Months Ended March 31,
2009
Our net income for the three months
ended March 31, 2010 was $1.4 million, or $0.04 per share (basic and diluted),
as compared to a net loss of $12.2 million, or ($0.50) per share (basic and
diluted), for the three months ended March 31, 2009.
Interest
Income
The following table sets forth
information relating to our interest income recognized for the periods presented
(in thousands, except percentages):
|
Three
Months Ended
March
31, 2010
|
Three
Months Ended
March
31, 2009
|
|||||||||||||||||||||||
|
Weighted
Average
|
Weighted
Average
|
|||||||||||||||||||||||
|
Interest
Income
|
Yield
(1)
|
Balance
|
Interest Income
|
Yield
(1)
|
Balance
|
|||||||||||||||||||
|
Interest
income:
|
||||||||||||||||||||||||
|
Interest income from
loans:
|
||||||||||||||||||||||||
|
Bank
loans
|
$ | 9,721 | 4.27% | $ | 907,934 | $ | 8,897 | 3.83% | $ | 927,891 | ||||||||||||||
|
Commercial real estate
loans
|
8,546 | 4.71% | $ | 727,131 | 13,723 | 6.83% | $ | 801,373 | ||||||||||||||||
|
Total interest income
from
loans
|
18,267 | 22,620 | ||||||||||||||||||||||
|
Interest
income from securities:
|
||||||||||||||||||||||||
|
CMBS-private
placement
|
2,534 | 7.53% | $ | 131,247 | 882 | 4.76% | $ | 74,138 | ||||||||||||||||
|
Securities
held-to-maturity
|
337 | 3.75% | $ | 35,945 | 540 | 6.83% | $ | 29,710 | ||||||||||||||||
|
Other
ABS
|
3 | N/A | N/A | − | N/A | N/A | ||||||||||||||||||
|
Total interest income
from
securities
available-for-sale
|
2,874 | 1,422 | ||||||||||||||||||||||
|
Leasing
|
235 | 10.50% | $ | 9,164 | 2,233 | 8.70% | $ | 99,213 | ||||||||||||||||
|
Interest
income – other:
|
||||||||||||||||||||||||
|
Temporary investment
in
over-night repurchase
agreements
|
197 | N/A | N/A | 347 | N/A | N/A | ||||||||||||||||||
|
Total interest income −
other
|
197 | 347 | ||||||||||||||||||||||
|
Total
interest
income
|
$ | 21,573 | $ | 26,622 | ||||||||||||||||||||
|
(1)
|
Certain
one-time items reflected in interest income have been excluded in
calculating the weighted average rate, since they are not indicative of
expected future results.
|
Aggregate interest income decreased
$5.0 million (19%) to $21.6 million for the three months ended March 31, 2010
from $26.6 million for the three months ended March 31, 2009. We
attribute this decrease to the following:
Interest
Income from Loans
Aggregate interest income from loans
decreased $4.4 million (19%) to $18.3 million for the three months ended March
31, 2010 from $22.6 million for the three months ended March 31,
2009.
Commercial
real estate loans produced $8.5 million of interest income for the three months
ended March 31, 2010 as compared to $13.7 million for the three months ended
March 31, 2009, a decrease of $5.2 million (38%). This decrease is a
result of the following:
|
|
·
|
a
decrease in the weighted average balance of $74.3 million on our
commercial real estate loans to $727.1 million for the three months ended
March 31, 2010 from $801.4 million for the three months ended March 31,
2009 primarily as a result of payoffs and paydowns;
and
|
|
|
·
|
a
decrease in the weighted average rate to 4.71%
for the three months ended March 31, 2010 from 6.83% for the three months
ended March 31, 2009, primarily due to decreases in LIBOR floors, which is
a reference index for the rates payable on these loans, from loan
modifications during 2009 and 2010. Management determined that seven
of these modifications were due to financial distress of the borrowers
and, accordingly, qualified as troubled debt restructurings. To
summarize the impact of modifications on the weighted average rate at
March 31, 2010, we have $189.6 million of loans with a weighted average
LIBOR floor of 2.24% as compared to $382.1 million of loans with a
weighted average LIBOR floor of 4.73% at March 31,
2009.
|
This
decrease in interest income on loans was partially offset by the
following:
Bank
loans generated $9.7 million of interest income for the three months ended March
31, 2010 as compared to $8.9 million for the three months ended March 31, 2009,
an increase of $824,000 (9%). This increase was primarily the result
of an increase in accretion income of $2.0 million to $2.9 million for the three
months ended March 31, 2010 from $888,000 for the three months ended March 31,
2009. The increase in accretion income is a result of the purchase of
$73.4 million of bank loans at discounts and the accretion of those discounts
into income. These discounted loan purchases are made as we invest
the proceeds from the loan payoffs from our borrowers and from the loans we have
sold, typically for credit reasons.
This
increase in bank loan accretion income was partially offset by the
following:
|
|
·
|
a
decrease in the weighted average balance on these loans of $20.0 million
to $907.9 million for the three months ended March 31, 2010 from $927.9
million for the three months ended March 31,
2009.
|
|
|
·
|
a
decrease in the weighted average rate earned by our bank loans to 4.27%
for the three months ended March 31, 2010 from 3.83% for the three months
ended March 31, 2009. This was principally a result of the
decrease in LIBOR which is a reference index for the rates payable on
these loans.
|
Interest
Income from Securities
Aggregate interest income from
securities increased $1.5 million (102%) to $2.9 million for the three months
ended March 31, 2010, from $1.4 million for the three months ended March 31,
2009. The increase in interest income from securities
available-for-sale resulted principally from the following:
CMBS-private placement increased $1.7
million (187%) to $2.5 million for the three months ended March 31, 2010 as
compared to $882,000 for the three months ended March 31, 2009. The
increase is primarily attributed to the following:
|
|
·
|
an
increase in the weighted average balance of assets of $57.1 million to
$131.2 million for the three months ended March 31, 2010 from $74.1
million for the three months ended March 31, 2009 primarily as a result of
the purchase of $7.7 million par value of assets during the three months
ended March 31, 2010 and $54.8 million par value of assets during the last
two quarters of the year ended December 31, 2009;
and
|
|
|
·
|
an
increase in the weighted average yield to 7.53% for the three months ended
March 31, 2010 from 4.76% for the three months ended March 31, 2009
primarily as a result of the increase in accretion income from
securities purchased at discounts.
|
Securities held-to-maturity decreased
$203,000 (38%) to $337,000 for the three months ended March 31, 2010 from
$540,000 for the three months ended March 31, 2009. This decrease is
primarily attributed to the following:
|
|
·
|
a
decrease in the weighted average rate earned by these securities to 2.38%
for the three months ended March 31, 2010 from 6.83% for the three months
ended March 31, 2009. This was principally a result of the
decrease in LIBOR which is a reference index for the rates payable on
these securities.
|
Interest
Income − Leasing
Our
equipment leasing portfolio generated $235,000 of interest income for the three
months ended March 31, 2010 as compared to $2.2 million for the three months
ended March 31, 2009, a decrease of $2.0 million (89%). This decrease
is primarily the result of our sale of the majority of the leasing portfolio, at
par, as of June 30, 2009. This decrease was partially offset by the
addition of a $10.2 million pool of leases during the three months ended March
31, 2010.
Interest
Income − Other
Aggregate interest income-other
decreased $150,000 (43%) to $197,000 for the three months ended March 31, 2010
as compared to $347,000 for the three months ended March 31,
2009. This decrease in interest income-other resulted principally
from lower rates earned on our overnight repurchase agreements on our temporary
investments.
Interest
Expense
The following table sets forth
information relating to our interest expense incurred for the periods presented
by asset class (in thousands, except percentages):
|
Three
Months Ended
March
31, 2010
|
Three
Months Ended
March
31, 2009
|
|||||||||||||||||||||||
|
Weighted
Average
|
Weighted
Average
|
|||||||||||||||||||||||
|
Interest
Expense
|
Yield
|
Balance
|
Interest
Expense
|
Yield
|
Balance
|
|||||||||||||||||||
|
Bank
loans
|
$ | 2,193 | 0.97% | $ | 906,000 | $ | 5,719 | 2.53% | $ | 906,000 | ||||||||||||||
|
Commercial
real estate loans
|
2,113 | 1.43% | $ | 587,314 | 2,625 | 1.55% | $ | 667,521 | ||||||||||||||||
|
Leasing
|
− | N/A | N/A | 830 | 3.58% | $ | 92,521 | |||||||||||||||||
|
General
|
3,631 | 5.57% | $ | 256,048 | 4,703 | 4.90% | $ | 372,689 | ||||||||||||||||
|
Total interest expense
|
$ | 7,937 | $ | 13,877 | ||||||||||||||||||||
Aggregate interest expense decreased $6.0 million (43%) to $7.9 million for the
three months ended March 31, 2010 from $13.9 million for the three months ended
March 31, 2009. We attribute this decrease to the
following:
Interest expense on bank loans was $2.2
million for the three months ended March 31, 2010 as compared to $5.7 million
for the three months ended March 31, 2009, a decrease of $3.5 million
(62%). This decrease resulted primarily from a decrease in the
weighted average yield on this debt to 0.97% for the three months ended March
31, 2010 from 2.53% for the three months ended March 31, 2009 as a result of the
decrease in LIBOR which is a reference index for the rates payable on most of
these notes.
Interest expense on commercial real
estate loans was $2.1 million for the three months ended March 31, 2010 as
compared to $2.6 million for the three months ended March 31, 2009, a decrease
of $512,000 million (20%). This decrease resulted primarily from a
decrease in the weighted average yield on our financings to 1.43% for the three
months ended March 31, 2010 as compared to 1.55% for the three months ended
March 31, 2009 primarily due to the decrease in LIBOR which is a reference index
for the rates payable on a vast majority of these borrowings.
Interest
expense on our equipment leasing portfolio was $0 for the three months ended
March 31, 2010 as compared to $830,000 for the three months ended March 31,
2009, a decrease of $830,000 (100%). The decrease is the result of
the sale of most of the leasing portfolio and the simultaneous transfer of all
of the related debt to Resource America who purchased the leases, at
par, as of June 30, 2009.
General
interest expense was $3.6 million for the three months ended March 31, 2010 as
compared to $4.7 million for the three months ended March 31, 2009, a decrease
of $1.1 million (23%). This decrease resulted primarily from the sale of
our leasing portfolio, at par, as of June 30, 2009, as well as the transfer of
the related hedges.
Non-Investment
Expenses
The following table sets forth
information relating to our non-investment expenses incurred for the periods
presented (in thousands):
|
Three
Months Ended
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Non-investment
expenses:
|
||||||||
|
Management fees – related
party
|
$ | 1,152 | $ | 1,001 | ||||
|
Equity compensation − related
party
|
724 | 88 | ||||||
|
Professional services
|
819 | 964 | ||||||
|
Insurance
|
212 | 172 | ||||||
|
General and administrative
|
645 | 405 | ||||||
|
Income tax
expense (benefit)
|
105 | (45 | ) | |||||
|
Total
non-investment expenses
|
$ | 3,657 | $ | 2,585 | ||||
Management fee – related party
increased $151,000 (15%) to $1.2 million for the three months ended March
31, 2010 as compared to $1.0 million for the three months ended March 31,
2009. This amounts represent compensation in the form of base
management fees and incentive management fees pursuant to our management
agreement. This increase was due to increased stockholders’ equity, a
component in the formula by which base management fees are calculated,
principally due to the receipt of $43.4 million of net proceeds from our common
stock offering completed in December 2009 and from the receipt of $18.0 million
of net proceeds we received from the sales of common stock through our Dividend
Reinvestment Plan, or DRIP. There was no incentive management fee
earned for the three months ended March 31, 2010 and March 31,
2009.
Equity compensation – related party
increased $636,000 (723%) to $724,000 for the three months ended March 31, 2010
as compared to $88,000 for the three months ended March 31,
2009. This expense relates to the amortization of annual grants of
restricted common stock to our non-employee independent directors, and annual
and discretionary grants of restricted stock to several employees of Resource
America who provided investment management services to us through our
Manager. The increase in expense was primarily the result of an
increase in our stock price and its impact on our quarterly remeasurement of
unvested stock and options as well as issuances of new grants during the
year.
Professional services decreased
$145,000 (15%) to $819,000 for the three months ended March 31, 2010 as
compared to $964,000 for the three months ended March 31, 2009 primarily due to
a decrease of $235,000 in lease servicing expense as a result of the sale of the
majority of the leasing portfolio. This decrease was offset by an
increase of $102,000 in legal fees for compliance work performed.
General and administrative expense
increased $240,000 (59%) to $645,000 for the three months ended March 31, 2010
as compared to $405,000 for the three months ended March 31,
2009. This increase is related to an agreement that we will reimburse
Resource America for the wages, salary and benefits of our Chief Financial
Officer, three accounting professionals and 50% of the salary and benefits of a
director of investor relations, beginning in October 2009.
Income tax expense (benefit) increased
$150,000 (333%) to an expense of $105,000 for the three months ended March 31,
2010 from a benefit of $45,000 for the three months ended March 31, 2009 as a
result of a corresponding increase in pre-tax income of Resource TRS, Inc., our
domestic taxable REIT subsidiary.
Other
(Expense)/Income
The following table sets forth
information relating to our other (expense) income incurred for the periods
presented (in thousands):
|
Three
Months Ended
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Impairment
losses on investment securities
|
$ | − | $ | (5,620 | ) | |||
|
Recognized
in other comprehensive loss
|
− | − | ||||||
|
Net
impairment losses recognized in earnings
|
− | (5,620 | ) | |||||
|
Net
realized losses on loans and investments
|
146 | 237 | ||||||
|
Provision
for loan and lease losses
|
(15,371 | ) | (16,951 | ) | ||||
|
Gain
on the extinguishment of debt
|
6,628 | − | ||||||
|
Other
income
|
24 | 22 | ||||||
|
Total
|
$ | (8,573 | ) | $ | (22,312 | ) | ||
Net
impairment losses recognized in earnings were $5.6 million during the three
months ended March 31, 2009 due to the other-than-temporary impairment charge on
one of our other ABS positions. There was no such impairment during
the three months ended March 31, 2010.
Our
provision for loan and lease losses decreased $1.6 million (9%) to $15.4 million
for the three months ended March 31, 2010 as compared to $17.0 million for the
three months ended March 31, 2009. The provision for the three months
ended March 31, 2010 consisted of a provision of $15.5 million in our CRE loan
portfolio, a $0.1 million provision on our direct financing leases and notes
offset by a reduction in the provision for our bank loan portfolio of $0.2
million. The provision for the three months ended March 31, 2009
consisted of an $11.9 million provision on our bank loan portfolio, a $5.0
million provision on our CRE portfolio and a $160,000 provision on our direct
financing leases and notes. The principal reason for the decrease
from the 2009 period was the significant improvement in market conditions on our
bank loan portfolio. The improvement in bank loan conditions was
offset by a $13.4 million allowance taken on a large position in our CRE
portfolio and allowances on other CRE loans of $2.1
million.
Gain on
the extinguishment of debt was $6.6 million for the three months ended March 31,
2010 and is due to the buyback of a portion of the debt issued by RREF 2006-1
and RREF 2007-1 during the period. The notes, issued at par, were
bought back as an investment by us at a weighted average price of
67.3%. The related deferred debt issuance costs were
immaterial. There was no such transaction in the three months ended
March 31, 2009.
Financial
Condition
Summary. Our total
assets at March 31, 2010 were $1.8 billion unchanged from December 31,
2009. As of March 31, 2010, we held $27.7 million of unrestricted
cash and cash equivalents.
Investment
Portfolio. The table below summarizes the amortized cost and
net carrying amount of our investment portfolio as of March 31, 2010 and
December 31, 2009, classified by interest rate type. The following
table 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 net carrying amount of our investment
portfolio and the related dollar price, which is computed by dividing the net
carrying amount by par amount (in thousands, except
percentages):
|
Amortized
cost
(3)
|
Dollar
price
|
Net
carrying amount
|
Dollar
price
|
Net
carrying amount less amortized cost
|
Dollar
price
|
|||||||||||||||||||
|
March
31, 2010
|
||||||||||||||||||||||||
|
Floating rate
|
||||||||||||||||||||||||
|
CMBS-private
placement
|
$ | 32,043 | 100.00% | $ | 10,322 | 32.21% | $ | (21,721 | ) | -67.79% | ||||||||||||||
|
Other
ABS
|
24 | 0.29% | 24 | 0.29% | − | −% | ||||||||||||||||||
|
B
notes (1)
|
26,500 | 100.00% | 26,298 | 99.24% | (202 | ) | -0.76% | |||||||||||||||||
|
Mezzanine
loans (1)
|
124,048 | 100.00% | 123,101 | 99.24% | (947 | ) | -0.76% | |||||||||||||||||
|
Whole
loans (1)
|
410,657 | 99.98% | 407,387 | 99.18% | (3,270 | ) | -0.80% | |||||||||||||||||
|
Bank
loans
|
872,085 | 96.69% | 843,454 | (2) | 93.51% | (28,631 | ) | -3.18% | ||||||||||||||||
|
Bank
loans held for sale (3)
|
2,376 | 88.99% | 2,376 | 88.99% | − | −% | ||||||||||||||||||
|
ABS
held-to-maturity (4)
|
31,559 | 89.06% | 23,189 | 65.44% | (8,370 | ) | -23.62% | |||||||||||||||||
|
Total floating rate
|
1,499,292 | 97.25% | 1,436,151 | 93.15% | (63,141 | ) | -4.10% | |||||||||||||||||
|
Fixed rate
|
||||||||||||||||||||||||
|
CMBS
– private placement
|
66,125 | 65.16% | 40,978 | 40.38% | (25,147 | ) | -24.78% | |||||||||||||||||
|
B
notes (1)
|
54,820 | 100.03% | 54,402 | 99.27% | (418 | ) | -0.76% | |||||||||||||||||
|
Mezzanine
loans (1)
|
58,634 | 100.27% | 51,788 | 88.56% | (6,846 | ) | -11.71% | |||||||||||||||||
|
Whole
loans (1)
|
46,721 | 99.83% | 32,371 | 69.17% | (14,350 | ) | -30.66% | |||||||||||||||||
|
Equipment
leases and loans (5)
|
10,975 | 100.01% | 10,325 | 94.09% | (650 | ) | -5.92% | |||||||||||||||||
|
Total fixed rate
|
237,275 | 87.06% | 189,864 | 69.67% | (47,411 | ) | -17.39% | |||||||||||||||||
|
Grand total
|
$ | 1,736,567 | 95.72% | $ | 1,626,015 | 89.62% | $ | (110,552 | ) | -6.10% | ||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||||||
|
Floating rate
|
||||||||||||||||||||||||
|
CMBS-private
placement
|
$ | 32,043 | 100.00% | $ | 11,185 | 34.91% | $ | (20,858 | ) | -65.09% | ||||||||||||||
|
Other
ABS
|
24 | 0.29% | 24 | 0.29% | − | −% | ||||||||||||||||||
|
B
notes (1)
|
26,500 | 100.00% | 26,283 | 99.18% | (217 | ) | -0.82% | |||||||||||||||||
|
Mezzanine
loans (1)
|
124,048 | 100.00% | 123,033 | 99.18% | (1,015 | ) | -0.82% | |||||||||||||||||
|
Whole
loans (1)
|
403,890 | 99.98% | 382,371 | 94.65% | (21,519 | ) | -5.33% | |||||||||||||||||
|
Bank
loans
|
857,451 | 96.87% | 798,614 | (2) | 90.23% | (58,837 | ) | -6.65% | ||||||||||||||||
|
Bank
loans held for sale (3)
|
8,050 | 78.88% | 8,050 | 78.88% | − | −% | ||||||||||||||||||
|
ABS
held-to-maturity (4)
|
31,401 | 88.77% | 21,287 | 60.18% | (10,114 | ) | -28.59% | |||||||||||||||||
|
Total floating rate
|
1,483,407 | 97.23% | 1,370,847 | 89.85% | (112,560 | ) | -7.38% | |||||||||||||||||
|
Fixed rate
|
||||||||||||||||||||||||
|
CMBS
– private placement
|
60,067 | 64.08% | 33,333 | 35.56% | (26,734 | ) | -28.52% | |||||||||||||||||
|
B
notes (1)
|
54,977 | 100.05% | 54,527 | 99.23% | (450 | ) | -0.82% | |||||||||||||||||
|
Mezzanine
loans (1)
|
58,638 | 100.28% | 53,200 | 90.98% | (5,438 | ) | -9.30% | |||||||||||||||||
|
Whole
loans (1)
|
80,305 | 99.78% | 79,647 | 98.96% | (658 | ) | -0.82% | |||||||||||||||||
|
Equipment
leases and loans (5)
|
2,067 | 100.05% | 927 | 44.87% | (1,140 | ) | -55.18% | |||||||||||||||||
|
Total fixed rate
|
256,054 | 88.38% | 221,634 | 76.50% | (34,420 | ) | -11.88% | |||||||||||||||||
|
Grand total
|
$ | 1,739,461 | 95.82% | $ | 1,592,481 | 87.72% | $ | (146,980 | ) | -8.10% | ||||||||||||||
|
(1)
|
Net
carrying amount includes an allowance for loan losses of $26.0 million at
March 31, 2010, allocated as follows: B notes ($0.6 million),
mezzanine loans ($7.8 million) and whole loans ($17.6
million). Net carrying amount includes an allowance for loan
losses of $29.3 million at December 31, 2009, allocated as
follows: B notes ($0.7 million), mezzanine loans ($6.4 million)
and whole loans ($22.2 million).
|
|
(2)
|
The
bank loan portfolio is carried at amortized cost less allowance for loan
loss and was $860.2 million at March 31, 2010. The amount
disclosed represents net realizable value at March 31, 2010, which
includes $11.9 million allowance for loan losses at March 31,
2010. The bank loan portfolio is carried at amortized cost less
allowance for loan loss and was $839.6 million at December 31,
2009. The amount disclosed represents net realizable value at
December 31, 2009, which includes $17.8 million allowance for loan losses
at December 31, 2009.
|
|
(3)
|
Bank
loans held for sale are carried at the lower of cost or
market. Amortized cost is equal to fair
value.
|
|
(4)
|
ABS
held to maturity are carried at amortized cost less other-than-temporary
impairment.
|
|
(5)
|
Net
carrying amount includes a $650,000 and $1.1 million allowance for
equipment leases and loans losses at March 31, 2010 and December 31, 2009,
respectively.
|
Commercial Mortgage-Backed
Securities-Private Placement. The determination of
other-than-temporary impairment is a subjective process, and different judgments
and assumptions could affect the timing of loss realization. We
review our portfolios monthly and the determination of other-than-temporary
impairment is made at least quarterly. We consider the following
factors when determining if there is an other-than-temporary impairment on a
security:
|
|
·
|
the
length of time the market value has been less than amortized
cost;
|
|
|
·
|
the
severity of the impairment;
|
|
|
·
|
the
expected loss of the security as generated by third party
software;
|
|
|
·
|
credit
ratings from the rating agencies;
|
|
|
·
|
underlying
credit fundamentals of the collateral backing the security;
and
|
|
|
·
|
our
intent to sell as well as the likelihood that we will be required to sell
the security before the recovery of the amortized cost
basis.
|
At March 31, 2010 and December 31,
2009, we held $51.3 million and $44.5 million, respectively, net of unrealized
gains of $5.0 million and $2.6 million, respectively, and net of unrealized
losses of $51.8 million and $50.2 million at March 31, 2010 and December 31,
2009, respectively, of CMBS-private placement at fair value which, for our
positions purchased in 2009, is based on dealer quotes due to their higher
ratings and more active markets and, for our positions purchased prior to 2009,
is based on taking a weighted average of the following three
measures:
|
|
·
|
an
income approach utilizing an appropriate current risk-adjusted yield, time
value and projected estimated losses from default assumptions based on
analysis of underlying loan
performance;
|
|
|
·
|
quotes
on similar-vintage, higher rate, more actively traded CMBS adjusted as
appropriate for the lower subordination level of our securities;
and
|
|
|
·
|
dealer
quotes on our securities for which there is not an active
market.
|
In the aggregate, we purchased our
CMBS-private placement portfolio at a discount. At March 31, 2010 and
December 31, 2009, the remaining discount to be accreted into income over the
remaining lives of the securities was $30.8 million and $29.1 million,
respectively. These securities are classified as available-for-sale
and, as a result, are carried at their fair value.
During
the three months ended December 31, 2009, two collateral positions that
supported the CMBS portfolio weakened to the point that default of these
positions became probable. The assumed default of these collateral
positions in our cash flow model yielded a value that would result in less than
a full recovery of our cost basis. Accordingly, we recognized a $6.9
million other-than-temporary impairment on two of our CMBS investments during
the three months ended December 31, 2009, bringing the combined fair value to
$206,000. We recognized these impairments through the consolidated
statements of operations.
While our CMBS investments have
continued to decline in fair value, we believe that their change continues to be
temporary. We perform an on-going review of third-party reports and
updated financial data with respect to the financial information on the
underlying properties to analyze current and projected loan
performance. Rating agency downgrades are considered with respect to
our income approach when determining other-than-temporary impairment and when
inputs are stressed the resulting projected cash flows are adequate to recover
principal.
The following table summarizes our
CMBS-private placement as of March 31, 2010 and December 31, 2009 (in thousands,
except percentages). Dollar price is computed by dividing amortized
cost by par amount.
|
March
31, 2010
|
December
31, 2009
|
|||||||||||||||
|
Amortized
Cost
|
Dollar
Price
|
Amortized
Cost
|
Dollar
Price
|
|||||||||||||
|
Moody’s
Ratings Category:
|
||||||||||||||||
|
Aaa
|
$ | 11,933 | 66.05% | $ | 11,690 | 64.70% | ||||||||||
|
Aa1
through Aa3
|
8,767 | 58.44% | 9,639 | 50.73% | ||||||||||||
|
A1
through A3
|
10,010 | 61.26% | 4,826 | 56.14% | ||||||||||||
|
Baa1
through Baa3
|
2,019 | 33.65% | 2,021 | 33.68% | ||||||||||||
|
Ba1
through Ba3
|
11,870 | 82.19% | 10,443 | 100.00% | ||||||||||||
|
B1
through B3
|
24,493 | 85.42% | 24,449 | 85.27% | ||||||||||||
|
Caa1
through Caa3
|
12,839 | 98.76% | 12,832 | 98.71% | ||||||||||||
|
Ca
through C
|
16,238 | 73.81% | 16,210 | 73.68% | ||||||||||||
|
Total
|
$ | 98,169 | 73.52% | $ | 92,110 | 73.23% | ||||||||||
|
S&P
Ratings Category:
|
||||||||||||||||
|
AAA
|
$ | 6,145 | 61.45% | $ | 5,997 | 59.97% | ||||||||||
|
AA+
through AA-
|
− | −% | 3,659 | 40.65% | ||||||||||||
|
A+
through A-
|
8,484 | 64.39% | 6,544 | 62.75% | ||||||||||||
|
BBB+
through BBB-
|
16,758 | 64.22% | 11,955 | 59.49% | ||||||||||||
|
BB+
through BB-
|
10,595 | 58.98% | 7,847 | 78.76% | ||||||||||||
|
B+
through B-
|
9,112 | 91.12% | 9,081 | 90.81% | ||||||||||||
|
CCC+
through CCC-
|
47,075 | 83.63% | 47,027 | 83.54% | ||||||||||||
|
Total
|
$ | 98,169 | 73.52% | $ | 92,110 | 73.23% | ||||||||||
|
Weighted
average rating factor
|
2,856 | 2,971 | ||||||||||||||
Other Asset-Backed
Securities. At March 31, 2010, we held two other ABS
positions with a fair value of $24,000. At December 31, 2009, we held
two other ABS positions with a fair value of $24,000 that is the result of
other-than-temporary impairment of $5.7 million recognized during the year ended
December 31, 2009.
Real Estate
Loans. The following table is a summary of the loans in our
commercial real estate loan portfolio at the dates indicated (in
thousands):
|
Description
|
Quantity
|
Amortized
Cost
|
Contracted
Interest
Rates
|
Maturity Dates (3)
|
|||||||
|
March 31,
2010:
|
|||||||||||
|
Whole loans, floating
rate (1)
|
35 | $ | 398,562 |
LIBOR
plus 1.50% to
LIBOR
plus 4.50%
|
May
2010 to
February
2017
|
||||||
|
Whole loans, fixed
rate (1)
|
4 | 58,816 |
6.98%
to 10.00%
|
June
2011 to
August
2012
|
|||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR
plus 2.50% to
LIBOR
plus 3.01%
|
July
2010 to
October
2010
|
|||||||
|
B notes, fixed rate
|
3 | 54,821 |
7.00%
to 8.68%
|
July
2011 to
July
2016
|
|||||||
|
Mezzanine loans, floating
rate
|
10 | 124,048 |
LIBOR
plus 2.15% to
LIBOR
plus 3.45%
|
May
2010 to
January
2013
|
|||||||
|
Mezzanine loans, fixed
rate
|
5 | 58,634 |
8.14%
to 11.00%
|
May
2010 to
September
2016
|
|||||||
|
Total (2)
|
60 | $ | 721,381 | ||||||||
|
December
31, 2009:
|
|||||||||||
|
Whole loans, floating
rate (1)
|
32 | $ | 403,890 |
LIBOR
plus 1.50% to
LIBOR
plus 4.40%
|
May
2010 to
February
2017
|
||||||
|
Whole loans, fixed
rate (1)
|
6 | 80,305 |
6.98%
to 10.00%
|
May
2010 to
August
2012
|
|||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR
plus 2.50% to
LIBOR
plus 3.01%
|
July
2010 to
October
2010
|
|||||||
|
B notes, fixed rate
|
3 | 54,977 |
7.00%
to 8.68%
|
July
2011 to
July
2016
|
|||||||
|
Mezzanine loans, floating
rate
|
10 | 124,048 |
LIBOR
plus 2.15% to
LIBOR
plus 3.45%
|
May
2010 to
January
2013
|
|||||||
|
Mezzanine loans, fixed
rate
|
5 | 58,638 |
8.14%
to 11.00%
|
May
2010 to
September
2016
|
|||||||
|
Total (2)
|
59 | $ | 748,358 | ||||||||
|
(1)
|
Whole
loans had $5.6 million in unfunded loan commitments as of March 31, 2010
unchanged from December 31, 2009. These commitments are
funded as the loans require additional funding and the related borrowers
have satisfied the requirements to obtain this additional
funding.
|
|
(2)
|
The
total does not include an allowance for loan losses of $26.0 million and
$29.3 million recorded as of March 31, 2010 and December 31, 2009,
respectively.
|
|
(3)
|
Excludes
one floating rate whole loan which matured in July 2009 and is in
foreclosure.
|
During the three months ended March 31,
2010, we determined that three loans deemed troubled debt restructurings had
probable losses and we recorded an additional allowance for each of the three
loans. For one whole loan, secured by a hotel in Southern California
that had experienced zoning difficulties with an amortized cost balance of $34.0
million we recorded an allowance of $13.4 million for probable
losses. On a second whole loan secured by multifamily properties in
southern California, we’ve agreed to a settlement and gave the borrower a
concession of $1.0 million that was recorded as an allowance for loss on that
loan. With the third loan, secured by an improved pad zoned for retail use, the
borrower has marketed the improved pad for sale at an amount approximately
$150,000 less than our basis in the loan and we took an allowance for loss in
the same amount against the loan. In addition, we recorded an
additional $1.0 million in allowance for loan losses against the remaining CRE
portfolio of loans during the three months ended March 31, 2010.
As of March 31, 2010, we recorded an
allowance for loan losses of $37.9 million consisting of a $11.9 million
allowance on our bank loan portfolio and a $26.0 million allowance on our
commercial real estate portfolio as a result of us deeming five bank loans and
eight commercial real estate loans impaired as well as the establishment of a
general reserve on these portfolios.
As of December 31, 2009, we recorded an
allowance for loan loss of $47.1 million consisting of a $17.8 million allowance
on our bank loan portfolio and a $29.3 million allowance on our commercial real
estate portfolio as a result of us having seven bank loans and three commercial
real estate loan that were deemed impaired as well as the establishment of a
general reserve on these portfolios.
Bank Loans. At
March 31, 2010, we held a total of $843.4 million of bank loans at fair value
through Apidos CDO I, Apidos CDO III and Apidos Cinco CDO, all of which secure
the debt issued by these entities. This is an increase of $44.8
million over our holdings at December 31, 2009. The increase in total
bank loans was principally due to improved market prices for bank
loans. We own 100% of the equity issued by Apidos CDO I, Apidos CDO
III and Apidos Cinco CDO which we have determined are VIEs of which we are the
primary beneficiary. See “-Variable Interest Entities,”
entities. As a result, we consolidate Apidos CDO I, Apidos CDO III
and Apidos Cinco CDO.
The following table summarizes our bank
loan investments as of March 31, 2010 and December 31, 2009 (in thousands,
except percentages). Dollar price is computed by dividing amortized
cost by par amount.
|
March
31, 2010
|
December
31, 2009
|
||||||||||||||||
|
Amortized
cost
|
Dollar
price
|
Amortized
cost
|
Dollar
price
|
||||||||||||||
|
Moody’s
ratings category:
|
|||||||||||||||||
|
Baa1
through Baa3
|
$ | 37,294 | 98.43% | $ | 38,419 | 98.09% | |||||||||||
|
Ba1
through Ba3
|
431,752 | 96.97% | 404,609 | 96.91% | |||||||||||||
|
B1
through B3
|
352,565 | 95.87% | 355,441 | 96.33% | |||||||||||||
|
Caa1
through Caa3
|
34,898 | 99.81% | 44,265 | 99.79% | |||||||||||||
|
Ca
|
7,061 | 99.99% | 13,697 | 88.68% | |||||||||||||
|
No
rating provided
|
10,891 | 92.87% | 9,070 | 91.64% | |||||||||||||
|
Total
|
$ | 874,461 | 96.67% | $ | 865,501 | 96.67% | |||||||||||
|
S&P
ratings category:
|
|||||||||||||||||
|
BBB+
through BBB-
|
$ | 65,533 | 98.67% | $ | 73,629 | 98.23% | |||||||||||
|
BB+
through BB-
|
358,461 | 97.19% | 353,725 | 97.11% | |||||||||||||
|
B+
through B-
|
354,141 | 95.85% | 337,193 | 96.12% | |||||||||||||
|
CCC+
through CCC-
|
31,223 | 98.79% | 42,198 | 96.65% | |||||||||||||
|
CC+
through CC-
|
1,634 | 100.25% | 3,104 | 100.13% | |||||||||||||
|
C+
through C-
|
− | −% | − | −% | |||||||||||||
| D | 7,364 | 100.00% | 8,602 | 95.91% | |||||||||||||
|
No
rating provided
|
56,105 | 94.60% | 47,050 | 94.85% | |||||||||||||
|
Total
|
$ | 874,461 | 96.67% | $ | 865,501 | 96.67% | |||||||||||
|
Weighted
average rating factor
|
2,103 | 2,131 | |||||||||||||||
Asset-backed securities
held-to-maturity. At March 31, 2010, we held a total of $23.2
million of ABS held-to-maturity at amortized cost through Apidos CDO I, Apidos
CDO III and Apidos Cinco CDO, all of which secure the debt issued by these
entities. This is an increase of $1.9 million over our holdings at
December 31, 2009. The increase in total ABS held-to-maturity was
principally due to the improved marked prices.
During
the three months ended September 30, 2009, one collateral position that
supported the ABS held-to-maturity weakened to the point that default of this
position became probable. The assumed default of this collateral
position in our cash flow model yielded a value that would result in less than a
full recovery of our cost basis. Accordingly, we recognized an
$895,000 other-than-temporary impairment on our ABS held-to-maturity investment
during the three months ended September 30, 2009 bringing the combined fair
value to $925,000. We recognized this impairment through the
consolidated statements of operations.
The following table summarizes our ABS
held-to-maturity, at cost as of March 31, 2010 and December 31, 2009 (in
thousands, except percentages). Dollar price is computed by dividing
amortized cost by par amount.
|
March
31, 2010
|
December
31, 2009
|
|||||||||||||||
|
Amortized
cost
|
Dollar
price
|
Amortized
cost
|
Dollar
price
|
|||||||||||||
|
Moody’s
ratings category:
|
||||||||||||||||
|
Aa1
through Aa3
|
$ | 2,850 | 83.48% | $ | 2,854 | 82.89% | ||||||||||
|
A1
through A3
|
306 | 76.50% | 303 | 75.75% | ||||||||||||
|
Ba1
through Ba3
|
4,433 | 95.85% | 4,427 | 95.72% | ||||||||||||
|
B1
through B3
|
4,400 | 97.69% | 4,240 | 97.58% | ||||||||||||
|
Caa1
through Caa3
|
9,929 | 99.16% | 9,913 | 99.14% | ||||||||||||
|
Ca
|
3,550 | 79.22% | 3,629 | 79.57% | ||||||||||||
|
No
rating provided
|
6,091 | 76.16% | 6,035 | 75.44% | ||||||||||||
|
Total
|
$ | 31,559 | 89.06% | $ | 31,401 | 88.77% | ||||||||||
|
S&P
ratings category:
|
||||||||||||||||
|
No
rating provided
|
$ | 31,559 | 89.06% | $ | 31,401 | 88.77% | ||||||||||
|
Total
|
$ | 31,559 | 89.06% | $ | 31,401 | 88.77% | ||||||||||
|
Weighted
average rating factor
|
4,144 | 4,028 | ||||||||||||||
Equipment Leases and
Notes. Investments in direct financing leases and notes, net
of unearned income, were as follows (in thousands):
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Direct
financing leases, net of unearned income
|
$ | 4,915 | $ | 1,397 | ||||
|
Operating
leases
|
384 | − | ||||||
|
Notes
receivable
|
5,676 | 670 | ||||||
|
Subtotal
|
10,975 | 2,067 | ||||||
|
Allowance
for lease losses
|
(650 | ) | (1,140 | ) | ||||
|
Total
|
$ | 10,325 | $ | 927 | ||||
Interest
Receivable. At March 31, 2010, we had interest receivable of
$5.4 million, which consisted of $5.4 million of interest on our securities,
loans and equipment leases and notes and $8,000 of interest earned on escrow and
sweep accounts At December 31, 2009, we had interest receivable of $5.8 million,
which consisted of $5.7 million of interest on our securities, loans and
equipment leases and notes and $9,000 of interest earned on escrow and sweep
accounts. The decrease in interest receivable resulted primarily from
a $500,000 decrease in interest on our commercial real estate portfolio which
was offset by an $119,000 increase in interest on our Apidos
portfolio.
Loans Receivable – Related
Party. At March 31, 2010, we had loans receivable that
consisted of two loans comprising $10.0 million outstanding. There
was no such receivable as of December 31, 2009.
Other Assets. Other
Assets at March 31, 2010 of $4.7 million consisted of $1.6 million of principal
paydown receivables on our bank loan and commercial real estate loan portfolios,
$1.4 million of loan origination costs associated with our commercial real
estate loan portfolio and trust preferred securities issuances, $1.2 million of
deferred tax assets, which is offset by a corresponding $1.2 million of
valuation allowance, $1.1 million of prepaid expenses, and $660,000 of other
receivables. Other assets at December 31, 2009 of $5.1 million consisted of $1.7
million of deferred tax assets, $1.6 million of loan origination costs
associated with our commercial real estate loan portfolio and trust preferred
securities issuances, $1.1 million of principal paydown receivables on our bank
loan and commercial real estate loan portfolios, $469,000 of prepaid expenses,
and $230,000 of other receivables. The decrease of $367,000 in other
assets was due to $1.2 million of valuation allowance on our deferred tax asset,
a decrease of $467,000 in deferred tax assets and a decrease of $181,000 in loan
origination costs. These decreases are partially offset by an increase of
$600,000 in prepaid assets, an increase of $476,000 in principal paydown
receivables, and an increase of $429,000 in other receivables.
Hedging
Instruments. Our hedges at March 31, 2010 and December 31,
2009 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. With interest rates at historically low levels and the
pending maturity of several agreements, we expect that the fair value of our
hedges will modestly improve during the remainder of 2010. We intend
to continue to seek such hedges for our floating rate debt in the
future. Our hedges at March 31, 2010 were as follows (in
thousands):
|
Benchmark
rate
|
Notional
value
|
Strike
rate
|
Effective
date
|
Maturity
date
|
Fair
value
|
|||||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
$ | 28,000 | 5.10% |
05/24/07
|
06/05/10
|
$ | (245 | ) | |||||||||
|
Interest
rate swap
|
1
month LIBOR
|
12,965 | 4.63% |
12/04/06
|
07/01/11
|
(656 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
12,150 | 5.44% |
06/08/07
|
03/25/12
|
(1,056 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
12,750 | 5.275 |
07/25/07
|
08/06/12
|
(1,191 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
34,464 | 4.13% |
01/10/08
|
05/25/16
|
(1,514 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
1,681 | 5.72% |
07/09/07
|
10/01/16
|
(155 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
1,880 | 5.68% |
07/13/07
|
03/12/17
|
(296 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
81,970 | 5.58% |
06/08/07
|
04/25/17
|
(7,358 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
1,726 | 5.65% |
06/28/07
|
07/15/17
|
(152 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
3,850 | 5.65% |
07/19/07
|
07/15/17
|
(338 | ) | |||||||||||
|
Interest
rate swap
|
1
month LIBOR
|
4,023 | 5.41% |
08/07/07
|
07/25/17
|
(316 | ) | |||||||||||
|
Total
|
$ | 195,459 | 5.16% | $ | (13,277 | ) | ||||||||||||
In addition, we also had an interest
rate cap agreement with a notional of $14.8 million outstanding as of March 31,
2010 which reduced our exposure to variability in future cash flows attributable
to LIBOR. The interest rate cap is a non-designated cash flow hedge
and as a result the change in fair value is recorded through the consolidated
statement of operations. The interest rate cap had an effective date
of January 8, 2009, has a maturity date of August 5, 2011 and has a cap rate of
2.00%. The interest rate cap had a fair value of $45,000 as of
December 31, 2009.
As of December 31, 2009, we had entered
into hedges with a notional amount of $217.9 million and maturities ranging from
February 2010 to July 2017. At December 31, 2009, the fair value on
our interest rate swap agreements was ($12.8) million.
Repurchase
Agreements. Historically, we have used repurchase agreements
to finance our commercial real estate loans and CMBS-private placement
portfolio. We discuss these repurchase agreements in “−Repurchase
Agreements,” below. When used, these agreements are secured by the
financed assets and bear interest rates that have historically moved in close
relationship to LIBOR. At March 31, 2010 and December 31, 2009, we
had established nine borrowing arrangements with various financial institutions
and for the three months ended March 31, 2010, we had not utilized any of these
arrangements. Because any repurchase transaction must be approved by
the lender, and as a result of current market conditions, we do not anticipate
using these facilities for the foreseeable future although, the facilities
remain available for use if market conditions improve.
Collateralized Debt
Obligations. As of March 31, 2010, we had executed and
retained equity in five CDO transactions as follows:
|
|
·
|
In
June 2007, we closed RREF CDO 2007-1, a $500.0 million CDO transaction
that provided financing for commercial real estate loans. The
investments held by RREF CDO 2007-1 collateralized $458.8 million of
senior notes issued by the CDO vehicle, of which RCC Real Estate, Inc., or
RCC Real Estate, a subsidiary of ours, purchased 100% of the class H
senior notes, class K senior notes, class L senior notes and class M
senior notes for $68.0 million at closing, $5.0 million of the Class J
senior notes purchased in February 2008 an additional $2.5 million of the
Class J senior notes in November 2009, and $11.9 million of the Class E
senior notes, $11.9 million of the Class F senior notes, $7.3 million of
the Class G senior notes in December 2009 and $250,000 of the Class J
senior notes in January 2010. In addition, RREF 2007-1 CDO
Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million
equity interest representing 100% of the outstanding preference
shares. At March 31, 2010, the notes issued to outside
investors, net of repurchased notes had a weighted average borrowing rate
of 0.80%.
|
|
|
·
|
In
May 2007, we closed Apidos Cinco CDO, a $350.0 million CDO transaction
that provided financing for bank loans. The investments held by
Apidos Cinco CDO collateralized $322.0 million of senior notes issued by
the CDO vehicle, of which RCC Commercial Inc., or RCC Commercial, a
subsidiary of ours, purchased a $28.0 million equity interest representing
100% of the outstanding preference shares. At March 31, 2010,
the notes issued to outside investors had a weighted average borrowing
rate of 0.76%.
|
|
|
·
|
In
August 2006, we closed RREF CDO 2006-1, a $345.0 million CDO transaction
that provided financing for commercial real estate loans. The
investments held by RREF CDO 2006-1 collateralized $308.7 million of
senior notes issued by the CDO vehicle, of which RCC Real Estate purchased
100% of the class J senior notes and class K senior notes for $43.1
million at closing and $7.5 million of the Class F senior notes in June
2009, $3.5 million of the Class E senior note, $4.0 million of the Class F
senior notes in September 2009 and $20.0 million of the Class A-1 senior
notes in February 2010. In addition, RREF 2006-1 CDO Investor,
LLC, a subsidiary of RCC Real Estate, purchased a $36.3 million equity
interest representing 100% of the outstanding preference
shares. At March 31, 2010, the notes issued to outside
investors, net of repurchased notes had a weighted average borrowing rate
of 1.17%.
|
|
|
·
|
In
May 2006, we closed Apidos CDO III, a $285.5 million CDO transaction that
provided financing for bank loans. The investments held by
Apidos CDO III collateralized $262.5 million of senior notes issued by the
CDO vehicle, of which RCC Commercial purchased $23.0 million equity
interest representing 100% of the outstanding preference
shares. At March 31, 2010, the notes issued to outside
investors had a weighted average borrowing rate of
0.71%.
|
|
|
·
|
In
August 2005, we closed Apidos CDO I, a $350.0 million CDO transaction that
provided financing for bank loans. The investments held by
Apidos CDO I collateralize $321.5 million of senior notes issued by the
CDO vehicle, of which RCC Commercial purchased $28.5 million equity
interest representing 100% of the outstanding preference
shares. At March 31, 2010, the notes issued to outside
investors had a weighted average borrowing rate of
0.83%.
|
Trust Preferred
Securities. In May and September 2006, we formed Resource
Capital Trust I and RCC Trust II, respectively, for the sole purpose of issuing
and selling trust preferred securities. Resource Capital Trust I and
RCC Trust II are not consolidated into our consolidated financial statements
because we are not deemed to be the primary beneficiary of either
trust. We own 100% of the common shares of each trust, each of which
issued $25.0 million of preferred shares to unaffiliated
investors. Our rights as the holder of the common shares of each
trust are subordinate to the rights of the holders of preferred shares only in
the event of a default; otherwise, our economic and voting rights are pari passu
with the preferred shareholders. We record each of our investments in
the trusts’ common shares of $774,000 as an investment in unconsolidated trusts
and record dividend income upon declaration by each trust. The junior
subordinated debentures debt issuance costs are deferred in other assets in the
consolidated balance sheets. We record interest expense on the junior
subordinated debentures and amortization of debt issuance costs in our
consolidated statements of operations.
In October 2009, we amended our
unsecured junior subordinated debentures held by RCT I and RCT II with a total
value outstanding of $51.5 million. The amendment provides for an
interest rate increase of 2% (from LIBOR plus 3.95% to LIBOR plus 5.95%) on both
issuances for a period of two years and a one-time restructuring fee of $250,000
in exchange for the waiver of financial covenants under our
guarantee. The covenant waiver expires on January 1,
2012. The debt issuance costs associated with the junior subordinated
debentures for RCT I and RCT II at March 31, 2010 were $57,000 and $37,000,
respectively. The interest rate adjustment took effect as of October
1, 2009 and expires on September 30, 2011. The rates for RCT I and
RCT II at March 31, 2010, were 6.24% and 6.20%, respectively. The
rates for RCT I and RCT II at December 31, 2009, were 6.18% and 6.19%,
respectively. The additional cost is approximately $280,000 per
quarter.
Stockholders’
Equity
Stockholders’ equity at March 31, 2010
was $239.6 million and included $46.9 million of net unrealized losses on our
available-for-sale portfolio, and $13.3 million of unrealized losses on cash
flow hedges, shown as a component of accumulated other comprehensive loss.
Stockholders’ equity at December 31, 2009 was $228.8 million and included $47.6
million of unrealized losses on our available-for-sale portfolio and $12.8
million of unrealized losses on cash flow hedges, shown as a component of
accumulated other comprehensive loss. The increase in stockholder’s equity
during the three months ended March 31, 2010 was principally due to the proceeds
received related to our DRIP.
Fluctuations in market values of assets
in our available-for-sale portfolio that have not been other-than-temporarily
impaired, do not impact our income determined in accordance with GAAP, or our
taxable income, but rather are reflected on our consolidated balance sheets by
changing the carrying value of the asset and stockholders’ equity under
‘‘Accumulated Other Comprehensive Loss.”
Estimated
REIT Taxable Income
We calculate estimated REIT taxable
income, which is a non-GAAP financial measure, according to the requirements of
the Internal Revenue Code. The following table reconciles net income
to estimated REIT taxable income for the periods presented (in thousands) (1):
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
income (loss) − GAAP
|
$ | 1,406 | $ | (12,152 | ) | |||
|
Taxable REIT subsidiary’s
loss
|
(125 | ) | − | |||||
|
Adjusted net income (loss)
|
1,281 | (12,152 | ) | |||||
|
Adjustments:
|
||||||||
|
Share-based compensation to
related parties
|
(316 | ) | 17 | |||||
|
Capital loss carryover
(utilization)/losses from the sale of securities
|
− | 5,620 | ||||||
|
Provisions for loan and lease
losses unrealized
|
15,500 | 4,978 | ||||||
|
Net book to tax adjustments for
the inclusion of our taxable foreign
REIT subsidiaries
|
(6,378 | ) | 7,590 | |||||
|
Subpart F income limitation
(2)
|
322 | − | ||||||
|
Other net book to tax
adjustments
|
(1,083 | ) | 45 | |||||
|
Estimated
REIT taxable income
|
$ | 9,326 | $ | 6,098 | ||||
|
Amounts
per share – diluted
|
$ | 0.24 | $ | 0.25 | ||||
|
(1)
|
RCC
believes that a presentation of estimated REIT taxable income provides
useful information to investors regarding its financial condition and
results of operations as this measurement is used to determine the amount
of dividends that RCC is required to declare to its stockholders in order
to maintain its status as a REIT for federal income tax
purposes. Since RCC, as a REIT, expects to make distributions
based on taxable income, RCC expects that its distributions may at times
be more or less than its reported GAAP net income. Total
taxable income is the aggregate amount of taxable income generated by RCC
and by its domestic and foreign taxable REIT
subsidiaries. Estimated REIT taxable income excludes the
undistributed taxable income (if any) of RCC’s domestic taxable REIT
subsidiary, which is not included in REIT taxable income until distributed
to RCC. There is no requirement that RCC’s domestic taxable
REIT subsidiary distribute its income to RCC. Estimated REIT
taxable income, however, includes the taxable income of RCC’s foreign
taxable REIT subsidiaries because RCC generally will be required to
recognize and report their taxable income on a current
basis. Because not all companies use identical calculations,
this presentation of estimated REIT taxable income may not be comparable
to other similarly-titled measures of other
companies.
|
|
(2)
|
U.S.
shareholders of controlled foreign corporations are required to include
their share of such corporations’ income on a current basis, however,
losses sustained by such corporations do not offset income of their U.S.
shareholders on a current
basis.
|
We
believe that a presentation of estimated REIT taxable income provides useful
information to investors regarding our financial condition and results of
operations as we use this measurement to determine the amount of tax
purposes. 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 GAAP earnings. Total taxable income is the
aggregate amount of taxable income generated by us and by our domestic and
foreign taxable REIT subsidiaries. Estimated REIT taxable income
excludes the undistributed taxable income of our domestic TRS, if any such
income exists, which is not included in REIT taxable income until distributed to
us. There is no requirement that our domestic TRS distribute its
earnings to us. Estimated REIT taxable income, however, includes the
taxable income of our foreign TRSs because we will generally be required to
recognize and report their taxable income on a current basis. Because
not all companies use identical calculations, this presentation of estimated
REIT taxable income may not be comparable to other similarly-titled measures of
other companies.
Liquidity
and Capital Resources
As of March 31, 2010, our principal
sources of current liquidity were $18.0 million of net proceeds from sales of
common stock through our DRIP, and funds available in existing CDO financings of
$78.2 million. As of December 31, 2009, our principal sources of
current liquidity were $43.4 million of net proceeds from our December 2009
offering and $8.9 million of net proceeds from sales of common stock through our
DRIP, and funds available in existing CDO financings of $80.5
million.
Our on-going liquidity needs consist
principally of funds to make investments, make debt repurchases, make
distributions to our stockholders and pay our operating expenses, including our
management fees. Our ability to meet our on-going liquidity needs will be
subject to our ability to generate cash from operations and, with respect to our
investments, our ability to maintain and/or obtain additional debt financing and
equity capital together with the sources of funds referred to
above. Historically, we have financed a substantial portion of our
portfolio investments through CDOs that essentially match the maturity and
repricing dates of these financing vehicles with the maturities and repricing
dates of our investments. We derive substantial operating cash from
our equity investments in our CDOs, which if they fail to meet certain tests,
will cease. Through March 31, 2010, we have not experienced
difficulty in maintaining our existing CDO financing and have passed all of the
critical tests required by these financings. However, we cannot
assure you that we will continue to meet all such critical tests in the future.
If we are unable to renew, replace or expand our sources of existing
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. Our restricted cash balance has both
operating and investing uses, for which operating cash is generated from
interest collections for payment of interest to note holders and other expenses
and investing is generated from principal repayments or paydowns for making
reinvestments in income generating activities.
At April 30, 2010, after paying the first quarter dividend, RCC’s liquidity of
$116.4 million consists of two primary sources:
|
|
·
|
unrestricted
cash and cash equivalents of $17.9 million and restricted cash of $3.5
million in margin call accounts;
and
|
|
|
·
|
capital
available for reinvestment in its five CDO entities of $95.0 million, of
which $1.7 million is designated to finance future funding commitments on
CRE loans.
|
Our leverage ratio may vary as a result
of the various funding strategies we use. As of March 31, 2010 and
December 31, 2009, our leverage ratio was 6.3 times and 6.7 times,
respectively. The decrease in leverage ratio was primarily due to the
DRIP proceeds received and the repurchase of our CDO debt, at substantial
discounts, during the three months ended March 31, 2010.
Distributions
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. On March 18, 2010, we declared a quarterly distribution of
$0.25 per share of common stock, $10.1 million in the aggregate, which was paid
on April 27, 2010 to stockholders of record on March 31, 2010.
Our 2010
dividends will be determined by our board of directors who will also consider
the composition of any common dividends declared, including the option of paying
a portion in cash and the balance in additional common shares. Generally,
dividends payable in stock are not treated as dividends for purposes of the
deduction for dividends, or as taxable dividends to the
recipient. The Internal Revenue Service, in Revenue Procedure
2009-15, has given guidance with respect to certain stock distributions by
publicly traded REITs. That Revenue Procedure applies to
distributions made on or after January 1, 2008 and declared with respect to a
taxable year ending on or before December 31, 2009. It provides that
publicly-traded REITs can distribute stock (common shares in our case) to
satisfy their REIT distribution requirements if stated conditions are
met. These conditions include that at least 10% of the aggregate
declared distributions be paid in cash and the shareholders be permitted to
elect whether to receive cash or stock, subject to the limit set by the REIT on
the cash to be distributed in the aggregate to all shareholders. We
did not use this Revenue Procedure with respect to any distributions for its
2008 and 2009 taxable years, but we are permitted to do so for distributions
with respect to 2010 and 2011.
Contractual
Obligations and Commitments
The table below summarizes our
contractual obligations as of March 31, 2010. The table below
excludes contractual commitments related to our derivatives, which we discuss in
our Annual Report on Form 10-K for fiscal 2009 in Item 7A − “Quantitative and
Qualitative Disclosures about Market Risk,” and in this report, in “Financial
Condition − Hedging Instruments,” because those obligations 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
|
||||||||||||||||
|
CDOs
|
$ | 1,465,782 | $ | − | $ | − | $ | − | $ | 1,465,782 | (1) | |||||||||
|
Unsecured
junior subordinated debentures
|
51,548 | − | − | − | 51,548 | (2) | ||||||||||||||
|
Base
management fees(3)
|
4,820 | 4,820 | − | − | − | |||||||||||||||
|
Total
|
$ | 1,522,150 | $ | 4,820 | $ | − | $ | − | $ | 1,517,330 | ||||||||||
|
(1)
|
Contractual
commitment does not include $1.4 million, $5.6 million, $4.6 million, $6.3
million and $15.0 million of interest expense payable through the non-call
dates of July 2010, May 2011, June 2011, August 2011 and June 2012,
respectively, on Apidos CDO I, Apidos Cinco CDO, Apidos CDO III, RREF
2006-1 and RREF 2007-1. The non-call date represents the
earliest period under which the CDO assets can be sold, resulting in
repayment of the CDO notes.
|
|
(2)
|
Contractual
commitment does not include $3.2 million and $4.5 million of interest
expense payable through the non-call dates of June 2011 and October 2011,
respectively, on our trust preferred
securities.
|
|
(3)
|
Calculated
only for the next 12 months based on our current equity, as defined in our
management agreement. Our
management agreement also provides for an incentive fee arrangement that
is based on operating performance. Because the incentive fee is
not a fixed and determinable amount, it is not included in this
table.
|
At March 31, 2010, we had 11 interest
rate swap contracts with a notional value of $195.5 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 March 31, 2010, the
average fixed pay rate of our interest rate hedges was 5.16% and our receive
rate was one-month LIBOR, or 0.23%. In addition, we also had an
interest rate cap agreement with a notional amount of $14.8 million outstanding
which reduced our exposure to variability in future cash flows attributable to
LIBOR. The interest rate cap is a non-designated cash flow hedge and,
as a result, the change in fair value is recorded through our consolidated
statements of operations.
Off-Balance
Sheet Arrangements
As of March 31, 2010, we did not
maintain any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance, special
purpose or variable interest entities, established for the purpose of
facilitating off-balance sheet arrangements or contractually narrow or limited
purposes. Further, as of March 31, 2010, we had not guaranteed any
obligations of unconsolidated entities or entered into any commitment or letter
of intent to provide additional funding to any such entities.
We have certain unfunded commitments
related to our commercial real estate loan portfolio that we may be required to
fund in the future. Our unfunded commitments generally fall into two
categories: (1) pre-approved capital improvement projects; and (2) new
or additional construction costs subject, in each case, to the borrower meeting
specified criteria. Upon completion of the improvements or
construction, we would receive additional loan interest income on the advanced
amount. As of March 31, 2010, we had four loans with unfunded
commitments totaling $5.6 million, of which $1.7 million will be
funded by restricted cash in RREF CDO 2007-1.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
As of March 31, 2010 and December 31,
2009, 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.
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
tables show, at March 31, 2010 and December 31, 2009, the estimated impact on
the fair value of our interest rate-sensitive investments and liabilities of
changes in interest rates, assuming rates instantaneously fall 100 basis points
and rise 100 basis points (dollars in thousands):
|
March
31, 2010
|
||||||||||||
|
Interest
rates fall 100
basis
points
|
Unchanged
|
Interest
rates rise 100
basis
points
|
||||||||||
|
CMBS
– private placement (1)
|
||||||||||||
|
Fair value
|
$ | 42,647 | $ | 40,773 | $ | 39,012 | ||||||
|
Change in fair value
|
$ | 1,847 | $ | − | $ | (1,761 | ) | |||||
|
Change as a percent of fair
value
|
4.60 | % | − | % | 4.32 | % | ||||||
|
Hedging
instruments
|
||||||||||||
|
Fair value
|
$ | (28,373 | ) | $ | (13,277 | ) | $ | (11,718 | ) | |||
|
Change in fair value
|
$ | (15,096 | ) | $ | − | $ | 1,559 | |||||
|
Change as a percent of fair
value
|
113.70 | % | − | % | 11.74 | % | ||||||
|
December
31, 2009
|
||||||||||||
|
Interest
rates fall 100
basis
points
|
Unchanged
|
Interest
rates rise 100
basis
points
|
||||||||||
|
CMBS
– private placement (1)
|
||||||||||||
|
Fair value
|
$ | 34,815 | $ | 33,333 | $ | 31,914 | ||||||
|
Change in fair value
|
$ | 1,482 | $ | − | $ | (1,419 | ) | |||||
|
Change as a percent of fair
value
|
4.45 | % | − | % | 4.26 | % | ||||||
|
Hedging
instruments
|
||||||||||||
|
Fair value
|
$ | (27,870 | ) | $ | (12,812 | ) | $ | (10,559 | ) | |||
|
Change in fair value
|
$ | (15,058 | ) | $ | − | $ | 2,253 | |||||
|
Change as a percent of fair
value
|
117.53 | % | − | % | 17.59 | % | ||||||
|
(1)
|
Includes
the fair value of available-for-sale investments that are sensitive to
interest rate change.
|
For purposes of the table, 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.
Effect
on Fair Value
A 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.
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 fixed-rate commercial real estate mortgages
and CMBS 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 CMBS 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 fixed-rate
commercial real estate mortgages and CMBS and our
borrowing.
|
|
CONTROLS
AND PROCEDURES
|
Disclosure Controls and
Procedures
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.
Changes in Internal Control
of Financial Reporting
There were no significant changes in
our internal control over financial reporting during the quarter ended March 31,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
|
|
(a)
|
In
accordance with the provisions of the management agreement, on January 31,
2010, we issued 73,815 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, 2009. The issuance of these shares was
exempt from the registration requirements of the Securities Act pursuant
to Section 4(2) thereof.
|
|
EXHIBITS
|
|
Exhibit No.
|
Description
|
|
|
3.1
|
Restated
Certificate of Incorporation of Resource Capital Corp. (1)
|
|
|
3.2
|
Amended
and Restated Bylaws of Resource Capital Corp. (1)
|
|
|
4.1
|
Form
of Certificate for Common Stock for Resource Capital Corp. (1)
|
|
|
4.2(a)
|
Junior
Subordinated Indenture between Resource Capital Corp. and Wells Fargo
Bank, N.A., dated May 25, 2006. (2)
|
|
|
4.2(b)
|
Amendment
to Junior Subordinated Indenture and Junior Subordinated Note due 2036
between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October
26, 2009 and effective September 30, 2009.
(11)
|
|
|
4.3(a)
|
Amended
and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
Trustees named therein, dated May 25, 2006. (2)
|
|
|
4.3(b)
|
Amendment
to Amended and Restated Trust Agreement and Preferred Securities
Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the
Administrative Trustees named therein, dated October 26, 2009 and
effective September 30, 2009.
(11)
|
|
|
4.4
|
Amended
Junior Subordinated Note due 2036 in the principal amount of $25,774,000,
dated October 26, 2009.
(11)
|
|
|
4.5(a)
|
Junior
Subordinated Indenture between Resource Capital Corp. and Wells Fargo
Bank, N.A., dated September 29, 2006. (3)
|
|
|
4.5(b)
|
Amendment
to Junior Subordinated Indenture and Junior Subordinated Note due 2036
between Resource Capital Corp. and Wells Fargo Bank, N.A., dated October
26, 2009 and effective September 30, 2009.
(11)
|
|
|
4.6(a)
|
Amended
and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
Trustees named therein, dated September 29, 2006. (3)
|
|
|
4.6(b)
|
Amendment
to Amended and Restated Trust Agreement and Preferred Securities
Certificate among Resource Capital Corp., Wells Fargo Bank, N.A. and the
Administrative Trustees named therein, dated October 26, 2009 and
effective September 30, 2009.
(11)
|
|
|
4.7
|
Amended
Junior Subordinated Note due 2036 in the principal amount of $25,774,000,
dated October 26, 2009.
(11)
|
|
|
10.1(a)
|
Master
Repurchase Agreement between RCC Real Estate SPE 3, LLC and Natixis Real
Estate Capital.
(4)
|
|
|
10.1(b)
|
First
Amendment to Master Repurchase Agreement between RCC Real Estate SPE 3,
LLC and Natixis Real Estate Capital, dated September 25, 2008. (5)
|
|
|
10.1(c)
|
Second
Amendment to Master Repurchase Agreement between RCC Real Estate SPE 3,
LLC and Natixis Real Estate Capital, dated November 25, 2008. (6)
|
|
|
10.1(d)
|
Letter
Agreement with respect to master Repurchase Agreement between Natixis Real
Estate Capital, Inc. and RCC Real Estate SPE 3, LLC, dated as of March 13,
2009. (7)
|
|
|
10.1(e)
|
Letter
Agreement with respect to Master Repurchase Agreement between Natixis Real
Estate Capital and RCC Real Estate SPE 3, LLC, dated June 29, 2009. (8)
|
|
|
10.2(a)
|
Guaranty
made by Resource Capital Corp. as guarantor, in favor Natixis Real Estate
Capital, Inc., dated April 20, 2007. (4)
|
|
|
10.2(b)
|
Second
Amendment to Guaranty made by Resource Capital Corp. as guarantor, in
favor of Natixis Real Estate Capital, Inc., dated September 25, 2008.
(5)
|
|
|
10.3(a)
|
Amended
and Restated Management Agreement between Resource Capital Corp., Resource
Capital Manager, Inc. and Resource America, Inc. dated as of June 30,
2008. (9)
|
|
|
10.3(b)
|
First
Amendment to Amended and Restated Management Agreement between Resource
Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc.
dated as of June 30, 2008. (10)
|
|
|
10.4
|
2005
Stock Incentive Plan. (1)
|
|
|
10.5
|
2007
Omnibus Equity Compensation Plan.
(12)
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(1)
|
Filed
previously as an exhibit to the Company’s registration statement on Form
S-11, Registration No. 333-126517.
|
|
(2)
|
Filed
previously as an exhibit to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30,
2006.
|
|
(3)
|
Filed
previously as an exhibit to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30,
2006.
|
|
(4)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on April 23, 2007.
|
|
(5)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on September 29, 2008.
|
|
(6)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on December 2, 2008.
|
|
(7)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on March 17, 2009.
|
|
(8)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on July 6, 2009.
|
|
(9)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on July 3, 2008.
|
|
(10)
|
Filed
previously as an exhibit to the Company’s Current Report on Form 8-K filed
on October 20, 2009.
|
|
(11)
|
Filed
previously as an exhibit to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30,
2009.
|
|
(12)
|
Filed
previously as an exhibit to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008.
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned duly authorized.
|
RESOURCE
CAPITAL CORP.
|
|
|
(Registrant)
|
|
|
Date:
May 6, 2010
|
By: /s/
Jonathan Z.
Cohen
|
|
Jonathan Z.
Cohen
|
|
|
Chief Executive Officer and
President
|
|
|
Date:
May 6, 2010
|
By: /s/ David
J.
Bryant
|
|
David J.
Bryant
|
|
|
Chief Financial Officer and
Chief Accounting Officer
|
|
50