ACRES COMMERCIAL REALTY CORP.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
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Maryland
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20-2287134
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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712 5
th
Avenue, 12
th
Floor
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New York, New York 10019
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(Address of principal executive offices) (Zip code)
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(212) 506-3870
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(Registrant's telephone number, including area code)
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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.
R
Yes
¨
No
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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R
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Non-accelerated filer
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¨
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(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
R
No
The number of outstanding shares of the registrant’s common stock on November 1, 2010 was 56,113,788 shares.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
ON FORM 10-Q
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PAGE
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PART I
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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3
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4
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5
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6
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8
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Item 2.
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33
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Item 3.
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52
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Item 4.
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53
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PART II
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OTHER INFORMATION
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Item 6.
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54
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55
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Item 1.
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Financial Statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
(in thousands, except share and per share data)
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September 30,
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December 31,
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|||||||
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2010
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2009
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(Unaudited)
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ASSETS
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Cash and cash equivalents
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$ | 38,344 | $ | 51,991 | ||||
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Restricted cash
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160,556 | 85,125 | ||||||
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Investment securities trading
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11,938 | − | ||||||
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Investment securities available-for-sale, pledged as collateral, at fair value
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56,816 | 39,304 | ||||||
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Investment securities available-for-sale, at fair value
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6,860 | 5,238 | ||||||
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Investment securities held-to-maturity, pledged as collateral
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31,486 | 31,401 | ||||||
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Property available-for-sale
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4,444 | − | ||||||
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Loans, pledged as collateral and net of allowances of $39.4 million and
$47.1 million
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1,482,673 | 1,558,687 | ||||||
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Loans held for sale
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2,824 | 8,050 | ||||||
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Lease receivables, pledged as collateral, net of allowances of $70,000 and
$1.1 million and net of unearned income
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115,404 | 927 | ||||||
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Loans receivable – related party
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9,992 | − | ||||||
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Investments in unconsolidated entities
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6,578 | 3,605 | ||||||
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Interest receivable
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5,522 | 5,754 | ||||||
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Other assets
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4,008 | 3,878 | ||||||
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Total assets
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$ | 1,937,445 | $ | 1,793,960 | ||||
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LIABILITIES
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Borrowings
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$ | 1,565,806 | $ | 1,536,500 | ||||
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Distribution payable
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13,682 | 9,170 | ||||||
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Accrued interest expense
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1,741 | 1,516 | ||||||
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Derivatives, at fair value
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16,022 | 12,767 | ||||||
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Accounts payable and other liabilities
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10,463 | 5,177 | ||||||
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Total liabilities
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1,607,714 | 1,565,130 | ||||||
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STOCKHOLDERS’ EQUITY
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Preferred stock, par value $0.001: 100,000,000 shares authorized; no shares
issued and outstanding
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− | − | ||||||
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Common stock, par value $0.001: 500,000,000 shares authorized;
54,653,638 and 36,545,737 shares issued and outstanding
(including 534,957 and 437,319 unvested restricted shares)
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55 | 36 | ||||||
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Additional paid-in capital
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504,209 | 405,517 | ||||||
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Accumulated other comprehensive loss
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(52,275 | ) | (62,154 | ) | ||||
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Distributions in excess of earnings
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(122,258 | ) | (114,569 | ) | ||||
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Total stockholders’ equity
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329,731 | 228,830 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$ | 1,937,445 | $ | 1,793,960 | ||||
The accompanying notes are an integral part of these statements
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
(in thousands, except share and per share data)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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|||||||||||||||
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2010
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2009
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2010
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2009
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REVENUES
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Interest income:
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Loans
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$ | 19,597 | $ | 20,207 | $ | 57,085 | $ | 64,333 | ||||||||
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Securities
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3,136 | 1,906 | 8,905 | 4,674 | ||||||||||||
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Leases
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4,614 | 11 | 6,777 | 4,337 | ||||||||||||
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Interest income − other
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1,902 | 377 | 2,651 | 1,053 | ||||||||||||
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Total interest income
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29,249 | 22,501 | 75,418 | 74,397 | ||||||||||||
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Interest expense
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10,089 | 9,203 | 26,955 | 35,828 | ||||||||||||
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Net interest income
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19,160 | 13,298 | 48,463 | 38,569 | ||||||||||||
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OPERATING EXPENSES
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Management fees − related party
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4,405 | 3,954 | 9,845 | 5,880 | ||||||||||||
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Equity compensation − related party
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544 | 721 | 1,463 | 1,074 | ||||||||||||
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Professional services
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491 | 739 | 2,186 | 2,792 | ||||||||||||
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Insurance
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184 | 220 | 576 | 609 | ||||||||||||
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Depreciation on operating leases
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1,658 | − | 2,343 | − | ||||||||||||
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General and administrative
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721 | 410 | 2,232 | 1,277 | ||||||||||||
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Income tax expense (benefit)
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4,068 | 6 | 5,305 | (16 | ) | |||||||||||
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Total expenses
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12,071 | 6,050 | 23,950 | 11,616 | ||||||||||||
| 7,089 | 7,248 | 24,513 | 26,953 | |||||||||||||
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OTHER REVENUE (EXPENSE)
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Impairment losses on investment securities
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(7,528 | ) | (3,019 | ) | (11,174 | ) | (19,372 | ) | ||||||||
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Recognized in other comprehensive loss
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(3,072 | ) | (2,124 | ) | (660 | ) | (12,812 | ) | ||||||||
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Net impairment losses recognized in earnings
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(4,456 | ) | (895 | ) | (10,514 | ) | (6,560 | ) | ||||||||
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Net realized gain on investment securities
available-for-sale and loans
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1,171 | 162 | 1,507 | 864 | ||||||||||||
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Net realized gain on investments securities
trading
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2,008 | − | 4,536 | − | ||||||||||||
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Net unrealized gain on investment securities
trading
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5,207 | − | 5,207 | − | ||||||||||||
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Provision for loan and lease losses
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(3,095 | ) | (6,311 | ) | (26,363 | ) | (45,274 | ) | ||||||||
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Gain on the extinguishment of debt
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6,250 | 12,741 | 29,285 | 19,641 | ||||||||||||
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Other (expense) income
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(121 | ) | (1,417 | ) | 650 | (1,375 | ) | |||||||||
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Total other revenue (expense)
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6,964 | 4,280 | 4,308 | (32,704 | ) | |||||||||||
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NET INCOME (LOSS)
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$ | 14,053 | $ | 11,528 | $ | 28,821 | $ | (5,751 | ) | |||||||
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NET INCOME (LOSS) PER SHARE –
BASIC
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$ | 0.27 | $ | 0.48 | $ | 0.64 | $ | (0.24 | ) | |||||||
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NET INCOME (LOSS) PER SHARE –
DILUTED
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$ | 0.27 | $ | 0.47 | $ | 0.64 | $ | (0.24 | ) | |||||||
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING – BASIC
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52,273,307 | 24,112,240 | 44,947,256 | 24,321,007 | ||||||||||||
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING – DILUTED
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52,578,884 | 24,376,681 | 45,203,521 | 24,321,007 | ||||||||||||
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DIVIDENDS DECLARED PER SHARE
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$ | 0.25 | $ | 0.30 | $ | 0.75 | $ | 0.90 | ||||||||
The accompanying notes are an integral part of these statements
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 2010
(in thousands, except share data)
(Unaudited)
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Common Stock
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Shares
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Amount
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Additional Paid-In Capital
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Accumulated Other Comprehensive Loss
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Retained Earnings
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Distributions in Excess of Earnings
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Total Stockholders’ Equity
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Comprehensive Income
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Balance, January 1, 2010
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36,545,737 | $ | 36 | $ | 405,517 | $ | (62,154 | ) | $ | − | $ | (114,569 | ) | $ | 228,830 | |||||||||||||||||
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Proceeds from dividend
reinvestment and stock
purchase plan
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8,946,659 | 9 | 53,631 | − | − | − | 53,640 | |||||||||||||||||||||||||
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Proceeds from common stock
offerings
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8,625,000 | 9 | 45,273 | − | − | − | 45,282 | |||||||||||||||||||||||||
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Offering costs
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− | − | (2,772 | ) | − | − | − | (2,772 | ) | |||||||||||||||||||||||
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Stock based compensation
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536,242 | 1 | 1,097 | − | − | − | 1,098 | |||||||||||||||||||||||||
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Amortization of stock
based compensation
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− | − | 1,463 | − | − | − | 1,463 | |||||||||||||||||||||||||
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Net income
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− | − | − | − | 28,821 | − | 28,821 | $ | 28,821 | |||||||||||||||||||||||
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Securities available-for-sale,
fair value adjustment, net
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− | − | − | 12,760 | − | − | 12,760 | 12,760 | ||||||||||||||||||||||||
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Designated derivatives, fair
value adjustment
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− | − | − | (2,881 | ) | − | − | (2,881 | ) | (2,881 | ) | |||||||||||||||||||||
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Distributions on common
stock
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− | − | − | − | (28,821 | ) | (7,689 | ) | (36,510 | ) | ||||||||||||||||||||||
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Comprehensive income
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− | − | − | − | − | − | − | $ | 38,700 | |||||||||||||||||||||||
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Balance, September 30, 2010
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54,653,638 | $ | 55 | $ | 504,209 | $ | (52,275 | ) | $ | − | $ | (122,258 | ) | $ | 329,731 | |||||||||||||||||
The accompanying notes are an integral part of this statement
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
(in thousands)
(Unaudited)
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Nine Months Ended
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September 30,
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2010
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2009
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$ | 28,821 | $ | (5,751 | ) | |||
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
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Provision for loan and lease losses
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26,363 | 32,605 | ||||||
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Depreciation and amortization of term facilities
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646 | 1,172 | ||||||
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Depreciation on operating leases
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2,343 | − | ||||||
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Accretion of net discount on investments
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(13,258 | ) | (4,589 | ) | ||||
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Amortization of discount on notes of CDOs
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1,158 | 160 | ||||||
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Amortization of debt issuance costs on notes of CDOs
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3,298 | 2,787 | ||||||
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Amortization of stock based compensation
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1,463 | 1,074 | ||||||
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Amortization of terminated derivative instruments
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329 | 367 | ||||||
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Non-cash incentive compensation to the Manager
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1,231 | 768 | ||||||
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Purchase of securities trading
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(13,548 | ) | − | |||||
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Proceeds from sale of securities trading
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11,346 | − | ||||||
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Unrealized losses on non-designated derivative instruments
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46 | 70 | ||||||
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Net realized (gains) losses on investments
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(6,043 | ) | 11,805 | |||||
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Net impairment losses recognized in earnings
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10,514 | 6,560 | ||||||
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Gain on the extinguishment of debt
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(29,285 | ) | (19,641 | ) | ||||
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Net unrealized gain on investment securities trading
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(5,207 | ) | − | |||||
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Changes in operating assets and liabilities
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5,841 | 12,343 | ||||||
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Net cash provided by operating activities
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26,058 | 39,730 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Increase in restricted cash
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(71,663 | ) | (16,487 | ) | ||||
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Purchase of securities available-for-sale
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(19,642 | ) | (20,135 | ) | ||||
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Principal payments on securities available-for-sale
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1,239 | 1 | ||||||
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Proceeds from sale of securities available-for-sale
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6,111 | − | ||||||
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Investment in unconsolidated entity
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(2,973 | ) | − | |||||
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Equity contribution to VIE
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(7,333 | ) | − | |||||
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Purchase of loans
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(217,691 | ) | (139,095 | ) | ||||
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Principal payments received on loans
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202,480 | 95,346 | ||||||
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Proceeds from sales of loans
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83,487 | 83,623 | ||||||
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Purchase of lease receivables
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(25,883 | ) | − | |||||
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Payments received on lease receivables
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8,005 | 8,629 | ||||||
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Proceeds from sale of lease receivables
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1,232 | 9,670 | ||||||
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Investment in loans – related parties
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(10,000 | ) | − | |||||
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Payments received on loans – related parties
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8 | − | ||||||
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Net cash (used in) provided by investing activities
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(52,623 | ) | 21,552 | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Net proceeds from issuance of common stock (net of offering costs of
$2,772 and $0)
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42,510 | 2,866 | ||||||
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Net proceeds of dividend reinvestment and stock purchase plan
(net of offering costs of $0 and $0)
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53,640 | − | ||||||
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Repurchase of common stock
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− | (5,039 | ) | |||||
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Proceeds from borrowings:
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Repurchase agreements
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− | 18 | ||||||
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Secured term facility
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6,500 | − | ||||||
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Payments on borrowings:
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Repurchase agreements
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− | (17,054 | ) | |||||
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Secured term facility
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(369 | ) | (13,395 | ) | ||||
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Equipment-backed securitized notes
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(9,798 | ) | − | |||||
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Repurchase of issued bonds
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(47,065 | ) | (2,379 | ) | ||||
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Payment of debt issuance costs
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(502 | ) | − | |||||
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Distributions paid on common stock
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(31,998 | ) | (25,054 | ) | ||||
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Net cash provided by (used in) financing activities
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12,918 | (60,037 | ) | |||||
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Nine Months Ended
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September 30,
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||||||||
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2010
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2009
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
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(13,647 | ) | 1,245 | |||||
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
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51,991 | 14,583 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
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$ | 38,344 | $ | 15,828 | ||||
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NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Distributions on common stock declared but not paid
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$ | 13,682 | $ | 7,509 | ||||
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Issuance of restricted stock
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$ | 338 | $ | 242 | ||||
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Transfer of lease receivables
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$ | − | $ | 89,763 | ||||
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Transfer of secured term facility
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$ | − | $ | 82,319 | ||||
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Assumption of equipment-backed securitized notes
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$ | 112,223 | $ | − | ||||
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Acquisition of lease receivables
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$ | (100,305 | ) | $ | − | |||
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Settlement of a secured term facility
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$ | (6,131 | ) | $ | − | |||
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Settlement of debt issuance costs
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$ | (1,012 | ) | $ | − | |||
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Property received on foreclosure of a real estate loan
:
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Loans, pledged as collateral
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$ | (4,444 | ) | $ | − | |||
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Property available-for-sale
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$ | 4,444 | $ | − | ||||
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SUPPLEMENTAL DISCLOSURE:
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Interest expense paid in cash
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$ | 27,985 | $ | 38,751 | ||||
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Income taxes paid in cash
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$ | − | $ | − | ||||
The accompanying notes are an integral part of these statements
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
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:
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·
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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”):
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-
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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.
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-
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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,
commercial mortgage-backed securities and property available-for-sale
.
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·
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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:
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-
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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.
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-
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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.
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-
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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.
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·
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Resource TRS, Inc. (“Resource TRS”), the Company’s directly-owned TRS, holds all the Company’s lease receivables and structured notes and owns 100% of the equity of the following VIE:
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-
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LEAF Receivables Funding 3, LLC, (“LEAF Funding 3”) was established to complete a securitization of lease receivables.
|
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 and nine months ended September 30, 2010 may not necessarily be indicative of the results of operations for the full fiscal year ending December 31, 2010.
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 each of the trusts. The Company does not have the power to direct the activities of either trust, nor does it have the obligation to absorb losses or recognize the benefits that could potentially be significant to 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 and nine months ended September 30, 2010, the Company recognized $923,000 and $2.7 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $76,000 and $225,000, respectively, of amortization of deferred debt issuance costs. For the three and nine months ended September 30, 2009, the Company recognized $643,000 and $2.1 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $39,000 and $115,000, respectively, of amortization of deferred debt issuance costs. The Company will do a continuous reassessment as to whether it should be deemed to be the primary beneficiary of the trusts.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
All inter-company transactions and balances have been eliminated.
Investment Securities
The Company classifies its investment portfolio as trading investments, available-for-sale or held-to-maturity. The Company, from time to time, may 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. To determine fair value, the Company uses two methods, either a dealer quote or an internal valuation model, depending upon when the position was purchased.
For securities purchased in 2009 and thereafter, the Company obtains a quote from a dealer, which typically will be the dealer who sold the Company the security. The Company has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models. These quotes are non-binding. As a result of how the dealers develop their quotes, the market illiquidity and low levels of trading activity
as of December 31, 2009, the Company categorized all of these investment securities available-for-sale in Level III in the fair value hierarchy. Due to the increased level of trading activity in 2010, the Company moved some of these securities into Level II in the fair value hierarchy. The Company evaluates the reasonableness of the quotes it receives by applying its own valuation models. If there is a material difference between a quote the Company receives and the value indicated by its valuation models, the Company will evaluate the difference. As part of that evaluation, the Company will discuss the difference with the dealer, who may revise their quote based upon these discussions. Alternatively, the Company may revise its valuation models.
For investment securities available-for-sale purchased prior to 2009, the Company determines fair value based on taking a weighted average of the following three measures:
|
|
·
|
dealer quotes, as described above;
|
|
|
·
|
quotes on more actively-traded, higher-rated securities issued in a similar time period, adjusted for differences in rating and seniority; and
|
|
|
·
|
the value resulting from an internal valuation model using an income approach based upon an appropriate risk-adjusted yield, time value and projected losses using default assumptions based upon an historical analysis of underlying loan performance.
|
On a quarterly basis, the Company evaluates its available-for-sale investments for other-than-temporary impairment. An available-for-sale 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. Realized gains and losses on investment securities are determined on the specific identification method.
The Company’s investment securities trading are reported at fair value. To determine fair value, the Company uses 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 as well as quotes on similar securities. Any changes in fair value are recorded on the Company’s results of operations as net unrealized gain on investment securities trading.
Allowance for Loan and Lease Losses
The Company maintains an allowance for loan and lease losses. Loans held for investment are first individually evaluated for impairment so specific reserves can be applied. Loans for which a specific reserve is 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.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
Allowance for Loan and Lease Losses – (Continued)
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 Company evaluates the adequacy of the allowance for credit losses on lease receivables based upon, among other factors, management’s historical experience with the lease receivables 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. The allowance for losses is based upon its previous loss history, economic conditions and trends. The Company’s policy is to charge-off to the allowance those financings for which management believes the collectability is unlikely.
The balance of impaired loans and leases was $123.7 million and $100.1 million at September 30, 2010 and December 31, 2009, respectively. The total balance of impaired loans and leases with a specific valuation allowance at September 30, 2010 and December 31, 2009 was $55.2 million and $82.2 million, respectively. The total balance of impaired loans and leases without a specific valuation allowance was $68.5 million and $17.9 million at September 30, 2010 and December 31, 2009, respectively. The specific valuation allowance related to these impaired loans and leases was $27.4 million and $31.0 million at September 30, 2010 and December 31, 2009, respectively. The Company did not recognize any income on impaired loans and leases during the nine months ended September 30, 2010 and the year ended December 31, 2009 once each individual loan or lease became impaired unless cash was received.
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 is 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 that 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 July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that will require companies to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. The guidance is effective for the Company as of December 15, 2010. The Company does not anticipate that adoption will have a significant effect on its consolidated financial statements.
In February 2010, the FASB issued guidance which removes the requirement that a person subject to the reporting requirements of the Securities Exchange Act of 1934 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 accounting principles generally accepted in the United States (“GAAP”). This guidance was effective upon issuance.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
Recent Accounting Pronouncements – (Continued)
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 was 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. Adoption will require additional disclosure to delineate such categories in the notes to the Company’s consolidated financial statements (see Note 14).
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. Adoption of this accounting guidance did not have an impact on the Company’s 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 was effective for interim and annual periods beginning after November 15, 2009. The Company evaluated the potential impact of adopting this statement and concluded that it will continue to consolidate the VIEs that it has 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 of this statement did not have a material impact on the Company’s consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2009 consolidated financial statements to conform to the 2010 presentation.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
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)
|
|||||||||||||
|
September 30, 2010
:
|
||||||||||||||||
|
Commercial mortgage-backed securities
|
$ | 98,508 | $ | 8,135 | $ | (42,991 | ) | $ | 63,652 | |||||||
|
Other asset-backed
|
− | 24 | − | 24 | ||||||||||||
|
Total
|
$ | 98,508 | $ | 8,159 | $ | (42,991 | ) | $ | 63,676 | |||||||
|
December 31, 2009
:
|
||||||||||||||||
|
Commercial mortgage-backed securities
|
$ | 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 September 30, 2010 and December 31, 2009, $56.8 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
|
|||||||||
|
September 30, 2010
:
|
||||||||||||
|
Less than one year
|
$ | 2,887 | (1) | $ | 6,912 | 1.51% | ||||||
|
Greater than one year and less than five years
|
10,112 | 28,112 | 2.28% | |||||||||
|
Greater than five years
|
50,677 | 63,484 | 5.69% | |||||||||
|
Total
|
$ | 63,676 | $ | 98,508 | 4.43% | |||||||
|
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 $2.9 million of commercial mortgage-backed securities, or CMBS, maturing in these categories are collateralized by floating-rate loans and are expected to extend until at least November 2011 as the debtors in the floating-rate structures have a contractual right to extend with options ranging from two one-year options to three one-year options. Beyond the contractual extensions, the servicer may allow further extensions of the underlying floating rate loans.
|
The contractual maturities of the investment securities available-for-sale range from November 2011 to February 2019.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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
|
|||||||||||||||||||
|
September 30, 2010
:
|
||||||||||||||||||||||||
|
Commercial mortgage-
backed securities
|
$ | 15,865 | $ | (5,393 | ) | $ | 7,513 | $ | (37,598 | ) | $ | 23,378 | $ | (42,991 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 15,865 | $ | (5,393 | ) | $ | 7,513 | $ | (37,598 | ) | $ | 23,378 | $ | (42,991 | ) | |||||||||
|
December 31, 2009
:
|
||||||||||||||||||||||||
|
Commercial mortgage-
backed securities
|
$ | 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 eight and 13 investment securities available-for-sale that have been in a loss position for more than 12 months as of September 30, 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 and makes other-than-temporary impairment determinations 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
|
|
|
·
|
whether, based upon the Company’s intent, it is more likely than not that the Company will sell the security before the recovery of the amortized cost basis.
|
At September 30, 2010 and December 31, 2009, the Company held $63.7 million and $44.5 million, respectively, (net of unrealized losses of $34.9 million and $47.6 million, respectively) of CMBS recorded at fair value. To determine fair value, the Company uses two methods, either a dealer quote or an internal valuation model, depending upon when the position was purchased. As of September 30, 2010 and December 31, 2009, $52.8 million and $29.7 million, respectively, of investment securities available for sale were valued using dealer quotes and $10.9 million and $14.8 million, respectively, were valued using the weighted average of the three measures discussed below.
For securities purchased in 2009 and thereafter, the Company obtains a quote from a dealer, which typically will be the dealer who sold the Company the security. The Company has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models. These quotes are non-binding. As a result of how the dealers develop their quotes, the market illiquidity and low levels of trading activity
as of December 31, 2009, the Company categorized all of these investment securities available-for-sale in Level III in the fair value hierarchy. Due to the increased level of trading activity in 2010, the Company moved some of these securities into Level II in the fair value hierarchy. The Company evaluates the reasonableness of the quotes it receives by applying its own valuation models. If there is a material difference between a quote the Company receives and the value indicated by its valuation models, the Company will evaluate the difference. As part of that evaluation, the Company will discuss the difference with the dealer, who may revise their quote based upon these discussions. Alternatively, the Company may revise its valuation models.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
For investment securities available-for-sale purchased prior to 2009, the Company determines fair value based on taking a weighted average of the following three measures:
|
|
·
|
dealer quotes, as described above;
|
|
|
·
|
quotes on more actively-traded, higher-rated securities issued in a similar time period, adjusted for differences in rating and seniority; and
|
|
|
·
|
the value resulting from an internal valuation model using an income approach based upon an appropriate risk-adjusted yield, time value and projected losses using default assumptions based upon an historical analysis of underlying loan performance.
|
During the three and nine months ended September 30, 2010, the Company recognized $4.5 million and $10.5 million of other-than-temporary impairment on one and three positions, respectively, that supported the Company’s CMBS investments bringing the combined fair value of these positions to $470,000. The assumed default of the underlying collateral positions in the Company’s cash flow model yielded a value that would result in less than a full recovery of the Company’s cost basis. During the three and nine months ended September 30, 2009, the Company recognized $45,000 and $5.7 million, respectively, of other-than-temporary impairment on one Other ABS position bringing the combined fair value to $0. The assumed default of this collateral position in the Company’s cash flow model yielded a value of less than full recovery of the Company’s cost basis. The net impairment losses were recognized in earnings in the consolidated statements of operations. All of the Company’s other-than-temporary impairment losses are related to credit losses. While the Company’s remaining securities classified as available-for-sale have continued to decline in fair value on a net basis, the Company concluded that 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. 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 September 30, 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. At September 30, 2010, the aggregate discount exceeded the aggregate premium on the Company’s MBS by approximately $30.1 million. At December 31, 2009, the aggregate discount exceeded the aggregate premium on the Company’s MBS by approximately $29.1 million.
The following table summarizes the Company's structured notes, including those classified as investment securities trading, which are carried at fair value (in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
September 30, 2010
:
|
||||||||||||||||
|
Structured notes
|
$ | 6,731 | $ | 5,207 | $ | − | $ | 11,938 | ||||||||
|
Total
|
$ | 6,731 | $ | 5,207 | $ | − | $ | 11,938 | ||||||||
The Company purchased 10 and 18 securities and sold six and nine securities during the three and nine months ended September 30, 2010, respectively, for a gain of $2.0 million and $4.5 million, respectively. The Company holds 10 investment securities trading as of September 30, 2010. The Company did not hold any such investment at December 31, 2009.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
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
|
|||||||||||||
|
September 30, 2010
:
|
||||||||||||||||
|
Collateralized loan obligation securities
|
$ | 31,486 | $ | 315 | $ | (8,208 | ) | $ | 23,593 | |||||||
|
Total
|
$ | 31,486 | $ | 315 | $ | (8,208 | ) | $ | 23,593 | |||||||
|
December 31, 2009
:
|
||||||||||||||||
|
Collateralized loan obligation securities
|
$ | 31,401 | $ | 267 | $ | (10,348 | ) | $ | 21,320 | |||||||
|
Total
|
$ | 31,401 | $ | 267 | $ | (10,348 | ) | $ | 21,320 | |||||||
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
|
|||||||||
|
September 30, 2010
:
|
||||||||||||
|
Greater than five years and less than ten years
|
$ | 16,917 | $ | 19,793 | 3.23% | |||||||
|
Ten years or greater
|
6,676 | 11,693 | 4.26% | |||||||||
|
Total
|
$ | 23,593 | $ | 31,486 | ||||||||
|
December 31, 2009
:
|
||||||||||||
|
Greater than five years and less than ten years
|
$ | 15,628 | $ | 19,667 | 3.06% | |||||||
|
Ten years or greater
|
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
|
|||||||||||||||||||
|
September 30, 2010
:
|
||||||||||||||||||||||||
|
Collateralized loan
obligations
|
$ | 2,588 | $ | (72 | ) | $ | 13,124 | $ | (8,136 | ) | $ | 15,712 | $ | (8,208 | ) | |||||||||
|
Total temporarily
impaired securities
|
$ | 2,588 | $ | (72 | ) | $ | 13,124 | $ | (8,136 | ) | $ | 15,712 | $ | (8,208 | ) | |||||||||
|
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 as of September 30, 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 Company does not believe that any of its investments classified as held-to-maturity were other-than-temporarily impaired as of September 30, 2010.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
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 and makes other-than-temporary impairment determinations at least quarterly. The Company considers the following factors when determining if there is an other-than-temporary impairment on a security:
|
|
·
|
the severity of the impairment;
|
|
|
·
|
the expected loss of the security as generated by third party software;
|
|
|
·
|
original and current credit ratings from the rating agencies;
|
|
|
·
|
underlying credit fundamentals of the collateral backing the securities; and
|
|
|
·
|
third-party support for default, recovery, prepayment speed and reinvestment price assumptions
|
The following is a summary of the Company’s loans (in thousands):
|
Loan Description
|
Principal
|
Unamortized
(Discount) Premium
|
Carrying
Value
(1)
|
|||||||||
|
September 30, 2010
:
|
||||||||||||
|
Bank loans
(2)
|
$ | 910,413 | $ | (28,536 | ) | $ | 881,877 | |||||
|
Commercial real estate loans:
|
||||||||||||
|
Whole loans
|
422,942 | (42 | ) | 422,900 | ||||||||
|
B notes
|
57,645 | (142 | ) | 57,503 | ||||||||
|
Mezzanine loans
|
162,513 | 148 | 162,661 | |||||||||
|
Total commercial real estate loans
|
643,100 | (36 | ) | 643,064 | ||||||||
|
Subtotal loans before allowances
|
1,553,513 | (28,572 | ) | 1,524,941 | ||||||||
|
Allowance for loan loss
|
(39,444 | ) | − | (39,444 | ) | |||||||
|
Total
|
$ | 1,514,069 | $ | (28,572 | ) | $ | 1,485,497 | |||||
|
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 September 30, 2010 and December 31, 2009, respectively.
|
|
(2)
|
Amounts include $2.8 million and $8.1 million of bank loans held for sale as of September 30, 2010 and December 31, 2009, respectively.
|
At September 30, 2010, the Company’s bank loan portfolio consisted of $871.6 million (net of allowance of $10.3 million) of floating rate loans, which bear interest ranging between the London Interbank Offered Rate (“LIBOR”) plus 0.50% and LIBOR plus 10.50% with maturity dates ranging from March 2011 to December 2017.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 6 – LOANS HELD FOR INVESTMENT – (Continued)
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 bore interest ranging between the LIBOR plus 0.50% and LIBOR plus 18.25% with maturity dates ranging from June 2011 to August 2022.
The following is a summary of the Company’s bank loans’ weighted average life, at amortized cost (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Less than one year
|
$ | 6,253 | $ | 1,148 | ||||
|
One year and less than five years
|
744,835 | 801,424 | ||||||
|
Five years or greater
|
130,789 | 62,929 | ||||||
| $ | 881,877 | $ | 865,501 | |||||
The following is a summary of the Company’s commercial real estate loans (in thousands):
|
Description
|
Quantity
|
Amortized
Cost
|
Contracted
Interest Rates
|
Maturity Dates
(4)
|
|||||||
|
September 30, 2010
:
|
|||||||||||
|
Whole loans, floating rate
(1)
|
36 | $ | 422,900 |
LIBOR plus 1.50% to
LIBOR plus 4.50%
|
November 2010 to
May 2017
|
||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR plus 2.50% to
LIBOR plus 3.01%
|
July 2011 to
October 2011
|
|||||||
|
B notes, fixed rate
|
2 | 31,003 |
7.00% to 8.68%
|
July 2011 to
April 2016
|
|||||||
|
Mezzanine loans, floating rate
|
9 | 104,048 |
LIBOR plus 2.15% to
LIBOR plus 3.00%
|
October 2010 to
January 2013
|
|||||||
|
Mezzanine loans, fixed rate
(3)
|
5 | 58,613 |
8.14% to 11.00%
|
January 2016 to
September 2016
|
|||||||
|
Total
(2)
|
55 | $ | 643,064 | ||||||||
|
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 $5.8 million in unfunded loan commitments as of September 30, 2010 and $5.6 million as of 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 $29.1 million and $29.3 million recorded as of September 30, 2010 and December 31, 2009, respectively.
|
|
(3)
|
Fixed rate mezzanine loan dates exclude a loan that matured in May 2010 and is in default.
|
|
(4)
|
Maturity dates do not include possible extension options that may be available to the borrowers.
|
The above includes three and one commercial real estate loans on non-accrual status as of September 30, 2010 and December 31, 2009, respectively.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 6 – LOANS HELD FOR INVESTMENT – (Continued)
During the three months ended September 30, 2010, the Company accepted a bankruptcy court-approved settlement on a portfolio of condominiums that had been in default since July 2009 and after receiving a settlement pay-down of $2.3 million that brought the loan balance to $5.0 million. After a review of the projected sale proceeds, the Company determined a provision of $648,000 was needed and upon foreclosure, the Company classified the property as property available-for-sale with a fair value of $4.4 million at September 30, 2010.
The following is a summary of the Company’s commercial real estate loans’ weighted average life, at amortized cost (in thousands):
|
Description
|
2010
|
2011
|
2012 and
Thereafter
|
|||||||||
|
September 30, 2010
:
|
||||||||||||
|
B notes
|
$ | − | $ | 14,439 | $ | 43,063 | ||||||
|
Mezzanine loans
(1)
|
10,517 | − | 147,144 | |||||||||
|
Whole loans
|
1,669 | 114,820 | 306,412 | |||||||||
|
Total
(2)
|
$ | 12,186 | $ | 129,259 | $ | 496,619 | ||||||
|
(1)
|
Mezzanine loans exclude one loan with an amortized cost of $5.0 million which matured in May 2010 and is in default.
|
|
(2)
|
Weighted average life of commercial real estate loans assumes full exercise of extension options available to borrower.
|
The following table shows the changes in the allowance for loan loss (in thousands):
|
Commercial
Real Estate
Loans
|
Bank Loans
|
Total
|
||||||||||
|
Allowance for loan loss at January 1, 2009
|
$ | 15,109 | $ | 28,758 | $ | 43,867 | ||||||
|
Provision for loan loss
|
31,856 | 26,855 | 58,711 | |||||||||
|
Loans charged-off
|
(17,668 | ) | (37,788 | ) | (55,456 | ) | ||||||
|
Recoveries
|
− | − | − | |||||||||
|
Allowance for loan loss at December 31, 2009
|
29,297 | 17,825 | 47,122 | |||||||||
|
Provision for loan loss
|
27,294 | (1,182 | ) | 26,112 | ||||||||
|
Loans charged-off
|
(27,416 | ) | (6,374 | ) | (33,790 | ) | ||||||
|
Recoveries
|
− | − | − | |||||||||
|
Allowance for loan loss at September 30, 2010
|
$ | 29,175 | $ | 10,269 | $ | 39,444 | ||||||
|
Net charge-off ratio at December 31, 2009
|
2.25% | 4.00% | 3.21% | |||||||||
|
Net charge-off ratio at September 30, 2010
|
3.89% | 0.70% | 2.09% | |||||||||
The following is a summary of the Company’s commercial real estate and bank loans’ allowance for loan loss (in thousands, except percentages) by asset class:
|
Description
|
Allowance for
Loan Loss
|
Percentage of
Total Allowance
|
||||||
|
September 30, 2010
:
|
||||||||
|
B notes
|
$ | 684 | 1.7% | |||||
|
Mezzanine loans
|
8,646 | 21.9% | ||||||
|
Whole loans
|
19,845 | 50.3% | ||||||
|
Bank loans
|
10,269 | 26.1% | ||||||
|
Total
|
$ | 39,444 | ||||||
|
December 31, 2009:
|
||||||||
|
B notes
|
$ | 666 | 1.4% | |||||
|
Mezzanine loans
|
6,453 | 13.7% | ||||||
|
Whole loans
|
22,177 | 47.1% | ||||||
|
Bank loans
|
17,825 | 37.8% | ||||||
|
Total
|
$ | 47,121 | ||||||
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
As of September 30, 2010, the Company had recorded an allowance for loan losses of $39.4 million consisting of a $10.3 million allowance on the Company’s bank loan portfolio and a $29.1 million allowance on the Company’s commercial real estate portfolio as a result of the Company deeming six bank loans and eight commercial real estate loans impaired as well as the maintenance of a general reserve on these portfolios.
As of December 31, 2009, the Company had recorded an allowance for loan losses 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 deeming seven bank loans and three commercial real estate loans impaired as well as the establishment of a general reserve on these portfolios.
In May 2010, the Company closed a $120.0 million securitization. The securitization, LEAF Funding 3, issued equipment-backed securitized notes at a weighted average discounted price of 93.6% with a weighted average interest rate of 7.85% and a weighted average life of 1.89 years. At closing, $14.4 million of the proceeds were placed into a restricted account and were used as new leases were originated by LEAF Funding 3 together with an additional equity contribution by the Company of approximately $1.1 million. The notes can be prepaid upon reaching 15% of the original issuance amount through an auction call provision or upon reaching 10% through a standard clean-up. The transaction was structured and purchased by a third party, who then sold the securitization to the Company. The Company had $14.8 million of equity invested in LEAF Funding 3 as of September 30, 2010. The Company evaluated this transaction and determined that the securitization was a VIE and that the Company was the primary beneficiary. Therefore, the securitization has been consolidated onto the Company’s books. The Company will do a continuous reassessment of its conclusion, as required.
The Company has the right to require LEAF Funding to repurchase credit impaired contracts or replace such contracts with performing contracts. LEAF Funding would have to repurchase or provide substitute contracts for each credit impaired contract at an amount equal to the discounted contract balance plus any overdue payments. The foregoing is limited to 5% of the aggregate discounted contract balance of all of the contracts sold by LEAF Funding to the Company.
The Company’s lease receivables had weighted average initial lease and loan terms of 52 months and 65 months as of September 30, 2010 and December 31, 2009, respectively. The interest rates on lease receivables range from 8.0% to 14.0% and from 8.0% to 15.0% as of September 30, 2010 and December 31, 2009, respectively. Investments in leases, net of unearned income, were as follows (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Leases, net of unearned income
|
$ | 79,263 | $ | 1,397 | ||||
|
Operating leases
|
19,363 | − | ||||||
|
Notes receivable
|
16,848 | 670 | ||||||
|
Subtotal
|
115,474 | 2,067 | ||||||
|
Allowance for lease losses
|
(70 | ) | (1,140 | ) | ||||
|
Total
|
$ | 115,404 | $ | 927 | ||||
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
The components of net investment in leases are as follows (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Total future minimum lease payments
|
$ | 91,097 | $ | 1,610 | ||||
|
Unguaranteed residual
|
4,237 | − | ||||||
|
Unearned income
|
(16,071 | ) | (213 | ) | ||||
|
Total
|
$ | 79,263 | $ | 1,397 | ||||
The components of net investment in operating leases are as follows (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Investment in operating leases
|
$ | 21,706 | $ | − | ||||
|
Accumulated depreciation
|
(2,343 | ) | − | |||||
|
Total
|
$ | 19,363 | $ | − | ||||
Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Company recognizes rental income on a straight-line basis and records it as interest income in the consolidated statement of operations. The Company recognized $2.0 million and $2.9 million, respectively, in rental income during the three and nine months ended September 30, 2010.
The Company evaluates the adequacy of the allowance for credit losses on lease receivables based upon, among other factors, management’s historical experience with the lease receivables portfolios it holds, 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 lease receivables, 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 recorded a provision for lease losses of $250,000 for the nine months ended September 30, 2010. The Company also recorded a charge-off to the general reserve of $1.4 million during the nine months ended September 30, 2010 to reduce the allowance to $70,000 at September 30, 2010.
The following table shows the changes in the allowance for lease loss (in thousands):
|
Allowance for lease loss at January 1, 2009
|
$ | 450 | ||
|
Provision for lease loss
|
2,672 | |||
|
Leases charged-off
|
(1,994 | ) | ||
|
Recoveries
|
12 | |||
|
Allowance for lease loss at December 31, 2009
|
1,140 | |||
|
Provision for lease loss
|
250 | |||
|
Leases charged-off
|
(1,368 | ) | ||
|
Recoveries
|
48 | |||
|
Allowance for lease loss at September 30, 2010
|
$ | 70 |
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
The Company historically has financed the acquisition of its investments, including investment securities, loans and equipment leases, primarily through the use of secured and unsecured borrowings in the form of CDOs, securitized notes, repurchase agreements, secured term facilities, warehouse facilities, trust preferred securities issuances and other secured and unsecured borrowings. Certain information with respect to the Company’s borrowings at September 30, 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
C
ollateral
|
||||||||||
|
September 30, 2010
:
|
|||||||||||||
|
RREF CDO 2006-1 Senior Notes
(1)
|
$ | 172,924 | 1.32% |
35.9 years
|
$ | 220,294 | |||||||
|
RREF CDO 2007-1 Senior Notes
(2)
|
339,652 | 0.81% |
36.0 years
|
407,247 | |||||||||
|
Apidos CDO I Senior Notes
(3)
|
319,586 | 1.07% |
6.8 years
|
310,302 | |||||||||
|
Apidos CDO III Senior Notes
(4)
|
260,550 | 0.75% |
9.7 years
|
249,887 | |||||||||
|
Apidos Cinco CDO Senior Notes
(5)
|
319,227 | 0.88% |
9.6 years
|
312,924 | |||||||||
|
Equipment Contract Backed Notes,
Series 2010-2
(6)
|
102,319 | 5.00% |
5.6 years
|
115,404 | |||||||||
|
Unsecured Junior Subordinated Debentures
(7)
|
51,548 | 6.45% |
25.9 years
|
− | |||||||||
|
Total
|
$ | 1,565,806 | 1.38% |
18.0 years
|
$ | 1,616,058 | |||||||
|
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
(7)
|
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 $174.9 million and $243.5 million less unamortized issuance costs of $2.0 million and $3.3 million as of September 30, 2010 and December 31, 2009, respectively. This CDO transaction closed in August 2006.
|
|
(2)
|
Amount represents principal outstanding of $343.6 million and $351.2 million less unamortized issuance costs of $3.9 million and $4.6 million as of September 30, 2010 and December 31, 2009, respectively. This CDO transaction closed in June 2007.
|
|
(3)
|
Amount represents principal outstanding of $321.5 million less unamortized issuance costs of $1.9 million as of September 30, 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 $1.9 million as of September 30, 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 $2.8 million as of September 30, 2010 and $3.3 million as of December 31, 2009. This CDO transaction closed in May 2007.
|
|
(6)
|
Amount represents principal outstanding of $103.5 million less unamortized issuance costs of $1.2 million as of September 30, 2010. This transaction closed in May 2010.
|
|
(7)
|
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
|
Collateralized Debt Obligations
Resource Real Estate Funding CDO 2007-1
During the nine months ended September 30, 2010, the Company repurchased $250,000 of the Class J note and $7.5 million of the Class B note in RREF CDO 2007-1 at a weighted average price of 39.00% to par which resulted in a $4.7 million gain, reported as a part of the gain on the extinguishment of debt in the consolidated statements of operations. There were no such repurchases made during the nine months ended September 30, 2009.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
Collateralized Debt Obligations
Resource Real Estate Funding CDO 2006-1
During the three and nine months ended September 30, 2010, the Company repurchased $20.0 million of the Class A-1 notes and $68.6 million of the Class A-1, A-2, B, C and D notes in RREF CDO 2006-1 at a weighted average price of 68.8% and 64.2% to par which resulted in a $6.3 and $24.6 million gain, respectively, reported as a gain on the extinguishment of debt in the consolidated statements of operations. During the three and nine months ended September 30, 2009, the Company repurchased $14.5 million of the Class D, E, and F notes and $22.0 million of the Class D, E, and F notes in RREF CDO 2006-1 at a weighted average price of 12.3% and 10.8% to par which resulted in a $12.7 million and $19.6 million gain, respectively, reported as a gain on the extinguishment of debt in its consolidated statements of operations.
Secured Term Facility
In April 2010, the Company entered into a loan and security agreement with The Bancorp Bank to finance the purchase of lease receivables. The maximum amount of the Company’s borrowing under this agreement was $6.5 million. Borrowings under this agreement bore interest at six percent (6%) per annum. The facility was repaid in full and was terminated on May 27, 2010. There were no such borrowings as of December 31, 2009.
Equipment Contract Backed Notes, Series 2010-2
In May 2010, the Company acquired Equipment Contract Backed Notes, Series 2010-2, issued by LEAF Funding 3, a $120.0 million transaction that provides financing for leases. The investments held by LEAF Funding 3 collateralize the debt it issued and, as a result, the investments are not available to the Company, its creditors or stockholders. LEAF Funding 3 issued a total of $120.0 million of senior notes at a weighted average price of $93.52 to unrelated investors generating proceeds of $112.2 million. The Company will amortize the discount at issuance over the lives of the notes using the effective yield method, adjusted for the effects of estimated prepayments on the notes. The Company had $14.8 million of equity invested in LEAF Funding 3 as of September 30, 2010.
The equipment contract backed notes issued to investors by LEAF Funding 3 consist of the following classes: (i) $95.5 million of class A notes; (ii) $7.0 million of class B notes; (iii) $6.4 million of class C notes; (iv) $6.4 million of class D notes; and (v) $4.7 million of class E notes. All of the notes issued bear a fixed rate of interest 5.0%. The class A notes mature in May 2016 and the class B through E notes mature in December 2017.
On May 25, 2010, the Company sold 8,625,000 shares of common stock, including 1,125,000 shares exercised through the underwriters over-allotment option, at a price of $5.25 per share. The Company received net proceeds of approximately $42.8 million after payment of underwriting discounts and commissions of approximately $2.5 million and other offering expenses of approximately $197,000.
Under a dividend reinvestment plan authorized by the board of directors on March 22, 2010, the Company is authorized to issue up to 8.0 million shares of common stock. Under this plan, which succeeded the June 2008 plan, the Company has issued 5,822,290 shares, at a weighted-average share price of $6.28 per share, and received proceeds of $53.6 million (net of costs) as of September 30, 2010.
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. Under this plan, the Company had issued 3.1 million shares of common stock during the three months ended March 31, 2010 at a weighted-average share price of $5.91 per share and received proceeds of $18.0 million (net of costs). The Company had issued 5.0 million shares of common stock under this plan.
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 nine months ended September 30, 2010. The Company has repurchased a total of 1,663,000 shares under this program as of September 30, 2010.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
The following table summarizes restricted common stock transactions:
|
Non-Employee Directors
|
Non-Employees
|
Total
|
||||||||||
|
Unvested shares as of January 1, 2010
|
52,632 | 384,687 | 437,319 | |||||||||
|
Issued
|
16,939 | 320,800 | 337,739 | |||||||||
|
Vested
|
(52,632 | ) | (187,469 | ) | (240,101 | ) | ||||||
|
Forfeited
|
− | − | − | |||||||||
|
Unvested shares as of September 30, 2010
|
16,939 | 518,018 | 534,957 | |||||||||
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 nine months ended September 30, 2010 and 2009, including shares issued to the five non-employee directors, was $1.8 million and $709,000, respectively.
On April 12, 2010, the Company issued 4,895 shares of restricted common stock under its 2005 Stock Incentive Plan. These restricted shares will vest 33.3% on each of April 12, 2011, 2012 and 2013.
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 each of February 10, 2011, 2012 and 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 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 each of January 22, 2011, 2012 and 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 September 30, 2010
|
602,666 | $ | 14.99 | 5 | $ | 564 | ||||||||||
|
Exercisable at September 30, 2010
|
602,666 | $ | 14.99 | 5 | $ | 564 | ||||||||||
The stock options have a remaining contractual term of five years. Upon exercise of options, new shares are issued.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 10 – SHARE-BASED COMPENSATION – (Continued)
The following table summarizes the status of the Company’s unvested stock options as of September 30, 2010:
|
Unvested Options
|
Options
|
Weighted Average
Grant Date
Fair Value
|
||||||
|
Unvested at January 1, 2010
|
21,666 | $ | 14.88 | |||||
|
Granted
|
− | $ | − | |||||
|
Vested
|
(21,666 | ) | $ | 14.88 | ||||
|
Forfeited
|
− | $ | − | |||||
|
Unvested at September 30, 2010
|
− | $ | − | |||||
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 vested stock options as of September 30, 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
|
21,666 | $ | 14.88 | |||||||||||
|
Exercised
|
− | $ | − | |||||||||||
|
Forfeited
|
(5,000 | ) | $ | 15.00 | ||||||||||
|
Vested as of September 30, 2010
|
602,666 | $ | 14.99 |
5
|
$ |
564
|
||||||||
The stock option transactions are valued using the Black-Scholes model using the following assumptions:
|
As of
September 30,
|
||||
|
2010
|
||||
|
Expected life
|
5 years
|
|||
|
Discount rate
|
1.09% | |||
|
Volatility
|
80.70% | |||
|
Dividend yield
|
15.75% | |||
The estimated fair value of each option granted for the three months ended September 30, 2010 and the year ended December 31, 2009 was $0.936 and $0.897, respectively. For the three months ended September 30, 2010 and 2009, the components of equity compensation expense were as follows (in thousands):
|
Three Month Ended
September 30,
|
Nine Month Ended
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Options granted to Manager and non-employees
|
$ | − | $ | 13 | $ | 11 | $ | 14 | ||||||||
|
Restricted shares granted to Manager and non-employees
|
516 | 680 | 1,368 | 976 | ||||||||||||
|
Restricted shares granted to non-employee directors
|
28 | 28 | 84 | 84 | ||||||||||||
|
Total equity compensation expense
|
$ | 544 | $ | 721 | $ | 1,463 | $ | 1,074 | ||||||||
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
During the three and nine months ended September 30, 2010, the Manager received 124,688 and 198,503 shares as incentive compensation valued at $2.9 million and $4.4 million, respectively pursuant to the Management Agreement. During the three and nine months ended September 30, 2009, the Manager received 26,097 shares as incentive compensation valued at $98,000 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 September 30, 2010. All awards are discretionary in nature and subject to approval by the compensation committee.
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
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Basic
:
|
||||||||||||||||
|
Net income (loss)
|
$ | 14,053 | $ | 11,528 | $ | 28,821 | $ | (5,751 | ) | |||||||
|
Weighted average number of shares outstanding
|
52,273,307 | 24,112,240 | 44,947,256 | 24,321,007 | ||||||||||||
|
Basic net income (loss) per share
|
$ | 0.27 | $ | 0.48 | $ | 0.64 | $ | (0.24 | ) | |||||||
|
Diluted
:
|
||||||||||||||||
|
Net income (loss)
|
$ | 14,053 | $ | 11,528 | $ | 28,821 | $ | (5,751 | ) | |||||||
|
Weighted average number of shares outstanding
|
52,273,307 | 24,112,240 | 44,947,256 | 24,321,007 | ||||||||||||
|
Additional shares due to assumed conversion of
dilutive instruments
|
305,577 | 264,441 | 256,265 | − | ||||||||||||
|
Adjusted weighted-average number of common
shares outstanding
|
52,578,884 | 24,376,681 | 45,203,521 | 24,321,007 | ||||||||||||
|
Diluted net income (loss) per share
|
$ | 0.27 | $ | 0.47 | $ | 0.64 | $ | (0.24 | ) | |||||||
Potentially dilutive shares relating to 88,147 shares of restricted stock are not included in the calculation of diluted net loss per share for the nine months ended September 30, 2009 because the effect would have been anti-dilutive.
Relationship with Resource America and Certain of its Subsidiaries
At September 30, 2010, Resource America owned 2,390,512 shares, or 4.4%, 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 and nine months ended September 30, 2010, the Manager earned base management fees of approximately $1.4 million and $3.9 million, respectively, and incentive management fees of $3.0 million and $5.9 million, respectively, for the three and nine months ended September 30, 2010. For the three and nine months ended September 30, 2009, the Manager earned base management fees of approximately $877,000 and $2.8 million, respectively, and $3.1 million of incentive management fees during the three and nine months ended September 30, 2009. The Company may also reimburse 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 and nine months ended September 30, 2010, the Company paid the Manager $497,000 and $1.4 million, respectively, as expense reimbursements. For the three and nine months ended September 30, 2009, the Company paid the Manager $130,000 and $427,000, respectively, as expense reimbursements.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 12 – RELATED PARTY TRANSACTIONS – (Continued)
Relationship with Resource America and Certain of its Subsidiaries
At September 30, 2010, the Company was indebted to the Manager for base management fees of $497,000, incentive management fees of $3.1 million and for the reimbursement of expenses of $233,000. 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.
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% to 5% (depending on the asset agreement) of the total funding required for each asset acquisition on a monthly basis. The investment balance of $5.0 million and $2.1 million at September 30, 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 made a loan of $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 loan matures on January 14, 2015, with an option to extend for two additional periods of 12 months each.
On March 5, 2010, the Company entered into a promissory note with Lease Equity Appreciation Fund II, L.P. (“LEAF II”), that provides an $8.0 million credit facility to LEAF II, 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 which is secured by the all assets of LEAF II, including its entire ownership interest in LEAF II Receivables Funding, LLC. The facility matures on March 3, 2011.
The Company allocated an initial investment of $5.0 million in structured notes. Resource Capital Markets, Inc., a wholly-owned subsidiary of Resource America, commenced trading in these privately issued securities through the Company’s TRS during the nine months ended September 30, 2010. The Company has since reinvested some of the gains from this activity and holds $11.9 million of these trading securities, at market on September 30, 2010.
Relationship with LEAF Financial Corp.
LEAF Financial Corp. (“LEAF”), a majority-owned subsidiary of Resource America, originates and manages lease receivables on the Company’s behalf. On May 27, 2010, the Company closed a $120.0 million securitization adding to the Company’s existing lease receivables. The securitization, LEAF Funding 3, issued equipment-backed securitized notes at a weighted average discounted price of 93.6%. At closing, $14.4 million of proceeds were placed into a restricted account. As of September 30, 2010, all proceeds related to the commitment have been funded. The Company had $14.8 million of equity invested in LEAF Funding 3 as of September 30, 2010.
The Company purchases 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 and nine months ended September 30, 2010, the Company had acquired $4.6 million and $126.5 million, respectively, of notes from LEAF, including $102,000 of origination cost reimbursements in each period. These acquisitions are directly related to the LEAF Funding 3 securitization discussed above. 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 lease receivables. On May 27, 2010, as a result of the Purchase and Sale Agreement with respect to LEAF Funding 3 between the Company and LEAF, LEAF agreed to waive any and all servicing fees on the leases sold from that period forward. At September 30, 2010 and December 31, 2009, the Company was indebted to LEAF for servicing fees in connection with the Company’s equipment finance portfolio of $22,000 and $8,000, respectively. LEAF servicing fees for the three and nine months ended September 30, 2010 were $22,000 and $66,000, respectively, as compared to $7,000 and $500,000 for the three and nine months ended September 30, 2009, respectively.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
Relationship with LEAF Financial Corp. – (Continued)
The Company has the right to require LEAF Funding to repurchase credit impaired contracts or replace such contracts with performing contracts. LEAF Funding would have to repurchase or provide substitute contracts for each credit impaired contract at an amount equal to the discounted contract balance plus any overdue payments. The foregoing is limited to 5% of the aggregate discounted contract balance of all of the contracts sold by LEAF Funding to the Company.
During the three and nine months ended September 30, 2010, the Company sold two loans back to LEAF at a price equal to their book value. The total sale proceeds received $140,000. During the three and nine months ended September 30, 2009, the Company did not sell any notes back to LEAF.
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 September 30, 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.
Relationship with Law Firm
Until 1996, 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. 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. For the three and nine months ended September 30, 2010, the Company paid Ledgewood approximately $22,000
and $233,000, respectively, for legal services as compared to $71,000 and $172,000 for the three and nine months ended September 30, 2009, respectively.
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 of directors 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. However, 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.
On September 16, 2010, the Company declared a quarterly distribution of $0.25 per share of common stock, $13.7 million in the aggregate, which was paid on October 26, 2010 to stockholders of record as of September 30, 2010.
On June 10, 2010, the Company declared a quarterly distribution of $0.25 per share of common stock, $12.8 million in the aggregate, which was paid on July 27, 2010 to stockholders of record as of June 30, 2010.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
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 as of March 31, 2010.
In analyzing the fair value of its investments accounted for on a fair value basis, 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.
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 reports its investment securities available-for-sale at fair value. To determine fair value, the Company uses two methods, either a dealer quote or an internal valuation model, depending upon when the position was purchased.
For securities purchased in 2009 and thereafter, the Company obtains a quote from a dealer, which typically will be the dealer who sold the Company the security. The Company has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models. These quotes are non-binding. As a result of how the dealers develop their quotes, the market illiquidity and low levels of trading activity
as of December 31, 2009, the Company categorized all of these investment securities available-for-sale in Level III in the fair value hierarchy. Due to the increased level of trading activity in 2010, the Company moved some of these securities into Level II in the fair value hierarchy. The Company evaluates the reasonableness of the quotes it receives by applying its own valuation models. If there is a material difference between a quote the Company receives and the value indicated by its valuation models, the Company will evaluate the difference. As part of that evaluation, the Company will discuss the difference with the dealer, who may revise their quote based upon these discussions. Alternatively, the Company may revise its valuation models.
For investment securities available-for-sale purchased prior to 2009, the Company determines fair value based on taking a weighted average of the following three measures:
|
|
·
|
dealer quotes, as described above;
|
|
|
·
|
quotes on more actively-traded, higher-rated securities issued in a similar time period, adjusted for differences in rating and seniority; and
|
|
|
·
|
the value resulting from an internal valuation model using an income approach based upon an appropriate risk-adjusted yield, time value and projected losses using default assumptions based upon an historical analysis of underlying loan performance.
|
The Company reports its investment securities trading at fair value, which is based on 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 as well as quotes on similar securities.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
Derivatives (interest rate swap contracts), both assets and liabilities, are valued by a third-party pricing agent using an income approach with models that use as their primary inputs 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 September 30, 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
|
$ | − | $ | 49,218 | $ | 14,458 | $ | 63,676 | ||||||||
|
Investment securities trading
|
− | − | 11,938 | 11,938 | ||||||||||||
|
Total assets at fair value
|
$ | − | $ | 49,218 | $ | 26,396 | $ | 75,614 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives (net)
|
$ | − | $ | 16,022 | $ | − | $ | 16,022 | ||||||||
|
Total liabilities at fair value
|
$ | − | $ | 16,022 | $ | − | $ | 16,022 | ||||||||
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
|
3,781 | |||
|
Purchases
|
14,531 | |||
|
Transfers out of Level 3
|
(49,218 | ) | ||
|
Unrealized gains – included in accumulated other comprehensive income
|
12,760 | |||
|
Ending balance, September 30, 2010
|
$ | 26,396 | ||
The Company had $4.5 million and $10.5 million of losses included in earnings during the three and nine months ended September 30, 2010, respectively, due to other-than-temporary impairment charges with respect to one and three securities during the three and nine months ended September 30, 2010, respectively. The Company had $895,000 and $6.6 million of losses included in earnings during the three and nine months ended September 30, 2009, respectively, due to other-than-temporary impairment charges with respect to two assets during the three and nine months ended September 30, 2009. These losses are included in the consolidated statement of operations as net impairment losses recognized in earnings.
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 bank loans held for sale and impaired bank loans is based on what secondary markets are currently offering for these loans. As such, the Company classifies these loans as recurring Level 2. The amount of the adjustment for fair value for bank loans held for sale for the three and nine months ended September 30, 2010 were losses of $91,000 and $94,000, respectively. For the Company’s commercial real estate, or CRE loans, where there is no market, the loans are measured third-party using cash flows and other valuation techniques
and these loans are classified as nonrecurring Level 3. For the three and nine months ended September 30, 2010, there were $1.5 million and $31.1 million, respectively of nonrecurring fair value losses which are included in the consolidated statement of operations as provision for loan and lease losses.
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2010
(Unaudited)
Property available-for-sale is estimated based on recent sales prices of prior similar condominium units in the property and the appraised value of a similar condominium unit in the property less costs to sell.
The following table presents information about the Company’s assets subject to fair value adjustments (impairment) on a non-recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands) for the nine months ended September 30, 2010 (in thousands):
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets
:
|
||||||||||||||||
|
Loans held for sale
|
$ | − | $ | 2,824 | $ | − | $ | 2,824 | ||||||||
|
Impaired loans
|
− | 3,219 | 90,027 | 93,246 | ||||||||||||
|
Property available-for-sale
|
− | − | 4,444 | 4,444 | ||||||||||||
|
Total assets at fair value
|
$ | − | $ | 6,043 | $ | 94,471 | $ | 100,514 | ||||||||
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 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 above in this Note 14. The carrying value of the Company’s equipment-backed notes approximates their fair value due to the recent issuance.
The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheet are reported below.
|
Fair Value of Financial Instruments
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
Carrying value
|
Fair value
|
Carrying value
|
Fair value
|
|||||||||||||
|
Loans held-for-investment
|
$ | 1,482,673 | $ | 1,462,544 | $ | 1,590,088 | $ | 1,536,946 | ||||||||
|
CDOs
|
$ | 1,411,939 | $ | 880,147 | $ | 1,484,952 | $ | 857,262 | ||||||||
|
Junior subordinated notes
|
$ | 51,548 | $ | 18,042 | $ | 51,548 | $ | 18,042 | ||||||||
At September 30, 2010, the Company had 10 interest rate swap contracts outstanding whereby the Company will pay an average fixed rate of 5.17% and receive a variable rate equal to one-month LIBOR. The aggregate notional amount of these contracts was $167.1 million at September 30, 2010. In addition, the Company also has one interest rate cap agreement with a notional amount 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)
SEPTEMBER 30, 2010
(Unaudited)
The estimated fair value of the Company’s interest rate swaps was ($16.0) million and ($12.8) million as of September 30, 2010 and December 31, 2009, respectively. The Company had aggregate unrealized losses of $17.4 million and $14.6 million on the interest rate swap agreements as of September 30, 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 derivatives not designated as hedging instruments per Accounting Standards Codification (“ASC”) 815 as well as their classification on the balance sheet as of September 30, 2010 and on the consolidated statement of operations for the three and nine months ended September 30, 2010:
|
Fair Value of Derivative Instruments as of September 30, 2010
(in thousands)
|
|||||||||
|
Liability Derivatives
|
|||||||||
|
Notional
Amount
|
Balance Sheet Location
|
Fair Value
|
|||||||
|
Interest rate cap agreement
|
$ | 14,841 |
Derivatives, at fair value
|
$ | − | ||||
|
Interest rate swap contracts
|
$ | 167,057 |
Derivatives, at fair value
|
$ | (16,022 | ) | |||
|
Accumulated other comprehensive loss
|
$ | 16,022 | |||||||
|
The Effect of Derivative Instruments on the Statement of Operations for the
Three Months Ended September 30, 2010
(in thousands)
|
|||||||||
|
Liability Derivatives
|
|||||||||
|
Notional
Amount
|
Statement of Operations Location
|
Unrealized
Loss
(1)
|
|||||||
|
Interest rate cap agreement
|
$ | 14,841 |
Interest expense
|
$ | 2 | ||||
|
Interest rate swap contracts
|
$ | 167,057 |
Interest expense
|
$ | 2,125 | ||||
|
The Effect of Derivative Instruments on the Statement of Operations for the
Nine Months Ended September 30, 2010
(in thousands)
|
|||||||||
|
Liability Derivatives
|
|||||||||
|
Notional Amount
|
Statement of Operations Location
|
Unrealized
Loss
(1)
|
|||||||
|
Interest rate cap agreement
|
$ | 14,841 |
Interest expense
|
$ | 46 | ||||
|
Interest rate swap contracts
|
$ | 167,057 |
Interest expense
|
$ | 7,294 | ||||
|
(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)
SEPTEMBER 30, 2010
(Unaudited)
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.
The Company received $9.1 million in proceeds related to the issuance of 1,453,672 shares of common stock on the Company’s dividend reinvestment plan during October 2010.
AND RESULTS OF OPERATIONS (Unaudited)
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 June 30, 2010, Resource America managed approximately $12.7 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 interests in first mortgage loans, or A notes, junior interests in first mortgage loans, or B notes, mezzanine debt, CMBS, bank loans, lease receivables, investments in real estate joint ventures, structured 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, lease receivables 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 32 of our 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 September 30, 2010, we cannot assure you that further impairments will not occur or that our assets will otherwise not be adversely affected by market conditions.
Our relative inability since 2008 to access credit markets has 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, although we were able to securitize and finance notes during the second quarter of 2010. Short-term financing through warehouse lines of credit and repurchase agreements also has been largely unavailable. However, we continue to see indications that the CRE term financing market may become more active as well as the bank loan financing market. However, we caution investors that even if credit through these markets becomes more available, we may be unable to access those markets on economically favorable terms, or at all.
Credit market conditions and an unstable 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 September 30, 2010, we have modified 32 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, including troubled debt restructurings, in the future.
Since the beginning of 2008 through September 30, 2010, we have sought 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 nine months ended September 30, 2010:
|
|
·
|
$47.6 million of commercial real estate loan principal repayments;
|
|
|
·
|
$36.8 million of commercial real estate loan sale proceeds;
|
|
|
·
|
$154.9 million of bank loan principal repayments; and
|
|
|
·
|
$46.7 million of bank loan sale proceeds.
|
During the latter half of 2009 and through September 30, 2010, we have also sought to manage liquidity through the sale of common stock. During the latter half of 2009 and the nine months ended September 30, 2010, we obtained $52.3 million and $96.1 million, respectively, through a combination of secondary offerings of our common stock in December 2009 and May 2010 and sales of our common stock under our Dividend Reinvestment Plan (“DRIP”).
We have also used recycled capital in our CRE CDO and bank loan collateralized loan obligation, or 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 $78.9 million with a discount to par of 40.8% and bank loans of $509.7 million with a discount to par of 9.0%. From the net discounts of approximately $32.1 million and $45.9 million, we expect to recognize income from accretion of these discounts of approximately $5.0 million and $9.3 million in our CMBS and bank loan portfolio, respectively, during 2010.
In October 2010, we originated two new CRE loans totaling $17.9 million as part of our capital recycling effort.
As of September 30, 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 September 30, 2010, we had invested 77.9% of our portfolio in CRE assets, 17.9% in commercial bank loans, 2.7% in leases and 1.5% in structured 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 leases.
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 investment and trading securities, 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 and Nine Months Ended September 30, 2010 as compared to
Three and Nine Months Ended September 30, 2009
Our net income for the three and nine months ended September 30, 2010 was $14.1 million, or $0.27 per weighted average common share (basic and diluted) and $28.8 million, or $0.64 per weighted average common share (basic and diluted), respectively, as compared to net income of $11.5 million, or $0.48 per weighted average common share (basic and diluted) and a net loss of $88,000, or ($0.00) per weighted average common share (basic and diluted) for the three and nine months ended September 30, 2009, respectively.
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
|
Three Months Ended
|
|||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||||||||||
|
Interest
Income
|
Yield
|
Balance
|
Interest
Income
|
Yield
|
Balance
|
|||||||||||||||||||
|
Interest income from loans:
|
||||||||||||||||||||||||
|
Bank loans
|
$ | 11,491 | 4.95% | $ | 910,664 | $ | 8,444 | 3.64% | $ | 917,495 | ||||||||||||||
|
Commercial real estate loans
|
8,106 | 4.83% | $ | 672,146 | 11,763 | 5.95% | $ | 783,862 | ||||||||||||||||
|
Total interest income from loans
|
19,597 | 20,207 | ||||||||||||||||||||||
|
Interest income from securities:
|
||||||||||||||||||||||||
|
CMBS
|
2,620 | 7.26% | $ | 144,379 | 1,509 | 6.25% | $ | 95,334 | ||||||||||||||||
|
Securities held-to-maturity
|
403 | 4.46% | $ | 35,635 | 397 | 4.84% | $ | 34,256 | ||||||||||||||||
|
Other ABS
|
113 | 19.67% | $ | 2,300 | − | N/A | N/A | |||||||||||||||||
|
Total interest income from
securities available-for-sale
|
3,136 | 1,906 | ||||||||||||||||||||||
|
Leasing
(1)
|
4,614 | 18.40% | $ | 98,037 | 11 | 1.70% | $ | 2,603 | ||||||||||||||||
|
Interest income – other:
|
||||||||||||||||||||||||
|
Preference payments on structured
notes
|
1,474 | 199.77% | $ | 2,952 | − | N/A | N/A | |||||||||||||||||
|
Temporary investment
in over-night repurchase
agreements
|
428 | N/A | N/A | 377 | N/A | N/A | ||||||||||||||||||
|
Total interest income − other
|
1,902 | 377 | ||||||||||||||||||||||
|
Total interest income
|
$ | 29,249 | $ | 22,501 | ||||||||||||||||||||
|
(1)
|
Leasing interest income includes $2.0 million of
rental income on operating leases which are included within the May 2010 securitization.
|
|
Nine Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||||||||||
|
Interest
Income
|
Yield
|
Balance
|
Interest
Income
|
Yield
|
Balance
|
|||||||||||||||||||
|
Interest income from loans:
|
||||||||||||||||||||||||
|
Bank loans
|
$ | 31,784 | 4.60% | $ | 910,758 | $ | 25,863 | 3.77% | $ | 923,324 | ||||||||||||||
|
Commercial real estate loans
|
25,301 | 4.73% | $ | 704,173 | 38,470 | 6.39% | $ | 792,070 | ||||||||||||||||
|
Total interest income from loans
|
57,085 | 64,333 | ||||||||||||||||||||||
|
Interest income from securities:
|
||||||||||||||||||||||||
|
CMBS
|
7,694 | 7.33% | $ | 138,970 | 3,274 | 5.32% | $ | 81,281 | ||||||||||||||||
|
Securities held-to-maturity
|
1,058 | 3.81% | $ | 35,796 | 1,400 | 5.68% | $ | 32,399 | ||||||||||||||||
|
Other ABS
|
153 | 8.87% | $ | 2,300 | − | N/A | N/A | |||||||||||||||||
|
Total interest income from
securities available-for-sale
|
8,905 | 4,674 | ||||||||||||||||||||||
|
Leasing
(1)
|
6,777 | 17.65% | $ | 49,857 | 4,337 | 8.60% | $ | 65,300 | ||||||||||||||||
|
Interest income – other:
|
||||||||||||||||||||||||
|
Preference payments on structured
notes
|
1,590 | 192.26% | $ | 1,103 | − | N/A | N/A | |||||||||||||||||
|
Temporary investment
in over-night repurchase
agreements
|
1,061 | N/A | N/A | 1,053 | N/A | N/A | ||||||||||||||||||
|
Total interest income − other
|
2,651 | 1,053 | ||||||||||||||||||||||
|
Total interest income
|
$ | 75,418 | $ | 74,397 | ||||||||||||||||||||
|
(1)
|
Leasing interest income includes $2.9 million of
rental income on operating leases which are included within the May 2010 securitization.
|
Aggregate interest income increased $6.7 million (30%) and $1.0 million (1%) to $29.2 million and $75.4 million for the three and nine months ended September 30, 2010, respectively, from $22.5 million and $74.4 million for the three and nine months ended September 30, 2009, respectively. We attribute these increases to the following:
Interest Income from Loans
Aggregate interest income from loans decreased $610,000 (3%) and $7.2 million (11%) to $19.6 million and $57.1 million for the three and nine months ended September 30, 2010, respectively from $20.2 million and $64.3 million for the three and nine months ended September 30, 2009, respectively.
Commercial real estate loans produced $8.1 million and $25.3 million of interest income for the three and nine months ended September 30, 2010, respectively, as compared to $11.8 million and $38.5 million for the three and nine months ended September 30, 2009, respectively, decreases of $3.7 million (31%) and $13.2 million (34%), respectively. These decreases are the result of the following:
|
|
·
|
a decrease in the weighted average balance of $111.7 million and $87.9 million on our commercial real estate loans to $672.1 million and $704.2 million for the three and nine months ended September 30, 2010, respectively, from $783.9 million and $792.1 million for the three and nine months ended September 30, 2009, respectively, primarily as a result of payoffs and paydowns and, to a lesser extent, write-offs of impaired loans; and
|
|
|
·
|
a decrease in the weighted average interest yield to 4.83% and 4.73% for the three and nine months ended September 30, 2010, respectively from 5.95% and 6.39% for the three and nine months ended September 30, 2009, respectively. The reduced rate is primarily due to decreases in loans with LIBOR floors, which is a reference index for the rates payable on these loans, from loan modifications during 2009 and 2010. At September 30, 2010, we had $166.1 million of loans with a weighted average LIBOR floor of 1.98% as compared to $345.2 million of loans with a weighted average LIBOR floor of 2.68% at September 30, 2009.
|
The decrease in interest income on commercial real estate loans was partially offset an increase in interest income on bank loans.
Bank loans generated $11.5 million and $31.8 million of interest income for the three and nine months ended September 30, 2010, respectively, as compared to $8.4 million and $25.9 million for the three and nine months ended September 30, 2009, increases of $3.1 million (36%) and $5.9 million (23%), respectively. These increases were primarily the result of an increase in accretion income of $1.9 million and $5.9 million for the three and nine months ended September 30, 2010, respectively, to $3.5 million and $9.6 million for the three and nine months ended September 30, 2010, respectively, from $1.6 million and $3.7 million for the three and nine months ended September 30, 2009, respectively. The increase in accretion income is the result of the purchase of $58.0 million and $224.2 million of bank loans at discounts and the accretion of those discounts into income. These discounted loan purchases are made as we reinvest the proceeds from loan payoffs from our borrowers and from the loans we have sold, typically for credit reasons.
The increase in bank loan accretion income was partially offset by a decrease in the weighted average balance on these loans of $6.8 million and $12.6 million to $910.7 million and $910.8 million for the three and nine months ended September 30, 2010, respectively, from $917.5 million and $923.3 million for the three and nine months ended September 30, 2009, respectively, as a result of write-off of several loans in the last quarter of 2009 and the first quarter of 2010 as well as the timing of when loans were sold and the proceeds reinvested.
Interest Income from Securities
Aggregate interest income from securities increased $1.2 million (65%) and $4.2 million (91%) to $3.1 million and $8.9 million for the three and nine months ended September 30, 2010, respectively, from $1.9 million and $4.7 million for the three and nine months ended September 30, 2009, respectively.
Interest income from CMBS increased $1.1 million (74%) and $4.4 million (135%) to $2.6 million and $7.7 million for the three and nine months ended September 30, 2010, respectively, from $1.5 million and $3.3 million for the three and nine months ended September 30, 2009, respectively. These increases resulted primarily from the following:
|
|
·
|
an increase of $724,000 and $2.7 million in accretion income to $1.2 million and $3.4 million for the three and nine months ended September 30, 2010, respectively, from $447,000 and $667,000 for the three and nine months ended September 30, 2009 respectively. The increase in accretion income results from the purchase of $82.1 million of CMBS at discounts during the last quarter of 2009 and during 2010 and accretion of those discounts into income. These discounted security purchases are made as we reinvest the proceeds from the loan and security payoffs from our borrowers and from the loans and securities we have sold, typically for credit reasons, and
|
|
|
·
|
an increase of the weighted average balance of our CMBS of $49.0 million and $57.7 million to $144.4 million and $139.0 million for the three and nine months ended September 30, 2010, respectively, from $95.3 million and $81.3 million for the three and nine months ended September 30, 2009, respectively, as a result of the purchase of $82.1 million of securities during the last quarter of 2009 and during 2010.
|
Income from securities held-to-maturity increased $6,000 (2%) and decreased $342,000 (24%) to $403,000 and $1.1 million for the three and nine months ended September 30, 2010, respectively, from $397,000 and $1.4 million for three and nine months ended September 30, 2009, respectively. The decrease for the nine months ended September 30, 2010 is primarily attributed to a decrease in the weighted average yield earned by these securities to 3.81% for the nine months ended September 30, 2010 from 5.68% for the nine months ended September 30, 2009, principally as a result of the decrease in LIBOR which is a reference index for the rates earned on these securities.
Interest Income − Leasing
Our lease portfolio generated $4.6 million and $6.8 million of interest income for the three and nine months ended September 30, 2010, respectively, as compared to $11,000 and $4.3 million of interest income for the three and nine months ended September 30, 2009, respectively, increases of $4.6 million (41,845%) and $2.4 million (56%), respectively. This increase for the three and nine months September 30, 2010 was due to the addition of a $120.0 million new pool of leases during the nine months ended September 30, 2010 financed by a new securitization. The increase for the nine months ended September 30, 2010 was partially offset by the sale of the majority of our legacy leasing portfolio, at par, as of June 30, 2009. The legacy portfolio was sold to reduce our leverage and exposure to certain lease receivables that were underwritten under dated, more aggressive, credit standards. In May 2010, we acquired a new leasing portfolio which was underwritten with stricter credit standards, longer term debt and the option of prepayment of notes upon meeting specific terms, which combined yields more attractive risk-adjusted returns than our legacy portfolio.
Interest Income − Other
Aggregate interest income-other increased $1.5 million (405%) and $1.6 million (152%) to $1.9 million and $2.7 million for the three and nine months ended September 30, 2010, respectively, as compared to $377,000 and $1.1 million for the three and nine months ended September 30, 2009, respectively. Preference payments on structured notes generated $1.5 million and $1.6 million for the three and nine months ended September 30, 2010, respectively. We had not invested in these securities during the three and nine months ended September 30, 2009. This income is cash received on our investments in structured finance notes. These payments vary from period to period and do not have a contractual interest rate associated with the underlying notes or shares.
Interest Expense
The following tables set forth information relating to our interest expense incurred for the periods presented (in thousands, except percentages):
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||||||||||
|
Interest Expense
|
Yield
|
Balance
|
Interest Expense
|
Yield
|
Balance
|
|||||||||||||||||||
|
Bank loans
|
$ | 2,651 | 1.15% | $ | 906,000 | $ | 3,114 | 1.35% | $ | 906,000 | ||||||||||||||
|
Commercial real estate loans
|
1,941 | 1.49% | $ | 521,576 | 2,460 | 1.46% | $ | 645,929 | ||||||||||||||||
|
Leasing
|
2,443 | 8.86% | $ | 107,875 | − | N/A | $ | − | ||||||||||||||||
|
General
|
3,054 | 5.37% | $ | 217,174 | 3,629 | 4.92% | $ | 278,290 | ||||||||||||||||
|
Total interest expense
|
$ | 10,089 | $ | 9,203 | ||||||||||||||||||||
|
Nine Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
|||||||||||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||||||||||
|
Interest Expense
|
Yield
|
Balance
|
Interest Expense
|
Yield
|
Balance
|
|||||||||||||||||||
|
Bank loans
|
$ | 7,185 | 1.05% | $ | 906,000 | $ | 12,987 | 1.90% | $ | 906,000 | ||||||||||||||
|
Commercial real estate loans
|
6,271 | 1.53% | $ | 552,183 | 7,738 | 1.52% | $ | 657,752 | ||||||||||||||||
|
Leasing
|
3,462 | 8.80% | $ | 51,889 | 2,143 | 4.63% | $ | 58,858 | ||||||||||||||||
|
General
|
10,037 | 5.38% | $ | 236,827 | 12,960 | 4.92% | $ | 337,693 | ||||||||||||||||
|
Total interest expense
|
$ | 26,955 | $ | 35,828 | ||||||||||||||||||||
Aggregate interest expense increased $886,000 (10%) and decreased $8.9 million (25%) to $10.1 million and $27.0 million for the three and nine months ended September 30, 2010, respectively, from $9.2 million and $35.8 million for the three and nine months ended September 30, 2009, respectively. We attribute these changes to the following:
Interest expense on bank loans was $2.7 million and $7.2 million for the three and nine months ended September 30, 2010, respectively, as compared to $3.1 million and $13.0 million for the three and nine months ended September 30, 2009, respectively, decreases of $463,000 million (15%) and $5.8 million (45%), respectively. These decreases resulted from a decrease in the weighted average yield on the debt to 1.15% and 1.05% for the three and nine months ended September 30, 2010, respectively, from 1.35% and 1.90%, respectively, for the three and nine months ended September 30, 2009, respectively, due to the decrease in three month LIBOR which is a reference index for the rates payable on most of these notes.
Interest expense on commercial real estate loans was $1.9 million and $6.3 million for the three and nine months ended September 30, 2010, respectively, as compared to $2.5 million and $7.7 million for the three and nine months ended September 30, 2009, respectively, decreases of $519,000 (21%) and $1.5 million (19%), respectively. These decreases resulted primarily from a decrease in the weighted average balance of the related financings of $124.4 million and $105.6 million to $521.6 million and $552.2 million for the three and nine months ended September 30, 2010, respectively, as compared to $645.9 million and $657.8 million for the three and nine months ended September 30, 2009, respectively, primarily due to the repurchase of $131.9 million of notes in 2009 and 2010.
General interest expense was $3.1 million and $10.0 million for the three and nine months ended September 30, 2010, respectively, as compared to $3.6 million and $13.0 million for the three and nine months ended September 30, 2009, respectively, decreases of $575,000 (16%) and $2.9 million (23%), respectively. These decreases were primarily from the sale of our legacy leasing portfolio, at par, as of September 30, 2009, which also resulted in the transfer of the related interest rate hedges and a decrease in that associated cost.
These decreases in interest expense were fully offset for the three months ended September 30, 2010 and partially offset for the nine months ended September 30, 2010 as a result of interest expense financing related to our leasing portfolio which was $2.4 million and $3.5 million for the three and nine months ended September 30, 2010, respectively, as compared to $0 and $2.1 million for the three and nine months ended September 30, 2009, respectively, increases of $2.4 million and $1.3 million (62%) for the three and nine months ended September 30, 2010, respectively. These increases are the result of the addition of a new securitization entered into in April 2010 in conjunction with a $120.0 million pool of new leases. The increase for the nine months ended was partially offset by a decrease in expense related to our legacy leasing portfolio when the debt was transferred to Resource America at the time the portfolio was sold on June 30, 2009.
Operating Expenses
The following table sets forth information relating to our expenses incurred for the periods presented (in thousands):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Management fees - related party
|
$ | 4,405 | $ | 3,954 | $ | 9,845 | $ | 5,880 | ||||||||
|
Equity compensation - related party
|
544 | 721 | 1,463 | 1,074 | ||||||||||||
|
Professional services
|
491 | 739 | 2,186 | 2,792 | ||||||||||||
|
Insurance
|
184 | 220 | 576 | 609 | ||||||||||||
|
Depreciation on operating leases
|
1,658 | − | 2,343 | − | ||||||||||||
|
General and administrative
|
721 | 410 | 2,232 | 1,277 | ||||||||||||
|
Income tax expense (benefit)
|
4,068 | 6 | 5,305 | (16 | ) | |||||||||||
|
Total operating expenses
|
$ | 12,071 | $ | 6,050 | $ | 23,950 | $ | 11,616 | ||||||||
Management fees–related party increased $451,000 (11%) and $4.0 million (67%) to $4.4 million and $9.8 million for the three and nine months ended September 30, 2010, respectively, as compared to $4.0 million and $5.9 million for the three and nine months ended September 30, 2009, respectively. The base management fees increased by $557,000 (63%) and $1.1 million (39%) to $1.4 million and $3.9 million for the three and nine months ended September 30, 2010, respectively as compared to $877,000 and $2.8 million for the three and nine months ended September 30, 2009, respectively. The increases in the base management fee were due to increased stockholders’ equity, a component in the formula by which base management fees are calculated, primarily as a result of the receipt of $43.4 million and $42.8 million of net proceeds from our common stock offerings completed in December 2009 and May 2010, respectively, and from our receipt of $53.6 million of net proceeds from the sales of common stock through our Dividend Reinvestment Plan, or DRIP during the nine months ended September 30, 2010. Incentive management fees decreased $105,000 (3%) and increased $2.9 million (93%) to $3.0 million and $5.9 million for the three and nine months ended September 30, 2010, respectively from $3.1 million for the three and nine months ended September 30, 2009. The increase in incentive management fees, which is based on net income above a specified threshold, is directly attributable to the net income increase for both periods.
Equity compensation – related party decreased $177,000 (25%) and increased $389,000 (36%) to $544,000 and $1.5 million for the three and nine months ended September 30, 2010, respectively, from $721,000 and $1.1 million for the three and nine months ended September 30, 2009, respectively. 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 provide investment and executive management services to us through our Manager. The increase in expense for the nine months ended September 30, 2010 was primarily the result of an increase in our stock price and its impact on our quarterly remeasurement of unvested restricted stock and options as well as issuances of new grants during the year. The increase in stock price was completely offset in the three months ended September 30, 2010 by the vesting of grants subsequent to September 30, 2009.
Professional services decreased $248,000 (34%) and $606,000 (22%) to $491,000 and $2.2 million for the three and nine months ended September 30, 2010, respectively, as compared to $739,000 million and $2.8 million for the three and nine months ended September 30, 2009, respectively. These decreases were primarily the result of decreases in audit and tax expense as a result of the timing of when work was performed and billed. The decrease during the nine months ended September 30, 2010 was also a result of servicing fees incurred in 2009 on our legacy equipment leasing portfolio, which we sold on June 30, 2009.
Depreciation on operating leases was $1.7 million and $2.3 million for the three and nine months ended September 30, 2010. There was no such expense for the three and nine months ended September 30, 2009. The expense relates entirely to the depreciation of the assets in the lease portfolio that we acquired and securitized in May 2010.
General and administrative expense increased $311,000 (76%) and $955,000 (75%) to $721,000 and $2.2 million for the three and nine months ended September 30, 2010, respectively, as compared to $410,000 and $1.3 million for the three and nine months ended September 30, 2009, respectively. This increase is related to our agreement to 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 that began in October 2009.
Income tax expense increased $4.1 million (67,700%) and $5.3 million (33,256%) to $4.1 million and $5.3 million for the three and nine months ended September 30, 2010, respectively, from an expense of $6,000 and a benefit of $16,000 for the three and nine months ended September 30, 2009, respectively, as a result of a corresponding increase in pre-tax income of Resource TRS, Inc., our domestic taxable REIT subsidiary, earned from the income generated by the leasing securitization acquired in May 2010 as well as activity related to our agreement with Resource Capital Markets and the trading of structured notes related to this agreement and preference payments received on these 2010 investments.
Other Revenue (Expense)
The following table sets forth information relating to our other (expense) income incurred for the periods presented (in thousands):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Impairment losses on investment securities
|
$ | (7,528 | ) | $ | (3,019 | ) | $ | (11,174 | ) | $ | (19,372 | ) | ||||
|
Recognized in other comprehensive loss
|
(3,072 | ) | (2,124 | ) | (660 | ) | (12,812 | ) | ||||||||
|
Net impairment losses recognized in earnings
|
(4,456 | ) | (895 | ) | (10,514 | ) | (6,560 | ) | ||||||||
|
Net realized gain/(loss) on investment securities
available-for-sale and loans
|
1,171 | 162 | 1,507 | 864 | ||||||||||||
|
Net realized gain on investment securities trading
|
2,008 | − | 4,536 | − | ||||||||||||
|
Net unrealized gain on investments securities
trading
|
5,207 | − | 5,207 | − | ||||||||||||
|
Provision for loan and lease losses
|
(3,095 | ) | (6,311 | ) | (26,363 | ) | (45,274 | ) | ||||||||
|
Gain on the extinguishment of debt
|
6,250 | 12,741 | 29,285 | 19,641 | ||||||||||||
|
Other (expense) income
|
(121 | ) | (1,417 | ) | 650 | (1,375 | ) | |||||||||
|
Total other revenue (expense)
|
$ | 6,964 | $ | 4,280 | $ | 4,308 | $ | (32,704 | ) | |||||||
Net impairment losses recognized in earnings increased $3.6 million (398%) and $4.0 million (60%) to $4.5 million and $10.5 million for the three and nine months ended September 30, 2010, respectively, from $895,000 and $6.6 million for the three and nine months ended September 30, 2009, respectively. Losses for the three and nine months ended September 30, 2010 relate to impairment charges taken on two CMBS positions during the three months ended September 30, 2010 and impairment charges taken on two CMBS positions during the first six months of 2010. Losses for the three and nine months ended September 30, 2009 relate to the impairment charge taken on one ABS position during the three months ended March 31, 2009 and impairment charges taken on another ABS position during the first six months of 2009.
Net realized gain on investment securities available-for-sale and loans increased $1.0 million (623%) and $643,000 (74%) to $1.2 million and $1.5 million for the three and nine months ended September 30, 2010, respectively, as compared to $162,000 and $864,000 for the three and nine months ended September 30, 2009, respectively, primarily as a result of the sale of one CMBS position at a gain of $1.2 million during the three months ended September 30, 2010. This increase was partially offset for the nine months ended September 30, 2010 by a decrease in gains on sales of loans of $340,000 during nine months ended September 30, 2010.
Our provision for loan and lease losses decreased $3.2 million (51%) and $18.9 million (42%) to $3.1 million and $26.4 million for the three and nine months ended September 30, 2010, respectively, as compared to $6.3 million and $45.3 million for the three and nine months ended September 30, 2009, respectively.
The following table summarizes information relating to our provision for loan and lease losses for the periods presented (in thousands):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
CRE loan portfolio
|
$ | 3,265 | $ | 4,240 | $ | 27,294 | $ | 18,318 | ||||||||
|
Bank loan portfolio
|
(170 | ) | 1,433 | (1,183 | ) | 25,533 | ||||||||||
|
Lease receivables
|
− | 638 | 251 | 1,422 | ||||||||||||
| $ | 3,095 | $ | 6,311 | $ | 26,362 | $ | 45,273 | |||||||||
The principal reason for the decrease from the 2009 periods was the significant improvement in market conditions with respect to assets in our bank loan portfolio. The improvement in bank loan conditions was partially offset by allowances taken on our CRE portfolio. During the three and nine months ended September 30, 2010, we had two and nine loans, respectively for which we had taken impairment charges as compared to one and two loans for the three and nine months ended September 30, 2009, respectively, as a result of our quarterly impairment analysis.
Gain on the extinguishment of debt was $6.3 million and $29.3 million for the three and nine months ended September 30, 2010, respectively, as compared to $12.7 million and $19.6 million for the three and nine months ended September 30, 2009, respectively, primarily due to the buyback of a portion of the debt issued by RREF 2006-1 and RREF 2007-1 during the period. The $20.0 million and $76.4 million of notes, issued at par, were bought back as an investment by us at a weighted average price of
68.8% and 61.6%
for the three and nine months ended September 30, 2010, respectively. For the three and nine months ended September 30, 2009, the $14.5 million and $22.0 million of notes, issued at par, were bought back as an investment by us at a weighted average price of 12.3% and 10.8%, respectively. The related deferred debt issuance costs were immaterial. We buyback debt opportunistically to the extent we have cash accessible and the securities become available on acceptable terms and, accordingly, our gains on the extinguishment of debt may fluctuate materially from period to period.
Other income (expense) increased $1.3 million (91%) and $2.0 million (147%) to an expense of $121,000 and income of $650,000 for the three and nine months ended September 30, 2010, respectively, as compared to expenses for both the three and nine months ended September 30, 2009 of $1.4 million, respectively, primarily due to a charge in September 2009, which was the result of an accrual for a liability related to the sale of our equity position in our former Ischus II portfolio which we deconsolidated in November 2007. The increase in other income for the nine months ended September 30, 2010 includes a gain of $753,000 from the sale of a property in May 2010 by a real estate joint venture in which we have invested. There were no sales by the joint venture in the comparable 2009 period.
Financial Condition
Summary.
Our total assets at September 30, 2010 were $1.9 billion, an increase from $1.8 billion at December 31, 2009. As of September 30, 2010, we held $38.3 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 September 30, 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
|
|||||||||||||||||||
|
September 30, 2010
|
||||||||||||||||||||||||
|
Floating rate
|
||||||||||||||||||||||||
|
CMBS
|
$ | 31,127 | 100.00% | $ | 8,730 | 28.05% | $ | (22,397 | ) | -71.95% | ||||||||||||||
|
Structured notes
|
6,731 | 33.01% | 11,938 | 58.55% | 5,207 | 25.54% | ||||||||||||||||||
|
Other ABS
|
− | −% | 24 | 0.29% | 24 | 0.29% | ||||||||||||||||||
|
B notes
(1)
|
26,500 | 100.00% | 26,185 | 98.81% | (315 | ) | -1.19% | |||||||||||||||||
|
Mezzanine loans
(1)
|
104,048 | 100.00% | 102,810 | 98.81% | (1,238 | ) | -1.19% | |||||||||||||||||
|
Whole loans
(1)
|
422,900 | 99.99% | 403,055 | 95.30% | (19,845 | ) | -4.69% | |||||||||||||||||
|
Bank loans
|
879,052 | 96.86% | 847,545 | (2) | 93.38% | (31,507 | ) | -3.48% | ||||||||||||||||
|
Loans held for sale
(3)
|
2,824 | 86.84% | 2,824 | (2) | 86.84% | − | −% | |||||||||||||||||
|
ABS held-to-maturity
(4)
|
31,486 | 89.58% | 23,593 | 67.13% | (7,893 | ) | -22.45% | |||||||||||||||||
|
Total floating rate
|
1,504,668 | 96.49% | 1,426,704 | 91.49% | (77,964 | ) | -5.00% | |||||||||||||||||
|
Fixed rate
|
||||||||||||||||||||||||
|
CMBS
|
67,381 | 59.69% | 54,922 | 48.65% | (12,459 | ) | -11.04% | |||||||||||||||||
|
B notes
(1)
|
31,002 | 99.54% | 30,634 | 98.36% | (368 | ) | -1.18% | |||||||||||||||||
|
Mezzanine loans
(1)
|
58,613 | 100.25% | 51,205 | 87.58% | (7,408 | ) | -12.67% | |||||||||||||||||
|
Lease receivables
(5)
|
115,474 | 100.00% | 115,404 | 99.94% | (70 | ) | -0.06% | |||||||||||||||||
|
Total fixed rate
|
272,470 | 85.69% | 252,165 | 79.31% | (20,305 | ) | -6.38% | |||||||||||||||||
|
Grand total
|
$ | 1,777,138 | 94.66% | $ | 1,678,869 | 89.43% | $ | (98,269 | ) | -5.23% | ||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Floating rate
|
||||||||||||||||||||||||
|
CMBS
|
$ | 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 | ) | -6.64% | ||||||||||||||||
|
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
|
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% | |||||||||||||||||
|
Lease receivables
(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 $29.1 million at September 30, 2010, allocated as follows: B notes ($684,000), mezzanine loans ($8.6 million) and whole loans ($19.8 million). Net carrying amount includes an allowance for loan losses of $29.3 million at December 31, 2009, allocated as follows: B notes ($666,000), 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 $871.6 million and $839.6 million at September 30, 2010 and December 31, 2009, respectively. The amount disclosed represents net realizable value, which includes a $10.3 million and $17.8 million allowance for loan losses at September 30, 2010 and December 31, 2009, respectively.
|
|
(3)
|
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 any other-than-temporary impairment charges.
|
|
(5)
|
Net carrying amount includes a $70,000 and $1.1 million allowance for lease losses at September 30, 2010 and December 31, 2009, respectively.
|
Commercial Mortgage-Backed Securities.
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 on the security as generated by third party software;
|
|
|
·
|
credit ratings from the rating agencies;
|
|
|
·
|
underlying credit fundamentals of the collateral backing the security; and
|
|
|
·
|
whether, based upon our intent, it is more likely than not that we will sell the security before the recovery of the amortized cost basis.
|
At September 30, 2010 and December 31, 2009, we held $63.7 million and $44.5 million, respectively, (net of unrealized losses of $34.9 million and $47.6 million, respectively) of CMBS recorded at fair value. To determine fair value, we use two methods, either a dealer quote or an internal valuation model, depending upon when the position was purchased. As of September 30, 2010 and December 31, 2009, $52.8 million and $29.7 million, respectively, of investment securities available for sale were valued using dealer quotes and $10.9 million and $14.8 million, respectively, were valued using the weighted average of the three measures discussed below.
For securities purchased in 2009 and thereafter, we obtain a quote from a dealer, which typically will be the dealer who sold us the security. We have been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models. These quotes are non-binding. As a result of how the dealers develop their quotes, the market illiquidity and low levels of trading activity
as of December 31, 2009, we categorized all of these investment securities available-for-sale in Level III in the fair value hierarchy. Due to the increased level of trading activity in 2010, we moved some of these securities into Level II in the fair value hierarchy. We evaluate the reasonableness of the quotes we receive by applying our own valuation models. If there is a material difference between a quote we receive and the value indicated by our valuation models, we will evaluate the difference. As part of that evaluation, we will discuss the difference with the dealer, who may revise their quote based upon these discussions. Alternatively, we may revise our valuation models.
For investment securities available-for-sale purchased prior to 2009, we determine fair value based on taking a weighted average of the following three measures:
|
|
·
|
dealer quotes, as described above;
|
|
|
·
|
quotes on more actively-traded, higher-rated securities issued in a similar time period, adjusted for differences in rating and seniority; and
|
|
|
·
|
the value resulting from an internal valuation model using an income approach based upon an appropriate risk-adjusted yield, time value and projected losses using default assumptions based upon an historical analysis of underlying loan performance.
|
In the aggregate, we purchased our CMBS portfolio at a discount. At September 30, 2010 and December 31, 2009, the remaining discount to be accreted into income over the remaining lives of the securities was $30.1 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 and nine months ended September 30, 2010, we recognized $4.5 million and $10.5 million of other-than-temporary impairment on one and three positions, respectively, that supported our CMBS investments bringing the combined fair value of these positions to $470,000. The assumed default of the underlying collateral positions in our cash flow model yielded a value that would result in less than a full recovery of our cost basis. We recognized these impairments through the consolidated statements of operations.
During the three and nine months ended September 30, 2009, we recognized $45,000 and $5.7 million, respectively, of other-than-temporary impairment on one Other ABS position bringing the combined fair value to $0. The assumed default of this collateral position in our cash flow model yielded a value of less than full recovery of our cost basis. The net impairment losses were recognized in earnings in our consolidated statements of operations. All of our other-than-temporary impairment losses were related to credit losses.
While the remaining CMBS investments have continued to decline in fair value on a net basis, 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. We do not believe any other of our securities available-for-sale were other-than-temporarily impaired as of September 30, 2010.
The following table summarizes our CMBS as of September 30, 2010 and December 31, 2009 (in thousands, except percentages). Dollar price is computed by dividing amortized cost by par amount.
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
Amortized Cost
|
Dollar Price
|
Amortized Cost
|
Dollar Price
|
|||||||||||||
|
Moody’s Ratings Category:
|
||||||||||||||||
|
Aaa
|
$ | 6,086 | 68.89% | $ | 11,690 | 64.70% | ||||||||||
|
Aa1 through Aa3
|
21,670 | 69.38% | 9,639 | 50.73% | ||||||||||||
|
A1 through A3
|
13,936 | 70.60% | 4,826 | 56.14% | ||||||||||||
|
Baa1 through Baa3
|
2,412 | 40.20% | 2,021 | 33.68% | ||||||||||||
|
Ba1 through Ba3
|
4,265 | 31.53% | 10,443 | 100.00% | ||||||||||||
|
B1 through B3
|
9,921 | 66.14% | 24,449 | 85.27% | ||||||||||||
|
Caa1 through Caa3
|
16,984 | 86.66% | 12,832 | 98.71% | ||||||||||||
|
Ca through C
|
23,234 | 77.26% | 16,210 | 73.68% | ||||||||||||
|
Total
|
$ | 98,508 | 68.40% | $ | 92,110 | 73.23% | ||||||||||
|
S&P Ratings Category:
|
||||||||||||||||
|
AAA
|
$ | 3,221 | 64.41% | $ | 5,997 | 59.97% | ||||||||||
|
AA+ through AA-
|
4,048 | 80.97% | 3,659 | 40.65% | ||||||||||||
|
A+ through A-
|
6,519 | 71.84% | 6,544 | 62.75% | ||||||||||||
|
BBB+ through BBB-
|
34,470 | 69.43% | 11,955 | 59.49% | ||||||||||||
|
BB+ through BB-
|
4,779 | 53.10% | 7,847 | 78.76% | ||||||||||||
|
B+ through B-
|
255 | 2.55% | 9,081 | 90.81% | ||||||||||||
|
CCC+ through CCC-
|
45,216 | 88.16% | 47,027 | 83.54% | ||||||||||||
|
Total
|
$ | 98,508 | 68.40% | $ | 92,110 | 73.23% | ||||||||||
|
Weighted average rating factor
|
3,524 | 2,971 | ||||||||||||||
Investment Securities Trading.
At September 30, 2010, we held $11.9 million of investment securities trading at fair value. We purchased 10 and 18 securities and sold six and nine during the three and nine months ended September 30, 2010, respectively, for a gain of $2.0 million and $4.5 million, respectively. Investment securities trading are reported at fair value. We did not hold any such investment at December 31, 2009.
Other Asset-Backed Securities.
At September 30, 2010 and December 31, 2009, we held two other ABS positions with a fair value of $24,000.
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
(4)
|
|||||||
|
September 30, 2010
:
|
|||||||||||
|
Whole loans, floating rate
(1)
|
36 | $ | 422,900 |
LIBOR plus 1.50% to
LIBOR plus 4.50%
|
November 2010 to
May 2017
|
||||||
|
B notes, floating rate
|
3 | 26,500 |
LIBOR plus 2.50% to
LIBOR plus 3.01%
|
July 2011 to
October 2011
|
|||||||
|
B notes, fixed rate
|
2 | 31,003 |
7.00% to 8.68%
|
July 2011 to
April 2016
|
|||||||
|
Mezzanine loans, floating rate
|
9 | 104,048 |
LIBOR plus 2.15% to
LIBOR plus 3.00%
|
October 2010 to
January 2013
|
|||||||
|
Mezzanine loans, fixed rate
(3)
|
5 | 58,613 |
8.14% to 11.00%
|
January 2016 to
September 2016
|
|||||||
|
Total
(2)
|
55 | $ | 643,064 | ||||||||
|
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 $5.8 million in unfunded loan commitments as of September 30, 2010 and $5.6 million as of December 31, 2009. These commitments are funded as the borrowers require additional funding and have satisfied the requirements to obtain this additional funding.
|
|
(2)
|
The total does not include an allowance for loan losses of $29.1 million and $29.3 million recorded as of September 30, 2010 and December 31, 2009, respectively.
|
|
(3)
|
Fixed rate mezzanine loan dates exclude a loan that matured in May 2010 and is in default.
|
|
(4)
|
Maturity dates do not include possible extension options that may be available to the borrowers.
|
During the nine months ended September 30, 2010, we determined that three loans deemed troubled debt restructurings had probable losses and we recorded a provision for two 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 $35.1 million we recorded an allowance of $14.4 million for probable losses. On a second whole loan secured by an improved pad zoned for retail use, the borrower has received a bid at an amount of approximately $850,000 less than our basis in the loan and we took a provision for loss in the same amount against the loan. With the third loan secured by a hotel in South Florida, the borrower has noted possible reserve short-falls in fiscal 2011, we have not yet taken a provision on this loan but continue to monitor its performance. In addition to these provisions, we recorded $3.4 million in general provisions for loan losses against the remaining CRE portfolio of loans during the nine months ended September 30, 2010.
During the three months ended September 30, 2010, we accepted a bankruptcy court-approved settlement on a portfolio of condominiums that had been in default since July 2009 and after receiving a settlement pay-down of $2.3 million that brought the loan balance to $5.0 million. After a review of the projected sale proceeds, we determined a provision of $648,000 was needed and upon foreclosure, we now classify the property as property available-for-sale with a fair value of $4.4 million at September 30, 2010.
Bank Loans.
At September 30, 2010, we held a total of $847.5 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 $48.9 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 have determined that Apidos CDO I, Apidos CDO III and Apidos Cinco are VIEs and that we are the primary beneficiary. 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 September 30, 2010 and December 31, 2009 (in thousands, except percentages). Dollar price is computed by dividing amortized cost by par amount.
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
Amortized cost
|
Dollar price
|
Amortized cost
|
Dollar price
|
|||||||||||||
|
Moody’s ratings category:
|
||||||||||||||||
|
Baa1 through Baa3
|
$ | 27,897 | 98.81% | $ | 38,419 | 98.09% | ||||||||||
|
Ba1 through Ba3
|
430,102 | 97.13% | 404,609 | 96.91% | ||||||||||||
|
B1 through B3
|
366,128 | 96.10% | 355,441 | 96.33% | ||||||||||||
|
Caa1 through Caa3
|
30,594 | 99.59% | 44,265 | 99.79% | ||||||||||||
|
Ca
|
8,934 | 100.00% | 13,697 | 88.68% | ||||||||||||
|
No rating provided
|
18,222 | 95.18% | 9,070 | 91.64% | ||||||||||||
|
Total
|
$ | 881,877 | 96.82% | $ | 865,501 | 96.67% | ||||||||||
|
S&P ratings category:
|
||||||||||||||||
|
BBB+ through BBB-
|
$ | 58,629 | 99.03% | $ | 73,629 | 98.23% | ||||||||||
|
BB+ through BB-
|
359,420 | 97.15% | 353,725 | 97.11% | ||||||||||||
|
B+ through B-
|
361,447 | 95.98% | 337,193 | 96.12% | ||||||||||||
|
CCC+ through CCC-
|
32,319 | 98.09% | 42,198 | 96.65% | ||||||||||||
|
CC+ through CC-
|
1,634 | 100.25% | 3,104 | 100.13% | ||||||||||||
| D | 7,297 | 100.00% | 8,602 | 95.91% | ||||||||||||
|
No rating provided
|
61,131 | 96.69% | 47,050 | 94.85% | ||||||||||||
|
Total
|
$ | 881,877 | 96.82% | $ | 865,501 | 96.67% | ||||||||||
|
Weighted average rating factor
|
2,108 | 2,131 | ||||||||||||||
Asset-backed securities held-to-maturity.
At September 30, 2010, we held a total of $23.6 million of ABS held-to-maturity 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 $2.3 million over our holdings at December 31, 2009. The increase in total ABS held-to-maturity was principally due to the improved market prices.
The following table summarizes our ABS held-to-maturity, at cost, as of September 30, 2010 and December 31, 2009 (in thousands, except percentages). Dollar price is computed by dividing amortized cost by par amount.
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
Amortized cost
|
Dollar price
|
Amortized cost
|
Dollar price
|
|||||||||||||
|
Moody’s ratings category:
|
||||||||||||||||
|
Aa1 through Aa3
|
$ | 2,776 | 84.82% | $ | 2,854 | 82.89% | ||||||||||
|
A1 through A3
|
311 | 77.75% | 303 | 75.75% | ||||||||||||
|
Baa1 through Baa3
|
2,349 | 78.73% | − | −% | ||||||||||||
|
Ba1 through Ba3
|
4,446 | 96.13% | 4,427 | 95.72% | ||||||||||||
|
B1 through B3
|
4,246 | 97.72% | 4,319 | 97.63% | ||||||||||||
|
Caa1 through Caa3
|
9,941 | 99.20% | 9,913 | 99.14% | ||||||||||||
|
Ca
|
3,552 | 79.23% | 3,550 | 79.22% | ||||||||||||
|
No rating provided
|
3,865 | 77.30% | 6,035 | 75.44% | ||||||||||||
|
Total
|
$ | 31,486 | 89.58% | $ | 31,401 | 88.77% | ||||||||||
|
S&P ratings category:
|
||||||||||||||||
|
No rating provided
|
$ | 31,486 | 89.58% | $ | 31,401 | 88.77% | ||||||||||
|
Total
|
$ | 31,486 | 89.58% | $ | 31,401 | 88.77% | ||||||||||
|
Weighted average rating factor
|
4,111 | 4,028 | ||||||||||||||
The following table provides information as to the lien status of our bank loans. All, except $850,000 of first lien loans, are held by the indicated CDOs, which we consolidate (in thousands):
|
Amortized Cost
(1)
|
||||||||||||||||
|
Apidos I
|
Apidos III
|
Apidos Cinco
|
Total
|
|||||||||||||
|
September 30, 2010
:
|
||||||||||||||||
|
Loans held for investment:
|
||||||||||||||||
|
First lien loans
|
$ | 292,977 | $ | 239,084 | $ | 297,050 | $ | 829,111 | ||||||||
|
Second lien loans
|
14,047 | 11,460 | 13,142 | 38,649 | ||||||||||||
|
Subordinated second lien loans
|
163 | 122 | − | 285 | ||||||||||||
|
Defaulted first lien loans
|
6,064 | 2,732 | − | 8,796 | ||||||||||||
|
Defaulted second lien loans
|
500 | 500 | 362 | 1,362 | ||||||||||||
|
Total
|
313,751 | 253,898 | 310,554 | 878,203 | ||||||||||||
|
First lien loans held for sale at fair value
|
1,834 | 218 | 772 | 2,824 | ||||||||||||
|
Total
|
$ | 315,585 | $ | 254,116 | $ | 311,326 | $ | 881,027 | ||||||||
|
December 31, 2009
:
|
||||||||||||||||
|
Loans held for investment:
|
||||||||||||||||
|
First lien loans
|
$ | 284,719 | $ | 232,900 | $ | 295,511 | $ | 813,130 | ||||||||
|
Second lien loans
|
11,507 | 9,097 | 10,657 | 31,261 | ||||||||||||
|
Subordinated second lien loans
|
163 | 122 | − | 285 | ||||||||||||
|
Defaulted first lien loans
|
4,511 | 5,579 | 1,685 | 11,775 | ||||||||||||
|
Defaulted second lien loans
|
500 | 500 | − | 1,000 | ||||||||||||
|
Total
|
301,400 | 248,198 | 307,853 | 857,451 | ||||||||||||
|
First lien loans held for sale at fair value
|
4,064 | 2,077 | 1,909 | 8,050 | ||||||||||||
|
Total
|
$ | 305,464 | $ | 250,275 | $ | 309,762 | $ | 865,501 | ||||||||
|
(1)
|
All loans are senior and secured unless otherwise noted.
|
Lease Receivables.
Investments in lease receivables, net of unearned income, were as follows (in thousands):
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Leases, net of unearned income
|
$ | 79,263 | $ | 1,397 | ||||
|
Operating leases
|
19,363 | − | ||||||
|
Notes receivable
|
16,848 | 670 | ||||||
|
Subtotal
|
115,474 | 2,067 | ||||||
|
Allowance for lease losses
|
(70 | ) | (1,140 | ) | ||||
|
Total
|
$ | 115,404 | $ | 927 | ||||
Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. We recognize rental income on a straight-line basis and record it as interest income in the consolidated statement of operations. We recognized $2.0 million and $2.9 million, respectively, in rental income during the three and nine months ended September 30, 2010.
We have the right to require LEAF Funding to repurchase credit impaired contracts or replace such contracts with performing contracts. LEAF Funding would have to repurchase or provide substitute contracts for each credit impaired contract at an amount equal to the discounted contract balance plus any overdue payments. The foregoing is limited to 5% of the aggregate discounted contract balance of all of the contracts sold by LEAF Funding to us.
Interest Receivable.
At September 30, 2010, we had interest receivable of $5.5 million, which consisted of $5.5 million of interest on our securities, loans and equipment leases and $9,000 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 lease receivables and $9,000 of interest earned on escrow and sweep accounts. The decrease in interest receivable resulted primarily from a $600,000 decrease in interest on our commercial real estate loan portfolio due to loan modifications which resulted in the decrease in weighted average rate. This was partially offset by a $200,000 increase in interest receivable on our bank loan portfolio due to the increase in weighted average rate as a result of fewer defaulted positions which resulted in a higher yield at September 30, 2010, and a $100,000 increase in interest on loans receivable – related party.
Loans Receivable – Related Party.
At September 30, 2010, we had loans receivable that consisted of two loans totaling $10.0 million. On January 15, 2010 we loaned Resource Capital Partners, Inc. $2.0 million 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 loan matures on January 14, 2015. On March 5, 2010, we entered into a Promissory Note with LEAF II that allowed for an $8.0 million facility, all of which was funded as of September 30, 2010. The loan is secured by all the assets of LEAF II, including its entire ownership interest in LEAF II Receivables Funding, LLC. The loan is scheduled to mature on March 3, 2011. There were no such receivables as of December 31, 2009.
Other Assets.
The following table summarizes our other assets as of September 30, 2010 and December 31, 2009 (in thousands)
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Fixed assets
|
$ | − | $ | 1 | ||||
|
Deferred debt issuance costs
|
1,271 | 1,626 | ||||||
|
Other receivables
|
1,715 | 555 | ||||||
|
Prepaid assets
|
770 | 612 | ||||||
|
Principal paydown
|
252 | 1,084 | ||||||
|
Total
|
$ | 4,008 | $ | 3,878 | ||||
Other assets increased $130,000 to $4.0 million as of September 30, 2010 from $3.9 million as of December 31, 2009. This increase resulted primarily from an increase of $1.2 million in other receivables principally due to receivables on our leasing portfolio and a related party receivable, an increase of $158,000 in prepaid assets due to an increase in prepaid insurance. These increases are partially offset by a decrease of $832,000 in principal receivables due to the timing of when principal was due and received and a $356,000 decrease in deferred debt issuance costs due to the amortization of these costs into expense.
Hedging Instruments.
Our hedges at September 30, 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 forward curve projecting steadily increasing rates, 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 September 30, 2010 were as follows (in thousands):
|
Benchmark rate
|
Notional value
|
Strike rate
|
Effective date
|
Maturity date
|
Fair value
|
|||||||||||||
|
Interest rate swap
|
1 month LIBOR
|
$ | 12,965 | 4.63% |
12/04/06
|
07/01/11
|
$ | (425 | ) | |||||||||
|
Interest rate swap
|
1 month LIBOR
|
12,150 | 5.44% |
06/08/07
|
03/25/12
|
(919 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
12,750 | 5.27% |
07/25/07
|
08/06/12
|
(1,143 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
34,330 | 4.13% |
01/10/08
|
05/25/16
|
(2,993 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
1,681 | 5.72% |
07/09/07
|
10/01/16
|
(188 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
1,880 | 5.68% |
07/13/07
|
03/12/17
|
(447 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
81,702 | 5.58% |
06/08/07
|
04/25/17
|
(8,877 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
1,726 | 5.65% |
06/28/07
|
07/15/17
|
(190 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
3,850 | 5.65% |
07/19/07
|
07/15/17
|
(424 | ) | |||||||||||
|
Interest rate swap
|
1 month LIBOR
|
4,023 | 5.41% |
08/07/07
|
07/25/17
|
(416 | ) | |||||||||||
|
Total
|
$ | 167,057 | 5.17% | $ | (16,022 | ) | ||||||||||||
In addition, we also had an interest rate cap agreement with a fair value of $100 and notional amount of $14.8 million outstanding as of September 30, 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.
Collateralized Debt Obligations.
RCC Real Estate, Inc., or RCC Real Estate, a subsidiary of ours, repurchased debt issued by RREF 2006-1 of $20.0 million of the Class A-1 senior notes in February 2010, $12.0 million of the Class A-2 senior notes, $6.9 million of the Class B senior notes, and $7.7 million of the Class C senior notes in April 2010, $2.0 million of the Class D senior notes in June 2010 and $20.0 million of Class A-1 notes in July 2010. At September 30, 2010, the notes issued to outside investors, net of repurchased notes, had a weighted average borrowing rate of 1.32%.
RCC Real Estate repurchased debt issued by RREF 2007-1 of $250,000 of the Class J senior notes in January 2010 and $7.5 million of the class Class B senior notes in June 2010. At September 30, 2010, the notes issued to outside investors, net of repurchased notes, had a weighted average borrowing rate of 0.81%.
Secured Term Facility.
In April 2010, we entered into a loan and security agreement with The Bancorp Bank to finance the purchase of notes. The maximum amount of our borrowing under this agreement was $6.5 million. Borrowings under this agreement bore interest at six percent (6%) per annum. The facility was repaid in full on May 27, 2010 and the facility was terminated. There were no such borrowings as of December 31, 2009.
Equipment Contract Backed Notes, Series 2010-2.
In May 2010, we closed Equipment Contract Backed Notes, Series 2010-2, a $120.0 million transaction that provides financing for notes. The investments held by LEAF Receivables Funding 3, LLC collateralize the debt it issued and, as a result, the investments are not available to us, its creditors or stockholders. LEAF Receivables Funding 3, LLC issued a total of $120.0 million of senior notes at a weighted average price of $93.52 to unrelated investors generating proceeds of $112.2 million. We will amortize the discount at issuance over the lives of the notes using the effective yield method, adjusted for the effects of estimated prepayments on the notes.
The equipment contract backed notes issued to investors by LEAF Receivables Funding 3, LLC consist of the following classes: (i) $95.5 million of class A notes; (ii) $7.0 million of class B notes; (iii) $6.4 million of class C notes; (iv) $6.4 million of class D notes; and (v) $4.7 million of class E notes. All of the notes issued bear a fixed rate of interest 5.0%. The class A notes mature in May 2016 and the class B through E notes mature in December 2017.
Stockholders’ Equity
Stockholders’ equity at September 30, 2010 was $329.7 million and included $34.9 million of net unrealized losses on our available-for-sale portfolio, and $17.4 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 nine months ended September 30, 2010 was principally due to the receipt of $42.8 million related to a stock offering in May 2010 combined with $53.6 million of proceeds related to our DRIP in 2010.
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):
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net income (loss) − GAAP
|
$ | 14,053 | $ | 11,528 | $ | 28,821 | $ | (5,751 | ) | |||||||
|
Taxable REIT subsidiary’s (income) loss
|
(5,141 | ) | 653 | (6,611 | ) | 1,853 | ||||||||||
|
Adjusted net income (loss)
|
8,912 | 12,181 | 22,210 | (3,898 | ) | |||||||||||
|
Adjustments:
|
||||||||||||||||
|
Share-based compensation to related parties
|
(473 | ) | 631 | (587 | ) | 660 | ||||||||||
|
Capital loss carryover/(utilization) losses from
the sale of securities
|
(1,181 | ) | − | (1,181 | ) | 4,978 | ||||||||||
|
Provisions for loan and lease losses unrealized
|
3,265 | 4,240 | 27,294 | 13,340 | ||||||||||||
|
Asset impairments
|
4,456 | 895 | 10,514 | 6,560 | ||||||||||||
|
Equity in income of real estate joint venture
|
(2,661 | ) | − | (7,552 | ) | − | ||||||||||
|
Deferral of extinguishment of debt income
|
8,307 | (12,741 | ) | − | (12,741 | ) | ||||||||||
|
Net book to tax adjustments for our taxable
foreign REIT subsidiaries
|
(10,090 | ) | (3,134 | ) | (16,207 | ) | 4,601 | |||||||||
|
Subpart F income limitation
|
− | 5,406 | − | 6,871 | ||||||||||||
|
Other net book to tax adjustments
|
(126 | ) | 1,419 | (1,397 | ) | 1,387 | ||||||||||
|
Estimated REIT taxable income
|
$ | 10,409 | $ | 8,897 | $ | 33,094 | $ | 21,758 | ||||||||
|
Amounts per share – diluted
|
$ | 0.20 | $ | 0.36 | $ | 0.73 | $ | 0.89 | ||||||||
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 dividends that we are required to declare to our stockholders in order to maintain our status as a REIT for federal income 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.
Summary of CDO and CLO Performance Statistics
The following table sets forth collateralized debt obligations – distributions and coverage test summary for the periods presented (in thousands):
|
Annualized
|
||||||||||||||||||||||
|
Interest
|
||||||||||||||||||||||
|
Coverage
|
Overcollateralization
|
|||||||||||||||||||||
|
Cash Distributions
|
Cushion
|
Cushion
|
||||||||||||||||||||
|
Year Ended
|
Nine Months Ended
|
As of
|
As of Initial
|
|||||||||||||||||||
|
December 31,
|
September 30,
|
September 30,
|
September 30,
|
Measurement
|
||||||||||||||||||
|
Name
|
CDO Type
|
2009
(1)
|
2010
(1)
|
2010
(2) (3)
|
2010
(4)
|
Date
|
||||||||||||||||
|
(actual)
|
(actual)
|
|||||||||||||||||||||
|
Apidos CDO I
|
CLO
|
$ | 6,643 | $ | 5,792 | $ | 3,607 | $ | 11,262 | $ | 17,136 | |||||||||||
|
Apidos CDO III
|
CLO
|
$ | 6,390 | $ | 4,781 | $ | 2,455 | $ | 7,324 | $ | 11,269 | |||||||||||
|
Apidos Cinco CDO
|
CLO
|
$ | 7,553 | $ | 5,698 | $ | 4,219 | $ | 19,465 | $ | 17,774 | |||||||||||
|
RREF 2006-1
|
CRE CDO
|
$ | 13,222 | $ | 6,978 | $ | 4,397 | $ | 8,010 | $ | 24,941 | |||||||||||
|
RREF 2007-1
|
CRE CDO
|
$ | 20,536 | $ | 11,644 | $ | 12,118 | $ | 20,192 | $ | 26,032 | |||||||||||
|
(1)
|
Distributions on retained equity interests in CDOs (comprised of note investment and preference share ownership).
|
|
(2)
|
Interest coverage includes annualized amounts based on the most recent trustee statements.
|
|
(3)
|
Interest coverage cushion represents the amount by which annualized interest income expected exceeds the annualized amount payable on all classes of CDO notes senior to our preference shares.
|
|
(4)
|
Overcollateralization cushion represents the amount by which the collateral held by the CDO issuer exceeds the maximum amount required.
|
Liquidity and Capital Resources
During the nine months ended September 30, 2010, our principal sources of current liquidity were $42.8 million of net proceeds from a common stock offering in May 2010, $53.6 million of net proceeds from sales of common stock through our DRIP, and funds available in existing CDO financings of $151.9 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.
During the period ended September 30, 2010, we financed the acquisition of a leased-equipment portfolio through a $120.0 million securitization, Leaf Funding 3. The securitization issued equipment-backed notes at a weighted average discounted price of 93.6% with a weighted average cost of 7.85% and an average life of 1.89 years. We invested $14.8 million of equity in Leaf Funding 3 as of September 30, 2010. The Leaf Funding 3 financing enabled us to leverage a portion of the capital sourced through the sale of common stock in May 2010.
At October 31, 2010, after disbursing the third quarter 2010 dividend, RCC’s liquidity of $182.6 million consists of three primary sources:
|
|
·
|
unrestricted cash and cash equivalents of $36.2 million and restricted cash of $3.0 million in margin call accounts;
|
|
|
·
|
capital available for reinvestment in its five CDO entities of $138.3 million, of which $1.7 million is designated to finance future funding commitments on CRE loans; and
|
|
|
·
|
capital available for reinvestment in its equipment backed securitized notes of $5.1 million.
|
Our leverage ratio may vary as a result of the various funding strategies we use. As of September 30, 2010 and December 31, 2009, our leverage ratio was 4.7 times and 6.7 times, respectively. The decrease in leverage ratio was primarily due to the common stock offering and DRIP proceeds received and the repurchase of our CDO debt, at substantial discounts, during the nine months ended September 30, 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 September 16, 2010, we declared a quarterly distribution of $0.25 per share of common stock, $13.7 million in the aggregate, which was paid on October 26, 2010 to stockholders of record on September 30, 2010.
Our dividends for the remainder of 2010 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 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 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 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.
Contractual Obligations and Commitments
The table below summarizes our contractual obligations as of September 30, 2010. The table below excludes contractual commitments related to our derivatives, which we discuss in our Annual Report on Form 10-K for the year ended 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
|
$ | 1,411,939 | $ | − | $ | − | $ | − | $ | 1,411,939 | (1) | |||||||||
|
Equipment contract backed notes,
Series 2010-2
|
102,319 | − | − | − | 102,319 | (2) | ||||||||||||||
|
Unsecured junior subordinated debentures
|
51,548 | − | − | − | 51,548 | (3) | ||||||||||||||
|
Base management fees
(4)
|
5,963 | 5,963 | − | − | − | |||||||||||||||
|
Total
|
$ | 1,571,769 | $ | 5,963 | $ | − | $ | − | $ | 1,565,806 | ||||||||||
|
(1)
|
Contractual
commitment does not include $17.0 million, $23.0 million, $17.9 million, $25.6 million and $46.5 million of interest expense payable through the non-call dates of July 2010, May 2011, June 2011, August 2011 and June 2012, respectively, plus an additional reinvestment period of four and five years on Apidos CDO I, Apidos Cinco CDO and Apidos CDO III and RREF 2006-1 and RREF 2007-1, respectively. 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 $36.4 million of interest expense payable through the maturity date of May 2016 and on our equipment-backed securitized notes.
|
|
(3)
|
Contractual
commitment does not include $52.5 million and $53.5 million of interest expense payable through the maturity date of June 2036 and October 2036, respectively, on our trust preferred securities.
|
|
(4)
|
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 September 30, 2010, we had ten interest rate swap contracts with a notional value of $167.1 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 September 30, 2010, the average fixed pay rate of our interest rate hedges was 5.17% and our receive rate was one-month LIBOR, or 0.26%. 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 September 30, 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 September 30, 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 September 30, 2010, we had five loans with unfunded commitments totaling $5.8 million, of which $1.6 million will be funded, if funding conditions are met, by restricted cash in RREF CDO 2007-1.
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
As of September 30, 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 September 30, 2010 and December 31, 2009, the estimated impact on the fair value of our interest rate-sensitive investments and hedging instruments of changes in interest rates, assuming rates instantaneously fall 100 basis points and rise 100 basis points (dollars in thousands):
|
September 30, 2010
|
||||||||||||
|
Interest rates
fall 100
basis points
|
Unchanged
|
Interest rates
rise 100
basis points
|
||||||||||
|
CMBS
(1)
|
||||||||||||
|
Fair value
|
$ | 56,955 | $ | 54,501 | $ | 52,176 | ||||||
|
Change in fair value
|
$ | 2,454 | $ | − | $ | (2,325 | ) | |||||
|
Change as a percent of fair value
|
4.50% | −% | 4.27% | |||||||||
|
Hedging instruments
|
||||||||||||
|
Fair value
|
$ | (35,745 | ) | $ | (16,022 | ) | $ | (20,062 | ) | |||
|
Change in fair value
|
$ | (19,723 | ) | $ | − | $ | (4,040 | ) | ||||
|
Change as a percent of fair value
|
123.10% | −% | -25.22% | |||||||||
|
December 31, 2009
|
||||||||||||
|
Interest rates
fall 100
basis points
|
Unchanged
|
Interest rates
rise 100
basis points
|
||||||||||
|
CMBS
(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.
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.
|
|
ITEM 4.
|
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 at the reasonable assurance level.
Changes in Internal Control of Financial Reporting
There were no significant changes in our internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
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., as Property Trustee of Resource Capital Trust I, dated October 26, 2009 and effective September 30, 2009.
(4)
|
|
|
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.
(4)
|
|
|
4.4
|
Amended Junior Subordinated Note due 2036 in the principal amount of $25,774,000, between Resource Capital Corp. and Wells Fargo Bank, N.A., as Property Trustee of Resource Capital Trust I, dated October 26, 2009.
(4)
|
|
|
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., as Property Trustee of RCC Trust II, dated October 26, 2009 and effective September 30, 2009.
(4)
|
|
|
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.
(4)
|
|
|
4.7
|
Amended Junior Subordinated Note due 2036 in the principal amount of $25,774,000, between Resource Capital Corp. and Wells Fargo Bank, N.A., as Property Trustee of RCC Trust II, dated October 26, 2009.
(4)
|
|
|
10.1(a)
|
Amended and Restated Management Agreement between Resource Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc. dated as of June 30, 2008.
(5)
|
|
|
10.1(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.
(6)
|
|
|
10.1(c)
|
Second Amendment to Amended and Restated Management Agreement between Resource Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc., date August 17, 2010.
(7)
|
|
|
10.2
|
2005 Stock Incentive Plan.
(1)
|
|
|
10.3
|
2007 Omnibus Equity Compensation Plan.
(8)
|
|
|
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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
|
|
(5)
|
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on July 3, 2008.
|
|
(6)
|
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on October 20, 2009.
|
|
(7)
|
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed on August 19, 2010.
|
|
(8)
|
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 thereunto duly authorized.
|
RESOURCE CAPITAL CORP.
|
|
|
(Registrant)
|
|
|
Date: November 5, 2010
|
By:
/s/ Jonathan Z. Cohen
|
|
Jonathan Z. Cohen
|
|
|
Chief Executive Officer and President
|
|
|
Date: November 5, 2010
|
By:
/s/ David J. Bryant
|
|
David J. Bryant
|
|
|
Chief Financial Officer and Chief Accounting Officer
|
|
`
55
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Organization and Basis Of Quarterly PresentationNote 2 Summary Of Significant Accounting PoliciesNote 2 Summary Of Significant Accounting Policies (continued)Note 3 Investment Securities Available-for-saleNote 3 Investment Securities Available-for-sale (continued)Note 4 Investment Securities TradingNote 5 Investment Securities Held-to-maturityNote 5 Investment Securities Held-to-maturity (continued)Note 6 Loans Held For InvestmentNote 6 Loans Held For Investment (continued)Note 7 Lease ReceivablesNote 7 Lease Receivables (continued)Note 8 BorrowingsNote 8 Borrowings (continued)Note 9 Share Issuance and RepurchaseNote 10 Share-based CompensationNote 10 Share-based Compensation (continued)Note 11 Earnings Per ShareNote 12 Related Party TransactionsNote 12 Related Party Transactions (continued)Note 13 DistributionsNote 13 Distributions (continued)Note 14 Fair Value Of Financial InstrumentsNote 14 Fair Value Of Financial Instruments (continued)Note 15 Interest Rate Risk and Derivative InstrumentsNote 15 Interest Rate Risk and Derivative Instruments (continued)Note 16 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 6. Exhibits