SEC Filing Summary: Resource Capital Corp. (10-Q)
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2009. Resource Capital Corp. is a specialty finance company and Real Estate Investment Trust (REIT) that invests in commercial real estate-related assets (loans, CMBS) and commercial finance assets (bank loans, equipment leases). The company is externally managed by Resource Capital Manager, Inc., a subsidiary of Resource America, Inc.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Assets | $1,774.6 million | $1,936.0 million |
| Net Interest Income | $25.3 million | $27.2 million |
| Net Operating Income | $19.7 million | $21.0 million |
| Net Loss | $(17.3) million | $4.1 million (Income) |
| Net Loss Per Share (Basic) | $(0.71) | $0.17 |
| Provision for Loan and Lease Losses | $28.0 million | $16.8 million |
| Net Realized/Unrealized Losses on Investments | $(16.0) million | $(1.9) million |
| Total Borrowings | $1,584.7 million | $1,699.8 million |
| Cash and Cash Equivalents | $10.6 million | $14.6 million |
| Stockholders' Equity | $165.9 million | $186.3 million |
Material Changes vs. Prior Period
- Net Loss vs. Income: The company reported a net loss of $17.3 million for the six months ended June 30, 2009, compared to net income of $4.1 million in the prior year period. This reversal is primarily driven by a $11.1 million increase in provisions for loan and lease losses and a $14.0 million increase in net realized and unrealized losses on investments.
- Asset Valuation: Total assets decreased by approximately $161 million. Significant unrealized losses were recorded on Commercial Mortgage-Backed Securities (CMBS) and other Asset-Backed Securities (ABS). Specifically, a $5.7 million other-than-temporary impairment was recognized on an ABS position, reducing its fair value to zero.
- Interest Income: Total interest income decreased by 25% to $51.9 million, largely due to lower LIBOR rates affecting floating-rate assets and a reduction in the commercial real estate loan portfolio balance.
- Interest Expense: Interest expense decreased by 37% to $26.6 million, benefiting from lower LIBOR rates on borrowings and a reduction in repurchase agreement balances.
- Debt Extinguishment: The company recorded a $6.9 million gain on the extinguishment of debt after repurchasing $7.5 million of senior notes issued by a subsidiary at 8% of par value.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that ongoing problems in real estate and credit markets continue to impact operations, particularly the ability to generate capital and financing. The market for new securitizations has largely disappeared, and the company does not expect to sponsor new CDOs in the foreseeable future.
- Liquidity Strategy: The company is managing liquidity through capital recycling (loan payoffs and paydowns) and existing capacities within completed securitizations. Short-term financing via warehouse lines and repurchase agreements has become less reliable due to margin call risks.
- Loan Modifications: Due to borrower deterioration, the company has modified 14 commercial real estate loans since the beginning of 2008. Modifications include term extensions and interest rate adjustments.
- Dividends: To maintain REIT status, the company declared a quarterly distribution of $0.30 per share ($7.5 million aggregate) in June 2009. Management indicated that future dividends may be paid partially in stock to satisfy REIT distribution requirements.
- Risks: Key risks include further impairments on the investment portfolio, inability to renew financing on acceptable terms, and the potential need to liquidate assets at losses if financing cannot be replaced.
Investor Verification Checklist
- Impairment Methodology: Verify the assumptions used to determine that CMBS unrealized losses are "temporary" rather than "other-than-temporary," given the severity of the decline (amortized cost of $70.7M vs. fair value of $18.2M).
- Loan Allowance Adequacy: Review the specific reserves on the $158.2 million of impaired loans and leases to ensure the $59.1 million allowance is sufficient given the recessionary environment.
- Financing Renewals: Assess the status of the Natixis repurchase facility, which has been reduced and may require full paydown by March 2010, and the availability of alternative funding sources.
- Derivative Exposure: Confirm the impact of the $228.3 million notional amount of interest rate swaps, where the company pays a fixed rate averaging 5.14% while receiving a variable rate near 0.32% (LIBOR).
- Related Party Transactions: Review the sale of the direct financing lease portfolio to Resource America and the terms of the resulting $7.5 million promissory note.