Resource America Inc. (NASDAQ:REXI)
F4Q08 Earnings Call
December 9, 2008 8:30 am ET
Jonathan Z. Cohen – President, Chief Executive Officer
Purvi Kamdar – Director, Investor Relations
Steven J. Kessler – Chief Financial Officer
Good day ladies and gentlemen and welcome to the fourth quarter and fiscal year ended September 30, 2008 Resource America conference call. My name is Dan and I’ll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today’s call, Mr. Jonathan Cohen, President and CEO of Resource America. Please proceed.
Jonathan Z. Cohen
Thank you for joining the Resource America fourth quarter and fiscal year ended September 30, 2008 earnings conference call. This is Jonathan Cohen, President and CEO of Resource America. I would like to welcome you to our call. Before I begin, I will ask Purvi Kamdar, our Director of Investor Relations, to read the safe harbor statement.
When using this conference call, the words believe, anticipate, expect and similar expressions are intended to identify forward-looking statements. Although the company believes that these forward-looking statements are based on reasonable assumptions, such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from these contained in the forward-looking statements.
These risks and uncertainties are discussed in the company’s reports filed with the SEC including its reports on Forms 8-K, 10-Q and 10-K and in particular Item 1 on the Form 10-K report under the title Risk Factors. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. And with that, I’ll turn it back to Jonathan.
Jonathan Z. Cohen
Thank you Purvi. Again this is Jonathan Cohen and I thank you for joining our call. First I would like to review our operations and results for the fourth quarter and fiscal year 2008. The company reported adjusted income from continuing operations to non-GAAP measure of $539,000 or $0.03 per common share diluted and $11.5 million or $0.62 per common share fully diluted for the fourth quarter and fiscal year ended September 30, 2008 respectively.
For the fourth quarter and fiscal year ended September 30, 2008 the company reported adjusted revenues of $38 million and $179 million respectively. For the fourth quarter and fiscal year ended September 30, 2008 the company reported adjusted operating income of $4.4 million and $56.9 million. Adjusted revenues and adjusted operating income, both non-GAAP measures, include $6 million and $23.5 million of pretax fair value of adjustments on investments reported under the equity method of accounting for the fourth quarter and fiscal year ended September 30, 2008.
The company reported a net loss after discontinued operations of $9.2 million or $0.52 per share diluted for the fourth quarter ended September 30, 2008 and a net loss after discontinued operations of $26.2 million or $1.50 per common share diluted for the fiscal year ended September 30, 2008. As of September 30, 2008 the company’s GAAP book value per common share was $8.17 per share.
These results of course reflect the impact of the meltdown of the financial markets that started in 2007 and has accelerated through fiscal 2008. This has been particularly painful for us because even during this difficult time we’ve continued to raise new capital from our partners, profited handsomely from some asset sales, and carefully managed our existing partnerships; but the magnitude of the upheaval in the financial world has affected every company including ours.
The world turned quickly and through efforts that have taken us a year, we are making significant progress and we are positioning ourselves for future growth and profitability. We’ve aggressively pursued a three-pronged approach, which we believe will position us to take advantage of our platform, the current economic maelstrom, and to return our stock to a price which reflects our $8.17 book value, our earnings power and the unrecognized intangible value of our long term contracts.
The three-pronged approach includes first, lowering our general and administrative expenses in response to the new environment; second, maximizing our existing long term management contracts and their earning power and adding management of new assets and funds; and three, raising new investor capital by creating funds, limited partnerships that reflect opportunities that have developed through the market dislocations and emphasize our capabilities to exploit those opportunities.
I will now discuss each of these and tell you exactly what we have done and when you as investors can expect to see the results. First, we have made significant reductions in our general and administrative costs. The measures that we have instituted in fiscal 2008 should result in savings of approximately $17 million on an annualized basis beginning in January, 2009. One of the many steps leading to these savings did result in a severance charge in the fourth quarter of approximately $1.8 million.
Our cost savings will come from lower expenses at our resource financial fund management subsidiary, LEAF financial, our commercial finance asset manager as well as to a lesser extent Resource Real Estate in our corporate overhead. The world changed very rapidly and while our adjustments could not and did not happen as rapidly, we have now adjusted to that new world and are prepared to continue to adjust as needed.
What does this mean? It means that we will focus on our core businesses and the personnel, assets and structure needed to manage and service those businesses, as well as our ability to market new products and raise new capital through both the institutional channel and our retail channel.
Second, we recognize that the businesses that we have built have provided us with very good, long term contracts to service and manage the partnerships we sponsored, the funds we launched, our affiliate companies as well as CDO’s and CLO’s that we manage. We are focused on the value and longevity of these contracts. We have carefully analyzed our Resource financial fund management contracts and we verified our belief that these contracts are indeed valuable.
If discounted tremendously under very distressed scenarios, we believe the present value is between $50 and $80 million after costs. In addition, we have significant fee income that lasts for many years for managing the LEAF partnerships, the Resource Realty partnerships, and other funds. These contracts all reflect future revenues and therefore none are carried on our balance sheet.
Third, and perhaps most importantly, we continue to raise new equity from our retail channel and our institutional network. We have previously announced that even in this environment, and I am speaking of the last five months very difficult time for everybody, we have raised over $50 million of retail equity on our way to our $280 million goal, and have put to work over
$75 million of new institutional capital including our own small committed capital in the distressed real estate joint venture which we previously announced.
Again, these new limited partnerships, funds and ventures are subject to long term contracts and provide both up front fees, future management fees and incentive fees. In fiscal year 2009 alone, we expect to raise $330 million of investor funds to manage from LEAF, Resource Real Estate, our retail distressed real estate fund and our institutional distressed real estate fund. We are pleased by this performance during such a time of duress.
We continue to build all three divisions and have been pleased by LEAF’s ability to access new financings for its funds. During November LEAF III, an unconsolidated LEAFing partnership managed by LEAF, entered into two financing facilities totaling $355 million including an extension of $205 million credit facility led by Morgan Stanley Bank that was originally used to acquire the assets of Net Bank business finance and a new five year revolving $150 million credit facility that refinanced a maturing credit facility.
We continue to be able to finance new apartment buildings for our Resource Real Estate partnerships through Fannie Mae and Freddie Mac among other places. With the distressed real estate fund joint venture, we have not sought to use leverage.
Now I will ask Steve Kessler, our Chief Financial Officer to walk us through the financial highlights.
Steven J. Kessler
Thank you Jonathan. The press release along with Jonathan’s comments covered the results of operations. I would like to briefly discuss our balance sheet and cash flow statements. Our balance sheet assets decreased from $966.5 million at September 30, 2007 to $762.7 million at September 30, 2008, a decrease of $203.8 million. Our borrowings decreased to $554.1 million at September 30, 2008 from $706.4 million at September 30, 2007, a decrease of $152.3 million.
We anticipate that we’ll be able to continue to reduce borrowings and overall leverage, and I’ll talk about that a little more later.
On our balance sheet, we have loans held for investment net are $219.7 million at September 30, 2008, and represent a portfolio of floating rate syndicated bank loans that we consolidate under N46R. Our investment and exposure to this investment is $18.6 million at September 30, 2008.
On to our commercial finance loans and leases, we present our investment in commercial finance loans and leases in two categories in our balance sheet, based on the ultimate resolution of the loan or lease. Those leases and loans that are to be sold to the LEAF funds are classified as held for sale. Those leases and loans that are owned by LEAF commercial finance fund are classed as held for investment. As LCFF, what we call Leaf Commercial Finance Fund is consolidated on our balance sheet since we own the equity.
LCFF is a $25 million fund that sells 8.25% fixed promissory notes to investors. The held for sale leases and loans are about $113 million at September 30, ’08 and the held for investment leases and loans are about $185 million at September 30, 2008.
Investments in real estate net, which is our legacy portfolio of loans and properties interest was $38 million at September 30, ’08, a decrease of $11 million from September 30, ’07. The decrease is principally a result of the partial pay down of $18.4 million on a loan on the Evening Star building which is located in Washington, DC. We recognized a gain of $7.5 million in the fourth quarter of fiscal ’08 on this transaction, and our remaining investment is a $3.6 million discounted mezzanine loan.
At September 30, 2008 we reduced our total borrowings to $554 million from $706 million. Of that amount, $214 million is the net liabilities consolidated under FIN46-R which I spoke about earlier, and that’s related to our [Apidos six] investment and the company has no recourse to that. $273 million is non-recourse credit facilities at LEAF, with we also have no recourse and
$66.9 million is other debt, which includes $13.7 million of mortgage loans secured by properties owned by the company’s subsidiary.
In connection with this overall reduction in borrowings, it is important to note that our corporate secured revolving credit facilities, net of cash on our balance sheet, reached their peak of
$58.5 million at March 31, 2008. Those facilities at September 30, ’08 had borrowings again net of cash of $35.7 million, a reduction of $22.8 million since March 31, 2008. We expect and it is our goal to further reduce our corporate secured revolving credit facilities in fiscal 2009.
Our total stockholders equity was $143.7 million at September 30, 2008 as compared to
$185.3 million at September ’07. Our total common shares outstanding were $17.6 million at September, ’08 versus $17.4 million at September, ’07.
Let me now go to the cash flow statement. Net cash provided by operating activities of continuing operations as adjusted was approximately $31 million for the fiscal year ended September 30, 2008, an increase of $14.3 million as compared to net cash provided by operating activities as adjusted of about $16.6 million for the fiscal year ended September, ’07.
Schedule 3 in the press release reconciles net cash provided by operating activities of continuing operations to net cash provided by operating activities of continuing operations as adjusted.
At this time, I will turn it back to Jonathan.
Jonathan Z. Cohen
Thank you Steve. As Steve pointed out, we have significantly reduced our net debt recourse to the company over the last six months to $35 million. We expect to continue to pay down debt for the next few months. We will seek to strategically sell certain assets as we have done in the past, as well as to generate cash to retire debt. We will be making investments into our new distressed funds, as well as our usual small LP investments.
With this being said, we are lowering our guidance of expected 2009 net income from continuing operations to a range of $0.50 to $0.70. The higher end is contingent on LEAF, our commercial finance asset manager continuing to be able to get new financing at the rate that it has been doing so over the past six months, which might I add has been successfully.
This decrease is due to our concern in general decreasing guidance about the amount of financing that is available in the world and specifically for our leasing partnerships, and therefore the amount of leverage we will be able to put under those partnerships in 2009 fiscal year. When lease leverage or securitization returns, we expect to increase assets substantially at the funds and profitability to the manager Resource America and LEAF Financial just as substantially.
In the meantime, we will continue to build our company and look for an asset from some of the subsidiaries when the market plays normalizes and credit becomes more available. With that, I think if we have any questions, we will be happy to take them.
(Operator Instructions) At this time you have no questions in queue.
Jonathan Z. Cohen
Okay. Thank you very much and we look forward to speaking with you next quarter.
Thank you for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Good day.
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