Resource America Management Discusses Q1 2013 Results - Earnings Call Transcript

Feb. 6.13 | About: Resource America, (REXI)

Resource America (NASDAQ:REXI)

Q1 2013 Earnings Call

February 06, 2013 8:30 am ET


Jonathan Z. Cohen - Chief Executive Officer, President, Director and Member of Executive Committee

Purvi Kamdar - Director of Marketing and Investor Relations

Thomas C. Elliott - Chief Financial Officer and Senior Vice President


Leon G. Cooperman - Omega Advisors, Inc.

Allan Young


Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 Resource America Earnings Conference Call. My name is Shawn, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Jonathan Cohen, President and CEO of Resource America. Please proceed, sir.

Jonathan Z. Cohen

Thank you. And thank you for joining the Resource America earnings conference call for the first fiscal quarter ended December 31, 2012. This is Jonathan Cohen, President and CEO of Resource America, and I welcome you to our call.

Before I begin, I will ask Purvi Kamdar, our Director of Investor Relations, to read the Safe Harbor Statement.

Purvi Kamdar

Thank you, Jonathan. When used in this conference call, the words believes, anticipates, expects 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 1A 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 as 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

Thanks again, Purvi. This is Jonathan Cohen. Thank you for joining our call.

Now to our earnings. The company reported adjusted income from continuing operations attributable to common shareholders, net of tax, of $1.4 million or $0.06 per common share diluted for the first fiscal quarter ended December 31, 2012, as compared to an adjusted loss from continuing operations attributable to common shareholders, net of tax, of $2.6 million or $0.13 per common share, diluted for the first fiscal quarter ended December 31, 2011.

It is unfortunate that we have had to continue to write down legacy receivables related to our leasing funds, although these now are only on our books for approximately $10 million. These losses show up as credit losses. This circumstance forces us to look at the company on an adjusted basis and makes us focus shareholders on the present and the future, rather than the past.

Resource America's first fiscal quarter of 2013 reflects, in my opinion, our progress and makes us excited about our future prospects.

In this past year, we showed strong growth and positioned ourselves for the future. With growth has come increasing cash profitability. In my opinion, the best way to look at our progress is to track, first, our assets under management, which grew from -- grew by $2 billion to over the $15 billion. Second, our adjusted cash earnings from operations, which grew from a loss of $2 million during the quarter ended December 31, 2011, to a profit of nearly $3.5 million this quarter.

The progression of the cash earnings is significant and interesting for shareholders. The company had a loss of $528,000, then earned $46,000, $244,000 and now, $3.5 million over the last 4 quarters, respectively.

And the third way to track our progress is examine the amount of new equity capital raised for our products, specifically, the real estate products, which would add over $92 million for the quarter, up from $34 million a year ago.

In summary, there's not much to say as the company is performing substantially as expected, by me at least, in most areas. Our real estate businesses are growing significantly. In the first fiscal quarter alone, our public and private REITs, Resource Capital Corp. and Resource Real Estate Opportunity REIT, collectively raised over $92 million in new equity capital, which builds these companies and provides Resource America with substantial fee revenue from which we will earn sustainable and long-term future asset management fees and potentially incentive fees, positioning us for continued growth.

Resource Real Estate Opportunity REIT had a record quarter of fund raising, raising over $42 million of equity and acquiring nearly $29 million of real estate assets. Just to let you know, the trend has continued. We raised over $33 million of new equity capital for real estate products in January alone. We expect to set another high bar this quarter.

Not to be forgotten is our corporate credit business, CVC Credit Partners, our joint venture with CVC Capital, the private equity and asset management platform. Although we now only own 33% of this business, it's a much larger business and has a much more significant ability to raise capital for these products.

We have added over $1.4 billion in assets under management since we closed the deal with CVC only 9 months ago. CVC Credit Partners has been very active, closing a $450 million CLO during the first quarter and another $400 million CLO in January 2013.

CVC Credit Partners is a top performer in a thriving industry. The CLO market is robust and we expect to benefit of our ownership in one of the premier global credit managers.

We also seem to be gaining strength in the institutional marketing effort, and we look forward to expanding the credit business at CVC Credit Partners.

We are also excited about the performance of the CLOs managed by Gretchen Bergstresser and her team. Due to the continued great performance, we have started receiving incentive fees owed to us, owed to Resource America, that is, by various CLOs.

In January, as part of our quarterly distributions, we received $375,000 of incentive fees. Remember, we retained 75% of these fees when we sold the majority of the business to CVC. We expect these fees to be quite substantial, and we'll continue to collect them over the next few years. In my opinion, the $375,000 is just a start.

Our balance sheet remains very strong, with substantial liquidity and little debt, and we are generating positive cash operating earnings. We have repurchased over 382,000 shares of our stock since August, and we intend to continue to opportunistically use our strong liquidity position to repurchase our stock.

All of the growth over the past few years leaves us with a much different balance sheet in a different and more focused company. Our balance sheet is solid, with a strong cash position and a book value of approximately $7.28 as of December 31, in a company that has tremendous access to third party capital for such a relatively small asset management company.

As I've said in past calls, we hope that 2013 will be known as the year of the tipping point for Resource America's profitability. We believe the company has already started to show signs of its business model succeeding. We are now in a position to add significantly to our cash flow. Now I will ask Tom Elliott, our Chief Financial Officer, to comment on the financials.

Thomas C. Elliott

Thank you, Jonathan. I'd like to first discuss the operating results and then highlight a few items on our balance sheet.

The company reported a loss from continuing operations attributable to common shareholders of $1.4 million or $0.07 per common share diluted for the first fiscal quarter ended December 31, 2012, as compared to net income from continuing operations of $185,000 or $0.01 per common share diluted for the first fiscal quarter ended December 31, 2011.

Total borrowings as of December 31, 2012 were $22.6 million. This includes $10 million of 9% senior notes that we recently extended from October 2013 to March 2015 and $12.6 million of other debt, of which $10.5 million relates to property debt secured by one of our legacy assets that is due in September 2021.

As of December 31, 2012, the company had no outstanding debt under its corporate credit facilities and had $10.4 million of available credit.

During the quarter, the company extended the maturity of these 2 facilities. The company's $3.5 million revolving credit facility with Republic Bank was extended to December 2014 from December 2013, and its $7.5 million revolving credit facility was extended to December 2014 from August 2013.

As of December 31, 2012, the company's GAAP book value per common share was $7.28. Total stockholders' equity was $142.3 million as of December 31, 2012, as compared to $146.1 million as of September 30, 2012.

Total common shares outstanding were 19,551,379 as of December 31, 2012, as compared to 19,706,514 as of September 30, 2012.

As Jonathan highlighted in his remarks, the company's adjusted operating cash flow has increased these past 4 quarters to approximately $3.5 million for the quarter ended December 31, 2012.

We arrived at adjusted operating cash flow by adding or deducting noncash items impacting our financial results to income loss from continuing operations before taxes.

At this time, I'll turn it back to Jonathan.

Jonathan Z. Cohen

Thank you, Tom. And with Tom's presentation over, we will open the call for any questions, if there are any.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Lee Cooperman from Omega Advisors.

Leon G. Cooperman - Omega Advisors, Inc.

I'm a little -- I'd like to kind of put you on the line for perhaps giving us some forecast or some insight into what this company's capable of earning. I know a little bit about the asset management business. We have $15.3 billion of assets in the management and we're reporting GAAP losses. I understand that's probably tied to this provision for your prior mistakes in the leasing business, which, I guess, you mentioned were down to $10 million receivables. So I guess the question -- the real question I have, what is the company capable of earning in normal environment? In other words, we have a shareholders' equity of $142.5 million or $7.28 a share. It seems to me in this business, in this environment, given low cost liabilities, we will be able to earn 15% in our equity. With 15% of equity, something [ph] approaching $1 a share. We're reporting GAAP losses, we're not reporting GAAP profits. So when do the GAAP losses become the GAAP profits? And what's a reasonable level of expectation to judge you and your management team in terms of your performance? That would be one -- most important question here. Second, I understand we're buying back a little bit of stock here in there, but the share count continues to rise, it doesn't go down. So what is the fully diluted share account? And could we look towards this repurchase program to reduce the shares outstanding, rather than redistribute the ownership of the shares? And then the third question would be the issue about the...

[Audio Gap]

Jonathan Z. Cohen

Let me just go back to your first question. Last call, I said that we were going to earn $3 million to $5 million of cash operating this year, and then we thought, eventually, meaning in a year or so, we could get up to earning rate of between $0.75 and $1 a share, which would get you to that 15% number. And we would do so without increasing debt or doing anything silly like that. We're on track to do that. In fact, instead of earning $3 million to $5 million for the year, we earned $3.5 million of cash in the first quarter of this year. So we're on track, and I tried, in my comments, to give a progression of where the company has come from. We've been at the tipping point of, "hey, we're adding equity, we're adding capital, we have to turn that into profit." I think we're there. We're substantially protected by net operating losses we have from the financial crisis. So cash has started to drop to the bottom line, which has started to do, which we're very pleased with. I think it's not that it stopped at $0.75 or $1, I think that our business model is one that if people are looking at the credit markets and interested in credit product, interested in yield, interested in dividend, those are the things that we provide our investors with. I think that we're set up very well to grow that even further and justify not just the return on equity on the book value, but in increased valuation from where we are here today. That -- I think that management should be judged by cash earnings once we turn this thing around. We went through a process of the crisis hitting us, too much debt, redoing the debt, repositioning the company, waiting for our products to come back, starting to market them again, getting marketing power behind us. I think, given the numbers that we're seeing at $92 million of equity raised this quarter versus $34 million a year before, we're on the right track there, and I think we should be judged by putting that on the bottom line, not only consistently, but in increasing amounts of return for our investors. I, myself, is a large -- am a large investor as are you, and I want to judge myself by the same standards that you would want me judged by. Does that...

Leon G. Cooperman - Omega Advisors, Inc.

I guess the answer...

Jonathan Z. Cohen

I want to talk about the share count first.

Leon G. Cooperman - Omega Advisors, Inc.

Okay. But on the first point, the answer is you expect to earn somewhere between $0.75 to $1, looking out a year.

Jonathan Z. Cohen

Yes. On a run-rate basis, we're going to get to that within -- not within the year, but within 2000 -- well, we're in our fiscal 2013, because we're September, but I think sometime in the fiscal 2014, we're going to be positioned there.

Leon G. Cooperman - Omega Advisors, Inc.

Got you. Okay. Share count, you're going to go to now?

Jonathan Z. Cohen

I'm sorry. Share count, and I know this won't please you, but unfortunately, I've been working at this company for 17 years now and a lot of us had been and a lot of the options that we got 10 years ago, we expired this year and we all have exercised our options for approximately, Tom, how many shares?

Thomas C. Elliott

About 800,000 shares were put into the share count in the third quarter and fourth quarter of fiscal 2012.

Jonathan Z. Cohen

So we haven't really been handing out shares or options in any size since those time. So those are potentially expired and...

Leon G. Cooperman - Omega Advisors, Inc.

What was the strike price of those options?

Jonathan Z. Cohen

Varied between $3.50 and $4.50?

Thomas C. Elliott

About $3.50 to just around $4.

Jonathan Z. Cohen

Yes. Which wasn't quite a great profit over 10 years. And nobody sold those options to pay taxes or at least I didn't, and I know others did not. That being said, we'd like to make a dent in the share count as well. There are warrants that are outstanding, so as we make money on an adjusted basis, those warrants show up in our share count and those are dilutive, as we all know, to the common shareholders and our program. So that's really where we are today. We're currently, given the stock run up to $8.05, we're continuing to, at least the management team, look at opportunistically buying the stock, but we feel like now that it's run up considerably from where we've proposed it to our board, we're going back to the board with an evaluation. Once the board is satisfied, hopefully we'll be back to business on that.


No questions left that at this time. [Operator Instructions] So your next question comes from the line of Allan Young, Raging Capital Management.

Allan Young

Just wanted to check in on -- just generally speaking, in the lending environment, what's the competitive environment like? Are you seeing banks actively participating? Are you seeing pressure on loan pricing? Just curious, as a general statement, what you're seeing out there.

Jonathan Z. Cohen

Well, I can best talk to that, really, in our commercial mortgage business lending, as well as in our syndicated bank loan business. I think both businesses, there's more and more appetite, but there's also more and more appetite on existing good borrowers to lower their interest rates. And I think you're seeing both an increase in lending, as well as a decrease in rates. But you're also seeing, and equally, the ability for specialty finance companies to borrow money even cheaper than they could borrow money 1 month ago, 6 months ago, 1 year ago. And also, the securitized marketplaces have returns even for products like commercial real estate, CDOs and other things where we're seeing very cheap long-term capital be available to fund loans. And the loans are robust in terms of the demand. In terms of competition, I would just say, yes, there's a decent amount of money out there, but in terms of real estate lending, it's still a very market-to-market business, and the banks that are in each submarket don't necessarily want to be that exposed to every office building or every multi-family building. So it's competitive, but nothing out of the ordinary, I would say.

Allan Young

Okay. And then you -- as cash earnings come in, you talked about reevaluating the share buyback program with the board. What are some of the considerations that you would be discussing? And what are you view as the options?

Jonathan Z. Cohen

Well, I mean, I don't want to get ahead of myself with the options. My own personal opinion outside of the board or of the company is that we have a relatively -- our company is in very good shape, and that is -- as we look at the stock at this price, depending on the balance sheet and the cash earnings that we should be constantly looking to buy back the shares of our company. And the things I would look at is really, look we're putting away a lot of equities that is either perpetually managed or managed for 5 to 10 years. We're hitting the incentive fees that of increasing importance and stability for us. Cash earnings are robust. We don't have a lot of debt, and I think that, that kind of company really should either expand into new areas, I mean, looking at starting new products and expanding within our channels that we have, and that does take some cash or buying back shares or dividing cash out. But we're going to do evaluation again. Of course, we've took a long time doing the first evaluation, so it's not going to take that long to do this one. And at the next board meeting, we'll go through it and we'll let everybody know how we -- how the board feels.


No further questions. So I'd like to now turn the call over to Jonathan Cohen for closing remarks.

Jonathan Z. Cohen

Well, first of all, I want to thank everybody for participating, those who asked questions and those who listened. Please free to call Purvi Kamdar, our Head of Investor Relations, or anybody at the company with any other questions. I know some people e-mailed some questions, and we tried to answer most of them within a framework of what we said. If we didn't, please call us and thank you very much for your attention and support of our little, but growing company.


Okay. Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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