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Resource America (NASDAQ:REXI)

Q3 2013 Earnings Call

August 08, 2013 8:30 am ET

Executives

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

Purvi Kamdar - Director of Marketing and Investor Relations

Alan F. Feldman - Senior Vice President, Chief Executive Officer of Resource Real Estate Inc and President of Resource Properties

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

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 3 2013 Resource America Earnings Conference Call. My name is Sue, and I will be the operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now 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 third fiscal quarter, ended June 30, 2013. 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 Vice President 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 $3.2 million or $0.15 per common share diluted for the third fiscal quarter ended June 30, 2013, as compared to an adjusted loss from continuing operations, net of tax, of $496,000 or $0.03 per common share diluted for the third fiscal quarter ended June 30, 2012.

I have often spoken about the tipping point for Resource America and its earnings. As you can see from this quarter, we have truly tipped. We expect going forward to see earnings continue to rise and net operating cash earnings will continue to add to cash balances. Right now, we are in execution mode. We are executing on a business plan that is very focused and seems, at least to me, to be working.

Today we would like to take you through the 3 segments of our business, how they are growing and their potential earning power. I will review our Real Estate Debt Asset Management business. Alan Feldman, our CEO of Resource Real Estate, will review our Real Estate Equity business. And then I will review our Credit Asset Management business. After that, Tom Elliott, our Chief Financial Officer, will walk us through our financials.

Before we get started, just some important facts. First, our assets under management grew by $1.1 billion to $16.1 billion over the last 12 months and grew by over $750 million since last quarter. Second, adjusted cash earnings from operations grew from $46,000 in the quarter ended June 30, 2012, to nearly $1.6 million this quarter and $7.7 million year-to-date. For the full fiscal year ending September 30, 2013, we expect to exceed $10 million. And for fiscal 2014, we expect to generate adjusted cash earnings from operations of more than $15 million. Third, we have added new real estate products to continue our growth, such as real estate -- such as our Real Estate Diversified Income Fund, which is our first mutual fund product, which launched at the end of the last quarter. We are working on expanding our real estate products. Stay tuned. And lastly, fourth, in the 12 months ending June 30, 2013, we raised over $517 million for our REITs as compared to a year ago where we had raised $150 million over the trailing 12 months.

Now to the segments. Our commercial real estate Debt Asset Management business is mostly supported by our core product, which is Resource Capital, a New York Stock Exchange-listed REIT managed by us. It has over $821 million of managed equity, including preferred equity on which we receive a 1.5% base management fee and an incentive fee above a certain hurdle rate. In addition, we receive reimbursements and direct expense payments.

RSO is a strong player in the commercial REIT market, with over an $840 million market cap and the ability to raise a significant amount of equity through both the public markets as well as through the common and preferred DRIP programs every month. The company's floating rate assets protects -- provide protection against rising interest rates and assets are predominantly term funded. Resource Capital has access to new financing and a strong loan origination platform, a robust pipeline of deals and maintains at all times a good amount of liquidity.

RSO, Resource Capital, has grown meaningfully during 2013 as it has raised $230 million in new equity capital through June 30. In addition, it's added a $200 million line from Deutsche Bank to an increased $250 million line from Wells Fargo to leverage that capital into very significant loan origination capacity. And in fact, Resource Capital did originate $91 million of new commercial real estate loans during the June quarter. This growth enables Resource Capital to make larger loans and expand its products.

For example, during the quarter, it made a $44 million bridge loan secured by a 186,000-square-foot retail center in Los Angeles. We subsequently sold an A note to a large national bank and retained a substantial mezzanine loan. Resource Capital's ability to close on the entire loan enabled us to structure and retain an extremely attractive and profitable loan while providing great service and execution for our borrower. As the operations of the business grow, RSO, Resource Capital, shareholders can benefit and REXI shareholders will also benefit.

Now I would like Alan Feldman, our CEO of Resource Real Estate, to walk us through the real estate Equity Asset Management business. Alan?

Alan F. Feldman

Thank you very much, Jonathan. This is Alan Feldman, and I'm pleased to be joining the call this morning. This past week, I marked my 11th year at Resource America, where I serve as Chief Executive of Resource Real Estate, our wholly owned real estate investment and asset management subsidiary that focuses on equity investing. In addition to managing several partnerships, funds and joint ventures that collectively represent $570 million of raised equity capital and 76 real estate assets, we are currently the sponsor of Resource Real Estate Opportunity REIT or OpREIT [ph] as we call it. In this publicly registered, non-listed REIT, we have successfully raised over $375 million of capital through July 31, 2013. The OpREIT [ph] currently owns 21 multi-family assets, consisting of 5,834 apartment units in 12 states.

The pace of fundraising and acquisitions is accelerating. We raised $33 million in July and are on pace to raise between $175 million to $350 million more by the end of the current calendar year, when the offering closes. When this new capital, along with the OpREIT's [ph] current asset base, is modestly leveraged, the OpREIT [ph] should own well in excess of $1 billion of real estate assets once fully invested versus its $288 million of real estate assets as of June 30, 2013.

As part of the OpREIT's [ph] continuing growth, we recently announced an agreement to acquire for $52.7 million the real estate investments owned by Paladin REIT, a West Coast-based firm that owns a portfolio of 11 multi-family investments and 1 office building. While the transaction is still subject to due diligence, closing conditions and Paladin's shareholder vote, it is representative of the type of transaction or the types of transactions that are possible with the creative and entrepreneurial real estate team at Resource combined with our significant capital base.

The growth of the OpREIT [ph] has a direct and positive impact on Resource America's assets under management and profitability. Resource earns acquisition fees and annual asset management fees for acquiring and then overseeing the real estate investments. Our business has good operating leverage, so incremental capital creates high-margin incremental revenues for Resource. Resource also earns property management fees for operating the assets, collecting rents, performing construction management, et cetera.

Though our property management function is lower margin than acquiring or asset managing, it is a vital component of Resource's strategy of buying, fixing and earning good returns on our investments and it critically differentiates Resource from our competition. In addition, we expect to sell these assets and reinvest the capital into new assets. Resource will likely earn disposition and reinvestment fees on most assets at least once more over the next 2 to 4 years in this current offering. Of course, as we raise more capital towards the end of this offering, these additional revenues will also increase and so will Resource's profits.

As I mentioned, the current OpREIT [ph] will purchase in excess of $700 million of assets. If however, capital raising volume continues to accelerate, we may raise the full $375 million of the current equity offering by calendar year end. If this is achieved and a significant portion of this capital is invested during 2014, then our contribution to Resource America could meet or exceed $10 million in 2014.

Looking further ahead, we expect that the OpREIT [ph] will generate at least $60 million of revenue for Resource over the next 5 years in acquisition, disposition and asset management revenues. That said, we are not sitting still. We have built an efficiently scalable acquisition and management platform. A potential follow-on offering for the OpREIT [ph] or a second de novo non-listed REIT would generate an additional approximately $60 million of revenue during the same 5-year period, with significantly less execution risk and with a very manageable marginal cost associated with scaling our current asset base.

Historically, our business generated more episodic victories and profits, selling assets for gains, earning promotes. Today, however, with a larger and more stable asset base, we are well positioned for growth and scale. We have substantial recurring revenue and increasingly honed operations in raising capital, deploying capital and managing real estate assets. Our next non-listed REIT and potential other funds could easily double our contribution to earnings to Resource America in 2015 and beyond. The future of real estate at Resource is quite bright and will remain quite busy. Jonathan?

Jonathan Z. Cohen

Thanks, Alan. Now to our credit business. Our credit segment is focused on our ownership of CVC Credit Partners, our joint venture with CVC Capital, the private equity and asset management platform, as well as residual management of trust-preferred securities and ABS. Although we now own 33% of the CVC Credit business, it is a much larger business and has a significantly enhanced ability to raise capital for its products. We have added over $3 billion in AUM since we closed the deal with CVC only last year.

CVC Credit Partners has been very active, closing 2 additional CLOs, Apidos XII, par value $523 million; and our largest deal to date, Apidos XIV, par value $617 million, with a total par value of $1.14 billion since April, bringing the total CLO closed to 5 since closing the deal with CVC.

CVC Credit Partners expect to receive $5.2 million annually in asset management fees in the future in connection with these 2 CLOs. Most of this growth has come from U.S. CLO's, which we manage for institutional investors. However, in June, in a great victory in my opinion, CVC Credit Partners completed a $456 million public offering of CVC Credit Partners European Opportunities Limited, an investment vehicle providing investors access to sub-investment grade European debt markets.

CVC Credit Partners is a top performer in a thriving industry. We have added to the JV quite a number of high-level debt credit professionals, including Caroline Benton, who spent the last 13 years at Goldman Sachs working with their Special Assets Group; Mark DeNatale, who comes to us after 17 years at Goldman Sachs as a Head Loan for -- Head of Loan Trading; and Scott Bynum, who spent 8 years at GS in a proprietary investing capacity. We have also added a number of top-tier professionals in the London office. We have started to actively market CVC Global Credit Opportunities Fund and are starting to see our institutional separate account business greatly pick up. Since January, we have closed on about $180 million in this business. We are working on new ways to work with our partners at CVC to add more products to this segment. Stay tuned to that.

Due to the continued great performance of the legacy Apidos CLOs, we have started receiving incentive fees -- we being Resource America, have started receiving incentive fees owed to us by various CLOs. Since January, as part of our quarterly distributions we have received over $1.5 million of incentive fees. Remember, we retained 75% of those fees when we sold a 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.

Our balance sheet remains very strong with substantial liquidity and little debt and we are generating positive operating cash earnings. All of the growth over the last few years leaves us with a much different and stronger balance sheet and a more focused company. Our balance sheet is solid with a strong cash position, very little debt and a book value of approximately $7.35 as of June 30, and a company that has a tremendous access to third-party capital for such a relatively small asset management company. We believe the company has already started showing 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 CFO, 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 net income attributable to common shareholders of $1.5 million or $0.07 per common share diluted for the third fiscal quarter ended June 30, 2013, as compared to net income attributable to common shareholders of $30.2 million or $1.44 per common share diluted for the third fiscal quarter ended June 30, 2012.

The company's results for the quarter ended June 30, 2012, included a realized gain of $34.5 million net of tax in connection with the sale of Apidos, the company's credit loan manager.

Total borrowings as of June 30, 2013, were $22.1 million. This includes $10 million of 9% senior notes that mature in March 2015 and $12.1 million of other debt, of which $10.4 million relates to property debt secured by one of our legacy assets that is due in September 2021.

As of June 30, 2013, the company had no outstanding debt under its corporate credit facilities and had $10.5 million of available credit. Both the company's $3.5 million revolving credit facility with Republic Bank and $7.5 million revolving credit facility with TD Bank mature in December 2014.

As of June 30, 2013, the company's GAAP book value per common share was $7.35. Total stockholders' equity was $147 million as of June 30, 2013, as compared to $146.1 million as of September 30, 2012. Total common shares outstanding were 19,988,397 as of June 30, 2013, as compared to 19,706,514 as of September 30, 2012.

As Jonathan highlighted in his remarks, the company's adjusted operating cash flow was $1.6 million for the quarter ended June 30, 2013. We arrive 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 will turn it back to Jonathan.

Jonathan Z. Cohen

Thank you, Tom, and I want to thank everybody for joining the call. We will now open up the call to any questions, if there are any. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Sir, you have no questions at this time. [Operator Instructions] At this stage, there are no questions coming through.

Jonathan Z. Cohen

Okay. Well, thank you very much for joining the call and we appreciate the support and we look forward to speaking to you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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