Resource Capital's Dividend Dilemma

| About: Resource Capital (RSO)

Resource Capital (NYSE:RSO) is one of the few specialty finance REITs that has been able to maintain a significant cash dividend throughout the credit crisis, most recently sporting a $0.30/share quarterly cash dividend. At a stock price of about $5.00, that's an amazing 24% yield.

More compellingly, Resource Capital has been able to maintain this high yield for over a year, since the stock price first dipped below $5.00 in September 2008. At one point during the lows of March 2009, RSO was paying a quarterly dividend of $0.30/share against a share price of $1.43 - a yield of nearly 84%!

Although Resource Capital has done an extraordinary job maintaining a cash dividend while materially reducing recourse debt on the balance sheet, the company's most recent results indicate that lofty dividend is no longer supportable, at least from an economic standpoint.

Q3 2009 taxable income decreased significantly for the second quarter in a row, to just $0.14/share - well below the $0.30/share dividend amount. For the nine months ended September 30, 2009, REIT taxable income was just $0.61/share versus distributions of $0.90/share declared for 2009 to date.

RSO had been able to maintain a level of taxable income necessary to support the dividend in previous periods because of the taxable income flowing from its Apidos CLOs, three foreign-domiciled taxable REIT subsidiaries collateralized by bank loans. REITs are required to include income from foreign TRSs in their taxable income and the Apidos CLOs were producing taxable income requiring distribution.

Recently, however, Resource Capital has had to sell & replace (at a loss) certain assets out of the CLOs to maintain covenant compliance & keep the CLOs cash flowing at all tranches. These realized losses have materially reduced the taxable income coming from the Apidos CLOs. Thus, in order to maintain the cash flows to the junior tranches of the CLOs, RSO has had to accelerate taxable losses that normally would not have been recognized so quickly.

RSO seems to be determined to maintain a significant cash dividend as a way to prove its general health and support a lagging stock price. While Resource Capital has done an outstanding job managing its balance sheet & overall operations during the credit crunch, in this environment, it appears foolish to distribute a return of capital to shareholders. Hopefully, RSO will reduce the dividend and use the retained capital to increase share buybacks or repurchase debt at a significant discount.

Disclosure: Author has no positions in RSO.