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Resource America (NASDAQ:REXI)

Q3 2013 Earnings Call

November 19, 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

Analysts

Leon G. Cooperman - Omega Advisors, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 Resource America Earnings Conference Call. My name is Emily and I will be your operator for today. [Operator Instructions] As a reminder, this conference 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.

Jonathan Z. Cohen

Thank you, and thank you for joining the Resource America earnings conference call for the third quarter ended September 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 subject -- are based on reasonable assumptions, such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those 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-A 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 the earnings. The company reported adjusted net income attributable to common shareholders of $5.1 million or $0.23 per common share diluted for the third quarter ended September 30, 2013, as compared to adjusted net income of $3.1 million or $0.15 per common share diluted for the third quarter ended September 30, 2012. In my opinion, the only way you can describe the quarter ended September 30, 2013 is a pretty good quarter. Earlier this year, I spoke about Resource America having passed the tipping point and this quarter shows that indeed, we have tipped. Not only did we earn $6.9 million of adjusted cash flow from operations, but 1, we raised the dividend by 33%; 2, we bought back approximately 1% of the fully diluted stock outstanding; 3, we increased our assets under management by $1.5 billion from the same period 1 year earlier and 4, we beat our guidance for this fiscal year ended September 30, 2013, of adjusted cash from operations by almost $5 million, having earned $14.6 million compared to our guidance of $10 million. In addition, almost all aspects of our business executed well during the third quarter, and we expect that going forward, you will continue to see good earnings and net operating cash earnings to add to cash balances.

Today, I would like to take you through the 3 segments of our business and how they are performing. I will review our real estate debt asset management business, Alan Feldman, the CEO of Resource Real Estate, will review our real estate equity asset management business and then I will review our Credit Asset Management business. After that, Tom Elliott, our Chief Financial Officer, will walk us through the financials.

Before we get started just some important facts. Our assets under management grew by $1.5 billion to $16.5 billion over the last 12 months and grew by over $475 million since last quarter. Adjusted cash flow from operations grew from $244,000 during the quarter ended September 30, 2012 to cover -- to over $6.9 million this quarter and $11.2 million for the 9 months ended September 30, 2013. In the 12 months ending September 30, 2013, we had raised over $507 million for our REITs as compared to the same period a year ago when we had raised $265 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 of Real Resource Capital Corp., a New York Stock Exchange, publicly listed REIT externally managed by us. It has over $805 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 in direct expense payments. RSO is a strong player in the commercial REIT market, with nearly $900 million of equity capitalization and the ability to raise a significant amount of equity through both the public markets and through DRIP and ATM programs for its common and preferred stock, which we access as needed. It further showed its ability to raise attractive capital with a $150 million senior note -- convertible notes offering last month that raised debt with a 6% coupon. The company's floating-rate assets provide protection against rising interest rates and assets are predominantly term-funded. The company has access to new financing and has a strong loan origination platform, a robust pipeline of deals and maintains a good amount of liquidity. RSO, Resource Capital, has grown meaningfully during 2013 as it has raised over $184 million in new equity capital through September 30. In addition in the third quarter of 2013, RSO originated $94.2 million of commercial real estate home loans and has a robust pipeline, which we anticipate to originate over $600 million of real estate loans in 2014. In addition, RSO has just recently acquired a residential mortgage company and started a middle-market corporate loan platform. Both efforts will need more equity by the end of 2014. RSO's strong liquidity and access to capital enables it to make larger loans and expand its products. As the operations of the business grow, RSO shareholders and REXI shareholders will also benefit.

Now, I would like Alan Feldman, 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. As I mentioned last quarter, I'm the CEO of Resource Real Estate, Resource America's wholly-owned real estate subsidiary. This past quarter was perhaps the busiest and most productive in my 11 years at Resource America and Resource Real Estate. Our primary focus has been on raising capital for our current non-listed REIT, Resource Real Estate Opportunity REIT or the OpREIT, as we refer to it. We then prudently invest this capital on behalf of the OpREIT's investors. For Resource America, this continues to build a stream of growing and recurring asset management revenues. While entering the final phases of fundraising for the OpREIT, we're also focus on preparing for our next non-listed REIT, which is currently in registration. This REIT will keep us busy raising capital for several years.

And now I'd like to highlight some of our recent activity. First, capital raising and then investment activity. Last quarter, I reported that we had raised $375 million through July 31 for the OpREIT, and that we had expected to raise an additional $175 million to $350 million by the close of the REIT. As of this past Friday, November 15, we have already raised $538 million, thus nearly achieving the lower goal. We have a busy month of fundraising remaining and expect it to be substantial. Our fundraising level will enable the OpREIT to purchase approximately $1 billion to $1.2 billion of real estate assets by year end 2014.

For Resource America, this will translate into a very significant recurring asset management and acquisition fees. As a result of this fundraising, Resource's acquisition and financing teams have been very busy finding good investments in financing the unencumbered properties that we've already purchased. In the September quarter alone, the OpREIT purchased 4 properties, representing 1,120 units in Denver, Dallas and Newport News, Virginia. These purchases generated $2.5 million of acquisition revenues for Resource America. Subsequent to the quarter ending September 30, on October 25, the OpREIT purchased a 437-unit, multi-family property for $25 million from a special servicer. This is an excellent investment purchased at a 60% discount to replacement cost and in even the few weeks since acquisition, the property has already been incorporated into Resource's comprehensive management and operations program. From this acquisition, Resource has already earned over $600,000 in acquisition fees and will earn asset management revenues of approximately $350,000 per year. Currently, the OpREIT has $408 million of real estate assets in its portfolio, representing 25 assets, 6,600 apartment units in 15 states. In addition, the OpREIT is currently sitting with over $100 million in cash and available credit capacity. The OpREIT is also contracted to buy 2 additional assets located in Minneapolis and in San Antonio for an aggregate purchase price of $56 million. These transactions should close in December.

As we have previously mentioned, the OpREIT is also under agreement to acquire, for $53 million, the real estate investments owned by Paladin REIT, a West Coast-based firm that owns a portfolio of 10 multi-family investments and 1 office building. Diligence is completed and the transaction remains subject to Paladin shareholder approval, with a vote scheduled for December 19. If approved, this transaction is expected to close in December or early January.

With our significant and growing capital base in the OpREIT, these transactions are representative of the excellent investment opportunities we bring to funds that we manage while providing accretive and stable revenues to Resource. Our business has good operating leverage, so incremental capital creates incremental revenues for Resource America. Resource also earns property management fees for operating the properties. Though property management is generally a lower-margin function than acquisition or asset management, it's a vital component of our strategy of buying and fixing multi-family assets and it critically differentiates us from our competitors.

Looking ahead to 2014, we expect to deploy approximately $500 million of capital in new acquisitions. This will generate approximately $15 million of asset management and acquisition revenues in 2014 and we expect this revenue stream to build over time. Despite the success that we have with our business today, we are not sitting still. We manage many real estate investments on behalf of institutional partners and other private funds and are always looking at new products in the real estate and real estate securities area to introduce to retail and institutional investors. As our business grows, we are attempting to take advantage of business relationships, scale and operating leverage to find innovative investments for our clients, while at the same time being mindful of costs and managing G&A. The future of Resource Real Estate is quite bright and we remain very busy. Jonathan?

Jonathan Z. Cohen

Thanks, Alan. Now to our credit business. Our credit segment is focused on our 33% 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 in ABS. We've added nearly $3.7 billion in AUM since we closed the deal with CVC only last year. Since July 1, we closed 2 additional CLOs totaling $1.1 billion. Apidos XIV, our largest deal to date, par value $617 million, and Apidos XV, par value $500 million. In addition, we closed a $130 million separately managed account and raised an additional $27 million for our opportunity fund, which now is over $100 million in managed equity.

We continue to work with our partners at CVC to add more products to this segment. Our balance sheet remains 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. Resource America had a book value of approximately $7.82 as of September 30 and a company, which I believe, has tremendous access to third-party capital, for such a relatively small asset management company. We believe the company has already started to show signs of its business model succeeding. We now believe we're 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 net income attributable to common shareholders of $3.4 million or $0.16 per common share diluted for the third quarter ended September 30, 2013 as compared to a net loss attributable to common shareholders of $2.3 million or $0.11 per common share diluted for the third quarter ended September 30, 2012. Our financial statements now reflect the consolidation of Resource Capital Corp., or RSO, our publicly traded real estate investment trust. The impact of consolidation is significant to the presentation of our financial statements but not to our financial condition or results of operations. In addition, we elected to change our year end to December 31 to conform to RSO's year end.

Our balance sheet presents the assets and liabilities of RSO and separately identified categories, labeled as consolidated assets and liabilities of variable interest entities and the equity section of our balance sheet includes a noncontrolling interest that attributes approximately 98% of the net assets to RSO's public shareholders.

On our statement of operations, and within the notes to our financial statements and management's discussion and analysis, we continue to report the fees earned from managing RSO as revenues of our operating subsidiaries. The revenues and expenses of RSO are segregated from our operating results and income attributable to RSO's public shareholders is shown as a reduction to arrive at net income attributable to common shareholders.

In Note 4 of our financial statements, we have and will continue to provide consolidating financial statements that present the standalone balance sheets, statements of operations and statements of cash flow for the company and RSO. Total borrowings for the company as of September 30, 2013 were $20.4 million. This includes $10 million of 9% senior notes that mature in March 2015 and $10.3 million of other debt secured by one of our legacy assets that is due in September 2021. As of September 30, 2013, the company had no outstanding debt under its corporate credit facilities and had $10.5 million of available credit. Assets under management increased from $15 billion as of September 30, 2012 to $16.5 billion as of September 30, 2013. After adjusting for our joint venture managed products, net assets managed by the company were $7.4 billion as of September 30, 2013. As of September 30, 2013, the company's GAAP book value per common share was $7.82. Total stockholders’ equity was $154.9 million as of September 30, 2013 as compared to $151.2 million as of December 31, 2012. Total common shares outstanding were 19,812,669 as of September 30, 2013 as compared to 19,551,379 as of December 31, 2012.

As Jonathan highlighted in his remarks, the company's adjusted operating cash flow was $6.9 million for the quarter ended September 30, 2013. We arrive at adjusted operating cash flow by adding or deducting non-cash 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 our call. We will now open the call to any questions if there are any.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from the line from Leon Cooperman from Omega Advisors.

Leon G. Cooperman - Omega Advisors, Inc.

I really have a series of questions, maybe just jot them down and take them in any order you like. Can you discuss the relative profitability with 3 lines of business, 1, 2, any kind of indication about the earnings outlook over 2014, including free cash flow, the likely use, and then if you could discuss the other income line, VIE-RSO, just the variable income equity and operating income was down year-over-year for the 3 months and the entire increase was in this $16.6 million of other income. Is that a non-recurring item, recurring item, just how should we look at that? And then finally, do you have any plans to deal with the warrants as an opportunity to maybe reduce the share count by taking out the warrants, which I think come due sometime next year. Those will be my questions.

Jonathan Z. Cohen

I can handle the first 2, I think. In terms of the relative profitability of the 3 segments right now, the real estate debt or real estate business is by far the most profitable within the real estate business, the real estate debt business is probably the most profitable and that is really our management of RSO and the incentives that we may receive from managing RSO. The second most profitable there is the Resource Real Estate equity business but that is greatly increasing in profitability by the day as we raise increasingly amounts of money within the opportunity REIT that we manage. I would expect that next year as Alan said, that, that business probably equals or overcomes the Resource Capital business in terms of recurring profitability, and I think Alan mentioned the number of somewhere around $10 million of profitability from just the resource equity -- Resource Real Estate equity business. So we're seeing a great momentum in terms of non-RSO related real estate profitability. The lesser -- from a GAAP perspective and a cash perspective today, the credit business, particularly the CVC Credit Partners, is probably much less profitable in terms of total numbers, but it has often been saddled by millions of dollars of investment on our behalf during 2012 and 2013 on an annual basis to build that business and we're hopeful that over the next 12 to 24 months as they continue growing, you'll see that business start to greatly increase in profitability as well, although it's profitable today. The second question, in terms of...

Leon G. Cooperman - Omega Advisors, Inc.

2014.

Jonathan Z. Cohen

Right, 2014 outlook. We had given guidance for 2013 of $10 million of adjusted cash flow from operations. We did $14.9 million, let's call it $15 million during that period. We are looking to now a calendar 2014 of somewhere between $15 million and $20 million of adjusted cash flow from operations. I would say the $15 million, we feel extremely comfortable with. It could be $20 million, it could be even more than that, depending on how our businesses operate. Tom, you want to handle the...

Thomas C. Elliott

Sure. Lee, your question about the other income, that is a gain that Resource Capital realized on the sale of an investment in a multi-family asset that it made in 2011. It was purchased for approximately $16 million and sold for around $32 million. So that is a non-recurring gain that occurred at RSO, although they do often have transactions that bought and sold and recognize gains so there is some recurring nature to recognizing gains.

Jonathan Z. Cohen

So just to be clear, that was a gain at Resource Capital Corp. not at Resource America. So it was netted out. The only thing that really came to us was a small incentive net of employee cost.

Thomas C. Elliott

That's right.

Leon G. Cooperman - Omega Advisors, Inc.

So that would imply that operating income was down in the quarter year-over-year because the operating income line was $12.8 million versus $16.2 million.

Thomas C. Elliott

Yes, Lee, that's correct although some of that is being driven by the consolidation. So RSO's revenues are included above. As I mentioned in my comments, the 98% that's attributed out to RSO is on the noncontrolling interest line. So our operating income, if you look at the standalone financial statements, would not be down. That would be the impact of RSO's operating income being down quarter-over-quarter, that's correct.

Leon G. Cooperman - Omega Advisors, Inc.

So getting back, when you say adjusted cash flow from operations of $15 million to $20 million or more in 2014, that's your definition of free cash flow, in other words, if we do nothing, we didn't pay dividend, we didn't invest in any of our programs, year-over-year, we would generate $15 million to $20 million of cash?

Jonathan Z. Cohen

That's right. That is correct.

Leon G. Cooperman - Omega Advisors, Inc.

I guess just the question is, how would you envision that somewhere between $0.75 and close to $1 of cash flow being utilized, all things being equal.

Jonathan Z. Cohen

Well, as I've always said, this is a very low CapEx business. We do have some development of new products that we're interested in, in building but basically, we're on the path of increasing the dividend and trying to buy back our shares when we have the opportunity.

Leon G. Cooperman - Omega Advisors, Inc.

Just to -- Tom, maybe could -- how many actual shares are outstanding and how much comes from the potential dilution from the warrants?

Thomas C. Elliott

So we have 19.8 million shares outstanding in our diluted share count, which is done on the treasury method, the warrants are adding about 1.4 million additional shares in that count and that's assuming an average price during the quarter of about $8.15 over a strike price of $5.10.

Operator

There currently are no further questions.

Jonathan Z. Cohen

Well, we want to thank everybody for their support during this quarter and we look forward to speaking with you after the year end.

Operator

Thank you for joining today's conference call. This concludes the presentation. You may now disconnect. Have a good day.

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