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Resource America, Inc. (NASDAQ:REXI)

Q4 2013 Earnings Conference Call

March 11, 2014, 08:30 AM ET


Jonathan Cohen - Chief Executive Officer, President and Director

Thomas Elliott - Chief Financial Officer

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

Purvi Kamdar - Vice President, Director of Marketing and Investor Relations


Leon Cooperman - Omega Advisors


Good day, ladies and gentlemen, and welcome to the Q4 year ended December 2013 Resource America earnings conference call. My name is Sheena, I will be your operator for today. (Operator Instructions) And now, it's my pleasure to hand over to Mr. Jonathan Cohen, President and CEO. Please proceed, sir.

Jonathan Cohen

Thank you. And thank you for joining the Resource America earnings conference call for the fourth quarter and year ended December 31, 2013. This is Jonathan Cohen, President and CEO of Resource America, and I welcome you to our call.

Joining me today are my colleague, Tom Elliott, our Chief Financial Officer; Alan Feldman, who heads our Real Estate Equity business; and Purvi Kamdar, our Vice President of Investor Relations, who I will ask now 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 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 the 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 Cohen

Thanks again, Purvi. Now, to our earnings. Resource America had a good fourth quarter and a good year. We earned adjusted net income attributable to common shareholders of $3.6 million or $0.16 per common share diluted for the fourth quarter and $11.9 million or $0.54 per common share diluted for the year. This compares to adjusted net income of $1.3 million or $0.06 per common shares diluted for the fourth quarter of 2012 and $335,000 or $0.02 per common share diluted for the year ended December 31, 2012.

The fourth quarter demonstrates the operational leverage that Resource America has built. First, not only that we are in $4.1 million of adjusted cash earnings from operations, but our adjusted cash earnings for the year ended December 31, 2013, was $15.7 million as compared to $3.7 million from December 31, 2012, that's over a 300% increase. This exceeded our own expectations of adjusted cash from operation by almost $6 million as compared to our projection of $10 million.

Second, our performance in strong cash flows allowed us to increase our dividend by 25% in the fourth quarter and 67% since December 2012. Third, we bought back almost 3% of our outstanding shares during the last few quarters. And fourth, increased our gross assets under management by $2 billion from the same period one year earlier, a 13% increase.

With such strong results, it is no surprise that almost all aspects of our business executed well during the fourth quarter. We expect 2014 to be an even stronger year, but also be the foundation for tremendous growth in 2015 and 2016. The basis for this assertion is our launch of new product.

In the last year, we have quietly launched asset management businesses focused on residential mortgages, middle market corporate lending, insurance products and global real estate securities. We have built great teams led by seasoned investors and supported by very experienced Risk Managers at Resource America.

These products currently are investing capital for existing accounts and products or have launched their own product in our retail channel. We are also now looking to expand our offerings to more institutional account.

Although, these products are new and exiting, our core products are also growing. As many of you might have noted, we launched Resource Real Estate Opportunity REIT II, our second non-traded REIT, with a registration statement of up to $1 billion. The sales process has begun and we are pleased with our progress.

Today, we would like to take you through the three segments of our business and how they are performing. I will review our real estate debt business, debt asset management business; Alan Feldman will review our real estate equity asset management business; and then I will review our credit asset management business; after that Tom Elliott will review our financial.

Resource Capital, our core commercial real estate debt product, grew meaningfully during 2013. It raised over $190 million in new equity capital for the year. In the fourth quarter of 2013, RSO originated $97.4 million of commercial real estate whole loans and has a robust pipeline, which is anticipated to originate between $600 million and $700 million of real estate loans in 2014.

RSO completed a $308 million commercial real estate securitization in December, in which it issued term notes in the amount of $261 million to outside investors at a weighted average spread of 1.86% and on which it expects to earn a return on invested equity of approximately 20%. Resource Capital should revisit the securitization market in the next few months and we expect the results to be either more favorable.

Additionally, Resource Capital recently acquired a residential mortgage company and late last year we started building a middle-market lending business that will grow to replace the CLO investments, we need for Resource Capital that have been very profitable for it and which are now paying down.

Currently, the middle-market lending business is growing and is approximately $80 million of funded loans and commitment, and we expect that business to have deployed $150 million by the end of the first quarter of 2014. Also we continue to enhance RSO by providing asset to our other credit capability. We have a full team in place to expand the growth of this business and we will continue to look for new products to manage.

RSO's access to new financing is a strong loan origination platform, a robust pipeline of deals that maintains a good amount of liquidity. As Resource Capital's operations grow, its shareholders and REXI shareholders should both benefit.

Now, I would like Alan Feldman to walk us through the real estate equity asset management business. Alan?

Alan Feldman

Thank you very much, Jonathan. This is Alan Feldman, and I am pleased to be joining the call this morning. The December quarter was perhaps the busiest and most exciting for our real estate team for several reasons.

First, we completed fund raising for Resource Real Estate Opportunity REIT or OpREIT I, as we refer to it, with $635 million raised including $195 million in the fourth quarter alone. Second, we continue to find great investments to purchase with this capital.

And third, subsequent to the quarter ending, our next non-listed REIT Resource Real Estate Opportunity REIT II or OpREIT II, as we refer to it, was deemed effective by the SEC and launched on February 6, 2014, and this is a $1 billion offering. Altogether, this capital combined with our productive acquisitions and management teams is helping to build a stream of growing and recurring asset management revenues for Resource America.

I'd now like to highlight some of our recent activity. First, I'll discuss capital raising and then our investment activity. OpREIT I closed its offering on December 13, 2013, with $635 million. Approximately $100 million of this capital was raised in the last month of the offering. This prolific fund raising will enable OpREIT I to purchase over $1 billion of assets by the end of 2014.

For Resource America, this will generate very significant recurring asset management and acquisition fees, as asset management fees are based on 1% of invested assets. This is also in addition to certain expense reimbursements that Resource America receives. To put this capital to work, 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 December quarter, OpREIT I purchased three assets, representing 1,080 apartment units in Atlanta, San Antonio and Minneapolis. These purchases generate long-term and recurring asset and property management revenues, as we grow and manage and improve the performance of these properties over time.

Subsequent to the quarter ending December 31, 2013, on January 28 of this year, OpREIT I completed its purchase of the assets of Paladin Realty Income Properties REIT for $51.5 million. Paladin was a West Coast based REIT that owned a portfolio of JV interest in 10-multifamily properties and two office buildings.

For the last month, we have visited all of the Paladin JV partners and properties and we are aggressively implementing our asset management plans. Already we have worked out deals to take over certain properties, sell few small non-core assets and reached an agreement in principal to buy in another interest from an operating partner. Altogether, the Paladin acquisition has provided an outlet to let resource expand our asset management outreach by taking over an operating, more good quality, multifamily assets.

Currently, OpREIT I has $520 million of real estate assets in its portfolio invested. This is 35 properties with 9,769 apartment units across 20 states. In addition, OpREIT I has over $200 million in cash in available credit capacity. This does not include any additional financing from unencumbered assets.

With additional leverage that we typically place on a property post-acquisition, OpREIT I should be able to buy more than $400 million of assets in 2014. We are working to productively invest this capital and already have one meaningful investment under agreement with several other transactions in works.

OpREIT 1 is representative of the investment opportunities that we bring to funds that we manage, while providing accretive and stable revenues to Resource. As John said, our business has good operating leverage, though investing capital creates incremental revenues for Resource America. We also earned property management fees from operating the properties. Our property management is a vital component of our strategy of buying and fixing up properties, and it critically differentiates us from our competitors.

For 2014, we expect to deploy more than $400 million. Most of this will be on behalf of OpREIT I, but we will likely be investing some capital in the latter half of the year for OpREIT II as we ramp its capital raise. OpREIT II is already off to a great start, as we are busily attaining critical selling agreements from our key broker dealer partners. Altogether, we expect to generate more than $15 million of asset management and acquisition revenues in 2014, and we expect this revenue stream to build over time.

Despite the success we've had with our business today, we are not sitting still. We manage many real estate investments on behalf of institutional partners and are always looking at new products in the real estate and real estate securities area. For example, we are currently working on building a commercial real estate securities fund for both retail and institutional clients.

As our business continues to grow, we are attempting to take advantage of scale and operating leverage, while at the same time being mindful of costs and managing our G&A. 2014 is off to a great start and the future of Resource Real Estate remains bright. Thank you. Jonathan?

Jonathan Cohen

Thanks, Alan. And now I will speak to our credit business. Our credit segment is focused on our 33% ownership of CVC Credit Partners, our joint venture with CVC Capital, a private equity in asset management platform as well as managing residual trust preferred securities in ABS.

Since October 1, 2013, we closed two additional CLOs, totaling $1.1 billion; Apidos XV, par value of $550 million and Apidos XVI, par value of $600 million. In addition, we closed two separately managed accounts for $250 million and raised an additional $16 million for our opportunity fund, which is now close to $120 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 in the last few years leaves us with a much different and stronger balance sheet and a more focused company. We had book value of approximately $7.87 as of December 31.

Now, I will ask Tom Elliott, our Chief Financial Officer, to comment on the financials.

Thomas Elliott

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

Company reported net income attributable to common shareholders of $1.4 million or $0.06 per common share diluted for the fourth quarter of 2013 and $6.4 million or $0.29 per common share diluted for the year ended December 31, 2013. When we adjust for items that are impacted by the consolidation of RSO, our net income on a standalone basis was $2.1 million or $0.10 per common share diluted and $8.2 million or $0.37 per common share diluted for the fourth quarter and year ended December 31, 2013.

RSO's fourth quarter GAAP results were negatively impacted by a $16 million non-cash charge associated with the deconsolidation of Apidos CLO VIII, a bank loan securitization that was called in October. In consolidation, the company required to remove the dividend income earned on its 2.9 million shares and to record its 2.2% share of RSO's GAAP income.

In periods where RSO's GAAP net income per share differs from a dividend per share, the company will reflect an adjustment. Our press release and financial statements will include consolidating results, to highlight our standalone results prior to consolidation.

Total borrowings include $10 million of 9% senior notes that mature in March 2015 and $10.3 million of other non-recourse debt, secured by one of our legacy asset that is due in September 2021. As of December 31, 2013, the company had no outstanding debt under its corporate credit facilities and $10.5 million of available credits and $14.9 million of cash, excluding consolidated cash of real estate VIE and self-insurance accounts maintained by our property manager.

Assets under management increased from $15.3 billion as of December 31, 2012, to $17.3 billion as of December 31, 2013. After adjusting for our joint venture managed products, net assets managed by the company were $7.9 billion as of December 31, 2013, as compared to $6.8 billion as of December 31, 2012. Net assets reflect our 33% interest in our joint venture with CVC Credit and our 50% interest in Trapeza, our trust preferred asset manager.

As of December 31, 2013, company's GAAP book value per common share was $7.87. Total stockholders equity was $153.7 million as of December 31, 2013, as compared to $151.2 million as of December 31, 2012. Total common shares outstanding were 19,544,000 as of December 31, 2013, and our weighted average diluted shares were 21,828,000. Diluted shares include 1.5 million additional shares associated with outstanding warrants.

As Jonathan highlight in his remarks, the company's adjusted operating cash flow was $4.1 million and $15.7 million for the quarter and year ended December 31, 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 tax.

At this time, I will turn it back to Jonathan.

Jonathan Cohen

Thanks, Tom. In summary, we are proud of the progress we have made and are excited about things to come. We have little debt, improving cash flow, growing assets under management through our existing products and developing new ones. As we grow our businesses earning and cash flows, we will continue to focus on return to shareholders through increasing dividend, stock repurchases and of course through capital appreciation.

Thank you for joining our call. We will open up the call to any questions, if there are any.

Question-and-Answer Session


(Operator Instructions) Please start by your first question. This comes from Leon Cooperman, Omega Advisors.

Leon Cooperman - Omega Advisors

I just had a couple of questions. There are a lot of moving parts, and just curious, do you have expectation or budget in 2014 that you could share with us, number one? Number two, you haven't authorized repurchase program. You bought stock in the year, but I see that outstanding shares were up almost 10% year-to-year. So are we just starting to see a decline in the share count or we're going to just see repurchases that are more than offset by issuance?

Jonathan Cohen

Tom, why don't you handle that question?

Thomas Elliott

Lee, some of that impacted and we did have almost 250,000 warrants that were exercised during the year. So there was some additional offset there that offset the 550,000 or so shares that we repurchased, we did have. We also have shares that are issued in our 401k plan, so that's why some of that was flat.

Leon Cooperman - Omega Advisors

Weighted average shares were $21.8 million in 2013 versus $20 million in 2012, that's an increase of 9% from outstanding shares.

Thomas Elliott

Lee, I apologize. The total outstanding shares, when you exclude non-investment share is 19,543,000 compared to 19,551,000.

Leon Cooperman - Omega Advisors

Give me those numbers, again. It's not what I'm seeing in the financials.

Thomas Elliott

19,543,709 versus 2012 of 19,551,000. At September 30, that number was actually 19,812,000 and has come down. So in the balance sheet section, if you're looking at outstanding shares, it's in the treasuries stock, which you'll see is significantly higher from last year's 10.4 versus 9.9 deducted from that amount to get to a net outstanding shares.

Leon Cooperman - Omega Advisors

So if you take the actual shares outstanding and adjust for all the dilutive securities, what will be the total share account now?

Thomas Elliott

Lee, on a diluted basis, that's a different approach. On a diluted basis the warrants are impacting the basic shares by about 1.5 million. So this past quarter, the average price for our stock was just under $9, so there is 3.4 million warrant that accounted for on the treasury method and that increases the basic shares to the diluted by 1.5 million.

Leon Cooperman - Omega Advisors

In terms of any guidance that you could provide regarding expectation for this, 2014?

Jonathan Cohen

Lee, on the last quarter call, we gave guidance, which we reconfirm here, I guess which was increasing our cash from operations from the $15.7 million this year to somewhere between $20 million and $25 million.

Leon Cooperman - Omega Advisors

So the $20 million to $25 million could be looked at as roughly 20 million shares as to facilitating like a $1 to $1.20 or so in cash earnings for the year?

Jonathan Cohen

I mean, I think last time we actually said that we would be somewhere between $0.75 and $1, but given where some of our incentive fees seem to be penciling out, we're fortunate to earn them. That could be more from $1 there.

Leon Cooperman - Omega Advisors

In terms of the repurchase program is still after, then your intension is to use it this year, assuming stock price is good.

Jonathan Cohen



No further questions at this time on the floor. I would like to turn the call back over to Mr. Cohen for closing remarks. Thank you.

Jonathan Cohen

That's it from us, but thank you for your support. And we look forward to speaking to you next quarter.


Thank you, sir. Ladies and gentlemen, that concludes the presentation. You may now disconnect. Have a very good day.

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