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Resource Capital Corp. (NYSE:RSO)

Q1 2014 Results Earnings Conference Call

May 7, 2014 8:30 AM ET

Executives

Jonathan Cohen - President and CEO

Purvi Kamdar - Vice President, Investor Relations

Dave Bloom - Head, Real Estate

David Bryant - Chief Financial Officer

Analysts

Richard Eckert - MLV & Company

Steve Delaney - JMP Securities

Matthew Stolzar - Pyrrho Capital Management

Gabe Poggi - EJF Capital

David Mills - JDM Capital Management

Operator

Good day, ladies and gentlemen. And welcome to the Quarter One 2014 Resource Capital Corp. Earnings Conference Call. My name is Sally, and I will be your operator for today. At this time, all participants are in listen-only mode. We’ll conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Jonathan Cohen, President and CEO of Resource Capital Corp. Please proceed.

Jonathan Cohen

Thank you for joining the Resource Capital Corp. earnings call for the first quarter ended March 31, 2014. I am Jonathan Cohen, President and CEO of Resource Capital Corp. Before I begin, I would like to 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.

With that, I’ll turn it back to Jonathan.

Jonathan Cohen

Thank you, Purvi. First a few highlights. Adjusted funds from operations were $0.20 per share for the quarter ended March 31, 2014, a 43% increase from last quarter. During the quarter, we had commercial real estate loan originations of $111.6 million, as compared to $61.4 million the same quarter last year.

We expect to close at least and I underline the word at least $160 million of new loans during the quarter ended -- the quarter ending June 30, 2014. We paid a dividend of $0.20 for the quarter.

With those highlights out of the way, I will now introduce my colleagues. With me today are Dave Bloom, Head of Real Estate; David Bryant, Chief Financial Officer; and Purvi Kamdar, our Vice President of Investor Relations.

We are very pleased to have earned $0.20 of adjusted funds from operations during this quarter matching our dividend of $0.20. This is a sharp increase from last quarter. This Increase was driven by commercial real estate lending, our new securitization, some new investments on the commercial finance side of our business and our continued re-leveraging of our business through the use of convertible senior notes at 6%, as well as preferred stock issuance at approximately 8.5%.

As stated on last quarter’s conference call, we are confident that we will be fully invested by the end of the second quarter and look forward to using this investment cycle to better leverage our balance sheet to appropriate the conservative level.

An example of this leveraging will be through when we again access the real estate securitization market. We expect to continue to earn approximately $0.27 of AFFO, adjusted funds from operations per quarter through the remainder of the year.

During the first quarter of 2014, Resource Capital Corp. made over $300 million of high-quality, diversified, investments in commercial real estate and commercial finance. Our pipeline is very strong and we hope to increase those investment levels sequentially throughout the year.

Our core CRE or commercial real estate loan origination production is running at a significantly higher rate than a year ago and some of our newer initiatives are already beginning to make a significant contribution and we expect this to grow in a meaningful way.

As I mentioned, we expect to finish the second quarter with commercial real estate lending production of at least $160 million and I again emphases the word at least and there is a good chance that number will be much higher.

In commercial real estate, the company currently has nine new loans in process and other application totaling $254 million. The company has an ongoing pipeline of new commercial real estate loan opportunities in various stages of negotiation and underwriting of new whole loan, representing almost $500 million our potential investment.

As per book value, we have several assets that we are confident have value beyond their GAAP book value. We believe year end book value will end at the current level, approximate current level.

For example, since the end of the first quarter, we have sold our hospitality property on which we held the loan and later acquired an equity interests. With this sale we have been paid in full on our loan which was paid current at all-time and have realized the gain of approximately $5.25 million.

This demonstrates some of the unlocked value that we carry on our balance sheet. We also -- it also shows our ability to work effectively with our borrowers, doing a variety of situations and help create win-win situation that help our borrowers and our shareholders.

We have always invested a portion of our capital into the corporate loans space and we have transition that to the middle market lending emphasis. Currently, our middle market lending business is growing and during the first quarter it deployed $58.2 million of capital.

We have a full team in place to expand the growth of this business. During the first quarter RSO also invested $37.8 million in two European CLO equity position and expect to make a 21% IRR on these investments.

The company also made $23.6 million of new investments during the first quarter of 2014 in one of the remaining leverage loan vehicle Apidos Cinco, which had a return of equity of over 40% in 2013 and we are redeploying all available capital as the reinvestment period winds down into middle market loan and the low cost of financing provide significant returns for our shareholder.

We continue to seek opportunities to generate solid returns on quality credit related products to supplement our commercial real estate lending business. As this portfolio grows, it should add a significant boost to our earnings and our AFFO.

Between the ramp of our commercial real estate origination and our middle market lending portfolio, we expect to be fully invested by the end of June. As that occurs, we expect add leverage to our portfolio. We finished the period 1.9 times levered and we will increase this during 2014 as we strategically utilize leverage to increase our invested capital.

LEAF Commercial Capital, the small-ticket leasing business that we've invested into a partnership with a leading private equity firm has continued to make excellent progress.

In recently secured new financing vehicles with Credit Suisse and now as more than sufficient funding capacity to grow its business for the foreseeable future. Even at the 50% compound annual growth rate that has enjoyed over the last few years. We believe that this is another area of where the value of our holdings is greater perhaps much greater than GAAP book value.

Our credit quality continues to be very solid, our real estate watch-list is shrinking and we reverse $4.6 million of the specific allowance in the first quarter as a result of the pending sale by the borrower on the property of a legacy the whole loan that will pay down the existing balance and further reduce our legacy loan portfolio.

We concurrently maintain the general reserve of $5.8 million on our commercial real estate loan portfolio with an outstanding principal balance of $918 million as of March 31, 2014. This is in line with our recent charge-off history and reflects our strong focus on originating commercial real estate loans with strong credit profile.

Even as we are increasing our origination capacity, our primary focus remains credit quality. Our liquidity remains outstanding. We had approximately $166 million of unrestricted cash as of March 31st.

As I have already mentioned, our pipeline are full and we expect that we will be fully invested by the end of the second quarter. Once that is done and the cash is invested, we should see our return on equity return to historic level.

Now, I will ask Dave Bloom to review our real estate activities.

Dave Bloom

Thank you very much, Jonathan. Resource Capital Corp.'s commercial mortgage and CMBS portfolio has a current balance of approximately $1.3 billion in a diverse and granular pool.

RSO's commercial mortgage portfolios comprised of 63 individual loans, with an aggregate committed balance of approximately $1 billion. The portfolio, its in-component is follows, 93% whole loans, 6% mezzanine loans and 2% B-notes.

The underlying collateral base continues to be in geographically diverse markets, spread across the major asset categories, with the portfolio breakdown of 36% multi-family, 16% office, 18% hotel, 20% retail and 10% other, such as industrial and mixed use deal.

During the first quarter of 2014, Resource Capital closed five new loans with commitments totaling approximately $170 million. As of the end of the first quarter, new loan production on a trailing 12-month basis was approximately $395 million comprised of 26 individual loans

Since the beginning of the second quarter of 2014, we have closed three new whole loans with commitments totaling approximately $60 million and in the process of closing five additional loans and one new mezzanine loan with an aggregate committed balance of approximately $173 million

As Jonathan noted in his comment, anticipated new loan closings by the end of the second quarter are projected to be at least $160 million. That said, to the extent of certain acquisitions we are financing close without extensions. It is possible that the full $173 million of deals in process will fund prior to the close of the second quarter, which will put new loan production for the current quarter at $233 million or more.

Between $177 million of closed transactions and new loans deep in process provided that all of the transaction and documentation close, total new originations for 2014 as of today are approximate $350 million.

I have noted on previous calls that our new loan production is casing at about twice the volume we saw in 2013 and our 2014 loans bears this out and is already equal to last year’s total new origination.

While RSO will have again grown quarterly loan production significantly, we remain extremely focused on credit and market fundamentals, and are holding to strict asset quality, valuation metrics, sponsor experience and diversity standards that have always guided our core bridge lending program.

As we look beyond the second quarter of 2014, RSO currently has two new loans with an aggregate committed balance of approximately $62 million in process for closing in the third quarter, with applications issued and under active negotiations for approximately $160 million of additional new origination.

In addition, RSO is actively underwriting a forward pipeline between $400 million and $500 million of new lending opportunities, which continues to increase on a quarter-over-quarter basis as demand for our traditional floating rate bridge loan increases and as we add and scale new loan programs to our nationwide platform of self-originated customized real estate financing solutions.

On the last call, it was noted that RSO was on track for 2014 annual new loan production between $600 million and $700 million, and that we still feel very confident in this anticipated volume projection. During the period that we are aggregating collateral, RSO will continue to utilize our $450 million of term financing facilities provided by our commercial banking partners to drive earnings growth.

Maximum returns on invested equity will be realized when we again access the commercial real estate note securitization market, which we anticipate doing more frequently based on the velocity of new originations in order to match fund loan portfolios in the most efficient manner.

Credit across the portfolio continues to trend in very positive direction, with improving metrics across all assets classes. The majority of the properties securing our loans are continuing to realize improved cash flow and receiving borrower's plans for value creation well on or ahead of track. Once again, I'm pleased to report that the entire commercial real estate loan portfolio is performing with no defaults.

As existing assets are recapitalized, sold and paid off, the very short list of legacy positions that require extra asset management sessions has grown even shorter. One of these loans is under a definitive agreement to be resolved this quarter, with another two loans in process of ultimate resolution and if successful, looking for a late second quarter or early third quarter payoff of both positions with full recoveries and substantial exit fees.

We continue to harvest real estate owned for gains. In addition to the disposition of the hospitality asset that Jonathan mentioned, two additional owned properties are slated for imminent sale. A 30,000 square foot office building has a contract in the final stages of negotiations and our sole remaining wholly-owned multifamily property is fully stabilized, providing strong cash flow and therefore, we anticipate broadly marketing this property before year end.

Finally, RSOs venture with an institutional partner that owned a portfolio of 20 non-performing loans and distressed multifamily properties, representing an investment of approximately $160 million at its peak is now down to two assets representing approximately $10 million of remaining book value, both of which are slated for resolutions by the end of the second quarter. RSO has booked gains through its 25% profit participation, as this portfolio has been resolved.

With that, I'll turn it back to Jonathan and rejoin you for the Q&A section of the call. Thank you.

Jonathan Cohen

Thank you, Dave Bloom. Now, I will ask Dave Bryant, our Chief Financial Officer to discuss our financials.

David Bryant

Thank you, Jonathan. Resource Capital Corp. declared and paid a cash dividend for the first quarter of $0.20 per common share, approximately $25.6 million. Our adjusted fund from operations or AFFO for the quarter was $25 million, also $0.20 per share common shares diluted.

In determining AFFO for the first quarter, there were several non-cash adjustments that led to approximately $5 million. And cash adjustments of $6.4 million, of which $4.5 million comes from the recognition of cash gains on the extinguishment of debt and $1.9 million from realized gains on the sales of two real estate joint venture investments. We passed all of the interest coverage and over collateralization tests in all of our securitizations, including our two legacy real estate CDOs and three remaining bank loans CLOs.

Each of these financing structures performed well and continued to generate strong cash flow to us in the first quarter. We ended Q1 2014 with approximately $157 million of real estate loans on our term facilities. So, when we add the expected origination growth in Q2, we anticipate having sufficient assets, allowing us to close our next real estate CLO later this summer.

We ended Q1 2014 with $407 million available on these facilities that will help fuel our anticipated real estate growth in 2014. In the first quarter, we saw a net reduction of $4 million in provisions for loan losses. The reversal of $4.6 million on our real estate loan was offset by an increased provisions of $600,000 with bank loans. Most of that offset resulted from the sales repositioned for credit reasons, which required us to increase reserves before those sales were consummated.

We ended the period with $5.8 million in real estate allowances and $700,000 in bank loan allowances. Overall, real estate credit has been excellent and I continue to characterize our bank loan portfolio credit as very benign. Only one bank loan of $1.6 million is delinquent out of a portfolio of $732 million, only 21 basis points and all $60 million of our commercial real estate loans are performing.

Our leverage stands at 1.9 times at March 31, 2014. When we trim our TruPS issuances which have a remaining term of approximately 23 years as equity, our leverage is 1.7 times. With regard to real estate leverage, we end Q1 at 1.33 times on our entire real estate portfolio, which includes unrestricted cash earmarked for these new real estate loan originations.

Our modest increase in leverage came from the new CLO investment and increased borrowings under our real estate term facilities that again, helps fund our real estate loan origination business. These increases to leverage will offset partially our paydowns and runoffs of CLO debt, real estate CDO debt as well as from a modest amount of equity raised during at-the-market preferred stock program.

Overall, our weighted average effective cost on net proceeds from that program, both series of preferred stock is 8.57%. In terms of liquidity, after paying the first quarter common and preferred stock dividends in late April, we have $156 million of unrestricted cash, with several real estate and middle market loan originations in process and intended to invest this equity.

We ended the March 31st quarter with GAAP book value per share of $5.28. At March 31st, our equity is allocated as follows -- commercial real estate loans and CMBS 73%, commercial finance 26% and 1% in other investments.

With that, my formal remarks are completed and I’ll turn the call back to Jonathan Cohen.

Jonathan Cohen

Thank you, Dave Bryant. And with that, I will open the call for any questions if there are any.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Richard Eckert from MLV & Company.

Richard Eckert - MLV & Company

Good morning. And thank you for taking my call. First question, Dave Bloom, I hate to start this call this way, but during the last earnings conference call, I think we’re talking about a $160 million in production for the first quarter. Are any of those five loans that closed in this quarter, were they supposed to have closed in the first?

Jonathan Cohen

Well, Dave can answer that.

Dave Bloom

Yes, Rich, they are. And to the extent that we have tried to articulate in acquisition financings, we’re certainly ready, but don’t control the entire transaction simply put. So if we look at where we’re pacing, we’d like to give a degree on either side of that, Jon’s number was 160 for this quarter, I told you what we have in process.

Jonathan Cohen

Let me just intervene here for one second. So just there is $30 million of loans, that’s slipped from the end of March to the beginning of April, and so we would have been more like in the 140 to143 range have we completed those loans which we thought would have. But when you deal with acquisitions, as you know these things sometimes can be on again, off again and so we lost a week or two in with those two loans which we’re happy to close.

On the flip side, and Dave mentioned this, I gave guidance at least $160 million because we’ve been a little bit high in our guidance in past quarters and we thought it will be good to know that, even though we believe we will close north of $200 million of loans, we’re giving guidance out there, about $160 million which we think is pretty conservative. Although it gives you a sense whether it’s 200 or 160, if you combine the first two quarters at 111 and 200 or 160, whatever you want to call it, you are averaging about $135 million to $150 million per quarter which gets you to kind of an annualized $600 million-ish number or a little bit less on the low side there. But obviously, we are seeing incredible amounts of momentum which we’re very pleased with.

Richard Eckert - MLV & Company

Okay. So you are still comfortable with the $600 million to $700 million for total 2014?

Jonathan Cohen

Absolutely.

Richard Eckert - MLV & Company

Okay. Second question, there was a sizeable increase in the syndicated bank loan portfolio and you indicated that they were all funded by the Apidos CDO. I thought two of those were closed for reinvestment and the last one I believe closes this month. How are you funding them?

Jonathan Cohen

Well, actually just little bit artificial that number. We were accounting for us to consolidate a investment that we made in a third party managed European CLO, and therefore we made approximately -- what was the investment about, $30 million investment.

Richard Eckert - MLV & Company

Correct.

Jonathan Cohen

Which we probably won’t hold for very long, but that investment which had been very low leverage European CLO of corporate loans had to be consolidated. So the assets are higher than they were last quarter but only originating in that one CLO that I mentioned, Apidos CDO.

Richard Eckert - MLV & Company

Yes. So the net investments were a lot lower than what shows up in the portfolio?

Jonathan Cohen

Exactly.

Richard Eckert - MLV & Company

And finally, David Bryant, the $4.5 million of gains on extinguishment of debt, did you buy back any bonds in the quarter or…

David Bryant

No, Rich, what had happened was we had previously bought back bonds, A1 notes, the highest rated notes in the 2006 real estate CDO and we sold them back into the market at an early par, so we got all that cash came back because we had bought them back. When we originally bought them, it was at much less than par. So we sold them back out at $0.99, took all that cash gain that was remaining, and the debt that we sold back is at LIBOR plus about 40 basis points. So, it’s very cheap financing for us.

Jonathan Cohen

Just to be clear, when we bought the bonds years ago, we booked the GAAP gain, but we didn’t book it through AFFO because it was not a cash gain.

Richard Eckert - MLV & Company

That’s right, John.

Jonathan Cohen

And now that we actually sold it and we realized the cash, we realized the cash gain because we received the cash versus the cash that we put out in the investment.

Richard Eckert - MLV & Company

Right. Okay, that’s all I have to ask. Thank you very much.

Jonathan Cohen

Thank you, Rich.

Operator

Thank you. The next question comes from the line of Steve Delaney from JMP Securities.

Steve Delaney - JMP Securities

Good morning, everyone, and congratulations on a good start to the year. John, I had some slow reception, I apologize if my question if you cut started in your comments. But we have been reading lately some news releases about the residential mortgage company down in Atlanta, Primary Capital that you invested in. And I was just curious if you could comment on that and talk about the amount of money that you did invest and do you see this is more of what I guess I would describe as a merchant banking type investment or did you see this as more of a strategic platform type investment where you’re looking to Primary Capital to create credit assets that you would hold on in the RSO portfolio? Thanks.

Jonathan Cohen

Thanks, Steve. I think that it’s still unknown where our investment will go. We are very supportive of what Primary Capital is doing. We are very excited about it. We’re relatively small investment under $10 million on our books. Is that right?

David Bryant

When we acquired it, it was about $7.5 million and then we invested another $10 million to keep the business -- get the business going.

Jonathan Cohen

Right, we put $10 million of capital and this is working capital into the business. So it’s a relatively small investment. We will see where it goes. We are hopeful that they can grow their origination platform which we are very excited about both intellectually and from an investment perspective. We think it will work out great for Resource Capital’s shareholders. I think you will see some of the fruits of what we have done before, for instance at least capital where essentially that is sold into the market in building these specialty finance companies for our shareholders and realizing gains. So the answer is, we are not really sure, it could be a little bit of merchant banking. We could buy things opportunistically onto our balance sheet and we see great investments. We are certainly going to be buying them because that’s what we think we do well.

Steve Delaney - JMP Securities

Okay, great. So we will just stay tuned for more developments there and then on the CLO [side floating on the] (ph) CMBS front. I am just curious is that market is staring to evolve and loosening up. Are you doing this -- are you still doing senior floating bridge loans? And, I mean, are you looking at structures that would provide you with the replenishment feature just sort of kind of constantly be able to have a cash sitting from payoffs that you can constantly reinvent. I am just curious if going down the road we might see structures that have a replenishment period for you like we did back in the old days.

Dave Bloom

Actually, this is Dave Bloom. We are certainly very close to the market and I look at all of the sort of CLO notes. They are quite frankly not being many of them. There have been cash issuers of floating rate CMBS say our peers. We are certainly with each deal seeing additional features coming along in meetings that we have with the agencies which we do regularly. There are preparations being made for towards the replenishment criteria that there are. And in short, I think we’re working our way there, but it's going to take a little bit of time. We are certainly not going to push very, very hard. Those who have done it have there very unique situations and they are selling AAAs at very, very expensive rates.

Steve Delaney - JMP Securities

Right. I knew there would definitely be a cost to hedge that quick capability so to speak, okay, well, great...

Jonathan Cohen

I will just add, Steve. This is Jonathan. The markets that we are all seeing were at the forefront of it. And I think that as we showed with our first deal that I think led to better execution for numerous issuers in the marketplace. They’ve kept pushing now a little bit. I think that people become more and more comfortable with the asset class looking and smelling or performing as well as some of its brethren. I think you’ll see the capability of the top tier manager, which we would like to include ourselves there have a little bit more flexibility.

Steve Delaney - JMP Securities

Well, again, congrats and thanks for the comments. Appreciate.

Jonathan Cohen

Thank you, Steve.

Operator

Thank you. Your next question comes from Matthew Stolzar from Pyrrho Capital Management. Go ahead.

Matthew Stolzar - Pyrrho Capital Management

Hi guys. Thank you for taking my question. On your last call you said that you expect run rate 2014 AFFO ending the year in excess of the current dividend. Can you walk us through which one-time items should be back out to retract the process, your progress on that, and sort of what your path is from an origination and a leverage perspective together?

Jonathan Cohen

We can probably do that offline. I think it’s a little complicated to do it online here. But in general, going forward, we’re building our portfolio, the portfolio should support as I said last call by the end of year on just normalized non-recurring basis at least $0.20 of AFFO. During the interim kind of what I would call the first second periods there is a couple little things but they diminish and obviously the delta between the portfolio earning AFFO and gain or non-cash item will become smaller.

Matthew Stolzar - Pyrrho Capital Management

Okay. And the stock process or at least the guidance is that with execution that you described on this call, plus increasing the leverage that you described, does that ultimate get you to that run rate?

Jonathan Cohen

Yes.

Matthew Stolzar – Pyrrho Capital Management

Okay. Got it. Thanks.

Jonathan Cohen

And we’re really not that far-off now.

Matthew Stolzar – Pyrrho Capital Management

Okay.

Jonathan Cohen

Is that helpful?

Matthew Stolzar – Pyrrho Capital Management

Yeah. That’s helpful.

Jonathan Cohen

All right. Thank you, Matthew.

Operator

Thank you. Your next question comes from the line of Gabe Poggi from EJF Capital. Go ahead.

Gabe Poggi - EJF Capital

Hi, good morning, guys.

Jonathan Cohen

Hey, Gabe.

Gabe Poggi - EJF Capital

Piggyback to the question that we just asked. Are you guys saying that by the end of the year you expect kind of, what I would call core earnings potential to be $0.20 to cover the dividend, excluding one-time items, so that there's no more book value erosion?

Jonathan Cohen

Yes. And we don't think, as I said in my comment, yes, is the answer to first question. And as I said in my comments, I think, in the meantime, we don't expect book value to go down from where it really is. You stay around the approximate same level because we are also selling assets to increase book value.

Gabe Poggi - EJF Capital

Got it. What’s the timing for those asset sales?

Jonathan Cohen

We’ve actually, I mean, on the call, I mentioned, one that that will be in the second quarter, which is already booked is $5.25 million. And then we have a few in the second quarter. We’re very fortunate we actually have a lot of stuff on our book that have significant gain embedded in them and it’s just a matter of executing.

Gabe Poggi - EJF Capital

Got it. And then one more question. You may have mentioned this in the beginning of the call which I missed. How much of the first quarter commercial real estate loans were closed towards the back end of the quarter or just timing?

Jonathan Cohen

It was a little bit towards the back end of the quarter but I’m just looking here. The bulk of it was in the middle of the quarter, like around March 6th area.

Gabe Poggi - EJF Capital

Okay. And then one more --

Jonathan Cohen

But I just wanted to mention. We mentioned earlier that two loans of $30 million closed in April. We’ve already -- just to give you a sense, maybe David said this we’ve already closed probably how much of this quarter?

David Bryant

We have probably close to $60 million, so at $177 million for the year as of today.

Gabe Poggi - EJF Capital

Got it. And then Dave Bryant mentioned, I think you guys probably mentioned in the initial comments. Another securitization in late summer, is that kind of the way you’re tracking?

Jonathan Cohen

But we don’t really talk about the timing or that, but we will access that market at some point.

Gabe Poggi - EJF Capital

Right. But based on kind of the ramp, if you guys execute on the origination, you should have enough warehouse to that point in commercial with new commercial loan origination to be at a ballpark to get something off arguably?

Jonathan Cohen

Yeah. Arguably, yes.

Gabe Poggi - EJF Capital

Okay. Thanks guys.

Jonathan Cohen

Thanks, Gabe

Operator

Thank you. Your next question comes from the line of David Mills from JDM Capital Management.

David Mills - JDM Capital Management

Good Morning everybody. Could you just comment on what is it that’s driving the rapid increase in originations this year? Is it much better cap rates and internal rate of returns that you are looking at out there or is it something else?

Jonathan Cohen

It’s just a general market as many people on the marketplace. Many people in the marketplace who participate in the marketplace know, this is a great deal of desire on behalf of our, to access this type of capital that’s more creative and more flexible.

David Mills - JDM Capital Management

Okay. And then second question, does it make sense to think about the share repurchase plan here given the yield on the stock and the fact that your real book value is probably, considerably higher than your stated book value?

Jonathan Cohen

It’s something that we always contemplate. Right now, we’re trading above book value and probably when you add in all the things around book values, it’s not a great transaction. If we feel like we can put money up, especially leveraging the company. Right now, our capital that we access is relatively cheap. It’s under 3% on our line and 6% on our senior notes in converts, so it’s 8.5% on the preferred. So, we see the next year really moving forward and building a portfolio that can do well and provide tremendous yields for our investors. But we’re always up if the stock is cheap, meaning discounts and book value substantially, we will be buyers.

David Mills - JDM Capital Management

And how high do you think or how higher you are comfortable with increasing your leverage, say over the next couple of years?

Jonathan Cohen

We are a normalize company. I mean, I always joke it is hard to be a financed company with a one-time leverage. And no financed company in the country actually operates like that. I would say normalized here. You can see probably in the 2.5 to 3 times area, which is a considerable leverage from where we are today.

David Mills - JDM Capital Management

And would you consider that a target, say over the next 18 to 24 months?

Jonathan Cohen

We don’t really target that. It’s much more of a -- we are really into investment returns for our shareholders. So if we can make a return as we have before many times at one-time leverage or zero times leverage to make mid-teens return. A lot of times, we’ll appreciate that return better than a two or three times leverage portfolio returns. So it really depends what we’re investing in and what the returns are. So we don’t really have a target area but I think normalized commercial real estate lending as you can see from the securitizations where people on the lines, somewhere in the two to two and a half to three times area.

David Mills - JDM Capital Management

Thank you.

Jonathan Cohen

Thank you.

Operator

Thank you. There are no further questions.

Jonathan Cohen

Great. I want to really thank everybody for the support, but I also want to thank Dave Bloom and his team, Darryl Myrose and Kyle Geoghegan, who really led a great team, originating a tremendous amount of high-quality products as well as the rest of the Resource America team that led to really what I think is the start of a great trend for Resource Capital. So we appreciate the support and we’ll talk to you next quarter.

Operator

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

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Source: Resource Capital's (RSO) CEO Jonathan Cohen on Q1 2014 Results - Earnings Call Transcript
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