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Resource Capital Corp. (NYSE:RSO)

Q3 2010 Earnings Call

November 3, 2010; 08:30 am ET

Executives

Jonathan Cohen - President & Chief Executive Officer

Purvi Kamdar - Director of Investor Relations

David Bloom - Sr. Vice President of Real Estate Investments

David Bryant - Chief Financial Officer

Analyst

Gabe Poggi - FBR Capital Markets

Steve Delaney - JMP Securities

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Resource Cap Corp Earnings Conference Call. My name is Stephanie and I will be the operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today Mr. Jonathan Cohen, President and CEO of Resource Capital Corp. Please proceed.

Jonathan Cohen

Thank you, for joining the Resource Capital Corp conference call for the third quarter of 2010. I am Jonathan Cohen, President and CEO of Resource Capital. Before I begin, I would like to ask Purvi Kamdar, our Director of Investor Relations, to read the Safe Harbor statement.

Purvi Kamdar

Thank you, Jonathan. When used in this conference call, the words believe, anticipate, expect, 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 they discussed in the company’s reports filed with the SEC, including its reports on Forms-8K, 10Q, and 10K, and in particular item 1A on the Form-10K 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 obligations to update any of these forward-looking statements.

And with that I will turn it back to Jonathan.

Jonathan Cohen

Thank you, Purvi. First, a few highlights, for the three and nine months ended September 30, 2010 we had net income of $0.27 and $0.64 per share diluted respectively. And for the three and nine months ended September 30, 2010 we had retaxable income of $0.20 and $0.73.

We announced a dividend of $0.25 per common share for the quarter ended September 2010 with $13.7 million in aggregate paid on October 26, 2010 the stockholders of record on September 30, 2010. GAAP book value increased, it was $6.03 per common share as of September 30, 2010 up $5.92 a quarter before.

With those highlights out of the way, I will now introduce my colleagues with me today are David Bloom, Senior Vice President in charge of Real Estate Lending and David Bryant, our Chief Financial Officer, as well as Purvi Kamdar, our Director of Investor Relations.

The third quarter of 2010 was marked by many positive events including the following, first, our book value per share increased to $6.03 per share from $5.92 per share in June, 2010. Second, we repurchased $20 million par value of our CDO debt at a discount of 31%.

Third, our cash position increased to nearly $200 million close to $4 per share positioning us to expand our investment portfolio at substantially higher rates and deleveraging our balance sheet from a net debt standpoint. Fourth, our impairments and importantly our impairments reserves decreased substantially from last quarter while our gains and net interest income increased substantially.

And fifth, and also importantly, we paid our $0.25 dividend after earning $0.27 per share of net income. We focused this quarter on making investments and repositioning our commercial real estate mortgage origination business. We are doing this with $200 million of cash on the balance sheet and no short-term debt. We spent the last few years in defensive mode and that left us well positioned.

We are now officially on the offense, our ability to play defense is demonstrated by our deleveraging to discount purchases of our bonds and by the performance of our overall portfolio throughout the financial crisis and after. As one can see, our credit seems to be getting better with write-offs and reserves going down by 50% quarter-over-quarter.

Our ability to play offence is highlighted by the gains in the quarter from spotting attractive investment opportunities over the last six months. As for investments, we are restarting the engines of our real estate lending machine. We have kept our team intact from before the financial crisis, we reviewed many opportunities, but we’re selective to choose only the best one. That patience has paid off and we’re finally finding opportunities that indeed set to build.

After the quarter, we closed our first two loans, which Dave Bloom our Head of Real Estate Lending will go over in his report. They are truly accretive to earnings as we are reinvesting cash that is currently sitting on the balance sheet earning nothing. Now to credits, this quarter we took the opportunity to increase our general reserve on our commercial real estate loan portfolio by $2.4 million. Also due to a quarter proved bankruptcy settlement, we foreclosed on a portfolio condominium and worked the asset down to the likely sales proceeds, resulting in a $600,000 charge. This was an asset that was already in the pause for many, many quarters.

Under the same path, we impaired one originally rated BBB legacy CMBS bonds, which was purchased in 2007. We replaced it with higher rated bonds at a steep discount and we are very happy to make this trade. Our credit otherwise remained stable and indeed I think improving.

Our leveraged loan assets also improved. Moving from an approximate $87 weighted average price at September 30, 2009, to $94 at October 31, 2010. We have continued to see price appreciation this quarter, as the portfolio has moved to an approximate amortized cost of $913 million. This improvement has led to our ability to increase our cushion to our over-collateralization test as well as to upgrade the quality of our loan book.

We have over $30 million of bank loan discounts to accrete over the next few years, thanks for the very opportunistic work of Gretchen Bergstresser and the entire Apidos team. We are looking to take advantage of opportunities in this space and of course as term financing returns, which is indeed have a.k.a the CLO market, we will take advantage of lower cost liabilities as we did in the last cycle.

Now, I will ask Dave Bloom to comment on the real estate side of the business.

Dave Bloom

Thanks, Jonathan. RSO’s commercial mortgage portfolio has a current committed balance of approximately $670 million across a well-diversified pool of 41 separate loans. Our portfolio of commercial mortgage positions is in components as follows, 67% whole loans, 24% mezzanine loans, and 9% B-notes. The collateral base underlying the portfolio continues to be diversified across the major asset categories in geographically diverse markets with a portfolio breakdown of 26% multi-family, 22% office, 33% hotel, 12% retail, and 7% others, such as flexed office and self-storage.

Across the portfolio, there are signs of improving credit as we see a general trend towards the beginning of the stabilization in the commercial real estate markets. While parts of our portfolio continue to face difficulties, we remain fully engaged and continue to benefit from a deep bench of experienced real estate professionals to address the issues in the portfolio as they arise, with the exception of one $10.5 million mezzanine loan that has been in default and is now in the final stages of restructuring to be brought current. The balance of our portfolio of commercial real estate loans continues to be current and performing.

We continue to see both sale and financing transaction volumes increasing and liquidity returning to the market. In recent months, there has been a significant increase in financing activity from banks, insurance companies and especially from reconstituted CMBS programs.

The capital dedicated to new real estate loans is obviously a positive sign for the market in general and for our portfolio in specific. As we see a number of our portfolio properties getting ready for take out financing. RSO benefits from our focus and expertise in directly originating loans between $10 million and $20 million even though there are a number of capital sources in the market to make new loans most in our staff to make loans in this size and many lenders are looking to make much larger loans.

We have an extensive pipeline of deals and are looking to convert select opportunities to loans for our portfolio. Since the end of the third quarter, we have closed two loans. The first loan was in the amount of $8.15 million and it’s secured by a neighborhood shopping center in Orlando, Florida. The term of the loan is three years with two one year extensions.

The second loan within the amount of $9.75 million and it’s secured by a portfolio of retail and multi-family buildings and the GAAP plan section of San Diego, California. The term of the second loan is also three years with two one year extensions. We’re actively sourcing new deals and are seeing opportunities to originate new loans post crisis evaluation, premium spreads and optimal structure.

There are hundreds of millions of dollars of loans coming due and not enough debt providers to address the total financing demand. We have fully established origination, asset management and loan servicing teams and infrastructure are in place. As deal flow continue to build, we’re uniquely positioned to take advantage of opportunities for well structured transactions at premium spread and to match our production levels with our existing financing facilities and capital availability.

With that I’ll turn it back to Jonathan and rejoin for Q-&-A.

Jonathan Cohen

Great, Dave. As I stated I will now give you some statistics on our corporate bank loan portfolio. As I stated earlier, we have syndicated bank loans of approximately $913 million in amortized costs encompassing over 30 industries. Our top industries are healthcare 11%, diversified 9%, broadcasting and entertainment 8%, printing and publishing 5% and chemicals 5%. As of the end of September, our average loan asset yield 2.71% over LIBOR and our liabilities are costing us 47 basis points over LIBOR.

Now I will ask Dave Bryant, our Chief Financial Officer, to walk us through the financials.

Dave Bryant

Thank you, Jonathan. Our Board declared a cash dividend for the third quarter of $0.25 per common share, for a total of $13.7 million. This brings our year-to-date results to $33.1 million of retaxable income estimated and payout ratio of approximately 103%.

At September 30, 2010, RCC’s investment portfolio was financed with approximately $1.6 billion of total indebtedness that included $1.4 billion of CDO senior notes, approximately, $102 million of leased equipment backed securitized notes, and $51.5 million sourced from our unsecured junior subordinated debentures related to our two trust issuances back in 2006.

We ended the period with $329.7 million booked equity and RCC’s borrowings of $1.6 billion had a weighted average interest rate of 1.38% at September 30, 2010 a continued reflection of very low LIBOR. Consistent with our long stated philosophy of maximizing match funding, our investment portfolio continues to be completely match funded by long-term borrowings and thus we have no short-term debt.

We continue to pass all of the critical interest coverage and over-collateralization tests in our two real estate CDOs and three-bank loan CLOs. Each of the structures continue to perform and generate stable cash flow to RCC year-to-date in 2010. The two real estate CDOs produced over $18.6 million and bank loan CLOs generated over $16.3 million of cash flow in the nine months ended September 30, respectively to the re.

Of note as of October 31, we have in excess of $128 million in investable cash, comprised of $29 million and $99 million in our bank loans and real estate deals respectively. This cash is available for reinvestment in our CLOs and CDOs to build collateral generate attractive spreads over the cost of the associated debt and also strengthening our positions in each structure.

For example, during the nine months ended September 30, we bought investment grade CMBS of $27.2 million at par, for a weighted average price of 72 spot rate. Resulting discount of $7.6 million improved the collateralization in our CRE, CDOs and the CMBS purchases provided a cash-on-cash yield of approximately 8%. During the three months ended September 30, we agreed to a bankruptcy court approved settlement on a CRE loan. Notably, this represents the resolution of a previous default, in our portfolio.

As part of the settlement, the loan was paid down by approximately $2.3 million from $7.3 million to just north of $5 million. In addition, we received possession of the remaining real estate collateral, which was written down to it’s estimated fair value of $4.4 million and classified as property available for sale on our balance sheet as of September 30. So we intend to liquidate the real estate.

As Jonathan mentioned earlier, we also added $2.4 million to our general CRE loan allowance. Our leverage is 4.7 times. When we consider our trust issuances, which have a remaining term of approximately 26 years as equity, we see our leverage drop to 4 times. Focusing on real estate, we were levered 2.3 times on our real estate CDOs at December 31, 2009. After giving effect to the debt repurchases in the nine months ended September 30, we ended the quarter 1.6 times levered on our real estate portfolio.

This is a modest improvement upon the production from our December 2009 common stock offering, when we had targeted CRE leverage to the 1.7 times level. Our GAAP book value per common share was $6.03 at September 30 up $0.11 from $5.92 at June 30. Net income of approximately $0.27 per share less the dividend pay out of $0.25 added $0.02 to book value.

The balance of the improvement came from increases in the mark-to-market on our CMBS portfolio amounting to approximately $0.10 per share. Particularly, we saw this improvement on bonds purchased in 2009 and 2010, a reflection of a huge rally in that space. At September 30, our equity is allocated as follows: commercial real estate loans and CMBS 78%, commercial bank loans 18% and lease receivables of 3% and finally structured notes of 1%.

With that my prepared remarks are complete and I turn the call back to Jonathan Cohen.

Jonathan Cohen

Thanks Dave. Again, as I said last quarter and many times before management’s recommendation is that our intentions continue to pay our dividend in cash and well our intention at this point is to have a $1 dividend in 2011 and this is based on our management’s expectation of continued good performance, and it is based on our liquidity increasing and, hopefully, our intend is then to look during 2011 to increase interest income and eventually increase the dividends.

Thanks for participating in our call. Now, I’ll open up the call for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Gabe Poggi with FBR Capital Markets. Please proceed.

Gabe Poggi – FBR Capital Markets

Hey, good morning guys.

Jonathan Cohen

Hi Gabe, how are you doing?

Gabe Poggi – FBR Capital Markets

Good, how are you?

Jonathan Cohen

Good.

Gabe Poggi - FBR Capital Markets

A couple of quick questions. Can you talk about what you guys have scheduled for maturity on the asset side of things, the CRE book, how much in total matures in 2011? And then kind of what your thought processes in dealing with any maturities? And I got some other questions behind that.

Jonathan Cohen

I would say, I think we don’t have that information right on hand here. But there’s nothing maturing in - we’re happy to go through with you if you give Dave Bloom and Dave Bryant a call, but there’s nothing maturing that, it’s related to assets.

Gabe Poggi – FBR Capital Markets

Right, because this is not just you know the big junk.

Jonathan Cohen

No, that’s probably why we don’t have the listing.

Gabe Poggi – FBR Capital Markets

Perfect. Okay. In terms of, you talked about the pipeline going forward, playing offence and Dave had mentioned it’s extensive. Do you guys assuming, what’s the size or the scope, or what you’re looking at is it $1 billion worth of stuff, couple of $100 million? I’m trying to get a sense of how many pitches you guys are seeing to hit so to speak?

Jonathan Cohen

Yes, basically we have about $150 million to $200 million of cash. We’re going to invest all that in, during the next six months to nine months. Most of it in the next three to six months.

Gabe Poggi – FBR Capital Markets

Okay.

Jonathan Cohen

Well I should say most of it in the next six months, although we have Dave, said we’ve started to write loans, we’re looking at opportunities in all the areas that we focused on, not just real estate. And we are often engaged in thinking about having the appropriate term leverage on new investments and we’ll see how that goes, and so, the number will be bigger.

Gabe Poggi – FBR Capital Markets

And then last question is a follow-up to that is, and if Dave, you mentioned it, I apologize, what, generally speaking, what do you guys see as the spread pickup between new paper you can write and for lack of better word, legacy paper in your CRE, CDOs? In other words, what’s your spread pickup, what’s the delta there?

Dave Bloom

It’s all in somewhere because you remember, we’ve been in an accommodative mode as we played defense, so we were lowering LIBOR floors, rewriting loans that may help the borrowers out more than it helps us, or we took it on the backside. Now we’re basically in the mode of getting repaid and putting money out at higher spreads. So somewhere, I would say, between, I would say like 250 to 400 basis points of increasing spreads.

Gabe Poggi – FBR Capital Markets

Yes, certainly. Yes.

Dave Bryant

Yes, so it’s just below 5% weighted average now and Dave’s writing loans at seven and three quarters...

Dave Bloom

Yes, plus the point.

Gabe Poggi – FBR Capital Markets

Okay.

Dave Bryant

Definitely and at that point.

Gabe Poggi – FBR Capital Markets

Right, plus point okay, that’s very helpful. Thanks, good quarter guys.

Dave Bryant

Thanks.

Dave Bloom

Thanks Gabe.

Operator

(Operator instructions) Our next question comes from the line of Steve Delaney with JMP Security. Please proceed.

Steve Delaney – JMP Securities

Good morning, everyone and congratulations on another solid quarter.

Jonathan Cohen

Thanks, Steve.

Steve Delaney – JMP Securities

My question has to deal with the two loans you’ve elected to sell in the quarter. I think it was about, looks like it’s about $37 million. I was just wondering if you’d give us some color, I mean, with these up loans, this sale was sort of part of a work, conclusion of a workout process, or talk a little bit about that and whether were those loans that were within the CDOs and you’re just basically converting them into cash for new investment.

Jonathan Cohen

Steve, very good question. Those were, notes that people approached us to buy, they were both mezzanine, B-note type of loans on large assets that people wanted to buy and since mezzanine and B-notes tend to be binary, they don’t workout, they don’t. We were willing to sell them at about I think about $1.85. So they weren’t any workout we sure took a discount because there is somebody waving cash in front of us.

Steve Delaney – JMP Securities

Right.

Jonathan Cohen

But otherwise, we would have excepted that to go to par.

Dave Bloom

And Steve, I’d add that as of June 30, we knew about those situations and wrote those loans down to those recoverable value.

Steve Delaney – JMP Securities

Right. In other words, you were sort of getting those dealers in those bids and kind of indicating where the market and I guess, in your mind that kind of put them in sort of held for sale.

Dave Bloom

Yes, as good as we know we were going to sell them at a discount, we took the charge in the, I think in the second quarter.

Dave Bloom

Correct

Steve Delaney – JMP Securities

Right, that looks to be a very healthy sign of the market we’ve been hearing about.

Jonathan Cohen

So I would just say, in generally the mezzanine and B market is increasing liquidity daily and I would say values for those pieces have gone up tremendously. I wish we had brought more at the bottom.

Steve Delaney – JMP Securities

Yeah, I mean, that’s good color, because we see it in the whole loan market with the insurance companies and CVS condo, which you could see those like 10 ten year loan yield stropping, but that’s the first color I’ve heard on, sort of the mezzanine B-note market where they’re actually they buy they sell with cash in hand looking to find those assets.

Jonathan Cohen

And it’s a combination of opportunity funds, we have a lot of money looking for control positions on assets and large insurance companies and pension funds, we are just willing to own seven years at 8%, because they can’t get it elsewhere. If they buy that in a discount, they are getting like 11%. And they don’t mind earnings billions at basis.

Steve Delaney – JMP Securities

Okay, great and then one final thing, this is just sort of a technical thing I guess it’s for Dave Bryant. I guess between taxable and GAAP there is always timing issues with respect to when actually losses are run through the system and for GAAP, either your provisions and then the actual loss comes later, is that what is going on that pushes your taxable $0.20 versus your GAAP at $0.27?

Dave Bryant

Yes, pretty much Steve it must be.

Jonathan Cohen

But also we have things in taxable REIT subsidiaries where we’re paying taxes. So even though we are making the money we are providing for tax income there.

Dave Bryant

Correct.

Steve Delaney – JMP Securities

Right, so it sounds like, even if we get that normally of taxable being a little less, as long as you got the GAAP, the GAAP earnings that it sounds like with the Board, that’s the basis on, which you Board is going to do…

Jonathan Cohen

Yes, exactly and as I said at the end of the call, we are looking at the 2011; we feel that $1 is very solid there.

Steve Delaney – JMP Securities

All right. Guys, well, congrats and have a good day and thanks for the comments.

Jonathan Cohen

Thank you.

Operator

There is no further questions in queue. I would now like to turn the call over to Mr. Jonathan Cohen for any closing remarks. Please proceed.

Jonathan Cohen

Well, I just want to thank everybody, for their continued support and interest. And let us know if you need anything and you can find us with Purvi Kamdar, our Director of Investor Relations. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for participation. You may now disconnect and have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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