Resource America, Inc. (NASDAQ:REXI)
Q2 2008 Earnings Call Transcript
May 9, 2008 8:30 am ET
Purvi Kamdar – Director of Marketing and IR
Jonathan Cohen – President and CEO
Steve Kessler – EVP and CFO
Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Resource America, Inc. Conference Call. My name is Lauren, and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference, at which time you may press star one for questions. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jonathan Cohen, President and CEO of Resource America, Inc.
Thank you. And thank you for joining the Resource America second quarter conference call. This is Jonathan Cohen, President and CEO of Resource America. I would like to welcome you to our call. Before I begin, I will ask Purvi Kamdar, our Director of Investor Relations to read the Safe Harbor statement. Purvi?
Thank you. When used in this conference call, the words believe, 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 in the Form 8-K, 10-Q, and 10-K, and in particular Item 1 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 obligations to update any of these forward-looking statements.
And with that, I will turn it back to Jonathan.
Thanks. Again, this is Jonathan Cohen, and I thank you for joining our call. Our second quarter, which ended March 31, 2008, was very successful. But we had some difficulties. Our successes came largely from, first, the growth at LEAF Financial, our leasing and asset management subsidiary, which had a record $8.7 million pre-tax income for the quarter. Second, growth at Resource Real Estate. And certainly importantly, from a GAAP perspective, returning to profitability, albeit slight. However, we also addressed difficulties with the additional write down of our Resource Financial Fund Management equity due to the deterioration of the credit markets.
We are dedicated to increasing our successes and focus on decreasing our difficulties over the next few quarters. The nature of our accomplishments gives us great confidence that we are well positioned for the current environment, which remains challenging. In particular, we continue to raise significant capital through our proprietary fund raising channels, and this was most evidenced by our ability, since January 1, 2008, to raise over $71 million of equity for our leasing, real estate, and bank private equity programs.
I want to emphasize that during the financial market dislocations of the past several months, our ability to raise funds through those channels was never significantly impacted and we see this ability as a big strength. And remember, this equity and the corresponding assets that we purchased with it, on behalf of our limited partners, we get to manage for up to 10 years.
We are well on our way to raising over the $200 million of equity just through this channel alone this year. In addition, we have add institutional partners for real estate investing, and are in talks with others to capitalize on our platform, experience, and capabilities to take advantage of the opportunities available in CMBS, real estate, and bank trust preferreds. We look forward to announcing additional partnerships and ventures in the near future.
Now, I would like to dive deeper in to the three divisions. LEAF Financial continued to performance at the highest level. LEAF now manages $1.7 billion, and had an income before taxes and minority interest of $8.7 million for the quarter, and $16.2 million for the six months ended March 31, 2008. LEAF successfully sold the remaining asset from its 2007 acquisitions, just to remind you, NetBank, Dolphin, Pacific Capital, down to its managed funds. This, by the way, reduced assets by $323 million and debt by $315 million if you look from the March 31, Resource America consolidated balance sheet, and will lower our resource debt at the parent level on our corporate facility since March 31.
Lease credit at the Partnership level remains strong and on track. The acquisition completed in the first fiscal quarter helped to further diversify the portfolio in all key categories, by industry, equipment type, and location, further mitigating the risk related to a downturn in a particular sector or part of the country. For example, other than California, at 15%, no other state makes up more than 7.5% of the portfolio.
In anticipation of continued economic slowdown, LEAF has taken steps to maintain acceptable delinquency levels by adding collectors and accelerating the collection process. Write-offs as well continued to be within our projected levels as they remain 25 basis points below our targeted static pool loss of 2.5% on a weighted average basis. Also strengthening our portfolio is the enhanced profitability of the new business we are putting on the books today. The spread over two-year swaps for business originated in March 2008 was 681 basis points or 200 basis points higher than that originated in March 2007.
We are pleased with LEAF's progress, and see huge opportunity in the small to middle ticket leasing business – small to middle ticket leasing and business loan segment due to the issues that many of you know at some of the more established players and banks. We see our ability to add quality vendor programs to our arsenal over the next two years as an important long-term builder of value. For example, we have added many, many significant corporate programs, such as Sage, Cartier [ph], Mattel [ph], Sophis [ph] as well as significantly expanded our relationships with Dell and Solivant Shine [ph].
As Resource Real Estate, they continued to do great work and see great opportunity. First, managing the – they do great work managing the resource capital, RSO, on the New York Stock Exchange, their debt portfolio. Second, growing their private fund business, where we expect to close Resource Real Estate Investor VI Limited Partner, which will be fully subscribed at $35 million of equity sometime this week. Third, growing their institutional real estate business, where they have just reached agreement with an institution to commit capital to their multi-family business, and another institution to partner on other real estate businesses.
And also, importantly, fourth, moving forward on selling non-core real estate at very attractive prices, and we look forward to announcing this in the near future. In fact, we expect this process to continue in the June 30, 2008 quarter, and this will allow us to take assets that net us close to zero in terms of GAAP earnings and use the proceeds to pay down corporate debt and to invest in our business. We believe that our overall real estate business will be a driver going forward.
Now, to Resource Financial Fund Management. We continue to work through the credit crisis, and have started to see some life the securitized marketplaces, although, I must admit, minimal. Our assets under management as of March, 31, 2008 in this segment was $14.3 billion, and we expect it to remain fairly constant for the near term with a specific exception. We continue to receive substantial fees from managing this business and expect to add assets in our Apidos Capital Management business segment over the next week to the tune of approximately $1.6 billion through the absorption of another bank loan manager and their corresponding deals. We are very excited about this and we expect to issue a press release announcing it when it is complete.
In our Trapeza business segment, we remain watchful as commercial banks around the country continue to be under pressure. For the most part, however, we just continue to try to outperform our peers in terms of performance and continue to manage our portfolios. On the investment side, as many of you know, we had direct equity investments in our CDOs of approximately $24 million and then own the equity in whole of Apidos CDO VI. As most of this equity is tied to the bank loan market, we continue to benefit from the great performance of our team, led by Gretchen Bergstresser. We have had very little in terms of defaults, and we have been able to buy higher-rated names at discount over the past six months, essentially building par in our vehicles.
I would like to comment on the 8-K filed yesterday, which said that we will be restating some of our previous reported results. I will try to summarize the information in the 8-K, but I urge all interested parties to read the 8-K in its entirety. We will be restating quarterly information for the years ended September 30, '07, '06, '05, and retained earnings for '04. The cumulative effect is a reduction in (inaudible) income for all the years of 3.2 million. Steve Kessler will go into greater detail.
And with that, I will ask Steve Kessler to walk us through the financial highlights.
Thank you very much, Jonathan. The corrections that John just referred to related to the financial statements of the Trapeza partnerships, which we formed back in 2002 and 2003, of which we own about $8.4 million, or 8% of the limited partnership interest, and are a 50% owner of the general partner. The adjustment related to the application of valuation procedures applied to privately issued trust-preferred securities, held by the CDO issuers, in which the Trapeza perspectives hold the equity. I would add that we received $6.7 million in the last year in fee income and partnership distributions on those – from those partnerships, a pretty significant return on $8.4 million.
Let me now address our balance sheet, liquidity, and cash flow. Our balance sheet assets increased from $970 million at September 30, 2007, to $1.1 billion at March 31, 2008, an increase of $174 million. Our borrowings increased to $884 million at March 31, 2008, from $706 million at September 30, '07, an increase of $177.8 million.
Let me now explain some of the significant increases. There are two categories of loans shown on our balance sheet at September 30, '07- loans sold not settled, and loans held for investment net. The loans sold not settled are the remnants of the loans sold in the September quarter. They settled in January 2008, and are totally gone now at March. The loans held for investment at September 30, 2007, are the warehouse lines, which we terminated in January 2008, and they are gone.
The loans held for investment at March 31, 2008, of $227.7 million are the securitization of the bank loans, which we refer to as Apidos VI that we closed in December 2007. The investments in our commercial finance assets increased to $620.2 million at March 31, 2008, from $243 million at September 30, 2007, an increase of $377 million.
The major reason for the increase was the $412 million acquisition by LEAF of NetBank in November of 2007. The NetBank assets, which were approximately $323 million at March 31, 2008, were sold to LEAF III, one of the LEAF fund partnerships, in April 2008, and therefore come off of our balance sheet, and that would leave us down to about a little under $300 million, which I think is kind of where we want to be carrying the LEAF's commercial finance assets, going forward.
Let me now review the borrowings. At March 31, 2008, the company had total borrowings, as I said before, of $884 million. After adjusting for the April transfer of the $315 million of non-recourse bridge loans at LEAF the financed – the NetBank acquisition, the borrowings outstandings would be about $569 million, and this includes $213 million of net liabilities consolidated under FIN 46R as to which the company has no resource and relate to the Apidos VI loan assets that I previously referred to.
There is an additional $269 million of non-recourse revolving credit facilities at LEAF, and this is what LEAF does to fund the assets they have on their balance sheet until they sell them down to the funds. And then there is $70 million of corporate debt – corporate-level debt, which is revolving debt, and about $16 million or $17 million of other debt, which is principally mortgage debts on our hotel property in Savannah, Georgia.
As far as book value, at March 31, 2008, the company's GAAP book value per common share was $8.91. Total stockholders' equity was $156.1 million at March 31, 2008, as compared to $185 million at September '07. There were about 17.4 million common shares outstanding at September '07.
Adjusted book value per common share outstanding, a non-GAAP measure, was $9.33. Adjusted book value was computed by adding back the GAAP book value, the unrealized loss on swap transactions associated with the NetBank portfolio that were transferred to LEAF III in April 2008, and by adjusting the unrealized losses related to the company's investment in Resource Capital Corp., which is RSO on the New York Stock Exchange, utilizing the closing price at May 7, 2008. A reconciliation of the company's reported net book value to adjusted book value, a non-GAAP measure, is included in Schedule III to the release.
Let me now go to the cash flow statement. Net cash provided by operating activities of continuing operations, as adjusted, was $35.2 million for the six months ended March 31, 2008, an increase of $24.3 million as compared to net cash provided by operating activities, as adjusted, of $10.8 million in the six months ended March '07. Please see Schedule II to the press release that reconciled the net cash provided by – used in operating activities of continuing operations to net cash provided by operating activities of continuing operations as adjusted.
Just a little aside, you'll see in this press release, there are Schedules IV, V, and VI to the press release. And these schedules set forth the support for the restated balance sheet at September 30, 2007, the income statements for the three and six months ended March 31, 2007, and the cash flow statement for the six months ended March 31, 2007.
We also stated in yesterday's 8-K filing that the company expects to file a Form 12b-25 to request a five-day automatic extension with respect to its quarterly reports on Form 10-Q for the quarter ended March 31, '08 and expects to file a 2007 Form 10-KA, as amended, and a December 31, 2007 Form 10-QA, and it's March 31, 2008 10-Q with the SEC on or before May 19, 2008.
I'll turn it back to Jonathan.
Thank you, Steve. Looking forward, we are excited about the possibilities for LEAF, as well, but we are also excited about our ability to exploit cheaper assets in the marketplace for our managed funds at Resource Financial Fund Management as well as for our real estate partnerships and joint ventures. We will work hard to get back in growth mode here and to create shareholder value in the near future.
Thanks, and I will open the call to any questions, if there are any.
(Operator instructions) And there are currently no questions in the queue.
Okay. Thank you very much, and we look forward to speaking with you next quarter.
And thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Good day.
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