Resource America, Inc. (NASDAQ:REXI)
F3Q08 Earnings Call
August 7, 2008 8:30 am ET
Jonathan Cohen - President and Chief Executive Officer
Steve Kessler - Executive Vice President and Chief Financial Officer
Purvi Kamdar - Director of Marketing and Investor Relations
Lee Cooperman - Omega Advisors
Welcome to the third quarter 2008 Resource America, Inc. earnings conference call. (Operator Instructions) I would now like to turn this presentation over to your host for todays call Jonathan Cohen, President and CEO Resource America, Inc..
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, Jonathan. 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 that are discussed in the company's reports filed with the SEC, including its reports on 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 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.
Our third quarter which ended June 30, 2008 saw us position ourselves for a successful fiscal 2009 ending September 30, 2009 and saw the continued progress of our business units. Many of the events during our third quarter will leave us with a much cleaner slate for the next fiscal year.
First, we recorded valuation adjustments of $14.2 million of our residual investments tied to our Research Financial Fund Management business, lowering our remaining exposure that is subject to valuation equity position to approximately $11.5 million net of tax. Second, we launched a $500 million joint venture with Varde Partners, an institutional investor with whom we were a partner before to invest in distressed real estate; we are very excited about that.
Third we ramped up our marketing efforts to the launch of LEAF IV L.P., a $200 million fund being launch currently. Commercial finance on a $25 million specialized fund managed by LEAF, Resource real estate is having a $55 million fund manage by Resource Real Estate and others.
Fourth, we took over management of over $1.3 billion of assets from the fund-to-asset management company. Fifth, we positioned ourselves with greater reserves in all of our businesses and sixth lowered our balance sheet assets and net liabilities by over 35%. We continue to make progress after the quarter with the collection of a discounted loan that was secured by a 15% interest in the Evening Star ability for a gain of approximately $7.5 million, which we will take next quarter.
Although we are certainly not proud of the financial result this fiscal year and the credit crisis created unimaginable conditions for the company, things are beginning to pick at Resource America. Although, this quarter and this fiscal year have been dedicated to cleaning up the residual interest in the CDO management business, the core businesses continued to build and grow.
As the balance sheet items moderate, we will be left with three high growth businesses. This quarter was not representative of any of their earning power as we found ourselves with onetime charges and costs in addition to the impairment charges. Next fiscal year will be very different.
LEAF financial continue to perform very well even though we cut back our potential origination levels in order to wait for the launch of LEAF IV and the commercial finance on L.P., which will target raising $225 million of additional equity. LEAF now manages $1.6 billion of assets and has income before taxes and minority interest of $5 million for the quarter before the impact of the startup businesses and $22 million for the nine months ended June 30, 2008.
LEAF successfully de-leveraged its own balance sheet and got down to a level of lease and loan assets with which we are comfortable; currently $300 million approximately. Many of these assets will go into the commercial finance fund, which has commenced fund raising. Lease credit at the partnership level remains fairly strong and on track. Write-offs as well have continued to be within our projected level as they remain 25 basis points below our targeted 2.5% static pool loss on a weighted average basis.
Also strengthening LEAF’s portfolio is the enhanced profitability of the new business we are putting on the books today. We can be very choosy and spreads have remained wide. Many of the limited partnerships we managed have benefited from this trend. We are pleased with LEAF’s progress and performance and see huge opportunity in the small to mid ticket leasing and business loan segment due to the issue of 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. We will continue to add programs such as Covidien formerly Tyco Healthcare and international manufacture of medical devices and Greenway Medical technologies, a recognized leader in software for physician practices in hospitals.
We expect LEAF to earn approximately $24 million pre-tax next year and we believe that that number will arise significantly in fiscal 2010, if we are able to complete fund raising of LEAF IV and the commercial finance fund as we double our equity under management without increasing our costs dramatically. We are true believers in this company and this model.
On the Resource Real Estate, the team has really established itself as we premier national player in the real estate business. With the reemergence of our Distressed Real Estate program with our partners we’ve begun to build a major asset management specialty in a business that all indications lead us to believe will by huge over the next 24 months.
With approximately 300 people in the real estate company to manage loans and buildings throughout the entire country, we are well positioned to expand our multifamily private equity business. We just launched Resource Real Estate 7 to raise $55 million and planned to capitalize on the distressed opportunities in the market through our Varde joint venture.
In addition our debt business remains stable and in good shape. We expect Resource Real Estate to earn $8.5 million before tax and gain to losses on legacy assets and we see that as mostly gains; look at the Evening Star sales in fiscal 2009 and as we look towards 2010 and 2011 we are excited by the prospects of the additional acquisition and incentive fees that we believe we will earn.
We are also reminded by our sales of the Evening Star loan after the quarter that our passed efforts in distressed real estate have proven to be very fruitful, as we bought the loan on that building from a Japanese bank in distress adding significant discounts during their crisis in the 1990’s; what a winner for us.
Finally onto our financial fund management business, the source of our impairments this fiscal year; we continue to generate substantial fees and have added $1.3 billion of new assets to the assumption of the recent portfolio we acquired. We are now marking various distress funds and have started to focus on building a managed account business in the loan space.
We continue to try to exploit the credit crisis and believe we will ultimately be successful in building back this business; I should say the growth in this business. We continue to raise private equity to invest in commercial banks and now has $55 million under management in that group and a new fund out raising more.
We have substantially lowered our balance sheet risk to the underlying deals we manage and we’ll continue to react to any deterioration in the marketplace. At some point new funds will replace old funds and we should be a beneficiary of manager consolidation as we were with the leasing portfolio of management contract assumption.
Nonetheless in our approximate book value of $9, we do not include any of the fee streams associated with this business or for that case any other business; LEAF or Resource Real Estate. For many of the products, the fee streams could last longer than 10 years.
As we muddle through the remaining exposures to the pasts, we look forward to the future, where our businesses continue to find new life and growth. I’m looking forward to a cleaner; less noisy balance sheet and income statement; don’t worry its coming soon. That time will come and so will the time of harvesting the businesses that we have build.
Management has continued to be an aggressive buyer of the stock, because we see the light at the end of this tunnel and the beginning of the phase of realization. As many of you know, who have watched us build all of our businesses over these many years, it is never; and I repeat never, a straight line up, but in the end I believe we build lasting businesses with great returns on equity; just wait.
Now I’ll ask Steve Kessler, our CFO to walk us through the financial highlights.
I believe that the press release really covers the operations for the quarter, so I would like to concentrate some of my remarks on the balance sheet and the statement of cash flows. Our balance sheet assets decreased from $971 million at September 30, 07 to $802 million at June 30, 2008, a decrease of $169 million.
Our borrowing decreased of $574 million at June 30, 2008 from $706 million at September 30, 2007, a decrease of $132 million. You should note that our borrowings at March 31, were $884 million and we reduced our borrowing by $310 million since March 31, primarily as a result of the sale of the net bank portfolio to LEAF Fund III.
The investments in our commercial finance assets decreased $305 million at June 30 2008 from $243 million at September 30, 2007. This was an increase of $62 million but again these assets decreased by $315 million from March 31, 2008 when they were $620 million; I think 250 to 300 is pretty much what we should be carrying there.
The investments of $49.6 million in real estate at June 30 will decrease by approximately $10.5 million to $11 million from the payment we received in August from the Evening Star transaction. We actually received $18.5 million but part of that went to the gain that John described and we anticipate monetizing additional assets in our legacy portfolio in the future. You’ll notice that property and equipment went up and at March 31, 2008 property and equipment includes $11.6 million for an apartment building we acquired for our current real estate fund; that property was sold to the fund in July.
Our exposure to future valuations adjustments is $3.9 million net of tax for trust preferred securities which are reported on our balance sheet as investments and on consolidated entities and $7.6 million also net of tax for direct investments and collateralized debt obligations which is reported as investment securities available for sale on the balance sheet. The company has no exposure to evaluation adjustments for residential mortgage back securities.
Let me now go over our borrowings; as of June 30 2008 the company reduced its total borrowings to $574.5 million from $884 million at March 31; this is a decrease of 35%. Of that amount $213 million is net liabilities consolidated under FIN 46-R as to which the company has no recourse. About $275 million is non-recourse revolving credit facilities at LEAF and $26.5 million in other debt included with the $9.9 million loan that was assumed by the real estate investment partnership that I described above after June 30; and we also have some mortgage debt secured by properties owned by the company.
With the proceeds from the sale of the Evening Star, the company will continue to reduce its corporate level security revolving credit facilities which were about $60 million at June and in fact we paid that down by $10 million after June 30. At June 30, 2008 our GAAP book value per common share was $8.91. Total stockholders' equity was $156.6 million at June 30; this was compared to $185 million as of September 30 and our total common shares outstanding were about $17.6 million at June compared to about $17.4 million at September 30.
Let me get to the cash flow statement. Net cash provided by operating activities of continuing operations as adjusted was $35.9 million for the nine months ended June 30. This was an increase of $20.4 million as compared to cash provided by operating activities as adjusted of $15.5 million in the nine months ended June 30, 2007. You can please to refer to schedule three in the press release that reconcile net cash provided by or used in operating activities of continuing operations to net cash provided by operating activities of continuing operations as adjusted.
I’ll now turn it back to Jonathan
We will open the floor to questions.
Question and Answer Session
(Operator Instructions) Your first question comes from Lee Cooperman - Omega Advisors.
Lee Cooperman – Omega Advisors
If you’re taking a forecast of roughly $1 for next year, so that’s about $17.5 million of net income, dividend is running around $5 million, assuming everything is the same, the total business is like it is, stock price is like it is, what will be the priorities for using that $12 million, $13 million of lets say free cash flow in terms of usage?
First of all I just to want to clarify that they’re a little bit higher than that because when we give our guidance we give it in the fully diluted which is about $18.5 million, so it’s a little bit higher. We are currently looking to basically continue to lower our corporate debt in the immediate term.
We have a few other loans that we’re looking at and as we’ve always mentioned to people we think are under valued significantly on our balance sheet, that we’re in the process of looking at selling and as we finish that up by the end of the year we’ll be in a pretty strong position as we look to fiscal 2009. That cash flow will obviously be used once we’re finished retiring debt to be in the buyer of our stock as well as be an investor in future businesses.
You have no further questions at this time.
Thank you very much and we will talk to you next quarter.