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Resource America "repositioning our leasing company"--March 31 Quarter Report

"We are in the middle of repositioning our leasing company which suffered this quarter in part as a result of costs incurred to solidify that valuable franchise,” declared Jonathan Cohen, CEO and President, Resource America (NASDAQ@: Rexi), in his company press release, which also reported reporting a loss from continuing operations attributable to common shareholders of $1.2 million for the second fiscal quarter and six months ended March 31, 2010. It was confirmation of the Leasing News story written on April 13, 2010.

In the press release, Mr. Cohen was quoted as saying, "While we were pleased by events at Resource Capital, Apidos, and Resource Real Estate both during the quarter and immediately after it, we were disappointed by our loss this quarter after two profitable quarters; nonetheless we believe our recovery to stable profitability remains on track."

The loss this quarter was better than the loss from continuing operations attributable to common shareholders of $11.5 million for the second fiscal quarter and six months ended March 31, 2009; only $1.2 million.

There was no explanation of the “positioning statement;” however, Leasing News has been writing about it since the beginning of last year, with the latest on April 13, 2010 when Leasing News questioned the financial structure of LEAF Financial Corporation, especially in relationship to its parent Resource America. The SEC reports showed consolidations, cut back of employees, and operations. Most seriously affected has been LEAF-Specialty Finance, South Carolina, which has not been funding new leases for a period of two months and their brokers most likely have gone elsewhere by this time.

The South Carolina operation is also reportedly down to 12 employees servicing the portfolio primarily from NetBank days, along with the previous years business, down considerably, Leasing News is told by several sources. This unit is for sale, according to many reliable sources. Reportedly AJ Batt, former founder of ATEL Capital considered getting back into the leasing business, but appears more interested in the hedge marketplace. Resource America makes fees from buying and selling properties, including leasing portfolios, and the cash infusion would be good for the company whose main business is real estate management ( multi-family, apartments, industrial property, as well as leasing and finance.

The loss is not good for its borrowing ability. As noted in the April 13, 2010 article:

"LEAF Financial Corporation and Leaf Funding, Inc. are borrowers pursuant to a $100 million credit agreement dated as of July 31, 2006 with PNC Bank, National Association. The parties thereto have entered into an amendment dated as of March 31, 2010 that extends the maturity date of the credit agreement until May 15, 2010, while the parties negotiate the terms and documentation of a longer term renewal. Under the terms of the extension the maximum borrowing limit reduces by unused capacity in excess of $25 million if created by sales of commercial finance assets to any of the LEAF sponsored investment funds."

The May 6, 2010 press release noted:

"At March 31, 2010, borrowings include $96.5 million of borrowings under a non-recourse credit facility at LEAF, $17.6 million of corporate revolving debt, $13.5 million of senior notes, net of a discount, and $16.9 million of other debt, of which $13.5 million is in mortgage debt secured by the underlying properties."

It was noted by SEC filings:

"It appears PNC has extended, by another amendment, the Leaf warehouse line for 45 days, from March 31, 2010 to May 15, 2010. Amendments are needed to avoid a formal default to the main agreement. It also appears the $100M w/l capacity will be reduced further if Leaf sells assets to any of the funds over $25M. Does that mean PNC doesn’t want Leaf to have more than $25M of line capacity? The 8K report said the exact same thing with no further details."

In the highlights of the March 31, 2010 quarter of Resource America, their six month statement for their fiscal year: "The Company reduced its borrowings to $144.5 million at March 31, 2010, a decrease of $49.9 million from September 30, 2009. This decrease primarily reflects a $40.00 million reduction in borrowings on LEAF's revolving warehouse credit facility and a $9.5 million reduction of the Company’s two corporate revolving lines of credit."

By SEC filings it appears the $100M w/l capacity will be reduced further if Leaf sells assets to any of the funds over $25M.

The recent statement does not address this and the numbers in the consolidated statements of operation do not break apart the leasing entities, and may include other financing arrangements. Either way, the numbers are not good:

Commercial Finance (in thousands)
Three Months Ended
2010 $4,731
2009 $6,775
Six Months Ended
2010 $10,343
2009 $11,288

Resource America, Consolidated (in thousands)
Net Loss  
Three Month Ending Net loss attributable to common shareholders
2010 (1,847) (1,232)
2009 (12,789) (11,633)
Six Months Ended  
2010 (1,259) (261)
2009 (16,392) (14,853)

If you are a lender seeing the nature business of the parent with holdings in Southern California and other troubled areas, the losses, the changes in the leasing industry, and the apparent slow reaction of the financial side that resulted in perhaps the new financial officers and other changes, you too would be suspicious about getting in deeper with this credit. To some, it appears a house of mirrors with fees and funds and structure, while others see the general nature of the business itself in trouble as small and medium size banks have continued trouble with construction loans, commercial real estate loans, and less “take out” money as the entire real estate market remains in serious trouble and has not recovered from the subprime and derivatives 1-4 and multi family housing bubble burst, including commercial properties affect by the overturn and perhaps “over-built”

In writing “Bank Beat” the overwhelming small and regional bank failures, meaning 50 branches and more, came from commercial and industrial real estate loans, not 1-4 multi-family properties. Other failures were in other related commercial real estate loans and apartment loans, as well as “land development.”

- The Trouble with LEAF and Resource America
   by Christopher Menkin

Bank Beat:

Full SEC report:

Disclosure: No stock