SOURCE: Resource Capital Corp.

Resource Capital Corp.

August 01, 2016 21:11 ET

Resource Capital Corp. Reports Results for Three and Six Months Ended June 30, 2016

NEW YORK, NY--(Marketwired - Aug 1, 2016) -  Resource Capital Corp. (NYSE: RSO)

Highlights and Significant Items

  • On August 1, 2016, RSO entered into an agreement to sell Northport TRS, LLC ("Northport"), its self-originated middle market loan business, for $247.0 million. The sale is expected to close on or before August 5, 2016 with net proceeds of approximately $102.0 million. RSO is retaining Northport's portfolio of broadly syndicated loans and one self-originated loan. RSO expects that the transaction will result in an after tax GAAP loss of $8.2 million, or $0.27 per common share-diluted and a reduction of Adjusted Funds from Operations ("AFFO") of $8.2 million, or $0.27 per common share-diluted.

  •  After giving effect to the Northport transaction discussed above, AFFO was $0.48 and $0.95 per share-diluted (see Schedule I), and GAAP net income (loss) allocable to common shares were $(0.05) and $0.26 per share-diluted.

  • Since the inception of RSO's common stock repurchase program and through June 30, 2016, RSO has repurchased approximately 8.0% of its outstanding common shares. 

  • In addition, RSO repurchased 196,000 shares of its Series B Preferred stock, which had an accretive impact to our common shareholders of $1.5 million, or $0.05 per share-diluted, during the six months ended June 30, 2016.

  • RSO declared and paid a common stock cash dividend of $0.42 in the second quarter and $0.84 per share for the first six months of 2016.

  • As previously announced, on May 22, 2016, Resource America, Inc., the parent company of RSO's external manager, agreed to be acquired by C-III Capital Partners LLC, a leading commercial real estate services company engaged in a broad range of activities, including primary and special loan servicing, loan origination, fund management, CDO management, principal investment, investment sales and multifamily property management. 

Resource Capital Corp. (NYSE: RSO) ("RSO" or the "Company"), a real estate investment trust, or REIT, whose investment strategy focuses on commercial real estate ("CRE") assets, commercial mortgage-backed securities ("CMBS"), middle market loans, commercial finance assets and other investments, reported results for the three and six months ended June 30, 2016. All per share amounts stated in this release take into account the one-for-four reverse stock split effective on August 31, 2015 as though it were in full effect for all periods presented for comparison purposes.

Second Quarter 2016 Results

  • RSO reported AFFO for the three and six months ended June 30, 2016 of $14.5 million, or $0.48 per share-diluted and $29.2 million, or $0.95 per share-diluted as compared to $20.1 million, or $0.61 per share-diluted and $41.3 million, or $1.26 per share-diluted for the three and six months ended June 30, 2015. A reconciliation of net income (loss) in accordance with accounting principles generally accepted in the United States ("GAAP") to AFFO is set forth in Schedule I of this release.
  • GAAP net income (loss) allocable to common shares for the three and six months ended June 30, 2016 was $(1.5) million, or $(0.05) per share-diluted and $8.1 million, or $0.26 per share-diluted as compared to net losses of $(31.0) million, or $(0.94) per share-diluted and $(21.6) million, or $(0.66) per share-diluted for the three and six months ended June 30, 2015.

Additional highlights:

Commercial Real Estate

  • Substantially all of the $1.4 billion CRE loan portfolio is comprised of senior whole loans as of June 30, 2016.
  • Of this portfolio, 98% of the loans are floating rate senior whole loans and have London Interbank Offered Rate ("LIBOR") floors with a weighted average floor of 0.28% as of June 30, 2016. 
  • Interest income on whole loans increased by $2.2 million and $5.5 million or 12.3% and 16.1%, to $20.2 million and $39.6 million during the three and six months ended June 30, 2016, respectively, as compared to $18.0 million and $34.1 million during the three and six months ended June 30, 2015. For comparison purposes, this excludes income in the 2015 period from our legacy CRE CDOs deconsolidated in the first quarter of 2016.
  • RSO closed and funded $414.7 million of new whole loans in the 12 months ended June 30, 2016, with a weighted average yield of 5.37%, including amortization of origination fees.

The following table summarizes RSO's CRE loan activities and fundings of previous commitments, at par, for the three, six and 12 months ended June 30, 2016 (in millions, except percentages):

                               
 
 
 
 
Three Months Ended
June 30, 2016
 
 
 
 
Six Months Ended
June 30, 2016
 
 
 
 
12 Months Ended
June 30, 2016
 
 
 
 
Floating Weighted Average Spread (1) (2)  
 
 
 
Weighted Average Fixed Rate  
 
New whole loans funded and originated   $ 7.2     $ 46.1     $ 414.7     5.25 %   -- %
Unfunded loan commitments     3.3       13.5       47.8              
New loans originated     10.5       59.6       462.5              
Payoffs (3)     (107.2 )     (131.6 )     (408.7 )            
Previous commitments funded     21.7       39.0       61.0              
Principal pay downs     --       --       (0.4 )            
Unfunded loan commitments     (3.3 )     (13.5 )     (47.8 )            
Loans, net funded   $ (78.3 )   $ (46.5 )   $ 66.6              
(1) Represents the weighted-average rate above the one-month LIBOR on loans whose interest rate is based on LIBOR as of June 30, 2016. $46.1 million of loans originated during the six months ended June 30, 2016 have LIBOR floors, with a weighted average floor of 0.25%.
(2) Reflects rates on new whole loans funded and originated during the six months ended June 30, 2016.
(3) CRE loan payoffs and extensions resulted in $426,000 and $632,000 of exit and extension fees earned during the three and six months ended June 30, 2016, respectively.
   

Legacy Commercial Real Estate CDO Liquidation

On April 25, 2016, RSO called and liquidated its investment in RREF CDO 2006-1. RREF CDO 2006-1 was RSO's first CRE CDO which closed on August 10, 2006 and was comprised of $345.0 million of assets at closing. RSO received the remaining collateral of $49.0 million, at par, recognizing a gain of approximately $846,000, in exchange for its remaining interest after paying off the CDO debt. As it relates to AFFO, RSO had deferred $21.4 million of gains on extinguishment of debt related to notes of its RREF CDO 2006-1 securitization that were repurchased at significant discounts and subsequently canceled. Approximately $6.3 million of that $21.4 million of gains on extinguishment of debt was realized in cash upon the refinancing of certain assets received in the liquidation of RREF CDO 2006-1. The remaining cash gains are expected to be recognized over subsequent periods in AFFO as RSO receives cash above its cost basis in the repurchased debt.

Commercial Finance & Middle Market Loans

  • On August 1, 2016, RSO entered into a purchase agreement to sell Northport TRS, LLC for $247.0 million. The transaction includes substantially all of the direct origination middle market loans and one syndicated loan with a collective par balance of $257.0 million and the assumption of the Credit Facility, for net proceeds of approximately $102.0 million. RSO will retain the remaining broadly syndicated middle market loans and one direct origination middle market loan totaling $68.0 million, at carrying value. During the second quarter, RSO recorded $9.0 million provision for loan losses on the loans sold to adjust the portfolio to fair value and accelerated the amortization of the remaining deferred debt issuance costs of $2.6 million pertaining to the Credit Facility. The ownership of Northport TRS, LLC is held approximately 70.0% in a taxable subsidiary and 30.0% in a non-taxable subsidiary. The impact of the added provisions and write-off of the remaining debt issuance costs, net of tax, is $8.2 million. It is anticipated the transaction will close on or before August 5, 2016.
  • RSO earned $912,000 of net fees through its subsidiary, Resource Capital Asset Management, during the six months ended June 30, 2016.

The following table summarizes RSO's middle market loan activities and fundings of previous commitments, at par, for the six months and 12 months ended June 30, 2016 (in millions, except percentages):

                                     
    Three Months Ended
June 30, 2016
    Six Months Ended
June 30, 2016
    12 Months
Ended
June 30, 2016
    Weighted
Average
Spread
(1)
    Weighted
Average
All-in Rate
(2)
    Weighted Average Yield  
New loans funded and originated   $ 21.8     $ 71.9     $ 154.5     9.43 %   10.43 %   9.93 %
Unfunded loan commitments     2.7       7.5       10.9                    
New loans originated     24.5       79.4       165.4                    
Payoffs and sales (3)     (9.5 )     (114.6 )     (149.3 )                  
Previous commitments funded     0.1       4.4       12.4                    
Principal pay downs     (2.0 )     (5.3 )     (12.3 )                  
Unfunded loan commitments     (2.7 )     (7.5 )     (10.9 )                  
Loans, net funded   $ 10.4     $ (43.6 )   $ 5.3                    
(1) Represents the weighted-average rate above the one-month and three-month LIBOR on loans whose interest rate is based on LIBOR as of June 30, 2016, excluding fees. Of these loans, $21.8 million have LIBOR floors with a weighted average floor of 1.00%.
(2) Reflects rates on RSO's portfolio balance as of June 30, 2016, excluding fees.
(3) Middle market loan payoffs resulted in $2.6 million of prepayment fees earned during the six months ended June 30, 2016.
   

Liquidity

At June 30, 2016, RSO's liquidity is derived from three primary sources:

  • unrestricted cash and cash equivalents of $65.2 million and restricted cash of $30,000 in margin call accounts;
  • capital available for reinvestment in two of RSO's CRE securitizations of $6.3 million; and
  • loan principal repayments of $178,000 that will pay down outstanding CLO note balances, as well as interest collections of $113,000. In addition, RSO had $197,000 in restricted deposits related to certain of its investments.

In addition, as described under Commercial Finance & Middle Market Loans, the sale of Northport TRS, LLC is expected to yield net proceeds of approximately $102.0 million, which will be considered unrestricted cash.

RSO also has $240.7 million and $126.7 million, respectively, available through two term financing facilities to finance the origination of CRE loans and $77.4 million available through a term financing facility to finance the purchase of CMBS. 

Equity Allocation

As of June 30, 2016, RSO had allocated its invested equity capital among its targeted asset classes as follows: 72% in total real estate assets, 27% in commercial finance and middle market assets and 1% in other investments.

Book Value

As of June 30, 2016, RSO's book value per common share was $16.63, a decrease from $17.63 per common share at December 31, 2015. The decrease in book value is primarily attributable to the adoption of new consolidation accounting guidance effective January 1, 2016 combined with distributions paid in excess of earnings during the six months ended June 30, 2016. Upon adoption, RSO deconsolidated five variable interest entities resulting in a reduction to the beginning balance of retained earnings of $16.9 million, or $0.55 per common share. RSO has provided a schedule on economic book value which adjusts for certain investments which RSO intends to hold to maturity and has recorded unrealized losses on the investments, in excess of RSO's value at risk (See Schedule IV). Total stockholders' equity at June 30, 2016, which measures equity before the consideration of non-controlling interests, was $777.6 million, of which $270.1 million was attributable to preferred stock. Total stockholders' equity at December 31, 2015 was $818.9 million of which $274.7 million was attributable to preferred stock.

Capital Transactions

Since the inception of the share repurchase program in August 2015 through June 30, 2016, RSO has repurchased $33.9 million of its common stock (approximately 2.7 million shares), which represented approximately 8.0% of its outstanding common shares, at a weighted average price of $12.58 per share.

RSO repurchased 196,000 shares of its Series Preferred B stock, which had an accretive impact to our common shareholders of $1.5 million, or $0.05 per share-diluted, during the six months ended June 30, 2016.

Investment Portfolio

The following table summarizes the amortized cost and net carrying amount of RSO's investment portfolio as of June 30, 2016, classified by asset type:

                     
    Amortized
Cost
  Net Carrying Amount   Percent of
Portfolio
    Weighted
Average Coupon
 
As of June 30, 2016                    
Loans Held for Investment:                    
  CRE Whole loans(1)   $ 1,421,190   $ 1,419,765   63.55 %   5.50 %
  Middle market loans     54,485     54,485   2.44 %   8.63 %
  Residential mortgage loans(4)     2,641     2,630   0.12 %   4.16 %
      1,478,316     1,476,880   66.11 %      
Loans held for sale (2):                        
  Middle market loans     259,179     259,179   11.60 %   10.13 %
  Residential mortgage loans     161,129     161,129   7.21 %   3.75 %
      420,308     420,308   18.81 %      
Investments in Available-for-Sale Securities:                        
  CMBS-private placement     89,621     88,158   3.95 %   5.15 %
  RMBS     1,919     2,017   0.09 %   4.51 %
  ABS     162,759     165,105   7.39 %   N/A(3)  
      254,299     255,280   11.43 %      
Investment Securities-Trading:                        
  Structured notes     5,907     3,982   0.18 %   N/A(3)  
  RMBS     1,896     --   -- %   N/A(3)  
      7,803     3,982   0.18 %      
Other (non-interest bearing):                        
  Investment in unconsolidated entities     76,801     76,801   3.44 %   N/A(3)  
  Direct Financing Leases(5)     1,130     665   0.03 %   5.66 %
      77,931     77,466   3.47 %      
Total Investment Portfolio   $ 2,238,657   $ 2,233,916   100.00 %      
(1) Net carrying amount includes allowance for loan losses of $1.4 million at June 30, 2016.
(2) Loans held for sale are carried at the lower of cost or market.
(3) There is no stated rate associated with these securities.
(4) Net carrying amount includes allowance for loan losses of $11,000 at June 30, 2016.
(5) Net carrying amount includes allowance for lease losses of $465,000 at June 30, 2016.
   

Supplemental Information

The following schedules of reconciliations and supplemental information as of June 30, 2016 are included at the end of this release:

  • Schedule I - Reconciliation of GAAP Net Income (Loss) to Funds from Operations ("FFO") and AFFO.
  • Schedule II - Summary of General and Administrative Expenses.
  • Schedule III - Summary of Securitization Performance Statistics.
  • Schedule IV - Reconciliation of GAAP Stockholders' Equity to Economic Book Value.
  • Supplemental Information regarding loan investment statistics, CRE loans and middle market loans.

About Resource Capital Corp.

RSO is a real estate investment trust that is primarily focused on originating, holding and managing commercial mortgage loans and other commercial real estate-related debt and equity investments. RSO also makes other commercial finance and residential mortgage investments and holds middle market loans.

RSO is externally managed by Resource Capital Manager, Inc., an indirect wholly-owned subsidiary of Resource America, Inc. (NASDAQ: REXI), an asset management company that specializes in real estate and credit investments.

For more information, please visit RSO's website at www.resourcecapitalcorp.com or contact investor relations at pkamdar@resourcecapitalcorp.com.

Safe Harbor Statement

Statements made in this release may include forward-looking statements, which involve substantial risks and uncertainties. RSO's actual results, performance or achievements could differ materially from those expressed or implied in this release. The risks and uncertainties associated with forward-looking statements contained in this release include those related to:

  • fluctuations in interest rates and related hedging activities;
  • the availability of debt and equity capital to acquire and finance investments;
  • defaults or bankruptcies by borrowers on RSO's loans or on loans underlying its investments;
  • adverse market trends which have affected and may continue to affect the value of real estate and other assets underlying RSO's investments;
  • increases in financing or administrative costs; and
  • changes in general business and economic conditions that in the past have impaired and may in the future impair the credit quality of borrowers and RSO's ability to originate loans.

For further information concerning these and other risks pertaining to the forward-looking statements contained in this release, and to the general risks to which RSO is subject, see Item 1A, "Risk Factors" included in its Annual Report on Form 10-K and the risks expressed in other of its public filings with the Securities and Exchange Commission.

RSO cautions you not to place undue reliance on any forward-looking statements contained in this release, which speak only as of the date of this release. All subsequent written and oral forward-looking statements attributable to RSO or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this release. Except to the extent required by applicable law or regulation, RSO undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.

Furthermore, certain non-GAAP financial measures are discussed in this release. RSO's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

The remainder of this release contains RSO's unaudited consolidated balance sheets, unaudited consolidated statements of operations, reconciliation of GAAP net income (loss) to FFO and AFFO, summary of securitization performance statistics and supplemental information regarding RSO's CRE loan and middle market loan portfolios and a reconciliation of GAAP stockholders' equity to economic book value.

 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
    June 30,
 2016
    December 31,
 2015
 
    (unaudited)        
ASSETS (1)            
  Cash and cash equivalents   $ 65,167     $ 78,756  
  Restricted cash     6,823       40,635  
  Investment securities, trading     3,982       25,550  
  Investment securities available-for-sale, pledged as collateral, at fair value     88,122       162,306  
  Investment securities available-for-sale, at fair value     167,158       45,782  
  Loans held for sale ($161.1 million and $94.5 million at fair value)     420,308       95,946  
  Loans, pledged as collateral and net of allowances of $1.4 million and $47.1 million     1,476,880       2,160,751  
  Investments in unconsolidated entities     76,801       50,030  
  Derivatives, at fair value     6,133       3,446  
  Interest receivable     8,868       14,009  
  Deferred tax asset, net     16,916       12,646  
  Principal paydown receivable     8,100       17,941  
  Direct financing leases, net of allowances of $0.5 million     665       931  
  Intangible assets     26,726       26,228  
  Prepaid expenses     5,058       3,180  
  Other assets     12,137       22,295  
    Total assets   $ 2,389,844     $ 2,760,432  
LIABILITIES (2)                
  Borrowings   $ 1,575,219     $ 1,895,288  
  Distribution payable     17,060       17,351  
  Accrued interest expense     5,282       5,604  
  Derivatives, at fair value     3,084       3,941  
  Accrued tax liability     139       549  
  Accounts payable and other liabilities     12,629       10,939  
    Total liabilities     1,613,413       1,933,672  
EQUITY                
  Preferred stock, par value $0.001: 10,000,000 shares authorized 8.50% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share 1,069,016 and 1,069,016 shares issued and outstanding     1       1  
  Preferred stock, par value $0.001: 10,000,000 shares authorized 8.25% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share 5,544,579 and 5,740,479 shares issued and outstanding     6       6  
  Preferred stock, par value $0.001: 10,000,000 shares authorized 8.625% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share 4,800,000 and 4,800,000 shares issued and outstanding     5       5  
  Common stock, par value $0.001: 125,000,000 shares authorized; 31,163,780 and 31,562,724 shares issued and outstanding (including 655,775 and 691,369 unvested restricted shares)     31       32  
  Additional paid-in capital     1,218,340       1,228,346  
  Accumulated other comprehensive income (loss)     700       (2,923 )
  Distributions in excess of earnings     (441,522 )     (406,603 )
    Total stockholders' equity     777,561       818,864  
  Non-controlling interests     (1,130 )     7,896  
    Total equity     776,431       826,760  
TOTAL LIABILITIES AND EQUITY   $ 2,389,844     $ 2,760,432  
 
 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
 
    June 30,
 2016
  December 31,
 2015
 
    (unaudited)      
(1) Assets of consolidated Variable Interest Entities ("VIEs") included in the total assets above:          
  Cash and cash equivalents   $ --   $ 95  
  Restricted cash     6,595     39,061  
  Investment securities available-for-sale, pledged as collateral, at fair value     --     66,137  
  Loans held for sale     --     1,475  
  Loans, pledged as collateral and net of allowances of $1.0 million and $42.8 million     942,182     1,416,441  
  Interest receivable     3,767     6,592  
  Prepaid expenses     42     238  
  Principal paydown receivable     8,100     17,800  
  Other assets     41     833  
  Total assets of consolidated VIEs   $ 960,727   $ 1,548,672  
               
(2) Liabilities of consolidated VIEs included in the total liabilities above:              
  Borrowings   $ 634,553   $ 1,032,581  
  Accrued interest expense     549     923  
  Derivatives, at fair value     --     3,346  
  Accounts payable and other liabilities     157     (117 )
  Total liabilities of consolidated VIEs   $ 635,259   $ 1,036,733  
 
 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
 
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
REVENUES                        
  Interest income:                        
    Loans   $ 31,365     $ 29,759     $ 65,477     $ 62,422  
    Securities     4,291       5,500       9,089       9,552  
    Leases     39       163       (15 )     258  
    Interest income - other     2,307       1,119       3,548       1,951  
      Total interest income     38,002       36,541       78,099       74,183  
  Interest expense     18,636       15,803       34,407       30,705  
      Net interest income     19,366       20,738       43,692       43,478  
  Dividend income     18       17       35       33  
  Fee income     103       2,816       (598 )     3,986  
    Total revenues     19,487       23,571       43,129       47,497  
OPERATING EXPENSES                                
  Management fees - related party     3,099       3,500       7,136       7,060  
  Equity compensation - related party     1,415       791       2,678       1,786  
  Rental operating expense     --       --       --       6  
  Lease operating     1       24       4       47  
  General and administrative     11,153       9,994       21,223       19,605  
  Depreciation and amortization     504       621       1,145       1,186  
  Impairment losses     --       --       --       59  
  Provision (recovery) for loan and lease losses     12,099       38,810       12,136       42,800  
    Total operating expenses     28,271       53,754       44,322       73,923  
                                 
      (8,784 )     (30,183 )     (1,193 )     (26,426 )
OTHER INCOME (EXPENSE)                                
  Equity in earnings of unconsolidated subsidiaries     2,696       662       4,918       1,368  
  Net realized and unrealized gain (loss) on sales of investment securities available-for-sale and loans and derivatives     6,946       9,580       11,774       22,187  
  Net realized and unrealized gain (loss) on investment securities, trading     183       279       328       2,353  
  Unrealized gain (loss) and net interest income on linked transactions, net     --       --       --       235  
  (Loss) on reissuance/gain on extinguishment of debt     --       (171 )     --       (1,071 )
  (Loss) gain on sale of real estate     --       22       (3 )     --  
    Total other income (expense)     9,825       10,386       17,017       26,446  
                                 
INCOME (LOSS) BEFORE TAXES     1,041       (19,797 )     15,824       20  
  Income tax (expense) benefit     3,488       (2,918 )     2,725       (4,765 )
NET INCOME (LOSS)     4,529       (22,715 )     18,549       (4,745 )
                                 
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
  Net (income) loss allocated to preferred shares     (6,014 )     (6,116 )     (12,062 )     (12,207 )
  Carrying value in excess of consideration paid for preferred shares     (111 )     --       1,500       --  
  Net (income) loss allocable to non-controlling interest, net of taxes     60       (2,180 )     150       (4,657 )
NET INCOME (LOSS) ALLOCABLE TO COMMON SHARES   $ (1,536 )   $ (31,011 )   $ 8,137     $ (21,609 )
NET INCOME (LOSS) PER COMMON SHARE - BASIC   $ (0.05 )   $ (0.94 )   $ 0.27     $ (0.66 )
NET INCOME (LOSS) PER COMMON SHARE - DILUTED   $ (0.05 )   $ (0.94 )   $ 0.26     $ (0.66 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC     30,410,451       32,852,316       30,505,428       32,833,426  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED     30,410,451       32,852,316       30,724,272       32,833,426  
                                 

SCHEDULE I

 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME (LOSS) TO FFO and AFFO
(in thousands, except per share data)
(unaudited)
 

Funds from Operations

RSO evaluates our performance based on several performance measures, including funds from operations, or FFO, and adjusted funds from operations, or AFFO, in addition to net income. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts as net income (computed in accordance with GAAP), excluding gains or losses on the sale of depreciable real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures.

AFFO is a computation made by analysts and investors to measure a real estate company's operating performance. RSO calculates AFFO by adding or subtracting from FFO the impact of non-cash accounting items as well as the effects of items that we deem to be non-recurring in nature. We deem transactions to be non-recurring if a similar transaction has not occurred in the past two years, and if we do not expect a similar transaction to occur in the next two years. We adjust for these non-cash and nonrecurring items to analyze our ability to produce cash flow from on-going operations, which we use to pay dividends to our shareholders. Non-cash adjustments to FFO include the following: impairment losses resulting from fair value adjustments on financial instruments; provisions for loan losses; equity investment gains and losses; straight-line rental effects; share based compensation expense; amortization of various deferred items and intangible assets; gains on sales of property that are wholly owned or owned through a joint venture; the cash impact of capital expenditures that are related to our real estate owned; and REIT tax planning adjustments, which primarily relate to accruals for owned properties for which we made a foreclosure election and adjustments to tax estimates with respect to the final resolution of foreclosed property when it is listed for sale. In addition, we calculate AFFO by adding and subtracting from FFO the realized cash impacts of the following: extinguishment of debt, reissuances of debt, sales of property and capital expenditures.

Management believes that FFO and AFFO are appropriate measures of our operating performance in that they are frequently used by analysts, investors and other parties in the evaluation of REITs. Management uses FFO and AFFO as measures of its operating performance, and believes they are also useful to investors because they facilitate an understanding of our operating performance apart from non-cash and non-recurring items, which may not necessarily be indicative of current operating performance and that may not allow accurate period to period comparisons of our operating performance.

While RSO's calculations of AFFO may differ from the methodology used for calculating AFFO by other REITs and our FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs, RSO also believes that FFO and AFFO may provide us and our investors with an additional useful measure to compare our performance with some other REITs. Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to GAAP net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of its liquidity.

The following table reconciles GAAP net income (loss) to FFO and AFFO for the periods presented (unaudited) (in thousands, except share and per share data):

             
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Net income (loss) allocable to common shares - GAAP   $ (1,536 )   $ (31,011 )   $ 8,137     $ (21,609 )
Adjustments:                                
  (Gains) losses on sales of property (1)     (10 )     (22 )     (32 )     --  
FFO allocable to common shares     (1,546 )     (31,033 )     8,105       (21,609 )
Adjustments:                                
Non-cash items:                                
  Provision (recovery) for loan losses     1,277       38,117       1,420       41,741  
  Amortization of deferred costs (non real estate) and intangible assets     3,321       2,986       6,491       5,853  
  Amortization of discount on convertible senior notes     705       633       1,415       949  
  Acceleration of deferred debt issuance costs from sale of Northport loans     2,560       --       2,560       --  
  Equity investment (gains) losses     (933 )     (350 )     (2,344 )     (402 )
  Share-based compensation     1,415       791       2,678       1,786  
  Impairment losses     --       --       --       59  
  Unrealized losses (gains) on CMBS marks - linked transactions (2)     --       --       --       (235 )
  Unrealized (gains) losses on trading portfolio     (183 )     (155 )     (118 )     (1,319 )
  Unrealized (gains) losses on foreign exchange transactions     (80 )     5,510       (246 )     4,851  
  Unrealized (gains) losses on derivatives     (834 )     --       (2,212 )     1,075  
  Loss on resale of debt     --       171       --       1,071  
  Change in mortgage servicing rights valuation reserve     2,300       (800 )     4,800       (250 )
  Change in residential loan warranty reserve     213       400       332       400  
  Dead deal costs     --       --       --       399  
  REIT tax planning adjustments     --       --       --       317  
Cash items:                                
  Gains (losses) on sale of property (1)     10       22       32       --  
  Gains (losses) on extinguishment of debt     6,303       3,765       6,303       6,645  
  AFFO allocable to common shares   $ 14,528     $ 20,057     $ 29,216     $ 41,331  
                                 
Weighted average shares - diluted     30,410       32,852       30,724       32,833  
                                 
AFFO per share - diluted   $ 0.48     $ 0.61     $ 0.95     $ 1.26  
(1) Amount represents gains/losses on sales of owned real estate as well as sales of joint venture real estate interests that were recorded by RSO on an equity basis.
(2) As the result of an accounting standards update adopted on January 1, 2015, RSO unlinked its previously linked transactions.
   

RSO has five reportable operating segments: Commercial Real Estate Lending, Commercial Finance, Middle Market Lending, Residential Mortgage Lending, and Corporate & Other. The reportable operating segments are business units that offer different products and services. The Commercial Real Estate Lending operating segment includes our activities and operations related to commercial real estate loans, commercial real estate-related securities, and investments in real estate. The Commercial Finance operating segment includes RSO's activities and operations related to bank loans, bank loan-related securities, and direct financing leases. The Middle Market Lending operating segment includes RSO's activities and operations related to the origination and purchase of middle market loans. The Residential Mortgage Lending operating segment includes RSO's activities and operations related to the origination and servicing of residential mortgage loans and the investment in residential mortgage-backed securities ("RMBS"). The Corporate & Other segment includes corporate level interest income, interest expense, inter-segment eliminations not allocable to any particular operating segment, and general and administrative expense. The following table presents a reconciliation of GAAP net income (loss) to AFFO for the three months ended June 30, 2016 presented by operating segment (in thousands, except per share data):

                           
    Commercial Real Estate Lending    Commercial Finance    Middle Market Lending    Residential Mortgage Lending    Corporate & Other    Total  
Net income (loss) allocable to common shares - GAAP   $ 17,004     $ 7,276     $ (9,939 )   $ (1,255 )   $ (14,622 )   $ (1,536 )
Adjustments:                                                
  (Gains) losses on sales of property (1)     (10 )     --       --       --       --       (10 )
FFO allocable to common shares     16,994       7,276       (9,939 )     (1,255 )     (14,622 )     (1,546 )
Adjustments to net income (loss) to reconcile AFFO:                                                
Non-cash items:                                                
  Provision (recovery) for loan and lease losses     (68 )     --       1,345       --       --       1,277  
  Amortization of deferred costs (non real estate) and intangible assets     1,379       327       233       1,345       37       3,321  
  Amortization of discount on convertible senior notes     --       --       --       --       705       705  
  Acceleration of deferred debt issuance costs from sale of Northport loans     --       --       2,560       --       --       2,560  
  Equity investment (gains) losses     --       (933 )     --       --       --       (933 )
  Share-based compensation     --       --       --       63       1,352       1,415  
  Unrealized (gains) losses on trading portfolio     --       (183 )     --       --       --       (183 )
  Unrealized (gains) losses on foreign exchange transactions     --       (80 )     --       --       --       (80 )
  Unrealized (gains) losses on derivatives     --       --       198       (1,136 )     104       (834 )
  Change in mortgage servicing rights valuation     --       --       --       2,300       --       2,300  
  Change in residential loan warranty reserve     --       --       --       213       --       213  
Cash items:                                                
  Gains (losses) on sale of property(1)     10       --       --       --       --       10  
  Gains (losses) on extinguishment of debt     6,303       --       --       --       --       6,303  
Total AFFO adjustments     7,624       (869 )     4,336       2,785       2,198       16,074  
AFFO allocable by segment   $ 24,618     $ 6,407     $ (5,603 )   $ 1,530     $ (12,424 )   $ 14,528  
                                                 
Weighted average shares - diluted     30,410       30,410       30,410       30,410       30,410       30,410  
                                                 
AFFO per share - diluted (by segment)   $ 0.81     $ 0.21     $ (0.18 )   $ 0.05     $ (0.41 )   $ 0.48  
Contribution by percentage     91.34 %     23.77 %     (20.79 )%     5.68 %                
Allocation   $ 0.44     $ 0.11     $ (0.10 )   $ 0.03                  
(1) Amount represents gains/losses on sales of owned real estate as well as sales of joint venture real estate interests that were recorded by RSO on an equity basis.
   

SCHEDULE II

 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUMMARY OF GENERAL AND ADMINISTRATIVE EXPENSES
(in thousands)
(unaudited)
 

The following table presents the allocation of general and administrative expenses between Corporate and Residential Mortgage Lending:

         
    For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
    2016   2015   2016   2015
General and administrative expenses:                
  Corporate   $ 4,200   $ 4,081   $ 8,186   $ 8,865
  Residential Mortgage Lending     6,953     5,927     13,037     12,114
    Total   $ 11,153   $ 10,008   $ 21,223   $ 20,979
                             

SCHEDULE III

 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUMMARY OF SECURITIZATION PERFORMANCE STATISTICS
(in thousands)
(unaudited)
 

Securitizations - Distributions and Coverage Test Summary

The following table sets forth the distributions made and coverage test summaries for each of the Company's securitizations for the periods presented (in thousands):

             
Name   Cash Distributions   Annualized Interest Coverage Cushion   Overcollateralization Cushion
    Six Months Ended
 June 30,

2016
  Year Ended
December 31,

2015
  As of June 30,
2016 (1) (2)
  As of June 30,
2016 (3)
  As of Initial
Measurement Date
Apidos Cinco CDO (4)   $ 1,733   $ 6,336   $ 3,956   $ 20,860   $ 17,774
RREF CDO 2006-1(4) (9)   $ 1,394   $ 3,451   $ --   $ --   $ 24,941
RREF CDO 2007-1(4)   $ 1,001   $ 6,102   $ 15,250   $ 67,491   $ 26,032
RCC CRE Notes 2013   $ 2,217   $ 9,129     N/A     N/A     N/A
RCC 2014-CRE2 (5)   $ 6,894   $ 15,826     N/A   $ 50,660   $ 20,663
RCC 2015-CRE3 (6)   $ 5,954   $ 9,186     N/A   $ 26,092   $ 20,313
RCC 2015-CRE4 (7)   $ 6,024   $ 3,291     N/A   $ 9,397   $ 9,397
Moselle CLO S.A. (8)   $ 183   $ 29,099     N/A     N/A     N/A
(1) Interest coverage includes annualized amounts based on the most recent trustee statements.
(2) Interest coverage cushion represents the amount by which annualized interest income expected exceeds the annualized amount payable on all classes of securitization notes senior to the Company's preference shares.
(3) Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the maximum amount required.
(4) Apidos Cinco CDO, RREF CDO 2006-1, and RREF CDO 2007-1 were deconsolidated as a result of the new consolidation accounting guidance adopted effective January 1, 2016.
(5) Resource Capital Corp. 2014-CRE2 has no reinvestment period; however, principal repayments, for a period which ended in July 2016, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(6) Resource Capital Corp. 2015-CRE3 closed on February 24, 2015; the first distribution was in March 2015. There is no reinvestment period; however, principal repayments, for a period ending in February 2017, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(7) Resource Capital Corp. 2015-CRE4 closed on August 18, 2015; the first distribution was in September 2015. There is no reinvestment period; however, principal repayments, for a period ending in September 2017, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(8) Moselle CLO S.A. was acquired on February 24, 2014 and the reinvestment period for this securitization expired prior to the acquisition. In the fourth quarter of 2014 RSO began to liquidate Moselle CLO S.A. and, by January 2015, all of the assets were sold.
(9) RREF CDO 2006-1 was liquidated on April 25, 2016 and, as a result, all $66.3 million of the remaining assets were returned to RSO in exchange for the Company's preference shares and equity notes in the securitization.
   

SCHEDULE IV

 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
RECONCILIATION OF GAAP STOCKHOLDERS' EQUITY TO ECONOMIC BOOK VALUE(2)
(in thousands)
(unaudited)
 
    As of
June 30, 2016
 
Total stockholders' equity per GAAP (1)   $ 777,561  
Preferred stock equity     (270,087 )
Stockholders' equity allocable to common shares     507,474  
         
Add:        
  Deconsolidation of RREF CDO 2006-1 (3) (4)     370  
  Deconsolidation of RREF CDO 2007-1 (3) (4)     9,492  
  Deconsolidation of Apidos Cinco CDO (3) (4)     3,953  
  Net unrealized losses - investment securities available-for-sale and derivatives (5)     700  
Economic book value   $ 521,989  
Shares outstanding     30,508,005  
Economic book value per share   $ 17.11  
(1) Book value allocable to common shares is calculated as total stockholders' equity of $777.6 million less preferred stock equity of $270.1 million as of June 30, 2016.
(2 Management views economic book value, a non-GAAP measure, as a useful and appropriate supplement to GAAP stockholders' equity and book value per share. This serves as an additional measure of RSO's value because it facilitates evaluation of RSO without the effects of unrealized losses on investments and derivatives for which we expect to recover net realizable value at maturity, in excess of RSO's value at risk. Unrealized losses that are in excess of RSO's maximum value at risk and unrealized net discounts on loans and securities are added back to stockholders' equity in arriving at economic book value. Economic book value should be reviewed in connection with GAAP stockholders' equity as set forth in RSO's consolidated balance sheets, to help analyze RSO's value to investors. Economic book value is defined in various ways throughout the REIT industry. Investors should consider these differences when comparing RSO's economic book value to that of other REITs.
(3) Effective January 1, 2016, RSO deconsolidated RREF CDO 2006-1, RREF CDO 2007-1 and Apidos Cinco CDO upon the adoption of new accounting guidance. RSO retains investment securities and preferred interests in the CDO vehicles, which RSO accounts for as investments securities, available-for-sale. The reduction to retained earnings of $16.9 million represents the effect of marking these investments to market as of the date of the required adoption and represents discounts to par due to illiquidity premiums and other market forces and RSO expects to recover these amounts over time as the investments approach their respective maturities. On April 25, 2016, RSO called RREF CDO 2006-1 and in exchange for RSO's equity notes and preference share, received the remaining collateral. RSO records the collateral of RREF CDO 2006-1 at fair market value. This resulted in RSO recording a gain on acquisition of $846,000 during the three months ended June 30, 2016 and there remains an unamortized discount of $370,000 as of June 30, 2016 on the original $1.5 million charge to retained earnings related to the valuation of RREF CDO 2006-1 as of January 1, 2016.
(4) RSO will recognize the excess of all cash flows attributable to the beneficial interest estimated at the date of the required adoption over the fair value of the investment (the accretable yield) at January 1, 2016, as interest income over the life of the beneficial interest using the effective interest method. The cash flows are subject to changes in prepayment speeds and potential impairments of the underlying investments, which would have an impact on the net realizable value and future income. These assumptions are reviewed quarterly.
(5) RSO adds back unrealized net accretion of securities that will be accreted into interest income over the lives of the securities using the effective interest method, adjusted for the effects of estimated prepayments. If the investment is purchased at a discount or at a premium, the effective interest is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium. The effective interest method requires RSO to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium can be amortized, over the estimated remaining life of the investment. The cash flows are subject to changes in prepayment speeds and potential impairments of the underlying investments, which would have an impact on the net realizable value and future income. These assumptions are reviewed quarterly.
   
 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(in thousands, except percentages)
(unaudited)
 

Loan Investment Statistics

The following table presents information on RSO's impaired loans and related allowances for the periods indicated (based on amortized cost):

             
    June 30,
 2016
    December 31,
 2015
 
Allowance for loan losses:            
Specific allowance:            
  Commercial real estate loans (1)   $ --     $ 40,274  
  Bank loans (1)     --       1,282  
Total specific allowance     --       41,556  
General allowance:                
  Commercial real estate loans     1,425       1,565  
  Middle market loans     --       3,939  
  Residential mortgage loans     11       11  
Total general allowance     1,436       5,515  
Total allowance for loans   $ 1,436     $ 47,071  
Allowance as a percentage of total loans     .10 %     2.1 %
                 
Loans held for sale: (2)                
  Bank loans   $ --     $ 1,475  
  Middle market loans (3)     259,179       --  
  Residential mortgage loans     161,129       94,471  
Total loans held for sale   $ 420,308     $ 95,946  
(1) As a result of the deconsolidation of RREF CDO 2006-1, RREF CDO 2007-1, and Apidos Cinco CDO on January 1, 2016, the loans in these CDO vehicles are no longer carried on our consolidated balance sheet.
(2) Loans held for sale are presented at the lower of cost or fair value.
(3) Middle market direct origination loans were moved to held for sale and are reflected at fair value. See Commercial Finance and Middle Market Loans section for further discussion.
   
 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(unaudited)
 

The following table presents commercial real estate loan portfolio statistics as of June 30, 2016 (based on carrying value):

       
Security type:      
Whole loans   100.0 %
Total   100.0 %
       
Collateral type:      
Multifamily   44.9 %
Office   20.2 %
Retail   20.7 %
Hotel   14.2 %
Total   100.0 %
       
Collateral location:      
Texas   27.7 %
Southern California   14.8 %
Northern California   11.1 %
Georgia   8.7 %
Florida   7.1 %
North Carolina   5.8 %
Colorado   3.6 %
Nevada   3.0 %
Pennsylvania   2.5 %
Minnesota   2.2 %
Maryland   2.2 %
Other   11.3 %
Total   100.0 %
 
 
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(unaudited)
 

The following table presents middle market loan portfolio statistics by industry as of June 30, 2016 (based on carrying value):

Industry type:      
Healthcare, Education, and Childcare   15.6 %
Diversified/Conglomerate Service   14.7 %
Hotels, Motels, Inns, and Gaming   10.6 %
Telecommunications   9.1 %
Home and Office Furnishings, Housewares, and Durable Consumer Products   7.5 %
Beverage, Food and Tobacco   6.4 %
Leisure, Amusement, Motion Pictures, Entertainment   5.8 %
Insurance   5.3 %
Personal Transportation   5.0 %
Banking   4.2 %
Personal, Food, and Miscellaneous Services   3.0 %
Structure Finance Securities   3.0 %
Finance   2.6 %
Diversified/Conglomerate Manufacturing   2.3 %
Buildings and Real Estate   2.2 %
Cargo Transport   1.9 %
Oil and Gas   0.8 %
Total   100.0 %
       

Contact Information

  • CONTACT:
    DAVID J. BRYANT
    CHIEF FINANCIAL OFFICER
    RESOURCE CAPITAL CORP.
    712 Fifth Ave, 12
    THFloor
    New York, NY 10019
    212-506-3870