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Resource Capital Corp. Reports Results for Three Months and Year Ended December 31, 2016

NEW YORK, NY--(Marketwired - Mar 13, 2017) - Resource Capital Corp. ( NYSE : RSO )

Significant Items and Highlights

  • GAAP net loss allocable to common shares of $(0.31) and $(1.73) per share-diluted and core earnings of $(0.12) and $(0.03) per share-diluted (see Schedule I).
  • Common stock cash dividends of $0.05 and $1.31 per share.
  • In November, the board of directors approved a strategic plan (the "Plan") that allows Resource Capital Corp. ("RSO" or the "Company") to focus on making commercial real estate ("CRE") debt investments. The Plan includes disposing of certain non-CRE assets and businesses and underperforming legacy CRE loans and maintaining a dividend policy based on sustainable earnings. Legacy CRE loans are loans underwritten prior to 2010. As part of the Plan, certain non-CRE assets and underperforming legacy CRE loans were reclassified as held for sale during the fourth quarter of 2016.
  • GAAP net loss for the three months ended December 31, 2016 includes impairments of $12.2 million attributable to the reclassification of assets to held for sale, comprised of provisions for loan losses of $7.7 million on two legacy CRE loans and fair value adjustments of $4.5 million on business segments classified as discontinued operations. Additionally, GAAP net loss for the three months ended December 31, 2016 includes an unrealized loss of $2.6 million on a previously impaired middle market loan, a specific provision for loan loss of $2.5 million on one CRE whole loan, a $1.4 million write-down of RSO's deferred tax asset and a gain of $2.8 million on the liquidation of our last remaining legacy CRE securitization, resulting in a net impairment charge for the fourth quarter of 2016 of $15.9 million.
  • Since September 30, 2016 and through February 28, 2017, RSO has monetized $78.4 million of the investments that were included in the Plan and it expects to continue this disposition process during the remainder of 2017.

Resource Capital Corp. ( NYSE : RSO ) reported results for the three months and year ended December 31, 2016.

Fourth Quarter 2016 Results

  • GAAP net loss allocable to common shares for the three months and year ended December 31, 2016 was $9.5 million, or $(0.31) per share-diluted, and $53.0 million, or $(1.73) per share-diluted, respectively, as compared to GAAP net income allocable to common shares for the three months ended December 31, 2015 of $949,000, or $0.03 per share-diluted, and GAAP net loss allocable to common shares for the year ended December 31, 2015 of $13.9 million, or $(0.43) per share-diluted.
  • RSO reported core earnings for the three months and year ended December 31, 2016 of $(3.7) million, or $(0.12) per share-diluted, and $(1.0) million, or $(0.03) per share-diluted, respectively. A reconciliation of GAAP net income (loss) to core earnings is set forth in Schedule I of this release.

Additional Items

  • RSO declared and paid common stock cash dividends of $0.05 per share for the fourth quarter and $1.31 per share for the year ended December 31, 2016.

Commercial Real Estate

  • Substantially all of the $1.3 billion CRE loan portfolio comprises floating rate senior whole loans at December 31, 2016.
  • The CRE whole loan portfolio had a weighted average spread of 4.97% and a weighted average London Interbank Offered Rate ("LIBOR") floor of 0.30% at December 31, 2016.
  • Interest income on whole loans increased by $9.4 million, or 12.32%, to $85.2 million during the year ended December 31, 2016 as compared to $75.8 million during the year ended December 31, 2015. Included in this amount is $355,000 of net interest income earned on legacy CRE loans classified as assets held for sale at December 31, 2016. For comparison purposes, this excludes income in the 2015 period from our legacy CRE collateralized debt obligations ("CDOs") that were deconsolidated in the first quarter of 2016. 
  • RSO closed and funded $173.0 million of new whole loans during the 12 months ended December 31, 2016, with a weighted average unlevered yield of 5.95%, including amortization of origination fees.

The following table summarizes RSO's CRE loan activities and fundings of previous commitments, at par, for the three, 12 and 24 months ended December 31, 2016 (in millions, except percentages):

                         
    Three Months Ended
December 31,
 2016
    12 Months Ended
December 31,
 2016
    24 Months Ended
December 31,
 2016
   
Weighted
Average Spread
(1) (2)
 
New whole loans funded and originated   $ 47.1     $ 173.0     $ 856.4     5.19 %
Unfunded loan commitments     3.5       23.7       84.5        
New loans originated     50.6       196.7       940.9        
Payoffs (3)     (68.1 )     (355.6 )     (737.2 )      
Previous commitments funded     12.9       67.3       114.8        
Principal paydowns     (1.0 )     (1.0 )     (3.1 )      
Unfunded loan commitments     (3.5 )     (23.7 )     (84.5 )      
Loans, net funded/(repaid)   $ (9.1 )   $ (116.3 )   $ 230.9        
(1)   Represents the weighted-average rate above one-month LIBOR on loans whose interest rates are based on LIBOR at December 31, 2016. During the year ended December 31, 2016, $173.0 million of loans originated have LIBOR floors, with a weighted average floor of 0.42%.
(2)   Reflects rates on new whole loans funded and originated during the year ended December 31, 2016.
(3)   CRE loan payoffs and extensions resulted in $1.9 million of exit and extension fees during the year ended December 31, 2016.
     

Legacy CRE CDO Liquidations

  • On April 25, 2016, RSO called and liquidated its investment in Resource Real Estate Funding CDO 2006-1 ("RREF 2006-1"). RSO received the remaining collateral of $65.7 million, at fair value, recognizing a gain of approximately $846,000, in exchange for its remaining interest after repaying CDO debt.
  • On November 25, 2016, RSO called and liquidated its investment in Resource Real Estate Funding CDO 2007-1 ("RREF 2007-1"). RSO received the remaining collateral of $130.9 million, at fair value, recognizing a gain of approximately $2.1 million, in exchange for its remaining interest after repaying the CDO debt. RSO repaid $60.3 million of third-party notes to trigger the liquidation, of which $26.6 million was returned in the form of principal payments, for a net outlay of $33.7 million.

CRE Asset Impairment and Loan Reserves

  • RSO recorded other-than-temporary impairment of $19.9 million during the year ended December 31, 2016 on its interest in RREF 2007-1.
  • Pursuant to the Plan, during the quarter ended December 31, 2016, $158.2 million of legacy CRE loans were reclassified to assets held for sale. As a result, a charge of $15.8 million was taken to write the loans down to fair value, of which $7.7 million relates to the three months ended December 31, 2016. Additionally, RSO recorded a provision for loan loss of $2.5 million on one CRE loan related to a shopping center in Roswell, GA, which was determined based on an appraisal obtained during the quarter.

Commercial Finance and Middle Market Loans

  • During the three months ended December 31, 2016, RSO's middle market syndicated loan portfolio was reclassified to assets held for sale and a loss of $819,000 was taken to reflect the lower of cost or fair market value. As a result of the reclassification, the middle market lending segment was reported as a discontinued operation and excluded from continuing operations for all periods presented. At December 31, 2016, six middle market syndicated loans, with an aggregate carrying value of $38.5 million, were current with respect to contractual payments due. Additionally, during the three months ended December 31, 2016, two of the other middle market syndicated loans paid off at par and one middle market syndicated loan was sold at a slight discount generating total cash proceeds of approximately $15.0 million.
  • On November 14, 2016, Apidos CDO Cinco, LTD was called causing all of the notes payable to be redeemed and substantially all of its assets to be liquidated. RSO received $20.4 million of cash as a result of the liquidation through December 2016. As a result of the repayment of all senior and mezzanine notes of the deal, RSO consolidated Apidos Cinco's remaining assets, at fair value, onto its balance sheet. The assets at liquidation consisted primarily of cash, one structured security and three syndicated corporate loans, which had an aggregate fair value of $2.3 million.

Residential Mortgage Lending

As part of the Plan to exit non-core asset classes, the assets and liabilities of RSO's residential mortgage lending business, Primary Capital Mortgage, LLC ("PCM"), have been reclassified to held for sale and are considered discontinued operations at December 31, 2016. PCM originated $1.8 billion of agency mortgage loans and $127.2 million of jumbo mortgage loans during the year ended December 31, 2016. PCM obtained its New York license to operate during the quarter ended December 31, 2016. PCM also serviced over $3.4 billion of residential mortgage loans at December 31, 2016. In December 2016, PCM sold approximately $14.5 million of its agency servicing asset portfolio. This sale generated cash of $13.2 million, a future cash receivable of $1.5 million (expected to be received in May 2017) and a loss of $600,000 from transaction costs. PCM recognized losses of approximately $5.2 million and $10.2 million for the quarter and year ended December 31, 2016, respectively.

Liquidity

At February 28, 2017, RSO's liquidity is derived from two primary sources:

  • unrestricted cash and cash equivalents of $171.0 million; and
  • capital available for reinvestment in two of RSO's CRE securitizations of $5.0 million, all of which is designated to finance future funding commitments on CRE loans.

RSO also had $94.3 million and $163.3 million available under two term financing facilities to finance originations of CRE loans and $78.4 million available under a term financing facility to finance purchases of CMBS at February 28, 2017.

Common Stock Book Value and Total Stockholders' Equity

At December 31, 2016, RSO's book value per common share was $14.17, a decrease from $17.63 per common share at December 31, 2015. The decrease in book value during the year was attributable to the following: a net loss of $1.73 per common share; dividends paid of $1.31 per common share; declines of $0.55 per common share resulting from deconsolidation adjustments and $0.23 per common share attributable to the expense associated with the vesting of restricted stock; offset by increases of $0.16 per common share resulting from RSO's share repurchases and $0.20 per common share resulting from marks on available-for-sale securities and interest rate hedges. 

Total stockholders' equity at December 31, 2016, which measures equity before accounting for non-controlling interests, was $704.3 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 December 31, 2016, RSO has repurchased $35.2 million of its common stock (approximately 2.8 million shares), which represents approximately 8.3% of its outstanding common shares, at a weighted average price of $12.60 per share. RSO repurchased 196,000 shares of its Series B Preferred stock, which had an accretive impact to the book value of our common stock of $1.5 million, or $0.05 per share-diluted, during the year ended December 31, 2016.

Investment Portfolio

The following table summarizes the amortized cost and net carrying amount of RSO's investment portfolio at December 31, 2016, classified by asset type (in thousands, except percentages):

                     
At December 31, 2016   Amortized
Cost
  Net Carrying Amount   Percent of
Portfolio
    Weighted
Average Coupon
 
Loans Held for Investment:                        
  CRE whole loans (1)   $ 1,290,107   $ 1,286,278   69.46 %   5.63 %
                         
Loans Held for Sale:                        
  Syndicated corporate loans (2)     1,007     1,007   0.05 %   5.54 %
                         
Investments in Available-for-Sale Securities:                        
    CMBS     98,525     98,087   5.30 %   5.38 %
    RMBS     1,526     1,601   0.09 %   5.43 %
    ABS     21,365     25,280   1.35 %   N/A(4)  
      121,416     124,968   6.74 %      
Investment Securities-Trading:                        
    Structured notes     6,242     4,492   0.24 %   N/A (4)  
                         
Other (non-interest bearing):                        
    Investments in unconsolidated entities     87,919     87,919   4.76 %   N/A (4)  
    Direct financing leases(3)     992     527   0.03 %   5.66 %
      88,911     88,446   4.79 %      
Other Assets Held for Sale:                        
    Residential mortgage loans     148,140     148,140   8.00 %   3.79 %
    Middle market loans     52,382     40,443   2.18 %   5.87 %
    CRE legacy loans     158,192     158,178   8.54 %   2.90 %
      358,714     346,761   18.72 %      
                         
Total Investment Portfolio   $ 1,866,397   $ 1,851,952   100.00 %      
(1)   Net carrying amount includes an allowance for loan losses of $3.8 million at December 31, 2016.
(2)   The fair value option was elected for syndicated corporate loans held for sale.
(3)   Net carrying amount includes allowance for lease losses of $465,000 at December 31, 2016.
(4)   There is no stated rate associated with these securities.
     

Supplemental Information

The following schedules of reconciliations or supplemental information at December 31, 2016 are included at the end of this release:

  • Schedule I - Reconciliation of GAAP Net Income (Loss) to Core Earnings;
  • Schedule II - Summary of Securitization Performance Statistics; and
  • Supplemental Information.

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 investments. RSO has historically made other commercial finance investments.

RSO is externally managed by Resource Capital Manager, Inc., an indirect wholly-owned subsidiary of Resource America, Inc. In September 2016, Resource America was acquired by C-III Capital Partners LLC, a leading commercial real estate investment management and services company engaged in a broad range of activities.

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 that 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
  • general business and economic conditions that have impaired and may continue to 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 release 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 of 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 are set forth in Schedule I of this release and can be accessed through RSO's 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, a reconciliation of GAAP net income (loss) to core earnings, a summary of securitization performance statistics and supplemental information regarding RSO's CRE loan portfolio.

   
   
RESOURCE CAPITAL CORP. AND SUBSIDIARIES  
CONSOLIDATED BALANCE SHEETS  
(in thousands, except share and per share data)  
   
    December 31,
 2016
    December 31,
 2015
 
    (unaudited)        
ASSETS (1)                
  Cash and cash equivalents   $ 116,026     $ 78,756  
  Restricted cash     3,544       40,635  
  Interest receivable     6,404       11,494  
  CRE loans, pledged as collateral and net of allowances of $3.8 million and $43.1 million     1,286,278       1,783,503  
  Loans held for sale     1,007       1,475  
  Principal paydowns receivable     19,280       17,941  
  Investment securities, trading     4,492       25,550  
  Investment securities available-for-sale, including securities pledged as collateral of $97.5 million and $162.3 million     124,968       208,088  
  Investments in unconsolidated entities     87,919       50,030  
  Derivatives, at fair value     647       727  
  Direct financing leases, net of allowances of $0.5 million and $0.5 million     527       931  
  Intangible assets     213       5,316  
  Other assets     14,673       17,562  
  Deferred tax asset, net     4,255       12,646  
  Assets held for sale (amount includes $158.2 million of legacy CRE loans held for sale in continuing operations)     383,310       510,908  
      Total assets   $ 2,053,543     $ 2,765,562  
LIABILITIES (2)                
  Accounts payable and other liabilities   $ 4,480     $ 3,286  
  Management fee payable - related party     1,318       1,227  
  Accrued interest expense     4,979       5,361  
  Borrowings     1,191,456       1,621,713  
  Distributions payable     5,560       17,351  
  Derivatives, at fair value     97       3,458  
  Liabilities held for sale     142,563       286,406  
      Total liabilities     1,350,453       1,938,802  
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; 31,050,020 and 31,562,724 shares issued and outstanding (including 400,050 and 691,369 unvested restricted shares)     31       32  
  Additional paid-in capital     1,218,352       1,228,346  
  Accumulated other comprehensive income (loss)     3,081       (2,923 )
  Distributions in excess of earnings     (517,177 )     (406,603 )
      Total stockholders' equity     704,299       818,864  
  Non-controlling interests     (1,209 )     7,896  
      Total equity     703,090       826,760  
TOTAL LIABILITIES AND EQUITY   $ 2,053,543     $ 2,765,562  
                 
   
RESOURCE CAPITAL CORP. AND SUBSIDIARIES  
CONSOLIDATED BALANCE SHEETS - (Continued)  
(in thousands, except share and per share data)  
   
    December 31,
 2016
  December 31,
 2015
 
    (unaudited)      
(1)Assets of consolidated variable interest entities ("VIEs") included in total assets above:              
  Cash and cash equivalents   $ --   $ 95  
  Restricted cash     3,308     39,061  
  Investment securities available-for-sale, pledged as collateral, at fair value     369     66,137  
  CRE loans, pledged as collateral and net of allowances of $0.8 million and $42.8 million     747,726     1,416,441  
  Loans held for sale     1,007     1,475  
  Interest receivable     3,153     6,592  
  Principal paydowns receivable     5,820     17,800  
  Other assets     58     1,071  
    Total assets of consolidated VIEs   $ 761,441   $ 1,548,672  
               
(2)Liabilities of consolidated VIEs included in total liabilities above:              
  Borrowings   $ 480,103   $ 1,032,581  
  Accrued interest expense     519     923  
  Derivatives, at fair value     --     3,346  
  Accounts payable and other liabilities     133     (117 )
    Total liabilities of consolidated VIEs   $ 480,755   $ 1,036,733  
               
null
   
RESOURCE CAPITAL CORP. AND SUBSIDIARIES  
CONSOLIDATED STATEMENTS OF OPERATIONS  
(in thousands, except share and per share data)  
   
    Three Months Ended     Years Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
    (unaudited)     (unaudited)        
REVENUES                                
  Interest income:                                
    CRE loans   $ 20,664     $ 28,772     $ 85,229     $ 99,334  
    Securities     8,693       3,914       22,384       18,332  
    Leases     37       306       --       556  
    Interest income - other     730       1,340       5,005       4,252  
      Total interest income     30,124       34,332       112,618       122,474  
  Interest expense     13,346       15,343       53,747       56,530  
      Net interest income     16,778       18,989       58,871       65,944  
  Dividend income     19       16       (134 )     66  
  Fee income     1,574       1,468       3,943       4,865  
      Total revenues     18,371       20,473       62,680       70,875  
OPERATING EXPENSES                                
  Management fees - related party     2,802       2,994       12,991       13,306  
  Equity compensation - related party     (518 )     1,387       3,025       2,420  
  Rental operating     --       --       --       6  
  Lease operating     4       43       9       57  
  General and administrative     4,237       4,593       15,197       16,346  
  Depreciation and amortization     332       2,805       1,566       4,245  
  Impairment losses     1,173       313       26,470       372  
  Provision for loan and lease losses     10,126       1,366       17,765       41,088  
      Total operating expenses     18,156       13,501       77,023       77,840  
      215       6,972       (14,343 )     (6,965 )
OTHER INCOME (EXPENSE)                                
  Equity in earnings of unconsolidated entities     23       686       5,973       2,388  
  Net realized and unrealized gain (loss) on derivatives and sales of investment securities available-for-sale and loans     2,054       2,106       4,066       18,459  
  Net realized and unrealized gain (loss) on investment securities, trading     2,312       (2,320 )     2,398       (547 )
  Unrealized gain (loss) and net interest income on linked transactions, net     --       --       --       235  
  (Loss) on reissuance/gain on extinguishment of debt     --       --       --       (1,403 )
  Gain on sale of real estate     36       225       64       206  
  Other income (expense)     --       60       1,500       60  
      Total other income (expense)     4,425       757       14,001       19,398  
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES     4,640       7,729       (342 )     12,433  
  Income tax (expense) benefit     (1,434 )     1,653       (10,992 )     (1,354 )
NET INCOME (LOSS) FROM CONTINUING OPERATIONS     3,206       9,382       (11,334 )     11,079  
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX     (6,728 )     (2,175 )     (19,260 )     6,104  
NET INCOME (LOSS)     (3,522 )     7,207       (30,594 )     17,183  
  Net (income) loss allocated to preferred shares     (6,014 )