Amendment to Quarterly-Transition Report — Form 10-Q — Rule 13a-10 / 15d-10 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-QT/A Amendment to Quarterly-Transition Report HTML 1.85M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 54K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 53K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 48K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 48K
162: R1 Document and Entity Information HTML 68K
96: R2 Consolidated Balance Sheets HTML 183K
91: R3 Consolidated Balance Sheets (Parenthetical) HTML 69K
23: R4 Consolidated Statements of Operations HTML 201K
93: R5 Consolidated Statements of Comprehensive Income HTML 113K
(Loss)
65: R6 Consolidated Statements of Comprehensive Income HTML 60K
(Loss) Parenthetical
132: R7 Consolidated Statement of Changes in Equity HTML 106K
67: R8 Consolidated Statements of Cash Flows HTML 208K
72: R9 Nature of Operations HTML 51K
24: R10 Restatements HTML 959K
69: R11 Summary of Significant Accounting Policies HTML 58K
131: R12 Financing Receivables HTML 246K
119: R13 Supplemental Cash Flow Information HTML 87K
92: R14 Investment Securities HTML 104K
154: R15 Investments in Real Estate HTML 73K
127: R16 Investments in Unconsolidated Entities HTML 69K
20: R17 Accrued Expenses HTML 60K
31: R18 Borrowings HTML 107K
153: R19 Accumulated Other Comprehensive Income (Loss) HTML 69K
159: R20 Earnings (Loss) Per Share HTML 53K
165: R21 Benefit Plans HTML 58K
157: R22 Certain Relationships and Related Party HTML 111K
Transactions
106: R23 Other Income, Net HTML 57K
26: R24 Fair Value HTML 183K
64: R25 Commitments and Contingencies HTML 70K
39: R26 Operating Segments HTML 247K
38: R27 Variable Interest Entities HTML 1.80M
74: R28 Subsequent Events HTML 58K
105: R29 Summary of Significant Accounting Policies HTML 144K
(Policies)
124: R30 Restatements (Tables) HTML 953K
47: R31 Financing Receivables (Tables) HTML 252K
75: R32 Supplemental Cash Flow Information (Tables) HTML 85K
144: R33 Investment Securities (Tables) HTML 102K
44: R34 Investments in Real Estate (Tables) HTML 68K
117: R35 Investments in Unconsolidated Entities (Tables) HTML 61K
118: R36 Accrued Expenses (Tables) HTML 58K
81: R37 Borrowings (Tables) HTML 79K
37: R38 Accumulated Other Comprehensive Income (Loss) HTML 62K
(Tables)
116: R39 Benefit Plans (Tables) HTML 57K
45: R40 Certain Relationships and Related Party HTML 103K
Transactions (Tables)
73: R41 Other Income, Net (Tables) HTML 56K
125: R42 Fair Value (Tables) HTML 178K
57: R43 Operating Segments (Tables) HTML 240K
108: R44 VARIABLE INTEREST ENTITIES (Tables) RSO HTML 1.99M
90: R45 Nature of Operations (Details) HTML 48K
43: R46 Restatements Narrative (Details) HTML 55K
139: R47 Restatements Balance Sheets (Details) HTML 255K
33: R48 Restatements Statements of Operations (Details) HTML 218K
46: R49 RESTATEMENTS Restatement Statement of Operations HTML 50K
(Phantom) (Details)
89: R50 Restatements Comprehensive Income (Loss) (Details) HTML 141K
97: R51 Restatements Statements of Cash Flows (Details) HTML 283K
135: R52 Financing Receivables (Past Due Financing HTML 82K
Receivables) (Details)
21: R53 Supplemental Cash Flow Information (Details) HTML 95K
113: R54 Financing Receivables (Allowance for Credit HTML 90K
Losses) (Details)
86: R55 Financing Receivables (Impaired Financing HTML 67K
Receivables) (Details)
30: R56 Investment Securities (Narrative) (Details) HTML 72K
36: R57 Investments in Real Estate (Investments in Real HTML 57K
Estate) (Details)
95: R58 Investment Securities (Components of Investment HTML 63K
Securities) (Details)
151: R59 Investments in Real Estate (Operating Leases) HTML 66K
(Details)
168: R60 Investment Securities (Pre-tax Unrealized Gains HTML 64K
(Losses) Relating to Investments in
Available-for-Sale Securities) (Details)
166: R61 Investment Securities (Available-for-sale HTML 66K
Securities, Continuous Unrealized Loss Position)
(Details)
122: R62 Investments in Unconsolidated Entities (Narrative) HTML 67K
(Details)
55: R63 Investments in Unconsolidated Entities (Investment HTML 61K
Vehicles, Including the Range of Interests it
Owns) (Details)
51: R64 Accrued Expenses (Details) HTML 64K
114: R65 Borrowings (Credit Facilities and Other Debt) HTML 62K
(Details)
149: R66 Borrowings (Corporate and Real Estate Debt) HTML 104K
(Details)
29: R67 Borrowings (Senior Notes) (Details) HTML 65K
156: R68 Borrowings (Terminated and/or Transferred HTML 75K
Facilities and Loans) (Details)
58: R69 Borrowings (Debt Repayments) (Details) HTML 65K
82: R70 Borrowings (Covenants) (Details) HTML 48K
77: R71 Accumulated Other Comprehensive Income (Loss) HTML 58K
(Narrative) (Details)
53: R72 Accumulated Other Comprehensive Income (Loss) HTML 93K
(Changes in Accumulated Other Comprehensive Income
(Loss) by Category) (Details)
70: R73 Earnings (Loss) Per Share (Narrative) (Details) HTML 59K
130: R74 Benefit Plans (Components of Net Periodic Benefit HTML 72K
Cost) (Details)
101: R75 Certain Relationships and Related Party HTML 72K
Transactions (Receivables and Payables from
Related Party) (Details)
14: R76 Certain Relationships and Related Party HTML 78K
Transactions (Fees From Unconsolidated Investment
Entities) (Details)
110: R77 Certain Relationships and Related Party HTML 54K
Transactions Related party trading security
transactions (Details)
15: R78 Certain Relationships and Related Party HTML 51K
Transactions (Relationship with Brandywine
Construction & Management, Inc. (“Bcmi”))
(Details)
98: R79 Certain Relationships and Related Party HTML 60K
Transactions (Advances to Affiliated Real Estate
Limited Partnership) (Details)
34: R80 Other Income, Net (Details) HTML 59K
147: R81 Fair Value (Narrative) (Details) HTML 61K
141: R82 Fair Value (Assets and Liabilities Recorded at HTML 54K
Fair Value on Recurring Basis) (Details)
152: R83 Fair Value (Additional Information About Assets HTML 67K
Which Were Measured at Fair Value on a Recurring
Basis Utilizing Level 3 Inputs) (Details)
163: R84 Fair Value (Quantitative Inputs and Assumptions HTML 63K
Used in Determining the Fair Value of Items
Categorized in Level 3) (Details)
169: R85 Fair Value (Changes in Carrying Value of Assets HTML 79K
and Liabilities Measured at Fair Value on a
Non-recurring Basis) (Details)
13: R86 Fair Value (Fair Value of Financial Instruments, HTML 74K
Excluding Instruments Valued on a Recurring Basis)
(Details)
32: R87 Commitments and Contingencies (Details) HTML 115K
148: R88 Operating Segments (Narrative) (Details) HTML 60K
123: R89 Operating Segments (Summarized Operating Segment) HTML 161K
(Details)
133: R90 RSO Consolidated Balance Sheets RSO (Details) HTML 183K
128: R91 RSO Consolidated Balance Sheets (Parenthetical) HTML 48K
RSO (Details)
18: R92 Consolidated Statements of Income (Unaudited) RSO HTML 156K
(Details)
59: R93 Consolidated Statements of Cash Flows (Unaudited) HTML 288K
RSO (Details)
60: R94 Consolidated Statements of Cash Flows (Unaudited) HTML 54K
(Parenthetical) RSO (Details)
85: R95 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HTML 63K
(Details) RSO
62: R96 VARIABLE INTEREST ENTITIES (Details) RSO HTML 133K
146: R97 VARIABLE INTEREST ENTITIES (Schedule of Carrying HTML 119K
Value of Assets and Liabilities of Consolidated
VIEs) (Details) RSO
42: R98 VARIABLE INTEREST ENTITIES (Schedule of HTML 78K
Classification, Carrying Value, and Maximum
Exposure to Loss of Unconsolidated VIEs) (Details)
RSO
19: R99 SUPPLEMENTAL CASH FLOW INFORMATION (Details) RSO HTML 71K
145: R100 INVESTMENT SECURITIES TRADING (Details) RSO HTML 61K
78: R101 INVESTMENT SECURITIES TRADING (Schedule of HTML 72K
Investment Trading Securities at Fair Value)
(Details) RSO
126: R102 INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Schedule HTML 73K
of Available-for-Sale Securities, Fair Value)
(Details) RSO
107: R103 INVESTMENT SECURITIES AVAILABLE-FOR-SALE HTML 95K
(Estimated Maturities of Available-For-Sale
Securities) (Details) RSO
140: R104 INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Gross HTML 79K
Unrealized Loss and Fair Value of Securities)
(Details) RSO
161: R105 INVESTMENT SECURITIES AVAILABLE-FOR-SALE (Details) HTML 90K
RSO
66: R106 INVESTMENTS IN REAL ESTATE (Investments in Real HTML 60K
Estate) (Details) RSO
17: R107 INVESTMENTS IN REAL ESTATE (Pro Forma Information) HTML 57K
(Details) RSO
52: R108 INVESTMENTS IN REAL ESTATE (Details) RSO HTML 52K
167: R109 LOANS HELD FOR INVESTMENT (Summary of Loans) HTML 97K
(Details) RSO
50: R110 LOANS HELD FOR INVESTMENT (Weighted Average Life HTML 54K
of Bank Loans, at Amortized Cost) (Details) RSO
142: R111 LOANS HELD FOR INVESTMENT (Commercial Real Estate HTML 109K
Loans Held for Investment) (Details) RSO
28: R112 LOANS HELD FOR INVESTMENT (Weighted Average Life HTML 60K
of Commercial Real Estate Loans, at Amortized
Cost) (Details) RSO
61: R113 LOANS HELD FOR INVESTMENT (Allocation of Allowance HTML 56K
for Loan Loss for Commercial and Bank Loans)
(Details) RSO
129: R114 LOANS HELD FOR INVESTMENT (Details) RSO HTML 77K
150: R115 INVESTMENTS IN UNCONSOLIDATED ENTITIES (Details) HTML 96K
RSO
12: R116 FINANCING RECEIVABLES (Allowance for Loan Losses HTML 110K
and Recorded Investments in Loans) (Details) RSO
112: R117 FINANCING RECEIVABLES (Credit Risk Profiles of HTML 56K
Bank Loans) (Details) RSO
68: R118 FINANCING RECEIVABLES (Credit Risk Profiles of HTML 72K
Commercial Real Estate Loans) (Details) RSO
25: R119 FINANCING RECEIVABLES (Loan Portfolio Aging HTML 80K
Analysis as of the Dates Indicated at Cost Basis)
(Details) RSO
155: R120 FINANCING RECEIVABLES (Impaired Loans) (Details) HTML 108K
RSO
79: R121 FINANCING RECEIVABLES (Loan Portfolio HTML 66K
Troubled-debt Restructurings) (Details) RSO
100: R122 FINANCING RECEIVABLES (Details) RSO HTML 56K
54: R123 INTANGIBLE ASSETS (Summary of Intangible Assets) HTML 63K
(Details) RSO
137: R124 INTANGIBLE ASSETS (Details) RSO HTML 82K
158: R125 BORROWINGS (Schedule of Debt) (Details) RSO HTML 80K
48: R126 BORROWINGS (Schedule of Debt - Parenthetical) HTML 72K
(Details) RSO
160: R127 BORROWINGS (Resource Real Estate Funding CDO HTML 107K
2007-1) (Details) RSO
35: R128 BORROWINGS (Resource Real Estate Funding CDO HTML 98K
2006-1) (Details) RSO
164: R129 BORROWINGS (Whitney CLO I) (Details) RSO HTML 74K
121: R130 BORROWINGS (Apidos CLO VIII) (Details) RSO HTML 76K
27: R131 BORROWINGS (Apidos Cinco CDO) (Details) RSO HTML 75K
71: R132 BORROWINGS (Apidos CDO III) (Details) RSO HTML 76K
102: R133 BORROWINGS (Apidos CDO I) (Details) RSO HTML 79K
40: R134 BORROWINGS (Unsecured Junior Subordinated HTML 69K
Debentures) (Details) RSO
143: R135 BORROWINGS (CMBS Term Repurchase Facility) HTML 84K
(Details) RSO
115: R136 BORROWINGS (CRE - Term Repurchase Facility) HTML 79K
(Details) RSO
16: R137 BORROWINGS (CRE - Repurchase Facility) (Details) HTML 52K
RSO1
84: R138 BORROWINGS (Short-Term Repurchase Agreements) HTML 75K
(Details) RSO
94: R139 BORROWINGS (Revolving Credit Facility) (Details) HTML 54K
RSO
120: R140 BORROWINGS (Mortgage Payable) (Details) RSO HTML 67K
56: R141 RELATED PARTY TRANSACTIONS (Relationship with LEAF HTML 65K
Financial) (Details) RSO
49: R142 RELATED PARTY TRANSACTIONS (Relationship with CVC HTML 68K
Credit Partners, LLC) (Details) RSO
111: R143 RELATED PARTY TRANSACTIONS (Relationship with HTML 88K
Resource Real Estate) (Details) RSO
99: R144 RELATED PARTY TRANSACTIONS (Relationship with The HTML 60K
Bancorp) (Details) RSO
134: R145 RELATED PARTY TRANSACTIONS (Relationship with Law HTML 49K
Firm) (Details) RSO
104: R146 FAIR VALUE OF FINANCIAL INSTRUMENTS (Assets and HTML 78K
Liabilities Measured at Fair Value) (Details) RSO
80: R147 FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF HTML 67K
FINANCIAL INSTRUMENTS (Assets Measured on
Recurring Basis) (Details) RSO
63: R148 FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF HTML 54K
FINANCIAL INSTRUMENTS (Liabilities Measured on
Recurring Basis) (Details) RSO
136: R149 FAIR VALUE OF FINANCIAL INSTRUMENTS (Assets and HTML 63K
Liabilities, Quantitative Information) (Details)
RSO
41: R150 FAIR VALUE OF FINANCIAL INSTRUMENTS (Fair Value, HTML 66K
by Balance Sheet Grouping) (Details) RSO
83: R151 FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) RSO HTML 56K
76: R152 VARIABLE INTEREST ENTITIES RAI - Other VIE HTML 56K
(Details)
109: R153 VARIABLE INTEREST ENTITIES (Schedule of Carrying HTML 70K
Amount of Assets Related to VIEs) (Details) RSO
138: R154 Subsequent Events (Details) HTML 111K
88: XML IDEA XML File -- Filing Summary XML 288K
22: EXCEL IDEA Workbook of Financial Reports XLSX 921K
87: EXCEL IDEA Workbook of Financial Reports (.xls) XLS 9.16M
6: EX-101.INS XBRL Instance -- rexi-20121231 XML 13.42M
8: EX-101.CAL XBRL Calculations -- rexi-20121231_cal XML 554K
9: EX-101.DEF XBRL Definitions -- rexi-20121231_def XML 3.40M
10: EX-101.LAB XBRL Labels -- rexi-20121231_lab XML 4.41M
11: EX-101.PRE XBRL Presentations -- rexi-20121231_pre XML 3.62M
7: EX-101.SCH XBRL Schema -- rexi-20121231 XSD 577K
103: ZIP XBRL Zipped Folder -- 0000083402-13-000084-xbrl Zip 918K
(Registrant's
telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
NASDAQ Global Select Market
Title of class
Name of exchange on which registered
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated
filer
þ
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Contemporaneously
with this Transition Report on Form 10-QT/A, we are filing a Form 10-K/A to amend our previously-filed Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as filed on December 14, 2012 (the “2012 10-K/A”) for the purpose of restating our consolidated balance sheets as of September 30, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the fiscal years ended September 30, 2012 and 2011, including the applicable notes to consolidated financial statements, to reflect the consolidation of Resource Capital Corp. (“RSO”). The 2012 10-K/A reflects the audited financial
information of Resource America as of and for the fiscal years ended September 30, 2012 and 2011, which has been restated to include the consolidation of the audited financial information of RSO as of and for the corresponding calendar years ended December 31, 2012 and 2011.
In this Transition Report on Form 10-QT/A, we are amending and replacing in its entirety our previously filed Quarterly Report on Form 10-Q for the three months ended December 31, 2012 as filed on February 8, 2013 to (i) restate our consolidated balance sheets as of December
31, 2012 and September 30, 2012, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the three months ended December 31, 2012 and 2011, including the applicable notes to consolidated financial statements, to reflect the consolidation of Resource Capital Corp (“RSO”), (ii) reflect the corresponding change in our fiscal year end from September 30 to December 31 to conform to the fiscal year of RSO, and (iii) as a result of the change in fiscal year, to constitute this report as a transition report. The consolidated balance sheet for the fiscal year ended September 30, 2012 as presented in this Transition Report differs from the consolidated balance sheet as reported in the 2012 10-K/A, which reflects
the non-conforming periods for RAI and RSO as indicated above. All filings subsequent to the Form 10-K/A, including this Report, reflect the consolidation of RAI and RSO for the same period(s) and on the basis of a fiscal year ended December 31.
Receivables from managed entities and related parties, net
30,618
34,418
Investments
in real estate, net
18,041
19,149
Investment securities, at fair value
10,576
7,030
Investments in unconsolidated loan manager
37,221
36,356
Investments
in unconsolidated entities
13,156
12,993
Assets of consolidated variable interest entity ("VIE") - RSO (see Note 19):
Cash
and cash equivalents (including restricted cash)
179,390
169,450
Investments, at fair value
256,433
214,048
Loans
1,849,428
1,752,424
Investments
in real estate and unconsolidated entities
120,706
122,211
Other assets
70,600
62,512
Total assets of consolidated VIE - RSO
2,476,557
2,320,645
Property
and equipment, net
2,590
2,732
Deferred tax assets, net
28,274
27,770
Other assets
6,726
3,776
Total
assets
$
2,636,764
$
2,488,458
LIABILITIES AND EQUITY
Liabilities:
Accrued
expenses and other liabilities
$
21,559
$
23,042
Payables to managed entities and related parties
3,536
4,349
Borrowings
21,040
21,343
Liabilities
of consolidated VIE - RSO (see Note 19):
Borrowings
1,785,600
1,670,010
Other liabilities
71,239
58,295
Total
liabilities of consolidated VIE - RSO
1,856,839
1,728,305
Total liabilities
1,902,974
1,777,039
Commitments
and contingencies
Equity:
Preferred
stock, $1.00 par value, 1,000,000 shares authorized; none outstanding
—
—
Common stock, $.01 par value, 49,000,000 shares authorized; 30,069,822 and 29,866,664 shares issued (including nonvested restricted stock of 604,353 and 403,195), respectively
295
294
Additional
paid-in capital
286,048
285,844
Accumulated deficit
(29,486
)
(26,770
)
Treasury stock, at cost; 9,914,090, and 9,756,955 shares, respectively
(103,472
)
(102,457
)
Accumulated
other comprehensive loss
(2,197
)
(2,226
)
Total stockholders’ equity
151,188
154,685
Noncontrolling interests
279
208
Noncontrolling
interests of consollidated VIE - RSO
582,323
556,526
Total equity
733,790
711,419
$
2,636,764
$
2,488,458
The
accompanying notes are an integral part of these statements
Resource America, Inc. (the "Company") (NASDAQ: REXI) is a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its real estate, financial fund management, and commercial finance operating segments. As a specialized asset manager, the Company seeks to develop investment funds for outside investors for which the Company provides asset management services, typically under long-term management and operating arrangements either through a contract with, or as the manager or general partner of, the sponsored fund. The
Company limits its investment funds to investment areas where it owns existing operating companies or has specific expertise. The Company manages assets on behalf of institutional and individual investors and Resource Capital Corp. (“RSO”) (NYSE: RSO), a diversified real estate finance company that qualifies as a real estate investment trust (“REIT”). The Company owns 2.5% of RSO's outstanding common stock at December 31, 2012. RSO has been reflected on a consolidated basis with the Company's financial statements (see Notes 2 and 19).
The consolidated financial statements
and the information and tables contained in the notes to the consolidated financial statements are unaudited. However, in the opinion of management, these interim financial statements include all adjustments necessary to fairly present the results of the interim periods presented. The results of operations for the three months ended December 31, 2012 may not necessarily be indicative of the results of operations for a full year.
NOTE 2 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED AND AS OF DECEMBER 31, 2012 AND 2011 AND CHANGE IN FISCAL YEAR
On September
19, 2013, the Audit Committee of the Company's Board of Directors concluded that it was necessary to restate the audited financial statements set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (the “2012 10-K/A”) and certain of the unaudited financial statements in its Quarterly Reports on Form 10-Q, including each of the quarters ended December 31, 2012 and 2011. The restatement reflects the consolidation of RSO which the Company previously treated as an unconsolidated variable interest entity. The 2012 10-K/A reflects
the audited financial information of Resource America as of and for the fiscal years ended September 30, 2012 and 2011 as well as for the interim periods within the fiscal year ended September 30, 2011, which has been restated to include the consolidation of the audited financial information of RSO as of and for the corresponding calendar years ended December 31, 2012 and 2011.
The Company also elected, effective September 30, 2012, to change its fiscal year end from September 30 to December 31 in order to conform to the fiscal year of RSO. As such,
the period from October 1, 2012 to December 31, 2012 is reflected in this report as a transition period. The consolidated balance sheet for the fiscal year ended September 30, 2012 as presented in this Transition Report differs from the consolidated balance sheet as reported in the 2012 10-K/A, which reflects the non-conforming periods for RAI and RSO as indicated above. All filings subsequent to the Form 10-K/A, including this Report, reflect the consolidation of RAI and RSO for the same period(s) and on the basis of a fiscal year ended December 31.
The impact of consolidating RSO to the Company's consolidated net income attributable to common
shareholders for the three months ended December 31, 2012 and 2011 was as follows (in thousands):
•
Dividends from RSO were eliminated, which reduced net income attributable to common shareholders by $534,000 and $631,000, respectively; and
•
The Company's equity interests
in the earnings of RSO (2.54% and 3.16%, respectively) increased consolidated net income attributable to common shareholders by $367,000 and $13,000, respectively.
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated balance sheet as of December 31, 2012 (in thousands) (unaudited):
Restatement
Adjustments
As Restated
Eliminations
RSO
As Previously Reported
ASSETS
Cash
$
11,899
$
—
$
—
$
11,899
Restricted
cash
638
—
—
638
Receivables
468
—
—
468
Receivables
from managed entities and related parties, net
30,618
(8,067
)
—
38,685
Investments in real estate, net
18,041
—
—
18,041
Investment
securities, at fair value
10,576
(14,957
)
—
25,533
Investments in unconsolidated loan manager
37,221
—
—
37,221
Investments
in unconsolidated entities
13,156
—
—
13,156
Assets of consolidated VIE - RSO (see Note 19):
Cash
and cash equivalents (including restricted cash)
179,390
—
179,390
—
Investments, at fair value
256,433
—
256,433
—
Loans
1,849,428
(1,570
)
1,850,998
—
Investments
in real estate and unconsolidated entities
120,706
(93
)
120,799
—
Other assets
70,600
(31
)
70,631
—
Total
assets of consolidated VIE-RSO
2,476,557
(1,694
)
2,478,251
—
Property and equipment, net
2,590
—
—
2,590
Deferred
tax assets, net
28,274
(7,099
)
—
35,373
Other assets
6,726
—
—
6,726
Total
assets
$
2,636,764
$
(31,817
)
$
2,478,251
$
190,330
LIABILITIES
AND EQUITY
Liabilities:
Accrued
expenses and other liabilities
$
21,559
$
3
$
—
$
21,556
Payables
to managed entities and related parties
3,536
(31
)
—
3,567
Borrowings
21,040
(1,570
)
—
22,610
Liabilities
of consolidated VIE - RSO (see Note 19):
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated balance sheet as of September 30, 2012 (in
thousands) (unaudited):
Restatement Adjustments
As
Restated
Eliminations
RSO
As Previously Reported
ASSETS
Cash
$
19,393
$
—
$
—
$
19,393
Restricted
cash
642
—
—
642
Receivables
3,554
—
—
3,554
Receivables
from managed entities and related parties, net
34,418
(6,633
)
—
41,051
Investments in real estate, net
19,149
—
—
19,149
Investment
securities, at fair value
7,030
(15,502
)
22,532
Investment in unconsolidated loan manager
36,356
—
—
36,356
Investments
in unconsolidated entities
12,993
—
—
12,993
Assets of consolidated VIE - RSO (see Note 19):
Cash
and cash equivalents (including restricted cash)
169,450
—
169,450
—
Investments, at fair value
214,048
—
214,048
—
Loans
1,752,424
(1,677
)
1,754,101
—
Investments
in real estate and unconsolidated entities
122,211
(76
)
122,287
—
Other assets
62,512
(31
)
62,543
—
Total
assets of consolidated VIE - RSO
2,320,645
(1,784
)
2,322,429
—
Property and equipment, net
2,732
—
—
2,732
Deferred
tax assets, net
27,770
(6,795
)
—
34,565
Other assets
3,776
—
—
3,776
Total
assets
$
2,488,458
$
(30,714
)
$
2,322,429
$
196,743
LIABILITIES
AND EQUITY
Liabilities:
Accrued
expenses and other liabilities
$
23,042
$
—
$
—
$
23,042
Payables
to managed entities and related parties
4,349
(31
)
—
4,380
Borrowings
21,343
(1,677
)
—
23,020
Liabilities
of consolidated VIE - RSO (see Note 19):
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of operations for the three months ended December
31, 2012 (in thousands) (unaudited):
Restatement Adjustments
As
Restated
Eliminations
RSO
As Previously Reported
REVENUES:
Real
estate (includes revenues of $4,787 related to RSO)
$
13,154
$
—
$
—
$
13,154
Financial
fund management (includes revenue of $(8) related to RSO)
2,675
—
—
2,675
Commercial finance
(124
)
—
—
(124
)
15,705
—
—
15,705
Revenues
of consolidated VIE - RSO (see Note 19)
33,041
—
33,041
—
Elimination of consolidated VIE revenues attributed to operating segments
(4,811
)
(4,811
)
—
—
Total
revenues
43,935
(4,811
)
33,041
15,705
COSTS
AND EXPENSES:
Real estate
7,998
—
—
7,998
Financial
fund management
1,017
—
—
1,017
Commercial finance
(49
)
—
—
(49
)
General
and administrative
2,228
(28
)
—
2,256
Provision for credit losses
5,152
—
—
5,152
Depreciation
and amortization
492
—
—
492
16,838
(28
)
—
16,866
Expenses
of consolidated VIE - RSO (see Note 19)
24,098
(7,624
)
31,722
—
Elimination of consolidated VIE expenses attributed to operating segments
(4,762
)
(4,762
)
—
—
Total
expenses
36,174
(12,414
)
31,722
16,866
OPERATING
INCOME (LOSS)
7,761
7,603
1,319
(1,161
)
OTHER
INCOME (EXPENSE):
Interest expense
(522
)
—
—
(522
)
Other
income (expense), net
106
(482
)
—
588
(416
)
(482
)
—
66
Other
income of consolidated VIE - RSO (see Note 19)
13,733
—
13,733
—
Elimination of consolidated VIE income attributed to operating segments
32
32
—
—
Total
other income (expense), net
13,349
(450
)
13,733
66
Income (loss) from continuing operations before taxes
21,110
7,153
15,052
(1,095
)
Income
tax benefit
(241
)
—
—
(241
)
Income tax provision - RSO
7,624
7,624
—
—
Income
(loss) from continuing operations
13,727
(471
)
15,052
(854
)
Discontinued operations
(6
)
—
—
(6
)
Net
income (loss)
13,721
(471
)
15,052
(860
)
Net income attributable to noncontrolling interests
(587
)
—
—
(587
)
Net
income attributable to noncontrolling interests - RSO
(14,668
)
(13,757
)
(911
)
—
Net (loss) income attributable to common shareholders
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of operations for the three months ended December 31, 2011 (in thousands) (unaudited):
Restatement
Adjustments
As Restated
Eliminations
RSO
As Previously Reported
REVENUES:
Real
estate (includes revenues of $1,498 related to RSO)
$
8,666
$
—
$
—
$
8,666
Financial
fund management (includes revenues of $2,522 related to RSO)
6,579
—
—
6,579
Commercial finance
3,419
—
—
3,419
18,664
—
—
18,664
Revenues
of consolidated VIE - RSO (see Note 19)
25,211
—
25,211
—
Elimination of consolidated VIE revenues attributed to operating segments
(4,501
)
(4,501
)
—
—
Total
revenues
39,374
(4,501
)
25,211
18,664
COSTS
AND EXPENSES:
Real estate
7,192
—
—
7,192
Financial
fund management
5,804
—
—
5,804
Commercial finance
1,963
—
—
1,963
General
and administrative
2,896
—
—
2,896
Gain on sale of leases and loans
(37
)
—
—
(37
)
Provision
for credit losses
2,250
—
—
2,250
Depreciation and amortization
2,061
—
—
2,061
22,129
—
—
22,129
Expenses
of consolidated VIE - RSO (see Note 19)
17,031
(7,767
)
24,798
—
Eliminations of consolidated VIE expenses attributed to
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of comprehensive loss for the three months ended December 31, 2012 (in thousands) (unaudited):
Restatement
Adjustments
As Restated
Eliminations
RSO
As Previously Reported
Net income (loss)
$
13,721
$
(471
)
$
15,052
$
(860
)
Other
comprehensive (loss) income:
Unrealized gain (loss) on investment securities available for sale, net of tax
6
412
—
(406
)
Minimum
pension liability adjustments, net of tax
(3
)
(3
)
—
—
Minimum pension liability - reclassification for losses realized, net of tax
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of comprehensive loss for the three
months ended December 31, 2011 (in thousands) (unaudited):
Restatement Adjustments
As
Restated
Eliminations
RSO
As Previously Reported
Net (loss) income
$
(259
)
$
(1,235
)
$
413
$
563
Other
comprehensive income (loss) :
Unrealized gain (loss) on investment securities available for sale, net of tax
46
(939
)
—
985
Minimum
pension liability - reclassification for loss realized, net of tax of $37 and $36
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidating statement of cash flows for the three months ended December
31, 2012 (in thousands) (unaudited):
Restatement Adjustments
As
Restated
Eliminations
RSO
As Previously Reported
CASH FLOWS FROM OPERATING ACTIVITIES:
Net
income (loss)
$
13,721
$
(471
)
$
15,052
$
(860
)
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
550
—
—
550
Provision
for credit losses
5,152
—
—
5,152
Unrealized gain on trading securities
(164
)
—
—
(164
)
Equity
in earnings of unconsolidated entities
(1,201
)
—
—
(1,201
)
Distributions from unconsolidated entities
1,011
—
—
1,011
Gain
on sale of loans and investment securities, net
(307
)
—
—
(307
)
Gain on sale of assets
(831
)
—
—
(831
)
Deferred
income tax benefit
(277
)
(36
)
—
(241
)
Equity-based compensation issued
205
—
—
205
Equity-based
compensation received
—
206
—
(206
)
Trading securities purchases and sales, net
(1,828
)
—
—
(1,828
)
Income
from discontinued operations
6
—
—
6
Changes in operating assets and liabilities
(4,710
)
(44
)
—
(4,666
)
Change
in cash attributable to operations of consolidated VIE - RSO
(1,972
)
(206
)
(1,766
)
—
Net cash provided by (used in) operating activities
9,355
(551
)
13,286
(3,380
)
CASH
FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(80
)
—
—
(80
)
Purchase
of commercial finance assets
712
—
—
712
Investments in real estate and unconsolidated entities
(1,012
)
—
—
(1,012
)
Principal
payments received on leases and loans
3
—
—
3
Purchase of loans and securities by consolidated VIE - RSO
(219,936
)
—
(219,936
)
—
Principal
payments and proceeds from sales received by consolidated VIE - RSO
280,724
—
280,724
—
Purchase of loans and investments
(1,323
)
—
—
(1,323
)
Increase
in restricted cash - consolidated VIE RSO
(34,657
)
—
(34,657
)
—
Other investing activity of consolidated VIE - RSO
(1,696
)
17
(1,713
)
—
Net
cash provided by (used in) in investing activities
22,735
17
24,418
(1,700
)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings
(229
)
—
—
(229
)
Net
repayments of debt by consolidated VIE - RSO
(79,130
)
—
(79,130
)
—
Dividends paid
(593
)
—
—
(593
)
Dividends
paid on common stock by consolidated VIE - RSO
(19,285
)
534
(19,819
)
—
Net proceeds from issuance of common stock by consolidated VIE - RSO
48,719
—
48,719
—
Repurchase
of common stock
(1,078
)
—
—
(1,078
)
Decrease in restricted cash
3
—
—
3
Other
(150
)
—
—
(150
)
Other
financing activity of consolidated VIE - RSO
12,526
—
12,526
—
Net cash (used in) provided by financing activities
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidating statement of cash flows for the three months ended December
31, 2011 (in thousands) (unaudited):
Restatement Adjustment
As
Restated
Eliminations
RSO
As Previously Reported
CASH FLOWS FROM OPERATING ACTIVITIES:
Net
(loss) income
$
(259
)
$
(1,235
)
$
413
$
563
Adjustments
to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization
3,087
—
—
3,087
Provision
for credit losses
2,250
—
—
2,250
Equity in earnings of unconsolidated entities
(557
)
—
—
(557
)
Distributions
from unconsolidated entities
1,163
—
—
1,163
Gain on sale of leases and loans
(37
)
—
—
(37
)
Gain
on sale of loans and investment securities, net
(58
)
—
—
(58
)
Gain on sale of subsidiary
(8,749
)
—
—
(8,749
)
Loss
on extinguishment of debt
2,190
—
—
2,190
Deferred income tax provision
154
—
—
154
Equity-based
compensation issued
498
—
—
498
Loss from discontinued operations
20
—
—
20
Changes
in operating assets and liabilities
(1,432
)
—
—
(1,432
)
Change in cash attributable to operations of consolidated VIE - RSO
(2,053
)
383
(2,436
)
—
Net
cash used in operating activities
(3,783
)
(852
)
(2,023
)
(908
)
CASH
FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(106
)
—
—
(106
)
Payments
received on real estate loans and real estate
1,550
—
—
1,550
Investments in real estate and unconsolidated entities
(127
)
—
—
(127
)
Purchase
of commercial finance assets
(18,483
)
—
—
(18,483
)
Principal payments received on leases and loans
9,031
—
—
9,031
Purchase
of loans and securities by consolidated VIE - RSO
(483,006
)
—
(483,006
)
—
Principal payments and proceeds from sales received by consolidated VIE - RSO
174,581
—
174,581
—
Cash
divested on deconsolidation of LEAF
(2,284
)
—
—
(2,284
)
Purchase of loans and investments
(600
)
—
—
(600
)
Proceeds
from sale of loans and investment securities
207
—
—
207
Increase in restricted cash - consolidated VIE RSO
8,680
—
8,680
—
Other
investing activity of consolidated VIE - RSO
(5,392
)
33
(5,425
)
—
Net cash (used in) provided by investing activities
(315,949
)
33
(305,170
)
(10,812
)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowings
128,845
—
—
128,845
Principal
payments on borrowings
(123,823
)
—
—
(123,823
)
Net borrowings (repayments) of debt by consolidated VIE - RSO
307,618
—
307,618
—
Dividends
paid
(569
)
—
—
(569
)
Dividends paid on common stock by consolidated VIE - RSO
(18,526
)
631
(19,157
)
—
Net
proceeds from issuance of equity shares of consolidated VIE - RSO
17,462
—
17,462
—
Repurchase of common stock
(939
)
—
—
(939
)
Decrease
in restricted cash
(633
)
—
—
(633
)
Other
(2,250
)
188
—
(2,438
)
Other
financing activity of consolidated VIE - RSO
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated
financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company also consolidates entities that are VIEs where it has determined that it is the primary beneficiary of such entities. Once it is determined that the Company holds a variable interest in a VIE, management must perform a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly
impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and reevaluate the requirement to consolidate them. The portions of these entities that the
Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements.
The financial statements for the months ended December 31, 2012 and 2011 and as September 30, 2012 reflect the consolidation of RSO. See Note 19 for additional disclosures pertaining to VIEs.
All intercompany transactions and balances have been eliminated in the Company's consolidated financial statements.
Financing Receivables
Receivables from managed entities. The
Company performs a review of the collectability of its receivables from managed entities on a quarterly basis. If upon review there is an indication of impairment, the Company will analyze the future cash flows of the managed entity. With respect to the receivables from its commercial finance investment partnerships, this takes into consideration several assumptions by management, primarily concerning estimations of future bad debts and recoveries. For the receivables from the real estate investment entities for which there are indications of impairment, the Company estimates the cash flows through the sale of the underlying properties, which is based on projected net operating income as a multiple of published capitalization rates, which is then reduced by the underlying mortgage balances and priority
distributions due to the investors in the entity.
Real estate - rent receivables. The Company evaluates the collectability of the rent receivables for the properties it owns and fully reserves for amounts after they are 90 days past due. Amounts are charged off when they are deemed to be uncollectible.
Recent Accounting Standards
Newly-Adopted Accounting Principles
The Company’s adoption of the following standard during 2012 did not have a material impact on its consolidated financial position, results of operations or cash flows:
Comprehensive
income (loss). In June 2011, the FASB issued an amendment to eliminate the option to present components of other comprehensive income (loss) as part of the statement of changes in stockholders' equity. The amendment requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income (loss) and its components followed consecutively by a second statement that should present total other comprehensive income (loss), the components of other comprehensive income (loss), and the total of comprehensive income (loss). The Company adopted this guidance beginning October 1, 2012 and has presented the required disclosures.
Repurchases of common stock from employees in exchange for the payment of income taxes and option exercises
$
9
$
8
Issuance
of treasury stock for the Company's investment savings plan
72
126
Effects from the deconsolidation of entities:(1)
Restricted
cash
$
—
$
20,282
Receivables from managed entities and related parties, net
—
(3,411
)
Receivables
—
954
Investments
in commercial finance, net
—
199,955
Investments in unconsolidated entities
—
7,049
Property and equipment, net
—
3,754
Deferred
tax assets, net
—
4,558
Goodwill
—
7,969
Other assets
—
6,806
Accrued
expense and other liabilities
—
(10,208
)
Payables to managed entities and related parties
—
(98
)
Borrowings
—
(202,481
)
Accumulated
other comprehensive loss
—
255
Noncontrolling interests
—
(37,668
)
(1)
Reflects
the deconsolidation of LEAF Commercial Capital, Inc. ("LEAF") during the three months ended December 31, 2011. As a result of the deconsolidation of this entity, the amounts noted above were removed from the Company’s consolidated balance sheets. The sum of the assets removed and cash equated to the sum of the liabilities and equity that were similarly eliminated and, as such, there was no change in the Company’s net assets.
NOTE 5 – FINANCING RECEIVABLES
The following table is the aging
of the Company’s past due financing receivables (presented gross of allowance for credit losses) as of December 31, 2012 (in thousands):
Receivables
are presented gross of an allowance for credit losses of $29.6 million, $2.5 million and $457,000 related to the Company’s commercial finance, real estate and financial fund management investment entities, respectively. The remaining receivables from managed entities and related parties have no related allowance for credit losses.
The following table is the aging of the Company’s past due financing receivables (presented gross of allowance for credit losses) as of September 30, 2012 (in thousands):
30-89
Days
Past Due
Greater than
90 Days
Greater than
181 Days
Total
Past Due
Current
Total
Receivables
from managed entities
and related parties: (1)
Commercial
finance investment entities
$
—
$
—
$
38,834
$
38,834
$
148
$
38,982
Real
estate investment entities
743
2,694
15,180
18,617
2,054
20,671
Financial
fund management entities
6
—
46
52
2,141
2,193
Other
—
—
—
—
152
152
749
2,694
54,060
57,503
4,495
61,998
Rent
receivables - real estate
6
1
32
39
6
45
Total
financing receivables
$
755
$
2,695
$
54,092
$
57,542
$
4,501
$
62,043
(1)
Receivables
are presented gross of an allowance for credit losses of $25.1 million and $2.5 million related to the Company’s commercial finance and real estate investment entities, respectively. The remaining receivables from managed entities and related parties had no related allowance for credit losses.
The following table summarizes the activity in the allowance for credit losses for all financing receivables (in thousands):
The Company’s financing receivables (presented gross of allowance for credit losses) as of December 31, 2012 relate to the balance in the allowance for credit losses, as follows
(in thousands):
Receivables from
Managed Entities
Rent
Receivables
Total
Ending
balance, individually evaluated for impairment
$
63,178
$
—
$
63,178
Ending balance, collectively evaluated for impairment
—
112
112
Balance,
end of period
$
63,178
$
112
$
63,290
The Company’s financing receivables (presented gross of allowance
for credit losses) as of September 30, 2012 relate to the balance in the allowance for credit losses, as follows (in thousands):
Receivables from
Managed Entities
Rent
Receivables
Total
Ending
balance, individually evaluated for impairment
$
61,998
$
—
$
61,998
Ending balance, collectively evaluated for impairment
—
45
45
Balance,
end of period
$
61,998
$
45
$
62,043
The following table discloses information about the Company’s impaired
financing receivables (in thousands):
The commercial property, consolidated through a VIE, was sold in November 2012.
The contractual future minimum rental income on non-cancelable operating leases included in properties owned for each of the five succeeding annual periods ending December 31, and thereafter,
are as follows (in thousands):
2013
$
944
2014
872
2015
662
2016
487
2017
396
Thereafter
546
$
3,907
NOTE
7 − INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
Available-for-sale
securities. The following table discloses the pre-tax unrealized gains relating to the Company’s investments in available-for-sale securities (in thousands):
Equity
securities. The Company holds 18,972 shares of The Bancorp, Inc. ("TBBK") common stock.
CLO securities. The collateralized loan obligation ("CLO") securities represent the Company’s retained equity interest in five and four CLO issuers that it directly and/or through its joint venture has structured and managed at December 31, 2012 and September 30, 2012, respectively. The fair
value of these retained interests is impacted by the fair value of the investments held by the respective CLO issuers, which are sensitive to interest rate fluctuations and credit quality determinations. The Company is required to maintain a minimum investment of $2.0 million (par value) in the subordinated notes of one of the CLO issuers, Apidos CLO II.
Trading securities. The Company began purchasing investment securities classified as trading securities during fiscal 2012. For the three months ended December 31, 2012, the
Company had net unrealized gains on these securities totaling $164,000 and realized gains from sales of trading securities of $307,000 which were included in Financial Fund Management Revenues on the consolidated statements of operations.
During the three months ended December 31, 2011, the Company sold 26,517 shares of TBBK stock held in a Rabbi Trust for the Supplemental Employment Retirement Plan ("SERP") for its former Chief Executive Officer and recognized net gains of $17,000. The
Company held 6,992 shares of TBBK common stock valued at $50,000 as of December 31, 2011 which were all subsequently sold during 2012.
Unrealized losses along with the related fair value and aggregated by the length of time the investments were in a continuous unrealized loss position, are as follows (in thousands, except number of securities):
NOTE
8 − INVESTMENTS IN UNCONSOLIDATED ENTITIES AND LOAN MANAGER
As a specialized asset manager, the Company develops various types of investment vehicles, which it manages under long-term management agreements or similar arrangements. The following table details the Company’s investments in these vehicles, including the range of ownership interests owned (in thousands, except percentages):
Two of the Trapeza entities that have incentive distributions, also known as carried interests, are subject to a potential clawback to the extent that such distributions exceed the cumulative net profits of the entities, as
defined in the respective partnership agreements (see Note 17). The general partner of those entities is equally owned by the Company and its co-managing partner. Performance-based incentive fees in interim periods are recorded based upon a formula as if the contract were terminated at that date. On a quarterly basis (interim measurement date), the Company quantifies the cumulative net profits/net losses (as defined under the Trapeza partnership agreements) and allocates income/loss to the limited and general partners according to the terms of such agreements. Subsequently in 2013, the general partner began the process of dissolving the two partnerships and settled the
clawback liability. The Company’s proportionate share of these payments was $1.1 million.
Included in investments in unconsolidated entities is the Company's $1.8 million investment in the Resource Real Estate Opportunity REIT, Inc. (“RRE Opportunity REIT”), a fund that is currently in the offering stage. The Company accounts for its investment in RRE Opportunity REIT on the cost method since the Company owns less than 1% of the shares outstanding. The
Company will evaluate these investments for impairment on a quarterly basis. There were no identified events that had a significant adverse effect on these investments and, as such, no impairment was recorded.
Investment in Unconsolidated Loan Manager. Until the Company sold its Apidos Capital Management, LLC (“Apidos”) CLO business to CVC Capital Partners SICAV-FIS, S.A., a private equity firm (“CVC”) on April 17, 2012, the operations of Apidos were included in the Company's consolidated results. Thereafter, the Company has recorded its
33% equity share of the results of the joint venture, CVC Credit Partners, which includes the Apidos operations, in Financial Fund Management Revenues on the consolidated statements of operations.
As a part of the transactions in forming the CVC Credit Partners joint venture, the Company received a preferred interest in Apidos (which became a subsidiary of CVC Credit Partners) relating to incentive management fees on pre-joint venture CLO's managed by Apidos. The Company accounts for this interest, with a book value of $6.8 million at December 31, 2012, on the cost method. As
the incentive fees are received, in accordance with its preferred interest, the Company receives a distribution of 75% of those amounts which will initially be recorded as income, net of any contractual amounts due to third-parties. On a quarterly basis, the Company will evaluate the investment for impairment by estimating the fair value of the expected future cash flows from the incentive management fees. If the estimated fair value is less than the cost basis of the interest, the preferred interest will be deemed to be impaired. If the Company determines that the shortfall is other-than-temporary, the impairment will be recorded as a reduction of the preferred interest by reducing
the revenues previously recorded on these preferred shares. To the extent that the investment in preferred equity has been reduced to zero, all subsequent distributions will be recorded as income.
The
amount of the facility as shown has been reduced by $503,000 for an outstanding letter of credit at December 31, 2012 and September 30, 2012.
Credit Facilities
TD Bank, N.A. (“TD Bank”). On November 19, 2012, the Company amended its agreement with TD Bank to extend the maturity of the TD Bank facility to December 31, 2014, to set the interest rate
on borrowings as either (a) the prime rate of interest plus 2.25% or (b) the London Interbank Offered Rate ("LIBOR") plus 3% and to eliminate the previous floor of 6.0%. The LIBOR rate used varies from one to six months, depending upon the period of the borrowing, at the Company's election. The Company is charged an annual fee of 0.5% on the unused facility amount as well as a 5.25% fee on the $503,000
of outstanding letter of credit.
Borrowings are secured by a first priority security interest in certain of the Company's assets and the guarantees of certain subsidiaries, including (i) the present and future fees and investment income earned in connection with the management of, and investments in, sponsored CDO issuers, (ii) a pledge of 18,972 shares of TBBK common stock, and (iii) the pledge of 1,969,843 shares of RSO common stock. Availability under the facility is limited to the lesser of (a) 75% of the net present value of future RSO base management fees to be earned or (b) the maximum revolving credit facility
amount.
There were no borrowings outstanding as of or during the three months ended December 31, 2012 on the secured credit facility and the availability on the facility was $7.0 million, as reduced for an outstanding letter of credit. Weighted average borrowings on the line of credit for the three months ended December 31, 2011 were $5.4 million at a weighted average borrowing rate of 6.0%, with an effective interest rate (inclusive of amortization of deferred issuance costs) of 10.6%. Weighted average borrowings
for the term note portion of the facility (which was repaid in full by the Company in November 2011) for the three months ended December 31, 2011 were $771,000 at a weighted average borrowing rates of 6.0% and an effective interest rate of 38.2% (reflecting the accelerated amortization of deferred finance costs).
Republic First Bank (“Republic Bank”). In February 2011, the Company entered into a $3.5 million revolving credit facility with Republic Bank. The facility bears interest at the prime rate of interest plus 1% with a floor of 4.5%. The loan is secured by a pledge of 700,000
shares of RSO stock and a first priority security interest in certain real estate collateral located in Philadelphia, Pennsylvania. Availability under this facility is limited to the lesser of (a) the sum of (i) 25% of the appraised value of the real estate, based upon the most recent appraisal delivered to the bank and (ii) 100% of the cash and 75% of the market value of the pledged RSO shares held in the pledged account; and (b) 100% of the cash and 100% of the market value of the pledged RSO shares held in the pledged account. The Company also is charged an unused annual facility fee equal to 0.25%. In October
2012, the Company amended this facility to extend the maturity date to December 28, 2014. There were no borrowings under this facility during the three months ended December 31, 2012 and September 30, 2012 and the availability as of December 31, 2012 was $3.4 million.
Senior Notes
In December 2012, the
Company modified the terms of its $10.0 million 9% Senior Notes that remained outstanding following the partial repayment referred to below to extend the maturity date from October 2013 to March 31, 2015. In connection with the modification, the Company paid a modification incentive payment equal to 1.0% of the aggregate principal amount of each note. The detachable 5-year warrants to purchase 3,690,195 shares of common stock issued with the original notes remain outstanding. The Company accounted for these warrants as
a discount to the original notes. Upon the modification and partial repayment of the Senior Notes in November 2011, the Company expensed the remaining $2.2 million of unamortized discount. The effective interest rate (inclusive of the amortization of deferred finance fees and the discount for the warrants for fiscal 2012) for the three months ended December 31, 2012 and 2011 was 9.5% and 20.6%, respectively.
Per the agreement relating to the issuance of the Senior Notes, the
Company was restricted from paying dividends in excess of $0.03 per share. During the quarter ended September 2013, the holders of the Senior Notes consented to remove the restriction in its entirety.
Terminated and/or Transferred Facilities and Loans
Commercial Finance Debt. The Company was not an obligor or a guarantor of these facilities and these facilities were non-recourse to the Company except for the Series 2010-2 term securitization (see Note 17 for a description of the Company's obligations with respect to the Series 2010-2 term
securitization). Due to the November 2011 deconsolidation of LEAF, the Company's commercial finance debt is no longer included in the Company's consolidated financial statements.
Securitization of leases and loans. On October 28, 2011, LEAF completed a $105.0 million securitization. A subsidiary of LEAF issued eight classes of notes which are asset-backed debt, secured and payable by certain assets of LEAF. The notes included interest rates ranging from 0.4% to 5.5%, rated by both Dominion Bond Rating
Service, Inc. (“DBRS”) and Moody's Investors Services, Inc., and mature from October 2012 to March 2019. The weighted average borrowings for the period from October 1 to November 16, 2011 were $42.7 million, at a weighted average borrowing rate of 2.6% and an effective interest rate (inclusive of amortization of deferred financing costs and interest rate swaps) of 5.6%.
Guggenheim Securities LLC (“Guggenheim”). Beginning in January 2011, Guggenheim provided LEAF with a revolving warehouse credit facility with availability up to $110.0 million and committed
to further expand the borrowing limit to $150.0 million. LEAF, through its wholly-owned subsidiary, issued to Guggenheim, as initial purchaser, six classes of DBRS-rated variable funding notes, with ratings ranging from “AAA” to “B”, for up to $110.0 million. The notes were secured and payable only from the underlying equipment leases and loans. Interest was calculated at a rate of 30-day LIBOR plus a margin rate applicable to each class of notes. The revolving period of the facility ends on December 31, 2012 and the stated maturity of the notes is December 15,
2020, unless there is a mutual agreement to extend. Principal payments on the notes were required to begin when the revolving period ends. The weighted average borrowings for the period from October 1 to November 16, 2011 (prior to the LEAF deconsolidation) were $68.8 million, at a weighted average borrowing rate of 4.2% and an effective interest rate of 5.1%.
Series 2010-2 term securitization. In May 2010, LEAF Receivables Funding 3, LLC, a subsidiary of LEAF (“LRF3”), issued $120.0 million of equipment contract-backed notes (“Series 2010-2”)
to provide financing for leases and loans. In the connection with the formation of LEAF in January 2011, RSO contributed the Series 2010-2 notes, along with the underlying lease portfolio, to LEAF. LRF3 is the sole obligor on these notes. The weighted average borrowings for the period from October 1 to November 16, 2011 were $70.1 million at a weighted average borrowing rate of 5.1% and an effective interest rate of 8.5%.
Annual principal payments on the Company’s aggregate borrowings for the next five fiscal years ending December 31, and thereafter, are as follows (in thousands):
2013
$
753
2014
198
2015
10,211
2016
224
2017
240
Thereafter
9,414
$
21,040
Covenants
The
TD Bank credit facility is subject to certain financial covenants, which are customary for the type and size of the facility, including debt service coverage and debt to equity ratios. The debt to equity ratio restricts the amount of recourse debt the Company can incur based on a ratio of recourse debt to net worth.
The mortgage on the Company's hotel property contains financial covenants related to the net worth and liquid assets of the Company. Although non-recourse in nature, the loan is subject to limited standard exceptions (or “carveouts”) which the Company has guaranteed. These carveouts
will expire as the loan is paid down over the next ten years. The Company has control over the operations of the underlying property, which mitigates the potential risk associated with these carveouts and, accordingly, no liabilities for these obligations have been recorded in the consolidated financial statements. To date, the Company has not been required to make any carveout payments.
Included in Accumulated Other Comprehensive Loss as of December 31, 2012 and September 30, 2012 were net unrealized losses of $4,000 (net of tax benefit of $2,000) and $9,000 (net of tax benefit of $6,000), respectively, related to hedging instruments held by the investment funds sponsored by LEAF Financial Corporation ("LEAF Financial"), in which the Company owns an equity interest. In addition, at December 31,
2012 and September 30, 2012, the Company had a net unrealized loss of $10,000 (net of tax benefit of $7,000) and $13,000 (net of tax benefit of $9,000), respectively, included in Accumulated Other Comprehensive Loss for hedging activity of LEAF. The Company has no other hedging activity, other than that of its consolidated VIE (see Note 19) as of December 31, 2012 or September 30,
2012.
The following are changes in accumulated other comprehensive income (loss) by category (in thousands):
Basic earnings (loss) per share (“Basic EPS”) is computed using the weighted average number of common shares outstanding during the period, inclusive of nonvested share-based awards that are entitled to receive non-forfeitable dividends. The diluted earnings (loss)
per share (“Diluted EPS”) computation takes into account the effect of potential dilutive common shares. Potential common shares, consisting primarily of outstanding stock options, warrants and director deferred shares, are calculated using the treasury stock method.
For the three months ended December 31, 2012 and 2011, the Basic EPS and Diluted EPS shares were the same because the impact of potential dilutive securities would have been antidilutive. Accordingly, the following were excluded from the Diluted EPS computation: outstanding options to purchase 1.0 million shares of common stock (at a weighted average price per share of $16.26
and $16.14) and warrants to purchase 3,690,000 shares of common shares (exercise price per share of $5.10) for the three months ended December 31, 2012, and 2011, respectively.
NOTE 13 - BENEFIT PLANS
Supplemental Employment Retirement Plan ("SERP"). The Company established a SERP, which has Rabbi and Secular Trust components, for Mr. Edward E. Cohen (“Mr. E. Cohen”), while he was the
Company’s Chief Executive Officer ("CEO"). The Company pays an annual benefit equal to $838,000 during his lifetime or for a period of 10 years from June 2004, whichever is longer. The components of net periodic benefit costs for the SERP were as follows (in thousands):
NOTE
14 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has sponsored and manages investment entities. Additionally, it has ongoing relationships with several related entities. The following table details these receivables and payables (in thousands):
Receivables from managed entities and related parties, net:
Commercial finance investment entities (1)
$
10,644
$
13,904
Real
estate investment entities (2)
18,060
18,169
Financial fund management investment entities
1,736
2,193
Other
178
152
Receivables
from managed entities and related parties
$
30,618
$
34,418
Payables due to managed entities and related parties, net:
Real
estate investment entities (3)
$
3,300
$
3,900
Other
236
449
Payables
to managed entities and related parties
$
3,536
$
4,349
(1)
Includes
$29.6 million and $25.1 million of reserves, respectively, for credit losses related to management fees owed from three commercial finance investment entities that, based on changes in the estimated cash distributions, are not expected to be collectible.
(2)
Includes $2.5 million and $2.5 million, respectively of reserves for credit losses related to management fees owed from two real estate investment entities.
(3)
Includes
$3.2 million and $2.9 million in funds provided by the real estate investment entities, which are held by the Company to self insure the properties held by those entities at December 31, 2012 and September 30, 2012.
The Company receives fees, dividends and reimbursed expenses from several related/managed entities. In addition, the Company reimburses related entities for certain operating expenses. The following table details those activities (in thousands):
CVC Credit
Partners – reimbursement of net costs and expenses
216
—
RRE Opportunity REIT:
Reimbursement of costs and expenses
75
105
LEAF:
Payment
for sub-servicing the commercial finance investment
partnerships
(382
)
(405
)
Payment for rent and related expenses
(197
)
(120
)
Reimbursement
of net costs and expenses
59
60
1845 Walnut Associates Ltd. – payment of rent and operating expenses
(154
)
(106
)
Brandywine
Construction & Management, Inc. – payment for property management of hotel property
(54
)
(59
)
Atlas Energy, L.P. – reimbursement of net costs and expenses
144
169
Ledgewood
P.C. – payment for legal services
(53
)
(155
)
Graphic Images, LLC – payment for printing services
(27
)
(8
)
The
Bancorp, Inc. – reimbursement of net costs and expenses
28
45
9 Henmar, LLC – payment of broker/consulting fees
(19
)
(18
)
(1)
Includes
discounts recorded by the Company of $538,000 and $76,000 recorded in the three months ended December 31, 2012 and 2011 in connection with management fees from its real estate investment entities that it expects to receive in future periods.
(2)
During the three months ended December 31, 2012
and 2011, the Company waived $751,000 and $1.5 million, respectively, of fund management fees from its commercial finance investment entities.
Purchases of related party trading securities. The Company engages in structured finance security trading, both as an agent, through the Company's registered broker-dealer subsidiary, Resource Securities, Inc. ("Resource Securities"), and for the
Company. During the three months ended December 31, 2012, the Company purchased $5.9 million notional value of notes of Alesco Financial, Inc. ("Alesco") for $239,000 which were sold for a gain of $121,000 during the three months ended December 31, 2012. Alesco merged with Cohen & Company, Inc. in December 2009 which then changed its name to Institutional Financial Markets, Inc. ("IFMI") in January 2011. Mr. Daniel G. Cohen is the CEO and Chief Investment Officer of IFMI and is the brother of the Company's CEO, Mr. Jonathan Z. Cohen, and the son
of Mr. E. Cohen, the Company's Chairman.
Relationship with Brandywine Construction & Management, Inc. (“BCMI”). BCMI manages the property underlying one of the Company’s real estate investments. Mr. E. Cohen is the chairman of BCMI.
In November 2012, the Company paid a $95,000 fee to BCMI in connection with the negotiations and ultimate sale of a property in which the Company had a loan investment.
Advances
to Affiliated Real Estate Limited Partnership. During fiscal 2011, the Company agreed to advance up to $3.0 million to an affiliated real estate limited partnership under a revolving note, bearing interest at the prime rate. Amounts drawn, which are due upon demand, were $2.5 million and $2.4 million as of December 31, 2012 and September 30, 2012, respectively, which are included in Receivables from Managed Entities and Related Parties, net of allowance
for credit losses. The Company recorded $18,000 and $16,000 of interest income on this loan during the three months ended December 31, 2012 and 2011, respectively. Based on projected collectability concerns, determined by applying current asset values, these amounts have been fully reserved.
Amortization
of unrecognized loss - SERP (see Note 13)
(48
)
(83
)
Other (expense) income, net
(8
)
(113
)
Other income (expense), net
$
106
$
(72
)
NOTE
16– FAIR VALUE
In analyzing the fair value of its assets and liabilities accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities are categorized into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1 − Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level
2 − Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3 − Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and that are, consequently, not based on market activity, but upon particular valuation techniques.
There were no transfers between any of the Levels within the fair value hierarchy for any of the periods presented.
The following is a discussion of the assets and liabilities that are recorded at fair value on a recurring and non-recurring basis, as well as the valuation techniques applied to each
fair value measurement and the estimates and assumptions used by the Company in those measurements.
Receivables from managed entities. The Company recorded a discount on certain of its receivable balances due from its real estate and commercial finance managed entities due to the extended term of the repayment to the Company. The discount was computed based on estimated inputs, including the repayment term (Level 3).
For the real estate managed entity receivables, the Company assumes the fair value of the real estate investment funds
through the sale of the underlying properties. The net proceeds are applied first to the payoff of the lenders and then to the payment of distributions due to investors; any balance remaining is then available to repay the amounts due to the Company. The balance sheet date fair values of the properties are individually calculated based on capitalized net operating income, which are derived from capitalization rates from a third-party research firm (for the region in which the properties are located, based on actual sales data for properties sold during the past year) as applied to the Company's internally-generated projected operating results for each of the respective properties. These projections are historically based on and are adjusted for current trends in the marketplace and specific changes as
applicable by property.
With respect to the commercial finance partnership receivables, management projects the availability of excess cash flow at the individual investment entity to repay the
Company's receivable. In determining the excess cash flow, management starts with the gross future payments due on leases and loans for each of the funds, which are fixed and determinable, net of debt service and expected credit losses, which are estimated based on a migration analysis which is calculated based on historical data across the entire portfolio of leases and loans. This analysis estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully reserved, less an estimated recovery amount based on the historical trends of the funds (currently estimated at 12.4%). Cash is first applied to the payoff of the underlying principal and interest on debt used to purchase the portfolios. The projected cash flows also take into consideration the receipt
of other income (such as late fees or residual gains), the payment of general and administrative expenses of the funds and distributions to limited partners. The remaining excess cash is then available to repay the amounts due to the Company.
Investment securities − equity securities. The Company uses quoted market prices (Level 1) to value its investment in TBBK and RREDX common stock.
Investment securities − trading securities. The Company uses third-party dealer quotes or bids to estimate the fair value of its trading securities (Level 3).
Investment
securities − CLO securities. The fair value of CLO securities is based on internally generated expected cash flow models that require significant management judgments and estimates due to the lack of market activity and unobservable pricing inputs. Unobservable inputs into these models include default, recovery, discount and deferral rates, prepayment speeds and reinvestment interest spreads (Level 3).
The significant unobservable inputs used in the fair value measurement of the Company's CLO securities are prepayment rates, probability of default, loss severity rate, reinvestment price on underlying collateral and the discount rate. Significant increases (decreases) in the default or discount rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases
(decreases) in the recovery rate, prepayment rate or reinvestment price in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the discount rate and a directionally opposite change in the assumption used for prepayment rates, recovery rates and reinvestment prices on underlying collateral.
Investment in real estate. During 2012, the Company received an offer for the sale of one of its assets included in Investments in Real Estate. The offer was below the book value of the asset and, accordingly, the Company recorded an impairment charge during 2012 (Level 2). The
property was sold in November 2012.
Investment in real estate - office building. The Company's investment in an office building, located in Philadelphia, Pennsylvania was determined to be impaired during 2012. The Company determined the fair value of the building using an estimate of the loan to value based on stabilized projected cash flows (Level 3).
Investment in CVC Credit Partners. The Company utilized a third-party valuation firm to value its investment in CVC Credit Partners and its preferred interest as of its formation on April 17,
2012. The joint venture investment was valued at $28.6 million based on the weighted average of several calculations, including implied transaction, dividend discount, discounted cash flow, and guideline public company models. These valuation models required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which took into consideration the current economic environment and credit market conditions (Level 3).
Investment in Apidos-CVC preferred interest and contractual commitment. The Company's preferred interest in Apidos-CVC, initially valued at $6.8 million, as well as the corresponding contractual commitment valued at $589,000,
were both based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).
Investment in LEAF. The Company's investment in LEAF, also based on a third-party valuation, was valued at $1.7 million. The valuation utilized several approaches, including discounted expected cash flows, market approach and comparable sales transactions. These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions (Level 3).
As of December 31, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands):
Level
1
Level 2
Level 3
Total
Asset:
Restated
Investment
securities
$
209
$
—
$
10,367
$
10,576
As
of September 30, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands):
Level 1
Level
2
Level 3
Total
Assets:
Restated
Investment securities
$
195
$
—
$
6,835
$
7,030
The
following table presents additional information about assets which were measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value during the three months ended December 31, 2012 (in thousands):
Investment Securities
Balance, beginning of period
$
6,835
Purchases
4,608
Income
accreted
223
Payments and distributions received
(613
)
Sales
(1,160
)
Gain on sales of trading securities
307
Unrealized holding
gain on trading securities
164
Change in unrealized gains – included in accumulated other comprehensive loss
3
Balance, end of period
$
10,367
The following table presents the
Company's quantitative inputs and assumptions used in determining the fair value of items categorized in Level 3 (in thousands, except percentages):
Investment securities - trading securities. Since the Company
uses third-party dealer marks to estimate the fair value of its nonmarketable trading securities owned, the valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2012 have not been provided.
The Company recognized the following changes in carrying value of the assets measured at fair value on a non-recurring basis, as follows (in thousands):
Level 1
Level
2
Level 3
Total
Three Months Ended December 31 , 2012:
Assets:
Receivables
from managed entities – commercial finance, real estate and financial fund management
Receivables
from managed entities – commercial finance and real estate
$
—
$
—
$
16,752
$
16,752
Investment
in real estate
—
727
—
727
Investment in real estate - office building
—
—
906
906
Investment
in CVC Credit Partners
—
—
28,600
28,600
Investment in Apidos-CVC preferred interest
—
—
6,792
6,792
Investment
in LEAF
—
—
1,749
1,749
Total
$
—
$
727
$
54,799
$
55,526
Liability:
Apidos
contractual commitment
$
—
$
—
$
589
$
589
The
fair value of financial instruments required to be disclosed at fair value, excluding instruments valued on a recurring basis, is as follows (in thousands):
Receivables
from managed entities and related parties, net
$
30,618
$
30,618
$
34,418
$
34,418
$
30,618
$
30,618
$
34,418
$
34,418
Borrowings:
Corporate
secured credit facilities and note
$
—
$
—
$
—
$
—
Real
estate debt
10,473
11,398
10,531
11,554
Senior Notes
10,000
11,728
10,000
11,364
Other
debt
567
567
812
812
$
21,040
$
23,693
$
21,343
$
23,730
For
cash, receivables and payables, the carrying amounts approximate fair value because of the short-term maturity of these instruments.
The Company estimated the fair value of the real estate debt using current interest rates for similar loans. The Company estimated the fair value of the Senior Notes by applying the percentage appreciation in a high-yield fund with approximately similar quality and risk attributed to the Senior Notes. The carrying value of the Company's other debt was estimated using current interest rates for similar loans at December 31, 2012 and September
30, 2012.
LEAF
lease valuation commitment. In conjunction with the third-party equity investment in LEAF, the Company and RSO have undertaken a contingent obligation with respect to the equity value of LEAF Receivables Funding 3, LLC (“LRF 3”), the entity that holds the portfolio of equipment, equipment leases and notes that RSO contributed to LEAF. To the extent that the value of the equity on the balance sheet of LRF 3 is less than $18.7 million (the value of the equity of LRF3 on the date it was contributed to LEAF), as of the final testing date within 90 days after December 31, 2013, the Company
and RSO have agreed to be jointly and severally obligated to contribute cash to LEAF to the extent of any shortfall. The LRF 3 equity as of December 31, 2012 was in excess of this commitment and, therefore, the Company was not required to record a liability. Subsequently, as of September 30, 2013, the equity was also sufficient such that no liability was recorded with respect to this obligation.
Limited loan guarantee. The Company and two of its commercial finance investment partnerships, Lease Equity Appreciation Fund I, L.P. (“LEAF I”)
and Lease Equity Appreciation Fund II, L.P. (“LEAF II”), have provided a limited guarantee to a lender to the LEAF partnerships in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. The loans mature at the earlier of (a) the maturity date (March 20, 2014 for LEAF I and December 21, 2013 for LEAF II), or (b) the date on which an event of default under the loan agreement occurs. The maximum guarantee provided by the Company is up to $7.3 million ($2.3 million for LEAF I and $5.0 million for LEAF II). If
the Company were required to make any such payments under the guarantee in the future, it would have the option to either step in as the lender or otherwise make a capital contribution to the LEAF partnerships for the amount of the required guarantee payment. Under certain circumstances, the lender will also discount its loans by approximately $250,000 for LEAF I and $347,500 for LEAF II. Management has determined that, based on projected cash flows from the underlying lease and loan portfolios collateralizing the loans, there should be sufficient funds to repay the LEAF partnerships' outstanding loan balances and, accordingly, the Company was not required to record a liability with respect to the guarantee.
Broker-Dealer
Capital Requirement. Resource Securities serves as a dealer-manager for the sale of securities of direct participation investment programs, both public and private, sponsored by subsidiaries of the Company who also serve as general partners and/or managers of these programs. Additionally, Resource Securities serves as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies for the Company and for RSO. As a broker-dealer, Resource Securities is required to maintain minimum net capital, as defined in regulations under the Securities Exchange Act of 1934, as amended, which was $113,000
and $100,000 as of December 31, 2012 and September 30, 2012, respectively. As of December 31, 2012 and September 30, 2012, Resource Securities net capital was $258,000 and $447,000, respectively, which exceeded the minimum requirements by $145,000 and $347,000, respectively.
Clawback liability. On
November 1, 2009 and January 28, 2010, the general partners of two of the Trapeza entities, which are owned equally by the Company and its co-managing partner, repurchased substantially all of the remaining limited partnership interests in the two Trapeza entities with potential clawback liabilities for $4.4 million. The Company contributed $2.2 million (its 50% share). The clawback liability was $1.2 million at December 31,
2012 and September 30, 2012. Subsequently in 2013, the general partner began the process of dissolving the two partnerships and settled the clawback liability. The Company’s proportionate share of these payments was $1.1 million.
Legal proceedings. In September 2011, First Community Bank (“First Community”) filed a complaint against First Tennessee Bank and approximately thirty other defendants consisting of investment banks, rating agencies, collateral managers, including Trapeza Capital Management, LLC (“TCM”), and issuers of CDOs, including Trapeza CDO XIII, Ltd. and Trapeza CDO XIII, Inc. TCM
and the Trapeza CDO issuers are collectively referred to as Trapeza. The complaint includes causes of action against TCM for fraud, negligent misrepresentation, violation of the Tennessee Securities Act of 1980 and unjust enrichment. First Community alleges, among other things, that it invested in certain CDOs, that the defendant rating agencies assigned inflated investment grade ratings to the CDOs, and that the defendant investment banks, collateral managers and issuers (including Trapeza) fraudulently and/or negligently made “materially false and misleading representations and omissions” that First Community relied on in investing in the CDOs, including both written representations in offering materials and unspecified oral representations. Specifically, with respect to Trapeza, First Community alleges that it purchased $20 million of notes in the D tranche of the Trapeza CDO XIII transaction from J.P. Morgan. The
Court dismissed this matter in June 2012. First Community appealed and the appellate court affirmed the dismissal as against Trapeza in August 2013.
The Company is also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on the Company's consolidated financial condition or operations.
Real estate commitments. As a specialized asset manager, the Company sponsors and manages investment funds in which it may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT, the Company is committed to invest 1%
of the equity raised to a maximum amount of $2.5 million. This commitment was reduced to $708,000 as of December 31, 2012 as a result of funds already invested to date and was fully funded by September 30, 2013.
In July 2011, the Company entered into an agreement with one of the tenant-in-common ("TIC") real estate programs it sponsored and manages. This agreement requires the Company to fund up to $1.9 million for capital improvements
for the TIC property over the next two years. The Company has advanced funds totaling $1.7 million as of December 31, 2012, which is included in Investments in real estate on the consolidated balance sheets.
The liabilities for the real estate commitments will be recorded in the future as amounts become due and payable.
General corporate commitments. The Company is also party to employment agreements with certain executives that provide for compensation and other benefits, including severance
payments under specified circumstances.
As of December 31, 2012, except for the clawback liability recorded for the two Trapeza entities and executive compensation, the Company did not believe it was probable that any payments would be required under any of its commitments and contingencies and, accordingly, no liabilities for these obligations were recorded in the consolidated financial statements.
NOTE 18 - OPERATING SEGMENTS
The Company manages
its operations and makes business decisions based on three reportable operating segments, Real Estate, Financial Fund Management and Commercial Finance, and one segment, RSO, which is a consolidated VIE. Certain other activities are reported in the “All Other” category and "Eliminations" in the tables in order for the information presented about the Company's operating segments to agree to the consolidated balance sheets and statements of operations. Summarized operating segment data are as follows (in thousands):
Includes
general corporate expenses and assets not allocable to any particular segment.
(2)
In viewing its segment operations, management includes the pretax (income) loss attributable to noncontrolling interests. However, these interests are excluded in (loss) income from operations as computed in accordance with U.S. GAAP and, accordingly, should be deducted to compute (loss) income from operations as reflected in the Company’s consolidated statements of operations.
In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. The Company has variable interests in VIEs through its management contracts
and investments in various securitization entities, including CDO issuers. Since the Company serves as the asset manager for the investment entities it sponsored and manages, the Company is generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by the Company, the Company will perform an additional qualitative analysis to determine if its interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant
to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, the Company compares the benefits it would receive (in the optimistic scenario) or the losses it would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by the Company were significant as compared to total benefits and losses absorbed by all variable interest holders, then the Company would conclude it is the primary beneficiary.
Consolidated VIE - RSO
The
Company determined that it was the primary beneficiary of RSO, as it has the power to direct the activities of RSO that most significantly impact RSO’s economic performance, and the obligation to absorb losses/right to receive benefits from RSO that could potentially be significant to RSO. As part of its analysis, the Company evaluated its duties under the terms of the management agreement and the voting rights provided to RSO’s shareholders which include the right to elect the Company’s board of directors and the ability to terminate the management agreement. The Company concluded that the fee to be paid to the Company as the manager
in the event of a termination and the Company’s role in managing the operations of RSO resulted in the Company having the power to direct the activities of RSO, as defined in ASC Topic 810. Additionally, the Company prepared a quantitative analysis to measure the management/incentive fees and the Company’s equity ownership position in RSO relative to the anticipated economic performance of RSO. The Company determined its benefits could be significant to RSO and, therefore, concluded that the
Company is the primary beneficiary and should consolidate RSO. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse against the assets of the Company.
1 -Line items included in the RSO cash flow - operating activities.
A.
Summary
of Significant Accounting Policies - RSO
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates affecting the accompanying consolidated financial statements include the net realizable and fair values of RSO's investments and derivatives, the estimated life used to calculate depreciation, amortization, and accretion of premiums and discounts, respectively, on investments and provisions for loan losses.
Investment Securities
RSO
classifies its investment portfolio as trading or available-for-sale. RSO, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.RSO’s investment securities, trading are reported at fair value. To determine fair value, RSO uses dealer quotes or bids which are validated using a third-party valuation firm utilizing appropriate prepayment, default, and recovery rates. Any changes in fair value are recorded in RSO’s results of operations as net realized and unrealized gain (loss) on investment securities, trading.
RSO’s investment securities available-for-sale are reported at fair value. To determine fair value, RSO uses a dealer quote, which typically will be the dealer who sold RSO the security. RSO has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities,
if any, or internal valuation models. These quotes are non-binding. Based on how dealers develop their quotes, market liquidity and levels of trading, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. RSO evaluates the reasonableness of the quotes it receives by applying its own valuation models. If there is a material difference between a quote RSO receives and the value indicated by its valuation models, RSO will evaluate the difference. As part of that evaluation, RSO will discuss the difference with the dealer, who may revise its quote based upon these discussions. Alternatively, RSO may revise its valuation models.
On a quarterly basis, RSO evaluates its available-for-sale investments for other-than-temporary impairment. An available-for-sale investment is impaired when its fair value has declined below its amortized cost basis. An impairment is considered other-than-temporary
when the amortized cost basis of the investment or some portion thereof will not be recovered. In addition, RSO’s intent to sell as well as the likelihood that RSO will be required to sell the security before the recovery of the amortized cost basis is considered. Where credit quality is believed to be the cause of the other-than-temporary impairment, that component of the impairment is recognized as an impairment loss in the statement of operations. Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
Investment security transactions are recorded on the trade date. Realized gains and losses on investment securities are determined on the specific identification method.
Investment Interest Income Recognition
Interest income on RSO’s mortgage-backed
and other asset-backed securities is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets. Premiums and discounts are amortized or accreted into interest income over the lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments. For an investment purchased at par, the effective yield is the contractual interest rate on the investment. If the investment is purchased at a discount or at a premium, the effective yield 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 yield 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 prepayment estimates that RSO uses directly impact the estimated remaining lives of its investments. Actual prepayment estimates are reviewed as of each quarter end or more frequently if RSO becomes aware of any material information that would lead it to believe that an adjustment is necessary. If prepayment estimates are incorrect, the amortization or accretion of premiums and discounts may have to be adjusted, which would have an impact on future income.
RSO acquires loans through direct origination, through the acquisition of participations in commercial real estate loans and corporate leveraged loans in the secondary market and through syndications of newly originated loans. Loans are held for investment; therefore, RSO initially records them at their acquisition price, and subsequently, accounts for them based on their outstanding principal plus or minus unamortized premiums or discounts. RSO may sell a loan held for investment where the credit fundamentals underlying a particular loan have changed in such a manner that RSO's expected
return on investment may decrease. Once the determination has been made by RSO that it no longer will hold the loan for investment, RSO identifies these loans as “Loans held for sale” and will account for them at the lower of amortized cost or fair value.
Loan Interest Income Recognition
Interest income on loans includes interest at stated rates adjusted for amortization or accretion of premiums and discounts. Premiums and discounts are amortized or accreted into income using the effective yield method. If a loan with a premium or discount is prepaid, RSO immediately recognizes the unamortized portion as a decrease or increase to interest income. In addition, RSO defers loan origination fees and loan origination costs and recognizes them over the life of the related loan against interest income using the effective yield method.
Allowance
for Loan Loss
RSO maintains an allowance for loan loss. Loans held for investment are first individually evaluated for impairment so specific reserves can be applied. Loans for which a specific reserve is not applicable are then evaluated for impairment as a homogeneous pool of loans with substantially similar characteristics so that a general reserve can be established, if needed. The reviews are performed at least quarterly.
RSO considers a loan to be impaired if one of two conditions exists. The first condition is if, based on current information and events, management believes it is probable that RSO will be unable to collect all amounts due according to the contractual terms of the loan agreement. The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty. These
TDRs may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and / or guarantees made by the borrowers.
When a loan is impaired under either of these two conditions, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value. Fair value may be determined based on the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs. When a loan, or a portion thereof, is considered uncollectible and pursuit of collection is not warranted, RSO will record a charge-off or write-down of the loan against the allowance for loan losses.
An impaired loan may remain on accrual status during the period in which RSO
is pursuing repayment of the loan; however, the loan would be placed on non-accrual status at such time as (i) RSO's management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) RSO's management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the loan’s underlying collateral approximates RSO’s carrying value for such loan. While on non-accrual status, RSO recognizes interest income only when an actual payment is received.
Investments in Real Estate
Investments in real estate are carried net of accumulated depreciation. Costs directly related to the acquisition are expensed as incurred. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Costs related
to the improvement of the real property are capitalized and depreciated over their useful life.
Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” RSO allocates the purchase price of its investments in real estate to land, building, site improvements, the value of in-place leases and the value of above or below market leases. The value allocated to above or below market leases is amortized over the remaining lease term as an adjustment to rental income. RSO amortizes the value allocated to in-place leases over the weighted average remaining lease term to depreciation and amortization expense. RSO depreciates real property using the straight-line method over the estimated useful lives of the assets as follows:
Lesser of the remaining life of building or useful life
Long-Lived and Intangible Assets
Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. If impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.
Other than
an impairment charge of $1.7 million RSO took on conversion of a loan investment into equity of a real estate property during the years ended 2011, no impairment charges were recorded on RSO’s investment in real estate or intangible assets during the year ended December 31, 2012.
Comprehensive Income/(Loss)
Comprehensive income/(loss) for RSO includes net income and the change in net unrealized gains/(losses) on available-for-sale securities and derivative instruments used to hedge exposure to interest rate fluctuations and protect against declines in the market value of assets resulting from general market trends.
Income Taxes
RSO operates in such a manner
as to qualify as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"); therefore, applicable REIT taxable income is included in the taxable income of its shareholders, to the extent distributed by RSO. To maintain REIT status for federal income tax purposes, RSO is generally required to distribute at least 90% of its REIT taxable income to its shareholders as well as comply with certain other qualification requirements as defined under the Code. As a REIT, RSO is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year.
Taxable income, from non-REIT activities managed through RSO's taxable REIT subsidiaries,
is subject to federal, state and local income taxes. RSO's taxable REIT subsidiaries' income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and tax basis of assets and liabilities.
Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CDO VIII, and Whitney CLO I, RSO's foreign TRSs, are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands, and are generally exempt from federal and state income at the corporate level because their activities in the United States are limited to trading in stock and securities for their own account. Therefore, despite their status as taxable REIT subsidiaries,
they generally will not be subject to corporate tax on their earnings and no provision for income taxes is required; however, because they are “controlled foreign corporations,” RSO will generally be required to include Apidos CDO I's, Apidos CDO III's, Apidos Cinco CDO's, Apidos CDO VIII's, and Whitney CLO I's current taxable income in its calculation of REIT taxable income.
On October 27, 2011 RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. On January 24, 2012, RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, for the period January 1, 2012 through
January 23, 2012, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. For the period January 24, 2012 and ending December 31, 2012 the earnings from Apidos CDO I are included in RSO's calculation of REIT taxable income.
On December 11, 2012, RSO reorganized the ownership structure of Apidos CDO III. As a result, for the period from January 24, 2012 through December 10, 2012 the earnings from Apidos CDO III are included in RSO's calculation of REIT taxable income. Also as a result of the reorganization on December
11, 2012, for the period December 11, 2012 and ending December 31, 2012, the earnings from Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax.
On November 12, 2012, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I. As a result, for the period November 12, 2012 and ending December 31, 2012, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from November 12, 2012 through December 31, 2012 has been recorded.
Linked Transactions
If RSO finances the purchase of securities
with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria and RSO will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on RSO's consolidated balance sheet in the line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain and net interest income on linked transactions, net on RSO's consolidated statement of operations.
B.
Variable
Interest Entities - RSO
RSO has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes) and its CDOs in order to determine if they qualify as VIEs. RSO monitors these investments and, to the extent it has determined that it owns a material investment in the current controlling class of securities of a particular entity, analyzes the entity for potential consolidation. RSO will continually analyze investments and liabilities, including when there is a reconsideration event, to determine whether such investments or liabilities are VIEs and whether such VIE should be consolidated. This analysis requires considerable judgment in determining the primary beneficiary of a VIE and could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation
of an entity that would have otherwise been consolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on the analysis by RSO's management, RSO is the primary beneficiary of seven VIEs: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1 and Whitney CLO I. In performing the primary beneficiary analysis for six of these VIEs (other than Whitney CLO I, which is discussed below), it was determined that the persons that have the power to direct the activities that are most significant to each of these VIEs and RSO who has the right to receive benefits and the obligation to absorb losses that could potentially be significant to these VIEs, are a related party group. It was then determined that RSO was the party within that group that is
more closely associated to each such VIE because of its preferred equity (and in some cases debt) interest in them.
These CDO and CLO entities were formed on behalf of RSO to invest in real estate-related securities, CMBS, property available-for-sale, bank loans and asset-backed securities and were financed by the issuance of debt securities. CVC Credit Partners manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of CDO and CLO bonds, RSO seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception.
Whitney CLO I, the seventh entity, is one in which RSO acquired the rights to manage the assets held by the entity as collateral for its CLOs in February 2011. For a discussion on
the primary beneficiary analysis for Whitney, see “- Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest) - Resource Capital Asset Management,” below. For a discussion of RSO’s CDOs and CLOs, see “Borrowings” below.
For CLOs in which RSO does not own 100% of the subordinated notes, RSO imputes an interest rate using expected cash flows over the life of the CLO and records the third party's share of the cash flows as interest expense on the RSO consolidated statements of income.
RSO has exposure to CDO and CLO losses to the extent of its subordinated debt and preferred equity interests in them. RSO is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the CDO or CLO, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these CDOs and CLOs have been eliminated, and RSO’s consolidated balance sheet reflects both the assets held and debt issued by the CDOs and CLOs to third parties and any accrued expense to third parties.
RSO's operating results and cash flows include the gross amounts related to CDO and CLO assets and liabilities as opposed to RSO's net economic interests in the CDO and CLO entities. Assets and liabilities related to the CDOs and CLOs are disclosed in the aggregate on RSO's consolidated balance sheets.
The creditors of RSO’s seven consolidated VIEs have no recourse to the general credit of RSO. However, in its capacity as manager, RSO has voluntarily supported two credits in one of its commercial real estate CDOs as the credits went through a restructuring in order to maximize their future cash flows. For the three months ended December 31, 2012 and 2011, RSO has provided financial support of $0
and $210,000, respectively. RSO has provided no other financial support to any other of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by RSO. There are no explicit arrangements or implicit variable interests that obligate RSO to provide financial support to any of its consolidated VIEs, although RSO may choose to do so in the future.
The following table shows the classification and carrying value of assets and liabilities of consolidated VIEs as of December 31, 2012 (in thousands):
Apidos
I
Apidos
III
Apidos
Cinco
Apidos
VIII
Whitney CLO I
RREF
2006
RREF
2007
Total
ASSETS
Restricted
cash (1)
$
30,799
$
12,956
$
22,669
$
11,027
$
11,800
$
20
$
837
$
90,108
Investment
securities
available-for-sale, pledged as
collateral, at fair value
8,333
6,902
11,316
501
33,700
10,796
64,018
135,566
Loans,
pledged as collateral
177,385
209,561
306,196
329,467
146,106
226,716
283,288
1,678,719
Loans
held for sale
2,671
2,770
3,657
5,796
—
—
—
14,894
Interest
receivable
(12
)
720
1,050
737
404
1,153
1,934
5,986
Prepaid
assets
50
25
30
69
18
78
58
328
Principal
receivable
—
—
—
—
—
6,320
19,250
25,570
Other
assets
—
—
—
—
—
63
270
333
Total
assets (2)
$
219,226
$
232,934
$
344,918
$
347,597
$
192,028
$
245,146
$
369,655
$
1,951,504
LIABILITIES
Borrowings
$
202,968
$
221,304
$
320,550
$
320,998
$
177,415
$
145,664
$
225,983
$
1,614,882
Accrued
interest expense
380
94
343
1,427
266
50
106
2,666
Derivatives,
at fair value
—
—
—
—
—
1,939
12,139
14,078
Accounts
payable and
other liabilities
142
16
30
395
92
22
1
698
Total
liabilities
$
203,490
$
221,414
$
320,923
$
322,820
$
177,773
$
147,675
$
238,229
$
1,632,324
(1)
Includes
$27.5 million available for reinvestment in certain of the CDOs.
(2)
Assets of each of the consolidated VIEs may only be used to settle the obligations of each respective VIE.
Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest)
Based on the analysis by RSO's management, RSO is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE
or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in RSO’s financial statements as of December 31, 2012. RSO’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Risk Exposure,” column in the table below.
In the November 16, 2011 formation of LEAF, in exchange for its prior interests in its lease related investments, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate
the fair value of its investment in LEAF as a result of the transaction. These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions. RSO’s investment in LEAF was valued at $33.1 million and $34.0 million as of December 31, 2012 and September 30, 2012, respectively, based on a third-party valuation.
RSO determined that it is not the primary beneficiary of LEAF because it does not participate in any management or portfolio decisions, holds only two of six
board positions, and only controls 26.7% of the voting rights in the entity. Furthermore, a third-party investor holds consent rights with respect to significant LEAF actions, including incurrence of indebtedness, consummation of a sale of the entity, liquidation or initiating a public offering.
Unsecured Junior Subordinated Debentures
RSO has a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), valued at $1.5 million in the aggregate (or 3% of each trust). RCT I and RCT II were formed for the purposes of providing debt financing to RSO, as described below. RSO completed a qualitative analysis to determine whether or not it is the primary
beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest and protection of collateral through servicing rights. Accordingly, neither trust is consolidated into RSO’s consolidated financial statements.
RSO records its investments in RCT I and RCT II’s common shares as investments in unconsolidated trusts using the cost method and records dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which RSO is the obligor in the amount of $25.8 million for RCT I and $25.8 million for RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II. RSO will continuously
reassess whether it should be deemed to be the primary beneficiary of the joint venture.
Resource Capital Asset Management CDOs
In February 2011, RSO purchased a company that manages $1.9 billion of bank loan assets through five CLOs. As a result, RSO is entitled to collect senior, subordinated and incentive management fees from these CLOs. The purchase price of $22.5 million resulted in an intangible asset that was allocated to each of the five CLOs and is amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $13.1 million at December 31, 2012. RSO recognized
fee income of $1.9 million and $1.5 million for the three months ended December 31, 2012 and 2011, respectively. With respect to four of these CLOs, RSO determined that it does not hold a controlling interest and, therefore, is not the primary beneficiary. With respect to the fifth CLO, Whitney CLO I, in October 2012, RSO purchased 66.6% of its preferred equity, which was determined to be a reconsideration event. Based upon that purchase, RSO determined that it does have an obligation to absorb losses and/or the right to receive benefits that could potentially be significant to Whitney CLO I and that a related party has the power to direct the activities that are most significant to the VIE.
As a result, together RSO has both the power to direct and the right to receive benefits and the obligation to absorb losses. It was then determined that, as between RSO and the related party, RSO was the party within that group that is more closely associated with Whitney CLO I because of its preferred equity interest in Whitney CLO I. RSO, therefore, consolidated Whitney CLO I as discussed above in “- Consolidated VIEs (RSO is the primary beneficiary)”.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (a VIE that holds interests in a real estate joint venture) from the Company. This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value. RSO acquired the membership
interests for $2.1 million. The joint venture agreement requires RSO to contribute 3%to 5% (depending on the terms of the agreement pursuant to which the particular asset is being acquired) of the total funding required for each asset acquisition as needed up to a specified amount. RSO provided funding of $126,000 and $231,000 for these investments for the three months ended December 31, 2012 and 2011, respectively. Resource Real Estate Management, LLC (“RREM”), an indirect subsidiary of the Company, acts as asset manager of the venture and receives a monthly
asset management fee. RSO’s investment in RRE VIP Borrower, LLC at December 31, 2012 and September 30, 2012 was $2.3 million and $3.0 million, respectively. Using the equity method of accounting, RSO recognized equity in earnings related to this investment of $820,000 and $(148,000) for the three months ended December 31, 2012 and 2011, respectively.
On June 19, 2012, RSO entered into a second joint venture with Värde Investment Partners, LP, acting as lender, to purchase two
condominium developments. RSO purchased a 7.5% equity interest in the venture. RSO may be subject to a capital call based on its pro rata share of equity interest in the venture up to the earlier of the end of the investment period, ending in May 2015, or the date the aggregate of all capital contributions exceeds $500 million. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RSO’s investment in Värde Investment Partners, LP at December 31, 2012 was $526,000.
Using the equity method of accounting, RSO recognized equity in losses related to this investment of $135,000 for the three months ended December 31, 2012.
RSO has determined that it does not have the power to direct the activities that most significantly impact the economic performance of each of these ventures, which include asset underwriting and acquisition, lease review and approval, and loan asset servicing, and, therefore, RSO is not the primary beneficiary of either.
The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of December 31, 2012 (in thousands):
Unconsolidated
Variable Interest Entities
LEAF Commercial Capital, Inc.
Unsecured Junior Subordinated Debentures
Resource Capital Asset Management CDOs
RRE VIP Borrower, LLC
Värde
Investment Partners, LP
Total
Maximum Exposure to Loss (1)
Investment
in unconsolidated entities
$
33,071
$
1,548
$
—
$
2,264
$
526
$
37,409
$
37,409
Intangible
assets
—
—
13,105
—
—
13,105
$
13,105
Total
assets
33,071
1,548
13,105
2,264
526
50,514
Borrowings
—
50,814
—
—
—
50,814
N/A
Total
liabilities
—
50,814
—
—
—
50,814
Net
asset (liability)
$
33,071
$
(49,266
)
$
13,105
$
2,264
$
526
$
(300
)
(1)
RSO's
maximum exposure to loss at December 31, 2012 does not exceed the carrying amount of its investment, subject to the LEAF Receivables Funding 3's contingent obligation as described above.
Other than the contingent liability arrangement described above in connection with LEAF and the commitments to fund its real estate joint ventures, there were no explicit arrangements or implicit variable interests that could require RSO to provide financial support to any of its unconsolidated VIEs.
Non-cash investing activities include the following:
Acquisition of real estate investments
$
(21,661
)
$
(33,073
)
Conversion
of loans to investment in real estate
$
21,661
$
34,550
Net purchase of loans on warehouse line
$
—
$
(52,735
)
Acquisition
of loans, pledged as collateral
$
(230,152
)
$
—
Non-cash financing activities include the following:
Distributions
on common stock declared but not paid
$
21,024
$
19,979
Distribution on preferred stock declared but not paid
$
1,244
$
—
Issuance
of restricted stock
$
2,189
$
1,203
Subscription receivable
$
1,248
$
—
Assumption
of collateralized debt obligations
$
206,408
$
—
Acquisition of loans on warehouse line
$
—
$
52,735
D.
Investment
securities - Trading - RSO
The following table summarizes RSO's structured notes and residential mortgage-backed securities (“RMBS”) which are classified as investment securities, trading and carried at fair value (in thousands):
RSO
purchased two securities and sold 15 securities during the year ended December 31, 2012, for a net gain of $5.5 million. RSO also had one position liquidate during the year ended December 31, 2012 which resulted in a gain of $224,000. RSO held 13 investment securities, trading as of December 31, 2012. RSO purchased 27 securities and sold 11 securities during the year ended December 31, 2011, for a realized
gain of $8.0 million. RSO held 13 investments securities, trading as of September 30, 2012.
RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. CMBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.
The following table summarizes RSO's investment securities, including those pledged as collateral and classified as available-for-sale, which are carried at fair value (in thousands):
As
of December 31, 2012 and September 30, 2012, $195.2 million and $158.1 million, respectively, of securities were pledged as collateral security under related financings.
The following table summarizes the estimated maturities of RSO’s CMBS, ABS and corporate bonds according to their estimated weighted average life classifications (in thousands, except percentages):
RSO
expects that the maturity date of these CMBS will either be extended or the CMBS will be paid in full.
The contractual maturities of the CMBS investment securities available-for-sale range from November 2013 to April 2027. The contractual maturities of the ABS investment securities available-for-sale range from October 2015 to September 2022. The contractual maturities of the corporate bond investment securities available-for-sale range from May 2014 to February 2022.
The following table shows the fair value and gross unrealized losses, aggregated by investment category and length of time, of those individual investment securities available-for-sale that have been in a continuous unrealized loss position during the periods specified (in thousands):
RSO
held 19 and 27 CMBS investment securities available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and September 30, 2012, respectively. RSO held nine and 11 ABS investment securities available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and September 30, 2012, respectively. RSO had no corporate bond investment securities
available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and September 30, 2012. The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
The determination of other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. RSO reviews its portfolios and makes other-than-temporary impairment determinations at least quarterly. RSO considers the following factors when determining if there is an other-than-temporary impairment on a security:
•
the
length of time the market value has been less than amortized cost;
•
the severity of the impairment;
•
the expected loss of the security as generated by a third-party valuation model;
•
original and current credit ratings from the rating agencies;
•
underlying
credit fundamentals of the collateral backing the securities;
•
whether, based upon RSO’s intent, it is more likely than not that RSO will sell the security before the recovery of the amortized cost basis; and
•
third-party support for default, for recovery, prepayment speed and reinvestment price assumptions.
At December 31, 2012 and September 30,
2012, RSO held $170.8 million and $176.9 million, respectively, (net of net unrealized losses of $12.0 million and $15.4 million, respectively), of CMBS recorded at fair value. To determine fair value, RSO uses dealer quotes which are either provided by RSO's trade or financing counterparties. As of December 31, 2012 and September 30, 2012, $170.8 million and $176.9 million, respectively, of investment securities available-for-sale were valued using dealer quotes and $0 and $0,
respectively, were valued using an internal valuation model.
At December 31, 2012 and September 30, 2012, RSO held $27.1 million and $27.4 million (net of net unrealized losses of $574,000 and $3.3 million), respectively, of ABS recorded at fair value. To determine their fair value, RSO uses dealer quotes.
At December 31, 2012, RSO held $33.7 million (net of net unrealized losses of $67,000), of corporate bonds recorded
at fair value. RSO held no corporate bonds as of December 31, 2011. To determine their fair value, RSO uses dealer quotes.
RSO’s securities classified
as available-for-sale have increased in fair value on a net basis as of December 31, 2012 as compared to December 31, 2011, primarily due to improving dealer marks and new purchases in 2012. RSO performs an on-going review of third-party reports and updated financial data on the underlying properties in order to analyze current and projected security performance. Rating agency downgrades are considered with respect to RSO’s income approach when determining other-than-than temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment.
RSO did not recognize any other-than-temporary impairment during the three months ended December
31, 2012 or 2011.
During the three months ended December 31, 2012, RSO sold five CMBS positions with a total par of $24.0 million, and recognized a net gain of $460,000. RSO did not sell any CMBS positions during the three months ended December 31, 2011.
During the three months ended December 31, 2012, RSO sold no ABS positions. During the three months ended December 31, 2011, RSO sold six ABS positions with a total par of $8.1
million and recognized a loss of $2.4 million.
During the three months ended December 31, 2012, RSO sold one corporate bond position with a par value of $2.25 million , and recognized a gain of $27,000. During the three months ended December 31, 2012, the company had two corporate bond positions redeemed with a total par of $2.1 million and recognized a gain of $13,000.
Changes
in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on CMBS in RSO’s investment portfolio. At December 31, 2012 and September 30, 2012, the aggregate discount due to interest rate changes exceeded the aggregate premium on RSO’s CMBS by approximately $8.0 million and $12.2 million, respectively. At December 31, 2012 and September 30, 2012, the aggregate discount on RSO’s ABS portfolio was $3.1 million and $3.3 million respectively. There
were no premiums on RSO’s ABS investment portfolio at December 31, 2012. At December 31, 2012, the aggregate premium on RSO’s corporate bond portfolio was $604,000.
No
impairment charges were recorded on RSO's investment in real estate during the three months ended December 31, 2012 and 2011.
RSO has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed on the new investment in real estate acquired during the three months ended December 31, 2012. Accordingly, RSO's preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as RSO completes the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in the RSO consolidated financial statements retrospectively.
During the third quarter of 2011, RSO accounted for the acquisition
of The Heights (formerly Whispertree Apartments) as a business combination in accordance with FASB ASC Topic 805. In the fourth quarter of 2011, RSO obtained the final appraisal of the property. Based on the final appraisal, RSO adjusted the value of the land and the value of the building by $3.9 million, respectively, as of the acquisition date. Accordingly, these adjustments were recognized and are reflected in the RSO consolidated financial statements as of December 31, 2012 and September 30, 2012.
The following unaudited pro forma information, after including the acquisition of real properties, is presented below as if the acquisitions occurred on January 1, 2011. The pro forma results for RSO are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the period presented, nor is it indicative of RSO's future results (in thousands):
These amounts have been calculated after adjusting the results of the acquired properties to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to RSO's investments in real estate had been applied from January 1, 2011.
G.
Loans held for investments - RSO
The
following is a summary of RSO’s loans (in thousands):
Amounts
include deferred amendment fees of $450,000 and $400,000 and deferred upfront fees of $334,000 and $360,000 being amortized over the life of the bank loans as of December 31, 2012 and September 30, 2012, respectively. Amounts include loan origination fees of $1.9 million and $1.6 million and loan extension fees of $214,000 and $98,000 being amortized over the life of the commercial real estate loans as of December 31,
2012 and September 30, 2012, respectively.
At December 31, 2012 and September 30, 2012, approximately 47.7% and 45.6%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in commercial real estate loans located in California; approximately 7.9% and 8.9%, respectively,
in Arizona; approximately 11.1% and 8.2%, respectively, in Texas, and approximately 3.3% and 4.6%, respectively, in Florida. At December 31, 2012 and September 30, 2012, approximately 13.2% and 13.9%, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare.
At December 31, 2012, RSO’s bank loan portfolio consisted of $1.2 billion (net of allowance of
$9.7 million) of floating rate loans, which bear interest ranging between the three-month LIBOR plus 1.5% and three month LIBOR plus 8.8% with maturity dates ranging from August, 2013 to January, 2021. At September 30, 2012, RSO’s bank loan portfolio consisted of $1.1 billion (net of allowance of $5.1 million) of floating rate loans, which bear interest ranging between three month LIBOR plus 1.4%, and three month LIBOR
plus 9.0% with maturity dates ranging from December 2012 to March 2020.
The following is a summary of the weighted average life of RSO’s bank loans, at amortized cost (in thousands):
Whole
loans had $8.9 million and $10.1 million in unfunded loan commitments as of December 31, 2012 and September 30, 2012, respectively. These commitments are funded as the borrowers require additional funding and have satisfied the requirements to obtain this additional funding.
(2)
The total does not include an allowance for loan loss of $8.0 million and $7.7 million as of December 31,
2012 and September 30, 2012, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.
(4)
Floating rate whole loans include a $2.0 million portion of a whole loan that has a fixed rate of 15.0% as of December 31, 2012 and September
30, 2012, respectively.
Floating
rate whole loans include a $1.0 million and $800,000 preferred equity tranche of a whole loan that has a fixed rate of 10.0% as of December 31, 2012 and September 30, 2012, respectively.
(6)
Amount includes $34.0 million from two whole loans that are classified as loans held for sale at December 31, 2012.
(7)
Fixed
rate mezzanine loans include a mezzanine loan that was modified into two tranches which both currently pay interest at 0.50%. In addition, the subordinate tranche accrues interest at LIBOR plus 18.50% which is deferred until maturity.
The following is a summary of the weighted average life of RSO’s commercial real estate loans, at amortized cost (in thousands):
Weighted
average life of commercial real estate loans assumes full exercise of extension options available to borrowers.
The following is a summary of the allocation of the allowance for loan loss with respect to RSO’s commercial real estate and bank loans (in thousands, except percentages) by asset class:
As
of December 31, 2012, RSO had recorded an allowance for loan losses of $17.7 million consisting of a $9.7 million allowance on RSO’s bank loan portfolio and a $8.0 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on five bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios.
As of September 30, 2012, RSO had recorded an allowance for loan losses of $12.8 million
consisting of a $5.1 million allowance on RSO’s bank loan portfolio and a $7.7 million allowance on RSO’s commercial real estate portfolio as a result of the impairment of three bank loan and two commercial real estate loans as well as the maintenance of a general reserve with respect to these portfolios.
RSO has an investment in LEAF for which it recorded losses of $1.0 million for the three months ended December 31, 2012, which was recorded in equity in earnings of unconsolidated subsidiaries on the RSO consolidated statements of income. No
such loss was recorded at December 31, 2011. RSO’s investment in LEAF was valued at $33.1 million as of December 31, 2012.
RSO has a 100% interest valued at $1.5 million in the common shares (3% of the total equity) in two trusts, Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”). RSO completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts. RSO does not have the power to direct the activities of either trust, nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be
significant to these trusts. Therefore, RSO is not deemed to be the primary beneficiary of either trust and they are not consolidated into RSO’s consolidated financial statements. RSO records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated trusts using the cost method and records dividend income upon declaration by RCT I and RCT II. For the three months ended December 31, 2012 and 2011, RSO recognized $0.6 million and $.3 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $47,000 and $44,000, respectively, of
amortization of deferred debt issuance costs. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds RSO's interests in a real estate joint venture) from the Company at book value. This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value. RSO acquired the membership interests for $2.1 million. The agreement requires
RSO to contribute 3% to 5% (depending on the asset agreement) of the total funding required for each asset acquisition on a monthly basis. RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1% of the combined investment calculated as of the last calendar day of the month. For the three months ended December 31, 2012 and 2011, RSO paid RREM management fees of $10,000 and $14,000, respectively. For the three months ended December 31, 2012 and 2011, RSO recorded a loss of $248,000
and a gain of $820,000, respectively, which was recorded in equity in earnings of unconsolidated subsidiaries on the RSO consolidated statements of income. The investment balance of $2.3 million and $3.0 million at December 31, 2012 and September 30, 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.
On June 19, 2012, RSO entered into a joint venture with Värde Investment Partners, LP acting as lender, to purchase two
condominium developments. RSO purchased a 7.5% equity interest in the venture. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RREM receives an annual asset management fee equal to 1.0% of outstanding contributions. RSO incurred fees payable to RREM of $29,000 during the three months ended December 31, 2012. For the three months ended December 31, 2011, RSO recorded losses of $135,000,
which were recorded in equity in earnings of unconsolidated subsidiaries on the RSO consolidated statements of income. The investment balance of $526,000 at December 31, 2012 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.
RSO uses a risk grading matrix to assign grades to bank loans. Loans are graded at inception and updates to assigned grades are made continually as new information is received. Loans are graded on a scale of 1-5 with 1 representing
RSO’s highest rating and 5 representing its lowest rating. RSO also designates loans that are sold after the period end at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales. RSO considers metrics such as performance of the underlying company, liquidity, collectability of interest, enterprise valuation, default probability, ratings from rating agencies, and industry dynamics in grading its bank loans.
Credit risk profiles of bank loans were as follows (in thousands):
All
of RSO’s bank loans are performing with the exception of five loans with an amortized cost of $5.4 million as of December 31, 2012, one of which defaulted as of December 31, 2012, three of which defaulted as of March 31, 2012, which includes a loan acquired with deteriorated credit quality as a result of the acquisition of Whitney CLO I, and one of which defaulted on December 31, 2011. As of September 30, 2012, all of RSO's bank loans are performing
with the exception of three loans, two which defaulted on March 31, 2012 and one which defaulted on December 31, 2011 with a carrying amount of $1.5 million.
Commercial Real Estate Loans
RSO uses a risk grading matrix to assign grades to commercial real estate loans. Loans are graded at inception and updates to assigned grades are made continually as new information is received. Loans are graded on a scale of 1-4 with 1 representing RSO’s highest rating and 4 representing its lowest rating. RSO designates loans that are sold after the period end at the lower of their fair market value or cost, net
of any allowances and costs associated with the loan sales. In addition to the underlying performance of the loan collateral, RSO considers metrics such as the strength of underlying sponsorship, payment history, collectability of interest, structural credit enhancements, market trends and loan terms in grading its commercial real estate loans.
Credit risk profiles of commercial real estate loans were as follows (in thousands):
Whole loans include a whole loan with a pre-modification and post-modification outstanding recorded balance of $21.8 million that have
been converted to real-estate owned and will no longer be a TDR after December 31, 2012.
(2)
Loans receivable - related party reflects a loan outstanding to LEAF Fund II, which is a commercial finance partnership that was sponsored and is managed/serviced by the Company. RSO has received paydowns on this loan for the year ended December 31, 2012 and currently has an outstanding balance of $6.8 million as of December 31, 2012.
Intangible assets represent identifiable intangible assets acquired as a result of RSO’s acquisition of Resource Capital Asset Management ("RCAM") in February 2011, its conversion of loans to investments in real estate in June 2011, and the acquisition of real estate in August 2011. RSO amortizes identified intangible assets to expense over their estimated lives or period of benefit using the straight-line method. RSO evaluates intangible assets for impairment
as events and circumstances change. In October 2012, RSO purchased 66.6% of preferred equity of one of the RCAM CDOs. As a result of this transaction and consolidation of Whitney CLO I, RSO wrote-off the unamortized balance of $2.6 million, the intangible asset associated with this CDO, which was recorded in gain/(loss) on consolidation in the consolidated statement of income. Due to a 2013 event whereby a second CLO liquidated, RSO accelerated the amortization of the remaining balance of its intangible asset and recorded a $657,000 charge to depreciation and amortization on the RSO consolidated statements of income. RSO expects to record amortization expense on intangible assets of approximately $1.9 million for the year ended December
31, 2013, and $1.8 million for the years ended December 31, 2014, 2015, 2016 and 2017. The weighted average amortization period was 8.7 years and 9.0 years at December 31, 2012 and September 30, 2012, respectively and the accumulated amortization was $10.5 million and $6.6 million at December 31, 2012 and 2011,
respectively.
For the three months ended December 31, 2012
and 2011, RSO recognized $1.8 million and $1.9 million and of fee income related to the investment in RCAM.
RSO historically has financed the acquisition of its investments, including investment securities, loans and lease receivables, through the use of secured and unsecured borrowings in the form of CDOs, securitized notes, repurchase agreements, secured term facilities, warehouse facilities and trust preferred securities issuances. Certain information with respect to RSO’s borrowings at December 31, 2012 and September 30, 2012 is summarized in the following table (in thousands, except percentages):
Amount represents principal outstanding of $146.4 million and $146.4 million less unamortized issuance costs of $728,000
and $835,000 as of December 31, 2012 and September 30, 2012, respectively. This CDO transaction closed in August 2006.
(2)
Amount represents principal outstanding of $227.4 million and $265.8 million less unamortized issuance costs of $1.4 million and $1.8 million as of December 31, 2012 and September 30,
2012, respectively. This CDO transaction closed in June 2007.
(3)
Amount represents principal outstanding of $203.2 million and $231.8 million less unamortized issuance costs of $274,000 and $439,000 as of December 31, 2012 and September 30, 2012, respectively. This CDO transaction closed in August 2005.
(4)
Amount
represents principal outstanding of $222.0 million and $244.9 million less unamortized issuance costs of $659,000 and $834,000 as of December 31, 2012 and September 30, 2012, respectively. This CDO transaction closed in May 2006.
(5)
Amount represents principal outstanding of $322.0 million and $322.0 million less unamortized
issuance costs of $1.5 million and $1.6 million as of December 31, 2012 and September 30, 2012, respectively. This CDO transaction closed in May 2007.
Amount represents principal outstanding of $317.6 million and $317.6 million, less unamortized issuance costs of $4.7 million and $5.1 million, and less unamortized discounts of $11.9 million and $12.8 million as of December 31, 2012 and September 30, 2012, respectively. This
CDO transaction closed in October 2011.
(7)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(8)
Amount represents principal outstanding of $47.5 million and $47.4 million less unamortized deferred debt costs of $23,000 and $91,000 and accrued interest costs of $37,000
and $31,000 related to CMBS repurchase facilities as of December 31, 2012 and September 30, 2012, respectively, and principal outstanding of $59.1 million and $28.9 million less unamortized deferred debt costs of $348,000 and $479,000 accrued interest costs of $79,000 and $57,000 related to CRE repurchase facilities as of December 31, 2012 and September 30, 2012,
respectively.
(9)
Amount represents principal outstanding of $13.6 million and $13.6 million less unamortized real estate financing costs of $0 and $0 as of December 31, 2012 and September 30, 2012, respectively. This real estate transaction closed in August 2011.
(10)
Amount
represents principal outstanding of $174.1 million less unamortized discounts of $2.5 million as of December 31, 2012. In October 2012 RSO purchased a $20.9 million equity interest in Whitney CLO I which represents 67% of the outstanding preference shares. The transaction gave RSO a controlling interest in the CLO.
(11)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Senior Notes, respectively.
Collateralized
Debt Obligations
Resource Real Estate Funding CDO 2007-1
In June 2007, RSO closed RREF CDO 2007-1, a $500.0 million CDO transaction that provided financing for commercial real estate loans and commercial mortgage-backed securities. The investments held by RREF CDO 2007-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. RREF CDO 2007-1 issued a total of $265.6 million of senior notes at par to unrelated investors. RCC Real Estate purchased 100% of the class H senior notes (rated BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for $68.0 million. In
addition, Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity interest representing 100% of the outstanding preference shares. The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2007-1but are senior in right of payment to the preference shares. The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2007-1. The reinvestment period for RREF 2007-1 ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down. As of December 31, 2012, $14.5 million of Class A-1 notes have been paid down.
The senior notes
issued to investors by RREF CDO 2007-1 consist of the following classes: (i) $180.0 million of class A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of unissued class A-1R notes, which allow the CDO to fund future funding obligations under the existing whole loan participations that have future funding commitments; the undrawn balance of the class A-1R notes accrued a commitment fee at a rate per annum equal to 0.18%, the drawn balance bore interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of class A-2 notes bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million
of class B notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million of class C notes bearing interest at a fixed rate of 6.423%; (vi) $26.8 million of class D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of class E notes bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9 million of class F notes bearing interest at one-month LIBOR plus 1.30%; (ix) $11.3 million of class G notes bearing interest at one-month LIBOR plus 1.55%;
(x) $11.3 million of class H notes bearing interest at one-month LIBOR plus 2.30%; (xi) $11.3 million of class J notes bearing interest at one-month LIBOR plus 2.95%; (xii) $10.0 million of class K notes bearing interest at one-month LIBOR plus 3.25%; (xiii) $18.8 million of class L notes bearing interest at a fixed rate of 7.50% and (xiv) $28.8 million of class M notes bearing interest at a fixed rate of 8.50%. All of the notes issued mature in September 2046, although RSO has the right to call the notes anytime after
July 2017 until maturity. The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 0.81% and 0.83% at December 31, 2012 and September 30, 2012, respectively.
During the three months ended December 31, 2012, RSO repurchased $26.8 million of the Class D notes in RREF CDO 2007-1 at a weighted average price of 58% to par, resulting in an $11.2 million gain reported as a gain on the extinguishment of debt in the RSO consolidated statements of income. During the
three months ended December 31, 2011, RSO did not repurchase any notes.
In connection with RSO’s ownership of certain notes held by RREF CDO
2007-1, on June 21, 2011 RSO surrendered for cancellation, without consideration, to the trustee of RREF CDO 2007-1the following outstanding notes, which previously eliminated in consolidation: $7.5 million of the Class B notes, $6.5 million of the Class F notes, $6.3 million of the Class G notes and $10.6 million of the Class H notes. The surrendered notes were canceled by the trustee pursuant to the applicable indenture, and the obligations due under those notes were deemed extinguished. The effect of these cancellations was to improve the CDO’s performance with respect to its over-collateralization and interest coverage tests, with which it was
already in compliance before the cancellation, and to secure RSO’s long-term interest in this structured vehicle.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Resource Real Estate Funding CDO 2006-1
In August 2006, RSO closed RREF CDO 2006-1, a $345.0 million CDO transaction that provided financing for commercial real estate loans. The investments held by RREF CDO 2006-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. RREF CDO 2006-1 issued a total of $308.7 million of senior notes at par to investors of which RCC Real Estate purchased 100%
of the class J senior notes (rated BB: Fitch) and class K senior notes (rated B:Fitch) for $43.1 million. In addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $36.3 million equity interest representing 100% of the outstanding preference shares. The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2006-1 but are senior in right of payment to the preference shares. The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2006-1. The reinvestment period for RREF 2006-1 ended in September 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down. As of December 31, 2012,
$29.7 million of Class A-1 notes have been paid down.
The senior notes issued to investors by RREF CDO 2006-1 consist of the following classes: (i) $129.4 million of class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4 million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii) $5.0 million of class A-2 notes bearing interest at a fixed rate of 5.842%; (iv) $6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%; (v) $20.7 million
of class C notes bearing interest at one-month LIBOR plus 0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing interest at one-month LIBOR plus 3.75%,
(xi) $14.7 million of Class J notes bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of Class K notes bearing interest at a fixed rate of 6.00%. As a result of RSO’s ownership of the Class J and K senior notes, these notes eliminate in consolidation. All of the notes issued mature in August 2046, although RSO has the right to call the notes anytime after August 2016 until maturity. The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 1.42% and 1.42% at December 31, 2012 and September 30, 2012,
respectively.
During the three months ended December 31, 2012 and 2011, RSO did not repurchase any notes.
In connection with RSO’s ownership of certain notes held by RREF CDO 2006-1, on June 21, 2011 RSO surrendered for cancellation, without consideration, to the trustee of RREF CDO 2006-1 the following outstanding notes, which previously eliminated in consolidation: $6.9 million of the Class B notes, $7.7 million of the Class C notes, $5.52 million of the Class D notes, $7.0 million of the Class E notes and $5.25 million
of the Class F notes. The surrendered notes were canceled by the trustee pursuant to the applicable indenture, and the obligations due under those notes were deemed extinguished. The effect of these cancellations was to improve the CDO’s performance with respect to its over-collateralization and interest coverage tests, with which it was already in compliance before the cancellation, and to secure RSO’s long-term interest in this structured vehicle.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
In February 2011, RSO acquired the rights to manage the assets held by Whitney CLO I. In October 2012, RSO purchased a $20.9 million preferred equity interest at a discount of 42.5% which represents 67% of the outstanding preference shares in Whitney CLO I. Based upon that purchase, RSO determined that it had a controlling interest and consolidated Whitney CLO I. The preferred
equity interest is subordinated in right of payment to all other securities issued by Whitney CLO I.
The balance of senior notes to investors when RSO acquired a controlling interest in October 2012 were as follows: (i) $48.8 million of class A-1L notes bearing interest at LIBOR plus 0.32%; (ii) $26.5 million of class A-1LA notes bearing interest at LIBOR plus 0.29%; (iii) $36.5 million of class A-1LB notes bearing interest at LIBOR plus 0.45%; (iv) $19.75 million of class
A-2F notes bearing interest at LIBOR plus 5.19%; (v) $15.0 million of class A-2L notes bearing interest at LIBOR plus 0.57%; (vi) $25.0 million of class A-3L notes bearing interest at LIBOR plus 1.05%; (vii) $23.5 million of class B-1LA notes bearing interest at LIBOR plus 2.1%; (viii) $14.36 million of class B-1LB notes bearing interest at LIBOR plus 1.0%.
All of the notes issued mature on March 1, 2017. RSO has the right to call the notes anytime after March 1, 2009 until maturity in March 2017. The weighted average interest rate on all notes was 1.82% at December 31, 2012. The reinvestment period for Whitney CLO I ended in March 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down. Since October 2012, $15.5 million of Class A-1L and $19.9 million of Class A-1LA notes have been paid down.
Apidos CLO VIII
In October 2011, RSO closed Apidos CLO VIII, a $350 million
CLO transaction that provides financing for bank loans. The investments held by Apidos CLO VIII collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. Apidos CLO VIII issued a total of $317.6 million of senior notes at a discount of 4.4% to investors and RCC commercial purchased a $15.0 million interest representing 43% of the outstanding subordinated debt. The remaining 57% of subordinated debt is owned by unrelated third parties. The reinvestment period for Apidos CLO VIII will end in October 2014. The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII.
The senior
notes issued to investors by Apidos CLO VIII consist of the following classes: (i) $231.2 million of class A-1 notes bearing interest at LIBOR plus 1.50%; (ii) $35.0 million of class A-2 notes bearing interest at LIBOR plus 2.00%; (iii) $17.3 million of class B-1 notes bearing interest at LIBOR plus 2.50%; (iv) $6.8 million of class B-2 notes bearing interest at LIBOR plus 2.50%; (v) $14.1 million of class C notes bearing interest at LIBOR plus 3.10% and (vi) $13.2 million
of class D notes bearing interest at LIBOR plus 4.50%. All of the notes issued mature on October 17, 2021, although RSO has the right to call the notes anytime from October 17, 2013 until maturity. The weighted average interest rate on all notes was 2.16% and 2.28% at December 31, 2012 and September 30, 2012, respectively.
Apidos Cinco CDO
In May 2007, RSO closed Apidos Cinco CDO, a $350.0 million CDO transaction that provides financing for bank loans. The
investments held by Apidos Cinco CDO collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. Apidos Cinco CDO issued a total of $322.0 million of senior notes at par to investors and RCC commercial purchased a $28.0 million equity interest representing 100% of the outstanding preference shares. The reinvestment period for Apidos Cinco CDO will end in May 2014. The equity interest is subordinated in right of payment to all other securities issued by Apidos Cinco CDO.
The senior notes issued to investors by Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class A-1 notes bearing interest at LIBOR plus 0.24%;
(ii) $200.0 million of class A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3 notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes bearing interest at LIBOR plus 4.25%.
All of the notes issued mature on May 14, 2020, although RSO has the right to call the notes anytime after May 14, 2011 until maturity. The weighted average interest rate on all notes was 0.82% and 0.94% at December 31, 2012 and September 30, 2012, respectively.
In May 2006, RSO closed Apidos CDO III, a $285.5 million CDO transaction that provides financing for bank loans. The investments held by Apidos CDO III collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. Apidos CDO III issued a total of $262.5 million of senior notes at par to investors and RCC Commercial purchased a $23.0
million equity interest representing 100% of the outstanding preference shares. The reinvestment period for Apidos CDO III will end in December 2012. The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO III.
The senior notes issued to investors by Apidos CDO III consist of the following classes: (i) $212.0 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B
notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D notes bearing interest at 3-month LIBOR plus 4.25%. All of the notes issued mature on September 12, 2020, although RSO has the right to call the notes anytime after September 12, 2011 until maturity. The weighted average interest rate on all notes was 0.80% and 0.87%
at December 31, 2012 and September 30, 2012, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down. As of December 31, 2012, $40.5 million of Class A-1 notes have been paid down.
Apidos CDO I
In August 2005, RSO closed Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank loans. The investments held by Apidos CDO I collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. Apidos CDO I issued
a total of $321.5 million of senior notes at par to investors and RCC Commercial purchased a $28.5 million equity interest representing 100% of the outstanding preference shares. The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO I.
The senior notes issued to investors by Apidos CDO I consist of the following classes: (i) $259.5 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%;
(iii) $20.5 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and (v) $8.0 million of class D notes bearing interest at a fixed rate of 9.251%. All of the notes issued mature on July 27, 2017, although RSO has the right to call the notes anytime after July 27, 2010 until maturity. The weighted average interest rate on all notes was 1.07% and 1.14%
and at December 31, 2012 and September 30, 2012, respectively. The reinvestment period for Apidos CDO I ended in July 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down. As of December 31, 2012, $116.3 million of Class A-1 Notes have been paid down.
During the three months ended December 31, 2012 and 2011, RSO did not repurchase any notes.
Unsecured Junior Subordinated Debentures
In May 2006 and September 2006, RSO formed RCT I and RCT II, respectively,
for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although RSO owns 100% of the common securities of RCT I and RCT II, RCT I and RCT II are not consolidated into RSO’s consolidated financial statements because RSO is not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, RSO issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing RSO’s maximum exposure to loss. The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II are included in borrowings and are being amortized into interest expense in the consolidated statements of income using the effective yield method over a ten year period.
The
debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2012 were $358,000 and $377,000, respectively. The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at September 30, 2012, were $381,000 and $400,000, respectively. The rates for RCT I and RCT II, at December 31, 2012, were 4.26% and 4.26%, respectively. The rates for RCT I and RCT II, at September
30, 2012, were 4.41% and 4.40%, respectively.
The rights of holders of common
securities of RCT I and RCT II are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of RCT I and RCT II are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, RCT I will dissolve on May 25, 2041 and RCT II will dissolve on September 29, 2041. The junior subordinated debentures are the sole assets of RCT I and RCT II, mature on September 30, 2036 and October 30, 2036, respectively, and may be called at par by RSO any time after September 30, 2011 and October 30, 2011, respectively. RSO records its investments
in RCT I and RCT II’s common securities of $774,000 each as investments in unconsolidated trusts and records dividend income upon declaration by RCT I and RCT II.
Repurchase and Credit Facilities
CMBS - Term Repurchase Facility
In February 2011, RSO's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc. (collectively, the "RSO Companies"), entered into a master repurchase and securities contract (the “2011 Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). Under the Facility, from time to time, the parties may enter into transactions in which the RSO Companies
and Wells Fargo agree to transfer from the RSO Companies to Wells Fargo all of their right, title and interest to certain commercial mortgage backed securities and other assets (the “Assets”) against the transfer of funds by Wells Fargo to the RSO Companies, with a simultaneous agreement by Wells Fargo to transfer back to the RSO Companies such Assets at a date certain or on demand, against the transfer of funds from the RSO Companies to Wells Fargo. The maximum amount of the 2011 Facility is $100.0 million which has a two year term with a one year option to extend, and an interest rate equal to the one-month London Interbank Offered Rate (LIBOR) plus 1.29% plus a .25% initial structuring
fee and a .25% extension fee upon exercise. On February 1, 2013, RSO exercised the option to extend the CMBS Term Repurchase 2011 Facility for a period of one year. The RSO Companies may enter into interest rate swaps and cap agreements to mitigate interest rate risk under the 2011 Facility.
The 2011 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed. The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the RSO Companies to repay the purchase price
for purchased assets.
The 2011 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the RSO Companies to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
Under the terms of the 2011 Facility and pursuant to a guarantee agreement dated February 1, 2011 (the “2011 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Companies to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation,
reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of RSO; and (c) any other obligations of the RSO Companies with respect to Wells Fargo under each of the governing documents. The 2011 Guaranty includes covenants that, among other things, limit RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of December 31, 2012.
At December 31, 2012, RCC Real Estate had borrowed $42.5 million (net of $23,000 of deferred debt issuance costs), all of which RSO had guaranteed. At December 31, 2012,
borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $51.4 million and a weighted average interest rate of one-month LIBOR plus 1.32%, or 1.53%. At September 30, 2012, RCC Real Estate had borrowed $60.7 million (net of $91,000 of deferred debt issuance costs), all of which RSO had guaranteed. At September 30, 2012, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $73.5 million
and a weighted average interest rate of one-month LIBOR plus 1.30%, or 1.56%. At December 31, 2012, RSO had repurchase agreements of $20.4 million that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.
Equal
to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
CRE - Term Repurchase Facility
On February 27, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Bank, National Association (the "2012 Facility") to finance the origination of commercial real estate loans. The facility has a maximum amount of $150.0 million and an initial 18 month term with two one year options to extend. RSO paid an origination fee of 37.5 basis points (0.375%). RSO
guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement. At December 31, 2012, RCC Real Estate had borrowed $58.8 million (net of $348,000 of deferred debt issuance costs), all of which RSO had guaranteed. At December 31, 2012, borrowings under the repurchase agreement were secured by several commercial real estate loans with an estimated fair value of $85.4 million and a weighted average interest rate of one-month LIBOR plus 2.67%, or 2.88%. RCC Real Estate had $28.4 million (net of $479,000
of deferred debt issuance costs) of borrowings under the 2012 Facility as of September 30, 2012.
The 2012 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed. The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the RSO Companies to repay the purchase price for purchased assets.
The 2012 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the RSO Companies
to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
Under the terms of the 2012 Facility and pursuant to a guarantee agreement dated February 27, 2012 (the “2012 Guaranty”), the registrant agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Companies to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of
the registrant; and (c) any other obligations of the RSO Companies with respect to Wells Fargo under each of the governing documents. The 2012 Guaranty includes covenants that, among other things, limit the registrant's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of December 31, 2012.
Equal to the
estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
On March 8, 2005, RSO entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of commercial real estate loans. RSO guaranteed RCC Real Estate's performance of its obligations under the repurchase agreement. There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of one-month LIBOR plus 3.25%. RSO had repaid all borrowings under this agreement as of December 31, 2012.
Short-Term Repurchase Agreements
On March 8, 2005,
RSO entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of CMBS and commercial real estate loans. There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of interest rates. RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement. At December 31, 2012, RCC Real Estate had borrowed $3.1 million, all of which RSO had guaranteed. At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $5.1 million and a weighted average interest rate of one-month LIBOR
plus 1.25%, or 1.46%. RSO had no borrowings under this facility as of September 30, 2012.
The following table shows information about the amount at risk under this facility (dollars in thousands);
Equal
to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
On February 14, 2012, RSO entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the origination of CMBS. There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity date with monthly resets of interest rates. RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement. At December 31, 2012, RCC Real Estate had borrowed $5.4 million, all of which RSO had guaranteed. At December 31, 2012, borrowings under the repurchase agreement
were secured by two CMBS bonds with an estimated fair value of $8.5 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%. RSO had no borrowings under this facility as of September 30, 2012.
The following table shows information about the amount at risk under this facility (dollars in thousands);
Equal
to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$3.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2012.
On November 6, 2012, RSO entered into a master repurchase and securities agreement with JP Morgan Securities LLC to finance the origination of CMBS. There is no stated maximum amount of the facility and
the repurchase agreement has no stated maturity with monthly resets of interest rates. At December 31, 2012, RCC Real Estate had borrowed $4.7 million, all of which RSO had guaranteed. At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $7.2 million and a weighted average interest rate of one-month LIBOR plus 0.80%, or 1.01%. RSO had no borrowings under this facility as of September 30, 2012.
Equal
to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$4.7 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2012.
Revolving Credit Facility
On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility with TBBK. The facility provided bridge
financing for up to five business days, which enabled RSO and RCC Real Estate to fund real estate loans to third parties prior to their sale to RSO’s CRE CDOs. This facility was evidenced by a Revolving Judgment Note and Security Agreement by and among the borrowers and TBBK entered into on July 7, 2011. The facility was secured by a pledge of $32.9 million of the Class A-1 notes of RREF CDO 2006-1, which are owned by RCC Real Estate. The facility was secured by a pledge of $32.9 million of the Class A-1 notes of RREF CDO 2006-1, which are owned by RCC Real Estate. RSO had no borrowings under this revolving credit facility as of December 31, 2012 and 2011. The note became due and
payable on June 30, 2012 and was terminated.
Mortgage Payable
On August 1, 2011, RSO, through RCC Real Estate, purchased Whispertree Apartments, a 504 unit multi-family property located in Houston, Texas, for $18.1 million. The property was 95% occupied at acquisition. In conjunction with the purchase of the property, RSO entered into a seven year mortgage of $13.6 million with a lender. The mortgage bears interest at a rate of one-month LIBOR plus 3.95%. As of
December 31, 2012 and September 30, 2012 the borrowing rate was 4.17% and 4.17%, respectively.
L. Related party transactions - RSO
Relationship with LEAF. LEAF originates and manages equipment leases and notes on behalf of RSO.
On March 5, 2010, RSO entered into agreements with Lease Equity Appreciation Fund II, L.P. (“LEAF II”) (an equipment leasing partnership sponsored by LEAF Financial and of which a LEAF Financial subsidiary
is the general partner), pursuant to which RSO provided an $8.0 million credit facility to LEAF II, of which all $8.0 million has been funded. The credit facility had a one year term at 12% per year, payable quarterly, and was secured by all the assets of LEAF II Receivables Funding, LLC, including its entire ownership interest in LEAF II. RSO received a 1% origination fee in connection with establishing the facility. The facility originally matured on March 3, 2011 and was extended until September 3, 2011 with a 1% extension fee paid on the outstanding loan balance. On June
3, 2011, RSO entered into an amendment to extend the maturity to February 15, 2012 and decrease the interest rate from 12% to 10% per annum resulting in a troubled-debt restructuring under current accounting guidance. On February 15, 2012, the credit facility was further amended to extend the maturity to February 15, 2013 with a 1% extension fee accrued and added to the amount outstanding. On January 11, 2013, RSO entered into another amendment to extend the maturity to February 15, 2014 with an additional 1% extension fee accrued and
added to the amount outstanding. The loan amount outstanding at December 31, 2012 and September 30, 2012 was $6.8 million and 7.4 million, respectively.
Relationship with CVC Credit Partners. CVC Credit Partners manages internally and externally originated bank loan assets on RSO’s behalf. On February 24, 2011, a subsidiary of RSO purchased 100% of the ownership interests in RCAM (formerly known as Churchill Pacific Asset Management LLC) from Churchill Financial Holdings LLC for $22.5 million. Through
RCAM, RSO is entitled to collect senior, subordinated and incentive fees related to five Collateralized Loan Obligation issuers (“CLO”) holding approximately $1.9 billion in assets managed by RCAM. RCAM is assisted by CVC Credit Partners in managing the five CLOs. CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM. For the years ended December 31, 2012 and 2011, CVC Credit Partners earned subordinated fees of $800,000 and $1.0 million, respectively. In October 2012, RSO purchased 66.6%
of the preferred equity in one of the RCAM CLOs.
Relationship with Resource Real Estate. Resource Real Estate, a subsidiary of the
Company, originates, finances and manages RSO’s commercial real estate loan portfolio, including whole loans, A notes, B notes, mezzanine loans, and investments in real estate. RSO reimburses Resource Real Estate for loan origination costs associated with all loans originated.
On August 9, 2006, RSO, through its subsidiary, RCC Real Estate, originated a loan to Lynnfield Place, a multi-family apartment property, in the amount of $22.4 million. The loan was then purchased by RREF CDO 2006-1. The loan, which matures on May 9, 2018, carries an interest rate of LIBOR plus a spread of 3.50% with a LIBOR floor of 2.50%. On June
14, 2011, RCC Real Estate converted this loan, collateralized by a multi-family building, to equity. The loan was kept outstanding and continues to be used as collateral in RREF CDO 2006-1. RREM was appointed as the asset manager as of August 1, 2011. RREM performs lease review and approval, debt service collection, loan workout, foreclosure, disposition and/or entitlements and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements.
With respect to the joint venture, which is structured as a credit facility with Värde Investment Partners, LP, RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1.0% of the combined investment calculated as of
the last calendar day of the month. For the three months ended December 31, 2012 and 2011, RSO paid RREM management fees of $10,000 and $14,000, respectively. For the three months ended December 31, 2012 and 2011, RSO recorded a loss of $248,000 and a gain of $820,000, respectively, which was recorded in equity in earnings of unconsolidated subsidiaries on the RSO consolidated statements of income. The investment balance of $2.3 million and $3.0
million at December 31, 2012 and September 30, 2012, respectively is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.
On June 21, 2011, RSO entered into a joint venture with an unaffiliated third party to form CR SLH Partners, L.P. (“SLH Partners”) to purchase a defaulted promissory note secured by a mortgage on a multi-family apartment building. RSO purchased a 10% equity interest in the venture and also loaned SLH Partners $7.0 million to finance the project secured by a first mortgage lien on the property. On May
23, 2012, SLH Partners repaid the $7.0 million loan in its entirety. The loan had a maturity date of September 21, 2012 and bore interest at a fixed rate of 10.0% per annum on the unpaid principal balance, payable monthly. RSO received a commitment fee equal to 1.0% of the loan amount at the origination of the loan and received a $70,000 exit fee upon repayment. RREM was appointed as the asset manager of the venture. RREM performs lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RREM receives
an annual asset management fee equal to 2.0% of the gross receipts generated from the property. RSO holds a $1.2 million preferred equity investment in SLH Partners as of December 31, 2012.
Relationship with TBBK. Walter Beach, a director of TBBK since 1999, has also served as a director of RSO since March 2005. On March 14, 2011, RSO paid TBBK a loan commitment fee in the amount of $31,500 in connection with TBBK’s commitment to establish a credit facility for the benefit of RSO. On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility
with TBBK. The facility provided bridge financing for up to five business days, which enabled RSO and RCC Real Estate to fund real estate loans to third parties prior to their sale to RSO’s CRE CDOs. The facility was evidenced by a Revolving Judgment Note and Security Agreement by and among the borrowers and Bancorp and was secured by a pledge of $32.9 million of the Class A-1 notes of RREF CDO 2006-1 and was owned by RCC Real Estate. The note matured on June 30, 2012. There were no outstanding borrowings as of December 31, 2012 or September 30, 2012.
Relationship with Ledgewood. Until
1996, Edward E. Cohen, a director who was RSO’s Chairman from its inception until November 2009, was of counsel to Ledgewood. In addition, one of RSO’s executive officers, Jeffrey F. Brotman, was employed by Ledgewood until 2007. Mr. E. Cohen receives certain debt service payments from Ledgewood related to the termination of his affiliation with Ledgewood and its redemption of his interest in the firm. Mr. Brotman also receives certain debt service payments from Ledgewood related to the termination of his affiliation with the firm. For the three months ended December 31, 2012 and 2011, RSO paid Ledgewood $161,000 and $21,000, respectively, in connection with legal services rendered to RSO.
In analyzing the fair value of its investments accounted for on a fair value basis, RSO follows the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. RSO determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own
assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. RSO evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, RSO expects that changes in classifications between levels will be rare.
Certain assets and liabilities are measured at fair value on a recurring basis. The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.
RSO reports its investment securities available-for-sale
at fair value. To determine fair value, RSO uses a dealer quote which typically will be the dealer who sold RSO the security. RSO has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models. These quotes are non-binding. Based on how dealers develop their quotes, market liquidity and levels of trading, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. RSO evaluates the reasonableness of the quotes it receives by applying its own valuation models. If there is a material difference between a quote RSO receives and the value indicated by its valuation models, RSO will evaluate the difference. As part of that evaluation, RSO will discuss the difference with the dealer, who may revise its quote based upon these discussions. Alternatively, RSO may revise its valuation models.
RSO
reports its investment securities, trading at fair value, which is based on a dealer quotes or bids which are validated using an income approach utilizing appropriate prepayment, default and recovery rates as well as an independent third-party valuation. Any changes in fair value are recorded on RSO’s results of operations as net unrealized gain on investment securities, trading.
The CMBS underlying RSO’s Linked Transactions are valued using the same techniques to those used for RSO’s other CMBS. The value of the underlying CMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the CMBS and accrued interest payable on the underlying repurchase agreement borrowings. RSO’s Linked Transactions are classified as Level 2 or Level 3 in the fair value hierarchy.
Derivatives
(interest rate swaps and interest rate caps), both assets and liabilities, are reported at fair value, and are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although RSO has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by RSO and its counterparties. RSO assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and, if material, categorizes those derivatives within Level 3 of the fair value hierarchy.
The following table presents information about RSO’s assets (including derivatives that are presented net) measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
The
following table presents additional information about assets which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
The following table presents additional information about liabilities which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
There were no losses included in earnings due to other-than-temporary impairment charges during the three months ended December 31, 2012 or 2011.
Loans
held for sale consist of bank loans and commercial real estate loans (“CRE loans”) identified for sale due to credit concerns. RSO recognizes interest on loans held for sale is recognized according to the contractual terms of the loan and includes it in interest income on loans. The fair value of bank loans held for sale and impaired bank loans is based on what secondary markets are currently offering for these loans. As such, RSO classifies these loans as nonrecurring Level 2. For RSO’s CRE loans where there is no primary market, fair value is measured using discounted cash flow analysis and other valuation techniques and these loans are classified as nonrecurring Level 3. The amount of nonrecurring fair value losses for impaired loans for the three months ended December 31, 2012 and 2011 was $2.2 million and $5.4
million, respectively, and is included in the consolidated statements of operations as provision for loan and lease losses.
The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
For
Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
RSO is required
to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, principal paydown receivable, interest receivable, distribution payable and accrued interest expense approximates their carrying value on the RSO consolidated balance sheet.
The fair value of RSO’s Level 2 loans held-for-investment was primarily measured using a third-party pricing service. The fair value of RSO’s Level 3 Loans held-for-investment was measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Loans receivable-related party are estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
CDO notes are valued using dealer quotes, typically the dealer who underwrote the CDO in which the notes are held.
Junior
subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.
The fair values of RSO's remaining financial instruments that are not reported at fair value on the RSO consolidated balance sheet are reported below (in thousands):
Fair
Value Measurements
Carrying Amount
Fair Value
Quoted Prices in Active Markets for Identical Assets of Liabilities (Level 1)
The following table reflects the assets and liabilities of a real estate VIE which was included in the Company’s consolidated balance sheets (in thousands):
In November 2012, the property underlying the loan was sold for a gain of $831,000 of which $793,000 was attributable to noncontrolling interests; as such, the Company no longer consolidates this real estate VIE.
The Company’s investments in RRE Opportunity REIT, and its investments in the structured finance entities that hold investments in trust preferred assets (“Trapeza entities”) and asset-backed securities (“Ischus entities”), were all determined to be VIEs that the Company does not consolidate as it does not have the obligation
of, or right to, losses or earnings that would be significant to those entities. With respect to RRE Opportunity REIT, the Company has advanced offering costs that are being reimbursed as the REIT raises additional equity which is included in Receivables from managed entities and related parties, net on the consolidated balance sheets. Except for those advances, the Company has not provided financial or other support to these VIEs and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at December 31, 2012.
The following table presents the carrying amounts of the assets in the
Company's consolidated balance sheets that relate to the Company's variable interests in identified nonconsolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at December 31, 2012 (in thousands):
Receivables
from
Managed Entities and
Related Parties,
Net (1)
Investments
Maximum Exposure
to Loss in
Non-consolidated VIEs
RRE Opportunity REIT
$
—
$
1,792
$
1,792
Ischus
entities
237
—
237
Trapeza entities
—
912
912
$
237
$
2,704
$
2,941
(1)
Exclusive
of expense reimbursements due to the Company.
NOTE 20 – SUBSEQUENT EVENTS
RAI - Real estate. In January 2013, the Company sold its 10% interest in a real estate joint venture to its partner for $3.0 million. The Company will continue to manage the asset and will receive property management fees in the future.
RAI - Commercial Finance. As
of November 21, 2013, the LEAF II loan was paid-off in full and, accordingly, the Company's guarantee for that loan has been terminated.
RSO related subsequent events:
On January 2, 2013, RSO sold two CRE whole loans which are classified as loans held for sale at December 31, 2012 for $34.0 million.
On February 15, 2013, Olympic CLO I Ltd., one of the RCAM managed CLOs, with
the consent of the Majority Preferred Shareholders, elected to redeem the outstanding notes in whole.
In April 2013, RSO entered into another stock purchase agreement with LEAF to purchase shares of newly issued Series E Preferred Stock for $3.3 million. The Series E Preferred Stock has priority over the other classes of preferred stock.
On April 2, 2013, RCC Real Estate, a subsidiary of RSO, entered into an amendment of its existing commercial real estate credit facility with Wells Fargo Bank, N.A. The amendment increases the size of the facility to $250 million and extends the current term of the facility to February of 2015 and provides two additional one
year extension options at RSO’s discretion. RCC Real Estate paid an additional structuring fee of $101,000 and an extension fee of $938,000 in connection with the amendment and will amortize the additional fees over the term of the extension.
On July 19, 2013, an indirect wholly-owned subsidiary of RSO entered into a $200 million Master Repurchase Agreement with Deutsche Bank AG to be used to finance RSO’s core commercial real estate lending business. The financing facility matures initially on July 19, 2014, with the right to extend an additional two years to July 16,
2016.
On October 30, 2013, RSO issued a total of $115.0 million aggregate principal amount of RSO's 6% Convertible Senior Notes due 2018, for total net proceeds to RSO of approximately $111.1 million after deduction of underwriting discounts and commissions and estimated offering expenses.
On October 31, 2013, RSO, through RCC Residential, Inc., its newly-formed taxable REIT subsidiary, acquired a residential mortgage origination company, Primary Capital Advisors LC, an Atlanta based firm, for $8.4 million; consisting of
$7.6 million in cash and $800,000 in shares of RSO common stock. Of this $7.6 million cash consideration, $1.8 million
was set aside in an escrow account as a contingency for potential purchase price adjustments.
The Company has evaluated subsequent events through the filing of this form and determined that there have not been any events that have occurred that would require adjustments to the consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
On September 19, 2013, the Audit Committee of our Board of Directors concluded that it was necessary to restate the audited financial statements set forth in our Annual Report on Form 10-K for the year ended September 30, 2012 and the unaudited financial statements in our Quarterly Reports on Form 10-Q for each of the quarters ended December 31, 2012, March
31, 2013 and June 30, 2013 to consolidate Resource Capital Corp. (NYSE: RSO), referred to in this report as RSO, which we previously treated as an unconsolidated variable interest entity. The impact of the consolidation is significant to the presentation of our financial statements but is not material to our financial condition or results of operations. See Note 2, “Restatement,” and Note 19, “Variable Interest Entities” of the notes to our consolidated financial statements in Item 1 of this report.
In management’s discussion and analysis that follows, we analyze our operations by three business segments: Real Estate, Financial Fund Management, and Commercial Finance. Each of our operating segments earns fees for acquiring, managing, and/or financing certain assets on behalf of RSO, for which we receive payment. These revenues are included in the tables that
follow and then eliminated in order to reflect the consolidation of RSO for accounting purposes.
We are a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through our real estate, financial fund management and commercial finance subsidiaries as well as our joint ventures. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, our sponsored investment funds. We typically maintain an investment in the funds we sponsor. As of December
31, 2012, we managed $15.3 billion of assets.
We limit our fund development and management services to asset classes where we own existing operating companies or have specific expertise. We believe this strategy enhances the return on investment we can achieve for our funds. In our real estate operations, we concentrate on the ownership, operation and management of multifamily and commercial real estate and real estate mortgage loans including whole mortgage loans, first priority interests in commercial mortgage loans, known as A notes, subordinated interests in first mortgage loans, known as B notes, mezzanine loans, investments in discounted and distressed real estate loans and investments in “value-added” properties (properties which, although not distressed, need substantial improvements to reach their full investment potential). In our financial fund management
operations, we concentrate on bank loans, trust preferred securities of banks, bank holding companies, insurance companies and other financial companies, and asset backed securities, or ABS.
In our real estate segment, we have focused our efforts primarily on acquiring and managing a diversified portfolio of commercial real estate and real estate related debt that has been significantly discounted due to the effects of current economic conditions and high levels of leverage. We expect to continue to expand this business by raising investor funds through our retail broker channel for investment programs, principally through Resource Real Estate Opportunity REIT, Inc. which we refer to as RRE Opportunity REIT.
In our financial fund management segment, our recent focus has primarily been the sponsorship and management of collateralized debt and loan obligations, or CDOs and CLOs,
respectively. In addition, on April 17, 2012, we completed the sale of 100% of our equity interests in Apidos Capital Management, LLC, or Apidos, our CLO management subsidiary, to CVC Capital Partners SICAV-FIS, S.A., a private equity firm, or CVC. In connection with the transaction, we received $25.0 million in cash before transaction costs and partnership interests in a joint venture, CVC Credit Partners, L.P., or CVC Credit Partners, that includes the Apidos portfolios as well as the portfolios contributed by CVC. Additionally, we retained a preferred equity interest in Apidos, which entitles us to receive 75% of the incentive management fees from the legacy Apidos portfolios that were previously managed by us and are now managed by CVC Credit Partners. We recorded a $54.5 million net gain on the sale during fiscal 2012. Through our new joint venture, we closed Apidos CLO IX ($409.8 million of par value) in July
2012, Apidos CLO X ($450.0 million of par value) in November 2012 and Apidos CLO XI ($400.0 million of par value) in January 2013. For fiscal 2013, we expect to continue to focus on managing our existing assets as well as to continue to expand our CLO business through our joint venture.
We currently account for our interests in LEAF Commercial Capital, Inc., or LEAF, as an equity method investment. In addition, we have recorded provisions for credit losses of $4.5 million during the three months ended December 31, 2012 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows.
We recorded a consolidated net loss attributable to common shareholders of $1.5 million for the
three months ended December 31, 2012 primarily due to the provision for credit loss on receivables from our commercial finance investment funds.
Presentation of Managements’ Discussion and Analysis of Financial Condition and Results of Operations.
Our financial statements have been prepared to consolidate the financial statements of RSO. Our operating segments manage assets
on behalf of RSO and the compensation we earn under the terms of our management agreement with RSO is allocated across our operating segments in proportion to the management services each segment provides to RSO. The impact of consolidation is significant to the presentation of our financial statements, but not to our financial condition or results of operations. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse to us. Our rights to the benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO are limited to our ownership position (2.54% of RSO's outstanding common stock at December 31, 2012). The operating results and the discussion that follows the description of each of our operating segments is presented before the consolidation of RSO to appropriately reflect the manner
in which we conduct our operations. Management believes that excluding the fees earned by us under the terms of the management agreement with RSO that are eliminated upon consolidation may impact a reader’s analysis and understanding of our operating results.
Assets Under Management
We increased our assets under management by $2.0 billion to $15.3 billion at December 31, 2012 from $13.3 billion at December 31, 2011. The following table sets forth information relating to our assets under management
by operating segment (in millions, except percentages) (1):
December 31,
Increase (Decrease)
2012
2011
Amount
Percentage
Financial
fund management (2)
$
13,007
$
11,145
$
1,862
17%
Real
estate
1,795
1,610
185
11%
Commercial finance
529
549
(20
)
(4)%
$
15,331
$
13,304
$
2,027
15%
(1)
We
describe how we calculate assets under management, in the notes to the third table of this section.
(2)
The increase is primarily due to the $2.1 billion addition of the CVC portfolio contributed in April 2012 to CVC Credit Partners, our joint venture with CVC in which we own 33%, and the addition of Apidos CLO X ($450.0 million). This increase was offset, in part, by reductions in the eligible collateral bases of our ABS ($282.6 million), corporate loan ($166.4 million) and trust preferred portfolios ($287.2 million) resulting from defaults, paydowns, sales and calls.
Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public
and private limited partnerships, tenant-in-common, or TIC, property interest programs, two real estate investment trusts, or REITs, and other investment funds. All of our operating segments manage assets on behalf of RSO. The following table sets forth the number of entities we manage by operating segment:
As
of December 31, 2012 and December 31, 2011, we managed assets in the following classes for the accounts of institutional and individual investors, RSO, and for our own account (in millions):
We value our managed real estate assets as the sum of: (i) the amortized cost of our commercial real estate loans; and (ii) the book value of each of the following: (a) real estate and other assets held by our real estate investment entities, (b) our outstanding legacy loan portfolio, and (c) our interests in real estate.
(3)
We value our commercial finance assets as the sum of the book value of the financed equipment and leases and loans.
Employees
As
of December 31, 2012, we had 612 full-time employees, an increase of 60 or (11%), from 552 employees at December 31, 2011. The following table summarizes our employees by operating segment:
The revenues in each of our operating segments are generated by the fees we earn for
structuring and managing the investment entities we sponsored on behalf of individual and institutional investors and RSO, and the income produced by the assets and investments we manage for our own account. The following table sets forth information about our revenue sources (in thousands):
Elimination of consolidated VIE revenues attributed to operating segments
(4,811
)
(4,501
)
$
43,935
$
39,374
(1)
Includes
fees from each of our real estate, financial fund management and commercial finance operations and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.
(2)
Includes rental income, revenues from certain real estate assets and interest income on bank loans from our financial fund management operations. For periods prior to November 2011, includes interest and rental income from our commercial finance operations.
(3)
Reflects
the various management fees that are received by our operating segments acquiring, managing and financing the assets of RSO. These fees are eliminated in reporting the consolidated results of operations.
(4)
Includes the resolution of loans we hold in our real estate segment.
(5)
Includes gains (losses) on trading securities. For periods prior to November 2011, primarily includes insurance fees, documentation fees and other charges earned by our commercial finance operations.
We
provide a more detailed discussion of the revenues generated by each of our business segments under “-Results of Operations: “:Real Estate”, “:Financial Fund Management”, and “:Commercial Finance.”
Results of Operations: Real Estate
Through our real estate segment, we focus on four different areas:
•
the acquisition, ownership and management of portfolios of discounted real estate and real estate related debt, which we have acquired through two sponsored real estate investment entities as well as through joint ventures with institutional investors;
•
the
management of sponsored real estate investment entities that principally invest in multifamily housing;
•
the management, principally for RSO, of general investments in commercial real estate debt, including first mortgage debt, whole loans, mortgage participations, B notes, mezzanine debt and related commercial real estate securities; and
•
to a significantly lesser extent, the management and resolution of a portfolio of real estate loans and property interests that we acquired at various times between 1991 and 1999, which
we collectively refer to as our legacy portfolio.
For
information on how we calculate assets under management, see “Assets under Management”, above.
We support our real estate investment funds by making long-term investments in them. In addition, from time to time, we make bridge investments in the funds to facilitate acquisitions. We record losses on these equity method investments primarily as a result of depreciation and amortization expense recorded by the property interests. Fee income can be highly variable and, for fiscal 2013, will depend upon the success of RRE Opportunity REIT and the timing of its acquisitions.
The following table sets forth information relating to the revenues recognized and costs and expenses incurred in our real estate operations (in thousands):
Revenues from our real estate operations increased $4.5 million to $13.2 million for the three months ended December 31, 2012. We attribute the increase primarily to the following:
Management fees
•
a
$377,000 increase in asset management fees, reflecting a $534,000 increase in broker-dealer manager fees earned for raising funds for RRE Opportunity REIT, partly offset by a $217,000 increase in the discount recorded for management fees that we expect to receive in future periods;
a $388,000
increase in property management fees earned by our property manager, Resource Residential, reflecting a 4,063 unit increase (27%) in multifamily units under management to 19,267 units at December 31, 2012 from 15,204 units at December 31, 2011; and
•
a $3.3 million increase in REIT management fees from RSO. The base management fees
increased by $670,000 due to the increase in the equity of RSO upon which this fee is based. We also earned incentive management fees of $2.6 million during the three months ended December 31, 2012, as compared to none for the same period last year. The incentive management fees are based on the adjusted operating earnings of RSO, which vary by quarter.
Other revenues
•
a $771,000 increase in gains and fees on resolution of loans and investment entities. In November 2012, we sold a commercial property located in Elkins, West Virginia which was consolidated through a VIE, recognizing
a gain of $831,000, of which $793,000 was attributable to noncontrolling interests;
•
an $83,000 increase in fee income in connection with the purchase and third-party financing of properties through our real estate investment entities, as follows:
•
during the three months ended December 31, 2012, we earned $884,000 in fees primarily from
the following activities:
•
the acquisition of five properties (valued at $28.9 million); and
•
the sale of one property (valued at $16.1 million).
•
in comparison, during the three months ended December 31, 2011,
we earned $801,000 in fees primarily from the following activities:
•
the acquisition of one property (valued at $8.3 million); and
•
the sale of two properties and two loans.
These increases were offset, in part, by:
•
a
$585,000 decrease in the equity in earnings of unconsolidated entities. During the three months ended December 31, 2012, we earned equity income of $21,000. The three months ended December 31, 2011 included a $750,000 gain in conjunction with the release of funds from escrow related to the fiscal 2011 sale of a Washington, DC office building held by one of our legacy portfolio investments.
Costs and Expenses − Three Months Ended December 31, 2012 as Compared to Three Months Ended December31, 2011
Costs and expenses of our real estate operations increased $806,000
(11%). We attribute these changes primarily to the following:
•
a $421,000 increase in general and administrative expenses principally related to a $228,000 increase in wages and benefits, reflecting the additional staffing required to manage the increased properties under management as well as the additional personnel hired at Resource Securities to increase our fundraising capabilities; and
•
a $491,000
increase in Resource Residential expenses due to increased wages and benefits, principally in conjunction with the additional personnel needed to operate and manage the increased number of properties.
Results of Operations: Financial Fund Management
General. We conduct our financial fund management operations primarily through six separate operating entities:
•
CVC Credit Partners, a joint venture between us and CVC, finances, structures and manages investments in bank loans, high yield bonds and equity investments through CLO issuers, managed accounts and a credit opportunities
fund. Prior to April 17, 2012, we conducted these operations through our Apidos subsidiary;
•
Trapeza Capital Management, LLC, or TCM, a joint venture between us and an unrelated third party, manages investments in trust preferred securities and senior debt securities of banks, bank holding companies, insurance companies and other financial companies through CDO issuers and related partnerships. TCM, together with the Trapeza CDO issuers and Trapeza partnerships, are collectively referred to as Trapeza;
•
Resource
Financial Institutions Group, Inc., or RFIG, serves as the general partner for seven company-sponsored affiliated partnerships which invest in financial institutions;
•
Ischus Capital Management, LLC, or Ischus, finances, structures and manages investments in ABS including residential mortgage-backed securities, or RMBS, and commercial mortgage-backed securities, or CMBS;
Resource Capital Markets, Inc., or Resource Capital Markets, through our registered broker-dealer subsidiary, Resource Securities, Inc., or Resource Securities, acts as an agent in the primary and secondary markets for structured finance securities and manages accounts for institutional investors; and
•
Resource Capital Manager, Inc., or RCM, an indirect wholly-owned subsidiary, provides investment management and administrative services to RSO under a management agreement between us, RCM and RSO.
The
following table sets forth information relating to assets managed by our financial fund management operating entities on behalf of institutional and individual investors and RSO (in millions) (1):
For
information on how we calculate assets under management, see "Assets Under Management”, above.
(2)
In April 2012, we sold 100% of Apidos to CVC and retained a 33% interest in CVC Credit Partners, which manages the former Apidos portfolio as well as the portfolio contributed by CVC.
In our financial fund management operating segment, we earn monthly fees on assets managed on behalf of institutional and individual investors as follows:
•
Collateral
management fees − we receive fees for managing the assets held by CLO and CDO issuers we have sponsored, including subordinate and incentive fees. These fees vary by issuer, with our annual fees ranging between 0.1% and 0.35% of the aggregate principal balance of the eligible collateral owned by the issuers. The indentures to the notes require that certain overcollateralization test ratios, or O/C ratios, be maintained. O/C ratios measure the ratio of assets (collateral) to liabilities (notes) of a given issuer. Losses incurred on collateral due to payment defaults, payment deferrals or rating agency downgrades reduce the O/C ratios. If specified O/C ratios are not met by an issuer, subordinate or incentive management fees, which are discussed in the following sections, are deferred and interest collections from collateral are applied to outstanding
principal balances on the notes, typically in order of seniority.
•
Administration fees − we receive fees for managing the assets held by our company-sponsored partnerships and through April 2012, our credit opportunities fund (which is now being managed by CVC Credit Partners). These fees vary by limited partnership or fund, with our annual fee ranging between 0.75% and 2.00% of the partnership or fund capital balance.
Based on the terms of our general partner interests, two of the Trapeza partnerships we manage as general partner include a clawback provision.
We
discuss the basis for our fees and revenues for each area in more detail in the following sections.
Our financial fund management operations historically have depended upon our ability to sponsor and manage CLO and CDO issuers. During the past several years, the market for CDOs has been non-existent and extremely limited for CLOs although in fiscal 2012, we began to experience an opening in the CLO market. As a result, in October 2011, we were able to sponsor Apidos CLO VIII, the first such deal we closed since fiscal 2007. In July 2012, CVC Credit Partners closed its first CLO, Apidos CLO IX and in November 2012 and January 2013, closed Apidos CLO X and XI, respectively.
Through CVC Credit Partners, we and our joint venture partner have sponsored, structured and/or currently manage 22 CLO issuers for institutional and individual investors and RSO. These joint venture CLO issuers, accounts and funds hold approximately $8.1 billion in U.S. and European bank loans and corporate bonds at December 31, 2012, of which $2.7 billion are managed on behalf of RSO.
Under our former Apidos business, we derived revenues through base and subordinate management fees. Base management fees varied by CLO issuer (ranged between 0.01% and 0.15% of the aggregate principal balance of eligible collateral
held by the CLO issuers). Subordinate management fees, which also varied by CLO issuer (ranged between 0.04% and 0.40% of the aggregate principal balance of eligible collateral held by the CLO issuers), were subordinated to debt service payments on the CLOs. In connection with the sale of Apidos, we retained the right to 75% of incentive management fees earned by the legacy Apidos CLOs. Though we were entitled to receive such fees, which are also subordinate to debt service payments, we did not receive any such fees in the three months ended December 31, 2012 or 2011. In January 2013, we received net incentive fee payments of $374,000 from three of the legacy Apidos CLOs.
As a result of the sale and resulting deconsolidation of Apidos, we no longer reflect the revenues and expenses of the Apidos business in our consolidated results, and instead record our 33% equity interest in the operations of CVC Credit Partners.
Trapeza
In our Trapeza operations, we sponsored, structured and currently co-manage 13 CDO issuers holding approximately $3.6 billion in trust preferred securities of banks, bank holding companies, insurance companies and other financial companies.
We own a 50% interest in an entity that manages 11 Trapeza CDO issuers and a 33.33% interest in another entity that manages two Trapeza CDO issuers. We also own a 50% interest in the general partners of five limited partnerships, two of which own the equity interests of two Trapeza CDO issuers. The general
partners have repurchased substantially all of the remaining limited partnership interests in two of the Trapeza entities which we are in the process of dissolving. Additionally, we hold limited partnership interests in each of the three other limited partnerships.
We derive revenues from our Trapeza operations through base management fees. Base management fees vary by CDO issuer, but range from between 0.10% and 0.25% of the aggregate principal balance of the eligible collateral held by the CDO issuers. These fees are shared with our co-sponsors.
Ischus
We sponsored, structured and/or currently manage nine CDO issuers for institutional and individual investors, which hold approximately $1.2 billion in primarily real estate ABS including RMBS, CMBS and credit default swaps.
We
derive revenues from our Ischus operations through base management fees. Base management fees vary by CDO issuer, ranging from between 0.10% and 0.20% of the aggregate principal balance of eligible collateral held by the CDO issuer.
Company-Sponsored Partnerships
We sponsored, structured and, through RFIG, currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $65.2 million of investments in financial institutions. We derive revenues from these operations through annual management fees, based on 2.0% of the equity invested in these partnerships. As part of our sponsorship, management and general partnership interests, we hold limited partnership interests in these partnerships. We may receive a carried interest of up to 20% upon meeting specific investor return rates.
Through
our Resource Capital Markets group, we engage in structured finance security trading, both as an agent through Resource Securities, and for our own account. We earn introductory agent fees which are negotiated on a deal-by-deal basis. In our own trading portfolio, we buy and sell structured finance securities and record both unrealized and realized gains and losses which are reflected in Financial Fund Management revenues.
The following table sets forth certain information relating
to the revenues recognized and costs and expenses incurred in our financial fund management operations (in thousands):
Fees
and/or reimbursements that we receive vary by transaction and, accordingly, there may be significant variations in the revenues we recognize from our financial fund management operations from period to period.
Revenues decreased $3.9 million (59%) to $2.7 million for the three months ended December 31, 2012 from $6.6 million
for the three months ended December 31, 2011. We attribute the decrease primarily to the following:
•
a decrease of $3.5 million in revenues due to the April 2012 deconsolidation of Apidos, comprised of the following:
◦
a $3.1 million decrease in fund management fees, principally the $3.0 million decrease in CLO collateral management and partnership management fees; and
◦
a
$451,000 decrease in RSO base management fees;
•
a $1.9 million decrease in incentive management fees earned on managing a trading portfolio on behalf of RSO;
•
a $289,000 increase in introductory agent fees as a result of fees earned in connection with eight structured security transactions with an average fee of $55,000 for fiscal 2013 as compared to seven structured security transactions
with an average fee of $22,000 for the prior year period;
•
an $891,000 increase in our equity in the earnings of unconsolidated entities, reflecting $865,000 of income attributable to our interest in CVC Credit Partners;
•
a $483,000 net increase in realized and unrealized gains, and interest recorded on trading securities purchased since June 2013; and
•
a
$166,000 decrease in our share of realized and unrealized fair value adjustments recorded relative to our limited and general partner interests held in unconsolidated company-sponsored partnerships, the value of which depends on market conditions and may vary significantly year to year.
Costs and expenses of our financial fund management operations decreased $4.8 million (82%) for the three months ended December 31, 2012,
principally due to a $4.5 million reduction in wages and benefits as a result of the following:
•
a $3.2 million reduction in the profit-sharing arrangement with certain employees in connection with the portfolio management activities conducted on behalf of RSO; and
•
a $1.3 million reduction in wages and benefits due to the reduced number of employees in connection with the sale of Apidos to CVC and the related formation of our CVC Credit Partners joint venture with CVC.
In January 2011, we contributed the leasing origination and servicing platform of LEAF Financial to LEAF to facilitate outside investment in our commercial finance business. RSO also contributed assets and cash to LEAF, and Guggenheim Securities LLC, or Guggenheim, provided a credit facility for use in LEAF's originations. LEAF Financial retained the management of four equipment leasing partnerships, for which LEAF is the sub-servicer. As a result of the investment in LEAF by a third-party venture capital company in November 2011,
we determined that we no longer controlled LEAF and, accordingly, it was deconsolidated from our financial statements. Subsequently, we have recorded our retained interest in LEAF on the equity method of accounting.
The commercial finance assets we manage through LEAF decreased by $20.0 million to $529.0 million as compared to $549.0 million at December 31, 2011. This decrease reflects a $171.0 million reduction in assets we managed for our four investment entities due to the natural runoff of the lease portfolios, which was partially offset by a $151.0 million increase in the LEAF portfolio. As of December 31,
2012, LEAF managed approximately 55,000 leases and loans for itself and our investment entities, with an average original finance value of $24,000 and an average term of 57 months, as compared to approximately 60,000 leases and loans with an average original finance value of $26,000 and an average term of 58 months as of December 31, 2011.
The following table sets forth information related to commercial finance assets managed by us and our unconsolidated joint venture (1) (in millions):
For
information on how we calculate assets under management, see - “Assets under Management”, above.
During fiscal 2012, our share of LEAF's losses reduced our investment to zero, such that we will not reflect any future equity losses in LEAF. However, we will continue to record our share of any charges that may be recorded in LEAF's accumulated other comprehensive income relating to its hedging activities.
We continue to consolidate the operating results of LEAF Financial. Commencing December 1, 2010, we agreed to waive all future management fees from our commercial finance investment partnerships due to their reduced equity distributions as a result of the impact of the recession on their respective cash flows. Accordingly, we waived $751,000 and $1.5
million of fund management fees from these entities during the three months ended December 31, 2012 and 2011, respectively.
The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our commercial finance operations (in thousands):
RSO, which we consolidate as a VIE, is a diversified real estate finance company that is organized and conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended. RSO's investment strategy focuses on commercial real estate and commercial real estate-related assets and, to a lesser extent, commercial finance assets. RSO invests in the following asset classes: commercial real estate-related assets such as commercial real estate property, whole loans, A-notes, B-notes, mezzanine loans, commercial
mortgage-backed securities and investments in real estate joint ventures as well as commercial finance assets such as bank loans, lease receivables and other asset-backed securities, trust preferred securities, debt tranches of collateralized debt obligations, structured note investments and private equity investment principally issued by financial institutions. RSO has financed a substantial portion of its portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of its financings with the maturities and repricing dates of those investments, and has sought to mitigate interest rate risk through derivative instruments.
The following summarizes the operating activities of RSO for the three months ended December 31, 2012 and 2011 (in thousands):
(1) Included
in other income for the three months ended December 31, 2012 is a $1.2 million gain on the extinguishment of debt.
Results of Operations: Other Costs and Expenses
General and Administrative Expenses
Three Months Ended December 31, 2012 as Compared to Three Months Ended December 31, 2011. General and administrative costs were $2.2 million for the three months ended December 31, 2012, a decrease of $668,000
(23%) as compared to $2.9 million for the three months ended December 31, 2011. We reduced our professional fees, primarily legal and accounting services, by $312,000. In addition, wages and benefits decreased by $304,000, primarily due to a $196,000 reduction in amortization expense related to stock-based compensation awards.
Provision for Credit Losses
The following table sets forth our provision for credit losses as reported by segment (in thousands):
We have estimated, based on projected cash flows, that three of the commercial finance funds and two of the real estate partnerships that we sponsored and managed will not have sufficient funds to pay a portion of their accrued management fees and, accordingly, we recorded provisions of $4.7 million and $2.1 million for the three months ended December 31, 2012 and 2011, respectively. In
addition, we recorded a reserve against a receivable due from a financial fund management entity relating to the sale of Apidos. This increase was offset, in part, by the $154,000 reduction in the provision for commercial finance leases and loans held for investment due to the deconsolidation of LEAF in November 2011.
Depreciation and Amortization
Depreciation expense decreased by $1.6 million for the three months ended December 31, 2012 as compared to December 31, 2011 due to the November 2011 deconsolidation of LEAF. The following table reflects the depreciation reported by
LEAF as compared to our other operating segments (in thousands):
Other
operating segments include depreciation of $256,000 and $237,000 on our real estate property investments and $236,000 and $268,000 on property and equipment for the three months ended December 31, 2012 and 2011, respectively.
Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs, as well as discounts related to the following: (a) the value of the warrants issued to the original holders of our Senior Notes, (b) warrants that LEAF issued in connection with its credit facility, and (c) LEAF's securitized borrowings and the corresponding issuance of equipment-backed notes. We recorded interest expense for LEAF for the period prior to its deconsolidation in November 2011. The following table reflects interest expense as reported by segment (in thousands):
In
November 2011, we refinanced the Senior Notes through a partial redemption and modification, which reduced the principal balance outstanding from $18.8 million to $10.0 million and reduced the interest rate from 12% to 9%.
(2)
The amounts presented for commercial finance for fiscal 2012 reflect activity during the period from October 1 to November 16, 2011. Subsequently, these facilities have been deconsolidated from our consolidated financial statements.
As a result of the deconsolidation of LEAF and a reduction in both corporate borrowings and the average interest rate on those borrowings,
interest expense for the three months ended December 31, 2012 decreased by $2.5 million to $522,000 from $3.0 million for three months ended December 31, 2011.
Gain on the Deconsolidation and Sale of Subsidiaries
Gain on Deconsolidation of LEAF. In November 2011, we obtained an additional investment in LEAF by a third-party private investment firm. Accordingly, we determined that we no longer controlled LEAF and, effective with that investment,
we deconsolidated it for financial reporting purposes. Our equity interest in LEAF is 14.9% on a fully diluted basis. We recorded a $7.0 million gain to bring the value of our negative investment in LEAF to zero. In addition, based on a third-party valuation, our investment in LEAF was valued at $1.7 million. Accordingly, during the three months ended December 31, 2011, we recorded a total gain of $8.7 million in conjunction with the deconsolidation of LEAF.
Loss on Extinguishment of Debt
In September and October 2009, we issued $18.8 million of Senior Notes along with detachable 5-year warrants to purchase common stock. The proceeds from the Senior Notes were allocated to the notes and the warrants based on their relative fair values. The fair value of the warrants was recorded as a discount to the notes and was amortized over
the 3-year term of the Senior Notes using the effective interest method. In November 2011, we refinanced the Senior Notes through a partial redemption and modification. Due to the modification, during the three months ended December 31, 2011, we expensed the remaining $2.2 million discount related to the warrant fair value.
Net Income Attributable to Noncontrolling Interests - RSO
Our rights to the benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO are limited to our ownership interest (2.5% as of December 31, 2012). The remaining difference of RSO's net income (loss) is attributed to noncontrolling interests-RSO. For the three months
ended December 31, 2012 and 2011, non-controlling interests expense attributable to RSO was $14.7 million and $367,000, respectively.
Net (Income) Loss Attributable to Noncontrolling Interests - RAI
We record third-party interests in our earnings as amounts allocable to noncontrolling interests. Subsequent to the deconsolidation of LEAF in November 2011, we no longer record commercial finance noncontrolling interests. The following table sets forth the net (income) loss attributable to noncontrolling interests (in thousands):
Outside interests in a commercial property, net of tax of $278 and $0(2)
(516
)
—
Commercial
finance:
Stock-based compensation(3)
—
218
$
(587
)
$
193
(1)
A
related party holds a 19.99% interest in our investment in a hotel property in Savannah, Georgia.
(2)
A third party's interest in a commercial real estate property in Elkins, West Virginia that we consolidated as a VIE. The property underlying the loan was sold and our investment was resolved during the three months ended December 31, 2012.
(3)
Senior executives of LEAF held a 13.9% interest in LEAF Financial as of December
31, 2010. In January 2011, these shares were exchanged for a 21.98% interest in LEAF (10% on a fully diluted basis). As a result of the deconsolidation of LEAF, we no longer record this noncontrolling interest.
Three Months Ended December 31, 2012 as Compared to Three Months Ended December 31, 2011. Our effective income
tax rate (income taxes as a percentage of income from continuing operations, before taxes, excluding RSO) was a benefit of 22% for the three months ended December 31, 2012 as compared to a provision of 21% for the three months ended December 31, 2011. Our effective income tax rate without discrete tax items would have been 47% for the three months ended December 31, 2012. We project our effective tax rate to be between 44% and 47% for fiscal 2013. This rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and the level of our tax credits. We take certain of these and other factors, including our history of pretax earnings, into account in assessing our ability to realize our net deferred tax assets.
We are subject
to examination by the U.S. Internal Revenue Service, or IRS, and other taxing authorities in certain states in which we have significant business operations. We are currently undergoing a New York State examination for fiscal 2007 - 2009. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009 and are no longer subject to state and local income tax examinations by tax authorities for fiscal years before 2006.
Liquidity and Capital Resources
Our analysis of liquidity and capital reserves excludes the liquidity and capital of our consolidated VIE - RSO as we do not have access to or the ability utilize RSO's assets nor do we have any obligation or recourse with respect to any of its liabilities or borrowings.
As an
asset management company, our liquidity needs consist principally of capital needed to make investments and to pay our operating expenses (principally wages and benefits and interest expense). Our ability to meet our liquidity needs will be subject to our ability to generate cash from operations, and, with respect to our investments, our ability to raise investor funds.
At December 31, 2012, our liquidity consisted of four primary sources:
•
cash on hand of $11.9 million;
•
$10.4
million of availability under our two corporate credit facilities;
•
potential disposition of non-core assets; and
•
cash generated from operations.
Disposition of Non-core Assets. Our legacy portfolio at December 31, 2012 consisted of five property interests. To the extent we are able to dispose of these assets, we will obtain additional liquidity. The
amount of additional liquidity we obtain will vary significantly depending upon the asset being sold and then-current economic conditions. We cannot provide any assurance that any dispositions will occur or as to the timing or amounts we may realize from any such dispositions.
Refinancing of Our Debt. In October and November 2012, we amended our Republic and TD Bank facilities, respectively, to extend the maturities of these facilities to December 2014. In December 2012, we amended our Senior Notes extending the maturity to March 2015.
As of December 31, 2012, our total borrowings outstanding of $22.6 million included $10.0 million of Senior Notes, $10.5 million of mortgage debt (secured by the underlying property) and $2.1 million of other debt.
Capital
Requirements
Our capital needs consist principally of funds to make investments in the investment vehicles we sponsor or for our own account and to provide bridge financing or other temporary financial support to facilitate asset acquisitions by our sponsored investment vehicles. Accordingly, the amount of capital we require will depend to a significant extent upon our level of activity in making investments for our own account or in sponsoring investment vehicles, all of which is largely within our discretion.
Dividends
We used cash reserves to fund our dividends during periods in which our cash flows from operations were insufficient.
Our Senior Notes limited the amount of cash dividends to $0.03 per share unless our basic earnings per common share from continuing operations from the preceding
fiscal quarter exceeded $0.25 per share. In September 2013, we obtained approval from the holders of the Senior Notes to remove all limitations on our ability to declare and pay quarterly cash dividends. The determination of the amount of future cash dividends, if any, is at the discretion of our board of directors and will depend on the various factors affecting our financial condition and other matters the board of directors deems relevant.
Not
included in the table above are estimated interest payments calculated at rates in effect at December 31, 2012; less than 1 year: $1.6 million; 1-3 years: $2.4 million; 4-5 years: $1.3 million; and after 5 years: $2.1 million.
Amount
of Commitment Expiration Per Period
Total
Less than
1 Year
1 – 3
Years
4 – 5
Years
After
5 Years
Other
commercial commitments:
Guarantees
$
—
$
—
$
—
$
—
$
—
Real
estate commitments
958
958
—
—
—
Standby
letters of credit
803
803
—
—
—
Total
commercial commitments
$
1,761
$
1,761
$
—
$
—
$
—
LEAF
Valuation Commitment. In conjunction with the third-party equity investment in LEAF, we along with RSO have jointly undertaken a contingent obligation with respect to the equity value of the entity that holds the portfolio of equipment, equipment leases and notes that RSO contributed to LEAF. To the extent that equity falls below $18.7 million (the balance as of the contribution date) as of the final testing date within 90 days of December 31, 2013, we and RSO have agreed to be jointly and severally obligated to contribute cash to LEAF to cover the shortfall. As of December 31, 2012, the value of the equity of the entity was in excess of the commitment and, therefore, we were not required to record a liability with respect to this obligation.
Limited Loan
Guarantee. We and two of our commercial finance fund partnerships, Lease Equity Appreciation Fund I, L.P., or LEAF I, and Lease Equity Appreciation Fund II, L.P., or LEAF II, have provided a limited guarantee to a lender to the partnerships in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. The loans mature at the earlier of (a) the maturity date (March 20, 2014 for the LEAF I loan and December 21, 2013 for the LEAF II loan), or (b) the date on which an event of default under the loan agreement occurs. The maximum guarantee provided by us is up to $7.3 million ($2.3 million for LEAF I and $5.0 million for LEAF II). If we were required
to make any such payments under the guarantee in the future, we would have the option to either step in as the lender or otherwise make a capital contribution to the LEAF partnerships for the amount of the required guarantee payment. Under certain circumstances, the lender will also discount its loans by approximately $250,000 for LEAF I and $347,500 for LEAF II. Management has determined that based on projected cash flows from the underlying lease and loan portfolios collateralizing the loans, there should be sufficient funds to repay the LEAF partnerships' outstanding loan balances and, accordingly, we have not recorded any liability with respect to this guarantee.
Broker-Dealer Capital Requirement. Resource Securities, our wholly-owned subsidiary, is a registered broker-dealer and serves as a dealer-manager for the sale of securities of direct participation investment programs, both public and private, sponsored by our subsidiaries who also serve as general partners and/or managers of these programs. Additionally, Resource Securities serves as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies and for us and RSO. As a broker-dealer, Resource Securities is required to maintain minimum net capital, as defined in regulations under the Securities Exchange Act of 1934, as amended, which was $113,000 and
$100,000 as of December 31, 2012 and September 30, 2012, respectively. As of December 31, 2012 and September 30, 2012, Resource Securities net capital was $258,000 and $447,000, respectively, which exceeded the minimum requirements by $145,000 and $347,000, respectively.
Clawback Liability.
Two financial fund management investment partnerships that have incentive distributions, also known as carried interest, are structured so that there is a “clawback” of previously paid incentive distributions to the extent that such distributions exceed the cumulative net profits of the entities, as defined in the respective partnership agreements. On November 1, 2009 and January 28, 2010, we, along with the co-manager of the general partner of those investment entities, repurchased substantially all the remaining limited partnership interests in these two partnerships, significantly reducing our potential clawback liability. The clawback liability we recorded was $1.2 million at December 31, 2012 and September 30,
2012. Subsequently in 2013, the general partner began the process of dissolving the two partnerships, and settled the clawback liability. Our proportionate share of these payments was $1.1 million.
Legal proceedings. In September 2011, First Community Bank, (“First Community”) filed a complaint against First Tennessee Bank and approximately thirty other defendants consisting of investment banks, rating agencies, collateral managers, including Trapeza Capital Management, LLC (“TCM”), and issuers of CDOs, including Trapeza CDO XIII, Ltd. and Trapeza CDO XIII, Inc. TCM and the Trapeza CDO issuers are collectively referred to as Trapeza. The complaint includes causes of action against TCM for fraud, negligent misrepresentation, violation of the Tennessee Securities Act of 1980 and unjust enrichment. First
Community alleges, among other things, that it invested in certain CDOs, that the defendant rating agencies assigned inflated investment grade ratings to the CDOs, and that the defendant investment banks, collateral managers and issuers (including Trapeza) fraudulently and/or negligently made “materially false and misleading representations and omissions” that First Community relied on in investing in the CDOs, including both written representations in offering materials and unspecified oral representations. Specifically, with respect to Trapeza, First Community alleges that it purchased $20 million of notes in the D tranche of the Trapeza CDO XIII transaction from J.P. Morgan. The Court dismissed this matter in June 2012. First Community appealed and the appellate court affirmed the dismissal as against Trapeza in August 2013.
We are also a party to various routine
legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on our consolidated financial condition or operations.
Real Estate Commitments. As a specialized asset manager, we sponsor investment funds in which we may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT, we have committed to invest 1% of the equity raised to a maximum amount of $2.5 million. This commitment has been reduced to $708,000 as of December 31, 2012
as a result of funds already invested to date.
In July 2011, we entered into an agreement with one of TIC programs we sponsored and manage. This agreement requires us to fund up to $1.9 million for capital improvements for the TIC property over the next two years. The Company advanced funds totaling $1.7 million as of December 31, 2012.
The liabilities for the real estate commitments will be recorded in the future as the amounts become due and payable.
General Corporate Commitments. We are also a party
to employment agreements with certain executives that provide for compensation and other benefits, including severance payments under specified circumstances.
As of December 31, 2012, except for the clawback liability recorded for the two Trapeza entities and executive compensation, we do not believe it is probable that any payments will be required under any of our commitments and contingencies, and accordingly, no liabilities for these obligations have been recorded in the consolidated financial statements.
In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. We have variable interests in VIEs through our management contracts and investments in various securitization entities, including CDO issuers. Since we serve as the asset manager for the investment entities we sponsored and manage, we are generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by us, we will perform an additional qualitative analysis to determine if
our interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, we compare the benefits we would receive (in the optimistic scenario) or the losses we would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by us were significant as compared to total benefits and losses absorbed by all variable interest holders, then we would conclude we are the primary beneficiary.
The financial statements for the three months December 31, 2012 and 2011 and as of September
30, 2012 and December 31, 2012 reflect the consolidation of RSO. Also consolidated at December 31, 2011 was a real estate VIE in which we held a mezzanine loan. The property underlying this loan was subsequently sold in November 2012 and the loan was resolved.
Our investment in RRE Opportunity REIT, and our investments in the structured finance entities that hold investments in trust preferred assets, which we refer to as our Trapeza entities, and asset-backed securities, which we refer to as our Ischus entities, were all determined to be VIEs that we do not consolidate as we do not have the obligation of, or right to, losses or earnings that would be significant to those entities. With respect to RRE Opportunity REIT, we have advanced offering costs that are being reimbursed as the REIT raises additional equity. Except
for those advances, we have not provided financial or other support to these VIEs and have no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at December 31, 2012.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent
assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities and in estimating the liability, if any, for clawback provisions on certain of our partnership interests. We used assumptions, specifically inputs to the Black-Scholes pricing model and the discounted cash flow model, in computing the fair value of the Senior Notes and related warrants. On an on-going basis, we evaluate our estimates, which are based on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to various market risks from changes
in interest rates. Fluctuations in interest rates can impact our results of operations, cash flows and financial position. We manage this risk through regular operating and financing activities. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. The range of changes presented reflects our view of changes that are reasonably possible over a one-year period and provides indicators of how we view and manage our ongoing market risk exposures. Our analysis does not consider other possible effects that could impact our business.
Debt
At December 31, 2012, we had two secured revolving credit facilities for general business use. There were no borrowings on these facilities during the three months ended
December 31, 2012.
All other debt as of December 31, 2012 was at fixed rates of interest and are, therefore, not subject to interest rate fluctuation.
Trading Securities
Our trading security investments are a source of market risk. As of December 31, 2012, our trading security portfolio was comprised of $5.4 million of investments in equity and debt securities. Trading securities are recorded at fair value and changes in the fair value are included in operations. Assuming an immediate 10% decrease in the market value of these
investments as of December 31, 2012, the hypothetical loss would have been approximately $533,000.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, and as a result of the material weakness in our internal controls over financial reporting discussed in "Remediation of Material Weakness" below, our chief executive officer and chief financial officer concluded that our disclosure controls
and procedures were not effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
We are in the process of implementing new procedures to strengthen our internal control over financial reporting. Other than these changes, as discussed below, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weakness
As described in Item 9A of our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2012, management identified various
remedial steps to be implemented with respect to the material weakness in internal control over financial reporting. We designed our remediation efforts to address the material weakness identified by management in connection with the valuation of two of our legacy real estate investments and to strengthen our internal control over financial reporting.
As of September 30, 2013, we have taken steps to address the material weakness and to improve our internal control over financial reporting with respect to the valuation of certain assets, as follows:
•
analyzed and confirmed the accuracy of any significant changes in the methods and assumptions used
in valuing our legacy real estate portfolio; and
formalized our new documentation processes and procedures relative to these valuations.
Management has evaluated its internal control over financial reporting with respect to its determination that RSO should be consolidated
and has concluded that the deficiency was associated with our misapplication of the accounting guidance and the insufficient review of the accounting for the consolidation of variable interest entities.
Management has identified remedial steps that it is in the process of implementing with respect to this control weakness, as follows:
•
management has reviewed and re-evaluated the relevant accounting literature regarding variable interest entities and the circumstances under which they must be consolidated; and
•
management
has re-evaluated and will continue to re-evaluate, based on reconsideration events, the treatment of our other unconsolidated variable interest entities to determine whether any of these entities should be consolidated.
Subject to satisfactory completion of the design and testing of these processes and procedures for effectiveness, management believes that the implementation of these new control processes and procedures will remediate the material weaknesses in its internal control over financial reporting and, as a result, its disclosure controls and procedures.
The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with the Company’s business previously disclosed in Part I, Item 1A of the Company’s 2012 Form 10-KA under the heading “Risk Factors.” The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described
below, any one or more of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations and common stock price.
Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
As of September 30, 2013, we identified a material weakness in our internal control over financial reporting. Failure to maintain an effective system of internal controls may result in investors losing confidence in our financial reporting and disclosures and the price of our common stock may decline.
We have identified deficiencies in our internal control over financial reporting, which we have determined constitutes a material weakness in such financial controls and, consequently, in our disclosure controls and procedure. We have implemented steps to remediate such deficiencies. We discuss these deficiencies and our remedial steps in Item 4 in this report. We cannot assure you that such remedial steps will address adequately these deficiencies or that we have discovered all of
the deficiencies that may exist in our internal controls over financial reporting. Failure to maintain an effective system of internal controls may result in investors losing confidence in our financial reporting and disclosures and the price of our common stock may decline.
As a result of our consolidation of RSO, our financial statements will be materially different from those we have heretofore issued as a separate entity, and will be affected by risks principally relating to RSO and not to us.
Following a re-evaluation of applicable accounting literature, management determined that we must treat RSO as a consolidated variable interest entity rather than as an unconsolidated variable interest entity as we have done previously. RSO has substantially greater assets, liabilities, revenues and expenses that we have as a separate company and, accordingly, our financial statements
are substantially different from the financial statements we would present if we were not required to consolidate RSO. As a result of the consolidation of RSO, certain of the assets, liabilities, revenues and expenses set forth in our financial statements will be affected by risks affecting RSO. We refer you to a discussion of those risks set forth in Item 1A, “Risk Factors,” beginning on page 16 of RSO’s Annual Report on Form 10-K for the year ended December 31, 2012, a copy of which such discussion is annexed to this report as Exhibit 99.4, and which is hereby incorporated herein by this reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases by us during
the quarter ended December 31, 2012 of equity securities that are registered under Section 12 of the Securities Exchange Act of 1934:
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average
Price
Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs
Maximum Number of Shares (or Approximate Dollar Value)
that May Yet be Purchased Under the Plans or Programs
The
average price per share as reflected above includes broker fees and commissions.
On August 1, 2012, our Board of Directors authorized the repurchase of up to 5% of our outstanding common shares. Share repurchases may be made from time to time through open market purchases or privately negotiated transactions at our discretion and in accordance with the rules of the U.S. Securities and Exchange Commission, as applicable. The amount and timing of any repurchases will depend on market conditions and other factors.
Amended
and Restated Bylaws of Resource America. (1)
4.1
Note Purchase Agreement (including the form of Senior Note and form of Warrant). (2)
4.1 (a)
Form of 9% Senior Note due 2015. (14)
10.1(a)
Amended
and Restated Loan and Security Agreement, dated March 10, 2011, between Resource America, Inc. and TD Bank, N.A. (5)
10.1(b)
First Amendment to the Amended and Restated Loan and Security Agreement, dated as of November 29, 2011, between Resource America, Inc. and TD Bank, N.A. (7)
10.1(c)
Second Amendment to the Amended and Restated Loan and Security Agreement and Joinder to Loan
Documents, dated as of February 15, 2012, between Resource America, Inc. and TD Bank, N.A and the Joining Guarantors set forth therein. (11)
10.1(d)
Third Amendment to the Amended and Restated Loan and Security Agreement and Joinder to Loan Documents, dated as of November 16, 2012, between Resource America, Inc. and TD Bank, N.A and the Joining Guarantors set forth therein. (13)
10.2
Amended
and Restated Employment Agreement between Michael S. Yecies and Resource America, Inc., dated December 29, 2008. (3)
Amended and Restated Employment Agreement between
Jeffrey F. Brotman and Resource America, Inc., dated December 29, 2008. (3)
10.5
Amended and Restated Employment Agreement between Jonathan Z. Cohen and Resource America, Inc., dated December 29, 2008. (3)
10.6
Amended and Restated Employment Agreement between Steven J. Kessler and Resource America, Inc., dated December 29, 2008. (3)
10.7(a)
Loan
Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (4)
10.7(b)
Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (6)
10.7(c)
Second Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc.
(9)
10.7(d)
Third Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (12)
10.8
Settlement Agreement, dated January 9, 2012, by and among Raging Capital Group and Resource America, Inc. (8)
10.9
Sale
and Purchase Agreement between Resource America, Inc. and CVC Capital Partners SICAV-FIS, S.A. dated December 29, 2011. (10)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification
of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Stock Purchase Agreement by and among LEAF Commercial Capital, Inc., LEAF Financial Corporation, Resource TRS, Inc., Resource Capital Corp., Resource America, Inc. and the Purchasers named therein, dated November 16, 2011. (10)
Filed previously as an exhibit to our Current Report on Form 8-K filed on December 2, 2011 and by this reference incorporated herein.
(8)
Filed previously as an exhibit to our Current Report on Form
8-K filed on January 11, 2012 and by this reference incorporated herein.
(9)
Filed previously as an exhibit to our Current Report on Form 8-K filed on January 17, 2012 and by this reference incorporated herein.
(10)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2011, and by this reference incorporated herein.
(11)
Filed previously as an exhibit to our Current Report on Form 8-K filed on February 15, 2012, and by this reference incorporated herein.
(12)
Filed previously as an exhibit to our Current Report on Form 8-K filed on October 31, 2012 and by this reference incorporated herein.
(13)
Filed
previously as an exhibit to our Current Report on Form 8-K filed on November 19, 2012 and by this reference incorporated herein.
(14)
Filed previously as an exhibit to our Current Report on Form 8-K filed on December 18, 2012 and by this reference incorporated herein.
(15)
Filed
previously as an exhibit to our Current Report on Form 8-K filed on November 18, 2013 and by this reference incorporated herein.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
