ACRES Commercial Realty Corp. - FORM 8-K - EX-99..1 - EXHIBIT 99..1 - August 1, 2016

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8-K - 8-K - ACRES Commercial Realty Corp.a2016630rso-8k.htm


FOR IMMEDIATE RELEASE


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

RESOURCE CAPITAL CORP.
REPORTS RESULTS FOR
THREE AND SIX MONTHS ENDED JUNE 30, 2016

Highlights and Significant Items
•
On August 1, 2016, RSO entered into an agreement to sell Northport TRS, LLC ("Northport"), its self-originated middle market loan business, for $247.0 million. The sale is expected to close on or before August 5, 2016 with net proceeds of approximately $102.0 million. RSO is retaining Northport's portfolio of broadly syndicated loans and one self-originated loan. RSO expects that the transaction will result in an after tax GAAP loss of $8.2 million, or $0.27 per common share-diluted and a reduction of Adjusted Funds from Operations (“AFFO”) of $8.2 million, or $0.27 per common share-diluted.
•
After giving effect to the Northport transaction discussed above, AFFO was $0.48 and $0.95 per share-diluted (see Schedule I), and GAAP net income (loss) allocable to common shares were $(0.05) and $0.26 per share-diluted.
•
Since the inception of RSO's common stock repurchase program and through June 30, 2016, RSO has repurchased approximately 8.0% of its outstanding common shares.
•
In addition, RSO repurchased 196,000 shares of its Series B Preferred stock, which had an accretive impact to our common shareholders of $1.5 million, or $0.05 per share-diluted, during the six months ended June 30, 2016.
•
RSO declared and paid a common stock cash dividend of $0.42 in the second quarter and $0.84 per share for the first six months of 2016.
•
As previously announced, on May 22, 2016, Resource America, Inc., the parent company of RSO’s external manager, agreed to be acquired by C-III Capital Partners LLC, a leading commercial real estate services company engaged in a broad range of activities, including primary and special loan servicing, loan origination, fund management, CDO management, principal investment, investment sales and multifamily property management.

New York, N.Y., August 1, 2016 - Resource Capital Corp. (NYSE: RSO) (“RSO” or the “Company”), a real estate investment trust, or REIT, whose investment strategy focuses on commercial real estate ("CRE") assets, commercial mortgage-backed securities (“CMBS”), middle market loans, commercial finance assets and other investments, reported results for the three and six months ended June 30, 2016. All per share amounts stated in this release take into account the one-for-four reverse stock split effective on August 31, 2015 as though it were in full effect for all periods presented for comparison purposes.

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




million, or $(0.94) per share-diluted and $(21.6) million, or $(0.66) per share-diluted for the three and six months ended June 30, 2015.

Additional highlights:
Commercial Real Estate
•
Substantially all of the $1.4 billion CRE loan portfolio is comprised of senior whole loans as of June 30, 2016.
•
Of this portfolio, 98% of the loans are floating rate senior whole loans and have London Interbank Offered Rate ("LIBOR") floors with a weighted average floor of 0.28% as of June 30, 2016.
•
Interest income on whole loans increased by $2.2 million and $5.5 million or 12.3% and 16.1%, to $20.2 million and $39.6 million during the three and six months ended June 30, 2016, respectively, as compared to $18.0 million and $34.1 million during the three and six months ended June 30, 2015. For comparison purposes, this excludes income in the 2015 period from our legacy CRE CDOs deconsolidated in the first quarter of 2016.
•
RSO closed and funded $414.7 million of new whole loans in the 12 months ended June 30, 2016, with a weighted average yield of 5.37%, including amortization of origination fees.
The following table summarizes RSO's CRE loan activities and fundings of previous commitments, at par, for the three, six and 12 months ended June 30, 2016 (in millions, except percentages):
 
Three Months Ended
 
Six Months Ended
 
12 Months Ended
 
Floating
Weighted
Average Spread (1) (2)
 
Weighted Average Fixed Rate
 
June 30,
2016
 
June 30,
2016
 
June 30,
2016
 
 
New whole loans funded and originated
$
7.2

 
$
46.1

 
$
414.7

 
5.25
%
 
—
%
Unfunded loan commitments
3.3

 
13.5

 
47.8

 
 
 
 
New loans originated
10.5

 
59.6

 
462.5

 
 
 
 
Payoffs (3)
(107.2
)
 
(131.6
)
 
(408.7
)
 
 
 
 
Previous commitments funded
21.7

 
39.0

 
61.0

 
 
 
 
Principal pay downs
—

 
—

 
(0.4
)
 
 
 
 
Unfunded loan commitments
(3.3
)
 
(13.5
)
 
(47.8
)
 
 
 
 
Loans, net funded
$
(78.3
)
 
$
(46.5
)
 
$
66.6

 
 
 
 
(1)
Represents the weighted-average rate above the one-month LIBOR on loans whose interest rate is based on LIBOR as of June 30, 2016. $46.1 million of loans originated during the six months ended June 30, 2016 have LIBOR floors, with a weighted average floor of 0.25%.
(2)
Reflects rates on new whole loans funded and originated during the six months ended June 30, 2016.
(3)
CRE loan payoffs and extensions resulted in $426,000 and $632,000 of exit and extension fees earned during the three and six months ended June 30, 2016, respectively.
Legacy Commercial Real Estate CDO Liquidation
On April 25, 2016, RSO called and liquidated its investment in RREF CDO 2006-1. RREF CDO 2006-1 was RSO's first CRE CDO which closed on August 10, 2006 and was comprised of $345.0 million of assets at closing. RSO received the remaining collateral of $49.0 million, at par, recognizing a gain of approximately $846,000, in exchange for its remaining interest after paying off the CDO debt. As it relates to AFFO, RSO had deferred $21.4 million of gains on extinguishment of debt related to notes of its RREF CDO 2006-1 securitization that were repurchased at significant discounts and subsequently canceled. Approximately $6.3 million of that $21.4 million of gains on extinguishment of debt was realized in cash upon the refinancing of certain assets received in the liquidation of RREF CDO 2006-1. The remaining cash gains are expected to be recognized over subsequent periods in AFFO as RSO receives cash above its cost basis in the repurchased debt.
Commercial Finance & Middle Market Loans
•
On August 1, 2016, RSO entered into a purchase agreement to sell Northport TRS, LLC for $247.0 million. The transaction includes substantially all of the direct origination middle market loans and one syndicated loan with a collective par balance of $257.0 million and the assumption of the Credit Facility, for net proceeds of approximately $102.0 million. RSO will retain the remaining broadly syndicated middle market loans and one direct origination middle market loan totaling $68.0 million, at carrying value. During the second quarter, RSO recorded $9.0 million provision for loan losses on the loans sold to adjust the portfolio to fair value included in the purchase price and accelerated the amortization of the remaining deferred debt issuance costs of $2.6 million pertaining to the Credit Facility. The ownership of Northport TRS, LLC is held approximately 70.0% in a taxable subsidiary and 30.0% in a




non-taxable subsidiary. The impact of the added provisions and write-off of the remaining debt issuance costs, net of tax, is $8.2 million. It is anticipated the transaction will close on or before August 5, 2016.
•
RSO earned $912,000 of net fees through its subsidiary, Resource Capital Asset Management, during the six months ended June 30, 2016.
The following table summarizes RSO's middle market loan activities and fundings of previous commitments, at par, for the six months and 12 months ended June 30, 2016 (in millions, except percentages):
 
Three Months Ended 
June 30, 2016
 
Six Months Ended
June 30, 2016
 
12 Months
Ended
June 30, 2016
 
Weighted
Average
Spread (1)
 
Weighted
Average
All-in Rate (2)
 
Weighted Average Yield
 
 
 
 
 
 
New loans funded and originated
$
21.8

 
$
71.9

 
$
154.5

 
9.43
%
 
10.43
%
 
9.93
%
Unfunded loan commitments
2.7

 
7.5

 
10.9

 
 
 
 
 
 
New loans originated
24.5

 
79.4

 
165.4

 
 
 
 
 
 
Payoffs and sales (3)
(9.5
)
 
(114.6
)
 
(149.3
)
 
 
 
 
 
 
Previous commitments funded
0.1

 
4.4

 
12.4

 
 
 
 
 
 
Principal pay downs
(2.0
)
 
(5.3
)
 
(12.3
)
 
 
 
 
 
 
Unfunded loan commitments
(2.7
)
 
(7.5
)
 
(10.9
)
 
 
 
 
 
 
Loans, net funded
$
10.4

 
$
(43.6
)
 
$
5.3

 
 
 
 
 
 
(1)
Represents the weighted-average rate above the one-month and three-month LIBOR on loans whose interest rate is based on LIBOR as of June 30, 2016, excluding fees. Of these loans, $21.8 million have LIBOR floors with a weighted average floor of 1.00%.
(2)
Reflects rates on RSO's portfolio balance as of June 30, 2016, excluding fees.
(3)
Middle market loan payoffs resulted in $2.6 million of prepayment fees earned during the six months ended June 30, 2016.
Liquidity
At June 30, 2016, RSO's liquidity is derived from three primary sources:
•
unrestricted cash and cash equivalents of $65.2 million and restricted cash of $30,000 in margin call accounts;
•
capital available for reinvestment in two of RSO's CRE securitizations of $6.3 million; and
•
loan principal repayments of $178,000 that will pay down outstanding CLO note balances, as well as interest collections of $113,000. In addition, RSO had $197,000 in restricted deposits related to certain of its investments.
In addition, as described under Commercial Finance & Middle Market Loans, the sale of Northport TRS, LLC is expected to yield net proceeds of approximately $102.0 million, which will be considered unrestricted cash.
RSO also has $240.7 million and $126.7 million, respectively, available through two term financing facilities to finance the origination of CRE loans and $77.4 million available through a term financing facility to finance the purchase of CMBS.
Equity Allocation
As of June 30, 2016, RSO had allocated its invested equity capital among its targeted asset classes as follows: 72% in total real estate assets, 27% in commercial finance and middle market assets and 1% in other investments.
Book Value
As of June 30, 2016, RSO’s book value per common share was $16.63, a decrease from $17.63 per common share at December 31, 2015.  The decrease in book value is primarily attributable to the adoption of new consolidation accounting guidance effective January 1, 2016 combined with distributions paid in excess of earnings during the six months ended June 30, 2016. Upon adoption, RSO deconsolidated five variable interest entities resulting in a reduction to the beginning balance of retained earnings of $16.9 million, or $0.55 per common share. RSO has provided a schedule on economic book value which adjusts for certain investments which RSO intends to hold to maturity and has recorded unrealized losses on the investments, in excess of RSO's value at risk (See Schedule IV). Total stockholders’ equity at June 30, 2016, which measures equity before the consideration of non-controlling interests, was $777.6 million, of which $270.1 million was attributable to preferred stock. Total stockholders’ equity at December 31, 2015 was $818.9 million of which $274.7 million was attributable to preferred stock.

Capital Transactions




Since the inception of the share repurchase program in August 2015 through June 30, 2016, RSO has repurchased $33.9 million of its common stock (approximately 2.7 million shares), which represented approximately 8.0% of its outstanding common shares, at a weighted average price of $12.58 per share.
RSO repurchased 196,000 shares of its Series Preferred B stock, which had an accretive impact to our common shareholders of $1.5 million, or $0.05 per share-diluted, during the six months ended June 30, 2016.
Investment Portfolio
The following table summarizes the amortized cost and net carrying amount of RSO's investment portfolio as of June 30, 2016, classified by asset type:
 
Amortized
Cost
 
Net Carrying Amount
 
Percent of
Portfolio
 
Weighted
Average Coupon
As of June 30, 2016
 
 
 
 
 
 
 
Loans Held for Investment:
 
 
 
 
 
 
 
CRE Whole loans(1)
$
1,421,190

 
$
1,419,765

 
63.55
%
 
5.50%
Middle market loans
54,485

 
54,485

 
2.44
%
 
8.63%
Residential mortgage loans(4)
2,641

 
2,630

 
0.12
%
 
4.16%
 
1,478,316

 
1,476,880

 
66.11
%
 
 
Loans held for sale (2):
 
 
 
 
 
 
 
Middle market loans
259,179

 
259,179

 
11.60
%
 
10.13%
Residential mortgage loans
161,129

 
161,129

 
7.21
%
 
3.75%
 
420,308

 
420,308

 
18.81
%
 
 
Investments in Available-for-Sale Securities:
 
 
 
 
 
 
 
  CMBS-private placement
89,621

 
88,158

 
3.95
%
 
5.15%
  RMBS
1,919

 
2,017

 
0.09
%
 
4.51%
  ABS
162,759

 
165,105

 
7.39
%
 
N/A(3)
 
254,299

 
255,280

 
11.43
%
 
 
Investment Securities-Trading:
 
 
 
 
 
 
 
Structured notes
5,907

 
3,982

 
0.18
%
 
N/A(3)
RMBS
1,896

 
—

 
—
%
 
N/A(3)
 
7,803

 
3,982

 
0.18
%
 
 
Other (non-interest bearing):
 
 
 
 
 
 
 
Investment in unconsolidated entities
76,801

 
76,801

 
3.44
%
 
N/A(3)
Direct Financing Leases(5)
1,130

 
665

 
0.03
%
 
5.66%
 
77,931

 
77,466

 
3.47
%
 
 
Total Investment Portfolio
$
2,238,657

 
$
2,233,916

 
100.00
%
 
 
(1)
Net carrying amount includes allowance for loan losses of $1.4 million at June 30, 2016.
(2)
Loans held for sale are carried at the lower of cost or market.
(3)
There is no stated rate associated with these securities.
(4)
Net carrying amount includes allowance for loan losses of $11,000 at June 30, 2016.
(5)
Net carrying amount includes allowance for lease losses of $465,000 at June 30, 2016.




Supplemental Information
The following schedules of reconciliations and supplemental information as of June 30, 2016 are included at the end of this release:
•
Schedule I - Reconciliation of GAAP Net Income (Loss) to Funds from Operations (“FFO”) and AFFO.
•
Schedule II - Summary of General and Administrative Expenses.
•
Schedule III - Summary of Securitization Performance Statistics.
•
Schedule IV - Reconciliation of GAAP Stockholders' Equity to Economic Book Value.
•
Supplemental Information regarding loan investment statistics, CRE loans and middle market loans.
About Resource Capital Corp.
RSO is a real estate investment trust that is primarily focused on originating, holding and managing commercial mortgage loans and other commercial real estate-related debt and equity investments. RSO also makes other commercial finance and residential mortgage investments and holds middle market loans.
RSO is externally managed by Resource Capital Manager, Inc., an indirect wholly-owned subsidiary of Resource America, Inc. (NASDAQ: REXI), an asset management company that specializes in real estate and credit investments.
For more information, please visit RSO's website at www.resourcecapitalcorp.com or contact investor relations at pkamdar@resourcecapitalcorp.com.
Safe Harbor Statement
Statements made in this release may include forward-looking statements, which involve substantial risks and uncertainties. RSO's actual results, performance or achievements could differ materially from those expressed or implied in this release. The risks and uncertainties associated with forward-looking statements contained in this release include those related to:
•
fluctuations in interest rates and related hedging activities;
•
the availability of debt and equity capital to acquire and finance investments;
•
defaults or bankruptcies by borrowers on RSO's loans or on loans underlying its investments;
•
adverse market trends which have affected and may continue to affect the value of real estate and other assets underlying RSO's investments;
•
increases in financing or administrative costs; and
•
changes in general business and economic conditions that in the past have impaired and may in the future impair the credit quality of borrowers and RSO's ability to originate loans.
For further information concerning these and other risks pertaining to the forward-looking statements contained in this release, and to the general risks to which RSO is subject, see Item 1A, “Risk Factors” included in its Annual Report on Form 10-K and the risks expressed in other of its public filings with the Securities and Exchange Commission.
RSO cautions you not to place undue reliance on any forward-looking statements contained in this release, which speak only as of the date of this release. All subsequent written and oral forward-looking statements attributable to RSO or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this release. Except to the extent required by applicable law or regulation, RSO undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
Furthermore, certain non-GAAP financial measures are discussed in this release. RSO's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. 
The remainder of this release contains RSO's unaudited consolidated balance sheets, unaudited consolidated statements of operations, reconciliation of GAAP net income (loss) to FFO and AFFO, summary of securitization performance statistics and supplemental information regarding RSO's CRE loan and middle market loan portfolios and a reconciliation of GAAP stockholders' equity to economic book value.




RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS (1)
 
 
 
Cash and cash equivalents
$
65,167

 
$
78,756

Restricted cash
6,823

 
40,635

Investment securities, trading
3,982

 
25,550

Investment securities available-for-sale, pledged as collateral, at fair value
88,122

 
162,306

Investment securities available-for-sale, at fair value
167,158

 
45,782

Loans held for sale ($161.1 million and $94.5 million at fair value)
420,308

 
95,946

Loans, pledged as collateral and net of allowances of $1.4 million and $47.1 million
1,476,880

 
2,160,751

Investments in unconsolidated entities
76,801

 
50,030

Derivatives, at fair value
6,133

 
3,446

Interest receivable
8,868

 
14,009

Deferred tax asset, net
16,916

 
12,646

Principal paydown receivable
8,100

 
17,941

Direct financing leases, net of allowances of $0.5 million
665

 
931

Intangible assets
26,726

 
26,228

Prepaid expenses
5,058

 
3,180

Other assets
12,137

 
22,295

Total assets
$
2,389,844

 
$
2,760,432

LIABILITIES (2)
 

 
 

Borrowings
$
1,575,219

 
$
1,895,288

Distribution payable
17,060

 
17,351

Accrued interest expense
5,282

 
5,604

Derivatives, at fair value
3,084

 
3,941

Accrued tax liability
139

 
549

Accounts payable and other liabilities
12,629

 
10,939

Total liabilities
1,613,413

 
1,933,672

EQUITY
 

 
 

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.50% Series A cumulative redeemable preferred shares, liquidation preference $25.00
per share 1,069,016 and 1,069,016 shares issued and outstanding
1

 
1

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.25% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share 5,544,579 and 5,740,479 shares issued and outstanding
6

 
6

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.625% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share 4,800,000 and 4,800,000 shares issued and outstanding
5

 
5

Common stock, par value $0.001:  125,000,000 shares authorized; 31,163,780 and 31,562,724 shares issued and outstanding (including 655,775 and 691,369 unvested restricted shares)
31

 
32

Additional paid-in capital
1,218,340

 
1,228,346

Accumulated other comprehensive income (loss)
700

 
(2,923
)
Distributions in excess of earnings
(441,522
)
 
(406,603
)
Total stockholders’ equity
777,561

 
818,864

     Non-controlling interests
(1,130
)
 
7,896

      Total equity
776,431

 
826,760

TOTAL LIABILITIES AND EQUITY
$
2,389,844

 
$
2,760,432








RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)

 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
(1) Assets of consolidated Variable Interest Entities ("VIEs") included in the total assets above:
 
 
 
Cash and cash equivalents
$
—

 
$
95

        Restricted cash
6,595

 
39,061

        Investment securities available-for-sale, pledged as collateral, at fair value
—

 
66,137

        Loans held for sale
—

 
1,475

Loans, pledged as collateral and net of allowances of $1.0 million and
$42.8 million
942,182

 
1,416,441

        Interest receivable
3,767

 
6,592

        Prepaid expenses
42

 
238

        Principal paydown receivable
8,100

 
17,800

        Other assets
41

 
833

        Total assets of consolidated VIEs
$
960,727

 
$
1,548,672

 
 
 
 
(2) Liabilities of consolidated VIEs included in the total liabilities above:
 
 
 
        Borrowings
$
634,553

 
$
1,032,581

        Accrued interest expense
549

 
923

        Derivatives, at fair value
—

 
3,346

        Accounts payable and other liabilities
157

 
(117
)
        Total liabilities of consolidated VIEs
$
635,259

 
$
1,036,733





RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
REVENUES
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
31,365

 
$
29,759

 
$
65,477

 
$
62,422

Securities
4,291

 
5,500

 
9,089

 
9,552

Leases
39

 
163

 
(15
)
 
258

Interest income - other
2,307

 
1,119

 
3,548

 
1,951

Total interest income
38,002

 
36,541

 
78,099

 
74,183

Interest expense
18,636

 
15,803

 
34,407

 
30,705

Net interest income
19,366

 
20,738

 
43,692

 
43,478

Dividend income
18

 
17

 
35

 
33

Fee income
103

 
2,816

 
(598
)
 
3,986

Total revenues
19,487

 
23,571

 
43,129

 
47,497

OPERATING EXPENSES
 

 
 

 
 
 
 
Management fees - related party
3,099

 
3,500

 
7,136

 
7,060

Equity compensation - related party
1,415

 
791

 
2,678

 
1,786

Rental operating expense
—

 
—

 
—

 
6

Lease operating
1

 
24

 
4

 
47

General and administrative
11,153

 
9,994

 
21,223

 
19,605

Depreciation and amortization
504

 
621

 
1,145

 
1,186

Impairment losses
—

 
—

 
—

 
59

Provision (recovery) for loan and lease losses
12,099

 
38,810

 
12,136

 
42,800

Total operating expenses
28,271

 
53,740

 
44,322

 
72,549

 
 
 
 
 
 
 
 
 
(8,784
)
 
(30,169
)
 
(1,193
)
 
(25,052
)
OTHER INCOME (EXPENSE)
 

 
 

 
 
 
 
Equity in earnings of unconsolidated subsidiaries
2,696

 
662

 
4,918

 
1,368

Net realized and unrealized gain (loss) on sales of investment securities available-for-sale and loans and derivatives
6,946

 
9,580

 
11,774

 
22,187

Net realized and unrealized gain (loss) on investment securities, trading
183

 
279

 
328

 
2,353

Unrealized gain (loss) and net interest income on linked transactions, net
—

 
—

 
—

 
235

(Loss) on reissuance/gain on extinguishment of debt
—

 
(171
)
 
—

 
(1,071
)
(Loss) gain on sale of real estate
—

 
22

 
(3
)
 
—

Total other income (expense)
9,825

 
10,372

 
17,017

 
25,072

 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE TAXES
1,041

 
(19,797
)
 
15,824

 
20

Income tax (expense) benefit
3,488

 
(2,918
)
 
2,725

 
(4,765
)
NET INCOME (LOSS)
4,529

 
(22,715
)
 
18,549

 
(4,745
)
 
 
 
 
 
 
 
 




 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net (income) loss allocated to preferred shares
(6,014
)
 
(6,116
)
 
(12,062
)
 
(12,207
)
Carrying value in excess of consideration paid for preferred shares
(111
)
 
—

 
1,500

 
—

Net (income) loss allocable to non-controlling interest, net of taxes
60

 
(2,180
)
 
150

 
(4,657
)
NET INCOME (LOSS) ALLOCABLE TO COMMON SHARES
$
(1,536
)
 
$
(31,011
)
 
$
8,137

 
$
(21,609
)
NET INCOME (LOSS) PER COMMON SHARE – BASIC
$
(0.05
)
 
$
(0.94
)
 
$
0.27

 
$
(0.66
)
NET INCOME (LOSS) PER COMMON SHARE – DILUTED
$
(0.05
)
 
$
(0.94
)
 
$
0.26

 
$
(0.66
)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC
30,410,451

 
32,852,316

 
30,505,428

 
32,833,426

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED
30,410,451

 
32,852,316

 
30,724,272

 
32,833,426







SCHEDULE I

RESOURCE CAPITAL CORP. AND SUBSIDIARIES
RECONCILIATION OF GAAP NET INCOME (LOSS) TO FFO and AFFO
(in thousands, except per share data)
(unaudited)
Funds from Operations
RSO evaluates our performance based on several performance measures, including funds from operations, or FFO, and adjusted funds from operations, or AFFO, in addition to net income. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts as net income (computed in accordance with GAAP), excluding gains or losses on the sale of depreciable real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures.
AFFO is a computation made by analysts and investors to measure a real estate company’s operating performance. RSO calculates AFFO by adding or subtracting from FFO the impact of non-cash accounting items as well as the effects of items that we deem to be non-recurring in nature. We deem transactions to be non-recurring if a similar transaction has not occurred in the past two years, and if we do not expect a similar transaction to occur in the next two years. We adjust for these non-cash and nonrecurring items to analyze our ability to produce cash flow from on-going operations, which we use to pay dividends to our shareholders. Non-cash adjustments to FFO include the following: impairment losses resulting from fair value adjustments on financial instruments; provisions for loan losses; equity investment gains and losses; straight-line rental effects; share based compensation expense; amortization of various deferred items and intangible assets; gains on sales of property that are wholly owned or owned through a joint venture; the cash impact of capital expenditures that are related to our real estate owned; and REIT tax planning adjustments, which primarily relate to accruals for owned properties for which we made a foreclosure election and adjustments to tax estimates with respect to the final resolution of foreclosed property when it is listed for sale. In addition, we calculate AFFO by adding and subtracting from FFO the realized cash impacts of the following: extinguishment of debt, reissuances of debt, sales of property and capital expenditures.
Management believes that FFO and AFFO are appropriate measures of our operating performance in that they are frequently used by analysts, investors and other parties in the evaluation of REITs. Management uses FFO and AFFO as measures of its operating performance, and believes they are also useful to investors because they facilitate an understanding of our operating performance apart from non-cash and non-recurring items, which may not necessarily be indicative of current operating performance and that may not allow accurate period to period comparisons of our operating performance.
While RSO's calculations of AFFO may differ from the methodology used for calculating AFFO by other REITs and our FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs, RSO also believes that FFO and AFFO may provide us and our investors with an additional useful measure to compare our performance with some other REITs. Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to GAAP net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of its liquidity.






The following table reconciles GAAP net income (loss) to FFO and AFFO for the periods presented (unaudited) (in thousands, except share and per share data):
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss) allocable to common shares - GAAP
$
(1,536
)
 
$
(31,011
)
 
$
8,137

 
$
(21,609
)
Adjustments:
 
 
 
 
 
 
 
   (Gains) losses on sales of property (1) 
(10
)
 
(22
)
 
(32
)
 
—

FFO allocable to common shares
(1,546
)
 
(31,033
)
 
8,105

 
(21,609
)
Adjustments:
 
 
 
 
 
 
 
Non-cash items:
 
 
 
 
 
 
 
   Provision (recovery) for loan losses
1,277

 
38,117

 
1,420

 
41,741

   Amortization of deferred costs
(non real estate) and intangible assets
3,321

 
2,986

 
6,491

 
5,853

   Amortization of discount on convertible senior notes
705

 
633

 
1,415

 
949

  Acceleration of deferred debt issuance costs from sale of Northport loans
2,560

 
—

 
2,560

 
—

   Equity investment (gains) losses
(933
)
 
(350
)
 
(2,344
)
 
(402
)
   Share-based compensation
1,415

 
791

 
2,678

 
1,786

   Impairment losses
—

 
—

 
—

 
59

   Unrealized losses (gains) on CMBS
marks - linked transactions (2)
—

 
—

 
—

 
(235
)
   Unrealized (gains) losses on
trading portfolio
(183
)
 
(155
)
 
(118
)
 
(1,319
)
   Unrealized (gains) losses on foreign exchange transactions
(80
)
 
5,510

 
(246
)
 
4,851

   Unrealized (gains) losses on derivatives
(834
)
 
—

 
(2,212
)
 
1,075

   Loss on resale of debt
—

 
171

 
—

 
1,071

   Change in mortgage
servicing rights valuation reserve
2,300

 
(800
)
 
4,800

 
(250
)
Change in residential loan warranty reserve
213

 
400

 
332

 
400

Dead deal costs
—

 
—

 
—

 
399

REIT tax planning adjustments
—

 
—

 
—

 
317

Cash items:
 
 
 
 
 
 
 
   Gains (losses) on sale of property (1) 
10

 
22

 
32

 
—

   Gains (losses) on extinguishment of debt
6,303

 
3,765

 
6,303

 
6,645

AFFO allocable to common shares
$
14,528

 
$
20,057

 
$
29,216

 
$
41,331

 
 
 
 
 
 
 
 
Weighted average shares – diluted
30,410

 
32,852

 
30,724

 
32,833

 
 
 
 
 
 
 
 
AFFO per share – diluted 
$
0.48

 
$
0.61

 
$
0.95

 
$
1.26

 
(1)
Amount represents gains/losses on sales of owned real estate as well as sales of joint venture real estate interests that were recorded by RSO on an equity basis.
(2)
As the result of an accounting standards update adopted on January 1, 2015, RSO unlinked its previously linked transactions.






RSO has five reportable operating segments: Commercial Real Estate Lending, Commercial Finance, Middle Market Lending, Residential Mortgage Lending, and Corporate & Other. The reportable operating segments are business units that offer different products and services. The Commercial Real Estate Lending operating segment includes our activities and operations related to commercial real estate loans, commercial real estate-related securities, and investments in real estate. The Commercial Finance operating segment includes RSO's activities and operations related to bank loans, bank loan-related securities, and direct financing leases. The Middle Market Lending operating segment includes RSO's activities and operations related to the origination and purchase of middle market loans. The Residential Mortgage Lending operating segment includes RSO's activities and operations related to the origination and servicing of residential mortgage loans and the investment in residential mortgage-backed securities ("RMBS"). The Corporate & Other segment includes corporate level interest income, interest expense, inter-segment eliminations not allocable to any particular operating segment, and general and administrative expense. The following table presents a reconciliation of GAAP net income (loss) to AFFO for the three months ended June 30, 2016 presented by operating segment (in thousands, except per share data):
 
Commercial Real Estate Lending
 
Commercial Finance
 
Middle Market Lending
 
Residential Mortgage Lending
 
Corporate & Other
 
Total
Net income (loss) allocable to common shares - GAAP
$
17,004

 
$
7,276

 
$
(9,939
)
 
$
(1,255
)
 
$
(14,622
)
 
$
(1,536
)
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
   (Gains) losses on sales of property (1) 
(10
)
 
—

 
—

 
—

 
—

 
(10
)
FFO allocable to common shares
16,994

 
7,276

 
(9,939
)
 
(1,255
)
 
(14,622
)
 
(1,546
)
Adjustments to net income (loss) to reconcile AFFO:
 
 
 
 
 
 
 
 
 
 
 
Non-cash items:
 
 
 
 
 
 
 
 
 
 
 
    Provision (recovery) for loan and lease losses
(68
)
 
—

 
1,345

 
—

 
—

 
1,277

    Amortization of deferred costs (non real estate)
and intangible assets
1,379

 
327

 
233

 
1,345

 
37

 
3,321

    Amortization of discount on convertible senior notes
—

 
—

 
—

 
—

 
705

 
705

  Acceleration of deferred debt issuance costs from sale of Northport loans
—

 
—

 
2,560

 
—

 
—

 
2,560

    Equity investment (gains) losses
—

 
(933
)
 
—

 
—

 
—

 
(933
)
    Share-based compensation
—

 
—

 
—

 
63

 
1,352

 
1,415

    Unrealized (gains) losses on trading portfolio
—

 
(183
)
 
—

 
—

 
—

 
(183
)
   Unrealized (gains) losses on foreign exchange transactions
—

 
(80
)
 
—

 
—

 
—

 
(80
)
    Unrealized (gains) losses on derivatives
—

 
—

 
198

 
(1,136
)
 
104

 
(834
)
    Change in mortgage servicing rights valuation
—

 
—

 
—

 
2,300

 
—

 
2,300

    Change in residential loan warranty reserve
—

 
—

 
—

 
213

 
—

 
213

Cash items:
 
 
 
 
 
 
 
 
 
 
 
    Gains (losses) on sale of property(1)
10

 
—

 
—

 
—

 
—

 
10

   Gains (losses) on extinguishment of debt
6,303

 
—

 
—

 
—

 
—

 
6,303

Total AFFO adjustments
7,624

 
(869
)
 
4,336

 
2,785

 
2,198

 
16,074

AFFO allocable by segment
$
24,618

 
$
6,407

 
$
(5,603
)
 
$
1,530

 
$
(12,424
)
 
$
14,528

 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares – diluted
30,410

 
30,410

 
30,410

 
30,410

 
30,410

 
30,410

 
 
 
 
 
 
 
 
 
 
 
 
AFFO per share – diluted (by segment)
$
0.81

 
$
0.21

 
$
(0.18
)
 
$
0.05

 
$
(0.41
)
 
$
0.48

Contribution by percentage
91.34
%
 
23.77
%
 
(20.79
)%
 
5.68
%
 
 
 
 
Allocation
$
0.44

 
$
0.11

 
$
(0.10
)
 
$
0.03

 
 
 
 
(1)
Amount represents gains/losses on sales of owned real estate as well as sales of joint venture real estate interests that were recorded by RSO on an equity basis.





SCHEDULE II


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

The following table presents the allocation of general and administrative expenses between Corporate and Residential Mortgage Lending:
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
General and administrative expenses:
 
 
 
 
 
 
 
 
Corporate
 
$
4,200

 
$
4,081

 
$
8,186

 
$
8,865

Residential Mortgage Lending
 
6,953

 
5,927

 
13,037

 
12,114

Total
 
$
11,153

 
$
10,008

 
$
21,223

 
$
20,979






SCHEDULE III

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

Securitizations - Distributions and Coverage Test Summary
The following table sets forth the distributions made and coverage test summaries for each of the Company's securitizations for the periods presented (in thousands):
Name
 
Cash Distributions
 
Annualized Interest Coverage Cushion
 
Overcollateralization Cushion
 
 
Six Months Ended 
 June 30,
 
Year Ended
December 31,
 
As of June 30,
 
As of June 30,
 
As of Initial
Measurement Date
 
 
2016
 
2015
 
2016 (1) (2)
 
2016 (3)
 
Apidos Cinco CDO (4)
 
$
1,733

 
$
6,336

 
$
3,956

 
$
20,860

 
$
17,774

RREF CDO 2006-1(4) (9)
 
$
1,394

 
$
3,451

 
$
—

 
$
—

 
$
24,941

RREF CDO 2007-1(4)
 
$
1,001

 
$
6,102

 
$
15,250

 
$
67,491

 
$
26,032

RCC CRE Notes 2013
 
$
2,217

 
$
9,129

 
N/A

 
N/A

 
N/A

RCC 2014-CRE2 (5)
 
$
6,894

 
$
15,826

 
N/A

 
$
50,660

 
$
20,663

RCC 2015-CRE3 (6)
 
$
5,954

 
$
9,186

 
N/A

 
$
26,092

 
$
20,313

RCC 2015-CRE4 (7)
 
$
6,024

 
$
3,291

 
N/A

 
$
9,397

 
$
9,397

Moselle CLO S.A. (8)
 
$
183

 
$
29,099

 
N/A

 
N/A

 
N/A

(1)
Interest coverage includes annualized amounts based on the most recent trustee statements.
(2)
Interest coverage cushion represents the amount by which annualized interest income expected exceeds the annualized amount payable on all classes of securitization notes senior to the Company's preference shares.
(3)
Overcollateralization cushion represents the amount by which the collateral held by the securitization issuer exceeds the maximum amount required.
(4)
Apidos Cinco CDO, RREF CDO 2006-1, and RREF CDO 2007-1 were deconsolidated as a result of the new consolidation accounting guidance adopted effective January 1, 2016.
(5)
Resource Capital Corp. 2014-CRE2 has no reinvestment period; however, principal repayments, for a period which ended in July 2016, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(6)
Resource Capital Corp. 2015-CRE3 closed on February 24, 2015; the first distribution was in March 2015. There is no reinvestment period; however, principal repayments, for a period ending in February 2017, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(7)
Resource Capital Corp. 2015-CRE4 closed on August 18, 2015; the first distribution was in September 2015. There is no reinvestment period; however, principal repayments, for a period ending in September 2017, may be designated to purchase loans held outside of the securitization that represent the funded commitments of existing collateral in the securitization that were not funded as of the date the securitization was closed. Additionally, the indenture contains no interest coverage test provisions.
(8)
Moselle CLO S.A. was acquired on February 24, 2014 and the reinvestment period for this securitization expired prior to the acquisition. In the fourth quarter of 2014 RSO began to liquidate Moselle CLO S.A. and, by January 2015, all of the assets were sold.
(9)
RREF CDO 2006-1 was liquidated on April 25, 2016 and, as a result, all $66.3 million of the remaining assets were returned to RSO in exchange for the Company's preference shares and equity notes in the securitization.





SCHEDULE IV

RESOURCE CAPITAL CORP. AND SUBSIDIARIES
RECONCILIATION OF GAAP STOCKHOLDERS’ EQUITY TO ECONOMIC BOOK VALUE (2) 
(in thousands)
(unaudited)

 
As of
June 30, 2016
Total stockholders' equity per GAAP (1)
$
777,561

Preferred stock equity
(270,087
)
Stockholders' equity allocable to common shares
507,474

 
 
Add:
 
Deconsolidation of RREF CDO 2006-1 (3) (4)
370

Deconsolidation of RREF CDO 2007-1 (3) (4)
9,492

Deconsolidation of Apidos Cinco CDO (3) (4)
3,953

Net unrealized losses - investment securities available-for-sale and derivatives (5)
700

Economic book value
$
521,989

Shares outstanding
30,508,005

Economic book value per share
$
17.11


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





RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(in thousands, except percentages)
(unaudited)

Loan Investment Statistics

The following table presents information on RSO's impaired loans and related allowances for the periods indicated (based on amortized cost):
 
 
June 30,
2016
 
December 31,
2015
Allowance for loan losses:
 
 
 
 
Specific allowance:
 
 
 
 
     Commercial real estate loans (1)
 
$
—

 
$
40,274

     Bank loans (1)
 
—

 
1,282

Total specific allowance
 
—

 
41,556

General allowance:
 
 
 
 
     Commercial real estate loans
 
1,425

 
1,565

     Middle market loans
 
—

 
3,939

     Residential mortgage loans
 
11

 
11

Total general allowance
 
1,436

 
5,515

Total allowance for loans
 
$
1,436

 
$
47,071

Allowance as a percentage of total loans
 
0.10
%
 
2.1
%
 
 
 
 
 
Loans held for sale: (2)
 
 
 
 
     Bank loans
 
$
—

 
$
1,475

     Middle market loans (3)
 
259,179

 
—

     Residential mortgage loans
 
161,129

 
94,471

Total loans held for sale
 
$
420,308

 
$
95,946

 
(1)
As a result of the deconsolidation of RREF CDO 2006-1, RREF CDO 2007-1, and Apidos Cinco CDO on January 1, 2016, the loans in these CDO vehicles are no longer carried on our consolidated balance sheet.
(2)
Loans held for sale are presented at the lower of cost or fair value.
(3)
Middle market direct origination loans were moved to held for sale and are reflected at fair value. See Commercial Finance and Middle Market Loans section for further discussion.




RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(unaudited)

The following table presents commercial real estate loan portfolio statistics as of June 30, 2016 (based on carrying value):
Security type:
 
Whole loans
100.0
%
Total
100.0
%
 
 
Collateral type:
 
Multifamily
44.9
%
Office
20.2
%
Retail
20.7
%
Hotel
14.2
%
Total
100.0
%
 
 
Collateral location:
 
Texas
27.7
%
Southern California
14.8
%
Northern California
11.1
%
Georgia
8.7
%
Florida
7.1
%
North Carolina
5.8
%
Colorado
3.6
%
Nevada
3.0
%
Pennsylvania
2.5
%
Minnesota
2.2
%
Maryland
2.2
%
Other
11.3
%
Total
100.0
%





RESOURCE CAPITAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(unaudited)


The following table presents middle market loan portfolio statistics by industry as of June 30, 2016 (based on carrying value):
Industry type:
 
Healthcare, Education, and Childcare
15.6
%
Diversified/Conglomerate Service
14.7
%
Hotels, Motels, Inns, and Gaming
10.6
%
Telecommunications
9.1
%
 Home and Office Furnishings, Housewares, and Durable Consumer Products
7.5
%
Beverage, Food and Tobacco
6.4
%
Leisure, Amusement, Motion Pictures, Entertainment
5.8
%
Insurance
5.3
%
Personal Transportation
5.0
%
Banking
4.2
%
Personal, Food, and Miscellaneous Services
3.0
%
Structure Finance Securities
3.0
%
Finance
2.6
%
Diversified/Conglomerate Manufacturing
2.3
%
Buildings and Real Estate
2.2
%
Cargo Transport
1.9
%
Oil and Gas
0.8
%
Total
100.0
%


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