March 07, 2017 - 6:07pm EST by
2017 2018
Price: 8.20 EPS N/A 1.00
Shares Out. (in M): 31 P/E N/A 8.2
Market Cap (in $M): 255 P/FCF N/A N/A
Net Debt (in $M): 1,439 EBIT 0 0
TEV ($): 1,979 TEV/EBIT N/A N/A

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  • Discount to book
  • REIT


     Resource Capital Corp (RSO) was founded and, until recently, run by the infamous Cohen family. Long time VIC members will remember them from a variety of companies that they managed that were written up on VIC. The pater familias, Edward, will be remembered from his roles in Atlas Resource Partners (ARP), Atlas Energy Group (ATLS), Atlas Pipeline Partners (APL) and Resource America (REXI). Edward's wife, Betsy, founded and ran RAIT Financial (RAS) and The Bancorp (TBBR). Their son, Jonathan, assisted his parents in these ventures and, until recently, ran RSO. In almost every instance, the Cohens have destroyed the capital that they got their hands on. Personally, however, they seemed to have done pretty well.

     RSO is a real estate investment trust which defined itself as a "specialty finance company" organized to invest in a wide variety of financial instruments. It went public in March of 2006 at $60 a share. It is externally managed by Resource America (REXI). The management contract is relatively standard:

1) A base fee of 1.5% of equity which is defined as "the net proceeds from any issuance of shares of common stock less offering-related costs, plus or minus our retained earnings (excluding non-cash equity compensation incurred in current or prior periods) less any amounts we have paid for common stock repurchases.

2) Incentive compensation, (i) 25% of the dollar amount by which (A) adjusted operating earnings exceeds the weighted average of the price per share of the common stock in our initial offering and the prices per share of subsequent offerings, multiplied by (B) the greater of (a) 2% and (b) 0.50% plus one-fourth of the Ten Year Treasury rate for the quarter, multiplied by (c) the weighted average shares outstanding. 75% of the incentive compensation will be paid in cash and 25% in common stock (unless more stock is requested).

     On Sept. 9, 2016 REXI was acquired by C-III Capital Partners, a subsidiary of Island Capital. Island Capital was founded by Andrew Farkas in 2003 after he sold his successful prior venture, Insignia Financial Group. Island Capital is involved in a wide assortment of real estate ventures including luxury marinas, civil engineering, real estate brokerage, debt and equity securities placement services, and, through C-III, loan servicing, loan origination, fund management and principal investment. The principals of the firm have generally been with it since for 10 years and longer. Andrew Farkas has become Chairman of RSO, and Robert C. Lieber, an executive managing partner of C-III, has become RSO's President. Robert Lieber joined C-II in 2010 after serving as Deputy Mayor for Economic Development under Michael Bloomberg. He joined the City government in 2007 after 23 years at Lehman Brothers where he was Global Head of Real Estate Banking. Jeffrey P. Cohen of C-III (no relation to the Edward Cohen family) has joined RSO's Board. He has been with Island Capital since 2003 and was with Insignia prior to that.

     I believe that the C-III people talented and of high quality. On Nov. 14, 2016 the C-II team introduced themselves in their first earnings call. They announced that RSO was taking $51.6 million of write-downs and that another $11 to $14 million of write-downs was anticipated in the fourth quarter.These impairments reduced GAAP book value to $14.71 on Sept 30. If another $14 million of losses are incurred book will be further impaired to $14.26. Last, new management announced that the dividend would be cut from $0.42 a quarter to $0.05 a quarter for 2017. On the news, RSO stock declined from about $12 to its present price $8.20. At $8.20, RSO is selling at a 42% discount to book of $14.26. About 22% of the Sept. 30 portfolio were assets unrelated to commercial real estate lending. When those are disposed of, RSO will become a single line business engaged in commercial real estate lending. As the process unfolds over the year, RSO's prospects will become clearer, and the stocks discount to NAV should narrow. There is lots of work to do, but there is a margin for error that might be sufficient.

     RSO's balance sheet as of Sept. 30 is as follows:


Cash and equivalents  - $164.8 mil

Assets held for sale    -  $438.0 mil

Investments & other  -  $1,554.7 mil

Total assets              -  $2,157.5 mil


Borrowings               -  $1,439.0 mil (including $115 mil 6% cv debs due 12/1/18 and $100 mil 8% cv debs due 1/15/2020)

8.5% Preferred A      -  $27 mil (1,069,016 shares callable 6/14/17 @ $25 - cumulative)

8.25% Preferred B    -  $139 mil(5,544,579 shares callable 10/2/17 @ $25 - cumulative)

8.63% Preferred C    -  $120 mil (4,800,000 shares callable 7/30/24 @ $25 - cumulative)

Total                        -  $1,724 mil

Book equity              -  $457 mil

Equity @ Mkt           -  $254.8 mil - 44% discount




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


RSO will report their 4th quarter and 2016 results on March 13th. Management commentary and the results will, hopefully, clarify the situation.

As 2016 progresses, investors should become more hopeful about RSO's prospects and the institution of a bigger dividend in 2017.

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