|Shares Out. (in M):||31||P/E||0||0|
|Market Cap (in $M):||325||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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Price Target: $15.00 (45% up); risk price: $9.00; risk-reward: 1 to 3
Resource Capital Corp is a commercial mortgage REIT that languished for years under the Cohen family’s Resource America. The manager was purchased in 2016 by Andrew Farkas’s C-III Capital, which (1) slashed the dividend; (2) announced plans to divest non-core businesses; and (3) haircut NAV by nearly 15%. The market reaction to these curative actions was severe, sending shares from $12.50 to $8.50. One year later, the turnaround is nearly complete, yet the shares have only recovered half of that drop and still trade at a sharp discount to NAV.
Early this year, ele2996 wrote up the company, focusing on the pedigreed team from C-III (whose quality has been further demonstrated over the past few quarters). A number of events have transpired since then that have de-risked the story and enable us to project the path forward.
Resource Capital is a commercial mortgage REIT. Its core business is transitional real estate lending: short-term, first lien debt backed by non-stabilized commercial real estate. Examples of “non-stabilized” real estate include: apartments having their kitchen appliances upgraded; adjacent hotels that are merging into one; and dying retail centers being repurposed as medical office complexes. In a typical transaction, RSO will underwrite and pool a portfolio of three-year loans at 70% LTVs and L+500, then sell off the 0-50% LTV slice at L+150 to create synthetic mezzanine loans generating a low-to-mid teens yield. The legacy team at RSO has been pretty good at this: since 2014, they originated $1.7bn of CRE loans and generated double-digit levered returns without significant losses (note: RSO did recognize some losses on pre-crisis deals during this period).
However, this was not enough to satisfy RSO’s former managers, who tried to use the mortgage REIT to seed other AUM-gathering strategies, including:
Management raised high-cost corporate debt and preferred equity to feed these challenged, subscale, non-core businesses, wrapping the whole package in an unsustainable dividend policy to hide the poor returns. Thus was the stage set for C-III in assuming management of RSO in late 2016.
Given the extent of the mess created by the Cohens, it is impressive that C-III was able to right the ship in just one year. Consider the following:
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