Description

1. Resource Financial Fund Management (RFFM): RFFM executes and manages collateralized debt obligations (CDO’s) in the trust preferred, asset-backed securities, and leveraged loan markets. RFFM currently manages $9 billion in approximately 18 different CDO’s. RFFM derives management fees ranging from 25-50 bps as well as structuring fees which vary.

RFFM has also recently launched a $30 mm hedge fund focused on structured credit opportunities as well as a $50 mm private equity fund focused on small cap and de novo banks. Both funds are 2% management fee and 20% carry.

2. LEAF Financial Corporation (LEAF): LEAF originates and manages small-ticket equipment leases in the medical, computer, and industrial markets among others. LEAF does not use its own balance sheet to originate and hold these leases to maturity. 3^rd party equity is raised through partnerships to provide the capital to own the leases originated. LEAF derives fees from managing these assets (110 bps), originating the leases (200 bps), and providing the capital to hold the leases until they are sold into the partnerships (200 bps). LEAF currently manage $550 mm of leases and is originating new leases at a $500 mm and growing run-rate.

While management has run the company since 1983, LEAF’s current incarnation as a manager of outside capital began in late 2001. In our opinion they now have the best business model of any independent leasing company in the industry as their growth will not be constrained by having enough balance sheet to support the leases they originate. In fact, LEAF has been able to acquire additional leases from other smaller independent leasing companies (and entire leasing companies) that could not hold all the leases they originated due to lack of equity capital.

LEAF recently relocated to a new building and is now operating independent of the Resource America parent. This business could easily be spun-off into its own publicly-traded company if management decides this is the best way to maximize shareholder value.

3. Resource Real Estate (RRE): RRE manages real estate investment partnerships and tenant-in-common (TIC) programs to acquire multi-family real estate for yield-oriented investors. Approximately $100 mm of equity capital is currently invested in $314 mm of assets (16 different properties). RRE derives fees from the acquisition (175 bps), debt placement (175 bps), property management (100 bps), and investment management (100 bps) of these assets. Incentive fees of 25% over an 8% hurdle are also earned (the partnerships have compounded at 12% IRR’s after fees to-date). RRE is also building out its real estate debt securitization business in which they have completed and now manage their first CDO.

4. Resource Capital Corporation (RSO): REXI is the general partner of Resource Capital Corporation (RSO) which is a publicly-traded Mortgage REIT on the NYSE under ticker RSO. RSO currently manages $225 mm of equity in $2.2 billion of real estate and commercial finance assets composed of mostly RMBS, CMBS, and bank loans. As the general partner of RSO, REXI derives a management fee equal to 1.5% of the equity of RSO as well as an incentive fee of 25% of any profits over an 8% hurdle rate. REXI owns 1.9 mm shares of RSO.

• $20 mm of net cash.
• $32 mm ownership of RSO shares (the 1.9 mm shares REXI owns).
• $52 mm of legacy real estate investments from the company’s prior history of investing its own capital opportunistically. REXI has reduced these investments from $200 mm to the current $52 mm and plans to continue to opportunistically divest these assets. Fair value of the remaining real estate is $10-25 mm more than their $52 mm book value.
• $95 mm of other investments in the assets and as a limited partner in the various investment partnerships that REXI manages.
• These assets are offset by long-term debt, minority interests, deferred revenues, and other liabilities of $42 mm.

• FFM continues to originate 2-3 CDO deals per year for each of their groups and realizes 80% incremental operating margins.
• LEAF grows originations from $500 mm to $800 mm over the next 3 years which results in acquisition fees and expense reimbursements covering operating expenses allowing management and spread income to fall to operating income.
• Corporate G&A grows from $9 mm to $16 mm in 2009.

• Resource Capital grows its equity base beyond $225 mm through equity issuances and REXI begins earning additional management and incentive fees on a larger capital base. It is not unreasonable to believe that at some point in the next few years RSO has $1 billion of equity. It is worth noting that RSO had initially planned on raising $125 mm of additional equity in its IPO but was downsized to $30 mm of because the deal was brought to market at an inopportune time. RSO managing up to $1 billion of equity would be worth up to an additional $15/share to REXI. We expect a $150 mm equity raise within the next few months.
• The business segments could grow faster than our conservative expectations and thus more fee income would be derived. For example we assume that the hedge fund and private equity fund stay at $30 and $50 mm of AUM, when in fact these funds have just been launched and there could be capital raises for both funds in the future. Just the base management fee (no incentive fees) on an additional $200 mm of equity is worth up to $2/share.
• Incentive fees are earned on the CDO investment partnerships, real estate investment partnerships, hedge funds, and private equity funds. All of these partnerships earn 20-25% carry on profits above certain hurdle rates. We assume only the base management fees are earned. While it is impossible to know what the performance fees will end up being, it is worth noting that all of REXI’s investment partnerships have had excellent returns since inception and have earned carry. We can however estimate the magnitude; with reasonable return assumptions (12%) these partnerships can earn incentive fees of over $10 mm per year or $.50/share of eps. Applying a multiple of 5-15x results in incremental value of $2.50-$7.50/share just with the current AUM.
• REXI will buy back its stock. We have assumed zero stock buybacks but the company has been an active repurchaser of shares (roughly 3% of the shares outstanding in the last 6 months) as they believe their stock is undervalued. Management has indicated that they plan to continue repurchasing shares. As an aside, insiders have recently been purchasing shares of REXI and RSO on the open market.

• There is no sell-side coverage of Resource America.
• The profitability of the business will be very different three years from now than from today due to the significant operating leverage inherent in a young and fast growing asset management business. Current earnings are understated as the company is spending money through the expense line to build out the different business.
• The financial statements are very difficult to understand due to the significant changes that have occurred at the company over the last 3 years. There are many moving parts that require detailed analysis to correctly separate and value.
• There are many related party transactions that at first blush make people feel uncomfortable with corporate governance.

• Returns from the various investment partnerships are poor enough where they destroy the relationships and brand value that Resource America has built over many years with the broker/deal channel. We think one of the competitive advantages of REXI is their ability to raise capital and any threat to this is a potential risk.
• There is a liquidity crunch where the real estate and/or corporate credit markets get hit hard enough to prevent FFM from launching future CDO’s and have impairments to their current investments in their CDO’s and RSO.
• While management has spent a lot of money building a deep bench at the different operating businesses, Jonathon Cohen is the irreplaceable driving force behind the growth at the company and his loss would impact our growth assumptions.

Catalyst