2% Yield With Upside Potential, But This REIT Comes With Risk

Resource Capital Corp (RSO) hasn’t had as much attention as I would’ve liked to give it because I wanted to focus more on the mall REITs. I believed RSO has the potential to see a nice gain on BV for Q3 2017. I’m expected quarter end BV to run around $15. Book value per share ended up being $14.91 which was a material jump from $14.12 in June.
Their current price is about 65% price to book ratio.
RSO had two major things going for it coming into Q3. One is a large gain on selling off a discontinued part of the business. This should make GAAP earnings look much stronger. Again, this could materially improve P/E ratios, depending on how the tool finds earnings. Further, we are lapping Q3 2016. That was the quarter when management took huge impairments to recognize the huge flaws the company had. Between the selling of a segment at a substantial gain and lapping the other quarter, GAAP earnings for the trailing 4 quarters should look dramatically better.
Meanwhile, RSO also issued those convertible bonds at a much lower interest rate. They said they were looking to repurchase their higher rate bonds. Those higher rate bonds were carried on the balance sheet at amortized cost below face value and were unlikely to be offered up for sale at any material discount to face value. Consequently, if they managed to buy back the bonds, they should see a slight decrease in BV as an accounting adjustment. However, this would lead to lower interest costs for future... Read more

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