Real Estate

REXI 's real estate portfolio has taken a beating, along with the rest of the real estate market, but the company has real expertise in the distressed real estate business, which is booming in these troubled times.

REXI manages distressed real estate with money raised from others and earns a fee and a carry (percentage of the profits) from that, which is a highly attractive business model.

REXI manages real estate in five areas:

  1. A commercial real estate debt portfolio comprised principally of A notes, whole loans, mortgage participations, B notes, mezzanine debt, and related commercial real estate securities.
  2. Real estate investment fund assets, primarily multifamily apartments.
  3. Portfolios of distressed or value- added real estate assets acquired through joint ventures with institutional investors.
  4. Real estate loans, owned assets, and ventures, known collectively as legacy portfolio.
  5. A portfolio of distressed real estate loans acquired at a discount, primarily from the Department of Housing and Urban Development (HUD).

Table 9.3 shows the assets under management in each area. REXI summarized its real estate activities and future plans in its Q1 2009 earnings release. Here are key excerpts:

• The Company, through its distressed real estate joint ventures, has closed on $71.1 million of acquisitions, including committed capital, from September 2007 through November 2008. The Company acquired $13.2 million of these distressed

Table 9.3 Real Estate Assets under Management

Table 9.3 Real Estate Assets under Management

Assets under Management (millions)

2008

2007

Commercial real estate debt

$

888

$ 935

Real estate investment funds and

$

538

$ 448

programs

Institutional portfolios

$

129

$ 86

Legacy portfolio

$

96

$ 100

Distressed portfolios

$

68

$ 75

$1,719

$1,644

assets in the first fiscal quarter of 2009 and anticipates using its retail broker-dealer channel to launch a $50.0 million fund to expand its distressed real estate operations.

  • Since January 1, 2008, Resource Real Estate has acquired $119.3 million in real estate assets for its investment vehicles including four properties during the first fiscal quarter ended December 31, 2008.
  • Resource Real Estate commenced fundraising for Resource Real Estate Investors 7, L.P. ("RREI 7"), a $40.0 million offering that will invest in multifamily real estate assets. Through February 3, 2009, Resource Real Estate had raised $20.4 million through RREI 7. We anticipate closing this fund in late fiscal 2009. In addition, Resource Real Estate intends to launch Resource Real Estate Opportunity Fund L.P., a real estate partnership focused on investing in discounted real estate.
  • Resource Real Estate 's wholly-owned subsidiary, Resource Residential, a multifamily and commercial property management company, completed its first full year of operations.
  • Resource Real Estate increased the apartment units it manages or whose management it supervises to 17,653 at December 31, 2008 from 14,919 at December 31, 2007. This includes a portfolio of 50 multifamily properties representing 12,301 apartment units managed by Resource Residential.

Table 9.4 shows the financial statement for REXI 's real estate operations for Q1 2009.

We can see that REXI 's Q1 operating profit was about $1 million in each of the past two years. For the previous three years, the annual operating profit was $11.6 million in 2006, $9.8 million in 2007, and $8.9 million in 2008. We expect that the combination of a difficult environment, growth in the distressed real estate business, and cost cutting will result in roughly $8 million of operating profit in this segment in FY 2009.

We then adjust this for the profit REXI earns from rental property since we include the value of this property in our calculation of intrinsic value and we don 't want to double count. This was $525,000 in Q1 2009 or roughly $2 million annualized, so our adjusted annual estimate of real estate operating profit is $6 million.

Table 9.4 Real Estate Operations Income Statement (000s)

Three Months Ended

Three Months Ended

Table 9.4 Real Estate Operations Income Statement (000s)

12/31/08

12/31/07

Revenues:

Management fees:

Asset management fees

$ 995

$ 649

Resource Residential property management fees

$ 984

$ 232

REIT management fees from RCC

$ 1,085

$1,776

$ 3,064

$2,657

Fee income from sponsorship of partnerships and

$ 1,511

$1,299

TIC property interests

Master lease revenues

$ 982

$ 877

Rental property income and FIN 46-R revenues

$ 1,292

$1,109

Interest, including accreted loan discount

$ 240

$ 419

Equity in losses of unconsolidated entities

-$ 199

-$ 60

Net gains on sale of TIC property interests

$ 0

$ 171

Total Revenues

$6,890

$6,472

Costs and expenses:

General and administrative

$2,959

$ 2,947

Resource Residential expenses

$ 992

$ 783

Master lease expenses

$1,200

$ 946

Rental property and FIN 46-R expenses

$ 767

$ 790

Total Expenses

$5,918

$5,466

Real Estate Operating Profit

$ 972

$1,006

Minus net profit from rental property and

$ 525

$ 319

FIN 46-R

Adjusted Real Estate Operating Profit

$ 447

$ 687

SOURCE: REXI 10-Q, Q1 2009.

SOURCE: REXI 10-Q, Q1 2009.

It's hard to know what kind of multiple to put on these earnings, so we use a wide range of 5 to 10 times the $6 million of pretax operating profit, resulting in a $30 million to $60 million valuation estimate.

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