UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
  FORM
10-Q
 (Mark
One)
 x           QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
  For the
quarterly period ended June 30, 2009
  OR
   ̈           TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
  For the
transition period from _________ to __________
  Commission
file number: 1-32733
  
 RESOURCE
CAPITAL CORP.
 (Exact
name of registrant as specified in its charter)
 Maryland
                
                20-2297134(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      No.)
 
 712
      5th
      Avenue, 10th
      FloorNew
      York, New York 10019(Address
      of principal executive offices) (Zip code)(212)
      506-3870(Registrant's
      telephone number, including area
code)
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x
Yes  ̈
No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
 Yes  ̈ No  ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 
 Large
      accelerated filer
                 ̈
                
                Accelerated
      filer
                xNon-accelerated
      filer
                 ̈
                (Do
      not check if a smaller reporting Company)
                Smaller
      reporting company
                 ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  ̈ Yes x No
 
 The
number of outstanding shares of the registrant’s common stock on August 5, 2009
was 24,944,589 shares.
  (Back to Index)
 
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 INDEX
TO QUARTERLY REPORT
 ON FORM 10-Q
 
 
 PAGEPART
      I
                              FINANCIAL
      INFORMATIONItem 1.
                              Financial
      StatementsConsolidated Balance Sheets – June 30, 2009 (unaudited) and
      December 31, 2008
                              3Consolidated Statements of Operations
      (unaudited)
                                Three and Six
      Months Ended June 30, 2009 and 2008
                              4Consolidated Statement of Changes in Stockholders’ Equity
      (unaudited)
                                Six Months
      Ended June 30, 2009
                              5Consolidated Statements of Cash Flows (unaudited) Six Months
      Ended June 30, 2009 and 2008
                              6Notes to Consolidated Financial Statements – June 30, 2009
      (unaudited)
                              7Item 2.
                              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                              28Item 3.
                              Quantitative and Qualitative Disclosures about Market
      Risk
                              46Item 4.
                              Controls and Procedures
                              47PART
      II
                              OTHER
      INFORMATIONItem 6.
                              Exhibits
                              48SIGNATURES
                              49
  (Back to Index)
 
 (Back to Index)
  PART
I.                      FINANCIAL
INFORMATION
  Item
1.                 Financial
Statements
 
 RESOURCE CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except share data)
 
 June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)ASSETSCash and cash
      equivalents
                    
                    $
                    10,553
                    
                    
                    $
                    14,583Restricted cash
                    
                    
                    58,728
                    
                    
                    
                    60,394Investment securities
      available-for-sale, pledged as collateral, at fair value
                    
                    
                    13,940
                    
                    
                    
                    22,466Investment securities
      available-for-sale, at fair value
                    
                    
                    4,236
                    
                    
                    
                    6,794Loans, pledged as collateral and
      net of allowances of $59.1 million and
                      $43.9 million
                    
                    
                    1,663,306
                    
                    
                    
                    1,712,779Loans held for
    sale
                    
                    
                    2,401
                    
                    
                    
                    −Direct financing leases and
      notes, pledged as collateral, net of allowance of
                      $600,000 and $450,000 and net
      of unearned income
                    
                    
                    2,833
                    
                    
                    
                    104,015Investments in unconsolidated
      entities
                    
                    
                    1,548
                    
                    
                    
                    1,548Interest
    receivable
                    
                    
                    6,331
                    
                    
                    
                    8,440Principal paydown
      receivables
                    
                    
                    59
                    
                    
                    
                    950Other assets
                    
                    
                    10,623
                    
                    
                    
                    4,062Total assets
                    
                    $
                    1,774,558
                    
                    
                    $
                    1,936,031LIABILITIESBorrowings
                    
                    $
                    1,584,664
                    
                    
                    $
                    1,699,763Distribution
    payable
                    
                    
                    7,532
                    
                    
                    
                    9,942Accrued interest
      expense
                    
                    
                    2,325
                    
                    
                    
                    4,712Derivatives, at fair
      value
                    
                    
                    11,830
                    
                    
                    
                    31,589Accounts payable and other
      liabilities
                    
                    
                    2,305
                    
                    
                    
                    3,720Total
    liabilities
                    
                    
                    1,608,656
                    
                    
                    
                    1,749,726STOCKHOLDERS’
      EQUITYPreferred stock, par value
      $0.001:  100,000,000 shares authorized;
                      no shares issued and
      outstanding
                    
                    
                    −
                    
                    
                    
                    −Common stock, par value
      $0.001:  500,000,000 shares authorized;
                      24,911,944 and 25,344,867
      shares issued and outstanding
                      (including 466,446 and 452,310
      unvested restricted shares)
                    
                    
                    26
                    
                    
                    
                    26Additional paid-in
      capital
                    
                    
                    353,831
                    
                    
                    
                    356,103Accumulated other comprehensive
      loss
                    
                    
                    (66,446
                    )
                    
                    
                    (80,707
                    )Distributions in excess of
      earnings
                    
                    
                    (121,509
                    )
                    
                    
                    (89,117
                    )Total stockholders’
      equity
                    
                    
                    165,902
                    
                    
                    
                    186,305TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    1,774,558
                    
                    
                    $
                    1,936,031
 The
accompanying notes are an integral part of these statements
 (Back to Index)
 3
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share data)
 (Unaudited)
 
 Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008REVENUESNet interest
    income:Loans
                    
                    $
                    21,969
                    
                    
                    $
                    28,686
                    
                    
                    $
                    45,129
                    
                    
                    $
                    61,125Securities
                    
                    
                    883
                    
                    
                    
                    1,158
                    
                    
                    
                    1,765
                    
                    
                    
                    2,339Leases
                    
                    
                    2,093
                    
                    
                    
                    1,961
                    
                    
                    
                    4,326
                    
                    
                    
                    3,951Interest income −
      other
                    
                    
                    329
                    
                    
                    
                    453
                    
                    
                    
                    676
                    
                    
                    
                    1,826Total interest
      income
                    
                    
                    25,274
                    
                    
                    
                    32,258
                    
                    
                    
                    51,896
                    
                    
                    
                    69,241Interest expense
                    
                    
                    12,748
                    
                    
                    
                    18,924
                    
                    
                    
                    26,625
                    
                    
                    
                    42,072Net interest
    income
                    
                    
                    12,526
                    
                    
                    
                    13,334
                    
                    
                    
                    25,271
                    
                    
                    
                    27,169OPERATING
      EXPENSESManagement fees − related
      party
                    
                    
                    925
                    
                    
                    
                    1,171
                    
                    
                    
                    1,926
                    
                    
                    
                    2,909Equity compensation − related
      party
                    
                    
                    265
                    
                    
                    
                    541
                    
                    
                    
                    353
                    
                    
                    
                    622Professional
      services
                    
                    
                    1,089
                    
                    
                    
                    664
                    
                    
                    
                    2,053
                    
                    
                    
                    1,456Insurance
    expenses
                    
                    
                    217
                    
                    
                    
                    170
                    
                    
                    
                    389
                    
                    
                    
                    298General and
      administrative
                    
                    
                    441
                    
                    
                    
                    343
                    
                    
                    
                    846
                    
                    
                    
                    698Income tax
    expense
                    
                    
                    44
                    
                    
                    
                    138
                    
                    
                    
                    (1
                    )
                    
                    
                    167Total expenses
                    
                    
                    2,981
                    
                    
                    
                    3,027
                    
                    
                    
                    5,566
                    
                    
                    
                    6,150NET
      OPERATING INCOME
                    
                    
                    9,545
                    
                    
                    
                    10,307
                    
                    
                    
                    19,705
                    
                    
                    
                    21,019OTHER
      (EXPENSE) REVENUENet realized and unrealized
      losses (gains) on
                      investments
                    
                    
                    (1,608
                    )
                    
                    
                    102
                    
                    
                    
                    (15,953
                    )
                    
                    
                    (1,893
                    )Other income
                    
                    
                    20
                    
                    
                    
                    26
                    
                    
                    
                    42
                    
                    
                    
                    59Provision for loan and lease
      losses
                    
                    
                    (19,984
                    )
                    
                    
                    (15,692
                    )
                    
                    
                    (27,973
                    )
                    
                    
                    (16,829
                    )Gain on the extinguishment of
      debt
                    
                    
                    6,900
                    
                    
                    
                    −
                    
                    
                    
                    6,900
                    
                    
                    
                    1,750Total other
      expenses
                    
                    
                    (14,672
                    )
                    
                    
                    (15,564
                    )
                    
                    
                    (36,984
                    )
                    
                    
                    (16,913
                    )NET
      (LOSS) INCOME
                    
                    $
                    (5,127
                    )
                    
                    $
                    (5,257
                    )
                    
                    $
                    (17,279
                    )
                    
                    $
                    4,106NET
      (LOSS) INCOME PER SHARE –BASIC
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.71
                    )
                    
                    $
                    0.17NET
      (LOSS) INCOME PER SHARE –DILUTED
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.21
                    )
                    
                    $
                    (0.71
                    )
                    
                    $
                    0.16WEIGHTED
      AVERAGE NUMBER OF
                      SHARES OUTSTANDING –
      BASIC
                    
                    
                    24,369,581
                    
                    
                    
                    24,721,063
                    
                    
                    
                    24,427,452
                    
                    
                    
                    24,665,840WEIGHTED
      AVERAGE NUMBER OF
                      SHARES OUTSTANDING –
      DILUTED
                    
                    
                    24,369,581
                    
                    
                    
                    24,721,063
                    
                    
                    
                    24,427,452
                    
                    
                    
                    24,922,340DIVIDENDS
      DECLARED PER SHARE
                    
                    $
                    0.30
                    
                    
                    $
                    0.41
                    
                    
                    $
                    0.60
                    
                    
                    $
                    0.82
 
 The
accompanying notes are an integral part of these statements
 (Back to Index)
 4
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTOF CHANGESIN STOCKHOLDERS’ EQUITY
 SIX
MONTHS ENDED JUNE 30, 2009
 (in
thousands, except share data)
 (Unaudited)
 
 Common
      StockShares
                  
                  
                  Amount
                  
                  
                  Additional
                      Paid-In
      Capital
                  
                  
                  Accumulated
      Other Comprehensive Loss
                  
                  
                  Retained
      Earnings
                  
                  
                  Distributions
      in Excess of Earnings
                  
                  
                  Total
      Stockholders’
                      Equity
                  
                  
                  Comprehensive
      LossBalance,
      January 1, 2009
                  
                  
                  25,344,867
                  
                  
                  $
                  26
                  
                  
                  $
                  356,103
                  
                  
                  $
                  (80,707
                  )
                  
                  $
                  −
                  
                  
                  $
                  (89,117
                  )
                  
                  $
                  186,305Net
      proceeds from dividend
                    reinvestment and
      stock
                    purchase plan
                  
                  
                  23,541
                  
                  
                  
                  −
                  
                  
                  
                  76
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  76Repurchase
      and retirement of
                    treasury shares
                  
                  
                  (700,000
                  )
                  
                  
                  −
                  
                  
                  
                  (2,800
                  )
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  (2,800
                  )Stock
      based compensation
                  
                  
                  251,727
                  
                  
                  
                  −
                  
                  
                  
                  99
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  99Amortization
      of stock
                    based
    compensation
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  353
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  353Forfeiture
      of unvested stock
                  
                  
                  (8,191
                  )
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −Net
      loss
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  (17,279
                  )
                  
                  
                  −
                  
                  
                  
                  (17,279
                  )
                  
                  
                  (17,279
                  )Available-for-sale,
      fair
                    value adjustment,
    net
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  (5,639
                  )
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  (5,639
                  )
                  
                  
                  (5,639
                  )Designated
      derivatives, fair
                    value adjustment
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  19,900
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  19,900
                  
                  
                  
                  19,900Distributions
      on common
                    stock
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  17,279
                  
                  
                  
                  (32,392
                  )
                  
                  
                  (15,113
                  )Comprehensive
      loss
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  $
                  (3,018
                  )Balance,
      June 30, 2009
                  
                  
                  24,911,944
                  
                  
                  $
                  26
                  
                  
                  $
                  353,831
                  
                  
                  $
                  (66,446
                  )
                  
                  $
                  −
                  
                  
                  $
                  (121,509
                  )
                  
                  $
                  165,902
 
 The
accompanying notes are an integral part of these financial
statements
 
 (Back to Index)
 5
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 Six
      Months EndedJune
      30,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net income
                      
                      $
                      (17,279
                      )
                      
                      $
                      4,106Adjustments to reconcile net
      income to net cash provided by
                        operating
      activities:Provision for loan and lease
      losses
                      
                      
                      27,973
                      
                      
                      
                      16,828Depreciation and
      amortization
                      
                      
                      1,023
                      
                      
                      
                      396Amortization/accretion of net
      discount on investments
                      
                      
                      (2,436
                      )
                      
                      
                      (483
                      )Amortization of discount on
      notes
                      
                      
                      101
                      
                      
                      
                      84Amortization of debt issuance
      costs
                      
                      
                      1,767
                      
                      
                      
                      1,576Amortization of stock-based
      compensation
                      
                      
                      353
                      
                      
                      
                      622Amortization of terminated
      derivative instruments
                      
                      
                      238
                      
                      
                      
                      56Non-cash incentive compensation
      to the Manager
                      
                      
                      (1
                      )
                      
                      
                      141Unrealized losses on
      non-designated derivative instruments
                      
                      
                      37
                      
                      
                      
                      −Net realized and unrealized
      losses on investments
                      
                      
                      15,953
                      
                      
                      
                      1,893Gain on the extinguishment of
      debt
                      
                      
                      (6,900
                      )
                      
                      
                      (1,750
                      )Changes in operating assets and
      liabilities
                      
                      
                      573
                      
                      
                      
                      9,819Net cash provided by operating
      activities
                      
                      
                      21,402
                      
                      
                      
                      33,288CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted cash
                      
                      
                      −
                      
                      
                      
                      73,255Principal payments on securities
      available-for-sale
                      
                      
                      −
                      
                      
                      
                      2,269Proceeds from sale of securities
      available-for-sale
                      
                      
                      −
                      
                      
                      
                      8,000Distribution from unconsolidated
      entities
                      
                      
                      −
                      
                      
                      
                      257Purchase of loans
                      
                      
                      (92,098
                      )
                      
                      
                      (131,498
                      )Principal payments received on
      loans
                      
                      
                      51,520
                      
                      
                      
                      63,473Proceeds from sales of
      loans
                      
                      
                      52,261
                      
                      
                      
                      19,836Purchase of direct financing
      leases and notes
                      
                      
                      −
                      
                      
                      
                      (14,291
                      )Proceeds from payments received on
      direct financing leases and notes
                      
                      
                      8,639
                      
                      
                      
                      15,907Proceeds from sale of direct
      financing leases and notes
                      
                      
                      2,125
                      
                      
                      
                      1,174Net cash provided by investing
      activities
                      
                      
                      22,447
                      
                      
                      
                      38,382CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of
      common stock
                      
                      
                      174
                      
                      
                      
                      −Repurchase of common
      stock
                      
                      
                      (2,800
                      )
                      
                      
                      −Proceeds from
      borrowings:Repurchase
    agreements
                      
                      
                      18
                      
                      
                      
                      239Collateralized debt
      obligations
                      
                      
                      −
                      
                      
                      
                      18,040Secured term
    facility
                      
                      
                      −
                      
                      
                      
                      4,083Payments on
      borrowings:Repurchase
    agreements
                      
                      
                      (13,754
                      )
                      
                      
                      (47,586
                      )Secured term
    facility
                      
                      
                      (13,395
                      )
                      
                      
                      (9,993
                      )Repurchase of issued
      bonds
                      
                      
                      (600
                      )
                      
                      
                      (3,250
                      )Settlement of derivative
      instruments
                      
                      
                      −
                      
                      
                      
                      (4,178
                      )Distributions paid on common
      stock
                      
                      
                      (17,522
                      )
                      
                      
                      (20,799
                      )Net cash used in financing
      activities
                      
                      
                      (47,879
                      )
                      
                      
                      (63,444
                      )
 (Back to Index)
 6
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 Six
      Months EndedJune
      30,2009
                    
                    
                    2008NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (4,030
                    )
                    
                    
                    8,226CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    14,583
                    
                    
                    
                    6,029CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    10,553
                    
                    
                    $
                    14,255NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Distributions on common stock
      declared but not paid
                    
                    $
                    7,532
                    
                    
                    $
                    10,440Issuance of restricted
      stock
                    
                    $
                    242
                    
                    
                    $
                    1,335Promissory note from sale of
      direct financing leases and notes
                    
                    $
                    7,545
                    
                    
                    $
                    −Transfer of direct financing
      leases and notes
                    
                    $
                    89,763
                    
                    
                    $
                    −Transfer of secured term
      facility
                    
                    $
                    82,319
                    
                    
                    $
                    −SUPPLEMENTAL
      DISCLOSURE:Interest expense paid in
      cash
                    
                    $
                    25,029
                    
                    
                    $
                    44,984Income taxes paid in
      cash
                    
                    $
                    −
                    
                    
                    $
                    489
 The
accompanying notes are an integral part of these financial
statements
  (Back to Index)
 7
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
1 – ORGANIZATION AND BASIS OF QUARTERLY PRESENTATION
 
 Resource Capital Corp. and
subsidiaries’ (the ‘‘Company’’) principal business activity is to purchase and
manage a diversified portfolio of commercial real estate-related assets and
commercial finance assets.  The Company’s investment activities are
managed by Resource Capital Manager, Inc. (‘‘Manager’’) pursuant to a management
agreement (‘‘Management Agreement’’).  The Manager is a wholly-owned
indirect subsidiary of Resource America, Inc. (“Resource America”) (NASDAQ:
REXI).  The following variable interest entities (“VIEs”) are
consolidated on the Company’s financial statements:
  ·
              RCC
      Real Estate, Inc. (“RCC Real Estate”) holds real estate investments,
      including commercial real estate loans and commercial real estate-related
      securities.  RCC Real Estate owns 100% of the equity of the
      following entities:
  -
              Resource
      Real Estate Funding CDO 2006-1 (“RREF CDO 2006-1”), a Cayman Islands
      limited liability company and qualified real estate investment trust
      (“REIT”) subsidiary (“QRS”).  RREF CDO 2006-1 was established to
      complete a collateralized debt obligation (“CDO”) issuance secured by a
      portfolio of commercial real estate loans and commercial mortgage-backed
      securities.
  -
              Resource
      Real Estate Funding CDO 2007-1 (“RREF CDO 2007-1”), a Cayman Islands
      limited liability company and QRS.  RREF CDO 2007-1 was
      established to complete a CDO issuance secured by a portfolio of
      commercial real estate loans and commercial
      mortgage-backed securities.
  ·
              RCC
      Commercial, Inc. (“RCC Commercial”) holds bank loan investments and
      commercial real estate-related securities.  RCC Commercial owns
      100% of the equity of the following
entities:
  -
              Apidos
      CDO I, Ltd. (“Apidos CDO I”), a Cayman Islands limited liability company
      and taxable REIT subsidiary (“TRS”).  Apidos CDO I was
      established to complete a CDO secured by a portfolio of bank
      loans.
  -
              Apidos
      CDO III, Ltd. (“Apidos CDO III”), a Cayman Islands limited liability
      company and TRS.  Apidos CDO III was established to complete a
      CDO secured by a portfolio of bank
loans.
  -
              Apidos
      Cinco CDO, Ltd. (“Apidos Cinco CDO”), a Cayman Islands limited liability
      company and TRS.  Apidos Cinco CDO was established to complete a
      CDO secured by a portfolio of bank
loans.
  ·
              Resource
      TRS, Inc. (“Resource TRS”), the Company’s directly-owned TRS, holds all
      the Company’s direct financing leases and
notes.
 
 The consolidated financial statements
and the information and tables contained in the notes to the consolidated
financial statements are unaudited.  However, in the opinion of
management, these interim financial statements include all adjustments necessary
to fairly present the results of the interim periods presented.  The
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.  The results of operations for the six months ended June 30,
2009 may not necessarily be indicative of the results of operations for the full
fiscal year ending December 31, 2009.
  Investment
Securities Available-for-Sale
 
 The Company accounts for its
investments in securities under Statement of Financial Accounting Standards
(“SFAS”) 115, ‘‘Accounting for Certain Investments in Debt and Equity
Securities,” (“SFAS 115”) which requires the Company to classify its investment
portfolio as either trading investments, available-for-sale or
held-to-maturity.  Although the Company generally plans to hold most
of its investments to maturity, it may, from time to time, sell any of its
investments due to changes in market conditions or in accordance with its
investment strategy.  Accordingly, the Company classifies all of its
investment securities as available-for-sale and reports them at fair value,
which is based on taking a weighted average of the following three
measures:
  i.
                    an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      analysis of underlying loan
performance;
  ii.
                      quotes
      on similar-vintage, higher rate, more actively traded commercial
      mortgage-backed securities (“CMBS”) adjusted for the lower subordination
      level of the Company’s securities;
and
  iii.
                  dealer
      quotes on the Company’s securities for which there is not an active
      market.
 (Back to Index)
 8
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Investment
Securities Available-for-Sale – (Continued)
 
 Unrealized gains and losses are
reported as a component of accumulated other comprehensive loss in stockholders’
equity.
  The Company evaluates its investments
for other-than-temporary impairment in accordance with Financial Accounting
Standards Board (“FASB”) Staff Position (“FSP”) 115-1 and SFAS 124-1, “The
Meaning of Other-than-Temporary Impairment and its Application to Certain
Investments,” FSP SFAS 115-2 and SFAS 124-2, “The Recognition and Presentation
of Other than-Temporary Impairments, and FSP EITF 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20” (“FSP 99-20-1”) and EITF 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets” (“EITF 99-20”) which require an investor to determine when an
investment is considered impaired (i.e., when its fair value has declined below
its amortized cost basis), evaluate whether that impairment is other than
temporary (i.e., the amortoized cost basis of the investment value will not be
recovered over its remaining life), and, if the impairment is other than
temporary, to recognize an impairment loss equal to the difference between the
investment’s amortized cost basis and its fair value.
  Investment securities transactions are
recorded on the trade date.  Purchases of newly issued securities are
recorded when all significant uncertainties regarding the characteristics of the
securities are removed, generally shortly before settlement
date.  Realized gains and losses on investment securities are
determined on the specific identification method.
 
 Allowance
for Loan and Lease Losses
 
 The Company maintains an allowance for
loan and lease losses.  Loans and leases held for investment are first
individually evaluated for impairment so specific reserves can be applied, and
then evaluated for impairment as a homogeneous pool of loans with substantially
similar characteristics so that a general reserve can be established, if
needed.  The reviews are performed at least quarterly.
 
 The Company considers a loan to be
impaired when, based on current information and events, management believes it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement.  When a loan is
impaired, the allowance for loan losses is increased by the amount of the excess
of the amortized cost basis of the loan over its fair value.  Fair
value may be determined based on the present value of estimated cash flows; on
market price, if available; or on the fair value of the collateral less
estimated disposition costs.  When a loan, or a portion thereof, is
considered uncollectible and pursuit of collection is not warranted, then the
Company will record a charge-off or write-down of the loan against the allowance
for loan and lease losses.
 
 The balance of impaired loans and
leases was $158.2 million and $23.9 million at June 30, 2009 and December 31,
2008, respectively.  The total balance of impaired loans and leases with a
valuation allowance was $140.2 million at June 30, 2009.  The total
balance of impaired loans without a specific valuation allowance $18.0 million
at June 30, 2009.  All loans and leases deemed impaired at December
31, 2008 have an associated valuation allowance.  The specific valuation
allowance related to these impaired loans and leases was $44.1 million and $19.6
million at June 30, 2009 and December 31, 2008, respectively.  The
average balance of impaired loans and leases was $112.9 million and $24.9
million during the six months ended June 30, 2009 and the year ended December
31, 2008, respectively.  The Company recognized income on impaired loans
and leases during 2009 and 2008 only to the extent that cash was
collected.  During the six months ended June 30, 2009 and the year ended
December 31, 2008, the Company did not recognize any income on impaired loans
and leases.
  (Back to Index)
 9
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
 Allowance
for Loan and Lease Losses – (Continued)
 
 An impaired loan or lease may remain on
accrual status during the period in which the Company is pursuing repayment of
the loan or lease; however, the loan or lease would be placed on non-accrual
status at such time as (i) management believes that scheduled debt service
payments will not be met within the coming 12 months; (ii) the loan or lease
becomes 90 days delinquent; (iii) management determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment;
or (iv) the net realizable value of the loan’s underlying collateral
approximates the Company’s carrying value of such loan.  While on
non-accrual status, the Company recognizes interest income only when an actual
payment is received.
 
 Recent
Accounting Pronouncements
 
 In June 2009, the FASB issued SFAS 168,
“The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 168”).  SFAS 168 will become
the single source of authoritative GAAP, other than guidance put forth by the
Securities and Exchange Commission (“SEC”).  All other accounting
literature not included in the codification will be considered
non-authoritative.  The provisions of SFAS 168 will be effective for
the Company for interim and annual periods beginning after September 15,
2009.  The Company does not expect adoption to have a material impact
on its consolidated financial statements.
 
 In June 2009, the FASB issued SFAS 167,
“Amendments to FASB Interpretation No. 46(R) (“SFAS 167”).  SFAS 167
amends FASB Interpretation No. 46(R), “Consolidation of Variable Interest
Entities (“FIN 46(R)”) and changes the consolidation guidance applicable to a
VIE.  It also amends the guidance governing the determination of
whether an enterprise is the primary beneficiary of a VIE and therefore,
required to consolidate an entity, by requiring a qualitative analysis rather
than a quantitative analysis.  This standard also requires continuous
reassessment of whether an enterprise is the primary beneficiary of a
VIE.  SFAS 167 also requires enhanced disclosures about an
enterprise’s involvement with a VIE.  SFAS 167 will be effective for
interim and annual periods ending after November 15, 2009.  The
Company is evaluating the potential impact of adopting this
statement.
 
 In June 2009, the FASB issued SFAS 166,
“Accounting for Transfers of Financial Assets-an amendment of FASB Statement No.
140” (“SFAS 166”).  The provisions of SFAS 166 eliminate the concept
of a “qualifying special-purpose entity,” change the requirements for
derecognizing financial assets and require greater transparency of related
disclosures.  SFAS 166 is effective for fiscal years beginning after
November 15, 2009.  The Company does not expect adoption will
have a material on the Company’s consolidated financial statements.
 In May
2009, the FASB issued SFAS 165, “Subsequent Events” (“SFAS
165”).  SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
issuance of the financial statements.  The Company adopted the
provisions of this statements in the second quarter of 2009.  The
required disclosures upon adoption of this statement can be found in Note
14.
 On April
9, 2009, the FASB issued three final Staff Positions intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities.  FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,” provides guidelines for making fair value
measurements more consistent with the principles presented in FASB SFAS 157,
“Fair Value Measurements”, when the volume and level of activity for the asset
or liability have decreased significantly.  FSP No. FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures.  FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments,” provides additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities.  Provisions for this
guidance are effective for interim periods ending after June 15, 2009, with
early adoption permitted in the first quarter of 2009.  Although
adoption did not have a significant impact on the Company’s financial
statements, additional disclosures were added in Note 12 to the consolidated
financial statements.
 
 (Back to Index)
 10
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
 Recent
Accounting Pronouncements – (Continued)
  In March 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS 133” (“SFAS 161”).  This new standard requires
enhanced disclosures for derivative instruments, including those used in hedging
activities.  It is effective for fiscal years and interim periods
beginning after November 15, 2008 and is applicable to the Company in the first
quarter of fiscal 2009.  Although the adoption did not have a
significant impact on the Company’s financial statements, additional disclosures
were added in Note 13 to the consolidated financial statements.
 
 In
February 2008, the FASB issued FSP 140-3, “Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions” (“FSP FAS 140-3”) which provides
guidance on accounting for a transfer of a financial asset and repurchase
financing.  FSP FAS 140-3 addresses whether transactions where assets
purchased from a particular counterparty and financed through a repurchased
agreement with the same counterparty can be considered and accounted for as
separate transactions, or are required to be considered “linked” transactions
and may be considered derivatives under SFAS 133.  FSP FAS 140-3 is
effective for fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years.  The Company does not expect that FSP FAS
140-3 will have a material effect on the Company’s financial statements. 
Adoption did not have a material impact on the Company's consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements,” (“SFAS 160”).  SFAS 160 amends
Accounting Research Bulletin 51 to establish accounting and reporting standards
for the noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary.  It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  Adoption did not have a material impact on the
Company’s consolidated financial statements.
 
 Reclassifications
 
 Certain immaterial reclassifications
have been made to the 2008 consolidated financial statements to conform to the
2009 presentation.


NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE
 
 The following tables summarize the
Company's mortgage-backed securities (“MBS”) and other asset-backed securities
(“ABS”), including those pledged as collateral and classified as
available-for-sale, which are carried at fair value (in thousands):
 
 Amortized
                    Cost
      (1)
                
                
                Unrealized
                    Gains
                
                
                Unrealized
                    Losses
                
                
                Fair
      Value (1)June 30,
      2009:Commercial
      MBS private placement
                
                $
                70,678
                
                
                $
                −
                
                
                $
                (52,502
                )
                
                $
                18,176Total
                
                $
                70,678
                
                
                $
                −
                
                
                $
                (52,502
                )
                
                $
                18,176December
      31, 2008:Commercial
      MBS private placement
                
                $
                70,458
                
                
                $
                −
                
                
                $
                (41,243
                )
                
                $
                29,215Other
      ABS
                
                
                5,665
                
                
                
                −
                
                
                
                (5,620
                )
                
                
                45Total
                
                $
                76,123
                
                
                $
                −
                
                
                $
                (46,863
                )
                
                $
                29,260
 
 (1)
                As
      of June 30, 2009 and December 31, 2008, $13.9 million and $22.5 million
      were pledged as collateral security under related financings,
      respectively.
 
 
 (Back to Index)
 11
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
  NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE – (Continued)
 The following tables summarize the
estimated maturities of the Company’s MBS and other ABS according to their
estimated weighted average life classifications (in thousands, except
percentages):
 
 Weighted
      Average Life
                
                Fair
      Value
                
                
                Amortized
      Cost
                
                
                Weighted
      Average CouponJune 30,
      2009:Less than one
      year
                
                $
                9,672
                
                
                $
                27,064
                
                
                
                1.75%Greater than one year and less
      than five years
                
                
                1,424
                
                
                
                5,000
                
                
                
                2.01%Greater than five
      years
                
                
                7,080
                
                
                
                38,614
                
                
                
                5.80%Total
                
                $
                18,176
                
                
                $
                70,678
                
                
                
                3.98%December
      31, 2008:Less than one
      year
                
                $
                5,088
                
                
                $
                10,465
                
                
                
                3.17%Greater than one year and less
      than five years
                
                
                9,954
                
                
                
                21,596
                
                
                
                3.75%Greater than five
      years
                
                
                14,218
                
                
                
                44,062
                
                
                
                5.05%Total
                
                $
                29,260
                
                
                $
                76,123
                
                
                
                4.36%
 
 The contractual maturities of the
securities available-for-sale range from July 2017 to March 2051.
 
 The following tables show the fair
value and gross unrealized losses, aggregated by investment category and length
of time, of those individual securities that have been in a continuous
unrealized loss position during the indicated periods (in
thousands):
  Less
      than 12 Months
                
                
                More
      than 12 Months
                
                
                TotalFair
      Value
                
                
                Gross
      Unrealized Losses
                
                
                Fair
      Value
                
                
                Gross
      Unrealized Losses
                
                
                Fair
      Value
                
                
                Gross
      Unrealized LossesJune 30,
      2009:Commercial MBS privateplacement
                
                $
                −
                
                
                $
                −
                
                
                $
                18,176
                
                
                $
                (52,502
                )
                
                $
                18,176
                
                
                $
                (52,502
                )Total temporarilyimpaired
      securities
                
                $
                −
                
                
                $
                −
                
                
                $
                18,176
                
                
                $
                (52,502
                )
                
                $
                18,176
                
                
                $
                (52,502
                )December
      31, 2008:Commercial MBS privateplacement
                
                $
                −
                
                
                $
                −
                
                
                $
                29,215
                
                
                $
                (41,243
                )
                
                $
                29,215
                
                
                $
                (41,243
                )Other ABS
                
                
                −
                
                
                
                −
                
                
                
                45
                
                
                
                (5,620
                )
                
                
                45
                
                
                
                (5,620
                )Total temporarilyimpaired
      securities
                
                $
                −
                
                
                $
                −
                
                
                $
                29,260
                
                
                $
                (46,863
                )
                
                $
                29,260
                
                
                $
                (46,863
                )
  
 (Back to Index)
 12
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
3 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE –
(Continued)
 The
determination of other-than-temporary impairment is a subjective process, and
different judgments and assumptions could affect the timing of loss
realization.  The Company reviews its portfolios monthly and the
determination of other-than-temporary impairment is made at least
quarterly.  The Company considers the following factors when
determining if there is an other-than-temporary impairment on a
security:
  ·
              the
      length of time the market value has been less than amortized
      cost;
  
 ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
  ·
              underlying
      credit fundamentals of the collateral backing the securities;
      and
  ·
                the
      Company's intent to sell as well as the likelihood that the Company will
      be required to sell the security before the recovery of the amoritzed cost
      basis.
  At June 30, 2009 and December 31,
2008, the Company held $18.2 million and $29.2 million, respectively, net of
unrealized losses of $52.5 million and $41.2 million, respectively, of CMBS at
fair value which is based on taking a weighted average of the following three
measures:
  i.
                  an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      historical analysis of underlying loan
  performance;
  ii.
                quotes
      on similar-vintage, higher rated, more actively traded CMBS adjusted for
      the lower subordination level of our securities;
  and
  iii.
                    dealer
      quotes on the Company’s securities for which there is not an active
      market.
 
 While the Company’s CMBS investments have continued to decline in fair value,
the decline continues to be temporary.  The Company performs an
on-going review of third-party reports and updated financial data on the
underlying property financial information to analyze current and projected loan
performance.  All securities but one are current with respect to
interest and principal payments.  The one security that was not
current at June 30, 2009 became current in July 2009.  Rating agency
downgrades are considered with respect to the Company’s income approach when
determining other-than-temporary impairment and when inputs are stressed, the
resulting projected cash flows reflect a full recovery of
principal.
 
 During the three months ended March 31,
2009, a collateral position that supported the other-ABS investment weakened to
the point that default of that position became probable.  The assumed
default of this collateral position in the Company’s cash flow model yielded a
value of less than full recovery of the Company’s cost basis and, as a result,
the Company recognized a $5.6 million other-than-temporary impairment on its
other-ABS investment.  During the three months ended June 30, 2009, an
additional $45,000 of other-than-temporary impairment was recognized on this
investment bringing the fair value to $0.  As a result of the
impairment charges, the cost of this security was written down to fair value
through the statement of operations.
  The Company does not believe that any
other of its securities classified as available-for-sale were
other-than-temporarily impaired as of June 30,
2009.
 (Back to Index)
 13
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
4 – LOANS HELD FOR INVESTMENT
 
 The following is a summary of the
Company’s loans (in thousands):
  Loan
      Description
                
                Principal
                
                
                Unamortized
                  (Discount)
                    Premium
                
                
                Carrying
                  Value(1)June 30,
      2009:Bank loans, including $2.4
      million in loans held for sale
                
                $
                947,934
                
                
                $
                (20,546
                )
                
                $
                927,388Commercial real estate
      loans:Whole loans
                
                
                505,918
                
                
                
                (781
                )
                
                
                505,137B notes
                
                
                81,711
                
                
                
                46
                
                
                
                81,757Mezzanine
loans
                
                
                214,991
                
                
                
                (4,494
                )
                
                
                210,497Total commercial real estate
      loans
                
                
                802,620
                
                
                
                (5,229
                )
                
                
                797,391Subtotal loans before
      allowances
                
                
                1,750,554
                
                
                
                (25,775
                )
                
                
                1,724,779Allowance for loan
      loss
                
                
                (59,072
                )
                
                
                −
                
                
                
                (59,072
                )Total
                
                $
                1,691,482
                
                
                $
                (25,775
                )
                
                $
                1,665,707December
      31, 2008:Bank loans, including $9.0
      million in loans held for sale .
                
                $
                945,966
                
                
                $
                (8,459
                )
                
                $
                937,507Commercial real estate
      loans:Whole loans
                
                
                521,015
                
                
                
                (1,678
                )
                
                
                519,337B notes
                
                
                89,005
                
                
                
                64
                
                
                
                89,069Mezzanine
loans
                
                
                215,255
                
                
                
                (4,522
                )
                
                
                210,733Total commercial real estate
      loans
                
                
                825,275
                
                
                
                (6,136
                )
                
                
                819,139Subtotal loans before
      allowances
                
                
                1,771,241
                
                
                
                (14,595
                )
                
                
                1,756,646Allowance for loan
      loss
                
                
                (43,867
                )
                
                
                −
                
                
                
                (43,867
                )Total
                
                $
                1,727,374
                
                
                $
                (14,595
                )
                
                $
                1,712,779
 
 (1)
                Substantially
      all loans are pledged as collateral under various borrowings at June 30,
      2009 and December 31, 2008.
 
 At June 30, 2009, the Company’s bank
loan portfolio consisted of $892.5 million (net of allowance of $34.9 million)
of floating rate loans, which bear interest ranging between the London Interbank
Offered Rate (“LIBOR”) plus 0.25% and LIBOR plus 10.50% with maturity dates
ranging from May 2010 to August 2022.
 
 At December 31, 2008, the Company’s
bank loan portfolio consisted of $908.7 million (net of allowance of $28.8
million) of floating rate loans, which bear interest ranging between LIBOR plus
0.97% and LIBOR plus 10.0% with maturity dates ranging from March 2009 to August
2022.
  The
following table shows the changes in the allowance for all loan losses (in
thousands):
 
 Allowance
      for loan loss at January 1, 2008
                        
                        $
                        5,918Provision for loan
      loss
                        
                        
                        45,259Loans
    charged-off
                        
                        
                        (7,310
                        )Recoveries
                        
                        
                        −Allowance
      for loan loss at December 31, 2008
                        
                        
                        43,867Provision for loan
      loss
                        
                        
                        27,190Loans
    charged-off
                        
                        
                        (11,985
                        )Recoveries
                        
                        
                        −Allowance
      for loan loss at June 30, 2009
                        
                        $
                        59,072
 
 (Back to Index)
 14
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
4 – LOANS HELD FOR INVESTMENT – (Continued)
 
 The following is a summary of the
Company’s commercial real estate loans (in thousands):
 
 Description
                
                Quantity
                
                
                Amortized
      Cost
                
                Contracted
                  Interest
      Rates
                
                Range
      of
                    Maturity
      DatesJune 30,
      2009:Whole
      loans, floating rate (1)
                
                
                29
                
                
                $
                426,292
                
                LIBOR
      plus 1.50% to
                  LIBOR
      plus 4.40%
                
                July
      2009 to
                  July
      2012Whole
      loans, fixed rate (1)
                
                
                6
                
                
                
                78,846
                
                6.98%
      to 10.00%
                
                February
      2010 to
                  August
      2012B
      notes, floating rate
                
                
                3
                
                
                
                26,500
                
                LIBOR
      plus 2.50% to
                  LIBOR
      plus 3.01%
                
                October
      2009 to
                  July
      2010B
      notes, fixed rate
                
                
                3
                
                
                
                55,256
                
                7.00%
      to 8.68%
                
                July
      2011 to
                  July
      2016Mezzanine
      loans, floating rate
                
                
                10
                
                
                
                129,184
                
                LIBOR
      plus 2.15% to
                  LIBOR
      plus 3.45%
                
                August
      2009 to
                  May
      2010Mezzanine
      loans, fixed rate
                
                
                7
                
                
                
                81,313
                
                5.78%
      to 11.00%
                
                November
      2009 to
                  September
      2016Total (2)
                
                
                58
                
                
                $
                797,391December
      31, 2008:Whole
      loans, floating rate (1)
                
                
                29
                
                
                $
                431,985
                
                LIBOR
      plus 1.50% to
                  LIBOR
      plus 4.40%
                
                April
      2009 to
                  August
      2011Whole
      loans, fixed rates (1)
                
                
                7
                
                
                
                87,352
                
                6.98%
      to 10.00%
                
                May
      2009 to
                  August
      2012B
      notes, floating rate
                
                
                4
                
                
                
                33,535
                
                LIBOR
      plus 2.50% to
                  LIBOR
      plus 3.01%
                
                March
      2009 to
                  October
      2009B
      notes, fixed rate
                
                
                3
                
                
                
                55,534
                
                7.00%
      to 8.68%
                
                July
      2011 to
                  July
      2016Mezzanine
      loans, floating rate
                
                
                10
                
                
                
                129,459
                
                LIBOR
      plus 2.15% to
                  LIBOR
      plus 3.45%
                
                May
      2009 to
                  February
      2010Mezzanine
      loans, fixed rate
                
                
                7
                
                
                
                81,274
                
                5.78%
      to 11.00%
                
                November
      2009 to
                  September
      2016Total (2)
                
                
                60
                
                
                $
                819,139
 
 (1)
                Whole
      loans had $11.0 million and $26.6 million in unfunded loan commitments as
      of June 30, 2009 and December 31, 2008, respectively, that are funded as
      the loans require additional funding and the related borrowers have
      satisfied the requirements to obtain this additional
    funding.
  (2)
                The
      total does not include an allowance for loan losses of $24.2 million and
      $15.1 million recorded as of June 30, 2009 and December 31, 2008,
      respectively.
 
 (Back to Index)
 15
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
4 – LOANS HELD FOR INVESTMENT− (Continued)
 
 As of June 30, 2009, the Company had
recorded an allowance for loan losses of $59.1 million consisting of a $34.9
million allowance on the Company’s bank loan portfolio and a $24.2 million
allowance on the Company’s commercial real estate portfolio as a result of the
Company classifying eleven bank loans and three commercial real estate loans
impaired.
 
 As of
December 31, 2008, the Company had recorded an allowance for loan losses of
$43.9 million consisting of a $28.8 million allowance on the Company’s bank loan
portfolio and a $15.1 million allowance on the Company’s commercial real estate
portfolio as a result of the Company classifying ten bank loans and one
commercial real estate loan impaired.  The Company also established a
general reserve on each of these portfolios.
 
 NOTE
5 –DIRECT FINANCING LEASES AND NOTES
 
 On June 30, 2009, the Company sold a
membership interest in a subsidiary that primarily held a pool of leases valued
at $89.8 million and transferred the $82.3 million balance of the related
secured term facility to Resource America.  No gain or loss was
recognized on the sale.  The Company received a note of $7.5 million
from Resource America for the equity in the portfolio on June 30,
2009.  The promissory note from the subsidiary bears interest at LIBOR
plus 3% and matures on September 30, 2009.  On July 1, 2009, $4.5
million of the promissory note was repaid.  The outstanding principal
balance of the note of $3.0 million was paid in full on August 3, 2009. 
The balance of direct financing leases and notes was $104.0 million as of
December 31, 2008.
 At June 30, 2009, the Company had one
lease that was sufficiently delinquent with respect to scheduled payments of
interest to require a provision for lease loss.  As a result, the
Company recorded an allowance for lease losses of $184,000.  The
Company also recorded a general reserve of $60,000 during the three months ended
June 30, 2009 to bring the total general reserve to $600,000 at June 30,
2009.  At December 31, 2008, the Company had seven leases that were
sufficiently delinquent with respect to scheduled payments of interest to
require a provision for lease losses.  As a result, the Company
recorded an allowance for lease losses of $451,000.  The Company also
recorded a general reserve of $300,000 during the three months ended December
31, 2008 to bring the general reserve to $450,000 at December 31,
2008.
 The following table shows the changes
in the allowance for lease loss (in thousands):
 
 Allowance
      for lease loss at January 1, 2008
                              
                              $
                              −Provision for lease
      loss
                              
                              
                              901Leases
    charged-off
                              
                              
                              (451
                              )Recoveries
                              
                              
                              −Allowance
      for lease loss at December 31, 2008
                              
                              
                              450Provision for lease
      loss
                              
                              
                              784Leases charged
    off
                              
                              
                              (634
                              )Recoveries
                              
                              
                              −Allowance
      for lease loss at June 30, 2009
                              
                              $
                              600
 
 (Back to Index)
 16
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
6 – BORROWINGS
 
 The Company has financed the
acquisition of its investments, including securities available-for-sale, loans
and equipment leases and notes, primarily through the use of secured and
unsecured borrowings in the form of CDOs, repurchase agreements, a secured term
facility, warehouse facilities, trust preferred securities issuances and other
secured and unsecured borrowings.  Certain information with respect to
the Company’s borrowings at June 30, 2009 and December 31, 2008 is summarized in
the following table (dollars in thousands):
  Outstanding
      Borrowings
                  
                  
                  Weighted
      Average Borrowing Rate
                  
                  Weighted
      Average
                      Remaining
      Maturity
                  
                  Value
      of CollateralJune 30,
      2009:Repurchase
      Agreements (1)
                  
                  $
                  3,359
                  
                  
                  
                  3.32%
                  
                  18.1
      days
                  
                  $
                  26,688RREF
      CDO 2006-1 Senior Notes (2)
                  
                  
                  254,191
                  
                  
                  
                  1.21%
                  
                  37.1
      years
                  
                  
                  296,337RREF
      CDO 2007-1 Senior Notes (3)
                  
                  
                  378,381
                  
                  
                  
                  0.95%
                  
                  37.3
      years
                  
                  
                  435,860Apidos
      CDO I Senior Notes (4)
                  
                  
                  318,783
                  
                  
                  
                  1.65%
                  
                  8.1
      years
                  
                  
                  273,145Apidos
      CDO III Senior Notes (5)
                  
                  
                  259,899
                  
                  
                  
                  1.37%
                  
                  11.0
      years
                  
                  
                  219,543Apidos
      Cinco CDO Senior Notes (6)
                  
                  
                  318,503
                  
                  
                  
                  1.41%
                  
                  10.9
      years
                  
                  
                  269,855Unsecured
      Junior Subordinated Debentures (7)
                  
                  
                  51,548
                  
                  
                  
                  5.09%
                  
                  27.2 years
                  
                  
                  −Total
                  
                  $
                  1,584,664
                  
                  
                  
                  1.43%
                  
                  21.4 years
                  
                  $
                  1,521,428December
      31, 2008:Repurchase
      Agreements (1)
                  
                  $
                  17,112
                  
                  
                  
                  3.50%
                  
                  18.0
      days
                  
                  $
                  39,703RREF
      CDO 2006-1 Senior Notes (2)
                  
                  
                  261,198
                  
                  
                  
                  1.38%
                  
                  37.6
      years
                  
                  
                  322,269RREF
      CDO 2007-1 Senior Notes (3)
                  
                  
                  377,851
                  
                  
                  
                  1.15%
                  
                  37.8
      years
                  
                  
                  467,310Apidos
      CDO I Senior Notes (4)
                  
                  
                  318,469
                  
                  
                  
                  4.03%
                  
                  8.6
      years
                  
                  
                  206,799Apidos
      CDO III Senior Notes (5)
                  
                  
                  259,648
                  
                  
                  
                  2.55%
                  
                  11.5
      years
                  
                  
                  167,933Apidos
      Cinco CDO Senior Notes (6)
                  
                  
                  318,223
                  
                  
                  
                  2.64%
                  
                  11.4
      years
                  
                  
                  207,684Secured
      Term
      Facility
                  
                  
                  95,714
                  
                  
                  
                  4.14%
                  
                  1.3
      years
                  
                  
                  104,015Unsecured
      Junior Subordinated Debentures (7)
                  
                  
                  51,548
                  
                  
                  
                  6.42%
                  
                  27.7 years
                  
                  
                  −Total
                  
                  $
                  1,699,763
                  
                  
                  
                  2.57%
                  
                  20.6 years
                  
                  $
                  1,515,713
 
 (1)
              At
      June 30, 2009, collateral consisted of a RREF CDO 2007-1 Class H bond that
      was retained at closing with a carrying value of $3.9 million and loans
      with a fair value of $22.8 million.  At December 31, 2008,
      collateral consisted of the RREF CDO 2007-1 Class H bond with a carrying
      value of $3.9 million and loans with a fair value of $35.8
      million.
  (2)
              Amount
      represents principal outstanding of $258.0 million less unamortized
      issuance costs of $3.8 million as of June 30, 2009.  Amount
      represents principal outstanding of $265.5 million less unamortized
      issuance costs of $4.3 million as of December 31, 2008.  This
      CDO transaction closed in August
2006.
  (3)
              Amount
      represents principal outstanding of $383.9 million less unamortized
      issuance costs of $5.5 million as of June 30, 2009 and principal
      outstanding of $383.8 million less unamortized issuance costs of $5.9
      million as of December 31, 2008.  This CDO transaction closed in
      June 2007.
  (4)
              Amount
      represents principal outstanding of $321.5 million less unamortized
      issuance costs of $2.7 million as of June 30, 2009 and $3.0 million as of
      December 31, 2008.  This CDO transaction closed in August
      2005.
  (5)
              Amount
      represents principal outstanding of $262.5 million less unamortized
      issuance costs of $2.6 million as of June 30, 2009 and $2.9 million as of
      December 31, 2008.  This CDO transaction closed in May
      2006.
  (6)
              Amount
      represents principal outstanding of $322.0 million less unamortized
      issuance costs of $3.5 million as of June 30, 2009 and $3.8 million as of
      December 31, 2008.  This CDO transaction closed in May
      2007.
  (7)
              Amount
      represents junior subordinated debentures issued to Resource Capital Trust
      I and RCC Trust II in May 2006 and September 2006,
      respectively.
  (Back to Index)
 17
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
6 – BORROWINGS − (Continued)
  During the three months ended June 30,
2009, we acquired a $7.5 million senior note, issued at par, by RREF 2006-1 for
8% or $600,000 resulting in a gain on extinguishment of debt of $6.9
million.
  The Company had repurchase agreements
with the following counterparties at the dates indicated (dollars in
thousands):
 
 Amount
      at
                      Risk
      (1)
                  
                  
                  Weighted
      Average Maturity in Days
                  
                  
                  Weighted
      Average Interest RateJune 30,
      2009:Natixis
      Real Estate Capital Inc.
                  
                  $
                  19,580
                  
                  
                  
                  18
                  
                  
                  
                  3.32%Credit
      Suisse Securities (USA) LLC
                  
                  $
                  3,837
                  
                  
                  
                  27
                  
                  
                  
                  3.50%December
      31, 2008:Natixis
      Real Estate Capital Inc.
                  
                  $
                  18,992
                  
                  
                  
                  18
                  
                  
                  
                  3.50%Credit
      Suisse Securities (USA) LLC
                  
                  $
                  3,793
                  
                  
                  
                  23
                  
                  
                  
                  4.50%
 
 (1)
                Equal
      to the estimated fair value of securities or loans sold, plus accrued
      interest income, minus the sum of repurchase agreement liabilities plus
      accrued interest expense.
 
 Repurchase
and Credit Facilities
 
 Commercial
Real Estate Loan – Term Repurchase Facility
 In April
2007, the Company’s indirect wholly-owned subsidiary, RCC Real Estate SPE 3,
LLC, entered into a master repurchase agreement with Natixis Real Estate
Capital, Inc. to be used as a warehouse facility to finance the purchase of
commercial real estate loans and commercial mortgage-backed
securities.  The Company has guaranteed RCC Real Estate SPE 3, LLC’s
performance of its obligations under the repurchase agreement.  At
June 30, 2009, RCC Real Estate SPE 3 had borrowed $3.3 million.  At
June 30, 2009, borrowings under the repurchase agreement were secured by
commercial real estate loans with a fair value of $22.8 million and had a
weighted average interest rate of one-month LIBOR plus 2.30%, which was 3.32% at
June 30, 2009.  At December 31, 2008, RCC Real Estate SPE 3 had
borrowed $17.0 million, all of which the Company had guaranteed.  At
December 31, 2008, borrowings under the repurchase agreement were secured by
commercial real estate loans with an estimated fair value of $35.8 million and
had a weighted average interest rate of one-month LIBOR plus 2.30%, which was
3.50% at December 31, 2008.
 (Back to Index)
 18
 (Back to Index)
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
6 – BORROWINGS − (Continued)
 
 Repurchase
and Credit Facilities − (Continued)
 
 Through a series of amendments entered
into in 2008 and 2009 between RCC Real Estate SPE 3 and Natixis, the term
repurchase facility and the related Guaranty have been amended as
follows:
  ·
                The
      amount of the facility was reduced from $150,000,000 to
      $100,000,000.
  ·
                The
      amount of the facility will further be reduced to the amount outstanding
      on October 18, 2009.
  ·
                Beginning
      on November 25, 2008, any further repurchase agreement transactions may be
      made in Natixis’ sole discretion.  In addition, premiums over
      new repurchase prices are required for early repurchase by RCC Real Estate
      SPE 3 of the Existing Assets that represent collateral under the facility;
      however, the premiums will reduce the repurchase price of the remaining
      Existing Assets.
  ·
                RCC
      Real Estate SPE 3’s obligation to pay non-usage fees was
      terminated.
  ·
                The
      weighted average undrawn balance (as defined in the agreement) threshold
      exempting payment of the non-usage fee was reduced from $75,000,000 to
      $56,250,000.
  ·
                The
      minimum net worth covenant amount was reduced from $250,000,000 to
      $125,000,000.
  ·
                RCC
      Real Estate SPE 3 is required to repay $1.3 million of the amount
      outstanding under the facility in September 2009, $1.0 million in December
      2009, and the remaining outstanding balance and all other amounts due on
      March 31, 2010.
 
 Commercial
Real Estate Loans – Non-term Repurchase Facilities
  In March 2005, the Company entered into
a master repurchase agreement with Credit Suisse Securities (USA) LLC to finance
the purchase of agency residential MBS (“RMBS”) securities.  In
December 2006, the Company began using this facility to finance the purchase of
CMBS-private placement and other securities.  Each repurchase
transaction specifies its own terms, such as identification of the assets
subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  At June 30, 2009, the
Company had borrowed $54,000 with a weighted average interest rate of
3.50%.  At June 30, 2009, borrowings under the repurchase agreement
were secured by a RREF CDO 2007-1 Class H bond that was retained at closing with
a carrying value of $3.9 million.  At December 31, 2008, the Company
had borrowed $90,000 with a weighted average interest rate of
4.50%.  At December 31, 2008, borrowings under the repurchase
agreement were secured by a RREF CDO 2007-1 Class H bond that was retained at
closing with a carrying value of $3.9 million.
  NOTE
7 – SHARE REPURCHASE
 
 Under a
share repurchase plan authorized by the board of directors on July 26, 2007, the
Company is authorized to buy back up to 2.5 million of its outstanding common
shares.  In January and February of 2009, the Company bought back
400,000 and 300,000 shares, respectively at a weighted average price of $4.00
per share.  Including these 2009 transactions, the Company has
repurchased 963,000 shares under this program.
 (Back to Index)
 19
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 NOTE
8 – SHARE-BASED COMPENSATION
 
 The following table summarizes
restricted common stock transactions:
 
 Non-Employee
      Directors
                
                
                Non-Employees
                
                
                TotalUnvested
      shares as of January 1, 2009
                
                
                17,261
                
                
                
                435,049
                
                
                
                452,310Issued
                
                
                52,632
                
                
                
                172,998
                
                
                
                225,630Vested
                
                
                (17,261
                )
                
                
                (186,042
                )
                
                
                (203,303
                )Forfeited
                
                
                −
                
                
                
                (8,191
                )
                
                
                (8,191
                )Unvested
      shares as of June 30, 2009
                
                
                52,632
                
                
                
                413,814
                
                
                
                466,446
 
 Pursuant
to SFAS 123(R) and EITF 96-18, the Company is required to value any unvested
shares of restricted common stock granted to the Manager and non-employees at
the current market price.  The estimated fair value of the unvested
shares of restricted stock granted during the three and six months ended June
30, 2009 and year ended December 31, 2008, including shares issued to the five
non-employee directors, was $624,000 and $1.5 million,
respectively.
 
 On
January 26, 2009, the Company issued 40,452 shares of restricted common stock
under its 2007 Omnibus Equity Compensation Plan.  These restricted
shares will vest in full on January 26, 2010.
 
 On
February 1, 2009 and March, 9 2009, the Company granted 6,716 and 45,916 shares
of restricted stock, respectively, to the Company’s non-employee directors as
part of their annual compensation.  These shares will vest in full on
the first anniversary of the date of grant.
 
 On
February 2, 2009, the Company granted 60,000 shares of restricted stock under
its 2007 Omnibus Equity Compensation Plan. These restricted shares vested 25% on
issuance and 12.5% on March 31, 2009 and June 30, 2009.  The
balance will vest quarterly thereafter through June 30, 2010.
 
 On
February 20, 2009, the Company granted 35,046 shares of restricted stock under
its 2007 Omnibus Equity Compensation Plan.  These restricted shares will
vest in full on February 20, 2010.
 
 The following table summarizes stock
option transactions:
 
 Number
      of Options
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted
      Average Remaining Contractual Term (in years)
                
                
                Aggregate
      Intrinsic Value (in thousands)Outstanding
      as of January 1, 2009
                
                
                624,166
                
                
                $
                14.99Granted
                
                
                −
                
                
                
                −Exercised
                
                
                −
                
                
                
                −Forfeited
                
                
                (14,500
                )
                
                
                15.00Outstanding
      as of June 30, 2009
                
                
                609,666
                
                
                $
                14.99
                
                
                
                6
                
                
                $
                88Exercisable
      at June 30, 2009
                
                
                412,999
                
                
                $
                14.99
                
                
                
                6
                
                
                $
                60
 
 The stock options have a remaining
contractual term of six years.  Upon exercise of options, new shares
are issued.
 
 (Back to Index)
 20
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
8 – SHARE-BASED COMPENSATION – (Continued)
 
 The
following table summarizes the status of the Company’s unvested stock options as
of June 30, 2009:
 
 Unvested Options
                        
                        Options
                        
                        
                        Weighted
      Average Grant Date
                            Fair
      ValueUnvested
      at January 1, 2009
                        
                        
                        43,333
                        
                        
                        $
                        14.88Granted
                        
                        
                        −
                        
                        
                        
                        −Vested
                        
                        
                        (21,667
                        )
                        
                        $
                        14.88Forfeited
                        
                        
                        −
                        
                        
                        
                        −Unvested
      at June 30, 2009
                        
                        
                        21,666
                        
                        
                        $
                        14.74
 
 The weighted average period the Company
expects to recognize the remaining expense on the unvested stock options is
approximately one year.
 
 The
following table summarizes the status of the Company’s vested stock options as
of June 30, 2009:
 
 Vested Options
                            
                            Number
      of
                                Options
                            
                            
                            Weighted
      Average Exercise Price
                            
                            Weighted
      Average Remaining Contractual Term (in years)
                            
                            Aggregate
                                IntrinsicValue
                                (in
      thousands)Vested
      as of January 1, 2009
                            
                            
                            580,833
                            
                            
                            $
                            15.00Vested
                            
                            
                            21,667
                            
                            
                            $
                            14.88Exercised
                            
                            
                            −
                            
                            
                            
                            −Forfeited
                            
                            
                            (14,500
                            )
                            
                            $
                            15.00Vested
      as of June 30, 2009
                            
                            
                            588,000
                            
                            
                            $
                            14.99
                            
                            6
                            
                            $         85
 
 The stock option transactions are
valued using the Black-Scholes model using the following
assumptions:
 
 As
      of June 30,
                    
                    
                    As
      of December 31,2009
                    
                    
                    2008Expected
      life
                    
                    8
      years
                    
                    
                    8
      yearsDiscount
      rate
                    
                    
                    3.68%
                    
                    
                    
                    2.94%Volatility
                    
                    
                    168.52%
                    
                    
                    
                    127.20%Dividend
      yield
                    
                    
                    37.5%
                    
                    
                    
                    33.94%
 
 The fair value of each common stock
transaction for the period ended June 30, 2009 and the year ended December 31,
2008, respectively, was $0.144 and $0.149.  For the three and six
months ended June 30, 2009 and 2008, the components of equity compensation
expense were as follows (in thousands):
 
 Three
      Months Ended
                  
                  
                  Six
      Months EndedJune
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Options
      granted to Manager and non-employees
                  
                  $
                  2
                  
                  
                  $
                  4
                  
                  
                  $
                  1
                  
                  
                  $
                  (54
                  )Restricted
      shares granted to Manager andnon-employees
                  
                  
                  235
                  
                  
                  
                  509
                  
                  
                  
                  296
                  
                  
                  
                  626Restricted
      shares granted to non-employeedirectors
                  
                  
                  28
                  
                  
                  
                  28
                  
                  
                  
                  56
                  
                  
                  
                  50Total
      equity compensation expense
                  
                  $
                  265
                  
                  
                  $
                  541
                  
                  
                  $
                  353
                  
                  
                  $
                  622
  (Back to Index)
 21
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
8 – SHARE-BASED COMPENSATION – (Continued)
 
 During
the three and six months ended June 30, 2009, the Manager received 26,097 shares
as incentive compensation valued at $98,000 pursuant to the Management
Agreement.  During the three and six months ended June 30, 2008, the
Manager received 17,839 shares as compensation, valued at $141,000, pursuant to
the Management Agreement.  The incentive management fee is paid one
quarter in arrears.
 
 Apart
from incentive compensation payable under the Management Agreement, the Company
has established no formal criteria for equity awards as of June 30,
2009.  All awards are discretionary in nature and subject to approval
by the compensation committee.
 
 NOTE
9 –EARNINGS PER SHARE
 
 The following table presents a
reconciliation of basic and diluted earnings per share for the periods presented
as follows (in thousands, except share and per share amounts):
 
 Three
      Months Ended
                      
                      
                      Six
      Months EndedJune
      30,
                      
                      
                      June
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Basic:Net (loss) income
                      
                      $
                      (5,127
                      )
                      
                      $
                      (5,257
                      )
                      
                      $
                      (17,279
                      )
                      
                      $
                      4,106Weighted average number of shares
      outstanding
                      
                      
                      24,369,581
                      
                      
                      
                      24,721,063
                      
                      
                      
                      24,427,452
                      
                      
                      
                      24,665,840Basic net (loss) income per
      share
                      
                      $
                      (0.21
                      )
                      
                      $
                      (0.21
                      )
                      
                      $
                      (0.71
                      )
                      
                      $
                      0.17Diluted:Net (loss) income
                      
                      $
                      (5,127
                      )
                      
                      $
                      (5,257
                      )
                      
                      $
                      (17,279
                      )
                      
                      $
                      4,106Weighted average number of shares
      outstanding
                      
                      
                      24,369,581
                      
                      
                      
                      24,721,063
                      
                      
                      
                      24,427,452
                      
                      
                      
                      24,665,840Additional shares due to assumed
      conversion of
                        dilutive
    instruments
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      256,500Adjusted weighted-average number
      of common
                        shares
outstanding
                      
                      
                      24,369,581
                      
                      
                      
                      24,721,063
                      
                      
                      
                      24,427,452
                      
                      
                      
                      24,922,340Diluted net (loss) income per
      share
                      
                      $
                      (0.21
                      )
                      
                      $
                      (0.21
                      )
                      
                      $
                      (0.71
                      )
                      
                      $
                      0.16
 
 Potentially
dilutive shares relating to 282,566 and 262,515 shares of restricted stock are
not included in the calculation of diluted net (loss) per share for the three
and six months ended June 30, 2009, respectively, because the effect was
anti-dilutive.  Potentially dilutive shares relating to 242,200 shares
of restricted stock are not included in the calculation of diluted net (loss)
per share for the three months ended June 30, 2008 because the effect was
anti-dilutive.
 
 NOTE
10 – RELATED PARTY TRANSACTIONS
 
 Relationship
with Resource Real Estate
 
 Resource Real Estate, a subsidiary of
Resource America, originates, finances and manages the Company’s commercial real
estate loan portfolio, including whole loans, A notes, B notes and mezzanine
loans.  The Company reimburses Resource Real Estate for loan
origination costs associated with all loans originated.  At June 30,
2009 and December 31, 2008, the Company was indebted to Resource Real Estate for
loan origination costs in connection with the Company’s commercial real estate
loan portfolio of $24,000 and $24,000, respectively.
 
 (Back to Index)
 22
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
10 – RELATED PARTY TRANSACTIONS – (Continued)
  Relationship
with LEAF
 
 LEAF, a majority-owned subsidiary of
Resource America, originates and manages equipment leases and notes on the
Company’s behalf.  The Company purchases its equipment leases and
notes from LEAF at a price equal to their book value plus a reimbursable
origination cost not to exceed 1% to compensate LEAF for its origination
costs.  The Company did not acquire any equipment lease and note
investments during the three and six months ended June 30, 2009.  For
the three and six months ended June 30, 2008, the Company had acquired $8.1
million and $14.3 million, respectively, of equipment lease and note investments
from LEAF, including $80,000 and $141,000, respectively, of origination cost
reimbursements.  In addition, the Company pays LEAF an annual
servicing fee, equal to 1% of the book value of managed assets, for servicing
the Company’s equipment leases and notes.  At June 30, 2009 and
December 31, 2008, the Company was indebted to LEAF for servicing fees in
connection with the Company’s equipment finance portfolio of $159,000 and
$172,000, respectively.  LEAF’s servicing fees for the three and six
months ended June 30, 2009 were $239,000 and $492,000, respectively, as compared
to $224,000 and $460,000 for the three and six months ended June 30, 2008,
respectively.
  On June 30, 2009, the Company sold a
membership interest in a subsidiary that primarily held a pool of leases valued
at $89.8 million and transferred the $82.3 million balance of the related
secured term facility to Resource America.  No gain or loss was
recognized on the sale.  The Company received a note of $7.5 million
from Resource America for the equity in the portfolio on June 30,
2009.  The promissory note from the subsidiary bears interest at LIBOR
plus 3% and matures on September 30, 2009.  On July 1, 2009, $4.5
million of the promissory note was repaid.  The outstanding principal
balance of the note of $3.0 million was paid in full on August 3,
2009.
 During three and six months ended June
30, 2008, the Company sold two equipment notes back to LEAF at a price equal to
their book value.  The total proceeds received on the sale of the
outstanding notes receivable were $2.6 million.
 
 Relationship
with Resource America
 
 At June 30, 2009, Resource America,
owned 2,048,675 shares, or 8.2%, of the Company’s outstanding common
stock.  In addition, Resource America holds 2,166 options to purchase
restricted stock.
 
 The
Company is managed by the Manager pursuant to the Management Agreement that
provides for both base and incentive management fees.  For the three
and six months ended June 30, 2009, the Manager earned base management fees of
approximately $926,000 and $1.9 million, respectively, but did not earn any
incentive management fees.  For the three and six months ended June
30, 2008, the Manager earned base management fees of approximately $1.2 million
and $2.3 million, respectively, and incentive management fees of $564,000 for
the three and six months ended June 30, 2009 and 2008.  The Company
may also reimburse the Manager and Resource America for expenses and employees
of Resource America who perform legal, accounting, due diligence and other
services that outside professionals or consultants would otherwise
perform.  For the three and six months ended June 30, 2009, the
Company reimbursed the Manager $138,000 and $284,000, respectively, for such
expenses.  For the three and six months ended June 30, 2008, the
Company reimbursed the Manager $82,000 and $183,000, respectively, for such
expenses.
 
 At June
30, 2009, the Company was indebted to the Manager for base management fees of
$310,000 and for the reimbursement of expenses of $43,000.  At
December 31, 2008, the Company was indebted to the Manager for base management
fees of $725,000, incentive management fees of $397,000 and for reimbursement of
expenses of $73,000.  These amounts are included in accounts payable
and other liabilities.
 Relationship
with Law Firm
 
 Until 1996, the Company’s Chairman,
Edward Cohen, was of counsel to Ledgewood, P.C., a law firm.  For the
three and six months ended June 30, 2009, the Company paid Ledgewood
approximately $61,000 and $76,000, respectively, for legal services as compared
to $36,000 and $104,000 for the three and six months ended June 30, 2008,
respectively.  Mr. Cohen receives certain debt service payments from
Ledgewood related to the termination of his affiliation with Ledgewood and its
redemption of his interest.
 
 (Back to Index)
 23
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  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
11 – DISTRIBUTIONS
 
 On March 23, 2009, the Company declared
a quarterly distribution of $0.30 per share of common stock, $7.5 million in the
aggregate, which was paid on April 28, 2009 to stockholders of record on March
31, 2009.
 
 On June 12, 2009, the Company declared
a quarterly distribution of $0.30 per share of common stock, $7.5 million in the
aggregate, which was paid on July 28, 2009 to stockholders of record as of June
19, 2009.
 
 NOTE
12 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Effective January 1, 2008, the Company
adopted the provisions of SFAS 157.  The adoption of SFAS 157 did not
have a material effect on the Company’s consolidated financial statements as the
Company has historically carried is investment securities available-for-sale and
derivatives at fair value.  SFAS 157 establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The Company
determines fair value based on quoted prices when available or, if quoted prices
are not available, through the use of alternative approaches, such as
discounting the expected cash flows using market interest rates commensurate
with the credit quality and duration of the investment.  SFAS 157’s
hierarchy defines three levels of inputs that may be used to measure fair
value:
 
 Level 1 - Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.
  Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset and
liability or can be corroborated with observable market data for substantially
the entire contractual term of the asset or liability.
 
 Level 3 - Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.
 
 The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.  The Company evaluates its hierarchy disclosures
each quarter; depending on various factors, it is possible that an asset or
liability may be classified differently from quarter to
quarter.  However, the Company expects that changes in classifications
between levels will be rare.
 
 Certain
assets and liabilities are measured at fair value on a recurring
basis.  The following is a discussion of these assets and liabilities
as well as the valuation techniques applied to each for fair value
measurement.
 
 Investment
securities available-for-sale are valued by taking a weighted average of the
following three measures:
  i.
                using
      an income approach and utilizing an appropriate current risk-adjusted,
      time value and projected estimated losses from default assumptions based
      upon underlying loan
performance;
  ii.
                quotes
      on similar-vintage, higher rate, more actively traded CMBS securities
      adjusted for the lower subordinated level of the Company’s securities;
      and
  iii.
                dealer
      quotes on the Company’s securities for which there is not an active
      market.
 
 Derivatives (interest rate swap
contracts), both assets and liabilities, are valued by a third-party pricing
agent using an income approach and utilizing models that use as their primary
basis readily observable market parameters.  This valuation process
considers factors including interest rate yield curves, time value, credit
factors and volatility factors.  Although the Company has determined
that the majority of the inputs used to value its derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates
of current credit spreads, to evaluate the likelihood of default by the Company
and its counterparties.  The Company has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its
derivative positions and has determined that the credit valuation adjustments
are not significant to the overall valuation of its derivatives.  As a
result, the Company has determined that its derivative valuations in their
entirety are classified in Level 2 of the fair value
hierarchy.
 
 (Back to Index)
 24
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
12 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
 
 The following table presents
information about the Company’s assets (including derivatives that are presented
net) measured at fair value on a recurring basis as of June 30, 2009 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value.
 Assets
      and liabilities measured on a recurring basisLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalAssets:Securities
      available-for-sale
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  18,176
                  
                  
                  $
                  18,176Total assets at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  18,176
                  
                  
                  $
                  18,176Liabilities:Derivatives
(net)
                  
                  $
                  −
                  
                  
                  $
                  11,830
                  
                  
                  $
                  −
                  
                  
                  $
                  11,830Total liabilities at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  11,830
                  
                  
                  $
                  −
                  
                  
                  $
                  11,830
 The
following table presents additional information about assets which are measured
at fair value on a recurring basis for which the Company has utilized Level 3
inputs to determine fair value.
 
 Level
      3Beginning
      balance, January 1,
      2009
                      
                      $
                      29,260Total
      gains or losses (realized/unrealized):Included in
      earnings
                      
                      
                      (5,445
                      )Purchases, sales, issuances, and
      settlements
      (net)
                      
                      
                      −Included in other comprehensive
      income
                      
                      
                      (5,639
                      )Ending
      balance, June 30,
      2009
                      
                      $
                      18,176
 
 The
Company had $45,000 and $5.7 million of losses included in earnings due to the
other-than-temporary impairment charge of one asset during the three and six
months ended June 30, 2009, respectively.  The loss is included in the
consolidated statement of operations as net realized and unrealized losses on
investments.
  Loans held for sale consist of bank
loans identified for sale due to credit issues.  Interest on loans held for
sale is recognized according to the contractual terms of the loan and included
in interest income on loans.  The fair value of loans held for sale and
impaired loans is based on what secondary markets are currently offering for
these loans.  As such, the Company classifies loans held for sale as
recurring Level 2.  The amount of the adjustment for fair value for the six
months ended June 30, 2009 was $10.9 million and is included in the consolidated
statement of operations as net realized and unrealized losses on
investments.  For loans where there is no market, the loans are
measured third-party using cash flows and other valuation techniquesand these loans are
classified as nonrecurring Level 3.  For the six months ended June 30,
2009, there were $15.8 million of nonrecurring fair value losses which are
included in the consolidated statement of operations as provision for loan and
lease loss.
 
 The following table summarizes the
financial assets and liabilities measured at fair value on a nonrecurring basis
as of June 30, 2009 and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value.
 
 Assets
      and liabilities measured on a nonrecurring basisLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalAssets:Loans held for
    sale
                  
                  $
                  −
                  
                  
                  $
                  2,401
                  
                  
                  $
                  −
                  
                  
                  $
                  2,401Impaired loans
                  
                  
                  −
                  
                  
                  
                  8,196
                  
                  
                  
                  103,404
                  
                  
                  
                  111,600Total assets at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  10,597
                  
                  
                  $
                  103,404
                  
                  
                  $
                  114,001
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 25
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 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
12 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)
  SFAS 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of
financial instruments for which it is practicable to estimate that
value.  The fair value of short-term financial instruments such as
cash and cash equivalents, restricted cash, interest receivable, principal
receivable, repurchase agreements, warehouse lending facilities and accrued
interest expense approximates their carrying value on the consolidated balance
sheet. The fair value of the Company’s investment securities
available-for-sale is reported in Note 3. The fair value of the
Company’s derivative instruments is reported in Note 13.
 
 The fair values of the Company’s
remaining financial instruments that are not reported at fair value on the
consolidated statement of financial position are reported below.
 
 Fair Value of Financial
      Instruments(in
      thousands)June
      30, 2009
                  
                  
                  December
      31, 2008Carrying
      value
                  
                  
                  Fair
      value
                  
                  
                  Carrying
      value
                  
                  
                  Fair
      valueLoans
      held-for-investment
                  
                  $
                  1,665,706
                  
                  
                  $
                  1,523,993
                  
                  
                  $
                  1,712,779
                  
                  
                  $
                  1,037,927CDOs
                  
                  $
                  1,529,757
                  
                  
                  $
                  728,887
                  
                  
                  $
                  1,535,389
                  
                  
                  $
                  690,926Junior
      subordinated notes
                  
                  $
                  51,548
                  
                  
                  $
                  12,887
                  
                  
                  $
                  51,548
                  
                  
                  $
                  10,310
 
 NOTE
13 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS
 
 At June
30, 2009, the Company had 13 interest rate swap contracts outstanding whereby
the Company will pay an average fixed rate of 5.14% and receive a variable rate
equal to one-month LIBOR.  The aggregate notional amount of these
contracts was $228.3 million at June 30, 2009.  In addition, the
Company also has one interest rate cap agreement with a notional amount of $14.8
million outstanding whereby it reduced its exposure to variability in future
cash flows attributable to LIBOR.  The interest rate cap is a
non-designated cash flow hedge and, as a result, the change in fair value is
recorded through the consolidated statement of operations.
 
 At December 31, 2008, the Company had
31 interest rate swap contracts outstanding whereby the Company paid an average
fixed rate of 5.07% and received a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $325.0
million at December 31, 2008.
 
 The estimated fair value of the Company’s interest rate swaps was ($11.9)
million and ($31.6) million as of June 30, 2009 and December 31, 2008,
respectively.  The Company had aggregate unrealized losses of $13.9
million and $33.8 million on the interest rate swap agreements as of June 30,
2009 and December 31, 2008, respectively, which is recorded in accumulated other
comprehensive loss.  In connection with the August 2006 close of RREF
CDO 2006-1, the Company realized a swap termination loss of $119,000, which is
being amortized over the maturity of RREF CDO 2006-1.  The
amortization is reflected in interest expense in the Company’s consolidated
statements of operations.  In connection with the June 2007 close of
RREF CDO 2007-1, the Company realized a swap termination gain of $2.6 million,
which is being amortized over the maturity of RREF CDO 2007-1.  The
accretion is reflected in interest expense in the Company’s consolidated
statements of operations.  In connection with the termination of a
$53.6 million swap related to RREF CDO 2006-1 during the nine months ended
September 30, 2008, the Company realized a swap termination loss of $4.2
million, which is being amortized over the maturity of a new $45.0 million
swap.  The amortization is reflected in interest expense in the
Company’s consolidated statements of operations.  In connection with
the payoff of a fixed-rate commercial real estate loan during the three months
ended September 30, 2008, the Company terminated a $12.7 million swap and
realized a $574,000 swap termination loss, which is being amortized over the
maturity of the terminated swap and the amortization is reflected in interest
expense in the Company’s consolidated statements of operations.
  (Back to Index)
 26
 (Back to Index)
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2009
 (Unaudited)
 
 NOTE
13 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS – (Continued)
 
 The following tables present the fair
value of the Company’s derivative financial instruments as well as their
classification on the balance sheet as of June 30, 2009 and on the consolidated
statement of operations for the six months ended June 30, 2009:
  Fair
      Value of Derivative Instruments as of June 30, 2009
                            (in
      thousands)Liability
      DerivativesNotional
      Amount
                        
                        Balance
      Sheet Location
                        
                        Fair
      ValueDerivatives
      not designated as hedging instrumentsunder
      SFAS 133Interest
      rate cap agreement
                        
                        $
                        14,841
                        
                        Derivatives,
      at fair value
                        
                        $
                        103Derivatives
      designated as hedging instrumentsunder
      SFAS 133Interest
      rate swap contracts
                        
                        $
                        228,290
                        
                        Derivatives,
      at fair value
                        
                        $
                        (11,933
                        )Accumulated
      other comprehensive loss
                        
                        $
                        11,933
  
 The
      Effect of Derivative Instruments on the Statement of Operations for
      the
                          Six
      Months Ended June 30, 2009
                          (in
      thousands)Liability
      DerivativesNotional
      Amount
                      
                      Statement
      of Operations  Location
                      
                      Unrealized
      Loss (1)Derivatives
      not designated as hedging instrumentsunder
      SFAS 133Interest
      rate cap agreement
                      
                      $
                      14,841
                      
                      Interest
      expense
                      
                      $
                      (37
                      )
 
 (1)
                Negative
      values indicate a decrease to the associated balance sheet or consolidated
      statement of operations line
items.
 
 Changes in interest rates may also have
an effect on the rate of mortgage principal prepayments and, as a result,
prepayments on MBS in the Company’s investment portfolio.  The Company
seeks to mitigate the effect of changes in the mortgage principal repayment rate
by balancing assets purchased at a premium with assets purchased at a
discount.  At June 30, 2009, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $3.6
million.  At December 31, 2008, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $3.7
million.
 
 NOTE
14 – SUBSEQUENT EVENT
 
 The Company has evaluated subsequent
events through the filing of this Form 10-Q on August 7, 2009, and determined
that there have not been any events that have occurred that would require
adjustments to or disclosures in the unaudited consolidated financial statements
except for the following transaction:
  ·
                The
      Company repurchased 700,000 common shares at a weighted average price of
      $3.20 per share on July 20,
2009.
  (Back to Index)
 27
 (Back to Index)
  ITEM
2.                      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  (Unaudited)
 
 This
report contains certain forward-looking statements. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts.  In some cases, you can identify forward-looking
statements by terms such as “anticipate,” “believe,” “could,” “estimate,”
“expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and
“would” or the negative of these terms or other comparable
terminology.  Such statements are subject to the risks and
uncertainties more particularly described in Item 1A, under the caption “Risk
Factors,” in our Annual Report on Form 10-K for period ended December 31,
2008.  These risks and uncertainties could cause actual results to
differ materially.  Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof.  We undertake no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances after the date of
this report, except as may be required under applicable law.
 
 Overview
 
 We are a specialty finance company that
focuses primarily on commercial real estate and commercial
finance.  We are organized and conduct our operations to qualify as a
REIT under Subchapter M of the Internal Revenue Code of 1986, as
amended.  Our objective is to provide our stockholders with total
returns over time, including quarterly distributions and capital appreciation,
while seeking to manage the risks associated with our investment
strategy.  We invest in a combination of real estate-related assets
and, to a lesser extent, higher-yielding commercial finance
assets.  We have financed a substantial portion of our portfolio
investments through borrowing strategies seeking to match the maturities and
repricing dates of our financings with the maturities and repricing dates of
those investments, and have sought to mitigate interest rate risk through
derivative instruments.
 
 We are externally managed by Resource
Capital Manager, Inc., which we refer to as the Manager, a wholly-owned indirect
subsidiary of Resource America, Inc. (NASDAQ: REXI), a specialized asset
management company that uses industry specific expertise to generate and
administer investment opportunities for its own account and for outside
investors in the commercial finance, real estate, and financial fund management
sectors.  As of June 30, 2009, Resource America managed approximately
$14.3 billion of assets in these sectors.  To provide its services,
the Manager draws upon Resource America, its management team and their
collective investment experience.
 
 We generate our income primarily from
the spread between the revenues we receive from our assets and the cost to
finance the purchase of those assets and hedge interest rate
risks.  We generate revenues from the interest we earn on our whole
loans, A notes, B notes, mezzanine debt, commercial mortgage-backed securities,
or CMBS, bank loans, payments on equipment leases and notes and other
asset-backed securities, or ABS.  Historically, we have used a
substantial amount of leverage to enhance our returns and we have financed each
of our different asset classes with different degrees of
leverage.  The cost of borrowings to finance our investments comprises
a significant part of our expenses.  Our net income depends on our
ability to control these expenses relative to our revenue.  In our
bank loans, CMBS, equipment leases and notes and other ABS, we historically have
used warehouse facilities as a short-term financing source and collateralized
debt obligations, or CDOs, and, to a lesser extent, other term financing as a
long-term financing source.  In our commercial real estate loan
portfolio, we historically have used repurchase agreements as a short-term
financing source, and CDOs and, to a lesser extent, other term financing as a
long-term financing source.  Our other term financing has consisted of
long-term match-funded financing provided through long-term bank financing and
asset-backed financing programs, depending upon market conditions and credit
availability.
 
 Ongoing problems in real estate and
credit markets continue to impact our operations, particularly our ability to
generate capital and financing to execute our investment strategies.  These
problems have also affected a number of our commercial real estate borrowers
and, with respect to 14 of our commercial real estate loans, caused us to enter
into loan modifications.  We have increased our provision for loan and
lease losses to reflect the effect of these conditions on our borrowers and have
recorded both temporary and other than temporary impairments in the market
valuation of the CMBS and other ABS in our investment portfolio.  While we
believe we have appropriately valued the assets in our investment portfolio at
June 30, 2009, we cannot assure you that further impairments will not occur or
that our assets will otherwise not be adversely effected by market
conditions.
 
 The events occurring in the credit
markets have impacted our financing and investing strategies and, as a result,
our ability to originate new investments and to grow.  The market for
securities issued by new securitizations collateralized by assets similar to
those in our investment portfolio has largely disappeared.  Since our
sponsorship in June 2007 of Resource Real Estate Funding CDO 2007-1, or RREF CDO
2007-1, we have not sponsored any new securitizations and we do not expect to be
able to sponsor new securitizations for the foreseeable
future.  Short-term financing through warehouse lines of credit and
repurchase agreements has become largely unavailable and reliable as increasing
volatility in the valuation of assets similar to those we originate has
increased the risk of margin calls.  To reduce our exposure to margin
calls or facility terminations, we have paid down repurchase agreement
borrowings, by $13.7 million during the six months ended June 30, 2009, that
finance commercial real estate loans and other securities that we
hold.  Because of recently rising interest rates, we have received
proceeds from margin calls related to our interest rate derivatives of $2.3
million during the six months ended June 30, 2009.
 (Back to Index)
 28
 (Back to Index)
  Credit market conditions and the
recessionary economy have also resulted in an increasing number of loan
modifications, particularly in our commercial real estate
loans.  Borrowers have experienced deterioration in the performance of
the properties we have financed or delays in implementing their business
plans.  In order to assist our borrowers in effectuating their
business plans, including the leasing and repositioning of the underlying
assets, we have been willing to enter into loan modifications that would adapt
our financing to their particular situations.  The most common loan
modifications have included term extensions and modest interest rate reductions
through the lowering of London Interbank Offered Rate, or LIBOR, floors, offset
by increased interest rate spreads over LIBOR.  In exchange for the
loan modifications, we have received partial principal pay-downs, new equity
investment commitments in the properties from the borrowers or their principals,
additional fees and other structural improvements and enhancements to the
loans.  In addition, in four of our loan modifications, we have
reduced our future funding obligations by approximately $12.4 million in the
aggregate to preserve our own liquidity.  Since the beginning of 2008
through June 30, 2009, we have modified 14 commercial real estate, or CRE,
loans.  We expect that we may have more CRE loan modifications in the
future.
 
 Currently, we seek to manage our
liquidity and originate new assets primarily through capital recycling as loan
payoffs and paydowns occur and through existing capacities within our completed
securitizations.  The following is a summary of repayments we received
during the six months ended June 30, 2009:
  ·
                $7.0
      million of commercial real estate loans paid
  off;
  ·
                $16.7
      million of commercial real estate loans principal
    repayments;
  ·
                $27.6
      million of bank loan principal repayments;
and
  ·
                $51.0
      million of bank loan sale proceeds.
 
 As of June 30, 2009, we had $3.4
million of outstanding repurchase agreements (including accrued interest) with
pledged collateral of $3.9 million of CRE CDO notes and $22.8 million of CRE
loans, which was reduced from $17.1 million of outstanding repurchase agreements
with pledged collateral of $3.9 million CRE CDO notes and CRE loans of $35.8
million at December 31, 2008.
 We expect to continue to generate net
investment income from our current investment portfolio and generate dividends
for our shareholders.
 
 As of June 30, 2009, we had invested
72% of our portfolio in commercial real estate-related assets 27% in commercial
bank loans and 1% in direct financing leases and notes.  As of
December 31, 2008, we had invested 72% of our portfolio in commercial real
estate-related assets 25% in commercial bank loans and 3% in direct financing
leases and notes.
 
 Critical
Accounting Policies and Estimates
 
 In this section, we discuss our most
critical accounting policies and estimates.  For a complete discussion
of our critical accounting policies and estimates, see the discussion our annual
report on Form 10-K for fiscal 2008 under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations − Critical Accounting Policies
and Estimates.”
 
 Allowance
for Loan and Lease Losses
 
 We maintain an allowance for loan and
lease losses.  Loans and leases held for investment are first
individually evaluated for impairment, and then evaluated as a homogeneous pool
of loans with substantially similar characteristics for
impairment.  The reviews are performed at least
quarterly.
 
 We consider a loan to be impaired when,
based on current information and events, management believes it is probable that
we will be unable to collect all amounts due according to the contractual terms
of the loan agreement.  When a loan is impaired, the allowance for
loan losses is increased by the amount of the excess of the amortized cost basis
of the loan over its fair value.  Fair value may be determined based
the present value of estimated cash flows; on market price, if available; or on
the fair value of the collateral less estimated disposition
costs.  When a loan, or a portion thereof, is considered uncollectible
and pursuit of the collection is not warranted, we will record a charge-off or
write-down of the loan against the allowance for credit
losses.
 The balance of impaired loans and
leases was $158.2 million and $23.9 million at June 30, 2009 and December 31,
2008, respectively.  The total balance of impaired loans and leases with a
valuation allowance was $140.2 million at June 30, 2009.  The total
balance of impaired loans without a specific valuation allowance was $18.0
million at June 30, 2009.  All loans and leases deemed impaired at
December 31, 2008 had an associated valuation allowance.  The specific
valuation allowance related to these impaired loans and leases was $44.1 million
and $19.6 million at June 30, 2009 and December 31, 2008,
respectively.  The average balance of impaired loans and leases was
$112.9 million and $24.9 million during the six months ended June 30, 2009 and
the year ended December 31, 2008, respectively.  We recognized income on
impaired loans and leases during 2009 and 2008 only to the extent that cash was
collected.  For the six months ended June 30, 2009 and the year ended
December 31, 2008, we did not recognize any income on impaired loans and
leases.
 (Back to Index)
 29
 (Back to Index)
  An impaired loan or lease may remain on
accrual status during the period in which we are pursuing repayment of the loan
or lease; however, the loan or lease would be placed on non-accrual status at
such time as either (i) management believes that scheduled debt service payments
will not be met within the coming 12 months; (ii) the loan or lease becomes 90
days delinquent; (iii) management determines the borrower is incapable of, or
has ceased efforts toward, curing the cause of the impairment; or (iv) the net
realizable value of the loan’s underlying collateral approximates our carrying
value of such loan.  While on non-accrual status, we recognize
interest income only when an actual payment is received.
 
 The following tables show the changes
in the allowance for loan and lease losses (in thousands):
 Allowance
      for loan loss at January 1, 2009
                      
                      $
                      43,867Provision for loan
      loss
                      
                      
                      27,190Loans
    charged-off
                      
                      
                      (11,985
                      )Recoveries
                      
                      
                      −Allowance
      for loan loss at June 30, 2009
                      
                      $
                      59,072Allowance
      for lease loss at January 1, 2009
                      
                      $
                      450Provision for lease
      loss
                      
                      
                      784Leases
    charged-off
                      
                      
                      (634
                      )Recoveries
                      
                      
                      −Allowance
      for lease loss at June 30, 2009
                      
                      $
                      600
 
 Classifications
and Valuation of Investment Securities
  Effective January 1, 2008, we adopted
the provisions of Statement of Financial Accounting Standard, or SFAS, 157,
“Fair Value Measurements.”  The adoption of SFAS 157 did not have a
material effect on our consolidated financial statements with respective to
investment securities available-for-sale and derivatives since we had previously
recorded these at fair value.  SFAS 157 establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  We
determined fair value based on quoted prices when available or, if quoted prices
are not available through the use of alternative approaches, such as discounting
the expected cash flows using market interest rates commensurate with the credit
quality and duration of the investment.  SFAS 157’s hierarchy defines
three levels of inputs that may be used to measure fair value:
 Level 1 - Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.
  Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset and
liability or can be corroborated with observable market data for substantially
the entire contractual term of the asset or liability.
 
 Level 3 - Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.
 
 The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.  We evaluate our hierarchy disclosures each
quarter, depending on various factors, it is possible that an asset or liability
may be classified differently from quarter to quarter.  However, we
expect that changes in classifications between levels will be rare.
 
 Certain
assets and liabilities are measured at fair value on a recurring
basis.  The following is a discussion of these assets and liabilities
as well as the valuation techniques applied to each for fair value
measurement.
 
 Investment
securities available-for-sale are valued by taking a weighted average of the
following three measures:
  i.
                using
      an income approach and utilizing an appropriate current risk-adjusted,
      time value and projected estimated losses from default assumptions based
      upon underlying loan
performance;
  ii.
                quotes
      on similar-vintage, higher rate, more actively traded CMBS securities
      adjusted for the lower subordinated level of our securities;
      and
  iii.
                dealer
      quotes on our securities for which there is not an active
      market.
 (Back to Index)
 30
 (Back to Index)
  Derivatives (interest rate swap
contracts), both assets and liabilities, are valued by a third-party pricing
agent using an income approach and utilizing models that use as their primary
basis readily observable market parameters.  This valuation process
considers factors including interest rate yield curves, time value, credit
factors and volatility factors.  Although we have determined that the
majority of the inputs used to value our derivatives fall within Level 2 of
the fair value hierarchy, the credit valuation adjustments associated with our
derivatives use Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by us and our
counterparties.  We have assessed the significance of the impact of
the credit valuation adjustments on the overall valuation of our derivative
positions and have determined that the credit valuation adjustments are not
significant to the overall valuation of our derivatives.  As a result,
we have determined that our derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy.
 The following table presents
information about our assets (including derivatives that are presented on a net
basis) measured at fair value on a recurring basis as of June 30, 2009 and
indicates the fair value hierarchy of the valuation techniques utilized by us to
determine such fair value.
 
 Assets
      and liabilities measured on a recurring basisLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalAssets:Securities
      available-for-sale
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  18,176
                  
                  
                  $
                  18,176Total assets at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  18,176
                  
                  
                  $
                  18,176Liabilities:Derivatives
(net)
                  
                  $
                  −
                  
                  
                  $
                  11,830
                  
                  
                  $
                  −
                  
                  
                  $
                  11,830Total liabilities at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  11,830
                  
                  
                  $
                  −
                  
                  
                  $
                  11,830
 The
following table presents additional information about assets which are measured
at fair value on a recurring basis for which we have utilized Level 3 inputs to
determine fair value.
 
 Level
      3Beginning
      balance, January 1,
      2009
                      
                      $
                      29,260Total
      gains or losses (realized/unrealized):Included in
      earnings
                      
                      
                      (5,445
                      )Purchases, sales, issuances, and
      settlements
      (net)
                      
                      
                      −Included in other comprehensive
      income
                      
                      
                      (5,639
                      )Ending
      balance, June 30,
      2009
                      
                      $
                      18,176
 
 We had
$5.7 million of losses on a security included in earnings due to the
other-than-temporary impairment charge of one asset during the six months ended
June 30, 2009, respectively.  We include the loss on our consolidated
statement of operations as net realized and unrealized losses on investments.
  Loans held for sale consist of bank
loans identified for sale due to credit issues.  Interest on loans held for
sale is recognized according to the contractual terms of the loan and included
in interest income on loans.  The fair value of loans held for sale and
impaired loans is based on what secondary markets are currently offering for
these loans.  As such, we classify loans held for sale as recurring Level
2.  The amount of the adjustment for fair value for the six months ended
June 30, 2009 was $10.9 million and is included in on the consolidated statement
of operations as net realized and unrealized losses on
investments.  For loans where there is no active market, we base our
measurements on third-party cash flows and other valuation techniquesand classify them
nonrecurring Level 3.  For the six months ended June 30, 2009, there were
$6.3 million of nonrecurring fair value loan losses which we include in our
consolidated statement of operations as provision for loan and lease
loss.
   (Back to Index)
 31
 (Back to Index)
  The following table summarizes the
financial assets and liabilities measured at fair value on a nonrecurring basis
as of June 30, 2009 and indicates the fair value hierarchy of the valuation
techniques utilized by us to determine such fair value.
 
 Assets
      and liabilities measured on a nonrecurring basisLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalAssets:Loans held for
    sale
                  
                  $
                  −
                  
                  
                  $
                  2,401
                  
                  
                  $
                  −
                  
                  
                  $
                  2,401Impaired loans
                  
                  
                  −
                  
                  
                  
                  8,196
                  
                  
                  
                  103,404
                  
                  
                  
                  111,600Total assets at fair
      value
                  
                  $
                  −
                  
                  
                  $
                  10,597
                  
                  
                  $
                  103,404
                  
                  
                  $
                  114,001
 
 Results
of Operations − Three and Six
Months Ended June 30, 2009 as compared to Three
and Six Months Ended June 30, 2008
 
 Our net loss for the three and six
months ended June 30, 2009 was $5.1 million, or ($0.21) per weighted average
common share (basic and diluted) and $17.3 million, or ($0.71) per weighted
average common share (basic and diluted) as compared to a net loss of $5.3
million, or ($0.21) per weighted average common share (basic and diluted) for
the three months ended June 30, 2008 and net income of $4.1 million or $0.17 per
weighted average common share-basic ($0.16 per weighted average common
share-diluted) for the six months ended June 30, 2008..
 
 To a large extent, the decline in net
income for the six months ended June 30, 2009 as compared to the same period in
2008 is due to increased provisions of $11.1 million and increased losses on
investments of $14.0 million in the 2009 period.  This trend reflects
the ongoing deterioration in credit markets that we expect to continue
throughout 2009.
  Interest
Income
 
 The following table sets forth
information relating to our interest income recognized for the periods presented
(in thousands, except percentages):
  Three
      Months Ended
                          
                          
                          Three
      Months EndedJune
      30, 2009
                          
                          
                          June
      30, 2008Weighted
      Average
                          
                          
                          
                          
                          
                          Weighted
      AverageInterest
      Income
                          
                          
                          Yield
      (1)
                          
                          
                          Balance
                          
                          
                          Interest
      Income
                          
                          
                          Yield
                          
                          
                          BalanceInterest income from
      loans:Bank loans
                          
                          $
                          8,985
                          
                          
                          
                          3.72%
                          
                          
                          $
                          958,104
                          
                          
                          $
                          12,637
                          
                          
                          
                          5.27%
                          
                          
                          $
                          945,219Commercial real estate
      loans
                          
                          
                          12,984
                          
                          
                          
                          6.36%
                          
                          
                          $
                          791,167
                          
                          
                          
                          16,049
                          
                          
                          
                          7.43%
                          
                          
                          $
                          858,603Total interest income fromloans
                          
                          
                          21,969
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          28,686Interest income from securities
      available-for-sale:Other ABS
                          
                          
                          −
                          
                          
                          
                          N/A
                          
                          
                          
                          N/A
                          
                          
                          
                          70
                          
                          
                          
                          4.67%
                          
                          
                          $
                          6,000CMBS-private
      placement
                          
                          
                          882
                          
                          
                          
                          4.73%
                          
                          
                          $
                          74,138
                          
                          
                          
                          1,088
                          
                          
                          
                          5.58%
                          
                          
                          $
                          74,565Total interest income
      from
                            securities
      available-for-sale
                          
                          
                          882
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,158Leasing
                          
                          
                          2,093
                          
                          
                          8.60%
                          
                          
                          $
                          92,846
                          
                          
                          $
                          1,961
                          
                          
                          
                          8.68%
                          
                          
                          $
                          90,487Interest income –
      other:Temporary
      investment
                            in over-night repurchaseagreements
                          
                          
                          330
                          
                          
                          
                          N/A
                          
                          
                          
                          N/A
                          
                          
                          
                          453
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ATotal interest income −
      other
                          
                          
                          330
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          453Total
      interest income
                          
                          $
                          25,274
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          32,258
 
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 32
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 Six
      Months Ended
                      
                      
                      Six
      Months EndedJune
      30, 2009
                      
                      
                      June
      30, 2008Weighted
      Average
                      
                      
                      
                      
                      
                      Weighted
      AverageInterest
      Income
                      
                      
                      Yield
      (1)
                      
                      
                      Balance
                      
                      
                      Interest
      Income
                      
                      
                      Yield
                      
                      
                      BalanceInterest income from
      loans:Bank loans
                      
                      $
                      18,422
                      
                      
                      3.83%
                      
                      
                      $
                      957,742
                      
                      
                      $
                      28,800
                      
                      
                      
                      6.02%
                      
                      
                      $
                      943,026Commercial real estate
      loans
                      
                      
                      26,707
                      
                      
                      6.53%
                      
                      
                      $
                      796,242
                      
                      
                      $
                      32,325
                      
                      
                      
                      7.54%
                      
                      
                      $
                      851,589Total interest income fromloans
                      
                      
                      45,129
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      61,125Interest income from securities
      available-for-sale:Other ABS
                      
                      
                      −
                      
                      
                      −%
                      
                      
                      $
                      −
                      
                      
                      $
                      19
                      
                      
                      
                      0.66%
                      
                      
                      $
                      6,000CMBS-private
      placement
                      
                      
                      1,765
                      
                      
                      4.74%
                      
                      
                      $
                      74,138
                      
                      
                      $
                      2,320
                      
                      
                      
                      5.79%
                      
                      
                      $
                      78,269Total interest income
      from
                        securities
      available-for-sale
                      
                      
                      1,765
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,339Leasing
                      
                      
                      4,326
                      
                      
                      8.60%
                      
                      
                      $
                      96,029
                      
                      
                      $
                      3,951
                      
                      
                      
                      8.68%
                      
                      
                      $
                      93,490Interest income –
      other:Interest income – other (2)
                      
                      
                      −
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      997
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATemporary investment
      in
                        over-night
      repurchaseagreements
                      
                      
                      676
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      829
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATotal interest income −
      other
                      
                      
                      676
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,826Total
      interest income
                      
                      $
                      51,896
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      69,241
 
 (1)
                Certain
      one-time items reflected in interest income have been excluded in
      calculating the weighted average rate, since they are not indicative of
      expected future results.
  (2)
                Represents
      cash received from Ischus CDO II in excess of our investment
      balance.  We sold our interest in Ischus CDO II in November 2008
      and, as a result, deconsolidated it at that time.  Income on
      this investment was recognized using the cost recovery
    method.
  Interest income decreased $7.0 million
(22%) and $17.3 million (25%) to $25.3 million and $51.9 million for the three
and six months ended June 30, 2009, respectively from $33.0 million and $69.2
million for the three and six months ended June 30, 2008,
respectively.  We attribute this decrease to the
following:
  Interest
Income from Loans
 Aggregate interest income from bank and
commercial real estate loans decreased $6.7 million (23%) and $16.0 million
(26%) to $22.0 million and $45.1 million for the three and six months ended June
30, 2009, respectively from $28.7 million and $61.1 million for the three and
six months ended June 30, 2008, respectively.
 
 Bank loans generated $9.0 million and
$18.4 million of interest income for the three and six months ended June 30,
2009, respectively, as compared to $12.6 million and $28.8 million for the three
and six months ended June 30, 2008, decreases of $3.7 million (29%) and $10.4
million (36%), respectively.  These decreases resulted primarily from
a decrease in the weighted average interest rate to 3.72% and 3.83% for the
three and six months ended June 30, 2009, respectively from 5.27% and 6.02% for
the three and six months ended June 30, 2008, respectively, primarily as a
result of the decrease in LIBOR which is a reference index for the rates payable
by these loans.
 
 These decreases were partially offset
by increases in the weighted average balance on these loans of $12.9 million and
$14.7 million to $958.1 million and $957.7 million for the three and six month
ended June 30, 2009, respectively, from $945.2 million and $943.0 million for
the three and six months ended June 30, 2008, respectively.
  (Back to Index)
 33
 (Back to Index)
 Commercial real estate loans produced
$13.0 million and $26.7 million of interest income for the three and six months
ended June 30, 2009, respectively, as compared to $16.0 million and $32.2
million for the three and six months ended June 30, 2008, respectively,
decreases of $3.1 million (19%) and $5.6 million (17%),
respectively.  These decreases are the result of the
following:
  ·
                a
      decrease in the weighted average balance of $67.4 million and $55.3
      million on our commercial real estate loans to $791.2 million and $796.2
      million for the three and six months ended June 30, 2009, respectively,
      from $858.6 million and $851.6 million for the three and six months ended
      June 30, 2008, respectively, as a result of payoffs and paydowns since
      March 31, 2008; and
  ·
                a
      decrease in the weighted average interest rate to 6.36% and 6.53% for the
      three and six months ended June 30, 2009, respectively, from 7.43% and
      7.54% for the three and six months ended June 30, 2008, respectively,
      primarily as a result of the decrease in LIBOR which is a reference index
      for the rates payable by these
loans.
 
 Interest
Income from Securities Available-for-Sale
 
 Aggregate interest income from
securities available-for-sale (CMBS-private placement and other ABS) decreased
$275,000 (24%) and $574,000 (25%) to $883,000 and $1.8 million for the three and
six months ended June 30, 2009, respectively, from $1.2 million and $2.3 million
for the three and six months ended June 30, 2008, respectively.
 
 Interest income from CMBS-private
placement decreased $205,000 (19%) to $882,000 for the six months ended June 30,
2009 from $1.1 million for the six months ended June 30, 2008.  This
decrease resulted primarily from the following:
  ·
                a
      decrease in the weighted average rate to 4.73% and 4.74% for the three and
      six months ended June 30, 2009, respectively, from 5.58% and 5.79% for the
      three and six months ended June 30, 2008, respectively, primarily as a
      result of the decrease in LIBOR which is a reference index for the rates
      payable by these loans; and
  ·
                a
      decrease of the weighted average balance on these securities of $427,000
      and $4.1 million to $74.0 million and $74.0 million for the three and six
      months ended June 30, 2009, respectively, from $74.6 million and $78.3
      million for the three and six months ended June 30, 2008, respectively, as
      a result of payoffs since March 31,
2008.
 
 Interest
income from other ABS decreased $70,000 (100%) to $0 for the three months ended
June 30, 2009 from $70,000 for the three months ended June 30, 2008 as a result
of the default of a collateral position which has not paid interest since the
three months ended March 31, 2008.
 
 Interest
Income − Other
 
 Interest income-other decreased
$124,000 (27%) and $1.2 million (63%) to $330,000 and $676,000 for the three and
six months ended June 30, 2009, respectively, as compared to $453,000 and $1.8
million for the three and six months ended June 30, 2008.  The
decrease for the six months ended is primarily the result of a decrease in
interest income from our equity method investment in Ischus CDO
II.  We used the cost recovery method to recognize the income on this
investment.  We sold our interest in Ischus CDO II in November 2008
and, as a result, deconsolidated it at that time.  For the three
months ended March 31, 2008, $997,000 of interest income was recognized on this
investment.  No such income has been recognized since March 31, 2008
for the six months ended June 30, 2009.  In addition, the balance of
the decrease for the three and six months ended is the result of decreases in
our temporary investment income due to lower rates earned on our over-night
repurchase agreements.
 
 Interest
Income from Leasing
 
 Interest
income from leasing generated $2.1 million and $4.3 million of interest income
for the three and six months ended June 30, 2009, respectively, as compared to
$2.0 million and $4.0 million for the three and six months ended June 30, 2008,
respectively, increases of $132,000 (7%) and $375,000 (9%),
respectively.  The increase is the result of an increase of $2.4
million and $2.5 million in the weighted average balance of leases to $92.8
million and $96.0 million for the three and six months ended June 30, 2009,
respectively, from $90.5 million and $93.5 million for the three and six months
ended March 31, 2008, respectively, due to the addition of a new pool of leases
at the end of 2008 which were held for the entire six months ended June 30,
2009.
  (Back to Index)
 34
 (Back to Index)
  Interest
Expense
 
 The following tables set forth
information relating to our interest expense incurred for the periods presented
(in thousands, except percentages):
  Three
      Months Ended
                      
                      
                      Three
      Months EndedJune
      30, 2009
                      
                      
                      June
      30, 2008Weighted
      Average
                      
                      
                      
                      
                      
                      Weighted
      AverageInterest
      Expense
                      
                      
                      Yield
                      
                      
                      Balance
                      
                      
                      Interest
      Expense
                      
                      
                      Yield
                      
                      
                      BalanceBank
      loans
                      
                      $
                      4,154
                      
                      
                      
                      1.81%
                      
                      
                      $
                      906,000
                      
                      
                      $
                      8,208
                      
                      
                      
                      3.58%
                      
                      
                      $
                      906,000Commercial
      real estate loans
                      
                      
                      2,653
                      
                      
                      
                      1.60%
                      
                      
                      $
                      660,044
                      
                      
                      
                      6,626
                      
                      
                      
                      3.78%
                      
                      
                      $
                      699,850CMBS-private
      placement
                      
                      
                      −
                      
                      
                      
                      N/A%
                      
                      
                      
                      N/A
                      
                      
                      
                      11
                      
                      
                      
                      5.52%
                      
                      
                      $
                      848Leasing
                      
                      
                      1,313
                      
                      
                      5.85%
                      
                      
                      $
                      85,550
                      
                      
                      
                      931
                      
                      
                      
                      4.25%
                      
                      
                      $
                      86,751General
                      
                      
                      4,628
                      
                      
                      
                      4.75%
                      
                      
                      $
                      363,173
                      
                      
                      
                      3,148
                      
                      
                      
                      3.21%
                      
                      
                      $
                      384,385Total interest
      expense
                      
                      $
                      12,748
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      18,924
 
 Six
      Months Ended
                      June
      30, 2009
                    
                    
                    Six
      Months Ended
                      June
      30, 2008Weighted
      Average
                    
                    
                    
                    
                    
                    Weighted
      AverageInterest
      Expense
                    
                    
                    Yield
                    
                    
                    Balance
                    
                    
                    Interest
      Expense
                    
                    
                    Yield
                    
                    
                    BalanceBank
      loans
                    
                    $
                    9,873
                    
                    
                    
                    2.24%
                    
                    
                    $
                    906,000
                    
                    
                    $
                    19,094
                    
                    
                    
                    4.17%
                    
                    
                    $
                    906,000Commercial
      real estate loans
                    
                    
                    5,277
                    
                    
                    
                    1.60%
                    
                    
                    $
                    663,762
                    
                    
                    
                    15,101
                    
                    
                    
                    4.26%
                    
                    
                    $
                    701,615CMBS-private
      placement
                    
                    
                    −
                    
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    
                    
                    88
                    
                    
                    
                    4.88%
                    
                    
                    $
                    3,570Leasing
                    
                    
                    2,143
                    
                    
                    4.66%
                    
                    
                    $
                    88,775
                    
                    
                    
                    2,215
                    
                    
                    
                    4.94%
                    
                    
                    $
                    89,649General
                    
                    
                    9,332
                    
                    
                    
                    4.82%
                    
                    
                    $
                    367,886
                    
                    
                    
                    5,574
                    
                    
                    
                    2.79%
                    
                    
                    $
                    388,523Total interest
      expense
                    
                    $
                    26,625
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    42,072
 
 Interest expense decreased $6.2 million
(33%) and $15.4 million (37%) to $12.7 million and $26.6 million for the three
and six months ended June 30, 2009, respectively, from $18.9 million and $$42.1
million for the three and six months ended June 30, 2008.  We
attribute these decreases to the following:
 
 Interest expense on bank loans was $4.2
million and $9.9 million for the three and six months ended June 30, 2009,
respectively, as compared to $8.2 million and $19.1 million for the three and
six months ended June 30, 2008, decreases of $4.1 million (49%) and $9.2 million
(48%), respectively.  These decreases resulted primarily from a
decrease in the weighted average rate on the debt related to bank loans which
decreased to 1.81% and 2.24% for the three and six months ended June 30, 2009,
respectively, from 3.58% and 4.17%, respectively, for the three and six months
ended June 30, 2008 due to a decrease in LIBOR which is a reference index for
the rates payable on this debt.
 
 Interest expense on commercial real
estate loans was $2.7 million and $5.3 million for the three and six months
ended June 30, 2009, respectively, as compared to $6.6 million and $15.1 million
for the three and six months ended June 30, 2008, decreases of $4.0 million
(60%) and $9.8 million (65%).  These decreases resulted primarily from
the following:
  ·
                  a
      decrease in the weighted average interest rate to 1.60% and 1.60% for the
      three and six months ended June 30, 2009, respectively, as compared to
      3.78% and 4.26%  for the three and six months ended June 30,
      2008, respectively,  primarily as a result of a decrease in
      LIBOR which is a reference index for the rates payable on this debt;
      and
  ·
                  a
      decrease of $39.8 million and $37.9 million in the weighted average
      balance of debt to $660.0 million and $663.8 million for the three and six
      months ended June 30, 2009, respectively, from $699.9 million and $701.6
      million for the three and six months ended June 30, 2008, respectively,
      primarily related to the paying down of our repurchase
      facilities.
   Interest expense on CMBS-private
placement was $11,000 and $88,000 for the three and six months ended June 30,
2008.  There was no such interest expense for the three and six months
ended June 30, 2009.  The decrease is due to the elimination of
advance rates on our pledged CMBS-private placement collateral in November 2008
as a result of policy changes surrounding advance rates at our
lender.
 (Back to Index)
 35
 (Back to Index)
  Interest expense on leasing activities
was $1.3 million and $2.1 million for the three and six months ended June 30,
2009 as compared to $931,000 and $2.2 million for the three and six months ended
June 30, 2008, respectively, an increase of $382,000 (41%) for the three months
ended June 30, 2009 and a decrease of $72,000 (3%) for the six months ended June
30, 2009.  The increase for the three months ended June 30, 2009 is
due to the acceleration of $662,000 of deferred debt issuance costs related to
the sale of the direct financing leases and notes.  The decrease for
the six months ended June 30, 2009 is a decrease in the interest rate payable
and weighted average balance as compared to the prior six month period offset by
the acceleration of $662,000 of deferred debt issuance costs related to the sale
of the direct financing leases and notes.
 
 General
interest expense was $4.6 million and $9.3 million for the three and six months
ended June 30, 2009, respectively, as compared to $3.1 million and $5.6 million
for the three and six months ended June 30, 2008 increases of $1.5 million (47%)
and $3.8 million (67%), respectively.  This increase resulted primarily
from an increase of $1.6 million and $4.2 million for the three and six months
ended June 30, 2009, respectively, on our interest rate derivatives that fix the
rate we pay under these agreements.  During the three and six months
ended June 30, 2009, the fixed rate we paid exceeded the floating rate we
received due to a decrease in LIBOR.  The increase in derivative
expense was partially offset by a decrease in interest expense of $212,000 and
$555,000 for the three and six months ended June 30, 2009, respectively, related
to our unsecured junior subordinated debentures held by unconsolidated trusts
that issued trust preferred securities as a result of a decrease in LIBOR which
is a reference index for the rates payable by these
debentures.
  Non-Investment
Expenses
 
 The following table sets forth
information relating to our expenses incurred for the periods presented (in
thousands):
 
 Three
      Months Ended
                  
                  
                  Six
      Months EndedJune
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Management
      fee – related party
                  
                  $
                  925
                  
                  
                  $
                  1,171
                  
                  
                  $
                  1,926
                  
                  
                  $
                  2,909Equity
      compensation − related party
                  
                  
                  265
                  
                  
                  
                  541
                  
                  
                  
                  353
                  
                  
                  
                  622Professional
      services
                  
                  
                  1,089
                  
                  
                  
                  664
                  
                  
                  
                  2,053
                  
                  
                  
                  1,456Insurance
                  
                  
                  217
                  
                  
                  
                  170
                  
                  
                  
                  389
                  
                  
                  
                  298General
      and administrative
                  
                  
                  441
                  
                  
                  
                  343
                  
                  
                  
                  846
                  
                  
                  
                  698Income
      tax expense (benefit)
                  
                  
                  44
                  
                  
                  
                  138
                  
                  
                  
                  (1
                  )
                  
                  
                  167Total
                  
                  $
                  2,981
                  
                  
                  $
                  3,027
                  
                  
                  $
                  5,566
                  
                  
                  $
                  6,150
  Management fee–related party decreased
$246,000 (21%) and $983,000 (34%) to $925,000 and $1.9 million for the
three and six months ended June 30, 2009, respectively, as compared to $1.2
million and $2.9 million for the three and six months ended June 30, 2008,
respectively.  These amounts represent compensation in the form of
base management fees and incentive management fees pursuant to our management
agreement.  The base management fees decreased by $245,000
(21%) and $415,000 (18%) to $925,000 and $1.9 million for the three and six
months ended June 30, 2009, respectively, as compared to $1.2 million and $2.3
million for the three and six months ended June 30, 2008,
respectively.  This decrease was due to our decreased stockholders’
equity, a component in the formula by which base management fees are calculated,
primarily as a result of significant additional provisions for loan and lease
losses during 2008 and 2009.  Incentive management fees were $564,000
for the three and six months ended June 30, 2008.  There was no
incentive management fee for the three and six months ended June 30, 2009 or the
three months ended June 30, 2008 as a result of the realized losses we incurred
on our loan, lease and securities available-for-sale portfolios during that
period.
 
 Equity compensation expense decreased
$276,000 (51%) and $269,000 (43%) to $265,000 and $353,000 for the three and six
months ended June 30, 2009, respectively, from $541,000 and $622,000 for the
three and six months ended June 30, 2008, respectively.  These
expenses relate to the amortization of annual grants of restricted common stock
to our non-employee independent directors, and annual and discretionary grants
of restricted stock to several employees of Resource America, Inc., or RAI, who
provide investment management services to us through our Manager.  The
decrease in expense was primarily the result of the decrease of our stock price
and its impact on our quarterly remeasurement of unvested stock and
options.  This measurement decrease was partially offset by the
issuance of several restricted stock grants during 2009.
 
 Professional services increased
$425,000 (64%) and $597,000 (41%) to $1.1 million and $2.1 million for the
three and six months ended June 30, 2009, respectively, as compared to $664,000
and $1.5 million for the three and six months ended June 30, 2008,
respectively.  These increases were primarily the result of increases
in legal fees of $441,000 and $528,000 for the three and six months ended June
30, 2009, respectively, primarily related to collections on our leasing
portfolio and costs related to CRE loan modifications.
  Income tax expense decreased $94,000
(68%) and $168,000 (101%) to an expense of $44,000 and a benefit of $1,000 for
the three and six months ended June 30, 2009, respectively, from an expense of
$138,000 and $167,000 for the three and six months ended June 30, 2008. 
This change is the result of an establishment of a valuation allowance against
our ability to utilize net operating loss carryfowards due to the disposition of
assets held by our TRS during the three months ended June 30,
2009.
 (Back to Index)
 36
 (Back to Index)
  Other
(Expenses) Revenues
 
 The following table sets forth
information relating to our other (expenses) revenues incurred for the periods
presented (in thousands):
 
 Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      realized and unrealized gains (losses) on sales
                      of investments
                    
                    $
                    (1,608
                    )
                    
                    $
                    102
                    
                    
                    $
                    (15,953
                    )
                    
                    $
                    (1,893
                    )Other
      income
                    
                    
                    20
                    
                    
                    
                    26
                    
                    
                    
                    42
                    
                    
                    
                    59Provision
      for loan and lease loss
                    
                    
                    (19,984
                    )
                    
                    
                    (15,692
                    )
                    
                    
                    (27,973
                    )
                    
                    
                    (16,829
                    )Gain
      on the extinguishment of debt
                    
                    
                    6,900
                    
                    
                    
                    −
                    
                    
                    
                    6,900
                    
                    
                    
                    1,750Total
                    
                    $
                    (14,672
                    )
                    
                    $
                    (15,564
                    )
                    
                    $
                    (36,984
                    )
                    
                    $
                    (16,913
                    )
 Net
realized and unrealized losses on investments increased $1.7 million (1,676%)
and $14.1 million (743%) to a loss of $1.6 million and a loss of $16.0 million
for the three and six months ended June 30, 2009, respectively, as compared to a
gain of $102,000 and a loss of $1.9 million for the three and six months ended
June 30, 2008, respectively.  Realized losses during the three and
six  months ended June 30, 2009 consist of $1.9 million and $10.9
million, respectively, of fair value adjustments on our loans held for sale and
$45,000 and $5.7 million, respectively, of other-than-temporary impairment loss
on our other ABS position.  These losses were partially offset by
$266,000 and $478,000 of gains on the sale of bank loan positions and $103,000
and $128,000 on gains from sales from our leasing portfolio, for the three and
six months ended June 30, 2009, respectively.  Realized gains during
the three months ended June 30, 2008 consist of $44,000 of gains on the sale of
bank loan positions and $58,000 on gains from sales from our leasing
portfolio.  Realized losses for the six months ended June 30, 2008
consist primarily of a loss of $2.0 million on the sale of one of our CMBS –
private placement positions.  This loss was partially offset by
$45,000 of gains on the sale of bank loan positions and $63,000 on gains from
sales from our leasing portfolio.  The increase in our net realized
and unrealized losses resulted from a deterioration in the creditworthiness of
several of the issuers of these investments in the current recessionary
environment.
 
 Our
provision for loan and lease losses increased $4.3 million (27%) and $11.1
million (66%) to $20.0 million and $28.0 million for the three and six months
ended June 30, 2009, respectively, as compared to $15.7 million and $16.8
million for the three and six months ended June 30, 2008,
respectively.  The provisions for the three and six months ended June
30, 2008 consisted of $10.3 million and $13.1 million, respectively, of
provisions for loan loss on our bank loan portfolio, $9.1 million and $14.1
million, respectively, of provisions for loan loss on our commercial real estate
portfolio and $624,000 and $784,000, respectively, of provisions on our direct
financing leases and notes.  Our provision for loan and lease losses
for the three and six months ended June 30, 2008 consisted of $3.9 million and
$4.6 million, respectively, of provisions for loan loss on our bank loan
portfolio, $11.6 million and $11.7 million, respectively, of provisions for loan
loss on our commercial real estate portfolio and $198,000 and $0, respectively,
of provision on our leasing portfolio.  The principal reason for the
increase in the provision for loan and lease losses was our recognition of
specific reserves on additional defaulted bank loans and defaulted CRE
loans during the three and six months ended June 30, 2009.
 
 Gain on
the extinguishment of debt increased $6.9 million (100%) and $5.2 million (294%)
to $6.9 million for the three and six months ended June 30, 2009, respectively,
from $0 and $1.8 million for the three and six months ended June 30, 2008,
respectively.  Gain on extinguishment is due to the buyback of $7.5 million
of debt issued by RREF 2006-1. The notes, issued at par, were bought back as an
investment by us at a price of 8% resulting in a gain of $6.9 million. 
Gain on the extinguishment of debt for the six months ended June 30, 2008 is due
to the buyback of $5.0 million of debt issued by RREF 2007-1.  The
notes, issued at par, were bought back as an investment by us at a price of 65%
resulting in a gain of $1.8 million.  The related deferred debt
issuance costs were immaterial in both transactions.
 
 Financial
Condition
 
 Summary
 
 Our total assets at June 30, 2009 were
$1.8 billion as compared to $1.9 billion at December 31, 2008.  As of
June 30, 2009, we held $10.6 million of cash and cash
equivalents.
  (Back to Index)
 37
 (Back to Index)
  Investment
Portfolio
 
 The table below summarizes the
amortized cost and net carrying amount of our investment portfolio as of June
30, 2009 and December 31, 2008, classified by interest rate type.  The
following table includes both (i) the amortized cost of our investment portfolio
and the related dollar price, which is computed by dividing amortized cost by
par amount, and (ii) the net carrying amountof our investment
portfolio and the related dollar price, which is computed by dividing the net
carrying amount by par amount (in thousands, except percentages):
 
 Amortized
      cost (3)
                
                
                Dollar
      price
                
                
                Net
      carrying amount
                
                
                Dollar
      price
                
                
                Net
      carrying amount less amortized cost
                
                
                Dollar
      priceJune
      30, 2009Floating rateCMBS-private
      placement
                
                $
                32,064
                
                
                
                100.00%
                
                
                $
                11,095
                
                
                
                34.60%
                
                
                $
                (20,969
                )
                
                
                -65.40%B
      notes (1)
                
                
                26,500
                
                
                
                100.00%
                
                
                
                26,399
                
                
                
                99.62%
                
                
                
                (101
                )
                
                
                -0.38%Mezzanine
      loans (1)
                
                
                129,184
                
                
                
                100.00%
                
                
                
                128,795
                
                
                
                99.70%
                
                
                
                (389
                )
                
                
                -0.30%Whole
      loans (1)
                
                
                426,292
                
                
                
                99.88%
                
                
                
                415,865
                
                
                
                97.44%
                
                
                
                (10,427
                )
                
                
                -2.44%Bank
      loans (2)
                
                
                924,988
                
                
                
                97.83%
                
                
                
                747,000
                
                
                
                79.00%
                
                
                
                (177,988
                )
                
                
                -18.83%Bank
      loans held for sale (3)
                
                
                2,401
                
                
                
                100.00%
                
                
                
                2,401
                
                
                
                100.00%
                
                
                
                −
                
                
                
                −%Total floating
    rate
                
                
                1,541,429
                
                
                
                98.65%
                
                
                
                1,331,555
                
                
                
                85.22%
                
                
                
                (209,874
                )
                
                
                -13.43%Fixed rateCMBS
      – private placement
                
                
                38,614
                
                
                
                91.78%
                
                
                
                7,080
                
                
                
                16.83%
                
                
                
                (31,534
                )
                
                
                -74.95%B
      notes (1)
                
                
                55,256
                
                
                
                100.08%
                
                
                
                55,089
                
                
                
                99.78%
                
                
                
                (167
                )
                
                
                -0.30%Mezzanine
      loans (1)
                
                
                81,313
                
                
                
                94.76%
                
                
                
                68,418
                
                
                
                79.73%
                
                
                
                (12,895
                )
                
                
                -15.03%Whole
      loans (1)
                
                
                78,846
                
                
                
                99.63%
                
                
                
                78,614
                
                
                
                99.34%
                
                
                
                (232
                )
                
                
                -0.29%Equipment
      leases and loans (4)
                
                
                3,433
                
                
                
                100.03%
                
                
                
                2,833
                
                
                
                82.55%
                
                
                
                (600
                )
                
                
                -17.48%Total fixed
rate
                
                
                257,462
                
                
                
                96.92%
                
                
                
                212,034
                
                
                
                79.81%
                
                
                
                (45,428
                )
                
                
                -17.11%Grand total
                
                $
                1,798,891
                
                
                
                98.40%
                
                
                $
                1,543,589
                
                
                
                84.44%
                
                
                $
                (255,302
                )
                
                
                -13.96%December
      31, 2008Floating rateCMBS-private
      placement
                
                $
                32,061
                
                
                
                99.99%
                
                
                $
                15,042
                
                
                
                46.91%
                
                
                $
                (17,019
                )
                
                
                -53.08%Other
      ABS
                
                
                5,665
                
                
                
                94.42%
                
                
                
                45
                
                
                
                0.75%
                
                
                
                (5,620
                )
                
                
                -93.67%B
      notes (1)
                
                
                33,535
                
                
                
                100.00%
                
                
                
                33,434
                
                
                
                99.70%
                
                
                
                (101
                )
                
                
                -0.30%Mezzanine
      loans (1)
                
                
                129,459
                
                
                
                100.01%
                
                
                
                129,071
                
                
                
                99.71%
                
                
                
                (388
                )
                
                
                -0.30%Whole
      loans (1)
                
                
                431,985
                
                
                
                99.71%
                
                
                
                430,690
                
                
                
                99.41%
                
                
                
                (1,295
                )
                
                
                -0.30%Bank
      loans (2)
                
                
                937,507
                
                
                
                99.11%
                
                
                
                582,416
                
                
                
                61.57%
                
                
                
                (355,091
                )
                
                
                -37.94%Total floating
    rate
                
                
                1,570,212
                
                
                
                99.36%
                
                
                
                1,190,698
                
                
                
                75.35%
                
                
                
                (379,514
                )
                
                
                -24.01%Fixed rateCMBS
      – private placement
                
                
                38,397
                
                
                
                91.26%
                
                
                
                14,173
                
                
                
                33.69%
                
                
                
                (24,224
                )
                
                
                -57.57%B
      notes (1)
                
                
                55,534
                
                
                
                100.11%
                
                
                
                55,367
                
                
                
                99.81%
                
                
                
                (167
                )
                
                
                -0.30%Mezzanine
      loans (1)
                
                
                81,274
                
                
                
                94.72%
                
                
                
                68,378
                
                
                
                79.69%
                
                
                
                (12,896
                )
                
                
                -15.03%Whole
      loans (1)
                
                
                87,352
                
                
                
                99.52%
                
                
                
                87,090
                
                
                
                99.23%
                
                
                
                (262
                )
                
                
                -0.29%Equipment
      leases and notes (4)
                
                
                104,465
                
                
                
                99.38%
                
                
                
                104,015
                
                
                
                98.95%
                
                
                
                (450
                )
                
                
                -0.43%Total fixed
rate
                
                
                367,022
                
                
                
                97.55%
                
                
                
                329,023
                
                
                
                87.45%
                
                
                
                (37,999
                )
                
                
                -10.10%Grand total
                
                $
                1,937,234
                
                
                
                99.02%
                
                
                $
                1,519,721
                
                
                
                77.68%
                
                
                $
                (417,513
                )
                
                
                -21.34%
 
 (1)
                Net
      carrying amount includes an allowance for loan losses of $24.2 million at
      June 30, 2009, allocated as follows:  B notes ($0.3 million),
      mezzanine loans ($13.3 million) and whole loans ($10.6
      million).  Net carrying amount includes an allowance for loan
      losses of $15.1 million at December 31, 2008, allocated as follows: B
      notes ($0.3 million), mezzanine loans ($13.3 million) and whole loans
      ($1.5 million).
  (2)
                The
      bank loan portfolio is carried at amortized cost less allowance for loan
      loss and was $890.1 million at June 30, 2009.  The amount
      disclosed represents net realizable value at June 30, 2009, which includes
      $34.9 million allowance for loan losses at June 30, 2009.  The
      bank loan portfolio was $908.7 million (net of allowance of $28.8 million)
      at December 31, 2008.
  (3)
                Bank
      loans held for sale and other ABS are carried at fair value and,
      therefore, amortized cost is equal to fair
  value.
  (4)
                Net
      carrying amount includes a $600,000 and $450,000 allowance for lease
      losses at June 30, 2009 and December 31, 2008,
    respectively.
  (Back to Index)
 38
 (Back to Index)
 
 Commercial Mortgage-Backed
Securities-Private Placement. The determination of other-than-temporary
impairment is a subjective process, and different judgments and assumptions
could affect the timing of loss realization.  We review our portfolios
monthly and the determination of other-than-temporary impairment is made at
least quarterly.  We consider the following factors when determining
if there is an other-than-temporary impairment on a security:
  ·
              the
      length of time the market value has been less than amortized
      cost;
  ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
  ·
              underlying
      credit fundamentals of the collateral backing the securities;
      and
 ·
                our
      intent to sell as well as the likelihood that we will be required to
      sell the security before the recovery of the amortized cost
      basis.
 At June 30, 2009 and December 31, 2008,
we held $18.2 million and $29.2 million, respectively, net of unrealized losses
of $52.5 million and $41.2 million at June 30, 2009 and December 31, 2008,
respectively, of CMBS private placement, or CMBS, at fair value which is based
on taking a weighted average of the following three measures:
  i.
              an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      historical analysis of underlying loan
  performance;
  ii.
              quotes
      on similar-vintage, higher rated, more actively traded CMBS securities
      adjusted for the lower subordination level of our securities;
      and
  iii.
              dealer
      quotes on our securities for which there is not an active
      market.
 
 While the CMBS investments have
continued to decline in fair value, their change continues to be
temporary.  We perform an on-going review of third-party reports and
updated financial data on the underlying property financial information to
analyze current and projected loan performance.  All assets are
current with respect to interest and principal payments.  Rating
agency downgrades are considered with respect to our income approach when
determining other-than-temporary impairment and when inputs are stressed
projected cash flows are adequate to recover principal.
 
 The following table summarizes our
CMBS-private placement as of June 30, 2009 and December 31, 2008 (in thousands,
except percentages).  Dollar price is computed by dividing amortized
cost by par amount.
 
 June
      30, 2009
                  
                  
                  December
      31, 2008Amortized
      Cost
                  
                  
                  Dollar
      Price
                  
                  
                  Amortized
      Cost
                  
                  
                  Dollar
      PriceMoody’s
      Ratings Category:Baa1
      through Baa3
                  
                  
                  −
                  
                  
                  
                  −%
                  
                  
                  
                  63,459
                  
                  
                  
                  94.52%Ba1
      through Ba3
                  
                  
                  14,464
                  
                  
                  
                  99.99%
                  
                  
                  
                  −
                  
                  
                  
                  −%B1
      through B3
                  
                  
                  31,309
                  
                  
                  
                  92.98%
                  
                  
                  
                  6,999
                  
                  
                  
                  99.99%Caa1
      through Caa3
                  
                  
                  24,905
                  
                  
                  
                  95.79%
                  
                  
                  
                  −
                  
                  
                  
                  −%Total
                  
                  $
                  70,678
                  
                  
                  
                  95.33%
                  
                  
                  $
                  70,458
                  
                  
                  
                  95.04%S&P
      Ratings Category:BBB+
      through BBB-
                  
                  
                  23,255
                  
                  
                  
                  93.23%
                  
                  
                  
                  51,378
                  
                  
                  
                  94.24%BB+
      through BB-
                  
                  
                  34,012
                  
                  
                  
                  96.64%
                  
                  
                  
                  19,080
                  
                  
                  
                  97.26%CCC+
      through CCC-
                  
                  
                  13,411
                  
                  
                  
                  95.79%
                  
                  
                  
                  −
                  
                  
                  
                  −%Total
                  
                  $
                  70,678
                  
                  
                  
                  95.33%
                  
                  
                  $
                  70,458
                  
                  
                  
                  95.04%Weighted
      average rating factor
                  
                  
                  3,225
                  
                  
                  
                  
                  
                  
                  
                  830
  Other Asset-Backed
Securities.  At June 30, 2009, we held one other ABS position
with a fair value of $0 that is the result of other-than-temporary impairment of
$5.7 million recognized during the six months ended June 30, 2009.  At
December 31, 2008, we held $45,000 of other ABS at fair value, which was net of
unrealized losses of $5.6 million.  These securities are classified as
available-for-sale and, as a result, are carried at their fair
value.
 
 (Back to Index)
 39
 (Back to Index)
  The following tables summarize the
estimated maturities of our MBS and other ABS according to their estimated
weighted average life classifications (in thousands, except
percentages):
  Weighted
      Average Life
                        
                        Fair
      Value
                        
                        
                        Amortized
      Cost
                        
                        
                        Weighted
      Average CouponJune
      30,
      2009:Less than one year
                        
                        $
                        9,672
                        (1)
                        
                        $
                        27,064
                        
                        
                        
                        1.75
                        %Greater than one year and less
      than five years
                        
                        
                        1,424
                        (1)
                        
                        
                        5,000
                        
                        
                        
                        2.01
                        %Greater than five
      years
                        
                        
                        7,080
                        
                        
                        
                        38,614
                        
                        
                        
                        5.80
                        %Total
                        
                        $
                        18,176
                        
                        
                        $
                        70,678
                        
                        
                        
                        3.98
                        %December 31, 2008:Less than one year
                        
                        $
                        5,088
                        
                        
                        $
                        10,465
                        
                        
                        
                        3.17
                        %Greater than one year and less
      than five years
                        
                        
                        9,954
                        
                        
                        
                        21,596
                        
                        
                        
                        3.75
                        %Greater than five
      years
                        
                        
                        14,218
                        
                        
                        
                        44,062
                        
                        
                        
                        5.05
                        %Total
                        
                        $
                        29,260
                        
                        
                        $
                        76,123
                        
                        
                        
                        4.36
                        %
 (1)
                    All
      of the $11.1 million of CMBS maturing in these categories are
      collateralized by floating-rate loans and are expected to extend for up to
      a minimum of two additional years as the loans in the floating-rate
      structures have a contractual right to extend with options ranging from
      two one-year options to three one-year
  options.
  For the six months ended June 30, 2009,
we recognized $5.7 million of other-than-temporary impairment on our other-ABS
position.  As a result of the impairment charge, the cost of this
security was written down to fair value through the statement of
operations.  We do not believe that any other of our securities
classified as available-for-sale were other-than-temporarily impaired as of June
30, 2009.
 The
following table summarizes our other ABS as of June 30, 2009 and December 31,
2008 (in thousands, except percentages).  Dollar price is computed by
dividing amortized cost by par amount.
  June
      30, 2009
                  
                  
                  December
      31, 2008Amortized
                      cost
                  
                  
                  Dollar
      price
                  
                  
                  Amortized
                      cost
                  
                  
                  Dollar
      priceMoody’s
      ratings category:B1
      through B3
                  
                  $
                  −
                  
                  
                  
                  −%
                  
                  
                  $
                  5,665
                  
                  
                  
                  94.42%Caa1
      through Caa3
                  
                  
                  0
                  
                  
                  
                  −%
                  
                  
                  
                  −
                  
                  
                  
                  −%Total
                  
                  $
                  0
                  
                  
                  
                  −%
                  
                  
                  $
                  5,665
                  
                  
                  
                  94.42%S&P
      ratings category:B+
      through B-
                  
                  $
                  −
                  
                  
                  
                  −%
                  
                  
                  $
                  5,665
                  
                  
                  
                  94.42%CCC+
      through CCC-
                  
                  
                  0
                  
                  
                  
                  −%
                  
                  
                  
                  −
                  
                  
                  
                  −%Total
                  
                  $
                  0
                  
                  
                  
                  −%
                  
                  
                  $
                  5,665
                  
                  
                  
                  94.42%Weighted
      average rating factor
                  
                  
                  8,070
                  
                  
                  
                  
                  
                  
                  
                  3,490
 Bank Loans.  At
June 30, 2009, we held a total of $762.5 million of bank loans at fair value
through Apidos CDO I, Apidos CDO III and Apidos Cinco CDO, all of which secure
the debt issued by these entities.  This is an increase of $180.1
million over our holdings at December 31, 2008.  The increase in total
bank loans was principally due to improved market prices for bank loans during
the first six months of 2009.  We own 100% of the equity issued by
Apidos CDO I, Apidos CDO III and Apidos Cinco CDO which we have determined are
VIEs of which we are the primary beneficiary.  As a result, we
consolidated Apidos CDO I, Apidos CDO III and Apidos Cinco CDO as of June 30,
2009.
  (Back to Index)
 40
 (Back to Index)
 The following table summarizes our bank
loan investments as of June 30, 2009 and December 31, 2008 (in thousands, except
percentages).  Dollar price is computed by dividing amortized cost by
par amount.
 
 June
      30, 2009
                  
                  
                  December
      31, 2008Amortized
      cost
                  
                  
                  Dollar
      price
                  
                  
                  Amortized
      cost
                  
                  
                  Dollar
      priceMoody’s
      ratings category:Aa1
      through Aa3
                  
                  $
                  1,157
                  
                  
                  
                  77.13%
                  
                  
                  $
                  1,136
                  
                  
                  
                  75.72%A1
      through A3
                  
                  
                  −
                  
                  
                  
                  −%
                  
                  
                  
                  6,351
                  
                  
                  
                  97.71%Baa1
      through Baa3
                  
                  
                  52,730
                  
                  
                  
                  97.71%
                  
                  
                  
                  19,782
                  
                  
                  
                  97.70%Ba1
      through Ba3
                  
                  
                  390,215
                  
                  
                  
                  97.89%
                  
                  
                  
                  471,781
                  
                  
                  
                  99.19%B1
      through B3
                  
                  
                  399,725
                  
                  
                  
                  97.57%
                  
                  
                  
                  397,157
                  
                  
                  
                  99.10%Caa1
      through Caa3
                  
                  
                  72,979
                  
                  
                  
                  99.91%
                  
                  
                  
                  34,617
                  
                  
                  
                  100.09%Ca
                  
                  
                  2,172
                  
                  
                  
                  100.00%
                  
                  
                  
                  −
                  
                  
                  
                  −%No
      rating provided
                  
                  
                  8,410
                  
                  
                  
                  85.64%
                  
                  
                  
                  6,683
                  
                  
                  
                  99.00%Total
                  
                  $
                  927,388
                  
                  
                  
                  97.74%
                  
                  
                  $
                  937,507
                  
                  
                  
                  99.11%S&P
      ratings category:BBB+
      through BBB-
                  
                  $
                  61,010
                  
                  
                  
                  97.82%
                  
                  
                  $
                  41,495
                  
                  
                  
                  99.44%BB+
      through BB-
                  
                  
                  390,577
                  
                  
                  
                  97.63%
                  
                  
                  
                  473,354
                  
                  
                  
                  99.03%B+
      through B-
                  
                  
                  334,951
                  
                  
                  
                  97.96%
                  
                  
                  
                  317,601
                  
                  
                  
                  99.46%CCC+
      through CCC-
                  
                  
                  43,415
                  
                  
                  
                  99.95%
                  
                  
                  
                  27,961
                  
                  
                  
                  100.02%D
                  
                  
                  15,506
                  
                  
                  
                  100.03%
                  
                  
                  
                  1,480
                  
                  
                  
                  100.00%C
                  
                  
                  533
                  
                  
                  
                  100.00%
                  
                  
                  
                  −
                  
                  
                  
                  −%No
      rating provided
                  
                  
                  81,396
                  
                  
                  
                  95.78%
                  
                  
                  
                  75,616
                  
                  
                  
                  97.57%Total
                  
                  $
                  927,388
                  
                  
                  
                  97.74%
                  
                  
                  $
                  937,507
                  
                  
                  
                  99.11%Weighted
      average rating factor
                  
                  
                  2,208
                  
                  
                  
                  
                  
                  
                  
                  1,946
  Equipment Leases and
Notes.  On June 30, 2009, we sold a membership interest in a
subsidiary that primarily held a pool of leases valued at $89.8 million and
transferred the $82.3 million balance of the related secured term facility to
Resource America.  No gain or loss was recognized on the
sale.  We received a note of $7.5 million from Resource America for
the equity in the portfolio on June 30, 2009.  The promissory note
from the subsidiary bears interest at LIBOR plus 3% and matures on September 30,
2009.  On July 1, 2009, $4.5 million of the promissory note was
repaid.  The outstanding principal balance of the note of $3.0 million
was paid in full on August 3, 2009.  The balance of direct financing
leases and notes was $104.0 million as of December 31, 2008.
 
 Interest
Receivable.  At June 30, 2009, we had accrued interest
receivable of $6.3 million, which consisted of $6.3 million of interest on our
securities loans and equipment leases and notes, and $15,000 of interest earned
on escrow and sweep accounts.  At December 31, 2008, we had interest
receivable of $8.4 million, which consisted of $8.4 million of interest on our
securities, loan and equipment leases and loans and $49,000 of interest earned
on escrow and sweep accounts.  The decrease of $2.1 million on our
bank loan portfolio was primarily due to a decrease in LIBOR, a reference index
for the rates payable on these assets.
 
 Principal Paydown Receivables.At June 30, 2009 and December 31, 2008, we had principal paydown
receivables of $59,000 and $950,000, respectively, which consisted of principal
payments on our commercial real estate loans and bank loans which were
subsequently collected.
 
 Other
Assets
 
 Other assets at June 30, 2009 of $10.6
million consisted primarily of $1.7 million of loan origination costs associated
with our commercial real estate loan portfolio and trust preferred securities
issuances, $635,000 of prepaid director’s and officer’s liability insurance,
$766,000 of prepaid expenses and a $7.5 million note receivable from LEAF Asset
Management, LLC in connection with our sale of membership interest to Resource
America.  Other assets at December 31, 2008 of $4.1 million consisted
primarily of $2.7 million of loan origination costs associated with our trust
preferred securities issuances, commercial real estate loan portfolio and
secured term facility, $125,000 of prepaid directors’ and officers’ liability
insurance, $764,000 of prepaid expenses, $424,000 of lease payment receivables
and $60,000 of other receivables.
 (Back to Index)
 41
 (Back to Index)
 Hedging
Instruments
 
 Our hedges at June 30, 2009 and
December 31, 2008, were fixed-for-floating interest rate swap agreements whereby
we swapped the floating rate of interest on the liabilities we hedged for a
fixed rate of interest.  As of December 31, 2008, we had entered into
hedges with a notional amount of $325.0 million and maturities ranging from May
2009 to November 2017.  We intend to continue to seek such hedges for
our floating rate debt in the future.  Our hedges at June 30, 2009
were as follows (in thousands):
  Benchmark
      rate
                        
                        Notional
      value
                        
                        
                        Pay
      rate
                        
                        
                        Effective
      date
                        
                        Maturity
      date
                        
                        Fair
      valueInterest
      rate swap
                        
                        1
      month LIBOR
                        
                        $
                        12,750
                        
                        
                        
                        5.27%
                        
                        
                        07/25/07
                        
                        08/06/12
                        
                        $
                        (1,274
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        12,965
                        
                        
                        
                        4.63%
                        
                        
                        12/04/06
                        
                        07/01/11
                        
                        
                        (853
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        28,000
                        
                        
                        
                        5.10%
                        
                        
                        05/24/07
                        
                        06/05/10
                        
                        
                        (1,175
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        1,880
                        
                        
                        
                        5.68%
                        
                        
                        07/13/07
                        
                        03/12/17
                        
                        
                        (295
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        15,235
                        
                        
                        
                        5.34%
                        
                        
                        06/08/07
                        
                        02/25/10
                        
                        
                        (489
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        12,150
                        
                        
                        
                        5.44%
                        
                        
                        06/08/07
                        
                        03/25/12
                        
                        
                        (1,199
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        7,000
                        
                        
                        
                        5.34%
                        
                        
                        06/08/07
                        
                        02/25/10
                        
                        
                        (224
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        44,652
                        
                        
                        
                        4.13%
                        
                        
                        01/10/08
                        
                        05/25/16
                        
                        
                        (981
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        82,379
                        
                        
                        
                        5.58%
                        
                        
                        06/08/07
                        
                        04/25/17
                        
                        
                        (4,902
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        1,726
                        
                        
                        
                        5.65%
                        
                        
                        06/28/07
                        
                        07/15/17
                        
                        
                        (84
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        1,681
                        
                        
                        
                        5.72%
                        
                        
                        07/09/07
                        
                        10/01/16
                        
                        
                        (101
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        3,850
                        
                        
                        
                        5.65%
                        
                        
                        07/19/07
                        
                        07/15/17
                        
                        
                        (187
                        )Interest
      rate swap
                        
                        1
      month LIBOR
                        
                        
                        4,023
                        
                        
                        
                        5.41%
                        
                        
                        08/07/07
                        
                        07/25/17
                        
                        
                        (169
                        )Total
                        
                        
                        
                        $
                        228,291
                        
                        
                        
                        5.14%
                        
                        
                        
                        
                        
                        
                        $
                        (11,933
                        )
 
 In addition, we also had an interest
rate cap agreement with a notional of $14.3 million outstanding which reduced
our exposure to variability in future cash flows attributable to
LIBOR.  The interest rate cap is a non-designated cash flow hedge and,
as a result, the change in fair value is recorded through our consolidated
statement of operations.
 
 Repurchase
Agreements
 
 We have entered into repurchase
agreements to finance our commercial real estate loans and CMBS-private
placement portfolio.  These agreements are secured by the financed
assets and bear interest rates that have historically moved in close
relationship to LIBOR.  At June 30, 2009, we had established nine
borrowing arrangements with various financial institutions and had utilized two
of these arrangements, principally our arrangement with
Natixis.  Because any repurchase transaction must be approved by the
lender, and as a result of current market conditions, we do not anticipate
further use of these facilities for the foreseeable future; however, the
facilities remain available for use if market conditions improve.
  Our repurchase facility with Natixis
was arranged through a subsidiary, whose performance we
guaranteed.  We describe the terms of the Natixis facility in Note 6
of the notes to our consolidated financial statements contained in Part I, Item
1 of this report.
 Stockholders’
Equity
 
 Stockholders’ equity at June 30, 2009
was $165.9 million and included $52.5 million of net unrealized losses on our
available-for-sale portfolio, and $13.9 million of unrealized losses on cash
flow hedges, shown as a component of accumulated other comprehensive loss. 
Stockholders’ equity at December 31, 2008 was $186.3 million and included $46.9
million of unrealized losses on our available-for-sale portfolio and $33.8
million of unrealized losses on cash flow hedges, shown as a component of
accumulated other comprehensive loss.  The decrease in stockholder’s equity
during the six months ended June 30, 2009 was principally due to the decrease in
the market value of our available-for-sale securities offset by an increase in
the value of our cash flow hedges.
 
 Fluctuations in market values of assets
in our available-for-sale portfolio that have not been other-than-temporarily
impaired, do not impact our income determined in accordance with accounting
principles generally accepted in the United States, or GAAP, or our taxable
income, but rather are reflected on our consolidated balance sheets by changing
the carrying value of the asset and stockholders’ equity under ‘‘Accumulated
Other Comprehensive Loss.”
  (Back to Index)
 42
 (Back to Index)
 Estimated
REIT Taxable Income
 
 We calculate estimated REIT taxable
income, which is a non-GAAP financial measure, according to the requirements of
the Internal Revenue Code.  The following table reconciles net income
to estimated REIT taxable income for the periods presented (in
thousands):
 
 Three
      Months Ended
                  
                  
                  Six
      Months EndedJune
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      (loss) income
                  
                  $
                  (5,127
                  )
                  
                  $
                  (5,257
                  )
                  
                  $
                  (17,279
                  )
                  
                  $
                  4,106Taxable REIT subsidiary’s
      loss
                  
                  
                  1,200
                  
                  
                  
                  −
                  
                  
                  
                  1,200
                  
                  
                  
                  −Adjusted net (loss)
      income
                  
                  
                  (3,927
                  )
                  
                  
                  (5,257
                  )
                  
                  
                  (16,079
                  )
                  
                  
                  4,106Adjustments:Share-based compensation to
      related parties
                  
                  
                  12
                  
                  
                  
                  (392
                  )
                  
                  
                  29
                  
                  
                  
                  (539
                  )Capital loss carryover
      (utilization)/losses from
                    the sale of
      securities
                  
                  
                  (642
                  )
                  
                  
                  −
                  
                  
                  
                  4,978
                  
                  
                  
                  2,000Provisions for loan and lease
      losses unrealized
                  
                  
                  9,787
                  
                  
                  
                  11,629
                  
                  
                  
                  14,765
                  
                  
                  
                  11,685Net book to tax adjustments for
      the Company’s
                    taxable foreign REIT
      subsidiaries
                  
                  
                  145
                  
                  
                  
                  3,462
                  
                  
                  
                  7,735
                  
                  
                  
                  4,237Other net book to tax
      adjustments
                  
                  
                  (77
                  )
                  
                  
                  1
                  
                  
                  
                  (32
                  )
                  
                  
                  9Estimated
      REIT taxable income
                  
                  $
                  5,298
                  
                  
                  $
                  9,443
                  
                  
                  $
                  11,396
                  
                  
                  $
                  21,498Amounts
      per share – diluted
                  
                  $
                  0.21
                  
                  
                  $
                  0.38
                  
                  
                  $
                  0.46
                  
                  
                  $
                  0.86
 
 We believe that a presentation of
estimated REIT taxable income provides useful information to investors regarding
our financial condition and results of operations as we use this measurement to
determine the amount of dividends that we are required to declare to our
stockholders in order to maintain our status as a REIT for federal income tax
purposes.  Since we, as a REIT, expect to make distributions based on
taxable earnings, we expect that our distributions may at times be more or less
than our reported GAAP earnings.  Total taxable income is the
aggregate amount of taxable income generated by us and by our domestic and
foreign taxable REIT subsidiaries.  Estimated REIT taxable income
excludes the undistributed taxable income of our domestic TRS, if any such
income exists, which is not included in REIT taxable income until distributed to
us.  There is no requirement that our domestic TRS distribute its
earnings to us.  Estimated REIT taxable income, however, includes the
taxable income of our foreign TRSs because we will generally be required to
recognize and report their taxable income on a current basis.  Because
not all companies use identical calculations, this presentation of estimated
REIT taxable income may not be comparable to other similarly-titled measures of
other companies.
  Liquidity
and Capital Resources
 
 Capital
Sources
 
 Currently, we seek to manage our
liquidity and originate new assets primarily through capital recycling as loan
payoffs and paydowns occur and through existing capacities within our completed
securitizations.  The following is a summary of repayments we received
during the six months ended June 30, 2009:
  ·
              $7.0
      million of commercial real estate loans paid
  off;
  ·
              $16.7
      million of commercial real estate loans principal
    repayments;
  ·
              $27.6
      million of bank loan principal repayments;
and
  ·
              $51.0
      million of bank loan sale proceeds.
  Liquidity
 
 Our liquidity needs consist principally
of capital needed to make investments, make distributions to our stockholders,
pay our operating expenses, including management fees and our approved share
repurchase plan.  Our ability to meet our liquidity needs is subject
to our ability to generate cash from operations, and, with respect to our
investments, our ability to obtain debt financing and equity
capital.  The availability of equity and debt financing depends on
economic conditions which, as discussed in “Overview”, currently make equity or
debt financing difficult to obtain on acceptable terms or at all.  As
a result, we currently focus on managing our existing portfolio and, as
described in “Capital Sources,” above, reinvesting the proceeds of loan
repayments or investment sales.  Investors should be aware that if we
are unable to renew or replace our existing financing on substantially similar
terms, we may be required to liquidate portfolio investments.  If
required, a sale of portfolio investments could be at prices lower than the
carrying value of such investments, which could result in losses and reduced
income.
 (Back to Index)
 43
 (Back to Index)
 At July 31, 2009, after disbursing our
second quarter 2009 dividend, we had three primary liquidity
sources:
  ·
              unrestricted
      cash
      and cash
      equivalents of $7.0 million, which includes $4.5 million received from the
      note receivable related to the sale of direct financing leases and notes
      and restricted cash of $5.4 million in margin call
      accounts;
  ·
              capital
      available for reinvestment in our five collateralized debt obligation, or
      CDO, entities of $38.2 million, of which $3.0 million is designated to
      finance future funding commitments on CRE loans;
  and
  ·
              while
      we have $96.7 million of unused capacity under a three-year non-recourse
      CRE repurchase facility, under a proposed amendment to the facility we
      would be required to pay down all outstanding balances over a specified
      term of approximately one year, and accordingly we will likely not be able
      to use this facility as a source of liquidity.  See “Financial
      Condition – Repurchase Agreements.”  Moreover, even were we to
      retain availability under the facility, the facility requires that the
      repurchase counterparty approve each individual repurchase
      transaction.
 
 Our leverage ratio may vary as a result
of the various funding strategies we use.  As of June 30, 2009 and
December 31, 2008, our leverage ratio was 9.5 times and 9.1 times,
respectively.  This increase in leverage was primarily due to the
decrease in fair market value adjustments that are recorded in the statement of
stockholders equity through accumulated other comprehensive loss on
available-for-sale securities and derivatives that were partially
offset by the repayment of repurchase agreements.
 
 Distributions
 
 In order to maintain our qualification
as a REIT and to avoid corporate-level income tax on the income we distribute to
our stockholders, we intend to make regular quarterly distributions of all or
substantially all of our net taxable income to holders of our common
stock.  This requirement can impact our liquidity and capital
resources.  On June 12, 2009, we declared a quarterly distribution of
$0.30 per share of common stock, $7.5 million in the aggregate, which was paid
on July 28, 2009 to stockholders of record as of June 19, 2009.
 
 Our 2009
dividends will be determined by our board which will also consider the
composition of any common dividends declared, including the option of paying a
portion in cash and the balance in additional common shares. Generally,
dividends payable in stock are not treated as dividends for purposes of the
deduction for dividends, or as taxable dividends to the
recipient.  The Internal Revenue Service, in Revenue Procedure
2009-15, has given guidance with respect to certain stock distributions by
publicly traded REITs.  That Revenue Procedure applies to
distributions made on or after January 1, 2008 and declared with respect to a
taxable year ending on or before December 31, 2009.  It provides that
publicly-traded REITs can distribute stock (common shares in our case) to
satisfy their REIT distribution requirements if stated conditions are met. These
conditions include that at least 10% of the aggregate declared distributions be
paid in cash and the shareholders be permitted to elect whether to receive cash
or stock, subject to the limit set by the REIT on the cash to be distributed in
the aggregate to all shareholders.  We did not use this Revenue
Procedure with respect to any distributions for our 2008 taxable year, but we
may do so for distributions with respect to our 2009 taxable year.
 (Back to Index)
 44
 (Back to Index)
 Contractual
Obligations and Commitments
 
 The table below summarizes our
contractual obligations as of June 30, 2009.  The table below excludes
contractual commitments related to our derivatives, which we discuss in our
Annual Report on Form 10-K for fiscal 2008 in Item 7A − “Quantitative and
Qualitative Disclosures about Market Risk,” and in “Financial
Condition  − Hedging Instruments,” above and incentive fees payable
under the Management Agreement that we have with our Manager, which we discuss
in our Annual Report on Form 10-K for fiscal 2008 in Item 1 − “Business” and
Item 13, “Certain Relationships and Related Transactions”because those
obligations do not have fixed and determinable payments.
 Contractual
      commitments
                        (dollars
      in thousands)Payments
      due by periodTotal
                      
                      
                      Less
      than 1 year
                      
                      
                      1 –
      3 years
                      
                      
                      3 –
      5 years
                      
                      
                      More
      than 5 yearsRepurchase
      agreements (1)
                      
                      $
                      3,359
                      
                      
                      $
                      3,359
                      
                      
                      $
                      −
                      
                      
                      $
                      −
                      
                      
                      $
                      −CDOs
                      
                      
                      1,529,757
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      1,529,757
                      (2)Unsecured
      junior subordinated debentures
                      
                      
                      51,548
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      51,548
                      (3)Base
      management fees (4)
                      
                      
                      3,722
                      
                      
                      
                      3,722
                      
                      
                      
                      −
                      
                      
                      
                      −
                      
                      
                      
                      −Total
                      
                      $
                      1,588,386
                      
                      
                      $
                      7,081
                      
                      
                      $
                      −
                      
                      
                      $
                      −
                      
                      
                      $
                      1,581,305
 
 (1)
                Includes
      accrued interest of $8,000.
  (2)
                Contractual
      commitments do not include $10.7 million, $14.3 million, $11.9 million,
      $16.2 million and $32.7 million of interest expense payable through the
      non-call dates of July 2010, May 2011, June 2011, August 2011 and June
      2012, respectively, on Apidos CDO I, Apidos Cinco CDO, Apidos CDO III,
      RREF 2006-1 and RREF 2007-1.  A non-call date represents the
      earliest period under which the CDO assets can be sold, resulting in
      repayment of the CDO notes.
  (3)
                Contractual
      commitments do not include $6.8 million and $8.2 million of interest
      expense payable through the non-call dates of June 2011 and October 2011,
      respectively, on our junior subordinated debentures issued in connection
      with the trust preferred securities issuances of Resource Capital Trust I
      and RCC Trust II in May 2006 and September 2006,
    respectively.
  (4)
                Calculated
      only for the next 12 months based on our current equity, as defined in our
      Management Agreement.
 
 At June 30, 2009, we had 13 interest
rate swap contracts with a notional value of $228.3 million.  These
contracts are fixed-for-floating interest rate swap agreements under which we
contracted to pay a fixed rate of interest for the term of the hedge and will
receive a floating rate of interest.  As of June 30, 2009, the average
fixed pay rate of our interest rate hedges was 5.14% and our receive rate was
one-month LIBOR, or 0.32%.  In addition, we also had an interest rate
cap agreement with a notional amount of $14.8 million outstanding which reduced
our exposure to variability in future cash flows attributable to
LIBOR.  The interest rate cap is a non-designated cash flow hedge and,
as a result, the change in fair value is recorded through our consolidated
statement of operations.
 
 Off-Balance
Sheet Arrangements
 
 As of June 30, 2009, we did not
maintain any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance vehicles,
special purpose entities or VIEs, established for the purpose of facilitating
off-balance sheet arrangements.  Further, as of June 30, 2009, we had
not guaranteed any obligations of unconsolidated entities, nor had we entered
into any commitment or had any intent to provide additional funding to any such
entities.
 
 Recent
Development
 
 We repurchased 700,000 common shares at
a weighted average price of $3.20 per share on July 20, 2009.
 
 (Back to Index)
 45
 (Back to Index)
  ITEM
3.                      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 As of June 30, 2009 and December 31,
2008, the primary component of our market risk was interest rate risk, as
described below.  While we do not seek to avoid risk completely, we do
seek to assume risk that can be quantified from historical experience, to
actively manage that risk, to earn sufficient compensation to justify assuming
that risk and to maintain capital levels consistent with the risk we undertake
or to which we are exposed.
 
 The following sensitivity analysis
tables show, at June 30, 2009 and December 31, 2008, the estimated impact on the
fair value of our interest rate-sensitive investments and liabilities of changes
in interest rates, assuming rates instantaneously fall 100 basis points or rise
100 basis points (dollars in thousands):
 
 June
      30, 2009Interest
      rates
                    fall
      100
                    basis
      points
                
                
                Unchanged
                
                
                Interest
      rates rise 100
                    basis
      pointsCMBS
      – private placement (1)Fair value
                
                $
                7,284
                
                
                $
                7,080
                
                
                $
                6,887Change in fair
    value
                
                $
                204
                
                
                $
                −
                
                
                $
                (193
                )Change as a percent of fair
      value
                
                
                2.88%
                
                
                
                −%
                
                
                
                2.73%Repurchase
      and warehouse agreements (2)Fair value
                
                $
                3,354
                
                
                $
                3,354
                
                
                $
                3,354Change in fair
    value
                
                $
                −
                
                
                $
                −
                
                
                $
                −Change as a percent of fair
      value
                
                
                −%
                
                
                
                −%
                
                
                
                −%Hedging
      instrumentsFair value
                
                $
                (31,538
                )
                
                $
                (11,934
                )
                
                $
                (12,062
                )Change in fair
    value
                
                $
                (19,604
                )
                
                $
                −
                
                
                $
                (128
                )Change as a percent of fair
      value
                
                
                N/M
                
                
                
                −%
                
                
                
                N/M
 
 
 December
      31, 2008Interest
      rates fall 100
                    basis
      points
                
                
                Unchanged
                
                
                Interest
      rates rise 100
                    basis
      pointsCMBS
      – private placement (1)Fair value
                
                $
                14,880
                
                
                $
                14,173
                
                
                $
                13,513Change in fair
    value
                
                $
                707
                
                
                $
                −
                
                
                $
                (660
                )Change as a percent of fair
      value
                
                
                4.99%
                
                
                
                −%
                
                
                
                4.66%Repurchase
      and warehouse agreements (2)Fair value
                
                $
                112,804
                
                
                $
                112,804
                
                
                $
                112,804Change in fair
    value
                
                $
                −
                
                
                $
                −
                
                
                $
                −Change as a percent of fair
      value
                
                
                −%
                
                
                
                −%
                
                
                
                −%Hedging
      instrumentsFair value
                
                $
                (53,727
                )
                
                $
                (31,589
                )
                
                $
                (26,600
                )Change in fair
    value
                
                $
                (22,138
                )
                
                $
                −
                
                
                $
                4,989Change as a percent of fair
      value
                
                
                N/M
                
                
                
                −%
                
                
                
                N/M
 
 (1)
                Includes
      the fair value of other available-for-sale investments that are sensitive
      to interest rate changes.
  (2)
                The
      fair value of the repurchase agreements and warehouse agreements would not
      change materially due to the short-term nature of these
      instruments.
 
 For purposes of the tables, we have
excluded our investments with variable interest rates that are indexed to
LIBOR.  Because the rate resets on these instruments are short-term in
nature, we are not subject to material exposure to movements in fair value as a
result of changes in interest rates.
 
 (Back to Index)
 46
 (Back to Index)
 It is important to note that the impact
of changing interest rates on fair value can change significantly when interest
rates change beyond 100 basis points from current levels.  Therefore,
the volatility in the fair value of our assets could increase significantly when
interest rates change beyond 100 basis points from current levels.  In
addition, other factors impact the fair value of our interest rate-sensitive
investments and hedging instruments, such as the shape of the yield curve,
market expectations as to future interest rate changes and other market
conditions.  Accordingly, actual changes in interest rates, may result
in changes in the fair value of our assets that would likely differ from those
shown above, and such differences might be material and adverse to our
stockholders.
 
 ITEM
4.                      CONTROLS
AND PROCEDURES
 
 We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.  In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 Under the supervision of our Chief
Executive Officer and Chief Financial Officer, we have carried out an evaluation
of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report.  Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
 
 There have been no significant changes
in our internal control over financial reporting that occurred during the three
months ended June 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 (Back to Index)
 47
 (Back to Index)
 PART
II.  OTHER INFORMATION
 
 ITEM
6.                      EXHIBITS
 
 Exhibit
      No.
                Description3.1
                Restated
      Certificate of Incorporation of Resource Capital Corp. (1)3.2
                Amended
      and Restated Bylaws of Resource Capital Corp. (1)4.1
                Form
      of Certificate for Common Stock for Resource Capital Corp. (1)4.2
                Junior
      Subordinated indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated May 25, 2006. (3)4.3
                Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated May 25, 2006. (3)4.4
                Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      May 25, 2006. (3)4.5
                Junior
      Subordinated Indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated September 29, 2006. (4)4.6
                Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated September 29, 2006. (4)4.7
                Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      September 29, 2006. (4)10.1
                Letter
      Agreement with respect to Master Repurchase Agreement between Natixis Real
      Estate Capital and RCC Real Estate SPE 3, LLC, dated June 29, 2009. (6)31.1
                Rule
      13a-14(a)/Rule 15d-14(a) Certification of Chief Executive
      Officer.31.2
                Rule
      13a-14(a)/Rule 15d-14(a) Certification of Chief Financial
      Officer.32.1
                Certification
      of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title
      18 of the United States Code.32.2
                Certification
      of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title
      18 of the United States Code.
 
 (1)
              Filed
      previously as an exhibit to the Company’s registration statement on Form
      S-11, Registration No. 333-126517.
  (2)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on April 23, 2007.
  (3)
              Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended June 30,
2006.
  (4)
              Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended September 30,
2006.
  (5)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on March 17, 2009.
  (6)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on July 6, 2009.
  
 (Back to Index)
 48
 (Back to Index)
  SIGNATURES
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 RESOURCE
      CAPITAL CORP.(Registrant)Date:
      August 7, 2009
                      By:           /s/
      Jonathan Z.
      CohenJonathan Z.
    CohenChief Executive Officer and
      President
 
 
 Date:
      August 7, 2009
                  By:          /s/
      David J.
      BryantDavid J.
  BryantChief Financial Officer and
      Chief Accounting Officer