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 March 31, 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)
 
 (Registrant’s
      telephone number, including area code):  212-506-3870
 
 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 May 6, 2009 was
24,910,452 shares.
  (Back to Index)
 
 (Back to Index)
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 INDEXTO QUARTERLY REPORT
 ON
FORM 10-Q
 
 
 PAGEPART
      I
              FINANCIAL
      INFORMATIONItem 1.
              Financial
      StatementsConsolidated
      Balance Sheets – March 31, 2009 (unaudited) andDecember
      31, 2008
              3Consolidated Statements of Operations (unaudited)
                Three Months
      Ended March 31, 2009 and 2008
              4Consolidated Statement of Changes in Stockholders’
      Equity (unaudited)
                Three
      Months Ended March 31, 2009
              5Consolidated Statements of Cash Flows (unaudited)
                Three
      Months Ended March 31, 2009 and 2008
              6Notes to Consolidated Financial Statements – March 31, 2009
      (unaudited)
              7Item
      2.
              Management’s Discussion and Analysis of Financial
      Condition
                and Results of
      Operations
              32Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              52Item
      4.
              Controls and Procedures
              53PART
      II
              OTHER
      INFORMATIONItem
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              54Item
      6.
              Exhibits
              55SIGNATURES
              56




(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 and per share data)
  
 March
      31,
              
              
              December
      31,2009
              
              
              2008(Unaudited)ASSETSCash and cash
      equivalents
              
              $
              10,668
              
              
              $
              14,583Restricted cash
              
              
              60,273
              
              
              
              60,394Investment securities
      available-for-sale, pledged as collateral, at fair value
              
              
              15,376
              
              
              
              22,466Investment securities
      available-for-sale, at fair value
              
              
              4,950
              
              
              
              6,794Loans, pledged as collateral and
      net of allowances of $46.9 million and
                $43.9 million
              
              
              1,682,283
              
              
              
              1,712,779Loans held for sale, at fair
      value
              
              
              15,968
              
              
              
              −Direct financing leases and
      notes, pledged as collateral, net of allowance of
                $550,000 and $450,000 and net
      of unearned income
              
              
              96,546
              
              
              
              104,015Investments in unconsolidated
      entities
              
              
              1,548
              
              
              
              1,548Interest
    receivable
              
              
              6,992
              
              
              
              8,440Principal paydown
      receivables
              
              
              44
              
              
              
              950Other assets
              
              
              4,780
              
              
              
              4,062Total assets
              
              $
              1,899,428
              
              
              $
              1,936,031LIABILITIESBorrowings
              
              $
              1,692,571
              
              
              $
              1,699,763Distribution
    payable
              
              
              7,529
              
              
              
              9,942Accrued interest
      expense
              
              
              2,737
              
              
              
              4,712Derivatives, at fair
      value
              
              
              22,786
              
              
              
              31,589Accounts payable and other
      liabilities
              
              
              4,297
              
              
              
              3,720Total
    liabilities
              
              
              1,729,920
              
              
              
              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;
                24,901,995 and 25,344,867
      shares issued and outstanding
                (including 554,769 and 452,310
      unvested restricted shares)
              
              
              26
              
              
              
              26Additional paid-in
      capital
              
              
              353,534
              
              
              
              356,103Accumulated other comprehensive
      loss
              
              
              (75,249
              )
              
              
              (80,707
              )Distributions in excess of
      earnings
              
              
              (108,803
              )
              
              
              (89,117
              )Total stockholders’
      equity
              
              
              169,508
              
              
              
              186,305TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              1,899,428
              
              
              $
              1,936,031
  The
accompanying notes are an integral part of these financial
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 EndedMarch
      31,2009
              
              
              2008REVENUESInterest
income:Loans
              
              $
              23,160
              
              
              $
              32,439Securities
              
              
              882
              
              
              
              1,181Leases
              
              
              2,233
              
              
              
              1,990Interest income −
      other
              
              
              347
              
              
              
              1,373Total interest
      income
              
              
              26,622
              
              
              
              36,983Interest expense
              
              
              13,877
              
              
              
              23,148Net interest
    income
              
              
              12,745
              
              
              
              13,835OPERATING
      EXPENSESManagement fee expense −
      related party
              
              
              1,001
              
              
              
              1,738Equity compensation expense −
      related party
              
              
              88
              
              
              
              81Professional
      services
              
              
              964
              
              
              
              792Insurance
    expense
              
              
              172
              
              
              
              128General and
      administrative
              
              
              405
              
              
              
              355Income tax (benefit)
      expense
              
              
              (45
              )
              
              
              29Total expenses
              
              
              2,585
              
              
              
              3,123NET
      OPERATING INCOME
              
              
              10,160
              
              
              
              10,712OTHER
      (EXPENSE) REVENUESNet realized and unrealized
      losses on investments
              
              
              (14,345
              )
              
              
              (1,995
              )Other
      income
              
              
              22
              
              
              
              33Provision for loan and lease
      loss
              
              
              (7,989
              )
              
              
              (1,137
              )Gain on the extinguishment of
      debt
              
              
              −
              
              
              
              1,750Total other
      expenses
              
              
              (22,312
              )
              
              
              (1,349
              )NET
      (LOSS) INCOME
              
              $
              (12,152
              )
              
              $
              9,363NET
      (LOSS) INCOME PER SHARE – BASIC
              
              $
              (0.50
              )
              
              $
              0.38NET
      (LOSS) INCOME PER SHARE – DILUTED
              
              $
              (0.50
              )
              
              $
              0.38WEIGHTED
      AVERAGE NUMBER OF SHARES
                OUTSTANDING −
    BASIC
              
              
              24,467,408
              
              
              
              24,612,724WEIGHTED
      AVERAGE NUMBER OF SHARES
                OUTSTANDING −
      DILUTED
              
              
              24,467,408
              
              
              
              24,883,444DIVIDENDS
      DECLARED PER SHARE
              
              $
              0.30
              
              
              $
              0.41
 
 The
accompanying notes are an integral part of these statements
 
 (Back to Index)
 4
 (Back to Index)
 
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’EQUITY
 THREE
MONTHS ENDED MARCH 31, 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
              
              
              Treasury
      Shares
              
              
              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
              
              
              13,592
              
              
              
              −
              
              
              
              44
              
              
              
              
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              44Offering
      costs
              
              
              −
              
              
              
              −
              
              
              
              
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              
              
              
              
              −Repurchase
      and retirement of
                treasury
      sharesshares
              
              
              (700,000
              )
              
              
              −
              
              
              
              (2,800
              )
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              
              
              
              
              (2,800
              )Stock
      based compensation
              
              
              251,727
              
              
              
              
              
              
              
              99
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              99Amortization
      of stock
                based
    compensation
              
              
              −
              
              
              
              −
              
              
              
              88
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              88Forfeiture
      of unvested stock
              
              
              (8,191
              )
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −Net
      loss
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (12,152
              )
              
              
              −
              
              
              
              −
              
              
              
              (12,152
              )
              
              
              (12,152
              )Available-for-sale,
                fair value adjustment,
      net
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (3,423
              )
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (3,423
              )
              
              
              (3,423
              )Designated
      derivatives, fair
                value adjustment
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              8,881
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              8,881
              
              
              
              8,881Distributions
      on common
                stock
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              12,152
              
              
              
              (19,686
              )
              
              
              −
              
              
              
              (7,534
              )Comprehensive
      loss
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              $
              (6,694
              )Balance,
      March 31, 2009
              
              
              24,901,995
              
              
              $
              26
              
              
              $
              353,534
              
              
              $
              (75,249
              )
              
              $
              −
              
              
              $
              (108,803
              )
              
              $
              −
              
              
              $
              169,508
 
  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)
 
 Three
      Months EndedMarch
      31,2009
                        
                        
                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
                        
                        $
                        (12,152
                        )
                        
                        $
                        9,363Adjustments to reconcile net
      (loss) income to net cash provided by
                          operating
      activities:Provision for loan and lease
      losses
                        
                        
                        7,989
                        
                        
                        
                        786Depreciation and
      amortization
                        
                        
                        187
                        
                        
                        
                        196Amortization/accretion on net
      discount on investments
                        
                        
                        (988
                        )
                        
                        
                        (184
                        )Amortization of discount on
      notes
                        
                        
                        48
                        
                        
                        
                        41Amortization of debt issuance
      costs
                        
                        
                        823
                        
                        
                        
                        729Amortization of stock-based
      compensation
                        
                        
                        88
                        
                        
                        
                        81Amortization of terminated
      derivative instruments
                        
                        
                        120
                        
                        
                        
                        21Non-cash incentive compensation
      to the Manager
                        
                        
                        (1
                        )
                        
                        
                        141Unrealized loss on
      non-designated derivative instrument
                        
                        
                        92
                        
                        
                        
                        −Net realized and unrealized
      losses on investments
                        
                        
                        14,345
                        
                        
                        
                        2,346Gain on the extinguishment of
      debt
                        
                        
                        −
                        
                        
                        
                        (1,750
                        )Changes in operating assets and
      liabilities
                        
                        
                        3,297
                        
                        
                        
                        2,814Net cash provided by operating
      activities
                        
                        
                        13,848
                        
                        
                        
                        14,584CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted cash
                        
                        
                        (3,162
                        )
                        
                        
                        71,230Principal payments on securities
      available-for-sale
                        
                        
                        −
                        
                        
                        
                        74Proceeds from sale of securities
      available-for-sale
                        
                        
                        −
                        
                        
                        
                        8,000Distribution from unconsolidated
      entities
                        
                        
                        −
                        
                        
                        
                        257Purchase of loans
                        
                        
                        (36,680
                        )
                        
                        
                        (85,000
                        )Principal payments received on
      loans
                        
                        
                        27,131
                        
                        
                        
                        37,829Proceeds from sales of
      loans
                        
                        
                        8,376
                        
                        
                        
                        6,629Purchase of direct financing
      leases and notes
                        
                        
                        −
                        
                        
                        
                        (6,208
                        )Proceeds payments received on
      direct financing leases and notes
                        
                        
                        6,825
                        
                        
                        
                        6,991Proceeds from sale of direct
      financing leases and notes
                        
                        
                        506
                        
                        
                        
                        −Net cash provided by investing
      activities
                        
                        
                        2,996
                        
                        
                        
                        39,802CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds from dividend
      reinvestment and stock purchase plan (net of
                          offering costs of $0 and
      $0)
                        
                        
                        44
                        
                        
                        
                        −Repurchase of common
      stock
                        
                        
                        (2,800
                        )
                        
                        
                        −Proceeds from
      borrowings:Collateralized debt
      obligations
                        
                        
                        −
                        
                        
                        
                        12,589Secured term
    facility
                        
                        
                        −
                        
                        
                        
                        2,675Payments on
      borrowings:Repurchase
    agreements
                        
                        
                        (1,054
                        )
                        
                        
                        (44,358
                        )Secured term
    facility
                        
                        
                        (7,003
                        )
                        
                        
                        (4,429
                        )Use of unrestricted cash for
      early extinguishment of debt
                        
                        
                        −
                        
                        
                        
                        (3,250
                        )Settlement of derivative
      instruments
                        
                        
                        −
                        
                        
                        
                        (4,178
                        )Distributions paid on common
      stock
                        
                        
                        (9,946
                        )
                        
                        
                        (10,366
                        )Net cash used in financing
      activities
                        
                        
                        (20,759
                        )
                        
                        
                        (51,317
                        )NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                        
                        
                        (3,915
                        )
                        
                        
                        3,069CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                        
                        
                        14,583
                        
                        
                        
                        6,029CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                        
                        $
                        10,668
                        
                        
                        $
                        9,098NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Distributions on common stock
      declared but not paid
                        
                        $
                        7,529
                        
                        
                        $
                        10,433SUPPLEMENTAL
      DISCLOSURE:Interest expense paid in
      cash
                        
                        $
                        13,933
                        
                        
                        $
                        25,372Income taxes paid in
      cash
                        
                        $
                        −
                        
                        
                        $
                        335
 (Back to Index)
 6
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 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 three months ended March 31,
2009 may not necessarily be indicative of the results of operations for the full
fiscal year ending December 31, 2009.
 
 Principles
of Consolidation
 
 The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”).  The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned.
 
 When the
Company obtains an explicit or implicit interest in an entity, the Company
evaluates the entity to determine if the entity is a VIE, and, if so, whether or
not the Company is deemed to be the primary beneficiary of the VIE, in
accordance with Financial Accounting Standards Board (“FASB”) Interpretation 46,
“Consolidation of Variable Interest Entities,” as revised (“FIN 46-R”). 
Generally, the Company consolidates VIEs for which the Company is deemed to be
the primary beneficiary or non-VIEs which the Company controls. The primary
beneficiary of a VIE is the variable interest holder that absorbs the majority
of the variability in the expected losses or the residual returns of the
VIE.  When determining the primary beneficiary of a VIE, the Company
considers its aggregate explicit and implicit variable interests as a single
variable interest.  If the Company’s single variable interest absorbs the
majority of the variability in the expected losses or the residual returns of
the VIE, the Company is considered the primary beneficiary of the VIE.  The
Company reconsiders its determination of whether an entity is a VIE and whether
the Company is the primary beneficiary of such VIE if certain events
occur.
 
  (Back to Index)
 7
 (Back to Index)
   RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation – (Continued)
 
 The Company has a 100% interest valued
at $1.5 million in the common shares (three percent of the total equity) in two
trusts, Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”). 
Accordingly, the Company does not have the right to the majority of RCTs’
expected residual returns.  Therefore, the Company is not deemed to be
the primary beneficiary of either trust and they are not consolidated in the
Company’s consolidated financial statements.  The Company records its
investments in RCT I and RCT II’s common securities of $774,000 each as
investments in unconsolidated trusts using the cost method and records dividend
income upon declaration by RCT I and RCT II.  For the three months
ended March 31, 2009 and 2008, the Company recognized $765,000 and $1.1 million,
respectively, of interest expense with respect to the subordinated debentures it
issued to RCT I and RCT II which included $37,000 and $32,000, respectively, of
amortization of deferred debt issuance costs.
 
 All
inter-company transactions and balances have been eliminated.
 
 Use
of Estimates
 
 The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.  Estimates affecting the accompanying consolidated
financial statements include the net realizable and fair values of the Company’s
investments and derivatives, the estimated life used to calculate amortization
and accretion of premiums and discounts, respectively, on investments and
provisions for loan and lease losses.
 
 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 CMBS securities
      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.
 
 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 SFAS 115, Staff Position
(“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 requires an investor to determine when an investment is considered
impaired (i.e., when its fair value has declined below its amortized cost),
evaluate whether that impairment is other than temporary (i.e., 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 cost 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.
   (Back to Index)
 8
 (Back to Index)
   RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
 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 $67.6 million and $17.2 million at March 31, 2009 and 2008,
respectively.  All loans and leases deemed impaired at March 31, 2009
have an associated valuation allowance.  The total balance of impaired
loans and leases with a valuation allowance of $16.9 million at March 31
2008.  The total balance of impaired leases without a specific
valuation allowance was $360,000 at March 31 2008.  The specific
valuation allowance related to these impaired loans and leases was $33.5 million
and $2.7 million at March 31, 2009 and 2008, respectively.  The
Company did not recognize any income on impaired loans and leases during 2009 or
2008 once each individual loan or lease became impaired.
 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.
 
 Income
Taxes
  The Company operates in such a manner
as to qualify as a REIT under the provisions of the Internal Revenue Code of
1986, as amended (the "Code"); therefore, applicable REIT taxable income is
included in the taxable income of its shareholders, to the extent distributed by
the Company.  To maintain REIT status for federal income tax purposes, the
Company is generally required to distribute at least 90% of its REIT taxable
income to its shareholders as well as comply with certain other qualification
requirements as defined under the Code.  As a REIT, the Company is not
subject to federal corporate income tax to the extent that it distributes 100%
of its REIT taxable income each year.
 
 Taxable income from non-REIT activities
managed through Resource TRS are subject to federal, state and local income
taxes.  Resource TRS income taxes are accounted for under the asset
and liability method as required under SFAS 109 "Accounting for Income
Taxes."  Under the asset and liability method, deferred income taxes
are recognized for the temporary differences between the financial reporting
basis and tax basis of Resource TRS' assets and liabilities.
 
 Apidos CDO I, Apidos CDO III, Apidos
Cinco CDO and Ischus CDO II, Ltd., (“Ischus CDO II”) a Cayman Islands TRS, (now
de-consolidated), the Company’s foreign TRSs, are organized as exempted
companies incorporated with limited liability under the laws of the Cayman
Islands, and are generally exempt from federal and state income tax at the
corporate level because their activities in the United States are limited to
trading in stock and securities for their own account.  Therefore,
despite their status as TRSs, they generally will not be subject to corporate
tax on their earnings and no provision for income taxes is required; however,
because they are “controlled foreign corporations,” the Company will generally
be required to include Apidos CDO I’s, Apidos CDO III’s, Apidos Cinco CDO’s and
Ischus CDO II’s current taxable income in its calculation of REIT taxable
income.  (Back to Index)
 9
 (Back to Index)
 
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
 
 Stock
Based Compensation
 
 The
Company follows SFAS 123(R), “Share Based Payment,” (“SFAS
123(R)”).  Issuances of restricted stock and options are accounted for
using the fair value based methodology prescribed by SFAS 123(R) whereby the
fair value of the award is measured on the grant date and expensed monthly to
equity compensation expense-related party on the consolidated statements of
operations with a corresponding entry to additional paid-in
capital.  For issuances to the Company’s Manager and to non-employees,
the unvested stock and options are adjusted quarterly to reflect changes in fair
value as performance under the agreement is completed.  For issuances
to the Company’s five non-employee directors, the amount is not remeasured under
the fair value-based method.  The compensation for each of these
issuances is amortized over the service period and included in equity
compensation expense.
 
 Recent
Accounting Pronouncements
  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.  FASB Staff Position 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.  FASB Staff Position 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.  FASB Staff Position 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.  The Company will adopt the provisions in the quarter
ended June 30, 2009.  The Company is evaluating the potential impact
of adopting these statements.
 
 In
January 2009, the FASB issued FSP 99-20-1.  FSP 99-20-1 amends the
impairment guidance in EITF Issue No. 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,” to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP 99-20-1 is effective, on a prospective basis, for interim and
annual reporting periods ending after December 15, 2008.  Adoption of
FSP 99-20-1 did not have a material impact on the Company’s consolidated
financial statements.
 
 In June 2008, the FASB issued FSP EITF
03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS 128, “Earnings per Share.”  Under the
guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and must be included in the computation of
earnings per share pursuant to the two-class method.  FSP EITF 03-6-1
is effective for the Company in fiscal 2009.  After the effective date
of FSP EITF 03-6-1, all prior-period earnings per share data presented must be
adjusted retrospectively.  Adoption of FSP EITF 03-6-1 did not have a
material effect on the Company’s financial statements.
 
 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 14 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 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.
 (Back to Index)
 10
 (Back to Index)
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)
  Recent
Accounting Pronouncements – (Continued)
 
 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, 2009.  Adoption did not have a material impact on the
Company’s financial statements.
  In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141 (“SFAS 141R”). SFAS 141R, among other things,
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired
(including intangibles), the liabilities assumed and any noncontrolling interest
in the acquired entity. Additionally, SFAS 141R requires that all transaction
costs will be expensed as incurred.   SFAS 141R is effective for
fiscal years beginning after December 15, 2008.  Adoption did not have a
material impact on the Company’s financial statements.
 Reclassifications
 
 Certain reclassifications have been
made to the 2008 consolidated financial statements to conform to the 2009
presentation.
 
 NOTE
3 − RESTRICTED CASH
 
 Restricted cash as of March 31, 2009
consists of $49.8 million held in five consolidated CDO trusts, $7.1 million in
cash collateralizing outstanding margin calls and $3.4 million of interest
reserves and security deposits held in connection with the Company’s equipment
lease and note portfolio.
  NOTE
4 – 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)March 31,
      2009:Commercial
      MBS private placement
              
              $
              70,568
              
              
              $
              −
              
              
              $
              (50,287
              )
              
              $
              20,281Other
      ABS
              
              
              45
              
              
              
              −
              
              
              
              −
              
              
              
              45Total
              
              $
              70,613
              
              
              $
              −
              
              
              $
              (50,287
              )
              
              $
              20,326December 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 March 31, 2009 and December 31, 2008, $15.4 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)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
4 – 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 CouponMarch 31,
      2009:Less than one
      year
              
              $
              8,756
              
              
              $
              23,064
              
              
              
              2.67%Greater than one year and less
      than five years
              
              
              3,386
              
              
              
              8,998
              
              
              
              2.67%Greater than five
      years
              
              
              8,184
              
              
              
              38,551
              
              
              
              5.64%Total
              
              $
              20,326
              
              
              $
              70,613
              
              
              
              4.45%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 LossesMarch 31,
      2009:Commercial MBS
      private
                placement
              
              $
              −
              
              
              $
              −
              
              
              $
              20,281
              
              
              $
              (50,287
              )
              
              $
              20,281
              
              
              $
              (50,287
              )Total temporarily
                impaired
    securities
              
              $
              −
              
              
              $
              −
              
              
              $
              20,281
              
              
              $
              (50,287
              )
              
              $
              20,281
              
              
              $
              (50,287
              )December 31,
      2008:Commercial MBS privateplacement
              
              $
              −
              
              
              $
              −
              
              
              $
              29,215
              
              
              $
              (41,243
              )
              
              $
              29,215
              
              
              $
              (41,243
              )Other
      ABS
              
              
              −
              
              
              
              −
              
              
              
              45
              
              
              
              (5,620
              )
              
              
              45
              
              
              
              (5,620
              )Total temporarily
                impaired
    securities
              
              $
              −
              
              
              $
              −
              
              
              $
              29,260
              
              
              $
              (46,863
              )
              
              $
              29,260
              
              
              $
              (46,863
              )
 
 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;
  ·
              our
      intent and ability to hold the security for a period of time sufficient to
      allow for any anticipated recovery in market
  value;
  ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
and
  ·
              underlying
      credit fundamentals of the collateral backing the
    securities.
 (Back to Index)
 12
 (Back to Index)
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
  NOTE
4 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE − (Continued)
 At
March 31, 2009 and December 31, 2008, we held $20.3 million and $29.2 million,
respectively, net of unrealized losses of $50.3 million and $41.2 million at
March 31, 2009 and December 31, 2008, respectively, of Commercial MBS private
placement (“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.  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
assets are current with respect to interest and principal
payments.  Rating agency downgrades are considered with respect to its
income approach when determining other-than-temporary impairment and when inputs
are stressed projected cash flows are adequate to recover
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 our cost basis and, as a result, the Company
recognized a $5.6 million other-than-temporary impairment on its other-ABS
investment.  As a result of the impairment charge, 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 March 31, 2009.  For the three
months ended March 31, 2008, the Company recognized no other-than-temporary
impairment.
 
 NOTE
5 – 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)March 31,
      2009:Bank loans, includes $16.0
      million in loans held for sale
              
              $
              953,308
              
              
              $
              (13,899
              )
              
              $
              939,409Commercial real estate
      loans:Whole loans
              
              
              514,330
              
              
              
              (1,213
              )
              
              
              513,117B notes
              
              
              81,833
              
              
              
              54
              
              
              
              81,887Mezzanine
loans
              
              
              215,199
              
              
              
              (4,510
              )
              
              
              210,689Total commercial real estate
      loans
              
              
              811,362
              
              
              
              (5,669
              )
              
              
              805,693Subtotal loans before
      allowances
              
              
              1,764,670
              
              
              
              (19,568
              )
              
              
              1,745,102Allowance for loan
      loss
              
              
              (46,851
              )
              
              
              −
              
              
              
              (46,851
              )Total
              
              $
              1,717,819
              
              
              $
              (19,568
              )
              
              $
              1,698,251December 31,
      2008:Bank loans, includes $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 March 31,
      2009 and December 31, 2008.


(Back to Index)
 13
 (Back to Index)
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
5 – LOANS HELD FOR INVESTMENT− (Continued)


At March 31, 2009, the Company’s bank
loan portfolio consisted of $912.6 million (net of allowance of $26.7 million)
of floating rate loans, which bear interest ranging between the London Interbank
Offered Rate (“LIBOR”) plus 0.94% and LIBOR plus 10.50% with maturity dates
ranging from December 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 loan loss (in
thousands):
  Allowance
      for loan loss at December 31, 2008
                        
                        $
                        43,867Reserve charged to
      expense
                        
                        
                        7,829Loans
    charged-off
                        
                        
                        (4,825
                        )Recoveries
                        
                        
                        −Allowance
      for loan loss at March 31, 2009
                        
                        
                        46,851




(Back to Index)
 14
 (Back to Index)


RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
5 – 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
      DatesMarch 31,
      2009:Whole
      loans, floating rate (1)
              
              
              29
              
              
              $
              424,645
              
              LIBOR
      plus 1.50% to
                LIBOR
      plus 4.40%
              
              May
      2009 to
                January
      2012Whole
      loans, fixed rate  (1)
              
              
              7
              
              
              
              88,472
              
              6.98%
      to 10.00%
              
              May
      2009 to
                August
      2012B
      notes, floating rate
              
              
              3
              
              
              
              26,500
              
              LIBOR
      plus 2.50% to
                LIBOR
      plus 3.01%
              
              July
      2009 to
                October
      2009B
      notes, fixed rate
              
              
              3
              
              
              
              55,387
              
              7.00%
      to 8.66%
              
              July
      2011 to
                July
      2016Mezzanine
      loans, floating rate
              
              
              10
              
              
              
              129,396
              
              LIBOR
      plus 2.15% to
                LIBOR
      plus 3.45%
              
              May
      2009 to
                February
      2010Mezzanine
      loans, fixed rate
              
              
              7
              
              
              
              81,293
              
              5.78%
      to 11.00%
              
              November
      2009 to
                September
      2016Total (2)
              
              
              59
              
              
              $
              805,693December 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 $23.0 million and $26.6 million in unfunded loan commitments as
      of March 31, 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 $20.1 million and
      $15.1 million recorded as of March 31, 2009 and December 31, 2008,
      respectively.





(Back to Index)
 15
 (Back to Index)




RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
5 – LOANS HELD FOR INVESTMENT− (Continued)





As of March 31, 2009, the Company had
recorded an allowance for loan losses of $46.9 million consisting of a $26.8
million allowance on the Company’s bank loan portfolio and a $20.1 million
allowance on the Company’s commercial real estate portfolio as a result of the
Company deeming nine 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 deeming ten bank loans and one commercial
real estate loan impaired.  The Company also established a general reserve
on these portfolios.





The Company has one mezzanine loan,
with a balance of $11.6 million secured by 100% of the equity interests in two
enclosed regional shopping malls which went into default in February
2008.  During early 2008, the Company began working with the borrower
and special servicer to resolve the default.  However, during the
quarter ended June 30, 2008, the borrower defaulted on the more senior first
mortgage position.  This event triggered the reevaluation of the
Company’s provision for loan loss and the Company determined that, during the
three months ended June 30, 2008, a full reserve of the remaining balance of
$11.6 million was necessary.  Any future recovery from this loan will
be adjusted through the Company’s allowance for loan loss.





NOTE
6 –DIRECT FINANCING LEASES AND NOTES





The Company’s direct financing leases
and notes have weighted average initial lease and note terms of 69 months and 72
months as of March 31, 2009 and December 31, 2008, respectively.  The
interest rates on notes receivable range from 2.3% to 21.6% and from 2.8% to
17.3% as of March 31, 2009 and December 31, 2008,
respectively.  Investments in direct financing leases and notes, net
of unearned income, were as follows (in thousands):





March
      31,
            
            
            December
      31,2009
            
            
            2008Direct
      financing leases, net of unearned
      income
            
            $
            26,227
            
            
            $
            29,423Operating
      leases
            
            
            309
            
            
            
            337Notes
      receivable
            
            
            70,560
            
            
            
            74,705Subtotal
            
            
            97,096
            
            
            
            104,465Allowance
      for lease
      losses
            
            
            (550
            )
            
            
            (450
            )Total
            
            $
            96,546
            
            
            $
            104,015





The components of net investment in
direct financing leases are as follows (in thousands):





March
      31,
            
            
            December
      31,2009
            
            
            2008Total
      future minimum lease
      payments
            
            $
            30,197
            
            
            $
            34,105Unguaranteed
      residual
            
            
            237
            
            
            
            237Unearned
      income
            
            
            (4,207
            )
            
            
            (4,919
            )Total
            
            $
            26,227
            
            
            $
            29,423







(Back to Index)
 16
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
6 –DIRECT FINANCING LEASES AND NOTES – (Continued)





The components of net investment in
operating leases are as follows (in thousands):





March
      31,
            
            
            December
      31,2009
            
            
            2008Investment
      in operating leases
            
            $
            368
            
            
            $
            371Accumulated
      depreciation
            
            
            (59
            )
            
            
            (34
            )Total
            
            $
            309
            
            
            $
            337




At March 31, 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 had recorded an allowance for lease losses of $60,000.  The
Company also recorded a general reserve of $100,000 during the three months
ended March 31, 2009 to bring the total general reserve to $550,000 at March 31,
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 had
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, 2009
              
              $
              450Provision for lease
      loss
              
              
              160Leases charged
    off
              
              
              (60
              )Recoveries
              
              
              −Allowance
      for lease loss at March 31, 2009
              
              $
              550









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 17
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
7 – 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 March 31, 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 CollateralMarch 31,
      2009:Repurchase
      Agreements (1)
            
            $
            16,052
            
            
            
            2.82%
            
            
            18.0
      days
            
            $
            39,785RREF
      CDO 2006-1 Senior Notes (2)
            
            
            261,386
            
            
            
            1.43%
            
            
            37.4
      years
            
            
            311,232RREF
      CDO 2007-1 Senior Notes (3)
            
            
            378,115
            
            
            
            1.20%
            
            
            37.5
      years
            
            
            435,795Apidos
      CDO I Senior Notes (4)
            
            
            318,625
            
            
            
            1.73%
            
            
            8.3
      years
            
            
            237,315Apidos
      CDO III Senior Notes (5)
            
            
            259,772
            
            
            
            2.08%
            
            
            11.2
      years
            
            
            191,784Apidos
      Cinco CDO Senior Notes (6)
            
            
            318,362
            
            
            
            1.74%
            
            
            11.1
      years
            
            
            235,435Secured
      Term
      Facility
            
            
            88,711
            
            
            
            2.86%
            
            
            1.0
      years
            
            
            96,546Unsecured
      Junior Subordinated Debentures (7)
            
            
            51,548
            
            
            
            5.13%
            
            
            27.4 years
            
            
            −Total
            
            $
            1,692,571
            
            
            
            1.79%
            
            
            20.4 years
            
            $
            1,547,892December 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
      March 31, 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 carrying value of $35.9 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 carrying value of $35.8
      million.


(2)
            Amount
      represents principal outstanding of $265.5 million less unamortized
      issuance costs of $4.1 million as of March 31, 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 $383.8 million less unamortized
      issuance costs of $5.7 million as of March 31, 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 $2.9 million as of March 31, 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 $2.7 million as of March 31, 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 $3.6 million as of March 31, 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)
 18
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





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 RateMarch 31,
      2009:Natixis
      Real Estate Capital Inc.
            
            $
            20,074
            
            
            
            18
            
            
            
            2.82
            %Credit
      Suisse Securities (USA) LLC
            
            $
            3,852
            
            
            
            25
            
            
            
            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 maximum amount of the Company’s borrowing under the
repurchase agreement was $150.0 million.  The financing provided by
the agreement matures April 18, 2010 subject to a one-year extension at the
option of RCC Real Estate SPE 3 and subject further to the right of RCC Real
Estate SPE 3 to repurchase the assets held in the facility
earlier.  The Company paid a facility fee of 0.75% of the maximum
facility amount, or $1.2 million, at closing.  In addition, once the
borrowings exceed a weighted average undrawn balance of $75.0 million for the
prior 90 day period, the Company was required to pay a Non-Usage Fee on the
unused portion equal to the product of (i) 0.15% per annum multiplied by, (ii)
the weighted average undrawn balance during the prior 90 day
period.  Each repurchase transaction specifies its own terms, such as
identification of the assets subject to the transaction, sale price, repurchase
price, rate and term.  These are one-month contracts.  The
repurchase agreement is with recourse only to the assets financed, subject to
standardized exceptions relating to breaches of representations, fraud and
similar matters.  The Company has guaranteed RCC Real Estate SPE 3,
LLC’s performance of its obligations under the repurchase
agreement.  At March 31, 2009, RCC Real Estate SPE 3 had borrowed
$16.0 million.  At March 31, 2009, borrowings under the repurchase
agreement were secured by commercial real estate loans with an estimated fair
value of $35.9 million and had a weighted average interest rate of one-month
LIBOR plus 2.30%, which was 2.82% at March 31, 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.
 
 On
September 25, 2008, RCC Real Estate SPE 3 entered into an amendment to the
master repurchase agreement.  The amendment reduced (i) the amount of
the facility from $150,000,000 to $100,000,000 and (ii) the weighted average
Undrawn Balance (as defined in the Agreement) threshold exempting payment of the
non-usage fee from $75,000,000 to $56,250,000.  A modification fee of
0.25% of the amended facility amount of $100,000,000 was charged by Natixis in
connection with the repurchase agreement amendment.
 
 On
September 25, 2008, the Company also entered into a second amendment to its
guaranty, dated April 12, 2007, with Natixis, pursuant to which the Company’s
minimum net worth covenant was reduced to $200,000,000 from
$250,000,000.


(Back to Index)
 19
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Repurchase
and Credit Facilities − (Continued)




Commercial
Real Estate Loan – Term Repurchase Facility − (Continued)
  On
November 25, 2008, RCC Real Estate SPE 3 entered into a second amendment to the
master repurchase agreement.  Pursuant to the second
amendment:
  ·
              The
      Company repaid $41.5 million of amounts outstanding under the
      facility.
  ·
              The
      maximum facility amount was maintained at $100.0 million, reducing on
      October 18, 2009 to the amounts then outstanding on the
      facility.
  ·
              Further
      repurchase agreement transactions under the facility may be made in
      Natixis’ sole discretion.
  ·
              The
      repurchase prices for assets remaining subject to the facility on November
      25, 2008, referred to as the Existing Assets, were set an aggregate of
      $17.0 million.  Premiums over new repurchase prices are required
      for early repurchase by RCC Real Estate SPE 3 of the Existing Assets;
      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.


On
March 13, 2009, RCC Real Estate SPE 3 entered into a third amendment to the
master repurchase agreement and the guaranty.  The amendment (i) reduced
the amount of the net worth the Company is required to maintain under its
guaranty to $165,000,000 from $200,000,000 for the period from December 31, 2008
through May 12, 2009, (ii) required a paydown of $1.0 million of amounts
outstanding under the facility by March 17, 2009 and (iii) required that
reasonable best efforts be used by (a) the Company to reduce amounts outstanding
under the facility further and (b) the Company and Natixis to reduce the amount
of the net worth requirement.




Secured
Term Facility





In March
2006, the Company entered into a secured term credit facility with Bayerische
Hypo – und Vereinsbank AG to finance the purchase of equipment leases and
notes.  The maximum amount of the Company’s borrowing under this
facility is $100.0 million.  Borrowings under this facility bear
interest at one of two rates, determined by asset class.





The Company paid $8,000 and $38,000 in
unused line fees as of March 31, 2009 and December 31, 2008,
respectively.  Unused line fees are expensed immediately into interest
expense in the consolidated statements of operations.  As of March 31,
2009, the Company had borrowed $88.7 million at a weighted average interest rate
of 2.86%.  As of December 31, 2008, the Company had borrowed $95.7
million at a weighted average interest rate of 4.14%.  The facility
expires in March 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
commercial MBS (“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 March 31, 2009,
the Company had borrowed $36,000 with a weighted average interest rate of
3.50%.  At December 31, 2008, the Company had borrowed $90,000 with a
weighted average interest rate of 4.50%.





Collateralized
Debt Obligations





Resource
Real Estate Funding CDO 2007-1





In June 2007, the Company closed RREF
CDO 2007-1, a $500.0 million CDO transaction that provides financing for
commercial real estate loans and commercial mortgage-backed
securities.  The investments held by RREF CDO 2007-1 collateralize the
debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  RREF CDO 2007-1 issued a
total of $265.6 million of senior notes at par to unrelated
investors.  RCC Real Estate purchased 100% of the class H senior notes
(rated BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L senior
notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for $68.0
million.  In addition, Resource Real Estate Funding 2007-1 CDO
Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity
interest representing 100% of the outstanding preference shares.  The
senior notes purchased by RCC Real Estate are subordinated in right of payment
to all other senior notes issued by RREF CDO 2007-1 but are senior in right of
payment to the preference shares.  The equity interest is subordinated
in right of payment to all other securities issued by RREF CDO
2007-1.







(Back to Index)
 20
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Collateralized
Debt Obligations – (Continued)





Resource
Real Estate Funding CDO 2007-1





The senior notes issued to investors by
RREF CDO 2007-1 consist of the following classes: (i) $180.0 million of class
A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of
class A-1R notes, which allow the CDO to fund future funding obligations under
the existing whole loan participations that have future funding commitments
bearing interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of class A-2
notes bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million of
class B notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million
of class C notes bearing interest at a fixed rate of 6.423%; (vi) $26.8 million
of class D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9
million of class E notes bearing interest at one-month LIBOR plus 1.15%; (viii)
$11.9 million of class F notes bearing interest at one-month LIBOR plus 1.30%;
(ix) $11.3 million of class G notes bearing interest at one-month LIBOR plus
1.55%; (x) $11.3 million of class H notes bearing interest at one-month LIBOR
plus 2.30%; (xi) $11.3 million of class J notes bearing interest at one-month
LIBOR plus 2.95%; (xii) $10.0 million of class K notes bearing interest at
one-month LIBOR plus 3.25%; (xiii) $18.8 million of class L notes bearing
interest at a fixed rate of 7.50% and (xiv) $28.8 million of class M notes
bearing interest at a fixed rate of 8.50%.  All of the notes issued
mature in September 2046, although the Company has the right to call the notes
anytime after July 2017 until maturity.  The weighted average interest
rate on all notes issued to outside investors was 1.20% at March 31,
2009.





During the three months ended March 31,
2008, the Company repurchased $5.0 million of the Class J notes in RREF CDO
2007-1 at a price of 65.0% which resulted in a $1.75 million gain, reported as a
gain on the extinguishment of debt in its consolidated statements of
operations.  As a result of the Company’s ownership of 100% of the
Class H, K, L and M senior notes and $5.0 million of the Class J senior note,
the notes retained eliminate in consolidation.





Resource
Real Estate Funding CDO 2006-1





In August 2006, the Company closed RREF
CDO 2006-1, a $345.0 million CDO transaction that provides financing for
commercial real estate loans.  The investments held by RREF CDO 2006-1
collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  RREF CDO
2006-1 issued a total of $308.7 million of senior notes at par to investors of
which RCC Real Estate purchased 100% of the class J senior notes (rated BB:
Fitch) and class K senior notes (rated B:Fitch) for $43.1 million.  In
addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of
RCC Real Estate, purchased a $36.3 million equity interest representing 100% of
the outstanding preference shares.  The senior notes purchased by RCC
Real Estate are subordinated in right of payment to all other senior notes
issued by RREF CDO 2006-1 but are senior in right of payment to the preference
shares.  The equity interest is subordinated in right of payment to
all other securities issued by RREF CDO 2006-1.





The senior notes issued to investors by
RREF CDO 2006-1 consist of the following classes:  (i) $129.4 million
of class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4
million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii)
$5.0 million of class A-2 notes bearing interest at a fixed rate of 5.842%; (iv)
$6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%;
(v) $20.7 million of class C notes bearing interest at one-month LIBOR plus
0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR
plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month
LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at
one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest
at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing
interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of Class J notes
bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of Class K
notes bearing interest at a fixed rate of 6.00%.  As a result of the
Company’s ownership of the Class J and K senior notes, these notes eliminate in
consolidation.  All of the notes issued mature in August 2046,
although the Company has the right to call the notes anytime after August 2016
until maturity.  The weighted average interest rate on all notes
issued to outside investors was 1.43% at March 31, 2009.




Apidos
Cinco CDO
 
 In May 2007, the Company closed Apidos
Cinco CDO, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos Cinco CDO collateralize the
debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  Apidos Cinco CDO issued a
total of $322.0 million of senior notes at par to investors and RCC commercial
purchased a $28.0 million equity interest representing 100% of the outstanding
preference shares.  The equity interest is subordinated in right of
payment to all other securities issued by Apidos Cinco CDO.





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 21
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Collateralized
Debt Obligations − (Continued)




Apidos
Cinco CDO − (Continued)


The senior notes issued to investors by
Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class
A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of class
A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class
A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3
notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes
bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes
bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes
bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14,
2020, although the Company has the right to call the notes anytime after May 14,
2011 until maturity.  The weighted average interest rate on all notes
was 1.74% at March 31, 2009.





Apidos
CDO III





In May
2006, the Company closed Apidos CDO III, a $285.5 million CDO transaction that
provides financing for bank loans.  The investments held by Apidos CDO
III collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  Apidos CDO
III issued a total of $262.5 million of senior notes at par to investors and RCC
Commercial purchased a $23.0 million equity interest representing 100% of the
outstanding preference shares.  The equity interest is subordinated in
right of payment to all other securities issued by Apidos CDO III.





The
senior notes issued to investors by Apidos CDO III consist of the following
classes:  (i) $212.0 million of class A-1 notes bearing interest at
3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest
at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing
interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes
bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D
notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes
issued mature on June 12, 2020, although the Company has the right to call the
notes anytime after June 12, 2011 until maturity.  The weighted
average interest rate on all notes was 2.08% at March 31, 2009.





Apidos
CDO I





In August 2005, the Company closed
Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos CDO I collateralize the debt it
issued and, as a result, the investments are not available to the Company, its
creditors or stockholders.  Apidos CDO I issued a total of $321.5
million of senior notes at par to investors and RCC Commercial purchased a $28.5
million equity interest representing 100% of the outstanding preference
shares.  The equity interest is subordinated in right of payment to
all other securities issued by Apidos CDO I.





The senior notes issued to investors by
Apidos CDO I consist of the following classes:  (i) $265.0 million of
class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million
of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5
million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv)
$13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and
(v) $8.0 million of class D notes bearing interest at a fixed rate of
9.251%.  All of the notes issued mature on July 27, 2017, although the
Company has the right to call the notes anytime after July 27, 2010 until
maturity.  The weighted average interest rate on all notes was 1.73%
at March 31, 2009.




Trust
Preferred Securities
 
 In May 2006 and September 2006, the
Company formed RCT I and RCT II, respectively, for the sole purpose of issuing
and selling capital securities representing preferred beneficial
interests.  Although the Company owns 100% of the common securities of
RCT I and RCT II, RCT I and RCT II are not consolidated into the Company’s
consolidated financial statements because the Company is not deemed to be the
primary beneficiary of these entities in accordance with FIN 46-R.  In
connection with the issuance and sale of the capital securities, the Company
issued junior subordinated debentures to RCT I and RCT II of $25.8 million each,
representing the Company’s maximum exposure to loss.  The debt
issuance costs associated with the junior subordinated debentures for RCT I and
RCT II at March 31, 2009 were $672,000 and $683,000,
respectively.  These costs which are included in other assets are
being amortized into interest expense using the effective yield method over a
ten year period and are recorded in the consolidated statements of
operation.





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 22
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)


NOTE
7 – BORROWINGS − (Continued)
 
 Collateralized
Debt Obligations − (Continued)
 
 Trust
Preferred Securities− (Continued)
 
 The rights of holders of common
securities of RCT I and RCT II are subordinate to the rights of the holders of
capital securities only in the event of a default; otherwise, the common
securities economic and voting rights are pari passu with the capital
securities.  The capital and common securities of RCT I and RCT II are
subject to mandatory redemption upon the maturity or call of the junior
subordinated debentures held by each.  Unless earlier dissolved, RCT I
will dissolve on May 25, 2041 and RCT II will dissolve on September 29,
2041.  The junior subordinated debentures are the sole assets of RCT I
and RCT II and mature on June 30, 2036 and October 30, 2036, respectively, and
may be called at par by the Company any time after June 30, 2011 and October 30,
2011, respectively.  Interest is payable for RCT I and RCT II
quarterly at a floating rate equal to three-month LIBOR plus 3.95% per
annum.  The rates for RCT I and RCT II, at March 31, 2009, were 5.13%
and 5.12%, respectively.  The Company records its investments in RCT I
and RCT II’s common securities of $774,000 each as investments in unconsolidated
trusts and records dividend income upon declaration by RCT I and RCT
II.


NOTE
8 – 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 outstanding
shares.  During the three months ended March 31, 2009, the Company
bought back 700,000 shares at a weighted average price of $4.00 per
share.  Including these 2009 transactions, the total number of shares
repurchased under this program is 963,000.





NOTE
9 – 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
            )
            
            
            (97,719
            )
            
            
            (114,980
            )Forfeited
            
            
            −
            
            
            
            (8,191
            )
            
            
            (8,191
            )Unvested
      shares as of March 31, 2009
            
            
            52,632
            
            
            
            502,137
            
            
            
            554,769





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 months ended March 31, 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 vested 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.  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.


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 23
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
9 – SHARE-BASED COMPENSATION – (Continued)


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 March 31, 2009
            
            
            609,666
            
            
            $
            14.99
            
            
            
            6
            
            
            $
            57Exercisable
      at March 31, 2009
            
            
            392,999
            
            
            $
            15.01
            
            
            
            6
            
            
            $
            37




The stock options have a remaining
contractual term of six years.  Upon exercise of options, new shares
are issued.





The following table summarizes the
status of the Company’s unvested stock options as of March 31,
2009:





Unvested
      Options
            
            Options
            
            
            Weighted
      Average Grant Date
                Fair
      ValueUnvested
      at January 1, 2009
            
            
            43,333
            
            
            $
            14.88Granted
            
            
            −
            
            
            $
            −Vested
            
            
            (1,667
            )
            
            $
            18.37Forfeited
            
            
            −
            
            
            $
            −Unvested
      at March 31, 2009
            
            
            41,666
            
            
            $
            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 March 31, 2009:





Vested Options
            
            Number
      of Options
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Term (in years)
            
            Aggregate
      Intrinsic Value (in thousands)Vested
      as of January 1, 2009
            
            
            580,833
            
            
            $
            15.00Vested
            
            
            1,667
            
            
            $
            18.37Exercised
            
            
            −
            
            
            
            −Forfeited
            
            
            (14,500
            )
            
            $
            15.00Vested
      as of March 31, 2009
            
            
            568,000
            
            
            $
            15.01
            
            6
            
            $         53





The stock option transactions are
valued using the Black-Scholes model using the following
assumptions:





As
      of March 31,
            
            
            As
      of December 31,2009
            
            
            2008Expected
      life
            
            8
      years
            
            
            8
      yearsDiscount
      rate
            
            
            2.93%
            
            
            
            2.94%Volatility
            
            
            152.83%
            
            
            
            127.20%Dividend
      yield
            
            
            39.72%
            
            
            
            33.94%




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 24
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 NOTE
9 – SHARE-BASED COMPENSATION – (Continued)


The fair value of each common stock
transaction for the three months ended March 31, 2009 and the year ended
December 31, 2008, respectively, was $0.094 and $0.149.  For the three
months ended March 31, 2009 and 2008, the components of equity compensation
expense were as follows (in thousands):





Three
      Month Ended
              March
      31,2009
            
            
            2008Options
      granted to Manager and non-employees
            
            $
            (1
            )
            
            $
            (58
            )Restricted
      shares granted to Manager and non-employees
            
            
            61
            
            
            
            117Restricted
      shares granted to non-employee Directors
            
            
            28
            
            
            
            22Total
      equity compensation expense
            
            $
            88
            
            
            $
            81




During the three months ended March 31,
2009, the Manager received 26,097 shares as incentive compensation valued at
$98,000 pursuant to the management agreement.  There was no incentive
fee paid during the three months ended March 31, 2008.  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 March 31, 2009.  All awards are
discretionary in nature and subject to approval by the compensation
committee.





NOTE
10 –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
              March
      31,2009
            
            
            2008Basic:Net (loss) income
            
            $
            (12,152
            )
            
            $
            9,363Weighted average number of shares
      outstanding
            
            
            24,467,408
            
            
            
            24,612,724Basic net (loss) income per
      share
            
            $
            (0.50
            )
            
            $
            0.38Diluted:Net (loss) income
            
            $
            (12,152
            )
            
            $
            9,363Weighted average number of shares
      outstanding
            
            
            24,467,408
            
            
            
            24,612,724Additional shares due to assumed
      conversion of dilutive
              instruments
            
            
            −
            
            
            
            270,720Adjusted weighted-average number
      of common shares
              outstanding
            
            
            24,467,408
            
            
            
            24,883,444Diluted net (loss) income per
      share
            
            $
            (0.50
            )
            
            $
            0.38





Potentially dilutive shares relating to
242,464 shares of restricted stock are not included in the calculation of
diluted net (loss) per share for the three months ended March 31, 2009 because
the effect was anti-dilutive.





NOTE
11 – 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 March 31,
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.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
11 – 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 months ended March 31, 2009.  For the
three months ended March 31, 2009, the Company had acquired $6.1 million of
equipment lease and note investments from LEAF, including $61,000 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 March 31, 2009 and
December 31, 2008, the Company was indebted to LEAF for servicing fees in
connection with the Company’s equipment finance portfolio of $164,000 and
$172,000, respectively.  LEAF servicing fees for the three months
ended March 31, 2009 and 2008 were $253,000 and $236,000,
respectively.




During three months ended March 31,
2009, 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 $822,000.  The Company did not sell
any equipment notes back to LEAF during the three months ended March 31,
2008.





Relationship
with Resource America





At March 31, 20009, Resource America,
owned 2,048,675 shares, or 8.2% of the Company’s outstanding common
stock.  In addition, Resource America held 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
months ended March 31, 2009 and 2008, the Manager earned base management fees of
approximately $1.0 million and $1.2 million, respectively, and incentive
compensation fees of $0 and $564,000, respectively.  The Company may
also reimburse the Manager and Resource America for expenses for employees of
Resource America who perform legal, accounting, due diligence and other services
that outside professionals or consultants would otherwise
perform.  For the three months ended March 31, 2009 and 2008, the
Company reimbursed the Manager $146,000 and $101,000, respectively, for such
expenses.





At March
31, 2009, the Company was indebted to the Manager for base management fees of
$674,000 and for the reimbursement of expenses of $106,000.  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.





As of
March 31, 2009, the Company had executed six CDO transactions.  These
CDO transactions were structured for the Company by the Manager, but, under the
management agreement the Manager was not separately compensated by the Company
for these transactions.





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 months ended March 31, 2009 and 2008, the Company paid Ledgewood
approximately $15,000 and $66,000, respectively, for legal
services.  Mr. Cohen receives certain debt service payments from
Ledgewood related to the termination of his affiliation with Ledgewood and its
redemption of his interest.





NOTE
12 – DISTRIBUTIONS





In order to qualify as a REIT, the
Company must currently distribute at least 90% of its taxable
income.  In addition, the Company must distribute 100% of its taxable
income in order not to be subject to corporate federal income taxes on retained
income.  The Company anticipates it will distribute substantially all
of its taxable income to its stockholders.  Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses
(such as depreciation and provisions for loan and lease losses), in certain
circumstances, the Company may generate operating cash flow in excess of its
distributions or, alternatively, may be required to borrow to make sufficient
distribution payments.







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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
12 – DISTRIBUTIONS – (Continued)




The Company’s 2009 distributions
will be determined by the Company’s 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.  However, 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 the Company’s
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.  The Company did not
use this Revenue Procedure with respect to any distributions for its 2008
taxable year, but may do so for distributions with respect to 2009.


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.





NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS





Effective January 1, 2008, the Company
adopted the provisions of SFAS 157 which did not have a material effect on the
Company’s consolidated financial statements as investment securities
available-for-sale and derivatives have always been disclosed 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 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; and 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
      of 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.








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 27
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)




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.
 
 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 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 three months ended March 31,
2009 was $9.0 million and is included in the consolidated statement of
operations as net realized and unrealized losses on investments.


The Company measures impairment on all
nonaccrual loans for which it has established specific reserves as part of the
specific allowance component of the allowance for loan loss.  For loans
where there are active markets, loans are measured based on market value and
these loans are classified as nonrecurring Level 2.  For loans where there
is no active market, loans are measured using cash flows and other valuation
techniquesand
these loans are classified as nonrecurring Level 3.  For the three months
ended March 31, 2009, there were $9.3 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 presents
information about the Company’s assets (including derivatives that are presented
net) measured at fair value on a recurring basis as of March 31, 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 basis





Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalAssets:Securities
      available-for-sale
            
            $
            −
            
            
            $
            −
            
            
            $
            20,326
            
            
            $
            20,326Loans held for
    sale
            
            
            −
            
            
            
            15,968
            
            
            
            −
            
            
            
            15,968Total assets at fair
      value
            
            $
            −
            
            
            $
            15,968
            
            
            $
            20,326
            
            
            $
            36,294Liabilities:Derivatives
(net)
            
            $
            −
            
            
            $
            22,786
            
            
            $
            −
            
            
            $
            22,786Total liabilities at fair
      value
            
            $
            −
            
            
            $
            22,786
            
            
            $
            −
            
            
            $
            22,786





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
            
            
            (5,511
            )Purchases, sales, issuances, and
      settlements (net)
            
            
            −Included in other comprehensive
      income
            
            
            (3,423
            )Ending
      balance, March 31, 2009
            
            $
            20,326





The
Company had $5.6 million of losses included in earnings due to the
other-than-temporary impairment charge of one asset during the three months
ended March 31, 2009.  The loss is included in the consolidated
statement of operations as net realized and unrealized losses on investments.







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 28
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)


NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS – (Continued)




The following table summarizes the
financial assets and liabilities measured at fair value on a nonrecurring basis
as of March 31, 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 basis
 
 Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              TotalAssets:Total assets at fair
      value
              
              $
              -
              
              
              $
              7,180
              
              
              $
              2,102
              
              
              $
              9,282


NOTE
14 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS





A significant market risk to the
Company is interest rate risk.  Interest rates are highly sensitive to
many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond the
Company’s control.  Changes in the general level of interest rates can
affect net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest expense incurred in
connection with the interest-bearing liabilities, by affecting the spread
between the interest-earning assets and interest-bearing
liabilities.  Changes in the level of interest rates also can affect
the value of the Company’s interest-earning assets and the Company’s ability to
realize gains from the sale of these assets.  A decline in the value
of the Company’s interest-earning assets pledged as collateral for borrowings
under repurchase agreements could result in the counterparties demanding
additional collateral pledges or liquidation of some of the existing collateral
to reduce borrowing levels.





The Company seeks to manage the extent
to which net income changes as a function of changes in interest rates by
matching adjustable-rate assets with variable-rate borrowings.  During
periods of changing interest rates, interest rate mismatches could negatively
impact the Company’s consolidated financial condition, consolidated results of
operations and consolidated cash flows.  In addition, the Company
mitigates the potential impact on net income of periodic and lifetime coupon
adjustment restrictions in its investment portfolio by entering into interest
rate hedging agreements such as interest rate caps and interest rate
swaps.





At March 31, 2009, the Company had 31
interest rate swap contracts outstanding whereby the Company will pay an average
fixed rate of 5.07% and receive a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $319.7
million at March 31, 2009.  In addition, the Company also has one
interest rate cap agreement with a notional of $14.3 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 will pay an
average fixed rate of 5.07% and receive 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 ($22.8)
million and ($31.6) million as of March 31, 2009 and December 31, 2008,
respectively.  The Company had aggregate unrealized losses of $25.0
million and $33.8 million on the interest rate swap agreements as of March 31,
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.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 MARCH
31, 2009
 (Unaudited)
 
 NOTE
14 – 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 March 31, 2009 and on the Consolidated
Statement of Operations for the three months ended March 31,
2009:
  Fair
      Value of Derivative Instruments as of March 31, 2009
                    (in
      thousands)Liability
      DerivativesNotional
      Amount
                
                Balance
      Sheet Location
                
                Fair
      ValueDerivatives
      not designated as hedging instrumentsunder
      SFAS 133Interest
      rate cap agreement
                
                $
                14,284
                
                Derivatives,
      at fair value
                
                $
                (43
                )Derivatives
      designated as hedging instrumentsunder
      SFAS 133Interest
      rate swap contracts
                
                $
                319,659
                
                Derivatives,
      at fair value
                
                $
                22,829Accumulated
      other comprehensiveloss
                
                $
                (22,829
                )
  
 The
      Effect of Derivative Instruments on the Statement of Operations for
      the
                    Three
      Months Ended March 31, 2009
                    (in
      thousands)Liability
      DerivativesNotional
      Amount
                
                Statement
      of Operations  Location
                
                Unrealized
      LossDerivatives
      not designated as hedging instrumentsunder
      SFAS 133Interest
      rate cap agreement
                
                $
                14,284
                
                Interest
      expense
                
                $
                (92
                )
 
 ·
              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 March 31, 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
15 – INCOME TAXES
 
 The Company has made an election to be
taxed, and believes it qualifies, as a REIT under Sections 856 through 860 of
the Code.  To maintain REIT status for federal income tax purposes,
the Company is generally required to distribute at least 90% of its REIT taxable
income to its shareholders as well as comply with certain other qualification
requirements as defined under the Code.  Accordingly, the Company is
not subject to federal corporate income tax to extent that it distributes 100%
of its REIT taxable income each year.  Taxable income from non-REIT
activities managed through Resource TRS, the Company's taxable REIT subsidiary,
is subject to federal, state and local income taxes.
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


MARCH
31, 2009


(Unaudited)





NOTE
15 – INCOME TAXES




Resource
TRS' income taxes are accounted for under the asset and liability method as
required under SFAS 109 "Accounting for Income Taxes."  Under the
asset and liability method, deferred income taxes are recognized for the
temporary differences between the financial reporting basis and tax basis of
Resource TRS' assets and liabilities.





The following table details the
components of Resource TRS’ income taxes (in thousands):





As
      of March 312009
            
            
            2008(Benefit)
      provision for income taxes:Current:Federal
            
            $
            (34
            )
            
            $
            23State
            
            
            (11
            )
            
            
            6Deferred
            
            
            −
            
            
            
            −Income
      tax (benefit) provision
            
            $
            (45
            )
            
            $
            29





The components of Resource TRS’
deferred tax assets and liabilities are as follows (in thousands):





Three
      Months EndedMarch
      31,2009
            
            
            2008Deferred
      tax assets related to:Foreign, state and local loss
      carryforwards
            
            $
            303
            
            
            $
            −Provision for loan and lease
      losses
            
            
            206
            
            
            
            −Total deferred tax assets,
      net
            
            $
            509
            
            
            $
            −Deferred
      tax liabilities related to:Property and equipment basis
      differences
            
            $
            (186
            )
            
            $
            −Total deferred tax
      liabilities
            
            $
            (186
            )
            
            $
            −





Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO, the Company’s foreign TRSs, are organized as exempted companies
incorporated with limited liability under the laws of the Cayman Islands, and
are generally exempt from federal and state income tax at the corporate level
because their activities in the United States are limited to trading in stock
and securities for their own account.  Therefore, despite their status
as taxable REIT subsidiaries, they generally will not be subject to corporate
tax on their earnings and no provision for income taxes is required; however,
because they are “controlled foreign corporations,” the Company will generally
be required to include Apidos CDO I’s, Apidos CDO III’s and Apidos Cinco CDO’s
current taxable income in its calculation of REIT taxable income.





Effective January 1, 2007, the Company
adopted the provisions of FIN 48, “Accounting for Uncertainties in Income Taxes
- an Interpretation of SFAS 109” (“FIN 48”), which did not have an impact on its
balance sheet on the date of adoption nor as of March 31, 2009.  FIN
48 prescribes that a tax position should only be recognized if it is more likely
than not that the position will be sustained upon examination by the appropriate
taxing authority.  A tax position that meets this threshold is
measured as the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement.  The Company is required
under FIN 48 to disclose its accounting policy for classifying interest and
penalties, the amount of interest and penalties charged to expense each period
as well as the cumulative amounts recorded in the consolidated balance
sheets.  The Company will continue to classify any tax penalties as
other operating expenses and any interest as interest expense.  The
Company does not have any unrecognized tax benefits that would affect the
Company’s financial position.




As of March 31, 2009, income tax
returns for the calendar years 2005 - 2007 remain subject to examination by
Internal Revenue Service ("IRS") and/or any state or local taxing
jurisdiction.  The Company has not executed any agreements with the
IRS or any state and/or local taxing jurisdiction to extend a statue of
limitations in relation to any previous year.






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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 March 31, 2009, Resource America managed approximately
$16.7 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
ongoing problems have affected our earnings on a GAAP basis as 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 March 31, 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 less available 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 that finance commercial real estate loans and other securities that
we hold.  In addition, we have received proceeds from margin calls
related to our interest rate derivatives of $610,000 during the three months
ended March 31, 2009.







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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 three months ended March 31, 2009:




·
            $7.0
      million of commercial real estate loans paid
  off;




·
            $10.5
      million of commercial real estate loans principal
    prepayments;




·
            $9.7
      million of bank loan principal
prepayments;




·
            $8.4
      million of bank loan sale proceeds;
and




·
            $7.6
      million of leasing repayments.





As of March 31, 2009, we had $16.1
million of outstanding repurchase agreements (including accrued interest) with
pledged collateral of $3.9 million of CRE CDO notes and $36.0 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 March 31, 2009, 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.  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, then 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 $67.6 million and $17.2 million at March 31, 2009 and 2008,
respectively.  All loans and leases that are deemed impaired at March
31, 2009 have an associated valuation allowance.  The total balance of
impaired loans and leases with a valuation allowance of $16.9 million at March
31 2008.  The total balance of impaired leases without a specific
valuation allowance was $360,000 at March 31 2008.  The specific
valuation allowance related to these impaired loans and leases was $33.5 million
and $2.7 million at March 31, 2009 and 2008, respectively.  We did not
recognize any income on impaired loans and leases during 2008 or 2009 once each
individual loan or lease became impaired.




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.





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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
            
            
            7,829Loans
    charged-off
            
            
            (4,845
            )Recoveries
            
            
            −Allowance
      for loan loss at March 31, 2009
            
            $
            46,851Allowance
      for lease loss at January 1, 2009
            
            $
            450Provision for lease
      loss
            
            
            160Leases
    charged-off
            
            
            (60
            )Recoveries
            
            
            −Allowance
      for lease loss at March 31, 2009
            
            $
            550





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.”  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 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; and 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
      of 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.





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.







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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 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 three months ended March 31, 2009 was $9.0
million and is included in on the consolidated statement of operations as net
realized and unrealized losses on investments.




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 March 31, 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 basis





Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalAssets:Securities
      available-for-sale
            
            $
            −
            
            
            $
            −
            
            
            $
            20,326
            
            
            $
            20,326Loans held for
    sale
            
            
            −
            
            
            
            15,968
            
            
            
            −
            
            
            
            15,968Total assets at fair
      value
            
            $
            −
            
            
            $
            15,968
            
            
            $
            20,326
            
            
            $
            36,924Liabilities:Derivatives
(net)
            
            $
            −
            
            
            $
            22,786
            
            
            $
            −
            
            
            $
            22,786Total liabilities at fair
      value
            
            $
            −
            
            
            $
            22,786
            
            
            $
            −
            
            
            $
            22,786





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
            
            
            (5,511
            )Purchases, sales, issuances, and
      settlements (net)
            
            
            −Included in other comprehensive
      income
            
            
            (3,423
            )Ending
      balance, March 31, 2009
            
            $
            20,326





We had
$5.6 million of losses includes in earnings due to the other-than-temporary
impairment charge of one asset during the three months ended March 31,
2009.  We include the loss on our consolidated statement of operations
as net realized and unrealized losses on investments.
 
 We measure impairment on all nonaccrual
loans for which we have established specific reserves as part of the specific
allowance component of the allowance for loan loss.  For loans where there
are active markets, we base our measurements on market value and classify them
as nonrecurring Level 2.  For loans where there is no active market, we
base our measurements on cash flows and other valuation techniquesand classify them
nonrecurring Level 3.  For the three months ended March 31, 2009, there
were $9.3 million of nonrecurring fair value loan losses which we include in our
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 March 31, 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 basis





Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalAssets:Total assets at fair
      value
            
            $
            −
            
            
            $
            7,180
            
            
            $
            2,102
            
            
            $
            9,282








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 35
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Accounting
for Derivative Financial Instruments and Hedging Activities





Our policies permit us to enter into
derivative contracts, including interest rate swaps and interest rate caps to
add stability to our interest expense and to manage our exposure to interest
rate movements or other identified risks.  We designated these
transactions as cash flow hedges.  We evaluate contracts or hedge
instruments at inception and at subsequent balance sheet dates to determine if
they qualify for hedge accounting under SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities.”  SFAS 133 requires that we
recognize all derivatives on the balance sheet at fair value.  We
record changes in the fair value of the derivative in other comprehensive income
to the extent that it is effective.  Any ineffective portion of a
derivative’s change in fair value will be immediately recognized in
earnings.





Results
of Operations − Three Months
Ended March 31, 2009 as compared to Three Months Ended March 31,
2008





Our net loss for the three months ended
March 31, 2009 was $12.2 million, or ($0.50) per weighted average common share
(basic and diluted) as compared to $9.4 million, or $0.38 per weighted average
common share (basic and diluted) for the three months ended March 31,
2008.





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
              March
      31, 2009
            
            
            Three
      Months Ended
              March
      31, 2008Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Income
            
            
            Yield
      (1)
            
            
            Balance
            
            
            Interest
      Income
            
            
            Yield
      (1)
            
            
            BalanceInterest
      income from loans:Bank loans
            
            $
            9,437
            
            
            
            3.95%
            
            
            $
            957,363
            
            
            $
            16,163
            
            
            
            6.62
            
            
            $
            940,832Commercial real estate
      loans
            
            
            13,723
            
            
            
            6.83%
            
            
            $
            801,373
            
            
            
            16,276
            
            
            
            7.35
            
            
            $
            860,019Total interest income
      from
              loans
            
            
            23,160
            
            
            
            
            
            
            
            
            
            
            
            32,439Interest
      income from securities available-for-sale:ABS-RMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            −
            
            
            
            N/A
            
            
            
            N/ACMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            −
            
            
            
            N/A
            
            
            
            N/AOther ABS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            (51
            )
            
            
            (3.34%)
            
            
            $
            6,006CMBS-private
      placement
            
            
            882
            
            
            
            4.76%
            
            
            $
            74,138
            
            
            
            1,232
            
            
            
            5.58%
            
            
            $
            81,973Total interest income
      from
              securities
      available-for-sale
            
            
            882
            
            
            
            
            
            
            
            
            
            
            
            1,181Leasing
            
            
            2,233
            
            
            
            8.70%
            
            
            $
            99,213
            
            
            
            1,990
            
            
            
            8.68
            
            
            $
            94,568Interest
      income – other:Interest income – other (2)
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            997
            
            
            
            N/A
            
            
            
            N/ATemporary
      investment
              in over-night
      repurchase
              agreements
            
            
            347
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            376
            
            
            
            N/A
            
            
            
            N/ATotal interest income −
      other
            
            
            347
            
            
            
            
            
            
            
            
            
            
            
            1,373Total interest
    income
            
            $
            26,622
            
            
            
            
            
            
            
            
            
            
            $
            36,983





(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.  Income on this investment was recognized using the
      cost recovery method.






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 36
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Interest income decreased $10.4 million
(28%) to $26.6 million for the three months ended March 31, 2009 from $37.0
million for the three months ended March 31, 2008.  We attribute this
decrease to the following:


Interest
Income from Loans





Interest income from loans decreased
$9.2 million (29%) to $23.2 million for the three months ended March 31, 2009
from $32.4 million for the three months ended March 31, 2008.





Bank loans generated $9.4 million of
interest income for the three months ended March 31, 2009 as compared to $16.2
million for the three months ended March 31, 2008, a decrease of $6.7 million
(42%).  This decrease resulted from a decrease in the weighted average
rate to 3.58% for the three months ended March 31, 2009 from 6.57% for the three
months ended March 31, 2008, primarily as a result of the decrease in LIBOR
which is a reference index for the rates payable by these loans.





This decrease was partially offset by
the following:




·
            an
      increase in accretion income to $888,000 for the three months ended March
      31, 2009 from $465,000 for the three months ended March 31, 2008 as a
      result of the purchase of loans at discounts and the subsequent accretion
      of those discounts into income.  We make these purchases as we
      receive the proceeds of loan payoffs or sales;
  and




·
            an
      increase in the weighted average balance on these loans of $16.5 million
      to $957.4 million for the three months ended March 31, 2009 from $940.8
      million for the three months ended March 31,
  2008.





Commercial real estate loans produced
$13.7 million of interest income for the three months ended March 31, 2009 as
compared to $16.3 million for the three months ended March 31, 2008, a decrease
of $2.6 million (16%).  This decrease is a result of the
following:




·
            a
      decrease in the weighted average balance of $58.6 million on our
      commercial real estate loans to $801.4 million for the three months ended
      March 31, 2009 from $860.0 million for the three months ended March 31,
      2008 as a result of payoffs and paydowns since March 31, 2008;
      and




·
            a
      decrease in the weighted average rate to 6.83% for the three months ended
      March 31, 2009 from 7.35% for the three months ended March 31, 2008,
      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





Interest income from securities
available-for-sale decreased $299,000 (25%) to $882,000 for the three months
ended March 31, 2009, from $1.2 million for the three months ended March 31,
2008.





Interest income from CMBS-private
placement decreased $350,000 (28%) to $882,000 for the three months ended March
31, 2009 from $1.2 million for the three months ended March 31,
2008.  This decrease resulted primarily from the
following:




·
            a
      decrease of the weighted average balance on these securities of $7.8
      million to $74.1 million for the three months ended March 31, 2009 from
      $82.0 million for the three months ended March 31, 2008 as a result of
      payoffs since March 31, 2008; and




·
            a
      decrease in the weighted average rate to 4.76% for the three months ended
      March 31, 2009 from 5.58% for the three months ended March 31, 2008
      primarily as a result of the decrease in LIBOR which is a reference index
      for the rates payable by these
loans.





Interest
Income − Other





Interest income-other decreased $1.0
million (75%) to $347,000 for the three months ended March 31, 2009 as compared
to $1.4 million for the three months ended March 31, 2008.  This
decrease 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.  For the three
months ended March 31, 2008, $997,000 of interest income was recognized on this
investment.  No such income was recognized since March 31, 2008 and
for the three months ended March 31, 2009.





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Interest
Income from Leasing
 
 Interest
income from leasing generated $2.2 million of interest income for the
three months ended March 31, 2009 as compared to $2.0 million for the three
months ended March 31, 2008, an increase of $243,000 (12%).  The
increase is the result of an increase of $4.6 million in the weighted average
balance of leases to $99.2 million for the three months ended March 31, 2009
from $94.6 million for the three months ended March 31, 2008 due to the addition
of a new pool of leases at the end of 2008 which were held for the entire three
months ended March 31, 2009.


Interest
Expense





The following table sets forth
information relating to our interest expense incurred for the periods presented
(in thousands, except percentages):




Three
      Months Ended
              March
      31, 2009
            
            
            Three
      Months Ended
              March
      31, 2008Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Expense
            
            
            Yield
            
            
            Balance
            
            
            Interest
      Expense
            
            
            Yield
            
            
            BalanceBank
      loans
            
            $
            5,719
            
            
            
            2.53
            %
            
            $
            906,000
            
            
            $
            10,886
            
            
            
            4.63
            %
            
            $
            906,000Commercial
      real estate loans
            
            
            2,625
            
            
            
            1.55
            %
            
            $
            667,521
            
            
            
            8,474
            
            
            
            4.53
            %
            
            $
            705,524CMBS-private
      placement
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            77
            
            
            
            5.57
            %
            
            $
            6,291Leasing
            
            
            830
            
            
            
            3.58
            %
            
            $
            92,521
            
            
            
            1,285
            
            
            
            6.57
            %
            
            $
            92,547General
            
            
            4,703
            
            
            
            4.90
            %
            
            $
            372,689
            
            
            
            2,426
            
            
            
            2.36
            %
            
            $
            392,465Total interest
      expense
            
            $
            13,877
            
            
            
            
            
            
            
            
            
            
            $
            23,148





Interest expense decreased $9.2 million
(40%) to $13.9 million for the three months ended March 31, 2009 from $23.1
million for the three months ended March 31, 2008.  We attribute this
decrease to the following:





Interest expense on bank loans was $5.7
million for the three months ended March 31, 2009 as compared to $10.9 million
for the three months ended March 31, 2008, a decrease of $5.2 million
(47%).  This decrease resulted primarily a decrease in the weighted
average rate on the debt related to bank loans which decreased to 2.53% for the
three months ended March 31, 2009 from 4.63% for the three months ended March
31, 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 $2.6 million for the three months ended March 31, 2009 as
compared to $8.5 million for the three months ended March 31, 2008, a decrease
of $5.9 million (69%).  This decrease resulted primarily from the
following:




·
            a
      decrease in the weighted average rate to 1.55% for the three months ended
      March 31, 2009 as compared to 4.53% for the three months ended March 31,
      2008 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 $38.0 million in the weighted average balance of debt to
      $667.5 million for the three months ended March 31, 2009 from $705.5
      million for the three months ended March 31, 2008 primarily related to the
      paying down of our repurchase
facilities.





Interest expense on CMBS-private
placement was $77,000 for the three months ended March 31,
2008.  There was no such interest expense for the three months ended
March 31, 2009.  The decrease is due to the elimination of advance
rates on our pledged CMBS-private placement collateral in November
2008.





Interest expense on leasing activities
was $830,000 for the three months ended March 31, 2009 as compared to $1.3
million for the three months ended March 31, 2008, a decrease of $455,000 (35%)
due primarily to a decrease in the weighted average rate to 3.58% for the three
months ended March 31, 2009 from 6.57% for the three months ended March 31, 2008
resulting from the decrease in the commercial paper index rate, which is a
reference index for the rate payable on this facility.





General
interest expense was $4.7 million for the three months ended March 31, 2009 as
compared to $2.4 million for the three months ended March 31, 2008 an increase
of $2.3 million (94%).  This increase resulted primarily from an increase
of $2.5 million on our interest rate derivatives that fix the rate we pay under
these agreements.  During the three months ended March 31, 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 $343,000 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.




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Non-Investment
Expenses





The following table sets forth
information relating to our expenses incurred for the periods presented (in
thousands):





Three
      Months Ended
              March
      31,2009
            
            
            2008Management
      fees – related party
            
            $
            1,001
            
            
            $
            1,738Equity
      compensation − related party
            
            
            88
            
            
            
            81Professional
      services
            
            
            964
            
            
            
            792Insurance
            
            
            172
            
            
            
            128General
      and administrative
            
            
            405
            
            
            
            355Income
      tax (benefit) expense
            
            
            (45
            )
            
            
            29Total non-investment
      expenses
            
            $
            2,585
            
            
            $
            3,123





Management fee–related party decreased
$737,000 (42%) to $1.0 million for the three months ended March 31, 2009 as
compared to $1.7 million for the three months ended March 31,
2008.  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 $169,000
(14%) to $1.0 million for the three months ended March 31, 2009 as compared
to $1.2 million for the three months ended March 31, 2008.  This
decrease was due to our decreased equity, a component in the formula by which
base management fees are calculated, primarily as a result of provisions for
loan and lease losses during 2008.  Incentive management fees were
$564,000 for the three months ended March 31, 2008.  There was no
incentive management fee for the three months ended March 31, 2009 as a result
of the realized losses we incurred on our loan and securities available-for-sale
portfolios during that period.





Professional services increased
$172,000 (22%) to $964,000 for the three months ended March 31, 2009 as
compared to $792,000 for the three months ended March 31, 2008.  This
increase was primarily due to the following:




·
            a
      $52,000 increase in legal fees primarily related to collections on our
      leasing portfolio; and




·
            an
      $87,000 increase in audit and tax fees due to the timing of when the
      services were performed and billed.





Income tax (benefit) expense decreased
$74,000 (255%) to a benefit of $45,000 for the three months ended March 31, 2009
from an expense of $29,000 for the three months ended March 31, 2008 as a result
of a decrease in net income on our taxable REIT subsidiary, Resource TRS,
Inc.  The decrease in net income from our TRS was a result of the
increase in swap expense of $637,000 partially offset by a decrease in interest
expense of $459,000 during the three months ended March 31, 2009 as compared to
the three months ended March 31, 2008.





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
              March
      31,2009
            
            
            2008Net
      realized and unrealized losses on investments
            
            $
            (14,345
            )
            
            $
            (1,995
            )Other
      income
            
            
            22
            
            
            
            33Provision
      for loan and lease losses
            
            
            (7,989
            )
            
            
            (1,137
            )Gain
      on the extinguishment of debt
            
            
            −
            
            
            
            1,750Total
            
            $
            (22,312
            )
            
            $
            (1,349
            )





Net
realized and unrealized losses on investments increased $12.3 million (619%) to
a loss of $14.3 million for the three months ended March 31, 2009 as compared to
a loss of $2.0 million for the three months ended March 31,
2008.  Realized losses during the three months ended March 31, 2009
consisted primarily of a $9.0 million fair value adjustment on our loans held
for sale and a $5.6 million other-than-temporary impairment loss on our other
ABS position.  This loss was partially offset by $213,000 of gains on
the sale of bank loan positions during the three months ended March 31,
2009.  Realized losses during the three months ended March 31, 2008
consisted primarily of a $2.0 million loss on the sale of one of our CMBS –
private placement positions.






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Our
provision for loan and lease losses increased $6.9 million (603%) to $8.0
million for the three months ended March 31, 2009 as compared to $1.1 million
for the three months ended March 31, 2008.  The provision for the
three months ended March 31, 2009 consisted of a $2.8 million provision for loan
loss on our bank loan portfolio, a $5.0 million provision on our commercial real
estate portfolio and a $160,000 provision on our direct financing leases and
notes.  The provision for the three months ended March 31, 2008
consisted of a $1.1 million provision for loan loss on our bank loan portfolio
and a $56,000 provision for loan loss on our commercial real estate
portfolio.  The principal reason for the increase in the provision for
loan and lease losses was our recognition of additional specific
reserves on seven defaulted bank loans and three defaulted CRE loans during
the three months ended March 31, 2009 compared to taking a specific reserve on
one defaulted bank loan during the three months ended March 31,
2008.





Gain on
the extinguishment of debt in the three months ended March 31, 2008 is due to
the buyback of a portion of the debt issued by RREF 2007-1 during the
period.  The notes, issued at par, were bought back as an investment
by us at a price of 65%.  The related deferred debt issuance costs
were immaterial.  There was no such transaction in the three months
ended March 31, 2009.





Income
Taxes





We do not pay federal income tax on
income we distribute to our stockholders, subject to our compliance with REIT
qualification requirements.  However, Resource TRS, our domestic TRS,
is taxed as a regular subchapter C corporation under the provisions of the
Internal Revenue Code.  For the three months ended March 31, 2009,
Resource TRS recognized a $45,000 benefit for income taxes.  For the
three months ended March 31, 2008, Resource TRS recognized a $29,000 provision
for income taxes.





Financial
Condition





Summary





Our total assets at March 31, 2009 were
$1.9 billion as compared to $1.9 billion at December 31, 2008.  As of
March 31, 2009, we held $10.7 million of cash and cash equivalents.






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 40
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Investment
Portfolio





The table below summarizes the
amortized cost and net carrying amount of our investment portfolio as of March
31, 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
                priceMarch
      31, 2009Floating
      rateCMBS-private
      placement
            
            $
            32,063
            
            
            
            99.99%
            
            
            $
            12,142
            
            
            
            37.87%
            
            
            $
            (19,921
            )
            
            
            -62.12%Other
      ABS
            
            
            45
            
            
            
            100.00%
            
            
            
            45
            
            
            
            100.00%
            
            
            
            −
            
            
            
            −%B
      notes (1)
            
            
            26,500
            
            
            
            100.00%
            
            
            
            26,399
            
            
            
            99.62%
            
            
            
            (101
            )
            
            
            -0.38%Mezzanine
      loans (1)
            
            
            129,396
            
            
            
            100.00%
            
            
            
            129,007
            
            
            
            99.70%
            
            
            
            (389
            )
            
            
            -0.30%Whole
      loans (1)
            
            
            424,645
            
            
            
            99.80%
            
            
            
            418,371
            
            
            
            98.32%
            
            
            
            (6,274
            )
            
            
            -1.48%Bank
      loans (2)
            
            
            923,441
            
            
            
            97.58%
            
            
            
            648,566
            
            
            
            68.54%
            
            
            
            (274,875
            )
            
            
            -29.04%Bank
      loans held for sale (3)
            
            
            15,968
            
            
            
            100.00%
            
            
            
            15,968
            
            
            
            100.00%
            
            
            
            −
            
            
            
            −%Total floating
    rate
            
            $
            1,552,058
            
            
            
            98.49%
            
            
            $
            1,250,498
            
            
            
            79.36%
            
            
            $
            (301,560
            )
            
            
            -19.13%Fixed
      rateCMBS
      – private placement
            
            $
            38,505
            
            
            
            91.52%
            
            
            $
            8,139
            
            
            
            19.34%
            
            
            $
            (30,366
            )
            
            
            -72.18%B
      notes (1)
            
            
            55,387
            
            
            
            100.10%
            
            
            
            55,221
            
            
            
            99.80%
            
            
            
            (166
            )
            
            
            -0.30%Mezzanine
      loans (1)
            
            
            81,293
            
            
            
            94.74%
            
            
            
            68,398
            
            
            
            79.71%
            
            
            
            (12,895
            )
            
            
            -15.03%Whole
      loans (1)
            
            
            88,472
            
            
            
            99.61%
            
            
            
            88,210
            
            
            
            99.31%
            
            
            
            (262
            )
            
            
            -0.30%Equipment
      leases and loans (4)
            
            
            97,096
            
            
            
            99.27%
            
            
            
            96,546
            
            
            
            98.71%
            
            
            
            (550
            )
            
            
            -0.56%Total fixed
rate
            
            $
            360,753
            
            
            
            97.54%
            
            
            $
            316,514
            
            
            
            85.58%
            
            
            $
            (44,239
            )
            
            
            -11.96%Grand total
            
            $
            1,912,811
            
            
            
            98.31%
            
            
            $
            1,567,012
            
            
            
            80.54%
            
            
            $
            (345,799
            )
            
            
            -17.77%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 $20.1 million at
      March 31, 2009, allocated as follows:  B notes ($0.3 million),
      mezzanine loans ($13.3 million) and whole loans ($6.5
      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 $896.7 million at March 31, 2009.  Amount disclosed
      represents net realizable value at March 31, 2009, which includes $26.8
      million allowance for loan losses at March 31, 2009.  The bank
      loan portfolio is carried at amortized cost less allowance for loan loss
      and 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 $550,000 and $450,000 allowance for lease
      losses at March 31, 2009 and December 31, 2008,
    respectively.




(Back to Index)
 41
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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;
  ·
              our
      intent and ability to hold the security for a period of time sufficient to
      allow for any anticipated recovery in market
  value;
  ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
and
  ·
              underlying
      credit fundamentals of the collateral backing the
    securities.
 
 At March 31, 2009 and December 31,
2008, we held $20.3 million and $29.2 million, respectively, net of unrealized
losses of $50.3 million and $41.2 million at March 31, 2009 and December 31,
2008, respectively, of Commercial MBS 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 March 31, 2009 and December 31, 2008 (in thousands,
except percentages).  Dollar price is computed by dividing amortized
cost by par amount.





March
      31, 2009
            
            
            December
      31, 2008Amortized
      Cost
            
            
            Dollar
      Price
            
            
            Amortized
      Cost
            
            
            Dollar
      PriceMoody’s
      Ratings Category:Baa1
      through Baa3
            
            
            43,348
            
            
            
            92.89%
            
            
            
            63,459
            
            
            
            94.52%Ba1
      through Ba3
            
            
            2,870
            
            
            
            100.00%
            
            
            
            −
            
            
            
            −%B1
      through B3
            
            
            10,600
            
            
            
            100.00%
            
            
            
            6,999
            
            
            
            99.99%Caa1
      through Caa3
            
            
            13,750
            
            
            
            98.21%
            
            
            
            −
            
            
            
            −%Total
            
            $
            70,568
            
            
            
            95.19%
            
            
            $
            70,458
            
            
            
            95.04%S&P
      Ratings Category:BBB+
      through BBB-
            
            
            43,993
            
            
            
            93.76%
            
            
            
            51,378
            
            
            
            94.24%BB+
      through BB-
            
            
            24,696
            
            
            
            97.93%
            
            
            
            19,080
            
            
            
            97.26%CCC+
      through CCC-
            
            
            1,879
            
            
            
            93.97%
            
            
            
            −
            
            
            
            −%Total
            
            $
            70,568
            
            
            
            95.19%
            
            
            $
            70,458
            
            
            
            95.04%Weighted
      average rating factor
            
            
            3,226
            
            
            
            
            
            
            
            830





Other
Asset-Backed Securities





At March 31,
2009 and December 31, 2008, we held $45,000 and $45,000, respectively, of other
ABS at fair value, which is based on 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,
net of unrealized gains of $0 and $0, respectively, and losses of $0 and $5.6
million, respectively.  These securities are classified as
available-for-sale and, as a result, are carried at their fair
value.
 (Back to Index)
 42
 (Back to Index)


For the
three months ended March 31, 2009, we recognized $5.6 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 March 31, 2009.  For the three
months ended March 31, 2008, we recognized no other-than-temporary
impairment.





The
following table summarizes our other ABS as of March 31, 2009 and December 31,
2008 (in thousands, except percentages).  Dollar price is computed by
dividing amortized cost by par amount.


March
      31, 2009
                
                
                December
      31, 2008Amortized
      cost
                
                
                Dollar
      price
                
                
                Amortized
      cost
                
                
                Dollar
      priceMoody’s
      ratings category:B1
      through B3
                
                $
                −
                
                
                
                −%
                
                
                $
                5,665
                
                
                
                94.42
                %Caa1
      through Caa3
                
                
                45
                
                
                
                100.00%
                
                
                
                −
                
                
                
                −
                %Total
                
                $
                45
                
                
                
                100.00%
                
                
                $
                5,665
                
                
                
                94.42
                %S&P
      ratings category:B+
      through B-
                
                $
                −
                
                
                
                −%
                
                
                $
                5,665
                
                
                
                94.42
                %CCC+
      through CCC-
                
                
                45
                
                
                
                100.00%
                
                
                
                −
                
                
                
                −
                %Total
                
                $
                45
                
                
                
                100.00%
                
                
                $
                5,665
                
                
                
                94.42
                %Weighted
      average rating factor
                
                
                8,070
                
                
                
                
                
                
                
                3,490




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 43
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Commercial
Real Estate Loans





The following table is a summary of
the loans in our commercial real estate loan portfolio at the dates indicated
(in thousands):





Description
              
              Quantity
              
              
              Amortized
      Cost
              
              Contracted
                Interest
      Rates
              
              Range
      of
                  Maturity
      DatesMarch 31,
      2009:Whole
      loans, floating rate (1)
              
              
              29
              
              
              $
              424,645
              
              LIBOR
      plus 1.50% to
                LIBOR
      plus 4.40%
              
              May
      2009 to
                January
      2012Whole
      loans, fixed rate  (1)
              
              
              7
              
              
              
              88,472
              
              6.98%
      to 10.00%
              
              May
      2009 to
                August
      2012B
      notes, floating rate
              
              
              3
              
              
              
              26,500
              
              LIBOR
      plus 2.50% to
                LIBOR
      plus 3.01%
              
              July
      2009 to
                October
      2009B
      notes, fixed rate
              
              
              3
              
              
              
              55,387
              
              7.00%
      to 8.66%
              
              July
      2011 to
                July
      2016Mezzanine
      loans, floating rate
              
              
              10
              
              
              
              129,396
              
              LIBOR
      plus 2.15% to
                LIBOR
      plus 3.45%
              
              May
      2009 to
                February
      2010Mezzanine
      loans, fixed rate
              
              
              7
              
              
              
              81,293
              
              5.78%
      to 11.00%
              
              November
      2009 to
                September
      2016Total (2)
              
              
              59
              
              
              $
              805,693December 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 $23.0 million and $26.6 million in unfunded loan commitments as
      of March 31, 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 $20.1 million and
      $15.1 million recorded as of March 31, 2009 and December 31, 2008,
      respectively.






(Back to Index)
 44
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We have one mezzanine loan, with a
balance of $11.6 million secured by 100% of the equity interests in two enclosed
regional shopping malls which went into default in February
2008.  During early 2008, we began working with the borrower and
special servicer toward a resolution of the default.  However, during
the quarter ended June 30, 2008, the borrower defaulted on the more senior first
mortgage position.  This event triggered the reevaluation of our
provision for loan loss and we determined that, during the three months ended
June 30, 2008, a full reserve of the remaining balance of $11.6 million was
necessary.  Any future recovery from this loan will be adjusted
through our allowance for loan loss.





Bank
Loans




At March 31, 2009, we held a total of $664.5 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 $88.7
million over our holdings at December 31, 2008.  The increase in total
bank loans was principally due to purchases of bank loans from capital recycled
as loan payoffs and paydowns occurred in three CDOs.  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.  See
“-Variable Interest Entities,” entities.  As a result, we consolidated
Apidos CDO I, Apidos CDO III and Apidos Cinco CDO as of March 31,
2009.




The following table summarizes our bank
loan investments as of March 31, 2009 and December 31, 2008 (in thousands,
except percentages).  Dollar price is computed by dividing amortized
cost by par amount.





March
      31, 2009
            
            
            December
      31, 2008Amortized
      cost
            
            
            Dollar
      price
            
            
            Amortized
      cost
            
            
            Dollar
      priceMoody’s
      ratings category:Aa1
      through Aa3
            
            
            $
            1,146
            
            
            
            76.40%
            
            
            $
            1,136
            
            
            
            75.72%A1
      through A3
            
            
            
            −
            
            
            
            −%
            
            
            
            6,351
            
            
            
            97.71%Baa1
      through Baa3
            
            
            
            31,638
            
            
            
            96.66%
            
            
            
            19,782
            
            
            
            97.70%Ba1
      through Ba3
            
            
            
            437,526
            
            
            
            98.45%
            
            
            
            471,781
            
            
            
            99.19%B1
      through B3
            
            
            
            387,894
            
            
            
            96.60%
            
            
            
            397,157
            
            
            
            99.10%Caa1
      through Caa3
            
            
            
            77,477
            
            
            
            99.48%
            
            
            
            34,617
            
            
            
            100.09%No
      rating provided
            
            
            
            3,728
            
            
            
            88.66%
            
            
            
            6,683
            
            
            
            99.00%Total
            
            
            $
            939,409
            
            
            
            97.62%
            
            
            $
            937,507
            
            
            
            99.11%S&P
      ratings category:BBB+
      through BBB-
            
            
            $
            61,090
            
            
            
            97.78%
            
            
            $
            41,495
            
            
            
            99.44%BB+
      through BB-
            
            
            
            424,565
            
            
            
            98.20%
            
            
            
            473,354
            
            
            
            99.03%B+
      through B-
            
            
            
            324,749
            
            
            
            96.91%
            
            
            
            317,601
            
            
            
            99.46%CCC+
      through CCC-
            
            
            
            36,363
            
            
            
            96.75%
            
            
            
            27,961
            
            
            
            100.02%D
            
            
            
            
            15,520
            
            
            
            100.03%
            
            
            
            1,480
            
            
            
            100.00%No
      rating provided
            
            
            
            77,122
            
            
            
            97.30%
            
            
            
            75,616
            
            
            
            97.57%Total
            
            
            $
            939,409
            
            
            
            97.62%
            
            
            $
            937,507
            
            
            
            99.11%Weighted
      average rating factor
            
            
            
            2,241
            
            
            
            
            
            
            
            1,946





Equipment
Leases and Notes





Investments in direct financing leases
and notes as of March 31, 2009 and December 31, 2008 were as follows (in
thousands):





March
      31,
            
            
            December
      31,2009
            
            
            2008Direct
      financing leases, net of unearned income
            
            $
            26,227
            
            
            $
            29,423Operating
      leases
            
            
            309
            
            
            
            337Notes
      receivable
            
            
            70,560
            
            
            
            74,705Sub total
            
            
            97,096
            
            
            
            104,465Allowance
      for possible losses
            
            
            (550
            )
            
            
            (450
            )Total
            
            $
            96,546
            
            
            $
            104,015






(Back to Index)
 45
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Interest
Receivable
 
 At March 31, 2009, we had accrued
interest receivable of $7.0 million, which consisted of $7.0 million of interest
on our securities loans and equipment leases and notes, and $26,000 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 $1.4 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 March 31, 2009 and December 31,
2008, we had principal paydown receivables of $44,000 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 March 31, 2009 of $4.8
million consisted primarily of $2.5 million of loan origination costs associated
with our revolving credit facility, commercial real estate loan portfolio and
secured term facility, $853,000 of prepaid director’s and officer’s liability
insurance, $697,000 of prepaid expenses, $705,000 of lease payment receivables
and $23,000 of other receivables. 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.




Hedging
Instruments





Our hedges at March 31, 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 March 31, 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
            
            $
            (1,578
            )Interest
      rate swap
            1
      month LIBOR
            
            
            12,965
            
            
            
            4.63%
            
            12/04/06
            
            07/01/11
            
            
            (1,013
            )Interest
      rate swap
            1
      month LIBOR
            
            
            28,000
            
            
            
            5.10%
            
            05/24/07
            
            06/05/10
            
            
            (1,436
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,880
            
            
            
            5.68%
            
            07/13/07
            
            03/12/17
            
            
            (427
            )Interest
      rate swap
            1
      month LIBOR
            
            
            15,235
            
            
            
            5.34%
            
            06/08/07
            
            02/25/10
            
            
            (643
            )Interest
      rate swap
            1
      month LIBOR
            
            
            10,435
            
            
            
            5.32%
            
            06/08/07
            
            05/25/09
            
            
            (77
            )Interest
      rate swap
            1
      month LIBOR
            
            
            12,150
            
            
            
            5.44%
            
            06/08/07
            
            03/25/12
            
            
            (1,446
            )Interest
      rate swap
            1
      month LIBOR
            
            
            7,000
            
            
            
            5.34%
            
            06/08/07
            
            02/25/10
            
            
            (295
            )Interest
      rate swap
            1
      month LIBOR
            
            
            44,711
            
            
            
            4.13%
            
            01/10/08
            
            05/25/16
            
            
            (2,305
            )Interest
      rate swap
            1
      month LIBOR
            
            
            82,500
            
            
            
            5.58%
            
            06/08/07
            
            04/25/17
            
            
            (7,034
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,726
            
            
            
            5.65%
            
            06/28/07
            
            07/15/17
            
            
            (130
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,681
            
            
            
            5.72%
            
            07/09/07
            
            10/01/16
            
            
            (145
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,850
            
            
            
            5.65%
            
            07/19/07
            
            07/15/17
            
            
            (291
            )Interest
      rate swap
            1
      month LIBOR
            
            
            4,023
            
            
            
            5.41%
            
            08/07/07
            
            07/25/17
            
            
            (281
            )Interest
      rate swap
            1
      month LIBOR
            
            
            15,889
            
            
            
            5.32%
            
            03/30/06
            
            09/22/15
            
            
            (1,314
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,803
            
            
            
            5.31%
            
            03/30/06
            
            11/23/09
            
            
            (45
            )Interest
      rate swap
            1
      month LIBOR
            
            
            4,148
            
            
            
            5.41%
            
            05/26/06
            
            08/22/12
            
            
            (188
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,010
            
            
            
            5.43%
            
            05/26/06
            
            04/22/13
            
            
            (231
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,857
            
            
            
            5.72%
            
            06/28/06
            
            06/22/16
            
            
            (297
            )Interest
      rate swap
            1
      month LIBOR
            
            
            672
            
            
            
            5.52%
            
            07/27/06
            
            07/22/11
            
            
            (29
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,569
            
            
            
            5.54%
            
            07/27/06
            
            09/23/13
            
            
            (227
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,973
            
            
            
            5.25%
            
            08/18/06
            
            07/22/16
            
            
            (614
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,179
            
            
            
            5.06%
            
            09/28/06
            
            08/22/16
            
            
            (241
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,012
            
            
            
            4.97%
            
            12/22/06
            
            12/23/13
            
            
            (165
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,238
            
            
            
            5.22%
            
            01/19/07
            
            11/22/16
            
            
            (208
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,373
            
            
            
            5.05%
            
            04/23/07
            
            09/22/11
            
            
            (59
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,822
            
            
            
            5.42%
            
            07/25/07
            
            04/24/17
            
            
            (237
            )Interest
      rate swap
            1
      month LIBOR
            
            
            7,706
            
            
            
            4.53%
            
            11/29/07
            
            10/23/17
            
            
            (595
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,720
            
            
            
            4.40%
            
            12/26/07
            
            11/22/17
            
            
            (423
            )Interest
      rate swap
            1
      month LIBOR
            
            
            4,309
            
            
            
            3.35%
            
            01/23/08
            
            12/22/14
            
            
            (166
            )Interest
      rate swap
            1
      month LIBOR
            
            
            12,473
            
            
            
            3.96%
            
            09/30/08
            
            09/22/15
            
            
            (689
            )Total
            
            
            $
            319,659
            
            
            
            5.07%
            
            
            
            
            
            $
            (22,829
            )


In addition, we also had an interest
rate cap agreement with a notional of $14.3 million outstanding whereby it
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 the consolidated
statement of operations.
 (Back to Index)
 46
 (Back to Index)


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 March 31, 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 7
of the Noted to Consolidated Financial Statements contained in Part I, Item 1 of
this report.  A covenant in our guarantee required us to maintain a
net worth of $200.0 million.  Under an amendment to the facility, that
requirement was reduced to $165.0 million for the period December 31, 2008
through May 12, 2009, after which it would revert to $200.0
million.  As provided in that amendment, we are currently in
negotiations with Natixis to permanently reduce the amount of net worth we are
required to maintain and to provide for the term repayment of the
facility.  If we are unable to complete these negotiations with
Natixis before reporting compliance with the minimum net worth covenant for our
next reporting period, which is effective for the three-month period ended June
30, 2009, we would likely be in default of the minimum net worth
covenant.  Such an event of default would permit Natixis to demand
repayment of the $16.0 million currently outstanding under the facility, which
likely would require us to liquidate some or all of the assets pledged as
collateral.  The prices we receive upon liquidation of any assets hold
as collateral could be lower than their carrying value, which could result in
recognition of losses by us.  We do, however, expect to complete our
negotiations with Natixis and maintain compliance with the minimum net worth
covenant before reporting for the June 30, 2009 period.




Collaterized
Debt Obligations





As of
March 31, 2009, we had executed six CDO transactions as follows:




·
            In
      June 2007, we closed RREF CDO 2007-1, a $500.0 million CDO transaction
      that provided financing for commercial real estate loans.  The
      investments held by RREF CDO 2007-1 collateralized $390.0 million of
      senior notes issued by the CDO vehicle, of which RCC Real Estate, Inc., or
      RCC Real Estate, a subsidiary of ours, purchased 100% of the class H
      senior notes, class K senior notes, class L senior notes and class M
      senior notes for $68.0 million and $5.0 million of the Class J senior
      notes purchased in February 2008.  In addition, RREF 2007-1 CDO
      Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million
      equity interest representing 100% of the outstanding preference
      shares.  At March 31, 2009, the notes issued to outside
      investors had a weighted average borrowing rate of
  1.20%.




·
            In
      May 2007, we closed Apidos Cinco CDO, a $350.0 million CDO transaction
      that provided financing for bank loans.  The investments held by
      Apidos Cinco CDO collateralized $322.0 million of senior notes issued by
      the CDO vehicle, of which RCC Commercial Inc., or RCC Commercial, a
      subsidiary of ours, purchased a $28.0 million equity interest representing
      100% of the outstanding preference shares.  At March 31, 2009,
      the notes issued to outside investors had a weighted average borrowing
      rate of 1.74%.




·
            In
      August 2006, we closed RREF CDO 2006-1, a $345.0 million CDO transaction
      that provided financing for commercial real estate loans.  The
      investments held by RREF CDO 2006-1 collateralized $308.7 million of
      senior notes issued by the CDO vehicle, of which RCC Real Estate purchased
      100% of the class J senior notes and class K senior notes for $43.1
      million.  At March 31, 2009, the notes issued to outside
      investors had a weighted average borrowing rate of
  1.43%.




·
            In
      May 2006, we closed Apidos CDO III, a $285.5 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO III collateralized $262.5 million of senior notes issued by the
      CDO vehicle, of which RCC Commercial purchased $23.0 million equity
      interest representing 100% of the outstanding preference
      shares.  At March 31, 2009, the notes issued to outside
      investors had a weighted average borrowing rate of
  2.08%.




·
            In
      August 2005, we closed Apidos CDO I, a $350.0 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO I collateralize $321.5 million of senior notes issued by the
      CDO vehicle, of which RCC Commercial purchased $28.5 million equity
      interest representing 100% of the outstanding preference
      shares.  At March 31, 2009, the notes issued to outside
      investors had a weighted average borrowing rate of
  1.73%.




(Back to Index)
 47
 (Back to Index)




·
            In
      July 2005, we closed Ischus CDO II, a $403.0 million CDO transaction that
      provided financing for MBS and other asset-backed.  The
      investments held by Ischus CDO II collateralize $376.0 million of senior
      notes issued by the CDO vehicle, of which RCC Commercial purchased $28.5
      million equity interest representing 100% of the outstanding preference
      shares.  At November 13, 2007, we sold 10% of our equity
      interest and were no longer deemed to be the primary
      beneficiary.  We no longer had any interest in Ischus CDO II at
      March 31, 2009.





Trust
Preferred Securities





In May and September 2006, we formed
Resource Capital Trust I and RCC Trust II, respectively, for the sole purpose of
issuing and selling trust preferred securities.  In accordance with
FASB, Interpretation No. 46-R, or FIN 46-R, Resource Capital Trust I and RCC
Trust II are not consolidated into our consolidated financial statements because
we are not deemed to be the primary beneficiary of either trust.  We
own 100% of the common shares of each trust, each of which issued $25.0 million
of preferred shares to unaffiliated investors.  Our rights as the
holder of the common shares of each trust are subordinate to the rights of the
holders of preferred shares only in the event of a default; otherwise, our
economic and voting rights are pari passu with the preferred
shareholders.  We record each of our investments in the trusts’ common
shares of $774,000 as an investment in unconsolidated entities and record
dividend income upon declaration by each trust.





In connection with the issuance and
sale of the trust preferred securities, we issued $25.8 million principal amount
of junior subordinated debentures to each of Resource Capital Trust I and RCC
Trust II.  The junior subordinated debentures debt issuance costs are
deferred in other assets in the consolidated balance sheets.  We
record interest expense on the junior subordinated debentures and amortization
of debt issuance costs in our consolidated statements of
operations.  At March 31, 2009, the junior subordinated debentures had
a weighted average borrowing rate of 5.13%.




Term
Facilities





In March 2006, Resource Capital
Funding, LLC, a special purpose entity whose sole member is Resource TRS, Inc.,
our wholly-owned subsidiary, entered into a Receivables Loan and Security
Agreement as the borrower among LEAF Financial Corporation as the servicer,
Black Forest Funding Corporation as the lender, Bayerische Hypo-Und Vereinsbank
AG, New York Branch as the agent, U.S. Bank National Association, as the
custodian and the agent’s bank, and Lyon Financial Services, Inc. (d/b/a U.S.
Bank Portfolio Services), as the backup servicer.  This agreement is a
$100.0 million secured term credit facility used to finance the purchase of
equipment leases and notes.  At March 31, 2009 and December 31, 2008,
there were $88.7 million and $95.7 million, respectively, outstanding under the
facility.





The facility bears interest at one of
two rates, determined by asset class.




·
            Pool
      A—one-month LIBOR plus 1.10%; or




·
            Pool
      B—one-month LIBOR plus 0.80%.





The weighted average interest rate was
2.86% and 4.14% at March 31, 2009 and December 31, 2008,
respectively.





Upon a default, the program will
terminate and Resource Capital Funding must cease purchasing receivables from
Resource TRS and the lender may declare all loans made and any yield or fees due
thereon to be immediately due and payable.





Stockholders’
Equity


Stockholders’ equity at March 31, 2009
was $169.5 million and included $50.3 million of net unrealized losses on our
available-for-sale portfolio, and $25.0 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 three months ended March 31, 2009 was principally due to the decrease
in the market value of our available-for-sale securities and on 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 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)
 48
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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 EndedMarch
      31,2009
            
            
            2008Net
      income
            
            $
            (12,152
            )
            
            $
            9,363Adjustments:Share-based compensation to
      related parties
            
            
            17
            
            
            
            (147
            )Capital loss carryover
      (utilization)/losses from the sale of securities
            
            
            5,620
            
            
            
            2,000Provisions for loan and lease
      losses unrealized
            
            
            4,978
            
            
            
            56Net book to tax adjustments for
      the inclusion of our taxable foreign
              REIT
      subsidiaries
            
            
            7,590
            
            
            
            775Other net book to tax
      adjustments
            
            
            45
            
            
            
            8Estimated
      REIT taxable income
            
            $
            6,098
            
            
            $
            12,055Amounts
      per share – diluted
            
            $
            0.25
            
            
            $
            0.48




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 three months ended March 31, 2009:




·
            $7.0
      million of commercial real estate loans paid
  off;




·
            $10.5
      million of commercial real estate loans principal
    prepayments;




·
            $9.7
      million of bank loan principal
prepayments;




·
            $8.4
      million of bank loan sale proceeds;
and




·
            $7.6
      million of leasing repayments.





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 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)
 49
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At April 30,
2009, after disbursing the first quarter 2009 dividend, there were three primary
sources for RCC’s liquidity:
  ·
              unrestricted
      cash and cash equivalents of $7.6 million and restricted cash of $10.0
      million comprised of $6.6 million in margin call accounts and $3.4 million
      related to the leasing portfolio;
  ·
              capital
      available for reinvestment in its five collateralized debt obligation
      (“CDO”) entities of $41.9 million, of which $6.8 million is designated to
      finance future funding commitments on CRE loans;
  and
  ·
              while
      we have $84.0 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 March 31, 2009 and
December 31, 2008, our leverage ratio was 10.0 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 and 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 March 23, 2009, we 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.





Our 2009
dividends will be determined by our board who 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 its 2008 taxable year,
but we may do so for distributions with respect to 2009.


(Back to Index)
 50
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Contractual
Obligations and Commitments





The table below summarizes our
contractual obligations as of March 31, 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)
            
            $
            16,052
            
            
            $
            16,052
            
            
            $
            −
            
            
            $
            −
            
            
            $
            −CDOs
            
            
            1,536,260
            
            
            
            −
            
            
            
            
            
            
            
            −
            
            
            
            1,536,260
            (2)Secured
      term facility
            
            
            88,711
            
            
            
            −
            
            
            
            88,711
            (3)
            
            
            −
            
            
            
            −Unsecured
      junior subordinated debentures
            
            
            51,548
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            51,548
            (4)Base
      management fees (5)
            
            
            4,055
            
            
            
            4,055
            
            
            
            −
            
            
            
            −
            
            
            
            −Total
            
            $
            1,696,626
            
            
            $
            20,107
            
            
            $
            88,711
            
            
            $
            −
            
            
            $
            1,587,808





(1)
            Includes
      accrued interest of $16,000.




(2)
            Contractual
      commitment does 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.  The non-call date represents the
      earliest period under which the CDO assets can be sold, resulting in
      repayment of the CDO notes.




(3)
            Contractual
      commitment does not include $3.2 million of interest expense payable
      through the facility maturity date of March 2010 on our secured term
      facility with Bayerische Hypo- und Vereinsbank
  AG.




(4)
            Contractual
      commitment does 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 trust preferred securities
      issued to Resource Capital Trust I and RCC Trust II in May 2006 and
      September 2006,
respectively..




(5)
            Calculated
      only for the next 12 months based on our current equity, as defined in our
      management agreement.




At March 31, 2009, we had 31 interest
rate swap contracts with a notional value of $319.7 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 March 31, 2009, the
average fixed pay rate of our interest rate hedges was 5.07% and our receive
rate was one-month LIBOR, or 0.52%.  In addition, we also had an
interest rate cap agreement with a notional amount 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.





Off-Balance
Sheet Arrangements





As of March 31, 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 March 31, 2009, we had
not guaranteed any obligations of unconsolidated entities, entered into any
commitment or had any intent to provide additional funding to any such
entities.


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ITEM
3.               QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As of March 31, 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 March 31, 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
pointsor rise 100 basis points (dollars in thousands):




March
      31, 2009Interest
      rates fall 100
                    basis
      points
                
                
                Unchanged
                
                
                Interest
      rates rise 100
                    basis
      pointsCMBS
      – private placement (1)Fair value
                
                $
                8,402
                
                
                $
                8,139
                
                
                $
                7,891Change in fair
    value
                
                $
                263
                
                
                $
                −
                
                
                $
                (248
                )Change as a percent of fair
      value
                
                
                3.23%
                
                
                
                −
                
                
                
                3.05%Repurchase
      and warehouse agreements (2)Fair value
                
                $
                104,747
                
                
                $
                104,747
                
                
                $
                104,747Change in fair
    value
                
                $
                −
                
                
                $
                −
                
                
                $
                −Change as a percent of fair
      value
                
                
                −
                
                
                
                −
                
                
                
                −Hedging
      instrumentsFair value
                
                $
                (49,720
                )
                
                $
                (22,829
                )
                
                $
                (24,301
                )Change in fair
    value
                
                $
                (26,891
                )
                
                $
                −
                
                
                $
                (1,472
                )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.


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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, in the event of changes in actual interest
rates, the changes in the fair value of our assets 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 have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.


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PART
II.  OTHER INFORMATION





ITEM
2.                     UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





(a)
            In
      accordance with the provisions of the management agreement, on January 31,
      2009, we issued 26,097 shares of common stock to the
      Manager.  These shares represented 50% of the Manager’s
      quarterly incentive compensation fee that accrued for the three months
      ended December 31, 2008.  The issuance of these shares was
      exempt from the registration requirements of the Securities Act pursuant
      to Section 4(2) thereof.





(c)
            The
      following table provides information about purchases by us during the
      three months ended March 31, 2009 of equity securities that are registered
      by us pursuant to Section 12 of the Securities Exchange Act of
      1934.





Issuer
Purchases of Equity Securities





Period
            
            Total
      Number
                of
      Shares Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
      (2)
            
            
            Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet be Purchased
      Under the Plans or Programs (1)January
      1 to January 31, 2009
            
            
            400,000
            
            
            $
            4.00
            
            
            
            400,000
            
            
            
            1,837,000February
      1 to February 28, 2009
            
            
            300,000
            
            
            $
            4.00
            
            
            
            300,000
            
            
            
            1,537,000March
      1 to March 31,
      2009
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            1,537,000Total
            
            
            700,000
            
            
            
            
            
            
            
            700,000





(1)
            On
      July 26, 2007, the Board of Directors approved a share repurchase program
      under which we may repurchase our common stock up to an aggregate of 2.5
      million shares, or approximately 10% of our outstanding common
      shares.  Repurchases may be made from time to time through open
      market purchases or privately negotiated transactions at the discretion of
      the Company and in accordance with the rules of the Securities and
      Exchange Commission, as applicable.  The amount and timing of
      any repurchases will depend on market
  conditions.




(2)
            Through
      March 31, 2009, we have repurchased an aggregate of 963,000 shares at a
      total cost of approximately $5.6 million pursuant to our stock repurchase
      program, at an average cost, including commission, of $5.79 per
      share.




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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, Inc. and RCC Real Estate SPE 3, LLC, dated as of March 13,
      2009. (5)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.





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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:
      May 8, 2009
            By:           /s/ Jonathan Z.
      CohenJonathan Z.
    CohenChief Executive Officer and
      President








Date:
      May 8, 2009
            By:           /s/ David J.
      BryantDavid J.
  BryantChief Financial Officer and
      Chief Accounting Officer