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 September 30, 2008




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 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 November 6,
2008 was 25,314,420 shares..




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


INDEXTO QUARTERLY REPORT


ON
FORM 10-Q








PAGEPART
      I
            FINANCIAL
      INFORMATIONItem 1.
            Financial
      StatementsConsolidated Balance Sheets – September 30, 2008 (unaudited)
      and December 31, 2007
            3Consolidated
      Statements of OperationsThree
      and Nine Months Ended September 30, 2008 and 2007
      (unaudited)
            4Consolidated
      Statement of Changes in Stockholders’ EquityNine
      Months Ended September 30, 2008 (unaudited)
            5Consolidated
      Statements of Cash FlowsNine
      Months Ended September 30, 2008 and 2007 (unaudited)
            6 − 7Notes to Consolidated Financial Statements – September 30,
      2008 (unaudited)
            8 – 31Item
      2.
            Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
            32 − 55Item
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            56 − 57Item
      4.
            Controls and Procedures
            57PART
      II
            OTHER
      INFORMATIONItem
      6.
            Exhibits
            58SIGNATURES
            59





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PART
I.                      FINANCIAL
INFORMATION




Item
1.                 Financial
Statements





RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(in
thousands, except share data)





September
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)ASSETSCash and cash
      equivalents
            
            $
            12,110
            
            
            $
            6,029Restricted cash
            
            
            74,607
            
            
            
            119,482Investment securities
      available-for-sale, pledged as collateral, at fair value
            
            
            46,221
            
            
            
            65,464Loans, pledged as collateral and
      net of allowances of $30.0 million and $5.9 million
            
            
            1,743,208
            
            
            
            1,766,639Direct financing leases and
      notes, pledged as collateral and net of allowances of
              $0.7 million and $0.3 million
      and net of unearned income
            
            
            105,466
            
            
            
            95,030Investments in unconsolidated
      entities
            
            
            1,548
            
            
            
            1,805Interest
    receivable
            
            
            8,635
            
            
            
            11,965Principal paydown
      receivables
            
            
            5,920
            
            
            
            836Other assets
            
            
            5,230
            
            
            
            4,898Total assets
            
            $
            2,002,945
            
            
            $
            2,072,148LIABILITIESBorrowings
            
            $
            1,732,384
            
            
            $
            1,760,969Distribution
    payable
            
            
            9,928
            
            
            
            10,366Accrued interest
      expense
            
            
            4,640
            
            
            
            7,209Derivatives, at fair
      value
            
            
            12,885
            
            
            
            18,040Accounts payable and other
      liabilities
            
            
            4,007
            
            
            
            3,958Total
    liabilities
            
            
            1,763,844
            
            
            
            1,800,542STOCKHOLDERS’
      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;
              25,296,164 and 25,103,532
      shares issued and outstanding
              (including 475,230 and 581,493
      unvested restricted shares)
            
            
            25
            
            
            
            25Additional paid-in
      capital
            
            
            356,104
            
            
            
            355,205Accumulated other comprehensive
      loss
            
            
            (45,121
            )
            
            
            (38,323
            )Distributions in excess of
      earnings
            
            
            (71,907
            )
            
            
            (45,301
            )Total stockholders’
      equity
            
            
            239,101
            
            
            
            271,606TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            2,002,945
            
            
            $
            2,072,148




The
accompanying notes are an integral part of these statements




(Back to Index)
 3
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007REVENUESLoans
            
            $
            28,903
            
            
            $
            37,398
            
            
            $
            90,028
            
            
            $
            100,786Securities
            
            
            1,062
            
            
            
            8,768
            
            
            
            3,401
            
            
            
            24,072Leases
            
            
            1,995
            
            
            
            1,856
            
            
            
            5,946
            
            
            
            5,667Interest income −
      other
            
            
            352
            
            
            
            769
            
            
            
            2,178
            
            
            
            2,080Interest income
            
            
            32,312
            
            
            
            48,791
            
            
            
            101,553
            
            
            
            132,605Interest expense
            
            
            18,664
            
            
            
            34,266
            
            
            
            60,736
            
            
            
            91,255Net interest
    income
            
            
            13,648
            
            
            
            14,525
            
            
            
            40,817
            
            
            
            41,350OPERATING
      EXPENSESManagement fees − related
      party
            
            
            1,915
            
            
            
            1,298
            
            
            
            4,824
            
            
            
            5,357Equity compensation − related
      party
            
            
            157
            
            
            
            94
            
            
            
            779
            
            
            
            717Professional
      services
            
            
            773
            
            
            
            772
            
            
            
            2,229
            
            
            
            2,005Insurance
    expenses
            
            
            171
            
            
            
            116
            
            
            
            469
            
            
            
            351General and
      administrative
            
            
            421
            
            
            
            405
            
            
            
            1,119
            
            
            
            1,141Income tax (benefit)
      expense
            
            
            (33
            )
            
            
            91
            
            
            
            134
            
            
            
            262Total expenses
            
            
            3,404
            
            
            
            2,776
            
            
            
            9,554
            
            
            
            9,833NET
      OPERATING INCOME
            
            
            10,244
            
            
            
            11,749
            
            
            
            31,263
            
            
            
            31,517OTHER
      (EXPENSES) REVENUESNet realized gains (losses) on
      investments
            
            
            242
            
            
            
            158
            
            
            
            (1,651
            )
            
            
            513Asset
impairments
            
            
            −
            
            
            
            (25,490
            )
            
            
            −
            
            
            
            (26,277
            )Other income
            
            
            27
            
            
            
            37
            
            
            
            86
            
            
            
            110Provision for loan and lease
      loss
            
            
            (10,999
            )
            
            
            (369
            )
            
            
            (27,828
            )
            
            
            (503
            )Gain on the extinguishment of
      debt and loan
            
            
            574
            
            
            
            −
            
            
            
            2,324
            
            
            
            −Total other
      expenses
            
            
            (10,156
            )
            
            
            (25,664
            )
            
            
            (27,069
            )
            
            
            (26,157
            )NET
      INCOME (LOSS)
            
            $
            88
            
            
            $
            (13,915
            )
            
            $
            4,194
            
            
            $
            5,360NET
      INCOME (LOSS) PER SHARE –BASIC
            
            $
            0.00
            
            
            $
            (0.56
            )
            
            $
            0.17
            
            
            $
            0.22NET
      INCOME (LOSS) PER SHARE –DILUTED
            
            $
            0.00
            
            
            $
            (0.56
            )
            
            $
            0.17
            
            
            $
            0.22WEIGHTED
      AVERAGE NUMBER OF
              SHARES OUTSTANDING –
      BASIC
            
            
            24,814,789
            
            
            
            24,807,162
            
            
            
            24,719,889
            
            
            
            24,650,313WEIGHTED
      AVERAGE NUMBER OF
              SHARES OUTSTANDING –
      DILUTED
            
            
            25,054,296
            
            
            
            24,807,162
            
            
            
            24,889,965
            
            
            
            24,910,848DIVIDENDS
      DECLARED PER SHARE
            
            $
            0.39
            
            
            $
            0.41
            
            
            $
            1.21
            
            
            $
            1.21




The
accompanying notes are an integral part of these statements




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 4
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2008


(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
      Loss25,103,532
            
            
            $
            25
            
            
            $
            357,976
            
            
            $
            (38,323
            )
            
            $
            −
            
            
            $
            (45,301
            )
            
            $
            (2,771
            )
            
            $
            271,606Retirement
      of treasury shares
            
            
            −
            
            
            
            −
            
            
            
            (2,771
            )
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            2,771
            
            
            
            −Offering
      costs
            
            
            −
            
            
            
            −
            
            
            
            (22
            )
            
            
            −
            
            
            
            
            
            
            
            −
            
            
            
            −
            
            
            
            (22
            )Stock
      based compensation
            
            
            192,632
            
            
            
            −
            
            
            
            142
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            142Amortization
      of stock
              based
    compensation
            
            
            −
            
            
            
            −
            
            
            
            779
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            779Net
      income
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            4,194
            
            
            
            −
            
            
            
            −
            
            
            
            4,194
            
            
            
            4,194Available-for-sale,
              fair value
    adjustment
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            (7,287
            )
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            (7,287
            )
            
            
            (7,287
            )Designated
      derivatives, fair
              value adjustment
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            489
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            489
            
            
            
            489Distributions
      on common stock
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            (4,194
            )
            
            
            (26,606
            )
            
            
            −
            
            
            
            (30,800
            )Comprehensive
      loss
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            $
            (2,604
            )Balance,
      September 30, 2008
            
            
            25,296,164
            
            
            $
            25
            
            
            $
            356,104
            
            
            $
            (45,121
            )
            
            $
            −
            
            
            $
            (71,907
            )
            
            $
            −
            
            
            $
            239,101




The
accompanying notes are an integral part of these statements




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 5
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





Nine
      Months EndedSeptember
      30,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net income
            
            $
            4,194
            
            
            $
            5,360Adjustments to reconcile net
      income to net cash provided by
              operating
      activities:Depreciation and
      amortization
            
            
            812
            
            
            
            597Amortization/accretion of
      net discounts on investments
            
            
            (873
            )
            
            
            (812
            )Amortization of discount on
      notes
            
            
            128
            
            
            
            45Amortization of debt issuance
      costs
            
            
            2,345
            
            
            
            1,917Amortization of stock based
      compensation
            
            
            779
            
            
            
            717Non-cash incentive compensation
      to the Manager
            
            
            341
            
            
            
            551Net realized losses (gains) on
      derivative instruments
            
            
            86
            
            
            
            (88
            )Net realized losses (gains) on
      investments
            
            
            1,651
            
            
            
            (336
            )Gain on the extinguishment of
      debt
            
            
            (1,750
            )
            
            
            −Provision for loan and lease
      losses
            
            
            27,828
            
            
            
            −Asset
    impairments
            
            
            −
            
            
            
            26,277Changes in operating assets and
      liabilities:Decrease (increase) in
      restricted cash
            
            
            6,151
            
            
            
            (7,120
            )Decrease (increase) in
      interest receivable, net of purchased interest
            
            
            3,320
            
            
            
            (5,219
            )Increase in accounts
      receivables
            
            
            (27
            )
            
            
            (1,142
            )(Increase)
      decrease  in principal paydowns receivable
            
            
            (5,084
            )
            
            
            16(Increase) decrease in
      management and incentive fee payable
            
            
            546
            
            
            
            (293
            )Increase in security
      deposits
            
            
            222
            
            
            
            77(Decrease) increase in
      accounts payable and accrued liabilities
            
            
            (982
            )
            
            
            6(Decrease) increase in accrued
      interest expense
            
            
            (2,730
            )
            
            
            7,251Increase in other
      assets
            
            
            (802
            )
            
            
            (1,515
            )Net cash provided by operating
      activities
            
            
            36,155
            
            
            
            26,289CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted cash
            
            
            38,724
            
            
            
            (37,036
            )Purchase of securities
      available-for-sale
            
            
            −
            
            
            
            (87,378
            )Principal payments on securities
      available-for-sale
            
            
            2,288
            
            
            
            8,703Proceeds from sale of securities
      available-for-sale
            
            
            8,000
            
            
            
            29,867Distribution from unconsolidated
      entities
            
            
            257
            
            
            
            −Purchase of loans
            
            
            (161,299
            )
            
            
            (1,206,066
            )Principal payments received on
      loans
            
            
            128,392
            
            
            
            452,700Proceeds from sales of
      loans
            
            
            29,593
            
            
            
            177,494Purchase of direct financing
      leases and notes
            
            
            (36,477
            )
            
            
            (16,002
            )Proceeds payments received on
      direct financing leases and notes
            
            
            23,563
            
            
            
            17,978Proceeds from sale of direct
      financing leases and notes
            
            
            2,280
            
            
            
            4,592Net cash used in investing
      activities
            
            
            35,321
            
            
            
            (655,148
            )




(Continued)




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 6
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)








Nine
      Months EndedSeptember
      30,2008
            
            
            2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of
      common stock (net of offering costsof
      $22 and $350)
            
            
            (22
            )
            
            
            14,136Proceeds from
      borrowings:Repurchase
    agreements
            
            
            239
            
            
            
            458,246Collateralized debt
      obligations
            
            
            21,319
            
            
            
            670,869Unsecured revolving credit
      facility
            
            
            −
            
            
            
            10,000Secured term
    facility
            
            
            22,451
            
            
            
            14,916Payments on
      borrowings:Repurchase
    agreements
            
            
            (55,557
            )
            
            
            (462,342
            )Secured term
    facility
            
            
            (14,252
            )
            
            
            (20,412
            )Unsecured revolving credit
      facility
            
            
            −
            
            
            
            (10,000
            )Use of unrestricted cash for
      early extinguishment of debt
            
            
            (3,250
            )
            
            
            −Settlement of derivative
      instruments
            
            
            (4,752
            )
            
            
            2,581Payment of debt issuance
      costs
            
            
            (333
            )
            
            
            (11,642
            )Distributions paid on common
      stock
            
            
            (31,238
            )
            
            
            (27,709
            )Net cash (used in) provided by
      financing activities
            
            
            (65,395
            )
            
            
            638,643NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            6,081
            
            
            
            9,784CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            6,029
            
            
            
            5,354CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            12,110
            
            
            $
            15,138NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Distributions on common stock
      declared but not paid
            
            $
            9,928
            
            
            $
            10,256Issuance of restricted
      stock
            
            $
            1,435
            
            
            $
            4,051Purchase of loans on warehouse
      line
            
            $
            −
            
            
            $
            (311,069
            )Proceeds from warehouse
      line
            
            $
            −
            
            
            $
            311,069SUPPLEMENTAL
      DISCLOSURE:Interest expense paid in
      cash
            
            $
            72,835
            
            
            $
            92,422Income taxes paid in
      cash
            
            $
            611
            
            
            $
            90




The
accompanying notes are an integral part of these statements




(Back to Index)
 7
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(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. (“RAI”) (Nasdaq:
REXI).





The Company has three direct
wholly-owned subsidiaries:





·
            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 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 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 period ended December 31,
2007.  The results of operations for the three and nine months ended
September 30, 2008 may not necessarily be indicative of the results of
operations for the full fiscal year ending December 31, 2008.





Certain reclassifications with respect
to the exit fees and incomes taxes have been made to the 2007 consolidated
financial statements to conform to the 2008 presentation.





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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.





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 8
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Principles
of Consolidation − (Continued)





When the
Company obtains an explicit or implicit interest in an entity, the Company
evaluates the entity to determine if the entity is a variable interest entity
(“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 for 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.





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 and records dividend income upon
declaration by RCT I and RCT II.  For the three and nine months ended
September 30, 2008, the Company recognized $27,000 and $86,000, respectively, of
income on its investment in RCT I and RCT II and $930,000 and $3.0 million,
respectively, of interest expense which included $34,000 and $100,000,
respectively, of amortization of deferred debt issuance costs.  For the
three and nine months ended September 30, 2007, the Company recognized $37,000
and $109,000, respectively, of income on its investment in RCT I and RCT II and
$1.3 million and $3.7 million, respectively, of interest expense which included
$28,000 and $82,000, respectively, of amortization of deferred debt issuance
costs (see Note 7 for further discussion on RCT I and RCT II under Trust
Preferred Securities) .





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.





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 Statement of Financial Account Standards
(“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.  For the nine months ended September 30, 2008
and the year ended December 31, 2007, Resource TRS recognized a provision
for income taxes of $134,000 and $338,000, respectively.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Income
Taxes − (Continued)





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.





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, and then evaluated for impairment as a
homogeneous pool of loans with substantially similar
characteristics.  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 the collection is not warranted, then
the Company 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 $39.7 million at September 30, 2008.  The total balance of
impaired loans and leases with a valuation allowance at September 30, 2008 was
$38.6 million.  All of the loans deemed impaired at September 30, 2008
have an associated valuation allowance.  The total balance of impaired
leases without a specific valuation allowance was $1.1 million at September 30,
2008.  The specific valuation allowance related to these impaired
loans and leases was $580,000 at September 30, 2008.  The average
balance of impaired loans and leases was $25.0 million for the nine months ended
September 30, 2008.  The Company recognized and received $1.1 million
of income on one impaired loan, which reflected all interest income due, during
the nine months ended September 30, 2008.


The balance of impaired loans and
leases was $17.4 million at December 31, 2007.  The total balance of
impaired loans and leases with a valuation allowance at December 31, 2007 was
$17.0 million.  All of the loans deemed impaired at December 31, 2007
have an associated valuation allowance.  The total balance of impaired
leases without a specific valuation allowance was $359,000 at December 31,
2007.  The specific valuation allowance related to these impaired
loans and leases was $2.3 million at December 31, 2007.  The average
balance of impaired loans and leases was $4.3 million during
2007.  The Company did not recognize any income on impaired loans and
leases during 2007 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.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(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





In October 2008, the Financial
Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) 157-3,
“Determining the Fair Value of a Financial Asset in a Market that is Not Active”
(“FSP 157-3”).  FSP 157-3 clarifies the application of SFAS 157 “Fair
Value Measurements,” (“SFAS 157”) in an inactive market.  The
provisions of FSP 157-3 are effective immediately and adoption did not have a
material effect on our consolidated financial statements.





In September 2008, the FASB issued FSP
FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement
No. 161” (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 is
intended to improve disclosures about credit derivatives by requiring more
information about the potential adverse effects of changes in credit risk on
financial position, financial performance, and cash flows of the sellers of
credit derivatives.  FSP FAS 133-1 and FIN 45-4 is effective for
reporting periods ending after November 15, 2008.   The
Company is currently evaluating the potential impact of FSP FAS 133-1 and FIN
45-4.





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 No. 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 shall 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.  The Company is currently evaluating the
potential impact of adopting FSP EITF 03-6-1.




In May 2008, the FASB issued SFAS 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”).  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework or hierarchy for selecting accounting
principles to be used in preparing financial statements in conformity with U.S.
GAAP.  The Company does not expect that SFAS 162 will have an impact
on its consolidated 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 will be applicable to the Company in the
first quarter of fiscal 2009.  The Company is assessing the potential
impact that the adoption of SFAS 161 may have on its financial
statements.
 
 In
February 2008, the FASB issued FASB Staff Position 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 its consolidated financial statements.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(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.  The Company is currently
determining the effect, if any, that SFAS 160 will have on its consolidated
financial statements.  SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008.





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 be expensed as incurred.  The Company is currently evaluating
the effect, if any, that SFAS 141R will have on its financial
statements.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008.





In December 2007, the Securities and
Exchange Commission (“SEC”) issued Staff Accounting Bulletin 110 (“SAB
110”).  SAB 110 amends and replaces Question 6 of Section D.2 of Topic
14, “Share-Based Payment,” of the Staff Accounting Bulletin
series.  Question 6 of Section D.2 of Topic 14 expresses the views of
the Staff regarding the use of the “simplified” method in developing an estimate
of the expected term of “plain vanilla” share options and allows usage of the
“simplified” method for share option grants prior to December 31,
2007.  SAB 110 allows public companies which do not have historically
sufficient experience to provide a reasonable estimate of the expected term of
outstanding options to continue use of the “simplified” method for estimating
the expected term of “plain vanilla” share option grants after December 31,
2007.  The Company will continue to use the “simplified” method until
it has enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110.





In February 2007, the FASB issued SFAS
159, “The Fair Value Option for Financial Assets and Financial Liabilities −
Including an amendment of FASB Statement 115,” (“SFAS 159”).  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value.  This statement is effective for fiscal
years beginning after November 15, 2007.  The Company did not elect to
apply the provisions of SFAS 159 for existing eligible instruments at December
31, 2007.





In September 2006, the FASB issued SFAS
157.  SFAS 157 clarifies the definition of fair value, establishes a
framework for measuring fair value in GAAP and expands the disclosure of fair
value measurements.  This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years.  The Company adopted SFAS 157 in the first quarter of 2008,
which did not have a material effect on the consonlidated financial
statements.




NOTE
3 − RESTRICTED CASH
 
 Restricted cash as of September 30,
2008, consists of $63.1 million held in five consolidated CDO trusts, $4.0
million in cash collateralizing outstanding margin calls and a $1.6 million
credit facility reserve used to fund future investments that will be acquired by
the Company’s three closed bank loan CDO trusts.  The remaining $5.9
million consists of interest reserves and security deposits held in connection
with the Company’s equipment lease and note portfolio.





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 12
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)








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)September 30,
      2008:Commercial
      MBS private placement
              
              $
              70,418
              
              
              $
              −
              
              
              $
              (24,197
              )
              
              $
              46,221Other
      ABS
              
              
              5,665
              
              
              
              −
              
              
              
              (5,665
              )
              
              
              −Total
              
              $
              76,083
              
              
              $
              −
              
              
              $
              (29,862
              )
              
              $
              46,221December 31,
      2007:Commercial
      MBS private placement
              
              $
              82,373
              
              
              $
              −
              
              
              $
              (17,809
              )
              
              $
              64,564Other
      ABS
              
              
              5,665
              
              
              
              −
              
              
              
              (4,765
              )
              
              
              900Total
              
              $
              88,038
              
              
              $
              −
              
              
              $
              (22,574
              )
              
              $
              65,464


(1)
            As
      of September 30, 2008 and December 31, 2007, substantially all securities
      were pledged as collateral security under related
    financings.





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 CouponSeptember
      30,
      2008:Less than one
      year
            
            $
            16,682
            
            
            $
            23,132
            
            
            
            4.30%Greater than one year and less
      than five years
            
            
            6,801
            
            
            
            8,997
            
            
            
            4.62%Greater than five years and less
      than tenyears
            
            
            22,738
            
            
            
            43,954
            
            
            
            5.38%Total
            
            $
            46,221
            
            
            $
            76,083
            
            
            
            4.99%December
      31, 2007:Less than one
      year
            
            $
            11,908
            
            
            $
            12,824
            
            
            
            6.15%Greater than one year and less
      than five years
            
            
            19,042
            
            
            
            21,589
            
            
            
            6.16%Greater than five years and less
      than ten years
            
            
            34,514
            
            
            
            53,625
            
            
            
            5.85%Total
            
            $
            65,464
            
            
            $
            88,038
            
            
            
            5.96%





The contractual maturities of the
securities available-for-sale range from July 2017 to March 2051.




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 13
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
4 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE − (Continued)





The following tables show the fair
value and gross unrealized losses, aggregated by investment category and length
of time, that individual securities that have been in a continuous unrealized
loss position (in thousands):





Less
      than 12 Months
            
            
            More
      than 12 Months
            
            
            TotalFair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized LossesSeptember
      30,
      2008:Commercial
      MBS privateplacement
            
            $
            −
            
            
            $
            −
            
            
            $
            46,221
            
            
            $
            (24,197
            )
            
            $
            46,221
            
            
            $
            (24,197
            )Other
      ABS
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            (5,665
            )
            
            
            −
            
            
            
            (5,665
            )Total temporarilyimpaired
      securities
            
            $
            −
            
            
            $
            −
            
            
            $
            46,221
            
            
            $
            (29,862
            )
            
            $
            46,221
            
            
            $
            (29,862
            )December
      31, 2007:Commercial
      MBS privateplacement
            
            $
            64,564
            
            
            $
            (17,809
            )
            
            $
            −
            
            
            $
            −
            
            
            $
            64,564
            
            
            $
            (17,809
            )Other
      ABS
            
            
            900
            
            
            
            (4,765
            )
            
            
            −
            
            
            
            −
            
            
            
            900
            
            
            
            (4,765
            )Total temporarilyimpaired
      securities
            
            $
            65,464
            
            
            $
            (22,574
            )
            
            $
            −
            
            
            $
            −
            
            
            $
            65,464
            
            
            $
            (22,574
            )





The
determination of other-than-temporary impairment is a subjective process, and
different judgments and assumptions could affect the timing of loss
realization.  The Company reviews its portfolios monthly and the
determination of other-than-temporary impairment is made at least
quarterly.  The Company considers the following factors when
determining if there is an other-than-temporary impairment on a
security:




·
            the
      length of time the market value has been less than amortized
      cost;




·
            the
      Company’s 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.





While the available-for-sale
investments have continued to decline in fair value, their change continues to
be temporary.  In particular, with respect to CMBS, all assets are
current with respect to interest and principal payments.  In addition,
the Company performs an on-going review of third-party reports and updated
financial data on the underlying property to analyze current and projected loan
performance.  The Company’s review concluded that there exist no
credit characteristics that would indicate other-than-temporary impairments as
of September 30, 2008.





In November 2007, the Company sold a
portion of its preferred shares in Ischus CDO II to an independent third
party.  The sale was deemed to be a reconsideration event under FASB
Interpretation No. 46, “Consolidation of Variable Interests,” as revised (“FIN
46-R”) and as a result, the Company was no longer considered to be its primary
beneficiary based on a discounted cash flow analysis of expected losses and
expected residual returns and Ischus CDO II was deconsolidated.  The
Company currently recognizes income on its remaining investment using the cost
recovery method.  At the date of deconsolidation, the value of the
Company’s investments in Ischus CDO II was $722,000.  From the date of
deconsolidation through December 31, 2007, the Company received $465,000 of
distributions leaving a balance of $257,000 at December 31, 2007.  For
the three months ended March 31, 2008, $1.3 million of cash receipts were
collected of which $997,000 was recognized as interest income – other on the
consolidated statements of operations.  No additional cash has been
collected since March 31, 2008.




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 14
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
5 – LOANS HELD FOR INVESTMENT





The following is a summary of loans (in
thousands):




Loan
      Description
              
              Principal
              
              
              Unamortized
                (Discount)
                  Premium
              
              
              Amortized
                Cost(1)September 30,
      2008:Bank
      loans
              
              $
              941,945
              
              
              $
              (5,004
              )
              
              $
              936,941Commercial
      real estate loans:Whole
      loans
              
              
              538,381
              
              
              
              (2,147
              )
              
              
              536,234B
      notes
              
              
              89,131
              
              
              
              74
              
              
              
              89,205Mezzanine
      loans
              
              
              215,382
              
              
              
              (4,527
              )
              
              
              210,855Subtotal commercial real
      estate loans
              
              
              842,894
              
              
              
              (6,600
              )
              
              
              836,294Loans
      before
      allowances
              
              
              1,784,839
              
              
              
              (11,604
              )
              
              
              1,773,235Allowance
      for loan
      loss
              
              
              (30,027
              )
              
              
              −
              
              
              
              (30,027
              )Total loans, net of
      allowances
              
              $
              1,754,812
              
              
              $
              (11,604
              )
              
              $
              1,743,208December 31,
      2007:Bank
      loans
              
              $
              931,107
              
              
              $
              (6
              )
              
              $
              931,101Commercial
      real estate loans:Whole
      loans
              
              
              532,277
              
              
              
              (3,559
              )
              
              
              528,718B
      notes
              
              
              89,448
              
              
              
              129
              
              
              
              89,577Mezzanine
      loans
              
              
              227,597
              
              
              
              (4,435
              )
              
              
              223,162Subtotal commercial real
      estate loans
              
              
              849,322
              
              
              
              (7,865
              )
              
              
              841,457Loans
      before
      allowances
              
              
              1,780,429
              
              
              
              (7,871
              )
              
              
              1,772,558Allowance
      for loan
      loss
              
              
              (5,919
              )
              
              
              −
              
              
              
              (5,919
              )Total loans, net of
      allowances
              
              $
              1,774,510
              
              
              $
              (7,871
              )
              
              $
              1,766,639


(1)
            Substantially
      all loans are pledged as collateral under various borrowings at September
      30, 2008 and December 31, 2007.





As of September 30, 2008, approximately
40.0% and 10.9% of the Company’s commercial real estate loan portfolio was
concentrated in commercial real estate loans located in California and New York,
respectively.  As of September 30, 2008, approximately 11.0% of the
Company’s bank loan portfolio was concentrated in the collective industry
grouping of healthcare, education and childcare.





At September 30, 2008, the Company’s
bank loan portfolio consisted of $924.5 million (net of allowance of $12.4
million) of floating rate loans, which bear interest ranging between the London
Interbank Offered Rate (“LIBOR”) plus 1.00% and LIBOR plus 9.50% with maturity
dates ranging from March 2009 to August 2022.





At December 31, 2007, the Company’s
bank loan portfolio consisted of $928.3 million (net of allowance of $2.8
million) of floating rate loans, which bore interest ranging between LIBOR plus
1.38% and LIBOR plus 7.50% with maturity dates ranging from July 2008 to August
2022.




(Back to Index)
 15
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(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
      DatesSeptember 30,
      2008:Whole
      loans, floating rate
            
            
            27
            
            
            $
            450,426
            
            LIBOR
      plus 1.50% to LIBOR plus 4.40%
            November
      2008 to
              June
      2010Whole
      loans, fixed rate
            
            
            7
            
            
            
            85,808
            
            6.98%
      to 10.00%
            May
      2009 to
              August
      2012B
      notes, floating rate
            
            
            3
            
            
            
            33,537
            
            LIBOR
      plus 2.50% to LIBOR plus 3.01%
            March
      2009 to
              October
      2009B
      notes, fixed rate
            
            
            3
            
            
            
            55,668
            
            7.00%
      to 8.68%
            July
      2011 to
              July
      2016Mezzanine
      loans, floating rate
            
            
            10
            
            
            
            129,600
            
            LIBOR
      plus 2.15% to LIBOR plus 3.45%
            December
      2008 to
              October
      2009Mezzanine
      loans, fixed rate
            
            
            7
            
            
            
            81,255
            
            5.78%
      to 11.00%
            November
      2009 to
              September
      2016Total
            
            
            57
            
            
            $
            836,294December 31,
      2007:Whole
      loans, floating rate
            
            
            28
            
            
            $
            430,776
            
            LIBOR
      plus 1.50% to LIBOR plus 4.25%
            May
      2008 to
              July
      2010Whole
      loans, fixed rates
            
            
            7
            
            
            
            97,942
            
            6.98%
      to 8.57%
            May
      2009 to
              August
      2012B
      notes, floating rate
            
            
            3
            
            
            
            33,570
            
            LIBOR
      plus 2.50% to LIBOR plus 3.01%
            March
      2008 to
              October
      2008B
      notes, fixed rate
            
            
            3
            
            
            
            56,007
            
            7.00%
      to 8.68%
            July
      2011 to
              July
      2016Mezzanine
      loans, floating rate
            
            
            11
            
            
            
            141,894
            
            LIBOR
      plus 2.15% to LIBOR plus 3.45%
            February
      2008 to
              May
      2009Mezzanine
      loans, fixed rate
            
            
            7
            
            
            
            81,268
            
            5.78%
      to 11.00%
            November
      2009 to
              September
      2016Total
            
            
            59
            
            
            $
            841,457







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


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
5 – LOANS HELD FOR INVESTMENT− (Continued)





As of September 30, 2008, the Company
had recorded a provision for loan loss of $30.0 million consisting of a $12.4
million provision on the Company’s bank loan portfolio and a $17.6 million
provision on the Company’s commercial real estate portfolio as a result of the
Company having two bank loan issuers and two commercial real estate loans that
were deemed impaired as well as the establishment of a general reserve for these
portfolios.





As of December 31, 2007, the Company
had recorded a provision for loan loss of $5.9 million consisting of a $2.7
million provision on the Company’s bank loan portfolio and a $3.2 million
provision on the Company’s commercial real estate portfolio as a result of the
Company having two bank loans and one commercial real estate loan that were
deemed impaired.





The Company has one mezzanine loan,
with a book value of $11.6 million secured by 100% of the equity interests in
two enclosed regional malls.  RCC had been working with the borrower
and special servicer toward a resolution as the mezzanine loan was in default
since February 2008.  However, during the quarter ended June 30, 2008,
the borrower on the mezzanine loan 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 book value balance of $11.6
million was necessary.  If in the future, the Company is able to
recover any value from this loan, the amount would be adjusted through our
allowance.





At September 30, 2008, the Company took a
reserve of $2.8 million against one whole loan due to the prepayment of the loan
at a discount subsequent to the end of the quarter.




The
following table shows the changes in the allowance for loan loss (in
thousands):
 
 Allowance
      for loan loss at January 1, 2008
              
              $
              5,918Provision for loan
      loss
              
              
              27,392Loans
    charged-off
              
              
              (3,283
              )Recoveries
              
              
              −Allowance
      for loan loss at September 30, 2008
              
              $
              30,027


NOTE
6 –DIRECT FINANCING LEASES AND NOTES





The Company’s direct financing leases
and notes had weighted average initial lease and note terms of 70 months and 72
months as of September 30, 2008 and December 31, 2007,
respectively.  The interest rates on notes receivable range from 4.5%
to 17.8% and from 6.8% to 13.4% as of September 30, 2008 and December 31, 2007,
respectively.  Investments in direct financing leases and notes, net
of unearned income, were as follows (in thousands):





September
      30,
            
            
            December
      31,2008
            
            
            2007Direct
      financing leases,
      net
            
            $
            29,040
            
            
            $
            28,880Notes
      receivable
            
            
            76,576
            
            
            
            66,150Subtotal
            
            
            105,616
            
            
            
            95,030Allowance
      for lease
      losses
            
            
            (150
            )
            
            
            −Total
            
            $
            105,466
            
            
            $
            95,030





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 17
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 SEPTEMBER
30, 2008
 (Unaudited)
  NOTE 6 –DIRECT
FINANCING LEASES AND NOTES − (Continued)


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





September
      30,
            
            
            December
      31,2008
            
            
            2007Total
      future minimum lease
      payments
            
            $
            33,924
            
            
            $
            34,009Unguaranteed
      residual
            
            
            180
            
            
            
            21Unearned
      income
            
            
            (5,064
            )
            
            
            (5,150
            )Total
            
            $
            29,040
            
            
            $
            28,880





At September 30, 2008, the Company had
six 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 $729,000.  The
Company also recorded a general reserve of $50,000 during the three months ended
September 30, 2008 to bring the total general reserve to $150,000 at September
30, 2008.  At December 31, 2007, the Company had three 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 $293,000.




The following table shows the changes
in the allowance for lease loss (in thousands):
 
 Allowance
      for lease loss at January 1, 2008
                
                $
                293Provision for lease
      loss
                
                
                435Leases
    charged-off
                
                
                −Recoveries
                
                
                −Allowance
      for lease loss at September 30, 2008
                
                $
                728




(Back to Index)
 18
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
7 – BORROWINGS





The Company has historically 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 September 30, 2008 and December 31, 2007 is
summarized in the following table (dollars in thousands):





Outstanding
      Borrowings
            
            
            Weighted
      Average Borrowing Rate
            
            Weighted
      Average Remaining Maturity
            
            Value
      of CollateralSeptember 30,
      2008:Repurchase
      Agreements (1)
            
            $
            60,930
            
            
            
            3.89%
            
            18.1
      days
            
            $
            106,491RREF
      CDO 2006-1 Senior Notes (2)
            
            
            261,019
            
            
            
            4.07%
            
            37.9
      years
            
            
            317,729RREF
      CDO 2007-1 Senior Notes (3)
            
            
            363,011
            
            
            
            3.98%
            
            38.0
      years
            
            
            440,144Apidos
      CDO I Senior Notes (4)
            
            
            318,322
            
            
            
            3.31%
            
            8.8
      years
            
            
            277,211Apidos
      CDO III Senior Notes (5)
            
            
            259,527
            
            
            
            3.27%
            
            11.7
      years
            
            
            226,068Apidos
      Cinco CDO Senior Notes (6)
            
            
            318,089
            
            
            
            3.31%
            
            11.6
      years
            
            
            285,077Secured
      Term
      Facility
            
            
            99,938
            
            
            
            5.06%
            
            1.5
      years
            
            
            105,466Unsecured
      Junior Subordinated Debentures (7)
            
            
            51,548
            
            
            
            6.75%
            
            27.9 years
            
            
            −Total
            
            $
            1,732,384
            
            
            
            3.79%
            
            20.1 years
            
            $
            1,758,186December 31,
      2007:Repurchase
      Agreements (1)
            
            $
            116,423
            
            
            
            6.33%
            
            18.5
      days
            
            $
            190,914RREF
      CDO 2006-1 Senior Notes (2)
            
            
            260,510
            
            
            
            5.69%
            
            38.6
      years
            
            
            282,849RREF
      CDO 2007-1 Senior Notes (3)
            
            
            345,986
            
            
            
            5.49%
            
            38.8
      years
            
            
            444,715Apidos
      CDO I Senior Notes (4)
            
            
            317,882
            
            
            
            5.47%
            
            9.6
      years
            
            
            309,495Apidos
      CDO III Senior Notes (5)
            
            
            259,178
            
            
            
            5.59%
            
            12.5
      years
            
            
            253,427Apidos
      Cinco CDO Senior Notes (6)
            
            
            317,703
            
            
            
            5.38%
            
            12.4
      years
            
            
            311,813Secured
      Term
      Facility
            
            
            91,739
            
            
            
            6.55%
            
            2.3
      years
            
            
            95,030Unsecured
      Junior Subordinated Debentures (7)
            
            
            51,548
            
            
            
            8.86%
            
            28.7 years
            
            
            −Total
            
            $
            1,760,969
            
            
            
            5.72%
            
            20.1 years
            
            $
            1,888,243


(1)
            At
      September 30, 2008, collateral consisted of a RREF CDO 2007-1 Class H bond
      that was retained at closing with a carrying value of $3.9 million,
      available-for-sale securities with a carrying value of $10.6 million and
      loans with a carrying value of $92.0 million.  At December 31,
      2007, collateral consisted of RREF CDO 2007-1 Class H & K bonds that
      were retained at closing with a carrying value of $20.5 million,
      available-for-sale securities with a carrying value of $13.6 million and
      loans with a carrying value of $156.8
million.




(2)
            Amount
      represents principal outstanding of $265.5 million less unamortized
      issuance costs of $4.5 million and $5.0 million as of September 30, 2008
      and December 31, 2007, respectively.  This CDO transaction
      closed in August 2006.




(3)
            Amount
      represents principal outstanding of $369.2 million less unamortized
      issuance costs of $6.2 million as of September 30, 2008 and principal
      outstanding of $352.7 million less unamortized issuance costs of $6.7
      million as of December 31, 2007.  This CDO transaction closed in
      June 2007.




(4)
            Amount
      represents principal outstanding of $321.5 million less unamortized
      issuance costs of $3.2 million as of September 30, 2008 and $3.6 million
      as of December 31, 2007.  This CDO transaction closed in August
      2005.




(5)
            Amount
      represents principal outstanding of $262.5 million less unamortized
      issuance costs of $3.0 million as of September 30, 2008 and $3.3 million
      as of December 31, 2007.  This CDO transaction closed in May
      2006.




(6)
            Amount
      represents principal outstanding of $322.0 million less unamortized
      issuance costs of $3.9 million as of September 30, 2008 and $4.3 million
      as of December 31, 2007.  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)
 19
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(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 RateSeptember 30,
      2008Natixis
      Real Estate Capital,
      Inc.
            
            $
            42,534
            
            
            
            18
            
            
            
            3.89%Credit
      Suisse Securities (USA)
      LLC
            
            $
            3,521
            
            
            
            29
            
            
            
            7.00%December 31,
      2007:Natixis
      Real Estate Capital,
      Inc.
            
            $
            58,155
            
            
            
            18
            
            
            
            6.42%Credit
      Suisse Securities (USA)
      LLC
            
            $
            15,626
            
            
            
            25
            
            
            
            5.91%J.P.
      Morgan Securities,
      Inc.
            
            $
            886
            
            
            
            9
            
            
            
            5.63%Bear,
      Stearns International
      Limited
            
            $
            1,170
            
            
            
            15
            
            
            
            6.22%


(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 Loans – Term Repurchase Facility





In April
2007, the Company’s indirect wholly owned subsidiary, RCC Real Estate SPE 3,
LLC, (“RCC Real Estate SPE 3”) entered into a master repurchase agreement with
Natixis Real Estate Capital, Inc. (“Natixis”) 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 is $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 connection with the
new agreement, the Company expensed $211,000 of previously capitalized costs and
capitalized the new fee of $250,000.  In addition, once the borrowings
exceed a weighted average undrawn balance of $75.0 million for the prior 90 day
period, the Company will be 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’s
performance of its obligations under the repurchase agreement
 
 On
September 25, 2008, RCC Real Estate SPE 3 entered into an amendment to the
Master Repurchase Agreement dated as of April 12, 1007 with
Natixis.  The Repurchase Agreement Amendment reduces (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.





At
September 30, 2008, RCC Real Estate SPE 3 had borrowed $60.6 million which were
secured by collateral of RREF CDO 2007-1 Class H bond with a carrying value of
$3.9 million, available-for-sale securities with a carrying value of $10.6
million and loans with a carrying value of $92.0 million and had a weighted
average interest rate of one-month LIBOR plus 1.39%, which was
3.89%.  At December 31, 2007, RCC Real Estate SPE 3 had borrowed $96.7
million which were secured by collateral of RREF CDO 2007-1 Class H & K
bonds with a carrying value of $20.5 million, available-for-sale securities with
a carrying value of $13.6 million and loans with a carrying value of $156.8
million and had a weighted average interest rate of one-month LIBOR plus 1.39%,
which was 6.42%.




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


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Repurchase
and Credit Facilities − (Continued)





Direct
Financing Leases and Notes





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 received a waiver for the
period ended December 31, 2007, which was effective through June 23, 2008, from
Bayerische Hypo − und Vereinsbank AG with respect to Resource America’s
non-compliance with the tangible net worth covenant.  Under the
covenant, Resource America was required to maintain a consolidated net worth
(stockholder’s equity) of at least $175.0 million plus 90% of the net proceeds
of any capital transactions, minus all amounts (not to exceed $50,000,000) paid
by Resource America to repurchase any outstanding shares of common or preferred
stock of Resource America, measured by each quarter end, as further described in
the agreement.  On June 23, 2008, the facility was amended to base the
net worth test on LEAF Financial Corporation (“LEAF”) and to change the measure
of net worth to not less than the sum of (i) $17,000,000, plus (ii) 50% of the
aggregate net income of LEAF for each fiscal quarter beginning with the fiscal
quarter ended September 30, 2008.  See Note 11 regarding the Company’s
relationship with LEAF.





The Company paid $300,000 in commitment
fees during the year ended December 31, 2006.  Commitment fees are
being amortized into interest expense using the effective yield method over the
life of the facility in the consolidated statements of
operations.  The Company paid $15,000 and $33,000 for the three and
nine months ended September 30, 2008, respectively, in unused line
fees.  Unused line fees are expensed immediately into interest expense
in the consolidated statements of operations.  As of September 30,
2008, the Company had borrowed $99.9 million at a weighted average interest rate
of 5.06%.  As of December 31, 2007, the Company had borrowed $91.7
million at a weighted average interest rate of 6.55%.  The facility
expires March 2010.




Corporate
Revolving Credit Facility


In
December 2005, the Company entered into a $15.0 million unsecured revolving
credit facility with TD Bank, N.A. (successor by merger to Commerce Bank,
N.A.).  This facility was increased to $25.0 million in April
2006.  This facility was decreased to $10.0 million in April 2008 to
reflect more closely the actual borrowing base available to the Company under
the facility and to reduce fees payable on the amount available for borrowing
under the facility.  Outstanding borrowings bear interest at one of
two rates elected at the Company’s option; (i) the lender’s prime rate plus a
margin ranging from 0.50% to 1.50% based upon the Company’s leverage ratio; or
(ii) LIBOR plus a margin ranging from 1.50% to 2.50% based upon the Company’s
leverage ratio.  The facility expires in December 2008.  The
Company paid $17,000 and $37,000 in unused line fees as of September 30, 2008
and December 31, 2007, respectively.  Commitment fees are being
amortized into interest expense using the effective yield method over the life
of the facility in the consolidated statements of operations.  Unused
line fees are expensed immediately into interest expense in the consolidated
statements of operations.  As of September 30, 2008 and December 31,
2007, no borrowings were outstanding under this facility.





The Company received a waiver for the
period ended September 30, 2008 from TD Bank with respect to its non-compliance
with the interest coverage ratio covenant.  The waiver was required
due to our provisions for loan and lease losses during the three months ended
September 30, 2008.  Under the covenant, the Company is required to
maintain a ratio of consolidated cash flow to consolidated interest expense of
not less than 1.15 to 1.0, measured at each quarter end, as further described in
the agreement.




Commercial
Real Estate Loans – Non-term Repurchase Facilities


In August 2005, the Company’s
subsidiary, RCC Real Estate, entered into a master repurchase agreement with
Bear, Stearns International Limited (“Bear Stearns”) to finance the purchase of
commercial real estate loans.  The maximum amount of the Company’s
borrowing under the repurchase agreement is $150.0 million.  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.  The Company has
guaranteed RCC Real Estate’s obligations under the repurchase agreement to a
maximum of $150.0 million.  At September 30, 2008, the Company had
repaid all obligations under this facility.  At December 31, 2007, the
Company had borrowed $1.9 million, all of which was guaranteed, with a weighted
average interest rate of LIBOR plus 1.25%, which was 6.22% at December 31,
2007.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Repurchase
and Credit Facilities − (Continued)




Commercial
Real Estate Loans – Non-term Repurchase Facilities − (Continued)


In March 2005, the Company entered into
a master repurchase agreement with Credit Suisse Securities (USA) LLC to finance
the purchase of agency ABS-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 September 30,
2008, the Company had borrowed $360,000 with a weighted average interest rate of
7.00%.  At December 31, 2007, the Company had borrowed $14.6 million
with a weighted average interest rate of 5.91%.




Other
Repurchase Facility


In March 2005, the Company entered into
a master repurchase agreement with J.P. Morgan Securities, Inc. to finance the
purchase of agency ABS-RMBS.  In August 2007, the Company began using
this facility to finance the purchase of CMBS-private placement.  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 September 30,
2008, the Company had repaid all obligations under this facility.  At
December 31, 2007, the Company had borrowed $3.2 million with a weighted average
interest rate of 5.63%.





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 CMBS.  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 $390.0 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.





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
available class A-1R notes ($35.4 million was funded as of September 30, 2008),
which allow the CDO to fund future funding obligations under the existing whole
loan participations held by RREF CDO 2007-1 that have future funding
commitments; the undrawn balance of the class A-1R notes will accrue a
commitment fee at a rate per annum equal to 0.18%, the drawn balance will bear
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 3.98% at September 30, 2008.





During the nine months ended September
30, 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.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Collateralized
Debt Obligations − (Continued)





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.





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 3.31% at September 30, 2008.





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 4.07% at September 30, 2008.





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.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
7 – BORROWINGS − (Continued)





Collateralized
Debt Obligations − (Continued)





Apidos
CDO III − (Continued)





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 3.27%
at September 30, 2008.





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 3.31%
at September 30, 2008.





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 in
the trusts.  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 September 30, 2008 were $708,000 and $718,000,
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
operations.





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, 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 on the junior subordinated
debentures held by 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 September 30, 2008, were 6.75% and 6.75%, 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.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
8 – CAPITAL STOCK





Under a share repurchase plan
authorized by the board of directors on July 26, 2007, the Company was
authorized to buy back up to 2.5 million outstanding shares.  As of
December 31, 2007, the Company had repurchased 263,000 shares at a weighted
average price, including commissions, of $10.54 per share.  No
additional shares were repurchased during the nine months ended September 30,
2008.





NOTE
9 – SHARE-BASED COMPENSATION





The following table summarizes
restricted common stock transactions:





Manager
            
            
            Non-Employee
      Directors
            
            
            Non-Employees
            
            
            TotalUnvested
      shares as of January 1, 2008
            
            
            113,332
            
            
            
            4,404
            
            
            
            463,757
            
            
            
            581,493Issued
            
            
            −
            
            
            
            17,261
            
            
            
            157,532
            
            
            
            174,793Vested
            
            
            (113,332
            )
            
            
            (4,404
            )
            
            
            (163,320
            )
            
            
            (281,056
            )Forfeited
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            −Unvested
      shares as of September 30, 2008
            
            
            −
            
            
            
            17,261
            
            
            
            457,969
            
            
            
            475,230





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 nine months ended September 30, 2008 and 2007,
including shares issued to the four non-employee directors, was $1.5 million and
$4.1 million, respectively.





On January 14, 2008, the Company issued
144,000 shares of restricted common stock under its 2007 Omnibus Equity
Compensation Plan.  These restricted shares will vest 33.3% on January
14, 2009.  The balance will vest annually thereafter through January
14, 2011.





On February 1, 2008 and March 8, 2008,
the Company granted 2,261 and 15,000 shares of restricted stock, respectively,
to the Company’s non-employee directors as part of their annual
compensation.  These shares will vest in full on the first anniversary
of the date of grant.





On July 1, 2008, the Company granted
13,532 shares of restricted stock under its 2007 Omnibus Equity Compensation
Plan. These restricted shares will vest 33.3% on June 30, 2009.  The
balance will vest annually thereafter through June 30, 2011.





The following table summarizes common
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, 2008
            
            
            640,166
            
            
            $
            14.99Granted
            
            
            −
            
            
            
            −Exercised
            
            
            −
            
            
            
            −Forfeited
            
            
            −
            
            
            
            −Outstanding
      as of September 30, 2008
            
            
            640,166
            
            
            $
            14.99
            
            
            
            7
            
            
            $
            74Exercisable
      at September 30, 2008
            
            
            405,833
            
            
            $
            14.99
            
            
            
            7
            
            
            $
            47





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





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
9 – SHARED-BASED COMPENSATION − (Continued)





The following table summarizes the
status of the Company’s unvested stock options as of September 30,
2008:





Unvested
      Options
            
            Options
            
            
            Weighted
      Average Grant-Date Fair ValueUnvested
      at January 1, 2008
            
            
            205,722
            
            
            $
            14.97Granted
            
            
            −
            
            
            $
            −Vested
            
            
            (162,389
            )
            
            $
            14.98Forfeited
            
            
            −
            
            
            $
            −Unvested
      at September 30, 2008
            
            
            43,333
            
            
            $
            14.88





The weighted average period over which
the Company expects to recognize the remaining expense on the unvested options
is less than one year.





The
following table summarizes the status of the Company’s vested stock options as
of September 30, 2008:





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, 2008
            
            
            434,444
            
            
            $
            15.00Vested
            
            
            162,389
            
            
            
            14.98Exercised
            
            
            −
            
            
            
            −Forfeited
            
            
            −
            
            
            
            −Vested
      as of September 30, 2008
            
            
            596,833
            
            
            $
            15.00
            
            7
            
            $         60





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





As
      of
                September
      30, 2008
            
            
            As
      of
                December
      31, 2007Expected
      life
            
            9
      years
            
            
            7
      yearsDiscount
      rate
            
            
            4.18%
            
            
            
            3.97%Volatility
            
            
            62.89%
            
            
            
            42.84%Dividend
      yield
            
            
            25.08%
            
            
            
            17.62%





The fair value of each common stock
transaction for the period ended September 30, 2008 and for the year ended
December 31, 2007 was $0.115 and $0.251, respectively.  For the three
and nine months ended September 30, 2008 and 2007, the components of equity
compensation expense are as follows (in thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Options
      granted to Manager and non-employees
            
            $
            -
            
            
            $
            (9
            )
            
            $
            (54
            )
            
            $
            (53
            )Restricted
      shares granted to Manager andnon-employees
            
            
            129
            
            
            
            84
            
            
            
            755
            
            
            
            715Restricted
      shares granted to non-employeeDirectors
            
            
            28
            
            
            
            19
            
            
            
            78
            
            
            
            55Total
      equity compensation expense
            
            $
            157
            
            
            $
            94
            
            
            $
            779
            
            
            $
            717





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
9 – SHARED-BASED COMPENSATION − (Continued)





During the nine months ended September
30, 2008, the Manager received 17,839 shares as compensation, valued at
$142,000, pursuant to the management agreement.  There was no
incentive fee received during the three months ended September 30,
2008.  During the three and nine months ended September 30, 2007, the
Manager received 26,194 and 47,503 shares, respectively, as incentive
compensation, valued at $365,000 and $723,000, respectively, pursuant to the
management agreement.  The incentive management fee is paid one
quarter in arrears.





Apart from incentive compensation
payable under the management agreement, the Company had established no formal
criteria for equity awards as of September 30, 2008.  All awards are
discretionary in nature and subject to approval by the compensation committee of
the Company’s board of directors.





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
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Basic:Net income (loss)
            
            $
            88
            
            
            $
            (13,915
            )
            
            $
            4,194
            
            
            $
            5,360Weighted average number of shares
      outstanding
            
            
            24,814,789
            
            
            
            24,807,162
            
            
            
            24,719,889
            
            
            
            24,650,313Net income (loss) per
      share
            
            $
            0.00
            
            
            $
            (0.56
            )
            
            $
            0.17
            
            
            $
            0.22Diluted:Net income (loss)
            
            $
            88
            
            
            $
            (13,915
            )
            
            $
            4,194
            
            
            $
            5,360Weighted average number of shares
      outstanding
            
            
            24,814,789
            
            
            
            24,807,162
            
            
            
            24,719,889
            
            
            
            24,650,313Additional shares due to assumed
      conversion of
              dilutive
    instruments
            
            
            239,507
            
            
            
            −
            
            
            
            170,076
            
            
            
            260,535Adjusted weighted-average number
      of common
              shares
outstanding
            
            
            25,054,296
            
            
            
            24,807,162
            
            
            
            24,889,965
            
            
            
            24,910,848Net income (loss) per
      share
            
            $
            0.00
            
            
            $
            (0.56
            )
            
            $
            0.17
            
            
            $
            0.22




Potentially dilutive shares relating to
373,165 shares of restricted stock are not included in the calculation of
diluted net income per share for the three months ended September 30, 2007
because the effect was anti-dilutive.


NOTE
11 – RELATED PARTY TRANSACTIONS





Relationship
with Resource Real Estate





Resource Real Estate originates,
finances and manages the Company’s commercial real estate loan portfolio,
including A notes, B notes and mezzanine loans.  The Company
reimburses Resource Real Estate for loan origination costs associated with all
loans originated.  At December 31, 2007, the Company was indebted to
Resource Real Estate for $197,000 of loan origination costs.  The
Company was not indebted to Resource Real Estate for any such costs at September
30, 2008.  At December 31, 2007, Resource Real Estate was indebted to
the Company for deposits held in trust in connection with the Company’s
commercial real estate portfolio of approximately $90,000.  Resource Real
Estate was not indebted to the Company for any such deposits at September 30,
2008.





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CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
11 – RELATED PARTY TRANSACTIONS − (Continued)





Relationship
with LEAF





LEAF, a majority-owned subsidiary of
RAI, originates and manages equipment leases and notes on the Company’s
behalf.  The Company purchases these 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.  At September
30, 2008 and December 31, 2007, the Company acquired $36.3 million and $38.7
million, respectively, of equipment lease and note investments from LEAF,
including $360,000 and $387,000 of origination cost reimbursements,
respectively.  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 September 30, 2008 and
December 31, 2007, the Company was indebted to LEAF for servicing fees in
connection with the Company’s equipment finance portfolio of approximately
$151,000 and $133,000, respectively.  LEAF’s servicing fees for the
three and nine months ended September 30, 2008 were $232,000 and $698,000,
respectively, compared to $199,000 and $612,000 for the three and nine months
ended September 30, 2007, respectively.




During the three and nine months ended
September 30, 2008, the Company sold ten and thirteen leases,
respectively, back to LEAF at a price equal to their book
value.  The total proceeds received were $3.1 million and $5.7
million, respectively.  During the three months ended September 30,
2007, the Company did not sell any leases back to LEAF.  During the
nine months ended September 30, 2007, the Company sold three lease back to LEAF
at a price equal to the Company’s book value.  The total proceeds
received on outstanding notes receivable were $1.8 million.


Relationship
with Resource America





At September 30, 2008, RAI owned
1,980,339 shares, or 7.8%, of the Company’s outstanding common
stock.  In addition, RAI has 100,088 unexercised warrants and 2,166
options to purchase restricted stock.





The
Company is managed by the Manager pursuant to a management agreement that
provides for both base and incentive management fees.  On June 30,
2008, the Company and the Manager entered into an amended and restated
management agreement that has an initial term ending March 31, 2009 and will
automatically renew for a one-year term annually unless at least two-thirds of
the independent directors or a majority of the outstanding common shares agree
to not automatically renew.  Incentive compensation fee was revised as
follows:  (i) twenty-five percent (25%) of the dollar amount
by which (A) the Company’s Adjusted Operating Earnings (before Incentive
Compensation but after the Base Management Fee) for such quarter per Common
Share (based on the weighted average number of Common Shares outstanding for
such quarter) exceeds (B) an amount equal to (1) the weighted
average of the price per share of the Common Shares in the initial offering by
the Company and the prices per share of the Common Shares in any subsequent
offerings by the Company, in each case at the time of issuance thereof,
multiplied by (2) the greater of (a) 2.00% and (b) 0.50% plus
one-fourth of the Ten Year Treasury Rate for such quarter, multiplied by
(ii) the weighted average number of Common Shares outstanding during such
quarter subject to adjustment; to exclude events pursuant to changes in GAAP or
the application of GAAP, as well as non-recurring or unusual transactions or
events, after discussion between the Manager and the Independent Directors and
approval by a majority of the Independent Directors in the case of non-recurring
or unusual transactions or events.  For the three and nine months
ended September 30, 2008, the Manager earned base management fees of
approximately $1.1 million and $3.5 million, respectively, and incentive
management fees of $799,000 and $1.4 million, respectively.  For the
three and nine months ended September 30, 2007, the Manager earned base
management fees of approximately $1.3 million and $3.9 million, respectively,
and incentive management fees of $0 and $1.5 million,
respectively.  In addition, the Company may 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 and nine months
ended September 30, 2008, the Company reimbursed the Manager $105,000 and
$288,000, respectively, for such expenses.  For the three and nine
months ended September 30, 2007, the Company reimbursed the Manager $121,000 and
$414,000, respectively, for such expenses.





At September 30, 2008, the Company was
indebted to the Manager for base management fees of $748,000, incentive
management fees of $799,000 and for the reimbursement of expenses of
$61,000.  At December 31, 2007, the Company was indebted to the
Manager for base management fees of $802,000 and for reimbursement of expenses
of $65,000.  These amounts are included in accounts payable and other
liabilities.





As of September 30, 2008 and December
31, 2007, 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.





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 28
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
11 – RELATED PARTY TRANSACTIONS − (Continued)





Relationship
with Law Firm





Until 1996, the Company’s Chairman,
Edward Cohen, was of counsel to Ledgewood, P.C., a law firm.  For the
three and nine months ended September 30, 2008, the Company paid Ledgewood
$38,000 and $139,000, respectively, compared to $31,000 and $283,000 during the
three and nine months ended September 30, 2007, respectively.  Mr.
Cohen receives certain debt service payments from Ledgewood related to the
termination of his affiliation with Ledgewood and its redemption of his
interest.





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), 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.





On September 25, 2008, the Company
declared a quarterly distribution of $0.39 per share of common stock, $9.9
million in the aggregate, which was paid on October 28, 2008 to stockholders of
record as of October 6, 2008.





On June 20, 2008, the Company declared
a quarterly distribution of $0.41 per share of common stock, $10.4 million in
the aggregate, which was paid on July 28, 2008 to stockholders of record as of
June 30, 2008.





On March 11, 2008, the Company declared
quarterly distribution of $0.41 per share of common stock which was paid on
April 28, 2008 to stockholders of record as of March 31, 2008.





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 the Company historically has
valued its investment securities available-for-sale and derivatives at fair
value.  SFAS 157 establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The Company determines fair value
based on quoted prices when available or 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.





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 29
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





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





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 measured
with income valuation approaches and dealer quotes using the following types of
inputs:




·
            CMBS
      with no secondary trading except for distressed sellers and markets
      reflecting forced liquidations are valued using an income approach and
      utilizing an appropriate current market yield, time value and estimated
      losses from default assumptions based on historical
    analysis.




·
            Other
      ABS are priced using consensus pricing and a dealer
  quote.





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 itself and
its counterparties.  However, as of September 30, 2008, 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.





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 September 30, 2008 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value.





Quoted
      Prices in Active Markets
                Level
      1
            
            
            Significant
      Other Observable Inputs
                Level
      2
            
            
            Significant
      Unobservable Inputs
                Level
      3
            
            
            Balance
      as of September 30, 2008Securities
      available-for-sale
            
            $
            −
            
            
            $
            −
            
            
            $
            46,221
            
            
            $
            46,221Derivatives,
      net
            
            
            −
            
            
            
            (12,885
            )
            
            
            −
            
            
            
            (12,885
            )Total
            
            $
            −
            
            
            $
            (12,885
            )
            
            $
            46,221
            
            
            $
            33,336





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.





Fair
      Value Measurements Using Significant Unobservable Inputs
                (Level
      3)
                Securities
      Available-for-SaleBeginning
      balance
            
            $
            65,464Total
      gains or losses (realized/unrealized):Included
      in
      earnings
            
            
            (1,667
            )Purchases,
      sales, issuances, and settlements
      (net)
            
            
            (10,288
            )Included
      in other comprehensive
      income
            
            
            (7,288
            )Ending
      balance
            
            $
            46,221





The
Company had $2.0 million of losses included in earnings due to the sale of one
asset in February 2008.  The loss is included on the consolidated
statements of operations as net realized gains (losses) on sales of investments.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)


SEPTEMBER
30, 2008


(Unaudited)





NOTE
14 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS





The primary 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 September 30, 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 $330.2
million at September 30, 2008.





At December 31, 2007, the Company had
30 interest rate swap contracts outstanding whereby the Company will pay an
average fixed rate of 5.36% and receive a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $347.9
million at December 31, 2007.





The
estimated fair value of the Company’s interest rate swaps was ($12.9) million
and ($18.0) million as of September 30, 2008 and December 31, 2007,
respectively.  The Company had aggregate unrealized losses of $15.3
million and $15.7 million on the interest rate swap agreements as of September
30, 2008 and December 31, 2007, 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.





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 September 30, 2008, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $3.8
million.  At December 31, 2007, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $4.1
million.





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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,
2007.  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 release the results of
any revisions to forward-looking statements which we may make to reflect events
or circumstances after the date of this Form 10-Q or to reflect the occurrence
of unanticipated events, 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.  Future distributions and capital appreciation are not
guaranteed, however, and we have only a relatively short operating history and
REIT experience upon which you can base an assessment of our ability to achieve
our objectives.





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 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 have used repurchase agreements as a short-term financing source,
and CDOs and have used, 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 this trend.  We
have also determined that the market valuation for CMBS and Other ABS in our
investment portfolio has been temporarily impaired.  While we believe we
have appropriately valued the assets in our investment portfolio at September
30, 2008, we cannot assure you that further impairment 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.  The
market for securities issued by securitizations collateralized by assets similar
to those in our investment portfolio has contracted severely.  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 expect our
ability to sponsor new securitizations will be limited for the foreseeable
future.  As a result, our ability to originate and finance new
invetments has been significantly diminished.  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 CMBS and other securities that we
hold.  In addition, we have received returns of funded margin calls
related to our interest rate derivatives and repurchase agreements of $295,000
and $2.8 million during the three and nine months ended September 30, 2008,
respectively.


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Beginning in the second half of 2007,
we have focused on managing our exposure to liquidity risks primarily by
reducing our exposure to possible margin calls under repurchase agreements,
seeking to conserve our liquidity.  We have continued to manage our
liquidity and originate new assets primarily through capital recycling as
payoffs occur and through existing capacities within our completed
securitizations.  As a result of commercial real estate loan
repayments in the nine months ended September 30, 2008, we were able to shift
loans, available-for-sale securities, and commercial real estate CDO notes from
our commercial real estate term facility and short term repurchase agreements
into our CDO structures and vice-versa, which resulted in the following
transfers by category:
  ·
              $79.2
      million of commercial real estate loans into our commercial real estate
      CDO structures  from our commercial real estate term
      facility
  ·
              $17.3
      million of commercial real estate CDO notes we owned into RREF CDO
      2006-1
  ·
              $5.0
      million of available-for-sale securities into our CDO
      structures
 
 The transfer of assets into our CDOs
was offset by the transfer of assets from our CDOs to our commercial real estate
term facility with the following transactions:
  ·
              $11.5
      million of commercial real estate
loans
  ·
              $12.0
      million of available-for-sale
securities
  These transfers into and out of our CDO
structures totaling $125.0 million, resulted in proceeds of $78.8 million, of
which a net $33.1 million was used to pay down our commercial real estate term
facility, $22.6 million was used to fund purchases of assets from our CDO
structures, and the remainder of $23.1 million represented unrestricted cash to
us.
 
 In addition to the above transfer
activity, during the nine months ended September 30, 2008 we sold a CMBS
security that provided proceeds of $8.0 million.  The combined
transfer to/from our CDOs and commercial real estate term facility and sale of
the CMBS security resulted in a total $31.1 million net unrestricted cash to us
during the nine month period.
 
 As of September 30, 2008, our
repurchase agreement exposure (pledged collateral less outstanding repurchase
agreement debt) was $42.5 million on commercial real estate loans and $3.5
million on commercial real estate CDO notes, for a total of $46.0 million, which
was reduced from $75.8 million in the aggregate as of December 31,
2007.
 
 We expect to continue to generate net
investment income from our current investment portfolio and generate dividends
for our shareholders. We continue to seek additional sources of financing,
including expanded bank financing, and use of co-investment, participations and
joint venture strategies that will enable us to originate investments and
generate fee income while preserving capital.
 
 We consolidate variable interest
entities, or VIEs, if we determine we are the primary beneficiary, in accordance
with Financial Accounting Standards Board, or FASB, Interpretation 46,
“Consolidation of Variable Interest Entities,” as revised, or FIN
46-R.  During the year ended December 31, 2007, we sold ten percent of
our equity investment in Ischus CDO II to an independent third party at market
value.  The sale was deemed to be a reconsideration event under FIN
46-R and we determined we were no longer the primary beneficiary based on a
discounted cash flow analysis of expected losses and expected residual
returns.  Therefore, we deconsolidated Ischus CDO II and recognized
income in our investment in Ischus CDO II using the cost recovery
method.  At the date of deconsolidation, the value of our investment
in Ischus CDO II was $722,000.  From the date of deconsolidation
through December 31, 2007, we received $465,000 of distributions leaving a
balance of $257,000 at December 31, 2007.  For the three months ended
March 31, 2008, $1.3 million of cash receipts were collected and we recognized
$997,000 of interest income on this investment which we record on our income
statement as interest income – other.  No additional cash has been
collected since March 31, 2008.
 
 As of September 30, 2008, we had
invested 73% of our portfolio in commercial real estate-related assets 25% in
commercial bank loans and 2% in direct financing leases and notes.  As
of December 31, 2007, we had invested 75% of our portfolio in commercial real
estate-related assets, 24% in commercial bank loans and 1% in direct financing
leases and notes.
 
 Critical
Accounting Policies and Estimates
 
 The following represents 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 2007 under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations − Critical Accounting Policies
and Estimates.”


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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
as 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 our 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 $39.7 million at September 30, 2008.  The balance of
impaired loans and leases with a valuation allowance at September 30, 2008 was
$38.6 million.  All of the loans deemed impaired at September 30, 2008
have an associated valuation allowance.  The balance of impaired
leases without a specific valuation allowance was $1.1 million at September 30,
2008.  The valuation allowance related to these specifically impaired
loans and leases was $580,000 at September 30, 2008.  The average
balance of impaired loans and leases was $25.0 million for the nine months ended
September 30, 2008.  We recognized and received $1.1 million of income
on one impaired loan, which reflected all interest income due, during the nine
months ended September 30, 2008.


The balance of impaired loans and
leases was $17.4 million at December 31, 2007.  The balance of
impaired loans and leases with a valuation allowance at December 31, 2007 was
$17.0 million.  All of the loans deemed impaired at December 31, 2007
have an associated valuation allowance.  The balance of impaired
leases without a specific valuation allowance was $359,000 at December 31,
2007.  The valuation allowance related to these specifically impaired
loans and leases was $2.3 million at December 31, 2007.  The average
balance of impaired loans and leases was $4.3 million during 2007.  We
did not recognize any income on impaired loans and leases during 2007 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.





The following tables show the changes
in the allowance for loan and lease losses (in thousands):





Allowance
      for loan loss at January 1, 2008
            
            $
            5,918Provision for loan
      loss
            
            
            27,392Loans
    charged-off
            
            
            (3,283
            )Recoveries
            
            
            −Allowance
      for loan loss at September 30, 2008
            
            $
            30,027





Allowance
      for lease loss at January 1, 2008
            
            $
            293Provision for lease
      loss
            
            
            435Leases
    charged-off
            
            
            −Recoveries
            
            
            −Allowance
      for lease loss at September 30, 2008
            
            $
            728





Classifications
and Valuation of Investment Securities





Effective January 1, 2008, we adopted
the provisions of Statement of Financial Accounting Standards No. 157, or SFAS,
“Fair Value Measurements.”  SFAS 157 did not have a material effect on
our consolidated financial statements with respect to investment securities
available-for-sale and derivatives.  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.




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 34
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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 measured
with income valuation approaches and dealer quotes using the following types of
inputs:




·
            CMBS
      with no secondary trading except for distressed sellers and markets
      reflecting forced liquidations are valued using an income approach and
      utilizing an appropriate current market yield, time value and estimated
      losses from default assumptions based on historical
    analysis.




·
            Other
      ABS is priced using consensus pricing and a dealer
  quote.





The
following is a discussion of the valuation techniques applied to derivatives for
fair value measurement.




·
            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 utilize
      Level 3 inputs, such as estimates of current credit spreads to
      evaluate the likelihood of default by us and our
      counterparties.  However, as of September 30, 2008, we have
      assessed the significance of the impact of the credit valuation
      adjustments on the overall valuation of our derivative positions and has
      determined that the credit valuation adjustments are not significant to
      the overall valuation of our derivatives.  As a result, we have
      determined that our derivative valuations in their entirety are classified
      in Level 2 of the fair value
hierarchy.





The following table presents
information about our assets (including derivatives that are presented net)
measured at fair value on a recurring basis as of September 30, 2008 and
indicates the fair value hierarchy of the valuation techniques utilized by us to
determine such fair value.





Quoted
      Prices in Active Markets
                Level
      1
            
            
            Significant
      Other Observable Inputs
                Level
      2
            
            
            Significant
      Unobservable Inputs
                Level
      3
            
            
            Balance
      as of September 30, 2008Securities
      available-for-sale
            
            $
            −
            
            
            $
            −
            
            
            $
            46,221
            
            
            $
            46,221Derivatives,
      net
            
            
            −
            
            
            
            (12,885
            )
            
            
            −
            
            
            
            (12,885
            )Total
            
            $
            −
            
            
            $
            (12,885
            )
            
            $
            46,221
            
            
            $
            33,336





The
following table presents additional information about assets which we measure at
fair value on a recurring basis for which we used Level 3 inputs to determine
fair value.





Fair
      Value Measurements Using Significant Unobservable Inputs
                (Level
      3)
                Securities
      Available-for-SaleBeginning
      balance
            
            $
            65,464Total
      gains or losses (realized/unrealized):Included
      in earnings
            
            
            (1,667
            )Purchases,
      sales, issuances, and settlements (net)
            
            
            (10,288
            )Included
      in other comprehensive income
            
            
            (7,288
            )Ending
      balance
            
            $
            46,221





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We had $2.0 million of losses included in earnings due to the sale of one asset
during the nine months ended September 30, 2008.  The loss is included
on consolidated statements of operations as net realized gains (losses) on sales
of investments.




SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” requires us to classify our
investment portfolio as either trading investments, available-for-sale
investments or held-to-maturity investments.  Although we generally
plan to hold most of our investments to maturity, we may from time to time sell
any of our investments due to changes in market conditions or in accordance with
our investment strategy.  Accordingly, SFAS 115 requires us to
classify all of our investment securities as available-for-sale.  We
report all investments classified as available-for-sale at fair value, based on
the methodology described above and based on SFAS 157 with unrealized gains and
losses reported as a component of accumulated other comprehensive income (loss)
in stockholders’ equity.
  We evaluate our available-for-sale
investments for other-than-temporary impairment on a quarterly basis in
accordance with the guidance provided in FASB Staff Position No. 115-1 and
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments,” (“FSP 115-1 and FSP 124-1”).  We evaluate the
probability that we will not collect all of the contractual amounts due and our
ability and intent to hold the security until recovery in determining whether
each security has other-than-temporary impairment.


While our available-for-sale
investments have continued to decline in fair value, we believe that these
declines continue to be temporary. In particular, with respect to CMBS, all
assets are current with respect to interest and principal payments. In addition,
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.  Our review concluded, that there exist no
credit characteristics that would indicate other-than-temporary impairments as
of September 30, 2008.





We record investment securities
transactions on the trade date.  We record purchases of newly issued
securities when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement
date.  We determine realized gains and losses on investment securities
on the specific identification method.





Repurchase
Agreements





We have used repurchase agreements as a
financing source in acquiring our commercial real estate loans and CMBS-private
placement portfolios, and have used repurchase agreements as a short-term
financing source for our commercial real estate loan portfolio prior to the
execution of a CDO. Although structured as a sale and purchase obligation, a
repurchase agreement operates as a financing arrangement under which we pledge
our securities as collateral to secure a loan which is equal in value to a
specified percentage of the estimated fair value of the pledged collateral,
while we retain beneficial ownership of the pledged collateral.  We
carry these repurchase agreements at their contractual amounts, as specified in
the respective agreements.  We recognize interest expense on all
borrowings on an accrual basis.





We have from time to time purchased
debt investments from a counterparty and subsequently financed the acquisition
of those debt investments through repurchase agreements with the same
counterparty.  We currently record the acquisition of the debt
investments as assets and the related repurchase agreements as financing
liabilities gross on the consolidated balance sheets.  Interest income
earned on the debt investments and interest expense incurred on the repurchase
obligations are reported gross on our consolidated income
statements.  However, under an interpretation of SFAS 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” such transactions may not qualify as a purchase by
us.  There were no such transactions as of September 30, 2008 and
December 31, 2007.  In February 2008, FASB issued FASB Staff Position
140-3, or FSP FAS 140-3, “Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions,” which provides guidance on accounting for a
transfer of a financial asset and repurchase financing, which is effective for
fiscal years beginning after November 15, 2008.  We do not expect FSP
FAS 140-3 will have a material effect on our consolidated financial
statements.





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Derivative
Instruments





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 No. 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 and Nine
Months Ended September 30, 2008 as compared to


Three and Nine Months Ended September
30, 2007





Our net income for the three and nine
months ended September 30, 2008 was $88,000, or $0.00 per weighted average
common share (basic and diluted), and $4.2 million or $0.17 per weighted average
common share (basic and diluted), respectively as compared to a net loss of
$13.9 million, or $0.56 per weighted average common share (basic and diluted),
and net income of $5.4 million, or $0.22 per weighted average common share
(basic and diluted) for the three and nine months ended September 30, 2007,
respectively.





The increase in net income of $14.0
million for the three months ended September 30, 2008 from the comparative 2007
period is primarily attributable to asset impairments of $25.5 million recorded
during the three months ended September 30, 2007.  No such impairments
were recorded during the three months ended September 30, 2008.  This
was partially offset by an increase in our provision for loan and lease losses
of $10.6 million during the three months ended September 30, 2008 as compared to
the three months ended September 30, 2007.  The decrease in net income
of $1.2 million for the nine months ended September 30, 2008 from the
comparative 2007 period is primarily attributable to an increase in our
provision for loan and lease losses of $27.3 million during the nine months
ended September 30, 2008 offset by asset impairments of $26.3 million
recorded during the nine months ended September 30, 2007.  No such
impairments were recorded during the nine months ended September 30,
2008.





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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
              September
      30, 2008
            
            
            Three
      Months Ended
              September
      30, 2007Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Income
            
            
            Yield
      (1)
            
            
            Balance
            
            
            Interest
      Income
            
            
            Yield
      (1)
            
            
            BalanceInterest income from
      loans:Bank loans
            
            $
            12,589
            
            
            
            5.19%
            
            
            $
            952,907
            
            
            $
            18,734
            
            
            
            7.55%
            
            
            $
            953,632Commercial real estate
      loans
            
            
            16,314
            
            
            
            7.34%
            
            
            $
            845,021
            
            
            
            18,664
            
            
            
            8.58%
            
            
            $
            861,689Total interest income from
      loans
            
            
            28,903
            
            
            
            
            
            
            
            
            
            
            
            37,398Interest income from securities
      available-for-sale:ABS-RMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            6,452
            
            
            
            7.00%
            
            
            $
            350,347CMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            404
            
            
            
            5.59%
            
            
            $
            28,255Other ABS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            461
            
            
            
            6.98%
            
            
            $
            25,429CMBS-private
      placement
            
            
            1,062
            
            
            
            5.68%
            
            
            $
            74,218
            
            
            
            1,451
            
            
            
            6.41%
            
            
            $
            83,682Total interest income
      from
              securities
      available-for-sale
            
            
            1,062
            
            
            
            
            
            
            
            
            
            
            
            8,768Leasing
            
            
            1,995
            
            
            
            8.68%
            
            
            $
            89,729
            
            
            
            1,856
            
            
            
            8.67%
            
            
            $
            84,016Interest income –
      other:Interest rate swap
      agreements
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            118
            
            
            
            0.21%
            
            
            $
            212,298Temporary
      investment
              in over-night
      repurchase
              agreements
            
            
            352
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            651
            
            
            
            N/A
            
            
            
            N/ATotal interest income −
      other
            
            
            352
            
            
            
            
            
            
            
            
            
            
            
            769Total
      interest income
            
            $
            32,312
            
            
            
            
            
            
            
            
            
            
            $
            48,791





(1)
              Certain
      one-time items reflected in interest expense have been excluded in
      calculating the weighted average rate, since they are not indicative of
      expected future results.




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Nine
      Months Ended
              September
      30, 2008
            
            
            Nine
      Months Ended
              September
      30, 2007Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Income
            
            
            Yield
      (1)
            
            
            Balance
            
            
            Interest
      Income
            
            
            Yield
      (1)
            
            
            BalanceInterest income from
      loans:Bank loans
            
            $
            41,389
            
            
            
            5.66%
            
            
            $
            946,320
            
            
            $
            51,799
            
            
            
            7.47%
            
            
            $
            896,474Commercial real estate
      loans
            
            
            48,639
            
            
            
            7.31%
            
            
            $
            849,384
            
            
            
            48,987
            
            
            
            8.87%
            
            
            $
            749,807Total interest income fromloans
            
            
            90,028
            
            
            
            
            
            
            
            
            
            
            
            100,786Interest income from securities
      available-for-sale:ABS-RMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            19,011
            
            
            
            7.10%
            
            
            $
            349,701CMBS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            1,205
            
            
            
            5.65%
            
            
            $
            28,269Other ABS
            
            
            19
            
            
            
            0.24%
            
            
            $
            6,000
            
            
            
            1,218
            
            
            
            6.97%
            
            
            $
            23,061CMBS-private
      placement
            
            
            3,382
            
            
            
            5.50%
            
            
            $
            76,909
            
            
            
            2,638
            
            
            
            6.29%
            
            
            $
            53,513Total interest income
      from
              securities
      available-for-sale
            
            
            3,401
            
            
            
            
            
            
            
            
            
            
            
            24,072Leasing
            
            
            5,946
            
            
            
            8.68%
            
            
            $
            92,277
            
            
            
            5,667
            
            
            
            8.70%
            
            
            $
            85,544Interest income –
      other:Interest rate swap
      agreements
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            150
            
            
            
            0.17%
            
            
            $
            157,226Interest income – other (2)
            
            
            997
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            −
            
            
            
            N/A
            
            
            
            N/ATemporary
      investment
              in over-night
      repurchase
              agreements
            
            
            1,181
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            1,930
            
            
            
            N/A
            
            
            
            N/ATotal interest income −
      other
            
            
            2,178
            
            
            
            
            
            
            
            
            
            
            
            2,080Total
      interest income
            
            $
            101,553
            
            
            
            
            
            
            
            
            
            
            $
            132,605





(1)
                Certain
      one-time items reflected in interest expense have been excluded in
      calculating the weighted average rate, since they are not indicative of
      expected future results.


(2)
            Represents
      cash received on our 90% equity investment in Ischus CDO II in excess of
      our investment.  Income on this investment is recognized using
      the cost recovery method.





Interest income decreased $16.5 million
(34%) and $31.1 million (23%) to $32.3 million and $101.6 million for the three
and nine months ended September 30, 2008, respectively, from $48.8 million and
$132.6 million for the three and nine months ended September 30,
2007.  We attribute this decrease to the following:





Interest
Income from Loans





Interest income from loans decreased
$8.5 million (23%) and $10.8 million (11%) to $28.9 million and $90.0 million
for the three and nine months ended September 30, 2008, respectively, from $37.4
million and $100.8 million for the three and nine months ended September 30,
2007, respectively.





Bank loans generated interest income of
$12.6 million and $41.4 million for the three and nine months ended September
30, 2008, respectively, as compared to $18.7 million and $51.8 million for the
three and nine months ended September 30, 2007, respectively, a decrease of $6.1
million (33%) and $10.4 million (20%), respectively.  These decreases
resulted primarily from a decrease in the weighted average rate earned by our
bank loans to 5.19% and 5.66% for the three and nine months ended September 30,
2008, respectively, from 7.55% and 7.47% for the three and nine months ended
September 30, 2007, respectively.  This was principally as a result of
the decrease in LIBOR which is a reference index for the rates payable on these
loans.  The effects of the decrease in the weighted average rate were
partially offset by an increase of $49.8 million in the weighted average balance
of assets to $946.3 million for the nine months ended September 30, 2008 from
$896.5 million for the nine months ended September 30, 2007 as a result of the
acquisition of investments for Apidos Cinco CDO.





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Commercial real estate loans generated
interest income of $16.3 million and $48.6 million of interest income for the
three and nine months ended September 30, 2008, respectively, as compared to
$18.7 million and $49.0 million for the three and nine months ended September
30, 2007, respectively, a decrease of $2.4 million (13%) and $348,000 (1%),
respectively.  This decrease resulted from a decrease in the weighted
average rate earned by our bank loans to 7.11% and 7.19% for the three and nine
months ended September 30, 2008, respectively, from 8.19% and 8.15% for the
three and nine months ended September 30, 2007, respectively, as a result of the
decrease in LIBOR which is a referenced index for most of the
rates.  This decrease was partially offset by the
following:




·
            an
      increase of $99.6 million in the weighted average balance of our
      commercial real estate loans to $849.4 million for the nine months ended
      September 30, 2008 from $749.8 million for the nine months ended September
      30, 2007 as a result of the accumulation of assets for our second
      commercial real estate, or CRE CDO, RREF CDO 2007-1 which closed in June
      2007; and




·
            the
      acceleration of loan origination fees of $495,000 for the nine months
      ended September 30, 2008 as a result of the sale of
      loans.  There was no such acceleration of loan origination fees
      for the three months ended September 30,
2008.





Interest
Income from Securities Available-for-Sale





Interest income from securities
available-for-sale decreased $7.7 million (88%) and $20.7 million (86%) to $1.1
million and $3.4 million for the three and nine months ended September 30, 2008,
respectively, from $8.8 million and $24.1 million for the three and nine months
ended September 30, 2007, respectively.





Interest income from our asset-backed
securities-residential mortgage-backed securities, or ABS-RMBS, CMBS and other
ABS portfolio generated $6.5 million, $404,000 and $461,000, respectively for
the three months ended September 30, 2007 and $19.0 million, $1.2 million and
$1.2 million, respectively for the nine months ended September 30,
2007.  No interest income from ABS-RMBS and CMBS was generated during
the three and nine months ended September 30, 2008.  The other ABS
portfolio generated $19,000 for the nine months ended September 30,
2008.  The decrease is primarily a result of the deconsolidation of
Ischus CDO II  on November 13, 2007 following our sale of a 10%
portion of our equity ownership, a reconsideration event in accordance with FIN
46-R.





CMBS-private placement generated $1.1
million and $3.4 million of interest income for the three and nine months ended
September 30, 2008, respectively, as compared to $1.5 and $2.6 million for the
three and nine months ended September 30, 2007, respectively, a decrease of
$389,000 (27%) for the three months ended September 30, 2008 and an increase of
$744,000 (28%) for the nine months ended September 30, 2008.  The
decrease for the three months ended September 30, 2008 resulted primarily from
the decrease of the weighted average balance of $9.5 million on these securities
to $74.2 million for the three months ended September 30, 2008 from $83.7
million for the three months ended September 30, 2007 primarily as a result of
the sale of one bond with a $10.0 million par value in February
2008.  In addition, the decrease was a result of a decrease in the
weighted average rate to 5.68% for the three months ended September 30, 2008
from 6.41% for the three months ended September 30, 2007 as a result of the
decrease in LIBOR which is a reference index for the rates payable on some of
these securities.  The increase for the nine months ended September
30, 2008 resulted primarily from an increase of $23.4 million in the weighted
average balance of the securities to $76.9 million for the nine months ended
September 30, 2008 from $53.5 million for the nine months ended September 30,
2007.  This increase was partially offset from a decrease in the
weighted average rate to 5.50% for the nine months ended September 30, 2008 from
6.29% for the nine months ended September 30, 2007 as a result of the decrease
in LIBOR which is a reference index for the rates payable on some of these
securities.





Interest
Income from Leasing





Leasing generated $2.0 million and $5.9
million of interest income for the three and nine months ended September 30,
2008, respectively, as compared to $1.9 million and $5.7 million for the three
and nine months ended September 30, 2007, respectively, an increase of $139,000
(7%) and $279,000 (5%) for the three and nine months ended September 30, 2007,
respectively.  The increase is primarily the result of an increase in
the weighted average balance on the leases of $5.7 million and $6.7 million to
$89.7 million (7%) and $92.3 million (5%) for the three and nine months ended
September 30, 2008, respectively, as compared to $84.0 million and $85.5 million
for the three and nine months ended September 30, 2007,
respectively.





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Interest
Income - Other





Interest income-other decreased
$417,000 (54%) and increased $98,000 (5%), respectively, to $352,000 and $2.2
million, respectively, for the three and nine months ended September 30, 2008,
respectively, as compared to $769,000 million and $2.1 million for the three and
nine months ended September 30, 2007, respectively.  The decrease for
the three months ended September 30, 2008 was due to lower rates earned on our
over-night repurchase agreements.  The increase for the nine months
ended September 30, 2008 was from an increase in interest income from our equity
method investment in Ischus CDO II.  We use the cost recovery method
to recognize the income on this investment and recognized $997,000 during the
three months ended March 31, 2008.  No such additional income was
recognized during the nine months ended September 30, 2008.  This
increase during the nine months ended September 30, 2008 was partially offset by
a decrease in temporary investment income due to lower rates earned on our
over-night repurchase agreements.





Interest
Expense





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




Three
      Months Ended
              September
      30, 2008
            
            
            Three
      Months Ended
              September
      30, 2007Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Expense
            
            
            Yield
            
            
            Balance
            
            
            Interest
      Expense
            
            
            Yield
            
            
            BalanceBank
      loans
            
            $
            7,993
            
            
            
            3.46%
            
            
            $
            906,000
            
            
            $
            13,908
            
            
            
            5.90%
            
            
            $
            906,000Commercial
      real estate loans
            
            
            6,587
            
            
            
            3.68%
            
            
            $
            697,190
            
            
            
            11,496
            
            
            
            6.18%
            
            
            $
            700,725ABS-RMBS
      / CMBS / ABS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            5,850
            
            
            
            5.97%
            
            
            $
            376,000CMBS-private
      placement
            
            
            39
            
            
            
            3.73%
            
            
            $
            4,181
            
            
            
            229
            
            
            
            5.62%
            
            
            $
            16,031Leasing
            
            
            884
            
            
            
            4.28%
            
            
            $
            83,192
            
            
            
            1,443
            
            
            
            6.72%
            
            
            $
            81,888General
            
            
            3,161
            
            
            
            3.20%
            
            
            $
            379,996
            
            
            
            1,340
            
            
            
            8.84%
            
            
            $
            54,670Total interest
      expense
            
            $
            18,664
            
            
            
            
            
            
            
            
            
            
            $
            34,266





Nine
      Months Ended
              September
      30, 2008
            
            
            Nine
      Months Ended
              September
      30, 2007Weighted
      Average
            
            
            
            
            
            Weighted
      AverageInterest
      Expense
            
            
            Yield
            
            
            Balance
            
            
            Interest
      Expense
            
            
            Yield
            
            
            BalanceBank
      loans
            
            $
            27,087
            
            
            
            4.02%
            
            
            $
            906,000
            
            
            $
            38,846
            
            
            
            5.95%
            
            
            $
            855,656Commercial
      real estate loans
            
            
            21,689
            
            
            
            4.21%
            
            
            $
            700,130
            
            
            
            26,091
            
            
            
            6.38%
            
            
            $
            534,477ABS-RMBS
      / CMBS / ABS
            
            
            −
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            17,118
            
            
            
            5.96%
            
            
            $
            376,000CMBS-private
      placement
            
            
            126
            
            
            
            4.24%
            
            
            $
            3,816
            
            
            
            1,000
            
            
            
            5.55%
            
            
            $
            25,193Leasing
            
            
            3,100
            
            
            
            4.79%
            
            
            $
            87,469
            
            
            
            4,255
            
            
            
            6.57%
            
            
            $
            83,727General
            
            
            8,734
            
            
            
            2.93%
            
            
            $
            386,761
            
            
            
            3,945
            
            
            
            9.03%
            
            
            $
            52,270Total interest
      expense
            
            $
            60,736
            
            
            
            
            
            
            
            
            
            
            $
            91,255





Interest expense decreased $15.6
million (46%) and $30.5 million (33%) to $18.7 million and $60.7 million for the
three and nine months ended September 30, 2008, respectively, from $34.3 million
and $91.3 million for the three and nine months ended September 30, 2007,
respectively.  We attribute this decrease to the
following:





Interest expense on bank loans was $8.0
million and $27.1 million for the three and nine months ended September 30,
2008, respectively, as compared to $13.9 million and $38.8 million for the three
and nine months ended September 30, 2007, a decrease of $5.9 million (43%) and
$11.8 million (30%), respectively.  This decrease resulted from a
decrease in the weighted average rate on the debt related to bank loans to 3.28%
and 3.76% for the three and nine months ended September 30, 2008, respectively,
from 5.86% and 5.85% for the three and nine months ended September 30, 2007,
respectively, due primarily to the decrease in LIBOR which is a reference index
for the rates payable on a majority of these notes.  This decrease was
partially offset by an increase of $50.3 million in the weighted average balance
of the notes during the nine months ended September 30, 2008 due to the closing
of our third Apidos CLO, Apidos Cinco CDO.  The decrease was also
partially offset due to amortization of $399,000 and $1.2 million for the three
and nine months ended September 30, 2008, respectively as compared to $351,000
and $854,000 of deferred debt issuance costs related to the CDO financings for
the three and nine months ended September 30, 2007, respectively.  The
increase in deferred debt issuance costs is due to the closing of our third
Apidos CLO, Apidos Cinco CDO.





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 41
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Interest
expense on commercial real estate loans which was $6.6 million and $21.7 million
for the three and nine months ended September 30, 2008, respectively, decreased
$4.9 million (43%) and $4.4 million (17%) for the three and nine months ended
September 30, 2008 from $11.5 million and $26.1 million for the three and nine
months ended September 30, 2007, respectively.  These decreases were due
principally to the decrease in the weighted average rate to 3.68% and 4.21% for
the three and nine months ended September 30, 2008, respectively, as compared to
6.18% and 6.38% for the three and nines months ended September 30, 2007,
respectively, primarily as a result of the decrease in LIBOR which is a
reference index for the rates payable on a majority of these
borrowings.  This decrease in rates was partially offset by the
following:




·
            the
      amortization of $211,000 of expenses in September 2008 related to the
      restructuring of our Natixis facility.  There was no such
      expense in the prior year.




·
            our
      amortization of $370,000 and $1.2 million of deferred debt issuance costs
      related to the CDO financings for the three and nine months ended
      September 30, 2008, respectively, as compared to $324,000 and $614,000 for
      the three and nine months ended September 30, 2007, respectively;
      and




·
            the
      increase of $165.6 million in the weighted average balance of debt to
      $700.1 million for the nine months ended September 30, 2008 from $534.5
      million for the nine months ended September 30, 2007 as a result of the
      accumulation of assets for our second CRE CDO, RREF 2007-1 which closed in
      June 2007.





ABS-RMBS, CMBS and other ABS, which we
refer to collectively as ABS, were pooled and financed by Ischus CDO
II.  Interest expense related to these obligations was $5.9 million
and $17.1 million for the three and nine months ended September 30, 2007,
respectively.  There was no such interest expense for the three and
nine months ended September 30, 2008 due to the deconsolidation of Ischus CDO II
on November 13, 2007, which was a result of the sale of 10% of our equity
ownership, a reconsideration event in accordance with FIN 46-R.





Interest expense on CMBS-private
placement was $39,000 and $126,000 for the three and nine months ended September
30, 2008, respectively, as compared to $229,000 and $1.0 million for the three
and nine months ended September 30, 2007, respectively, a decrease of $190,000
(83%) and $935,000 (88%) due to the following:




·
            the
      decrease in weighted average balance on this facility of $11.9 million and
      $21.4 million to $4.2 million and $3.8 million for the three and nine
      months ended September 30, 2008, respectively, as compared to $16.0
      million and $25.2 million for the three and nine months ended September
      30, 2007, respectively, due to a majority of the assets being refinanced
      by CDO debt subsequent to May 2007;




·
            the
      decrease in weighted average rate to 3.73% and 4.24% for the three and
      nine months ended September 30, 2008, respectively, from 5.62% and 5.55%
      for the three and nine months ended September 30, 2007, respectively, as a
      result of the decrease in LIBOR rate which is a reference index for the
      rates payable on these borrowings.





Interest expense on leasing activities
was $884,000 and $3.1 million for the three and nine months ended September 30,
2008, respectively, as compared to $1.4 million and $4.3 million for the three
and nine months ended September 30, 2007, respectively, a decrease of $559,000
(39%) and $1.2 million (27%), respectively.  The decrease is primarily
due to a decrease in rate to 4.28% and 4.79% for the three and nine months ended
September 30, 2008, respectively, from 6.72% and 6.57% for the three and nine
months ended September 30, 2007, respectively.  The decrease in rate
was the result of the decrease in the commercial paper index, which is a
reference index for the rate payable on this facility.





The decrease in interest expense was
partially offset by the increase in general interest expense which was $3.2
million and $8.7 million for the three and nine months ended September 30, 2008,
respectively, as compared to $1.3 million and $3.9 million for the three and
nine months ended September 30, 2007, respectively, an increase $1.8 million
(136%) and $4.8 million (123%), respectively.  This increase resulted
primarily from an increase of $2.2 million and $5.7 million in expenses on our
interest rate derivatives that fix the rate we pay under these
agreements.  During the three and nine months ended September 30,
2008, the floating rate we paid exceeded the fixed rate we received due to the
decrease in LIBOR. The increase in derivative expense was partially offset by a
decrease in interest expense related to our unsecured junior subordinated
debentures held by unconsolidated trusts that issued trust preferred securities
as a result of a decrease in the LIBOR rate which is a reference index for the
rates payable by these debentures.





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 42
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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
              September
      30,
            
            
            Nin
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Management
      fee – related party
            
            $
            1,915
            
            
            $
            1,298
            
            
            $
            4,824
            
            
            $
            5,357Equity
      compensation − related party
            
            
            157
            
            
            
            94
            
            
            
            779
            
            
            
            717Professional
      services
            
            
            773
            
            
            
            772
            
            
            
            2,229
            
            
            
            2,005Insurance
            
            
            171
            
            
            
            116
            
            
            
            469
            
            
            
            351General
      and administrative
            
            
            421
            
            
            
            405
            
            
            
            1,119
            
            
            
            1,141Income
      tax (benefit) expense
            
            
            (33
            )
            
            
            91
            
            
            
            134
            
            
            
            262Total
            
            $
            3,404
            
            
            $
            2,776
            
            
            $
            9,554
            
            
            $
            9,833





Management fee–related party increased
$617,000 (48%) for the three months ended September 30, 2008 and decreased
$533,000 (10%) for the nine months ended September 30, 2008 to $1.9 million and
$4.8 million for the three and nine months ended September 30, 2008,
respectively, as compared to $1.3 million and $5.4 million for the three and
nine months ended September 30, 2007, respectively.  These amounts
represent compensation to our manager in the form of base management fees and
incentive management fees pursuant to our management agreement.  The
base management fees decreased by $183,000 (14%) and $421,000 (11%) to $1.1
million and $3.5 million for the three and nine months ended September 30, 2008,
respectively, as compared to $1.3 million and $3.9 million for the three and
nine months ended September 30, 2007, respectively.  This decrease was
due to decreased equity, a component in the formula by which base management
fees are calculated, as a result of asset impairments and the eventual
deconsolidation of Ischus CDO II and as a result of provisions for loan and
lease losses during 2008.  Incentive management fees increased
$799,000 (100%) for the three months ended September 30, 2008 and decreased
$113,000 (8%) for the nine months ended September 30, 2008 to $799,000 and $1.4
million for the three and nine months ended September 30, 2008, respectively,
from $0 and $1.5 million in the three and nine months ended September 30, 2007,
respectively.  The increase for the three months ended September 30,
2008 was due to the fact that no incentive was paid in the three months ended
September 30, 2007 as a result of the net loss for that period.  The
net loss was primarily the result of asset impairments on our ABS-RMBS
portfolio.  The decrease for the nine months ended September 30, 2008
was primarily the result of a decrease in our adjusted net income of $352,000,
as defined in the management agreement, during the nine months ended September
30, 2008 as compared to the nine months ended September 30, 2007.





Equity compensation–related party
increased $63,000 (67%) and $62,000 (9%) to $157,000 and $779,000 for the three
and nine months ended September 30, 2008, respectively, as compared to $94,000
and $717,000 for the three and nine months ended September 30,
2007.  These expenses relate to the amortization of annual grants of
restricted common stock to our non-employee independent directors, and annual
and discretionary grants of restricted stock to several employees of Resource
America, Inc., or RAI, who provide investment management services to us through
our Manager.  The increase in expense was primarily the result of
several restricted stock grants issued during and subsequent to September
2007.  This was partially offset by our quarterly remeasurement of
unvested stock and options as a result of the decrease in our stock
price.





Professional services increased
$224,000 (11%) to $2.2 million for the nine months ended September 30, 2008 as
compared to $2.0 million for the nine months ended September 30,
2007.  The increases during the nine months ended September 30, 2008
was primarily due to an increase of $148,000 and $101,000, respectively, of
legal and tax fees related principally to compliance work
performed.





Insurance
expense increased $55,000 (47%) and $118,000 (34%) to $171,000 and $469,000 for
the three and nine months ended September 30, 2008 as compared to $116,000 and
$351,000 for the three and nine months ended September 30, 2007.  The
increases are the result of an increase in our director's and officer's policy
premium beginning in March 2008.





Income
tax expense decreased $124,000 (136%) and $128,000 (49%) to income of $33,000
and expense of $134,000 for the three and nine months ended September 30, 2008
as compared to $91,000 and $262,000 for the three and nine months ended
September 30, 2007.





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 43
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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
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      realized gains (losses) on sales
              of investments
            
            $
            242
            
            
            $
            158
            
            
            $
            (1,651
            )
            
            $
            513Asset
      impairments
            
            
            −
            
            
            
            (25,490
            )
            
            
            −
            
            
            
            (26,277
            )Other
      income
            
            
            27
            
            
            
            37
            
            
            
            86
            
            
            
            110Provision
      for loan and lease loss
            
            
            (10,999
            )
            
            
            (369
            )
            
            
            (27,828
            )
            
            
            (503
            )Gain
      on the extinguishment of debt and loan
            
            
            574
            
            
            
            −
            
            
            
            2,324
            
            
            
            −Total
            
            $
            (10,156
            )
            
            $
            (25,664
            )
            
            $
            (27,069
            )
            
            $
            (26,157
            )





Net
realized gains (losses) on sales of investments increased $84,000 (53%) and
decreased $2.2 million (422%) to a gain of $242,000 and a loss of $1.7 million
for the three and nine months ended September 30, 2008, respectively, from gains
of $158,000 and $513,000 for the three and nine months ended September 30, 2007,
respectively.  The increase in realized losses during the nine months
ended September 30, 2008 was primarily due to a loss of $2.0 million on the sale
of one of our CMBS – private placement positions.





Asset
impairments were $25.5 million and $26.3 million for the three and nine months
ended September 30, 2007 and consisted entirely of other-than-temporary
impairment on assets in our ABS-RMBS portfolio.  During the third and
fourth quarter of 2007, we experienced illiquidity in the sub-prime market and
deteriorating delinquency characteristics of the mortgages underlying our
bonds.  These trends, together with significant rating agency actions,
supported the need to further reevaluate the level of asset impairments in our
ABS-RMBS portfolio.  The asset impairments recorded reflect these worsening
market conditions.  Due to the substantial impairments recorded in
2007 and the deconsolidation of Ischus CDO II on November 13, 2007, there
was no such impairment for the three and nine months ended September 30,
2008.





Our
provision for loan and lease losses was $11.0 million and $27.8 million for the
three and nine months ended September 30, 2008, respectively.  It
consisted of $8.0 million and $12.9 million of provisions for loan loss on our
bank loan portfolio for the three and nine months ended September 30, 2008,
respectively, $2.8 million and $14.4 million of provisions for loan loss on our
commercial real estate portfolio for the three and nine months ended September
30, 2008, respectively, and $237,000 and $435,000 of provision on our
leasing portfolio for the three and nine months ended September 30, 2008,
respectively.  Our provision for loan and lease losses was $369,000
and $503,000 for the three and nine months ended September 30, 2007,
respectively.  It consisted of $239,000 and $373,000 of provision on
our bank loan portfolio and $130,000 and $130,000 of provision on our leasing
portfolio for the three and nine months ended September 30, 2007,
respectively.  The principal reason for the increase in the provision
for loan and lease losses was due to reserves recognized on three defaulted bank
loans and reserving for one defaulted CRE loan and one CRE loan sold at a
discount subsequent to September 30, 2008.  We also increased our
general reserve due to deteriorating credit market
conditions.


Gain on
the extinguishment of debt and loan in 2008 is due to the buyback of $5.0
million of debt issued by RREF 2007-1 in February 2008.  The notes,
issued at par, were bought back as an investment by us at a price of 65%
resulting in a gain of $1.8 million.  The related deferred debt
issuance costs were immaterial.  There was no such transaction in the
nine months ended September 30, 2007.  In addition, in September 2008,
we were reimbursed for the termination of a hedge and recognized a gain of
$574,000 in connection with the transaction.





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 and nine months ended September
30, 2008, Resource TRS recognized a reduction of $33,000 and an increase of
$133,000 in the provision for income taxes, respectively.  For the
three and nine months ended September 30, 2007, Resource TRS recognized a
$83,000 and $254,000 provision for income taxes, respectively.





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 44
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Financial
Condition





Investment
Portfolio





The table below summarizes the
amortized cost and net carrying amount of our investment portfolio as of
September 30, 2008 and December 31, 2007, 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
            
            
            Dollar
      price
            
            
            Net
      carrying amount
            
            
            Dollar
      price
            
            
            Net
      carrying amount less amortized cost
            
            
            Dollar
      priceSeptember
      30, 2008Floating
      rateCMBS-private
      placement
            
            $
            32,130
            
            
            
            99.98%
            
            
            $
            23,482
            
            
            
            73.07%
            
            
            $
            (8,648
            )
            
            
            -26.91%Other
      ABS
            
            
            5,665
            
            
            
            94.42%
            
            
            
            −
            
            
            
            0.00%
            
            
            
            (5,665
            )
            
            
            -94.42%B
      notes (1)
            
            
            22,037
            
            
            
            100.01%
            
            
            
            21,982
            
            
            
            99.76%
            
            
            
            (55
            )
            
            
            -0.25%Mezzanine
      loans (1)
            
            
            129,600
            
            
            
            100.02%
            
            
            
            129,276
            
            
            
            99.77%
            
            
            
            (324
            )
            
            
            -0.25%Whole
      loans (1)
            
            
            450,425
            
            
            
            99.63%
            
            
            
            446,450
            
            
            
            98.75%
            
            
            
            (3,975
            )
            
            
            -0.88%Bank
      loans (2)
            
            
            936,942
            
            
            
            99.47%
            
            
            
            788,356
            (4)
            
            
            83.69%
            
            
            
            (148,586
            )
            
            
            -15.78%Total floating
    rate
            
            $
            1,576,799
            
            
            
            99.56%
            
            
            $
            1,409,546
            
            
            
            89.00%
            
            
            $
            (167,253
            )
            
            
            -10.56%Fixed
      rateCMBS
      – private placement
            
            $
            38,288
            
            
            
            91.00%
            
            
            $
            22,739
            
            
            
            54.05%
            
            
            $
            (15,549
            )
            
            
            -36.95%B
      notes (1)
            
            
            67,168
            
            
            
            100.11%
            
            
            
            67,000
            
            
            
            99.86%
            
            
            
            (168
            )
            
            
            -0.25%Mezzanine
      loans (1)
            
            
            81,254
            
            
            
            94.69%
            
            
            
            68,393
            
            
            
            79.70%
            
            
            
            (12,861
            )
            
            
            -14.99%Whole
      loans (1)
            
            
            85,808
            
            
            
            99.44%
            
            
            
            85,593
            
            
            
            99.19%
            
            
            
            (215
            )
            
            
            -0.25%Equipment
      leases and notes (3)
            
            
            106,196
            
            
            
            100.00%
            
            
            
            105,466
            
            
            
            99.33%
            
            
            
            (730
            )
            
            
            -0.69%Total fixed
rate
            
            $
            378,714
            
            
            
            97.74%
            
            
            $
            349,191
            
            
            
            90.12%
            
            
            $
            (29,523
            )
            
            
            -7.62%Grand total
            
            $
            1,955,513
            
            
            
            99.20%
            
            
            $
            1,758,737
            
            
            
            89.22%
            
            
            $
            (196,776
            )
            
            
            -9.98%December
      31, 2007Floating
      rateCMBS-private
      placement
            
            $
            54,132
            
            
            
            93.40%
            
            
            $
            41,524
            
            
            
            71.65%
            
            
            $
            (12,608
            )
            
            
            -21.75%Other
      ABS
            
            
            5,665
            
            
            
            94.42%
            
            
            
            900
            
            
            
            15.00%
            
            
            
            (4,765
            )
            
            
            -79.42%B
      notes (1)
            
            
            33,570
            
            
            
            100.10%
            
            
            
            33,486
            
            
            
            99.85%
            
            
            
            (84
            )
            
            
            -0.25%Mezzanine
      loans (1)
            
            
            141,894
            
            
            
            100.09%
            
            
            
            141,539
            
            
            
            99.83%
            
            
            
            (355
            )
            
            
            -0.26%Whole
      loans (1)
            
            
            430,776
            
            
            
            99.35%
            
            
            
            429,699
            
            
            
            99.10%
            
            
            
            (1,077
            )
            
            
            -0.25%Bank
      loans (2)
            
            
            931,101
            
            
            
            100.00%
            
            
            
            874,736
            (4)
            
            
            93.95%
            
            
            
            (56,365
            )
            
            
            -6.05%Total floating
    rate
            
            $
            1,597,138
            
            
            
            99.58%
            
            
            $
            1,521,884
            
            
            
            94.88%
            
            
            $
            (75.254
            )
            
            
            -4.69%Fixed
      rateCMBS
      – private placement
            
            $
            28,241
            
            
            
            98.95%
            
            
            $
            23,040
            
            
            
            80.73%
            
            
            $
            (5,201
            )
            
            
            -18.22%B
      notes (1)
            
            
            56,007
            
            
            
            100.17%
            
            
            
            55,867
            
            
            
            99.92%
            
            
            
            (140
            )
            
            
            -0.25%Mezzanine
      loans (1)
            
            
            81,268
            
            
            
            94.69%
            
            
            
            80,016
            
            
            
            93.23%
            
            
            
            (1,252
            )
            
            
            -1.46%Whole
      loans (1)
            
            
            97,942
            
            
            
            99.24%
            
            
            
            97,697
            
            
            
            98.99%
            
            
            
            (245
            )
            
            
            -0.25%Equipment
      leases and notes (3)
            
            
            95,323
            
            
            
            100.00%
            
            
            
            95,030
            
            
            
            99.69%
            
            
            
            (293
            )
            
            
            -0.31%Total fixed
rate
            
            $
            358,781
            
            
            
            98.49%
            
            
            $
            351,650
            
            
            
            96.53%
            
            
            $
            (7,131
            )
            
            
            -1.96%Grand total
            
            $
            1.955,919
            
            
            
            99.37%
            
            
            $
            1,873,534
            
            
            
            95.19%
            
            
            $
            (82,385
            )
            
            
            -4.18%





(1)
            Net
      carrying amount includes an allowance for loan losses of $17.6 million at
      September 30, 2008, allocated as follows:  B notes ($0.2
      million), mezzanine loans ($13.2 million) and whole loans ($4.2
      million).  Net carrying amount includes an allowance for loan
      losses of $3.2 million at December 31, 2007, allocated as
      follows:  B notes ($0.2 million), mezzanine loans ($1.6 million)
      and whole loans ($1.4 million).




(2)
            Net
      carrying amount includes a $12.4 million and $2.7 million allowance for
      loan losses at September 30, 2008 and December 31, 2007,
      respectively.




(Back to Index)
 45
 (Back to Index)


(3)
            Net
      carrying amount includes $730,000 and $293,000 allowance for lease losses
      at September 30, 2008 December 31, 2007,
  respectively.




(4)
            Bank
      loan portfolio is carried at amortized cost less allowance for loan loss
      and was $924.5 million and $928.3 million at September 30, 2008 and
      December 31, 2007, respectively.  Amounts disclosed in the table
      represent fair value.





Commercial
      Mortgage-Backed Securities-Private
Placement





At September 30, 2008 and December 31,
2007, we held $46.2 million and $64.6 million, respectively, of CMBS-private
placement at fair value which is based on certain valuation techniques, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations − Critical Accounting Policies and Estimates,” net of unrealized
losses of $24.2 million and $17.8 million, respectively.  The
portfolio was purchased at a discount.  As of September 30, 2008 and
December 31, 2007, the remaining discount to be accreted into income over the
remaining lives of the securities was $3.8 million and $4.1 million,
respectively.  These securities are classified as available-for-sale
and, as a result, are carried at their fair value.





The following table summarizes our
CMBS-private placement as of September 30, 2008 and December 31, 2007 (in
thousands, except percentages).  Dollar price is computed by dividing
amortized cost by par amount.





September
      30, 2008
            
            
            December
      31, 2007Amortized
      Cost
            
            
            Dollar
      Price
            
            
            Amortized
      Cost
            
            
            Dollar
      PriceMoody’s
      Ratings Category:Aaa
            
            $
            −
            
            
            
            N/A
            
            
            $
            10,000
            
            
            
            100.00%Baa1
      through Baa3
            
            
            63,420
            
            
            
            94.36%
            
            
            
            65,377
            
            
            
            94.07%Ba1
      through Ba3
            
            
            6,998
            
            
            
            99.97%
            
            
            
            6,996
            
            
            
            99.94%Total
            
            $
            70,418
            
            
            
            94.89%
            
            
            $
            82,373
            
            
            
            95.23%S&P
      Ratings Category:AAA
            
            $
            −
            
            
            
            N/A
            
            
            $
            10,000
            
            
            
            100.00%BBB+
      through BBB-
            
            
            58,300
            
            
            
            94.74%
            
            
            
            72,373
            
            
            
            94.61%BB+
      through BB-
            
            
            12,118
            
            
            
            95.64%
            
            
            
            −
            
            
            
            N/ATotal
            
            $
            70,418
            
            
            
            94.89%
            
            
            $
            82,373
            
            
            
            95.23%Weighted
      average rating factor
            
            
            562
            
            
            
            
            
            
            
            497





Other
Asset-Backed Securities





At September 30, 2008 and December 31,
2007, we held $0 and $900,000, respectively, of other ABS at fair value, which
is based on market prices provided by dealers, net of fair value losses of
$5.7 million and $4.8 million, respectively.  In the aggregate, we
purchased our other ABS portfolio at a discount.  As of September 30,
2008 and December 31, 2007, the remaining discount to be accreted into income
over the remaining lives of securities was $335,000.  These securities
are classified as available-for-sale and, as a result, are carried at their fair
market value.





The
following table summarizes our other ABS as of September 30, 2008 and December
31, 2007 (in thousands, except percentages).  Dollar price is computed
by dividing amortized cost by par amount.





September
      30, 2008
            
            
            December
      31, 2007Amortized
      Cost
            
            
            Dollar
      Price
            
            
            Amortized
      Cost
            
            
            Dollar
      PriceMoody’s
      ratings category:B1
      through B3
            
            $
            5,665
            
            
            
            94.42%
            
            
            $
            5,665
            
            
            
            94.42%Total
            
            $
            5,665
            
            
            
            94.42%
            
            
            $
            5,665
            
            
            
            94.42%S&P
      ratings category:B+
      through B-
            
            $
            5,665
            
            
            
            94.42%
            
            
            $
            5,665
            
            
            
            94.42%Total
            
            $
            5,665
            
            
            
            94.42%
            
            
            $
            5,665
            
            
            
            94.42%Weighted
      average rating factor
            
            
            3,490
            
            
            
            
            
            
            
            610







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 46
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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
            Maturity
      DatesSeptember 30,
      2008:Whole
      loans, floating rate
            
            
            27
            
            
            $
            450,425
            
            LIBOR
      plus 1.50% to LIBOR plus 4.40%
            November
      2008 to
              June
      2010Whole
      loans, fixed rate
            
            
            7
            
            
            
            85,808
            
            6.98%
      to 10.00%
            May
      2009 to
              August
      2012B
      notes, floating rate
            
            
            3
            
            
            
            33,537
            
            LIBOR
      plus 2.50% to LIBOR plus 3.01%
            March
      2009 to
              October
      2009B
      notes, fixed rate
            
            
            3
            
            
            
            55,669
            
            7.00%
      to 8.68%
            July
      2011 to
              July
      2016Mezzanine
      loans, floating rate
            
            
            10
            
            
            
            129,600
            
            LIBOR
      plus 2.15% to LIBOR plus 3.45%
            December
      2008 to
              October
      2009Mezzanine
      loans, fixed rate
            
            
            7
            
            
            
            81,255
            
            5.78%
      to 11.00%
            November
      2009 to
              September
      2016Total (1)
            
            
            57
            
            
            $
            836,294December 31,
      2007:Whole
      loans, floating rate
            
            
            28
            
            
            $
            430,776
            
            LIBOR
      plus 1.50% to LIBOR plus 4.25%
            May
      2008 to
              July
      2010Whole
      loans, fixed rate
            
            
            7
            
            
            
            97,942
            
            6.98%
      to 8.57%
            May
      2009 to
              August
      2012B
      notes, floating rate
            
            
            3
            
            
            
            33,570
            
            LIBOR
      plus 2.50% to LIBOR plus 3.01%
            March
      2008 to
              October
      2008B
      notes, fixed rate
            
            
            3
            
            
            
            56,007
            
            7.00%
      to 8.68%
            July
      2011 to
              July
      2016Mezzanine
      loans, floating rate
            
            
            11
            
            
            
            141,894
            
            LIBOR
      plus 2.15% to LIBOR plus 3.45%
            February
      2008 to
              May
      2009Mezzanine
      loans, fixed rate
            
            
            7
            
            
            
            81,268
            
            5.78%
      to 11.00%
            November
      2009 to
              September
      2016Total (1)
            
            
            59
            
            
            $
            841,457


(1)
            The
      total does not include a provision for loan losses of $17.6 million
      recorded as of September 30, 2008 and $3.2 million as of December 31,
      2007.





We have
one mezzanine loan, with a book value of $11.6 million secured by 100% of the
equity interests in two enclosed regional malls.  We had been working
with the borrower and special servicer toward a resolution as the mezzanine loan
was in default since February 2008.  However, during the quarter ended
June 30, 2008, the borrower on the mezzanine loan defaulted on the more senior
first mortgage position.  This event triggered the reevaluation of our
provision for loan loss and we determined that a full reserve of the remaining
book value balance of $11.6 million was necessary.  If in the future
we are able to recover any value from this loan, the amount would be credited
directly to income in that period.




At
September 30, 2008, we took a reserve of $2.8 million against one whole loan due
to the prepayment of the loan at a discount subsequent to the end of the
quarter.


(Back to Index)
 47
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Bank
Loans





At September 30, 2008, we held a total
of $788.4 million of bank loans at fair value, all of which are held by and
secure the debt issued by Apidos CDO I, Apidos CDO III and Apidos Cinco
CDO.  This is a decrease of $86.3 million over our holdings at
December 31, 2007 at fair value.  The decrease in the fair value of
bank loans was principally due to the reduction of market prices.  We
own 100% of the equity issued by Apidos CDO I, Apidos CDO III and Apidos Cinco
CDO.  We have determined that Apidos CDO I, Apidos CDO III and Apidos
Cinco are VIEs for which we are the primary beneficiaries.  See
“-Variable Interest Entities.”  As a result, we consolidated Apidos
CDO I, Apidos CDO III and Apidos Cinco CDO as of September 30,
2008.





The following table summarizes our bank
loan investments as of September 30, 2008 and December 31, 2007 (in thousands,
except percentages).  Dollar price is computed by dividing amortized
cost by par amount.





September
      30, 2008
            
            
            December
      31, 2007Amortized
      Cost
            
            
            Dollar
      Price
            
            
            Amortized
      Cost
            
            
            Dollar
      PriceMoody’s
      ratings category:A1
      through A3
            
            
            $
            6,347
            
            
            
            97.65%
            
            
            $
            −
            
            
            
            −%Baa1
      through Baa3
            
            
            
            17,870
            
            
            
            99.43%
            
            
            
            5,914
            
            
            
            98.65%Ba1
      through Ba3
            
            
            
            504,912
            
            
            
            99.55%
            
            
            
            500,417
            
            
            
            100.02%B1
      through B3
            
            
            
            370,866
            
            
            
            99.34%
            
            
            
            386,589
            
            
            
            100.01%Caa1
      through Caa3
            
            
            
            30,268
            
            
            
            100.14%
            
            
            
            20,380
            
            
            
            100.20%Ca
      through C
            
            
            
            −
            
            
            
            −%
            
            
            
            1,000
            
            
            
            100.00%No
      rating provided
            
            
            
            6,679
            
            
            
            98.95%
            
            
            
            16,800
            
            
            
            99.44%Total
            
            
            $
            936,942
            
            
            
            99.47%
            
            
            $
            931,100
            
            
            
            100.00%S&P
      ratings category:BBB+
      through BBB-
            
            
            $
            46,260
            
            
            
            99.80%
            
            
            $
            14,819
            
            
            
            100.15%BB+
      through BB-
            
            
            
            490,133
            
            
            
            99.39%
            
            
            
            433,624
            
            
            
            100.00%B+
      through B-
            
            
            
            313,131
            
            
            
            99.61%
            
            
            
            405,780
            
            
            
            100.06%CCC+
      through CCC-
            
            
            
            16,539
            
            
            
            100.02%
            
            
            
            4,207
            
            
            
            100.00%D
            
            
            
            
            1,480
            
            
            
            100.00%
            
            
            
            -
            
            
            
            −%No
      rating provided
            
            
            
            69,399
            
            
            
            99.04%
            
            
            
            72,670
            
            
            
            99.59%Total
            
            
            $
            936,942
            
            
            
            99.47%
            
            
            $
            931,100
            
            
            
            100.00%Weighted
      average rating factor
            
            
            
            1,866
            
            
            
            
            
            
            
            2,000





Equipment
Leases and Notes





Investments in direct financing leases
and notes as of September 30, 2008 and December 31, 2007 were as follows (in
thousands):





September
      30, 2008
            
            
            December
      31, 2007Direct
      financing leases
            
            $
            29,040
            
            
            $
            28,880Notes
      receivable
            
            
            76,576
            
            
            
            66,150Subtotal
            
            
            105,616
            
            
            
            95,030Allowance
      for possible losses
            
            
            (150
            )
            
            
            −Total
            
            $
            105,466
            
            
            $
            95,030






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 48
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Variable
Interest Entities





In December 2003, FASB issued FIN 46-R
which addresses the application of Accounting Research Bulletin No. 51,
“Consolidated Financial Statements,” to a variable interest entity, or VIE, and
requires that the assets, liabilities and results of operations of a VIE be
consolidated into the financial statements of the enterprise that has a
controlling financial interest in it. The interpretation provides a framework
for determining whether an entity should be evaluated for consolidation based on
voting interests or significant financial support provided to the entity which
we refer to as variable interests.  We consider all counterparties to
a transaction to determine whether a counterparty is a VIE and, if so, whether
our involvement with the entity results in a variable interest in the entity. We
perform analyses to determine whether we are the primary
beneficiary.  As of September 30, 2008, we determined that RREF CDO
2007-1, RREF CDO 2006-1, Apidos CDO I, Apidos CDO III and Apidos Cinco CDO were
VIEs and that we were the primary beneficiary of the VIEs.  We own
100% of the equity interests of RREF CDO 2007-1, RREF CDO 2006-1, Apidos CDO I,
Apidos CDO III and Apidos Cinco CDO.  As a result of the application
of FIN 46-R, we consolidated $1.7 billion of assets for these entities onto our
balance sheet; however, only our equity investments in these VIEs, amounting to
$273.9 million (before adjustments to other comprehensive loss) as of September
30, 2008, is available to our creditors.





Interest
Receivable





At September 30, 2008, we had accrued
interest receivable of $8.6 million, which consisted of $8.5 million of interest
on our securities, loans and equipment leases and notes, and $119,000 of
interest earned on escrow and sweep accounts.  At December 31, 2007,
we had interest receivable of $12.0 million, which consisted of $11.7 million of
interest on our securities, loans and equipment leases and notes and $228,000 of
interest earned on escrow and sweep accounts.





Principal
Paydown Receivables





At September 30, 2008 and December 31,
2007, we had principal paydown receivables of $5.9 million and $836,000,
respectively, which consisted of principal payments on our bank loans and
commercial real estate loans.  The decrease was primarily due to the
timing of contractual due dates.





Other
Assets





Other assets at September 30, 2008 of
$5.2 million consisted primarily of $2.9 million of loan origination costs
associated with our revolving credit facility, commercial real estate loan
portfolio and secured term facility, $1.2 million of prepaid expenses and $1.1
million of lease payment receivables.





Other assets at December 31, 2007 of
$4.9 million consisted primarily of $3.4 million of loan origination costs
associated with our trust preferred securities issuances, revolving credit
facility, commercial real estate loan portfolio and secured term facility,
$85,000 of prepaid directors’ and officers’ liability insurance, $412,000 of
other prepaid expenses, $998,000 of lease payment receivables and $37,000 of
other receivables.





(Back to Index)
 49
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Hedging
Instruments





Our hedges at September 30, 2008 and
December 31, 2007, 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, 2007, we had entered into
hedges with a notional amount of $347.9 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 September 30,
2008 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
            
            $
            (710
            )Interest
      rate swap
            1
      month LIBOR
            
            
            12,965
            
            
            
            4.63%
            
            
            12/04/06
            
            07/01/11
            
            
            (397
            )Interest
      rate swap
            1
      month LIBOR
            
            
            28,000
            
            
            
            5.10%
            
            
            05/24/07
            
            06/05/10
            
            
            (880
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,880
            
            
            
            5.68%
            
            
            07/13/07
            
            03/12/17
            
            
            (185
            )Interest
      rate swap
            1
      month LIBOR
            
            
            15,235
            
            
            
            5.34%
            
            
            06/08/07
            
            02/25/10
            
            
            (468
            )Interest
      rate swap
            1
      month LIBOR
            
            
            10,435
            
            
            
            5.32%
            
            
            06/08/07
            
            05/25/09
            
            
            (138
            )Interest
      rate swap
            1
      month LIBOR
            
            
            12,150
            
            
            
            5.44%
            
            
            06/08/07
            
            03/25/12
            
            
            (721
            )Interest
      rate swap
            1
      month LIBOR
            
            
            7,000
            
            
            
            5.34%
            
            
            06/08/07
            
            02/25/10
            
            
            (215
            )Interest
      rate swap
            1
      month LIBOR
            
            
            44,833
            
            
            
            4.13%
            
            
            01/10/08
            
            05/25/16
            
            
            120Interest
      rate swap
            1
      month LIBOR
            
            
            82,764
            
            
            
            5.58%
            
            
            06/08/07
            
            04/25/17
            
            
            (6,100
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,726
            
            
            
            5.65%
            
            
            06/28/07
            
            07/15/17
            
            
            (150
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,681
            
            
            
            5.72%
            
            
            07/09/07
            
            10/01/16
            
            
            (149
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,850
            
            
            
            5.65%
            
            
            07/19/07
            
            07/15/17
            
            
            (333
            )Interest
      rate swap
            1
      month LIBOR
            
            
            4,023
            
            
            
            5.41%
            
            
            08/07/07
            
            07/25/17
            
            
            (245
            )Interest
      rate swap
            1
      month LIBOR
            
            
            18,200
            
            
            
            5.32%
            
            
            03/30/06
            
            09/22/15
            
            
            (683
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,432
            
            
            
            5.31%
            
            
            03/30/06
            
            11/23/09
            
            
            (63
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,186
            
            
            
            5.41%
            
            
            05/26/06
            
            08/22/12
            
            
            (135
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,425
            
            
            
            5.43%
            
            
            05/26/06
            
            04/22/13
            
            
            (130
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,205
            
            
            
            5.72%
            
            
            06/28/06
            
            06/22/16
            
            
            (167
            )Interest
      rate swap
            1
      month LIBOR
            
            
            971
            
            
            
            5.52%
            
            
            07/27/06
            
            07/22/11
            
            
            (23
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,852
            
            
            
            5.54%
            
            
            07/27/06
            
            09/23/13
            
            
            (126
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,792
            
            
            
            5.25%
            
            
            08/18/06
            
            07/22/16
            
            
            (254
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,662
            
            
            
            5.06%
            
            
            09/28/06
            
            08/22/16
            
            
            (125
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,105
            
            
            
            4.97%
            
            
            12/22/06
            
            12/23/13
            
            
            (72
            )Interest
      rate swap
            1
      month LIBOR
            
            
            3,526
            
            
            
            5.22%
            
            
            01/19/07
            
            11/22/16
            
            
            (114
            )Interest
      rate swap
            1
      month LIBOR
            
            
            1,823
            
            
            
            5.05%
            
            
            04/23/07
            
            09/22/11
            
            
            (37
            )Interest
      rate swap
            1
      month LIBOR
            
            
            2,989
            
            
            
            5.42%
            
            
            07/25/07
            
            04/24/17
            
            
            (124
            )Interest
      rate swap
            1
      month LIBOR
            
            
            8,105
            
            
            
            4.53%
            
            
            11/29/07
            
            10/23/17
            
            
            (155
            )Interest
      rate swap
            1
      month LIBOR
            
            
            5,668
            
            
            
            4.40%
            
            
            12/26/07
            
            11/22/17
            
            
            (99
            )Interest
      rate swap
            1
      month LIBOR
            
            
            4,837
            
            
            
            3.35%
            
            
            01/23/08
            
            12/22/14
            
            
            47Interest
      rate swap
            1
      month LIBOR
            
            
            13,177
            
            
            
            3.96%
            
            
            09/30/08
            
            09/22/15
            
            
            (54
            )Total
            
            
            $
            330,247
            
            
            
            5.07%
            
            
            
            
            
            
            $
            (12,885
            )







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 50
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Borrowings





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.  Through September 30, 2008, we had established
nine borrowing arrangements with various financial institutions and had utilized
four of these arrangements, principally our arrangement with Credit Suisse
Securities (USA) LLC, the initial purchaser and placement agent for our March
2005 offering and one of the underwriters in our two public
offerings.  None of the counterparties to these agreements are
affiliates of the Manager or us.





We seek to renew the repurchase
agreements we use to finance asset acquisitions as they mature under the
then-applicable borrowing terms of the counterparties to our repurchase
agreements.  Through September 30, 2008, we have encountered no
difficulties in effecting renewals of our repurchase
agreements.  However, we have had to post substantial collateral
and/or pay down a particular repurchase agreement depending upon the market
value of the securities or other collateral subject to that repurchase
agreement.





Collaterized
Debt Obligations





As of
September 30, 2008, 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, 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, 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.  At September 30, 2008, RREF CDO 2007-1 had $20.4
      million of uninvested principal and $14.6 million of A1-R availability to
      fund future funding commitments on commercial real estate
      loans.  At September 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.98%.




·
            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,
      purchased a $28.0 million equity interest representing 100% of the
      outstanding preference shares.  At September 30, 2008, Apidos
      Cinco CDO had $4.8 million in uninvested principal and $1.2 million in a
      credit facility reserve.  At September 30, 2008, the notes
      issued to outside investors had a weighted average borrowing rate of
      3.31%.




·
            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, Inc., or
      RCC Real Estate, purchased 100% of the class J senior notes and class K
      senior notes for $43.1 million.  At September 30, 2008, RREF CDO
      2006-1 had $5.0 million of uninvested principal.  At September
      30, 2008, the notes issued to outside investors had a weighted average
      borrowing rate of 4.07%.




·
            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.  At September 30, 2008, Apidos CDO III had $9.7
      million in uninvested principal and $151,000 in a credit facility
      reserve.  At September 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.27%.




·
            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 $23.0 million equity
      interest representing 100% of the outstanding preference
      shares.  At September 30, 2008, Apidos CDO I had $14.8 million
      in uninvested principal and $267,000 in a credit facility
      reserve.  At September 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.31%.




·
            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 are no longer deemed to be the primary
      beneficiary.  As a result, we deconsolidated Ischus CDO II at
      that date.






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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
FIN 46-R, we do not consolidate Resource Capital Trust I and RCC Trust II 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 our 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 September 30, 2008, the junior subordinated debentures
had a weighted average borrowing rate of 6.75%.





Term
Facility





In March 2006, we entered into a
secured term credit facility with Bayerische Hypo – und Vereinsbank AG, New York
Branch to finance the purchase of equipment leases and notes.  The
maximum amount of our borrowing under this facility is $100.0
million.  At September 30, 2008 and December 31, 2007, $99.9 million
and $91.7 million, respectively was outstanding under the
facility.  The facility bears interest at one of two rates, determined
by asset class.  The interest rate was 5.06% and 6.55% at September
30, 2008 and December 31, 2007, respectively.





Corporate
Revolving Credit Facility





In December 2005, we entered into a
$15.0 million corporate credit facility with TD Bank, N.A. (successor by merger
to Commerce Bank, N.A.)  This facility was increased to $25.0 million
in April 2006 and decreased to $10.0 million in April 2008 to reflect more
closely the actual borrowing base available to us under the facility and to
reduce fees payable on the amount available for borrowing under the
facility.  As a result, we do not believe the reduction will have a
material impact on our current liquidity.  The unsecured revolving
credit facility permits us to borrow up to the lesser of the facility amount and
the sum of 80% of the sum of our unsecured assets rated higher than Baa3 or
better by Moody’s and BBB- or better by Standard and Poor’s plus our interest
receivables plus 65% of our unsecured assets rated lower than Baa3 by Moody’s
and BBB- from Standard and Poor’s.  Up to 20% of the borrowings under
the facility may be in the form of standby letters of credit.  At
September 30, 2008 and December 31, 2007, no balance was outstanding under this
facility.  The interest rate varies from, in the case of LIBOR loans,
from the adjusted LIBOR rate (as defined in the agreement) plus between 1.50% to
2.50% depending upon our leverage ratio (the ratio of consolidated total
liability to consolidated tangible net worth) or, in the case of base rate
loans, from TD Bank, N.A. base rate plus between 0.50% and 1.50% also depending
upon our leverage ratio.





We received a waiver for the period
ended September 30, 2008 from TD Bank with respect to our non-compliance with
the interest coverage ratio covenant.  The waiver was required due to
our provisions for loan and lease losses during the three months ended September
30, 2008.  Under the covenant, we are required to maintain a ratio of
consolidated cash flow to consolidated interest expense of not less than 1.15 to
1.0, measured at each quarter end, as further described in the
agreement.





Stockholders’
Equity





Stockholders’ equity at September 30,
2008 was $239.1 million and included $29.9 million of net unrealized losses on
our CMBS-private placement and other asset-backed portfolio, and $15.3 million
of unrealized losses on cash flow hedges, shown as a component of accumulated
other comprehensive loss.  Stockholders’ equity at December 31, 2007
was $271.6 million and included $15.7 million of unrealized losses on cash flow
hedges and $22.6 million of unrealized losses on our available-for-sale
portfolio, shown as a component of accumulated other comprehensive
loss.  The decrease in stockholder’s equity during the nine months
ended September 30, 2008 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
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 Income (Loss).’’  By accounting for our assets in
this manner, we hope to provide useful information to stockholders and creditors
and to preserve flexibility to sell assets in the future without having to
change accounting methods.


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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 Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income (loss)
            
            $
            88
            
            
            $
            (13,915
            )
            
            $
            4,194
            
            
            $
            5,360Adjustments:Share-based compensation to
      related parties
            
            
            (190
            )
            
            
            (385
            )
            
            
            (729
            )
            
            
            (725
            )Incentive management fee expense
      to
              related parties paid in
      shares
            
            
            −
            
            
            
            (417
            )
            
            
            −
            
            
            
            −Capital loss carryover
      (utilization)/losses from
              the sale of
      securities
            
            
            −
            
            
            
            −
            
            
            
            2,000
            
            
            
            −Provisions for loan and lease
      losses unrealized
            
            
            2,761
            
            
            
            −
            
            
            
            14,446
            
            
            
            −Net book to tax adjustments for
      our taxable
              foreign REIT
      subsidiaries
            
            
            7,034
            
            
            
            −
            
            
            
            11,271
            
            
            
            −Addback of GAAP loss
      reserve
            
            
            −
            
            
            
            25,490
            
            
            
            −
            
            
            
            26,277Other net book to tax
      adjustments
            
            
            (281
            )
            
            
            90
            
            
            
            (272
            )
            
            
            139Estimated
      REIT taxable income
            
            $
            9,412
            
            
            $
            10,863
            
            
            $
            30,910
            
            
            $
            31,051Amounts
      per share – diluted
            
            $
            0.38
            
            
            $
            0.44
            
            
            $
            1.24
            
            
            $
            1.25





We believe that a presentation of
estimated REIT taxable income provides useful information to investors regarding
our financial condition and results of operations as this measurement is used 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 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 taxable REIT subsidiary, if any
such income exists, which is not included in REIT taxable income until
distributed to us.  There is no requirement that our domestic taxable
REIT subsidiary distribute its earnings to us.  Estimated REIT taxable
income, however, includes the taxable income of our foreign taxable REIT
subsidiaries 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.





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 does not allow us to generate any material
amount of investment funds from operations to fund investments or to provide
operating liquidity.





Liquidity
and Capital Resources





Capital
Sources





For the nine months ended September 30,
2008, we had both restricted and unrestricted sources of capital funds as
follows:




·
            Restricted
      - $158.5 million of principal repayments and sale proceeds on investments
      held by our CDO issuers and $21.3 million of CDO future funding
      advances.




·
            Unrestricted
      - $1.7 million from principal repayments on investments held at our term
      facility.






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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 will be
subject to our ability to generate cash from operations, and, with respect to
our investments, our ability to obtain debt financing and equity
capital.  We may seek to increase our capital resources through
offerings of equity securities (possibly including common stock and one or more
classes of preferred stock), CDOs, trust preferred securities or other forms of
financing.  However, the availability of any such financing will
depend on market conditions which, as we discuss in “Overview”, have recently
been subject to substantial volatility and reduction in liquidity.  If
we are unable to renew, replace or expand our sources of financing on
substantially similar terms, we may be unable to implement our investment
strategies successfully and 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.





At October 31, 2008, our liquidity
consists of three primary sources:




·
            unrestricted
      cash and cash equivalents of $2.8 million and restricted cash of $11.2
      million comprised of $5.3 million in margin call accounts and $5.9 million
      related to its leasing portfolio;




·
            capital
      available for reinvestment in our five CDO entities of $74.1 million,
      which is made up of $59.5 million of restricted cash and $14.6 million
      available to finance future funding commitments on commercial real estate
      loans; and




·
            financing
      available under existing borrowing facilities of $10.1 million, comprised
      of $0.1 million of available cash from our three year non-recourse secured
      financing facility and $10.0 million of unused capacity under its
      unsecured revolving credit facility.  We also have $40.5 million
      of unused capacity under a three-year non-recourse commercial real estate
      repurchase facility, which, however, requires approval of individual
      repurchase transactions by the repurchase
  counterparty.





We anticipate that, depending upon
market conditions and credit availability, upon repayment of each borrowing
under a repurchase agreement, we will immediately use the collateral released by
the repayment as collateral for borrowing under a new repurchase agreement to
maximize liquidity.  Our leverage ratio may vary as a result of the
various funding strategies we use.  As of September 30, 2008 and
December 31, 2007, our leverage ratio was 7.2 times and 6.5 times,
respectively.  This increase 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 due to available-for-sale
securities and derivatives and offset by the repayment of repurchase
agreements.





Distributions





On September 25, 2008, we declared a
quarterly distribution of $0.39 per share of common stock, $9.9 million in the
aggregate, which was paid on October 28, 2008 to stockholders of record as of
October 6, 2008.





On June 20, 2008, we declared a
quarterly distribution of $0.41 per share of common stock, $10.4 million in the
aggregate, which was paid on July 28, 2008 to stockholders of record as of June
30, 2008.





On March 11, 2008, we declared a
quarterly distribution of $0.41 per share of common stock, $10.4 million in the
aggregate, which was paid on April 28, 2008 to stockholders of record as of
March 30, 2008.






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Contractual
Obligations and Commitments





The table below summarizes our
contractual obligations as of September 30, 2008.  The table below
excludes contractual commitments related to our derivatives, which we discuss in
our Annual Report on Form 10-K for fiscal 2007 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 2007 in Item 1 − “Business” and
Item 13, “Certain Relationships and Related Transactions”because those contracts
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)
            
            $
            60,930
            
            
            $
            60,930
            
            
            $
            −
            
            
            $
            −
            
            
            $
            −CDOs
            
            
            1,519,968
            
            
            
            −
            
            
            
            318,322
            
            
            
            577,616
            
            
            
            624,030Secured
      term facility
            
            
            99,938
            
            
            
            −
            
            
            
            99,938
            
            
            
            −
            
            
            
            −Junior
      subordinated debentures
              held by unconsolidated
      trusts
              that issued trust
      preferred
              securities
            
            
            51,548
            
            
            
            −
            
            
            
            −
            
            
            
            −
            
            
            
            51,548Total
      borrowings
            
            
            1,732,384
            
            
            
            60,930
            
            
            
            418,260
            
            
            
            577,616
            
            
            
            675,578Base
      management fees (2)
            
            
            4,510
            
            
            
            4,510
            
            
            
            −
            
            
            
            −
            
            
            
            −Total
      contractual commitments
            
            $
            1,736,894
            
            
            $
            65,440
            
            
            $
            418,260
            
            
            $
            577,616
            
            
            $
            657,578







(1)
            Includes
      accrued interest of $78,000.




(2)
            Calculated
      only for the next 12 months based on our current equity, as defined in our
      management agreement.





At September 30, 2008, we had 31
interest rate swap contracts with a notional value of $330.2
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
September 30, 2008, the average fixed pay rate of our interest rate hedges was
5.07% and our receive rate was one-month LIBOR, or 3.08%.





Off-Balance
Sheet Arrangements





As of September 30, 2008, 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 or contractually narrow or limited
purposes.  Further, as of September 30, 2008, we had not guaranteed
any obligations of unconsolidated entities or entered into any commitment or
intent to provide additional funding to any such entities.







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ITEM
3.                      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As of September 30, 2008 and December
31, 2007, 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 September 30, 2008 and December 31, 2007, the estimated impact
on the fair value of our interest rate-sensitive investments and liabilities of
changes in interest rates, assuming rates instantaneously fall 100 basis points
and rise 100 basis points (dollars in thousands):





September
      30, 2008Interest
      rates fall 100
                basis
      points
            
            
            Unchanged
            
            
            Interest
      rates rise 100
                basis
      pointsCMBS
      – private placement (1)Fair value
            
            $
            25,996
            
            
            $
            24,590
            
            
            $
            6,742Change in fair
    value
            
            $
            1,406
            
            
            $
            −
            
            
            $
            (17,848
            )Change as a percent of fair
      value
            
            
            5.72
            %
            
            
            
            
            
            
            72.58
            %Repurchase
      and warehouse agreements (2)Fair value
            
            $
            154,652
            
            
            $
            154,652
            
            
            $
            154,652Change in fair
    value
            
            $
            −
            
            
            $
            −
            
            
            $
            −Change as a percent of fair
      value
            
            
            −
            
            
            
            −
            
            
            
            −Hedging
      instrumentsFair value
            
            $
            (27,628
            )
            
            $
            (12,833
            )
            
            $
            (2,479
            )Change in fair
    value
            
            $
            (14,795
            )
            
            $
            −
            
            
            $
            10,354Change as a percent of fair
      value
            
            
            N/M
            
            
            
            −
            
            
            
            N/M








December
      31, 2007Interest
      rates fall 100
                basis
      points
            
            
            Unchanged
            
            
            Interest
      rates rise 100
                basis
      pointsCMBS
      – private placement (1)Fair
      value
            
            $
            28,756
            
            
            $
            27,154
            
            
            $
            11,519Change in fair
    value
            
            $
            1,602
            
            
            $
            −
            
            
            $
            (15,635
            )Change as a percent of fair
      value
            
            
            5.90
            %
            
            
            −
            
            
            
            57.58
            %Repurchase
      and warehouse agreements (2)Fair value
            
            $
            207,908
            
            
            $
            207,908
            
            
            $
            207,908Change in fair
    value
            
            $
            −
            
            
            $
            −
            
            
            $
            −Change as a percent of fair
      value
            
            
            −
            
            
            
            −
            
            
            
            −Hedging
      instrumentsFair value
            
            $
            (33,731
            )
            
            $
            (18,040
            )
            
            $
            (3,234
            )Change in fair
    value
            
            $
            (15,691
            )
            
            $
            −
            
            
            $
            14,806Change 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 variable rates 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 change in the fair value of our assets would likely differ from that
shown above and such difference 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 at the reasonable assurance
level.





There have been no significant changes
in our internal controls over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting during our most recent fiscal year.







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I


PART
II.  OTHER INFORMATION




TEM
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. (2)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. (2)4.4
            Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      May 25, 2006. (2)4.5
            Junior
      Subordinated Indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated September 29, 2006. (3)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. (3)4.7
            Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      September 29, 2006. (3)4.8
            Form
      of Warrant to Purchase Common Stock (1)10.1
            First
      Amendment to Master Repurchase Agreement between RCC Real Estate SPE 3,
      LLC and Natixis Real Estate Capital, dated September 25, 2008. (4)10.2
            Second
      Amendment to Guaranty made by Resource Capital Corp as guarantor, in favor
      of Natixis Real Estate Capital, Inc., dated September 25, 2008. (4)10.3
            Agreement
      between David Bloom and Resource America, Inc. dated December 26, 2007.
      (5)10.4
            Amended
      and Restated Management Agreement between Resource Capital Corp., Resource
      Capital Manager, Inc. and Resource America, Inc. dated as of June 30,
      2008. (6)31.1
            Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
      Executive Officer.31.2
            Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
      Financial Officer.32.1
            Certification of Chief Executive Officer pursuant to
      Section 1350 of Chapter 63 of Title 18 of the United States
      Code.32.2
            Certification of Chief Financial Officer pursuant to
      Section 1350 of Chapter 63 of Title 18 of the United States
      Code.


(1)
            Filed
      previously as an exhibit to the Company’s registration statement on Form
      S-11, Registration No. 333-126517.




(2)
            Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended June 30,
2006.




(3)
            Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended September 30,
2006.




(4)
            Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on September 29, 2008.




(5)
            Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on August 18, 2008.




(6)
            Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on July 3, 2008.




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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:  November
      10, 2008
            By:           /s/ Jonathan Z.
      CohenJonathan Z.
    CohenChief Executive Officer and
      President








Date:  November
      10, 2008
            By:           /s/ David J.
      BryantDavid J.
  BryantChief Financial Officer and
      Chief Accounting Officer