News Column

RESOURCE AMERICA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 12, 2014

Overview

The financial information presented reflects the operations and assets of Resource Capital Corp, a publicly-traded real estate investment trust, or REIT, which we sponsored and manage (NYSE: RSO), on a consolidated basis with our operations and assets. In management's discussion and analysis that follows, we analyze the Resource America operations by its three business segments: Real Estate, Financial Fund Management, and Commercial Finance and one other segment, RSO, which is a consolidated VIE. Each of our operating segments earns fees for acquiring, managing, and/or financing certain assets on behalf of RSO, for which we receive payment. These revenues are included in the tables that follow and then eliminated in order to reflect the consolidation of RSO for accounting purposes. We are a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through our real estate, financial fund management and commercial finance subsidiaries as well as our joint ventures. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, our sponsored investment funds. We typically maintain an investment in the funds we sponsor. As of March 31, 2014, we managed $17.8 billion of assets. We limit our fund development and management services to asset classes where we own existing operating companies or have specific expertise. We believe this strategy enhances the return on investment we can achieve for our funds. In our real estate operations, we concentrate on the ownership, operation and management of multifamily and commercial real estate and real estate mortgage loans including whole mortgage loans, first priority interests in commercial mortgage loans, known as A notes, subordinated interests in first mortgage loans, known as B notes, mezzanine loans, investments in discounted and distressed real estate loans and investments in "value-added" properties (properties which, although not distressed, need substantial improvements to reach their full investment potential). In our financial fund management operations, we concentrate on bank loans, trust preferred securities of banks, bank holding companies, insurance companies and other financial companies, and asset backed securities, or ABS. In our real estate segment, we have focused our efforts primarily on acquiring and managing a diversified portfolio of commercial real estate and real estate related debt that has been significantly discounted due to the effects of current economic conditions and high levels of leverage as well as value-added multifamily investments. In December 2013, we completed the public offering for Resource Real Estate Opportunity REIT I, having raised a total of $635.0 million (including proceeds of a private offering). We expect to continue to expand this business by raising investor funds through our retail broker channel for investment programs, principally through Resource Real Estate Opportunity REIT II, Inc., which we refer to as RRE Opportunity REIT II, during 2014. During 2013, we launched Resource Real Estate Diversified Income Fund, or DIF, a publicly-offered, diversified, closed-end management investment company which will invest at least 80% of its assets in real estate and real estate related industry securities, primarily in income-producing equity and debt securities. During the three months ended March 31, 2014, we launched Resource Real Estate Global Property Securities, or RREGP, an Australian unregistered managed investment fund, structured as a unit trust, which we manage through a joint venture. We invested $677,400 in RREGP in March 2014. In our financial fund management segment, we continue to focus primarily on the sponsorship and management of issuers of collateralized loan and debt obligations, or CLOs and CDOs, through our joint venture, CVC Credit Partners. Through this joint venture, we have closed nine CLOs (with a total of approximately $4.6 billion par value of assets) since its formation in 2012. In September 2013, CVC Credit Partners completed the public offering of Credit Partners European Opportunities Limited, which invests in sub-investment grade European debt instruments. The offering raised 174.7 million and 150.8 million before transaction fees and expenses. Euro denominated shares trade under the symbol "CCPE" and Sterling denominated shares trade under the symbol "CCPG" on the London Stock Exchange. In our commercial finance segment, we recorded provisions for credit losses of $1.2 million during the three months ended March 31, 2014 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows. We had provided a limited guarantee to a lender of Lease Equity Appreciation Fund I, L.P., or LEAF I, one of our sponsored commercial finance investment partnerships. On March 20, 2014, pursuant to the guarantee, we made a payment of $954,000 to the lender on behalf of LEAF I to pay off the loan. We recorded consolidated net income attributable to common shareholders of $990,000 for the three months ended March 31, 2014. Back to



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Presentation of Managements' Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements have been prepared to consolidate the financial statements of RSO. Our operating segments manage assets on behalf of RSO and the compensation we earn under the terms of our management agreement with RSO is allocated across our operating segments in proportion to the management services each segment provides to RSO. The assets of RSO are held solely to satisfy RSO's obligations and the creditors of RSO have no recourse to us. Our rights to the benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO are limited to our 2.2% ownership position. The operating results and the discussion that follows the description of each of our operating segments is presented before the consolidation of RSO to appropriately reflect the manner in which we conduct our operations. Management believes that excluding the fees earned by us under the terms of the management agreement with RSO that are eliminated upon consolidation may impact a reader's analysis and understanding of our results of operations. Assets Under Management We increased our assets under management by $2.5 billion to $17.8 billion at March 31, 2014 from $15.3 billion at March 31, 2013. The following table sets forth information relating to our assets under management by operating segment (in millions, except percentages) (1): March 31, Increase 2014 2013 Amount Percentage Financial fund management (2) $ 14,558$ 12,988$ 1,570 (2) 12% Real estate (3) 2,618 1,822 796 44% Commercial finance 617 527 90 17% $ 17,793$ 15,337$ 2,456 16%



Net assets under management (4) $ 8,286$ 6,842$ 1,444 21%

(1) We describe how we calculate assets under management in the notes to the

third table of this section.

(2) The increase primarily reflects the $2.2 billion increase in the CVC Credit

Partners portfolio related to the issuance of four new CLOs. This increase

was offset, in part, by reductions in the eligible collateral bases of our

asset-backed securities, or ABS ($206.5 million), corporate loan ($188.4

million) and trust preferred portfolios ($266.4 million) resulting from

defaults, paydowns, sales and calls.

(3) The increase is primarily due to the $553.0 million increase in assets

managed for RRE Opportunity REIT I; the fundraising for this fund was

completed in December 2013.

(4) Net assets under management represents the proportionate share of assets we

manage after reflecting joint venture arrangements.

Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public and private limited partnerships, TIC property interest programs, two REITs, and other investment funds. The following table sets forth the number of entities we manage by operating segment: Other Limited Investment CDOs and CLOs Partnerships TIC Programs Funds As of March 31, 2014 (1) Financial fund management 45 8 - 8 Real estate 2 8 6 6 Commercial finance - 4 - 2 47 20 6 16 As of March 31, 2013 (1) Financial fund management 44 13 - 3 Real estate 2 9 6 5 Commercial finance - 4 - 2 46 26 6 10



(1) All of our operating segments manage assets on behalf of RSO.

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As of March 31, 2014 and 2013, we managed assets in the following classes for the accounts of institutional and individual investors, Resource Capital Corp., or RSO, and for our own account (in millions): March 31, 2014 March 31, 2013 Institutional and Individual Investors RSO Company Total Total Bank loans (1) $ 8,363 $ 1,666 $ - $ 10,029 $ 8,203 Trust preferred securities (1) 3,269 - - 3,269 3,536 Asset-backed securities (1) 954 - - 954 1,160 Mortgage and other real estate-related loans (2) 5 1,284 - 1,289 992 Real properties (2) 1,285 19 16 1,320 830 Commercial finance assets (3) 617 - - 617 527 Private equity and other assets (1) 71 244 - 315 89 $ 14,564 $ 3,213 $ 16 $ 17,793$ 15,337 Net assets under management (4) $ 6,493 $ 1,777 $ 16 $ 8,286 $ 6,842



(1) We value these assets at their amortized cost.

(2) We value our managed real estate assets as the sum of: (i) the amortized cost

of the commercial real estate loans; and (ii) the book value of each of the

following: (a) real estate and other assets held by our real estate

investment entities, (b) our outstanding legacy loan portfolio, and (c) our

interests in real estate.

(3) We value our commercial finance assets as the sum of the book value of the

financed equipment and leases and loans.

(4) Net assets under management represents the proportionate share of assets we

manage after reflecting joint venture arrangements.

Employees

As of March 31, 2014, we had 633 full-time employees, an increase of 25 (4%), from 608 employees at March 31, 2013. The following table summarizes our employees by operating segment:

Financial Fund Corporate/ Total Real Estate Management Other March 31, 2014 Investment professionals 66 50 13 3 Other 85 29 11 45 151 79 24 48 Property management 482 482 - - Total 633 561 24 48 March 31, 2013 Investment professionals 56 42 11 3 Other 69 19 13 37 125 61 24 40 Property management 483 483 - - Total 608 544 24 40 The revenues in each of our operating segments are generated by the fees we earn for structuring and managing the investment entities we sponsored on behalf of individual and institutional investors and RSO, and the income produced by the assets and investments we manage for our own account. The following table sets forth information about our revenue sources (in thousands): Back to



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Back to Index Three Months Ended March 31, 2014 2013 Fund management revenues (1) $ 15,269$ 7,968 Finance and rental revenues (2) 1,988



2,005

RSO management fees (3) 2,782



2,574

Gains on resolution of loans (4) -



1,606

Other revenues 212



1,296

Subtotal - Resource America revenues before consolidating with RSO 20,251



15,449

RSO - consolidated VIE revenues 31,931



30,578

Elimination of consolidated VIE revenues attributed to operating segments (2,880 ) (2,700 ) $ 49,302$ 43,327



(1) Includes fees from each of our real estate, financial fund management and

commercial finance operations and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.



(2) Includes rental income, revenues from certain real estate assets and interest

income on bank loans from our financial fund management operations.

(3) Reflects the various management fees that are received by our operating

segments acquiring, managing, and financing the assets of RSO. These fees are

eliminated in reporting the consolidated results of Resource America

including RSO.

(4) Includes the resolution of loans we hold in our real estate segment. We provide a more detailed discussion of the revenues generated by each of our business segments under "-Results of Operations: Real Estate", "Financial Fund Management", and "Commercial Finance." Results of Operations: Real Estate Through our real estate segment, we focus on three different areas: the acquisition, ownership and management of portfolios of real estate and real estate related debt, which we have acquired through a sponsored real estate investment entity as well as through joint ventures with institutional investors, that principally invest in multifamily housing; the management, principally for RSO, of general investments in commercial real estate debt, including first mortgage debt, whole loans, mortgage participations, B notes, mezzanine debt and related commercial real estate securities; and to a significantly lesser extent, the management and resolution of a portfolio of real estate property interests that we acquired at various times between 1991 and 1999, which we collectively refer to as our legacy portfolio.



The following table sets forth information related to real estate assets managed (1) (in millions):

March 31, 2014 2013 Assets under management (1): Commercial real estate debt $ 1,235$ 938 Real estate investment funds and programs 569 582 RRE Opportunity REIT I 703 150 Distressed portfolios 19 57 Properties managed for RSO 35 64 Institutional portfolios 15 15 Residential mortgages for RSO 18 - Legacy portfolio 16 16 DIF 8 - $ 2,618$ 1,822 Net assets under management $ 2,618$ 1,822 Back to Index 80



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(1) For information on how we calculate assets under management, see "Assets

under Management" above.

We support our real estate investment funds by making long-term investments in them. In addition, from time to time, we make bridge investments in the funds to facilitate acquisitions. We record losses on these equity method investments primarily as a result of depreciation and amortization expense recorded by the property interests. Certain of our fee income is transaction based and, as such, can be highly variable. For 2014, our fee income will depend upon the success of RRE Opportunity REIT I and RRE Opportunity REIT II and the timing of their respective acquisitions, refinancings, and dispositions. The following table sets forth information relating to the revenues recognized and costs and expenses incurred in our real estate operations (in thousands): Three Months Ended March 31, 2014 2013 Revenues: Management fees: REIT management fees from RSO $ 2,646$ 2,193 Property management fees 2,403 2,517 Asset management fees 1,942 1,202 Broker-dealer fees - 1,108 6,991 7,020 Other:



Rental property income and revenues of consolidated VIEs (1)

939



949

Master lease revenues 1,049



1,056

Fee income from sponsorship of investment entities 4,651



689

Gains and fees on resolution of loans and other property interests -



1,606

Equity in earnings of unconsolidated entities (355 )



20

$ 13,275 $



11,340

Costs and expenses: General and administrative expenses $ 4,080$ 3,507 Property management expenses 2,220 2,355 Broker-dealer expenses 578 1,186 Master lease expenses 1,197 1,579 Rental property expenses and expenses of consolidated VIEs (1) 800 813 $ 8,875$ 9,440



(1) We generally consolidate a VIE when we are deemed to be the primary

beneficiary of the entity.

Revenues - Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013 Revenues from our real estate operations increased $1.9 million (17%) to $13.3 million for 2014 from $11.3 million in 2013. We attribute the increase primarily to the following: Management fees a $740,000 increase in asset management fees, principally an $844,000



increase in the fees earned from RRE Opportunity REIT I as a result of

the increase in its assets, offset in part by a $98,000 decrease in

fees related to two assets sold during the quarter that were held by an

RSO joint venture; a $453,000 increase in RSO management fees. The base management fee increased due to an increase in the equity of RSO upon which this fee is based; and



a $1.1 million decrease in broker-dealer manager fees. In December

2013, we closed the offering for RRE Opportunity REIT I for which

broker-dealer fees were earned during the prior year quarter.

Other revenues a $4.0 million increase in fee income in connection with the purchase and third-party financing of properties through our real estate investment entities, as follows: during the three months ended March 31, 2014, we earned $4.7 million in fees primarily from the following activities: Back to Index 81



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the acquisition of two properties (valued at $114.3 million);

the acquisition of joint venture interests in 10 multifamily communities (valued at $51.2 million);



the sale of two properties (valued at $82.9 million); and

the placement of $115.0 of financing on properties.

in comparison, during the three months ended March 31, 2013, we earned $689,000 in fees primarily from the following activities:



the acquisition of two properties (valued at $18.6 million); and

the sale of two properties (valued at $13.0 million).

The increase is offset by a $1.6 million decline in gains and fees on resolution of property interests. During the three months ended March 31, 2013 we recognized a gain of $1.6 million from the sale of our 10% interest in a real estate joint venture. We had no such transactions in the three months ended March 31, 2014. Costs and Expenses - Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013 Costs and expenses of our real estate operations decreased $565,000 (6%) to $8.9 million for 2014 from $9.4 million in 2013. We attribute these changes primarily to the following: a $573,000 increase in general and administrative expenses, principally a $386,000 increase in wages and benefits in conjunction with the increased operating activities of RRE Opportunity REIT I as well as the additional staffing required to manage the increased properties under management;



a $382,000 decrease in expenses for our master lease; and

a $608,000 decrease in expenses for our broker-dealer. During the three

months ended March 31, 2013, we were fundraising for RRE Opportunity

REIT I and completed the fundraising in December 2013. As fundraising

for RRE Opportunity REIT II escalates, our broker-dealer expenses will increase. Results of Operations: Financial Fund Management General. We conduct our financial fund management operations primarily through six separate operating entities: CVC Credit Partners, or CCP, a joint venture between us and an



unrelated third-party, finances, structures and manages investments in

bank loans, high yield bonds and equity investments through CLO issuers, managed accounts and a credit opportunities fund;



Trapeza Capital Management, LLC, or TCM, a joint venture between us and

an unrelated third-party, manages investments in trust preferred

securities and senior debt securities of banks, bank holding companies,

insurance companies and other financial companies through CDO issuers. TCM, together with the Trapeza CDO issuers, are collectively referred to as Trapeza; Resource Financial Institutions Group, Inc., or RFIG, serves as the



general partner for seven company-sponsored affiliated partnerships

which invest in financial institutions; Ischus Capital Management, LLC, or Ischus, finances, structures and manages investments in ABS including residential mortgage-backed securities, or RMBS, and commercial mortgage-backed securities, or CMBS; Resource Capital Markets, Inc., or Resource Capital Markets, through our registered broker-dealer subsidiary, Resource Securities, acts as an agent in the primary and secondary markets for structured finance securities; and



Resource Capital Manager, Inc., or RCM, an indirect wholly-owned

subsidiary, provides investment management and administrative services to RSO under a management agreement between us, RCM and RSO. Back to Index 82



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The following table sets forth information relating to assets managed by our financial fund management operating entities on behalf of institutional and individual investors and RSO (in millions) (1):

Institutional and Individual Investors RSO Total by Type March 31, 2014 CVC Credit Partners $ 8,363 $ 1,666$ 10,029 Trapeza 3,269 - 3,269 Ischus 954 - 954 Other 62 244 306 $ 12,648 $ 1,910$ 14,558 Net assets under management $ 5,195 $ 473 $ 5,668 March 31, 2013 CVC Credit Partners $ 5,610 $ 2,593 $ 8,203 Trapeza 3,536 - 3,536 Ischus 1,160 - 1,160 Other company-sponsored partnerships 66 23 89 $ 10,372 $ 2,616$ 12,988 Net assets under management $ 4,567 $ 453 $ 5,020



(1) For information on how we calculate assets under management, see "Assets

Under Management" above.

Our financial fund management operations historically have depended upon our ability to sponsor and manage CDO and CLO issuers. Prior to 2012, the market for CDOs had been non-existent and limited for CLOs in the asset classes we manage. In October 2011, we were able to sponsor Apidos CLO VIII, the first such deal we closed since 2007. Since 2012, we have closed nine CLO's (all of which were sponsored by CVC Credit Partners) financing $4.6 billion in assets. CVC Credit Partners We and our joint venture partner have sponsored, structured and/or currently manage 23 CLO issuers and nine separate accounts for institutional and individual investors as well as for RSO, holding approximately $10.0 billion in U.S. and European bank loans and corporate bonds ($8.5 billion of which are held in CLO issuers) at March 31, 2014, of which $1.8 billion are managed on behalf of RSO. For the CLOs managed, we earn average fees of 0.12% (senior) and 0.26% (subordinate) of the aggregate principal balance of eligible collateral. Subordinate management fees are subordinate to debt service payments on the CLOs. Incentive management fees, which depend on performance, are also subordinate to payments on debt. During the three months ended March 31, 2014, we also received 75% of the incentive management fees generated by six legacy Apidos CLOs. For separately managed accounts, we earn approximately 0.73% on the average balance of assets managed. Subsequent to the sale and resulting deconsolidation of Apidos, we no longer reflect the revenues and expenses of Apidos and the credit opportunities fund in our consolidated results; instead, we record our 33% equity interest in the operations of CVC Credit Partners. Trapeza We sponsored, structured and currently co-manage 13 CDO issuers holding approximately $3.3 billion in trust preferred securities of banks, bank holding companies, insurance companies and other financial companies at March 31, 2014. We own a 50% interest in an entity that manages 11 Trapeza CDO issuers and a 33.33% interest in another entity that manages two Trapeza CDO issuers. We also owned a 50% interest in the general partners of five affiliated limited partnerships, which are all in the process of liquidation. Additionally, as part of our sponsorship and management, we hold limited partnership interests in each of these limited partnerships. On November 1, 2009 and January 28, 2010, the general partners repurchased substantially all of the remaining limited partnership interests in two of the Trapeza entities. Back to



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On average, we earn 0.12% in senior management fees on the aggregate principal balance of the eligible collateral held by the CDO issuers. These fees are shared with our co-sponsors. Ischus We sponsored, structured and/or currently manage nine CDO issuers for institutional and individual investors, which hold approximately $1.0 billion in real estate ABS, including RMBS, CMBS and credit default swaps at March 31, 2014. On average, we earn 0.07% in senior management fees on the aggregate principal balance of eligible collateral held by the CDO issuers. One of these CDO issuers no longer pays management fees. Company-Sponsored Partnerships We sponsored, structured and, through RFIG, currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $62.4 million of investments in financial institutions at March 31, 2014. We derive revenues from these operations through annual management fees, based on an average of 1.85% of equity. As part of our sponsorship, management and general partnership interests, we hold limited partnership interests in these partnerships. We may receive a carried interest of up to 20% upon meeting specific investor return rates. Through our Resource Capital Markets group, we engage in structured finance security trading, both as an agent through Resource Securities and for our own account. The introductory agent fees we earn are negotiated on a deal-by-deal basis. In the trading portfolio we manage for our own account, we buy and sell structured finance securities and record both unrealized and realized gains and losses in financial fund management revenues. The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our financial fund management operations (in thousands): Three Months Ended March 31, 2014 2013 Revenues: Fund management fees $ 815$ 733 Fund management fees - incentive 1,059 409 RSO management fees - trading portfolio - 226 RSO management fees 136 155 Structuring and placement fees 3,327 - Introductory agent fees 548 331 Equity in earnings of unconsolidated CDO issuers 243 227 Equity in earnings of CVC Credit Partners 361 582 Gains, net, on trading securities 183 1,276 Other revenues 242 20 6,914 3,959 Total limited and general partner interests 161 328 $ 7,075$ 4,287 Costs and expenses: General and administrative expenses $ 4,389$ 2,528 Revenues - Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013 Revenues increased $2.8 million (65%) to $7.1 million for 2014 from $4.3 million in 2013. We attribute the increase to the following: a $82,000 increase in fund management fees, primarily due to increased



capital bases in our unconsolidated company-sponsored partnerships as a

result of fair value adjustments.

a $650,000 increase in fund management incentive fees, reflecting

payments received in connection with retaining 75% of the incentive

management fees earned by the legacy Apidos CLOs;

a $3.3 million increase in structuring and placement fees, principally

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a $217,000 increase in introductory agent fees as a result of fees earned in connection with eight structured security transactions with



an average fee of $68,500 as compared to eleven structured security

transactions with an average fee of $30,200 for the prior year period.

These increases were partially offset by the following decreases, which can vary significantly by quarter: a $226,000 decrease in incentive management fees earned on managing a



trading portfolio on behalf of RSO.

a $1.1 million decrease in realized and unrealized gains and interest

recorded on our trading securities portfolio; and

a $162,000 decrease in fair value adjustments recorded for our limited

general partner interests in unconsolidated company-sponsored

partnerships.

Cost and Expenses - Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013

Costs and expenses of our financial fund management operations increased $1.9 million (74%) to $4.4 million for the three months ended March 31, 2014 from $2.5 million in the three months ended March 31, 2013 primarily as a result of an increase in incentive compensation in connection with the structuring and placement fees earned. Results of Operations: Commercial Finance The commercial finance assets we manage through LEAF increased by $90 million to $617.0 million as compared to $527 million at March 31, 2013. This increase reflects a $168 million increase in the LEAF portfolio, offset in part by a $78 million decrease in the assets managed by our four investment partnerships, reflecting the natural runoff of those portfolios. As of March 31, 2014 and 2013, respectively, LEAF managed approximately 58,000 and 55,000 leases and loans for itself and our investment entities, with an average original finance value of $23,000 and $24,000, and an average term of 56 and 57 months, respectively. The following table sets forth information related to commercial finance assets managed by us and LEAF, our unconsolidated joint venture (1) (in millions): March 31, 2014 2013 LEAF $ 581$ 413



Commercial finance investment partnerships 36 114

$ 617$ 527



(1) For information on how we calculate assets under management, see "Assets

under Management" above.

The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our commercial finance operations (in thousands): March 31, 2014 2014 2013 Revenues: Equity in losses of investment entities (97 ) (173 ) Equity in losses of LEAF (2 ) (5 ) $ (99 )$ (178 ) Costs and expenses: General and administrative expenses - wage and benefit costs $ 85 $



33

General and administrative expenses - other 18 12 $ 103$ 45 During 2012, our share of LEAF's losses reduced our investment to zero such that we will not reflect any future losses of LEAF. However, we will continue to record our share of any changes that may be recorded in LEAF's accumulated other comprehensive income relating to its hedging activities. Commencing December 1, 2010, we agreed to waive all future management fees from our commercial finance investment partnerships due to their reduced equity distributions as a result of the impact of the recession on their respective cash flows. Accordingly, we waived $224,000 and $618,000 of fund management fees from these entities during the three months ended March 31, 2014 and 2013, respectively. Back to Index 85



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Results of Operations: Other Costs and Expenses General and Administrative Expenses General and administrative costs increased $1.0 million (46%) to $3.2 million for the three months ended March 31, 2014 from $2.2 million for the three months ended March 31, 2013. Professional fees increased by $631,000 primarily due to increased audit and legal fees related to the change in our year end and the consolidation of RSO. Other-Than-Temporary Impairment Losses There were no other-than-temporary impairment losses during the three months ended March 31, 2014. During the three months ended March 31, 2013, we recorded $214,000 of other-than-temporary impairment losses of certain of our investments in CLOs, primarily those with investment in bank loans. Provision for Credit Losses The following table sets forth our provision for credit losses as reported by segment (in thousands): Three Months Ended March 31, 2014 2013 Commercial finance: Receivables from managed entities $ 1,212 $



2,863

Leases, loans and future payment card receivables (1 ) (3 ) Real estate: Receivables from managed entities 1 (2,533 ) Rent receivables (4 ) 11 $ 1,208 $ 338 We have estimated, based on projected cash flows, that three of the commercial finance partnerships that we sponsored and managed will not have sufficient funds to pay a portion of their accrued management fees and, accordingly, we recorded provisions of $1.2 million, and $2.9 million for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2013, as a result of the sale of our interest and full repayment of accrued management fees in a real estate joint venture, we reversed a $1.0 million provision that was previously recorded. Additionally, due to increases in the projected cash flows of the real estate investment partnerships, we reversed another $1.5 million of our provision for credit losses. Depreciation and Amortization The following table reflects the depreciation reported by our operating segments (in thousands): Three Months Ended March 31, 2014 2013 Real estate property investments $ 129 $ 180 Other operating segments - primarily depreciation on fixed assets 322 236 Total depreciation expense $ 451 $ 416 Interest Expense Interest expense includes the non-cash amortization of debt issuance costs. During the three months ended March 31, 2014 and 2013, corporate interest is comprised primarily of the 9% interest on our $10.0 million of Senior Notes outstanding. Real estate segment interest primarily relates to the mortgage on our hotel property in Savannah, Georgia. The following table reflects interest expense as reported by segment (in thousands): Back to



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Back to Index Three Months Ended March 31, 2014 2013 Corporate $ 287 $ 296 Real estate 196 197 Commercial finance - 1 $ 483 $ 494 Net (Income) Loss Attributable to Noncontrolling Interests We record third-party interests in our earnings as amounts allocable to noncontrolling interests. Subsequent to the deconsolidation of LEAF, we no longer record commercial finance non-controlling interests. The following table sets forth the net (income) loss attributable to noncontrolling interests (in thousands): Three Months Ended March 31, 2014 2013



Noncontrolling interests in consolidated VIE - RSO (1) $ (17,151 )

$ (12,314 ) Other: Real estate - hotel property (2) $ 30 $ 43 Real estate - Australian joint venture (3) 10 - $ 40 $ 43



(1) Our rights and benefits of RSO are limited to the management compensation and

expense reimbursements we receive and our risks associated with being an

investor in RSO which is limited to our ownership position. The remaining

portion of RSO's net income (loss) is attributed to Noncontrolling interests

attributable to RSO.

(2) A related party holds a 19.99% interest in our hotel property in Savannah,

Georgia.

(3) Our Australian joint venture partner holds a 25% interest in those

operations.

Income Taxes The following table details the allocation of our consolidated provision (benefit) for income taxes from continuing operations between RAI and RSO (in thousands): Three Months Ended March 31, 2014 2013 RAI $ 1,069$ (146 ) RSO 16 1,762 Total $ 1,085$ 1,616 The following paragraphs discuss the income tax, exclusive of the income tax provision for our consolidated VIE - RSO. Our effective income tax rate (income taxes as a percentage of income from continuing operations, before taxes) was a provision of 46% for the three months ended March 31, 2014 as compared to a 26% benefit for the three months ended March 31, 2013. The change in the income tax rate primarily relates to additional tax benefits recorded for the three months ended March 31, 2013 which are not applicable for the three months ended March 31, 2014. Our effective income tax rate without discrete tax items would have been 39% for the three months ended March 31, 2014. We project our effective tax rate to be between 42% and 45% for 2014. This rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and the level of our tax credits. We take certain of these and other factors, including our history of pretax earnings, into account in assessing our ability to realize our net deferred tax assets. We are subject to examination by the U.S. Internal Revenue Service, or IRS, and other taxing authorities in certain states in which we have significant business operations. We are currently undergoing an IRS examination for the fiscal years ended September 2011 and September 2012. In addition, we are currently undergoing a New York State examination for the fiscal years ended September 2007 - 2009. We are no longer subject to U.S. federal income tax examinations for years before 2010 and are no longer subject to state and local income tax examinations by tax authorities for years before 2007. Back to



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The New York State 2014-2015 Budget Act ("N.Y. Budget Act"). The N.Y. Budget Act was signed into law on March 31, 2014. The N.Y. Budget Act substantially modified and reformed various aspects of New York State tax law. We anticipate that the legislation will reduce the amount of taxable income apportioned to New York State, thereby reducing our state effective income tax rate beginning in 2015. Results of Operations: RSO RSO, which we consolidate as a VIE, is a diversified real estate finance company that is organized and conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended. RSO's investment strategy focuses on commercial real estate and commercial real estate-related assets and, to a lesser extent, commercial finance assets. RSO invests in the following asset classes: commercial real estate-related assets such as commercial real estate property, whole loans, A-notes, B-notes, mezzanine loans, commercial mortgage-backed securities and investments in real estate joint ventures as well as commercial finance assets such as bank loans, lease receivables and other asset-backed securities, trust preferred securities, debt tranches of collateralized debt obligations, structured note investments and private equity investment principally issued by financial institutions. RSO has financed a substantial portion of its portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of its financings with the maturities and repricing dates of those investments, and has sought to mitigate interest rate risk through derivative instruments. The following summarizes the operating activities of RSO (in thousands): Three Months Ended March 31, 2014 2013

Total interest income $ 27,085$ 33,320 Interest expense 9,637 11,165 Net interest income 17,448 22,155 Other revenues 14,483 8,423 Total revenues 31,931 30,578 Operating expenses 13,140 17,950 Net operating income 18,791 12,628 Other revenues (1,331 ) - Net income $ 17,460$ 12,628 Although we treat RSO as a consolidated VIE, our sole interests in it are through our management agreements as its external manager and our ownership of 2.9 million shares (2.2%) of its common stock as of March 31, 2014. Liquidity and Capital Resources Our analysis of liquidity and capital reserves excludes the liquidity of our consolidated VIE, RSO, as we do not have access or the ability to utilize any of RSO's assets, nor do we have any obligation or liability with respect to any of its liabilities or borrowings. As an asset manager, our liquidity needs consist principally of capital needed to make investments and to pay our operating expenses (principally wages, benefits and interest expense). 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 raise investor funds. At March 31, 2014, our liquidity consisted of four primary sources: cash on hand of $17.2 million;



$10.5 million of availability under two corporate credit facilities;

potential disposition of non-core assets; and

cash generated from operations.

Disposition of Non-core Assets. Our legacy portfolio at March 31, 2014 consisted of five property interests. To the extent we are able to dispose of these assets, we will obtain additional liquidity. The amount of additional liquidity we obtain will vary significantly depending upon the asset being sold and then-current economic conditions. We cannot provide any assurance that we will be able to dispose of these properties or as to the timing or amounts we may realize from any such dispositions. Back to



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Refinancing and Repayment of Our Debt. In November 2013, we amended our credit facility with Republic First Bank to extend the maturity date to December 28, 2016. In April 2014, we amended our credit facility with TD Bank to extend the maturity date to December 31, 2017. In addition, the maximum borrowing capacity was increased from $7.5 million to $11.5 million. As of March 31, 2014, our total borrowings outstanding of $20.5 million included $10.0 million of Senior Notes, $10.2 million of mortgage debt (secured by the underlying property) and $265,000 of other debt. Capital Requirements Our capital needs consist principally of funds to make investments in the investment vehicles we sponsor or for our own account and to provide bridge financing or other temporary financial support to facilitate asset acquisitions by our sponsored investment vehicles. Accordingly, the amount of capital we require will depend to a significant extent upon our level of activity in making investments for our own account or in sponsoring investment vehicles, all of which is largely within our discretion. Dividends We used our cash reserves to fund dividends during periods in which our cash flows from operations were insufficient. For the three months ended March 31, 2014 and 2013, we paid cash dividends of $980,000 and $589,000, respectively. We have paid quarterly cash dividends since August 1995. The determination of the amount of future cash dividends, if any, is at the discretion of our Board of Directors and will depend on the various factors affecting our financial condition and other matters that the directors deem relevant. Contractual Obligations and Other Commercial Commitments Our analysis of contractual obligations and other commitments excludes the obligations and commitments of our consolidated VIE - RSO as we do not have any obligation or recourse with respect to any of its liabilities or borrowings. The following tables summarize our contractual obligations and other commercial commitments at March 31, 2014 (in thousands): Payments Due By Period Less than 1 - 3 3 - 5 After Total 1 Year Years Years 5 Years Contractual obligations: Non-recourse to us: Mortgage - hotel property (1) $ 10,236$ 202$ 442$ 504$ 9,088 Recourse to us: Other debt (1) 10,000 10,000 - - - Capital lease obligations (1) 265 184 81 - - 10,265 10,184 81 - - Operating lease obligations 15,004 2,196 4,285 3,906 4,617 Other long-term liabilities 6,860 831 1,576



1,459 2,994 Total contractual obligations $ 42,365$ 13,413$ 6,384$ 5,869$ 16,699

(1) Not included in the table above are estimated interest payments calculated at

rates in effect at March 31, 2014; less than 1 year: $1.6 million; 1-3 years: $1.3 million; 3-5 years: $1.2 million; and after 5 years: $1.3 million. Back to Index 89



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Amount of



Commitment Expiration Per Period

Less than 1 - 3 3 - 5 After Total 1 Year Years Years 5 Years Other commercial commitments: Guarantees $ - $ - $ - $ - $ - Real estate commitments 800 800 - - - Standby letters of credit 803 803 - - -



Total commercial commitments $ 1,603$ 1,603 $ -

$ - $ - Limited Loan Guarantee. We and Lease Equity Appreciation Fund I, L.P. ("LEAF I"), one of our sponsored commercial finance investment partnerships, had provided a limited guarantee to a lender to the LEAF partnership in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. On March 20, 2014, pursuant to the guarantee, we advanced funds of $954,000 to the lender on behalf of LEAF I to pay off the loan in full. Broker-Dealer Capital Requirement. Resource Securities, our wholly-owned subsidiary, is a registered broker-dealer and serves as a dealer-manager for the sale of securities of direct participation investment programs, both public and private, sponsored by our subsidiaries who also serve as general partners and/or managers of these programs. Additionally, Resource Securities serves as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies and for us and RSO. As a broker-dealer, Resource Securities is required to maintain minimum net capital, as defined in regulations under the Securities Exchange Act of 1934, as amended, which was $101,000 and $221,000 as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014 and December 31, 2013, Resource Securities net capital was $1.6 million and $2.7 million, respectively, which exceeded the minimum requirements by $1.5 million and $2.5 million, respectively. Legal proceedings. We are also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on our consolidated financial condition or operations. Real Estate Commitments. As a specialized asset manager, we sponsor investment funds in which we may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT II, we are committed to invest 1% of the first $100.0 million of equity raised. During 2013, we invested $200,000. In April 2014, we funded an additional $1.0 million, for a total investment of $1.2 million. General Corporate Commitments. We are also a party to employment agreements with certain executives that provide for compensation and other benefits, including severance payments under specified circumstances. As of March 31, 2014, except for the real estate commitment and executive compensation, we do not believe it is probable that any payments will be required under any of our commitments and contingencies, and accordingly, no liabilities for these obligations have been recorded in the restated consolidated financial statements. Variable Interest Entities In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. We have variable interests in VIEs through our management contracts and investments in various securitization entities, including CDO issuers. Since we serve as the asset manager for the investment entities we sponsored and manage, we are generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by us, we will perform an additional qualitative analysis to determine if our interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, we compare the benefits we would receive (in the optimistic scenario) or the losses we would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by us were significant as compared to total benefits and losses absorbed by all variable interest holders, then we would conclude that we are the primary beneficiary. The financial statements for the three months ended March 31, 2014 and 2013 reflect the consolidation of RSO. See Note 19 of the notes to our consolidated financial statements for additional disclosures pertaining to VIEs. Back to



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Our investment in RRE Opportunity REIT I and II, and our investments in the Trapeza structured finance entities that hold investments in trust preferred assets and asset-backed securities, which we refer to as our Ischus entities, and a new investment fund we sponsored and manage in Australia, RRE Global Opportunity Fund, were all determined to be VIEs that we do not consolidate as we do not have the obligation of, or right to, losses or earnings that would be significant to those entities. With respect to RRE Opportunity REIT II, we have advanced offering costs that are being reimbursed as the REIT II raises additional equity. Except for those advances, we have not provided financial or other support to these VIEs and have no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2014. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our restated consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities and in estimating the liability, if any, for clawback provisions on certain of our partnership interests. We used assumptions, specifically inputs to the Black-Scholes pricing model and the discounted cash flow model, in computing the fair value of the Senior Notes and related warrants. On an on-going basis, we evaluate our estimates, which are based on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Back to Index 91



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