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VARIABLE INTEREST ENTITIES
 12 Months Ended
Dec. 31, 2012
Sep. 30, 2012
Variable Interest Entities [Abstract]    
VARIABLE INTEREST ENTITIES
The following reflects the assets and liabilities and operations of RSO which was consolidated by the Company:
RSO Balance Sheets Detail (in thousands):
 
 
 
 
December 31,
 
2012
 
2011
ASSETS (1)
 
 
 
Cash and cash equivalents
$
85,278

 
$
43,116

Restricted cash
94,112

 
142,806

Subtotal- Cash and cash equivalents
179,390

 
185,922

 
 
 
 
Investment securities, trading
24,843

 
38,673

Investment securities available-for-sale, pledged as collateral, at fair value
195,200

 
136,188

Investment securities available-for-sale, at fair value
36,390

 
4,678

Subtotal- Investments, at fair value
256,433

 
179,539

 
 
 
 
Loans, pledged as collateral and net of allowances of $17.7 million and $27.5 million
1,793,780

 
1,772,063

Loans receivable–related party
8,324

 
9,497

Loans held for sale
48,894

 
3,154

Subtotal - Loans, before eliminations
1,850,998

 
1,784,714

Eliminations
(1,677
)
 
(8,605
)
Subtotal - Loans
1,849,321

 
1,776,109

 
 
 
 
Property available-for-sale
—

 
2,980

Investment in real estate
75,386

 
48,027

Investments in unconsolidated entities
45,413

 
47,899

Subtotal, Investments in real estate and unconsolidated entities, before eliminations
120,799

 
98,906

Eliminations
(93
)
 
(38,850
)
Subtotal, Investments in real estate and unconsolidated entities
120,706

 
60,056

Line items included in "other assets":
 
 
 
Linked transactions, at fair value
6,835

 
2,275

Interest receivable
7,763

 
8,836

Deferred tax asset
2,766

 
626

Principal paydown receivable
25,570

 
—

Intangible assets
13,192

 
19,813

Prepaid expenses
10,396

 
648

Other assets
4,109

 
3,445

Subtotal - Other assets, before eliminations
70,631

 
35,643

Eliminations
(31
)
 
(34
)
Subtotal - Other assets
70,600

 
35,609

Total assets (excluding eliminations)
$
2,478,251

 
$
2,284,724

Total assets (including eliminations)
$
2,476,450

 
$
2,237,235

LIABILITIES (2)
 

 
 

Borrowings
$
1,785,600

 
$
1,794,083

 
 
 
 
Distribution payable
21,655

 
19,979

Accrued interest expense
2,918

 
3,260

Derivatives, at fair value
14,687

 
13,210

Accrued tax liability
13,641

 
12,567

Deferred tax liability
8,376

 
5,624

Accounts payable and other liabilities
18,029

 
6,311

Subtotal - Other liabilities, before eliminations
79,306

 
60,951

Eliminations
(6,633
)
 
(2,698
)
Subtotal - Other liabilities
72,673

 
58,253

Total liabilities (before eliminations)
$
1,864,906

 
$
1,855,034

Total liabilities (after eliminations)
$
1,858,273

 
$
1,852,336


RSO Balance Sheets Detail (in thousands):
 
 
 
 
December 31,
 
2012
 
2011
(1) Assets of consolidated RSO's VIEs included in the total assets above:
 
 
 
        Restricted cash
$
90,108

 
$
138,120

        Investments securities available-for-sale, pledged as collateral, at fair value
135,566

 
89,045

        Loans held for sale
14,894

 
3,154

        Property available-for-sale
—

 
2,980

        Loans, pledged as collateral and net of allowances of $15.2 million and $17.2 million
1,678,719

 
1,730,950

        Interest receivable
5,986

 
6,003

        Prepaid expenses
328

 
212

        Principal receivable
25,570

 
—

        Other assets
333

 
24

        Total assets of consolidated VIEs
$
1,951,504

 
$
1,970,488

 
 
 
 
(2) Liabilities of consolidated RSO's VIEs included in the total liabilities above:
 
 
 
        Borrowings
$
1,614,882

 
$
1,689,638

        Accrued interest expense
2,666

 
2,943

        Derivatives, at fair value
14,078

 
12,000

        Accounts payable and other liabilities
698

 
442

        Total liabilities of consolidated VIEs
$
1,632,324

 
$
1,705,023

The following table presents detail of noncontrolling interests attributable to RSO:
 
December 31,
 
2012
 
2011
Total stockholders equity per RSO balance sheet
$
613,345

 
$
429,690

Eliminations
(31,895
)
 
(31,313
)
Noncontrolling interests attributable to RSO
$
581,450

 
$
398,377

RSO Cash Flow Detail (in thousands)
 
 
 
 
Years Ended
 
December 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
64,443

 
$
37,716

Items included in "Change in cash attributable to consolidated VIE - RSO":
 
 
 
Provision for loan losses
16,818

 
13,896

Depreciation of investments in real estate and other
1,838

 
729

Amortization of intangible assets
4,047

 
3,890

Amortization of term facilities
957

 
570

Accretion of net discounts on loans held for investment
(17,817
)
 
(15,588
)
Accretion of net discounts on securities available-for-sale
(3,177
)
 
(3,698
)
Amortization of discount on notes of CDOs
2,470

 
274

Amortization of debt issuance costs on notes of CDOs
4,700

 
3,341

Amortization of stock-based compensation
4,636

 
2,526

Amortization of terminated derivative instruments
227

 
227

Accretion of interest-only available-for-sales securities
(719
)
 
—

Deferred income tax benefits
2,329

 
(399
)
Purchase of securities, trading
(8,348
)
 
(38,904
)
Principal payments on securities, trading
1,027

 
643

Proceeds from sales of securities, trading
33,579

 
18,131

Net realized and unrealized gain on investment securities, trading
(12,435
)
 
(837
)
Net realized gains on investments
(4,106
)
 
(2,643
)
Gain on early extinguishment of debt
(16,699
)
 
(3,875
)
Net impairment losses recognized in earnings
180

 
6,898

      Gain on consolidation
(2,498
)
 
—

      Linked Transactions fair value adjustments
(168
)
 
—

      Equity in losses (earnings) of unconsolidated subsidiaries
2,709

 
(112
)
      Minority Interest Equity
114

 
—

      Adjust for impact of imputed interest on VIE accounting
1,879

 
—

Changes in operating assets and liabilities
 
 
 
   Decrease in restricted cash
(2,062
)
 
(5,628
)
   Decrease in interest receivable, net of purchased interest
987

 
(2,513
)
   Increase in subscriptions receivable
(1,248
)
 
—

   Increase in principal paydowns receivable
(25,465
)
 
363

   Increase in management fee payable
3,929

 
974

   Increase in security deposits
25

 
80

   Increase in accounts payable and accrued liabilities
7,573

 
15,370

   Decrease in accrued interest expense
(193
)
 
1,696

   Increase in other assets
(20,003
)
 
(520
)
Subtotal -consolidated VIE - RSO operating activity
(24,914
)
 
(5,109
)
Change in consolidated VIE - RSO cash for the period
(42,162
)
 
(13,628
)
Subtotal- Change in cash attributable to consolidated VIE - RSO before eliminations
(67,076
)
 
(18,737
)
Elimination of intercompany activity
1,850

 
2,572

Subtotal- Change in cash attributable to consolidated VIE - RSO
(65,226
)
 
(16,165
)
 
 
 
 
Non-cash incentive compensation to RAI
1,468

 
430

Elimination of intercompany activity
(1,468
)
 
(430
)
Non-cash incentive compensation to RAI, after eliminations
—

 
—

 
 
 
 
Net cash provided by operating activities (excluding eliminations)
40,997

 
33,037

RSO Consolidated Statements of Cash Flows (in thousands)
 
 
 
 
Years Ended
 
December 31,
 
2012
 
2011
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of loans
(649,983
)
 
(970,309
)
Purchase of securities available-for-sale
(119,779
)
 
(117,044
)
 
 
 
 
Subtotal - Purchase of loans and securities by consolidated VIE - RSO, before eliminations
(769,762
)
 
(1,087,353
)
Eliminations
—

 
15,221

Subtotal - Purchase of loans and securities by consolidated VIE - RSO
(769,762
)
 
(1,072,132
)
 
 
 
 
Principal payments received on loans
570,276

 
424,600

Proceeds from sale of loans
173,378

 
212,042

Principal payments on securities available-for-sale
47,284

 
11,810

Proceeds from sale of securities available-for-sale
28,652

 
13,747

Proceeds from sale of real estate held-for-sale
2,886

 
1,464

Subtotal - principal payments and proceeds from sales received by consolidated VIE - RSO, before eliminations
822,476

 
663,663

 
 
 
 
Decrease (increase) in restricted cash
50,756

 
31,014

 
 
 
 
Items included in "Other -VIE, investing activity":
 
 
 
Investment in unconsolidated entity
474

 
(4,762
)
Equity contribution to VIE
(710
)
 
—

Improvement of  real estate held-for-sale
(138
)
 
—

Purchase of investments in real estate
—

 
(19,299
)
Distributions from investments in real estate
1,152

 
—

Improvements in investments in real estate
(3,878
)
 
—

Purchase of intangible asset
—

 
(21,213
)
Investment in loans - related parties
—

 
(10,000
)
Principal payments received on loans – related parties
1,251

 
10,430

Investments in real estate assets
—

 
(689
)
Subtotal - Other consolidated VIE - investing activity, before eliminations
(1,849
)
 
(45,533
)
Eliminations
(76
)
 
—

Subtotal - Other consolidated VIE - investing activity
(1,925
)
 
(45,533
)
 
 
 
 
Net cash provided by (used in) investing activities (excluding eliminations)
101,621

 
(438,209
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended
 
December 31,
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Items included in "Net borrowings (repayments) of debt by consolidated VIE - RSO"
 
 
 
Proceeds from borrowings:
 
 
 

Repurchase agreements
71,121

 
55,852

Collateralized debt obligations
—

 
323,244

Mortgage payable
—

 
13,600

Payments on borrowings:
 
 
 
Collateralized debt obligations
(257,905
)
 
(28,542
)
  Repurchase of issued bonds
—

 
(6,125
)
  Retirement of debt
(20,365
)
 
—

Subtotal - net (repayments) borrowings of debt by consolidated VIE - RSO
(207,149
)
 
358,029

 
 
 
 
Distributions paid on common stock
(74,050
)
 
(69,869
)
Elimination of dividends paid to RAI
2,174

 
2,455

Distributionx paid on common stock, after elimination
(71,876
)
 
(67,414
)
 
 
 
 
Net proceeds from issuances of common stock (net of offering costs of $2,165 and $1,263)
55,502

 
46,347

Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $19 and $11)
73,044

 
83,564

Proceeds from issuance of 8.5% Series A redeemable
preferred shares (net of offering costs of $781 and $0)
16,411

 
—

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $1,201 and $0)
26,099

 
—

Subtotal - net proceeds from issuance of stock by consolidated VIE
171,056

 
129,911

 
 
 
 
Payment of debt issuance costs
(586
)
 
(6,385
)
Payment of equity to third party sub-note holders
(3,480
)
 
—

Distributions paid on preferred stock
(613
)
 
—

Proceeds from CDO retained notes
14,366

 
7,114

Subtotal - Other consolidated VIE -RSO financing activity
9,687

 
729

Net cash (used in) provided by financing activities (excluding eliminations)
$
(100,456
)
 
$
418,800

NET (DECREASE) INCREASE IN CASH
   AND CASH EQUIVALENTS
42,162

 
13,628

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
43,116

 
29,488

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
85,278

 
$
43,116

SUPPLEMENTAL DISCLOSURE:
 

 
 

Interest expense paid in cash
$
41,369

 
$
32,596
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. The Company has variable interests in VIEs through its management contracts and investments in various securitization entities, including CDO issuers. Since the Company serves as the asset manager for the investment entities it sponsored and manages, the Company is 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 the Company, the Company will perform an additional qualitative analysis to determine if its 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, the Company compares the benefits it would receive (in the optimistic scenario) or the losses it 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 the Company were significant as compared to total benefits and losses absorbed by all variable interest holders, then the Company would conclude it is the primary beneficiary.
Consolidated VIE - RSO
The Company determined that it was the primary beneficiary of RSO, as it has the power to direct the activities of RSO that most significantly impact RSO’s economic performance, and the obligation to absorb losses/right to receive benefits from RSO that could potentially be significant to RSO. As part of its analysis the Company evaluated its duties under the terms of the management agreement and the voting rights provided to RSO’s shareholders which include the right to elect the Company’s board of directors and the ability to terminate the management agreement. The Company concluded that the fee paid to the manager in the event of a termination and the Company’s role in managing the operations of RSO resulted in the Company having the power to direct, as defined in ASC Topic 810. Additionally, the Company prepared a quantitative analysis to measure the management/incentive fees and the Company’s equity ownership position in RSO relative to the anticipated economic performance of RSO. The Company determined its benefits could be significant and therefore concluded that the Company is the primary beneficiary and should consolidate RSO. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse against the assets of the Company.
RSO Income Statement Detail
   (in thousands)
 
 
 
 
Years Ended December 31,
 
2012
 
2011
REVENUES
 
 
 
Interest income:
 
 
 
Loans
$
109,030

 
$
86,739

Securities
14,296

 
12,424

Interest income − other
10,004

 
10,711

Total interest income
133,330

 
109,874

Interest expense
42,792

 
32,186

Net interest income
90,538

 
77,688

Rental income
11,463

 
3,656

Dividend income
69

 
3,045

Equity in (losses) earnings of unconsolidated subsidiaries
(2,709
)
 
112

Fee income
7,068

 
7,789

Net realized gain on sales of investment securities available-for-sale and loans
4,106

 
2,643

Net realized and unrealized gain on investment securities, trading
12,435

 
837

Unrealized gain and net interest income on linked transactions, net
728

 
216

Revenues from consolidated VIE - RSO
123,698

 
95,986

OPERATING EXPENSES
 

 
 

Management fees − related party
18,512

 
11,022

Equity compensation − related party
4,636

 
2,526

Professional services
4,700

 
3,791

Insurance
639

 
658

Rental operating expense
8,046

 
2,743

General and administrative
4,434

 
3,950

Depreciation and amortization
5,885

 
4,619

Income tax expense
14,602

 
12,036

Net impairment losses recognized in earnings
180

 
6,898

Provision for loan losses
16,818

 
13,896

Total operating expenses
78,452

 
62,139

Reclassification of income tax expense
(14,602
)
 
(12,036
)
Expenses of consolidated VIE - RSO
63,850

 
50,103

Adjusted operating income
59,848

 
45,883

OTHER REVENUE (EXPENSE)
 

 
 

Gain on consolidation
2,498

 
—

Gains on the extinguishment of debt
16,699

 
3,875

Other expenses
—

 
(6
)
Other income, net, from consolidated VIE - RSO
19,197

 
3,869

Income from continuing operations
79,045

 
49,752

Income tax provision - RSO
14,602

 
12,036

NET INCOME
64,443

 
37,716

Net income allocated to preferred shares
(1,244
)
 
—

NET INCOME ALLOCABLE TO RSO COMMON SHAREHOLDERS
$
63,199

 
$
37,716

Summary of Significant Accounting Policies - RSO
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 RSO's investments and derivatives, the estimated life used to calculate depreciation, amortization, and accretion of premiums and discounts, respectively, on investments and provisions for loan losses.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities of three months or less at the time of purchase. At December 31, 2012 and 2011, this included $19.9 million and $4.8 million, respectively, held in a prime brokerage account, $20.6 million and $26.0 million, respectively, held in a money market account, $43.3 million and $12.0 million, respectively, held in checking accounts, and $1.5 million and $299,000, respectively, held in accounts at RSO's investment properties.
Investment Securities
RSO classifies its investment portfolio as trading or available-for-sale.  RSO, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.RSO’s investment securities, trading are reported at fair value.  To determine fair value, RSO uses dealer quotes or bids which are validated using a third-party valuation firm utilizing appropriate prepayment, default, and recovery rates.  Any changes in fair value are recorded in RSO’s results of operations as net realized and unrealized gain (loss) on investment securities, trading.
RSO’s investment securities available-for-sale are reported at fair value.  To determine fair value, RSO uses a dealer quote, which typically will be the dealer who sold RSO the security.  RSO has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models.  These quotes are non-binding.  Based on how dealers develop their quotes, market liquidity and levels of trading, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.  RSO evaluates the reasonableness of the quotes it receives by applying its own valuation models.  If there is a material difference between a quote RSO receives and the value indicated by its valuation models, RSO will evaluate the difference.  As part of that evaluation, RSO will discuss the difference with the dealer, who may revise its quote based upon these discussions.  Alternatively, RSO may revise its valuation models.
On a quarterly basis, RSO evaluates its available-for-sale investments for other-than-temporary impairment.  An available-for-sale investment is impaired when its fair value has declined below its amortized cost basis.  An impairment is considered other-than-temporary when the amortized cost basis of the investment or some portion thereof will not be recovered.  In addition, RSO’s intent to sell as well as the likelihood that RSO will be required to sell the security before the recovery of the amortized cost basis is considered.  Where credit quality is believed to be the cause of the other-than-temporary impairment, that component of the impairment is recognized as an impairment loss in the statement of operations.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
Investment security transactions are recorded on the trade date.  Realized gains and losses on investment securities are determined on the specific identification method.
Investment Interest Income Recognition
Interest income on RSO’s mortgage-backed and other asset-backed securities is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets.  Premiums and discounts are amortized or accreted into interest income over the lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments.  For an investment purchased at par, the effective yield is the contractual interest rate on the investment.  If the investment is purchased at a discount or at a premium, the effective yield is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium.  The effective yield method requires RSO to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium can be amortized, over the estimated remaining life of the investment.  The prepayment estimates that RSO uses directly impact the estimated remaining lives of its investments.  Actual prepayment estimates are reviewed as of each quarter end or more frequently if RSO becomes aware of any material information that would lead it to believe that an adjustment is necessary.  If prepayment estimates are incorrect, the amortization or accretion of premiums and discounts may have to be adjusted, which would have an impact on future income.
Loans
RSO acquires loans through direct origination, through the acquisition of participations in commercial real estate loans and corporate leveraged loans in the secondary market and through syndications of newly originated loans. Loans are held for investment; therefore, RSO initially records them at their acquisition price, and subsequently, accounts for them based on their outstanding principal plus or minus unamortized premiums or discounts. RSO may sell a loan held for investment where the credit fundamentals underlying a particular loan have changed in such a manner that RSO's expected return on investment may decrease. Once the determination has been made by RSO that it no longer will hold the loan for investment, RSO identifies these loans as “Loans held for sale” and will account for them at the lower of amortized cost or fair value.
Loan Interest Income Recognition
Interest income on loans includes interest at stated rates adjusted for amortization or accretion of premiums and discounts. Premiums and discounts are amortized or accreted into income using the effective yield method. If a loan with a premium or discount is prepaid, RSO immediately recognizes the unamortized portion as a decrease or increase to interest income. In addition, RSO defers loan origination fees and loan origination costs and recognizes them over the life of the related loan against interest income using the effective yield method.
Allowance for Loan Loss
RSO maintains an allowance for loan loss.  Loans held for investment are first individually evaluated for impairment so specific reserves can be applied.  Loans for which a specific reserve is not applicable are then evaluated for impairment as a homogeneous pool of loans with substantially similar characteristics so that a general reserve can be established, if needed.  The reviews are performed at least quarterly.
RSO considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that RSO will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  These TDRs may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and / or guarantees made by the borrowers.
When a loan is impaired under either of these two conditions, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value.  Fair value may be determined based on the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs.  When a loan, or a portion thereof, is considered uncollectible and pursuit of collection is not warranted, RSO will record a charge-off or write-down of the loan against the allowance for loan losses.
An impaired loan may remain on accrual status during the period in which RSO is pursuing repayment of the loan; however, the loan would be placed on non-accrual status at such time as (i) RSO's management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) RSO's 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 RSO’s carrying value for such loan.  While on non-accrual status, RSO recognizes interest income only when an actual payment is received.
Investments in Real Estate
Investments in real estate are carried net of accumulated depreciation.  Costs directly related to the acquisition are expensed as incurred.  Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Costs related to the improvement of the real property are capitalized and depreciated over their useful life.
Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.”  RSO allocates the purchase price of its investments in real estate to land, building, site improvements, the value of in-place leases and the value of above or below market leases. The value allocated to above or below market leases is amortized over the remaining lease term as an adjustment to rental income. RSO amortizes the value allocated to in-place leases over the weighted average remaining lease term to depreciation and amortization expense.  RSO depreciates real property using the straight-line method over the estimated useful lives of the assets as follows:
Category
Term
Building
25 - 40 years
Site improvements
Lesser of the remaining life of building or useful life

Long-Lived and Intangible Assets
Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition.  If impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.
Other than an impairment charge of $1.7 million RSO took on conversion of a loan investment into equity of a real estate property during the years ended 2011, no impairment charges were recorded on RSO’s investment in real estate or intangible assets during the year ended December 31, 2012.
Comprehensive Income/(Loss)
Comprehensive income/(loss) for RSO includes net income and the change in net unrealized gains/(losses) on available-for-sale securities and derivative instruments used to hedge exposure to interest rate fluctuations and protect against declines in the market value of assets resulting from general market trends.
Income Taxes
RSO operates in such a manner as to qualify as a real estate investment trust (“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 RSO.  To maintain REIT status for federal income tax purposes, RSO 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, RSO 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 RSO's taxable REIT subsidiaries, is subject to federal, state and local income taxes.  RSO's taxable REIT subsidiaries' income taxes are accounted for under the asset and liability method.  Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and tax basis of assets and liabilities. 
Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CDO VIII, and Whitney CLO I, RSO'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 at the corporate level because their activities in the United States are limited to trading in stock and securities for their own account.  Therefore, despite their status as taxable REIT subsidiaries, they generally will not be subject to corporate tax on their earnings and no provision for income taxes is required; however, because they are “controlled foreign corporations,” RSO will generally be required to include Apidos CDO I's, Apidos CDO III's, Apidos Cinco CDO's, Apidos CDO VIII's, and Whitney CLO I's current taxable income in its calculation of REIT taxable income.
On October 27, 2011 RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. On January 24, 2012, RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III.  As a result, for the period January 1, 2012 through January 23, 2012, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. For the period January 24, 2012 and ending December 31, 2012 the earnings from Apidos CDO I are included in RSO's calculation of REIT taxable income.
On December 11, 2012, RSO reorganized the ownership structure of Apidos CDO III.  As a result, for the period from January 24, 2012 through December 10, 2012 the earnings from Apidos CDO III are included in RSO's calculation of REIT taxable income.  Also as a result of the reorganization on December 11, 2012, for the period December 11, 2012 and ending December 31, 2012, the earnings from Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. 
On November 12, 2012, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I.  As a result, for the period November 12, 2012 and ending December 31, 2012, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from November 12, 2012 through December 31, 2012 has been recorded.
Linked Transactions
If RSO finances the purchase of securities with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria and RSO will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on RSO's consolidated balance sheet in the line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain and net interest income on linked transactions, net on RSO's consolidated statement of operations.
Variable Interest Entities - RSO
RSO has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes) and its CDOs in order to determine if they qualify as VIEs. RSO monitors these investments and, to the extent it has determined that it owns a material investment in the current controlling class of securities of a particular entity, analyzes the entity for potential consolidation. RSO will continually analyze investments and liabilities, including when there is a reconsideration event, to determine whether such investments or liabilities are VIEs and whether such VIE should be consolidated. These analysis require considerable judgment in determining the primary beneficiary of a VIE and could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would have otherwise been consolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on management’s analysis, RSO is the primary beneficiary of seven VIEs: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1 and Whitney CLO I. In performing the primary beneficiary analysis for six of these VIEs (other than Whitney CLO I, which is discussed below), it was determined that the persons that have the power to direct the activities that are most significant to each of these VIEs and RSO who has the right to receive benefits and the obligation to absorb losses that could potentially be significant to these VIEs, are a related party group. It was then determined that RSO was the party within that group that is more closely associated to each such VIE because of its preferred equity (and in some cases debt) interest in them.
These CDO and CLO entities were formed on behalf of RSO to invest in real estate-related securities, CMBS, property available-for-sale, bank loans and asset-backed securities and were financed by the issuance of debt securities. The manager manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of CDO and CLO bonds, RSO seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception.
Whitney CLO I, the seventh entity, is one in which RSO acquired the rights to manage the assets held by the entity as collateral for its CLOs in February 2011. For a discussion on the primary beneficiary analysis for Whitney, see “- Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest) - Resource Capital Asset Management,” below. For a discussion of RSO’s CDOs and CLOs, see “Borrowings” below.
For CLOs in which RSO does not own 100% of the subordinated notes, RSO imputes an interest rate using expected cash flows over the life of the CLO and records the third party's share of the cash flows as interest expense on the consolidated statement of income.
RSO has exposure to CDO and CLO losses to the extent of its subordinated debt and preferred equity interests in them. RSO is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the CDO or CLO, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these CDOs and CLOs have been eliminated, and RSO’s consolidated balance sheet reflects both the assets held and debt issued by the CDOs and CLOs to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to CDO and CLO assets and liabilities as opposed to RSO's net economic interests in the CDO and CLO entities.
The creditors of RSO’s seven consolidated VIEs have no recourse to the general credit of RSO. However, in its capacity as manager, RSO has voluntarily supported two credits in one of its commercial real estate CDOs as the credits went through a restructuring in order to maximize their future cash flows. For the years ended December 31, 2012 and 2011, RSO has provided financial support of $156,000 and $710,000, respectively. RSO has provided no other financial support to any other of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by RSO. There are no explicit arrangements or implicit variable interests that obligate RSO to provide financial support to any of its consolidated VIEs, although RSO may choose to do so in the future.
The following table shows the classification and carrying value of assets and liabilities of consolidated VIEs as of December 31, 2012 (in thousands):
 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney CLO I
 
RREF
2006
 
RREF
2007
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
30,799

 
$
12,956

 
$
22,669

 
$
11,027

 
$
11,800

 
$
20

 
$
837

 
$
90,108

Investment securities
  available-for-sale, pledged as
  collateral, at fair value
8,333

 
6,902

 
11,316

 
501

 
33,700

 
10,796

 
64,018

 
135,566

Loans, pledged as collateral
177,385

 
209,561

 
306,196

 
329,467

 
146,106

 
226,716

 
283,288

 
1,678,719

Loans held for sale
2,671

 
2,770

 
3,657

 
5,796

 
—

 
—

 
—

 
14,894

Interest receivable
(12
)
 
720

 
1,050

 
737

 
404

 
1,153

 
1,934

 
5,986

Prepaid assets
50

 
25

 
30

 
69

 
18

 
78

 
58

 
328

Principal receivable
—

 
—

 
—

 
—

 
—

 
6,320

 
19,250

 
25,570

Other assets
—

 
—

 
—

 
—

 
—

 
63

 
270

 
333

Total assets (2)
$
219,226

 
$
232,934

 
$
344,918

 
$
347,597

 
$
192,028

 
$
245,146

 
$
369,655

 
$
1,951,504

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
202,968

 
$
221,304

 
$
320,550

 
$
320,998

 
$
177,415

 
$
145,664

 
$
225,983

 
$
1,614,882

Accrued interest expense
380

 
94

 
343

 
1,427

 
266

 
50

 
106

 
2,666

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,939

 
12,139

 
14,078

Accounts payable and
  other liabilities
142

 
16

 
30

 
395

 
92

 
22

 
1

 
698

Total liabilities
$
203,490

 
$
221,414

 
$
320,923

 
$
322,820

 
$
177,773

 
$
147,675

 
$
238,229

 
$
1,632,324

 
(1)
Includes $27.5 million available for reinvestment in certain of the CDOs.
(2)
Assets of each of the consolidated VIEs may only be used to settle the obligations of each respective VIE.
Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest)
Based on management’s analysis, RSO is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in RSO’s financial statements as of December 31, 2012. RSO’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Risk Exposure,” column in the table below.
LEAF Commercial Capital, Inc.
In the November 16, 2011 formation of LEAF, in exchange for its prior interests in its lease related investments, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction. These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions. RSO’s investment in LEAF was valued at $33.1 million based on a third-party valuation.
RSO determined that it is not the primary beneficiary of LEAF because it does not participate in any management or portfolio decisions, holds only two of six board positions, and only controls 26.7% of the voting rights in the entity. Furthermore, a third-party investor holds consent rights with respect to significant LEAF actions, including incurrence of indebtedness, consummation of a sale of the entity, liquidation or initiating a public offering.
In connection with this transaction, RSO and the Company have undertaken a contingent obligation with respect to the value of the equity on the balance sheet of LEAF Receivables Funding 3, a wholly-owned subsidiary of LEAF which owns equipment, equipment leases and notes. LEAF Receivables Funding 3 was included in the assets contributed to LEAF by RSO. As part of the SPA, RSO and the Company agreed that, to the extent the value of the equity on the balance sheet of LEAF Receivables Funding 3 is less than approximately $18.7 million (the value of the equity of LEAF Receivables Funding 3 on the date it was contributed to LEAF by RSO), as of the final testing date, which must be within 90 days following December 31, 2013, they will be jointly and severally obligated to contribute cash to LEAF to make up the deficit. RSO does not believe it is probable that it will be required to fund LEAF in accordance with the SPA based on projected operating results because LEAF Receivables Funding 3 is currently profitable and is expected to be profitable through the year ended December 31, 2013.
Unsecured Junior Subordinated Debentures
RSO has a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), valued at $1.5 million in the aggregate (or 3% of each trust). RCT I and RCT II were formed for the purposes of providing debt financing to RSO, as described below. RSO completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest and protection of collateral through servicing rights. Accordingly, neither trust is consolidated into RSO’s consolidated financial statements.
RSO records its investments in RCT I and RCT II’s common shares as investments in unconsolidated trusts using the cost method and records dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which RSO is the obligor in the amount of $25.8 million for RCT I and $25.8 million for RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.
Resource Capital Asset Management CDOs
In February 2011, RSO purchased a company that manages $1.9 billion of bank loan assets through five CLOs. As a result, RSO is entitled to collect senior, subordinated and incentive management fees from these CLOs. The purchase price of $22.5 million resulted in an intangible asset that was allocated to each of the five CLOs and is amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $13.1 million and $19.0 million at December 31, 2012 and 2011, respectively. RSO recognized fee income of $7.0 million and $7.8 million for the years ended December 31, 2012 and 2011, respectively. With respect to four of these CLOs, RSO determined that it does not hold a controlling interest and, therefore, is not the primary beneficiary. With respect to the fifth CLO, Whitney CLO I, in October 2012, RSO purchased 66.6% of its preferred equity, which was determined to be a reconsideration event. Based upon that purchase, RSO determined that it does have an obligation to absorb losses and/or the right to receive benefits that could potentially be significant to Whitney CLO I and that a related party has the power to direct the activities that are most significant to the VIE. As a result, together RSO has both the power to direct and the right to receive benefits and the obligation to absorb losses. It was then determined that, as between RSO and the related party, RSO was the party within that group that is more closely associated with Whitney CLO I because of its preferred equity interest in Whitney CLO I. RSO, therefore, consolidated Whitney CLO I as discussed above in “- Consolidated VIEs (RSO is the primary beneficiary)”.
Real Estate Joint Ventures
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (a VIE that holds interests in a real estate joint venture) from the Company. This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value. RSO acquired the membership interests for $2.1 million. The joint venture agreement requires RSO to contribute 3% to 5% (depending on the terms of the agreement pursuant to which the particular asset is being acquired) of the total funding required for each asset acquisition as needed up to a specified amount. RSO provided funding of $591,000 and $1.9 million for these investments for the years ended December 31, 2012 and 2011, respectively. Resource Real Estate Management, LLC (“RREM”), an indirect subsidiary of the Company, acts as asset manager of the venture and receives a monthly asset management fee. RSO’s investment in RRE VIP Borrower, LLC at December 31, 2012 and 2011 was $2.3 million and $3.6 million, respectively. Using the equity method of accounting, RSO recognized equity in earnings related to this investment of $683,000 and $112,000 for the years ended December 31, 2012 and 2011, respectively.
On June 19, 2012, RSO entered into a second joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments. RSO purchased a 7.5% equity interest in the venture. RSO may be subject to a capital call based on its pro rata share of equity interest in the venture up to the earlier of the end of the investment period, ending in May 2015, or the date the aggregate of all capital contributions exceeds $500 million. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RSO’s investment in Värde Investment Partners, LP at December 31, 2012 was $526,000. Using the equity method of accounting, RSO recognized equity in losses related to this investment of $135,000 for the year ended December 31, 2012.
RSO has determined that it does not have the power to direct the activities that most significantly impact the economic performance of each of these ventures, which include asset underwriting and acquisition, lease review and approval, and loan asset servicing, and, therefore, RSO is not the primary beneficiary of either.
The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of December 31, 2012 (in thousands):
 
Unconsolidated Variable Interest Entities
 
 
 
LEAF Commercial Capital, Inc.
 
Unsecured Junior Subordinated Debentures
 
Resource Capital Asset Management CDOs
 
RRE VIP Borrower, LLC
 
Värde Investment Partners, LP
 
Total
 
Maximum Exposure to Loss (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment in unconsolidated entities
$
33,071

 
$
1,548

 
$
—

 
$
2,264

 
$
526

 
$
37,409

 
37,409

Intangible assets
—

 
—

 
13,105

 
—

 
—

 
13,105

 
13,105

Total assets
33,071

 
1,548

 
13,105

 
2,264

 
526

 
50,514

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
50,814

 
—

 
—

 
—

 
50,814

 
N/A

Total liabilities
—

 
50,814

 
—

 
—

 
—

 
50,814

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net asset (liability)
$
33,071

 
$
(49,266
)
 
13,105

 
2,264

 
526

 
$
(300
)
 
N/A

 
(1)
RSO's maximum exposure to loss at December 31, 2012 does not exceed the carrying amount of its investment, subject to the LEAF Receivables Funding 3's contingent obligation as described above.
Other than the contingent liability arrangement described above in connection with LEAF and the commitments to fund its real estate joint ventures, there were no explicit arrangements or implicit variable interests that could require RSO to provide financial support to any of its unconsolidated VIEs.
Supplemental cash flow information - RSO
Supplemental disclosure of cash flow information (in thousands):
 
Year Ended
 
December 31,
 
2012
 
2011
Non-cash investing activities include the following:
 
 
 
Acquisition of real estate investments
$
(21,661
)
 
$
(33,073
)
Conversion of loans to investment in real estate
$
21,661

 
$
34,550

Net purchase of loans on warehouse line
$
—

 
$
(52,735
)
Acquisition of loans, pledged as collateral
$
(230,152
)
 
$
—

 
 
 
 
Non-cash financing activities include the following:
 

 
 

Distributions on common stock declared but not paid
$
21,024

 
$
19,979

Distribution on preferred stock declared but not paid
$
1,244

 
$
—

Issuance of restricted stock
$
2,189

 
$
1,203

Subscription receivable
$
1,248

 
$
—

Assumption of collateralized debt obligations
$
206,408

 
$
—

Acquisition of loans on warehouse line
$
—

 
$
52,735

Investment securities - Trading - RSO
The following table summarizes RSO's structured notes and residential mortgage-backed securities (“RMBS”) which are classified as investment securities, trading and carried at fair value (in thousands):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
December 31, 2012
 
 
 
 
 
 
 
Structured notes
$
9,413

 
$
10,894

 
$
(1,028
)
 
$
19,279

RMBS
6,047

 
858

 
(1,341
)
 
5,564

Total
$
15,460

 
$
11,752

 
$
(2,369
)
 
$
24,843

 
 
 
 
 
 
 
 
December 31, 2011
 

 
 

 
 

 
 

Structured notes
$
27,345

 
$
6,098

 
$
(1,890
)
 
$
31,553

RMBS
8,729

 
100

 
(1,709
)
 
7,120

Total
$
36,074

 
$
6,198

 
$
(3,599
)
 
$
38,673


RSO purchased two securities and sold fifteen securities during the year ended December 31, 2012, for a net gain of $5.5 million.  RSO also had one position liquidate during the year ended December 31, 2012 which resulted in a gain of $224,000.  RSO held thirteen investment securities, trading as of December 31, 2012. RSO purchased 27 securities and sold 11 securities during the year ended December 31, 2011, for a realized gain of $8.0 million. RSO held 27 investments securities, trading as of December 31, 2011.
Investment securities available-for-sale - RSO
RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. CMBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.
The following table summarizes RSO's investment securities, 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
December 31, 2012:
 
 
 
 
 
 
 
CMBS
$
182,828

 
$
4,626

 
$
(16,639
)
 
$
170,815

ABS
26,479

 
1,700

 
(1,127
)
 
27,052

Corporate Bonds
33,767

 
111

 
(178
)
 
33,700

Other asset-backed
—

 
23

 
—

 
23

Total
$
243,074

 
$
6,460

 
$
(17,944
)
 
$
231,590

 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

CMBS
$
144,334

 
$
1,129

 
$
(29,821
)
 
$
115,642

ABS
28,513

 
215

 
(3,527
)
 
25,201

Other asset-backed
—

 
23

 
—

 
23

Total
$
172,847

 
$
1,367

 
$
(33,348
)
 
$
140,866

 
(1)
As of December 31, 2012 and 2011, $195.2 million and $136.2 million, respectively, of securities were pledged as collateral security under related financings.    
The following table summarizes the estimated maturities of RSO’s CMBS, ABS and corporate bonds according to their estimated weighted average life classifications (in thousands, except percentages):
Weighted Average Life
Fair Value
 
Amortized Cost
 
Weighted Average Coupon
December 31, 2012:
 
 
 
 
 
Less than one year
$
42,618

(1) 
$
46,522

 
4.09
%
Greater than one year and less than five years
122,509

 
131,076

 
4.55
%
Greater than five years and less than ten years
61,780

 
60,801

 
3.31
%
Greater than ten years
4,683

 
4,675

 
4.03
%
Total
$
231,590

 
$
243,074

 
4.12
%
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

Less than one year
$
44,583

(2) 
$
48,934

 
4.45
%
Greater than one year and less than five years
68,751

 
91,199

 
4.62
%
Greater than five years and less than ten years
25,596

 
29,527

 
3.52
%
Greater than ten years
1,936

 
3,187

 
3.84
%
Total
$
140,866

 
$
172,847

 
4.36
%
 
(1)
RSO expects that the maturity date of these CMBS will either be extended or the CMBS will be paid in full.
(2)
CMBS of $6.7 million maturing in this category are collateralized by floating-rate loans and, as permitted under the CMBS terms, are expected to extend their maturities, because, beyond their contractual extensions which expired or will expire this year, the servicer may allow further extensions of the underlying floating rate loans.  RSO expects that the remaining $37.9 million of CMBS will either have their maturity date extended or be paid in full. ABS of $950,000 maturing in this category were subsequently extended until March 2018.
The contractual maturities of the CMBS investment securities available-for-sale range from November 2013 to April 2027.  The contractual maturities of the ABS investment securities available-for-sale range from October 2015 to September 2022. The contractual maturities of the corporate bond investment securities available-for-sale range from May 2014 to February 2022 .
The following table shows the fair value and gross unrealized losses, aggregated by investment category and length of time, of those individual investment securities available-for-sale that have been in a continuous unrealized loss position during the periods specified (in thousands):
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
25,803

 
$
(442
)
 
$
38,734

 
$
(16,197
)
 
$
64,537

 
$
(16,639
)
ABS
501

 
(12
)
 
5,961

 
(1,115
)
 
6,462

 
(1,127
)
Corporate Bonds
18,944

 
(178
)
 
—

 
—

 
18,944

 
(178
)
Total temporarily impaired securities
$
45,248

 
$
(632
)
 
$
44,695

 
$
(17,312
)
 
$
89,943

 
$
(17,944
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

 
 

 
 

CMBS
$
88,726

 
$
(17,033
)
 
$
8,281

 
$
(12,788
)
 
$
97,007

 
$
(29,821
)
ABS
13,583

 
(935
)
 
4,473

 
(2,592
)
 
18,056

 
(3,527
)
Total temporarily impaired securities
$
102,309

 
$
(17,968
)
 
$
12,754

 
$
(15,380
)
 
$
115,063

 
$
(33,348
)

RSO held 19 and eight CMBS investment securities available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and 2011, respectively.  RSO held nine and seven ABS investment securities available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and 2011, respectively.  RSO had no corporate bond investment securities available-for-sale that have been in a loss position for more than 12 months as of December 31, 2012 and 2011. The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
The determination of other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.  RSO reviews its portfolios and makes other-than-temporary impairment determinations at least quarterly.  RSO considers the following factors when determining if there is an other-than-temporary impairment on a security:    
•
the length of time the market value has been less than amortized cost;
•
the severity of the impairment;
•
the expected loss of the security as generated by a third-party valuation model;
•
original and current credit ratings from the rating agencies;
•
underlying credit fundamentals of the collateral backing the securities;
•
whether, based upon RSO’s intent, it is more likely than not that RSO will sell the security before the recovery of the amortized cost basis; and
•
third-party support for default, for recovery, prepayment speed and reinvestment price assumptions.
At December 31, 2012 and 2011, RSO held $170.8 million and $115.6 million, respectively, (net of net unrealized losses of $12.0 million and $28.7 million, respectively), of CMBS recorded at fair value.  To determine fair value, RSO uses dealer quotes which are either provided by RSO's trade or financing counterparties.  As of December 31, 2012 and 2011, $170.8 million and $106.7 million, respectively, of investment securities available-for-sale were valued using dealer quotes and $0 and $8.9 million, respectively, were valued using an internal valuation model.
At December 31, 2012 and 2011, RSO held $27.1 million and $25.2 million, respectively, (net of net unrealized losses of $574,000 and $3.3 million), of ABS recorded at fair value.  To determine their fair value, RSO uses dealer quotes.
At December 31, 2012 , RSO held $33.7 million (net of net unrealized losses of $67,000), of corporate bonds recorded at fair value. RSO held no corporate bonds as of December 31, 2011.  To determine their fair value, RSO uses dealer quotes.
 RSO’s securities classified as available-for-sale have increased in fair value on a net basis as of December 31, 2012 as compared to December 31, 2011, primarily due to improving dealer marks and new purchases in 2012. RSO performs an on-going review of third-party reports and updated financial data on the underlying properties in order to analyze current and projected security performance.  Rating agency downgrades are considered with respect to RSO’s income approach when determining other-than-than temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment.
RSO did not recognize any other-than-temporary impairment during the year ended December 31, 2012. During the year ended December 31, 2011, RSO recognized a $4.6 million other-than-temporary impairment on one fixed rate position that supported RSO's CMBS investments bringing the fair value to $48,000.
During the year ended December 31, 2012, RSO sold seven CMBS positions with a total par of $31.0 million, and recognized a net gain of $1.4 million. During the year ended December 31, 2011, RSO sold three CMBS positions with a total par of $15.0 million and recognized a gain of $3.5 million.
During the year ended December 31, 2012, RSO sold five ABS positions with a total par of $4.3 million, and recognized a gain of $147,000. During the year ended December 31, 2011, RSO sold six ABS positions with a total par of $8.1 million and recognized a loss of $2.4 million.
During the year ended December 31, 2012, RSO sold one corporate bond position with a total par of $2.25 million, and recognized a gain of $27,000. During the year ended December 31, 2012, RSO had two corporate bond positions redeemed with a total par of $2.1 million, and recognized a gain of $13,000. RSO held no corporate bonds as of December 31, 2011.
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on CMBS in RSO’s investment portfolio.  At December 31, 2012 and 2011, the aggregate discount due to interest rate changes exceeded the aggregate premium on RSO’s CMBS by approximately $8.0 million and $13.4 million, respectively.  At December 31, 2012 and 2011, the aggregate discount on RSO’s ABS portfolio was $3.1 million and $3.8 million respectively.  There were no premiums on RSO’s ABS investment portfolio at December 31, 2012 and 2011. At December 31, 2012, the aggregate premium on RSO’s corporate bond portfolio was $604,000.
Investments real estate - RSO
 
 
As of December 31, 2012
 
As of December 31, 2011
 
 
Book Value
 
Number of Properties
 
Book Value
 
Number of Properties
Multi-family property
 
$
42,179

 
2
 
$
38,577

 
2
Office property
 
10,149

 
1
 
10,149

 
1
Hotel property
 
25,608

 
1
 
—

 
—
Subtotal
 
77,936

 
 
 
48,726

 
 
Less:  Accumulated depreciation
 
(2,550
)
 
 
 
(699
)
 
 
Investments in real estate
 
$
75,386

 
 
 
$
48,027

 
 

No impairment charges were recorded on RSO's investment in real estate during the years ended December 31, 2012 and 2011.
Acquisitions
During the year ended December 31, 2012, RSO foreclosed on one self-originated loan and converted it to an investment in real estate. During the year ended December 31, 2011, RSO converted two loans it had originated to investments in real estate and acquired one real estate asset, summarized as follows:
•
On September 6, 2012, RSO foreclosed on a self-originated loan and converted the loan to equity with a fair value of $25.5 million at acquisition. The loan was collateralized by a 179 unit hotel property in Coconut Grove, Florida. The property had a hotel occupancy rate of 75% at acquisition.
•
On August 1, 2011, RSO, through its subsidiary RCC Real Estate, purchased Whispertree Apartments, a 504 multi-family property located in Houston, Texas, for $18.1 million, the fair value.  The property was 95% occupied at acquisition.  In conjunction with the purchase of this property, RSO entered into a mortgage in the amount of $13.6 million.
•
On June 24, 2011, RSO converted a self-originated loan to equity with a fair value of $10.7 million at acquisition.  The loan was collateralized by an office building in Pacific Palisades, California.  The property was 60% occupied at acquisition.
•
On June 14, 2011, RSO converted a self-originated loan to equity with a fair value of $22.4 million at acquisition.  The loan was collateralized by a 400 unit multi-family property in Memphis, Tennessee.  The property was 93.8% occupied at acquisition.
The following table is a summary of the aggregate estimated fair value of the assets and liabilities acquired on the respective date of acquisition (in thousands):
 
 
December 31,
Description
 
2012
 
2011
Assets acquired:
 
 
 
 
Investments in real estate
 
$
25,500

 
$
48,683

Cash and cash equivalents
 
—

 
177

Restricted cash
 
—

 
2,360

Intangible assets
 
—

 
2,490

Other assets
 
(89
)
 
391

Total assets acquired
 
25,411

 
54,101

Liabilities assumed:
 
 
 
 

Accounts payable and other liabilities
 
3,750

 
673

Total liabilities assumed
 
3,750

 
673

Estimated fair value of net assets acquired
 
$
21,661

 
$
53,428


RSO has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed on the new investment in real estate acquired during the year ended December 31, 2012. Accordingly, RSO's preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as RSO completes the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in the consolidated financial statements retrospectively.
During the third quarter of 2011, RSO accounted for the acquisition of The Heights (formerly Whispertree Apartments) as a business combination in accordance with FASB ASC Topic 805.  In the fourth quarter of 2011, RSO obtained the final appraisal of the property.  Based on the final appraisal, RSO adjusted the value of the land and the value of the building by $3.9 million, respectively, as of the acquisition date.  Accordingly, these adjustments were recognized and are reflected in the consolidated financial statements as of December 31, 2012 and 2011.
    
The following unaudited pro forma information, after including the acquisition of real properties, is presented below as if the acquisitions occurred on January 1, 2011. The pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor is it indicative of RSO's future results (in thousands):
 
 
Years Ended
December 31,
Description
 
2012
 
2011
Total revenue, as reported
 
$
123,698

 
$
95,986

Pro forma revenue
 
$
131,028

 
$
111,263

Net income, reported
 
$
63,199

 
$
37,716

Pro forma net income
 
$
63,503

 
$
37,535

Earnings per share - basic, reported
 
$
0.71

 
$
0.54

Earnings per share per - diluted, reported
 
$
0.71

 
$
0.53

Pro forma earnings per share - basic
 
$
0.72

 
$
0.53

Pro forma earnings per share - diluted
 
$
0.71

 
$
0.53


These amounts have been calculated after adjusting the results of the acquired properties to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to RSO's investments in real estate had been applied from January 1, 2011.
Loans held for investments - RSO
The following is a summary of RSO’s loans (in thousands):
Loan Description
 
Principal
 
Unamortized (Discount) Premium (1)
 
Carrying Value (2)
December 31, 2012
 
 
 
 
 
 
Bank loans (3) 
 
$
1,218,563

 
$
(25,249
)
 
$
1,193,314

Commercial real estate loans:
 
 

 
 

 
 

Whole loans (4) 
 
569,829

 
(1,891
)
 
567,938

B notes
 
16,441

 
(114
)
 
16,327

Mezzanine loans
 
82,992

 
(206
)
 
82,786

Total commercial real estate loans
 
669,262

 
(2,211
)
 
667,051

Subtotal loans before allowances
 
1,887,825

 
(27,460
)
 
1,860,365

Allowance for loan loss
 
(17,691
)
 
—

 
(17,691
)
Total
 
$
1,870,134

 
$
(27,460
)
 
$
1,842,674

 
 
 
 
 
 
 
December 31, 2011:
 
 

 
 

 
 

Bank loans (3) 
 
$
1,205,826

 
$
(32,073
)
 
$
1,173,753

Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
545,828

 
(1,155
)
 
544,673

B notes
 
16,579

 
(144
)
 
16,435

Mezzanine loans
 
67,842

 
32

 
67,874

Total commercial real estate loans
 
630,249

 
(1,267
)
 
628,982

Subtotal loans before allowances
 
1,836,075

 
(33,340
)
 
1,802,735

Allowance for loan loss
 
(27,518
)
 
—

 
(27,518
)
Total
 
$
1,808,557

 
$
(33,340
)
 
$
1,775,217

 
(1)
Amounts include deferred amendment fees of $450,000 and $286,000 and deferred upfront fees of $334,000 and $0 being amortized over the life of the bank loans as of December 31, 2012 and 2011, respectively.  Amounts include loan origination fees of $1.9 million and $984,000 and loan extension fees of $214,000 and $123,000 being amortized over the life of the commercial real estate loans as of December 31, 2012 and 2011, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at December 31, 2012 and 2011, respectively.
(3)
Amounts include $14.9 million and $3.2 million of bank loans held for sale at December 31, 2012 and 2011, respectively.
(4)
Amount includes $34.0 million from two whole loans which are classified as loans held for sale at December 31, 2012.
At December 31, 2012 and 2011, approximately 47.7% and 41.9%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in commercial real estate loans located in California; approximately 7.9% and 8.9%, respectively, in Arizona; approximately 11.1% and 6%, respectively, in Texas, and approximately 3.3% and 8%, respectively, in Florida.  At December 31, 2012 and 2011, approximately 13.2% and 13.9%, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare.
At December 31, 2012, RSO’s bank loan portfolio consisted of $1.2 billion (net of allowance of $9.7 million) of floating rate loans, which bear interest ranging between the 3-month LIBOR plus 1.5% and three month LIBOR plus 8.8% with maturity dates ranging from August, 2013 to January, 2021.  At December 31, 2011, RSO’s bank loan portfolio consisted of $1.2 billion (net of allowance of $3.3 million) of floating rate loans, which bear interest ranging between three month LIBOR plus 1.1%, and three month LIBOR plus 10.6% with maturity dates ranging from March, 2012 to September, 2019.
The following is a summary of the weighted average life of RSO’s bank loans, at amortized cost (in thousands):
 
December 31,
 
2012
 
2011
Less than one year
$
10,028

 
$
1,968

Greater than one year and less than five years
821,568

 
684,376

Five years or greater
361,718

 
487,409

 
$
1,193,314

 
$
1,173,753


The following is a summary of RSO’s commercial real estate loans held for investment (in thousands):
Description
 
Quantity
 
Amortized Cost
 
Contracted
Interest Rates
 
Maturity
Dates (3)
December 31, 2012
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (4) (5) (6)
 
37
 
$
567,938

 
LIBOR plus 2.50% to
LIBOR plus 5.50%
 
June 2013 to
February 2019
B notes, fixed rate
 
1
 
16,327

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
2
 
15,845

 
LIBOR plus 2.50% to
LIBOR plus 7.45%
 
August 2013 to
December 2013
Mezzanine loans, fixed rate (7)
 
3
 
66,941

 
0.50% to 20.00%
 
September 2014 to
September 2019
Total (2) 
 
43
 
$
667,051

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 
 
 
 

 
 
 
 
Whole loans, floating rate (1) (4) (5)
 
32
 
$
537,708

 
LIBOR plus 2.50% to
LIBOR plus 5.75%
 
April 2012 to
February 2019
Whole loans, fixed rate
 
1
 
6,965

 
10.00%
 
June 2012
B notes, fixed rate
 
1
 
16,435

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
3
 
53,908

 
LIBOR plus 2.50% to
LIBOR plus 7.45%
 
May 2012 to
December 2012
Mezzanine loans, fixed rate (7)
 
2
 
13,966

 
8.99% to 11.00%
 
January 2016 to
September 2016
Total (2) 
 
39
 
$
628,982

 
 
 
 
 
(1)
Whole loans had $8.9 million and $5.2 million in unfunded loan commitments as of December 31, 2012 and 2011, respectively.  These commitments are funded as the borrowers require additional funding and have satisfied the requirements to obtain this additional funding.
(2)
The total does not include an allowance for loan loss of $8.0 million and $24.2 million as of December 31, 2012 and 2011, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.
(4)
Floating rate whole loans include a $2.0 million portion of a whole loan that has a fixed rate of 15% as of December 31, 2012 and 2011, respectively.
(5)
Floating rate whole loans include a $1.0 million and $302,000 preferred equity tranche of a whole loan that has a fixed rate of 10% as of December 31, 2012 and 2011, respectively.
(6)
Amount includes $34.0 million from two whole loans that are classified as loans held for sale at December 31, 2012.
(7)
Fixed rate mezzanine loans include a mezzanine loan that was modified into two tranches which both currently pay interest at 0.5%. In addition, the subordinate tranche accrues interest at LIBOR plus 18.5% which is deferred until maturity.
The following is a summary of the weighted average life of RSO’s commercial real estate loans, at amortized cost (in thousands):
Description
 
2013
 
2014
 
2015 and Thereafter
 
Total
December 31, 2012
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,327

 
$
16,327

Mezzanine loans
 
5,328

 
20,694

 
56,764

 
82,786

Whole loans
 
71,799

 
—

 
496,139

 
567,938

Total (1) 
 
$
77,127

 
$
20,694

 
$
569,230

 
$
667,051

 
(1)
Weighted average life of commercial real estate loans assumes full exercise of extension options available to borrowers.
The following is a summary of the allocation of the allowance for loan loss with respect to RSO’s commercial real estate and bank loans (in thousands, except percentages) by asset class:
Description
 
Allowance for Loan Loss
 
Percentage of
Total Allowance
December 31, 2012:
 
 
 
 
B notes
 
$
206

 
1.17%
Mezzanine loans
 
860

 
4.85%
Whole loans
 
6,920

 
39.12%
Bank loans
 
9,705

 
54.86%
Total
 
$
17,691

 
 
 
 
 
 
 
December 31, 2011:
 
 

 
 
B notes
 
$
253

 
0.92%
Mezzanine loans
 
1,437

 
5.23%
Whole loans
 
22,531

 
81.87%
Bank loans
 
3,297

 
11.98%
Total
 
$
27,518

 
 

As of December 31, 2012, RSO had recorded an allowance for loan losses of $17.7 million consisting of a $9.7 million allowance on RSO’s bank loan portfolio and a $8.0 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on five bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios.  The whole loan allowance decreased $15.6 million from $22.5 million as of December 31, 2011 to $6.9 million as of December 31, 2012.  This decrease is primarily the result of a charge to the allowance resulting from a CRE loan that was restructured with a new borrower and with a new use for the underlying property.

As of December 31, 2011, RSO had recorded an allowance for loan losses of $27.5 million consisting of a $3.3 million allowance on RSO’s bank loan portfolio and a $24.2 million allowance on RSO’s commercial real estate portfolio as a result of the impairment of one bank loan and four commercial real estate loans as well as the maintenance of a general reserve with respect to these portfolios.
Investments in unconsolidated entities - RSO
In the November 16, 2011 formation of LEAF, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock (the “Series B Preferred Stock”) and 2,364 shares of newly issued Series D Redeemable Preferred Stock (the “Series D Preferred Stock”), collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF in exchange for its prior interest in LEAF.  RSO’s investment in LEAF was valued at $36.3 million based on a third-party valuation.  Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction.  These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions. RSO recorded a loss of $2.2 million in conjunction with the transaction.  RSO’s resulting interest is accounted for under the equity method.  RSO recorded losses of $3.3 million for the year ended December 31, 2012, which was recorded in equity in earnings of unconsolidated subsidiaries on the consolidated statement of income.  No such loss was recorded at December 31, 2011. RSO’s investment in LEAF was valued at $33.1 million as of December 31, 2012.
RSO has a 100% interest valued at $1.5 million in the common shares (3% of the total equity) in two trusts, Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”).  RSO completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts.  RSO does not have the power to direct the activities of either trust, nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to these trusts.  Therefore, RSO is not deemed to be the primary beneficiary of either trust and they are not consolidated into RSO’s consolidated financial statements.  RSO records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated trusts using the cost method and records dividend income upon declaration by RCT I and RCT II.  For the years ended December 31, 2012 and 2011, RSO recognized $2.5 million and $3.0 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $183,000 and $277,000, respectively, of amortization of deferred debt issuance costs.  RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.  
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds RSO's interests in a real estate joint venture) from the Company at book value.  This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value.  RSO acquired the membership interests for $2.1 million. The agreement requires RSO to contribute 3% to 5% (depending on the asset agreement) of the total funding required for each asset acquisition on a monthly basis.  RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1% of the combined investment calculated as of the last calendar day of the month. For the years ended December 31, 2012 and 2011, RSO paid RREM management fees of $45,000 and $34,000, respectively. For the years ended December 31, 2012 and 2011, RSO recorded income of $683,000 and $112,000, respectively, which was recorded in equity in earnings of unconsolidated subsidiaries on the consolidated statement of income. The investment balance of $2.3 million and $3.6 million at December 31, 2012 and 2011, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.
On June 19, 2012, RSO entered into a joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments.  RSO purchased a 7.5% equity interest in the venture. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements.  RREM receives an annual asset management fee equal to 1.0% of outstanding contributions. RSO incurred fees payable to RREM of $39,000 during the year ended December 31, 2012. For the year ended December 31, 2012, RSO recorded losses of $(135,000), which were recorded in equity in earnings of unconsolidated subsidiaries on the consolidated statement of income. The investment balance of $526,000 at December 31, 2012 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.
Financing receivables - RSO
The following tables show the allowance for loan losses and recorded investments in loans for the years indicated (in thousands):
 
Commercial Real Estate Loans
 
Bank Loans
 
Lease Receivables
 
Loans Receivable-Related Party
 
Total
December 31, 2012:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2012
$
24,221

 
$
3,297

 
$
—

 
$
—

 
$
27,518

Provision for loan loss
5,225

 
11,593

 
—

 
—

 
16,818

Loans charged-off
(21,460
)
 
(5,185
)
 
—

 
—

 
(26,645
)
Allowance for losses at December 31, 2012
$
7,986

 
$
9,705

 
$
—

 
$
—

 
$
17,691

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
2,142

 
$
3,236

 
$
—

 
$
—

 
$
5,378

Collectively evaluated for impairment
$
5,844

 
$
6,469

 
$
—

 
$
—

 
$
12,313

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
177,055

 
$
4,688

 
$
—

 
$
8,324

 
$
190,067

Collectively evaluated for impairment
$
489,996

 
$
1,187,875

 
$
—

 
$
—

 
$
1,677,871

Loans acquired with deteriorated credit quality
$
—

 
$
751

 
$
—

 
$
—

 
$
751

 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

 
 

Allowance for losses at January 1, 2011
$
31,617

 
$
2,616

 
$
70

 
$
—

 
$
34,303

Provision for loan loss
6,478

 
7,418

 
—

 
—

 
13,896

Loans charged-off
(13,874
)
 
(6,737
)
 
(70
)
 
—

 
(20,681
)
Allowance for losses at December 31, 2011
$
24,221

 
$
3,297

 
$
—

 
$
—

 
$
27,518

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
17,065

 
$
1,593

 
$
—

 
$
—

 
$
18,658

Collectively evaluated for impairment
$
7,156

 
$
1,704

 
$
—

 
$
—

 
$
8,860

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
113,038

 
$
2,693

 
$
—

 
$
9,497

 
$
125,228

Collectively evaluated for impairment
$
515,944

 
$
1,171,060

 
$
—

 
$
—

 
$
1,687,004

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—


Credit quality indicators
Bank Loans
RSO uses a risk grading matrix to assign grades to bank loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-5 with 1 representing RSO’s highest rating and 5 representing its lowest rating.  RSO also designates loans that are sold after the period end at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  RSO considers metrics such as performance of the underlying company, liquidity, collectability of interest, enterprise valuation, default probability, ratings from rating agencies, and industry dynamics in grading its bank loans.
Credit risk profiles of bank loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Rating 5
 
Held for Sale
 
Total
As of December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
1,095,148

 
$
33,677

 
$
27,837

 
$
16,318

 
$
5,440

 
$
14,894

 
$
1,193,314

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011:
 

 
 

 
 

 
 

 
 

 
 

 
 

Bank loans
$
1,076,298

 
$
19,739

 
$
60,329

 
$
11,540

 
$
2,693

 
$
3,154

 
$
1,173,753


All of RSO’s bank loans are performing with the exception of five loans with an amortized cost of $5.4 million as of December 31, 2012, one of which defaulted as of December 31, 2012, three of which defaulted as of March 31, 2012, which includes a loan acquired with deteriorated credit quality as a result of the acquisition of Whitney CLO I, and one of which defaulted on December 31, 2011. As of December 31, 2011, all of RSO's bank loans are performing with the exception of one loan which defaulted on December 31, 2011 with a carrying amount of $2.7 million.
Commercial Real Estate Loans
RSO uses a risk grading matrix to assign grades to commercial real estate loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-4 with 1 representing RSO’s highest rating and 4 representing its lowest rating.  RSO designates loans that are sold after the period end at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  In addition to the underlying performance of the loan collateral, RSO considers metrics such as the strength of underlying sponsorship, payment history, collectability of interest, structural credit enhancements, market trends and loan terms in grading its commercial real estate loans.
Credit risk profiles of commercial real estate loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Held for Sale
 
Total
As of December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Whole loans
$
427,456

 
$
—

 
$
106,482

 
$
—

 
$
34,000

 
$
567,938

B notes
16,327

 
—

 
—

 
—

 
—

 
16,327

Mezzanine loans
38,296

 
—

 
44,490

 
—

 
—

 
82,786

 
$
482,079

 
$
—

 
$
150,972

 
$
—

 
$
34,000

 
$
667,051

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011:
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
329,085

 
$
87,598

 
$
90,225

 
$
37,765

 
$
—

 
$
544,673

B notes
16,435

 
—

 
—

 
—

 
—

 
16,435

Mezzanine loans
23,347

 
—

 
44,527

 
—

 
—

 
67,874

 
$
368,867

 
$
87,598

 
$
134,752

 
$
37,765

 
$
—

 
$
628,982


All of RSO’s commercial real estate loans were performing as of December 31, 2012 and 2011.


Loan Portfolios Aging Analysis
The following table shows the loan portfolio aging analysis as of the dates indicated at cost basis (in thousands):
 
30-59 Days
 
60-89 Days
 
Greater than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
December 31, 2012:
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
567,938

 
$
567,938

 
$
—

B notes
—

 
—

 
—

 
—

 
16,327

 
16,327

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
82,786

 
82,786

 
—

Bank loans
1,549

 
—

 
3,891

 
5,440

 
1,187,874

 
1,193,314

 
—

Loans receivable- related party
—

 
—

 
—

 
—

 
8,324

 
8,324

 
—

Total loans
$
1,549

 
$
—

 
$
3,891

 
$
5,440

 
$
1,863,249

 
$
1,868,689

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
544,673

 
$
544,673

 
$
—

B notes
—

 
—

 
—

 
—

 
16,435

 
16,435

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
67,874

 
67,874

 
—

Bank loans
—

 
—

 
—

 
—

 
1,173,753

 
1,173,753

 
—

Loans receivable- related party
—

 
—

 
—

 
—

 
9,497

 
9,497

 
—

Total loans
$
—

 
$
—

 
$
—

 
$
—

 
$
1,812,232

 
$
1,812,232

 
$
—

Impaired Loans
The following tables show impaired loans indicated (in thousands):
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
December 31, 2012:
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
115,841

 
$
115,841

 
$
—

 
$
114,682

 
$
3,436

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
367

Bank loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
6,754

 
$
6,754

 
$
—

 
$
—

 
$
851

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
23,142

 
$
23,142

 
$
(2,142
)
 
$
22,576

 
$
801

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
5,440

 
$
5,440

 
$
(3,236
)
 
$
—

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
138,983

 
$
138,983

 
$
(2,142
)
 
$
137,258

 
$
4,237

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
367

Bank loans
5,440

 
5,440

 
(3,236
)
 
—

 
—

Loans receivable - related party
6,754

 
6,754

 
—

 
—

 
851

 
$
189,249

 
$
189,249

 
$
(5,378
)
 
$
175,330

 
$
5,455

 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
December 31, 2011:
 

 
 

 
 

 
 

 
 

Loans without a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
75,273

 
$
75,273

 
$
—

 
$
75,263

 
$
2,682

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
7,820

 
$
7,820

 
$
—

 
$
—

 
$
1,112

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
37,765

 
$
37,765

 
$
(17,065
)
 
$
36,608

 
$
920

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
2,693

 
$
2,693

 
$
(1,593
)
 
$
2,693

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
113,038

 
$
113,038

 
$
(17,065
)
 
$
111,871

 
$
3,602

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
—

Bank loans
2,693

 
2,693

 
(1,593
)
 
2,693

 
—

Loans receivable - related party
7,820

 
7,820

 
—

 
—

 
1,112

 
$
123,551

 
$
123,551

 
$
(18,658
)
 
$
114,564

 
$
4,714


Troubled- Debt Restructurings
The following tables show troubled-debt restructurings in RSO's loan portfolio (in thousands):
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded Balance
 
Post-Modification
Outstanding
Recorded Balance
Year Ended December 31, 2012:
 
 
 
 
 
Whole loans (1)
7
 
$
175,708

 
$
158,422

B notes
—
 
—

 
—

Mezzanine loans
1
 
38,072

 
38,072

Bank loans
—
 
—

 
—

Loans receivable - related party (2)
1
 
7,797

 
7,797

Total loans
9
 
$
221,577

 
$
204,291

 
 
 
 
 
 
Year Ended December 31, 2011:
 
 
 

 
 

Whole loans
2
 
$
34,739

 
$
33,073

B notes
—
 
—

 
—

Mezzanine loans
—
 
—

 
—

Bank loans
—
 
—

 
—

Loans receivable
—
 
—

 
—

Loans receivable - related party
1
 
7,981

 
7,981

Total loans
3
 
$
42,720

 
$
41,054

 
(1)
Whole loans include a whole loan with a pre-modification and post-modification outstanding recorded balance of $21.8 million that have been converted to real-estate owned and will no longer be a TDR after December 31, 2012.
(2)
Loans receivable - related party reflects a loan outstanding to LEAF Fund II, which is a commercial finance partnership that was sponsored and is managed/serviced by the Company. RSO has received paydowns on this loan for the year ended December 31, 2012 and currently has an outstanding balance of $6.8 million as of December 31, 2012.
As of December 31, 2012 and December 31, 2011, there were no troubled-debt restructurings that subsequently defaulted.
Intangible assets - RSO
Intangible assets represent identifiable intangible assets acquired as a result of RSO’s acquisition of RCAM in February 2011, its conversion of loans to investments in real estate in June 2011, and the acquisition of real estate in August 2011.  RSO amortizes identified intangible assets to expense over their estimated lives or period of benefit using the straight-line method.  RSO evaluates intangible assets for impairment as events and circumstances change.  In October 2012, RSO purchased 66.6% of preferred equity of one of the RCAM CDOs. As a result of this transaction and consolidation of Whitney CLO I, RSO wrote-off the unamortized balance of $2.6 million, the intangible asset associated with this CDO, which was recorded in gain/(loss) on consolidation in the consolidated statement of income. Due to a 2013 event whereby a second CLO liquidated, RSO accelerated the amortization of the remaining balance of its intangible asset and recorded a $657,000 charge to depreciation and amortization on the consolidated statement of income. RSO expects to record amortization expense on intangible assets of approximately $1.9 million for the year ended December 31, 2013, and $1.8 million for the years ended December 31, 2014, 2015, 2016 and 2017.  The weighted average amortization period was 8.7 years and 8.0 years at December 31, 2012 and 2011, respectively and the accumulated amortization was $10.5 million and $3.9 million at December 31, 2012 and 2011, respectively.
The following table summarizes intangible assets at December 31, 2012 and 2011 (in thousands).
 
Beginning Balance
 
Accumulated Amortization
 
Net Asset
December, 2012
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(8,108
)
 
$
13,105

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,379
)
 
82

Above (below) market leases
29

 
(24
)
 
5

 
2,490

 
(2,403
)
 
87

Total intangible assets
$
23,703

 
$
(10,511
)
 
$
13,192

 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

Investment in RCAM
$
21,213

 
$
(2,237
)
 
$
18,976

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(1,634
)
 
827

Above (below) market leases
29

 
(19
)
 
10

 
2,490

 
(1,653
)
 
837

Total intangible assets
$
23,703

 
$
(3,890
)
 
$
19,813



For the years ended December 31, 2012 and 2011, RSO recognized $7.2 million and $7.8 million, respectively, of fee income related to the investment in RCAM.
Borrowings - RSO
RSO historically has financed the acquisition of its investments, including investment securities, loans and lease receivables, through the use of secured and unsecured borrowings in the form of CDOs, securitized notes, repurchase agreements, secured term facilities, warehouse facilities and trust preferred securities issuances.  Certain information with respect to RSO’s borrowings at December 31, 2012 and 2011 is summarized in the following table (in thousands, except percentages):
 
Outstanding Borrowings
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
December 31, 2012:
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes (1) 
$
145,664

 
1.42%
 
33.6 years
 
$
295,759

RREF CDO 2007-1 Senior Notes (2) 
225,983

 
0.81%
 
33.8 years
 
292,980

Apidos CDO I Senior Notes (3) 
202,969

 
1.07%
 
4.6 years
 
217,745

Apidos CDO III Senior Notes (4) 
221,304

 
0.80%
 
7.5 years
 
232,655

Apidos Cinco CDO Senior Notes (5) 
320,550

 
0.82%
 
7.4 years
 
344,105

Apidos CLO VIII Senior Notes (6) 
300,951

 
2.16%
 
8.8 years
 
351,014

Apidos CLO VIII Securitized Borrowings (11)
20,047

 
15.27%
 
8.8 years
 
—

Whitney CLO I (10)
171,555

 
1.82%
 
4.2 years
 
191,704

Whitney Securitized Borrowings(11)
5,860

 
9.50%
 
4.2 years
 
—

Unsecured Junior Subordinated Debentures (7)
50,814

 
4.26%
 
23.7 years
 
—

Repurchase Agreements (8) 
106,303

 
2.28%
 
18 days
 
145,234

Mortgage Payable (9) 
13,600

 
4.17%
 
5.6 years
 
18,100

Total(12)
$
1,785,600

 
1.62%
 
12.5 years
 
$
2,089,296

 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 
 
 
 
 

RREF CDO 2006-1 Senior Notes (1) 
$
157,803

 
1.44%
 
34.6 years
 
$
264,796

RREF CDO 2007-1 Senior Notes (2) 
315,882

 
0.85%
 
34.8 years
 
422,641

Apidos CDO I Senior Notes (3) 
314,884

 
1.04%
 
5.6 years
 
315,088

Apidos CDO III Senior Notes (4) 
261,209

 
0.99%
 
8.5 years
 
260,167

Apidos Cinco CDO Senior Notes (5) 
319,959

 
0.95%
 
8.4 years
 
326,164

Apidos CLO VIII Senior Notes (6) 
298,312

 
2.42%
 
9.8 years
 
334,122

Apidos CLO VIII Securitized Borrowings (11)
21,364

 
15.27%
 
9.8 years
 
—

Unsecured Junior Subordinated Debentures (7)
50,631

 
4.35%
 
24.7 years
 
—

Repurchase Agreements (8) 
40,503

 
1.54%
 
18 days
 
47,143

Mortgage Payable (9) 
13,536

 
4.23%
 
6.6 years
 
18,100

Total
$
1,794,083

 
1.38%
 
15.2 years
 
$
1,988,221

 
(1)
Amount represents principal outstanding of $146.4 million and $159.1 million less unamortized issuance costs of $728,000 and $1.2 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in August 2006.
(2)
Amount represents principal outstanding of $227.4 million and $318.6 million less unamortized issuance costs of $1.4 million and $2.7 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in June 2007.
(3)
Amount represents principal outstanding of $203.2 million and $315.9 million less unamortized issuance costs of $274,000 and $1.1 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in August 2005.
(4)
Amount represents principal outstanding of $222.0 million and $262.5 million less unamortized issuance costs of $659,000 and $1.3 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in May 2006.
(5)
Amount represents principal outstanding of $322.0 million and $322.0 million less unamortized issuance costs of $1.5 million and $2.0 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in May 2007.
(6)
Amount represents principal outstanding of $317.6 million and $317.6 million, less unamortized issuance costs of $4.7 million and $5.5 million, and less unamortized discounts of $11.9 million and $13.8 million as of December 31, 2012 and 2011, respectively.  This CDO transaction closed in October 2011.
(7)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(8)
Amount represents principal outstanding of $47.5 million and $40.9 million less unamortized deferred debt costs of $23,000 and $494,000 and accrued interest costs of $37,000 and $39,000 related to CMBS repurchase facilities as of December 31, 2012 and 2011, respectively, and principal outstanding of $59.1 million less unamortized deferred debt costs of $348,000 and accrued interest costs of $79,000 related to CRE repurchase facilities as of December 31, 2012. Does not reflect CMBS repurchase agreement borrowings that are components of Linked Transactions. At December 31, 2012 and 2011, RSO had repurchase agreements of $20.4 million and $14.9 million, respectively, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the above table.
(9)
Amount represents principal outstanding of $13.6 million and $13.6 million less unamortized real estate financing costs of $0 and $65,000 as of December 31, 2012 and 2011, respectively.  This real estate transaction closed in August 2011.
(10)
Amount represents principal outstanding of $174.1 million less unamortized discounts of $2.5 million as of December 31, 2012 . In October 2012 RSO purchased a $20.9 million equity interest in Whitney CLO I which represents 67% of the outstanding preference shares. The transaction gave RSO a controlling interest in the CLO.
(11)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Senior Notes, respectively.
Collateralized Debt Obligations
Resource Real Estate Funding CDO 2007-1
In June 2007, RSO closed RREF CDO 2007-1, a $500.0 million CDO transaction that provided financing for commercial real estate loans and commercial mortgage-backed securities.  The investments held by RREF CDO 2007-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2007-1 issued a total of $265.6 million of senior notes at par to unrelated investors.  RCC Real Estate purchased 100% of the class H senior notes (rated  BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for $68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2007-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2007-1. The reinvestment period for RREF 2007-1 ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of December 31, 2012, $14.5 million of Class A-1 notes have been paid down.
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 unissued class A-1R notes, which allow the CDO to fund future funding obligations under the existing whole loan participations that have future funding commitments; the undrawn balance of the class A-1R notes accrued a commitment fee at a rate per annum equal to 0.18%, the drawn balance bore 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 RSO 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 and net of repurchased notes was 0.81% and 0.85% at December 31, 2012 and 2011, respectively.
During the year ended December 31, 2012 RSO repurchased and redeemed $50.0 million of the Class A-1R notes and $26.8 million of the Class D notes in RREF CDO 2007-1 at a weighted average price of 78.85% to par which, after fees paid to an investment bank to finance the transaction and related expenses, resulting in a $14.9 million gain reported as a gain on the extinguishment of debt in the consolidated statements of income. During the year ended 2011, RSO repurchased $10.0 million of Class A-2 notes at a weighted average price of 61.25% to par which resulted in a $3.9 million gain.
In connection with RSO’s ownership of certain notes held by RREF CDO 2007-1, on June 21, 2011 RSO surrendered for cancellation, without consideration, to the trustee of RREF CDO 2007-1the following outstanding notes, which previously eliminated in consolidation:  $7.5 million of the Class B notes, $6.5 million of the Class F notes, $6.3 million of the Class G notes and $10.6 million of the Class H notes.  The surrendered notes were canceled by the trustee pursuant to the applicable indenture, and the obligations due under those notes were deemed extinguished.  The effect of these cancellations was to improve the CDO’s performance with respect to its over-collateralization and interest coverage tests, with which it was already in compliance before the cancellation, and to secure RSO’s long-term interest in this structured vehicle.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Resource Real Estate Funding CDO 2006-1
In August 2006, RSO 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 collateralize the debt it issued and, as a result, the investments are not available to RSO, 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 reinvestment period for RREF 2006-1 ended in September 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of December 31, 2012, $29.7 million of Class A-1 notes have been paid down.
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 RSO’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 RSO 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 and net of repurchased notes was 1.42% and 1.44% at December 31, 2012 and 2011, respectively.
During the year ended December 31, 2012 RSO repurchased $4.3 million of the Class A-1 notes and $4.0 million of the Class C notes in RREF CDO 2006-1 at a weighted average price of 81.63% to par which resulted in a $1.5 million gain reported as a gain on the extinguishment of debt in the consolidated statements of income.  During the year ended December 31, 2011, RSO did not repurchase any notes.
In connection with RSO’s ownership of certain notes held by RREF CDO 2006-1, on June 21, 2011 RSO surrendered for cancellation, without consideration, to the trustee of RREF CDO 2006-1 the following outstanding notes, which previously eliminated in consolidation:  $6.9 million of the Class B notes, $7.7 million of the Class C notes, $5.52 million of the Class D notes, $7.0 million of the Class E notes and $5.25 million of the Class F notes.  The surrendered notes were canceled by the trustee pursuant to the applicable indenture, and the obligations due under those notes were deemed extinguished.  The effect of these cancellations was to improve the CDO’s performance with respect to its over-collateralization and interest coverage tests, with which it was already in compliance before the cancellation, and to secure RSO’s long-term interest in this structured vehicle.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Whitney CLO I
In February 2011, RSO acquired the rights to manage the assets held by Whitney CLO I. In October 2012, RSO purchased a $20.9 million preferred equity interest at a discount of 42.5% which represents 67% of the outstanding preference shares in Whitney CLO I. Based upon that purchase, RSO determined that it had a controlling interest and consolidated Whitney CLO I. The preferred equity interest is subordinated in right of payment to all other securities issued by Whitney CLO I.
The balance of senior notes to investors when RSO acquired a controlling interest in October 2012 were as follows: (i) $48.8 million of class A-1L notes bearing interest at LIBOR plus 0.32%; (ii) $26.5 million of class A-1LA notes bearing interest at LIBOR plus 0.29%; (iii) $36.5 million of class A-1LB notes bearing interest at LIBOR plus 0.45%; (iv) $19.75 million of class A-2F notes bearing interest at LIBOR plus 5.19%; (v) $15.0 million of class A-2L notes bearing interest at LIBOR plus 0.57%; (vi) $25.0 million of class A-3L notes bearing interest at LIBOR plus 1.05%; (vii) $23.5 million of class B-1LA notes bearing interest at LIBOR plus 2.1%; (viii) $14.36 million of class B-1LB notes bearing interest at LIBOR plus 1.0%. All of the notes issued mature on March 1, 2017. RSO has the right to call the notes anytime after March 1, 2009 until maturity in March 2017. The weighted average interest rate on all notes was 1.82% at December 31, 2012. The reinvestment period for Whitney CLO I ended in March 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down. Since October 2012, $15.5 million of Class A-1L and $19.9 million of Class A-1LA notes have been paid down.
Apidos CLO VIII
In October 2011, RSO closed Apidos CLO VIII, a $350 million CLO transaction that provides financing for bank loans.  The investments held by Apidos CLO VIII collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CLO VIII issued a total of $317.6 million of senior notes at a discount of 4.4% to investors and RCC commercial purchased a $15.0 million interest representing 43% of the outstanding subordinated debt.  The remaining 57% of subordinated debt is owned by unrelated third parties.  The reinvestment period for Apidos CLO VIII will end in October 2014.  The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII.
The senior notes issued to investors by Apidos CLO VIII consist of the following classes: (i) $231.2 million of class A-1 notes bearing interest at LIBOR plus 1.50%; (ii) $35.0 million of class A-2 notes bearing interest at LIBOR plus 2.00%; (iii) $17.3 million of class B-1 notes bearing interest at LIBOR plus 2.50%; (iv) $6.8 million of class B-2 notes bearing interest at LIBOR plus 2.50%; (v) $14.1 million of class C notes bearing interest at LIBOR plus 3.10% and (vi) $13.2 million of class D notes bearing interest at LIBOR plus 4.50%. All of the notes issued mature on October 17, 2021, although RSO has the right to call the notes anytime from October 17, 2013 until maturity.  The weighted average interest rate on all notes was 2.16% and 2.42% at December 31, 2012 and 2011, respectively.
Apidos Cinco CDO
In May 2007, RSO 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 RSO, 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 reinvestment period for Apidos Cinco CDO will end in May 2014.  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 RSO has the right to call the notes anytime after May 14, 2011 until maturity.  The weighted average interest rate on all notes was 0.82% and 0.95% at December 31, 2012 and 2011, respectively.
 
Apidos CDO III
In May 2006, RSO 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 RSO, 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 reinvestment period for Apidos CDO III will end in December 2012.  The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO III.
The senior notes issued to investors by Apidos CDO III consist of the following classes:  (i) $212.0 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes issued mature on September 12, 2020, although RSO has the right to call the notes anytime after September 12, 2011 until maturity.  The weighted average interest rate on all notes was 0.80% and 0.99% at December 31, 2012 and 2011, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of December 31, 2012, $40.5 million of Class A-1 notes have been paid down.
Apidos CDO I
In August 2005, RSO 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 RSO, 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) $259.5 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 RSO has the right to call the notes anytime after July 27, 2010 until maturity.  The weighted average interest rate on all notes was 1.07% and 1.04% and at December 31, 2012 and 2011, respectively. The reinvestment period for Apidos CDO I ended in July 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of December 31, 2012, $116.3 million of Class A-1 Notes have been paid down.
During the year ended December 31, 2012 RSO repurchased $2.0 million of the Class B notes in Apidos CDO I at a weighted average price of 85.11% to par which resulted in a $298,000  gain reported as a gain on the extinguishment of debt in the consolidated statements of income.  During the year ended December 31, 2011, RSO did not repurchase any notes.
Unsecured Junior Subordinated Debentures
In May 2006 and September 2006, RSO formed RCT I and RCT II, respectively, for the sole purpose of issuing and selling capital securities representing preferred beneficial interests.  Although RSO owns 100% of the common securities of RCT I and RCT II, RCT I and RCT II are not consolidated into RSO’s consolidated financial statements because RSO is not deemed to be the primary beneficiary of these entities.  In connection with the issuance and sale of the capital securities, RSO issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing RSO’s maximum exposure to loss.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II are included in borrowings and are being amortized into interest expense in the consolidated statements of income using the effective yield method over a ten year period.
The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2012 were $358,000 and $377,000, respectively.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2011, were $450,000 and $467,000, respectively.  The rates for RCT I and RCT II, at December 31, 2012, were 4.26% and 4.26%, respectively.  The rates for RCT I and RCT II, at December 31, 2011, were 4.32% and 4.38%, respectively.
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 September 30, 2036 and October 30, 2036, respectively, and may be called at par by RSO any time after September 30, 2011 and October 30, 2011, respectively.  RSO 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.
Repurchase and Credit Facilities
CMBS - Term Repurchase Facility
In February 2011, the registrant's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc.(collectively, the "Companies"), entered into a master repurchase and securities contract (the “Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  Under the Facility, from time to time, the parties may enter into transactions in which the Companies and Wells Fargo agree to transfer from the Companies to Wells Fargo all of their right, title and interest to certain commercial mortgage backed securities and other assets (the “Assets”) against the transfer of funds by Wells Fargo to the Companies, with a simultaneous agreement by Wells Fargo to transfer back to the Companies such Assets at a date certain or on demand, against the transfer of funds from the Companies to Wells Fargo.  The maximum amount of the Facility is $100.0 million which has a two year term with a one year option to extend, and an interest rate equal to the one-month London Interbank Offered Rate (LIBOR) plus 1.29% plus a .25% initial structuring fee and a .25% extension fee upon exercise. On February 1, 2013, RSO exercised the option to extend the CMBS Term Repurchase Facility for a period of one year. The Companies will enter into interest rate swaps and cap agreements to mitigate interest rate risk under the Facility.
The Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the Companies to repay the purchase price for purchased assets.
 The Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the Companies to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the Facility and pursuant to a guarantee agreement dated February 1, 2011 (the “Guaranty”), the registrant agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the Companies to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of the Companies with respect to Wells Fargo under each of the governing documents.  The Guaranty includes covenants that, among other things, limit the registrant's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of December 31, 2012.
At December 31, 2012, RCC Real Estate had borrowed $42.5 million (net of $23,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $51.4 million and a weighted average interest rate of one-month LIBOR plus 1.32%, or 1.53%.  At December 31, 2011, RCC Real Estate had borrowed $41.0 million (net of $494,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At December 31, 2011, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $47.1 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.54%. At December 31, 2012 and 2011, RSO had repurchase agreements of $20.4 million and $14.9 million, respectively, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.
The following table shows information about the amount at risk under this facility (dollars in thousands):
 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2012:
 
 
 
 
 
Wells Fargo Bank, National Association.
$
10,722

 
18
 
1.53%
 
 
 
 
 
 
December 31, 2011:
 

 
 
 
 
Wells Fargo Bank, National Association.
$
8,461

 
18
 
1.54%
 
(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.
(2)
$12.2 million and $14.9 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2012 and 2011, respectively.
CRE - Term Repurchase Facility
On February 27, 2012, RSO entered into a master repurchase and securities agreement with Wells Fargo Bank, National Association to finance the origination of commercial real estate loans.  The facility has a maximum amount of $150.0 million and an initial 18 month term with two one year options to extend.  RSO paid an origination fee of 37.5 basis points (0.375)%.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.  At December 31, 2012, RCC Real Estate had borrowed $58.8 million (net of $348,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by several commercial real estate loans with an estimated fair value of $85.4 million and a weighted average interest rate of one-month LIBOR plus 2.67%, or 2.88%.RSO had no borrowings under the facility as of December 31, 2011.
The Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the Companies to repay the purchase price for purchased assets.
 The Facility also contains margin call provisions relating to a decline in the market value of an security. Under these circumstances, Wells Fargo may require the Companies to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the Facility and pursuant to a guarantee agreement dated February 27, 2012 (the “Guaranty”), the registrant agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the Companies to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of the Companies with respect to Wells Fargo under each of the governing documents.  The Guaranty  includes covenants that, among other things, limit the registrant's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of December 31, 2012.
 
Amount at
Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2012:
 
 
 
 
 
Wells Fargo Bank, National Association.
$
26,332

 
18
 
2.88%
 
(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.
CRE - Repurchase Facility
On March 8, 2005, RSO entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of commercial real estate loans. RSO guaranteed RCC Real Estate's performance of its obligations under the repurchase agreement. There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of one-month LIBOR plus 3.25%.   RSO had repaid all borrowings under this agreement as of December 31, 2012.
Short-Term Repurchase Agreements
On March 8, 2005, RSO entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of CMBS and commercial real estate loans.  There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.  At December 31, 2012, RCC Real Estate had borrowed $3.1 million, all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $5.1 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%.  RSO had no borrowings under this facility as of December 31, 2011.
The following table shows information about the amount at risk under this facility (dollars in thousands);

 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2012:
 
 
 
 
 
Deutsche Bank Securities, Inc.
$
2,069

 
7
 
1.46%
 
(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.
On February 14, 2012, RSO entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity date with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.  At December 31, 2012, RCC Real Estate had borrowed $5.4 million, all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by two CMBS bonds with an estimated fair value of $8.5 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%.  RSO had no borrowings under this facility as of December 31, 2011.
The following table shows information about the amount at risk under this facility (dollars in thousands);
 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2012:
 
 
 
 
 
Wells Fargo Securities, LLC
$
1,956

 
28
 
1.46
%
 
(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.
(2)
$3.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2012.

On November 6, 2012, RSO entered into a master repurchase and securities agreement with JP Morgan Securities LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity with monthly resets of interest rates.  At December 31, 2012, RCC Real Estate had borrowed $4.7 million, all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $7.2 million and a weighted average interest rate of one-month LIBOR plus 0.80%, or 1.01%.  RSO had no borrowings under this facility as of December 31, 2011.
The following table shows information about the amount at risk under this facility (dollars in thousands);
 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2012:
 
 
 
 
 
JP Morgan Securities
$
2,544

 
11
 
1.01
%
 
(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.
(2)
$4.7 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2012.
Revolving Credit Facility
On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility with TBBK.  The facility provided bridge financing for up to five business days, which enabled RSO and RCC Real Estate to fund real estate loans to third parties prior to their sale to RSO’s CRE CDOs.  TBBK entered into July 7, 2011.  The facility was secured by a pledge of $32.9 million of the Class A-1 notes of RREF CDO 2006-1, which are owned by RCC Real Estate.  RSO had no borrowings under this revolving credit facility as of December 31, 2012 and 2011. The note became due and payable on June 30, 2012 and was terminated.  
Mortgage Payable
On August 1, 2011, RSO, through RCC Real Estate, purchased Whispertree Apartments, a 504 unit multi-family property located in Houston, Texas, for $18.1 million.  The property was 95% occupied at acquisition.  In conjunction with the purchase of the property, RSO entered into a seven year mortgage of $13.6 million with a lender.  The mortgage bears interest at a rate of one-month LIBOR plus 3.95%.  As of December 31, 2012 and 2011 the borrowing rate was 4.17% and 4.23%, respectively.
Related party transactions - RSO
Relationship with LEAF. LEAF originates and manages equipment leases and notes on behalf of RSO.
On March 5, 2010, RSO entered into agreements with Lease Equity Appreciation Fund II, L.P. (“LEAF II”) (an equipment leasing partnership sponsored by LEAF Financial and of which a LEAF Financial subsidiary is the general partner), pursuant to which RSO provided an $8.0 million credit facility to LEAF II, of which all $8.0 million has been funded.  The credit facility had a one year term at 12% per year, payable quarterly, and was secured by all the assets of LEAF II Receivables Funding, LLC, including its entire ownership interest in LEAF II.  RSO received a 1% origination fee in connection with establishing the facility.  The facility originally matured on March 3, 2011 and was extended until September 3, 2011 with a 1% extension fee paid on the outstanding loan balance.  On June 3, 2011, RSO entered into an amendment to extend the maturity to February 15, 2012 and decrease the interest rate from 12% to 10% per annum resulting in a troubled-debt restructuring under current accounting guidance.  On February 15, 2012, the credit facility was further amended to extend the maturity to February 15, 2013 with a 1% extension fee accrued and added to the amount outstanding.  On January 11, 2013, RSO entered into another amendment to extend the maturity to February 15, 2014 with an additional 1% extension fee accrued and added to the amount outstanding. The loan amount outstanding at December 31, 2012 and 2011 was $6.8 million and 7.8 million, respectively.
In the formation of LEAF, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis, a 26.7% interest in LEAF in exchange for its prior interest in LEAF.  RSO’s resulting interest is accounted for under the equity method.  For the year ended December 31, 2012, RSO recorded a loss of $3.3 million which was recorded in equity in earnings of unconsolidated subsidiaries on the consolidated statement of income.  No such loss was incurred for the year ended December 31, 2011. RSO’s investment in LEAF was valued at $33.1 million and $36.3 million as of December 31, 2012 and 2011, respectively.
Relationship with CVC Credit Partners. On April 17, 2012, ACM, a former subsidiary of the Company, was sold to CVC, a joint venture entity in which the Company owns a 33% interest.  CVC Credit Partners manages internally and externally originated bank loan assets on RSO’s behalf.  On February 24, 2011, a subsidiary of RSO purchased 100% of the ownership interests in Churchill Pacific Asset Management LLC ("CPAM") from Churchill Financial Holdings LLC for $22.5 million.  CPAM subsequently changed its name to Resource Capital Asset Management ("RCAM"). Through RCAM, RSO is entitled to collect senior, subordinated and incentive fees related to five Collateralized Loan Obligation issuers (“CLO”) holding approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing the five CLOs.   CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM.  For the years ended December 31, 2012 and 2011, CVC Credit Partners incurred subordinated fees of $800,000 and $1.0 million, respectively. In October 2012, RSO purchased 66.6% of the preferred equity in one of the RCAM CLOs.
Relationship with TBBK. Walter Beach, a director of The Bancorp, Inc. since 1999, has also served as a director of RSO since March 2005. On March 14, 2011, RSO paid TBBK a loan commitment fee in the amount of $31,500 in connection with TBBK’s commitment to establish a credit facility for the benefit of RSO.  On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility with TBBK.  The facility provided bridge financing for up to five business days, which enabled RSO and RCC Real Estate to fund real estate loans to third parties prior to their sale to RSO’s CRE CDOs.  The facility was evidenced by a Revolving Judgment Note and Security Agreement by and among the borrowers and Bancorp and was secured by a pledge of $32.9 million of the Class A-1 notes of RREF CDO 2006-1 and was owned by RCC Real Estate.  The note matured on June 30, 2012.  There were no outstanding borrowings as of December 31, 2012 or 2011.
Relationship with Ledgewood.  Until 1996, Edward E. Cohen, a director who was RSO’s Chairman from its inception until November 2009, was of counsel to Ledgewood, P.C., a law firm.  In addition, one of RSO’s executive officers, Jeffrey F. Brotman, was employed by Ledgewood until 2007.  Mr. E. Cohen receives certain debt service payments from Ledgewood related to the termination of his affiliation with Ledgewood and its redemption of his interest in the firm.  Mr. Brotman also receives certain debt service payments from Ledgewood related to the termination of his affiliation with the firm.  For the years ended December 31, 2012 and 2011, RSO paid Ledgewood $438,000 and $238,000, respectively, in connection with legal services rendered to RSO.
M.    Fair value of financial instruments
In analyzing the fair value of its investments accounted for on a fair value basis, RSO follows the 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.  RSO determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.  The hierarchy followed 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.  RSO evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, RSO expects that changes in classifications between levels will be rare.
Certain assets and liabilities are measured at fair value on a recurring basis.  The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.
RSO reports its investment securities available-for-sale at fair value.  To determine fair value, RSO uses a dealer quote which typically will be the dealer who sold RSO the security.  RSO has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models.  These quotes are non-binding.  Based on how dealers develop their quotes, market liquidity and levels of trading, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.  RSO evaluates the reasonableness of the quotes it receives by applying its own valuation models.  If there is a material difference between a quote RSO receives and the value indicated by its valuation models, RSO will evaluate the difference.  As part of that evaluation, RSO will discuss the difference with the dealer, who may revise its quote based upon these discussions.  Alternatively, RSO may revise its valuation models.
RSO reports its investment securities, trading at fair value, which is based on a dealer quotes or bids which are validated using an income approach utilizing appropriate prepayment, default and recovery rates as well as an independent third-party valuation.  Any changes in fair value are recorded on RSO’s results of operations as net unrealized gain on investment securities, trading.
The CMBS underlying RSO’s Linked Transactions are valued using the same techniques to those used for RSO’s other CMBS. The value of the underlying CMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the CMBS and accrued interest payable on the underlying repurchase agreement borrowings. RSO’s Linked Transactions are classified as Level 2 or Level 3 in the fair value hierarchy.
Derivatives (interest rate swaps and interest rate caps), both assets and liabilities, are reported at fair value, and are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters.  This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors.  Although RSO 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 RSO and its counterparties.  RSO assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and, if material, categorizes those derivatives within Level 3 of the fair value hierarchy.
The following table presents information about RSO’s assets (including derivatives that are presented net) measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
24,843

 
$
24,843

Investment securities available-for-sale
9,757

 
132,561

 
89,272

 
231,590

CMBS - Linked Transactions
—

 
4,802

 
2,033

 
6,835

Total assets at fair value
$
9,757

 
$
137,363

 
$
116,148

 
$
263,268

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
610

 
14,077

 
14,687

Total liabilities at fair value
$
—

 
$
610

 
$
14,077

 
$
14,687

 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Investment securities, trading
$
—

 
$
—

 
$
38,673

 
$
38,673

Investment securities available-for-sale
—

 
121,031

 
19,835

 
140,866

CMBS - Linked Transactions
—

 
2,275

 
—

 
2,275

Total assets at fair value
$
—

 
$
123,306

 
$
58,508

 
$
181,814

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
1,210

 
12,000

 
13,210

Total liabilities at fair value
$
—

 
$
1,210

 
$
12,000

 
$
13,210


The following table presents additional information about assets which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
 
Level 3
Beginning balance, January 1, 2011
$
43,380

Total gains or losses (realized/unrealized):
 

Included in earnings
2,948

Purchases
38,887

Sales
(18,181
)
Paydowns
(3,212
)
Transfers out of Level 3
(4,437
)
Unrealized losses – included in accumulated other comprehensive income
(877
)
Beginning balance, January 1, 2012
58,508

Total gains or losses (realized/unrealized):
 

Included in earnings
14,105

Purchases
8,341

Sales
(37,632
)
Paydowns
(2,012
)
Unrealized gains (losses) – included in accumulated other comprehensive income
8,457

Transfers from level 2
66,381

Ending balance, December 31, 2012
$
116,148


The following table presents additional information about liabilities which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
 
Level 3
Beginning balance, January 1, 2011                                                                                                 
$
10,929

Unrealized losses – included in accumulated other comprehensive income
1,071

Beginning balance, January 1, 2012                                                                                                 
12,000

Unrealized losses – included in accumulated other comprehensive income
2,077

Ending balance, December 31, 2012                                                                                                 
$
14,077


RSO had $4.6 million of losses included in earnings due to the other-than-temporary impairment charges of one assets during the year ended December 31, 2011. These losses are included in the consolidated statements of operations as net impairment losses recognized in earnings. There were no losses included in earnings due to other-than-temporary impairment charges during the year December 31, 2012.
Loans held for sale consist of bank loans and commercial real estate loans (“CRE loans”) identified for sale due to credit concerns.  Interest on loans held for sale is recognized according to the contractual terms of the loan and included in interest income on loans.  The fair value of bank loans held for sale and impaired bank loans is based on what secondary markets are currently offering for these loans.  As such, RSO classifies these loans as nonrecurring Level 2.  For RSO’s CRE loans where there is no primary market, fair value is measured using discounted cash flow analysis and other valuation techniques and these loans are classified as nonrecurring Level 3. The amount of nonrecurring fair value losses for impaired loans for the years ended December 31, 2012 and 2011 was $7.8 million and $11.4 million, respectively, and is included in the consolidated statements of operations as provision for loan and lease losses.
The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
14,894

 
$
34,000

 
$
48,894

Impaired loans
—

 
4,366

 
21,000

 
25,366

Total assets at fair value
$
—

 
$
19,260

 
$
55,000

 
$
74,260

 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for sale
$
—

 
$
3,154

 
$
—

 
$
3,154

Impaired loans
—

 
1,099

 
—

 
1,099

Total assets at fair value
$
—

 
$
4,253

 
$
—

 
$
4,253


For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
December 31, 2012
 
Valuation Technique
 
Significant
Unobservable
Inputs
 
Significant
Unobservable
Input Value
Impaired loans
$
21,000

 
Discounted cash flow
 
Cap rate
 
10.00%
Interest rate swap agreements
$
(14,687
)
 
Discounted cash flow
 
Weighted average credit spreads
 
4.98%

RSO is required to disclose the fair value of financial instruments for which it is practicable to estimate that value.  The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, principal paydown receivable, interest receivable, distribution payable and accrued interest expense approximates their carrying value on the consolidated balance sheet.  The fair value of RSO’s investment securities-trading is reported in section D. Investment securities - trading section above. The fair value of RSO’s investment securities available-for-sale is reported in section E. Investment securities available-for-sale above. 
Loans held-for-investment:  The fair value of RSO’s Level 2 Loans held-for-investment was primarily measured using a third-party pricing service.  The fair value of RSO’s Level 3 Loans held-for-investment was measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Loans receivable-related party are estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
CDO notes are valued using the dealer quotes, typically the dealer who underwrote the CDO in which the notes are held.
Junior subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.
The fair values of the Company’s remaining financial instruments that are not reported at fair value on the consolidated balance sheet are reported below (in thousands):
 
 
 
Fair Value Measurements
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets of Liabilities (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
December 31, 2012:
 
 
 
 
 
 
 
 
 
Loans held-for-investment
$
1,793,780

 
$
1,848,617

 
$
—

 
$
1,186,642

 
$
661,975

Loans receivable-related party
$
8,324

 
$
8,324

 
$
—

 
$
—

 
$
8,324

CDO notes
$
1,614,883

 
$
1,405,124

 
$
—

 
$
1,405,124

 
$
—

Junior subordinated notes
$
50,814

 
$
17,308

 
$
—

 
$
—

 
$
17,308

 
 
 
 
 
 
 
 
 
 
December 31, 2011:
 

 
 

 
 

 
 

 
 

Loans held-for-investment
$
1,772,063

 
$
1,755,541

 
$
—

 
$
1,142,638

 
$
612,903

Loans receivable-related party
$
9,497

 
$
9,497

 
$
—

 
$
—

 
$
9,497

CDO notes
$
1,689,413

 
$
1,034,060

 
$
—

 
$
1,034,060

 
$
—

Junior subordinated notes
$
50,631

 
$
17,125

 
$
—

 
$
—

 
$
17,125


RAI - Other VIEs
Consolidated VIE - Real estate property
The following table reflects the assets and liabilities of a real estate VIE which was included in the Company’s consolidated balance sheets (in thousands):
 
September 30,
2012
 
September 30,
2011
Cash and property and equipment, net
$
727

 
$
944

Accrued expenses and other liabilities
189

 
300


In November 2012, the property underlying the loan was sold for a gain of $831,000 of which $793,000 was attributable to noncontrolling interests; as such, the Company will no longer consolidate the real estate VIE.
VIEs not consolidated
The Company’s investments in RRE Opportunity REIT, a fund that is currently in the offering stage, and its investments in the structured finance entities that hold investments in trust preferred assets (“Trapeza entities”) and asset-backed securities (“Ischus entities”), were all determined to be VIEs that the Company does not consolidate as it does not have the obligation of, or right to, losses or earnings that would be significant to those entities.  With respect to RRE Opportunity REIT, the Company has advanced offering costs that are being reimbursed as the REIT raises additional equity which is included in Receivables from manged entities and related parties, net on the Consolidated Balance Sheets.  Except for those advances, the Company has not provided financial or other support to these VIEs and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at September 30, 2012.
The following table presents the carrying amounts of the assets in the Company's consolidated balance sheets that relate to the Company's variable interests in identified nonconsolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at September 30, 2012 (in thousands):
 
Receivables from
Managed Entities and
Related Parties,
Net (1)
 
Investments
 
Maximum Exposure
to Loss in
Non-consolidated VIEs
RRE Opportunity REIT
$
—

 
$
1,444

 
$
1,444

Ischus entities
231

 
—

 
231

Trapeza entities
—

 
967

 
967

 
$
231

 
$
2,411

 
$
2,642

 
(1)
Exclusive of expense reimbursements due to the Company.
Income Taxes
RSO operates in such a manner as to quality 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 RSO shareholders, to the extent distributed RSO. To maintain REIT status for federal income tax purposes, RSO 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, RSO is not subject to federal corporate income tax to extent that it distributes 100% of its REIT taxable income each year.
Taxable income from non-REIT activities managed through RSO's taxable REIT subsidiaries is subject to federal, state and local income taxes. RSO's taxable REIT subsidiaries' income taxes are accounted for under the asset and liability method.  Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and tax basis of assets and liabilities. 
The following table details the components of income taxes (in thousands):
 
Years Ended December 31,
 
2012
 
2011
Provision (benefit) for income taxes:
 
 
 
Current:
 
 
 
Federal
$
11,497

 
$
7,839

State
776

 
4,596

Total current
12,273

 
12,435

 
 
 
 
Deferred:
 
 
 
Federal
1,769

 
(305
)
State
560

 
(94
)
Total deferred
2,329

 
(399
)
Income tax provision (benefit)
$
14,602

 
$
12,036


A reconciliation between the federal statutory income tax rate and effective income tax rate is as follows:
 
Years Ended December 31,
 
2012
 
2011
Statutory tax
35
%
 
35
%
State and local taxes, net of federal benefit
1
%
 
15
%
Valuation allowance for deferred tax assets
—
%
 
—
%
Subpart F income
13
%
 
11
%
Basis difference in LEAF Commercial Capital investment
—
%
 
6
%
Other items
5
%
 
—
%
 
54
%
 
67
%

The components of deferred tax assets and liabilities are as follows (in thousands):
 
December 31,
 
2012
 
2011
Deferred tax assets related to:
 
 
 
Investment in securities
$
118

 
$
119

Intangible assets basis difference
2,557

 
490

Federal, state and local loss carryforwards
45

 
17

Capital loss carryforward
12

 
—

Partnership investment
34

 
—

Total deferred tax assets
2,766

 
626

Valuation allowance
—

 
—

Total deferred tax assets
$
2,766

 
$
626

Deferred tax liabilities related to:
 
 
 
Unrealized income/loss on investments
$
(4,286
)
 
$
(1,188
)
Equity investments
(838
)
 
(394
)
Basis difference in LEAF Commercial Capital investment
(185
)
 
(3,390
)
Subpart F income
(3,067
)
 
(652
)
Total deferred tax liabilities
$
(8,376
)
 
$
(5,624
)

Apidos CDO I, Apidos CDO III and Apidos Cinco CDO, Apidos CLO VIII, and Whitney CLO I, RSO'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 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,” RSO will generally be required to include Apidos CDO I's, Apidos CDO III's, Apidos Cinco CDO's, Apidos CLO VIII's, and Whitney CLO I's current taxable income in its calculation of REIT taxable income.
On October 13, 2011, RSO acquired approximately 43% of the equity of Apidos CLO VIII, which is a foreign TRS, organized as an exempted company incorporated with limited liability under the laws of the Cayman Islands.  This equity is directly owned by a domestic TRS of RSO; therefore, its earnings are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax.  Accordingly, a provision for income taxes has been recorded.
On October 27, 2011 RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. On January 24, 2012, RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III.  As a result, for the period January 1, 2012 through January 23, 2012, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. For the period January 24, 2012 and ending December 31, 2012 the earnings from Apidos CDO I are included in RSO's calculation of REIT taxable income.
On October 19, 2012, RSO acquired approximately 66% of the equity of Whitney CLO I, which is a foreign TRS, organized as an exempted company incorporated with limited liability under the laws of the Cayman Islands.  This equity is directly owned by a domestic TRS of RSO; therefore, its earnings are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax.  Accordingly, a provision for income taxes has been recorded.
On November 12, 2012, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I.  As a result, for the period November 12, 2012 and ending December 31, 2012, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from November 12, 2012 through December 31, 2012 has been recorded.
On December 11, 2012, RSO reorganized the ownership structure of Apidos CDO III.  As a result, for the period from January 24, 2012 through December 10, 2012 the earnings from Apidos CDO III are included in RSO's calculation of REIT taxable income.  Also as a result of the reorganization on December 11, 2012, for the period December 11, 2012 and ending December 31, 2012, the earnings from Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. 
Effective January 1, 2007, RSO adopted the provisions of FASB's guidance for uncertain tax positions. This implementation did not have an impact on RSO's balance sheet or results of operations. The guidance prescribes that a tax position should only be recognized if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. RSO is required to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period as well as the cumulative amounts recorded in the consolidated balance sheets. RSO will continue to classify any tax penalties as other operating expenses and any interest as interest expense. RSO does not have any unrecognized tax benefits that would affect RSO's financial position.
As of December 31, 2012, income tax returns for the calendar years 2009 - 2012 remain subject to examination by Internal Revenue Service ("IRS") and/or any state or local taxing jurisdiction. RSO has not executed any agreements with the IRS or any state and/or local taxing jurisdiction to extend a statue of limitations in relation to any previous year.