Resource Capital Corp. (RSO) continues to pay a $0.41 per share dividend, putting the current yield over 20%. Fourth quarter adjusted net income, excluding non-cash charges, was $0.43 per share in the fourth quarter, ahead of our estimates. Operationally, the company continues to perform well and almost all of their commercial loans are performing.
We rate the shares a Hold due to the uncertainty in commercial real estate debt markets. We think more of the company's commercial loans will have problems in the coming year as commercial fundamentals are eroding. In addition, many of the company's former financing sources are no longer available. We expect some type of dividend cut in financial year 2008.
On a price/earnings basis, the company is trading at 4.9x our 2008 estimates of $1.60 per share (excluding impairments), a 14% premium to sector averages. In addition, RSO is valued at .73x GAAP and 0.65x economic book value, in line with its peer group. We expect commercial real estate loan volumes to decrease over the coming year as residential housing problems will begin to spill over into the commercial sector. The credit squeeze should continue at least through the end of the year, and spreads could decrease as investors' appetite for mortgage bonds will continue to wane in the coming months.
We think that the company has adequate liquidity to whether the current downtown, although with key financing sources shut off, RSO will have more difficulty borrowing money to lend. On the other hand, only a small portion of the company's debt is at risk to margin calls, currently about 10%, which makes us comfortable in the company's long-term outlook and survival if lenders call loans.
We recommend investors Hold the shares for the attractive yield and wait for some uncertainty to pan out in commercial debt markets. We are setting our six-month price target at $8 per share or 5x 2008 projected earnings, which puts the company in-line with most of its commercial peers.
