1521 Locust Street, Suite 400
Company Perspectives:
We operate energy and real estate finance businesses through our subsidiaries, Atlas America, Inc. and Resource Properties, Inc.
Based in Philadelphia, Pennsylvania, Resource America, Inc. has been involved in the production of gas and oil throughout its more than 50 years of existence. During the 1990s, however, it evolved into a specialty finance firm that bought up real estate loans. In addition, it established a computer leasing operation. Following a downturn in its stock price, Resource America has since left the leasing business, de-emphasized real estate, and renewed its interest in energy. Through subsidiaries Atlas America and Resource Properties, the company is involved in more than 4,000 gas and oil wells located in the Appalachian Basin. The family of Chairman and CEO Edward E. Cohen owns approximately 5 percent of Resource America.
Forming Original Company As a Tax Shelter in the 1960s
The company was incorporated originally in 1966 as SMTR Corp., and then in 1970 changed its name to Resource Exploration, Inc. The gas and oil drilling operation, focusing on wells in Ohio and Pennsylvania, was operated out of Shreveport, Louisiana, by longtime oil man J.C. Trahan, who had little more than a high school education but advanced skills as a promoter. He projected an image of careless wealth by flashing gaudy jewelry and handing out large tips to procure choice tables at New York hot spots. Starting in 1968 he began to sell limited partnerships of the corporation and its two operating subsidiaries: Lafayette Funds and Oil & Gas Funds. Trahan was believed to be spending more time selling the over-the-counter shares than actually drilling for gas or oil. Earnings from exploration were a future bonus, but the company was positioned primarily as a tax shelter, promising a 150 percent write-off. Between 1968 and 1976 the company raised more than $34 million but paid out just $2.6 million. The IRS and SEC eventually looked into the activities of Resource Exploration. Trading of its stock was suspended in March 1976, and Trahan resigned. J. Russell Duncan, chairman of the board, replaced Trahan and moved the company's headquarters to Canton, Ohio, which was much closer to its oil and gas fields.
In December 1976 the SEC filed a civil complaint against Resource Exploration alleging material misstatements and omissions connected to the sale of partnerships. A month later, as part of a consent order entered into with the SEC, all of the operating officers of the corporation either resigned or were terminated. A year later the company filed for bankruptcy, and the court named Willard E. White as receiver. It was reorganized three years later but struggled to remain a viable business and continued to court controversy. After fending off a hostile takeover bid by Yankee Oil & Gas in 1983, Resource Exploration suffered through a confusing period in which top management was regularly shuffled. White, in fact, was fired as chief executive officer three times in a single year.
Finally, in 1988 Resource Exploration would come under stable management. Philadelphia businessman Edward E. Cohen and his partners, who included Jack Dorrance, the elderly head of the family that founded Campbell Soups, were looking for the tax shelter benefits of an oil company, but wanted to gain management control to avoid the types of nefarious dealings that so far had marred the existence of Resource Exploration. Cohen also recognized that the company controlled undervalued assets. He was the chairman of the board of Bryn Mawr Resources, Inc., which created a subsidiary it called BMR Newcorp. to hold $600,000 worth of gas and oil properties, in addition to $5 million in cash and no liabilities. It was then sold to Resource Exploration for 2.2 million shares of stock, or roughly a one-third stake in the company. As part of the deal, Bryn Mawr named three directors to the board, including Cohen, who also took over as president and chief executive officer.
Cohen had an unusual background for an executive. In addition to earning a law degree, he received a doctorate from Princeton, where he studied ancient Greek law and economics. He would go on to write three books on ancient Athens. Because of that academic experience, Cohen told a reporter in a 1998 interview with Investor's Business Daily, "I question all kinds of academic theories. I question everything I'm told about business activity, and I tend to be countercyclical." Moreover, he said, "I originally wanted a better understanding of economics to aid my academic research, but I also wanted to be financially independent. It was many years later, after being surrounded by people who in fact wanted to amass all the money there is in the world, that I became infected by a more mercenary system of values. ... I try to be a winner, but I try to be a winner fairly." When he gained control of Resource Exploration at the age of 49, Cohen had 20 years of experience in the banking business. He sat on the board of JeffBanks Inc., founded by his wife Betsy, who served as CEO.
Diversification and Growth Through the 1990s
After changing the name of the company to Resource America in 1989, Cohen began to display his ability to think outside the box. Rather than borrowing heavily to ramp up production in anticipation of rebounding oil prices, he elected to simply pump his existing reserves, earning approximately $10 million in three years. Out of necessity, in 1991 he began to move the company into an entirely new area of business: specialty finance, in particular troubled real estate loans. Because the market was in a downturn, investors were bailing out, enabling Cohen, as usual operating against the grain, to pick up the mortgages at reasonable rates. The loans were typically worth less than $5 million and held by major institutions, which were unwilling to devote the time required to resolve the various issues among their borrowers. The lenders, more interested in obtaining ready cash and ridding themselves of problems, were happy to sell the loans to Resource America at a generous discount to the unpaid principal. Resource America then worked out a payment plan with each of the borrowers, agreeing not to foreclose for a number of years in order to allow the individual properties involved to become profitable. Moreover, the company might even recover its initial investment by selling senior participations in the loans while still retaining an interest. Cohen's willingness to engage in conflict resolution was rewarded with generous profits. By 1994 Resource America would generate $2.5 million in revenues from real estate finance (out of total revenues of $8.2 million). The next year would see real estate revenues increase by 142 percent, reaching $6.1 million (out of total revenues of $11.4 million).
Resource America continued to move away from the energy business in 1995 by becoming involved in the leasing of business equipment, in particular computers. Again, Cohen targeted a niche: in this case, small ticket contracts worth less than $100,000, as opposed to the $50 million-and-over contracts favored by major leasing operations. Whereas computer leasing appeared on the surface to be entirely different from the company's real estate loan business, it also involved mediation and financial expertise. In essence, Resource America served as the connection between the makers of computers and customers. Resource America, well versed in the tax advantages of business leasing, could simply run the finance operations for computer manufacturers. Resource America's entry into leasing was accomplished through the September 1995 acquisition of the leasing operations of The Fidelity Mutual Life Insurance Co. (Fidelity Leasing Corporation) for approximately $1.5 million in cash and the assumption of $312,000 in liabilities. The company then hired an experienced management team to run the subsidiary. Abraham Bertsein was named its chief executive. He had built up the equipment leasing business of Tokai Bank of Japan, experience that led to Resource America winning the contracts to run the equipment leasing operations at a number of banks, including CoreStates Financial Corp. and Bank of America. Moreover, the Fidelity Leasing acquisition brought with it more than 500 leases that provided a revenue stream of $1.1 million for the subsidiary's first year of operation.
With Resource America's real estate loan business thriving in the mid-1990s, Cohen decided to exploit its dealing even further by establishing a Real Estate Investment Trust (REIT), to be run by his wife. REITs were created by Congress in 1960 as a way for small investors to become involved in real estate in a manner similar to mutual funds. REITs could be taken public and their shares traded like those of any other public company. Unlike other companies, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, thus severely limiting the ability of REITs to raise funds internally. During the first 30 years of existence, REITs were hindered in their growth because they were allowed only to own real estate; other parties had to manage the properties. Moreover, the existing tax code made direct real estate investments an attractive tax shelter for many individuals, thereby absorbing funds that might have been invested in REITs. It was the Tax Reform Act of 1986 that began to change the nature of real estate investment. Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, REITs were still not embraced as an investment option in the late 1980s. It was not until the mid-1990s that REITs finally became an attractive option.
In October 1997 Resource America filed papers regarding its proposed REIT, Resource Asset Investment Trust, indicating that it intended to limit its ownership stake to less than 10 percent. The REIT would concentrate on Philadelphia area office and commercial buildings, as well as multifamily residential properties, ranging in price from $2 million to $20 million. Most of its initial portfolio would be bought from Resource America and JeffBank. In contrast to Resource America's real estate business that focused on real estate loans that were on the verge of default, Resource Asset intended to acquire properties that had progressed to the point at which workout provisions were already in effect. In January 1998 Resource Asset sold approximately 3.3 million shares at $15, raising almost $50 million. Resource America bought 500,000 shares, costing $7.5 million.
Resource America enjoyed robust growth through the 1990s, a situation not lost on investors. Revenues reached $17 million in fiscal 1996, then grew to $31.9 million in 1997, and $83.2 million in 1998 when net income soared to $27.6 million. Between January 1996 and January 1997, the company's stock price increased 167 percent, from $8.50 per share to $21.50. In August 1998 Resource America stock was trading higher than $35. The price started to slide, then all but collapsed when the company became the target of a report by the Off Wall Street Consulting Group of Cambridge, Massachusetts, which questioned the accounting practices of Resource America and maintained that the company was severely overvalued. What was at issue were real estate assets that Resource America listed at appraised values rather than what it actually paid for the loans. Resource America's position, backed up by analysts familiar with the field, was that it followed standard accounting practices and that Off Wall Street simply did not understand the business. Nevertheless, in a matter of days the price of the company's stock plunged to a level below $15.
Resource America was not the first firm to conflict with Off Wall Street. Like Cohen, the latter firm's founder, Mark Roberts, came to business with an uncommon background, having studied French literature as an undergraduate at Swarthmore College and graduate student at the University of California at Berkeley. After working in his family's steel service business, he ran another steel business before becoming an investment analyst in New York. He started Off Wall Street in 1990, gaining early recognition for a report critical of TCBY, whose stock plummeted by 75 percent. His report was distributed to a select group of clients who paid in excess of $30,000 a year. Critics of Off Wall Street contended that its reports were used in nothing less than a cynical ploy to drive down a company's stock price for the benefit of short-sellers. Other Off Wall Street targets included Samsonite, Pillotex Corp., and Miller Industries. Claiming to be right about 80 percent of the time, Roberts once recommended a short on America Online, advice that he would later retract.
Resource America vehemently questioned Roberts's criticism. Two weeks later, Off Wall Street issued a follow-up report, correcting what it called a technical point. Again, Roberts called into question Resource America's accounting methods, although he refused to release the report to the press or provide any detailed explanation. Resource America insisted that the new report simply confirmed that Roberts failed to understand the company's specialty business. Nevertheless, the stock price dropped further, losing some 80 percent of its value since the first Off Wall Street Report. The company hired an outside auditor, Grant Thornton LLP, which later in September 1998 announced that Resource America's accounting methods were correct. Roberts dismissed the findings, maintaining that even if the company's accounting methods were technically correct they failed to accurately reflect the "quality of earnings."
Adapting to Circumstances, Planning for the Future: 2000s
No matter the reality of the situation, the perception of Resource America created by the Off Wall Street flap would in many ways shape the future of the company. Even a woefully inadequate offer of $15 per share, from an unknown investment firm, to buy the company was given momentary credence. Cohen announced that if a legitimate offer were made and was priced significantly below $30, his family would possibly make a counteroffer. In the meantime, Resource America carried on growing its business, adding to its energy portfolio by acquiring the Atlas Group and its gas and oil drilling operations. Fidelity Leasing also agreed to purchase the U.S. leasing operation of Japan Leasing Corp. for $38 million and the assumption of debt. JLA Credit Corp. and its $367 million in assets increased Fidelity's total assets to $1.4 billion. Nonplussed by the turmoil swirling around Resource America, Cohen told the press, "None of this has much to do with reality. It has to do with calls from lenders and more margin calls that have people dumping stock. Meanwhile, people like us go about our business operating hugely successful companies and wondering what kind of anti-matter universe we've stumbled into."
Revenues exceeded $140 million in 1999, resulting in net income of $18.4 million. The company even changed its accounting methods. Nevertheless, Resource America faced a shareholder lawsuit that, based on Off Wall Street reporting, essentially accused management of fraud. Despite producing solid results, the company received further criticism for management pay hikes and a resetting of stock option prices, measures which Cohen maintained were necessary to retain his top level staff. The company essentially was forced to develop plans to raise cash by spinning off businesses and selling assets.
In January 2000 Resource America made a public offering of 47 percent of the stock in Atlas Pipeline Partners, which combined the 600-mile pipeline business of Atlas with a subsequent acquisition of Viking Resources Corp. and its 150 miles of pipelines. The offering raised $19.5 million. Fidelity Leasing was then sold in August 2000 to European American Bank for $583 million, which included the assumption of $431 million in third party debt. In fiscal 2000 Resource America did not add any new mortgages to its real estate portfolio. Although the company appeared to be reverting to its earlier existence as an energy company, with most of its activity in 2001 involving new drilling and the acquisition of oil and gas rights, it would not be surprising to see Cohen eventually take Resource America in an entirely new direction.
Principal Subsidiaries: Atlas America, Inc.; Resource Properties, Inc.
Principal Competitors: American Residential Investment Trust; Belden & Blake; Ocwen Financial; Transamerica Corporation.
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