TIPTREE INC. quarterly report, Q1 FY2013

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Business context and reporting period

Care Investment Trust Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Care is a healthcare and senior-housing real estate investment trust, with triple-net-leased properties and a mortgage loan investment. Its portfolio included 19 senior-housing facilities at quarter-end, up from 17 at December 31, 2012. The filing identifies Care Investment Trust—not Tiptree Inc.—as the registrant; it describes a proposed combination with majority owner Tiptree. Care states that it is a voluntary filer and is not subject to Exchange Act filing requirements.

Financial performance and position

  • Revenue: $4.519 million, up 13.7% from $3.975 million in Q1 2012. Rental income was $3.841 million, reimbursable income $0.366 million, and loan investment income $0.312 million.
  • Profitability: GAAP net loss was $0.148 million, or $0.01 per diluted share, versus net income of $0.294 million, or $0.03 per diluted share, a year earlier. Operating expenses were $3.111 million versus $2.617 million; interest expense was $1.651 million versus $1.586 million. FFO was $0.927 million ($0.09 per share) and AFFO was $1.326 million ($0.13 per share), compared with $1.262 million and $0.710 million, respectively, in Q1 2012. FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or earnings.
  • Cash flow: Operating activities used $0.048 million, compared with $1.446 million used in Q1 2012. Investing activities used $18.212 million, principally for the additional interest in the syndicated loan. Financing activities used $0.411 million. Cash declined to $27.757 million from $46.428 million at year-end 2012.
  • Assets and liquidity: Total assets were $208.360 million, versus $185.797 million at year-end. Cash was $27.757 million; the company had no revolving credit facility or other credit line. Management said short-term liquidity was adequate.
  • Debt: Mortgage notes payable were $112.884 million, up from $95.232 million. Contractual mortgage payments, including interest, totaled $136.4 million; approximately $82.4 million was scheduled for 2015. The Bickford loans, approximately $79.1 million at quarter-end, mature in July 2015 and have prepayment restrictions. The filing reports covenant compliance for the Bickford and Greenfield loans.
  • Distributions: A $0.02-per-share Q1 2013 dividend was declared on May 9, payable June 6. The prior quarterly dividend was $0.135 per share.

Material changes versus the prior comparable period

  • Revenue growth mainly reflected two months of income from the February acquisition of a 75% interest in Care Cal JV LLC, which owns two New York senior-housing properties. The properties were approximately 97% occupied at March 31.
  • On March 1, Care bought the remaining approximately two-thirds interest in its Louisiana-secured syndicated loan for about $17.3 million; the acquired portion had approximately $21.8 million of principal outstanding. The loan investment balance rose to $22.576 million from $5.553 million at year-end.
  • Marketing, general and administrative expense increased to $1.533 million from $1.172 million, including Calamar operating costs and legal costs relating to acquisitions and other potential transactions. Depreciation and amortization also increased, partly due to Calamar.
  • Care reported a $0.420 million unrealized derivative gain in Q1 2012; there was no comparable gain in Q1 2013. This contributed to the year-over-year decline in GAAP earnings.
  • Approximately 93% of Q1 2013 revenue came from the Bickford, Calamar and Greenfield tenants, compared with approximately 95% from Bickford and Greenfield in Q1 2012.

Outlook, risks and unusual items

  • Proposed Tiptree combination: Under the proposed transaction, Care would contribute substantially all its assets and liabilities to a new operating subsidiary for an approximately 25% interest; Tiptree would receive approximately 75% and other consideration. The transaction required stockholder and other approvals and was anticipated to close in the first half of 2013; the filing gives no assurance it would close. A special meeting was scheduled for June 12, 2013.
  • REIT status and distributions: Care expected the combined company to cease qualifying as a REIT, with taxable-corporation treatment expected retroactive to January 1, 2013. If completed, the 90% REIT distribution requirement would no longer apply, and the board could reduce distributions. The declared $0.02 dividend was substantially below the prior $0.135 quarterly dividend.
  • Concentration and operating risks: Results rely heavily on a small number of tenants and operators. Risks include tenant or borrower distress, economic and healthcare-regulatory changes, interest rates, refinancing access, real estate values, and dependence on joint-venture partners. A significant downturn or tenant insolvency could impair the company’s ability to meet cash obligations.
  • Debt and acquisition risks: The 2015 Bickford loan maturities create a refinancing risk, and prepayment restrictions limit flexibility. The Calamar purchase-price allocation remained preliminary, and the acquired properties’ mortgages are non-recourse except for customary carveouts.
  • Related-party and transaction items: Care incurred approximately $0.3 million of Q1 transaction expenses for the proposed combination. It also held $1.2 million of notes receivable from Calamar affiliates and remained party to a services agreement with TREIT, an affiliate of Tiptree.
  • Management reported effective disclosure controls and procedures. No material litigation or defaults on senior securities were reported.

Most important facts for investors to verify

  1. Whether the proposed Tiptree contribution transaction closed, its final terms, and the resulting ownership, governance and tax treatment.
  2. Whether the $0.02 dividend signals a sustained change in distribution policy, particularly if REIT status ends.
  3. Plans and available financing to address the substantial 2015 Bickford loan maturities and any refinancing restrictions.
  4. Performance and repayment prospects of the Louisiana loan investment, including collateral value and the difference between its reported carrying amount and estimated fair value.
  5. Tenant concentration, Calamar property performance and final purchase-price allocation, and any material changes in tenant or operator credit quality.