TIPTREE INC. quarterly report, Q3 FY2011

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Business context and reporting period

This is Care Investment Trust Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The filing describes Care as a healthcare-focused equity REIT with senior-housing properties, interests in partially owned real estate entities, and a remaining mortgage loan investment. Tiptree acquired control in August 2010. The filing’s registrant is Care Investment Trust Inc., not Tiptree Inc.; investors should confirm the company identity associated with the request.

Care’s 2010 results are affected by push-down purchase accounting following the Tiptree transaction. The filing presents “predecessor” and “successor” periods on different accounting bases; MD&A also uses a non-GAAP combination of 2010 periods for comparison.

Financial performance and position

Unless noted otherwise, figures are in millions of dollars. GAAP income statement comparisons are not directly like-for-like because of the predecessor/successor accounting periods.

  • Third quarter: Revenue was $3.517, including $3.371 rental income and $0.146 loan income. Net income was $0.535, or $0.05 per basic and diluted share.
  • Nine months: Revenue was $10.512, including $9.923 rental income and $0.589 loan income. Net income was $0.489, or $0.05 per share. Interest expense was $4.139 and depreciation and amortization was $2.620.
  • MD&A’s combined 2010 comparison: Revenue was $3.700 for the quarter and $11.248 for nine months; net losses were $6.993 and $17.325, respectively. Management cautions these combined figures are non-GAAP and combine periods using different accounting bases.
  • Non-GAAP REIT measures: 2011 FFO was $1.404 for the quarter and $5.667 for nine months; AFFO was $1.399 and $4.938, respectively. Per-share FFO/AFFO was $0.14 for the quarter and $0.56/$0.49 for nine months. The company cautions that these measures are not substitutes for GAAP earnings or operating cash flow.
  • Cash flow: Nine-month operating cash flow was $4.591; investing cash flow was negative $12.697; financing cash flow was $11.981. Cash increased $3.875 to $8.907.
  • Balance sheet at September 30: Total assets were $178.630, mortgage notes payable $96.495, total liabilities $99.558, and stockholders’ equity $79.072. Cash was $8.907; real estate, net, was $124.185; partially owned entity investments were $29.121; and loans were $6.285.
  • Distributions: Care declared and paid $0.135 per share in each of the first two quarters and declared a third-quarter dividend of $0.135, payable December 1, 2011. The nine-month cash-flow statement reports $2.743 of dividends paid.

Material changes versus the prior comparable period

  • In MD&A’s combined 2010 comparison, nine-month revenue declined to $10.512 from $11.248, while net results improved to income of $0.489 from a loss of $17.325. The improvement reflects lower management, buyout, legal, and transaction-related costs, as well as changed accounting and economics for the Cambridge investment; it should not be read as a clean underlying year-over-year earnings comparison.
  • Rental income rose modestly in the combined comparison, while loan income fell to $0.589 for nine months from $1.564. Management attributes the decline primarily to principal paydowns and the reduction in the loan portfolio.
  • Care acquired three Virginia assisted-living and memory-care facilities for $20.8 in September, funded with approximately $15.5 of bridge financing and cash. It reported owning 17 senior-living properties at quarter-end, versus 14 at December 31, 2010.
  • Care sold its interest in three of four SMC properties in May, receiving approximately $6.1 net proceeds. The remaining SMC property had approximately 89% occupancy, and Care recorded a $0.1 impairment for the nine-month period.
  • Cash increased from $5.032 at December 31, 2010 to $8.907 at September 30, 2011, while mortgage debt rose from $81.684 to $96.495, principally reflecting the Greenfield bridge loan.

Outlook, commentary, risks and unusual items

  • Management said it believed liquidity was adequate for short-term needs and expected operating cash flows, working capital, and investment receipts to support operations and distributions. The filing provides no earnings or revenue guidance.
  • Bickford covenant issue: Low occupancy at two properties caused a net-operating-income-to-rent coverage covenant default under the Bickford master lease, which also constitutes a default under both related mortgages. Care had proposed a lease modification and expected lender acceptance; it had not received a mortgage default notice. The lender could potentially accelerate the mortgages if the issue is not resolved.
  • Greenfield financing: The $15.5 KeyBank bridge loan bears interest at LIBOR plus 4.00%, is guaranteed by Care up to $5.0, and matures June 20, 2012, subject to a conditional extension. Care intended to refinance with Freddie Mac financing. After quarter-end, Care reported closing a short U.S. Treasury position for a gain of approximately $0.7 in connection with its Freddie Mac mortgage application.
  • Remaining loan: Care’s approximately $6.3 carrying-value loan was past its original maturity and had been extended through October 28, 2011. Restructuring discussions continued, with no assurance as to outcome. Borrowers and related parties filed a lawsuit naming other lenders, not Care; Care may have indemnification obligations to a lender.
  • Cambridge investment: An April 2011 restructuring converted Care’s interest to a $40 fixed investment with a 14% preferred return and a targeted current distribution rate of 12%. In an October 19 amendment, Cambridge could purchase the interest through December 9 for the $40 investment plus accrued unpaid preferred return (approximately $2.0); Cambridge stated its intent to proceed by that date. Care expected approximately $42 of additional cash if the purchase closed. The transaction’s completion and accounting impact remained unresolved in the filing.
  • Interest-rate and market risks include floating-rate Greenfield and loan exposures, financing access, healthcare operator performance, occupancy, and broader economic and credit-market conditions. Care had no interest-rate derivatives outstanding at quarter-end.
  • Care is a REIT and generally must distribute at least 90% of REIT taxable income to maintain its tax status. The company stated that it believed it would continue to qualify.

Most important facts for investors to verify

  1. Confirm the issuer: this filing is for Care Investment Trust Inc.; clarify its relationship to the Tiptree Inc. company named in the request.
  2. Check whether Cambridge completed its stated purchase by December 9, 2011, the cash proceeds received, and the resulting accounting treatment.
  3. Verify resolution of the Bickford lease covenant default and whether the mortgage lender accepted the proposed modification or took other action.
  4. Confirm the remaining loan’s status after its October 28 extension, including restructuring terms, repayments, and any indemnification exposure.
  5. Track refinancing of the Greenfield bridge loan, its maturity and guarantee exposure, and whether permanent financing was completed on acceptable terms.
  6. Assess recurring cash generation and dividend coverage independently of non-GAAP FFO/AFFO, property distributions, and one-time or transaction-related items.