TIPTREE INC. quarterly report, Q2 FY2013

Business context and reporting period

Tiptree Financial Inc. (formerly Care Investment Trust Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The reported results are for the pre-reorganization healthcare real estate REIT and are not indicative of the company’s results after its July 1, 2013 combination with Tiptree Financial Partners, L.P. The filing describes the resulting company as a diversified holding company focused on insurance, real estate, asset management and specialty finance.

At June 30, the portfolio included $41.9 million of wholly or majority-owned real estate, a $2.5 million unconsolidated real estate investment and a $22.4 million loan investment. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.

Financial performance and position

• Net income included a $15.463 million net gain from the Bickford Portfolio sale. Excluding that gain, the company reported losses from continuing operations in both the quarter and half-year.
• Q2 revenue growth reflected the February acquisition of the Calamar properties and increased income from the loan investment after purchasing the remaining syndicated-loan interests in March. Continuing-operations expenses rose to $3.654 million from $1.231 million in Q2 2012, including a $1.537 million related-party incentive fee largely associated with the Bickford sale gain.
• Six-month FFO was $0.655 million ($0.06 per share) and AFFO was $1.234 million ($0.12 per share), versus $1.998 million and $1.854 million, respectively, in 2012. These are non-GAAP measures; the filing cautions they are not substitutes for GAAP income or operating cash flow.
• At June 30, cash and cash equivalents were $69.002 million, total assets $142.983 million, mortgage notes payable $33.376 million, total liabilities $37.410 million and stockholders’ equity $105.573 million. At December 31, 2012, cash was $46.428 million, mortgage notes payable $95.232 million and total assets $185.797 million.
• Six-month investing cash flow was $23.940 million, including $44.021 million of Bickford sale proceeds and $17.258 million invested in loans. Financing cash flow was $(2.379) million, including $1.599 million of dividends paid. Cash interest paid was $3.544 million.
• Mortgage debt fell substantially following the Bickford transaction; remaining debt was principally associated with Greenfield and Calamar properties. Contractual mortgage payments and related interest were estimated at $44.3 million in total, with $1.0 million due in 2013 and $34.9 million thereafter.

Material changes versus the prior comparable period

• The June 28 sale of the 14-property Bickford Portfolio generated approximately $44.0 million net cash proceeds and a $15.5 million gain. The buyer-affiliated entity that owned the portfolio remained borrower on approximately $78.8 million of Bickford debt after the sale.
• The company acquired a 75% interest in Care Cal JV LLC in February, consolidating two New York senior-housing properties; the acquisition included assumption of approximately $18.1 million of mortgage debt. It also bought the remaining approximately two-thirds interest in a Louisiana collateralized loan for about $17.3 million.
• Cash increased and reported debt decreased compared with year-end 2012, reflecting the portfolio disposition. Revenue and continuing-operation expenses also increased, in part due to the Calamar acquisition and greater loan ownership.

Outlook, risks and unusual items

• Management stated that consolidated cash, cash equivalents and investments on hand were expected to cover operational and capital requirements for at least the next 12 months, based on current operations. The company anticipated pursuing acquisitions and noted that future funding needs could require debt or equity financing.
• The July 1 contribution transaction is expected to end REIT tax treatment retroactively effective January 1, 2013. The filing estimated approximately $3.5 million of tax related to the transaction and loss of REIT status, and approximately $9.6 million of NOL carryforwards that may be limited under Section 382. The tax effect was still being assessed and was expected to be recorded in Q3.
• Following the change in tax status, the company would no longer face the REIT requirement to distribute at least 90% of taxable income; the board could reduce distributions. A subsequent dividend of $0.02 per Class A share was declared August 8, 2013.
• Revenue was concentrated: Greenfield and Calamar tenants together accounted for approximately 66% of Q2 and 69% of six-month 2013 revenue. The loan investment was concentrated in Louisiana collateral, and approximately $69 million of cash was held with one major financial institution.
• Other stated risks include tenant, borrower and joint-venture counterparty credit; interest rates and refinancing; healthcare regulation; real estate values; access to capital; and integration of acquisitions. The filing reported no material litigation expected to materially affect financial position, results or liquidity; a previously disclosed class action was settled and dismissed, with the relevant subsidiary indemnified by its former parent.
• On August 2, the company entered agreements to acquire two New York assisted-living and memory-care facilities for $21.3 million, subject to agreement terms, with a proposed 12-year triple-net lease. Completion was not established in this filing.

Important facts for investors to verify

• Review subsequent filings for the post-combination company’s actual consolidated results, capital structure and segment performance; this quarter’s figures precede the July reorganization.
• Confirm the final tax accounting for loss of REIT status, the estimated $3.5 million tax, and the availability and Section 382 limitations of NOLs.
• Verify the Bickford sale’s final proceeds, adjustments and treatment of the approximately $78.8 million debt remaining in the sold subsidiary.
• Assess the performance, collateral values and collectability of the Louisiana loan, including the difference between its carrying basis and disclosed estimated fair value.
• Monitor tenant concentration, Calamar and Greenfield property performance, debt maturities and covenants, and the funding and completion of the announced acquisition.