Care Investment Trust Inc. — Q2 2012 Form 10-Q
Entity and period: The filing is for Care Investment Trust Inc. (Care), a healthcare-property REIT controlled by Tiptree Financial Partners, L.P.; it is not a filing by Tiptree Inc. The unaudited quarter and six-month periods ended June 30, 2012. Care states it is a voluntary filer and is not subject to Exchange Act reporting requirements.
Business context and reporting period
Care owned 17 senior-housing facilities and held one remaining loan investment and an interest in one unconsolidated senior-living venture. Its wholly owned properties are leased under triple-net leases. At quarter-end, management characterized the portfolio as approximately 94% wholly owned real estate, 4% loan investment, and 2% joint-venture investment. The Greenfield facilities acquired in 2011 added to the portfolio and contributed to year-over-year revenue growth.
Financial results and key metrics
Amounts below are in millions, except per-share amounts. Balance-sheet figures compare June 30, 2012 with December 31, 2011.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $3.98 | $3.47 | $7.95 | $7.00 |
| Net income (loss) | $(0.24) | $1.07 | $0.06 | $(0.05) |
| Basic EPS | $(0.03) | $0.11 | $0.00 | $(0.00) |
| FFO, non-GAAP | $0.74 | $1.92 | $2.00 | $4.26 |
| AFFO, non-GAAP | $1.15 | $1.44 | $1.85 | $3.53 |
- Revenue and earnings: Q2 revenue increased about 14% year over year; six-month revenue rose about 14%. The company recorded a Q2 loss despite higher revenue. Six-month net income improved from a small loss to modest income.
- Cash flow: Six-month operating cash flow was negative $0.89 million, versus positive $3.20 million a year earlier. Investing activities provided $0.24 million; financing activities used $3.61 million. Cash declined $4.27 million to $48.04 million.
- Assets, debt and liquidity: Total assets were $189.07 million; mortgage notes payable were $95.88 million; total liabilities were $97.85 million; and stockholders’ equity was $91.23 million. Cash was $48.04 million. The filing reports no revolving credit facility or other credit line. Management said liquidity was adequate for short-term needs.
- Debt terms: The $15.5 million floating-rate Greenfield bridge loan was refinanced in April with approximately $15.7 million of fixed-rate loans at 4.76%, maturing in May 2022. The Bickford loans, totaling approximately $79.8 million at quarter-end, mature in July 2015 and have prepayment restrictions. Contractual obligations show $112.3 million of mortgage principal and interest, including a significant 2015 payment concentration.
- Distributions: Care declared quarterly dividends of $0.135 per share, including a second-quarter dividend declared August 9, payable September 6, 2012. Six-month dividends paid totaled $2.79 million.
Material changes versus prior period
- Greenfield, acquired in September 2011, drove most of the revenue increase and also added depreciation, interest expense and reimbursed property expenses.
- Q2 results shifted from $1.07 million net income in 2011 to a $0.24 million loss in 2012. The prior-year quarter included approximately $1.2 million of preferential Cambridge investment income; Care sold its Cambridge interest in November 2011. Q2 2012 also included a $0.42 million unrealized derivative loss, partly offset by an $0.09 million realized gain.
- Six-month interest expense increased to $3.19 million from $2.73 million, mainly due to Greenfield financing and deferred financing-cost amortization. Marketing, general and administrative expense rose to $2.07 million from $1.71 million, reflecting transaction-related professional fees and stock-based compensation.
- Operating cash flow turned negative, in part because 2011 included larger cash distributions from partially owned investments and 2012 included payment of prior-period advisory fees and bonuses.
- On June 30, 2012, TREIT and Tiptree Capital became indirect subsidiaries of Tiptree; the Services Agreement with TREIT remained in effect. The former CFO resigned effective June 23, and interim principal financial and accounting officers were appointed.
Outlook, commentary, risks and unusual items
- Management provided no quantified earnings, revenue or acquisition guidance. It said it would pursue additional healthcare-property investments as suitable opportunities arise and believed existing liquidity and cash flows would meet anticipated needs.
- Management warned that dividends are discretionary and may be reduced or suspended; future distributions depend partly on earnings and REIT requirements.
- Key risks include tenant and operator financial distress, heavy tenant concentration, economic weakness, property-value declines, refinancing and interest-rate risk, healthcare regulation, access to capital, REIT qualification, and related-party conflicts. Bickford and Greenfield tenants together accounted for approximately 95% of revenue in both the three- and six-month 2012 periods.
- The Bickford loans are cross-collateralized and cross-defaulted; the Greenfield loans are also cross-collateralized and cross-defaulted. Breach of applicable covenants could accelerate amounts due. Care reported compliance with financial covenants at June 30.
- The remaining Louisiana loan is a restructured investment with a November 2016 maturity. No loans were on nonaccrual status. Management reported no impairment of wholly owned real estate or the remaining joint-venture investment in the periods presented.
- Care reported no material litigation, no material off-balance-sheet arrangements, and effective disclosure controls. A termination fee potentially payable to TREIT if the Services Agreement is not renewed is not fixed or determinable and was excluded from contractual-obligation totals.
- FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow; their calculation may differ from other REITs’ measures.
Most important facts for investors to verify
- Confirm the filing entity: this is Care Investment Trust Inc., not Tiptree Inc., and Care identifies itself as a voluntary filer.
- Review tenant/operator credit quality and exposure concentration, particularly the approximately 95% revenue dependence on Bickford and Greenfield.
- Assess ability to refinance or repay the large Bickford debt maturity in July 2015, including prepayment restrictions and the 2015 contractual cash requirement.
- Reconcile the $48.04 million cash balance with negative operating cash flow, scheduled debt service and dividends; note the absence of a credit line.
- Examine the causes and sustainability of the Q2 loss and the decline in FFO/AFFO from 2011, including Cambridge’s prior-period contribution and derivative volatility.
- Verify dividend coverage and the implications of discretionary distributions, the REIT distribution requirement, and related-party advisory fees and governance.