Filing summary: Care Investment Trust Inc. (not Tiptree Inc.)
Reporting period: Form 10-Q for the quarter and six months ended June 30, 2011. The filing is for Care Investment Trust Inc., a healthcare-focused REIT; it describes Tiptree as its controlling investor. Results use successor accounting after Tiptree’s August 2010 acquisition of control and push-down purchase accounting, so comparisons with 2010 predecessor results are not fully like-for-like.
Business context and financial highlights
Care held 14 senior-living properties leased to Bickford, interests in medical-office and senior-living investments, and one remaining mortgage loan. At June 30, the company reported $110.4 million of wholly owned real estate, $29.4 million invested in partially owned entities, and a $7.0 million loan investment.
| Metric | Q2 2011 | Six months 2011 |
|---|---|---|
| Total revenue | $3.474 million | $6.995 million |
| Net income (loss) | $1.067 million | $(46,000) |
| Basic EPS | $0.11 | $(0.00) |
| FFO / AFFO, non-GAAP | $1.921 million / $1.440 million | $4.263 million / $3.526 million |
| Cash from operating activities | Not separately stated | $3.199 million |
| Cash from investing activities | Not separately stated | $7.447 million |
| Cash from financing activities | Not separately stated | $(1.740) million |
Amounts are in U.S. dollars; statement figures are in thousands unless otherwise noted. The filing does not provide a clear operating-margin measure. Net income included a substantial equity-method investment contribution in Q2, including a $1.2 million Cambridge preferred return, and should not be read as a direct measure of property operating performance.
Liquidity, debt and distributions
- Cash and cash equivalents were $13.938 million at June 30, versus $5.032 million at December 31, 2010. Total assets were $163.479 million, total liabilities $83.620 million, and mortgage notes payable $81.240 million.
- The two fixed-rate Bickford mortgages mature in July 2015 and have stated rates of 6.845% and 7.17%; annual debt service is approximately $7.7 million. Prepayment restrictions limit refinancing before 2015.
- Care paid a $0.135-per-share dividend in the second quarter and declared another $0.135-per-share dividend for payment September 1, 2011. Management said it believed current liquidity and cash flows were adequate for short-term needs and contractual obligations. The company had no revolving credit facility or other credit line.
Changes versus the prior comparable period
- Q2 revenue decreased 3.2% year over year to $3.474 million; rental revenue rose modestly, but loan-investment income fell to $198,000 from $403,000.
- Q2 net income improved from a $1.902 million loss in 2010 to $1.067 million income. Partially owned entities contributed $1.384 million of income versus a $876,000 loss in the prior-year quarter; management fees and general and administrative expenses also declined.
- Six-month revenue fell 7.3% to $6.995 million, while the net loss narrowed to $46,000 from $10.332 million. Lower loan income was partly offset by lower management/buyout costs and improved results from partially owned entities.
- Six-month operating cash flow improved to $3.199 million from $2.624 million used in 2010. The comparison benefited from the absence of the $7.5 million former-manager buyout payment made in 2010.
- Non-GAAP FFO and AFFO improved from the prior-year six-month losses of $4.073 million and $5.304 million, respectively. The company cautions these measures are not substitutes for GAAP earnings or operating cash flow.
Management commentary, material events and risks
- Bickford covenant issue: Low occupancy at two of 14 properties caused a lease NOI-to-rent-coverage covenant default. A lease default may also constitute a default under both related mortgages, and potential lender action includes acceleration. Care had not received a mortgage notice of default; management was communicating with the servicer and expected no material impact, while monitoring the matter and considering a waiver or modification.
- Remaining loan: Care’s variable-rate $7.0 million loan, secured by senior-care properties, had been extended several times and was scheduled to mature August 19, 2011; lenders and borrowers were negotiating a further extension through October 15. One borrower sued three of the four lenders. Care was not named but disclosed indemnification obligations to a named lender. Contractual default interest was accruing but was not currently payable or recognized as income.
- Cambridge restructuring: Effective April 15, 2011, a settlement ended related litigation and changed Care’s investment to a fixed $40 million investment with a 14% preferred return and a targeted 12% operating cash distribution rate. Cambridge retained rights to 200,000 nonconvertible OP units, and received a warrant to buy 300,000 Care shares at $6.00. The filing reports Cambridge’s portfolio was approximately 92% leased.
- SMC disposition: In May, three of four properties in the Senior Management Concepts portfolio were sold. Care received approximately $6.2 million net proceeds; it retained an interest in the remaining Utah property, reported at approximately 89% occupancy. Care recorded an approximately $77,000 impairment on its SMC investment due to lower occupancy.
- Management described acquisitions as dependent on suitable opportunities and available financing; there was no quantified earnings or acquisition guidance. Care cited risks including healthcare regulation, interest rates, capital availability, operator and borrower performance, real-estate conditions, and REIT qualification. Maintaining REIT status requires distributing at least 90% of REIT taxable income.
Most important facts for investors to verify
- Whether the Bickford coverage default is cured or waived, and whether either mortgage lender takes action.
- Repayment or further extension of the remaining loan, borrower litigation developments, and any resulting indemnification exposure.
- Cash generation and the sustainability of the $0.135 quarterly dividend, considering REIT distribution requirements and the absence of a credit facility.
- Cambridge preferred-return collections and the terms, valuation and potential dilution associated with the OP units and $6.00 warrant.
- Occupancy, cash distributions and impairment risk at the remaining SMC property and across the Bickford portfolio.
- Comparability of reported results: 2010 is a predecessor period, and 2011 reflects post-acquisition push-down accounting; review GAAP earnings alongside FFO, AFFO and cash flows.