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EX-32.1 - EX-32.1 - TIPTREE INC. | y04886exv32w1.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly period ended June 30, 2011
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 000-54474
Care Investment Trust Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland | 38-3754322 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification Number) |
780 Third Avenue, 21st Floor, New York, New York | 10017 | |
(Address of Registrants principal executive offices) | (zip code) |
(212) 446-1410
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
(Explanatory Note: The registrant is a voluntary filer and is not subject to the filing
requirements of the Securities Exchange Act of 1934. Although not subject to these filing
requirements, Care Investment Trust Inc. has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: As of August 8, 2011, there were 10,156,390 shares, par value
$0.001, of the registrants common stock outstanding.
Care Investment Trust Inc.
INDEX
3
Table of Contents
Part I Financial Information
ITEM 1. Financial Statements.
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(dollars in thousands except share and per share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Successor) | (Successor) | |||||||
Assets: |
||||||||
Real Estate: |
||||||||
Land |
$ | 5,020 | $ | 5,020 | ||||
Buildings and improvements |
102,002 | 102,002 | ||||||
Less: accumulated depreciation and amortization |
(2,845 | ) | (1,293 | ) | ||||
Total real estate, net |
104,177 | 105,729 | ||||||
Cash and cash equivalents |
13,938 | 5,032 | ||||||
Investment in loans |
6,971 | 8,552 | ||||||
Investments in partially-owned entities |
29,391 | 39,200 | ||||||
Accrued interest receivable |
20 | 64 | ||||||
Identified intangible assets leases in place, net |
6,218 | 6,477 | ||||||
Other assets |
2,764 | 1,822 | ||||||
Total Assets |
$ | 163,479 | $ | 166,876 | ||||
Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Mortgage notes payable |
$ | 81,240 | $ | 81,684 | ||||
Accounts payable and accrued expenses |
1,561 | 1,570 | ||||||
Accrued expenses payable to related party |
225 | 39 | ||||||
Obligation to issue operating partnership units |
463 | 2,095 | ||||||
Other liabilities |
131 | 525 | ||||||
Total Liabilities |
83,620 | 85,913 | ||||||
Commitments and Contingencies |
||||||||
Stockholders Equity |
||||||||
Preferred stock; $0.001 par value, 100,000,000 shares authorized, none issued or outstanding |
| | ||||||
Common stock: $0.001 par value, 250,000,000 shares authorized 10,154,294 and 10,064,982
shares issued and outstanding, respectively |
11 | 11 | ||||||
Additional paid-in capital |
83,729 | 83,416 | ||||||
Accumulated deficit |
(3,881 | ) | (2,464 | ) | ||||
Total Stockholders Equity |
79,859 | 80,963 | ||||||
Total Liabilities and Stockholders Equity |
$ | 163,479 | $ | 166,876 | ||||
See Notes to Condensed Consolidated Financial Statements
4
Table of Contents
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(dollars in thousands except share and per share data)
Three Months | Three Months | Six Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Successor) | (Predecessor) | (Successor) | (Predecessor) | |||||||||||||
Revenue: |
||||||||||||||||
Rental income |
$ | 3,276 | $ | 3,187 | $ | 6,552 | $ | 6,401 | ||||||||
Income from investments in loans |
198 | 403 | 443 | 1,147 | ||||||||||||
Total Revenue |
3,474 | 3,590 | 6,995 | 7,548 | ||||||||||||
Expenses |
||||||||||||||||
Base management and services fees and buyout payments to
related party |
99 | 375 | 203 | 8,304 | ||||||||||||
Incentive fee to related party |
176 | | 481 | | ||||||||||||
Marketing, general and administrative (including stock-based
compensation of $15 and $49 and $45 and $113, respectively) |
1,202 | 2,367 | 2,340 | 4,183 | ||||||||||||
Depreciation and amortization |
868 | 841 | 1,736 | 1,683 | ||||||||||||
Realized gain on sales and repayments of loans |
| | | (4 | ) | |||||||||||
Adjustment to valuation allowance on loans held at LOCOM |
| (84 | ) | | (829 | ) | ||||||||||
Operating Expenses |
2,345 | 3,499 | 4,760 | 13,337 | ||||||||||||
(Income) or loss from investments in partially-owned entities, net |
(1,384 | ) | 876 | (771 | ) | 1,459 | ||||||||||
Net unrealized (gain) or loss on derivative instruments |
| (310 | ) | 255 | 268 | |||||||||||
Impairment
of investments |
77 | | 77 | | ||||||||||||
Interest income |
(5 | ) | (31 | ) | (8 | ) | (79 | ) | ||||||||
Interest expense including amortization and write-off of deferred
financing costs |
1,374 | 1,458 | 2,728 | 2,895 | ||||||||||||
Net income (loss) |
$ | 1,067 | $ | (1,902 | ) | $ | (46 | ) | $ | (10,332 | ) | |||||
Net income or (loss) per share of common stock |
||||||||||||||||
Net income (loss), basic |
$ | 0.11 | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.34 | ) | |||||
Net income (loss), diluted |
$ | 0.10 | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.34 | ) | |||||
Weighted average common shares outstanding, basic |
10,149,562 | 30,344,489 | 10,145,018 | 30,326,975 | ||||||||||||
Weighted average common shares outstanding, diluted |
10,167,272 | 30,344,489 | 10,145,018 | 30,326,975 | ||||||||||||
Dividends declared per common share |
$ | 0.135 | $ | | $ | 0.135 | $ | | ||||||||
See Notes to Condensed Consolidated Financial Statements
5
Table of Contents
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders Equity
(Unaudited)
(dollars in thousands, except share data)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | $ | Capital | Deficit | Total | ||||||||||||||||
Balance at December 31, 2010 |
10,064,982 | $ | 11 | $ | 83,416 | $ | (2,464 | ) | $ | 80,963 | ||||||||||
Net loss |
| | | (46 | ) | (46 | ) | |||||||||||||
Stock-based compensation to Directors for services |
6,068 | * | 30 | | 30 | |||||||||||||||
Stock-based compensation to Employees (1) |
73,999 | * | * | | | |||||||||||||||
Issuance of stock for related party incentive fee (2) |
9,245 | * | 61 | | 61 | |||||||||||||||
Warrant issued |
| | 222 | | 222 | |||||||||||||||
Dividends |
| | | (1,371 | ) | (1,371 | ) | |||||||||||||
Balance at June 30, 2011 |
10,154,294 | $ | 11 | $ | 83,729 | $ | (3,881 | ) | $ | 79,859 | ||||||||||
* | Less than $500 | |
(1) | Shares issued to employees on January 3, 2011, pursuant to 2010 employment agreements which was recognized as compensation expense during the fourth quarter of 2010. | |
(2) | Shares issued to TREIT Management LLC on May 16, 2011 as part of an incentive fee pursuant to the Services Agreement for the three-month period ended March 31, 2011. |
See Notes to Condensed Consolidated Financial Statements
6
Table of Contents
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2011 | 2010 | |||||||
(Successor) | (Predecessor) | |||||||
Cash Flow From Operating Activities |
||||||||
Net loss |
$ | (46 | ) | $ | (10,332 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||
Increase in deferred rent receivable |
(1,189 | ) | (1,139 | ) | ||||
Realized gain on sale and repayment of loans |
| (4 | ) | |||||
(Income) loss from investments in partially-owned entities |
(771 | ) | 1,459 | |||||
Impairment of investments |
77 | | ||||||
Distribution of income from partially-owned entities |
2,763 | 3,469 | ||||||
Amortization of above-market leases |
104 | | ||||||
Amortization and write-off of deferred financing costs |
| 65 | ||||||
Amortization of deferred loan fees |
| (15 | ) | |||||
Stock-based compensation |
30 | 113 | ||||||
Non-cash incentive fee |
61 | | ||||||
Depreciation and amortization on real estate and fixed assets, including intangible assets |
1,736 | 1,683 | ||||||
Unrealized loss on derivative instruments |
255 | 268 | ||||||
Adjustment to valuation allowance on investment in loans held at LOCOM |
| (829 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accrued interest receivable |
44 | 121 | ||||||
Other assets |
371 | 848 | ||||||
Accounts payable and accrued expenses |
(10 | ) | 275 | |||||
Other liabilities including payable to related parties |
(226 | ) | 1,394 | |||||
Net cash provided by (used in) operating activities |
3,199 | (2,624 | ) | |||||
Cash Flow From Investing Activities |
||||||||
Sale of loans to third parties |
| 5,880 | ||||||
Fixed asset purchases |
(228 | ) | | |||||
Loan repayments |
1,582 | 10,707 | ||||||
Return of investment in partially owned entities |
6,093 | | ||||||
Investments in partially-owned entities |
| (687 | ) | |||||
Net cash provided by investing activities |
7,447 | 15,900 | ||||||
Cash Flow From Financing Activities |
||||||||
Principal payments under mortgage notes payable |
(369 | ) | (401 | ) | ||||
Repurchases of common stock |
| (490 | ) | |||||
Dividends paid |
(1,371 | ) | (3 | ) | ||||
Net cash used in financing activities |
(1,740 | ) | (894 | ) | ||||
Net increase in cash and cash equivalents |
8,906 | 12,382 | ||||||
Cash and cash equivalents, beginning of period |
5,032 | 122,512 | ||||||
Cash and cash equivalents, end of period |
$ | 13,938 | $ | 134,894 | ||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash paid for interest |
$ | 1,419 | $ | 2,800 | ||||
Non-cash financing and investing activities: |
||||||||
Warrant issued |
$ | 222 | $ | | ||||
Modification of Operating Partnership Units |
$ | (1,870 | ) | $ | | |||
See Notes to Condensed Consolidated Financial Statements
7
Table of Contents
Care Investment Trust Inc. and Subsidiaries Notes to
Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011
Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011
Note 1 Organization
Care Investment Trust Inc. (together with its subsidiaries, the Company or Care unless
otherwise indicated or except where the context otherwise requires, we, us or our) is a real
estate investment trust (REIT) with a geographically diverse portfolio of senior housing and
healthcare-related assets in the United States of America. From inception through November 16,
2010, Care was externally managed and advised by CIT Healthcare LLC (CIT Healthcare). Upon
termination of CIT Healthcare as our external manager, Care moved to a hybrid management structure
whereby it internalized its senior management and entered into a services agreement (the Services
Agreement) with TREIT Management, LLC (TREIT), which is an affiliate of Tiptree Capital
Management, LLC (Tiptree Capital), by which Tiptree Financial Partners, L.P. (Tiptree) is
externally managed. Tiptree acquired control of Care on August 13, 2010, as discussed further in
Note 2. As of June 30, 2011, Cares
portfolio of assets consisted of owned real estate of senior housing
facilities and, medical office properties as well as mortgage
loans on senior housing facilities and
healthcare related assets. Our owned senior housing facilities are leased, under triple-net
leases, which require the tenants to pay all property-related expenses.
Care elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable
year ended December 31, 2007. To maintain our tax status as a REIT, we are required to distribute
at least 90% of our REIT taxable income to our stockholders. At present, Care does not have any
taxable REIT subsidiaries (TRS), but in the normal course of business we expect to form such
subsidiaries as necessary.
Note 2 Basis of Presentation and Significant Accounting Policies
Basis of Presentation
On August 13, 2010, Care completed the sale of control of the Company to Tiptree through a
combination of a $55.7 million equity investment by Tiptree in newly issued common stock of the
Company at $9.00 per share (prior to the Companys announcement of a three-for-two stock split in
September 2010), and a cash tender (the Tender Offer) by the Company for all of the Companys
previously issued and outstanding shares of common stock (the Tiptree Transaction). Approximately
97.4% of previously existing stockholders tendered their shares in connection with the Tiptree
Transaction, and the Company simultaneously issued to Tiptree approximately 6.19 million newly
issued shares of the Companys common stock, representing ownership of approximately 92.2% of the
outstanding common stock of the Company. Pursuant to the Tiptree Transaction, CIT Healthcare ceased
management of the Company as of November 16, 2010. Since such time, Care has been managed through a
combination of internal management and a services agreement with TREIT.
The Tiptree Transaction was accounted for as a purchase in accordance with Accounting
Standards Codification (ASC) 805 Business Combinations, (ASC 805) and the purchase price was
pushed-down to the Companys consolidated financial statements in accordance with SEC Staff
Accounting Bulletin Topic 5J (New Basis of Accounting Required in Certain Circumstances). When
using the push-down basis of accounting, the acquired companys separate financial statements
reflect the new accounting basis recorded by the acquiring company. Accordingly, Tiptrees purchase
accounting adjustments have been reflected in the Companys financial statements for the period
commencing on August 13, 2010. The new basis of accounting reflects the estimated fair value of the
Companys assets and liabilities as of the date of the Tiptree Transaction.
As a result of the Tiptree Transaction, the period from January 1, 2010 to June 30, 2010, for
which the Companys results of operations, financial position and cash flows are presented, is
reported as the Predecessor period. The period from January 1, 2011 through June 30, 2011, for
which the Companys results of operations, financial position, and cash flows are presented, is
reported as the Successor period as well as the Companys financial position as of December 31,
2010.
8
Table of Contents
The following table shows fair value of assets and liabilities on the date of the Tiptree
Transaction resulting in an adjustment to paid-in capital of approximately $22.7 million:
Dollars in thousands | Fair Value as of | |||
Item | August 13, 2010 | |||
Assets: |
||||
Real Estate, Net |
$ | 107,022 | ||
Cash |
12,239 | |||
Investments in loans |
9,553 | |||
Investments in partially-owned entities |
43,350 | |||
Accrued interest receivable |
127 | |||
Identified intangible assets leases in place |
6,693 | |||
Other assets |
294 | |||
Total assets |
$ | 179,278 | ||
Liabilities: |
||||
Mortgage notes payable |
$ | 82,074 | ||
Accounts payable and accrued expenses |
7,512 | |||
Accrued expenses payable to related party |
3,186 | |||
Obligation to issue operating partnership units |
2,932 | |||
Other liabilities |
525 | |||
Total liabilities |
96,229 | |||
Fair value of net assets acquired |
83,049 | |||
Cash paid by Tiptree for 6,185,050 shares at $9.00 per share |
55,665 | |||
Shares not tendered, 523,874 shares at $9.00 per share |
4,715 | |||
Adjustment to additional paid-in capital to reflect fair value |
22,669 | |||
Total equity |
$ | 83,049 | ||
For purposes of determining estimated fair value of the assets and liabilities of the Company
as of August 13, 2010, historical values were used for cash and cash equivalents as well as short
term receivables and payables, which approximated fair value. For real estate, investments in
loans, investments in partially-owned entities, leases in-place and mortgage notes payable, the
value for each such item was independently determined using internal models, based on historical
operating performance, in order to determine projections for future performance and applying
available current market data, including, but not limited to, published industry discount and
capitalization rates for similar or comparable items, historical appraisals and applicable interest
rates on newly originated mortgage financing as adjusted to take into consideration other relevant
variables.
The accompanying condensed consolidated financial statements are unaudited. In our opinion,
all estimates and adjustments (which include fair value adjustments related to the acquisition and
normal recurring adjustments) necessary to present fairly the financial position, results of
operations and cash flows have been made. The condensed consolidated balance sheet as of December
31, 2010 has been derived from the audited consolidated balance sheet as of that date. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of America (GAAP)
have been omitted in accordance with Article 10 of Regulation S-X and the instructions to Form
10-Q. These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2010, as filed with the Securities and Exchange Commission
(SEC). The results of operations for the three and six months ended June 30, 2011 are not
necessarily indicative of the operating results for the full year ending December 31, 2011.
Consolidation
The consolidated financial statements include our accounts and those of our subsidiaries,
which are wholly-owned or controlled by us. All intercompany balances and transactions have been
eliminated. Our consolidated financial statements are prepared in accordance with GAAP, which
require us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ materially from those estimates.
9
Table of Contents
Comprehensive Income
The Company has no items of other comprehensive income, and accordingly net income (loss) is
equal to comprehensive income (loss) for all periods presented.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less
from the date of purchase to be cash equivalents. Included in cash and cash equivalents at June 30,
2011 and December 31, 2010, are approximately $0.1 million and $0.5 million, respectively, in
customer deposits maintained in an unrestricted account.
Real Estate and Identified Intangible Assets
Real estate and identified intangible assets are carried at cost, net of accumulated
depreciation and amortization. Betterments, major renewals and certain costs directly related to
the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is provided on a straight-line basis over the
assets estimated useful lives which range from 7 to 40 years.
We assess fair value based on estimated cash flow projections that utilize appropriate
discount and capitalization rates and available market information. Estimates of future cash flows
are based on a number of factors including the historical operating results, known trends, and
market/economic conditions that may affect the property.
Our properties, including any related intangible assets, are regularly reviewed for impairment
under ASC 360-10-35-15, Impairment or Disposal of Long-Lived Assets, (ASC 360-10-35-15).
Impairment exists when the carrying amount of an asset exceeds its fair value. An impairment loss
is measured based on the excess of the carrying amount over the fair value. We determine fair value
by using a discounted cash flow model and an appropriate discount rate. The evaluation of
anticipated cash flows is subjective and is based, in part, on assumptions regarding future
occupancy, rental rates and capital requirements that could differ materially from actual results.
If our anticipated holding periods change or estimated cash flows decline based on market
conditions or otherwise, an impairment loss may be recognized.
Investments in Loans
We account for our investment in loans in accordance with ASC 948, Financial Services
Mortgage Banking (ASC 948), which codified the Financial Accounting Standards Boards (FASB)
Accounting for Certain Mortgage Banking Activities. Under ASC 948, loans expected to be held for
the foreseeable future or to maturity should be held at amortized cost, and all other loans should
be held at lower of cost or market (LOCOM), measured on an individual basis. In accordance with
ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company includes nonperformance
risk in calculating fair value adjustments. As specified in ASC 820, the framework for measuring
fair value is based on independent observable, if available, or unobservable inputs of market data.
The Company determined and recorded the fair value of its remaining loan as of August 13, 2010
in conjunction with the Companys decision to adopt push-down accounting following the Tiptree
Transaction, and such loan is carried on the June 30, 2011 and December 31, 2010 balance sheets at
its amortized cost basis, net of an allowance recorded in 2010 for unrealized losses of
approximately $0.4 million, in accordance with the Companys intent to hold the loan to maturity.
For loans held-for-investment, interest income is recognized using the interest method or on a
basis approximating a level rate of return over the term of the loan. Nonaccrual loans are those on
which the accrual of interest has been suspended. Loans are placed on nonaccrual status and
considered nonperforming when full payment of principal and interest is in doubt, or when principal
or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal
and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status
is reversed against interest income. In addition, the amortization of net deferred loan fees is
suspended. Interest income on nonaccrual loans may be recognized only to the extent it is received
in cash. However, where there is doubt regarding the ultimate collectability of loan principal,
cash receipts on such nonaccrual loans are applied to reduce the carrying value of such loans.
Nonaccrual loans may be returned to accrual status when repayment is reasonably assured and there
has been demonstrated performance under the terms of the loan or, if applicable, the restructured
terms of such loan. The Company did not have any loans on non-accrual status as of June 30, 2011
and December 31, 2010.
10
Table of Contents
Currently, our intent is to hold our remaining loan investment, in which we are a participant
in a larger credit facility, to maturity, and we have therefore reflected this investment at its
amortized cost basis on the June 30, 2011 and December 31, 2010 consolidated balance sheets.
Investments in the loans amounted to approximately $7.0 million and approximately $8.6 million at
June 30, 2011 and December 31, 2010, respectively. This mortgage loan was originally scheduled to
mature on February 1, 2011. The loan maturity has been extended several times, most recently to
August 19, 2011, and the parties are currently negotiating an extension of the credit facility
through October 15, 2011. In the course of negotiations, one of the borrowers filed a lawsuit in
which three (3) of the four (4) lenders in the credit facility are named. While Care is not named
in the lawsuit, the Company does have certain indemnification obligations to one of the named
syndicated lenders (see Notes 4 and 12). As part of an earlier extension, default interest shall
accrue and is not paid currently. Accordingly, amounts attributable to default interest shall not
be recognized until received. In addition, in February 2011, the lender consortium agreed to
liquidate an existing capital expense reserve. Our share of this reserve was approximately $1.0
million, which we received in February 2011 and treated as a partial principal pay down.
Coupon interest on the loans is recognized as revenue when earned. Receivables are evaluated
for collectability. If the fair value of a loan held at LOCOM by Predecessor was lower than its
amortized cost, changes in fair value (gains and losses) were reported through the consolidated
statement of operations. Loans previously written down may be written up based upon subsequent
recoveries in value, but not above their cost basis.
Expense for credit losses in connection with loan investments is a charge to earnings to
increase the allowance for credit losses to the level that management estimates to be adequate to
cover probable losses considering delinquencies, loss experience and collateral quality. Impairment
losses are taken for impaired loans based on the fair value of collateral on an individual loan
basis. The fair value of the collateral may be determined by an evaluation of operating cash flow
from the property during the projected holding period, and/or estimated sales value computed by
applying an expected capitalization rate to the stabilized net operating income of the specific
property, less selling costs. Whichever method is used, other factors considered relate to
geographic trends and project diversification, the size of the portfolio and current economic
conditions. Based upon these factors, we will establish an allowance for credit losses when
appropriate. When it is probable that we will be unable to collect all amounts contractually due,
the loan is considered impaired.
Investment in Partially-Owned Entities
We invest in preferred equity interests that allow us to participate in a percentage of the
underlying propertys cash flows from operations and proceeds from a sale or refinancing. At the
inception of the investment, we must determine whether such investment should be accounted for as a
loan, joint venture or as real estate. Care held two equity investments as of June 30, 2011 and
December 31, 2010 and accounts for both such investments under the equity method.
The Company assesses whether there are indicators that the value of its partially owned
entities may be impaired. An investments value is impaired if the Company determines that a
decline in the value of the investment below its carrying value is other than temporary. To the
extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of
the investment over the estimated value of the investment. The Company recognized an impairment on
investments of its partially owned entities of approximately $0.1 million for the three and six
month periods ended June 30, 2011 related to the Companys
SMC investment due to lower occupancy.
Derivative Instruments Obligation to issue Operating Partnership Units
We account for derivative instruments in accordance with ASC 815, Derivatives and Hedging
(ASC 815). In the normal course of business, we may use a variety of derivative instruments to
manage, or hedge, interest rate risk. We will require that hedging derivative instruments be
effective in reducing the interest rate risk exposure they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Some derivative instruments may be
associated with an anticipated transaction. In those cases, hedge effectiveness criteria also
require that it be probable that the underlying transaction will occur. Instruments that meet these
hedging criteria will be formally designated as hedges at the inception of the derivative contract.
To determine the fair value of derivative instruments, we may use a variety of methods and
assumptions that are based on market conditions and risks existing at each balance sheet date. For
the majority of financial instruments including most derivatives, long-term investments and
long-term debt, standard market conventions and techniques such as discounted cash flow analysis,
option-pricing models, replacement cost, and termination cost are likely to be used to determine
fair value. All methods of assessing fair value result in a general approximation of fair value,
and such value may never actually be realized.
We may use a variety of commonly used derivative products that are considered plain vanilla
derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. We
expressly prohibit the use of unconventional derivative instruments
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and using derivative instruments for trading or speculative purposes. Further, we have a
policy of only entering into contracts with major financial institutions based upon their credit
ratings and other factors; therefore, we do not anticipate nonperformance by any of our
counterparties.
As of and for the periods ending June 30, 2011 and December 31, 2010, we were not party to any
derivative instruments, except for the operating partnership units
issued in conjunction with the Cambridge investment as described in Note 5.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended. To qualify as a REIT, we must meet certain organizational and operational
requirements, including a requirement to distribute at least 90% of our REIT taxable income to
stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income
that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we
will then be subject to federal income tax on our taxable income at regular corporate rates and we
will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost unless the Internal Revenue Service
grants us relief under certain statutory provisions. Such an event could materially adversely
affect our net income and net cash available for distributions to stockholders. However, we believe
that we will continue to operate in such a manner as to qualify for treatment as a REIT for federal
income tax purposes. We may, however, be subject to certain state and local taxes.
All tax years from 2007 forward remain open for examination by Federal, state and local taxing
authorities. The Company does not have any uncertain tax positions as of June 30, 2011.
Earnings per Share
We present basic earnings per share or EPS in accordance with ASC 260, Earnings per Share
(ASC 260). Basic EPS excludes dilution and is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur, if securities or other contracts to issue common stock were exercised or
converted into common stock where such exercise or conversion would result in a lower EPS amount.
For the three months ended June 30, 2011, the original operating partnership units
issued at the time we acquired
the Cambridge investment (and which are no longer convertible into
the Companys common stock as of April 15, 2011)
were not dilutive to EPS. For the six month period ended June 30, 2011 and the three and six month periods ended June
30, 2010, basic and diluted EPS did not include operating partnership units that were outstanding
prior to April 15, 2011 as they were anti-dilutive. For the
three month period ended June 30, 2011, diluted EPS included the
warrant issued to Cambridge (The Warrant) as part of the restructuring of our
investment because the average market price was more than the
exercise price. For the six month period ended June 30, 2011, basic
and diluted EPS did not include the Warrant issued to Cambridge as it
was anti-dilutive.
As described in Note 5, on April 14, 2011 (effective April 15, 2011), our Cambridge investment
was restructured and the operating partnership units issued in connection with the Cambridge
investment are no longer redeemable for or convertible into shares of our common stock.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Significant estimates are made for the valuation allowance on investment in
loans, valuation of financial instruments, fair value assessments with respect to the Companys
decision to implement push-down accounting as part of its change of control and impairment
assessments. Actual results could differ from those estimates.
Concentrations of Credit Risk
Real estate and financial instruments, primarily consisting of cash, mortgage loan investments
and interest receivable, potentially subject us to concentrations of credit risk. We may place our
cash investments in excess of insured amounts with high quality financial institutions. We perform
ongoing analysis of credit risk concentrations in our real estate and loan investment portfolios by
evaluating exposure to various markets, underlying property types, investment structure, term,
sponsors, tenant mix and other credit metrics. The collateral securing our investments in loans are
real estate properties located in the United States of America.
In addition, we are required to disclose fair value information about financial instruments,
whether or not recognized in the financial statements, for which it is practical to estimate that
value. In cases where quoted market prices are not available, fair value is based upon the
application of discount rates to estimated future cash flows based on market yields or other
appropriate valuation methodologies. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the
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estimates presented herein are not necessarily indicative of the amounts we could realize on
disposition of the financial instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year
presentation.
Recent Accounting Pronouncements
In April 2011, the FASB issued Accounting Standards Update (ASU) 2011-02, Receivables (Topic
310): A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU
2011-02). ASU
2011-02 provides amendments to Topic 310 to clarify which loan modifications constitute troubled
debt restructurings. It is intended to assist creditors in determining whether a modification of
the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both
for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.
For public companies, the new guidance is effective for interim and annual periods beginning on or
after June 15, 2011, and applies retrospectively to restructurings occurring on or after the
beginning of the fiscal year of adoption. Early adoption is permitted. The Company is currently
evaluating the impact on its results of operations or financial position of the adoption of this
standard.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs (ASU
2011-04). The amendments in ASU 2011-04 change the wording used to describe many of the
requirements in GAAP for measuring fair value and for disclosing information about fair value
measurements. The amendments are intended to create comparability of fair value measurements
presented and disclosed in financial statements prepared in accordance with GAAP and International
Financial Reporting Standards. ASU 2011-04 is effective for interim and annual periods beginning
after December 15, 2011. The Company does not expect the adoption of this standard to have a
material effect on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (ASU
2011-05), which requires an entity to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05
eliminates the option to present components of other comprehensive income as part of the statement
of equity. This ASU does not change the items that must be reported in other comprehensive income.
ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The
Company does not expect the adoption of this standard to have a material effect on its consolidated
financial statements.
Note 3 Investments in Real Estate
As of June 30, 2011 and December 31, 2010, we owned 14 senior living properties of which six
(6) are located in Iowa, five (5) in Illinois, two (2) in Nebraska and one (1) in Indiana. The
properties were acquired in two separate transactions from Bickford Senior Living Group LLC, an
unaffiliated party, in 2008. The initial transaction was completed on June 26, 2008, whereby we
acquired 12 of the aforementioned 14 senior living properties for approximately $100.8 million.
Concurrent with that purchase, we leased those properties to Bickford Master I, LLC (the Master
Lessee or Bickford), for an initial annual base rent of $8.3 million and additional base rent of
$0.3 million, with fixed escalations of 3.0% per annum for 15 years. The lease provides for four
(4) renewal options of ten (10) years each. The additional
base rent was deferred and accrued for
the first three (3) years of the initial lease term and then is paid over a 24 month period
commencing with the first month of the fourth year (July of 2011). We funded this acquisition using
cash on hand and mortgage financing of $74.6 million (see Note 7).
On September 30, 2008, we purchased the remaining two (2) Bickford senior living properties
for approximately $10.3 million. Concurrent with the purchase, we amended the aforementioned lease
with Bickford (the Bickford Master Lease) to include these two (2) properties at an initial
annual base rent of $0.8 million and additional base rent of $0.03 million with fixed escalations
of 3% per annum for 14.75 years (the remaining term of the Bickford Master Lease). The additional
base rent was deferred and accrued for the first 33 months of the initial lease term and then is
paid over a 24 month period starting with the first month of the fourth year (July of 2011). We
funded this acquisition using cash on hand and mortgage financing of $7.6 million (see Note 7).
As an enticement for the Company to enter into the leasing arrangement for the properties,
Care received additional collateral and guarantees of the lease obligation from parties affiliated
with Bickford who act as subtenants under the Bickford Master Lease. The
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additional collateral pledged in support of Bickfords obligation to the lease commitment
included properties and ownership interests in affiliated companies of the subtenants. In June of
2011, Care released its 49% equity pledge on one (1) of these properties in exchange for: (i) a 49%
equity pledge on a different Bickford property located in Sioux City, Iowa and (ii) purchase
options on three (3) additional Bickford properties located in Iowa and a fourth Bickford property
located in Indiana.
Additionally, as part of the June 26, 2008 transaction, we sold back a property acquired on
March 31, 2008 from Bickford Senior Living Group, LLC. The property was sold at its net carrying
amount, which did not result in a gain or a loss to the Company.
In connection with the Tiptree Transaction discussed in Note 2, the Company completed an
assessment of the allocation of the fair value of the acquired assets (including land, buildings,
equipment and in-place leases) in accordance with ASC 805 and ASC 350, Intangibles Goodwill and
Other. Based upon that assessment, the allocation of the fair value on August 13, 2010 of the
Bickford assets acquired was as follows (in millions):
Buildings and improvements |
$ | 95.6 | ||
Furniture, fixtures and equipment |
6.4 | |||
Land |
5.0 | |||
Identifiable intangibles leases in-place including above market leases |
6.7 | |||
Total |
$ | 113.7 | ||
As
of June 30, 2011, the properties owned by Care and leased to
Bickford were 100% managed and
operated by Bickford Senior Living Group, LLC. Due to low occupancy at two (2) of the 14 properties, there is a covenant default under the
Bickford Master Lease as net operating income (NOI) for the quarter was not sufficient to satisfy
the NOI to lease payment coverage ratio covenant. Under the Companys mortgage documents with its
secured lender for these properties, a default under the Master Lease constitutes a default under
both mortgages. Accordingly, management is in communication with the mortgage loan servicer in
regard to the aforementioned covenant default under the Bickford Master Lease. To date, the
Company has not been provided with or received a notice of default with regard to the Bickford
mortgages. Management currently anticipates that such covenant default will not have a material
impact on the financial statements, operations and/or the liquidity of the Company.
Notwithstanding the foregoing, potential lender actions as a result of the default include an
acceleration of the mortgages. Accordingly, management is actively monitoring the situation and
will continue its efforts to resolve this issue in a timely manner, including, if appropriate,
seeking a waiver of such default and/or a modification of the applicable provision in the loan
documents.
Note 4 Investments in Loans
As of June 30, 2011 and December 31, 2010, we maintain one loan investment of approximately
$7.0 million and approximately $8.6 million, respectively. Prior to September 30, 2010, we carried
our loan investments at LOCOM. Our intent is to hold our remaining loan investment to maturity, and
we have therefore reflected this loan at its amortized cost basis, subject to impairment, on the
June 30, 2011 and December 31, 2010 balance sheets. The principal amortization portion of payments
received is applied to the carrying value of the loan.
Our loan investments have historically included senior loans and participations secured
primarily by real estate and other collateral in the form of pledges of ownership interests, direct
liens or other security interests and have been in various geographic markets in the United States.
Our remaining mortgage loan investment at June 30, 2011 and December 31, 2010, in which we are a
participant in a larger credit facility, is a variable rate loan that was scheduled to mature on
February 1, 2011. The agent for the credit facility has been engaged in discussions with the
borrowers with respect to repayment of the credit facility, and in connection with these
negotiations the lender consortium and the borrowers have agreed to several extensions of the loan
maturity, the most recent being August 19, 2011. Borrowers and lenders are currently negotiating an
additional extension of the credit facility through October 15, 2011. In the course of
negotiations, one of the borrowers filed a lawsuit in which three (3) of the four (4) lenders in
the credit facility are named. While Care is not named in the lawsuit, the Company does have
certain indemnification obligations to one of the named syndicated lenders (See Note 12). As part
of an earlier extension, the borrowers will continue to pay scheduled principal and interest
payments, and default interest due on the credit facility shall
contractually accrue and is not payable
currently. Accordingly amounts attributable to default interest shall not be recognized until
received. In addition, in February 2011, the lenders agreed to liquidate an existing capital
expense reserve. Our share of this reserve was approximately $1.0 million which we received in
February 2011 and treated as a partial principal pay down.
Blended | ||||||||||||||||||||
Cost | Base | |||||||||||||||||||
Location | Basis | Interest | Maturity | |||||||||||||||||
Collateral Type | City | State | (000s) | Rate (1) | Date (2) | |||||||||||||||
June 30, 2011 |
||||||||||||||||||||
Senior Nursing Facilities/
Senior Apartments/Assisted Living Facilities |
Various | Texas/Louisiana | $ | 6,971 | L+4.02% | 8/19/11 | ||||||||||||||
Investments in Loans |
$ | 6,971 | ||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||
Senior Nursing Facilities/
Senior Apartments/Assisted Living Facilities |
Various | Texas/Louisiana | $ | 8,995 | L+4.06% | 2/21/11 | ||||||||||||||
Unrealized Loss on Investments |
(443 | ) | ||||||||||||||||||
Investments in Loans |
$ | 8,552 | ||||||||||||||||||
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(1) | Does not include default interest rate. | |
(2) | The original maturity date was February 1, 2011 which was initially extended to February 21, 2011 and has been subsequently extended to August 19, 2011. |
Note 5 Investments in Partially Owned Entities
The Company has two investments in partially owned entities; Cambridge Medical Office Building
Portfolio and Senior Management Concepts Senior Living Portfolio as described below.
Cambridge Medical Office Building Portfolio
In December of 2007, we acquired an 85% equity interest in eight (8) limited partnerships that
own nine (9) Class A medical office buildings (the Cambridge Portfolio) developed and managed by
Cambridge Holdings, Inc. (Cambridge) in exchange for a total investment of approximately $72.4
million consisting of approximately $61.9 million of cash, of which $2.8 million was held back to
perform tenant improvements, and the commitment to issue to Cambridge 700,000 operating partnership
units (the OP Units) with a stated value of $10.5 million, subject to the properties achieving
certain performance hurdles. Total rentable area is approximately 767,000 square feet. Eight (8) of
the properties are located in Texas and one (1) property is located in Louisiana. The properties
are situated on medical center campuses or adjacent to acute care hospitals or ambulatory surgery
centers, and are affiliated with and/or occupied by hospital systems and doctor groups. Cambridge
owned the remaining 15% interest in each of the limited partnerships and continues to operate the
underlying properties pursuant to long-term management contracts. Pursuant to the terms of our
management agreements, Cambridge acts as the manager and leasing agent of each medical office
building, subject to certain removal rights held by us. The properties were approximately 92%
leased at June 30, 2011.
On April 14, 2011 (effective as of April 15, 2011) we entered an Omnibus Agreement (the
Omnibus Agreement) with Cambridge and certain of its affiliates (the Cambridge Parties)
regarding our investment in the Cambridge Portfolio. Pursuant to the Omnibus Agreement, we
simultaneously entered into a settlement agreement with Cambridge in regard to the ongoing
litigation between ourselves and Cambridge. The economic terms of our investment in the Cambridge
Portfolio are amended by the Omnibus Agreement as follows:
| The number and terms of the OP Units have been revised such that Cambridge retains rights to 200,000 OP Units. These OP Units are entitled to dividend equivalent payments equal to any ordinary dividend declared and paid by Care to its stockholders, but are no longer convertible into or redeemable for shares of common stock of Care and have limited voting rights in ERC Sub, L.P., (the limited partnership through which we hold our investment in the Cambridge Portfolio); | ||
| We issued a warrant (the Warrant) to Cambridge to purchase 300,000 shares of our common stock at $6.00 per share; | ||
| Our obligation to fund up to approximately $0.9 million in additional tenant improvements in the Cambridge Portfolio is eliminated; | ||
| Our aggregate interest in the Cambridge Portfolio is converted from a stated percentage interest of 85% to a fixed dollar investment of $40 million with a preferred return of 14%; | ||
| Retroactive to January 1, 2011, we receive a preferential distribution of cash flow from operations with a target distribution rate of 12% on our $40 million fixed dollar investment with any cash flow from operations in excess of the target distribution rate being retained by Cambridge; | ||
| We have a preference with regard to any distributions from special events, such as property sales, refinancings and capital contributions, equal to the sum of our outstanding fixed dollar investment plus our accrued but unpaid preferred return; | ||
| Cambridge can purchase our interest in the Cambridge Portfolio at any time during the term of the Omnibus Agreement for an amount equal to the sum of our outstanding fixed dollar investment plus our accrued but unpaid preferred return plus a cash |
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premium that increases annually as well as the return to Care of the OP Units, the Warrant and any Care stock acquired upon a cashless exercise of the Warrant (the Redemption Price as defined in the Omnibus Agreement); | |||
| Cambridge is required to purchase our interest in the Cambridge Portfolio upon the earlier of: (i) the date when our fixed dollar investment has been reduced to zero or (ii) June 2, 2017, for an amount equal to the Redemption Price; and | ||
| If prior to April 15, 2013, a medical office competitor, as defined in the Omnibus Agreement, acquires control of the Company, Cambridge may purchase our interest in the Cambridge Portfolio for a fixed dollar price, with no incremental premium, plus the return of the OP Units, the Warrant and any Care stock acquired upon a cashless exercise of the Warrant. |
As stated above, certain
provisions of the Omnibus Agreement are retroactive to January 1,
2011. The effects of the restructuring of the Cambridge investment was
reflected in the carrying value of the investment. Those effects
included an increase of $0.2 million for the valuation of the Warrant, a
decrease of $1.8 million for the change in the value of the remaining OP
units and a reduction of a $1.0
million for the cash distruibution for the first quarter in 2011. In
addition, our obligation for tenant improvements related to the
Cambridge properties of approximately $0.9 million was released as
per the terms of the Omnibus Agreement. On April 15, 2011,
there was no effect
to our results of operations for the three and six month periods ending June 30, 2011 as a result
of the above transaction.
In
addition, we increased our Cambridge Portfolio investment at
June 30, 2011 by our preferred return of approximately $1.2 million
which is included in income in investments from partially owned
entities for the
three months ended June 30, 2011. We received our related
preferred return distribution on July 29, 2011.
The Company used the Black-Scholes option pricing model to measure the fair value of the
warrant on April 15, 2011, the date of the issuance, in accordance with the Omnibus Agreement. The
Black-Scholes model valued the warrant using the following
assumptions:
Volatility |
53.3 | % | ||
Expected Dividend Yield |
10.29 | % | ||
Risk-free Rate of Return |
1.87 | % | ||
Market Price (Date of Issuance) |
$ | 5.25 | ||
Strike Price |
$ | 6.00 | ||
Term of warrant |
6.0 years |
The table below provides information with respect to the Cambridge Portfolio as of June 30,
2011:
Weighted average rent per square foot |
$ | 25.94 | ||
Average square foot per tenant |
5,535 | |||
Weighted average remaining lease term |
6.5 years | |||
Largest tenant as percentage of total rental square feet |
8.8 | % |
Lease Maturity Schedule:
% of | ||||||||||||||||
Number of | Rental | |||||||||||||||
Year | tenants | Square Ft | Annual Rent | Sq Ft | ||||||||||||
2011 |
24 | 71,118 | $ | 1,437,339 | 7.8 | % | ||||||||||
2012 |
16 | 51,644 | 1,287,058 | 7.0 | % | |||||||||||
2013 |
23 | 90,902 | 1,973,424 | 10.7 | % | |||||||||||
2014 |
7 | 31,265 | 619,150 | 3.4 | % | |||||||||||
2015 |
22 | 117,420 | 2,479,304 | 13.5 | % | |||||||||||
2016 |
13 | 61,194 | 1,361,069 | 7.4 | % | |||||||||||
2017 |
8 | 48,317 | 1,870,412 | 10.2 | % | |||||||||||
Thereafter |
15 | 236,655 | 7,350,333 | 40.0 | % | |||||||||||
100.0 | % | |||||||||||||||
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Prior to April 15, 2011, we included 85% of the operating losses from the Cambridge Portfolio
in our statements of operations and reduced the value of our investment in the Cambridge Portfolio
based on such losses and the receipt of cash distributions. Under the previous structure, credit
support for our preferred return consisted of: (i) the cash flow otherwise attributable to
Cambridges 15% stake in the entities; (ii) the ordinary dividend equivalent payments or
distributions otherwise payable to Cambridge with respect to the OP Units currently held in escrow;
and (iii) a reduction in the total number of OP Units (held in escrow) otherwise payable to
Cambridge, when the cash flow attributable to our 85% stake in the entities was not sufficient to
meet the preferred return. The sources of credit support for our preferred return described in the
preceding sentence were utilized in the order presented. Accordingly, if our interest in the cash
flow generated by the properties was not sufficient to fully fund our preferred return, we first
looked to the cash flow otherwise allocable to Cambridge, subsequent to which we captured the
distributions otherwise payable on the OP Units should a shortfall still exist, and finally, we
reduced the number of OP Units otherwise payable to Cambridge in the future, to the extent required
to fully fund our preferred return.
The OP Units are accounted for as a derivative obligation on our balance sheet. Prior to April
15, 2011, the value of these OP Units was derived from our stock price (as each OP Unit was
redeemable for one share of our common stock, or at the cash equivalent thereof, at our option),
and the overall performance of the Cambridge Portfolio as the number of OP Units eventually payable
to Cambridge was subject to reduction to the extent such OP Units were utilized as credit support
for our preferred payment as described above. The modified OP Units are valued based on the
expected dividend equivalent payments equal to expected ordinary
dividends declared and paid on our common stock to be made during the
expected term of the OP Units, discounted by a risk adjusted rate.
Summarized Financial Information for the Cambridge Portfolio
Summarized financial information as of and for the three and six months ended June 30, 2011
(successor) and June 30, 2010 (predecessor), for the Companys unconsolidated investment in
Cambridge is as follows (amounts in millions):
2011 | 2010 | |||||||
Amount | Amount | |||||||
Revenue (six months) |
$ | 12.7 | $ | 12.8 | ||||
Expenses (six months) |
15.4 | 15.2 | ||||||
Net Loss
before Preferred Distribution (six months) |
(2.8 | ) | (2.4 | ) | ||||
Net Loss
after Preferred Distribution (six months) |
(4.2 | ) | (2.4 | ) | ||||
Revenue (three months) |
$ | 6.4 | $ | 6.5 | ||||
Expenses (three months) |
7.9 | 7.9 | ||||||
Net Loss
before Preferred Distribution (three months) |
(1.5 | ) | (1.3 | ) | ||||
Net Loss
after Preferred Distribution (three months) |
(2.9 | ) | (1.3 | ) |
Note:
The above table includes the financial position and results of
operations of our investment in the Cambridge medical office
buildings in the
aggregate and reflects the changes applicable pursuant to the Omnibus Agreement.
Senior Management Concepts Senior Living Portfolio
Until May of this year, we owned interests in four (4) independent and assisted living
facilities located in Utah and operated by Senior Management Concepts, LLC (SMC), a privately
held operator of senior housing facilities. The four (4) private pay facilities contain 408 units
of which 243 are independent living units and 165 are assisted living units. Four (4) affiliates of
SMC each entered into 15-year leases for the respective facilities that expire in 2022. We
acquired our interest in the SMC portfolio in December 2007, paying $6.8 million in exchange for
100% of the preferred equity interests and 10% of the common equity interests in the four (4)
properties. At the time of our initial investment, we entered into an agreement with SMC that
provides for payments to us of an annual cumulative preferred return of 15.0% on our investment. In
addition, we are to receive a common equity return payable for up to ten (10) years equal to 10.0%
of budgeted free cash flow after payment of debt service and the preferred return as well as 10% of
the net proceeds from a sale of one or more of the properties. Subject to certain conditions being
met, our preferred equity interest in the
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properties is subject to redemption at par beginning on January 1, 2010. If our preferred
equity interest is redeemed, we have the right to put our common equity interests to SMC within 30
days after notice at fair market value as determined by a third-party appraiser. In addition, we
have an option to put our preferred equity interest to SMC at par any time beginning on January 1,
2016, along with our common equity interests at fair market value as determined by a third-party
appraiser.
In May of this year, with our prior consent, SMC sold three (3) of the four (4) properties. At
the time of closing, SMC was delinquent with respect to four (4) months of preferred and budgeted
common equity payments totaling approximately $0.4 million, as well as default interest of
approximately $50,000. At closing we received approximately $6.6 million of gross proceeds and $6.2
million of net proceeds (the offset corresponding to an approximately $0.4 million security deposit
held by us) consisting of approximately $5.2 million representing a partial return of our preferred
equity investment in the three (3) sold properties, approximately $0.9 million representing our 10%
common equity interest in the sold properties and approximately $0.4 million for the outstanding
delinquent and default interest payments. We received approximately $12,000 in excess of the cost
basis of our investment on the sale of the three (3) properties, which was impacted by the
Companys election to utilize push-down accounting in conjunction with the Tiptree Transaction.
As of June 30, 2011 and subsequent to the aforementioned sale, we retain our 100% preferred
equity interest and 10% common equity interest in the remaining property, the Meadows, in St.
George, Utah. This facility contains 120 units of senior living and the current occupancy is
approximately 89%. Average occupancy during 2010 was approximately 92.5%.
Note 6 Identified Intangible Assets leases in-place, net
In connection with the Tiptree Transaction and the election to use push-down accounting, we
undertook an assessment of the allocation of the fair value of the acquired assets as discussed in
more detail in Note 3.
The following table summarizes the Companys identified intangible assets (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Lease in-place including above market leases of $2,674 |
$ | 6,693 | $ | 6,693 | ||||
Accumulated amortization |
(475 | ) | (216 | ) | ||||
$ | 6,218 | $ | 6,477 | |||||
The Company amortizes this intangible asset over the terms of the underlying lease on a
straight-line basis at the monthly amount of approximately $43,000 (or approximately $0.5 million
annually through June 2023), of which approximately $52,000
and $104,000, of the amortization for above-market
leases reduced rental income for the three and six months ended June
30, 2011, respectively.
Note 7 Borrowings under Mortgage Notes Payable
On June 26, 2008, in connection with the acquisition of the initial 12 properties from
Bickford Senior Living Group LLC (discussed in Note 3), we entered into a mortgage loan with Red
Mortgage Capital, Inc. in the principal amount of approximately $74.6 million. The mortgage loan has a fixed
interest rate of 6.845% and provided for one year of interest only debt service. Thereafter, as of
July 2009, the mortgage loan requires a fixed monthly payment of approximately $0.6 million for
both principal and interest, until maturity in July 2015 at which time the then outstanding balance
of approximately $69.6 million is due and payable. In addition, we are required to make monthly
escrow payments for taxes and reserves for which we are reimbursed by Bickford Master I, LLC, an
affiliate of Bickford Senior Living Group, LLC and the master lessee under our triple net lease
(the Master Lessee). The mortgage loan is collateralized by the 12 properties.
On September 30, 2008, we acquired two (2) additional properties from Bickford Senior Living
Group, LLC and entered into a second mortgage loan with Red Mortgage Capital, Inc. in the principal
amount of approximately $7.6 million. The mortgage loan has a fixed interest rate of 7.17% and it provides for a
fixed monthly debt service payment of approximately $62,000 for principal and interest until the
maturity in July 2015 when the then outstanding balance of approximately $7.1 million is due and
payable. In addition, we are required to make monthly escrow payments for taxes and reserves for
which we are reimbursed by the Master Lessee. The mortgage loan is collateralized by the two (2)
properties.
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As a result of the election to utilize push-down accounting in connection with the Tiptree
Transaction, the aforementioned mortgage notes payable were recorded at their fair value of
approximately $82.1 million, an increase of approximately $0.8 million over the combined amortized
loan balances of approximately $81.3 million at August 13, 2010. As of June 30, 2011 approximately
$0.6 million remains to be amortized over the remaining term of the mortgage loans.
Both mortgage loans contain prepayment restrictions that materially impact our ability to
refinance either of the mortgage loans prior to 2015. The annual total debt service for the two (2)
loans is approximately $7.7 million.
Due to low occupancy at two (2) of the 14 properties, there is a covenant default under the
Bickford Master Lease as net operating income (NOI) for the quarter was not sufficient to satisfy
the NOI to lease payment coverage ratio covenant. Under the Companys mortgage documents with its
secured lender for these properties, a default under the Master Lease constitutes a default under
both mortgages. Accordingly, management is in communication with the mortgage loan servicer in
regard to the aforementioned covenant default under the Bickford Master Lease. To date, the
Company has not been provided with or received a notice of default with regard to the Bickford
mortgages. Management currently anticipates that such covenant default will not have a material
impact on the financial statements, operations and/or the liquidity of the Company.
Notwithstanding the foregoing, potential lender actions as a result of the default include an
acceleration of the mortgages. Accordingly, management is actively monitoring the situation and
will continue its efforts to resolve this issue in a timely manner, including, if appropriate,
seeking a waiver of such default and/or a modification of the applicable provision in the loan
documents.
Note 8 Related Party Transactions
Management Agreement with CIT Healthcare LLC
In connection with our initial public offering, we entered into a management agreement (the
Management Agreement) with CIT Healthcare LLC (CIT Healthcare), which described the services to
be provided by our former manager and its compensation for those services. Under the Management
Agreement, CIT Healthcare, subject to the oversight of our Board of Directors, was required to
conduct our business affairs in conformity with the policies approved by our Board of Directors.
The Management Agreement had an initial term scheduled to expire on June 30, 2010, which would
automatically be renewed for one-year terms thereafter unless terminated by us or CIT Healthcare.
On September 30, 2008, we entered into an amendment (the Amendment) to the Management
Agreement between ourselves and CIT Healthcare. Pursuant to the terms of the Amendment, the Base
Management Fee (as defined in the Management Agreement) payable to CIT Healthcare under the
Management Agreement was reduced from a monthly amount equal to 1/12 of 1.75% of the Companys
Equity (as defined in the Management Agreement) to a monthly amount equal to 1/12 of 0.875% of the
Companys Equity. In addition, pursuant to the terms of the Amendment, the Incentive Fee (as
defined in the Management Agreement) payable to CIT Healthcare pursuant to the Management Agreement
was eliminated and the Termination Fee (as defined in the Management Agreement) payable to CIT
Healthcare upon the termination or non-renewal of the Management Agreement was amended to equal the
average annual Base Management Fee as earned by CIT Healthcare during the two (2) years immediately
preceding the most recently completed fiscal quarter prior to the date of termination times three
(3), but in no event less than $15.4 million. No Termination Fee would be payable if we terminated
the Management Agreement for cause.
In consideration of the Amendment and for CIT Healthcares continued and future services to
the Company, we granted CIT Healthcare a warrant (the 2008
Warrant) to purchase 435,000 shares of the Companys common
stock at $17.00 per share under the Manager Equity Plan adopted by the Company on June 21, 2007
(the Manager Equity Plan). The 2008 Warrant, which is
immediately exercisable expires on September
30, 2018 (see Other Transactions with Related Parties below). As part of the Tiptree Transaction,
Tiptree acquired the 2008 Warrant from CIT Healthcare for $100,000, and
the terms of the 2008 Warrant were
subsequently adjusted to provide for the purchase of 652,500 shares of the Companys common stock
at $11.33 per share as a result of the three-for-two stock split announced by the Company in
September 2010.
On January 15, 2010, we entered into an Amended and Restated Management Agreement (the A&R
Management Agreement) with CIT Healthcare. Pursuant to the terms of the A&R Management Agreement,
which became effective upon approval of the Companys plan of liquidation by our stockholders on
January 28, 2010, the Base Management Fee was reduced to a monthly amount equal to: (i) $125,000
from February 1, 2010 until the earlier of (x) June 30, 2010 and (y) the date on which four (4) of
the Companys six (6) then-existing investments have been sold; then from such date (ii) $100,000
until the earlier of (x) December 31, 2010 and (y) the date on which five (5) of the Companys six
(6) then-existing investments have been sold; then from such date (iii) $75,000 until the effective
date of expiration or earlier termination of the A&R Management Agreement by either of the Company
or CIT Healthcare; provided, however, that notwithstanding the foregoing, the Base Management Fee
was to remain at $125,000 per month until the later of: (a) ninety (90) days after the filing by
the Company of a Form 15 with the SEC; and (b) the date that the Company is no longer subject to
the reporting requirements of the Exchange Act. In addition, the termination fee payable to CIT
Healthcare upon the termination or non-renewal of the A&R Management Agreement was replaced by a
buyout payment of $7.5 million, payable in installments of: (i) $2.5 million upon approval of the
Companys plan of liquidation by our stockholders; (ii) $2.5 million upon the earlier of (a) April
1, 2010 and (b) the effective date of the termination of the A&R Management Agreement by either of
the Company or CIT Healthcare; and (iii) $2.5 million upon the earlier of (a) June 30, 2011 and (b)
the effective date of the termination of the A&R Management Agreement by either the Company or CIT
Healthcare. The A&R Management Agreement also provided CIT Healthcare with an incentive fee of $1.5
million if: (i) at any time prior to December 31, 2010, the aggregate cash dividends paid to the
Companys stockholders since the effective date of the A&R Management Agreement equaled or exceeded
$9.25 per share or (ii) as of December 31, 2010, the sum of: (x) the aggregate cash dividends paid
to the Companys stockholders since the effective date of the
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A&R Management Agreement and (y) the aggregate distributable cash equals or exceeds $9.25 per
share. In the event that the aggregate distributable cash equaled or exceeded $9.25 per share but
for the impact of payment of a $1.5 million incentive fee, the Company shall have paid CIT
Healthcare an incentive fee in an amount that allows the aggregate distributable cash to equal
$9.25 per share. Under the A&R Management Agreement, the mortgage purchase agreement between us and
CIT Healthcare was terminated and all outstanding notices of our intent to sell additional loans to
CIT Healthcare were rescinded. The A&R Management Agreement was to continue in effect, unless
earlier terminated in accordance with the terms thereof, until December 31, 2011. The share prices
discussed above are not adjusted for the Companys three-for-two stock split announced in September
2010.
On November 4, 2010, the Company entered into a Termination, Cooperation and Confidentiality
Agreement (the CIT Termination Agreement) with CIT Healthcare. Pursuant to the CIT Termination
Agreement, the parties terminated the A&R Management Agreement on November 16, 2010 (the
Termination Effective Date). The CIT Termination Agreement also provides for: (i) a 180 day
cooperation period beginning on the Termination Effective Date relating to the transition of Care
from an externally managed REIT to a hybrid management structure consisting of senior management
becoming employees of the Company and the Company entering into a services agreement (the Services
Agreement) with TREIT Management, LLC (TREIT, which is an affiliate of Tiptree Capital Management
LLC (Tiptree Capital by which Tiptree is externally managed) as described in more detail below;
(ii) a two (2) year mutual confidentiality period; and (iii) a mutual release of all claims related
to CIT Healthcares management of the Company. Under the CIT Termination Agreement, the parties
agreed that in lieu of the payments otherwise required under the termination provisions of the A&R
Management Agreement, the Company would pay to CIT Healthcare on the Termination Effective Date
$2.4 million plus any earned but unpaid monthly installments of the Base Management Fee due under
the A&R Management Agreement. Those amounts were paid in full in November 2010. The Company
previously paid $5.0 million of the buyout fee during the first two quarters of 2010.
For the three month periods ended June 30, 2011 and 2010, we recognized approximately $0 and
$0.4 million in management and buyout fees paid to CIT Healthcare, respectively. For the six month
periods ended June 30, 2011 and 2010, we recognized approximately $0 and $8.3 million in management
and buyout fees paid to CIT Healthcare, respectively. Included within the payments to CIT
Healthcare was reimbursement for certain expenses detailed in the Management Agreement and
subsequent amendments, such as rent, utilities, office furniture, equipment, and overhead, among
others, required for our operations.
Services Agreement with TREIT Management LLC
On November 4, 2010, the Company entered into a Services Agreement with TREIT pursuant to
which TREIT will provide certain advisory services related to the Companys business beginning on
the Termination Effective Date. For such services, the Company will pay TREIT a monthly base
services fee in arrears of one-twelfth of 0.5% of the Companys Equity (as defined in the Services
Agreement) and a quarterly incentive fee of 15% of the Companys AFFO Plus Gain/(Loss) On Sale (as
defined in the Services Agreement) so long as and to the extent that the Companys AFFO Plus Gain
/(Loss) on Sale exceeds an amount equal to Equity multiplied by the Hurdle Rate (as defined in the
Services Agreement). Twenty percent (20%) of any such incentive fee shall be paid in shares of
common stock of the Company, unless a greater percentage is requested by TREIT and approved by an
independent committee of directors. The initial term of the Services Agreement extends until
December 31, 2013. Unless terminated earlier in accordance with its terms, the Services Agreement
will be automatically renewed for one year periods following such date unless either party elects
not to renew. If the Company elects to terminate without cause, or elects not to renew the Services
Agreement, a Termination Fee (as defined in the Services Agreement) shall be payable by the Company
to TREIT. Such termination fee is not fixed and determinable and is calculated in accordance with
the terms of the Services Agreement.
For the three month periods ended June 30, 2011, we incurred approximately $0.1
million in service fee expense to TREIT. For the six month periods ended June 30, 2011,
we incurred approximately $0.2 million in service fee expense to TREIT. In addition,
during the three month period ended June 30, 2011, the Company incurred an incentive fee payable to
TREIT of approximately $0.2 million, of which 20% is payable in the Companys common stock, during
the Companys third fiscal quarter of 2011. The total incentive paid to TREIT for the first six
months of 2011 was approximately $0.5 million of which 20% is payable in the Companys stock.
Other Transactions with Related Parties
In
connection with the Tiptree Transaction, CIT Healthcare sold the
2008 Warrant to Tiptree which provides for the purchase of 435,000
shares of the Companys common stock at $17.00 per share under the Manager Equity Plan adopted by
the Company on June 21, 2007. The 2008 Warrant, which was granted to CIT Healthcare by the Company as
consideration for amendments to earlier versions of the Management Agreement, and which was
immediately exercisable, expires on September 30, 2018 and was adjusted to provide for the purchase
of 652,500 shares of the Companys common stock at $11.33 per share as a result of the three for
two stock split announced by the Company in September 2010.
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In accordance with ASC 505-50, the Company used the Black-Scholes option pricing model to
measure the fair value of the warrant on the date of the Tiptree Transaction. The Black-Scholes
model valued the warrant using the following assumptions at the fair value date of August 13, 2010:
Volatility |
20.1 | % | ||
Expected Dividend Yield |
7.59 | % | ||
Risk-free Rate of Return |
3.6 | % | ||
Current Market Prices |
$ | 8.96 | ||
Strike Price |
$ | 17.00 | ||
Term of Warrant |
8.14 years |
The fair value of the warrant was approximately $36,000 at August 13, 2010, and is recorded as
part of additional paid-in-capital in connection with the transaction.
Note 9 Fair Value of Financial Instruments
The Company has established processes for determining the fair value of financial instruments.
Fair value is based on quoted market prices, where available. If listed prices or quotes are not
available, then fair value is based upon internally developed models that primarily use inputs that
are market-based or independently-sourced market parameters.
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The three levels of
valuation hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The following describes the valuation methodologies used for the Companys financial
instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Investments in loans At June 30, 2011 and December 31, 2010, we valued our remaining loan at
amortized cost, less allowances for unrealized losses. For purposes of both determining value on
August 13, 2010 and the amount of the subsequent allowance for unrealized losses, we utilized
internal modeling factors using Level 3 inputs. Prior to September 30, 2010, we valued our
investment in loans at LOCOM. Such valuations were determined primarily on appraisals from third
parties as investing in healthcare-related commercial mortgage debt is transacted through an
over-the-counter market with minimal pricing transparency. Loans are infrequently traded and market
quotes are not widely available and disseminated.
Obligation to issue operating partnership units the fair value of our obligation to issue
OP Units is based on internally developed valuation models, as quoted market prices are not
available nor are quoted prices available for similar liabilities. Our model involves the use of
management estimates as well as some Level 2 inputs. The variables in the model prior to April 15,
2011 included the estimated release dates of the shares out of escrow, based on the expected
performance of the underlying properties, a discount factor of approximately 19% as of March 31,
2011 and 21% as of December 31, 2010, and the market price and expected quarterly dividend of
Cares common shares at each measurement date. As discussed above in Note 5, pursuant to the
Omnibus Agreement as of April 15, 2011, the number of OP Units outstanding was
reduced to 200,000 and the terms of such OP Units were altered to eliminate any
conversion right and provided for forfeiture of
the OP Units upon the occurrence of certain events.
Under the modified terms, as of June 30, 2011, the variables (level 3
inputs) in the model include the expected life of
the units, and the expected
dividend rate on our common stock and a
discount factor of 12%.
ASC 820-10-50-2(bb) (ASC 820) requires disclosure of the amounts of significant transfers
between Level 1 and Level 2 of the fair value hierarchy and the reasons for the transfers. In
addition, ASC 820 requires entities to separately disclose, in their roll-forward reconciliation of
Level 3 fair value measurements, changes attributable to transfers in and/or out of Level 3 and the
reasons for those transfers. Significant transfers into a level must be disclosed separately from
transfers out of a level. We had no transfers between levels for the three month and six
month periods ended June 30, 2011.
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The following table presents the Companys financial instruments carried at fair value on the
consolidated balance sheets as of June 30, 2011 and December 31, 2010:
Fair Value at June 30, 2011 (Successor) | ||||||||||||||||
($ in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities |
||||||||||||||||
Obligation to issue operating partnership units(1) |
$ | | $ | | $ | 0.5 | $ | 0.5 | ||||||||
Fair Value at December 31, 2010 (Successor) | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities |
||||||||||||||||
Obligation to issue operating partnership units(1) |
$ | | $ | | $ | 2.1 | $ | 2.1 | ||||||||
(1) | For the six month period ended June 30, 2011, we recorded an unrealized loss of approximately $0.3 million on revaluation and for the twelve month period ended December 31, 2010 an unrealized gain of approximately $0.8 million on revaluation. |
The table below presents reconciliations for all assets and liabilities measured at fair value
on a recurring basis using significant Level 3 inputs during the six month period ended June 30,
2011. Level 3 instruments presented in the tables include a liability
to issue OP Units, which are carried at fair value. The Level 3 instruments were valued using
internally developed valuation models that, in managements judgment, reflect the assumptions a
marketplace participant would use at June 30, 2011:
Obligation to | ||||
Issue | ||||
Level 3 Instruments | Partnership | |||
Fair Value Measurements | Units | |||
(dollars in millions) | ||||
Balance, December 31, 2010 |
$ | (2.1 | ) | |
Modification
of OP Units (offset against investment) |
1.9 | |||
Net change in unrealized loss from obligations |
(0.3 | ) | ||
Balance, June 30, 2011 |
$ | (0.5 | ) | |
Estimates and other assets and liabilities in financial statements
In addition, we are required to disclose fair value information about financial instruments,
whether or not recognized in the financial statements, for which it is practical to estimate that
value. In cases where quoted market prices are not available, fair value is based upon the
application of discount rates to estimated future cash flows based on market yields or other
appropriate valuation methodologies. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts we could realize on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
In addition to the amounts reflected in the financial statements at fair value as provided
above, cash and cash equivalents, accrued interest receivable, accounts payable and other
liabilities reasonably approximate their fair values due to the short maturities of these items.
The mortgage notes payable of approximately $73.8 million and approximately $7.5 million that were
used to finance the acquisitions of the Bickford properties on June 26, 2008 and September 30,
2008, respectively, were revalued in connection with the Tiptree Transaction and our election to
utilize push-down accounting and were determined to have a combined fair value of approximately
$82.1 million on August 13, 2010 and a combined fair value
of approximately $84.5 million as of
June 30, 2011. The fair value of the debt was calculated by determining the present value of the
agreed upon cash flows at a discount rate reflective of financing terms currently available to us
for collateral with the similar credit and quality characteristics.
The Company is exposed to certain risks relating to its ongoing business. The primary risk
that may be managed by using derivative instruments is interest rate risk. We may enter into
interest rate swaps, caps, floors or similar instruments to manage interest rate risk associated
with the Companys borrowings. The Company has no interest rate derivatives in place as of June 30,
2011 or December 31, 2010.
We are required to recognize all derivative instruments as either assets or liabilities at
fair value in the statement of financial position. As of June 30, 2011, the Company has only one
derivative instrument that pertains to the OP Units issued
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in conjunction with the Cambridge investment. The Company has not designated this derivative
instrument as a hedging instrument. Accordingly, our consolidated financial statements include the
following fair value amounts and reflect gains and losses associated with the aforementioned
derivative instrument (dollars in thousands):
June 30, | December 31, | |||||||||||
2011 | 2010 | |||||||||||
(Successor) | (Successor) | |||||||||||
Balance | Balance | |||||||||||
Derivatives not designated as | Sheet | Fair | Sheet | Fair | ||||||||
hedging instruments | Location | Value | Location | Value | ||||||||
Operating Partnership
Units
|
Obligation to issue operating partnership units | $ | (463 | ) | Obligation to issue operating partnership units | $ | (2,095 | ) |
Amount of (Gain) / Loss Recognized in Income on Derivative | ||||||||||||||||
Location of (Gain) / Loss | Three Months | Three Months | Six Months | Six Months | ||||||||||||
Derivatives not designated as hedging | Recognized in Income on | Ended | Ended | Ended | Ended | |||||||||||
instruments | Derivative | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||
Operating Partnership Units
|
Unrealized loss /
(gain) on
derivative instruments |
$ | $ | (310 | ) | $ | 255 | $ | 268 |
Note 10 Stockholders Equity
Our authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par
value and 250,000,000 shares of common stock, $0.001 par value. As of June 30, 2011, no shares of
preferred stock were issued and outstanding and 10,154,294 shares of common stock were issued and
outstanding.
On December 10, 2009, the Company granted special transaction performance share awards to plan
participants for an amount of 15,000 shares at target levels and an aggregate maximum amount of
30,000 shares. On February 23, 2010, the terms of the awards were modified such that the awards
were triggered upon the execution, during 2010, of one or more of the following transactions that
resulted in liquidity to the Companys stockholders within the parameters expressed in the special
transaction performance share awards agreement: (i) a merger or other business combination
resulting in the disposition of all of the issued and outstanding equity securities of the Company,
(ii) a tender offer made directly to the Companys stockholders either by the Company or a third
party for at least a majority of the Companys issued and outstanding common stock, or (iii) the
declaration of aggregate distributions by the Companys Board equal to or exceeding $8.00 per
share. Two thousand of these shares were forfeited and the maximum target level was reached when
the tender offer transaction and sale of shares to Tiptree was completed on August 13, 2010,
triggering the issuance of the aggregate maximum 28,000 shares on that day. The performance share
awards were settled prior to the Companys three-for-two stock split announced in September 2010.
On January 3, 2011, the Company awarded a total of 73,999 common shares to four of its
employees in accordance with their employment agreements. The issuance of such shares was treated
as compensation expense in the fourth quarter of 2010. These shares were issued under the Care
Investment Trust Inc. Equity Plan (Equity Plan).
On May 16, 2011, the Company issued 9,245 common shares to TREIT Management LLC in conjunction
with its quarterly incentive fee due under the Services Agreement (See Note 8). These shares were
issued under the Manager Equity Plan.
As of June 30, 2011, 278,502 common shares remain available for future issuances under the
Equity Plan and 197,673 shares remain available for future issuances
under the Manager Equity Plan. Per the terms of the respective
plans,
the amounts available for issuance under the Equity Plan and the
Manager Equity Plan were adjusted by the Companys
three-for-two stock split announced in September 2010.
During the second quarter of fiscal 2011, the Company declared and paid a cash dividend of
$0.135 per common share of approximately $1.4 million. On August 4, 2011, the Company declared a
cash dividend of $0.135 per common share to be paid on September 1,
2011 to stockholders of record as of August 18, 2011.
Shares Issued to Directors for Board Fees:
On January 3, 2011, April 6, 2011 and July 5, 2011, 3,156, 2,912 and 2,096 shares,
respectively, of common stock with a combined aggregate fair value of approximately $45,000 were
granted to our independent directors as part of their annual retainer.
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The shares were issued under the Equity Plan. Each independent director receives an annual
base retainer of $50,000, payable quarterly in arrears, of which 70% is paid in cash and 30% in
shares of Care common stock. Shares granted as part of the annual retainer vest immediately and are
included in general and administrative expense.
Note 11 Income (Loss) per Share (in thousands, except share and per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||||
Net income (loss) per share basic |
$ | 0.11 | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.34 | ) | |||||
Net income (loss) per share diluted |
$ | 0.10 | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.34 | ) | |||||
Numerator |
||||||||||||||||
Net income (loss) |
$ | 1,067 | $ | (1,902 | ) | $ | (46 | ) | $ | (10,332 | ) | |||||
Denominator |
||||||||||||||||
Weighted average common shares outstanding basic |
10,149,562 | 30,344,489 | 10,145,018 | 30,326,975 | ||||||||||||
Weighted average common shares outstanding diluted |
10,167,272 | 30,344,489 | 10,145,018 | 30,326,975 | ||||||||||||
For the three month period ended June 30, 2011 diluted income per share includes
the effect of 17,710 common shares pertaining to
the Warrant
issued to Cambridge on April 15, 2011 under the Omnibus
Agreement. The 2008 Warrant convertible into
652,500 common shares was excluded in diluted income per share because the exercise price was more
than the average market price and it is anti-dilutive for this period.
For the six month period ended June 30, 2011 and the three and six month periods ended June
30, 2010, there were no outstanding securities that were dilutive.
For the three months ended June 30, 2011, the original operating
partnership units did not affect diluted EPS. For the six month
period ended June 30, 2011 and the three and six month periods ended
June 30, 2010, basic and diluted EPS did not include operating
partnership units that were outstanding prior to April 15, 2011 as
they were antidilutive.
As described in Note 5, on April 14, 2011 (effective April 15, 2011), our Cambridge investment
was restructured and the OP Units issued in connection with the Cambridge
investment are no longer redeemable for or convertible into shares of our common stock.
The weighted average common shares outstanding (basic and diluted) for the three and six month
period ended June 30, 2010 are adjusted to reflect the Companys three-for-two stock split
announced in September 2010.
Note 12 Commitments and Contingencies
As discussed above in Note 5, as of April 15, 2011, Cares previous obligation to provide
approximately $0.9 million in tenant improvements related to our purchase of the Cambridge
properties was eliminated in conjunction with the execution of the Omnibus Agreement.
On November 4, 2010, the Company entered into a Services Agreement with TREIT pursuant to
which TREIT will provide certain advisory services related to the Companys business beginning upon
the effective termination of CIT Healthcare as our external manager
on November 16, 2010. For such services, the Company
will pay TREIT a monthly base services fee in arrears of one-twelfth of 0.5% of the Companys
Equity (as defined in the Services Agreement) and a quarterly incentive fee of 15% of the Companys
AFFO Plus Gain/(Loss) On Sale (as defined in the Services Agreement) so long as and to the extent
that the Companys AFFO Plus Gain/(Loss) on Sale exceeds an amount equal to Equity multiplied by
the Hurdle Rate (as defined in the Services Agreement). Twenty percent (20%) of any such incentive
fee shall be paid in shares of common stock of the Company, unless a greater percentage is
requested by TREIT and approved by an independent committee of directors. The initial term of the
Services Agreement extends until December 31, 2013, unless terminated earlier in accordance with
the terms of the Services Agreement and will be automatically renewed for one year periods
following such date unless either party elects not to renew the Services Agreement in accordance
with its terms. If the Company elects to terminate without cause, or elects not to renew the
Services Agreement, a Termination Fee (as defined in the Services Agreement) shall be payable by
the Company to TREIT.
In
addition to the mortgage Notes from our BickFord properties (See Note
3), the table below summarizes our remaining contractual obligations as of June 30, 2011.
Amounts in millions | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | |||||||||||||||||||||
TREIT Base service fee(1) |
0.3 | 0.4 | 0.4 | | | | | |||||||||||||||||||||
Company Office Lease |
0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.5 |
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(1) | Subject to increase based on increases in stockholders equity. In 2014 and 2015, TREIT will receive either (i) the Termination Fee in the event of non-renewal, or (ii) the base service fee in the event of renewal by the Company. The Termination Fee payable to TREIT in the event of termination without cause or non-renewal of the Services Agreement by the Company is not fixed and determinable and is therefore not included in the table. |
Litigation
Care is not presently involved in any material litigation or, to our knowledge, is any
material litigation threatened against us or our investments, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any, incurred by us related
to litigation will not materially affect our financial position, operating results or liquidity.
Notwithstanding the foregoing, the Company, as discussed above in Note 2 and Note 4, has certain
indemnification obligations with respect to a lawsuit filed by one of the borrowers in our
remaining loan asset in which Care was not named as a defendant.
On November 25, 2009, we filed a lawsuit in the U.S. District Court for the Northern District
of Texas against Mr. Jean-Claude Saada and 13 of his companies (the Saada Parties), seeking
various declaratory judgments relating to our various partnership agreements with respect to the
Cambridge Portfolio. Saada brought a number of counterclaims against us.
On April 14, 2011 (effective April 15, 2011) we settled all litigation with the Saada Parties
and the Cambridge entities, and all litigation between the parties was dismissed with prejudice,
ending the litigation.
On September 18, 2007, a class
action complaint for violations of federal securities laws was filed in the United
States District Court, Southern District of New York alleging that the Registration Statement relating to the initial
public offering of shares of our common stock, filed on June 21, 2007, failed to disclose that certain of the assets in
the contributed portfolio were materially impaired and overvalued and that we were experiencing increasing
difficulty in securing our warehouse financing lines. On January 18, 2008, the court entered an order appointing
co-lead plaintiffs and co-lead counsel. On February 19, 2008, the co-lead plaintiffs filed an amended complaint citing
additional evidentiary support for the allegations in the complaint. The parties filed various
motions between April 2008 and July 2010. The plaintiffs filed an opposition to our motion to dismiss on July 9,
2008, to which we filed our reply on September 10, 2008. On March 4, 2009, the court denied our motion to
dismiss. Care filed its answer on April 15, 2009. At a conference held on May 15, 2009, the Court ordered the
parties to make a joint submission (the Joint Statement) setting forth: (i) the specific statements that Plaintiffs
claim are false and misleading; (ii) the facts on which Plaintiffs rely as showing each alleged misstatement was false
and misleading and (iii) the facts on which Defendants rely as showing those statements were true. The parties filed
the Joint Statement on June 3, 2009. On July 31, 2009, the parties entered into a stipulation that narrowed the scope
of the proceeding to the single issue of the warehouse financing disclosure in the Registration Statement. Fact
discovery closed on April 23, 2010. Care filed a motion for summary judgment on July 9, 2010. By Opinion and
Order dated December 22, 2010, the Court granted Care summary judgment motion in its entirety and directed the
Clerk of the Court to enter judgment accordingly.
On
January 11, 2011, the parties entered into a stipulation ending the
litigation. In the stipulation: (i) plaintiffs waived any and all
appeal rights that they had in the action, including, without
limitation, the right to appeal any portion of the Courts
Opinion and Order granting Cares summary judgment or the
judgment entered by the Clerk; (ii) Care waived any and all rights
that they had to seek sanctions of any form against plaintiffs or
their counsel in connection with the action; and (iii) each party
agreed it would bear its own fees and costs in connection with the
action. The stipulation was so ordered by the Court on January 12,
2011, bringing the litigation to a close.
Note 13 Subsequent Events
On August 4, 2011, the Company declared a cash dividend of $0.135 per common
share to be paid on September 1, 2011 to stockholders of record as
of August 18, 2011.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with the consolidated financial statements and
notes included herein. This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain non-GAAP financial measures. See Non-GAAP Financial
Measures and supporting schedules for reconciliation of our non-GAAP financial measures to the
comparable GAAP financial measures.
Overview
Care Investment Trust Inc. (all references to Care, the Company, we, us, and our
means Care Investment Trust Inc. and its subsidiaries) is an equity REIT that invests in healthcare
facilities including assisted-living, skilled nursing and other senior care facilities, medical
office buildings and other healthcare related real estate assets. The Company, which utilizes a hybrid
management structure containing components of both internal and external management, was
incorporated in Maryland in March 2007 and completed its initial public offering on June 22, 2007.
We were originally structured as an externally-managed REIT positioned to make mortgage
investments in healthcare-related properties and to invest in healthcare-related real estate
through the origination platform of our then external manager, CIT Healthcare LLC (CIT
Healthcare), a wholly-owned subsidiary of CIT Group Inc. (CIT). We acquired our initial
portfolio of mortgage loan assets from CIT Healthcare in exchange for cash proceeds from our
initial public offering and common stock. In response to dislocations in the overall credit market
and, in particular, the securitized financing markets, in late 2007, we redirected our focus to
place greater emphasis on equity investments in healthcare-related real estate. In 2008, we
completed this transition into becoming an equity REIT by making our mortgage loan portfolio
available for sale and fully shifting our strategy from investing in mortgage loans to acquiring
healthcare-related real estate.
On March 16, 2010, we entered into a definitive purchase and sale agreement with Tiptree
Financial Partners, L.P. (Tiptree) under which we agreed to sell a significant amount of newly
issued common stock to Tiptree (the Tiptree Transaction) at $9.00 per share (prior to the
Companys announcement of a three-for-two stock split in September 2010) and to commence a cash
tender offer for up to all (the Tender Offer) of our outstanding common stock at $9.00 per share
(prior to the Companys announcement of a three-for-two stock split in September 2010). This change
of control was completed on August 13, 2010. A total of approximately 19.74 million shares of our
common stock, representing approximately 97.4% of our outstanding common stock, were tendered by
our stockholders in the Tender Offer and approximately 6.19 million of newly issued shares of our
common stock, representing approximately 92.2% of our outstanding common stock, after taking into
consideration the effect of the tender offer, were issued to Tiptree in the Tiptree Transaction in
exchange for cash proceeds of approximately $55.67 million.
On November 4, 2010, in conjunction with the change of control, we entered into a termination,
cooperation and confidentiality agreement with CIT Healthcare terminating CIT Healthcare as our
external manager as of November 16, 2010. A hybrid management structure was put into place with
senior management becoming our employees and the Company entering into a services agreement with
TREIT Management, LLC (TREIT, which is an affiliate of Tiptree Capital Management, LLC (Tiptree
Capital), by which Tiptree is externally managed) pursuant to which certain administrative
services are provided to us.
As of June 30, 2011, we maintained a diversified investment portfolio consisting of
approximately $29.4 million (20%) in unconsolidated joint ventures that own real estate,
approximately $110.4 million (75%) in wholly owned real estate and approximately $7.0 million (5%)
in mortgage loans. Due to the Tiptree Transaction and our election to utilize push-down
accounting, our entire portfolio was revalued as of August 13, 2010 based on the estimated fair
market value of each asset on such date. Our current investments in healthcare-related real estate
include medical office buildings, assisted living facilities, independent living facilities and
alzheimer facilities. Our remaining mortgage investment is primarily secured by a portfolio of
skilled nursing and assisted living facilities and senior apartments.
As a REIT, we are generally not subject to income taxes. To maintain our REIT status, we are
required to distribute annually as dividends at least 90% of our REIT taxable income, as defined by
the Internal Revenue Code of 1986, as amended (the Code), to our stockholders, among other
requirements. If we fail to qualify as a REIT in any taxable year, we would be subject to U.S.
federal income tax on our taxable income at regular corporate tax rates.
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Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K
for the year ended December 31,
2010 in Managements Discussion and Analysis of Financial Condition and Results of
Operations. There have been no significant changes to those policies during the six-month period
ended June 30, 2011.
Results of Operations
Comparison of the three months ended June 30, 2011 and the three months ended June 30, 2010
Revenue
During the three month period ended June 30, 2011, we recognized approximately $3.3 million of
rental revenue on the Bickford properties, as compared with approximately $3.2 million during the
comparable period in 2010, an increase of approximately $0.1 million. Included in the revenue for
each period are approximately $0.3 million of taxes, insurance and other escrows that we collect on
behalf of our tenant in our wholly-owned properties and pass through to our mortgage lender to be
paid upon coming due.
We earned investment income on our remaining mortgage investment of approximately $0.2 million
for the three month period ended June 30, 2011 as compared with approximately $0.4 million for the
three months ended June 30, 2010, a decrease of approximately $0.2 million. The decrease in income
related to our mortgage portfolio is primarily attributable to a lower average outstanding
principal loan balance during the three month period ended June 30, 2011 as compared with the
comparable period during 2010, which was the result of principal pay downs that occurred on our
remaining mortgage investment during the twelve months ended June 30, 2011. Our remaining mortgage
loan is variable rate based on LIBOR, and at June 30, 2011, had a weighted average spread of 4.02%
over remaining one-month LIBOR, with an effective yield of 4.21% and is scheduled to mature on August 19,
2011, as extended. The effective yield on our mortgage investment at the period ended June 30, 2010
was 4.65%.
Expenses
For the three
months ended June 30, 2011, we recorded base services fee expense payable to our
advisor, TREIT, under our Services Agreement of approximately $0.1 million as compared with
management fee expense payable to our former manager, CIT Healthcare, under our management
agreement of approximately $0.4 million for the three month period ended June 30, 2010, a decrease
of approximately $0.3 million. The decrease in fee expense is primarily attributable to the
reduction in the monthly fee arrangement with our advisor as compared to our former manager.
For the three month period ended June 30, 2011, we also incurred incentive fee expense payable
to TREIT of approximately $0.2 million, of which approximately $141,000 is to be paid in cash and
approximately $35,000 is to be paid in stock as stock-based compensation, during the Companys
third fiscal quarter of 2011, pursuant to the terms of our services agreement. Such expense did not
occur during the three months ended June 30, 2010.
Marketing, general and administrative expenses were approximately $1.2 million for the quarter
ended June 30, 2011 and consist of fees for professional services, which include audit, legal and
investor relations; directors & officers (D&O)
insurance and other insurance; general overhead costs for
the Company and employee salaries and benefits as well as fees paid to our directors, as compared
with approximately $2.4 million for the comparable period ended June 30, 2010, a decrease of
approximately $1.2 million. The decrease consists primarily of a reduction in legal fees of
approximately $1.1 million, as well as lower expenses pertaining to our 2011 audit fees and D&O
insurance of approximately $0.5 million. Such cost reductions were offset primarily by employee
compensation expense of approximately $0.4 million during the period ended June 30, 2011 which was
incurred as a result of the Companys internalization of management and other employees. This
expense did not occur during the comparable period in 2010 as the Company was externally-managed
and did not have any employees during that period. Also included in the marketing, general and
administrative expenses for each of the three month periods ended June 30, 2011 and 2010 are
approximately $0.3 million of taxes, insurance and other escrows that we collect on behalf of our
master tenant in our wholly-owned property portfolio and pass through to our mortgage lender to be
paid upon coming due. We also expensed approximately $15,000 for the three month period ended June
30, 2011 consisting of the stock portion of the fees paid to our independent directors as part of
their compensation for their service on our board for the second
quarter of 2011. For the
comparable period in 2010, our stock-based compensation expense for our independent directors was
approximately $50,000, or approximately $35,000 more than in the current period. The annual fees
paid to our directors were reduced following the Tiptree Transaction. Each independent director is
now paid a base retainer of $50,000 annually, which is payable 70% in cash and 30% in stock.
Payments are made quarterly in arrears. Shares of our common stock issued to our independent
directors as part of their annual compensation vest immediately and are expensed by us accordingly.
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The management fees, services fees, incentive fees, expense reimbursements, and the
relationship between us and our former Manager and our current advisor, TREIT, are discussed
further in Note 8 to the condensed consolidated financial statements.
Income
or loss from investments in partially-owned entities
For the three month period ended June 30, 2011, income from investments in partially-owned
entities amounted to approximately
$1.4 million as compared with
a loss recognized of approximately $0.9 million for the
comparable period in 2010, an increase of approximately $2.3 million. As a result of the new
economic terms in our Cambridge investment (as outlined in the Omnibus Agreement dated April 15,
2011, which was retroactive as of January 1, 2011) we will receive a preferential distribution of
cash flow from operations with a target distribution rate of 12% of our $40 million fixed dollar
investment with any cash flow from operations in excess of the target distribution rate being
retained by Cambridge, and we will no longer recognize 85% of the
operating gain or loss (after
depreciation and amortization) with respect to the Cambridge Portfolio. As per the new economic terms
outlined in the Omnibus Agreement, we recognized
in income $1.2 million
to reflect our related preferred return distribution for the three months ended June 30, 2011. We also
recognized our share of equity income in the SMC properties of approximately $0.2 million for the three months
ended June 30, 2011. An impairment of approximately
$0.1 million was recognized on our SMC
investment during the three month period ended June 30, 2011
due to lower occupancy.
Unrealized
gain or loss on derivative instruments
We did not recognize any income or loss on the fair value of our obligation to issue
OP Units related to the Cambridge transaction for the three month period ended June 30,
2011, as compared with an unrealized loss of approximately $0.3 million for the comparable period
in 2010, a decrease of approximately $0.3 million. Pursuant to the terms of the Omnibus Agreement,
the valuation and accounting for the OP Units were modified on April 15, 2011. The number and
terms of the OP Units have been revised such that Cambridge retains rights to 200,000 OP Units,
with the balance having been canceled per the terms of the Omnibus Agreement. These remaining OP
Units are entitled to dividend equivalent payments equal to any
ordinary dividend declared and paid
by Care to its stockholders, but no longer are convertible into or redeemable for shares of common
stock of Care. As a result of the
reduction in the number of and change in the terms
of the OP Units
resulting from the restructuring of our
Cambridge investment, the liability associated with the respect to the OP Units was
reduced to approximately $0.5 million.
Interest Expense
We incurred interest expense of approximately $1.4 million for the three month period ended
June 30, 2011 as compared with interest expense of approximately $1.5 million for the three month
period ended June 30, 2010, a decrease of approximately $0.1 million. Interest expense for the
quarter was related to the interest payable on the mortgage debt that was incurred for the
acquisition of 14 facilities from Bickford. The reduction in interest expense is
primarily
the result of the
amortization
of the principal amount of the mortgage loans offset by the
amortization of premium related to the fair value of the mortgage
loans in conjunction with the Companys recording of purchase
accounting adjustments as part of the Tiptree Transaction.
Comparison of the six months ended June 30, 2011 and the six months ended June 30, 2010
Revenue
During the six month period ended June 30, 2011, we recognized approximately $6.6 million of
rental revenue on the Bickford properties, as compared with approximately $6.4 million during the
comparable period in 2010. Included in the revenue for each period are approximately $0.3 million
of taxes, insurance and other escrows which we collect on behalf of our tenant in our wholly-owned
properties and pass through to our mortgage lender to be paid upon coming due.
We earned investment income on our investment in loans of approximately $0.4 million for the
six month period ended June 30, 2011 as compared with approximately $1.1 million for the six months
ended June 30, 2010, a decrease of approximately $0.7 million. The decrease in income related to
our mortgage portfolio is primarily attributable to a lower average outstanding principal loan
balance during the six month period ended June 30, 2011 as compared with the comparable period
during 2010, which was the result of scheduled principal payments as well as loan maturities and
loan sales that occurred during the first quarter of 2010 in connection with the companys decision
to shift our operating strategy to place greater emphasis on acquiring high quality
healthcare-related real estate investments and away from mortgage investments. Our remaining
mortgage loan is variable rate based on LIBOR, and at June 30, 2011, had a weighted average spread
of 4.02% over one-month LIBOR, with an effective yield of 4.21% and is scheduled to
mature on August 19, 2011, as extended. The effective yield on our mortgage portfolio at the
period ended June 30, 2010 was 4.65%.
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Expenses
For the six months ended June 30, 2011, we recorded base services fee expense payable to our
advisor, TREIT, under our services agreement of approximately $0.2 million as compared with
management fee expense payable to our former manager, CIT Healthcare,
under our prior management
agreement of approximately $0.8 million for the six month period ended June 30, 2010, a decrease of
approximately $0.6 million. The decrease in fee expense is primarily attributable to the reduction
in the monthly fee arrangement with our advisor as compared to our former manager. We also
recorded a buyout payment expense of $7.5 million for the six month period ended June 30, 2010 in
connection with our obligation to CIT Healthcare upon termination of the CIT Management Agreement
that did not recur during the comparable period in 2011.
For the six month period ended June 30, 2011, we also incurred incentive fee expense payable
to TREIT of approximately $0.5 million, of which approximately $0.4 million was to be paid in cash
and approximately $0.1 million was to be paid in stock as stock-based compensation as per the terms
of our Services Agreement, which expense did not occur during the six months ended June 30, 2010.
Marketing, general and administrative expenses were approximately $2.3 million for the six
month period ended June 30, 2011 and consist of fees for professional services, which include
audit, legal and investor relations; directors & officers (D&O) and other insurance; general
overhead costs for the Company and employee salaries and benefits as well as fees paid to our
directors, as compared with approximately $4.2 million for the comparable period ended June 30,
2010, a decrease of approximately $1.9 million. The decrease consists primarily of a reduction in
legal fees of approximately $1.8 million, as well as lower expense related to our 2011 audit fees
and D&O insurance of approximately $0.7 million. Such cost reductions were offset primarily by
employee compensation expense of approximately $0.9 million during the period ended June 30, 2011,
which was incurred as a result of the Companys internalization of management and other employees.
This expense did not occur during the comparable period in 2010 as the Company was
externally-managed and did not have any employees. Also included in the marketing, general and
administrative expenses for each of the six month periods ended June 30, 2011 and 2010 are
approximately $0.6 million of taxes, insurance and other escrows that we collect on behalf of our
tenant in our wholly-owned properties and pass through to our mortgage lender to be paid upon
coming due. We also recognized compensation expense of approximately
$30,000 for the six month
period ended June 30, 2011 consisting of the stock portion of the fees paid to our independent
directors as part of their compensation for their service on our board, compared with an expense of
$100,000 for the six months ended June 30, 2010, a decrease of approximately $70,000. The annual
fees paid to our directors were reduced following the Tiptree Transaction. Each independent
director is now paid a base retainer of $50,000 annually, which is payable 70% in cash and 30% in
stock. Payments are made quarterly in arrears. Shares of our common stock issued to our
independent directors as part of their annual compensation vest immediately and are expensed by us
accordingly.
The management fees, services fees, incentive fees, expense reimbursements, and the
relationship between us and our former Manager and our current advisor, TREIT, are discussed
further in Note 8 to the condensed consolidated financial statements.
Income
or loss from investments in partially-owned entities
For
the six month period ended June 30, 2011, income from investments in partially-owned
entities was approximately $0.8 million, as compared to a loss of approximately $1.5 million for
the comparable period in 2010, an increase of approximately $2.3 million. As a result of the new
economic terms in our Cambridge investment (as outlined in the Omnibus Agreement dated April 15,
2011, which was retroactive as of January 1, 2011), we receive a preferential distribution of cash
flow from operations with a target distribution rate of 12% of our $40 million fixed dollar
investment with any cash flow from operations in excess of the target distribution rate being
retained by Cambridge. We will no longer recognize 85% of the
operating income or loss (after
depreciation and amortization) with respect to the Cambridge
Portfolio. Our income for the six months ended June 30, 2011
consisted of the sum of $1.1 million representing 85% of the
operating loss of Cambridge for the first quarter of 2011 and $1.2
million representing the preferential return under the terms of the
Omnibus Agreement. Going forward, we will recognize income on the
investment each period equal to our preferential return. We recognized our share of equity
income in our SMC investment of approximately $0.6 million for
the six months ended June 30, 2011. In addition, an impairment
loss of approximately $0.1 million was recognized on our SMC investment during the six
month period ended June 30, 2011.
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Unrealized
gain or loss on derivative instruments
We recognized
approximately
$0.3 million unrealized loss on the fair value of our obligation to issue
OP Units related to the Cambridge investment for the six month period ended June 30,
2011, as compared with an unrealized loss of approximately $0.3 million for the comparable period
in 2010. Pursuant to the terms of the Omnibus Agreement, the valuation and accounting for the OP
Units were modified on April 15, 2011. The number and terms of the OP Units have been revised such
that Cambridge retains rights to 200,000 OP Units, with the balance having been canceled per the
terms of the Omnibus Agreement. These remaining OP Units are entitled to dividend
equivalent payments equal to any ordinary dividend declared and paid by
Care to its stockholders, but no
longer are convertible into or redeemable for shares of common stock of Care. As a result of the
reduction in the number of and change in the terms
of the OP Units
resulting from the restructuring of
our Cambridge investment, the
liability associated with the respect to the original OP Units was
reduced to approximately $0.5 million.
Interest Expense
We incurred interest expense of approximately $2.7 million for the six month period ended June
30, 2011 as compared with interest expense of approximately $2.9 million for the six month period
ended June 30, 2010, a decrease of approximately $0.2 million. Interest expense for the respective
periods was primarily related to the interest payable on the mortgage debt that was incurred for
the acquisition of 14 facilities from Bickford. The approximately $0.2 million decrease in interest
expense is attributable to the amortization of the principal amount of the mortgage loans offset by
the amortization of
premium related to the fair value of the mortgage loans in
conjunction with the Companys recording of purchase accounting
adjustments as part of the Tiptree Transaction
in the six month period ended June 30, 2011.
Liquidity and Capital Resources
Short-term Liquidity Needs
Liquidity is a measurement of our ability to meet short and long-term cash needs. Our
principal current cash needs are: (1) to fund operating expenses, including debt service on our
outstanding mortgage loan obligations (2) to distribute 90% of our REIT taxable income in order to
maintain our REIT status and (3) to fund other general ongoing business needs. As of June 30,
2011, we did not have any development and/or redevelopment projects or any outstanding purchase
agreements for the acquisition of additional assets. Our primary sources of liquidity are
our current working capital,
rental
income from our real estate properties, distributions from our interests in non-consolidated
partnerships, interest income earned on our mortgage loan investment and interest income earned
from our available cash balances. We also obtain liquidity from repayments of principal by our
borrower in connection with our remaining mortgage loan. Management currently believes that the
Company has adequate liquidity to meet its short-term capital needs.
We intend to invest in additional properties only as suitable opportunities arise. In the
short term, we intend to fund any future
acquisitions, developments or redevelopments with
a combination of
working capital
and/or by entering into a credit facility or other line of credit. In evaluating acquisition
opportunities, the Company takes into consideration its current and future cash needs as well as
the availability of third party financing.
Long-term Liquidity Needs
Our long-term liquidity requirements consist primarily of funds necessary for scheduled debt
maturities, property acquisitions, developments and redevelopments of health care facilities and
other non-recurring capital expenditures that are needed periodically for our properties. We
currently do not have a revolving credit facility or other credit line. As we grow our business,
we will likely seek additional capital from public and/or private offerings of common stock and/or
preferred stock and will likely seek to procure a revolving credit facility with one or more
commercial banks. We may also pursue joint ventures with institutional investors as a means of
capitalizing property acquisitions. Finally, we may in the future issue operating partnerships
units in either UPREIT or DownREIT transactions, which units could be convertible into our common
stock. These sources of liquidity, in addition to existing working capital and cash provided by
operations, will allow us to meet our anticipated future liquidity needs.
We routinely review our liquidity requirements and believe that our current cash flows are
sufficient to allow us to continue operations, satisfy our contractual obligations and pay
dividends to our stockholders. Sources of cash and cash equivalents, cash flows provided by (used
in) operating activities, investing activities and financing activities are discussed below.
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Cash and Cash Equivalents
Cash
and cash equivalents were approximately $13.9 million at June 30, 2011 as compared with
$134.9 million at June 30, 2010, a decrease of approximately $120.9 million, which is primarily
attributable to the Companys Tender Offer in conjunction with the Tiptree Transaction which
occurred during the third quarter of 2010. During the first six
months of 2011, cash, respectively of
approximately $3.2 million and approximately $7.4 million was generated from
operating activities and investing activities and was offset by $1.7 million used in financing
activities during the period.
Cash from Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2011 amounted to
approximately $3.2 million as compared with approximately $2.6 million used in operating activities
for the six months ended June 30, 2010, an increase of approximately $5.8 million.
The positive change in cash from operating activities is primarily a
result of the buy out payment to our former manager of $7.5 million
during the six months ended June 30, 2010, which did not occur during
the six months ended June 30, 2011, as well as a reduction in legal
fees of approximately $1.8 million from the six months ended June
30, 2010.
Net loss before
adjustments was approximately $46,000 for the six months ended June 30, 2011. Distributions from
investments in partially-owned entities added $2.2 million. Non-cash charges for straight-line
effects of lease revenue, stock based compensation for shares issued to directors and related
parties, income from investments in partially-owned entities,
impairment on investments,
unrealized loss on derivative instruments and depreciation and amortization provided approximately $3.0 million.
The net change in operating assets provided approximately $0.4 million and consisted of a decrease in accrued
interest receivable and decrease in other assets. The net change in operating liabilities used
approximately $0.2 million and consisted of a decrease in accounts payable and accrued expenses and a decrease in
other liabilities, including amounts due to a related party.
Cash from Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2011 was
approximately $7.4 million as compared with approximately $15.9 million for the six months ended
June 30, 2010, a decrease of approximately $8.5 million. The decrease is primarily attributable to
the sale of a loan to a third party for $5.9 million and loan repayments received of $10.7 million
which occurred during the first six months of 2010, as compared with loan repayments received of
approximately $1.6 million along with an increase in cash from a return on investment in
partially-owned entities of $6.1 million associated with the sale of three (3) of the Companys
four (4) properties in its SMC investment during the comparable period in 2011.
Cash from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2011 was approximately
$1.7 million as compared with net cash used in financing activities of approximately $0.9 million
for the six months ended June 30, 2010, an increase of approximately $0.8 million. The increase is
primarily attributable to dividends paid of approximately $1.4 million during the six months ended
June 30, 2011 as compared to $3,000 during the comparable period in 2010, offset by common stock
repurchases of $0.5 million during the six month period ended June 30, 2010 which did not occur
during the comparable period in 2011.
There have been no material changes to the Companys Financial Condition from December 31,
2010.
Debt
On June 26, 2008, in connection with the acquisition of the initial 12 properties from
Bickford Senior Living Group LLC (discussed in Note 3), we entered into a mortgage loan with Red
Mortgage Capital, Inc. in the principal amount of $74.6 million. The mortgage loan has a fixed
interest rate of 6.845% and provided for one year of interest only debt service. Thereafter, as of
July 2009, the mortgage loan requires a fixed monthly payment of approximately $0.6 million for
both principal and interest, until maturity in July 2015 at which time the then outstanding balance
of approximately $69.6 million is due and payable. In addition, we are required to make monthly
escrow payments for taxes and reserves for which we are reimbursed by Bickford Master I, LLC, an
affiliate of Bickford Senior Living Group, LLC and the master lessee under our triple net lease
(the Master Lessee). The mortgage loan is collateralized by the 12 properties.
On September 30, 2008, we acquired two (2) additional properties from Bickford Senior Living
Group, LLC and entered into a second mortgage loan with Red Mortgage Capital, Inc. in the principal
amount of $7.6 million. The mortgage loan has a fixed interest rate of 7.17% and it provides for a
fixed monthly debt service payment of approximately $62,000 for principal and interest until the
maturity in July 2015 when the then outstanding balance of approximately $7.1 million is due and
payable. In addition, we are required to make monthly escrow payments for taxes and reserves for
which we are reimbursed by the Master Lessee. The mortgage loan is collateralized by the two (2)
properties.
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As a result of the election to utilize push-down accounting in connection with the Tiptree
Transaction, the aforementioned mortgage notes payable were recorded at their fair value of
approximately $82.1 million, an increase of approximately $0.8 million over the combined amortized
loan balances of approximately $81.3 million at August 13, 2010. As of June 30, 2011 approximately
$0.6 million remains to be amortized over the remaining term of the mortgage loans.
Both mortgage loans contain prepayment restrictions that materially impact our ability to
refinance either of the mortgage loans prior to 2015. The annual total debt service for the two loans is approximately $7.7 million.
Due to low occupancy at two (2) of the 14 properties, there is a covenant default under the
Bickford Master Lease as net operating income (NOI) for the quarter was not sufficient to satisfy
the NOI to lease payment coverage ratio covenant. Under the Companys mortgage documents with its
secured lender for these properties, a default under the Master Lease constitutes a default under
both mortgages. Accordingly, management is in communication with the mortgage loan servicer in
regard to the aforementioned covenant default under the Bickford Master Lease. To date, the
Company has not been provided with or received a notice of default with regard to the Bickford
mortgages. Management currently anticipates that such covenant default will not have a material
impact on the financial statements, operations and/or the liquidity of the Company.
Notwithstanding the foregoing, potential lender actions as a result of the default include an
acceleration of the mortgages. Accordingly, management is actively monitoring the situation and
will continue its efforts to resolve this issue in a timely manner, including, if appropriate,
seeking a waiver of such default and/or a modification of the applicable provision in the loan
documents.
The Company leases its corporate office space with monthly rental payments approximating
$20,000. The lease expires March 7, 2019.
Per the terms of the Services Agreement, the Company is obligated to pay TREIT a monthly base
services fee of one twelfth of 0.5% of the Companys Equity (as defined in the Services Agreement).
See Note 8 Related Party Transactions.
Equity
As of June 30, 2011, we had 10,154,294 shares of common stock and no shares of preferred stock
outstanding.
On May 16, 2011, the Company issued 9,245 common shares to TREIT Management LLC in conjunction
with its quarterly incentive fee due under the Services Agreement (See Note 8). These shares were
issued under the Manager Equity Plan.
As of June 30, 2011, 278,502 common shares remain available for future issuances under the
Equity Plan and 197,673 shares remain available for future issuances under the Manager Equity Plan.
Per the terms of the respective plans, the amounts available for issuance under the Equity Plan
and Manager Equity Plan were adjusted for the Companys three-for-two stock split announced in
September 2010.
On January 3, 2011, April 6, 2011 and July 5, 2011, 3,156, 2,912 and 2,096 shares,
respectively, of common stock with a combined aggregate fair value of approximately $45,000 were
granted to our independent directors as part of their annual retainer. The shares were issued
under the Equity Plan. Each independent director receives an annual base retainer of $50,000,
payable quarterly in arrears, of which 70% is paid in cash and 30% in shares of Care common stock.
Shares granted as part of the annual retainer vest immediately and are included in general and
administrative expense.
In connection with the Tiptree Transaction, CIT Healthcare sold a warrant (the 2008 Warrant) to purchase 435,000
shares of the Companys common stock at $17.00 per share under the Manager Equity Plan. The
2008 Warrants, which was granted to CIT Healthcare by the Company as consideration for amendments to
earlier versions of the Management Agreement, and which was immediately exercisable, expire on
September 30, 2018 and was adjusted to provide for the purchase of 652,500 shares of the Companys
common stock at $11.33 per share as a result of the three for two stock split announced by the
Company in September 2010.
As discussed above, under the terms of the Omnibus Agreement, on April 15, 2011, the Company
issued to the Cambridge Parties a warrant (the Warrant) to purchase 300,000 shares of the Companys common stock
at an exercise price of $6.00 per share. The warrants expire upon the expiration of the term of
the Omnibus Agreement (June 30, 2017 at the latest).
Distributions
We are required to distribute 90% of our REIT taxable income (excluding the deduction for
dividends paid and capital gains) on an annual basis in order to qualify as a REIT for federal
income tax purposes. Accordingly, we intend to make, but are not contractually bound to make,
regular quarterly distributions to holders of our common stock and
dividend equivalent payments to holders of OP Units. All
such distributions are authorized at the discretion of our board of directors. We may make certain
distributions consisting of both cash and shares to meet REIT distribution requirements. We
consider market factors and our performance in addition to REIT requirements in determining
distribution levels.
Our board of directors declared a first quarter dividend of $0.135 per share of common stock
for the quarter ended on March 31, 2011 which was paid to stockholders of record at the close of
business on May 9, 2011. Additionally, our board of directors declared a second quarter dividend
of $0.135 per share of common stock for the quarter ended on June 30, 2011. The dividend is payable
on September 1, 2011 to stockholders of record at the close of business on August 18, 2011.
Contractual Obligations
As of April 15, 2011, Cares previous obligation to provide approximately $0.9 million in
tenant improvements related to our investment of the Cambridge Portfolio was eliminated in
conjunction with the execution of the Omnibus Agreement.
Acquisitions and Dispositions
During the three and six month periods ended June 30, 2011, Care did not acquire or dispose of
any real estate holdings and other than its consent to the sale of three (3) of the four (4) properties underlying its SMC investment. As of June 30, 2011 the Company had not entered into any definitive purchase and
sale agreements with regard to any real estate transactions. The Company regularly evaluates
potential real estate acquisitions and dispositions. While current and projected returns for a
subject property significantly influence the decision making process, other items, such as the
impact on the geographical diversity of the Companys portfolio, the type of property, the
Companys experience with and the overall reputation of the property operator and the availability
of mortgage financing are also taken into consideration. Applicable capitalization rates for such
acquisitions vary depending on a number of factors including, but not limited to, the type of
facility, its location, competition and barriers to entry in the particular marketplace, age and
physical condition of the facility, status and experience of the property operator and the
existence or availability of mortgage financing. The property net operating income for perspective
acquisitions is generally based upon the EBITDA for such property adjusted for market vacancy and
property management fees as well as applicable maintenance, operating
and tax reserves.
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Impact of Inflation
Inflation may affect us in the future by changing the underlying value of our real estate or
by impacting our cost of financing our operations. Our revenues are generated primarily from
long-term investments. Inflation has remained relatively low during recent periods. There can be
no assurance that future Medicare, Medicaid or private pay rate increases will be sufficient to
offset future inflation increases. Certain of our leases require increases in rental income based
upon increases in the revenues of the tenants.
Recent Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). ASU 2011-02 provides amendments to Topic 310 to
clarify which loan modifications constitute troubled debt restructurings. It is intended to assist
creditors in determining whether a modification of the terms of a receivable meets the criteria to
be considered a troubled debt restructuring, both for purposes of recording an impairment loss and
for disclosure of troubled debt restructurings. For public companies, the new guidance is effective
for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to
restructurings occurring on or after the beginning of the fiscal year of adoption. Early adoption
is permitted. The Company is currently evaluating the impact on its results of operations or
financial position of the adoption of this standard.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU
2011-04). The amendments in ASU 2011-04 change the wording used to describe many of the
requirements in GAAP for measuring fair value and for disclosing information about fair value
measurements. The amendments are intended to create comparability of fair value measurements
presented and disclosed in financial statements prepared in accordance with GAAP and International
Financial Reporting Standards. ASU 2011-04 is effective for interim and annual periods beginning
after December 15, 2011. The Company does not expect the adoption of this standard to have a
material effect on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (ASU
2011-05), which requires an entity to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05
eliminates the option to present components of other comprehensive income as part of the statement
of equity. This ASU does not change the items that must be reported in other comprehensive income.
ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The
Company does not expect the adoption of this standard to have a material effect on its consolidated
financial statements.
Non-GAAP Financial Measures
Funds from Operations
Funds From Operations, or FFO, which is a non-GAAP financial measure, is a widely recognized
measure of REIT performance. We compute FFO in accordance with standards established by the
National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to
FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or
that interpret the NAREIT definition differently.
The revised White Paper on FFO, approved by the Board of Governors of NAREIT in April 2002
defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint ventures.
Adjusted Funds from Operations
Adjusted Funds From Operations, or AFFO, is a non-GAAP financial measure. We calculate AFFO as
net income (loss) (computed in accordance with GAAP), excluding gains (losses) from debt
restructuring and gains (losses) from sales of property, plus the expenses associated with
depreciation and amortization on real estate assets, non-cash equity compensation expenses, the
effects of straight lining lease revenue, excess cash distributions from the Companys equity
method investments and one-time events pursuant to changes in GAAP and other non-cash charges.
Proportionate adjustments for unconsolidated partnerships and joint
ventures will also be taken when calculating the Companys AFFO.
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We believe that FFO and AFFO provide additional measures of our core operating performance by
eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial
results to those of other comparable REITs with fewer or no non-cash charges and comparison of our
own operating results from period to period. The Company uses FFO and AFFO in this way and also
uses AFFO as one performance metric in the Companys executive compensation program. Additionally,
the Company believes that its investors also use FFO and AFFO to evaluate and compare the
performance of the Company and its peers, and as such, the Company believes that the disclosure of
FFO and AFFO is useful to (and expected by) its investors. The
Company uses FFO and AFFO in this way, and also uses AFFO as one performance metric in the Companys executive compensation program
as well as a variation of AFFO calculating the Incentive Fee payable to its advisor, TREIT (as
adjusted pursuant to the Services Agreement).
However, the Company cautions that neither FFO nor AFFO represent cash generated from
operating activities in accordance with GAAP and they should not be considered as an alternative to
net income (determined in accordance with GAAP), or an indication of our cash flow from operating
activities (determined in accordance with GAAP), as a measure of our liquidity, or an indication of
funds available to fund our cash needs, including our ability to make cash distributions. In
addition, our methodology for calculating FFO and/or AFFO may differ from the methodologies
employed by other REITs to calculate the same or similar supplemental performance measures, and
accordingly, our reported FFO and/or AFFO may not be comparable to the FFO and AFFO reported by
other REITs.
The following is a reconciliation of FFO and AFFO to net income (loss), which is the most
directly comparable GAAP performance measure, for the three and six month periods ended June 30,
2011 and 2010, respectively (in thousands, except share and per share data):
For the three months ended | For the six months ended | |||||||||||||||
June 30, 2011 | June 30, 2011 | |||||||||||||||
FFO | AFFO | FFO | AFFO | |||||||||||||
Net income (loss) |
$ | 1,067 | $ | 1,067 | $ | (46 | ) | $ | (46 | ) | ||||||
Add: |
||||||||||||||||
Depreciation and amortization from partially-owned entities |
| | 2,601 | 2,601 | ||||||||||||
Depreciation and amortization on owned properties |
854 | 854 | 1,708 | 1,708 | ||||||||||||
Amortization of above-market leases |
| 52 | | 104 | ||||||||||||
Stock-based compensation to directors |
| | | 30 | ||||||||||||
Stock issued to related parties |
| 61 | | 61 | ||||||||||||
Straight-line effect of lease revenue |
| (594 | ) | | (1,188 | ) | ||||||||||
Excess cash distributions from the Companys equity method
investments |
| | | 1 | ||||||||||||
Change in the obligation to issue OP Units |
| | | 255 | ||||||||||||
Funds From Operations and Adjusted Funds From Operations |
$ | 1,921 | $ | 1,440 | $ | 4,263 | $ | 3,526 | ||||||||
FFO and Adjusted FFO per share basic |
$ | 0.19 | $ | 0.14 | $ | 0.42 | $ | 0.35 | ||||||||
FFO and Adjusted FFO per share diluted |
$ | 0.19 | $ | 0.14 | $ | 0.42 | $ | 0.35 | ||||||||
Weighted average shares outstanding basic(1)(2) |
10,149,562 | 10,149,562 | 10,145,018 | 10,145,018 | ||||||||||||
Weighted average shares outstanding diluted(1)(2) |
10,167,272 | 10,167,272 | 10,153,922 | 10,153,922 |
For the three months ended | For the six months ended | |||||||||||||||
June 30, 2010 | June 30, 2010 | |||||||||||||||
FFO | AFFO | FFO | AFFO | |||||||||||||
Net Loss |
$ | (1,902 | ) | $ | (1,902 | ) | $ | (10,332 | ) | $ | (10,332 | ) | ||||
Add: |
||||||||||||||||
Depreciation and amortization from partially-owned entities |
2,280 | 2,280 | 4,576 | 4,576 | ||||||||||||
Depreciation and amortization on owned properties |
841 | 841 | 1,683 | 1,683 | ||||||||||||
Adjustment to valuation allowance for loans carried at LOCOM |
| (84 | ) | | (829 | ) | ||||||||||
Stock-based compensation to directors |
| 49 | | 113 | ||||||||||||
Straight-line effect of lease revenue |
| (569 | ) | | (1,139 | ) | ||||||||||
Excess cash distributions from the Companys equity method
investments |
| 179 | | 360 | ||||||||||||
Change in the obligation to issue OP Units |
| (310 | ) | | 268 | |||||||||||
Gain on loans sold |
| | | (4 | ) | |||||||||||
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For the three months ended | For the six months ended | |||||||||||||||
June 30, 2010 | June 30, 2010 | |||||||||||||||
FFO | AFFO | FFO | AFFO | |||||||||||||
Funds From Operations and Adjusted Funds From Operations |
$ | 1,219 | $ | 484 | $ | (4,073 | ) | $ | (5,304 | ) | ||||||
FFO and Adjusted FFO per share basic and diluted |
$ | 0.04 | $ | 0.02 | $ | (0.13 | ) | $ | (0.17 | ) | ||||||
Weighted average shares outstanding basic and diluted(1)(2) |
30,344,489 | 30,344,489 | 30,326,975 | 30,326,975 |
(1) | The diluted FFO and AFFO per share calculations exclude the dilutive effect of the 2008 Warrant convertible into 652,500 and 435,000 common shares for the three and six month periods ended June 30, 2011 and June 30, 2010, respectively, because the exercise price was more than the average market price. The diluted FFO and AFFO per share calculations include the dilutive effect of the Warrant issued pursuant to the Omnibus Agreement because the average market price was more than the exercise price. (see Note 5 to the Condensed Consolidated Financial Statements) convertible into 300,000 common shares for the three month period ended June 30, 2011. | |
(2) | Does not include original operating partnership units issued to Cambridge that were held in escrow and were reduced and restructured in conjunction with the Omnibus Agreement (see Note 5 to the Condensed Consolidated Financial Statements). |
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Table of Contents
FORWARD-LOOKING INFORMATION
We make forward looking statements in this Form 10-Q that are subject to risks and
uncertainties. These forward looking statements include information about possible or assumed
future results of our business and our financial condition, liquidity, results of operations, plans
and objectives. They also include, among other things, statements concerning anticipated revenues,
income or loss, capital expenditures, dividends, capital structure, or other financial terms, as
well as statements regarding subjects that are forward looking by their nature, such as:
| our business and financing strategy; | ||
| our ability to acquire investments on attractive terms; | ||
| our understanding of our competition; | ||
| our projected operating results; | ||
| market trends; | ||
| estimates relating to our future dividends; | ||
| completion of any pending transactions; | ||
| projected capital expenditures; and | ||
| the impact of technology on our operations and business. |
The forward looking statements are based on our beliefs, assumptions and expectations of our
future performance, taking into account the information currently available to us. These beliefs,
assumptions, and expectations can change as a result of many possible events or factors, not all of
which are known to us. If a change occurs, our business, financial condition, liquidity, and
results of operations may vary materially from those expressed in our forward looking statements.
You should carefully consider this risk when you make a decision concerning an investment in our
securities, along with the following factors, among others, that could cause actual results to vary
from our forward looking statements:
| the factors referenced in this Form 10-Q; | ||
| general volatility of the securities markets in which we invest and the market price of our common stock; | ||
| uncertainty in obtaining stockholder approval, to the extent it is required, for a strategic alternative; | ||
| changes in our business or investment strategy; | ||
| changes in healthcare laws and regulations; | ||
| availability, terms and deployment of capital; | ||
| availability of qualified personnel; | ||
| changes in our industry, interest rates, the debt securities markets, the general economy or the commercial finance and real estate markets specifically; | ||
| the degree and nature of our competition; | ||
| the performance and financial condition of borrowers, operators and corporate customers; | ||
| increased rates of default and/or decreased recovery rates on our investments; |
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| changes in governmental regulations, tax rates and similar matters; | ||
| legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company); | ||
| the adequacy of our cash reserves and working capital and | ||
| the timing of cash flows, if any, from our investments. |
When we use words such as will likely result, may, shall, believe, expect,
anticipate, project, intend, estimate, goal, objective or similar expressions, we
intend to identify forward looking statements. You should not place undue reliance on these forward
looking statements. We are not obligated to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
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ITEM 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Notwithstanding the foregoing, no matter how well a control system is designed and operated, it can
provide only reasonable, not absolute, assurance that it will detect or uncover failures within our
Company to disclose material information otherwise required to be set forth in our periodic
reports.
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three
months ended June 30, 2011 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings.
Care is not presently involved in any material litigation or, to our knowledge, is any
material litigation threatened against us or our investments, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any, incurred by us related
to litigation will not materially affect our financial position, operating results or liquidity.
Notwithstanding the foregoing, the Company, as discussed above in
Note 2, Note 4 and Note 12, has certain
indemnification obligations with respect to a lawsuit filed by one of the borrowers in our
remaining loan asset in which Care was not named as a defendant.
On November 25, 2009, we filed a lawsuit in the U.S. District Court for the Northern District
of Texas against Mr. Jean-Claude Saada and 13 of his companies (the Saada Parties), seeking
various declaratory judgments relating to our various partnership agreements with respect to the
Cambridge medical office properties. Saada brought a number of counterclaims against us.
On April 14, 2011 (effective April 15, 2011) we settled all litigation with Saada and the
Cambridge entities, and all litigation between the parties was dismissed with prejudice, ending the
litigation.
On September 18, 2007, a class action complaint for violations of federal securities laws was filed in the United
States District Court, Southern District of New York alleging that the Registration Statement relating to the initial
public offering of shares of our common stock, filed on June 21, 2007, failed to disclose that certain of the assets in
the contributed portfolio were materially impaired and overvalued and that we were experiencing increasing
difficulty in securing our warehouse financing lines. On January 18, 2008, the court entered an order appointing
co-lead plaintiffs and co-lead counsel. On February 19, 2008, the co-lead plaintiffs filed an amended complaint
citing additional evidentiary support for the allegations in the complaint. We believe the complaint and allegations
are without merit and intend to defend against the complaint and allegations vigorously. The parties filed various
motions between April 2008 and July 2010. The plaintiffs filed an opposition to our motion to dismiss on July 9,
2008, to which we filed our reply on September 10, 2008. On March 4, 2009, the court denied our motion to
dismiss. Care filed its answer on April 15, 2009. At a conference held on May 15, 2009, the Court ordered the
parties to make a joint submission (the Joint Statement) setting forth: (i) the specific statements that Plaintiffs
claim are false and misleading; (ii) the facts on which Plaintiffs rely as showing each alleged misstatement was false
and misleading and (iii) the facts on which Defendants rely as showing those statements were true. The parties filed
the Joint Statement on June 3, 2009. On July 31, 2009, the parties entered into a stipulation that narrowed the scope
of the proceeding to the single issue of the warehouse financing disclosure in the Registration Statement. Fact
discovery closed on April 23, 2010. Care filed a motion for summary judgment on July 9, 2010. By Opinion and
Order dated December 22, 2010, the Court granted Care summary judgment motion in its entirety and directed the
Clerk of the Court to enter judgment accordingly.
On
January 11, 2011, the parties entered into a stipulation ending the
litigation. In the stipulation: (i) plaintiffs waived any and all
appeal rights that they had in the action, including, without
limitation, the right to appeal any portion of the Courts
Opinion and Order granting Cares summary judgment or the
judgment entered by the Clerk; (ii) Care waived any and all rights
that they had to seek sanctions of any form against plaintiffs or
their counsel in connection with the action; and (iii) each party
agreed it would bear its own fees and costs in connection with the
action. The stipulation was so ordered by the Court on January 12,
2011, bringing the litigation to a close.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As discussed above, under the terms of the Omnibus Agreement, on April 15, 2011, the Company
issued to the Cambridge Parties a warrant (the Warrant)
to purchase 300,000 shares of the Companys common stock
at an exercise price of $6.00 per share. The Warrants expires upon the expiration of the term of
the Omnibus Agreement (June 30, 2017 at the latest). The Warrant was issued in reliance on the
exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended.
The Warrants may be exercised by cash payment of the exercise price or by a cashless
exercise whereby the number of shares to be issued to the Warrant holder will be determined by
dividing (x) the number of shares purchasable under the warrant (or the portion of the Warrant
being cancelled) multiplied by the difference between the fair value of one share and the exercise
price by (y) the fair value of one share. To the extent the
Cambridge Parties receive shares of care common stock from a cash less exercise, such shares subject to forfeiture upon
certain conditions.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved.]
Item 5. Other Information.
As previously disclosed in our Current Report on Form 8-K filed July 27, 2011, our annual
meeting of stockholders will be held at 10:00 a.m. Eastern Time on Thursday, November 3, 2011. The
meeting will be held at 780 Third Avenue, 29th Floor, New York, NY 10017. Stockholders of record as
of the close of business on September 15, 2011, will be entitled to notice of and to vote at the
annual meeting. The deadline for stockholders to submit stockholder proposals under rule 14a-8 of
the Securities Exchange Act of 1934, as amended (Rule 14a-8) for inclusion in the proxy materials
for the 2011 annual meeting is the close of business on Friday, September 9, 2011. Such proposals
should be delivered to the following address: Care Investment Trust Inc., 780 Third Avenue, 21st
Floor, New York, NY 10017, Attn: Danielle M. DePalma, Senior Counsel and Secretary. Under the terms
of the Companys Third Amended and Restated Bylaws, for a stockholder to submit a director
nomination or proposal outside of Rule 14a-8, such proposal or nomination was required to be received no later
than 5:00 p.m. Eastern Time on Monday, August 8, 2011 at the address above and in the form
described in Article II, Section 10 of the Companys Third Amended and Restated Bylaws, as
applicable.
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ITEM 6. Exhibits
(a) Exhibits
3.1
|
Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | |
3.2
|
Second Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on August 16, 2010 and herein incorporated by reference). | |
3.3
|
Third Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on September 3, 2010 and herein incorporated by reference). | |
3.4
|
Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | |
3.5
|
Second Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Form 8-K (File No. 001-33549), filed on June 25, 2010 and herein incorporated by reference). | |
3.6
|
Third Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on November 8, 2010 and herein incorporated by reference). | |
4.1
|
Form of Certificate for Common Stock (previously filed as Exhibit 4.1 to the Companys Form S-11, as amended (File No. 333-141634), filed on June 7, 2007 and herein incorporated by reference). | |
10.1
|
Omnibus Agreement dated as of April 15, 2011 among Care Investment Trust Inc., ERC Sub, L.P., Cambridge Holdings, Inc., Jean Claude Saada and affiliates of Cambridge Holdings, Inc. (previously filed as Exhibit 10.1 to the Companys Form 8-K (File No. 001-33549), filed on April 19, 2011 and herein incorporated by reference) | |
31.1
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
31.2
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
32.1
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.2
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
101.INS
|
XBRL Instance Document* | |
101.SCH
|
XBRL Taxonomy Extension Schema Document* | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document* | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document* | |
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document* |
* | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Stockholders Equity for the six month period ended June 30, 2011, (iv) the Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2011 and 2010 and (v) the Notes to the Consolidated Financial Statements. |
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability
under those sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Care Investment Trust Inc. |
||||
Date: August 9, 2011 | By: | /s/ Salvatore (Torey) V. Riso, Jr | ||
Salvatore (Torey) V. Riso, Jr | ||||
President and Chief Executive Officer
Care Investment Trust Inc. |
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Date: August 9, 2011 | By: | /s/ Steven M. Sherwyn | ||
Steven M. Sherwyn | ||||
Chief Financial Officer and Treasurer |
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Table of Contents
EXHIBIT INDEX
Exhibit No. | Description | |
3.1
|
Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | |
3.2
|
Second Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on August 16, 2010 and herein incorporated by reference). | |
3.3
|
Third Articles of Amendment and Restatement of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on September 3, 2010 and herein incorporated by reference). | |
3.4
|
Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Form 10-Q (File No. 001-33549), filed on August 14, 2007 and herein incorporated by reference). | |
3.5
|
Second Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Form 8-K (File No. 001-33549), filed on June 25, 2010 and herein incorporated by reference). | |
3.6
|
Third Amended and Restated Bylaws of the Registrant (previously filed as Exhibit 3.1 to the Companys Form 8-K (File No. 001-33549), filed on November 8, 2010 and herein incorporated by reference). | |
4.1
|
Form of Certificate for Common Stock (previously filed as Exhibit 4.1 to the Companys Form S-11,
as amended (File No. 333-141634), filed on June 7, 2007 and herein incorporated by reference). |
|
10.1
|
Omnibus Agreement dated as of April 15, 2011 among Care Investment Trust Inc., ERC Sub, L.P.,
Cambridge Holdings, Inc., Jean Claude Saada and affiliates of Cambridge Holdings, Inc. (previously
filed as Exhibit 10.1 to the Companys Form 8-K (File
No. 001-33549), filed on April 19, 2011 and herein incorporated by reference) |
|
31.1
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
31.2
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
32.1
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
32.2
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | |
101.INS
|
XBRL Instance Document* | |
101.SCH
|
XBRL Taxonomy Extension Schema Document* | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document* | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document* | |
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document* |
* | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Stockholders Equity for the six month period ended June 30, 2011, (iv) the Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2011 and 2010 and (v) the Notes to the Consolidated Financial Statements. |
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended,
are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise
are not subject to liability under those sections.
43