Tiptree Inc (TIPT) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Care Investment Trust, Inc. First Quarter 2008 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded, May 15, 2008.

I would now like to turn the conference over to Leslie Loyet, Financial Relations Board. Please go ahead.

Thank you. I'd like to thank everyone for joining us today. Earlier this morning, we sent out a press release outlining the results for the first quarter 2008. If anyone has not received the release, please visit Care's website at www.carereit.com to retrieve a copy. Management will provide an overview of the quarter and then we'll open the call up to your questions.

Before I turn the call over to management, I need to inform you that certain statements made in the press release and on this conference call that are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

For a discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, please see Risk Factors in the Company's Form 10-K for the period ended December 31, 2007, filed with the SEC. All forward-looking statements speak only as of the date on which they are made and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such event.

Also, during today's conference call, the Company may discuss funds from operations, or FFO, or adjusted funds from operations, or AFFO, both of which are non-GAAP financial measures as defined by the SEC Regulation G. Reconciliation of each non-GAAP financial measure and the comparable GAAP financial measure, or net income, can be found on the Ad 6 page of the press release issued this morning, May 15, 2008 and on the Company's website, again, at www.carereit.com by selecting the press release regarding the Company's first quarter earnings.

With that said, I'd now like to introduce Scott Kellman, President and Chief Executive Officer of Care Investment Trust. Scott, please go ahead.

Thank you, Leslie, and thanks to everyone who joined us this morning to talk about Care's first quarter results. With me this morning are Bob O'Neill, our Chief Financial Officer, and Mike McDugall is also here. He's our Chief Investment Officer who heads our risk and underwriting functions.

Today, I will provide a summary of our investment activity for the quarter, review the financial results, touch upon the strength of Care's portfolio, highlight a very exciting $100 million new partnership with a brand name assisted living operator in the Midwest, and conclude by addressing our pipeline and our line of sight to the liquidity necessary to execute on these opportunities. I'd like to touch upon each of these elements and then move on to address your specific questions during the Q&A.

Let's start by reviewing our investment activity and financial results for the quarter. During the first quarter, Care made $14.4 million in new investments. $10.3 million was invested in two Michigan skilled nursing facilities, though this investment was structured as a loan, in order to address the specific needs of our partners in the transaction. We did receive equity-like returns on the deal. Current returns are set at LIBOR plus 700 basis points with a floor of 11.5%. And if we assume 50% leverage on this transaction, an overall transaction IRRs are anticipated to fall in the high teens.

On March 31, we purchased and leased back to the Bickford Group a 35-bed Alzheimer's facility in Sioux City, Iowa. Now, this transaction carries a 9% initial rent and also has annual escalators of 3% for the term of the lease. Because this transaction closed on the last day in March, it had no impact on our financial results for the first quarter. We also funded $600,000 of additional advances to portfolio clients under terms of existing contracts.

As equity investments and joint ventures that owned real property, as well as direct ownership of real estate, make up an increasingly significant portion of Care's assets, the look of our financials is changing. Care generated a little more than $4.8 million of total revenues during the first quarter, approximately comprised of $4.7 million of interest income from our mortgage portfolio and then adding in another $100,000 of other income. Other income resulted primarily from interest earned on invested cash during the quarter.

Total operating expenses during the quarter slightly exceeded $2.6 million. These included about $1.3 million in management fees and slightly more than $1 million in marketing, general, and administrative expenses, including $200,000 of non-employee stock-based compensation. Now, we also recognized a $317,000 loss of un-amortized premium on a $27.2 million loan payoff. Though this payoff actually occurred after the close of the first quarter, because we were notified during the first quarter that the payoff was imminent, FAS 5 requires the loss to be recognized in that first quarter.

I should note that the payoff provided us with much needed additional liquidity and continues a trend of early payments by our borrowers, which facilitates our strategic objective of recycling these funds into owned real property. In addition, Care incurred approximately $416,000 of interest expense during the quarter. Now, the effect of our equity investments on our financial presentation is most noticeable as a result of the next two lines on our first quarter operating statements.

If you look at the line that's titled, Loss from Investments in Partially-owned Entities, totaling $1.1 million for the quarter, this results from the depreciation flowing from ownership of the Cambridge properties, which drove a $1.4 million accounting loss, which was counterbalanced by approximately $300,000 of income from our equity investment in Senior Management Concepts. The unrealized loss on derivative instruments equaled $195,000. Now, this loss results from Cambridge actually outperforming expectations during the first quarter. Let me explain this.

Because the Cambridge operating results exceeded expectations, the residual value of the operating partnership units we issued at closing increased. This is a positive for both parties, as Cambridge will recognize more value when the escrows are released and Care benefits from the properties performing at a higher level sooner than we had originally anticipated. Consequently, net income and funds from operations for Q1 diverged significantly for the first time this quarter. Net income equaled only $0.02 per share while FFO equaled $0.13 per share. This results primarily from the add back of depreciation to derive FFO.

Adjusted funds from operations, or AFFO, equaled $0.17 per share. The AFFO metric adds back to FFO and non-stock, non-cash stock compensation that we referenced before, the non-cash charge relating to the loan prepayment that we talked about, as well as the non-cash charge resulting from the revaluation from the partnership units issued in the Cambridge transaction.

Our portfolio remained in excellent condition at quarter end. 100% of payments due for the quarter were collected and portfolio cash flows produced strong debt service coverage ratios. In fact, debt service coverage on the portfolio as of March 31, 2008 averaged close to 1.7 times after deducting an imputed 5% management fee and $300 per bed for capital expenditures from the cash flows of the assets available to service our loans. Care had no loans on non-accrual and has had no impairments on the loan portfolio since our inception in June of last year. As we already mentioned, SMC in Cambridge continued to do exceedingly well, as well.

Yesterday, affiliates of Care Investment Trust and Bickford Senior Living Group signed a purchase and sale contract where, by Care, will acquire and lease back to Bickford 12 independent assisted and Alzheimer facilities with 569 units spread throughout the Midwest. The transaction size exceeds $100 million. We anticipate funding the transaction with approximately $75 million of agency debt and $26 million of our own equity. The deal is expected to close near the end of June and is anticipated to contribute over $0.035 cents per share per quarter to Care's AFFO.

Those of you who are familiar with the senior housing industry will appreciate how excited we are to partner with the EB family and the Bickford organization. Over the past 20 years, the EB family has enjoyed an unparalleled reputation for delivering quality care and for truly enhancing the lives of their residents. I cannot overstate the gratification that we at Care feel over the opportunity to help the Bickford Organization in their mission.

Care has a significant pipeline of additional opportunities. Though I am not currently at liberty to identify them by name, I will describe some of them, generically, to provide flavor for the types of transactions we are currently seeing in the market. We are currently in discussions with an assisted living operator who is interested in taking back operating units exchangeable for Care stock through a down REIT structure in exchange for the equity in their properties. This would be sized in the $50 million to $60 million range and would probably be supported by agency debt, as well.

We also have a hospital deal of similar size that would provide initial rents in the double digits and provide additional opportunities to grow with the operator. Finally, we are in discussions with two attractive skilled nursing deals that have the potential to provide compelling returns. Discussions with other prospects are not as far along as those referenced here, but we have several other opportunities that we are pursuing.

Care currently holds $44 million in cash. We are required to retain $10 million for general liquidity purposes under our line with Collin Financial. This leaves us with $34 million available to invest currently. The Bickford transaction will use approximately $26 million of this availability, leaving $8 million of free cash for future investments. However, we also currently hold $99.4 million of collateral in the form of mortgages that are not pledged under our Collin Financial line. We have received preliminary terms from a lender to advance capital against a secured interest in this collateral. Preliminary indications are for approximately $50 million, priced at LIBOR plus 225 basis points to 250 basis points with a line outstanding for a 17-month term.

I want to emphasize that while we're fairly far along with this particular lender, and I am hopeful that this will materialize in the near future, we have no formal commitment and this lender could withdraw at any time. Consequently, we are in discussions with other lenders, as well. We are also in discussions with two groups regarding the sale of all or part of our mortgage portfolio. Confidentiality agreements have been executed and our portfolio is currently being reviewed by these parties.

One final option under review is the sale of an A tranche of the most secure 50% of our mortgages to a financial institution. We would attempt to pass through a lower rate to the buyer of the more secure piece of paper, thus enhancing our current economics on the portfolio. In short, we are currently exploring multiple avenues to secure additional liquidity. I also want to point out that we intend to utilize our equity through down reach structures where the economics are compelling and immediately accretive, such as in the pipeline opportunity we discussed earlier.

Operator, that wraps up our prepared remarks. Could you please open the line for questions?

Yes, sir. Thank you. (OPERATOR INSTRUCTIONS). One moment, please, for our first question.

Our first question comes from the line of Douglas Harter with Credit Suisse. Please go ahead.

Thanks. Thanks, Scott, for the color on the liquidity plan. That's very helpful. If you could, talk about the insight you have as to when the mortgage portfolio is going to continue to pay down. I think you've had some good progress there. And just sort of the outlook for the remainder of '08 to free up liquidity that way, as well.

Yes. It's a great question, Doug. Here's my philosophy on the mortgage portfolio. I believe that we have the ability to accelerate pay downs in the mortgage portfolio. Because the coverages are so strong on that portfolio, our borrowers actually have embedded equity in their properties that they could extract through higher leverage.

Instead of underwriting to 170 coverage, many of these portfolio operators could take their properties elsewhere and have them underwritten to a 130 or a 125 coverage after 5% management fee and $300 per bed and thus extract additional capital to expand or use for acquisitions. I don't want -- I'm trying to balance, going to them and saying we will waive your prepayment fee in order to bring that capital in and direct them to lenders who we know are active in that marketplace against knowing that I can immediately re-deploy that capital in new transactions. So, it's a balancing act.

But when we absolutely need capital, I believe that we have a strong likelihood of being able to -- probably the best way to say it is encourage prepayments by allowing them to go elsewhere without paying their prepayment fees and possibly even lining up that liquidity for them. So, while I have limited liquidity and we're talking to lenders, I also think there's embedded liquidity in the mortgage portfolio and, quite frankly, it only runs through 2011 on average and with that type of short duration, the same people who are providing us liquidity for a 17-month period would also be interested in going directly to these borrowers and we're in conversations about that, as well.

So there are other people out there that are still actively making loans?

You know, there's one group, there's one financial institution, it's a bank. I don't want to name it on the call, but they are currently buying market share by still doing transactions in the low 300s and recently actually did a transaction at LIBOR plus 275, and their concept, I believe, is that now is the time to give up 50 to 100 basis points, do the transaction, capture the relationship, and lock these people up for the future, and they have the liquidity to do it. And, in addition to that particular lender, there are several others who are currently active in the skilled nursing and assisted living lending arena who are similar, not quite as aggressive on rate, but similarly aggressive in terms of advancing proceeds at historic coverages, though at higher rates. And so, there are opportunities.

Plus, we're seeing firming in the market. For properties that are newer and have higher coverages, we are seeing values coming back up in the marketplace, similar to how AAA Paper is now trading [in part] in the marketplace if people are trading secured paper these days. There's been a real movement. Bernanke was talking about it in the paper yesterday that he sees things firming at the higher end of credit quality.

Great. And then, I guess, just sort of touching on that one thing you said about where some of the spreads are on new originated stuff and given where your portfolio spreads are, it would lead you to believe that, or lead me to believe that the portfolio is pretty well positioned from a spread perspective when you're talking to potential buyers with the portfolio.

Our portfolio right now, and I'm going to turn to Mike McDugall, who's sitting with me and just get verification, but I believe we have LIBOR plus 327 as our average return. Mike's confirming. At LIBOR plus 327, if someone were to go out and underwrite a new deal today, I would argue that the pricing would be closer to LIBOR plus 375 to 425.

However, that would be for an underwriting with coverage at approximately 1.3 times. We currently have an average portfolio coverage of 1.7 times after a 5% management fee and the $300 per CapEx. And many of our portfolio clients are over 2 times. So, yes, I think we're well positioned for people who want safety and quality, and I think we can trade this paper. Well, I don't want to judge the market. The market is very bizarre right now, but I think there's a good likelihood that we'll be able to trade this paper in those ranges.

Great. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Our next question is from the line of Jason Deleeuw with Piper Jaffray. Please go ahead.

Thank you and good morning.

Hey, Jason.

Just trying to get a feel for the ongoing run rate of the funds from operations. Net interest income with the declining short-term rates here, maybe a little bit lower next quarter, but the equity investments have been offsetting that, at least in the first quarter. And then, it seems like you're going to be able to strengthen your funds from operation run rates as you continue to deploy capital into the equity strategy. So, I'm just, from a high-level perspective, there's a lot of stuff going on here in terms of how you're freeing up capital. But, from a high-level perspective, can you give us some color on your expectations for the FFO over the coming quarters?

Yes. Let me -- it's a great question and here is how I view it. This quarter, the second quarter, will be difficult. We only deployed $14.4 million during the first quarter, which will not mitigate in its entirety the downward trend of LIBOR and thus the resulting de-ammunition of income flowing from our mortgage portfolio. So, we will probably see a dip of at least a couple of cents in this next quarter. However, with the closing of the Bickford transaction near the end of the second quarter, we should more than make that up, moving into the third quarter.

And if indeed we're able to close either of the two primary transactions that I talked about, the down reach structure with the assisted living operator with whom we're in deep negotiations and fairly far down the path or the hospital transaction, which will yield us initial returns in the double digits, we should see significant growth in FFO going forward. If we're able to close both of those, then we will have a very, very good year in terms of growth in the FFO. And so, I think -- and then, there's additional activity, which is in the pipeline, which is farther out but not nearly as comfortable am I with articulating our attempt to move forward with those transactions.

Thanks. That's very helpful. And then, what's the dividend? Under [standing], there could be some fluctuation here in the second quarter but things are looking better for the rest of the year. Would you -- would the dividend tend to be correlated with the earnings, quarter to quarter, or would you prefer to keep it at the current run rate with the expectations that things will be much better by the second half of 2008?

It's a valid question, but it's one for our Board, and the Board will have to look at what activities occur before their next in a position to declare the dividend. And they'll make a determination at that time and I would hesitate to presumptively anticipate their thinking on that issue.

Okay. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Now, I'd like to turn the conference back over to Mr. Kellman for any closing remarks.

I just want to say thank you. We're at a point of inflection where the equity strategy is really taking hold. I have visibility to some additional liquidity and, hopefully, we'll be able to lock that down in the near future and speak more about that on our next call. And I appreciate the support of all of our investors and your participation with us today. Be well.

Thank you. Ladies and gentlemen, this does conclude the Care Investment Trust, Inc. First Quarter 2008 Conference Call. Thank you for your participation and you may now disconnect.