Tiptree Inc (TIPT) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Care Investment Trust Inc. Third Quarter 2008 Earnings 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 today, Friday, November 14th of 2008.

At this time, I'd like to turn the conference over to Leslie Loyet with Financial Relations Board. Please go ahead, ma'am.

Thank you. I'd like to thank everyone for joining us today. Earlier in the day, we sent out a press release outlining the results for third quarter 2008. If anyone has not received a 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 the risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, please see the Risk Factors section in the Company's Form 10-K for the period ended December 31st, 2007, filed with the Securities and Exchange Commission.

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 events.

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 SEC Regulation G. A reconciliation of each non-GAAP financial measure and the comparable GAAP financial measure or net income can be found in the press release issued this morning, November 14th, 2008, and on the Company's website at again, carereit.com by selecting the press release regarding the Company's third 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 third quarter results. On the phone with us are Frank Plenskofski, our Chief Financial Officer, and Mike McDugall, our Chief Investment Officer. Today, what I would like to do is review our investment activity for the quarter, walk through our financial results, and touch upon the strong performance of the portfolio during the third quarter. We will follow up by addressing our pipeline and our line of sight to the required liquidity to execute on these opportunities.

Let's talk about the investment activity. During the third quarter, Care purchased two assisted-living facilities for $10.3 million from affiliates of the Bickford Group. We funded this acquisition from cash on hand and $7.6 million of mortgage debt. These facilities were folded into the master lease agreement that governs the 12-facility $101 million transaction, which we closed at the end of the second quarter.

This was the first quarter that we experienced the full benefit of the original Bickford transaction. And it added $0.04 to this quarter's adjusted funds from operations. We are extremely pleased to have expanded our relationship with Bickford in the third quarter. And we look forward to further opportunities to partner together in 2009.

Moving to the financial results for the quarter, Care generated $6.6 million of total revenues during the third quarter, approximately comprised of $3.6 million of interest income from our mortgage portfolio, rental revenue of $2.9 million, and other income of approximately $100,000. Other income resulted primarily from interest earned on invested cash during the quarter.

Operating expenses during the quarter were slightly below $3.3 million. These included approximately $900,000 in management fees and a little more than $2.4 million in marketing, general, and administrative expenses. This included stock-based compensation expense of a little over $900,000, which primarily resulted from marking to market stock-based compensation issued in prior periods to non-employees of Care. Remember that Care has no employees. And all of the employees are externally -- are employees of our external manager CIT Healthcare.

Loss from investments in partially owned entities equaled $1.2 million for the quarter. Components included a $1.5 million loss related to our investment in the Cambridge properties that resulted from a non-cash depreciation charge of $2.4 million. This result also includes equity income of approximately $300,000 from Care's investment in the Senior Management Concepts properties. A $1.1 million depreciation charge relating to the 12-facility Bickford portfolio also ran through this year's expenses -- this quarter's expenses, excuse me.

The $622,000 unrealized loss on derivative instruments largely resulted from a revaluation of the operating partnership units relating to Cambridge. This revaluation was driven by the increase in Care's stock price during the quarter.

Interest expense totaled $1.7 million. This included $300,000 paid on the $37.8 million outstanding under our warehouse line of credit, $1.3 million relating to the mortgage debt incurred to finance the Bickford properties, and approximately $100,000 from amortization of deferred financing costs. Care's effective interest rate on borrowings for the quarter was approximately 3.6%.

Care also incurred a $2.2 million loss as a result of reclassifying a $24.7 million mortgage as held for sale. This loss reflects the effect of marking this asset to approximately 91% of par, which represents the value Care anticipates realizing upon sale of the asset in the fourth quarter.

Consequently, net loss for the quarter equaled $0.17 per share, while FFO equaled $0.00 per share. This results primarily from the add-back of depreciation to derive FFO. Adjusted funds from operations or AFFO equaled $0.04. The AFFO metric adds back to FFO the non-cash stock compensation adjustment and the non-cash expense resulting from revaluation of the partnership units issues in the Cambridge transaction. AFFO also adjusts for the non-cash effects of straight-lining of lease revenue.

AFFO this quarter was negatively impacted by $0.11 per share by the one-time earnings effect of making the decision to sell the mortgage asset we referenced earlier. Absent this impact, AFFO for the quarter would have totaled $0.15 per share.

Portfolio metrics for the quarter were excellent. 100% of payments due for the quarter were collected and portfolio cash flows produced strong debt service coverage ratios. Debt service coverage on the mortgage portfolio as of September 30th, 2008, averaged more than 1.75 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 has no loans on non-accrual. Performance of our owned properties continues to be strong as well. Occupancy in Cambridge's medical office buildings continues to track slightly above our underwritten assumptions, which is very positive in these difficult times. Of particular note, given the recent turmoil in the assisted living sector is the continued strength of our investments in this area. Occupancy in our facilities managed by Senior Management Concepts continues to average over 90%, while our Bickford portfolio continues to perform in line with our underwriting assumptions and enjoyed its second highest month of occupancy for the year in September.

Our origination team continues to source attractive opportunities in the market. But quite frankly, we are becoming increasingly selective in what we review for potential investment. We are currently actively engaged in underwriting three transactions. While we are very enthusiastic about these opportunities, given the current debt markets, there is no assurance that any of these deals will close in the near future.

Care currently holds $18.8 million in cash. We are required to retain $5 million for general liquidity purposes under our recently amended column financial line. This leaves us with $13.8 million currently available for investment in general corporate purposes.

This week, Care and our manager CIT Healthcare reached agreement under the mortgage purchase agreement, which we have talked about on prior calls, for CIT Healthcare to purchase a $24.7 million mortgage asset from Care. The sale of this asset will provide approximately $22.4 million of proceeds to Care. Upon completion of this sale, Care will have approximately $36 million of free cash with which to execute on the opportunities described earlier.

Now last quarter, we discussed two borrowers of approximately $53 million in our mortgage portfolio that we're pursuing re-financings under the FHA program. These borrowers have continued to work through the FHA process and they hope to repay Care within the next 60 days. Once again, while we would very much welcome these early repayments, there is no assurance that they will occur in that timeframe or at all.

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

Yes, sir. Thank you. (Operator Instructions).

Our first question's from the line of Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Hi. Good morning.

Hey, Jerry.

I guess a couple things -- one, just prospects for continuing to sell loans to CIT just based on their financial situation, what's going on the markets?

Right. We've done one and the Board will determine on a going-forward basis, Jerry, whether we do more. But the drivers of that decision will be market circumstances and I think an evaluation of Care's liquidity position, which, of course, will be significantly impacted by whether these FHA programs actually go through and whether these two borrowers in our current mortgage portfolio are able to repatriate that cash and pay us off.

So, I think that the possibility and the availability of the funds are there. And the question really becomes do we need it? And given the market opportunities that we're seeing, when is the best time to execute on the put and capture that additional cash?

Okay. And then, just maybe a little bit more thinking on sort of strategy, it sounds like you, like some of the other healthcare REITs, obviously, just given the general uncertainty of this market, are kind of pulling back on investments.

What kind of -- do you have sort of some broader comments maybe on strategy or how you think about things as you're looking for sort of a different kind of minimum yield? Are you looking to buy assets or do mortgages? Given what you're seeing out there, assuming you've got this $36 million, which is obviously I assume coming, and maybe the $53 million on top of that, do you just sit on it? Or what kinds of things do you look to do? What kind of yields?

Jerry, we're not going to sit on it right now because quite frankly, the areas that we're focused on in the immediate future are primarily assisted living and skilled nursing. Both areas have expanding cap rates right now that provide some compelling returns. And you're starting to see the opportunity to make investments with established coverage ratios on the go-in. And so, you can actually deploy capital today in select circumstances and achieve a great deal of safety in addition to higher spreads than you've achieved in over the last 12 months. So, we don't intend to sit on it. By the same token, we don't intend to buy older properties or put ourselves at risk.

Let me give you a couple of examples. Recent investment in the assisted living area, such as our add-on with the Bickford Group was in the 8.4% area. And that cap rate is actually trending higher. We folded that into our last transaction with them and established the pricing consistent with the last one because, quite frankly, these two new assets increased our coverages and added a margin of safety to the portfolio. But if we did more, we would look for a higher rate than that.

Skilled nursing with heavy Medicare focus for potential acquisitions we're currently reviewing is probably 100 to 150 basis points higher. And we're talking levels approaching 9.5% to 10%. And these are for facilities that have going-in coverage of 1.35 times and up from there. There are a few deals we're actively working on now, which is one driver of our decision to sell the mortgage asset we talked about on the call and take that hit in the third quarter so that we can actually grow our asset base and move forward in the fourth quarter.

Now, there are mortgages out there to be had at extremely attractive yields. And quite frankly, we just passed on one that was very attractive and had more than a 20% IRR in it. But it came with 80% financing and it was a mortgage deal. And we want to continue our progress in transitioning to an equity REIT. And we believe that while that may be available and attractive for the next two or three years, if you're looking longer term, we'd rather capture equity opportunities that we'll own forever at attractive yields.

So, we made the decision not to bite on that transaction and to move forward with our focus on equity properties. But there are select opportunities out there and I think more attractive returns at better safety parameters than we've seen recently.

Okay. That's helpful. And then, just one last thing, and I think we have probably the detail to go through it probably loan by loan. But just how are you thinking about the -- now the drop in LIBOR and how much variation that's going to create in income go forward? Because I know some of your -- a lot of your stuff's LIBOR-based. Some of it's got floors and that sort of stuff. So, are you sort of planning for fluctuation, assuming we stay at LIBOR rates through the first -- where they are now through the fourth quarter?

Jerry, the majority of our mortgages are -- well, 100% of our mortgages are floating rate. So, we are subject to LIBOR fluctuations. That being said, the majority of them have floors in the [710] to [725] range. So actually, the spread, given the fact that our current line is at LIBOR plus 100, is quite attractive.

That being said, the mortgages as I view them are a source of continuing liquidity. In a market where we can't go back to the equity markets and we can't raise additional capital, what we can do is continually encourage our mortgage borrowers to refinance with HUD, with FHA, or with Fannie Mae or Freddie Mac. And that's what we've been doing. And we've seen some great repatriation of capital over the last year by people going to these programs, including the $53 million that two borrowers are currently pursuing through those programs.

So, I actually like our mortgage portfolio from the standpoint of these mortgages primarily mature over the next 18 months to 24 months. So, I have a source of cash in a capital-constrained market. And at the same time, given there are floors, I think we're getting comparatively attractive returns on them. And so, I see them sort of as a kitty of available cash that I can access or encourage as I see investment opportunities out there. I actually think it puts us in a relatively good position. That being said, what you articulated is absolutely correct. And for those where we don't have floors, we will see a decline in our returns. So, we could have some short-term fluctuations in our FFO and our AFFO.

Okay. And then, just one last thing for me, if I could -- you obviously -- some of the major shareholders have been pushing for sale of the Company. Any comments on sort of where some of those issues stand or whether there's anything sort of bigger picture strategic that you're feeling the need to do or to look at?

Not immediately at this time from the shareholders. In fact, two of those shareholders have started selling our stock, which I think has kept it at the levels that you've been seeing. I think that we've seen some liquidations from those shareholders ranging from [10] to [11.50]. And there's selling pressure whenever we start to tick up over 11 as these shareholders dispose of some stock. I think it's a good thing for the Company because it increases our float and the availability of other people to build positions. But we haven't had very recent conversations with them.

I don't believe that their attitudes about the desire to see us liquidate so they can re-deploy into other investment opportunities have changed. But we continue to take advice from them and stay in contact with them. But I haven't had any recent conversations.

Okay. Thanks.

Sure. Thank you.

Thank you. (Operator Instructions).

And our next question's from the line of Jason Deleeuw with Piper Jaffray. Please go ahead.

Hi, Jason.

Good morning. Hello. Just a couple questions here -- you've got the three transactions you guys are underwriting right now. What is -- can you give us a sense of the size of those transactions? And I believe your loan on Bickford -- on that Bickford deal was a GSE loan. And can you just talk about the environment, trying to get the GSE financing and what kind of leverage you think you could get, the type of leverage you got on Bickford that you got that you're looking at with these other deals that you're taking a look at right now?

Yes, let me address that first and then the other question. The federal programs or ostensibly federal programs with Fannie and Freddie are still open for business. And in fact, Fannie and Freddie, we've met with representatives of Fannie and Freddie at recent conferences. And their perspective is that these programs provide them a much-needed and appreciated diversification from home lending. And they've done quite well with these programs. So, what we've been told is that the window remains open and that there will be activity in those programs on a go-forward basis.

We saw that with the Bickford add on. The $7.6 million that we did was also through Fannie Mae. So, I think that those windows will remain open. And I think it's an easy established flow of funds for the federal government to support economic activity. I doubt that that will be changed on a go-forward basis.

HUD continues FHA, which is the HUD program, continues to be active. And the HUD intermediaries continue to process loans through that program. And most recently, they've established what they call the HUD lean program, which allows you to move through the process in three months or less, which is radically faster than historically. So, it actually seems that the government is putting more effort into these programs as opposed to pulling back.

In terms of the three assets or three transactions that we're looking at, two of them exceed nine figures and are in the transitional care or high acuity skilled nursing arena. And one of the transactions is in the assisted-living arena and is slightly less than that level.

Okay. And then, in terms of like the underwriting and the GSEs, you think the leverage would be similar to what we've seen in the past?

Yes, we haven't -- they have not altered their guidelines. And we have not received any indication that the leverage would be less.

Okay. And then, in the G&A expense this quarter, were there any one-time items in that? And I believe you said -- pardon me if I'm wrong -- some of the Bickford expenses were ran through that this quarter?

I mean, there were some Bickford expenses relating to closing the transaction. Most of those were capitalized, I believe. So, I don't believe that they ran through, but in any material fashion. But the big issue that we have that causes some fluctuation in that expense line is the fact that our employees are not employees of Care. And so, we actually have to adjust our employee stock compensation expense based upon fluctuations in our stock price. And our stock price was significantly higher at the end of the third quarter than it was at the end of the second quarter.

So, there were a number of accounting adjustments running through the stock comp, which was about $900,000 increase. It's not like we issued ourselves $900,000 of additional stock comp in these difficult times, which changed radically as well as the expense relating to the Cambridge units, which were valued higher because our stock price was higher. So, we had a higher liability. So, our financials do have a little bit of noise in them relating to these fluctuations, which really don't have a cash effect but can have significant impacts on our earnings and flowing through our financial metrics.

Okay. And then last quarter, you guys spoke about an annual run rate for your AFFO. And just given with the moves in LIBOR and where LIBOR currently sits and the opportunities that you guys are seeing, can you speak to that this quarter?

I appreciate the question. But at this point in time, given the uncertainties of the payoffs, the fact that, quite frankly, getting the put on the conversion of the mortgage removes income, which we believe was wise because it positions us to take advantage of some of these equity opportunities. Should these equity opportunities not materialize, we would have made an economically disadvantageous decision. Now, we wouldn't do something if we didn't think that the equities weighed highly on the advisability of doing it. So, the act speaks for itself.

But it's very difficult for me to make projections. And the last thing I want to do, especially in this market, is articulate a run rate based upon events that haven't occurred yet. So, I'm hesitant to do that. I will say that last time when we spoke about the run rate, it was with the assumptions of the portfolio that we had and the level of LIBOR at the time that we spoke. LIBOR since then has fallen, gone up, and fallen again. And so, the LIBOR flexibility -- variability I should say -- does greatly impact the advisability of our Company at this time with the makeup of our portfolio giving guidance. And I think I would rather not at this time.

Okay. And now, you've got these three transactions you're looking at, you also have the share repurchase program. How are you going to view capital uses for share repurchases if, let's say, some of these opportunities don't materialize? How are you looking at utilizing capital?

Yes, the share repurchase program was instituted by the Board to provide it flexibility. It's a decision that's made by the Board or a subset of the Board. We have not yet executed on the share repurchase program, though we're allowed to purchase up to 2 million shares depending upon issues, such as market conditions, legal considerations, and other factors. I guess I would say that we will look at the totality of the circumstances and market conditions, including our liquidity and where our stock is trading and make a decision based upon the models that we run internally to determine what the best use of our capital is.

All things being equal, I would rather -- and this is just me speaking -- I would rather make accretive investments than buy back shares. However, there are times when the shares become a compelling investment opportunity for us. And we wouldn't hesitate to hit the shares at that time.

Okay. Thank you. And then, just one last one -- the book value at the end of the quarter, do you guys have that?

Yes, we do. Frank, do you have that?

Yes, Scott. The book value at the end of the quarter is roughly about [1380].

Okay. Thank you very much, guys.

Thank you.

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

Thanks. I was wondering if you could just talk about -- obviously have the two potential payoffs in the work -- but the availability of liquidity for the rest of the loan portfolio to be able to refinance and pay you off?

The rest of the portfolio is very strong. And whenever you have debt service coverages that average [1.75], Doug, you have the availability to extract additional capital out of those assets if you're able to refinance. Now, the primary refinancing vehicle in today's market is HUD. And historically, people had differing opinions about HUD. Do they want to go through the regulatory circumstances?

With the HUD lean program, the FHA lean program that's been instituted, the process has been greatly eased to access this type of funds. And we're in conversations with several of our borrowers on various transactions about whether they want to attempt to access that program on a go-forward basis. So, we're constantly in conversations with our portfolio borrowers, discussing their liquidity options and their availability to seek additional capital.

That being said, most of the portfolio runs off over the next two years anyway. And so, we expect repatriation of funds during that period of time one way or the other. I think that there are real possibilities there. And quite frankly, in the background is always the possibility of executing on the put with CIT Healthcare, should we need the liquidity for a specific investment opportunity.

And can you also talk about -- is there any other -- do you have other availability on your current borrowing facilities?

The current borrowing facilities are not fully drawn. That being said, we have not gone to them recently, given the current market conditions. So, given the fact that, like any CDO warehouse line, the lender has 100% discretion as to whether they fund, we have not pursued that recently. Of course, we have not had a need to pursue it up to this time. So, we haven't gone to Column Financial and asked for additional liquidity.

Okay. Thank you.

Sure.

Thank you. And at this time, we have no further questions. I'd like to turn it back to Mr. Kellman for any closing remarks.

I just want to say thank you for joining us. It's a very difficult environment out there. The gyrations in the markets are wild and at times scary. We at Care are very gratified that we have a solid portfolio that pays us every month on time and that we have opportunities on a go-forward basis to grow this Company, given our current liquidity position. Once again, we thank you for joining us. And have a good day.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 using the access code of 11122142 followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.