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TIPT > SEC Filings for TIPT > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for TIPTREE FINANCIAL INC.


13-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

Our disclosure and analysis in this Quarterly Report on Form 10-Q, and the documents that are incorporated by reference herein contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and funds from operations ("FFO") and adjusted funds from operations ("AFFO"), our strategic plans and objectives, cost management, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated capital expenditures (and access to capital) required to complete projects, amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecast in the 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. Statements regarding the following subjects, among others, are forward-looking by their nature:

our business and financing strategy;

our ability to acquire investments on attractive terms;

our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;

our understanding of our competition;

our projected operating results;

market trends;

completion of any pending real estate transactions;

projected capital expenditures; and

the impact of technology on our operations and business.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

risks and uncertainties related to the current market environment, the national and local economies, and the real estate industry in general and in our specific markets, which may have a negative effect on the following, among other things:

the financial condition and performance of our tenants, borrowers, operators, corporate customers, joint-venture partners, lenders and/or institutions that hold our cash balances, which may expose us to increased risks of default by these parties;

our ability to obtain equity or debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition opportunities and refinance existing debt and our future interest expense; and

the value of our real estate investments, which may limit our ability to divest our assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.

general volatility of the securities markets in which we invest and the market price of our common stock;

changes in our business or investment strategy;

changes in healthcare laws and regulations;

availability, terms and deployment of capital;

our ability to pay distributions and the amount of such distributions;

our dependence upon key personnel whose continued service is not guaranteed and our ability to identify, hire and retain highly qualified executives in the future;

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 risks associated with the Company's investments in joint ventures and unconsolidated entities, including its lack of sole decision-making authority and its reliance on its joint venture partners' financial condition and continued cooperation;

increased rates of default and/or decreased recovery rates on our investments;

potential environmental contingencies, and other liabilities;


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loss of our status as a real estate investment trust ("REIT") which is expected to occur effective as of January 1, 2013;

increased prepayments or extensions of the mortgages and other loans underlying our mortgage portfolio;

actual and potential conflicts of interest with Tiptree Financial Partners, L.P. ("Tiptree"), TREIT Management LLC ("TREIT" or "Advisor"), their respective affiliates and their related persons and entities;

increased prepayments or extensions of the mortgages and other loans underlying our loan investment portfolio;

the extent of future or pending healthcare reform and regulation;

changes in governmental regulations, tax rates and similar matters;

legislative and regulatory changes;

the adequacy of our cash reserves and working capital;

the timing of cash flows, if any, from our investments;

the availability of appropriate acquisition targets and our ability to close on such acquisitions; and

the risks associated with failure to integrate acquisitions successfully.

This list of risks and uncertainties, however, is only a summary of some of the most important factors to us and is not intended to be exhaustive. New factors may also emerge from time to time that could materially and adversely affect us.

The following should be read in conjunction with the condensed consolidated financial statements and notes included herein. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") 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

As of June 30, 2013, Tiptree Financial Inc., formerly known as Care Investment Trust Inc., (together with its subsidiaries, the "Company" unless otherwise indicated or except where the context otherwise requires, "we", "us" or "our") was an equity real estate investment trust ("REIT") that invested in healthcare facilities including assisted-living, independent living, memory care, skilled nursing and other healthcare and seniors-related real estate assets in the United States of America (the "U.S."). The Company was incorporated in Maryland in March 2007 and completed its initial public offering on June 22, 2007. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "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.

As of June 30, 2013, we maintained a geographically-diversified investment portfolio consisting of approximately $41.9 million (63%) in wholly-owned and majority-owned real estate, approximately $2.5 million (4%) in an unconsolidated joint venture that owns real estate, and approximately $22.4 million (33%) in a loan investment. As of June 30, 2013, our portfolio of assets consisted of wholly-owned real estate of senior housing facilities, including assisted living, independent living and memory care facilities, as well as real estate joint-ventures of senior housing facilities, including an assisted / independent living facility and senior apartments, and a loan investment secured by skilled nursing facilities, as well as collateral relating to assisted living facilities and a multifamily property. Our wholly-owned senior housing facilities are leased, under triple-net leases, which require the tenants to pay all property-related expenses. As of June 30, 2013, we operated in only one reportable segment.

On August 13, 2010, Tiptree Financial Partners, L.P. ("TFP") acquired control of the Company (the "2010 Transaction"). As part of the 2010 Transaction, we entered into a hybrid management structure whereby senior management was internalized and we entered into a services agreement with TREIT Management, LLC ("TREIT" or "Advisor") for certain advisory and support services (the "Services Agreement").

Current Event - Reorganization

On July 1, 2013, we completed a combination with TFP pursuant to the Contribution Agreement, dated as of December 31, 2012, as amended by Amendment No. 1 to the Contribution Agreement, dated as of February 14, 2013 (the "Contribution Agreement"), among us, TFP and Tiptree Operating Company, LLC (the "Operating Subsidiary"). Pursuant to the Contribution Agreement, we contributed substantially all of our assets to the Operating Subsidiary in exchange for 10,289,192 common units in the Operating Subsidiary (representing an approximately 25% interest in Operating Subsidiary), and TFP contributed substantially all of its assets to Operating Subsidiary in exchange for 31,147,371 common units in the Operating Subsidiary (representing an approximately 75% interest in Operating Subsidiary) and 31,147,371 shares of our newly classified Class B Common Stock (the "Contribution Transactions").

TREIT became an indirect subsidiary of the Company in connection with the Contribution Transactions. The Services Agreement was assigned by TFI to its subsidiary Care Investment Trust LLC on July 1, 2013 in connection with the Contribution Transactions. The Services Agreement remains in full effect.

Immediately prior to closing the Contribution Transactions, we filed our Fourth Articles of Amendment and Restatement with the Maryland Department of Assessments and Taxation in order to, among other things, (i) change the company name from "Care Investment Trust Inc." to "Tiptree Financial Inc.", (ii) rename our common stock as "Class A Common Stock", with no change to the economic or voting rights of such stock, (iii) reclassify 50,000,000 authorized and unissued shares of our common stock as Class B Common Stock, and (iv) remove certain provisions related to our qualification as a REIT.

As a result of the Contribution Transactions, we have become a diversified holding company whose subsidiaries will hold and manage the assets of and operate the businesses we operated prior to the Contribution Transactions and those contributed by TFP on a consolidated basis. Through our operating subsidiary, Tiptree Operating Company, LLC, our primary focus is on four sectors of financial services: insurance and insurance services, real estate, asset management and specialty finance (including corporate, consumer and tax-exempt credit). The financial information in this Quarterly Report presents our financial results prior to the completion of the Contribution Transactions and are not indicative of our financial results following the Contribution Transactions.

As a result of the Contribution Transactions, we expect that we will not qualify to be taxed as a REIT for Federal income tax purposes and would become a taxable corporation effective January 1, 2013 due to the nature of the assets and the businesses contributed by TFP. If we are not taxed as a REIT, we will not be subject to the 90% distribution requirement and our board of directors, or the Board, may then determine to distribute less of its taxable income than it would if we were taxed as a REIT.


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Transactions in 2013 and 2012

In April 2012, Care refinanced the Bridge Loan for the Greenfield properties, consisting of three assisted living and memory care fecilities located in Virginia, by entering into three separate non-recourse loans (each a "Greenfield Loan" and collectively the "Greenfield Loans") with KeyCorp Real Estate Capital Markets, Inc. ("KeyCorp") for an aggregate amount of approximately $15.7 million.

The Greenfield Loans bear interest at a fixed rate of 4.76%, amortize over a 30-year period, provide for monthly interest and principal payments commencing on June 1, 2012 and mature on May 1, 2022. The Greenfield Loans are secured by separate cross-collateralized, cross-defaulted first priority deeds of trust on each of the Greenfield properties. The Greenfield Loans are non-recourse to the Company except for certain non-recourse carveouts (customary for transactions of this type), as provided in the related guaranty agreements for each Greenfield Loan.

Each Greenfield Loan contains typical representations and covenants for loans of this type. A breach of the representations or covenants could result in a default under each of the Greenfield Loans, which would result in all amounts owing under each of the Greenfield Loans to become immediately due and payable since all of the Greenfield Loans are cross-defaulted. In June 2012, KeyCorp sold each of the Greenfield Loans to Federal Home Loan Mortgage Corporation ("Freddie Mac") under Freddie Mac's Capital Markets Execution ("CME") Program.

Effective as of February 1, 2013, we acquired a 75% interest in a newly formed Limited Liability Company ("Care Cal JV LLC") whose subsidiaries own two senior housing apartment buildings located in New York containing an aggregate 202 units. Affiliates of Calamar Enterprises, Inc. ("Calamar"), a full service real estate organization with construction, development, management, and finance and investment divisions, developed the properties and own a 25% interest in Care Cal JV LLC. Simultaneously with the acquisition, we entered into a management agreement with a term of ten years with affiliates of Calamar for the management of the properties. A joint venture agreement provides that the properties may be marketed for sale after a seven year lockout subject to additional provisions. The properties were developed by Calamar within the last 5 years and are approximately 97% occupied as of March 31, 2013.

Care receives a preference on interim cash flows and sales proceeds and Calamar's management fee is subordinate to such payments. The aggregate purchase price of the properties acquired was $23.3 million. In connection with the transaction, Care received a right of first offer to acquire four additional senior communities owned by Calamar.

The properties are encumbered by two separate loans from Liberty Bank with an aggregate debt balance of approximately $18.3 million (the "Calamar Loans"). One loan had a principal balance of approximately $7.7 million at the time of acquisition and amortizes over 30 years, with a fixed interest rate of 4.5% through maturity in February 2020. The second loan had a principal balance of approximately $10.6 million at the time of acquisition and also amortizes over 30 years, with a fixed interest rate of 4.0% through maturity in August 2019.

The Calamar Loans are secured by separate first priority deeds of trust on each of the properties. The Calamar Loans are non-recourse to the Company except for certain non-recourse carveouts (customary for transactions of this type), as provided in the related guaranty agreements for each Calamar Loan. Each Calamar Loan contains typical representations and covenants for loans of this type. A breach of the representations or covenants could result in a default under each of the Calamar Loans, which would result in all amounts owing under the applicable Calamar Loan to become immediately due and payable.

On March 1, 2013, we purchased all of the remaining interest (with a principal outstanding balance of approximately $21.8 million on the date of acquisition) in the syndicated loan in which we held an approximately one-third interest for approximately $17.3 million. See Note 4 to the condensed consolidated financial statements for further description of the loan investment.

On June 28, 2013, we sold 100% of the membership interests in Care YBE Subsidiary LLC ("Care YBE"), which owns the 14 independent living, assisted living and memory care facilities operated by Bickford (the "Bickford Portfolio"), which the Company acquired in two separate sale-leaseback transactions in June and September of 2008, respectively (see Note 3 to the condensed consolidated financial statements). The membership interests in Care YBE were sold to an affiliate of National Health Investors Inc. for approximately $122.8 million, subject to certain allocations, credits and adjustments as described in the Membership Interest Purchase Agreement. Care YBE is also the borrower under the Bickford Loans, which had an outstanding principal balance of approximately $78.8 million as of June 28, 2013 and which remains an obligation of Care YBE subsequent to the sale of the Bickford Portfolio.


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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, 2012 in "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no significant changes to those policies during the quarter ended June 30, 2013.

Results of Operations

Comparison of the three months ended June 30, 2013 and the three months ended June 30, 2012

Revenue

During the three months ended June 30, 2013, we recognized approximately $1.1 million of rental revenue and approximately $38,000 of reimbursable income on our Greenfield properties (the "Greenfield Portfolio") and our Calamar properties (the "Calamar Portfolio"), as compared with approximately $0.4 million of rental revenue and approximately $43,000 of reimbursable income related solely to the Greenfield Portfolio for the comparable period in 2012. The increase in rental revenue during the quarter ended June 30, 2013 is primarily due to our acquisition in February 2013 of the Calamar Portfolio from which we recognized three months of income during the three months ended June 30, 2013 and which had no impact on the comparable quarter in 2012. Reimbursable income includes real estate taxes and certain other escrows that we collect on behalf of our Greenfield Portfolio and that are used to pay such expenses as they come due. Due to the sale of the Bickford Portfolio in June 2013, the rental revenue and reimbursable income related to the Bickford Portfolio for the three month periods ended June 30, 2013 and June 30, 2012 have been reclassified within Income from discontinued operations (see "Income from discontinued operations" below).

We earned interest income on our remaining loan investment of approximately $0.6 million and $0.2 million for the three month periods ended June 30, 2013 and 2012, respectively. The increase of approximately $0.4 million in income during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 is primarily due to the increase in the outstanding principal balance as a result of our purchase of the remaining approximately two-thirds interest in the loan investment in March 2013 which we did not already own. We recognized interest income for the three month periods ended June 30, 2013 and June 30, 2012 at an effective interest rate based on London Interbank Offered Rate ("Libor") in effect at the inception of the restructured loan and using a weighted average spread of 7.21% and 7.20%, respectively.

Expenses

For the three months ended June 30, 2013, we recorded base service fee and incentive fee expense for certain advisory and support services pursuant to the Services Agreement of approximately $0.1 million and $1.5 million, respectively, as compared with approximately $0.1 million and $0, respectively, for the comparable period in 2012. The increase in incentive fee expense during the quarter ended June 30, 2013 is primarily the result of the gain recognized by the Company from the sale of the Bickford Portfolio.

Marketing, general and administrative expenses ("G&A"), which includes fees for professional services, such as audit, legal and investor relations; directors & officers ("D&O") insurance; general overhead costs for the Company; and employee salaries and benefits, as well as fees paid to our directors, were approximately $1.6 million and $0.9 million for the three month periods ended June 30, 2013 and 2012, respectively. The increase in G&A during the second quarter of fiscal 2013, as compared to the comparable period in 2012, is primarily due to our acquisition in February 2013 of the Calamar Portfolio from which we incurred three months of operating expenses of approximately $0.2 million during the three months ended June 30, 2013; an increase in legal expenses of approximately $0.1 million related tolegal fees arising from the consummation of the Contribution Transactions with Tiptree; deal-related legal fees from the pursuit of potential transactions in our pipeline; an increase of $0.2 million related to employee bonus accruals; and a decrease in offsets to state taxes from refunds of approximately $0.1 million.

Reimbursed property expenses include real estate taxes and other reserves that we collect and disburse on behalf of our tenants in our wholly owned properties. Reimbursable expenses for the three months ended June 30, 2013 were approximately $38,000 as compared to approximately $43,000 during the quarter ended June 30, 2012. Reimbursable income recognized from our Greenfield Portfolio offset such reimbursable expenses. Due to the sale of the Bickford Portfolio in June 2013, the reimbursable expenses related to the Bickford Portfolio for the quarters ended June 30, 2013 and June 30, 2012 have been reclassified within Income from discontinued operations (see "Income from discontinued operations" below).

Depreciation and Amortization

Depreciation and amortization expenses amounted to approximately $0.3 million for the three months ended June 30, 2013 as compared to approximately $0.2 million during the three months ended June 30, 2012. Depreciation and amortization expense for the three month periods ended June 30, 2013 and June 30, 2012 included amounts related to the Greenfield Portfolio. The increase in depreciation and amortization during the second quarter of fiscal 2013, as compared to the comparable period in 2012, is primarily due to the depreciation and amortization related to the properties in the Calamar Portfolio acquired in February 2013. Also included in depreciation and amortization were expenses related to the fixtures, furniture and equipment located in the Company's corporate headquarters. Due to the sale of the Bickford Portfolio in June 2013, the depreciation and amortization related to the Bickford Portfolio (including the amortization of the in-place leases related to these properties) for the three months ended June 30, 2013 and June 30, 2012 have been reclassified within Income from discontinued operations (see "income from discontinued operations" below).

Income or loss from investments in partially-owned entities

For the three month period ended June 30, 2013, income from partially-owned entities amounted to approximately $0.1 million as compared with income of approximately $0.1 million for the comparable period in 2012. For each of the quarters ended June 30, 2013 and 2012, we recognized our share of equity income in our SMC investment of $0.1 million.

Interest Expense

We incurred interest expense of approximately $0.4 million for the quarter ended June 30, 2013 and $0.2 million for the three months ended June 30, 2012. Interest expense for both of these periods includes the interest incurred on the mortgage debt secured by the Greenfield Portfolio. The increase in interest expense during the second quarter of fiscal 2013, as compared to the three months ended June 30, 2012, is primarily due to interest expense of approximately $0.2 million which was incurred during the second quarter of 2013 from the mortgage debt assumed in connection with the acquisition of the Calamar Portfolio in February 2013. Due to the sale of the Bickford Portfolio in June 2013, the interest expense related to the Bickford Portfolio for the three month periods ended June 30, 2013 and June 30, 2012 have been reclassified within income from discontinued operations (see "Income from discontinued operations" below).

Income from discontinued operations

For the three months ended June 30, 2013, discontinued operations, net, totaled approximately $16.3 million as compared to $0.8 million for the comparable period in 2012. Discontinued operations, net, included a gain on sale of Bickford portfolio, net, of approximately $15.5 million for the three month period ended June 30,


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2013 related to the sale of the Bickford Portfolio during that quarter. As a result of the Company's sale of the Bickford Portfolio during the second quarter of 2013, rental revenue and reimbursable income along with associated expense items related to the Bickford Portfolio for the three month period ended June 30, 2013 has been reclassified within income from discontinued operations, as well as for the comparative period in 2012.

Comparison of the six months ended June 30, 2013 and the six months ended June 30, 2012

Revenue

During the six months ended June 30, 2013, we recognized approximately $1.9 million of rental revenue and approximately $77,000 of reimbursable income on the Greenfield Portfolio and the Calamar Portfolio, as compared with approximately $0.8 million of rental revenue and approximately $85,000 of reimbursable income related solely to the Greenfield Portfolio for the comparable period in 2012. The increase in rental revenue during the six month period ended June 30, 2013 is primarily due to our acquisition in February 2013 of the Calamar Portfolio from which we recognized five months of income during the six months ended June 30, 2013 and which had no impact on the comparable period in 2012. Reimbursable income includes real estate taxes and certain other escrows that we collect on behalf of our Greenfield Portfolio and that are used to pay such expenses as they come due. Due to the sale of the Bickford Portfolio in June 2013, the rental revenue and reimbursable income related to the Bickford Portfolio for the six month periods ended June 30, 2013 and June 30, 2012 have been reclassified within Income from discontinued operations (see "Income from discontinued operations" below).

We earned interest income on our remaining loan investment of approximately $0.9 million and $0.4 million for the six month periods ended June 30, 2013 and 2012, respectively. The increase of approximately $0.5 million in income during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 . . .

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