UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2007
For the transition period from to
Commission File Number: 001-33549
Care Investment Trust Inc.
(Exact name of Registrant as specified in its charter)
505 Fifth Avenue, 6th Floor, New York, New York 10017
(Address of Registrant’s principal executive offices)
(212) 771-0505
(Registrant’s telephone number, including area code)
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 No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘large accelerated filer’’ and ‘‘accelerated filer’’ in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer Accelerated filer Non-accelerated filer .
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
As of November 12, 2007, there were 21,017,588 shares, par value $0.001, of the registrant’s common stock outstanding.
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Part I — Financial Information
ITEM 1. Financial Statements
Consolidated Balance Sheet — Unaudited(dollars in thousands — except share and per share data)
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Operations (Unaudited)(dollars in thousands — except share and per share data)
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Consolidated Statement of Stockholders’ Equity (Unaudited)(dollars in thousands)
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Consolidating Statement of Cash Flows (Unaudited)(dollars in thousands)
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Care Investment Trust Inc. — Notes to Consolidated Financial Statements (Unaudited)
September 30, 2007
Note 1 — Organization
Care Investment Trust Inc., a Maryland corporation (‘‘we,’’ ‘‘Care’’ or the ‘‘Company’’), was organized in Maryland on March 26, 2007, as a real estate and finance company formed principally to invest in healthcare-related commercial mortgage debt and real estate. The Company was formed, and is externally managed by, CIT Healthcare LLC (‘‘CIT Healthcare’’ or the ‘‘Manager’’), a wholly-owned subsidiary of CIT Group Inc. (‘‘CIT’’) to leverage the Manager’s expertise and relationships in the healthcare marketplace. In its capacity as Manager, CIT Healthcare identifies assets for acquisition and performs loan origination, servicing and other activities on behalf of the Company.
Care provides financing to companies operating a full range of healthcare-related facilities, including skilled nursing facilities, hospitals, outpatient centers, surgery centers, senior housing, assisted living facilities, independent living facilities, continuing care retirement communities, medical office buildings, laboratories and other healthcare facilities. We provide mortgage financing secured by these healthcare facilities, including first lien mortgage loans, mezzanine loans, B notes and construction loans. Additionally, the Company intends to invest in healthcare real estate assets that are consistent with our investment guidelines, such as acquisitions of healthcare facilities.
Care intends to qualify as a real estate investment trust, or ‘‘REIT’’ under the Internal Revenue Code commencing with our taxable year ending December 31, 2007. To maintain our tax status as a REIT, we plan to distribute at least 90% of our taxable income to our stockholders.
On June 22, 2007 (commencement of operations), the Company acquired a portfolio of healthcare-related mortgage assets from the Manager with a fair value of approximately $283.1 million. Care received approximately $210.3 million (after underwriting discounts and other expenses related to the offering) from the closing of its initial public offering of its common stock on June 27, 2007 and utilized approximately $204.3 million as partial payment to purchase the initial assets from the Manager. The remainder of the purchase price was paid via the issuance of $78.8 million in common shares to the Manager.
On September 17, 2007, Care formed a wholly owned subsidiary, Care QRS 2007 RE Holdings Corp. (‘‘Care QRS’’). Care QRS has not elected to be treated as a taxable entity and it is anticipated that Care QRS will be operated in a manner to maintain its non-taxable status. Care is the sole shareholder and is the manager of Care QRS. Care has the responsibility and discretion in the management and control of Care QRS, accordingly, we consolidate the accounts of Care QRS.
On September 17, 2007, Care QRS formed a wholly owned subsidiary, Care Mezz QRS 2007 RE Holdings Corp. (‘‘Care Mezz’’). Care Mezz has not elected to be treated as a taxable entity and it is anticipated that Care Mezz will be operated in a manner to maintain its non-taxable status. Care QRS is the sole shareholder and Care is the manager of Care Mezz. Care has the responsibility and discretion in the management and control of Care Mezz, accordingly, we consolidate the accounts of Care Mezz.
At present, Care does not have any taxable REIT subsidiaries (‘‘TRS’’), but in the normal course of business expects to form such subsidiaries as necessary.
Basis of Quarterly Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. Financial statements in this Form 10-Q are unaudited, but in the
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opinion of management include all adjustments, consisting only of normal recurring adjustments, considered necessary for fair presentation. Results of operations for interim periods are not necessarily representative of results expected for the full year.
Note 2 — Significant Accounting Policies
Segment Reporting
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for the way that public entities report information about operating segments in the financial statements. We are a REIT focused on originating and acquiring healthcare-related commercial mortgage debt and real estate and currently operate in only one reportable segment.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents at September 30, 2007 are approximately $1.2 million in security deposits maintained in an unrestricted account.
Loans and Investments
We have the intent and ability to hold our investments in loans to maturity in accordance with SFAS No. 65 Accounting for Certain Mortgage Banking Activities. Such loans are classified as held for investment and are carried at cost, net of unamortized up-front loan fees, acquisition premium and acquisition costs, unless such loans or investments are deemed to be impaired. At such time as we invest in preferred equity interests that allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing, we must determine whether such investment should be accounted for as a loan, joint venture or as real estate at the inception or the investment. Care did not own any preferred equity investments at September 30, 2007.
The expense for credit losses in connection with loan investments is a charge to earnings to increase the allowance for possible 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 estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs. Alternatively, for construction loans, the fair value of the collateral may be determined based on the estimated cost to complete and projected sales value of the property. Whichever method is used, other factors considered relate to geographic trends a nd project diversification, the size of the portfolio and current economic conditions. Based upon these factors, we will establish an allowance for probable credit losses. When it is probable that we will be unable to collect all amounts contractually due, the loan is considered impaired.
Where impairment is indicated, an impairment charge is recorded based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. As of September 30, 2007, we had no impaired loans and no allowance for credit losses.
Revenue Recognition
Interest income on investments in loans is recognized over the life of the investment on the accrual basis. Fees received in connection with loans are recognized over the term of the loan as an adjustment to yield. Anticipated exit fees whose collection is expected will also be recognized over the term of the loan as an adjustment to yield. Unamortized fees are recognized when the associated loan investment is repaid before maturity on the date of such repayment. Premium and discount on purchased loans are amortized or accreted on the effective yield method over the remaining terms of the loans.
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Income recognition will generally be suspended for loan investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
Deferred Financing Costs
Deferred financing costs represent commitment fees, legal and other third party costs associated with obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements on the effective interest method and the amortization is reflected in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period in which it is determined that the financing will not close.
Stock-based Compensation Plans
We have two stock-based compensation plans, described more fully in Note 7. We account for the plans using the fair value recognition provisions of SFAS No. 123R, Accounting for Stock-Based Compensation. SFAS No. 123R requires that compensation cost for stock-based compensation be recognized ratably over the benefit period of the award. Because all of our stock-based compensation is issued to non-employees, the amount of compensation is to be adjusted in each subsequent reporting period based on the fair value of the award at the end of the reporting period until such time as the award has vested or the service being provided is substantially completed or, under certain circumstances, likely to be completed, whichever occurs first.
Derivative Instruments
We account for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. 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 deri vative 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 value, and such value may never actually be realized.
In the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures, which may include the use of derivatives. To address exposure to interest rates, we may use derivatives primarily to hedge the mark-to-market risk of our liabilities with respect to certain of our assets.
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 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, so we do not anticipate nonperformance by any of our counterparties.
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We may employ swaps, forwards or purchased options to hedge qualifying forecasted transactions. Gains and losses related to these transactions are deferred and recognized in net income as interest expense in the same period or periods that the underlying transaction occurs, expires or is otherwise terminated.
Hedges that are reported at fair value and presented on the balance sheet could be characterized as either cash flow hedges or fair value hedges. For derivative instruments not designated as hedging instruments, the gain or loss resulting from the change in the estimated fair value of the derivative instruments will be recognized in current earnings during the period of change.
As of September 30, 2007, Care held no derivative instruments.
Income Taxes
We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code beginning with our taxable year ending December 31, 2007. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary 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 ava ilable for distributions to stockholders. However, we believe that we will operate in such a manner as to qualify for treatment as a REIT and we intend to operate in the foreseeable future in such a manner so that we will qualify as a REIT for federal income tax purposes. We may, however, be subject to certain state and local taxes.
Underwriting Commissions and Costs
Underwriting commissions and costs incurred in connection with our initial public offering are reflected as a reduction of additional paid-in-capital.
Organization Costs
Costs incurred to organize Care have been expensed as incurred.
Earnings per Share
We present basic earnings per share or EPS in accordance with SFAS No. 128, Earnings per Share. We also present diluted EPS, when diluted EPS is lower than basic EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders 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. At September 30, 2007, diluted EPS was the same as basic EPS because all outstanding restricted stock awards were anti-dilutive.
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. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, loan investments and interest receivable. We may place our cash investments in excess of insured amounts with high quality financial institutions. We perform ongoing analysis of
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credit risk concentrations in our loan investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenant mix and other credit metrics. The collateral securing our loan investments are real estate properties located in the United States.
New Accounting Pronouncements
In June, 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting for Parent Companies and Equity Method Investors for Investments in Investment Companies. This SOP provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the Guide). Entities that are within the scope of the Guide are required, among oth er things, to carry their investments at fair value, with changes in fair value included in earnings. The provisions of this SOP have been deferred indefinitely, however, the Company is currently evaluating this guidance and has not determined whether it will be required to apply the provisions of the SOP in presenting its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which established a framework for calculating the fair value of assets and liabilities as required by numerous other accounting pronouncements, and expands disclosure requirements of the fair value of certain assets and liabilities. SFAS 157 is effective for us on January 1, 2008. The Company is currently evaluating the impact, if any, that the adoption of this statement will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement was issued with the intent to provide an alternative measurement treatment for certain financial assets and liabilities. The alternative measurement would permit fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings as those changes occur. This ‘‘Fair Value Option’’ would be available on an instrument-by- instrument basis. For us, SFAS 159 is effective for January 1, 2008. The Company is currently assessing the impact, if any, that adoption of this statement will have on our consolidated financial statements.
Note 3 — Investments in Loans
As of September 30, 2007, our investments in loans amounted to $272.1 million and consisted of $255.5 million of loans from the initial portfolio contributed by our Manager, $1.2 million funded to existing portfolio clients, and $15.4 million of new originations generated by our Manager (see Note 5). During the quarter, the Company realized an early loan payoff from one borrower of $24.1 million and a partial payoff of $2.0 million from another. In addition, the Company received approximately $1.5 million in loan amortizations and other loan-related payments.
Our investments include senior whole loans and participations secured primarily by real estate property in the form of pledges of ownership interests, direct liens or other security interests. The investments are in various geographic markets in the United States. Our investment in variable rate loans (15 loans) approximated $237.7 million and had an effective yield for the three months ended September 30, 2007 of LIBOR plus 3.20%. One-month LIBOR was 5.13% at September 30, 2007. The remaining $34.4 million of investment was fixed rate and had an effective yield for the three months ended September 30, 2007 of 8.12%. As of September 30, 2007 we held the following investments (in thousands):
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The premium on the purchased portfolio is amortized on the effective yield method over the remaining term of the loans. As of September 30, 2007, one loan with a carrying value of approximately $26 million was technically past due 90 days with respect to interest payments as a result of a billing dispute. This dispute was subsequently resolved and Care received full payment for the past due interest. All other loans were performing in accordance with their terms as of September 30, 2007.
Note 4 — Debt Obligations
The acquisition of the initial portfolio of loans from the Manager was financed from proceeds of the initial public offering of the Company’s common stock and the issuance of common stock of the Company to the Manager. As of September 30, 2007, Care had no debt obligations or facilities in place to provide financing for the acquisition of future investments. On October 1, 2007, Care entered into a master repurchase agreement with Column Financial, Inc., an affiliate of Credit Suisse, one of the underwriters of Care’s initial public offering in June 2007 (See Note 11).
Investor concerns surrounding sub-prime mortgage credit risk, hedge fund losses, a large volume of unsuccessful leveraged loan syndications and related impact on the overall credit markets, including widening of credit spreads, arose in the second quarter of 2007. Disruption in the credit markets persists beyond September 30, 2007. These factors have materially impacted the availability of liquidity in the debt markets, making financing terms for borrowers less attractive. Consequently, the advance rates of our warehouse facility are less than the levels expected at inception of negotiations for the facility. In addition, plans to issue collateralized debt obligations (CDO) for more stable longer-term financing are uncertain given continuing turmoil in the CDO market. We can not foresee when the CDO market may stabilize and do not believe that we will he able to successfully enter into a CDO on terms acceptable to us in the short term. Should the current market conditions continue for an extended period of time, our ability to grow may be impeded and Care may be required to further adjust its business plan.
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Note 5 — Related Party Transactions
Management Agreement
In connection with our initial public offering, we entered into a Management Agreement with our Manager, which describes the services to be provided by our Manager and its compensation for those services. Under the Management Agreement, our Manager, subject to the oversight of the Board of Directors of Care, is required to manage the day-to-day activities of the Company, for which the Manager receives a base management fee and is eligible for an incentive fee. The Manager is also entitled to charge the Company for certain expenses incurred on behalf of Care.
The Management Agreement has an initial term expiring on June 30, 2010, and will be automatically renewed for one-year terms thereafter unless either we or our Manager elect not to renew the agreement. The base management fee is payable monthly in arrears in an amount equal to 1/12 of 1.75% of the Company’s stockholders’ equity at the end of each month, computed in accordance with GAAP, adjusted for certain items pursuant to the terms of the Management Agreement. Our Manager is also eligible to receive an incentive fee, payable quarterly in arrears based upon performance thresholds stipulated in the Management Agreement.
Our Manager may also be entitled to a termination fee, payable for non-renewal of the Management Agreement without cause, in an amount equal to three times the sum of the average annual base management fee and the average annual incentive fee, both as earned by our Manager during the two years immediately preceding the most recently completed calendar quarter prior to the date of termination. No termination fee is payable if we terminate the Management Agreement for cause.
Care is also responsible for reimbursing the Manager for its pro rata portion of certain expenses detailed in the Management Agreement, such as rent, utilities, office furniture, equipment, and overhead, among others, required for Care’s operations. Transactions with our Manager during the three months ended September 30, 2007 and the period from June 22 (commencement of operations) to September 30, 2007 included:
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Note 6 — Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by management using available market information and 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.
Cash equivalents, accrued interest receivable, accounts payable and accrued expenses, and other liabilities reasonably approximate their fair values due to the short maturities of these items.
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. Our investments in variable rate loans bear interest at stated spreads to a floating base rate (1 Month LIBOR) and reprice monthly. Accordingly, management believes our variable rate loans, considering borrowers with similar risk profiles, are carried at amounts which reasonably approximate fair value. Our $34.4 million fixed rate mortgage investment is carried at its unpaid principal balance plus the premium paid at purchase from our Manager. The loan was repaid in full, along with a prepayment fee of $0.6 million, approximately five months prior to maturity and subsequent to September 30, 2007. As a result, management believes the carrying value of this loan at September 30, 2007 reasonably approximates fair value.
Note 7 — 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 September 30, 2007, no shares of preferred stock were issued and outstanding and 21,012,373 shares of common stock were issued and outstanding.
Equity Plan
We have adopted the Care Investment Trust Inc. Equity Plan, which provides for the issuance of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based on our common stock that may be made by us to our directors and officers and to our advisors and consultants who are providing services to the Company (which may include employees of our Manager and its affiliates) as of the date of the grant of the award. Shares of common stock to be issued to our independent directors in respect of their annual retainer fees will be issued under this plan.
An aggregate of 700,000 shares of our common stock are reserved for issuance under the Equity Plan, subject to adjustment under certain circumstances. Each stock option and stock appreciation right granted under the Equity Plan will have a term of no longer than 10 years, and will have an exercise or base price that is no less than 100% of the fair market value of our common stock on the date of the grant of the award. The other terms of stock options and stock appreciation rights granted by us under the Equity Plan will be determined by Care’s Board of Directors (the ‘‘plan administrator’’). Unless otherwise determined by the plan administrator, the holders of awards of restricted stock or restricted stock units will be entitled to receive dividends or, in the case of restricted stock units, dividend equivalents, which in either case will be payable at such time that dividends are paid on outstanding shares.
On June 22, 2007, 133,333 shares of common stock with a fair value of approximately $2.0 million were awarded to our Manager’s employees, some of whom are officers or directors of Care. The shares granted vest on June 22, 2010, three years from the date of grant. Pursuant to SFAS 123R, we
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recognized approximately $0.1 million in expense for the period from June 22, 2007 (commencement of operations) to September 30, 2007 related to these grants. The remainder of the compensation will be recognized over the remaining vesting period and the amount of the compensation adjusted to fair value at each measurement date pursuant to SFAS 123R.
On June 22, 2007, 15,000 shares of common stock with a fair value of approximately $0.2 million were awarded to members of Care’s independent Board of Directors. The shares vest ratably on the first, second and third anniversaries of the grant. Care recognized approximately $15,000 in compensation expense related to these grants for the period from June 22, 2007 (commencement of operations) to September 30, 2007. The remainder of the compensation will be recognized over the remaining vesting period and the amount of the compensation adjusted to fair value at each measurement date pursuant to SFAS 123R.
As of September 30, 2007, 148,333 shares of our common stock had been granted pursuant to the Equity Plan and 551,667 shares remain available for future issuances. The Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. Care’s Board of Directors may terminate, amend, modify or suspend the Equity Plan at any time, subject to stockholder approval in the case of amendments or modifications.
Schedule of Non Vested Shares — Equity Plan
Vesting Schedule
Manager Equity Plan
We have adopted the Care Investment Trust Inc. Manager Equity Plan, which provides for the issuance of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based on our common stock that may be made by us to our Manager. Our Manager may make awards to its employees and employees of its affiliates which are in the form of or based on the shares of our common stock acquired by our Manager under the Manager Equity Plan, in which case our Manager will make all determinations concerning the eligible employees of our Manager and its affiliates who may receive awards, which form the awards will take, and the terms and conditions of the awards.
An aggregate of 1,325,635 shares of our common stock are reserved for issuance under the Manager Equity Plan, subject to adjustment. Each stock option and stock appreciation right granted under the Manager Equity Plan will have a term of no longer than 10 years, and will have an exercise or base price that is no less than 100% of the fair market value of our common stock on the date of the grant of the award. The other terms of stock options and stock appreciation rights granted under the Manager Equity Plan will be determined by Care’s Board of Directors (the ‘‘plan administrator’’). Unless otherwise determined by the plan administrator, the Manager will be entitled to receive dividends or, in the case of restricted stock units, dividend equivalents, in respect of restricted stock and restricted stock unit awards, which in either case will be payable at such time that dividends are paid on outstanding shares.
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On June 22, 2007, upon completion of Care’s initial public offering of its common stock, we granted to our Manager 607,690 fully vested shares of our common stock under the Manager Equity Plan. These shares are subject to our Manager’s right to register the resale of such shares pursuant to a registration rights agreement we entered into with our Manager in connection with our initial public offering. Because these shares vest immediately, their fair value of $9.1 million was expensed at issuance.
At September 30, 2007, 717,945 shares are available for future issuances under the Manager Equity Plan. The Manager Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. Care’s Board of Directors may terminate, amend, modify or suspend the Manager Equity Plan at any time, subject to stockholder approval in the case of amendments or modifications.
Note 8 — Income (Loss) per Share
Diluted income per share was the same as basic income per share for the three months ended September 30, 2007 and diluted loss per share was the same as basic loss per share for the period from June 22, 2007 (commencement of operations) to June 30, 2007 because all outstanding restricted stock awards were anti-dilutive.
Note 9 — Commitments and Contingencies
Several of our investments in loans have commitment amounts in excess of the amount that we have funded to date on such loans. At September 30, 2007, Care was obligated to provide approximately $5.0 million in additional financing at the request of our borrowers, subject to the borrowers’ compliance with their respective loan agreements.
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 Care Investment Trust Inc.’s 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 Care was experiencing increasing difficulty in securing its warehouse financing lines. Care believes the complaint and allegations are without merit and intends to defend against the complaint and allegations vigorously. However, the outcome of this matter can not currently be predicted.
Care is not presently involved in any other material litigation nor, to our knowledge, is any material litigation threatened against us or our investments, other that 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.
Note 10 — Financial Instruments: Derivatives and Hedging
At September 30, 2007, Care did not have any investments in derivatives or hedging instruments.
Note 11 — Subsequent Events
Secured Warehouse Facility
On October 1, 2007, Care and two of its subsidiaries, Care ORS and Care Mezz, entered into a master repurchase agreement (the ‘‘Agreement’’) with Column Financial, Inc. (‘‘Column’’), an affiliate
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of Credit Suisse Securities LLC which is an affiliate of Credit Suisse, one of the underwriters of Care’s June 2007 initial public offering. This type of lending arrangement is often referred to as a warehouse facility.
The Agreement provides an initial line of credit of up to $300 million which may be increased temporarily to an aggregate amount of $400 million under the terms of the Agreement. Care may receive up to 50% of the value of each loan sold based on Column’s underwriting of such loan and will agree to repurchase each loan at a future date. From the time of sale until the time of repurchase, Care will pay Column a monthly price differential payment which will be set at 0.75% over LIBOR for the first eight months of the Agreement and 1% over LIBOR thereafter,
Column has the right to issue margin calls in certain situations which Care generally must satisfy in cash within one business day. The Agreement also contains certain financial covenants that require Care to maintain a minimum level of liquidity, a minimum adjusted tangible net worth (as defined in the Agreement), a maximum ratio of indebtedness to adjusted tangible net worth of 4:1, and generate a net quarterly profit each quarter, The Agreement provides for specified events of default including, among others, if Care fails to make any payment due under the Agreement, comply with certain covenants set forth in the Agreement or repurchase all of the loans purchased by Column within 120 days following a change in control in Care, as defined in the Agreement.
The term of the Agreement is for three years and may be terminated by Column at any time on not less than one year’s notice.
Early Loan Termination
On October 5, 2007 a borrower, upon prior notification to Care, prepaid its current loan obligation of $34.4 million in accordance with the terms of the underlying loan agreement. Proceeds from the repayment also included a pre-payment fee of approximately $0.6 million, which after accounting for the unamortized premium resulting from the initial contribution, will result in $0.5 million in income in the fourth quarter of 2007.
Declaration of Dividend
On November 5, 2007, the Board of Directors declared the Company’s first dividend in the amount of $0.17 per share of common stock. The dividend is payable on November 30, 2007 to common stockholders of record on November 15, 2007.
Potential Transaction Costs
Included in Other assets at September 30, 2007, are approximately $0.6 million in deferred legal costs and professional fees incurred in connection with the possible acquisition of healthcare-related properties. Negotiations have been protracted and ongoing. Should we terminate negotiations with the counterparty or the acquisition is otherwise no longer deemed probable, Care will recognize these deferred expenses.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The following should be read in conjunction with the consolidated financial statements and notes included herein. This ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Quantitative and Qualitative Disclosures about Market Risk’’ contain 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 subsidiaries) is a newly-organized, real estate investment and finance company formed principally to invest in healthcare-related commercial mortgage debt and real estate. We provide financing to companies operating a full range of healthcare-related facilities, including skilled nursing facilities, hospitals, outpatient centers, surgery centers, senior housing, assisted living facilities, independent living facilities, continuing care retirement communities, medical office buildings, laboratories and other healthcare facilities. We intend to provide mortgage financing secured by these healthcare facilities, including first lien mortgage loans, mezzanine loans, B Notes and construction loans. In addition , we intend to make investments in healthcare real estate assets that are consistent with our investment guidelines, such as acquisitions of healthcare facilities.
Care is externally managed and advised by CIT Healthcare LLC (‘‘Manager’’), a wholly-owned subsidiary of CIT Group Inc. Our Manager is a healthcare finance company that offers a full-spectrum of financing solutions and related strategic advisory services to companies across the healthcare industry throughout the United States. Our Manager was formed in 2004 and is a wholly-owned subsidiary of CIT Group Inc., a leading commercial and consumer finance company that provides clients with financing and leasing products and advisory services. We intend to qualify as a real estate investment trust, or REIT, for federal income tax purposes and will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with our taxable year ending December 31, 2007. We generally will not be subject to federal taxes on our taxable income to the extent that we distribute our taxable income to stockholders and maintain our qualification as a REIT.
We intend to utilize leverage in accordance with our investment guidelines in order to increase our overall returns. Our investment guidelines state that our leverage will generally not exceed 80% of the total value of our investments. Current conditions in the credit markets have resulted in significantly reduced availability of liquidity and may require Care to utilize less leverage in the near term, resulting in slower growth than planned. We cannot anticipate when credit markets will stabilize and liquidity becomes available. Our actual leverage will depend on our mix of investments and the cost and availability of leverage. Our charter and bylaws do not limit the amount of indebtedness we can incur, and our board of directors has discretion to deviate from or change our investment guidelines at any time. We will use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. Our financing str ategy focuses on the use of match-funded financing structures. Accordingly, we will seek to match the maturities and/or repricing schedules of our financial obligations with those of our investments to minimize the risk that we will have to refinance our liabilities prior to the maturities of our investments and to reduce the impact of changing interest rates on earnings.
We will use short-term financing, in the form of warehouse facilities, secured bank lines and repurchase agreements. These short-term financing structures are typically in the form of collateralized loans made to borrowers who invest in securities and loans and, in turn, pledge the resulting securities and loans to the lender. We executed a warehouse facility with Column Financial Inc, an affiliate of Credit Suisse Securities, LLC on October 1, 2007. For longer-term funding, we expect that as our portfolio of assets becomes large enough and when the securitized credit markets stabilize, we will
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enter into collateralized debt obligations (‘‘CDOs’’) or commercial mortgage-backed securities (‘‘CMBS’’), as well as other match-funded secured financing structures. We can not foresee when the CDO market may stabilize and do not believe we will be able to successfully enter into a CDO on terms acceptable to us in the short term. Should the current market conditions continue for an extended period of time, our ability to grow may be impeded and Care may be required to further adjust its business plan. We also intend to finance a portion of the purchase price of our investments in real estate by borrowing property-specific non-recourse debt from third parties.
We have not invested in any loans that contain assets that could be classified as sub-prime residential mortgages. We do not anticipate that losses in the sub-prime residential mortgage market will affect our portfolio of healthcare-related commercial mortgages. However, continued turmoil in the sub-prime residential market may have an effect on the commercial mortgage market in general, including reduced liquidity and general availability of credit.
As of September 30, 2007, we held investments in variable rate and fixed rate loans of approximately $237.7 million and $34.4 million, net of premiums and discounts, respectively. These loans are principally first mortgage loans or term loans secured by first mortgages. The investments are in various geographic markets within the United States. As of September 30, 2007, one loan with a carrying value of approximately $26 million was technically past due 90 days with respect to interest payments as a result of a billing dispute. This dispute was subsequently resolved and Care received full payment for the past due interest. All other loans were performing in accordance with their terms as of September 30, 2007.
Critical Accounting Policies
We have the intent and ability to hold our investments in loans to maturity in accordance with SFAS No. 65 Accounting for Certain Mortgage Banking Activities. Such loans are classified as held for investment and are carried at cost, net of unamortized up-front loan fees, acquisition premium and acquisition costs, unless such loan or investment is deemed to be impaired. At such time as we invest in preferred equity interests that allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing, we must determine whether such investment should be accounted for as a loan, joint venture or as real estate at the inception of the investment. Care did not own any preferred equity investments at September 30, 2007.
The expense for credit losses in connection with loan investments is a charge to earnings to increase the allowance for possible credit losses to the level that management estimates to be adequate to cover probable losses considering delinquencies, loss experience and collateral quality. Specific valuation allowances are established 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 estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs. Alternatively, for construction loans, the fair value of the collateral may be determined based on the estimated cost to complete and projected sales value of the property. Whichever method is used, other factors considered relate to g eographic trends and project diversification, the size of the portfolio and current economic conditions. Based upon these factors, we will establish an allowance for probable credit losses. When it is probable that we will be unable to collect all amounts contractually due, the loan is considered impaired.
Where impairment is indicated, an impairment charge is recorded based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. As of September 30, 2007, we had no impaired loans and accordingly, no allowance for credit losses.
We rely on significant subjective judgments and assumptions of our Manager (i.e., discount rates, expected prepayments, market comparables etc.) regarding the above items. There may be a material impact to these financial statements if our Manager’s judgment or assumptions are subsequently determined to be incorrect.
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Interest income on investments in loans is recognized over the life of the investment on the accrual basis. Fees received in connection with loans are recognized over the term of the loan as an adjustment to yield. Anticipated exit fees, whose collection is expected, will also be recognized over the term of the loan as an adjustment to yield. Unamortized fees are recognized when the associated loan investment is repaid before maturity on the date of such repayment. Premium and discount on purchased loans are amortized or accreted on the effective yield method over the remaining terms of the loans.
We account for stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (‘‘SFAS’’) 123R, Accounting for Stock-Based Compensation. SFAS 123R requires that compensation cost for stock based compensation be recognized ratably over the benefit period of the award. Because all of our stock-based compensation is issued to non-employees, the amount of compensation is to be adjusted, in accordance with Emerging Issues Task Force (‘‘EITF’’) 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services, i n each subsequent reporting period based on the fair value of the award at the end of the reporting period until such time as the award has vested or the service being provided is substantially completed or, under certain circumstances, likely to be completed, which ever occurs first.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which established a framework for calculating the fair value of assets and liabilities as required by numerous other
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accounting pronouncements, and expands disclosure requirements of the fair value of certain assets and liabilities. SFAS 157 is effective for us on January 1, 2008. The Company is currently evaluating the impact, if any, that the adoption of this statement will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement was issued with the intent to provide an alternative measurement treatment for certain financial assets and liabilities. The alternative measurement would permit fair value to be used for both initial and subsequent measurement, with changes in fair value recognized in earnings as those changes occur. This ‘‘Fair Value Option’’ would be available on an instrument-by-instrument basis. For us, SFAS 159 is effective for January 1, 2008. The Company is currently assessing the impact, if any, that adoption of this statement will have on our consolidated financial statements.
Results of Operations
For the three months ended September 30, 2007 and for the period from June 22, 2007 (commencement of operations) to September 30, 2007
Revenue
We earned investment income on our portfolio of mortgage and real estate related investments of approximately $5.9 million for the three month period ended September 30, 2007. For the period from June 22, 2007 (commencement of operations) through September 30, 2007, our investment in loans generated approximately $6.5 million. We did not utilize leverage during these periods and therefore did not incur any interest expense related to the financing of our investments. In order to increase our net income and the cash flows available to pay dividend to our stockholders, we intend to pursue a strategy of acquiring additional investments by leveraging our portfolio of investments through a warehouse facility, dedicated asset financing and other borrowings. Care is not currently levered, accordingly income from investments on loans for the three months ended September 30, 2007 and for the period from June 22,  ;2007 through September 30, 2007 is not representative of the Company’s business plan.
Other Income for the three month period ended September 30, 2007 and for the period from June 22, 2007 (commencement of operations) to September 30, 2007 amounted to $217,000 and $220,000, respectively. Other Income largely interest earned on cash balances and miscellaneous fees.
Expenses
For both the three months ended September 30, 2007 and for the period from June 22, 2007 to June 30, 2007 (period of commencement), we recorded total related party expenses of approximately $1.3 million consisting of the base management fee payable to our Manager under our management agreement.
Included in our expenses is stock based non-employee compensation related to our issuance of 133,333 shares of restricted common stock to our Manager’s employees, some of whom are also Care officers or directors, and 15,000 shares to our independent directors with a total fair value of approximately $2.2 million at the date of grant. The shares granted to our Manager’s employees vest on June 22, 2010, three years from the date of grant. The shares granted to our independent directors vest ratably over the next three years on each anniversary of the date of grant. Pursuant to SFAS 123R, we recognized $142,000 in expense for the three month period ended September 30, 2007 and $161,000 in expense from June 22, 2007 (commencement of operations) to September 30, 2007 related to these stock grants. The balance of this compensation will be recognized over the remaining vesting period and the amount of the compensation adjusted to fair value at each measurement date pursuant to SFAS 123R.
Marketing, general and administrative expenses were approximately $1.0 million for the three months ended September 30, 2007 and $1.3 million for the period from June 22, 2007 (commencement of operations) to September 30, 2007. These expenses consist of professional fees, insurance and
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general overhead costs for the Company. We had approximately $20,000 of expenses for the period from June 22, 2007 (commencement of operations) to September 30, 2007 relating to our formation involving miscellaneous non-recurring costs for initial setup, design and related work.
As discussed previously, we also recorded non-employee compensation expense of approximately $9.1 million related to the issuance of 607,690 shares of our common stock to our Manager pursuant to the Manager Equity Plan. The 607,690 shares represent approximately 46% of the total shares available under the plan and 717,945 shares remain available under the Manager Equity Plan.
The management fees, expense reimbursements, formation costs and the relationship between our Manager and us are discussed further in ‘‘Related Party Transactions.’’
We had net income of approximately $3.7 million for the three months ended September 30, 2007 largely the result of $5.9 million in income from investments in loans, offset by fees earned by our Manager and recurring operating expenses. We had a net loss of approximately $5.2 million for the period from June 22, 2007 (commencement of operations) to September 30, 2007. The net loss includes non-employee compensation expense of approximately $9.1 million relating to the issuance of 607,690 shares of our common stock to our Manager.
Cash Flows
Cash and cash equivalents was $23.9 million at September 30, 2007 and was provided by $210.3 million in net proceeds from our initial public offering and $6.9 million from operations for the period from June 22, 2007 (commencement of operations) to September 30, 2007, offset by $193.3 million of net investment in loans over the period.
Cash flows provided by operations for the period from June 22, 2007 (commencement of operations) to September 30, 2007 was primarily comprised of a $5.2 million net loss for the period, adjusted for $9.1 million in stock-based compensation granted to our Manager, and a $2.7 million net change in operating liabilities and assets. Also impacting cash flows from operations were non-cash charges of $0.4 million related to amortization of loan premium and stock-based compensation, offset by $0.1 million related to amortization of deferred fees and net gain from prepayment of a loan.
Net cash used in investing activities for the period from June 22, 2007 (commencement of operations) to September 30, 2007 was primarily used for the $204.3 million purchase of the initial portfolio from our manager and $16.6 million of additional investments in loans, offset by $27.6 million in loan prepayments, scheduled amortizations and other loan-related payments.
Net cash provided by financing activities for the period from June 22, 2007 (commencement of operations) to September 30, 2007 resulted from the $225.0 million proceeds from our initial public offering in June, 2007 reduced by $14.7 million in underwriting and other costs associated with the initial public offering.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. Our primary source of funds for liquidity consists of funds we raised in our initial public offering in June 2007. Additional sources of liquidity will be net cash provided by operating activities, repayment of principal by our borrowers in connection with our loans and investments, borrowings under our warehouse facility, the issuance by us or special purpose vehicles owned by us of fixed income securities collateralized by certain of our investments and the issuance by us of preferred equity or common equity in secondary offerings.
We believe these sources of financing, including the net proceeds of our initial public offering, will be sufficient to meet our near-term liquidity needs. Since our initial public offering in June 2007, liquidity in the global credit markets has been curtailed and interest rate spreads have widened significantly. Concerns stemming from the sub-prime residential mortgage market in the United States have spilled over to other sectors of the credit markets, including securitized financing vehicles such as
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short-term warehouse facilities and longer-term structures such as CDOs and CMBS. Consequently, the advance rates under the warehouse facility are more restrictive than initially planned. This disruption in the credit markets may impede our ability to grow in the short-term until the credit markets return to a more normal environment.
Our ability to meet our long-term liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. We cannot anticipate when credit markets will stabilize and liquidity becomes available. Our actual leverage will depend on our mix of investments and the cost and availability of leverage. If we are unable to renew, replace or expand our sources of financing, it may have an adverse effect on our business, results of operations, and ability to make distributions to our stockholders. Any indebtedness we incur will likely be subject to continuing covenants and we will likely be required to make continuing representations and warranties about our company in connection with such debt. Our debt financing terms may require us to keep un-invested cash on hand, or to maintain a certain portion of our assets free of liens, each of which could serve to limit our borrowing ability. Moreover, our debt ma y be secured by our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock. In addition, posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets.
To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that, when the credit markets return to normal conditions, our significant capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new lending and investment opportunities, paying distributions to our stockholders and servicing our debt obligations.
Capitalization
As of September 30, 2007, we had 21,012,373 shares of common stock outstanding.
Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate and interest rate risks.
Real Estate Risk
Commercial mortgage assets and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions which may be adversely affected by industry slowdowns and other factors, local real estate conditions (such as an oversupply of retail, industrial, office or other commercial space), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). In the event net operating income decreases, or the value of property held for sale decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. Even when a property’s net operating income is sufficient to cover the property’s debt service, at the time a loan is made, there can be no assurance that this will continue in the future.
The current turmoil in the residential mortgage market may continue to have an effect on the commercial mortgage market and real estate industry in general for the foreseeable future.
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Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including the availability of liquidity, governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our assets and borrowings are expected to be variable-rate instruments that we will finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. Although we have not done so to date, we may enter into hedging transactions with respect to liabilities relating to fixed rate assets in the future. If we were to finance fixed rate assets with variable rate debt and the benchmark for our variable rate debt increased, our net income would decrease. Furthermore, as most of our planned financing will allow the lender to mark our assets to market and make margin calls based on a change in the value of our assets, financing fixed rate assets with floating rate debt will create the risk that an incre ase in fixed rate benchmarks (such as ‘‘swap’’ yields) would decrease the value of our fixed rate assets. Some of our loans may be subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase our returns.
In the event of a significant rising interest rate environment and/or economic downturn, delinquencies and defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
Our funding strategy involves leveraging our investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, repurchase agreements, secured loans, securitizations, including the issuance of CDOs or Commercial Mortgage Bond Securities, loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings. In the short-term we intend to use warehouse lines of credit to finance the acquisition of assets until a sufficient quantity of eligible assets is accumulated, at which point we intend to refinance through a CDO securitization or other long-term secured financing. Currently, the availability of liquidity through CDOs is very limited due to investor concerns surrounding sub-prime mortgage credit risk, hedge fund losses, the large volume of unsuccessful leveraged loan syndications and related impact on the overall credit markets. These concerns have materially impacted liquidity i n the debt markets, making financing terms for borrowers significantly less attractive. We cannot foresee when credit markets may stabilize and liquidity becomes available. A prolonged downturn in the term CDO and CMBS markets may cause us to seek alternative sources of potentially less attractive financing, and may impede our ability to grow the Company in accordance with our business plan.
Contractual Obligations
The table below summarizes our contractual obligations as of September 30, 2007 (Amounts in thousands).
The estimated amounts and timing of the commitments presented above are based on projections based on data provided by borrowers. The projections are subject to adjustments based on changes in borrowers’ needs. Any amounts due to our Manager under the Management Agreement are not included in the table above because such amounts are not fixed and determinable.
Off-Balance Sheet Arrangements
As of September 30, 2007, we had no off-balance sheet arrangements.
Dividends
To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking into consideration the dividends
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paid deduction and net capital gains. We intend to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for Federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our secured credit facility, we must first meet both our operating requirements and any scheduled debt service on our outstanding borrowings.
Related Party Transactions
Contribution Agreement
We and our Manager entered into a contribution agreement, pursuant to which our Manager contributed a portfolio of initial assets to us and we issued to our Manager shares of our common stock and cash. Our Manager determined that the fair value of the assets contributed was approximately $283.1 million on June 22, 2007 inclusive of approximately $4.6 million in premium. The initial assets were acquired in exchange for approximately $204.3 million in cash from the proceeds of our initial public offering and 5,256,250 restricted shares of our common stock at a fair value of approximately $78.8 million. We recorded each initial asset we purchased at its fair value.
In connection with our initial public offering, we entered into a Management Agreement with our Manager which describes the services to be provided by our Manager and its compensation for those services. Under the Management Agreement, our Manager, subject to the oversight of our board of directors, is required to conduct our business affairs in conformity with the policies and the investment guidelines that are approved by our board of directors. The Management Agreement has an initial term expiring on June 30, 2010, and will automatically be renewed for one-year terms thereafter unless terminated by us or our Manager.
Please see Note 5. Related Party Transactions — Management Agreement in the Notes to Consolidated Financial Statements in Part I — Item 1 for a summary description of the compensation, fees and costs payable to our Manager.
Transactions with our Manager included:
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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 than we do.
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 compute AFFO in accordance with our Management Agreement’s definition of FFO and as such it may not be comparable to AFFO reported by other REITs that do not compute AFFO on the same basis. Our management agreement defines FFO, for purposes of the agreement, to mean net income (loss) (computed in accordance with GAAP), excluding gains (losses) from debt restructuring and gains (losses) from sales of property, plus depreciation and amortization on real estate assets and non-cash equity compensation expense, and after adjustments for unconsolidated partnerships and joint ventures; provided, that the foregoing calculation of Funds From Operations shall be adjusted to exclude one-time events pursuant to changes in GAAP and may be adjusted to exclude other non-cash charges after discussion between the Manager and the independent directors, and approval by the majority of the independen t directors in the case of non-cash charges.
FFO and AFFO
We believe that FFO and AFFO are helpful to investors as measures of the performance of a REIT because, along with cash flow from operating activities, financing activities and investing activities, FFO and AFFO provide investors with an indication of our ability to incur and service debt, to make investments and to fund other cash needs. AFFO, as defined in our agreement with our Manager, also provides the basis for the computation of the amount of the Management Incentive Fee payable to our Manager.
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), as an indication of our financial performance or cash flow from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions.
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FFO and AFFO for the three months ended September 30, 2007 and for the period from June 22, 2007 (commencement of operations) to September 30, 2007 were as follows (in thousands except per share data):
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 obtain future financing arrangements;
• 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:
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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.
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 SEC’s 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 Controls over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended September 30, 2007 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
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 the initial public offering of shares of Care Investment Trust Inc.’s 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 Care was experiencing increasing difficulty in securing its warehouse financing lines. Care believes the complaint and allegations are without merit and intends to defend against the complaint and allegations vigorously. However, the outcome of this matter can not currently be predicted.
ITEM 1A. Risk Factors
Risk Factors
There have been no material changes to the risk factors previously disclosed in the prospectus filed pursuant to Rule 424b(4) on June 21, 2007 with the Securities and Exchange Commission in connection with our initial public offering, except for a continued disruption in the Collateralized Debt Obligation (CDO) market and other sectors of the credit markets, as discussed below.
Our funding strategy involves leveraging our investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, repurchase agreements, secured loans, securitizations, including the issuance of CDOs or Commercial Mortgage Bond Securities, loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings. In the short-term we intend to use warehouse lines of credit to finance the acquisition of assets until a sufficient quantity of eligible assets is accumulated, at which point we intend to refinance through a CDO securitization or other long-term secured financing. Currently, the availability of liquidity through CDOs is very limited due to investor concern surrounding sub-prime mortgage credit risk, hedge fund losses, the large volume of unsuccessful leveraged loan syndications and related impact on the overall credit markets. These concerns have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive. A prolonged downturn in the term CDO and CMBS markets may cause us to seek alternative sources of potentially less attractive financing, and may impede our ability to grow the Company in accordance with our plan.
ITEM 2. Changes in Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
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ITEM 6. Exhibits
Except as indicated by an asterisk (*), the following exhibits are filed herewith as part of this Form 10-Q.
(a) Exhibits
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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.
November 12, 2007
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EXHIBIT INDEX
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