CARE INVESTMENT TRUST CRE
February 02, 2010 - 10:31pm EST by
agape1095
2010 2011
Price: 8.20 EPS -$1.32 nm
Shares Out. (in M): 21 P/E nm nm
Market Cap (in $M): 165 P/FCF nm nm
Net Debt (in $M): 82 EBIT -22 0
TEV ($): 153 TEV/EBIT nm nm

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Description

Special Situation: announced intent to liquidate the company on Dec 11, 2009. 

 

Investment Thesis: the eventual liquidation value is higher than current stock price of $8.2 and the liquidation will be completed in about 5 months.

 

Reasons for the discount

  • Classic orphan stock - there is no sell-side coverage.
  • Irrational selling - institutions/retail investors do not want to hold a company that is no longer a going concern and thin trading volume.

 

Near-term Catalyst: the current management contract with CIT will expire on June 30, 2010, and it is reasonable to assume there won't be an extension with the liquidation intent announcement. 

 

The Formation of CRE: CIT and Jeffrey Peek:

 

CRE is a REIT that was listed in June 2007, right at the peak of the RE bubble/credit crisis.  It has no employees and is solely managed by CIT healthcare, a wholly-owned subsidiary of the publicly traded CIT group.  As such, to analyze CRE, one must understand CIT and, more importantly, its ousted CEO, Jeffrey Peek.

 

Peek, who lost the battle for the Merrill CEO job in 2001, was hired by CIT in 03 and eventually became CEO in 04.  He was eager to use CIT as a means to an end - to demonstrate to his Wall St peers that he is back.  The following summarizes Peek's accomplishment during his reign of CIT.

 

  • Move HQ to a skyscraper on 5th Avenue, Manhattan from an office campus in New Jersey.
  • Started an investment banking division in 2005, focusing on syndication.
  • Expanded into subprime mortgage lending, and student lending (we all knew how this movie ended).
  • Asset grew at 18% CAGR from 03 - 07. On a managed asset basis, CAGR is 14% for the same period. It is clear in hindsight that Peek believed that "bigger is better" and, unfortunately for shareholders, the expanded asset base contains lower quality investments that ultimately bankrupted the company.

 

In summary, under Peek's leadership, CIT's strategy changed from "originate and hold" to, what he called, "originate and optimize".  The business model changes from earning spread income generated by proper credit underwriting to transaction fees based on deal volume. 

 

For every deal, there needs to be a buyer to take the other side.  To earn fees from transactions and management fees from the buyers would be the equivalent of having one's cake and eat it too.  Consequently, to capture profits from both sides of the trade, CIT created CRE.

 

CRE's Investment Portfolio:

 

CIT expected to utilize CRE as a vehicle to monetize its healthcare-related loans.  In fact, CRE's investment was 100% mortgage loans at the time of its IPO in June 2007.  It has no employees and is managed by CIT healthcare under a very generous contract favorable to the managers.  The credit crisis has disrupted CIT's plan and forced it to invest in healthcare properties instead.

 

As of 3Q09, the portfolio consists of 4 parts:

1.      Legacy mortgage loans from CIT Healthcare with book value (BV) of $58m

2.      Bickford Portfolio

3.      Equity stakes in two healthcare joint ventures managed by 3rd parties (Cambridge and SMC)

4.      $94.7m of cash

 

Legacy loans:

 

Did CIT lower its underwriting criteria when originating the loans?  Are the loans still worth BV, or less?  These are reasonable questions because

1) CIT was chasing fees and deal volume, and in hindsight, its underwriting record is poor

2) The initial price paid by CRE for the loans were not arms-length transaction

 

"The contribution agreement through which we acquired our initial portfolio of mortgage loan assets at the time of our initial public offering was not negotiated on an arms-length basis and we did not receive independent appraisals of the initial assets. As a result, the terms of the contribution agreement, including the consideration paid by us in exchange for the initial assets, may not be as favorable to us as if it was negotiated with an unaffiliated third party."

Source: 2008 10K

 

I believe that the loans are worth at least BV because

  • The loans are held at lower of cost or market (LOCOM)
  • All loans are secured by hard, RE assets with very short duration (1.3 years).
  • All loans are variable rates based on Libor. $129.2m (68% of loans at cost basis) are subject to floor protection ranging from 6% - 11.5%. Source: 3Q09 10Q note 3
  • Management has been selling the loans to build cash on the balance sheet. CRE were able to sell these loans to 3rd parties and CIT at prices close to BV for the first nine months of 2009 and realized a small gain on sale ($1.18m).

 

Bickford Portfolio:

 

CRE bought 14 senior living properties (assisted living, independent living and Alzheimer) in two sales-leaseback transactions during 2008 for $111m.  Annual rents are $9.1m, with 3% annual escalation.  Occupancy was 92% as of 2008 year-end.

 

 

NAV calculation

 

Bickford Portfolio

 

annual NOI

9.43

cap rate

8.50%

NAV

110.94

 

 

Based on earnings call transcript from other healthcare REITs, market cap rate ranges from 7 - 8%.  I added 0.5% for conservatism.

 

Cambridge Joint Venture

 

The JVs are managed by Cambridge Healthcare Properties (CHP).  The manager has 22 years of operating history as a developer/owner of healthcare properties.

 

Investment Structure: CRE paid $72.4m ($61.9m in cash, the rest in stock) for 85% interest of the fund.  A return of 8% (based on $72.4m) is guaranteed which is supported by 1) cash flow to CHP and 2) the cancellation of stocks to CHP.

 

The JVs owned 9 medical office buildings developed by CHP with 767,000 sf and are 95% leased at 2008 year-end.

 

NAV calculation

 

Cambridge Portfolio

 

CRE's share of earnings, at 85% interest

(4.30)

depreciation

7.20

Tenant improvements

(1.10)

FCF for 9 months ended 2009

1.80

FCF annualized

2.40

 

 

Distribution received

4.60

Distribution annualized

6.13

 

 

NAV, at 10x FCF

24.00

 

Using 2009 FCF is quite conservative because distributions ($6.13m) and 2008 FCF ($3.3m) are much higher.

 

Senior Management Concepts Joint Venture

 

The JV owns four independent and assisted living properties which contain 233 IL and 159 AL units operated by Senior Management Concepts (SMC).  The facilities are upscale, 100% private pay and were 88% occupied as of 2008 yr-end.

 

Investment Structure: CRE bought 100% of preferred equity with 15% yield and 10% of common equity for $6.8m.  The preferred are callable after two years, and puttable after eight. 

 

NAV calculation

 

SMC Portfolio

 

Distribution

0.90

annualized

1.20

NAV = BV

6.78

 

In 2008 and 2009, reported earnings = distributions, which implies that SMC can afford to pay the distributions because reported earnings include non-cash charges (depreciation expense).  Given that the credit market has reopened, SMC would likely refinance in 2010 as the preferred becomes callable.  If SMC does not refinance, CRE will continue to receive the distributions.  As a point of reference, HCN (Healthcare REIT with similar properties) series D callable in 03/2010 is yielding around 8%.  For margin of safety I will mark this at BV with 15% yield.

 

Why liquidate?

  • From CIT's perspective, CRE is part of the non-core assets inherited from former management.
  • Interestingly enough, the management contract has a termination fee of $15.4m for the manager (CIT Healthcare) even if the manager fires itself. Management has confirmed in earnings calls that this fee is payable in the event of liquidation.

 

NAV Summary

Worst

Normal

cash

94.70

94.70

Bickford

110.94

117.88

Legacy loans

57.98

57.98

Cambridge

24.00

36.80

SMC

6.78

6.78

Liabilities

(89.04)

(89.04)

termination fee

(15.40)

(15.40)

NAV

189.96

209.70

diluted # of share

20.89

20.89

NAV/Share

9.09

10.04

 

Conclusion: In the worst case scenario, one can still earn 11% in five months, which equals to an annualized return of 28%.

 

Catalyst

Expiry of management contract on June 30, 2010.

Evenutal liquidation.

    sort by    

    Description

    Special Situation: announced intent to liquidate the company on Dec 11, 2009. 

     

    Investment Thesis: the eventual liquidation value is higher than current stock price of $8.2 and the liquidation will be completed in about 5 months.

     

    Reasons for the discount

     

    Near-term Catalyst: the current management contract with CIT will expire on June 30, 2010, and it is reasonable to assume there won't be an extension with the liquidation intent announcement. 

     

    The Formation of CRE: CIT and Jeffrey Peek:

     

    CRE is a REIT that was listed in June 2007, right at the peak of the RE bubble/credit crisis.  It has no employees and is solely managed by CIT healthcare, a wholly-owned subsidiary of the publicly traded CIT group.  As such, to analyze CRE, one must understand CIT and, more importantly, its ousted CEO, Jeffrey Peek.

     

    Peek, who lost the battle for the Merrill CEO job in 2001, was hired by CIT in 03 and eventually became CEO in 04.  He was eager to use CIT as a means to an end - to demonstrate to his Wall St peers that he is back.  The following summarizes Peek's accomplishment during his reign of CIT.

     

     

    In summary, under Peek's leadership, CIT's strategy changed from "originate and hold" to, what he called, "originate and optimize".  The business model changes from earning spread income generated by proper credit underwriting to transaction fees based on deal volume. 

     

    For every deal, there needs to be a buyer to take the other side.  To earn fees from transactions and management fees from the buyers would be the equivalent of having one's cake and eat it too.  Consequently, to capture profits from both sides of the trade, CIT created CRE.

     

    CRE's Investment Portfolio:

     

    CIT expected to utilize CRE as a vehicle to monetize its healthcare-related loans.  In fact, CRE's investment was 100% mortgage loans at the time of its IPO in June 2007.  It has no employees and is managed by CIT healthcare under a very generous contract favorable to the managers.  The credit crisis has disrupted CIT's plan and forced it to invest in healthcare properties instead.

     

    As of 3Q09, the portfolio consists of 4 parts:

    1.      Legacy mortgage loans from CIT Healthcare with book value (BV) of $58m

    2.      Bickford Portfolio

    3.      Equity stakes in two healthcare joint ventures managed by 3rd parties (Cambridge and SMC)

    4.      $94.7m of cash

     

    Legacy loans:

     

    Did CIT lower its underwriting criteria when originating the loans?  Are the loans still worth BV, or less?  These are reasonable questions because

    1) CIT was chasing fees and deal volume, and in hindsight, its underwriting record is poor

    2) The initial price paid by CRE for the loans were not arms-length transaction

     

    "The contribution agreement through which we acquired our initial portfolio of mortgage loan assets at the time of our initial public offering was not negotiated on an arms-length basis and we did not receive independent appraisals of the initial assets. As a result, the terms of the contribution agreement, including the consideration paid by us in exchange for the initial assets, may not be as favorable to us as if it was negotiated with an unaffiliated third party."

    Source: 2008 10K

     

    I believe that the loans are worth at least BV because

     

    Bickford Portfolio:

     

    CRE bought 14 senior living properties (assisted living, independent living and Alzheimer) in two sales-leaseback transactions during 2008 for $111m.  Annual rents are $9.1m, with 3% annual escalation.  Occupancy was 92% as of 2008 year-end.

     

     

    NAV calculation

     

    Bickford Portfolio

     

    annual NOI

    9.43

    cap rate

    8.50%

    NAV

    110.94

     

     

    Based on earnings call transcript from other healthcare REITs, market cap rate ranges from 7 - 8%.  I added 0.5% for conservatism.

     

    Cambridge Joint Venture

     

    The JVs are managed by Cambridge Healthcare Properties (CHP).  The manager has 22 years of operating history as a developer/owner of healthcare properties.

     

    Investment Structure: CRE paid $72.4m ($61.9m in cash, the rest in stock) for 85% interest of the fund.  A return of 8% (based on $72.4m) is guaranteed which is supported by 1) cash flow to CHP and 2) the cancellation of stocks to CHP.

     

    The JVs owned 9 medical office buildings developed by CHP with 767,000 sf and are 95% leased at 2008 year-end.

     

    NAV calculation

     

    Cambridge Portfolio

     

    CRE's share of earnings, at 85% interest

    (4.30)

    depreciation

    7.20

    Tenant improvements

    (1.10)

    FCF for 9 months ended 2009

    1.80

    FCF annualized

    2.40

     

     

    Distribution received

    4.60

    Distribution annualized

    6.13

     

     

    NAV, at 10x FCF

    24.00

     

    Using 2009 FCF is quite conservative because distributions ($6.13m) and 2008 FCF ($3.3m) are much higher.

     

    Senior Management Concepts Joint Venture

     

    The JV owns four independent and assisted living properties which contain 233 IL and 159 AL units operated by Senior Management Concepts (SMC).  The facilities are upscale, 100% private pay and were 88% occupied as of 2008 yr-end.

     

    Investment Structure: CRE bought 100% of preferred equity with 15% yield and 10% of common equity for $6.8m.  The preferred are callable after two years, and puttable after eight. 

     

    NAV calculation

     

    SMC Portfolio

     

    Distribution

    0.90

    annualized

    1.20

    NAV = BV

    6.78

     

    In 2008 and 2009, reported earnings = distributions, which implies that SMC can afford to pay the distributions because reported earnings include non-cash charges (depreciation expense).  Given that the credit market has reopened, SMC would likely refinance in 2010 as the preferred becomes callable.  If SMC does not refinance, CRE will continue to receive the distributions.  As a point of reference, HCN (Healthcare REIT with similar properties) series D callable in 03/2010 is yielding around 8%.  For margin of safety I will mark this at BV with 15% yield.

     

    Why liquidate?

     

    NAV Summary

    Worst

    Normal

    cash

    94.70

    94.70

    Bickford

    110.94

    117.88

    Legacy loans

    57.98

    57.98

    Cambridge

    24.00

    36.80

    SMC

    6.78

    6.78

    Liabilities

    (89.04)

    (89.04)

    termination fee

    (15.40)

    (15.40)

    NAV

    189.96

    209.70

    diluted # of share

    20.89

    20.89

    NAV/Share

    9.09

    10.04

     

    Conclusion: In the worst case scenario, one can still earn 11% in five months, which equals to an annualized return of 28%.

     

    Catalyst

    Expiry of management contract on June 30, 2010.

    Evenutal liquidation.

    Messages


    Subjecttermination fee and Cambridge
    Entry02/02/2010 11:59 PM
    Memberconway968

    Wasn't the termination fee reduced to $7.5mm in the modified agreement filed in an 8-k 1/15/10?

    Doesn't it seem aggressive to assume that Cambridge can be sold in 5 months, considering that the company needs the JV partner's approval to sell its stake and that partner is in litigation with the company?

    Also, while the numbers seem reasonable, it seems a stretch to label your more conservative guesses as "Worst."


    Subjectcapitalsource sale of triple net lease facilities
    Entry02/04/2010 10:06 PM
    Membernha855

    It appears that Capitalsource sold their triple net lease failities at a 10.3% cap rate. Is this a good comp for the Bickford portfolio? If yes, it would appear that there is little upside to the stock. Please let me know if I'm thinking about this incorrectly.


    SubjectBickford and Cambridge
    Entry02/04/2010 10:37 PM
    Memberconway968

    The Bickford number may be a bit high, but the Cambridge number is probably low.

    CRE paid about $110mm for Bickford in summer 2008.  They paid $65mm (small part stock) for Cambridge at the end of 2007.  Bickford is performing as expected and Cambridge is performing better than the underwritten assumptions.  Cambridge is a growth project, so FCF multiple needs to be higher.

    Market valuations have moved lower since these deals were done, but the assets have performed as expected.  So adjust appropriately.


    SubjectRE: termination fee and Cambridge
    Entry02/10/2010 07:27 PM
    Memberagape1095

    Thanks for pointing out the reduction of management fee.  I completely missed that.  This should add around 30 cents to my price targets.

    Can you provide a source for the Cambridge litigation?  I can't find any info on Bloomgerg and Google. 

    I do like to point out that the fact that CIT did not extend the management contract while reducing the termination fee is strong evidence that they would like to get rid of CRE, ASAP.  Otherwise, they could have just run the company on auto-pilot and collect the management fees.  With CIT just re-emerged from bankruptcy and new management (Thain) coming in, there really is no point in keeping CRE (the management fees are immaterial to CIT).


    SubjectRE: RE: termination fee and Cambridge
    Entry02/10/2010 07:47 PM
    Memberconway968

    IN THE UNITED STATES DISTRICT COURT
    FOR THE NORTHERN DISTRICT OF TEXAS
    DALLAS DIVISION

    Case 3:09-cv-02256-K

    CARE INVESTMENT TRUST, INC.,
    Plaintiff,
    -v.-
    JEAN-CLAUDE SAADA; CAMBRIDGE ONALP,
    INC.; CAMBRIDGE NASSAU BAY GP LLC; 6000
    GREENVILLE, INC.; ALLEN MOB, INC.; 5280
    MEDICAL DRIVE, INC.; CAMBRIDGE GORBUTT
    MOB, INC.; CAMBRIDGE TARRANT, INC.; CHMP
    MANAGER, LLC; CAMBRIDGE B/R, INC.;
    CAMBRIDGE-GREENVILE DALLAS, LLC; PMC
    CAMBRIDGE OF PLANO, LTD; CAMBRIDGECROWN
    ATRIUM LLC; and CAMBRIDGE NORTH
    TEXAS HOLDINGS, LLC,
    Defendants.


    Subjecttender off at $9/share
    Entry03/16/2010 04:10 PM
    Memberagape1095

    http://www.prnewswire.com/news-releases/care-investment-trust-inc-announces-definitive-agreement-with-tiptree-financial-partners-lp-87816307.html

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