Care Investment Real EstateTrust: A Classic Small Cap Value Investment

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Includes: CSA, HCN, HCP, HR, TIPT, VTR
by: Adam Muller
Company and Investment Overview
Care Investment Trust Inc (CVTR.PK) is an undervalued healthcare real estate investment trust (REIT) with a $50mm market capitalization that is 92% owned by Tricadia Capital, a New York based hedge fund. Care has had a tumultuous existence since its June 2007 IPO that has led to its current form, ownership, and valuation.
From a late 2007 mandate change to focus on making equity investments in healthcare properties to a board review and auction process to the decision to liquidate the company and finally to the sale to the company to Tiptree Financial Partners, an affiliate of Tricadia Capital, Care has undergone massive change in the four years since its IPO. Trading today at $5.70/share implying a market capitalization of $58mm, Care is valued at only 0.7x book value and 10.2x pro forma FFO (see below), well below the valuations of comparable healthcare focused REITs.
Company History
As mentioned above, CVTR was originally formed to make mortgage investments in healthcare properties utilizing CIT Group’s healthcare origination platform to source the investments. In late 2007 amidst the deteriorating credit markets, the company changed course to focus on equity investments in healthcare-related real estate (medical office building, senior housing facilities, etc.).
In early 2008 the company began reviewing its strategic alternatives and assessed both a sale of the company and a full liquidation as alternatives to continued operations. After a significant process the company entered a sale agreement with Tiptree at $9/share (this was before a 3 for 2 stock split; post-split this equates to $6/share). The structure of the deal involved Tiptree Financial Partners purchasing new equity from the company at $9/share with the company using the proceeds from the equity sold to tender for outstanding shares.
The size of the new issue was dependent upon the number of shares tendered. Link to the transaction proxy for additional detail on the Tiptree sale process, here. Ultimately, 97.4% of the outstanding shares were tendered (19.7mm shares) and 6.2mm shares were issued to Tiptree. After the tender offer and equity issuance Tiptree owned 92.2% of the outstanding shares. After taking control Tiptree terminated the relationship with CIT Healthcare thereby internalizing senior management into the company with help from a third party manger (TREIT Management LLC, an affiliate of Tiptree).
Valuation Discussion
Care is currently materially undervalued. The key metric with which to assess the value of Care is Funds from Operations (FFO). FFO provides a measure of the magnitude of the dividend that will be paid out by the REIT.
The company provides both FFO and adjusted FFO on page 56 of the 10-K. To assess the FFO generation potential of the company going forward these values have to be adjusted for the significant one-time non-recurring costs associated with the Tiptree transaction. Link to CVTR 2010 10-K.

These non-recurring costs include a $7.4mm payment to CIT Healthcare related to their removal as manager, $3.5mm in advisory costs related to the Tiptree transaction, and $1.5mm in legal costs related to both the Tiptree deal and the now settled Cambridge litigation. This results in $12.4mm of total non-recurring costs. Link to press release regarding the settlement of litigation with Cambridge Holdings, Inc.
Adding back these costs would swing 2010 FFO from negative $6.7mm to positive $5.7mm and adjusted FFO (or AFFO) from negative $9.2mm to positive $3.2mm. This implies P/FFO and P/AFFO multiples of 9.4x and 16.8x, respectively.
Further, CVTR’s book value per the 10-K filing is $81mm or $8/share representing a greater than 50% premium over the share price today. The 10-K tells us that as of August 13, 2010 the entire asset portfolio was evaluated and revalued to reflect the estimated fair market value of each asset. This provides some level of comfort as to the accuracy of book value and at the very least reveals that the book valuations are recent and not relics of a different economic climate.
Table 1 below provides price to book value and price to FFO multiples for some comparable heathcare REITs. The data suggests that compared to comparable healthcare focused REITS CVTR is very inexpensive.
Table 1: Comparable Healthcare REITS
Company
Ticker
Share Price
Market Cap
($mm)
Price / Book Value
Price /FFO
Dividend Yield (%)
Care Investment Trust
CVTR
$5.70
$58
0.7x
-
-
Cogdell Spenser Inc
$6.00
$306
2.4x
-
6.7%
HCP, Inc.
$38.21
$15,513
1.9x
18.7x
5.0%
Healthcare REIT
$53.34
$9,380
1.8x
24.5x
5.2%
Healthcare Realty Trust
$23.35
$1,569
1.8x
20.3x
5.1%
Ventas
$55.62
$9,062
3.7x
20.8x
4.1%
Click to enlarge
Source: Bloomberg as of 2:30pm 20-Apr-2011
As a REIT, CVTR must dividend out 90% of its REIT taxable income. The pro forma 2010 FFO of $5.7mm implies a dividend yield of $0.50/share ($5.7mm multiplied by 0.9 divided by 10.1 million shares) or a dividend yield of 8.8%, which is above the range of 4.2% to 6.8% in Table 1.
Conclusions
Care is a classic value investment opportunity. But, like many stocks that look cheap, there are several reasons why that are important to consider. In this case the reasons are technical, not structural or operational. While the deal-related non-recurring costs will disappear from the results going-forward they still depressed cash flow generation resulting in no dividend and few investors want to own a REIT that has no yield.
Further, Care has a very small capitalization and is a unique and complicated story. Typically, seasoned institutional investors are the people willing to dig into the details and comb through the complexities to understand the true valuation. CVTR is simply too small to be worth their time. Given Tricadia’s 92% ownership, there is only 8% or just over $4.5mm of value available for everyone else. Care trades on the pink sheets after being delisted from the NYSE post the Tiptree deal as a result of the small float. This also limits the potential investor universe.
Catalysts
Tiptree/Tricadia is very smart money and presumable has plans for the company that could involve growing the asset base through acquisitions. Further, FFO for the first quarter should results in a resumption of the dividend (as a 92% shareholder Tricadia has every incentive to want the dividend resumed and as a REIT the distribution to cash flow is mandatory to maintain the tax status). It is also logical, if not highly likely, that at some stage Care could be acquired by a larger healthcare REIT. In the meantime, while investors wait for Tiptree to articulate and ultimately execute on its strategy the downside is limited given the discount to book value that already exists.

Disclosure: I am long CVTR.PK.