CRE Care Investment Trust Inc. Common Stock

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K/A

(Amendment No. 2)

 

 

Commission File Number: 001-33549

 

Care Investment Trust Inc.

(Exact name of Registrant as specified in its charter)

 

 

505 Fifth Avenue, 6 ^th Floor, New York, New York 10017
(Address of Registrant’s principal executive offices)

(212) 771-0505
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last day of the registrant’s most recently completed second fiscal quarter: $65,704,642.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of July 1, 2010, there were 20,235,924 shares, par value $0.001, of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE
None.

 

 

EXPLANATORY NOTE

 

The registrant is filing this Amendment No. 2 (the “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“Original Report”), to (i) enhance the disclosure previously included in Note 6 (“Investments in Partially Owned Entities”) to the registrant’s Consolidated Financial Statements included under Item 8 (“Financial Statements and Supplementary Data”) by providing summarized financial data for four of the eight legal entities included in the registrant’s investment in the Cambridge medical office building portfolio that contributed more than 20% to the registrant’s 2009 consolidated pre-tax loss, (ii) update the disclosure previously included in Note 16 (“Commitments and Contingencies”) to the registrant’s Consolidated Financial Statements included under Item 8 (“Financial Statements and Supplementary Data”) by providing an update to the status of litigation through July 14, 2010 and (iii) separate audited financial statements for SMC-CIT Holding Company, LLC as of and for the years ended December 31, 2009 (audited) and December 31, 2008 (unaudited).

 

This Amendment includes information contained in the Original Report, and we have made no attempt in the Amendment to modify or update the disclosure presented in the Original Report, except as expressly identified above. The disclosures in this Amendment speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with the Original Report, and in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report, including any amendments to those filings.

 

Table of Contents

 

 

Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Care Investment Trust Inc. and subsidiaries

New York, NY

 

We have audited the accompanying consolidated balance sheets of Care Investment Trust Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2009 and 2008, and for the period from June 22, 2007 (commencement of operations) to December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15. We also have audited the Company’s internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Care Investment Trust and subsidiaries as of December 31, 2009 and 2008, and the

results of their operations and their cash flows for the years ended December 31, 2009 and 2008, and for the period from June 22, 2007 (commencement of operations) to December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

 

Parsippany, NJ

March 16, 2010 (July 14, 2010 as to Notes 6 and 16)

Care Investment Trust Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

 

See Notes to Consolidated Financial Statements

Care Investment Trust Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

 

See Notes to Consolidated Financial Statements.

Care Investment Trust Inc. and Subsidiaries

 

Consolidated Statement of Stockholders’ Equity

 

 

See Notes to Consolidated Financial Statements

Care Investment Trust Inc. and Subsidiaries

 

Consolidated Statement of Cash Flows

 

 

See Notes to Consolidated Financial Statements

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

December 31, 2009, December 31, 2008 and for the Period from June 22, 2007
(Commencement of Operations) to December 31, 2007

 

 

Care Investment Trust Inc. (together with its subsidiaries, the “Company” or “Care” unless otherwise indicated or except where the context otherwise requires, “we”, “us” or “our”) is a real estate investment trust (“REIT”) with a geographically diverse portfolio of senior housing and healthcare-related assets in the United States. Care is externally managed and advised by CIT Healthcare LLC (“Manager”). As of December 31, 2009, this portfolio of assets consisted of real estate and mortgage related assets for senior housing facilities, skilled nursing facilities, medical office properties and first mortgage liens on healthcare related assets. Our owned senior housing facilities are leased, under “triple-net” leases, which require the tenants to pay all property-related expenses.

 

Care elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2007. To maintain our tax status as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders. 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 Presentation

 

On December 10, 2009, our Board of Directors approved a plan of liquidation and recommended that our shareholders approve the plan of liquidation. On January 28, 2010, our shareholders approved the plan of liquidation. Under the plan of liquidation, the Board of Directors reserves the right to continue to solicit and entertain proposals from third parties to acquire all or substantially all of the company’s outstanding common stock, prior to and after approval of the plan of liquidation by our shareholders. We have entered into a material definitive agreement for a sale of control of the Company and have not pursued the plan of liquidation. Since it is not probable that the Company would liquidate, the Company has presented its financial statements on a going concern basis. See Note 19.

 

Accounting Standards Codification (“ASC”)

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement establishing the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The standard explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. This standard is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. The Company adopted this standard in the third quarter of 2009.

 

Consolidation

 

The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us. All significant intercompany balances and transactions have been eliminated.

 

Investments in partially-owned entities where the Company exercises significant influence over operating and financial policies of the subsidiary, but does not control the subsidiary, are reported under the equity method of accounting. Generally under the equity method of accounting, the Company’s share of the investee’s earnings or loss is included in the Company’s operating results.

 

Accounting Standards Codification 810 Consolidation (“ASC 810”) , requires a company to identify investments in other entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and to determine which business enterprise is the primary beneficiary of the VIE. A variable interest entity is broadly defined as an entity where either the equity investors as a group, if any, do not have a controlling financial interest or the equity investment at risk is insufficient to finance that entity’s activities without

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

additional subordinated financial support. The Company consolidates investments in VIEs when it is determined that the Company is the primary beneficiary of the VIE at either the creation or the variable interest entity or upon the occurrence of a reconsideration event. The Company has concluded that neither of its partially-owned entities are VIEs.

 

Segment Reporting

 

Accounting Standards Codification 280 Segment Reporting (“ASC 280”) 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 real estate and commercial mortgage debt and currently operate in only one reportable segment.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents at December 31, 2009 and 2008, are approximately $1.1 million and $1.3 million, respectively in customer deposits maintained in an unrestricted account.

 

Real Estate and Identified Intangible Assets

 

Real estate and identified intangible assets are carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives which range from 7 to 40 years.

 

Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangible assets such as above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance Accounting Standards Codification 805 Business Combinations (“ASC 805”) , and Accounting Standards Codification 350-30 Intangibles — Goodwill and other (“ASC 350-30”) , and we allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

 

Our properties, including any related intangible assets, are reviewed for impairment under ACS 360-10-35-15, Impairment or Disposal of Long-Lived Assets , (“ASC 360-10-35-15”) if events or circumstances change indicating that the carrying amount of the assets may not be recoverable. Impairment exists when the carrying amount of an asset exceeds its fair value. An impairment loss is measured based on the excess of the carrying amount over the fair value. We have determined fair value by using a discounted cash flow model and an appropriate discount rate. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. If our anticipated holding periods change or estimated cash flows decline based on market conditions or otherwise, an impairment loss may be recognized. As of December 31, 2009, we have not recognized an impairment loss.

 

Loans Held at LOCOM

 

Valuation Allowance on Loans Held at LOCOM

 

Investments in loans amounted to $25.3 million at December 31, 2009. We account for our investment in loans in accordance with Accounting Standards Codification 948 Financial Services — Mortgage Banking (“ASC 948”), which codified the FASB’s Accounting for Certain Mortgage Banking Activities . Under ASC 948, loans expected to be held for the foreseeable future or to maturity should be held at amortized cost, and all other loans should be held at the lower of cost or market (LOCOM), measured on an individual basis. In accordance with ASC 820 Fair Value

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

Measurements and Disclosures (“ASC 820”), the Company includes nonperformance risk in calculating fair value adjustments. As specified in ASC 820, the framework for measuring fair value is based on independent observable inputs of market data and follows the following hierarchy:

 

Level 1  — Quoted prices in active markets for identical assets and liabilities.

 

Level 2  — Significant observable inputs based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable.

 

Level 3  — Significant unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities.

 

At December 31, 2008, in connection with our decision to reposition ourselves from a mortgage REIT to a traditional direct property ownership REIT (referred to as an equity REIT, see Notes 2, 4, and 5) and as a result of existing market conditions, we transferred our portfolio of mortgage loans to LOCOM because we are no longer certain that we will hold the portfolio of loans either until maturity or for the foreseeable future. Until December 31, 2008, we held our loans until maturity, and therefore the loans had been carried at amortized cost, net of unamortized loan fees, acquisition and origination costs, unless the loans were impaired. In connection with the transfer, we recorded an initial valuation allowance of approximately $29.3 million representing the difference between our carrying amount of the loans and their estimated fair value at December 31, 2008. Interim assessments were made of carrying values of the loan based on available data, including sale and repayments on a quarterly basis during 2009. Gains or losses on sales are determined by comparing proceeds to carrying values based on interim assessments. At December 31, 2009, the valuation allowance was reduced to $8.4 million representing the difference between the carrying amounts and estimated fair value of the Company’s three remaining loans.

 

Coupon interest on the loans is recognized as revenue when earned. Receivables are evaluated for collectibility if a loan becomes more than 90 days past due. If fair value is lower than amortized cost, changes in fair value (gains and losses) are reported through our consolidated statement of operations through a valuation allowance on loans held at LOCOM. Loans previously written down may be written up based upon subsequent recoveries in value, but not above their cost basis.

 

Expense for credit losses in connection with loan investments is a charge to earnings to increase the allowance for 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/or estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs. Whichever method is used, other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions. Based upon these factors, we will establish an allowance for credit losses when appropriate. When it is probable that we will be unable to collect all amounts contractually due, the loan is considered impaired.

 

Investment in Partially-Owned Entities

 

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. At the inception of the investment, we must determine whether such investment should be accounted for as a loan, joint venture or as real estate. Care invested in two equity investments as of December 31, 2009 and accounts for such investments as a joint venture.

 

The Company assesses whether there are indicators that the value of its partially owned entities may be impaired. An investment’s value is impaired if the Company determines that a decline in the value of the investment below its carrying value is other than temporary. To the extent impairment has occurred, the loss shall be measured

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

as the excess of the carrying amount of the investment over the estimated value of the investment. As of December 31, 2009, the Company has not recognized any impairment on our partially owned entities.

 

Comprehensive Income

 

The Company has no items of other comprehensive income, and accordingly net loss is equal to comprehensive loss for all periods presented.

 

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.

 

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. For the years ended December 31, 2009 and 2008, we have no loans for which income recognition has been suspended.

 

The Company recognizes rental revenue in accordance with Accounting Standards Codification 840 Leases (“ASC 840”). ASC 840 requires that revenue be recognized on a straight-line basis over the non-cancelable term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Renewal options in leases with rental terms that are lower than those in the primary term are excluded from the calculation of straight line rent if the renewals are not reasonably assured. We commence rental revenue recognition when the tenant takes control of the leased space. The Company recognizes lease termination payments as a component of rental revenue in the period received, provided that there are no further obligations under the lease.

 

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 14. We account for the plans using the fair value recognition provisions of 505-50 Equity-Based Payments to Non-Employees (“ASC 505-50”) and ASC 718 — Compensation — Stock Compensation (“ASC 718”). ASC 505-50 and ASC 718 requires that compensation cost for stock-based compensation be recognized ratably over the service period of the award. Because all of our stock-based compensation is issued to non-employees and board members, 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.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

Derivative Instruments

 

We account for derivative instruments in accordance with Accounting Standards Codification 815 Derivatives and Hedging (“ASC 815”). 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 derivative 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 fair value, and such value may never actually be realized.

 

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.

 

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.

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our REIT 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 available 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.

 

In July 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). ASC 740 prescribes a recognition threshold and measurement attribute for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 requires that the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values. ASC 740 was adopted by

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

the Company and became effective beginning January 1, 2007. The implementation of ASC 740 has not had a material impact on the Company’s consolidated financial statements.

 

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 ASC 260, 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 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 December 31, 2009 and 2008, diluted EPS was the same as basic EPS because all outstanding restricted stock awards were anti-dilutive. The operating partnership units issued in connection with an investment (See Note 6) are in escrow and do not impact EPS.

 

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. Significant estimates are made for the valuation allowance on loans held at LOCOM, valuation of derivatives and impairment assessments. 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, real estate, 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 credit risk concentrations in our real estate and loan investment portfolios 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.

 

Recent Accounting Pronouncements

 

Noncontrolling Interests in Consolidated Financial Statements

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements which was codified in FASB ASC 810 Consolidation (“ASC 810”). ASC 810 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. ASC 810 is effective for the Company on January 1, 2009. The Company records its investments using the equity method and does not consolidate these joint ventures. As such, there is no impact upon adoption of ASC 810 on its consolidated financial statements.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

Disclosures about Derivative Instruments and Hedging Activities

 

On March 20, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which is codified in FASB ASC 815 Derivatives and Hedging Summary (“ASC 815”). The derivatives disclosure pronouncement provides for enhanced disclosures about how and why an entity uses derivatives and how and where those derivatives and related hedged items are reported in the entity’s financial statements. ASC 815 also requires certain tabular formats for disclosing such information. ASC 815 applies to all entities and all derivative instruments and related hedged items accounted for under this new pronouncement. Among other things, ASC 815 requires disclosures of an entity’s objectives and strategies for using derivatives by primary underlying risk and certain disclosures about the potential future collateral or cash requirements (that is, the effect on the entity’s liquidity) as a result of contingent credit-related features. ASC 815 is effective for the Company on January 1, 2009. The Company adopted ASC 815 in the first quarter of 2009 and included disclosures in its consolidated financial statements addressing how and why the Company uses derivative instruments, how derivative instruments are accounted for and how derivative instruments affect the Company’s financial position, financial performance, and cash flows. (See Note 9)

 

Disclosures about Fair Value of Financial Instruments

 

In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments codified in FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments and APB 28 Interim Financial Reporting by requiring an entity to provide qualitative and quantitative information on a quarterly basis about fair value estimates for any financial instruments not measured on the balance sheet at fair value. The Company adopted the disclosure requirements of ASC 820 in the quarter ended June 30, 2009.

 

In June 2009, issued ASU 2009-17 to codify FASB issued Statement No. 167, “ Amendments to FASB Interpretation No. 46(R) ” as ASC 810 (“ASC 810”), with the objective of improving financial reporting by entities involved with variable interest entities (VIE). It retains the scope of FIN 46(R) with the addition of entities previously considered qualifying special-purpose entities, as the concept of those entities was eliminated by FASB Statement No. 166, “ Accounting for Transfers of Financial Assets ” (ASU 2009-16; FASB ASC 860). ASC 810 will require an analysis to determine whether the entity’s variable interest or interests give it a controlling financial interest in a VIE.

 

On September 30, 2009, the FASB issued ASU 2009-12 to provide guidance on measuring the fair value of certain alternative investments. The ASU amends ASC 820 to offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share. The ASU is effective for the first reporting period (including interim periods) ending after December 15, 2009 with early adoption permitted.

 

On January 21, 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, with early adoption permitted.

 

Subsequent Events

 

In May 2009, the FASB issued SFAS 165 Subsequent Events , which is codified in FASB ASC 855, Subsequent E vents (“ASC 855”). ASC 855 introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The pronouncement is effective for interim periods ending after June 15, 2009. The Company adopted ASC 855 in the 2009 second quarter. The Company evaluates subsequent events as of the date of issuance of its financial statements and considers the impact of all events that have taken place to that date in its disclosures and financials statements when reporting on the Company’s financial position and results of operations. The Company has evaluated subsequent events through the date of filing and has determined that no other events need to be disclosed.

 

 

On June 26, 2008, we purchased twelve senior living properties for approximately $100.8 million from Bickford Senior Living Group LLC, an unaffiliated party. Concurrent with the purchase, we leased these properties to Bickford Master I, LLC (the “Master Lessee” or “Bickford”), for initial annual base rent of $8.3 million and additional base rent of $0.3 million, with fixed escalations of 3% for 15 years. The leases contain an option of four renewals of ten years each. The additional base rent is deferred and accrues for the first three years and then is paid starting with the first month of the fourth year. We funded this acquisition using cash on hand and mortgage borrowings of $74.6 million.

 

On September 30, 2008, we purchased two additional senior living properties for approximately $10.3 million from Bickford Senior Living Group LLC. Concurrent with the purchase, we leased these properties back to Bickford for initial annual base rent of $0.8 million and additional base rent of $0.03 million with fixed escalations of 3% for 14.75 years. The leases contain an option of four renewals of ten years each. The additional base rent is deferred and accrues for the first three years and then is paid starting with the first month of the fourth year. We funded this acquisition using cash on hand and mortgage borrowings of $7.6 million.

 

At each acquisition, we completed a preliminary assessment of the allocation of the fair value of the acquired assets (including land, buildings, equipment and in-place leases) in accordance with ASC 805 Business Combinations , and ASC 350 Intangibles — Goodwill and Other . Based upon that assessment, the final allocation of the purchase price to the fair values of the assets acquired is as follows (in millions):

 

 

Additionally, as part of the June 26, 2008 transaction we sold back a property acquired from Bickford Senior Living Group, LLC that was acquired on March 31, 2008 at its net carrying amount, which did not result in a gain or a loss to the Company.

 

As of December 31, 2009, the properties owned by Care, and leased to Bickford were 100% managed or operated by Bickford Senior Living Group, LLC. As an enticement for the Company to enter into the leasing arrangement for the properties, Care received additional collateral and guarantees of the lease obligation from parties affiliated with Bickford who act as subtenants under the master lease. The additional collateral pledged in support of Bickford’s obligation to the lease commitment included properties and ownership interests in affiliated companies of the subtenants.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

Future minimum annual rental revenue under the non-cancelable terms of the Company’s operating leases at December 31, 2009 are as follows (in thousands):

 

 

 

As of December 31, 2009 and December 31, 2008, our net investments in loans amounted to $25.3 million and $159.9 million, respectively. During the years ended December 31, 2009 and 2008, we received $138.4 million and $54.2 million in principal repayments and proceeds from the loan sales and recognized $1.5 million and $1.9 million, respectively in amortization of the premium we paid for the purchase of our initial assets as a reduction of interest income. Our investments include senior whole loans and participations secured primarily by real estate 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. These investments are all variable rate at December 31, 2009 and had a weighted average spread of 6.76% and 5.76% over one month LIBOR and have an average maturity of approximately 1.0 and 2.1 years at December 31, 2009 and 2008, respectively. Some loans are subject to interest rate floors. The effective yield on the portfolio was 6.99%, 6.20% and 8.22%, respectively for the years ended December 31, 2009 and December 31, 2008 and for the period from June 22, 2007 (commencement of operations) to December 31, 2007. One month LIBOR was 0.23% and 0.45% at December 31, 2009 and December 31, 2008, respectively.

 

December 31, 2009

 

 

At the conclusion of 2008, upon considering changes in our strategies and changes in the marketplace discussed in Note 2, we transferred our portfolio of mortgage loans to the lower of cost or market in the December 31, 2008 financial statements because we were not certain that we would hold the portfolio of loans either until maturity or for the foreseeable future. The transfer resulted in a charge to earnings of $29.3 million.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

December 31, 2008

 

 

 

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

 

Our mortgage portfolio (gross) at December 31, 2009 is diversified by property type and U.S. geographic region as follows (in millions of dollars):

 

 

 

 

 

During the year ended December 31, 2009, the Company received proceeds of $37.5 million related to the prepayment of balances related to two mortgage loans and received proceeds of $42.2 million related to sales to its Manager. In addition, during the year ended December 31, 2009, the Company received $55.8 million related to sales of mortgage loans to third parties. See Note 13 for a roll forward of the investment held at fair value from December 31, 2008 to December 31, 2009. As of December 31, 2009, our portfolio of three mortgages was extended to five borrowers. Two of those three mortgage loans were sold or repaid in 2010 as indicated in (g) and (k), above. As of December 31, 2008, our portfolio of eighteen mortgages was extended to fourteen borrowers with the largest exposure to any single borrower at 20.9% of the carrying value of the portfolio. The carrying value of three loans, each to different borrowers with exposures of more than 10% of the carrying value of the total portfolio, amounted to 54.9% of the portfolio.

 

 

On September 30, 2008 we finalized a Mortgage Purchase Agreement (the “Agreement”) with our Manager that provided us an option to sell loans from our investment portfolio to our Manager at the loan’s fair value on the sale date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of the terms and conditions of the Agreement. Pursuant to the agreement, we sold loans in 2008 and 2009 as discussed below.

 

Pursuant to the agreement, we sold a loan with a carrying amount of approximately $24.8 million in November 2009. We incurred a loss on the sale of $2.4 million.

 

On February 3, 2009, we sold one loan with a net carrying amount of approximately $22.5 million as of December 31, 2008. Proceeds from the sale approximated the net carrying value of $22.5 million. We incurred a loss of $4.9 million on the sale of this loan. The loss on this loan was included in the valuation allowance on the loans held at LOCOM at December 31, 2008. On August 19, 2009, we sold two mortgage loans with a net carrying value of approximately $2.9 million as of December 31, 2008. Proceeds from the sale of those two mortgage loans approximated the net carrying value as of June 30, 2009 of $2.3 million. On September 16, 2009, we sold interests in a participation loan in Michigan with a net carrying value of approximately $19.7 million as of December 31, 2008 and reduced to $18.7 million at the time of sale as a result of principal paydown. Proceeds from the sale of the interests in the participation loan were approximately $17.4 million or approximately $1.3 million less than the net carrying value. All of these loans were sold under the Mortgage Purchase Agreement (the “Agreement”) with our Manager, which was finalized in 2008 and provided us an option to sell loans from our investment portfolio to our Manager at the loan’s fair value on the sale date. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of the terms and conditions of the Agreement.

 

On September 15, 2009, we sold four mortgage loans to a third party with a net carrying value of approximately $22.8 million as of December 31, 2008 and $22.4 million as of June 30, 2009. Proceeds from the sale of these four mortgage loans were approximately $24.8 million or approximately $2.4 million above the net carrying value. On

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

October 6, 2009, we sold one mortgage loan with a net carrying value of $8.2 million as of December 31, 2008 and an adjusted value of $8.4 million as of June 30, 2009. Proceeds from the sale of this mortgage loan were approximately $8.5 million or approximately $0.1 million above the net carrying value. On November 12, 2009, we sold one mortgage loan to a third party with a net carrying value of approximately $19.3 million as of December 31, 2008 and an adjusted value of $19.9 million as of June 30, 2009. Proceeds from the sale of this mortgage loan were approximately $22.4 million or approximately $2.5 million above the net carrying value.

 

 

On December 31, 2007, Care, through its subsidiary ERC Sub, L.P., purchased an 85% equity interest in eight limited liability entities owning nine medical office buildings with a value of $263.0 million for $61.9 million in cash including the funding of certain reserve requirements. The Seller was Cambridge Holdings Incorporated (“Cambridge”) and the interests were acquired through a “DownREIT” partnership subsidiary, i.e., ERC Sub, L.P. The transaction also provided for the issuance of 700,000 operating partnership units to Cambridge subject to future performance of the underlying properties. These units were issued by us into escrow and will be released to Cambridge subject to the acquired properties meeting certain performance benchmarks. Based on the expected timing of the release of the operating partnership units from escrow, the fair value of the operating partnership units was $2.9 million and $3.0 million on December 31, 2009 and 2008, respectively. At December 31, 2014, each operating partnership unit held in escrow at that time is redeemable into one share of the Company’s common stock, subject to certain conditions. The Company has the option to pay cash or issue shares of company stock upon redemption.

 

In accordance with ASC 820, the obligation to issue operating partnership units is accounted for as a derivative instrument. Accordingly, the value of the obligation to issue the operating partnership units is reflected as a liability on the Company’s balance sheet and accordingly will be remeasured every period until the operating partnership units are released from escrow.

 

Care will receive an initial preferred minimum return of 8.0% on capital invested at close with 2.0% per annum escalations until certain portfolio performance metrics are achieved. As of December 31, 2009, the entities now owned with Cambridge carry $178.6 million in asset-specific mortgage debt which mature no earlier than the fourth quarter of 2016 and bear a weighted average fixed interest rate of 5.86%.

 

The Cambridge portfolio contains approximately 767,000 square feet and is located in major metropolitan markets in Texas (8) and Louisiana (1). The properties are situated on leading medical center campuses or adjacent to prominent acute care hospitals or ambulatory surgery centers. Affiliates of Cambridge will act as managing general partners of the entities that own the properties, as well as manage and lease these facilities.

 

Four of the eight Cambridge legal entities had a 2009 pre-tax loss which was greater than 20% of the Company’s 2009 loss. Supplemental summarized financial data detail for those four entities individually and aggregated for the remaining Cambridge entities with greater than 10% and less than 10% of the Company’s 2009

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

loss as of and for the years ended December 31, 2009, along with 2008 amounts which are presented for comparative purposed, are as follows:

 

December 31, 2009 Balance Sheet Detail

 

 

Income Statement Detail

 

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

December 31, 2008
Balance Sheet Detail

 

 

Income Statement Detail

 

 

 

 

On December 31, 2007, the Company also formed a joint venture, SMC-CIT Holding Company, LLC, with an affiliate of Senior Management Concepts, LLC to acquire four independent and assisted living facilities located in Utah. Total capitalization of the joint venture is $61.0 million. Care invested $6.8 million in exchange for 100% of the preferred equity interests and 10% of the common equity interests of the joint venture. The Company will receive a preferred return of 15% on its invested capital and an additional common equity return equal to 10% of the projected free cash flow after payment of debt service and the preferred return. Subject to certain conditions being met, our preferred equity interest is subject to redemption at par beginning on January 1, 2010. We retain an option to put our preferred equity interest to our partner at par any time beginning on January 1, 2016. If our preferred equity interest is redeemed, we have the right to put our common equity interests to our partner within thirty days after notice at fair market value as determined by a third-party appraiser. Affiliates of Senior Management

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

Concepts, LLC have leased the facilities from the joint venture for 15 years, expiring in 2022. Care accounts for its investment in SMC-CIT Holding Company, LLC under the equity method.

 

The four facilities contain 243 independent living units and 165 assisted living units. The properties were constructed in the last 25 years, and two were built in the last 10 years. Since both transactions closed on December 31, 2007, the Company recorded no income or loss on these investments for the period from June 22, 2007 (commencement of operations) to December 31, 2007.

 

For the years ended December 31, 2009 and December 31, 2008, our equity in the loss of our Cambridge portfolio amounted to $5.6 million and $5.6 million, respectively, which included $9.6 million and $9.4 million, respectively, attributable to our share of the depreciation and amortization expenses associated with the Cambridge properties. The Company’s investment in the Cambridge entities was $49.3 million and $58.1 million at December 31, 2009 and 2008, respectively. During the years ended December 31, 2009 and December 31, 2008, we received $5.8 million and $2.2 million in distributions from our investment in Cambridge.

 

For the years ended December 31, 2009 and December 31, 2008, we recognized $1.2 million and $1.1 million, respectively, in equity income from our interest in SMC and received $1.2 million and $1.1 million in distributions, respectively.

 

 

The following table summarizes the Company’s identified intangible assets as of December 31, 2009:

 

 

The estimated annual amortization of acquired in-place leases for each of the succeeding years as of December 31, 2008 is as follows: (amounts in thousands )

 

 

The Company amortizes this intangible asset over the life of the leases on a straight-line basis.

 

 

Other assets at December 31, 2009 and 2008 consisted of the following (amounts in thousands ) :

 

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

 

On October 1, 2007, Care entered into a master repurchase agreement (“Agreement”) with Column Financial, Inc. (“Column”), an affiliate of Credit Suisse, one of the underwriters of Care’s initial public offering in June 2007. This type of lending arrangement is often referred to as a warehouse facility. The Agreement provided an initial line of credit of up to $300 million, which could be increased temporarily to an aggregate amount of $400 million under the terms of the Agreement.

 

On March 9, 2009, Care repaid this loan in full and closed the warehouse line of credit.

 

 

On June 26, 2008 with the acquisition of the twelve properties from Bickford Senior Living Group LLC, the Company entered into a mortgage loan with Red Mortgage Capital, Inc. for $74.6 million. The terms of the mortgage require interest-only payments at a fixed interest rate of 6.845% for the first twelve months. Commencing on the first anniversary and every month thereafter, the mortgage loan requires a fixed monthly payment of $0.5 million for both principal and interest until the maturity in July 2015 when the then outstanding balance of $69.6 million is due and payable. Care paid approximately $0.3 million in principal amortization during the year ended December 31, 2009. The mortgage loan is collateralized by the properties.

 

On September 30, 2008 with the acquisition of the two additional properties from Bickford, the Company entered into an additional mortgage loan with Red Mortgage Capital, Inc. for $7.6 million. The terms of the mortgage require interest and principal payments of approximately $52,000 based on a fixed interest rate of 7.17% until the maturity in July 2015 when the then outstanding balance of $7.1 million is due and payable. Care paid approximately $0.1 in principal amortization during the year ended December 31, 2009. The mortgage loan is collateralized by the properties.

 

As of December 31, 2009, principal repayments due under all borrowings for the next 5 years and thereafter are as follows (in millions):

 

 

 

Other liabilities as of December 31, 2009 and 2008 consist principally of deposits and real estate escrows from borrowers amounting to $1.1 million and $1.3 million, respectively.

 

 

Management Agreement

 

In connection with our initial public offering in 2007, 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.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

On September 30, 2008, we amended our Management Agreement (“Amendment 1”). Pursuant to the terms of the amendment, the Base Management Fee (as defined in the Management Agreement) payable to the Manager under the Management Agreement is reduced to a monthly amount equal to 1 / 12 of 0.875% of the Company’s equity (as defined in the Management Agreement). In addition, pursuant to the terms of the Amendment, the Incentive Fee (as defined in the Management Agreement) to the Manager pursuant to the Management Agreement has been eliminated and the Termination Fee (as defined in the Management Agreement) to the Manager upon the termination or non-renewal of the Management Agreement shall be equal to the average annual Base Management Fee as earned by the Manager during the immediately preceding two years multiplied by three, but in no event shall the Termination Fee be less than $15.4 million.

 

In consideration of the Amendment and for the Manager’s continued and future services to the Company, the Company granted the Manager warrants to purchase 435,000 shares of the Company’s common stock at $17.00 per share (the “Warrant”) under the Manager Equity Plan adopted by the Company on June 21, 2007 (the “Manager Equity Plan”). The Warrant, which is immediately exercisable, expires on September 30, 2018.

 

In accordance with ASC 505-50, the Company used the Black-Scholes option pricing model to measure the fair value of the Warrant granted with the Amendment. The Black-Scholes model valued the Warrant using the following assumptions:

 

 

The fair value of the Warrant is approximately $0.5 million, which is recorded as part of additional paid-in-capital with a corresponding entry to expense. The Warrant will be remeasured to fair value at each reporting date, and amortized into expense over 18 months, which represents the remaining initial term of the Management Agreement.

 

On January 15, 2010, the Company entered into an Amended and Restated Management Agreement, dated as of January 15, 2010 (“Amendment 2”) which amends and restates the Management Agreement, dated June 27, 2007, as amended by Amendment No. 1 to the Management Agreement. Amendment 2 became effective upon approval by the Company’s stockholders of the plan of liquidation on January 28, 2010. Amendment 2 shall continue in effect, unless earlier terminated in accordance with the terms thereof, until December 31, 2011.

 

Amendment 2 reduces the base management fee to a monthly amount equal to (i) $125,000 from February 1, 2010 until June 30, 2010 and (ii) $100,000 until the earlier of December 31, 2010 and the sale of certain assets and (iii) $75,000 until the effective date of expiration or earlier termination of the agreement, subject to additional provisions.

 

Pursuant to the terms of the Amendment 2, the Company shall pay the Manager a buyout payment of $7.5 million, payable in three installments of $2.5 million on January 28, 2010 and, effectively, April 1, 2010 and either June 30, 2011 or the effective date of the termination of the agreement if earlier. Amendment 2 provides the Company and the Manager with a right to terminate the agreement without cause, under certain conditions, and the Company with a right to terminate the agreement with cause, as defined in Amendment 1.

 

Pursuant to the terms of Amendment 2, the Manager is eligible for an incentive fee of $1.5 million under certain conditions where cash distributed or distributable to stockholders equals or exceeds $9.25 per share. See Note 16.

 

We are also responsible for reimbursing the Manager for its pro rata portion of certain expenses detailed in the initial agreement and subsequent amendments, such as rent, utilities, office furniture, equipment, and overhead,

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

among others, required for our operations. Transactions with our Manager during the year ended December 31, 2009 included:

 

 

 

The Company has established processes for determining fair values and fair value is based on quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

 

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Investment in loans — the fair value of the portfolio is based primarily on appraisals from third parties. 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. The Company also gives consideration to its knowledge of the current marketplace and the credit worthiness of the borrowers in determining the fair value of the portfolio. At December 31, 2009, we valued our loans primarily based upon appraisals obtained from The Debt Exchange, Inc. or DebtX. When loans are under contract for sale or sold or repaid subsequent to the filing of our Form 10-K, they are valued at their fair value and are valued using level 2 inputs.

 

Obligation to issue operating partnership units — the fair value of our obligation to issue operating partnership units is based on an internally developed valuation model, as quoted market prices are not available nor are quoted prices for similar liabilities. Our model involves the use of management estimates as well as some Level 2 inputs. The variables in the model include the estimated release dates of the shares out of escrow, based on the expected performance of the underlying properties, a discount factor of approximately 15%, and the market price and expected quarterly dividend of Care’s common shares at each measurement date.

Care Investment Trust Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements — (Continued)

 

The following table presents the Company’s financial instruments carried at fair value on the consolidated balance sheet as of December 31, 2009: