On January 31, 2014, the Company completed a transaction resulting in our 67.5% ownership interest in Luxury Mortgage Corp., which operates out of leased office space of 22,450 square feet located in Stamford, CT.
*Certain units are permitted to be used as memory care/Alzheimer’s units.
Our insurance operations are conducted through PFG, of which we own 93.58%, with the remainder owned by management and employees of PFG. PFG develops and administers private placement insurance and annuities for high net worth and institutional clients. As of December 31, 2013, PFAS, a subsidiary of PFG, administered $35 billion of company-owned and bank-owned life insurance and the total separate account assets for policies written by PFG was $4.6 billion.
Our real estate operations include Care LLC, a wholly-owned real estate investment company that invests in senior housing properties, and interests in the Star Asia Entities, which are all Tokyo based real estate holding companies formed to invest predominately in Asian properties and real estate related debt instruments. As of December 31, 2013, Care LLC had total assets of $160.7 million.
For additional information about our operating segments, see Note 4 to the financial statements.
The year ended December 31, 2013 was a transformative period for Tiptree. The following highlights certain developments during this period, which are described in more detail elsewhere in this report.
We purchased an aggregate of approximately 66.7% of the voting equity interests of Siena for an aggregate of $10 million in two stages on April 2013 and July 2013. A scheduled capital contribution by another investor in Siena diluted our interest in Siena to approximately 62% in October 2013.
After several quiet years in the CLO market, there was increased issuance of CLOs in 2013, which led to new entrants and greater supply. We issued two new CLOs in 2013 and initiated a warehouse facility for a third CLO. More recently, uncertainties regarding regulatory guidance in the banking sector resulted in some institutional investors curtailing purchases of CLO liabilities. This has had a negative effect on CLO issuances. Credit spreads on AAA tranches have widened and, if not offset by contracting spreads on other liability tranches, could lead to lower returns on the subordinated notes on new CLOs. It is uncertain whether we will continue to sponsor the same volume of CLOs as in 2013.
The decrease in realized and unrealized gains we experienced from 2012 to 2013 was primarily driven by the assets of our tax-exempt business. These assets, which consist primarily of fixed coupon instruments with long durations, are highly sensitive to changes in interest rates. The large decline in interest rates throughout 2012 significantly increased the value and unrealized gains of the tax-exempt assets. Because interest rates remained relatively flat in 2013, the tax-exempt portfolio value remained flat.
Our expenses increased significantly in 2013 primarily from additional payroll expense associated with our acquisition of the administrative services business in our insurance and insurance services segment. We expect to incur additional expenses to relocate the administrative servicing business from New Jersey to Pennsylvania in 2014, although we expect that relocation to improve the profitability of our insurance servicing operations over time. Our operating expenses also increased in 2013 as a result of operating as a newly public company.
As a result of the $50 million borrowed under the credit agreement with Fortress and the $44 million of proceeds from the sale of the Bickford Portfolio in our real estate segment during 2013, we maintained a relatively larger cash balance. In 2014, we intend to deploy a significant amount of our cash balance to purchase assets, sponsor CLOs, support our existing business and invest in new products. To the extent we are unable to deploy cash effectively, we could experience lower returns than we would expect from the deployment of cash into higher returning assets.
The results presented in the table below are the consolidated results of Tiptree, which include its majority-owned subsidiaries, PFG, Care, MFCA, Siena, and TAMCO, as well as principal investments. Due to acquisitions and dispositions during the periods discussed below, it may be difficult to compare Tiptree’s results of operations from period to period as a result of purchase accounting adjustments, which only reflect the financial results of an acquisition from that point forward.
The Contribution Transactions were accounted for as a combination of entities under common control. As a result, the comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if-pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity.
The acquisition of TAMCO was accounted for as a combination of entities under common control and, as a result, the consolidated results of operations for all periods presented have been retrospectively adjusted to furnish comparative combined financial information as if TAMCO was part of the consolidated group as of January 1, 2010. The application of this “as-if-pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity.
Statements of Operations Information - Year Ended December 31, 2013 compared to 2012
Realized and unrealized gains decreased by $7.4 million, or 58%, for the year ended December 31, 2013 over 2012 levels. The decrease from 2012 to 2013 was primarily driven by the assets of our tax-exempt business. These assets, which consist primarily of fixed coupon instruments with long durations, are highly sensitive to changes in interest rates. The large decline in interest rates throughout 2012 resulted in $10.1 million of unrealized gains in 2012, whereas interest rates remained relatively flat in 2013 therefore the tax-exempt portfolio value remained relatively flat with $0.8 million of losses in 2013. The lower realized and unrealized gains in 2013 were partially offset by a $3.9 million change in unrealized gain related to interest rate swaps and increased value in loans in the Telos 5 warehouse credit facility and a $0.9 million net increase in the investment in the Star Asia portfolio due to improvement in the Japanese commercial real estate market in 2013.
Interest income on loan and security portfolios increased $6.5 million, or 65.8%, for the year ended December 31, 2013 compared to the prior year, primarily due to $5.2 million of interest income from loans held by warehouse credit agreements in 2013 in connection with the formation of Telos 3, Telos 4 and Telos 5 and additional interest income of $1.5 million primarily from real estate operations in 2013.
Administrative service fees increased $26.5 million, or 115.2%, for the year ended December 31, 2013 compared to the prior year. This was primarily due to a full year of administrative service fees from the acquisition of administrative services rights from The Hartford Financial Services Group, Inc. (“The Hartford”) by PFG in July 2012 (the “PFAS Transaction”).
Rental revenues for 2013 from Care LLC were $5.8 million, an increase over the comparable period in 2012, due to Care LLC’s acquisition of additional properties, including Calamar, Heritage and the Premier properties in 2013.
The $2.2 million increase in depreciation and amortization expense relates to an increase in amortization expense due to the PFAS Transaction in July 2012 and the Care properties acquired in 2013.
Because Tiptree consolidates the VIEs, all of the net income and expense of the VIEs is included in its consolidated results, even though Tiptree only benefits from the net income and suffers the net loss of the portion of the VIEs owned by it. Net (loss) income attributable to the VIE subordinated noteholders represents net (loss) income not attributable to Tiptree’s ownership interest in the VIEs. Therefore higher net losses attributable to VIE subordinated noteholders increases net income available to Tiptree Class A stockholders. Conversely, higher income attributable to VIE subordinated noteholders decreases net income available to Tiptree Class A stockholders. The net loss attributable to the VIE subordinated noteholders for 2013 was $18.0 million, compared to net income of $4.0 million for 2012, a decrease of $22.1 million. This decrease was primarily due to losses of $20.8 million in the performance of Telos 1 in which Tiptree has a small ownership, partially offset by gains in the performance of Telos 3 and Telos 4 of $3.1 million.
Total liabilities increased over the prior year end primarily due to an increase in separate account liabilities of $590.0 million and an increase in liabilities of consolidated CLOs of $555.3 million (consisting primarily of notes payable from Telos 3 and Telos 4). Total stockholders’ equity of Tiptree increased as of December 31, 2013 to $565.9 million, compared to $535.6 million at December 31, 2012, primarily due to an increase in retained earnings.
Intersegment revenues refers to those items of revenue which will be eliminated upon consolidation. Included in revenue, expense, interest revenue, interest expense, segment profit/(loss), and segment assets are items which are eliminated upon consolidation as well as adjustments for discontinued operations, reclassifications, assets of consolidated CLOs and non-controlling interest. These items are classified as “corporate eliminations and other” in the tables below.
Segment Results - Year ended December 31, 2013 compared to 2012
Total operating profit for insurance operations for fiscal 2013 was $14.0 million, compared to $3.3 million for 2012, an increase of $10.7 million, or 324.2%. This increase was primarily the result of the additional profit from the PFAS Transaction, which offset an increase in related expenses.
Total revenues for specialty finance operations for fiscal 2013 were $27.5 million, compared to $31.0 million for 2012, a decrease of $3.5 million, or 11.2%. The decline was primarily attributable to a decline in unrealized gains of $6.2 million due to declines
Total revenues for asset management were $16.6 million for fiscal 2013, relatively flat when compared to $17.4 million for 2012. The lower revenue in 2013 was primarily attributable to lower management fees received from third parties offset in part by the addition of Telos 3 and Telos 4 and the associated management fees.
Total operating profit for asset management was $1.9 million for fiscal 2013 compared to $7.0 million in 2012. This was primarily attributable to the aforementioned increase in payroll expense.
Total revenues for real estate operations for fiscal 2013 were $33.8 million, compared to $18.4 million for 2012, an increase of $15.4 million, or 83.7%. This increase was primarily due to the gain on sale of the Bickford Portfolio.
Total expenses for real estate operations for fiscal 2013 were $18.5 million, compared to $17.0 million for 2012. This increase was primarily due to the addition of the Calamar and Heritage joint ventures in 2013.
Total operating profit for real estate operations for fiscal 2013 was $15.3 million, compared to a profit of $1.5 million in 2012, an increase of $13.8 million, or 920%. The gain on sale of the Bickford Portfolio was the primary driver of this increase.
Economic Net Income (“ENI”) is a non-GAAP financial measure of profitability which Tiptree uses to measure the performance of its core business. Management believes that ENI reflects the nature and substance of the economic results of Tiptree’s businesses. Management also uses ENI as a measurement for determining incentive compensation. ENI as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. ENI should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP.
Effect of change in majority ownership of subsidiaries is the dilutive effect of Care Inc.’s issuance of shares related to the Contribution Transactions and stock-based compensation, the effect of Tiptree’s increased ownership of PFG due to the accretion of preferred shares, and the increase in ownership of Siena.
Adjustment is to account at fair value the CLO subordinated notes held by Tiptree and PFG’s available-for-sale securities. Fair values are obtained from independent third party pricing sources.
Reversal of VIEs net losses/(gains) attributable to Tiptree (see reconciliation table below in thousands):
The purchase of TAMCO on June 30, 2012 was accounted for as a combination of entities under common control. As a result, the assets and liabilities of TAMCO were presented as if TAMCO had been consolidated by Tiptree on January 1, 2010. For non-controlling interest, we are reversing the effect of this recasting of financial information for prior periods.
Convertible preferred distribution reclassified as expense for purposes of ENI so as to reflect a cost of capital charge for outstanding convertible preferred. This class automatically converted to common shares effective July 1, 2013.
Reflects the timing difference on the recognition of yen exposure GAAP versus ENI.
Amortization of expenses associated with the start-up of Tiptree in 2007. The amortization period ended on June 30, 2012.
EBV as used by Tiptree may not be comparable to similar measures presented by other companies as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. EBV should be considered in addition to, not as a substitute for, financial measures determined in accordance with GAAP. The following is a reconciliation of GAAP book value attributable to Tiptree to EBV as of December 31, 2013 and 2012 (in thousands except share data):
Adjustment is to include the fair value of our ownership position in the VIEs which has been reversed as described in note (1) above.
Convertible preferred distribution was reclassified as expense for purposes of ENI. This adjustment conforms the reclassification for EBV purposes.
Assumes full redemption of Operating Company units for Class A common stock. Operating Company is owned approximately 25% by Tiptree and approximately 75% by TFP. Tiptree’s ownership is equal to the number of shares of Class A common stock and pursuant to Operating Company’s limited liability agreement this ratio will remain 1:1. TFP’s
Tiptree is a holding company and conducts all of its operations through Operating Company. Dividends and distributions from our subsidiaries to Operating Company and investments are the principal source of cash to make acquisitions, invest in existing businesses, pay employee compensation, dividends, professional fees (including advisory services, legal and accounting fees), office rent, insurance costs, and certain support services (including under the Transition Services Agreement and Administrative Services Agreement). Tiptree’s current source of liquidity is its cash, cash equivalents and investments and distributions from operating subsidiaries and principal investments, including subordinated notes of CLOs managed by Telos. At December 31, 2013, Tiptree had unrestricted cash of $120.6 million. As a result of the $50.0 million borrowed under the credit agreement with Fortress and the $44.0 million of proceeds from the sale of the Bickford Portfolio in our real estate segment during 2013, we maintained a relatively larger cash balance. In 2014 we intend to deploy a significant amount of our cash balance to purchase assets, sponsor CLOs, support our existing business and invest in new products. Tiptree intends to opportunistically acquire majority control of new businesses both in its existing financial services sectors and complementary sectors. Accordingly, Tiptree’s cash needs will differ over time from Tiptree’s historical cash needs and Tiptree may seek additional sources of cash to fund acquisitions or investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level.
Cash used in operating activities for the period ended December 31, 2013 was $18.4 million, compared to $36.7 million cash provided for the comparable period in 2012, a decrease of $55.1 million. Cash used in operating activities from VIEs for the year ended December 31, 2013 was $19.5 million, an increase of $13.6 million from cash used of $5.9 million for the year ended December 31, 2012. Also included in cash used in operating activities was $15.5 million from the net realized gain on sale of properties related to the Bickford sale. Excluding the activity attributable to the VIEs and this one time gain related to Bickford, cash provided by operating activities declined $26.0 million. The decrease was largely attributable to the decline in net income.
ended December 31, 2012. This increase was primarily related to the formation of Telos 3 and Telos 4 in 2013. Excluding the activity attributable to the VIEs, cash used in investing activities increased $10.3 million. This increase was largely attributable to the increase in the purchases of trading securities and loans carried at fair value of $166.2 million offset against the decline in cash used in acquisitions of $109.7 million compared to the prior year and proceeds from sales of real estate of $44.0 million received in 2013. The increase in the purchases of trading securities and loans relate to the Telos 5 warehouse activity during the year and the decline in cash used in acquisitions relate to the PFAS Transaction in 2012.
Cash provided by financing activities for the year ended December 31, 2013 was $739.6 million, compared to $99.1 million in cash provided for the comparable period in 2012, an increase of $640.5 million. Cash provided by financing activities for VIEs was $545.0 million for the year ended December 31, 2013 and cash used in financing activities for VIEs was $3.9 million for the comparable period in 2012. Excluding the activity attributable to VIEs, cash provided by financing activities increased $91.6 million. The increase was largely attributable to the increase in the proceeds from loans of $70.4 million and the proceeds from borrowings under mortgage notes payables of $16.0 million. The increase in proceeds from loans was a result of borrowings related to the Telos 5 warehouse activity and net proceeds from Tiptree’s credit facility. Borrowings under mortgage notes payable were used to fund Care’s acquisition of real estate.
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50.0 million under the Credit Agreement. The Credit Agreement also includes an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125.0 million, subject to satisfaction of certain customary conditions. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement shall become immediately due and payable on September 18, 2018. Loans under the Credit Agreement bear interest at a variable rate per annum equal to the one-month London interbank offering rate (LIBOR), with a minimum LIBOR rate of 1.25%, plus a margin of 6.50% per annum. The principal amounts of the loans are to be repaid in consecutive quarterly installments, which installments may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. As of December 31, 2013, $49.5 million was outstanding on this obligation. The weighted average interest rate for 2013 was 7.75%. See Note 12 to the consolidated financial statements for a discussion of other debt instruments of our operating segments.
Mortgage notes payable include mortgage notes entered into by Care LLC in connection with its acquisition of several properties (see Note 12-Debt).
The Company’s significant accounting policies are described in Note 2-Summary of Significant Accounting Policies. Tiptree’s critical accounting policies and estimates are those related to principles of consolidation, variable interest entities, fair value of financial instruments, goodwill and other intangibles and income taxes. Further information can be found in the Notes to Consolidated Financial Statements related to the following: variable interest entities can be found in Note 3; valuation of assets where quoted market prices are not available can be found under “Fair Value Measurement” in Note 6; policies related to goodwill and intangible assets can be found in Note 2-Summary of Significant Accounting Policies-Goodwill and Identifiable Intangible Assets; and additional information on income taxes can be found under Note 13-Income Taxes. The consolidated financial statements prepared under GAAP for all periods presented include retroactive adjustments to comparative periods to reflect the combinations under common control described in Note 1 related to TAMCO and the Contribution Transactions. All intercompany items have been eliminated for these periods.
The consolidation of the CLOs required the initial recognition of the assets and liabilities at fair value as of January 1, 2010 for Telos 1 and Telos 2 and at inception for subsequent CLOs (Telos 3 and Telos 4). Since the assets are solely for the benefit of the beneficial interest holders (liability holders) and no residual value from their liquidation is available to TAMCO, the difference between the fair value of the assets of the CLOs and its liabilities upon consolidation have been reflected as appropriated retained earnings. Given the nature and activity of the CLOs, TAMCO has applied the investment company accounting guidance to the CLOs’ financial statements and as such recognizes changes in fair value of the assets of the CLOs and accreted the fair value adjustment to the liabilities of the CLOs (recorded upon consolidation) in the consolidated statement of operations.
The following table summarizes the Company’s consolidated assets and non-recourse liabilities of the consolidated CLOs included in the Condensed Balance Sheets (in thousands):
Net income of the CLOs to the Company as a result of its investments in the CLOs.
Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities that Tiptree has the ability to access at the measurement date.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Tiptree’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. Management analyzes the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy. Further, management has a process in place to review all changes in fair value from measurement period to measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. Tiptree utilizes observable and unobservable inputs into its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. For broker quotes, quotes are obtained from sources recognized to be market participants. Unobservable inputs may include expected cash flow streams, default rates, supply and demand considerations and market volatility.
within either Level 2 or Level 3 of the fair value hierarchy. The fair value of IRSs is determined by obtaining broker or counterparty quotes. Because there were observable inputs used to arrive at these quotes, Tiptree has classified the IRSs within Level 2 of the fair value hierarchy.
Separate Account Assets: Separate account assets are primarily invested in alternative investments (which include investments in limited partnerships, private equity funds, hedge funds, and fund of funds), mutual funds, fixed maturity securities, and equity securities. The alternative investments are valued at estimated fair value with the assistance of investment managers of the underlying alternative investments. Since the entities underlying these alternative investments are investment companies for accounting purposes, as a practical expedient, Tiptree utilizes the separate account’s proportionate interest in the fair value of the underlying net assets to determine the fair value of these investments. The fair value of the underlying net assets of each alternative investment is determined from financial information provided by the investment manager. These alternative investments are generally classified within Level 3 of the fair value hierarchy. Most hedge fund investments are classified as Level 3. However, some alternative asset investments with minimal liquidity restrictions such as no lockup period, redemption notification of 35 days or less, withdrawal frequency greater than annually, and withdrawal payouts within 30 days are classified within Level 2. Mutual funds and equity securities are exchange-traded and are value based on quoted market prices from independent pricing services and are classified within Level 1 of the fair value hierarchy. U.S. Treasury securities are classified within Level 1 of the fair value hierarchy and all other fixed maturity securities are classified within Level 2.
rates are primarily the result of: (i) income and (loss) attributable to noncontrolling interests and to the VIE subordinated noteholders which do not result in income tax expense or (benefit) to the Company, (ii) the one-time effect of the Company’s change from nontaxable to taxable status which must be reported as part of the income tax provision on continuing operations, and (iii) the effect of changes in valuation allowance on net operating losses reported by Siena, MFCA and a portion of net operating losses reported by PFG. Prior periods do not have comparable effective tax rates as the Company, as a REIT, was not subject to income taxes.
The Company’s primary tax jurisdiction is the U.S., which currently has a statutory income tax rate of 35%. The Company also operates in several state jurisdictions that have an average combined statutory rate of approximately 6%. The Company is a holding company and several of the subsidiaries file separate federal and state income tax returns, rather than filing tax returns as a single consolidated group with the Company. The U.S. federal and state income tax returns are subject to examination by the Internal Revenue Service and the various state departments of revenue where filings are required.
The Company initially records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite lived intangibles and other intangibles, in accordance with ASC 805 Business Combinations. Goodwill, indefinite-lived intangibles and other intangibles are subsequently accounted for in accordance with ASC 350 Intangibles-Goodwill and Other and ASC 360 Impairment or Disposal of Long-Lived Assets.The initial measurement of goodwill and intangibles requires judgment concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($4.3 million at December 31, 2013) and indefinite-lived intangible assets ($2.5 million at December 31, 2013) are not amortized but subject to tests for impairment annually or if events or circumstances indicate it is more likely than not they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
Tiptree does not have any off-balance sheet obligations. Other than the consolidation of Telos 1, Telos 2, Telos 3, and Telos 4, Tiptree does not maintain any other relationships with unconsolidated entities or financial partnerships, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2013, Tiptree did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.
Consolidated Statement of Operations for the years ended December 31, 2013 and 2012
Consolidated Statement of Comprehensive Income for the years ended December 31, 2013 and 2012
Tiptree Financial Inc. (Tiptree and, together with its consolidated subsidiaries, collectively, the Company) is a Maryland Corporation that was incorporated on March 19, 2007. Until July 1, 2013, Tiptree operated under the name Care Investment Trust Inc. (which, for the period prior to July 1, 2013, we refer to as Care Inc.). Tiptree is a diversified holding company which conducts its operations through its Operating Company, Tiptree Operating Company, LLC (Operating Company). Tiptree’s primary focus is on four sectors: insurance and insurance services, specialty finance (including corporate, consumer and tax-exempt credit), asset management and real estate.
On July 1, 2013, Care Inc. completed a transaction with Tiptree Financial Partners, L.P. (TFP) in which Care Inc. contributed substantially all of its assets to Operating Company in exchange for common units in Operating Company representing an approximately 25% interest in Operating Company, and TFP contributed substantially all of its assets (excluding shares of Tiptree’s Class A Common Stock owned by TFP) to Operating Company in exchange for common units in Operating Company representing an approximately 75% interest in Operating Company and the same number of shares of Tiptree’s newly classified Class B Common Stock (Contribution Transactions).
The Contribution Transactions were accounted for as a combination of entities under common control. As a result, the comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity.
Pursuant to Operating Company’s limited liability operating agreement, at any time after July 1, 2014, TFP will have the right to redeem common units of Operating Company held by it for an equal number of shares of Class A common stock of Tiptree (and an equal number of shares of Class B common stock held by TFP will be canceled). Tiptree may instead, at its election, deliver a cash amount (or combination of cash and Class A common stock) based on the fair market value of the Class A common stock on the redemption date.
As a result of the Contribution Transactions, Tiptree does not qualify to be taxed as a REIT for Federal income tax purposes and became a taxable corporation effective January 1, 2013 due to the nature of the assets and the businesses contributed by TFP. As a REIT, Care Inc. was generally not subject to U.S. federal corporate income tax on its taxable income distributed to stockholders. However, even as a REIT, Care Inc. was subject to U.S. federal income and excise taxes in various situations, such as on Care Inc.’s undistributed income. See Note 13 for a discussion of income taxes.
The following discussion summarizes the acquisition of businesses by TFP that were contributed to Operating Company as part of the Contribution Transactions on July 1, 2013. As explained in Note 1, due to the Contribution Transactions, comparative financial information has been retrospectively adjusted to furnish comparative combined financial information from August 2010 (the date of common control). The application of this “as-if pooling of interests” required the previously issued consolidated financial statements of Tiptree to be recast to reflect such activity. As a result, any capital transaction activity of TFP related to these acquisitions, such as any increases or decreases in noncontrolling interest, was retroactively
adjusted as an adjustment to Tiptree’s additional paid-in capital. Also, the results of operations of each of the acquisitions that have occurred after August 2010 are included in the consolidated financial statements from the date of acquisition.
The acquisition of controlling interests in each of TFP’s businesses discussed below were accounted for under the purchase method of accounting. The purchase price allocations were based on estimates of fair values of the assets acquired and liabilities assumed at the acquisition date. The fair values of the acquired net assets were determined using observable and unobservable information.
In 2010 and 2011, PFG recapitalized and issued additional equity reducing TFP’s ownership percentage from 100% to approximately 93.58%.
The consolidated financial statements reflect the consolidated accounts of Tiptree and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain other entities known as variable interest entities (VIEs) in which Tiptree, through its subsidiaries, is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these consolidated financial statements.
Tiptree has an approximate 25% ownership interest in Operating Company as of December 31, 2013. Based on the VIE guidance in ASC Topic 810, Operating Company has been determined to be a VIE and Tiptree has been determined to be the primary beneficiary of Operating Company. TFP’s approximate 75% non-controlling interest in Operating Company is reflected as such in the consolidated balance sheet and statement of operations.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (ASC Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) (ASU 2013-11), which provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. ASU 2013-11 will be effective for the Company beginning in the first quarter of fiscal 2014. The Company has completed its analysis of ASU 2013-11 and believes that adoption of this standard will not have a material effect on the Company’s consolidated financial statements.
The Company considers all highly liquid investments of sufficient credit quality with maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of U.S. denominated cash on hand, cash held in banks and investments in money market funds. The Company’s restricted cash primarily consists of cash held by its consolidated CLOs as well as cash that is collateral for any U.S. Treasury short positions held. The cash held by CLOs is restricted for use by the individual CLOs and cannot be distributed to the Company.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset. From time to time, the Company’s assets and liabilities will transfer between one level to another level. It is the Company’s policy to recognize transfers between different levels at the end of each reporting period.
Positions in securitized products such as CLOs and CDOs are based on quotes obtained from dealers. When these quotes are based directly or indirectly on observable inputs such as quoted prices for similar assets exchanged in an active or inactive market, the Company has classified them within Level 2 of the fair value hierarchy. If these quotes are based on
valuation models using unobservable inputs such as expected future cash flows, default rates, supply and demand considerations, and market volatility, the Company has classified them within Level 3 of the fair value hierarchy.
The fair value of tax exempt securities is determined by obtaining quotes from independent pricing services. In most cases, quotes are obtained from two pricing services and the average of both quotes is used. The independent pricing services determine their quotes using observable inputs such as current interest rates, specific issuer information and other market data for such securities. Therefore, the estimate of fair value is subject to a high degree of variability based upon market conditions, the availability of issuer information and the assumptions made. The valuation inputs used to arrive at fair value for such debt obligations are generally classified within Level 2 or Level 3 of the fair value hierarchy.
Derivatives: Derivatives are comprised of credit default swaps (CDS), index credit default swaps (CDX) and interest rate swaps (IRS). The fair value of these instruments is based upon valuation pricing models, which represent what the Company would expect to receive or pay at the balance sheet date to exit the position. In general, the fair value of CDSs and CDXs are based on dealer quotes. Because significant inputs used to determine the dealer quotes are not observable, such as price volatility, the Company has classified them as Level 2. The fair value of IRS is based upon valuation pricing models, which represent what the Company would expect to pay at the balance sheet date if the contracts were exited. The fair value of IRS is determined by obtaining broker or counterparty quotes. Because there are observable inputs used to arrive at these quotes, the Company has classified IRS within Level 2 of the fair value hierarchy.
Cash and Cash Equivalents - Restricted: The carrying amounts of cash and cash equivalents - restricted are carried at cost which approximates fair value.
Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts of these assets and liabilities approximate their fair value due to their relatively short-term nature.
Loans Owned, at Amortized Cost: The fair value of loans owned, at amortized cost is computed by discounting the expected future cash flows at market rates. Variable rate lines of credit outstanding are assumed to be at fair value.
Mortgage Notes Payable: The fair value of notes payable is determined based on contractual cash flows discounted at market rates.
Policy Loans: The fair value of policy loans is deemed to be the carrying value, which is unpaid principal and accrued interest. Policy loans are not marketable instruments and can only be satisfied by the policy owner for the value carried.
Debt and equity securities and corporate bonds classified as trading securities are intended to be sold at any time and are recorded at fair value, with unrealized gains/(losses) included in the consolidated statement of operations.
The CLOs managed by the Company contain a diversified portfolio of middle market leveraged loans carried at estimated fair value. In general, the fair value of leveraged loans are obtained from an independent pricing service which provides secondary coverage of market participants. The values represent a composite of mark-to-market bid/offer prices and are classified as Level 2. In certain instances the Company will make its own determination of fair value of leveraged loans based on internal models and other unobservable inputs and the Company classified these leveraged loans as Level 3. The changes in fair values of investments in loans are reported in the consolidated statement of operations.
Real estate is 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 9 to 40 years.
The Company carries intangible assets, which represent insurance licensing agreements, insurance servicing agreement, software licenses, leases in place and insurance policies and contracts acquired. Management has deemed the insurance licensing agreements to have indefinite useful life and performs impairment tests on these assets at least annually. The Company recorded an intangible asset related to administration servicing rights acquired in connection with the acquisition of Hartford Life Private Placement LLC. This intangible asset is being amortized in relation to expected gross profits over the life of the serving rights.
In-place lease values are based upon the Company’s evaluation of the specific characteristics of each property acquired and the respective tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods and market conditions. In estimating carrying costs, the company includes estimates of lost rents at estimated market rates during the hypothetical expected lease-up periods, which are dependent upon local market conditions and expected trends.
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 management 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 as the excess of the carrying amount of the investment over the estimated value of the investment. There were no material impairments on our investments in partially-owned entities for the years ended December 31, 2013 and December 31, 2012.
Policy acquisition costs for traditional life insurance products are generally deferred and amortized over the premium paying period of the policy. Deferred policy acquisition costs and policy initiation costs related to universal life and investment-type products are amortized in relation to expected gross profits over the life of the policies.
Separate account assets and liabilities represent variable annuity and variable universal life contract funds invested primarily in private and public equity securities, fixed maturities and investment partnerships. The separate account assets and liabilities are reported at fair value in the consolidated financial statements.
Investment income and investment gains and losses accrue directly to the policyholders and are not included in the results of operations of the Company. Premiums and deposits received and payments made on the policyholder’s accumulated account value are excluded from the amounts reported in the consolidated statement of operations.
Future policy benefit reserves are determined using the net level premium method, which provides for benefits based upon estimated future investment yield, expected mortality and estimated policy lapses. Interest rate assumptions range from 3.0% to 6.0%. Mortality has been calculated principally on an experience multiple applied to select and ultimate tables in common usage in the insurance industry. Estimated policy lapses have been determined principally based upon historical experience. Future policy benefit reserves for universal life policies consist of premiums received plus credited interest less accumulated policyholder assessments. These items are included in policy liabilities in the Company’s consolidated balance sheet.
Rental revenue from residential tenants are recognized on a contractual basis, as lease periods for residential tenants are short-term in nature. The Company recognizes rental revenue from triple net leases in accordance with ASC Topic 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 higher than those in the primary term are excluded from the calculation of straight line rent if the renewals are not reasonably assured. The Company commences 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. Amortization expense of above-market leases reduces rental revenue on a straight-line basis over the non-cancelable term of the lease. Taxes, insurance and reserves collected from tenants are separately shown as reimbursable income and corresponding payments are included in reimbursed property expenses included as components of other income and other expenses respectively in the consolidated statement of operations.
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized
Deferred tax assets and liabilities are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are established for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to reverse. A valuation allowance is established when necessary to reduce a deferred tax asset to the amount expected to be realized. The Company’s subsidiaries PFG, Siena Capital Finance Acquisition Corp., MFCA Funding and Tamco Manager, Inc. file both federal and state returns. These U.S. federal and state income tax returns, when filed, will be subject to examination by the Internal Revenue Service and state departments of revenue. See Note 13.
The Company earns administrative fee revenue as a third party administrator for insurance contracts. The revenue is recorded as earned. The Company pays fees to a third party in conjunction with the administration of certain insurance contracts. The fees are recorded when incurred by the Company.
Amounts assessed to the policyholders for mortality and expense charges, premium loads, charges for cost of insurance, and policy initiation fees are included in revenues. Death benefits and other benefits paid in excess of the policyholder’s accumulated account value are included in expenses. The Company recognizes premiums for life insurance products and other long-duration life insurance products as revenue when due from policyholders. The Company matches benefits, losses and related expenses with premiums over the related contract periods. These amounts are recorded as a component of fees of separate accounts and mortality expense respectively on the Company’s condensed consolidated statements of operations.
Certain prior period amounts have been reclassified to conform to the current year presentation.
Telos Asset Management LLC (Telos), a subsidiary of the Company acquired in 2012, is a CLO manager of four CLOs; namely Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007-2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of TAMCO, the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which were recorded at fair value. The Company met the requirement
Subordinated debt obligations owned by TFI are not included in the tables below as these amounts are eliminated in consolidation.
The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider them assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. For this reason the difference between the fair value of the assets and liabilities at initial consolidation and subsequent results attributable to the VIE subordinated noteholders is reflected as appropriated retained earnings. As of December 31, 2013 and 2012, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $38,459 and $6,819, respectively, as well as the management fees receivable of $3,616 and $3,089 as of December 31, 2013 and 2012, respectively. Both the carrying values of the CLOs and management fees receivable are eliminated upon consolidation.
On August 6, 2013, Telos entered into a new $100,000 warehouse agreement with Telos 2013-5, Ltd. (Telos 5) that was amended on September 25, 2013 to increase the amount to $140,000. As of December 31, 2013, $171,087 is carried as investments in loans at fair value and $133,715 as loans payable on the consolidated balance sheet of TFI. The Company’s exposure in Telos 5 is limited to its equity investment of $35,000.
•Asset Management activities are conducted through TAMCO, an SEC-registered investment advisor. TAMCO’s operating subsidiaries include: (1) Telos, an asset management company that specializes in investing in middle market corporate credit through managed accounts and structured investment vehicles, such as CLOs; (2) Muni Capital Management, LLC (MCM) which in addition to managing its own portfolio of tax-exempt securities, manages Non-Profit Preferred Funding Trust I (NPPF I), a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of unaffiliated investors; (3) Tiptree Capital Management, LLC, the manager of Operating Company; and (4) TREIT, a real estate focused service provider.
The tabular information that follows shows components of revenue, expense, and profit or loss, for each of the operating segments for the years ended December 31, 2013 and 2012 and total assets as of December 31, 2013 and 2012.
Revenue is derived from the main income components of each segment. For Insurance and Insurance Services, the main drivers of revenue are fees on separate account assets, and administration service fees. For Specialty Finance, the main sources of revenue are investment interest and realized and unrealized gains/losses on investment securities. For Asset Management, revenue is derived from management fees based on assets under management and, in some cases, incentive fees based on the profits generated. For Real Estate, revenue includes rental revenue and investment interest.
Intersegment revenues refers to those items of revenue which will be eliminated upon consolidation. Included in revenue, expense, interest revenue, interest expense, segment profit/(loss), and segment assets are items which are eliminated upon consolidation as well as adjustments for discontinued operations, reclassifications, assets of consolidated CLOs and non-controlling interest. These items are classified as corporate eliminations and other in the tables below.
(2) Includes management fees which is a component of other income on the Company’s Consolidated Statements of Operations
The following table summarizes the gross unrealized losses on available for sale securities in an unrealized loss position as of December 31, 2013 and 2012:
At December 31, 2013, the Company held five securities which were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $14 and the fair value was $923. At December 31, 2012, the Company had three securities that were in an unrealized loss position for more than one year. The total unrealized losses on these securities were $10 and the fair value was $343. The unrealized losses were attributable to changes in interest rates and not credit-related issues. There have been no other-than-temporary impairments recorded by the Company in 2013 or 2012.
Purchases of available for sale debt securities were $9,431and $9,034 for the periods ended December 31, 2013 and 2012, respectively. Proceeds from maturities of available for sale debt securities were $520 and $850 for these same periods.
The following table represents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the year ending December 31, 2013 and 2012:
ASC Topic 820, as amended by ASU 2011-04, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not reasonably available to the Company. As such, the disclosure provided below provides quantitative information only about the significant unobservable inputs used in the valuation of certain privately held securities, credit default assets and tax-exempt municipal securities.
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities and the fair value hierarchy level(s) associated with these assets and liabilities as of December 31, 2013 and 2012:
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company entered into this contract as a buyer of protection so as to minimize the credit risk exposure of its investment portfolio. The Company is required to post cash collateral for this position equal to an initial 7% of the notional amount with subsequent calls for drops in value of the CDX and had $2,021 held as collateral as of December 31, 2013.
CDS contracts each of which had a notional value of $5,000 as of December 31, 2012. During 2013, two CDS contracts were closed out.
Credit derivatives are included within trading investments on the Company’s Consolidated Balance Sheet.
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps to protect against such adverse movements in the interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included as a component of other assets in the consolidated balance sheet.
The following tables identify the fair value amounts of the derivative instruments as of December 31, 2013 and 2012, categorized by primary underlying risk:
The following tables identify the unrealized gain/(loss) amounts included within the change in unrealized (depreciation)/appreciation of the consolidated statement of operations, categorized by primary underlying risk, for the year ended December 31, 2013 and 2012:
Total loans include net deferred loan origination fees of $686 at December 31, 2013. There were no such fees recorded at December 31, 2012.
As of December 31, 2013 and 2012, the Company, through its subsidiary Care, had a loan investment that was secured by skilled nursing facilities, as well as collateral relating to assisted living facilities and a multifamily property. The properties securing the loan are all located in Louisiana. The loan investment was previously syndicated to three lenders (including the Company), each of which owned an approximate one-third interest in the loan at December 31, 2012. In March 2013, the Company purchased the remaining approximately two-thirds interest for $17,258. The Company performs a collateral valuation on these properties on an individual basis to determine if any impairment exists. As of both December 31, 2013 and 2012 no impairment existed on these properties.
In February 2013, Care acquired a 75% interest in Care Cal JV LLC, which through two subsidiaries, owns what are referred to as the Calamar Properties. Affiliates of Calamar Enterprises, Inc. (Calamar) own a 25% interest in Care Cal JV LLC. In connection therewith, a subsidiary of Care Cal JV LLC issued notes to affiliates of Calamar. The cost basis of the notes at December 31, 2013 was approximately $3,561.
In September 2012, the Company made a $4,700 investment in Star Asia Opportunity II, LLC (SAO II), which represented a 20.33% ownership interest. SAO II was a newly formed single purpose LLC vehicle which directly held a Japanese real estate property as well as a CMBS position. Including the Company, SAO II had a total of four investors. On December 20, 2012, SAO II contributed its interest in these assets to Star Asia Japan Special Situations Sub (SAJSS Sub), a newly formed LP. At that time, two of the investors withdrew their membership interests in SAO II so as to retain their interest in SAJSS Sub through a newly formed entity, Star Asia Japan Special Situations LP (SAJSS). As a result of the departure of these two investors, the Company and the other remaining investor each held a 50% interest in SAO II. The Company and the remaining investor share control equitably with no one party having more control or economic interest than the other party. As such, the Company accounts for this investment under the equity method.
In December 2013, the Company made a $1,518 investment in Luxury Mortgage Corp. This investment is in the form of 151,875 shares of Series A Preferred Stock with a par value of $10 per share.
In February 2013, affiliates of Care entered into a joint venture with affiliates of Calamar Enterprises, Inc. (Calamar). Care Cal JV LLC is owned 75% by affiliates of Care. Care Cal JV LLC through two subsidiaries owns what are referred to as the Calamar Properties. Calamar is a full service real estate organization with construction, development, management, and finance and investment divisions, developed the properties and owns a 25% interest in Care Cal JV LLC. Simultaneously with the acquisition, affiliates of Care entered into a management agreement with a term of 10 years with affiliates of Calamar for the management of the properties. Care receives a preference on interim cash flows and sales proceeds. The aggregate purchase price allocated to the two properties was $23,024, of which $18,307 was funded through the assumption of loans with Liberty Bank and the balance with cash on hand. For the year ended December 31, 2013, rental revenue and net income from this acquisition were approximately $2,282 and $137, respectively.
The Terraces portfolio was acquired by affiliates of Care on August 16, 2013 and is leased pursuant to a Master Lease to affiliates of Premier with an initial term of 12 years with two renewal options of five years each. Rent payments during the first year are approximately $1,732, representing an initial lease rate of approximately 8.17%, with annual rental increases of 2.75% during the initial term of the lease commencing on the second anniversary of the closing date. Premier Senior Living, L.L.C. has guaranteed the obligations of the tenants under the Master Lease. The aggregate purchase price for the two properties was $21,200, which was funded with cash on hand. For the year ended December 31, 2013, rental revenue and net loss from this acquisition were approximately $895 and $149, respectively.
$32,900 was funded through loans with First Niagara Bank and the balance with cash on hand. For the year ended December 31, 2013, rental revenue and net loss from this acquisition were approximately $1,082 and $901, respectively.
We completed a preliminary assessment of the allocation of the fair value of the real estate acquired from Heritage (including land, buildings, and equipment) in accordance with ASC 805 Business Combinations. The allocation of the purchase price is preliminary pending the receipt of information necessary to identify and measure the real estate acquired. The Company expects to finalize the purchase price allocation by March 31, 2014. These amounts relating to Heritage have been included within the Company’s investment in real estate balance as of December 31, 2013.
The following table represents insurance and insurance services segment’s amortization expense on intangible assets for the next five years:
The following table summarizes the real estate segment identifiable intangible assets at:
The following table represents real estate segment’s amortization expense on intangible assets for the next five years:
The Company conducts annual impairment tests according to ASC 350 Intangibles-Goodwill and Other. As of December 31, 2013 and 2012, there was no impairment recorded on intangibles.
The specialty finance segment had as of December 31, 2013, $1,206 recorded as goodwill on its balance sheets. The Company assesses annually, or more often if events and circumstances indicate that it is more likely than not that goodwill may be impaired. As of December 31, 2013, there was no impairment recorded on this goodwill.
On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress Credit Corp. (Fortress) and borrowed $50,000 thereunder, with an associated original issue discount of $1,000, which is being amortized over the term of the agreement. The Credit Agreement allows Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement become immediately due and payable on September 18, 2018. Loans under the Credit Agreement bear interest at a variable rate per annum equal to one-month LIBOR (with a minimum LIBOR rate of 1.25%), plus a margin of 6.50% per annum. The weighted average rate paid for 2013 was 7.75%. The principal amounts of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter.
The Company capitalized approximately $1,308 of costs associated with transaction and is amortizing the costs ratably over the life of the facility. The Company recorded approximately $74 of expense for the year ended December 31, 2013 relating to these capitalized costs.
In connection with the PFAS Transaction described in Note 1, PFAS issued a note in July 2012 in the amount of $100,000 to a third party. The note bears an annual interest rate of 12.66% and provides for monthly interest and principal payments commencing on August 15, 2012, with final payment due on July 15, 2022. Membership interests of PFLAC, the borrower, serve as collateral for the note.
Effective November 2013, in connection with the acquisition of The Heritage Portfolio, the Company entered into two separate loans from First Niagara Bank with an aggregate balance of $32,848 as of December 31, 2013. Both of these loans amortize over a twenty-five year period at a floating rate of LIBOR + 2.75%. These loans are secured by separate first priority mortgages on each of the properties. A breach of representations or covenants could result in a default under each of these loans, which would result in all amounts owing under applicable loan to become immediately due and payable.
On July 25, 2013 Siena closed on a line of credit with Wells Fargo Bank. This revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of January 25, 2017. As of December 31, 2013 there was $5,371 outstanding on this line.
Interest expense of $17,410 and $8,096 was incurred on the Company’s debt for the year ended December 31, 2013 and 2012 respectively.
Future maturities of the Company’s long-term debt (excluding warehouse borrowing) are as follows as of December 31, 2013:
The Company includes in its consolidated balance sheets, as part of liabilities of consolidated CLOs, the debt obligations used to finance the investment in corporate loans and other investments owned by the CLOs that it manages. The carrying amount of the notes represents the accreted value from the initial consolidation and is recognized through the measurement date using the effective interest method or a method that approximates the effective interest method. See Note 3 for additional information.
The Company's income taxes payable as of December 31, 2013 are $1,811.
A reconciliation of the expected federal income tax expense on income from continuing operations using the 35% federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate as of December 31, 2013 is as follows:
For the twelve months ended December 31, 2013, the Company’s effective tax rate on income from continuing operations is equal to 111.07%, which does not bear a customary relationship to statutory income tax rates. Differences from the statutory income tax rates are primarily the result of: (i) income and (loss) attributable to noncontrolling interests and to the VIE subordinated noteholders which do not result in income tax expense or (benefit) to the Company, (ii) the one-time effect of the Company’s change from nontaxable to taxable status which must be reported as part of the income tax provision on continuing operations, and (iii) the effect of changes in valuation allowance on net operating losses reported by Siena, MFCA and a portion of net operating losses reported by PFG. Prior periods do not have comparable effective tax rates as the Company, as a REIT, was not subject to income taxes.
Separate returns are filed for Tiptree and each of the Company’s subsidiaries that are required to file returns (PFG, Siena Capital Finance Acquisition Corp., MFCA Funding, and TAMCO Manager Inc.). These subsidiaries file returns in various state jurisdictions, and as such may have state tax obligations. As needed, the Company will take all necessary steps to comply with any tax withholding requirements.
On July 1, 2013, in conjunction with the Contribution Transactions, Operating Company issued warrants to TFP, to purchase an aggregate of 2,098,500 shares of Class A common stock at an exercise price of $8.48 per share which is immediately exercisable and expires on June 12, 2017 and another warrant to purchase 1,510,920 shares of Class A common stock at an exercise price of $5.36 per share which is immediately exercisable and expires on June 30, 2022. TFP paid $4,328 and $6,846, respectively, for these. Since these warrants were issued by Operating Company, they are not included as a component of stockholders’ equity of the Company. TFP also owns a warrant to purchase 652,500 shares of Class A common stock at $11.33 per share which is immediately exercisable and expires on September 30, 2018.
The 2007 Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. The Board of Directors may terminate, amend, modify or suspend the 2007 Equity Plan at any time, subject to stockholder approval in the case of certain amendments as required by law, regulation or stock exchange.
As of December 31, 2013, no common shares remain for future issuance.
Included in vested shares for 2013 are 10,159 shares surrendered to pay taxes on behalf of the employees with shares vesting.
A holder of the restricted share units, as per the terms of the restricted stock unit agreement governing the awards, have all of the rights of a share holder, including the right to vote and receive distributions. The restricted share units shall vest and become nonforfeitable with respect to one-third of Tiptree shares granted on each of the first, second, and third anniversaries of the date of the grant.
On August 8, 2013 the Company granted 19,310 shares to employees of the Company. These shares have a grant date fair value of $134 and will vest over a period of three years beginning on January 3, 2014. During 2012 the Company granted 33,600 shares with a grant date fair value of $252 which vest over a three year period.
Restricted unit expense was $73 and $31 for the twelve month periods ended December 31, 2013 and 2012, respectively. These expenses are included within payroll expense in the consolidated statement of operations.
On October 14, 2010, the PFG board of directors adopted the PFG Plan. A total of 546,136 shares of common stock of PFG were reserved and available for issuance under the PFG Plan. The number of shares of PFG stock was increased to 583,300 during 2012. As of December 31, 2013, 564,092 shares have been granted to PFG employees.
As of December 31, 2013 the total unrecognized compensation cost related to PFG common stock was $89, which is expected to be recognized as compensation expense over a weighted average period of 1.4 years. Total unrecognized compensation cost was $155 as of December 31, 2012.
On June 30, 2012, TAMCO, TFP and Tricadia entered into a Transition Services Agreement in connection with the internalization of the management of Tiptree. Pursuant to this agreement, Tricadia provides TAMCO and its affiliates, including TFP, with the services of designated officers as well as certain back office, administrative, information technology, insurance, legal and accounting services. The Transition Services Agreement was assigned to the Company in connection with the Contribution Transactions. The Company pays Tricadia specified prices per service. TFP paid Tricadia $1,684 and $817 for 2013 and 2012, respectively. For the six months ended December 31, 2012, TFP issued 37,500 TFP units which were redeemed for 104,925 shares of Class A common stock under the Transition Services Agreement. For the year ended December 31, 2013, the Company issued 194,868 shares of Class A common stock to Tricadia under the Transition Services Agreement.
The Company is subject to certain inherent credit risks arising from its transactions involving counterparties to CDS and CDX and IRS positions.
The Company’s policy is to monitor its market exposure and counterparty risk through the use of various credit exposure reporting and control procedures.
Tiptree, TAMCO and Care maintain unrestricted cash and cash equivalents and certain financial positions in accounts held by J.P. Morgan Securities Inc., its custodian pursuant to a custodial agreement. MFCA held substantially all of its cash and cash equivalents with U.S. Bank. PFG held substantially all of its cash and cash equivalents with Wilmington Trust. If these and other agents do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the agent. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.
PFG reinsures portions of its insurance risks with other insurers as is customary in the industry. The following table provides additional information on PFG’s direct and ceded business as of December 31, 2013 and 2012:
PFG through its subsidiaries, PFLAC and PFLACNY, is a party to two reinsurance agreements with a reinsurance company (the reinsurer). Under the first reinsurance agreement, the reinsurer assumed as direct obligations approximately 90% of PFLAC’s in force ordinary life and annuity business and 100% of PFLAC’s accident and health business.
Should any reinsurer be unable to fulfill its obligation at the time of a claim, the ultimate liability remains with PFG as primary insurer. PFG evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers in order to minimize exposure to significant loss from reinsurer insolvencies.
The table below summarizes the Company’s contractual obligations by period that payments are due as of December 31, 2013:
Mortgage notes payable include mortgage notes entered into by the Company in connection with its acquisition of several properties (See Note 12-Debt).
CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and 2024 for Telos 4 (See Note 3-CLOs and Consolidated Variable Interest Entities).
On September 18, 2013 Operating Company entered into a Credit Agreement with Fortress and borrowed $50,000 under the Credit Agreement. The Credit Agreement also includes an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions (See Note 12-Debt).
The Company has reclassified the income and expenses attributable to all properties sold prior to December 31, 2013 to discontinued operations related to its real estate segment. Expenses include an allocation of interest expense based on property carrying values and cost of debt. The following illustrates the reclassification impact as a result of classifying properties as discontinued operations for the periods presented:
Activity in accumulated other comprehensive income/(loss) (AOCI), net of tax, for the year ended December 31, 2013 and 2012, was as follows:
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the income statement for the period ended December 31, 2013:
The Company has evaluated events that have occurred from December 31, 2013 through March 18, 2014 (the date this Form 10-K was filed), and except as already included in the notes to the consolidated financial statements, it believes that no events have occurred that would require recognition or additional disclosures in these audited consolidated financial statements.