A Small Year for iStar Financial

A couple of weeks ago, I wrote an article about a REIT that I am currently invested in called iStar Financial (NYSE: SFI). The position of a long term investor gives the advantage of having quick access to financial statements as soon as they are issued.

This year, I have been very disappointed by the performance of the management of this REIT, which was, before 2008, the soundest of such companies, in my opinion.

In my previous article, I elaborated on the attractiveness of iStar, which unfolded to be a yield trap, with a dividend so attractive that it could not be sustained forever. At the time of my first analysis of iStar, their average quarterly dividend for the last five years hovered around 70 cents per share. This amounts to roughly $2.80 per year. With an average cost per share of $3.98, such a dividend would provide a staggering dividend yield of 70%! Such a yield is mouth-watering for a value investor and many dividend investors have probably noticed the same phenomenon.

The only problem is that the Board of Directors decided to suspend the company dividend during the last half of 2008, at the same time making the company’s stock less attractive relative to the initial characteristics that made iStar Financial so appealing.

The annual letter by Chairman and Chief Executive Officer Jay Sugarman was more of a desperate call for shareholders to not leave the company’s beaten down stock than a real explanation of what happened.

Plus one of the matters that had to be voted in the annual shareholder’s meeting was the Board of Directors' proposed vote in favor of the 2009 Long-Term Incentive Plan and Performance-Based Retention Award to the Chairman and Chief Executive Officer. The plan allows Jay Sugarman to get compensated in stock about every three years relative to the performance of the company. They justify the plan by claiming that the company purchased about 32.6 million shares between July 1st 2008 and March 31st 2009.

The only reason I disagree with the plan is that in three years, iStar’s performance will be significantly better than in 2008. Jay Sugarman will automaticallybe awarded for the good performance of the company. I just hope the stock price will be significantly up enough to ensure little dilution of shareholders’ wealth. This is another good example of the institutional imperative.

My only solace is that the company proceeded to a huge share buyback program, thus bringing the common stock count from 133 million shares to 105 million as of December 31st 2009. This is great news since it will allow the company to spend proportionally about 21% less cash when they reinstate their dividend.

At the time of making the investment in iStar, or in any dividend paying company for the long term, a yield of 10% is enough to justify a 10 year commitment from my capital. Taking this into assumption, iStar needs to have a quarterly dividend of at least 10 cents per share to make a long-term investment worthwhile.

Disclosure: The author is long in SFI

Comments

[YoYoMama:]

I'm not sure what was the point of this article. You made a bad investment and you're unhappy, and that concerns us because....??

May 31 08:17 AM

[oscar13:]

Can you tell us when the next dividend payment is? How about their preferred shares? Do you know anything about them?

May 31 08:54 AM

[zorro6204:]

I'm a little amazed at your article. The reasons for SFI's downfall are well known, this depression thing we got going on here? A lot of bad loans to condo and development projects? I can't believe anyone invested in SFI since mid-2008 at the latest, expected anything close to the pre-crash dividend to continue.

And I must call you out regarding your statement that; "This is great news since it will allow the company to spend proportionally about 21% less cash when they reinstate their dividend." The number of shares outstanding will have nothing to do with the gross amount of cash being distributed as REIT dividends. Nothing. Great news? Hey, at least your handle is appropriate.

May 31 11:09 AM

[mbkelly75:]

They are still paying the dividend on the preferred shares or were earlier in January. I was looking at this stock a year or so ago when it was dropping from it's $140 down to $70. I thought WOW! and ended up selling it at $50 as it just continued falling down. I kept an eye on it though and noticed in January that it seemed to be channeling between $0.70 or so and about $2.00. I watched for several weeks and bought some at $0.80/share on 2/20. It moved up nicely and I sold 1/2 of my shares @ $1.84/share. This paid me back ALL of the money I had spent on them (including commission costs!) so I now had the other 1/2 with a zero cost basis (free shares). I sold another 1/2 of the remaining shares (1/4 of the original purchase) @$2.77/share on 3/23 giving me a better than 200% profit after all expenses, and I still had 1/4 of the original shares left with NO money invested in them at all. If the shares drop back to <$1.00 again, I will buy more and do it again. When they DO start paying a dividend again - I will have quite a bundle of zero cost basis shares and that will make a nice additional income. If they ever go back over $100/share (they were about $140/share fpr a long time) my free shares will give me a VERY nice payday. In the mean time - since I have NO cash in them at all - I can afford to wait and see what happens. This is the real value of seeing or finding stocks that are in a channel. I will not pay ChannelingStocks.com to find them, but I love finding them on my own.

May 31 11:40 AM

[the_reaper:]

This article shows that anyone can get published on the internet. A 70% dividend sucked you in? Not only are you a poor writer, but you don't know anything about investing? Have you ever heard of 'research', or 'due diligence'?

Here's a tip (the only kind of research you use, apparently): Put your money in a CD. You'll get 5% for 5 years. Let those of us who know do the investing.

(By the way, I'm long in SFI, and several other high-yield stocks. While I'm down in SFI for the past several months, diversification has my portfolio yielding well over 8%, even in the downturn. If you're looking for a speculative play, look at CYRV.)

May 31 12:38 PM

[mbkelly75:]

At Friday's close of $3.10/share for SFI - I am currently up 268.55% in SFI (between 2/20 and 3/23 - 31 days) and still have a bunch of zero cost basis shares. Please keep in mind while you are referring to SFI as a high-yield stock - that the common stock of SFI is not currently paying a dividend so it is NOT actually a high-yield stock at all. It has interesting trade possibilties - but high-yield?? Not quite that! The last quarterly dividend it paid was $0.87/share so if they do start paying a dividend again - they could very well be a high-yield stock again - they just are not one now. Granted a 70% dividend should be a red flag instead of an attraction, but everyone learns sometime. At least he is trying, and people learn by doing. When I first started in the Stock and Bond markets over 50 (fifty) years ago, I would not have told anyone my reasonings for anything in the way he has. I give him credit for the effort.


On May 31 12:38 PM User 422888 wrote:

> This article shows that anyone can get published on the internet.
> A 70% dividend sucked you in? Not only are you a poor writer, but
> you don't know anything about investing? Have you ever heard of 'research',
> or 'due diligence'?
>
> Here's a tip (the only kind of research you use, apparently): Put
> your money in a CD. You'll get 5% for 5 years. Let those of us who
> know do the investing.
>
> (By the way, I'm long in SFI, and several other high-yield stocks.
> While I'm down in SFI for the past several months, diversification
> has my portfolio yielding well over 8%, even in the downturn. If
> you're looking for a speculative play, look at CYRV.)

May 31 05:14 PM

[Olddude:]

Just in summary I don't mind killin waitin time at the ror with the prefs

May 31 11:45 PM

[YoYoMama:]

I noticed that you changed your profile picture from your real photo - of a handsome young African-American - to a picture of your white mentor.

You need to understand that the negativity expressed on the board has nothing to do with your race. It has everything to do with the post.

I hope you will reconsider your change in photo. We need to keep a sense of diversity on this board.

Jun 08 12:18 PM

[dogit:]

70% yield appealed to you???? Investing 101 will tell you that is a GIGANTIC stop sign when doing cursory DD. I've followed this stock since early 2008 bought in, collected a dividend made a tidy profit and got out like my but was on fire and my head was catching. This stock WAS the definition of RISK - if you're still in I see why you're insinuating it may still be a viable investment - now its the definition of a failed company. Mbkelly, my hat's off to you, the author of this article needs to start a new hobby and let Mb write for him...

Jul 02 06:15 PM

[stanr:]

When was IStar selling for 140 bucks a share?

Jul 11 11:15 AM