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Executives

Andrew Backman - SVP, IR

Jay Sugarman - Chairman and CEO

Dave DiStaso - CAO

Analyst

Don Fandetti - Citigroup

James Shanahan - Wells Fargo

David Fick - Stifel Nicolaus

Michael Kim - CRT

Presentation

iStar Financial, Inc. (SFI) Q1 2010 Earnings Call April 29, 2010 10:00 AM ET

Operator

Good day and welcome to iStar Financial’s First Quarter 2010 Earnings Conference Call. (Operator Instructions). As a reminder, today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to iStar Financial’s Senior Vice President of Investor Relations and Marketing, Mr. Andrew Backman. Please go ahead, sir.

Andrew Backman

Thank you Rich and good morning everyone. Thank you for joining us today to review iStar Financial’s first quarter 2010 earnings report. With me today are Jay Sugarman, our Chairman and Chief Executive Officer, and David DiStaso, our Chief Accounting Officer.

This morning’s call is being webcast on our website at istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12:30 p.m. Eastern Time today. The dial-in for the replay is 1-800-475-6701 with a confirmation code of 153969.

Before I turn the call over to Jay, I’d like to remind everyone that statements in this earnings call which are not historical facts will be forward-looking. iStar Financial’s actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our SEC reports. In addition, as stated more formally in our SEC reports, iStar disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Now, let me turn the call over to iStar’s Chairman and CEO, Jay Sugarman. Jay?

Jay Sugarman

Thanks Andy. The first quarter provided a small glimpse of blue sky in what continued to be a difficult environment for our company. The better overall turn in the capital markets allowed a number of our borrowers to access funds to pay off or pay down iStar investments and liquidity has being steadily improving in the real estate markets through the first four months of the year.

Low interest rate throughout the credit world and an increasing sense that real estate assets, particularly higher quality ones, have began to find the bottom has led to increasing capital flows into the sector and even the first flickers of life from the CMBS origination world.

While the market environment certainly gives us some hope that all the hard work we’ve done to shrink our balance sheet and work through problem assets will pay off for shareholders, our basic challenges have not materially changed. We still have large debt maturities in 2011 and 2012. We still have a number of assets whose outcome is difficult to quantify, and we still have a large number of NPL assets that require intense management focus in order to recover fair value.

But as we’ve done since this crisis began, we continue to diligently focus on working through these issues and remain committed to achieving positive outcomes. Our first quarter results reflected some of the market improvements. Earnings continued to be negative, but benefited from several asset resolutions and lower loss provisioning. AEPS came in at negative $0.26 per share versus a negative $1.47 per share last quarter.

Liquidity was good with almost 800 million in loan repayments and 300 million in other monetization including loan and asset sales, helping us build cash, pay down debt and meet all our funding obligations.

With respect to credit quality, there were fewer negative developments than in the past quarters. But the portfolio still contains a number of assets whose outcome is difficult to predict. We continue to work through outstanding asset issues fairly systematically trying to assess the likely outcomes as best we can. Those outcomes will be a key variable in the coming quarters.

With that brief overview, let me turn it over to Dave. Dave?

Dave DiStaso

Thanks Jay and good morning everyone. I’ll begin by discussing our results for the first quarter before moving to credit quality and liquidity. For the quarter, we reported an adjusted loss of 24.2 million or negative $0.26 per common share. Results this quarter included 89.5 million of additional loss provisions and 6 million of impairments primarily related to other real estate-owned assets. Partially offsetting these losses were 39 million of gains associated with the retirement of debt at a discount.

Revenues for the first quarter were 174 million versus 226 million for the first quarter 2009. The year-over-year decrease is primarily due to a reduction of interest income as a result of an increase in nonperforming assets including NPLs and OREOs as well as an overall smaller asset base.

Net investment income for the quarter was 119 million versus 238 million for the first quarter 2009. The year-over-year decrease is primarily due to smaller gains associated with the early extinguishment of debt as well as the lower interest income I previously mentioned, somewhat offset by the decrease in interest expense.

During the first quarter, we funded a total of 142 million under pre-existing commitments. We received 916 million in gross proceeds from loan repayments and loan sales and generated 183 million of proceeds from OREO and corporate tenant lease sales. Based on principal repayments and asset sales associated with the Fremont portfolio during the quarter, the A-participation interest was reduced by 222 million, down to 252 million at the end of the first quarter. As you know, 70% of all proceeds from principal repayments and asset sales, associated with the Fremont portfolio go to reduce the A-participation until it is paid off. After that, iStar will retain 100% of all proceeds received.

Our remaining unfunded commitments for the total portfolio were $668 million at the end of the first quarter. Let me turn to the portfolio and credit quality. At the end of the first quarter, our total portfolio had a book value of 13.1 billion or 13.3 billion on a managed basis. As a reminder, when we talk about the portfolio on a managed basis, we refer to iStar’s carrying value of loans, gross of specific reserves and the remaining Fremont A-participation interest. Our total portfolio was comprised of 8.3 billion of managed loan value or 8 billion of book value in loans and other lending investments.

In addition, we had 3.5 billion of corporate tenant lease assets, 830 million of other real estate owned or OREO assets, 543 million of real estate held for investment, as well as approximately 200 million of other investments. 82% of our portfolio is comprised of first mortgages, senior loans and corporate tenant lease assets.

Our total condo exposure was 3.1 billion at the end of the quarter versus 3.4 billion last quarter. Our total land exposure was 1.9 billion at the end of the quarter versus 2.2 billion last quarter. The land exposure was comprised of 1.4 billion of loans and approximately 550 million of owned real estate. At the end of the first quarter, 72 assets representing 3.5 billion or 42.3% of managed loan values or NPLs. This compares to 81 assets representing 4.2 billion or 45% last quarter.

During the quarter, six assets representing 372 million were sold or repaid. Seven assets representing 192 million moved from NPL status to performing. And six assets representing 291 million became NPLs. At the end of the quarter, 26 assets representing approximately 815 million of managed loan value were in foreclosure.

Our NPLs continue to be primarily land and condo-related assets. Condo assets make up 31% of our NPLs, while land assets represent 27%. At the end of the quarter, the performing loan watch list included 12 assets representing 674 million or 8.1% of managed loan value. This compares to 14 assets, representing 718 million or 7% last quarter.

Let me now turn to our OREOs and real estate held for investment. During the quarter, we took title to six properties which had an aggregate managed loan value of 398 million prior to foreclosure, resulting in 122 million of charge-offs against our loan loss reserves. We received net proceeds of 166 million associated with OREO asset sales and recorded 5 million of additional impairments on the total OREO portfolio.

At the end of the quarter, our total OREO and real estate held for investment assets were 1.4 billion. Of these assets, 830 million were classified as OREO and considered held for sale, based on our current intention to market the assets and sell them in the near term. The remaining 543 million of assets are considered investment properties and are classified as real estate held for investment based on our current intention and ability to hold them for a longer period of time.

Let me move on to reserves. During the first quarter, we reported 89.5 million of additional provisions versus 216 million in the prior quarter. While we have seen provisions trend lower over the past few quarters, the rate at which they may continue to do so is uncertain. At the end of the quarter, our reserves totaled 1.3 billion consisting of 1.1 billion of asset-specific reserves and 191 million of general reserves. Our reserves represent 15.8% of total managed loans and 31.3% total nonperforming loans and watch list assets combined.

Okay. Let me review our covenants. For our secured bank credit facilities, our tangible net worth was approximately 1.6 billion at the end of the first quarter, above our 1.5 billion requirement. Our fixed charge coverage, calculated on a trailing 12 month basis was 2.2 times at quarter end which is above the one times requirement and our unencumbered asset to unsecured debt or UAUD ratio was 1.3 times at quarter end, exceeding our 1.2 times requirement.

For both our unsecured and secured bonds, our fixed charge coverage ratio was 2.1 times and our UAUD ratio was 1.3 times. As a reminder, the fixed charge covered ratio incurrence requirement is 1.5 times and the UAUD maintenance requirement is 1.2 times.

Now let’s move on to liquidity. We ended the quarter with 641 million of unrestricted cash versus 225 million at the end of the prior quarter. Since the end of the quarter, we have repaid 130 million of bonds that matured in mid April.

For the remainder of 2010, in addition to 180 million of bond maturities in December, we expect approximately 330 million of other net uses of cash comprised primarily of remaining loan commitments, funding other investments as well as CTL, OREO and REHI expenses.

With that let me turn it back to Jay. Jay?

Jay Sugarman

Thanks Dave. As most of you know, Jim Burns, our former CFO, left at the end of last month to pursue another opportunity. Dave and his team are well prepared to fill this role as we decide to how to best move forward in the months ahead; we think we’re in pretty good hands here.

We’ve also engaged Lazard as an advisor to help us think through the long-term structure of our assets and liabilities. With markets beginning to turn somewhat and the date nearing for both our forward funding commitment and the Fremont A-notes, maybe all but gone, we want to begin focusing on the best way to position ourselves over the next several years. And matching up our projected asset payoffs with liability maturities is a key exercise we need to get right.

Finally, we’re also progressing with the sale of the large sale leaseback portfolio we began marketing earlier this year. We are working with one party on an exclusive basis during the due diligence period for the entire 33 assets portfolio. Now while there is no assurance that the sale will take place, if it does get completed, the sale will likely provide additional liquidity to the company, reduce our debt on the balance sheet and increase our tangible net worth.

With that, let’s go ahead and open it up for questions, operator.

Question-And-Answer Session

Operator

Thank you. Today’s question and answer will be conducted electronically. (Operator Instructions). We’ll pause just a moment to assemble the roster. And we will start at the line of Don Fandetti with Citigroup; please go ahead.

Don Fandetti - Citigroup

Hey, good morning. Jay, four other companies in this space that have been working through some of the issues around the credit crisis have kind of laid out sort of their stress test or a bull case scenario, what’s your sense on a good positive outcome here? How this would shape out? Can you sort of walk us through a couple of those steps and how it might look?

Jay Sugarman

Hey Don, it’s a little premature as I mentioned in my comments there. It’s still a fairly significant dollar amount of assets where the outcomes are just hard to predict. If you wanted to pick a bull case, certainly we have seen other companies begin targeting book value as a recovery benchmark. That’s something that clearly we have mentioned in the past; it’s something that we are clearly working towards as well. But I think it’s still early. We are seeing some signs of life in the capital markets that have put things back on the radar that maybe we couldn’t have contemplated a while ago. But I would just caution it’s still a little too early to start laying out bull cases. We’re still working through the challenges we have.

Don Fandetti - Citigroup

Okay. And in terms of sort of negotiations with the banks for some of your bank maturities next year, any thoughts on when you might – the timing on that?

Jay Sugarman

Well I think the first step in that process obviously was engaging advisors to help us look not only in the near term, but holistically across the entire range of asset and liability maturities. We do think that they will be helpful in that process. We have some fairly good views on what should work for some of our creditors. But I think that’s a process that needs to take some time to really get engaged with. I would certainly hope that through 2010, we can find a way to really match those up and start moving forward with the business.

Operator

Next question comes from the line of James Shanahan with Wells Fargo. Please go ahead.

James Shanahan - Wells Fargo

Regarding the net proceeds that were generated from the proposed, that could be generated from this proposed asset sale, how much of that would you just characterize or describe as potentially being used for new investments or initiatives?

Jay Sugarman

Jim, I think at this point, we’re still working on things inside our own portfolio. We still do have some forward funding commitments. We’d like to take care of internal sources of funds. I think right now, we are still targeting most of those proceeds for internal uses as opposed to new external investments.

James Shanahan - Wells Fargo

Once you’ve reached an agreement to sell the portfolio, how long do you think it would take for the buyer to complete due diligence and close the sale?

Jay Sugarman

We are looking for a timeframe that is commercially reasonable. So I think within the typical construct of these kind of deals, we’re not going to let this stay out there too long; so we’ll move forward on a fairly expeditious basis.

James Shanahan - Wells Fargo

I’m sorry, Jay, what is typical in this case, you have obviously more experienced than I do with this sort of thing?

Jay Sugarman

Yeah, I think anything beyond 60 or 90 days starts to feel like two long a period. So...

James Shanahan - Wells Fargo

Okay.

Jay Sugarman

So if the deal is going to happen, we’ll know certainly by the end of next quarter.

James Shanahan - Wells Fargo

And I have a question about the reserve, if you don’t mind a quick follow-up. The provisions were 89 million, I estimated charge-offs at around 200 million, it’s backed into that number. There was clearly some improvement in your other credit metrics if you look at certainly NPLs.

But in aggregate, NPLs, watch list assets and then the assets that are put on the balance sheet that had previously served as loan collateral, you look at all that in aggregate, there is obviously some improvement in those metrics. But the lower provision or the dramatic decline in loss provision seemed to be a lot greater than those – how maybe those metrics had improved. So, I was wondering if you could walk me through the thought process.

What changed here, is there – do you look at the portfolio and did you conclude that maybe loss severities aren’t trending quite as bad or that some of those loans, more of those loans are carrying or they’re just based upon the lower level of NPLs that the reserves were adequate, less incrementally 89 million, just sort of your thought process with that.

Jay Sugarman

Sure, I mean, just as a reminder, that process is very granular. We go through every single asset, take all the knowledge we have and try to come up with the terminations for individual assets. If you’re looking for more of a global statement, I will say look, the capital markets are better, some borrowers have been able to access capital in a way that clearly nine months ago, they couldn’t have, that’s helping.

Two, there is a lot of capital beginning to, I think, lower its return target, certainly in some of the major markets we’ve seen results that were better than we expected on some of the NPL outcomes. So I think that’s been a piece of the puzzle. And then third, I think obviously over time things get written down to a basis at which there’s just not a lot of negative surprises or development on a large number of the assets because all the bad news has been factored in.

As I said, I still think there’s some assets in the book that are just hard to quantify, and we got to continue to watch real time what’s going on in those markets and those assets. But for a large pool of the assets, we saw improvement as opposed to certainly throughout 2009, just constant barrage of negative developments.

James Shanahan - Wells Fargo

Related to the earlier comments in prepared remarks then, did I hear you correctly that you’re really not ready to say that then that there couldn’t be another large provision in any of the upcoming quarters.

Jay Sugarman

It’s too early and premature to make that kind of statements, Jim.

Operator

We will go to the line of David Fick with Stifel Nicolaus. Please go ahead.

David Fick - Stifel Nicolaus

Good morning. I apologize for the cell phone. Can you all comment, I guess, Jay comment on where you might benchmark decision to issue common equity, would it be price of a book or what is your thought process there?

Jay Sugarman

Dave, I think as we’ve always done, we look at the capital markets everyday as where capital is available to us and where we can deploy that capital. I think certainly, there are things on our radar now that were not available to us or certainly things we were not considering prior. I can’t give you an exact sort of, at this level yes, at that level no.

But I can tell you, we look at the overall capital structure. And as we see sort of the bid-ask between where we can deploy capital and where we can raise capital shrinking, it does give us some opportunity to begin thinking about where we can raise capital, whether it’s equity and/or debt. I hate to keep saying it, but this recovery feels like it’s still relatively early. And for us it’s a little premature to be thinking entirely about one or other part of the capital (inaudible). We are looking at the overall capital structure and the overall opportunity to deploy capital, and I will say it feels a little better than it did certainly last quarter and way better than it did two or three quarters ago.

David Fick - Stifel Nicolaus

Last quarter’s repayments are roughly $800 million. Can you give us some sense or were these mostly cash flowing assets where people were able to put on permanent mortgages, what generated those payoffs?

Jay Sugarman

For the first time, we really saw some meaningful capital market take-out activity. So we did see refinancing where companies and/or individual or property owners were actually able to go and get third-party capital and repay us. That was nice to see. We continue to see, actually in major markets, reasonably good sell-down on some of the condo projects. We had three or four assets to just pay us off from normal asset unit sales.

And then we did have one or two big NPL sales that candidly we stuck with for a long time. We thought they were good assets, they were in good markets and we started to see some real capital market activity around bidders coming in. And I think they were able to access capital, and so they were able to bid higher numbers back to us. So we are seeing just the general sentiments starting to flow through at least in the first quarter in a positive way.

David Fick - Stifel Nicolaus

Have you started any discussion with the banks about an extension at this point on your alliance?

Jay Sugarman

As I mentioned to Jim, we have engaged Lazard to begin those discussions. I think throughout the coming quarters, we will obviously be working hard to figure out a way to again match those assets and liabilities in a proper way.

David Fick - Stifel Nicolaus

You’ve been selling some performing loans? Can you give us an idea of the average par value, percentage of par you recovered there; I assume that you had reserves. So they weren’t significant gains or losses here.

Jay Sugarman

Yes, I think the performing stuff we’re actually getting relatively good numbers in the high 90s. It’s really the NPLs where there is a lot of variability. I think that’s kind of 25 to $0.30 loss. The sample size is growing in the range that’s probably still pretty wide. But I think that 25 to $0.30 loss number as a benchmark still seems to be about the right number.

David Fick - Stifel Nicolaus

So you’re 30% plus reserves on NPLs and watch list is fairly conservative from your perspective?

Jay Sugarman

I don’t want to go there just because a lot of those assets, again as we said, we specifically reserve against assets based on what we know; and that can be a much higher or a much lower number. In terms of actual resolutions, that number is starting to center around 25 to 30. I would say at the end of when it’s all said and done, it’ll probably be somewhere close to that range, but I don’t want to expand from the small sample size we have and say we feel that’s where it’s going to ultimately end up. We do feel like based on a risk rating process this quarter, those are adequate reserves.

David Fick - Stifel Nicolaus

Okay. And then lastly, your OREO and property held for investments, some of that now has sufficient age that I suppose you can sort of assess where you were when you got in and where you are today. I’m thinking specifically of assets like the Comerica building which I think it’s going on two years since you took that back. What kind of activity are you seeing specifically there and at some of your more mature OREO?

Jay Sugarman

So I was thinking, the multifamily/condo assets have been easiest to sort of understand the marketplace dynamics. We feel relatively good about where those portfolios are going to, how they’re going to play out. There are real-time benchmarks everyday in those markets about where things can and will sell.

I think land is much more difficult, it’s a longer cycle process. We have seen some recovery, particularly in Southern California and some of the better East Coast markets. With respect to Comerica, we don’t have a ton of office, and certainly Detroit is not on the hit list for anybody. It’s difficult to see comps in that market. It remains the best building in the market. There are a couple large tenants trolling. Some of the lower caliber assets have gotten into trouble. Sponsors have been unable to continue to feed buildings, and we do think institutional-owned high-quality assets will at least be able to consolidate some of the tenancy. But that’s obviously still a challenging market and even having the best building in the market is no guarantee.

Operator

Thank you. Our final question will from the line of Michael Kim with CRT. Please go ahead.

Michael Kim - CRT

Hi, good morning. Just quick question on the sale of the CTL portfolio. Wondering if you could provide us some color on how many bids that you saw during the quarter and if it was well received, and perhaps maybe some color surrounding the profile of the buyer that you – the potential buyer that you entered into exclusivity with?

Jay Sugarman

Look, I want to be cautious here; we are under an exclusive agreement that we don’t want to go into too much detail in this call. I will say that as we said in the past, high-quality cash flowing, well recognized assets are the center of the plate right now for real estate investing. I think they can get finance; they create a lot of stability. They’re not betting on where the market is going to be today or tomorrow. You get a nice diversified pool of income; and so we didn’t have a lot of people attracted to the nature of the deal. We made some decisions about who had the best prospects for closing. So, we’ve done what you would expect us to do in thinking about the variables and choosing a candidate that we thought met the criteria that was most important to us. So we’ll have more to talk about that I hope in the next quarter, but I don’t want to do too much more on this one.

Operator

And I’ll turn it back to you for final comments, sir.

Jay Sugarman

We’re going to thank you all for your support and attention, and we look forward to talking with you again in next quarter.

Andrew Backman

Great. Thanks Jay and thanks everybody for joining us this morning. If you should have any additional questions on today’s earnings release, please feel free to contact me directly here in New York. Rich, can you go ahead and give the conference call replay instructions once again please? Thank you.

Operator

Certainly. Ladies and gentlemen, this conference will be available for replay after 12:30 PM Eastern today through May 13 at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code of 153969. International participants may dial 1-320-365-3844; those numbers again are 1-800-475-6701 or 1-320-365-3844 with an access code of 153969. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive teleconference. You may now disconnect.

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Source: iStar Financial, Inc. Q1 2010 Earnings Call Transcript
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