iStar: A View From The Perspective Of A Preferred Investor

| About: iStar Inc. (STAR)

Summary

All newbies should click on the "Basics" link to fully understand my investment philosophy.

When considering preferreds, I view them as a separate entity from their common cousins.

I utilize Quantum Online to thoroughly research each preferred prospectus.

I like to compare the performance of the stock I want to invest in with the S&P and others in its sector.

For those of you unfamiliar with my preferred investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.

When considering the acquisition of iStar, Inc.'s (NYSE:STAR) preferred shares, STAR-D, E, F, G, I, and SFICP, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.

Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to iStar. Below is a snapshot of a slice of that page:

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A quick review informs us that iStar is a finance and investment diversified REIT focused on larger assets of commercial real estate located in major metropolitan markets. Its previous ticker symbol was SFI, which was changed 8/19/15.

Let's click on the Find Related Securities to examine any preferreds this company has to offer.

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Here, we learn that iStar offers the preferreds, (STAR-D, E, F, G, I, and SFICP), which were initially offered at the respective interest rates of 8.00%, 7.875%, 7.80%, 7.65%, 7.50%, and 4.50%. I find it interesting and encouraging that the initial interest rate offered was at the highest interest rates, which except for SFICP, consistently moved lower. This might be a positive indication or might be nothing of note.

Now, let's click on STAR-D itself. Below is the screenshot:

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  • I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, and consequently, I don't buy them.
  • These shares were callable at the company's option on 10/8/02 at $25.00 plus any accrued interest owed.
  • They pay a dividend of $2.00 per share per year, or 0.50 per quarter, paid 3/15, 6/15, 9/15, 12/15 of each year.
  • At the time of their IPO, these shares were junk rated at Caa1/CCC+ by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
  • These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
  • Dividends are NOT eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
  • As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.
  • Of all these preferreds, only SFICP has a convertible option.

However, simply knowing and understanding the preferred issues of a company in no way allow one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls.

Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder, which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.

Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of STAR.

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Above is a screenshot of STAR's five-year chart, which, as far as I'm concerned, is the picture of a company that has its ups and downs during this time. The price of its shares over the past year has dropped sharply only to rebound slightly of late. It pays no common dividend.

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Above is a screenshot taken from a Finviz view of STAR's present financial highlights. The company's current market value is $828.76 million. It lost $51.30 million, its stock price over the past year has fallen by 32.20%, and risen by 8.39% during this last quarter. Year to date, it's down by 18.50%. I also find its long- and short-term debt/equity is 4.23.

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According to the Yahoo chart above, STAR was placed solidly in the middle of its peer group, and underperformed the S&P. In fact, as a sector, these carriers have underperformed the S&P. The peer comparisons charted above are: Armada Hoffler (NYSE:AHH), Global Net Lease (NYSE:GNL), Investors Real Estate Trust (NASDAQ:IRET), Gladstone Commercial Corp. (NASDAQ:GOOD), and One Liberty Properties (NYSE:OLP).

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The final chart illustrates the three-year price movement of the preferred issue in STAR-D we are interested in acquiring. This is the chart of a company preferred, which has performed well except for a great buying opportunity at the end of last year that was followed by a price spring-back, followed by an upward trend since the beginning of the year.

My bottom-line decision is to look at charts of the past few years' performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year.

Ultimately, I must decide whether or not I believe in the long-term survivability of iStar, which I'll leave it up to your judgment, although I've held a long-term position in this company, which I intend to continue to hold.

My advice is simply my opinion, and you know what they say about opinions and how everyone has one. It's your money, invest it with care. As a bonus for being a patient audience, I worked out the math below, which takes into account today's prices, although they might change tomorrow, and accordingly, the best choice might change too. You know the formula - it might be wise to do the math just prior to placing your bid.

Star Preferreds

Symbol Yearly Dividend Cost Dividend/Cost Yield Best
STAR-D 2.00 23.66 2/23.66 8.45%
STAR-E 1.96875 23.30 1.96875/23.30 8.45% Best
STAR-F 1.95 23.15 1.95/23.15 8.42%
STAR-G 1.9125 23.27 1.9125/23.27 8.22%
STAR-I 1.875 22.64 1.875/22.64 8.28%
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Frankly, this one is a close call. I selected the E as best because, if called, it has a better upside by .36 over the D. However, the I Series has a nice upside, but because it costs the company the least interest rate, I don't expect it to be called any time soon.

Note: I didn't even bother listing SFICP. Chalk it up to laziness.

Disclosure: I am/we are long STAR-E STAR-F.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Notice that I utilize the same format to determine whether or not, or how to invest in a particular preferred. I do this for several reasons: The primary reason is because this is the way I accomplish it most effectively. It's also easiest for me to write. But, best of all, it makes it easier for you, my repeat audience, to breeze through each article and painlessly absorb the valuable information, particular to each company, that will help you make your most informed investment decision.