IStar's Dividend Appears to Be in Jeopardy

Is IStar the Canary in the Coal Mine, or is this Just Fremont Coming Home to Roost?

IStar (SFI) saw the need to issue interim estimated earnings estimates for the second quarter on Friday, and it wasn't encouraging. As a result of loan losses and impairments uncovered during the Company's quarterly risk review process, IStar said it now expects net income per share to be in the range of $0.05 - $0.15, and that it will book an adjusted earnings loss of between $1.45 and $1.55 per share when its second quarter results are announced at the end of the month. There was no update on guidance for the full year. In the first quarter, IStar reported adjusted earnings of .87/share, which was down from .93/share for the first quarter of 2007.

The tone of the conference call was business-like, but Sugarman only amplified concerns with respect to the health of the Company's operating environment, saying he was "shocked" and "stunned" that the general credit environment had deteriorated so rapidly as a result of the rumors swirling around Fannie (FNM) and Freddie (FRE).

Significantly, the Company said it had alerted the ratings agencies to the revised guidance on Thursday, but the agencies hadn't yet had time to "process" the information. However, management thinks that its leverage ratio would still remain "flattish" despite the asset write downs, so perhaps IStar can hang on to its rating for the time being. Nevertheless, the margin for error in this regard has disappeared; everything has to go right from here on out.

IStar's policy is to pay out 100% of taxable income in the form of dividends, but when asked about the ability to maintain the dividend, CEO Sugarman was circumspect. I would expect nothing more even in the best of circumstances, but it's obvious that taxable earnings are heading in the wrong direction, which suggests that that the dividend will soon follow suit.

The adjusted losses stemmed from loan loss provisions of approximately $275 million, including $215 million of asset specific provisions. In addition, the Company expects to record approximately $50 million of mark-to-market impairments and approximately $50 million in write-offs of goodwill and certain intangibles. The Company said about two thirds of the losses were in the Fremont portfolio, and that all of the asset specific losses were "expected".

I have heard this sentiment expressed from management before with respect to the Fremont deal, usually going something along the lines of "the assets are perfoming in-line with our original underwriting". Translated, that means that the deals they thought would be underwater when they priced the acquisition are in fact face down in the lake, and the deals they thought would be ok are actually doing ok.

But sometimes it helps to be a simpleton when wading through all this Park Avenue puffery, so the obvious simple question is this: if these losses were expected, then why the unexpected loss?

Disclosure: None.

Comments

[werawc]

Certainly the dividend will be reduced earlier than previously expected, but the share price by now should fully reflect this. Don't forget, the shares are down from over $50. As a long time follower and sometimes shareholder (since IStar took over Tri-Net Properties), I view this as a buying opportunity, and as such, have been buying in recent months. I expect to have to wait a year or two for a recovery, but the other side of the valley will be green in my opinion.

[a13fox]

I just started purching this stock in March. I fully expect the market to turn around at some point, so I will keep buying as a am able.

[nyka]

What is an "a am able"?

[digivision]

this is a good buying opportunity .. SFI has 1.4bil in cash
they can ride this crisis out I will continue buying until as much as I can

[archer_id]

Istar has a long history of dividends and still has $1.5 billion in cash. This company is not having financial problems in terms of liquidity. If anything, it might have problems generating new business and therefore short-term profits. The real question is whether it can raise more capital through debt issues--say convertible bonds--so it can use that money to lend in a market where getting a loan has become so hard.

[Patrick1980SC]

Well, I think iStar is also running out of good assets to sell. The common price is too low to do a successful offering, they have oodles of preferred series, and the unsecured debt market ain't gonna give it up for the barely investment grade iStar. So iStar may have to begin the ardurous process of obtaining secured funding, an unpromising option when asset values are tanking. iStar does have enough in the way of capital gains to support the dividend through 2008, but I suspect they will realign the dividend come first quarter 2009. Even at run rate of $1.00/year, iStar would be yielding more than 12%.

[JLH]

The company had a large addition to its non performing loans this quarter, but the company is giving investors confusing guidance as to the 09 dividend outlook. Impossible it seems to get a straight answer. I would load up on the stock but fear the 09 dividend might be in jeopardy. How about some clarity.

[Patrick1980SC]

iStar’s woes continued to mount this week after last week’s ominous pre-announcement warning. Fitch downgraded iStar’s debt ratings to BBB- and placed the Company on Ratings Watch Negative. iStar is now at the very bottom of the investment grade ranks, which is key to being able to issue unsecured debt into the marketplace. Unsecured debt is iStar’s primary form of financing and is significant to the Company’s overall capital management. Fitch cited concerns over the Company’s ratio of EBITDA to fixed charges and the increased in secured debt, despite iStar’s move to increase liquidity through asset sales. Shares of iStar plummeted further this week; the stock has shed nearly two-thirds of its value since mid-May.