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?