iStar Financial - On the Shelf

Like most financial companies, iStar Financial Inc. (SFI) has experienced a difficult time over the last several quarters. It has seen it share price collapse from a 52 week high of $40.55 to under $10.

SFI's quarterly dividend is $0.87/share. Unfortunately, SFI has not earned its dividend the last four quarters, and it doesn't appear it will in Q2. In a July 18, 2008 earnings revision, SFI said it expects a second quarter non-GAAP loss of $1.55 to $1.45 per share with loan loss provisions of $275.0 million.

Ironically, SFI's cash has been growing over the last four quarters - from $88 million at Q2/2007 to $119 million at Q1/2008. Looking at the cash flow statement, this increase in cash has been funded via a net issuance of long-term debt. SFI's net issuance in 2007 was about $4.5 billion and in the first quarter this year it issued (net) a little over $100 million.

From an allocation standpoint, I was scheduled to purchase SFI in August. When I saw the 40+% dividend yield, a red flag went up and I began looking deeper into the company's financials. I have a small portion of my portfolio set aside for speculative stocks and SFI is by far my riskiest stock in that category.

As mentioned in my "On The Shelf" post, if a security is not performing at the desired level for additional purchases, but also is not performing badly enough to warrant a sale, then I will put it "on the shelf". By that I mean it will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold. SFI currently fits that description. As such I have put SFI on the shelf, until its financial condition changes for the good or bad.

Disclosure: Long SFI

Comments

[Patrick Harden:]

Not to quibble too much, but on what basis are you claiming that iStar has not "earned" its dividend? Based on taxable income, which is the metric driving mortgage REIT dividends, iStar has covered its dividend every quarter with ordinary or capital gain taxable income.

2008 Jul 27 01:57 PM

[Dividends4Life:]

EPS. From moneycentral.msn.com/i...

Q2/07 $0.78 EPS vs $0.83 Dividend
Q3/07 $0.75 EPS vs $0.83 Dividend
Q4/07 ($0.63) EPS vs $1.12 Dividend
Q1/08 $0.56 EPS vs $0.87 Dividend

D4L

2008 Jul 27 03:51 PM

[Patrick Harden:]

Mortgage REITs manage their businesses based on long-term opportunities to earn cash flows. Their common stock dividend distributions are driven by the REIT tax laws and their taxable income as calculated pursuant to the IRS tax code. Their reported results for GAAP purposes differ materially, however, from both their cash flows and their taxable income.

You have cited GAAP earnings, which include the effects of non-cash, non-deductible mark-to-market valuation adjustments. These adjustments severely distort a mortgage REIT's reported earnings and do not accurately measure the health of the dividend.

2008 Jul 27 05:20 PM

[E Nuff Sed:]

Looks like a good speculative bet at this stage - which can pay off handsomely once the credit crunch passes. However there could be liquidity risk which could drive them to restructure at depressed prices. Are they funded with recourse or non-recourse loans?

2008 Jul 27 05:33 PM

[cranyinnyc:]

Patrick C
you are correct to say taxable income and not gaap income is the relevant measure for REITS because that is the measure that they are required to pay at least 90% in the form of dividends to keep their REIT status but and this is an important but over time those 'non-cash' items that GAAP expenses faster than taxable income or analyst or mgmt waive away in their FFO calculations are important. If dividends are greater than GAAP earnings for a meaningful period either the company is 'self-liquidating' or it has to raise fresh equity. So in the end it is importanat for a REIT's dividend to be 'earned' even in GAAP terms

2008 Jul 27 06:54 PM

[Patrick Harden:]

Although generally GAAP/tax differences will reverse over time during the life of a securitization, iStar's taxable income has historically been lower than the cash flow generated by our business activities (and GAAP), primarily because its taxable income is reduced by non-cash expenses, such as impairment charges, provisions for loan losses, depreciation, depletion and amortization.

2008 Jul 27 07:35 PM

[cranyinnyc:]

Patrick C
Sorry but depreciation depletion and amortization eventually have to be earned and are not reversable. they are not 'Impairments' the dividends they paid have only been supported by equity raises that permit growth. Provisions for loan losses or other credit related charges that are not cash are reversable if the actual loss realized is lower. that in this enviroment is not a slam dunk. I stand by my critique of your assertion that investors should pay no heed to dividends in excess of gaap earnings. they should

2008 Jul 28 08:20 PM

[nyka:]

Crusty--apparently you place no value on punctuation in your writing. The end result is a collection of run-on sentences which blur the meaning of your message, and make it considerably less credible.

2008 Jul 29 02:21 PM

[cranyinnyc:]

nyka - yea that just blew away my agruement. bad punctuation.

2008 Jul 29 03:44 PM