iStar Financial (SFI) Q3 2012 Earnings Call October 26, 2012 10:00 AM ET
Good day ladies and gentlemen, and welcome to iStar Financial’s Third Quarter 2012 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 Mr. Jason Fooks, Vice President of Investor Relations and Marketing. Please go ahead, sir.
Thank you, John, and good morning everyone. Thank you for joining us today to review iStar Financial’s third quarter 2012 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer and David DiStaso, our Chief Financial Officer. This morning’s call is being webcast on our website at www.istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12:30 PM Eastern Time today. The dial in for the replay is 1800-475-6701 with a confirmation code of 268-531.
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 fully in our SEC reports, iStar disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.
Now, I’d like to turn the call over to iStar’s Chairman and CEO, Jay Sugarman. Jay?
Thanks Jason. Thank you for joining us on the call this morning. Since our last call, we’ve made progress on a number of fronts, as we continue to move iStar into position for increased investment activity.
During the third quarter, we again paid down significant amounts of debt and shortly after quarter end, executed a longer term refinancing for a sizable portion of the asset base. Together with the improved access to longer term unsecured capital, the successful execution of this new five year secure facility, gives us the opportunity to begin focusing the company on deploying capital in 2013 for new investments, as well as for continued debt reduction and refinancing activity.
Our portfolio is now falling into several distinct business lines, and as we move forward, we will being highlighting of this different areas are contributing to overall cooperate results. Roughly speaking, we define these lines of businesses as real estate finance, net lease, the operating portfolio, the managed land portfolio and strategic investments.
In each category, there are assets that are performing well and contributing to earnings and other assets that remain in transition and are negatively impacting earnings. As we mentioned before, unlocking value in these assets will require additional investment and significant management time. We’re building a growing pool of profitable examples that gives us confidence we will be able to make that happen.
Let me go through a quick overview of the business lines. Our real estate finance focus is currently over $2.1 billion and we break the business down into the performing loan book and the non-performing loan book. Returns on the performing loans totalling just over 1.5 billion are quite healthy with yields in the LIBOR plus 600 region for floating and 8.5% for fix.
But the NPL book of approximately $650 million is still a material drag on earnings with ongoing litigation cost and extended foreclosure proceedings increasing the load.
For approximately 1.5 billion net lease book we break the business down into occupied and vacant assets. Occupied assets makeup more than 90% this portfolio on a book basis and occupied effective yields in the 9.5% range suggest significant value in the occupied portfolio. Obviously, the vacant assets will require future leasing to maximize their value. The operating portfolio is approximately $1 billion in size and we break it down into condo residential on one hand and commercial properties on the other. Currently condos make up just under 400 million of this portfolio and operating commercial properties make up approximately 600 million. The condos are relatively seasonal and have been generating gains over the last several quarters while the commercial portfolio is more transitional, we can improve leasing results in several markets, offset by slower improvement in others.
The managed land portfolio is approximately $900 million which can be broken down a few different ways but one simple way is to group them according to when they will begin production. Our current portfolio has 10% of assets by book value already in production and we anticipate having approximately 60% by book value to be in production by the end of 2014. The reminder are expected to begin production between 2015 and 2017.
This portfolio should be a strong contributor to future earnings, but not until the majority of the projects are in full selling mode and will remain both a cash flow and earnings negative until then.
Lastly, in our roughly $400 million strategic portfolio, we group investments into active investments primarily LNR and passive LP positions in certain (inaudible) and other funds that will wind down over time. These have been good investments on the whole for the company and should continue to be until we harvest them.
Taken as a whole, the portfolio has a large proportion of strongly performing investments, offset by some $2 billion of assets that do not yet contribute to earnings. As a result, our net for the third quarter excluding non-cash charges and gains and losses on debt retirement was a $26 million loss.
Turning that number around is dependent on unlocking earnings potential and those assets that are now negatively impacting our P&L and our efforts remain focused on time them around or monetizing them as appropriate.
And with that background, let me turn it over to Dave for more of the details, Dave.
Thanks Jay and good morning everyone. I’ll begin by discussing our financial results for the third quarter 2012 and recent capital markets activities for moving on to discuss our portfolio and then update an on liquidity. For the quarter, we reported a net loss of 72 million or a loss of $0.86 per diluted common share compared to a net loss of 62 million or $0.71 per diluted common share for the third quarter 2011.
Adjusted income for the quarter was a loss of 26 million, compared to a loss of 19 million for the same quarter last year. Results in the prior year period included a 22 million, one time gain from discontinued operations associated with the previous net leased assets portfolio sale.
Excluding this item, the year-over-year improvement was due to the income we’re now generating from our condo sales. Increased earnings form equity method investments, as well as a reduction in G&A costs. This was partially offset by decreasing interest income from an overall smaller real estate finance portfolio.
Adjusted EBIDTA for our third quarter was 77 million compared to 83 million for the same period last year. Our press release contains the calculations of adjusted income and adjusted EBITDA as well as reconciliations to GAAP net income.
We’ve continued to reduce our overall debt levels, during the third quarter we repaid a 148 million on the A1 tranche of our 2011 secured credit facility and 66 million on the A1 tranche of our 2012 secured credit facility.
As we previously announced, subsequent to the end of the quarter, we refinanced the balance of our 2011 secured credit facility with a new 1.82 billion senior secured credit facility due October 2017 marking our third capital raise this year. The transaction has a number of important benefits for iStar, including a lower cost of capitals in 2011 facility and a longer term that significantly improves our debt majority profile.
In addition, we were able to release certain assets from the collateral pool, which will be available to us in addressing our 2013 unsecured debt maturities. We’re also pleased to receive an upgrade from Moody’s in connection with refinancing, bringing our corporate rating to B2 and our senior unsecured credit rating to B3.
In addition, Moody’s assigned a B1 rating to our new secured credit facility and upgraded the A1 and A2 tranches of our March 2012, senior secured facilities to BA3 and B1 respectively.
Further, S&P affirmed both our long term issuer credit rating and our senior unsecured rating at B plus and also assigned a double B negative rating on our new facility. Our leverage remained 2.5 times and our weighted average effective cost of debt for the quarter was 6.5%.
At the end of the quarter, we had 739 million of cash, including cash reserved for repayment of debt. We subsequently used part of this cash to repay the remaining 461 million balance on our senior unsecured convertible notes due October 2012 at maturity.
During the third quarter, we generated a total of 318 million of proceeds from our portfolio comprised of 158 million of principal repayments, 80 million of residential unit sales, 67 million from sales of owned real estate and 13 million from other investments. In addition, we funded approximately 28 million of investments in capital expenditures during the quarter.
Let me now turn to the portfolio, at the end of the third quarter, our total portfolio had a carrying value of 6 billion, gross of general reserves. This was comprised of approximately 2.2 billion of loans in our real estate finance portfolio, 1.5 billion of net leased assets, 1.9 billion of owned real estate and 420 million of strategic investments. At the end of the quarter, our real estate finance business included 1.5 billion of performing loans with a weighted average LTV of 71% and a maturity of approximately three years.
The performing loans consisted of 46% floating rate loans that generated a weighted average effective yield for the quarter of 6.4% and 54% fixed rate loans that generated a weighted average effective yield of 8.5% for the quarter. The weighted average risk rating of our performing loans was 3.08 at the end of the quarter, an improvement of 3.16 at the end of the prior quarter. Included in our performing loans were 19 million of watch list loans, a decrease from 75 million last quarter.
Our non-performing loans or NPLs had a carrying value of 640 million net of 491 million of specific reserves, which is comparable to the balances at the end of the prior quarter. Our NPLs consist primarily of 34% land, 21% retail assets, 15% hotel assets, 12% apartment residential and 11% entertainment leisure.
During the quarter, we recorded a $17 million provision for loan losses versus 27 million last quarter. At the end of the quarter our reserves totaled 544 million consisting of 506 million of assets specific reserves and 38 million of general reserves. Our reserves represent 20.4% of the total gross carrying value of loans. This compares to loan loss reserves of 564 million or 19.8% at the end of the prior quarter.
Next, I will discuss our net leased portfolio. At the end of the quarter, our 1.5 billion of net leased assets which are reported net of 353 million of accumulated depreciation or 91% leased with a weighted average remaining lease term of over 12 years. They had a weighted average risk rating of 2.70 unchanged from the prior quarter. For the quarter, our occupied net leased assets generated a weighted average effective yield of 9.6% or our total net lease portfolio generated weighted average effective yield of 8.6%.
Now, let me turn up to our owned real estate portfolio. Our 1.9 billion owned real estate portfolio is comprised of operating real estate assets and land assets. Our operating portfolio is 986 million, including 389 million of condominium assets with commercial real estate assets representing the balance. These are assets we own and are working to reposition and redevelop through the infusion of capital and intensive asset management in order to maximize their values.
As a result of those investments and repositioning efforts, we have continued to recognized gains in this part of the portfolio. During the third quarter, we recorded 20 million of income from unit sales some of which is reflected in earnings from equity method investments.
Our residential assets are generally luxury and super luxury properties located in major metropolitan markets. At the end of the quarter, our remaining inventory was approximately 1150 units. The balance of the operating portfolio consists of more traditional commercial real estate collateral types including retail, office, industrial, hotel and multifamily. Many of these assets generate revenue but are still transitional and will require time, effort and capital to re-tenant in and stabilize the properties.
Okay. Let me discuss our land business. Our 896 million land portfolio consists of high quality land parcels half of which are slated for master plan communities and the remainder represent waterfront resort or urban land, along with some land entitled for retail and commercial.
While these assets will continue to involve long lead times and capital investment, we believe that our discounted basis in the land portfolio together with improving fundamentals create the potential for attractive future returns. For the quarter, our owned real estate portfolio generated 30 million of combined revenue and gains from condo sales offset by $25 million of expenses.
Finally, let me conclude with a discussion on our liquidity. As of September 30th, we had approximately 285 million of unrestricted cash after repaying the convertible notes in early October. Expected uses of cash for the fourth quarter include approximately 70 million of investments from comprised of investment funding and capital expenditures on our net lease operating and land portfolios.
We have just over $1 billion of unsecured debt maturing in 2013. Consistent with how we’ve managed debt maturities in recent years, we expect to address these maturities with the combination of unrestricted cash, repayments received on shorter term assets, including those that were unencumbered in the recent financing, asset sales and opportunistic capital markets transactions.
Our annual debt maturities declined after 2013 giving us a window to focus on creating value in our existing platforms.
With that, let me turn it back to Jay. Jay?
Thanks Dave. Well there’s really not much more to add other than we’ll keep pushing forward and look to make further progress on our plans as we head into 2013. So let’s go ahead and open it up for questions operator.
(Operator Instructions) And first go to the line of Joshua Barber with Stifel Nicolaus. Please go ahead.
Joshua Barber - Stifel Nicolaus
I am wondering if you could talk a bit about the reserves. Maybe this is more of an accounting based question, but you guys have close to 40 million of general reserves. At what point do you just start dipping into that rather than taking quarterly and asset specific reserves?
Joshua, from that perspective, we continue to look at asset specific reserves, as we go ahead and evaluate loans each quarter, from an accounting perspective, if assets require specific reserves, we would continue to provision for them. The general reserves are just for the remainder of the portfolio subject to conditions we’re not yet aware of.
Joshua Barber - Stifel Nicolaus
Okay. But you are adding it back when it comes to calculating your book leverage and stuff like, do you expect to use that at some point or do you think that that just may be excess reserves at this point?
At this point, they are just general reserves that are not identified for the specific assets.
But Josh, the simple answer is yes, we would expect to use them, they are done a based algorithmically against performing loans, but I think it’s fair to say I think that $40 million will get used over the next couple of years.
Joshua Barber - Stifel Nicolaus
Okay. When we’re looking at your land portfolio especially with home building and land being on everybody’s mind today, are you seeing better interest in just buying land parcels or at least partnering with you guys on land parcels for some of your assets and how is that changed over the last six months?
Yes, we've seen a material upturn as you probably read in the press, the public home builders are active and engaged now. There are markets where shortages of lots have become acute and so it’s not only what can I buy for today’s needs but people are actually starting to engage in productive dialogue around what they need for future needs. But there is still work to be done to really position properties for the right market that we see down the road. So lot of those conversations are about particular portions of a project. I think we still think there is value to be added on our own ownership before we want to think about seriously engaging those conversations.
Joshua Barber - Stifel Nicolaus
That makes sense. Dave, I may have missed it but do you have a 2013 capital spending or CapEx target for that, speaking about land portfolio?
On the land side, CapEx, so we are projecting somewhere in the range of $75 million to $100 million for land related expenditures.
Joshua Barber - Stifel Nicolaus
One last question, AMF always seems to popup in the news at some point, can you just remind us what the total amount of cash rents that you are getting from AMF today?
Yes, AMF is about a $27 million GAAP number and obviously we see what’s in the press, all I would say is, and our conversations are focused on improving the quality of our lease and improving the credit of our tenant. We’re pleased if that outcome can help both parties, so we think that's a safe and secure piece of paper for us.
Our next question is from Michael Kim with CRT Capital Group. Please go ahead.
Michael Kim - CRT Capital Group
Just had a question on LNR, what is that mark on the balance sheet at quarter end, under other investments?
I'm not sure, whether you can see there, but it's somewhere in the $180 million range, Mike.
Michael Kim - CRT Capital Group
And I guess of the 23 million of earnings from equity method investments during the quarter, how much of that was related to LNR?
About two thirds.
Michael Kim - CRT Capital Group
And just to follow-up on the question on AMF, our understanding that AMF is currently working under a short term forbearance agreement to allow for a balance sheet restructuring plan and part of this forbearance is AMF looking to negotiate a new mass lease agreement with iStar and if so, is this going to address lease projections, concessions or closures?
As I already said, Mike, I think our goal is just to improve the quality of our lease and I know the tenant here would like to improve the overall credit of the company and those are both good things for us. So I think rather than go into specific details, I'll just tell you again, we think we're in a nice safe position and certainly hope the outcome of this is a stronger tenant.
Michael Kim - CRT Capital Group
And on the land side, I really appreciate all the color that you just provided on the call. I'll bet 60% targeted for production by 2014, now how much in CapEx is required over the next two years and of that amount how much do you think will be mass client communities versus the other category for water front resort and other land.
Let me see if our guys can break it down for you. But on the land side we are investing in all those properties, some are dollar investments and are just capital intensive or making infrastructure improvements. Others are much more I would say, sweat equity, we're repositioning, re-entitling, re-envisioning where some of these properties need to go.
We like the markets, we like the potential in those, but we really don't want to spend money unless we see some long term return on it. So, they give you a number of 75 to 100 million. That doesn't go away unfortunately. These are big projects; they continue to have multiple phases. So we think that run rate number is probably a pretty good number for a while.
The mix between the more urban waterfront stuff and the big master plan community stuff, I can’t probably give you a dollar number but I can tell you the larger projects right now are out in production moving forward, but we do think some of those urban projects are going to get kicked off here pretty soon in a more meaningful way. So, there will be money spent on both and I just don’t have a breakdown, I can give you off the top of my head.
Our next question is from Mark Palmer with BTIG. Please go ahead.
Mark Palmer - BTIG
Could you provide some timing with regard to addressing the 2013 maturities and in particular can you talk about the balance between the cost of taking out in particular the June 13 maturity versus waiting, particular given the uncertainty that we may see in the not too distant future with regard to the U.S. election, the fiscal cliff and Europe?
Absolutely, it’s very topical question. We did the longer refinancing on the secured piece really to give us as many options as possible as we start to think about ‘13. One of the positive benefits of that exercise, we’ve got a lot of reverse inquire on other parts of the capital stag. I think there is some good ideas in there that obviously have a trade-off between, you’re doing now or you’re doing later and then what sizes. Obviously, we’re not going to wait for the last minute. We do think there are things we should do sooner rather than later. But there is a cost to all those decisions and at 8 5/8 every time, we’ll save a little bit of money, but we don’t think it’s prudent to postpone all of our 2013 thinking for long time.
Our next question is from Jonathan Feldman with Nomura Securities. Please go ahead.
Jonathan Feldman - Nomura Securities
Just have three questions. One is, if you guys were prepared to give any sort of informal guidance if you will on cash burn for next year. Second question is, just where you’re seeing the best investment opportunities in the portfolio and should we expect the capital that you’re committing to existing portfolio investments or new investments to grow as your balance sheet continues to improve. And then I guess just third, was wondering if you could amplify your thoughts on whether you think it’s make sense and/or is feasible to raise capital in a context other than repaying debt. And where you think the cost capital would need to be for that to be attractive to you. Thanks so much.
As we think about supplying capital Jonathan, obviously the decisions we’re making on the ground all need to be net present value positive to us. So we are trying to pick among the best alternatives in the portfolio we could obviously spend even, well beyond the numbers they throughout. If we had lower cost to capital, we were most indiscriminate in how we thought about this stuff.
But right now there is a pretty high bar and obviously the money we do spend we think we’re generating returns. The stuff that goes into new leasing or to building an add-on building for our tenant that’s going come into production right away, you’re going to can see returns right away. We built some additional multifamily. We built some things that you can see the results immediately.
Other investments particularly in the land, you’re not going to see those show-up in earnings anytime soon, there is a lot of upfront cost, a lot of upfront soft cost associated with those projects that’s why we keep cautioning that, while we think there’re going to be big contributor long term, those are not the kind of instantaneous satisfaction you get from fixing a condominium or putting a new tenant in place or building a multifamily project, those returns are tangible and we can kind of point you to that pool of examples where we see the profitability of those and it gives us great confidence that as we continue to work away at the non-income generating assets, we’re going to be able to show a pretty compelling case that with time and money and effort we have been making that a pool start to perform.
But I don’t think we can give you specific numbers about how we’re going to go about allocating money between that or new investments. Literally almost a week-to-week exercise of where the best returns, where is that incremental dollar better deployed and that’s the same process we go through when we think about selling assets, we will take a loss on one asset if we think we’re going to deploy those dollars on a marginal basis into some something else in the portfolio and generate overall an even better return. So that dynamic is on-going and regular way part of our thinking.
When we think about new capital for the business and there's lots of ways to access capital, as I said, we can sell existing assets and redeploy that. We can do JV’s with people, we can bring in third party capital, we can raise it ourselves. We still think it two and half times more debt reduction is probably prudent right now. Not a ton more. I think we set our target is two to two and half towards the high end of that range, we wouldn’t want it to go above that, but as we start to work down towards the lower end of the range, we’ll start thinking about different alternatives. Obviously within the constraints of our covenants and our liquidity profile, but we are getting to a point where new business is on the radar for 2013 for us. We are actively talking about some new investments that seem quite interesting to us and certainly meet our bogie. So, I think that’s going to be part of the story on ‘13.
(Operator Instructions) And we will go to Amanda Lynam with Goldman Sachs.
Amanda Lynam - Goldman Sachs
My initial question was on timing for addressing the 2013 maturities that since we have already cover that, could you talk a little bit about whether there are parts of the capital structure you might consider, would you add a convert back to the balance sheet specifically. And then secondly is your goal still to ultimately return to investment grade debt ratings and do you view that as necessary to really get back into the full swing of writing new business or do you think that you can write some attractive new business opportunities without regaining those investment grade ratings? Thanks.
Yes, it would be fantastic if I thought we could get investment grade ratings in the near term, I just don’t see that as a possibility, but I do think upgrades from where we are today are certainly feasible and we run this business as kind of a 4B level many times and for many years in our past. And it will be a very profitable business at those levels. So that’s a good interim target for us and probably a more realistic target in any sort of relevant timeframe.
We were pleased that Moody’s was part of the upgrade story this year. Certainly next year we think we’ll have more good news to share with both S&P and Moody’s and we will look forward to an opportunity to continue to make progress with both of them.
When we think about our capital stack, you’ve seen us looking at all parts of the equation we brought stock. We've certainly been thoughtful about where the best places are to either raise capital or deploy capital. So we don’t ever exclude anything but I guess I would say the reverse inquiry God gave us some ideas about where attractive capital could be priced and we will consider all those factors, when we think about the best way to move forward.
And Mr. Fooks, we have no further questions.
Thank you. Thanks John. Thanks everyone for joining us this morning, if you have any additional questions on today's earnings release please feel free to contact me directly. John, please give the conference call replay instructions, once again. Thank you.
Certainly and ladies and gentlemen, this conference starts at 12:30 p.m. Eastern Time and will last until November 8 at midnight. You may access the replay at any time by dialing 800-475-6701 and entering the access code 268-531. That does conclude your conference for today. Thank you for your participation. You may now disconnect.
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