Patrick Harden

iStar Financial - On the Shelf

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.

iStar Financial - On the Shelf

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.

iStar Financial - On the Shelf

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.

IStar's Dividend Appears to Be in Jeopardy

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.

IStar's Dividend Appears to Be in Jeopardy

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%.

The Five Largest Quarterly Dividend Stocks

CapitalSource is almost certainly going to reduce its dividend. Consider the following comments from a recent press release: "Upon the closing of the asset acquisition from FIL, we expect to reevaluate our dividend policy and may decide to retain a majority of our earnings, consistent with dividend policies of other commercial depository institutions, to redeploy in attractive lending opportunities, subject to satisfying our minimum distribution requirements to qualify as a REIT for 2008."

iStar Financial and NorthStar Realty have plenty of capital gains available to support their dividend stream.