iStar Inc.
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to iStar Financial’s First Quarter 2013 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.

[Jason Fooks:]

Thank you, John. Good morning everyone. Thank you for joining us today to review iStar Financial’s first quarter 2013 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 istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12

[Jay Sugarman:]

Thanks Jason. Thanks to all of you for joining us this morning. We started this year with a clear game plan, work to get our NPL balances down, increase the yield on our operating portfolio, and kick and gear our new investment activity. Our first quarter was a good start in achieving those goals. We made progress on a good chunk of NPLs, got a little momentum going in some of our operating assets, and began getting a pipeline of new investments under letter of intent. We still have plenty of work to do, but we are pleased to see some of our efforts beginning to show results. Let me go through a quick review of the business lines. Our real estate finance book saw continued payoffs and a nice reduction in NPL balances. We are under LOI or letter of intent or in process of working on several sizable new investments and hope that some of those close by the end of the second quarter or very early in the third quarter. Segment profit was $2.4 million and we will need to make more progress on NPLs to get that number up. The net lease book has remained relatively stable and remains a solid performer. We are beginning to target new investments in this area. We may choose to access third-party capital to help ramp this business up. Built-to-suit opportunities as well as situations or expansion of existing assets is possible seemed to offer the best returns right now. And our net lease team is engaged on a number of interesting situations. Segment profit was $8.6 million and we look to grow that through new investments throughout the year. The operating portfolio continues to benefit from very strong performance from the condominium assets to where our assets over the last years. We have repositioned many of these assets and can now harvest, attract our profits, as we sell through to customers. Segment profit was $19 million for the quarter and was helped not only by strong condo sales, but also by a pickup in leasing of some of the transitional assets, so that remains somewhat uneven across the commercial portfolio. They also benefited from the sale of stabilized retail assets. Our land portfolio remains a drag on earnings, but we expect progress throughout the year. While much of that progress won’t show up in GAAP numbers until 2014 or 2015, we expect to be able to start giving markers of value for several projects before year end. Segment loss for the quarter was $18.7 million and there aren’t many near-term levers that will change that number unless we change strategies and sell off prime parcels. I think you heard us say our goal is to maximize the value of those assets rather than worry about the GAAP financials. We will continue working with builders to find an optimal solution for the long-term iStar value and likely continue to forego short-term gains. Lastly, you’ve probably read that we recently completed the sale of our LNR interest as part of a sale of the overall company. And so our $120 million investment in July of 2010, our total LNR investment has returned to approximately $285 million before management incentive and some $250 million net of those incentives, after two and a half years as Chairman of LNR, I am delighted with the success we achieved, but happy that fellow Board Member, Nina Matis and I can now refocus more directly on iStar’s go-forward business plan. And with that, let me turn it over to Dave to review the numbers for the quarter in more detail. Dave?

[David DiStaso:]

Thanks Jay and good morning everyone. Let me begin by discussing our financial results for the first quarter 2013 as well as recent capital markets activities before moving on to discuss our real estate and loan portfolios. For the quarter our net loss was $41 million or a loss of $0.49 per diluted common share compared to a net loss of $55 million or $0.66 per diluted common share for the same quarter last year. Our adjusted income for the quarter was a loss of $300,000 compared to a loss of $2.8 million for the first quarter of 2012. Results in the current quarter included $5 million of loss on early extinguishment of debt and $4 million of other expenses associated with the re-pricing of our $1.71 billion secured credit facility. Excluding these charges, our net loss for the quarter would have been $33 million and our adjusted income would have been $3 million. Contributing to the year-over-year improvement was increased income from residential condominium sales, increased lease income as we continue to lease up our operating properties and a reduction in interest expense and provision for loan loses. This was partially offset by decreasing interest income from an overall small real estate finance portfolio as well as lower earnings from equity method investments. During the first quarter we issued $200 million of our 4.5% Series J Cumulative Convertible Preferred Stock. This stock has an initial conversion price of approximately $12.79 a share. We intend the use net proceeds from this offering to fund new investment originations. As we previously announced this quarter we have re-priced the $1.71 billion outstanding balance on our senior secured credit facility. The term loan now bears interest in an annual rate of LIBOR plus 3.50% with 1% LIBOR floor, a reduction from the prior rate of LIBOR plus 4.50% with 1.25% LIBOR floor. Following this re-pricing we repaid $34 million on this facility bringing to remaining outstanding balance to $1.67 billion at quarter end. We also repaid $109 million on the $410 million A-1 Tranche of our $880 million secured credit facility, brining the remaining outstanding balance of the A-1 Tranche to $60 million at March 31, 2013. The balance of the A-2 Tranche remains $470 million. Based on the total amount repaid, we have already exceeded the minimum cumulative amortization required to be paid on the facility before maturity. Our effort over past couple of quarters to reduce interest costs has resulted in our weighted average cost of capital decreasing to 6.2% from 6.5% for the prior quarter. In addition, as a result of the reduction in overall indebtedness and preferred equity raise during the quarter, our leverage decreased to 2.1 times from 2.5 times at December 31, 2012. Let me now turn to investment activity in our real state and loan portfolios. During the first quarter, we generated $355 million of proceeds from our portfolio, primarily comprised of $231 million from repayments and sales of loans in our real state finance portfolio and $130 million from sales of operating properties. Subsequent to quarter end, we sold our 24% interest in LNR Property and received $220 million in net proceeds at closing. We intend to redeploy those proceeds primarily into new investment originations. We invested a total of $40 million during the quarter. As Jay mentioned we expect this number to increase through out year as investment activity ramps up. At March 31, 2013 our total portfolio had a carrying value of $5.8 billion, gross of $406 million of accumulated depreciation and $31 million of general loan loss reserves. Our real state finance portfolio totaled $1.6 billion at the end of the quarter. This includes $1.3 billion of performing loans that had a weighted average LTV of 72% and a weighted average maturity of just under three years. They were comprised of $834 million of first mortgages or senior loans and $421 million of mezzanine or subordinated debt. These performing loans generated a weighted average effective yield for the quarter of 7.2%. The weighted average risk rating on the loans improved to 3.00 from 3.01 in the prior quarter. Included in the portfolio were $42 million of watch list loans. At the end of the quarter, we had $359 million of non-performing loans or NPLs, which are carried net of $466 million of specific reserves. This quarter we made meaningful progress as we reduced the balance of NPLs are approximately 30% from the $503 million of NPLs we had at the end of the fourth quarter. The decrease is primarily due to pay-downs received on existing NPLs and their corresponding transfer to performing status. Our remaining NPLs were mainly comprised of 35% land, 22% hotel, 21% entertainment, and 14% retail. For the quarter, we recorded $10 million provision for loan losses bringing our total reserves for loan losses to $522 million, consisting of $491 million of asset-specific reserves and $31 million of general reserves. While we saw the level of provision decrease this quarter, the rate of which it may continue to do so is uncertain, and we could see quarterly fluctuations. Our reserves represent 25% of the total gross carrying value of loans versus 22% at the end of the fourth quarter. Next, I will discuss our net leasing portfolio. At the end of the quarter, we had $1.7 billion of net lease assets, gross of $319 million of accumulated depreciation. The portfolio was 95% leased for the weighted average remaining lease term of 12 years. The portfolio had a weighted average risk rating of 2.43, an improvement from 2.46 in the prior quarter. For the quarter, our occupied net lease assets generated unleveraged weighted average effective yield of 7.9%, while our total net lease portfolio generated an un-leveraged weighted average effective yield of 7.5%. Let me now turn to our operating properties portfolio. Our operating properties totaled $1.2 billion, gross of $85 million of accumulated depreciation and was comprised of commercial and residential real estate properties. We invested $14 million into these operating properties during the quarter. Commercial properties totaled $841 million gross of accumulated depreciation and represented a diverse pool of real estate assets across a broad range of geographies and collateral types, such as office, retail, and hotel properties. They generated $36 million of revenue and gains offset by $20 million of expenses during the quarter. Our strategy within this portfolio is to reposition or redevelop these assets with the objective of maximizing their values, with the infusion of capital or intensive asset management efforts. At the end of the quarter, we had a $193 million of stabilized commercial operating properties. The stabilized properties were 88% leased resulting in a 9.8% unlevered weighted average effective yield for the quarter. The remaining $648 million of commercial operating properties are transitional real estate properties that were 54% leased and generated a 2.9% un-levered weighted average effective yield for the quarter. We also sold one stabilized commercial operating property of $29 million proceeds and recorded a $5 million gain. The residential operating properties totaled $359 million and were comprised of 923 condominium units remaining in inventory at the end of the quarter. These units are generally located in projects characterized by luxury buildings in major cities throughout the United States. During the quarter, we sold 116 condos for $83 million in proceeds, resulting in a $26 million gain offset by $5 million of expenses. This brings me to our land portfolio. At the end of the quarter, our land portfolio totaled $977 million and included 11 master plan communities, 7 infill land parcels, and 6 waterfront land parcels. At the end of the quarter, 4 of these projects were in production with sales activity having begun, 9 were in development where we are actively working on entitlement and 11 were in the predevelopment phase. The projects in the portfolio are well diversified with our largest exposures in California, the New York Metro area, Florida and several markets in Mid-Atlantic and Southwest regions. Master plan communities generally represent large scale residential projects that we plan to entitle plan and develop. We currently have entitlements at these projects for more than 25,000 watts our infill and waterfront parcels are currently entitled for 6,000 residential units and select projects include commercial, retail and office space. During the quarter, we invested $8 million into our loan portfolio through capital expenditures. Let me conclude with some comments regarding our plans for the reminder of the year. We expect return to the capital markets to refinance the approximately $45 million of unsecured notes that are maturing this year. Following, the sale of LNR subsequent to quarter end, our current cash position is excess of $700 million providing us with significant capital to ramp up our investment origination activity. In addition, we expect to invest approximately $187 million for the remainder of the year in capital expenditures on projects primarily in our net leasing, operating and land segments. With that let me turn it back to Jay. Jay?

[Jay Sugarman:]

Thanks Dave. We look forward to coming back next quarter with details on the new investment pipeline and further progress on our overall business strategy. But for now let’s go ahead and open it up for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question is from the line of Michael Kim with CRT Capital Group. Please go ahead.

[Michael Kim:]

Thanks. Good morning everyone. My question is under the stabilized operating portfolio, commercial operating portfolio, the weighted average effective yield at 9.8% was higher than our expectations and up from the prior quarter and I am just curious what drove the yield increase was it largely the $40 million of additional stabilized assets added during or any sort of one-time items that might affect kind of that yield profile, I guess how should we think about the effective yield going forward is the first quarter a good figure to use?

[Jay Sugarman:]

Hey Michael, yeah I think it’s a strong number maybe a little stronger than we expected as well, it was impacted by some new assets with good stabilized deals but also little bit of progress on leasing and some other assets and a seasonality in a particular hotel assets in (indiscernible). So, it’s probably much higher than we project going forward, but certainly the trend look good.

[Michael Kim:]

Yeah. Absolutely, okay, that’s helpful. And in your comments about new investments it sounds like you got some letters of intent, could see some use in the second or third quarter. I guess what does the loan origination pipeline look like right now? I mean what sort of deals are you looking at specifically just looking for color on the size of these transactions and maybe your buy size if you are going to slowdown that portion of the loan or types of collateral general terms, duration or even yield profile?

[Jay Sugarman:]

Lot in there but let me I give you general sense of what we’re looking at. Again as I mentioned on last call I think we think size is important to kind of move away from the pack. Certainly what we see in the conduit world and the life company in commercial banking world is a very competitive environment. We are trying to use our strength working with borrowers who need some flexibility and you have a little bit more fluid situation where they are not sure exactly what they need, but they no need partner who can do senior debt, junior debt anything up and down the capital stock. We are seeing some opportunities in larger deals where we can be sort of a one stop shop for whatever capital needs pop up. That’s something we’re pursuing in the multi-family sector, hospitality mixed use and office world. We are seeing little bit on the net lease side pretty competitive but as I mentioned in my comments of things that have both a strong income stream but also the potential for future development is a place that we think we have some fairly unique skills. So, we are trying to tie some deals down in that sector, but as I said, it takes a little bit of time to get that pipeline set up. As Dave said, we have got about 700 plus of cash. So, we need to get going. And we have got some good progress on the number of fronts, but got to get some things locked and loaded and closed before where we can really tell you where the best opportunities are?

[Michael Kim:]

Got you, understood. And lastly just a question on the NPL resolution, it’s great to see that 30% decline, one, you think you can exceed the guidance provided just calling for a 40% reduction and you have more visibility on other resolution for the rest of the year? And also during the first quarter, what was the split between pay-downs versus transfers to performing status assuming that there were no assets that were they can be entitled to?

[Jay Sugarman:]

Okay. So, just in terms of the first quarter, we had about 40% of that reduction was from pay down.

[Michael Kim:]

Okay.

[Jay Sugarman:]

The other 60% was mostly comprised of asset, where we got a material pay down and reached resolution on the remainder. We did buyout a couple positions to get ourselves into ownership. We think that was a pretty smart trade. And we have had a couple of borrowers do successful asset sales and reduce their balances to a point where they can go back to performing. We had a mix of things that broke our way. That’s probably the same dynamic we’ll see going forward. It’s hard to predict when these things can’t get done, there are many of them have been in NPL for a long time, but we are making progress, and we do think there are other situations that could possibly get resolved, and if so we could very well beat that target.

[Michael Kim:]

Right.

[Jay Sugarman:]

But we are not going to go out on a limb just yet, Mike and...

[Michael Kim:]

Sure, yeah. I mean, the pay downs that occur during the first quarter, were those anticipated and did you have visibility that they were going to get pay down or is that kind of unexpected?

[Jay Sugarman:]

The specific timing was not easily pegged. We have been working on those for several years, so…

[Michael Kim:]

Right.

[Jay Sugarman:]

Yes, we do think things are getting to the end of the line in many cases. And so it’s just a matter which quarter they happen and which is why we comfortable saying last quarter we felt sizable reduction was in the works, but the fact that we got a number of these down in the first quarter was just good news.

[Michael Kim:]

Okay, excellent nice quarter. Thank you.

[Jay Sugarman:]

Thanks Mike.

[Operator:]

(Operator Instructions) Our next question is from the line of Joshua Barber with Stifel. Please go ahead.

[Joshua Barber:]

Hi, good morning. I am wondering if you could talk about your available cash position today, especially in reference to some of your comments about sizable deals. What sort of cash balance are you comfortable running with for the rest of the year and do you think there is possibility to leverage some of your investing cash to sort of multiply the amount of liquidity that you have?

[Jay Sugarman:]

I guess a couple of things Josh. One, as Dave said, we’ve got over $700 million. So, we got plenty of money to pursue pretty much everything we want to right now. We don’t feel constrained. We can lookout and see number of repayments coming in throughout the rest of the year that provide more capital. So, I think the game right now is just to get embedded in a couple high-quality, high-profile, high return deals and see where we go from there. We don’t feel right now limited in anyways. So, we are pursuing those, the deals we think are attractive. Further down the road thinking about the capital structure, as Dave said, we are looking to refinance the rest of this year’s maturities and we have a small maturity coming up in the first quarter of ‘14 and then it’s pretty much a free runway for a couple of years. So, we are going to take a hard look once we get through this capital markets execution cycle and decide where leverage should be for this company long-term. But we continue to believe kind of the 2.5 times – 2 to 2.5 times is where we are going to end up and we work to corporately make sure that kind of the range we stay in.

[Joshua Barber:]

Great. When you look at your net lease portfolio, I am just curious and more of a maintenance question, but it looks like the unlevered yields actually fell this quarter even though occupancy was mostly flat. Can you talk about what happened there, it looks like rents fell off while OpEx went up a bit also can you help us with what’s going on there?

[Jay Sugarman:]

Let’s make sure we’re using same terminology. We are showing this quarter and going forward the yields on the gross carrying value. I think historically we’ve also shown the yields on the net. But as you think about that business and certainly as we own more and more assets we’re going to gravitate towards showing yields on gross carrying value before depreciation and it’s a better metric for you, I expect you to follow. So one, let’s just make sure we are using that terminology.

[Joshua Barber:]

Okay, but it still did look like no, I did fall a bit this quarter, is there going on there?

[Jay Sugarman:]

Let me take a look here, we’ll have to come back to you on that there is nothing specific in the books that I complain to. There may have been one or two assets that rolled into a different lease status, but let us come back to you on that Josh.

[Joshua Barber:]

Okay, great and one last question Jay. When you mentioned the potential use of third party capital was that specific for general forward investment or was that also potentially for part of your land bank?

[Jay Sugarman:]

It can be in any form but really the specifically comment was directed towards the net lease book.

[Joshua Barber:]

Great, thanks very much.

[Operator:]

Your next question is from Jonathan Feldman with Nomura Securities. Please go ahead.

[Jonathan Feldman:]

Good morning. Question was what do you guys see as the opportunity to further optimize your cost of debt capital going forward or do you think you have reached the limit there?

[Jay Sugarman:]

I hope, we have reached the limit. We think as we demonstrate to the market both the right side and the left side of the balance sheet getting stronger and that there is room certainly to refashion some of the pricing on the right side of the balance sheet. I think the market and certainly rating agencies are giving us indications that as we move to a stronger position on the assets side in terms of earnings that there might be some room to move those ratings up and that would certainly save us some cost on the interest side of the new debt. I think the secured piece of the portfolio continues to pay down, we continue to look at those assets and with the optimal way to have them finance. We think the re-pricing got us to a closer place but we are constantly looking at the Jonathan and we have some flexibility now to fine tune that nothing dramatic. But we certainly think there is a little more room to go.

[Jonathan Feldman:]

Great and then just on final question, that is you commented briefly on the capital available on the balance sheet but I just wanted to follow up by asking how you felt about or if there are any sort of near and medium term plans to raise any equity capital or do you feel like you have the ability to recycle investments to provide you with the liquidity that you would like to make those new investments?

[Jay Sugarman:]

I think we feel really good right now where we are in terms of liquidity and future liquidity needs. So, I think right now we are good where we are. And the next thing in the capital markets will be refinancing of the upcoming maturities. Once we get all the capital invested in all that capital market activity done certainly we would think about growth capital with the opportunities that are there.

[Operator:]

(Operator Instructions) And I’ll go to (indiscernible) with Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Thank you very much. Congratulations on the quarter, just some housekeeping items, so you already mentioned Jay in your prepared remarks that you might access third party capital for that net lease portfolio. Is that third-party capital for investors that you would like to investor a long side risk or is that third party capital where you may potential upsize the amount that you might look to do in the unsecured debt market maybe above that 545, do you have room in your covenants to do that?

[Jay Sugarman:]

Yeah, now was former we have had a lot of interest in that sector and we think there is ways to not only expand or pool of capital available, but also bring in the types of investors who maybe interested another parts of our business. So, it’s a good relationship opportunity if it’s there, but there is nothing certain and so I don’t want to go too far here, but that’s one sector that we think there is capital that would like our expertise.

[Unidentified Analyst:]

Great. Okay, great. And then regarding the cash on hand of over $700 million is any of that restricted or is that all available for use in terms of new investments and general corporate purposes?

[David DiStaso:]

Yeah, (indiscernible) the majority of that cash is available and not restricted. We have very small balance of restricted cash for deposits. So, the majority of that 700 plus is available for all corporate uses.

[Unidentified Analyst:]

Great and then just one last question, the room in your covenants the headroom, do you have ability to upsize any potential capital markets transaction above the $545 million that matures in 2013 or are you really looking to just replace that debt for debt?

[David DiStaso:]

Yeah, right now based on our covenants, we are looking to replace the debt and raise the $545 million extend the maturities to that and improve the rate structure.

[Unidentified Analyst:]

Great, okay, perfect. Thank you.

[Operator:]

And Mr. Fooks, we have no further questions.

[Jason Fooks:]

Thanks, John and thanks to everyone for joining us this morning. If you should have any additional questions on today’s earnings release, please feel free to contact me directly. John, would you please give the conference call replay instructions once again. Thank you.

[Operator:]

Certainly and ladies and gentlemen this replay starts today at 12.30 PM Eastern Time and will last in to May 14th at midnight. You may access the replay at anytime by dialing 800-475-6701 and entering the access code 290986, that those conclude your conference for today. Thank you for your participation. You may now disconnect.