Business context and reporting period
Important entity mismatch: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2019—not a Safehold Inc. 10-Q. iStar is a diversified real estate finance, net lease, operating properties, and land-development company; it owned approximately 66.5% of Safehold (SAFE) and managed SAFE.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $98.5m | $171.6m | $205.3m | $535.8m |
| Net income | $373.7m | $60.5m | $366.7m | $95.5m |
| Net income allocable to common shareholders | $362.7m | $42.9m | $345.2m | $69.7m |
| Adjusted income allocable to common shareholders (non-GAAP) | $316.9m | $43.6m | $316.7m | $96.8m |
Operating cash flow was a use of $39.5m for the first six months, compared with a $21.1m use in 2018. Investing activities used $124.0m and financing activities used $416.8m. Cash, cash equivalents and restricted cash ended at $394.3m; unrestricted cash was $330.1m.
At June 30, total assets were $4.77bn, total equity $1.32bn, and net debt obligations $3.07bn (gross principal $3.11bn). iStar also reported $325m available under its undrawn revolving credit facility. It had no debt maturities remaining in 2019; scheduled principal maturities were $400m in 2020, $435.5m in 2021, and $1.11bn in 2022.
Material changes versus prior period
- Reported earnings surged mainly due to unusual transactions: a $219.7m gain on a net-lease asset portfolio sale and $180.4m selling profit from a sales-type lease transaction in 2019. The comparable 2018 period included a $67.9m gain from consolidating an equity-method venture.
- Revenue fell year over year, particularly land-development revenue: first-half revenue was $21.8m versus $357.4m, largely reflecting two bulk land sales in 2018. First-half net income nevertheless rose, primarily because of the 2019 sale and lease transaction gains.
- Operating lease income increased, helped by consolidation of the Net Lease Venture and new assets; interest income declined as the average performing loan balance fell. The loan portfolio’s reported performing-loan yield was 9.1%, versus 9.5% for the first half of 2018.
- Debt obligations, net declined from $3.61bn at year-end 2018, including repayment of $375m of 5.00% notes. Common shares outstanding declined to 62.2m from 68.1m, reflecting repurchases.
Outlook, management commentary, and risks
Management said capital remained plentiful in traditional commercial real estate lending and described a cautious approach: favor existing relationships, originate fewer traditional loans, and monetize legacy assets. It expected to continue allocating more capital and resources to ground leases and pursuing transactions with SAFE. No earnings or revenue guidance was provided.
For the next 12 months, iStar expected portfolio capital expenditures of approximately $50m–$100m, including about $30m for vertical construction. Maximum unfunded commitments were $418.5m, largely conditional on borrowers and tenants meeting milestones; management expected to fund most over two years. The company also cited $357.2m of scheduled real estate finance maturities over the next 12 months, excluding borrower extensions.
Key risks include interest-rate and credit exposure, commercial real estate market volatility, loan collateral valuations, and refinancing needs. The loan-loss reserve was $53.4m; non-performing loans had $25.1m net carrying value, and two loans were more than 90 days delinquent and in resolution proceedings. Management stated it believed reserves and collateral were adequate, while noting estimates require significant judgment. A 100-basis-point rate increase was estimated to raise annual net income by $3.2m; a 100-basis-point decrease was estimated to reduce it by $2.1m, assuming other factors unchanged. The filing reported routine litigation and no pending proceeding expected to have a material adverse effect; risk factors were unchanged from the prior annual report.
Most important facts for investors to verify
- Confirm the intended issuer: this filing reports iStar Inc., not Safehold Inc.; SAFE figures appear as an investment and managed affiliate.
- Separate recurring operating performance from the $219.7m asset-sale gain and $180.4m sales-type lease profit; review the company’s non-GAAP adjusted-income reconciliation.
- Assess liquidity against negative operating cash flow, $3.11bn gross debt, upcoming maturities, and the conditional $418.5m unfunded commitments.
- Review performance and recovery prospects for non-performing loans, including the two long-delinquent loans, and test the adequacy of the $53.4m reserve.
- Check SAFE ownership, management-fee arrangements, and the effects of iStar’s ground-lease concentration strategy on capital allocation and related-party exposure.