Safehold Inc. 2018 Q3 10-Q Summary
Entity and period: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018, not a Safehold Inc. 10-Q. iStar held approximately 40.5% of Safehold (SAFE) and accounted for it as an equity-method investment. The financial results below are iStar consolidated results.
Business context and reporting period
iStar finances, invests in and develops commercial real estate through four segments: real estate finance, net lease, operating properties, and land and development. The filing compares the three and nine months ended September 30, 2018 with the corresponding 2017 periods; balance-sheet comparisons are with December 31, 2017.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $122.1 million | $119.9 million | $658.0 million | $576.1 million |
| Net income (loss) | $(8.8) million | $(3.7) million | $86.7 million | $176.9 million |
| Net income (loss) allocable to common shareholders | $(19.0) million | $(34.5) million | $50.7 million | $115.8 million |
| Common EPS, basic | $(0.28) | $(0.48) | $0.75 | $1.61 |
| Interest expense | $47.2 million | $48.7 million | $135.6 million | $148.7 million |
- Q3 revenue growth reflected higher operating lease income and other income, partly offset by lower interest income and land development revenue. Q3 results included $8.7 million of income from a lease termination.
- Nine-month earnings included a $67.9 million gain upon consolidation of the Net Lease Venture and $79.4 million of gains on real estate sales. Land development revenue was $369.7 million, with $318.9 million of related cost of sales and $50.8 million gross profit.
- 2017 comparisons included a $123.4 million gain from discontinued operations related to the 2017 Ground Lease business transaction and significant litigation-related income. These items make year-over-year net income comparisons less representative of recurring performance.
- Management’s non-GAAP adjusted income allocable to common shareholders was $3.7 million in Q3 2018 versus a loss of $3.6 million in Q3 2017; for nine months it was $179.7 million versus $183.1 million. The 2018 year-to-date measure includes a $75.9 million accounting-adoption adjustment and is not a substitute for GAAP income or operating cash flow.
- Operating cash flow was $(36.6) million for the first nine months, versus $99.9 million in 2017. Investing cash flow was $579.2 million and financing cash flow was $(428.0) million. Cash, cash equivalents and restricted cash ended the period at $792.4 million; balance-sheet cash and cash equivalents were $757.4 million.
- At September 30, total assets were $5.08 billion, total liabilities $3.88 billion, and total equity $1.19 billion. Debt principal was $3.67 billion ($3.61 billion net of discounts and financing costs), versus $3.54 billion principal at year-end 2017.
- Management reported $757.4 million of unrestricted cash and $325 million of undrawn revolver capacity. iStar initiated a quarterly common dividend of $0.09 per share; $6.2 million was declared during the nine months.
Material changes versus the prior comparable period
- iStar consolidated the Net Lease Venture on June 30, 2018 after obtaining control, adding substantial real estate and debt to the balance sheet and recognizing a $67.9 million non-cash consolidation gain. The venture had previously been accounted for under the equity method.
- Net lease real estate increased substantially, while land and development assets and loans and other lending investments declined from year-end 2017. The balance-sheet shifts reflect consolidation, asset sales, loan repayments and other portfolio activity.
- Nine-month land development revenue more than doubled, primarily due to bulk land parcel sales. Operating property and net lease sales generated $267.1 million of proceeds in the first nine months.
- Loan-loss provision was $18.2 million in the first nine months, compared with an $8.1 million recovery in 2017. The reserve was $54.7 million at quarter-end, down from $78.5 million at year-end; management attributed part of the change to a resolved non-performing loan and a lower general reserve.
- The 2016 Senior Term Loan was increased to $650 million, repriced to LIBOR plus 2.75%, and extended to June 2023. iStar repaid the $325 million balance on its revolving credit facility during the period; the full $325 million borrowing capacity was available at quarter-end.
Outlook, management commentary, risks and contingencies
- Management described commercial real estate capital as plentiful but noted rising interest rates and greater equity-market volatility. It said iStar was taking a cautious approach, emphasizing existing customer relationships and sales of legacy assets. Management expected further land and operating-property sales in Q4 2018 and 2019.
- Management expected $125 million to $175 million of portfolio capital expenditures over the next 12 months, including approximately $70 million for vertical construction, and expected to fund most of $527.3 million in maximum unfunded commitments over two years if applicable milestones and conditions are met. It also disclosed $490.5 million of real estate finance maturities over the next 12 months, excluding borrower extension options.
- After quarter-end, iStar refinanced a net lease asset for $115.5 million of net proceeds and called $122 million of senior notes for redemption on November 2, 2018. Management said the July senior-note maturity would decline from $770 million at the start of 2018 to $375 million following that redemption.
- Principal risks include interest-rate exposure, potential spread compression, borrower defaults and credit losses, asset-sale and development execution, and debt covenant compliance. The company estimated that a 100-basis-point rate increase would increase annual net income by $8.4 million, while a 100-basis-point decrease would reduce it by $7.4 million, assuming no change in assets or liabilities.
- Maximum exposure to unfunded investment commitments was $527.3 million. iStar also provided limited recourse and environmental guarantees associated with SAFE’s original secured financing; SAFE generally agreed to indemnify iStar for related payments or losses.
- The company reported routine litigation, including foreclosure-related matters, and said none was expected to have a material adverse effect on its consolidated financial statements. It reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer: this is an iStar Inc. filing, not a Safehold Inc. filing, and the reported statements are consolidated iStar results.
- Review the source and sustainability of earnings, separating recurring operations from the Net Lease Venture consolidation gain, property-sale gains, lease-termination income, land-sale activity and prior-year litigation items.
- Assess liquidity and refinancing needs against scheduled maturities, post-quarter-end note redemption, the net lease refinancing, capital spending plans and unfunded commitments.
- Examine loan portfolio quality, including risk-rating deterioration, non-performing loan balances, reserve assumptions and the recoverability and terms of the preferred equity received in the resolved loan.
- Review debt covenants, pledged collateral, floating-rate exposure and the assumptions underlying management’s interest-rate sensitivity estimates.
- Assess execution and valuation risks for land and development projects, operating properties, asset dispositions and the new Net Lease Venture II.