Filing identity and reporting period
Important entity mismatch: The supplied filing is iStar Inc.’s Form 10-K for the fiscal year ended December 31, 2016, not a Safehold Inc. filing. It identifies the common stock as NYSE ticker STAR. Verify that this is the intended filing before relying on the figures below.
iStar is a REIT investing in real estate finance, net lease properties, operating properties, and land and development. This summary covers fiscal 2016 and compares results primarily with fiscal 2015.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $477.0 million | $514.6 million |
| Net income (loss) | $100.2 million | ($6.2 million) |
| Net income (loss) allocable to common shareholders | $44.0 million | ($52.7 million) |
| Adjusted income allocable to common shareholders (non-GAAP) | $112.6 million | $29.7 million |
| Cash from operating activities | $20.0 million | ($59.9 million) |
| Cash from investing activities | $466.5 million | $184.0 million |
| Cash from financing activities | ($868.9 million) | $114.5 million |
| Cash and cash equivalents at year-end | $328.7 million | $711.1 million |
| Total assets | $4.83 billion | $5.60 billion |
| Debt obligations, net | $3.39 billion | $4.12 billion |
| Total equity | $1.06 billion | $1.10 billion |
Revenue fell 7% year over year. Operating lease income declined 7%, interest income 4%, and land development revenue 12%. Interest expense decreased slightly to $221.4 million, while the weighted-average cost of debt rose to 5.6% from 5.4%. The filing does not present a single consolidated operating-margin measure.
The 2016 net-income turnaround included $105.3 million of gains on real estate sales and $77.3 million of equity-method earnings. The company reported a $91.0 million loss before equity-method earnings and other items. Adjusted income is a company-defined non-GAAP measure and should not be treated as cash flow or as a substitute for GAAP net income.
Portfolio, credit, and operating trends
- Gross investment portfolio carrying value was $4.63 billion. Land and development represented 22.4%, office/industrial 22.9%, hotels 12.5%, and entertainment/leisure 10.6%.
- Real estate finance performing loans totaled $1.20 billion, with an 8.9% weighted-average yield and 64% weighted-average loan-to-value ratio. Net carrying value of non-performing loans increased to $191.7 million from $60.3 million, representing 13.0% of loan carrying value versus 3.7% a year earlier.
- The net lease portfolio was 98% leased, with a 14.7-year weighted-average remaining lease term. Commercial operating properties were 74% occupied overall; transitional properties were 54% leased and generated a 1.5% yield.
- Land development revenue less cost of sales was $26.3 million, down from $32.8 million. Earnings from land-development equity-method investments increased to $30.0 million from $16.7 million.
- The company sold commercial operating properties for $229.1 million net proceeds and recorded $49.3 million in gains; it sold 209 residential condominiums for $96.9 million net proceeds and recorded $26.1 million in gains.
Material changes and financing
- The company repaid $926.4 million of maturing unsecured notes during 2016 and issued $275.0 million of 6.50% unsecured notes due 2021. It also entered into a $500.0 million senior secured credit facility, principally refinancing other secured debt.
- At December 31, 2016, debt principal maturities included $924.7 million in 2017 and $611.2 million in 2018. Management identified a further $311.2 million of debt due before the end of February 2018.
- Year-end unrestricted cash was $328.7 million, with $420.0 million of additional borrowing capacity, for stated available liquidity of $748.7 million. The filing later states approximately $710.7 million of cash and available capacity as of February 23, 2017.
- Maximum unfunded investment commitments were approximately $452.0 million, subject to funding conditions. The company expected $150–$200 million of portfolio capital expenditures over the next 12 months, including about $80 million for vertical construction.
- Common stock repurchases totaled 10.2 million shares for $98.4 million in 2016. No common dividends were declared or paid in 2016 or 2015; preferred dividends totaled $51.3 million in each year.
Outlook, risks, and unusual items
Management described 2016 as a year of progress, citing new lending and net lease investment, sales and repositioning of operating properties, and advancement of land projects. It intended to continue investing and asset repositioning, while using debt or equity issuance, asset sales, loan repayments, and partnership or business-line interest sales to meet obligations. The filing provides no earnings or revenue guidance.
- Refinancing and liquidity: Management planned to address substantial 2017 maturities through capital-market access, asset disposals, loan collections, and other liquidity sources, but stated these sources were not assured. The company’s unsecured credit ratings were below investment grade, increasing borrowing costs and activating restrictive covenants.
- Credit exposure: Non-performing loans increased materially, including a $157.2 million gross loan transfer to non-performing status after bankruptcy proceedings involving its collateral. Management said reserves and collateral were adequate, but reserve estimates depend on valuation judgments.
- Other risks: Interest-rate spread compression, borrower or tenant defaults, real estate and development market declines, geographic and property-type concentrations, illiquid assets, covenant breaches, and REIT qualification requirements could adversely affect results and liquidity.
- Unusual items and contingencies: The company recorded a $12.5 million net recovery of loan losses, $14.5 million of asset impairments, $77.3 million of equity-method earnings, and $105.3 million of real estate sale gains. A favorable $114.0 million judgment against Lennar, plus 12% simple interest and certain costs, remained under appeal; receipt and timing were uncertain. A shareholder action was dismissed, with the dismissal affirmed by Maryland’s highest court in January 2017.
- Controls and audit: The independent auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of year-end.
Most important facts for investors to verify
- Confirm the issuer: this is iStar Inc.’s 2016 10-K, not Safehold Inc.’s filing.
- Review the 2017 and early-2018 maturity schedule, refinancing progress, covenant headroom, and the difference between year-end and February 2017 stated liquidity.
- Assess the non-performing loan increase, underlying collateral valuations, and adequacy of the $85.5 million total loan-loss reserve.
- Separate recurring operating performance and cash generation from gains on asset sales, equity-method earnings, and the company’s non-GAAP adjusted-income measure.
- Track capital needs and unfunded commitments, development project timing, and the uncertain Lennar appeal proceeds.