Filing summary
Issuer and period: The supplied filing is iStar Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed February 26, 2016. It is not a Safehold Inc. filing; verify the issuer and ticker before relying on this summary. The filing reports full-year results, with selected fourth-quarter figures noted below.
Business context
iStar was a diversified real-estate finance, investment and development REIT, with four segments: real estate finance, net lease, operating properties, and land and development. At year-end, gross investment portfolio carrying value was approximately $5.09 billion. The business generated income from rents and loan interest, as well as property and land sales and equity-method investments.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $514.6 million | $462.0 million |
| Net income (loss) | $(6.2) million | $15.8 million |
| Net income (loss) allocable to common shareholders | $(52.7) million | $(33.7) million |
| Adjusted income allocable to common shareholders (non-GAAP) | $84.0 million | $109.4 million |
| Cash flow from operating activities | $(59.9) million | $(10.3) million |
| Cash flow from investing activities | $184.0 million | $159.8 million |
| Cash flow from financing activities | $114.5 million | $(191.0) million |
| Cash and cash equivalents at year-end | $711.1 million | $472.1 million |
| Debt obligations, net | $4,143.7 million | $4,022.7 million |
| Total equity | $1,101.3 million | $1,248.3 million |
Revenue rose 11%, but reported net income declined. Common-shareholder losses widened, and non-GAAP adjusted income fell about 23%. The filing cautions that adjusted income is not a substitute for GAAP earnings or operating cash flow. Interest expense was $224.6 million, nearly unchanged, while real-estate expense was $146.8 million. No single overall operating margin is stated; reported costs and gains across property sales and equity-method investments make a simple revenue margin an incomplete measure.
Year-end loans and other lending investments, net, were $1.60 billion, up from $1.38 billion. Performing loans had an 8% weighted-average yield and a 2.3-year weighted-average remaining term. Non-performing loans were $60.3 million, or 3.9% of loan carrying value; total loan-loss reserves were $108.2 million, 6.6% of loans before reserves. Net lease assets were 96% leased, with a weighted-average remaining lease term of about 14.9 years.
Material changes and notable items
- Land-development revenue increased to $100.2 million from $15.2 million; portfolio gross margin increased to $49.5 million from $17.3 million. A December land sale generated $62.8 million of revenue and $24.2 million gross margin.
- Interest income rose 10% with a larger loan portfolio, although the weighted-average yield on performing loans decreased to 8.8% from 9.1% (excluding a specified one-time 2014 loan item).
- Equity-method earnings fell to $32.2 million from $94.9 million, largely because 2014 included substantial investee asset-sale and settlement gains.
- The loan-loss provision was $36.6 million, versus a $1.7 million recovery in 2014; specific reserves increased primarily because of a new non-performing loan.
- Income from real-estate sales was $93.8 million. The company sold net-lease assets and condominiums and recognized gains on other property transactions.
- Fourth-quarter 2015 revenue was $172.0 million and net income was $20.0 million; diluted earnings per common share were $0.09. Quarterly results were uneven, including losses in the second and third quarters.
- The company repurchased 5.7 million common shares for about $70.4 million during 2015 and retired all outstanding high-performance units. It paid no common dividends in 2015 or 2014; preferred dividends totaled $51.3 million in each year.
Liquidity, debt and outlook
Management reported $711.1 million of unrestricted cash at year-end and cited cash, portfolio income, loan repayments, asset sales, and debt or equity financing as expected liquidity sources. However, $926.4 million of debt principal was due in 2016, and management said access to capital and timely refinancing were uncertain. The company had approximately $778.9 million of maximum unfunded commitments, with most expected to be funded over the following two years if applicable conditions were met.
Management expected $225 million to $300 million of portfolio capital expenditures over the next 12 months, including approximately $130 million for vertical construction. This is an expenditure expectation, not earnings guidance; the filing provides no specific revenue or profit forecast. The company entered a secured revolving credit facility with a $250 million maximum capacity in March 2015. Unsecured debt covenants included a minimum 1.2x unencumbered-assets-to-unsecured-debt ratio; management also disclosed restrictions on additional borrowing and cross-default provisions. The company’s unsecured ratings were below investment grade.
Risks, contingencies and unusual matters
- Key risks included refinancing and liquidity needs, below-investment-grade ratings, debt covenants, real-estate and credit-market deterioration, loan defaults and reserve-estimation uncertainty, interest-rate spread changes, tenant credit and lease expirations, and development delays or cost overruns.
- Portfolio concentrations included land (22.7%) and office/industrial property (22.5%); New York represented 19.9% and California 13.6% of portfolio exposure. Transitional commercial properties were 65% leased and generated a 2.8% unleveraged yield, compared with 89% leased and 8.8% yield for stabilized properties.
- A court judgment awarded the company $114 million plus 12% annual simple interest and other amounts in a land-sale dispute with Lennar. The judgment was stayed pending appeal, and receipt and timing were uncertain.
- The company recorded $10.5 million of real-estate impairments and $36.6 million of loan-loss provision in 2015. A separate $4.3 million impairment at Spring Mountain Ranch was attributed to newly imposed California water regulations.
- The company disclosed a presentation correction for repurchased shares: previously reported treasury stock was reclassified to common stock and additional paid-in capital. It said total equity and operating results were unchanged and prior statements were not materially misstated.
- Management and the independent auditor concluded internal control over financial reporting was effective. The auditor issued an unqualified opinion on the financial statements.
Most important facts to verify
- Confirm the filing issuer: this document identifies iStar Inc., not Safehold Inc.
- Review the 2016 debt maturity schedule, refinancing progress, covenant headroom, and liquidity available after committed investment funding.
- Assess the adequacy of loan-loss reserves, non-performing exposures, and changes in collateral values and credit quality.
- Separate recurring earnings from gains on asset sales, investee transactions, and the non-GAAP adjusted-income measure.
- Track whether projected capital spending and development milestones produce planned sales and cash receipts, particularly in land and operating-property projects.
- Check the status and potential proceeds of the Lennar appeal, and the effect of share repurchases and preferred dividends on capital and liquidity.