Safehold Inc. quarterly report, Q2 FY2014

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iStar Financial, Inc. — Q2 2014 Form 10-Q

Entity note: The supplied filing is for iStar Financial, Inc., not Safehold Inc. It covers the quarter and six months ended June 30, 2014; financial statements are unaudited.

Business context and reporting period

iStar was a commercial real estate finance and investment company taxed as a REIT, with real estate finance, net lease, operating properties and land segments. Management said improving market conditions and access to capital supported debt refinancing, legacy-asset sales and increased investment activity.

Financial performance and liquidity

  • Q2 revenue: $129.8 million, up 30% from $99.9 million. Operating lease income was $61.0 million; interest income $35.1 million; other income $29.3 million; and land sales revenue $4.5 million.
  • Q2 earnings: Net loss was $3.6 million versus $14.4 million a year earlier. Loss attributable to common shareholders was $16.2 million, or $0.19 per share, versus $26.0 million, or $0.31 per share. The improvement in reported net loss included lower interest expense and higher equity-method earnings, partly offset by a larger debt-extinguishment loss and lower residential-property sale income.
  • First-half revenue and earnings: Revenue was $238.6 million, up 23% from $194.0 million. Net loss was $17.8 million versus $46.7 million; common-shareholder loss was $42.8 million, or $0.50 per share, versus $67.3 million, or $0.79 per share.
  • Adjusted measures: Q2 adjusted income allocable to common shareholders was $28.9 million versus $4.4 million; adjusted EBITDA was $101.2 million versus $86.5 million. First-half adjusted income was $23.3 million versus $4.1 million, while adjusted EBITDA was $167.4 million versus $172.2 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
  • Cash flow: First-half operating cash flow was negative $83.5 million, investing cash flow positive $58.7 million and financing cash flow negative $132.3 million. Cash and cash equivalents ended June at $356.5 million, down from $513.6 million at year-end 2013.
  • Debt and liquidity: Debt obligations, net, were $4.08 billion, down from $4.16 billion at year-end. Total liabilities were $4.22 billion and total assets $5.47 billion. The company issued $1.32 billion of unsecured notes in June and used the proceeds, together with cash, to repay and terminate a $1.32 billion secured facility. Management said the refinancing reduced secured debt to 16% of total debt from 49% and released about $2.0 billion of collateral. Unencumbered assets had a reported carrying value of $4.8 billion.
  • Credit portfolio: Net loans and other lending investments were $1.46 billion. Non-performing loans fell to $94.0 million, or 7.4% of loan carrying value, from $203.6 million, or 16.6%, at year-end. Loan-loss reserves fell to $137.9 million from $377.2 million, largely due to $233.1 million of charge-offs associated with loan resolutions.

Material changes versus the prior comparable period

  • Q2 revenue rose primarily on higher lease and interest income, $19.0 million of gains on sales of non-performing loans, and land sales. First-half revenue also benefited from those loan-sale gains and a lease-modification fee.
  • Interest expense declined 18% in Q2 and 19% in the first half, reflecting lower average debt balances and a lower effective borrowing cost. Management reported a 5.5% effective cost of debt for both 2014 periods, compared with 6.0% for Q2 2013 and 6.1% for the first half of 2013.
  • Q2 equity-method earnings increased to $24.1 million from $8.3 million, including $23.4 million from asset sales by an investee. First-half equity-method earnings declined to $27.3 million from $30.0 million, with the prior-year comparison affected by the LNR investment and its sale.
  • Residential-property sale income declined: $17.2 million in Q2 versus $34.3 million, and $33.7 million in the first half versus $58.0 million. The company recorded $6.3 million of first-half real estate impairments.
  • Reported results included $23.6 million of Q2 and $24.8 million of first-half losses on early debt extinguishment, primarily related to writing off discounts and financing fees when the secured facility was repaid.

Outlook, risks and unusual items

  • Management expected to use quarter-end cash primarily for new investments and reported $167.1 million of Q2 investment fundings. It expected $175–$250 million of portfolio capital expenditures over the next 12 months, dependent on development pace and partnering activity.
  • Management identified cash on hand, loan repayments, asset-sale proceeds and debt refinancing or equity transactions as expected liquidity sources. It noted uncertainty about the timing and availability of those sources and said new borrowing capacity could be limited by fixed-charge-coverage covenants.
  • Maximum unfunded commitments were $355.9 million, subject to performance milestones, discretionary approvals and investment drawdowns. The company also reported $130.9 million of debt maturities due before June 30, 2015; the contractual-obligations table separately lists $139.4 million of principal due in less than one year.
  • Unsecured debt covenants include a minimum 1.2x unencumbered-assets-to-unsecured-debt ratio. The remaining secured facilities include a 1.25x collateral-coverage requirement and cross-default provisions. The company paid no common dividends in the first half; preferred dividends were paid.
  • Credit-loss estimates depend on collateral valuations and significant judgment; management also cited economic uncertainty for European loan assets. A shareholder action filed in Maryland in March 2014 seeks unspecified relief over certain executive restricted-stock awards. The company said it believes the claims lack merit and intends to defend them.
  • No specific earnings or revenue guidance was provided. The filing adopted new discontinued-operations guidance early; no 2014 disposal met the revised threshold for discontinued-operations reporting.

Important facts for investors to verify

  • Confirm the issuer: the supplied filing names iStar Financial, not Safehold Inc.
  • Review loan-level credit quality, collateral values, charge-offs and the adequacy of the sharply reduced loan-loss reserve.
  • Assess whether refinancing savings and released collateral offset new unsecured debt costs and the $24.8 million first-half extinguishment loss.
  • Reconcile the $130.9 million maturity disclosure with the contractual schedule’s $139.4 million due within one year, and evaluate the timing of the $175–$250 million capital-spending plan.
  • Distinguish GAAP losses and negative operating cash flow from management’s non-GAAP adjusted results; assess the durability of investee gains and residential-property sale income.