Safehold Inc. quarterly report, Q3 FY2013

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Business context and reporting period

Filing identity discrepancy: The supplied filing is iStar Financial Inc.’s Form 10-Q for the quarter ended September 30, 2013—not a Safehold Inc. filing. The summary below reflects iStar’s filing.

iStar was a commercial real estate finance and investment company operating through real estate finance, net lease, operating properties and land segments, and was taxed as a REIT. The filing presents third-quarter and nine-month results through September 30, 2013, compared with the corresponding 2012 periods.

Financial performance and position

  • Third quarter: Revenue was $95.8 million, up 2% year over year. Net loss was $18.6 million, compared with a $64.3 million loss; loss allocable to common shareholders was $30.6 million, or $0.36 per share, versus $71.8 million, or $0.86 per share. Adjusted loss allocable to common shareholders, a non-GAAP measure, was $7.3 million versus $26.0 million.
  • First nine months: Revenue was $290.0 million, down 4%. Net loss was $65.2 million versus $161.5 million; loss allocable to common shareholders was $97.8 million, or $1.15 per share, versus $185.6 million, or $2.22 per share. Adjusted loss allocable to common shareholders was $3.3 million versus $30.2 million.
  • Revenue and costs: Nine-month operating lease income rose 10% to $175.6 million, while interest income fell 25% to $78.6 million, principally as loan repayments reduced average performing loan balances. Interest expense declined 25% to $204.5 million. Nine-month costs and expenses totaled $456.5 million, including $5.4 million of net loan-loss provision and $6.3 million of asset impairment.
  • Cash flow: For the first nine months, operating activities used $150.3 million (versus $84.6 million used in 2012); investing activities provided $942.3 million; financing activities used $312.9 million. Cash increased $479.1 million to $735.5 million.
  • Debt and liquidity: Debt obligations, net, were $4.25 billion at September 30, down from $4.69 billion at year-end 2012. Total assets were $5.77 billion and total equity was $1.39 billion. Unrestricted cash was $735.5 million; unencumbered assets had a carrying value of approximately $2.98 billion. No debt had a scheduled 2013 maturity.
  • Portfolio and credit: Net loans and other lending investments were $1.36 billion, down from $1.83 billion at year-end. Non-performing loans declined to $235.3 million from $503.1 million; total loan-loss reserves were $380.0 million. Commercial operating properties, excluding hotels and multifamily, were 62.3% leased; net lease assets were 94.6% leased.

Material changes versus prior comparable periods

  • Lower debt balances and refinancing at lower rates reduced third-quarter interest expense 30% and nine-month interest expense 25% year over year.
  • Loan repayments reduced interest income and portfolio balances, while operating lease income increased, supported by additional operating properties and leasing activity.
  • Loan-loss expense improved markedly: the third quarter included a $9.8 million net recovery, compared with a $16.8 million provision in 2012. The nine-month provision fell to $5.4 million from $60.9 million.
  • Equity-method earnings declined to $4.3 million in the quarter and $34.3 million for nine months, in part because iStar sold its 24% interest in LNR in April 2013. The sale generated $220.3 million in net proceeds; nine-month results included a $41.0 million impairment related to the investment.
  • Residential property sales income rose to $72.1 million for nine months from $35.6 million. Dispositions also generated gains, including $22.5 million from discontinued operations for nine months.

Outlook, management commentary, risks and unusual items

  • Management said it was focused on strengthening the balance sheet, resolving non-performing loans, improving commercial property and land assets, and pursuing new investments. It cited an active investment pipeline but provided no formal earnings or revenue guidance.
  • Management expected approximately $245 million of portfolio capital expenditures over the next 12 months, to be funded primarily from cash, loan repayments and unencumbered asset sales. The company also reported $132.0 million of maximum unfunded commitments, subject to specified performance hurdles, approvals or drawdowns.
  • Management said land carrying costs and transitional commercial properties continued to weigh on earnings. It also cautioned that non-performing loans and reserves may fluctuate, and that loan valuation involves significant judgment, including added uncertainty for European assets.
  • Debt covenants include a minimum 1.2x ratio of unencumbered assets to unsecured indebtedness and 1.25x collateral coverage for secured facilities. Covenant breaches, cross-default provisions and restrictions on additional borrowing could affect liquidity or accelerate debt. Management expected capacity for new borrowing under the fixed-charge coverage test to remain limited for the foreseeable future.
  • Debt refinancing and early repayments produced $28.3 million of net losses on early extinguishment for the first nine months. New unsecured notes issued in May 2013 helped repay notes due in 2013 and 2013 maturities were fully addressed; principal maturities include $215.4 million in 2014 and $2.29 billion in 2017.
  • The company reported ordinary-course litigation, including foreclosure matters, and said it was not aware of pending proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
  • Common dividends were not declared or paid during the first nine months. Preferred dividends totaled $36.2 million. The board increased the common-stock repurchase authorization to $50 million in September; no shares were repurchased during the period.

Most important facts for investors to verify

  1. Confirm the issuer: the provided filing is for iStar Financial Inc., not Safehold Inc.
  2. Review the quality and sustainability of the reported improvement in losses, including non-GAAP adjusted results, loan-loss recoveries, property-sale income and gains from discontinued operations.
  3. Assess remaining credit exposure: non-performing loans were $235.3 million, with $380.0 million of total reserves and substantial charge-offs during the period.
  4. Evaluate liquidity against expected capital expenditures, unfunded commitments and upcoming debt maturities, especially the 2017 maturity concentration and covenant constraints.
  5. Track occupancy, land and property carrying costs, loan resolutions, and the effect of the LNR sale on recurring equity-method earnings.