Filing identity and period
Important discrepancy: The supplied filing is iStar Financial Inc.’s Form 10-Q for the quarter ended September 30, 2011, not a Safehold Inc. filing. The summary below reflects the filing text provided. Amounts are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context and financial performance
iStar was a commercial real estate finance and investment company taxed as a REIT, with lending, net leasing and real estate investment segments. The filing covers the three and nine months ended September 30, 2011, compared with the same 2010 periods.
- Third quarter: Revenue was $97.4 million, down 27% year over year, principally as interest income fell 46% to $45.9 million amid a smaller performing-loan portfolio. Operating lease income was $41.4 million. Net loss was $54.7 million versus a $74.6 million loss; loss attributable to common shareholders was $62.2 million, or $0.71 per share, versus $83.5 million, or $0.89 per share.
- Nine months: Revenue was $336.3 million, down 23%. Net income was $3.2 million versus $139.1 million in 2010, while loss allocable to common shareholders was $27.1 million, or $0.30 per share, versus income of $103.3 million, or $1.10 per share. The 2010 result benefited substantially from a $270.4 million gain on discontinued operations; 2011 included a $22.2 million release of a previously deferred gain.
- Expenses and credit costs: Third-quarter interest expense rose 19% to $91.8 million; the weighted-average effective debt cost increased to 5.74% from 3.57%, despite lower average debt. Nine-month loan-loss provision declined to $30.5 million from $277.2 million. Total loan-loss reserves were $710.1 million, or 17.9% of gross loans, versus $814.6 million, or 15.1%, at year-end 2010.
- Cash flow: Nine-month operating cash flow was negative $12.4 million, compared with positive $8.9 million in 2010. Investing cash flow was positive $1.154 billion, largely reflecting loan repayments and asset sales; financing cash flow was negative $1.429 billion. Cash and cash equivalents declined to $217.0 million from $504.9 million at December 31, 2010; restricted cash was a further $39.3 million.
Balance sheet, debt and liquidity
- Total assets were $7.754 billion, down from $9.175 billion at year-end 2010. Net loans and other lending investments fell to $3.284 billion from $4.587 billion.
- Debt obligations, net, were $5.995 billion, down from $7.345 billion. Principal maturities were $6.038 billion; scheduled maturities included $1.744 billion in 2012 and $1.971 billion in 2013. The company reported $1.76 billion of debt maturities and minimum amortization payments due on or before December 31, 2012.
- In March 2011, iStar arranged a $2.95 billion secured credit facility, with tranches maturing in 2013 and 2014 and stated spreads of LIBOR plus 3.75% and 5.75%. The facility is secured by a pool of assets and requires 1.25x collateral coverage. The company had repaid $428.7 million of the A-1 tranche by quarter-end, exceeding its December 2011 minimum amortization requirement.
- Management expected near-term capital sources primarily from loan repayments and strategic asset sales, potentially supplemented by debt refinancing or equity issuance. It said available cash and expected proceeds should meet obligations for the remainder of 2011, while warning that asset-sale and refinancing timing and amounts were uncertain and inability to repay or refinance debt would materially harm the company.
Material changes, outlook and risks
- Management said it would limit new investments relative to expected repayments and use excess proceeds primarily to reduce debt. It cited continuing elevated non-performing assets, limited liquidity access and dependence on a sustained economic recovery. No specific earnings or revenue guidance was provided.
- Non-performing loans were $1.024 billion, 31.3% of total loan carrying value, compared with $1.351 billion and 29.6% at year-end 2010. Loans more than 90 days past due totaled $1.386 billion gross; all such loans were non-performing and on non-accrual. Watch-list loans declined to $41.8 million from $190.6 million.
- During the first nine months, the company took title to properties in satisfaction of troubled loans, recorded related charge-offs, sold OREO with $142.8 million carrying value, and incurred $12.6 million of net OREO impairment charges. Combined REHI and OREO balances were $1.62 billion at quarter-end. The filing notes that collateral valuation and loan-loss estimates require significant judgment.
- Unfunded commitments totaled up to $253.5 million, subject to performance conditions, discretionary approvals and capital drawdowns. The company also disclosed $21.9 million of unfunded commitments to a consolidated investment entity and $22.4 million to Oak Hill-related entities.
- Subsequent to quarter-end, iStar sold a substantial portion of its Oak Hill interests in an all-cash transaction and expected an approximately $30 million pretax gain in the fourth quarter. A director who was Oak Hill’s president and senior partner acquired part of the interests sold.
- Other notable items: iStar repurchased 12.3 million shares for approximately $78.8 million during the nine months, at an average $6.40 per share; it paid $31.7 million of preferred dividends and paid no common dividends. The filing describes securities and shareholder derivative litigation, including a securities class action that remained pending; iStar said it believed the claims lacked merit and intended to defend them.
Most important facts for investors to verify
- Confirm the issuer: this source is an iStar Financial Inc. 2011 10-Q, not a Safehold Inc. filing.
- Assess refinancing and repayment capacity against $1.76 billion of near-term maturities and required amortization, $217.0 million of unrestricted cash, and the company’s dependence on asset repayments and sales.
- Review non-performing and delinquent loan exposures, collateral valuations, reserve adequacy and the effects of foreclosures, restructurings and charge-offs.
- Separate recurring operating performance from debt-extinguishment gains, discontinued-operation gains and other unusual items; note that interest expense rose despite lower average debt.
- Verify completion and proceeds of the post-quarter Oak Hill sale, the expected gain, and the related-party aspects disclosed in the filing.