Business context and reporting period
Registrant discrepancy: The supplied filing is iStar Financial Inc.’s Form 10-Q for the quarter ended June 30, 2011, not a filing identified as Safehold Inc. Verify the issuer before relying on this summary. iStar was a commercial real estate finance and investment company, operating in lending, net leasing and real estate investment, and elected REIT status. The filing presents unaudited second-quarter and six-month results, compared with the same 2010 periods.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $129.5 million | $135.4 million | $241.1 million | $303.8 million |
| Net income (loss) | $(26.0) million | $229.9 million | $57.9 million | $213.7 million |
| Net income (loss) per common share | $(0.38) | $2.27 | $0.36 | $2.00 |
| Provision for loan losses | $10.4 million | $109.4 million | $21.2 million | $198.8 million |
- Second-quarter interest income was $80.2 million, down 7%; operating lease income was $41.7 million, down 3%. Lower average performing loan balances drove much of the interest income decline. The quarter included $26.3 million of interest recognized upon resolutions of non-performing loans.
- Q2 interest expense rose 18% to $96.8 million, primarily reflecting higher rates on the new secured facility, despite lower average debt. The weighted average effective debt cost was 5.65% versus 3.96% in Q2 2010. Six-month interest expense declined slightly to $166.4 million as debt balances fell, partly offset by higher borrowing costs.
- Operating cash flow was negative $32.0 million for the first six months, versus negative $9.6 million in 2010. Investing activities provided $851.6 million, and financing activities used $935.6 million. Cash and cash equivalents ended the period at $388.9 million; restricted cash was $65.3 million.
- At June 30, total assets were $8.29 billion, debt obligations net were $6.39 billion, total liabilities were $6.55 billion and total equity was $1.74 billion. The filing does not provide a conventional consolidated operating-margin measure.
- Net income in the first half included a $105.6 million net gain on early debt extinguishment. Q2 2010 included a $266.0 million gain from discontinued operations on net-lease asset sales and a $70.1 million debt-extinguishment gain; these items make headline earnings comparisons less indicative of recurring performance.
Changes versus the prior comparable period
- First-half revenue declined 21%, mainly because average performing loan balances fell to $2.93 billion from $4.30 billion. Total costs and expenses declined 36%, largely because loan-loss provisions and impairments were substantially lower than in 2010.
- Q2 net loss contrasted with prior-year net income, principally because the 2010 quarter included the $266.0 million asset-sale gain and a $70.1 million debt-extinguishment gain. Current-quarter lower credit provisions and impairments partly offset these absent gains and higher interest expense.
- Net loans and other lending investments fell to $3.63 billion from $4.59 billion at year-end 2010. Total debt, net, fell to $6.39 billion from $7.35 billion; cash fell to $388.9 million from $504.9 million.
- Non-performing loans declined to $1.07 billion from $1.35 billion at year-end, while the watch-list balance declined to $74.3 million from $190.6 million. The allowance for loan losses was $701.2 million, or 16.3% of gross loans, compared with $814.6 million, or 15.1%, at year-end. Charge-offs exceeded provisions in the first half.
Outlook, risks and unusual items
- Management reported early signs of recovery in commercial real estate and capital markets, but said elevated non-performing assets remained and improvement depended on a sustained recovery. It expected lower asset sales unless full value could be realized or liquidity required, limited new investment relative to repayments, and continued debt reduction.
- Management believed available cash, expected asset repayments and sales, and potential financing alternatives would cover obligations for the remainder of 2011. It warned that proceeds, timing and refinancing access were uncertain and that inability to repay or refinance debt when due could materially harm the company.
- Debt principal maturities and required amortization through June 30, 2012 totaled approximately $1.07 billion, including $210.7 million due by December 31, 2011. The March 2011 $2.95 billion secured credit facility is collateralized by a pool of assets, carries LIBOR floors and requires scheduled amortization. The facility requires 1.25x collateral coverage; covenant breaches and cross-default provisions could trigger acceleration.
- At June 30, non-performing loans were 29.6% of net loan carrying value; loans more than 90 days past due totaled approximately $1.37 billion. The filing says collateral valuation and loan-loss estimates require significant judgment. Management believed reserves and collateral were adequate, but outcomes remain sensitive to commercial property values and recoveries.
- Other commitments included up to $299.1 million of unfunded commitments, subject to milestones, discretionary approvals or drawdowns. The filing describes pending securities class-action and shareholder derivative litigation; the company said it believed the class action lacked merit and intended to defend it. No class had been certified.
- No formal earnings guidance is provided. iStar paid $21.2 million in preferred dividends in the first half and declared no common dividends. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing’s issuer and its relationship, if any, to Safehold Inc.; the document names iStar Financial Inc.
- Review debt maturity and amortization requirements, collateral coverage, covenant headroom, and refinancing sources against the $388.9 million unrestricted cash balance.
- Assess the quality and recoverability of the $1.07 billion non-performing loan portfolio, the $701.2 million allowance, charge-offs and collateral valuations.
- Separate recurring operating performance from the 2010 asset-sale gain, debt-extinguishment gains and the 2011 loan-resolution interest benefit.
- Check subsequent developments in asset sales, liquidity, loan resolutions, litigation and the expected economic recovery.