Business context and reporting period
Registrant clarification: The supplied filing is iStar Inc.’s Form 10-K, not Safehold Inc.’s. Safehold (SAFE) is an iStar-managed, publicly traded REIT in which iStar held approximately 65.2% at December 31, 2019. The filing covers the fiscal year ended December 31, 2019; quarterly data includes the three months ended December 31, 2019.
iStar finances, invests in and develops real estate. Its reportable segments are real estate finance, net lease, operating properties, and land and development. Management said its 2019 priorities were improving its credit profile, simplifying the business by monetizing legacy assets, and scaling its ground-lease platform through SAFE.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $479.5 million | $798.1 million |
| Net income (loss) | $334.3 million | ($18.3 million) |
| Net income (loss) allocable to common shareholders | $291.5 million | ($64.8 million) |
| Adjusted income allocable to common shareholders (non-GAAP) | $291.3 million | $143.1 million |
| Operating cash flow | ($45.6 million) | ($24.1 million) |
| Investing cash flow | ($398.1 million) | $778.9 million |
| Financing cash flow | ($178.6 million) | ($457.9 million) |
- Revenue decreased 40%, chiefly as land-development revenue fell to $119.6 million from $409.7 million; 2018 included two bulk land sales generating $253.3 million of revenue.
- 2019 earnings included $236.6 million of gains on real-estate sales, including a $219.7 million gain on a net-lease portfolio sale, and $180.4 million of selling profit from a sales-type lease transaction. The latter arose from modifications to bowling-center leases extended to 2047. These items materially affect the year-over-year earnings comparison.
- Interest expense was $183.9 million, nearly unchanged from 2018; the reported weighted-average cost of debt declined to 5.4% from 5.5%. Impairment expense declined to $13.4 million from $147.1 million. Debt-extinguishment losses increased to $27.7 million from $10.4 million.
- At year-end, total assets were $5.085 billion, debt obligations net were $3.387 billion, and total equity was $1.238 billion. Unrestricted cash was $307.2 million and undrawn revolving-credit capacity was $350.0 million. Cash, cash equivalents and restricted cash totaled $352.2 million on the cash-flow statement.
- Common dividends declared were $0.39 per share, versus $0.18 in 2018. iStar repurchased 7.3 million shares for $74.6 million, an average $10.16 per share.
- Real-estate-finance loans and other lending investments, net, were $827.9 million. One loan was non-performing, with a $16.1 million carrying value; total loan-loss reserves were $28.6 million, or 4.1% of gross loan carrying value.
- SAFE’s ground-lease portfolio grew from $947 million at year-end 2018 to $2.7 billion at year-end 2019. iStar reported a $1.3 billion market value for its SAFE shares and a $729.4 million equity-method carrying value.
- For fourth-quarter 2019, revenue was $128.9 million and net loss was $36.0 million; loss allocable to common shareholders was $46.3 million, or $0.71 per share.
Material changes versus the prior comparable period
- Net income swung to $334.3 million from a $18.3 million loss, but the 2019 result included significant sale and lease-transaction gains; 2018 included a $67.9 million gain from consolidating the Net Lease Venture.
- iStar invested approximately $583.1 million in SAFE common stock during 2019 and made additional net-lease investments. It reported that the legacy portfolio’s gross book value was $901 million at year-end, down 10% during the year.
- iStar refinanced or repaid approximately $1.5 billion of debt, issued $1.325 billion of new unsecured notes, and extended its revolving-credit facility maturity to September 2022. The Series J preferred stock was converted into approximately 16.5 million common shares.
- Adoption of the new lease accounting standard led to recognition of sales-type leases, including a $418.9 million net investment in leases at year-end. The bowling-center transaction generated the $180.4 million selling profit noted above.
Outlook, risks, contingencies and unusual items
- Outlook: No earnings or revenue guidance was provided. Management expected to use cash primarily for investment activity and working capital, and estimated $25 million to $75 million of portfolio capital expenditures over the next 12 months, including approximately $15 million for vertical construction. Maximum unfunded investment commitments were $443.9 million; management expected to fund most over the following two years, subject to conditions and milestones.
- Management cited no corporate debt maturities through September 2022. The debt schedule shows substantial maturities thereafter, including $845.9 million in 2022; verify exact dates and the effect of the January 2020 repayment of the remaining $110.5 million of 6.00% notes due 2022.
- Key risks include execution and valuation risk in the Ground Lease strategy and SAFE investment; below-investment-grade corporate ratings; debt covenant and refinancing constraints; interest-rate exposure; borrower defaults and uncertain collateral values; legacy-property monetization; real-estate market weakness; tenant concentration; and potential conflicts in related-party dealings with SAFE.
- The largest customer represented 11.8% of iStar’s 2019 revenue; its five largest borrowers or tenants collectively represented approximately 19.8%. The filing also identifies concentrations by property type and geography.
- On January 1, 2020, iStar expected to record an approximately $12.0 million increase in its general credit-loss reserve upon adoption of the expected-credit-loss standard, with a corresponding decrease to shareholders’ equity.
- The filing reports ordinary-course litigation, including foreclosure proceedings, and states that no pending proceeding was expected to have a material adverse effect on the consolidated financial statements. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Confirm the intended issuer: this summary is based on iStar’s 10-K, not a Safehold 10-K.
- Assess how much of 2019 earnings and adjusted income reflects recurring operations versus asset-sale gains and the sales-type lease profit.
- Review operating cash-flow weakness, liquidity needs, the $443.9 million of maximum unfunded commitments, and near-term loan maturities.
- Check debt maturity dates, covenant headroom, credit ratings, and the status of the remaining 2022 notes after the January 2020 repayment.
- Evaluate SAFE concentration, related-party arrangements, and whether iStar’s ground-lease strategy is delivering returns that justify its capital commitment.
- Review the loan-loss reserve assumptions, the non-performing loan’s resolution, and the expected impact of the 2020 credit-loss accounting adoption.