Filing identity and reporting period
Important issuer mismatch: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018, not a Safehold Inc. 10-Q. Safehold (SAFE) appears as an equity-method investment and affiliate of iStar. The summary below covers iStar; verify the intended issuer before relying on it as a Safehold filing summary.
iStar finances, invests in and develops real estate and related projects through four segments: real estate finance, net lease, operating properties, and land and development.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $364.2 million | $108.3 million |
| Net income (loss) | $35.0 million | $(15.4) million |
| Net income (loss) attributable to common shareholders | $26.8 million | $(27.1) million |
| Diluted earnings (loss) per common share | $0.35 | $(0.38) |
| Cash from operating activities | $(46.6) million | $(35.7) million |
| Cash from investing activities | $126.1 million | $129.9 million |
| Cash from financing activities | $(370.2) million | $474.9 million |
- Revenue growth was principally driven by land-development revenue of $276.4 million, versus $20.1 million a year earlier. Land-development gross profit was $53.0 million, compared with $4.2 million.
- Two land-parcel sales generated approximately $253.4 million in gross proceeds and $48.3 million in profit, according to management. The company also provided $145.0 million of financing to buyers; $81.2 million was repaid after quarter-end.
- Operating lease income declined 3% to $45.8 million, and interest income declined 8% to $26.7 million. Interest expense fell 12% to $45.2 million; the weighted-average cost of debt was 5.4%, down from 5.9%.
- Adjusted income allocable to common shareholders, a non-GAAP measure, was $132.3 million versus a loss of $11.8 million. It includes a $75.9 million retained-earnings adjustment from adopting new accounting guidance and should not be confused with GAAP earnings or cash available for distribution.
Balance sheet, debt and liquidity
- At March 31, 2018, total assets were $4.45 billion, total liabilities $3.43 billion, and total equity $1.02 billion. Debt obligations, net, were $3.13 billion, down from $3.48 billion at year-end 2017.
- Cash and cash equivalents were $366.7 million; cash, cash equivalents and restricted cash totaled $387.1 million. iStar repaid the $325 million balance on its revolving credit facility during the quarter and reported $325 million of available borrowing capacity at quarter-end.
- Quarterly cash decreased by $290.6 million, primarily reflecting debt repayments and share repurchases. Operating cash flow was negative, so reported net income did not translate into positive operating cash flow.
- Scheduled debt principal maturities were $771.4 million in 2019 and $1.12 billion in 2022. The filing reports $481.3 million of maximum unfunded commitments, subject to performance hurdles and other conditions.
- Performing loans totaled $1.21 billion, with a 9.4% weighted-average yield and 60% weighted-average LTV. Non-performing loans had $171.2 million net carrying value; the total loan-loss reserve was $69.5 million.
Material changes and management commentary
- Common-shareholder results improved from a loss to a profit, largely alongside unusually high land sales and the absence of the prior-year discontinued ground-lease operations. The 2018 quarter included $17.0 million of gains on real-estate sales, versus $8.1 million in 2017.
- Management said it continued to focus on selective real-estate finance and net-lease investments while monetizing operating properties and land. It expects asset-sale proceeds to be reinvested in those businesses and active development projects.
- Management expected $175 million to $225 million of portfolio capital expenditures over the next 12 months, including approximately $140 million for vertical construction. It expected to fund most of the $481.3 million maximum commitments over the next two years, subject to the stated conditions.
- The Net Lease Venture’s investment period was extended from March 31 to June 30, 2018. iStar held approximately 39.9% of SAFE’s common stock and had waived certain SAFE management fees and expense reimbursements through June 30, 2018.
Risks, contingencies and unusual items
- Land-sale timing and development activity materially affected quarterly revenue and profit; these results may not recur at the same level.
- Interest-rate exposure is a key market risk. iStar reported a net variable-rate asset position and estimated that a 100-basis-point increase in rates would raise annual net income by approximately $10.7 million, while a 100-basis-point decrease would reduce it by approximately $10.2 million, assuming balances and other conditions stayed constant.
- Debt covenants include minimum unencumbered-asset, collateral-coverage and fixed-charge-coverage requirements. A breach not cured within applicable periods could permit acceleration of debt.
- iStar remained a limited-recourse guarantor and environmental indemnitor for financing associated with SAFE’s initial ground-lease portfolio, subject to stated conditions and SAFE’s indemnity. The filing also describes ordinary-course litigation and a pending application for more than $17 million of attorneys’ fees in the Lennar matter; recovery had not been determined.
- A $4.1 million impairment was recorded on a residential property held for sale. Stock-based compensation expense was $9.1 million, including $7.9 million associated with performance incentive plans whose value can change with underlying asset performance.
- The company reported no material changes to the risk factors in its 2017 annual report. It stated that disclosure controls were effective and that there were no material quarterly changes in internal control over financial reporting.
Key facts for investors to verify
- Confirm whether the intended filing is iStar’s 10-Q or Safehold’s own filing; the supplied document is iStar’s.
- Assess how much of the earnings improvement reflects recurring operations versus land sales and the $75.9 million accounting-adoption adjustment included in adjusted income.
- Review the timing, collectability and collateral support for non-performing loans, loan-loss reserves, unfunded commitments and buyer financing on land sales.
- Check liquidity and refinancing capacity against the 2019 and 2022 debt maturities, covenant thresholds and planned development spending.
- Monitor SAFE-related ownership, fee waivers, guarantee exposure and related-party arrangements, as well as the status of the Lennar attorneys’ fee application.