Safehold Inc. quarterly report, Q3 FY2019

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Filing scope and business context

Important entity distinction: The supplied 10-Q is for iStar Inc. (NYSE: STAR), not Safehold Inc. (NYSE: SAFE). iStar reports its investment in SAFE under the equity method and held approximately 67.1% of SAFE’s common stock at September 30, 2019. This summary covers iStar’s quarter and nine months ended September 30, 2019; financial amounts are in U.S. dollars.

iStar is a real estate finance, investment and development company with four reportable segments: real estate finance, net lease, operating properties, and land and development. It also externally manages SAFE, a ground-lease-focused company.

Financial performance and condition

  • Third quarter: Revenue was $145.3 million, up from $122.1 million a year earlier. Net income was $3.6 million versus a net loss of $8.8 million; net loss allocable to common shareholders was $7.3 million, or $0.12 per share, compared with a $19.0 million loss, or $0.28 per share. Management’s non-GAAP adjusted income allocable to common shareholders was $3.4 million versus $3.7 million.
  • Nine months: Revenue was $350.6 million, down from $658.0 million. Net income was $370.3 million versus $86.7 million; income allocable to common shareholders was $337.8 million, or $5.23 per basic share, versus $50.7 million, or $0.75 per share. Adjusted income was $320.2 million versus $100.5 million; this is a company-defined non-GAAP measure, not a substitute for GAAP results or cash flow.
  • Revenue drivers and earnings quality: Nine-month revenue fell mainly because 2018 included substantially higher land-development sales. 2019 GAAP earnings included a $180.4 million selling profit from sales-type lease accounting and $233.4 million of gains on real estate sales, including a $219.7 million gain on a net-lease portfolio sale. The 2018 comparison included a $67.9 million gain from consolidating a venture. These items make year-over-year net income comparisons less indicative of recurring operating performance.
  • Cash flow: For the nine months, operating cash flow was negative $75.8 million (negative $36.6 million in 2018), investing cash flow was negative $241.3 million (positive $579.2 million), and financing cash flow was positive $321.3 million (negative $428.0 million). Cash, cash equivalents and restricted cash increased $4.3 million to $978.8 million; unrestricted cash was $917.3 million.
  • Margins and expenses: The filing does not present a single consolidated operating-margin measure. Q3 costs and expenses were $152.7 million against revenue of $145.3 million. Nine-month land-development revenue and cost of sales were $76.7 million and $71.8 million, respectively, compared with $369.7 million and $318.9 million in 2018.
  • Debt and liquidity: Debt obligations, net, were $3.83 billion at September 30, versus $3.61 billion at December 31, 2018; total principal debt was $3.88 billion. The company reported $350 million of available capacity on its revolving credit facility. In September it issued $675 million of 4.75% notes due October 2024; in October, after quarter-end, it used proceeds and cash to repay $400 million of 4.625% notes and $275 million of 6.50% notes. Management said it had no debt maturities through April 2022.
  • Other balance-sheet metrics: Total assets were $5.58 billion and total equity was $1.30 billion at September 30. Loans receivable and other lending investments, net, were $808.3 million, down from $988.2 million at year-end. The loan-loss reserve was $30.4 million, down from $53.4 million.

Material changes versus the prior comparable period

  • Nine-month revenue decreased by $307.3 million, primarily reflecting 2018 bulk land-parcel sales; lower interest and other income also contributed. Operating lease income rose $8.7 million, with growth in net lease partly offset by asset sales and lease reclassification.
  • Property-sale gains increased to $233.4 million from $79.4 million, and 2019 included the $180.4 million sales-type lease profit. In May 2019, modified bowling-center leases were classified as sales-type leases, creating a $421.3 million net investment in leases at quarter-end.
  • Loan-loss expense shifted to a $3.8 million recovery from an $18.2 million provision in 2018. The reserve reduction included a $19.2 million charge-off following resolution of a non-performing loan.
  • iStar expanded its SAFE investment: it invested $250 million in January and purchased SAFE shares for $168 million in August. Its SAFE carrying value increased to $581.1 million from $149.6 million at year-end.
  • Common shares outstanding were 62.2 million at September 30, down from 68.1 million at December 31. iStar repurchased 6.2 million shares for $58.8 million during the first nine months.

Outlook, management commentary and risks

  • Management said commercial real estate capital remained cheap and plentiful and expected that environment to continue for the remainder of 2019. In response, iStar described a cautious approach: fewer traditional loan originations, focus on existing customer relationships, and continued monetization of legacy assets. No earnings or revenue guidance was provided.
  • Over the next 12 months, management expected $50–$100 million of portfolio capital expenditures, including approximately $20 million for vertical construction, and expected to fund most of its $395.5 million of maximum unfunded commitments over the following two years, subject to milestones and other conditions. It also reported $331.8 million of scheduled real estate finance maturities over the next 12 months, excluding borrower extension options.
  • Liquidity sources identified by management included cash, portfolio income, loan repayments and asset-sale proceeds. Management cautioned it could not predict specific transactions or market conditions with certainty.
  • Credit risk includes one loan more than 90 days delinquent, with a $38.4 million recorded investment and $21.7 million specific reserve; the loan was in resolution and had been outstanding for 10.3 years. Management said it believed collateral and reserves were adequate, while noting estimates require significant judgment.
  • Interest-rate risk is material. The company estimated that, holding balances constant, a 100-basis-point rate increase would increase annual net income by $7.8 million, while a 100-basis-point decrease would reduce it by $6.2 million; actual results could differ. Debt covenants include collateral-coverage and fixed-charge tests, and breaches could lead to acceleration of debt.
  • Maximum exposure to loss on unconsolidated VIE investments was limited to $115.8 million carrying value plus $21.6 million of related unfunded commitments. The company also disclosed ordinary-course litigation, including foreclosure matters, but did not expect pending proceedings to have a material adverse effect. It reported no material change to previously disclosed risk factors.

Most important facts for investors to verify

  1. Confirm the issuer: this filing is iStar Inc.’s 10-Q, not Safehold Inc.’s. Review SAFE’s own filing for SAFE-specific financial results and risks.
  2. Assess how much reported 2019 earnings depended on the $180.4 million lease-accounting profit and $233.4 million of property-sale gains, versus recurring income and cash generation.
  3. Review the October 2019 debt repayments and refinancing, cash used, remaining maturities, and covenant headroom after the quarter-end transactions.
  4. Track operating cash flow, planned investment and development spending, and the timing and conditions on the $395.5 million of commitments.
  5. Monitor the delinquent loan’s resolution, reserve adequacy, and the effects of interest-rate changes on asset yields, funding costs and hedges.