Filing summary
Entity clarification: The supplied filing is iStar Inc.’s Form 10-Q for the quarter ended June 30, 2017, not a Safehold Inc. 10-Q. It discusses Safety, Income and Growth, Inc. (SAFE), the ground-lease REIT that iStar helped launch. The summary below is of iStar’s filing.
Business context and reporting period
iStar is a diversified real estate finance, investment and development REIT, with real estate finance, net lease, operating properties, and land and development segments. The unaudited filing reports the three and six months ended June 30, 2017, compared with the same 2016 periods.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $347.9 | $122.4 | $456.2 | $232.6 |
| Income from continuing operations | $76.1 | $12.7 | $47.9 | $(10.7) |
| Net income | $196.0 | $59.8 | $180.6 | $50.5 |
| Net income allocable to common shareholders | $177.5 | $38.1 | $150.4 | $16.9 |
| Basic EPS | $2.46 | $0.52 | $2.09 | $0.22 |
- Q2 revenue included $139.5 million of other income and $132.7 million of land development revenue. The six-month figures were $151.4 million and $152.8 million, respectively.
- Q2 net income included a $123.4 million gain from the ground-lease business transaction. Other income also included significant interest and tax reimbursements from the Lennar land-sale litigation settlement. These items make reported profit and revenue less indicative of recurring performance.
- Six-month operating cash flow was $102.9 million, versus $0.2 million in 2016. Investing activities provided $346.3 million and financing activities provided $176.3 million. Cash and cash equivalents rose to $954.3 million from $328.7 million at year-end 2016.
- At June 30, total assets were $4.915 billion, total liabilities $3.706 billion, and total equity $1.205 billion. Net debt obligations were $3.368 billion; principal debt outstanding was $3.394 billion.
- Reported interest expense was $48.8 million for Q2 and $100.0 million for the first half, down 13% and 12%, respectively, year over year. Management attributed the decrease to lower average debt balances. The weighted average cost of debt was 5.5% in Q2 and 5.7% for the first half.
- Land development revenue less cost of sales produced a $14.4 million gross margin for the first half, compared with $14.0 million in 2016.
Material changes versus prior periods
- iStar transferred control of its 12-property ground-lease business to institutional investors in April, deconsolidated the properties and related financing, and retained an investment in SAFE. SAFE completed an IPO and a private placement in June; iStar held approximately 28% at quarter-end.
- The ground-lease transaction and litigation settlement were major contributors to the year-over-year increase in reported Q2 revenue and net income. Excluding those exceptional transactions, underlying comparisons were mixed: operating lease income and interest income declined, while land development activity increased.
- Operating lease income fell 6% in Q2 and the first half, while interest income declined 17% in Q2 and 15% in the first half. Lower average performing loan balances contributed to the interest-income decline, despite higher loan yields.
- Equity-method earnings fell to $5.5 million in Q2 from $39.4 million and to $11.2 million for the first half from $47.7 million, primarily because the prior-year periods included gains from investment sales.
- Loan-loss reserves were $78.8 million at June 30, down from $85.5 million at year-end 2016. The filing reported a $5.5 million first-half recovery, citing improved loan risk ratings and a smaller portfolio. Five loans were classified as non-performing in the MD&A, with aggregate carrying value of $188.7 million.
Liquidity, outlook, risks and contingencies
- Management said cash would be used primarily to repay debt and fund investment activity. The company had $234.6 million of available capacity under its revolving credit facility at June 30; as of August 2, cash and available borrowing capacity totaled approximately $1.2 billion.
- Debt maturities included $550 million in the remaining six months of 2017 and $610.1 million in 2018. Management expected to use cash, capital-market access, loan repayments and asset sales to meet obligations; if capital sources proved insufficient, it could slow new investment and seek alternatives.
- Management expected approximately $175 million to $225 million of portfolio capital expenditures over the next 12 months, including about $50 million of vertical construction. Maximum unfunded investment commitments were $388.6 million; the company expected to fund most over the next two years, subject to contractual milestones and conditions.
- Key credit risks include non-performing loans, collateral and property-market valuation uncertainty, and interest-rate exposure. The filing estimates that a 100-basis-point rate increase would raise annual net income by approximately $10.0 million, while a 10-basis-point decline would reduce it by approximately $1.0 million, assuming no other changes.
- Debt agreements impose asset-coverage and fixed-charge covenants, with potential acceleration upon uncured breaches or specified cross-defaults. The filing also describes a limited-recourse guaranty and environmental indemnity related to the former ground-lease financing; SAFE generally agreed to indemnify iStar for covered amounts and losses.
- The Lennar land dispute was resolved with the April 2017 transfer of approximately 1,250 acres. iStar reported net proceeds of approximately $234 million; recovery of attorneys’ fees remained subject to further court proceedings, with iStar seeking more than $17 million. Management stated that routine and other pending litigation was not expected to materially adversely affect the financial statements.
- Asset impairments totaled $14.7 million for the first half, including impairments tied to a land-development exit-strategy change and local condominium-market conditions. SAFE offering costs contributed to higher other expense. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for iStar Inc.; SAFE is an affiliate and the ground-lease company discussed in the report.
- Assess recurring earnings separately from the $123.4 million SAFE transaction gain and unusual Lennar settlement-related income, and review management’s non-GAAP adjusted-income reconciliation.
- Verify the timetable and funding plan for near-term debt maturities, available liquidity, and compliance with debt covenants.
- Review performance and resolution prospects for non-performing loans, the adequacy of reserves, and the timing and conditions of unfunded commitments and planned capital spending.
- Track SAFE ownership, iStar’s remaining guaranty exposure and fee waivers, and the outcome of the pending attorneys’ fee proceedings.