Business context and reporting period
The filing is iStar Financial Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Although the request identifies Safehold Inc., the filing itself names iStar Financial Inc. as the registrant; verify the company identity before relying on this summary. iStar operated as a diversified real estate finance, net lease, operating properties, and land and development business and was structured as a REIT.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $109.2 | $129.8 | $222.0 | $238.6 |
| Net income (loss) | $(19.8) | $(3.6) | $(32.1) | $(17.8) |
| Net loss allocable to common shareholders | $(31.0) | $(16.2) | $(53.5) | $(42.8) |
| Loss per common share | $(0.36) | $(0.19) | $(0.63) | $(0.50) |
| Adjusted income allocable to common shareholders (non-GAAP) | $9.8 | $28.9 | $18.3 | $23.3 |
| Segment profit | $21.4 | $42.3 | $41.1 | $49.1 |
- Q2 revenue fell 16% year over year; the six-month decline was 7%. No consolidated margin figure is clearly provided in the filing.
- For the six months, operating cash flow was $(63.8), investing cash flow $(2.4), and financing cash flow $230.8. Cash and cash equivalents ended at $637.1, up from $472.1 at year-end 2014.
- At June 30, total assets were $5.67 billion, debt obligations net were $4.15 billion, total liabilities were $4.48 billion, and total equity was $1.18 billion. Debt net rose from $4.02 billion at December 31, 2014.
- Loans and other lending investments, net, were $1.57 billion. Loan-loss reserves were $121.9 million, or 8.0% of loans before reserves; non-performing loans were $83.6 million net of specific reserves, versus $65.0 million at year-end.
- Net lease same-store occupancy was 95.4% versus 92.8% a year earlier. Same-store commercial operating-property occupancy was 63.6% versus 61.1%.
Material changes versus prior comparable periods
- The common-shareholder loss widened in both the quarter and first half. Q2’s $19.2 million loan-loss provision compared with a $2.8 million recovery in Q2 2014; the six-month provision was $23.4 million versus a $6.2 million recovery.
- Lower other income was a significant comparison factor: 2014 included $19.0 million of gains from non-performing loan sales. Equity-method earnings also declined, partly because 2014 included $23.4 million from asset sales by an investee.
- Operating lease income declined 8% in Q2 and 6% for the first half. Higher loan balances and yields lifted six-month interest income 9%, while lower borrowing costs helped reduce interest expense.
- Real estate sales income increased to $39.5 million for the first half from $33.7 million. General and administrative expense and depreciation and amortization also declined.
- Debt and liquidity structure changed during the period: iStar entered a $250 million secured revolving facility in March 2015 and reported $250 million drawn at June 30. The prior-year comparison also includes a $23.6 million Q2 2014 loss on early debt extinguishment, versus a minimal loss in Q2 2015.
Outlook, risks, contingencies, and unusual items
- Management said it continued originating investments, repositioning operating properties, and advancing land entitlements and development, with the aim of supporting future revenue and asset value. It provided no specific earnings or revenue guidance.
- Management expected to spend approximately $225 million to $300 million on portfolio capital expenditures over the next 12 months, including about $85 million for vertical construction. It cited cash, portfolio income, loan repayments, asset sales, and debt or equity transactions as expected funding sources, while noting liquidity needs and market conditions could change.
- Maximum unfunded investment commitments were approximately $790 million, assuming applicable milestones, performance hurdles, approvals, and other funding conditions are met. These include $727.7 million of performance-based commitments.
- Calendar-year 2016 scheduled debt principal maturities were $926.4 million; separately, management identified $261.4 million due before June 30, 2016. Covenant breaches, cross-default provisions, and refinancing or capital-market access are relevant risks.
- Credit quality warrants attention: the company recorded about $29.8 million of specific reserves during the first half, primarily related to a new non-performing loan. Four loans were more than 90 days past due and in various stages of resolution.
- A court awarded iStar $114 million, plus 12% annual simple interest, taxes, and certain legal costs, in its Lennar land dispute. Lennar appealed; enforcement was stayed pending appeal subject to a posted bond. Timing and receipt are uncertain, and a third party has a 15% participation interest in proceeds.
- In a separate property transaction, iStar received $93.5 million from selling a commercial leasehold interest and entered a 99-year ground lease; it recorded a $38.1 million lease-incentive asset and deferred a $5.3 million gain. A $16.1 million amphitheater land transaction was not recognized as a sale because of continuing involvement.
- The company paid preferred dividends but declared no common-stock dividends in the first half. Its HPU tender offer, scheduled to expire August 12, 2015, offered holders cash, common shares, or a combination; tender commitments and tenders were reported as of July 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing also states that the 2014 comparative cash-flow presentation was reclassified to correct classification of land-sale proceeds; the company said the original error was not material.
Important facts for investors to verify
- Confirm whether this iStar Financial filing is the intended document for the Safehold Inc. request.
- Review the quality and sustainability of earnings, including loan-loss provisions, asset-sale gains, investee earnings, and the non-GAAP adjusted-income reconciliation.
- Assess loan delinquencies, non-performing exposures, reserve adequacy, collateral values, and changes in portfolio risk ratings.
- Evaluate liquidity against debt maturities, the drawn revolving facility, $790 million of potential commitments, and management’s projected capital expenditures.
- Track the Lennar appeal and potential proceeds, as well as the status and accounting effects of the HPU tender offer and deferred property-sale gains.