Business context and reporting period
The supplied filing is iStar Financial Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013—not a Safehold Inc. filing. iStar was a commercial real estate finance and investment company operating across real estate finance, net lease, operating properties and land.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $100.3m | $107.2m | $194.9m | $208.3m |
| Net income (loss) | $(14.4)m | $(51.1)m | $(46.7)m | $(97.2)m |
| Net loss allocable to common shareholders | $(26.0)m | $(59.0)m | $(67.3)m | $(113.8)m |
| Common loss per share | $(0.31) | $(0.70) | $(0.79) | $(1.36) |
| Adjusted income (non-GAAP) | $4.4m | $(1.4)m | $4.1m | $(4.3)m |
| Adjusted EBITDA (non-GAAP) | $98.0m | $106.6m | $183.8m | $201.7m |
| Operating cash flow | — | $(106.5)m | $(67.1)m |
At June 30, 2013, cash and cash equivalents were $715.9m; debt obligations, net, were $4.402bn; total assets were $5.947bn and total equity was $1.419bn. The filing does not present a conventional profit margin measure.
Material changes versus the prior comparable period
- Q2 revenue fell 6%, chiefly as interest income declined with the smaller average performing loan portfolio; operating lease income rose 6%.
- Interest expense fell 27% in Q2, reflecting lower average debt and a lower weighted-average effective debt cost (5.98% versus 6.51%). Loan-loss provision fell to $5.0m from $26.5m; the 2013 quarter included a $6.0m recovery on a resolved loan.
- Net loss improved year over year, but Q2 included $15.2m of net losses on early debt extinguishment. Gains from discontinued operations were $8.3m versus $24.9m; income from residential property sales increased to $34.3m from $13.3m.
- For the first half, loan repayments and sales reduced net loans and other lending investments to $1.514bn from $1.830bn at year-end 2012. Cash rose to $715.9m from $256.3m, supported by asset sales and financing activity.
Outlook, management commentary, risks and unusual items
- Management said it had refinanced or repaid 2013 maturities, extended the debt maturity profile, reduced funding costs and ended Q2 with significant liquidity intended mainly for new investments. No formal earnings or revenue guidance was provided.
- In May, iStar issued $265m of 3.875% notes due 2016 and $300m of 4.875% notes due 2018, using proceeds and cash to repay higher-rate notes due 2013. The company reported no debt with scheduled 2013 maturities at quarter-end; $2.442bn of principal maturities were scheduled for 2017.
- iStar sold its 24% interest in LNR for $220.3m net proceeds; about $25.2m was held in escrow for potential indemnification claims. Management cautioned that replacement investments may not fully replace LNR’s earnings contribution.
- Credit risk remained material: non-performing loans were $370.0m, or 25.6% of total loan carrying value; loan-loss reserves were $479.8m, or 24.9% of gross loan carrying value. Management noted significant judgment in estimating collateral values and reserves, including added uncertainty for European loan assets.
- Management cited continued earnings pressure from non-performing loans, transitional commercial properties and land carrying costs, while pursuing loan resolutions and asset management. Expected portfolio capital expenditures over the next 12 months were approximately $200m; maximum disclosed unfunded commitments were $211.6m.
- Debt covenants include minimum collateral coverage of 1.25x for secured facilities and a 1.2x unencumbered-assets-to-unsecured-debt ratio for unsecured securities. Breaches may permit acceleration, and management expected limited capacity for additional debt under fixed-charge coverage restrictions.
- Operating cash flow was negative despite positive investing cash flow of $708.7m, which included real estate and investment-sale proceeds. The filing reports ordinary-course litigation and foreclosure proceedings; management did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer: the source text is iStar Financial Inc., not Safehold Inc., and should not be attributed to Safehold.
- Review the composition and sustainability of reported losses and non-GAAP adjusted income, including asset-sale income, debt-extinguishment losses and the loan-resolution recovery.
- Assess non-performing loan exposures, reserve adequacy, charge-offs and collateral assumptions, especially for European assets.
- Check liquidity availability against planned capital expenditures, unfunded commitments, debt maturities and secured-credit collateral requirements.
- Review whether investment activity replaces the earnings contribution from the LNR sale and whether occupancy and performance of operating properties improve.