Safehold Inc. annual report, FY2013

Filing identity and reporting period

Important mismatch: The supplied filing is iStar Financial Inc.’s Form 10-K for the fiscal year ended December 31, 2013—not a Safehold Inc. filing. The summary below describes iStar Financial and should not be treated as Safehold’s results. The filing includes fourth-quarter information, but reports primarily on the full fiscal year.

Business context

iStar was a commercial real estate finance and investment company taxed as a REIT, with real estate finance, net lease, operating properties and land segments. At year-end, its portfolio included $1.37 billion of net loans and other lending investments and $3.16 billion of real estate, including assets held for sale.

Financial performance and position

Amounts below are in U.S. dollars; millions unless otherwise stated.

• Operating lease income rose 8% to $234.6 million, while interest income fell 19% to $108.0 million as the average performing-loan balance declined.
• Total costs and expenses were $613.2 million, exceeding revenue; interest expense was $266.2 million, real estate expense $157.4 million, and depreciation and amortization $71.3 million. The filing does not present a conventional operating-margin measure.
• Adjusted EBITDA, a non-GAAP measure, was $298.8 million versus $349.8 million. Its ratio to interest expense and preferred dividends was 0.9x in both years.
• Investing cash flow was positive $893.4 million, principally reflecting portfolio repayments and asset-sale proceeds; financing cash flow was negative $455.8 million. Cash increased by $257.2 million during the year.
• Unrestricted cash was $513.6 million, and unencumbered assets had a carrying value of approximately $3.0 billion. Debt principal maturities due before December 31, 2014 were $21.7 million; net debt at year-end was $4.16 billion.
• The company reported $203.6 million of non-performing loans, down from $503.1 million, and total loan-loss reserves of $377.2 million. The reserve equaled 23.5% of loans before reserves.

Material changes versus 2012

• The common-shareholder loss narrowed to $155.8 million from $273.0 million, and adjusted income improved but remained negative.
• Interest expense declined 25% to $266.2 million. Management attributed the reduction to lower average debt and a lower weighted-average effective debt cost (5.9%, versus 6.5%). Debt obligations, net, fell by $533.4 million.
• Provision for loan losses declined to $5.5 million from $81.7 million, reflecting recoveries and a lower non-performing-loan balance; the company also recorded $152.8 million of charge-offs.
• Residential condominium sales generated $269.7 million of net proceeds and $82.6 million of income. The company sold its LNR interest for $220.3 million net proceeds, but recorded a $30.9 million other-than-temporary impairment; equity-method earnings fell to $41.5 million from $103.0 million.
• Operating cash flow remained negative. Revenue decreased modestly, while general and administrative expense increased 14% to $92.1 million.

Outlook, risks and unusual items

• Management expected to fund $275 million to $350 million of portfolio capital expenditures over the next 12 months, largely dependent on land-development activity. It planned to use cash, loan repayments, asset sales and debt or equity transactions to meet funding needs. No formal earnings guidance was provided.
• Management said significant near-term debt maturities had been addressed and intended to increase lending and net-lease investments while repositioning operating properties and developing land. It cautioned that assets were expected to contribute positively to earnings over time, not that this outcome was assured.
• Key risks include below-investment-grade unsecured credit ratings, significant leverage, restrictive debt covenants and cross-default provisions, limited future debt-incurrence capacity, refinancing and liquidity risk, real estate market weakness, tenant or borrower defaults, and uncertainty in collateral and asset valuations. Management also highlighted interest-rate exposure, concentration in land and selected property types/geographies, and REIT qualification requirements.
• Unusual or material items included $33.2 million of net losses on early debt extinguishment, a $7.4 million loss on a land contribution to an unconsolidated venture, and $86.7 million of income from residential-property sales. The annual common-stock dividend was zero; preferred dividends totaled $49.0 million.
• Unfunded commitments could total up to $119.2 million if specified performance milestones are met, discretionary funding is approved, and committed strategic-investment capital is drawn. The filing describes routine litigation and states management did not believe pending proceedings would materially adversely affect consolidated financial condition.
• In February 2014, after year-end, iStar partnered with a sovereign wealth fund on a venture targeting up to $1.25 billion of net-lease assets, funded with up to $500 million of equity.

Most important facts for investors to verify

• Confirm the issuer: the provided document is iStar Financial Inc.’s 2013 10-K, not Safehold Inc.’s filing.
• Review the full debt maturity schedule, covenant calculations, collateral coverage and current access to refinancing; management’s liquidity assessment is not a guarantee of future access.
• Assess the recoverability of loans and real estate, including the substantial reserves, remaining non-performing loans and reliance on Level 3 valuation estimates.
• Test whether land-development spending, transitional property occupancy and condominium sales can improve recurring earnings and cash generation.
• Distinguish GAAP results from adjusted income and adjusted EBITDA, and note that operating cash flow was negative despite positive adjusted EBITDA.
• Verify subsequent developments, including the February 2014 venture, and the status of the escrowed LNR sale proceeds and potential indemnification obligations.