Safehold Inc. — Filing summary
Issuer identity warning: The supplied filing is iStar Financial Inc.’s Form 10-K for the fiscal year ended December 31, 2011, not a Safehold Inc. filing. Verify the issuer and filing before relying on this summary. The filing reports full-year 2011 results and selected fourth-quarter data; it is not a quarterly 10-Q.
Business context and reporting period
iStar was a REIT focused on commercial real estate, with lending, net leasing, and real estate investment segments. Its strategy during 2011 remained centered on resolving problem assets, raising liquidity, reducing leverage, and preserving shareholder value, rather than pursuing substantial new originations.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $432.8 million | $569.7 million |
| Net income (loss) | $(25.7) million | $80.2 million |
| Net income (loss) attributable to iStar | $(22.1) million | $79.7 million |
| Net income (loss) allocable to common shareholders | $(62.4) million | $36.3 million |
| Interest income | $226.9 million | $364.1 million |
| Interest expense | $344.8 million | $314.9 million |
| Provision for loan losses | $46.4 million | $331.5 million |
| Adjusted EBITDA | $376.5 million | $768.8 million |
| Cash flow from operating activities | $(31.8) million | $(47.4) million |
Revenue fell 24%, primarily as the average performing loan balance declined. Interest expense rose 10%, and the company reported a loss before equity-method earnings and other items of $255.2 million. Adjusted EBITDA, a non-GAAP measure, declined about 51%; its ratio to interest expense and preferred dividends was 1.0x, versus 2.0x in 2010. Fourth-quarter 2011 revenue was $96.5 million and net loss was $28.9 million.
At year-end, total assets were $7.52 billion, debt obligations net were $5.84 billion, and total equity was $1.57 billion. Cash and cash equivalents were $356.8 million. Investing cash flow was positive $1.47 billion, largely reflecting loan repayments and asset-sale proceeds; financing cash flow was negative $1.59 billion, principally reflecting debt reduction.
Portfolio, liquidity and changes versus prior year
- Net loans and other lending investments declined to $2.86 billion from $4.59 billion. The loan-loss reserve was $646.6 million, or 18.5% of gross loan carrying value.
- Non-performing loans were $771.2 million net of asset-specific reserves, 27.1% of net loan carrying value; on the gross portfolio presentation, non-performing loans were 38.0%. The net non-performing balance fell from $1.35 billion at year-end 2010.
- REHI and OREO increased to $1.91 billion from $1.58 billion. The company took title to properties with estimated foreclosure-date fair value of $502.5 million and recorded $20.8 million of OREO impairment. Net REHI/OREO operating and holding costs were $42.0 million.
- Net lease assets were $1.70 billion; 299 facilities covered 23.5 million square feet, were 92.0% leased, and had a weighted-average remaining lease term of about 12 years.
- The company generated $1.74 billion from loan repayments and asset sales and reduced debt by about $1.51 billion. It completed $2.96 billion of secured refinancing transactions, but at a higher cost of capital. Average effective debt cost rose to 5.24% from 3.73%.
- Debt maturities and required amortization due by the end of 2012 totaled about $1.60 billion, including $1.38 billion of unsecured maturities. Management cited $356.8 million of unrestricted cash and $3.69 billion of other unencumbered assets as liquidity resources.
Outlook, risks and unusual items
No formal earnings or revenue guidance was provided. Management said it intended to continue resolving non-performing assets, reducing leverage, improving asset-liability alignment, and investing in REHI/OREO. On February 28, 2012, after year-end, the company launched syndication of up to $900 million of secured facilities intended to refinance 2012 unsecured maturities; completion was not assured.
- Refinancing and liquidity: Failure to refinance or repay maturities could trigger defaults, cross-defaults, and acceleration. Unsecured credit ratings were below investment grade. Covenants included a 1.2x unencumbered-assets-to-unsecured-debt test and 1.25x collateral coverage for the secured facility.
- Credit and valuation: Further borrower defaults, collateral-value declines, or inadequate reserves could cause additional losses. Significant estimates relied on internal Level 3 valuations for impaired loans and real estate.
- Portfolio and market exposure: Commercial real estate volatility, property-type and geographic concentrations, tenant credit, interest-rate spreads, and asset-sale timing could adversely affect results and liquidity.
- Dividend and REIT status: No common dividends were declared or paid in 2011 or 2010; preferred dividends totaled $42.3 million in each year, with no arrearages reported. REIT qualification and distribution requirements remain relevant risks.
- Unusual items: Results included a $101.5 million net gain on early debt extinguishment, $95.1 million of equity-method earnings, and $25.1 million of gains from discontinued operations. The 2010 comparison included $270.4 million of discontinued-operation gains, principally from a large net-lease portfolio sale.
- Legal matters: The company continued defending the Citiline securities class action, in which no class had been certified. The Vancil derivative action was dismissed in February 2012; the related Kautz action had previously been dismissed and affirmed on appeal.
Most important facts for investors to verify
- Confirm that the intended issuer is iStar Financial Inc., not Safehold Inc., and that the 2011 reporting period is the one requested.
- Track the outcome and terms of the proposed $900 million refinancing and the repayment or refinancing of 2012 debt maturities.
- Assess the trajectory of non-performing loans, charge-offs, reserve adequacy, and realized proceeds from foreclosed-property sales.
- Reconcile GAAP losses, preferred dividends, and non-GAAP Adjusted EBITDA; do not treat Adjusted EBITDA as operating cash flow or distributable funds.
- Review covenant headroom, below-investment-grade financing costs, and the value and availability of unencumbered collateral.
- Confirm subsequent developments in the Citiline litigation and any material changes to dividend or REIT status.