Filing summary
Issuer identification: The request identifies Safehold Inc., but the supplied Form 10-Q is filed by iStar Financial Inc. Confirm that this is the intended filing. It covers the quarter ended March 31, 2012; financial statements are unaudited. Amounts below are rounded to millions unless stated otherwise.
Business context and reporting period
iStar describes itself as a commercial real estate finance and investment company and REIT, with lending, net leasing, and real estate investment segments. The company said it was focused on resolving problem assets, generating liquidity, retiring debt, and reducing leverage.
Financial results and condition
| Metric | Q1 2012 | Q1 2011 or prior balance-sheet date |
|---|---|---|
| Total revenue | $94.7 million | $110.2 million |
| Net income (loss) | $(46.0) million | $83.9 million |
| Net income (loss) attributable to iStar | $(46.1) million | $83.5 million |
| Basic and diluted EPS | $(0.66) | $0.73 basic; $0.71 diluted |
| Cash from operating activities | $(35.8) million | $(0.6) million |
| Cash from investing activities | $(307.9) million | $170.3 million |
| Cash from financing activities | $113.7 million | $(356.1) million |
| Cash and cash equivalents | $126.9 million | $356.8 million at Dec. 31, 2011 |
| Restricted cash | $524.2 million | $32.6 million at Dec. 31, 2011 |
| Total assets | $7.590 billion | $7.518 billion at Dec. 31, 2011 |
| Debt obligations, net | $5.968 billion | $5.838 billion at Dec. 31, 2011 |
| Total equity | $1.507 billion | $1.574 billion at Dec. 31, 2011 |
Interest income was $37.2 million, operating lease income $41.2 million, and other income $16.3 million. Interest expense was $86.1 million. The filing does not present a conventional operating-margin measure. Adjusted EBITDA, a non-GAAP measure defined by the company, was $95.1 million versus $90.4 million.
Material changes versus the prior comparable period
- Revenue decreased 14%, primarily as interest income fell 39% with the smaller performing loan portfolio; average performing loans declined to $2.09 billion from $3.18 billion.
- Interest expense rose 24% to $86.1 million. Management attributed this mainly to the higher cost of refinanced debt; the weighted-average effective debt cost increased to 5.83% from 3.95%, despite lower average debt outstanding.
- Loan-loss provision increased to $17.5 million from $10.9 million, and asset impairments increased to $15.5 million from $1.5 million.
- The sharp earnings reversal chiefly reflects the comparison with a $106.6 million debt-extinguishment gain in Q1 2011; the Q1 2012 gain was $1.7 million. Q1 2012 also included residential-property sale income and gains.
- Net loans and other lending investments fell to $2.596 billion from $2.861 billion. Nonperforming loans were $662.7 million, or 25.7% of net loan carrying value; watch-list loans were $169.8 million.
Liquidity, debt, outlook, and risks
- In March, iStar entered into $880 million of new secured facilities due in 2016 and 2017. Proceeds funded repurchases of convertible notes, repayment of its unsecured credit facility, and cash reserved for other 2012 debt repayments. The refinancing extended maturities but increased borrowing costs.
- At quarter-end, $913.8 million of debt maturities and required amortization were due by year-end 2012, including $751.0 million of unsecured maturities. The company reported $609.7 million of cash and cash reserved for debt repayment and approximately $3.20 billion of unencumbered assets at carrying value.
- After quarter-end, iStar reported further repayments against secured-facility amortization, an April 30 sale of 12 net-lease assets for $130.6 million net proceeds (with an estimated $24 million gain and $79.8 million proceeds after repayment of related debt), and a May 8 issuance of $275 million of 9.0% notes due 2017. Management said these resources would repay substantially all unsecured debt maturing in 2012.
- For maturities beyond 2012, including approximately $1.02 billion due in 2013, management expected to rely mainly on refinancing, asset sales, and borrower repayments, with possible equity capital raising. The company cautioned that market conditions, asset-sale execution, and access to financing could impede timely repayment and potentially trigger defaults, cross-defaults, or acceleration.
- Management cited continued volatility in commercial real estate and credit markets, elevated nonperforming assets, higher capital costs, and uncertainty about sustained economic recovery. The company also had up to $218.1 million in stated unfunded commitments, subject to performance conditions, approvals, or drawdowns.
- The company provided no numerical earnings guidance. It expected selective asset sales, continued deleveraging, and investments intended to maximize real-estate portfolio value. Preferred dividends of $10.6 million were paid; no common dividends were declared or paid.
- Pending litigation included the Citiline securities class action; the company said it considered the action without merit and intended to defend it. It reported that the derivative actions described in the filing had been dismissed. Management did not expect pending proceedings to have a material adverse effect on consolidated financial condition.
Important facts for investors to verify
- Whether the iStar Financial Inc. filing is the intended filing for the Safehold Inc. request.
- The amount and availability of unrestricted cash versus restricted cash, and the use of proceeds from the May 2012 note issuance and asset sale.
- Execution of remaining debt repayments and refinancing needs, especially the 2013 maturities and applicable covenant and collateral requirements.
- Credit quality trends, including nonperforming and watch-list loans, charge-offs, reserve adequacy, and foreclosed-property values and carrying costs.
- The sustainability of reported earnings sources, including the Madison Funds unrealized gain and residential-property sale income, and the impact of higher refinancing costs.