Business context and reporting period
This is iStar Inc.’s unaudited Form 10-Q for the three months ended March 31, 2017—not a Safehold Inc. filing. iStar reported a diversified real estate finance, net lease, operating properties, and land and development business. The filing discusses a ground net lease business later named Safety, Income and Growth, Inc.; it does not identify the registrant as Safehold.
Financial highlights
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Total revenue | $113.6 million | $114.6 million |
| Net loss | $15.4 million | $9.3 million |
| Net loss attributable to iStar | $14.3 million | $8.4 million |
| Loss allocable to common shareholders; diluted loss per share | $27.1 million; $0.38 | $21.2 million; $0.27 |
| Cash from operating activities | $(37.5) million | $(15.7) million |
| Cash from investing activities | $130.2 million | $(13.1) million |
| Cash from financing activities | $476.0 million | $(91.1) million |
At March 31, 2017, cash and cash equivalents were $897.5 million, total assets were $5.29 billion, debt obligations net were $3.88 billion, total liabilities were $4.26 billion, and total equity was $1.03 billion. The filing reported $236 million of available capacity under the revolving facility at quarter-end; as of May 3, it reported approximately $1.2 billion of cash and available borrowing capacity.
Material changes versus the prior comparable period
- Revenue was nearly flat, but the common-shareholder loss widened to $27.1 million from $21.2 million. Adjusted loss allocable to common shareholders, a non-GAAP measure, was $11.8 million versus $0.3 million.
- Interest income fell 13% to $29.1 million, primarily because average performing loan balances declined; the weighted-average yield on performing loans increased to 9.2% from 8.5%.
- Interest expense declined 10% to $51.2 million as average debt outstanding decreased, although the reported weighted-average cost of debt rose to 5.9% from 5.5%.
- Land development revenue rose 34% to $20.1 million; related cost of sales rose to $15.9 million, producing a $4.2 million gross margin versus $3.3 million.
- The loan-loss line shifted from a $1.5 million provision to a $4.9 million recovery, reflecting improved portfolio risk ratings. The loan-loss reserve declined to $79.4 million from $85.5 million.
- Operating cash use increased to $37.5 million. Cash nevertheless rose substantially, mainly reflecting financing inflows, including $854.6 million in borrowings, and portfolio collections and sales.
Outlook, commentary, risks and unusual items
- Management said it was pursuing new investments in real estate finance and net lease while repositioning operating properties and advancing land entitlements and development. It expected to use cash primarily for debt repayment and future investments.
- Management estimated $175 million to $225 million of portfolio capital expenditures over the next 12 months, including approximately $80 million for vertical construction. Maximum unfunded commitments were approximately $385 million, with most expected to be funded over two years if specified conditions are met.
- Near-term refinancing is a key liquidity risk. The filing listed $825 million of debt maturities in the remaining nine months of 2017 and stated that $1.125 billion of unsecured debt matured before March 31, 2018. Management expected to use capital markets, asset dispositions, loan repayments and cash; it cautioned that these sources might not be sufficiently available.
- In March, iStar issued $375 million of 6.00% senior notes due 2022, and entered into $227 million of secured financing at 3.795%, due 2027. After quarter-end, it repaid $275 million of 9.00% notes, paying a $2.75 million make-whole premium.
- After quarter-end, investors acquired a 51% interest in the 12-property ground net lease business. iStar received $340 million in total consideration, including assumption of the $227 million financing, and expected to recognize an approximately $178 million gain. iStar retained a 49% noncontrolling interest and committed up to $25 million in offering costs for a possible IPO.
- After quarter-end, iStar received $231.1 million net proceeds in its Lennar land settlement, including $121.8 million of interest, subject to holdbacks and final resolution of certain interest and legal-fee matters.
- A $4.4 million impairment was recorded on a real estate asset held for sale due to local condominium-market demand and a change in exit strategy. Four loans were more than 90 days delinquent, with an aggregate recorded investment of $233.8 million; five loans were classified as non-performing in the portfolio summary.
- Key risks include interest-rate changes, loan defaults and collateral valuations, refinancing access, debt covenant compliance, and execution of property sales and development. Management reported effective disclosure controls and no material change in risk factors from the prior annual report.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for iStar Inc., not Safehold Inc.
- Review the timing and funding plan for 2017–2018 maturities, and subsequent repayment of the $275 million notes against reported liquidity.
- Assess whether operating cash use, unfunded commitments and planned capital expenditures are supportable by cash, asset sales, collections and financing availability.
- Track the ground net lease transaction, expected gain, retained investment, IPO-related costs and any resulting changes to reported earnings and cash flows.
- Monitor non-performing loans, loan-loss reserves and the assumptions underlying the real estate impairment and future asset-sale proceeds.