Safehold Inc. (identified in this filing as iStar Inc.) — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet figures are as of September 30, 2015. The filing’s registrant is iStar Inc., not Safehold Inc.; investors should verify the intended issuer and historical corporate relationship before relying on this summary.
Business context
iStar described itself as a REIT financing, investing in and developing real estate, with four segments: real estate finance, net lease, operating properties, and land and development. Financial amounts below are in U.S. dollars; statement figures are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $120.5 | $113.5 | $342.5 | $352.1 |
| Net income (loss) | $6.0 | $35.5 | $(26.1) | $17.7 |
| Net income (loss) allocable to common shareholders | $(6.1) | $22.3 | $(59.8) | $(20.5) |
| Adjusted income allocable to common shareholders (non-GAAP) | $27.8 | $57.7 | $45.9 | $81.1 |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $(87.0) | $(10.4) |
- Q3 drivers: Revenue rose 6%, but net income fell 83%, chiefly as equity-method earnings declined $39.0 million year over year. Those earnings had included substantial prior-year investee asset-sale and carried-interest gains. The company recorded a $7.5 million loan-loss provision versus a $0.7 million recovery in Q3 2014.
- Nine-month drivers: Revenue declined 3% and the company moved to a net loss. Loan-loss provisions swung to $30.9 million from a $6.9 million recovery; equity-method earnings fell $50.9 million; and total costs and expenses increased 2%. Lower real-estate expense, impairment, and debt-extinguishment losses partly offset these pressures.
- Revenue mix and operating indicators: For the first nine months, operating lease income was $171.0 million, interest income $102.2 million, other income $40.2 million, and land-development revenue $29.1 million. Performing-loan yield was 9.0% for the period. Same-store net-lease occupancy was 95.3%; same-store commercial operating-property occupancy was 66.2%.
- Balance sheet at September 30: Total assets were $5.64 billion; debt obligations, net, were $4.14 billion; total equity was $1.15 billion. Cash and cash equivalents were $656.7 million. Loans and other lending investments, net, were $1.59 billion; total real estate was $2.79 billion.
- Debt and liquidity: Average debt cost was 5.45% for the first nine months, compared with 5.57% a year earlier. Scheduled principal maturities included $926.4 million in 2016 and $1.26 billion in 2017. Management cited $526.4 million of debt maturities due before September 30, 2016, and expected $200–$275 million of portfolio capital expenditures over the next 12 months.
- Cash flows: Investing activities provided $84.7 million and financing activities provided $186.5 million during the first nine months. Cash increased by $184.7 million to $656.7 million. Operating cash use worsened from the prior-year period.
Material changes and significant items
- Loans and other lending investments, net, increased to $1.59 billion from $1.38 billion at year-end 2014. The loan-loss reserve rose to $128.6 million from $98.5 million; non-performing loans, net of specific reserves, were $82.6 million, or 5.5% of total loan carrying value.
- The company entered a $250 million secured revolving credit facility in March 2015 and had $250 million outstanding at September 30. It also recorded $148.2 million of loan participations payable following loan-participation transfers accounted for as secured borrowings.
- Real estate available and held for sale was $296.6 million. The company recorded $66.0 million of income from real estate sales for the first nine months, including gains on net-lease asset sales and a commercial property sale to an unconsolidated venture.
- In August, iStar repurchased and retired all outstanding High Performance Units, using $9.8 million in cash and issuing 1.2 million common shares. It repurchased 1.67 million common shares for $20.3 million during the first nine months and increased its repurchase-program authorization to $50 million.
- The company reported a $87.0 million net operating cash outflow for the first nine months. It also reclassified 2014 land-sale proceeds from operating to investing cash flows; management said the prior classification error was not material.
Outlook, risks, and contingencies
- Management said it continued originating investments, repositioning or redeveloping operating properties, and advancing land entitlements and development. It expected cash on hand, portfolio income, loan repayments, asset-sale proceeds, and debt or equity transactions to fund expected cash needs. No formal earnings guidance was provided.
- Maximum unfunded commitments were approximately $750.7 million, assuming applicable performance milestones are met and discretionary fundings are approved. Management also cited expected capital expenditures of $200–$275 million over the coming 12 months.
- Credit and property risks include four loans more than 90 days delinquent, loan workouts and foreclosure-related proceedings, and exposure to commercial real-estate values. Management stated it believed collateral and reserves were adequate, while noting that reserve estimates require significant judgment.
- A court judgment in the company’s favor against Lennar involved a $114 million land purchase price, 12% annual simple interest, taxes, and legal costs. Lennar appealed; the judgment was stayed pending appeal with an appeal bond posted. The company cautioned that timing and actual receipt were uncertain, and a third party was entitled to 15% of proceeds.
- A shareholder action previously dismissed was on appeal, with oral argument scheduled for December 2015. Management reported no pending proceeding it believed would materially adversely affect the consolidated financial statements. Debt covenants include asset-coverage and fixed-charge tests; breaches and cross-defaults could trigger acceleration.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It stated there were no material changes to previously disclosed risk factors or market-risk disclosures.
Investor verification priorities
- Confirm the issuer identity: this supplied 10-Q is for iStar Inc., although the request names Safehold Inc.
- Review debt maturities, revolving-facility borrowing, covenant headroom, and the company’s ability to refinance 2016–2017 obligations.
- Assess the drivers and collectability of the higher loan-loss reserve, the four delinquent loans, and the increase in non-performing loan balances.
- Distinguish GAAP results from management’s non-GAAP adjusted income, and examine why adjusted income fell year over year.
- Track operating cash use, planned capital spending, and the conditions attached to the substantial unfunded commitments.
- Monitor the Lennar appeal and potential proceeds, as well as the shareholder-action appeal; neither outcome or timing was assured.