Safehold Inc. 10-Q Summary — 2017 Q3
Issuer and period: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, not a Safehold Inc. 10-Q. iStar reports a 34.6% investment in Safety, Income & Growth Inc. (SAFE), a ground-lease REIT it helped launch.
Business context
iStar finances, invests in and develops real estate through four segments: real estate finance, net lease, operating properties, and land and development. In April 2017, institutional investors took control of iStar’s ground-lease business; iStar deconsolidated the assets and began accounting for its retained SAFE interest under the equity method.
Financial performance and position
- Third-quarter revenue: $119.9 million, down 3% from $124.1 million. Net loss was $3.7 million versus net income of $58.2 million; loss allocable to common shareholders was $34.5 million versus income of $46.3 million. Continuing-operations loss was $23.0 million.
- Nine-month revenue and earnings: Revenue was $576.1 million, up 62% from $356.6 million. Net income was $176.9 million versus $108.6 million, including a $123.4 million gain on the ground-lease business disposition. Net income allocable to common shareholders was $115.8 million versus $63.2 million.
- Key revenue movements: Nine-month other income rose to $172.0 million, principally including $121.8 million of interest and tax reimbursements from the Bevard litigation resolution. Land-development revenue increased to $178.7 million from $74.4 million, including $114.0 million related to Bevard. Interest income fell 17% to $83.1 million as average performing-loan balances declined.
- Costs and credit: Nine-month interest expense declined 12% to $148.7 million. General and administrative expense rose 17% to $73.3 million; asset impairments were $15.3 million. Loan-loss recoveries were $8.1 million. The loan-loss reserve was $76.2 million, or 6.9% of gross loans; non-performing loans had $177.2 million net carrying value.
- Cash flow: For the first nine months, operating cash flow was $86.8 million versus an outflow of $14.6 million in 2016; investing cash flow was $446.4 million and financing cash flow was $1.05 billion. Cash and equivalents were $1.912 billion at September 30.
- Debt and liquidity: Debt obligations, net, were $4.279 billion versus $3.390 billion at year-end 2016. iStar reported a $325 million undrawn revolver capacity. Subsequent to quarter-end, it used approximately $1.4 billion of cash, together with financing proceeds, to repay $1.15 billion of notes and redeem $240 million of Series E and F preferred stock, plus dividends.
- Margins: Land-development revenue less cost of sales produced a $12.8 million nine-month gross margin, down from $23.6 million. The filing does not provide a single consolidated operating-margin measure.
Material changes, outlook and commentary
- September capital-market transactions refinanced near-term maturities, extended weighted-average debt maturity by 1.5 years to 4.0 years, and reduced stated annual expenses underlying earnings by about $37 million. The company said its ratings were upgraded by all three major agencies. No corporate debt maturities remained until July 2019 after the transactions and subsequent repayments.
- Management expected to spend approximately $175–$225 million on portfolio capital expenditures over the next 12 months, including about $100 million of vertical construction. It expected to fund most of its $419.8 million maximum unfunded commitments over the next two years, subject to milestones and other conditions. Funding sources cited included cash, portfolio income, loan repayments and asset-sale proceeds. No specific earnings guidance was provided.
- iStar reported 97.9% occupancy in its consolidated net-lease portfolio. It continued repositioning operating properties and advancing land projects, with the aim of improving their future earnings contribution.
- Unusual and nonrecurring items materially affected comparisons: the $123.4 million SAFE disposition gain, Bevard litigation-related income, real-estate sale gains, and the preferred-stock redemption premium. Q3 adjusted loss allocable to common shareholders, a company-defined non-GAAP measure, was $3.6 million versus adjusted income of $49.1 million a year earlier.
- Risks include commercial-real-estate loan defaults and collateral valuation, interest-rate and funding-cost exposure, debt covenant compliance, and execution of development and asset-sale plans. Hurricane-related property losses of approximately $1.2 million were recorded. Lennar sought U.S. Supreme Court review of issues in the Bevard dispute; the outcome and any recovery of requested attorneys’ fees remained uncertain. The filing reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Confirm the issuer: this document is iStar Inc.’s filing, not Safehold Inc.’s filing.
- Separate recurring operating results from the SAFE disposition gain, Bevard-related income, property-sale gains, and preferred redemption charge.
- Reconcile September 30 cash and debt with the subsequent note repayments and preferred redemption, and review remaining maturities and covenant headroom.
- Assess the status and collateral coverage of non-performing loans, the adequacy of loan-loss reserves, and the timing and conditions of unfunded commitments.
- Track the Bevard Supreme Court petition and any attorneys’ fee recovery, as well as hurricane insurance recoveries and the projected capital expenditure program.