Filing summary
Important entity mismatch: The filing provided is iStar Inc.’s Form 10-Q for the quarter ended March 31, 2019, not a Safehold Inc. Form 10-Q. Safehold (SAFE) is discussed as an iStar investment and managed affiliate. The summary below describes iStar’s filing.
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with the same period in 2018. iStar is a diversified real estate finance, investment and development company, with reportable segments in real estate finance, net lease, operating properties, and land and development.
Key financial metrics
Unless otherwise indicated, amounts are in millions of dollars.
| Metric | Q1 2019 | Q1 2018 / prior balance |
|---|---|---|
| Total revenue | $106.8 | $364.2 |
| Net income (loss) | $(7.0) | $35.0 |
| Net income (loss) attributable to iStar | $(9.4) | $34.9 |
| Net income (loss) allocable to common shareholders | $(17.6), or $(0.26) per share | $26.8, or $0.39 per share |
| Adjusted income (loss) allocable to common shareholders, non-GAAP | $(0.1) | $132.3 |
| Operating cash flow | $(46.5) | $(46.6) |
| Cash, cash equivalents and restricted cash at quarter-end | $363.8 | $974.5 at December 31, 2018 |
| Unrestricted cash at quarter-end | $315.4 | — |
| Debt obligations, net | $3,070.3 | $3,609.1 at December 31, 2018 |
| Total assets / total liabilities | $4,671.4 / $3,661.9 | $5,014.3 / $3,950.2 at December 31, 2018 |
No consolidated profit-margin figure is stated in the filing. Cash flows used in investing and financing were $213.2 million and $351.0 million, respectively. The filing does not present a single consolidated free-cash-flow measure.
Material changes versus the prior comparable period
- Revenue fell 71%, primarily because Q1 2018 included two large land-parcel sales. Land development revenue declined to $12.7 million from $276.4 million; related cost of sales was $14.4 million versus $223.4 million.
- Operating lease income rose to $58.9 million from $45.8 million, mainly reflecting consolidation of the Net Lease Venture and a newly acquired asset. Interest income fell to $20.4 million from $26.7 million as average performing loan balances declined.
- Common shareholders’ results moved from income to loss. iStar cited the weaker land-sale contribution, among other period-to-period operating changes. Segment profit was $26.6 million for net lease and a $15.1 million loss for land and development.
- Debt declined following repayment in March of $375 million of 5.00% senior notes due July 2019. The repayment generated a $0.5 million early-extinguishment loss. iStar reported no debt maturities for the remainder of 2019.
- Other investments increased to $522.0 million from $304.3 million, largely reflecting iStar’s $250 million investment in SAFE operating partnership units in January 2019. iStar reported a 65.8% fully diluted economic interest in SAFE, while voting power remained capped at 41.9%.
Outlook, management commentary, risks and unusual items
- Management said traditional commercial real estate lending capital remained cheap and plentiful and expected that condition to continue through 2019. iStar described a cautious approach, with fewer traditional loan originations, emphasis on existing customer relationships, monetization of legacy assets, and further investment in ground leases through SAFE.
- iStar expected portfolio capital expenditures of approximately $75 million to $125 million over the following 12 months, including about $40 million for vertical construction. It expected to fund the majority of its $428.1 million maximum unfunded commitments over the next two years, subject to milestones and other conditions.
- Management cited $315.4 million of unrestricted cash and $325 million of available revolving-credit capacity at quarter-end. It expected liquidity sources to include cash, portfolio income, loan repayments and asset-sale proceeds, while noting that specific transactions to meet liquidity needs could not be predicted with certainty.
- Credit risks include three non-performing loans with $66.5 million gross carrying value and a $40.9 million specific reserve; two loans were more than 90 days delinquent. Total loan-loss reserves were $53.3 million, or 6.3% of gross loans. Management said it believed collateral and reserves were adequate, but reserve estimates depend on judgment and market conditions.
- Interest-rate sensitivity analysis estimated annual net income would increase by $3.1 million for a 100-basis-point rate increase and decrease by $2.3 million for a 100-basis-point decrease, assuming no change in assets or liabilities. iStar warned that rate changes, economic downturns and credit losses could adversely affect results and liquidity.
- Maximum unfunded commitments were $428.1 million. Legal matters were described as routine, including foreclosure-related proceedings; the company did not expect pending proceedings to have a material adverse effect. The filing reported no material change to previously disclosed risk factors.
- On May 2, 2019, iStar announced that its President of Land and Development and CFO would leave to pursue other opportunities, and that it would search for a new CFO; other senior managers would cover the duties temporarily.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is for iStar Inc., not Safehold Inc.
- Review whether the sharp year-over-year revenue and earnings decline is understood in light of the unusually large Q1 2018 land sales, and distinguish GAAP results from non-GAAP adjusted income.
- Track cash use, asset-sale proceeds, debt reduction, refinancing needs and the timing of the $428.1 million in conditional commitments and expected capital expenditures.
- Monitor non-performing loans, collateral valuations, reserve adequacy and the progress of foreclosure or other resolution proceedings.
- Assess the SAFE investment’s economic interest, voting limitations, management agreement terms and ability to generate returns for iStar.
- Follow the CFO transition and any subsequent updates to management, liquidity or business outlook.