Filing summary
Entity mismatch: The supplied 10-Q is for iStar Financial Inc., not Safehold Inc. It covers the quarter and nine months ended September 30, 2012. The summary below reflects the filing provided.
Business context and reporting period
iStar describes itself as a commercial real estate finance and investment company, taxed as a REIT, with lending, net leasing and real estate investment segments. The company said it had curtailed originations and focused on repositioning assets, generating liquidity and reducing debt.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $86.2 million | $94.3 million | $274.9 million | $327.3 million |
| Net income (loss) | $(64.3) million | $(54.7) million | $(161.5) million | $3.2 million |
| Net income (loss) allocable to common shareholders | $(71.8) million | $(62.2) million | $(185.6) million | $(27.1) million |
| Common diluted loss per share | $(0.86) | $(0.71) | $(2.22) | $(0.30) |
| Adjusted income (loss) allocable to common shareholders | $(26.0) million | $(19.0) million | $(30.2) million | $(22.3) million |
| Adjusted EBITDA | $76.6 million | $83.1 million | $278.3 million | $276.2 million |
Adjusted income and Adjusted EBITDA are non-GAAP measures defined by the company; the filing cautions they are not substitutes for GAAP results or operating cash flow. The filing does not provide a single consolidated profit-margin measure.
- Revenue and expenses: Q3 interest income fell 32% year over year to $31.2 million, while interest expense rose to $91.8 million. For the first nine months, interest income declined 44% to $104.8 million and interest expense increased 6% to $271.6 million. The company attributed lower interest income mainly to a smaller performing loan portfolio and higher interest expense to a higher cost of debt.
- Cash flow: Nine-month operating cash flow was $(84.6) million, versus $(17.7) million in 2011. Investing cash flow was $501.4 million versus $1.154 billion; financing cash flow was $(489.0) million versus $(1.424) billion. Cash and cash equivalents declined $72.2 million to $284.7 million. Restricted cash was $493.4 million at quarter-end.
- Balance sheet: Total assets were $6.94 billion, down from $7.52 billion at December 31, 2011. Debt obligations, net, were $5.39 billion, down from $5.84 billion. Total equity was $1.40 billion, compared with $1.57 billion at year-end.
- Liquidity: The company reported $739.3 million of cash and restricted cash reserved for debt repayment and approximately $3.33 billion of unencumbered assets at September 30. It reported $1.04 billion of debt maturities and minimum amortization requirements through 2013 after giving effect to post-quarter transactions.
Material changes versus the prior comparable period
- For Q3, common-shareholder loss widened to $71.8 million from $62.2 million. The company noted that Q3 2011 included a $22.2 million discontinued-operations gain; excluding that prior-year item, current-period results benefited from residential property sales, higher equity-method earnings and lower G&A, but were pressured by reduced interest income and higher financing costs.
- For the first nine months, common-shareholder loss was $185.6 million versus $27.1 million. The comparison was affected by a $102.3 million net gain on early debt extinguishment in 2011, alongside lower 2012 interest income and higher loan-loss provisions and asset impairments.
- The loan portfolio contracted: net loans and other lending investments were $2.12 billion, versus $2.86 billion at year-end 2011. Nonperforming loans were $639.9 million, or 30.2% of loan carrying value, compared with $771.2 million, or 27.1%, at year-end. The loan-loss reserve was $543.5 million, including $60.9 million of provision and $164.0 million of charge-offs in the first nine months.
- Net lease assets were 91.3% leased at quarter-end, versus 88.7% a year earlier. The company sold OREO assets with $281.0 million carrying value during the first nine months and recorded $35.6 million of income from residential property sales.
Outlook, risks and unusual items
- Management said it expected to address remaining maturities through a combination of cash, asset repayments and sales, refinancing and potentially equity capital transactions. It also expected to continue deleveraging and make further investments to maximize portfolio value. No numerical earnings guidance was provided.
- After quarter-end, iStar repaid $460.7 million of convertible notes at maturity and refinanced the 2011 secured facilities with a $1.82 billion secured facility due October 2017. Management said the refinancing extended maturities, reduced minimum amortization and lowered the effective interest rate versus the refinanced facilities. The new facility is secured by a fixed asset pool and includes collateral coverage requirements.
- On November 7, the company priced offerings of $300 million of 7.125% senior notes due 2018 and $175 million of 3.0% convertible notes due 2016, with an option for up to $25 million more of convertibles. The intended use was to redeem certain 2013 notes; closing remained subject to customary conditions and was not assured.
- Management cited continued volatility in commercial real estate and capital markets, elevated nonperforming assets and financing costs, and uncertainty in generating liquidity. Failure to meet debt obligations could trigger cross-defaults and acceleration. The company also noted valuation uncertainty, including risks for $226.4 million of European assets amid Eurozone uncertainty.
- Citiline litigation settlement was subject to court approval; the company expected to contribute $2.0 million, with most settlement payments funded by insurers. Regarding Hurricane Sandy, the company had not identified material damage as of the report date but cautioned that further effects could emerge.
Most important facts for investors to verify
- Confirm the issuer: the provided document is iStar Financial Inc.’s 2012 Q3 10-Q, not a Safehold filing.
- Track execution of the post-quarter debt refinancing, note offerings and planned redemptions, including final closing and use of proceeds.
- Monitor debt maturities, collateral coverage and covenant compliance, and whether asset sales, repayments and refinancing provide sufficient liquidity.
- Assess nonperforming loans, charge-offs, reserves and the valuation assumptions for impaired loans and real estate.
- Separate recurring operating performance from asset-sale income, equity-method gains, impairments and debt-extinguishment items when evaluating results.