iStar Inc (STAR) 2002 Q4 法說會逐字稿

Good day and welcome to the iStar Financial, Inc., fourth quarter and fiscal year 2002 earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to iStar Financial's Executive Vice President of Capital Markets, Mr. Andrew Richardson. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Joining us today are Jay Sugarman, Chairman and Chief Executive Officer; Spencer Haber, President; Katie Rice, Chief Financial Officer; Tim O'Connor, Executive Vice President and Chief Operating Officer; and Colette Tretola, Senior Vice President and Controller.

Before I turn the call over to Jay, I want to inform you that the call is being simultaneously cast on our website. We also have a replay number, 1-800-475-6701, with a confirmation code of 665333.

Before we begin, I need to inform you that statements in this earnings call which are not historical fact may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial's expectations are detailed in our SEC reports.

Now I would like to turn the call over to iStar Financial's Chairman and Chief Executive Officer, Jay Sugarman. Jay?

Thanks, Andy, and thank you all of you for being with us today. I'm pleased to report our fourth quarter earnings, announced earlier this morning, represent another strong quarter for our company and highlight another very strong year for our business and for our shareholders.

2002 was a record-setting year for iStar on many fronts and I want to highlight a few of those areas for you. First, earnings reached an all-time high of $282m or $3.03 per share on an AEPS basis. Second, net asset growth reached a record $1.2b for the year, including over $1.8b in new originations during the year, a 50% increase over the prior year. Three, return on equity finished at over 18%, despite running at average leverage levels well below our 2 to 1 maximum leverage target and significantly below other commercial finance companies, which are still running in the 7 to 1 leverage range. Four, credit quality remained high as evidenced by our formal upgrade to investment grade credit ratings from Fitch. iStar became the only company to receive an upgrade in their commercial finance and leasing universe last year, while 26 other companies in the sector were downgraded. And finally, fifth, total shareholder return was just over 23% for the year, completing a three year period in which iStar shareholders have enjoyed returns that have dramatically outperformed all major market indices. Our thanks to those of you who have been with us during that period.

Now let me turn to the fourth quarter specifically. While the quarter started somewhat slowly, we saw a burst of activity late in the year as borrowers and corporations moved to close transactions prior to year end. We ended up closing over $460m in new financing commitments during the quarter and we were very pleased with both the asset quality we saw and the spreads we were able to achieve on both an un-levered and a levered basis. Katie is going to break down that investment activity further for you in just a minute.

It's worth pointing out again that over 80% of our new originations in the last quarter were comprised of first mortgages and investment-grade corporate tenant lease transactions. Focusing on such high-quality investments is consistent with our strategy of building an overall business platform that generates a low volatility, high-quality income stream and that served us particularly well during the past two years when the markets have been unsettled and somewhat in decline.

Earnings came in a penny above our guidance at 77 cents per share on an AEPS basis and returns on equity and net interest margins remained strong and slightly above our expectations.

So given we increased our equity base, now totaling over $2b in tangible equity capital. We increased our asset diversification. We expanded our customer base of Fortune 1000 corporations, large institutional investors and high-net-worth individuals and we continued our track record of generating strong returns with minimal credit issues. Overall we're very happy with how the year ended and look forward to a very profitable 2003.

I'm going to speak more about that coming year in a minute, but let's have Spencer and Katie walk you through the numbers in more detail first. Spencer?

Thanks, Jay. Good morning, everybody. As you know, last quarter we brought Katie Rice on board as CFO. Katie brings to iStar extensive capital markets talent from over 16 years at Merrill Lynch, Lehman Brothers and Bank of America in both corporate finance and real estate finance. More importantly, having personally worked with Katie for a decade, I know that she brings a level of integrity and a straight-shooting style that's consistent with our own. So we welcome Katie on board.

She joins an executive management team that is now over a dozen deep with Tim O'Connor as COO and head of risk management, Jeff Digel and Roger Cozzi as co-heads of investments, Nina Matis as General Counsel; Barb Rubin as head of servicing and many other seasoned professionals in each of the key disciplines required to run and grow our core businesses.

With day-to-day operations in very good hands, I now have the opportunity to focus on how best to expand our platform into new and complementary businesses. Business development could take the form of external acquisitions, the internal formation of new origination businesses or the establishment of co-investment ventures with strategic partners to the extent we think such a structure would benefit iStar. So it pleases me to turn the call over to Katie to discuss our financial results in more detail, as well as the right side of the balance sheet. Katie?

Thanks, Spencer. Good morning, everybody. I'd like to cover three topics this morning. First, I'll summarize our results for the fourth quarter and the fiscal year ended 2002. Then I'll talk about risk management and credit quality and finally I'll review our capital markets activities and balance sheet position.

Let's start with our results. As Jay mentioned, we had a very strong quarter, particularly in light of the continued softness in the economy. Our adjusted earnings came in at 77 cents per diluted share, which is one cent above consensus. Our net investment income rose to $80m, which is another record for us. Our return on equity for the quarter was 18.9%. Our leverage decreased to 1.7 times book equity from 1.8 times in the prior quarter and fourth quarter interest coverage was 2.5 times and our fixed charge coverage was 2.1 times.

In terms of new business, our investment team had a busy quarter. We originated 15 new transactions with total capital commitments of $469m. We had repayments this quarter of $195m.

Let me give you a little more color on our new commitments. With respect to the underlying collateral, about 55% was office and industrial, 12% was hotels and 11% was residential. We continued to originate assets with an emphasis on security and credit, with first mortgages and investment-grade sale/lease-backs accounting for 82% of this quarter's volume. 54% of our new loan volume was fixed rate and 46% was floating rate.

Geographically, we continued to diversify our asset base this quarter with 35% of our new commitments located in the Southeast, 20% in the mid-Atlantic region, and 18% in the Northeast.

Now let's turn to the full year. For the fiscal year 2002, we had another record in a number of areas. Revenues grew almost 11.5% from the prior year, reaching $526m. Our AEPS for the year came in at $3.03, 1 cent above consensus.

We had a great year with respect to new origination volume, with over $1.2b in net asset growth. Our in-place net interest margins at the end of the year were 378 basis points, right in the middle of our targeted 350 to 400 basis point range. We also generated a return on equity of 18.4% for the full year.

Our credit statistics remain strong. At the end of the year our leverage was 1.7 times and from a coverage perspective we once again posted consistently strong results. For the year our interest coverage was 2.5 times and our fixed-charge coverage was 2.1 times.

Finally, with respect to our 2003 earnings guidance, we continue to expect diluted AEPS of $3.22 to $3.28 for the year. With respect to the first quarter, we expect to generate adjusted earnings of 77 to 78 cents per diluted share and, as we've already announced, we currently expect to increase our dividend by 5.2% in the first quarter from 63 to 66.25 cents per share.

Now let's turn to risk management and credit quality. For those of you who have followed us for a while, you know that our risk ratings are the result of our quarterly credit review, which is a two-day, bottom-up review of each asset. Every professional at iStar attends this meeting.

Our risk ratings range from 1 to 5, with 1 indicating both superior credit quality and performance well above our underwriting. A 3 would indicate average credit quality and performance in line with our underwriting and a 5 would indicate performance well below our underwriting.

This quarter our overall asset quality improved. With respect to our loans, the weighted average risk rating was 2.75, an improvement from last quarter's 2.81. In-place debt-service coverage at the end of the quarter remained a very strong 2.2 times, based on 2002 actual cash flows and current interest rates.

Our last dollar loan-to-value for the entire portfolio was 68%, so our borrowers continue to have significant equity investments to support our loans and cushion us from realizing the effects of softer commercial real estate markets.

Now let's move to the CTL portfolio. The average risk ratings for our CTL assets at the end of the fourth quarter also improved and came in at 2.76 versus 2.80 in the prior quarter.

Tim O'Connor and our risk management team continue to do a great job extending our lease maturities. Our CTL portfolio remains well leased at 96.1%, with a weighted average remaining lease term of 9.4 years. Lease expirations in 2003 represent just 2.1% of our annualized total revenue for the fourth quarter of 2002, so we have little exposure to near-term underlying real estate conditions.

As part of our risk management process, we monitor the credit profiles and performance of our corporate tenants. At the end of the year, 87% of our CTL customers were public companies or subsidiaries of public companies and 53% were investment grade. This gives us good visibility with respect to the credits underlying our leases.

In addition, our CTL portfolio remains well diversified from an industry concentration perspective with over 38 SIC codes represented.

In addition to reviewing our risk ratings each quarter, we also determine whether assets should be added to our watch list or put on non-accrual. In terms of our watch list, at the end of the quarter the watch list dropped to an aggregate book value of about $108m, down from $137m at the end of September. We added two loans and removed one CTL asset from the watch list, so we now have four loans and two CTL assets on the list. We also put one additional small loan on non-accrual status at the end of the quarter, giving us three loans totaling $11m in aggregate on non-accrual.

Now just to be clear, all of the assets on our watch list and on non-accrual are currently paying as agreed, but consistent with our risk management discipline, we will continue to monitor these assets very closely.

Now despite our strong credit track record with no loan losses in the past 10 years, we have built and will continue to build substantial loss reserves. We believe that we are well protected in the event that a credit issue does arise. Based on the size and diversity of our asset base and the reserve levels that we've built, we're comfortable that, to the extent we were to suffer a credit loss, it would not have a material impact on our balance sheet or our earnings guidance.

Finally, let me walk you through our recent capital markets activities and our balance sheet. The most significant event this quarter was the completion of our first primary equity issuance in November. We sold a total of 11.5 million shares, 8 million primary shares and 3.5 million shares owned by Starwood Capital Group. We used the $203m of net proceeds to pay down our secured credit lines and increased our tangible book equity to $2b.

The equity offering was a great opportunity for us to get out on the road again and tell our story and we had over 90 institutions participating in the offering and were able to significantly expand our shareholder base and create additional float in our stock. Starwood Capital reduced its ownership to 19.8% of our diluted shares.

We believe that we have plenty of liquidity to fund our business through 2003 and don't plan to raise primary equity this year. You will probably see us increase the size of our universal shelf back up to the $500m level, but the capacity is intended for debt issuance, not equity.

We also announced the recent extension of our-- one of our $700m credit facilities. We extended the maturity from 2005 to 2007. Currently we have five credit facilities with a total committed capacity of $2.7b, with just $1.3b drawn at year end. We have no meaningful debt maturities until 2005 and we ended the year with unencumbered assets to unencumbered debt at a strong 2.2 times.

We're now starting to work on the next offering under our iStar asset receivables program, the matched funding program that we call STARS. STARS continues to be a very cost-effective way for us to issue on-balance-sheet debt, backed by our loan and CTL assets.

In terms of matched funding, we're committed to operating the business such that 100 basis point move in interest rates has minimal impact on our earnings. We define minimal as a range of plus or minus 2.5%. We're currently operating within our policy and with a 100 basis point move impacting earnings by about 1.5% or about a penny per quarter.

As Jay reiterated, we were upgraded to investment grade by Fitch and put on positive credit watch by Moody's and S&P last summer, so one of the most important priorities this year will be to position ourselves to move from positive outlook to investment grade at Moody's and S&P.

We remain confident that the continued strength of both our business and our credit statistics throughout a difficult cycle will warrant an upgrade this year.

And with that, let me turn it back to Jay.

Thanks, Katie. Just quickly back to 2003, we see the economy, hopefully, [inaudible] the first signs of recovering and the real estate market, hopefully, touching bottom. So we expect to see a pretty attractive mix of business from all our product lines this year.

Obviously, while geopolitical concerns may inject some uncertainty during the first half of the year, we are comfortable that market opportunities will be there throughout the year as we continue to expand our reach into both our core markets and increase the size of our origination platform.

With our dividend increase of just over 5% previously announced as guidance and a long-term goal of continuing to increase dividends annually at, at least that level, we believe ample rewards still exist for shareholders to take the time to understand our industry and our market-leading position in it and we look forward to helping everyone out there reach that level of understanding. So with that, let me thank you all for joining us and let's open it up for questions operator.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press the one on your Touch-Tone phone. You'll hear a tone indicating you've been placed in queue. If you pressed one prior to this announcement, we ask that you please do so again at this time. You may remove yourself from queue at any time by pressing the pound key and if you're using a speaker phone, please pick up your handset before dialing. Our first question comes from Gary Gordon with UBS Warburg. Please go ahead.

OK, thanks; two questions. One is I know there was $6.7m in fee income you earned and I get some feel for the composition of that? I guess, [inaudible] is there any material prepayment penalty.

Sure, Gary. It's Spencer and I'm sure Katie will chime in, too. As usual for us, the other income line item was a combination of prepayment penalties, realized gains on discount loans that came back during the quarter and just miscellaneous fees. Just the composition of that is probably about $3.5m of the $6.7m was prepayment penalties and discounts and the rest were fees-- was fee income.

OK, thanks. Two questions on the-- on your-- I'll call it the interest margin, although it's not quite that. Just on the new business, it looks like you got a higher spread over your [inaudible] in '02 than '01, despite having more a conservative mix. Presumably, that's the benefit of a better supply/demand characteristics of the market. Let me ask that one first. Is that-- does that make sense that basically you're benefiting from better supply/demand?

I would tell you the supply-side equation, unequivocally yes. The demand side there has been competition coming into the markets as we mentioned in our last call. I will tell you that we did a great job of positioning ourselves in the third quarter for deals in the fourth quarter that we thought would happen at attractive spreads and they did. Part of that-- what happens, typically at year end, is people become less price-sensitive and more execution-sensitive. Obviously, iStar is in a perfect position to deliver with certainty and credibility in a way that we can get a little bit wider premiums than sometimes we can get during the year. So I think, yes, supply looks really attractive, as I said, in all product lines. We think there's going to be a lot of opportunities for us to put out capital. Actually, I should say the demand side looks very attractive. The supply side there's a little bit more competition creeping in, so, again, if net interest margins tick down from above 400 into the mid-300s, that's where kind of we'd expect them to stay.

OK. That may sort of get at my last question. If I look-- if you look at the mix of your business, the first mortgages, the second mortgages and sale lease-backs so the risk profile that you're looking at, at present, is that, would you assume, on the more-conservative side with what you see over time, normal or, you know, potentially higher risk than you'd expect over time? And I would assume it's-- I guess, I'm assuming it's on the lower-risk side and as you get more normal in your mix your interest margin would widen out.

I think you're touching on a theme that will probably play out over 2003 as we see the market begin to bottom. You know, obviously, going back to early 2000 we have shifted towards, you know, the safer end of the spectrum because we felt the markets were using underwriting assumptions that we just couldn't agree with. I now believe -- and I think, again, we mentioned this last quarter -- we are seeing the market start to underwrite with relatively conservative projections, much more in line with what we typically have used. That will allow us to put out capital, I think, a little more aggressively when we see signs the market is turning. Don't quite see that yet. As you saw in the fourth quarter, we continued to skew towards stuff that we think, through thick and thin and pretty much any uncertain scenario still performs great. As we see an upturn taking place, you're still going to see a lot of very-high-quality deals in the portfolio, but it will give us a little more comfort on reaching for yield in some of the situations we feel good that our principal's very well protected. That hasn't developed just yet, Gary, but I would tell you as 2003 plays out and, certainly, as the geopolitical environment plays out, you could very well see the mix slightly turn back towards what it was in '98 and '99.

The other thing I'd say, Gary, is I'll answer a question that you kind of asked but maybe didn't directly. You know, we've always said that we think that we serve, you know, maybe 10% of a very, very large market. And what's-- one of the things we've noticed in the last 12 months is that, even on the supply-side, as Jay said, where there's a little bit more competition in some areas, I would say, you know, secularly speaking, a bigger chunk of the overall commercial mortgage and sale/lease-back market is coming into our wheelhouse because I think there is a long-term trend where borrowers are realizing that the securitization straight-jacket, the conduit straight-jacket, is not always the way to go and that the demand for what I'll call more flexible or alternative capital in our markets feels like it's growing. So it feels like our addressable market is growing, even though I would tell you there also is a little more competition than there was a couple of years ago.

OK. Thanks a lot. Good luck.

Thanks.

Thank you. Our next question is from Don Destino with Banc of America. Go ahead, please.

Hello, everyone.

Hello, Don.

Hi, Don.

I've got a little bit of a laundry list, so if you want to cut me off, I can get back in queue. My first question is related to Gary's. While I can see that on a year-over-year-- on a full-year-over-full-year basis LTVs have come down on lending, it looks like over the course of 2002 LTVs actually increased even as you were kind of backing away from the MES tranche (ph) and I'm just wondering is there anything going on there, any kind of strategic shift towards higher LTV first mortgages?

I don't-- I mean, I'll let Jay answer this, really, Don, but if you look at the numbers just to focus on your point, this is all in the supplemental data at the end of our press release. The last dollar of leverage for business originated in the fourth quarter was 72% versus the last dollar of leverage for the average piece of business originated during the year, which is 68.5%. And honestly, just our business, as you know, is not scientific enough to infer a trend from that couple of percentage point difference. Honestly, that's just the spin of the wheel.

Right. Yeah, I was just-- I was just noticing kind of the progression during the year, you know, it kind of marched up while you backed off of MES (ph), but I do realize this is not an actuarial analysis and it can shift pretty easily.

I'd also say, Don, the systemic revaluation came down during the year. So we may be in the same place in the overall capital structure, but we, you know, believe valuations are finally being applied more conservatively across the market and so we're going to show you those statistics. So, you know, we may be at the same basis per foot in a multi-family or in an office building, but the valuation actually came down during the year.

That makes sense.

And that's an important point, just to follow on. When Katie gave the 68% portfolio-wide last dollar LTV number and when you're looking at these origination stats, you know, for us, people should understand these are not static numbers. These are not we go get some third-party appraisal, we stick it in a file and that's the number that it stays at until we either get our money back or there's an issue. So, hopefully, we're providing investors with some real-time flavor for where we think the collateral value is moving, quarter-to-quarter, because we do update these valuations every quarter.

Got it. OK. Two more, actually; they may be quick. The first, Spencer, are you ready to provide a little more color around the types of other businesses that you may be interested in? And, I mean, is that just purely a function of you being freed up a little bit; because it sounds as though you're still excited about the MES [ph] piece going forward.

Yeah, I think a couple comments on that. One, there is nothing that's material that's in our cross hairs right now. So this really is a question of focus going forward, not an underhanded way of telling people that there's something about to happen, because there's not. But with respect to our focus on growing the business, you know, we have always said that our core competence is in the intersection of real estate, credit capital markets and corporate finance. I'd say, again, speaking generally, the last couple of years have presented us with not a whole lot of interesting opportunities to expand the business because we've seen a lot of either bad business models or business models that are decent business models that were just very, very richly priced in the market. And I think as we get to be, at this point, a $6.5b enterprise it does make sense from both the shareholder perspective and a creditor perspective to make sure that we've got a diversified product offering and I think you've seen in operation in the last two years, even with the five or six product lines that we have, that we have never been in a position where we have to keep forcing capital out in an area that's gotten overheated because we have enough to do across all of our businesses. And I think it's in our long-term interest -- again, both from a credit and from an equity perspective -- to make sure that we're looking at diversifying our product lines and I do think that there is opportunity in the market right now, given some of the dislocation in the corporate credit markets, given what's happening to real estate fundamentals being somewhat softer, I would say that the opportunity, generically speaking, for us going forward the next year or two is greater than it has been over the last year or two, but there's nothing that's in our cross hairs right now.

Got it. And then finally, maybe for Katie, I'm well aware of all the benefits of the STARS program. How do the rating agencies view that program? I mean, given your credit, given your leverage, you certainly look like an investment-grade credit and I'm just wondering if the rating agencies frown upon you pledging a lot of assets to the STARS program and if that's one of the things that's holding you back.

No. We wouldn't say that's holding us back. Obviously, the rating agencies are focusing on unencumbered assets but we think that the benefit of issuing STARS at the low cost clearly outweighs the issue of having additional encumbered assets.

Got it.

So we don't think that would be something that would be impacting their thinking about our rating. Really, what they're waiting for is to see some light of day on the economy here. I think they're generally very comfortable that inherently we are an investment-grade credit. I think they would like to see us come through a few more quarters of the cycle, just to watch us and watch our credit statistics.

All right. Thank you all very much. Nice quarter.

Thanks, Don.

Thank you. We'll now move on to Jack Micenko with Lehman Brothers. Please go ahead.

Good morning. Thanks. Most of my questions have been answered; just a few slight ones. Last quarter you talked about $950m in net portfolio growth in '03 and we've seen a pretty strong third quarter, about $300m net, and it sounds by all accounts that there's some optimism around business volumes. How do you feel about that in light of the recent quarter? And then, second, can you provide any color on some of the asset-level trends we saw in the watch list? It looked like a pretty large lease came back around or maybe was sold and then the two smaller loans were then listed on the watch list. Can you talk about that stuff?

Sure. Jay, you want to take the first one?

Yeah, I guess, volume-wise we had I think a very, very strong fourth quarter as, again, I said. People somewhat got religion, realizing year end was fast approaching and we were able to put a lot of deals together in a short period of time. You know, volume-wise, the mix moving towards first mortgages and CTLs will probably bump up nominal volume numbers typically and bump down net interest margins nominally. So that's a trend you'll have to be somewhat sensitive to when you see us skew towards very safe first mortgages and CTLs. You might get an incremental bump in volume and a slight notch down in margin.

Sure. Sure.

So they somewhat off-weight each other. That said, we had, you know, a quarter that we are very, very happy with. I think you'll see throughout this year volumes will be strong. It's going to be dependent, somewhat, though on the timing of the resolution of the geopolitical issues out there because borrowers will slow down if they think there's an imminent event coming. So I think there's a little bit of uncertainty in the first half of the year that we think will clear up and then, again, you may see a reasonably strong burst of activity later in the year.

OK. OK.

Katie?

Yeah, with respect to the watch list, as I mentioned there are six assets, totally, on the watch list, four loans and two CTLs. We had one CTL move off of the watch list last quarter. They restructured their business with an equity infusion into their business, so we moved that off of the watch list last quarter.

OK. It sounds like most of the watch list stuff is still performing, it's just being watched as the name would imply?

Yeah, absolutely. All of them are paying as agreed and these are situations that we want to monitor carefully. You know, some of them have complications with respect to joint ventures or credit, but they're all paying as agreed. It's just something that we use as a management tool to proactively watch.

OK, great. Thank you.

Thanks, Jack.

Thanks, Jack.

Thank you. Our next question comes from Michael Hodes with Goldman Sachs. Go ahead, please.

Yeah, hi. Good morning. Two questions; the first is a follow-up on the asset growth expectations for this year. I was hoping you could give us a sense of what you're looking to see as far as refinancing activity as we expect that to start to slow down with some incremental stability on rates. And then secondly, I was hoping you could drill down a little further on your thinking on provisioning. I notice that it did pick up in the fourth quarter. Should we take that as a run rate? Thanks.

Yeah, I guess it's a little tricky to predict net asset growth, again, because it's dependent on mix. I think we talked about, you know, $1.5b of gross originations and $700m-ish of repayments as our best guess early in the year. That number's clearly going to move around, Mike. We're not going to be able to give you better guidance early in the year, again, because mix plays so importantly into the nominal numbers. What we do see is across all product lines the kind of deal flow that suggests to us that we're going to have a very strong year and, again, subject to geopolitical issues out there, we feel pretty comfortable that the mix times the margin is going to come in where we want it to be. You know, it may be a little more volume in the senior loan side or the credit tenant lease side at slightly lower spreads or it may be a little more volume in the subordinated stuff at slightly higher spreads, but when you mix it all together we feel pretty good. The repayment piece of the puzzle we have a pretty good handle on. There's actually quite a few maturities scheduled this year, which we expect to take place as expected. I somewhat agree with you that with rates staying where they are, unexpected repayments should be lower, but in this environment, I'll just tell you, we have seen other people willing to do stuff well inside of, on a spread basis, where we would be willing to transact and those are deals we're just going to let go. So there may be some incremental repayments that take place throughout the year. But, again, looking at the overall mix of deals going out the door and capital coming back in from repayments we still feel pretty good about that.

Mike, with respect to -- and Katie will chime in -- with respect to reserve growth, look, it's always been our policy to grow reserves when possible. We had a strong quarter in terms of net asset growth, obviously a very strong year in terms of net asset growth, but I would actually not guide you to expect $2.5m as a run rate number without, obviously, getting into too much detail. That is probably a higher number than I would expect for a run rate in '03. We try to be conservative when we can be conservative and I think that we are relatively fast closing on our stabilized targeted reserve levels and because of that, I think in 2003 what you're going to see is reserve provisioning quarter-by-quarter is going to be much more a function of where we are in terms of net asset growth. And that's-- it's, frankly, a very good point. Because what you've seen from us in the last five years of basically these sort of stair-step reserves every quarter is unlikely to continue, simply because we're at the point where I think we've reached or very close to reached our targeted sort of in-place level of provisioning. And it's going to be much more a function of net asset growth going forward, so it will fluctuate up and down on a quarterly basis and $2.5m feels like a higher than run rate number for 2003.

All right. But we should think of it in proportion to asset-- loan growth, essentially?

Exactly.

Yeah. Thanks.

Thanks.

Thank you. We'll now move on to Mike Hughes with Merrill Lynch. Go ahead, please.

Hi. If I heard you guys correctly, you have no plans for primary equity this year and if that's the case versus the prior asset growth guidance, I would think your leverage is going to either push very close to 2 or even eclipse 2; any clarification?

Sure. It shouldn't eclipse 2, Mike. Obviously, we don't want to get into specifically what our capital plans are since they're not finalized yet, but there are other ways to get between Point A and Point B, for instance, one of the things that we haven't done in four years is issue perpetual preferred. You know, we might want to layer in a little bit of perpetual preferred this year. We just, obviously, raised common equity and the perpetual market is pretty attractive right now. So maybe we do a little bit of that later in the year. I think to the extent that we look for primary equity it probably is an early '04 event and, obviously, somewhat a function of how quickly net asset growth happens. But based on our model now with the net asset growth that we've guided to, based on our total capital plans, which might include a perpetual preferred offering, we don't have the need for another primary offering this year.

And 2 is still the ceiling, roughly, on the leverage and that's still the agreement with the rating agency?

Yeah. I mean, 2 is the max that we, you know, want to run at and that's still, I think, our policy and it's still the understanding with the rating agencies.

Great. Thanks. Nice quarter.

Thank you.

Thank you. Our next question is from Jim Wolfe (ph) with RBC Capital Markets. Please go ahead.

Yes, good morning. I just had one question remaining. Can you tell us what happens with the re-marketable securities on March 1st?

No. I don't think it's appropriate. You know, sorry to ever say no, but I don't think it's appropriate to comment on that because it hasn't happened yet and those are public securities. I can tell you what the options are. The options are we pay them off or the options are that we reissue them as unsecured bonds. I will tell you we do have a plan in place for dealing with them. I will tell you that we've already got our cross hairs keyed in on what we're going to do and that there should be absolutely no issue with respect to that maturity. It's not very big. It's only $125m, but, Jim, I'd rather not go into that, because those are public securities. But we're either going to pay them off or we're going to reissue them as unsecured bonds pursuant to the documents.

And what would be the timing on the public announcement?

It would happen right when those bonds mature, which would be the first week of March.

OK. Thanks very much.

OK.

Thank you. We'll now move on to Steve Springer (ph) with Target Capital. Go ahead, please.

Yes. I'm wondering what your net interest margin would be if you were operating with the current mix of business with investment-grade ratings?

Yeah. We think that getting the investment-grade rating will decrease our interest cost by about 100 to 125 basis points but that's, obviously, the marginal cost. It won't flow through the balance sheet right away. So our net interest margins would, obviously, increase accordingly.

I mean, if you assume, just for incremental color, that not all of our debt is ever going to be corporate debt, OK, and you assume that, again, these are very, very broad numbers -- I caveat this six ways to Sunday, OK? -- but that half of our debt is secured and half of our debt is unsecured and we save 100 to 125 basis points on the unsecured component, while although it will take us a little while to roll that through the balance sheet, you can start to get a feel for kind of what the weighted average improvement in our net interest spread would be.

OK. Thank you.

Thank you.

Thank you and just a reminder to press one if you do have a question. We'll now move on to Ann Masick (ph) with Deutsche Banc Securities. Please go ahead.

Good morning, just two questions. One, in the 10-Q the company made mention that there were a small number of loans that provide for the accrual of interest that is different from the payment terms. Has that number changed at all? And two, is the company willing to provide any greater clarity either on the principal amount that is related to those loans or, alternatively, the interest differential?

Sure, Ann. Let me take-- let me address that. Speaking generally, while we have occasionally done what are called pay-versus-accrue loans, it has not been a particularly large piece of our business. I don't think we have a problem providing that to the market supplementally, although I don't have the exact number for you right in front of me. But I don't think we have a problem providing it supplementally. We-- in terms of directionally, we, as you know, bought Lazard Freres (ph) structured finance business in December of '98 and their business was almost entirely pay versus accrue, structured as pay-versus-accrue loans and we're very, very happy with that transaction. We've made a lot of money on that transaction, but as those loans have paid off, the percentage of income from pay-versus-accrue loans has actually dropped over time.

And just to give you some indication, in the fourth quarter of 2002 there wasn't a single deal that has an accrual feature. Of the $460m, all pay and coupon rates were identical.

OK.

We can provide that information supplementally in terms of-- we can stick in the K in terms of the principal balance of loans that have that structure and, obviously, as a risk management and an accounting matter, we would only book a positive difference between accrual versus pay if we actually believed it was realizable. But we can provide that number supplementally in the K.

OK. And then the other question was the agencies have talked about a desire for the company to increase their dependence on unsecured debt. Have they given any targets in terms of percentages that they would hope iStar would achieve?

I think the conversations that we've had with them have been around a 50/50-type split of unsecured versus secured debt as we get to investment grade. Obviously, this is a chicken and egg problem that faces dozens and dozens of companies. It's a very old tale of which comes first, the rating or the unsecured debt. I think we've made an enormous sign of good faith over the last five years, having between 25% and 30% of our overall debt be unsecured debt when the cost of that debt, which is reflective of our rating, is way out of line with where we think it should be. And the conversations with the rating agencies that we've had have been, we will continue to show that good faith in terms of spending some of our own capital, shareholders' capital and our capital, to show that sign of good faith as long as there was an understanding on the other side that it is a chicken and egg issue and we're not going to run at 50% unsecured with a BB+ rating. And I think there's been a recognition of that and I think that, as Katie said, we do not believe that -- while we obviously do not guide or control or dictate what the rating agencies do or believe -- we do not believe that the issue of so-called unencumbered assets or how much of our debt is unsecured is going to keep us from an investment-grade rating as long as we acknowledge, which we have, that we keep the march towards a higher percentage of unsecured debt as our ratings continue to improve, which is what we've done.

OK, excellent, great. Congratulations and good luck in making that progress this year.

Thanks.

Thanks, Ann.

Thank you. We have no further questions at this time, Mr. Richardson. Please go ahead with your closing remarks.

Hi. This is Jay. I just want to again thank you all of you for being with us and continue to look forward to good results this year and we'll give you another update in about three months. Thanks again.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.