iStar Inc (STAR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the iStar Financial third-quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, iStar Financial Executive Vice President, Mr. Andrew Richardson. Please go ahead.

Thank you, operator, and good morning, everyone. Joining us today are Jay Sugarman, Chairman and Chief Executive Officer, 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 this call is being simultaneously cast our website. We also have a replay number 1-800-475-6701 with a confirmation code of 702511. Before we begin, I need to inform you that statements in this earnings call, which are not historical facts, may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial, Inc.'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 all of you for joining us today. iStar had another strong performance in the third quarter, as our pace of business quickened and earnings continued to reach record levels. On the origination-repayment front, we have increases across the board. Net margins on new transactions were very strong. And we're slowly but surely reducing our cost of capital, as our balance-sheet and portfolio strength continued to increase.

As most of you know, what drives our business is our ability to quickly and efficiently meet the needs of high-end customers with a wide range of custom-tailored financing solutions. And then, most importantly, hold those investments on balance sheet so our customers have the comfort and assurance that they can get a rapid response in the future as market conditions change and opportunities present themselves. What lets us know we're doing a good job for our customers is our high percentage of repeat customers and the positive feedback we get from brokerage community about our responsiveness, our creativity and our fairness in dealing with our customers. The quarter I'm pleased to report the repeat-customer business crossed the $5 billion mark. And that one makes up more than 50 percent of total historical originations.

Our investments activity this quarter was very strong. Investments this quarter ranged from a large, first-mortgage financing, as part of the buyout and privatization of publicly-traded real estate company by a well-known LBO firm, all the way to a long-term credit tenant transaction that will generate for our shareholders low-teen returns against the single-A credit through the year 2017. One large repayment in that was our investment in the General Motors building in New York City, which ended up selling for 40 percent above the value we assumed in our calculations for our own internal loan-to-value exposure levels. At that sales price, the last-seller(ph) exposure of our loan turned out to be less than 47 percent of today's value.

Now, while real estate values continue to hold-up well, real estate fundamentals continue to bounce along pretty weakly. As we have said in previous calls, we have not yet seen a discernible firming trend in most major markets, although many market participants continue to anticipate a recovery beginning sometime soon. Our relatively safer loan investments and long-term credit-tenant lease deals do insulate us from most of the weaker fundamentals, but we can continue to evaluate our portfolio with a cautious viewpoint. And you will see that reflected in our risk ratings this quarter. We had positive outcomes on several of our watch list (ph) assets this quarter. And total watch list amounts actually went down. But we did write-off the above par amount associated with one of those watch list assets that we had acquired in 1998. That assets had a very high coupon, and we now expect that unusually high coupon will need to be renegotiated. Consequently, the above par basis is no longer warranted. In short, we think we are on track for the rest of this year, and are now beginning focusing on what new opportunities are out there as we head into the new year. So let's wrap up the third quarter, and turn it over to Katie.

Thanks, Jay. Good morning, everyone. I would like to cover three topics. First, I will summarize our results for the third quarter and talk about our earnings guidance, both for the remainder of 2003 and for 2004. Then I will talk about risk management and credit quality. And finally, I will review our capital markets' activity and balance-sheet position. Let's start with our results for the third quarter. We had another strong quarter with adjusted earnings coming in at 83 cents per diluted common share -- a penny above consensus. Our net investment income rose to 91.2 million -- up over 16 percent from the third quarter of 2002. Our return on assets was 6.1 percent, and our return on equity for the quarter was 19.5 percent. Our leverage at the end of the quarter was 1.8 times book equity. And our interest covered ratio was 2.9 times, and our fixed-charge coverage ratio was 2.4 times. Our dividend payout ratio for the third quarter was 77 percent.

In terms of new business, we originated 15 new transactions with total capital commitments of 848 million -- clearly a record quarter. And as we anticipated, we also had significant repayments this quarter, which totaled 436 million. Approximately 45 percent of the dollar volume of our new commitments was made to repeat customers. As our franchise continues to grow, we are pleased to be able to provide thoughtful advice and creative financial solutions to a growing list of high-end, real estate owners and to provide our existing clients with the speed and certainty, with respect to their financing needs, that they have come to expect from us. We do remain cautious with respect to the commercial real estate market, and are continuing to originate assets with an emphasis on security and credit. This quarter first mortgages, participation in first mortgages and investment-grade, corporate-tenant leases continued to dominate our new origination volume, making up approximately 68 percent of our transaction.

We're finding opportunities in a number of different asset types, including office, industrial, multi-family, and hotel properties. Geographically, we continue to diversify the portfolio, with 29 percent of our new commitments located in the mid-Atlantic region, 20 percent in the Southeast, 12 percent in the Central Region, and 10 percent in the West. Our in-place, net interest margin at the end of the quarter, was 427 basis points up from last quarter, reflecting both strong asset returns and a decrease in our cost-of-debt capital.

Now let me walk you through our earnings guidance. With respect to our 2003 earnings guidance, we currently expect adjusted earnings of $3.24 to $3.25 per diluted common share for the year. We also expect full year GAAP earnings of $2.39 to $2.42 per diluted common share. With respect to the fourth quarter, we expect adjusted earnings of 84 to 85 cents and GAAP earnings of 60 to 63 cents per diluted common share. Our guidance now assumes net asset growth for the year of 1.1 to 1.3 billion, which is about $300 million higher than our prior net asset-growth assumption of 800 million to a billion. Our new net asset-growth figures assume gross originations this year of 2.3 billion and repayments of 1.1 billion for the year. With over 770 million of net asset growth through the third quarter, we are comfortable adjusting our full-year growth assumptions up slightly. We do expect other income in the fourth quarter to be higher than normal, due to prepayment penalties from two loans that we expect to repay. So we expect our full-year earnings, to come in at the high end of our prior guidance, which was 320 to 325 per diluted common share.

Now let's move onto our 2004 earnings guidance and talk about the first quarter compensation charges. In early October, our CEO, Jay Sugarman, contingently vested the remaining 400,000 incentive shares out of a total 2 million now earned by him under the Company's long-term incentive plan. We expect that these shares will become fully vested on March 30th, 2004. At that time, the Company will record a one-time charge from the line item, general-administrative stock-based compensation. The charge will be equal to our stock price on March 30th multiplied by 2 million shares. So, as an example, assuming our stock price closed at $38 on March 30th, the charge to earnings would be 76 million.

Most of you are familiar with our CEO's compensation arrangement under our long-term incentive plan. It is described in detail in our last three annual proxy statements, and each of our quarterly financial statement filings since 2001. But let me summarize some of the key points. Three years ago, the Board structured our CEO's employment agreement with four tranches (ph) of incentive shares that vested once certain stock price hurdles were met. The agreement was structured such that he would receive no incentive shares if the Company generated less than the 20 percent average, annual total rate of return to its shareholders during the period beginning January 2001 and ending March of 2004. In order to earn the maximum number of shares -- which is 2 million -- the Company had to generate an average, annual total rate of return of more than 35 percent during the same period. As of October third of this year, the Company generated, through dividends and stock price appreciation, a 39.7 percent average, annual total rate of return for its shareholders. And at that time, the final truancy of the CEO's shares vested.

Now to put this performance in perspective, our average, annual total rate of return of over 39 percent has solidly outperformed most of the indexes, including the S&P 500, which has had an average, annual total rate of return over the same period of negative 7.2 percent, the Russell 1000 financials, which had an average return of negative 4.6 percent, and Morgan Stanley the REIT index, which had an average return of about 15.8 percent, over the same period. In total, since January 2001, our shareholder returns, assuming the dividends were reinvested, were approximately 150 percent and over to $2.4 billion of shareholder value has been created.

In addition to the CEO shares. we anticipate that two other share awards will vest in the first quarter of 2004. The first is a 100,000 incentive-share award that I was awarded when I joined Company. It will vest at the end of January. It's certain total rate of return targets are met. Second is a 155,000 share award that was issued to the principals of the former Acre Partners. This represents the final contingent consideration related to the acquisition of their company in 2000. So we expect the aggregate, first-quarter 2004 charge to be 2,255,000 shares, both applied by the then current stock price. Assuming a $38 stock price on the respective vesting dates of the incentive shares, the total first-quarter charge will be approximately $86 million.

Now, let's walk through our 2004 earnings guidance before giving effect to the compensation charges we have just reviewed. We expect adjusted earnings for 2004 of $3.40 to $3.48 per diluted common share and diluted GAAP EPS of 243 to 253. Our earnings will be reduced by the compensation charge in the first quarter by approximately 76 cents, assuming a $38 stock price on the vesting dates. Our assumptions for our guidance include 2.4 billion of new originations and additional fundings and 560 million of repayments, resulting in net asset growth of approximately 1.8 billion. Our growth estimates take into account the increased velocity of our business but are tempered by our views with respect to the current softness in the commercial real estate market. As we have said in the past, we target a 5 percent dividend growth rate and a 78 to 82 percent payout ratio.

Now let's turn to risk management and credit quality. As you know, our risk ratings are the result of our quarterly credit review, which is a two-day bottom-up review of the asset. Early in the year, we refine our risk rating systems for loans in order to better reflect two statistics that were implicit in our prior rating system. The first is our assessment of the risk of principal loss, and the second is how the collateral is performing compared to our original underwriting. We continue to use a scale of 1 to 5 in rating each asset, with one being the best rating and a five indicating a problem asset. We have included both of these loan-risk ratings in our earnings release. We believe that breaking out those statistics will enable you to better understand how the risk-to-recovery of our principal is relatively insensitive to fluctuations in underlying real estate market conditions and changes in collateral performance. This quarter the overall asset quality in our structured finance portfolio declined slightly. With respect to our loans, the weighted-average risk-rating principal loss was 2.65, up slightly from 2.52 last quarter. For performance compared to original underwriting, the average increased slightly to 3.11 from last quarter's average of 3.00. For our structured finance portfolio, the in-place debt service coverage at the end of the quarter, remained a very strong 2.2 times. This is based on year-to-date cash flows or trailing twelve-month cash flows and current interest rates. Our last-dollar-loan to value was 69 percent. So, overall, our borrowers was continued to have significant equity investments to support our loans.

Now let's move to the CTL portfolio. Our CTL risk ratings continue to reflect our assessment of the quality and longevity of the cash flows from the assets. The average risk rating of our CTL assets at the end of the third quarter was 2.69, an improvement from the prior quarter's rating of 2.79. At the end of the quarter, our CTL portfolio was 92.7 percent leased, with an average remaining lease term of 9.6 years. These expirations for the remainder of the year represent just .7 percent of our annualized total revenues for the third quarter of 2003. As part of our risk management process, we monitor the credit profiles and performance of our corporate tenants. At the end of the quarter, over 80 percent of our CTL customers were public companies or subsidiaries of public companies, and 57 percent were investment grade our implied-investment grade. This gives us good visibility with respect to the credits underlying our leases.

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. At the end of the quarter, we took two loans off of our watch list. The first loan has a book value of 38 million and is collateralized by a hotel asset located in New York. We recently completed a modification to the loan that resulted in the borrower making a principal pay down and funding the completion of several additional rooms in exchange for a reduction in interest rate. The second loan, which had a book value of 3 million, was collateralized by a retail property, paid off in full in September. We added one corporate-tenant lease with a book value of 7.2 million to our watch list, due to complications surrounding the tenants' affirmation of our lease in their bankruptcy proceedings. We also took one corporate-tenant lease off of our watch list, due to the tenant's improved liquidity position after a settlement with one of its service providers. The watch list now includes five loans and three corporate-tenant lease assets. with a total book value of 107.6 million or 1.7 percent of our total book value.

This quarter we put one additional assets on non-accrual. This loan is a 90-percent interest in a mezzanine loan that has an outstanding principal balance of 31.6 million and is secured by a class-A office building. The loan has been on our watch list for two quarters, due to a decrease in the occupancy of the property, resulting from accounting firm unexpectedly vacating their space. We acquired this loan in 1998 as part of the Lazard Freres (ph) structured-finance portfolio acquisition. And Lazard continues to retain a 10-percent interest in the loan. When we acquired the Lazard portfolio, we booked this asset with a small premium to its face amount, due to the over-market interest rate. The inner-creditor agreement between the first mortgage and our mezzanine loan, does not allow us to foreclose on the property. This quarter we placed a loan on non-accrual when the borrower stopped making its debt-service payments, due to insufficient cash flow at the property level. Today, we believe that the underlying collateral value, supports our basis in the outstanding, unpaid principal balance of the loan. However, we believe that the remaining 3.3 million of unamortized premium associated with the loan is impaired. As result, we wrote off the premium and took a $3.3 million charge against our loan loss reserves in the third quarter. This represents the first impairment charge we have taken against an asset. The accounting treatments for the impairment is fairly straightforward. The asset value is decreased by 3.3 million, and our on-balance sheet general reserve is reduced by 3.3 million. There's no P&L impact. We now have four assets with an aggregate book value of 51.4 million or .8 percent of our total book value on non-accrual. We continue to monitor our watch list in non-accrual assets very closely.

As we do each quarter, we continue to build loss reserves to ensure that we are well protected when credit issues arise. Our general loss reserves and asset specific cash reserves totaled 237 million or 655 basis points at the end of the third quarter. With respect to our corporate-tenants leases, our cash deposits, letters of credit, allowances for doubtful accounts, and accumulated depreciation totaled 263 million or 958 basis points as of September 30th. Based on the size and diversity of our asset base and the reserve levels that we have built, we are comfortable with our current reserve levels.

Finally, let me walk you through our recent capital markets activities in our balance sheet. During the quarter, we met with the rating agencies as part of our annual update process. Yesterday, Moody's confirmed our senior unsecured-debt rating as CA1 with a positive outlook. We were hopeful that we would receive an upgrade from Moody's in the fourth quarter. However, we remain on positive outlook, and Moody's has indicated that it expects to revisit our rating sometime in the second quarter of next year. We expect to receive feedback from S&P later this quarter. In September, we completed a public offering of 4 million shares or approximately $100 million of our Series S (ph) cumulative, redeemable preferred stock. The preferred was priced with a 780 dividend yield, and is non-callable for five years. We used the proceeds from the offering to pay down our secured-credit facilities.

We continue to have plenty of financing capacity to fund our pipeline. Currently we have five credit facilities, with a total committed capacity of 2.7 billion, and just 1.2 billion drawn at the end of the quarter. Our balance sheet remains strong, as we now have over 2.2 billion of tangible book equity. We have no meaningful debt maturities until 2005. So we continue to have plenty of liquidity to fund our near-term growth. With that, let me turn it back to Jay.

Thanks, Katie. That's a lot of information, but as we have in the past, we are going to try these details we can on these calls. One other thing, Katie mentioned our ongoing rating agency process and the delayed time frame for reaching investment-grade with Moody's. As you know, while we're covered out of the financial services groups at Fitch and S&P, Moody's continues to cover us out of their REIT (ph) group. And our business model focusing primarily on the financing of high-end real estate assets, does represent something of an outlier to the rest of their coverage universe. We will continue our efforts to help them understand the superior safety and stability our business model creates for our bondholders as a result of the significantly lower risk position our investments have and differentiate that business model from other property-owning companies that they currently cover. But that's going to be an ongoing process. With that, let me open it up for questions now. Operator? Operator, you want to go ahead and open it up for questions, please?

Thank you sir. (OPERATOR INSTRUCTIONS). Our first question comes from Don Destino from JMP Securities. Please go ahead.

Hey, guys. I have a couple of questions. First on the Moody's action. If I could summarize what seems like the three things they were concerned about -- one was just kind of granularity, and that seems like it goes away just with growth. One was a dependence on secured debt. Is that kind of a chicken or the egg issue -- that they want you to pursue more of an unsecured-debt strategy but you probably don't want to do that until you actually get the upgrade? And would you be willing, if the cost of admission for that upgrade was some more unsecured debt -- would you be willing to pay little to do that?

Yes, I guess the easiest way to say is our business model has always been premised on using the unsecured markets to finance our business. Obviously, if we're out of their financing investment-grade assets, it is somewhat difficult to then finance that business with non-investment-grade unsecured debt. We've made that point repeatedly that the quality of our asset base has materially improved, as we have said on many conference calls. The majority of our investments are investment-grade in nature. Frankly, it's something that we want to do -- we want to use more unsecured debt. The metric we constantly focus on is unencumbered assets-to-unsecured debt. We would argue our bondholders are in an extremely safe position right now based on that ratio. So, I think maybe it's just a little bit difference in our viewpoint that, first and foremost, we do think as a fundamental nature of our business, we want to be an unsecured borrower. Two, because of the high-quality nature of our assets, we do need access to investment-grade unsecured capital to fund that business. And three, I think, more importantly, we think we have kept our bondholders in an extremely secure position by keeping a large pool of unencumbered assets available to pay them. And I think that ratio has stayed north of two times since we've been a rated company. And that's pretty much as good as anybody we see in our business.

But I think we just need to continue to look at the numbers with them and make sure they understand that we haven't been able to find a scenario where our unsecured bondholders don't have all the benefits of all the protections that most investment-grade bondholders have. And if that's the position we put them in, some of these other statistics may be interesting, but I don't think they really get to the heart of the matter. And so we need -- I think, frankly, just to spend some more time in explaining how we look at the business and how we think about financing it in such a way that we do want a significant portion of unsecured debt, we do want to make sure those bondholders are well-protected by unencumbered assets. But at the same time. it's going the difficult to finance high-investment-grade investments with non-investment-grade unsecured debt. And I would think that's less of a chicken-and-egg, it's just -- the familiarity of our business increases, they will understand the dynamic is the portfolio has gotten much, much safer. It's much stronger. Our market cap has increased fourfold. The asset pool has increased fivefold. So I think when you look at the diversity scores, the strength scores, capital-adequacy scores -- you know, in our minds, this company is in a very, very safe position for its bondholders. And night-and-day from where it was, frankly, four years ago. night-and-day from the company that we acquired that had investment-grade ratings. So I think we're looking at a lot of the metrics that we use in our business, and feel great about what we've done and where we're headed. But perhaps we haven't communicated that well enough.

Got you. I assume there's no opportunity to request that you are reviewed by a financial services analyst or jointly reviewed by another analyst. The language that your targeted leverage ratio was relatively high was -- kind of spoke volumes to the way they are viewing you relative to some higher-rated finance companies.

Like we've always said, we're a little bit of both, although our primary business model is a finance business model. And so when we look for guidance, we're generally looking at how other finance companies have built their franchises, their positions in market. And we do have a minority position, which is on our net lease business, and ultimately, you do own a piece of real estate at the end of the day. But we would argue that is really an asset-based finance business as well. And the preponderance of our business is really backed by finance-company assets, finance-company business models. I think when you look at the right side of our balance sheet, it's just a lot easier to look at it from a finance-company perspective. And as you point out -- and I think Moody's understands -- it's difficult to find a peer group inside the property-owning, REIT universe is. There is really is nobody, you know, directly or, frankly, even indirectly comparable. We play different parts of the capital structure than everyone of those companies. We are far more diversified and heterogeneous in terms of property-type geography in place in the capital structure. So I'm not surprised it is a struggle to find comparable metrics in the REIT universe. But we do think they have the capability in-house, both through their structured finance group and their financial services group to understand what this company has tried to do, is trying to do and will continue to try to do, which is basically be a provider of debt capital, whether through the sale-lease-back market for a minority of our business or through straight lending, which is our primary business line. So I don't think we're going to change anything. We fundamentally believe that having access to unsecured debt markets is critical -- not just for the financial flexibility but really the way we operate the business. It will allow us to serve our customers -- protect our intellectual property in a way that is completely consistent and fair, relative to the protections we will give our bondholders.

Let me ask one more quick, unrelated question. You've been talking a lot this year about the fundamentals and the pricing of the mezzanine market looking a little more favorable. I think -- and I could have these numbers wrong -- it looks like you accelerated the non-CTL, non-first mortgage transactions this quarter. The first question is, is that correct? And the second quick question is, is a little color about the -- you know, if that's higher-margin business and if your view of those businesses has changed or kind of remained the same?

It's really two things, Don, and it's good point. We are -- I would say, tip-toeing gingerly. We still think real estate fundamentals are bouncing along the bottom. But we don't see an uptrend yet. Moving up the risk curve really hasn't been a conscious decision. What we have seen is because capital is moving into real estate for lots of good reasons, we've been able to take advantage of taking down whole positions and then laying off a very, very tightly-priced senior position, and just hold what we think is the best risk return in the capital structure. So we did do some that this quarter. That notched up our non-investment-grade or non-first mortgage par portfolio. But I will tell you, I think the origination pipeline is still heavily skewed towards high-grade CTLs on first mortgages. What we do with those first mortgages -- you know, if this market remains where we see senior debt being priced very, very tightly -- every once in awhile, you are going to see us chop up a piece of paper and try to extract what we think is extraordinary risk return. And I think when you look at the net interest margins of this quarter, you will see some of that impact where margins were very attractive. And that's the benefit of being a company that can go in at the front end of a deal, see where their opportunities really going to be and have the flexibility to capture what we think is going to be the best risk award. I don't think you're going to see us make a conscious decision to move up the risk curve yet. We just don't see the dynamics of the market supporting that. But you will see us try to take advantage of a market where lots of capital is moving. And our premise is that we can be a little nimbler and ahead of that movement.

Ah, that's very helpful. Thank you very much.

Thank you. And our next question comes from Michael Hodes with Goldman Sachs. Please go ahead.

Yes, hi, good morning. I was hoping, Jay or Katie, you could update us on your thoughts about leverage? I noticed that the asset growth expectation was a little higher for next year. Does it still make sense to assume -- I assume it is still makes sense to count on some kind of offering in the early part of next year -- equity offering? Maybe just give us, you know, updated commentary on how you are approaching that?

Yes, I think -- we are targeting -- right now, we're about 1.8 times leverage at the end of the third quarter. And currently are continuing to target sort of that two times level. So as we do approach that, you will see us raise equity. We did raise some preferred in the last quarter so that's keeping us at about 1.8 times. But as we do move up, you will see us raise some common.

One thing I would mention, Mike, is that we are constantly looking inside our portfolio at the types of assets we are financing. And obviously, as you know, a first mortgage or twenty-year bondable, investment-grade REIT (ph) is going to be financed differently then maybe an unsecured corporate loan or a junior position in the capital structure. And that matrix is something that we have been pretty open with -- both the agencies and with some of our bondholders about how we think about the business. But we don't manage to a specific, single number. We manage to a number that is a composite of five or six product lines that are all financed somewhat differently. And as the shift in business moves around, you will see that number bump around a little bit. But I think from Katie's perspective and my perspective, we've always wanted to keep a very, very significant margin of safety in this business. We tend to raise equity before, frankly, we even need it. It probably costs a couple cents a share by doing that. But as a finance company, you all always want to be ahead of your finance needs, not chasing them. And I think we've always made a conscious decision while we thought we could certainly run at higher leverage or lower liquidity, we've always made the trade-off to say, let's take capital down well before we have a need for it. And that has served us and our shareholders well. And I think you'll see us to continue to do that.

Okay, thanks a lot.

Thank you. And our next question comes from Jack Micenko with Lehman Brothers. Please go ahead.

Good morning. Most of the questions I had have been answered. But I was wondering, can you just confirm or clarify for me if the $3.3 million charge -- that was a non-cash charge? And then second, the margin was a little bit higher than expected for the quarter. In the 340 to 348 sort of guidance, what is your margin expectation given sort of a stable -- stable yield curve over that? Thanks.

First, Jack, on the $3.3 million impairment charge that is a write-down of the asset and a write-down of the general reserve. So it is a non-cash charge. It does not hit P&L. And then your second question with respect to the 340 to 348 guidance that we gave, that's about a 5 to 7 percent EPS (ph) growth rate. It's about a 17 percent revenue growth rate year-over-year. So with respect to margins in the overall business, we continue -- in terms of the NIMs (ph), we continue to see -- pardon?

Next year's NIMs.

Next year's NIMs-- probably will trend down slightly. They are fairly high right now at about 427 basis points. You know, our average assets right now -- our total are about 930, with our debt costs right about 5 percent. So as interest rates continue to move around a little bit, we are not predicting and not continuing to show in our model such a high NIM. Typically, in our business, they have been sort of in the 350 to 400 range.

And our next question comes from Susan Berliner with Bear Stearns. Please go ahead.

Good morning. I just had a question on the balance sheet. You had some outstandings on your credit facilities. And my first questions question is what are you planning on doing with that in terms of terming (ph) it out? And the second question is in regards to this secured term loan. It went up this quarter, and I was wondering if that was primarily because of the Jersey City transaction?

In terms of our credit facility, we continue to have quite a bit of capacity on our credit facility. Our expectation is to term them out with unsecured debt going forward in the next couple of quarters. But we do have a lot of additional capacity, both on our secured and our unsecured facilities. And with respect to the term loan increase, yes, you are correct. We did finance our Harborside investment through (indiscernible) a life company. It's about $135 million transaction.

Okay. Great. Thank you.

Thank you. And presenters there are no further questions at this time.

Okay. Well, thank you everyone for joining us. I think the key take away for today is the velocity of our business is absolutely increasing. I think that's a testament both to our market penetration but also a market that is continuing to move and capital continuing to flow. And those are the kind of markets that we think iStar is ideally set up for. We will try to work hard on bringing our cost of capital down quickly here. One statistic that Katie didn't mention, is almost 88 percent of all our secured debt is unsecurable tomorrow. So to the extent we can get to the position we would like to be on the right side of the balance sheet, we can quickly both ladder maturity, drop our cost of funds and move a lot of our debt to an unsecured basis. But that is going to be a process, apparently, so we'll have to get back to you next time with a little more information on that. Again, thank you for your time, and we'll talk to next quarter.

Ladies and gentlemen, this conference will be available for replay after 1:30 Eastern today through October 30th, 2003 at 11:59 PM Eastern. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 702511. International participants dial 320-365-3844 those numbers again our 1-800-475-7701 and 320-365-3844 within an access code of 702511. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconferencing. You may now disconnect.