iStar Inc (STAR) 2005 Q4 法說會逐字稿

Welcome to iStar Financial's fourth-quarter and fiscal year 2005 earnings conference call. During the presentation portion of today's earnings conference, all of your lines will be muted or in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes.

And with that being said, let's get right to this fourth-quarter and fiscal year 2005 agenda. Here with our opening remarks is iStar Financial Vice President of Investor Relations and Marketing, Mr. Andy Backman. Happy New Year, Mr. Backman, and please go ahead, sir.

Good morning, everyone. Thank you for joining us today to review iStar Financial's fourth-quarter and year-end 2005 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, our President; Tim O'Connor, our Chief Operating Officer; and Katy Rice, our Chief Financial Officer. This morning's call is being webcast on our corporate website at www.iStarFinancial.com in the investor relations section. There will be a replay of the call beginning at 1:30 Eastern time today. The dial-in for the replay is 1-800-475-6701 with the confirmation code of 814866.

Before I turn the call over to Jay, I need to remind everyone 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's expectations are detailed in our SEC reports.

Now, I would like to turn the call over to iStar Financial's Chairman and CEO, Jay Sugarman.

Thanks, Andy, and welcome to everyone joining us for this call. I want to start today with a recap of the fourth-quarter results and some of the highlights of the full year 2005, and then I'm going to circle back at the end and give some color on what we see for 2006 going forward. So let's begin with the fourth quarter.

First, on the earnings front, adjusted earnings were just over $92 million in the fourth quarter or $0.81 per diluted share, primarily impacted by lower other income versus fourth quarter last year. Full-year earnings reached $382 million or $3.36 per share on a diluted AEPS basis, with strong originations offset by high levels of repayments.

Let me turn to originations for a second. We had a very solid quarter and full year, with new commitments in the quarter of well over $1.6 billion and full-year originations reaching $4.9 billion, both records. Fundings on these commitments were just over $1 billion in the fourth quarter, and full-year 2005 fundings reached a record $3.9 billion.

Third, focusing on returns and spreads, return on equity finished at 19% and margins and spreads were quite good in the quarter, helped by strong returns on several deals that closed during the last week of the year, and where we were able to charge a certainty premium for being there when our customers absolutely had to close.

Fourth, looking at our assets, credit metrics remained strong, still just a handful of issues throughout the entire portfolio. Combined with our conservative leverage targets, the overall balance sheet continues to be in very solid shape.

And fifth and finally on the strategic front, we continue to make progress in expanding our footprint across markets where our core strengths can be turned into a real competitive advantage. In both the fourth quarter and the full year, there has been a cost to that expansion. It has obviously hurt earnings a little bit and our returns this year. But we are still very confident that the increased breadth and depth of our platform going forward will more than offset the near-term dilution we took. And I think we have gotten to exactly where we went to be as a company.

Before I turn to 2006, let me turn it over to Katy to fill in the rest of the details for the fourth quarter and 2005, and then I will come back and kick off the discussion on 2006.

Thanks, Jay. Good morning, everyone. I'd like to cover my usual three topics this morning. First, I'll summarize our results for the fourth quarter and fiscal year ended 2005 and review our earnings guidance. Next, I'll briefly review risk management and credit quality. And finally, I'll review our capital markets activities and balance sheet position.

Let's start with our fourth-quarter results. As Jay mentioned, our adjusted earnings came in at $0.81 per diluted common share. Our net investment income was $99.3 million, which is up 10% from the fourth quarter 2004. Our return on book assets was 5.1%, and our return on equity for the quarter was 19%.

Our credit statistics remain strong. Fourth-quarter interest coverage was 2.2 times, and our fixed charge coverage was 2 times. These ratios have declined slightly over the past year, primarily as a result of moving our leverage towards our capital model targets. Our leverage at the end of the fourth quarter was 2.1 times debt to book equity plus accumulated depreciation and loan loss reserves, which is below our risk-based capital model, which has been in the mid-2-times range based on our asset mix.

In terms of new business, we generated a record $1.7 billion in new financing commitments in 33 separate transactions. As always, we expect to experience some lumpiness with respect to our quarterly originations and repayments throughout the year.

88% of our commitments this quarter were first mortgages or CTLs. Repayments totaled $558 million this quarter. Some of the prepayments we originally forecast to occur in the fourth quarter have slipped to the first quarter, so our prepayments are somewhat lower than we anticipated. Our in-place net interest margin at the end of the quarter was 316 basis points, about the same level as it had been throughout 2005.

Now, let's move on to the full-year results. For the fiscal year 2005, we had a strong year in a number of areas. Revenues grew over 15% from the prior year, reaching $798 million. Our AEPS for the year came in at $3.36, about in the middle of our guidance range. While the environment remains competitive, as Jay mentioned, our investment activity totaled $4.9 billion of commitments, up from 2.8 billion last year. This brings our cumulative repeat customer transactions up to $8.7 billion dollars. Our fundings this year totaled $3.9 billion, and repayments and asset sales totaled $2.5 billion, bringing our net asset growth to approximately $1.4 billion for the year.

From a credit perspective, we completed our migration from secured to unsecured debt this year. We issued $2.1 billion of unsecured bonds in 2005 and now have $1.5 billion of unsecured line capacity. As a result, at the end of 2005, our secured debt as a percentage of our total debt was just 7% versus 37% a year ago, and our unencumbered assets now total $8.1 billion.

With respect to our earnings guidance, we are reiterating our 2006 diluted AEPS guidance of $3.35 to $3.50 and our diluted GAAP earnings per share of $2.35 to $2.50, based on net asset growth of approximately $1.5 billion.

Now, let's turn to risk management and credit quality. This quarter, our overall asset quality remains solid. The asset quality of our loans, as measured by our quarterly risk-rating process, declined very slightly. Our last dollar loan to value for the entire structured finance portfolio was just 65.2%, so our borrowers continue to have significant equity investments to support our loans.

The average risk rating of our CTL assets at the end of the fourth quarter also declined very slightly. Our CTL portfolio remains well leased at 95.9% with a weighted average remaining lease term of 11 years. Lease expirations in 2006 represent just 2.5% of our annualized total revenue for the fourth quarter of 2005. This quarter, our nonperforming loans totaled $35.3 million, which represented just 0.41% of our total assets. NPLs this quarter included the same two loans that have been on non-accrual for the last several quarters, and no repossessed assets. Watchlist assets represented just 0.23% of total assets this quarter.

Now, let me briefly review our capital markets activities and our balance sheet. Earlier in the year, we successfully upsized our unsecured credit facility to $1.5 billion. This increase in our line has enabled us to reduce our more expensive secured line capacity. We are now funding almost all of our investments with our unsecured line of credit, and as we accumulate balances on the line we expect to turn them out or match-fund them with longer-term unsecured debt. We plan to fund our net asset growth in the coming year with a combination of unsecured debt and equity. We expect to modestly increase our leverage this year as we continue to move towards our risk-based capital model targets.

We take a fairly conservative approach to managing the right side of our balance sheet. It's our objective to insulate our earnings as much as possible from changes in short and long-term interest rates. We match-fund fixed-rate assets with fixed-rate debt and floating-rate assets with floating-rate debt. We are committed to operating our business such that a 100 basis point move in interest rates has a minimal impact on our earnings. We define minimal as a range of plus or minus 2.5%. We are currently operating well within our policy, with a 100 basis point increase in short-term rates decreasing our adjusted earnings by only about 0.77%, so we are well-hedged at this point.

We also take a conservative approach with respect to our asset and liability management. We have almost no debt maturing this year and very little debt maturing in the following year. Our asset maturities are well in excess of our liability maturities over the same period. We believe we have plenty of liquidity to fund our business in the year ahead.

And last but not least, our Board announced an increase to our quarterly dividend, beginning with the first quarter of 2006, to $0.77 per share or $3.08 per share on an annualized basis, which is a 5% increase over last year's dividend.

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

Thanks, Katy. Let me turn now to 2006 and just make a couple of points here. One, with interest rates now moving closer to our predicted levels, our game plan for the coming year will focus on those areas where we believe the best risk-adjusted returns can be found. I expect a reasonably high proportion of this year's volume to be senior lending, and that will again dominate the portfolio. But this year we will see more opportunities to provide fixed-rate loans, both senior and subordinate, as borrowers begin shifting away from low floating-rate loans, now that the curve is inverting on us.

We will continue to offer borrowers the full range of one-stop funding capabilities that iStar is known for, with continued emphasis on what we call success-based funding structures, a strategy that allows us to underwrite what's in place today at disciplined levels, but also provides customers with locked-in proceeds or rate reductions when certain milestones are met going forward, without having to go back to the market or undergoing another round of ground-up due diligence. We think it's a key to some of our successful investing in the past, and will be part of our forward book as well.

Lastly, we look for 2006 to be the beginning of a renewed period of growth for the Company. We still have a few cost areas that are ramping up, but we expect this year to begin seeing origination volumes that not only justify the increased costs but also start to demonstrate the power of the iStar platform going forward.

So with that, let's open it up now and take questions. Operator?

(OPERATOR INSTRUCTIONS). Don Destino, JMP Securities.

Just one question this morning. Jay, how correlated -- obviously, the originations have been very strong. The repayments have been a drag on growth. How correlated do you think your origination volume is to the factors that are driving the high repayments? In other words, if we get relief from the level of repayments we have had over the last 24 months or so, what kind of effect do you think that's going to have on your origination volumes?

Good question, Don. As I've said in past calls, the velocity of this business has increased, and I think that's not something that's going to change. Again, one of the challenges we have had is borrowers not refinancing but actually going out there and selling assets. And we actually believe, as interest rates rise a little bit here, that that part of the refinancing world will slow down on us. But there is a correlation. The velocity of the origination business, the fact that many of our customers have been using floating-rate debt gives them a chance to come back to market every two or three years and kind of take a re-look. So, if we see less velocity out there, there's going to be a very small impact on originations.

What really drives originations for us right now is some of the internal factors that we've talked about over the last couple of years, the repeat customer business. Frankly, the flexibility of the unsecured investment-grade balance sheet, the ability now to chase lower-spread business, because we have a cost of funds that's more in line with other finance companies. So I think our origination volume's growth is high to the velocity of the business, but much more directly to some of the strengths we have been able to develop over the last couple of years.

Ann Maysek, Deutsche Bank.

Just on the non-accrual loans, Katy, you mentioned there's the same two loans that have been on your books for some time. Just trying to reconcile that comment with the reduction in the balance, unless I'm misunderstanding the 10-Q disclosure that noted those were $72 million in September. Can you talk about how that reduction was achieved?

Sure. And you were pretty faint; I'm going to repeat the question, as best I can. Ann is asking a question about the NPL, the two loans that were the same loans that were on our NPL list last quarter. One of those loans is on the residential project here in New York City, and it is paying down as they are continuing to sell units. So we were always expecting that, and I think our developer is waiting for continued higher prices. So that has paid down fairly substantially, and we are very comfortable with our basis on that loan.

And then, secondly, in looking at the collateral types, I've noticed a pretty steady growth in the retail component throughout the year. Is there something about that particular segment of the market that makes that particularly appealing to iStar at this point in time?

Yes. I think, not in particular but as we continue to ramp our AutoStar portfolio (multiple speakers) characterize the AutoStar CTLs and some of the loans as retail.

Susan Berliner, Bear Stearns.

A couple questions. One is, can you go over -- was there any lumpiness in the 33 commitments you did this quarter, and what was the largest?

Let's see. Not a lot of lumpiness with respect to the dollar volume. I think they are still in and around the 20 to $100 million range, so not a lot of lumpiness with respect to the commitments this quarter in terms of dollars. And in terms of those originations we mentioned, about 88% were first mortgage or CTLs. 80% of that were first mortgages -- very typical collateral types for us. Retail, as Ann mentioned -- apartment and residential, some mixed-use portfolios, a little bit of industrial.

My second question is with regard to the bank line outstanding, obviously a lot of moving pieces with your billion of issuance last week, as well as your funding growth. Can you give us an update on where the bank outstandings stand right now?

Sure. We had fairly high unsecured line outstandings at the end of the year. We were obviously waiting to do some funding and, frankly, waiting for the rating agencies to kind of complete the rating cycle and get to committee. So we did have higher outstandings on the unsecured line at year end than we would normally want to have. But at this point, our outstandings are more in the 3 to $400 million range, after the $1 billion bond deal we did a couple of weeks ago.

And I guess the last question was are you guys close to announcing any new initiatives in the near term?

No, we don't plan to announce, in particular, any new initiatives similar to AutoStar.

Jim Shanahan, Wachovia Securities.

Given the strength of the bid for real estate assets, why wouldn't iStar be motivated to become a net seller of CTL assets right now -- I mean, in size? Can you discuss the capital requirements on that business relative to the lending business, and other factors such as tax considerations that might make that business attractive going forward, or [continue to] be involved in that business?

Well, I think as we have said in the last couple of calls, that market is very competitive right now. And what we are using the strength in the market to do is prune the portfolio of assets that, either from a basis or geographic concentration risk, we are using the strength in the market to refine the portfolio. On every deal we look at, though, we're looking at where we are going to invest that capital, and can we make better risk-adjusted returns?

So I think, relative to just selling everything because the market is strong, that's really not the analysis. The analysis is can we increase the credit quality or decrease the basis risk by selling an asset and redeploying proceeds back into the market? And we have done that selectively, pretty significant sales at the end of last year, more modest sales continuing through this year. But it is something that we continue to look at, and where we can trade out of credit or geographic concentration, you'll see us continue to do that.

Unfortunately and obviously, all the gains from that pruning are below the line, and they are not included in our AEPS. So, even as we prune the portfolio, we will not see the benefits of that flow through the earnings.

And then I guess, on your second question, tax motivations and other things like that are not really driving those decisions. We do, obviously, take that into account in terms of the net proceeds available to redeploy, but that has not been the major factor in most of the decisions we have made.

A follow-up, please. What was the dollar volume of originations in the AutoStar business in the fourth quarter? And how would that compare to, say, Q3 or Q2?

We're really comfortable with the way that business is developing. We are not, as of yet, going to start giving out breakdowns. But we will tell you we are very much on track to make the $1 billion target we set out over the first 36 months of that venture. And the volumes are very consistent through the last couple of quarters, so nothing is different than what we expected or we've seen in the last couple of quarters.

Respectfully, I believe that you have disclosed or your company has disclosed the dollar value of originations in some other strategies like the timber business. What makes AutoStar so different that you would be uncomfortable disclosing those volumes?

Actually, we think, frankly, from a competitive perspective it is not to our advantage to disclose the volumes or the types of -- the mix of assets that we're doing. We think that has actually hurt us in the past.

So I'd say that Jay described it well. I think our AutoStar venture is in a mode right now where it is acquiring customers. We have hired some people on the origination side, and we are out addressing our customer base, and that is, as you guys well know, a process that takes some time. So our volumes are steady, but they have not gotten to that accelerated point where you are going to see big volumes. We expect that more down the road.

I appreciate that, and if you don't mind one last question, the Company has had a lot of momentum in terms of investment-grade ratings. Is it your opinion that that has largely played out? Is there anything more powerful or more meaningful you can do at this point to propel your ratings much higher from here?

That's a good question. We've had a few upgrades by all three agencies in the last 16 months, which, I think, is a pretty strong statement. I think, at this point, all the agencies are looking for us to grow our asset base, to continue to diversify, to strengthen the Company through some of the new initiatives and some of the things that we've worked on with respect to our platform -- Oak Hill, et cetera.

So I think, at this point, while obviously over the longer term we expect more ratings momentum, certainly in the near term, I think we're just in the grow and continue to maintain our discipline mode.

(OPERATOR INSTRUCTIONS). Don Fandetti, Citigroup.

Good quarter. Jay, quick question -- how are you getting a 13.5% coupon on your fixed-rate loans? Can you talk about the types of deals you are going and what the levered return is on that type of transaction?

I guess, let me say two things. One, fourth quarter can often get very interesting late in the year. We tend to keep a full crew around right up until the last day of the year, because we tend to see opportunities where other people fall out or where they start to get uncomfortable with another lending source come to us and say, it's not really about the cost, it's really about getting this closed on time.

This year, we had a couple of fairly attractive transactions come together literally the last week of the year. So the good news is the borrowers were not very price-sensitive; they had tied up some great transactions on the buy side and capital to finance them was not going to make or break the deal. So they were willing to share some of the benefit of the bargain with us.

The downside of that is many of those deals are short-term in nature, so I would caution you not to kind of bake in those kind of returns. They tend to be one-off opportunities that we are pretty uniquely positioned to take advantage of, and they tend to happen in moments where time is precious and certainty and credibility are very valuable.

The one thing that would say that I was very pleased about -- and maybe it doesn't show up in the numbers, per se -- is about half the deals we closed in the fourth quarter were either with public companies or private funds, either real estate funds or private equity funds. That customer base is very exciting because, frankly, as we have said, we try to find the smartest investors in the market and provide them capital. They tend to find very smart deals, as they did very late in the year last year, and they will tend to come to us and say, we just need to get this done.

So I think the caliber of the customer base last quarter, which probably is not evident anywhere in our materials, is the single strongest signal I saw last year about the strength of our franchise. We are starting to engage in dialogue with some of the best, smartest equity investors in the markets, and as we do that I think the deal flow, based on both our capabilities, as I mentioned earlier, our cost of funds, our speed because of our unsecured investment-grade borrowing strategy -- that's pretty exciting. It's one of the reasons we can raise volumes pretty materially, we think, without materially changing our risk profile. And we have had a lot of great success kind of overlapping our contact base and Oak Hill's contact base, and really forming a dialogue.

And you never know when those deals are going to come; they happened to come a lot and in a big way at the end of last year. We can't predict that; that's not regular-way business, but it's pretty attractive business when it hits, as you saw from the spreads. On a risk-adjusted basis, those are phenomenal returns. They are going to be in the 20's and 30's on a levered basis.

Just on that, in terms of the private equity, what are those buyers purchasing? Are they looking at value-add properties? Are they sort of peeling off assets from an equity reprivatization? Any commentary there?

I don't think there's a single theme that runs through it. I think, again, these are smart investors. The earlier question about retail -- we have been a player in some of the larger transactions that have taken place, the Neiman Marcus's of the world, the Toys "R" Us's of the world, where it's a real estate and a corporate credit underwriting. And I think we have had a lot of success utilizing our relationships and, frankly, Oak Hill's relationships to be in the flow of a lot of those types of transactions. That's interesting business.

We think, again, on a risk-adjusted basis there is a much smaller group of investors who can play in those worlds, and we think we're one of the best. And so I think you'll see, as we continue to grow the platform, as we continue to be able to serve our customers in more places, a lot of repeat customer business, a lot of business with larger poles of capital, both public and private, where we can provide them something unique. That's a trend we are very excited about.

And then, lastly, can you just walk through a simplistic example of a success-based loan?

Sure. We have mentioned in our last call, last quarter, this John Q. Hammons privatization transaction, where we provided not only a significant amount of capital to accomplish the buyout, but also a long-term forward commitment based on some success milestones. It's a fairly sizable commitment over -- what is it, Katy -- 15-year period, which requires the borrower to meet certain milestones to take down the money. That is going to be an undrawn commitment for a long, long time. I think a fraction of it has been drawn already, but it gave that borrower an ability to see his business over a long period of time and know if he succeeded in doing what he said he wanted to do. His capital would be there, the cost would be effective for him, and he didn't have to worry about going to market again and again and again, bringing in new lenders, having to re-underwrite his entire business plan.

So we think those kind of situations, where we can underwrite what's in place today, using the same discipline we have always had, but then give the customer flexibility that he can't find in the securitization market, that he can't find in the syndication market -- it's really the ability to turn to somebody like us as a private banker and say, I don't want to plan on the next deal. I want to plan on the next five, seven, ten years. I need to know my capital is there, and I'd like to know that if I succeed, I don't have to keep doing this drill every two to three years.

It's one of the ways we are offsetting the speed and velocity of the floating-rate market, is to find more transactions where, once we are involved, it's very unlikely that the borrower will have an economic reason to go find somebody else. It has worked in the past. It's working well now. It's a part of our business that is obviously not going to generate enormous component, but we have seen it succeed, and it's something that we think we have a real competitive advantage in.

Dave McGowan, Citigroup.

I tried to get out of the queue, but Don asked my question. So thank you.

With that, Mr. Sugarman and our host panel, there are no further questions. Please continue.

Well, again, I want to thank everybody for joining us today. Let me turn it over now to Andy Backman to close the call.

Thanks, Jay. And thanks, everyone, for joining us this morning. If you should have any additional questions on today's call or release, please feel free to call me directly here in New York. [Brent], would you please give the conference call replay instructions once again?

Indeed, I would be happy to. And thank you, sir. And ladies and gentlemen, your host is making today's conference available for digitized replay. It's for two full weeks, starting at 1:30 PM Eastern standard time February the 28th, all the way through 11:59 PM, March the 14th. To access AT&T's executive replay service, please dial 800-475-6701. At the voice prompt, enter today's conference ID of 814866. Internationally, you may access the replay as well by dialing 320-365-3844, again with the conference ID of 814866. And that does conclude our earnings call for this fourth quarter and fiscal year 2005. Thank you very much for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.