iStar Inc (STAR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to iStar Financial's fourth-quarter and year-end 2008 earnings conference call. (Operator Instructions). As a reminder, 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 Senior Vice President of Investor Relations and Marketing, Mr. Andy Backman. Please go ahead, sir.

Thanks, John and good morning, everyone. Thanks for joining us today to review iStar's fourth-quarter and year-end 2008 earnings report. With me today are Jay Sugarman, our Chairman and Chief Executive Officer; Jay Nydick, our President; Katy Rice, our Chief Financial Officer; and Jim Burns, our Executive Vice President and Treasurer.

This morning's call is being webcast on our website at istarfinancial.com in the Investor Relations section. There will, of course, be a replay of the call beginning at 12:30 p.m. Eastern Time today. The dial-in for the replay is 1-800-475-6701 with a confirmation code of 983296.

Before I turn the call over to Jay, I'd like 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 let me turn the call over to iStar's Chairman and CEO, Jay Sugarman.

Thanks, Andy. Thanks, everyone, for joining us today. We want to go over several things with you -- one, the results for the fourth quarter; two, the results for the full-year 2008; and three, some of our plans for 2009 and beyond. Now this has been a punishing year for the markets, for the economy and unfortunately for our Company. While I still believe the severity of the current crisis could have been avoided, it is very clear now our economy is in for a lengthy struggle.

Despite this worsening environment, we have continued to work diligently to find ways to fight through the challenges in the marketplace and protect and preserve value for iStar. There are no easy solutions, but we have made progress and continue to seek ways to strengthen our balance sheet for the future.

So let me recap fourth-quarter and full-year results and set the table for our plans for 2009. First, earnings. Our fourth-quarter earnings were positive, but included large gains and large reserve provisions and impairments, really overshadowing our core operating results. Nonetheless, we were pleased to report a positive $0.10 per share on an adjusted basis in the fourth quarter and for the full year, adjusted earnings per share was negative $2.68 and reflected material loan provisioning and impairment, partly offset by several large gains from asset sales and debt retirement. With so many one-time items in 2008, we look forward to getting back to more normal operating metrics as we move through 2009.

Second, liquidity. We ended the year with over $500 million in unrestricted cash and available capacity on our credit facility. Our repayments and fundings were both lower than expected with gross repayments in the fourth quarter of $730 million and fundings totaling $680 million. For the full year, gross repayments were $3.9 billion and fundings were $3.3 billion.

Our payments continue to come in, but at a slower pace and with more uncertainty as time has gone on. Countering this is the slower pace of funding as borrowers slow projects, cancel projects or are required to use their own equity to finish construction. We have also been active in monetizing assets and we continue to rebalance and rework the portfolio where appropriate.

Third on credit. Increasing stress in the real estate markets has created increasing stress on our portfolio. Nonperforming loans, or NPLs, rose fairly dramatically throughout the year and the post Lehman aftershocks have put the entire marketplace under severe duress, particularly residential and retail-related assets. This has definitely slowed our progress in resolving assets at the pace we would have liked and with NPLs at $3.5 billion, we have a lot of work to do to get these problem assets under control.

Lastly, we began in the fourth quarter of last year exploring ways to add operating flexibility as we headed into 2009. We have always believed the low leverage, unsecured funding strategy would provide the maximum flexibility for our business model and we are now working to use the strength of that model to carry us through this difficult period.

Jim will walk you through one of the transactions we are pursuing to strengthen our position as we use the remainder of 2009 to work through the bulk of our remaining forward commitments and to finish paying off the remaining Fremont A note. So with that quick overview, let me turn it over to Katy and Jim and then follow-up with some further comments. Katy.

Thanks, Jay. Good morning, everyone. This quarter, global markets and economic conditions have deteriorated and remain challenging. The lack of capital in the real estate sector has continued to impact our borrowers. Some have had difficulty servicing our loans, while others have had difficulty refinancing our loans at maturity. Because of these challenges, we expect to see continued variability with respect to both the timing and the amounts of repayments from our borrowers. We expect that markets will remain difficult for at least the next 12 to 18 months and that there will be no easy turnaround.

To offset the expected slowdown in repayments, as we announced in our press release this morning, we are currently working with members of our bank group to provide a new, secured term loan facility and to restructure our existing bank facility. I will let Jim review the details of the transaction in a couple of minutes, but in general, the transaction, if closed, would provide iStar with between $700 million and $1 billion of incremental liquidity and would give us increased operating flexibility in exchange for providing security to participating members of our bank lending group.

Now let me quickly run through the results for the quarter and for the year. With respect to the first quarter, we reported adjusted earnings of $12.7 million, or $0.10 per common share. Our results this quarter included $252 million of additional loan loss provisions versus $411 million from the prior quarter. In addition, during the fourth quarter, we recorded $150 million of impairments relating to REO, other assets and securities in our corporate loan and debt portfolio. During the quarter, we recorded $19 million of gains from the sale of seven corporate tenant lease assets. As a reminder, gains from CTL sales are excluded from adjusted earnings, but included in net income.

During the fourth quarter, we recognized $323 million of gains associated with the retirement of debt at a discount. We also purchased 27 million common shares during the quarter. We continue to believe that our debt and equity securities remain attractively priced and will, when appropriate, invest in these securities opportunistically.

Net investment income for the quarter was $435 million versus $219 million for the fourth quarter of 2007. The significant year-over-year increase was primarily due to gains recognized in the quarter associated with the early extinguishment of debt.

Okay. For the full-year 2008, we reported an adjusted loss of $352 million, or $2.68 per common share. Results for the year included a $1 billion of loan loss provision, $335 million of impairments, $64 million of gains from the sale of 49 corporate tenant lease assets, $285 million of gains from the sale of timber investments and $393 million of gains associated with the retirement of debt. We also purchased 29 million common shares during the year under our share repurchase program. Net investment income for the year was $982 million versus $686 million last year.

At the end of the quarter, our equity represented 24% of our total capitalization and our leverage, defined as book debt net of unrestricted cash divided by the sum of book equity, accumulated depreciation and loan loss reserve, was 3.1 times, down from 3.3 times at the end of the third quarter. We expect to continue to deleverage in 2009 as we shrink the balance sheet through asset repayments, resolve a portion of our NPL and REO assets and pay off existing debt maturities.

During the fourth quarter, we funded a total of $683 million under existing commitments and received $730 million in gross principal repayments versus $679 million of repayments last quarter. Of the $730 million of repayments received in the fourth quarter, $279 million was used to pay down the A participation interest in the Fremont portfolio and $451 million was retained by iStar.

The principal balance of the A participation at the end of the fourth quarter was $1.3 billion, down from $1.6 billion last quarter and $3 billion at the end of the fourth quarter last year. As you know, 70% of all principal repayments from the Fremont portfolio go to reduce the A participation until it is paid off. After that, I iStar will retain 100% of all principal received. We currently expect the A participation to be fully repaid within the next 12 months. Unfunded commitments related to the Fremont portfolio were $651 million at the end of the fourth quarter, of which we expect to fund $415 million. This compares to $2.2 billion of unfunded Fremont commitments at the end of last year.

Okay. Let me turn to the portfolio and credit quality. At the end of the fourth quarter, our total portfolio on a managed asset basis was $16.9 billion. This was comprised of $12.9 billion of loans, $3.6 billion of corporate tenant lease assets, as well as $434 million of other investments. 91% of our portfolio is first mortgages, senior loans and corporate tenant lease assets. As a reminder, managed asset values represent iStar's book value plus the A participation interest in the associated assets. The loan portfolio is comprised of $4 billion of Fremont loans and $8.8 billion of iStar loans. The average loan to value on our loan portfolio is 75.8% at the end of the quarter.

At the end of the quarter, total completed condo construction assets represented $1.5 billion while in-progress condo construction represented $2.9 billion. Completed condo conversion assets represented $396 million while in-progress condo conversion assets represented $297 million at the end of the quarter. Our land loan portfolio was approximately $2.7 billion.

As we discussed on our last earnings call, we expect our NPLs to continue to increase in the near term. At the end of the fourth quarter, 68 assets representing $3.5 billion, or 27.5% of managed loan value, were nonperforming or NPLs. This compares to 51 assets representing $2.5 billion, or 19.4% of managed loan value last quarter. Approximately $2.3 billion, or about two-thirds of the Company's NPLs are iStar legacy loans. In aggregate, the iStar NPLs consisted of 31 loans ranging in size from $4 million to $255 million. 97% of iStar's NPLs are first mortgage or senior loans and only 3% or $82 million are mezzanine or junior loans. We continue to believe that being in the senior position gives us more control and the ability to recover maximum value during the workout process.

15 loans representing approximately $1.2 billion, or 53% of iStar's NPLs, are related to land. Eight loans representing $522 million, or 15% of the legacy iStar loans, were condo-related. Two loans were classified as entertainment leisure, which represents $269 million, or 12% and four loans were classified as retail, which represents $144 million, or 6% of iStar's NPLs. There was one hotel NPL representing $126 million. The remaining NPL is a small corporate loan.

Geographically, 20% of iStar's NPLs are located in Florida. 14% are in Washington DC. 13% are in New York. 12% are in Arizona. 12% in California and 9% are in Las Vegas.

Now let me turn to Fremont NPLs. $1.2 billion, or approximately a third of our total NPLs, are Fremont-related. They are comprised of 37 loans ranging in size from under $1 million to $182 million. 100% of these loans are first mortgages. The largest group representing 32% of the Fremont NPLs are condo construction projects. [21]% are condo conversions, 21% are land related, 17% are retail, 10% are secured by other collateral sites.

Geographically, 26% of the Fremont NPLs are located in California, 25% are located in Florida, 12% in Kansas City, 11% in Hawaii, 10% in New York City, 6% in Chicago and 5% are in Las Vegas. We expect the Company's total NPLs to increase as we continue through this very difficult credit cycle. In addition, as I mentioned earlier, we believe that many of our borrowers will continue to have difficulty refinancing or selling their projects in order to repay us in a timely manner.

As we've said in the past, real estate loans often take longer to resolve than other types of financial assets, but tend to have higher recovery rates. In order to maximize recovery, it is sometimes necessary to foreclose on assets. At the end of the fourth quarter, 26 assets on our NPL list, representing approximately $950 million of managed asset value, were in foreclosure. While the foreclosure process can take anywhere from three to 18 months, our asset management team is focused on resolving each NPL as expeditiously as possible with the highest possible outcome.

During the fourth quarter, we took title to three properties that had an aggregate gross book value of $72 million prior to foreclosure. This resulted in a $31 million charge against our allowance to loan loss reserves. At the end of the fourth quarter, we had 11 REO assets with a book value of $243 million. We recorded $3.1 million of impairments associated with two REO assets sold during the quarter, which generated total net proceeds of $61.4 million. In addition, the Company recorded $16.4 million of non-cash impairment charges on five REO assets.

Now let me move on to reserves and impairments. As you know, as part of a quarterly risk-weighting process, we establish specific reserves for any loans in the portfolio that we believe are impaired. Impairment can arise if we do not believe we are able to collect all of our principal and interest or if the underlying collateral of the asset is significantly below our basis in the loan.

During the fourth quarter, we recorded $252 million of loan loss provisions, all of which were asset-specific. The level of reserve is based upon the increase in nonperforming loans, as well as our belief that larger reserves were needed on some assets based upon the underlying value of the collateral.

At the end of the quarter, our reserves totaled $977 million, consisting of $800 million of asset-specific reserves and $177 million of general reserves. Our total loss coverage, which is defined as our on-balance sheet reserve, plus $56 million of discount remaining from the Fremont acquisition, was $1 billion. Total loss coverage was 8.2% of total managed loans and 22% total nonperforming loans and watchlist assets combined.

At quarter end, we also review our non-loan assets for impairment. As a reminder, we are not able to take specific or general reserves on these assets. During the fourth quarter, we took $110 million of impairments on assets within our corporate loan and other investment portfolios.

Okay. Let me review our covenants. First, we continue to be in compliance with all our bank and bond covenants, including our tangible net worth covenants. As we have discussed in the past, our current bank and bond covenants each have a fixed charge coverage ratio test of 1.5 times and an unencumbered asset to unsecured debt or UAUD test of 1.2 times.

At the end of the fourth quarter, fixed charge coverage for our bank line calculated on a trailing 12-month basis was 2.7 times. For our bonds, it was 2.2 times. The fixed charge coverage test in our bank line is a maintenance test; while in our bond covenants, it is an incurrence test. The UAUD covenant in both the bank and bonds are maintenance tests. At the end of the fourth quarter, UAUD was 1.3 times. Our tangible net worth at the end of the year was $2.4 billion versus our covenant of $2.3 billion.

Now, before I turn it over to Jim to discuss the new bank facilities and walk you through liquidity and guidance, I wanted to take a moment to talk about my pending retirement. As we announced several months ago, I will be retiring from iStar early next month. I am very pleased to be passing the baton to my colleague and friend, Jim Burns.

As an Executive Vice President and our Treasurer over the past six years, Jim knows the Company well and he has had an opportunity to work with many of you along the way. He has had an extensive involvement in all of our financing transactions, as well as our relationships with our bank group, our bondholders, our investment banks and the rating agencies.

Jim and I have been working together to create a smooth transition since we made the announcement last year. Jim will lead a group of finance and accounting professionals that I am very proud of. It is a cohesive seasoned team and I am confident that I'm leaving the Company in good hands with Jim, Dave DiStaso, our Chief Accounting Officer and Andy Backman, our Senior Vice President of Investor Relations and Marketing, along with their respective teams.

On a personal note, I want to thank those of you that I have had the opportunity to work with over the past six years. We have worked together through the good times and the challenging times, but most importantly to me, we've built strong relationships and enduring friendships that I value greatly. So now, let me turn it over to Jim.

Thanks, Katy. I would like to spend some time walking you through the transaction that we are currently working on with the members of our bank lending group. We expect to close the transaction in March, so let me remind you that this transaction is not yet complete and is subject to closing conditions. There can be no assurance that this transaction will be completed in this timeframe or at all.

We have considered various alternatives of how best to manage our 2009 obligations, including our unfunded commitments and payments on the Fremont A note participation. We have looked into alternatives that would most effectively bridge us to 2010 when our very short maturity asset portfolio begins to generate significant cash flow and build substantial liquidity going forward.

We have determined that creating increased liquidity and flexibility by working with members of our bank lending group would be the most beneficial transaction for the Company over the long term. As Katy mentioned, thus far, we have received approximately $700 million of commitments and we are continuing the syndication process. If completed, we expect the principal amount of the new facility to be somewhere between $700 million and $1 billion.

Lenders who participate in providing new capital to the new secured facility would have a first lien on a pool of collateral and would also receive a second lien to secure their existing positions in our unsecured revolvers. Taken together, the loans would be collateralized with asset coverage of at least 1.2 times. The new facility will be priced at LIBOR plus 250 basis points and would mature in June 2012. The second lien loans would be priced at LIBOR plus 150 basis points and would maintain their original maturities of June 2011 and June 2012.

The secured facilities would also include covenant modifications. We would anticipate that required minimum consolidated tangible net worth requirement would be $1.5 billion versus $2.3 billion currently. Required minimum fixed charge coverage would be one times versus 1.5 times currently. Maximum total debt to net worth remains the same at five times and minimum unencumbered assets to unsecured debt ratio remains the same as well at 1.2 times.

As we have previously mentioned, we will continue to explore opportunities to increase both operational flexibility and liquidity by monetizing our valuable unencumbered asset base. This could be through asset sales, note sales, joint ventures, issuance of additional secured debt and other means available.

Now let's review our sources and uses of funds for 2009 as we see it today. At the end of the fourth quarter, we had approximately $558 million of unrestricted cash and available capacity in our credit facilities comprised mostly of cash. This amount is slightly lower than our previous expectation to end the year with $700 million. There is no doubt that our borrowers will continue to be impacted by the disruption in the credit markets in the overall economy and we are anticipating that the pace of lower repayments in 2009 will reflect these adverse conditions. However, as we've stated before, our funding obligations should diminish throughout the year as many of our construction projects will be completed.

For the period February through December 2009, we currently expect to receive $1.8 billion in repayments net of the A participation paydown. In addition, we expect approximately $1.7 billion of NPL resolutions and other asset monetizations. We look at repayments and asset monetizations together, which, in this case, totaled $3.5 billion over the 11-month period. We will continue, to the extent that repayments lag, to resolve assets that did not repay in a timely manner by monetizing them and in others manner, such as a sale. In other words, the mix of repayments and asset monetizations could vary over time.

Our expected uses for the same 11-month period totaled $2.5 billion, which includes $1.2 billion of unfunded commitments and approximately $1.3 billion of remaining debt maturities. Assuming no new asset originations and excluding the impact of the contemplated new bank financing, we currently expect to end 2009 with over $1 billion of liquidity. If we were to complete the bank financing I just discussed, it would provide additional flexibility to allow us to assess the appropriate timing and amount of asset monetizations.

Let me conclude with earnings and dividend expectations. Given the significant uncertainty of the global economy, we will not be providing earnings guidance for this year at this time. We will, of course, continue to update you on a quarterly basis as events unfold. With respect to dividends, we will continue to pay out common dividends in an amount necessary to pay out 100% of our taxable income. Given the uncertainty in the global markets, we are not able to provide an estimate of any potential dividend at this time. With that, let me turn it back to Jay.

Thanks, Jim. So where do we go from here? I think once the bank deal is closed, we would expect to work with our bondholders and others to see if we can further enhance our liquidity, create more operating flexibility and really open up the runway out to 2010 and beyond. We are going to continue to advocate for the real estate industry in its attempts to craft policies and programs beneficial to the industry with the Fed and Treasury. And when appropriate, we will seek ways to reengage our very deep investment resources and capabilities with the investment opportunities this downturn has created.

Right now, the challenges in our own portfolio are many and will take a great deal of time and effort to solve, but we must find a way to solve them and move past them the best we can. And I think I can assure you every person at iStar is working very hard and is focused on doing just that. So with that, let's go ahead and open it up for questions.

(Operator Instructions). Ee Lin See, Sirios Capital.

Hi, thanks for taking my call. Could you please explain how you decided to have reserves as a percentage of NPLs of 28% for the fourth quarter compared to the higher number, which was 33.6% in the third quarter? Thank you.

Sure. Remember, the process for creating reserves is literally an asset-by-asset review by literally 100 people in the firm. So every asset is given a specific reserve based on all material information coming from all parts of the firm -- risk management, investment, legal, etc. There is no formulaic approach to specific reserves, so that number can jump around pretty materially. We have NPLs that are on NPL simply because they couldn't repay at maturity. It doesn't necessarily mean there is going to be a loss. So again, it is not a formula and I think you would probably be down the wrong track if you are just looking at a simple percentage every quarter and trying to put those together. What we will tell you is that every single asset gets looked at and every specific reserve is based on all facts available at that moment in time.

I see. So was the change a result of new NPLs expecting to have a lower loss or was it a revaluation of previous NPLs that resulted in this change?

It was actually a combination and I think what Jay is referencing is probably the mix of assets that went NPL this quarter may have been a few more assets that, as he is referencing, were really maturity defaults where the borrower was not able to find an additional lender to refinance the loan. But we don't feel that we are impaired in any way with respect to where our loan basis is. But conversely, we also look at all of the NPLs and REO on the book each quarter and there were instances in this quarter where we bumped up reserves on prior NPLs. We have had NPLs from prior quarters to reflect what we thought was currently happening to that asset in the market.

Okay, thank you very much.

John, next question.

[Shubhomoy Mukherjee], Barclays Capital.

Hi, I just had a question around the kind of collateral that you will be providing for the new secured loan. Please give us some sense of whether these will be CTL assets or some of the loan positions that you guys have?

Sure. The collateral that we are discussing would be a combination of our loan and CTL assets.

Okay, any breakups in terms of what would be the ratio?

It is a mix.

We are still working on the transaction and it will be a pool that will be both a mix of loans and CTL. And as the transaction is still in process, that has not been finalized.

All right. Thanks a lot.

Omotayo Okusanya, UBS.

Yes, good morning. Just a quick -- first of all, a quick comment. Katy, we will definitely miss you. It has been great working with you since I have been covering the name for the past 1.5 years and Jim, I definitely look forward to working with you. A couple of questions. One, the new secured line -- in the press release, you do have this caveat in there that says it is still subject to closing conditions. Could you talk about what some of those closing conditions could be?

We are in the process of finalizing the syndication process, so the deal will then be subject, once we have syndicated it, to fairly typical closing conditions, documentation. And as Jim mentioned, there will be some finalization of the collateral package. So fairly typical closing conditions and we would hope to be in a position to do that sometime in mid March.

Okay, that's great. Then just a second question, in regards to potential asset sales going forward, especially on the CTL side, could you talk a little bit more -- kind of the environment, what you are seeing out there and opportunities to do that?

Sure, I think the market has been very receptive to real estate assets that are very solid for the next several years. What the market is afraid of right now is trying to guess when stabilization kicks in. So anything that has got a rollover, anything that has got material susceptibility to current economic conditions is pretty tough.

Long-term CTLs that have a solid credit paying for the next 7, 10, 12, 15 years seem to be very much in favor in the marketplace and we have taken advantage of that and sold a nice number of assets and generated reasonably strong pricing. We obviously don't want to sell long-term, stable assets. They are at the core of our portfolio, but where appropriate, we have been peeling some of those off.

Great, thanks, again. And just being able to execute on the line and as well as buying back the debt in this environment, very well done and kudos to your team.

Thanks.

John, next question.

[Joseph Schatz], Goldman Sachs.

Yes, hi, good morning. It's actually Louise Pitt here from Goldman Sachs. I work with Joe. Just a couple of questions. One, the first one is that you mentioned asset coverage of at least 1.2 times on the two new secured facilities or the one new secured and then the change of the unsecured. That equates roughly I guess to about an 83% loan-to-value. Can you give us a breakdown on how that will be split between the two? The first lien and second lien?

There will be one pool of collateral, which, overall, if you added all the loans together will be covered at at least 1.2 times. So that would imply that the first lien will have a much higher coverage ratio than that obviously. The second lien would always be covered as well at 1.2 times, but it is just one pool of collateral.

Okay, great. Thanks. And also could you give us any breakdown on the debt that you had bought back with respect to maturities and sizing of the particular bonds in question?

Yes, it is actually -- over the course of the quarter, it was sort of a variety of both long and midterm and shorter debt. So it is really a variety depending on what we were able to buy in the market.

Okay. And will that breakdown be in the 10-K?

Yes, it will.

Okay. And then the final question that I had, just with respect to the comment about working with bondholders once these facilities have been closed after March. Can you clarify a little bit more what you meant by that statement?

Sure. We have obviously looked to build long-term relationships with all our credit constituents. As part of the review Jim said we went through, we decided going to work with the banks first was the most appropriate way to do it. But we did carve out an ability to also work with bondholders on similar structure. So we would like to continue to find ways to create the runway we think is prudent given market conditions and we wanted to be able to include as many credit constituents as possible in that solution.

Okay. That's really helpful. Thanks very much.

And Mr. Backman, we have no further questions.

Great, John. Thank you very much. Before I wrap up the call, Jay, let me turn it over to you for some summary comments.

Thanks, Andy. Yes, I just really want to express my own appreciation for all that Katy has done for us over the past six years. We have had a great team here. We have been fortunate to have some really top-notch talent. And I am delighted that Jim is going to be able to step in and continue the high quality. But I wanted to make sure that I made my own appreciation for Katy's work known on this call. And with that, we will talk to you next quarter.

Great. Thanks, Jay; thanks, Katy; thanks, Jim; and thanks to everybody for joining us this morning. As always, if you should have additional questions on today's earning release, please feel free to contact me directly here in New York and John, would you please give the conference call replay instructions once again. Thank you, everybody.

Certainly. Ladies and gentlemen, this replay starts today at 12:30 p.m. Eastern and will last until March 12 at midnight. You may access the replay at any time by dialing 800-475-6701 and entering the access code 983296. That does conclude your conference for today. Thank you for your participation. You may now disconnect.