iStar Inc (STAR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the iStar Financial's fourth quarter and fiscal year 2009 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. Andrew Backman. Please go ahead, sir.

Thank you, John, and good morning to everyone. Thank you for joining us today to review iStar Financial's fourth quarter and fiscal year 2009 earnings report. With me today are Jay Sugarman, chairman and chief executive officer, and Jim Burns, our chief financial officer. This morning's call is being webcast on our website at www.istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12;30 PM Eastern Time today. The dial-in for the replay is 1-800-475-6701 with the confirmation code of 145462.

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, will be forward-looking. IStar Financial's actual results may differ materially from these forward-looking statements and the risk factors that could cause these differences are detailed in our SEC reports.

In addition, as stated more fully in our SEC reports, iStar disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law.

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

Thanks, Andy. 2009 was a very difficult year for iStar. Despite a lot of hard work, it seemed like we were climbing an ever-steepening hill. Asset impairments and negative surprises were large, painful, and ongoing.

The final quarter provided some positive signs of stabilization in high quality and cash flowing assets. The transitional assets remain out of favor and sellable only at meaningful discounts to normalize value. Market fundamentals continue to be weak in most areas, and the macroeconomy remains fragile, though on steadier ground than early last year.

Our fourth quarter and year-end results reflected much of this economic backdrop. Fourth quarter earnings were weak, with provisions for loan losses driving a large adjusted loss, totaling $1.47 per diluted share. And while slightly better than the third quarter, elevated losses have continued, as we grind down the portfolio and try to work down both the left and right side of the balance sheet.

Unfortunately, 2010 will likely be more of the same, though we do think we have made progress in 2009 in reducing some of the flashpoints in the portfolio. Taking our lumps on certain assets and continued paydowns on various performing loans have enabled us to meet our funding obligations through the end of last year, and should position us to meet remaining funding obligations and debt maturities through the first half of 2010.

In addition, we'll continue to explore the sale of a mix of both high quality assets and some lesser quality assets to prepare for future maturities, and position the Company to approach our banks regarding 2011 maturities. With respect to credit quality, the paydown of good assets continue.

The remaining asset portfolio will be made up of a higher and higher proportion of problem loans that will take longer to work out and monetize. As a result, our credit status continue to look very poor. All we can do is continue to work these problem assets out and realign the firm's resources accordingly.

So with that brief overview, let me turn it over to Jim. Jim?

Thanks, Jay, and good morning, everyone. Let me start with our earnings results for the fourth quarter and for the full year before moving to credit and liquidity.

For the quarter, we reported an adjusted loss of $142 million, or $1.47 per common share. Results this quarter included $216 million of additional loan loss provisions and $65 million of impairments related to REOs, CTLs and other assets. Partially offsetting these losses were $100 million of gains associated with retirement of debt at a discount.

Revenues for the fourth quarter were $200 million versus $287 million for the fourth quarter of 2008. The year-over-year decrease is primarily due to a reduction of interest income as a result of an increase in nonperforming assets, including NPLs and REOs, as well as an overall smaller asset base.

Net investment income for the quarter was $192 million versus $432 million for the fourth quarter 2008. The year-over-year decrease is primarily due to a smaller gain associated with the early extinguishment of debt, as well as the lower interest income I just mentioned, somewhat offset by lower interest expense.

For the full year 2009, we reported an adjusted loss of $689 million or $6.88 per common share. Results for the year included $1.3 billion of loan loss provisions, $141 million of impairments, and $547 million of gains associated with retirement of debt, including a one-time gain of $108 million we recorded upon completion of our bond exchange earlier in the year. Given the required accounting treatment, we still have approximately $228 million of unamortized gains associated with this exchange, which we will amortize against interest expense over the life of the 2011 and 2014 secured notes.

Net investment income for the year was $911 million versus $966 million last year. Revenues for the year were $893 million versus $1.4 billion for the prior year. Again, the primary drivers of the decrease were the reduction of interest income as a result of an increase in nonperforming assets, including NPLs and REOs, as well as an overall smaller asset base.

At the end of the fourth quarter, our leverage, defined as booked debt net of unrestricted cash divided by the sum of book equity, accumulated depreciation, and loan loss reserves, was 2.9x, unchanged from the prior quarter. During the fourth quarter, we funded a total of $253 million under pre-existing commitments. We received $673 million in gross proceeds from loan repayments and loan sales versus $586 million received last quarter, and we generated $104 million of proceeds from REO and CTL sales.

Based on principle repayments and asset sales associated with the Fremont portfolio during the quarter, the A-participation interest was reduced by $200 million to $473 million at the end of the fourth quarter. As you know, 70% of all proceeds from principal repayments and asset sales associated with the Fremont portfolio go to reduce the A-participation until it's paid off. After that, iStar will retain 100% of all proceeds received.

Our remaining unfunded commitments for the total portfolio were $840 million at the end of the fourth quarter, of which we expect to fund approximately $540 million. $198 million of our unfunded commitments relate to the Fremont portfolio, of which we expect to fund about $71 million.

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 $14.5 billion. As a reminder, when we talk about managed basis, we mean iStar's carrying value of loans, gross of specific reserves, and the A-participation interest outstanding on Fremont portfolio assets.

Our total portfolio was comprised of $9.6 billion of loans and other lending investments; $3.5 billion of corporate tenant lease assets; $839 million of other real estate owned; $426 million of real estate held for investment; as well as $192 million of other investments. 84% of our portfolio is comprised of first mortgages, senior loans, and corporate tenant lease assets.

The loan portfolio had an average loan to value of 85%, and on a managed basis, is comprised of $7 billion of iStar loans and lending investments, and $2.6 billion of Fremont loans. The average loan to value for all performing loans was 76% at the end of the quarter.

Our total condo loan exposure was $3.5 billion versus $4.2 billion last quarter. Completed condo construction loans represented $2 billion; in-progress condo construction loans represented $1.2 billion; and condo conversion loans were approximately $300 million. Our total land loan portfolio was approximately $1.9 billion at the end of the quarter, down slightly from $2.2 billion at the end of last quarter, due to a number of loans being moved to our REO and real estate held-for-investment portfolios.

At the end of the fourth quarter, 81 assets representing $4.2 billion or 45% of managed loan value were NPL. This compares to 85 assets representing $4.4 billion or 42% of managed loan value last quarter. At the end of the quarter, 22 assets representing approximately $700 million of managed asset value were in foreclosure.

Our NPLs continue to be primarily land and condo-related assets. Land assets represent 30% of our NPLs; new condo construction assets make up 28%; and condo conversions make up 2%.

On the performing loan watch list at the end of the quarter were 14 assets representing $718 million or 8% of managed loan value. This compares to 26 assets representing $1.2 billion or 11% of managed loan value last quarter.

Let me turn to OREOs and real estate held-for-investment. During the quarter, we took title to 12 properties, which had an aggregate gross loan value of $675 million prior to foreclosure, resulting in $211 million of charge-offs against our loan loss reserves. We received net proceeds of $98 million associated with the sale of OREO assets and recorded $42 million of additional impairments on the OREO portfolio.

At the end of the quarter, our OREO and real estate held-for-investment assets totaled $1.3 billion. Of these assets, $839 million reclassified as REO were considered held-for-sale, based on our current intention to market the assets and sell them in the near-term. The remaining $423 million, the largest component of which is land, are considered investment properties, and are considered and are classified as "Real Estate Held For Investment", based on our current intention and our ability to hold them for a longer period of time.

Let me move on to reserves and impairments. During the fourth quarter, we took $216 million of additional provisions versus $346 million of provisions in the third quarter and $435 million in the second quarter. While we've seen provisions trend lower over the past couple of quarters, the rate at which they continue to do so is uncertain. At the end of the quarter, our reserves totaled $1.4 billion, consisting of $1.2 billion of asset-specific reserves and $175 million of general reserves. Our reserves represent 15% of total managed loans and 29% of total nonperforming loans and watch list assets combined.

Okay, let me review our covenants. First, we continue to be in compliance with all of our bank and bond covenants, and our intent is to continue to take the appropriate actions to maintain compliance with all of our covenants going forward.

For our secured bank credit facilities, our tangible net worth was approximately $1.7 billion at the end of the fourth quarter, above our $1.5 billion requirement. Our fixed charge coverage, calculated on a trailing 12-month basis, was 2.4x at quarter-end, which is above the one-time requirement. In our unencumbered assets and unsecured debt, or UA/UD ratio, was 1.4x at quarter-end, exceeding our 1.2x requirement.

For both our unsecured and secured bonds, our fixed charge coverage ratio was 2.3x and our UA/UD ratio was 1.4x. As a reminder, the fixed charge coverage ratio incurrence requirement is 1.5x and the UA/UD maintenance requirement is 1.2x.

Now let's move to liquidity. We ended the year with $225 million of unrestricted cash. Since the end of December, we completed several asset sales as well as had some assets repay, including the highly publicized Drake loan, where we received approximately $191 million or 95% of the par value of the loan.

Cash available at year-end, as well as the proceeds from recent asset sales and repayments, will be used to pay our approximately $300 million of March and April bond maturities and help offset our other full year 2010 obligations, which include $430 million of unfunded commitments, of which we expect to fund approximately $300 million by the end of June, and $250 million of December bond maturities.

In addition, as outlined in our public filings, if we do not pay down our first lien facility by $500 million in September, then any proceeds from principal repayments or asset sales associated with the collateral securing that facility, will be applied to pay down that facility by up to $500 million. As we have said in the past, we will continue to work to meet our funding obligations, utilizing a combination of cash, credit facilities and asset sales.

With that, let me turn it back to Jay. Jay?

Thanks, Jim. Last year, I hoped 2009 would be a transition year, setting us back on course. That did not happen, as some borrowers, who we believed, would work aggressively to recover value and protect their positions, instead threw in the towel, walked away from their investments, or worse, actively blocked and impeded our value to recover proceeds due to iStar. It will now be up to us in many cases to find a way to extract value from these assets.

We hope to be able to shore up many of these assets and put them back on solid ground. The bigger question is, how do we get iStar back on solid footing? Given sufficient time, we believe we can create significant value for shareholders from the existing portfolio. So, gaining time and creating a long enough runway to be able to maximize asset values will continue to be a key focus in 2010.

But execution on the left side of the balance sheet will be very sensitive to execution on the right side of the balance sheet. On the right side, we need to work down our leverage; protect book value; stay within covenant guidelines; and find ways to meet debt maturities in funding commitments. This is the same fine line we have been walking for some time now, and we expect to continue to have little margin of error in our execution. However, with funding commitments mostly coming to an end over the next 12 months, our main focus can now be on meeting our future debt maturities. We'll obviously keep you updated throughout the year on how we plan to do that.

With that, let's go ahead and open it up for questions. Operator?

(Operator Instructions). Joshua Barber, Stifel Nicolaus.

It's Dave Fick, also with Josh Barber. Two quick questions. The loan sales in the quarter, $129 million, what percentage of par, original par, were those sales done at on average?

Hold on, David. David, what's your second question?

Your 8-K filing last week, you indicated that you had offers to sell roughly 40% of your CTL portfolio. First of all, is this the one collateralizing the GE capital loan? And what kind of cap rate indicators are you seeing? And what is your strategy around selling those loans -- I'm sorry, the CTL assets, considering they're some of your more stable assets in the portfolio?

I think we have been over the last two years looking for opportunities to monetize assets. We do believe the market for strong, stable assets is actually quite attractive right now, given the dearth of very long-lived and very stable cash flow assets that are actually available in the marketplace.

A lot of capital out there that we think needs to find a home, given the low treasury interest rate environment it finds itself in. And we think the sale leaseback product is one of the more attractive ones out there for those who don't want to take near-term macroeconomic or real estate risk.

It's not to say we are going to do anything there, David. Our view right now is we are exploring the opportunity as a result of a number of inbound calls. We do think the values could approach levels that would be attractive to us, but we will obviously know that relatively soon and make a decision going forward.

Can you say anything about what kinds of yields you're seeing in that marketplace?

Yes, I think the last two trades that have gone down on a sale leaseback basis that we monitored very closely, the best was about a 7.5 cap on a suburban Princeton office building leased to a large pharma company. 7.5 cap is probably close to or just behind where that would have traded probably two or three years ago.

We have seen some industrial stuff trade in the high 7's, and we're seeing some second tier properties trading in the low 8's. So, we think there's a strong bid for assets that, at least in the near-term, people are not having to guess where the economy's going or where the real estate market's going. We think really high caliber assets, like some of the ones in our portfolio, should be attractively priced to built-in benchmarks.

These sales would not affect, if they occurred, your tangible net worth calculation, but they would affect your liquidity, obviously. And I'm sure that's behind your call here.

To the extent they're gains, they would impact tangible net worth.

Okay, thanks.

David, just getting back to you on your first question. The loan assets that we sold in the first quarter -- sorry, in the fourth quarter -- we realized just a hair under 90% recovery on those assets.

Wow, that's very strong. Okay, great. Thank you.

Thanks, David. Next question, Jim?

(Operator Instructions). Jim Shanahan, Wells Fargo.

It's James Shanahan. Good morning, everyone. A question that I have -- the Company has continued to, obviously, to see opportunities to acquire outstanding debt and retire the debt for gains. However, I'm guessing here that the largest gain potential is not likely to be with the near-term maturities. But just to make sure that -- I wanted to verify -- is any of the debt that was retired in the fourth quarter, is any of that the March or April maturities that we've been discussing?

Yes, as I mentioned on the call, our March and April debt maturities now are down to about $300 million. So we did repurchase some of those in the fourth quarter.

I apologize; I missed those comments. I have two other earnings conference calls going on. The -- so, regarding the other liquidity, did you provide an update, Jim, of the liquidity position today and the outlook for the repayment of those debt maturities as scheduled?

Yes. No, we talked about where we were at the end of the quarter and that we have had some repayments and some asset sales thus far already this year. And that included -- we did get back almost $200 million on our Drake position, which got a fair amount of publicity.

So we now have the $300 million of March and April's that we expect to repay in March and April, we think in the first half of the year. We've got about $300 million of unfunded commitments that we need to meet. And then the second half of the year, probably another $130 million of unfunded commitments, mostly related to construction loans. Our December 2010 unsecured bond, which we'd also been buying back a little bit of, is now down to $250 million.

And in September of this year, as part of our first lien bank line credit facility, if we don't make a $500 million payment, it's not a mandatory repayment but if we don't pay it down by $500 million, repayments of principle on any asset sales of the collateral that's in that pool goes to pay down the banks until they receive the $500 million paydown there. So that's kind of where we are.

Okay, thank you for that review.

Thanks, Jim. John?

We have time for one more question. That will be from the line of Ian Goltra with Forward Management. Please go ahead.

Morning, Jay. Of the $4.2 billion of NPLs currently, how many of those are maturity defaults? Or what dollar amount of maturity defaults versus nonpayment of P&I is occurring?

You know, I don't have the exact amount, but it's mostly maturity defaults. We've got three buckets. We've got maturity default; we have things being delinquent by 90 days; interest being delinquent for 90 days; and then we also have assets where we take the borrowers with assets impaired and the borrowers no longer making an effort to repay the loan. And the vast, vast majority of those assets that are NPL are maturity defaults.

In which case you're receiving P&I on an ongoing basis?

Oh, no, I'm sorry. In most cases in the maturity default, we're not receiving interest either. Some cases, it will go NPL before maturity, if someone stops paying interest. But no, for the cases that there's a maturity default, not always, but in most cases, there's no more interest being paid either.

Okay.

I want to be careful there. I mean, I think most of the NPLs are impaired assets and not simply passage of time issues. It's actually a credit issue.

Okay. And then, lastly, the reserve at roughly $0.33 on the dollar relevant to the NPLs -- is that a -- I mean, are you guys using fairly draconian assumptions at this point? Or can you talk for a minute about sort of your qualitative assessment of the loans and the risk ratings, and where you are with -- I assume there's varying shades of gray here relative to those NPLs, and just kind of where you are in terms of draconian versus, say, fair value assumption?

Yes, we're spending a lot of time on that, Ian. I guess the number that gets tossed out in the world is 40% decline in values as the baseline. In our own experience, I'd break that down for you and tell you for high quality, strong, stable, cash-flowing assets, it's probably 0% to maybe as much as 20%. You know, if it's high quality but the cash flows are somewhat transitional or it's a second tier asset with somewhat stable cash flows, I'd say you've probably lost 20% to 40% of value.

If it's high quality and it's got no cash flow or negative cash flow, particularly in the hospitality area, or you've got second tier assets with cash flows in transition, you're probably down 40%, 50%, even 60%. And then if your second tier assets really with negative or no cash flow, you could be down as much as 60% to 80%.

So I think the 40% baseline is an interesting number; but as we look through the portfolio and try to assess real value diminution, a lot of it comes down to an assessment of where it is in that cycle of cash flows and qualitative issues with respect to the real estate. And we think the 33% number, while interesting, hard to generalize from each individual asset could be from very little reserves to very, very, very significant reserves.

The average just happens to be kind of in the 33% range, which, if you think values on average have fallen 40% and we were at kind of 65% or 70% of initial value, feels adequate. But I'll tell you there's 50 -- probably about 50 high beta assets in the portfolio, where we just -- it's very difficult to make an assessment of the outcome. It's almost binary.

So we are making judgment calls on how things are going to fall out. And again, I think we've gone several steps beneath the surface to try to analyze exactly what we think outcomes will be; severities will be; and see the end result. But I would caution you that it's a very granular approach.

And in a dollar value sense, what -- those 50 assets represent what percentage of the total NPLs?

Not just NPLs --

Across the board.

Yes. It's 10% of the total number of assets. It's more than that on a dollar amount. We think, fundamentally, if we had to break it down for you, we look at value and say -- if a borrower paid more than replacement costs in the last three years, that money is lost and never coming back. It's pretty easy to assess those.

I think where replacement costs have changed, the borrower paid replacement costs, we lent against then-current replacement costs, we think those numbers are down 10% to 20%. Most cases, we're probably fine. The borrower has probably lost the money, but we're probably fine. I think the loss of leverage on some of these deals is impacting value. We think time may heal some of that but, clearly, won't heal all of it.

And then we think fundamentals have weakened. There's simply been a flat-out reduction in cash flow, particularly in hospitality, retail, and even some multi-family. But we think that's something that actually will come back as the economy comes back.

So when you look at those factors and we try to decide where value has been permanently diminished versus where are things at, with the passage of time, may be recovered. And that's how we're trying to assess both severities and the timeframe in which we'll recover our basis.

And lastly, shifting gears, you had a small impairment of $22 million against the CTL portfolio. Is that due to any particular event? Or is it just market conditions? Can you articulate what it is that caused that?

Yes, we had a transaction we thought was going to close last year on a parcel of land in California. The zoning didn't happen. And so there's more work to be done there before that value can be realized. Based on GAAP, we had to take that impairment.

Thank you.

I'll turn it back to you, Mr. Backman.

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

Certainly. Ladies and gentlemen, this replay will end March 5 at midnight. You can access the replay at any time by dialing 800-475-6701 and entering the access code 145462. That number again, 800-475-6701 and the access code 145462. That does conclude your conference for today. Thank you for your participation. You may now disconnect.