iStar Inc (STAR) 2010 Q1 法說會逐字稿

Good day, and welcome to iStar Financial's first-quarter 2010 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, Rich, and good morning everyone. Thank you for joining us today to review iStar Financial's first-quarter 2010 earnings report. With me today are Jay Sugarman, our Chairman and Chief Executive Officer, and David DiStaso, our Chief Accounting Officer.

This morning's call is being webcast on our website at istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12.30PM Eastern Time today. The dial-in for the replay is 1-800-475-6701, with a confirmation code of 153969.

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

Now let me turn the call over to iStar's Chairman and CEO, Jay Sugarman. Jay?

Thanks, Andy. Well, the first quarter provided a small glimpse of blue sky in what continues to be a difficult environment for our Company. The better overall tone in the capital markets allowed a number of our borrowers to access funds to pay off or pay down iStar investments. And liquidity has been steadily improving in the real estate market through the first four months of the year.

Low interest rates throughout the credit world and an increasing sense that real estate assets, particularly higher-quality ones, have begun to find a bottom, has led to increasing capital flows into the sector, and even the first flickers of life from the CMBS origination world.

While the market environment certainly gives us some hope that all the hard work we have done to strengthen our balance sheet and work through problem assets will pay off for shareholders, our basic challenges have not materially changed. We still have large debt maturities in 2011 and 2012. We still have a number of assets whose outcome is difficult to quantify. And we still have a large number of NPL assets that require intense management focus in order to recover fair value.

But as we have done since this crisis began, we continue to diligently focus on working through these issues and remain committed to achieving positive outcomes.

Our first-quarter results reflected some of the market improvements. Earnings continued to be negative, but benefited from several asset resolutions and lower loss provisioning. AEPS came in at negative $0.26 per share versus a negative $1.47 per share last quarter.

Liquidity was good, with almost $800 million in loan repayments and $300 million in other monetizations, including loan and asset sales, helping us build cash, pay down debt and meet all our funding obligations.

With respect to credit quality, there were fewer negative developments than in past quarters. But the portfolio still contains a number of assets whose outcome is difficult to predict. We continue to work through our outstanding asset issues fairly systematically, trying to assess the likely outcomes as best we can. Those outcomes will be a key variable in the coming quarters.

With that brief overview, let me turn it over to Dave. Dave?

Thanks, Jay, and good morning, everyone. I will begin by discussing our results for the first quarter before moving to credit quality and liquidity.

For the quarter, we reported an adjusted loss of $24.2 million or negative $0.26 per common share. Results this quarter included $89.5 million of additional loss provisions and $6 million of impairments, primarily related to other real estate owned assets. Partially offsetting these losses were $39 million of gains associated with the retirement of debt at a discount.

Revenues for the first quarter were $174 million versus $226 million for the first quarter 2009. 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 OREOs, as well as an overall smaller asset base.

Net investment income for the quarter was $119 million versus $238 million for the first quarter 2009. The year-over-year decrease is primarily due to smaller gains associated with the early extinguishment of debt, as well as the lower interest income I previously mentioned, somewhat offset by the decrease in interest expense.

During the first quarter, we funded a total of $142 million under preexisting commitments. We received $916 million in gross proceeds from loan repayments and loan sales and generated $183 million of proceeds from OREO and corporate tenant lease sales.

Based on principal repayments and asset sales associated with the Fremont portfolio during the quarter, the A-participation interest was reduced by $222 million, down to $252 million at the end of the first 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 is paid off. After that, iStar will retain 100% of all proceeds received. Our remaining unfunded commitments for the total portfolio were $668 million at the end of the first quarter.

Let me turn to the portfolio and credit quality. At the end of the first quarter, our total portfolio had a book value of $13.1 billion, or $13.3 billion on a managed basis. As a reminder, when we talk about the portfolio on a managed basis, we refer to iStar's carrying value of loans, gross of specific reserves and the remaining Fremont A-participation interest.

Our total portfolio was comprised of $8.3 billion of managed loan value or $8 billion of book value in loans and other lending investments. In addition, we had $3.5 billion of corporate tenant lease assets, $830 million of other real estate owned, or OREO, assets, $543 million of real estate held for investment, as well as approximately $200 million of other investments. 82% of our portfolio is comprised of first mortgages, senior loans and corporate tenant lease assets.

Our total condo exposure was $3.1 billion at the end of the quarter versus $3.4 billion last quarter. Our total land exposure was $1.9 billion at the end of the quarter versus $2.2 billion last quarter. The land exposure was comprised of $1.4 billion of loans and approximately $550 million of owned real estate.

At the end of the first quarter, 72 assets representing $3.5 billion or 42.3% of managed loan value were NPLs. This compares to 81 assets representing $4.2 billion or 45% last quarter.

During the quarter, six assets representing $372 million were sold or repaid. Seven assets representing $192 million moved from NPL status to performing. And six assets representing $291 million became NPLs. At the end of the quarter, 26 assets representing approximately $815 million of managed loan value were in foreclosure.

Our NPLs continue to be primarily land- and condo-related assets. Condo assets make up 31% of our NPLs, while land assets represent 27%.

At the end of the quarter, the performing loan watchlist included 12 assets representing $674 million or 8.1% of managed loan value. This compares to 14 assets representing $718 million or [7.7%] (corrected by company after the call) last quarter.

Let me now turn to our OREOs and real estate held for investment. During the quarter, we took title to six properties, which had an aggregate managed loan value of $398 million prior to foreclosure, resulting in $122 million of charge-offs against our loan loss reserves. We received net proceeds of $166 million associated with OREO asset sales and recorded $5 million of additional impairments on the total OREO portfolio.

At the end of the quarter, our total OREO and real estate held for investment assets were $1.4 billion. Of these assets, $830 million were classified as OREO and considered held-for-sale based on our current intention to market the assets and sell them in the near term. The remaining $543 million of assets are considered investment properties and are classified as real estate held for investment based on our current intention and ability to hold them for a longer period of time.

Let me move on to reserves. During the first quarter, we recorded $89.5 million of additional provisions versus $216 million in the prior quarter. While we have seen provisions trend lower over the past few quarters, the rate at which they may continue to do so is uncertain.

At the end of the quarter, our reserves totaled $1.3 billion, consisting of $1.1 billion of asset-specific reserves and $191 million of general reserves. Our reserves represent 15.8% of total managed loans and 31.3% total nonperforming loans and watchlist assets combined.

Okay, let me review our covenants. For our secured bank credit facilities, our tangible net worth was approximately $1.6 billion at the end of the first quarter, above our $1.5 billion requirement. Our fixed charge coverage calculated on a trailing 12-month basis was 2.2x at quarter end, which is above the 1x requirement. And our unencumbered asset to unsecured debt, or UAUD, ratio was 1.3x at quarter end, exceeding our 1.2x requirement.

For both our unsecured and secured bonds, our fixed charge coverage ratio was 2.1x and our UAUD ratio was 1.3x. As a reminder, the fixed charge coverage ratio incurrence requirement is 1.5x, and the UAUD maintenance requirement is 1.2x.

Now let's move on to liquidity. We ended the quarter with $641 million of unrestricted cash versus $225 million at the end of the prior quarter. Since the end of the quarter, we have repaid $130 million of bonds that matured in mid-April. For the remainder of 2010, in addition to $180 million of bond maturities in December, we expect approximately $330 million of other net uses of cash, comprised primarily of remaining loan commitments funding other investments, as well as CTL, OREO and REHI expenses.

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

Thanks, Dave. As most of you know, Jim Burns, our former CFO, left at the end of last month to pursue another opportunity. Dave and his team are well prepared to fill this role as we decide how to best move forward in the months ahead. We think we are in pretty good hands here.

We've also engaged Lazard as an advisor to help us think through the long-term structure of our assets and liabilities. With markets beginning to turn somewhat, and the date nearing where both our forward funding commitments and the Fremont A-note may be all but gone, we want to begin focusing on the best way to position ourselves over the next several years, and matching up our projected asset payoffs with liability maturities is a key exercise we need to get right.

Finally, we are also progressing with the sale of the large sale-leaseback portfolio we began marketing earlier this year. We are working with one party on an exclusive basis during the due diligence period for the entire 33-asset portfolio. Now, while there is no assurance that the sale will take place, if it does get completed, the sale will likely provide additional liquidity to the Company, reduce our debt on the balance sheet, and increase our tangible net worth.

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

(Operator Instructions). Don Fandetti, Citigroup.

Jay, a couple other companies in the space that have been working through some of the issues around the credit crisis have kind of laid out their stress test or bull-case scenario. What is your sense on a good, positive outcome here, how this would shape out? Can you walk us through a couple of those steps and how it might look?

Don, it's a little premature. As I mentioned in my comments, there is still a fairly significant dollar amount of assets where the outcomes are just hard to predict. If you wanted to pick a bull case, certainly we have seen other companies begin targeting book value as a recovery benchmark.

That's something that clearly we have mentioned in the past as something that we are clearly working towards as well. But I think it's still early. We are seeing some signs of life in the capital markets that have put things back on the radar that maybe we couldn't have contemplated a while ago. But I would just caution you it's still a little too early to start laying out bull cases. We're still working through the challenges we have.

Okay. And in terms of negotiations with the banks for some of your bank maturities next year, any thoughts on when you might -- the timing on that?

Well, I think the first step in that process, obviously, was engaging advisors to help us look not only in the near term, but holistically across the entire range of asset and liability maturities. We do think that they will be helpful in that process. We have some fairly good views on what should work for some of our creditors. But I think that's a process that needs to take some time to really get engaged with. I would certainly hope that through 2010 we can find a way to really match those up and start moving forward with the business.

Okay. Thank you.

James Shanahan, Wells Fargo.

Regarding the net proceeds that were generated from the proposed, or that could be generated from this proposed asset sale, how much of that would you characterize or describe as potentially being used for new investments or initiatives?

I think at this point, we are still working on things inside our own portfolio. We still do have some forward funding commitments we'd like to take care of from internal sources of funds. So I think right now, we are still targeting most of those proceeds for internal uses as opposed to new external investments.

Once you've reached an agreement to sell the portfolio, how long do you think it would take for the buyer to complete due diligence and close the sale?

We are looking for a timeframe that is commercially reasonable, so I think within the typical construct of these kind of deals. We are not going to let this stay out there too long. So we'll move forward on a fairly expeditious basis.

I'm sorry, Jay, what is typical in this case? You have obviously more experience than I do with this sort of thing. (multiple speakers)

Yes, I think anything beyond 60 or 90 days starts to feel like too long a period. So if the deal is going to happen, we will know certainly by the end of next quarter.

Okay. And I had a question about the reserve, if you don't mind a quick follow-up. The provisions were $89 million. I estimated charge-offs at around $200 million. I just backed into that number. There was clearly some improvement in your other credit metrics if you look at certainly NPLs, but in aggregate, NPLs, watchlist assets, and then the assets that are put on the balance sheet that had previously served as loan collateral -- you look at all that in aggregate, and there was obviously some improvement in those metrics.

But the lower provision or the dramatic decline in loss provision seemed to be a lot greater than those -- how maybe those metrics had improved. So I was wondering if you could walk me through the thought process. What changed here? Is there -- do you look at the portfolio, and as you conclude that maybe loss severities aren't trending quite as bad, or that some of those loans -- more of those loans are carrying, or is that just based upon the lower level of NPLs, that the reserves were adequate, less an incremental $89 million? Just sort of your thought process with that.

Sure. Just as a reminder, that process is very granular. We go through every single asset, take all the knowledge we have and try to come up with the determinations for individual assets.

If you're looking for more of a global statement, I will say, look, the capital markets are better. Some borrowers have been able to access capital in a way that clearly nine months ago they couldn't have. That's helping.

Two, there is a lot of capital beginning to lower its return targets. Certainly in some of the major markets, we've seen results that were better than we expected on some of the NPL outcomes. So I think that's been a piece of the puzzle.

And third, I think obviously over time, things get written down to a basis at which there's just not a lot of negative surprises or developments on a large number of the assets because all the bad news has been factored in. As I said, I still think there's some assets in the book that are just hard to quantify, and we've got to continue to watch real-time what's going on in those markets and those assets. But for a large pool of the assets, we saw improvements as opposed to, certainly throughout 2009, just a constant barrage of negative developments.

Related to the earlier comments in the prepared remarks, then, did I hear you correctly that you're really not ready to say, then, that there couldn't be another large provision in any of the upcoming quarters?

Just too early and premature to make that kind of statement, James.

Okay. Thank you very much.

David Fick, Stifel Nicolaus.

I apologize for the cell phone. Can you all comment -- I guess, Jay, comment on where you might benchmark a decision to issue common equity? Would it be priced off of book, or what is your thought process there?

I think as we've always done, we look at the capital markets every day as where capital is available to us and where we can deploy that capital. I think certainly there are things on our radar now that were not available to us or certainly things we were not considering prior.

I can't give you an exact sort of at this level, yes, at that level, no, but I can tell you we look at the overall capital structure, and as we see the bid/ask between where we can deploy capital and where we can raise capital shrinking, it does give us some opportunity to begin thinking about where we can raise capital, whether it's equity and/or debt.

I hate to keep saying it, but this recovery feels like it's still relatively early, and for us it's a little premature to be thinking entirely about one or another part of the capital (technical difficulty). We are looking at the overall capital structure and the overall opportunity to deploy capital, and I will say it feels a little better than it did certainly last quarter and way better than it did two or three quarters ago.

Last quarter's repayments of roughly $800 million, can you give us some sense of were these mostly cash-flowing assets where people were able to put on permanent mortgages, or what generated those payoffs?

For the first time, we really saw some meaningful capital market takeout activity. We did see refinancings, where companies and/or individual property owners were actually able to go get third-party capital and repay us. That was nice to see.

We continue to see, actually in major markets, reasonably good sell-down on some of the condo projects. We had three or four assets just pay us off from normal asset -- unit sales. And then we did have one or two big NPL sales that, candidly, we stuck with for a long time. We thought they were good assets. They were in good markets. And we started to see some real capital market activity around bidders coming in, and I think they were able to access capital, and so they were able to bid higher numbers back to us. So we are seeing just the general sentiment starting to flow through, at least in the first quarter, in a positive way.

Okay. Have you started any discussions with the banks about an extension at this point on your lines?

As I mentioned to Jim, we have engaged Lazard to begin those discussions. I think throughout the coming quarters, we will obviously be working hard to figure out a way to, again, match those assets and liabilities in the proper way.

You've been showing some performing loans. Can you give us an idea of the average par value or percentage of par that you recovered there? I assume that you had reserves, so there weren't significant gains or losses here.

I think the performing stuff, we are actually getting relatively good numbers, in the high 90s. It's really the NPLs where there's a lot of variability. We think that kind of $0.25 to $0.30 loss, the sample size is growing and the range is probably still pretty wide. But I think that $0.25 to $0.30 loss number as a benchmark still seems to be about the right number.

So your 30%-plus reserves on NPLs and watchlist is fairly conservative from your perspective?

Well, I don't want to go there, just because a lot of those assets, again, as we've said, we specifically reserve against assets based on what we know. And that can be a much higher or much lower number.

In terms of actual resolutions, that number is starting to center around $0.25 to $0.30. I would say when it's all said and done, it will probably be somewhere close to that range, but I don't want to expand from the small sample size we have and say we feel that's where it's going to ultimately end up. We do feel like, based on our risk-rating process this quarter, those are adequate reserves.

Okay. And then lastly, your OREO and property held for investment, some of that now has sufficient age that I suppose you can sort of assess where you were when you got in, and where you are today. I'm thinking specifically of assets like the Comerica building, which I think it's going on two years since you took that back. What kind of activity are you seeing specifically there and at some of your more mature OREOs?

No, I would say again the multifamily/condo assets have been the easiest to sort of understand the marketplace dynamics, feel relatively good about where those portfolios are going to,how they're going to play out. There are real-time benchmarks every day in those markets about where things can and will sell.

I think land is much more difficult. It's a longer-cycle process. We have seen some recovery, particularly in Southern California and some of the better East Coast markets.

And with respect to Comerica, we don't have a ton of office, and certainly Detroit is not on the hit list for anybody. It's difficult to see comps in that market. It remains the best building in the market. There are a couple large tenants trolling. Some of the lower-caliber assets have gotten into trouble. Sponsors have been unable to continue to feed buildings.

And we do think institutional-owned high-quality assets will at least be able to consolidate some of the tenancy. But that's obviously still a challenging market, and even having the best building in the market is no guarantee.

Michael Kim, CRT.

Just a quick question on the sale of the CTL portfolio. Wondering if you could provide us some color on how many bids that you saw during the quarter, and if it was well received, and perhaps maybe some color surrounding the profile of the buyer that you or the potential buyer that you entered into exclusivity with?

Look, I want to be cautious here. We are under an exclusive arrangement, and we don't want to go into too much detail on this call.

I will say that, as we've said in the past, high-quality, cash flowing, well-recognized assets are the center of the plate right now for real estate investing. I think that they can get financed. They create a lot of stability. You are not betting on where the market is going to be today or tomorrow. You get a nice, diversified pool of income.

So we did have a lot of people attracted to the nature of the deal. We made some decisions about who had the best prospects for closing. So we've done what you would expect us to do in thinking about the variables and choosing a candidate that we thought met the criteria that was most important to us.

So we will have more to talk about that, I hope, in the next quarter, but I don't want to do too much more on this one.

I turn it back to you for final comments, sir.

Well, again, thank you all for your support and attention, and we look forward to talking with you again in the next quarter.

Thanks, Jay, and thanks, everybody, for joining us this morning. If you should have any additional questions on today's earnings release, please feel free to contact me directly here in New York. Rich, can you go ahead and give the conference call replay instructions once again, please? Thank you.

Certainly. Ladies and gentlemen, this conference will be available for replay after 12.30PM Eastern today through May 13 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 153969. International participants may dial 1-320-365-3844. Those numbers again are 1-800-475-6701 or 1-320-365-3844 with an access code of 153969.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.