iStar Inc (STAR) 2010 Q2 法說會逐字稿

Good day and welcome to iStar Financial's second 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 now 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 and good morning everyone. Thank you for joining us today to review iStar Financial's second quarter 2010 earnings report. With me today are Jay Sugarman, 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 12.30 PM Eastern Time today. The dial-in for the replay is 1-800-475-6701 with a confirmation code of 164196.

Before I turn the call over to Jay, I would 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 report. 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 would like to turn the call over to iStar's Chairman and CEO, Jay Sugarman. Jay?

Thanks Andy. Our second quarter was another one of hard work and steady progress on a number of fronts, offset by a less than robust macro economy, challenging asset workouts and a continued need to realign asset and liability maturities more appropriately. We made good progress in our ongoing efforts to create a stronger balance sheet and more flexible operating profile with the closing of a $1.35 billion sale of a diversified portfolio of credit tenant lease assets. The sale, in conjunction with continued loan repayments from borrowers, individual asset sales and fewer funding commitments, allowed us to pay down debt, reduce leverage, solidify book value and improve many of our operating metrics.

Progress on the asset side was more mixed, with the macroeconomic pause we saw in the latter parts of the second quarter slowing some of the asset resolutions we expected following the first quarter. While real estate capital markets continue to recover, we remain cautious on the speed at which values on certain of our more difficult assets will recover and many asset resolutions will continue to take material amounts of time and effort with less than certain outcomes.

Let me touch quickly on the second quarter results. Earnings continue to be impacted by increased provisions and continued high levels of nonperforming assets, partially offset by gains on debt repurchases. Adjusted earnings per share were negative $-0.89 per share, primarily due to provisions that remain stubbornly high.

Leverage came down nicely, as we repaid almost $1.8 billion in debt and increased our book value by several hundred million dollars. Tangible net worth, UA/UD and other operating metrics all improved as well.

And our operating profile continued to be solid with repayments easily exceeding fundings and unrestricted cash at quarter end in excess of $0.5 billion. However, the debt maturities in 2011 and 2012 remain an obvious concern that we are focused on. I will give a brief update on that after Dave gives you all of the numbers. Dave?

Thanks, Jay, and good morning everyone. I'll begin by discussing our financial results for the second quarter before moving to credit quality and liquidity. For the quarter we reported net income of $212 million or $2.27 per common share. Earnings this quarter included a $250 million gain associated with our previously announced portfolio sale of 32 corporate tenant lease or CTL properties.

Adjusted earnings, which excludes gains from the portfolio sale and other discontinued operations, was a loss of $83 million for the quarter or a loss of $0.89 per common share.

Revenues for the second quarter were $137 million versus $193 million for the same period last year. The year-over-year decrease is primarily due to a reduction of interest income as a result of performing loans moving to nonperforming status and to a lesser extent a smaller asset base resulting from loan repayments and sales.

Net investment income for the quarter was $130 million versus $276 million for the second 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 a decrease in interest expense and increased earnings from equity method investments. You may recall that, in the second quarter last year, we completed a bond exchange that generated $108 million of net gains upon closing of the transaction.

During the second quarter we funded a total of $131 million under pre-existing commitments. In addition, as part of the CTL portfolio sale we provided a $106 million mezzanine loan to the buyer, of which $25 million was repaid subsequent to quarter end. During the quarter we received $1.3 billion of proceeds from the CTL portfolio sale, $592 million in gross proceeds from loan repayments and loan sales. And we generated $144 million of proceeds from OREO as well is the other CTL sales.

Based on principal repayments and asset sales associated with the Fremont portfolio during the quarter, the A-participation interest was reduced by $116 million down to $135 million at the end of the second quarter.

Let me turn to the portfolio and credit quality. At the end of the second quarter, our total portfolio had a book value of $11.3 billion. Our remaining unfunded commitments for the total portfolio were $532 million at the end of the second quarter, of which we expect to fund just under $200 million.

Our total portfolio was comprised of $7.3 billion of loans and other lending investments. In addition, we had $2.2 billion of corporate tenant lease assets, $891 million of OREO assets, $642 million of real estate held for investment and $211 million of other investments. 77% of our portfolio was comprised of first mortgages, senior loans and corporate tenant lease assets. Our total condo exposure was $2.7 billion at the end of the quarter versus $3.1 billion last quarter.

Our total land exposure remained flat quarter over quarter at $1.9 billion. The land exposure was comprised of $1.3 billion of loans and $624 million of owned real estate.

At the end of the second quarter, 63 assets representing $3 billion or 39.9% of managed loan value were nonperforming loans or NPLs. This compares to 72 assets representing $3.5 billion or 42.3% last quarter. Managed loan value refers to iStar's carrying value of loans, gross of specific reserves and the remaining $135 million Fremont A-participation interests.

Our NPLs continue to be primarily land and condo related assets. Land assets represent 29% of our NPLs while condo assets make up 26%. At the end of the quarter, the performing loan watchlist included 14 assets representing $1 billion or 13.8% of managed loan value. This compares to 12 assets representing $674 million or 8.1% last quarter.

Let me now turn to our other real estate owned, or OREOs, and real estate held for investment. During the quarter we took title to nine properties which had an aggregate managed loan value of $385 million prior to foreclosure. This resulted in $147 million of charge-offs against our loan loss reserves.

We received net proceeds of $74 million associated with OREO asset sales including unit sales, and recorded $12 million of additional impairments on the total OREO portfolio.

At the end of the quarter our OREO and real estate held for investment assets totaled $1.5 billion compared to $1.4 billion at the end of last quarter. Of these assets, $891 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 $642 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 onto reserves. At the end of the second quarter we recorded $109 million of additional provisions versus $90 million in the prior quarter. While we have seen provisions trend significantly lower from last year, as we have said before the rate at which they may continue to do so is uncertain and we could see quarterly fluctuations as we did this quarter.

The main driver behind the quarter-over-quarter increase related to one asset in our corporate loan portfolio, which, as a result of recent restructuring discussions conducted during the second quarter, warranted significant incremental reserves.

At the end of the quarter, our reserves totaled $1.2 billion, consisting of $1 billion of asset-specific reserves and $174 million of general reserves. Our reserves represent 15.9% of total managed loans.

Okay, let me review our covenants. For our secured bank credit facilities our tangible net worth was approximately $1.8 billion at the end of the second quarter, above our $1.5 billion requirement. Our fixed charge coverage, calculated on a trailing 12 month basis, was 2.1x at quarter end which is above the one-time requirement. And our unencumbered assets to unsecured debt, or UA/UD ratio, was approximately 1.5x 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 UA/UD ratio was approximately 1.5x. Finally, let me conclude with a discussion of liquidity. We ended the quarter with $532 million of unrestricted cash versus $641 million at the end of the prior quarter. During the quarter we repaid approximately $1.8 billion of debt.

Specifically, we fully repaid a $948 million term loan collateralized primarily by assets in the CTL portfolio we sold. We repaid our $129 million unsecured bond that matured in April and we paid down $161 million of other outstanding indebtedness.

In addition, we redeemed $282 million par value of our 8% secured notes due March 2011 and 10% secured notes due June 14 and repurchased $235 million of senior unsecured notes at a discount. As a result, we recorded a $70 million net gain on the early extinguishment of debt in the quarter.

In terms of our cash obligations for the remainder of 2010, we have a $130 million unsecured bond maturity in December. In addition, we currently expect a net use of cash of approximately $300 million, which includes funding remaining loan commitments, other investments, as well as CTL, OREO and real estate held for investment expenses. These uses exclude any potential amortization payments on our first lien bank line.

We're considering our options with respect to the September 30th $500 million amortization payment. If we do not make the payment, we will direct proceeds from repayments and sales of collateral to pay down the first lien bank line to $500 million in accordance with the terms of the first lien loan agreement.

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

Thanks Dave. So, our list of priorities has not changed much over the past several quarters -- reduce debt, protect book value, shrink the size of the Company to more manageable levels. And we've make good progress on all of those fronts.

To give you some sense of what it has taken to do that, in the past twelve quarters we have repaid over $8 billion in debt and we funded over $8 billion throughout the portfolio. That has put us in a better position to begin negotiating an extension of our debt maturities and our goal is to better align them with our asset maturity profiles.

At this point, ideas are being shared between us and our bank group on how we would like to be able to do that, but there is no guarantee we will be successful in finding a solution. But we do hope our debt and equity holders will continue to support us as we try to protect value for all our stakeholders.

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

(Operator Instructions) Don Fandetti, Citigroup.

I was wondering if -- I guess, Jay, is there a roadmap to the other side for you is my first question. And then secondly, what criteria do you think the banks would look at to determine whether or not they would work with you?

Yes, I think as I said, the roadmap for us at least to this point has been to reduce debt, protect the book value, shrink the Company. We have kept intact what we think is still a very powerful investment platform; continue to see opportunities in our own portfolio where we have deployed new and additional capital.

Obviously once we're able to access appropriately priced capital from the capital markets, I think the macro opportunity is quite large. But right now the biggest opportunity and where focus needs to be is really to maximize the value of our existing $10 billion plus [one]. I think were going to keep our eyes focused on that.

With respect to the second question, I guess the five most important things to say when you're asking for some sort of extension from a lender is, one, don't need anymore money. As I mentioned in my remarks, repayments are exceeding fundings by a wide margin so we don't need any more money. You want to tell them you're going to pay them off in full. I think we spent the last two years working very hard to demonstrate that there's lots of equity value in this Company and we put ourselves in a position where I think certainly our bank group feels like they will be paid in full.

We don't need them to lower our rates. That's always a tough decision. We face it oft-times with borrowers--will say I need a lower rate. That is always difficult. As a lender, we don't need that.

We don't need them to accrue interest. We will continue to pay them currently. We have plenty of money to do that.

And we're going to improve their security. That's one of the things we always look for in situations where we're asked to extend, is... how are you making my position better? So if you look at those five things, we don't need anymore money. We're going to pay our creditors in full. We don't need to lower the rate. We don't need them to accrue interest. We are going to improve security.

At least from an extension standpoint, those are good things to have in your back pocket. I think we spent the last eight, twelve quarters really trying to put ourselves in a position where we can ask something that we think is a regular [way] conversation that happens every day, not something that is done under duress or not something that is a crisis mode. That is how we would like to handle it.

We continue to work on our stand-alone business plan. But obviously, as we have said many times, aligning assets and liability profiles really will maximize value for everybody.

Okay and just another question, I may have missed this, but as you look at -- I mean there's not a tremendous amount of commercial real estate loan acquiring and originating opportunities now. When do you think that tipping point occurs where just transaction velocity opportunities open up for the business in general?

I think there actually are plenty of opportunities out there. I think surprisingly there's just a lot of money chasing them. In a more normal environment I think there has been quite a bit of dollar volume available. But it seems like in this cycle there is a lot more capital chasing real estate because of the yield, because of the potential upside. And relative to a 0% interest-rate environment, the yields on our assets in our industry continue to look attractive.

So, I think the -- certainly the supply of opportunities is there. It is just not as robust as the demand for them. It feels like stuff is starting to shake loose. I will tell you that as we see the large holders of commercial real estate begin to write them down to trading levels, as opposed to what they may view as intrinsic long-term value, you will see more and more trades take place.

It's always a difficult to thing to sell something below what you think its intrinsic long-term value is. But in many cases for an institution, a bank, somebody who has a lot of different parts of the machine, if they can get out without a loss and they can redeploy that capital and they can demonstrate progress I think they are going to do that.

I think we're starting to see marks reach the point where people are saying, I would like to shrink down the book. I would like to take a lower profile. I would like to be able to do some new deals. To do that, we have to start seeing velocity.

I think the capital demand from a wide range of investors is there. It's just the price points haven't been attractive enough. But as people get comfortable that rates are not going up any time soon, I think the relative attractiveness to the yields in real estate will start to stand out.

Michael Kim, CRT.

Thanks for taking my question. Jay, in terms of the loan portfolio just kind of curious how much was actually scheduled to be repaid during the quarter and the breakdown of how much was actually transferred to nonperforming status from the scheduled repayments.

I don't have that number at my fingertips. Maybe you can follow up with Andy afterwards and he can give you some more detail.

Great. My follow-up question, just the news on the LNR recapitalization, I'm just wondering what your stake in this equity investment was, and was this a net use of cash from iStar's perspective?

Yes, I think as you might have seen in our 8-K filing, it had a bunch of different pieces to it. But we were a large senior creditor, a large junior creditor. We received about half of our senior credit paid down as part of the transaction. So we retained about a $50 million stake in the senior credit.

We received a $50 million repayment on our senior credit. We converted our $100 million junior position into equity and we invested $100 million of new equity. So we come out of this with really two pieces of paper around a $50 million first lien and about one-quarter of the Company equity.

Do you expect this to be a big contributor? More of a long-term investment obviously, but is there any short-term impact from something like this or--?

I think it was a strategic decision that there are only four or five major players in that sector, LNR being the largest and with some of the most industry-leading statistics in their ability to work out assets. And in the environment we find ourselves in, we think that could be an attractive place. We have seen a lot of very high-profile investors chasing the [space].

We were in the space. We decided that making an additional investment with some other high-profile investors could lead to some pretty interesting opportunities. But at this point we made a single investment decision based on the prospects of the company with or without our participation, and we thought with our participation was the right decision.

And my last question just real quickly on the Fremont portfolio, how is that trending? And do you expect to have this fully repaid by the end of the third quarter just the (inaudible)?

It's a variable. Some of that is outside of our control. Obviously the faster we sell assets in the Fremont portfolio, the faster that piece of paper will go away. We do still have some funding commitments under Fremont loans. So, it can go down and also it can go up a little bit.

We certainly think that over time that is going to pay off and 100% of the proceeds of that portfolio will be available to us. But right now we don't have exact visibility. But it's paying down every quarter and the natural runoff feels like about $20 million a month. That excludes sales which are obviously in our discretion.

James Shanahan, Wells Fargo.

Thank you and good morning. Most of my questions have been asked and answered. I did have one remaining question, however.

The increase in watchlist assets that occurred in the second quarter offset the improvement in NPAs. But I'm more curious if you could discuss these assets in detail in and what was the motivation for moving them to the watchlist at this stage in the cycle. Did something change with these properties? Was it lumpy? Any detail there would be helpful. Thanks.

I guess I would personally say I was disappointed in a number of these assets showing up this quarter and the way they did. They are characterized by large assets, major markets and I'm talking about really the three or four that make up the bulk of the change.

Each one had a borrower who ran out of money. Each one had a mezzanine lender who decided not to fund additional capital. Each one had a cost overrun that we wish would have been avoided. I think our view is, given that they are in good markets, we are faced with a decision on how to move forward and that is why they're on the watchlist.

Is it your anticipation, then, that maybe watchlist assets have stabilized at this level? Or do you think it's a possibility for another large increase?

As the portfolio shrinks here we are hoping that both NPLs and watchlists become a smaller and smaller subset of the portfolio. I think for the most part that is true.

I would also say some of these assets that remain in our portfolio are quite large, and when something goes sideways you can see some variability. It wasn't the number of loans, obviously, this quarter that changed dramatically. But the dollar amounts were fairly large.

I think that is still the issue and I think I mentioned that on a couple of past calls, is you have got these assets that have uncertain outcomes. Some, certainly in the first quarter, went very well; probably better than we expected. I would say in the second quarter with the economy pausing, we saw a few that actually didn't expect have these issues with.

But it's something we're dealing with everyday and have dealt with every day. I think we continue to think we are able to protect value when we need to and when these surprises happen we'll go to work to try to protect it.

Joshua Barber, Stifel Nicolaus.

Good morning. Your $300 million that you referenced before of remaining cash uses, does that include the $100 million that you invested in LNR?

Yes it does.

In reference to your watchlist assets and everything else that got added to the -- either NPL or watchlist, can you talk about how many of those assets have funded commitments associated with them?

Yes. At this point most of the funding commitments have burned off. But as I said, when you have a construction project that has issues, somebody has to fund it. If your borrower chooses not to and your mezzanine chooses not to, somebody is going to. And if at the end of the day we need to do so to protect our value we will do that. I won't say those are very large numbers in the grand scheme of things, though.

Ravi Bellur, BlackRock.

I was wondering if you could just -- most of my questions were asked and answered, but I was wondering if you could just elaborate a little bit more on NPL sales or loan sales during the quarter in terms of what kind of recoveries you got on those.

Again we are -- we have plenty of NPLs. We're trying to fairly judiciously tear that down. Sales on some of these took place at prices we thought were appropriate given the market place.

I think probably the most disappointing was a sale we did in D.C. of a very high-quality project that stumbled during construction. We recovered probably $0.65 to $0.70 on that. I think if we had been willing to hold it, we might have done a little better but we had a participant. We looked at the challenges moving forward and we decided that together it was the right time to sell.

We recovered 100 cents on a couple of the deals as well and some of the CTLs we sold -- obviously we sold at a very sizable (inaudible) to par. So, again, I think it is not a question of being forced to sell anything. We're judiciously paring that portfolio down when borrowers reach a price point that we think is acceptable or third parties reach a price point that we think is acceptable.

But we're trying to be thoughtful about it and this was not a big sale quarter. We had the CTL deal in the market. We wanted to see if that would close first. So we did not actively push to pare down the portfolio because we thought the CTL deal would do that for us.

As we move forward, we will continue to look at that list and try to get it down.

We have time for one more question please.

(inaudible)

Can you just clarify how much of the provision in the quarter was for LNR?

Yes, it was a fairly large provision. We had taken quite a large general reserve. We ended up then converting that to an even larger specific reserve and reversing out the general reserve. But it made up in almost half the impairments for the quarter.

So did -- the provision went down excluding LNR linked quarter?

Generals went down a little bit, right? (multiple speakers) I'm looking at Dave.

Yes, general reserves went down approximately $16 million for the quarter. Without this provision, quarter-over-quarter the total provision would have decreased from prior quarter.

Right. The provision on the income statement would have decreased linked quarter.

Correct.

Okay, thank you. Back to you Mr. Backman.

Great. Well, thank you everybody for joining us. If you should have any additional questions on today's earnings call, as always please feel free to contact me here directly in New York. Michele would you please give the conference replay instructions one more time? Thank you.

Certainly. Ladies and gentlemen this conference will be made available for replay after 12.30 PM today until August 17 at midnight. You may access AT&T Executive Playback Service at any time by dialing 1-800-475-6701, entering the access code 164196. International participants dial 1-320-365-3844 and again that access is 164196.

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