iStar Inc (STAR) 2010 Q3 法說會逐字稿

Good day and welcome to iStar Financial's third-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'd 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, Rochelle, and good morning, everyone. Thank you for joining us today to review iStar Financial's third-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 www.istarfinancial.com in the Investor Relations section. There will 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 the confirmation code of 173998.

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 those 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 report, 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 Jay. Jay?

Thanks, Andy. The third quarter was a constructive one for iStar, as we continue focusing on resolving near-term challenges while also identifying longer-term opportunities. With the capital markets beginning to open up and interest rates remaining low, we saw increased liquidity in the real estate sector and more transaction flow in our portfolio.

Offsetting this, the overall economy remained weak, and large-scale recovery and values remained confined to the most stable markets and the strongest properties. Within our diversified portfolio, we were able to take advantage of these stronger conditions in certain markets and in certain properties, but we remain exposed to other less vibrant sectors, where values continue to be uncertain and recovery will take place over a longer timeframe.

Let me quickly touch on the third-quarter results. As in prior quarters, earnings were impacted by increased provisions and high levels of nonperforming assets. AEPS was negative $0.76 per share, primarily due to provisions that were lower than the second-quarter but remained too high.

Flow of funds was strong again, with inflows from repayments and asset sales and dispositions well in excess of new investments and fundings under prior commitments that enabled us to both further do debt reduction and increase capital flexibility.

With the $4.2 billion Fremont A-participation now paid off in full, and a significantly reduced level of future commitments ahead of us, the majority of that excess cash flow will likely be directed to future debt reductions. In line with that thinking, this morning we began the process of paying off in full the approximately $978 million remaining on our 2012 first lien credit facility.

As a reminder, this was the $1 billion first lien facility due 2012 extended by our banks in March of 2009. We're delighted to be able to retire it in full approximately 18 months later and some 20 months prior to its maturity. The net result of the repayment is a capital structure that now is comprised of approximately $3.2 billion in first lien debt; $4.2 billion in unsecured debt; and $1.8 billion of trust preferred, preferred, and common equity.

We also made one strategic investment this quarter, helping to recapitalize the largest special servicing company in the country, LNR. Together with a handful of other institutional owners, we invested significant equity capital and installed a new management team that we believe will deliver strong results and enhance the Company's capabilities in serving its many customers.

With over $28 billion in specialty service loans, we think much of the real estate recovery will pass through LNR's doors in one shape or another. Our partners and we believe this represents a unique window into the real estate finance markets over the next several years.

So with that brief update, let me turn it over to Dave for more details. Dave?

Thanks, Jay, and good morning, everyone. I'll begin by discussing our financial results for the third quarter before moving to credit quality and liquidity.

For the quarter, we reported a net loss of $84 million, or $0.89 per common share. Adjusted earnings was a loss of $71 million for the quarter or $0.76 per common share. Revenues for the third quarter were $134 million versus $178 million for the same period last year. The year-over-year decrease is primarily due to a smaller asset base resulting from loan repayments and sales, and a reduction of interest income related to the movement of performing loans to nonperforming status.

Net investment income for the quarter was $59 million versus $167 million for the third quarter of 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.

During the third quarter, we funded a total of $77 million under pre-existing commitments and $100 million in new investment activity. In addition, we received $863 million in gross proceeds from loan repayments and loan sales, and we generated $188 million of proceeds from OREO and CTL asset sales.

Based on principal repayments and asset sales associated with the Fremont portfolio during the quarter, the A-participation interest is now fully retired. As a result, the Company now retains 100% of proceeds from sales and repayments of assets associated with the portfolio. The Fremont portfolio is currently $2.1 billion with only $50 million of unfunded commitments remaining.

Let me turn to the portfolio and credit quality. At the end of the third quarter, our total portfolio had a gross book value of $10.4 billion. Our potential remaining unfunded commitments for the total portfolio were $408 million at the end of the third quarter, of which we expect to fund approximately $165 million.

Our total portfolio was comprised of approximately $6.4 billion of loans and other lending investments. In addition, we had $2.2 billion of corporate tenant lease assets; $783 million of OREO assets; $716 million of real estate held for investment; and $337 million of other investments. 76.4% of our portfolio is comprised of first mortgages, senior loans, and corporate-tenant lease assets.

Our total condo exposure was $2.4 billion at the end of the quarter versus $2.7 billion last quarter. Our total land exposure at the end of the quarter was $1.7 billion, down from $1.9 billion at the end of the prior quarter. The land exposure was comprised of $1 billion of loans and $661 million of owned real estate.

At the end of the third quarter, 60 assets representing $2.76 billion, or 43.4% of managed loan dollar value, were nonperforming loans or NPLs. This compares to 63 assets representing $2.96 billion, or 39.9% last quarter.

Managed loan value refers to iStar's carrying value of loans gross of specific reserves and the A-participation interest outstanding on Fremont portfolio assets. Now that the A-participation interest has been fully repaid, managed loan values equal gross book value of loans, which are gross of specific reserves.

Our NPLs continued to be primarily land and condo-related assets. Condo assets make up 35%, while our land assets represent 25% of our NPLs.

At the end of the quarter, the performing loan watch list included 11 assets, representing $696 million or 11% of managed loan value. This compares to 14 assets, representing $1 billion, or 13.8% last quarter.

Let me now turn to our other real estate owned, or OREO, and real estate held for investment (REHI). During the quarter, we took title to five properties, which had an aggregate managed loan value of $237 million prior to foreclosure. This resulted in $144 million of charge-offs against our loan loss reserves for the quarter. We received net proceeds of $135 million associated with OREO asset sales, including unit sales.

At the end of the quarter, our OREO and real estate held for investment assets totaled $1.5 billion, consistent with the prior quarter. Of these assets, $783 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 $716 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. For the third quarter, we recorded $78 million of additional provisions versus $109 million last quarter. While we have seen provisions trend significantly lower from last year, as we said, the rate at which they may continue to do so is uncertain and we could see quarterly fluctuations. At the end of the quarter, our reserves totaled $1 billion, consisting of $891 million of asset specific reserves and $134 million of general reserves. Our reserves represent 16.1% of total managed loans.

Okay, let me now review our covenants. For our secured bank credit facilities, our tangible net worth was approximately $1.8 billion at the end of the third quarter, above our $1.5 billion requirement. Our fixed charge coverage, calculated on a trailing 12-month basis, was 1.9x at quarter-end, which is above the one-time requirement.

Our unencumbered assets to unsecured debt, or UA/UD ratio, was approximately 1.4x at quarter-end, exceeding our 1.2x requirement. For both our unsecured and secured bonds, fixed charge coverage ratio was 2.1x and our UA/UD ratio was approximately 1.4x.

Finally, let me conclude with a discussion of liquidity. We ended the quarter with $1.1 billion of unrestricted cash versus $532 million at the end of the prior quarter. During the quarter, we repurchased 125 million par value of our senior unsecured notes at a discount, resulting in a gain on early extinguishment of debt of $9.5 million for the quarter.

We also repurchased 1.1 million shares of common stock during the quarter. As we said in our press release, we have already notified our lenders that next week, we will repay our $1.0 billion First Priority Credit Facility due June 2012. This will further reduce leverage and give us additional flexibility by enabling us to retain net sales proceeds and repayments on assets serving as collateral for our secured credit facilities and secured notes.

In addition, it will reduce the size of the collateral pool that is pledged, and allow us to repurchase additional debt and equity securities, subject to limitations under the terms of our credit facilities. Aside from repaying the First Priority Credit Facility, our other non-discretionary cash uses for the fourth quarter 2010 are estimated to be approximately $230 million, which includes a $111 million unsecured bond maturity in December.

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

Thanks, Dave. Obviously, the 2011 maturities are still a priority for us, and we were unsuccessful in trying to negotiate an amendment to our facilities to start retiring those maturities in the open market during the past quarter. But we're going to continue to seek ways to improve the security of those maturing facilities and to extend their maturity to better match the asset maturities we currently project in the portfolio. There's still a lot of work to do, but as the markets improve and we whittle down the number of variables, we look forward to finding the right outcome in the coming quarters.

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

(Operator Instructions). James Shanahan, Wells Fargo.

I have a couple of questions. First of all, on page 13 of the press release, the supplemental information the schedule provided regarding your loan book performing CTL is very helpful and I appreciate the additional disclosure.

I wanted to drill down on the OREO and the real estate held for investment portfolios. I appreciate now that, with this additional disclosure of 58% of the OREO portfolio in condo categories and about 69% of real estate held for investment, in land. But we had some questions from investors during the last quarter about these two specific categories and what the current carrying values are for these categories relative to say, historical costs, and how those carrying values are determined, especially given the illiquidity and depressed values in the condo and land categories.

Okay. Well, let's start with the categorization between OREO and REHI. Obviously, it is a characterization of how we plan to operate and whether the assets are, in fact, for sale. We plan to hold them for a long period of time, Jim, so those that does impact our accounting.

I would say in terms of the current balances as a percentage of original balance, there have been material write-downs, but we'd rather not give a specific figure right now but it's fairly material. Different across the asset classes,some of these assets are quite large and they're somewhat distortive. I think the average number is probably not a relevant statistic, but it is a material; a delta to original cost.

We think the completed condo transactions and the land are valuated every quarter. And there's obviously a little more specificity in terms of market data around the condominium product.

And with the land we have to do a DCF over a long period of time and try to understand the variables. We do that every quarter in conjunction with the entire asset management and credit team here. We also have our auditors involved in that process very often.

So I think it's a number that we feel comfortable reflects all the information we have currently. The characterization between OREO and REHI is a management decision on how we're going to treat those assets, and it does impact how they are accounted for,whether it represents fair value today or value over a period of time, which would be more how the REHI is evaluated.

And a follow-up with regards to credit, if you don't mind. In absolute dollar terms, there were a couple of pretty large reductions, both in terms of NPLs and watch list assets well in excess of what was charged off in the period. I was wondering if you could comment if there were some larger loans that were cured or returned otherwise to performing status, or what might have caused the $500 million, $600 million improvement in those categories during the period, certainly well in excess of less than $100 million in charge-offs?

Again, a number of components to the question. I think the good news in there is that there were a number of land sales that came off very close to par, which was a nice resolution on those. We did have a number of assets move to NPL from the watch list. In particular, one very large asset that is a very high quality asset but it is now in litigation. And that's put it into an NPL status.

We have had a few things that have gone from NPLs to OREO; made up about $250 million of the delta. Those were some difficult assets, and a couple of very poorly performing Fremont assets and two land assets from the iStar portfolio.

Unfortunately, as you guys know from past practice, it's hard to generalize about this portfolio and it's hard to give you statistics that we think are meaningful on a projection, go-forward basis. But we do think there is a decidedly better tone to the real estate markets.

We've seen that transaction flow start to show up in our own portfolio. And where we've seen chances to work with borrowers and reach resolution, we've done that. But it's still a very long process once something ends up in NPLs. So, the migration numbers will continue to bounce around. I really can't give you any real comfort on how that's going to go, but we do see a better tone in the market.

Thank you. I'd like to ask one final question, selfishly. I'm sure there are others in the queue, so I'll be brief here but, I'm curious if you can opine on what your expectations are now with regards to this pool of unencumbered assets. As this collateral is freed up, should we as analysts expect to see that re-leveraged? And if so, is the cost of that leverage and the terms better today than when the facility was originally underwritten? Or perhaps should we expect to see some of these assets sold to generate liquidity?

I'll hold off-line for the answer. Thanks.

Well, just a quick answer is, under our credit agreements, there are restrictions on how much unencumbered and unpledged collateral can be levered. So it's not just a free ball that comes available to us. But there are within constraints and ability to both leverage and to continue to sell assets. So that's pretty much similar to the regime we've been operating under since March 2009. We will continue to be thoughtful about how we execute on liquidity and continue to find ways to meet all our obligations.

Great. Next question Rochelle, please?

Michael Kim, CRT Capital Group.

Congratulations on a strong cash flow quarter to you and your team. Just wanted to ask about, I guess, the pace of OREO sales and NPL resolutions during the quarter and into the fourth quarter so far. Any color would be helpful.

Yes. Look, obviously we're active on a lot of fronts to try to get things resolved. A lot of different variables in that mix, and some I would say are going reasonably well and some just don't get to the finish line for a variety of reasons.

Again, my over-arching comment is the markets are more liquid. We are seeing more transaction flow, but none of these really turn out to be easy and it does take time to get them done. So picking a quarter in which things will get done is very difficult and probably a fool's exercise.

What we will say is we're working again to get these things on at least a stabilized basis so we can give you better visibility into the portfolio. It's just a lot of stuff is either in a court process right now -- that is really unpredictable -- or we're in negotiations with borrowers to try to find resolutions.

So I would say relative to last year, yes, the pace feels better, but this is still a long and difficult process in almost every case. So I can't really give you a lot of comfort that the trend is going to continue.

I appreciate the comments. And just as a follow-up, just wondering if you can help us understand how management responsibilities are being allocated today. With the CFO position vacant, understanding who's interacting with your advisors and thinking about the capital structure -- and then split between the overall business. If you could provide any color there, that would be helpful.

I mean, historically, this has been a far more the top four, five, six, seven people all are very intimately involved in the key parts of the business. We have a great team in place running our auto business, our European business, our land business, our CPL business; construction team, servicing team -- all those folks are part of the inner circle here and are part of a lot of the dialogue.

With respect to the larger scale issues that you talked about, that is myself and Dave and Nina Matis, and other team members we bring in on different parts of the roles.

So, right now, it's pretty much a team effort working forward. We've got a lot of very talented people making the numbers happen that you're seeing. And we're focused on figuring out how to get to the finish line and moving on to the next part of the challenge.

Great. Thank you.

Thanks, Mike. Next question, please?

Jeremy Banker, Citi.

I was wondering if you could provide us some updates on your sources and uses, expectations for 2011 and your liquidity options in regards to your mid-year maturities?

We do have projections, I guess over-arching. All I would say is we have a $10 billion balance sheet, as I mentioned in the terms of the capital structure; 30%, 35% of that is secured; 40% is unsecured debt and just under 20% or 20+% is equity or equity-like.

We think that gives us the flexibility to work through some of the challenges coming at us. It is of paramount importance to us to figure out a solution. We do not have a solution today. We think the markets are improving. We think the refinanceability of the types of assets we have is improving. And we certainly have a number of ideas on how we're going to do that, but it's probably premature to go into detail on that right now.

Thanks.

Thanks, Jeremy. Next question, please?

Joshua Barber, Stifel Nicolaus.

Good morning. Piggybacking a little bit on Jeremy's question, can you talk about just your forward loan maturities over the next three quarters? And with big debt maturity shaping up in June, and you guys using most of your cash right now to pay off the first priority agreement, can you talk about where you think a lot of those sources are coming from? Would that be primarily loan sales or asset maturities?

Well, we continue to have loans mature and a number of loans do pay off as expected. We've said over the last several years that there's a lot of liquidity in the portfolio, whether it's through sales or monetizations or refinancing. I don't think that's atypical for companies who have lots of hard assets.

And we continue to use that flexibility in the financeability and salability of the assets to continue to meet our obligations when they're due. We're not rushing to solve problems that we don't yet have, but we are focused on the issues coming in 2011. And we think there are a number of different strategies that we have evaluated and continue to evaluate.

I will say there's not enough loan maturities coming to pay off the $2.2 billion due in June 2011, but that obviously is only a small part of the sources of capital that we have available to us.

Can you tell us what dollar price approximately you got for your loan sales this past quarter?

In terms of loans themselves, we got just under par.

Okay. And in regard to the loans that you took title to this past quarter, it seems like the charge-offs there were abnormally high as the (multiple speakers) loss severity --

As I said, there are three not very good Fremont loans in there that, again, there's litigation; they're messy. The timeframes under which they're going to be resolved are moving out, which means the discount rate applied is going to drop their values. Those are all things that are unfortunate but somewhat outside our control right now.

The two iStar assets were both land loans. They had taken material marks. Borrowers recourse that we had counted on dissipated during the crisis and was no longer available to support either our loan or the project. Those are unhappy outcomes for us and represent some really bad outcomes. Again, I would caution you not to read too much into them, although there are plenty of bad outcomes in the portfolio.

One last question. It looks like your CTL net operating income dropped off fairly sharply from last quarter. Was there anything that happened differently in the portfolio? Was there a loss of occupancy or something else going on?

We obviously sold $1.5 billion of that portfolio last quarter, so that was about a 35%, 40% of the book. So that part was natural. We also sold a few more assets this quarter, which will continue to take it down. In terms of the organic nature of the income on that portfolio -- you know, markets are weak, so when tenants are rolling over, there obviously is a little more vacancy and a little more downtime. I think the statistic now is about 87% occupied.

So it's going to take some time for those to come up. But I would tell you the vast majority of that delta was simply the sale of the $1.4 billion portfolio last quarter.

Thanks very much.

Next question?

(Operator Instructions). Ashish Kishore, Manikay Partners.

Thank you. I had a couple of follow-ups and a little bit more granular on fourth-quarter sources and uses. I think you had indicated $230 million usage of cash. That is inclusive of the bond maturity coming up in December? Or exclusive of that?

That $230 million is inclusive of the $111 million maturity that comes due in December.

Okay, just wanted to clarify that. And then combined with the $1 billion paydown and approximately $1 billion of cash that you have, can you give us some sense of what kind of sources of cash might be coming in for the fourth quarter?

Yes.We are continuing to measure assets and liabilities, and create the liquidity we need to do the strategic steps we think need to be taken. We think we have sufficient capital and/or visibility on capital to take care of that $230 million. To the extent we wish to raise more money than that, we will do so. But there's no urgency to do so.

And so I think, again, it's a management decision literally on a day-by-day, week-by-week decision. There's lots of assets that we can clearly monetize if we choose to. The prices are not always the ones we want. And historically, and even today, when we've don't like a price, we don't take it. We still think we have a sufficiently diversified portfolio and a number of capital sources available to us so that no individual sale is make or break. And so we treat them each as an individual decision and try to do the right thing to maximize value.

Okay. So it sounds like you have good visibility going into the quarter and feel fairly comfortable with regards to either loan maturities coming up and asset sales that may be executed during the quarter. Would that be fair to say?

Fair statement.

And then just as a follow-up, how much cash do you think you need to run the business just to keep on the balance sheet?

We've historically had between $50 million and $100 million of excess cash. Again, given that our forward commitments have come down pretty materially, there tends not to be any unexpected needs for cash. We pretty much know where they're coming from.

We do still have, as I think Dave said, about $165 million of forward commitments probably over the next -- we're going to guess 12 to 15 months. The bulk of those will be [called]. So $10 million, $15 million a month on average. We think $50 million to $100 million in the bank is plenty to take care of that kind of monthly draw.

And my last question, you did comment a little bit on the loan sales and the price achieved for that. Can you also comment on your OREO sales and the CTL sales that you did, whether there was a gain and loss on those asset sales.

The CTLs about broke even; we made a little bit of money on them, nothing really material in the grand scheme of things. And I would say the OREO went off at kind of the same -- a little bit of a premium to our marks, but at a discount to original investment.

Again, it's hard to read into these numbers any patterns, but the OREO this quarter was down about 19 points from original investment. Again, not indicative. We had one that went north of original investment and one that went at $0.70 of original investment. So a little bit scattershot; over long periods of time, we continue to see troubled assets trade at material discounts to our original investment. And we're not happy about that, but things feel like they're getting a little better out there.

Okay. Thank you.

Thanks. Rochelle, we have time for one more question, please.

Okay. Our final question comes from the line of Dale Stohr, RBS. Please go ahead.

Just a little bit of follow-up, I guess, on the last question. The Company charged off $91 million against its reserve for loan losses in the quarter. I had thought it would be related to some of the OREO sales or some other sales, but it doesn't sound like it, based on the comments. What were those related to?

The recapitalization of LNR required us to move part of our debt there into equity, and there was a pretty material change in value on that -- or made up the bulk of it.

Okay. Thank you.

Alright. Great. Well, thank you, everybody. We appreciate your joining us today. If you should have any additional questions, please feel free to contact me directly here in New York. Other than that, you can listen to the replay. And Rochelle, would you please give the replay instructions right now? Thank you.

Certainly. Ladies and gentlemen, this conference will be made available for replay after 12.30 p.m. today until November 11 at midnight. And you may access AT&T Executive Playback Service at any time by dialing 1-800-475-6701, entering the accesscode 173998. International participants dial 1-320-365-3844, and again that access code is 173998.

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