Q3 2019 Earnings Call
Good morning, and welcome to ice stars third quarter 2019 earnings Conference call. If you need assistance during today's call. Please press Star Zero as a reminder, today's conference is being recorded at this time for opening remarks in introductions I would like to teleconference I want to chase.
And folks senior Vice President Investor Relations and marketing. Please go ahead Sir.
Thank you John and good morning, everyone. Thank you for joining us today to review I started <unk> third quarter 2019 earnings.
They are Jay Sugarman, Chairman and Chief Executive Officer, Mark Silverado, <unk>, President and Chief investment Officer.
<unk> publishing earnings presentation, highlighting our third quarter results and our coal will refer to these slides can be found on our website at <unk> I start dot com and the Investor section.
They'll be a replay of the called beginning at <unk> PM Eastern time today, a replay is accessible on our website.
Dialing one 804, 756 071 with a confirmation code.
Or seven to nine five too.
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 <unk>.
I started actual results may differ materially following these forward looking statements and the risk factors that could cause. These differences are detailed I see reports I started to claims any intention or obligation to update these forward looking statements, except as expressly required by law now.
Now, it's like knowledge on the call over to assess chairman CEO Jay Sugarman Jay.
Thanks, Jason.
The third quarter was highlighted by strong growth in our core ground lease initiatives continued progress strengthening our balance sheet.
Earlier this year to focus on building a customer friendly value enhancing ground lease platform is beginning to bear fruit.
Are you seeing strong returns our capital invested in shares the same coal.
As well the direct benefit or using the better price capital that a safe hold ground lease provides as part of our own safe star transactions.
On the capital side, we continue to increase our safe hold position primarily by acquiring an additional 6 million shares during safe holds follow on offering in August .
No stake valued at over $900 million.
Same old posted record third quarter investment boreal closing 400 million, a new transactions because I'm trying to close an even higher number in the fourth quarter breaking through what sell whole top tier building owners and operators.
We continue to believe that value at the same old business increased significantly as it scales I think its shares remain a compelling investment.
On the property acquisition side, we captured the benefits of the modern ground lease structure as we acquired $113 million leasehold position in a brand or 300000 square foot office building in one of the stronger Submarkets in Austin.
Buildings leased thought long term basis to high grade credit.
The acquisition was joint restructured lets say pulled under our same store program.
Cars investment gaining the financial benefits that come with a modern efficient ground lease higher cash on cash returns higher expected higher or lower debt maturity risk.
Demonstrating to us once again, the properly structured ground leases or more capital for sure and more cost efficient I can increase value and lower overall risk for building owners across the country.
The capital for these investments continues to come mainly for loan repayments and certain at least on legacy assets sales.
And the ability to rebuild the warrant proceeds into say its diversified portfolio ground leases there were additional investments in its shares or into direct investments D'orsay Star program.
Represents an attractive capital recycling opportunity.
And one that is upgrading the quality of our portfolio.
At the same time, we've taken several strong steps forward with our balance sheet by replacing shorter it turned out with new longer maturities.
And opening up a sizable runway with no debt maturities.
Better asset quality on a stronger balance sheet has led to some positive momentum with the rating agencies and we look forward to making additional progress in the future.
On the earnings from while our net lease Unfinanced portfolios continue to generate solid returns our legacy in development assets will remain a drag on earnings until they're sold and the perceives redeployed into the ground lease ecosystem.
What sizable earnings already booked for the year and our safe investment becoming increasingly profitable.
Real redoubling, our efforts to trade out of legacy assets and into higher quality more strategic earning generators over the next 12 to 18 months.
And with our quick overview about sub markets take you through the details Marcos Thanks, Jay and good morning, everyone. My remarks will refer to slides from the earning presentation posted on our website earlier this morning.
Let me begin on slide three I want to take a moment to reflect on the strategy has played out at the beginning of the year, It's a measurable progress so far in 2018.
As you'll recall, we set out to pay the new direction of growth and value creation for Highstar going all in on the ground leases ecosystem that's safe.
While at the same time working to simplify and strengthen our balance sheet.
The third quarter, we've continued to make significant strides on this strategy, which is driven year to date earnings a $4 in 26 cents per diluted share and adjust their earnings of $4.04 per diluted share.
However, these results are exclusive of the unrealized gains embedded in our investment and say fault shares, which currently have a market value of 347 million or more than $4 per diluted share in excess of our basis using yesterday's closing price.
Discuss more of the key achievements that safe hold in the third quarter. Shortly as we're enthusiastic to see growth and customer adoption accelerates significantly.
Additionally, this quarter. We also continue to enhance our credit profile by executing a 675 million dollar bond refinancing, which extended our overall debt maturity profile created one way or no corporate debt maturities for the next two and a half years and lowered our overall cost.
Flipping to slide for more detail on this quarter's earnings.
During this third quarter I started to GAAP loss of 12 cents per share an adjusted income of six cents per share year to date, we have recorded 338 million up GAAP earnings or dollars in 26 cents per share at 320 million of adjusted income before dollars at four cents per share.
Moving to slide five during the quarter, we invested a total of 381 million, which included a 183 million up investments in say are safe and that's it. That's meant was made primarily in connection with face first follow on equity offering at $28 per share, 40% premium to the IPO price.
In addition, we made 168 million dollar in investment fundings in our real estate finance and net leased businesses the largest of which was the new safe starting at least investment in Austin, Texas that Jay referenced.
This investment is wholly owned and not part of our net leased strike that you're.
Separately, we also invested 30 million of Capex this quarter versus 53 million in the second quarter.
That's very park at the beginning of the third quarter, we began closing condo units Asbury Ocean club.
And began operations at the Asbury Ocean called Hotel, which has now moved from our land and development segment into operating properties Asbury Ocean Club is setting a new standard for luxury living on the Jersey shore and be very pleased to date with the early reception at the project for the media hotel guests and condo buyers has weakened.
They need to close on condo sales, we expect to see our book balance and Asbury Park decline. Our this balance may fluctuate slightly over the coming quarters do that seasonal nature of the market a final construction close at the timing of kind of close.
Turning to slide six the substantial progress we've made this year and unlocking value in the portfolio has translated into meaningful growth in our equity value per share.
Our common equity value per share has grown from $6.61 at the beginning of year a $10.
And at the quarter on an adjusted basis, which primarily adds back accumulated depreciation and amortization our equity value per share has grown from $11 in 15 cents at the started the year $13 at 75 cents at the end of the third quarter.
However, these figures are based on the historical investment basis in safe and do not reflect the strong performance at the same stock inclusive of the market value of our investment at save a common equity value per share was $14 in 19 cents per share and our adjusted equity per share stood at $18 on 17 cents. These figures are based on a diluted.
Share count inclusive inclusive of the conversion of our 200 million F series J convertible preferred which are currently in the money with a conversion price of $12 in 22 cents per share.
On slide seven we highlight based performance during the quarter.
People hit there several critical milestones this year underscored by strong third quarter with $1.3 billion of close deals and signed contracts.
These investments will matched with innovative financing structures that provide safe hold with a weighted average debt maturity profile of approximately 30 years pro forma for closing all these transaction.
Portfolio has grown seven ex since our IPO to two and a half billion and our unrealized capital appreciation account has grown attacks to four and a half billion.
Safe old is originating trophy assets in major markets, including Manhattan sophisticated institutional investors as we continue to see adoption pick up say bolts also made meaningful problem progress exploring innovative new channels of growth with the launch of its safe swap program.
The program works with customers to purchase and restructure outdated ground leases stripping away, our K provisions in favor mater framework that unlocked significant value.
As of today Staples has increased its market cap to approximately 1.4 billion.
On slide eight I'd like to walk through what was an important value enhancing capital markets transaction, we announced during the quarter.
We refinanced 675 million of notes that were maturing in 2020, and 21 with 675 million of new unsecured notes due in 2024 as a result, we pushed out our weighted average debt maturity profile for 3.8 to 4.6 years and to create a two and a half years, a runway with no corporate debt maturities.
In addition, we reduced the weighted average coupon on those notes by 64 basis points.
We also amended and extended an upsized, our revolving credit facility, adding a new lender into the next giving us $350 million total capacity and pushing out that maturity until September 2022.
We've continued to improve our credit profile by reducing cost strengthening the balance sheet monetizing legacy assets and ultimately recycling that capital from higher risk assets in our portfolio into among the safest ground leases at the balance sheet continues to transform at S&P has recognized this progress it but I stars credit ratings are positive outlook.
With that I'd like to conclude by saying that this quarter. It's continued to be part of a strong year. Five stars. We forge ahead on our strategic plan, we laid out at the beginning of the year.
It's strong earnings and our gravelly strategy, taking hold we expect that we will continue to that we'll continue to be a driver of growth for I start moving forward lastly, the capital markets transactions, we discussed continue to enhance our credit profile strengthen our balance sheet aggregators risk and while we're pleased to see these achievements are beginning to be recognize.
The market that's the stock price has risen over 40% of the announcement of our strategic shift earlier. This year, we still believe there's plenty of room to continue shrinking that gap between market value intrinsic value and with that I'll turn it back to Jay.
Thanks, Mark House.
So we're going to use a lot so far this year and the growing success at save a growing strength of our stars its majority owner a manager.
That's that's up nicely going forward with a clear and unique business strategy, a solid balance sheet and a deep and committed team.
And a lot more work to do but we're pleased with the progress so far and look forward educating more of the market about what the new our star is doing and why it is succeeding.
And with that operator, let's go ahead and open up for questions.
Thank you.
Today's question and answer session will be conducted electronically to ask your question. Please press star one at this time, we will take as many questions as time permits and proceed in the order that you say no us once again. Please press star one to ask a question, we'll pause just a moment to assemble the roster.
And first from the line of a Stephen laws with Raymond James. Please go ahead.
Hi, good morning.
I guess first wanted to get a little more color on Asbury Park. It looks like Capex declined sequentially 53 million to 30, I'm seeing some press releases on Oh, penthouse sale and Tom minute.
You are seeing good traction there can you maybe give us a little more color on you know remaining capex or a capex expectation raspberry for next year and you know one idea kind of what kind of sales proceeds you expect to see or or kind of a net cash flow. We should think about up off the Asbury Park assets.
Sure.
Think of Oh, sorry, I was in club is three separate components that hotel.
But capital expense is closed out.
The condominiums, which we'll probably see the close valve in the fourth quarter.
But maybe into the first quarter.
And then the street level retail or what's your beyond sort of white box.
Condition, but as we bring tenants and.
It'll be a little bit of capex associated with the Ti leasing Commission there.
So the majority of capitals them, though.
Tower structure and at the hotel should be behind us by the end of the year.
The rest of Asbury Park, or we continue to see quite high levels of interest.
So our expectation is a we will not <unk>, we have seen peak asbury by the end of the year and we'll see our capex the offset by a reduction in capital deployed elsewhere I'm, particularly through the condo sales.
We still I think are setting record breaking numbers in terms of the price per foot, we're achieving them the building.
We're looking for about $50 million of proceeds.
By the end of year, we've got a bunch of contracts going back and forth for additional proceeds but those will be until 2020. So we do think the the tipping point is about to be reached or actually has been reached a warehouse Barry will become self funding.
Yeah, we called out for a peak Asbury.
Well I think the goal there was to build the reputation marketplace up to a point, where not only we but other developers would come in and find the land that we have owned a attractive and you'll see us starting to work to monetize those assets as opposed to build them out ourselves.
Great. Thanks for the color there and moving to some of the short term legacy assets looks like to about $380 million or are there any big concentrations in that another goal is to have those resolved by the end of next year.
You know any significant assets, the where the sales maybe chunky or any visibility into how you expect that to wind down over the next 14 months.
Yeah.
Our team is working really hard to move no either very small ones, but even the largest ones are probably about 25 to 30 range.
Yeah I was just as we've said before these land development assets are typically multiple parcels.
And processes permitting processes, so even when we get them under hard contracts, they take a while to get close.
So we continue to give ourselves sort of a window to move out the ones that are already on the market already under contract.
I think the big three Asbury Magnolia Green and Graham Vista.
Continue to be steady as she goes obviously Asbury is hopefully reached a tipping point, where it will become self funding Magnolia for all intents and purposes and self funding and Graham Vista How's. The you know this potential purchase right by the tenant.
In about two years. So those are the time frames for the longer lived assets shorter life assets I think you'll see progress almost every quarter, but as you know have unfortunately had to say in the past Upselling land assets is there a little glorious process.
Team is working diligently in every dollar we get back from out we can redeploy into.
Simpler more strategic earnings generators, Oh, that's always a good day for us.
I appreciate that and kind of piggybacking on your last comment meat. He maybe talk about I guess first I haven't had a chance I haven't seen the Q, but did you repurchase any stock in star during the quarter.
And then just in general how do you view repurchasing star stock, which seems to be at over 30% discount this morning to though the mark to market.
Adjusted book value.
Versus potential dividend increases or obviously, the and investments in say stock I expect to continue but can you talk about though the thoughts on buying back start common stock.
Sure.
Unfortunately, the third quarter, we all are able to buyback are very very small amount that was a heavy capital markets quarter lot of blocked out moments for us. Unfortunately, we did get our board recently to authorize a buyback program up to $50 million again, So we are reloaded I'm ready.
And obviously, if we can get out of the blackout periods, we've got good some attractive.
Valuations to deploy capital into.
Great. Thank you very much the color there and I'm appreciate you taking my questions. This morning.
Thanks.
And next to a Jade Rahmani with KBW. Please go ahead.
You mentioned doubling down on 'em asset Monetizations and thinking about the real estate finance portfolio on one hand. It is a current earnings generator, but it seems to me covering the commercial real estate lenders you those kinds of yield or not available today, and the market and there's tons of spread compression or lending.
Competition, So would you consider selling that portfolio both portfolio sale to a debt fund that has aspirations to create a public mortgage riet [laughter] take that capital and redeployed into your now.
Of course strategy.
Hi, Good morning, Jay So yeah, I think the good news about that portfolio is it does have a very high returns. The bad news is that was relatively short a weighted average maturities. So we're actually seeing a really nice natural progression of capital coming back from that.
Our son and spark.
And as as we have used for it and our other ground lease ecosystem areas, primarily safe its kind of work down nicely. The money shows why do we need it but we have these earning assets until we need it. So I think trying to do something.
Holistic all at once doesn't really make sense for us.
Those assets will come back over a relatively short period of time and provide a lot of liquidity to redeploy. So it's kinda happing naturally I don't think we need before that.
Okay.
Thinking about the profile of the company if you look to the three years out.
The real estate finance portfolio has paid off sure shorter duration legacy assets, hopefully, our monetize and safe continues to grow it what kind of returns on equity do you think I stuck at achieve in that scenario I guess, both on a kind cash return basis, such as they often deal that you talked about or total returns.
Turning in the value of the safe, though portfolio.
Sure I mean look our viewpoint.
Just on those so my comments is the total return profile coming out of the safety ecosystem is not only great today, but as that business scales. We think the values will be recognized by the marketplace.
But we we studied and believe in every day and our Board's believe huh.
It's one of the reasons, we continue to make the out as our primary focus for our investment capital and you know we don't think the value Assembly in the cash flows we create its in the value we're creating a throughout the portfolio. The fact that as we get bigger or financing gets more efficient.
So we think the bar we use of the underlying assets are attractive on a risk adjusted basis, but because they're so far above the comparable benchmarks. The real value creation is understanding the delta between for risk and maturity profile of what we're creating and the risk and maturity profile of comparable <unk>.
<unk>.
I'll now return as exceptional and so I.
I think right now we think the.
That leads business that we're creating our you know quite interesting I think the Austin deal, we're probably double digit cash on cash.
Well certainly in the mid to high teens for an overall our expectation.
We would love to do those high quality assets that when I think is leased or a single a single a minus tenant for 14 15 years.
That's really good business in a competitive not least world.
We think that value was unlocked by working with a safe and creating a more efficient structure, but those are few and far between where the real driver of earnings or.
Enterprise value and actually you know alpha in the assets he was going to be the ground lease business, let's say pole business. So when you. When you ask what are we think we're going to earn our goal has always been to earn.
You don't mid to high teens are are we use with relatively low risk.
We don't think that's achievable and meeting finance market right now we think only.
In very specific situations can we unlock than though we've done that lease market, but we think away at a wide open playing field in the ground lease world to create those kind of returns.
See our capital go there you'll see us continue trying to identify for the marketplace value components that's safe.
Not only the cash flow components, but the enterprise value it's building on the network.
Portfolio effect value that its unrealized capital appreciation is aggregating.
And we've got to do a better job forgetting that recognized.
I start will not get the full benefit of what it's created until we are able to get the market to see those three separate components and value them fully or we can tell you quite honestly, we're we're still in the first building on that process.
Thanks, very much that's helpful.
On me three large development assets have you been approached by any equity partners about potential joint ventures structures.
Something you would consider is are there any active dialogue taking place.
Nothing holistic on on the other three very different profiles, we are getting approach quite a bit on individual parcels within Asbury Park.
I'm sure you've seen the press.
In 10 years that city has gone from you know close the bankruptcy on and off the radar to let somebody told me recently was the one of the coolest small cities in America. So developers are taking [noise], taking notice of the the price points that we've been able to achieve in that market.
I look forward, so finding ways to either work together well actually outright monetizing some of those parcels.
In the coming year Magnolia Green. Unfortunately is a master planned community are really a a spectacular family environment, a great amenities, but the price points all over the mouth. So there's no one natural player to partner with <unk>.
Yeah, probably.
You know five to 10 builders across all those price points some products.
I'm, sorry, I want to unfortunately, we're gonna have to stay on the and how you know just continue to feed lots into those different builders.
We've been one of a.
I don't know highest market share lot providers over the last many years, but it's going to take a couple more years to really work through the last a couple of phase was about project and then maybe we can your part or somebody to take out the last.
Whatever number of walks remain.
Third piece is the you know completely different it's represents a 5500 acres Oh, that's currently being used as an autonomous vehicle testing facility. One day will be a well very valuable piece of land, but right now its most value is there what it's being used for.
And given the tenant has buyout rights, we really can't do any future thinking about what that might be.
I think the highest probability outcome is the tenant buys the parcel, but until we know that for sure.
Yeah, we're just costing checks and waiting patiently.
On the long Beach I think there was a sale reported.
In a in the press I'm wondering if that close and how the proceeds as compared to carrying value.
Sorry, I missed the.
Just the the long beach assets was reportedly sold.
I'm wondering if that closed in how proceeds would compare to carrying value.
<unk>, we have a long road to go there that one is is what I would tell you the.
The permitting process the government contingencies are still real Oh, so we're still working through those but we.
We are engaged them certainly hope to bring that want to conclusion sometime in 2020, I'm not going to go out in the lemon about one spins here wait too long the value you know, it's it's been a disappointing asset we think it is a very valuable assets, but we will again.
Just trying to get our money back and if we get close to book, we're gonna be happy.
Okay. One task I got a lot of questions on you know a potential safe star combination or something of that short.
And I know last year before new news answer that.
Generally speaking, but do you think that's nice does your equity base has to shrink in order for some kind of transactions happening.
He thought of it in that context, I mean again weve. Historically, so you know that it's definitely something out there on the future that might make sense and you know both boards.
Independent we will have to come to that decision. Our goal is to build a extremely valuable platform and for I star shareholders make their investment in both the shares and the management contract.
Become very valuable assets. So that's still our goal how that gets realized whether that's in conjunction with a transaction with safe or with a third party you have to be determined but.
Our goal is to continue to deploy assets out of other asset classes into this so at some point I've starts they probably will have an interesting conversation.
[noise], thanks for taking the questions.
Ladies and gentlemen, just quickly remind you of question. Please press Star One and then we'll go back to Stephen laws with Raymond James. Please go ahead.
Hi, one follow up question looks like your converts are now in the money you know as I know you've done some capital markets are things recently with extending debt but.
Any thoughts on taking those out or how do you think about those now that they're in the money with a with other options you may have available.
Oh. Good question. How are you know, we do think our cost to capital across all our preferred is quite high.
Given the balance sheet strength thing on the asset quality upgrading we've been doing Bose converts as you point out are in the money. Yeah. We're trying to think of ways to not shrink our equity balance sheet, but also capture as much value as possible as we continue to make this transition too.
What we think is really unique business. So haven't had any direct conversations or with holders. There continue to think entirely what's the best way.
To re fashion the balance sheet of this you know upgrading and transition takes place and that's certainly some place we need to spend some time.
We have an ability to call them.
Certainly the ultimate Oh power we have.
But we also have a thoughtful long term plan for how to capture value for all our constituents so still working through it but a good question and one we're focused on.
Great Thanks for providing color there.
And we have a question for my Michael I mean with Wells Fargo. Please go ahead.
Hey, guys. Thanks, a nice job, let's say, if I guess I guess I'm, just a little confused with the new incentive plan at safe and I know they've been concerns in the past about DNA at Star are you guys had an effect being incentivized in both entities and I guess that sort of ties into jades question I guess it goes up about consolidating.
<unk> the organization.
Sure.
Remember the plans that I've started relate only to the shares that I start around and save and there's no obligation for I start to own shares and safe. So from saves independent director perspective, I don't think it would have been prudent to rely solely on a incentive program created through covered just shares.
Owned by one particular owner.
I'll be if there is clearly economic value as we create a value at safe that has not yet been recognized and I stars plan does that not just lets say shares but all investments made in any particular to your window. So its or commingled plan represents only a fraction of the total value at save.
Oh, albeit today, that's a that's about two thirds. So the plan that was implemented in safe you know does not directly benefit.
So employees and less two things happen once they've shares materially go up and too if we can create value as we scale from what we call. This unrealized capital appreciation of account, which.
Now here too for where you have not yet seen any analyst or frankly, any shareholders give any value too. So it's a very specific safe centric incentive plan, but only has value of shares rise materially, which fortunately there there. They have certainly had a good run.
And we create value in a way, but I guess, most people still seem pretty skeptical about but that we believe.
So it was much more safe centric.
Applies to all shareholders of say if not just the shares owned by Star. So we think they are certainly cognizant of each other's plans, but I think two independent boards I was slightly different incentives and tried to create a prudent incentive plan that met this particular needs of their companies. So sure there's an overlap.
We want safe to be extraordinarily successful for both shareholder base is but I think the plans are structured quite differently and incentive is a little bit different.
Okay. Thank you.
And Mr. folks we have no further questions.
Hey, great. Thank you and if you should have any additional questions lets say its earnings release, please feel free to cost to contact me directly.
John would you please give the conference calls instructions once again.
Lastly, and again, ladies and gentlemen, this replace starts today at 12 P.M. Eastern we'll know until November 14th at Midnight you can access the replay on anytime by dialing 804, 756 701 entering the access code for seven to nine five to that number again one 800.
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