Q4 2019 Earnings Call

We are especially.

Please don't work with a broad range of both local investors and Global investment funds over the second half of the Year demonstrating that a modern ground leads properly sized and properly structured can be a powerful value enhancing tool.

With record originations in the 4th Corps and in 2019 safe old now has a portfolio of over two point seven billion of ground leases and investors have begun to recognize the potential valve that are growing diversifying pool of ground leases represents. We will continue to deploy Capital out of Legacy businesses into safe hold and so far. I've seen very strong Returns on this deployment.

Turning to the other parts of our portfolio. Our Focus was to both highlight value and to generate Capital to further invest in safe hold large gains were recorded on historical assets drug running significantly beyond our targets and together with large unrealized gains on our safe Investments help push our adjusted Book value close to $20 per share at your end.

in addition

Into investing in safe hold. We also bought back sizable amounts of ice Stars outstanding shares during the year and continue to view our shares as undervalued both today and compared to where we believe values will be in the future of last week. We took several steps to strengthen the balance sheet and continue shrinking our portfolio of non-core assets.

By accessing the debt markets thoughtfully throughout the year. We pushed out all debt maturities to the latter part of 2022 lowered our coupon costs and called and converted a large position that was becoming a technical overhang on the stock.

These steps together with our clear strategic Focus comfortable leverage levels and sizable realized and unrealized gains resulted in an upgrade upgrade to double by us and P and a positive dialogue with the other agencies as well.

And with that let me turn over now to Marcus to go through the deck Marcos. Thanks, Jay and good morning. Everyone. My remarks will refer to the slides from the earnings presentation posted on our website earlier this morning. Let me begin on slide slide 3 to highlight the progress we've made this year as you can see we had solid earnings results strengthened our balance sheet enhanced our credit profile and made meaningful progress in scaling argh business VSA fold at the beginning of 2019. We set out a new Direction growth value creation and simplification for I star and we made significant strides on all these fronts wage.

before we dive into detail on the

Strategic progress. Let me first walk through our earnings results for both the quarter and the full year. You can see on slide for 2019 was a fantastic year for earnings at Star for the full net income was $3.73 per share and adjusted income was $3.72 per share for the quarter net income was a loss of seventy-one cents per share while adjusted income wage loss of $0.44 per share. It is important to note that during the quarter $0.32 of one time charges to adjust it income were related to early extinguishment fact that these were associated with a creative Capital markets transactions. We completed that will drive meaningful Savings in the future. I'll discuss those in more detail in a moment also of note. The weighted average diluted share count is lower for the fourth quarter than the $78 million shares. We had outstanding at the end of the year because our convertible preferred Equity shares converted to common stock in late December.

moving aside

During the quarter. We invested a total of 311 million at I start this included $137 million in safe hold stock bringing our total ownership of safe stock to Thirty one point two million shares in addition. We invested $133 billion in our real estate finance and at least businesses this included two new investments in our second net-lease joint venture as well as funding Pryor financing commitments. We also bought back 1.1 million shares of star stock for 16 million. These purchases happened in the last week of the year because we were largely blacked out for most of the fourth quarter wage lastly. We invested $25 million of capex into our Legacy portfolio. Primarily Asbury Park and Magnolia green turning to slide six at the beginning of 2019. We signaled a new era Thai Star and outlined a three-prong strategy that will allow us to establish ourselves as the best in a big and growing industry and create long-term shareholder value. I want to take a moment to member.

progress on each component of our

Strategy, the first was four. I started to utilize its human capital and financial resources to go all-in on safehold and the ground lease ecosystem focusing the organization on a single Mission. Secondly. We set out the Highlight the embedded value in our portfolio by buying back our stock raising the dividend and selectively demonstrating the value through transactions in our net lease portfolio wage.

And lastly we set out to simplify our business by accelerating the monetization of most of our Legacy assets enhancing our capital structure and improving our credit quality. Let me go through each of these components in a little more depth on slide seven. We highlight safe performance. Our first objective objective was to scale the ground lease business in 2019. We originated 1.8 billion of ground lease investment Samsung fold, which was more than double the 750 million initial Target. We put out at the beginning of the year. I start participated in all three of safe holds Equity raises during the year investing $183 million into safe. In addition. We participated in several safe start transactions that allowed us to put more Capital to work in proprietary net lease and real estate Finance opportunities since I was the number one performing publicly traded read in 2019 with a hundred and 18% Total return. We also generated over $500 million of unrealized gains as of year-end 2019 on Arthur's.

as you can see on the chart on the

After we gained a lot of exposure to ground leases this year at the end of last year. I start had a hundred and fifty six million invested in safe mode with a market value of $144 Million by the end of 2019 a total exposure to Safe hold two grown by 1.1 billion to a market value of 1.26 billion, which we carry at a basis of 745 million. We expect to continue to Transformer balance sheet and continue to recycle capital from some of our higher risk assets into safe hold.

Next on slide eight. Let me talk a little bit or second strategic strategic objective for the year, which was the highlight unlock embedded value in our portfolio in the second quarter. We sold preferred freezer a portfolio of seven Cold Storage assets for a 220 million dollar gain. We also recorded a hundred eighty million dollar gained through a series of transactions with Bolero, including a hundred and twelve million incremental investment and the extension of our existing Master Lease through 2047.

in the middle of the slide you can

See that we increased our annualized dividend by 11% from $0.36 at the beginning of the year to $0.40 today. And lastly we bought back 7.3 million shares of our stock this year four seventy-five million at an average price of $10.16 per share this represents 9% of the diluted share count as of 2019 at the end of the year. We had thirty-four million remaining by wage authorization, and we continue to believe that I star represents a very attractive value particularly as our investment in safe hold has continued to appreciate

And slide 9 we illustrate how we are simplifying our business. We accomplished a number of important things on this front as well this year in terms of our capital structure. We executed a total of 2 billion of our markets transactions throughout the year that have been enhanced our credit profile and simplified our balance sheet. As you can see on the left side of the slide. We summarize our unsecured debt activity. We also exercised amended extended Andre price. Revolver paid down a portion of our secured Term Loan and converted r-series J convertible preferred Equity into common stock in connection with all these transactions be recorded a total of $28 million dollars of early extinguishment of debt of which 21 million was cash and seven million was non-cash. The charge was likely taken in. The fourth quarter was largely taken the fourth quarter.

however

Through these transactions we were able to reduce our weighted average coupon by 53 basis points, which implies a total of 17 and 1/2 million of annual interest expense savings plus the elimination of money million annual preferred dividend expense are unencumbered asset-based increased the 3 and 1/2 billion and we extended our debt maturity profile to nearly five years, including and over 30 months away with no corporate debt maturities as a result. We were very pleased to see S&P upgrade our credit rating to BB flat continue on slide ten. We also simplified our business by continuing the progress of monetizing our Legacy assets in total. We sold Legacy assets for 250 million generating thirty-three million dollar gain taking a legacy assets down from 20% of portfolio to 16% at the end of the year as a reminder. We divide our Legacy assets into two buckets are long-term Legacy portfolio is comprised of three larger assets that we can end in tend to age.

Send you to hold that pooling.

Priest modestly with $65 million of sales this year offset with $95 million of capex are short-term Legacy bucket has been reduced by 27% this year down to $356 million lastly on slide 11, you can see how our performance this year has translated into growth in equity value per share inclusive of the market value of safe and pro forma for the conversion of or Series J. Preferred shares common Equity per share Grew From $6.53 at the beginning of the year to $16.22 per share. And when you add back accumulated depreciation adjusted common Equity grew by 82% from $10.91 per share to $19.89 per share.

Istar stock reflected this progress as we were also one of the top-performing recent 2019 with a 64% total shareholder return and and we have continued our momentum here today that said we believe that there are remains a meaningful meaningful disconnect between the intrinsic value of the company versus where the stock is trading today. So we intend to continue down our strategic pass 2020 scaling safehold simplifying or business and highlighting our value to shareholders, and we look forward to updating you on the progress throughout the year with that. I'll turn it back to Jay.

trademark

Thanks, just two final things. As you know, based on accounting rules, most of the appreciation and are safe. Hold investment does not show up in our income statement.

Or in our book value increases in safe share price will create meaningful value-priced are but generally won't flow through earnings or Chopin book value per share until we reduce our ownership of big as a result. We're looking to how best to convey our results. Now that our portfolios increasingly made up of safehold chairs, and we'll work with it to help investors track the potential earnings balance sheet and Book value impacts and title together underlying results. Our hope is to give a clear view of the value being created as we continue to grow and scale our current lease business.

I'm also pleased to announce will be adding Jeremy Fox Jean is our CFO and Senior member of our team. Jeremy was previously CFO of Mackenzie and companies North American Business and Thursday background in management consulting and financial services will help us navigate our projected growth and our ambitious goals for the future. We look forward to welcoming him aboard later in March month and without operator when we open up for questions.

Thank you.

Today's question-and-answer session will be conducted electronically to ask a question, please, press one zero at this time. We will take as many questions as time permits and proceed in the order to signalize. Once again, please press one zero to ask a question. We will pause just a moment to assemble the roster.

Our first question comes from Jade rahmani from KBW, please go ahead. Thank you very much. Just wanted to ask on safe pipeline month and for the full year. What are your targeting in? 1 q and what do you expect in terms of transaction volumes for the full year.

Hey, Jade. Yeah, you know look, I think we started last year's America's mansion with a $750 million-dollar Target and six months ago. I would have tell you we probably be here saying about 5 billion dollars, but obviously through the second half of the year. We saw some pretty good traction. So, you know, I think we we're optimistic. We're going to beat that original Target pretty handily but we're not quite ready to put out a formal Target yet. I think in terms of the pipeline of Marcos answer that but you know again, this is a a business. We are still knocking down, you know, some old prejudices to some old biases. So we look more at annual targets than quarterly targets. And right now the pipeline, you know feels like again we will be well ahead of our previous targets we keep going

yeah, just

Just to add to that Jade as I look at the composition of the pipeline. I feel optimistic, um that will be able to exceed expectations. Um, uh, as you know, the business office episodic with some of these large transactions and so we had a great fourth quarter at safe with a few large deals in New York City with great clients. We expect to follow those clients into new markets and we're starting to suck that in our pipeline. Um, and so as we solidify that will come back to you and should we expect that the team's focus is on those large transactions.

So I I think we are set ourselves up geographically and so naturally the coverage in New York because of the you know transaction volume or that San Francisco or Los Angeles, you know, the brackets are going to be larger by count I think will be pretty Diversified by assets type I think will be pretty Diversified but yes naturally, you know, you know this ten million dollar deal and a billion dollar deal take to effectively the same amount of work. So we're going to be focused on large institutional quality assets that continue to diversify our portfolio and have there been any deals closed so far in the corner, there's only about a month or so remaining. Yes any indication of kind of a range for that.

I only were giving out ranges yet again. I think we came off a very strong fourth-quarter and we're you know building the pipeline in a bunch of new markets. We have been focused on multifamily a little bit, So that's been one of the target markets and those those assets sizes are a little bit smaller. So again, we we focus more on sort of annual numbers than quarterly numbers and you know go I don't want to get out there with quarter-by-quarter numbers, but we'll just tell you feel pretty good about where the years had it.

Okay, in terms of the inflation bumps. Can you give an estimate of what the weighted average is across the safe portfolio just fine-tuning our npv analysis for lunch or safe. I get to something close to the two safes cost basis just the end the npv of the cash flows, but wondering what the right assumption is for inflation bumps month. It's approximately 2%

Okay in terms of Steve stock purchases, how much do you think we should expect I start to continue to acquire on a quarterly. Run-rate basis. Also. What ratio should we expect I started participate in future safe Equity offerings.