Q1 2020 Earnings Call
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Good morning, and welcome to ice starts first quarter 2020, earning conference call.
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At this time for opening remarks introduction I would like to turn the conference over to GE folks senior Vice President.
Investor Relations and marketing. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us today to review why stores first quarter Twentytwenty earnings.
On the call with me today, our Jay Sugarman, Chairman and Chief Executive Officer, Mark Silverado, Our President and Chief investment Officer, and Jeremy walks gain our Chief Financial Officer.
This morning, we published and earnings presentation, highlighting our first quarter results and our call. We'll refer to these slides, which can be found on our recently revamped website that I star Dot com and the Investor section.
I'll be a replay of the called beginning at one PM Eastern time today.
The replay is accessible on our website or by dialing 18662, 071 year old one with a confirmation code of 3183 zero <unk>.
Before I turn the call over to Jay I'd like to remind everyone that statements in this earnings call, which had not historical facts will be forward looking I started actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our FTC reports.
I started disclaims any intention or obligation to update these forward looking statements, except as expressly required.
Now, let's turn the call over I stress, chairman and CEO, Jay Sugarman Jay.
Thanks, Jason.
Let me just start by expressing our sympathies to those who have experienced last when cobot 19.
And our gratitude to those on the front lines. So that's why.
Everyone is working to mitigate the impact its global crisis, it sounds like thanks, and our support.
Turning to high Star or three part strategy began in 2019 has us well positioned to weather the storm and continue growing our new ground lease platform.
We lay that strategy out in some detail on our website and at our 2019 annual report.
The earnings back we provided this morning includes a recap of the strategy and highlights from the first quarter.
Here's the key takeaway.
Steps, we took to strengthen our balance sheet last year by growing our equity base, increasing our unencumbered assets and bolstering liquidity.
Provider, that's the resources and flexibility to continue investing in say hold during the first quarter.
And enabled us to keep our focus squarely on the engine that is the primary driver of value for shareholders.
They pulled you need ground lease portfolio proved to be a strong performer in the first quarter.
And with yields on comparable quality comparable maturity bonds falling to historically low levels the value of staples portfolio and device stars investment I'd say have increased significantly since the beginning of a year.
Nearly $2 billion. This is our largest investment by far.
It's positive impact on shareholder value should take center stage as we continue to build out the platform.
Well are safe investment has performed well.
Since in other parts of the portfolio are clearly being negatively impacted by the crisis.
We haven't diversified portfolio of loans that leases and operating and development properties.
And we provided some statistics from April to show their initial resilience in the face these difficult economic condition.
This is a good thing well, we expect things to become more difficult the longer the locked down continues mostly in the entertainment hotel and land categories.
I'll come back to that in a minute, let's first have Germany walk through the numbers from the first quarter.
Jeremy.
Thanks, Jay and good morning, everyone.
My comments will refer to the earnings deck, we published this morning, which you can find on our website.
Let me begin with slight complete with an update on our strategy, which we laid out a year ago.
Well, that's part of that strategy is to scale all coal ground lease business it's safe.
To date, the market value of opposition and safe is $1.9 billion with a $1.1 billion unrealized gain.
The second part of our strategy is to strengthen our balance sheet, enhancing all credit profile and maintaining liquidity.
We have $435 million of cash and revolver availability.
No corporate debt maturities, the two and a half years.
Which puts us in an advantageous position during this period of on site.
And finally, we have continued to simplify our business.
With $88 million of legacy asset sales proceeds this quota reducing that portfolio biting.
I'll walk through each of these components in more debt before reviewing off last quarter results.
Slide four shows our progress scaling say hope all coal Groundlings business.
During the quarter, we invested $105 million insightful.
$80 million through our participation in say holds follow on equity offering the most of the balance through open market purchases of stock.
We continue to believe safe holds market value represents a meaningful discount to the intrinsic value of a large diversified portfolio of high quality institutional ground.
A year ago, the market value of our investment in safe hold was $442 million, which represented a relatively small parts of our total portfolio.
Over the last year the market value of our investment in safe hold has grown by $1.5 billion.
So a combination of continued investment and strong market before.
Leading to a $1.1 billion unrecognized.
During this period, our investments to more than doubled safe holds portfolio to $2.8 billion of ground beef.
Slide five shows our progress on the second part of our strategy, which has been to strengthen our balance sheet and improve all credit profile.
As a result at the capital markets actions taken over the past.
Capped off by the January retirement of the remaining $111 million of unsecured notes, we could we financed and coal for redemption in December.
We have materially strengthens our balance sheet.
We have reduced secured indebtedness, including really paying down our revolver subsequent to the ending the quarter.
Today, approximately 75% deval portfolio, including safe marked to market or $4.5 billion of our assets are unencumbered.
Which provides us additional flexibility and 2.1 times coverage relative to our unsecured.
We have extended our corporate debt maturity profile. So that we have no maturities for two and a half years, not <unk> and 22000.
Well, let Richard decreased to 1.3 times.
Corporate debt of 68% unsecured and we do not rely on the actions facility.
Our balance sheet affords us the ability to be patient. So we can act thoughtfully and deliberately during uncertain times.
Slide six shows all legacy asset progress.
We sold legacy assets, the proceeds of $88 million during the quarter generating a slight 3 million dollar again above book value.
Most of these sales what from our short term bucket, reducing that balanced by 19.
So with that update on how we performed against our strategy, Let me turn to slide seven to walk through last first quarter results.
We reported a GAAP loss of $21.5 million or 28 cents per share.
Beginning this quarter, we are reporting a new simplified non-GAAP earnings metric.
The primary change, reflecting the shift in our strategy towards staying safe hold and simplifying our business is the eliminate adjustments the loan loss reserves and impairments.
Those charges will now be reflected in adjusted earnings in the same period in which they all recorded in accordance with.
A reconciliation of our adjusted earnings metric and net income can be found in the back about that.
And we have confirmed up prior period amounts to the modified definition.
Adjusted earnings were $10.7 million or 14 cents per share less is $2.6 million <unk> four cents Fischeri Europe.
Slide eight highlights our investment activity during the quarter.
We invested a total of $195 million with $105 million insightful.
We funded $61 million at prior commitments on loans and techniques investments and made a $16 million of capital investments in our legacy.
During the quarter, we repurchased $12 million of lifestyle stock.
And based on the equity value the share with you. Shortly we continue to believe that all stock trades at a significant discount to intrinsic value.
At the end of the first quarter, we had remaining authorization to repurchase approximately $22 million of additional shacks.
Slide nine shows off 5.7 dollars 5.7 billion dollar portfolio, which is well diversified business by property type and by geography.
Our largest asset is all position in safe hole, which represents 32% the portfolio.
As many of you heard on safe earnings call. It a week ago. It received 100% of its April ground rent continues to perform well in this challenging environment.
We received 97% of our April cash rent from on net lease portfolio.
100% of cash interest due within all real estate finance portfolio.
Excluding one pre existing legacy nonperforming loan.
79% about cash rent from operating properties.
Oh smallest business segment, representing only five incentive our assets.
We cannot be set and we will receive this level of collections in future periods.
Lastly, on slide 10, one a highlight our intrinsic equity value per share, including safe old Mark to market.
On the left side, our common equity value.
It was $22.55 per share up 241% from the first quarter 19.
On the Rightside adjusted for depreciation amortization and loan loss reserves.
I'll common equity value was $26.52 picture.
Hundred 38% from Q1 90.
We believe that there isn't material disconnect between ice storms car market value and it's in transit.
I'll finish by saying I'm excited to join lifestyle, it's been an interesting mum and I look forward to speaking with many of you in the future with that let me turn it back again.
Jay you may be on mute.
Thanks, Jeremy.
Welcome aboard it's great to have you.
Let me finish by touching on two key assets that we've been fielding the most calls on bolero and Asbury Park.
Our three master leases with Valero represent a combined 700 million that leasing basket and make up approximately 75% of our entertainment and leisure category.
Well there was a very well run company with a dominant market position and the assets in our master leases generate the majority of the company's cash flow.
The company entered the year on the strongest financial position we've seen in good 16 years, we've been involved.
With excellent liquidity and some $1.2 billion invested between outstanding corporate debt and equity from a well capitalized PE sponsor.
Operations were curtailed beginning in March and will likely ramp up slowly once they reopen.
What we believe accompanied strong liquidity management sponsorship and reserves should hold them in good stead.
I should also note that approximately 15% of our overall position is owned by a JV partner and one of the master leases or actual exposure is somewhat less than a number of book.
[noise] Asbury Park is a 350 million mission investment comprising Ocean front land parcels innovative hotel assets and Asbury Osha club or recently completed Ocean front condominium tower.
Values and Asbury Park had been growing consistently since we began investing in this unique city.
And while the virus has put a hard pause on our efforts, we expect as reports beach front lifestyle and proximity to major employment centers will prove attractive in the post pandemic world.
Here too, we expect to rebound to be slower first.
It's hard to our with our hotels thing every precaution to ensure our guests safety when they reopen.
Sales in our new tower to take time to kick back into gear and land sales to other developers to be pushed back a bit.
And our initiatives make Asbury park their creative hub of New Jersey, and I go to choice for entrepreneurs and startups.
Restart once we get passed the current economic dislocation.
The slower pacing and some challenges to be sure, but nothing has changed as our long term strategy.
My conclusion from all of us that will need to continue to lean on our experienced asset management team to navigate any issues that come up in the portfolio.
But that we are in a solid position to be patient and our top priority remains the scaling up say fold.
And getting the market to fully realize the value that is embedded in that platform.
That will be the key driver for creating shareholder value now and then the future.
And with that operator, let's go ahead and open it up for questions.
Thank you.
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[noise].
Our first question comes from Jade Rahmani with KBW. Please go ahead.
Thanks, very much im glad to hear from all of them.
I was wondering if you could or provide any perspective as to whether anything that's taking place right now in the market or anything that you expect to transpire in commercial real estate.
Caused a shift in strategy.
Whether it'd be.
In terms of accelerating disposition noncore assets, not just legacy assets back, but perhaps other assets [noise].
Or if on the other hand, there might be some interesting investment opportunities or other business lines that.
That become.
Top of mind for management beyond a ground lease.
Hey, Jay Thanks.
Let me take the second piece first the virtues.
We still believe safe hold on the ground lease business represents the best risk adjusted returns by far so nothing's changed in terms of our focus in our strategy.
Again, we think that's a business where we can walk in excess returns we earn that excess return for.
Decades, and decades of the 99 years, there's certainly some interesting short term credit plays out there where you can earn some excess returns but.
But we will tend to be short lived and we're certainly not going to get distracted from a business that you know we're fundamentally a <unk> the largest and biggest player and so no change from our strategy standpoint.
I think you heard Jeremy say and me say that.
We're in a great position to be patient. So I don't think you'll see us trying to accelerate monetizations into relatively uncertain market.
We will continue to be thoughtful about how we monetize those assets.
But we're sitting on a lot of liquidity. So there's no real reason to try to push faster on any about oh, particularly in a market where values are still little bit up in there.
Thank you in the beginning of the question.
What do we see out there in terms of changes going on.
Almost too early to tell obviously, though the credit side of the market shock.
When through the system, we have not seeing a lot of transaction activity Jay.
Lot of deals that we were working on had been pause.
I'm not so much because of ground lease we were ready to move forward, but the lending markets in the equity markets people are starting to figure out how to reprice them re forecast and so I think theres been a pretty hard stop on most transactions and so we don't have a good sense, but I think the markets or sorry.
Come to grips with the data coming in in terms of the economy.
And certainly what the fed is done and what the administration has done that's helped on the liquidity side. So.
Again, our watchword right now is focused on the thing that we believe creates the most value for shareholders and be patient and thoughtful on everything else.
Thanks, very much are you seeing any inbounds in terms of the star Safe program from.
Holdings of assets that can potentially be forced sellers, whether it be mortgage rates facing margin calls or equity reach that rather than pursue an outright sale.
Might want to pursue the sale of a partial interest or perhaps a ground lease yeah I would think given the liquidity position you cited.
And the duration of your capital that I start could be a and attractive source of capital to such parties.
Well I'm going to throw at the markers, but I will say, we came into the end of the quarter or thinking about star SAIC was a big comparative advantage and had some really interesting deals keyed up Unfortunately, the equity stepped away on a couple of those deals.
So we ended up not being able to deploy that capital and so we're getting there both a safe and that star.
And Mark is going to give you a sense of what he's sitting on the front line.
[noise] Jade I may take you on my zoom origination call going forward. The we've seen a ton of reverse inquiry from groups that we actually weren't pursuing I wouldn't call it necessarily distress I think the capital markets.
Whether that asset level finance or corporate finance of dislocated so dramatically and our perspective. This is we're taking a long term hundred your view.
And so we haven't changed our pricing and so we thought we were the best option pre Cove. It we certainly look much more attractive. So we're spending a lot of time with institutions on high quality asset educating them.
On our safe hold a and we hope to reap the benefits of of all this work.
You know the back end of the year as it relates to the pipeline. They pulled I think you saw in our offering materials when we raised equity.
Approximately an 800 million dollar pipeline as Jay said, you expect a large majority of those things not to close but we remain optimistic that a few of those things get across the finish line.
[noise]. Thanks very much on me collections that you cited with respect to operating properties I was wondering how that.
70, 973% compared with last month I assume it's probably similar since there are some non stabilized assets there.
Yeah, that's such a small part of the portfolio that you know there one or two things happening again.
Change the whole.
On a number around pretty hard so I think this number is probably represents about a half million dollars in total so it's just not material to the.
The overall enterprise.
Okay.
Do you have a sense for what I expected cash uses for the year on how that compares to <unk> just trying to put in the the liquidity position in context.
Yeah, I mean look we have.
Or forward commitments are down to a couple hundred million Jade over the next 12 months.
So there are down there not material relative to buys of the repayments screens and unencumbered asset profile and liquidity.
We will obviously start to see some of those commitment.
Delayed.
But even if they all you know got accelerated that it's just not a big number I think it's somewhere in the $200 million range right now.
Next 12 months.
Okay, turning to the loan portfolio.
How are you feeling about the hotel condo land and mixed use exposure within that portfolio do you expect any nonperformance have you gotten any requests for either interest deferrals or other types of forbearance.
Yeah, just give you a number overall.
If you exclude bolero, which I talked about we feel pretty good about a deferral requests on that lease and finance came in around 15%.
I'm not so much I think in terms of.
Concerns about long term value, but some of those business plans are definitely on hold.
You mentioned hospitality.
We have a few assets in there they tend to be relatively large and.
Relatively strong sponsors, but with hotels running at zero percent or 5% occupancy if it's hard for anybody to make long term predictions.
We did we do think they're good assets in good locations and.
Oh, well certainly hope that the recovery is perhaps slow but ultimately will.
Protect our position.
I don't think the deferral conversations or fully flushed out in terms of what people are needing and what they're thinking but.
Yes, we did have had.
Those categories be where most of the deferral requests to come from.
[noise] and within Safes portfolio I was curious about what impact do you expect from.
Not just hotel ground leases, but also the overall leasehold mortgage if there is a default how does the ground lease be impacted does the lender in that case, a make the ground rent payments.
Yeah, absolutely so.
Yeah.
Equity of not able to fulfill the obligation which.
Again as a result from April 100% performance.
That is we're sort of the capital that.
Is meant to be quiet and not get phone calls and out certainly improved out in April we'll see the longer this lockdown goes weather.
Markets change a little bit, but right now we feel pretty good and I think leasehold lenders have every incentive to continue to protect the significant value they haven't yet so.
So multiple layers of protective capital that should make.
The ground lease and not get the phone call.
Yeah.
The discussion, we just had one more person Q or or question, maybe you one just re queue Bakken, yes sure. Thanks.
Our next question comes from Stephen loss with Raymond James. Please go ahead.
Hi, good morning.
Hey, Thanks, Hey, good morning, Jay to follow up a couple of.
Questions Jade.
Relating to the $540 million above long term assets that are that looks like they will be developed what did the expected capex or development costs, there, what's the timeline or when should we expect those.
The cash to be used there.
Yes, so remember that.
Made up of three assets Asbury Park.
Magnolia Green business successful.
Master plan development good.
Moving into its later phase and.
Should be self sufficient.
And.
A large parcel of land that is actually being used by a fortune 100 company under.
Net lease so those were longer term.
So that we need to continue to do some work on but based starting to reach sort of self sufficiency in terms of capital any.
[music].
Discretionary Capex is certainly being looked at but I don't think you're going to see a lot of net investment in those assets going forward for the most part that they're starting to be self sufficient.
And at least in as various case at some point will turn out to be on a large provider of capital certainly of the condominium sales begin.
Ramp up in close so I don't think that's going to be the driver.
Capex out the door or we do have.
Small amount of capital going into net lease outs that small amount of capital going into some of our.
Loan position better funding up so I think that's when I say, there's 200 million of Capex.
Small relatively small percentage of that will be it.
In the long term bucket over the next couple of months.
Most of those or or handling their own capital.
Great and a follow up on the real estate debt investments no you touched on it or a few minutes ago, a 21% hotel, 8% retail about 250 million are there any.
Concentrations are exposures there they either on the all one youre concerned about Ah watching very closely are on the flip side are there characteristics about any of these particular alone.
You less concerned relative to the the average for those property types.
Yeah look hotel is the tricky one.
One of those is a construction loan in a great location in New York City.
No.
I think it's actually a good news to not be open these days and so that when we'll open up into a market that's going to be.
Get roiled, but theres, a strong equity sponsor and again.
I loved the location.
So I think the one asset because some of you know about from the path.
Huh.
Yes a.
Artifact of our legacy portfolio and has.
Large amount of collateral backing in not just a direct hotels, but lots of other collateral.
But what we're going to watch carefully, but it's actually doesn't come due till 2024, I'm. So there's quite a bit of time now for those assets to recover.
So right now Steven I think we're watching as everybody is but.
Well, if we see a change or we see a diminishing value will certainly reflected in our financials, but.
We don't see about just yet.
Thanks for the color there Jay and lastly, just this week.
Close the discussion or at least for me right now on a use of of liquidity.
No I appreciate the update 22 million on the authorization remaining looking at the first half last year when the stock with a similar level, but the the safe Mark to market with lower a you know you bought back around 20 or 25 million per quarter. So should we expect to see a an increase in that authorization are you more focused near terminal building.
The liquidity as opposed to repurchasing stock clearly continued purchases of safe.
To that but you can you talk about the priority of maybe how you view those things as to buying say repurchasing star or simply building liquidity or new investments.
Sure I mean look we came into the year. We felt so it was a very attractive place where top will.
Early in the year, we switched.
And started to focus on.
Putting in place a program to.
By small amounts of ice star pretty consistently I'm not a big program.
But it's a consistent program and we knew that a blackout come and go and.
In the past we've seen that is.
Challenge to be able to expressed our view on the value of the company.
So we do have a program in place there continues to nibble away at the very attractive prices and will continue to do that.
As we come out of blackouts certainly depending on.
Our balance sheet strength, and our financial position, we always balance the desire to be as strong as possible.
As I keep saying the story here is April.
The value created in the first quarter and save hold.
Far outweighs Oh in our minds at least the impact of co grid on any of our other assets. So we want to protect.
Business strategy as much as possible, but at the same time, if we can deploy excess proceeds.
Carefully into things that are mispriced, you know, we do that we were doing deliberately but we also do a very thoughtfully looking up the balance sheet and our leverage metrics as Jeremy you went through we've done a lot of work to get those credit metrics and that balance sheet into a very good position, we're certainly not going to jeopardize that.
But we've created enough liquidity that we have some options here.
Great.
Question is really driven by the prepared remarks that highlighted the valuation disconnect I think with start up and say given how well save this held up during this recent volatility. So was was looking to get your thoughts around how that's impacted the relative attractiveness of repurchasing star more aggressively here.
Yeah.
Look we were surprised when you look at the.
The pluses and minuses of the first quarter you can see the pluses certainly outweigh the minuses and yet we saw the discount to ensuring been value actually widened so.
You know tough to tell our story when we're so they all sitting at home.
Certainly think it's a strong story, we think that say pulled story continues to be one that.
Even on just the bond values of the cash flows of the assets. We already have still represents a sizable discount oh, given where we're trading all about loans back into our historic and even more concentrated way.
So we've got two stories, we need to tell we need to tell the safe hold story.
More fully get more investors aware of that story and then some of that interest will clearly flow back into I start and we think both stories right now or things, we need to focus on coming out of those prices.
Great well, thanks for the call or the comments this morning, Jay and I.
I hope all or a well on your own ticker you too.
Our next question comes from Jane Romani. Please go ahead.
Thanks for taking the follow up.
I guess, one big picture question, and then one technical item.
Hey, you know what's governments globally ticking on so much.
Obligations Chileans and.
No longer term the potential for potentially more in sourcing and manufacturing.
Because people are realizing.
How dependent supply chains on China, how do you look at the risk of an increase in inflation and the potential impact that can have on ground lease.
Valuations.
It's a great question Jay I mean, we're we're watching you know the the pundits all talk about deflation and lower longer in Japan application them.
You know what's happening in the eurozone over the last really since the last crisis is 12 years of near zero and negative interest rates.
Fundamentally this is a brave new world.
In terms of credit markets and base rate.
I don't think we have a perfect crystal ball, but certainly there's plenty of reasons to think that <unk>.
Rates and or inflation could remain relatively low for quite a long time.
Obviously accrues to the saves benefited from its cash flow screen.
Flip side as high inflation or.
Higher inflation.
Certainly increases the value, we think of all real estate replacement cost all go up.
And our large embedded capital gain at say fold. It is certainly going to be a beneficiary of rising replacement cost.
So if you had asked me today I'd say, you know probably put a little more my money on lower longer.
But we are nicely hedged because we have a large intrinsic embedded portfolio that will increase his replacement costs increase so.
Can give you a you know any better answer than anybody else out there but.
I'm looking of Japan, I'm looking at the Eurozone and I'm looking at what happens when rates go to zero and it seems like a very very difficult to change that dynamic.
This is the this is completely new that the pin debit they have different rules.
Looking at those two major economies.
Lower longer seems to be not such a bad place to be.
Thanks for that and just a technical question other income on the income statement spikes quite meaningfully I was wondering.
What drove that.
Yeah, we had a one of our private investments actually got marked up through Uh huh.
New raise Jeremy any other color you want to give there [noise].
[noise] no that was the primary driver.
Is that within the strategic investment category.
It is.
You should give any additional color on what that relates to.
We have a small interest in a cold storage.
The company from when we sold our.
Third freezer portfolio.
[noise] okay.
Thanks very much.
Jay Jay just one more thing on the ground lease valuation if you remember almost all of our leases have inflation look back.
So theres a catch up to the extent deflation Ron.
Okay.
So if there were a spike in what is the look back period.
Depends on the on the the lease but it's typically tenures [noise].
[noise]. So once every 10 years, there would be some kind of a true up.
Correct.
Okay.
Alright, Thank you very much.
Understood.
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Mr folks we have no further questions.
Okay. Thank you oil if anyone should have additional questions on todays earnings release, please feel free to contact me directly Tiffany would you. Please give the conference call replay instructions once again federal thanks.
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