Q2 2020 iStar Inc Earnings Call
Good morning, and welcome to ice stars second quarter 2020, <unk> earnings Conference call.
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At this time for opening remarks, an introduction I would like to turn the conference over to Jeremy Facchin Chief Financial Officer.
And also as a reminder, this conference is being recorded.
Please go ahead Sir.
Thank you and good morning, everyone. Thanks for joining us today to review lifestyles second quarter 2020 Onek.
With me today, Jay Sugarman, Chairman and Chief Executive Officer.
'cause Alvarado, all president and Chief investment Officer.
This morning, we published an earnings presentation, highlighting all second quarter results funnel coal will but to these flight.
Which can be found on our website at <unk> dot com Indeed investors section.
It will be a replay of the coal beginning at one PM eastern time today.
We play is accessible on our website or by dialing 186.20710 for one with the confirmation code of 2077911.
Before I turn the corner to Jay I'd like to remind everyone that statements in this earnings call, which are not historical track well before looking.
Lifestyles actual results may differ materially from these forward looking statements.
Risk factors that could cause these differences are detailed in <unk>.
I stopped disclaims any intention or obligation to update these forward looking statements, except as expressly required.
Now I'd like to kind of call over the ice calls chairman and CEO Jay Sugarman Jay.
Thanks, Jeremy.
The last four months had been extraordinarily challenging ones for the United States.
The toll of co bid on families businesses at our economy continues to grow.
The full impact is still being felt across the country.
We offer our sympathies to those affected at all thanks to those working to help us overcome this challenge.
We also hope the renewed focus on racial equality an equal opportunity.
Help set us on the right path for future.
Prosperous U.S., we're all respected we're all can contribute.
What's the best long term environment for I start to execute on its strategy.
And we hope better times are ahead for all.
Despite this difficult environment, we continue to focus on the core strategies, we laid out last year.
Growing say fold by reinventing the ground lease sector.
Recycling capital from legacy assets into go forward assets, and keeping plenty of liquidity and a strong balance sheet.
Or quarter was a relatively quite one and most customers across business lines continue to pay.
We sold two things that are worth mentioning.
One with long term interest rates falling significantly since the beginning of a year.
Value of our long tail cash flows have increased materially.
Our interest in say fold and its ground lease portfolio is worth substantially more at today's lower interest rates that baby true for many of our net lease assets as well.
We believe the intrinsic value of say fold continues to be much higher than the current trading price.
And as a result, we believe I stores 1.7 billion dollar investment position in save a significant embedded value beyond its current market value.
True the longer cobot negatively impacts the economy, the more stress certain real estate sectors will feel.
Well, we see the negative impacts on parts of our portfolio being more than offset by the positive value created by lower rates, we are watching hotel and entertainment markets carefully for signs of recovery and working to understand the runway crushing borrowers and tenants have created for themselves.
Most seem to be fine for the near term, but of cobot shutdowns extend into the fourth quarter and into 2021, we can expect further pressure on those asset areas.
Fortunately our pivot the ground leases is creating significant value and balance sheet flexibility and we have plenty of opportunities ahead of us to deploy capital at attractive rates.
As real estate transaction activity picks up during the second half the year, we'll remain focused on growing the ground lease ecosystem recycling legacy dollars into that space to strengthen the balance sheet and helping shareholders understand the sizable value building up inside of ice star.
With that let me turn it over to Jeremy now to go through the details Jeremy.
Thank you Jay My comments will refer to the earnings deck that we published this morning.
I'll begin on slide three <unk>.
With a brief overview of the a the activity during the quarter.
We continue to make progress against our strategy during the quarter dominated by the economic slowdown due to cope with 19.
I'm staying safe whole.
Despite a significant reduction in real estate transactions, we closed four transactions within safe <unk> $61 million.
I'll post code that pipeline continues to build an hour investments team is focused on generating new opportunities for continued growth.
Our investment in say told today has an unrealized gain of $840 million.
Strengthening our balance sheet.
As of yesterday, we have $422 million in cash an undrawn revolver capacity.
No corporate debt maturity to 2.2 years.
Its liquidity position enables us to be patient and thoughtful as we continue to scale safe hold and what to maximize the value embedded within our existing.
And simplify our business.
We sold legacy assets was $16 million during the quarter, primarily at Asbury Ocean club and Magnolia Green.
And this legacy asset portfolio now represents 14% about total book.
Slide four with more unsafe hole.
They called collected 100% of its ground rent demonstrating the safety of its cash flows.
And it's or 39% year over year Dps growth, reflecting all success in scaling the business.
Its ground lease portfolio is now $2.9 billion, and then has approximately $900 million purchasing power continue its growth assuming a two to one leverage.
As Jim mentioned, our investment in safe old today is worth approximately $1.7 billion, a $1.1 billion increase in value year over year.
Slide five details, how we meaningfully strengthened our balance sheet over the past years improved all credit metrics.
Our unencumbered asset base increased by approximately $900 million to $4.3 billion.
Unencumbered assets go unsecured debt remains at a comfortable two times.
We have a runway of 2.2 years before any corporate debt maturity.
Our leverage sits at 1.4 times debt to adjusted equity based on the stakes market value.
We remain primarily an unsecured borrower with unsecured debt representing 68% about total bank you have no oh facilities.
We were pleased to see that states recognize this progress and put all credit rating on positive outlook in July.
On slide six we show an update on the progress we've made monetizing all legacy assets over the past.
We sold legacy assets with $227 million, reducing the portfolio by 15% to 800, a $19 million.
Most of that reduction is being concentrated within a short time legacy assets, which is down 29%, bringing that balance down to 286 <unk>.
The same time, we've made good progress within our long term legacy portfolio.
As sales it as we park and Magnolia Green over the past could possibly quotas has outpaced all remaining capex requirements.
That said, we expect that the slowdown due to the economic impact of code at 19, they delayed the near term pace of monetization of legacy assets.
Slide seven shows our earnings for the quarter.
We reported a net loss for the quarter $23.3 million, which is a net loss of 31 cents per share and on adjusted loss of four cents bisha.
The first half of the it we reported a net loss of $44.8 million, which isn't that loss of 58 cents a share.
And an adjusted earnings of 10 cents.
On slide eight you see our investment activity within lifestyle for the quarter.
Benzaclin activity was muted.
Funded $113 million of investments during the quarter.
Comprised of $85 million of loan net lease and strategic fundings $12 million of capital expenditures.
$16 million of stock repurchases.
Yes. The dates we bought back 2.5 million shares the nearly $28 million reducing shares outstanding by.
Earlier, this week outboard reinstated our authorization to repurchase up to $50 million of lifestyle spoke.
Slide nine shows the makeup of our investment portfolio.
Now, let me give an update on collections by business line.
Safe hold which represents 30% about portfolio with C, 100% of its ground rent for the second quarter.
With respect to one net lease portfolio.
During the quarter, we reached an agreement with our longstanding tenant ball arrow to apply $10 million. The cash proceeds we received from recent sales with bowling alleys towards the next few months of rent.
We had been holding this cash as an acquisition reserved for the purchase of new Boeing venues.
In exchange, we terminated that purchase.
Well I don't know represents approximately $700 million about 2.2 billion net lease portfolio.
And represents approximately 75% of our entertainment exposure.
As for the remaining $1.5 billion in on that lease portfolio, we collected 98% of already for the quarter.
Within our real estate finance portfolio, which represents 14 incentive all portfolio overall.
We collected 94% of our interest.
Excluding one pre existing legacy nonperforming loans.
The uncollected balance relates to a senior loan on a retail and entertainment broke.
Finally for our operating properties, which represent only 5% about portfolio, we collected 80% of rent bode doing the cool.
We have reached agreement with many of the tenants who are not able to pay to provide relief in the form a short tbas therell be paid back over the course of the next 12 to 24.
Finally on slide 10, we show a book value per share, which illustrates the value created blue safe home.
And ice dog current trading discount to that down.
Including safe Mark to market, our book value per share stands at $19.55.
And at $23, an 84 cents when adjusted the depreciation amortization and see school.
Our current stock price represents a meaningful discount to this value.
In conclusion that was relatively new to the quota for transaction activity due to the economic impact is cobot 19. However, we remain committed to our strategy and scaling safe old strengthening our balance sheet. So that we can support that growth at lifestyle and simplifying our business recycling capital from our legacy assets into the.
Ground lease ecosystem.
With that let me turn it back to you get.
Thanks, Jeremy.
And as those numbers show, we believe I started trading well below adjusted book.
Well, that's based on saves trading price and for those interested we're happy to walk through the reasons, we believe saves existing portfolio significantly undervalued and the market.
And why future growth and capital appreciation create even more upside.
Our top priorities now or to execute on saves growth potential and demonstrate its powerful upside for star shareholders.
We are confident in our ability to do both.
Operator, let's go ahead and open it up for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press one zero at this time.
We will take as many questions as time permits and proceed in order that you think not once again. Please pass one zero to ask a question.
We will talk just a moment to assemble thereafter.
Our first question comes from Stephens <unk> with Raymond James. Please go ahead.
Jay I guess, what first start with the ground lease I know, that's what you're going to quite a hot for a couple of years now and not you needed any anybody to reinforce it but I saw some articles last week about some new some other companies are increasing their their presence or looking to deploy more capital into ground leases or.
I would call what was mentioned specifically so can you talk about the competitive environment, there, what's that doing so returns and whether or not a you know the opportunity maybe so large that the competition doesn't move the needle yet, but can you maybe expand on kind of the competitive landscape off the ground lease business.
Yeah sure you know I think for.
Punch line on this one is yeah. We are in more places with more people with more products than anybody else in the space by I would say factor of 10.
So there is where our people looking up the space.
Well, we've got a full fledged team across the country engaged in the top 30 markets and we don't see anybody who shows up in more than a fraction of the opportunities. We're pursuing so it's still early in the game for this reinvention of the ground lease space and certainly others are paying attention and I'm starting to see.
Some of the things we saw.
But the real value of it we see unsafe that we've not seen anybody else a really be able to do is to create a permanent light vehicle that is really.
Building the whole ecosystem around ground leases.
And so we've got something you know that's a larger b you know more expansive and she has a.
Business strategy and time horizon, but we don't see anywhere else.
So right now the competition is not an issue it's really kogut just hard to get transactions done when when the markets are frozen. So we fully expect when the markets reopen we'll continue to be the ground lease leader, but we'll all sorts, but you know people to continue to.
Tried to do deals as well, it's just we haven't seen anybody be able to.
You know puts a time effort and frankly, the financial resources behind that that we have.
Appreciate that color it moving to the I guess the other part of the then that leave the certainly some of it but the the movie theater exposure I saw.
I believe AMC you reached agreement with the PR of about dog some of their agreements a master lease structure. They went into that can you talk about.
How your investments they're performing have there been any material changes. So since you guys last gave an update to the to the market.
Yeah, <unk> as I said in my comments were watching those markets closely the longer coven or continues to impact those companies. The more concerned we got frankly a.
You know you've built decent runways, some better than others, but you always think our overall exposure to the sector is relatively small compared to our overall portfolio. So again, we think the ER positive impacts a low rates was going to outweigh any thing.
Negative, but certainly theaters or one of the places we're concerned about.
You know what AMC is blazing a new trail here, we haven't seen the specifics around what how they participate in.
Some of.
At home screaming dollars that might be created going forward, but we don't saving positive coming out of these kobin period I'm. So that's one that we've got our eyes on and.
You know certainly think we're gonna get mixed and scratched on on that sector.
We think bowling on the other him there hasn't been no systemic change we think people will have birthday parties and corporate parties again.
It's a temporal issue.
It's not something changing the industry systemically, that's sort of a different viewpoint about that than maybe a theater a box.
You know may vary we have some really good locations, we certainly expect them to be leading theaters coming out of whatever happens, but some of it may need to be a rethought and so we'll be part of that process with our tenants right now.
Our two largest pendants of the three are paying so.
I'm good news, so far, but certainly on or or or watch listing firms of that industry in particular.
Right. Thanks for the comments, Jay and up I'm.
Happy to see the the repurchase authorization. This morning, too so glad to see you guys are continuing that.
Thanks.
Thanks.
Our next question comes from Jade roaming with KBW. Please go ahead.
Thank you very much as a follow up to Stephen's question.
Did you put the net lease portfolio together with the loan portfolio could you, perhaps ring fenced or put some quantitative parameters around the magnitude of headwinds you can see and those portfolios. We've seen the mortgage reach I get to about 5% of loans non accrual a few companies.
Made asset sales at around 96% of par I haven't seen any control draconian haircuts to par value, but I was somewhat surprised by the lower collection rate in the portfolio, which seems to be able to one loan, but I think it'd be helpful. Do.
Makes sense this issue.
I'm not 100% sure what you're saying <unk> when you say ring fence, where do you mean.
Well, if we take the some of the net lease portfolio and the some of the loan portfolio, what a level of either loss or a impairment do you expect to incur.
Okay.
Look at it it's still too early to give you a you know a high confidence or kind of number we still feel confident in our loan portfolio.
We have.
Gone through that pretty carefully and as I keep saying you know <unk>. The variable here, we can't identifies how long its covert going to go on certainly the hospitality sectors not a.
A place that can withstand <unk> you know for extended periods of time without material impacts and.
We've been thoughtful about about again that represents a relatively small part of our overall portfolio, but we are watching it carefully I'm. So certainly the hotel and entertainment assets or where are the auction will be.
If there were gonna be losses, and if they're gonna be.
Issues, we evaluated at the end of the second quarter and still feel pretty comfortable but we are you know thoughtful and watchful as we head into the third and fourth quarter of whether whether we see the economy coming back whether we see those types of assets opening up and seeing decent results or whether they're going to go.
Onto a.
You know difficult winter and we'll certainly need to evaluate them every quarter, but I got what I'd like to.
Convey it is while we certainly expect there to be some pain on that side.
The conditions that creates a pain <unk> you know slow economy.
Difficult conditions, as driven interest rates down to a point where.
The magnitude of value creation, not just in our or <unk> or ground lease portfolio, but in some of our very strong along like net lease assets.
At least right now to be honest it feels like that as a bigger uplift than some other concerns we have on the downside.
That could change of Cove. It looks like you know, there's no I'm not going to be solution tool.
Mid or late 2021, but that's something we've evaluated at 630 with the best information we have enough given you the but the benefit of what we know today.
But it could certainly change.
Okay and I'm in terms of the shape hold portfolio, 19% hotel, how are you thinking hospitality exposure in that portfolio.
Well, we don't think hotels have lost 70% of their value permanently. So again, we think there's a temporal component to hotels, which is.
Mostly the equity and the leasehold lenders have to figure out.
But could be six months 12 months 18 months, we've heard some some hotel experts tell us they would be 2024, but before we reach 2019 numbers again.
But those are frankly, not issues for or ground lease what would be an issue for ground lease is asset type where the demand base just disappears.
And we have heard people talk about some of the convention hotels or some of the.
Business hotels, being having more long term impacts.
Our initial evaluation of out is again, it's not creating the kind of diminishing in value that would impact our ground lease positions.
So we're evaluating both temporal impacts which.
At least at this point as you've seen from our pay rates. We think our equity sponsors don't believe are permanent and certainly don't believe that the leasehold lenders we think are permanent.
But if this continues and people change their behavior and.
Zoom replaces 20% of hotel demand you know we'd have to rethink just sort of how we go about attacking the hotel market, but right now again, we're seeing strong collections and we're seeing sponsors who believe in their assets. So.
Can't say there won't be any changes in the hotel industry. We certainly believe there will be but right now the temporal impacts shouldn't shouldn't have would be a problem for our ground lease portfolio.
Thanks for that I'm, turning to the a the land portfolio can you give an update as to the anticipated duration.
Timeline to monetization both for the long term and the short term buckets. If they were going to apply some kind of the discount rate the carrying values, even though ultimately I star may receive those values back just the timeline it takes to monetize what would be your expectation after that.
You know together with <unk>, let's take a base case of Cove it impacts the economy through the early parts of next year and then people see the light at the end of the tunnel and things start to turn around a little bit.
What we have seen in the land side that was a bit of surprise is with low rates were actually seeing strong demand around the country for land.
There are pockets that are still they're being impacted but overall the market has been surprisingly strong. So those transactions probably are not as delayed as we originally thought they might be so I'd again, I'd give us on the short term pool, probably out through the end of 2021 Uh Huh.
It was like a good sort of timeframe to whittle away about portfolio with some decent sized transactions.
The long term as you know or three main assets.
No real changes under the.
At least one I would say Magnolia Green <unk> continues to be a a strong performer in terms of.
Price points across the housing spectrum and.
Haven't seen as.
Much of an impact from covert as we initially thought so that when it still seems on track, but that's a.
Has been and we'll continue to be a three to four to five year sellout.
And then Asbury.
We did take a pause down there we felt like a some of the assets we have on the marketplace. Yeah, we just weren't going to be able to get people into the visit and transact and there was really no government permitting going on so those got pushed back a little bit but weve. The interested parties are still interested.
So again, we thing you know Oh by the end of the year and certainly by the end of next year. You know Asbury has reached kind of peak capital and now we see it as a source of funds going forward.
Good things slip a year because the Cove and yeah, I think that's a fair approximation of what we see right now.
But again the surprise there is with low interest rates the demand for.
Housing assets, whether their single family or whether they're a multi or a condo.
Certainly in our markets has been stronger than we thought.
And so how long do you think asbury, even take can be fully monetized or perhaps moving into another all time structure.
You know we were using three to five years you know some some.
Sumption is embedded in that for sure I still think that's a reasonable timeframe.
Could that slip a year I think so but you know we've got a pretty good plan of how are these assets will play out.
At least right now we don't see.
A multiyear impact we see maybe six to 12 month impact.
Okay are there any other callers in queue <unk>, it's going to ask a couple of follow ups on the ground lease space.
There are no other callers in queue, but if you would like to ask a question. Please press one zero. Please go ahead.
Thanks are you seeing any ability to get higher cap rates than previously just maybe based on scarcity of capital and also some of the changes that are being spoken about in the office sector with respect to some decline in these times duration of of office leases.
No I again, the ground leases really in a bellboy AAA slice and if you looked at any double and triple A.O. bonds out in the marketplace. They've tightened material either you know there not a price was not widening so on the high quality stuff, we've actually seen rates come down we've not seen them go up so that.
Our market is responsive to where you know dollars are flowing in very high quality stuff.
Well, where I think you're seeing you know cap will be a little bit more scarce is stuff that is hard to underwrite.
Lower quality 'em up but doesn't really relate to what's happening in the ground lease sector. So its not really about you know prices widening in fact, you know with base rates going down I think the.
The dynamics actually be opposite what is happening as values are changing and as you mentioned office people are trying to get their hands around so you know if.
Net income goes down but cap rates also go down.
What's the net net impact of that and we've looked to Japan into Europe, but to see what happens when rates go down and stay lower a longer well cap rates tend to chase them down. So if you have good strong.
Emitted cash flows a little this market environment actually is a positive for you. What I think you point out is what if a cash flows are not locked in what if they're variable.
What if you've got a lot of tenant role you know I think that's a trick your equation right now and we certainly think people are going to.
To be more cautious in terms of valuing office assets that have a characteristic so we haven't seen that battle take place yet because there just aren't a lot of transactions to see where it is but that's the bid ask in the market and again from a ground lease capital provider. We think we can provide long term.
From.
Very stable capital to folks in that environment as long as they believe that their assets, having diminished dramatically in value. A we think theres a lot of people who want to play long term in.
Whether it's new Yorker, San Francisco, or Boston, and we're here to provide capital to appropriate levels again, we never like to get into a quote unquote oversized ground lease and there's plenty of those out there in the world you won't see us buying something that represents 65 70, 585% of today's.
Value, that's not our business, but a 35% 40% of today's value.
You know, we think we provide some of the most efficient capital in the market.
[noise] and have you guys put out a a sensitivity with respect to safe NV, well fair value a relative to changes in discount rate against the discount rate moves by 50 basis point, what would be the net impact to value.
Yeah.
We actually do that you know every day, but just to give you. Some round numbers. If you run the bond math on our existing portfolio, it's safe today.
Using you know these ultra long term ultra high grade bonds that we look out.
You know safe is approaching $100 a share of bond value trading at 50.
Well, if you take that metric and you realize that I start owns a billion seven of stock today, the intrinsic bon value of safe that would flow through the eyes star.
That is a almost doubling in value. So as I said in my comments, we really need to do or a good job of helping people see what you just mentioned, which is rates coming down 100 basis points on the 30 years since the beginning of the year and 150 basis points since we went public.
<unk>.
We have some of the most attractive long term high quality cash flows in the world.
And certainly in the U.S. market. So I'm not surprised that you know there a lot of other factors that people are focused on but we will make sure we get people to focus on that last 50 basis points a change in the ultra high grade bond world.
Has created enormous value for safe.
We don't think as reflected in the stock and enormous value for star indirectly, but we certainly don't think as reflected in its value. So we.
We will do a.
But a little bit better job of getting people to just put those numbers the paper and I think some people will be surprised how good they look.
Thanks, very much for taking the questions.
Thanks, Chad.
Thank you and ladies and gentlemen, if he would like to ask a question. Please pass one zero at that time, well momentum only Wayne.
Mr. Foxconn, we have no further questions at this time.
Thank you if you should have any additional questions on todays earnings release, please feel free to reach out.
Operator will you please get the conference call replay instructions once again thank.
Thank you.
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