Q4 2020 iStar Inc Earnings Call
Good morning, and welcome to ice star's fourth quarter and fiscal year 2020 earnings conference call.
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At this time for opening remarks, and introductions I would.
I'd like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and marketing please.
Please go ahead Sir.
Thank you and good morning, everyone.
Thank you for joining us today to review <unk> fourth quarter and fiscal year 2020 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer.
Marcos Alvarado, our president and Chief investment Officer, and Jeremy Fox Green, Our Chief Financial Officer.
This morning, we published an earnings presentation, highlighting our results and our call. We'll refer to these slides, which can be found on our website at I start dot com in the investors section.
There'll be a replay of the call beginning at one P. M. Eastern time today and the replay is accessible on our website or by dialing 186 620 710 for one with the confirmation code of 3895665.
Before I turn the call over to Jay I'd like to remind everyone that statements in this earnings call, which are not historical facts will be forward looking I start as actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our SEC reports I started disclaims any intent or obligation to update these forward looking statements, except as expressly required by.
Well.
Now I'd like to turn the call over to <unk>, Chairman and CEO, Jay Sugarman Jay.
Thanks, Jason.
At the beginning of 2019, we announced our new business strategy would be to scale, our ground lease business simplify our portfolio and strengthen our balance sheet.
We're pleased to have made excellent progress since then.
For the past two years safe holds ground lease portfolio has grown by over $2 billion, our investment in safe holdings increased in value over 300% and our legacy assets have fallen below 15% of our portfolio.
I start share price over the same period has increased over 60%.
Total returns exceeded 70 per cent.
As we look forward to the next two years our goal is to not only create further value in our ground lease business, but also to get that success fully reflected in the share price of ICR.
Additional innovations additional resources and the addition of investment grade credit ratings will all spur growth in our ground lease business with Stifel.
Since creating the modern ground lease industry four years ago, we've continued to work to deliver the most efficient lowest cost capital solutions for our customers and.
In addition, our ongoing work with real estate owners lenders and intermediaries has enabled us to continue bringing innovations that expand the ground lease ecosystem.
And the combination of new products, and a lower cost of debt and equity would say fold should enable us to capture more of this very large opportunity.
The mandated I start over the next day quarters will be to further simplify the balance sheet and to steadily take the steps necessary to maximize value from star shareholders.
With staples business ramping up further our net lease business, reaching the end of its investment period. Later this year legacy assets past peak capital and declining in the loan business only committing capital to support new ground lease deals we are well on our way to completing the migration to the ground lease business started two years ago.
That migration should be almost fully complete over the next two years and we will have a chance then to look at the architecture in place and see if there are better ways to maximize value.
Lastly, despite relatively good overall results from 2020, I would be remiss not to mention the impact Covid has had on many parts of our business and the paint. It has inflicted on many of the communities in which we work and live.
I'm proud of our team for not only handling whatever challenges came their way, but also for the many initiatives as they develop to help those less fortunate and most impacted by the pandemic.
We're hopeful the efforts taking place across the nation and the world will enable us all to return to some sense of normalcy in the near future.
Now, let me turn it over to Jeremy and have him walk through the fourth quarter and year end results Jeremy.
Thank you Jay and good morning, everyone. Let's begin on slide three with a review of the year against the three part strategy, we laid out two years ago.
As part of that strategy was to scale safe hold and build the ground lease ecosystem.
Dave hold had a strong EBITDA despite the challenges of the economic slowdown due to COVID-19.
It was the best performing Navy members stock for the second year running and the unrealized gain on our investment increased by $1 billion. During the year the $1 $6 billion at year end, which is of course not reflected in our GAAP financial results.
During 2020, we invested an additional $176 million into safe hold.
The second part of our strategy was to strengthen our balance sheet in part to ensure we're able to continue to support safe holds growth.
During 2020, we issued new bonds reduced our fixed charges extended our debt maturities, which now have a weighted average maturity of four points three years.
And increased our unencumbered asset base to $5 billion.
We retained comfortable levels of liquidity throughout the year and as at year end, we had $449 million in cash and revolver availability.
The third part of our strategy was to simplify the business.
During the year, we sold $191 million of legacy assets, reducing the net balance of that portfolio by 20%.
Turning the page to the fourth quarter, you see more on safe hold.
Fourth quarter was a very strong quarter for safe hold reflecting growing investment momentum.
Say hold close 13 ground leases the most deals that has ever closed in a quarter total.
$331 million.
As the market's understanding of the value embedded in a safe and growth in pool of ground leases continued to develop.
<unk> delivered its investors, 82% total shareholder with tons per year.
Additionally, save hold was recently awarded investment grade credit ratings from both Moody's and Fitch, which will help give it access to the investment grade unsecured bond market, helping diversify its funding sources to a deep pool of flexible efficient capital.
We believe these ratings will provide an important competitive advantage as the business continues to scale.
On slide five we provide an update on our legacy assets during.
During the quarter.
So legacy assets of $66 million in proceeds reducing the portfolio by 10%.
At the end of the quarter, our legacy portfolio totaled $725 million and this was comprised of $503 million associated with three assets in our long term goal and $222 million associated with 20 assets in our short term pool.
Slide six summarizes our investment activity during the quarter.
I start investing a total of $127 million, including $65 million in states November follow on equity offering in which we acquired an additional $1 1 million shares at the offering price of $61 a share.
We invested $47 million into loan and net lease fundings, including one safe star leasehold loan on a safe home ground lease.
In addition, we invested $8 million in Capex within our legacy asset portfolio.
We repurchased $7 million of our common stock.
Bringing our total share repurchases for the year to $48 million.
Subsequent to quarter end the board increased our remaining share repurchase authorization from $33 $8 million at year end to $50 million.
Slide seven shows the makeup of a $6 $4 billion portfolio and our cash rent collections.
<unk> was strong and similar to last quarter.
<unk> continued to collect 100 percentage of its ground rent demonstrating the safety of its cash flows.
Within all net lease portfolio as we discussed during last quarters call. We reached an agreement with our largest tenant allowance to defer approximately 60% of the rent owed to us for the nine months period between October 2020 through June 21.
Representing a total of $23 million of deferred rent.
That deferred rent will accrue with interest and we'll be repaid over two years commencing January 1st 2023.
This agreement was part of a comprehensive deal with old Valero as capital providers to ensure sufficient flexibility to manage through the business disruption created by Covid.
And as part of that deal, we terminated all $55 million forward commitments to purchase additional bowling centers.
Within the net lease portfolio outside of Valero, We received 19, 9% of all rent due during the quarter.
Further we had previously disclosed in the second quarter that we had one theater tenants who filed for bankruptcy and rejected ollie's.
During the fourth quarter. They also reinstate that lease and paid all of the back rent owed.
Okay.
We collected 89% of the interest due within our real estate finance portfolio.
The uncollected amount as last quarter was related to a single loan on a retail and entertainment property, which we classified as a nonperforming loan at the end of the third quarter.
The reduction from the 92% collection in the third quarter.
Due to a smaller overall loan portfolio following loan repayments.
Operating properties, our smallest business segment, representing only 5% of our portfolio received 85 percentage of rent collection.
This quarter our earnings presentation includes new disclosure on slide 14 that highlights our top 10 net lease tenants, which represent approximately 67% of our net lease portfolio by aggregate book book value.
And in addition, beginning next quarter given the consistency of our collections, we plan to revert back to pre Covid disclosures and no longer report quarterly cash rent and interest collections.
Slide eight details our earnings for the quarter and the year.
For the fourth quarter, I still reported a net loss of $19 $1 million.
Loss of 26 cents per share.
On an adjusted basis, we earned $11 million or 15 cents per share.
For the full year, we reported a net loss of $65 $9 million or a loss of 87 cents per share.
On an adjusted basis, we earned $48 million or <unk> 54 per share.
Of note our results from the fourth quarter include a $20 million of other income associated with two favorable settlements of outstanding legal matters offset by $19 million of losses associated with other legacy asset sales.
Finally, slide nine shows our book value per share.
Including saves Mark to market all book value per share stood at $29.05.
At the end of day yeah.
And $33 75, when adjusted for depreciation amortization and Cecil allowance.
Current stock price represents a significant discount to this value.
In conclusion, despite the challenges of the economic slowdown due to the impact of COVID-19, we made significant progress against our strategy during 2020, creating over $1 billion of incremental value for shareholders through our investment in safe hold while continuing to simplify our business and strengthen our balance sheet.
Now, let me turn it back to Jay.
Great Jeremy.
With a clear two year plan and innovative business with significant upside and a skilled team is executing on all fronts. We're looking forward to delivering on the opportunity ahead of us from continuing to drive returns for our shareholders.
Operator, let's go ahead and open it up for questions.
Thank you today's question and answer session will be conducted over the phone to ask a question. Please press one zero at this time.
We will take as many questions as time permits.
Once again, please press one zero to ask a question we.
We will pause a moment to assemble the roster.
Our first question comes from Jade Rahmani with K B W. Please go ahead.
Thank you very much for taking the questions good to speak with you.
Just thinking about investment activity and I started off balance sheet.
You know how do you think of weighing the tradeoffs between making incremental investments in safe.
Primarily in conjunction with their equity offerings.
And buying back <unk> shares I think in the quarter.
Your disclosure indicates there was a $65 million investment in safe and $7 million and I started share repurchases.
Sales I believe is trading at somewhere around three times book value.
While I start is trading at.
According to your market Mark to market book value estimate.
Like a 0.4 times, maybe those aren't the appropriate metrics, but just wondering how you're thinking about that.
Sure Jay So I think we said in the past we think both companies have.
We have significant upside are we think there is unrealized value.
I'd say fold.
We think there's an entirely.
Misunderstood component of value there that you'll hear us talk about it in 2021.
We think will add significant value added states hold so we still think it's an exceptional investment opportunity not only in the context of the value today.
But its growth prospects and certainly for high star, It's a major driver of value for them. So.
We're continuing to increase and growth of Grandma's ecosystem will.
Eventually in your significant benefits back to our store.
Over it I started look we think the value of the company does not yet fully reflect.
The business that we started.
Again has a lot of upside from here.
Foster growing business.
But we certainly think it represents a very attractive.
No place to put capital steadily done that over the past several years.
We'll continue to do that.
Our board is supportive of that all in a prudent manner.
There's no.
Urgent through here to put any stress on the balance sheet.
I went through a significant cycle of strengthening.
But we will continue to take advantage of that disparity in value with both say folded into the store.
In terms of day, the ground lease origination it seems like there was a shift back toward slightly smaller deal sizes.
Our focus on multifamily is that where you're seeing the most traction.
Are you seeing any interest in on the office side or do you view. The office sector is still too early for investors to be underwriting and are you also looking at ground leases on other property types, such as industrial which is seeing a big uplift in volumes recently.
Well, there's a lot going on there let me flip it over to Marcos, who can tell you a little bit more what are you seeing on the ground.
Hey, Jay.
So yeah, you pointed out well we did.
A record number of deals and in Q4.
I think it was the team's efforts over the summer and the early parts of the pandemic on getting the word out.
Continuing to improve our brand awareness. So there's been a push on the on the multifamily side naturally really liquid market.
Tons of capital flowing into that space, So 80% of the money we put out in Q4, it's safe was on the residential side.
Were selectively looking at office assets are again very focused on the.
The quality of the lease terms the quality of the assets and the location of the assets selectively looking at our hospitality.
As it relates to deal size I think you've seen this over the evolution of safe.
We pursue some pretty large transactions, though those happen to be pretty lumpy.
And so in the P&L in Q4, we didn't close any large transactions, but our.
Patient is that are you know.
Over the over the year in the coming years, we will continue to close on some of those large transactions that will drive volume in a specific quarter.
Is there any interest in pursuing the strategy beyond the U S internationally.
In the U K, where ground leases are prevalent.
Well, we think it's the seven trillion dollar addressable market in the U S.
We're a 3 billion.
We're going to focus our firepower in our knowledge base right now on the market we've been working on for the last four years.
There's certainly an opportunity in other markets, but I would tell you, though the focus right now should stay here.
We have lots of competitive advantage competitive advantages in the U S.
So not not not at this point Jay no no intention to take our eye off the ball.
In terms of ground lease originations, what's the target for 'twenty and 'twenty one.
The 1 billion to one and a half billion dollar.
<unk>.
Yeah, Martin as I think you've put a sort of a broad metric out there.
Yeah, Jay we what we've said is we'd look to double the portfolio over the next three years from.
Q fours.
Based on our end. So we've also said we'd be disappointed if we didn't.
How much of that.
And in terms of the ATM program that they've had in places that is the intention there.
To allow safe to match.
You know deployment with.
Oh match equity issuance with deployment or is.
Is that a placeholder, what's how should we think about the ATM program.
Yeah, I'll I'll flip it to Jeremy other than just saying, it's another tool in our Arsenal to try.
The lowest cost capital for our customers. So the more efficient we can be the more efficient capital we can provide book.
Jeremy or anything else you want to add to that.
Jay I'm not sure I'd add anything to that.
Jay the ATM is a is a common tool to enable us to access the equity capital markets in the most efficient way.
Thanks are there any other questions in the queue, otherwise I'll I'll I'll get back in.
And they are called locks you can keep going.
Okay.
Are there any capital deployment plans in the real estate finance net lease segment that youre thinking about for for the coming year.
Chris you want to take that.
Yeah. This is Jay meant as Jay mentioned Jay.
On the finance side, we're going to continue to support the ground lease ecosystem, we closed a safe star one stop capital solution in Q4, So we're continuing to.
Drive that product so that will be.
What we do on the finance side.
On the net lease side the investment window runs through.
Into the third quarter of this year.
So we will continue to deploy and find opportunities until that juncture.
And on legacy assets are there targets for dispositions this year.
Yeah look I think the goal is to continue to drive that number down we wanted to get it down into the single digits over this two year period. So.
The asset management team has.
<unk> been very effective.
Drinking about portfolio receiver continuing.
As you know the big three Asbury Park, Magnolia Green and Grand.
And does that make up the majority of the remaining assets. So any progress on those will be the determining factor.
Any changes on the credit outlook and the loan book.
No no no specific changes, obviously, COVID-19 Oh does impact them.
Particularly the hospitality side of our business. So that's the one we're watching book.
We're hopeful that.
The vaccination process continues apace and.
I know a lot of.
People are feeling like once a comfort level psychological comfort levels, but the country or you could see a burst of activity that will obviously help hospitality, particularly.
Particularly the kind of assets that are.
Folks can travel too quickly so.
So we think you know.
All eyes on the economy overall, just to see when we reach that psychological comfort point.
But nothing's really changed since we were a couple of quarters ago.
And then just lastly on the safe carrot.
I was wondering if there's a timeline that youre thinking about with respect to I mean, you keep using these.
Somewhat ambiguous terms in terms of.
Showing the market the value and things of that nature not sure how how that will transpire I'm sure you have a plan in mind, but.
Is there a timeline over which we should be expecting.
Some kind of event or trigger point to take place.
I don't I don't think it's a trigger point Jay if you think back to the evolution of our whole business. When we started people said well we want to see if the customers understand these capital efficiency friction cost reduction risk reduction.
A while for us to educate the market for people to think about it to see it in action and finally go yeah I'd actually works, it's actually pretty good on the repeat customer business really kind of sunk the book.
People you got over their initial questions. Then we saw it on me.
Yeah.
Qualitative and quantitative measures of the cash flow streams.
You can remember back people were trying to apply equity cap rates to ground leases.
We said that doesn't make any sense, but most comparable.
Assets or long term ultra high grade bonds, ultimately Green Street came out and confirmed that that was the best benchmark when people start to use that methodology because it makes sense. It's the most logical it matches credit and.
Tenor and starting at 35 per cent.
Ground leased the total value it was a very different proposition than starting at 100 per cent and using the same discount rate for those two investments.
It just doesn't make sense. So it takes a period of time for us to.
Really to simplify the message down to the basics to get people to use the same tools they use in other markets.
Total evaluate something that they probably haven't had a chance to investing before where the first.
Nationally scaled institutional quality, where the first public company.
We're the first chance most investors get to invest in a very.
Very high quality institutional our ground lease portfolio that not only on a static basis is very valuable but continues to grow we think exponentially. So theres a lot of dynamics in getting people to see what we saw four years ago.
As we get bigger as our footprint grows it just gets easier.
Got a lot of time with the rating agencies, helping them see through the same lens that they use them a lot of other companies to see ground leases in that context.
You saw the result of that so at each point along the way.
You know, we try to really simplify.
The core principles of the business with things that attracted us to it but.
The things that happened when you scale and grow this business are not obvious and sometimes we have to sit down ourselves and go through it multiple times to really understand why this is really simple. This is really analogous to things we do all over the place from reimbursement worldwide why can't we get people to see it this way.
You know we've been through three or four of these processes.
You know our history it doesn't happen with a trigger point it happens slowly and then it happened suddenly.
I think what you'll see here is the same dynamic or we will be very thoughtful in trying to prevent or present, a very simple template more and more people will see that template to think about it study or try to compare it try to shoot holes in it.
And ultimately we think they will come back and say Wow. This is actually the right way to look at it this makes total sense.
We've made 2021, a year certainly, let's say you fold, where we want that message to be.
Clear and simple and resonate with as many investors as possible.
And so I think what you'll see is over certainly the duration of this year a real attempt to make this a simple component of value that's faithful, but everybody will understand.
It won't happen overnight, but it will happen and so at the same dynamic we've seen that has driven some of the success with customers. Some are obsessed with rating agencies some success.
On the rent stream side, we think we'll just now naturally a true.
Played into what we're doing.
Well the next big piece and I think that's that's why we're so excited going into 2021 for both seafood.
Shareholders, but also supply star shareholders. Because we think this is a big component of the value that we can get realized for both companies.
But we shouldn't be thinking about some kind of catalyst like like a securitization or an asset sale or portfolio refinance.
Or some kind of trigger point that.
Unlocks in crystallizes.
The value that you're speaking about.
Yeah, No I got it.
I think we've learned from the process over the last four years.
How to make these things.
Simple and resume its rarely in a single meeting or a single moment.
Have to educate the market first to help give people a chance to really think through how best to communicate inside their own organisations weight. This is just like this or this is how we value everything why would this be different so.
I think that's still the right process certainly at the end of that education process, there could be something more very specific but to be honest, what we're seeing today.
Data is it's the education part of the process that takes the time, Inc, and delivers the results.
Certainly there are lots of things, we're going to add to the story lots of innovations that youre going to be hearing about.
But this was relatively straightforward and simple we just need to go out and help educate the market.
Thank you for taking the questions.
Our next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Jay I think you touched on a little bit in one of your responses to Jay but can you touch on the roughly 200 million of hotel loans kind of the exposure there any sequential changes you saw and I know you mentioned kind of something you're watching closely with the vaccine are reopening but where.
Where you are with where things stand with those those properties.
Yeah.
Yeah look it through you know the.
The summer there was you know quite a bit of optimism.
The third wave or a second wave depending on how you characterize it I mean, it was much more severe than.
I think a lot of people hoped and so you saw a pull back and now I think as the spring.
Summer around the corner I think there was optimism again, you know the good news about hotels as well.
Yeah, Mark it changes every night and so we saw a burst of activity we've.
We've seen some of that cool off where are we now.
All are optimistic they will see a return to more normal activity later in this year when it actually happens again I think it's almost a psychological thing, but we think the long term assets certainly justify the values.
If we can get back from some sense of normalcy.
No that part of the portfolio, we think we will.
Simply become a source of cash to continue bromine from its ecosystem.
Okay.
Great and you know you guys touched on Valero with the.
The agreement there, but can you touch on the movie theater exposure I know what one is listed on the new breakout all of 14 I appreciate you.
You guys, providing that but can you talk about the movie theater exposure, how conversations with sponsors are growing there and.
You know what the concerns are to that.
Yeah look that's an industry, that's definitely suffering and we think there have been some changes in that industry, but maybe not.
Just go back to normal.
The rest of the world does get back to normal so.
We're studying we're learning we're talking with our tenants to really understand how they're dealing with it.
Everything from the Paramount decree.
On to some of the new streaming services potentially wanting to be in the exhibition business lots of things going back and forth. We were happy to see a M. C make significant strides in terms of their balance sheet.
There's still plenty of challenges ahead, but.
The team will need to be creative and adapt to the new world, but they've got a very valuable footprint.
We're probably not the ones to tell you where the movie industry will be in the next two or three or four years, but I'm certainly rethink our tenants are working hard to try to figure that out.
And you've got you know assets that there.
There should be the beneficiaries when they do figure it out so where.
We're hanging tight we've called that out in past calls because we think there has been real systemic change in industry and you know it makes it a little harder for us to project a book.
But again you saw some cash.
Capital structure hearing over the last quarter or so, but that's a good thing.
Great and my final question from me you know I appreciate the comments earlier about stock repurchases in sales marketing the book for today it puts it or adjusted book around 38. So.
Certainly seems attractive per continued repurchases.
But just to shift to capital Capex. When you talk about the Capex that you know Asbury Magnolia Green Investor and they may need over the course of this year.
Yeah. It is not material in the Grand scheme of things Stephen It's we're past peak.
Cancel commitments at Magnolia and Asbury.
It's just not going to be.
Meaningful number in the Grand scheme of things, but it's there.
Probably in the order of 10 million 20 million. If you if things go really well, but we expect to take significantly more money out of those assets.
Moving forward and so it shouldn't shouldn't really be meaningful.
Great. Thanks for the color Jay.
Yeah.
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Mr. Fooks, we have no further questions at this time.
Okay, great. Thank you if anyone else from our calls should have additional questions on today's earnings release, Please feel free to just contact me indirectly.
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