Q1 2021 iStar Inc Earnings Call

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Good morning, and welcome to I start the first quarter 2021 earnings conference call. If he the assistance during todays call. Please press star zero, if you'd like to ask a question. Please press one.

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As a reminder, today's conference is being recorded at this time for opening remarks, and introductions I would like to turn the conference over to Jason Fooks Senior Vice President of Investor.

The Investor Relations and marketing. Please go ahead Sir.

Thank you and good morning, everyone. Thank you for joining us today. The view I starts first quarter 2021 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, Mark The Silverado, 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 the slides, which can be found on our website and I start dot com in the investors section.

There'll be a replay of the call beginning of two P. M Eastern time today the.

The replay is accessible on our website or by dialing one 806 20710 of four one with the confirmation code of 4108868.

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.

<unk> 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 start disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.

Now I would like to turn the call over to <unk>, Chairman and CEO, Jay Sugarman Jay.

Thanks, Jason and good morning, everyone.

Kicked off 2021 by continuing to focus on building, our ground lease business and reducing our legacy asset portfolio.

Consistent with our previously announced plan to use the next two years to ensure the full value of our portfolio and strategy is reflected in the price of <unk> shares.

During the first quarter safe hold continued to expand its business and achieve strong debut of credit ratings based on the underlying principal safety of its ground leased assets the growing scale and diversification of its portfolio.

And the conservative balance sheet strategies that have followed.

Importantly, the Staples has also begun the highlight for shareholders a framework for value and gets portfolio of residual ownership interest that has continued to grow in scale as its portfolio of ground leases has grown.

By growing say fold, increasing its capital efficiency and spotlighting, what we believe has significant value not yet reflected in the share price, we expect to be able to capture additional value for our store and create additional games on are very sizable ownership stake insightful.

While continuing to grow the modern ground lease business, we've also been reducing our exposure to legacy assets.

Progress in monetizing both the long term and short term pools of legacy assets has reduced spend as a percentage of the portfolio below our 15% target.

And we continue to redeploy repatriated capital into the ground lease ecosystem.

And then two prudent share repurchases.

With that quick recap, let me turn it over to Jeremy for more detail on the quarter Jeremy.

Thank you Jay and good morning, everyone. My comments will refer to the earnings presentation. We published this morning on our website.

I'll begin on slide three with an update on our strategy of scaling safe hold strengthening our balance sheet and simplifying our business.

Our investment in safe hold stands at $2 $4 billion, which represents a $1 5 billion unrealized gain for ice does share holders.

The balance sheet remains strong.

With $4 $8 billion of unencumbered assets and a weighted average debt maturity of four one years allow.

The allowing us significant financial flexibility in support of our strategy.

And we continued to monetize our legacy asset portfolio with $56 million of sale proceeds representing a net 6% reduction in that portfolio.

On slide four you can see the safe hold so steady investment activity during the quarter of.

Originating $166 million of new ground leases with the weighted average effective yield of five 3%.

Save hold again express confidence in achieving its medium term target of growing its portfolio to at least $6 billion.

By the end of 2023.

Stapled to use the newly awarded investment grade ratings to recast is price $600 million secured revolving credit facility to a new 1 billion dollar unsecured facility.

Which also resulted in a rate reduction of 30 basis points.

Yesterday <unk> issued its inaugural unsecured bond.

$400 million of 10 year offering priced at T plus 125 with robust demand.

Access to the unsecured financing market should provide safe hole with new competitive advantages to deliver its capital even more efficiently to its customers as it continues to scale its business.

And at the end of the court of Staples had <unk>.

$770 million of liquidity from cash on hand, and revolver availability to pursue new transactions.

Yeah.

To slide five.

During the quarter, we sold legacy assets for a total of $56 million Rec.

Recognizing of $7 million gain and reducing the size of the total legacy asset portfolio by a net 6% to $681 million.

The remaining legacy portfolio is composed of 19 assets in our short term pool with the gross book value of $199 million.

Which is down $23 million from $222 million last quarter.

And three larger assets within our long term pool with the gross book value of $482 million down $21 million from $503 million last quarter.

On slide six you can see that we invested $105 million during the quarter.

$88 million, primarily within our loan and net lease portfolio, including two investments made in connection with the safe Star One stop capital solution.

$12 million repurchasing our stock.

And $5 million of Capex.

Right.

Slide seven shows our portfolio.

Which stands at $6 3 billion inclusive of the safe holds the market value at.

The end of the quarter.

Our investments in safe hold of net lease represented approximately 75% of our portfolio.

And we continue to monetize our real estate finance portfolio, which is down $159 million from last quarter.

And now represents less than 10% of our assets.

Land and development decreased from the fourth quarter by a net $42 million as a result of the legacy asset sales just discussed.

Slide eight details our earnings.

We reported a net loss for the quarter.

Of zero point of $4 million.

The loss of <unk> <unk> per share.

Compared to a net loss of 21 $5 million or a loss of 28 cents per share in the same period last year.

This quarter adjusted earnings were $22 $7 million of <unk> 30 per share as compared to $10 7 million or <unk> 14 per share in the prior year period.

You can see from the income statement on slide 21, the earnings were notably impacted by an $11 million reduction in stock based compensation expenses, and an $8 million swing in provisions for loan losses.

Stock based compensation expense in the prior year period was driven by the mark to market impact on certain of our IP long term incentive plans from the significant appreciation in share safe host share price during the quarter.

And the swing in provisions for loan losses was driven partly by reserve recoveries because loans paid off this quarter and partly by the evolution of economic forecast used in our seasonal modeling rapidly worsening in Q1, 2020 and becoming more positive.

In this quarter.

Yeah.

Our weighted average share count decreased by $3 5 million shares over the past year as a result of stock repurchases.

Adjusted earnings per share of this quarter was also impacted by approximately 3 million shares of dilution from our September 2022 convertible bonds that are now in the money with the strike price of $14 14 per share.

The dilution calculation is based on net share settlement.

Meaning the $288 million of principal will be repaid in cash and any excess conversion value of above principle will be settled with stock.

Slide nine shows our book value per share.

And illustrates the value created through safe hold but not recognized in our reported financial statements.

Including saves market value as of March 31st.

Common equity value per share is $26 63, and when adjusted for depreciation amortization and Cecil allowance of our common equity value per share stands at 31 31.

This quarter the share count also includes the impact of the convertible dilution I previously mentioned.

In conclusion of the quarter represented continued progress on our goals with steady investment activity at safe hole and legacy asset sales.

With that let me hand, it back to Jay.

Alright, Jeremy.

Just to sum up with the.

Economy on the path to reopening and the real estate markets being more transactional activity with the guy.

The stars well positioned to execute the strategy, helping safely continue to grow in scale and value and delivering strong returns to our star shareholders.

Okay, 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 of time permit.

Once again, please press one zero would ask the question.

We will pause just a moment to assemble the roster.

Our first question comes from Jade Rahmani with K BW. Please go ahead.

Thank you very much looks like say fold is continuing to make progress with its inaugural investment grade bond issuance. So congratulations on that was wondering if you've looked at the company in the U K the ground lease company.

They've issued Securitizations I believe the fair hold the securitization limited.

Have you looked at that structure and does that potentially offer any template.

Or how investors might think about further unlocking of the embedded value in the ground lease portfolio.

Hi, Jay Thanks, Yeah no.

Looked at that in the past I think we believe the unsecured format is actually of the past for delivering what we think is valuable to our customers.

So we have the viewpoint since we went public the <unk>.

Being the.

Yeah, the most flexible, creating the lowest cost longer term capital.

Best positions us to create this whole new modern ground lease industry at scale.

It's not per se there arent opportunities to look at.

The other structures to see if they can create even more benefits book.

We worked hard to get to the.

Investment grade unsecured.

The ratings, because we think kind of right now that is the best way to open this mark at all.

Thank you for that you've been discussing the.

The value in the portfolio and the safe hold portfolio the.

Every rights.

And plans to enunciate, what do you believe is not appreciated by the market is the main action, we should expect at least over the next two years.

As part of <unk> strategic plan to come in the form of communication or is there some kind of capital of structural action that may also take place to unlock that value.

I think step one is definitely the education and communication, where just the gambling out what we have believed would unlock that value for city of full shareholders.

And obviously that reflects back into all the stars ownership stakes value of.

So we're just at the very very beginning I think were you know a week or two into this.

And we got a quite positive response of people are starting to really dig in to think about it.

I think they see you know a little more clearly what we have been they're tracking for them is the very substantial assets and they'll say fold.

Value equation and one that we have historically said you know we're not going to talk about total it's large enough diversified enough. That's proved out of most of the variables.

But it'll be obvious not only too.

The real estate centric investors, but basically of investors across almost any investment.

Strategy.

We think that's the the next big exciting part of the city of Hope story.

The business continues to grow all of that growth continues to add value throughout the portfolio.

But we did expect them.

Finally shared with the market why we think there's a big part of about a store that's not yet being valued so.

We'll continue to educate and communicate well.

There are a number of ways, but certainly you could envision capturing that value separate and apart from the cash flow stream of.

The loan portfolio.

But I think the you have to start with kind of.

Giving people the tools.

Across the.

The shareholder base that we have an even more expanded one we want to have we want to make sure people understand what it is why we're so excited.

We're excited about it and then we can start thinking about.

And even a more optimal way to.

The capture that value for shareholders.

Thanks, very much could you provide any color on the 8 million 88 million of capital deployment and the real estate finance and net lease segment. I think you mentioned two of the deals were in the safe start program, but just wondering.

I'm wondering if you could provide some color on them.

Yeah, we continue to look for places, where we can enhance the overall ground lease ecosystem of one place we've seen with the certain customers.

<unk> is to provide both the ground lease from sorry fold and is the.

The first mortgage loan from five star.

We don't do it that often because the the markets typically or a faster growth of liquid enough that they did the the best source of capital for the first mortgage book one of the opportunity presents itself.

We think the risk adjusted returns are quite attractive there as well so.

So that's the the lending piece of it in the well the net lease side, we continue to.

Finish out the investment period for all of our joint venture with the sovereign wealth fund.

We continue to see opportunities about market share before but the investment period runs out later this year.

Okay.

Thanks, very much and just finally on credits any changes in the outlook.

With.

Back to the the loan portfolio.

As of as of today.

Well I think as Jeremy said in his remarks, we received quite a number of pay offs and were able to reverse some reserves based on the the market environment today versus where it's been we see the market is starting to.

It will open up get a little more liquid.

Yeah.

Let's say there aren't going to the challenges across the different parts of the.

Commercial real estate World book.

Certainly the the liquidity in the market has increased significantly.

So we continue to see our customers borrowers on the loan book of access capital.

To repay of payoffs down.

The improved whatever.

The credit position, we have so you'll see those reserves this quarter.

On the wild as we see those market conditions improving.

Thanks for taking the questions.

Thanks, Joe.

Our next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning.

Jay I appreciate the comments earlier on safe and certainly the growth opportunity last week of I wanted to touch here on the.

The ice star of legacy stuff, a lot of progress looks like sales and selling those at the slight gains actually during the quarter of book.

The remaining <unk>.

Can you talk about.

You know things that.

Yeah, how much where resolutions or maybe you know monetization timelines delayed with COVID-19 now that that's kind of the year back in and you can look in the rearview mirror, even though it's certainly not complete.

Completely behind us, but you know how many assets we're able to continue the kind of move is at the on the on <unk>.

Interrupted pace towards the resolution and how many of those legacy is where we're really extended in.

By how much.

Yeah. Thanks, there I guess you know the the toughest part of COVID-19 certainly it was about the of March to the Labor day period out of the markets.

Much of frozen so not not of lot of progress through that period on somebody else. It's the you know we had been teeing up coming out of the Labor day, we certainly saw the beginnings of a revival in all of those conversations of miles we head into <unk>.

You know of 2021 certainly the the the tone of it was much better.

The level of engagement is much higher so we think we lost you know maybe six nine.

Months in some of those conversations, but I'm pretty pleased actually of our asset management teams from doing a great job of.

Preparing things putting them on the mark of monetizing them, you've seen most of the successes Jeremy walk through just in terms of reducing the portfolio.

<unk> made some progress.

So yeah, we talked about peak Asbury.

Being around in the latter part of last year. So you've seen some good progress there and reducing our capital. So on all fronts. When you feel like the certainly the direction is good and positive.

Yeah, some of the stuff kind of proppant a little bit earlier, but you know candidly.

Given ourselves two year window.

The move all of these.

Sales piece was down the the board in May.

Right now all of the vectors all pointing in the right direction.

Thanks for those comments and when you think about the.

Uses of cash between dividends buyback and buying safe shares the others.

Been a number of points in the past year or two where you've been able to do concurrent private placements of invest significant amounts of money into safe.

With the new debt in place, there and kind of the growth outlook.

That opportunity I don't know it may not happen as frequently or.

And as much size, but we'll talk about how you think about it.

The allocation of of dividend buybacks and say purchases.

Maybe what the levels you can really.

Focus when we're looking at those options.

Sure I mean, we start with the premise of of what we wanted to build a really strong balance sheet and create a.

Very Oh safe corridor, no pun intended to help scale the safe.

So you fold into what we think is kind of all the next big milestone, which is about $5 billion of ground leases.

So that's really been the goal first and foremost to make sure we had that strong.

Foundation of that.

When we create excess capital.

Do have some choices to make.

We deploy money into things of that expand the ground lease ecosystem.

Rethink of enhances the value of our overall safe position and then we prudently use of to buy in shares because we think theres still materially undervalued not just the value of safe whole than the rest of our portfolio of today, but as you heard US talk about we think there's a whole another leg to the state full valuation.

All of that isn't even reflective of the share price of any material way today. So we've.

We've got good King really created a double barrel the fact.

Continuing to grow let's say for them continuing to get the market to understand the full value of what it's building and then you know be thoughtful and prudent about they're buying shares when it makes sense and so whether it's safe whether it's star.

We think you know all of our our mission is pretty clear right create the value of everybody can capture for shareholders.

Great and then I guess lastly on the buyback buyback Jay is there anything from a structural or covenant standpoint that the limits how much of our shares you'd be willing to repurchase.

Yeah look again, it's it's the it's a really a question of prudence in the trading was very strong window.

To continue executing all of our business plan.

Other than saying, we want to be prudent and we want to make sure of it we have a very strong balance sheet.

That's our commitment to the.

Both the board and our creditors.

I think you know we have some flexibility we've been building liquidity.

Think we've grown substantial value one of the balance sheet through the sales position. So I think it's really just a matter of prudence at this point in terms of executing.

The optimal strategy to again create the value capture of the value we.

We don't want to do anything that might upset.

Of that Applecart.

Great well congratulations on the progress from Q1 and I appreciate the update this morning.

Thanks Jay.

Ladies and gentlemen, if you do wish to ask the question. Please press one zero at this time.

Mr. Fooks, we have no further question.

Okay, great. Thank you for tuning in and if you share of any additional questions on today's earnings release, Please feel free to contact me directly of.

Operator would you please give the conference call replay instructions once again.

Yes. Thank you ladies and gentlemen, this conference will be available for replay after two P. M. Eastern time today through May 13th at Midnight, you May access the executive replay system at anytime by dialing 18662071 day of four one and entering the access code 410886.

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