Q2 2021 iStar Inc Earnings Call

Good morning, and welcome to I start second quarter 2021 earnings conference call. If you need assistance during todays call. Please press star zero.

If you'd like to ask a question. Please press 1 zero, that's 1 zero to ask a question.

As a reminder, today's conference is being recorded 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 go ahead Sir.

Thank you and good morning, everyone. Thank you for joining US today for you I started second quarter 2021 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, and Marcos Alvarado, our President and Chief investment Officer.

This morning, we published an earnings presentation, highlighting our results and our call rule for these 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 at 1 P M eastern time today.

The replay is accessible on our website or by dialing 186620710 for 1 with the confirmation code of 2859281.

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.

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

Now I'd like to turn the call over to <unk>, Chairman and CEO, Jay Sugarman, Jay Thanks, Jason and thank you all for joining us today.

Second quarter saw continued progress on our stated strategy, which enabled us to increase the scale and value of our ground lease business and see that value more fully reflected in the shares of ice star.

During the quarter the value of our investment in safe hold increased several hundred million dollars are stapled share price benefited from increasing origination activity and a growing recognition of its unique value creating strategies.

This together with our progress that I started our legacy asset monetization and capital redeployment plans helped us highlight I stars growing value for investors and helped our share has performed strongly during the quarter.

Our strategy to scale say fold and streamline I Star also led us to begin exploring the market for our net lease portfolio and platform.

And while this process is not likely to be completed before the end of the year. This has the potential to represent another meaningful step in our 2 year plan seeking to maximize value for shareholders.

We believe the market should find the long term cash flows and strong track record of our net lease platform quite attractive but.

Well, we don't expect to have any further information to share until sometime in the fourth quarter.

Based on the positive momentum in our business, we increased our dividend another 14% during the quarter and continued to look for ways to attractively deploy capital internally externally and then our own capital structure.

With further asset monetization since the end of the quarter, we should be in a strong position to continue making accretive capital decisions.

And with that let's have Marcos take you through the details Marcos.

Thanks, Jay and good morning, everyone. Let me begin on slide 3.

During the second quarter, we made steady progress on our 3 pronged strategy, which we laid out at the beginning of the year first.

First and foremost we continue to scale safe and expand the ground lease ecosystem seeing solid investment activity, while growing our suite of products at the same time, we are working with the investment community to help the market understand the value of the safe enterprise as it scales.

Second we continue to maintain a strong balance sheet. So we have the financial strength and flexibility to execute on our strategy during.

During the quarter Fitch recognized the improvement and upgraded our credit rating to double D. While S&P upgraded their credit outlook to stable.

And finally, we saw momentum on the monetization of our legacy assets began a process to explore interest in our net lease portfolio and raised our common stock dividend by 14% to an annualized 50 per share.

All with the intent to simplify the business and shrink the gap between our view of intrinsic value and where the stock has been trading.

Yeah.

Slide 4 provides more detail on safety performance.

Second quarter was a solid quarter for safe.

We closed on $222 million of ground leases and grew unrealized capital appreciation by $374 million.

Safe hold also expanded its suite of offerings in Q2 with the launch of ground lease plus a new innovative product, which provides customers with ground lease capital earlier in the lifecycle of an asset I will discuss more about our ground lease plus activity in a moment.

Safe hold utilized its recently awarded investment grade ratings for its successful debut unsecured bond offering in which it issued 400 million of 2.8% senior notes due 2031.

The market value of our investment in safe based on the June 30 closing price of $78.50 per share increased to nearly $2.8 billion, bringing our unrealized gain to $1.7 billion.

On slide 5 we provide an update on our legacy assets.

During the quarter, we sold legacy assets for $34 million of proceeds generating a 2 and a half million dollars game in.

In addition, you can see highlighted on the slide in Green that subsequent to quarter end, we sold legacy assets for an additional 167 million of proceeds which should generate an approximate $30 million gain in the third quarter.

Also as Jay mentioned during the second quarter, we announced that we engaged eastdil to explore market interest in our net lease portfolio. We are in the very early stages of this process.

Slide 6 summarizes our investment activity for the quarter.

I Star invested a total of $163 million during the second quarter. This included $25 million of open market safe share purchases $7 million of Capex on legacy assets and $20 million or 1.1 million shares of ice star stock buybacks the board.

Has approved our stock buyback authorization to $50 million as of today.

Also during the quarter, we invested $111 million in loans net lease and ground lease plus.

For our first ground lease plus transactions I star originated 2 ground leases totaling $84 million on adjacent pre development land parcels in the CBD of Austin, Texas.

These ground leases also contain an additional conditional funding obligation of $166 million, bringing the total to $250 million.

I would like to take a moment to describe our new ground lease plus concept in a bit more detail.

As we have continued to evolve the modern ground lease space, we recognized that while our customers would benefit from a fishing ground lease capital solutions for their pre development assets.

Those same assets generally do not meet staples investment criteria.

The ground lease product was designed to fill that void.

And a ground lease plus investment I star enters into 2 arrangements. The first is the origination of the ground lease with a third party ground tenant our customer and the second is a purchase agreement with faithful to acquire that ground lease at a future day.

The ground lease provides for an initial investment for my star and an additional upside the obligation to provide construction funds for the proposed development.

That upsize obligation is conditioned upon our customer achieving certain development milestones within a defined timeframe.

Which we refer to as being shovel ready for vertical construction the.

The achievement of those development milestones also serves to qualify the asset for safe holds investment and trigger say folds obligation to purchase the ground lease for my Star.

Our ground lease plus product further evidences <unk> commitment to the ground lease ecosystem and we believe creates a win win win.

First I star is able to generate an attractive risk adjusted return through a combination of ground rent and a gain on selling the asset to Saiful second safe obtains a pipeline of high quality ground leases that meets its investment criteria and finally, and most importantly, our customers benefit from our efficient.

99 year ground lease capital earlier in the lifecycle of their assets.

Turning to slide 7 shows the makeup of our portfolio.

At the end of the second quarter, our total portfolio stood at $6.5 billion, we continue to monetize our real estate financing.

Which is down by a net $79 million during the quarter and now represents $460 million or 7% of our portfolio.

And pro forma for the sales we completed subsequent to the end of the quarter, our legacy asset balance is approximately 8% of our portfolio.

Slide 8 details our earnings result.

We reported a net loss for the quarter of $19.5 million for loss of 27 per share compared to a net loss of $23.3 million or a loss of 31 per share in the same period last year.

Adjusted earnings were $12 million for <unk> 15 per share an improved improvement from a loss of $2.9 million or for per share in the prior year period.

Lastly, slide 9 shows our book value per share and illustrates the value created through say fall, but not recognized in our reported financial statements.

Including saves Mark to market value as of June 30, our book value per share stood at $29.59 per share at the end of the quarter.

And at $34.37 per share when adjusted for depreciation amortization and the Cecil allowance.

While we are pleased to see the stock momentum year to date. We also recognize we still have work to do as we believe there remains a gap between where the stock is trading and intrinsic value.

In conclusion this quarter represented encouraging progress on our strategy with solid investment activity and innovation at safe and continued legacy asset monetization and with that let me turn it back to Jay.

Great. Thanks Marcus.

I think with that details the backdrop. It sounds like we can just go ahead and open it up for questions operator.

Thank you today's question and answer session will be conducted over the phone to ask a question. Please press 1 zero at this time we.

We will take as many questions as time permits.

Once again, please press 1 zero to ask a question.

We will pause a moment to assemble the roster.

Our first question comes from Jade Rahmani with Keith W. Please go ahead.

Thank you very much.

You talk to which legacy assets were sold in the quarter and post quarter end as you disclosed and why are you seeing the most traction there.

What do you think the outlook is in terms of timing of monetization of those assets has that accelerated at all.

Yeah, Jay I think you know we've been working on a.

Pretty diligently trying to work through the short term assets.

Couple of sold in the quarter couple sold post quarter.

Actually some other ones that we've spent a lot of time and a lot of management resources getting prepared for sale.

So we're delighted to see those go.

No.

Small parcels of land some operating properties.

You see in the deck.

You know 1 of the long term larger long term assets.

So we're making good progress across all fronts on that it's been a you know.

A time consuming process for each 1 that sells is a good day for us.

We still got more to go but the team continues to work on those assets really at the end of our 2 year plan, we think Asbury Magnolia Green are the only 2 relevant assets.

Asbury had another good quarter Magnolia had another good quarter, so theyre tracking and they just happened to be on a longer lead time kind of.

Monetization schedule, so I think youll see us continue to move through those short term assets in the next 18 months and then we will have.

I've done a lot of good work at Asbury Magnolia to put those on the same kind of track.

Longer term.

And so.

What was the third.

You said that 1 of the larger and long term assets. There was some progress on was that Grand Vista or <unk>.

What was that.

So that's been net consult.

Yeah.

Okay. Thank you for that.

<unk>.

I guess in terms of looking at the valuation of the company. Overall, you guys talk a lot about that tens of other UCA.

And even looking at <unk> earlier days I think for proponent of the different discounted dividend model. What do you think the right way is to value istar today.

And do you believe that the value of the legacy assets post Covid has increased.

Yeah look we think for markers, we put out in the market Jay are relevant but.

Obviously, the driving force for the last couple of years has been our investment in this ground lease.

Creation, we think there is enormous upside.

We're still early in that game.

I think as Marcos noted, we've done very well so far but we have very high aspirations for what that business can be when we look around and see what are the dominant companies and all of the sectors in real estate size wise or you know, we've got a lot of good opportunity and whites.

Pace ahead of us so.

Our mandates are really to grow that business.

That's going to create enormous value given our shareholding position on our management contract.

And at the same time maximize the value.

As we see opportunities arise in our legacy assets in our non core assets.

I don't think post COVID-19 per se or even pre COVID-19, we would've said legacy assets are the main events or not.

Our asset management teams have done a great job working through those and we're fortunate in many cases to generate gains, but you've heard me say over the years there'll be winners there'll be losers. It will get our money out we'll redeploy it and that's really the main event.

So were much more pleased frankly by the success, we're having on the ground lease ecosystem business.

That's the real driver of the business going forward and the fuel coming out of some of the legacy assets.

It just gives us even more runway to build that business.

I think with net lease its a little bit different we see our JV with our partner.

The investment period runs out later this year.

So this was a natural time in any event, but we're also seeing a very strong bid.

For the kind of assets from the track record we've built up.

So theres a natural interest on our part in terms of maximizing value to just see where the market is.

So that.

Yeah at some point along the curve anyway, but we're seeing a very attractive market developing potentially for the kind of assets we own.

We've had some very good news on our largest.

Net lease tenant bolero, so all of those things came together to make it.

Pretty easy decision for at least <unk>.

Flor what might be possible there and then as you know the the loan book to sort of running off on its own continue.

Continue to see our customers do their thing make their assets worth more and maybe that's the 1 area where the post COVID-19 rebound.

You know has made the financing markets a lot more liquid and our customers are taking advantage of some of that low price capital. So we have seen some payoffs there.

You know that have really been the result of a reopening of the real estate finance markets.

And then the net lease side.

Do you expect for sale this year.

To happen or is it still very early in the exploratory process and if it did happen.

And I get a lot from investors does that accelerate a potential combination with safe in 2022.

Yeah, a lot of a lot of good questions. In there first you know this is an exploration.

We have not committed to do any specific course of action. So we'll just.

Take it 1 piece at a time, we think the market will like what we're.

Got to show them, but no decisions can be made until we see how that goes whether it makes more sense to do things in total or in pieces or in some other structured fashion. So let's see how that plays out and then we'll turn our attention to how do we use.

What we learned from that to help maximize value.

And in the remaining period of our 2 year plan, we think theres going to be lots of options on the table lots of opportunities both within <unk> and with Saiful to do some smart capital allocation.

We think there is opportunities internally externally and in our own capital structure, but.

We're going to we're going to take it 1 step at a time Jay right. Now. This is a you know a lot of.

Good things happening.

We're gonna let them play out so we get the best information back and then you'll see us.

Coming to you guys with you know a very thoughtful plan on.

How that might impact.

What we're gonna do architecturally between say from Star, We've said safe needs for scale, a little bit larger to really have that conversation in.

In the right way that we put out a marker that should have north of $5 billion of ground leases in terms of its scale.

So all of these things are moving down the field nicely.

But can't rush, 1 or the other so we're letting them all develop is as the market gives us opportunities and we think the other net lease piece is a big piece, but safe scaling is also a big piece.

Thanks for taking the questions.

Our next question comes from Matthew Howlett with B Riley. Please go ahead.

Thanks for taking my question Jay just on the on the priority of capital deployment and capital allocation, we have a lot yet with the ground lease plus program now kicking in you obviously repurchasing stock.

And then potentially save it could be more investments in save in the back half for the year. How are you thinking about capital allocation in the back half for the year, What's what do you how do you prioritize.

Yes, we always started with let's build a really strong balance sheet.

We know there are good things are happening.

<unk> happening in the company and the last thing we want to do is in any way jeopardize that corridor of opportunity. So we started with the premise of keep the balance sheet really strong I think Marcos mentioned some other things.

We've been working on have been recognized by the agencies.

2 is to look across the portfolio of opportunities and we're trying to focus on things that are go forward businesses and deemphasize things that we think are non core we've reached peak Asbury sometime last year. So we're seeing capital come out about we will see the same thing in Magnolia Green are relatively soon.

<unk>.

The loan book is providing capital so as that money comes in Matt you're exactly right we look across.

Whereas I start trading, whereas saiful trading where our different parts of the capital structure.

And then we looked at externally what can we do to create value where are they accretive opportunities and clearly right now and you know we keep re emphasizing this ground lease is a massive opportunity.

We have done a good job.

Basically, creating this modern ground lease industry, but we think there are a lot more legs to that story.

You heard about 1 of them ground lease plus there are others. We are working on thinking about with customers to make us the best longest term capital available in the marketplace. When it comes to the land under buildings and I think that story is not yet fully recognized and not yet fully played out so you'll see us.

To commit capital there we think there's a lot of upside for that we think is starts still undervalued. We should think safe is still undervalued.

On many many metrics that we look at.

So lots of places to put capital and I think all of them are good choices, but we'll be thoughtful each time, we have to make that decision, whereas the 1 that moves the ball the furthest or what's what's going to have the biggest impact ground lease right. Now is the story has been for the last couple of years.

Different parts of the ground lease ecosystem of debt.

We have been experimenting with may turn out to be really attractive for capital allocation, but right now the focus is scale saiful streamline this I start balance sheet. So we have really simple clear directions.

In terms of where we wanted to deploy capital and how we want to deploy it and set us up for 2022. So we can continue this value maximization journey.

We set out gave ourselves 2 years, our board gave us a mandate in 2 years, let's see the value of creating recognized.

We're 6.7 months into that so far so good but we've got a lot more work to do and a lot more opportunities to finish that story.

Just a follow up on the streamlining of <unk> balance sheet.

Part of it I think of it is just paying down debt when I think about the net lease sales do I think of most has secured debt going with the sale being paid down.

Cash and then you have that convert coming up next year I'm, assuming those are the 2 items I need to get.

That debt off the balance sheet, you will start to really look a lot different for a lot of people and close that gap. As you mentioned just talk about the cadence for debt pay downs heading into 'twenty 2.

Yeah look I think you're on the right path in terms of secured debt secured by our net lease assets.

Need to be taken care of and a transaction would certainly accelerate that part of the process.

You know were liquid were strong I think youre going to see continued liquidity coming out of that legacy book any net lease transactions would only add to that liquidity.

So we do think there'll be opportunities to streamline not only the asset side of the balance sheet, but the liability side, but.

But it's a little premature to go down any of those thought processes just yet.

We're.

Certainly looking forward to coming back in the fourth quarter, and having a little more clarity.

But you know this is the right moment for us to continue to push on some of these levers in the net lease levers a big 1.

Great. Thanks, Jay.

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

Hi, good morning.

Jay why don't I wanted to follow up on the use of capital question from earlier.

You know on the buyback.

More shares and we've seen the last couple of quarters and you also announced an increase in authorization.

Is that coincidental or just given the.

You know kind of widening gap it seems like we should expect to see a higher.

The level of repurchases stocks stays where it is.

Yeah, No. We you know over the years, you've seen us be a thoughtful and consistent buyer.

At prices, we thought you know.

Made a lot of sense for the company.

Yeah.

We were prudent about it we want to keep a strong balance sheet for 1 of our key pillars.

We think the 6 million shares has been.

A solid bite.

Got anything crazy as we build liquidity as we build balance sheet strength as we pay down debt.

That number can move around a little bit but right now we're on the same steady path we've been on for several years.

So I think you know.

Until factors change that's kind of the path, we want to stay on.

Great and on the zone.

The ground lease plus.

Can you give us some insight into how we should think about modeling that is it going to be carrying held for investment at star held for sales and so that should go up and if so will you accrete some.

You know accrete some income into our forecasted sales price or is it going to be cash flow with a big gain on sales and how should we think about modeling the growth from that ground lease plus on the store our balance sheet.

Yeah, I think because of the safe hold potential.

Potential purchase of that ground lease is conditioned on a number of events.

You can assume it's going to happen with hundred percent probability.

So until those conditions are met and there is a transaction are triggered.

Don't think Youll see.

Anything other than the rent coming in.

From the underlying tenant.

So yes at the end when the transaction happens there will be a pickup too I star, but all youll see now as it owns a ground lease on a great piece of dirt and it has a very strong tenant who's got a lot of money at risk.

Working very hard to get it into a position where it fits safe holds.

Very high quality.

Building parameters and once that happens then youll see the the full economic impact flow through.

What's the typical time, it's going to need to see them to reach that point is that a 12 month for 36 months or kind of how do we think about when those gains dark what year, we should start to see those roll in from this first ground lease plus investments.

I think each ground lease plus transaction will be unique but for modeling purposes, you can assume somewhere between 24 to 48 months.

Great last question Jay can you touch on you know.

Bolero and how that investments are going here in reopening I think there was some news earlier. This month that they may look to go public for us back or whether that has any impact on your investment in and if so what is that.

Yes, it's certainly 1 of the 1 of several positive events that took place in our net lease portfolio over the first 6 months for the year.

So that is a business that we felt very comfortable with long term, which snapped back at it has done so.

The spark transaction as an added bonus I think it gives it a currency to continue their business plan. They are 1 of those top experiential companies out there now and then.

Certainly, they're getting a benefit from that but you know the bottom line for US as you know we've owned those assets for a long long time for well over a decade.

We know the real estate underlying the business is very strong.

You know as the markets are reopening we're seeing the benefits of that.

But I think more importantly, you know as part of our portfolio. It's a very long term very well constructed net lease asset and I think when people really dig in and theyre going to like what they see there.

Great I appreciate the comments for floating thanks Jay.

Ladies and gentlemen, if you wish to ask a question. Please press 1 zero at this time.

1 moment, while we wait for our next question.

We have a follow up question from Jade Rahmani with Keith BW. Please go ahead.

Thank you very much just a broader macro question curious if your thoughts around the New York office market have changed at all.

Are you looking at deals in the New York Office market are you inclined to participate in such deals what are your thoughts there.

Yeah, Jay and I'll start with the premise of we Love New York as a market.

We focus first and foremost on locations.

Whether they are you know office or otherwise so we continue to be long term believers in New York are.

New leadership coming in we'll see how that goes we think the long.

Long term dynamics of a city like New York are places, we want to invest in.

We can't predict short term dynamics.

You know certainly office continues to have.

A rough road ahead of it and we think vaccination in New York.

Yes, it was still pretty good.

Post Labor day is when we'll start to see how companies really adjust to this new.

Secondly, either hybrid or more flexible workplace, we know from our experience.

We've been back in the office for almost a year now we are far more productive in the office, but we can afford to be flexible.

So I think that's the <unk>.

That we would make is that officers will adapt companies will adapt but they'll still need high quality space, where people can congregate and.

Be creative.

But there'll be a flexibility attached to it so near term I think the top landlords will start to figure out how to accommodate the needs of.

For the post Covid era for us, it's that's less relevant if you have great land under under buildings, we want to talk to you well. We think we can unlock value for you are far better than any other solution.

So we wouldn't shy away from those kind of transactions Jay but it starts with do you have great land.

Thanks, and I think for NATO, probably a couple of quarters ago, maybe it was last quarter talked about.

Some potential to bifurcate the company.

For a separate out day lands through a ground lease REIT.

<unk>.

On the stakeholder side anticipate the potential for any M&A transactions I know in the ice stars Genesis there were some.

Right interesting and.

M&A transactions that accelerated the company's growth I think you guys bought lazard as a mezzanine business at 1 point.

Any anything on the M&A side do you think that might accelerate.

Safe trajectory toward that $5 billion gross asset number you put out.

Well, we always love talking to forward thinking folks. We do think this is a way to unlock significant value for shareholders.

You know, it's a new business, it's a new way to think.

It'll take a forward thinker to really come over to that kind of thinking with their entire portfolio, but I think theyre going to be opportunities to work with all kinds of building owners of private public.

Institutional international.

Now that you've heard us talk about this Jay we think 1 plus 1 equals more than 2 in <unk>.

Eventually real estate markets will look a lot more like what we see in the corporate sales.

Sale leaseback World, where is just makes a ton more sense to separate the operating business, which all of these.

Top operators are great at that.

They constantly think about highest and best use how can I meet the customers' needs I think in that same letter vornado talked a lot about every assets of hospitality asset every asset is trying to figure out what our customer wants and needs and meet that need.

We love that kind of thinking because we're in the same business and we think our customers. These building owners, we want to provide them with what they need whether it's ground lease plus or.

Uh huh.

Modern ground lease that unlocks value everything we do is to expand this market as fast as possible and I think youll see at some point forward. Thank Anders will go first and then everybody else will follow and that seems to be that dynamic we're on right now.

Okay. Thanks, very much I'll stay tuned for those kinds of developments.

Thanks Jay.

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Mr. Fuchs, we have no further questions.

Okay. Thank you if anyone should have additional questions on today's earnings release, please feel free to contact me directly.

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