Q3 2021 iStar Inc Earnings Call
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Good morning, and welcome to ice start third quarter 2021 earnings conference call.
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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 Relations and marketing.
Please go ahead Sir.
Good morning, Thank you for joining us today to review I start third 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. We will refer to these slides, which can be found on our website and I start out com in the investors section.
There'll be a replay of the call beginning at 230 P. M. Eastern time today. The replay is accessible on our website or by dialing one 806 20710 or one with a confirmation code of 146 3546.
Before I turn the call over to Jay I 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'd like to turn the call over to our chairman and CEO, Jay Sugarman, Jay Thanks, Jason I appreciate everyone joining us today.
As far as third quarter was highlighted by strong success in monetizing legacy assets and continued progress on scaling staple earning.
Earnings benefited from both of these strategic initiatives with EPS for the quarter topping $1 50, a share in adjusted EPS over $1 75.
On the legacy asset side, our asset management team has been working hard to simplify our portfolio and those efforts paid off nicely last quarter, bringing in almost $250 million proceeds and generating almost $50 million of gains in the process.
Legacy assets now make up well less than 10% of the overall portfolio and are rapidly moving into the rearview mirror.
Turning to sample our investment team continues to drive new business and the ground lease sector delivering over $320 million of new ground leases in the staples portfolio during the quarter and exploring further ways to help expand the customer base. We continue to believe the ground lease ecosystem represents a rich area of opportunity going forward.
We also continue to make progress on our net lease exploration process and have been positioning ourselves to be able to execute efficiently as we evaluate various alternatives.
As we're mid process, we can't provide any details just yet but look forward to updating you on the process in the future.
And with that let's have Marcos take you through the details Marcos.
Thanks, Jay and good morning, everyone, let's begin on slide three.
During the third quarter, we made meaningful progress on our two year strategy, we laid out at the beginning of the year.
We continue to scale and build momentum its April with solid investment activity and capital raising expanding the ground lease ecosystem.
In terms of simplifying the business, we were pleased with the progress this quarter with legacy assets now down to 7% of our portfolio.
Altogether the success produced a $125 million of gains, which drove strong third quarter earnings results.
Slide four provides more details on its April we continue to grow our investment in ground leases and over the past year the value of our interest has increased by approximately half a billion dollars.
During the quarter safe hold saw EPS growth of 36% from the prior year period, and strong investment momentum with $321 million of originations.
Alongside with new originations UCA grew by an additional $624 million and stood at approximately $6 7 billion at quarter end.
Additionally, during the quarter stapled raised $242 million of equity at a price of $76 per share based on strong institutional demand. The offering was upsized by 10% from launch, notably I start took a smaller position in this equity raise representing 25% of the initial base offering.
While we continue to believe that staples stapled at these levels is materially undervalued. We felt it was important to focus on long term value creation and pair back our participation. So that safe holds could attract new investors increase its float and enhanced trading liquidity in the stock.
As a result of our smaller participation our ownership position decreased from 66% to 64% U S. GAAP treats this reduction in percentage ownership as if by Star sold a pro rata share of its investment in Saiful. This resulted in a gain of $60 million, which was recorded in earnings from equity.
Method investments.
In effect the gain accreted into book value a portion of the unrealized gain we have been highlighting for the past two years.
So for investors, who have been thinking about <unk> intrinsic value.
Inclusive of Staples market value. These gains have no net effect.
At the end of the quarter, we held approximately 36 million shares of staples with a market value of $2 6 billion, a one 4 billion unrealized gain above our $1 1 billion gross book value.
On slide five we provide an update on our legacy assets.
We're very pleased with the progress on our legacy asset strategy. This quarter as we were able to generate proceeds of $246 million and record $49 million of gains. This included the previously announced sale of Grand Vista, which posted a $26 million gain this quarter.
Over the past year, we have reduced our legacy asset portfolio by 42% from 803 million to $464 million, which is now down to 7% of our total portfolio.
As you can see on the right side of the slide our legacy asset portfolio includes 14 short term assets totaling $113 million.
The long term assets are comprised of two remaining assets Asbury Park, Magnolia Green, which totaled $351 million.
While there are no near term plans to sell these assets outright we expect to see the balance of Asbury Park continue to decrease as we sell our remaining condo inventory at the Ocean club.
To date, we sold approximately 70% of the inventory and our basis in the remaining condos is approximately $69 million.
Slide six summarizes our investment activity for the quarter.
<unk> invested a total of $175 million during the third quarter. This included $53 million and stakeholders of which $50 million was our participation in safe equity offering and the remaining $3 million was open market stock purchases.
This quarter, we also repurchased two 4 million shares of <unk> stock for 60 million, our remaining stock buyback authorization stood at $31 million at quarter end.
In addition, we invested $54 million associated with loan net lease and other fundings that were primarily associated with prior commitments and lastly, we invested $8 million of capital expenditures related to our legacy assets.
Slide seven shows the makeup of our portfolio.
At the end of the third quarter, our total portfolio stood at $6 3 billion with Saiful net lease and cash on hand, representing nearly 85% of our portfolio.
In July of this year, we announced that we had engaged eastdil to explore a potential sale of our net lease portfolio that process is ongoing and we look forward to updating you in the future after concluding the process.
Slide eight details our earnings results for the quarter net income was $121 9 million or $1 51 per ship per diluted common share.
And adjusted earnings were $141 3 million or $1 76 per diluted common share.
Earnings were driven in large part by a $125 million of gains this quarter, including the previously discussed $60 million gain related to the safe hold equity offering and a $49 million.
Gains associated with sales of legacy assets. In addition.
We recorded $16 million of gains.
Strong performance from other investments.
Lastly, slide nine shows our book value per share on a GAAP basis and as adjusted to illustrate the value created through staple, but not recognized in our reported financial statements.
As of September 30, our common equity per share was $7 12.
And when adjusted for depreciation amortization and seasonal allowance adjusted common equity per share was $12 23 per share.
Including safe Mark to market value, our common equity value per share stood at $25 75 per share and adjusted common equity was $30 47 per share.
Of note the third quarter included the dilution impact of our convertible bonds based on the average stock price during the third quarter those bonds had a dilutive impact of 9 million shares.
Whereas they were non dilutive in that comparative period, a year ago.
We have sought to mitigate some of that dilution from the convert with our open market stock repurchases.
In conclusion, the third quarter represented strong progress on our two year strategy with solid investment activity at safe hold and we're encouraged with the advancement of sales in our legacy asset portfolio.
And while we're pleased with the progress to date, we still have a lot of work to accomplish our objectives.
Let me turn it back to Jay.
Great market with good progress on a number of fronts and more to come as we expand our ground lease business and streamline I start.
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 to ask a question.
Pause a moment to assemble the roster.
Our first question comes from Nate Crossett with Bam, but please go ahead.
Hey, good morning, guys.
Good morning.
Just on the portfolio sale and I know you can't say much but it looks like you made an announcement yesterday that you received a consent from the bond holders as it relates to the solicitation.
And so I was just kind of wondering is that kind of the last procedure I'll move needed before any sale announcement.
And then to let's just say hypothetically a large sale occurs within the next couple of months.
Can you kind of remind that near term use of proceeds is such a sale.
Paul.
Yes.
Sure, Yes, the consent process was really to eliminate any barriers on timing sequencing sizing and give us the ability to execute efficiently on any of the various potential alternatives.
Not in a position to talk about them yet but.
It was a major step to really make sure we can execute efficiently when we when and if we want to.
I think in terms of Europe.
The process and getting through the other side.
We're not going to.
Specifically, we would be able to talk about what we're going to do until we know exactly what we're going to do.
But we've begun to analyzing a number of different alternatives.
For each of the outcomes, we think is possible.
Certainly be in a position on our next call to start talking about that.
Okay. That's helpful and then if I could just ask one on <unk>.
Maybe just an update on the ground lease plus product.
And I think that was a big topic on the last quarter's call.
Maybe you can just touch on was the decline look for that on heading into 2018.
And then just maybe remind us kind of the yield then return that you get.
To that.
Hey, Nate.
So as you remember we closed our first two ground lease plus transactions in the prior quarter, we have our third transaction under letter of intent.
As in the closing process.
And we have a reasonable pipeline going into 'twenty two for the product, which I think is a fantastic outcome for both the star and safe as.
You kind of think about returns.
High single digits.
<unk> double digit IRR is what we're looking for.
Okay I'll get back into queue. Thank you.
Yes.
Sure.
Our next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
You mentioned the.
Asbury Magnolia Green and curious to get a little more detail. There. If you think you guys will look at completing those on your own or if you are looking to bring in some some partners. There and then as I think about other long duration investments under the senior loans or I think <unk> seven year weighted average maturity, but the mezz and other loans.
And the real estate finance bucket looks like they have seven to nine year weighted average maturity can you can you talk about.
What you may elect to do there as you think about.
Potential combination of the company in a much shorter time frame than those expected maturities.
Hey, Steven Thanks for your question.
Asbury Magnolia.
<unk>.
Our stores continued to move in a positive direction, we will we will anticipate.
Bringing in others to take down pieces of the puzzle.
So we don't intend to be building all those out till the bitter end.
So there is an opportunity we've seen a lot of interest from third party builders both markets.
So as we get closer to the finish line certainly can your transactions were chunks of those properties will be sold to third parties.
In terms of the senior debt book Youre right its running off on a relatively short maturity basis.
The mezz and any longer dated assets, we are looking at opportunities to monetize those where appropriate and we feel pretty good about most of the book in terms of sort.
Sort of the end of 'twenty two.
Just around sort of target for having the book in a ninth streamlined simplified shape theres going to be some asset classes no question, but we feel pretty good about the direction of everything.
Great.
Very active on the stock repurchase front.
Glen Glen <unk>.
<unk> focus on that Jay given the discount to the mark to market book value.
$31 million remaining authorization can you talk about your appetite for more repurchases at the current price whether or not you.
Continue those repurchases in October I don't think the Q is out yet.
Yes, it's part of our strategy to recycle veins.
Into smart investments, which being faithful and SAR both represents significant value.
For our core to our thesis of recycling summary.
Mostly it's been gains out of legacy assets into more productive.
Users that's been taking place.
Historically, our board has approved.
Prudent levels of repurchases.
I would expect that to continue and I'm not going to talk about exactly what we're doing but.
We have been historically on active buyer when we think our securities are undervalued.
Alright I appreciate the comments this morning, Jay Thank you.
Our next question comes from Jade Rahmani with <unk>. Please go ahead.
One moment please.
Thank you.
I do apologize.
Our next question comes from Matt Howlett with B Riley. Please go ahead.
Okay. Thanks, everyone.
Yes, I don't need to.
Question about the portfolio could you tell us whether there has been an LOI out there and.
Anything in terms of what's going on in terms of negotiations at this point the net lease portfolio.
Yes, I wish I could Matt we're mid process can't really do that at this moment, but we.
We're trying to move the process along.
Continue to work with our advisor on a very productive basis. So.
We should definitely have some information for you.
By the next call coming around.
Got you well just thinking ahead to potentially a sale in the excess capital being freed up.
I look at some of that some of the secured debt with most of that is tied to 1 billion tied to the portfolio.
Am I right to assume that's likely to go with the sale be pay down to would you.
Be in a position to payback some some senior notes three you're out there buying Steve shares everyday to these form fours.
What is the appetite.
In conjunction with you continue to buy back your own stock to buy in those same shares. It just talking about this capital transformation will then and what you plan on doing with it.
Yes.
Sure.
I think.
The goal of any transaction is to simplify our balance sheet and strengthen it.
Retiring debt is definitely going to be part of our calculus.
How deep and how far and where it goes will say for our next call but.
Certainly one of the alternatives.
Something we are going after evaluating if.
If a transaction happens what do we do with the proceeds most effectively but debt retirement will definitely be part of thought process.
And when we think about say fold in the opportunity set over there and we did pare back our investment in the most recent offering.
If the market gives us an opportunity to buy below what we think is fair value. It's always a good alternative.
I don't think we have signaled to the market that will be I am trying to increase our ownership dramatically. We just think.
We have quite a bit of liquidity at I start today, and we're looking for parts of the capital structure that we think are really attractive.
As I said historically.
We've been thoughtful about how to deploy capital to keep a strong balance sheet through everything prudently, but certainly save trading below the last offering price seemed unusually attractive.
And then of course, we're weighing that against share repurchases.
Assuming there could be a dividend requirement when you sell in all of this is just part of the capital management process.
Because they do us when you're ready.
Yes.
There are a lot of pieces to the puzzle apply to process, we need to be prudent and thoughtful as we go through it.
We have tried to make it.
As efficient as possible, but it's still going to take a little bit of time to be able to come back John holdup.
Great. Thanks, Jay.
Our next question comes from Jade Rahmani with <unk>. Please go ahead.
Thank you very much I was wondering if you could quantify what percentage of corporate G&A related to the net lease business.
Yes, we don't breakout specifically, obviously a lot of cross functionality throughout the store organization. So people work on lots of different things for us to add expertise but.
In terms of just general direction, Jay it's not a huge part of the G&A.
It's <unk>.
Piece of the puzzle but.
I wouldn't allocate an enormous amount to it.
Thank you and the short term legacy asset bucket with the low average price per asset.
Do you think that there are.
Decent gains in that portfolio.
Sorry, rich part of the bucket.
The short term short term legacy asset bucket, which is the 8 million average per.
<unk>.
Yes, I think we've historically guided you through.
There'll be some winners there'll be some losers overall fuel brokers comfortable.
And a good market that might surprise us to the upside, but I wouldn't be programming that in just yet.
And then the strategic investments can.
Can you give any color as to what those are composed of and does it include any prop tech investments.
Yes look we have used our balance sheet to see areas, where we thought that it could be really interesting.
Interesting opportunity in cold storage.
That's been successful we do have a small investment in.
In the prop Tech World just to keep our eyes and.
Let's see what's coming next.
But again not material amount.
Okay.
Thank you and lastly, any update on the park hotels portfolio or.
Assets within <unk> portfolio that could have a near term catalysts.
No active discussions Jade I think the.
Yes.
So.
Portfolio is recovering so.
I think there could be an opportunity in the future when things are more stabilized, but right now I think they are still focused on this recovery mode from Covid.
So we haven't we have not had any active dialogue.
Thank you.
Ladies and gentlemen to ask a question. Please press one zero at this time.
One moment, while we wait for further questions.
Once again, if you do have a question. Please press one zero at this time.
Mr. <unk>, we have no further questions.
I do apologize I spoke too soon.
Our next question comes from Rich Anderson with SM BC. Please go ahead.
Hey, rich.
Rich your line is open.
I thought I was on mute.
So when you guys think about a hypothetical collapsing a recombination of star and safe.
What do you, obviously there'll be something in star today that would that would fall along in that type of.
Sort of a hypothetical arrangement.
But how small is the asset base has to have to be in star for it to start to make logical sense to bring the two companies back together.
Yes.
It's probably premature to start focusing on that we've got a lot of work to do between here and there and we've told the market. We will have that conversation when we think safe is.
<unk> reached the scale, where it makes the most sense and the good news here Rich and you know this is both companies are very much aligned on maximizing the value.
The safe hold ecosystem that is building, that's going to accrue significant benefits to <unk> shareholders. So.
That's the kind of question that will have to be sorted out.
It will determine the wins <unk> in house, and whether it's what's the highest and best execution and architecture going forward.
There are a lot of steps between here and there so let us focus on those first and then we'll have a much clearer sense of how to maximize value for both sets of shareholders.
That's the good news because I think <unk> got a.
Very much alignment of interest in terms of the ultimate goal, how we get there is a number of steps on each side.
We've said stapled needs to scale further our store needs to continue to streamline and keep balance sheet strong and liquid those are the steps. We're most focused on now.
But if it's appropriate and there is a value uplift from having a conversation about.
But certainly one that both companies are prepared for them.
Should be in good good good alignment for.
Yes, So let me maybe ask it this way in.
I expect the.
The process and everything but.
Yeah.
With the assets to the Star current star assets that would remain in this sort of this combined entity has some form of business relationship with the ground lease execution or could there be distinct.
Off.
That would stay in the combined company I mean in other words would there would there.
<unk> plus business, obviously would follow along but would there be other forms of business potentially that would that would stay even if they don't have any real connection with the ground lease business.
Hello.
We structured the say fold.
As a pure play we think that was the <unk>.
Absolute right strategy.
I don't think anything's changed in our thinking there ultimately.
Ultimately in terms of timing sequencing sizing all of those questions.
Tax we're going to have to kick those further out when we have more clarity around what both companies are trying to achieve and how to maximize both companies outcomes.
So at least at this point cant give you a lot of guidance on.
<unk> and <unk>.
How big anything that might be.
Just let us have that conversation when we when we further executed of both companies along their business plans and I think the answer will be the <unk>.
Right one for everybody.
At least at this point, having staple as a pure play still at least in our minds makes a lot of sense.
So if I ask it a third time and youre not going to if you're still not going to answer.
Okay.
Alright, thanks, guys.
Alright rich.
Alright.
Thank you everyone.
Any additional questions on today's earnings release, please feel free to contact me directly typically will you. Please give the replay instructions again.
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