Q1 2022 iStar Inc Earnings Call
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Good morning, and welcome to ice stars first quarter 2022 earnings conference call.
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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.
Thank you and good morning, everyone. Thank you for joining us today to review <unk> first quarter 'twenty two earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, Microsoft Dorado, President and Chief Investment Officer, and Brett <unk>, Our Chief Financial Officer.
This morning, we published an earnings presentation, highlighting our results and our call will refer to these slides, which can be found on our website at I star Dot com in the investors section.
Replay of the call beginning at $2 30 PM Eastern time today. The replay is accessible on our website or by dialing one 806 620710 or one with the confirmation code of 91 $978 88.
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 star 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.
<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 thanks to everyone joining us today.
During the first quarter, we continued to execute on our stated strategy of simplifying our strengthening the balance sheet and scaling staples.
The major event in the first quarter was the closing of the net lease platform for just over $3 billion. The.
This sale generated substantial earnings added over $1 billion of net cash proceeds to the balance sheet and retired all our secured debt obligations.
We're delighted our net lease team will have a new home at Carlisle to continue creating value and we want to thank barkley and everyone who has been part of our net lease team for their many years of profitable investing on behalf of ice to our shareholders.
Well the net lease sale is helping strengthen the balance sheet and simplify the portfolio. We continue to scale faithful and generated another strong quarter of originations I think a number of very attractive new investments customers and cities safer portfolio.
Our investment team continues to make ground leases and attractive tool for building owners and developers in top cities across the country.
Helping us reach the $5 billion portfolio milestone ahead of schedule.
And we believe the economics of Staples and modern ground lease business remain compelling.
Our message of stakeholder straightforward, we are a valuable existing portfolio of over $5 billion of high quality ground leases with long term financing in place at attractive spreads and inflation kickers that will boost spreads overtime if inflation remains elevated.
We have a valuable go forward business, where each new deal was priced to be accretive under various inflation models.
And we have a valuable pool of baked in capital appreciation or UCA portfolio that is growing rapidly and represents an estimated $9 billion captive asset.
Helping the market to see value in each of these three components.
Our important price to our shareholders since right now our same pole position appears to be trading significantly below its intrinsic value and the negative impact of the ISR share price has been meaningful.
We will work to address this value gap and also highlight the safety and market opportunity of the staple business as a key part of the go forward plan this year.
With that let me turn it over to Marcos and breadth to go into some more detail Marcos.
Thanks, Jay and good morning, everyone. Let me begin on slide three our results. This quarter reflect continued progress across our three part strategy to simplify the business further ground lease ecosystem and strengthen the balance sheet as Jay mentioned during the first quarter. We closed on the sale of our net lease portfolio, which was the driver for significant gains and a more.
Streamline business.
We also strengthened the balance sheet using proceeds the proceeds from the net lease transaction to repay all of our secured debt.
And subsequent to the end of the quarter, we completed an exchange of $194 million of convertible notes for common stock and a small amount of cash. Additionally.
Additionally, stapled saw strong results during the quarter and closed $677 million of originations, while UCA grew by one 3 billion.
Slide four details our earnings results for the quarter net income was $610 9 million or $8 85 per diluted common share and adjusted earnings were $607 5 million or $7 79 per diluted common share.
Moving to slide five we detail the impact of the net lease transaction.
As a result of the sale the ground lease ecosystem assets, along with cash on hand represent approximately 80% of our $4 $1 billion asset base since.
Since the beginning of 2019, one of the core components of our strategy has been to transition to the ground lease ecosystem is the primary focus for the organization.
Noncore investments related to our traditional real estate finance business, along with our strategic and legacy assets now make up 20% of the balance sheet.
And before we dive into the details I want to note two things about this quarters earnings presentation.
First a number of the slides here are presented pro forma for the distribution of a portion of the sale proceeds owed to the partners and our net lease joint ventures and participants in the company's long term incentive plan IPO. These.
These distributions will be made subsequent to the end of the quarter you can see the details for these adjustments in the pro forma supplemental financial data slides in the appendix.
Secondly, this quarter quarter, we're presenting our assets with the exception of safe stock based on GAAP carrying values for safe, we are still using the market value in the past we have presented the portfolio using gross book value, which primarily grossed up our carrying values for accumulated depreciation.
With the sale of our net lease portfolio the bulk of our accumulated depreciation has gone and the difference between our total carrying value in gross book value is down just to $58 million.
With that let's continue on to slide six which presents a more detailed makeup of our remaining pro forma balance sheet.
We ended the quarter with $1 4 billion of pro forma cash we had $1 8 billion of investments related to the ground lease ecosystem and $825 million of non core assets turning to the right side of the balance sheet. We had $2 1 billion of debt at the end of the quarter $64 million of accrued expense associated with iPad 90.
$6 million of accounts payable and other liabilities $12 million of Noncontrolling interest, mostly associated with iPad and a $305 million liquidation preference on our preferred equity.
In addition to the $75 million, we've already accrued for iPad between liabilities and NCI that I just mentioned, we provide an estimate of the amount payable, but not yet accrued under the terms of the plan.
Unapproved estimate of $105 million represents the undiscovered value that would be distributed based on the assumption that our safe stock is valued at the recent market price of $43 <unk> per share and the other investments in the IPO pools perform and are monetized is currently underwritten.
Further while the plan calls for distributions to be made to management in the form of 50% in cash and 50% in star stock.
Once assets are monetized if our shares are safe are the last material asset in an hie Pip pool. The board may elect a satellite pit by distributing shares of safe and stay.
In total our common equity as adjusted for safes market value and the unapproved IPO estimated distribution was approximately $1 4 billion or $17 75 per diluted share.
Moving to slide seven we provide a more illustrative overview and bridge to our equity value per share as.
As we did with our portfolio metrics, we are no longer presenting adjusted common equity, which was growth of accumulated depreciation and with that let me turn it over to Brett to go through the portfolio in more detail Brian .
Thank you Marcos and good morning, everyone.
Let me talk about each of our asset segments, beginning with <unk> on slide eight.
At the end of the first quarter, we owned approximately $40 1 million shares of say, Paul with a carrying value of $1 4 billion and a market value of $1 7 billion.
As Jay alluded to staples year to date stock decline as impacted the value of our investment.
However, <unk> business has continued to make strong progress in the first quarter originating 10, new round leases for $677 million.
In addition, we participated in <unk> equity raise with a $191 million investment.
St. Pauls ended the quarter with over 1 billion of available liquidity to fund our growing pipeline.
First quarter performance resulted in strong year over year earnings results with 35% growth in safety Etfs.
Turning to slide nine let's take a look at our investments in the ground lease ecosystem.
As we have discussed <unk> has been building its ground lease adjacent businesses.
Consisting primarily of our ground lease plus product as well as lease hold loans through our safe Star program.
Generally we are investing in both of these products through fund structures with third party partners.
Our net carrying value for these investments is $97 million and is comprised of four ground lease plus assets and three lease hold loans with targeted returns between 9% to 12%.
In addition, we have $116 million of unfunded commitments associated with these investments.
Slide 10 highlights what remains of our noncore assets.
Our remaining real estate finance business totaled $332 million, consisting of nine performing loans and one nonperforming loan.
Regarding our legacy on strategic assets, we ended the quarter with $75 million of short term legacy assets $59 million of strategic assets and $304 million of long term legacy assets comprised of Asbury Park Magnolia Green.
Slide 11 summarizes our investment activity for the quarter.
<unk> invested a total of $247 million during the first quarter.
This includes $202 million of safe hold share purchases predominantly through our participation in staples equity raise.
$29 million in the ground lease ecosystem through ground lease plus and leasehold loan fundings and.
$16 million of Capex on legacy assets and other investments.
Slide 12 shows the makeup of our portfolio.
At the end of the first quarter, we had total assets of $4 1 billion of which 80% is related to the ground lease ecosystem and cash.
For the remainder real estate finance represents 8% land and development, 7% operating properties, 3% and 2% was strategic and other investments.
Slide 13 presents a snapshot of our $2 1 billion of debt.
During the quarter, we repaid $1 2 billion of consolidated debt, representing a 100% of our secured indebtedness.
Leaving us with $1 7 billion of debt at quarter end.
Three series of unsecured notes.
$100 million of trust preferred and $288 million of convertible notes.
Subsequent to the end of the quarter, we further reduced our debt balance by completing privately negotiated exchange transactions with certain holders of our convertible notes.
In which we expanded $194 million of notes for $13 75 million shares of our common stock and $14 million of cash.
The purpose of this expansion was to further strengthen and simplify our balance sheet save interest expense and preserve cash.
Because these convertible notes were trading at a substantial premium. This consideration will result in a P&L impact of approximately $130 million loss on early extinguishment of debt in the second quarter that will be offset by $311 million of new equity on the balance sheet.
We estimate that these offsetting figures combined with additional shares issued will result in a minimal impact to our total equity value per diluted share.
So in conclusion, it was a strong and transformational quarter for us in which we made a lot of important progress on eastern part of our strategy.
Let me turn it back to Jeff.
Thanks, Brett So Brett mentioned the convert cleanup is another part of simplifying the balance sheet and putting us in the best position to maximize the value of our ground lease ecosystem opportunity.
Many of you have asked what a simpler architecture between ice star and safe hold might look like and we've previously said that our board expects to evaluate transactions that could change that architecture with a goal of unlocking value at Stifel.
While no meaningful conversations have yet taken place we look forward to updating you at the appropriate time in the future on any progress.
Okay, Operator, let's go ahead and open up the lines.
Thank you, ladies and gentlemen, if you wish to ask a question. Please select the London zero on your telephone keypad you may withdraw your question at any time may repeating the Windsor command, if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please select London zero at this time.
Our first question comes from the line of Stephen Laws. Please go ahead.
Hi, good morning.
Hey, I guess first can you talk about how youre going to use cash from here given your options to pay down debt I know you have the remaining $93 million maturing in Q3.
Stock repurchases buying save kind of how you think about the uses of cash at this moment.
Yes, I think nothing is economically attractive is the ground lease business growth.
We still think those three components.
And really create a compelling place to put cash so growing that ecosystem is still with <unk>.
Prime mission, but youre right claim claiming up some other parts of the capital stack.
Our smart.
Certainly things we can consider.
So we're evaluating everything Adam anything right now to make sure we make.
The best possible decisions as we go through the year, both with respect to the cash and with respect to the future architecture.
Great and I guess, a couple of more specific.
Questions, but.
What's left on the real estate held for sale and discontinued ops line on the balance sheet and then when we look at the real estate finance portfolio.
I don't think you break out the senior loans in this deck, but I think the duration on those would probably be less than half a year now so kind of what are your plans for the longer duration.
Investments in that real estate finance portfolio. Thanks.
Yes, you can see that breakdown I think it's four pages of breakdown Fitch.
We put that in there to try to give you the best snapshot, we can in terms of the pieces of that legacy puzzle youre.
You're right.
The senior loans over relatively short maturity a couple of them have extensions on them. So.
We think they are good.
Assets and if we wanted to monetize them to redeploy that capital, we certainly think most of them.
Essential.
We're looking at.
Asbury Magnolia Green is really the two that are are difficult to see a path to liquidity in the near term.
Both continue to perform along their business plan.
And then when you look at strategic and short term.
Those are assets historically, we've said short term means we can reach liquidity in probably about 12 to 18 24 months of the outside date.
And that still feels like a <unk>.
Assets that are moving closer and closer liquidity on some of the strategic.
TJ.
<unk>.
So discretionary we're in contact.
With possible places where that could be monetized. So I think thats the breakdown still feels right to us in terms of thinking about timeframe.
Turning to liquidity.
Obviously theres a few things in here that are a little less liquid to us we've tried to call them out npls are trickier some of the longer term assets will be trickier, but nothing has really changed strategically in our minds in terms of this is a source of capital for.
For the rest of the business.
None of these are.
Things that we want to hold onto long term, but we want to see the successful conclusion of the business plans, we put in place on those longer term assets.
Our asset management teams do a great job of prudently and consistently bringing things to market monetizing them and moving on.
Great. Thanks for the comments this morning, Joe.
Our next question today will come from the line of Jade Rahmani with K BW. Please go ahead.
Thank you very much with the cash position that <unk> is sitting on and the decline in states stock price with the changing interest rate outlook.
Yet you are continued bullishness on the ground lease business.
They're a world in which.
Star It might just be able to acquire the 35% of states it doesn't own realizing become the story will not be as simple.
As perhaps conceived previously, but I started the company with the $1 4 billion in cash.
And you continue to believe that safe that's trading at a material discount to NAV. So is that something on the table or are there too many complexities with respect to liability structure credit ratings on both sides of that equation.
Yeah, Jay I think you hit the nail on the head. There are there are this is a.
Ah interesting moment in time in the markets. We think there is a significant delta between intrinsic value and we're certainly stakeholders trading.
I think the math.
Mandates for the board are pretty clear to try to maximize value are there things that we can do in that corporate architecture to unlock that value.
Rather than talk about specific strategies I would just say under that heading.
We will certainly look at all alternatives.
Make sure we try to find the one that gives us the best path forward.
Unlock that value.
<unk>, just a little bit surprising yes.
This has been a very quick move in rates in a very quick move upward in inflation expectations, but there are at least on the screen long term inflation expectations are.
Two 5% spill.
So we think.
In a business like.
Faithful and with long term value creation.
That's something we think we can continue to execute on very attractive deal. So I don't think we want to do anything of broccoli, but we want to be thoughtful prudent and.
And move forward on things that can unlock value.
We love the idea of faith as a pure play, but obviously Starz board will we will look at before.
Menu of options and we will try to come up with something that unlocks the most value.
And so with that in mind.
Two questions number one.
How do you sit on the cash do you I mean, if I were.
The management team I would sit on the cash and not do anything with it until there's some clarity because why would you start going.
To clean up the liability structure buying back debt redeeming debt, if that cash could be potentially used for other means.
So that would be question number one question number two in terms of the actual dynamics between management and the board is Starz management team presenting various options to the board or is the board proceeding to hire independent outside advisors to come up with the framework is the framework coming from <unk> or is it.
From independent advisors.
So on the cash question.
Agree with you that.
Not looking too.
Do anything imprudent here, so we will take our time and be thoughtful and watch the markets the exactly where the opportunities best present themselves.
On the flip side is we don't really want to sit on that cash for a long long time. So there is a lot of thought going into the go forward business opportunities here.
Which plays into the second question, you asked Jade which is.
Management because of our position between both companies cannot drive the conversations but we can provide the analysis, we can provide the work.
And we continue to put together our thoughts on what different alternatives might look like and then present that to the board who.
We'll need outside advisors. This is.
The situation, where you have affiliated affiliate issue so management cant be the decider here, but we can provide the thought about the business about the market about the impacts and we are doing a lot of that work to put together our thoughts in terms of how do we unlock this value how do we get the most.
Investors to understand what's happening with this modern ground lease industry with the potential we're building there and right now that is.
It's a little trickier to lay out the path in the near term, but the long term path is still what we said for five years now which is we are changing for the better in industry that has.
$6 seven trillion.
<unk> assets and we think we've really just begun the journey.
So I think we always want to keep that context in mind as this business has just started its made great leaps and bounds. So far right now it feels like the market doesn't fully appreciate it but.
We've been in this situation before and we definitely believe all.
All three components of value.
At the end of the day, that's what's going to win out as if youre really creating the kind of value. We think we're creating it will be recognized in the share price.
Well go ahead.
Please go ahead pardon me, we'll go next to the line of Jade Rahmani with K B W. Go ahead.
Sorry, Jason.
<unk>.
Yes, we have another person in the queue. So we can go to the next question Okay.
We'll go to the line of Matthew Howlett with Brian Lee go ahead.
Alright, Thanks, guys. Thanks for taking my question.
With the decline in the fair value of both of them clearly with the decline of same stats and the leverage that's in your.
The shareholders see this may feel the impact.
Yes. This is Kent unwind. This can go the other way you know given given the inherent leverage in there so.
The first I guess.
Multiple questions first can I start buyback its own stock or safe shares now.
What what's excluding at that's one two.
What's the what are just generically what are your advisors, telling you in terms of what could be the impact.
And internalization and increased load it safe.
Higher getting into new indices.
This is sort of self fulfilling.
There is a merger and this increases the value of say policy I mean, everybody. So.
Just kind of walk me through what can started you know in terms of purchasing its own cycle or save shares in <unk>.
Just go with what could be the impact of an internalization.
Yes, great questions, Matt I think you can kind of understand where we are which is <unk>.
NPI kind of takes us out of the box in terms of buying shares in either company.
So that's that's something we have to be very cautious around.
Certainly we have lots of <unk>.
<unk>.
In terms of things that potentially could unlock value book some of that I think would represent MPI. So we'll just have to be a little bit cautious on that front.
In terms of the impacts.
That's what we're evaluating.
Like you we believe.
Increased float internal management.
Inclusion in more indices.
<unk> ability to more investors is a net plus.
How you make that.
Happen is obviously a.
A bit more challenging.
Just in terms of process and procedures and thought process. So Matt.
Management's goal here is to show the value of this business to as many investors as possible and give them as liquid a share to invest in that opportunity.
How we get from here to there is.
The exercise I think we're all thinking about.
It's one that.
I think when we come out the other side.
Feel very strongly the business story is a great one and lots of investors will want to participate.
There are some constraints today.
Definitely we wanted to take another look at it and that's been part of our message over the last year or so and so I would expect both boards and I think we said this on safety, let's call as well.
Since the start evaluating the types of things that could unlock that value sooner rather than later.
There are any additional questions. Please take this opportunity now to press one then zero on your Touchtone phone.
Mr. <unk>, we have no further questions.
Alright, well thank you.
We do have a follow up question from Jade Rahmani, if you'd like to take that.
Yes that was great. Thanks.
Hey, Mr Remind me your line is open.
Yeah. Thanks, very much I was wondering if you could just repeat the numbers on what the pro forma capital structure looks like post quarter end I think.
You all gave the debt balance of $1 7 billion I just want to make sure I have those numbers correct.
Sure.
Yes, so what we have after quarter end, we have three unsecured notes maturing in 2004 time back in 2006 at $1 $7 billion, and we have $100 million of trust preferred.
And then of the convertible notes, we were able to retire a $194 million.
Our principal so theres $93 million remaining on those notes.
And the post quarter end.
Fully diluted share count is up to $78 four or has that increased.
Yes, while we have in the <unk>.
What we have in the supplement represents the number as of <unk>.
$3 31.
It doesn't include the convertible exchange.
It doesn't okay do you know what the pro forma share count ends or otherwise, Jason Let me talk later I can get that pool.
So if you.
The calculation on the diluted shares are taking over the quarter and so.
So obviously, we'll have to see over the second quarter and what that prices.
If it were todays price it will be approximately $2 5 million additional shares.
Okay. Thanks very much.
We have no further questions at this time.
Okay great.
We wish to have additional questions on today's earnings release, please feel free to contact me directly.
Alan would you please give the conference call replay instructions once again thanks.
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