Q2 2022 iStar Inc Earnings Call
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Good morning, and welcome to ice starts second quarter 2022 earnings conference call. If you need assistance during todays call. Please press star zero, if you'd like to ask a question. Please press one zero. That's one zero to ask a question as a reminder, today's conference is being recorded at this.
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> second quarter 2022 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, Barbara Silverado, President and Chief Investment Officer, and Britt <unk>, our Chief Financial Officer.
We published an earnings presentation, highlighting our results and our call well refer to these slides, which can be found on our website at <unk> dot com in the investors section there.
He will be a replay of the call beginning at 230 PM Eastern time today. The replay is accessible on our website or by dialing one 806 620710 or one with a confirmation code of 6846235.
Before I turn the call over to Jay I would 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 started disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.
Lastly, I wanted to highlight that I saw recently filed an amended 13D disclosing that a special committee of the board of directors of ISR and the Special Committee of the board of directors of Staples.
In advanced discussions with respect to potential strategic corporate transaction and that they are proceeding to negotiate definitive agreements.
However, because no definitive agreements have yet been executed and there can be no assurance that a definitive agreement will be executed we won't be able to discuss the potential transaction on this call now.
Now I would like to turn the call over to <unk>, Chairman and CEO , Jay Sugarman, Jay Thanks, Jason and thank you all for joining today.
During the second quarter, we continued to execute on our stated strategies of simplifying ISR strengthening the balance sheet and scaling say hold.
With the net lease sale behind us ground lease ecosystem assets make up over 80% of our portfolio and we continue to monetize non ground lease related assets and recycle the proceeds into ground leased adjacent business lines or to pay off debt.
Partially retiring our convertible notes due in September was also a big part of the quarter.
The conversion into shares at a material impact on our P&L share count and equity balances.
We'll walk you through that in a moment.
So you called out a strong quarter with earnings per share up over 30% and the portfolio nearing $6 billion.
The level of engagement with building owners have been very good, but we expect market volatility is likely going to make go forward transaction somewhat more difficult in the second half of the year.
<unk> was also up strongly adding over a half a billion dollars in mark to market value to the portfolio and is now nearing $10 billion.
Lastly, as Jason mentioned conversations between I've started favorable regarding the future progress significantly.
As you saw in our recent 13D, we're in advanced discussions with say fold. So again, we won't be able to share details of those conversations on this call. We do hope to be able to do so in the near future.
Okay, let's turn it over to Brian market markets.
Jay and good morning, everyone let's.
Let's begin on slide three to discuss this quarter's results we continue to make meaningful progress on our three part strategy first and foremost we continued to scale staples and expand the ground lease ecosystem seeing solid investment activity during the quarter and the concurrent growth of the unrealized capital appreciation sitting on top of our land.
Second we strengthened the balance sheet by exchanging convertible notes for stock to increase our cash balance and we repurchased some bonds in the open market at a slight discount to par.
We continue to maintain a large cash position following the sale of our net lease portfolio at the end of the first quarter.
And finally, we saw further monetization of our non ground lease assets.
Allowing us to continue to simplify the business as we evolve into a predominantly ground lease focused company.
Slide four details our earnings results for the quarter net income was a loss of $138 5 million.
Or a loss of $1 70.
Per diluted common share.
And adjusted earnings were a loss of $34 2 million or a loss of <unk> 42 per diluted common share.
Of note our net income this quarter was impacted primarily by the $194 million.
The convertible note exchange, which resulted in a $118 million predominantly noncash loss on our income statement. However.
However that transaction was offset by $298 million increase of the equity.
For the additional $13 75 million shares.
Resulting in a net equity increase of $181 million.
In total this transaction resulted in a <unk> <unk> per share reduction to common equity per share.
Slide five shows an overview of our business is simplified and our presentation of our balance sheet.
At the end of the second quarter, we had $1 4 billion of cash the carrying value of just over $1 5 billion of investments related to the ground lease ecosystem and $684 million of noncore assets.
Turning to the right side of the balance sheet, we had $2 billion of total liabilities at the end of the quarter.
Prices of $1 8 billion of net debt obligations.
$8 million of accrued expenses associated with our IPO plan and $99 million of accounts payable and other liabilities.
We also have $305 million of preferred equity.
When we adjust for marking our safe investment to market, an estimate or unapproved <unk> distributions.
<unk> is our common equity at quarter end was approximately $1 4 billion or $17 <unk> per diluted share.
Let's walk through our portfolio of businesses, beginning with state bolt on slide six.
As announced yesterday at the end of the second quarter, we owned approximately $40 1 million shares of staple with a market value of $1 6 billion.
Although safe stock is down considerably from last year Staples underlying business continues to make solid progress and during the second quarter closed on seven new ground leases for 381 million.
Additionally, during the quarter safe brands to $150 million of fresh 30 year unsecured debt, which left the company with $930 million of total liquidity to fund its expanding pipeline.
Staples earnings per share grew 32% compared to the same period last year. Additionally.
Additionally, the estimated value of the UC April increased by four and $543 million and now stands at approximately $9 9 billion.
On slide seven we detail our investments in the ground lease ecosystem.
To capture additional ground lease adjacent opportunities I Star has two dedicated funds focused on investing in the ground lease ecosystem.
Think of the ground lease plus fund and the leasehold loan fund.
I Star holds a 53% interest in each of these funds and a third party investor owns the balance.
Our net carrying value for these investments totaled $120 million and is comprised of eight assets with targeted returns between 9% to 12%.
Additionally, we have $154 million of unfunded commitments associated with these ground lease related investments.
Slide eight highlights what remains of our non ground lease assets at.
At quarter end, the remaining real estate finance portfolio consisted of approximately $204 million of outstanding loans, which is down from $332 million at the end of the first quarter.
During the quarter, we had the opportunity to restructure one loan in order to receive our proceeds years earlier than what we were expecting.
In connection with this agreement, we took a net provision of $23 million during the quarter.
With regard to our legacy assets and other strategic assets, we reduced the balanced by a net $23 million during the quarter.
We have 14 remaining short term assets totaling 127 million as well as to long term legacy assets totaling $287 million comprised of Asbury Park Magnolia Green.
Slide nine details the makeup of our portfolio.
At the end of the second quarter the portfolio had $3 8 billion of total assets of which 82% is related to the ground lease ecosystem in cash.
For the balance of the portfolio Landon development represents 7% real estate finance was 5% operating properties, 3% at 3% of strategic and other investments.
Slide 10 presents an overview of our corporate deck.
During the quarter I star extinguished, a total of $255 million of debt convertible exchanges and open market purchases of our bonds.
And the exchange transactions, we entered into privately negotiated agreements with certain holders of our convertible senior notes, which mature in September 2022 to.
Exchange of $194 million aggregate principal amount of the notes are $13 $75 million of newly issued shares of common stock and $14 million of cash.
The purpose of this exchange was to simplify the balance sheet.
Deleverage and reduce volatility as we approach maturity with the stock significantly in the money.
Importantly, the transaction enables us to preserve cash on hand, as well as reducing outstanding debt.
And subsequent to the end of the quarter, we were able to exchange an additional $48 million of convertible notes for 2 million shares of common stock and $24 million of cash.
Today, we have $45 million of convertible notes outstanding.
In addition to these convertible exchanges during the second quarter, we repurchased $60 million of our other unsecured notes, resulting in a $2 million gain at quarter end, we had approximately 186 billion of outstanding debt with a weighted average maturity of three three years.
So in conclusion consistent progress on all fronts of our strategy and.
And we hope to provide a larger strategic update as soon as possible.
Let me turn it back to Jeff.
Thanks, Brett.
Again, I know many of you will want to ask about the faithful at ICR conversations, but I hope you understand we can't say anything at this point, but let's go ahead and open it up for questions.
Operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please first one zero at this time, we will take as many questions as time permits and proceed in the order that you signal us once again, please press one zero to ask a question.
Our first question comes from the line of Jade.
Mani <unk>. Please go ahead.
Thank you very much.
As the.
Evolving macro picture has played out this year is there anything you've seen that has caused you to change.
Any of your views with respect to how youre pursuing the ground lease investment and also whether there are other investment strategies or opportunities you might pursue perhaps looking at structures with less duration or more of a variable rate component.
I'm just curious if theres anything Thats played out this year that has caused you to revisit any of your prior assumptions or expectations.
Hey, Jade.
I think the core product.
Call the faithful modern ground lease.
<unk> is continuing to gain traction.
If you listened in on this April call.
We're now covering all 30 top cities in the country multiple product types.
Hi.
Institutional customers.
Local sharpshooters, we've got over I think at this point 50 leasehold lenders.
We've worked with so I think the core product.
Is very powerful.
Moving that every quarter, so I don't see us changing we're varying too much we haven't really.
<unk> seen a need to do that we do think there are other opportunities in this whole ground lease ecosystem that we can pursue.
But our focus right now is really on the core product really.
Looking at a mainstream part of the capitalization and the real estate markets.
So that piece is pretty well set.
I will say, what we've seen from a macro perspective is.
Transactions people buying and selling assets.
It has gotten more difficult.
We kind of.
Are part of a capital solution, but transactions need to happen for us to play the role we want to play so we have seen buyer.
Buyers and sellers struggled to figure out.
What's the right price for things we've seen this before.
It takes a little bit of time for mortgage to adjust to sharp changes.
Clearly in the first half of the year saw some pretty high volatility on interest rates cap rates et cetera. So we're starting to see green shoots of stability people are starting to figure out where the new price levels are.
But we still expect in the second half of the year slowdown in commercial real estate transactions, which means for safe hold it will probably be a little longer to get deals done.
Thank you and as you look at the scope of this cycle. This correction that seems to be playing out how.
How do you assess the magnitude of potential change.
072 O nine era of what we had was a very overleveraged system a lot of floating rate debt a lot of securitized debt.
Which caused waves of defaults that seems to be missing this cycle on the other hand, we do have high inflation.
Which has somewhat been a positive to real estate, because you get higher rents.
Are you looking at the dynamics of this cycle and magnitude of.
Potential downside.
Yes, it's always dangerous to make sweeping generalizations, we continue to see multifamily.
In other parts of the ground.
Commercial real estate World very strong.
Despite some of the challenges and the headwinds other parts are struggling a little bit obviously.
Talked about office in the past.
We do think the market takes time to adapt.
We're looking more long term trends.
Again inflation historically has been a positive for real estate because it pushes up replacement cost.
We're not anticipating long term.
Inflation to be outside the norm that we've seen over the past century.
There will be a moment in time, where it can certainly.
Do what it's doing right now.
But when we look back historically.
See inflation between 2% and 3% is pretty consistent over long periods of time and so.
I think thats, where things will settle and eventually how we model out our business long term.
Interestingly inflation rates above 2%.
Increase our returns, let's say pulled on a cash flow basis over long periods of time, I think thats something we need to talk about it more tips like in nature than maybe people give it credit score, but overall again, we think the dynamics and the macro environment right now are going through an adjustment process.
We see real strength in certain pockets, we see some challenges certainly from a macro standpoint and geopolitically.
So we're not in a business, where we have to guess where that's all going tomorrow.
You had to ask US we think there are some challenges out there.
But I think our long term view remains pretty constant.
Thank you and just lastly on the legacy assets continued to make progress there.
Are there any potential bulk portfolio sales that the company is thinking about.
Either on the loan side.
Sure.
The legacy asset side granted you may need to take a haircut to carrying value. However, there has been book value growth over the period. There is a lot of unrealized value growth.
Safe hold position and the company's cash and liquidity position is very strong. So I'm wondering if youre contemplating such transactions.
We're looking to position the balance sheet to have the most flexibility possible. So we have made decisions. When we think it makes the most sense of where we see a long term uncertainty that we can get rid of we did that on an asset this quarter I think in terms of the two biggest ones.
Asbury Park Magnolia that'll be.
Sort of a segmented approach there are opportunities to move parcels I don't think theres an opportunity to sell the whole thing in the near term.
But as we continue to track towards the successful conclusion of those projects that may very well be an opportunity to accelerate some sales.
Thank you.
And once again, ladies and gentlemen, if you have any questions or comments. Please press one zero.
And at this time there are no other questions in queue.
Okay, great. Thanks, everyone for tuning in operator, why don't you give the conference call replay instructions once again.
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