Q3 2022 iStar Inc Earnings Call
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Good morning, ladies and gentlemen.
I'll come to <unk>.
Third quarter earnings call.
At this time, all participants have been placed on a listen only mode.
The floor will be open.
Questions and comments.
The presentation.
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Want to ask a question 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.
Thank you and good morning, everyone.
Thank you for joining us today to review <unk> third quarter 2000 to 2022 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, Microsoft Dorado, President and Chief investment Officer, and bread assets, 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 start out com in the investors section.
There will be a replay of the call beginning at two o'clock PM Eastern time today and the replay successful on our website or by dialing one 877 or 81010 with the confirmation code of <unk>.
46958.
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.
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 screens 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.
During the third quarter are starting to sample to announce an agreement on a strategic combination.
Took another major step forward in building the first fully integrated pure play ground lease company in the public markets.
The proposed combination will add a new anchor investor in the company when completed and help highlight the valuable carried component of the combined companies growing ground lease portfolio.
Unfortunately, a highly volatile market marked by historic interest rate increases is made near term conditions very challenging.
We continue to work through those challenges and believe the long term prospects for our modern ground lease business remain compelling.
In addition, while our asset management and capital markets teams made continued progress in the quarter simplifying the balance sheet and monetizing noncore assets. We do expect these tougher market conditions to slow the expected timing of certain asset sales as.
As a result, we now expect the timing of the merger the fall at the end of the first quarter or early in the second quarter.
Moving to the core ground lease business.
<unk> closed on $280 million in new ground leases on a half a dozen high quality multifamily assets.
Giving customers, a clear capital advantage and helping them execute their business plan.
<unk> continued to grow and now exceeds $10 billion.
And stapled sold a ground lease in an off market opportunity working a sizable capital gains.
All positives in an otherwise challenging market, but has slowed real estate transaction activity and limited capital availability to the industry.
We expect ground lease volumes in the fourth quarter to reflect a slowing backdrop.
With that let's take a look at the quarter in more detail with Marcus and Brian .
Argos.
Thank you Jay and good morning, everyone.
Let's begin on slide three to discuss the quarter's activity.
During the third quarter, we continue to make progress on asset monetization and generated meaningful proceeds through asset sales and loan repayments.
As Jay alluded to the uncertain economic environment and reduced real estate transaction volume could potentially slow the pace of go forward asset sales.
Despite the current choppy markets stapled saw steady growth during the third quarter, both through new originations along with recognizing a significant gain from the sale of a ground lease.
Additionally, we continue to streamline our balance sheet by extinguishing debt and ended the quarter with approximately $1 3 billion of cash on hand.
Let's turn to slide four which details our earnings results for.
For the quarter net income was $12 1 million or <unk> 14 per diluted common share.
And adjusted earnings were $28 5 million or <unk> 33 per diluted common share.
Of note during the quarter, we negotiated with certain holders of our convertible notes on an early redemption of $81 million of those notes in exchange for $3 3 million shares of stock common stock and $43 million of cash.
These transactions resulted in a $12 million and $12 million of noncash losses on early extinguishment of debt during the quarter, which also resulted in a net increase to equity of $38 million.
Slide five shows an overview of our business with a simplified presentation of our balance sheet.
As mentioned before at the end of the third quarter, we had approximately $1 3 billion of unrestricted cash.
Carrying value of stapled stock ground lease plus and leasehold loan investments of $1 55 billion and $637 million of legacy assets and other assets.
Getting us to a total assets on the simplified version of the balance sheet of $3 5 billion.
On the right side of the balance sheet, we had $1 7 billion of remaining debt.
$305 million of preferred equity and $144 million of other liabilities and noncontrolling interests, including the accrued balance of iPad, leaving us with common equity of $1 4 billion.
When adjusting for safe Mark to market value and our estimate of the incremental on accrued amounts are common equity per share as adjusted is approximately $1 billion or $12 33 per share.
The significant decrease in this balance from last quarter is due to the pullback in safe market value and given our meaningful stock ownership safes market value will continue to be the biggest driver of value to <unk> shareholders.
As you can see on the slide we have provided a sensitivity analysis on this adjusted common equity value per share metric should safe stock price go up or down by $10 from here.
And with that let me turn it over to Brett to go through the portfolio in more detail.
Thank you Marcus and good morning, everyone.
Let's walk through our portfolio of businesses, beginning with safe hold on slide six.
During the third quarter say fold made steady progress originating $284 million of new ground lease transactions.
Also during the quarter <unk> sold one ground lease from its portfolio located in the Washington, DC, MSA, which generated an approximately $46 million net gain.
Separately as we previously announced MSP partners has committed to purchasing carrot at a 2 billion valuation, which is a substantial mark for the underappreciated asset and should serve as a good data point as we continue to seek to unlock carrots value for shareholders.
And lastly, Moody's does recognize the benefits of the merger transaction and put date bolt on positive outlook with a path to becoming an a rated borrower.
<unk> ended the quarter with more than $750 million of liquidity for future investments.
However, the current elevated rate environment has had a significant impact on <unk> stock price and you can see that reflected on the left side of the slide is the market value has fallen.
The $1 2 billion, which is below our carrying value.
On slide seven.
We detail our investments in the ground lease ecosystem.
As we've previously discussed <unk> has two separate funds centered on investing in the ground lease ecosystem, which enables us to pursue additional ground lease opportunities.
One is for pre development phase ground leases, while the other is providing leasehold loans that are combined with the safe hold ground lease.
During the third quarter based on milestones being met high Star sold one ground lease asset to safe hold for $36 million from its ground lease plus portfolio.
Our net carrying value for these investments totaled $90 million and is made up of seven assets with targeted.
Returns between 9% to 12%.
Additionally, we have $147 million of unfunded commitments associated with these ground leases ground lease related investments.
Slide eight highlights what remains of our non ground lease assets.
These are the assets that will either be monetized or moved over to Sprint Cup.
And our real estate finance portfolio during the quarter, we received proceeds from loan repayments and sales totaling $33 million and recognized $3 million of gains associated with these sales.
Remaining in this portfolio was six loans carried at $177 million.
We anticipate the majority of these loans to be repaid prior to merger closing.
Regarding our legacy in strategic assets, we received $35 million of proceeds and distributions from asset sales during the quarter, which generated an additional $11 million of gains.
What remains is a total of $394 million of carrying value of which Asbury Park Magnolia Green represent the two long term assets totaling $270 million as well as 13 short term assets, which totaled $124 million.
In total during the quarter I star generated $105 million of proceeds from asset sales loan repayments and a ground lease plus sale of the faithful.
Slide nine shows an overview of our corporate debt.
Continuing on our strategy to simplify the balance sheet reduced outstanding debt and preserve cash during the third quarter I star extinguished, a total of $155 million of debt, including $93 million of convertible notes and $62 million of open market purchases of our bonds at a price close to par.
At quarter end, we had approximately $1 7 billion of total outstanding debt with a weighted average maturity of three two years.
In conclusion, we continue to execute on our stated strategies to strengthen and streamline our portfolio.
Additionally, we are also making significant progress in the business combination with Stifel and look forward to providing you more details as they unfold.
With that let me turn it back to Jack.
Thanks, Brett.
I know a number of you have asked when the merger proxy is expected to be filed.
There are a lot of documents and different parties in the mix. So it's been time consuming to say the least.
I think we're nearing the home stretch on getting those documents filed.
Now, let's open up for questions operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one at this time.
We will take as many questions as time permits and proceed in the order that you signal us once.
Once again, please press star one to ask a question.
Pause just a moment to assemble the roster.
Thank you. Your first question is coming from Stephen laws of Raymond James Steven Please ask your question.
Hi, good morning.
Hey, I guess first maybe start with the.
Asset sales I think in the original announcement it was $400 million was the number provided.
You look at the sales that took place this quarter does that kind of all work against that number or is there an update.
How many more asset sales from here and then kind of on that topic any any sales in October .
And is there anything chunky or is it really just the loan pay offs and smaller assets.
Hey, Stephen Yes.
Do you think you've got it right.
I think about a dozen smaller.
Operating assets, we need to work through.
Those are as you might suspect processes, where your market get bids you've got to go through the process, sometimes the top pitfalls out you can go back.
That process is a bit frustrating, but team continues to make progress on the loan payoffs, yes, those are more chunky.
We have better visibility on those.
Again this is a market that we take nothing for granted.
Our team continues to work hard with our customers to make sure those get to the finish line.
And then one.
One or two sizable asthma.
We're working on but we can just deal by where the market is both.
Our original Timeframes are probably going to slip here.
Along those lines kind of on the timing you mentioned that the proxy.
As you look at it the path I think it's a boat and maybe it will take time for SEC review the documents can kind of lay down the lay out the path or timeframe. The events kind of up to end of Q1 early Q2 as far as maybe a targeted closing and is it correct that I think theres two extension options actually.
Allowed us to push through September 30 at the latest at the market.
Doesn't cooperate.
Yes, you are right there.
Real outside data.
Number 30.
Continue to have.
A lot of.
Time and effort going into trying to get those done by the end of the first quarter beginning of second quarter. There is some.
Small penalties involved we missed the first quarter.
Larger ones with the most of the second quarter. So.
A lot of motivation to try to get it done.
The process from here to the finish line has filed a proxy to get the FCC comments worked through that process with them.
There are multiple documents going.
At once so we'll probably have some some work to do with them.
And then the asset sales in parallel are taking place so.
We certainly believe the timeframe works to get those done by the end of the first quarter.
Early second quarter.
Thanks for laying that out sounds like everybody to have a busy holiday on your side with all of that.
We will have a question on the liabilities you retired extinguished a lot of that during the <unk>.
Quarter converts and then.
Can you talk about the <unk>.
<unk> of how you think about retiring debt.
How you look at relative to the attractiveness of what to retire first and kind of how we're going to see the that shrink between now and closing.
Yes, Brett I don't know if you want to lay out how we've been looking at the market right now.
Sure absolutely Hi, it's David.
Yes, we.
We definitely are retired a decent amount in the third quarter Opportunistically I think as Jay alluded to.
Once we kind of get through our filings and get through our process. We will continue to shrink down the balance I think the bonds right now are trading slightly below par.
And we're.
Earning a decent rate on our cash so I think the.
There is a lot less and we just need to get through our process to kind of to.
So the merger to shrink down that debt balance.
During the quarter, we obviously took out the $93 million.
Converts were able to issue.
What is that right.
The accretive equity.
On the bonds will continue to look to.
Get approvals to continue to shrink those balances as well.
Thanks for the color Brett.
Get the comments this morning.
Yeah.
Thank you very much. Your next question is coming from Jade Rami Romani at Kb WJ you line is live.
Thank you very much to follow up on the liabilities.
The weighted average duration is three two years the weighted average.
Cost is $4, 79%.
Even excluding the trups.
<unk> is between $4 75, and $5 50.
I mean, given the turmoil playing out today and recently in the capital markets and just extreme levels of interest rate volatility wouldn't.
Wouldn't you choose to keep those liabilities and look at that as an asset.
Yes, Hey, Jed.
Definitely in a market like this we're looking at all.
The sources of capital and definitely does look attractive on their face they do have a different covenant package.
Even.
We said at Star and safe hold so kind of take that into account as you saw as part of the transaction we are keeping the trups.
In the system so.
But definitely wasn't this paper both from duration.
Where it sits in pricing that made sense.
But I.
I think ultimately it all have the lineup to make sense and we think the structure we've come up with is still.
But.
Definitely if the market continues to deteriorate I'm sure those special committees will be taking that into consideration.
Thank you.
So I guess just.
To put a finer point on that.
Whose decision is it to repurchase and be buying back bonds is it is it management's decision or is it the special committee's decision.
That typically is a board decision.
And we have.
Authorizations that they have to be approved by the board.
The actual execution would obviously be at management's.
But the.
Sure.
Meaningful transaction like that would have board authorization.
Okay.
On the ground lease side are you are you all looking to do anything different.
I see the appeal of offering.
Our cash.
Cost that's below where.
Real estate investors can get a mortgage today, so clearly that is compelling for them.
What about on the safe and I start investing side.
Different to extract higher economics other than just repricing for where the.
Bond market is today.
The market was going to give some thoughts on that.
Hey, Jay.
So yes, I think you hit the nail on the head there is obviously a shift going on in pricing.
We're sort of balancing that with our customers' needs.
As you can imagine there is a little bit of a sticker shock going across the board not just from our cost of capital, but ultimately.
The fee financing alternatives, where are cap rates today in the market.
You heard us on the call with our expectation that there's going to be a slowdown given all of those dynamics.
So we're trying to be clever and figure out how to meet our customers' needs and ultimately meet.
Our needs and create value for our shareholders. So we're thinking about some different structures in alternatives, but as of right now we've just moved out our base pricing.
I'm curious about how youre thinking of the office market is it a sector you're avoiding that's an area, where we're seeing the most extreme liquidity shortfall a lot of the commercial mortgage Reits have been booking surprisingly large loan loss provision even on office deals that are well leased.
They previously rated class or rated risk rated two class a type office deals.
Those deals aren't even being able to refinance right now.
So if you were positively inclined toward office, there could be a massive opportunity probably step and they're not sure. How you feel how do you feel about the office market.
I think we share the broad sentiment that there is.
Potentially a decent amount of value destruction in the office space.
A broad generalization as you know Jade that's asset specific and market specific.
Quality and ultimately demand.
In certain markets, you can bifurcate that from San Francisco to 1%.
Potentially some of the southeast in Sun belt markets, where theres, probably better demand.
I think we're being extremely selective on office, we are looking at it.
Our rule of thumb is a little bit differently certainly values.
Our underwriting process, we look at alternative use we look at land value and ultimately when you look at where the land is.
And so I would say for the right asset for the right location, we will do some office transactions going forward.
Thank you very much.
Thank you. Your next question is coming from Matthew Howlett of B Riley Murphy. Please ask your question.
Okay, everyone. Thanks for taking my question.
Just on.
The sensitivity I realize.
How dependent.
On the price of <unk> common stock.
But when you just stripping that out when you look at when you gave the number.
David the merger I think it was 18 45 is safe.
Safety is at $43 45.
It's holding that constant as anything I mean, there's a lot of moving parts of iPad with noncore assets with debt repurchases as anything move one way or the other.
The move into safe share price.
Okay.
Yes, Brian although we run at.
I will now since since then that shows any kind of material variance Pip is clearly come down but that is tied directly to safe share price at this point.
Couple of the asset sales I think youll see some marginal degradation and realized values, but.
We're seeing we're still seeing.
So.
Modest numbers relative to the overall scale of the transaction so.
I think at this point, it's more a function of.
Getting to the finish line.
Having as much cash as we have on the balance sheet is a bit of a negative drag.
So having a run out longer is.
They're not good.
So we're trying to move everything along as quickly as we can but I'd.
I'd say that that's probably the biggest delta we see us.
Just friction costs.
Waiting to close the transaction.
We certainly hope to close by year end I don't think Thats.
Reasonable anymore. So extra three months four months of those type of cost to us.
Got you okay.
Still.
Certainly in this environment, but certainly.
I was pleased with the gains you had.
$11 million gains yet on the legacy stuff and I guess, that's my other question.
You look at spin co.
Go in there ultimately obviously, it's dominated by the Asbury Magnolia Green.
We had a lot of questions about the potential of.
<unk> clearly, it's going to take a while to monetize.
<unk> be some expenses in there.
Any update on but then again, it's a drag I mean people don't want to give you full credit for the book value today on spin co.
Any update on Asbury Park, Magnolia, that's worth pointing out and then I read an article on the trade rags that fit the bill.
Eloping carbon sort of Coney island is that going to be stinker Im just curious.
What you can give us an update on those two assets and spin co in general.
Yes.
Okay.
I think the rags doing as good a job as they can.
In that particular instance, we're actually selling the land to somebody who is doing the development.
Oh.
A quick portfolio.
So we're not the developer there.
Okay.
Margaret.
Things specific I mean, we continue to have a number of projects.
Process to sell to.
Third parties in Asbury Park.
Again, that's a fairly long development process that we have to shepherd for them.
So.
Certainly hopeful but short term bumps in the road in the marketplace for.
Well don't change long term investment thesis around why that was very special and why these particular parcels.
We think or.
Fit very well into there.
The buyers strategic plan. So we're going to continue to continue to execute that business plan the markets Leytonstone Magnolia Green, Yes, let me just give you some high level color.
In Q3, we sold eight units at Asbury Ocean Club.
So we're sort of winding down on our inventory there which is great.
Asbury Ocean club in the Asbury had their best two years from a revpar standpoint, so they're performing well.
As I think about the longer term picture for both Matt Green in Asbury Asbury Theyre, obviously susceptible to.
The rate environment, we're in so I do expect some slowdown.
And the monetization over the short term.
Those assets.
But theres still plowing along.
Q3 in the early days of Q4.
Great well look for an update and good luck with I know, it's a lot of our good luck with getting everything closed I think theres, obviously, a lot of potential and upside once you get through this but I appreciate all the hard work.
Thank you.
Yeah.
Thank you very much Mr. Fix we have no further questions.
Okay. Thank you if anyone should have any additional questions on today's earnings release, please feel free to contact me directly.
Jenny would you please give the conference call replay instructions again.
No problem, there will be a replay of the call beginning at two P. M. Eastern time today. The replay is accessible on our website or by dialing 18774814010 with the confirmation code.
Paul Thanks nine five.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
For your participation.
Okay.
Okay.
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