Q4 2022 iStar Inc Earnings Call

Good morning, and welcome to.

Fourth quarter and fiscal year 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 star one.

Wanted 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 P. S. Huffman Senior Vice President of capital market under Investor Relations. Please go ahead Sir.

Good morning, everyone and thank you for joining us today to review <unk> fourth quarter and fiscal year 2022 earnings.

With me today are Jay Sugarman, Chairman and Chief Executive Officer, Marcos Alvarado, President and Chief Investment Officer, and Brett <unk> 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 I started out com in the investors section.

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 870 74814010 with a confirmation code of 470 582.

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 may 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 Pearce.

To all of you for joining us today.

2022 was an important transition year for <unk>.

Monetizing legacy assets and positioning faithful to unlock its full potential and the prime focus for some time now.

And the merger announcement in August was the culmination of that strategy.

Since that time, we've continued to make progress on working hard to reach the finish line scheduling the vote for early next month and ideally closing by the end of the quarter.

Letting go of the past and embracing the future is always difficult.

Had to make some tough decisions along the way.

But the payoffs should be well worth the effort we remain convinced our modern ground lease structure has become a powerful new source of capital for the real estate industry.

We are pleased to have firmly established saiful cause the innovative leader of this important new asset class.

With much of our Starz large holdings and faithful is being delivered to shareholders either directly or indirectly the benefits of what we're building post merger should accrue in large part to ice star shareholders over the coming years.

Much hard work remains to realize the full promise of our ground lease strategy and to see its value fully reflected in our share price.

Have a very clear vision of how to unlock that value. Once we can put the current merger and market disruptions behind us.

Okay, let's turn it over to Marcos and breadth to recap the quarter and the year Marcos.

Thank you Jay and good morning, everyone, let's begin on slide three to discuss the quarter's highlights.

We've made meaningful progress monetizing assets in the fourth quarter and through the early part of 2023.

Generating approximately $150 million in net proceeds.

We currently estimate an additional $110 million of proceeds are required to reach our monitor monetization target in connection with the merger.

As previously disclosed we have agreed to repay our preferred stock and unsecured notes as part of the merger.

Special meetings of the safe and star shareholders have been scheduled for March nine.

Key remaining conditions to close our obtaining shareholder approvals completing the SEC review and NASDAQ listing process for the spinoff and meeting our asset monetization goal.

Based on where we sit today, we believe there is a potential pathway to an approximate March 31 closing date.

Also on December 7th I Star returned approximately $192 million to shareholders in the form of a special dividend of $6 6 million state co chairs.

Faithful continues to scale its position as the leader of the modern ground lease industry and 2022 was another strong year for the business.

The company continued to grow its portfolio with high quality investments supported by a strong balance sheet.

And we expect that balance sheet to strengthen as staples has been put on positive outlook by both Moody's and Fitch over the last six months.

While the broader real estate markets have seen a slowdown and we expect near term transaction volume to remain spotty.

We believe safe is well positioned for the inevitable market rebound with.

With ample liquidity to fund new ground lease investments as opportunities arise.

As I stars largest and most valuable asset stapled success will ultimately accrue to the benefit of <unk> shareholders.

Slide four details our earnings for the quarter and the year.

For the fourth quarter net income was a loss of $86 7 million or a loss of $1 per diluted common share.

And adjusted earnings were a loss of $79 9 million or a loss of 92 per diluted common share for.

For the full year net income was $397 8 million and earnings per share was $4 92.

Adjusted earnings was $522 million or $6 25 per share.

Slide five is an overview of the business with a simplified presentation of our balance sheet.

At the end of the fourth quarter, we had approximately $1 4 billion of unrestricted cash.

The carrying value of <unk> stock ground lease plus and leasehold loan investments of $1 3 billion and $483 million of legacy and other noncore assets getting to a total assets on the balance sheet of approximately $3 3 billion.

On the right side of the balance sheet, we had $1 7 billion of remaining debt $305 million of preferred equity and $162 million of other liabilities and noncontrolling interests, including the accrued balance of iPad, leaving us with common equity of approximately $1 1 billion.

When adjusting for safe Mark to market value and our estimate of the incremental unapproved IPF amounts are common equity at $909 million or $10 48 per share.

The decrease in this balance from last quarter is primarily due to the special dividend of $6 6 million safe shares distributed to star sure shareholders on December seven.

At the time of the special dividend safe was trading at $28 95.

Versus a $32 11 as of closed last Friday.

Additionally, we have provided a sensitivity analysis on the adjusted common equity value per share should safe stock go up or down by $10.

And with that let me turn it over to Brett to go through the portfolio in more detail.

Thank you Marco and good morning, everyone.

Let's walk through our portfolios business lines, beginning with safe hold on slide six.

During the fourth quarter stakeholder originated three new ground leases for $79 million and for the full year stakeholder originated 26, new ground leases for one 4 billion.

These new originations are well diversified by property type and location and included ground leases and 15 unique markets, including for institutional life science assets in markets, such as Boston and the Bay area, and 15 multifamily assets and markets, including New York, Los Angeles, Nashville, Denver and Miami.

Amy.

Unrealized capital appreciation or the estimated value of the building sitting about states ground lease basis.

Increased year over year by $2 4 billion and currently stands at $10 5 billion for the portfolio.

They both balance sheet and liquidity profile remains strong and subsequent to quarter end say, both closed an additional $500 million unsecured revolving credit facility, increasing the company's total unsecured credit lines to 185 billion.

Including the new revolver stapled ended the quarter with approximately $1 2 billion of liquidity.

While stapled financial performance portfolio metrics and balance sheet have all been positive.

Unfavorable market backdrop and interest rate volatility have been a negative for the stock, which you can see reflected in the mark to market carrying value.

We do not believe current places properly capture a stapled sum of the parts value proposition and are optimistic for what the future holds as the merger concludes and market stabilize.

On slide seven we detail our investments in the ground lease ecosystem.

As we previously discussed I start has two separate funds that enable us to pursue additional ground lease opportunities in the broader ground lease ecosystem.

One provides pre development ground leases and the other provides a leasehold loans that are combined with of course, a fault ground lease.

The net carrying value for the seven investments in these funds is $91 million with targeted returns between 9% and 12%.

There are approximately $147 million of unfunded commitments associated with these ground lease related investments.

Slide eight highlights the remaining non ground leased assets, including sales progress during the fourth quarter plus first quarter to date.

And the real estate finance portfolio, we received $69 million of repayments during the quarter.

There are four loans remaining in this portfolio with a carrying value of $86 million or 51% decrease from last quarter.

And the real estate and strategic asset portfolios, we received $60 million of proceeds and distributions from asset sales during the quarter, which generated net gains of $15 million.

At quarter end real estate and strategic assets totaled $345 million of carrying value of which Asbury Park, Magnolia green represented $269 million or <unk>, 78%.

The nine short term assets totaled $76 million.

Subsequent to quarter end, we received an additional $21 million of proceeds from continued real estate and strategic asset sales, which included the sale of one property for $17 million proceeds and regular way lot sales in our land portfolio for $4 million.

At this juncture, we estimate that approximately $110 million of additional proceeds are needed to reach our monetization target.

As previously disclosed we have agreed to repay our preferred stock and unsecured notes in connection with the merger.

Slide nine shows an overview of our corporate debt, which remains largely static from last quarter at.

At quarter end, there was approximately $1 7 billion of total debt outstanding with a weighted average maturity of two nine years.

In conclusion, we continue to make significant progress towards finalizing the business combination with default and look forward to the benefits of the transformation of our business.

And with that let me turn it back to Jay.

Thanks, Brett.

I've been asked in the past how to best summarize what we're doing at Staples and how large the ground lease opportunity is.

The answer is a simple as that is powerful we are providing a lower cost and lower risk way for commercial property owners and developers to capitalize on our properties.

And we're providing a faster growing and more valuable way for investors to participate in an asset class that has historically proven to be the source of great well.

As a result, we think the potential opportunity ahead of US is very large very exciting and very achievable.

And on that note operator, let's open it up for questions.

Thank you, ladies and gentlemen, if you would 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 signaled that.

Once again, please press star one to ask a question, we'll pause just a moment to assemble the roster.

Thank you. Your first question is coming from Stephen laws of Raymond James Steven Your line is live.

Hi, good morning.

First of all I'd touch on the remaining remaining asset sales I think it was $110 million you mentioned in the remarks.

Will that come from the the loan book.

I guess strategic legacy assets kind of where we see that and then.

Tie that and the impairment and reserve build during the fourth quarter can you talk about those and is that to Mark our reserve assets kind of where you anticipate selling those in the next six.

Six to eight weeks.

Thank you, Steve and good morning.

Good morning, Josh, Yes, we've got a handful of assets, we're getting to the finish line.

We've had some gains on some will probably.

Take some marks as we showed in the fourth quarter to get rid of some of the other ones, but we are tracking nicely to get to the finish line.

Yes.

Little bit of flux or can't predict exactly which assets, but we feel pretty confident.

We've got a handle on which which ones are in the market, which ones are under contract, which ones are going to get repaid.

So we feel like no matter what happens we should be able to figure it out here pretty shortly.

Great and then.

Move to closing here you know what transaction related expenses will be incurred at star.

We talked last week about the safe side of things.

Curious about any transaction related expenses, we should run through think about their numbers.

Sure Yeah I think.

What we have accrued to date in 'twenty, two is roughly $10 million I think going forward.

Everything related to advisers legal.

Accounting tax structuring.

All be accounted for merger at merger closing.

And obviously there is a.

Cost to repay our liabilities.

So we can work through.

Through a precise number.

Jay alluded to on the.

On the gains and losses.

There's lots of it theres lots of expenses and Theres lots of change.

<unk> and <unk>.

Proceeds for different asset sales.

And just to give you some context to that earlier question and we've booked over $30 million of gains.

To date since the merger announcement on those sales.

We will have to see.

Overall net net net.

As I mentioned, some some winners and some.

Some other assets, where we need to consider that will while the expenses will be flushed out and hopefully it'll be.

Our net Walsh.

Great appreciate the color this morning.

Thank you very much. Your next question is coming from Jade Rahmani from K B W. James Your line is live.

Thank you very much.

Kevin I stars historical.

Length of experience through real estate cycles I wanted to ask what are your expectations regarding the magnitude of any credit downturn in the market. This cycle and do you expect that kind of business to generate outsized investment opportunities for new safe is that channel going to be a meaningful source of.

Investment activity do you think or not really.

Hey, Jacob I'll, let Marco is weighing on some of the opportunities we expect to see but you're asking a great question, which is we've been through many many cycles.

The one thing, we always see a little bit of a creative destruction process.

Higher rates, obviously are not good for real estate overall, just in terms of overall values, but they tend to choke off supply, which then.

It creates the conditions for a rebound.

This could take some time, there's some stress in the market as you can probably.

Tell particularly on some of the asset classes like office and retail.

That transition is going to take.

Quite a bit of time and quite a bit of effort.

But what we've seen over longer periods of time is.

Higher rates tough market conditions do start to create the.

The foundation for a rebound in the future.

Generally has been a great place to deploy capital so I'll, let marcos walked through how we're thinking about that hey.

Hey, Jade.

To tackle what Jay just said, it's been an interesting sort of arc to the end of last year.

The liquidity desert, there wasn't a lot of opportunity.

To see some green shoots in our core business. It's safe. So people are engaged we're seeing new transactions.

But as we've alluded to on both the safe and the star cause in the short term.

Think transaction volume is going to be somewhat muted.

But we remain optimistic that the second half of the year.

We will be able to deploy capital as buyers and sellers sort of come to this equilibrium in past that they're at today.

And do you think that recapitalization of deals that have trouble will be a meaningful pull to play in.

And in terms of the fund business that you're launching is that an area in which to raise capital.

Yes, I think in the short term Jay you know a lot of the things that we're seeing in our pipeline are these quote unquote sort of recap distressed opportunities assets that may have been slightly over levered, but theres still an agreement on value. So think about that multifamily is item on one asset class on one side of the spectrum I think on the office side as Jay alluded to there is.

Probably a longer term sort of creative destruction going on and.

And we haven't seen that sort of put out and then.

As it relates to our fund management business that ultimately will sit and say, yes, we're excited about.

Watching that post the merger and taking advantage of the opportunity, but again I think we're going to be primarily focused on the core business, which is existing ground leases.

Thanks very much.

Are there any potential changes you envision happening with respect to the merger.

Perhaps related to high stocks capital structure or some other dynamics or is your baseline expectation that we'll just.

Close.

As.

Originally structured.

Yes, nothing material J&J, we're getting to the short strokes here. So it will move a few things around if we need to just to get.

It was done as soon as possible. It's it has been a major distraction for the firm and so we'd like to get back to business and.

Get out of.

Sort of the merger restrictions, we've been living under for 678 months now.

So everything feels like it's tracking we've been within all of the Guardrails, we set up.

Thank you.

Thank you very much just as a reminder, if anyone does have any questions. Please press star one on your side.

Mr. Wilson, we have no further questions.

Thank you.

You should have any additional questions on today's release, please feel free to contact me directly.

Jenny would you mind, giving the conference replay instructions once again.

Of course that 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 8774814010.

Okay.

Full seven five 8-K.

Thank you everyone. This does conclude today's conference call you May <unk>.

Connect your lines and have a wonderful day. Thank you for your participation.