Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by your conference when shortly and your line will be on music hold here until the conference begins.
Good morning, and welcome to Istar second quarter 2019 earnings Conference call. If you need assistance during todays call. Please press Star Zero as a reminder, today's conference is being recorded this time for opening remarks and instructions.
I would like to turn the conference over to Jason folks Senior Vice President Investor Relations and marketing. Please go ahead Sir.
Thank you and good morning, everyone. Thank you for joining us today to review I Star second quarter 2019 earnings with me today are Jay Sugarman, Chairman and Chief Executive Officer, and market Salvato, Our president and Chief investment Officer.
This morning, we publish our earnings presentation, highlighting our first our second quarter results and our call will further these slides, which can be found on our website at I start out calm in the investors section.
There will be a replay of the call beginning at 12 PM Eastern time today.
The replay is accessible on our website or by dialing one 804, 756 071 with a confirmation code of 469594.
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's 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, let's turn the call over to five stars Chairman and CEO Jay Sugarman Jay.
Thanks, Jason our second quarter was a very strong one delivering a record earnings and significantly increasing the strength of our balance sheet.
When we announced our strategic shift to focus on reinventing the ground lease sector at the beginning of the year, we created a list of goals we wanted to accomplish.
I'm pleased to report we've made excellent progress towards those goals in the first half of the year. So let me take you through what we've been able to do so far.
One of our key goals was to highlight the value in our portfolio that we felt was not being recognized in the share price.
To that end, we successfully closed two large transactions in the second quarter created approximately $400 million in gains above our book basis.
The sale of our preferred freezer portfolio to the largest cold storage company in the country.
And the expansion and extension of our bolero portfolio enabled us to not only demonstrate the value created in those portfolios portfolio assets over the years.
I would also help fuel the record earnings this quarter and materially increase book value.
We also saw it other ways to highlight shareholder value in 2019, we raised our dividend by 11% earlier in the year and have continued to buy back shares in the open market.
In the first half of the year, we bought back approximately 9% of outstanding shares at a cost below 950 per share capturing additional value.
Perhaps most importantly, given our strategic focus we wanted to help save fold gain traction with both customers and investors.
And continue to build its innovative and exciting growth story in the marketplace.
We believe safe hold is following a path many of the most successful companies in the country have taken making a big industry much more efficient and delivering a decisively better customer experience.
These are universal themes attractive to investors across the spectrum.
During the second quarter, we saw a safe hold reach several important milestones.
Its portfolio tripling in size since the IPO its market penetration with customers doubling and its share price rising some 50% since its IPO.
What's exciting to us as we believe we are still in the very early innings of this opportunity.
Staple recently increased its investment guidance for the year and its customer list continues to grow.
We have already seen a material increase in the value of ice stars shareholdings in safe well above our cost.
But we believe say full share price still reflects only a small portion of the underlying value. We believe we are creating and we will seek to continue investing in safe hold shares at these attractive prices.
I'll talk more about the second half of the year in a minute, let's have markets take you through the numbers first Marcos.
Thanks, Jay and good morning, everyone. My remarks will refer to the slide in the earnings presentation posted on our website. This morning.
Results were driven.
Primarily by two previously announced transactions preferred freezer, and Valero, which generated 220 million and 180 million gain this quarter respectively.
In our investment in stock appreciated by nearly 40% in Q2 as safe as one of the top performing reached during the quarter. All the recent progress. We have made has translated into significant growth in the book value per share and stop start stop with one of the top performing reached during the first quarter during Q2.
Flipping to slide four let me take a quick moment to walk you through this quarters large gains in a little bit more detail.
First the food freezing.
During the quarter, we sold a portfolio of seven cold storage properties net leased to preferred freezer full price of 440 million, including the assumption of 228 million of debt by the purchaser, resulting in a gain of $220 million.
As we have stated in the past we may opportunistically sell net lease assets that market conditions are favorable.
Second the Tilera, we need an additional investment of 57 million to purchase nine bowling and entertainment centers and committed to fund an additional 55 million towards future purchases.
All of the leases will be subject to our existing master leases.
In addition, we extended the term of our two master leases by 15 years to 2047.
As a result of the transaction, we were required to reclassify or at least from an operating lease to a sales type lease resulting in $180 million gain based on the fair market value of our assets.
Our long term relationship with Valero continues to be productive and this recent transaction helps highlight the underlying value that has been created in our portfolio over the last 15 years.
Moving to slide five we had a productive quarter investing over 250 million. This included $154 million at fundings, primarily related to loans and net leases and an additional $7 million of open market safety stock purchases.
Capex was a little over $50 million in the second quarter driven by our investment in adds three o'clock. We are very pleased with the progress we've made in Asbury and the continued strength in pricing for the residential condominiums that add sorry, I should call.
At the beginning of July we opened the Asbury Ocean Club Hotel and began closing on units since we opened the building we've seen a nice pickup in traffic at our sales center and more importantly, an increasing volume of units on the contract.
To the latter half of the year, we expect sales proceeds to exceed any remaining capital expenditures necessary at the building and as a result, our investment balance in Asbury Park should begin to decrease at the same time, we continue to market other legacy assets for sale.
We continue to believe star trades at a meaningful discount to book value.
On last quarter's call, we announced that the board reauthorized up to $50 million share repurchases.
During the quarter, we bought back 39 million of stock or about 6% of the shares outstanding.
On slide six we highlighted safes performance during the quarter.
As we announced earlier this year scaling the ground lease businesses become a focus if I start as go forward strategy and we are building momentum with both investors and customers in this endeavor.
For the second quarter sales generated 18 cents of earnings per share and signed up $186 million of ground leases and raised its full year investment target from 750 million to a billion, reflecting the strengthening pipeline.
Achieving this investment target with more than double the size of the portfolio from the beginning of the year.
And we are very excited by the progress we are making we believe the value creation should translate over to ice our stock performance.
Lastly on slide seven we highlighted substantial equity value growth that I star our book value per share on a GAAP and adjusted basis grew to 995 per share and 14 65 per share respectively.
And when factoring in the market value of our safe with investment the adjusted book value sits at $18.02 per share representing a significant premium to the current stock price.
In summary, this quarter is marked by significant gains continued investment activity and meaningful progress. Its April all come culminating in value growth that I start with that let me turn it back to Jay.
Thanks Marcus.
I mentioned, we'd achieve many of the goals we set out at the beginning of the year. So we began focusing on new goals for the second half of the year foremost among them is to accelerate the growth of safe home and we've raised say folds investment guidance for the full year by 33%.
Most of that increase taking place in the second half of the year.
Well also seek to further strengthen our balance sheet.
And lastly, we're doing a thorough search for a new CFO will be a strong addition to our team and will work to try to have that process ROP wrapped up by the end of the year.
And with that operator, let's go ahead and open it up.
Thank you todays question and answer session will be conducted electronically to ask a question. Please press star one at this time.
We'll take as many questions as time permits and proceed in the order that you signal us once again, please press star one to ask a question.
Pause just a moment to assemble the roster.
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First question is from Jade Rahmani with KBW. Please go ahead.
Thanks very much.
Remind us of what you just said regarding the balance sheet I think I heard you say strengthen the balance sheet curious if you could elaborate.
Yes look I think with the growing success of say fold.
Our goal is to create a very strong runway for I star.
Continued to help accelerate that growth yeah, we don't have any near term maturities, but as as the balance sheet was strengthened in the first half of the year, it's going to give us some opportunities to continue to.
Work on lengthening maturities et cetera on us in the second half of the year.
Okay and I assume in addition from ice does perspective, you would not contemplate or equity issuance.
But until we see the valuation gap close a little more jade its a right now were still a buyer of the stock.
Okay, turning to the Mark to market book value calculations do you think the loan portfolio as well as the legacy assets. In current terms are both were carrying value inclusive of any accumulated depreciation.
I do and when you say inclusive of depreciation you mean gross book value or not not correct, yes relative to gross book value Yeah.
I do.
Would you contemplate any bulk portfolio sales of.
For example, the real estate finance portfolio.
Or certain aspects of the net lease portfolio.
In order to.
Streamline the organization's focus on on the ground lease business.
Yes, I think as we said in the past those are part of the long term strategic goals. We're looking for the best place to deploy capital and right now we can tell you that.
The ground lease sector is a big focus for us.
Well, we can been able and won't be able to deploy all the capital that I star has.
If we were to.
Exit other businesses and right now those other businesses are actually helping or continue the ecosystem that we're trying to build so right. Now you know net leases still a core part of our business and finance is still one of our core capabilities.
If we were to find an opportunity to redeploy capital.
Those are certainly places we could access a significant amount of capital.
Okay.
In terms of the safe float and stated goal for it to grow its equity base, what's the rationale behind stars continue.
Regular purchases of safe stock.
Yeah.
That is part of a tenbfive plan. So it's not something we're doing on a discretionary basis, we set that up earlier in the year when we thought the value was.
Significantly undervalued and we still think it represents an extraordinary investment for five stars shareholders. We represent only about five or maybe on a slow day, 10% of the actual volume in the marketplace. So we're not driving the stock higher Oh, we're just being quiet in the background and continuing to accumulate shares that we think you know do not represent anywhere close to the value. We think we are creating.
Yeah, we continue to believe it's one of the best investments, we can make with capital and I Star and.
We will continue to look for ways to increase that position.
And on the net and the real estate finance portfolio are there any loans in the portfolio on a watch list or that you're reviewing in terms of potential.
No risk of impairment or loss.
Oh, there are none I will tell you you know we're continuing to watch this macro environment.
Just to make sure that we don't get surprised from somewhere yeah. We have seen some of these markets get a very frothy and miss on the finance side. So we have not been participating.
But you know what what we're most focused on right now is just continuing to build a strong balance sheet and really accelerating say fold.
Right now the loan book, you know it shouldn't be a problem.
Thanks, very much for taking the questions they should.
We have question from Stephen laws with Raymond James. Please go ahead.
Hi, good morning.
I appreciate you taking my questions a lot a lot of moving parts. This quarter I appreciate the disclosure in your.
Your investor supplement.
Can you give us a little more color on Asbury I know you you're getting in a point, where the investment of your exposure starts to decrease and you mentioned that in your prepared remarks, Jay but can you can you talk about kind of the timing of that and how we should think about.
You know that the say you know sales there and and you know is that a 12 month process isn't a 36 month process you know how how should we think about the Asbury development is that.
Oh, you know Bob progress is from today.
Sure.
Look we have.
Not a lot of work to build the profile of Asbury Park.
We've seen some really strong results and we think the Asbury Ocean club is only going to add to that story line. Our internal projections were more like 36 months in terms of total sell out with the hotel opening a we've got a lot of positive reaction from people who are surprised that.
Number of buyers, who want to focus on the highest priced units.
Oh there was some question in the marketplace about is there a ceiling in new Jersey on you know what people will pay for high quality well at the beach and I think yeah, we feel pretty comfortable that there is a lot of interest in the highest quality units in the building. So we have no no concerns about sort of the price point issue that it was still a question Mark about average selling price and the building is still around $1100 a foot, which as you know a new high watermark and I think we we believe its well deserved given what we are.
But on the ground there.
Great well, Jay if someone is landlocked <unk> high end at the Beach sounds awfully nice [laughter].
Thinking about the other legacy or non core assets, although Asbury certainly kinda seems core at this point, but as we think about the noncore and the legacy or the development portfolio how much more capex do you think is.
He is remaining for for you to get the assets, where you would like them to be in their business plan and then can monetize those and kind of whats the timeframe over those expenditures.
Yeah, I mean, I think we give ourselves a plus or minus 10% cushion you're on on what we have to invest and what decisions are you know the best for shareholders.
As we said at the beginning of the year, we are definitely not going to be.
Allocating a lot of capital unless there's a significant return associated with that so I I still expect is as we grind down that legacy portfolio, particularly in the.
Next 12 months.
That you'll see less and less capital to go into that but we still have some outstanding capital for Asbury have some outstanding capital sort of in a in a bunch of smaller chunks, but overall the trend is definitely less and less and less and I think once the Asbury is fully built and all that capital is out yeah, you're not gonna have really need to pay attention to that number much more.
Right and you touched on this.
And you did mention that the safe purchases are under a tenbfive, but.
Can you talk about how you view repurchasing.
I star shares here versus other opportunities for your capital, whether it's a increasing investment in safe or whether it's a new investment sincerely dad or other things you can do but you know how do you think about the trade offs between stock repurchases that as that I start given the appreciation versus other opportunities.
Yeah. Good question I, you know I think we we have historically said, we're always looking and evaluating real time about where's the best place to deploy capital to build overall value.
And that incorporates not only the asset value per share, but also the franchise value in the enterprise value.
We think say fold right now not only as an opportunity to create a very attractive assets on a risk adjusted basis.
But also to create real franchise value that will reflect back into ice star shares. So our first and foremost target right now is to build that business Buildout enterprise.
Capture value for ice star through its ownership position and management position there.
But if we have excess liquidity, if we have excess capital we're constantly looking at the ability to buy and I start shares at a discount is also very attractive and as I said, we think the finance markets pretty frothy right now so that's not really getting a lot of our attention. We think we can create much better risk adjusted returns inside our own balance sheet and inside of safe hold.
So it continues to be a focus we've already gone back for a second authorization from our board, we still have some availability under that one and will take a new look at things one so that's exhausted.
Yeah, and I should have mentioned in the last question I guess, the other option would be to increase the dividend other than buying back stock, which you've already done one since you've reinstated the dividend so.
You know are there any thoughts around that I don't think you guys are tied to any distribution requirements just given.
You know well tax loss carry forwards, probably but any any thoughts around again the dividend versus repurchase.
Yeah, I think I you know our construct was really to review that annually not quarterly we made the 11% increase really to demonstrate the confidence we have in the rest of the year.
That's helpful. Jay to think about that more on an annual reviews. So I appreciate the color. There. Thank you very much for taking my questions. Thank you.
And I suppose we have no further questions.
Okay, great. Thank you and anyone else you'd have additional questions on today's earnings release, please feel free to contact me directly.
Paul would you please give the conference call replay instructions once again thanks.
Ladies and gentlemen, this conference will be available for replay after noon eastern time today through midnight Eastern time on August 15th you May access <unk> teleconference replay system at anytime by dialing one 804 756 701 entering the access code Foursix nine Fivenine for international participants dial three to 03653 to four four.
Access code 469594.
And that does conclude our conference for today. Thank you for your participation for using <unk> executive teleconference.
You may now disconnect.
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