IStar Dividend Appears to be in Jeopardy
Is IStar the Canary in the Coal Mine, or is this Just Fremont Coming Home to Roost?
IStar saw the need to issue interim estimated earnings estimates for the second quarter today, and it wasn't encouraging. As a result of loan losses and impairments uncovered during the Company's quarterly risk review process, IStar said it now expects net income per share to be in the range of $0.05 - $0.15, and that it will book an adjusted earnings loss of between $1.45 and $1.55 per share when its second quarter results are announced at the end of the month. There was no update on guidance for the full year. In the first quarter, IStar reported adjusted earnings of .87/share, which was down from .93/share for the first quarter of 2007.
The tone of the conference call was business-like, but Sugarman only amplified concerns with respect to the health of the Company's operating environment, saying he was "shocked" and "stunned" that the general credit environment had deteriorated so rapidly as a result of the rumors swirling around Fannie and Freddie.
Fortunately, the Company now has plenty of cash and liquidity, but Sugarman said that if Fannie and Freddie continue to deteriorate, "all options would be on the table" with respect to raising new capital. However, with the encumbrance of their net lease portfolio recently, and the issuance of $750 million of unsecured debt, additional secured financings would imperil IStar's investment grade debt rating - if it isn't imperiled already.
Significantly, the Company said it had alerted the ratings agencies to the revised guidance yesterday, but the agencies hadn't yet had time to "process" the information. However, management thinks that their leverage ratio would still remain "flattish" despite the asset write downs, so perhaps IStar can hang on to its rating for the time being. Nevertheless, the margin for error in this regard has disappeared; everything has to go right from here on out.
IStar's policy is to pay out 100% of taxable income in the form of dividends, but when asked about the ability to maintain the dividend, CEO Sugarman was circumspect. I would expect nothing more even in the best of circumstances, but it's obvious that taxable earnings are heading in the wrong direction, which suggests that that the dividend will soon follow suit.
The adjusted losses stemmed from loan loss provisions of approximately $275 million, including $215 million of asset specific provisions. In addition, the Company expects to record approximately $50 million of mark-to-market impairments and approximately $50 million in write-offs of goodwill and certain intangibles. The Company said about two thirds of the losses were in the Fremont portfolio, and that all of the asset specific losses were "expected".
I have heard this sentiment expressed from management before with respect to the Fremont deal, usually going something along the lines of "the assets are perfoming in-line with our original underwriting". Translated, that means that the deals they thought would be underwater when they priced the acquisition are in fact face down in the lake, and the deals they thought would be ok are actually doing ok.
But sometimes it helps to be a simpleton when wading through all this Park Avenue puffery, so the obvious simple question is this: if these losses were expected, then why the unexpected loss?
Information on how REITs work can be found in the post REIT Definition.
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IStar saw the need to issue interim estimated earnings estimates for the second quarter today, and it wasn't encouraging. As a result of loan losses and impairments uncovered during the Company's quarterly risk review process, IStar said it now expects net income per share to be in the range of $0.05 - $0.15, and that it will book an adjusted earnings loss of between $1.45 and $1.55 per share when its second quarter results are announced at the end of the month. There was no update on guidance for the full year. In the first quarter, IStar reported adjusted earnings of .87/share, which was down from .93/share for the first quarter of 2007.
The tone of the conference call was business-like, but Sugarman only amplified concerns with respect to the health of the Company's operating environment, saying he was "shocked" and "stunned" that the general credit environment had deteriorated so rapidly as a result of the rumors swirling around Fannie and Freddie.
Fortunately, the Company now has plenty of cash and liquidity, but Sugarman said that if Fannie and Freddie continue to deteriorate, "all options would be on the table" with respect to raising new capital. However, with the encumbrance of their net lease portfolio recently, and the issuance of $750 million of unsecured debt, additional secured financings would imperil IStar's investment grade debt rating - if it isn't imperiled already.
Significantly, the Company said it had alerted the ratings agencies to the revised guidance yesterday, but the agencies hadn't yet had time to "process" the information. However, management thinks that their leverage ratio would still remain "flattish" despite the asset write downs, so perhaps IStar can hang on to its rating for the time being. Nevertheless, the margin for error in this regard has disappeared; everything has to go right from here on out.
IStar's policy is to pay out 100% of taxable income in the form of dividends, but when asked about the ability to maintain the dividend, CEO Sugarman was circumspect. I would expect nothing more even in the best of circumstances, but it's obvious that taxable earnings are heading in the wrong direction, which suggests that that the dividend will soon follow suit.
The adjusted losses stemmed from loan loss provisions of approximately $275 million, including $215 million of asset specific provisions. In addition, the Company expects to record approximately $50 million of mark-to-market impairments and approximately $50 million in write-offs of goodwill and certain intangibles. The Company said about two thirds of the losses were in the Fremont portfolio, and that all of the asset specific losses were "expected".
I have heard this sentiment expressed from management before with respect to the Fremont deal, usually going something along the lines of "the assets are perfoming in-line with our original underwriting". Translated, that means that the deals they thought would be underwater when they priced the acquisition are in fact face down in the lake, and the deals they thought would be ok are actually doing ok.
But sometimes it helps to be a simpleton when wading through all this Park Avenue puffery, so the obvious simple question is this: if these losses were expected, then why the unexpected loss?
Information on how REITs work can be found in the post REIT Definition.
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Disclosure: None
Labels: High Yield Mortgage REITs, High Yield REITs, REIT Dividends, SFI
posted by REIT Wrecks at
6:55 AM
7 Comments:
You are confusing the write downs with the NPL additions. It was the NPL addition related to Freemont that was expected. Please be precise in your language.
Thank you for taking the time to clarify this; I'd like to reiterate the primary point, however, and that is: taxable cash earnings = dividends.
Great article on SFI. Just a question though -- obviously the marks and the credit provisions are just GAAP losses, but I'm curious how much the goodwill and intangible writeoffs are taxable losses. Basically it looks as though iStar is generating lots of taxable income from the asset sales, but not all of the losses are taxable in nature. Obviously asset sales to support a dividend are unsustainable in the long-run, so do you think iStar will go ahead and lower its dividend in an attempt to buy more time by rolling forward the capital gains? It's becoming more and more like the BRT Realty Trust situation, although BRT is now eating taxable losses on foreclosed properties. Your thoughts?
Gee, I wonder what company the person that posted that last comment works for? Sugarman, displays the type of hubris that is the ultimate downfall of many smart people. What financial company raises their dividend in the midst of a credit crisis? This company is on the verge of a downgrade to junk status and they still tell investors they do not need to raise capital (sounds like another former financial firm filled with hubris - BSC). Consider that SFI is highly leveraged, cannot retain much of its earnings due to it's REIT status, has many poorly performing assets and the Commercial Real Estate market has only just begun to show signs of cracking. The future is bleak for SFI, don't be fooled...
Lots of good discussion. Over 18% of the float is short. If the Company is able to maintain the dividend at close to the present rate for the rest of the year, will that be sufficient to encourage the shorts to cover?
What range do you forsee for the dividend in 2009?
The difference between the huge and terrifying GAAP losses vs. the taxable cash losses are what make this sector so appealing. The "vig" is that the incredibly frightening GAAP headline numbers can often obscure some pretty strong operating fundamentals.
Northstar is a great example of this, it took an almost $200 million GAAP loss despite having zero defaults across a $7.4 billion portfolio. (N.B., I am long Northstar)
On the other hand, REITs like Alesco are complete and thorough basket cases ($1.3 billion in 2007 GAAP losses, portfolio fully invested at the 2006/2007 peak, stuffed full of defaulting CDO debt and and dodgy Trups issued by shaky banks, REIT status in jeopardy, etc. etc.).
The trick here is to avoid the Alescos (if you can help it; it's not easy) and double down on the Northstars.
In that light, the trends at SFI are just not good. With with so much CRE capital vanishing from the market and/or returning to traditional underwriting (including old fashioned things like 75% LTV and 1.25 debt coverage on real income), there is not much room to bet on SFI as it is now constituted.
SFI was a much different company before Fremont, and if the Fremont deal had a lot of hair on it in May of 2007, it has a lot more hair on it now, a year later. CRE prices continue to soften in response to the lack of indiscriminate capital, and if sponsors (i.e. borrowers) either can't or don't want to come up with more cash to refinance deals, they simply hand the property back to the lender.
I am just not impressed with the bravado at these organizations, including SFI and BRT, when it comes to "agressively taking the keys back" as Sugarman said they were doing in an earlier conf. call. When this happens, the borrower has given up. Why would a lender in New York know the market in Milwaukee better than some local guy who is walking away from $2.5 million in equity?
Mortgage REITs are just not good at managing physical assets; their business plan is built around managing debt, not concrete and dirt. Look for the portfolios that are performing in-line or at least close to it, don't invest in a trading book full of question marks. Until the Fremont dust settles, I would avoid this one (P.S. I was long SFI in '07 but cut my losses at $22. And I thought I was an idiot then...)
The earnings report on Thursday will certainly be interesting. Good luck to everyone, and thanks for reading and commenting.
As of today The stock price is $5 per share with a price/book value of .26 and adequate liquidity for 2009. Aren't the negatives factored into stock price? I believe it is time to buy.
Also, FNM and FRE are getting better press. Several large commercial property deals just got done.
I was not a buyer at $8, $9 , $10 nor $22.
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