STAR (2020 - Q4)

Good morning. And welcome to iStar’s Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. As a reminder, today conference is being recorded. At this time, for opening remarks and introduction, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relation and Marketing. Please go ahead, sir. Jason Fo

Thank you, and good morning, everyone. Thank you for joining us today to review iStar’s fourth quarter and fiscal year 2020 earnings. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Marcos Alvarado, our President and Chief Investment Officer; and Jeremy Fox-Geen, our Chief Financial Officer.

Thanks, Jason. At the beginning of 2019, we announced our new business strategy would be to scale our ground lease business, simplify our portfolio and strengthen our balance sheet. We are pleased to have made excellent progress since then. Over the past two years Safehold’s ground lease portfolio has grown by over $2 billion. Our investment in Safehold has increased in value over 300% and our legacy assets have fallen below 15% of our portfolio. iStar’s share price over the same period has increased over 60% and total returns exceeded 70%. As we look forward to the next few years, our goal is to not only create further value in our ground lease business, but also to get that successfully reflected in the share price of iStar. Additional innovations, additional resources and the addition of investment grade credit ratings will all spur growth in our ground lease business at Safehold. Since creating the modern ground lease industry four years ago, we have continued to work to deliver the most efficient, lowest cost capital solutions for our customers. In addition, our ongoing work with real estate owners, lenders and intermediaries has enabled us to continue bringing innovations and expand the ground lease ecosystem. And the combination of new products and a lower cost of debt and equity at Safehold should enable us to capture more of this very large opportunity. The mandate at iStar over the next eight quarters will be to further simplify the balance sheet and to steadily take the steps necessary to maximize value for iStar shareholders. With Safehold’s business ramping up further, our net lease business reaching the end of its investment period later this year, legacy assets past, peak capital and declining and the loan business only committing capital to support new ground lease deals, we are well on our way to completing the migration to the ground lease business started two years ago. That migration should be almost fully complete over the next two years and we will have a chance then to look at the architecture in place and see if there are better ways to maximize value.

Thank you, Jay, and good morning, everyone. Let’s begin on slide three, with a review of the year against the three-part strategy we laid out two years ago. First part of that strategy was to scale Safehold and build the ground lease ecosystem. Safehold had a strong year, despite the challenges of the economic slowdown due to COVID-19. It was the best performing Nareit member stock for the second year running and the unrealized gain on our investment increased by $1 billion during the year to $1.6 billion at year end, which is of course, not reflected in our GAAP financial results. During 2020, we invested an additional $176 million into Safehold. The second part of our strategy was to strengthen our balance sheet in part to ensure we are able to continue to support Safehold’s growth. During 2020, we issued new bonds, reduced our fixed charges, extended our debt maturities, which now have a weighted average maturity of 4.3 years and increased our unencumbered asset base to $5 billion. We retained comfortable levels of liquidity throughout the year and as at year end we had $449 million in cash and revolver availability. The third part of our strategy was to simplify the business. During the year we sold $191 million of legacy assets, reducing the net balance of that portfolio by 20%. Turning the page to the fourth quarter, you see more on Safehold. Fourth quarter was a very strong quarter for Safehold, reflecting growing investment momentum. Safehold closed 13 ground leases, the most deals it is ever closed in the quarter, totaling $331 million. As the market’s understanding of the value embedded in a safe and growing pool of ground leases continue to develop, Safe delivered its investors 82% total shareholder return for the year. Additionally, Safehold was recently awarded investment grade credit ratings from both Moody’s and Fitch, which will help give it access to the investment grade unsecured bond market, helping to diversify its funding sources to a deep pool of flexible efficient capital. We believe these ratings will provide an important competitive advantage as the business continues to scale.

Great, Jeremy. With a clear to your plan and innovative business with significant upside and a skilled team executing on all fronts, we are looking forward to delivering on the opportunity ahead of us and continuing to drive returns for our shareholders. Operator, let’s go ahead and open it up for questions.

Thank you. Our first question comes from Jade Rahmani with KBW. Please go ahead.

Thank you very much for taking the questions. Good to speak with you. Just thinking about investment activity and iStar’s balance sheet, how do you think of weighing the trade-offs between making incremental investments in Safe, primarily in conjunction with their equity offerings and buying back iStar shares. I think in the quarter your disclosure indicates there was a $65 million investment in Safe and $7 million in iStar’s share repurchases. Safe I believe it’s trading at somewhere around 3 times book value, while iStar is trading at -- according to your market -- mark-to-market book value estimate something like 0.4 times. There may be those aren’t the appropriate metrics but just wondering how you are thinking about that?

Sure, Jade. So, I think, we said in the past, we think both companies have significant upside. We think there’s unrealized value at Safehold. We think there’s an entirely misunderstood component of value there that you will hear us talk about in 2021 that we think will add significant value at Safehold. So we still think it’s an exceptional investment opportunity not only in the context of the value today, but its growth prospects and certainly for iStar, it’s a major driver of value. So continuing to increase and grow the ground lease ecosystem will eventually in your significant benefits back to iStar. Over at iStar look, we think the value of the company does not yet fully reflect the business that we have started that again has a lot of upside from here and the faster growing business. But we certainly think it represents a very attractive place to put capital steadily done that over the past several years. We will continue to do that. Our Board is supportive of that all in a prudent manner. There is no urgency here to put it any stress on the balance sheet that we were just went through a significant cycle of strengthening. But we will continue to take advantage of that disparity and value at both Safehold and iStar.

In terms of the ground lease origination, it seems like there was a shift back toward slightly smaller deal sizes, more focus on multifamily, is that what you are seeing the most traction? Are you seeing any interest in on the office side or do you view the office sector is still too early for investors to be underwriting? And are you also looking at ground leases on other property types such as industrial, which has seen a big uplift in volumes recently?

Well, there’s a lot going on there. Let me flip it over to Marcos, he can tell you a little bit more what he is seeing on the ground.

Hey, Jade. So, yeah, you pointed out well, we did a record number of deals in Q4. I think it was the team’s efforts over the summer and the early parts of the pandemic. I am getting the word out continuing to improve our brand awareness. So there has been a push on the multifamily side, naturally really liquid market tons of capital flowing into that space. So 80% of the money we put out in Q4 at Safe was on the residential side. We are selectively looking at office assets, again very focused on the quality of the lease terms, the quality of the asset and the location of the asset, selectively looking at our hospitality.

Is there any interest in pursuing the strategy beyond the U.S. internationally booking in the U.K., where ground leases are prevalent?

Well, we think it’s a $7 trillion addressable market in the U.S. and we are a $3 billion. So I think we are going to focus our firepower and our knowledge base right now in the market we have been working on for the last four years. We are certainly an opportunity in other markets. But I would tell you the focus right now should stay here. We have lots of competitive advantages in the U.S. So, not at this point, Jade, no intention to take our eye off the ball.

In terms of ground lease originations, what’s the target for 2021, is it somewhere in the $1 billion to $1.5 billion range?

Yeah. Marcos, I think you have put a -- sort of a broad metric out there.

Yeah. Jade, what we have said is we have looked to double the portfolio over the next three years at least in Q4’s based and so, we have also said, we would be disappointed if we didn’t accomplish that.

And in terms of the ATM program, the Safe has in place, is that -- is the intention there to allow Safe to match deployment with or match equity issuance with deployment or is that a placeholder, what -- how should we think about the ATM program?

Yeah. I will flip it to Jeremy, other than just saying, it’s another tool in our arsenal to create the lowest cost capital for our customers. So the more efficient we can be the more efficient capital we can provide. But Jeremy anything else you want to add for that?

Jay, I am not sure I’d add anything to that. Jade, the ATM is a common tool to enable us to access the equity capital markets in most efficient way.

Thanks. Are there any other questions in the queue, otherwise I will get back in the call.

You can go ahead.

Okay. Are there any capital deployment plans in the real estate finance or net lease segment that you are thinking about for the coming year?

Marcos, you want to take that?

Yeah. As Jay mentioned, Jade, on the finance side, we are going to continue to support the ground lease ecosystem. We closed the SAFE-STAR one-stop capital solution in Q4. So we are continuing to drive that product. So that will be -- what we do on the finance side. On the net lease side, the investment window runs through into the third quarter of this year and so we will continue to deploy and find opportunities until that juncture.

And on legacy assets are there targets for dispositions this year?

Yeah. Look, I think, the goal is to continue to drive that number down. We want to get it down into the single digits over this two-year period. So the asset management team has been very effective at shrinking that portfolio. We see that continuing. As you know, the big three, Asbury Park, Magnolia Green and Grand Vista make up the majority of the remaining assets. So any progress on those will be the determining factor.

Thanks. Any changes on the credit outlook in the loan book?

No. No specific changes. Obviously COVID does impact particularly in the hospitality side of our business. So that’s the one we are watching. But we are hopeful that the vaccination process continues at pace. And I know a lot of people are feeling like once the comfort level -- psychological comfort levels met in the country, you could see a burst of activity that will obviously help hospitality, particularly the kind of assets that folks can travel too quickly. So we think all eyes on the economy overall just to see when we reach that psychological comfort point. But nothing has really changed since really a couple of quarters ago.

And then just lastly on the Safe CARET, I was wondering if there is a timeline that you are thinking about with respect to, I mean, you keep using these somewhat ambiguous terms in terms of showing the market, the value and things of that nature, not sure how that will transpire, I am sure you have a plan in mind. But is there a timeline over which we should be expecting some kind of event or trigger point to take place?

I don’t think it’s a trigger point. Jade, if you think back to the evolution of our whole business, we started people said, well, we want to see if the customers understand these capital efficiency, frictioning, cost reduction, risk reduction. And it took a while for us to educate the market for people to think about it to see it in action. And finally go, yeah, it actually works, it’s actually pretty good and then the repeat customer business really kind of sunk the hook and people got over their initial questions. Then we saw it on the, yeah, qualitative and quantitative measures of the cash flow streams. You can remember back people were trying to apply equity cap rates to ground leases. We said that doesn’t make any sense, the most comparable assets are long-term ultra high grade bonds. Ultimately, Green Street came out and confirmed it, that was the best benchmark and people start to use that methodology, because it makes sense, it’s the most logical, it matches credit and tenor and starting at 35% ground lease the total value is a very different proposition and starting at a 100% and using the same discount rates for those two investments just doesn’t make sense. So it takes a period of time for us to really simplify the message down to the basics to get people to use the same tools they use in other markets. To evaluate something that they probably haven’t had a chance to invest in before, we are the first national scale of institutional quality, we are the first public company, we are the first chance most investors get to invest in a very high quality institutional ground lease portfolio that not only on a static basis is very valuable but continues to grow we think exponentially. So there is a lot of dynamics and getting people to see what we saw four years ago. As we get bigger, as our footprint grows, it just gets easier. We spent a lot of time with the rating agencies. Helping them see through the same lens that they use and a lot of other companies to see ground leases in that context and you saw the result of that. So at each point along the way, we tried to really simplify the core principles of the business. The things that attracted us to it, the things that happen when you scale and grow this business are not obvious and sometimes we have to sit down ourselves and go through it multiple times to really understand, right? This is really simple. This is really analogous to things we do all over the place in the investment world. Why can’t we get people see it this way and we have been through three or four of these processes in our history, it doesn’t happened with the trigger point, it happened slowly and then it happened suddenly. And I think what you will see here is the same dynamic and we will be very thoughtful and trying to present a very simple template. More and more people will see that template, think about it, study it, try it, compare it, try to see holes in it. And ultimately, we think they will come back and say, well, this is actually the right way to look at it this is a total sense. We have made 2021 a year, certainly, I’d say forward, where we want that message to be clear and simple and resonate with as many investors as possible. And so I think what you will see is over certainly the duration of this year, a real attempt to make this a simple component of value at Safehold that everybody will understand. Will it happen overnight? No, it won’t. But it will happen. And so the same dynamic we have seen that is driven some of the successful with customers, some of the success with rating agencies, some of the success on their rent stream side. We think we will just now naturally translate into what we are doing on the next big piece and I think that’s why we are so excited going into 2021 for both Safehold shareholders, but also iStar shareholders, because we think this is a big component of value that we can get realized for both companies.

But we shouldn’t be thinking about some kind of padalist, like a securitization or an asset sale or portfolio, refinance or some kind of trigger point that unlocks and crystallizes the value that you are speaking about?

Yeah. No. I -- and I think, we have learned from the process over the last four years, how to make these things simple and resonate, and it’s rarely in a single meeting or a single moment. You have to educate the market first to help give people a chance to really think through, how best to communicate inside their own organizations, like, this is just like their sort of. This is how we value everything why would this be different. So I think that’s still the right process, certainly at the end of that education process there could be something more very specific. But to be honest, what we have seen to-date is, it’s the education part of the process that takes the time and delivers the results. Certainly, there are lots of things we are going to add to the story, lots of innovations that you are going to be hearing about. But this will relatively straightforward and simple, we just need to go out and help educate the market.

Thank you for taking the questions.

Our next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning.

Good morning.

Jay, I think you touched on a little bit in one of your responses to Jade, but can you touch on the roughly $200 million of hotel loans, kind of, the exposure there, any sequential changes you saw? And then I know you have mentioned, kind of, something you are watching closely with the vaccine a reopening, but where you are with -- where things stand with those properties?

Yeah. Look at -- the summer, there was quite a bit of optimism, the third wave or second wave depending on how you characterize it. I mean was much more severe than I think a lot of people hoped and so you saw a pullback and now I think in the spring and summer around the corner. I think there’s optimism again. The good news about hotels is the -- market changes every night. And so we saw a burst of activity. We have seen some of the cool off. We now are optimistic they will see a return to more normal activity later in this year. When it actually happens again, I think, it’s almost a psychological thing. But we think the long-term asset certainly justify the values and if we can get back to some sense of normalcy that part of the portfolio, we think will simply become a source of cash to continue growing the ground lease ecosystem.

Great. And I know you guys touched on Bowlero with the agreement there, but can you touch on the movie theater exposure. I know, one is listed on the new breakout of the 14. I appreciate you guys providing that. But can you talk about the movie theater exposure? How conversations or sponsors are rolling there and what the concerns are today?

Yeah. Look, that’s an industry that’s definitely suffering and we think there have been some changes in that industry that may not just go back to normal like the rest of the world does get back to normal. So we are studying, we are learning, we are talking with our tenants to really understand how they are dealing with it, everything from the paramount decree to some of the new streaming services potentially wanting to be in the exhibition business, lots of things going back and forth. We were happy to see AMC make significant strides in terms of their balance sheet, still plenty of challenges ahead. But that team will need to be creative and adapt to the new world, but they have got a very valuable footprint. We are probably not the ones to tell you where the movie industry will be in the next two years, three years, four years, but certainly, we think our tenants are working hard to try to figure that out and we have got assets that should be the beneficiaries when they do figure it out. So we are hanging tight. We called that out in past calls, because we think there has been real systemic change in an industry and makes it a little harder for us to project. But again, you saw some capital structure healing over the last quarter. So that’s a good thing.

Great. And final question for me, I appreciate the comments earlier about stock repurchases, marking the book for today, it puts our adjusted book around 38. So, certainly seems attractive for continued repurchases. But just shift to capital -- CapEx, can you talk about the CapEx that Asbury, Magnolia Green and Vista may need over the course of this year?

Yeah. This is not material in the grand scheme of things. Stephen, it’s -- we are past peak capital commitments at Magnolia and Asbury. It’s just not going to be a meaningful number in the grand scheme of things, but it’s probably in the order of $10 million, $20 million, if things go really well. But we expect to pick significantly more money out of those assets going forward. So shouldn’t really be meaningful.

Great. Thanks for the color, Jay.

Mr. Fooks, we have no further questions at this time.

Okay. Great. Thank you. If anyone else on the call should have additional questions on today’s earnings release, please feel free to just contact me directly. Tiffany, would you please give the conference call replay instructions again. Thanks.

Yeah. Thank you. Ladies and gentlemen, this conference will be available for replay after 1 p.m. Eastern Time today through March 10th at midnight. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and entering access code 3895665. Those numbers again are 1-866-207-1041 with the access code of 3895665. That does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.