STAR (2021 - Q1)

Good morning. And welcome to iStar’s First Quarter 2021 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 first quarter 2021 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. 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 istar.com in the Investors section. There will be a replay of the call beginning at 2 p.m. Eastern Time today and the replay is accessible on our website or by dialing 1-866-207-1041 with the confirmation code of 4108868.

Thanks, Jason, and good morning, everyone. We kicked off 2021 by continuing to focus on building our ground lease business and reducing our legacy asset portfolio. This is consistent with our previously announced plan to use the next two years to ensure the full value of our portfolio and strategy is reflected in the price of iStar shares. During the first quarter, Safehold continued to expand its business and achieved strong debut credit ratings based on the underlying principal safety of its ground lease assets, the growing scale and diversification of its portfolio and the conservative balance sheet strategies that has followed. Importantly, Safehold has also begun to highlight for shareholders, a framework for valuing its portfolio of residual ownership interest that has continued to grow in scale, as its portfolio of ground leases has grown. By growing Safehold, increasing its capital efficiency and spotlighting what we believe is significant value not yet reflected in the share price, we expect to be able to capture additional value for iStar and create additional gains on our very sizable ownership stake in Safehold. While continuing to grow the modern ground lease business, we've also been reducing our exposure to legacy assets. Progress in monetizing, both the long-term and short-term pools of legacy assets has reduced them as a percentage of the portfolio below our 15% target, and we continue to redeploy repatriated capital into the ground lease ecosystem and into prudent share repurchases. With that quick recap, let me turn it over to Jeremy for more detail on the quarter. Jeremy?

Thank you, Jay and good morning, everyone. My comments will refer to the earnings presentation, we published this morning on our website. And I'll begin on Slide 3 with an update on our strategy of scaling Safehold, strengthening our balance sheet and simplifying our business. Our investment in Safehold stands at $2.4 billion, which represents a $1.5 billion unrealized gain for iStar shareholders. Our balance sheet remains strong with $4.8 billion of unencumbered assets and a weighted average debt maturity of 4.1 years, allowing us significant financial flexibility in support of our strategy. And we continue to monetize our legacy asset portfolio with $56 million of sale proceeds, representing a net 6% reduction in that portfolio.

Great, Jeremy. So, just to sum up, with the economy on a path to reopening and the real estate market seeing more transaction activity. We think iStar is well-positioned to execute its strategy, helping Safehold continue to grow in scale and value and delivering strong returns to iStar shareholders. Okay. Operator, let's go ahead and open it up for questions.

Thank you. Today’s question-and-answer session will be conducted over the phone. Our first question comes from Jade Rahmani with KBW. Please go ahead.

Thank you very much. Looks like Safehold is continuing to make progress with its inaugural investment-grade bond issuance. So, congratulations on that. Was wondering if you've looked at a company in the UK, it's a ground lease company. They've issued securitizations, I believe, it's called Fairhold Securitisation Limited. Have you looked at that structure? And does that potentially offer any template for how investors might think about further unlocking of embedded value in the ground lease portfolio?

Hey, Jade. Thanks. Yes. No, we looked at that in the past. I think we believe the unsecured format is actually the best for delivering what we think is valuable to our customers. We've had those viewpoints since we went public that being the most flexible creating the lowest cost longest term capital, best positions us to create this whole new modern ground lease industry at scale. That's not to say there aren't opportunities to look at other structures to see if they can create even more benefits. But we worked hard to get to the investment-grade unsecured ratings, because we think right now that is the best way to open this market up.

Thank you for that. You've been discussing the value and the portfolio in the Safehold portfolio, the very bright and plans to enunciate what you believe is not appreciated by the market. Is the main action we should expect at least over the next two years as part of iStar's strategic plan to come in the form of communication? Or is there some kind of capital or structural action that may also take place to unlock that value?

Yes. I think step one is definitely education and communication. We just began laying out what we have believed would unlock that value for Safehold shareholders. And obviously, that reflects back into iStar's ownership stakes value. So, we're just at the very, very beginning. I think we're week or two into this. And we've got a quite positive response. People are starting to really dig in to think about it. I think they see now a little more clearly what we have been tracking for them as a very substantial asset in the Safehold value equation, and one that we had historically said, we're not going to talk about till it's large enough diversified enough has proved out enough of the variables that it will be obvious not only to real estate-centric investors but basically investors across almost any investment strategy. And we think that's the next big exciting part of the Safehold story. The business continues to grow. That growth continues to add value throughout the portfolio. But we did expect and have now finally shared with the market why we think there's a big part of that story that's not yet being valued. So, we'll continue to educate, communicate.

Thanks very much. Could you provide any color on the $88 million of capital deployment in the real estate finance and net lease segments? I think you mentioned two of the deals were in the SAFE/STAR program, but just wondering if you could provide some color on them?

Yes. We continue to look for places where we can enhance the overall ground lease ecosystem. One place we've seen with certain customers is to provide both a ground lease from Safehold and a first mortgage loan from iStar. We don't do it that often because the markets typically are fast enough and liquid enough that they've been the best source of capital for that first mortgage. But when the opportunity presents itself we think the risk-adjusted returns are quite attractive there as well. So that's the lending piece of it. And then on the net lease side, we continue to finish out the investment period for our joint venture with the sovereign wealth fund continue to see opportunities in that market before that investment period runs out later this year.

Thanks very much. And just finally on credit any changes in the outlook with respect to the loan portfolio as of today?

Well, I think as Jeremy said in his remarks, we received quite a number of payoffs and we're able to reverse some reserves based on the market environment today versus where it's been. We see the markets starting to open up get a little more liquid. Not to say there aren't going to be challenges across different parts of the commercial real estate world, but certainly the liquidity in the market has increased significantly. So we continue to see our customers’ borrowers on the loan book access capital either to repay us, pay us down improve whatever credit position we have. So you'll see those reserves this quarter being unwound as we see those market conditions improving.

Thanks for taking the questions.

Thanks, Jade.

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

Hi. Good morning. Jay, I appreciate the comments earlier on SAFE and then certainly the growth opportunity last week. I wanted to touch here on the iStar legacy stuff a lot of progress. Looks like sales and selling those at slight gains actually during the quarter. What's remaining? Can you talk about things that -- how much were resolutions or maybe monetization timelines delayed with COVID now that that's kind of a year back and you can look in the rearview mirror even though it's certainly not completely behind us, but how many assets were able to continue to kind of move at the uninterrupted pace towards resolution? And how many of those legacies were really extended and by how much?

Yes. Thanks, Steve. I guess the toughest part of COVID certainly was that the March to Labor Day period the markets were pretty much frozen. So not a lot of progress during that period on some of the assets that we had been teeing up. Coming out of Labor Day we certainly saw the beginnings of a revival in those conversations. And now as we head into 2021 certainly the tone is much better. The level of engagement is much higher. So we think we lost maybe six months to nine months in some of those conversations. But pretty pleased actually our asset management team has been doing a great job of preparing things putting them on the market monetizing them. You've seen the success as Jeremy walked through just in terms of reducing that portfolio. Made some progress. Obviously, we talked about peak Asbury being around in the latter part of last year. So you've seen some good progress there in reducing our capital. So on all fronts, we feel like certainly the direction is good and positive, which some of the stuff could have happened a little bit earlier. But candidly, we've given ourselves this two-year window to move all these chess pieces down the board. And right now, all the vectors are pointing in the right direction.

Thanks. And when you think about uses of cash between dividends buyback and buying SAFE shares, there's been a number of points in the past year or two, where you've been able to do concurrent private placements and invest significant amounts of money into SAFE. With the new debt in place there and kind of the growth outlook, that opportunity I don't know may not happen as frequently or in as much size. But can you talk about how you think about that allocation of dividend buybacks and SAFE purchases and maybe what levels you really focus when looking at those options?

Sure. I mean, we start with the premise of we wanted to build a really strong balance sheet, create a very safe corridor, no pun intended to help scale Safehold into what we think is kind of the next big milestone, which is about $5 billion of ground leases. So, that's really been the goal first and foremost to make sure, we had that strong foundation. Then, when we create excess capital, we do have some choices to make. We deploy money into things that expand the ground lease ecosystem, which we think enhances the value of our overall SAFE position. And then, we prudently use it to buy in shares, because we think they're still materially undervalue, not just the value of Safehold and the rest of our portfolio today, but as you heard us talk about, we think there's a whole another leg to the Safehold valuation that isn't even reflected in the share price in any material way today. So, we think we can really create a double barrel effect by continuing to grow Safehold continuing to get the market to understand the full value of what it's building and then, be thoughtful and prudent about buying shares when it makes sense. And so, whether it's SAFE, whether it's STAR, we think our mission is pretty clear, create the value and then capture it for shareholders.

Great. And then I guess last one on the buyback Jay, is there anything from a structural or covenant standpoint that limits how much STAR shares you'd be willing to repurchase?

Yes. Look, again, it's really a question of prudence and creating this very strong window to continue executing on our business plan. Other than saying, we want to be prudent and we want to make sure that we have a very strong balance sheet. That's our commitment to both our Board and our creditors. I think we have some flexibility. We've been building liquidity. We think, we've grown substantial value on the balance sheet through the SAFE position. So I think, it's really just a matter of prudence at this point in terms of executing the optimal strategy to again create the value capture the value. We don't want to do anything that might upset that applecart.

Great. Well, congratulations on the progress in Q1 and appreciate the update this morning.

Thanks, Steve.

Mr. Fooks, we have no further question.

Okay. Great. Thank you for tuning in. And if you should have any additional questions on today's earnings release, please feel free to contact me directly. Operator, would you please give the conference call replay instructions once again? Thanks.

Yes. Thank you. Ladies and gentlemen, this conference will be available for replay after 2:00 p.m. Eastern Time today, through May 13 at midnight. You may access the executive replay system at any time by dialing 1866-207-1041 and entering the access code 4108868. Those numbers again are one 1866-207-1041 with the access code of 4108868. That does conclude our conference for today. Thank you for your participation. You may now disconnect.