Jul 22, 2008 iStar Financial Inc. (SFI): High provisions and impairments partially offset by asset sale gain WHAT'S CHANGED: Credit quality is deteriorating faster than we had anticipated and market conditions remain challenging. We do not anticipate these trends to improve in the near-term. We maintain our Neutral rating on iStar shares. iStar pre-announced disappointing 2Q08 results (full release scheduled for July 31, 2008). Management expects to report adjusted EPS in the range of -$1.45 to -$1.55, compared to our previous estimate of a $0.77 gain: 1. Following the internal risk rating review, management expects to record a loan loss provision of ~$275 mn, including $215 mn of asset-specific provisions and $60 mn of reserve building. 2. The company will record a $50 mn mark-to-market impairment on three bond positions and a $50 mn write-off of goodwill and certain intangibles. iStar will also recognize a $300 mn gain on the sale of certain assets in the TimberStar and AutoStar portfolios. The gain on sale and the goodwill impairment are not included in adjusted EPS. 3. Current liquidity includes $1.4 bn of cash and available capacity under credit facilities. iStar is in compliance with its bank and bond covenants (which are not operational, even after Moody’s downgrade to Baa3). IMPLICATIONS: We lower adjusted EPS estimates to $0.70 in 2008 (from $3.20), $2.70 in 2009 (from $3.40) and $3.15 in 2010 (from $3.75) due to higher provisions and lower volumes. We introduce our quarterly estimates for 2009 ($0.64, $0.65, $0.68, $0.73) and 2010 ($0.75, $0.74, $0.79, $0.88). VALUATION: We lower our 12-month EVA-derived price target to $10 (from $22) due to our lower earnings and a significantly higher cost of equity. KEY RISKS: Higher credit and funding cost are the key risks to our forecast.
KEY RISKS: Higher credit and funding cost are the key risks to our forecast.
The Fed says it is going to raise rates and the Moody's downgrade means funding costs will be higher. Except for very short-term technical trading SFI should be avoided until CMBX BBB drops back to May lows.