Analysis prepared by Bret Howlett on August 06, 2008, when the stock traded at $ 7.34. Highlights ä The downturn in the housing market and turmoil in the credit markets have taken a toll on SFI as non-performing assets continue to adversely affect results. Although SFI has $1.4 billion in cash, available lines of credit, and expects to receive $1 billion in asset repayments this year, we cannot rule out the need for additional capital if the credit environment worsens.We believe SFI's acquisition of Fremont's commercial loan portfolio has increased its risk exposure to condo conversions and construction loans, segments of the market we expect to show further deterioration in 2008. ä Due to recent asset sales and the company's lower profit forecast going forward, SFI reduced its third-quarter dividend to range of $0.30-$0.40 per share. Although SFI is currently in compliance with all of its covenants, we believe the company will be forced to de-leverage its balance sheets, which ultimately could pressure profits. Also, SFI's recent increase in its loan loss reserve may act as a drag on results in 2008. ä In 2008, we see funds from operations (FFO) at a loss $1.50 per share.We expect FFO per share of $2.20 in 2009. Investment Rationale/Risk ä Our hold recommendation reflects our view that SFI's credit issues have not stabilized and that its increased exposure to residential loans will create near-term volatility in results.We are also concerned about SFI's ability to raise debt to aggressively expand its investment portfolio due to increasing funding costs. In addition, the slowing economy should translate into poor corporate earnings and increasing vacancy rates for the corporate tenant leasing business in 2008. However, we view favorably SFI's low leverage levels relative to its competitors, its limited reliance on recourse financing, and its portfolio diversification. ä Risks to our recommendation and target price include a major slowdown in the economy, growing exposure to multi-family and constructions loans, and SFI's ability to source and fund new investments that fit its risk profile while meeting its return criteria. ä Our 12-month target price of $10 assumes SFI will generate FFO per share of $2.20 in 2009, and that the shares will trade at about 4.5X this estimate, toward the low end of the historical range. Qualitative Risk Assessment LOW MEDIUM HIGH Our risk assessment for SFI reflects the cyclical nature of the corporate real estate market as well as its potential credit risk and interest rate exposure. Partly offsetting this is SFI's portfolio diversification and asset/liability matching policy put in place to limit exposure to changes in interest rates. Quantitative Evaluations S&P Quality Ranking B+ D C B- B B+ A- A A+ Relative Strength Rank WEAK 8 LOWEST = 1 HIGHEST = 99 Revenue/FFO Data Revenue (Million $) 1Q 2Q 3Q 4Q Year 2008 164.7 -324.1 -- -- -- 2007 284.3 308.5 418.9 413.8 612.9 2006 224.6 236.8 256.6 265.3 980.2 2005 181.5 198.7 222.2 197.8 798.5 2004 169.4 182.1 177.3 186.4 694.4 2003 142.0 148.2 152.1 164.3 606.6 FFO Per Share ($) 2008 E0.87 E0.82 E0.75 E0.87 E-1.50 2007 -- -- -- -- -- 2006 -- -- -- -- -- 2005 -- -- -- -- -- 2004 -- -- -- -- -- 2003 -- -- -- -- -- Fiscal year ended Dec. 31. Next earnings report expected: Early November. Dividends have been paid since 1998. Source: Company reports. Stock Report | September 20, 2008 | NYS Symbol: SFI iStar Financial Inc. S&P Recommendation HOLD H H H H H Price $5.25 (as of Sep 19, 2008) 12-Mo. Target Price $10.00
Aug 01, 2008 iStar Financial Inc. (SFI): 2Q08: Forward looking comments after earnings pre-announcement WHAT'S CHANGED: Following the recent earnings pre-announcement, iStar management used the 2Q08 earnings call to provide investors with significant details about recent credit developments in the portfolio, the company’s liquidity position, and guidance for the remainder of the year. The market conditions are challenging and uncertainty is still high. Remain Neutral. (1) iStar forecasts an adjusted EPS loss for the full year 2008 in the $1.00 to $1.75 range. Management anticipates $300-$400 mn in additional reserves over the next two quarters. This guidance assumes that difficult market conditions prevail through the end of the year. (2) Management currently estimates that the 3Q2008 dividend will be between $0.30 and $0.40 per share (down from $0.87 in 2Q0208). The 4Q2008 dividend will be based on the amount necessary to distribute 100% of the taxable income for the year. In addition, the Board of Directors authorized a $50 mn common stock repurchase program. (3) Assuming no new obligations, management anticipates that iStar will not need to access the debt or equity markets through the end of 2009. This forecast does not account for potential NPL resolutions or asset sales. IMPLICATIONS: iStar reported a 2Q2008 adjusted EPS loss of $1.46, relative to a pre-announced range of -$1.45 to -$1.50. We lower our 2008 estimate to a loss of $1.70 (from +$0.70) and lower our forecast to $1.50 in 2009 (from $2.70) and $2.25 in 2010 (from $3.15) mostly due to higher provisions than previously anticipated. VALUATION: We lower our 12-month EVA-derived price target to $9 (from $10). KEY RISKS: Unforeseen credit deterioration poses the key risk to our EPS forecasts.