We rate shares of iStar Financial Hold/Speculative (2S). Target price is $8. Despite the recent trip-up on credit, iStar (SFI) has a well-regarded management team and franchise. Since the Fremont (FMT) portfolio acquisition in 2007, the shares have been under pressure due to the poor credit performance of the condo loan portfolio. Given the headwinds of the credit market dislocation which are unlikely to abate anytime soon, we are taking a more cautious stance on SFI shares. In addition, the risks of a US recession are clearly high which will likely lead to deteriorating credit quality.
We use a price-to-book multiple as our primary metric and use dividend yield as a secondary support valuation.
Our 12-month target price is $8 per share. Our target price is based on a 0.6x price-to-book.
Price-to-book. Applying a 0.6x price-to-book ratio to our fwd 12 mo book value estimate of approx. $13, generates a $8 share price. The peers trade at an average of 0.6x (range of 0.2x-0.8x). SFI has historically traded north of 2x P/B, prior to the credit crisis.
Dividend Yield. Based on our fwd 12 mo. dividend, our target price implies a fwd dividend yield of approximately 15%. This yield is lower than the peer average of 18% (peer range is 6% to 22.5%). We are comfortable with the apparent premium, as SFI's dividend has more certainty following mgt's guidance on the Q2 conf call. SFI's dividend is now baking in a more conservative loan loss provision guidance.
I don't want to draw any comparisons but Citi had holds on Fannie Mae and Freddie Mac on the FRI before the government takeover so I wouldn't look to Citi for an evaluation of anything. Citi really missed the entire move in tanker stocks after downgrading a year ago.
Citi also had a hold and $4 on Washington Mutual. I think Citi does explain that these are speculative holds as opposed to the "hold" we normally see giving themselves enough wiggle room should things sour.
The only reason I know about Citi is I received their revised reports by email on the SUN of that weekend of the takeover when they revised the price target on each from $4 to $0.31....
first time in my lifetime that a SUN ratings change was sent out to investors.
Its a stretch to say Citi "likes" SFI.
Wachovia Securities Market Perform 3 No Change 08/29/2008
Stifel Nicolaus/Hanifen Hold 3 No Change 08/01/2008
Deutsche Bank Hold 3 No Change 07/31/2008
Lehman Bros Overwght 4 No Change 05/07/2008
Citigroup Hold 3 No Change 05/02/2008
"SFI's dividend has more certainty following mgt's guidance on the Q2 conf call."
That's an odd statement, did the analyst really listen to the call??
Rice: " . . . the fourth quarter dividend will effectively be used to deliver a 100% taxable income to maintain REIT status but certainly no more."
Question: "It could very well be zero?"
Rice: "It could be zero, it could be... we've had a lot of gains in the portfolio this year which are good taxable REIT income, so I don't mean to be... we are not being coy, we are not being... its just there are lot of moving pieces . . ."
I got the impression that 2009 could be zero as well, depending on actual loan losses (deductible) vs. impairments (not deductible). I believe Rice summed up 2009 pretty well: "I think our thought process is that things will remain bad as they are now for the foreseeable future . . . the overall macro view is bad, same bad." Sugarman did think their portfolio was positive in terms of their ability to monitor and manage most of it, but I think if you're buying SFI, you're not really buying cash flow or equity. Think of it as a $3+ call option, expiration somewhere around the beginning of 2010. Sugarman: "I guess the question really Don, is how bad can it be?" We'll see.
If it's an option, it's a deep in the money call with no expiry whose strike price is well below intrinsic value.
The "bad" that Sugarman and Rice are talking about is the real estate market and its impact on loss reserves, not the fate of the company.
One absolutely gets much more than a flyer when buying SFI shares. The math here is simple: when loan losses stop getting booked earnings will be large, in the meantime you're getting assets for cents on the buck.