I do not think that it is likely that iStar will report much of a loss in Q4, if any.
I believe that they will have managed their affairs so that any additions to loss reserves or realized loses would be effectively offset by gains on purchase of debt.
The reason I believe this is that iStar really has no choice but to avoid losses.
Their tangible net worth covenant requirement is $2.3 Billion. At the end of Q3 their TNW was about $2.5 Billion, so they had a safety margin of about $200MM.
They cannot underany circumstances allow the TNW covenant to be breached, as it would result in the maturity acceleration of all debt, both directly and through cross default provisions. So they have to manage their business to avoid reductions in tangible net worth, period, which means they can't tolerate much in the way of operating losses in Q4. And I doubt they want to cut into their safety margin. In fact, they may want to increase it.
The good news is that they have the big 3, the elements needed to prevail: i.e. the resources, the will and the opportunity.
At end Q3 they had $800MM of cash and projected a positive Q4 cash flow of $500MM. This is plenty of powder to buy as much debt as needed to manage their net worth and liquidity needs. The discounted debt has and is available in sufficient magnitude. Cash flow from distressed asset sales contribute to the resources, potentially in an accelerated way.
Purchase of common shares decreases their TNW, and thus works against covenant compliance, but the purchase of $50MM of shares may not be or have been material to their resource bucket, though it is highly relevant to their BV per share and their per share earnings going forward.
I have no idea what actually happened in Q4. I expect them to take a hard line on assets and write off as many as necessary and make whatever additions to reserves are needed. However, I expect them to offset whatever that number is with debt gains.
Given that their baseline quarterly earnings from the good book and CTL is about $100MM per quarter, and given that they are known to have purchased almost $400MM of debt by Nov 10, with an almost $200MM gain, I do not think it is improbable that iStar shows a profit in Q4 while increasing reserves and/or NPLs, decreasing leverage and improving liquidity. Obviously that may not be the case.
In any event, however, those calling for a "huge" loss in Q4 have not connected the dots, in my most humble opinion.
Thoughtful comments appreciated.
I aM learning everyday, I am sending your posts to siblings and a brother-in-law. with all data. My brother in law lunchs with istar main broker's AND HIS BROTHERS. THEY ARE personial friends and competitors. I want to put Istar to rest or buy a few hundred thou. the brother runs a small firm over 700 on payroll, he was a trustee
for resalution trust properties in the 1980's. they is a RE BK trustee to.
Just out of curiosity, where are you from? Are you overseas or here in the US? Your lack of communication skills leads all to believe you are either a first generation citizen of the US or not from here at all. I am not entirely doubting your motives toward sfi, but it would probably help your communication status if we knew why you respond the way you do to the issues at hand for sfi and I am always up for verifyable information that may help with buying decisions.
You prove my point with name calling and having to use subcontractors for most or all you work.
how this related to IStar. loans on over priced properities, with buildings that have condos that donot rent.
I have seen dozens of clowns like you, in a up swing market, the worst used carsales men make millions. In the down turn they all go BK. and get devorced.
I wish you no luck, you have no business or you would not have time to write on the message board.
Best reguards, you wataby treehouse builder
Bully for you, You probably were no good with the tools.
How many times have YOU given last look to your prefered subs, while bid shopping?
Look at the Dick Corporation 50+ Miller act filings, ther standard offer is the demanded 20% discount after work is completed and accepted.
Or fight it out with the Surty. Poor subs do not know the Surty is running the company and trying to recoup past losses,
I bet your outfit is management only. you do strip mall? with Illligial mexican at below min wage. Or maybe you
run a H.R.Horton type scam like in Jersey.
One Excellant P.M. a Woody Woodhouse of
Al Cohan construction, Denver,colo. (a Wiese of Iowa division) lamenting to me while going up the elevators in the Fox Plaza building (owner Marvin Davis)
Ya, the Die Hard movie building. He was making the most money on the Self preformed work on the job. Door hanging 100% and Parking structure.
building was on time and underbudget. walk it.
P.S. the man that build Wiese, used to help his Father set forms and place and finish concrete with him. At Iowa State he was star on football team and First in Class Civil Eng. Look up the U.S. News and ratings for C.M. colleges.
You've obviously done your research. I appreciate the way you articulate your assessment of the facts, and I agree with your take on the situation at SFI. Thanks for the intelligent posts!
What do you see as the business model going forward out of 09? It seems istar will finish funding prior commitments, but since the ability to raise new capital is severely diminished, I am assuming istar is not going looking for new commitments, because they would have to do so out of cash and they need that cash to pay their own debt obligations. Is this company just going to shrink in size of assets and revenue while reducing overall debt, which I do not have a problem with given all of my holdings are in the preferred. Is it the opinion that they are morphing into a management only company?
I think it is likely that structurally iStar will look a lot like it does now but smaller, perhaps asset size in the $8-10 Billion range. They should be able to manage that transition reasonably well - they have about $2.5 Billion in book capital, $6 Billion in debt due in 2012 or later, and about $3 Billion in bank revolvers which I suspect are likely to be available to them in some form or another. Taken together there is plausible funding for the size I mentioned.
I do believe that additional preferreds are possible in the future, once the company and markets stabilize and owners of capital stop hiding in the mattress and under the Treasury rocks.
The economic Darwinism that's occurring in the REIT space is good for iStar, in my opinion, as it is cleansing the weak players and nonsense entities out of the system. The idea the CDO stuffing REITs will have access to cheap and gullible long term non-recourse debt with which to fund their houses of cards is not tenable. That business is gone. I do think sustainable CRE securitization will return in some fashion for rationally underwritten deals.
I also believe that iStar can do just fine on the earnings front, particularly with a cheap share buyback to the 100MM share range. I don't know if that's happened or not.
To those who believe the $2 share price "proves" that iStar is a bad company with no future - I would note that it is the fact that the company is selling for $2 that makes it interesting to me...... as a non believer in the efficient market hypothesis. I've bought shares as high as $25 in late 2007 and as low as .83 last year and enjoy the singular pleasure of being down 90% in some lots and up almost 200% in others. Sorta funny.
I'm not predicting any of this - just describing what I believe are in the set of possible outcomes. I am an entrepreneur/investor fond of generating investment theses and acting accordingly. It is entirely possible that I don't know what I'm talking about but every now and then I get something right, and this one's been fun to focus on.
I have some dumb thoughts, they will be come mature vets of this industry. If they make it.
the will purchase properties, as an insurance company does. stable returns.
they will operate like hard nosed landlords. Loaning money on inflated properties will stop. I can see them picking up some of the smaller Reits.
they may have a stable of hotels.
If they make it.
they will also be come experts in construction real time costs and progress time frames.
Half of U.S. construction Managers are really trained as Mafia type conmen. they screw the banks,owners and subcontractors. this is my opinion.
Nice prognosis, Quad. Got a bunch of ABK, some URE and may be picking up some SFI tomorrow.
Thanks for the updates. Ya' know, it sure doesn't seem like prices are still falling. Will be interesting to see what their non perfornmance % will be Q4.
<At end Q3 they had $800MM of cash and projected a positive Q4 cash flow of $500MM.>
Great compilation Q, Thanks for sharing. My understanding is that they expect to end Q4 with $500M cash, not generate $500M cash flow in 4Q. Perhaps that is what you meant. Below is the relevant excerpt from the 3Q ER:
"Now let's review our sources and uses of funds for the remainder of this year and 2009, as we see it today. As of today and as opposed to the 9/30 numbers that you have in the press release, we have approximately $700 million of cash and available capacity in our credit facilities, and today this is comprised primarily of cash. Given the heightened uncertainty surrounding the credit markets, we feel it is appropriate to maintain a large cash position.
In November and December, we expect to receive approximately $400 million in repayments net of the A-participation pay down. In addition, we expect approximately $100 million of NPL resolutions and other asset monetization, bringing our total sources to $1.2 billion for the balance of 2008.
Our uses of capital for the remainder of 2008 include approximately $600 million of forward commitments that we expect to fund, as well as approximately $100 million of secured debt pay downs, bringing total approximately $700 million. So as you'll see, our sources for the remainder of 2008 exceed our uses for the remainder of the year by approximately $500 million".>
Since they ended 3Q with $800M in cash, that would imply $300M use of cash in 4Q to fund loan commits, secured debt paydowns, etc net of payoffs, etc. If anyone has more accurate info, please correct me.
1. Don't you think the projected cash flow of $500MM this quarter might be just a little in jeopardy? You know, with the frozen markets thing?
2. The distressed asset sales are moving too slowly and are too small to offset the increases in NPLs. They moved a billion into NPL last quarter.
3. In one of your last posts, you said that they could buy back debt at .30 of par, yet their purchases have been averaging twice that expensive. Please explain.
4. They HAVE to use much of their free cash flow this year to buy back debt maturing THIS year. It's nice to talk about buying long maturing debt at .3, but they don't have the money to do it.
5. They have billions in scheduled exits this year in their loan portfolio. What happens if that number comes in at even half of that? Oh, and they don't have any extra cash because they spent it on 3-5 year maturing debt to keep their covenants afloat.
6. There's a delicate timing issue right now with the debt buybacks. If liquidity starts coming back to the unsecured debt markets before the CRE market is stabalized, Istar could see their bonds rally while still having to add losses from NPL. The first part is already starting to happen. It's highly unusual for even an extremely distressed but asset rich company like Istar to have debt trading at .3 of par when it's fairly clear that bond holders will get near full payment.
I agree that this is a powerful and unusual alchemy for Istar, but it can go away VERY quickly.
My take on the situation is that the ONLY way they can do everything they need to do is to secure borrow a huge amount against their unecumbered portfolio and then use the proceeds to buy back unsecured. Who is going to lend that quantity to them? Anybody got a spare billion?
Thank you for your thoughtful post.
My replies as follows:
1. Their cash flow is comprised of several different elements: regular interest and principal paydowns, rents, sales of properties, asset resolutions, etc. Yes, I think it is possible some of these elements were jostled by the market dislocations. Their projected end of year liquidity of $1.3 Billion provides some buffer to that. Cash could also have exceeded projections due to additional asset resolutions, payoffs by strong borrowers due to low interest rate environment, etc.
2. We do not have any official information about distressed asset sales, just the odd press release;
3. Buying back debt involves several factors. The debt noted in their 10Q was almost 50% gain. Interest rate on the debt, maturity dates, etc. all come into play. The point is that they can dump UNSCHEDULED asset resolutions (cash they didn't expect to have) at a deep discount and apply those funds to the cheap debt;
4. Their "free cash flow" is what's left after satisfying their debt paydowns through 2009. If they satisfy any of it at less than par they have more cash than projected;
5. I don't know what you mean by a scheduled "exit". If you are referring to asset maturities their projections have a cushion in them, abetted by below par debt curtailments and accelerated asset dispositions. This is a legitimate issue they must manage.
6. Basically I think the troubled assets and liabilities are pretty favorably correlated. The distressed debt is not only a function of what's happening at iStar but also of the needs of distressed sellers who need liquidity. My own opinion is that the coefficient of correlation is favorable to iStar.
I do not believe that iStar needs to borrow any more money at this point. They have said the same. They are going to manage their assets to cash flow needs. I'm not sure why you think they need to borrow money when they are forecasting a positive cash flow in a hostile environment. It it doesn't come to pass they need to compensate by more active asset resolution.
Remember, they have "good" assets equal to 75% of their total.
I appreciate your thoughts.
Maybe they could use their stock as collateral?
After all these guys are geniuses and are riding out the storm. According to this forum Istar's deft maneuvers have put them in the catbird seat and can handle just about any scenario thrown their way!
Its funny how the kool aid drinkers keep spewing out positives about this company while their stock trades at 8 quarters a share.
I understand how breaching the Tangible Net Worth covenant impacts all debt securities through cross call provisions and the like, but my (perhaps naive) question is which instruments actually have the TNW covenant or, more importantly, who owns the instruments directly pertaining to the Tangible Net Worth covenant? They could be in the driver's seat, no?
The bank debt contains the TNW covenants. They are not in the driver's seat unless it is breached, whereupon they would have the right, but not the obligation, to declare a default which would trigger the cross defaults, which may or may not be a preferred course of action. They could elect to amend the covenant or waive it for a period of time.