iStar Inc (STAR) Q2 2019 Earnings Call Transcript
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iStar Inc (NYSE: STAR)
Q2 2019 Earnings Call
Aug 1, 2019, 10:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning and welcome to iStar's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.
At this time, for opening remarks and instructions, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.
Jason Fooks -- Senior Vice President of Investor Relations and Marketing
Thank you, and good morning, everyone. Thank you for joining us today to review iStar's first quarter 2019 earnings. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Andy Richardson, our Chief Financial Officer and President of Land and Development; Marcus Alvarado, our President and Chief Investment Officer.
This morning we published our earnings presentation highlighting our first -- second quarter results, and our call will refer to these slides, which can be found on our website at istar.com in the Investors section. There'll be a replay of the call, beginning at 12:00 PM Eastern Time today. The replay is accessible on our website or by dialing 1800-475-6071 with the confirmation code of 469594.
Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call which are not historical facts will be forward-looking. iStar's actual results may differ materially from these forward-looking statements. And the risk factors that could cause these differences are detailed in our SEC reports. iStar disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.
Now, I like to turn the call over to iStar's Chairman and CEO, Jay Sugarman. Jay?
Jay Sugarman -- Chairman and Chief Executive Officer
Thanks, Jason. Our second quarter was a very strong one, delivering record earnings and significantly increasing the strength of our balance sheet. When we announced our strategic shift to focus on reinventing the ground lease sector at the beginning of the year, we created a list of goals we wanted to accomplish. I'm pleased to report, we've made excellent progress toward those goals in the first half of the year. So let me take you through what we've been able to do so far.
One of our key goals was to highlight the value in our portfolio that we felt was not being recognized in the share price. To that end, we successfully closed two large transactions in the second quarter and created approximately $400 million in gains above our book basis. The sale of our Preferred Freezer portfolio to the largest cold storage company in the country and the expansion and extension of our Bowlero portfolio enabled us to not only demonstrate the value created in those portfolio assets over the years, but also help fuel the record earnings this quarter and materially increase book value.
We also sort other ways to highlight shareholder value in 2019. We raised our dividend by 11% earlier in the year and have continued to buy back shares in the open market. In the first half of the year, we bought back approximately 9% of outstanding shares at a cost below $9.50 per share, capturing additional value. But perhaps most importantly, given our strategic focus, we wanted to help Safehold gain traction with both customers and investors and continue to build its innovative and exciting growth story in the marketplace.
We believe Safehold is following a path many of the most successful companies in the country have taken, making a big industry much more efficient and delivering a decisively better customer experience. These are universal themes attractive to investors across the spectrum. And during the second quarter, we saw Safehold reached several important milestones. It's portfolio tripling in size since the IPO, it's market penetration with customers doubling and it's share price rising some 50% since its IPO.
What's exciting to us is, we believe we are still in the very early innings of this opportunity. Safehold recently increased its investment guidance for the year and its customer list continues to grow. We have already seen a material increase in the value of iStar's shareholdings in Safe, well above our cost. But we believe Safehold share price still reflects only a small portion of the underlying value we believe we are creating and we will seek to continue investing in Safehold shares at these attractive prices.
Combined, these steps have helped drive significant value at iStar. And we will continue to work to build on this momentum, while also continuing to strengthen our balance sheet and reduce legacy assets as a percentage of our portfolio. I'll talk more about the second half of the year in a minute. Let's have Marcos take you through the numbers, first. Marcus?
Marcos Alvarado -- President and Chief Investment Officer
Thanks, Jay. Good morning, everyone. My remarks will refer to the slides in the earnings presentation posted on our website this morning. Beginning with slide three. We had a record quarter highlighted by $363 million or $4.55 per share of net income and $317 million or $3.98 per share of adjusted income.
Results were driven primarily by two previously announced transactions. Preferred Freezer and Bowlero, which generated $220 million and $180 million of gains this quarter, respectively. We have made some large stride at Safehold. And our investment in the stock appreciated by nearly 40% in Q2 as SAFE is one of the top performing REITs during the quarter. All the recent progress we have made has translated into significant growth in the book value per share and stock -- iStar's stock is one of the top performing REIT's during the first quarter -- during Q2.
Flipping to slide four. Let me take a quick moment to walk you through this quarter's large gains in a little bit more detail. First, Preferred Freezer. During the quarter, we sold the portfolio of seven cold storage properties, net leased to Preferred Freezer for a price of $440 million, including the assumption of $228 million of debt by the purchaser, resulting in a gain of $220 million. As we have stated in the past, we may opportunistically sell net lease assets when market conditions are favorable.
Second, with Bowlero we made an additional investment of $57 million to purchase nine bowling and entertainment centers and committed to find an additional $55 million toward future purchases. All of the leases will be subject to our existing master leases. In addition, we extended the terms of our two master leases by 15 years to 2047. As a result of the transaction, we were required to reclassify our lease from an operating lease to a sales-type lease, resulting in a $180 million gain, based on the fair market value of our asset. Our long-term relationship with Bowlero continues to be productive. And this recent transaction helps highlight the underlying value that has been created in our portfolio over the last 15 years.
Moving to slide five. We had a productive quarter, investing over $250 million. This included $154 million of fundings primarily related to loans in that leases and an additional $7 million of open market Safehold stock purchases. Capex was a little over $50 million in the second quarter, driven by our investment in Asbury Park. We are very pleased with the progress we've made in Asbury and the continued strength in pricing for the residential condominiums at Asbury Ocean Club. At the beginning of July we open the Asbury Ocean Club hotel and began closing on units. Since we opened the building, we've seen a nice pickup in traffic at our sales center, and more importantly, an increase in volume of units under contract.
For the latter half of the year, we expect sales proceeds to exceed any remaining capital expenditures necessary at the buildings. And as a result, our investment balance in Asbury Park should begin to decrease. At the same time, we continue to market other legacy assets for sale. We continue to believe STAR trades at a meaningful discount to book value. On last quarter's call, we announced that the Board reauthorized up to $50 million of share repurchases. Buring the quarter we bought back $39 million of stock or about 6% of the shares outstanding.
On slide six, we highlighted SAFE's performance during the quarter. As we announced earlier this year, scaling the ground lease business has become the focus of iStar's go-forward strategy and we are building momentum for both investors and customers in this [Indecipherable]. For the second quarter SAFE generated $0.18 of earnings per share and signed up $186 million of ground leases and raised its full-year investment target from $750 million to $1 billion, reflecting the strengthening pipeline. Achieving this investment target have more than double the size of the portfolio from the beginning of the year. We are very excited by the progress we are making. We believe the value creation should translate over to iStar's stock performance.
Lastly on slide seven, we highlighted the substantial equity value growth at iStar. Our book value per share on a GAAP and adjusted basis grew to $9.95 per share and $14.65 per share respectively. And then factoring in the market value of our Safehold investment, the adjusted book value sits at $18.02 per share, representing a significant premium to the current stock price.
In summary, this quarter is marked by significant gains continued, investment activity and meaningful progress at Safehold, all culminating in value growth at iStar.
With that, let me turn it back to Jay.
Jay Sugarman -- Chairman and Chief Executive Officer
Thanks, Marcos. I mentioned, we have achieved many of the goals we set out at the beginning of the year. So we begun focusing on new goals for the second half of the year. Foremost among them is to accelerate the growth of Safehold and we've raised Safehold's investment guidance for the full year by 33% with most of that increase taking place in the second half of the year. We'll also seek to further strengthen our balance sheet. And lastly, we're doing a thorough search for a new CFO, who will be a strong addition to our team, and we'll work to try to have that process wrapped up by the end of the year.
And with that, operator, let's go ahead and open it up.
Questions and Answers:
Operator
Thank you. [Operator Instructions] First question today is from Jade Rahmani with KBW. Please go ahead.
Jade Rahmani -- KBW -- Analyst
Thanks very much. Regarding the second half 2019 goals. Can you remind us of what you just said regarding the balance sheet. I think I heard you say strengthen the balance sheet. Curious if you could elaborate?
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. Look, I think with the growing success of Safehold, our goal is to create a very strong runway for iStar that continue to help accelerate that growth. We don't have any near term maturities, but as the balance sheet was strengthened in the first half of the year, it's going to give us some opportunities to continue to work on lengthening maturities, etc, on the -- in the second half of the year.
Jade Rahmani -- KBW -- Analyst
Okay. And I assume in addition from iStar perspective, you would not contemplate equity issuance?
Jay Sugarman -- Chairman and Chief Executive Officer
Until we see the valuation gap close a little more, Jade, it's -- right now, we're still a buyer of the stock.
Jade Rahmani -- KBW -- Analyst
Okay. Turning to the mark-to-market book value calculations. Do you think the loan portfolio, as well as the legacy assets in current terms are both were carrying value inclusive of any accumulated depreciation?
Jay Sugarman -- Chairman and Chief Executive Officer
I do. And when you say inclusive of depreciation, you mean gross book value, not net. Correct?
Jade Rahmani -- KBW -- Analyst
Yeah. Relative to gross book value.
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. I do.
Jade Rahmani -- KBW -- Analyst
Would you contemplate any bulk portfolio sales of -- for example, the real estate finance portfolio or certain aspects of the net lease portfolio in order to streamline the organization's focus on the ground lease business.
Jason Fooks -- Senior Vice President of Investor Relations and Marketing
Yeah, Jade. I think as we said in the past, those are part of the long-term strategic goals. We're looking for the best place to deploy capital and right now we can tell you that the ground lease sector is a big focus for us, but we can't been able and won't be able to deploy all the capital that iStar has if we were to exit other businesses. And right now, those other businesses are actually helping continue the ecosystem that we're trying to build. So right now, net lease is still core part of our business and finance is still one of our core capabilities. But if we were to find an opportunity to redeploy capital, those are certainly places we could access significant amount of capital.
Jade Rahmani -- KBW -- Analyst
Okay. In terms of the SAFE float and stated goal for -- to grow its equity base. What's the rationale behind iStar's continual regular purchases of SAFE stock?
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. That is part of a 10b5 plan. So it's not something we're doing on a discretionary basis. We set that up earlier in the year when we thought the value was significantly undervalued and we still think it represents an extraordinary investment for iStar shareholders. We represent only about 5% maybe on a slow day 10% of the actual volume in the marketplace, so we're not driving the stock higher. We're just being quiet in the background and continuing to accumulate shares that we think do not represent anywhere close to the value we think we're creating.
We continue to believe it's one of the best investments we can make with capital at iStar and we'll continue to look for ways to increase our position.
Jade Rahmani -- KBW -- Analyst
And on the net -- on the Real Estate Finance portfolio, are there any loans in the portfolio on a watch list or that you're reviewing in terms of potential risk of impairment or loss?
Jay Sugarman -- Chairman and Chief Executive Officer
There are none. I will tell you, we're continuing to watch this macro environment just to make sure that we don't get surprise from somewhere. We have seen some of these markets get a very frothy events on the finance side. So we have not been participating. But what we are most focused on right now is, is continuing to build a strong balance sheet and really accelerating Safehold. And right now the loan book, it shouldn't be a problem.
Jade Rahmani -- KBW -- Analyst
Thanks very much for taking the questions.
Jay Sugarman -- Chairman and Chief Executive Officer
Thanks, Jade.
Operator
We have a question from Stephen Laws with Raymond James. Please go ahead.
Stephen Laws -- Raymond James -- Analyst
Hi. Good morning. I appreciate you taking my questions. A lot of moving parts this quarter. And I appreciate the disclosure in your investor supplement. Can you give us a little more color on Asbury. I know you're getting at a point where the investment exposure starts to decrease and you mentioned that in your prepared remarks, Jay. But can you talk about kind of the timing of that and how we should think about the sales there? And is that a 12-month process? Is it a 36-month process? How should we think about the Asbury development as it progresses from today?
Jay Sugarman -- Chairman and Chief Executive Officer
Sure. Look, we have done a lot of work to build the profile of Asbury Park. We've seen some really strong results and we think Asbury Ocean Club is only going to add to that story line. Our internal projections were more like 36 months in terms of total sell out. With the hotel opening, we've got a lot of positive reaction from people who are surprised that how good it came out, the quality, the views, the environment. So we're certainly hopeful, we'll see a strong reaction in sales and maybe shorten that 36-month sell out period. But one thing anecdotally, I can tell you that surprised us is the number of buyers who want to focus on the highest priced units.
There were some question in the marketplace about, is there a ceiling in New Jersey on what people pay for high quality at the beach. And I think we feel pretty comfortable that there is a lot of interest in the highest quality units in the building. So we have no concerns about sort of the price point issue that was still a question mark. Average selling price in the building is still around $1,100 a foot. Which is a new high watermark and I think we believe it's well deserved, given what we put on the ground there.
Stephen Laws -- Raymond James -- Analyst
Great. Will, Jay, someone who's landlocked high end at the beach sounds awfully nice. Thinking about the other legacy or non-core assets, although Asbury certainly kind of seems core at this point. But as we think about the non-core and the legacy or the development portfolio, how much more capex do you think is remaining for you to get the assets where you would like them to be in the business plan and then can monetize those? And kind of what's the timeframe over those expenditures?
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. I mean, I think we give ourselves plus or minus 10% cushion on what we have to invest and what decisions are the best for shareholders. As we said at the beginning of the year, we are definitely not going to be allocating a lot of capital unless there is a significant return associated with that. So I still expect as we grind down that legacy portfolio, particularly in the next 12 months, that -- you'll see less and less capital to go into that, but we still have some outstanding capital for Asbury. We have some outstanding capital sort of in a bunch of smaller chunks. But, overall, the trend is definitely less and less and less. And I think once Asbury is fully built and all that capital is out, you're not going to really need to pay attention to that number much more
Stephen Laws -- Raymond James -- Analyst
Great. And you touched on this earlier in some of your responses to Jade's questions. And you did mention that the SAFE purchases are under 10b5, but I didn't run the math, but I'm very confident you guys were the best performing mortgage REIT since the last conference call. You're still active with your repurchase. Can you talk about how you view repurchasing iStar shares here versus other opportunities for your capital, whether it's increasing the investment in SAFE or whether it's new investments in CRE [Phonetic] debt or other things you can do. But how do you think about the trade-offs between stock repurchases at iStar, given the appreciation versus other opportunities?
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. Good question. I think we have historically said, we're always looking and evaluating real time about where is the best place for deploy capital to build overall value. And that incorporates not only the asset value per share, but also the franchise value and the enterprise value. We think Safehold right now not only has an opportunity to create very attractive assets on a risk adjusted basis, but also to create real franchise value of that over reflect back into iStar shares. So our first and foremost target right now is to build that business, build that enterprise, capture value for iStar through its ownership position and management position there. But if we have excess liquidity, if we have excess capital, we're constantly looking at the ability to buy an iStar shares at a discount is also very attractive.
And as I said we think the finance market is pretty frothy right now, so that's not really getting a lot of our attention. We think we can create much better risk-adjusted returns, inside our own balance sheet and inside of Safehold. So it continues to be a focus. We've already gone back for a second authorization from our Board. We still have some availability under that one and we'll take a new look at things once that's exhausted.
Stephen Laws -- Raymond James -- Analyst
Yeah. And I sort of mentioned in the last question, but I guess the other option would be to increase the dividend, other than buying back stock, which you've already done once since you've reinstated the dividend. So are there any thoughts around that? I don't think you guys are tied to any distribution requirements just given the NOL tax loss carry-forwards probably, but any thoughts around, again, the dividend versus repurchase?
Jay Sugarman -- Chairman and Chief Executive Officer
Yeah. I think -- our construct was really to review that annually, not quarterly. We made the 11% increase really to demonstrate the confidence we have in the rest of the year. I think, again, it's a constant dialog depending on where -- places we can put capital, what they look like at any moment in time? So, I don't think that's front in center right now, but it's certainly part of our annual plan is to continue to deliver dividends back to shareholders and increased value.
Stephen Laws -- Raymond James -- Analyst
That's helpful, Jay, to think about that more on an annual review. So I appreciate the color there. Thank you very much for taking my questions.
Jay Sugarman -- Chairman and Chief Executive Officer
Thank you.
Operator
And Mr. Fooks we have no further questions.
Jason Fooks -- Senior Vice President of Investor Relations and Marketing
Okay, great. Thank you. And if anyone else should have additional questions on today's earnings release, please feel free to contact me directly. Paul, would you please give the conference call replay instructions once again. Thanks.
Operator
Ladies and gentlemen, this conference will be available for replay after noon Eastern Time today through midnight Eastern Time on August 15. You may access the AT&T Teleconference replay system in any time by dialing 1800-475-6701, entering the access code 469594. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code 469594. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
Duration: 23 minutes
Call participants:
Jason Fooks -- Senior Vice President of Investor Relations and Marketing
Jay Sugarman -- Chairman and Chief Executive Officer
Marcos Alvarado -- President and Chief Investment Officer
Jade Rahmani -- KBW -- Analyst
Stephen Laws -- Raymond James -- Analyst
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