iStar Financial Inc. ( SFI)

Q3 2010 Earnings Call

October 28, 2010 10:00 am ET

Executives

Andrew Backman - SVP, IR and Marketing

Jay Sugarman - Chairman and CEO

David DiStaso - CAO

Analysts

James Shanahan - Wells Fargo

Michael Kim - CRT Capital Group.

Jeremy Banker - Citi

Joshua Barber - Stifel Nicolaus

Ashish Kishore - Manikay

Dale Store - RBS

Presentation

Operator

Good day and welcome to iStar Financial's third quarter 2010 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions, I'd like to turn the conference over to iStar Financial's Senior Vice President of Investor Relations and Marketing, Mr. Andrew Backman please go ahead sir.

Andrew Backman

Thank you Rochelle and good morning everyone. Thank you for joining us today to review iStar Financial's third quarter 2010 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; and David DiStaso our Chief Accounting Officer.

This morning's call is being webcast on our website at istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 12:30 pm Eastern Time today. The dial-in for the replay is 1-800-475-6701 with a confirmation code of 173998.

Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call, which are not historical fact's, will be forward-looking. iStar Financial's actual results may differ materially from those forward-looking statements and the risk factors that could cause these differences are detailed in our SEC report.

In addition, as stated more fully in our SEC report, iStar disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Now, I'd like to turn the call over to Jay. Jay?

Jay Sugarman

Thanks, Andy. The third quarter was a constructive one for iStar. As we continued focusing on resolving near term challenges, while also identifying longer-term opportunities. With the capital markets beginning to open up and the interest rates remaining low, we saw increased liquidity in the real estate sector and more transaction flow in our portfolio.

Offsetting this, the overall economy remained weak. And large scale recovery and values remained confined to the most stable markets and the strongest properties. Within our diversified portfolio, we were able to take advantage of these stronger conditions in certain markets and in certain properties. But we remain exposed to other less vibrant sectors where values continue to be uncertain, and recovery will take place over a longer timeframe.

Let me quickly touch you on the third quarter results. As in prior quarters, earnings were impacted by increased provisions and high levels of non-performing assets. AEPS was negative $0.76 per share, primarily due to provisions that were lower than the second quarter, but remained too high. Flow of funds was strong again, with inflows from repayments and asset sales and dispositions well in excess of new investments and fundings under prior commitments. That enable us to both further do debt reduction and increased capital flexibility.

With the $4.2 billion Fremont participation now paid off in full, and a significantly reduced level of future commitments ahead of us, the majority of that excess cash flow will likely be directed to future debt reduction.

And in line with that thinking, this morning we began to process the paying off in full the approximately $978 million remaining on our 2012 First Lien credit facility. As a reminder, this was the $1 billion First Lien facility due 2012 extended by our banks in March of 2009. And we're delighted to be able to retired in full approximately 18 months later, and some 20 months prior to its maturity.

The net result of the repayment as a capital structure that now is comprised of approximately $3.2 billion in First Lien debt, $4.2 billion in unsecured debt and $1.8 billion of trust preferred, preferred and common equity.

We also made one strategic investment this quarter, helping to recapitalize larger special servicing company in the country LNR. Together with a handful of other institutional owners, we invested significant equity capital and installed a new management team that we believe will deliver strong results, and enhance the company's capabilities in serving its many customers.

With over $28 billion in specialty service loans, we think much of the real estate recovery will pass through LNR's doors in one shape or another. And our partners and we believe this represents a unique window into the real estate finance markets over the next several years.

And with that brief update, let me turn it over to Dave for more details. Dave?

David DiStaso

Thanks, Jay and good morning, everyone. I'll begin by discussing our financial results for the third quarter before moving to credit quality and liquidity. For the quarter we reported a net loss of $84 million or $0.89 per common share. Adjusted earnings was a loss of $71 million for the quarter or $0.76 per common share.

Revenues for the third quarter were $134 million versus $178 million for the same period last year. The year-over-year decrease is primarily due to a smaller asset base, resulting from loan repayments and sales, and a reduction of interest income related to the movement of performing loans to non-performing status.

Net investment income for the quarter was $59 million versus $167 million for the third quarter 2009. The year-over-year decrease is primarily due to smaller gains associated with the early extinguishment of debt as well as the lower interest income I previously mentioned somewhat offset by a decrease in interest expense.

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