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spk06: Good morning and welcome to ISTAR's fourth quarter and fiscal year 2022 earnings conference call. If you need assistance during today's call, please press star zero. If you'd like to ask a question, please press star one. That's star one to ask a question. As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Piers Hoffman, Senior Vice President of Capital Market and Investor Relations. Please go ahead, sir.
spk00: Good morning, everyone. Thank you for joining us today to review I-Star's fourth quarter and fiscal year 2022 earnings. With me today are Jay Sugarman, Chairman and Chief Executive Officer, Marcos Alvarado, President and Chief Investment Officer, and Brett Asness, Chief Financial Officer. This morning, we published an earnings presentation highlighting our results. and our call will refer to these slides, which can be found on our website at istar.com in the investor section. There will be a replay of the call beginning at 2 p.m. Eastern time today. The replay is accessible on our website or by dialing 877-481-4010 with a confirmation code of 47582. 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 may be forward-looking. I-STAR'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. I-STAR 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 I-STAR's Chairman and CEO, Jay Sugarman. Jay?
spk01: Thanks, Pierce, and thanks to all of you for joining us today. 2022 was an important transition year for I-STAR. Monetizing legacy assets and positioning Safehold to unlock its full potential have been the prime focus for some time now, and the merger announcement in August was the culmination of that strategy. Since that time, we've continued to make progress and are working hard to reach the finish line, scheduling the vote for early next month and ideally closing by the end of the quarter. Letting go of the past and embracing the future is always difficult, and we've had to make some tough decisions along the way. But the payoff should be well worth the effort. We remain convinced our modern, groundless structure has become a powerful new source of capital for the real estate industry. We are pleased to have firmly established Safehold as the innovative leader of this important new asset class. With much of I-Star's large holdings in Safehold being delivered to shareholders, either directly or indirectly, the benefits of what we're building post-merger should accrue in large part to I-Star shareholders over the coming years. Much hard work remains to realize the full promise of our groundless strategy and to see its value fully reflected in our share price, but we have a very clear vision of how to unlock that value once we can put the current merger and market disruptions behind us. Okay, let's turn it over to Marcos and Brett to recap the quarter and the year. Marcos?
spk05: Thank you, Jay, and good morning, everyone. Let's begin on slide three to discuss the quarter's highlights. We've made meaningful progress monetizing assets in the fourth quarter and through the early part of 2023, generating approximately $150 million in net proceeds. We currently estimate an additional $110 million of proceeds are required to reach our monetization target in connection with the merger. As previously disclosed, we have agreed to repay our preferred stock and unsecured notes as part of the merger. Special meetings of the SAFE and STAR shareholders have been scheduled for March 9th. Key remaining conditions to close are obtaining shareholder approvals, completing the SEC review and NASDAQ listing process for the spinoff, and meeting our asset monetization goal. Based on where we sit today, we believe there is a potential pathway to an approximate March 31st closing date. Also on December 7th, I-Star returned approximately 192 million to shareholders in the form of a special dividend of 6.6 million safehold shares. Safehold continues to scale its position as the leader of the modern ground lease industry, and 2022 was another strong year for the business. The company continued to grow its portfolio with high-quality investments supported by a strong balance sheet, and we expect that balance sheet to strengthen as Safehold has been put on positive outlook by both Moody's and Fitch over the last six months. While the broader real estate markets have seen a slowdown and we expect near-term transaction volume to remain spotty, we believe SAFE is well positioned for the inevitable market rebound with ample liquidity to fund new groundless investments as opportunities arise. As I-STAR's largest and most valuable asset, SAFEhold's success will ultimately accrue to the benefit of I-STAR's shareholders. Slide four details our earnings for the quarter and the year. For the fourth quarter, net income was a loss of $86.7 million, or a loss of $1 per diluted common share. And adjusted earnings were a loss of $79.9 million, or a loss of $0.92 per diluted common share. For the full year, net income was $397.8 million, and earnings per share was $4.92. Adjusted earnings was $522 million, or $6.25 per share. Slide five is an overview of the business with a simplified presentation of our balance sheet. At the end of the fourth quarter, we had approximately $1.4 billion of unrestricted cash, a carrying value of Safehold stock, Ground Lease Plus, and leasehold loan investments of $1.3 billion, and $483 million of legacy and other non-core assets, getting to a total assets on the balance sheet of approximately $3.3 billion. On the right side of the balance sheet, we had $1.7 billion of remaining debt, $305 million of preferred equity, and $162 million of other liabilities and non-controlling interests, including the accrued balance of IPIP, leaving us with common equity of approximately $1.1 billion. When adjusting for Safe's mark-to-market value and our estimate of the incremental unaccrued IPIP amounts, our common equity is $909 million, or $10.48 per share. The decrease in this balance from last quarter is primarily due to the special dividend of 6.6 million Safe shares distributed to Star shareholders on December 7th. At the time of the special dividend, Safe was trading at $28.95 versus a $32.11 as of close last Friday. Additionally, we provided a sensitivity analysis on the adjusted common equity value per share should Safe stock go up or down by $10. And with that, let me turn it over to Brett to go through the portfolio in more detail.
spk04: Brett? Thank you, Marcos, and good morning, everyone. Let's walk through our portfolio's business lines, beginning with Safehold on slide six. During the fourth quarter, Safehold originated three new ground leases for $79 million, and for the full year, Safehold originated 26 new ground leases for $1.4 billion. These new originations are well diversified by property type and location, and included ground leases in 15 unique markets, including four institutional life science assets in markets such as Boston and the Bay Area, and 15 multifamily assets in markets including New York, Los Angeles, Nashville, Denver, and Miami. Unrealized capital appreciation, or the estimated value of the building sitting above SAIF's ground lease basis, increased year over year by $2.4 billion and currently stands at $10.5 billion for the portfolio. Safehold's balance sheet and liquidity profile remained strong, and subsequent to quarter end, Safehold closed an additional 500 million unsecured revolving credit facility, increasing the company's total unsecured credit lines to 1.85 billion. Including the new revolver, Safehold ended the quarter with approximately 1.2 billion of liquidity. While Safehold's financial performance, portfolio metrics, and balance sheet have all been positive, the unfavorable market backdrop and interest rate volatility have been a negative for the stock, which you can see reflected in the mark-to-market carrying value. We do not believe current prices properly capture a safehold sum of the parts value proposition and are optimistic for what the future holds as the merger concludes and markets stabilize. On slide seven, we detail our investments in the ground lease ecosystem. As we previously discussed, I-STAR has two separate funds that enable us to pursue additional ground lease opportunities in the broader ground lease ecosystem. One provides pre-development ground leases, and the other provides leasehold loans that are combined with a core safehold ground lease. The net carrying value for the seven investments in these funds is $91 million, with targeted returns between 9% and 12%. There are approximately $147 million of unfunded commitments associated with these ground lease-related investments. Slide 8 highlights the remaining non-ground lease assets, including sales progress during the fourth quarter plus first quarter to date. In the real estate finance portfolio, we received $69 million of repayments during the quarter. There are four loans remaining in this portfolio with a carrying value of $86 million, a 51% decrease from last quarter. In the real estate and strategic asset portfolios, we received $60 million of proceeds in distributions from asset sales during the quarter, which generated net gains of $15 million. At quarter end, real estate and strategic assets totaled $345 million of carrying value, of which Asbury Park and Magnolia Green represented $269 million, or 78%. The nine short-term assets totaled $76 million. Subsequent to quarter end, we received an additional 21 million of proceeds from continued real estate and strategic asset sales, which included the sale of one property for 17 million of proceeds and regular way lot sales in our land portfolio for 4 million. At this juncture, we estimate that approximately 110 million of additional proceeds are needed to reach our monetization target. As previously disclosed, we have agreed to repay our preferred stock and unsecured notes in connection with the merger. Slide 9 shows an overview of our corporate debt, which remains largely static from last quarter. At quarter end, there was approximately $1.7 billion of total debt outstanding, with a weighted average maturity of 2.9 years. In conclusion, we continue to make significant progress towards finalizing the business combination with Dayfold and look forward to the benefits of the transformation of our business. And with that, let me turn it back to Jay.
spk01: Thanks, Brad. I've been asked in the past how to best summarize what we're doing at Safehold and how large the ground lease opportunity is. And the answer is as simple as it is powerful. We are providing a lower cost and lower risk way for commercial property owners and developers to capitalize their properties. And we're providing a faster growing and more valuable way for investors to participate in an asset class that has historically proven to be the source of great wealth. As a result, we think the potential opportunity ahead of us is very large, very exciting, and very achievable. And on that note, operator, let's open it up for questions.
spk06: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 at this time. We will take as many questions as time permits and proceed in the order that you signal us. Once again, please press star 1 to ask a question. We'll pause just a moment to assemble the roster. Thank you. Your first question is coming from Stephen Laws of Raymond James. Stephen, your line is live.
spk02: Hi, good morning. First, I want to touch on the remaining asset sales. I think it says $110 million you mentioned in the remarks. And, you know, will that come from the loan book and, I guess, strategic legacy assets? Kind of where will we see that? And then, you know, to tie that in, the impairment and reserve bill during the fourth quarter Can you talk about those, and is that to mark or reserve assets, kind of where you anticipate selling those in the next six or eight weeks?
spk01: Hey, Stephen. Good morning.
spk02: Good morning, Jack.
spk01: Yeah, we've got a handful of assets. We're getting to the finish line. We've had some gains on some. We'll probably take some marks, as we showed in the fourth quarter, to get rid of some of the other ones. But we're tracking nicely to get to the finish line, and, you know, there'll be – little bit of a flux where I can't predict exactly which assets, but we feel pretty confident. We've got a handle on which, which ones are in the market, which ones are under contract, which ones are going to get repaid. So we feel like, you know, no matter what happens, we should be able to figure it out here pretty shortly.
spk02: Great. And then as we, you know, move to closing here, you know, what transaction related expenses will be incurred at star? I know we talked last week about the safe side of things. I'm curious about any transaction-related expenses we should run to think about in our numbers.
spk04: Sure. Yeah, I think what we've accrued to date in 22 is roughly $10 million. I think going forward, everything related to advisors, legal, accounting tax structuring, we'll all be accounted for for merger at merger closing and obviously there's a cost to repay our liabilities so we can work through a work through a precise number as Jay alluded to on the on the gains and losses, you know, there's there's lots of it. There's lots of expenses and there's lots of changes and Proceeds for different asset sales and just to give you some context to that earlier question. I And we booked over $30 million of gains to date since the merger announcement on those sales. So we'll have to see, I think, overall net, you know, as Jay mentioned, some winners and some other assets where we need to consider that all the expenses will be flushed out and hopefully it'll be a net wash.
spk02: Great. Appreciate the call this morning.
spk06: Thank you very much. Your next question is coming from Jade Romani from KBW. Jade, your line is live.
spk03: Thank you very much. Given I-Star's historical length of experience through real estate cycles, I wanted to ask, what are your expectations regarding the magnitude of any credit downturn in the market this cycle? And do you expect that kind of business to generate outsized investment opportunities for New Safe. Is that channel going to be a meaningful source of investment activity, do you think, or not really?
spk01: Hey, Jay. I'll let Marcos weigh in on some of the opportunities we expect to see. But you ask a great question, which is we've been through many, many cycles. The one thing we always see is, you know, a little bit of a creative destruction process. Higher rates obviously are not good for real estate overall, just in terms of overall values, but they tend to choke off supply, which then creates the conditions for a rebound. You know, this could take some time. There's some stress in the market, as you can probably tell, particularly on some of the asset classes like office and retail, that that transition is going to take, you know, quite a bit of time and quite a bit of effort But what we've seen over longer periods of time is higher rates, tough market conditions do start to create the foundation for a rebound in the future. And that generally has been a great place to deploy capital. So I'll let Marcus walk through how we're thinking about that.
spk05: Hey, Jay. So to echo what Jay just said, It's been an interesting sort of arc. I'd say the end of the last year, it was a liquidity desert. There wasn't a lot of opportunity. We're starting to see some green shoots in our core business at Safe. So people are engaged. We're seeing new transactions. But as we've alluded to on both the Safe and the Star calls in the short term, I think we think transaction volume is going to be somewhat muted. But we remain optimistic that the second half of the year, we'll be able to deploy capital as buyers and sellers sort of come to this equilibrium impasse that they're at today.
spk03: And do you think that recapitalization of deals that have trouble will be a meaningful pool to play in? And in terms of the fund business that you're launching, is that an area in which to raise capital?
spk05: Yeah, I think in the short term, Jay, you know, a lot of the things that we're seeing in our pipeline are these, quote unquote, sort of recap distressed opportunities assets that may have been slightly over levered, but there's still an agreement on value. So think about the multifamily side on one asset class on one side of the spectrum. I think on the office side, as Jay alluded to, there's a there's probably a longer term sort of creative destruction going on. And we haven't seen that sort of foot out. And then As it relates to our fund management business that ultimately will sit at safe. Yes, we're excited about watching that post the merger and taking advantage of the opportunity. But again, I think we're going to be primarily focused on the core business, which is existing ground leases.
spk03: Thanks very much. Are there any potential changes you envision happening with respect to the merger, perhaps related to I-STAR's capital structure or some other dynamics, or is your baseline expectation it'll just close as originally structured?
spk01: Yeah, nothing material, Jay. We're getting to the short strokes here, so We'll move a few things around if we need to just to get this done as soon as possible. It has been a major distraction for the firm, and so we'd like to get back to business and get out of sort of the merger restrictions we've been living under for six, seven, eight months now. So everything feels like it's tracking within all the guardrails we set up.
spk03: Thank you.
spk06: Thank you very much. Just as a reminder, if anyone does have any questions, please press Start 1 on your phone. Mr. Hoffman, we have no further questions.
spk00: Thank you. If you should have any additional questions on today's release, please feel free to contact me directly. Jenny, would you mind giving the conference replay instructions once again? Thanks.
spk06: Of course, there will be a replay of the call beginning at 2 p.m. Eastern Time today. The replay is accessible on our website or by dialing 877-481-4010 with a confirmation code of 47582. Thank you, everyone. This does conclude today's conference call. You may disconnect your lines and have a wonderful day. Thank you for your participation.
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