iStar Inc.

Thank you, John, and good morning, everyone. Thank you for joining us today to review iStar Financial's first quarter 2014 earnings report.

With me today are Jay Sugarman, Chairman and Chief Executive Officer; and David Distaso, our Chief Financial Officer.

30 p.m. Eastern Time today.

Dial-in for the replay is 1 (800) 475-6701 with the confirmation code of 324797.

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 Financial's actual results may differ materially from these forward-looking statements and the risk factors that could cause the differences are detailed in our SEC reports.

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

Now I'd like to turn the call over to iStar's Chairman and CEO, Jay Sugarman. Jay?

Thanks, Jason. And thank you for joining us this morning.

Our first quarter results continued a trend an improving performance, as we invest idle cash, lower our interest cost and push in our commercial operating and land portfolios to begin contributing to the bottom line. Investment activities continue to build with over $200 million in funding from the quarter.

And more importantly, a growing pipeline of opportunities in process and under LOI. Our markets are competitive.

We continue to work our existing portfolio for opportunities. And we're looking for ways to capture off-market transactions.

We expect to see some of those efforts show up in the coming quarters.

Let me do a brief overview of our various business lines. In real estate finance, segment profit was $9.3 million versus $10.8 million last quarter.

We noted an increase in yield within the portfolio to 8.6% from 8% in the fourth quarter due to higher yielding originations funded as well as payoffs of lower yielding loans, while prepayment fees ended a little bit lower.

With a lot of cash sitting on the balance sheet, we're getting involved in more transactions which should lead to increased investment activity and future revenue growth.

In net lease, we closed our JV with the sovereign wealth fund and contributed the first asset purchase for the fund. Our team is looking for assets we have a particular view on and continue to be disciplined in evaluating new situations.

Financial metrics associated with our net lease portfolio remains strong, including segment profit of $11.3 million, up from $9.8 million last quarter, a consistent yield of 7.5% and more than 11 years of weighted average remaining lease term.

Profit in the operating portfolio improved from $5.5 million last quarter to $11.3 million this quarter, due in part to an increase in condo gains, in addition to our stabilized commercial properties generated an 8.3% yield, while our transitional property saw an increase in occupancy to 61% and an increase in yield to 3.1% due to some additional leasing activity.

In our land portfolio, we continue to push on value-creating strategies. After many years of work, we reached successful entitlement milestones in Long Beach, New York, and in Los Angeles and began significant development in Naples, Florida, signing an agreement with a national homebuilder covering approximately 25% of the lot.

The income impact of these will take time to develop, and the portfolio is still generating a segment loss, $17.9 million this quarter versus $22.5 million last quarter, but it feels like we're making good progress on a number of fronts.

And with that, let me turn it over to Dave now, to review the numbers for the quarter in more detail. Dave?

Thanks, Jay, and good morning, everyone. Let me begin by discussing our financial results and capital markets activities for the first quarter before moving on to investments and the performance of our business segment.

For the quarter, our adjusted income was a loss of $5.5 million or $0.07 per common share compared to a loss of $300,000 for the same quarter last year. The change in adjusted income was the result of a $19 million reduction in earnings from equity method investments as the prior period included $15 million of income, associated with our LNR investment, which we sold in the second quarter of 2013.

Last year's period also included $13 million more in real estate gains, primarily because we had higher levels of condominium inventory during that period. This was partially offset by $15 million increase in our revenues, as a result of additional operating lease income due to new leases and increased interest income due to current quarter investment activity.

In addition, interest expense declined year-over-year by $14 million due to lower overall debt levels as well as lower cost of capital.

Our net loss allocable to common shareholders for the quarter, was a loss of $26.6 million, or $0.31 per diluted common share compared to a loss of $41.3 million or $0.49 per diluted common share for the same period last year.

In addition to the reasons I mentioned before, the year-over-year decrease in net loss was also driven by a $14 million improvement in our loan loss provision and lower loss on early extinguishment of debt, as last year's period included the repricing of our 2013 secured credit facility.

During the quarter, we repaid $46 million on our 2013 secured credit facility, reducing the remaining balance to $1.3 billion. This puts our collateral coverage at the end of the quarter at just over 1.375x.

When our coverage remains between 1.375x and 1.5x, we are able to retain 50% of the proceeds from principal repayments and sales of underlying collateral. This will slow our deleveraging and provide us with additional capital to reinvest.

We also repaid $13 million on our 2012 secured credit facility, bringing the remaining balance to $418 million.

Our weighted average effective cost of debt for the first quarter continued trending lower, down to 5.6% from 5.7% for the fourth quarter of 2013.

Our leverage increased slightly to 2.1x at the end of the quarter from 2x at the end of the prior quarter, but still remains at the low-end of our targeted range of 2x to 2.5x.

During the quarter, Fitch upgraded our credit rating, while also revising our outlook to positive. We are pleased to see the rating agency recognize a significant progress we've made in extending our maturity profile, reducing our cost of capital and improving the credit profile of the portfolio.

Let me turn now to investment activity in our real estate and loan portfolios. We invested $229 million during the first quarter, including $181 million of new originations during the quarter.

We generated $268 million of proceeds from our portfolio this quarter, which included $103 million from repayments and sales of loans in our real estate finance portfolio, $48 million from sales of operating properties, $76 million from sales of net lease assets and $41 million in proceeds across other segments. We ended the quarter with $410 million of cash, which we expect to primarily use to fund future investment activity.

At the end of the first quarter, our total portfolio had a carrying value of $5.2 billion, which represents the company's carrying value, gross of $433 million of accumulated depreciation and $31 million of general loan loss reserves.

Let me discuss each of our 4 business segments. Our real estate finance portfolio increased from $1.4 billion to $1.5 billion at the end of the quarter, as a result of the new loan originations we recently funded.

The portfolio includes approximately $1.3 billion of performing loans comprised of $660 million of first mortgages or senior loans and $645 million of mezzanine or subordinated debt. The performing loans generated a weighted average effective yield for the quarter of 8.6%, an improvement from the 8% we generated during the fourth quarter.

At the end of the quarter, we had $203 million of NPLs, consistent with the prior quarter's level. We expect to resolve additional NPLs in the coming months, which could reduce this balance.

For the quarter, we recorded a $3 million reversal of the loan loss provision compared to a provision for loan losses of $10 million in the first quarter of 2013.

Our total reserve for loan losses at March 31 was $370 million, comprised of $339 million of asset-specific reserves and $31 million of general reserves.

Now let me provide a brief update on certain key metrics relating to our net lease portfolio. At the end of the quarter, we had $1.6 billion of net lease assets, gross of $343 million of accumulated depreciation.

Our net lease portfolio totaled 20 million square feet across 33 states. This portfolio was 94% leased at the end of the quarter, with a weighted average remaining lease term of more than 11 years.

For the quarter, our total net lease portfolio generated an unleveraged weighted average effective yield of 7.5%.

As we announced on our last earnings call, we partnered with a sovereign wealth fund to form a vehicle that will jointly invest the net lease assets. The net lease venture's first investment, is a property net lease to AT&T, which was acquired by the venture during the first quarter.

Next, I'll turn to our operating properties portfolio. Our operating properties totaled $947 million, gross of $86 million of accumulated depreciation.

The portfolio was comprised of $747 million of commercial and $200 million of residential real estate properties. The commercial properties represent a diverse pool of real estate assets across a broad range of geographies and property types, such as office, retail and hotel properties.

They generated $34 million of revenue, offset by $22 million of expenses during the quarter.

At the end of the quarter, we had $132 million of stabilized commercial operating properties. These properties were 86% leased, resulting in an 8.3% unleveraged weighted average effective yield for the quarter.

The remaining $615 million of commercial operating properties are transitional real estate properties that were 61% leased and generated a 3.1% unlevered weighted average effective yield. We're continuing to actively lease these properties in order to maximize their value.

During the quarter, we executed commercial operating property leases, covering approximately 184,000 square feet.

The residential operating properties were comprised of 521 condominium units remaining in inventory at the end of the quarter. These units are generally located in projects characterized as luxury buildings in major cities throughout the United States.

During the quarter, we sold 96 condos for 400 -- for $48 million in proceeds, resulting in $18 million of income, offset by $6 million of expenses.

That brings me to our land portfolio. At the end of the quarter, our land portfolio totaled $973 million and included 11 master planned communities, 10 infill land parcels and 6 waterfront land parcels.

Master planned communities generally represent large-scale residential projects that we may entitle, plan and develop. We currently have entitlement to these projects for more than 25,000 lots.

Our infill and waterfront parcels are currently entitled for 6,000 residential units and select properties include commercial, retail and office space.

The projects in the portfolio are well diversified in locations such as California, the New York metro area, Florida and several markets in the mid-Atlantic and Southwest regions.

During the quarter, we invested $15.1 million in our land portfolio through capital expenditures. At the end of the quarter, we had 6 land projects in production, 10 in development and 11 in the predevelopment phase.

We've continued to make headway on our land projects, as discussed in the earnings release, by obtaining entitlements, increasing horizontal construction and developing site improvements. We have also continued to build relationships with homebuilders and other key partners, in order to maximize the value of our project.

With our expectation that land will become a more meaningful contributor to our business, we began presenting revenues and costs associated with land sales on our income statement this quarter. We believe this presentation will allow investors to track the progress of our land efforts.

This quarter, land sales revenues were $4.1 million and were associated with 2 projects, where we're actively selling lots, Magnolia Green and Tetherow . Magnolia Green is a 3,550 lot master planned community in the suburbs of Richmond, Virginia.

The community features resort-style amenities, including the Jack Nicklaus-designed Weston golf club. Tetherow is a 120-block lot master planned community near Bend, Oregon.

The project is situated on the edge of the Willamette National Forest and features an 18-hole championship golf course. Costs associated with these land sales were $3.7 million for the quarter.

We're working to position our land projects for increased contributions to earnings next year and look forward to updating you on our land development activities, as well as additional projects moving to production in the coming quarters.

With that, let me turn it back to Jay. Jay?

Thanks, Dave. So no big surprises this quarter, but we have some pretty good momentum heading into the middle of the year.

And I think if a few things break our way, we should be able to continue to move forward overall profitability on an adjusted basis. We'll keep you updated as the year progresses.

Operator, would you please open up the line for questions?

I guess, my question's really kind of focused on the land side. And I guess the income statement is starting to break out land sales, revenues and land cost of sales.

You mentioned Magnolia Green and Tetherow, I was just wondering if you could get a little bit more granular detail, just in terms of how many lots were sold in each and kind of the revenue per lot or the gross margin per lot of between the 2. And at a higher level, I guess, just thinking about the progression of land sales over the next couple of years, if you could give us some guidance on sort of projects, when they might come online and start contributing to the income statement.

I know that you mentioned the deal, the lot purchase agreement with Naples to develop and deliver initial lots by early next year. I'm just wondering if you'd help us think about how's the progression of land sales will be.

Will it be kind of a steady rise? Lumpy in nature?

Presumably some seasonality? But may not based on geographic mix.

Just -- and also the progression of gross margins of land sales. If we can kind of expect that to increase from the implied numbers from these 2 initial sales?

Or is that we'll kind of slowly grow over the year -- over the next couple of years.

Mike, sure. So let's talk about a little bit how we're thinking about our land and how's the best way to share information with you.

As Dave said, we're going to start breaking it out. We think it's time to do that.

We do think, over the next 12, 24 months, we've got enough projects coming online that you'll start to see some material metrics that we can share with you that are meaningful. I think in terms of Tetherow and Magnolia Green, we're very early in both those projects.

Magnolia being quite large, Tetherow not quite so much. So the one thing we've always hesitated to is that people kind of divide total lots by sales in a quarter and tell us how many years of supply we have because we are still early in the game on both of those.

But in this quarter, I think, we were just under 40 lots between call Magnolia 30-ish and Cascades 10, not really meaningful metrics yet, both in terms of the cost. We're having to spend upfront to accelerate those sales, but also just in terms of the overall magnitude of the portfolio.

There's really nothing to be gotten from those 2 statistics yet. Now I think as we go through the year and as we bring more of the master plan communities and some of the urban stuff online, then I think you're going to start seeing us disclose details that we think are representative of those projects.

But I would tell you it's still little early to do that. So we'll probably come up with a formal way to share those going forward, but it's probably premature to do that.

Okay. And, is your expectation that those metrics will be similar to, I guess, like the public homebuilders or land developers?

Yes. We're going to try to give you stuff that is representative and meaningful.

And I don't think we're going to vary too differently from what we've seen others, who have projects that are fully ramped midstream, then you can start seeing a steady state, "Okay, now I see where this is going." For something like Magnolia, where we're talking about 30 lots in a 3,000 a lot development, where we're just kicking off some big initiatives, it's probably not a relevant metric yet.

And on the land, in terms of other projects coming online, again, we've been somewhat circumspect just because the land business has taught us to be patient and thoughtful before we start projecting. We do feel like, as we said before '14, a lot of milestones crossed -- across this year.

And '15, really the year where we start to see real fundamental progress in terms of sales and certainly potentially profitability begin. That's the game plan right now.

I think in terms of getting stuff online, it's easier for us to project something like Naples, where we're in the ground and where we've moved 2 million cubic feet of dirt, and you can kind of see the story from here to there. I think some of the other ones where we're still battening down the last pieces of an entitlement process or political process, much more difficult to give you a quarterly projection.

We certainly think 2015 is the yearly projection. And we're not yet ready to narrow that down to the quarters, where we're going to bring stuff online.

I see. I guess, from your perspective, as you sit here today, for 2015, I guess, how many projects do you expect to be open, away from stuff that's still being negotiated or kind of worked through?

But as it stands today, in terms of certainty and lot purchase agreements and whatnot, how many active projects do you expect for 2015, would you say?

Well, Dave's got a great schedule on that. Right now, the projection is 11 things online.

Some of those are vertical. Some of those are single-family.

That's probably a good number to think about. Some of those are relatively big and quite interesting from a P&L perspective.

Some of them, as we've said in the past, we're just grinding through to get our money back with a small return on it. So I think you'll see us highlight the ones we think there are material P&L possibilities.

And as we get better metrics around those, you will see us give you some guideposts so you can, kind of, see where we think they're headed. With always the caveat in this business, we've learned -- it's a slower moving business, and things are not always as predictable as some of our other businesses.

But we feel pretty confident throughout '14 we will continue to highlight progress in individual projects, put them on your radar. And then, hopefully in '15, you'll start to see some P&L impact.

Can you discuss the investment pipeline what you're seeing in terms of opportunities and competition? Any color on yields, LTVs, or deal types would be helpful?

Jade, thanks. I think I've said in the past, that we fundamentally believe, particularly in a market like this, where there's a lot of competition for yields, that we need to play to our historical strength, which is looking for crossover markets.

There's a real estate component. There's a corporate credit component.

There's a capital markets component. There's a capital structure complexity.

Those are the places we're finding the most interesting opportunities, particularly within existing relationships or existing deals, we're redoubling our efforts to kind of dig underneath the covers and go what can we do here that would be a better risk reward, than what we see in the broader markets? The big theme is still we think the banks have kind of found their comfort zone.

They've left a big piece of the capital structure out there for folks like ourselves and others to fill. And everybody sort of jockeying to figure out how to fill it.

In some cases, let's take the whole thing down as we did in Times Square. In some cases, it's going to be taken just the mezzanine or being out with something in -- I'm going to call it 60% to 75% maybe 80% zone.

That piece of paper is still bouncing around. If it's nice and simple and can be bid out.

It's pretty tight out there. We're not doing any of those.

But the person who puts it together, the person that figures out how to solve the complexities, the person who's there early and comes up with a way to make it a strong deal from a capital structure standpoint, gets to charge the premium. And we're thinking the air is a lot thinner there.

There's probably 2 or 3 other people who we see regularly. We're all getting pretty much our fair share.

And that market segment is still quite interesting to us. So at least, on the finance side, there's a big chunk of the market that we think we can play in and play in effectively.

It's going to be, for us at least, currently, it's going to be in the high single digits, probably typically going to be on the floating rate basis. On the mezz stuff, it can be double-digit, low double, low teens kind of situation.

And if you're going above 80% or 85%, you're certainly looking for some sort of special kicker or call protection or something that gives you good convexity. That's really not different than anything we've seen over 20 years.

It's a little more competitive, I would say, for things that are clean and simple and easy and 10 people can bid on them. But those situations where it's not quite so clean, simple and easy or somebody will have to dig in and actually figure it out, and bring a lot of skill sets to bear.

We still have game there. So that's what we're focused and that's where we think we're winning the best deals.

And can you say a little bit more about what would characterize those deals where there's only 2 or 3 others looking at that and can solve for it? Is it acquisition financing?

Is it just a development involved? Or the lack of stabilization on the underlying asset?

Is it property type? Is it size?

Exactly what is it do you think?

Yes, I think you hit a lot of them. Certainly in transitional where you're underwriting a business plan you're going to have to dig in and do a lot of deep dive work to get comfortable with that.

That's been interesting. Large capital structures, we've talked about.

Size is still a limiter, keeps the composition down. So larger deals and situations where there's lots of moving pieces that can be in a corporate situation or it can be in a borrower who doesn't know exactly how much they need or when they need it, but they know they're going to do the deal.

That little bit of uncertainty you'd be surprised, makes it very hard for the typical intermediary to get their hands around, what I am asking for? What am I telling people they have to show up?

How fast people have to move? Typically, that's a situation we can be very helpful here to the borrower directly or to the intermediary and say, "Don't worry about it."

That was the business proposition. Tell us what you're trying to achieve.

Tell us why the equity is going to be successful here. And we'll figure out the rest of the capital structure, whether it's senior or junior or combined.

We're really good at that. That's where our $35 billion, $40 billion of track record comes into play.

But in terms of product type, in terms of very specific things, it's a time to be pretty opportunistic. We have seen some good development deals.

We have seen good transitional stuff. We have seen very good stabilized stuff in a large portfolio, corporate context.

So I can't give you the one theme or the 2 themes because there aren't any right now. But it's a big market, there are holes in it right now.

There's a couple of clever folks trying to fill them who have the capital capacity like we do. And right now, it's a pretty good market.

It's not great. There is competition for us with plenty of room for 4 or 5 people we see regularly.

And just on the increased competition, which we've definitely been hearing a lot about, I mean, do you view it as a normalization in the market, entrants or participants that haven't been as active over the last couple of years feeling confident enough in real estate, where we are in the economic cycle to make loans? Or are there things in underwriting that are a cause for concern to you?

I think it's much more the former. But I wouldn't say that they're more comfortable, I'd say that in a world starved for yield some of the largest investment complexes have all the decide they needed that exposure to this sector as committed resources and talent.

And doing what we have been doing for 20 years. We saw that opportunity in 1992 and have been playing it ever since.

You can create various good risk adjusted returns in a hard asset class like this with knowledge and expertise and the right capital structures. And I think other people are gravitating to that same combination.

But I think the banks pulling back and really finding a comfort zone has opened up the space so it can accommodate more folks like that. And we certainly think we're one of the biggest and most experienced, so we'll get our fair share.

Okay. Just a couple of quick ones.

First, can you just give color on what drove the impairment charge? And then, secondly, when do you think it's realistic to forecast the return to profitability?

Is that something that happens by the fourth quarter? Or is that really in 2015?

Sure. The impairment was a small property in Silicon Valley.

We got into a situation, where to get a tenant in, we had to give them a purchase option at the bottom of the market. We didn't think they'd hit it.

They turned out to be quite successful, so they purchased the assets at a price that cost us on a book basis. It was a low-yielding asset.

So frankly, we'll take those proceeds and reinvest them in a higher rate. But that's where it came from.

Okay. And, on the return to profitability?

That's the $64,000 question. As I said, on an adjusted basis, we've kind of targeted '15 as the year we're going to make that turn.

There are things in the hopper that could accelerate that, but I think, realistically, from now, I'd still point you to '15.

Great. Thanks, John, and thanks to everyone for joining us this morning.

If you should have any additional questions on today's earnings release, please feel free to contact me directly. John, would you please give the conference call replay instruction once again.

Thanks.