Arrow 1GridMenuMenuListGroup2017 Annual Review2017Annual Review

2017 was a year of tangible progress for iStar.

We recently celebrated our 20th anniversary as a public company and it gave me a chance to reflect on our past, present and future.

We have always been interested in coming up with game-changing ideas in the real estate world and scaling them into leadership positions. In 1993, we took a hard look at the real estate finance markets compared to the corporate finance markets and realized there was a large gap that we could fill, first as a private company and then as a fully scaled public company. Bringing a level of problem-solving, structuring skills and speed not typically available in the marketplace and marrying it to a customer-focused, our-word-is-our-bond approach, we scaled this simple innovation into a multibillion-dollar business generating well above market returns. In 2000, we saw another opportunity to rethink a core real estate business—this time the net lease business. Taking the approach that optimizing a net lease investment required not only real estate expertise, but also insightful corporate credit skills and sophisticated capital markets knowledge, we bought the largest net lease company on the NYSE and retooled the company into a powerful earnings generator with clearly demonstrated, superior returns on its deals. Along the way, we have always been willing to buck the trends to find value for our shareholders, and have often found excellent returns in areas others have either fled, disregarded or simply not taken the time to understand. Our data center investments after the tech bust in the early 2000s, our hotel investments after 9/11, and our first-of-its-kind financing structure for timber in 2006 all generated substantial returns in places others were not looking.

With markets flush with capital providers and competition, we took the opportunity over the past two years to incubate another idea that we believe will fundamentally change the way owners of real estate think about their properties. In June of last year, we launched a new public company, Safety, Income & Growth Inc. (NYSE: SAFE), to completely reinvent the use of ground leases in the marketplace. The company has begun executing on a strategy to maximize returns for owners of all major property types in the top markets around the country by separating the different risk-return profile of land from the risk-return profile of the building on top of the land. This completely natural evolution mirrors what has happened in almost all other parts of the capital markets and in the real estate finance markets. The most efficient markets, and most highly valued markets, allocate different risk-reward profiles to different investors, and the resulting sum of the parts exceeds the previous whole. Yet while most markets have continued this evolution in increasingly sophisticated forms, the ground lease market has remained unchanged over the decades and out of step with current market conventions.

Into this large market gap, we launched SAFE with two other skilled investors, a sovereign wealth fund and private endowment-backed fund. iStar owns just under 40% of the public company shares and is the outside manager of SAFE, so we have a very large vested interest in its success and will continue to work to grow it into a meaningful contributor to our earnings.

In addition to focusing on the new, we are also making progress on the old.

During 2017, we put an immense amount of work into various legacy assets that have been in our portfolio since the recession. Our strong results for the year, net income of $1.56 per share and adjusted income of $2.57 per share, benefited from significant positive outcomes in the legacy book. Our strategy over the past few years has been to generate profits from three main sources: our finance business in the form of interest income, our net lease business in the form of operating lease income, and from our legacy business in the form of gains resulting from our reimagining and repositioning assets we took control of during the downturn. Overall, we have been quite successful, generating sizable earnings growth and full-year 2017 adjusted earnings that represented a significant return on book value. Yet, our share price declined almost 9% last year, a very disappointing result in the face of these stellar earnings results. We must ask ourselves what we need to do differently so this disconnect does not repeat itself.

The first part of the equation is straightforward—continue to generate strong earnings. This will be helped by the fact that we will recognize over $75 million of adjusted earnings in 2018 that we were not able to recognize in prior years, but are now required to recognize in 2018. GAAP will add these to retained earnings rather than running them through the income statement, but as a shareholder, they are indeed earnings that should be considered as return on our invested capital and will appear in our adjusted earnings metric. We also expect to continue to monetize increasing amounts of legacy assets and harvest solid gains on these sales during the year. In addition, we are focused on deploying our significant cash balances ($658 million at year-end) in new investments to generate earnings well above what we earn on cash sitting in the bank.

The second part of the equation is a bit trickier—getting the markets excited about our company and having our share price reflect its full value. Generating high returns on equity from a combination of interest income, net lease income and asset sale gains has driven earnings for the past three years, and we have retired some 35% of total shares during this period to amplify the impact of those returns to shareholders. But it is also increasingly clear that earnings alone in the absence of asset growth and a more clearly defined path forward will not trade at an appropriate multiple. Earlier this year, we hired Marcos Alvarado as our new Chief Investment Officer to bring a renewed focus to our core businesses. We made promising strides in the fourth quarter of 2017, with new loan originations exceeding $400 million, and we believe that we can continue to push this momentum into 2018 and beyond.

So this is where we find ourselves now. After an initial decade of true innovation and market leadership in multiple investment areas, we want to take back that mantle and move forward as an innovator once more, delivering superior returns on the back of strong earnings, a unique platform and team, and a renewed focus on growth. We thank you for helping us get there.

Jay Sugarman
Chairman & Chief Executive Officer