KEY RATING DRIVERS
The 'B' IDR is driven by improvements in the company's leverage, continued demonstrated access to the capital markets and new sources of growth capital and material reductions in non-performing loans (NPLs). Further improvements in the company's land and operating property portfolios should increase the company's earnings power and cash flows. Stronger performance should be driven by the mild improvement in commercial real estate fundamentals, value stabilization, and financing markets, which increases the likelihood of iStar's borrowers to repay their debt.
While concepts of Fitch's Recovery Rating methodology are considered for all companies, explicit Recovery Ratings are assigned only to those companies with an IDR of 'B+' or below. At the lower IDR levels, there is greater probability of default so the impact of potential recovery prospects on issue-specific ratings becomes more meaningful and is more explicitly reflected in the ratings dispersion relative to the IDR.
The senior unsecured notes and senior convertible notes ratings of 'BB-/RR2' or a two-notch positive differential from iStar's 'B' IDR, are based on Fitch's estimate of superior recovery in the 71%-90% range based on iStar's current capital structure. In Fitch's view, the full repayment of the 2013 secured credit facility enabled the company to add higher quality assets with higher recoverable values than the pre-existing unencumbered pool, to iStar's pro forma unencumbered pool. This improves Fitch's estimates of recoveries for the company's unsecured obligations to the benefit of unsecured bondholders, resulting in stronger recoveries relative to the previous 'B/RR4' ratings.
The preferred stock rating of 'CCC/RR6' or a three-notch negative differential from iStar's 'B' IDR, is based on Fitch's estimate of poor recovery based on iStar's current capital structure. Fitch's Recovery Rating criteria provide flexibility for a two- or three-notch negative differential between the IDR and instrument rating. A three-notch negative differential is based on the nature of iStar's perpetual preferred stock - a deeply subordinated security that has weak terms and remedies available both before and after a general corporate default (e.g. no stated maturity, an inability for holders to put the security back to the company, and iStar has the ability to defer dividends indefinitely without triggering a corporate default).
The 2012 senior secured tranche A-2 secured credit facility rating of 'BB/RR1', or a three-notch positive differential from iStar's 'B' IDR, is based on Fitch's estimate of outstanding recovery in the 91%-100% range. These obligations represent first-lien security claims on collateral pools comprising primarily performing loans, credit tenant lease assets and operating properties.
CAPITAL ACCESS IMPROVES LIQUIDITY AND GROWTH OPPORTUNITIES
iStar has accessed the public capital markets five times since the beginning of 2013, raising
IMPROVING LOAN PORTFOLIO METRICS
The company has reduced its gross NPL balance by 47% since the beginning of 2013 through a combination of loan sales and loans returning to performing status. The quality of STAR's loan portfolio has improved, with gross NPLs representing approximately 31% of the company's gross loan portfolio balance as of
LAND PORTFOLIO CURRENTLY AN EARNINGS DRAG, BUT GROWTH DRIVER
The land segment makes up approximately 19% of the carrying value of the company's portfolio as of
IMPROVING BOOK LEVERAGE; HIGH CASH FLOW LEVERAGE
The company's leverage on a net debt/undepreciated book equity basis has improved to 2.2x as of
Fixed charge coverage was only 0.8x for the 12 months ended
MODESTLY CONSTRAINED GROWTH
The company is moderately constrained by non-compliance with an unsecured bond fixed charge incurrence covenant, which limits the company's ability to incur any additional debt to grow its investment portfolio. STAR's growth will occur via investment of unrestricted cash on hand, asset sales proceeds and from external capital raising, such as preferred stock and, potentially, common equity. The company's recently announced joint venture with a sovereign wealth fund to acquire and develop up to
The Positive Outlook is based on Fitch's expectation that the company will be able to access the capital markets to refinance indebtedness and obtain growth capital to expand its portfolio. Further, the company does not have meaningful debt maturities until 2016 when 22% of debt matures, creating a stronger liquidity profile and providing the company adequate runway to redeploy asset sales proceeds and loan repayments towards future investments. In addition, recovery in commercial real estate fundamentals and valuations should enable the company to further monetize assets within its operating property segment and its unencumbered asset pool more broadly.
The following may have a positive impact on iStar's ratings and/or Outlook:
--Demonstrated ability to generate earnings and monetize assets within the company's land segment;
--Generating adequate earnings to be able to incur additional debt under the company's debt incurrence fixed charge covenant;
--Further monetization of the company's unencumbered real estate investment portfolio via asset sales to repay unsecured debt;
--Continued demonstrated access to the common equity or unsecured bond market.
The following may have a negative impact on the ratings and/or Outlook:
--Deterioration in the quality of iStar's loan portfolio, including an increase in non-performing loans and additional provisions for loan losses;
--An inability for the company to generate earnings and monetize land segment assets;
--Encumbrance of the company's higher-quality assets.
Fitch has taken the following rating actions for
--IDR affirmed at 'B';
--2012 senior secured tranche A-2 due
--Senior unsecured notes upgraded to 'BB-/RR2' from 'B/RR4';
--Convertible senior notes upgraded to 'BB-/RR2' from 'B/RR4';
--Preferred stock affirmed at 'CCC/RR6'.
Fitch has withdrawn the ratings on the 2013 secured credit facility due 2017 as this obligation has been paid in full.
The Rating Outlook is Positive.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (
--'Criteria for Rating U.S. Mortgage REITs and Similar Finance Companies' (
--'Global Financial Institutions Rating Criteria' (
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (
--'Recovery Ratings and Notching Criteria for Equity REITs' (
--'Recovery Ratings for Financial Institutions' (
--'Finance and Leasing Companies Criteria' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Global Financial Institutions Rating Criteria
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Recovery Ratings for Financial Institutions
Finance and Leasing Companies Criteria
Mohak Rao, +1 212-908-0559
Source: Fitch Ratings
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