In his "Stupid Investment of the Week", Chuck Jaffe at Marketwatch calls out commercial originator iStar Financial (SFI) as being overvalued and a dangerous stock to own, despite its robust dividend yield and stellar credit record.
Long-time investors in iStar probably have to agree, given the stock's 70% decline over the past year. But is there any downside for new investors?
The dividend yield is over 24%, so obviously the market is betting the dividend will be cut in the future. Over the long-term, iStar does face some headwinds given the sour market, but in the short-term, the Company has a significant amount of unrealized gains in its portfolio, so asset sales will generate plenty of taxable gains that can be used to support the dividend. Capital gain dividends aren't really a long-term solution, but iStar will be able to maintain the dividend at least through 2008 despite a slowdown in loan origination activity.
The Company's portfolio is composed of primarily commercial whole loans, which are composed of 75% senior / 25% mezzanine positions. Included in that mix is the $2 billion junior participation interest in the Fremont General (FMT) portfolio that iStar purchased earlier in the year. It remains to be seen how well that portfolio will hold up. Fortunately, iStar has an additional source of revenue stream from its $3 billion corporate tenant lease portfolio - a lower-yielding but more steady source of income.
iStar carries a significant debt load, but $12 billion of the total $12.4 billion is unsecured. Therefore, iStar has funds available to it if it wants to go to the secured debt market and encumber its corporate tenant lease portfolio. There are no repurchase agreements to raise margin calls, and if iStar can limit loan loss reserve charges going forward, it should be able to satisfy its covenants and maintain its investment grade rating.
It does appear that it will take iStar some time to achieve full value from the purchase of the Fremont commercial platform. As commercial originations slow during the weakening economy, iStar net asset growth may be slim to none. Therefore, a wider gap between taxable income (from gains on asset sales) and iStar's organic earnings is to be expected going forward.
Bottom line: iStar's not going anywhere for a while. The stock is fairly priced in this environment, but income-oriented investors will enjoy that juicy dividend for some time to come.
1 comments:
Hi Patrick,
Unsecured debt is a new concept to me (although I understand it is similar to a credit card, I just didn't realize that it was done with real estate lending). How often does it happen that banks lend in that way (for real estate)? Are the interest payments on such debt increasing more rapidly than interest payments on collateralized debt?
Thanks
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