The health of the commercial real estate market continues to be a major concern as many business and real estate investment trusts (REITs) struggle to survive while the coronavirus pandemic lingers on. This volatile market makes it tough to decipher how iStar (NYSE: STAR), a unique hybrid mortgage and equity REIT, is faring.
The company, which has been slowly transitioning its business model from less real estate mezzanine debt to operating more ground leases, net leases, and real property, means its future could look very different from where it stands today. Let's take a closer look at where the company is today and where iStar could be in five years.
iStar originated as a mortgage REIT, also known as an mREIT, specializing in mezzanine debt, but over the past decade has branched into net lease and ground lease operations. The coronavirus pandemic, unsurprisingly, was hard on the company considering its diverse portfolio.
Despite having reduced the company's legacy assets by 20% in 2020, iStar still suffered from a $65.9 million loss in net income for the full year 2020. Earnings per share fell from $3.73 for the full year ending 2019 to -$0.87 for the full year ending 2020.
The one saving grace for iStar is its interest in Safehold (NYSE: SAFE), a subsidiary that handles its ground lease operations. iStar has ownership in 65.4% of Safehold's shares outstanding, making up 39% of the company's portfolio.
The company also operates two net lease ventures, which have fared well over the past year, maintaining a 99.3% occupancy rate and 99% rent collection average. iStar's real estate finance portfolio, which includes senior first-lien debt and second-lien mezzanine debt, has a roughly 7.5% delinquency rate.
Where iStar could be in five years
The company has 23 short-term and long-term legacy assets remaining in its portfolio, assets the company will continue to reduce at the appropriate time over the next five years. The net lease ventures have an average weighted remaining lease term of 15.5 years, meaning the average yield achieved of 7.9% should be maintained as long as tenants are able to maintain their leases, which could be difficult over the next five years. In addition, 45% and 43% of its net lease ventures belong to entertainment and office space respectively, two sectors that have been roiled over the past year. Thankfully, its top net lease tenants have maintained their lease payments during the pandemic and aren't on the trouble list for risk of closure or deferrals just yet.
iStar's leverage ratio of 2.2 times is a bit high, considering its financial performance over the past year and the unlikelihood of the market recovering this year. The company has two large debt maturities in the next five years totaling $780 million. Considering its current liquidity of $449 million including cash and revolving credit facility, the company will need to source additional funds to pay its debt obligations moving forward. It's likely the company will continue to liquidate its legacy assets to help recover capital.
I expect iStar will continue to double down on its shares and interest in its net lease operations and ground lease operations through Safehold in the next five years while reducing ownership of its legacy assets and real estate finance portfolio. This could help the company's financials balance out during the next few years of recovery, but it's going to be a tough run over the next three to five years.