April 06, 2015 - 11:26pm EST by
2015 2016
Price: 13.00 EPS 0.76 0
Shares Out. (in M): 130 P/E 17 0
Market Cap (in $M): 1,700 P/FCF 0 0
Net Debt (in $M): 3,550 EBIT 0 0
TEV ($): 5,250 TEV/EBIT 0 0

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  • Real Estate
  • Mortgage REIT
  • Sum Of The Parts (SOTP)
  • NOLs
* Idea not eligible for membership requirements


iStar Financial is significantly undervalued today and on the cusp of unlocking the earnings power embedded in the 44% of its balance sheet invested in legacy commercial real estate, land, and excess cash.  iStar should trade in the mid to high $30s in four years as it reaches over $2.50 in earnings power after reinvesting the capital and gains currently committed to legacy assets, increases leverage, lowers its cost of capital, and initiates a dividend.


The extent of iStar’s mispricing can be seen by analyzing the earnings power embedded in legacy assets that iStar has been improving but do not yet generate GAAP returns.  Also, by dividing iStar into REIT like assets and Homebuilder like assets one can see how it trades at a 25-35% discount to similar exposures.  With the opportunity set embedded in iStar’s large land portfolio finally defined by a host of unannounced and unnoticed entitlements over the past year, iStar is poised to generate significant earnings growth.

Adjusted Book Value Calculation ($s in 1000s)      
   Book Value   Per Share   Cumulative Book Value 
Stated Shareholders' Equity 12/31/2014  1,248,348    
Liquidation Value Pref Stock  (738,510)    
Add Back:      
Accumulated Depreciation, CTL Assets  364,323    
Accumulated Depreciation, Operating Properties  96,159    
Convertible Preferred  200,000    
Convertible Bonds  400,000    
NPV of Conv Pref Dividends to Optional Redemption Date  (27,678)    
NPV of Interest Expense on Convertible Bonds through Maturity  (17,571)    
Non Controlling Interests  (51,256)
Book Value  1,473,814  $11.00  $11.00
Subtract Intangibles:      
Debt Discounts  (11,665)  $(0.09)  $10.92
Net lease Intangibles (Intangibles and leasing costs)  (50,088)  $(0.37)  $10.54
Deferred Financing Fees  (36,774)  $(0.27)  $10.27
Add back of Reserved Assets W/Economic Value      
General Reserve  33,500  $0.25  $10.52
Tangible Book Value  1,408,787    
Adjustments For Market Value:      
Adjustment for Fair Value of CTL Assets @ 7% Cap Rate*  388,255  $2.90  $13.42
Adjustment for Fair Value of Commercial Operating Properties*  11,661  $0.09  $0.09
Adjustment for Fair Value of Condos*  75,000  $0.56  $0.56
Adjustment for Bevard Award  144,581  $1.08  $1.64
Adjustment For Land (excluding Bevard)  500,000  $3.73  $5.37
Adjustment for NPV of NOLs  235,379  $1.76  $7.13
Adjusted Tangible Common Equity  2,763,663    $20.63
*Premium to Gross Book      

iStar’s stock has struggled in the past six months as investors have worried about interest rate hikes and become impatient in their wait for iStar to resolve its land assets.  This note gives extensive asset level detail not available in any other public analysis of iStar, showing the wait is not long (from here) and is well worth it.


iStar screens poorly on its Tangible Book Value of only $10.52 per share[1].  However, we believe, adjusting to reasonable economic values for iStar’s CTL assets, commercial real estate, land, and tax assets results in an Adjusted Book Value per share over $20.  In 2020 iStar, will have transitioned 90-95% of its assets to GAAP earning assets and have earnings power of approximately $2.58.  Our 2019 Target Price for the stock, based on a 7% cap rate, is $37.  This represents a 30% compounded return for four years not including any dividends that might be declared (See Appendix A for detail).  This note also shows how on a sum of the parts basis (REIT and Homebuilder), iStar should be trading around $19 today.


The overhang today on iStar’s stock price is due to the legacy assets that either do not earn a GAAP return or significantly under earn the GAAP ROA of iStar’s loans and Credit Tenant Lease (CTL) assets.  However, the legacy assets are accreting in value.  For example, iStar has made significant progress entitling and developing the land assets it acquired through foreclosure during the crisis.  Development plans have been updated and improved, entitlements obtained, and in many cases construction has begun and sales are commencing.  The state of the land assets is materially different today than it was even one year ago.  However, only costs have been recognized during this process with revenues coming only as assets are sold.  We believe that land sales begin in earnest in 2015 and that visibility into the value of these assets will emerge.  Land sales should ramp significantly in 2016 and 2017.



Significant Progress in Entitlements Across Development Assets Since Beginning of 2014  
Project Status January 2014 Status March 2015
Coney Island Seaside Park and Community Center Approved December 2013 Construction slated to begin summer 2015
Ponte Vista Plan Approval recommended by Planning Comission City Council Approved Plan March 2014, ground breaking May 2014
Wayfarer (aka Superblock) City of Long Beach Suing iStar Lawsuit settled, Plan approved by the City of Long Beach in February 2014
Spring Mountain Ranch Phases 2 & 3 No Known Activity Construction began in Phase 1 in 2014
1000 S. Clark Street No Known Activity Construction began August 2014
Great Oaks Previous plan tabled in 2013 Plan approved by San Jose City Council November 2014
1210 California Circle No Known Activity Milpitas City Council approved plan November 2014
Los Valles No Known Activity Entitlements Approved by Castaic Land Use Committee in December 2014
Artesia Condominiums No Known Acitivity Scottsdale City Council approves Plan to expand entitlements by 175 untis in March 2015
Western Albaqueque Land Holdings Some discrete parcel sales, Talk about developing a MPC Santolina MPC "Level A" approval by Bernalillo County Commissioners potentially in May 2015


We believe that iStar will generate meaningful gains from sales of its land assets and commercial real estate over the next three years—the fruits of over five years of repositioning, redeveloping, and aggressively managing a portfolio of assets iStar acquired through foreclosure that are mostly (but not all) attractive assets that were leveraged and poorly timed by their original owner/developers.


Importantly, as iStar’s profitability continues to increase, a significant portion of earnings will be sheltered from taxes by iStar’s meaningful and growing tax shield.   Standing at $760 million at year-end 2013, iStar’s NOLs resulted from losses incurred during the crisis[2].   The upshot of the Tax Asset is that unlike almost any other REIT, iStar, by using its substantial tax shield, will be able to grow its capital base as it generates profits.  Not all profits can be sheltered by the NOLs (notably Taxable REIT subsidiary (TRS) income), however iStar should be able to fully utilize the NOLs before they expire. The notion that NOLs create value in a pass through entity can be confusing.  Typically, the value of NOLs would only represent the projected cash tax savings discounted by the time to realize those tax savings.  However, in iStar’s case, given that REITs typically distribute all their taxable income to shareholders and sell new stock to grow their capital base, iStar’s NOLs also represent the ability to grow its capital base by not paying a dividend or only a partial dividend on $760 million+ of income that would have been taxable without the presence of the NOLs.  The earnings growth (and long term dividend paying ability) that will result as capital is retained, invested in more transparent loans and triple net leases will be substantial and multiplied as iStar’s grows into its target leverage of 2.0-2.5x its equity.  This earnings growth will be further accentuated as iStar continues to reduce its cost of capital, and increase its leverage (now at the low end of its targeted range) as its asset mix shifts over time.


iStar’s stock is mispriced today because:


·    iStar is a REIT (excluding many investors) but does not pay a dividend (excluding most REIT investors).

·    Almost half of the portfolio is not generating an easily measurable GAAP return.

·    Assets are relatively opaque, requiring meaningful work to understand.

·    Management does not provide guidance, a presentation for equity investors nor attend sell side conferences.

·    Concerns about rising interest rates have hurt some REIT valuations (particularly a smaller cap, less liquid name with no dividend like iStar).

·    Some investors have been frustrated with the lack of transparency and seemingly slow monetization of the land assets.


Sum of The Parts Value



"REIT Segment" 2015 Estimate of FFO & Valuation       "Homebuilding/Land Segment" Valuation     Sum of the Parts  
    Incremental ROA Cash Flow            
Q4 REIT Segment Profit Annualized      97,909   Land Gross Book Value  1,093,000   REIT Value  $11.20
Accretion from Deploying Excess Cash  425,000 8.5%  36,000   Subtract Bevard  (102,938)   Homebuilder  $4.58
Accretion from Deploying One Detroit Plaza Cash  90,000 6.5%  6,300   Add Condo Book Value  156,481   Bevard  $1.73
Estimated 2015 REIT Segment Profit      140,209   Homebuilding Asset Value  1,146,543   Tax Asset  $1.76
          Allocated Debt  (672,037)   Total  $19.26
Allocated Preferred Dividends      (35,250)   Allocated Preferred Equity  (91,049)      
FFO      104,959   Net Book Value  383,457      
Cap Rate     7.0%   Book Value Multiple  1.60   8% Yield & 1x Book $16.17
Equity Value      1,499,414   Equity Value  613,531   6% Yield & 2x Book $22.30
Per Share      $11.20   Per Share  $4.58      


Another way to understand how the market is undervaluing iStar is to parse the company into a REIT (comprising the loans, CTL assets, commercial operating properties, certain private equity investments, and the cash) and a homebuilder (the condos, land and land JVs).  While iStar is primarily developing land to sell finished lots to homebuilders, it is also building condominium towers, townhouses, and multi-family properties.  The exposure is very similar to a homebuilder. Certainly, the end market is the same and most homebuilders are active in land development as well.  Altogether, iStar’s condominium sales, Production land assets and Development land assets control almost 12,300 units.  Including another 18,000 Predevelopment Lots, iStar homebuilding like operations control over 31,000 units.


Assuming a 7% cap rate on the REIT segment’s estimated 2015 profits[3], a conservative value for the tax assets, and credit for the Bevard judgment, the market is currently ascribing zero value for iStar’s land/homebuilding operations above allocated debt or only 67% of the $1.15 billion in book assets.  In context these homebuilding like activities are generating approximately $182 million in run rate revenues and $116 million in EBITDA.  If iStar were able to separate the two businesses today, and iStar’s homebuilding like operations traded in-line with homebuilders at 1.6x book[4], the stock would trade around $19.00.  Even an 8% yield and at 1.0x Book (the bottom of both groups) would imply the stock should be 25% higher.



Q4 2014 Business Segment Detail As Adjusted (1)                        
  Real Estate Finance Net Lease Operating Properties Corporate & Other Total REIT   Homebuilding   iStar   REIT Annualized   Homebuilding Annualized
Operating Lease Income  -    38,432  20,700  -    59,132    202    59,334    236,528    808
Interest Income  28,565  -    -    -    28,565    -      28,565    114,260    -  
Other Income  890  131  9,665  5,632  16,318    2,462    18,780    65,272    9,848
Land Sales Revenue  -    -    -    -    -      3,271    3,271    -      13,084
Total Revenue  29,455  38,563  30,365  5,632  104,015    5,935    109,950    416,060    23,740
Earnings (loss) from equity method investments  -    1,763  544  498  2,805    15,252    18,057    11,220    61,008
Income from Sales of Real Estate  -    6,206  (2,028)  -    4,178    24,300    28,478    16,712    97,200
Revenue and other earnings  29,455  46,532  28,881  6,130  110,998    45,487    156,485    443,992    181,948
Real Estate Expense  -    (5,714)  (22,166)  -    (27,880)    (11,057)    (38,937)    (111,520)    (44,228)
Land Cost of Sales  -    -    -    -    -      (2,812)    (2,812)    -      (11,248)
Other (expense) income  773  -    -    (1,968)  (1,195)    -      (1,195)    (4,780)    -  
Allocated Interest Expense  (12,546)  (17,314)  (7,102)  (8,910)  (45,872)    (9,201)    (55,073)    (183,490)    (36,802)
Allocated General & Administrative Expense  (2,288)  (3,144)  (1,374)  (4,767)  (11,573)    (2,675)    (14,248)    (46,294)    (10,698)
Total Expenses  (14,061)  (26,172)  (30,643)  (15,645)  (86,521)    (25,744)    (112,265)    (346,083)    (102,977)
Segment Profit  15,394  20,360  (1,762)  (9,515)  24,477    19,743    44,220    97,909    78,971
EBITDA                      281,398    115,774
(1) Adjustments:                          
Revenues and operating expenses from Residential Operating Properties (Condo Sales) shifted from Operating Properties to Homebuilding              
20% of allocated interest expense & Allocated G&A moved from Operating Properties  to Homebuilding (in-line with Condo Assets as % of Oper Prop)            







iStar’s Portfolio

iStar is categorized as a commercial mortgage REIT, however over 70% of the assets (excluding cash) are in the equity of real estate as opposed to credit exposure.  Unique among financials, with a bit of digging, a diligent analyst can identify most of the significant assets.  We start with a top down review here and provide analysis of specific assets in an Appendix.  The portfolio breaks down as:


Asset Type $MM %   Comments
Cash  491 9%   Significant Excess Cash
Commercial Real Estate Loans  1,346 24%   Primarily Post Crisis Loans 
Non-Performing Loans (NPLs)  65 1%   Immaterial at this point
Credit Tenant Lease Assets (gross of Depr)  1,682 30%   Stable, inflation protected
Land  1,093 19%   2009/10 valuations, Significant Progress Recently
Stabilized Commercial Operating Properties  109 2%    
Unstabilized Commercial Operating Properties  635 11%   Significant Dispositions at gains expected this year
Condominium Developments  156 3%   4-6 more quarters of 30-40% gains expected
Other Strategic Investments  110 2%    
Total  5,688      



40% of this balance sheet is either not earning a GAAP return (NPLs and Land) or a substandard return (Unstabilized Commercial Operating Properties and Cash).  However, iStar is moving steadily to improve these assets and sell them, many at what will be be large gains relative to current book value.  The capital is being reinvested into commercial real estate loans and triple net leases.



iStar has maintained a significant cash balance since the start of the financial crisis, which currently stands at $492 million.  Prior to the financial crisis iStar typically maintained less than $100 million of cash despite a much larger balance sheet.  We expect the excess cash to decline over the next several years as iStar’s asset mix shifts back to loans and triple net leases from development projects, as iStar’s credit rating improves and it becomes practical and attractive to manage liquidity through the use of a revolver.  We assume eventually $425 million of cash invested at an incremental 8.75% ROA would generate an additional $37.2 million of earnings annually, or $0.28 per share.


Commercial Real Estate Loans

iStar has $1.35 billion of performing commercial real estate loans and securities today.  The portfolio is reasonably diversified among geographies within the United States and most commercial real estate sectors (albeit with almost no exposure to land loans).  45% of the loans are in Senior Mortgages.   The average Loan To Value (LTV) of the entire portfolio is 70%.  The General Reserve is 2.5% of the portfolio.  The average accrual rate is 9% and weighted average remaining term is 2.7 years.  56% of the loans are fixed rate and 44% are variable rate.  Importantly, iStar’s origination engine has gotten going again.  In 2014 iStar originated $622 million of loans, including such high profile deals as 701 Seventh Avenue/20 Times Square and 212 5th Avenue in New York, and 181 Fremont in San Francisco alongside Starwood.  iStar appears focused on larger deals and deals where structuring can add value for both sides.


Non-Performing Loans (NPLs)

Non-Performing Loans used to be iStar’s largest problem; today it is almost a non-issue.  Non-Performing loans shrunk 58% in 2014, reduced by $139 million to 5 senior mortgage loans totaling $65 million or just 1% of the balance sheet.  NPLs appear well covered with a 50% specific reserve.  Recently, most NPLs have been resolved at book value or meaningfully above book.  As the remaining NPLs are liquidated the capital can be reinvested in performing loans and triple net lease assets.  Also, the associated legal expenses and management distraction will cease to be a drag.  $65 million of capital harvested from NPLs with an estimated $1.3 (2%) million per year of legal expenses would generate $6.9 million of additional earnings per year or $0.05 per share.


Credit Tenant Lease (CTL) Assets.

iStar owns 18.7 million square feet of commercial real estate across 304 facilities in 33 states which are leased to single tenants under long term Triple Net Leases.  In a typical net lease deal the lessee is responsible for rent, facility maintenance, utilities, insurance and taxes.  iStar’s net lease assets are 95.9% leased with a weighted average remaining lease term of 11.7 years.  The gross book value of these assets is $1.55 billion.  The net book value is $1.19 billion after $364 million of accumulated depreciation.  


Also, iStar is the manager of a Net Lease focused joint venture with a Sovereign Wealth fund.  iStar and the fund plan to contribute up to $500 million in equity to acquire or develop net lease projects up to $1.25 billion in assets.  The venture appears to be approximately 50% invested, with iStar’s capital committed to to date at $125 million.


Net Lease assets generate steady cash flow and complement some of the accrual construction and mezzanine loans in the real estate finance segment.  Net Lease assets are typically valued similar to a bond, with cap rates assigned based on yield, tenant credit and lease duration.  In our Adjusted Book Value analysis we value the CTL assets not at net book or gross book, but based on the cash flow yield of the properties.  We use a 7% cap rate on Q4 2014’s annual run rate Net Lease Revenue – Net Lease Operating Expenses.   To that we add an estimate for the value of the vacant properties.  The Sovereign Wealth Fund venture we value at book despite the potential for incentive fees in the future.  We do not include the segment’s allocated G&A because we believe a strategic acquirer would be able to eliminate these expenses[5].  The comparable group of Triple Net Lease REITs is currently trading 50 to 100 bps tighter than our 7% cap rate.



Land comprises the largest non-earning asset, making up 21% of iStar’s total portfolio and about half of the under-earning assets.  The book value of the land segment was $1.1 billion at 12/31/2014.  Net of Bevard (which is a litigation play), the book value of the land assets is $991 million.   We believe iStar will likely generate over $250 million in cash from resolving Bevard and close to $3 billion in net cash flows from the remaining land assets.  iStar has had six Development projects win breakthrough entitlement approvals in 2014 and 2015, allowing raw land to soon become housing.  The timing of the land cash flows is as important as margins in an NPV analysis of the land assets.   However, the company has not commented and the market has not awarded the stock anything for this progress.


We expect $1.6-1.7 billion of land cash flows to arrive by the end of 2020.  This view supports the net present value of approximately $1.5 billion we use in our Adjusted Tangible Book Value Analysis for all the land assets (ex Bevard).   The projects range from middle class single-family home master planned communities to luxury condominium projects, luxury apartment buildings, urban infill townhomes, retail and office commercial space, and one of a kind custom homes.



Land Segment Income Statement      
  2014 2013 2012
Operating Leasee Income  0.8  0.9  1.5
Other Income  3.3  1.5  2.6
Land Sales Revenue  15.2  -    -  
Total Revenue  19.4  2.4  4.2
Earnings (loss) from Equity Method Investments  15.0  (5.3)  (6.1)
Income from Sales of Real Estate  -    4.1  -  
Revenue & Other Earnings  34.32  1.10  (1.98)
Real Estate Expense  (26.9)  (33.8)  (27.3)
Land Cost of Sales  (12.8)  -    -  
Total Direct Expenses  (39.8)  (33.8)  (27.3)
Contribution Margin  (5.44)  (32.73)  (29.29)
Allocated Interest Expense  (29.4)  (30.4)  (44.1)
Allocated General & Administrative  (13.2)  (12.4)  (7.4)
Total Allocated Expenses  (42.6)  (42.7)  (51.5)
Segment Profit (loss)  (48.04)  (75.47)  (80.82)
Capital Expenditures  (80.1)  (36.3)  (20.5)
Land Sales Gross Margin 15.5% NA NA


iStar’s $1.1 billion of land book value is the sum of the discounted cash flow valuations iStar generated at the time of the individual asset foreclosures plus capital expenditures minus any impairments recognized since foreclosure.  As such, any increase in value due to improvement in market conditions beyond what was expected in the post crisis (2009-2010) time frame is not reflected in this valuation while any significant decreases in value have been through impairments.


By its nature the fair value process iStar used to establish the book value of the land creates a dynamic where meaningful gains should be recognized once projects reach the production (revenue) stage where homes, condos, lots etc. are sold.  At the time of foreclosure each land asset was valued using a discounted cash flow model incorporating what should have been appropriately conservative assumptions at the time for the scope of the project, time required to develop the project, capital expenditures required to develop the project, expected sales prices and absorption rates.  Given that land assets were valued using “mid-teens” discount rates, the simple case where the assumptions were correct implies, that on average, management expected at the time of foreclosure[6] that the land should have a NPV of about $2 billion today (1.15^5) or 2x the original fair value recorded on the books because we are closer to the positive cash flows.


In 2014, the Land Segment generated material revenue for the first time and almost broke even before Allocated Interest and G&A.  We expect land sales to accelerate in 2015 with $100 to $200 million in revenue versus $34 million in 2014.  Land Sales could double again in 2016 and remain at elevated levels for a number of years.  We also expect land sales gross margins to grow to about 50% as the mix shifts to higher value added properties.


iStar has only disclosed the number of projects in Production (6), under Development (13), and in Pre-Development (13); but has not disclosed the assets or asset value by category.  We believe this presentation has misled investors to continue to believe that most of the land assets are years away from revenue.  However, the truth is that most of value is not as far from revenue as people think; and in fact most assets are close.


New disclosures and our analysis suggest that $395 million of book or 37% of the land assets are in Production (i.e. generating revenue) or in the case of Bevard about to generate a large gain.  Another $460 million or 43% of the land assets by book value are in Development with revenues expected as early as later this year for certain projects.  Only a minority of the land value, $216 million is in Pre-Development, of which $150.7 million (70%) is comprised of three assets (Grand Vista, Valley Plaza, and WAICCS Las Vegas).  The other 10 assets are a grab bag of small assets some of which are relatively recent foreclosures.


Land Assets in Production:



PRODUCTION PROJECTS                              
  Project Location   Launch Date Anticipated Completion Date 2014 Revenues 2014 Units Sold Average Rev Per Unit Units Remaining Net Book Value Net Book Value Per Unit Estimated Incremental Cap Ex Adjusted Basis All In Basis Per Unit Anticiapted Avg Rev Per Unit Projected Revenues Estimated Gain
1 Magnolia Green Richmond, VA MPC 2007 2026  $7,862 114  $69 2,669 89,682 34  22,885  112,567  42  $90  $240,210  127,643
2 Asbury Park Asbury Park, NJ Waterfront 2014 2025  $6,696 14  $478 2,446 81,769 33  61,368  143,137  59  $150  $366,900  223,763
3 Tetherow Bend, OR MPC 2007 2020  $6,626 29  $228 106 14,657 138  2,650  17,307    $300  $31,800  14,493
4 Spring Mountain Ranch Phase 1 Riverside, CA MPC 2014 2016  $4,847 60  $81 375 21,105 56  3,750  24,855  66  $90  $33,750  6,725
5 Naples Reserve Naples, FL MPC 2014 2018  $703 7  $100 1,109 53,818 49  28,232  82,050  74  $150  $166,350  84,300
6 Marina Pams Miami Beach, FL Urban Infill 2015 2016  $54,210 0 NA 468 30,700 NA  -          NA   68,254
7 Bevard Farms Price George's County, MD MPC NA 2015 or 2016  $-   0 NA 0 102,938 NA  -   NA NA NA NA  144,581
                  7,173 394,669    118,885       839,010 669,759


We estimate iStar can generate $525 million of gains on the six assets in Production and another $145 million from the Bevard Litigation (were it to be settled today).  The projects range from mixed use (including townhomes and hotels) to mid-priced single-family homes, to luxury condominiums and custom homes in one of kind communities.  Of these Production assets we believe Asbury Park, Naples Reserve, and Marina Palms will generate extraordinary IRRs, whereas Magnolia Green, Spring Mountain Ranch Phase 1 (SMR1), and Tetherow will generate more modest returns[7].  A detailed discussion of the individual Production assets is provided in Appendix B.


Land Assets in Development:



  Project Location   Anticipated Launch Date Anticipated Completion Date Units Net Book Value Net Book Value Per Unit Total Capital Required Estimate of Cap Ex to Date Incremtal Cap Ex Adjusted Basis Adjusted Basis Per Unit/Lot Projected Avg Sales Price Per Unit/Lot Estimated Gain
1 Ponte Vista San Pedro, CA MPC 2015 2022  700 89,728 128 17,500 5,628  11,872 107,228  153  $250  67,772
2 Spring Mountain Ranch Phases 2 & 3 Riverside, CA MPC 2016 2025  1,014 75,970 75 20,280  -    20,280  96,250  95  $145  50,780
3 Los Valles Castaic, CA MPC 2016 2026  497 59,100 119 24,850  -    24,850 83,950  169  $350  90,000
4 Wayfarer (aka Superblock) Long Beach, NY Waterfront 2016 2016  522 54,986 105 27,500  2,525  24,975  79,961 NA  NA   50,044
5 Coney Island Brooklyn, NY Waterfront NA NA  NA  49,394 NA NA NA  25,000 NA NA  NA   100,000
6 Great Oaks San Jose, CA Urban Infill 2015 2016-2018  720 46,750 Mixed Use 64,800  -    64,800  111,550 NA  NA   63,997
7 Mammoth Crossing Mammoth Lakes, CA MPC 2016    463 17,891 39 NA NA NA NA NA  NA   NA 
8 Artesia Condominiums Scottsdale, AZ Urban Infill 2015 2017  562 17,906 32 89,920 NA  89,920 107,826  192  $456  148,179
9 1210 California Circle Milpitas, CA Urban Infill 2016 2018  144 10,549 73 23,040  -   23,040 33,589  233  $532  43,019
10 Western Albuqueque Land Holdings Alburqurque, NM MPC NA NA  NA  13,800 NA NA NA NA NA NA NA NA
11 1000 S. Clark Street Chicago, IL Urban Infill 2015 2015  469 9,400 NA NA NA NA NA NA NA  47,000
12 Unidentified Land Equity Interest   NA NA    NA  7,800 NA NA NA NA NA NA NA NA
13 Unidentified New York Land Asset   NA NA    NA  7,102 NA NA NA NA NA NA NA NA
            5,091 460,376   267,890   284,737       660,791


We estimate iStar can realize close to $600 million in gains from 90% of the assets (by book value) categorized as in Development.  The other 10% of assets do not have enough transparency for us to have a view.  The projects in Development include apartment buildings, large master planned communities, urban infill residential projects, and retail and office space.  Six[8] of the eight Development projects seeking plan approvals had breakthrough entitlement approvals in 2014 and 2015.  These approvals crystalized scope, dramatically reduced risk, and pulled forward cash flows.  Given the significance of plan approvals to iStar’s ability to turn these assets into cash we would have expected the market to mark up iStar on these developments.   However, the company, analysts, and the market have been silent on these meaningful catalysts.  Project by project detail is included in Appendix B.


Land Assets in Pre-Development:

We have identified fourteen land assets[9] which we believe are in Pre-Development totaling an estimated $215.7 million of book with the value dominated by Grand Vista ($96.7 million) and Valley Plaza ($30.5 million).  While time to development is uncertain for all these projects, Grand Vista and Valley Plaza are potentially extremely valuable assets given Grand Vista’s size and low basis per lot and Valley Plaza’s compelling location.  Each is discussed in Appendix B.


Operating Properties

Operating Properties is a reported business segment made up of $900 million of commercial and residential properties iStar acquired through foreclosure from 2007 through today.  Cynics might call this segment REO, however this is not your father’s REO.  iStar has generated low double digit ROAs amounting to over $300 million in operating profits from this “REO” portfolio over the past three years.  While we are not projecting profits as significant, we believe the luxury condominiums (Residences at Two Liberty), class A office space (Raintree, Westgate), destination retail (Valley Square, Westgate), and Boutique Hotel (Sarasota Aloft and Mandarin Oriental, Atlanta) properties embedded in this portfolio have meaningful long term upside.


$744 million of these assets are categorized as commercial real estate and $156 million as residential real estate (read condos).  Most of the significant assets are identified in the tables below.  In our Sum of the Parts valuation analysis we allocated the commercial operating properties to the REIT and the residential operating properties to the homebuilder.



Property Location St Acquired  Gross  Depreciation Net
Raintree Corporate Center Scottsdale AZ 2011  48,410  5,827  42,583
Miami Green Miami FL 2010  22,113  2,168  19,945
One Detroit Center Detroit MI 2007  143,573  25,622  117,951
M&I Bank Plaza Sarasota FL 2008  14,261  1,742  12,519
Unidentified 2009 AZ Foreclosure   AZ    4,651  194  4,457
Unidentified Office Properties Various      68,816  24,476  44,340
Office Total        301,824  60,029  241,795
Avondale Commerce Center I Avondale AZ 2009  11,009  1,249  9,760
Avondale Commerce Center II Avondale AZ 2009  10,887  1,185  9,702
Industrial/R&D        21,896  2,434  19,462
Office/Industial        323,720  62,463  261,257
Ilikai Hotel   HI 2010  5,201  -    5,201
Mandarin Oriental, Atlanta Hotel Atlanta GA 2010  32,750  3,700  29,050
Kauai Beach Resort Lihue HI 2009  16,090  1,628  14,462
Hotel Total        54,041  5,328  48,713
SF Furniture Scottsdale AZ 2009  8,855  515  8,340
Ilikai Shops Honolulu HI 2009  14,404  1,895  12,509
Ford City Mall Chicago IL 2012  50,215  2,961  47,254
Illinois Tollway Various IL 2010  1,529  406  1,123
Mandarin Oriental, Atlanta Retail Altanta GA 2010  24,670  705  23,965
Village at Belmont Greene Asburn  VA 2011  21,431  1,010  20,421
Retail        121,104  7,492  113,612
Westgate Glendale AZ 2011  83,457  8,752  74,705
Station Square   FL 2009  180  -    180
Artesia Retail & Parking? Scottsdale AZ 2011  5,046  326  4,720
Magnolia Square Riverside CA 2010  5,970  413  5,557
Valley Square Warrington PA 2012  65,004  6,624  58,380
Unidentified 2011 SC Foreclosure   SC 2011  2,351  185  2,166
Unidentified 2010 CA Foreclosure   CA 2010  6,500  262  6,238
Unidentified 2010 TX Foreclosure   TX 2010  2,709  -    2,709
Unidentified 2010 TX Foreclosure   TX 2010  1,391  -    1,391
Unidentified 2014 FL Foreclosure   FL 2014  40,765  729  40,036
Unidentifed 2014 FL Foreclosure   FL 2014  11,886  332  11,554
Unidentifed 2014 FL Foreclosure   FL 2014  19,735  418  19,317
Mixed Use/Mixed Collateral        244,994  18,041  226,953
         743,859  93,324  650,535


Commercial Operating Properties

iStar owns $744 million of income producing commercial real estate properties acquired through foreclosure, ranging from troubled to trophy.  iStar is actively managing this portfolio through divestitures, leasing and development activity.


Of the $744 million in commercial operating properties at year-end 2014, $109.4 million were classified as “stabilized”[10] and $635 million were “transitional”.  The occupancy of stabilized and transitional properties at 12/31/2014 was 88% and 58%, respectively.  Stabilized and transitional operating properties generated unleveraged weighted average yields of 7.8% and 2.5%, respectively.


While the current yield of the transitional properties is poor and the average same store rent of the overall segment declined year over year in 2014, we believe the results at a single large and weak asset, Ford City Mall, has dominated the headline trend for the past two years while the outlook at other properties such as 240 S. Pineapple/Aloft, Sarasota, The Shoppes at Valley Square, Mandarin Oriental Hotel-Atlanta, and Westgate remain attractive and improving.  Given the operating leverage inherent in leasing up large commercial real estate properties, continued success leasing up these quality assets should have a significant impact on profitability and valuation.


Over the past two years iStar has sold half of the stabilized properties, consistently generating gains.  Going forward we expect iStar to actively sell stabilized properties, opportunistically divest transitional properties and continue improving all the assets.  Q4 2014 was the most active quarter to date in leasing activity with 445,000 square feet leased.


In Q1 2015, we expect iStar to report the partial sale of the largest “transitional” asset, One Detroit Center.  News reports suggest that iStar is selling the building for approximately $100 million while retaining and providing a long term lease on the land and parking structure.  We expect iStar will add the land and parking lease to its CTL segment.  The transaction should generate a $10-15 million gain for iStar and its 10% minority partner.  That iStar is able to sell a transitional asset, in Detroit, at a gain is testament to the turnaround work iStar is executing as well as the appropriately conservative valuations that exist in the portfolio.  See Appendix C for Details of some of the larger commercial operating properties.


The Commercial Operating Property Portfolio also includes development opportunities.  For example, at 240 S. Pineapple in Sarasota, iStar is developing an Aloft branded hotel on vacant land connected to its M&I Bank building office property.  In the long term, additional development opportunities may be available on outparcels at Westgate, Valley Square, Magnolia Square, Belmont Greene, even a repurposing of all or part of Ford City Mall.


Residential Operating Properties



Residential Operating Properties          
Project City Book Value Units Basis/Unit Avg Pricing Gains
Illikai Hotel Honolulu, HI  40,900  101  405  680  27,780
Sage Condominiums Scottsdale, AZ  15,795  72  219  500  20,205
Bridgewater Emmeryville,CA  3,376        
Waipouli Beach Resort    1,665        
Unidentified CA Condo    7,138        
Ocean House Miami Beach, FL  5,370  1  5,370  12,000  6,630
Residences at Mandarin Oriental Atlanta, GA  25,136        
Hali'ipua Villas    483        
Trump Jersey City, NJ  485        
The Martin Las Vegas, NV  7,618        
10 Rittenhouse Square Philadelphia, PA  9,345        
Residences at Two Liberty Philadelphia, PA  37,044  73  507  1,000  35,956
Esplanade Tacoma, WA  2,117        
     156,472  247      90,571


iStar owns 332 luxury condominium units carried at $156 million which are actively being marketed for sale.  The 332 units are across 13 properties, many of which are at advanced stages of sell out.  77% of the book value of the remaining inventory is concentrated in four projects:  Ilikai Hotel, Residences at Two Liberty, Mandarian Oriental Hotel, and Sage Condominiums.  In 2014, iStar sold 457 units ($157 million of book) for proceeds of $236.2 million and gains of $79.1 million.  We conservatively expect the remaining inventory, which is at least as high quality to generate over $75 million of gains over the next 18 months.  We can actually get well above this number from just a portion of the inventory:  


·    The last unit at Ocean House sold in Q1 2015 for $12 million, which is a $6.6 million gain.   

·    iStar and Dranoff have launched sales of the 73 units at The Residences at Two Liberty at between $750,000 and $2 million.  Assuming an average sales price of $1 million versus a $507K per unit cost basis would imply over $30 million in gains when units are delivered in 2016.

·    At the Ilikai in 2014, average sales were $640,000 per unit or $1,168/ft.  Through March 23, 2015 iStar has sold 30 units compromising 16,474 square feet.  71 units (42,422 sq. ft.) remain unsold.  The trend suggests about $28 million in gains, most to be realized in 2015.

·    The 72 units at Phase 2 of the Sage Condominiums (sales just launched in December 2014) should generate over $20 million in gains.




Analysis of iStar's Earnings Power                
              Q4 2014  As Reported Per Share
Net Income (loss) attributable to common              (12,771)  
Depreciation & Amortization              19,763  
Provision for Loan Losses              5,151  
Impairment of Assets              12,893  
Stock based comp              4,770  
Loss on Early Extinguishment of debt              416  
Subtract Q4 Income from Equity Method Investments              (18,057)  
Add Normalized Income from Equity Method Inv  (Assuming avg 15% return & excluding land)        8,714  
Dividend on Convertible Preferred Shares              2,250  
Interest on Convertible Notes              2,250  
Q4 Income on an as converted basis              25,379  
          Current Runrate Cash EPS  101,515  $0.76
  Capital Released Add Estimated Gain Assets to Be Reinvested Incremental ROA Proforma Income Current Expense (Income) Annual Earnings Impact Earnings Impact Per Share
Subtract Condo Income  156,000  75,000  231,000 9.00%  20,790  (77,200)  (56,410)  $(0.42)
Sale of Stabilized Commercial Operating Properties  109,400  32,820  142,220 1.20%  1,707  -    1,707  $0.01
Stabilization & Sale of Transitional Operating Properties  635,000  75,000  710,000 6.50%  46,150  -    46,150  $0.34
Bevard Farms Judgment  87,497  144,581  232,079 9.00%  20,887  2,000  22,887  $0.17
Liquidation of Land Assets (1)  500,000  650,000  1,150,000 9.00%  103,500  13,112  116,612  $0.87
Deploy Excess Cash  425,000  -    425,000 8.75%  37,188  -    37,188  $0.28
Resolve NPLs & Redeploy Capital  65,047  -    65,047 9.00%  5,854  1,301  7,155  $0.05
Additional Leverage at Mid-Point (2.25x)      2,582,056 4.50%  116,193  -    116,193  $0.87
Lower Cost of Capital, Existing Debt      4,022,684 1.00%  40,227  -    40,227  $0.30
Subtract Incremental G&A to support Portfolio Growth      2,582,056 -0.50%  (12,910)  -    (12,910)  $(0.10)
Add Normailized Credit Losses (Portfolio Growth)      5,537,402 -1.00%  (55,374)    (55,374)  $(0.41)
Add Back Normailized Credit Losses (Current Loans)      1,410,000 -1.00%  (14,100)    (14,100)  $(0.11)
Conv Pref Dividends to Optional Redemption Date 0  (36,000)  (36,000) 9.00%  (3,240)  -    (3,240)  $(0.02)
Interest Expense on Convertible Bonds through Maturity 0  (18,000)  (18,000) 9.00%  (1,620)  -    (1,620)  $(0.01)
            Additional Earnings Power  $244,463  $1.83
(1) $900MM Cost of Land Sold - $400MM of Cap Ex           Current Run Rate Income  101,515  $0.76
            Earnings Power  345,979  $2.58
            Shares Outstanding  133,935  
            Yield 7%  
            2019 Target Price  $36.90  
Leverage Analysis      
Leverage 12/31/20 12/31/14 Additional Leverage
Book Debt  6,604,740  4,022,684  2,582,056
Less Cash & Cash Equivalents  (47,061)  (472,061)  
Net Book Debt  6,651,801  3,550,623  
Book Equity  1,248,348  1,248,348  
Capital Retained Through NOLs  760,000  -    
Capital Retained from D&A Tax Shield  395,260    
Add: Accumulated Depreciation & Amortization  519,248  519,248  
Add: General Loan Loss Reserves (GLLR)  33,500  33,500  
Sum of Book Equity, Acc D&A and GLLR  2,956,356  1,801,096  
Leverage 2.25  1.97  






Production Land Asset Detail


Marina Palms


Marina Palms Yacht Club & Residences located in North Miami Beach at 17201 Biscayne Blvd in North Miami Beach, features two 25-story towers with a combined 468 condominium residences.  The attached marina and yacht club will offer concierge service and 112 slips with mooring for yachts up to 90 feet.  The North Tower topped out in early 2015 and is completely sold out.  The South Tower, which was 37% sold through 12/31/2014, 60% sold as of early March 2015 and over 70% sold as of late March 2015, recently obtained an $87 million construction loan from HSBC.  


iStar seeded the Marina Palms project in 2013 when it sold land to the development JV for $21.4 million in cash, a preferred partnership interest and a 47.5% equity interest for an original $10.6 million basis.  iStar’s preferred partnership interest of $6.6 million was repaid in 2013 we believe around the same time a $98 million construction loan was obtained from HSBC for the construction of the first (North) tower.  During 2014, iStar acquired an additional preferred partnership interest in the entity of $10.0 million and recognized $14.7 million of income related to sales activity, which was included in "Earnings from equity method investments" in the Land segment.  As of December 31, 2014, iStar’s preferred and common equity interest in Marina Palms stood at $30.7 million.


Per the Marina Palms annual report filed as an attachment to the 2014 Form 10K/A, we know Recognized Revenue and Deferred Revenue through 2014 (all for the North Tower) totaled $232.5 million.  We are assuming this represents all the revenue from the North Tower (despite the fact over 9,000 square feet of penthouse space probably worth about $9 million was released in March 2015).  The annual report also shows revenue form the North Tower being recognized at a 58% gross margin.  These figures imply the North Tower was sold out at about $471 per square foot and built at a cost of approximately $271 per foot.  We believe the South Tower which was approximately 60% sold in early March 2015 at $500 per foot will sell out at an average of $530 per foot and cost the same $271 per foot to build as the North Tower.  The Marina’s 110 slip condos for sale are priced at $32.7 million and we are assuming the cost to rebuild the marina at $20 million.  Based on these figures, and extrapolating historical operating, sales and marketing costs through the life of the project, iStar’s $30.7 million stake should generate a gain of about $68 million spread out over 2015 and 2016.


Naples Reserve


Located on 688 acres along the U.S. 41 East/Collier Boulevard 951 corridor nine miles from Naples, Florida, Naples Reserve will include between 1,116 and 1,154 lakefront homes in 11 neighborhoods.  The community will have an assortment of one- and two-story Southern Coastal architectural designs as well as custom homes that will be nestled among 22 interconnected man-made lakes, the largest being over 50 acres.  With $27 million invested to date we estimate an additional $28 million will be spent to build out the community.  Based on average revenue per lot of $150,000 over the life of the project (versus $100,000 for the first 7 homes) we expect a gain of $84.3 million from Naples Reserve.




Bevard Farms


Bevard Farms, Judgment Award Analysis


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Expected Settlement Date










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Estimated Legal Fees



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Owed to Non-Controlling Interest (1)




iStar Cash Proceeds




iStar Gross Book Value



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Earnings Impact upon Reinvestment Of Capital


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(1) Assuming iStar advanced legal fees and real estate taxes on behalf of Oak Hill


The Bevard Farms asset is 1,250 acres of raw land in Prince George’s County, Maryland carried at a $102.9 million gross book value subject to a 15% minority interest from Oak Hill.  iStar acquired Bevard through foreclosure in 2009.  The U.S. Home division of Lennar failed to close on the purchase of this asset in May of 2008 and it has been the subject of litigation since that time:  Lennar v. Settlers Crossing, LLC, et al. (Civil Action No. DKC 08-1863).


On January 22, 2015, the United States District Court for the District of Maryland entered a judgment in favor of iStar finding iStar was entitled to specific performance and awarded damages to it in the aggregate amount of: (i) the remaining purchase price to be paid by Lennar of $114.0 million; plus (ii) interest on the unpaid amount at a rate of 12% per annum, calculated on a per diem basis, from May 27, 2008, until Lennar proceeds to settlement on the land; plus (iii) real estate taxes paid by the Company in the amount of approximately $1.6 million; plus (iv) actual and reasonable attorneys' fees and costs incurred by the Company in connection with the litigation.  Lennar has appealed the ruling and is also trying to argue whether it should pay simple or compound interest.  We believe the contract is clear given that default interest is calculated on a per diem basis and iStar was denied the use of the cash interest over the past seven years.  Regardless, the cash proceeds and accounting gain to iStar are significant.  We estimate (If Lennar pays at the end of March 2015) $198 million cash proceeds and $110.6 million gain in the case of simple interest and $232 million and $144.6 million in the case of compound interest.  These estimates are most likely to grow as the asset continues to accrue at 12% until Lennar proceeds to settlement.


Throughout the litigation Lennar’s position and arguments have been absurd, seemingly designed to either fool the court or at least delay the day of reckoning.  They even recently tried to argue that despite the court finding them at fault for not closing the transaction in 2008, the judgment should be reduced because in 2013 the zoning density was changed and fewer homes can now be built and the land has less value.  With a straight face Lennar insisted they should benefit from their own bad behavior.  Maybe that is the corporate culture at Lennar.  We point this out only to show an example that illustrates Lennar’s pattern of behavior and the lack of substance held up by extremely effective lawyering.  Based on extensive review of the case we have little doubt iStar will prevail, but cannot estimate the timing of when Lennar will finally purchase the Bevard.



Asbury Park


Asbury Park is a master planned community in the waterfront redevelopment district of the City of Asbury Park, New Jersey.  iStar originally acquired Asbury Park through foreclosure in 2009 and valued the asset at $43.3 million.  Since that time iStar has invested an additional $39 million in opportunistic land purchases, and infrastructure investment.  Asbury Park today consists of 2,669 potential residential units as well as retail and hotel commercial projects.  The development is massive and diverse and not all elements have been approved.  As such Asbury Park is difficult if not impossible to value, but we believe the potential for iStar to add value here is a significant as any asset in the Land portfolio.


While public information is sparse, we do know that the first mini-development, ”VIVE”, sold all 28 of its townhomes in one day at an average price of $478,000.   iStar’s built the townhomes itself rather than selling lots to a home.   Given raw land costs are around $33,000 per unit, gross margins on this small homebuilding project were probably over 40%.


iStar and the City are moving forward with a boutique 110 room hotel, a 34 unit condo complex dubbed “Monroe”, and another 28 Townhome project, this time in a joint venture with homebuilder Hovnanian, is underway.   The big project near term will likely be the unfinished Esperanza high-rise site that sits on Ocean Avenue between Third and Fourth Avenues. The site has remained an eyesore since a Hoboken developer’s plan to build 224-units there failed during the national mortgage crisis in 2007.  iStar is expected to announce details of the plan for the Esperanza in the near future.  iStar has commented to the press that they envision a mixed-use development with a 479-space parking structure, about 100 residential units and retail establishments.


Magnolia Green

Magnolia Green has the highest market share among master planned communities in Chesterfield County, VA.  Located in Moseley, about 30 minutes from Richmond, it features townhomes, single-family and custom-built residences from under $200,000 to $1 million.  iStar foreclosed on the property in 2009 has invested over $27 million with a targeted investment of nearly $50 million including the cost of a second residential phase and $10 million of community amenities which include an aquatics center, golf clubhouse, tennis facility and golf practice area expected to break ground in 2015.  The Magnolia Green Golf Course will finish an expansion from 9 holes to 18-holes this spring.


Using public disclosures, we believe iStar plans to invest $50 million into Magnolia Green with $27 million invested to date.  As such, Magnolia Green’s total basis would be $112.7 million (versus $89.7 million today) or $42,200 per lot.  Using Q1 2015 average lot prices of $79,000 at Magnolia Green and 2,669 units remaining, the gross margin from lots sales today should be over 46%. We expect lot prices to continue to appreciate with inflation and maturity of the community.  Using $90,000 per lot over the next ten years the total gain over the life of the project should be approximately $128 million.  The issue with Magnolia Green does not seem to be finished lot pricing but rather absorption rate.  114 lots were sold in 2014 and at that rate it would take 24 years to sell out the community despite Magnolia Green having the largest market share of building permits in Chesterfield County.  iStar in its 2014 10K predicts a 2026 completion date.  We find it plausible that the expansion of the golf course and the new amenities will improve absorption.  Also, continued improvement in the market for new homes based on loosening mortgage underwriting, increasing household formation, or general sentiment about homeownership should improve absorption rates.




Tetherow is a 700-acre destination resort built around the award winning David McLay Kid designed Tetherow Golf Course.  The community, 10 minutes from Bend, Oregon also features hiking trails, single-family home sites, townhomes, and two hotels.  iStar foreclosed on 159 residential lots in 2012 but is not an investor in either the golf course, or the two recently built luxury hotels.   iStar still owns 106 lots after selling 29 in 2014.  Similarly to Magnolia Green, Tetherow was already in production at the time of foreclosure so the discount rate applied (if any as we believe a portion of the asset was classified as REO which requires valuation at expected sales price) to the fair valuation analysis would have been below average depressing current gross margins on disposition.  Assuming an additional $25,000 of capital expenditures per lot (which we believe is conservative given the state of the project), we project an adjusted basis of $17.3 million and a gain of $6.9 million over the next three years.


Spring Mountain Ranch

Located within the hills of Box Springs Mountain Reserve in Riverside California, Spring Mountain Ranch is a master-planned community consisting of 1,461 single-family home sites within five distinct villages.  Phase 1 which is in Production consists of 435 lots which iStar contributed to a joint venture with KB Homes retaining a 75.6% JV equity interest valued at $21.1 million.  The remaining lots are likely to go into production in 2016 when Phase One is expected to sell out.  We believe iStar gave KB Home a sweetheart deal to get the community going and expect the economics to iStar to improve as the master planned community matures and the housing market in Riverside improves.  We believe KB Home is responsible for finishing the lots and so we are not modeling any incremental capital expenditures for Phase 1.  Assuming the average selling price per lot increases 10% on average over the life of Phase 1 to $90,000, we expect a moderate $6.7 million gain from this asset.  Phases 2 and 3 which we have assumed are in Development are modeled at $120,000 per lot over the life of the project from 2016 to 2025.  Given extensive infrastructure work performed by the original developer, we are estimating $20,000 per lot in incremental capital expenditures (a total of $20 million) and a total gain of $25.5 million.


Development Land Asset Detail


Ponte Vista

26900 S. Western Avenue, San Pedro, California

Located on 61.5 acres on the east side of Western Avenue across from Green Hills Memorial Park on the what was once naval housing, Ponte Vista is a master planned community where iStar plans to build 676 units with 24 units allowable but not formally included in the plan.  iStar’s plan calls for six different housing types which include 208 single-family homes along with town houses and single- and multilevel condominiums.  Pricing will range from close to $500,000 to more than $1 million for some of the larger single-family homes. The average pricing across all models should be somewhere between $600,000 and $750,000.  The project will also include a 2.4-acre public park at the southwest entrance of the neighborhood, make streetscape improvements along nearby Western and pave an access road from the community to nearby Mary Star of the Sea High School.  Ponte Vista is carried at $89.7 million, including $5.6 million of capital expenditures.  Demolition of the existing structures began in 2014, grading should begin this spring and the first homes are expected in late 2015.  Completion of the entire project is expected to take five to seven years.  Assuming $25,000 per lot of capital expenditures and a $250,000 average price per finished lot results in an adjusted basis of $107 million and a $68 million gain over five to seven years.


Los Valles

Los Valles’ 430 acres in rustic Hasley Canyon near Castaic Lake was originally envisioned as 203 homes on approximately half acre lots that would have been nestled around an 18 hole Arnold Palmer designed golf course.  iStar foreclosed on Los Valles in 2010, established an initial fair value of $59.1 million and now intends to more than double the number of homes to 497 while eliminating the golf course.  Lot sizes for each property start at 7,000 square feet with an average size of 12,500 square feet.  Los Valles will also feature a recreation center, 7 private recreation lots, 5 miles of pedestrian trails and a 19-acre community park.  The current basis works out to an average of $119,000 per lot before capital expenditures; which seems attractive for homes that will likely sell for prices around $1 million.  What’s also attractive about this development is that iStar’s required capital expenditures may be less than typical for a Greenfield project.  A freeway off-ramp and access road have already been built to the site.  Also, the previous owner performed significant grading on the site, having moved more than 12 million cubic yards of dirt to prepare for construction.  Foundational infrastructure prepared on the site included electrical installation, storm drains, sewers, graded roadways, golf course fairways and home pads, and a 750,000-gallon water tank.  The Castaic Town Council Land Use and Community Standards Committee approved Los Valles’ updated entitlements on December 19, 2014.  We believe iStar will begin selling homes in 2016.  Assuming $50,000 in additional capital expenditures per lot  ($25 million), and lot prices averaging $350,000, we project an all-in basis of $84 million and a gain of $90 million over 10 years.


Wayfarer (aka Long Beach Superblock)


iStar’s Wayfarer project on what has historically been known as “The Superblock” is located on just over six acres adjacent to the Long Beach Boardwalk between Riverside and Long Beach Boulevards in Long Beach, New York.  Development of the site, which was cobbled together from 13 separate parcels in 2006, had been held up in litigation with the City of Long Beach.  iStar settled the dispute in February 2014 in conjunction with the approval of a new development plan.


The Wayfarer will be a complex of two 160-foot towers (fifteen floors of residential over two floors of commercial space) with 522 one and two bedroom market rate rental units.  The buildings will be the tallest buildings in Long Beach.  The plan also includes 11,000 square feet of retail commercial space that would front the boardwalk.  The complex will include more than 900 parking spaces.  The project is expected to charge monthly rents ranging from $2,275 to $3,575.  Construction is expected to begin in 2015 and should be completed and ready for move in late 2016.  Similar to other vertical construction projects, we expect iStar to finance the Wayfarer off balance sheet with a development partner and the value of the project to iStar to be approximately $50 million in excess of book value.



This 44-acre project on the site of the former Scottsdale Radisson Resort was originally planned to encompass 480 residences, 22,000 sq. ft. of retail and an underground parking structure.  Starpointe Communities defaulted on $70 million in loans and the asset was foreclosed on by iStar in 2011.  iStar owns continues town the retail space and parking structure and in March 2015 received approval from the Scottsdale City Council to expand the housing plan by 175 units.  The units in the new plan will be smaller than the 2-3 story units in the original plan.  Some of the property fronts along the McCormick Ranch Golf Course, which will put a premium on the value of those residences.  Assuming average unit sizes of 1,600 square feet costing $100/ft. to build (Similar to Sage Phase 2), prices of $300/ft and 5% commissions. would generate a gain of $148 million.



1000 S. Clark Street

In partnership with JDL Development Corp, iStar is building a 28 story, 469-unit luxury apartment tower (including six three story townhomes) in the South Loop sub-market.  1000 S. Clark Street promises to offer unobstructed views of downtown Chicago and Lake Michigan, “resort style living”, five unique residential lounges, an indoor pool, basketball court, racquetball court, and a 7,000 square foot spa and fitness center.  The project is funded by iStar’s contribution of the land to the project JV for an initial equity interest of 85.7%, iStar’s commitment of $45.7 million of mezzanine financing (of which $14.6 million had been funded as of December 31, 2014), and an $80 million construction loan from the Bank of the Ozarks.  Construction began in August 2014, and appears to have been 32% complete based on the funding of the mezzanine loan.  Completion is expected late summer 2015 and first tenants are expected fall of 2015.  JDL plans to ask rents of around $2.60 per square foot (which is a slight premium to average downtown Chicago rents of $2.51).  We believe iStar’s stake in the project will be worth close to $60 million assuming 91 cents a foot in operating costs, $200 square foot in construction costs and a 6% cap rate for this high end apartment project.


Great Oaks

Great Oaks is 76-acre parcel of land in the Edenvale neighborhood of San Jose, CA.  Originally part of a CTL project, Great Oaks is currently carried on the books at $46.75 million reduced several years ago when an entitlement deal associated with a new soccer stadium fell through.  In November of 2014, however, the San Jose City Council finally approved a package of land-use changes that would allow up to 780 residential units, 154,000 square feet of retail and 260,000 square feet of office/R&D on the site. 720 residential units are currently proposed, made up of approximately 300 Apartments, 370 Townhomes and 50 Single Family Homes.  We believe Costco will lease the retail space or purchase the land.  We are projecting approximately $64 million in profits from this project made up of $31.7 million from the residential (after allocating all the land basis here), $16.4 million to the value of the Costco Warehouse land or lease and $16 million to the value of the office building—all after estimated construction costs.


Coney Island North & South Venture

iStar’s Coney Island asset consists of two significant land parcels along Surf Avenue.  Coney Island North Venture is comprised of vacant and under-improved land on three city blocks on the north side of Surf Avenue totaling nearly 109,000 square feet, one block from the beach.  Coney Island South Venture encompasses 5.5 acres interspersed over four blocks along the beachfront, and also includes vacant and under-improved land of 240,000 square feet.  Taconic Investments acquired the land in 2005 and iStar foreclosed on $89 million in loans in 2011.  iStar fair valued the project(s) at $49.4 million, which has remained unchanged since the foreclosure.  Taconic had envisioned “between 1.8 million and 2.4 million square feet of residential and retail projects with the potential to create 2,000 residential units and 200,000 square feet of retail space.”


In January 2014, New York City Council approved a plan to redevelop 2.4 acres of the South Venture surrounding the landmarked Child’s restaurant as a public park, 5,100-seat amphitheater, and 440-seat restaurant/catering facility.  The seasonal amphitheater would host 10-15 free and 30-35 paid concerts annually.  As part of the deal, iStar sold the land to the City for $53 million and a JV between iStar and the not-for profit Coney Island USA (think Mermaid Parade) leased it back for ten years.  The transaction both creates a unique and potentially very profitable destination event space (think concerts on the beach accessible from the city by the subway) that would invigorate the area surrounding iStar’s other Coney Island land holdings (the city block on the boardwalk east of 21st street and all the North Venture Holdings) making them compelling for luxury residential.  Construction of is expected to commence in the summer of 2015.


California Circle

In November 2014, the Milpitas City Council approved a plan for iStar to build 144 townhomes on land formerly associated with a CTL project.  Assuming 1600 sq. ft. homes that cost $100/ft. to build, $350/ft. pricing and 5% sales commissions, we believe the Gross Margin of this project could be north of $40 million with deliveries starting late 2016.


Pre-Development Land Asset Detail


Grand Vista

Grand Vista ($96.7 million book value) is a 5,485-acre Master Planned Community on the site of the former DaimlerChrysler Automotive Proving Grounds.  Located at Dove Valley Road and 211 Avenue in the City of Surprise, Arizona.  Grand Vista is 47 miles (45 minutes w/o traffic) from downtown Phoenix.   iStar foreclosed on the property in December 2010.  The borrower was a joint venture between Toll Brothers, Meritage Homes and Simon Property Group that acquired the property in December of 2005 for $312 million.  Grand Vista was and probably still is the largest dollar value land transaction in Arizona history.  According to the original Approved General Plan the project was initially slated for between 15,000 and 31,000 homes on 4,840-acres with 363 acres of mixed use/commercial space and 193 acres of open space.  The entitlements were altered in September 2007 reducing the single-family homes to 16,500, but increasing the available mixed use/commercial space to 639-acres and open space to 756 acres.  In 2013 iStar began working with the city to further adjust the scope of the project.  Under the revised plan, the community would have a “central core” design instead of sprawl.  iStar reduced the number of single-family homes by 350 units and multifamily homes by 175 units, added some additional neighborhood parks and eliminated one of two proposed golf courses[11].  Using these new numbers, allocating $20,000 per commercial acre, Grand Vista has a basis of approximately $5,250 per raw residential lot.


The key for Grand Vista will be the pace and direction the Phoenix metropolitan area grows.  When Toll Brothers/Meritage purchased Grand Vista in late 2005 they expected to start building homes there in 2009.  While, nine years later it seems farther off now than it did then, there are signs of life.   News reports and City documents suggest Lennar’s 14,000 home luxury community Asante, south of Grand Vista, which stopped building homes in 2007 after only completing 58, may begin building again.  And William Lyon Homes’ Rancho Mercado master planned community (which targets almost 1900 units) also seems to be applying for a multi-family building permit.  Both are closer to Phoenix and further along in the development process.


As a point of context, in a relatively recent (June 2013) nearby transaction, TerraWest Communities (a land bank/land development private equity firm) purchased 209.26 acres of raw land in Surprise’s Zanjero Trails Master Planned Community, 32 miles (and 33 minutes w/o traffic) from downtown Phoenix.  TerraWest paid $7.8 million for 172 residential acres zoned for 546 lots (or $45,265 per acre or $14,291 per lot) and $1.5 million for 37 acres of commercially zoned raw land (or $36,888 per acre).  Given TerraWest is a land developer active and focused exclusively on the northwest Phoenix metropolitan area with a history of flipping assets and a stated time horizon of 2-8 years, we believe the Zanjero Trails transaction, while closer to Phoenix, supports the view that the NPV of Grand Vista is at least reasonable if not attractive relative to current book value.  Indeed, TerraWest appears to continue to believe land assets in this region are attractive as they state on their website they are currently in escrow to purchase a Master Planned Community in the Northwest Phoenix Metropolitan Area.


Valley Plaza

Valley Plaza is a 23-acre outdoor mall located at the southwest corner of Laurel Canyon and Victory boulevards in North Hollywood, California.  The mall, damaged in the 1994 Northridge Earthquake is primarily vacant save for a Wells Fargo, a movie theater, and the headquarters for the Universal City North Hollywood Chamber of Commerce.  Developer J.H. Snyder originally planned a $333 million makeover that would have added department stores, restaurants and new retail shops, which later changed concept to space for movie studios and sound stages.  iStar foreclosed on the property in April 2011.  The site, in the heart of the San Fernando Valley has immediate access from the Victory Boulevard exit of the Hollywood Freeway and is one of the largest pieces of land available for development in the San Fernando Valley.  The problem with Valley Plaza is not just in what best to do with it, but also the presence of small in-parcels owned by third parties that have proved difficult potential partners.  There has been talk of the city of North Hollywood buying Valley Plaza and/or the in-parcels to push redevelopment ahead faster.  A similar sized parcel, Laurel Plaza, a couple blocks away and the site of a Macy’s Department store, was sold in January 2014 to developers who plan an approximately 360,000 SF retail/entertainment redevelopment project coupled with 400 residential units.  The Laurel Plaza transaction indicates to us other real estate professionals see the attractiveness of the location.


WAICCS Las Vegas

Acquired in Q4 2014, WAICCS Las Vegas is a $23.5 million book value 15.7% equity interest in the entity that foreclosed on 60 acres of land near the Las Vegas Strip at the corner of Harmon Avenue and Koval Lane.  The project was originally planned to build a W Hotel, two casinos and thousands of residential and hotel units.


Indian Town

Through the Fremont transaction, iStar acquired a land loan in Indiantown, FL, which is in Martin County just east of Lake Okeechobee.  The sponsor bought the 800 acres in May 2006 for $22.3 million ($28K/acre).  Fremont provided an $18.4 million acquisition loan.  The plan was to build a housing development called Irongate Indiantown with 1,600 homes and 60K square feet of commercial space but the project never got off the ground.  iStar foreclosed in October 2009 and is currently carrying the asset at $7.6 million or $9,500/acre…~0.35/$.  The last pre-bubble trade on the asset was in June 2001 for $6.7 million so it traded up 230% in 5 years.


Holiday Inn Riverwalk

Located at 2220 West First Street, Fort Myers Florida.  iStar acquired this five acre plot  that apparently used to be a Holiday Inn through foreclosure in 2009.  The parcel was previously slated to be condos and a yacht club is located next to the Caloosahatchee River.  No apparent development activity.


Exley Tracts

iStar foreclosed on these two adjacent parcels of land in Effingham County, Georgia totaling 1,077 acres in 2013.  The northern tract of the site will be multi-family residential while the southern larger portion will be a mix of industrial uses, ranging from warehouse and distribution to light industrial. There also is a sliver of commercial property along the eastern boundary, fronting Highway 21.  The original developers were planning approximately 1,350 units of townhomes, condominiums and apartments.  The commercial plan called for 6 million square feet of industrial and warehouse space.







M&I Bank Plaza/Aloft-Sarasota development

Located at 240 S. Pineapple just blocks from the bay in Sarasota, Florida.  M&I Bank Plaza is a 11 floor, 125,815 square foot office tower.  Currently 87% Occupied, M&I Bank Plaza is asking $25/foot full service for the remaining available space.  M&I Bank Plaza is likely worth approximately $21 million, which would generate an $8.5 million gain in a sale.


At an outparcel connected to the M&I Bank Plaza, iStar and Starwood are building a 139 room Aloft branded hotel expected to open in August of 2015.  We suspect (but don’t know for sure) that iStar has separated the land for this project from the original asset and this Aloft development is the unidentified land development project (Development project #12) carried at $7.8 million in real estate equity investments.


Mandarin Oriental, Atlanta Hotel and Retail

Mandarin Oriental, Atlanta (formerly The Mansion on Peachtree) is a 580-foot (177 m) tall, 42-floor, Robert A.M. Stern designed skyscraper in Atlanta, Georgia. It was constructed from 2006 to 2008 for a cost reported to be in excess of $200 million. It is the 12th tallest building in Atlanta.  The hotel occupies the lower half of the building and consists of 96 rooms and 31 suites.


Above the hotel are 45 residential units on 26 floors. The Residences also consist of a separate building located in the English Gardens called "The Villas". The Villas consist of three separate private residences that include three floors of living space and private underground garages.  We believe the retail space consists of an 80-seat restaurant, a 30-seat Library Bar, and a 14,500 square-foot spa facility on two floors with a 60-foot lap pool.


iStar carries the hotel on its books for $32.75 million gross, $29 million net and carries the retail at $24.7 million gross and $24 million net. The hotel’s net book value equates to $229,000/key without any adjustment for 25% of the keys being suites.  A sale of this luxury hotel at $350,000/key would generate a $15 million (50%) gain over book.  We would think the hotel and retail might be marketed for sale once all the residences have been sold which we believe given current trends would happen in 2016 or 2017.


Westgate and

Developed in 2006, Westgate City Center is a mixed use Entertainment Center, Mall, and office park located near Glendale Avenue and Loop 101 in Glendale, Arizona.  Westgate, which is adjacent to the Arena contains 265,000 square feet of retail space in an outdoor mall setting, 130,000 square feet of office in the mall and two stand alone 167,140 sq. foot office buildings at 6770 N. Sunrise Blvd and 6751 E. Sunset Blvd nearby.  iStar carries Westgate at $83.5 million gross and $74.7 million net which includes $20.7 million of additional capital since acquisition in 2011.  We believe Credit Suisse holds a minority interest in iStar’s Westgate consolidated subsidiary LLC which it received in exchange for contributing $27.3 million of land and other assets to the LLC in Q2 2012.  The LLC then contributed $11.6 million of land for a 40% controlling interest in the “Outlets at Tanger”, a new 328,000 square foot outlet mall iStar and Tanger built across the street from Westgate on the contributed land.  The Tanger JV is held in real estate equity investments.

We believe the two-standalone office buildings are approximately 80% leased.  iStar is asking $21/foot for office space at Westgate.


Raintree Corporate Center

Raintree Corporate Center Phase III & IV are two Class “A” office buildings located in Scottsdale, Arizona on Loop 101 just north of Shea.  The project totals 334,889 square feet and appears to be 65% leased.  iStar is asking $25 and $27.50 Per Square Foot Full Service.  Assuming $25.50 in average rent, $11 in operating costs and a 6% cap rate, iStar would need to increase occupancy from 65% to 73% (27,000 square feet) to sell the building at book value.  At 80% Occupancy, iStar would be able to generate a $10 million (23%) gain.


The Shops at Valley Square

The Shops at Valley Square is a mixed-use development offering 212,000 of square feet of retail, and 90,000 square feet of office space in Warrington, PA.  A long-term development opportunity exists to complete a luxury condo development on the property by adding 110 units in two buildings.  The retail space appears to be 78% leased, however the office space is only 20% leased.  IStar is asking $20/ft (Modified Gross) for the office space.  We believe the retail portion of this project supports the current book value.  Traction in the office space or with the condos could create attractive upside.


Miami Green

Miami Green is a 115,849 square foot office building with an additional 9,331 square foot ground floor retail condo built in 2007.  Miami Green is located at 3150 Miami Green Way in Coral Gables Florida and carried on iStar’s books at $22.1 million gross and $19.9 million net.  We believe the building is approximately 48% leased with the Consulate General of Brazil being a notable tenant that signed up in 2014.  Remaining space is asking between $31.50-$32.50/foot net.  Stabilizing this property would create a 50% gain (~$10 million) versus the $20 million book value.


Ford City Mall

iStar acquired the Ford City Mall from Sam Zell’s Equity Group Investments in March 2013 and is carried on the books at $50.2 million gross and $47.25 million net which includes $5.6 million of capital expenditures since acquisition (iStar is reported to have wanted to renovate the mall’s façade, update interior lighting and improve landscaping.  Zell acquired Ford City for about $75 million in 1987, according to published reports at the time and refinanced the property with a $1145 million property in 1993.  iStar acquired the loan sometime between 1993 and the foreclosure in 2013, It's unclear what the loan balance was when iStar took title.


Ford City consists of 1.2 million square feet of retail and was reported to be 10% vacant at the time of the foreclosure is apparently 83% leased today.  Ford City is anchored by a J.C. Penny and Carson Pirie Scott.  Two former anchors, a Montgomery Ward and a Sears have gone dark.   The Sears store was sold and the Montgomery Ward space remains vacant.  We suspect weak results at Ford City are disguising positive momentum at other commercial operating properties.












[1] Using a 134 million share count

[2] This tax shield could continue to grow although we believe its growth rate will slow and end soon.  iStar reports its NOLs based on completed tax returns, i.e. through 2013 in its 2014 10K.  Also, while specific reserves are deductible in many cases for tax purposes suggesting GAAP and tax losses should have been close to matched, there either are certain losses incurred on a GAAP basis years ago that are only flowing through as tax losses now as the assets are sold or the natural tax shield created by depreciation is currently enough to grow the tax asset at recent levels of taxable income.

[3] In-line with triple net lease REITs and the commercial mortgage REITs

[4] iStar’s land book value is actually about 10% structurally more conservative than a homebuilder’s.  iStar does not capitalize marketing and interest expense or a DTA.

[5] We do include these expenses in valuing the hypothetical publically traded “REIT” in our sum of the parts analysis.

[6] 43% of the land was foreclosed in 2009, 34% in 2010, 10% in 2011, 7% Pre-Crisis.

[7] With the difference being a combination of accounting treatment at foreclosure (REO versus Real Estate held for Investment) and the fact iStar was able to add significant value to the former three assets versus what they received at foreclosure.

[8] Ponte Vista, Wayfarer, Great Oaks, California Circle, and Los Valles totaling $261 million of book value.

[9] iStar cites 13 assets in Pre-Development  with the potential difference being that iStar may consider the two “Exley” assets one project or the two small Texas assets one asset.

[10] 80%+ occupancy or acceptable return

[11] “6 Years later, West Valley’s Grand Vista Community Still Unbuilt”. Lesley Wright.  June 24, 2013.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Land Revenues starting to ramp in 2015

Company Initiating guidance/improved disclosures in 2015

Earnings Growth.


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