Q4 2006 iStar Financial Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day and welcome to the iStar Financial fourth-quarter and fiscal-year 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to iStar Financial's Vice President of Investor Relations and Marketing, Mr. Andrew Backman. Please go ahead, sir.

ANDREW BACKMAN, VP OF IR AND MARKETING, ISTAR FINANCIAL, INC.: Thank you, and good morning, everyone. Thank you for joining us today to review iStar Financial's fourth-quarter and year-end 2006 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, iStar's President; and Katy Rice, our Chief Financial Officer.

This morning's call is being webcast on our website at istarfinancial.com in the Investor Relations section. There will be a replay of the call beginning at 1:30PM Eastern Time today. The dial-in for the replay is 1-800-475-6701 with a confirmation code of 859527.

Before I turn the call over to Jay, I need to remind everyone that statements in this earnings call which are not historical facts may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial's expectations are details in our SEC reports.

Now I would like to turn the call over to iStar Financial's Chairman and CEO, Jay Sugarman. Jay?

JAY SUGARMAN, CHAIRMAN AND CEO, ISTAR FINANCIAL, INC.: Thanks, Andy. Welcome, everybody. Let me start with a recap of the fourth-quarter results and some of the highlights for the full year 2006.

First, on the earnings front, adjusted earnings were $110 million in the fourth quarter or $0.91 per diluted share, another strong quarter and a solid finish to a year where earnings reached $420 million or $3.61 per share on a diluted AEPS basis. I'm really pleased by our performance this year, with earnings well above what we predicted at the beginning of 2006.

Second, we had another very solid quarter and full year of originations, with new commitments in the quarter of over $1.8 billion and full-year originations exceeding $6 billion. Fundings were over $1.3 billion in the fourth quarter and full-year 2006 fundings reached a record $4.5 billion. As I have mentioned before, we are covering an increasingly wide spectrum of the investment arena and we are doing it with more people in more places than ever before.

Third, returns and spreads remained quite strong, with the return on equity staying right around 20% and margins holding up in spite of overall market conditions. I want to come back to leverage later, but our well below market leverage levels continue to be one of the reasons we think the quality of our earnings remain particularly attractive.

Fourth, on credit, overall metrics remained solid, with reserves covering the few issues that have popped up as we have grown. Combined with our conservative leverage, the overall balance sheet continues to be in great shape.

Lastly, on the strategic front, we continue to look for markets where we can have an impact and avoid the wave of liquidity moving through the markets. We are spending both time and money seeking out new opportunities, but really don't have anything concrete to bring you up to date on for this call.

With that quick overview, let me turn it over to Katy to fill in the rest of the details.

KATY RICE, CFO, ISTAR FINANCIAL, INC.: Thanks, Jay. Good morning, everyone. Let me take a couple of minutes to review our fourth-quarter results before turning to the full year 2006. I will then discuss risk management and our capital markets initiative before wrapping it up with our 2007 earnings expectations and our announced dividend increase.

Let's start with our results. As Jay mentioned, our adjusted earnings came in at $0.91 per diluted common share for the fourth quarter. Our net investment income rose to $128 million. That was up approximately $31 million or 32% from the fourth quarter of 2005, primarily due to the growth of our loan portfolio.

Our return on equity continues to be above our mid-teens target, coming in at 20% for the quarter. Our net finance margin was 331 basis points this quarter, essentially in line with last quarter.

The margins in our lending business continue to hold up well, despite a competitive market, and were somewhat higher than we forecasted in the beginning of the year. Further, we have been able to mitigate some spread compression with our overall lower cost of funds, as we have become an investment-grade borrower.

Our credit statistics remain strong. Fourth-quarter interest coverage was 2 times, and our fixed charge coverage was 1.8 times. Our leverage at the end of the fourth quarter was 2.3 times debt to equity plus accumulated depreciation, depletion and loan loss reserves.

Our current leverage reflects the successful $541 million equity offering we completed in the fourth quarter. As many of you know, we have an asset-based leverage model. Based upon the current real estate market environment, our historical experience, our credit track record, and the aggressive market environment for asset-backed debt, we continue to believe that our current capital model is extremely conservative.

We had another solid quarter from an originations perspective, with $1.84 billion in new financing commitments, up over 10% year over year in 39 separate transactions. We funded $1.1 billion of our fourth-quarter commitments. 72% of …