UPDATE 2-IStar Q3 misses Street, says to continue asset sale

* Q3 adj loss $2.37/shr vs est loss $2.30

* To continue assets sales to fund commitments ahead

* Net investment income fell 14 pct

* In compliance with all covenants as of Sept. 30

* Shares fall as much as 13 pct (Recasts, adds CEO & analyst comment, conference call details)

By Archana Shankar

BANGALORE, Oct 30 (Reuters) - U.S. commercial real estate lender iStar Financial Inc (SFI.N) reported a wider-than-expected third-quarter loss, hurt by provision for bad loans, and said it will continue to sell its portfolio assets to repay debt.

"We continue to expect to build liquidity to fund our commitments and near-term debt maturities using available cash, as well as loan repayments and asset-sale proceeds," Chief Executive Jay Sugarman said on a conference call with analysts.

The company said it was in compliance with all of its bank and bond covenants as of Sept. 30.

"We are forecasting continued losses for iStar through third-quarter 2010, although we currently expect it to maintain adequate liquidity to survive this challenging period," analyst Jim Shanahan of Wells Fargo said.

Shares of the company traded up as much as 11 percent but pared those gains and were down more than 10 percent at $2.08 Friday afternoon on the New York Stock Exchange.

IStar, which used asset sales to make up for shortfalls for debt repayment in the third quarter, had $187.1 million of cash and available capacity on its credit facilities and total debt obligations of $11.3 billion as of Sept. 30.

It had about $13.4 billion of assets at the end of the quarter.

The company, which had unfunded commitments of $1.1 billion as of Sept. 30, said its estimated cash uses from October 2009 through April 2010 will be about $1 billion.

IStar expects its unfunded commitments to drop to $300 million in 2010, compared with $1.3 billion in 2009.

Sugarman, however, expects flow of funds liquidity to remain negative until end of the year or early 2010.

The company saw its tangible net worth decline to $1.8 billion from $2.1 billion on a sequential basis, nearing the regulatory requirement of $1.5 billion. The company saw a 47 percent plunge in interest income to $124.7 million in the quarter, taking the net investment income down 14 percent to $180.2 million.

IStar recorded $345.9 million in loan loss provision for the third quarter, reflecting the continued deterioration in the overall credit markets and its impact on the portfolio.

CEO Sugarman, however, expects provisions to trend lower, going forward, as compared to the past 12 months.

Shanahan said iStar is in a challenging part of the commercial real estate cycle with significant exposure to some of the weakest subsectors.

Although predominately a lender, iStar also buys buildings and leases them back to tenants, receiving monthly payments very much like a mortgage.

The company said 85 of its 260 total loans were on non-performing loan status. These loans represent $4.4 billion, or 42 percent of its total managed loans.

The credit crisis has forced lenders such as iStar to take provisions for possible loan defaults and write down the value of some of their loans.

Net loss allocable to common shareholders was $251.3 million, or $2.55 a share, for the third quarter, compared with a year-ago loss of $308.7 million, or $2.32 a share.

Excluding certain items, the loss was $2.37 a share.

Analysts were expecting iStar to post a loss of $2.30 a share, excluding items, according to Thomson Reuters I/B/E/S.

Quarterly revenue fell 38 percent to $210.2 million, while analysts were expecting $213.9 million. (Reporting by Archana Shankar in Bangalore; Editing by Himani Sarkar and Maju Samuel)