Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-15371
iStar Inc.
(Exact name of registrant as specified in its charter)
Maryland
95-6881527
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1114 Avenue of the Americas, 39th Floor
New York , NY
10036
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (212) 930-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock,
$0.001 par value
STAR
New York Stock Exchange
8.00% Series D Cumulative Redeemable Preferred Stock,
STAR-PD
7.65% Series G Cumulative Redeemable Preferred Stock,
STAR-PG
7.50% Series I Cumulative Redeemable Preferred Stock,
STAR-PI
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated
Filer
Non‑accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 2, 2022, there were 85,377,094 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
TABLE OF CONTENTS
Page
PART I
Consolidated Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021
2
Consolidated Statements of Operations (unaudited)—For the three and six months ended June 30, 2022 and 2021
3
Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three and six months ended June 30, 2022 and 2021
4
Consolidated Statements of Changes in Equity (unaudited)—For the three and six months ended June 30, 2022 and 2021
5
Consolidated Statements of Cash Flows (unaudited)—For the six months ended June 30, 2022 and 2021
7
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56
Item 4.
Controls and Procedures
57
PART II
Other Information
58
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
59
SIGNATURES
60
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except per share data)(1)
(unaudited)
As of
June 30,
December 31,
2022
2021
ASSETS
Real estate
Real estate, at cost
$
111,909
113,510
Less: accumulated depreciation
(21,678)
(21,360)
Real estate, net
90,231
92,150
Real estate available and held for sale
1,970
301
Total real estate
92,201
92,451
Real estate and other assets available and held for sale and classified as discontinued operations(2)
11,518
2,299,711
Net investment in leases ($380 and $0 of allowances as of June 30, 2022 and December 31, 2021, respectively)
31,999
43,215
Land and development, net
259,718
286,810
Loans receivable and other lending investments, net ($3,033 and $4,769 of allowances as of June 30, 2022 and December 31, 2021, respectively)
204,252
332,844
Loans receivable held for sale
—
Other investments
1,556,792
1,297,281
Cash and cash equivalents
1,400,658
339,601
Accrued interest and operating lease income receivable, net
1,601
1,813
Deferred operating lease income receivable, net
2,941
3,159
Deferred expenses and other assets, net
48,940
100,434
Total assets
3,610,620
4,840,534
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities
140,791
236,732
Liabilities associated with real estate held for sale and classified as discontinued operations(2)
5,715
968,419
Liabilities associated with properties held for sale
Debt obligations, net
1,833,250
2,572,174
Total liabilities
1,979,756
3,777,328
Commitments and contingencies (refer to Note 11)
Equity:
iStar Inc. shareholders' equity:
Preferred Stock Series D, G and I, liquidation preference $25.00 per share
12
Common Stock, $0.001 par value, 200,000 shares authorized, 83,303 and 68,870 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
84
69
Additional paid-in capital
3,406,422
3,100,015
Accumulated deficit
(1,774,069)
(2,227,213)
Accumulated other comprehensive loss
(17,872)
(21,587)
Total iStar Inc. shareholders' equity
1,614,577
851,296
Noncontrolling interests
16,287
211,910
Total equity
1,630,864
1,063,206
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Revenues:
Operating lease income
3,182
4,792
6,291
9,723
Interest income
4,221
8,084
9,169
17,874
Interest income from sales-type leases
376
157
732
Other income
15,881
8,903
24,521
21,917
Land development revenue
24,403
32,318
39,303
64,567
Total revenues
48,063
54,254
80,016
114,238
Costs and expenses:
Interest expense
24,149
28,641
53,392
57,450
Real estate expense
13,016
11,317
23,133
20,035
Land development cost of sales
24,095
30,803
38,591
60,126
Depreciation and amortization
1,338
1,573
2,695
3,974
General and administrative
(5,179)
30,394
(3,804)
51,833
Provision for (recovery of) loan losses
22,578
(2,158)
22,713
(5,800)
Provision for losses on net investment in leases
99
779
380
780
Impairment of assets
1,768
257
Other expense
1,523
211
2,453
463
Total costs and expenses
83,387
101,560
141,321
189,118
Income from sales of real estate
96
492
708
Loss from operations before earnings from equity method investments and other items
(35,324)
(47,210)
(60,813)
(74,172)
Loss on early extinguishment of debt, net
(116,563)
(117,991)
Earnings from equity method investments
19,393
11,098
44,425
22,866
Net loss from continuing operations before income taxes
(132,494)
(36,112)
(134,379)
(51,306)
Income tax (expense) benefit
(619)
(3)
79
Net loss from continuing operations
(36,731)
(134,382)
(51,227)
Net income from discontinued operations(1)
25,315
797,688
47,800
Net income (loss)
(11,416)
663,306
(3,427)
Net (income) loss from continuing operations attributable to noncontrolling interests
(117)
20
(99)
65
Net (income) from discontinued operations attributable to noncontrolling interests
(2,273)
(179,089)
(4,838)
Net income (loss) attributable to iStar Inc.
(132,611)
(13,669)
484,118
(8,200)
Preferred dividends
(5,874)
(11,748)
Net income (loss) allocable to common shareholders
(138,485)
(19,543)
472,370
(19,948)
Per common share data:
Basic and diluted
(1.70)
(0.27)
6.28
Net loss from continuing operations and allocable to common shareholders:
(0.59)
(1.94)
(0.86)
Net income from discontinued operations and allocable to common shareholders:
0.32
8.22
0.59
Weighted average number of common shares:
81,442
72,872
75,274
73,374
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income:
Reclassification of losses on cash flow hedges into earnings upon realization(1)
580
2,486
1,201
4,824
Unrealized gains (losses) on available-for-sale securities
(1,610)
657
(4,623)
(374)
Unrealized gains (losses) on cash flow hedges
4,382
(764)
7,137
11,211
Other comprehensive income
3,352
2,379
3,715
15,661
Comprehensive income (loss)
(129,142)
(9,037)
667,021
12,234
Comprehensive (income) attributable to noncontrolling interests(2)
(2,765)
(179,188)
(7,744)
Comprehensive income (loss) attributable to iStar Inc.
(129,259)
(11,802)
487,833
4,490
Consolidated Statements of Changes in Equity
iStar Inc. Shareholders' Equity
Accumulated
Common
Additional
Retained
Other
Preferred
Stock at
Paid-In
Earnings
Comprehensive
Noncontrolling
Total
Stock(1)
Par
Capital
(Deficit)
Income (Loss)
Interests
Equity
Balance as of March 31, 2022
3,100,665
(1,625,086)
(21,224)
330,514
1,784,950
Dividends declared—preferred
Dividends declared—common ($0.125 per share)
(10,498)
Issuance of stock/restricted stock unit amortization, net(2)
1
8,236
1,077
9,314
Issuance of common stock in connection with 3.125% convertible notes
14
297,521
297,535
117
Change in accumulated other comprehensive income (loss)
Distributions to noncontrolling interests
(315,421)
Balance as of June 30, 2022
Balance as of March 31, 2021
73
3,204,862
(2,309,763)
(41,858)
197,681
1,051,007
(9,148)
1,199
168
1,367
2,253
6,034
512
6,546
Repurchase of stock
(1)
(19,978)
(19,979)
Contributions from noncontrolling interests
794
(335)
(4,256)
(4,591)
Balance as of June 30, 2021
72
3,185,748
(2,338,454)
(35,824)
197,152
1,008,706
Balance as of December 31, 2021
Dividends declared—common ($0.25 per share)
(19,226)
8,886
2,427
11,314
Net income
179,188
7,893
(385,131)
Balance as of December 31, 2020
74
3,240,535
(2,316,972)
(52,680)
193,414
1,064,383
Impact from adoption of new accounting standards
(25,869)
15,850
(10,019)
Dividends declared—common ($0.235 per share)
(17,384)
3,771
1,538
5,309
4,773
16,856
2,970
19,826
(2)
(32,354)
(32,356)
857
(6,400)
(6,735)
6
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash flows from operating activities:
(6,057)
(1,866)
3,260
1,785
30,115
Non-cash interest income from sales-type leases
(1,706)
(18,808)
Stock-based compensation (income) expense
(30,350)
20,299
Amortization of discounts/premiums and deferred financing costs on debt obligations, net
5,278
3,957
Amortization of discounts/premiums and deferred interest on loans, net
(5,398)
(7,459)
Deferred interest on loans received
4,738
23,703
(171,305)
(25,466)
Distributions from operations of other investments
130,245
18,193
Deferred operating lease income
(2,267)
(5,211)
(684,229)
(2,822)
Land development revenue in excess of cost of sales
(712)
(4,441)
159,399
Other operating activities, net
(9,958)
(2,148)
Changes in assets and liabilities:
Origination and fundings of loans receivable held for sale
(62,525)
Changes in accrued interest and operating lease income receivable
1,937
3,572
Changes in deferred expenses and other assets, net
(8,921)
(1,637)
Changes in accounts payable, accrued expenses and other liabilities
(51,724)
(4,719)
Cash flows provided by (used in) operating activities
27,381
(44,962)
Cash flows from investing activities:
Originations and fundings of loans receivable, net
(4,762)
(65,208)
Capital expenditures on real estate assets
(858)
(4,287)
Capital expenditures on land and development assets
(10,165)
(8,382)
Acquisitions of real estate, net investments in leases and land assets
(34,115)
(42,000)
Repayments of and principal collections on loans receivable and other lending investments, net
57,273
209,779
Net proceeds from sales of loans receivable
145,583
79,560
Net proceeds from sales of real estate
1,981,599
3,259
Net proceeds from sales of land and development assets
38,004
61,945
Net proceeds from sales of net investment in leases
572,251
12,825
Distributions from other investments
153,629
22,996
Contributions to and acquisition of interest in other investments
(273,179)
(91,419)
Other investing activities, net
(138)
4,910
Cash flows provided by investing activities
2,625,122
183,978
Cash flows from financing activities:
Borrowings from debt obligations
50,000
25,000
Repayments and repurchases of debt obligations
(1,037,079)
(35,900)
Purchase of marketable securities in connection with the defeasance of mortgage notes payable
(252,571)
Preferred dividends paid
Common dividends paid
(19,385)
(17,304)
(32,556)
Payments for deferred financing costs
(75)
Payments for withholding taxes upon vesting of stock-based compensation
(10,428)
(2,181)
64
(351,005)
(6,401)
Payments for debt prepayment or extinguishment costs
(16,289)
Cash flows used in financing activities
(1,640,612)
(81,101)
Effect of exchange rate changes on cash
(50)
(111)
Changes in cash, cash equivalents and restricted cash
1,011,841
57,804
Cash, cash equivalents and restricted cash at beginning of period
393,996
150,566
Cash, cash equivalents and restricted cash at end of period
1,405,837
208,370
Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows
154,941
Restricted cash included in deferred expenses and other assets, net
5,179
53,429
Total cash and cash equivalents and restricted cash
Supplemental disclosure of non-cash investing and financing activity:
Fundings and (repayments) of loan receivables and loan participations, net
(42,501)
34,467
Defeasance of mortgage notes payable
230,452
Marketable securities transferred in connection with the defeasance of mortgage notes payable
252,571
Accounts payable for capital expenditures on land and development and real estate assets
2,839
930
Assumption of mortgage by third party
62,825
8
Notes to Consolidated Financial Statements
Note 1—Business and Organization
Business—iStar Inc. (the “Company”) finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. The Company also manages entities focused on ground lease investments (refer to Note 8). The Company has invested capital over the past two decades and is structured as a real estate investment trust (“REIT”) with a diversified portfolio focused on larger assets located in major metropolitan markets. The Company’s primary reportable business segments are net lease (refer to Note 3 - Net Lease Sale and Discontinued Operations), real estate finance, operating properties and land and development (refer to Note 17).
Organization—The Company began its business in 1993 through the management of private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new investments and corporate acquisitions.
Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Company’s consolidated financial statements and the related notes (refer to Note 3 – Net Lease Sale and Discontinued Operations) to conform to the current period presentation.
Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. The Company’s involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in “Net income from discontinued operations,” “Operating lease income,” “Interest income,” “Earnings from equity method investments,” “Real estate expense” and “Interest expense” in the Company’s consolidated statements of operations. The Company has provided no financial support to those VIEs that it was not previously contractually required to provide.
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE’s respective assets. The Company did not have any unfunded commitments related to consolidated VIEs as of June 30, 2022 and December 31,
Notes to Consolidated Financial Statements (Continued)
2021. The following table presents the assets and liabilities of the Company’s consolidated VIEs as of June 30, 2022 and December 31, 2021 ($ in thousands):
December 31, 2021
93,835
93,477
(16,518)
(14,987)
77,317
78,490
Real estate and other assets available and held for sale and classified as discontinued operations
198
886,845
153,044
176,833
21,318
23,908
5,061
5,001
256,945
1,171,081
LIABILITIES
26,151
24,744
Liabilities associated with real estate held for sale and classified as discontinued operations
291
493,739
26,442
518,483
Unconsolidated VIEs—The Company has investments in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company’s consolidated financial statements. As of June 30, 2022, the Company’s maximum exposure to loss from these investments does not exceed the sum of the $57.5 million carrying value of the investments, which are classified in “Other investments” on the Company’s consolidated balance sheets, and $2.2 million of related unfunded commitments.
Note 3—Summary of Significant Accounting Policies
Net Lease Sale and Discontinued Operations—A discontinued operation represents: (i) a component of the Company or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition.
Net Lease Sale—In March 2022, the Company, through certain subsidiaries of and entities managed by the Company, closed on a definitive purchase and sale agreement to sell a portfolio of net lease properties owned and managed by such subsidiaries and entities to a third party for an aggregate gross sales price of approximately $3.07 billion and recognized a gain of $663.7 million in “Net income from discontinued operations” in the Company’s consolidated statements of operations. The Company refers to this transaction as the "Net Lease Sale" in this report. The Net Lease Sale is consistent with the Company’s stated corporate strategy which is to grow its Ground Lease and Ground Lease adjacent businesses (refer to Note 8) and simplify its portfolio through sales of other assets.
The portfolio sold consisted of office, entertainment and industrial properties located in the United States comprising approximately 18.3 million square feet. It included assets wholly-owned by the Company and assets owned by two joint ventures (see Net Lease Venture and Net Lease Venture II below) managed by the Company and in which it owned 51.9% interests. At the time of closing, the portfolio was encumbered by an aggregate of $702 million of mortgage indebtedness, including indebtedness from equity method investments, which was repaid with proceeds from the sale. After repayment of the mortgage indebtedness and prepayment penalties, a senior term loan secured by certain of the assets (refer to Note 10), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, the Company retained net cash proceeds of $1.2 billion from the transaction. In addition, as part of the transaction, the buyer sold three of the properties to Safehold
10
Inc. (“SAFE”) for $122.0 million and entered into three Ground Leases with SAFE. Two net lease properties were sold to different third parties in the first quarter of 2022 and the Company’s net lease assets associated with its Ground Lease businesses were not included in the sale. The Company received net cash proceeds of $33.9 million from the sale of the two net lease properties and recognized a gain of $23.9 million in “Net income from discontinued operations” in the Company’s consolidated statements of operations.
Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the “Net Lease Venture”) and gave a right of first offer to the venture on all new net lease investments. The Company was responsible for sourcing new opportunities and managing the venture and its assets in exchange for a management fee and incentive fee. Several of the Company’s senior executives whose time was substantially devoted to the Net Lease Venture owned a total of 0.6% equity ownership in the venture via co-investment. These senior executives were also entitled to an amount equal to 50% of any incentive fee received based on the 47.5% external partner’s interest. Net Lease Venture was part of the Net Lease Sale. As of June 30, 2022, $3.2 million of “Noncontrolling interests” was attributable to the Net Lease Venture and represented proceeds from the Net Lease Sale that were not yet distributed to the Company’s partners in the venture as of June 30, 2022.
Net Lease Venture II—In July 2018, the Company entered into a new venture (the “Net Lease Venture II”) with an investment strategy similar to the Net Lease Venture. The Company was responsible for managing the venture in exchange for a management fee and incentive fee. During the six months ended June 30, 2022, the Company recorded $0.4 million of management fees from Net Lease Venture II in “Net income from discontinued operations” in the Company’s consolidated statements of operations. During the three and six months ended June 30, 2021, the Company recorded $0.4 million and $0.8 million, respectively, of management fees from Net Lease Venture II in “Net income from discontinued operations” in the Company’s consolidated statements of operations. Net Lease Venture II was part of the Net Lease Sale. As of June 30, 2022, $2.0 million of “Real estate and other assets available and held for sale and classified as discontinued operations” was attributable to the Net Lease Venture II and represented proceeds from the Net Lease Sale that were not yet distributed to the Company as of June 30, 2022.
Discontinued Operations—The Company’s net lease assets and liabilities associated with the Net Lease Sale and the Company’s other two net lease assets are classified as “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021. For the three months ended June 30, 2021 and the six months ended June 30, 2022 and 2021, the operations of such assets are classified in “Net income from discontinued operations” in the Company’s consolidated statements of operations.
11
The following table presents the Company’s consolidated assets and liabilities recorded in “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021 ($ in thousands).
1,537,655
(271,183)
Total real estate, net
1,266,472
Net investment in leases
486,389
48,675
1,972
103,229
Finance lease right of use assets
150,099
548
2,997
63,156
8,998
178,694
Total real estate and other assets available and held for sale and classified as discontinued operations
92,865
Finance lease liabilities
161,258
714,296
Total liabilities associated with real estate held for sale and classified as discontinued operations
The transaction described above involving the Company's net lease business qualified for discontinued operations and the following table summarizes net income from discontinued operations for the three and six months ended June 30, 2022 and 2021 ($ in thousands):
40,752
35,596
83,265
889
885
1,749
8,532
8,803
17,159
1,161
4,292
2,436
51,334
49,576
104,609
Interest expense(1)
10,776
7,484
21,530
6,972
5,072
15,148
Depreciation and amortization(1)
13,087
26,141
Recovery of loan losses
(105)
(257)
Recovery of losses on net investment in leases
(1,044)
(2,646)
Impairment of assets(2)
1,492
1,528
Other expense(3)
(5,669)
29,686
8,379
61,444
2,114
683,738
Income from discontinued operations before earnings from equity method investments and other items
23,762
724,935
45,279
1,599
127,129
2,600
(41,408)
Net income from discontinued operations before income taxes
25,361
810,656
47,879
Income tax expense
(46)
(12,968)
(79)
Net income from discontinued operations
Net income from discontinued operations attributable to iStar Inc.
23,042
618,599
42,962
The following table presents cash flows provided by operating activities and cash flows used in investing activities from discontinued operations for the six months ended June 30, 2022 and 2021 ($ in thousands):
Cash flows provided by operating activities
119,950
43,934
2,660,531
4,845
13
Note 4—Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
Land, at cost
7,125
6,831
Buildings and improvements, at cost
104,784
106,679
Real estate available and held for sale(1)
Dispositions—Refer to Note 3 - Net Lease Sale and Discontinued Operations.
Impairments—During the three and six months ended June 30, 2022, the Company recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $0.7 million and $1.4 million for the three and six months ended June 30, 2022, respectively, and $0.8 million and $1.4 million for the three and six months ended June 30, 2021, respectively. These amounts are included in “Operating lease income” in the Company’s consolidated statements of operations.
Allowance for Doubtful Accounts—As of June 30, 2022 and December 31, 2021, the allowance for doubtful accounts related to real estate tenant receivables was $0.1 million and $0.1 million, respectively. These amounts are included in “Accrued interest and operating lease income receivable, net” on the Company’s consolidated balance sheets.
Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-cancelable operating leases, excluding customer reimbursements of expenses, in effect as of June 30, 2022, are as follows by year ($ in thousands):
Operating
Year
Properties
2022 (remaining six months)
3,236
2023
6,322
2024
6,206
2025
5,600
2026
5,125
Thereafter
4,361
Note 5—Net Investment in Leases
In June 2021, the Company acquired two parcels of land for $42.0 million each and simultaneously entered into two Ground Leases with the respective tenants. Each Ground Lease also provides for a leasehold improvement allowance up to a maximum of $83.0 million. The Company also concurrently entered into an agreement pursuant to which SAFE would acquire the Ground Leases from the Company. If certain construction conditions are not met within a specified time period, SAFE will have no obligation to acquire the Ground Leases or fund the leasehold improvement allowances. The Company classified one of the Ground Leases as a sales-type lease and it was recorded in “Net investment in leases” on the
Company’s consolidated balance sheet at the time of acquisition. In January 2022, the Company sold the Ground Lease to an investment fund in which the Company owns a 53% noncontrolling interest (refer to Note 8 – Ground Lease Plus Fund). One Ground Lease was entered into with the seller of the land and did not qualify for sale leaseback accounting, and as such, was accounted for as a financing transaction and $42.0 million was recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheet at the time of acquisition. There can be no assurance that the conditions to closing will be satisfied and that SAFE will acquire the properties and Ground Leases from the Company. In January 2022, the Company sold the Ground Lease to the Ground Lease Plus Fund (refer to Note 8).
In January 2022, the Company entered into a commitment to acquire land for $36.0 million and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant’s recapitalization of an existing multifamily property. As of June 30, 2022, the Company had funded $32.0 million of this commitment. SAFE (refer to Note 8) waived its right of first refusal on this investment but entered into an agreement with the Company pursuant to which SAFE would acquire the land and related Ground Lease when certain construction related conditions are met. SAFE acquired the Ground Lease from the Company in July 2022.
The Company’s net investment in leases were comprised of the following as of June 30, 2022 and December 31, 2021 ($ in thousands):
Total undiscounted cash flows
356,302
524,712
Unguaranteed estimated residual value
21,750
42,000
Present value discount
(345,673)
(523,497)
Allowance for losses on net investment in leases
(380)
Net investment in leases(1)
Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases, excluding lease payments that are not fixed and determinable, in effect as of June 30, 2022, are as follows by year ($ in thousands):
Amount
520
1,056
1,204
1,240
1,264
351,018
15
Allowance for Losses on Net Investment in Leases—Changes in the Company’s allowance for losses on net investment in leases for the three and six months ended June 30, 2022 and 2021 were as follows ($ in thousands):
Three Months Ended
Six Months Ended
June 30, 2021
Allowance for losses on net investment in leases at beginning of period(1)
281
9,270
10,871
Provision for (recovery of) losses on net investment in leases (2)
(265)
Allowance for losses on net investment in leases at end of period(1)
9,005
Note 6—Land and Development
The Company’s land and development assets were comprised of the following ($ in thousands):
Land and land development, at cost
270,978
297,621
(11,260)
(10,811)
Total land and development, net
Dispositions—During the six months ended June 30, 2022 and 2021, the Company sold land parcels and residential lots and units and recognized land development revenue of $39.3 million and $64.6 million, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized land development cost of sales of $38.6 million and $60.1 million, respectively, from its land and development portfolio.
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Note 7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable and other lending investments by class ($ in thousands):
Construction loans
Senior mortgages
133,555
184,643
Corporate/Partnership loans
618
Subtotal - gross carrying value of construction loans(1)
185,261
Loans
2,590
14,965
Subordinate mortgages
12,886
12,457
Subtotal - gross carrying value of loans
15,476
27,422
Other lending investments
Held-to-maturity debt securities
35,000
96,838
Available-for-sale debt securities
23,254
28,092
Subtotal - other lending investments
58,254
124,930
Total gross carrying value of loans receivable and other lending investments
207,285
337,613
Allowance for loan losses
(3,033)
(4,769)
Total loans receivable and other lending investments, net
Allowance for Loan Losses—Changes in the Company’s allowance for loan losses were as follows for the three months ended June 30, 2022 and 2021 ($ in thousands):
General Allowance
Held to
Construction
Maturity Debt
Specific
Three Months Ended June 30, 2022
Securities
Allowance
Allowance for loan losses at beginning of period
1,252
674
2,415
591
4,932
Provision for (recovery of) loan losses(1)
(391)
(224)
23,599
23,101
Charge-offs(1)
(25,000)
Allowance for loan losses at end of period
861
450
1,014
3,033
Three Months Ended June 30, 2021
2,893
1,815
2,685
667
8,060
(Recovery of) provision for loan losses(1)
(1,253)
(196)
(292)
(77)
(1,818)
1,640
1,619
2,393
590
6,242
17
Changes in the Company’s allowance for loan losses were as follows for the six months ended June 30, 2022 and 2021 ($ in thousands):
Six Months Ended June 30, 2022
1,213
676
2,304
576
4,769
(352)
(226)
23,710
132
23,264
Six Months Ended June 30, 2021
6,541
1,643
3,093
743
12,020
Recovery of loan losses(1)
(4,901)
(24)
(700)
(153)
(5,778)
The Company’s investment in loans and other lending investments and the associated allowance for loan losses were as follows as of June 30, 2022 and December 31, 2021 ($ in thousands):
Individually
Collectively
Evaluated for
Impairment(1)
Impairment
As of June 30, 2022
Construction loans(2)
60,256
73,299
Loans(2)
Available-for-sale debt securities(3)
Less: Allowance for loan losses
(708)
(2,325)
59,548
144,704
As of December 31, 2021
59,640
125,621
(576)
(4,193)
59,064
273,780
Credit Characteristics—As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments which are inherently uncertain, and there can be no assurance that actual performance will be similar to current expectation. The Company designates loans as non-performing at such
18
time as: (1) interest payments become 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt.
The Company’s amortized cost basis in performing senior mortgages, corporate/partnership loans and subordinate mortgages, presented by year of origination and by credit quality, as indicated by risk rating, as of June 30, 2022 were as follows ($ in thousands):
Year of Origination
2020
2019
2018
Prior to 2018
Risk rating
1.0
1.5
2.0
2.5
3.0
64,323
3.5
8,976
4.0
4.5
5.0
Subtotal(1)
75,889
Subtotal
88,775
The Company’s amortized cost basis in loans, aged by payment status and presented by class, was as follows ($ in thousands):
Less Than
Greater
or Equal
Than
Current
to 90 Days
90 Days
Past Due
136,145
149,031
139,968
199,608
153,043
212,683
19
Impaired Loans—The Company’s impaired loan was as follows ($ in thousands):
Unpaid
Amortized
Principal
Related
Cost
Balance
With an allowance recorded:
Senior mortgages(1)
59,505
58,888
Loans receivable held for sale—In March 2021, the Company acquired land and simultaneously structured and entered into with the seller a Ground Lease on which a multi-family project will be constructed. The Company funded $16.1 million at closing and the Ground Lease documents provided for future funding obligations to the Ground Lease tenant of approximately $11.9 million of deferred purchase price and $52.0 million of leasehold improvement allowance upon achievement of certain milestones. At closing, the Company entered into an agreement with SAFE pursuant to which, subject to certain conditions being met, SAFE would acquire the ground lessor entity from the Company. The Company determined that the transaction did not qualify as a sale leaseback transaction and recorded the Ground Lease in “Loans receivable held for sale” on the Company’s consolidated balance sheet. Subsequent to closing, the Company funded approximately $6.0 million of the deferred purchase price to the Ground Lease tenant. The Company sold the ground lessor entity (and SAFE assumed all future funding obligations to the Ground Lease tenant) to SAFE in September 2021 for $22.1 million and recorded no gain or loss on the sale.
In June 2021, the Company acquired a parcel of land for $42.0 million and simultaneously entered into a Ground Lease (refer to Note 5). The Company also concurrently entered into an agreement pursuant to which SAFE would acquire the Ground Lease from the Company. The Ground Lease was entered into with the seller of the land and did not qualify for sale leaseback accounting, and as such, was accounted for as a financing transaction and $42.0 million was recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheet at the time of acquisition. In January 2022, the Company sold its loan receivable held for sale to the Ground Lease Plus Fund (refer to Note 8).
Other lending investments—Other lending investments includes the following securities ($ in thousands):
Net
Unrealized
Estimated
Carrying
Face Value
Cost Basis
Gain (Loss)
Fair Value
Value
Available-for-Sale Securities
Municipal debt securities
23,640
(386)
Held-to-Maturity Securities
Debt securities(1)
58,640
23,855
4,237
Debt securities
100,000
123,855
120,693
As of June 30, 2022, the contractual maturities of the Company’s securities were as follows ($ in thousands):
Held-to-Maturity Debt Securities
Available-for-Sale Debt Securities
Maturities
Within one year
After one year through 5 years
After 5 years through 10 years
After 10 years
Note 8—Other Investments
The Company’s other investments and its proportionate share of earnings (losses) from equity method investments were as follows ($ in thousands):
Earnings (Losses) from
Carrying Value
Equity Method Investments
as of
For the Three Months Ended
For the Six Months Ended
Real estate equity investments
Safehold Inc. ("SAFE")(1)
1,405,985
1,168,532
14,720
9,703
31,749
21,115
Ground Lease Plus Fund
65,068
17,630
1,289
Other real estate equity investments
38,458
44,349
3,773
(1,461)
7,384
(2,063)
1,509,511
1,230,511
19,013
8,242
40,422
19,052
Other strategic investments(2)
47,281
66,770
2,856
4,003
3,814
Safehold Inc.—SAFE is a publicly-traded company formed by the Company primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon (“Ground Leases”). During the six months ended June 30, 2022, the Company purchased 0.2 million shares of SAFE's common stock for $10.5 million, for an average cost of $66.83 per share, in open market purchases made in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended. In March 2022, the Company acquired 3,240,000 shares of SAFE’s common stock in a private placement for $191.2 million. As of June 30, 2022, the Company owned approximately 64.7% of SAFE’s common stock outstanding.
In January 2019, the Company purchased 12.5 million newly designated limited partnership units (the “Investor Units”) in SAFE’s operating partnership (“SAFE OP”), at a purchase price of $20.00 per unit, for a total purchase price of $250.0 million. In May 2019, after the approval of SAFE’s shareholders, the Investor Units were exchanged for shares of SAFE’s common stock on a one-for-one basis. Following the exchange, the Investor Units were retired.
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In connection with the Company’s purchase of the Investor Units, it entered into a Stockholder’s Agreement with SAFE on January 2, 2019. The Stockholder’s Agreement:
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee. In addition, the Company is also the external manager of a venture in which SAFE is a member. Following are the key terms of the management agreement with SAFE:
During the three months ended June 30, 2022 and 2021, the Company recorded $5.2 million and $3.5 million, respectively, of management fees pursuant to its management agreement with SAFE. During the six months ended June 30, 2022 and 2021, the Company recorded $9.7 million and $7.0 million, respectively, of management fees pursuant to its management agreement with SAFE.
The Company is also entitled to receive certain expense reimbursements, including for the allocable costs of its personnel that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants otherwise would perform. Historically, pursuant to the Company’s option under the management agreement, the Company has elected to not seek reimbursement for certain expenses. This historical election is not a waiver of reimbursement for similar expenses in future periods and the Company has started to elect to seek, and may further seek in the future, reimbursement of such additional expenses that it has not previously sought, including, without limitation, rent, overhead and certain personnel costs.
During the three months ended June 30, 2022 and 2021, the Company recognized $3.1 million and $1.9 million, respectively, of expense reimbursements pursuant to its management agreement with SAFE. During the six months ended June 30, 2022 and 2021, the Company recognized $6.3 million and $3.8 million, respectively, of expense reimbursements pursuant to its management agreement with SAFE.
The Company has an exclusivity agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
22
Following is a list of investments that the Company has transacted with SAFE for the periods presented, all of which were approved by the Company’s and SAFE’s independent directors:
In October 2017, the Company closed on a 99-year Ground Lease and a $80.5 million construction financing commitment to support the ground-up development of a to-be-built luxury multi-family project. The transaction included a combination of: (i) a newly created Ground Lease and a $7.2 million leasehold improvement allowance, which was fully funded; and (ii) an $80.5 million leasehold first mortgage. The Company sold the Ground Lease to SAFE in September 2020 for $34.0 million and in January 2021 sold the leasehold first mortgage to an entity in which the Company has a 53% noncontrolling equity interest (refer to “Other strategic investments” below) for $63.3 million.
In June 2020, Net Lease Venture II (see Note 3) acquired the leasehold interest in an office laboratory property in Honolulu, HI and simultaneously entered into a 99-year Ground Lease with SAFE. In November 2021, the Company acquired the property from Net Lease Venture II. The Company paid $0.6 million to its partner to acquire its equity interest in the property and assumed a $44.4 million mortgage on the property. The Company sold the property in the first quarter of 2022. Prior to the sale, SAFE paid $0.3 million to terminate a purchase option that allowed the Company to purchase the land at the expiration of the Ground Lease.
In February 2021, the Company provided a $50.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the Ground Lease tenant’s recapitalization of a hotel property. The Company received $1.9 million of consideration from SAFE in connection with this transaction. The Company sold the loan in July 2021 and recorded no gain or loss on the sale.
In March 2021, the Company acquired land and simultaneously structured and entered into with the seller a Ground Lease on which a multi-family project will be constructed. At closing, the Company entered into an agreement with SAFE pursuant to which, subject to certain conditions being met, SAFE would acquire the ground lessor entity from the Company. The Company sold the ground lessor entity to SAFE in September 2021 and recognized no gain or loss on the sale (refer to Note 7 - Loans receivable held for sale). The Company also committed to provide a $75.0 million construction loan to the Ground Lease tenant. The Company received $2.7 million of consideration from SAFE in connection with this transaction. In September 2021, the construction loan commitment and the $2.7 million of consideration was transferred to the Loan Fund (refer to “Other strategic investments” below).
In June 2021, the Company sold to SAFE its rights under a purchase option agreement for $1.2 million. The Company had previously acquired such purchase option agreement from a third-party property owner for $1.0 million and incurred $0.2 million of expenses. Under the option agreement, upon certain conditions being met by an outside developer who may become the Ground Lease tenant, SAFE has the right to acquire for $215.0 million a property and hold a Ground Lease under approximately 1.1 million square feet of office space that may be developed on the property. No gain or loss was recognized by the Company as a result of the sale.
In June 2021, the Company and SAFE entered into two agreements pursuant to each of which SAFE would acquire land and a related Ground Lease originated by the Company when certain construction related conditions are met by a specified time period. The purchase price to be paid for each is $42.0 million, plus an amount necessary for the Company to achieve the greater of a 1.25x multiple and a 9% return on its investment. In addition, each Ground Lease provides for a leasehold improvement allowance up to a maximum of $83.0 million, which obligation would be assumed by SAFE upon acquisition. If certain construction conditions are not met within a specified time period, SAFE will have no obligation to acquire the Ground Leases or fund the leasehold improvement allowances. In January 2022, the Company sold the Ground Leases to the Ground Lease Plus Fund (see below). There can be no assurance that the conditions to closing will be satisfied and that SAFE will acquire the properties and Ground Leases from the Ground Lease Plus Fund.
In November 2021, the Company and SAFE entered into an agreement pursuant to which SAFE would acquire land and a related Ground Lease originated by the Company when certain construction related conditions are met by a specified time period. The purchase price to be paid is $33.3 million, plus an amount necessary for the Company to achieve the greater of a 1.25x multiple and a 12% return on its investment. In addition, the Ground Lease provides for a leasehold
23
improvement allowance up to a maximum of $51.8 million, which obligation would be assumed by SAFE upon acquisition. If certain construction conditions are not met within a specified time period, SAFE will have no obligation to acquire the Ground Lease or fund the leasehold improvement allowance. There can be no assurance that the conditions to closing will be satisfied and that SAFE will acquire the land and Ground Lease from the Ground Lease Plus Fund (refer to Ground Lease Plus Fund below).
In December 2021, the Company’s partner in a venture recapitalized an existing multifamily property, which included a Ground Lease provided by SAFE. As part of the recapitalization, the Company’s partner acquired its 50% equity interest in the entity and the mezzanine loan held by the Company was repaid in full. During the three and six months ended June 30, 2021, the Company recorded $0.6 million and $1.1 million, respectively, of interest income on the mezzanine loan.
In January 2022, the Company and SAFE entered into an agreement pursuant to which SAFE would acquire land and a related Ground Lease originated by the Company when certain construction related conditions are met. The purchase price to be paid is a maximum of $36.0 million (refer to Note 5), plus an amount necessary for the Company to achieve the greater of a 1.05x multiple and a 10% return on its investment. There can be no assurance that the conditions to closing will be satisfied and that SAFE will acquire the land and Ground Lease from the Company.
In February 2022, the Loan Fund (refer to Other Strategic Investments below) committed to provide a $130.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan is for the Ground Lease tenant’s recapitalization of a life science property. The Loan Fund received $9.0 million of consideration from SAFE in connection with this transaction.
In April 2022, the Company sold a Ground Lease on a hotel property to SAFE for $9.0 million. The Company previously owned a 50% equity interest in a venture that owned the hotel property. The Company did not recognize any gain or loss on the sale.
In June 2022, the Loan Fund (refer to Other Strategic Investments below) committed to provide a $105.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan is for the Ground Lease tenant’s recapitalization of a mixed-use property. The Loan Fund received $5.0 million of consideration from SAFE in connection with this transaction.
24
Ground Lease Plus Fund—The Company formed and manages an investment fund that targets the origination and acquisition of Ground Leases for commercial real estate projects that are in a pre-development phase (the “Ground Lease Plus Fund”). The Company owns a 53% noncontrolling equity interest in the Ground Lease Plus Fund. The Company does not have a controlling interest in the Ground Lease Plus Fund due to the substantive participating rights of its partner and accounts for this investment as an equity method investment. In addition, the Ground Lease Plus Fund has first look rights through December 2023 on qualifying pre-development projects that SAFE has elected to not originate.
In November 2021, the Company acquired land for $33.3 million and simultaneously structured and entered into a Ground Lease on which a multi-family project will be constructed. In December 2021, the Company sold the Ground Lease to the Ground Lease Plus Fund and recognized no gain or loss on the sale. The Company and SAFE entered into an agreement pursuant to which SAFE would acquire the land and related Ground Lease from the Ground Lease Plus Fund when certain construction related conditions are met by a specified time period (refer to “Safehold Inc.” above).
In January 2022, the Company sold two Ground Leases to the Ground Lease Plus Fund (refer to Note 5) and recognized an aggregate $0.5 million of gains in “Income from sales of real estate” on the sale. The Company and SAFE entered into an agreement pursuant to which SAFE would acquire the land properties and related Ground Leases from the Ground Lease Plus Fund when certain construction related conditions are met by a specified time period (refer to “Safehold Inc.” above).
Other real estate equity investments—As of June 30, 2022, the Company’s other real estate equity investments include equity interests in real estate ventures ranging from 48% to 95%, comprised of investments of $38.2 million in operating properties and $0.3 million in land assets. As of December 31, 2021, the Company’s other real estate equity investments included $43.3 million in operating properties and $1.1 million in land assets.
Other strategic investments—As of June 30, 2022 and December 31, 2021, the Company also had investments in real estate related funds and other strategic investments in real estate entities.
In January 2021, the Company sold two loans for $83.4 million to a newly formed entity in which the Company owns a 53.0% noncontrolling equity interest (the “Loan Fund”). The Company did not recognize any gain or loss on the sales. In September 2021, the Company transferred a $75.0 million construction loan commitment to the Loan Fund. The Company does not have a controlling interest in the Loan Fund due to the substantive participating rights of its partner. The Company accounts for this investment as an equity method investment and receives a fixed annual fee in exchange for managing the entity.
In February 2022, the Loan Fund committed to provide a $130.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the Ground Lease tenant’s recapitalization of a life science property.
In June 2022, the Loan Fund committed to provide a $105.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the Ground Lease tenant’s recapitalization of a mixed-use property.
Summarized investee financial information—The following table presents the investee level summarized financial information for the Company’s equity method investment that was significant as of June 30, 2022 ($ in thousands):
Revenues
Expenses
Net Income Attributable to Parent
For the Six Months Ended June 30, 2022
SAFE
125,247
82,157
47,551
For the Six Months Ended June 30, 2021
87,720
57,536
31,640
25
Note 9—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):(1)
Other assets(2)
19,006
16,040
Operating lease right-of-use assets(3)
18,101
20,437
Restricted cash
54,395
Other receivables
3,739
5,054
Corporate furniture, fixtures and equipment, net(4)
1,696
1,852
Leasing costs, net(5)
665
818
Intangible assets, net(6)
350
1,209
Deferred financing fees, net
204
629
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
Accrued expenses
65,760
151,810
Accrued interest payable
27,556
31,293
Other liabilities(1)
27,120
30,362
Operating lease liabilities (see table above)
20,355
23,267
26
Note 10—Debt Obligations, net
The Company’s debt obligations were as follows ($ in thousands):
Carrying Value as of
Stated
Scheduled
Interest Rates
Maturity Date
Secured credit facilities:
Revolving Credit Facility
LIBOR + 2.00
% (1)
September 2022
Senior Term Loan
491,875
LIBOR + 2.75
% (2)
Total secured credit facilities
Unsecured notes:
3.125% senior convertible notes(3)
93,110
287,500
3.125
%
4.75% senior notes(4)
767,941
775,000
4.75
October 2024
4.25% senior notes(5)
550,000
4.25
August 2025
5.50% senior notes(6)
346,906
400,000
5.50
February 2026
Total unsecured notes
1,757,957
2,012,500
Other debt obligations:
Trust preferred securities
LIBOR + 1.50
October 2035
Total debt obligations
1,857,957
2,604,375
Debt discounts and deferred financing costs, net
(24,707)
(32,201)
Total debt obligations, net(7)
Future Scheduled Maturities—As of June 30, 2022, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
Unsecured Debt
Secured Debt
Total principal maturities
Unamortized discounts and deferred financing costs, net
Total debt obligations, net
27
Senior Term Loan—The Company had a $650.0 million senior term loan (the “Senior Term Loan”) that accrued interest at LIBOR plus 2.75% per annum and matured in June 2023. The Senior Term Loan was secured by pledges of equity of certain subsidiaries that own a defined pool of assets. The Senior Term Loan permitted substitution of collateral, subject to overall collateral pool coverage and concentration limits, over the life of the facility. The Company repaid the Senior Term Loan in full in March 2022 using proceeds from the Net Lease Sale (refer to Note 3 - Net Lease Sale and Discontinued Operations). During the six months ended June 30, 2022, the Company incurred a “Loss on extinguishment of debt” of $1.4 million in connection with the repayment of the Senior Term Loan.
Revolving Credit Facility—The Company has a secured revolving credit facility with a maximum capacity of $350.0 million that matures in September 2022 (the “Revolving Credit Facility”). Outstanding borrowings under the Revolving Credit Facility are secured by pledges of the equity interests in the Company’s subsidiaries that own a defined pool of assets. Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon the Company’s corporate credit rating, ranging from 1.0% to 1.5% in the case of base rate loans and from 2.0% to 2.5% in the case of LIBOR loans. In addition, there is an undrawn credit facility commitment fee that ranges from 0.25% to 0.45%, based on corporate credit ratings. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2023. As of June 30, 2022, based on the Company’s borrowing base of assets, the Company had the ability to draw $35.2 million without pledging any additional assets to the facility.
Unsecured Notes—As of June 30, 2022, the Company has senior unsecured notes outstanding with varying fixed-rates and maturities ranging from September 2022 to February 2026. In connection with the Net Lease Sale, in the fourth quarter 2021, the Company obtained the consents of holders of its outstanding 4.75% senior notes due 2024, 4.25% senior notes due 2025 and 5.50% senior notes due 2026 to certain amendments to the indentures governing the notes intended to align the indentures with the sale of the Company's net lease assets. The Company paid holders consent fees ranging from 0.75% to 1.00% of the principal amount of consenting notes, depending on the relevant series. The Company’s senior unsecured notes are interest only, are generally redeemable at the option of the Company and contain certain financial covenants (see below).
In April 2022, the Company completed separate, privately-negotiated transactions with holders of $194 million aggregate principal amount of the Company's 3.125% Convertible Notes in which the noteholders exchanged their convertible notes with the Company for 13.75 million newly issued shares of the Company's common stock and aggregate cash payments of $14 million. The 3.125% Convertible Senior Notes received by the Company were retired. The Company recognized a net increase in shareholders’ equity of $180.6 million inclusive of a $118.1 million loss on extinguishment of debt in connection with these transactions.
In April 2022, the Company redeemed $7.1 million principal amount of its 4.75% senior notes due October 2024 for $7.2 million. The Company recognized a $0.2 million loss on extinguishment of debt in connection with these transactions.
In June 2022, the Company redeemed $53.1 million principal amount of its 5.50% senior notes due February 2026 for $50.6 million. The Company recognized a $1.7 million net gain on extinguishment of debt in connection with these transactions.
Debt Covenants—The Company’s outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.3x and a covenant restricting certain incurrences of debt based on a fixed charge coverage ratio. If any of the Company’s covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.
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The Company’s Revolving Credit Facility contains certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. The Revolving Credit Facility is secured by a borrowing base of assets and requires the Company to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, the Company has the option to pay down outstanding borrowings or substitute assets in the borrowing base. Under the Revolving Credit Facility the Company is permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and the Company remains in compliance with its financial covenants after giving effect to the dividend.
The Company’s Revolving Credit Facility contains cross default provisions that would allow the lenders to declare an event of default and accelerate the Company’s indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company’s unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company’s indebtedness to them if the Company’s other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.
Note 11—Commitments and Contingencies
Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of June 30, 2022, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
Loans and Other
Lending
Real
Investments
Estate
Performance-Based Commitments
1,877
4,271
149,502
155,650
Strategic Investments
3,161
2,249
5,410
7,432
151,751
161,060
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Other Commitments—Future minimum lease obligations under non-cancelable operating leases as of June 30, 2022 are as follows ($ in thousands):(1)
3,237
6,295
6,178
6,166
142
162
22,180
Present value discount(1)
(1,825)
Lease liabilities
Legal Proceedings—The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company’s business as a finance and investment company focused on the commercial real estate industry, including foreclosure-related proceedings. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated financial statements.
Note 12—Derivatives
The Company’s use of derivative financial instruments has historically been limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company’s operating and financial structure and to manage its exposure to interest rates and foreign exchange rates. The Company may have derivatives that are not designated as hedges because they do not meet the strict hedge accounting requirements. Although not designated as hedges, such derivatives are entered into to manage the Company’s exposure to interest rate movements and other identified risks.
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The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2022 and December 31, 2021 ($ in thousands):(1)
Derivative Liabilities
Balance Sheet
Fair
Location
Derivatives Designated in Hedging Relationships
Interest rate swaps
8,395
31
The table below presents the effect of the Company’s derivative financial instruments, including the Company’s share of derivative financial instruments at certain of its equity method investments, in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) ($ in thousands):
Amount of Gain
Location of Gain
(Loss) Recognized in
(Loss) Reclassified
(Loss)
Accumulated Other
from Accumulated
Derivatives Designated in
When Recognized in
Other Comprehensive
Hedging Relationships
Income
Income into Earnings
For the Three Months Ended June 30, 2022
(580)
For the Three Months Ended June 30, 2021
(2,029)
(457)
7,138
(1,201)
2,573
(4,133)
8,638
(691)
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Note 13—Equity
Preferred Stock—The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of June 30, 2022 and December 31, 2021:
Cumulative Preferential Cash
Dividends(1)(2)
Shares Issued
and
Annual
Outstanding
Liquidation
Rate per
Dividend
Series
(in thousands)
Preference(3)
Annum
per share
D
4,000
0.001
25.00
8.00
2.00
89,041
G
3,200
7.65
1.91
72,664
I
5,000
7.50
1.88
120,785
12,200
282,490
Dividends—To maintain its qualification as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the REIT. The Company has recorded NOLs and may record NOLs in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company’s obligation to pay dividends for such periods in order to maintain its REIT qualification. As of December 31, 2021, the Company had $614.6 million of NOL carryforwards at the corporate REIT level that can generally be used to offset both ordinary taxable income and capital gain net income in future years. The NOL carryforwards will begin to expire in 2032 and will fully expire in 2036 if unused, except for $154 million of NOL which never expires. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and certain asset impairments), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. The Senior Term Loan and the Revolving Credit Facility permit the Company to pay common dividends with no restrictions so long as the Company is not in default on any of its debt obligations. The Company declared common stock dividends of $19.2 million, or $0.25 per share, for the six months ended June 30, 2022 and $17.4 million, or $0.235 per share, for the six months ended June 30, 2021. The character of the 2021 dividends was 100% capital gain distribution, of which 18.31% represented unrecaptured section 1250 gain.
Stock Repurchase Program—The Company may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. The Company did not repurchase any shares of its common stock during the six months ended June 30, 2022. During the six months ended June 30, 2021, the Company repurchased 1.8 million shares of its outstanding common stock for $32.4 million, for an average cost of $17.57 per share. The Company is generally authorized to repurchase up to $50.0 million in shares of its common stock and in February 2022, the Company's Board of Directors authorized an increase to the stock repurchase program to $50.0 million. As of June 30, 2022, the Company had remaining authorization to repurchase up to $50.0 million of common stock under its stock repurchase program.
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Accumulated Other Comprehensive Income (Loss)— “Accumulated other comprehensive income (loss)” reflected in the Company’s shareholders’ equity is comprised of the following ($ in thousands):
Unrealized (losses) gains on available-for-sale securities
Unrealized losses on cash flow hedges
(17,486)
(25,824)
Note 14—Stock-Based Compensation Plans and Employee Benefits
Stock-Based Compensation—The Company recorded stock-based compensation, including the expense related to performance incentive plans (see below), of ($17.9) million and $14.8 million for the three months ended June 30, 2022 and 2021, respectively, and ($30.4) million and $20.3 million for the six months ended June 30, 2022 and 2021, respectively, in “General and administrative” in the Company’s consolidated statements of operations.
Performance Incentive Plans—The Company’s Performance Incentive Plans (“iPIP”) are designed to provide, primarily to senior executives and select professionals engaged in the Company’s investment activities, long-term compensation which has a direct relationship to the realized returns on investments included in the plans. Awards vest over six years, with 40% being vested at the end of the second year and 15% each year thereafter. As of June 30, 2022, there are five iPIP Plans, each covering a two-year investment period beginning with the 2013-2014 Plan through the 2021-2022 Plan.
2019-2022 iPIP Plans—The Company’s 2019-2020 and 2021-2022 iPIP plans are equity-classified awards which are measured at the grant date fair value and recognized as compensation cost in “General and administrative” in the Company’s consolidated statements of operations and “Noncontrolling interests” in the Company’s consolidated statements of changes in equity over the requisite service period. Investments in the 2019-2022 iPIP plans are held by consolidated subsidiaries of the Company and have two ownership classes, class A units and class B units. The Company owns 100% of the class A units and the class B units were issued to employees as long-term compensation. Except for certain clawback provisions, participants can retain vested class B units upon their termination of employment with the Company. The class B units are entitled to distributions from the net cash realized from the investments in the plan after the Company, through its ownership of the class A units, has received a specified return on its invested capital and a return of its invested capital. Distributions on the class B units are also subject to reductions under a total shareholder return (“TSR”) adjustment. The fair value of the class B units was determined using a model that forecasts the underlying cash flows from the investments within the entity to which the class B units have ownership rights. During the six months ended June 30, 2022 and 2021, the Company recorded $2.4 million and $1.5 million, respectively, of expense related to the 2019-2022 iPIP plans. Distributions on the class B units are expected to be 50% in cash and 50% in shares of the Company’s common stock; provided, however, that (a) the cash portion will be increased if the Company does not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, the Company may elect to distribute SAFE shares in lieu of cash and Company stock.
The following is a summary of the status of the Company’s equity-classified iPIP plans and changes during the six months ended June 30, 2022.
iPIP Investment Pool
2019-2020
2021-2022
Points at beginning of period
95.20
84.75
Granted
7.95
Forfeited
(0.35)
Points at end of period
92.35
As of June 30, 2022, investments with an aggregate gross book value of $764 million, including 26.7 million shares of SAFE common stock acquired by the Company, were attributable to the 2019-2020 Plan and investments with an
34
aggregate gross book value of $435 million, including 5.0 million shares of SAFE common stock acquired by the Company, were attributable to the 2021-2022 Plan.
2013-2018 iPIP Plans—The remainder of the Company’s iPIP plans, as shown in the table below, are liability-classified awards and are remeasured each reporting period at fair value until the awards are settled. Certain employees will be granted awards that entitle employees to receive the residual cash flows from the investments in the plans after the Company has received a specified return on its invested capital and a return of its invested capital. Awards are also subject to reductions under a TSR adjustment. The fair value of awards is determined using a model that forecasts the Company’s projected investment performance. Settlement of the awards will be 50% in cash and 50% in shares of the Company’s common stock or in shares of SAFE’s common stock owned by the Company.
The following is a summary of the status of the Company’s liability-classified iPIP plans and changes during the six months ended June 30, 2022.
2013‑2014
2015‑2016(1)
2017‑2018
80.17
70.40
75.34
During the six months ended June 30, 2022, the Company recorded a $37.1 million reduction of expense related to the 2013-2018 iPIP plans, primarily due to a decrease in the price per share of SAFE common stock. During the six months ended June 30, 2021, the Company recorded $15.1 million of expense related to the 2013-2018 iPIP plans.
As of June 30, 2022, investments with an aggregate gross book value of $13 million were attributable to the 2013-2014 Plan and investments with an aggregate gross book value of $238 million, including 7.6 million shares of SAFE common stock acquired by the Company, were attributable to the 2017-2018 Plan. As of June 30, 2022 there were no investments attributable to the 2015-2016 Plan.
During the six months ended June 30, 2022, the Company made distributions to participants in the 2013-2014 investment pool. The iPIP participants received total distributions in the amount of $19.6 million as compensation, comprised of cash and 412,041 shares of the Company’s common stock with a fair value of $16.06 per share, which are fully-vested and issued under the 2009 LTIP. After deducting statutory minimum tax withholdings, a total of 215,657 shares of the Company’s common stock were issued.
During the six months ended June 30, 2022, the Company made distributions to participants in the 2015-2016 investment pool. The iPIP participants received total distributions in the amount of $19.2 million as compensation, comprised of cash and 402,731 shares of the Company’s common stock with a fair value of $16.06 per share, which are fully-vested and issued under the 2009 LTIP. After deducting statutory minimum tax withholdings, a total of 193,416 shares of the Company’s common stock were issued.
During the six months ended June 30, 2021, the Company made distributions to participants in the 2015-2016 investment pool. The iPIP participants received total distributions in the amount of $3.2 million as compensation, comprised of cash and 97,881 shares of the Company’s common stock with a fair value of $17.65 per share, which are fully-vested and issued under the 2009 LTIP. After deducting statutory minimum tax withholdings, a total of 57,920 shares of the Company’s common stock were issued.
As of June 30, 2022 and December 31, 2021, the Company had accrued compensation costs relating to iPIP of $47.0 million and $116.6 million, respectively, which are included in “Accounts payable, accrued expenses and other liabilities” on the Company’s consolidated balance sheets.
35
Long-Term Incentive Plan—The Company’s 2009 Long-Term Incentive Plan (the “2009 LTIP”) is designed to provide incentive compensation for officers, key employees, directors and advisors of the Company. The 2009 LTIP provides for awards of stock options, shares of restricted stock, phantom shares, restricted stock units, dividend equivalent rights and other share-based performance awards. All awards under the 2009 LTIP are made at the discretion of the Company’s Board of Directors or a committee of the Board of Directors. The Company’s shareholders approved the 2009 LTIP in 2009 and approved the performance-based provisions of the 2009 LTIP, as amended, in 2014. In May 2021, the Company’s shareholders approved an increase in the number of shares available for issuance under the 2009 LTIP from a maximum of 8.9 million to 9.9 million and extended the expiration date of the 2009 LTIP from May 2029 to May 2031.
As of June 30, 2022, an aggregate of 2.3 million shares remain available for issuance pursuant to future awards under the Company’s 2009 LTIP.
Restricted Stock Unit Activity—A summary of the Company’s stock-based compensation awards to certain employees in the form of long-term incentive awards for the six months ended June 30, 2022, is as follows (in thousands):
Nonvested at beginning of period
754
214
Vested
(283)
(13)
Nonvested at end of period
672
As of June 30, 2022, there was $7.7 million of total unrecognized compensation cost related to all unvested restricted stock units that are expected to be recognized over a weighted average remaining vesting/service period of 1.54 years.
Directors’ Awards— During the six months ended June 30, 2022, the Company granted 38,953 restricted shares of common stock to non-employee Directors at a fair value of $16.33 at the time of grant for their annual equity awards and also issued 1,280 common stock equivalents (“CSEs”) at a fair value of $17.97 per CSE in respect of dividend equivalents on outstanding CSEs. As of June 30, 2022, a combined total of 131,983 CSEs and restricted shares of common stock granted to members of the Company’s Board of Directors remained outstanding under the Company’s Non-Employee Directors Deferral Plan, with an aggregate intrinsic value of $1.8 million.
401(k) Plan— The Company made contributions of $0.1 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.9 million and $0.7 million for the six months ended June 30, 2022 and 2021, respectively, to the Company’s 401(k) Plan.
Note 15—Earnings Per Share
The following table presents a reconciliation of income from operations used in the basic and diluted earnings per share (“EPS”) calculations ($ in thousands, except for per share data):
Net loss from continuing operations and allocable to common shareholders for basic and diluted earnings per common share
(42,585)
(146,229)
(62,910)
36
Earnings allocable to common shares:
Numerator for basic and diluted earnings per share:
Net loss from continuing operations and allocable to common shareholders
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic and diluted earnings per common share
Basic and diluted earnings per common share:(1)
Net income from discontinued operations and allocable to common shareholders
Note 16—Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Certain of the Company’s assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are classified as being valued on a non-recurring basis.
37
The following fair value hierarchy table summarizes the Company’s assets and liabilities recorded at fair value on a recurring and non-recurring basis by the above categories ($ in thousands):
Fair Value Using
Quoted
market
Significant
prices in
other
active
observable
unobservable
markets
inputs
(Level 1)
(Level 2)
(Level 3)
Recurring basis:
Available-for-sale securities(1)
Non-recurring basis:
Real estate, net(2)
811
Held-to-maturity securities(3)
Derivative liabilities(1)
The following table summarizes changes in Level 3 available-for-sale securities reported at fair value on the Company’s consolidated balance sheets for the six months ended June 30, 2022 and 2021 ($ in thousands):
Beginning balance
25,274
Purchases
3,375
Repayments
(215)
(201)
Unrealized losses recorded in other comprehensive income
Ending balance
28,074
38
Fair values of financial instruments—The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):
Assets
Net investment in leases (refer to Note 5)(1)
Loans receivable and other lending investments, net(1)
333
345
Loans receivable held for sale(1)
Cash and cash equivalents(2)
1,401
340
Restricted cash(2)
54
Liabilities
Debt obligations, net(1)(3)
Level 1
1,734
1,717
2,473
2,799
Level 3
101
104
1,833
1,818
2,572
2,903
Note 17—Segment Reporting
The Company has determined that it has four reportable segments based on how management reviews and manages its business. These reportable segments include: Net Lease, Real Estate Finance, Operating Properties and Land and Development. The Net Lease segment (refer to Note 3 - Net Lease Sale and Discontinued Operations) includes the Company’s investments in SAFE and its Ground Lease adjacent businesses (refer to Note 8). The Real Estate Finance segment includes all of the Company’s activities related to senior and mezzanine real estate loans and real estate related securities. The Operating Properties segment includes the Company’s activities and operations related to its commercial and residential properties. The Land and Development segment includes the Company’s activities related to its developable land portfolio.
The Company evaluates performance-based on the following financial measures for each segment. The Company’s segment information is as follows ($ in thousands):
Real Estate
Land and
Corporate/
Company
Lease
Finance
Development
Other(1)
3,082
100
5,219
7,592
1,318
1,726
Earnings (losses) from equity method investments
15,240
769
3,673
(389)
Total revenue and other earnings
20,835
5,016
14,347
25,921
1,337
67,456
(461)
(8,261)
(4,294)
(13,016)
(24,095)
(521)
(40)
(238)
(724)
(1,523)
Allocated interest expense
(13,162)
(2,196)
(1,139)
(2,745)
(4,907)
(24,149)
Allocated general and administrative(2)
(3,838)
(1,226)
(625)
(2,114)
(4,941)
(12,744)
39
Segment profit (loss)(3)
2,853
1,554
4,322
(7,565)
(9,235)
(8,071)
Other significant items:
Provision for loan losses
1,750
969
227
Capitalized expenditures
320
5,813
6,133
4,703
89
299
7,785
3,529
52
3,953
1,315
755
(2,935)
1,474
2,101
13,688
8,592
5,817
35,196
2,155
65,448
(12)
(6,256)
(5,049)
(11,317)
(30,803)
(87)
(124)
(211)
(14,566)
(3,828)
(2,030)
(3,864)
(4,353)
(28,641)
(6,120)
(1,242)
(664)
(2,367)
(5,210)
(15,603)
Segment profit (loss) (3)
(7,010)
3,435
(3,133)
(6,887)
(7,532)
(21,127)
Other significant non-cash items:
1,221
228
123
432
4,571
5,003
6,056
235
75
9,094
9,680
10,255
2,635
1,914
33,038
1,783
3,718
3,665
2,221
44,017
10,914
20,029
45,838
4,135
124,933
(657)
(14,133)
(8,343)
(23,133)
(38,591)
(992)
(159)
(320)
(982)
(2,453)
(29,377)
(5,336)
(2,480)
(6,988)
(9,211)
(53,392)
Allocated general and administrative(3)
(8,854)
(2,350)
(1,103)
(4,369)
(9,870)
(26,546)
Segment profit (loss)(4)
4,137
3,069
2,313
(12,773)
(15,928)
(19,182)
1,955
456
284
540
10,524
11,064
9,540
183
317
17,557
7,007
151
2,704
5,764
1,220
(6,682)
4,619
2,594
28,596
18,928
9,857
72,073
8,358
137,812
(468)
(10,055)
(9,512)
(20,035)
(60,126)
(310)
(463)
(28,891)
(8,406)
(4,073)
(7,802)
(8,278)
(57,450)
40
(12,057)
(2,701)
(1,324)
(4,795)
(10,657)
(31,534)
(12,820)
7,668
(5,595)
(10,162)
(10,887)
(31,796)
3,208
446
489
9,311
9,800
Real estate and other assets available and held for sale and classified as discontinued operations(1)
Loans receivable and other lending investments, net
Loan receivable held for sale
1,471,053
23,219
38,168
290
24,062
Total portfolio assets
1,514,570
227,471
130,369
260,008
2,156,480
Cash and other assets
1,454,140
1,186,162
48,862
43,252
1,096
17,909
3,572,303
381,706
135,703
287,906
4,395,527
445,007
Segment loss
Less: (Provision for) recovery of loan losses
(22,578)
2,158
(22,713)
5,800
Less: Provision for losses on net investment in leases
(779)
(780)
Less: Impairment of assets
(1,768)
Less: Stock-based compensation income (expense)
17,923
(14,791)
30,350
(20,299)
Less: Depreciation and amortization
(1,338)
(1,573)
(2,695)
(3,974)
Less: Income tax (expense) benefit
Less: Loss on early extinguishment of debt, net
Less: Net income from discontinued operations
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Note 18 – Subsequent Events
In July and August 2022, the Company completed a series of privately-negotiated exchange transactions with holders of approximately $47.9 million aggregate principal amount of the Company's 3.125% Convertible Notes due 2022 (refer to Note 10) in which the noteholders exchanged their convertible notes with the Company for an aggregate of approximately 2.0 million newly issued shares of the Company's common stock and aggregate cash payments of approximately $24.3 million. The convertible notes received by the Company were retired. The Company will recognize a net increase in shareholders’ equity of $24.2 million inclusive of a $6.1 million loss on extinguishment of debt in connection with these transactions.
In July 2022, the Company sold a Ground Lease to SAFE for $36.0 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are included with respect to, among other things, iStar Inc.’s (the “Company’s”) current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1A—"Risk Factors’’ in our 2021 Annual Report, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “we,” “our” and “us” refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our 2021 Annual Report. These historical financial statements may not be indicative of our future performance.
Executive Overview
Corporate Strategy. We continue to execute our stated corporate strategy which is to grow our Ground Lease and Ground Lease adjacent businesses and simplify our portfolio through sales of other assets. In March 2022, we, through certain subsidiaries of ours and entities managed by us, sold our portfolio of net lease assets for an aggregate gross sales price of $3.07 billion (the “Net Lease Sale”).
The portfolio sold consisted of office, entertainment and industrial properties located in the United States comprising approximately 18.3 million square feet. It included assets wholly-owned by us and assets owned by two joint ventures managed by us and in which we owned 51.9% interests. At the time of the sale, the portfolio was encumbered by an aggregate of $702 million of mortgage indebtedness, including indebtedness of equity method investments, which was repaid with proceeds from the sale. After repayment of the mortgage indebtedness and prepayment penalties, repayment of our Senior Term Loan (refer to Note 10 to the consolidated financial statements), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, we retained net cash proceeds of $1.2 billion from the transaction. Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022. Our net lease assets associated with our Ground Lease businesses were not included in the sale.
In April 2022, we completed separate, privately-negotiated transactions with holders of $194 million aggregate principal amount of our 3.125% Convertible Notes (refer to Note 10 to the consolidated financial statements) in which the noteholders exchanged their convertible notes with us for 13.75 million newly issued shares of our common stock and aggregate cash payments of $14 million. The 3.125% Convertible Senior Notes received by us were retired. We recognized a net increase in shareholders’ equity of $180.6 million inclusive of a $118.1 million loss on extinguishment of debt in connection with these transactions. The exchanges will strengthen our balance sheet and allow us to save interest expense, preserve cash on hand, reduce our outstanding debt and mitigate volatility on the trading price of our common stock as we approach the maturity of the remaining outstanding 3.125% Convertible Notes in September 2022.
Portfolio Overview
As of June 30, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):
Property/Collateral
Land &
% of
Types
Corporate
Ground Leases
1,503,347
70.1
Land and Development
222,391
10.4
Multifamily
77,026
39,838
116,864
5.4
Hotel
46,498
62,881
109,379
5.1
Retail
62,062
12,620
8,340
83,022
3.9
Condominium
8,871
29,277
38,449
1.8
Office
9,761
0.5
Other Property Types
14,436
24,061
61,751
2.9
227,472
130,076
2,144,964
100.0
Percentage of Total
70%
11%
6%
12%
1%
100%
Geographic Region
Northeast
598,402
105,076
77,318
157,644
938,440
43.8
West
354,842
49,627
32,013
8,960
445,442
20.8
Mid-Atlantic
217,385
6,438
93,114
316,937
14.8
Southeast
156,524
29,913
186,727
8.7
Southwest
136,858
6.4
Central
39,336
14,307
62,514
Various
33,985
58,046
2.7
Net Lease
Prior to the Net Lease Sale, our net lease business created stable cash flows through long-term net leases primarily to single tenants on our properties. We targeted mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combined our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance).
After the Net Lease Sale, the net lease segment includes our Ground Lease investments made primarily through SAFE and our Ground Lease adjacent businesses.
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As of June 30, 2022, our net lease portfolio consisted primarily of our equity method investments in SAFE and the Ground Lease Plus Fund. The table below provides certain statistics for our net lease portfolio.
Wholly-Owned
Ownership %
64.7
53.0
Book value (millions)(1)
1,406
% Leased
Weighted average lease term (years)(2)
98.7
91.2
104.8
Weighted average yield(3)
5.2
4.8
5.7
SAFE—SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive long-term risk-adjusted returns from its investments. We believe its business has characteristics comparable to a high-grade fixed income investment business, but with certain unique advantages. Relative to alternative fixed income investments generally, SAFE’s Ground Leases typically benefit from built-in growth derived from contractual rent escalators that may compound over the duration of the lease. These rent escalators may be based on fixed increases, a CPI lookback or a combination thereof, and may also include a participation in the gross revenues of the property. SAFE also has the opportunity to realize value from its right to regain possession of the buildings and other improvements on its land upon expiration or earlier termination of the lease at no additional cost. We believe that these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments. As of June 30, 2022, we owned approximately 64.7% of SAFE’s common stock outstanding.
We account for our investment in SAFE as an equity method investment (refer to Note 8 to the consolidated financial statements). We act as SAFE’s external manager pursuant to a management agreement, and we have an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that we will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless we have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
Ground Lease Plus Fund—The Company formed and manages an investment fund that targets the origination and acquisition of Ground Leases for commercial real estate projects that are in a pre-development phase (the “Ground Lease Plus Fund”). We own a 53% noncontrolling interest in the Ground Lease Plus Fund. We do not have a controlling interest in the Ground Lease Plus Fund due to the substantive participating rights of our partner and account for this investment as an equity method investment. In addition, the Ground Lease Plus Fund has first look rights on qualifying pre-development projects through December 2023.
Real Estate Finance
Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. Our real estate finance portfolio consists of leasehold loans to Ground Lease tenants, including tenants of SAFE, senior mortgage loans that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets, and corporate/partnership loans, which represent mezzanine or subordinated loans to entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. Our real estate finance portfolio includes Ground Leases, loans on stabilized and
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transitional properties and ground-up construction projects. In addition, we also own loans through equity method investments and have preferred equity investments and debt securities classified as other lending investments.
The tables below shows certain statistics for our real estate finance portfolio ($ in thousands):
Allowance for
Gross
Loan Losses as
Number
Book
for Loan
Net Book
a % of Gross
of Loans
Losses
Book Value
Performing loans(1)
(1,310)
87,465
42.8%
1.5%
Non-performing loans
29.2%
1.2%
(1,015)
57,239
28.0%
1.7%
100.0%
Performing loans
(1,888)
151,155
45.4%
17.7%
1.0%
(2,305)
122,625
36.8%
1.8%
1.4%
Performing Loans—The table below summarizes our performing loans exclusive of allowances ($ in thousands):
Weighted average LTV
57%
60%
Yield - year to date(1)
7.1%
8.4%
Non-Performing Loans—We designate loans as non-performing at such time as: (1) interest payments become 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of June 30, 2022 and December 31, 2021, we had one non-performing loan with a carrying value of $59.5 million and $59.1 million, respectively. We expect that our level of non-performing loans will fluctuate from period to period.
Allowance for Loan Losses—The allowance for loan losses was $3.0 million as of June 30, 2022, or 1.5% of total loans and other lending investments, compared to $4.8 million, or 1.4%, as of December 31, 2021. We expect that our level of Expected Losses will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and Expected Losses requires the use of significant judgment. We currently believe there is adequate collateral and allowances to support the carrying values of the loans and other lending investments.
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The allowance for loan losses includes an asset-specific component and a formula-based component. An asset-specific allowance is established for an impaired loan when the estimated fair value of the loan’s collateral less costs to sell is lower than the carrying value of the loan. As of June 30, 2022 and December 31, 2021, asset-specific allowances were $0.7 million and $0.6 million, respectively.
We estimate the formula-based component based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market. In addition, we use third-party market data that includes forecasted economic trends, including unemployment rates.
The Expected Loss decreased to $2.3 million, or 1.6%, of performing loans and other lending investments as of June 30, 2022, compared to $4.2 million, or 1.5%, of performing loans and other lending investments as of December 31, 2021. The decrease was due primarily to the repayment of loans during the six months ended June 30, 2022.
Operating Properties
Our operating properties represent a pool of assets across a broad range of geographies and property types including hotel, multifamily, retail, condominium and entertainment/leisure properties. As of June 30, 2022, the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled $129.9 million.
The following table presents a land and development portfolio rollforward for the six months ended June 30, 2022.
Land and Development Portfolio Rollforward
(in millions)
Asbury Ocean
Club and
Asbury Park
Magnolia
All
Waterfront
Green
Others
Segment
Beginning balance(1)
137.8
95.8
53.2
286.8
Asset sales(2)
(27.1)
(8.9)
(0.5)
(36.5)
Capital expenditures
3.4
7.3
10.7
(1.2)
(0.1)
(1.3)
Ending balance(1)
114.1
93.0
52.6
259.7
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Results of Operations for the Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
$ Change
(3,863)
219
6,978
(7,915)
Total revenue
(6,191)
(4,492)
1,699
(6,708)
(235)
(35,573)
24,736
(680)
1,312
(18,173)
(96)
8,295
619
(25,315)
Net loss
(121,078)
Revenue—Operating lease income, which primarily includes income from commercial operating properties, decreased to $3.2 million during the three months ended June 30, 2022 from $4.8 million for the same period in 2021. The decrease was primarily due to the sale of assets, partially offset by an increase in rent at certain of our properties.
Interest income decreased to $4.2 million during the three months ended June 30, 2022 from $8.1 million for the same period in 2021. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $242 million for the three months ended June 30, 2022 and $371 million for the three months ended June 30, 2021. The weighted average yield on our performing loans and other lending investments was 7.0% and 8.4%, respectively, for the three months ended June 30, 2022 and 2021.
Interest income from sales-type leases increased to $0.4 million for the three months ended June 30, 2022 from $0.2 million for the same period in 2021. The increase resulted from the acquisition of a Ground Lease that was classified as a sales-type lease (refer to Note 5 to the consolidated financial statements).
Other income increased to $15.9 million during the three months ended June 30, 2022 from $8.9 million for the same period in 2021. Other income during the three months ended June 30, 2022 consisted primarily of income from our hotel properties, management fees and other ancillary income from our land and development projects and operating properties. Other income during the three months ended June 30, 2021 consisted primarily of a management fees, income from our hotel properties, other ancillary income from our land and development projects and loan portfolio and interest income on our cash.
Land development revenue and cost of sales—During the three months ended June 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $24.4 million which had associated cost of sales of $24.1 million. During the three months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $32.3 million which had associated cost of sales of $30.8 million.
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Costs and expenses—Interest expense decreased to $24.1 million during the three months ended June 30, 2022 from $28.6 million for the same period in 2021. Our weighted average cost of debt was 5.0% for the three months ended June 30, 2022 compared to 4.4% for the three months ended June 30, 2021. The average balance of our outstanding debt was $1.92 billion for the three months ended June 30, 2022 and $2.58 billion for the same period in 2021.
Real estate expense increased to $13.0 million during the three months ended June 30, 2022 from $11.3 million for the same period in 2021. The increase was primarily due to an increase in expenses at certain of our hotel operating properties that have increased operations from the prior year, which was partially offset by asset sales.
Depreciation and amortization decreased to $1.3 million during the three months ended June 30, 2022 from $1.6 million for the same period in 2021.
General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. We recognized a net recovery of general and administrative expenses of ($5.2) million during the three months ended June 30, 2022 versus $30.4 million of expense for the same period in 2021. The decrease in 2022 was due primarily to a $35.5 million decrease in performance-based compensation. Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 14 to the consolidated financial statements for more information on the iPIP Plans). In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.
The provision for loan losses was $22.6 million for the three months ended June 30, 2022 as compared to a recovery of loan losses of $2.2 million for the same period in 2021. The provision for loan losses for the three months ended June 30, 2022 resulted primarily from a $25.0 million provision on our held-to-maturity security, which is now recorded at its expected repayment proceeds. The recovery of loan losses for the three months ended June 30, 2021 resulted from the reversal of Expected Loss allowances on loans that repaid in full in the second quarter 2021 and from an improving macroeconomic forecast on commercial real estate markets since March 31, 2021.
The provision for losses on net investment in leases for the three months ended June 30, 2022 resulted from the macroeconomic forecast on commercial real estate markets. The provision for losses on net investment in leases for the three months ended June 30, 2021 resulted from the acquisition of two Ground Leases in June 2021 (refer to Note 5 to the consolidated financial statements).
During the three months ended June 30, 2022, we recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received.
Other expense was $1.5 million during the three months ended June 30, 2022 and $0.2 million for the same period in 2021. The increase in other expenses for the three months ended June 30, 2022 was due primarily to legal costs.
Income from sales of real estate—During the three months ended June 30, 2021, we recorded $0.1 million of income from sales of real estate from the sale of residential condominiums.
Loss on early extinguishment of debt, net—During the three months ended June 30, 2022, we incurred losses on early extinguishment of debt of $116.6 million resulting from the redemption of our unsecured notes (refer to Note 10 to the consolidated financial statements).
Earnings from equity method investments—Earnings from equity method investments increased to $19.4 million during the three months ended June 30, 2022 from $11.1 million for the same period in 2021. During the three months ended June 30, 2022, we recognized $14.7 million of income from our equity method investment in SAFE, $4.3 million primarily from the settlement of our interest in a venture and $0.4 million of net aggregate income from our remaining equity method investments. During the three months ended June 30, 2021, we recognized $9.7 million of income from our equity method investment in SAFE and $1.4 million of net aggregate income from our remaining equity method investments.
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Income tax (expense) benefit—Income tax expense of $0.6 million was recorded for the three months ended June 30, 2021 and related primarily to a reduction in the amount of expected refund of alternative minimum taxes due us resulting from amended tax returns from prior periods net operating loss carrybacks.
Net income from discontinued operations—In March 2022, we closed on the sale of the majority of our net lease properties owned directly and through ventures. Our net lease assets were comprised of office, entertainment and industrial properties located in the United States. Our net lease assets associated with our Ground Lease businesses were not included in the sale. Net income from discontinued operations represents the operating results from the net lease assets that are not associated with our Ground Lease businesses (refer to Note 3 to the consolidated financial statements - Net Lease Sale and Discontinued Operations).
Results of Operations for the Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
(3,432)
(8,705)
575
2,604
(25,264)
(34,222)
(4,058)
3,098
(21,535)
(1,279)
(55,637)
28,513
(400)
1,511
1,990
(47,797)
(216)
21,559
Income tax benefit (expense)
(82)
749,888
666,733
Revenue—Operating lease income, which primarily includes income from commercial operating properties, decreased to $6.3 million during the six months ended June 30, 2022 from $9.7 million for the same period in 2021. The decrease was primarily due to the sale of assets, partially offset by an increase in rent at certain of our properties.
Interest income decreased to $9.2 million during the six months ended June 30, 2022 from $17.9 million for the same period in 2021. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $259 million for the six months ended June 30, 2022 and $445 million for the six months ended June 30, 2021. The weighted average yield on our performing loans and other lending investments was 7.1% and 8.0%, respectively, for the six months ended June 30, 2022 and 2021.
Interest income from sales-type leases increased to $0.7 million for the six months ended June 30, 2022 from $0.2 million for the same period in 2021. The increase resulted from the acquisition of a Ground Lease that was classified as a sales-type lease (refer to Note 5 to the consolidated financial statements).
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Other income increased to $24.5 million during the six months ended June 30, 2022 from $21.9 million for the same period in 2021. Other income during the six months ended June 30, 2022 consisted primarily of management fees, income from our hotel properties and other ancillary income from our land and development projects and operating properties. Other income during the six months ended June 30, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties, lease termination fees and interest income on our cash.
Land development revenue and cost of sales—During the six months ended June 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $39.3 million which had associated cost of sales of $38.6 million. During the six months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $64.6 million which had associated cost of sales of $60.1 million.
Costs and expenses—Interest expense decreased to $53.4 million during the six months ended June 30, 2022 from $57.5 million for the same period in 2021. Our weighted average cost of debt was 4.9% for the six months ended June 30, 2022 compared to 4.4% for the six months ended June 30, 2021. The average balance of our outstanding debt was $2.20 billion for the six months ended June 30, 2022 and $2.60 billion for the same period in 2021.
Real estate expense increased to $23.1 million during the six months ended June 30, 2022 from $20.0 million for the same period in 2021. The increase was primarily due to an increase in expenses at certain of our hotel operating properties that have increased operations from the prior year, which was partially offset by asset sales.
Depreciation and amortization decreased to $2.7 million during the six months ended June 30, 2022 from $4.0 million for the same period in 2021.
General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. We recognized a net recovery of general and administrative expenses of ($3.9) million during the three months ended June 30, 2022 versus $51.8 million of expense for the same period in 2021. The decrease in 2022 was due primarily to a $54.7 million decrease in performance-based compensation. Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 14 to the consolidated financial statements for more information on the iPIP Plans). In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.
The provision for loan losses was $22.7 million for the six months ended June 30, 2022 as compared to a recovery of loan losses of $5.8 million for the same period in 2021. The provision for loan losses for the six months ended June 30, 2022 resulted primarily from a $25.0 million provision on our held-to-maturity security, which is now recorded at its expected repayment proceeds. The recovery of loan losses for the six months ended June 30, 2021 resulted from the reversal of Expected Loss allowances on loans that repaid in full during the period and from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.
The provision for losses on net investment in leases for the six months ended June 30, 2022 resulted from the macroeconomic forecast on commercial real estate markets. The provision for losses on net investment in leases for the three months ended June 30, 2021 resulted from the acquisition of two Ground Leases in June 2021 (refer to Note 5 to the consolidated financial statements).
During the six months ended June 30, 2022, we recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received. During the six months ended June 30, 2021, we recorded an aggregate impairment of $0.3 million in connection with the sale of residential condominiums.
Other expense was $2.5 million during the six months ended June 30, 2022 and $0.5 million for the same period in 2021. The increase in other expenses for the six months ended June 30, 2022 was due primarily to legal costs.
Income from sales of real estate—During the six months ended June 30, 2022, we recorded $0.5 million of income from sales of real estate primarily from the sale of Ground Leases. During the six months ended June 30, 2021, we recorded $0.7 million of income from sales of real estate from the sale of residential condominiums.
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Loss on early extinguishment of debt, net—During the six months ended June 30, 2022, we incurred losses on early extinguishment of debt of $118.0 million resulting from the redemption of our unsecured notes (refer to Note 3 and Note 10 to the consolidated financial statements) and the repayment of our senior term loan in connection with our Net Lease Sale.
Earnings from equity method investments—Earnings from equity method investments increased to $44.4 million during the six months ended June 30, 2022 from $22.9 million for the same period in 2021. During the six months ended June 30, 2022, we recognized $31.7 million of income from our equity method investment in SAFE, $5.0 million primarily from the settlement of our interest in a venture and $7.7 million of net aggregate income from our remaining equity method investments. During the six months ended June 30, 2021, we recognized $21.1 million of income from our equity method investment in SAFE and $1.8 million of net aggregate income from our remaining equity method investments.
Income tax (expense) benefit—Income tax benefit of $0.1 million was recorded for the six months ended June 30, 2021 and related primarily to refunds due us for alternative minimum taxes paid in prior periods.
Adjusted Earnings
In 2019, we announced a new business strategy that would focus our management personnel and our investment resources primarily on scaling our Ground Lease platform. As part of this strategy, we accelerated the monetization of legacy assets and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business. Adjusted earnings is a non-GAAP metric management uses to assess our execution of this strategy and the performance of our operations.
Adjusted earnings is used internally as a supplemental performance measure adjusting for certain items to give management a view of income more directly derived from operating activities in the period in which they occur. Adjusted earnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, including our proportionate share of depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock (“Adjusted Earnings”).
Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations. Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with generally accepted accounting principles in the United States of America (“GAAP”)), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance. It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies.
Add: Depreciation and amortization
3,900
16,712
7,901
34,341
Add: Stock-based compensation
(17,923)
14,791
Add: Non-cash portion of loss on early extinguishment of debt
118,303
123,413
Adjusted earnings (loss) allocable to common shareholders
(34,205)
11,960
573,334
34,692
Liquidity and Capital Resources
As of June 30, 2022, we had unrestricted cash of $1.4 billion and $350.0 million of borrowing capacity available under the Revolving Credit Facility. Our primary cash uses over the next 12 months are expected to be funding of investments in our Ground Lease and Ground Lease adjacent businesses, repayment of debt obligations (refer to Note 10 to the consolidated financial statements), capital expenditures on legacy assets, distributions to shareholders through dividends and share repurchases and funding ongoing business operations, including operating lease payments (refer to Note 11 to the consolidated financial statements). The amount we actually invest will depend on the closing of asset sales, the continuing impact of the COVID-19 pandemic, inflation, interest rate increases, market volatility and other macroeconomic factors on our business.
In April 2022, we completed separate, privately-negotiated transactions with holders of $194 million aggregate principal amount of our 3.125% convertible notes (refer to Note 10 to the consolidated financial statements) in which the noteholders exchanged their convertible notes with us for 13.75 million newly issued shares of our common stock and aggregate cash payments of $14 million. Our remaining $94 million aggregate principal amount of our 3.125% convertible notes mature in September 2022, and we must repay them in a combination of cash and shares of our common stock. We also had approximately $161.1 million of maximum unfunded commitments associated with our investments as of June 30, 2022, of which we expect to fund the majority of over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see “Unfunded Commitments” below). We also have approximately $108.3 million principal amount of scheduled real estate finance maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers.
We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future. Our capital sources to meet such cash requirements are expected to include cash on hand, Revolving Credit Facility borrowings, income from our portfolio, loan repayments from borrowers and proceeds from asset sales. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions.
We also have amounts due under our liability-classified and equity-classified iPIP Plans. We currently estimate the total amount due under our iPIP Plans to be $133 million, assuming SAFE is valued at a price of $35.37 per share and our other assets perform with current underwriting expectations. Of this amount, $60 million has been accrued in our financial
53
statements (refer to Note 14 to the consolidated financial statements). Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock; provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock. Additional information on our iPIP Plans can be found in our 2021 Annual Report and our 2021 Proxy Statement, both of which are available on our website.
The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the six months ended June 30, 2022 and 2021 ($ in thousands):
The increase in cash flows provided by operating activities during 2022 was due primarily to an increase in distributions of earnings from other investments in 2022, which was partially offset by iPIP Plan payments and a decrease in the amount of deferred interest on loans collected in 2022 versus 2021. The increases in cash flows provided by investing activities and cash flows used in financing activities during 2022 was due primarily to the Net Lease Sale (refer to Note 3 to the consolidated financial statements).
Debt Covenants—Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.3x and a covenant restricting certain incurrences of debt based on a fixed charge coverage ratio. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.
The Revolving Credit Facility contains certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. The Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. Under the Revolving Credit Facility we are permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend. We declared common stock dividends of $19.2 million, or $0.25 per share, for the six months ended June 30, 2022.
Derivatives—Our use of derivative financial instruments, if necessary, has primarily been limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes in foreign currencies. Refer to Note 12 to the consolidated financial statements.
Unfunded Commitments—We generally fund construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we have
committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of June 30, 2022, the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):
Stock Repurchase Program—We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the six months ended June 30, 2021, we repurchased 1.8 million shares of our outstanding common stock for $32.4 million, for an average cost of $17.57 per share. We are generally authorized to repurchase up to $50.0 million in shares of our common stock and in February 2022, our board of directors authorized an increase to the stock repurchase program to $50.0 million. As of June 30, 2022, we had remaining authorization to repurchase up to $50.0 million of common stock under our stock repurchase program.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2021 Annual Report.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Our operating results will depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the financial markets will affect the spread between our floating rate assets and liabilities subject to the net amount of floating rate assets/liabilities and the impact of interest rate floors and caps. Any significant compression of the spreads between interest-earning assets and interest-bearing liabilities could have a material adverse effect on us.
In the event of a significant rising interest rate environment or economic downturn, defaults could increase and cause us to incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults would likely have a material adverse effect on the spreads between interest-earning assets and interest-bearing liabilities. In addition, an increase in interest rates could, among other things, reduce the value of our fixed-rate interest-bearing assets and our ability to realize gains from the sale of such assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. We monitor the spreads between our interest-earning assets and interest-bearing liabilities and may implement hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps, interest rate caps and other interest rate-related derivative contracts. Such strategies are designed to reduce our exposure, on specific transactions or on a portfolio basis, to changes in cash flows as a result of interest rate movements in the market. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in our credit risk or the credit risk of our borrowers.
While a REIT may utilize derivative instruments to hedge interest rate risk on its liabilities incurred to acquire or carry real estate assets without generating non-qualifying income, use of derivatives for other purposes will generate non-qualified income for REIT income test purposes. This includes hedging asset related risks such as credit and interest rate exposure on our loan assets. As a result, our ability to hedge these types of risks is limited. There can be no assurance that our profitability will not be materially adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in annual net income, assuming no change in our interest earning assets or interest bearing liabilities, should interest rates decrease or increase by 10, 50 or 100 basis points, assuming no change in the shape of the yield curve (i.e., relative interest rates). The base interest rate scenario assumes the one-month LIBOR rate of 1.79% as of June 30, 2022. Actual results could differ significantly from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
Change in Interest Rates
Net Income(1)
-100 Basis Points
(13,058)
-50 Basis Points
(6,529)
-10 Basis Points
(1,306)
Base Interest Rate
+10 Basis Points
1,306
+50 Basis Points
6,628
+100 Basis Points
13,523
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has formed a disclosure committee that is responsible for considering the materiality of information and determining the disclosure obligations of the Company on a timely basis. The disclosure committee reports directly to the Company’s Chief Executive Officer and Chief Financial Officer.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the disclosure committee and other members of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) or Rule 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes in the Company’s internal control over financial reporting during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company’s business as a finance and investment company focused on the commercial real estate industry, including foreclosure-related proceedings. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated financial statements.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in our 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the three months ended June 30, 2022. As of June 30, 2022, we had remaining authorization to repurchase up to $50.0 million of common stock under our stock repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
In July and August 2022, the Company completed a series of privately-negotiated exchange transactions with holders of approximately $47.9 million aggregate principal amount of the Company's 3.125% Convertible Notes due 2022 in which the noteholders exchanged their convertible notes with the Company for an aggregate of approximately 2.0 million newly issued shares of the Company's common stock and aggregate cash payments of approximately $24.3 million.
Item 6. Exhibits
INDEX TO EXHIBITS
ExhibitNumber
Document Description
31.0
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
32.0
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act.
101*
The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2022 is formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021, (ii) the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2022 and 2021, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2022 and 2021, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended June 30, 2022 and 2021, (v) the Consolidated Statements of Cash Flows (unaudited) for six months ended June 30, 2022 and 2021 and (vi) the Notes to the Consolidated Financial Statements (unaudited).
Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)
*
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iStar Inc.Registrant
Date:
August 4, 2022
/s/ JAY SUGARMAN
Jay Sugarman
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
/s/ BRETT ASNAS
Brett Asnas
Chief Financial Officer
(principal financial officer)
RETT
/s/ GARETT ROSENBLUM
Garett Rosenblum
Chief Accounting Officer