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
September 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 November 1, 2022, there were 86,697,347 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 September 30, 2022 and December 31, 2021
2
Consolidated Statements of Operations (unaudited)—For the three and nine months ended September 30, 2022 and 2021
3
Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three and nine months ended September 30, 2022 and 2021
4
Consolidated Statements of Changes in Equity (unaudited)—For the three and nine months ended September 30, 2022 and 2021
5
Consolidated Statements of Cash Flows (unaudited)—For the nine months ended September 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
46
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
59
Item 4.
Controls and Procedures
60
PART II
Other Information
61
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
63
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
64
SIGNATURES
65
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except per share data)(1)
(unaudited)
As of
September 30,
December 31,
2022
2021
ASSETS
Real estate
Real estate, at cost
$
111,719
113,510
Less: accumulated depreciation
(22,575)
(21,360)
Real estate, net
89,144
92,150
Real estate available and held for sale
1,283
301
Total real estate
90,427
92,451
Real estate and other assets available and held for sale and classified as discontinued operations(2)
11,925
2,299,711
Net investment in leases ($0 of allowances as of December 31, 2021)
—
43,215
Land and development, net
248,246
286,810
Loans receivable and other lending investments, net ($2,890 and $4,769 of allowances as of September 30, 2022 and December 31, 2021, respectively)
176,623
332,844
Loans receivable held for sale
Other investments
1,605,268
1,297,281
Cash and cash equivalents
1,335,722
339,601
Accrued interest and operating lease income receivable, net
1,035
1,813
Deferred operating lease income receivable, net
2,842
3,159
Deferred expenses and other assets, net
50,044
100,434
Total assets
3,522,132
4,840,534
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities
140,876
236,732
Liabilities associated with real estate held for sale and classified as discontinued operations(2)
2,918
968,419
Liabilities associated with properties held for sale
Debt obligations, net
1,680,708
2,572,174
Total liabilities
1,824,502
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, 86,695 and 68,870 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
87
69
Additional paid-in capital
3,457,961
3,100,015
Accumulated deficit
(1,772,843)
(2,227,213)
Accumulated other comprehensive loss
(4,898)
(21,587)
Total iStar Inc. shareholders' equity
1,680,319
851,296
Noncontrolling interests
17,311
211,910
Total equity
1,697,630
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 September 30,
For the Nine Months Ended September 30,
Revenues:
Operating lease income
3,424
3,732
9,715
13,456
Interest income
2,093
6,972
11,262
24,846
Interest income from sales-type leases
129
526
861
683
Other income
27,024
39,033
51,545
60,950
Land development revenue
15,087
93,369
54,390
157,936
Total revenues
47,757
143,632
127,773
257,871
Costs and expenses:
Interest expense
22,664
28,695
76,056
86,145
Real estate expense
16,204
13,369
39,337
33,404
Land development cost of sales
16,778
87,380
55,369
147,507
Depreciation and amortization
1,290
1,742
3,985
5,715
General and administrative
14,210
17,121
10,406
68,954
Provision for (recovery of) loan losses
(157)
(1,610)
22,556
(7,411)
Provision for (recovery of) losses on net investment in leases
(380)
(315)
465
Impairment of assets
421
1,768
679
Other expense
4,171
894
6,624
1,358
Total costs and expenses
74,780
147,697
216,101
336,816
Income from sales of real estate
951
25,611
1,443
26,319
Income (loss) from operations before earnings from equity method investments and other items
(26,072)
21,546
(86,885)
(52,626)
Loss on early extinguishment of debt, net
(13,209)
(131,200)
Earnings from equity method investments
57,797
87,795
102,222
110,661
Net income (loss) from continuing operations before income taxes
18,516
109,341
(115,863)
58,035
Income tax (expense) benefit
(564)
39
(567)
117
Net income (loss) from continuing operations
17,952
109,380
(116,430)
58,152
Net income from discontinued operations(1)
21,614
797,688
69,415
Net income
130,994
681,258
127,567
Net (income) loss from continuing operations attributable to noncontrolling interests
53
(10)
(46)
55
Net (income) from discontinued operations attributable to noncontrolling interests(1)
(3,254)
(179,089)
(8,092)
Net income attributable to iStar Inc.
18,005
127,730
502,123
119,530
Preferred dividends
(5,874)
(17,622)
Net income allocable to common shareholders
12,131
121,856
484,501
101,908
Per common share data:
Net income (loss) allocable to common shareholders
Basic
0.14
1.71
6.16
1.40
Diluted
1.51
1.30
Net income (loss) from continuing operations and allocable to common shareholders:
1.45
(1.70)
0.56
1.28
0.52
Net income from discontinued operations and allocable to common shareholders:
0.26
7.86
0.84
0.23
0.78
Weighted average number of common shares:
85,458
71,299
78,706
72,675
85,867
80,487
78,402
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income:
Reclassification of losses on cash flow hedges into earnings upon realization(1)
562
2,683
1,763
7,507
Reclassification of losses on available-for-sale securities
386
Unrealized losses on available-for-sale securities
(539)
(4,623)
(913)
Unrealized gains on cash flow hedges
12,026
273
19,163
11,483
Other comprehensive income
12,974
2,417
16,689
18,077
Comprehensive income
30,926
133,411
697,947
145,644
Comprehensive (income) attributable to noncontrolling interests(2)
(4,207)
(179,135)
(11,951)
Comprehensive income attributable to iStar Inc.
30,979
129,204
518,812
133,693
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 June 30, 2022
84
3,406,422
(1,774,069)
(17,872)
16,287
1,630,864
Dividends declared—preferred
Dividends declared—common ($0.125 per share)
(10,905)
Issuance of stock/restricted stock unit amortization, net(2)
1,262
1,077
2,339
Issuance of common stock in connection with 3.125% convertible notes(3)
50,277
50,280
Net income (loss)
(53)
Change in accumulated other comprehensive income (loss)
Balance as of September 30, 2022
Balance as of June 30, 2021
72
3,185,748
(2,338,454)
(35,824)
197,152
1,008,706
(8,954)
1,158
1,107
2,265
3,264
1,474
943
Repurchase of stock
(2)
(59,505)
(59,507)
Contributions from noncontrolling interests
169
Distributions to noncontrolling interests
(3,917)
Change to noncontrolling interest
(74)
Balance as of September 30, 2021
70
3,127,401
(2,225,552)
(34,350)
198,644
1,066,225
Balance as of December 31, 2021
Dividends declared—common ($0.375 per share)
(30,131)
1
10,148
3,504
13,653
17
347,798
347,815
179,135
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 ($0.36 per share)
(26,338)
4,929
2,645
7,574
8,037
18,330
3,913
22,243
(4)
(91,859)
(91,863)
1,026
(335)
(10,317)
(10,652)
6
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash flows from operating activities:
(7,613)
Provision for losses on net investment in leases
(1,735)
3,260
2,965
44,971
Non-cash interest income from sales-type leases
(1,748)
(22,243)
Stock-based compensation
(30,724)
23,300
Amortization of discounts/premiums and deferred financing costs on debt obligations, net
7,362
5,920
Amortization of discounts/premiums and deferred interest on loans, net
(6,615)
(11,730)
Deferred interest on loans received
4,738
24,394
(229,351)
(114,675)
Distributions from operations of other investments
149,741
37,433
Deferred operating lease income
(2,169)
(7,874)
(685,180)
(28,433)
Land development revenue in excess of cost of sales
979
(10,429)
172,608
Other operating activities, net
(12,846)
(14,031)
Changes in assets and liabilities:
Origination and fundings of loans receivable held for sale
(42,000)
Changes in accrued interest and operating lease income receivable
2,552
5,259
Changes in deferred expenses and other assets, net
(15,308)
(9,186)
Changes in accounts payable, accrued expenses and other liabilities
(49,725)
(6,601)
Cash flows provided by (used in) operating activities
15,373
(4,741)
Cash flows from investing activities:
Originations and fundings of loans receivable, net
(5,831)
(71,921)
Capital expenditures on real estate assets
(1,090)
(5,835)
Capital expenditures on land and development assets
(15,993)
(15,603)
Acquisitions of real estate, net investments in leases and land assets
(36,730)
Repayments of and principal collections on loans receivable and other lending investments, net
90,615
226,065
Net proceeds from sales of loans receivable
145,583
122,609
Net proceeds from sales of real estate
1,982,254
125,666
Net proceeds from sales of land and development assets
51,580
154,094
Net proceeds from sales of net investment in leases
608,238
14,910
Net proceeds from sales of other investments
3,000
Distributions from other investments
161,275
34,926
Contributions to and acquisition of interest in other investments
(273,206)
(171,005)
Other investing activities, net
(62)
(1,184)
Cash flows provided by investing activities
2,706,633
373,722
Cash flows from financing activities:
Borrowings from debt obligations
50,000
25,000
Repayments and repurchases of debt obligations
(1,154,033)
(44,534)
Purchase of marketable securities in connection with the defeasance of mortgage notes payable
(252,571)
Preferred dividends paid
Common dividends paid
(30,224)
(26,149)
(88,946)
Payments for deferred financing costs
(75)
Payments for withholding taxes upon vesting of stock-based compensation
(10,567)
(2,210)
233
(351,005)
Payments for debt prepayment or extinguishment costs
(16,676)
Cash flows used in financing activities
(1,774,805)
(164,620)
Effect of exchange rate changes on cash
(100)
(126)
Changes in cash, cash equivalents and restricted cash
947,101
204,235
Cash, cash equivalents and restricted cash at beginning of period
393,996
150,566
Cash, cash equivalents and restricted cash at end of period
1,341,097
354,801
Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows
298,886
Restricted cash included in deferred expenses and other assets, net
5,375
55,915
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)
Accounts payable for capital expenditures on land and development and real estate assets
2,258
1,125
Contributions to other investments
2,000
34,467
Defeasance of mortgage notes payable
230,452
Marketable securities transferred in connection with the defeasance of mortgage notes payable
252,571
Settlement of senior unsecured notes (refer to Note 10)
218,945
Accrued repurchase of stock
3,117
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.
Merger with Safehold Inc.—On August 10, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Safehold Inc. (“SAFE”). The Merger Agreement provides that, subject to the terms and conditions thereof, SAFE will merge with and into the Company (the “Merger”). The surviving company of the Merger will be named Safehold Inc. (“New SAFE”) and its shares of common stock will trade on the New York Stock Exchange under the symbol “SAFE.” The Company expects that the Merger will close in the first quarter or second quarter of 2023.
As discussed further below, shortly before the closing of the Merger, the Company intends to separate its remaining legacy non-ground lease assets and businesses into a separate public company (“SpinCo”) by distributing to the Company’s stockholders, on a pro rata basis, the issued and outstanding equity interests of SpinCo (the “Spin-Off”).
Conditions to the Merger
The consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including: (i) the approval of the Company’s stockholders, (ii) the approval of SAFE’s stockholders, (iii) completion of the Spin-Off, (iv) the approval of the shares of STAR Common Stock to be issued in the Merger for listing on the NYSE, (v) the effectiveness of a registration statement on Form S-4 registering the STAR Common Stock to be issued in the Merger, (vi) the absence of any temporary restraining order, injunction or other order of any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the reverse stock split or the Merger, (vii) generation of certain cash proceeds, (viii) the receipt of certain tax opinions by the Company and SAFE that the Merger will qualify as a reorganization under the Internal Revenue Code and that the Company and SAFE each qualifies as a REIT for federal income tax purposes, (ix) the accuracy of certain representations and warranties of the Company and SAFE contained in the Merger Agreement and the compliance by the parties with the covenants contained in the Merger Agreement (subject to customary materiality qualifiers), and (x) other conditions specified in the Merger Agreement.
Conditions to the Spin-Off
Completion of the Spin-Off is subject to: (i) completion of the documents for the Spin-Off related financings; (ii) the satisfaction or waiver of relevant conditions to the consummation of the Merger; (iii) effectiveness of a registration statement on Securities and Exchange Commission (“SEC”) Form 10; (iv) the absence of an injunction or law preventing the consummation of the Spin-Off, the distribution and the transactions related thereto; and (v) other customary closing conditions.
Other Merger related transactions
The Company has entered into an agreement (the “MSD Stock Purchase Agreement”) with MSD Partners, L.P. (“MSD Partners”) and SAFE under which the Company has agreed to sell and MSD Partners has agreed to buy 5,405,406 shares of the SAFE’s common stock owned by the Company for $200.0 million (the “MSD Stock Purchase”) shortly before the closing of the Merger. If the Merger Agreement is terminated for any reason, the parties’ obligations to
Notes to Consolidated Financial Statements (Continued)
consummate the purchase and sale will also terminate. In addition to customary closing conditions, MSD Partners’ obligations to purchase SAFE’s common stock owned by the Company are subject to the condition that the closing of the MSD Caret Purchase (as defined below) will take place substantially concurrently with the closing of the MSD Stock Purchase. Upon closing of the transaction, MSD Partners will have a right to designate an observer to the board of directors of New SAFE, a preemptive right on future equity issuances (subject to certain exceptions) and registration rights. MSD Partners will be subject to a customary standstill and certain restrictions on sales of its New SAFE Common Stock.
MSD Partners has also subscribed to purchase 100,000 Caret units from SAFE for an aggregate purchase price of $20.0 million (the “MSD Caret Purchase”), conditioned on the closing of the Spin-Off and the Merger. MSD Partners’ obligations to purchase the Caret units are also subject to the closing of the MSD Stock Purchase and the implementation by SAFE of certain changes to its Caret program.
SpinCo will be capitalized in part with an 8.0%, four-year term loan from New SAFE having an initial principal amount of $100.0 million or such other amount as the parties may agree prior to the closing of the Merger, as well as up to $140.0 million of bank debt from Morgan Stanley Bank, N.A. which will be secured by $400 million in shares of SAFE common stock.
New SAFE will enter into a management agreement with SpinCo, under which it will continue to operate and pursue the orderly monetization of SpinCo’s assets. SpinCo will pay to New SAFE an annual management fee of $25.0 million in year one, $15.0 million in year two, $10.0 million in year three and $5.0 million in year four and 2.0% of the gross book value of SpinCo's assets, excluding shares of SAFE common stock, for each annual term thereafter. New SAFE and SpinCo will also enter into a governance agreement that will place certain restrictions on the transfer and voting of the shares of New SAFE owned by SpinCo, and a registration rights agreement under which New SAFE will agree to register such shares for resale in accordance with applicable securities laws.
The Company and SAFE have entered into a voting agreement pursuant to which the Company has agreed vote its shares representing 41.9% of the outstanding SAFE Common Stock to approve the Merger and take certain other actions, including voting against any alternative acquisition proposal or other proposal which could reasonably be expected to materially delay, postpone or materially adversely affect the consummation of the transactions contemplated by the Merger Agreement. In accordance with the terms of the existing stockholders’ agreement between SAFE and the Company, the remainder of the SAFE Common Stock owned by the Company will be voted in the same manner and proportion as the votes cast by the remaining shareholders of SAFE. The voting agreement and the obligations thereunder terminate upon the termination of the Merger Agreement in accordance with its terms.
As noted above, the Merger and related transactions are subject to a number of conditions, several of which are outside the Company's control; therefore, there can be no assurance that the Merger and related transactions will occur within the time frame currently expected by the parties, or at all. The foregoing descriptions of the Merger and the Merger Agreement and the related transactions and agreements do not purport to be complete and are subject to, and qualified in their entirety by, the full text of such agreements. Please see the Company's filings with the Securities and Exchange Commission for additional information, including copies of such agreements.
The Company has covenanted to redeem all of its outstanding preferred stock at the liquidation preference per share plus accrued and unpaid dividends and to retire all of its remaining senior unsecured notes in connection with the Merger. The Company’s trust preferred securities will remain outstanding at New SAFE.
10
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 September 30, 2022 and
11
December 31, 2021. The following table presents the assets and liabilities of the Company’s consolidated VIEs as of September 30, 2022 and December 31, 2021 ($ in thousands):
December 31, 2021
93,940
93,477
(17,277)
(14,987)
76,663
78,490
Real estate and other assets available and held for sale and classified as discontinued operations
886,845
145,545
176,833
33,768
23,908
6,420
5,001
262,402
1,171,081
LIABILITIES
25,078
24,744
Liabilities associated with real estate held for sale and classified as discontinued operations
146
493,739
25,224
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 September 30, 2022, the Company’s maximum exposure to loss from these investments does not exceed the sum of the $55.3 million carrying value of the investments, which are classified in “Other investments” on the Company’s consolidated balance sheets, and $4.9 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 $702.0 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 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 September 30, 2022, $3.1 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 September 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 nine months ended September 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 nine months ended September 30, 2021, the Company recorded $0.4 million and $1.2 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 September 30, 2022, $2.0 million of “Real estate and other assets available and held for sale and classified as discontinued operations” was attributable to the Net Lease Venture II and represented proceeds from the Net Lease Sale that were not yet distributed to the Company as of September 30, 2022.
Discontinued Operations—The Company’s net lease assets and liabilities associated with the Net Lease Sale and the Company’s other two net lease assets are classified as “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021. For the three months ended September 30, 2021 and the nine months ended September 30, 2022 and 2021, the operations of such assets are classified in “Net income from discontinued operations” in the Company’s consolidated statements of operations.
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The following table presents the Company’s consolidated assets and liabilities recorded in “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021 ($ in thousands).
1,537,655
(271,183)
Total real estate, net
1,266,472
Net investment in leases
486,389
48,675
1,963
103,229
Finance lease right of use assets
150,099
491
2,997
63,156
9,471
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
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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 nine months ended September 30, 2022 and 2021 ($ in thousands):
40,660
35,596
123,925
885
2,728
9,052
8,803
26,212
1,162
4,292
3,599
51,853
49,576
156,464
Interest expense(1)
10,776
7,484
32,306
5,355
5,072
20,503
Depreciation and amortization(1)
13,114
39,256
54
(202)
446
(2,200)
Impairment of assets(2)
758
1,492
2,286
Other expense(3)
1,117
(5,669)
31,620
8,379
93,066
683,738
2,114
Income from discontinued operations before earnings from equity method investments and other items
20,233
724,935
65,512
1,414
127,129
4,014
(41,408)
Net income from discontinued operations before income taxes
21,647
810,656
69,526
Income tax expense
(33)
(12,968)
(111)
Net income from discontinued operations
Net (income) from discontinued operations attributable to noncontrolling interests
Net income from discontinued operations attributable to iStar Inc.
18,360
618,599
61,323
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The following table presents cash flows provided by operating activities and cash flows used in investing activities from discontinued operations for the nine months ended September 30, 2022 and 2021 ($ in thousands):
Cash flows provided by operating activities
116,738
70,936
Cash flows provided by (used in) investing activities
2,660,531
(12,145)
New Accounting Pronouncements—In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-02, Financial Instruments—Credit Losses: Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 was issued to eliminate troubled debt restructuring recognition and measurement guidance and required disclosure of gross write-offs by vintage for public business entities. ASU 2022-02 is effective for annual reporting periods beginning after December 15, 2022. Early adoption is permitted. Management is currently evaluating the impact of ASU 2022-02 and does not expect ASU 2022-02 to have a material impact on the Company’s consolidated financial statements.
Note 4—Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
Land, at cost
6,830
6,831
Buildings and improvements, at cost
104,889
106,679
Real estate available and held for sale(1)
Dispositions—Refer to Note 3 - Net Lease Sale and Discontinued Operations.
Impairments—During the nine months ended September 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 $0.9 million and $2.4 million for the three and nine months ended September 30, 2022, respectively, and $0.6 million and $2.0 million for the three and nine months ended September 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 December 31, 2021, the allowance for doubtful accounts related to real estate tenant receivables was $0.1 million. These amounts are included in “Accrued interest and operating lease income receivable, net” on the Company’s consolidated balance sheets.
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Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-cancelable operating leases, excluding customer reimbursements of expenses, in effect as of September 30, 2022, are as follows by year ($ in thousands):
Operating
Year
Properties
2022 (remaining three months)
1,649
2023
6,459
2024
6,348
2025
5,698
2026
5,200
Thereafter
4,413
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. The Company funded $34.6 million of its commitment and then, pursuant to an agreement with SAFE (refer to Note 8) and upon certain construction related conditions being met, sold the Ground Lease to SAFE in July 2022 for $36.0 million and recognized a gain of $1.0 million in “Income from sales of real estate” in its consolidated statements of operations.
The Company’s net investment in leases were comprised of the following as of September 30, 2022 and December 31, 2021 ($ in thousands):
Total undiscounted cash flows
524,712
Unguaranteed estimated residual value
42,000
Present value discount
(523,497)
Net investment in leases(1)
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 nine months ended September 30, 2022 and 2021 were as follows ($ in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
Allowance for losses on net investment in leases at beginning of period(1)
380
9,005
10,871
Provision for (recovery of) losses on net investment in leases (2)
131
Allowance for losses on net investment in leases at end of period(1)
9,136
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
259,732
297,621
(11,486)
(10,811)
Total land and development, net
Dispositions—During the nine months ended September 30, 2022 and 2021, the Company sold land parcels and residential lots and units and recognized land development revenue of $54.4 million and $157.9 million, respectively. During the nine months ended September 30, 2022 and 2021, the Company recognized land development cost of sales of $55.4 million and $147.5 million, respectively, from its land and development portfolio.
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Note 7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable and other lending investments by class ($ in thousands):
Construction loans
Senior mortgages
133,468
184,643
Corporate/Partnership loans
618
Subtotal - gross carrying value of construction loans(1)
185,261
Loans
14,965
Subordinate mortgages
13,107
12,457
Subtotal - gross carrying value of loans
27,422
Other lending investments
Held-to-maturity debt securities
32,938
96,838
Available-for-sale debt securities
28,092
Subtotal - other lending investments
124,930
Total gross carrying value of loans receivable and other lending investments
179,513
337,613
Allowance for loan losses
(2,890)
(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 September 30, 2022 and 2021 ($ in thousands):
General Allowance
Held to
Construction
Maturity Debt
Specific
Three Months Ended September 30, 2022
Securities
Allowance
Allowance for loan losses at beginning of period
450
1,014
708
3,033
Provision for (recovery of) loan losses(1)
(13)
(72)
(67)
(143)
Allowance for loan losses at end of period
848
378
947
717
2,890
Three Months Ended September 30, 2021
1,640
1,619
2,393
590
6,242
(149)
(865)
145
50
(819)
1,491
754
2,538
640
5,423
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Changes in the Company’s allowance for loan losses were as follows for the nine months ended September 30, 2022 and 2021 ($ in thousands):
Nine Months Ended September 30, 2022
1,213
676
2,304
576
4,769
(365)
(298)
23,643
141
23,121
Charge-offs
(25,000)
Nine Months Ended September 30, 2021
6,541
1,643
3,093
743
12,020
Recovery of loan losses(1)
(5,050)
(889)
(555)
(103)
(6,597)
The Company’s investment in loans and other lending investments and the associated allowance for loan losses were as follows as of September 30, 2022 and December 31, 2021 ($ in thousands):
Individually
Collectively
Evaluated for
Impairment(1)
Impairment
As of September 30, 2022
Construction loans(2)
61,159
72,309
Loans(2)
Less: Allowance for loan losses
(717)
(2,173)
60,442
116,181
As of December 31, 2021
59,640
125,621
Available-for-sale debt securities(3)
(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
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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 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 September 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
65,559
3.5
6,750
4.0
4.5
5.0
Subtotal(1)
Subtotal
85,416
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
146,575
139,968
199,608
153,043
212,683
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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)
60,409
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
Held-to-Maturity Securities
Debt securities(1)
Available-for-Sale Securities
Municipal debt securities
23,855
4,237
Debt securities
100,000
123,855
120,693
22
As of September 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 Nine Months Ended
Real estate equity investments
SAFE(1)
1,459,476
1,168,532
42,800
73,475
74,549
94,590
Ground Lease Plus Fund
65,793
17,630
725
2,014
Other real estate equity investments(2)
33,808
44,349
12,365
11,965
19,749
9,902
1,559,077
1,230,511
55,890
85,440
96,312
104,492
Other strategic investments(3)
46,191
66,770
1,907
2,355
5,910
6,169
Safehold Inc.—Refer to Note 1 – Merger with 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 nine months ended September 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
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acquired 3,240,000 shares of SAFE’s common stock in a private placement for $191.2 million. As of September 30, 2022, the Company owned approximately 64.8% 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.
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 September 30, 2022 and 2021, the Company recorded $5.3 million and $3.6 million, respectively, of management fees pursuant to its management agreement with SAFE. During the nine months ended September 30, 2022 and 2021, the Company recorded $15.0 million and $10.6 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 September 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 nine months ended
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September 30, 2022 and 2021, the Company recognized $9.4 million and $5.6 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.
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
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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 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 nine months ended September 30, 2021, the Company recorded $0.6 million and $1.7 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 Company sold the Ground Lease to SAFE in July 2022 for $36.0 million when the construction related conditions were met and recognized a gain of $1.0 million in “Income from sales of real estate” in its consolidated statements of operations.
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 exchanged its 50% equity interest with a carrying value of $4.4 million in a venture that owned a hotel property for land underlying the property with an in-place Ground Lease valued at $9.0 million and recorded a gain of $4.6 million in “Earnings from equity method investments” in the consolidated statements of operations. Subsequently, the Company sold the Ground Lease on the land to SAFE for $9.0 million and 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.
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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 September 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 $33.8 million in operating properties. 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 September 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 $105.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the Ground Lease tenant’s recapitalization of a mixed-use property.
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Summarized investee financial information—The following table presents the investee level summarized financial information for the Company’s equity method investment that was significant as of September 30, 2022 ($ in thousands):
Revenues
Expenses
Net Income Attributable to SAFE(1)
For the Nine Months Ended September 30, 2022
SAFE
196,943
136,517
113,628
For the Nine Months Ended September 30, 2021
135,001
88,585
51,844
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Note 9—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):(1)
Other assets(2)
20,048
16,040
Operating lease right-of-use assets(3)
17,104
20,437
Restricted cash
54,395
Other receivables
4,962
5,054
Corporate furniture, fixtures and equipment, net(4)
1,575
1,852
Leasing costs, net(5)
646
818
Intangible assets, net(6)
334
1,209
Deferred financing fees, net
629
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
Accrued expenses
70,428
151,810
Accrued interest payable
24,575
31,293
Other liabilities(1)
26,867
30,362
Operating lease liabilities (see table above)
19,006
23,267
29
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)
Senior Term Loan
491,875
LIBOR + 2.75
% (2)
Total secured credit facilities
Unsecured notes:
3.125% senior convertible notes(3)
287,500
3.125
%
4.75% senior notes(4)
753,561
775,000
4.75
October 2024
4.25% senior notes(5)
501,997
550,000
4.25
August 2025
5.50% senior notes(6)
346,906
400,000
5.50
February 2026
Total unsecured notes
1,602,464
2,012,500
Other debt obligations:
Trust preferred securities
LIBOR + 1.50
October 2035
Total debt obligations
1,702,464
2,604,375
Debt discounts and deferred financing costs, net
(21,756)
(32,201)
Total debt obligations, net(7)
Future Scheduled Maturities—As of September 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
30
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 nine months ended September 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 had a secured revolving credit facility with a maximum capacity of $350.0 million and a maturity of September 2022 (the “Revolving Credit Facility”). The Company terminated the Revolving Credit Facility in August 2022. Outstanding borrowings under the Revolving Credit Facility were secured by pledges of the equity interests in the Company’s subsidiaries that own a defined pool of assets. Borrowings under this credit facility accrued interest at a floating rate indexed to one of several base rates plus a margin which adjusted 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 was an undrawn credit facility commitment fee that ranges from 0.25% to 0.45%, based on corporate credit ratings.
Unsecured Notes—As of September 30, 2022, the Company has senior unsecured notes outstanding with varying fixed-rates and maturities ranging from October 2024 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).
3.125% Senior Convertible Notes—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 July and August 2022, the Company completed a series of privately-negotiated exchange transactions with holders of approximately $80.9 million aggregate principal amount of the Company's 3.125% Convertible Notes in which the noteholders exchanged their convertible notes with the Company for an aggregate of approximately 3.3 million newly issued shares of the Company's common stock and aggregate cash payments of approximately $43.6 million inclusive of accrued interest. The convertible notes received by the Company were retired. The Company recognized a net increase in shareholders’ equity of $38.2 million inclusive of a $12.1 million loss on extinguishment of debt in connection with these transactions.
In September 2022, the holders of approximately $11.7 million aggregate principal amount of the Company's 3.125% Convertible Notes executed their conversion rights under the notes and exchanged their convertible notes with the Company for an aggregate of approximately 92,011 newly issued shares of the Company's common stock and aggregate cash payments of approximately $11.7 million. The convertible notes received by the Company were retired. The Company also repaid $0.5 million principal amount of its 3.125% Convertible Notes for cash at maturity.
4.75% Senior Notes—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 July and August 2022, the Company redeemed an aggregate $14.4 million principal amount of its senior notes due October 2024 for $14.5 million. The Company recognized a $0.3 million net loss on extinguishment of debt in connection with these transactions.
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5.50% Senior Notes—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.
4.25% Senior Notes— In August and September 2022, the Company redeemed an aggregate $48.0 million principal amount of its senior notes due August 2025 for $48.1 million. The Company recognized a $0.7 million loss on extinguishment of debt in connection with these transactions.
Debt Covenants—The Company’s outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.3x and a covenant restricting certain incurrences of debt based on a fixed charge coverage ratio. If any of the Company’s covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.
Note 11—Commitments and Contingencies
Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of September 30, 2022, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
Loans and Other
Lending
Real
Investments
Estate
Performance-Based Commitments
270
147,405
148,392
Strategic Investments
3,161
4,907
8,068
3,431
152,312
156,460
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Other Commitments—Future minimum lease obligations under non-cancelable operating leases as of September 30, 2022 are as follows ($ in thousands):(1)
1,628
6,295
6,178
6,166
142
162
20,571
Present value discount(1)
(1,565)
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 September 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
34
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 September 30, 2022
(562)
For the Three Months Ended September 30, 2021
(2,050)
(633)
(1,763)
2,845
(6,183)
8,638
(1,324)
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Note 13—Equity
Preferred Stock—The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of September 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 permits 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 $30.1 million, or $0.375 per share, for the nine months ended September 30, 2022 and $26.3 million, or $0.36 per share, for the nine months ended September 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 nine months ended September 30, 2022. During the nine months ended September 30, 2021, the Company repurchased 4.2 million shares of its outstanding common stock for $91.9 million, for an average cost of $21.70 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 September 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 gains on available-for-sale securities
Unrealized losses on cash flow hedges
(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 ($0.4) million and $3.0 million for the three months ended September 30, 2022 and 2021, respectively, and ($30.7) million and $23.3 million for the nine months ended September 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 September 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 nine months ended September 30, 2022 and 2021, the Company recorded $3.5 million and $2.6 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 nine months ended September 30, 2022.
iPIP Investment Pool
2019-2020
2021-2022
Points at beginning of period
95.20
84.75
Granted
7.95
Forfeited
(0.95)
Points at end of period
91.75
As of September 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
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an aggregate gross book value of $406 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 nine months ended September 30, 2022.
2013‑2014
2015‑2016(1)
2017‑2018
80.17
70.40
75.34
During the nine months ended September 30, 2022, the Company recorded a $39.0 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 nine months ended September 30, 2021, the Company recorded $15.0 million of expense related to the 2013-2018 iPIP plans.
As of September 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 $236 million, including 7.6 million shares of SAFE common stock acquired by the Company, were attributable to the 2017-2018 Plan. As of September 30, 2022 there were no investments attributable to the 2015-2016 Plan.
During the nine months ended September 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 nine months ended September 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 nine months ended September 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.
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As of September 30, 2022 and December 31, 2021, the Company had accrued compensation costs relating to iPIP of $45.1 million and $116.6 million, respectively, which are included in “Accounts payable, accrued expenses and other liabilities” on the Company’s consolidated balance sheets.
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 September 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 nine months ended September 30, 2022, is as follows (in thousands):
Nonvested at beginning of period
221
Vested
(316)
(19)
Nonvested at end of period
As of September 30, 2022, there was $6.5 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 1.33 years.
Directors’ Awards— During the nine months ended September 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 2,193 common stock equivalents (“CSEs”) at a fair value of $15.79 per CSE in respect of dividend equivalents on outstanding CSEs. As of September 30, 2022, a combined total of 132,896 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 $1.2 million.
401(k) Plan— The Company made contributions of $0.1 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $1.0 million and $0.8 million for the nine months ended September 30, 2022 and 2021, respectively, to the Company’s 401(k) Plan.
Note 15—Earnings Per Share
The following table presents a reconciliation of income from operations used in the basic and diluted earnings per share (“EPS”) calculations ($ in thousands, except for per share data):
Net income (loss) from continuing operations and allocable to common shareholders for basic and diluted earnings per common share
103,496
(134,098)
40,585
40
Earnings allocable to common shares:
Numerator for basic and diluted earnings per share:
Net income (loss) from continuing operations and allocable to common shareholders
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic earnings per common share
Add: Effect of assumed shares issued under treasury stock method for restricted stock units
76
206
Add: Effect of convertible debt
333
8,967
5,521
Weighted average common shares outstanding for basic and diluted earnings per common share
Basic earnings per common share:(1)
Net income from discontinued operations and allocable to common shareholders
Diluted earnings per common share:(1)
41
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.
The Company did not have any assets or liabilities recorded at fair value as of September 30, 2022. The following fair value hierarchy table summarizes the Company’s assets and liabilities recorded at fair value on a recurring basis by the above categories as of December 31, 2021 ($ in thousands):
Fair Value Using
Quoted
market
Significant
prices in
other
active
observable
unobservable
markets
inputs
(Level 1)
(Level 2)
(Level 3)
Recurring basis:
Derivative liabilities(1)
Available-for-sale securities(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 nine months ended September 30, 2022 and 2021 ($ in thousands):
Beginning balance
25,274
Purchases
3,375
Sales and Repayments
(26,752)
(201)
Realized gain recorded in other income
2,897
Unrealized losses recorded in other comprehensive income
(4,237)
Ending balance
27,535
42
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)
43
Loans receivable and other lending investments, net(1)
177
345
Loans receivable held for sale(1)
Cash and cash equivalents(2)
1,336
340
Restricted cash(2)
Liabilities
Debt obligations, net(1)(3)
Level 1
1,582
1,583
2,473
2,799
Level 3
99
104
1,681
1,682
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)
3,340
5,504
3,147
12,197
2,462
3,714
Earnings (losses) from equity method investments
43,525
1,329
11,515
850
578
Total revenue and other earnings
50,109
6,569
27,052
18,483
106,505
(726)
(11,012)
(4,466)
(16,204)
(16,778)
489
(78)
(218)
(4,364)
(4,171)
Allocated interest expense
(13,049)
(1,713)
(1,122)
(1,915)
(4,865)
(22,664)
Allocated general and administrative(2)
(5,302)
(1,190)
(751)
(2,333)
(5,008)
(14,584)
Segment profit (loss)(3)
31,521
3,588
14,167
(7,227)
(9,945)
32,104
Other significant items:
Recovery of loan losses
Recovery of losses on net investment in leases
923
227
140
Capitalized expenditures
5,301
5,405
3,636
96
651
6,321
3,605
1,095
16,869
3,189
14,275
872
1,129
10,836
1,483
78,257
8,288
47,245
107,490
15,758
257,038
(91)
(9,184)
(4,094)
(13,369)
(87,380)
(210)
(270)
(64)
(350)
(894)
(15,691)
(3,331)
(1,641)
(3,679)
(4,353)
(28,695)
(5,487)
(958)
(473)
(5,029)
(14,120)
Segment profit (loss) (3)
56,778
3,729
35,947
10,100
6,026
112,580
Other significant non-cash items:
1,385
228
121
7,416
7,537
9,396
319
75
11,187
15,185
3,185
22,452
5,097
5,626
76,563
3,112
15,233
4,516
2,798
94,127
17,484
47,081
64,322
8,424
231,438
(1,385)
(25,144)
(12,808)
(39,337)
(55,369)
(503)
(237)
(538)
(5,346)
(6,624)
(42,426)
(7,049)
(3,602)
(8,903)
(14,076)
(76,056)
Allocated general and administrative(3)
(14,156)
(3,540)
(1,854)
(6,702)
(14,878)
(41,130)
Segment profit (loss)(4)
35,657
6,658
16,481
(19,998)
(25,876)
12,922
Provision for loan losses
1,750
2,878
424
644
15,824
16,468
13,177
279
968
23,878
10,614
1,245
23,159
5,894
20,038
2,092
(5,553)
15,456
4,076
106,855
27,215
57,102
179,565
24,114
394,851
(19,238)
(13,604)
(33,404)
(147,507)
(422)
(662)
(1,358)
(44,582)
(11,737)
(5,714)
(11,481)
(12,631)
(86,145)
(17,544)
(3,659)
(1,797)
(6,968)
(15,686)
(45,654)
43,957
11,397
30,353
(59)
80,783
44
4,592
674
449
610
16,727
17,337
Real estate and other assets available and held for sale and classified as discontinued operations(1)
Loans receivable and other lending investments, net
1,525,270
24,349
21,841
Total portfolio assets
1,537,195
200,972
124,235
2,132,489
Cash and other assets
1,389,643
Loan receivable held for sale
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 income
Less: (Provision for) recovery of loan losses
157
1,610
(22,556)
7,411
Less: (Provision for) recovery of losses on net investment in leases
315
(465)
Less: Impairment of assets
(421)
(1,768)
(679)
Less: Stock-based compensation income (expense)
374
(3,001)
30,724
(23,300)
Less: Depreciation and amortization
(1,290)
(1,742)
(3,985)
(5,715)
Less: Income tax (expense) benefit
Less: Loss on early extinguishment of debt, net
Less: Net income from discontinued operations
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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, including the Merger with Safehold Inc. (“SAFE”) (refer to Note 1 to the consolidated financial statements), 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
Merger with SAFE—In August 2022, we entered into a definitive agreement with SAFE for a tax-free, strategic combination that provides that, subject to the terms and conditions thereof, SAFE will merge with and into us (the “Merger”). We expect that the Merger will accelerate SAFE’s market leadership in the Ground Lease industry and will make SAFE the only internally-managed, pure-play Ground Lease company in the public markets. We expect that the Merger will close in the first quarter or second quarter of 2023. Refer to Note 1 to the consolidated financial statements for more information on the Merger.
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 $702.0 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 $1.2 billion from the transaction. Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022. Our net lease assets associated with our Ground Lease businesses were not included in the sale.
Portfolio Overview
As of September 30, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):
Property/Collateral
Land &
% of
Types
Corporate
Ground Leases
1,525,564
71.9
Land and Development
218,980
10.3
Multifamily
74,866
34,790
109,656
5.2
Hotel
44,720
62,308
107,028
Retail
12,481
8,340
81,263
3.8
Condominium
6,671
20,926
27,898
1.3
Office
14,274
0.7
Other Property Types
14,355
21,840
36,195
1.7
200,973
2,120,858
100.0
Percentage of Total
72%
9%
6%
12%
1%
100%
Geographic Region
Northeast
590,357
87,446
150,145
904,611
42.7
West
373,833
45,733
31,933
8,950
460,449
21.7
Mid-Atlantic
196,624
1,335
89,151
287,110
13.5
Southeast
186,660
29,133
215,793
10.2
Southwest
138,898
6.5
Central
39,192
14,304
60,167
2.8
Various
31,990
53,830
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 September 30, 2022, our net lease portfolio consisted of our equity method investments in SAFE and the Ground Lease Plus Fund. The table below provides certain statistics for our net lease portfolio.
Ownership %
64.8
53.0
Book value (millions)(1)
1,459
66
% Leased
Weighted average lease term (years)(2)
91.7
104.6
Weighted average yield(3)
4.4
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 September 30, 2022, we owned approximately 64.8% 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 53.0% 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 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.
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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)
(1,225)
84,191
47.7%
1.4%
Non-performing loans
34.2%
1.2%
(948)
18.1%
2.9%
100.0%
1.6%
Performing loans
(1,888)
151,155
45.4%
17.7%
1.0%
(2,305)
122,625
36.8%
1.8%
Performing Loans—The table below summarizes our performing loans exclusive of allowances ($ in thousands):
Weighted average LTV
61%
60%
Yield - year to date(1)
6.9%
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 September 30, 2022 and December 31, 2021, we had one non-performing loan with a carrying value of $60.4 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 $2.9 million as of September 30, 2022, or 1.6% 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.
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
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lower than the carrying value of the loan. As of September 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 $2.2 million, or 1.8%, of performing loans and other lending investments as of September 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 nine months ended September 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 September 30, 2022, the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled $124.2 million.
The following table presents a land and development portfolio rollforward for the nine months ended September 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)
(35.6)
(16.6)
(0.6)
(52.8)
Capital expenditures
11.6
16.0
(1.7)
(0.1)
(1.8)
Ending balance(1)
106.6
89.1
52.5
248.2
Results of Operations for the Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021
$ Change
(308)
(4,879)
(397)
(12,009)
(78,282)
Total revenue
(95,875)
(6,031)
2,835
(70,602)
(452)
(2,911)
1,453
(65)
3,277
(72,917)
(24,660)
(29,998)
(603)
(21,614)
(113,042)
Revenue—Operating lease income, which primarily includes income from commercial operating properties, decreased to $3.4 million during the three months ended September 30, 2022 from $3.7 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 $2.1 million during the three months ended September 30, 2022 from $7.0 million for the same period in 2021. The decrease was due primarily to a decrease in our loans and other lending investments portfolio.
Interest income from sales-type leases decreased to $0.1 million for the three months ended September 30, 2022 from $0.5 million for the same period in 2021. The decrease resulted from the sale of Ground Leases in 2022 (refer to Note 5 to the consolidated financial statements).
Other income decreased to $27.0 million during the three months ended September 30, 2022 from $39.0 million for the same period in 2021. Other income during the three months ended September 30, 2022 consisted primarily of income from our hotel properties, management fees, gains on the sale of available-for-sale securities and other ancillary income from our land and development projects and operating properties. Other income during the three months ended September 30, 2021 consisted primarily of mark-to-market gains on an equity investment, management fees, income from our hotel properties, lease termination fees and other ancillary income from our land and development projects and loan portfolio.
Land development revenue and cost of sales—During the three months ended September 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $15.1 million which had associated cost of sales of $16.8 million. During the three months ended September 30, 2021, we sold residential lots and units and recognized land development revenue of $93.4 million which had associated cost of sales of $87.4 million. The decrease in 2022 was primarily due to a decrease in the size of our land and development portfolio.
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Costs and expenses—Interest expense decreased to $22.7 million during the three months ended September 30, 2022 from $28.7 million for the same period in 2021. The decrease in 2022 was primarily due to a decrease in the average balance of our outstanding debt as we repaid our Senior Term Loan and certain unsecured notes in 2022 (refer to Note 10 to the consolidated financial statements).
Real estate expense increased to $16.2 million during the three months ended September 30, 2022 from $13.4 million for the same period in 2021. The increase was primarily due to an increase in expenses at certain of our operating properties that have increased operations from the prior year.
Depreciation and amortization decreased to $1.3 million during the three months ended September 30, 2022 from $1.7 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 general and administrative expense $14.2 million during the three months ended September 30, 2022 versus $17.1 million of expense for the same period in 2021. The decrease was due primarily to a $2.3 million decrease in performance-based compensation, which was partially offset by severance costs for terminated employees. 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 recovery of loan losses was $0.2 million for the three months ended September 30, 2022 as compared to a recovery of loan losses of $1.6 million for the same period in 2021. The recovery of loan losses for the three months ended September 30, 2022 resulted primarily from reversal of Expected Loss allowances on loans that repaid in full in the third quarter 2022. The recovery of loan losses for the three months ended September 30, 2021 resulted from the reversal of Expected Loss allowances on loans that repaid in full in the third quarter 2021.
The recovery of losses on net investment in leases for the three months ended September 30, 2022 resulted from the reversal of an allowance on a property that was sold during the three months ended September 30, 2022. The recovery of losses on net investment in leases for the three months ended September 30, 2021 resulted from a changing macroeconomic forecast on commercial real estate markets since June 30, 2021.
During the three months ended September 30, 2021, we recorded an aggregate impairment of $0.4 million on an operating property held for sale.
Other expense was $4.2 million during the three months ended September 30, 2022 and $0.9 million for the same period in 2021. The increase in other expenses for the three months ended September 30, 2022 was due primarily to legal and consulting costs in connection with our Merger with SAFE (refer to Note 1 to the consolidated financial statements).
Income from sales of real estate—During the three months ended September 30, 2022, we recorded $1.0 million of income from sales of real estate from the sale of a Ground Lease to SAFE. During the three months ended September 30, 2021, we recorded $25.6 million of income from sales of real estate primarily from the sale of an operating property.
Loss on early extinguishment of debt, net—During the three months ended September 30, 2022, we incurred losses on early extinguishment of debt of $13.2 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 decreased to $57.8 million during the three months ended September 30, 2022 from $87.8 million for the same period in 2021. During the three months ended September 30, 2022, we recognized $42.8 million of income from our equity method investment in SAFE, $11.5 million primarily from the sale of a multifamily property at one of our ventures and $3.5 million of net aggregate income from our remaining equity method investments. During the three months ended September 30, 2021, we recognized $73.5 million of income from our equity method investment in SAFE (which included a dilution gain of $60.2
52
million – refer to Note 8) and $14.3 million of net aggregate income from our remaining equity method investments, which included $10.5 million from one of our equity method investments resulting from our share of income from land sales.
Income tax (expense) benefit—We recorded an income tax provision of $0.6 million for the three months ended September 30, 2022 due primarily to additional state and local taxes related to the sale of our net lease assets. Income tax benefit of $39 thousand was recorded for the three months ended September 30, 2021.
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 Nine months Ended September 30, 2022 compared to the Nine months Ended September 30, 2021
(3,741)
(13,584)
178
(9,405)
(103,546)
(130,098)
(10,089)
5,933
(92,138)
(1,730)
(58,548)
29,967
1,089
5,266
(120,715)
(24,876)
(8,439)
(684)
728,273
553,691
Revenue—Operating lease income, which primarily includes income from commercial operating properties, decreased to $9.7 million during the nine months ended September 30, 2022 from $13.5 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 $11.3 million during the nine months ended September 30, 2022 from $24.8 million for the same period in 2021. The decrease was due primarily to a decrease in our loans and other lending investments portfolio.
Interest income from sales-type leases increased to $0.9 million for the nine months ended September 30, 2022 from $0.7 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 which was partially offset by the sales of Ground Leases (refer to Note 5 to the consolidated financial statements).
Other income increased to $51.5 million during the nine months ended September 30, 2022 from $60.9 million for the same period in 2021. Other income during the nine months ended September 30, 2022 consisted primarily of management fees, income from our hotel properties, gains on the sale of available-for-sale securities and other ancillary income from our land and development projects and operating properties. Other income during the nine months ended September 30, 2021 consisted primarily of mark-to-market gains on an equity investment, management fees, lease termination fees, other ancillary income from our operating properties, land and development projects and loan portfolio and income from our hotel properties.
Land development revenue and cost of sales—During the nine months ended September 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $54.4 million which had associated cost of sales of $55.4 million. During the nine months ended September 30, 2021, we sold residential lots and units and recognized land development revenue of $157.9 million which had associated cost of sales of $147.5 million. The decrease in 2022 was primarily due to a decrease in the size of our land and development portfolio.
Costs and expenses—Interest expense decreased to $76.1 million during the nine months ended September 30, 2022 from $86.1 million for the same period in 2021. The decrease in 2022 was primarily due to a decrease in the average balance of our outstanding debt as we repaid our Senior Term Loan and certain unsecured notes in 2022 (refer to Note 10 to the consolidated financial statements).
Real estate expense increased to $39.3 million during the nine months ended September 30, 2022 from $33.4 million for the same period in 2021. The increase was primarily due to an increase in expenses at certain of our operating properties that have increased operations from the prior year, which was partially offset by asset sales.
Depreciation and amortization decreased to $4.0 million during the nine months ended September 30, 2022 from $5.7 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 general and administrative expense of $10.4 million during the nine months ended September 30, 2022 versus $69.0 million of expense for the same period in 2021. The decrease was due primarily to a $56.2 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 nine months ended September 30, 2022 as compared to a recovery of loan losses of $7.4 million for the same period in 2021. The provision for loan losses for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2021 resulted from the macroeconomic forecast on commercial real estate markets.
During the nine months ended September 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 nine months ended September 30, 2021, we recorded an impairment of $0.7 million in connection with the sale of residential condominiums.
Other expense was $6.6 million during the nine months ended September 30, 2022 and $1.4 million for the same period in 2021. The increase in other expenses for the nine months ended September 30, 2022 was due primarily to legal and consulting costs in connection with our Merger with SAFE.
Income from sales of real estate—During the nine months ended September 30, 2022, we recorded $1.4 million of income from sales of real estate primarily from the sale of Ground Leases. During the nine months ended September 30,
2021, we recorded $26.3 million of income from sales of real estate from the sale of an operating property and residential condominiums.
Loss on early extinguishment of debt, net—During the nine months ended September 30, 2022, we incurred losses on early extinguishment of debt of $131.2 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 decreased to $102.2 million during the nine months ended September 30, 2022 from $110.7 million for the same period in 2021. During the nine months ended September 30, 2022, we recognized $74.5 million of income from our equity method investment in SAFE, $11.5 million primarily from the sale of a multifamily property at one of our venturers, $5.0 million primarily from the settlement of our interest in a venture and $11.2 million of net aggregate income from our remaining equity method investments. During the nine months ended September 30, 2021, we recognized $94.6 million of income from our equity method investment in SAFE (which included a dilution gain of $60.7 million – refer to Note 8) and $16.1 million of net aggregate income from our remaining equity method investments, which included $13.3 million from one of our equity method investments resulting from our share of income from land sales.
Income tax (expense) benefit—We recorded an income tax provision of $0.6 million for the nine months ended September 30, 2022 due primarily to state and local taxes related to the sale of our net lease assets. Income tax benefit of $0.1 million was recorded for the nine months ended September 30, 2021.
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
3,705
16,449
11,606
50,790
Add: Stock-based compensation
(374)
3,001
Add: Non-cash portion of loss on early extinguishment of debt
13,051
136,464
Adjusted earnings allocable to common shareholders
28,513
141,306
601,847
175,998
Liquidity and Capital Resources
As of September 30, 2022, we had unrestricted cash of $1.3 billion. Our primary cash uses over the next 12 months are expected to be repayment of our debt obligations (refer to Note 1 and Note 10 to the consolidated financial statements), redemption of our preferred stock (refer to Note 1 and Note 13 to the consolidated financial statements), funding of investments in our Ground Lease and Ground Lease adjacent businesses, capital expenditures on legacy assets, distributions to shareholders through dividends 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 the Merger with SAFE, asset sales, the continuing impact of the COVID-19 pandemic, inflation, interest rate increases, market volatility and other macroeconomic factors on our business.
Beginning in April 2022 and continuing through September 2022, we completed separate, privately-negotiated transactions with holders of our 3.125% convertible notes in which the noteholders exchanged their convertible notes with us for newly issued shares of our common stock and cash (refer to Note 10 to the consolidated financial statements). We also repaid $0.5 million principal amount of our 3.125% convertible notes for cash at maturity. We have covenanted to redeem all of our outstanding preferred stock at the liquidation preference per share plus accrued and unpaid dividends and to retire all of our remaining senior unsecured notes in connection with the Merger. We also had approximately $156.5 million of maximum unfunded commitments associated with our investments as of September 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 $105.2 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 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 $84 million, assuming SAFE is valued at a price of $29.25 per share and our other assets perform with current underwriting expectations. Of this amount, $59 million has been accrued in our financial statements (refer to Note 14 to the consolidated financial statements). Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock; provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock. Additional information on our iPIP Plans can be found in our 2021 Annual Report and our 2021 Proxy Statement, both of which are available on our website.
56
We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future. Our capital sources to meet such cash requirements are expected to include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions.
The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the nine months ended September 30, 2022 and 2021 ($ 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 during 2022 was due primarily to the Net Lease Sale (refer to Note 3 to the consolidated financial statements). The increase in 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) and settlements and repayments of our unsecured notes.
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.
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
57
committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of September 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 nine months ended September 30, 2021, we repurchased 4.2 million shares of our outstanding common stock for $91.9 million, for an average cost of $21.70 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 September 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.
58
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 3.14% as of September 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
(13,114)
-50 Basis Points
(6,566)
-10 Basis Points
(1,313)
Base Interest Rate
+10 Basis Points
1,313
+50 Basis Points
6,566
+100 Basis Points
13,131
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
The Merger and related transactions may not be completed on the terms or timeline currently contemplated, or at all.
The completion of the Merger and related transactions are subject to certain conditions, including: (i) the approval of SAFE’s stockholders, (ii) the approval of the Company’s stockholders, (iii) completion of the spin-off, (iv) the approval of the shares of New SAFE common stock to be issued in the Merger for listing on the NYSE, (v) the effectiveness of the registration statement on Form S-4 registering the New SAFE common stock to be issued in the Merger, (vi) the absence of any temporary restraining order, injunction or other order of any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the reverse stock split or the Merger, (vii) generation of certain cash proceeds and repayment of the Company’s senior unsecured notes and preferred stock, (viii) the receipt of certain tax opinions by the Company and SAFE that the Merger will qualify as a reorganization under the Internal Revenue Code and that the Company and SAFE each qualifies as a REIT for federal income tax purposes, (ix) the accuracy of certain representations and warranties of the Company and SAFE contained in the Merger agreement and the compliance by the parties with the covenants contained in the Merger agreement (subject to customary materiality qualifiers), and (x) certain other conditions specified in the Merger agreement. The proposed sale of shares of SAFE common stock by the Company to MSD Partners is also subject to certain closing conditions and if it did not close for any reason, the Company would have to identify new sources of funds in order to satisfy the condition to the Merger that the Company repay its senior unsecured notes and preferred stock. Neither the Company nor SAFE can provide assurances that the Merger and related transactions will be consummated on the terms or timeline currently contemplated, or at all.
Failure to complete the Merger and related transactions could adversely affect the stock prices and the future business and financial results of the Company and SAFE.
If the Merger and related transactions are not completed, the ongoing businesses of the Company or SAFE may be adversely affected and the Company and SAFE will be subject to numerous risks, including the following:
If the Merger and related transactions are not completed, neither the Company nor SAFE can assure their respective stockholders that these risks will not materialize or will not materially affect the business, financial results and stock prices of either the Company or SAFE.
SAFE will have the option to internalize the Company's management if the Merger has not occurred by the outside date under the Merger agreement.
If the Merger agreement is terminated because the Merger has not occurred by September 30, 2023, SAFE will have the option under certain circumstances to terminate the existing external management agreement and internalize the Company's management, which may adversely affect the Company. If SAFE exercises its option under the Merger agreement to become internalized, it must pay the Company $100.0 million, of which up to $60.0 million may be paid in cash, at SAFE’s discretion, with the remainder being paid in shares of SAFE common stock, which is less than the $150.0 million of consideration that was allocated to the existing management agreement in the negotiations of the Merger. If SAFE exercises this option, the Company would become externally-managed by SAFE pursuant to a management agreement that SAFE and the Company have agreed to negotiate in good faith. These changes in the Company's management structure may adversely affect the Company and the market value of its securities.
The Merger agreement contains provisions that could discourage a potential competing acquirer of either the Company or SAFE or could result in any competing proposal being at a lower price than it might otherwise be.
The Merger agreement contains provisions that, subject to limited exceptions, restrict the ability of each of the Company and SAFE to, directly or indirectly, initiate, solicit, propose, knowingly encourage or facilitate competing third-party proposals to effect, among other things, a Merger, reorganization, share exchange, consolidation or the sale of 15% or more of the stock or consolidated net revenues, net income or total assets of the Company or SAFE. In addition, either the Company or SAFE generally has an opportunity to offer to modify the terms of the Merger agreement in response to any competing “superior proposal” (as defined in “the Merger Agreement”) that may be made to the other party before the special committee of the boards of directors of the Company or SAFE, as the case may be, may withdraw or modify its recommendation in response to such superior proposal or terminate the Merger agreement to enter into such superior proposal. In some circumstances, one of the parties will be required to pay a substantial termination fee to the other party.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company or SAFE from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than that market value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the Merger agreement. In addition, the Company's significant ownership interest and voting power in SAFE could discourage a potential competing acquirer for SAFE.
The pendency of the Merger and related transactions could adversely affect the business and operations of the Company and SAFE.
In connection with the pending Merger and related transactions, some tenants, vendors or other counterparties of each of the Company and SAFE may delay or defer decisions, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of the Company and SAFE, regardless of whether the Merger is completed. Similarly, current and prospective employees of the Company and New SAFE may experience uncertainty about their future roles with New SAFE following the Merger and related transactions, which may materially adversely affect the ability of the Company to attract and retain key personnel during the pendency of the Merger and related transactions. In addition, due to interim operating covenants in the Merger agreement, each of the Company and SAFE may be unable (without the other party’s prior written consent), during the pendency of the Merger and related transactions, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
There were no other material changes from the risk factors previously disclosed in our 2021 Annual Report.
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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 September 30, 2022. As of September 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
Item 6. Exhibits
INDEX TO EXHIBITS
ExhibitNumber
Document Description
2.1
Merger Agreement, dated as of August 10, 2022, by and between iStar Inc. and Safehold Inc. (Schedules have been omitted pursuant to Item 601(b)(5) of Regulation S-K. STAR agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.) (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K, filed August 11, 2022)
10.1
Voting Agreement, dated as of August 10, 2022, by and between iStar Inc. and Safehold Inc. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed August 11, 2022)
Stock Purchase Agreement, dated August 10, 2022, by and among iStar Inc., Safehold Inc., MSD Partners, L.P. and, with respect to certain specified sections, MSD Capital, L.P. (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed August 11, 2022)
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 September 30, 2022 is formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets (unaudited) as of September 30, 2022 and December 31, 2021, (ii) the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2022 and 2021, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2022 and 2021, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three and nine months ended September 30, 2022 and 2021, (v) the Consolidated Statements of Cash Flows (unaudited) for nine months ended September 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:
November 3, 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