Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2021
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
Indicate by check mark whether the registrant: (i) 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 (ii) 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 ☒
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
As of August 1, 2021, there were 71,690,805 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
TABLE OF CONTENTS
Page
PART I
Consolidated Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets (unaudited) as of June 30, 2021 and December 31, 2020
2
Consolidated Statements of Operations (unaudited)—For the three and six months ended June 30, 2021 and 2020
3
Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three and six months ended June 30, 2021 and 2020
4
Consolidated Statements of Changes in Equity (unaudited)—For the three and six months ended June 30, 2021 and 2020
5
Consolidated Statements of Cash Flows (unaudited)—For the six months ended June 30, 2021 and 2020
7
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56
Item 4.
Controls and Procedures
57
PART II
Other Information
58
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
59
SIGNATURES
60
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except per share data)(1)
(unaudited)
As of
June 30,
December 31,
2021
2020
ASSETS
Real estate
Real estate, at cost
$
1,657,173
1,752,053
Less: accumulated depreciation
(290,167)
(267,772)
Real estate, net
1,367,006
1,484,281
Real estate available and held for sale
99,201
5,212
Total real estate
1,466,207
1,489,493
Net investment in leases ($9,005 and $10,871 of allowances as of June 30, 2021 and December 31, 2020, respectively)
477,798
429,101
Land and development, net
381,719
430,663
Loans receivable and other lending investments, net ($7,135 and $13,170 of allowances as of June 30, 2021 and December 31, 2020, respectively)
454,960
732,330
Loans receivable held for sale
62,525
—
Other investments
1,275,954
1,176,560
Cash and cash equivalents
154,941
98,633
Finance lease right of use assets
142,985
143,727
Accrued interest and operating lease income receivable, net
7,328
10,061
Deferred operating lease income receivable, net
63,339
58,128
Deferred expenses and other assets, net
279,894
293,112
Total assets
4,767,650
4,861,808
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities
315,337
317,402
Finance lease liabilities
151,925
150,520
Liabilities associated with properties held for sale
2,201
27
Loan participations payable, net
42,501
Debt obligations, net
3,289,481
3,286,975
Total liabilities
3,758,944
3,797,425
Commitments and contingencies (refer to Note 12)
Equity:
iStar Inc. shareholders' equity:
Preferred Stock Series D, G and I, liquidation preference $25.00 per share (refer to Note 14)
12
Common Stock, $0.001 par value, 200,000 shares authorized, 72,419 and 73,967 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
72
74
Additional paid-in capital
3,185,748
3,240,535
Accumulated deficit
(2,338,454)
(2,316,972)
Accumulated other comprehensive loss (refer to Note 14)
(35,824)
(52,680)
Total iStar Inc. shareholders' equity
811,554
870,969
Noncontrolling interests
197,152
193,414
Total equity
1,008,706
1,064,383
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Revenues:
Operating lease income
45,544
46,812
92,988
94,158
Interest income
8,973
15,439
19,623
32,655
Interest income from sales-type leases
8,689
8,295
17,316
16,650
Other income
10,064
10,292
24,354
30,660
Land development revenue
32,318
15,577
64,567
95,752
Total revenues
105,588
96,415
218,848
269,875
Costs and expenses:
Interest expense
39,417
41,950
78,980
85,341
Real estate expense
18,289
14,276
35,183
36,774
Land development cost of sales
30,803
16,287
60,126
93,346
Depreciation and amortization
14,660
14,300
30,115
28,786
General and administrative
30,394
18,998
51,833
53,270
(Recovery of) provision for loan losses
(2,263)
2,067
(6,057)
6,070
(Recovery of) provision for losses on net investment in leases
(265)
534
(1,866)
1,826
Impairment of assets
4,783
1,785
6,491
Other expense
211
203
464
277
Total costs and expenses
131,246
113,398
250,563
312,181
Income from sales of real estate
2,210
62
2,822
Loss from operations before earnings from equity method investments and other items
(23,448)
(16,921)
(28,893)
(42,244)
Loss on early extinguishment of debt, net
(4,115)
Earnings from equity method investments
12,697
2,586
25,466
19,198
Net loss before income taxes
(10,751)
(14,335)
(3,427)
(27,161)
Income tax expense
(665)
(28)
(88)
Net loss
(11,416)
(14,363)
(27,249)
Net (income) attributable to noncontrolling interests
(2,253)
(3,098)
(4,773)
(5,789)
Net loss attributable to iStar Inc.
(13,669)
(17,461)
(8,200)
(33,038)
Preferred dividends
(5,874)
(11,748)
Net loss allocable to common shareholders
(19,543)
(23,335)
(19,948)
(44,786)
Per common share data:
Net loss allocable to common shareholders:
Basic
(0.27)
(0.31)
(0.58)
Diluted
Weighted average number of common shares:
72,872
76,232
73,374
76,838
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income (loss):
Reclassification of losses on cash flow hedges into earnings upon realization(1)
2,486
2,106
4,824
3,420
Unrealized gains (losses) on available-for-sale securities
657
972
(374)
1,175
Unrealized gains (losses) on cash flow hedges
(764)
(3,351)
11,211
(31,127)
Other comprehensive income (loss)
2,379
(273)
15,661
(26,532)
Comprehensive income (loss)
(9,037)
(14,636)
12,234
(53,781)
Comprehensive (income) loss attributable to noncontrolling interests
(2,765)
(2,348)
(7,744)
405
Comprehensive income (loss) attributable to iStar Inc.
(11,802)
(16,984)
4,490
(53,376)
Consolidated Statements of Changes in Equity
iStar Inc. Shareholders' Equity
Accumulated
Common
Additional
Retained
Other
Preferred
Stock at
Paid-In
Earnings
Comprehensive
Noncontrolling
Total
Stock(1)
Par
Capital
(Deficit)
Income (Loss)
Interests
Equity
Balance as of March 31, 2021
73
3,204,862
(2,309,763)
(41,858)
197,681
1,051,007
Dividends declared—preferred
Dividends declared—common ($0.125 per share)
(9,148)
Issuance of stock/restricted stock unit amortization, net(2)
1,199
168
1,367
Net income (loss)
2,253
Change in accumulated other comprehensive income (loss)
6,034
512
6,546
Repurchase of stock
(1)
(19,978)
(19,979)
Contributions from noncontrolling interests
794
Distributions to noncontrolling interests
(335)
(4,256)
(4,591)
Balance as of June 30, 2021
Balance as of March 31, 2020
77
3,275,055
(2,247,504)
(59,522)
191,951
1,160,069
Dividends declared—common ($0.11 per share)
(8,445)
1
860
848
1,709
3,098
477
(750)
(2)
(15,742)
(15,744)
153
(3,447)
Balance as of June 30, 2020
76
3,260,173
(2,279,284)
(59,045)
191,853
1,113,785
Balance as of December 31, 2020
Impact from adoption of new accounting standards (refer to Note 3)
(25,869)
15,850
(10,019)
Dividends declared—common ($0.235 per share)
(17,384)
3,771
1,538
5,309
4,773
16,856
2,970
19,826
(32,354)
(32,356)
857
(6,400)
(6,735)
Balance as of December 31, 2019
78
3,284,877
(2,205,838)
(38,707)
197,538
1,237,960
Impact from adoption of new accounting standards
(12,382)
Dividends declared—common ($0.21 per share)
(16,278)
3,082
1,575
4,658
5,789
(20,338)
(6,194)
(3)
(27,786)
(27,789)
317
(7,172)
6
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Non-cash interest income from sales-type leases
(18,808)
(8,153)
Stock-based compensation expense
20,299
21,014
Amortization of discounts/premiums and deferred financing costs on debt obligations, net
3,957
6,664
Amortization of discounts/premiums and deferred interest on loans, net
(7,459)
(16,977)
Deferred interest on loans received
23,703
8,633
(25,466)
(19,198)
Distributions from operations of other investments
18,193
11,000
Deferred operating lease income
(5,211)
(7,499)
(2,822)
(62)
Land development revenue in excess of cost of sales
(4,441)
(2,406)
4,115
Other operating activities, net
(2,148)
(9,008)
Changes in assets and liabilities:
Origination and fundings of loans receivable held for sale
(62,525)
Changes in accrued interest and operating lease income receivable
3,572
(929)
Changes in deferred expenses and other assets, net
(1,637)
(1,692)
Changes in accounts payable, accrued expenses and other liabilities
(4,719)
(11,218)
Cash flows used in operating activities
(44,962)
(9,792)
Cash flows from investing activities:
Originations and fundings of loans receivable, net
(65,208)
(57,828)
Capital expenditures on real estate assets
(4,287)
(6,482)
Capital expenditures on land and development assets
(8,382)
(25,028)
Acquisitions of real estate, net investments in leases and land assets
(42,000)
Repayments of and principal collections on loans receivable and other lending investments, net
209,779
87,552
Net proceeds from sales of loans receivable
79,560
Net proceeds from sales of real estate
3,259
9,090
Net proceeds from sales of net investment in leases
12,825
Net proceeds from sales of land and development assets
61,945
94,076
Distributions from other investments
22,996
11,606
Contributions to and acquisition of interest in other investments
(91,419)
(141,091)
Other investing activities, net
4,910
(332)
Cash flows provided by (used in) investing activities
183,978
(28,437)
Cash flows from financing activities:
Borrowings from debt obligations
25,000
310,572
Repayments and repurchases of debt obligations
(35,900)
(421,363)
Preferred dividends paid
Common dividends paid
(17,304)
(16,148)
(32,556)
(33,647)
Payments for debt prepayment or extinguishment costs
(3,316)
Payments for deferred financing costs
(75)
(2,501)
Payments for withholding taxes upon vesting of stock-based compensation
(2,181)
(1,984)
64
(6,401)
Cash flows used in financing activities
(81,101)
(186,990)
Effect of exchange rate changes on cash
(111)
(24)
Changes in cash, cash equivalents and restricted cash
57,804
(225,243)
Cash, cash equivalents and restricted cash at beginning of period
150,566
352,206
Cash, cash equivalents and restricted cash at end of period
208,370
126,963
Supplemental disclosure of non-cash investing and financing activity:
Fundings and (repayments) of loan receivables and loan participations, net
(42,501)
4,384
Accounts payable for capital expenditures on land and development and real estate assets
930
1,873
Accrued repurchase of stock
500
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 and net lease investments (refer to Note 8). The Company has invested over $40 billion of 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, real estate finance, operating properties and land and development (refer to Note 18).
Organization—The Company began its business in 1993 through the management of private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new investments and corporate acquisitions.
Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “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 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 “Operating lease income,” “Interest income,” “Earnings from equity method investments,” “Real estate expense” and “Interest expense” in the Company’s consolidated statements of operations. The Company has provided no financial support to those VIEs that it was not previously contractually required to provide.
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE’s respective assets. The Company did not have any unfunded commitments related to consolidated VIEs as of June 30, 2021 and December 31,
Notes to Consolidated Financial Statements (Continued)
2020. The following table presents the assets and liabilities of the Company’s consolidated VIEs as of June 30, 2021 and December 31, 2020 ($ in thousands):
December 31, 2020
900,365
899,110
(74,334)
(61,917)
826,031
837,193
199,876
240,137
29
35
24,999
22,571
1,295
1,472
34,119
29,428
117,977
122,591
1,204,326
1,253,427
LIABILITIES
76,684
115,581
480,708
488,719
557,392
604,300
Unconsolidated VIEs—The Company has investments in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company’s consolidated financial statements. As of June 30, 2021, the Company’s maximum exposure to loss from these investments does not exceed the sum of the $130.1 million carrying value of the investments, which are classified in “Other investments” on the Company’s consolidated balance sheets, and $14.9 million of related unfunded commitments.
Note 3—Summary of Significant Accounting Policies
The following paragraph describes the impact on the Company’s consolidated financial statements from the adoption of Accounting Standards Updates (“ASUs”) on January 1, 2021.
The Company adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) on January 1, 2021 using the modified retrospective approach method. Under the modified retrospective approach, the Company recorded a cumulative effect adjustment on January 1, 2021 by increasing “Debt obligations, net” by $10.0 million, increasing retained earnings by $15.9 million and decreasing “Additional paid-in capital” by $25.9 million with respect to its 3.125% senior convertible notes (refer to Note 11). Periods presented that are prior to the adoption date of January 1, 2021 will not be adjusted. In addition, upon the adoption of ASU 2020-06, the Company is required to use a modified if-converted method when calculating earnings per share. The Company will settle conversions of the 3.125% senior convertible notes by paying the conversion value in cash up to the original principal amount of the notes being converted and shares of common stock to the extent of any conversion premium. The if-converted method is modified so that interest expense is not added back to the numerator, and the denominator only includes the net number of incremental shares that would be issued upon conversion.
For the remainder of the Company’s significant accounting policies, refer to the Company’s Annual Report.
10
New Accounting Pronouncements—In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Note 4—Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
Net
Operating
Lease(1)
Properties
As of June 30, 2021
Land, at cost
188,418
6,830
195,248
Buildings and improvements, at cost
1,355,014
106,911
1,461,925
(270,401)
(19,766)
Real estate, net(1)
1,273,031
93,975
Real estate available and held for sale(2)
193,176
As of December 31, 2020
103,530
291,948
1,353,683
106,422
1,460,105
(250,198)
(17,574)
1,291,903
192,378
197,590
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 and its partner had joint decision making rights pertaining to the acquisition of new investments. Upon the expiration of the investment period on June 30, 2018, the Company obtained control of the venture through its unilateral rights of management and disposition of the assets. As a result, the expiration of the investment period resulted in a reconsideration event under GAAP and the Company determined that the Net Lease Venture is a VIE for which the Company is the primary beneficiary. Effective June 30, 2018, the Company consolidated the Net Lease Venture as an asset acquisition under ASC 810. The Net Lease Venture had previously been accounted for as an equity method investment. The Company has an equity interest in the Net Lease Venture of approximately 51.9%. The Company is 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 is substantially devoted to the Net Lease Venture own a total of 0.6% equity ownership in the venture via co-investment. These senior executives are also entitled to an amount equal to 50% of any incentive fee received based on the 47.5% external partner’s interest.
Dispositions—During the six months ended June 30, 2020, the Company sold a net lease asset for net proceeds of $7.5 million and recognized an impairment of $1.7 million in connection with the sale.
11
Real Estate Available and Held for Sale— During the six months ended June 30, 2021, the Company transferred an operating property with a carrying value of $96.8 million to held for sale due to an executed contract with a third party. The operating property was sold in July 2021 for $125.0 million and the Company expects to recognize a gain of approximately $25.0 million after selling costs.
Impairments—During the six months ended June 30, 2020, the Company recorded an impairment of $1.7 million in connection with the sale of a net lease asset and an impairment of $3.0 million on a real estate asset held for sale.
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 $5.1 million and $12.1 million for the three and six months ended June 30, 2021, respectively, and $5.4 million and $11.4 million for the three and six months ended June 30, 2020, respectively. These amounts are included in “Operating lease income” in the Company’s consolidated statements of operations.
Allowance for Doubtful Accounts—As of June 30, 2021 and December 31, 2020, the allowance for doubtful accounts related to real estate tenant receivables was $0.7 million and $1.7 million, respectively. These amounts are included in “Accrued interest and operating lease income receivable, net” on the Company’s consolidated balance sheets.
Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-cancelable operating leases, excluding customer reimbursements of expenses, in effect as of June 30, 2021, are as follows by year ($ in thousands):
Year
Lease
2021 (remaining six months)
67,653
3,163
2022
131,176
6,643
2023
122,817
6,383
2024
117,126
6,345
2025
120,582
5,682
Thereafter
1,333,855
8,247
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 is recorded in “Net investment in leases” on the Company’s consolidated balance sheets. One Ground Lease was entered into with the seller of the land and did not qualify for sale leaseback accounting, and as such, is accounted for as a financing transaction and $42.2 million is recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheet. 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 May 2019, the Company entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of nine bowling centers for $56.7 million, of which seven were acquired from the lessee for $44.1 million, and a commitment to invest up to $55.0 million in additional bowling centers over the next several years. The new centers were added to the Company’s existing master leases with the tenant. In connection with this transaction, the maturities of the master leases were extended by 15 years to 2047. In the second quarter 2020, the Company entered into a transaction with the lessee whereby it would apply $10 million of the net proceeds it received from certain sales of the lessee’s facilities to the lessee’s upcoming rent obligations to the Company. In exchange, the Company’s obligation under the lease to acquire an equal amount of new facilities for them or to reduce their rent in the future was terminated. In the third quarter
2020, the Company granted the lessee a nine-month rent deferral on its two wholly-owned master leases in exchange for eliminating the Company’s commitment to invest up to $55.0 million in additional bowling centers over the next several years. All deferred amounts are required to be repaid with interest beginning in January 2023.
As a result of the May 2019 modifications to the leases, the Company classified the leases as sales-type leases and recorded $424.1 million in “Net investment in leases” on its consolidated balance sheet. As a result of the modifications in the second and third quarter 2020, the Company reassessed this classification as required by ASC 842, and concluded that the leases should continue to be classified as sales-type leases. In May 2019, the Company determined that the seven bowling centers acquired did not qualify as a sale leaseback transaction and recorded $44.1 million in “Loans receivable and other lending investments, net” on its consolidated balance sheet (refer to Note 7).
For the three and six months ended June 30, 2021, the Company recognized $0.2 million and $0.3 million, respectively, of cash interest income and $8.5 million and $17.0 million, respectively, of non-cash interest income in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. For the three and six months ended June 30, 2020, the Company recognized $2.3 million and $9.2 million, respectively, of cash interest income and $6.0 million and $7.5 million, respectively, of non-cash interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations.
Dispositions—During the six months ended June 30, 2021, the Company sold net lease assets for net proceeds of $6.6 million and recognized an aggregate impairment of $1.5 million in connection with the sales.
The Company’s net investment in leases were comprised of the following as of June 30, 2021 and December 31, 2020 ($ in thousands):
Total undiscounted cash flows
1,545,634
1,020,921
Unguaranteed estimated residual value
378,016
345,284
Present value discount
(1,436,847)
(926,233)
Allowance for losses on net investment in leases
(9,005)
(10,871)
Net investment in leases(1)
Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases, excluding lease payments that are not fixed and determinable, in effect as of June 30, 2021, are as follows by year ($ in thousands):
Amount
14,249
30,590
43,272
43,029
31,955
1,382,539
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Allowance for Losses on Net Investment in Leases—Changes in the Company’s allowance for losses on net investment in leases for the three and six months ended June 30, 2021 and 2020 were as follows ($ in thousands):
Three Months Ended
Six Months Ended
June 30, 2020
Allowance for losses on net investment in leases at beginning of period
9,270
10,403
10,871
Initial allowance recorded upon adoption of new accounting standard(1)
9,111
(Recovery of) provision for losses on net investment in leases(2)
Allowance for losses on net investment in leases at end of period
9,005
10,937
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
392,703
441,201
(10,984)
(10,538)
Total land and development, net
Dispositions—During the six months ended June 30, 2021 and 2020, the Company sold land parcels and residential lots and units and recognized land development revenue of $64.6 million and $95.8 million, respectively. During the six months ended June 30, 2021 and 2020, the Company recognized land development cost of sales of $60.1 million and $93.3 million, respectively, from its land and development portfolio.
Impairments—During the six months ended June 30, 2020, the Company recorded an impairment of $1.5 million on a land and development asset.
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Note 7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable and other lending investments by class ($ in thousands):
Construction loans
Senior mortgages
190,830
449,733
Corporate/Partnership loans
20,049
65,100
Subtotal - gross carrying value of construction loans(1)
210,879
514,833
Loans
50,463
35,922
18,674
20,567
Subordinate mortgages
12,042
11,640
Subtotal - gross carrying value of loans
81,179
68,129
Other lending investments
Financing receivables (refer to Note 5)
48,286
46,549
Held-to-maturity debt securities
93,677
90,715
Available-for-sale debt securities
28,074
25,274
Subtotal - other lending investments
170,037
162,538
Total gross carrying value of loans receivable and other lending investments
462,095
745,500
Allowance for loan losses
(7,135)
(13,170)
Total loans receivable and other lending investments, net
Allowance for Loan Losses—Changes in the Company’s allowance for loan losses were as follows for the three months ended June 30, 2021 and 2020 ($ in thousands):
General Allowance
Held to
Construction
Maturity Debt
Financing
Specific
Three Months Ended June 30, 2021
Securities
Receivables
Allowance
Allowance for loan losses at beginning of period
2,893
1,815
2,685
998
667
9,058
Recovery of loan losses(1)
(1,253)
(196)
(292)
(105)
(77)
(1,923)
Allowance for loan losses at end of period
1,640
1,619
2,393
893
590
7,135
Three Months Ended June 30, 2020
9,724
686
53
1,100
21,701
33,264
Provision for loan losses(1)
2,012
219
2,348
11,736
905
111
1,159
35,612
15
Changes in the Company’s allowance for loan losses were as follows for the six months ended June 30, 2021 and 2020 ($ in thousands):
Six Months Ended June 30, 2021
6,541
1,643
3,093
1,150
743
13,170
(4,901)
(700)
(257)
(153)
(6,035)
Six Months Ended June 30, 2020
6,668
265
28,634
Adoption of new accounting standard(2)
(353)
98
20
964
729
5,421
542
91
195
6,249
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The Company’s investment in loans and other lending investments and the associated allowance for loan losses were as follows as of June 30, 2021 and December 31, 2020 ($ in thousands):
Individually
Collectively
Evaluated for
Impairment(1)
Impairment
Construction loans(2)
56,610
154,269
Loans(2)
Financing receivables
Available-for-sale debt securities(3)
Less: Allowance for loan losses
(590)
(6,545)
56,020
398,940
53,305
461,528
(743)
(12,427)
52,562
679,768
Credit Characteristics—As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments which are inherently uncertain, and there can be no assurance that actual performance will be similar to current expectation. The Company designates loans as non-performing at such 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.
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The Company’s amortized cost basis in performing senior mortgages, corporate/partnership loans, subordinate mortgages and financing receivables, presented by year of origination and by credit quality, as indicated by risk rating, as of June 30, 2021 were as follows ($ in thousands):
Year of Origination
2019
2018
2017
Prior to 2017
Risk rating
1.0
1.5
2.0
2.5
3.0
34,394
118,045
3,500
155,939
3.5
28,744
4.0
4.5
5.0
Subtotal(1)
146,789
184,683
Corporate/partnership loans
13,115
6,934
Subtotal
31,789
38,723
41,328
178,578
15,542
283,734
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The Company’s amortized cost basis in loans, aged by payment status and presented by class, was as follows ($ in thousands):
Less Than
Greater
and Equal
Than
Current
to 90 Days
90 Days
Past Due
241,293
235,448
292,058
443,154
485,655
42,721
42,946
85,667
497,515
85,447
582,962
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)
55,859
52,552
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 provide for future funding obligations 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 will acquire the ground lessor 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 as of June 30, 2021. The Company received $2.7 million of consideration from SAFE in connection with this transaction.
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, is accounted for as a financing transaction and $42.2 million is recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheets.
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Other lending investments—Other lending investments includes the following securities ($ in thousands):
Unrealized
Estimated
Carrying
Face Value
Cost Basis
Gain
Fair Value
Value
Available-for-Sale Securities
Municipal debt securities
23,855
4,219
Held-to-Maturity Securities
Debt securities
100,000
123,855
117,532
121,751
20,680
4,594
120,680
111,395
115,989
As of June 30, 2021, 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 (1)
Equity Method Investments(1)
as of
For the Three Months Ended
For the Six Months Ended
Real estate equity investments
Safehold Inc. ("SAFE")(2)
988,687
937,712
9,703
8,236
21,115
27,574
iStar Net Lease II LLC ("Net Lease Venture II")
84,735
78,998
1,599
564
2,600
757
Other real estate equity investments
68,920
89,939
(1,461)
(4,893)
(2,063)
(6,975)
1,142,342
1,106,649
9,841
3,907
21,652
21,356
Other strategic investments(3)
133,612
69,911
2,856
(1,321)
3,814
(2,158)
Safehold Inc.—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”). As of June 30, 2021, the Company owned approximately 66.0% 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 stockholders, 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:
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In March 2020, the Company acquired 1.7 million shares of SAFE’s common stock in a private placement for $80.0 million.
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee. In addition, the Company is also the external manager of a venture in which SAFE is a member. Following are the key terms of the management agreement with SAFE:
During the three months ended June 30, 2021 and 2020, the Company recorded $3.5 million and $3.2 million, respectively, of management fees pursuant to its management agreement with SAFE. During the six months ended June 30, 2021 and 2020, the Company recorded $7.0 million and $6.0 million, respectively, of management fees pursuant to its management agreement with SAFE.
The Company is also entitled to receive certain expense reimbursements, including for the allocable costs of its personnel that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants otherwise would perform. The Company has elected not to charge in full certain of the expense reimbursements while SAFE is growing its portfolio. During the three months ended June 30, 2021 and 2020, the Company recognized $1.9 million and $1.3 million, respectively, of expense reimbursements pursuant to its management agreement with SAFE. During the six months ended June 30, 2021 and 2020, the Company recognized $3.8 million and $2.5 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, all of which were approved by the Company’s and SAFE’s independent directors, for the periods presented:
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. During the three months ended June 30, 2020, the Company recorded $0.8 million of interest income on the loan. During the six months ended June 30, 2021 and 2020, the Company recorded $0.3 million and $1.5 million, respectively, of interest income on the loan. The Company sold the Ground Lease to SAFE in September 2020 for $34.0 million and sold the leasehold first mortgage to an entity in which the Company has a 53% equity interest (refer to “Other strategic investments” below) in January 2021 for $63.3 million.
22
In January 2019, the Company committed to provide a $13.3 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the conversion of an office building into a multi-family property. The loan was repaid during the fourth quarter 2020. During the three and six months ended June 30, 2020, the Company recorded $0.3 million and $0.5 million, respectively, of interest income on the loan.
In June 2020, Net Lease Venture II (see below) acquired the leasehold interest in an office laboratory property in Honolulu, HI and simultaneously entered into a 99-year Ground Lease with SAFE.
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. As of June 30, 2021, $42.7 million of the loan was funded and during the three and six months ended June 30, 2021, the Company recorded $1.5 million and $2.4 million, respectively, of interest income on the loan.
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 will acquire the ground lessor from the Company (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.
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. 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.
23
Net Lease Venture II—In July 2018, the Company entered into a new venture (“Net Lease Venture II”) with an investment strategy similar to the Net Lease Venture. The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by the Company. In June 2021, Net Lease Venture II’s investment period was extended to December 31, 2021. Net Lease Venture II is a voting interest entity and the Company has an equity interest in the venture of approximately 51.9%. The Company does not have a controlling interest in Net Lease Venture II due to the substantive participating rights of its partner. The Company accounts for its investment in Net Lease Venture II as an equity method investment and is responsible for managing the venture in exchange for a management fee and incentive fee. During the three months ended June 30, 2021 and 2020, the Company recorded $0.4 million and $0.4 million, respectively, of management fees from Net Lease Venture II. During the six months ended June 30, 2021 and 2020, the Company recorded $0.8 million and $0.8 million, respectively, of management fees from Net Lease Venture II.
Other real estate equity investments—As of June 30, 2021, the Company’s other real estate equity investments include equity interests in real estate ventures ranging from 33% to 95%, comprised of investments of $55.3 million in operating properties and $13.6 million in land assets. As of December 31, 2020, the Company’s other real estate equity investments included $58.7 million in operating properties and $31.2 million in land assets.
In August 2018, the Company provided a mezzanine loan with a principal balance of $33.0 million as of June 30, 2021 and December 31, 2020 to an unconsolidated entity in which the Company owns a 50% equity interest. The loan matures in August 2022. As of June 30, 2021, and December 31, 2020, the loan is included in “Loans receivable and other lending investments, net” on the Company’s consolidated balance sheet. During the three months ended June 30, 2021 and 2020, the Company recorded $0.6 million and $0.6 million, respectively, of interest income on the mezzanine loan. During the six months ended June 30, 2021 and 2020, the Company recorded $1.1 million and $1.2 million, respectively, of interest income on the mezzanine loan.
Other strategic investments—As of June 30, 2021 and December 31, 2020, 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 $83.4 million to a newly formed entity in which the Company has a 53.0% noncontrolling equity interest. The Company did not recognize any gain or loss on the sales. The Company does not have a controlling interest in this entity due to the substantive participating rights of its partner. The Company accounts for this investment as an equity method investment and receives a fixed annual fee in exchange for managing the entity.
Summarized investee financial information—The following table presents the investee level summarized financial information for the Company’s equity method investment that was significant as of June 30, 2021 ($ in thousands):
Revenues
Expenses
Net Income Attributable to Parent
For the Six Months Ended June 30, 2021
SAFE
87,720
57,536
31,640
For the Six Months Ended June 30, 2020
77,518
49,200
29,861
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Note 9—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
Intangible assets, net(1)
149,620
156,041
Restricted cash
53,429
51,933
Operating lease right-of-use assets(2)
45,894
48,891
Other assets(3)
20,720
19,453
Other receivables
4,696
10,881
Leasing costs, net(4)
2,631
2,340
Corporate furniture, fixtures and equipment, net(5)
1,852
2,024
Deferred financing fees, net
1,052
1,549
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
Other liabilities(1)
81,056
91,513
Accrued expenses
104,716
94,724
Intangible liabilities, net(2)
47,492
48,738
Operating lease liabilities (see table above)
48,645
50,072
Accrued interest payable
33,428
32,355
25
Note 10—Loan Participations Payable, net
The Company had one loan participation payable with a carrying value of $42.5 million and an interest rate of 6.0% as of December 31, 2020. The loan was repaid in the first quarter 2021.
Loan participations represent transfers of financial assets that did not meet the sales criteria established under ASC Topic 860 and are accounted for as loan participations payable, net as of December 31, 2020. As of December 31, 2020, the corresponding loan receivable balance was $42.5 million and is included in “Loans receivable and other lending investments, net” on the Company’s consolidated balance sheets. The principal and interest due on loan participations payable are paid from cash flows of the corresponding loans receivable, which serve as collateral for the participations.
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Note 11—Debt Obligations, net
The Company’s debt obligations were as follows ($ in thousands):
Carrying Value as of
Stated
Scheduled
Interest Rates
Maturity Date
Secured credit facilities and mortgages:
Revolving Credit Facility
LIBOR + 2.00
% (1)
September 2022
Senior Term Loan
491,875
LIBOR + 2.75
% (2)
June 2023
Mortgages collateralized by net lease assets
710,175
721,075
1.65% - 7.26
% (3)
Total secured credit facilities and mortgages(4)
1,202,050
1,212,950
Unsecured notes:
3.125% senior convertible notes(5)
287,500
3.125
%
4.75% senior notes(6)
775,000
4.75
October 2024
4.25% senior notes(7)
550,000
4.25
August 2025
5.50% senior notes(8)
400,000
5.50
February 2026
Total unsecured notes
2,012,500
Other debt obligations:
Trust preferred securities
LIBOR + 1.50
October 2035
Total debt obligations
3,314,550
3,325,450
Debt discounts and deferred financing costs, net(9)
(25,069)
(38,475)
Total debt obligations, net(10)
Future Scheduled Maturities—As of June 30, 2021, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
Unsecured Debt
Secured Debt
101,011
95,867
383,367
270,890
820,890
500,000
242,407
742,407
Total principal maturities
2,112,500
Unamortized discounts and deferred financing costs, net
(19,782)
(5,287)
Total debt obligations, net
2,092,718
1,196,763
Senior Term Loan—The Company has a $650.0 million senior term loan (the “Senior Term Loan”) that bears interest at LIBOR plus 2.75% per annum and matures in June 2023. The Senior Term Loan is secured by pledges of equity of certain subsidiaries that own a defined pool of assets. The Senior Term Loan permits substitution of collateral, subject to overall collateral pool coverage and concentration limits, over the life of the facility. The Company may make optional prepayments, subject to prepayment fees. As of June 30, 2021, the outstanding balance on the Company’s Senior Term Loan was $491.9 million.
Revolving Credit Facility—The Company has a secured revolving credit facility (the “Revolving Credit Facility”) with a maximum capacity of $350.0 million that matures in September 2022. Outstanding borrowings under the Revolving Credit Facility are secured by pledges of the equity interests in the Company’s subsidiaries that own a defined pool of assets. Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon the Company’s corporate credit rating, ranging from 1.0% to 1.5% in the case of base rate loans and from 2.0% to 2.5% in the case of LIBOR loans. In addition, there is an undrawn credit facility commitment fee that ranges from 0.25% to 0.45%, based on corporate credit ratings. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2023. As of June 30, 2021, based on the Company’s borrowing base of assets, the Company had the ability to draw $341.7 million without pledging any additional assets to the facility.
Unsecured Notes—As of June 30, 2021, the Company has senior unsecured notes outstanding with varying fixed-rates and maturities ranging from September 2022 to February 2026. 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).
During the six months ended June 30, 2020, repayments of unsecured notes prior to maturity resulted in losses on early extinguishment of debt of $4.1 million. This amount is included in “Loss on early extinguishment of debt, net” in the Company’s consolidated statements of operations.
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 1.2x 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.
The Company’s Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the Senior Term Loan requires the Company to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The Revolving Credit Facility is secured by a borrowing base of assets and requires the Company to maintain both borrowing base asset value
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of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, the Company has the option to pay down outstanding borrowings or substitute assets in the borrowing base. Under both the Senior Term Loan and the Revolving Credit Facility the Company is permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and the Company remains in compliance with its financial covenants after giving effect to the dividend.
The Company’s Senior Term Loan and the Revolving Credit Facility contain cross default provisions that would allow the lenders to declare an event of default and accelerate the Company’s indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company’s unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company’s indebtedness to them if the Company’s other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.
Note 12—Commitments and Contingencies
Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of June 30, 2021, 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
94,398
71,702
33,790
199,890
Strategic Investments
14,934
48,724
214,824
Other Commitments—Future minimum lease obligations under non-cancelable operating and finance leases as of June 30, 2021 are as follows ($ in thousands):
Operating(1)(2)
Finance(1)
2,588
2,763
6,756
5,604
6,393
5,716
6,309
5,830
6,297
5,946
496
1,567,826
28,839
1,593,685
Present value discount(1)
(3,128)
(1,441,760)
Other adjustments(2)
22,934
Lease liabilities
Future minimum lease obligations under non-cancelable operating and finance leases as of December 31, 2020 are as follows ($ in thousands):
3,797
5,494
30,048
1,596,416
(3,771)
(1,445,896)
23,795
30
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 13—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.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2021 and December 31, 2020 ($ in thousands):(1)
Derivative Liabilities
Balance Sheet
Fair
Location
Derivatives Designated in Hedging Relationships
Interest rate swaps
13,481
18,926
31
The table below presents the effect of the Company’s derivative financial instruments, including the Company’s share of derivative financial instruments at certain of its equity method investments, in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) ($ in thousands):
Amount of Gain
Location of Gain
(Loss) Recognized in
(Loss) Reclassified
(Loss)
Accumulated Other
from Accumulated
Derivatives Designated in
When Recognized in
Other Comprehensive
Hedging Relationships
Income
Income into Earnings
For the Three Months Ended June 30, 2021
(763)
(2,029)
(457)
For the Three Months Ended June 30, 2020
(2,365)
(1,799)
(986)
(307)
2,556
(4,133)
8,655
(691)
Interest Expense
(14,970)
(2,887)
(16,157)
(533)
32
Note 14—Equity
Preferred Stock—The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of June 30, 2021 and December 31, 2020:
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, 2020, the Company had $529.6 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. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and certain asset impairments), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. The Senior Term Loan and the Revolving Credit Facility permit the Company to pay common dividends with no restrictions so long as the Company is not in default on any of its debt obligations. The Company declared common stock dividends of $17.4 million, or $0.235 per share, for the six months ended June 30, 2021 and $16.3 million, or $0.21 per share, for the six months ended June 30, 2020. The character of the 2020 dividends was 100% return of capital.
Stock Repurchase Program—The Company may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the six months ended June 30, 2021, the Company repurchased 1.8 million shares of its outstanding common stock for $32.4 million, for an average cost of $17.57 per share. During the six months ended June 30, 2020, the Company repurchased 2.5 million shares of its outstanding common stock for $27.8 million, for an average cost of $10.98 per share. The Company is generally authorized to repurchase up to $50.0 million in shares of its common stock. As of July 31, 2021, the Company had remaining authorization to repurchase up to $33.0 million of common stock under its stock repurchase program. The Company’s Board of Directors subsequently authorized an increase to the stock repurchase program to $50.0 million effective after the date of the filing of this report on Form 10-Q.
33
Accumulated Other Comprehensive Income (Loss)— “Accumulated other comprehensive income (loss)” reflected in the Company’s shareholders’ equity is comprised of the following ($ in thousands):
Unrealized gains on available-for-sale securities
4,220
Unrealized losses on cash flow hedges
(40,043)
(53,075)
Unrealized losses on cumulative translation adjustment
(4,199)
Accumulated other comprehensive loss
Note 15—Stock-Based Compensation Plans and Employee Benefits
Stock-Based Compensation—The Company recorded stock-based compensation expense, including the expense related to performance incentive plans (see below), of $14.8 million and $20.3 million for the three and six months ended June 30, 2021, respectively, and $4.7 million and $21.0 million for the three and six months ended June 30, 2020, respectively, in “General and administrative” in the Company’s consolidated statements of operations.
Performance Incentive Plans—The Company’s Performance Incentive Plans (“iPIP”) are designed to provide, primarily to senior executives and select professionals engaged in the Company’s investment activities, long-term compensation which has a direct relationship to the realized returns on investments included in the plans. Awards vest over six years, with 40% being vested at the end of the second year and 15% each year thereafter. As of June 30, 2021, there are five iPIP Plans, each covering a two-year investment period beginning with the 2013-2014 Plan through the 2021-2022 Plan.
2019-2022 iPIP Plans—The Company’s 2019-2020 and 2021-2022 iPIP plans are equity-classified awards which are measured at the grant date fair value and recognized as compensation cost in “General and administrative” in the Company’s consolidated statements of operations and “Noncontrolling interests” in the Company’s consolidated statements of changes in equity over the requisite service period. Investments in the 2019-2022 iPIP plans are held by consolidated subsidiaries of the Company and have two ownership classes, class A units and class B units. The Company owns 100% of the class A units and the class B units were issued to employees as long-term compensation. Except for certain clawback provisions, participants can retain vested class B units upon their termination of employment with the Company. The class B units are entitled to distributions from the net cash realized from the investments in the plan after the Company, through its ownership of the class A units, has received a specified return on its invested capital and a return of its invested capital. Distributions on the class B units are also subject to reductions under a total shareholder return (“TSR”) adjustment. The fair value of the class B units was determined using a model that forecasts the underlying cash flows from the investments within the entity to which the class B units have ownership rights. During the six months ended June 30, 2021 and 2020, the Company recorded $1.5 million and $1.6 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 six months ended June 30, 2021.
iPIP Investment Pool
2019-2020
2021-2022
Points at beginning of period
97.40
Granted
94.75
Forfeited
(2.20)
(10.00)
Points at end of period
95.20
84.75
34
As of June 30, 2021, investments with an aggregate gross book value of $1.1 billion, including 26.7 million shares of SAFE common stock acquired by the Company, were attributable to the 2019-2020 Plan and investments with an aggregate gross book value of $109 million, including 0.3 million shares of SAFE common stock acquired by the Company, were attributable to the 2021-2022 Plan.
2013-2018 iPIP Plans—The remainder of the Company’s iPIP plans, as shown in the table below, are liability-classified awards and are remeasured each reporting period at fair value until the awards are settled. Certain employees will be granted awards that entitle employees to receive the residual cash flows from the investments in the plans after the Company has received a specified return on its invested capital and a return of its invested capital. Awards are also subject to reductions under a TSR adjustment. The fair value of awards is determined using a model that forecasts the Company’s projected investment performance. Settlement of the awards will be 50% in cash and 50% in shares of the Company’s common stock or in shares of SAFE’s common stock owned by the Company.
The following is a summary of the status of the Company’s liability-classified iPIP plans and changes during the six months ended June 30, 2021.
2013‑2014
2015‑2016
2017‑2018
80.17
70.40
73.34
75.34
During the six months ended June 30, 2021 and 2020, the Company recorded $15.1 million and $16.8 million, respectively, of expense related to the 2013-2018 iPIP plans.
As of June 30, 2021, investments with an aggregate gross book value of $387 million were attributable to the 2013-2014 Plan, investments with an aggregate gross book value of $434 million were attributable to the 2015-2016 Plan and investments with an aggregate gross book value of $496 million, including 7.6 million shares of SAFE common stock acquired by the Company, were attributable to the 2017-2018 Plan.
During the six months ended June 30, 2021, the Company made distributions to participants in the 2015-2016 investment pool. The iPIP participants received total distributions in the amount of $3.2 million as compensation, comprised of cash and 97,881 shares of the Company’s common stock with a fair value of $17.65 per share, which are fully-vested and issued under the 2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 57,920 shares of the Company’s common stock were issued.
During the six months ended June 30, 2020, the Company made distributions to participants in the 2015-2016 investment pool. The iPIP participants received total distributions in the amount of $1.5 million as compensation, comprised of cash and 54,245 shares of the Company’s common stock with a fair value of $14.51 per share, which are fully-vested and issued under the 2009 LTIP. After deducting statutory minimum tax withholdings, a total of 32,825 shares of the Company’s common stock were issued.
As of June 30, 2021 and December 31, 2020, the Company had accrued compensation costs relating to iPIP of $81.0 million and $69.1 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 June 30, 2021, an aggregate of 3.1 million shares remain available for issuance pursuant to future awards under the Company’s 2009 LTIP.
Restricted Stock Unit Activity—A summary of the Company’s stock-based compensation awards to certain employees in the form of long-term incentive awards for the six months ended June 30, 2021, is as follows (in thousands):
Nonvested at beginning of period
531
331
Vested
(112)
(32)
Nonvested at end of period
718
As of June 30, 2021, there was $6.7 million of total unrecognized compensation cost related to all unvested restricted stock units that are expected to be recognized over a weighted average remaining vesting/service period of 1.85 years.
Directors’ Awards—During the six months ended June 30, 2021, the Company granted 38,186 restricted shares of common stock to non-employee Directors at a fair value of $17.51 at the time of grant for their annual equity awards and also issued 1,159 common stock equivalents (“CSEs”) at a fair value of $18.24 per CSE in respect of dividend equivalents on outstanding CSEs. As of June 30, 2021, a combined total of 129,019 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 $2.7 million.
401(k) Plan— The Company made contributions of $0.1 million and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.7 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively, to the Company’s 401(k) Plan.
Note 16—Earnings Per Share
The following table presents a reconciliation of income from operations used in the basic and diluted earnings per share (“EPS”) calculations ($ in thousands, except for per share data):
Net income attributable to noncontrolling interests
Net loss allocable to common shareholders for basic and diluted earnings per common share
36
Earnings allocable to common shares:
Numerator for basic and diluted earnings per share:
Net loss attributable to iStar Inc. and allocable to common shareholders
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic and diluted earnings per common share
Basic and diluted earnings per common share:(1)
Note 17—Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Certain of the Company’s assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are classified as being valued on a non-recurring basis.
37
The following fair value hierarchy table summarizes the Company’s assets and liabilities recorded at fair value on a recurring and non-recurring basis by the above categories ($ in thousands):
Fair Value Using
Quoted
market
Significant
prices in
other
active
observable
unobservable
markets
inputs
(Level 1)
(Level 2)
(Level 3)
Recurring basis:
Derivative liabilities(1)
Available-for-sale securities(1)
Non-recurring basis:
Other investments(2)
75,402
Impaired land and development(3)
6,078
The following table summarizes changes in Level 3 available-for-sale securities reported at fair value on the Company’s consolidated balance sheets for the six months ended June 30, 2021 and 2020 ($ in thousands):
Beginning balance
23,896
Purchases
3,375
Repayments
(201)
(460)
Unrealized gains (losses) recorded in other comprehensive income
Ending balance
24,611
38
Fair values of financial instruments—The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):
478
491
429
431
Loans receivable and other lending investments, net(1)
455
488
732
772
Cash and cash equivalents(2)
155
99
Restricted cash(2)
52
Loan participations payable, net(1)
43
Debt obligations, net(1)(3)
3,289
3,543
3,287
3,414
Note 18—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 includes the Company’s activities and operations related to the ownership of properties generally leased to single corporate tenants and its investments in SAFE and Net Lease Venture II (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
Finance
Development
Other(1)
40,752
4,703
89
1,188
7,785
4,690
3,953
1,315
54
Earnings (losses) from equity method investments
11,302
755
(2,935)
1,474
2,101
2,114
96
Total revenue and other earnings
68,735
8,592
5,817
35,196
2,155
120,495
(6,984)
(6,256)
(5,049)
(18,289)
(30,803)
(87)
(124)
(211)
Allocated interest expense
(25,342)
(3,828)
(2,030)
(3,864)
(4,353)
(39,417)
Allocated general and administrative(2)
(6,120)
(1,242)
(664)
(2,367)
(5,210)
(15,603)
Segment profit (loss)(3)
30,289
3,435
(3,133)
(6,887)
(7,532)
16,172
Other significant items:
Recovery of loan losses
Recovery of losses on net investment in leases
13,088
1,221
228
123
Capitalized expenditures
63
432
4,571
5,066
41,500
5,242
70
39
14,579
4,621
3,839
492
1,103
237
8,800
(4,941)
48
64,076
18,418
855
16,798
(1,084)
99,063
(6,134)
(4,509)
(3,633)
(14,276)
(16,287)
(21)
(182)
(203)
(24,388)
(5,959)
(2,183)
(4,422)
(4,998)
(41,950)
(5,177)
(1,575)
(595)
(2,385)
(4,522)
(14,254)
Segment profit (loss) (3)
28,377
10,863
(6,432)
(9,929)
(10,786)
12,093
Other significant non-cash items:
Provision for loan losses
2,010
Provision for losses on net investment in leases
328
2,983
12,487
1,271
243
299
5,171
421
8,026
13,618
83,265
9,540
183
2,066
17,557
9,444
151
6,291
2,704
5,764
23,715
1,220
(6,682)
4,619
2,594
708
137,920
18,928
9,857
72,073
8,358
247,136
(15,616)
(10,055)
(9,512)
(35,183)
(60,126)
(311)
(464)
(50,421)
(8,406)
(4,073)
(7,802)
(8,278)
(78,980)
(12,057)
(2,701)
(1,324)
(4,795)
(10,657)
(31,534)
59,826
7,668
(5,595)
(10,162)
(10,888)
40,849
(5,800)
1,528
257
26,141
3,208
446
320
1,331
489
9,311
11,131
82,965
11,015
178
1,683
30,972
8,913
4,145
3,650
1,727
12,225
28,332
(7,608)
632
138,543
35,117
7,119
98,289
10,067
289,135
(12,361)
(12,173)
(12,240)
(36,774)
(93,346)
(41)
(236)
(277)
(48,866)
(12,158)
(4,442)
(8,992)
(10,883)
(85,341)
(12,166)
(3,672)
(1,384)
(5,204)
(9,830)
(32,256)
65,150
19,246
(10,880)
(21,493)
(10,882)
41,141
2,036
40
25,143
486
601
7,017
1,338
20,052
28,407
Net investment in leases
Loans receivable and other lending investments, net
47,392
407,568
Loan receivable held for sale
1,073,422
46,945
55,344
13,576
86,667
Total portfolio assets
2,934,168
454,513
248,520
395,295
4,119,163
Cash and other assets
648,487
45,398
686,932
1,016,710
58,739
31,200
2,783,112
256,329
461,863
4,258,147
603,661
Segment profit
Less: Recovery of (provision for) loan losses
2,263
(2,067)
6,057
(6,070)
Less: Recovery of (provision for) losses on net investment in leases
(534)
1,866
(1,826)
Less: Impairment of assets
(4,783)
(1,785)
(6,491)
Less: Stock-based compensation expense
(14,791)
(4,744)
(20,299)
(21,014)
Less: Depreciation and amortization
(14,660)
(14,300)
(30,115)
(28,786)
Less: Income tax expense
Less: Loss on early extinguishment of debt, net
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are included with respect to, among other things, iStar Inc.’s (the “Company’s”) current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1A—"Risk Factors’’ in our Annual Report on Form 10-K, 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 Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance.
Executive Overview
Our portfolio is well diversified by business, property type and geography. Our portfolio includes investments in the entertainment/leisure (22.6% of gross book value) and hotel (5.0% of gross book value) sectors, both of which have been particularly stressed by the COVID-19 pandemic. We may experience disruptions and collections of rent and interest payments until more normalized business conditions resume. In 2020, we increased our general allowance for loan losses reflecting the uncertainty related to the COVID-19 pandemic. While we have seen conditions gradually improve, there can be no assurance that we will not increase our allowances in the future.
The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and materially scaling SAFE’s portfolio in 2020 and the first quarter of 2021, primarily because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions. These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes. At this time, however, we cannot predict with certainty the full extent of the impacts of the COVID-19 pandemic on our or SAFE’s business. In addition, other macroeconomic factors such as inflation and the market reaction and response of government policy to inflation may impact our or SAFE’s business. See the Risk Factors section of our Annual Report on Form 10-K for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and other factors.
Portfolio Overview
As of June 30, 2021, based on our gross book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):(1)
Property/Collateral
Land &
% of
Types
Corporate
Ground Leases
1,122,334
24.2
Entertainment / Leisure
1,031,610
16,204
1,047,814
22.6
Office
817,852
52,162
870,014
18.7
Industrial / Lab
414,938
96,796
587,136
12.6
Land and Development
11,893
318,192
330,085
7.1
Hotel
147,723
83,552
231,275
Multifamily
118,933
59,357
178,290
3.8
Condominium
41,859
15,862
79,650
137,371
Retail
59,521
34,799
8,436
102,756
2.2
Other Property Types
28,075
11,265
39,340
0.8
3,386,734
460,166
306,570
406,278
4,646,415
100.0
Percentage of Total
72%
10%
7%
9%
2%
100%
Geographic Region
Northeast
944,323
151,256
93,503
235,632
1,424,714
30.7
West
509,989
138,551
56,533
30,971
736,044
15.8
Mid-Atlantic
568,252
5,941
104,295
678,488
14.6
Southwest
489,287
2,200
588,283
12.7
Central
429,563
47,418
45,440
31,500
553,921
11.9
Southeast
435,827
29,264
8,357
1,680
475,128
10.2
Various
9,493
189,837
4.1
Net Lease
Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on our properties. We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine 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). We generally intend to hold our net lease assets for long-term investment. However, we may dispose of assets if we deem the disposition to be in our best interests.
The net lease segment includes our Ground Lease investments made primarily through SAFE and our traditional net lease investments. As of June 30, 2021, the gross book value of our consolidated net lease portfolio totaled $2.3 billion. Our net lease portfolio, including the carrying value of our equity method investments in SAFE and Net Lease Venture II gross of accumulated depreciation, totaled $3.4 billion. Subsequent to June 30, 2021, we announced that we intend to explore market interest for possible sales of our net lease assets. There can be no assurance as to whether we will sell
some, all or none of our net lease assets, or as to the timing or terms of any sales. The table below provides certain statistics for our net lease portfolio.
Wholly-
Consolidated
Owned
Venture I
Real Estate(1)
Venture II
Ownership %
51.9
66.0
Gross book value (millions)(2)
908
2,275
324
3,524
% Leased
98.9
99.3
Square footage (thousands)
9,671
5,749
15,420
3,302
N/A
Weighted average lease term (years)(3)
19.5
18.0
89.1
Weighted average yield(4)
7.4
8.1
7.7
9.1
4.4
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 and gave a right of first refusal to the venture on all new net lease investments that met specified investment criteria (refer to Note 4 in our consolidated financial statements for more information on our Net Lease Venture). The Net Lease Venture’s investment period expired on June 30, 2018 and the remaining term of the venture extends through February 13, 2022, subject to two, one-year extension options at the discretion of us and our partner. We obtained control over the Net Lease Venture when the investment period expired on June 30, 2018 and consolidated the assets and liabilities of the venture, which had previously been accounted for as an equity method investment.
Net Lease Venture II—In July 2018, we entered into Net Lease Venture II with similar investment strategies as the Net Lease Venture (refer to Note 8). The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by us. We have an equity interest in the new venture of approximately 51.9%, which is accounted for as an equity method investment, and are responsible for managing the venture in exchange for a management fee and incentive fee. In June 2021, Net Lease Venture II’s investment period was extended to December 31, 2021.
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 increases, and the opportunity to realize value from residual rights to acquire the buildings and other improvements on its land at no additional cost. We believe that these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments. As of June 30, 2021, we owned approximately 66.0% of SAFE’s common stock outstanding.
We account for our investment in SAFE as an equity method investment (refer to Note 8). 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.
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
44
loans to mezzanine and preferred equity capital positions. Our real estate finance portfolio consists of 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, leasehold loans to Ground Lease tenants, including tenants of SAFE, 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 loans on stabilized and transitional properties, Ground Leases and ground-up construction projects. In addition, we have preferred equity investments and debt securities classified as other lending investments.
As of June 30, 2021, the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled $461.5 million, gross of general loan loss allowances. The portfolio, excluding securities and other lending investments, included $235.4 million of performing loans with a weighted average maturity of 2.3 years.
The tables below summarize our loans and the allowance for loan losses associated with our loans ($ in thousands):
Allowance for
Gross
Loan Losses as
Number
Book
for Loan
Net Book
a % of Gross
of Loans
Losses
Book Value
Performing loans
(3,258)
232,190
51.0%
1.4%
Non-performing loans
12.3%
1.0%
(3,287)
166,750
36.7%
1.9%
100.0%
1.5%
529,657
(8,184)
521,473
71.2%
(742)
52,563
7.2%
(4,244)
158,294
21.6%
2.6%
1.8%
Performing Loans—The table below summarizes our performing loans exclusive of allowances ($ in thousands):
432,350
Weighted average LTV
63%
57%
Yield - year to date(1)
8.0%
Non-Performing Loans—We designate loans as non-performing at such time as: (1) interest payments become 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of June 30, 2021 and December 31, 2020, we had one non-performing loan with a carrying value of $56.0 million and $52.6 million, respectively. We expect that our level of non-performing loans will fluctuate from period to period.
45
Allowance for Loan Losses—The allowance for loan losses was $7.1 million as of June 30, 2021, or 1.5% of total loans and other lending investments, compared to $13.2 million, or 1.8%, as of December 31, 2020. We expect that our level of allowance for loan losses will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and allowances 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 lower than the carrying value of the loan. As of June 30, 2021 and December 31, 2020, asset-specific allowances were $0.6 million and $0.7 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 general allowance decreased to $6.5 million, or 1.6%, of performing loans and other lending investments as of June 30, 2021, compared to $12.4 million, or 1.8%, of performing loans and other lending investments as of December 31, 2020. The decrease was due primarily to the repayment of loans during the six months ended June 30, 2021 and an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.
Operating Properties
Our operating properties represent a pool of assets across a broad range of geographies and property types including industrial, hotel, multifamily, retail, condominium and entertainment/leisure properties. As of June 30, 2021, the gross book value of our operating property portfolio, including the carrying value of our equity method investments gross of accumulated depreciation, totaled $306.6 million.
The following table presents a land and development portfolio rollforward for the six months ended June 30, 2021.
Land and Development Portfolio Rollforward
(in millions)
Asbury Ocean
Club and
Asbury Park
Magnolia
All
Waterfront
Green
Others
Segment
Beginning balance(1)
201.1
101.3
128.3
430.7
Asset sales(2)
(40.2)
(11.4)
(5.2)
(56.8)
Capital expenditures
9.4
(1.4)
(0.2)
(1.6)
Ending balance(1)
160.9
97.9
122.9
381.7
46
Results of Operations for the Three Months Ended June 30, 2021 compared to the Three Months Ended June 30, 2020
$ Change
(1,268)
(6,466)
394
(228)
16,741
Total revenue
9,173
(2,533)
Real estate expenses
4,013
14,516
360
11,396
(4,330)
(799)
17,848
2,148
10,111
(637)
2,947
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $1.3 million to $45.5 million during the three months ended June 30, 2021 from $46.8 million for the same period in 2020. The following table summarizes our operating lease income by segment ($ in millions).
Three Months Ended June 30,
Change
Net Lease(1)
40.7
41.5
(0.8)
Operating Properties(2)
4.7
5.2
(0.5)
0.1
45.5
46.8
(1.3)
47
The following table shows certain same store statistics for our consolidated Net Lease segment. Same store assets are defined as assets we owned on or prior to April 1, 2020 and were in service through June 30, 2021 (Operating lease income in millions).
Operating lease income(1)
50.2
48.8
Rent per square foot
13.10
12.61
Occupancy(2)
98.6
Interest income decreased to $9.0 million during the three months ended June 30, 2021 from $15.4 million for the same period in 2020. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $371 million for the three months ended June 30, 2021 and $755 million for the three months ended June 30, 2020. The weighted average yield on our performing loans and other lending investments was 8.4% and 7.8%, respectively, for the three months ended June 30, 2021 and 2020.
Interest income from sales-type leases increased to $8.7 million for the three months ended June 30, 2021 from $8.3 million for the same period in 2020.
Other income decreased to $10.1 million during the three months ended June 30, 2021 from $10.3 million for the same period in 2020. Other income during the three months ended June 30, 2021 consisted primarily of a management fees, income from our hotel properties, other ancillary income from our land and development projects and loan portfolio and interest income on our cash. Other income during the three months ended June 30, 2020 consisted primarily of management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash.
Land development revenue and cost of sales—During the three months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $32.3 million which had associated cost of sales of $30.8 million. During the three months ended June 30, 2020, we sold residential lots and units and recognized land development revenue of $15.6 million which had associated cost of sales of $16.3 million. The increase in 2021 was primarily due to an increase in sales at our Asbury properties.
Costs and expenses—Interest expense decreased to $39.4 million during the three months ended June 30, 2021 from $42.0 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the three months ended June 30, 2021 compared to 4.7% for the three months ended June 30, 2020. The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.44 billion for the three months ended June 30, 2021 from $3.55 billion for the same period in 2020.
Real estate expense increased $4.0 million to $18.3 million during the three months ended June 30, 2021 from $14.3 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions).
Operating Properties(1)
6.3
1.8
Land and Development(2)
3.6
1.4
Net Lease(3)
7.0
6.2
18.3
14.3
Depreciation and amortization increased to $14.7 million during the three months ended June 30, 2021 from $14.3 million for the same period in 2020.
General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. General and administrative expenses increased to $30.4 million during the three months ended June 30, 2021 from $19.0 million for the same period in 2020. The increase in 2021 was due primarily to an $11.5 million increase in performance-based compensation from 2020. Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these 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 $2.3 million for the three months ended June 30, 2021 as compared to a provision for loan losses of $2.1 million for the same period in 2020. The recovery of loan losses for the three months ended June 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the second quarter 2021 and from an improving macroeconomic forecast on commercial real estate markets since March 31, 2021. The provision for loan losses for the three months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.
The recovery of losses on net investment in leases for the three months ended June 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets since March 31, 2021. The provision for losses on net investment in leases for the three months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.
During the three months ended June 30, 2020, we recorded an aggregate impairment of $4.8 million on a real estate asset held for sale and a land and development asset.
Other expense was $0.2 million during the three months ended June 30, 2021 and $0.2 million for the same period in 2020.
Income from sales of real estate—During the three months ended June 30, 2021, we recorded $2.2 million of income from sales of real estate from the sale of net lease assets and residential condominiums. During the three months ended June 30, 2020, we recorded $0.1 million of income from sales of real estate from the sale of units at a residential operating property.
Earnings from equity method investments—Earnings from equity method investments increased to $12.7 million during the three months ended June 30, 2021 from $2.6 million for the same period in 2020. During the three months ended June 30, 2021, we recognized $9.7 million of income from our equity method investment in SAFE, $1.6 million from our equity method investment in Net Lease Venture II and $1.4 million of net aggregate income from our remaining equity method investments. During the three months ended June 30, 2020, we recognized $8.2 million of income from our equity method investment in SAFE, which was partially offset by $5.6 million of net aggregate losses from our remaining equity method investments.
Income tax benefit (expense)—Income tax expense of $0.7 million was recorded for the three months ended June 30, 2021 and related primarily to a reduction in the amount of expected refund of alternative minimum taxes due us resulting from amended tax returns from prior periods net operating loss carrybacks. Income tax expense of $28 thousand was recorded for the three months ended June 30, 2020 and related primarily to state margins taxes and other minimum state taxes.
49
Results of Operations for the Six Months Ended June 30, 2021 compared to the Six Months Ended June 30, 2020
(1,170)
(13,032)
666
(6,306)
(31,185)
(51,027)
(6,361)
(1,591)
(33,220)
1,329
(1,437)
(12,127)
(3,692)
(4,706)
187
(61,618)
612
6,268
88
23,822
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $1.2 million to $93.0 million during the six months ended June 30, 2021 from $94.2 million for the same period in 2020. The following table summarizes our operating lease income by segment ($ in millions).
Six Months Ended June 30,
83.3
83.0
0.3
9.5
11.0
(1.5)
0.2
93.0
94.2
(1.2)
The following table shows certain same store statistics for our consolidated Net Lease segment. Same store assets are defined as assets we owned on or prior to January 1, 2020 and were in service through June 30, 2021 (Operating lease income in millions).
102.1
13.33
12.64
50
Interest income decreased to $19.6 million during the six months ended June 30, 2021 from $32.7 million for the same period in 2020. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $445 million for the six months ended June 30, 2021 and $775 million for the six months ended June 30, 2020. The weighted average yield on our performing loans and other lending investments for both the six months ended June 30, 2021 and 2020 was 8.0%.
Interest income from sales-type leases increased to $17.3 million for the six months ended June 30, 2021 from $16.7 million for the same period in 2020.
Other income decreased to $24.4 million during the six months ended June 30, 2021 from $30.7 million for the same period in 2020. Other income during the six months ended June 30, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our land and development projects and loan portfolio, income from our hotel properties, lease termination fees and interest income on our cash. Other income during the six months ended June 30, 2020 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash.
Land development revenue and cost of sales—During the six months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $64.6 million which had associated cost of sales of $60.1 million. During the six months ended June 30, 2020, we sold residential lots and units and recognized land development revenue of $95.8 million which had associated cost of sales of $93.3 million.
Costs and expenses—Interest expense decreased to $79.0 million during the six months ended June 30, 2021 from $85.3 million for the same period in 2020 due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the six months ended June 30, 2021 compared to 4.8% for the six months ended June 30, 2020. The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, increased to $3.46 billion for the six months ended June 30, 2021 from $3.53 billion for the same period in 2020.
Real estate expenses decreased to $35.2 million during the six months ended June 30, 2021 from $36.8 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions).
10.1
12.2
(2.1)
(2.7)
15.6
12.4
3.2
35.2
36.8
Depreciation and amortization increased to $30.1 million during the six months ended June 30, 2021 from $28.8 million for the same period in 2020, primarily due to the full amortization of intangible assets associated with terminated leases and placing certain assets in service during 2021.
General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. General and administrative expenses decreased to $51.8 million during the six months ended June 30, 2021 from $53.3 million for the same period in 2020. The decrease in 2021 was due primarily to a $1.5 million decrease in payroll and related costs and performance-based compensation. Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these 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.
51
The recovery of loan losses was $6.1 million for the six months ended June 30, 2021 as compared to a provision for loan losses of $6.1 million for the same period in 2020. The recovery of loan losses for the six months ended June 30, 2021 resulted from the reversal of CECL 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 loan losses for the six months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.
The recovery of losses on net investment in leases for the six months ended June 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020. The provision for losses on net investment in leases for the six months ended June 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets.
During the six months ended June 30, 2021, we recorded an aggregate impairment of $1.8 million in connection with the sale of net lease assets and residential condominiums. During the six months ended June 30, 2020, we recorded an aggregate impairment of $6.5 million in connection with the sale of net lease assets and impairments on a real estate asset held for sale and a land and development asset.
Other expense increased to $0.5 million during the six months ended June 30, 2021 from $0.3 million for the same period in 2020.
Income from sales of real estate—During the six months ended June 30, 2021, we recorded $2.8 million of income from sales of real estate from the sale of net lease assets and residential condominiums. During the six months ended June 30, 2020, we recorded $0.1 million of income from sales of real estate from the sale of units at a residential operating property.
Loss on early extinguishment of debt, net—During the six months ended June 30, 2020, we incurred losses on early extinguishment of debt of $4.1 million resulting from the repayment of senior notes prior to maturity.
Earnings from equity method investments—Earnings from equity method investments increased to $25.5 million during the six months ended June 30, 2021 from $19.2 million for the same period in 2020. During the six months ended June 30, 2021, we recognized $21.1 million of income from our equity method investment in SAFE, $2.6 million from our equity method investment in Net Lease Venture II and $1.8 million of net aggregate income from our remaining equity method investments. During the six months ended June 30, 2020, we recognized $27.6 million of income from our equity method investment in SAFE, which included a dilution gain of $7.9 million resulting from a SAFE equity offering in March 2020, offset by $8.4 million of net aggregate losses from our remaining equity method investments.
Income tax expense—Income tax benefit of $0.1 million was recorded during the six months ended June 30, 2020 and was due primarily to state margins taxes and other minimum state taxes.
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, reducing our legacy portfolio to approximately 14% of our overall portfolio as of June 30, 2021, 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 reflects impairment charges and loan provisions in the same period in which they are recognized in net income (loss) prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
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 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
16,712
15,675
Add: Stock-based compensation expense
14,791
4,744
Adjusted earnings (loss) allocable to common shareholders
11,960
(2,916)
34,341
30,731
Add: Non-cash portion of loss on early extinguishment of debt
799
Adjusted earnings allocable to common shareholders
34,692
7,758
Liquidity and Capital Resources
During the three months ended June 30, 2021, we invested an aggregate $163 million in new investments, prior financing commitments and real estate development. Investments included $136 million in net lease (including $25 million in shares of SAFE common stock), loan, and strategic investments, $20 million in the repurchase of our common stock and $7 million of capital expenditures on legacy assets. These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):
338
1,598
3,949
4,884
Total capital expenditures on real estate assets
4,287
6,482
8,382
25,028
Total capital expenditures on land and development assets
As of June 30, 2021, we had unrestricted cash of $155 million and $342 million of borrowing capacity available under the Revolving Credit Facility. The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and
materially scaling SAFE’s portfolio in 2020 and the first quarter of 2021. These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes. Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures, distributions to shareholders through dividends and share repurchases and funding ongoing business operations. The amount we actually invest will depend on the full impact of the COVID-19 pandemic on our business and the pace of the economic recovery.
We had approximately $214.8 million of maximum unfunded commitments associated with our investments as of June 30, 2021, of which we expect to fund the majority 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 $201.9 million principal amount of scheduled real estate finance asset maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers.
We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future. Our capital sources to meet such cash requirements are expected to include cash on hand, Revolving Credit Facility borrowings, income from our portfolio, loan repayments from borrowers and proceeds from asset sales. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions.
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 1.2x and a covenant restricting certain incurrences of debt based on a fixed charge coverage ratio. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.
The Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the Senior Term Loan requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. Under both the Senior Term Loan and the Revolving Credit Facility we are permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend. We declared common stock dividends of $17.4 million, or $0.235 per share, for the six months ended June 30, 2021.
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 13 to the consolidated financial statements.
Unfunded Commitments—We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of June 30, 2021, the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):
Stock Repurchase Program—We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the six months ended June 30, 2021, we repurchased 1.8 million shares of our outstanding common stock for $32.4 million, for an average cost of $17.57 per share. During the six months ended June 30, 2020, we repurchased 2.5 million shares of our outstanding common stock for $27.8 million, for an average cost of $10.98 per share. We are generally authorized to repurchase up to $50.0 million in shares of our common stock. As of July 31, 2021, we had remaining authorization to repurchase up to $33.0 million of common stock under our stock repurchase program. Our Board of Directors subsequently authorized an increase to the stock repurchase program to $50.0 million effective after the date of the filing of this report on Form 10-Q.
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 Annual Report on Form 10-K.
New Accounting Pronouncements—For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements.
55
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 increase by 10, 50 or 100 basis points or decrease by 10 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 0.10% as of June 30, 2021. 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)
-10 Basis Points
370
Base Interest Rate
+10 Basis Points
(337)
+50 Basis Points
(1,632)
+100 Basis Points
(3,174)
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 Accounting Officer, who is currently performing the functions of the Company's principal 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 principal financial officer (whose functions are currently being performed by the Company's Chief Accounting 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 Accounting Officer (performing the functions of the principal 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 Accounting 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 Accounting Officer, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes during the last fiscal quarter in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company’s business as a finance and investment company focused on the commercial real estate industry, including foreclosure-related proceedings. The Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated financial statements.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in our 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth the information with respect to purchases made by us or on our behalf of our common stock during the three months ended June 30, 2021.
Total Number of Shares
Maximum Dollar Value
Purchased as Part of a
of Shares that May Yet
Total Number of
Average Price
Publicly Announced
be Purchased Under the
Shares Purchased
Paid per Share
Plan
Plans(1)
April 1 to April 30
240,117
18.37
35,690,410
May 1 to May 31
882,157
17.63
20,140,391
June 1 to June 30
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
31.0
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
32.0
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act.
101*
The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021 is formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets (unaudited) as of June 30, 2021 and December 31, 2020, (ii) the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2021 and 2020, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2021 and 2020, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended June 30, 2021 and 2020, (v) the Consolidated Statements of Cash Flows (unaudited) for six months ended June 30, 2021 and 2020 and (vi) the Notes to the Consolidated Financial Statements (unaudited).
104
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 Section 13 or 15(d) 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
/s/ JAY SUGARMAN
Date:
August 3, 2021
Jay Sugarman
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
/s/ GARETT ROSENBLUM
Garett Rosenblum
Chief Accounting Officer
(principal financial officer)