Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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 November 1, 2021, there were 69,475,927 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
TABLE OF CONTENTS
Page
PART I
Consolidated Financial Information
Item 1.
Financial Statements:
Consolidated Balance Sheets (unaudited) as of September 30, 2021 and December 31, 2020
2
Consolidated Statements of Operations (unaudited)—For the three and nine months ended September 30, 2021 and 2020
3
Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three and nine months ended September 30, 2021 and 2020
4
Consolidated Statements of Changes in Equity (unaudited)—For the three and nine months ended September 30, 2021 and 2020
5
Consolidated Statements of Cash Flows (unaudited)—For the nine months ended September 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
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 4.
Controls and Procedures
58
PART II
Other Information
59
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
60
SIGNATURES
61
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except per share data)(1)
(unaudited)
As of
September 30,
December 31,
2021
2020
ASSETS
Real estate
Real estate, at cost
$
1,657,866
1,752,053
Less: accumulated depreciation
(300,942)
(267,772)
Real estate, net
1,356,924
1,484,281
Real estate available and held for sale
1,983
5,212
Total real estate
1,358,907
1,489,493
Net investment in leases ($9,136 and $10,871 of allowances as of September 30, 2021 and December 31, 2020, respectively)
477,360
429,101
Land and development, net
302,845
430,663
Loans receivable and other lending investments, net ($6,370 and $13,170 of allowances as of September 30, 2021 and December 31, 2020, respectively)
405,509
732,330
Loans receivable held for sale
42,683
—
Other investments
1,419,766
1,176,560
Cash and cash equivalents
298,886
98,633
Finance lease right of use assets
142,615
143,727
Accrued interest and operating lease income receivable, net
5,046
10,061
Deferred operating lease income receivable, net
66,002
58,128
Deferred expenses and other assets, net
282,546
293,112
Total assets
4,802,165
4,861,808
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities
300,461
317,402
Finance lease liabilities
152,629
150,520
Liabilities associated with properties held for sale
252
27
Loan participations payable, net
42,501
Debt obligations, net
3,282,598
3,286,975
Total liabilities
3,735,940
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, 70,031 and 73,967 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
70
74
Additional paid-in capital
3,127,401
3,240,535
Accumulated deficit
(2,225,552)
(2,316,972)
Accumulated other comprehensive loss (refer to Note 14)
(34,350)
(52,680)
Total iStar Inc. shareholders' equity
867,581
870,969
Noncontrolling interests
198,644
193,414
Total equity
1,066,225
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 September 30,
For the Nine Months Ended September 30,
Revenues:
Operating lease income
44,392
46,370
137,381
140,529
Interest income
7,951
14,270
27,574
46,925
Interest income from sales-type leases
9,578
8,360
26,895
25,010
Other income
40,195
25,552
64,549
56,212
Land development revenue
93,369
20,502
157,936
116,254
Total revenues
195,485
115,054
414,335
384,930
Costs and expenses:
Interest expense
39,471
42,407
118,451
127,748
Real estate expense
18,724
16,935
53,907
53,708
Land development cost of sales
87,380
21,358
147,507
114,704
Depreciation and amortization
14,856
14,621
44,971
43,407
General and administrative
17,121
19,868
68,954
73,138
(Recovery of) provision for loan losses
(1,556)
(1,976)
(7,613)
4,093
Provision for (recovery of) losses on net investment in leases
131
175
(1,735)
2,001
Impairment of assets
1,179
2,965
6,491
Other expense
2,011
73
2,475
351
Total costs and expenses
179,317
113,461
429,882
425,641
Income from sales of real estate
25,611
6,055
28,433
6,118
Income (loss) from operations before earnings from equity method investments and other items
41,779
7,648
12,886
(34,593)
Loss on early extinguishment of debt, net
(7,924)
(12,038)
Earnings from equity method investments
89,209
6,805
114,675
26,003
Net income (loss) before income taxes
130,988
6,529
127,561
(20,628)
Income tax benefit (expense)
6
(78)
(165)
Net income (loss)
130,994
6,451
127,567
(20,793)
Net (income) attributable to noncontrolling interests
(3,264)
(2,646)
(8,037)
(8,435)
Net income (loss) attributable to iStar Inc.
127,730
3,805
119,530
(29,228)
Preferred dividends
(5,874)
(17,622)
Net income (loss) allocable to common shareholders
121,856
(2,069)
101,908
(46,850)
Per common share data:
Net income (loss) allocable to common shareholders:
Basic
1.71
(0.03)
1.40
(0.61)
Diluted
1.51
1.30
Weighted average number of common shares:
71,299
75,033
72,675
76,232
80,487
78,402
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income (loss):
Reclassification of losses on cash flow hedges into earnings upon realization(1)
2,683
2,371
7,507
5,792
Unrealized gains (losses) on available-for-sale securities
(539)
19
(913)
1,195
Unrealized gains (losses) on cash flow hedges
273
197
11,483
(30,930)
Other comprehensive income (loss)
2,417
2,587
18,077
(23,943)
Comprehensive income (loss)
133,411
9,038
145,644
(44,736)
Comprehensive (income) attributable to noncontrolling interests
(4,207)
(3,299)
(11,951)
(2,894)
Comprehensive income (loss) attributable to iStar Inc.
129,204
5,739
133,693
(47,630)
Consolidated Statements of Changes in Equity
iStar Inc. Shareholders' Equity
Accumulated
Common
Additional
Retained
Other
Preferred
Stock at
Paid-In
Earnings
Comprehensive
Noncontrolling
Total
Stock(1)
Par
Capital
(Deficit)
Income (Loss)
Interests
Equity
Balance as of June 30, 2021
72
3,185,748
(2,338,454)
(35,824)
197,152
1,008,706
Dividends declared—preferred
Dividends declared—common ($0.125 per share)
(8,954)
Issuance of stock/restricted stock unit amortization, net(2)
1,158
1,107
2,265
Net income
3,264
Change in accumulated other comprehensive income (loss)
1,474
943
Repurchase of stock
(2)
(59,505)
(59,507)
Contributions from noncontrolling interests
169
Distributions to noncontrolling interests
(3,917)
Change to noncontrolling interest
(74)
Balance as of September 30, 2021
Balance as of June 30, 2020
76
3,260,173
(2,279,284)
(59,045)
191,853
1,113,785
Dividends declared—common ($0.11 per share)
(8,315)
903
894
1,797
2,646
1,934
653
(13,623)
(13,625)
444
(3,802)
Balance as of September 30, 2020
3,247,453
(2,289,668)
(57,111)
192,688
1,093,448
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 ($0.36 per share)
(26,338)
4,929
2,645
7,574
8,037
18,330
3,913
22,243
(4)
(91,859)
(91,863)
1,026
(335)
(10,317)
(10,652)
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 ($0.32 per share)
(24,598)
1
3,985
2,469
6,455
8,435
(18,404)
(5,539)
(5)
(41,409)
(41,414)
760
(10,975)
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash flows from operating activities:
(Recovery of) provision for losses on net investment in leases
Non-cash interest income from sales-type leases
(22,243)
(15,681)
Stock-based compensation expense
23,300
26,675
Amortization of discounts/premiums and deferred financing costs on debt obligations, net
5,920
10,055
Amortization of discounts/premiums and deferred interest on loans, net
(11,730)
(24,360)
Deferred interest on loans received
24,394
15,275
(114,675)
(26,003)
Distributions from operations of other investments
37,433
17,146
Deferred operating lease income
(7,874)
(11,276)
(28,433)
(6,118)
Land development revenue in excess of cost of sales
(10,429)
(1,550)
12,038
Other operating activities, net
(14,031)
(21,207)
Changes in assets and liabilities:
Origination and fundings of loans receivable held for sale
(42,000)
Changes in accrued interest and operating lease income receivable
5,259
352
Changes in deferred expenses and other assets, net
(9,186)
(6,079)
Changes in accounts payable, accrued expenses and other liabilities
(6,601)
(10,644)
Cash flows used in operating activities
(4,741)
(6,178)
Cash flows from investing activities:
Originations and fundings of loans receivable, net
(71,921)
(80,635)
Capital expenditures on real estate assets
(5,835)
(11,661)
Capital expenditures on land and development assets
(15,603)
(33,488)
Acquisitions of real estate, net investments in leases and land assets
Repayments of and principal collections on loans receivable and other lending investments, net
226,065
151,612
Net proceeds from sales of loans receivable
122,609
Net proceeds from sales of real estate
140,576
42,684
Net proceeds from sales of land and development assets
154,094
113,670
Net proceeds from sales of other investments
3,000
Distributions from other investments
34,926
12,139
Contributions to and acquisition of interest in other investments
(171,005)
(194,775)
Other investing activities, net
(1,184)
(5,214)
Cash flows provided by (used in) investing activities
373,722
(5,668)
Cash flows from financing activities:
Borrowings from debt obligations
25,000
737,913
Repayments and repurchases of debt obligations
(44,534)
(824,740)
Preferred dividends paid
Common dividends paid
(26,149)
(24,397)
(88,946)
(47,272)
Payments for debt prepayment or extinguishment costs
(8,567)
Payments for deferred financing costs
(75)
(7,475)
Payments for withholding taxes upon vesting of stock-based compensation
(2,210)
(2,001)
233
Cash flows used in financing activities
(164,620)
(204,376)
Effect of exchange rate changes on cash
(126)
(10)
Changes in cash, cash equivalents and restricted cash
204,235
(216,232)
Cash, cash equivalents and restricted cash at beginning of period
150,566
352,206
Cash, cash equivalents and restricted cash at end of period
354,801
135,974
Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows
88,187
Restricted cash included in deferred expenses and other assets, net
55,915
47,787
Total cash and cash equivalents and restricted cash
Supplemental disclosure of non-cash investing and financing activity:
Fundings and (repayments) of loan receivables and loan participations, net
(42,501)
6,160
Accounts payable for capital expenditures on land and development and real estate assets
1,125
Contributions to other investments
2,000
Accrued repurchase of stock
3,117
499
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 “2020 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 September 30, 2021 and
Notes to Consolidated Financial Statements (Continued)
December 31, 2020. The following table presents the assets and liabilities of the Company’s consolidated VIEs as of September 30, 2021 and December 31, 2020 ($ in thousands):
December 31, 2020
901,254
899,110
(80,409)
(61,917)
820,845
837,193
190,929
240,137
26
35
25,114
22,571
1,282
1,472
36,665
29,428
119,127
122,591
1,193,988
1,253,427
LIABILITIES
74,307
115,581
478,567
488,719
552,874
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 September 30, 2021, the Company’s maximum exposure to loss from these investments does not exceed the sum of the $149.4 million carrying value of the investments, which are classified in “Other investments” on the Company’s consolidated balance sheets, and $7.6 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 $25.9 million with respect to its 3.125% senior convertible notes (refer to Note 11). Periods presented that are prior to the adoption date of January 1, 2021 will not be adjusted. In addition, upon the adoption of ASU 2020-06, the Company is required to use a modified if-converted method when calculating earnings per share. The Company will settle conversions of the 3.125% senior convertible notes by paying the conversion value in cash up to the original principal amount of the notes being converted and shares of common stock to the extent of any conversion premium. The if-converted method is modified so that interest expense is not added back to the numerator, and the denominator only includes the net number of incremental shares that would be issued upon conversion.
For the remainder of the Company’s significant accounting policies, refer to the Company’s 2020 Annual Report.
10
New Accounting Pronouncements—In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Note 4—Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
Net
Operating
Lease(1)
Properties
As of September 30, 2021
Land, at cost
188,418
6,830
195,248
Buildings and improvements, at cost
1,355,984
106,634
1,462,618
(280,521)
(20,421)
Real estate, net(1)
1,263,881
93,043
Real estate available and held for sale(2)
95,026
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 nine months ended September 30, 2021, the Company sold an operating property with a carrying value of $96.8 million for $125.0 million and recognized a gain of $25.6 million after selling costs. The gain is
11
recorded in “Income from sales of real estate” in the Company’s consolidated statements of operations. During the nine months ended September 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.
Impairments— During the three and nine months ended September 30, 2021, the Company recorded an impairment of $0.4 million on an operating property. During the nine months ended September 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 $5.3 million and $17.4 million for the three and nine months ended September 30, 2021, respectively, and $5.8 million and $17.1 million for the three and nine months ended September 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 September 30, 2021 and December 31, 2020, the allowance for doubtful accounts related to real estate tenant receivables was $0.4 million and $1.7 million, respectively. These amounts are included in “Accrued interest and operating lease income receivable, net” on the Company’s consolidated balance sheets.
Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-cancelable operating leases, excluding customer reimbursements of expenses, in effect as of September 30, 2021, are as follows by year ($ in thousands):
Year
Lease
2021 (remaining three months)
32,800
1,455
2022
133,616
6,226
2023
125,330
5,966
2024
119,714
5,913
2025
123,248
5,318
Thereafter
1,385,609
7,825
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, was accounted for as a financing transaction and $42.0 million was recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheet. 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 nine months ended September 30, 2021, the Company recognized $7.0 million and $7.3 million, respectively, of cash interest income and $2.5 million and $19.6 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 nine months ended September 30, 2020, the Company recognized $1.5 million and $10.7 million, respectively, of cash interest income and $6.9 million and $14.3 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 nine months ended September 30, 2021, the Company sold net lease assets for net proceeds of $8.7 million and recognized an aggregate impairment of $2.3 million in connection with the sales.
The Company’s net investment in leases were comprised of the following as of September 30, 2021 and December 31, 2020 ($ in thousands):
Total undiscounted cash flows
1,538,758
1,020,921
Unguaranteed estimated residual value
367,804
345,284
Present value discount
(1,420,066)
(926,233)
Allowance for losses on net investment in leases
(9,136)
(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 September 30, 2021, are as follows by year ($ in thousands):
Amount
7,372
30,590
43,272
43,029
31,955
1,382,540
13
Allowance for Losses on Net Investment in Leases—Changes in the Company’s allowance for losses on net investment in leases for the three and nine months ended September 30, 2021 and 2020 were as follows ($ in thousands):
Three Months Ended
Nine Months Ended
September 30, 2020
Allowance for losses on net investment in leases at beginning of period
9,005
10,937
10,871
Initial allowance recorded upon adoption of new accounting standard(1)
9,111
Provision for (recovery of) losses on net investment in leases(2)
176
2,002
Allowance for losses on net investment in leases at end of period
9,136
11,113
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
313,428
441,201
(10,583)
(10,538)
Total land and development, net
Dispositions—During the nine months ended September 30, 2021 and 2020, the Company sold land parcels and residential lots and units and recognized land development revenue of $157.9 million and $116.3 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recognized land development cost of sales of $147.5 million and $114.7 million, respectively, from its land and development portfolio.
Impairments—During the nine months ended September 30, 2020, the Company recorded an impairment of $1.5 million on a land and development asset.
14
Note 7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable and other lending investments by class ($ in thousands):
Construction loans
Senior mortgages
191,697
449,733
Corporate/Partnership loans
3,516
65,100
Subtotal - gross carrying value of construction loans(1)
195,213
514,833
Loans
15,181
35,922
17,941
20,567
Subordinate mortgages
12,248
11,640
Subtotal - gross carrying value of loans
45,370
68,129
Other lending investments
Financing receivables (refer to Note 5)
48,503
46,549
Held-to-maturity debt securities
95,258
90,715
Available-for-sale debt securities
27,535
25,274
Subtotal - other lending investments
171,296
162,538
Total gross carrying value of loans receivable and other lending investments
411,879
745,500
Allowance for loan losses
(6,370)
(13,170)
Total loans receivable and other lending investments, net
15
Allowance for Loan Losses—Changes in the Company’s allowance for loan losses were as follows for the three months ended September 30, 2021 and 2020 ($ in thousands):
General Allowance
Held to
Construction
Maturity Debt
Financing
Specific
Three Months Ended September 30, 2021
Securities
Receivables
Allowance
Allowance for loan losses at beginning of period
1,640
1,619
2,393
893
590
7,135
(Recovery of) provision for loan losses(1)
(149)
(865)
145
54
50
(765)
Allowance for loan losses at end of period
1,491
754
2,538
947
640
6,370
Three Months Ended September 30, 2020
11,736
905
111
1,159
21,701
35,612
(2,598)
(427)
(56)
17
899
(2,165)
9,138
478
55
1,176
22,600
33,447
Changes in the Company’s allowance for loan losses were as follows for the nine months ended September 30, 2021 and 2020 ($ in thousands):
Nine Months Ended September 30, 2021
6,541
1,643
3,093
1,150
743
13,170
Recovery of loan losses(1)
(5,050)
(889)
(555)
(203)
(103)
(6,800)
Nine Months Ended September 30, 2020
6,668
265
28,634
Adoption of new accounting standard(2)
(353)
98
20
964
729
Provision for loan losses(1)
2,823
115
212
4,084
16
The Company’s investment in loans and other lending investments and the associated allowance for loan losses were as follows as of September 30, 2021 and December 31, 2020 ($ in thousands):
Individually
Collectively
Evaluated for
Impairment(1)
Impairment
Construction loans(2)
58,819
136,394
Loans(2)
Financing receivables
Available-for-sale debt securities(3)
Less: Allowance for loan losses
(640)
(5,730)
58,179
347,330
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.
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 September 30, 2021 were as follows ($ in thousands):
Year of Origination
2019
2018
2017
Prior to 2017
Risk rating
1.0
1.5
2.0
11,900
2.5
3.0
109,137
3,281
112,418
3.5
23,741
4.0
4.5
5.0
Subtotal(1)
144,778
148,059
Corporate/partnership loans
Subtotal
21,457
166,235
15,529
230,267
18
The Company’s amortized cost basis in loans, aged by payment status and presented by class, was as follows ($ in thousands):
Less Than
Greater
or Equal
Than
Current
to 90 Days
90 Days
Past Due
206,878
181,764
240,583
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)
58,069
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 provided for future funding obligations to the Ground Lease tenant of approximately $11.9 million of deferred purchase price and $52.0 million of leasehold improvement allowance upon achievement of certain milestones. At closing, the Company entered into an agreement with SAFE pursuant to which, subject to certain conditions being met, SAFE would acquire the ground lessor entity from the Company. The Company determined that the transaction did not qualify as a sale leaseback transaction and recorded the Ground Lease in “Loans receivable held for sale” on the Company’s consolidated balance sheet. Subsequent to closing, the Company funded approximately $6.0 million of the deferred purchase price to the Ground Lease tenant. The Company sold the ground lessor entity (and SAFE assumed all future funding obligations to the Ground Lease tenant) to SAFE in September 2021 for $22.1 million and recorded no gain or loss on the sale.
In June 2021, the Company acquired a parcel of land for $42.0 million and simultaneously entered into a Ground Lease (refer to Note 5). The Company also concurrently entered into an agreement pursuant to which SAFE would acquire the Ground Lease from the Company. The Ground Lease was entered into with the seller of the land and did not qualify for sale leaseback accounting, and as such, was accounted for as a financing transaction and $42.0 million was recorded in “Loans receivable held for sale” on the Company’s consolidated balance sheets.
Other lending investments—Other lending investments includes the following securities ($ in thousands):
Unrealized
Estimated
Carrying
Face Value
Cost Basis
Gain
Fair Value
Value
Available-for-Sale Securities
Municipal debt securities
23,855
3,680
Held-to-Maturity Securities
Debt securities
100,000
123,855
119,113
122,793
20,680
4,594
120,680
111,395
115,989
As of September 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 Nine Months Ended
Real estate equity investments
Safehold Inc. ("SAFE")(2)
1,113,333
937,712
73,475
9,331
94,590
36,905
iStar Net Lease II LLC ("Net Lease Venture II")
100,471
78,998
1,414
811
4,014
1,568
Other real estate equity investments
44,196
89,939
11,965
(3,542)
9,902
(10,517)
1,258,000
1,106,649
86,854
6,600
108,506
27,956
Other strategic investments(3)
161,766
69,911
2,355
205
6,169
(1,953)
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”). During the nine months ended September 30, 2021, the Company purchased 0.4 million shares of SAFE's common stock for $27.9 million, for an average cost of $71.68 per share, in open market purchases made in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended. As of September 30, 2021, the Company owned approximately 63.6% 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:
21
In September 2021, the Company acquired 657,894 shares of SAFE’s common stock in a private placement for $50.0 million.
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 September 30, 2021 and 2020, the Company recorded $3.6 million and $3.2 million, respectively, of management fees pursuant to its management agreement with SAFE. During the nine months ended September 30, 2021 and 2020, the Company recorded $10.6 million and $9.3 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 September 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 nine months ended September 30, 2021 and 2020, the Company recognized $5.6 million and $3.8 million, respectively, of expense reimbursements pursuant to its management agreement with SAFE.
The Company has an exclusivity agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
22
Following is a list of investments that the Company has transacted with SAFE, 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 and nine months ended September 30, 2020, the Company recorded $0.9 million and $2.5 million, respectively, of interest income on the loan. The Company sold the Ground Lease to SAFE in September 2020 for $34.0 million and recognized a gain of $6.1 million in "Income from sales of real estate" in connection with the sale 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.
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 nine months ended September 30, 2020, the Company recorded $0.3 million and $0.8 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. The Company sold the loan in July 2021 and recorded no gain or loss on the sale. During the three and nine months ended September 30, 2021, the Company recorded $0.4 million and $2.9 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 would acquire the ground lessor entity from the Company. The Company sold the ground lessor entity to SAFE in September 2021 and recognized no gain or loss on the sale (refer to Note 7 - Loans receivable held for sale). The Company also committed to provide a $75.0 million construction loan to the Ground Lease tenant. The Company received $2.7 million of consideration from SAFE in connection with this transaction. In September 2021, the construction loan commitment and the $2.7 million of consideration was transferred to an entity in which the Company has a 53.0% noncontrolling equity interest (refer to “Other strategic investments” below).
In June 2021, the Company sold to SAFE its rights under a purchase option agreement for $1.2 million. The Company had previously acquired such purchase option agreement from a third-party property owner for $1.0 million and incurred $0.2 million of expenses. Under the option agreement, upon certain conditions being met by an outside developer who may become the Ground Lease tenant, SAFE has the right to acquire for $215.0 million a property and hold a Ground Lease under approximately 1.1 million square feet of office space that may be developed on the property. No gain or loss was recognized by the Company as a result of the sale.
In June 2021, the Company and SAFE entered into two agreements pursuant to each of which SAFE would acquire land and a related Ground Lease originated by the Company when certain construction related conditions are met by a specified time period. The purchase price to be paid for each is $42.0 million, plus an amount necessary for the Company to achieve the greater of a 1.25x multiple and a 9% return on its investment. In addition, each Ground Lease provides for a leasehold improvement allowance up to a maximum of $83.0 million, which obligation would be assumed by SAFE upon acquisition. If certain construction conditions are not met within a specified time period, SAFE will have no obligation to acquire the Ground Leases or fund the leasehold improvement allowances. 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 September 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 nine months ended September 30, 2021 and 2020, the Company recorded $1.2 million and $1.1 million, respectively, of management fees from Net Lease Venture II.
Other real estate equity investments—As of September 30, 2021, the Company’s other real estate equity investments include equity interests in real estate ventures ranging from 48% to 95%, comprised of investments of $43.7 million in operating properties and $0.5 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 September 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 September 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 September 30, 2021 and 2020, the Company recorded $0.6 million and $0.6 million, respectively, of interest income on the mezzanine loan. During the nine months ended September 30, 2021 and 2020, the Company recorded $1.7 million and $1.8 million, respectively, of interest income on the mezzanine loan.
Other strategic investments—As of September 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. In September 2021, the Company transferred a $75.0 million construction loan commitment to this entity. The Company does not have a controlling interest in this entity due to the substantive participating rights of its partner. The Company accounts for this investment as an equity method investment and receives a fixed annual fee in exchange for managing the entity.
Summarized investee financial information—The following table presents the investee level summarized financial information for the Company’s equity method investment that was significant as of September 30, 2021 ($ in thousands):
Revenues
Expenses
Net Income Attributable to Parent
For the Nine Months Ended September 30, 2021
SAFE
135,001
88,585
51,844
For the Nine Months Ended September 30, 2020
115,518
73,821
44,024
24
Note 9—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
Intangible assets, net(1)
146,588
156,041
Restricted cash
51,933
Operating lease right-of-use assets(2)
43,799
48,891
Other assets(3)
17,572
19,453
Other receivables
11,052
10,881
Leasing costs, net(4)
4,936
2,340
Corporate furniture, fixtures and equipment, net(5)
1,843
2,024
Deferred financing fees, net
841
1,549
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
Other liabilities(1)
65,318
91,513
Accrued expenses
112,223
94,724
Intangible liabilities, net(2)
46,870
48,738
Operating lease liabilities (see table above)
47,111
50,072
Accrued interest payable
28,939
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 $42.5 million and is included in “Loans receivable and other lending investments, net” on the Company’s consolidated balance sheets. The principal and interest due on loan participations payable are paid from cash flows of the corresponding loans receivable, which serve as collateral for the participations.
Note 11—Debt Obligations, net
The Company’s debt obligations were as follows ($ 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
701,541
721,075
1.63% - 7.19
% (3)
Total secured credit facilities and mortgages(4)
1,193,416
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
3,305,916
3,325,450
Debt discounts and deferred financing costs, net(9)
(23,318)
(38,475)
Total debt obligations, net(10)
Future Scheduled Maturities—As of September 30, 2021, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
Unsecured Debt
Secured Debt
95,495
95,324
382,824
269,780
819,780
500,000
240,942
740,942
Total principal maturities
2,112,500
Unamortized discounts and deferred financing costs, net
(18,426)
(4,892)
Total debt obligations, net
2,094,074
1,188,524
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 September 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 September 30, 2021, based on the Company’s borrowing base of assets, the Company had the ability to draw $340.2 million without pledging any additional assets to the facility.
Unsecured Notes—As of September 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 nine months ended September 30, 2020, repayments of unsecured notes prior to maturity resulted in losses on early extinguishment of debt of $12.0 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
28
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 September 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
7,860
29,716
71,319
108,895
Strategic Investments
1,900
7,592
9,492
31,616
78,911
118,387
29
Other Commitments—Future minimum lease obligations under non-cancelable operating and finance leases as of September 30, 2021 are as follows ($ in thousands):
Operating(1)(2)
Finance(1)
1,728
1,384
6,635
5,604
6,272
5,716
6,188
5,830
6,176
5,946
334
1,567,826
27,333
1,592,306
Present value discount(1)
(2,717)
(1,439,677)
Other adjustments(2)
22,495
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
6,756
6,393
6,309
6,297
496
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 September 30, 2021 and December 31, 2020 ($ in thousands):(1)
Derivative Liabilities
Balance Sheet
Fair
Location
Derivatives Designated in Hedging Relationships
Interest rate swaps
11,723
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 September 30, 2021
278
(2,050)
(633)
For the Three Months Ended September 30, 2020
(401)
(2,038)
598
(333)
2,834
(6,183)
8,649
(1,324)
Interest Expense
(15,371)
(4,926)
(15,559)
(866)
32
Note 14—Equity
Preferred Stock—The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of September 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 $26.3 million, or $0.36 per share, for the nine months ended September 30, 2021 and $24.6 million, or $0.32 per share, for the nine months ended September 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 nine months ended September 30, 2021, the Company repurchased 4.2 million shares of its outstanding common stock for $91.9 million, for an average cost of $21.70 per share. During the nine months ended September 30, 2020, the Company repurchased 3.7 million shares of its outstanding common stock for $41.4 million, for an average cost of $11.32 per share. The Company is generally authorized to repurchase up to $50.0 million in shares of its common stock. As of September 30, 2021, the Company had remaining authorization to repurchase up to $30.9 million of common stock under its stock repurchase program.
33
Accumulated Other Comprehensive Income (Loss)— “Accumulated other comprehensive income (loss)” reflected in the Company’s shareholders’ equity is comprised of the following ($ in thousands):
Unrealized gains on available-for-sale securities
3,681
Unrealized losses on cash flow hedges
(38,031)
(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 $3.0 million and $23.3 million for the three and nine months ended September 30, 2021, respectively, and $5.7 million and $26.7 million for the three and nine months ended September 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 September 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 nine months ended September 30, 2021 and 2020, the Company recorded $2.6 million and $2.5 million, respectively, of expense related to the 2019-2022 iPIP plans. Distributions on the class B units are expected to be 50% in cash and 50% in shares of the Company’s common stock; provided, however, that (a) the cash portion will be increased if the Company does not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, the Company may elect to distribute SAFE shares in lieu of cash and Company stock.
The following is a summary of the status of the Company’s equity-classified iPIP plans and changes during the nine months ended September 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 September 30, 2021, investments with an aggregate gross book value of $1.2 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 $163 million, including 1.0 million shares of SAFE common stock acquired by the Company, were attributable to the 2021-2022 Plan.
2013-2018 iPIP Plans—The remainder of the Company’s iPIP plans, as shown in the table below, are liability-classified awards and are remeasured each reporting period at fair value until the awards are settled. Certain employees will be granted awards that entitle employees to receive the residual cash flows from the investments in the plans after the Company has received a specified return on its invested capital and a return of its invested capital. Awards are also subject to reductions under a TSR adjustment. The fair value of awards is determined using a model that forecasts the Company’s projected investment performance. Settlement of the awards will be 50% in cash and 50% in shares of the Company’s common stock or in shares of SAFE’s common stock owned by the Company.
The following is a summary of the status of the Company’s liability-classified iPIP plans and changes during the nine months ended September 30, 2021.
2013‑2014
2015‑2016
2017‑2018
80.17
70.40
73.34
75.34
During the nine months ended September 30, 2021 and 2020, the Company recorded $15.0 million and $20.2 million, respectively, of expense related to the 2013-2018 iPIP plans.
As of September 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 $396 million were attributable to the 2015-2016 Plan and investments with an aggregate gross book value of $480 million, including 7.6 million shares of SAFE common stock acquired by the Company, were attributable to the 2017-2018 Plan.
During the nine months ended September 30, 2021, the Company made distributions to participants in the 2015-2016 investment pool. The iPIP participants received total distributions in the amount of $3.2 million as compensation, comprised of cash and 97,881 shares of the Company’s common stock with a fair value of $17.65 per share, which are fully-vested and issued under the 2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 57,920 shares of the Company’s common stock were issued.
During the nine months ended September 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 September 30, 2021 and December 31, 2020, the Company had accrued compensation costs relating to iPIP of $80.9 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 September 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 nine months ended September 30, 2021, is as follows (in thousands):
Nonvested at beginning of period
531
372
Vested
(112)
(32)
Nonvested at end of period
759
As of September 30, 2021, there was $6.8 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 1.35 years.
Directors’ Awards—During the nine months ended September 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 1,592 common stock equivalents (“CSEs”) at a fair value of $20.41 per CSE in respect of dividend equivalents on outstanding CSEs. As of September 30, 2021, a combined total of 129,452 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 $3.2 million.
401(k) Plan— The Company made contributions of $0.1 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and $0.8 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively, to the Company’s 401(k) Plan.
Note 16—Earnings Per Share
The following table presents a reconciliation of income from operations used in the basic and diluted earnings per share (“EPS”) calculations ($ in thousands, except for per share data):
Net income attributable to noncontrolling interests
Net income (loss) allocable to common shareholders for basic and diluted earnings per common share
36
Earnings allocable to common shares:
Numerator for basic earnings per share:
Net income (loss) attributable to iStar Inc. and allocable to common shareholders
Numerator for diluted earnings per share:
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic earnings per common share
Add: Effect of assumed shares issued under treasury stock method for restricted stock units
221
206
Add: Effect of convertible debt
8,967
5,521
Weighted average common shares outstanding for basic and diluted earnings per common share
Basic and diluted earnings per common share:(1)
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).
37
Certain of the Company’s assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are classified as being valued on a non-recurring basis.
The 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:
Impaired real estate available and held for sale(2)
1,682
Other investments(3)
98,461
Impaired land and development(4)
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 nine months ended September 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
24,631
38
Fair values of financial instruments—The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):
477
497
429
431
Loans receivable and other lending investments, net(1)
406
436
732
772
Cash and cash equivalents(2)
299
99
Restricted cash(2)
56
52
Loan participations payable, net(1)
Debt obligations, net(1)(3)
3,283
3,643
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)
40,659
3,637
96
1,630
6,321
4,767
1,095
16,869
3,189
14,275
Earnings (losses) from equity method investments
74,889
872
1,129
10,836
1,483
Total revenue and other earnings
131,523
8,288
47,246
107,490
15,758
310,305
(5,446)
(9,184)
(4,094)
(18,724)
(87,380)
(1,327)
(270)
(64)
(350)
(2,011)
Allocated interest expense
(26,467)
(3,331)
(1,641)
(3,679)
(4,353)
(39,471)
Allocated general and administrative(2)
(5,487)
(958)
(473)
(2,173)
(5,029)
(14,120)
Segment profit (loss)(3)
92,796
3,729
35,948
10,100
6,026
148,599
Other significant items:
Provision for (recovery of) loan losses
(1,610)
Provision for losses on net investment in leases
757
422
13,114
1,385
228
129
Capitalized expenditures
969
121
7,416
8,506
39
41,144
5,137
89
911
13,359
4,554
104
2,956
3,831
14,107
10,141
(4,134)
592
71,165
13,463
3,959
25,014
14,313
127,914
(7,136)
(4,428)
(5,371)
(16,935)
(21,358)
(37)
(36)
(73)
(26,049)
(5,831)
(2,289)
(4,606)
(3,632)
(42,407)
(5,161)
(1,451)
(582)
(2,320)
(4,693)
(14,207)
Segment profit (loss) (3)
32,819
6,144
(3,340)
(8,641)
5,952
32,934
Other significant non-cash items:
(1,995)
12,781
1,287
243
310
1,896
84
5,170
7,150
123,926
13,176
279
3,696
23,878
14,213
1,245
23,159
5,894
20,038
98,604
2,092
(5,553)
15,456
4,076
2,114
26,319
269,448
27,215
57,101
179,565
24,114
557,443
(21,065)
(19,238)
(13,604)
(53,907)
(147,507)
(422)
(662)
(2,475)
(76,888)
(11,737)
(5,714)
(11,481)
(12,631)
(118,451)
(17,544)
(3,659)
(1,797)
(6,968)
(15,686)
(45,654)
152,624
11,397
30,352
(59)
(4,865)
189,449
Recovery of loan losses
(202)
(7,411)
Recovery of losses on net investment in leases
2,286
679
39,255
4,593
674
449
2,300
610
16,727
19,637
124,109
16,153
267
2,594
44,331
13,468
4,249
6,605
5,558
26,332
38,472
(11,741)
1,225
6,056
62
209,709
48,580
11,079
123,304
24,379
417,051
(19,497)
(16,600)
(17,611)
(53,708)
(114,704)
(80)
(271)
(351)
(74,915)
(17,989)
(6,731)
(13,598)
(14,515)
(127,748)
(17,327)
(5,123)
(1,966)
(7,524)
(14,523)
(46,463)
97,970
25,388
(14,218)
(30,133)
(4,930)
74,077
Provision for loan losses
3,881
40
2,036
2,983
37,924
3,843
8,913
1,421
25,222
35,556
Net investment in leases
Loans receivable and other lending investments, net
47,555
357,954
Loan receivable held for sale
1,213,804
47,936
43,659
537
113,830
Total portfolio assets
3,045,283
405,890
138,685
303,382
4,007,070
Cash and other assets
795,095
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
1,556
1,976
7,613
(4,093)
Less: (Provision for) recovery of losses on net investment in leases
(131)
(175)
1,735
Less: Impairment of assets
(1,179)
(2,965)
(6,491)
Less: Stock-based compensation expense
(3,001)
(5,661)
(23,300)
(26,675)
Less: Depreciation and amortization
(14,856)
(14,621)
(44,971)
(43,407)
Less: Income tax benefit (expense)
Less: Loss on early extinguishment of debt, net
41
Note 19—Subsequent Events
Subsequent to the end of the quarter, the Company obtained the consents of holders of its outstanding 4.75% senior notes due 2024, 4.25% senior notes due 2025 and 5.50% senior notes due 2026 to certain amendments to the indentures governing the notes intended to align the indentures with the potential sale of the Company's net lease assets. The Company paid holders consent fees ranging from 0.75% to 1.00% of the principal amount of consenting notes, depending on the relevant series. The Company previously announced on July 6, 2021 that it intended to explore market interest for possible sales of its net lease assets. That process remains ongoing. There can be no assurance as to whether the Company will sell some, all or none of its net lease assets, or as to the timing and terms of any sales.
42
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 2020 Annual Report, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “we,” “our” and “us” refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our 2020 Annual Report. 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 (23.0% of gross book value) and hotel (4.2% 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.
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 continued into the third quarter 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 2020 Annual Report for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and other factors.
Portfolio Overview
As of September 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
1,229,403
27.1
Entertainment / Leisure
1,030,994
16,297
1,047,291
23.0
Office
820,048
52,107
872,155
19.2
Industrial / Lab
433,783
532,244
11.7
Land and Development
235,747
247,647
5.4
Hotel
107,505
82,292
189,797
4.2
Multifamily
122,906
59,918
182,824
Retail
61,461
31,566
8,340
101,367
2.2
Condominium
27,257
69,878
99,118
Other Property Types
27,536
15,369
42,905
0.9
3,514,228
410,672
192,056
313,965
4,544,751
100.0
Percentage of Total
77%
9%
4%
7%
3%
100%
Geographic Region
Northeast
961,145
101,479
93,624
196,702
1,352,950
29.8
West
581,022
143,774
43,083
11,847
779,726
17.2
Mid-Atlantic
573,630
6,090
102,063
681,783
15.0
Southwest
498,056
2,200
500,256
11.0
Southeast
461,294
28,479
6,647
1,153
497,573
10.9
Central
429,594
41,682
42,612
513,888
11.3
Various
9,487
218,575
4.8
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).
The net lease segment includes our Ground Lease investments made primarily through SAFE and our traditional net lease investments. As of September 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 $3.5 billion. In July 2021, we announced that we intend to explore market interest for possible sales of our net lease assets. The potential sale would be consistent with our stated corporate strategy which is to grow our Ground Lease and Ground Lease adjacent businesses and simplify our portfolio through
44
sales of other 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
63.6
Gross book value (millions)(2)
1,348
2,259
324
3,879
% Leased
98.9
99.3
Square footage (thousands)
9,630
5,755
15,385
3,302
N/A
Weighted average lease term (years)(3)
18.8
16.2
17.7
12.3
89.1
Weighted average yield(4)
7.6
8.2
7.8
9.1
4.6
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 September 30, 2021, we owned approximately 63.6% 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
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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 September 30, 2021, the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled $411.2 million, gross of general loan loss allowances. The portfolio, excluding securities and other lending investments, included $181.8 million of performing loans with a weighted average maturity of 2.9 years.
The tables below summarize our loans and the allowance for loan losses associated with our loans ($ in thousands):
Allowance for
Gross
Loan Losses as
Number
Book
for Loan
Net Book
a % of Gross
of Loans
Losses
Book Value
Performing loans
(2,244)
179,520
44.3%
1.2%
Non-performing loans
14.3%
1.1%
(3,486)
167,810
41.4%
2.0%
100.0%
1.5%
529,657
(8,184)
521,473
71.2%
(742)
52,563
7.2%
1.4%
(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)
7.9%
Non-Performing Loans—We designate loans as non-performing at such time as: (1) interest payments become 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of September 30, 2021 and December 31, 2020, we had one non-performing loan with a carrying value of $58.2 million and $52.6 million, respectively. We expect that our level of non-performing loans will fluctuate from period to period.
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Allowance for Loan Losses—The allowance for loan losses was $6.4 million as of September 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 September 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 $5.7 million, or 1.6%, of performing loans and other lending investments as of September 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 nine months ended September 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 September 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 $192.1 million.
The following table presents a land and development portfolio rollforward for the nine months ended September 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)
(50.2)
(19.1)
(72.6)
(141.9)
Capital expenditures
15.6
16.6
(2.3)
(0.3)
(2.6)
Ending balance(1)
151.9
95.5
55.4
302.8
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Results of Operations for the Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020
$ Change
(1,978)
(6,319)
1,218
14,643
72,867
Total revenue
80,431
(2,936)
Real estate expenses
1,789
66,022
235
(2,747)
420
(44)
1,938
65,856
19,556
7,924
82,404
124,543
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $2.0 million to $44.4 million during the three months ended September 30, 2021 from $46.4 million for the same period in 2020. The following table summarizes our operating lease income by segment ($ in millions).
Three Months Ended September 30,
Change
Net Lease(1)
40.7
41.1
(0.4)
Operating Properties(2)
3.6
5.2
(1.6)
0.1
44.4
46.4
(2.0)
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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 July 1, 2020 and were in service through September 30, 2021 (Operating lease income in millions).
Operating lease income(1)
50.6
49.4
Rent per square foot
13.25
12.77
Occupancy(2)
98.6
Interest income decreased to $8.0 million during the three months ended September 30, 2021 from $14.3 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 $323 million for the three months ended September 30, 2021 and $703 million for the three months ended September 30, 2020. The weighted average yield on our performing loans and other lending investments was 7.8% and 7.6%, respectively, for the three months ended September 30, 2021 and 2020.
Interest income from sales-type leases increased to $9.6 million for the three months ended September 30, 2021 from $8.4 million for the same period in 2020. The increase was due primarily to sales-type leases originated in 2021.
Other income increased to $40.2 million during the three months ended September 30, 2021 from $25.6 million for the same period in 2020. Other income during the three months ended September 30, 2021 consisted primarily of mark-to-market gains on an equity investment, income from our hotel properties, lease termination fees, management fees, 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 September 30, 2020 consisted primarily of mark-to-market gains 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 three months ended September 30, 2021, we sold land parcels and residential lots and units and recognized land development revenue of $93.4 million which had associated cost of sales of $87.4 million. During the three months ended September 30, 2020, we sold residential lots and units and recognized land development revenue of $20.5 million which had associated cost of sales of $21.4 million. The increase in 2021 was primarily due to the sale of three land properties.
Costs and expenses—Interest expense decreased to $39.5 million during the three months ended September 30, 2021 from $42.4 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.5% for the three months ended September 30, 2021 compared to 4.8% for the three months ended September 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 September 30, 2021 from $3.47 billion for the same period in 2020.
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Real estate expense increased $1.8 million to $18.7 million during the three months ended September 30, 2021 from $16.9 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions).
Operating Properties(1)
9.2
4.4
Land and Development(2)
4.1
(1.3)
Net Lease(3)
7.1
(1.7)
18.7
16.9
1.8
Depreciation and amortization increased to $14.9 million during the three months ended September 30, 2021 from $14.6 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 decreased to $17.1 million during the three months ended September 30, 2021 from $19.9 million for the same period in 2020. The decrease in 2021 was due primarily to a $1.8 million decrease in performance-based compensation and a $0.9 million decrease in payroll and related costs from 2020. Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 15 for more information on the iPIP Plans). In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.
The recovery of loan losses was $1.6 million for the three months ended September 30, 2021 as compared to a recovery of loan losses of $2.0 million for the same period in 2020. The recovery of loan losses for the three months ended September 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the quarter. The recovery of loan losses for the three months ended September 30, 2020 resulted from the reversal of CECL allowances on loans that repaid in full in the third quarter 2020 and a more favorable economic outlook on commercial real estate markets in the third quarter 2020 as compared to the second quarter 2020.
The provision for losses on net investment in leases for the three months ended September 30, 2021 resulted from a changing macroeconomic forecast on commercial real estate markets since June 30, 2021. The provision for losses on net investment in leases for the three months ended September 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.
During the three months ended September 30, 2021, we recorded an aggregate impairment of $0.8 million resulting from the sale of net lease assets and a $0.4 million on an operating property held for sale.
Other expense was $2.0 million during the three months ended September 30, 2021 and $0.1 million for the same period in 2020. Other expenses for the three months ended September 30, 2021 consisted primarily of legal costs.
Income from sales of real estate—During the three months ended September 30, 2021, we recorded $25.6 million of income from sales of real estate primarily from the sale of an operating property. During the three months ended September 30, 2020, we recorded $6.1 million of income from sales of real estate from the sale of a Ground Lease to SAFE.
Loss on early extinguishment of debt, net—During the three months ended September 30, 2020, we incurred losses on early extinguishment of debt of $7.9 million resulting from the repayment of senior notes prior to maturity.
Earnings from equity method investments—Earnings from equity method investments increased to $89.2 million during the three months ended September 30, 2021 from $6.8 million for the same period in 2020. During the three months ended September 30, 2021, we recognized $73.5 million of income from our equity method investment in SAFE (which included a dilution gain of $60.2 million – refer to Note 8), $1.4 million from our equity method investment in Net Lease
Venture II and $14.3 million of net aggregate income from our remaining equity method investments, which included $10.5 million from one of our equity method investments resulting from our share of income from land sales. During the three months ended September 30, 2020, we recognized $9.3 million of income from our equity method investment in SAFE and $0.8 million from our equity method investment in Net Lease Venture II, which was partially offset by $3.3 million of net aggregate losses from our remaining equity method investments.
Income tax benefit (expense)—Income tax benefit of $6 thousand was recorded for the three months ended September 30, 2021. Income tax expense of $0.1 million was recorded for the three months ended September 30, 2020 and related primarily to state margins taxes and other minimum state taxes.
Results of Operations for the Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020
(3,148)
(19,351)
1,885
8,337
29,405
(9,297)
199
32,803
1,564
(4,184)
(11,706)
(3,736)
(3,526)
2,124
4,241
22,315
88,672
171
148,360
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased to $137.4 million during the nine months ended September 30, 2021 from $140.5 million for the same period in 2020. The following table summarizes our operating lease income by segment ($ in millions).
Nine Months Ended September 30,
123.9
124.0
(0.1)
13.2
(3.0)
0.3
137.4
140.5
(3.1)
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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 September 30, 2021 (Operating lease income in millions).
152.7
147.3
13.32
12.68
Interest income decreased to $27.6 million during the nine months ended September 30, 2021 from $46.9 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 $403 million for the nine months ended September 30, 2021 and $716 million for the nine months ended September 30, 2020. The weighted average yield on our performing loans and other lending investments for both the nine months ended September 30, 2021 and 2020 was 7.9%.
Interest income from sales-type leases increased to $26.9 million for the nine months ended September 30, 2021 from $25.0 million for the same period in 2020. The increase was due primarily to sales-type leases originated in 2021.
Other income increased to $64.5 million during the nine months ended September 30, 2021 from $56.2 million for the same period in 2020. Other income during the nine months ended September 30, 2021 consisted primarily of mark-to-market gains on an equity investment, income from our hotel properties, management fees, lease termination fees, other ancillary income from our land and development projects and loan portfolio and interest income on our cash. Other income during the nine months ended September 30, 2020 consisted primarily of mark-to-market gains 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 nine months ended September 30, 2021, we sold residential lots and units and recognized land development revenue of $157.9 million which had associated cost of sales of $147.5 million. During the nine months ended September 30, 2020, we sold residential lots and units and recognized land development revenue of $116.3 million which had associated cost of sales of $114.7 million. The increase in 2021 was primarily due to the sale of three land properties.
Costs and expenses—Interest expense decreased to $118.5 million during the nine months ended September 30, 2021 from $127.7 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 nine months ended September 30, 2021 compared to 4.8% for the nine months ended September 30, 2020. The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.45 billion for the nine months ended September 30, 2021 from $3.51 billion for the same period in 2020.
Real estate expenses increased to $53.9 million during the nine months ended September 30, 2021 from $53.7 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions).
2.6
13.6
17.6
(4.0)
21.1
19.5
1.6
53.9
53.7
0.2
Depreciation and amortization increased to $45.0 million during the nine months ended September 30, 2021 from $43.4 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 $69.0 million during the nine months ended September 30, 2021 from $73.1 million for the same period in 2020. The decrease in 2021 was due primarily to a $2.1 million decrease in performance-based compensation and a $2.1 million decrease in payroll and related costs from 2020. Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 15 for more information on the iPIP Plans). In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.
The recovery of loan losses was $7.6 million for the nine months ended September 30, 2021 as compared to a provision for loan losses of $4.1 million for the same period in 2020. The recovery of loan losses for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2021 resulted from asset sales and an improving macroeconomic forecast on commercial real estate markets since December 31, 2020. The provision for losses on net investment in leases for the nine months ended September 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets.
During the nine months ended September 30, 2021, we recorded an aggregate impairment of $2.5 in connection with the sale of net lease assets and residential condominiums and a $0.4 million impairment on an operating property held for sale. During the nine months ended September 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 $2.5 million during the nine months ended September 30, 2021 from $0.4 million for the same period in 2020. The increase in 2021 was primarily due to an increase in legal costs.
Income from sales of real estate—During the nine months ended September 30, 2021, we recorded $28.4 million of income from sales of real estate from the sale of an operating property, net lease assets and residential condominiums. During the nine months ended September 30, 2020, we recorded $6.1 million of income from sales of real estate primarily from the sale of a Ground Lease to SAFE.
Loss on early extinguishment of debt, net—During the nine months ended September 30, 2020, we incurred losses on early extinguishment of debt of $12.0 million resulting from the repayment of senior notes prior to maturity.
Earnings from equity method investments—Earnings from equity method investments increased to $114.7 million during the nine months ended September 30, 2021 from $26.0 million for the same period in 2020. During the nine months ended September 30, 2021, we recognized $94.6 million of income from our equity method investment in SAFE (which included a dilution gain of $60.7 million – refer to Note 8), $4.0 million from our equity method investment in Net Lease Venture II and $16.1 million of net aggregate income from our remaining equity method investments, which included $13.3 million from one of our equity method investments resulting from our share of income from land sales. During the nine months ended September 30, 2020, we recognized $36.9 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, and $1.6 million from our equity investment in Net Lease Venture II, which were partially offset by $12.5 million of net aggregate losses from our remaining equity method investments.
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Income tax expense— Income tax benefit of $6 thousand was recorded during the nine months ended September 30, 2021. Income tax expense of $0.2 million was recorded during the nine months ended September 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 10% of our overall portfolio as of September 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 is used internally as a supplemental performance measure adjusting for certain items to give management a view of income more directly derived from operating activities in the period in which they occur. Adjusted earnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, including our proportionate share of depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock (“Adjusted Earnings”).
Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations. Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with generally accepted accounting principles in the United States of America (“GAAP”)), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance. It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies.
Add: Depreciation and amortization
16,449
15,795
Add: Stock-based compensation expense
3,001
5,661
Add: Non-cash portion of loss on early extinguishment of debt
2,672
Adjusted earnings allocable to common shareholders
141,306
22,059
50,790
46,526
3,470
175,998
29,821
Liquidity and Capital Resources
During the three months ended September 30, 2021, we invested an aggregate $175 million in new investments, prior financing commitments and real estate development. Investments included $107 million in net lease (including $53 million
in shares of SAFE common stock), loan, and strategic investments, $60 million in the repurchase of our common stock and $8 million of capital expenditures on legacy assets. These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):
560
2,037
5,275
9,624
Total capital expenditures on real estate assets
5,835
11,661
15,603
33,488
Total capital expenditures on land and development assets
As of September 30, 2021, we had unrestricted cash of $299 million and $340 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 and third 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.
Our $287.5 million aggregate principal amount of convertible notes mature in September 2022, and we must repay them in a combination of cash and shares of our common stock. We also had approximately $118.4 million of maximum unfunded commitments associated with our investments as of September 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 $166.2 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 $26.3 million, or $0.36 per share, for the nine months ended September 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 September 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 nine months ended September 30, 2021, we repurchased 4.2 million shares of our outstanding common stock for $91.9 million, for an average cost of $21.70 per share. During the nine months ended September 30, 2020, we repurchased 3.7 million shares of our outstanding common stock for $41.4 million, for an average cost of $11.32 per share. We are generally authorized to repurchase up to $50.0 million in shares of our common stock. As of September 30, 2021, we had remaining authorization to repurchase up to $30.9 million of common stock under our stock repurchase program.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2020 Annual Report.
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.
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 0.08% as of September 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
187
Base Interest Rate
+10 Basis Points
(234)
+50 Basis Points
(1,159)
+100 Basis Points
(2,237)
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.
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 September 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)
July 1 to July 31
730,194
23.28
33,000,255
August 1 to August 31
915,591
25.50
27,648,268
September 1 to September 30
744,981
25.66
30,885,618
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
Thirty-Sixth Supplemental Indenture, dated as of October 29, 2021, governing the 4.75% Senior Notes due 2024.
Thirty-Seventh Supplemental Indenture, dated as of October 29, 2021, governing the 4.25% Senior Notes due 2025.
4.3
Thirty-Eighth Supplemental Indenture, dated as of October 29, 2021, governing the 5.50% Senior Notes due 2026.
31.0
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
32.0
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act.
101*
The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2021 is formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets (unaudited) as of September 30, 2021 and December 31, 2020, (ii) the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2021 and 2020, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2021 and 2020, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three and nine months ended September 30, 2021 and 2020, (v) the Consolidated Statements of Cash Flows (unaudited) for nine months ended September 30, 2021 and 2020 and (vi) the Notes to the Consolidated Financial Statements (unaudited).
Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)
*
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections.
Pursuant to the requirements of 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
Date:
November 2, 2021
/s/ JAY SUGARMAN
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)