Safehold (SAFE) - 2021 Q3 - Quarterly Report

Part I Item 1. Financial Statements This section presents iStar Inc.'s unaudited consolidated financial statements for Q3 and YTD 2021, covering key financial statements and detailed notes Consolidated Balance Sheets As of September 30, 2021, iStar Inc. reported total assets of $4.80 billion, a slight decrease from $4.86 billion at year-end 2020, with total liabilities also decreasing to $3.74 billion from $3.80 billion Consolidated Balance Sheet Highlights (in thousands) | | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $4,802,165 | $4,861,808 | | Total real estate | $1,358,907 | $1,489,493 | | Loans receivable and other lending investments, net | $405,509 | $732,330 | | Other investments | $1,419,766 | $1,176,560 | | Cash and cash equivalents | $298,886 | $98,633 | | Total Liabilities | $3,735,940 | $3,797,425 | | Debt obligations, net | $3,282,598 | $3,286,975 | | Total Equity | $1,066,225 | $1,064,383 | Consolidated Statements of Operations For Q3 2021, iStar reported a net income of $131.0 million, a significant turnaround from $6.5 million in Q3 2020, driven by higher land development revenue, increased earnings from equity method investments, and gains on real estate sales Key Operating Results (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $195,485 | $115,054 | $414,335 | $384,930 | | Earnings from equity method investments | $89,209 | $6,805 | $114,675 | $26,003 | | Net income (loss) | $130,994 | $6,451 | $127,567 | ($20,793) | | Net income (loss) allocable to common shareholders | $121,856 | ($2,069) | $101,908 | ($46,850) | | Diluted EPS | $1.51 | ($0.03) | $1.30 | ($0.61) | Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, cash used in operating activities was $4.7 million, while investing activities provided $373.7 million, resulting in a net increase in cash to $354.8 million Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Cash flows used in operating activities | ($4,741) | ($6,178) | | Cash flows provided by (used in) investing activities | $373,722 | ($5,668) | | Cash flows used in financing activities | ($164,620) | ($204,376) | | Changes in cash, cash equivalents and restricted cash | $204,235 | ($216,232) | | Cash, cash equivalents and restricted cash at end of period | $354,801 | $135,974 | Notes to Consolidated Financial Statements The notes detail iStar's accounting policies and financial results, including its REIT structure, significant investment in Safehold Inc., $3.3 billion debt obligations, and a stock repurchase program, with a subsequent event noting exploration of net lease asset sales - The company's primary reportable business segments are Net Lease, Real Estate Finance, Operating Properties, and Land and Development[24][165] - The company adopted ASU 2020-06 on January 1, 2021, which impacted the accounting for its 3.125% senior convertible notes by eliminating the separate accounting for the conversion feature, resulting in an adjustment to debt, retained earnings, and additional paid-in capital[33] - As of September 30, 2021, the company owned approximately 63.6% of Safehold Inc. (SAFE) common stock, a key equity method investment. Earnings from SAFE included a significant dilution gain of $60.2 million in Q3 2021[72][74] - During the nine months ended September 30, 2021, the company repurchased 4.2 million shares of its common stock for $91.9 million. As of September 30, 2021, $30.9 million remained authorized for future repurchases[132] - Subsequent to the quarter-end, the company obtained holder consents to amend indentures for its senior notes to align with the potential sale of its net lease assets, a process which is ongoing[170] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting improved conditions, significant net income growth, and a strong liquidity position Portfolio Overview As of September 30, 2021, iStar's total investment portfolio had a gross book value of $4.54 billion, diversified by asset type and geography, with major concentrations in Ground Leases, Entertainment/Leisure, and Office properties Portfolio by Property/Collateral Type (as of Sep 30, 2021) | Property/Collateral Types | Gross Book Value ($ thousands) | % of Total | | :--- | :--- | :--- | | Ground Leases | $1,229,403 | 27.1% | | Entertainment / Leisure | $1,047,291 | 23.0% | | Office | $872,155 | 19.2% | | Industrial / Lab | $532,244 | 11.7% | | Land and Development | $247,647 | 5.4% | | Hotel | $189,797 | 4.2% | | Multifamily | $182,824 | 4.0% | | Other | $144,270 | 3.2% | | Total | $4,544,751 | 100.0% | - The company announced in July 2021 its intention to explore market interest for the potential sale of its net lease assets to simplify its portfolio and focus on its Ground Lease business[178][179] Results of Operations For Q3 2021, total revenue increased by $80.4 million to $195.5 million, primarily due to a $72.9 million increase in land development revenue and an $82.4 million increase in earnings from equity method investments, leading to a significant net income turnaround for both the quarter and year-to-date periods Comparison of Results for the Three Months Ended September 30 (in thousands) | Item | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Total revenue | $195,485 | $115,054 | $80,431 | | Land development revenue | $93,369 | $20,502 | $72,867 | | Earnings from equity method investments | $89,209 | $6,805 | $82,404 | | Income from sales of real estate | $25,611 | $6,055 | $19,556 | | Net income | $130,994 | $6,451 | $124,543 | Comparison of Results for the Nine Months Ended September 30 (in thousands) | Item | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Total revenue | $414,335 | $384,930 | $29,405 | | (Recovery of) provision for loan losses | ($7,613) | $4,093 | ($11,706) | | Earnings from equity method investments | $114,675 | $26,003 | $88,672 | | Net income (loss) | $127,567 | ($20,793) | $148,360 | - The decrease in General & Administrative expenses in Q3 2021 was primarily due to a $1.8 million decrease in performance-based compensation and a $0.9 million decrease in payroll and related costs[216] Adjusted Earnings (Non-GAAP) Adjusted Earnings, a non-GAAP metric, significantly increased to $141.3 million for Q3 2021 and $176.0 million for the nine-month period, reflecting adjustments for non-cash items to provide a clearer view of operating income Adjusted Earnings Reconciliation (in thousands) | | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) allocable to common shareholders | $121,856 | ($2,069) | $101,908 | ($46,850) | | Add: Depreciation and amortization | $16,449 | $15,795 | $50,790 | $46,526 | | Add: Stock-based compensation expense | $3,001 | $5,661 | $23,300 | $26,675 | | Adjusted earnings allocable to common shareholders | $141,306 | $22,059 | $175,998 | $29,821 | Liquidity and Capital Resources As of September 30, 2021, iStar maintained a strong liquidity position with $299 million in unrestricted cash and $340 million available under its Revolving Credit Facility, expecting to meet obligations through cash on hand, operating income, loan repayments, and asset sales - As of September 30, 2021, the company had $299 million of unrestricted cash and $340 million of borrowing capacity available under its Revolving Credit Facility[259] - The company has $287.5 million in convertible notes maturing in September 2022 and maximum unfunded commitments of $118.4 million[260] - The company is in compliance with its key debt covenants, which include maintaining a ratio of unencumbered assets to unsecured debt of at least 1.2x and a fixed charge coverage ratio[262] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a sensitivity analysis indicating that a 100 basis point increase in interest rates would decrease annual net income by an estimated $2.2 million - The primary market risk for the company is interest rate risk, which affects the spread between interest-earning assets and interest-bearing liabilities[272] Estimated Change in Net Income from Interest Rate Shifts (in thousands) | Change in Interest Rates | Estimated Change in Net Income | | :--- | :--- | | +10 Basis Points | ($234) | | +50 Basis Points | ($1,159) | | +100 Basis Points | ($2,237) | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures are effective at providing reasonable assurance of timely and accurate SEC reporting, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Accounting Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance of timely and accurate reporting[279] - There were no changes during the last fiscal quarter in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, these controls[280] Part II Item 1. Legal Proceedings The company is party to various routine litigation matters incidental to its business, none of which are expected to have a material adverse effect on its consolidated financial statements - The Company is not a party to any pending legal proceeding that is expected to have a material adverse effect on its financial statements[284] Item 1A. Risk Factors There were no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to risk factors were reported from the company's 2020 Annual Report[285] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 2.39 million shares of its common stock at an average price of approximately $24.85 per share, and in September 2021, the board increased the stock repurchase program authorization to $50.0 million Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1 to July 31 | 730,194 | $23.28 | | August 1 to August 31 | 915,591 | $25.50 | | September 1 to September 30 | 744,981 | $25.66 | - In September 2021, the board of directors authorized an increase to the stock repurchase program to $50.0 million[287] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[288] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[289] Item 5. Other Information The company reported no other information for this item - None[290] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including supplemental indentures related to senior notes and certifications pursuant to the Sarbanes-Oxley Act - Exhibits filed include supplemental indentures for the 4.75% Senior Notes due 2024, 4.25% Senior Notes due 2025, and 5.50% Senior Notes due 2026[294] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act were also filed as exhibits[294]