Safehold (SAFE) - 2022 Q2 - Quarterly Report

Part I: Consolidated Financial Information Financial Statements iStar reported a net income of $663.3 million for the six months ended June 30, 2022, driven by discontinued operations and a major asset sale that significantly impacted the balance sheet and cash flows Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total assets | $3,610,620 | $4,840,534 | | Cash and cash equivalents | $1,400,658 | $339,601 | | Real estate and other assets held for sale (discontinued ops) | $11,518 | $2,299,711 | | Total liabilities | $1,979,756 | $3,777,328 | | Debt obligations, net | $1,833,250 | $2,572,174 | | Total equity | $1,630,864 | $1,063,206 | Consolidated Statement of Operations Highlights (in thousands, except EPS) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total revenues | $80,016 | $114,238 | | Net loss from continuing operations | ($134,382) | ($51,227) | | Net income from discontinued operations | $797,688 | $47,800 | | Net income (loss) | $663,306 | ($3,427) | | Net income (loss) allocable to common shareholders | $472,370 | ($19,948) | | Diluted EPS | $6.28 | ($0.27) | - In March 2022, the company completed the sale of its net lease property portfolio for a gross price of approximately $3.07 billion, recognizing a gain of $663.7 million, and retained net cash proceeds of $1.2 billion after repaying debt and other expenses[38][39] Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Category | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $27,381 | ($44,962) | | Net cash provided by investing activities | $2,625,122 | $183,978 | | Net cash used in financing activities | ($1,640,612) | ($81,101) | | Change in cash and cash equivalents | $1,011,841 | $57,804 | Notes to Consolidated Financial Statements The notes detail significant accounting policies and events, including the strategic net lease portfolio sale, reclassified business segments, active debt management, and stock-based compensation plans tied to SAFE's stock performance - The company's business is organized into four reportable segments: Net Lease (now primarily SAFE and Ground Lease adjacent businesses), Real Estate Finance, Operating Properties, and Land and Development[28][209] - The Net Lease Sale involved a portfolio of office, entertainment, and industrial properties for a gross price of $3.07 billion, with operations of these assets now classified as discontinued operations[38][39][44] - As of June 30, 2022, the company owned 40.1 million shares of Safehold Inc. (SAFE), representing approximately 64.7% of SAFE's outstanding common stock, accounted for using the equity method as a core strategic investment[90][92] - In April 2022, the company exchanged $194 million of its 3.125% Convertible Notes for 13.75 million shares of common stock and $14 million in cash, recognizing a $118.1 million loss on extinguishment of debt[144] - For the six months ended June 30, 2022, the company recorded a $37.1 million reduction of expense related to its liability-classified iPIP plans, primarily due to a decrease in the share price of SAFE common stock[182] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the corporate strategy to grow Ground Lease businesses and simplify the portfolio through asset sales, resulting in a concentrated Ground Lease portfolio, strengthened balance sheet, and strong liquidity - The company's stated corporate strategy is to grow its Ground Lease and Ground Lease adjacent businesses and simplify its portfolio through sales of other assets, as demonstrated by the Net Lease Sale[225] Portfolio Composition by Property/Collateral Type (June 30, 2022) | Property/Collateral Type | Total Book Value (in thousands) | % of Total | | :--- | :--- | :--- | | Ground Leases | $1,503,347 | 70.1% | | Land and Development | $222,391 | 10.4% | | Multifamily | $116,864 | 5.4% | | Hotel | $109,379 | 5.1% | | Other | $192,983 | 9.0% | | Total | $2,144,964 | 100.0% | - As of June 30, 2022, the company had $1.4 billion in unrestricted cash and $350.0 million of available borrowing capacity, positioning it to meet liquidity requirements for the foreseeable future[296] - General and administrative expenses saw a net recovery of ($5.2) million in Q2 2022 compared to a $30.4 million expense in Q2 2021, primarily due to a $35.5 million decrease in performance-based compensation linked to SAFE's stock performance[263] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with a sensitivity analysis indicating that a 100 basis point increase would increase annual net income by $13.5 million, while a decrease would reduce it by $13.1 million - The primary market risk for the company is interest rate risk, which impacts the spread between interest-earning assets and interest-bearing liabilities[310] Interest Rate Sensitivity Analysis (as of June 30, 2022) | Change in Interest Rates | Estimated Change in Net Income (in thousands) | | :--- | :--- | | +100 Basis Points | $13,523 | | +50 Basis Points | $6,628 | | -50 Basis Points | ($6,529) | | -100 Basis Points | ($13,058) | Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[318] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[319] Part II: Other Information Legal Proceedings The company is involved in routine litigation, none of which is 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 condition[323] Risk Factors No material changes to the risk factors previously disclosed in the 2021 Annual Report on Form 10-K were reported - No material changes from the risk factors previously disclosed in the 2021 Annual Report were reported[324] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock during Q2 2022, retaining a remaining authorization to repurchase up to $50.0 million of its common stock - No shares of common stock were repurchased during Q2 2022. The company has a remaining authorization to repurchase up to $50.0 million of common stock[325] Other Information Subsequent to quarter-end, in July and August 2022, the company exchanged $47.9 million of convertible notes for 2.0 million shares of common stock and $24.3 million in cash - In July and August 2022, the company exchanged an additional $47.9 million of its 3.125% Convertible Notes for approximately 2.0 million shares of common stock and $24.3 million in cash[328] Exhibits This section lists exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and financial data in Inline XBRL format - The exhibits filed with the report include Sarbanes-Oxley certifications (Sections 302 and 906) and financial statements in Inline XBRL format[331]