Safehold (SAFE) - 2020 Q4 - Annual Report

PART I Business iStar Inc. is a REIT focused on financing, investing, and developing real estate, increasingly emphasizing its Ground Lease business through Safehold Inc. - The company operates through four primary reportable business segments: Net Lease, Real Estate Finance, Operating Properties, and Land and Development[13] - A key part of iStar's strategy is its focus on the Ground Lease sector through its subsidiary Safehold Inc. (SAFE), in which it owned approximately 65.4% of the common stock as of December 31, 2020[16][19] - The company is actively working to reduce its "legacy assets," primarily properties acquired from defaulting borrowers during the financial crisis, with the intention of reinvesting the proceeds into its net lease business, including Ground Leases[20] - As of February 19, 2021, the company had 143 employees, with substantially all of the workforce working remotely for several months in 2020 due to the COVID-19 pandemic[33][35] Risk Factors The company faces material risks including the COVID-19 pandemic's impact, significant commitment to its Ground Lease strategy, and financial risks like debt covenants and REIT status maintenance. - The COVID-19 pandemic has adversely affected the business, particularly in the entertainment/leisure (20.7% of gross book value) and hotel (5.7% of gross book value) sectors, and has constrained the company's ability to monetize legacy assets and scale SAFE's portfolio[42][43] - The company's future success is heavily dependent on its Ground Lease strategy through SAFE, which is subject to risks including market acceptance, interest rate changes, and potential conflicts of interest between iStar and SAFE[43][47][48] - The company's debt contains covenants that could limit operational flexibility, including maintaining a ratio of unencumbered assets to unsecured debt of at least 1.2x and restrictions on new debt incurrence based on a fixed charge coverage ratio[76] - Failure to maintain qualification as a REIT would subject the company to U.S. federal income tax at regular corporate rates, significantly reducing cash available for distribution to shareholders[95][96] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC. - There are no unresolved staff comments[108] Properties The company's principal executive offices are in New York, NY, with regional offices, and detailed property listings are in Schedule III of the financial statements. - The company's main executive offices are located at 1114 Avenue of the Americas, New York, NY 10036[109] Legal Proceedings The company is involved in various routine litigation matters incidental to its business, none of which are expected to have a material adverse effect on its financial statements. - The company is involved in ordinary routine litigation incidental to its business, which is not expected to have a material adverse effect on its financial statements[110] Mine Safety Disclosures This section is not applicable to the company. - Not applicable[111] PART II Market for Registrant's Equity and Related Stock Matters The company's common stock trades on the NYSE, and it repurchased shares in Q4 2020, with an increased stock repurchase program authorized in February 2021. Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | October 2020 | 456,000 | $12.04 | | November 2020 | — | $— | | December 2020 | 101,111 | $14.85 | - In February 2021, the company's board of directors increased the authorization for its stock repurchase program to $50.0 million[116] Management's Discussion and Analysis of Financial Condition and Results of Operations iStar's 2020 financial performance was significantly impacted by the COVID-19 pandemic, resulting in a net loss and declining adjusted earnings, despite maintaining strong liquidity and a strategic focus on Ground Leases. Executive Overview The company reported a net loss of $65.9 million for 2020, a significant decline from 2019, while maintaining strong rent collection and a healthy liquidity position. Key Financial Results (Year Ended Dec 31) | Metric | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Net Income (Loss) allocable to common shareholders | ($65.9M) | $291.5M | | Adjusted Earnings allocable to common shareholders | $40.8M | $388.0M | - During the fourth quarter of 2020, the company collected 99% of rent from net lease tenants, 89% of interest payments from its real estate finance portfolio, and 85% of rent from its operating properties[121] - As of December 31, 2020, the company had $99 million of cash and $350 million of credit facility availability, with no corporate debt maturities through September 2022[124] Portfolio Overview As of December 31, 2020, iStar's total investment portfolio had a gross book value of $4.76 billion, diversified across property types and segments with significant concentrations in Office, Entertainment/Leisure, and Ground Leases. Portfolio Composition by Property/Collateral Type (as of Dec 31, 2020) | Property/Collateral Type | Gross Book Value ($ thousands) | % of Total | | :--- | :--- | :--- | | Office | $989,019 | 20.8% | | Entertainment / Leisure | $984,074 | 20.7% | | Ground Leases | $962,386 | 20.2% | | Industrial | $444,708 | 9.3% | | Land and Development | $422,320 | 8.9% | | Condominium | $289,150 | 6.1% | | Hotel | $270,799 | 5.7% | | Multifamily | $206,909 | 4.3% | | Retail | $156,984 | 3.3% | | Other | $32,223 | 0.7% | | Total | $4,758,572 | 100.0% | Portfolio Composition by Segment (as of Dec 31, 2020) | Segment | Gross Book Value ($ thousands) | % of Total | | :--- | :--- | :--- | | Net Lease | $3,209,066 | 68% | | Real Estate Finance | $698,209 | 15% | | Land & Development | $472,401 | 10% | | Operating Properties | $308,986 | 6% | | Corporate | $69,910 | 1% | | Total | $4,758,572 | 100% | Results of Operations Total revenues increased in 2020, but a significant decrease in real estate sales income and the absence of prior-year sales-type lease profit led to a net loss of $30.9 million compared to a net income in 2019. Comparison of Operations (Years Ended Dec 31, in thousands) | Line Item | 2020 ($ thousands) | 2019 ($ thousands) | $ Change ($ thousands) | | :--- | :--- | :--- | :--- | | Total revenue | $530,949 | $479,496 | $51,453 | | Total costs and expenses | $597,973 | $575,897 | $22,076 | | Income from sales of real estate | $6,318 | $236,623 | ($230,305) | | Selling profit from sales-type leases | $— | $180,416 | ($180,416) | | Net income (loss) | ($30,853) | $334,325 | ($365,178) | - Operating lease income decreased by $17.7 million in 2020, primarily due to asset sales and a decrease in percentage rent at certain properties impacted by the COVID-19 pandemic[167][168][169] - Interest income decreased by $17.5 million in 2020, mainly due to a lower average balance of performing loans and a decrease in the weighted average yield to 7.7% from 8.8% in 2019[167][171] - The significant drop in 'Income from sales of real estate' from $236.6 million in 2019 to $6.3 million in 2020 was a primary driver of the net loss, with the 2019 figure boosted by the sale of a large portfolio of net lease assets[184] Adjusted Earnings The company's non-GAAP 'Adjusted Earnings' allocable to common shareholders sharply declined to $40.8 million in 2020 from $388.0 million in 2019, reflecting a challenging operating environment. Adjusted Earnings Reconciliation (in thousands) | | 2020 ($ thousands) | 2019 ($ thousands) | | :--- | :--- | :--- | | Net income (loss) allocable to common shareholders | ($65,937) | $291,547 | | Add: Depreciation and amortization | $63,882 | $58,925 | | Add: Stock-based compensation expense | $39,354 | $30,436 | | Add: Non-cash portion of loss on early extinguishment of debt | $3,470 | $7,118 | | Adjusted earnings allocable to common shareholders | $40,769 | $388,026 | Liquidity and Capital Resources As of December 31, 2020, the company maintained a strong liquidity position with $99 million in cash and $350 million in credit facility availability, having refinanced debt to extend maturities. - As of December 31, 2020, the company had $99 million of unrestricted cash and $350 million of borrowing capacity available under its Revolving Credit Facility[195] - In August 2020, the company issued $400.0 million of 5.50% senior unsecured notes due 2026, using the proceeds to repay notes due in September 2022[200] Unfunded Commitments (as of Dec 31, 2020, in thousands) | Category | Amount ($ thousands) | | :--- | :--- | | Performance-Based Commitments | $91,591 | | Strategic Investments | $12,810 | | Total | $104,401 | - During 2020, the company repurchased 4.2 million shares of its common stock for $48.4 million at an average price of $11.48 per share[207] Critical Accounting Estimates Management identifies the allowance for loan losses and impairment of long-lived assets as critical accounting estimates, requiring significant judgment and incorporating the new CECL standard. - The company adopted the new credit loss standard (ASU 2016-13) on January 1, 2020, which requires estimating current expected credit losses (CECL) for its financial instruments[211] - Impairment of real estate held for use is recognized only if the estimated aggregate future undiscounted cash flows are less than the asset's carrying value[216] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with a net variable-rate liability position, where a 100 basis point increase in rates would decrease annual net income by an estimated $2.6 million. Estimated Change in Annual Net Income from Interest Rate Changes | Change in Interest Rates | Estimated Change in Net Income ($ thousands) | | :--- | :--- | | -10 Basis Points | $278 | | +10 Basis Points | ($278) | | +50 Basis Points | ($1,364) | | +100 Basis Points | ($2,616) | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2020, including balance sheets, statements of operations, and comprehensive notes. Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | | 2020 ($ thousands) | 2019 ($ thousands) | | :--- | :--- | :--- | | Total real estate | $1,489,493 | $1,535,869 | | Loans receivable and other lending investments, net | $732,330 | $827,861 | | Other investments | $1,176,560 | $907,875 | | Total assets | $4,861,808 | $5,085,109 | | Debt obligations, net | $3,286,975 | $3,387,080 | | Total liabilities | $3,797,425 | $3,847,149 | | Total equity | $1,064,383 | $1,237,960 | Consolidated Statement of Operations Highlights (Year ended Dec 31, in thousands) | | 2020 ($ thousands) | 2019 ($ thousands) | | :--- | :--- | :--- | | Total revenues | $530,949 | $479,496 | | Total costs and expenses | $597,973 | $575,897 | | Net income (loss) | ($30,853) | $334,325 | | Net income (loss) allocable to common shareholders | ($65,937) | $291,547 | | Diluted EPS | ($0.87) | $3.73 | Changes and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure The company reported no disagreements with its registered public accounting firm regarding accounting principles, financial disclosure, or auditing scope. - None reported[569] Controls and Procedures The company's management concluded that its disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with no material changes. - The company's management concluded that its disclosure controls and procedures and its internal control over financial reporting were effective as of December 31, 2020[571][573] Other Information The company reported no other information for this item. - None[575] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for these items is incorporated by reference from the company's definitive proxy statement for its 2021 annual meeting of shareholders. - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting[578][579][580] PART IV Exhibits, Financial Statement Schedules, and Reports on Form 8-K This section lists the financial statements, schedules, and exhibits included in the Form 10-K report, noting no content for Item 16. - This section provides an index to the financial statements and schedules contained in Item 8 and a list of exhibits filed with the report[584][587] - Item 16, Form 10-K Summary, is noted as having no content[592]