SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended | |
December 31, | |
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. 001-38122
Safehold Inc.
(Exact name of registrant as specified in its charter)
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Maryland | | 30-0971238 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
1114 Avenue of the Americas, 39 th Floor | | | | |
New York, NY | | | | 10036 |
(Address of principal executive offices) | (Zip code) | |||
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: | | Trading Symbol(s) | Name of Exchange on which registered: | |
Common Stock, $0.01 par value | | SAFE | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o No ý
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
ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company | | Emerging growth company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
As of June 30, 2017,2021, the aggregate market value of Safety, Income & GrowthSafehold Inc. common stock, $0.01 par value per share, held by non-affiliates of the registrant was approximately $249.5 million,$1.4 billion, based upon the closing price of $19.15$78.50 on the New York Stock Exchange composite tape on such date.
As of February 15, 2018,11, 2022, there were 18,190,00056,631,251 shares of common stock outstanding.
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Explanatory Note for Purposes of the "Safe Harbor Provisions" of Section 21E of the Securities Exchange Act of 1934, as amended
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, our 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. Important factors that we believe might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1a1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. 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-K.
Business
We are a publicly-traded company that operates our business through one reportable segment by acquiring, managing and capitalizing ground leases. We believe that we areour business has characteristics comparable to a high-grade, fixed income investment business, but with certain unique advantages. Relative to alternative fixed income investments generally, our ground leases typically benefit from built-in growth derived from contractual base rent increases (either at a specified percentage or consumer price index ("CPI") based, or both), and the firstopportunity to realize value from residual rights to take ownership of the buildings and only publicly-traded company focused primarilyother improvements on ground leases. our land at no additional cost to us. We believe that these features offer us the opportunity to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments.
Ground leases generally represent the ownership of land underlying commercial real estate properties, which areprojects that is net leased on a long termlong-term basis (often(base terms are typically 30 to 99 years)years, often with tenant renewal options) by the landfee owner (landlord) to a tenant that owns and operates the building on top of the land (landlord) to the owners/operators of the real estate projects built thereon ("Ground Lease"), or what we refer to as a SafeholdTM. The property is generally leased on a triple net basis with the tenant generally responsible for taxes, maintenance and insurance as well as all operating costs and capital expenditures. Ground Leases typically provide that at the end of the lease term or upon tenant default and the termination of the Ground Lease upon such default, the land, building and all improvements revert back to the landlord. We seek tohave become the industry leader in Ground Leases by demonstrating their value-added characteristicsthe value of the product to real estate investors, owners, operators and developers and expanding their use throughout major metropolitan areas.
We have a diverse portfolio thatof properties diversified by property type and region. Our portfolio is comprised of 15 properties located in major metropolitan areas, 12 of which were acquired or originated by iStar over the past 20 years. All of the properties in our portfolio are subject to long-term leases consisting of 10 Ground Leases and one master lease (covering(relating to five properties)hotel assets that we refer to as our “Park Hotels Portfolio”) that provide for contractual periodic contractual rent escalations orand in some cases percentage rent participations in gross revenues generated at the relevant properties.
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We have chosen to focus on Ground Leases because we believe they meet an important need in part because theythe real estate capital markets for our customers. We also believe Ground Leases offer a unique combination of safety, income growth and the potential for capital appreciation. We believe that Ground Leases offerappreciation for investors for the opportunity to realize superior risk-adjusted total returns when compared to certain other alternative commercial real estate property investments.
High Quality Long-Term Cash Flow: We believe that a Ground Lease represents a safe position in a property'sproperty’s capital structure. This safety is derived from the typical structure of a Ground Lease, which we believe creates a low likelihood of a tenant default and a low likelihood of a loss by the Ground Lease landlord in the event of a tenant default. A Ground Lease landlord typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default, which provides a strong incentive for a Ground Lease tenant to make the required Ground Lease rent payments. Additionally, theThe combined property value of a property subject to a Ground Lease typically significantly exceeds the amount of the Ground Lease landlord'slandlord’s investment atin the time it was made;Ground Lease; therefore, even if the Ground Lease landlord takes over the property following a tenant default or upon expiration of the Ground Lease, the landlord is reasonably likely to recover substantially all of its Ground Lease investment, and possibly amounts in excess of its investment, depending upon prevailing market conditions.
Income Growth
: Ground Leases typically provide growing income streams through contractual base rent escalators that may compound over the duration of the lease. These rent escalators may be based on fixed increases,Opportunity for Capital Appreciation:
The opportunity for capital appreciationWe generally target Ground Lease investments in which the initial valuecost of the Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon (the "Combined Property Value") as if there was nothe Ground Lease on the land, or the Combined Property Value.did not exist. If the initial valuecost of a Ground Lease is equal to 35% of the Combined Property Value, the balance ofremaining 65% of the Combined Property Value represents potential excess value accretionover the amount of our investment that would be turned over to us upon the reversion of the property, assuming no intervening declinechange in the Combined Property Value. We refer to this potential value accretion as the "Value Bank," defined as the difference between the initial cost of the Ground Lease and the Combined Property Value. In our view, there is a strong correlation between inflation and commercial real estate values over time, which supports our belief that the value of our Value Bankowned residual portfolio should increase over time as inflation increases. Ourincreases, although our ability to recognize value through reversion rightsin certain cases may be limited by the rights of our tenants under some of our Ground Leases, including tenant rights to purchase our land in certain circumstances and the right of one tenant to leveldemolish improvements prior to the expiration of the lease. See "Risk Factors" for a discussion of these tenant rights.
Owned Residual Portfolio: We believe that the reversionresidual right is a unique feature distinguishing Ground Leases from other fixed income investments and property types. Accordingly, we periodically estimateWe track the unrealized capital appreciation in the value of our Value Bank based in part on valuationsowned residual portfolio over our basis because we believe it provides relevant information with regard to the three key investment characteristics of our Ground Leases. Leases: (1) the safety of our position in a tenant’s capital structure; (2) the quality of the long-term cash flows generated by our portfolio rent that increases over time; and (3) increases and decreases in the Combined Property Value of the portfolio that reverts to us pursuant to such residual rights.
We retainbelieve that, similar to a loan to value metric, tracking changes in the value of our owned residual portfolio is useful as an indicator of the quality of our cash flows and the safety of our position in a tenant’s capital structure, which, in turn, supports our objective to pay and grow dividends over time. Observing changes in our owned residual portfolio value also helps us monitor changes in the value of the real estate portfolio that reverts to us under the terms of the leases, either at the expiration or earlier termination of the lease. The value may be realized by us at the relevant time by entering into a new lease reflecting then current market terms and values, selling the building, selling the building with the land, or operating the building directly and leasing the spaces to tenants at prevailing market rates.
We have engaged an independent valuation firm to prepareprepare: (a) initial reports of the Combined Property Value associated with eachour Ground Lease in our portfolioportfolio; and (b) periodic updates of such reports. As reportedreports, which we use, in part, to determine the current estimated value of our owned residual portfolio. We calculate this estimated value by subtracting our original
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aggregate cost basis in the Ground Leases from our estimated aggregate Combined Property Value based on estimates by the valuation firm and by management.
The table below shows the current estimated unrealized capital appreciation in our Current Report on Form 8-K filed on February 15, 2018,owned residual portfolio ("UCA") as of December 31, 2017, our estimated Value Bank is $989.2 million2021 and 2020 ($ in aggregate and our estimated Value Bank per share is $54.38. Please review thatmillions):(1)
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| December 31, 2021 |
| December 31, 2020 | ||
Combined Property Value(2) | | $ | 12,725 | | $ | 8,637 |
Ground Lease Cost(2) | |
| 4,664 | |
| 3,177 |
Unrealized Capital Appreciation in Our Owned Residual Portfolio | |
| 8,061 | |
| 5,460 |
| (1) | Please review our Current Report on Form 8-K filed on February 15, 2022 for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of UCA. See "Risk Factors-Certain tenant rights under our Ground Leases may limit the value and the UCA we are able to realize upon lease expiration, sale of our land and Ground Leases or other events" for a discussion of certain tenant rights and other terms of the leases that may limit our ability to realize value from the UCA. |
| (2) | Combined Property Value includes our applicable percentage interests in our unconsolidated ventures and $818.3 million and $111.9 million related to transactions with remaining unfunded commitments as of December 31, 2021 and 2020, respectively. Ground Lease Cost includes our applicable percentage interests in our unconsolidated ventures and $165.5 million and $18.2 million of unfunded commitments as of December 31, 2021 and 2020, respectively. As of December 31, 2021, our gross book value as a percentage of Combined Property Value was 40%. |
We formed a subsidiary called Caret Ventures LLC that is structured to track and capture UCA to the extent UCA is realized upon expiration of our Ground Leases, sales of our land and Ground Leases or certain other specified events. Under a shareholder-approved plan, management was granted up to 15% of Caret Units, some of which remains subject to time-based vesting. Subsequent to December 31, 2021, we sold 108,571 Caret Units and received a binding commitment for the purchase of 28,571 Caret Units for $24.0 million. Those 137,142 Caret Units equal 1.37% of the valuation methodology used and important limitations and qualificationsauthorized Caret Units (refer to Note 14 to the consolidated financial statements). As part of the calculationsale, we are obligated to seek to provide a public market listing for the Caret Units, or securities into which they may be exchanged, within two years. If we are unable to provide public market liquidity within the two years at a value in excess of Value Bank. See also "Risk Factors - There can be no assurance that we will realize any incremental value from the Value Bank or thatnew investors’ basis, the market price of our common stock will reflect any value attributable thereto."
Market Opportunity
: We believe that there is a significant market opportunity for a dedicated provider of Ground Lease capital like us. We believe that the market for existing Ground Leases is fragmented with ownership comprised primarily of high net worth individuals, pension funds, life insurance companies, estates and endowments. However, while we intend to pursue acquisitions of existing Ground Leases, our investment thesis is predicated, in part, on what we believe is an untapped market opportunity to expand the use of Ground Leases to a broader component of the approximately $7.0 trillion institutional commercial property market in theWe are managed by SFTY Manager, LLC (our "Manager"), a wholly-owned subsidiary of iStar, our largest shareholder, pursuant to a management agreement (refer to Note 11). We have no employees, and rely on our Manager to provide all services.
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Investment Strategy
Our primary investment objective is to construct a diversified portfolio of Ground Leases that will generate attractive high-quality risk-adjusted returns and support stable and growing distributions to our stockholders.shareholders. We have identified several channels for pursuing Ground Lease investment opportunities which include:
| ● | Create a Ground Lease with a Third Party. We seek to pursue opportunities where a third party acquiror or existing owner of a commercial property may be interested in utilizing a Ground Lease structure to facilitate its options with respect to its interests in the property. We will create the Ground Lease by splitting ownership of the property into an ownership interest and Ground Lease on the land, and a separate leasehold interest of the building and improvements thereon. We will acquire the ownership interest and Ground Lease on the land from the third party. |
| ● | Acquire Existing Ground Leases. We seek to acquire existing Ground Leases or options to acquire existing Ground Leases that are marketed for sale and actively solicit potential sellers and related property brokers of existing Ground Leases to engage in off-market transactions. Our structure as an UPREIT gives us the ability to acquire Ground Leases from owners, particularly estates and high net worth individuals, using Operating Partnership units that may provide the seller with tax advantages, as well as liquidity, portfolio diversification and professional management. |
| ● | Originate Ground Leases to Provide Capital For Development or Value-Add Redevelopment or Repositioning. We seek opportunities where we can purchase land and simultaneously lease it pursuant to a new Ground Lease to a tenant who plans to develop a new, or significantly improve an existing, commercial property on the land. |
| ● | Acquire a Commercial Real Estate Property to Create a Ground Lease. We seek in select instances, in partnership with our Manager, to acquire commercial real estate properties that have the potential to be converted into an ownership structure that includes a Ground Lease retained by us and a leasehold interest that may be acquired by our Manager or sold to a third party. |
We generally intend to target Ground Leases that meet some or all of the following investment criteria:
| ● | Properties of any type that are located in major metropolitan areas; |
| ● | Average remaining initial lease terms that are typically 30 to 99 years; |
| ● | Periodic contractual rent escalators or percentage rent participations; |
| ● | Value of approximately 30% to 45% of the Combined Property Value at the commencement of the lease or the acquisition date; |
| ● | Ground Rent Coverage, defined as the ratio of the Property’s NOI to the annualized rental payment due us, of approximately 2.0x to 4.5x. Property NOI is defined as the trailing twelve month net operating income of the building and improvements being operated at the property without giving effect to any rent paid or payable under our Ground Lease, and for this purpose we use estimates of the stabilized Property NOI if we don’t receive current tenant information and for properties under construction or in transition, in each case based on leasing activity at the property and available market information, including leasing activity at comparable properties in the relevant market; |
| ● | First year cash return on asset of between 2.5% and 4.0% and effective yields between 4.5% and 5.5%; |
| ● | Properties that we believe are well located in markets with high barriers to entry and that have durable cash flow; and |
| ● | Transaction sizes between $10 million and $500 million or more. |
Financing Strategy
We may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury Regulations, any income from a hedging transaction we enter into (i) in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which we clearly identify as specified in Treasury Regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, or (ii) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into, or (iii) primarily to manage risk with respect to a hedging transaction described in clause (i) or (ii) after the extinguishment of such borrowings or disposal of the asset producing such income that is hedged by the hedging transaction, provided, in each case, that the hedging transaction is clearly identified as such before the close of the day on which it was acquired, originated or entered into, will not constitute gross income for purposes of the 75% or 95% gross income test. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the 75%utilize and 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT.
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indebtedness that will be either fixed or floating rate. Our board of directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity issuances, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors, including the restrictive covenants under our debt obligations.
To the extent our board of directors determines to obtain additional capital, we may, without stockholder approval, borrow funds or issue debt or equity securities, including additional Operating Partnership units, retain earnings (subject to the distribution requirements applicable to REITs under the Code) or pursue a combination of these methods. As long as our Operating Partnership is in existence, the proceeds of all equity capital raised by us will be contributed to our Operating Partnership in exchange for additional interests in our Operating Partnership, which will dilute the ownership interests of the then existing limited partners in our Operating Partnership.
Hedging Strategy
We may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. We intend to structure hedging transactions in a manner that does not jeopardize our qualification as a REIT.
Conflict of Interest Policies
Conflicts of interest may exist or could arise in the future with iStar and its affiliates, including our Manager, our executive officers and/or directors who are also officers and/or directors of iStar, and any limited partner of our Operating Partnership. Conflicts may include, without limitation: conflicts arising from the enforcement of agreements between us and iStar or our Manager; conflicts in the amount of time that officers and employees of our Manager will spend on our affairs versus iStar'siStar’s other affairs; conflicts in future transactions that we may pursue with iStar; conflicts between the interests of our stockholders and the management holders of Caret Units; and conflicts in pursuing transactions that could be structured as either a Ground Lease or as another type of transaction that is within iStar'sallocating investments to an iStar-managed investment focus. As of December 31, 2017,fund in which we may invest. iStar is our largest shareholder and ownsowned approximately 37.6%64.6% of our common stock.stock as of December 31, 2021. In addition, two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer. Our Manager is a wholly-owned subsidiary of iStar. As a result of the foregoing relationships, iStar will havehas significant influence over us.
Competition
We compete with numerous commercial developers, real estate companies (including other REITs), financial institutions (such as banks and insurance companies) and other investors (such as pension funds, investment funds, private companies and individuals) for investment opportunities and tenants. This competition may result in higher costs for properties, lower returns and impact our ability to grow. Some of these competitors have greater financial and other resources and access to more attractive capital than we do. However, due to our focus on Ground Leases located throughout the United States,U.S., and because some of our competitors are locally and/or regionally focused, we do not always encounter the same competitors in each market.
Regulation
We believe that we have been organized and have operated in a manner that has enabled us to maintain our qualification as a REIT and our exemption from regulation as an investment company under the Investment Company Act of 1940, as amended, and we intend to continue to do so. In addition, our properties are subject to various laws, ordinances
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and regulations. We believe that weOur tenants are in compliance in all material respects with the necessary permitsgenerally responsible under our Ground Leases for taxes, maintenance and approvals to conduct our business.
Code of Conduct
The Company has adopted a code of conduct that sets forth the principles of conduct and ethics to be followed by our directors, officers, Manager and employees of our Manager who perform services for us (the "Code of Conduct"). The purpose of the Code of Conduct is to promote honest and ethical conduct, compliance with applicable governmental rules and regulations, full, fair, accurate, timely and understandable disclosure in periodic reports, prompt internal reporting of violations of the Code of Conduct and a culture of honesty and accountability. A copy of the Code of Conduct has been provided to each of our directors, officers, the Manager and relevant employees, who are required to acknowledge that they have received and will comply with the Code of Conduct. A copy of the Company'sCompany’s Code of Conduct has been previously filed with the SEC and is incorporated by reference in this Annual Report on Form 10-K as Exhibit 14.1. The Code of Conduct is also available on the Company'sCompany’s website at
Human Capital Resources
We have no employees asand rely on our Manager provides allfor our human capital resources. Our management agreement requires that our Manager provide us with an executive management team and other appropriate support personnel to manage our business in accordance with the agreement. Our Manager is responsible for directly compensating and providing benefits to its employees who provide services to us, although we have granted equity compensation in the form of Caret Units and other stock-based awards to members of senior management and other iStar employees, and expect to do so in the future. Our Manager has advised us that it had 143 employees as of December 31, 2021 compared to 145 employees as of December 31, 2020. Substantially all of our Manager’s employees are full time employees.
Our Manager has publicly announced that scaling our business is one of its principal business strategies and that it has devoted substantial additional personnel and other resources to these efforts beginning in early 2019 when we and iStar announced an expansion of our relationship. Our Manager has reported that in its recruiting efforts, our Manager generally strives to have a diverse group of candidates to consider for roles. In addition, our Manager has reported that it maintains a variety of development, health and wellness and charitable programs for its personnel, including those who provide services to us.
In fiscal 2021, as a result of the COVID-19 pandemic, certain employees of our Manager’s workforce worked remotely, and our Manager instituted safety protocols and procedures to enable certain employees to work on site as necessary.
Additional Information
We maintain a website at www.safeholdinc.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K, and our web address is included only as an inactive textual reference. In addition to this Annual Report on Form 10-K, we file quarterly and special reports, proxy statements and other information with the SEC. Through our corporate website,
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In addition to the other information in this report, you should consider carefully the following risk factors in evaluating an investment in the Company'sCompany’s securities. Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Company'sCompany’s business, financial condition, results of operations, cash flows, ability to service our indebtedness, ability to pay distributions and the market price of the Company'sCompany’s common stock. The risks set forth below speak only as of the date of this report and the Company disclaims any duty to update them except as required by law. For purposes of these risk factors, the terms "our Company," "we," "our" and "us" refer to Safety, Income & GrowthSafehold Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
Risks Related to Our Portfolio and Our Business
Our expectationsbusiness and growth prospects have been adversely affected by the COVID-19 pandemic and could be adversely affected in the future by the COVID-19 pandemic or the outbreak of any other highly infectious or contagious diseases.
The COVID-19 pandemic adversely affected our growth during 2020 and 2021, and could adversely affect our business and growth in the future. At this time, we cannot predict the full extent or duration of the impacts of the COVID-19 pandemic on our business. COVID-19 or another pandemic could adversely affect us due to, among other factors:
| ● | closures of, or other operational issues at, one or more of our properties resulting from government or tenant action; |
| ● | deteriorations in our tenants’ financial condition and access to capital which could cause one or more of our tenants to be unable to meet their Ground Lease obligations to us in full, or at all; |
| ● | the impact on the hotel industry generally and our hotel assets specifically, which accounted for approximately 14.4% and 15.2% of our total revenues for the years ended December 31, 2021 and 2020, respectively, excluding percentage rent; |
| ● | the impact on our percentage rent revenues, all of which are based on operating performance at our hotel properties. We recognized no percentage rent from our Park Hotels Portfolio in 2021 in respect of 2020 hotel operating performance versus $3.6 million recognized in 2020, and we expect no percentage rent payable to us from our Park Hotels Portfolio in 2022 in respect of 2021 hotel operating performance; |
| ● | deteriorations in our financial performance which could cause us to be unable to satisfy debt covenants, including cash flow coverage tests in our revolving credit facility, which could trigger a default and acceleration of outstanding borrowings; |
| ● | difficulty accessing debt and equity capital on attractive terms, or at all, to fund business operations, growth or address maturing liabilities; |
| ● | a deterioration in iStar’s business performance and liquidity, which could adversely affect its ability to participate in future capital raising transactions that we may undertake; |
| ● | delays in the supply of products or services that are needed for our and our tenants’ efficient operations; and |
| ● | a deterioration in our Manager’s business continuity or the health of its personnel during a disruption. |
In addition to the potential adverse effects described above, our business and growth prospects may be adversely affected even after the COVID-19 pandemic ends as a result of ongoing negative business trends in the travel industry, which will adversely affect the hotel properties in our portfolio and the percentage rents that we receive from them, and the possibility that our office properties in urban areas experience less demand and declines in value due to a permanent shift in employees working from home or long-term relocation trends away from urban centers. As of December 31, 2021, approximately 50% of the gross book value of our Ground Lease portfolio is comprised of predominantly urban office properties. The lack of certainty as to when the COVID-19 pandemic will significantly subside and its after-effects on certain sectors of the economy and commercial real estate markets preclude any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 or the possibility of another pandemic presents material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
Our estimated UCA, Combined Property Value and Ground Rent Coverage, may not reflect the full potential sizeimpact of the COVID-19 pandemic and may decline materially in future periods.
Certain metrics that we report and monitor may not reflect the full potential impact of the COVID-19 pandemic. Our reported estimated UCA and Combined Property Value are based, in part, on third party appraisals that we obtained on a rolling quarterly basis during 2021. The estimated UCA and ratio of gross book value to the Combined Property Value of our portfolio, which are metrics that we report and that management tracks, in part, to assess risk and our seniority
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in capital structures, may not reflect the full effects of the COVID-19 pandemic. The unknown duration and potential impact of the COVID-19 pandemic on the economy combined with limited transaction activity makes current real estate valuations uncertain and our estimated UCA and ratio of gross book value to Combined Property Value could decline in future periods, and any such decline could be material. Our estimated Ground Rent Coverage represents the ratio of the property NOI of the commercial properties being operated on our land to the Ground Lease payment due to us, as of the date of determination. With respect to properties under development or in transition or for which financial statements are not available, we use our internal underwritten estimates of Ground Rent Coverage at stabilization and third party valuations where available, none of which has been adjusted to take into account any effects of the COVID-19 pandemic. With respect to other properties, the property NOI available to us at December 31, 2021 may not be indicative of future periods, depending on the direction and magnitude of the effects of the COVID-19 pandemic for the entire period. Given the uncertainty surrounding the COVID-19 pandemic and its effects, and the limitations of the information used in our estimates it is possible that the actual Ground Rent Coverage may be lower than our estimate, now or in the future.
The market for Ground Lease transactions and the availability of investment opportunities are untested and may prove to be incorrect.
The achievement of our investment objectives depends, in part, on our ability to continue to grow our portfolio. We cannot assure you that the size of the market for Ground Leases will enable us to meet our estimates.growth objectives. Potential tenants may prefer to own the land underlying the improvements they intend to develop, rehabilitate or own. Negative publicity about the experience of tenants with non-Safehold Ground Leases may also discourage potential tenants. In addition, we have beenincreases in an extended period of historically low interest rates may result in a reduction in the availability or an increase in costs of leasehold financing, which is critical to the growth of a robust Ground Lease market. The COVID-19 pandemic adversely affected our new investment activity during 2020 and when ratesthe first quarter of 2021. We saw an increase there may be less activity generallybeginning in the second quarter of 2021 which continued through a strong fourth quarter 2021; however, we continue to experience some effect from the COVID-19 pandemic. Equity and debt financing for real estate transactions, including leasing, development and financing and less financing available for potential tenants to finance their leasehold interests.
Our operating performance and the market value of our properties are subject to risks associated with real estate assets and the real estate industry, which could materially and adversely affect us.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may adversely affect our operating results and decrease cash available for distributions to our stockholders,shareholders, as well as the market value of our properties. These events include, but are not limited to:
| ● | adverse changes in international, national, regional or local economic and demographic conditions; |
| ● | adverse changes in the financial position or liquidity of tenants and potential buyers of properties; |
| ● | competition from other real estate investors with significant capital, including real estate operating companies, other publicly traded REITs, institutional investment funds, banks, insurance companies and individuals; |
| ● | potential liability under environmental laws as an owner of real property; |
| ● | our tenants’ failures to maintain adequate insurance on their properties as is typically required by our leases and the inability to insure against certain events, including acts of God; and |
| ● | changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws and governmental fiscal policies. |
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of thesesuch events may occur, could result in a general decline in attractive investment opportunities, the availability of financing for buyers and lessees of our properties or an increased incidence of defaults under our existing leases. As a result of the foregoing, there can be no assurance that we can achieve our investment objectives.
The rental payments under our leases may not keep up with changes in market value and inflation.
The leases relating to the One Ally Center, Northside Forsyth Hospital Medical Center, 6201 Hollywood (North) and 6200 Hollywood (South)at most of our properties provide for rental payments that are CPI-Linked or fixed with future CPI adjustments. Many of our Ground Leases include a periodic resetting of the rent increase based on changes inprior years cumulative CPI. These CPI lookbacks are generally capped between 3.0% - 3.5%. In the CPI, subject to a floor and a ceiling in both cases. These percentageevent cumulative inflation growth for the lookback period
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exceeds the cap, these rent participations and CPI adjustments may not keep up fully with changes in inflation. They may also not keep up fully with increases in market value.rental rates. As a result, we may not capture the full value of the propertiesland underlying our leases.leases at given points in time or the UCA at lease expiration. Future leases that we enter into mayare likely to contain similar or other limitations on rent increases, which may limit the appreciation in value of our properties andland, our net asset value.
We may be unable to meetrenew expiring Ground Leases, re-lease the land or sell the properties on favorable terms or at all.
Above-market lease rates at some of the properties in our portfolio at the time of any Ground Lease renewal or re-lease may force us to renew some expiring leases or re-lease properties at lower rates. We cannot assure you existing tenants will exercise any extension options or that our expiring leases will be renewed or that our properties will be re-leased at lease rates equal to or above their rental obligationsthen weighted average lease rates. Tenants may fail to properly maintain their improvements, and certain improvements may become obsolete over the long terms of our Ground Leases, which may impair the value and the UCA that we are able to realize upon a sale or re-leasing, or require us to make significant investments in order to restore the property to a suitable condition.
A lack of recourse to creditworthy counterparties may adversely affect us.
The tenants under our lease.
Counterparty, geographic and industry concentrations may expose us to financial credit risk.
For the year ended December 31, 2021, our two largest tenants by revenues accounted for approximately 8.6% and 8.3%, respectively, of our total revenues. For the year ended December 31, 2021, 14.4% of our total revenues came from hotel properties. We could be materially and adversely affected by negative factors affecting such concentration. We received no percentage rent payments from our Park Hotels Portfolio in 2021 (which reflect 2020 operations) due to the impact of the COVID-19 pandemic, and we expect to receive no percentage rent payments from this portfolio in 2022 (which reflect 2021 operations). Industry experts predict continued declines in corporate budgets and consumer demand for travel even after the COVID-19 pandemic subsides, and such declines may continue for several years. Percentage rent payments under our Ground Leases are likely to continue to be negatively affected while these conditions persist. In addition, as of December 31, 2021, our portfolio had the following regional geographic concentrations based on gross book value: Northeast-37%, West-24%, Mid-Atlantic-16%, Southeast-12%, Southwest-7% and Central-4%.
Percentage rent payable under our master lease relating to the Park Hotels Portfolio is calculated on an aggregate portfolio-wide basis.
The tenant under our Park Hotels Portfolio master lease pays us percentage rent equal to 7.5% of the positive difference between the aggregate annual operating revenues of the five hotels in the portfolio for any year and a threshold amount of approximately $81.4 million. We received no percentage rent payments from our Park Hotels Portfolio in 2021 (which reflect 2020 operations) versus $3.6 million received in 2020 (which reflect 2019 operations), and we do not expect to receive any in 2022 (which reflect 2021 operations). Any deterioration in the operating performance at any of the hotels in the Park Hotels Portfolio would adversely affect our ability to earn percentage rent under such hotels, and it is possible that poor operating performance at one or more such hotels could reduce or eliminate percentage rent for any annual period notwithstanding stable or improving operating performance at other hotels included in the Park Hotels Portfolio.
We are the tenant of a Ground Lease underlying a majority of our Doubletree Seattle Airport property.
The sum of our annualized cash base rental income in place for our Doubletree Seattle Airport property as of December 31, 20172021 and total percentage cash rental income during the year ended December 31, 20172021 for such property totaled an aggregate of $4.7$4.5 million, or approximately 22.3%4.0% of the cash income of our entire portfolio. A majority of the land underlying our Doubletree Seattle Airport property is owned by a third party and is ground leased to us. We are obligated to pay the third-party owner of the Ground Lease $0.4 million, subject to adjustment for changes in the CPI, per year through 2044; however, we pass this cost on to our tenant under the terms of our master lease. If the underlying Ground
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Lease is not renewed by the landlord on or before its expiration in 2044, our lease of the Doubletree Seattle Airport hotel to our tenant would also terminate which would result in the loss to us of the rental income from this hotel as well as any UCA that had not been realized by that time.
Certain tenant rights under our Ground Leases may limit the value and the UCA we are able to realize upon lease expiration, sale of our land and Ground Leases or other events.
Certain tenant rights under our Ground Leases may limit the value we are able to realize upon lease expiration, sale of our land or other events, including, among others: (i) our Park Hotels master lease gives the tenant the right to purchase one or more of the hotels at fair market value if the hotel suffers a major casualty or condemnation event, as defined under the master lease; (ii) prior to the expiration of the Ground Lease relating to an owner primarilyoffice property that represents 1.6% of land,the gross book value of our depreciation expenses are expectedportfolio as of December 31, 2021, the tenant has the right to demolish the building and improvements on the property, although it cannot do so during the last five years of the lease without our prior consent. Rent under our Ground Lease must continue to be limited for financialpaid through the end of the lease, even if the tenant demolishes the building and tax reporting purposes,any improvements on the property; (iii) the Lock Up Self Storage Facility lease gives the tenant the right to purchase our interest in the underlying land at fair market value as of the expiration of the lease in 2037; (iv) the tenants under certain of our Ground Leases have a right of first offer or a right of first refusal to purchase the land underlying the Ground Lease should we decide to sell the land together with the resultGround Lease to a third party; (v) the tenant under one of our Ground Leases has the right to purchase our land at lease expiration, although we have the right to terminate the tenant’s purchase option for a fee if the tenant sells the leasehold interest at any point prior to the expiration of the Ground Lease. The existence of these rights in existing and future leases may adversely affect the value and the UCA we are able to realize upon a sale of our Ground Leases and/or make it more difficult to re-let a property after the expiration of a lease.
We rely on Property NOI as reported to us by our tenants.
In evaluating Ground Rent Coverages and estimating Combined Property Values as indicators of the security of the rent owed to us pursuant to, and the safety of our investment in, a Ground Lease, we rely, to a significant degree, on Property NOI as reported to us by our tenants, or as otherwise publicly available, without independent investigation or verification on our part. Our tenants do not, nor do we expect that future tenants will, provide us with full financial statements prepared in accordance with GAAP or audited or reviewed by an independent registered public accounting firm. Our leases generally do not specify the detail upon which such financial information must be prepared, or require notice to us or our approval for rent concessions or abatements given by our tenants to their subtenants. We assume the accuracy and completeness of information provided to us by our tenants or that is publicly available and the appropriateness of the accounting methodology or principles, assumptions, estimates and judgments used in its preparation. Accordingly, no assurance can be given that the information provided to us by our tenants, or that is otherwise publicly available, is accurate or complete, which could materially and adversely affect our underwriting decisions. Tenants may also restrict our ability to disclose publicly their Property NOI. In addition, with respect to properties under development or renovation, Ground Rent Coverage reflects our estimated annual rent coverage at the expected stabilization or completion of renovation at the applicable property. There can be no assurance our estimates will prove to be correct.
Our estimates of Ground Rent Coverage for properties in development or transition, or for which we do not receive current tenant financial information, may prove to be incorrect.
Certain of the Ground Leases in our portfolio relate to properties that are under development or in transition. In such cases, our underwriting and monitoring of the property during development or transition is based on our estimate of the initial net operating income of the building at an assumed stabilization date. Similarly, we use estimates of Property NOI in cases where our tenant is not required to report the actual amount to us on a current basis. Our estimates are based on leasing activity at the building and available market information, including leasing activity at comparable properties in the market. Estimates are inherently uncertain. While we intend to use assumptions that we believe are reasonable when making estimates, our assumptions may prove to be incorrect. No assurance can be given regarding the accuracy of our estimates and assumptions and it is possible that the actual Ground Rent Coverage of these assets may be materially lower than our estimates.
Our estimates of Combined Property Value are based on various assumptions and information supplied to us by our tenants, and accordingly may not be indicative of actual values.
When underwriting a potential investment and monitoring our portfolio, our estimate of Combined Property Value is based on expected lease terms, information supplied to us by our prospective tenant or tenant and numerous
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assumptions made by us. We do not independently investigate or verify the information provided to us by our tenants and no assurance can be given that the information is accurate. See "—We rely on Property NOI as reported to us by our tenants." The use of different information or assumptions could result in valuations that are materially lower than those used in our underwriting and portfolio monitoring processes. Our estimates of Combined Property Values represent our opinion and may not accurately reflect the current market value of the properties relating to our Ground Leases. Such estimates are based on numerous estimates and assumptions and not on contractual sale terms or third-party appraisals and, therefore, are inherently uncertain, and no assurance can be given regarding the accuracy or appropriateness of such estimates and assumptions. The application of alternative estimates or assumptions could result in valuations, by us or others, that are materially lower than those used in our underwriting and portfolio monitoring processes.
There can be no assurance that we will realize any incremental value from the UCA in our owned residual portfolio or that the market price of our common stock will reflect any value attributable thereto.
Pursuant to the typical terms of a Ground Lease, we regain possession of the land and generally take title to the building and any improvements thereon, without the payment of any additional consideration by us. We regard the difference between the initial Ground Lease value and the Combined Property Value as UCA in our owned residual portfolio that we may realize at the end of the lease through a releasing or sale transaction, or perhaps by operating the property directly. To the extent we choose to operate a property directly, we will be subject to additional risks associated with leasing commercial real estate, including responsibility for property operating costs, such as taxes, insurance and maintenance, that previously were paid for by our tenant pursuant the Ground Lease. Though we estimate Combined Property Value using one or more valuation methodologies that we consider appropriate, there can be no assurance that this estimate or the amount of any UCA in our owned residual portfolio is accurate at the time we invest in a Ground Lease. Even if we estimate that a UCA exists initially, we will generally not be able to realize that appreciation through a near term transaction, as the property is leased to a tenant pursuant to a long-term lease. While the value of commercial real estate as a broad class has generally increased over extended periods of time and is believed by some to exhibit a positive correlation with rates of inflation, the value of a particular commercial real estate asset is primarily a function of its location, overall quality and the terms of relevant leases. Since our leases are typically long-term (base terms ranging from 30 to 99 years), it is possible that the UCA in our owned residual portfolio will increase in value, but over long periods of time. However, the Combined Property Value of a particular property at the end of a Ground Lease will be highly dependent on external capital sourcesits unique attributes and there can be no assurance that it will exceed the amount of our initial investment in the Ground Lease. Moreover, no assurance can be given that the market price of our common stock will include any value attributable to fundthe UCA in our growth.
Ground Leases with developers expose us to risks associated with property development and redevelopment that could materially and adversely affect us.
In Ground Lease transactions with developers, rent may not commence until construction is completed, which would subject us to risks that the developer will be unable to complete the project and have it begin paying rent to us. Risks associated with development transactions include, without limitation: (i) the availability and pricing of financing for the developer on favorable terms or at all; (ii) the availability and timely receipt by the developer of zoning and other regulatory approvals; (iii) the potential for the fluctuation of occupancy rates and rents, which could affect any percentage rents that we may receive; (iv) development, repositioning and redevelopment costs may be higher than at many other REITs. This also meansanticipated by the developer, which may cause the developer to abandon the project; and (v) cost overruns and untimely completion of construction (including due to risks beyond the developer’s control, such as weather or labor conditions, or material shortages). In addition, if our tenant has obtained leasehold financing to complete construction, and the construction lender forecloses on the mortgage following a default, there is a risk that we will be highly dependent on external capital sources to fund our growth. If capital markets are experiencing disruptionthe mortgagee or are otherwise unfavorable, wea new tenant may not have accessnecessary or sufficient development experience to capital on attractive terms,complete the project or at all, which could prevent us from achieving our investment objectives.
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We may also have duties to mitigate our losses and we may not be successful in that regard. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property.
We typically permit tenants to obtain mortgage financing secured by their leasehold interest and to assign the lease and the tenant’s rights under the lease to the mortgagee as collateral. The leasehold mortgagee typically has the right to (i) receive notices and cure tenant defaults under the lease, (ii) require us to the financial risks ofenter into a downturn in the hotel industry generally, and the hotel operations at our specific properties.
We are subject to the risk of bankruptcy of our tenants.
The bankruptcy or insolvency of a tenant may materially and adversely affect the income produced by our properties or could force us to "take back" a property as a result of a default or a rejection of the lease by a tenant in bankruptcy, any of which could materially and adversely affect us. If any tenant becomes a debtor in a case under federal bankruptcy law, we cannot evict the tenant and assume ownership of the building and improvements thereon solely because of the bankruptcy if the tenant continues to comply with the terms of our lease. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid and future rent would be a general unsecured claim subject to a statutory cap that might be substantially less than the rent actually owed to us under the lease. Our claim for unpaid rent will be a general unsecured claim that would likely not be paid in full. We may also be unable to re-lease a terminated or rejected space or re-lease it on comparable or more favorable terms.
We may directly own one or more commercial properties, before we are able to execute a Ground Lease transaction, which will expose us to the risks of ownership of operating properties and require us to bear the costs of owning and operating the properties.
There may be instances where we take ownership of thea commercial property for a period of time prior to the separation of theseparating it into fee and leasehold interests. For example, if a proposed Ground Lease tenant failsIn addition, we may own and operate commercial properties that revert to completeus upon the expiration or termination of a Ground Lease transaction with us, we may nonetheless maintain or take ownership of the commercial property while we pursue an alternative transaction.
Competition may adversely affect our ability to acquire and originate investments.
We compete with commercial developers, other REITs, real estate companies, financial institutions, such as banks and insurance companies, funds, and other investors, such as pension funds, private companies and individuals, for investment opportunities. Our competitors include both competitors seeking to originate or acquire Ground Lease transactions or acquire properties in their entirety and competitors offering debt financing as an alternative to a Ground Lease. Some of our competitors have greater financial and other resources and access to capital than we do. Due to our focus on Ground Leases throughout the United States,U.S., and because most competitors are often locally and/or regionally focused, we do not always encounter the same competitors in each market.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or unintentional event and could involve gaining unauthorized access to our or our Manager'sManager’s information systems for purposes of misappropriating assets, stealing
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confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to our business relationships. As reliance on technology has increased, so have the risks posed to both our and our Manager'sManager’s information systems and those provided by third-party service providers. Our Manager has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that we will not be materially and adversely affected by such an incident.
Risks Related to Our Relationship with Our Manager
Termination of the types conducted by us.
Termination of the types conducted by us. However, our codemanagement agreement without cause will be difficult and costly. Prior to June 30, 2023, we may not terminate the agreement except for certain cause events. Thereafter, the agreement may be terminated upon the affirmative vote of business conduct and ethics contains a conflicts of interest policy that prohibits our directors and executive officers, as well as personnelat least two-thirds of our independent directors, based upon unsatisfactory long-term performance by our Manager or iStar who provide servicesthat is materially detrimental to us from engaging inand our subsidiaries taken as a whole. The agreement may also be terminated beginning with the seventh annual renewal term after the initial term upon a finding by at least two-thirds of our independent directors that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent any transaction that involves an actual conflicttermination due to unfair fees by accepting a reduction of interest with us without the approval of a majoritymanagement fee agreed to by at least two-thirds of our independent directors. In addition,We must provide our Manager 180 days’ written notice of any termination. Additionally, upon such a termination, or if we are in default of the management agreement withand our Manager does not preventterminates the management agreement, the management agreement provides that we will pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the last completed fiscal year immediately preceding the effective date of termination. These provisions increase the cost to us of terminating the management agreement, adversely affect our ability to terminate the management agreement without cause and its affiliates from engagingmay inhibit change of control transactions that may be in additional management or investment opportunities, somethe interests of which could compete with us.
Our Manager'sManager’s liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable.
Our Manager does not assume any responsibility under the management agreement other than to render the services called for thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Under the terms of the management agreement,Additionally, our Manager and its officers, stockholders, members, managers, directors,affiliates, personnel, any person or entity controlling or controlled by our Manager (including iStar)shareholders and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Managerothers are not liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary's stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. In addition, weWe have agreed to indemnify our Manager and its officers, stockholders, members, managers, directors,affiliates, personnel, any person or entity controlling or controlled by our Managershareholders and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our Managerothers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in accordance with and pursuant to the management agreement.
We expect our reimbursement obligations to make investments on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time in the future would materially and adversely affect us.
We are required to reimburse our Manager for costs incurred by it on our behalf to operate our business, including our allocable share of the compensation and related costs of certain Manager personnel and, at our Manager’s option, rent, utilities and other overhead, in each case except those specifically required to be borne or its parent, iStar, or any adverse changes in our relationship withelected not to be charged by the Manager under the management agreement. Our expenses have grown and our Manager could hinderhas elected to seek reimbursement of additional expenses, including, without limitation, rent, overhead and certain personnel costs. We intend to continue our operating performance and abilityefforts to achieve our investment objectives.
The loss of our Manager or our Manager'sits key personnel could threaten our ability to operate our business successfully.
Our future success depends, to a significant extent, upon the continued services of our Manager'sManager and its management team. In particular, the Ground Lease experience of the management team and the extent and nature of the relationships they have developed within the real estate industrywith customers, brokers and with financial institutionsfinancing services are critically important to the success of our business. The loss of services of our Manager or one or more members of our Manager'sManager’s management team, whether as a result of their departure from iStar, a change of control of iStar or iStar'siStar’s unilateral decision to no longer make them available to our Manager, could threaten our ability to operate our business successfully. Additionally, theThe management agreement does not require our Manager to devote all of its resources or for its personnel to devote
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iStar to allocate any specific officers or employees to our Manager for our benefit, and we don't expect any of the officers or employees of our Manager or iStar to be dedicated exclusively to us.benefit. The ability of our Manager, iStar and their officers and employees to engage in other business activities may reduce the time our Manager spends managing us.
Transactions management agreement, exclusivity agreement,between iStar registration rights agreement and the purchase agreement for the Great Oaks Ground Leaseus were negotiated between related parties and their terms may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
Transactions between iStar and us, including our management agreement exclusivity agreement, iStar registration rights agreement and the Great Oaks Ground Lease (refer to Note 4)13 to the consolidated financial statements) and certain other transactions (refer to Note 11 and Note 13 to the consolidated financial statements) were negotiated between related parties and their terms including the consideration paid to iStar for our Initial Portfolio, fees payable to our Manager, the terms of iStar’s exclusivity commitment and resale rights and the purchase price for the Great Oaks Ground Lease may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under agreements with iStar because of our desire to maintain our ongoing relationship with iStar and our Manager.
There are various potential conflicts of interest in our relationship with iStar and its affiliates, including our Manager, and our executive officers and/or directors who are also officers and/or directors of iStar, which could result in decisions that are not in the best interest of our stockholders.
Conflicts of interest may exist or could arise in the future with iStar and its affiliates, including our Manager, our executive officers and/or directors who are also directors or officers of iStar, and any limited partner of our Operating Partnership.iStar. Conflicts may include, without limitation: conflicts arising from the enforcement of agreements between us and iStar or our Manager; conflicts in the amount of time that officers and employees of our Manager will spend on our affairs versus iStar'siStar’s other affairs; conflicts in future transactions that we may pursue with iStar; conflicts between the interests of our stockholders and the management holders of Caret Units; and conflicts in pursuing transactions that could be structuredallocating investments to an iStar-managed investment fund in which we may invest, as either a Ground Lease or as another type of transaction that is within iStar's investment focus. While we do not generally expect to enter into joint ventures withdiscussed further below. Transactions between iStar and if we do so, the terms and conditions of any such joint venture investmentus would be subject to the approval of a majority of our independent directors,directors; however, there can be no assurance that such approval will be successful in achieving terms and conditions as favorable to us as would be available from a third party. In addition, if a potential investment transaction could be structured either as a Ground Lease or a financing within iStar's investment focus, the transaction would meet the investment objectivesAs of bothDecember 31, 2021, iStar and us (including economic, diversification, geographic, maturity date, tenant and other investment objectives) and both we and iStar have the available capital to pursue the investment, iStar will present both a financing and a Ground Lease investment proposal to the property owner for potential selection by the owner; however, the terms of the proposal by iStar may be more favorable than the termsowned approximately 64.6% of our Ground Lease investment proposal.outstanding common stock. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer. Additionally, the fiduciary duties of executive officers and our directors who are also directors or officers of iStar to iStar and us may come in conflict from time to time. Our Manager is a wholly-owned subsidiary of iStar. As a result of the foregoing relationships and iStar’s significant ownership of our common stock, iStar has significant influence over us. Additionally, although we entered into an exclusivity agreement with iStar, the agreement contains exceptions to iStar'siStar’s exclusivity for opportunities that include only an incidental interest in Ground Leases and opportunities to manufacture or otherwise create a Ground Lease from a property that has been owned by iStar's existing net lease ventureiStar’s Net Lease Venture for at least three years after our initial public offering. Accordingly, the exclusivity agreement will not prevent iStar from pursuing certain Ground Lease opportunities directly or through the aforementioned Net Lease Venture.
iStar recently announced a transaction to sell its net lease venture.
iStar formed an investment fund, in which we may invest, which is managed by an affiliate of iStar also haveand targets the origination and acquisition of Ground Leases for commercial real estate projects that are in a pre-development phase, unlike the later stage development Ground Leases that fit our investment criteria. iStar may face conflicts of interest in fulfilling its duties to us and the fund. iStar, under applicable Maryland law. Those duties may comethrough our Manager and the manager of such fund, is responsible for identifying and appropriately allocating investments between the fund and us, based upon the fund’s and our respective investment criteria. In addition, iStar would be involved in conflict from time to time. Atnegotiating the same time, we, asprice and the general partnerconditions of our Operating Partnership,purchases of assets from any such fund. If iStar fails to deal appropriately with these and other conflicts, our business could be adversely affected. There can be no assurance that the terms of our investment in any such fund or transactions we may engage in with such fund will be as favorable as those we may achieve in an arm’s length transaction with unaffiliated parties.
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We have fiduciary
There can be no assurance that this fund will be successful, and its other partners under Delaware law. Our Operating Partnership agreement providesmaking investments through the fund may be less favorable to us than making them directly.
The fund pursues a new investment strategy targeting pre-development Ground Leases and there can be no assurance that the fund will be successful in implementing this strategy or in originating investments. Moreover, there can be no assurance that the pre-development projects underlying the fund’s Ground Leases would achieve the conditions necessary to meet our investment criteria for purchase in the event offuture. We currently expect that the time for a conflictproject to move from pre-development to development will range from one to four years. Investments in the duties owed byfund, or financial commitments to fund future Ground Leases, could reduce the amount of available capital for other investments, and could limit our directors and executive officersfinancial flexibility or require us to increase our company and the fiduciary duties owed by us,leverage. Moreover, our manager has no track record in our capacity as generalcompleting Ground Lease transactions that would meet any such fund’s investment criteria. As a potential limited partner of our Operating Partnership, to those limited partners, we will fulfill our fiduciary duties to those limited partners by acting in the best interestsfund, we would receive only a portion of the returns from the investments while they are held by the fund. Such returns will be reduced by the fees paid to the manager of the fund, and may exceed the fee we pay our company.
The management agreement.
The management fee thatpayable to our Manager is based on the amount of our total equity (as defined in the management agreement) at the end of each quarter, regardless of our performance. Our total equity for the purposes of calculating the management fee is not the same as, and could be greater than, the amount of total equity shown on our balance sheet. The possibility exists that significant management fees could be payable to our Manager for a given quarter despite the fact that we could experience a net loss during that quarter. Our Manager'sManager’s entitlement to such significant nonperformance-based compensation may not provide sufficient incentive to our Manager to devote its time and effort to source and maximize risk-adjusted returns on our investment portfolio.
Our Manager manages our portfolio pursuant to our investment guidelines and our board of directors will not approve each investment decision made by our Manager, which may result in our Manager making riskier investments on our behalf than would be specifically approved by our board of directors.
Our Manager is required to manage our business affairs in conformity with the policies and the investment guidelines approved by our board of directors. While our directors periodically review our policies, investment guidelines and our investment portfolio, they do not review all of our proposed investments, which may result in our Manager making riskier investments on our behalf than would be specifically approved by our board of directors. In addition, in conducting periodic reviews,reviewing certain investments, our directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may enter into complicated transactions thatit may be difficult or impossible to unwind transactions by the time they are reviewed by our directors. Our Manager has great latitude, within the broad investment guidelines in determining the types of assets it may decide are proper investments for us, which could result in investment returns that are substantially below expectations or that result in losses. Our Manager may change its investment process without stockholder approval at any time. Decisions made and investments entered into by our Manager may not fully reflect your best interests.
Financing and Investment Risks
Our debt obligations will reduce cash available for distribution to our stockholders and may expose us to the risk of default under those debt obligations and may include covenants that prohibit or otherwise restrict our ability to make distributions to our stockholders.
Payments of principal and interest on borrowings may leave us with insufficient cash resources to fund investment activities or to make distributions currently contemplated or necessary for us to qualify or maintain our qualification as a REIT. If interest rates, and therefore, the costs of our debt rise faster and by greater amounts than any rent escalations and percentage
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rents under our leases, we may not generate sufficient cash to pay amounts due under our borrowings. Additionally, given the long term of our Ground Leases and the comparatively shorter term of our debt, there may be a misalignment between interest rates at the time of a refinancing and our expected revenue stream under a Ground Lease. Our organizational documents do not contain any limitation on the amount of indebtedness we may incur. Our level of debt, the costs of our debt relative to the cash flows from operations and the limitations imposed on us by our debt agreements could have significant adverse consequences, including, without limitation, the following:
| ● | our cash flow may be insufficient to meet our required principal and interest payments; |
| ● | we may be unable to borrow additional funds as needed on favorable terms, or at all; |
| ● | we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness; |
| ● | increases in interest rates could materially increase our interest expense and adversely affect our growth by significantly increasing the costs of future investments; |
| ● | we may be forced to dispose of one or more of our assets, possibly on disadvantageous terms; |
| ● | our Unsecured Revolver prohibits us from paying distributions if there is a default thereunder, subject to limited exceptions relating to the maintenance of our REIT qualification; |
| ● | the actions or omissions of our tenants over which we have no direct control, such as a failure to pay required taxes, may trigger an event of default under certain of our mortgages (refer to Note 8 to the consolidated financial statements); |
| ● | if we default on our debt, the lenders or mortgagees may accelerate our debt obligations, repossess and/or take control of the properties, if any, that secure their loans and collect rents and other property income; and |
| ● | our default under debt agreements could trigger cross-default or cross acceleration of our other debt. |
Our failure to meet our required principal and interest payments;
Subject to our qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired beneficial impact on our results of operations and cash flows.accounting. Should we desire to terminate a hedging arrangement, there could bewe may incur significant costs and cash requirements involved to fulfill our initial obligation under the hedging arrangement.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on partners'partners’ or co-venturers'co-venturers’ financial position and liquidity and disputes between us and our co-venturers.
We hold certain of our Ground Leases through ventures owned by us and a third party, and we may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity.entities. Under our stockholder'sstockholder’s agreement with an institutional investor that invested in us prior to our initial public offering, we have agreed that it will have the right to participate as a co-investor in real estate investments for which we are seeking joint venture partners. In a joint venture, we wouldmay not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity.material decisions. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions as a result of their challenged financial position and liquidity or otherwise.contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives, and they may have competing interests that could create conflict of interest issues. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture.sale. In addition, prior consent of our partners or co-venturers may be required for a sale or transfer to a third party of our interests in the partnership or joint venture, which would restrict our ability to dispose of our interest in the partnership or joint venture. If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity at an unfavorable price or time.interest. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and preventcreate distractions for our executive officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk.directors. In addition, we may in certain circumstances be liable for the actions of our partners or co-venturers. Our partnerships or joint ventures may be subject to debt and we could be forced to fund our partners'partners’ or co-venturers'co-venturers’ share of such debt if they fail to make the required payments in order to preserve our investment.
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Our depreciation expenses are expected to be limited for financial and tax reporting purposes, with the result that we will be highly dependent on external capital sources to fund our growth.
As an owner of land, we expect to record limited depreciation expenses for either financial reporting or tax reporting purposes. As a result, we will not have significant depreciation expenses that will reduce our net taxable income and the payment ratio of our distributions to our cash available for distribution to our shareholders or other metrics is likely to be higher than at many other REITs. This also means that we will be highly dependent on external capital sources to fund our growth. If capital markets are experiencing disruption or are otherwise unfavorable, we may not have access to capital on attractive terms, or at all, which could prevent us from achieving our investment objectives.
The replacement of LIBOR may affect the value of certain of our financial obligations and could affect our results of operations or financial condition.
In addition,July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In March 2021, ICE Benchmark Administration, the administrator of LIBOR, extended the transition dates of certain LIBOR tenors to June 30, 2023, after which LIBOR reference rates will cease to be provided. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. As of December 31, 2021, approximately 17.9% of the total principal amount of our outstanding debt was floating rate debt. We are unable to predict the timing or effect of any changes, any establishment of alternative reference rates or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United States, the United Kingdom or elsewhere. Such changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any weakenedLIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Our credit ratings will impact our borrowing costs and our access to debt capital markets.
Our borrowing costs on our Unsecured Revolver and our access to debt capital markets will depend significantly on our credit ratings, which are based on our operating performance, liquidity and leverage ratios, financial condition and prospects, and other factors. Our unsecured corporate credit ratings from major national credit rating agencies are currently investment grade. However, there can be no assurance that our credit ratings or outlook will not be lowered in the future in response to adverse changes in these metrics caused by our operating results or by actions that we take that may reduce our profitability or that require us to incur additional indebtedness. Any downgrade in our credit ratings will increase our borrowing costs on our Unsecured Revolver and could have a material adverse effect on our ability to raise capital in the debt capital markets, which could in turn have a material adverse effect on our business, liquidity and the market the refinancingprice of such debt may require equity capital calls.
Risks Related to Our Organization and Structure
We are a holding company with no direct operations and will rely on funds received from our Operating Partnership to pay our obligations and make distributions to our stockholders.
We are a holding company and will conduct substantially all of our operations through our Operating Partnership. We will not have, apart from an interest in our Operating Partnership, any independent operations. As a result, we will rely on distributions from our Operating Partnership to make any distributions we declare on shares of our common stock. We will also rely on distributions from our Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our Operating Partnership. In addition, because we are a holding company, claims of stockholdersshareholders are structurally subordinated to all existing and future creditors and preferred equity holders of our Operating Partnership and its subsidiaries. Additionally, holders of equity interests in our subsidiaries, including joint venture partners and holders of Caret Units, will be entitled to share in liquidation proceeds to the extent of their interests therein. Therefore, in the event of a bankruptcy, insolvency, liquidation or reorganization of our Operating Partnership or its subsidiaries, assets of our Operating Partnership or the applicable subsidiary will be ableavailable to satisfy our claims to us as an equity owner therein only after all of their liabilities and preferred equity have been paid in full.
The concentration of our voting power may adversely affect the ability of investors to influence our policies.
As of December 31, 2017,2021, iStar ownsowned approximately 37.6%64.6% of the outstanding shares and voting power of our common stock. We entered into a Stockholder’s Agreement with iStar, pursuant to which iStar agreed to limit its aggregate voting power in us to 41.9% and iStar agreed to certain standstill provisions. Consequently, iStar has the ability to influence the outcome of matters presented to our stockholders,shareholders, including the election of our board of directors and approval of significant corporate transactions, including business combinations, consolidations and mergers. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer.
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Our directors, executive officers and iStar could exercise influence in a manner that is not in the best interest of our other stockholders.shareholders. The concentration of voting power in iStar might also have the effect of delaying, deferring or preventing a change of control that our other stockholdersshareholders may view as beneficial.
Certain provisions of Maryland law and our organizational documents could inhibit changes in control of our company.
Certain "business combination" and "control share acquisition" provisions of Maryland law, including the Maryland General Corporation Law or the MGCL, may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change(the “MGCL”), and our organizational documents could inhibit changes in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Pursuant to the MGCL, our board of directors has by resolution exempted business combinations between us and any other person. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. However, there can be no assurance that these exemptions will not be amended or eliminated at any time in the future. Our charter and bylaws and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of controlcompany that might involve a premium price for our common stock or that our stockholdersshareholders otherwise believe to be in their best interest, including, among others, the following:
| ● | Although our board of directors has by resolution exempted business combinations between us and any other person from the business combination provisions of the MGCL, and our bylaws exempt from the control share acquisition statute any and all acquisitions by any person of shares of our stock, there can be no assurance that these exemptions will not be amended or eliminated at any time in the future. |
| ● | Our ability as general partner of the Operating Partnership to make certain amendments to the partnership agreement and to cause the Operating Partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of us or our Operating Partnership without the consent of the limited partners. |
| ● | The right of the limited partners of our Operating Partnership to consent to transfers of our general partnership interest and mergers or other transactions involving us under specified circumstances. |
| ● | Our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of all classes and series of our capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. |
| ● | Our board of directors, without stockholder approval, has the power under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the terms of such newly classified or reclassified shares. As a result, our board of directors could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our shareholders otherwise believe to be in their best interest. |
Certain provisions in the partnership agreement of our Operating Partnership may delay, defer or prevent unsolicited acquisitions of us.
Our charter limits the liability of our present and former directors and executive officers to us and our stockholdersshareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law,The partnership agreement of our presentOperating Partnership also limits the liability of our directors, officers and executive officers will not haveothers. Additionally, our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for: (a) any liabilityderivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of any duty owed by us or by any director or officer or other employee to us or to our stockholders for money damagesshareholders; (c) any action asserting a claim against us or any director or officer or other than liability resulting from (i) actual receiptemployee arising pursuant to any provision of an improper benefitthe MGCL or profit in money, propertyour charter or servicesbylaws; or (ii) active and deliberate dishonesty(d) any action asserting a claim against us or any director or officer or other employee that is governed by the directorinternal affairs doctrine shall be the Circuit Court for Baltimore City, Maryland, or, executive officerif that was established by a final judgment and is material toCourt does not have jurisdiction, the causeUnited States District Court for the District of action. As a result, we andMaryland, Baltimore Division. These provisions of our stockholders have limited rights againstorganizational documents may limit shareholder recourse for actions of our present and former directors and executive officers which couldand limit your recourse in the event of actions not in your best interest.
Conflicts of interest exist or could arise in the future between the interests of our stockholdersshareholders and the interests of holders of Operating Partnership units, which may impede business decisions that could benefit our stockholders.
Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and executive officers have duties to us under applicable Maryland law in connection with their management of our company. At the same time, we, as the general partner of our Operating Partnership, have fiduciary duties and obligations to our Operating Partnership
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and its limited partners under Delaware law and the partnership agreement of our Operating Partnership in connection with the management of our Operating Partnership. Our fiduciary duties and obligations as general partner to our Operating Partnership and its partners may come into conflict with the duties of our directors and executive officers to our company. Our Operating Partnership agreement provides that in the event of a conflict in the duties owed by us to our stockholdersshareholders and the fiduciary duties owed by us, in our capacity as general partner of our Operating Partnership, to those limited partners, we will fulfill our fiduciary duties to those limited partners by acting in the best interests of our company.
Risks Related to Our Common Stock
Cash available for distribution may not be sufficient to make distributions to our stockholdersshareholders at expected levels, or at all.
All future distributions will be made at the discretion of our board of directors and will depend on a number of factors, including our actual or anticipated results of operations, cash flows and financial position, our qualification as a REIT, prohibitions and other restrictions in our
The numberavailability of shares and Operating Partnership units available for future sale could adversely affect the market price of our common stock.
We cannot predict whether future issuances of shares of our common stock or Operating Partnership units or the availability of shares for resale in the open market will decrease the market price of our common stock. We will pay management fees underto our management agreement beginningManager in July 2018cash or in shares of our common stock valued at the greater of (i) the volume weighted average market pricediscretion of our common stock during the quarter for which the fee is being calculated and (ii) the initial public offering price of $20.00 per share of our common stock. Although our Manager will be restricted from selling such shares for two years from the date such shares are issued, these restrictions will terminate upon termination of the management agreement, and the restrictions will not apply to distributions of shares to iStar in contemplation of a further distribution of such shares to iStar's stockholders.independent directors. Under the terms of registration rights agreements, iStar and two institutional investors received rights to have shares of our common stock issued orfrom time to be issued to iStar and two institutional investors, as applicable, in the Formation Transactions, in the concurrent iStar placement and under the management agreement and our stockholder's agreements with each of the two institutional investorstime registered for resale under the Securities Act. We may also issue shares of common stock or Operating Partnership units in connection with future property, portfolio or business acquisitions. Issuances or resales of substantial amounts of shares of our common stock (including shares of our common stock issued pursuant to our management agreement or our equity incentive plan) or Operating Partnership units, or upon exchange of Operating Partnership units, or the perception that such issuances or resales might occur could adversely affect the market price of our common stock. This potential adverse effect may be increased by the large number of shares of our common stock that are or will be owned by iStar and two institutional investors to the extent that any of themit resells, or there is a perception that any of themit may resell, a significant portion of its holdings. In addition, future issuances of shares of our common stock or Operating Partnership units may be dilutive to holders of shares of our common stock.
Distributions to holders of Caret Units will reduce distributions to us upon our liquidation, andcertain capital transactions. The economic interests of the Caret Units will not be diluted by future issuances of common stock. The terms of Caret Units could result in conflicts of interest between our management and our stockholders.
Caret Units generally entitle holders to a share of cash distributions in respect of the capital appreciation above our investment basis in our Ground Lease assets received upon the sale of a Ground Lease, the sale of a combined property and certain non-recourse mortgage debt refinancings of a Ground Lease. The number of authorized Caret Units is a fixed amount. We have established an equity securities (including preferredincentive plan providing for grants of Caret Units to our directors, officers and employees of our Manager and other eligible participants representing up to 15% of all distributions made to holders of Caret Units. Such grants were subject to stock price hurdles and Operating Partnership units),time-based service conditions, all of which have been satisfied as of December 31, 2021. Additionally, on February 15, 2022, we sold and received commitments to sell 1.37% of the authorized Caret Units to a group of investors. As a result, we will own the remaining 83.63% of the Caret Units, but may choose to sell additional amounts to third parties in the future, which would dilutereduce our current percentage interest (and indirectly the holdingsinterest of our then-existing common stockholders andshareholders) in cash distributions in respect of Caret Units.
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In connection with the February sale, we agreed to use commercially reasonable efforts to provide public market liquidity for the Caret Units, or securities into which they may be seniorexchanged, within the next two years. There can be no assurances that we will be able to sharesprovide public market liquidity within such timeframe, or at all, and if we are unable to do so, such investors have a right to require us to redeem their Caret Units at their original purchase price. Even if we are able to provide public market liquidity an active trading market may not develop, or be sustained, and the market price of such securities may be volatile. Additionally, in connection with the pursuit of public market liquidity, we may restructure the Caret Units, or securities into which they may be exchanged, and such revised terms may negatively impact our common stock for the purposesstockholders’ economic interests and other attributes of making distributions, periodically or upon liquidation,ownership in us and may materially and adversely affect the market price of shares of our common stock.
Future issuances of debt or preferred equity securities could adversely affect our common shareholders and result in conflicts of interest.
We may issue additional debt or equity securities or incur other borrowings.in the future. Upon liquidation, holders of our debt securities and other loans and shares of our preferred stock will receive a distribution of our available assets before holders of shares of our common stock. We are not required to offer any debt or equity securities to existing stockholders on a preemptive basis. Therefore, shares of our common stock that we issue in the future, directly or through convertible or exchangeable securities (including Operating Partnership units), warrants or options, will dilute the holdings of our then-existing common stockholders and such
Tax Risks Related to Ownership of Our Shares
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.
We believe we have been organized and operated and we intend to continue to operate in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2017. We have not requested and do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions and Treasury Regulations promulgated thereunder for which there are limited judicial and administrative interpretations. The complexity of these provisions and of applicable Treasury Regulations is greater in the case of a REIT that, like us, holds its assets through entities treated as partnerships for U.S. federal income tax purposes. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Our ability to satisfy these asset tests depends upon the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. In connection with such requirements, for so long as iStar or SFTY Venture LLC, an affiliate of GIC (Realty) Private Limited ("GICRE"),any other stockholder, either individually or together in the aggregate, holds 10% or more of the shares of our common stock, we will be deemed to own any tenant in which, iStar, GICREsuch stockholder or iStar and GICREsuch stockholder together own, at any time during a taxable year, a 10% or greater interest, applying certain constructive ownership rules, which could cause us to receive rental income from a related party tenant. We have put in place, together with iStar, and GICRE, procedures to diligence whether we will directly or indirectly receive rental income of a related party tenant, including as a result of our constructive ownership of a tenant due to ownership of such tenant by iStar and/or GICRE, and, in the event we receive rental income from a tenant in which GICRE owns a greater than 10% interest that could reasonably cause us to fail to qualify as a REIT, iStar has agreed to purchase our common shares from GICRE in an amount necessary to reduce GICRE's ownership interest in us below 10% on one occasion.iStar. However, due to the broad nature of the attribution rules of the Code, we cannot be certain that in all cases we will be able to timely determine whether we are receiving related party rental income in an amount that would cause us to fail the REIT gross income tests. To the extent we fail to satisfy a REIT gross income test as a result of receiving related party tenant income we could fail to qualify as a REIT or be subject to a penalty tax which could be significant in amount. See—"Certain U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Failure to Satisfy the Gross Income Tests.Tests." Moreover, new legislation, court decisions or administrative guidance, in each case
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possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we believe we have been organized and operated and intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax including any applicable alternative minimum tax for our taxable year ended December 31, 2017, on our taxable income at regular corporate rates, and distributions to our stockholdersshareholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of income tax would reduce significantly the amount of cash available for distribution to our stockholders.shareholders. Furthermore, if we fail to qualify or maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to our stockholders.shareholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. In addition, if we are treated as a "successor" of iStar (within the meaning of Treasury Regulations Section 1.856-8(c)(2)) and iStar'siStar’s REIT status were terminated or revoked, we would be prohibited from electing to be taxed as a REIT until the fifth calendar year following the year in which iStar Inc.'s’s qualification was lost.
The REIT distribution requirements could require us to borrow funds issue equity or sell assets during unfavorable market conditions or subject us to tax, whichtake other actions that may affect our ability to seize strategic opportunities, satisfy debt obligations and make distributionsbe disadvantageous to our stockholders.
In order to qualify as a REIT, we must distribute to our stockholders,shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net taxable income to our stockholdersshareholders in a manner intended to satisfy the REIT 90% distribution requirement and to eliminate U.S. federal income tax and the 4% nondeductible excise tax.
Our taxable income may exceed our net income as determined by GAAP because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may incur nondeductible capital expenditures or be required to make debt or amortization payments. Also, certain Ground Lease transactions we enter into may be determined to have a financing component, which may result in a timing difference between the receipt of cash and the recognition of income for U.S. federal income tax purposes. In addition, we may be required to take certain amounts into income no later than the time such amounts are reflected on our financial statements. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and we may incur U.S. federal income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to stockholdersshareholders in that year. In that event, we may be required to use cash reserves, incur debt, issue equity or liquidate assets at rates or times that we regard as unfavorable or make a taxable
Even if we qualify as a REIT, we may incur tax liabilities that reduce our cash flow.
Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes. In addition, any TRSs we own will be subject to U.S. federal, state and local corporate income taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, we may hold some of our assets through taxable C corporations, including TRSs. AnySuch subsidiary corporations will be subject to U.S. federal, state and local corporate income taxes, paid by such subsidiary corporationsincluding potential penalty taxes, which would decrease the cash available for distribution to our stockholders.
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Our principal executive offices are located at 1114 Avenue of the Americas, New York, New York, 10036. Our telephone number is (212) 930-9400. Our website address is www.safetyincomegrowth.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus.
We are not currently a party to any pending legal proceedings that we believe could have a material adverse effect on our business or financial condition. However, we may be subject to various claims and legal actions arising in the ordinary course of business from time to time.
Not applicable.
PART II
Our common stock trades on the NYSE under the symbol "SAFE." The high and low sales prices per share and dividends declared per share of common stock are set forth below for the periods indicated.
| 2017 | ||||||||||||
| Quarter Ended | High | Low | Dividend | |||||||||
| December 31 | $ | 19.02 | $ | 17.27 | $ | 0.15 | ||||||
| September 30 | $ | 20.00 | $ | 18.02 | 0.15 | |||||||
| June 30 | $ | 19.45 | $ | 18.32 | 0.0066 | |||||||
March 31(1) | N/A | N/A | ||||||||||
Unregistered Sales of Equity Securities
In addition to previously reported unregistered sales of equity securities, duringin October 2021, we issued 49,085 shares of our common stock to our Manager as payment for the fiscal yearmanagement fee for the three months ended December 31, 2017 thatSeptember 30, 2021. These shares were not registered under the Securities Act in reliance upon exemption from registration provided by Section 4(a)(2) of the Securities Act.
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the three months ended December 31, 2017.2021.
The following table sets forth information with respect to purchases of our common stock made by iStar during the three months ended December 31, 2021. The purchases were made in open market transactions on an opportunistic basis and not as part of a publicly announced plan. The amounts do not reflect shares of our common stock issued to iStar, in its capacity as our Manager, in lieu of cash management fees.
| | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Dollar Value of Shares that May Yet be Purchased under the Plans |
October 1 to October 31 | 267,053 | | $ 73.99 | | N/A | | N/A |
November 1 to November 30 | 170,467 | | $ 73.49 | | N/A | | N/A |
December 1 to December 31 | 148,598 | | $ 74.03 | | N/A | | N/A |
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Disclosure of Equity Compensation Plan Information
In connection with our initial public offering, we adopted a 2017an equity incentive plan (the "2017 Equity Incentive Plan") to provide equity incentive opportunities to members of our Manager’s management team and employees who perform services for us, our independent directors, advisers, consultants and other personnel. Our equity incentive plan provides for grants of stock options, shares of restricted common stock, phantom shares, dividend equivalent rights and other equity-based awards up to an aggregate of 907,500 (representing 5% of the issued and outstanding shares of our common stock as of the closing of our initial public offering).
Beginning in 2017, every year we have issued fully-vested shares to our directors who are not officers or employees of ourthe Manager or iStar werein consideration for their annual services as directors. In addition, in the first quarter 2019, we granted a total25,000 restricted stock units to an employee of 40,000the Manager, representing the right to receive 25,000 shares inof our common stock. The 25,000 restricted stock with an aggregate grant date fair value of $0.8 million.
The following table presents certain information about our equity compensation plan as of December 31, 2017:
| | | | | | |
| | | | | | (c) |
| | | | | | Number of securities |
| | (a) | | (b) | | remaining available for |
| | Number of securities to | | Weighted-average | | future issuance under |
| | be issued upon exercise | | exercise price of | | equity compensation plans |
| | of outstanding options, | | outstanding options, | | (excluding securities |
Plans Category |
| warrants and rights |
| warrants and rights |
| reflected in column (a)) |
Equity incentive plans approved by shareholders(1) | | 25,000 | | — | | 724,500 |
Equity incentive plans not approved by shareholders |
| — |
| — |
| — |
| (1) | Composed of the 2017 Equity Incentive Plan. |
In the third quarter 2018, we adopted an equity incentive plan providing for grants of interests (called "Caret Units") in a subsidiary of the Operating Partnership intended to constitute profits interests within the meaning of relevant Internal Revenue Service guidance. Our shareholders approved the plan in the second quarter of 2019. Grants under the plan are subject to graduated vesting based on time and hurdles of our common stock price. Once a particular stock price hurdle is met, a portion of the awards becomes vested, but remains subject to being forfeited, in part, if additional time-based service conditions are not satisfied. The awards generally entitle plan participants to cash distributions of up to 15%, in the aggregate, of the capital appreciation above our investment basis in our Ground Lease assets received upon the sale of a Ground Lease, the sale of a combined property and certain non-recourse mortgage debt refinancings of a Ground Lease. We own the remaining 85% of the Caret Units (refer to Note 14 to the consolidated financial statements). At the time of plan adoption, awards with an aggregate fair value of $1.4 million were granted to our independent directors and employees of the Manager and will be recognized over a period of four years. As of December 31, 2021, all stock price hurdles were achieved and all outstanding awards were fully vested. In February 2020 and March 2020, the Company granted awards with an aggregate grant date fair value of $0.5 million and $0.1 million, respectively, to employees of the Manager. The awards granted in February 2020 will cliff vest in December 2022 and the awards granted in March 2020, which were granted to one employee of the Manager, will vest over three years upon satisfaction of continuing service conditions. As of December 31, 2021, 12% of the awards granted in March 2020 had vested and 88% of the awards were forfeited.
Item 6. Selected Financial DataRESERVED
23
Item 7—"Management's7. Management’s Discussion and Analysis of Financial Condition and Results of Operations." As a resultOperations
Please read the following discussion of our acquisition of the Initial Portfolio from iStar, the selected financial data subsequent to April 14, 2017 is presented on a new basis of accounting pursuant to ASC 805 (refer to Note 4).
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| OPERATING DATA: | The Company | Predecessor | ||||||||||||||
| Ground and other lease income | $ | 16,952 | $ | 5,916 | $ | 21,664 | $ | 18,558 | ||||||||
| Total revenues | 17,210 | 6,024 | 21,743 | 18,565 | ||||||||||||
| Total costs and expenses | 20,879 | 4,686 | 15,128 | 12,848 | ||||||||||||
| Net income (loss) | (3,669 | ) | 1,846 | 6,615 | 5,717 | |||||||||||
| Per common share data: | ||||||||||||||||
| Net income (loss): | ||||||||||||||||
| Basic and diluted | $ | (0.25 | ) | N/A | N/A | N/A | ||||||||||
| Dividends declared per common share | $ | 0.3066 | N/A | N/A | N/A | |||||||||||
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
| SUPPLEMENTAL DATA: | The Company | Predecessor | ||||||||||||||
FFO(1) | $ | 2,737 | $ | 2,239 | $ | 9,757 | $ | 8,857 | ||||||||
AFFO(1) | 4,057 | 1,352 | 7,161 | 7,327 | ||||||||||||
EBITDA(1) | 10,222 | 5,179 | 17,999 | 16,086 | ||||||||||||
| As of December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
| BALANCE SHEET DATA: | The Company | Predecessor | ||||||||||
| Real estate, net | $ | 408,892 | $ | 104,478 | $ | 103,680 | ||||||
| Real estate-related intangible assets, net | 138,725 | 32,680 | 33,109 | |||||||||
| Total assets | 728,513 | 155,667 | 144,256 | |||||||||
| Debt obligations, net | 307,074 | — | — | |||||||||
| Total liabilities | 372,578 | 1,576 | 227 | |||||||||
| Total equity | 355,935 | 154,091 | 144,029 | |||||||||
| Total liabilities and equity | 728,513 | 155,667 | 144,256 | |||||||||
Executive Overview
We acquire, manage and capitalize Ground Leases and report our business as a single reportable segment. We believe owning a portfolio of Ground Leases affords our investors the opportunity for safe, growing income.income and capital appreciation. Safety is derived from a Ground Lease's superLease’s senior position in the commercial real estate capital structure. Growth is realized through long-term leases with contractual periodic increases in base rent. Capital appreciation is realized though growthappreciation in the value of the land over time and when,through our typical rights as landlord to take possession of the commercial buildings on our land at the end of the life of the lease, the commercial real estatea Ground Lease, which may yield substantial value to us. The diversification by geographic location, property reverts back to us, as landlord,type and sponsor in our portfolio further reduces risk and enhances potential upside. Under our Ground Leases we are able to realize the value of the leasehold, which may be substantial. Our leases share similarities with triple net leases in that typically we are not responsible for any operating or capital expenses over the life of the lease, making the management of our portfolio relatively simple, with limited working capital needs.
It is widely expected that the Federal Reserve will raise interest rates in 2022. Although our fourth quarter 2021 investment activity was comprisedstrong, any increase in interest rates may result in a reduction in the availability or an increase in costs of 12 properties located in major metropolitan areas that were acquired or originated by iStar overleasehold financing, which is critical to the past 20 years. Allgrowth of a robust Ground Lease market.
The coronavirus (COVID-19) pandemic has continued to impact the U.S. and global economies. The U.S. financial markets have experienced disruption and constrained credit conditions within certain sectors, including real estate. We and our Manager continue to be focused on ensuring the health and safety of our Manager’s personnel and the continuity of business activities, monitoring the effects of the crisis on our tenants, marshalling available liquidity to take advantage of investment opportunities and implementing appropriate cost containment measures. Although more normalized activities have resumed, at this time we cannot predict the full extent of the impacts of the COVID-19 pandemic on our business and the COVID-19 pandemic could have a delayed adverse impact on our financial results. We will continue to monitor its effects on a daily basis and will adjust our operations as necessary.
As of December 31, 2021, the percentage breakdown of the gross book value of our portfolio was 50% office, 34% multi-family, 15% hotels and <1% other. The COVID-19 pandemic hit the hotel sector, including the hotel properties in our Initial Portfolioportfolio, particularly hard. In addition to base rent, we are subjectentitled to long-term leases consistingreceive percentage rents under certain of sevenour hotel Ground Leases, based on hotel revenues, and one master lease (covering five properties) that provide for contractual periodic rental escalations orthe year ended December 31, 2020, percentage rents constituted approximately 2.5% of our total revenue. During 2020, operations at all of the hotel properties in our portfolio were substantially reduced. Our financial results for the year ended December 31, 2021 were adversely impacted by the COVID-19 pandemic as we recorded no percentage rent participationsrevenues under our Park Hotels Portfolio in gross revenues generated atrespect of 2020 hotel operating performance. There is no guarantee that we will not experience disruptions in the relevant properties.
We saw an increase in new investment activity beginning in the second quarter of 2021 which continued through a strong fourth quarter 2021; however, we acquired two additional Ground Leases. The Ground Leases were purchasedcontinue to experience some effect from third-party sellers for an aggregate purchase price of approximately $142.0 million. Both transactions are well located urban developments, and based uponthe COVID-19 pandemic on our estimate of net operating income at the properties upon stabilization, have significant coverage to the initial Ground Lease payment due under the leases, greater than 5.4x. We intend to grow our portfolio through future acquisitions and originations of Ground Leases and believe these transactions are indicative of somenew investment activity, primarily because of the typesreduced levels of Ground Leasesreal estate transactions and constrained conditions for equity and debt financing for real estate transactions, including leasehold loans. In addition, although more normalized activities have resumed, the COVID-19 pandemic has made it more difficult to execute transactions as people work from home and are reluctant to visit properties, local governmental offices have reduced operations and third parties such as survey, insurance, environmental and similar services have more limited capacities. These conditions will adversely affect our growth prospects while they persist. At this time, we are pursuing for acquisition and origination. We acquiredcannot predict the Ground Lease at 6201 Hollywood Boulevard, a 183,802 square foot land parcel subject to a long term Ground Lease located in Los Angeles, CA in the Hollywood neighborhood adjacent to the Hollywood/Vine metro station. The land is improved with approximately 535 apartments, 71,200 square feet of retail space, 1,300 underground parking spaces, and signage facing Hollywood Boulevard. The Ground Lease had 87 years remaining on its term. We also acquired the Ground Lease at 6200 Hollywood Boulevard, a 143,151 square foot land parcel subject to a long term Ground Lease located in Los Angeles, CA in the Hollywood neighborhood adjacent to the Hollywood/Vine metro station. The site is currently under construction; once completed, it will be improved with approximately 507 apartments, 56,100 square feet of retail space, 1,237 underground parking spaces, and signage facing Hollywood Boulevard. The Ground Lease had 87 years remaining on its term. Total development cost of these leasehold improvements is estimated to be $450 million, giving the projects a Combined Property Value of approximately $600 million. The $450 million of leasehold improvements reverts back to us as lessor at the endfull extent of the lease, which we refer to as the value bank ("Value Bank").
24
Our Portfolio
Our portfolio of an additional 160,000 square feet of development on terms consistent with the Ground Lease. iStar, our largest shareholderproperties is diversified by property type and Manager, committed to provide a $24.0 million construction loan to the ground lessee with an initial term of one year for the renovation of the property.
Below is an overview of the top 10 assets in our portfolio as of December 31, 2017, unless otherwise indicated ($ in millions)2021 (based on gross book value and excluding unfunded commitments):
| | | | | | | | | | | |
| | | | | | Lease | | | | | |
| | Property | | | | Expiration / | | Rent Escalation | | % of Gross | |
Property Name | Type | Location | As Extended | Structure | Book Value | | |||||
425 Park Avenue(2) | Office | New York, NY | 2090 / | Fixed with Inflation | 7.6 | % | |||||
135 West 50th Street | Office | New York, NY | 2123 / | ||||||||
Fixed with Inflation | 6.5 | % | |||||||||
195 Broadway | Office | New York, NY | 2118 / | Fixed with Inflation Adjustments | 6.2 | % | |||||
Park Hotels Portfolio(3) | Hotel | Various | 2025 / | % Rent | 4.8 | % | |||||
Alohilani | Hotel | Honolulu, HI | 2118 / | Fixed with Inflation Adjustments | 4.5 | % | |||||
685 Third Avenue | Office | New York, NY | 2123 / | Fixed with Inflation Adjustments | 4.1 | % | |||||
1111 Pennsylvania Avenue | Office | Washington, DC | 2117 / | Fixed with Inflation Adjustments | 3.3 | % | |||||
Columbia Center | | Office | | Washington, DC | | 2120 / | | Fixed with Inflation Adjustments | | 3.0 | % |
1551 Wewatta | Office | Denver, CO | 2120 / | Fixed with Inflation Adjustments | 2.5 | % | |||||
200 Elm Street & 695 Main Street | Office | Stamford, CT | 2119 / 2119 | Fixed with Inflation Adjustments | 2.2 | % |
| (1) |
| (2) |
| (3) | The Park Hotels Portfolio consists of five properties and is subject to a single master lease. |
| A majority of the land underlying |
The following tables show our portfolio by region and property type as of December 31, 2021, excluding unfunded commitments:
| | | |
| | % of |
| Gross | |
Region |
Book Value | | ||
Northeast | 37 | % | |
West | 24 | | |
Mid Atlantic | 16 | | |
Southeast | 12 | | |
Southwest | 7 | | |
Central | 4 | |
| | | |
| | % of Gross | |
Property Type | Book Value | | |
Office | 50 | % | |
Multifamily | 34 | | |
Hotel | 15 | | |
Other | < 1 | |
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Unfunded Commitments
We have unfunded commitments to certain of our Ground Lease tenants related to leasehold improvement allowances that we expect to fund upon the completion of certain conditions. As of December 31, 2021, we had $165.5 million of such commitments.
We also have unfunded forward commitments related to agreements that we entered into a purchase agreementfor the acquisition of Ground Leases if certain conditions are met (refer to acquire land subject to a Ground Lease on which a 301 unit, luxury multi-family project known as “Great Oaks” is currently being constructed in San Jose, California. PursuantNote 13 to the purchase agreement, weconsolidated financial statements). These commitments may also include leasehold improvement allowances that will purchasebe funded to the Ground Lease on November 1, 2020 from iStar for $34.0 million. iStar committed to provide a $80.5tenants upon the completion of certain conditions. As of December 31, 2021, we had an aggregate $363.9 million construction loan to the ground lessee. The Ground Lease expires in 2116. We currently estimateof such commitments. There can be no assurance that the Ground Rent Coverage at the time of stabilizationconditions to closing for these transactions will be in excess of 5.0x, assumingsatisfied and that construction is completed on or before November 1, 2020.
Results of Operations for the Year Ended December 31, 20172021 compared to the Year Ended December 31, 2016
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Year Ended December 31, 2017 | For the Year Ended December 31, 2016 | |||||||||||||||||||
| $ Change | % Change | |||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||
| The Company | Predecessor | Predecessor | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||||
| Ground and other lease income | $ | 16,952 | $ | 5,916 | $ | 22,868 | $ | 21,664 | $ | 1,204 | 6 | % | ||||||||||
| Other income | 258 | 108 | 366 | 79 | 287 | >100% | ||||||||||||||||
| Total revenue | 17,210 | 6,024 | 23,234 | 21,743 | 1,491 | 7 | % | |||||||||||||||
| Costs and expenses | ||||||||||||||||||||||
| Interest expense | 7,485 | 2,432 | 9,917 | 8,242 | 1,675 | 20 | % | |||||||||||||||
Real estate expenses(2) | 1,261 | 210 | 1,471 | 861 | 610 | 71 | % | |||||||||||||||
| Depreciation and amortization | 6,406 | 901 | 7,307 | 3,142 | 4,165 | >100% | ||||||||||||||||
| General and administrative | 5,094 | 1,143 | 6,237 | 2,883 | 3,354 | >100% | ||||||||||||||||
| Other expense | 633 | — | 633 | — | 633 | 100 | % | |||||||||||||||
| Total costs and expenses | 20,879 | 4,686 | 25,565 | 15,128 | 10,437 | 69 | % | |||||||||||||||
| Income from sales of real estate | — | 508 | 508 | — | 508 | 100 | % | |||||||||||||||
| Net income (loss) | $ | (3,669 | ) | $ | 1,846 | $ | (1,823 | ) | $ | 6,615 | $ | (8,438 | ) | >(100%) | ||||||||
| | | | | | | | | |
|
| |
|
| | ||||
| | For the Years Ended December 31, | | | | ||||
| | 2021 | | 2020 | | $ Change | |||
| | (in thousands) | |||||||
Interest income from sales-type leases | | $ | 118,824 | | $ | 81,844 | | $ | 36,980 |
Operating lease income | | | 67,667 | | | 72,340 | | | (4,673) |
Other income | |
| 523 | |
| 1,243 | |
| (720) |
Total revenues | |
| 187,014 | |
| 155,427 | |
| 31,587 |
Interest expense | |
| 79,707 | |
| 64,354 | |
| 15,353 |
Real estate expense | |
| 2,663 | |
| 2,480 | |
| 183 |
Depreciation and amortization | |
| 9,562 | |
| 9,433 | |
| 129 |
General and administrative | |
| 28,753 | |
| 22,733 | |
| 6,020 |
Other expense | |
| 868 | |
| 243 | |
| 625 |
Total costs and expenses | |
| 121,553 | |
| 99,243 | |
| 22,310 |
Earnings from equity method investments | |
| 6,279 | |
| 3,304 | |
| 2,975 |
Selling profit from sales-type leases | | | 1,833 | | | — | | | 1,833 |
Net income | | $ | 73,357 | | $ | 59,488 | | $ | 13,869 |
Interest income from sales-type leases increased to $118.8 million for the year ended December 31, 2021 from $81.8 million for the year ended December 31, 2020. The increase was due primarily to the origination of additional Ground Leases classified as sales-type leases and otherGround Lease receivables.
Operating lease income increaseddecreased to $22.9$67.7 million during the year ended December 31, 20172021 from $21.7$72.3 million for the same period in 2016. year ended December 31, 2020. The increase in 2017decrease was due primarily due to additional rental income earned on three Ground Leases originated in 2017, partially offset by a one-time $2.5 million decrease in 2017 percentage rent on thefrom our Park Hotels Portfolio resulting from an amendmentin 2021 in respect of 2020 hotel operating performance, which experienced a decline due to the COVID-19 pandemic.
Other income for both the years ended December 31, 2021 and 2020 includes $0.4 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.
During the year ended December 31, 2017,2021, we incurred interest expense from our secured financings including the 2017 Secured Financing, the 2017 Revolver and the 2017 Hollywood Mortgagedebt obligations of $7.8$79.7 million and we incurred an allocation of interest expense from iStar of $2.1compared to $64.4 million for the period prior to the 2017 Secured Financing. Duringduring the year ended December 31, 2016, interest expense2020. The increase during the year ended December 31, 2021 was primarily the result of $8.2 million represents the amountadditional borrowings to fund our growing portfolio of interest expense allocated to us by iStar. Interest expense was allocated to us by calculating our average net assets as a percentage of the average net assets in iStar’s net lease business segment and multiplying that percentage by the interest expense allocated to iStar’s net lease business segment.
Real estate expense during the years ended December 31, 2021 and 2020 was $1.5$2.7 million and $0.9$2.5 million, respectively, and consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property
26
appraisal fees and insurance expense. In addition, during both the years ended December 31, 2021 and 2020, we also recorded $0.4 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.
Depreciation and amortization was $9.6 million and $9.4 million during the years ended December 31, 20172021 and 2016, respectively. During the year ended December 31, 2017, real estate expenses consisted primarily of non-cash rent expense related to the amortization of a below market lease asset at one of our hotel properties, recoverable property taxes at one of our properties and insurance, consulting and legal fees. During the year ended December 31, 2016, real estate expenses consisted primarily of recoverable property taxes at one of our properties. The increase in 2017 was primarily due to the non-cash rent expense related to the amortization of a below market lease asset at one of our hotel properties.
General and administrative expenses include management fees, (which our Manager is waiving payment of during the first year of the management agreement), stock-based compensation for equity awards granted to our directors who are not employees of our Manager or iStar, costs of operating as a public company and an allocation of expenses to us from our Manager, costs of operating as a public company and iStar (which our Manager is waiving during the first year of the management agreement). Although we pay no management fee or expense reimbursementsstock-based compensation (primarily to our Manager through June 30, 2018, GAAP requires us to record expenses and a non-cash capital contribution from iStar despite iStar not receiving any compensation for its services. During the year ended December 31, 2016, general and administrative expenses primarily includes an allocation of expenses to us from iStar. General and administrative expenses were allocated to us for certain iStar corporate functions, including executive oversight, treasury, finance, human resources, tax compliance and planning, internal audit, financial reporting, information technology and investor relations. General and administrative expenses, including stock based compensation, were allocated to us based on a pro rata allocation of costs from iStar’s net lease and corporate business segments based on our average net assets.
| | | | | | |
| | For the Years Ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Management fees(1) | | $ | 14,865 | | $ | 12,684 |
Expense reimbursements to the Manager(1) | |
| 7,500 | |
| 5,000 |
Public company and other costs(2) | |
| 4,638 | |
| 3,305 |
Stock-based compensation(3) | |
| 1,750 | |
| 1,744 |
Total general and administrative expenses | | $ | 28,753 | | $ | 22,733 |
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Non-cash expenses | ||||||||||||||||
| Allocation from iStar | $ | — | $ | 807 | $ | 807 | $ | 2,470 | ||||||||
Stock-based compensation(1) | 766 | 246 | 1,012 | 364 | ||||||||||||
Management fees(2) | 1,988 | — | 1,988 | — | ||||||||||||
Expense reimbursements to the Manager(2) | 639 | — | 639 | — | ||||||||||||
| Subtotal - non-cash expenses | 3,393 | 1,053 | 4,446 | 2,834 | ||||||||||||
| Cash expenses | ||||||||||||||||
| Public company and other costs | 1,701 | 90 | 1,791 | 49 | ||||||||||||
| Subtotal - cash expenses | 1,701 | 90 | 1,791 | 49 | ||||||||||||
| Total general and administrative expenses | $ | 5,094 | $ | 1,143 | $ | 6,237 | $ | 2,883 | ||||||||
| (1) |
| (2) | Increase due primarily to |
| (3) | During the |
During the year ended December 31, 2017,2021, other expense consists primarily of non-recurring acquisition costs, unsuccessful investment pursuit costs and costs associated with entering into hedges.
| For the Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Revenues | ||||||||||||||
| Ground and other lease income | $ | 21,664 | $ | 18,558 | $ | 3,106 | 17 | % | ||||||
| Other income | 79 | 7 | 72 | >100% | ||||||||||
| Total revenue | 21,743 | 18,565 | 3,178 | 17 | % | |||||||||
| Costs and expenses | ||||||||||||||
| Interest expense | 8,242 | 7,229 | 1,013 | 14 | % | |||||||||
| Real estate expenses | 861 | 217 | 644 | >100% | ||||||||||
| Depreciation and amortization | 3,142 | 3,140 | 2 | — | % | |||||||||
| General and administrative | 2,883 | 2,262 | 621 | 27 | % | |||||||||
| Total costs and expenses | 15,128 | 12,848 | 2,280 | 18 | % | |||||||||
| Net income | $ | 6,615 | $ | 5,717 | $ | 898 | 16 | % | ||||||
During the year ended December 31, 20162021, earnings from $18.6equity method investments consisted of our $3.4 million forpro rata share of income from a venture that we entered into with an existing shareholder that acquired the same period in 2015. The increase in 2016 was primarily the result of us acquiring a property subject to a 99-yearexisting Ground Lease at 425 Park Avenue in March 2015New York City in November 2019 (refer to Note 6 to the consolidated financial statements) and our $2.9 million pro rata share of income from an increase in lease income at one of our hotel properties due to a lease amendment executed on September 30, 2015.
During the year ended December 31, 20162021, selling profit from $0.2 million duringsales-type leases resulted from the same period in 2015. The increase was primarily relatedreclassification of one existing operating lease to an increase in recoverable property taxes at one of our properties.
| For the Period from April 14, 2017 to December 31, 2017 | For the Period from January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Funds from Operations | The Company | Predecessor | ||||||||||||||
| Net income (loss) | $ | (3,669 | ) | $ | 1,846 | $ | 6,615 | $ | 5,717 | |||||||
| Add: Depreciation and amortization | 6,406 | 901 | 3,142 | 3,140 | ||||||||||||
| Less: Income from sales of real estate | — | (508 | ) | — | — | |||||||||||
| FFO | $ | 2,737 | $ | 2,239 | $ | 9,757 | $ | 8,857 | ||||||||
| Adjusted Funds from Operations | ||||||||||||||||
| FFO | $ | 2,737 | $ | 2,239 | $ | 9,757 | $ | 8,857 | ||||||||
| Straight-line rental income | (4,097 | ) | (1,271 | ) | (4,374 | ) | (2,902 | ) | ||||||||
| Amortization of real estate-related intangibles, net | 1,178 | 118 | 414 | 332 | ||||||||||||
| Stock-based compensation | 766 | 246 | 364 | 331 | ||||||||||||
| Acquisition costs | 381 | — | — | — | ||||||||||||
| Non-cash management fees and expense reimbursements | 2,627 | — | — | — | ||||||||||||
| Non-cash interest expense | 465 | 20 | 1,000 | 709 | ||||||||||||
AFFO(2) | $ | 4,057 | $ | 1,352 | $ | 7,161 | $ | 7,327 | ||||||||
| For the Period from April 14, 2017 to December 31, 2017 | For the Period from January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| EBITDA | The Company | Predecessor | ||||||||||||||
| Net income (loss) | $ | (3,669 | ) | $ | 1,846 | $ | 6,615 | $ | 5,717 | |||||||
| Add: Interest expense | 7,485 | 2,432 | 8,242 | 7,229 | ||||||||||||
| Add: Depreciation and amortization | 6,406 | 901 | 3,142 | 3,140 | ||||||||||||
| EBITDA | $ | 10,222 | $ | 5,179 | $ | 17,999 | $ | 16,086 | ||||||||
Liquidity is a measure of our ability to meet potential cash requirements, including to pay interest and repay borrowings, fund and maintain our assets and operations, complete acquisitions and originations of investments, make distributions to our stockholdersshareholders and meet other general business needs. In order to qualify as a REIT, we are required under the Internal Revenue Code of 1986 to distribute to our stockholders,shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly cash distributions to our stockholdersshareholders sufficient to meet REIT qualification requirements.
In the first quarter of 2021, we received investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+ and entered into a new unsecured revolver (refer to Note 8 to the consolidated financial statements) with a total capacity of $1.0 billion (the “Unsecured Revolver”). In December 2021, we obtained additional lender commitments increasing the maximum availability to $1.35 billion. In the second quarter of 2021, we issued $400 million aggregate principal amount of 2.80% senior notes due 2031 (the “2.80% Notes”). The 2.80% Notes were issued at
27
99.127% of par. In the fourth quarter of 2021, we issued $350 million aggregate principal amount of 2.85% senior notes due 2032 (the “2.85% Notes”). The 2.85% Notes were issued at 99.123% of par. As evidenced by our Unsecured Revolver, the 2.80% Notes and the 2.85% Notes, we believe the strong credit profile we have established utilizing our modern Ground Leases and our investment grade credit ratings will further accelerate our ability to bring commercial real estate owners, developers and sponsors more efficiently priced capital.
Our Unsecured Revolver replaced our secured revolving credit facility. With its increased size of total capacity of $1.35 billion and reduced cost, our Unsecured Revolver allows us significant operational and financial flexibility and supports our ability to scale our Ground Lease platform. We also believe our Unsecured Revolver marked a strong first step towards our goal of unlocking opportunities from the unsecured capital markets to deliver lower cost, more efficient capital to our customers.
In the first quarter of 2021, we entered into an at-the-market equity offering (the “ATM”) pursuant to which we may sell shares of our common stock up to an aggregate purchase price of $250.0 million. As of December 31, 2017,2021, we had $248.9 million of aggregate purchase price remaining under our ATM.
In September 2021, we sold 2,530,000 shares of our common stock in a public offering for gross proceeds of $192.3 million. Concurrently with the public offering, we sold $50.0 million in shares, or 657,894 shares, of our common stock to iStar in a private placement. We incurred approximately $8.0 million of offering costs in connection with these transactions.
As of December 31, 2021, we had $30 million of unrestricted cash and unused$860 million of undrawn capacity on our Unsecured Revolver. We refer to the combined $890 million of unrestricted cash and additional borrowing capacity underon our 2017Unsecured Revolver of $458 million.as our "equity" liquidity which can be used for general corporate purposes or leveraged to acquire or originate new Ground Lease assets. Our primary sources of cash to date have been proceeds of $205 million from our initial public offering,equity offerings and private placements (refer to Note 11 to the consolidated financial statements), proceeds of $45 million from our private placement to iStar, proceeds of $113 million from our initial capitalization by iStar and two institutional investors (refer to Note 11 to the consolidated financial statements) and borrowings from our other facilities.debt facilities, mortgages and unsecured notes. Our primary uses of cash to date have been the $113 million acquisition of the Initial Portfolio from iStar (which was subject to the 2017 Secured Financing, as defined below), the acquisition/origination of three Ground Leases, for an aggregate purchase price of approximately $158 million and repayments on our debt facilities.facilities and distributions to our shareholders.
As noted above, for the year ended December 31, 2020, percentage rents constituted approximately 2.5% of our total revenues. In 2021, we did not recognize any percentage rent revenues from our Park Hotels Portfolio in respect of 2020 hotel operating performance impacted by the COVID-19 pandemic. In addition, we do not expect to recognize any percentage rent revenues from our Park Hotels Portfolio in 2022 in respect of 2021 hotel operating performance. Any decrease in percentage rent revenues, as well as any disruptions in the payment of future rents by our hotel or other tenants, would adversely impact our cash flows from operations, and any such impact could be material.
We expect our short-term liquidity requirements to include debt service on our debt obligations (see Mortgages, Unsecured Revolver and Unsecured Notes below), distributions to our shareholders, working capital, new acquisitions and originations of Ground Lease investments, expense reimbursements to our Manager and payments of fees under our management agreement to the extent we do not elect to pay the fees in common stock (refer to Note 13 to the consolidated financial statements). Our primary sources of liquidity going forward will generally consist of cash on hand and cash generatedflows from our operating activities,operations, new financings and(refer to Note 14 to the consolidated financial statements), unused borrowing capacity under our 2017 Revolver.
We expect our long-term liquidity requirements to include:
28
and cash flows from operations, mortgagenew financings, debt issuances,unused borrowing capacity under our Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement) and common and/or preferred equity issuances and asset sales.
The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the contractual obligations relatedyears ended December 31, 2021 and 2020 ($ in thousands):
| | | | | | | | | |
| | For the Years Ended | | | | ||||
| | December 31, | | | | ||||
|
| 2021 |
| 2020 | | Change | |||
Cash flows provided by operating activities | | $ | 26,917 | | $ | 35,711 | | $ | (8,794) |
Cash flows used in investing activities | |
| (1,287,991) | | | (530,641) | |
| (757,350) |
Cash flows provided by financing activities | |
| 1,203,123 | | | 544,615 | |
| 658,508 |
The decrease in cash flows provided by operating activities during 2021 was due primarily to payments to terminate hedges (refer to Note 10 to the consolidated financial statements) and a decrease in percentage rent from our long-termPark Hotels portfolio, which was partially offset by an increase in rents collected from new originations and acquisitions of Ground Leases. The increase in cash flows used in investing activities during 2021 was due to an increase in new originations and acquisitions of Ground Leases. The increase in cash flows provided by financing activities during 2021 was due primarily to the issuance of new unsecured debt obligations and purchase commitments asto fund our growing Ground Lease portfolio (refer to Unsecured Notes below).
Mortgages—Mortgages consist of asset specific non-recourse borrowings that are secured by our Ground Leases. As of December 31, 2017 (refer to Note 6 and Note 7 to the consolidated and combined financial statements).
| Amounts Due By Period | |||||||||||||||||||||||
| Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | 5 - 10 Years | After 10 Years | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
Long-Term Debt Obligations(1): | |||||||||||||||||||||||
| 2017 Secured Financing | $ | 227,000 | $ | — | $ | — | $ | — | $ | 227,000 | $ | — | |||||||||||
| 2017 Revolver | 10,000 | — | — | 10,000 | — | — | |||||||||||||||||
| 2017 Hollywood Mortgage | 71,000 | — | — | — | 71,000 | — | |||||||||||||||||
| Total principal maturities | 308,000 | — | — | 10,000 | 298,000 | — | |||||||||||||||||
Interest Payable() | 92,662 | 11,110 | 22,250 | 22,068 | 37,234 | — | |||||||||||||||||
Purchase Commitments(3) | 33,959 | — | 33,959 | — | — | — | |||||||||||||||||
Total(4) | $ | 434,621 | $ | 11,110 | $ | 56,209 | $ | 32,068 | $ | 335,234 | $ | — | |||||||||||
Unsecured Revolver— In March 2021, the Initial Portfolio including seven Ground LeasesOperating Partnership (as borrower) and one master lease (covering the accounts of five properties). In connection with and prior to the closing of the 2017 Secured Financing, weus (as guarantor), entered into a $200 million notional rate lock swap, reducing the effective rate of the 2017 Secured Financing from 3.795% to 3.773% (refer to Note 3).
Unsecured Notes—In May 2021, the Operating Partnership (as issuer) and third-party fees, allus (as guarantor), issued $400.0 million aggregate principal amount of which2.80% senior notes due June 2031. The 2.80% Notes were capitalizedissued at 99.127% of par. We may redeem the 2.80% Notes in "Deferred expenseswhole at any time or in part from time to time prior to March 15, 2031, at our option and other assets, net" on our consolidated balance sheet.
In November 2021, the Operating Partnership (as issuer) and us (as guarantor), maturesissued $350.0 million aggregate principal amount of 2.85% senior notes due January 2032. The 2.85% Notes were issued at 99.123% of par. We may redeem the 2.85% Notes in January 2023whole at any time or in part from time to time prior to October 15, 2031, at our option and is callable without pre-payment penalty beginningsole discretion, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 2.85% Notes being redeemed; and (ii) a make-whole premium calculated in January 2021.
29
Debt Covenants—We are subject to financial covenants under the 2017Unsecured Revolver, including maintaining: (i) a limitation on total consolidated leverageratio of not more than 70%, or 75% for no more than 180 days,unencumbered assets to unsecured debt of our total consolidated assets;at least 1.33x; and (ii) a consolidated fixed charge coverage ratio of at least 1.45x;1.15x, as such terms are defined in the documents governing the Unsecured Revolver. In addition, the Unsecured Revolver contains customary affirmative and negative covenants. Among other things, these covenants may restrict our or certain of our subsidiaries’ ability to incur additional debt or liens, engage in certain mergers, consolidations and other fundamental changes, make other investments or pay dividends. Our 2.80% Notes and 2.85% Notes are subject to a consolidated tangible net worthfinancial covenant requiring a ratio of unencumbered assets to unsecured debt of at least 75% of our tangible net worth at the date of the 2017 Revolver plus 75% of future issuances of net equity; a consolidated secured leverage ratio of not more than 70%,1.25x. Our mortgages contain no significant maintenance or 75% for no more than 180 days, of our total consolidated assets; and a secured recourse debt ratio of not more than 5.0% of our total consolidated assets. Additionally, the 2017 Revolver restricts our ability to pay distributions to our stockholders. For 2017, we were permitted to make distributions based on an annualized distribution rate of 3.0% of the initial public offering price per share of our common stock. Beginning in 2018, we will be permitted to make annual distributions up to an amount equal to 110% of our adjusted funds from operations, as calculated in accordance with the 2017 Revolver. In addition, we may make distributions to the extent necessary to maintain our qualification as a REIT.ongoing financial covenants. As of December 31, 2017,2021, we were in compliance with all of our financial covenants.
Supplemental Guarantor Disclosure
In March 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The amendments became effective on January 4, 2021. We and the Operating Partnership have filed a registration statement on Form S-3 with the SEC registering, among other securities, debt securities of the Operating Partnership, which will be fully and unconditionally guaranteed by us. As of December 31, 2021, the Operating Partnership had issued and outstanding the 2.80% Notes and the 2.85% Notes. The obligations of the Operating Partnership to pay principal, premiums, if any, and interest on the 2.80% Notes and the 2.85% Notes are guaranteed on a senior basis by us. The guarantee is full and unconditional, and the Operating Partnership is a consolidated subsidiary of ours.
As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not dependent on the use of any off-balance sheet financing arrangements for liquidity.
Critical Accounting Estimates
Basis of the Company. In addition, as a result of the Company’s acquisition of the Initial Portfolio from iStar, the consolidated financial statements subsequent to April 14, 2017 are presented on a new basis of accounting pursuant to Accounting Standards Codification (“ASC”) 805 (refer to Note 4).
Real estate
—Real estate assets are recorded at cost less accumulated depreciation and amortization, as follows:Purchase price allocation—UponOur acquisition of real estate, we determine whether the transaction is a business combination, which isproperties are generally accounted for under the acquisition method, oras an acquisition of assets. For both types of transactions,asset acquisitions, we recognize and measure identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree based on their relative fair values. For business combinations, we recognizevalues and measure goodwill or gain from a bargain purchase, if applicable, and expense acquisition-related costs in the periods in which the costs are incurred. For acquisitions of assets, acquisition-related costs are capitalized and recorded in "Real estate, net," "Real estate-related intangible assets, net" and "Real estate-related intangible liabilities, net" on our combinedconsolidated balance sheets. If we acquire real estate and simultaneously enter into a lease of the real estate, the acquisition will be accounted for as an asset acquisition.
We account for our acquisition of properties by recording the purchase price of tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The value of the tangible assets, consisting of land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of lease incentive assets, above-market leases, below-market Ground Lease assets and in-place leases, which are each recorded at their estimated fair values and included in "Deferred expenses and other"Real estate-related intangible assets, net" on our consolidated and combined balance sheets. Intangible liabilities may include the value of below-market leases, which are recorded at their estimated fair values and included in "Accounts payable, accrued expenses and other liabilities""Real estate-related intangible liabilities, net" on our combinedconsolidated balance
30
sheets. In-place leases are amortized over the remaining non-cancelable term of the lease and the amortization expense is included in "Depreciation and amortization" in our combinedconsolidated statements of operations. Lease incentive assets and above-market (or below-market) lease value are amortized as a reduction of
Impairments—We review real estate assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The value of a long-lived asset held for use is impaired if management'smanagement’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) are less than its carrying value. Such estimate of cash flows considers factors such as expected future operating income trends, as well as the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the estimated fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate assets, if any, are recorded in "Impairment of assets" in our combinedconsolidated statements of operations.
Reserve for losses on net investment in sales-type leases and cash equivalents
Any potential reserve for whichlosses in net investment in sales-type leases and Ground Lease receivables will reflect management’s estimate of losses inherent in the seller is responsible has been arranged and all conditions for closing have been performed. We primarily use specific identification andportfolio as of the relative sales value method to allocate costs.
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 consolidated31
Market Risks
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market prices and interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. One of the principal market risks facing us is interest rate risk on our floating rate indebtedness.
Subject to qualifying and maintaining our qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. Our primary objectives when undertaking hedging transactions will be to reduce our floating rate exposure and to fix a portion of the interest rate for anticipated financing and refinancing transactions. However, we can provide no assurances that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio. Our current portfolio is not subject to foreign currency risk.
Our objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows and to lower our overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into hedging instruments such as interest rate swap agreements and interest rate cap agreements in order to mitigate our interest rate risk on a related floating rate financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.
As of December 31, 2017,2021, we had $227 million$2.2 billion principal amount of fixed-rate debt outstanding from the 2017 Secured Financing, $10and $490.0 million principal amount of floating-rate debt outstanding from the 2017 Revolver and $71 million principal amount of floating-rate debt outstanding from the 2017 Hollywood Mortgage.
Estimated Change In Net Income
($ in thousands)
| | | |
Change in Interest Rates |
| Net Income (Loss) | |
-10 Basis Points | | $ | 490 |
Base Interest Rate | |
| — |
+10 Basis Points | |
| (490) |
+ 50 Basis Points | |
| (2,450) |
+100 Basis Points | |
| (4,900) |
32
| Change in Interest Rates | Net Income | |||
| -100 Basis Points | $ | (549 | ) | |
| -50 Basis Points | (120 | ) | ||
| -10 Basis Points | (24 | ) | ||
| Base Interest Rate | — | |||
| +10 Basis Points | 24 | |||
| + 50 Basis Points | 120 | |||
| +100 Basis Points | 240 | |||
Index to Financial Statements
| |
| |
| Page |
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | 34 |
Financial Statements: | |
37 | |
38 | |
39 | |
40 | |
41 | |
43 | |
| |
64 |
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the shareholders and the Board of Directors
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Safety, Income & GrowthSafehold Inc. and its subsidiaries (the "Company") as of December 31, 2017,2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period from April 14, 2017 toended December 31, 2017 including2021, and the related notes and financial statement schedulethe schedules listed in the accompanying indexIndex at Item 15 (collectively referred to as the “consolidated financial statements”"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These consolidated
We conducted our audit of these consolidated
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
34
Purchase Price Allocation — Refer to Note 3 to the financial statements
Critical Audit Matter Description
The Company accounts for the acquisition of properties by recording the purchase price of tangible and intangible assets acquired and liabilities assumed based on their relative fair values. The value of the tangible assets, consisting of land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of lease incentive assets, above-market leases, below-market Ground Lease assets and in-place leases, which are each recorded at their estimated fair values. Intangible liabilities may include the value of below-market leases, which are recorded at their estimated fair values.
The relative fair value determination of assets acquired required management to make estimates related to the future expected cash flows, including market rent growth rates and expense growth rates, as well as the terminal capitalization and discount rates. We performed audit procedures to evaluate the reasonableness of these assumptions which required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the relative fair value of assets acquired by the Company included the following:
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) current market data, and (3) market rent, expense growth, discount and terminal capitalization rates by developing a range of independent estimates based on market data, and comparing our estimates to those used by management. We also tested the mathematical accuracy of the calculation of management’s analysis. |
| • | We assessed the reasonableness of management’s projections of rental revenue by comparing the assumptions used in the projections to external market sources, in-place lease agreements, historical data, and results from other areas of the audit. |
| • | We tested the effectiveness of internal controls over critical assumptions including management’s controls over: |
| ◾ | The selection of the methods and valuation techniques used to determine that fair value is appropriate and consistent with industry standards and previous Company acquisitions. |
| ◾ | Assumptions for allocating tangible and intangible assets. |
/s/ PricewaterhouseCoopersDELOITTE & TOUCHE LLP
New York, New York
February 20, 2018
We have served as the Company'sCompany’s auditor since 2016.2018.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on theInternal Control over Financial Statements
We have audited the accompanying combined balance sheetsinternal control over financial reporting of Safety, IncomeSafehold, Inc. and Growth, Inc. (Predecessor)subsidiaries (the “Company”) as of December 31, 2016, and2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the related combined statementsCommittee of operations, comprehensive income, changes in equity and cash flows for the period from January 1, 2017 to April 13, 2017 and for eachSponsoring Organizations of the two years in the period ended December 31, 2016, including the related notes (collectively referred to as the “combined financial statements”)Treadway Commission (COSO). In our opinion, the combined financial statements present fairly,Company maintained, in all material respects, theeffective internal control over financial position of the Companyreporting as of December 31, 2016,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and the results of its operations and its cash flows for the period from January 1, 2017 to April 13, 2017 and for each of the two years in the periodyear ended December 31, 2016 in conformity with accounting principles generally accepted2021, of the Company and our report dated February 15, 2022, expressed, an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the United States of America.
We conducted our audits of these combined financial statementsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the combined financial statements are freerisk that a material weakness exists, testing and evaluating the design and operating effectiveness of material misstatement, whether due to error or fraud.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopersDELOITTE & TOUCHE LLP
New York, New York
February 20, 2018
We have served as the Company'sCompany’s auditor since 2016.2018.
36
Safehold Inc.
(In thousands, except per share data)
| | | | | | |
| | As of December 31, | ||||
|
| 2021 |
| 2020 | ||
ASSETS |
| |
|
| |
|
Real estate |
| |
|
| |
|
Real estate, at cost | | $ | 740,971 | | $ | 752,420 |
Less: accumulated depreciation | |
| (28,343) | |
| (22,314) |
Real estate, net | |
| 712,628 | |
| 730,106 |
Real estate-related intangible assets, net | |
| 224,182 | |
| 242,166 |
Total real estate, net and real estate-related intangible assets, net | |
| 936,810 | |
| 972,272 |
Net investment in sales-type leases | |
| 2,412,716 | |
| 1,305,519 |
Ground Lease receivables | |
| 796,252 | |
| 577,457 |
Equity investments in Ground Leases | |
| 173,374 | |
| 129,614 |
Cash and cash equivalents | |
| 29,619 | |
| 56,948 |
Restricted cash | |
| 8,897 | |
| 39,519 |
Deferred operating lease income receivable | |
| 117,311 | |
| 93,307 |
Deferred expenses and other assets, net | |
| 40,747 | |
| 34,334 |
Total assets | | $ | 4,515,726 | | $ | 3,208,970 |
LIABILITIES AND EQUITY | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Accounts payable, accrued expenses and other liabilities(2) | | $ | 67,592 | | $ | 76,673 |
Real estate-related intangible liabilities, net | |
| 65,429 | |
| 66,268 |
Debt obligations, net | |
| 2,697,503 | |
| 1,684,726 |
Total liabilities | |
| 2,830,524 | |
| 1,827,667 |
Commitments and contingencies (refer to Note 9) | |
|
| |
|
|
Equity: | |
|
| |
|
|
Safehold Inc. shareholders' equity: | |
|
| |
|
|
Common stock, $0.01 par value, 400,000 shares authorized, 56,619 and 53,206 shares issued and outstanding as of December 31, 2021 and 2020, respectively | |
| 566 | |
| 532 |
Additional paid-in capital | |
| 1,663,324 | |
| 1,412,107 |
Retained earnings | |
| 59,368 | |
| 23,945 |
Accumulated other comprehensive loss | |
| (40,980) | |
| (57,461) |
Total Safehold Inc. shareholders' equity | |
| 1,682,278 | |
| 1,379,123 |
Noncontrolling interests | |
| 2,924 | |
| 2,180 |
Total equity | |
| 1,685,202 | |
| 1,381,303 |
Total liabilities and equity | | $ | 4,515,726 | | $ | 3,208,970 |
| (1) | Refer to Note 2 for details on the Company’s consolidated variable interest entities ("VIEs"). |
| (2) | As of December 31, 2021 and 2020, includes $6.2 million and $4.7 million, respectively, due to related parties. |
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | The Company | Predecessor | |||||
| Real estate | |||||||
| Real estate, at cost | $ | 413,145 | $ | 165,699 | |||
| Less: accumulated depreciation | (4,253 | ) | (61,221 | ) | |||
| Total real estate, net | 408,892 | 104,478 | |||||
| Real estate-related intangible assets, net (refer to Note 4) | 138,725 | 32,680 | |||||
| Total real estate, net and real estate-related intangible assets, net | 547,617 | 137,158 | |||||
| Cash and cash equivalents | 168,214 | — | |||||
| Restricted cash | 1,656 | — | |||||
| Ground and other lease income receivable, net | — | 3,482 | |||||
| Deferred ground and other lease income receivable, net | 4,097 | 8,423 | |||||
| Deferred expenses and other assets, net | 6,929 | 6,604 | |||||
| Total assets | $ | 728,513 | $ | 155,667 | |||
| LIABILITIES AND EQUITY | |||||||
| Liabilities: | |||||||
| Accounts payable, accrued expenses and other liabilities | $ | 7,545 | $ | 1,576 | |||
| Real estate-related intangible liabilities, net | 57,959 | — | |||||
| Debt obligations, net | 307,074 | — | |||||
| Total liabilities | 372,578 | 1,576 | |||||
| Commitments and contingencies (refer to Note 7) | — | — | |||||
| Equity: | |||||||
| Safety, Income & Growth Inc. Predecessor Equity | 154,091 | ||||||
| Safety, Income & Growth Inc. Shareholders' Equity: | |||||||
| Common stock, $0.01 par value, 400,000 shares authorized, 18,190 and 0 shares issued and outstanding as of December 31, 2017 and 2016, respectively | 182 | — | |||||
| Additional paid-in capital | 364,919 | — | |||||
| Retained earnings (deficit) | (9,246 | ) | — | ||||
| Accumulated other comprehensive income (loss) | 80 | — | |||||
| Total equity | 355,935 | 154,091 | |||||
| Total liabilities and equity | $ | 728,513 | $ | 155,667 | |||
The accompanying notes are an integral part of the consolidated and combined financial statements.
37
(In thousands, except per share data)
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Revenues: |
| |
|
| |
|
| |
|
Interest income from sales-type leases(1) | | $ | 118,824 | | $ | 81,844 | | $ | 18,531 |
Operating lease income | | | 67,667 | | | 72,340 | | | 72,071 |
Other income | |
| 523 | |
| 1,243 | |
| 2,794 |
Total revenues | |
| 187,014 | |
| 155,427 | |
| 93,396 |
Costs and expenses: | |
|
| |
|
| |
|
|
Interest expense | |
| 79,707 | |
| 64,354 | |
| 29,868 |
Real estate expense | |
| 2,663 | |
| 2,480 | |
| 2,673 |
Depreciation and amortization | |
| 9,562 | |
| 9,433 | |
| 9,379 |
General and administrative(2) | |
| 28,753 | |
| 22,733 | |
| 14,435 |
Other expense | |
| 868 | |
| 243 | |
| 899 |
Total costs and expenses | |
| 121,553 | |
| 99,243 | |
| 57,254 |
Income from operations before other items | |
| 65,461 | |
| 56,184 | |
| 36,142 |
Loss on early extinguishment of debt | |
| (216) | |
| 0 | |
| (2,011) |
Earnings (losses) from equity method investments | |
| 6,279 | |
| 3,304 | |
| (403) |
Selling profit from sales-type leases | | | 1,833 | | | — | | | — |
Net income | |
| 73,357 | |
| 59,488 | |
| 33,728 |
Net income attributable to noncontrolling interests | |
| (234) | |
| (194) | |
| (6,035) |
Net income attributable to Safehold Inc. common shareholders | | $ | 73,123 | | $ | 59,294 | | $ | 27,693 |
| | | | | | | | | |
Per common share data: | |
|
| |
|
| |
|
|
Net income | |
|
| |
|
| |
|
|
Basic | | $ | 1.35 | | $ | 1.17 | | $ | 0.89 |
Diluted | | $ | 1.35 | | $ | 1.17 | | $ | 0.89 |
Weighted average number of common shares: | |
|
| |
|
| |
|
|
Basic | |
| 54,167 | |
| 50,688 | |
| 31,008 |
Diluted | |
| 54,180 | |
| 50,697 | |
| 31,008 |
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | |||||||||||||
| 2016 | 2015 | ||||||||||||||
| Revenues: | The Company | Predecessor | |||||||||||||
| Ground and other lease income | $ | 16,952 | $ | 5,916 | $ | 21,664 | $ | 18,558 | |||||||
| Other income | 258 | 108 | 79 | 7 | |||||||||||
| Total revenues | 17,210 | 6,024 | 21,743 | 18,565 | |||||||||||
| Costs and expenses: | |||||||||||||||
| Interest expense | 7,485 | 2,432 | 8,242 | 7,229 | |||||||||||
Real estate expense(2) | 1,261 | 210 | 861 | 217 | |||||||||||
| Depreciation and amortization | 6,406 | 901 | 3,142 | 3,140 | |||||||||||
| General and administrative | 5,094 | 1,143 | 2,883 | 2,262 | |||||||||||
| Other expense | 633 | — | — | — | |||||||||||
| Total costs and expenses | 20,879 | 4,686 | 15,128 | 12,848 | |||||||||||
| Income (loss) from operations | (3,669 | ) | 1,338 | 6,615 | 5,717 | ||||||||||
| Income from sales of real estate | — | 508 | — | — | |||||||||||
| Net income (loss) | (3,669 | ) | 1,846 | 6,615 | 5,717 | ||||||||||
| Net income attributable to noncontrolling interest | — | — | — | (368 | ) | ||||||||||
| Net income (loss) attributable to Safety, Income & Growth Inc. | $ | (3,669 | ) | $ | 1,846 | $ | 6,615 | $ | 5,349 | ||||||
| Per common share data: | |||||||||||||||
| Net income (loss) | |||||||||||||||
| Basic and diluted | $ | (0.25 | ) | N/A | N/A | N/A | |||||||||
| Weighted average number of common shares: | |||||||||||||||
| Basic and diluted | 14,648 | N/A | N/A | N/A | |||||||||||
| (1) | For the years ended December 31, 2021, 2020 and 2019, the Company recorded $8.4 million, $8.2 million and $5.0 million, respectively, of “Interest income from sales-type leases” in its consolidated statements of operations from its Ground Leases with iStar Inc. (“iStar”). |
| (2) | For the |
The accompanying notes are an integral part of the consolidated and combined financial statements.
38
(In thousands)
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | |||||||||||||
| 2016 | 2015 | ||||||||||||||
| The Company | Predecessor | ||||||||||||||
| Net income (loss) | $ | (3,669 | ) | $ | 1,846 | $ | 6,615 | $ | 5,717 | ||||||
| Other comprehensive income (loss): | |||||||||||||||
| Reclassification of (gains) losses on derivatives into earnings | 110 | — | — | — | |||||||||||
| Unrealized gains/(losses) on derivatives | (30 | ) | 415 | — | — | ||||||||||
| Other comprehensive income (loss) | 80 | 415 | — | — | |||||||||||
| Comprehensive income (loss) | (3,589 | ) | 2,261 | 6,615 | 5,717 | ||||||||||
| Comprehensive (income) loss attributable to noncontrolling interests | — | — | — | (368 | ) | ||||||||||
| Comprehensive income (loss) attributable to Safety, Income & Growth Inc. | $ | (3,589 | ) | $ | 2,261 | $ | 6,615 | $ | 5,349 | ||||||
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Net income | | $ | 73,357 | | $ | 59,488 | | $ | 33,728 |
Other comprehensive income (loss): | |
|
| |
|
| |
|
|
Reclassification of losses on derivatives into earnings | |
| 3,191 | |
| 1,680 | |
| 271 |
Unrealized gain (loss) on derivatives | |
| 13,290 | |
| (20,018) | |
| (32,518) |
Other comprehensive income (loss) | |
| 16,481 | |
| (18,338) | |
| (32,247) |
Comprehensive income | |
| 89,838 | |
| 41,150 | |
| 1,481 |
Comprehensive income attributable to noncontrolling interests | |
| (234) | |
| (194) | |
| (2,377) |
Comprehensive income (loss) attributable to Safehold Inc. | | $ | 89,604 | | $ | 40,956 | | $ | (896) |
The accompanying notes are an integral part of the consolidated and combined financial statements.
39
Safehold Inc.
(In thousands)
| Safety, Income & Growth Inc. Predecessor Equity | Common Stock at Par | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||
| Predecessor | ||||||||||||||||||||||||||||
| Balance as of December 31, 2014 | $ | 105,124 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 105,124 | ||||||||||||||
| Net income | 5,349 | — | — | — | — | 368 | 5,717 | |||||||||||||||||||||
| Net transactions with iStar Inc. | 36,315 | — | — | — | — | — | 36,315 | |||||||||||||||||||||
| Contribution from noncontrolling interest | — | — | — | — | — | 3,819 | 3,819 | |||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (594 | ) | (594 | ) | |||||||||||||||||||
| Acquisition of noncontrolling interest | (2,759 | ) | — | — | — | — | (3,593 | ) | (6,352 | ) | ||||||||||||||||||
| Balance as of December 31, 2015 | $ | 144,029 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 144,029 | ||||||||||||||
| Net income | 6,615 | — | — | — | — | — | 6,615 | |||||||||||||||||||||
| Net transactions with iStar Inc. | 3,447 | — | — | — | — | — | 3,447 | |||||||||||||||||||||
| Balance as of December 31, 2016 | $ | 154,091 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 154,091 | ||||||||||||||
| Net income | 1,846 | — | — | — | — | — | 1,846 | |||||||||||||||||||||
| Unrealized gain on cash flow hedge | 415 | — | — | — | — | — | 415 | |||||||||||||||||||||
| Net transactions with iStar Inc. | (220,813 | ) | — | — | — | — | — | (220,813 | ) | |||||||||||||||||||
| Balance as of April 13, 2017 | $ | (64,461 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (64,461 | ) | ||||||||||||
| The Company | ||||||||||||||||||||||||||||
| Net income (loss) | $ | — | $ | — | $ | — | $ | (3,669 | ) | $ | — | $ | — | $ | (3,669 | ) | ||||||||||||
| Proceeds from issuance of common stock to initial investors | — | 57 | 112,943 | — | — | — | 113,000 | |||||||||||||||||||||
| Proceeds from issuance of common stock in initial public offering | — | 125 | 249,875 | — | — | — | 250,000 | |||||||||||||||||||||
| Contributions from iStar | — | — | 21,567 | — | — | — | 21,567 | |||||||||||||||||||||
| Offering costs | — | — | (20,232 | ) | — | — | — | (20,232 | ) | |||||||||||||||||||
| Issuance of common stock to directors | — | — | 766 | — | — | — | 766 | |||||||||||||||||||||
| Dividends declared | — | — | — | (5,577 | ) | — | — | (5,577 | ) | |||||||||||||||||||
| Change in accumulated other comprehensive income (loss) | — | — | — | — | 80 | — | 80 | |||||||||||||||||||||
| Balance as of December 31, 2017 | $ | — | $ | 182 | $ | 364,919 | $ | (9,246 | ) | $ | 80 | $ | — | $ | 355,935 | |||||||||||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | Retained | | Accumulated | | | | | | | |||
| | Common | | Additional | | Earnings / | | Other | | | | | | | ||||
| | Stock at | | Paid-In | | Accumulated | | Comprehensive | | Noncontrolling | | Total | ||||||
|
| Par |
| Capital |
| (Deficit) |
| Income (Loss) |
| Interests |
| Equity | ||||||
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | 183 | | $ | 370,530 | | $ | (8,486) | | $ | (6,876) | | $ | 2,007 | | $ | 357,358 |
Net income | |
| — | |
| — | |
| 27,693 | |
| — | |
| 6,035 | |
| 33,728 |
Issuance of common stock, net / amortization | |
| 170 | |
| 509,385 | |
| — | |
| — | |
| 356 | |
| 509,911 |
Investor Unit conversion (refer to Note 11) | |
| 125 | |
| 252,060 | |
| — | |
| (6,450) | |
| (245,735) | |
| — |
Dividends declared ($0.618 per share) | |
| — | |
| — | |
| (21,353) | |
| — | |
| — | |
| (21,353) |
Change in accumulated other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| (28,589) | |
| (3,658) | |
| (32,247) |
Contributions from noncontrolling interests | |
| — | |
| 628 | |
| — | |
| 2,792 | |
| 245,426 | |
| 248,846 |
Distributions to noncontrolling interests | |
| — | |
| — | |
| — | |
| — | |
| (2,945) | |
| (2,945) |
Balance at December 31, 2019 | | $ | 478 | | $ | 1,132,603 | | $ | (2,146) | | $ | (39,123) | | $ | 1,486 | | $ | 1,093,298 |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 478 | | $ | 1,132,603 | | $ | (2,146) | | $ | (39,123) | | $ | 1,486 | | $ | 1,093,298 |
Net income | |
| — | |
| — | |
| 59,294 | |
| — | |
| 194 | |
| 59,488 |
Issuance of common stock, net / amortization | |
| 54 | |
| 279,504 | |
| — | |
| — | |
| 543 | |
| 280,101 |
Dividends declared ($0.6427 per share) | |
| — | |
| — | |
| (33,203) | |
| — | |
| — | |
| (33,203) |
Change in accumulated other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| (18,338) | |
| — | |
| (18,338) |
Distributions to noncontrolling interests | |
| — | |
| — | |
| — | |
| — | |
| (43) | |
| (43) |
Balance at December 31, 2020 | | $ | 532 | | $ | 1,412,107 | | $ | 23,945 | | $ | (57,461) | | $ | 2,180 | | $ | 1,381,303 |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | $ | 532 | | $ | 1,412,107 | | $ | 23,945 | | $ | (57,461) | | $ | 2,180 | | $ | 1,381,303 |
Net income | |
| — | |
| — | |
| 73,123 | |
| — | |
| 234 | |
| 73,357 |
Issuance of common stock, net / amortization | |
| 34 | |
| 251,217 | |
| (736) | |
| — | |
| 451 | |
| 250,966 |
Dividends declared ($0.67224 per share) | |
| — | |
| — | |
| (36,964) | |
| — | |
| — | |
| (36,964) |
Change in accumulated other comprehensive income (loss) | |
| — | |
| — | |
| — | |
| 16,481 | |
| — | |
| 16,481 |
Contributions from noncontrolling interests | | | — | | | — | | | — | | | — | | | 105 | | | 105 |
Distributions to noncontrolling interests | |
| — | |
| — | |
| — | |
| — | |
| (46) | |
| (46) |
Balance at December 31, 2021 | | $ | 566 | | $ | 1,663,324 | | $ | 59,368 | | $ | (40,980) | | $ | 2,924 | | $ | 1,685,202 |
The accompanying notes are an integral part of the consolidated and combined financial statements.
40
(In thousands)
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Cash flows from operating activities: |
| |
|
| |
|
| |
|
Net income | | $ | 73,357 | | $ | 59,488 | | $ | 33,728 |
Adjustments to reconcile net income to cash flows from operating activities: | |
|
| |
|
| |
|
|
Depreciation and amortization | |
| 9,562 | |
| 9,433 | |
| 9,379 |
Stock-based compensation expense | |
| 1,750 | |
| 1,744 | |
| 1,582 |
Deferred operating lease income | |
| (33,727) | |
| (35,004) | |
| (35,165) |
Non-cash interest income from sales-type leases | |
| (43,808) | |
| (30,131) | |
| (6,547) |
Non-cash interest expense | |
| 11,772 | |
| 10,986 | |
| 2,865 |
Amortization of real estate-related intangibles, net | |
| 2,424 | |
| 2,648 | |
| 2,509 |
Loss on early extinguishment of debt | |
| 216 | |
| — | |
| 2,011 |
(Earnings) losses from equity method investments | |
| (6,279) | |
| (3,304) | |
| 403 |
Distributions from operations of equity method investments | |
| 1,973 | |
| 1,213 | |
| — |
Selling profit from sales-type leases | | | (1,833) | | | — | | | — |
Amortization of premium, discount and deferred financing costs on debt obligations, net | |
| 3,771 | |
| 2,281 | |
| 2,257 |
Non-cash management fees | |
| 14,865 | |
| 12,684 | |
| 7,461 |
Other operating activities | |
| 4,469 | |
| 2,201 | |
| 1,586 |
Changes in assets and liabilities: | |
|
| |
|
| |
|
|
Changes in deferred expenses and other assets, net | |
| (286) | |
| (143) | |
| 301 |
Changes in accounts payable, accrued expenses and other liabilities | |
| (11,309) | |
| 1,615 | |
| (24,333) |
Cash flows provided by (used in) operating activities | |
| 26,917 | |
| 35,711 | |
| (1,963) |
Cash flows from investing activities: | |
|
| |
|
| |
|
|
Acquisitions of real estate | |
| — | |
| (57,879) | |
| (28,816) |
Origination/acquisition of net investment in sales-type leases and Ground Lease receivables | |
| (1,247,980) | |
| (474,083) | |
| (1,364,682) |
Contributions to equity method investments | | | (39,455) | | | — | | | (127,970) |
Deposits on Ground Lease investments | |
| (2,083) | |
| 1,550 | |
| 250 |
Other investing activities | |
| 1,527 | |
| (229) | |
| 443 |
Cash flows used in investing activities | |
| (1,287,991) | |
| (530,641) | |
| (1,520,775) |
Cash flows from financing activities: | |
|
| |
|
| |
|
|
Proceeds from issuance of common stock | |
| 243,345 | |
| 271,206 | |
| 511,900 |
Proceeds from debt obligations | |
| 1,848,439 | |
| 693,970 | |
| 1,183,739 |
Repayments of debt obligations | |
| (830,000) | |
| (377,000) | |
| (351,500) |
Payments for debt prepayment or extinguishment costs | |
| — | |
| — | |
| (1,358) |
Payments for deferred financing costs | |
| (14,063) | |
| (6,784) | |
| (18,468) |
Dividends paid to common shareholders | |
| (35,947) | |
| (32,002) | |
| (16,622) |
Payment of offering costs | |
| (8,710) | |
| (4,756) | |
| (9,778) |
Distributions to noncontrolling interests | |
| (46) | |
| (43) | |
| (2,945) |
Contributions from noncontrolling interests | |
| 105 | |
| — | |
| 250,000 |
Other financing activities | |
| — | |
| 24 | |
| 127 |
Cash flows provided by financing activities | |
| 1,203,123 | |
| 544,615 | |
| 1,545,095 |
Changes in cash, cash equivalents and restricted cash | |
| (57,951) | |
| 49,685 | |
| 22,357 |
Cash, cash equivalents and restricted cash at beginning of period | |
| 96,467 | |
| 46,782 | |
| 24,425 |
Cash, cash equivalents and restricted cash at end of period | | $ | 38,516 | | $ | 96,467 | | $ | 46,782 |
41
| For the Period from April 14, 2017 to December 31, 2017 | For the Period From January 1, 2017 to April 13, 2017 | For the Years Ended December 31, | |||||||||||||
| 2016 | 2015 | ||||||||||||||
| The Company | Predecessor | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income (loss) | $ | (3,669 | ) | $ | 1,846 | $ | 6,615 | $ | 5,717 | ||||||
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | |||||||||||||||
| Depreciation and amortization | 6,406 | 901 | 3,142 | 3,140 | |||||||||||
| Non-cash expense for stock-based compensation | 766 | — | — | — | |||||||||||
| Deferred ground and other lease income | (4,097 | ) | (1,271 | ) | (4,374 | ) | (2,902 | ) | |||||||
| Income from sales of real estate | — | (508 | ) | — | — | ||||||||||
| Amortization of real estate-related intangibles, net | 1,178 | 118 | 414 | 332 | |||||||||||
| Amortization of premium and deferred financing costs on debt obligations, net | 465 | — | — | — | |||||||||||
| Management fees and non-cash expense reimbursements to the Manager | 2,627 | — | — | — | |||||||||||
| Other operating activities | 15 | 24 | — | — | |||||||||||
| Changes in assets and liabilities: | |||||||||||||||
| Changes in ground and other lease income receivable, net | 1,394 | 2,088 | (858 | ) | (588 | ) | |||||||||
| Changes in deferred expenses and other assets, net | 151 | (576 | ) | (39 | ) | (430 | ) | ||||||||
| Changes in accounts payable, accrued expenses and other liabilities | 852 | (13 | ) | 580 | (244 | ) | |||||||||
| Cash flows provided by operating activities | 6,088 | 2,609 | 5,480 | 5,025 | |||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Acquisitions of real estate | (270,734 | ) | — | (3,915 | ) | — | |||||||||
| Proceeds from sales of real estate | — | 508 | — | — | |||||||||||
| Changes in restricted cash held in connection with investing activities | (1,657 | ) | — | — | — | ||||||||||
| Other investing activities | (2,442 | ) | (1,042 | ) | (4,057 | ) | — | ||||||||
| Cash flows used in investing activities | (274,833 | ) | (534 | ) | (7,972 | ) | — | ||||||||
| Cash flows from financing activities: | |||||||||||||||
| Net transactions with iStar Inc. | — | (220,813 | ) | 3,447 | 1,943 | ||||||||||
| Distributions to noncontrolling interest | — | — | — | (594 | ) | ||||||||||
| Contributions from noncontrolling interest | — | — | — | (6,352 | ) | ||||||||||
| Contribution from iStar Inc. | 14,350 | — | — | — | |||||||||||
| Proceeds from issuance of common stock | 363,000 | — | — | — | |||||||||||
| Proceeds from debt obligations | 176,000 | 227,000 | — | — | |||||||||||
| Repayments of debt obligations | (95,000 | ) | — | — | — | ||||||||||
| Payments for deferred financing costs | (4,170 | ) | (7,217 | ) | — | — | |||||||||
| Payment of offering costs | (14,372 | ) | (779 | ) | (977 | ) | — | ||||||||
| Dividends paid to common shareholders | (2,849 | ) | — | — | — | ||||||||||
| Cash flows provided by (used in) financing activities | 436,959 | (1,809 | ) | 2,470 | (5,003 | ) | |||||||||
| Changes in cash and cash equivalents | 168,214 | 266 | (22 | ) | 22 | ||||||||||
| Cash and cash equivalents at beginning of period | — | — | 22 | — | |||||||||||
| Cash and cash equivalents at end of period | $ | 168,214 | $ | 266 | $ | — | $ | 22 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||
| Cash paid for interest | $ | 6,528 | $ | 168 | $ | — | $ | — | |||||||
| Supplemental disclosure of non-cash investing and financing activity: | |||||||||||||||
| Assumption of debt obligations | $ | 227,415 | $ | — | $ | — | $ | — | |||||||
| Contribution from iStar Inc. | 7,217 | — | — | — | |||||||||||
| Dividends declared to common shareholders | 2,728 | — | — | — | |||||||||||
| Accrued offering costs | 1,347 | — | 769 | — | |||||||||||
| Accrued finance costs | 128 | 21 | — | — | |||||||||||
| Contribution from noncontrolling interest | — | — | — | 3,819 | |||||||||||
| Net transactions with iStar Inc. | — | — | — | 34,372 | |||||||||||
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows | | | | | | | | | |
Cash and cash equivalents | | $ | 29,619 | | $ | 56,948 | | $ | 22,704 |
Restricted cash | | | 8,897 | | | 39,519 | | | 24,078 |
Total cash and cash equivalents and restricted cash | | $ | 38,516 | | $ | 96,467 | | $ | 46,782 |
Supplemental disclosure of cash flow information: | |
|
| |
|
| |
|
|
Cash paid for interest | | $ | 59,034 | | $ | 48,772 | | $ | 22,878 |
Supplemental disclosure of non-cash investing and financing activity: | |
|
| |
|
| |
|
|
Origination of sales-type lease | | $ | — | | $ | — | | $ | 10,194 |
Acquisition of real estate | |
| — | |
| 157 | |
| — |
Assumption of other liabilities/debt obligations | |
| — | |
| 157 | |
| 10,194 |
Investor Unit conversion (refer to Note 11) | |
| — | |
| — | |
| 250,000 |
Dividends declared to common shareholders | |
| 9,647 | |
| 8,636 | |
| 7,478 |
Accrued finance costs | |
| 89 | |
| 8 | |
| 658 |
Accrued offering costs | |
| 50 | |
| 47 | |
| 250 |
Caret Unit conversion (refer to Note 11) | |
| 747 | |
| — | |
| — |
The accompanying notes are an integral part of the consolidated and combined financial statements.
42
Note 1—Business and Organization
Business
—The Company intends to target investments in long-term Ground Leases in which: (i) the initial valuecost of its Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land ("Combined Property Value"); (ii) the ratio of underlying property net operating income to the Ground Lease payment due the Company ("Ground Rent Coverage") is between 2.0x to 5.0x;4.5x , and for this purpose the Company uses estimates of the stabilized property net operating income if it does not receive current tenant information and for properties under construction or in transition, in each case based on leasing activity at the property and available market information, including leasing activity at comparable properties in the relevant market; and (iii) the Ground Lease contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. A Ground Lease lessor (the Company) typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default and the termination of the Ground Lease on account of such default. The Company believes that the Ground Lease structure provides an opportunity for future investmentpotential value accretion through the reversion to the Company, as the Ground Lease owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from the Company.
The Company is managed by SFTY Manager, LLC (the "Manager"), a wholly-owned subsidiary of iStar, Inc. ("iStar"), the Company'sCompany’s largest shareholder, pursuant to a management agreement (refer to Note 11).agreement. The Company has no employees, as the Manager provides all services to it. The Company intends to drawdraws on the extensive investment origination and sourcing platform of its Manager to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants.
Organization
—Note 2—Basis of Presentation and Principles of Consolidation and Combination
Basis of Presentation
—43
financial statements and the reported amounts of revenues and expenses during the reporting periods. These combined financial statements for the periods prior to April 14, 2017 include an allocation of general and administrative expenses and interest expense to the PredecessorActual results could differ from iStar. General and administrative expenses include certain iStar corporate functions, including executive oversight, treasury, finance, human resources, tax compliance and planning, internal audit, financial reporting, information technology and investor relations. General and administrative expenses, including stock based compensation, represent a pro rata allocation of costs from iStar’s net lease and corporate business segments based on our average net assets as a percentage of iStar’s average net assets. Interest expense was allocated to the Predecessor by calculating its average net assets as a percentage of the average net assets in iStar’s net lease business segment and multiplying that percentage by the interest expense allocated to iStar’s net lease business segment (only for the number of days in the period in which the Predecessor did not have debt obligations outstanding—refer to Note 6). The Company believes the allocation methodology for the general and administrative expenses and interest expense is reasonable. Accordingly, the general and administrative expense allocation presented in our combined statements of operations for Predecessor periods does not necessarily reflect what our general and administrative expenses will be as a standalone public company for future reporting periods.
Principles of Consolidation and Combination
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of December 31, 2021, the total assets of these consolidated VIEs were $68.6 million and total liabilities were $29.9 million. The classifications of these assets are primarily within “Net investment in sales-type leases,” "Real estate, net," "Real estate-related intangible assets, net" and "Deferred operating lease income receivable" on the Company’s consolidated balance sheets. The classifications of liabilities are primarily within "Debt obligations, net" and "Accounts payable, accrued expenses and other liabilities" on the Company’s consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE’s respective assets. The Company has provided no financial support to VIEs that it was not previously contractually required to provide and did not have any unfunded commitments related to consolidated VIEs as of December 31, 2021.
Note 3—Summary of Significant Accounting Policies
Significant Accounting Policies
Real estate—
Real estate assets are recorded at cost less accumulated depreciation and amortization, as follows:Capitalization and depreciation
—Certain improvements and replacements are capitalized when they extend the useful life of the asset. Repair and maintenance costs are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life, which is generally 40 years for facilities, the shorter of the remaining lease term or expected life for tenant improvements and the remaining useful life of the facility for facility improvements.Purchase price allocation
—The Company accounts for its acquisition of properties by recording the purchase price of tangible and intangible assets and liabilities acquired based on their estimatedrelative fair values. The value of the tangible assets, consisting of land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of lease incentive assets, above-market leases, below-market Ground Lease assets and in-place leases, which are each recorded at their estimated fair values and included in "Real estate-related intangible assets, net" on the Company'sCompany’s consolidated and combined balance sheets. Intangible liabilities may include the value of below-market leases, which are recorded at their estimated fair values and included in "Real estate-related intangible liabilities, net" on the Company'sCompany’s consolidated and combined balance sheets. In-place leases are amortized over the remaining non-cancelable term of the lease and the amortization expense is included in "Depreciation and amortization" in the Company'sCompany’s consolidated and combined statements of operations. Lease incentive assets and above-market (or below-market) lease value are amortized as a reduction of (or, increase to) ground and otheroperating lease income over the remaining non-cancelable term of each lease. Below-market Ground Lease assets are amortized to real state estate expense over the remaining non-cancelable term of the lease. The Company may also engage in sale/leaseback transactions whereby the Company executes a net lease with the occupant simultaneously with the purchase of the asset.
Impairments
—The Company reviews real estate assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The value of a long-lived asset held for use is impaired if44
the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the estimated fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate assets, if any, are recorded in "Impairment of assets" in the Company's combinedCompany’s consolidated statements of operations. The Company did not record any impairments for the periods presented.
Net Investment in Sales-type Leases and Ground Lease Receivables—Net investment in sales-type leases and Ground Lease receivables are recognized when the Company’s Ground Leases qualify as sales-type leases. The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. Acquisition-related costs are capitalized and recorded in "Net Investment in Sales-type Leases" and "Ground Lease Receivables" on the Company’s consolidated balance sheets. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement. If a lease qualifies as a sales-type lease, it is further evaluated to determine whether the transaction is considered a sale leaseback transaction. When the Company acquires land and enters into a Ground Lease directly with the seller that qualifies as a sales-type lease, the lease does not qualify as a sale leaseback transaction and the lease is considered a financing receivable and is recognized in accordance with ASC 310 - Receivables and included in "Ground Lease receivables" on the Company’s consolidated balance sheets (refer to Note 5).
Reserve for losses in net investment in sales-type leases and Ground Lease receivables— The Company evaluates its net investment in sales-type leases and Ground Lease receivables for impairment under ASC 310 - Receivables. As part of the Company’s process for monitoring the credit quality of its net investment in sales-type leases and Ground Lease receivables, it performs a quarterly assessment for each of its net investment in sales-type leases and Ground Lease receivables. The Company considers a net investment in sales-type lease or Ground Lease receivable to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the Ground Lease. As of December 31, 2021, all of the Company’s net investment in sales-type leases and Ground Lease receivables were performing in accordance with the terms of the respective leases.
Any potential reserve for losses in net investment in sales-type leases and Ground Lease receivables will reflect management’s estimate of losses inherent in the portfolio as of the balance sheet date. If the Company determines that the collateral fair value less costs to sell is less than the carrying value of a collateral-dependent receivable, the Company will record a reserve. The reserve, if applicable, will be increased (decreased) in the Company’s consolidated statements of operations and will be decreased by charge-offs. The Company’s policy is to charge off a receivable when it determines, based on a variety of factors, that all commercially reasonable means of recovering the receivable balance have been exhausted. This may occur at different times, including when the Company receives cash or other assets in a pre-foreclosure sale or takes control of the underlying collateral in full satisfaction of the receivable upon foreclosure or deed-in-lieu, or when the Company has otherwise ceased significant collection efforts. The Company considers circumstances such as the foregoing to be indicators that the final steps in the receivable collection process have occurred and that a receivable is uncollectible. At this point, a loss is confirmed and the receivable and related reserve will be charged off. The Company has one portfolio segment represented by acquiring, managing and capitalizing Ground Leases, whereby it utilizes a uniform process for determining its reserve for losses on net investment in sales-type leases and Ground Lease receivables.
Interest Income from Sales-type Leases—Interest income from sales-type leases is recognized under the effective interest method. The effective interest method produces a constant yield on the net investment in the sales-type lease and Ground Lease receivable over the term of the lease. Rent payments that are not fixed and determinable at lease inception, such as percentage rent and CPI adjustments, are not included in the effective interest method calculation and are recognized in the Company’s consolidated statements of operations in the period earned. A Ground Lease receivable is placed on non-accrual status if and when it becomes 90-days past due or if the Company considers the Ground Lease receivable impaired.
Equity Investments in Ground Leases—Equity investments in Ground Leases are accounted for pursuant to the equity method of accounting if the Company can significantly influence the operating and financial policies of the investee. The Company has noncontrolling equity interests in ventures (refer to Note 6) and determined the entities to be voting
45
interest entities. As such, its equity interests in these ventures are accounted for pursuant to the equity method of accounting. The Company’s periodic share of earnings and losses in equity method investees are included in "Earnings (losses) from equity method investments" in the Company’s consolidated statements of operations. Equity investments are included in "Equity investments in Ground Leases" on the Company’s consolidated balance sheets.
The Company periodically reviews equity method investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investments may not be recoverable. The Company will record an impairment charge to the extent that the estimated fair value of an investment is less than its carrying value and the Company determines the impairment is other-than-temporary. Impairment charges, if applicable, are recorded in "Earnings (losses) from equity method investments" in the Company’s consolidated statements of operations.
Cash and cash equivalents—Cash and cash equivalents include cash held in banks or invested in money market funds, if applicable, with original maturity terms of less than 90 days.
Restricted Cash
—Restricted cash primarily includesOperating lease income
—The Company estimates losses within ground and othermoves to cash basis operating lease income recognition in the period in which collectability of all lease payments is no longer considered probable. At such time, any deferred operating lease income receivable balance will be written off. If and deferred groundwhen lease payments that were previously not considered probable of collection become probable, the Company will move back to the straight-line method of income recognition and otherrecord an adjustment to operating lease income receivable balancesin that period as if the lease was always on the straight-line method of the balance sheet date and incorporates an asset-specific reserve based on management's evaluation of the credit risks associated with these receivables. As of December 31, 2017 and 2016, we did not have an allowance for doubtful accounts related to real estate tenant receivables or deferred ground and other lease income.
Other income
—Other income primarily includes interest incomeEarnings per share
—The Company hasDeferred expenses and other assets
—Deferred expenses46
Deferred financing fees
—Deferred financing fees associated with theStock-based compensation
—The Company adopted an equity incentive plan (refer to Note 11) to provide equity incentive opportunities to members of the Manager’s management team and employees who perform services for the Company, theDuring the third quarter 2018, the Company adopted an equity incentive plan providing for grants of interests (called "Caret Units") in a subsidiary of the Operating Partnership intended to constitute profits interests within the meaning of relevant Internal Revenue Service guidance. The Company’s shareholders approved the plan in the second quarter of 2019. Grants under the plan are subject to graduated vesting based on time and hurdles of the Company’s common stock price (refer to Note 11). Expense from Caret Units is recorded in "General and administrative" in the Company’s consolidated statements of operations and "Noncontrolling interests" on the Company’s consolidated balance sheet.
Income taxes—
The Company operates its business in a manner consistent with itsDerivative instruments and hedging activity
—The| Derivative Type | Maturity | Notional Amount | Fair Value(2) | Balance Sheet Location | ||||||||
| Assets | ||||||||||||
| Interest rate swap | October 2020 | $ | 95,000 | $ | 798 | Deferred expenses and other assets, net | ||||||
| Interest rate swap | October 2020 | 10,000 | 128 | Deferred expenses and other assets, net | ||||||||
| Interest rate swap | October 2030 | 10,000 | 98 | Deferred expenses and other assets, net | ||||||||
Interest rate cap(3) | January 2021 | 71,000 | 18 | Deferred expenses and other assets, net | ||||||||
| Total | $ | 1,042 | ||||||||||
| Liabilities | ||||||||||||
| Interest rate swap | October 2030 | 95,000 | $ | 619 | Accounts payable, accrued expenses and other liabilities | |||||||
| Interest rate swap | October 2030 | 22,000 | 285 | Accounts payable, accrued expenses and other liabilities | ||||||||
| Total | $ | 904 | ||||||||||
| Derivatives Designated in Hedging Relationships | Location of Gain (Loss) Recognized in Income | Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion) | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Ineffective Portion) | ||||||||||
| Interest rate swaps | Interest expense / Other expense(1) | $ | 30 | $ | 110 | $ | 22 | |||||||
Location of Gain or (Loss) Recognized in Income | Amount of Gain or (Loss) Recognized in Income | |||||
| Derivatives not Designated in Hedging Relationships | ||||||
| Interest rate cap | Other Expense | $ | (5 | ) | ||
Variable interest entities—The Company evaluates its investments and other contractual arrangements to determine if they constitute variable interests in a VIE. A VIE is an entity where a controlling financial interest is achieved through means other than voting rights. A VIE is consolidated and combined balance sheets. In connection withby the Company's acquisitionprimary beneficiary, which is the party that has the power to direct matters that most significantly impact the activities of the Initial Portfolio,VIE and has the 2017 Secured Financing was recorded at fair valueobligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This overall consolidation assessment includes a review of, among other factors, which interests create or absorb variability, contractual terms, the key decision making powers, their impact on the VIE’s economic performance, and related party relationships. Where qualitative assessment is not conclusive, the resulting premium will be recordedCompany performs a quantitative analysis. The Company reassesses its
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evaluation of the primary beneficiary of a VIE on an ongoing basis and assesses its evaluation of an entity as a reduction to interest expense over the term of the 2017 Secured Financing.
Fair Values
—The Company is required to disclose fair value information with regard to its financial instruments, whether or not recognized in the consolidatedThe Company determinedfollowing table presents the carrying values of itsvalue and fair value for the Company’s financial instruments including cash and cash equivalents; restricted cash; ground and other lease income receivable; deferred ground and other lease income receivable, net; deferred expenses and other assets, net; and accounts payable, accrued expenses, and other liabilities approximated their fair values. For the Company's debt obligations not traded($ in secondary markets, the Company determines fair value primarily by using market rates currently available for debt obligations with similar terms and remaining maturities. The Company determined that the significant inputs used to value its debt obligations, net fall within Level 3 of the fair value hierarchy. The Company determined the fair value of its debt obligations, net as of December 31, 2017 was approximately $308.7 million.
| | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 | ||||||||
| | Carrying | | Fair | | Carrying | | Fair | ||||
|
| Value |
| Value |
| Value |
| Value | ||||
Assets | | | | | | | | | | | | |
Net investment in sales-type leases(1) | | $ | 2,413 | | $ | 2,704 | | $ | 1,306 | | $ | 1,306 |
Ground Lease receivables(1) | |
| 796 | |
| 893 | |
| 577 | |
| 577 |
Cash and cash equivalents(2) | |
| 30 | |
| 30 | |
| 57 | |
| 57 |
Restricted cash(2) | |
| 9 | |
| 9 | |
| 40 | |
| 40 |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Debt obligations, net(1) | |
| | | | | | | | | | |
Level 1 | | | 738 | | | 741 | | | — | | | — |
Level 3 | | | 1,960 | | | 2,118 | | | 1,685 | |
| 1,835 |
Total debt obligations, net | | | 2,698 | |
| 2,859 | |
| 1,685 | | | 1,835 |
| (1) | The fair value of the Company’s net investment in sales-type leases and Ground Lease receivables are classified as Level 3 within the fair value hierarchy. The fair value of the Company’s debt obligations traded in secondary markets are classified as Level 1 within the fair value hierarchy and the fair value of the Company’s debt obligations not traded in secondary markets are classified as Level 3 within the fair value hierarchy. |
| (2) | The Company determined the carrying values of its cash and cash equivalents and restricted cash approximated their fair values and are classified as Level 1 within the fair value hierarchy. |
New Accounting Pronouncements
—In February 2016,May 2019, the FASB issued ASU 2016-02, Leases (‘‘2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2016-02’’2019-04"), which requires to clarify certain accounting topics from previously issued ASUs, including ASU 2016-13. ASU 2019-04 addresses certain aspects of ASU 2016-13, including but not limited to, accrued interest receivable, loan recoveries, interest rate projections for variable-rate financial instruments and expected prepayments. ASU 2019-04 provides alternatives that allow entities to measure credit losses on accrued interest separate from credit losses on the recognitionprincipal portion of lease assets and lease liabilities by lessees for those leases classified as operating leases. For operating leases, a lessee will be required to: (i) recognize a right-of-use asset and a lease liability, initially measured at the present valueloan, clarifies that entities
48
should include expected recoveries in the lessor derecognizing the underlying asset from its booksmeasurement of credit losses, allows entities to consider future interest rates when measuring credit losses and recording a profit or loss on the sale and a net investment in the lease.can elect to adjust effective interest rates used to discount expected cash flows for expected loan prepayments. ASU 2016-022019-04 is effective for interim and annual reporting periods beginning after December 15, 2018. Earlyupon the adoption is permitted.of ASU 2016-13. Management is currently evaluating the impact of the guidanceASU 2019-04 on the Company’s consolidated financial statements and currently expects that future Ground Lease transactions will qualify as sales-type leases. This qualification will result in the Company recording a net investment in the lease asset and interest income on the net investment in the lease.
The Company'sCompany’s real estate assets consist of the following ($ in thousands)
| As of | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
| Land and land improvements, at cost | $ | 220,749 | $ | 41,160 | |||
| Buildings and improvements, at cost | 192,396 | 124,539 | |||||
| Less: accumulated depreciation | (4,253 | ) | (61,221 | ) | |||
| Total real estate, net | $ | 408,892 | $ | 104,478 | |||
| Real estate-related intangible assets, net | 138,725 | 32,680 | |||||
| Total real estate, net and real estate-related intangible assets, net | $ | 547,617 | $ | 137,158 | |||
| | | | | | |
| | As of | ||||
|
| December 31, 2021 |
| December 31, 2020 | ||
Land and land improvements, at cost | | $ | 547,739 | | $ | 559,188 |
Buildings and improvements, at cost | |
| 193,232 | |
| 193,232 |
Less: accumulated depreciation | |
| (28,343) | |
| (22,314) |
Total real estate, net | | $ | 712,628 | | $ | 730,106 |
Real estate-related intangible assets, net | |
| 224,182 | |
| 242,166 |
Total real estate, net and real estate-related intangible assets, net | | $ | 936,810 | | $ | 972,272 |
Real estate-related intangible assets, net consist of the following items ($ in thousands)
| | | | | | | | | |
|
| As of December 31, 2021 | |||||||
| | Gross | | Accumulated | | Carrying | |||
| | Intangible | | Amortization | | Value | |||
Above-market lease assets, net(1) | | $ | 186,002 | | $ | (12,119) | | $ | 173,883 |
In-place lease assets, net(2) | |
| 65,102 | |
| (15,523) | |
| 49,579 |
Other intangible assets, net | |
| 750 | |
| (30) | |
| 720 |
Total | | $ | 251,854 | | $ | (27,672) | | $ | 224,182 |
| | | | | | | | | |
| | As of December 31, 2020 | |||||||
| | Gross | | Accumulated | | Carrying | |||
|
| Intangible |
| Amortization |
| Value | |||
Above-market lease assets, net(1) | | $ | 203,778 | | $ | (9,494) | | $ | 194,284 |
In-place lease assets, net(2) | |
| 59,179 | |
| (12,025) | |
| 47,154 |
Other intangible assets, net | |
| 750 | |
| (22) | |
| 728 |
Total | | $ | 263,707 | | $ | (21,541) | | $ | 242,166 |
| As of | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
Above-market lease assets, net(2) | $ | 77,197 | $ | — | |||
In-place lease assets, net(3) | 35,744 | — | |||||
Below-market lease asset, net(4) | 25,784 | — | |||||
Lease incentives, net(5) | — | 32,545 | |||||
| Other intangible assets, net | — | 135 | |||||
| Real estate-related intangible assets, net | $ | 138,725 | $ | 32,680 | |||
| (1) |
| Above-market lease assets are recognized during |
| (2) | |
| In-place lease assets are recognized during |
The amortization of real estate-related intangible assets had the following impact on the Company’s consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 ($ in thousands):
| | | | | | | | | | | |
| | Income Statement | | For the Years Ended December 31, | |||||||
Intangible asset |
| Location | | 2021 |
| 2020 |
| 2019 | |||
Above-market lease assets (decrease to income) |
| Operating lease income | | $ | 3,255 | | $ | 3,310 | | $ | 3,144 |
In-place lease assets (decrease to income) |
| Depreciation and amortization | |
| 3,525 | |
| 3,396 | |
| 3,342 |
Other intangible assets (decrease to income) |
| Operating lease income | |
| 8 | |
| 8 | |
| 8 |
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The estimated expense from the amortization of real estate-related intangible assets for each of the five succeeding fiscal years is as follows ($ in thousands)
:(1) | | | |
Year |
| Amount | |
2022 | | $ | 6,712 |
2023 | | | 6,696 |
2024 | |
| 6,648 |
2025 | |
| 6,648 |
2026 | |
| 6,648 |
| Year | Amount | ||
| 2018 | 5,376 | ||
| 2019 | 5,376 | ||
| 2020 | 5,376 | ||
| 2021 | 5,376 | ||
| 2022 | 5,376 | ||
| (1) | As of December 31, |
Real estate-related intangible liabilities, net consist of the following items ($ in thousands)
| | | | | | | | | |
|
| As of December 31, 2021 | |||||||
| | Gross | | Accumulated | | Carrying | |||
| | Intangible | | Amortization | | Value | |||
Below-market lease liabilities(1) | | $ | 68,618 | | $ | (3,189) | | $ | 65,429 |
| | | | | | | | | |
|
| As of December 31, 2020 | |||||||
| | Gross | | Accumulated | | Carrying | |||
| | Intangible | | Amortization | | Value | |||
Below-market lease liabilities(1) | | $ | 68,618 | | $ | (2,350) | | $ | 66,268 |
| As of | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
Below-market lease liabilities(2) | $ | 57,959 | $ | — | |||
| Real estate-related intangible liabilities, net | $ | 57,959 | $ | — | |||
| (1) |
| Below-market lease liabilities are recognized during |
The amortization of real estate-related intangible liabilities had the following impact on the Company’s consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 ($ in thousands):
| | | | | | | | | | | |
| | Income Statement | | For the Years Ended December 31, | |||||||
Intangible liability |
| Location |
| 2021 |
| 2020 |
| 2019 | |||
Below-market lease liabilities (increase to income) |
| Operating lease income |
| $ | 838 | | $ | 669 | | $ | 642 |
Future Minimum Operating Lease Payments—Future minimum lease payments to be collected under non-cancelable operating leases, excluding lease payments that are not fixed and determinable, in effect as of December 31, 2021, are as follows by year ($ in thousands):
| | | | | | | | | | | | | | | | | | |
| | | |
| Fixed Bumps |
| | |
| | |
| Fixed |
| | | ||
| | | | | with | | | | | | | | Bumps with | | | | ||
| | Inflation- | | Inflation | | Fixed | | Percentage | | Percentage | | | | |||||
Year |
| Linked |
| Adjustments |
| Bumps |
| Rent |
| Rent |
| Total | ||||||
2022 | | $ | 5,357 | | $ | 16,928 | | $ | 2,185 | | $ | 11,018 | | $ | 356 | | $ | 35,844 |
2023 | |
| 5,357 | |
| 17,347 | |
| 2,213 | |
| 11,018 | |
| 281 | |
| 36,216 |
2024 | |
| 5,357 | |
| 17,677 | |
| 2,247 | |
| 11,018 | |
| 51 | |
| 36,350 |
2025 | |
| 5,357 | |
| 18,004 | |
| 2,313 | | | 11,018 | | | 51 | |
| 36,743 |
2026 | | | 5,357 | | | 18,370 | | | 2,357 | | | 986 | | | 51 | | | 27,121 |
Thereafter | |
| 407,341 | |
| 4,326,865 | |
| 435,496 | |
| 16,812 | |
| 77 | |
| 5,186,591 |
Note 5—Net Investment in Sales-type Leases and Ground Lease Receivables
The Company classifies certain of its Ground Leases as sales-type leases and records the leases within "Net investment in sales-type leases" on the Company’s consolidated balance sheets and records interest income in "Interest income from sales-type leases" in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases with the seller. These Ground Leases qualify
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as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in "Ground Lease receivables" on the Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in "Interest income from sales-type leases" in the Company’s consolidated statements of operations.
In September 2021, the Company entered into a lease assignment and modification with 1 of its tenants under an operating lease. In connection with this transaction, the lease was assigned to a new tenant and the maturity of the lease was extended by 3.5 years to September 2120. As a result of the modification to the lease, the Company re-evaluated the lease classification and classified the lease as a sales-type lease and recorded $40.9 million in "Net investment in leases" and derecognized $11.4 million from "Real estate, net," $9.8 million from "Deferred operating lease income receivable" and $17.9 million from "Real estate-related intangible assets, net" on its consolidated balance sheet. The Company recognized $1.8 million in "Selling profit from sales-type leases" in its consolidated statements of operations for the year ended December 31, 2021 as a result of the transaction.
The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Total undiscounted cash flows(1) | | $ | 23,707,424 | | $ | 13,676,701 |
Unguaranteed estimated residual value | |
| 2,319,761 | |
| 1,243,292 |
Present value discount | |
| (23,614,469) | |
| (13,614,474) |
Net investment in sales-type leases | | $ | 2,412,716 | | $ | 1,305,519 |
| (1) | As of December 31, |
The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the year ended December 31, 2021 ($ in thousands):
| | | | | | | | | |
|
| Net Investment in |
| Ground Lease |
| | | ||
| | Sales-type Leases | | Receivables | | Total | |||
Beginning balance | | $ | 1,305,519 | | $ | 577,457 | | $ | 1,882,976 |
Purchase price allocation adjustment | | | (182) | | | — | | | (182) |
Transfer from real estate, net | | | 40,900 | | | — | | | 40,900 |
Origination/acquisition/fundings(1) | |
| 1,035,580 | |
| 205,886 | |
| 1,241,466 |
Accretion | |
| 30,899 | |
| 12,909 | |
| 43,808 |
Ending balance(2) | | $ | 2,412,716 | | $ | 796,252 | | $ | 3,208,968 |
| (1) | The net investment in sales-type leases is initially measured at the |
| (2) | As of December 31, |
51
Future Minimum Lease Payments under Sales-type Leases—On April 14, 2017,Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of December 31, 2021, are as follows by year ($ in thousands):
| | | | | | | | | | | | |
| | | |
| | |
| Fixed Bumps |
| | | |
| | Fixed Bumps | | | | | with | | | | ||
| | with Inflation | | Fixed | | Percentage | | | | |||
|
| Adjustments |
| Bumps |
| Rent |
| Total | ||||
2022 | | $ | 75,034 | | $ | 1,303 | | $ | 537 | | $ | 76,874 |
2023 | |
| 78,109 | |
| 1,329 | |
| 586 | |
| 80,024 |
2024 | |
| 82,015 | |
| 1,356 | |
| 586 | |
| 83,957 |
2025 | |
| 83,484 | |
| 1,383 | |
| 586 | |
| 85,453 |
2026 | | | 85,049 | | | 1,411 | | | 586 | | | 87,046 |
Thereafter | |
| 22,839,557 | |
| 353,852 | |
| 100,661 | |
| 23,294,070 |
Total undiscounted cash flows | | $ | 23,243,248 | | $ | 360,634 | | $ | 103,542 | | $ | 23,707,424 |
During the years ended December 31, 2021, 2020 and 2019, the Company through a merger and other formation transactions, acquired the Initial Portfoliorecognized interest income from iStar and accounted for the acquisitionsales-type leases in its consolidated statements of operations as a business combination pursuant to ASC 805. Onfollows ($ in thousands):
| | | | | | | | | |
| | Net Investment |
| Ground |
| | | ||
| | in Sales-type | | Lease | | | | ||
Year Ended December 31, 2021 |
| Leases |
| Receivables |
| Total | |||
Cash | | $ | 52,091 | | $ | 22,925 | | $ | 75,016 |
Non-cash | |
| 30,899 | |
| 12,909 | |
| 43,808 |
Total interest income from sales-type leases | | $ | 82,990 | | $ | 35,834 | | $ | 118,824 |
| | | | | | | | | |
Year Ended December 31, 2020 | |
|
| |
|
| |
|
|
Cash | | $ | 36,098 | | $ | 15,615 | | $ | 51,713 |
Non-cash | |
| 21,186 | |
| 8,945 | |
| 30,131 |
Total interest income from sales-type leases | | $ | 57,284 | | $ | 24,560 | | $ | 81,844 |
| | | | | | | | | |
Year Ended December 31, 2019 | |
|
| |
|
| |
|
|
Cash | | $ | 10,086 | | $ | 1,898 | | $ | 11,984 |
Non-cash | |
| 5,541 | |
| 1,006 | |
| 6,547 |
Total interest income from sales-type leases | | $ | 15,627 | | $ | 2,904 | | $ | 18,531 |
Note 6—Equity Investments in Ground Leases
In June 28, 2017,2021, the Company separately acquired two additionala 29.2% noncontrolling equity interest in a Ground Leases (described below)Lease at an office property in New York City. As of December 31, 2021, the Company’s investment in the Ground Lease was $42.1 million. During the year ended December 31, 2021, the Company recorded $2.9 million in earnings from third party sellers forequity method investments from the Ground Lease.
In August 2019, the Company formed a venture with a sovereign wealth fund that is an aggregate purchase priceexisting shareholder of approximately $142.0 million and accounted for the acquisitions as business combinations pursuantCompany to ASC 805.
52
Deferred expenses and other assets, net, consist of the acquisitions accounted for as business combinations are presented in the table belowfollowing items ($ in thousands):
| | | | | | |
| | As of | ||||
|
| December 31, 2021 |
| December 31, 2020 | ||
Operating lease right-of-use asset(1) | | $ | 27,435 | | $ | 28,550 |
Deferred finance costs, net(2) | |
| 7,875 | |
| 3,354 |
Other assets | |
| 2,898 | |
| 1,965 |
Purchase deposits | |
| 2,083 | |
| — |
Leasing costs, net | |
| 456 | |
| 465 |
Deferred expenses and other assets, net | | $ | 40,747 | | $ | 34,334 |
| Initial Portfolio | 6200 Hollywood Blvd. | 6201 Hollywood Blvd. | Total | |||||||||||||
| Assets | ||||||||||||||||
| Land and land improvements, at cost | $ | 73,472 | $ | 68,140 | $ | 72,836 | $ | 214,448 | ||||||||
| Buildings and improvements, at cost | 192,396 | — | — | 192,396 | ||||||||||||
| Real estate | 265,868 | 68,140 | 72,836 | 406,844 | ||||||||||||
Real estate-related intangible assets(1) | 124,017 | 5,500 | 3,258 | 132,775 | ||||||||||||
| Other assets | 1,174 | — | — | 1,174 | ||||||||||||
| Total assets | $ | 391,059 | $ | 73,640 | $ | 76,094 | $ | 540,793 | ||||||||
| Liabilities | ||||||||||||||||
Real estate-related intangible liabilities(2) | $ | 50,644 | $ | — | $ | 7,734 | $ | 58,378 | ||||||||
| Debt obligations | 227,415 | — | — | 227,415 | ||||||||||||
| Total liabilities | 278,059 | — | 7,734 | 285,793 | ||||||||||||
Purchase Price(3) | $ | 113,000 | $ | 73,640 | $ | 68,360 | $ | 255,000 | ||||||||
| (1) |
| (2) |
| For the Years Ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Pro forma revenues | $ | 25,828 | $ | 27,422 | |||
Pro forma net income (loss) (1) | (803 | ) | 5,484 | ||||
| Year | Leases with CPI Based Escalations | Leases with Fixed Escalations | Leases with Revenue Participation (1) | Total | ||||||||||||
| 2018 | $ | 4,993 | $ | 5,172 | $ | 10,032 | $ | 20,197 | ||||||||
| 2019 | 4,993 | 5,245 | 10,032 | 20,270 | ||||||||||||
| 2020 | 4,993 | 5,323 | 10,032 | 20,348 | ||||||||||||
| 2021 | 4,993 | 5,409 | 10,032 | 20,434 | ||||||||||||
| 2022 | 4,993 | 5,488 | 10,032 | 20,513 | ||||||||||||
| As of | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
| Purchase deposit | $ | 2,855 | $ | — | |||
Deferred finance costs, net(2) | 2,490 | — | |||||
| Derivative assets | 1,042 | — | |||||
Other assets(3) | 450 | 5,841 | |||||
Leasing costs, net(4) | 92 | 763 | |||||
| Deferred expenses and other assets, net | $ | 6,929 | $ | 6,604 | |||
| Accumulated amortization of deferred finance costs was |
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands)
| | | | | | |
|
| As of | ||||
|
| December 31, 2021 |
| December 31, 2020 | ||
Interest payable | | $ | 31,601 | | $ | 17,890 |
Other liabilities(1) | |
| 14,998 | |
| 6,236 |
Dividends declared and payable | |
| 9,690 | |
| 8,673 |
Operating lease liability | |
| 5,605 | |
| 5,732 |
Management fee payable | |
| 4,271 | |
| 3,402 |
Accrued expenses(2) | |
| 1,427 | |
| 1,525 |
Interest rate hedge liabilities | | | — | | | 33,215 |
Accounts payable, accrued expenses and other liabilities | | $ | 67,592 | | $ | 76,673 |
| As of | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
| Dividends declared and payable | $ | 2,728 | $ | — | |||
Accounts payable(2) | 1,347 | 779 | |||||
Accrued expenses(3) | 1,285 | 708 | |||||
| Derivative liabilities | 904 | — | |||||
| Interest payable | 660 | — | |||||
Other liabilities(4) | 621 | 89 | |||||
| Accounts payable, accrued expenses and other liabilities | $ | 7,545 | $ | 1,576 | |||
| (1) |
| As of December 31, |
| (2) | |
| As of December 31, |
53
The Company'sCompany’s outstanding debt obligations consist of the following ($ in thousands):
| | | | | | | | | | |
| | As of |
| Interest |
| Scheduled | ||||
|
| December 31, 2021 |
| December 31, 2020 |
| Rate(1) |
| Maturity Date(2) | ||
Secured credit financing: |
| |
|
| |
|
|
|
|
|
Mortgages | | $ | 1,498,113 | | $ | 1,498,113 |
| 3.99 | % | April 2027 to November 2069 |
Revolver(3) | |
| — | |
| 215,000 |
| N/A | | N/A |
Total secured credit financing(4) | |
| 1,498,113 | |
| 1,713,113 |
|
|
|
|
Unsecured financing: | | | | | | | | | | |
Unsecured Revolver | | | 490,000 | | | — | | LIBOR plus 1.00 | % | March 2026 |
2.80% senior notes | | | 400,000 | | | — | | 2.80 | % | June 2031 |
2.85% senior notes | | | 350,000 | | | — | | 2.85 | % | January 2032 |
Total unsecured financing | | | 1,240,000 | | | — | | | | |
Total debt obligations | |
| 2,738,113 | |
| 1,713,113 |
|
|
|
|
Debt premium, discount and deferred financing costs, net | |
| (40,610) | |
| (28,387) |
|
|
|
|
Total debt obligations, net | | $ | 2,697,503 | | $ | 1,684,726 |
|
|
|
|
| As of | Stated Interest Rate | Scheduled Maturity Date(2) | |||||||||
| December 31, 2017 | December 31, 2016 | ||||||||||
| Secured credit financing: | |||||||||||
2017 Secured Financing(1) | $ | 227,000 | $ | — | 3.795% | April 2027 | |||||
2017 Hollywood Mortgage(3) | 71,000 | — | LIBOR plus 1.33% | January 2023 | |||||||
2017 Revolver(3) | 10,000 | — | LIBOR plus 1.35% | June 2022 | |||||||
| Total secured credit financing | 308,000 | — | |||||||||
| Total debt obligations | 308,000 | — | |||||||||
Debt premium and deferred financing costs, net(1) | (926 | ) | — | ||||||||
| Total debt obligations, net | $ | 307,074 | $ | — | |||||||
| (1) |
| (2) | Represents the extended maturity |
| (3) |
| (4) | As of December 31, |
Mortgages—In March 2017,Mortgages consist of asset specific non-recourse borrowings that are secured by the Company entered into a $227.0 million non-recourse secured financing transaction (the "2017 Secured Financing") that bearsCompany’s Ground Leases. As of December 31, 2021, the Company’s mortgages are full term interest only, bear interest at a fixedweighted average interest rate of 3.795%3.99% and matures inhave maturities between April 2027. The 2017 Secured Financing was collateralized by2027 and November 2069. In July 2019, the Initial Portfolio including sevenCompany refinanced 2 mortgages on existing Ground Leases and one master lease (coveringincurred $2.0 million in losses on early extinguishment of debt.
Unsecured Revolver— In March 2021, the accounts of five properties). In connection withOperating Partnership (as borrower) and prior to the closing of the 2017 Secured Financing, the Company (as guarantor), entered into a $200 million notional rate lock swap, reducing the effective rate of the 2017 Secured Financing from 3.795% to 3.773% (refer to Note 3).
Unsecured Notes—In May 2021, the closing date of June 27, 2017. The 2017 Revolver will allowOperating Partnership (as issuer) and the Company to leverage Ground Leases up to 67%. The 2017 Revolver provides an accordion feature to increase, subject to certain conditions, the maximum availability up to $500.0 million. The Company incurred $3.0(as guarantor), issued $400.0 million aggregate principal amount of lender and third-party fees, all of which were capitalized in "Deferred expenses and other assets, net" on the Company's consolidated balance sheet.
54
In November 2021, the Operating Partnership (as issuer) and the Company (as guarantor), matures inissued $350.0 million aggregate principal amount of 2.85% senior notes due January 2023 and is callable without pre-payment penalty beginning in January 2021.2032 (the “2.85% Notes”). The 2.85% Notes were issued at 99.123% of par. The Company incurred $1.3 millionmay redeem the 2.85% Notes in whole at any time or in part from time to time prior to October 15, 2031, at the Company’s option and sole discretion, at a redemption price equal to the greater of: (i) 100% of lenderthe principal amount of the 2.85% Notes being redeemed; and third-party fees, all(ii) a make-whole premium calculated in accordance with the indenture, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date. If the 2.85% Notes are redeemed on or after October 15, 2031, the redemption price will be equal to 100% of which were capitalized in "Debt obligations, net" on the Company's consolidated balance sheet.
Debt Covenants
—The Company is subject to financial covenants under theFuture Scheduled Maturities
—As of December 31,
| | | | | | | | | |
| | Secured | | Unsecured | | Total | |||
2022 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
2023 | | | 0 | | | 0 |
| | 0 |
2024 | |
| 0 | |
| 0 | |
| 0 |
2025 | |
| 0 | |
| 0 | |
| 0 |
2026 | |
| 0 | |
| 490,000 | |
| 490,000 |
Thereafter(1) | |
| 1,498,113 | |
| 750,000 | |
| 2,248,113 |
Total principal maturities | |
| 1,498,113 | |
| 1,240,000 | |
| 2,738,113 |
Debt premium, discount and deferred financing costs, net | |
| (27,744) | |
| (12,866) | |
| (40,610) |
Total debt obligations, net | | $ | 1,470,369 | | $ | 1,227,134 | | $ | 2,697,503 |
| 2017 Secured Financing | 2017 Hollywood Mortgage | 2017 Revolver | Total | ||||||||||||
| 2018 | $ | — | $ | — | $ | — | $ | — | |||||||
| 2019 | — | — | — | — | |||||||||||
| 2020 | — | — | — | — | |||||||||||
| 2021 | — | — | — | — | |||||||||||
| 2022 | — | — | 10,000 | 10,000 | |||||||||||
| Thereafter | 227,000 | 71,000 | — | 298,000 | |||||||||||
| Total principal maturities | 227,000 | 71,000 | 10,000 | 308,000 | |||||||||||
| Debt premium and deferred financing costs, net | (926 | ) | |||||||||||||
| Total debt obligations, net | $ | 307,074 | |||||||||||||
| (1) | As of December 31, 2021, the Company’s weighted average maturity for its secured mortgages was 29.5 years. |
Note 7—9—Commitments and Contingencies
Unfunded Commitments
—The Company also has unfunded forward commitments related to agreements that it entered into a purchase agreement to acquire land subject to afor the acquisition of Ground Lease on November 1, 2020 from iStar for $34.0 millionLeases if certain conditions are met (refer to Note 4)13).
Legal Proceedings
—The Company evaluates developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, 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
Note 8—10—Risk Management
In the normal course of its ongoing business operations, the Company encounters credit risk. Credit risk is the risk of default on the Company’s leases that result from a tenant’s inability or unwillingness to make contractually required payments.
Risk concentrations
—Concentrations of credit risks arise when the Company has multiple leases with a particular tenant or credit party, or a number of the Company’s tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features, such that their ability to meet contractual obligations, including those to the Company, could be similarly affected by changes in economic conditions.Although the Company’s real estate assetsGround Leases are geographically diverse and the tenants operate in a variety of industries and property types, to the extent the Company has a significant concentration of ground and otherinterest income from sales-type leases or operating lease income from any tenant, the inability of that tenant to make its payment could have a material adverse effect on the Company. The Company did not have a significant concentration of operating lease income from any tenant for the periods presented.
Derivative instruments and hedging activity—The Company’s use of derivative financial instruments has been associated with debt issuances and primarily limited to the utilization of interest rate swaps and interest rate caps to manage interest rate risk exposure. The Company does not enter into derivatives for trading purposes.
The Company recognizes derivatives as either assets or liabilities on the Company’s consolidated balance sheets at fair value. Interest rate hedge assets are recorded in "Deferred expenses and other assets, net" and interest rate hedge liabilities are recorded in "Accounts payable, accrued expenses and other liabilities" on the Company’s consolidated balance sheets. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability, a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.
For the Company’s derivatives designated and qualifying as cash flow hedges, changes in the fair value of the derivatives are reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt.
For the Company’s derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in "Interest expense" in the Company’s consolidated statements of operations. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements.
56
The table below presents the Company’s derivatives as well as their classification on the consolidated balance sheets as of December 31, 2021 and 2020 ($ in thousands):(1)
| | | | | | | | |
| | December 31, 2021 |
| December 31, 2020 |
| | ||
| | Fair | | Fair | | Balance Sheet | ||
Derivative Type |
| Value(2) | | Value(2) |
| Location | ||
Liabilities | |
|
| |
|
|
|
|
Interest rate swaps(3) | | $ | — | | $ | 33,215 |
| Accounts payable, accrued expenses and other liabilities |
Total | | $ | — | | $ | 33,215 | | |
| (1) | During the years ended December 31, 2021, 2020 and 2019, the Company recorded $13.3 million, ($20.0) million and ($32.5) million, respectively, of unrealized gains (losses) in accumulated other comprehensive income (loss). |
| (2) | The fair value of the Company’s derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2 within the fair value hierarchy. Over the next 12 months, the Company expects that $4.1 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive income (loss)" as an increase to interest expense. |
| (3) | During the year ended December 31, 2021, the Company terminated its remaining interest rate hedges for $19.9 million. |
Credit Risk-Related Contingent Features—The Company reports derivative instruments on a gross basis in its consolidated financial statements. The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In connection with its interest rate derivatives which were in a liability position as of December 31, 2020, the Company posted collateral of $35.5 million, which is included in "Restricted cash" on the Company’s consolidated balance sheets. As of December 31, 2020, the Company would not have been required to post any additional collateral to settle these contracts had the Company been declared in default on its derivative obligations.
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019 ($ in thousands):
| | | | | | | | |
| | | | Amount of Gain | | Amount of Gain | ||
| | | | (Loss) Recognized in | | (Loss) Reclassified | ||
| | Location of Gain (Loss) | | Accumulated Other | | from Accumulated | ||
| | When Recognized | | Comprehensive | | Other Comprehensive | ||
Derivatives Designated in Hedging Relationships |
| in Income |
| Income |
| Income into Earnings | ||
For the Year Ended December 31, 2021 |
|
|
| |
|
| |
|
Interest rate swaps |
| Interest expense | | $ | 13,290 | | $ | (3,191) |
| | | | | | | | |
For the Year Ended December 31, 2020 |
|
| |
|
| |
|
|
Interest rate swaps |
| Interest expense | | $ | (20,018) | | $ | (1,680) |
| | | | | | | | |
For the Year Ended December 31, 2019 |
|
| |
|
| |
|
|
Interest rate swaps |
| Interest expense | | $ | (32,518) | | $ | (271) |
| | | | | |
| | | | Amount of Gain | |
| | Location of Gain or | | or (Loss) | |
| | (Loss) Recognized in | | Recognized in | |
Derivatives not Designated in Hedging Relationships | Income | Income | |||
For the Year Ended December 31, 2019 | | ||||
Interest rate cap | Interest expense | | $ | (4) | |
Note 11—Equity
Common Stock—The Company has 1 class of common stock outstanding. During the year ended December 31, 2017, the Company’s two largest tenants accounted for approximately $10.4 million and $5.3 million, or 45% and 23%, respectively, of the Company’s revenues.
| Event | Date | Owner | # of shares | Price paid Per Share | |||||||
| Initial capitalization | April 14, 2017 | Third parties | 2,875,000 | $ | 20.00 | ||||||
| Initial capitalization | April 14, 2017 | iStar | 2,775,000 | 20.00 | |||||||
| Initial public offering | June 27, 2017 | Third parties | 10,250,000 | 20.00 | |||||||
| Concurrent iStar placement | June 27, 2017 | iStar | 2,250,000 | 20.00 | |||||||
| Issuance of shares to directors | June 27, 2017 | Directors | 40,000 | — | |||||||
| Shares outstanding at June 27, 2017 | 18,190,000 | ||||||||||
57
cost of $18.85$72.96 per share, pursuant to two 10b5-1 plans (the “10b5-1 Plans") in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which it could buy shares of the Company'sCompany’s common stock in the open market. In addition, in the fourth quarter of 2021 iStar purchased 24,108 shares of the Company’s common stock for $1.8 million in an open market uptransaction. iStar has also purchased shares of the Company’s common stock through private placements with the Company in connection with the Company’s public offerings. In September 2021, the Company sold 2,530,000 shares of its common stock in a public offering for gross proceeds of $192.3 million. Concurrently with the public offering, the Company sold $50.0 million in shares, or 657,894 shares, of its common stock to an ownership limitiStar in a private placement. The Company incurred approximately $8.0 million of 39.9%.offering costs in connection with these transactions which were recorded as a reduction to additional paid-in capital. As of December 31, 2017,2021, iStar owned 37.6%64.6% of the Company'sCompany’s common stock. Subsequentstock; however, its discretionary voting power is limited to December 31, 2017, iStar utilized41.9% as a result of limitations on its voting power contained in a stockholder’s agreement entered into in connection with its purchase of newly designated limited partnership units (the “Investor Units”) in January 2019. In May 2019, after approval of the remaining availability under its 10b5-1 Plans and purchased an additional 0.4 millionCompany’s shareholders, the Investor Units were exchanged for shares of the Company'sCompany’s common stock for $7.6 million,on a one-for-one basis.
In February 2021, the Company and its affiliates, entered into an at-the-market equity offering (the “ATM”) pursuant to which the Company may sell shares of its common stock up to an aggregate purchase price of $250.0 million. Through December 31, 2021, the Company sold 12,881 shares at an average costnet price of $17.92$81.45 per share.share, paid $15,977 of offering costs and raised $1.0 million of net proceeds pursuant to the ATM. Proceeds from the ATM were used for general corporate purposes. As of February 15,December 31, 2021, the Company had $248.9 million of aggregate purchase price remaining under its ATM.
Equity Plans—During the third quarter 2018, iStar owned 39.9%the Company adopted an equity incentive plan providing for grants of interests (called “Caret Units”) in a subsidiary of the Company'sOperating Partnership intended to constitute profits interests within the meaning of relevant Internal Revenue Service guidance. The Company’s shareholders approved the plan in the second quarter of 2019. Grants under the plan are subject to graduated vesting based on time and hurdles of the Company’s common stock.
In August 2021, in order to $0.5 millionensure that the interests of the non-management directors are best aligned with the interests of the Company’s common shareholders, each of the non-management directors (or, in the aggregatecase of 2 directors, their affiliated trusts to which the Caret Units had been issued) entered into agreements to exchange their Caret Units that were granted at the time of plan adoption into shares of the Company’s common stock. Effective December 1, 2021, each non-management director (or, in the case of 2 directors, their affiliated trusts to which the Caret Units had been issued) exchanged 3,750 Caret Units for 2,546 shares of the Company’s common stock. The Company’s board of directors approved the exchanges having considered the report of a leading independent valuation firm.
The Company adopted the 2017 Equity Incentive Plan to provide equity incentive opportunities to members of the Manager’s management team and employees who perform services for the Company, the Company’s non-management directors, advisers, consultants and other personnel. The 2017 Equity Incentive Plan provides for grants of stock options, shares of restricted common stock, phantom shares, dividend equivalent rights and other equity-based awards, including
58
long-term incentive plan units. In the second quarter 2019, the Company issued 40,000 fully-vested shares under the 2017 Equity Incentive Plan at $27.19 per share to its directors who are not employees of the Manager or iStar in consideration for their annual services as directors with an aggregate grant date fair value of $1.1 million. In the second quarter 2020, the Company issued 22,000 fully-vested shares with a fair value of $1.0 million, or $46.94 per share, to its directors who are not employees of the Manager or iStar in consideration for their annual services as directors. In the second quarter of 2021, the Company issued 16,000 fully-vested shares with a fair value of $1.1 million, or $69.86 per share, to its directors who are not employees of the Manager or iStar in consideration for their annual services as directors. In the first quarter 2019, the Company granted 25,000 restricted stock units with a fair value of $0.5 million, or $19.15 per share, under the 2017 Equity Incentive Plan to an employee of the Manager, representing the right to receive 25,000 shares. The restricted stock units vested in January 2022. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the restricted stock units vest and are settled. As of December 31, 2021, an aggregate of 724,500 shares remain available for issuance pursuant to future awards under the 2017 Equity Incentive Plan. During the trusts established by Jay Sugarman,years ended December 31, 2021, 2020 and 2019, the Company's ChairmanCompany recognized $1.3 million, $1.2 million and Chief Executive Officer,$1.2 million, respectively, in stock-based compensation expense related to the 2017 Equity Incentive Plan, which is classified within "General and Geoffrey Jervis,administrative" in the Company's Chief Operating OfficerCompany’s consolidated statements of operations.
Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) consists of net unrealized gains (losses) on the Company’s derivative transactions.
Noncontrolling Interests—Noncontrolling interests includes unrelated third-party equity interests in ventures that are consolidated in the Company’s consolidated financial statements and Chief Financial Officer, had utilized allCaret Units that have been granted to employees of the availability authorized in the 10b5-1 Plan.
Dividends
—The Company
EPS is calculated by dividing net income (loss) attributable to common stockholdersshareholders by the weighted average number of shares outstanding for the period. The following table presentstables present a reconciliation of net income (loss) from operations used in the basic and diluted EPS calculations ($ in thousands, except for per share data)
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Net income | | $ | 73,357 | | $ | 59,488 | | $ | 33,728 |
Net income attributable to noncontrolling interests | |
| (234) | |
| (194) | |
| (6,035) |
Net income attributable to Safehold Inc. common shareholders for basic and diluted earnings per common share | | $ | 73,123 | | $ | 59,294 | | $ | 27,693 |
59
| | | | | | | | | |
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Earnings attributable to common shares: |
| |
|
| |
|
| |
|
Numerator for basic and diluted earnings per share: | �� | |
|
| |
|
| |
|
Net income attributable to Safehold Inc. common shareholders - basic | | $ | 73,123 | | $ | 59,294 | | $ | 27,693 |
Net income attributable to Safehold Inc. common shareholders - diluted | | $ | 73,123 | | $ | 59,294 | | $ | 27,693 |
| | | | | | | | | |
Denominator for basic and diluted earnings per share: | |
|
| |
|
| |
|
|
Weighted average common shares outstanding for basic earnings per common share | |
| 54,167 | |
| 50,688 | |
| 31,008 |
Add: Effect of assumed shares under treasury stock method for restricted stock units | |
| 13 | |
| 9 | |
| 0 |
Weighted average common shares outstanding for diluted earnings per common share(1) | |
| 54,180 | |
| 50,697 | |
| 31,008 |
| | | | | | | | | |
Basic and diluted earnings per common share: | |
|
| |
|
| |
|
|
Net income attributable to Safehold Inc. common shareholders - basic | | $ | 1.35 | | $ | 1.17 | | $ | 0.89 |
Net income attributable to Safehold Inc. common shareholders - diluted | | $ | 1.35 | | $ | 1.17 | | $ | 0.89 |
| For the Period from April 14, 2017 to December 31, 2017 | ||||
| Income (loss) from operations | $ | (3,669 | ) | |
| Income (loss) from operations attributable and allocable to common shareholders for basic and diluted earnings per common share | $ | (3,669 | ) | |
| (1) |
| For the Period from April 14, 2017 to December 31, 2017 | ||||
| Earnings allocable to common shares: | ||||
| Numerator for basic and diluted earnings per share: | ||||
| Income (loss) from operations attributable to Safety, Income & Growth Inc. and allocable to common shareholders | $ | (3,669 | ) | |
| Net income (loss) | $ | (3,669 | ) | |
| Denominator for basic and diluted earnings per share: | ||||
| Weighted average common shares outstanding for basic and diluted earnings per common share | 14,648 | |||
| Basic and diluted earnings per common share: | ||||
| Net income (loss) attributable to Safety, Income & Growth Inc. and allocable to common shareholders | $ | (0.25 | ) | |
Note 11—13—Related Party Transactions
The Company is externally managed by an affiliate of iStar, the Company'sCompany’s largest shareholder. Although the Manager was recently formed, iStar has been an active real estate investor for over 20 years and has executed transactions with an aggregate value in excess of $35.0over $40.0 billion. iStar has an extensive network for sourcing investments, which includes relationships with brokers, corporate tenants and developers that it has established over its long operating history. As
60
A summary of the terms of the management agreement is below:
| |
Manager | |
SFTY Manager, LLC, a wholly-owned subsidiary of iStar Inc. | |
Management Fee | Annual fee of |
Management Fee Consideration | At the discretion of the Company’s independent directors, payment will be made |
Lock-up | Restriction from selling common stock received for management fees for |
Incentive Fee | NaN |
Term | Non-terminable through June 30, 2023, except for cause. Automatic annual renewals thereafter, subject to non-renewal upon certain findings by the Company’s independent directors and payment of termination fee. |
Termination Fee | 3x prior year’s management fee |
During the period from April 14, 2017 toyears ended December 31, 2017,2021, 2020 and 2019, the Company recorded $2.0$14.9 million, $12.7 million and $7.5 million, respectively, in management fees to the Manager. These management fees are recorded in "General and administrative expenses"administrative" in the Company'sCompany’s consolidated statements of operations. The management fees were not actually paid to the Manager because no management fees are payable during the first year of the agreement. The fees were accounted for as a non-cash capital contribution from iStar despite iStar not receiving any compensation for its services.
Expense Reimbursements
The Company pays, or reimburses the Manager for, allcertain of the Company'sCompany’s operating expenses as well as the costs of personnel performing certain legal, accounting, finance, due diligence tasks and other services, in each case except those specifically required to be borne or elected not to be charged by the Manager under the management agreement. In addition, because
During the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that third-party professionals or consultants otherwise would perform, the Manager is reimbursed, in cash or in shares of the Company's common stock, for the documented cost of performing such tasks.
Acquisitions and Commitments
iStar has participated in certain of the Company’s investment transactions, as the Company’s tenant or either as a seller of land or by providing financing to the Company’s Ground Lease tenants. Following is a list of transactions in which the Company and iStar have participated for the periods presented. These transactions were approved by the Company’s independent directors in accordance with the provisions of the management agreement, the expenses were waived by the Manager and, accordingly, were accounted for asCompany’s policy with respect to transactions in which iStar is also a non-cash capital contribution from iStar despite iStar not receiving any reimbursement for these allocated expenses.
| For the Quarter Ended December 31, | For the Quarter Ended September 30, | For the Period from April 14 to June 30, | For the Period from April 1 to April 13, | For the Quarter Ended March 31, | ||||||||||||||||
| The Company | Predecessor | |||||||||||||||||||
| 2017: | ||||||||||||||||||||
| Revenue | $ | 6,750 | $ | 6,256 | $ | 4,204 | $ | 691 | $ | 5,333 | ||||||||||
| Net income (loss) | $ | (1,344 | ) | $ | (721 | ) | $ | (1,604 | ) | $ | 54 | $ | 1,792 | |||||||
Earnings per common share data(1): | ||||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||
| Basic and diluted | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.25 | ) | N/A | N/A | |||||||||
| Weighted average number of common shares | ||||||||||||||||||||
| Basic and diluted | 18,190 | 18,190 | 6,293 | N/A | N/A | |||||||||||||||
| For the Quarters Ended | ||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | |||||||||||||||||
| Predecessor | ||||||||||||||||||||
| 2016: | ||||||||||||||||||||
| Revenue | $ | 7,706 | $ | 4,772 | $ | 4,672 | $ | 4,593 | ||||||||||||
| Net income (loss) | $ | 3,699 | $ | 949 | $ | 1,053 | $ | 914 | ||||||||||||
Earnings per common share data(1): | ||||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||
| Basic and diluted | N/A | N/A | N/A | N/A | ||||||||||||||||
| Weighted average number of common shares | ||||||||||||||||||||
| Basic and diluted | N/A | N/A | N/A | N/A | ||||||||||||||||
61
In November 2021, the Company entered into an agreement pursuant to which it would acquire land and a related Ground Lease originated by iStar when certain construction related conditions are met by a specified time period. The purchase price to be paid is $33.3 million, plus an amount necessary for iStar to achieve the greater of a 1.25x multiple or a 12% return on its investment. In addition, the Ground Lease documents contain future funding obligations to the Ground Lease tenant of approximately $51.8 million of leasehold improvement allowance upon achievement of certain milestones. In December 2021, iStar contributed the Ground Lease to an investment fund it formed that targets the origination and acquisition of Onyx on First (the “Property”). The Property isGround Leases for commercial real estate projects that are in a multifamily building locatedpre-development phase. iStar has a noncontrolling interest in the Navy Yards neighborhoodinvestment fund. The terms of Washington, D.C., just one block awaythe Company’s commitment under the agreement did not change upon iStar’s contribution of the Ground Lease to the investment fund. There can be no assurance that the conditions to closing will be satisfied and that the Company will acquire the Ground Lease from the Navy Yards metro station.investment fund.
In June 2021, the Company acquired from iStar a purchase option agreement for $1.2 million, which amount was equal to the deposit previously made by iStar under such option agreement plus assumption of iStar’s out of pocket costs and expenses in connection with entering into such option agreement. Under the option agreement, the Company has the right to acquire for $215.0 million a property that is under a separate option for the benefit of a third party, whereby such third party has the right to enter into a Ground Lease and develop approximately 1.1 million square feet of office space.
In June 2021, the Company entered into 2 agreements pursuant to each of which it would acquire land and a related Ground Lease originated by iStar 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 iStar 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 the Company upon acquisition. There can be no assurance that the conditions to closing will be satisfied and that the Company will acquire the properties and Ground Leases from iStar.
In March 2021, the Company entered into an agreement pursuant to which, subject to certain conditions being met, it would acquire 100% of the limited liability company interests in the owner of a fee estate subject to a Ground Lease on which a multi-family project is currently being constructed. In March 2021, iStar originated a $75.0 million construction loan commitment to the Ground Lease tenant and acquired the Ground Lease for $16.1 million. iStar subsequently sold the loan commitment to an entity in which it has a noncontrolling interest. The Ground Lease documents contained 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. Subsequent to the origination, iStar funded approximately $6.0 million of the deferred purchase price to the Ground Lease tenant. The Company’s acquisition of the ground lessor entity closed in September 2021. The total consideration paid was $24.8 million and the Company assumed the obligation for the remaining future funding obligations to the Ground Lease tenant.
In February 2021, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant’s recapitalization of an existing hotel property. iStar provided a $50.0 million loan to the Company’s Ground Lease tenant for the recapitalization of the leasehold. The Company paid iStar $1.9 million of additional consideration in connection with this investment.
In October 2020, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant’s recapitalization of an existing multi-family property. iStar provided a $22.5 million loan to the Company’s Ground Lease tenant for the recapitalization of the leasehold. The Company paid iStar $2.3 million of additional consideration in connection with this investment.
In September 2020, the Company closed on the acquisition of a Ground Lease pursuant to a purchase agreement that it entered into with iStar in October 2017 to acquire land subject to a Ground Lease on which a luxury multi-family project is currently being constructed for a purchase price of $34.0 million. iStar committed to provide a $80.5 million construction loan to the ground lessee.
In June 2020, the Company acquired the fee interest in an office condominium and simultaneously structured and entered into a Ground Lease with the condominium’s tenant. The tenant simultaneously acquired the leasehold interest in
62
the office condominium. The Ground Lease has a term of 99 years. The tenant was a venture in which iStar owned a 51.9% equity interest. In the fourth quarter 2021, iStar acquired an additional 47.5% equity interest in the venture.
Note 14—Subsequent Events
Subsequent to December 31, 2021, the Operating Partnership signed a definitive master note purchase agreement providing for a private placement of $475 million aggregate principal amount of its 3.980% senior notes due February 15, 2052 (the “3.980% Notes”). The Operating Partnership can elect to draw on these funds on up to 2 occasions through April 18, 2022 subject to customary conditions to closing. The 3.980% Notes will be fully and unconditionally guaranteed by the Company.
Subsequent to December 31, 2021, the Company sold 108,571 Caret Units and received a binding commitment for the purchase of 28,571 Caret Units for $24.0 million to third-party investors. As part of the sale, the Company is obligated to seek to provide a public market listing for the Caret Units, or securities into which they may be exchanged, within two years. If the Company is unable to provide public market liquidity within two years at a value in excess of the new investor’s basis, the investors have the right to cause the Company to redeem their Caret Units at their original purchase price.
Subsequent to December 31,2021, certain subsidiaries of, and entities managed by, iStar entered into a definitive purchase and sale agreement to sell a portfolio of net lease properties owned and managed by such subsidiaries and entities to a third party for an aggregate gross purchase price of approximately $3.07 billion, subject to final purchase price adjustments. As part of the transaction, the buyer intends to sell 3 of the properties to the Company for $122.0 million and enter into 3 Ground Leases with the Company. Closing of the transaction is subject to customary closing conditions. The Company expects the transaction to close in the first of quarter 2022; however, there can be no assurance that the transaction will occur in the expected timeframe or at all.
63
As of December 31, 2017
($ in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Cost | | Gross Amount Carried | | | | | | | | | ||||||||
| | | | | Initial Cost to Company | | Capitalized | | at Close of Period | | | | | | | Depreciable | | ||||||||||||
| | | | | | | | Building and |
| Subsequent to | | | | | Building and | | | | | Accumulated | | Date |
| Life | | ||||
Location |
| Encumbrances |
| Land |
| Improvements |
| Acquisition |
| Land |
| Improvements |
| Total(1) |
| Depreciation |
| Acquired |
| (Years) | | ||||||||
Detroit, MI | | $ | 31,961 | (2) | $ | 29,086 | | $ | 0 | | $ | 0 | | $ | 29,086 | | $ | 0 | | $ | 29,086 | | $ | 0 |
| 2017 |
| N/A |
|
Dallas, TX | |
| 3,736 | (2) |
| 1,954 | |
| 0 | |
| 0 | |
| 1,954 | |
| 0 | |
| 1,954 | |
| 0 |
| 2017 |
| N/A |
|
Dallas, TX | |
| 4,151 | (2) |
| 2,751 | |
| 0 | |
| 0 | |
| 2,751 | |
| 0 | |
| 2,751 | |
| 0 |
| 2017 |
| N/A |
|
Atlanta, GA | |
| 7,577 | (2) |
| 4,097 | |
| 0 | |
| 0 | |
| 4,097 | |
| 0 | |
| 4,097 | |
| 0 |
| 2017 |
| N/A |
|
Milwaukee, WI | |
| 3,633 | (2) |
| 4,638 | |
| 51,323 | |
| 0 | |
| 4,638 | |
| 51,323 | |
| 55,961 | |
| 6,085 |
| 2017 |
| 40 | (3) |
Washington, DC | |
| 5,190 | (2) |
| 1,484 | |
| 0 | |
| 0 | |
| 1,484 | |
| 0 | |
| 1,484 | |
| 0 |
| 2017 |
| N/A |
|
Minneapolis, MN | |
| 1,452 | (2) |
| 716 | |
| 0 | |
| 0 | |
| 716 | |
| 0 | |
| 716 | |
| 0 |
| 2017 |
| N/A |
|
Durango, CO | |
| 16,604 | (2) |
| 1,415 | |
| 17,080 | |
| 0 | |
| 1,415 | |
| 17,080 | |
| 18,495 | |
| 2,574 |
| 2017 |
| 35 | (3) |
Rohnert Park, CA | |
| 19,300 | (2) |
| 5,869 | |
| 13,752 | |
| 0 | |
| 5,869 | |
| 13,752 | |
| 19,621 | |
| 2,574 |
| 2017 |
| 32 | (3) |
Salt Lake City, UT | |
| 55,312 | (2) |
| 8,573 | |
| 40,583 | |
| 0 | |
| 8,573 | |
| 40,583 | |
| 49,156 | |
| 5,632 |
| 2017 |
| 34 | (3) |
San Diego, CA | |
| 38,084 | (2) |
| 5,077 | |
| 24,096 | |
| 0 | |
| 5,077 | |
| 24,096 | |
| 29,173 | |
| 3,533 |
| 2017 |
| 33 | (3) |
Seattle, WA | |
| 40,000 | (2) |
| 7,813 | |
| 45,562 | |
| 0 | |
| 7,813 | |
| 45,562 | |
| 53,375 | |
| 7,872 |
| 2017 |
| 30 | (3) |
Los Angeles, CA | |
| 57,936 | (2) |
| 72,836 | |
| 0 | |
| 0 | |
| 72,836 | |
| 0 | |
| 72,836 | |
| 0 |
| 2017 |
| N/A |
|
Los Angeles, CA | |
| 62,764 | (2) |
| 68,140 | |
| 0 | |
| 0 | |
| 68,140 | |
| 0 | |
| 68,140 | |
| 0 |
| 2017 |
| N/A |
|
Atlanta, GA | |
| 0 | |
| 6,300 | |
| 0 | |
| 0 | |
| 6,300 | |
| 0 | |
| 6,300 | |
| 0 |
| 2017 |
| N/A |
|
Washington, DC | |
| 23,100 | (2) |
| 27,354 | |
| 0 | |
| 0 | |
| 27,354 | |
| 0 | |
| 27,354 | |
| 0 |
| 2018 |
| N/A |
|
Orlando, FL | |
| 7,800 | (2) |
| 6,626 | |
| 0 | |
| 0 | |
| 6,626 | |
| 0 | |
| 6,626 | |
| 0 |
| 2018 |
| N/A |
|
Raleigh-Durham, NC | |
| 11,940 | (2) |
| 4,502 | |
| 0 | |
| 0 | |
| 4,502 | |
| 0 | |
| 4,502 | |
| 0 |
| 2018 |
| N/A |
|
Atlanta, GA | |
| 9,882 | (2) |
| 8,478 | |
| 0 | |
| 0 | |
| 8,478 | |
| 0 | |
| 8,478 | |
| 0 |
| 2018 |
| N/A |
|
San Diego, CA | |
| 0 | |
| 8,168 | |
| 0 | |
| 0 | |
| 8,168 | |
| 0 | |
| 8,168 | |
| 0 |
| 2018 |
| N/A |
|
Washington, DC | |
| 10,000 | (2) |
| 15,217 | |
| 0 | |
| 0 | |
| 15,217 | |
| 0 | |
| 15,217 | |
| 0 |
| 2018 |
| N/A |
|
Phoenix, AZ | |
| 0 | |
| 5,996 | |
| 0 | |
| 0 | |
| 5,996 | |
| 0 | |
| 5,996 | |
| 0 |
| 2018 |
| N/A |
|
Washington, DC | |
| 0 | |
| 21,478 | |
| 0 | |
| 0 | |
| 21,478 | |
| 0 | |
| 21,478 | |
| 0 |
| 2018 |
| N/A |
|
Miami, FL | |
| 6,000 | (2) |
| 9,170 | |
| 0 | |
| 0 | |
| 9,170 | |
| 0 | |
| 9,170 | |
| 0 |
| 2018 |
| N/A |
|
Miami, FL | |
| 2,471 | (2) |
| 3,735 | |
| 0 | |
| 0 | |
| 3,735 | |
| 0 | |
| 3,735 | |
| 0 |
| 2018 |
| N/A |
|
Washington, DC | |
| 95,000 | (2) |
| 121,100 | |
| 0 | |
| 0 | |
| 121,100 | |
| 0 | |
| 121,100 | |
| 0 |
| 2018 |
| N/A |
|
Nashville, TN | |
| 17,500 | (2) |
| 13,505 | |
| 0 | |
| 0 | |
| 13,505 | |
| 0 | |
| 13,505 | |
| 0 |
| 2018 |
| N/A |
|
Portland, OR | |
| 0 | — |
| 3,641 | |
| 0 | |
| 0 | |
| 3,641 | |
| 0 | |
| 3,641 | |
| 0 |
| 2019 |
| N/A |
|
San Antonio, TX | |
| 10,000 | (2) |
| 2,103 | |
| 836 | |
| 0 | |
| 2,103 | |
| 836 | |
| 2,939 | |
| 73 |
| 2019 |
| 40 |
|
Riverside, CA | |
| 0 | |
| 11,399 | |
| 0 | |
| 0 | |
| 11,399 | |
| — | |
| 11,399 | |
| 0 |
| 2019 |
| N/A |
|
San Ramon, CA | |
| 0 | |
| 19,635 | |
| 0 | |
| 0 | |
| 19,635 | |
| 0 | |
| 19,635 | |
| 0 |
| 2020 |
| N/A |
|
Washington, DC | |
| 0 | |
| 44,883 | |
| 0 | |
| 0 | |
| 44,883 | |
| 0 | |
| 44,883 | |
| 0 |
| 2020 |
| N/A |
|
Total | | $ | 541,393 | | $ | 547,739 | | $ | 193,232 | | $ | 0 | | $ | 547,739 | | $ | 193,232 | | $ | 740,971 | | $ | 28,343 |
|
|
|
|
|
| Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | Gross Amount Carried at Close of Period | |||||||||||||||||||||||||||||||||||
| Location | Encumbrances | Land | Building and Improvements | Land | Building and Improvements | Total(1) | Accumulated Depreciation | Date Acquired | Depreciable Life (Years) | ||||||||||||||||||||||||||||
| Detroit, MI | $ | 31,961 | (2) | $ | 29,086 | $ | — | $ | — | $ | 29,086 | $ | — | $ | 29,086 | $ | — | 2017 | N/A | ||||||||||||||||||
| Dallas, TX | 3,736 | (2) | 1,954 | — | — | 1,954 | — | 1,954 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Dallas, TX | 4,151 | (2) | 2,751 | — | — | 2,751 | — | 2,751 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Atlanta, GA | 7,577 | (2) | 4,097 | — | — | 4,097 | — | 4,097 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Milwaukee, WI | 3,633 | (2) | 4,638 | 51,323 | — | 4,638 | 51,323 | 55,961 | 916 | 2017 | 40 | (3) | |||||||||||||||||||||||||
| Washington, DC | 5,190 | (2) | 1,484 | — | — | 1,484 | — | 1,484 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Minneapolis, MN | 1,452 | (2) | 716 | — | — | 716 | — | 716 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Durango, CO | 16,604 | (2) | 1,415 | 17,080 | — | 1,415 | 17,080 | 18,495 | 387 | 2017 | 35 | (3) | |||||||||||||||||||||||||
| Rohnert Park, CA | 19,300 | (2) | 5,869 | 13,752 | — | 5,869 | 13,752 | 19,621 | 387 | 2017 | 32 | (3) | |||||||||||||||||||||||||
| Salt Lake City, UT | 55,312 | (2) | 8,573 | 40,583 | — | 8,573 | 40,583 | 49,156 | 847 | 2017 | 34 | (3) | |||||||||||||||||||||||||
| San Diego, CA | 38,084 | (2) | 5,077 | 24,096 | — | 5,077 | 24,096 | 29,173 | 532 | 2017 | 33 | (3) | |||||||||||||||||||||||||
| Seattle, WA | 40,000 | (2) | 7,813 | 45,562 | — | 7,813 | 45,562 | 53,375 | 1,184 | 2017 | 30 | (3) | |||||||||||||||||||||||||
| Los Angeles, CA | 36,920 | (4) | 68,140 | — | — | 68,140 | — | 68,140 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Los Angeles, CA | 34,080 | (4) | 72,836 | — | — | 72,836 | — | 72,836 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Atlanta, GA | — | (5) | 6,300 | — | — | 6,300 | — | 6,300 | — | 2017 | N/A | ||||||||||||||||||||||||||
| Total | $ | 298,000 | $ | 220,749 | $ | 192,396 | $ | — | $ | 220,749 | $ | 192,396 | $ | 413,145 | $ | 4,253 | |||||||||||||||||||||
| (1) | The aggregate cost for Federal income tax purposes was approximately |
| (2) | Pledged as collateral under |
| (3) | These properties have land improvements with depreciable lives from 7 to 12 years. |
The following table reconciles real estate from April 14, 2017 to December 31, 2017, from January 1, 2017 to April 13, 2017 and for the years ended December 31, 20162021, 2020 and 2015
| April 14, 2017 to December 31, 2017 | January 1, 2017 to April 13, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||
| The Company | The Predecessor | |||||||||||||||
| Beginning balance | $ | — | $ | 165,699 | $ | 161,784 | $ | 156,410 | ||||||||
| Acquisitions | 413,145 | — | 3,915 | 5,374 | ||||||||||||
| Ending balance | $ | 413,145 | $ | 165,699 | $ | 165,699 | $ | 161,784 | ||||||||
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Beginning balance | | $ | 752,420 | | $ | 687,902 | | $ | 669,923 |
Acquisitions | |
| — | |
| 64,518 | |
| 17,979 |
Transfer to net investment in sales-type lease | | | (11,449) | | | — | | | — |
Ending balance | | $ | 740,971 | | $ | 752,420 | | $ | 687,902 |
The following table reconciles accumulated depreciation from April 14, 2017 to December 31, 2017, from January 1, 2017 to April 13, 2017 and for the years ended December 31, 20162021, 2020 and 2015
| | | | | | | | | |
| | For the Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Beginning balance | | $ | 22,314 | | $ | 16,286 | | $ | 10,257 |
Additions | |
| 6,029 | |
| 6,028 | |
| 6,029 |
Ending balance | | $ | 28,343 | | $ | 22,314 | | $ | 16,286 |
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| April 14, 2017 to December 31, 2017 | January 1, 2017 to April 13, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||
| The Company | The Predecessor | |||||||||||||||
| Beginning balance | $ | — | $ | 61,221 | $ | 58,104 | $ | 54,987 | ||||||||
| Additions | 4,253 | 894 | 3,117 | 3,117 | ||||||||||||
| Ending balance | $ | 4,253 | $ | 62,115 | $ | 61,221 | $ | 58,104 | ||||||||
Evaluation of Disclosure Controls and Procedures
—The Company has established and maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in theBased upon their evaluation as of December 31, 2017,2021, the Chief Executive Officer and the Chief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) are effective.
Management’s Report on Internal Control Over Financial Reporting
—Based on management’s assessment under the framework in Internal Control—Integrated Framework, management has concluded that its internal control over financial reporting was effective as of December 31, 2021.
The Company’s internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Controls Over Financial Reporting
—There have been no changes during the last fiscal quarter in the
Item 9B. Other Information
None.
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PART III
Portions of the Company'sCompany’s definitive proxy statement for the 20182022 annual meeting of shareholders to be filed within 120 days after the close of the Company'sCompany’s fiscal year are incorporated herein by reference.
Portions of the Company'sCompany’s definitive proxy statement for the 20182022 annual meeting of shareholders to be filed within 120 days after the close of the Company'sCompany’s fiscal year are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the Company'sCompany’s definitive proxy statement for the 20182022 annual meeting of shareholders to be filed within 120 days after the close of the Company'sCompany’s fiscal year are incorporated herein by reference.
Portions of the Company'sCompany’s definitive proxy statement for the 20182022 annual meeting of shareholders to be filed within 120 days after the close of the Company'sCompany’s fiscal year are incorporated herein by reference.
Portions of the Company'sCompany’s definitive proxy statement for the 20182022 annual meeting of shareholders to be filed within 120 days after the close of the Company'sCompany’s fiscal year are incorporated herein by reference.
PART IV
| (a) | and (c) Financial statements and schedule—see Index to Financial Statements and Schedule included in Item 8. |
| (b) | Exhibits—see index on following page. |
INDEX TO EXHIBITS
| | |
Exhibit Number | | Document Description |
1.1 | | |
3.1 | | |
3.2 | | |
3.3 | | |
4.1 | | |
4.2 | | |
4.3 | |
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4.4 | | ||
4.5 | | ||
10.1 | | ||
10.2 | | ||
10.3 | | ||
10.4 | | ||
10.5 | | ||
10.6 | | ||
10.7 | | ||
10.8 | | ||
10.9 | | ||
10.10 | | ||
10.11 | | ||
10.12 | | ||
10.13 | | ||
10.14 | | ||
10.15 | | ||
10.16 | | ||
10.17 | | ||
10.18 | | ||
10.19* | |
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10.20 | | ||
14.1 | | ||
21.1* | | ||
23.1* | | ||
31.0* | | ||
32.0* | | ||
101** | | ||
Interactive data file | |||
104 | | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | In accordance with Rule 406T of Regulation S-T, the Inline 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. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Safehold Inc. Registrant | ||
Date: | February | /s/ JAY SUGARMAN | |
| | Jay Sugarman Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) | |
| | | |
| | Safehold Inc. | |
| | Registrant | |
Date: | February 15, 2022 | /s/ BRETT ASNAS | |
| | Brett Asnas | |
| | Chief Financial Officer (principal financial | |
| | | |
Safehold Inc. Registrant | |||
Date: | February 15, 2022 | /s/ GARETT ROSENBLUM | |
| | Garett Rosenblum Chief Accounting Officer |
69
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: | February 15, 2022 | ||
/s/ JAY SUGARMAN | |||
| | Jay Sugarman Chairman of the Board of Directors Chief Executive Officer | |
| | | |
Date: | February | /s/ DEAN S. ADLER | |
| | Dean S. Adler Director | |
| | | |
Date: | February | /s/ JESSE HOM | |
| | Jesse Hom Director | |
| | | |
Date: | February 15, 2022 | /s/ ROBIN JOSEPHS | |
| | Robin Josephs Director | |
| | | |
Date: | February 15, 2022 | /s/ JAY S. NYDICK | |
| | Jay S. Nydick Director | |
| | | |
Date: | February 15, 2022 | ||
/s/ STEFAN M. SELIG | |||
| | Stefan M. Selig Director |
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