Safehold Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2023. Safehold acquires, manages and capitalizes long-term ground leases. On March 31, Safehold (Old SAFE) merged with iStar; iStar was the legal acquirer and Old SAFE the accounting acquirer. Accordingly, historical operating results primarily reflect Old SAFE, while the March 31 balance sheet includes the combined company. The merger’s effect on Q1 revenue and net income was reported as immaterial because it closed on the final day of the quarter.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $78.3 million | $60.4 million |
| Net income | $4.7 million | $24.9 million |
| Net income attributable to common shareholders | $4.7 million; $0.07 per diluted share | $24.9 million; $0.42 per diluted share |
| Operating cash flow | $(6.8) million | $24.6 million |
| Investing cash flow | $(269.9) million | $(435.2) million |
| Financing cash flow | $276.6 million | $528.3 million |
Revenue grew about 30%, while net income fell about 81%. Net margin was approximately 6.0%, versus 41.3% in Q1 2022. At March 31, total assets were $6.29 billion, debt obligations net of discounts and financing costs were $3.90 billion, and total equity was $2.18 billion. Cash and cash equivalents were $20.3 million, with $28.0 million of restricted cash. The company reported $880 million of undrawn capacity on its revolving credit facilities.
Changes versus the prior comparable period
- Interest income from sales-type leases increased $14.0 million to $57.1 million, primarily from new ground leases and additional fundings. Operating lease income rose $3.9 million to $20.9 million, including higher percentage rent, mainly from the Park Hotels Portfolio.
- Interest expense increased $15.6 million to $40.9 million, reflecting higher borrowings and interest rates. General and administrative expense rose $5.9 million to $15.1 million, including merger-related accelerated stock compensation.
- Q1 2023 included $14.1 million of other expense, primarily merger-related legal, consulting and transfer-tax costs; $18.7 million of merger expenses were recorded in total across other expense and G&A. The company reported $26.4 million of merger expenses incurred through March 31, excluding specified other non-recurring charges and the loan-loss provision.
- Operating cash flow moved from positive to negative, primarily due to merger costs, higher debt costs and a prior-year cash receipt from termination of a derivative transaction, partly offset by higher rent collections.
Liquidity, debt and capital
Debt obligations were $3.95 billion principal amount ($3.90 billion net). The balance included $1.50 billion of secured mortgages and $2.45 billion of unsecured financing, including $970 million drawn on the 2021 revolver and $100 million of trust preferred securities assumed in the merger. The company reported compliance with all financial covenants. It had $380 million undrawn on the 2021 revolver and $500 million undrawn on the 2023 revolver. Management stated it expects to meet liquidity requirements over the next 12 months and beyond. The declared quarterly common dividend was $0.177 per share.
In April 2023, the company established an at-the-market equity program for up to $300 million of common stock; it is not obligated to sell shares. It also permitted Star Holdings, subject to company consent, to sell up to 1 million shares. These potential sales could affect share count and ownership.
Outlook, risks and unusual items
- No specific earnings or investment guidance was provided. Management described plans to scale the ground-lease platform and stated that it expects to meet liquidity needs using cash, operating cash flows, financing capacity and potential equity issuance.
- Reported unfunded commitments included $238.3 million of tenant improvement allowances, $319.6 million of forward ground-lease acquisition or related commitments, and $139.8 million of performance-based commitments through the Leasehold Loan Fund; funding or closings depend on specified conditions.
- The company originated a $115 million, four-year secured loan to related-party Star Holdings at 8.00% interest, with contractual step-ups possible to 10% or 12%. It recorded a $2.3 million credit-loss provision on the loan.
- Interest-rate risk is material: the company disclosed $2.9 billion of fixed-rate and $1.1 billion of floating-rate debt. Its sensitivity analysis estimated that a 100-basis-point rate increase would reduce annual net income by $10.7 million, excluding derivatives. The filing also notes that ground-lease CPI increases are generally capped at 3.0%–3.5%, so rent adjustments may not fully track higher inflation.
- The estimated unrealized capital appreciation in the owned residual portfolio was $10.0 billion, down from $10.5 billion at year-end. This is a management estimate, not a GAAP balance-sheet measure, and the filing cautions that tenant rights and valuation assumptions may limit value realized.
- Merger-related shareholder lawsuits and demands were voluntarily dismissed without company consideration by March 16, 2023. The filing says additional claims could still arise. Management reported no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- How the reverse-acquisition accounting and the March 31 merger affect period-to-period comparability and the combined company’s future results.
- The drivers and sustainability of lower net income, negative operating cash flow, and increased interest expense.
- Availability and terms of revolving credit, covenant headroom, rate exposure, and the potential impact of the $970 million revolver balance maturing in 2026.
- Conditions, timing and potential funding needs for the company’s unfunded commitments and related-party Star Holdings loan.
- Assumptions behind the estimated residual portfolio value, credit-loss allowances, and any share issuance under the company or selling-stockholder ATM programs.