Safehold Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 13, 2024. Safehold acquires, manages and capitalizes long-term commercial ground leases. The March 31, 2023 merger with iStar was accounted for as a reverse acquisition, with Old SAFE as the accounting acquirer. Accordingly, results before the merger primarily reflect Old SAFE, while year-end balance-sheet data reflect the combined company; year-over-year comparisons are not fully like-for-like.
Key financial and operating metrics
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Total revenue | $352.6 million | $270.3 million |
| Net income (loss) | $(54.6) million; $(0.82) per share | $144.7 million; $2.17 per share |
| Operating cash flow | $15.4 million | $64.9 million |
| Investing cash flow | $(576.6) million | $(1,146.0) million |
| Financing cash flow | $559.5 million | $1,091.0 million |
| Total assets | $6.55 billion | $5.85 billion |
| Debt obligations, gross | $4.10 billion | $3.57 billion |
| Cash and cash equivalents | $18.8 million unrestricted; $28.0 million restricted | $20.1 million unrestricted; $28.3 million restricted |
- Revenue increased 30.4%. Sales-type lease interest income rose to $235.5 million from $202.3 million; operating lease income rose to $71.3 million from $66.8 million.
- Net loss included a non-cash $145.4 million full impairment of merger-related goodwill. Interest expense increased to $181.0 million from $129.0 million, and general and administrative expense rose to $68.6 million from $38.6 million. The company also recorded $2.7 million of credit-loss provision.
- Other income included $19.4 million of Star Holdings management fees and $15.2 million recognized after a forecasted permanent-debt hedge transaction did not occur. FY2023 included $18.9 million of merger expenses.
- Interest income from sales-type leases included $83.8 million of non-cash accretion; cash interest income from these leases was $151.7 million. Cash interest paid was $151.3 million.
- At year-end, the company reported $733 million of undrawn capacity across its unsecured revolvers. Management stated it expects to meet liquidity needs over the next 12 months and beyond. Moody’s upgraded the company to A3 in October 2023; Fitch’s rating was BBB+. The company reported compliance with debt covenants.
- Debt included $1.50 billion of mortgages and $2.60 billion of unsecured financing, including $1.117 billion drawn on the 2021 revolver and $100 million of assumed trust preferred securities. The 2021 revolver matures in March 2026 after extensions; the $500 million 2023 revolver matures July 2025 and was undrawn. Scheduled debt maturities include $1.117 billion in 2026 and $237.0 million in 2027.
- Estimated portfolio Ground Rent Coverage was 3.6x. Estimated combined property value was $16.0 billion and estimated unrealized capital appreciation (UCA) was $9.83 billion, down from $10.52 billion in 2022. These are estimates, not realized or guaranteed values.
- Office and multifamily represented 42% and 38% of gross book value, respectively; hotels represented 11%. The company declared $0.708 per common share in dividends for 2023, versus $0.701 in 2022; 2023 dividends were classified as return of capital for tax reporting.
Material changes versus the prior comparable period
- The company moved from external management by an iStar affiliate to internal management following the merger. The iStar legacy non-ground-lease assets were spun off into Star Holdings, which Safehold manages under contract.
- Net income swung to a loss, primarily reflecting goodwill impairment, higher interest and corporate costs, and the prior-year $55.8 million gain on sale of a ground lease; the 2023 ground-lease sale gain was $0.4 million.
- Operating cash flow fell by $49.5 million, which management attributed mainly to merger costs and higher borrowing costs, partly offset by increased rents and percentage rent. Investing outflows were lower as new ground-lease originations and acquisitions declined.
- Gross debt increased approximately $531 million. In August 2023, Safehold issued 6.5 million shares for $139.1 million gross proceeds and separately sold $12.8 million of shares to MSD affiliates. No shares had been sold under the $300 million ATM program by year-end.
Outlook, risks and unusual items
- No quantified earnings, investment-volume or dividend guidance is provided. Management describes a strategy of growing a diversified ground-lease portfolio and targeting leverage of approximately 25% of combined property value, subject to an overall debt-to-equity ceiling of 2:1 under its stated policy; organizational documents do not cap debt.
- Key risks include higher interest rates and refinancing costs, office vacancies and demand shifts, tenant credit and bankruptcy risk, and competition for ground-lease investments. Rent escalators tied to CPI generally have caps of 3.0%–3.5%, so rent growth may lag inflation.
- UCA, combined property values and rent coverage rely on assumptions and tenant-provided or estimated information; the company cautions that lagging valuations may not capture market declines, particularly in office assets, and that UCA may never be realized.
- Star Holdings-related exposures include the $115 million secured term loan bearing 8% and maturing March 2027, as well as management-fee receivables. Star Holdings owned about 19% of Safehold at year-end, and its shares secure a margin loan, creating possible forced-sale and governance risks. The related-party loan had a $2.4 million credit-loss provision.
- Unfunded ground-lease tenant allowances were $115.0 million; forward ground-lease commitments were $283.1 million; and performance-based commitments through the Leasehold Loan Fund were $111.1 million. Funding or closing depends on conditions being met.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The filing reports no pending legal proceeding believed to have a material adverse effect.
Important facts for investors to verify
- Reconcile the merger’s accounting and the March 2023 spin-off when comparing historical results, leverage and cash flows.
- Review debt maturities, revolver extension conditions, covenant headroom, floating-rate exposure and hedge positions; confirm the company’s ability to refinance the 2026 revolver balance.
- Assess office-tenant occupancy, rent coverage and tenant credit, and the sensitivity of portfolio values and UCA to current real-estate markets.
- Check collection and continued performance of Star Holdings’ loan and management-fee obligations, along with potential share sales or margin-loan collateral calls.
- Evaluate the timing and conditions for the $509.2 million of ground-lease and tenant-allowance commitments and $111.1 million of performance-based commitments.
- Assess dividend sustainability against operating cash flow, debt service, REIT distribution requirements and board discretion; reported net income and operating cash flow differ materially.