Safehold Inc. (SAFE) — filing identity and period
Important identification note: The supplied filing is iStar Inc.’s Form 10-K for the fiscal year ended December 31, 2021, filed February 24, 2022—not Safehold Inc.’s 10-K. iStar reported owning approximately 64.6% of SAFE’s common stock and managing SAFE. The summary below describes iStar’s filing; SAFE-related information is identified as such.
Business context
iStar finances, invests in and develops real estate. Its segments were net lease, real estate finance, operating properties, and land and development. Management’s strategy was to grow ground-lease and ground-lease-adjacent businesses, primarily through SAFE, while selling other assets and reducing legacy holdings. The filing reports full-year results; it also provides unaudited fourth-quarter data.
Financial performance and position
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue, continuing operations | $308.6 million | $324.1 million |
| Net income (loss), including discontinued operations | $138.0 million | $(30.9) million |
| Net income (loss) allocable to common shareholders | $109.0 million; $1.51 per diluted share | $(65.9) million; $(0.87) per diluted share |
| Adjusted earnings allocable to common shareholders (non-GAAP) | $244.9 million | $40.8 million |
| Cash flow from operating activities | $(20.3) million | $21.9 million |
| Cash flow from investing activities | $514.0 million | $31.2 million |
| Cash flow from financing activities | $(250.1) million | $(255.0) million |
- FY 2021 continuing-operations revenue declined 4.8%. Interest income fell to $31.2 million from $56.7 million, primarily as average performing loan and investment balances decreased to $377 million from $706 million. Land development revenue increased to $189.1 million; related cost of sales was $172.0 million, a $17.1 million spread.
- Net income included $121.5 million from discontinued operations. Earnings from equity-method investments rose to $154.3 million, including a $60.7 million dilution gain from SAFE equity issuance. Thus, reported net income included material discontinued-operation and investment-related items.
- General and administrative expense increased to $131.7 million from $100.9 million, mainly because performance-based compensation rose $34.8 million. Stock-based compensation was $69.3 million, versus $39.4 million.
- Interest expense declined to $115.4 million from $126.8 million; average debt was $2.59 billion and weighted average debt cost was 4.4%, compared with $2.65 billion and 4.8% in 2020.
- At December 31, 2021, total assets were $4.84 billion, total liabilities $3.78 billion, and total equity $1.06 billion. Unrestricted cash was $339.6 million; cash plus restricted cash was $394.0 million.
- Debt obligations were $2.604 billion principal ($2.572 billion net of discounts and financing costs), excluding $714 million of debt classified with discontinued operations. Principal maturities included $287.5 million in 2022, $491.9 million in 2023, and $775 million in 2024. The $650 million senior term loan had $491.9 million outstanding and matures in June 2023.
- Loan and other lending investments, net, were $332.8 million, down from $686.9 million. One non-performing loan had a carrying value of approximately $59.1 million. The loan-loss allowance was $4.8 million, or 1.4% of gross loans and other lending investments, versus $12.0 million, or 1.7%, in 2020.
- Unaudited Q4 2021 revenue was $50.8 million; continuing-operations loss was $41.6 million; discontinued-operations income was $52.0 million; and net income allocable to common shareholders was $7.1 million, or $0.11 per share.
Material changes and significant transaction
- In February 2022, after year-end, iStar signed an agreement to sell most traditional net-lease properties for approximately $3.07 billion gross, subject to adjustments and closing conditions. The portfolio covered about 18.3 million square feet and had $720 million of associated mortgage debt. iStar estimated net cash proceeds of approximately $1.1 billion after debt repayment and other transaction-related payments; closing was expected in Q1 2022, but was not assured.
- The buyer intended to sell three properties to SAFE for $122 million and enter into three ground leases with SAFE. Two net-lease properties and ground-lease-related assets were excluded from the sale. The assets and results covered by the proposed sale were presented as held for sale and discontinued operations.
- iStar invested $565 million in investments, commitments, development and share repurchases in 2021, including $122.4 million to repurchase 5.5 million common shares at an average $22.38 per share. Common dividends declared were $0.485 per share, totaling $35.1 million.
- SAFE was accounted for as an equity-method investment. iStar reported a $1.169 billion carrying value for its SAFE investment and a $2.9 billion market value for its 36.6 million SAFE shares at year-end. iStar recorded $14.9 million of SAFE management fees in 2021.
Outlook, risks and unusual items
- Management said expected cash uses included ground-lease investments, debt repayment, legacy-asset capital spending, dividends and share repurchases, and operations. It expected to meet near-term liquidity needs using cash, asset-sale proceeds (including the pending sale), revolver borrowings, portfolio income, loan repayments and other asset sales.
- Near-term obligations included approximately $138 million of scheduled real-estate-finance maturities and $91.6 million of maximum unfunded commitments, subject to applicable funding conditions. Management reported no corporate debt maturities through September 2022, although the debt table lists $287.5 million of unsecured notes due in September 2022.
- Key risks include failure or delay of the net-lease sale; reliance on SAFE’s performance, distributions, access to capital and ground-lease growth; conflicts of interest arising from the iStar-SAFE management and investment relationship; interest-rate and refinancing exposure; below-investment-grade credit ratings; debt-covenant and liquidity constraints; COVID-19 effects, particularly on hotel and entertainment assets; and real-estate, credit, valuation, climate and environmental risks.
- Management noted SAFE hotel ground leases accounted for 14.4% of SAFE revenue in 2021 and that SAFE’s hotel percentage rent had materially declined; it expected similarly reduced percentage rent in 2022. iStar also warned that rising rates could compress spreads, lower asset values and make refinancing more difficult.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The critical audit matter was the judgment-intensive estimate of expected credit losses. The filing reported effective internal control over financial reporting.
Most important facts for investors to verify
- Confirm the intended issuer: this document is iStar Inc.’s 10-K, not Safehold Inc.’s filing.
- Verify whether the $3.07 billion net-lease sale closed, the final proceeds after adjustments and costs, and how proceeds were allocated to debt reduction, SAFE-related investment and other purposes.
- Separate recurring continuing-operations performance from discontinued operations, SAFE dilution gains, asset-sale gains and other nonrecurring items; review the non-GAAP adjusted-earnings reconciliation.
- Reconcile liquidity disclosures: the filing cites $350 million of revolver capacity in one discussion and approximately $278.5 million of drawable capacity based on the borrowing base elsewhere.
- Review debt maturities, covenant headroom, refinancing plans and the treatment of sale-related debt, as well as the status and collectability of the non-performing loan and remaining commitments.
- Assess iStar’s dependence on SAFE, related-party governance and conflicts, SAFE’s distributions and hotel exposure, and whether iStar’s post-sale strategy and cash flows match management’s expectations.