Safehold Inc. quarterly report, Q3 FY2021

Business context and reporting period

Important filing identification: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2021, not a Safehold Inc. 10-Q. iStar reported SAFE as an equity-method investment and owned approximately 63.6% of SAFE’s common stock at quarter-end. Amounts below are iStar consolidated results unless otherwise noted.

iStar finances, invests in and develops real estate through net lease, real estate finance, operating properties, and land and development businesses. Its strategy emphasizes growing ground-lease businesses and monetizing legacy assets.

Financial results and key metrics

• Third quarter revenue: $195.5 million, up from $115.1 million in Q3 2020. Net income was $131.0 million versus $6.5 million; net income attributable to iStar common shareholders was $121.9 million, or $1.71 basic and $1.51 diluted per share, compared with a $2.1 million loss, or $0.03 loss per share, a year earlier.
• Nine-month revenue: $414.3 million versus $384.9 million. Net income was $127.6 million versus a $20.8 million loss; income allocable to common shareholders was $101.9 million versus a $46.9 million loss. Diluted EPS was $1.30 versus a $0.61 loss.
• Earnings quality and non-GAAP measure: Equity-method earnings were $89.2 million in Q3 and $114.7 million year to date. These included SAFE dilution gains of $60.2 million and $60.7 million, respectively. Real estate sale gains were $25.6 million in Q3 and $28.4 million year to date. iStar’s non-GAAP adjusted earnings allocable to common shareholders were $141.3 million in Q3 and $176.0 million for nine months; the company cautions this measure is not a substitute for GAAP earnings or operating cash flow.
• Revenue drivers: Q3 land development revenue was $93.4 million, with $87.4 million of related cost of sales; nine-month amounts were $157.9 million and $147.5 million. Interest income fell to $8.0 million in Q3 and $27.6 million year to date, primarily as average performing loan and investment balances declined. Operating lease income was $44.4 million in Q3 and $137.4 million year to date.
• Expenses and credit provisions: Interest expense was $39.5 million in Q3 and $118.5 million year to date, down from $42.4 million and $127.7 million, respectively. Nine-month loan-loss recovery was $7.6 million, compared with a $4.1 million provision in 2020; lease-loss recovery was $1.7 million, versus a $2.0 million provision.
• Cash flow: For the first nine months, operating activities used $4.7 million, compared with $6.2 million used in 2020. Investing activities provided $373.7 million, versus $5.7 million used, largely reflecting loan collections and asset-sale proceeds. Financing activities used $164.6 million. Cash and cash equivalents were $298.9 million at September 30; including restricted cash, the cash-flow statement balance was $354.8 million.
• Balance sheet and debt: Total assets were $4.80 billion and total liabilities $3.74 billion. Net debt obligations were $3.28 billion, broadly unchanged from $3.29 billion at year-end 2020. The fair value of debt obligations was reported as $3.64 billion. Scheduled principal maturities include $382.8 million in 2022 and $491.9 million in 2023; the $287.5 million convertible notes mature in September 2022.
• Liquidity and capital returns: iStar reported $340.2 million of available borrowing capacity under its revolving facility, in addition to unrestricted cash. It paid $26.1 million of common dividends and repurchased $88.9 million of common stock during the nine-month period. The declared common dividend was $0.36 per share for the first nine months.
• Margins: The filing does not provide a single company-wide operating margin measure; segment results and reported costs reflect different business activities, including property sales and equity-method earnings.

Material changes versus the prior comparable period

• Q3 revenue increased by $80.4 million year over year, principally reflecting higher land development revenue, other income, and equity-method earnings. Q3 net income also benefited substantially from SAFE’s equity issuance dilution gain and a real estate sale gain.
• Nine-month revenue rose by $29.4 million, while the company moved from a net loss to net income. Higher equity-method earnings and real estate sale gains more than offset lower interest income.
• Net loans receivable and other lending investments declined to $405.5 million from $732.3 million at December 31, 2020; the filing cites loan repayments as a key factor in lower interest income and lower credit-loss allowances.
• Land and development assets declined to $302.8 million from $430.7 million, alongside land and residential-lot sales. Net real estate declined to $1.36 billion from $1.48 billion.
• Common shares outstanding were 70.0 million at September 30, versus 74.0 million at year-end 2020; iStar repurchased 4.2 million shares for $91.9 million during the first nine months.

Outlook, risks, contingencies and unusual items

• Management said transaction and financing conditions improved during Q2 and Q3 2021 after COVID-19-related disruption, and expected further improvement, while noting the pandemic’s full effect remained uncertain. Entertainment/leisure represented 23.0% and hotels 4.2% of gross book value; these sectors had been particularly affected.
• iStar was exploring market interest in possible sales of net lease assets, consistent with its strategy to focus on ground leases and simplify its portfolio. No assurance was given that any sale would occur, or as to scope, timing or terms. Subsequent to quarter-end, iStar obtained consents to amendments to indentures for certain senior notes intended to accommodate a potential sale and paid consent fees.
• Management expected to meet liquidity needs over the next 12 months using cash, revolver capacity, portfolio income, loan repayments and asset-sale proceeds. It also identified the September 2022 convertible-note maturity, approximately $118.4 million of maximum unfunded investment commitments, and approximately $166.2 million of real estate finance asset maturities over the next 12 months as funding considerations.
• Commitments are conditional: the $118.4 million maximum assumes all performance milestones are met and all strategic-investment commitments are drawn. Certain planned ground-lease transactions with SAFE also depend on construction conditions; the filing says SAFE may have no obligation to acquire the leases or fund related allowances if conditions are not met.
• Risks include interest-rate exposure, commercial real estate credit deterioration, COVID-19 effects, inflation and market responses to government policy. iStar reported an overall net variable-rate liability position; its sensitivity analysis estimated annual net income would decline by $2.2 million for a 100-basis-point rate increase, assuming no changes in balances or yield-curve shape.
• One $58.8 million loan was non-performing and on non-accrual status at quarter-end. Management said it believed collateral and allowances were adequate. Routine litigation, including foreclosure-related matters, was not believed to be material. No material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

1. Confirm the filing issuer: this is iStar’s filing, and SAFE’s results and investment are not presented as a SAFE standalone 10-Q.
2. Assess how much reported earnings depended on SAFE dilution gains, asset-sale gains, and land sales, and distinguish these from recurring cash generation.
3. Monitor the proposed net lease asset sales, related debt-indentures changes, and any effect on iStar’s relationship with and ownership of SAFE.
4. Review liquidity and refinancing plans for the September 2022 convertible notes and other near-term maturities, alongside covenant compliance and available revolver capacity.
5. Track the non-performing loan, unfunded commitments, SAFE-dependent transactions, and exposure to entertainment/leisure, hotel, and interest-rate risks.