Business context and reporting period
The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020—not a Safehold Inc. 10-Q. iStar is a real estate investment and finance company with net lease, real estate finance, operating properties, and land and development segments. It owned approximately 65.4% of Safehold (SAFE) and accounted for that investment using the equity method.
Financial and operating highlights
Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $96.4 | $98.5 | $269.9 | $205.3 |
| Net income (loss) | $(14.4) | $373.7 | $(27.2) | $366.7 |
| Net income (loss) allocable to common shareholders | $(23.3) | $362.7 | $(44.8) | $345.2 |
| Basic EPS | $(0.31) | $5.67 | $(0.58) | $5.24 |
| Interest expense | $42.0 | $43.8 | $85.3 | $90.3 |
- Revenue mix and changes: Q2 operating lease income fell $8.4 million year over year, and interest income declined $4.9 million; higher sales-type lease interest and land development revenue partly offset those decreases. First-half revenue rose $64.6 million, chiefly due to land development sales, including a California site sale, and higher sales-type lease interest.
- Profit and unusual comparisons: Prior-year earnings included $220.5 million of real estate sale income and $180.4 million of selling profit from sales-type leases in Q2, and those same gains materially boosted first-half 2019 results. First-half 2020 also included $4.1 million of losses on early debt extinguishment. Thus, reported net income comparisons reflect major prior-year transactions, not just recurring operations.
- Credit costs and impairments: First-half 2020 provisions were $6.1 million for loan losses and $1.8 million for losses on net investment in leases; asset impairments were $6.5 million. Management attributed increased credit provisions in part to COVID-19’s economic impact.
- Cash flow: For the six months, operating activities used $9.8 million, investing activities used $28.4 million, and financing activities used $187.0 million. Cash, cash equivalents and restricted cash ended at $127.0 million; unrestricted cash on the balance sheet was $80.7 million.
- Balance sheet and debt: Total assets were $4.883 billion and total liabilities $3.769 billion at June 30, 2020. Debt obligations, net, were $3.283 billion, compared with $3.387 billion at year-end 2019. The reported weighted-average cost of debt was 4.8% for the first half, versus 5.5% in the prior-year period.
- Liquidity: iStar reported $350 million of available capacity on its undrawn revolving credit facility. It also had approximately $242 million of maximum unfunded investment commitments and $598.8 million of scheduled real estate finance maturities over the next 12 months, excluding borrower extension options.
- Margins: The filing does not provide a single company-wide operating margin as a highlighted performance measure; segment results and significant non-cash items are presented separately.
Material changes and management commentary
- COVID-19 disrupted real estate markets and constrained transaction financing. iStar said the crisis hindered its strategy of monetizing legacy assets and scaling SAFE’s portfolio, and it could not predict the duration or full business impact.
- During Q2, iStar collected 98% of rent due from other net lease tenants, 94% of interest due in its real estate finance portfolio, and 80% of rent due in its operating properties portfolio. SAFE reported collecting 100% of ground rent due under its leases for the quarter. iStar warned that collections could remain disrupted.
- Entertainment/leisure and hotel represented 20.0% and 5.5%, respectively, of portfolio gross book value. An entertainment-sector tenant declared bankruptcy in April and rejected its lease; iStar reported no revenue from that tenant in Q2. Separately, iStar agreed to apply $10 million of proceeds from sales of that tenant’s facilities to upcoming rent obligations, in exchange for ending its obligation to acquire an equal amount of new facilities or reduce future rent.
- Management said it planned to limit non-investment cash expenditures where practicable. Future investment levels would depend on COVID-19’s effects and the pace of economic recovery. Expected liquidity sources included cash, portfolio income, loan repayments, and asset sale proceeds.
- SAFE-related exposure: iStar’s SAFE investment had a $839.6 million carrying value; its 33.4 million SAFE shares had a reported June 30 market value of approximately $1.9 billion. First-half equity-method earnings included a $7.9 million dilution gain related to SAFE’s March equity offering.
- iStar repurchased 2.5 million shares for $27.8 million in the first half. In August 2020, after quarter-end, its board authorized increasing the repurchase program to $50 million.
Outlook, risks and contingencies
- Management provided no quantified earnings or revenue guidance. It stated that outcomes depended on the pandemic, recovery pace, collections, investment opportunities, and market access.
- Risks identified include tenant and borrower distress or bankruptcy, further credit-loss allowances, reduced asset-sale activity, difficulty scaling SAFE, constrained access to capital, and possible covenant pressure. Debt agreements include collateral, asset coverage, and fixed-charge coverage requirements; breach could permit acceleration of debt.
- As of June 30, the company had one non-performing loan with a $15.6 million net carrying value and a $21.7 million specific allowance. The loan was more than 90 days delinquent and in resolution proceedings.
- Unfunded commitments totaled up to $242.0 million, assuming all performance conditions are met and all strategic commitments are drawn. Routine litigation, including foreclosure-related matters, was disclosed; management said it did not expect pending proceedings to materially affect the consolidated financial statements.
- First-half adoption of the expected-credit-loss standard reduced retained earnings by $12.4 million through a cumulative-effect adjustment. The company also reported $21.9 million of derivative liabilities at June 30 and expected $9.1 million of cash-flow hedge losses to be reclassified into interest expense over the following 12 months.
Investor verification priorities
- Confirm the issuer: the supplied document is iStar Inc.’s filing, not Safehold Inc.’s filing.
- Review subsequent tenant and borrower collections, bankruptcy developments, and any further allowance or impairment changes.
- Assess liquidity against the $598.8 million of scheduled real estate finance maturities, $242.0 million of commitments, and the availability and covenants of the revolving facility.
- Separate recurring results from 2019 sale gains and sales-type lease profit; review the filing’s adjusted earnings reconciliation alongside GAAP results.
- Verify SAFE’s operating performance, share value, distributions, and the implications of iStar’s controlling ownership and management relationship.
- Check later filings for changes to repurchases, dividends, covenant compliance, and management’s COVID-19 outlook.