Safehold Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2023. Safehold acquires, manages and finances long-term ground leases. On March 31, 2023, iStar merged into Old Safehold; for accounting purposes this was a reverse acquisition, so historical statements before the merger reflect Old Safehold. Comparisons therefore do not represent identical business perimeters throughout each period.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $85.6 million | $71.7 million | $249.6 million | $196.9 million |
| Net income (loss) attributable to common shareholders | $(123.0) million | $66.1 million | $(96.2) million | $113.6 million |
| Basic and diluted EPS | $(1.81) | $1.04 | $(1.47) | $1.83 |
| Interest expense | $46.6 million | $35.5 million | $133.5 million | $91.1 million |
- Revenue increased 19% year over year in Q3 and 27% for the nine-month period. Higher sales-type lease income and operating lease income contributed; 2023 also included related-party loan interest and Star Holdings management fees.
- Q3 included a $145.4 million non-cash goodwill impairment, fully writing off merger-related goodwill. Management cited a sustained share-price decline and concluded reporting-unit carrying value exceeded estimated fair value. The impairment drove the quarterly loss.
- Operating costs also rose: nine-month general and administrative expense was $51.8 million versus $29.2 million, reflecting post-merger public-company costs, stock compensation and merger-related costs. Nine-month other expense was $17.5 million, including merger-related costs and $1.9 million of previously capitalized deal costs written off.
- Cash flows for the first nine months: operating activities used $7.7 million, investing activities used $450.0 million, and financing activities provided $448.7 million. Cash, cash equivalents and restricted cash ended at $39.5 million, including $11.5 million unrestricted cash.
- At September 30, total assets were $6.44 billion, debt obligations net were $3.94 billion (principal $3.98 billion), and total equity was $2.30 billion. Debt increased from $3.52 billion net at year-end 2022. Fixed-rate debt principal was $2.9 billion and floating-rate debt principal $1.1 billion.
- Unsecured revolver availability was $847 million. The company reported compliance with debt covenants. The combined weighted-average stated interest rate on specified consolidated and venture debt was 3.85%; cash rate was 3.32%.
- Quarterly dividends declared were $0.177 per share; nine-month dividends declared were $0.531 per share. Portfolio estimated Ground Rent Coverage was 3.7x. Estimated owned-residual unrealized capital appreciation was $10.0 billion, down from $10.5 billion at year-end 2022; these are estimates, not GAAP measures.
Material changes versus the prior comparable period
- Revenue growth was offset by materially higher interest expense, increased corporate and compensation costs, and the goodwill impairment. Q3 2022 also included a $55.8 million gain on sale of a ground lease, absent in Q3 2023.
- The merger made Safehold internally managed and added Star Holdings-related management fees, a $115 million related-party term loan, legacy assets and equity-method investments. The merger also expanded the share count; common shares outstanding were 71.1 million at September 30, versus 62.4 million at December 31, 2022.
- Debt rose during the period, including $313 million of net additional revolver borrowings and $100 million of assumed trust preferred securities. August equity offerings raised approximately $151.9 million gross, including a private placement to MSD affiliates.
- The company adopted the expected-credit-loss standard in 2023. It recorded an initial allowance and subsequent credit-loss provisions; the September 30 allowance included approximately $0.5 million on sales-type leases, $0.3 million on ground-lease receivables and $2.4 million on the Star Holdings loan.
Outlook, commentary and risks
- No numerical earnings or investment guidance is provided. Management expects to meet liquidity requirements over the next 12 months and beyond, using cash flows, financing, joint-venture funding, revolver capacity and potential equity issuance. The company expects ongoing debt service, dividends, working-capital needs and new investments.
- Unfunded obligations at September 30 included $190.6 million of tenant improvement allowances, $283.6 million of forward ground-lease commitments and $118.9 million of performance-based commitments. Funding and closings depend on specified conditions.
- Interest-rate exposure, higher borrowing costs and tenant access to leasehold financing are key risks. The filing notes office-sector vacancies and reduced market liquidity could pressure tenants, rent coverage and property values. CPI-linked rent increases are often capped at 3.0%–3.5%, potentially limiting inflation protection.
- A 100-basis-point increase in rates was estimated to reduce annual net income by $5.5 million, assuming other factors unchanged. Management cautions actual results could differ significantly.
- In October 2023, Moody’s upgraded the company to A3, lowering revolver pricing. Also in October, the Star Holdings loan amendment allowed certain additional borrowing for margin-loan prepayments and eliminated the borrower’s option to pay interest in kind.
- Management reported no pending legal proceeding believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. It concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the reported revenue increase reflects recurring ground-lease economics versus merger-related Star Holdings fees and other ancillary income.
- Whether higher interest costs, debt maturities and floating-rate exposure remain manageable alongside the dividend and substantial unfunded commitments.
- The assumptions behind the goodwill impairment and management’s estimated $10.0 billion unrealized capital appreciation, including tenant rights and valuation sensitivity.
- Credit quality and repayment prospects for the $115 million Star Holdings loan, including the recorded allowance and related-party nature of the exposure.
- Portfolio tenant conditions, particularly office exposure, ground-rent coverage and the effect of capped inflation adjustments.