Safehold / iStar Inc. 2022 Form 10-K Summary
Filing identity and period: This filing is iStar Inc.’s Form 10-K for the fiscal year ended December 31, 2022, filed February 21, 2023. It is not Safehold Inc.’s standalone 10-K; iStar reported its investment in Safehold (SAFE) as an equity-method investment and owned approximately 54.3% of SAFE’s common shares at year-end.
Business context and strategy
iStar financed, invested in and developed real estate, while managing SAFE’s ground-lease platform. After selling most of its legacy net-lease portfolio in March 2022, iStar’s portfolio was predominantly ground leases: 74% of its $1.76 billion reported investment portfolio by book value. Land and development represented 11.8%; real estate finance and operating properties each represented about 6%.
In August 2022, iStar and SAFE agreed to a merger under which iStar would survive and change its name to Safehold Inc. iStar also planned to spin off its remaining non-ground-lease legacy assets into Star Holdings. At the filing date, the transactions were expected in the first half of 2023, subject to approvals and other conditions; completion was not assured.
Financial performance and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $158.1 million | $308.6 million |
| Net income (loss) | $600.4 million | $138.0 million |
| Net income (loss) from continuing operations | $(197.3) million | $16.6 million |
| Net income from discontinued operations | $797.7 million | $121.5 million |
| Net income allocable to common shareholders | $397.8 million | $109.0 million |
| Adjusted earnings allocable to common shareholders (non-GAAP) | $522.0 million | $244.9 million |
| Cash flow from operating activities | $47.7 million | $(20.3) million |
| Cash flow from investing activities | $2,787.8 million | $514.0 million |
| Cash flow from financing activities | $(1,780.7) million | $(250.1) million |
FY 2022 revenue fell 49%, primarily reflecting the net-lease sale, lower interest income as loan balances declined, and lower land-development sales. The reported profit increase was chiefly driven by discontinued operations, including the net-lease sale; continuing operations recorded a loss. The filing does not provide a single comparable operating margin that would capture these portfolio changes and unusual gains.
In the fourth quarter of 2022, revenue was $30.3 million, continuing-operations net loss was $80.8 million, and common-shareholder net loss was $86.7 million. The annual discontinued-operations income was reported in the first quarter, principally reflecting the completed sale.
- Net-lease sale: Gross proceeds were approximately $3.07 billion; iStar retained $1.2 billion in net cash proceeds after debt repayment and other transaction-related payments. The sale generated a $663.7 million gain reported in discontinued operations.
- Debt and interest: Debt obligations, net, were $1.68 billion at year-end, down from $2.57 billion. Average debt was $1.97 billion versus $2.59 billion; weighted-average debt cost rose to 5.0% from 4.4%. Interest expense declined to $98.1 million from $115.4 million.
- Liquidity: Unrestricted cash was $1.44 billion at December 31, 2022. Total assets were $3.25 billion and total liabilities $1.83 billion. Management said it expected to meet liquidity requirements over the next 12 months and the reasonably foreseeable future, relying on cash, portfolio income, loan repayments, asset sales and, in connection with the merger, financing proceeds.
- Credit and asset charges: The loan-loss provision was $45.0 million, versus an $8.1 million recovery in 2021. Two loans were non-performing at year-end, with an aggregate carrying value of $66.7 million, including one loan held for sale. Asset impairments were $15.1 million.
- Commitments: Maximum unfunded investment commitments were $146.6 million; the company expected to fund most over the following two years if conditions were met. Scheduled real estate finance maturities over the next 12 months were approximately $36.1 million.
Material changes and unusual items
- The March 2022 net-lease portfolio sale materially changed the company’s scale and asset mix; most associated operating results were presented as discontinued operations.
- iStar reported a $131.2 million loss on early extinguishment of debt, mainly related to convertible-note exchanges and repayment of the senior term loan. The convertible-note exchanges included issuance of common shares and cash payments.
- Land-development revenue decreased to $61.8 million from $189.1 million. FY 2021 included five bulk parcel sales contributing $96.9 million; FY 2022 land-development cost of sales of $63.4 million exceeded revenue.
- General and administrative expense declined to $21.3 million from $131.7 million, principally because performance-based compensation fell by $111.0 million. Stock-based compensation was reported as a $27.7 million credit in 2022, versus $69.3 million of expense in 2021.
- Common dividends were $0.375 per share in 2022, compared with $0.485 in 2021. In December 2022, iStar also distributed 6.63 million SAFE shares to its shareholders, described as a $2.19-per-iStar-share dividend.
Outlook, risks and contingencies
- Transaction execution: The merger, spin-off and related transactions depended on stockholder approvals, completion of the spin-off, financing and cash-proceeds conditions, tax opinions and other closing conditions. If the merger agreement terminates in specified circumstances, a $63 million termination fee may be payable. If the merger did not occur by September 30, 2023, SAFE could have an option, under specified circumstances, to internalize iStar’s management.
- Merger funding and preferred stock: iStar had covenanted to retire its remaining senior unsecured notes and redeem its preferred shares at liquidation preference plus accrued dividends in connection with the merger. The proposed sale of SAFE shares to MSD Partners was one anticipated source of proceeds and remained subject to conditions.
- Interest rates and markets: Management cited higher rates, inflation, real-estate and credit-market conditions, and housing-market weakness as factors that could affect financing costs, asset values, loan performance, land demand and liquidity. The company disclosed an overall net variable-rate liability position.
- SAFE dependence and conflicts: Future income was expected to depend substantially on SAFE dividends, management fees, asset sales and ground-lease-related investments, which may be less predictable than contractual rent. iStar also disclosed related-party conflicts, voting limitations, and risks tied to SAFE’s growth, liquidity and share-price performance.
- Other risks: Risks include borrower defaults and collateral-value estimates, property development and sale timing, below-investment-grade credit ratings and debt covenants, environmental and climate-related exposures, insurance availability, and REIT qualification and distribution requirements. Ordinary-course litigation was disclosed; management said it did not expect pending proceedings to materially adversely affect the consolidated financial statements.
- Controls and audit: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified estimation of collateral fair value for financially distressed loans as a critical audit matter.
No formal earnings or operating guidance was provided. Management’s forward-looking liquidity and transaction expectations are subject to the stated conditions and risks.
Investor verification priorities
- Verify subsequent completion, terms and funding of the merger, Star Holdings spin-off, SAFE share sale and preferred-stock redemption; these were pending at the filing date.
- Reconcile FY 2022 reported profit to continuing operations, discontinued operations and the net-lease sale; assess earnings and cash generation excluding large disposal-related items.
- Review the debt retirement plan, remaining unsecured-note maturities, covenant headroom, debt-market access and the cash needed for commitments, preferred redemption and incentive-plan payments.
- Assess SAFE’s contribution to iStar’s value and future cash flows, including dividend capacity, ground-lease growth, hotel exposure, share-price volatility and related-party governance.
- Examine non-performing loans, the held-for-sale loan valuation, loan-loss assumptions and the quality and liquidity of remaining legacy and development assets.