Safehold Inc. (SAFE) — filing identity note
The supplied filing is iStar Inc.’s Form 10-Q for the quarter ended March 31, 2022, not Safehold Inc.’s 10-Q. Safehold is discussed as iStar’s equity-method investment and managed affiliate. The figures below are iStar consolidated figures unless otherwise stated, and should not be read as Safehold’s standalone results.
Business context and reporting period
iStar finances, invests in and develops real estate. Its stated strategy is to expand its ground-lease and ground-lease-adjacent businesses, including through Safehold, and simplify its portfolio by selling other assets. In March 2022, it completed the sale of most of its net-lease portfolio; ground-lease assets were excluded. The interim statements are unaudited and cover the three months ended March 31, 2022, compared with the same period in 2021.
Financial performance and position
- Revenue: $32.0 million, down from $60.0 million. The decline reflected lower land-development revenue, interest income and operating-lease income.
- Profit: Net loss from continuing operations was $1.9 million, versus a $14.5 million loss. Net income was $795.8 million, versus $8.0 million, largely because discontinued operations included substantial gains from the net-lease sale. Net income allocable to common shareholders was $610.9 million, or $8.85 per diluted share; continuing-operations loss allocable to common shareholders was $0.11 per share.
- Sale-related result: iStar reported $797.7 million of net income from discontinued operations, including a $663.7 million gain on the net-lease sale. The reported quarter’s earnings therefore do not represent recurring operating performance.
- Adjusted earnings: Management’s non-GAAP measure was $607.5 million, versus $22.7 million. It includes the period’s unusual transaction effects and is not a substitute for GAAP earnings or operating cash flow.
- Cash flow: Operating activities used $30.6 million, compared with $3.8 million used a year earlier. Investing activities provided $2.42 billion, principally reflecting asset-sale proceeds; financing activities used $1.23 billion, including debt repayments.
- Liquidity and debt: At quarter-end, cash and cash equivalents were $1.50 billion ($1.55 billion including restricted cash), and net debt obligations were $2.08 billion. The company said $350 million was available under its revolving facility; borrowing capacity without pledging additional assets was $59.9 million. The balance sheet also reported total assets of $4.08 billion and total equity of $1.78 billion.
- Other credit metrics: Loans and other lending investments, net, were $331.8 million, with a $4.9 million allowance. One $59.6 million loan was non-performing and on non-accrual status. Maximum unfunded investment commitments were $128.4 million.
Material changes versus the prior comparable period
- The net-lease portfolio sale for approximately $3.07 billion gross proceeds drove the sharp increase in reported net income and investing cash flow. iStar retained approximately $1.2 billion of net cash proceeds after debt repayment and other transaction-related payments.
- iStar repaid its $491.9 million senior term loan balance during the quarter. Debt obligations, net, fell from $2.57 billion at December 31, 2021 to $2.08 billion at March 31, 2022.
- Equity-method earnings rose to $25.0 million from $11.8 million, including $17.0 million from Safehold, compared with $11.4 million from Safehold a year earlier.
- Land-development revenue declined to $14.9 million from $32.2 million; associated cost of sales declined to $14.5 million from $29.3 million.
- General and administrative expense fell to $1.4 million from $21.4 million, mainly due to lower performance-based compensation. Stock-based compensation was a $12.4 million credit in Q1 2022 versus $5.5 million of expense in Q1 2021.
Outlook, risks and unusual items
- Management outlook: iStar expected to meet liquidity needs over the next 12 months and the reasonably foreseeable future, drawing on cash, facility borrowings, portfolio income, loan repayments and asset-sale proceeds. It provided no quantified earnings or revenue guidance in the supplied filing text.
- Near-term uses and maturities: Management identified ground-lease investment, distributions to noncontrolling interests, debt repayment, capital expenditures, dividends, repurchases and operating costs as expected cash uses. At March 31, $287.5 million of 3.125% convertible notes was scheduled to mature in September 2022. On April 8, after quarter-end, holders exchanged $194 million principal for 13.75 million newly issued common shares and $14 million cash; the remaining $94 million was due in September and was to be settled with a combination of cash and shares.
- Investment obligations: Management expected to fund the majority of the $128.4 million maximum unfunded commitments over the following two years, subject to milestones and other conditions. It estimated total iPIP incentive-plan obligations of $219 million using a $43.05 Safehold share price assumption; these estimates are sensitive to asset values and performance.
- Market and credit risks: The filing highlights interest-rate and commercial-real-estate risks, including potential spread compression, borrower defaults and credit losses. A 100-basis-point rate increase was estimated to increase annual net income by $14.5 million under the filing’s stated assumptions; actual outcomes may differ materially.
- Other matters: The filing reports routine litigation that management did not believe would materially affect the consolidated financial statements, no material changes to previously disclosed risk factors, and effective disclosure controls. No material contingency value beyond the disclosed commitments is clearly provided.
Important facts for investors to verify
- Confirm the correct issuer: this is iStar’s 10-Q, not Safehold’s standalone filing; consult Safehold’s own filings for its financial statements and outlook.
- Assess recurring earnings and cash generation separately from the one-time net-lease sale gain and discontinued operations.
- Review the final settlement and dilution from the convertible-note exchange, including repayment or conversion of the remaining $94 million due in September 2022.
- Evaluate liquidity after distributions to joint-venture partners and other sale-related obligations, and verify actual availability under the revolving credit facility and debt-covenant compliance.
- Monitor the $59.6 million non-performing loan, allowance assumptions, unfunded commitments and estimated iPIP obligations.
- Check Safehold share-price exposure, iStar’s 64.7% Safehold ownership at quarter-end, and the related-party management, expense-reimbursement and ground-lease arrangements.