Filing identity and reporting period
Important issuer mismatch: The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020, not Safehold Inc.’s own 10-Q. It discusses Safehold (NYSE: SAFE) as an equity-method investment managed by iStar. Accordingly, the financial results below are iStar’s consolidated results unless otherwise noted.
iStar finances, invests in and develops real estate. Its segments are Net Lease, Real Estate Finance, Operating Properties, and Land and Development. At quarter-end, iStar owned approximately 65.8% of Safehold’s common stock.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $115.1 million | $145.3 million | $384.9 million | $350.6 million |
| Net income (loss) | $6.5 million | $3.6 million | $(20.8) million | $370.3 million |
| Net income (loss) allocable to common shareholders | $(2.1) million; $(0.03) per share | $(7.3) million; $(0.12) per share | $(46.9) million; $(0.61) per share | $337.8 million; $5.23 per share |
| Interest expense | $42.4 million | $46.5 million | $127.7 million | $136.9 million |
For the nine months, cash used in operating activities was $6.2 million, cash used in investing activities was $5.7 million, and cash used in financing activities was $204.4 million. Cash, cash equivalents and restricted cash ended at $136.0 million; unrestricted cash was approximately $88 million.
At September 30, 2020, total assets were $4.89 billion, total liabilities $3.79 billion, and total equity $1.09 billion. Net debt obligations were $3.31 billion. The company reported $330 million of additional borrowing capacity under its revolving credit facility. Its unencumbered assets-to-unsecured-debt ratio was 1.6x excluding, and 2.2x including, the market value uplift on its Safehold shares.
Safehold investment: iStar reported a carrying value of $855.9 million and held 33.7 million SAFE shares, with a stated market value of approximately $2.1 billion at the quarter-end share price of $62.10. iStar recognized $9.3 million of Safehold equity earnings in Q3 and $36.9 million for the nine-month period; the latter included a $7.9 million dilution gain.
Changes versus prior comparable periods
- Q3 revenue fell $30.3 million year over year, primarily reflecting lower land-development revenue and interest income. Lower interest expense and real estate costs partly offset the decline.
- Nine-month 2020 net loss contrasts with 2019 net income, which included $233.4 million of gains on real estate sales and $180.4 million of selling profit from sales-type leases. These prior-year gains make the earnings comparison unusually favorable to 2019.
- For the nine months, operating lease income declined $17.7 million, while sales-type lease interest income rose $12.9 million and land-development revenue increased $39.6 million. Other income rose $13.1 million, including $23.9 million in mark-to-market gains on an equity investment.
- Loan and lease credit allowances increased amid COVID-19 impacts and adoption of the expected-credit-loss standard. The loan-loss allowance was $33.4 million, or 4.2% of gross loans and other lending investments, versus $28.6 million, or 3.3%, at year-end 2019; the net-investment-in-leases allowance was $11.1 million.
- Debt refinancing: in August, iStar issued $400 million of 5.50% notes due February 2026 and used proceeds and cash to repay $400 million of 5.25% notes due September 2022. Management said this left no corporate debt maturities through September 2022. Early repayment costs contributed to $12.0 million of nine-month extinguishment losses.
Outlook, risks and unusual items
Management gave no numerical earnings or revenue guidance. It said COVID-19 had constrained real estate financing and transactions, delaying legacy-asset monetization and the expansion of Safehold’s portfolio. iStar reported collecting 98% of net-lease rent due in Q3, excluding a tenant with lease modifications; 92% of interest due on real estate finance investments; and 80% of operating-property rent. Safehold separately reported collecting 100% of Q3 ground rent.
Management identified entertainment/leisure and hotel exposure as particularly stressed, representing 20.2% and 5.6% of iStar’s gross book value, respectively. It cited uncertainty around tenant and borrower performance, potential further credit provisions, asset impairments, access to capital, covenant compliance, and the pace of recovery. A net-lease entertainment tenant had filed for bankruptcy and rejected its lease. Another entertainment tenant received a nine-month rent deferral, repayable with interest beginning January 2023, in exchange for ending iStar’s commitment to invest up to $55 million in additional facilities.
Over the next 12 months, iStar expected cash uses for investments, capital expenditures, dividends, share repurchases and operations. It disclosed approximately $136.0 million of maximum unfunded commitments and approximately $502 million of scheduled real estate finance asset maturities, excluding borrower extension options. Funding sources cited included cash, revolver capacity, portfolio income, loan repayments and asset-sale proceeds.
Other notable items: iStar declared common dividends of $0.32 per share for the first nine months of 2020 and repurchased 3.7 million shares for $41.4 million. Adjusted earnings, a non-GAAP measure, were $22.1 million for Q3 and $29.8 million for the nine months; management cautioned that this measure is not a substitute for GAAP earnings or operating cash flow. The filing described routine litigation, including foreclosure-related matters, and stated that none was expected to have a material adverse effect. Management reported effective disclosure controls.
Key facts for investors to verify
- Confirm the intended issuer: this source is iStar’s filing, not Safehold’s standalone filing.
- Review the separate Safehold 10-Q for Safehold’s own assets, debt, liquidity, earnings and cash flows; iStar’s investment accounting is not a substitute.
- Assess the sustainability of rent and interest collections, especially for entertainment/leisure, hotel and operating-property exposures, and monitor the deferred bowling-tenant rent repayments.
- Track non-performing loans, credit allowances, collateral values and any further COVID-related provisions or impairments.
- Evaluate iStar’s liquidity and refinancing capacity against debt maturities, unfunded commitments, dividends and expected investment spending; confirm compliance with debt covenants.
- Separate recurring operating performance from prior-year asset-sale gains, 2019 sales-type lease profit, current-period mark-to-market gains and debt-extinguishment costs.