Safehold Inc. quarterly report, Q1 FY2020

Business context and reporting period

The supplied filing is iStar Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2020, not a Safehold Inc. 10-Q. iStar is a diversified real estate investor and developer with net lease, real estate finance, operating property, and land and development segments. It owned approximately 65.4% of Safehold Inc. (SAFE) and accounted for that investment under the equity method.

Financial results and key metrics

Revenue growth was driven chiefly by land development revenue, which rose to $80.2 million from $12.7 million; associated cost of sales also increased, to $77.1 million from $14.4 million. Interest expense was $43.4 million, down from $46.6 million, while general and administrative expense increased to $34.3 million from $21.1 million, largely reflecting higher performance-based compensation. The filing does not provide a comparable consolidated operating margin measure.

SAFE contributed $19.3 million of equity-method income, including a $7.9 million dilution gain related to SAFE’s March equity offering. iStar’s investment in SAFE had a carrying value of $834.4 million; its 33.4 million SAFE shares had a reported market value of approximately $2.1 billion at quarter-end.

Material changes versus the prior comparable period

• Total revenue increased $66.7 million, but net loss widened by $5.9 million. The results reflect much higher land development sales and costs, higher stock-based compensation, and increased equity-method earnings.
• Operating lease income declined $11.6 million, partly due to asset sales and the reclassification of certain leases as sales-type leases. Interest income declined $3.2 million, primarily with a lower average balance of performing loans and other lending investments.
• Interest expense fell $3.2 million; management reported a lower weighted average cost of debt of 4.9%, compared with 5.5% in Q1 2019.
• Allowance for loan losses was $33.3 million, up from $28.6 million at year-end. A new lease-loss allowance of $10.4 million was also recorded, including the effect of adopting the expected-credit-loss standard.
• Accumulated other comprehensive loss increased to $59.5 million from $38.7 million, principally reflecting unrealized losses on cash flow hedges.

Outlook, risks, contingencies, and unusual items

• Management said Q1 results were generally in line with expectations, but warned that rent and interest receipts could decline materially from Q2 onward as COVID-19 affects tenants, borrowers, and the economy. It could not predict the extent or duration of the impact and expected further loan-loss allowance increases while the pandemic materially affected the U.S. economy.
• Management said COVID-19 was hindering legacy-asset monetization and SAFE portfolio growth, and planned to limit cash expenditures where practicable. Near-term cash uses include investments, capital expenditures, shareholder distributions, and operations. No quantified earnings or revenue guidance was provided.
• At the report date, after repaying the revolver subsequent to March 31, iStar reported approximately $85 million of unrestricted cash and $350 million of undrawn revolving capacity. At quarter-end, it had borrowed $300 million on the $350 million revolver and reported $50 million of additional borrowing capacity without pledging further assets.
• Management identified approximately $472.7 million of scheduled real estate finance maturities over the next 12 months, excluding borrower extension options. Reported maximum unfunded investment commitments were $335.8 million at March 31; subsequent fundings and repayments reduced that amount by approximately $51.4 million.
• One entertainment-sector tenant, representing about 0.7% of portfolio gross book value and 0.4% of Q1 revenue, filed for bankruptcy in April 2020, creating potential future rent loss. Entertainment/leisure and hotel represented 19.8% and 5.3% of portfolio gross book value, respectively.
• Debt covenants include collateral coverage and fixed-charge requirements; a breach could permit acceleration of debt. The filing reported ordinary-course litigation, including foreclosure-related matters, and management did not expect pending proceedings to have a material adverse effect.
• Unusual items included a $9.9 million gain on an equity security, a $7.9 million SAFE dilution gain, and $4.1 million of losses on early debt extinguishment. Adjusted earnings is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.

Important facts for investors to verify

• Confirm the intended issuer: the provided filing is iStar Inc.’s, while the request identifies Safehold Inc.
• Review subsequent-period rent and interest collections, tenant or borrower relief, bankruptcies, and changes in credit-loss allowances following the COVID-19 disruption.
• Track liquidity after the post-quarter revolver repayment, availability under the facility, upcoming loan maturities, and the funding schedule for commitments.
• Assess the sustainability and valuation of iStar’s SAFE investment and the degree to which reported earnings depend on SAFE equity-method income and non-recurring gains.
• Separate recurring operating performance from land-sale timing, stock-based compensation, debt-extinguishment costs, impairment charges, and management’s non-GAAP adjusted earnings measure.