Safehold Inc. quarterly report, Q3 FY2022

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Safehold Inc. (SAFE) — Filing identity and reporting period

Important entity clarification: The supplied 10-Q is filed by iStar Inc. (NYSE: STAR), not Safehold Inc. (NYSE: SAFE). It reports the quarter and nine months ended September 30, 2022. The figures below are iStar’s consolidated results; SAFE is a major equity-method investment and the other party to a proposed merger.

Business context and reporting period

iStar said it was shifting toward ground-lease and ground-lease-adjacent businesses and simplifying its portfolio through asset sales. In March 2022, it completed the sale of most of its legacy net-lease portfolio for approximately $3.07 billion gross, retaining about $1.2 billion in net cash proceeds after debt repayments and other transaction-related payments. The sold operations are presented as discontinued operations.

Key financial metrics

  • Third quarter 2022: Revenue was $47.8 million, down from $143.6 million in Q3 2021. Net income was $18.0 million, compared with $131.0 million; diluted earnings per common share were $0.14 versus $1.51. Continuing-operations income was $18.0 million, with no discontinued-operations income reported for the quarter.
  • Nine months ended September 30, 2022: Revenue was $127.8 million, versus $257.9 million in 2021. Net income was $681.3 million, compared with $127.6 million; basic and diluted EPS were each $6.16 versus $1.40 and $1.30, respectively. The 2022 result included $797.7 million of income from discontinued operations, including sale-related gains. Continuing operations recorded a net loss of $116.4 million.
  • Cash flow, nine months: Operating activities provided $15.4 million, investing activities provided $2.71 billion, and financing activities used $1.77 billion. Investing cash flow included substantial proceeds from asset sales; operating cash flow should not be inferred from reported net income.
  • Liquidity and balance sheet: Cash and cash equivalents were $1.336 billion at September 30, 2022, versus $339.6 million at year-end 2021. Total assets were $3.522 billion versus $4.841 billion; total liabilities were $1.825 billion versus $3.777 billion; and total equity was $1.698 billion versus $1.063 billion.
  • Debt: Debt obligations, net, were $1.681 billion, down from $2.572 billion at December 31, 2021. Outstanding principal maturities were $753.6 million in 2024, $502.0 million in 2025, and $346.9 million in 2026; $100 million of trust preferred securities mature in 2035. iStar repaid its senior term loan and terminated its revolving facility.
  • Portfolio and credit: SAFE represented $1.459 billion of iStar’s other investments. iStar reported a $176.6 million net loans-and-lending-investments balance and one non-performing loan with a $60.4 million carrying value. Its loan-loss allowance was $2.9 million.
  • Margins: The filing does not present a single consolidated operating-margin measure; reported results include real estate and investment income, asset-sale activity, and equity-method earnings.

Material changes versus comparable periods

  • Revenue fell substantially year over year, driven in part by the net-lease portfolio sale and lower land-development sales. Nine-month land-development revenue declined to $54.4 million from $157.9 million.
  • Interest expense declined to $76.1 million for the nine months from $86.1 million, mainly due to lower average debt. However, the company recorded a $131.2 million nine-month loss on early extinguishment of debt.
  • The nine-month loan-loss provision was $22.6 million, versus a $7.4 million recovery in 2021. The 2022 provision primarily reflected a $25 million charge-off on a held-to-maturity debt security.
  • Nine-month general and administrative expense fell to $10.4 million from $69.0 million, primarily because performance-based compensation decreased by $56.2 million. Stock-based compensation included a $30.7 million benefit for the 2022 nine-month period.
  • Reported 2022 net income was dominated by discontinued-operations gains from the net-lease sale; continuing operations reported a loss for the nine-month period.

Outlook, risks, contingencies, and unusual items

  • iStar expected its merger with SAFE to close in the first or second quarter of 2023, subject to shareholder approvals, completion of a planned Spin-Off of legacy assets, financing and cash-proceeds conditions, tax opinions, regulatory and other customary conditions. The filing cautions that the transaction may be delayed or not completed.
  • In connection with the proposed transaction, iStar planned to redeem all outstanding preferred stock at liquidation preference plus accrued dividends and retire remaining senior unsecured notes. The filing also describes a planned $200 million sale of SAFE shares to MSD Partners and a related $20 million purchase of SAFE Caret units, both subject to closing conditions.
  • Management said it expected to meet liquidity requirements over the next 12 months, using cash, portfolio income, loan repayments, and asset-sale proceeds. Expected uses include debt repayment, preferred-stock redemption, investment funding, dividends, capital expenditures, and operations. The company also cited approximately $105.2 million of scheduled real-estate-finance maturities over the next 12 months and $156.5 million of maximum unfunded commitments.
  • Management estimated $84 million of total iPIP incentive-plan obligations under stated assumptions; $59 million had been accrued in the financial statements. Payments may be made partly in cash and partly in shares.
  • Merger risks include failure to meet closing conditions, a possible $63 million termination fee in specified circumstances, transaction costs, business disruption, and potential effects on stock prices. If the merger has not occurred by September 30, 2023 and specified conditions apply, SAFE may have an option to internalize management; the filing describes $100 million of consideration for that option.
  • Interest-rate sensitivity analysis estimated that a 100-basis-point increase would raise annual net income by approximately $13.1 million, while a 100-basis-point decrease would reduce it by approximately $13.1 million, assuming the modeled balances and other stated assumptions remain unchanged. Management warned that actual results could differ materially.
  • iStar reported routine litigation, including foreclosure-related matters, and said it did not believe any pending proceeding would materially adversely affect its consolidated financial statements. It reported no material change to internal controls and concluded disclosure controls were effective.

Most important facts for investors to verify

  • Confirm the issuer: this is iStar Inc.’s 10-Q, not Safehold Inc.’s filing; review SAFE’s own filings for SAFE-specific financials.
  • Separate recurring continuing-operations performance from the net-lease sale and other discontinued-operations gains when assessing 2022 earnings.
  • Track merger and Spin-Off conditions, including required cash proceeds, debt retirement, preferred-stock redemption, approvals, and the proposed MSD transactions.
  • Assess liquidity against debt and preferred-stock repayment plans, upcoming loan maturities, unfunded commitments, dividends, and estimated incentive-plan obligations.
  • Review the $60.4 million non-performing loan and the held-to-maturity security charge-off, as well as exposure to interest-rate and commercial-real-estate-market changes.