Business context and reporting period
This filing is iStar Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Although the request identifies Safehold Inc., the filing’s registrant is iStar; iStar reported owning approximately 66% of Safehold (SAFE) and accounted for its SAFE investment using the equity method. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
iStar finances, invests in and develops real estate. Its reportable businesses are net lease, real estate finance, operating properties, and land and development. Management said its strategy was focused primarily on expanding its ground-lease platform and monetizing legacy assets.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $105.6 million | $96.4 million | $218.8 million | $269.9 million |
| Net loss | $11.4 million | $14.4 million | $3.4 million | $27.2 million |
| Net loss allocable to common shareholders | $19.5 million | $23.3 million | $19.9 million | $44.8 million |
| Loss per diluted common share | $0.27 | $0.31 | $0.27 | $0.58 |
| Interest expense | $39.4 million | $42.0 million | $79.0 million | $85.3 million |
| Equity-method investment earnings | $12.7 million | $2.6 million | $25.5 million | $19.2 million |
For the six-month period, cash flows used in operations were $45.0 million, compared with $9.8 million used in 2020. Investing activities provided $184.0 million, versus $28.4 million used; financing activities used $81.1 million, versus $187.0 million used. Cash, cash equivalents and restricted cash ended the period at $208.4 million.
At June 30, total assets were $4.77 billion, total liabilities $3.76 billion, and equity $1.01 billion. Cash and cash equivalents were $154.9 million; management separately reported $155 million of unrestricted cash and $342 million of available revolver borrowing capacity. Net debt obligations were $3.29 billion. The $350 million revolving facility had no borrowings, and reported capacity to draw without additional collateral was $341.7 million. Secured debt and mortgages totaled $1.20 billion; unsecured notes totaled $2.01 billion. Scheduled principal maturities were $101.0 million for the remaining six months of 2021, $383.4 million in 2022, and $491.9 million in 2023.
Gross margin is not presented as a single company-wide measure in the filing. Q2 land development revenue was $32.3 million against $30.8 million of related costs; six-month amounts were $64.6 million and $60.1 million. No separate consolidated operating cash flow margin is stated.
Material changes versus the prior comparable period
- Q2 revenue increased $9.2 million year over year, while six-month revenue declined $51.0 million. The six-month decrease mainly reflected lower land development revenue ($64.6 million versus $95.8 million) and interest income ($19.6 million versus $32.7 million); Q2 land development revenue rose to $32.3 million from $15.6 million.
- Q2 interest income fell as the average balance of performing loans and other lending investments declined to $371 million from $755 million; the weighted average yield increased to 8.4% from 7.8%. For the six months, the yield was 8.0% in both years, while average balances fell to $445 million from $775 million.
- Interest expense fell in Q2 and year to date, principally reflecting lower average debt costs. Six-month weighted average cost of debt was 4.6%, versus 4.8% in 2020.
- Equity-method earnings increased, including SAFE income of $21.1 million for the first half. SAFE earnings were $27.6 million in 2020 and included a $7.9 million dilution gain from an equity offering.
- Loan-loss and lease-loss allowances were recovered in 2021, reflecting loan repayments and a more favorable commercial real estate outlook, versus provisions in 2020. The loan-loss allowance was $7.1 million at June 30, down from $13.2 million at year-end.
- Q2 general and administrative expense increased to $30.4 million from $19.0 million, mainly due to an $11.5 million increase in performance-based compensation. For the six months, G&A declined to $51.8 million from $53.3 million.
Outlook, risks, contingencies and unusual items
- Management said transaction and financing conditions improved in Q2 2021 and expected further improvement as activity normalized. It cautioned that the full effects of COVID-19 remained uncertain and noted potential effects from inflation and government policy responses. Entertainment/leisure and hotel exposure represented 22.6% and 5.0% of portfolio gross book value, respectively.
- Management expected to meet liquidity needs over the next 12 months and beyond, using cash, revolver capacity, portfolio income, loan repayments and asset-sale proceeds. It reported $214.8 million of maximum unfunded commitments, most expected to be funded over two years subject to milestones and other conditions, and approximately $201.9 million of scheduled real estate finance asset maturities over the next 12 months.
- After quarter-end, iStar said it intended to explore market interest in possible sales of net lease assets; no sale, timing or terms were assured. An operating property with a $96.8 million carrying value was sold in July 2021 for $125 million, with an expected gain of approximately $25 million after selling costs.
- Some proposed ground-lease transactions depended on construction conditions being met before SAFE would be required to acquire the properties and assume related improvement allowances. The filing says there is no assurance those conditions will be satisfied.
- Adjusted earnings, a non-GAAP measure, were $12.0 million in Q2 2021 versus a $2.9 million loss in Q2 2020, and $34.7 million for the first half versus $7.8 million. The measure adds back depreciation and amortization and stock-based compensation, among other adjustments described in the filing; it is not a substitute for GAAP earnings or operating cash flow.
- Common dividends declared for the first half were $0.235 per share; preferred dividends were $11.7 million. iStar repurchased 1.8 million common shares for $32.4 million during the first half. It reported no preferred dividend arrears.
- Debt agreements include leverage, collateral-coverage and fixed-charge covenants; breaches could permit acceleration. The company reported no defaults upon senior securities. It also disclosed routine litigation, including foreclosure-related proceedings, and said it did not expect pending matters to have a material adverse effect.
- Disclosure controls were judged effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: this is iStar Inc.’s filing, not a Safehold Inc. 10-Q. Review SAFE’s own filing for its standalone financial results and risks.
- Track liquidity and refinancing against scheduled debt maturities, unfunded commitments, covenant requirements, and the stated $341.7 million of immediately available revolver capacity.
- Assess the status and credit quality of the $56.6 million non-performing loan; the company reported one non-performing loan and no interest income on impaired loans in the first half.
- Verify completion and economics of the July property sale and any potential net lease portfolio sales; expected proceeds and gains are not the same as realized results.
- Review the conditions and timing for SAFE’s potential acquisitions of iStar-originated ground leases, and the extent of iStar’s concentration in SAFE.
- Reconcile GAAP losses, operating cash use and dividends with management’s non-GAAP adjusted earnings measure and performance-based compensation accruals.