Document
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The Company acquired the land and the Company's Ground Lease tenant acquired the leasehold from a venture in which iStar has a</font><font style="font-family:inherit;font-size:10pt;background-color:#ffff00;"> </font><font style="font-family:inherit;font-size:10pt;background-color:#ffff00;">50%</font><font style="font-family:inherit;font-size:10pt;background-color:#ffff00;"> </font><font style="font-family:inherit;font-size:10pt;background-color:#ffff00;">ownership interest. 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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
 
September 30, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission File No. 001-38122
_______________________________________________________________________________
Safehold Inc.
(Exact name of registrant as specified in its charter)
Maryland
30-0971238
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
1114 Avenue of the Americas
 
39th Floor
 
New York
,
NY
10036
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large 
accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
 

 

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes     No ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   


Table of Contents

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
SAFE
 
NYSE
As of October 23, 2019, there were 40,444,156 shares, $0.01 par value per share, of Safehold Inc. common stock outstanding.
 


Table of Contents

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 

 
 
 



Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
Safehold Inc.
Consolidated Balance Sheets
(In thousands)
(unaudited)
 
As of
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
687,902

 
$
669,923

Less: accumulated depreciation
(14,779
)
 
(10,257
)
Real estate, net
673,123

 
659,666

Real estate-related intangible assets, net
244,503

 
262,531

Total real estate, net and real estate-related intangible assets, net
917,626

 
922,197

Net investment in sales-type leases
465,289

 

Ground Lease receivables
73,338

 

Equity investments in Ground Leases
21,410

 

Cash and cash equivalents
13,539

 
16,418

Restricted cash
23,249

 
8,007

Deferred operating lease income receivable
49,498

 
23,138

Deferred expenses and other assets, net
73,213

 
9,983

Total assets
$
1,637,162

 
$
979,743

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
42,975

 
$
20,800

Real estate-related intangible liabilities, net
57,494

 
57,620

Debt obligations, net
691,567

 
543,965

Total liabilities
792,036

 
622,385

Commitments and contingencies (refer to Note 9)


 


Equity:
 
 
 
Safehold Inc. shareholders' equity:
 
 
 
Common stock, $0.01 par value, 400,000 shares authorized, 40,444 and 18,276 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
404

 
183

Additional paid-in capital
888,457

 
370,530

Accumulated deficit
(5,809
)
 
(8,486
)
Accumulated other comprehensive loss
(39,284
)
 
(6,876
)
Total Safehold Inc. shareholders' equity
843,768

 
355,351

Noncontrolling interests
1,358

 
2,007

Total equity
845,126

 
357,358

Total liabilities and equity
$
1,637,162

 
$
979,743

_______________________________________________________________________________
Note - Refer to Note 2 for details on the Company's consolidated variable interest entities ("VIEs").

The accompanying notes are an integral part of the consolidated financial statements.

1

Table of Contents

Safehold Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Revenues:

Operating lease income
$
17,132

 
$
11,567

 
$
54,844

 
$
32,708

Interest income from sales-type leases
4,032

 

 
6,834

 

Other income
1,146

 
77

 
2,132

 
2,203

Total revenues
22,310

 
11,644

 
63,810

 
34,911

Costs and expenses:
 
 
 
 
 
 
 
Interest expense
7,708

 
3,747

 
18,215

 
10,378

Real estate expense
625

 
456

 
2,082

 
1,208

Depreciation and amortization
2,345

 
2,290

 
7,031

 
6,836

General and administrative
3,096

 
2,779

 
10,552

 
8,103

Other expense
285

 
303

 
600

 
812

Total costs and expenses
14,059

 
9,575

 
38,480

 
27,337

Income from operations before other items
8,251

 
2,069

 
25,330

 
7,574

Loss on early extinguishment of debt
(2,011
)
 

 
(2,011
)
 

Earnings (losses) from equity method investments
(759
)
 

 
(759
)
 

Net income
5,481

 
2,069

 
22,560

 
7,574

Net income allocable to noncontrolling interests(1)
(49
)
 
(60
)
 
(5,986
)
 
(142
)
Net income allocable to Safehold Inc. common shareholders
$
5,432

 
$
2,009

 
$
16,574

 
$
7,432

 
 
 
 
 
 
 
 
Per common share data:
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.11

 
$
0.62

 
$
0.41

Diluted
$
0.15

 
$
0.11

 
$
0.62

 
$
0.41

Weighted average number of common shares:
 
 
 
 
 
 
 
Basic
36,111

 
18,230

 
26,748

 
18,204

Diluted
36,111

 
18,230

 
26,748

 
18,204

_______________________________________________________________________________
(1)
For the nine months ended September 30, 2019, includes $5.8 million of income allocable to the Company's Manager relating to Investor Units it held in the Operating Partnership (refer to Note 11).


The accompanying notes are an integral part of the consolidated financial statements.

2

Table of Contents

Safehold Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income
$
5,481

 
$
2,069

 
$
22,560

 
$
7,574

Other comprehensive income:
 
 
 
 
 
 
 
Cumulative-effect adjustment for cash flow hedges

 

 

 
41

Reclassification of (gains) losses on derivatives into earnings
189

 
(77
)
 
(46
)
 
(99
)
Unrealized gain (loss) on derivatives
(9,132
)
 
2,954

 
(32,362
)
 
8,956

Other comprehensive income (loss)
(8,943
)
 
2,877


(32,408
)
 
8,898

Comprehensive income (loss)
(3,462
)
 
4,946

 
(9,848
)
 
16,472

Comprehensive income attributable to noncontrolling interests
(49
)
 
(60
)
 
(2,328
)
 
(142
)
Comprehensive income (loss) attributable to Safehold Inc.
$
(3,511
)
 
$
4,886

 
$
(12,176
)
 
$
16,330




The accompanying notes are an integral part of the consolidated financial statements.

3


Safehold Inc.
Consolidated Statements of Changes in Equity
(In thousands)
(unaudited)



 
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2019
 
$
309

 
$
626,793

 
$
(4,926
)
 
$
(30,341
)
 
$
1,229

 
$
593,064

Net income
 

 

 
5,432

 

 
49

 
5,481

Issuance of common stock, net / amortization
 
95

 
261,664

 

 

 
91

 
261,850

Dividends declared ($0.156 per share)
 

 

 
(6,315
)
 

 

 
(6,315
)
Change in accumulated other comprehensive income (loss)
 

 

 

 
(8,943
)
 

 
(8,943
)
Distributions to noncontrolling interests
 

 

 

 

 
(11
)
 
(11
)
Balance as of September 30, 2019
 
$
404

 
$
888,457

 
$
(5,809
)
 
$
(39,284
)
 
$
1,358

 
$
845,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
 
$
182

 
$
369,612

 
$
(9,327
)
 
$
6,101

 
$
1,805

 
$
368,373

Net income
 

 

 
2,009

 

 
60

 
2,069

Issuance of common stock / amortization
 

 
13

 

 

 

 
13

Dividends declared ($0.15 per share)
 

 

 
(2,735
)
 

 

 
(2,735
)
Change in accumulated other comprehensive income
 

 

 

 
2,877

 

 
2,877

Balance as of September 30, 2018
 
$
182

 
$
369,625

 
$
(10,053
)
 
$
8,978

 
$
1,865

 
$
370,597




4


Safehold Inc.
Consolidated Statements of Changes in Equity
(In thousands)
(unaudited)



 
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
 
$
183

 
$
370,530

 
$
(8,486
)
 
$
(6,876
)
 
$
2,007

 
$
357,358

Net income
 

 

 
16,574

 

 
5,986

 
22,560

Issuance of common stock, net / amortization
 
96

 
265,239

 

 

 
265

 
265,600

Investor unit conversion (refer to Note 11)
 
125

 
252,060

 

 
(6,450
)
 
(245,735
)
 

Dividends declared ($0.462 per share)
 

 

 
(13,897
)
 

 

 
(13,897
)
Change in accumulated other comprehensive income (loss)
 

 

 

 
(28,750
)
 
(3,658
)
 
(32,408
)
Contributions from noncontrolling interests
 

 
628

 

 
2,792

 
245,426

 
248,846

Distributions to noncontrolling interests
 

 

 

 

 
(2,933
)
 
(2,933
)
Balance as of September 30, 2019
 
$
404

 
$
888,457

 
$
(5,809
)
 
$
(39,284
)
 
$
1,358

 
$
845,126

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$
182

 
$
364,919

 
$
(9,246
)
 
$
80

 
$

 
$
355,935

Net income
 

 

 
7,432

 

 
142

 
7,574

Contributions from iStar Inc.
 

 
2,581

 

 

 

 
2,581

Offering costs
 

 
1,347

 

 

 

 
1,347

Issuance of common stock / amortization
 

 
778

 

 

 

 
778

Dividends declared ($0.45 per share)
 

 

 
(8,198
)
 

 

 
(8,198
)
Cumulative-effect adjustment for cash flow hedges

 

 

 
(41
)
 
41

 

 

Change in accumulated other comprehensive income
 

 

 

 
8,857

 

 
8,857

Contributions from noncontrolling interests
 

 

 

 

 
1,750

 
1,750

Distributions to noncontrolling interests
 

 

 

 

 
(27
)
 
(27
)
Balance as of September 30, 2018
 
$
182

 
$
369,625

 
$
(10,053
)
 
$
8,978

 
$
1,865

 
$
370,597


The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

Safehold Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Nine Months
Ended September 30,
 
 
 
 
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
22,560

 
$
7,574

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Depreciation and amortization
7,031

 
6,836

Stock-based compensation expense
1,450

 
778

Deferred operating lease income
(26,360
)
 
(11,781
)
Non-cash interest income from sales-type leases

(2,282
)
 

Amortization of real estate-related intangibles, net
1,843

 
1,709

Loss on early extinguishment of debt

2,011

 

(Earnings) losses from equity method investments

759

 

Amortization of premium, discount and deferred financing costs on debt obligations, net
1,654

 
1,124

Non-cash management fees
4,971

 
2,723

Other operating activities
1,065

 
770

Changes in assets and liabilities:
 
 
 
Changes in deferred expenses and other assets, net
476

 
(1,265
)
Changes in accounts payable, accrued expenses and other liabilities
(19,724
)
 
2,348

Cash flows provided by (used in) operating activities
(4,546
)
 
10,816

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(28,816
)
 
(208,083
)
Origination/acquisition of net investment in sales-type leases and Ground Lease receivables
(525,886
)
 

Deposits on ground lease investments

(30,697
)
 
(9,043
)
Contributions to equity method investments
(22,169
)
 

Other investing activities
(4,007
)
 
377

Cash flows used in investing activities
(611,575
)
 
(216,749
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
264,600

 

Proceeds from debt obligations
435,989

 
64,000

Repayments of debt obligations
(297,500
)
 

Payments for debt prepayment or extinguishment costs
(1,358
)
 

Payments for deferred financing costs
(2,559
)
 
(1,056
)
Dividends paid to common shareholders
(10,314
)
 
(8,192
)
Payment of offering costs
(5,029
)
 
(407
)
Distributions to noncontrolling interests
(2,933
)
 
(27
)
Contributions from noncontrolling interests (refer to Note 11)
250,000

 
1,750

Other financing
(2,412
)
 

Cash flows provided by (used in) financing activities
628,484

 
56,068

Changes in cash, cash equivalents and restricted cash
12,363

 
(149,865
)
Cash, cash equivalents and restricted cash at beginning of period
24,425

 
169,870

Cash, cash equivalents and restricted cash at end of period
$
36,788

 
$
20,005

Supplemental disclosure of non-cash investing and financing activity:
 
 
 
Contribution from iStar Inc.
$

 
$
2,581

Origination of sales-type leases
10,194

 

Assumption of debt obligations
10,194

 

Investor unit conversion (refer to Note 11)
250,000

 

Dividends declared to common shareholders
6,322

 
2,735

Accrued finance costs
561

 
165

Offering costs
114

 
(1,336
)



The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements
(unaudited)





Note 1—Business and Organization

Business—Safehold Inc. (the "Company"), formerly known as Safety, Income & Growth Inc., operates its business through one reportable segment by acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the landlord (the Company) and a tenant or leaseholder. The Company believes that it is the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon ("Ground Leases"). Ground Leases are similar to "triple net" leases because the tenant is generally responsible for all property operating expenses, such as maintenance, real estate taxes and insurance and is also responsible for development costs and capital expenditures. Ground Leases are typically long-term (base terms ranging from 30 to 99 years, often with tenant renewal options) and have contractual base rent increases (either at a specified percentage or consumer price index ("CPI") based, or both) and sometimes include percentage rent participations.

The Company intends to target investments in long-term Ground Leases in which: (i) the cost of its Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land ("Combined Property Value"); (ii) the ratio of underlying property net operating income to the Ground Lease payment due the Company ("Ground Rent Coverage") is between 2.0x to 5.0x, and for this purpose the Company uses estimates of the stabilized underlying property net operating income if it doesn't receive current tenant information and for properties under construction or in transition, in each case based on leasing activity at the property and available market information, including leasing activity at comparable properties in the relevant market; and (iii) the Ground Lease contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. A Ground Lease lessor (the Company) typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon tenant default and the termination of the Ground Lease on account of such default. The Company believes that the Ground Lease structure provides an opportunity for potential value accretion through the reversion to the Company, as the Ground Lease owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from the Company.

The Company is managed by SFTY Manager, LLC (the "Manager"), a wholly-owned subsidiary of iStar Inc. ("iStar"), the Company's largest shareholder, pursuant to a management agreement (refer to Note 13). The Company has no employees, as the Manager provides all services to it. The Company draws on the extensive investment origination and sourcing platform of its Manager to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants.

Organization—The Company is a Maryland corporation and completed its initial public offering in June 2017. The Company's common stock is listed on the New York Stock Exchange under the symbol "SAFE." The Company's predecessor ("Original Safety" or the "Predecessor") was formed as a wholly-owned subsidiary of iStar on October 24, 2016. iStar contributed a pre-existing portfolio of Ground Leases to Original Safety and sought third party capital to grow its Ground Lease business. A second entity, SIGI Acquisition, Inc. ("SIGI"), was capitalized on April 14, 2017 by iStar and two institutional investors. On April 14, 2017, Original Safety merged with and into SIGI with SIGI surviving the merger and being renamed Safety, Income & Growth Inc. (which was subsequently renamed to Safehold Inc.). References herein to the Company refer to Original Safety before such merger and to the surviving company of such merger thereafter.

On June 27, 2017, the Company completed its initial public offering raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement with iStar, its largest shareholder. The price per share paid in the initial public offering and the private placement was $20.00.

The Company elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with the tax year ended December 31, 2017. The Company is structured as an Umbrella Partnership REIT ("UPREIT"). As such, all of the Company's properties are owned through a subsidiary partnership, Safehold Operating Partnership LP (the "Operating Partnership"). As of September 30, 2019, the Company owned 100% of the limited partner interests and a subsidiary of the Company owned 100% of the general partner interests, in the Operating Partnership. The UPREIT structure may afford the Company certain benefits as it seeks to acquire properties from third parties who may want to defer taxes by contributing their Ground Leases to the Company.


7

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated and combined financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report").
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.

Principles of Consolidation—The consolidated financial statements include the accounts and operations of the Company, its wholly-owned subsidiaries and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of September 30, 2019, the total assets of these consolidated VIEs were $57.4 million and total liabilities were $29.5 million. The classifications of these assets are primarily within "Real estate, net," "Real estate-related intangible assets, net" and "Deferred operating lease income receivable" on the Company's consolidated balance sheets. The classifications of liabilities are primarily within "Debt obligations, net" and "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company has provided no financial support to VIEs that it was not previously contractually required to provide and did not have any unfunded commitments related to consolidated VIEs as of September 30, 2019.
Note 3—Summary of Significant Accounting Policies

The following paragraphs describe the impact on the Company's consolidated financial statements from the adoption of Accounting Standards Updates ("ASUs") on January 1, 2019.

ASU 2016-02 and ASU 2018-11—ASU 2016-02, Leases ("ASU 2016-02") resulted in the Company, as lessor, recognizing certain of its Ground Leases as sales-type leases and recording the Ground Lease as "Net investment in leases" on the Company's consolidated balance sheets (refer to Note 5). For the Company's Ground Leases which qualify as sales-type leases, the Company records interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations. The amount recorded as interest income from sales-type leases in any given period will likely be different than the straight-line ground lease income that would have been recorded under the superseded guidance.

ASU 2016-02 also required the recognition of lease assets and lease liabilities by the Company as lessee for those leases classified as operating or finance leases, both measured at the present value of the lease payments (refer to Note 7). As of December 31, 2018, the Company was party to a Ground Lease and obligated to pay the owner of the property $0.4 million, subject to adjustment for changes in the CPI, per year through 2044; however, the Company's tenant at the property pays this expense directly under the terms of a master lease. As lessee under the Ground Lease, the Company recognizes a single lease cost, calculated on a straight-line basis, in "Real estate expense" and an offsetting amount in "Other income" in the Company's consolidated statements of operations. In addition, the Company reclassified a below-market lease asset acquired as part of a business combination from "Real estate-related intangible assets, net" (refer to note 4) to "Deferred expenses and other assets, net" (refer to Note 7) on the Company's consolidated balance sheets.

Management elected the practical expedient package that allowed the Company: (a) to not reassess whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any

8

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


expired or existing leases entered into prior to January 1, 2019; and (c) to not reassess initial direct costs for any expired or existing leases entered into prior to January 1, 2019.

ASU 2018-11, Leases amended ASU 2016-02 so that: (i) entities could elect to not recast the comparative periods presented when transitioning to ASC 842 by allowing entities to change their initial application to the beginning of the period of adoption with a cumulative effect adjustment to equity; and (ii) provided lessors with a practical expedient to not separate non-lease components from the associated lease component of the contractual payments if certain conditions are met. Management elected both of these provisions.

ASU 2018-16—ASU 2018-16, Derivatives and Hedging: Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. The adoption of ASU 2018-16 did not have a material impact on the Company's consolidated financial statements.
Significant Accounting Policies

Net Investment in Sales-type Leases and Ground Lease Receivables—Net investment in sales-type leases and Ground Lease receivables are recognized when the Company's Ground Leases qualify as sales-type leases. The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company's estimate of residual value equals the fair value of the land at lease commencement. If a lease qualifies as a sales-type lease, it is further evaluated to determine whether the transaction is considered a sale leaseback transaction. When the Company acquires land and enters into a Ground Lease directly with the seller that qualifies as a sales-type lease, the lease does not qualify as a sale leaseback transaction and the lease is considered a financing receivable and is recognized in accordance with ASC 310 and included in "Ground Lease receivables" on the Company's consolidated balance sheets (refer to Note 5). The Company's Ground Lease receivables are held-for-investment and are carried at amortized cost. The Company considers a Ground Lease receivable to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the Ground Lease.

Interest Income from Sales-type Leases—Interest income from sales-type leases is recognized under the effective interest method. The effective interest method produces a constant yield on the net investment in the sales-type lease and Ground Lease receivable over the term of the lease. Rent payments that are not fixed and determinable at lease inception, such as percentage rent and CPI adjustments, are not included in the effective interest method calculation and are recognized in "Interest income from sales-type leases" in the Company's consolidated statements of operations in the period earned. A Ground Lease receivable is placed on non-accrual status if and when the Company considers the Ground Lease receivable impaired.

Equity Investments in Ground Leases—Equity investments in Ground Leases are accounted for pursuant to the equity method of accounting if the Company can significantly influence the operating and financial policies of the investee. The Company has a 54.8% equity interest in a venture (refer to Note 6) and has shared voting power with its partner. The Company determined the entity to be a voting interest entity and its equity interest is accounted for pursuant to the equity method of accounting. The Company's periodic share of earnings and losses in equity method investees are included in "Earnings (losses) from equity method investments" in the Company's consolidated statements of operations. Equity investments are included in "Equity investments in Ground Leases" on the Company's consolidated balance sheets.

The Company periodically reviews equity method investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investments may not be recoverable. The Company will record an impairment charge to the extent that the estimated fair value of an investment is less than its carrying value and the Company determines the impairment is other-than-temporary. Impairment charges, if applicable, are recorded in "Earnings (losses) from equity method investments" in the Company's consolidated statements of operations.

Fair Values—The Company is required to disclose fair value information with regard to its financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practical to estimate fair value. The Financial Accounting Standards Board ("FASB") guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Company determines the estimated

9

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


fair values of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant assumptions. The Company determined the carrying values of its cash and cash equivalents; net investment in sales-type leases; Ground Lease receivables; restricted cash; deferred operating lease income receivable; deferred expenses and other assets, net; and accounts payable, accrued expenses, and other liabilities approximated their fair values. The Company determined the fair value of its debt obligations, net as of September 30, 2019 and December 31, 2018 was approximately $705.1 million and $537.8 million, respectively, and falls within Level 3 of the fair value hierarchy.     

Restricted CashThe following table provides a reconciliation of the cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported in the Company's consolidated statements of cash flows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
September 30,
2018
 
December 31, 2017
Cash and cash equivalents
 
$
13,539

 
$
16,418

 
$
19,248

 
$
168,214

Restricted cash(1)
 
23,249

 
8,007

 
757

 
1,656

Total cash, cash equivalents and restricted cash reported in the consolidated statements of cash flows
 
$
36,788

 
$
24,425

 
$
20,005

 
$
169,870

_______________________________________________________________________________
(1)
Restricted cash primarily includes cash balances required to be maintained under certain of the Company's derivative transactions.

Other—The Company is an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") and is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other publicly-traded companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The Company has elected to utilize the exemption for auditor attestation requirements.
In addition, the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Company has chosen to "opt out" of this extended transition period, and as a result, it will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. The Company's decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The Company will remain an "emerging growth company" until the earliest to occur of: (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the Company's initial public offering; (iii) the date on which the Company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which the Company is deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended.
For the remainder of the Company's significant accounting policies, refer to the Company's 2018 Annual Report.

New Accounting PronouncementsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") which was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity. This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management is currently evaluating the impact of ASU 2016-13 on the Company’s consolidated financial statements.
In May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04") to clarify certain accounting topics from previously issued ASUs, including ASU 2016-13. ASU 2019-04 addresses certain aspects of ASU 2016-13, including

10

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


but not limited to, accrued interest receivable, loan recoveries, interest rate projections for variable-rate financial instruments and expected prepayments. ASU 2019-04 provides alternatives that allow entities to measure credit losses on accrued interest separate from credit losses on the principal portion of a loan, clarifies that entities should include expected recoveries in the measurement of credit losses, allows entities to consider future interest rates when measuring credit losses and can elect to adjust effective interest rates used to discount expected cash flows for expected loan prepayments. ASU 2019-04 is effective upon the adoption of ASU 2016-13. Management is currently evaluating the impact of ASU 2019-04 on the Company’s consolidated financial statements.
Note 4—Real Estate and Real Estate-Related Intangibles
The Company's real estate assets consist of the following ($ in thousands):
 
As of
 
September 30, 2019
 
December 31, 2018
Land and land improvements, at cost
$
494,670

 
$
477,527

Buildings and improvements, at cost
193,232

 
192,396

Less: accumulated depreciation
(14,779
)
 
(10,257
)
Total real estate, net
$
673,123

 
$
659,666

Real estate-related intangible assets, net
244,503

 
262,531

Total real estate, net and real estate-related intangible assets, net
$
917,626

 
$
922,197



Real estate-related intangible assets, net consist of the following items ($ in thousands):
 
As of September 30, 2019
 
Gross
Intangible
 
Accumulated
Depreciation
 
Carrying
Value
Above-market lease assets, net(1)
$
203,288

 
$
(5,358
)
 
$
197,930

In-place lease assets, net(2)
53,626

 
(7,790
)
 
45,836

Other intangible assets, net
750

 
(13
)
 
737

Total
$
257,664

 
$
(13,161
)
 
$
244,503

 
As of December 31, 2018
 
Gross
Intangible
 
Accumulated
Depreciation
 
Carrying
Value
Above-market lease assets, net(1)
$
193,249

 
$
(3,040
)
 
$
190,209

In-place lease assets, net(2)
52,071

 
(5,288
)
 
46,783

Below-market lease asset, net(3)
26,484

 
(1,688
)
 
24,796

Other intangible assets, net
750

 
(7
)
 
743

Total
$
272,554

 
$
(10,023
)
 
$
262,531

_______________________________________________________________________________
(1)
Above-market lease assets are recognized during business combinations and asset acquisitions when the present value of market rate rental cash flows over the term of a lease is less than the present value of the contractual in-place rental cash flows. Above-market lease assets are amortized over the term of the leases.
(2)
In-place lease assets are recognized during business combinations and asset acquisitions and are estimated based on the value associated with the costs avoided in originating leases comparable to the acquired in-place leases as well as the value associated with lost rental revenue during the assumed lease-up period. In-place lease assets are amortized over the term of the leases.
(3)
Below-market lease asset, net resulted from the acquisition of the initial portfolio from iStar and relates to a property that is majority-owned by a third party and is ground leased to the Company. The Company is obligated to pay the owner of the property $0.4 million, subject to adjustment for changes in the CPI, per year through 2044; however, the Company's tenant at the property pays this expense directly under the terms of a master lease. The below-market lease asset is amortized over the term of the lease. Effective with the adoption of ASU 2016-02 on January 1, 2019, below-market lease asset, net was reclassified to "Deferred expenses and other assets, net" on the Company's consolidated balance sheet (refer to Note 3).


11

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The amortization of real estate-related intangible assets had the following impact on the Company's consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 ($ in thousands):
 
 
Income Statement
 
For the Three Months Ended September 30,
Intangible asset
 
Location
 
2019
 
2018
Above-market lease assets (decrease to income)
 
Operating lease income
 
$
787

 
$
598

In-place lease assets (decrease to income)
 
Depreciation and amortization
 
836

 
788

Below-market lease asset (decrease to income)
 
Real estate expense
 

 
247

Other intangible assets (decrease to income)
 
Operating lease income
 
2

 
2

 
 
Income Statement
 
For the Nine Months Ended September 30,
Intangible asset
 
Location
 
2019
 
2018
Above-market lease assets (decrease to income)
 
Operating lease income
 
$
2,318

 
$
1,428

In-place lease assets (decrease to income)
 
Depreciation and amortization
 
2,503

 
2,331

Below-market lease asset (decrease to income)
 
Real estate expense
 

 
741

Other intangible assets (decrease to income)
 
Operating lease income
 
6

 
5


The estimated expense from the amortization of real estate-related intangible assets for each of the five succeeding fiscal years is as follows ($ in thousands):(1) 
Year
 
Amount
2019 (remaining three months)
 
$
1,668

2020
 
6,672

2021
 
6,672

2022
 
6,672

2023
 
6,672

_______________________________________________________________________________
(1)
As of September 30, 2019, the weighted average amortization period for the Company's real estate-related intangible assets was approximately 80 years.


12

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Real estate-related intangible liabilities, net consist of the following items ($ in thousands):(1) 
 
As of September 30, 2019
 
Gross
Intangible
 
Accumulated
Depreciation
 
Carrying
Value
Below-market lease liabilities(1)
$
59,015

 
$
(1,521
)
 
$
57,494

 
As of December 31, 2018
 
Gross
Intangible
 
Accumulated
Depreciation
 
Carrying
Value
Below-market lease liabilities(1)
$
58,660

 
$
(1,040
)
 
$
57,620

_______________________________________________________________________________
(1)
Below-market lease liabilities are recognized during business combinations and asset acquisitions when the present value of market rate rental cash flows over the term of a lease exceeds the present value of the contractual in-place rental cash flows. Below-market lease liabilities are amortized over the term of the leases.

The amortization of real estate-related intangible liabilities had the following impact on the Company's consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 ($ in thousands):
 
 
Income Statement
 
For the Three Months Ended September 30,
Intangible liability
 
Location
 
2019
 
2018
Below-market lease liabilities (increase to income)
 
Operating lease income
 
$
161

 
$
155


 
 
Income Statement
 
For the Nine Months Ended September 30,
Intangible liability
 
Location
 
2019
 
2018
Below-market lease liabilities (increase to income)
 
Operating lease income
 
$
481

 
$
465



Future Minimum Operating Lease PaymentsFuture minimum lease payments to be collected under non-cancelable operating leases, excluding lease payments that are not fixed and determinable, in effect as of September 30, 2019, are as follows by year ($ in thousands):
Year
 
Inflation-
Linked
 
Fixed Bumps with Inflation Adjustments
 
Fixed
Bumps
 
Percentage
Rent
 
Fixed Bumps with Percentage Rent
 
Total
2019 (remaining three months)
 
$
1,339

 
$
4,375

 
$
527

 
$
2,630

 
$
89

 
$
8,960

2020
 
5,357

 
17,708

 
2,117

 
10,519

 
356

 
36,057

2021
 
5,357

 
18,037

 
2,155

 
10,519

 
356

 
36,424

2022
 
5,357

 
18,384

 
2,185

 
10,519

 
356

 
36,801

2023
 
5,357

 
18,833

 
2,213

 
10,519

 
281

 
37,203


Note 5—Net Investment in Sales-type Leases and Ground Lease Receivables
On January 1, 2019, the Company adopted ASU 2016-02 and ASU 2018-11. As a result of the adoption of ASU 2016-02, the Company, as lessor, classifies certain Ground Leases entered into or acquired subsequent to December 31, 2018 as sales-type leases and records the leases within "Net investment in sales-type leases" on the Company's consolidated balance sheets and records interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations (refer to Note 3). In addition, during the nine months ended September 30, 2019, the Company entered into transactions whereby it acquired land and entered into Ground Leases directly with the seller. The Ground Leases qualified as sales-type leases and, as such, did not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 and are included in "Ground Lease receivables" on the Company's consolidated balance sheets (refer to Note 3). The Company records interest income from Ground Lease receivables in "Interest income from sales-type leases" in the Company's consolidated statements of operations.

13

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



The following table presents a rollforward of the Company's net investment in sales-type leases and Ground Lease receivables for the nine months ended September 30, 2019 ($ in thousands):
 
 
Net Investment in Sales-type Leases
 
Ground Lease
Receivables
 
Total
Beginning balance(1)
 
$

 
$

 
$

Origination/acquisition(2)
 
463,251

 
73,094

 
536,345

Accretion (amortization)
 
2,038

 
244

 
2,282

Ending balance
 
$
465,289

 
$
73,338

 
$
538,627

_______________________________________________________________________________
(1)
The Company elected a provision provided by ASU 2018-11 that allowed entities to not recast the comparative periods presented when transitioning to ASC 842 by allowing entities to change their initial application to the beginning of the period of adoption. As a result, the Company did not have any adjustments to its financial statements as of or prior to December 31, 2018.
(2)
The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company's estimate of residual value equals the fair value of the land at lease commencement. As of September 30, 2019, the weighted average remaining life of the Company's two Ground Lease receivables was 98.8 years.

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842, excluding lease payments that are not fixed and determinable, in effect as of September 30, 2019, are as follows by year ($ in thousands):
 
 
Fixed Bumps with Inflation Adjustments
 
Fixed Bumps with
Percentage Rent
 
Total
2019 (remaining three months)
 
$
3,788

 
$
133

 
$
3,921

2020
 
15,875

 
532

 
16,407

2021
 
16,219

 
532

 
16,751

2022
 
16,838

 
537

 
17,375

2023
 
17,098

 
586

 
17,684

Thereafter
 
5,291,255

 
102,420

 
5,393,675

Total undiscounted cash flows
 
5,361,073

 
104,740

 
5,465,813

Unguaranteed estimated residual value
 
 
 
 
 
463,251

Present value discount
 
 
 
 
 
(5,463,775
)
Net investment in sales-type leases as of September 30, 2019
 
 
 
 
 
$
465,289






14

Table of Contents
Safehold Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


During the three and nine months ended September 30, 2019, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):
Three Months Ended September 30, 2019
 
Net Investment in Sales-type Leases
 
Ground
Lease Receivables
 
Total
Cash
 
$
2,160

 
$
506

 
$
2,666

Non-cash
 
1,122

 
244

 
1,366

Total interest income from sales-type leases
 
$
3,282

 
$
750

 
$
4,032

Nine Months Ended September 30, 2019
 
Net Investment in Sales-type Leases
 
Ground
Lease Receivables
 
Total
Cash
 
$