UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Commission File No.
(Exact name of registrant as specified in its charter)
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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.
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Securities registered pursuant to Section 12(b) of the Act:
As of July 20, 2021, there were
TABLE OF CONTENTS
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
Safehold Inc.
Consolidated Balance Sheets(1)
(In thousands)
(unaudited)
As of | ||||||
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
ASSETS |
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Real estate |
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Real estate, at cost | $ | | $ | | ||
Less: accumulated depreciation |
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Real estate, net |
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Real estate-related intangible assets, net (refer to Note 4) |
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Total real estate, net and real estate-related intangible assets, net |
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Net investment in sales-type leases |
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Ground Lease receivables |
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Equity investments in Ground Leases |
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Cash and cash equivalents |
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Restricted cash |
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Deferred operating lease income receivable |
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Deferred expenses and other assets, net |
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Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY |
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Liabilities: |
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Accounts payable, accrued expenses and other liabilities(2) | $ | | $ | | ||
Real estate-related intangible liabilities, net (refer to Note 4) |
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Debt obligations, net |
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Total liabilities |
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Commitments and contingencies (refer to Note 9) |
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Equity: |
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Safehold Inc. shareholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
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Total Safehold Inc. shareholders' equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity | $ | | $ | |
(1) |
(2) |
The accompanying notes are an integral part of the consolidated financial statements.
1
Safehold Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
For the Three Months Ended | For the Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
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Revenues: |
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Operating lease income | $ | | $ | | $ | | $ | | |||||
Interest income from sales-type leases |
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Other income |
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Total revenues |
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Costs and expenses: |
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Interest expense |
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Real estate expense |
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Depreciation and amortization |
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General and administrative(1) |
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Other expense |
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Total costs and expenses |
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Income from operations before other items |
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Loss on early extinguishment of debt |
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Earnings from equity method investments |
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Net income |
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Net income attributable to noncontrolling interests |
| ( |
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Net income attributable to Safehold Inc. common shareholders | $ | | $ | | $ | | $ | | |||||
Per common share data: |
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Net income |
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Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Weighted average number of common shares: |
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Basic |
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Diluted |
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(1) |
The accompanying notes are an integral part of the consolidated financial statements.
2
Safehold Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
For the Three Months Ended | For the Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss): |
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Reclassification of losses on derivatives into earnings |
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Unrealized gain (loss) on derivatives |
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Other comprehensive gain (loss) |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interests |
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Comprehensive income attributable to Safehold Inc. | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements.
3
Retained | Accumulated | |||||||||||||||||
Common | Additional | Earnings | Other | |||||||||||||||
Stock at | Paid-In | (Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
| Par |
| Capital |
| Deficit) |
| Income (Loss) |
| Interests |
| Equity | |||||||
Balance at March 31, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income |
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Issuance of common stock, net / amortization |
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Dividends declared ($ |
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| ( |
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Change in accumulated other comprehensive income (loss) |
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Distributions to noncontrolling interests |
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| ( |
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Balance at June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Balance at March 31, 2020 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income |
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Issuance of common stock, net / amortization |
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Dividends declared ($ |
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Change in accumulated other comprehensive income (loss) |
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| ( |
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Distributions to noncontrolling interests |
| — |
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| — |
| — |
| ( |
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Balance at June 30, 2020 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
4
Retained | Accumulated | |||||||||||||||||
Common | Additional | Earnings | Other | |||||||||||||||
Stock at | Paid-In | (Accumulated | Comprehensive | Noncontrolling | Total | |||||||||||||
| Par |
| Capital |
| Deficit) |
| Income (Loss) |
| Interests |
| Equity | |||||||
Balance at December 31, 2020 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income |
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Issuance of common stock, net / amortization |
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Dividends declared ($ |
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Change in accumulated other comprehensive income (loss) |
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Distributions to noncontrolling interests |
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| ( |
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Balance at June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Balance at December 31, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
Net income |
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Issuance of common stock, net / amortization |
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Dividends declared ($ |
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Change in accumulated other comprehensive income (loss) |
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Distributions to noncontrolling interests |
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Balance at June 30, 2020 | $ | | $ | | $ | | $ | ( | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements.
5
Safehold Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
For the Six Months Ended | |||||||
June 30, | |||||||
| 2021 |
| 2020 |
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Cash flows from operating activities: |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to cash flows from operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Deferred operating lease income |
| ( |
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Non-cash interest income from sales-type leases |
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Non-cash interest expense |
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Amortization of real estate-related intangibles, net |
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Loss on early extinguishment of debt |
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Earnings from equity method investments |
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Distributions from operations of equity method investments |
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Amortization of premium, discount and deferred financing costs on debt obligations, net |
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Non-cash management fees |
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Other operating activities |
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Changes in assets and liabilities: |
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Changes in deferred expenses and other assets, net |
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Changes in accounts payable, accrued expenses and other liabilities |
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Cash flows provided by operating activities |
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Cash flows from investing activities: |
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Acquisitions of real estate |
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Origination/acquisition of net investment in sales-type leases and Ground Lease receivables |
| ( |
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Contributions to equity method investments | ( | — | |||||
Deposits on Ground Lease investments |
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Other investing activities |
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Cash flows used in investing activities |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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Proceeds from debt obligations |
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Repayments of debt obligations |
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Payments for deferred financing costs |
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Dividends paid to common shareholders |
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Payment of offering costs |
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Distributions to noncontrolling interests |
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Other financing activities |
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Cash flows provided by financing activities |
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Changes in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activity: |
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Acquisition of real estate | $ | — | $ | | |||
Assumption of other liabilities/debt obligations |
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Dividends declared to common shareholders | | | |||||
Accrued finance costs |
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Accrued offering costs |
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The accompanying notes are an integral part of the consolidated financial statements.
6
Note 1—Business and Organization
Business—Safehold Inc. (the “Company”) operates its business through
The Company intends to target investments in long-term Ground Leases in which: (i) the cost of its Ground Lease represents
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. The Company has
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 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 June 30, 2021, the Company owned
Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited condensed 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 financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”).
7
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 June 30, 2021, the total assets of these consolidated VIEs were $
Note 3—Summary of Significant Accounting Policies
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 following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value: Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The Company determines the estimated 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.
8
The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):
As of June 30, 2021 | As of December 31, 2020 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
| Value |
| Value |
| Value |
| Value | |||||
Net investment in sales-type leases(1) | $ | | $ | | $ | | $ | | ||||
Ground Lease receivables(1) |
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Cash and cash equivalents(1) |
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Restricted cash(1) |
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Debt obligations, net(2) |
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(1) | The Company determined the carrying values of its net investment in sales-type leases; Ground Lease receivables; cash and cash equivalents and restricted cash approximated their fair values. The fair value of the Company’s net investment in sales-type leases and Ground Lease receivables are classified as Level 3 within the fair value hierarchy and the fair value of the Company’s cash and cash equivalents and restricted cash are classified as Level 1 within the fair value hierarchy. |
(2) | The fair value of the Company’s debt obligations traded in secondary markets are classified as Level 1 within the fair value hierarchy and the fair value of the Company’s debt obligations not traded in secondary markets are classified as Level 3 within the fair value hierarchy. |
For the remainder of the Company’s significant accounting policies, refer to the Company’s 2020 Annual Report.
New Accounting Pronouncements—In 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. For public entities such as the Company that qualified as smaller reporting companies prior to December 31, 2019, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption is permitted. 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 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.
9
Note 4—Real Estate and Real Estate-Related Intangibles
The Company’s real estate assets consist of the following ($ in thousands):
As of | ||||||
| June 30, 2021 |
| December 31, 2020 | |||
Land and land improvements, at cost | $ | | $ | | ||
Buildings and improvements, at cost |
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Less: accumulated depreciation |
| ( |
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Total real estate, net | $ | | $ | | ||
Real estate-related intangible assets, net |
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Total real estate, net and real estate-related intangible assets, net | $ | | $ | |
Real estate-related intangible assets, net consist of the following items ($ in thousands):
| As of June 30, 2021 | ||||||||
Gross | Accumulated | Carrying | |||||||
Intangible | Amortization | Value | |||||||
Above-market lease assets, net(1) | $ | | $ | ( | $ | | |||
In-place lease assets, net(2) |
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Other intangible assets, net |
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| ( |
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Total | $ | | $ | ( | $ | |
As of December 31, 2020 | |||||||||
Gross | Accumulated | Carrying | |||||||
| Intangible |
| Amortization |
| Value | ||||
Above-market lease assets, net(1) | $ | | $ | ( | $ | | |||
In-place lease assets, net(2) |
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| ( |
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Other intangible assets, net |
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Total | $ | | $ | ( | $ | |
(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 non-cancelable 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 non-cancelable term of the leases. |
The amortization of real estate-related intangible assets had the following impact on the Company’s consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 ($ in thousands):
Income Statement | For the Three Months Ended June 30, | ||||||||
Intangible asset |
| Location |
| 2021 |
| 2020 | |||
Above-market lease assets (decrease to income) |
| Operating lease income | $ | | $ | | |||
In-place lease assets (decrease to income) |
| Depreciation and amortization |
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Other intangible assets (decrease to income) |
| Operating lease income |
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Income Statement | For the Six Months Ended June 30, | |||||||
Intangible asset |
| Location |
| 2021 |
| 2020 | ||
Above-market lease assets (decrease to income) |
| Operating lease income | $ | | $ | | ||
In-place lease assets (decrease to income) |
| Depreciation and amortization |
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Other intangible assets (decrease to income) |
| Operating lease income |
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10
The estimated amortization of real estate-related intangible assets for each of the five succeeding fiscal years is as follows ($ in thousands):(1)
Year |
| Amount | |
2021 (remaining six months) | $ | | |
2022 | | ||
2023 |
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2024 |
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2025 |
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(1) | As of June 30, 2021, the weighted average amortization period for the Company’s real estate-related intangible assets was approximately |
Real estate-related intangible liabilities, net consist of the following items ($ in thousands):(1)
| As of June 30, 2021 | ||||||||
Gross | Accumulated | Carrying | |||||||
Intangible | Amortization | Value | |||||||
Below-market lease liabilities(1) | $ | | $ | ( | $ | |
| As of December 31, 2020 | ||||||||
Gross | Accumulated | Carrying | |||||||
Intangible | Amortization | Value | |||||||
Below-market lease liabilities(1) | $ | | $ | ( | $ | |
(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 non-cancelable 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 six months ended June 30, 2021 and 2020 ($ in thousands):
Income Statement |
| For the Three Months Ended June 30, | |||||||
Intangible liability |
| Location |
| 2021 |
| 2020 | |||
Below-market lease liabilities (increase to income) |
| Operating lease income | $ | | $ | |
Income Statement |
| For the Six Months Ended June 30, | ||||||
Intangible liability |
| Location |
| 2021 |
| 2020 | ||
Below-market lease liabilities (increase to income) |
| Operating lease income | $ | | $ | |
Future Minimum Operating Lease Payments—Future minimum lease payments to be collected under non-cancelable operating leases, excluding lease payments that are not fixed and determinable, in effect as of June 30, 2021, are as follows by year ($ in thousands):
| Fixed Bumps |
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with | Bumps with | |||||||||||||||||
Inflation- | Inflation | Fixed | Percentage | Percentage | ||||||||||||||
Year |
| Linked |
| Adjustments |
| Bumps |
| Rent |
| Rent |
| Total | ||||||
2021 (remaining six months) | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
2022 |
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2023 |
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2024 |
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2025 | | | | | | | ||||||||||||
Thereafter |
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11
Note 5—Net Investment in Sales-type Leases and Ground Lease Receivables
The Company classifies certain of its Ground Leases 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. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases with the seller. These Ground Leases qualify as sales-type leases and, as such, do 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. The Company records interest income from Ground Lease receivables in “Interest income from sales-type leases” in the Company’s consolidated statements of operations.
The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):
| June 30, 2021 |
| December 31, 2020 | |||
Total undiscounted cash flows(1) | $ | | $ | | ||
Unguaranteed estimated residual value |
| |
| | ||
Present value discount |
| ( |
| ( | ||
Net investment in sales-type leases | $ | | $ | |
(1) | As of June 30, 2021, includes $ |
The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the six months ended June 30, 2021 and 2020 ($ in thousands):
Net Investment in | Ground Lease | ||||||||
| Sales-type Leases |
| Receivables |
| Total | ||||
Six Months Ended June 30, 2021 |
|
|
|
|
|
| |||
Beginning balance | $ | | $ | | $ | | |||
Purchase price allocation adjustment |
| ( |
| — |
| ( | |||
Origination/acquisition/fundings(1) |
| |
| |
| | |||
Accretion |
| |
| |
| | |||
Ending balance(2) | $ | | $ | | $ | |
Net Investment in | Ground Lease | ||||||||
| Sales-type Leases |
| Receivables |
| Total | ||||
Six Months Ended June 30, 2020 |
|
|
|
|
|
| |||
Beginning balance | $ | | $ | | $ | | |||
Origination/acquisition/fundings(1) |
| |
| |
| | |||
Accretion |
| |
| |
| | |||
Ending balance | $ | | $ | | $ | |
(1) | 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 estimated 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. |
(2) | As of June 30, 2021, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was |
12
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 June 30, 2021, are as follows by year ($ in thousands):
|
| Fixed Bumps |
| |||||||||
Fixed Bumps | with | |||||||||||
with Inflation | Fixed | Percentage | ||||||||||
| Adjustments |
| Bumps |
| Rent |
| Total | |||||
2021 (remaining six months) | $ | | $ | | $ | | $ | | ||||
2022 |
| |
| |
| |
| | ||||
2023 |
| |
| |
| |
| | ||||
2024 |
| |
| |
| |
| | ||||
2025 | | | | | ||||||||
Thereafter |
| |
| |
| |
| | ||||
Total undiscounted cash flows | $ | | $ | | $ | | $ | |
During the three and six months ended June 30, 2021 and 2020, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):
Net Investment | Ground | ||||||||
in Sales-type | Lease | ||||||||
Three Months Ended June 30, 2021 |
| Leases |
| Receivables |
| Total | |||
Cash | $ | | $ | | $ | | |||
Non-cash |
| |
| |
| | |||
Total interest income from sales-type leases | $ | | $ | | $ | |
| Net Investment |
| Ground |
| |||||
in Sales-type | Lease | ||||||||
Three Months Ended June 30, 2020 | Leases | Receivables | Total | ||||||
Cash | $ | | $ | | $ | | |||
Non-cash |
| |
| |
| | |||
Total interest income from sales-type leases | $ | | $ | | $ | |
Net Investment | Ground | ||||||||
in Sales-type | Lease | ||||||||
Six Months Ended June 30, 2021 |
| Leases |
| Receivables |
| Total | |||
Cash | $ | | $ | | $ | | |||
Non-cash |
| |
| |
| | |||
Total interest income from sales-type leases | $ | | $ | | $ | |
| Net Investment |
| Ground |
| |||||
in Sales-type | Lease | ||||||||
Six Months Ended June 30, 2020 | Leases | Receivables | Total | ||||||
Cash | $ | | $ | | $ | | |||
Non-cash |
| |
| |
| | |||
Total interest income from sales-type leases | $ | | $ | | $ | |
Note 6—Equity Investments in Ground Leases
In June 2021, the Company acquired a noncontrolling minority equity interest in a Ground Lease at an office property in New York City. As of June 30, 2021, the Company’s investment in the Ground Lease was $
13
During both the three and six months ended June 30, 2021, the Company recorded $
In August 2019, the Company formed a venture with a sovereign wealth fund that is an existing shareholder of the Company to acquire the existing Ground Lease at 425 Park Avenue in New York City. The venture acquired the Ground Lease in November 2019. The Company has a
Note 7—Deferred Expenses and Other Assets, Net and Accounts Payable, Accrued Expenses and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
As of | ||||||
| June 30, 2021 |
| December 31, 2020 | |||
Operating lease right-of-use asset(1) | $ | | $ | | ||
Other assets(2) |
| |
| | ||
Deferred finance costs, net(3) |
| |
| | ||
Leasing costs, net |
| |
| | ||
Purchase deposits |
| |
| |||
Deferred expenses and other assets, net | $ | | $ | |
(1) | Operating lease right-of-use asset 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 $ |
(2) | During the three months ended June 30, 2021 and 2020, the Company recognized $ |
(3) | Accumulated amortization of deferred finance costs was $ |
14
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
| As of | |||||
| June 30, 2021 |
| December 31, 2020 | |||
Interest rate hedge liabilities | $ | | $ | | ||
Interest payable |
| |
| | ||
Dividends declared and payable |
| |
| | ||
Operating lease liability |
| |
| | ||
Other liabilities(1) |
| |
| | ||
Management fee payable |
| |
| | ||
Accrued expenses(2) |
| |
| | ||
Accounts payable, accrued expenses and other liabilities | $ | | $ | |
(1) | As of June 30, 2021 and December 31, 2020, other liabilities includes $ |
(2) | As of June 30, 2021 and December 31, 2020, accrued expenses primarily includes accrued legal and audit expenses and accrued property expenses. |
Note 8—Debt Obligations, net
The Company’s outstanding debt obligations consist of the following ($ in thousands):
As of |
| Interest |
| Scheduled | ||||||
| June 30, 2021 |
| December 31, 2020 |
| Rate(1) |
| Maturity Date(2) | |||
Secured credit financing: |
|
|
|
|
|
|
|
| ||
Mortgages | $ | | $ | |
| | % | April 2027 to November 2069 | ||
Revolver(3) |
| — |
| |
| N/A | N/A | |||
Total secured credit financing(4) |
| |
| |
|
|
|
| ||
Unsecured financing: | ||||||||||
Unsecured Revolver | | — | LIBOR plus | % | March 2026 | |||||
| — | | % | June 2031 | ||||||
Total unsecured financing | | — | ||||||||
Total debt obligations |
| |
| |
|
|
|
| ||
Debt premium, discount and deferred financing costs, net |
| ( |
| ( |
|
|
|
| ||
Total debt obligations, net | $ | | $ | |
|
|
|
|
(1) | For mortgages, represents the weighted average interest rate of consolidated mortgage debt in effect over the life of the mortgage debt and excludes the effect of debt premium, discount and deferred financing costs. As of June 30, 2021, the weighted average cash interest rate for the Company’s consolidated mortgage debt, based on interest rates in effect at that date, was |
(2) | Represents the extended maturity date for all debt obligations. |
(3) | This revolver was replaced in March 2021 with the Company’s Unsecured Revolver. |
(4) | As of June 30, 2021, $ |
Mortgages—Mortgages consist of asset specific non-recourse borrowings that are secured by the Company’s Ground Leases. As of June 30, 2021, the Company’s mortgages are full term interest only, bear interest at a weighted average interest rate of
15
Unsecured Revolver—In March 2021, the Operating Partnership (as borrower) and the Company (as guarantor), entered into an unsecured revolving credit facility with an initial maximum aggregate principal amount of up to $
Unsecured Notes—In May 2021, the Operating Partnership (as issuer) and the Company (as guarantor), issued $
Debt Covenants—The Company is subject to financial covenants under the Unsecured Revolver, including maintaining: (i) a ratio of unencumbered assets to unsecured debt of at least
Future Scheduled Maturities—As of June 30, 2021, future scheduled maturities of outstanding debt obligations, assuming all extensions that can be exercised at the Company’s option, are as follows ($ in thousands):
Secured | Unsecured | Total | |||||||
2021 (remaining six months) |
| $ | |
| $ | |
| $ | |
2022 | | |
| | |||||
2023 |
| |
| |
| | |||
2024 |
| |
| |
| | |||
2025 |
| |
| |
| | |||
Thereafter(1) |
| |
| |
| | |||
Total principal maturities |
| |
| |
| | |||
Debt premium, discount and deferred financing costs, net |
| ( |
| ( |
| ( | |||
Total debt obligations, net | $ | | $ | | $ | |
(1) | As of June 30, 2021, the Company’s weighted average maturity for its secured mortgages was |
Note 9—Commitments and Contingencies
Unfunded Commitments—In June 2021, the Company acquired from iStar a purchase option agreement for $
16
assumption of iStar’s out of pocket costs and expenses in connection with entering into such option agreement. Under the option agreement, the Company has the right to acquire for $
In June 2021, the Company entered into an aggregate $
In June 2021, the Company entered into
In March 2021, the Company entered into an agreement pursuant to which, subject to certain conditions being met, it would acquire
In January 2021, the Company entered into an aggregate $
Legal Proceedings—The Company evaluates developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated financial statements.
Note 10—Risk Management and Derivatives
In the normal course of its ongoing business operations, the Company encounters credit risk. Credit risk is the risk of default on the Company’s leases that result from a tenant’s inability or unwillingness to make contractually required payments.
Risk concentrations—Concentrations of credit risks arise when the Company has multiple leases with a particular tenant or credit party, or a number of the Company’s tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features, such that their ability to meet contractual obligations, including those to the Company, could be similarly affected by changes in economic conditions.
17
Although the Company’s Ground Leases are geographically diverse and the tenants operate in a variety of industries and property types, to the extent the Company has a significant concentration of operating lease income from any tenant, the inability of that tenant to make its payment could have a material adverse effect on the Company. The Company did not have a significant concentration of operating lease income from any tenant for the periods presented.
Derivative instruments and hedging activity—The Company’s use of derivative financial instruments has been associated with debt issuances and primarily limited to the utilization of interest rate swaps and interest rate caps to manage interest rate risk exposure. The Company does not enter into derivatives for trading purposes.
The Company recognizes derivatives as either assets or liabilities on the Company’s consolidated balance sheets at fair value. Interest rate hedge assets are recorded in “Deferred expenses and other assets, net” and interest rate hedge liabilities are recorded in “Accounts payable, accrued expenses and other liabilities” on the Company’s consolidated balance sheets. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability, a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.
For the Company’s derivatives designated and qualifying as cash flow hedges, changes in the fair value of the derivatives are reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt.
For the Company’s derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in “Interest expense” in the Company’s consolidated statements of operations. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements.
The table below presents the Company’s derivatives as well as their classification on the consolidated balance sheets as of June 30, 2021 and December 31, 2020 ($ in thousands):(1)
June 30, 2021 |
| December 31, 2020 |
| |||||
Fair | Fair | Balance Sheet | ||||||
Derivative Type |
| Value(2) | Value(2) |
| Location | |||
Liabilities |
|
|
|
|
|
| ||
Interest rate swaps(3) | $ | | $ | |
| Accounts payable, accrued expenses and other liabilities | ||
Total | $ | | $ | |
(1) | During the three months ended June 30, 2020, the Company recorded $ |
(2) | The fair value of the Company’s derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2 within the fair value hierarchy. Over the next 12 months, the Company expects that $ |
(3) | During the six months ended June 30, 2021, the Company terminated its interest rate hedges for $ |
Credit Risk-Related Contingent Features—The Company reports derivative instruments on a gross basis in its consolidated financial statements. The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness,
18
then the Company could also be declared in default on its derivative obligations. In connection with its interest rate derivatives which were in a liability position as of December 31, 2020, the Company posted collateral of $
The table below presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020 ($ in thousands):
Amount of Gain | ||||||||
Amount of Gain | (Loss) Reclassified | |||||||
(Loss) Recognized | from Accumulated | |||||||
in Accumulated | Other | |||||||
Location of Gain (Loss) | Other | Comprehensive | ||||||
When Recognized in | Comprehensive | Income into | ||||||
Derivatives Designated in Hedging Relationships | Income |
| Income |
| Earnings | |||
For the Three Months Ended June 30, 2021 |
|
|
|
|
|
| ||
Interest rate swaps |
| Interest expense | $ | | $ | ( | ||
For the Three Months Ended June 30, 2020 |
|
|
|
|
| |||
Interest rate swaps |
| Interest expense | $ | ( | $ | ( | ||
For the Six Months Ended June 30, 2021 |
|
|
|
|
| |||
Interest rate swaps |
| Interest expense | $ | |
| $ | ( | |
For the Six Months Ended June 30, 2020 |
|
|
|
|
| |||
Interest rate swaps |
| Interest expense | $ | ( | $ | ( |
Note 11—Equity
Common Stock—The Company has
In February 2021, the Company and its affiliates, entered into an at-the-market equity offering (the “ATM”) pursuant to which the Company may sell shares of its common stock up to an aggregate purchase price of $
Equity Plans—During the third quarter 2018, the Company adopted an equity incentive plan providing for grants of interests (called “CARET Units”) in a subsidiary of the Operating Partnership intended to constitute profits interests within the meaning of relevant Internal Revenue Service guidance. The Company’s shareholders approved the plan in the second quarter of 2019. Grants under the plan are subject to graduated vesting based on time and hurdles of the Company’s
19
common stock price. Once a particular stock price hurdle is met, a portion of the awards become vested, but remain subject to being forfeited, in part, if additional time-based service conditions are not satisfied. The awards generally entitle plan participants to cash distributions of up to
The Company adopted an equity incentive plan to provide equity incentive opportunities to members of the Manager’s management team and employees who perform services for the Company, the Company’s independent directors, advisers, consultants and other personnel (the “2017 Equity Incentive Plan”). The 2017 Equity Incentive Plan provides for grants of stock options, shares of restricted common stock, phantom shares, dividend equivalent rights and other equity-based awards, including long-term incentive plan units. In the second quarter 2021, the Company issued
Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) consists of net unrealized gains (losses) on the Company’s derivative transactions.
Noncontrolling Interests—Noncontrolling interests includes unrelated third-party equity interests in ventures that are consolidated in the Company’s consolidated financial statements and CARET Units that have been granted to employees of the Company’s Manager.
Dividends—The Company elected to be taxed as a REIT beginning with its taxable year ended December 31, 2017. To qualify as a REIT, the Company must annually distribute, at a minimum, an amount equal to
20
payments in excess of operating cash flows. During the six months ended June 30, 2021 and 2020, the Company declared cash dividends on its common stock of $
Note 12—Earnings Per Share
Earnings per share (“EPS”) is calculated by dividing net income attributable to common shareholders by the weighted average number of shares outstanding for the period.
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Net income | $ | | $ | | $ | | $ | | |||||
Net income attributable to noncontrolling interests |
| ( |
| ( |
| ( |
| ( | |||||
Net income attributable to Safehold Inc. common shareholders for basic and diluted earnings per common share | $ | | $ | | $ | | $ | |
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Earnings attributable to common shares: |
|
|
|
|
|
|
|
|
| ||||
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Safehold Inc. common shareholders - basic | $ | | $ | | $ | | $ | | |||||
Net income attributable to Safehold Inc. common shareholders - diluted | $ | | $ | | $ | | $ | | |||||
Denominator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
| |||||
Weighted average common shares outstanding for basic earnings per common share |
| |
| |
| |
| | |||||
Add: Effect of assumed shares under treasury stock method for restricted stock units |
| |
| |
| |
| | |||||
Weighted average common shares outstanding for diluted earnings per common share |
| |
| |
| |
| | |||||
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
| |||||
Net income attributable to Safehold Inc. common shareholders - basic | $ | | $ | | $ | | $ | | |||||
Net income attributable to Safehold Inc. common shareholders - diluted | $ | | $ | | $ | | $ | |
Note 13—Related Party Transactions
The Company is externally managed by an affiliate of iStar, the Company’s largest shareholder. iStar has been an active real estate investor for over
21
Management Agreement
A summary of the terms of the management agreement is below:
During the three months ended June 30, 2021 and 2020, the Company recorded $
Expense Reimbursements
The Company pays, or reimburses the Manager for, certain of the Company’s operating expenses as well as the costs of personnel performing certain legal, accounting, finance, due diligence tasks and other services, in each case except those specifically required to be borne or elected not to be charged by the Manager under the management agreement.
During the three months ended June 30, 2021 and 2020, the Company was allocated $
Acquisitions
iStar has participated in certain of the Company’s investment transactions, as the Company’s tenant or either as a seller of land or by providing financing to the Company’s Ground Lease tenants. Following is a list of transactions in which the Company and iStar participated for the periods presented. These transactions were approved by the Company’s independent directors in accordance with the Company’s policy with respect to transactions in which iStar is also a participant.
22
In June 2020, the Company acquired the fee interest in an office condominium in Honolulu, HI and simultaneously structured and entered into a Ground Lease with the condominium's tenant. The tenant simultaneously acquired the leasehold interest in the office condominium. The Ground Lease has a term of
In February 2021, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant’s recapitalization of an existing hotel property. iStar provided a $
In March 2021, the Company entered into an agreement pursuant to which, subject to certain conditions being met, it would acquire
In June 2021, the Company acquired from iStar a purchase option agreement for $
In June 2021, the Company entered into
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are included with respect to, among other things, Safehold Inc.’s (the “Company’s”) current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in the Risk Factors section in this Form 10-Q and our Annual Report on Form 10-K, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “we,” “our” and “us” refer to Safehold Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance.
Executive Overview
The coronavirus (COVID-19) pandemic has continued to impact the U.S. and global economies. The U.S. financial markets have experienced disruption and constrained credit conditions within certain sectors, including real estate. We and our Manager continue to be focused on ensuring the health and safety of our personnel and the continuity of business activities, monitoring the effects of the crisis on our tenants, marshalling available liquidity to take advantage of investment opportunities and implementing appropriate cost containment measures. Although more normalized activities have resumed, at this time we cannot predict the full extent of the impacts of the COVID-19 pandemic on our business and the COVID-19 pandemic could have a delayed adverse impact on our financial results. We will continue to monitor its effects on a daily basis and will adjust our operations as necessary.
As of June 30, 2021, the percentage breakdown of the gross book value of our portfolio was 54% office, 28% multi-family, 17% hotels and 1% other. The COVID-19 pandemic hit the hotel sector, including the hotel properties in our portfolio, particularly hard. In addition to base rent, we are entitled to receive percentage rents under certain of our hotel Ground Leases, based on hotel revenues, and for the year ended December 31, 2020, percentage rents constituted approximately 2.5% of our total revenue. During 2020, operations at all of the hotel properties in our portfolio were substantially reduced. Our financial results for the six months ended June 30, 2021 were adversely impacted by the COVID-19 pandemic due to a decline in percentage rent revenues under our Park Hotels Portfolio in respect of 2020 hotel operating performance. Despite the decrease in percentage rent revenues, which may continue in subsequent quarters, we have received 100% of the Ground Lease rent due under our Ground Leases through June 30, 2021. However, there is no guarantee that we will not experience disruptions in the payment of future rents by our hotel or other tenants, which would adversely impact our cash flows from operations, and any such impact could be material.
We saw an increase in new investment activity in the second quarter 2021 versus the first quarter 2021, but continue to experience some effect from the COVID-19 pandemic on our new investment activity, primarily because of the reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions, including leasehold loans. In addition, although more normalized activities have resumed, the pandemic has made it more difficult to execute transactions as people work from home and are reluctant to visit properties, local governmental offices have reduced operations and third parties such as survey, insurance, environmental and similar
24
services have more limited capacities. These conditions will adversely affect our growth prospects while they persist. See the Risk Factors section of our 2020 Annual Report on Form 10-K for additional discussion of certain potential risks to our business arising from the COVID 19 pandemic.
Business Overview
We acquire, manage and capitalize Ground Leases and report our business as a single reportable segment. We believe owning a portfolio of Ground Leases affords our investors the opportunity for safe, growing income. Safety is derived from a Ground Lease’s senior position in the commercial real estate capital structure. Growth is realized through long-term leases with contractual periodic increases in rent. Capital appreciation is realized though appreciation in the value of the land over time and through our typical rights as landlord to acquire the commercial buildings on our land at the end of a Ground Lease, which may yield substantial value to us. The diversification by geographic location, property type and sponsor in our portfolio further reduces risk and enhances potential upside.
We have chosen to focus on Ground Leases because we believe they meet an important need in the real estate capital markets for our customers. We also believe Ground Leases offer a unique combination of safety, income growth and the potential for capital appreciation for investors for the following reasons:
High Quality Long-Term Cash Flow: We believe that a Ground Lease represents a safe position in a property’s capital structure. The combined property value subject to a Ground Lease typically significantly exceeds the Ground Lease landlord’s investment in the Ground Lease; therefore, even if the landlord takes over the property following a tenant default or upon expiration of the Ground Lease, the landlord is reasonably likely to recover substantially all of its Ground Lease investment, and possibly amounts in excess of its investment, depending upon prevailing market conditions. Additionally, the typical structure of a Ground Lease provides the landlord with a residual right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default. The landlord’s residual right provides a strong incentive for a Ground Lease tenant or its leasehold lender to make the required Ground Lease rent payments.
Income Growth: Ground Leases typically provide growing income streams through contractual base rent escalators that may compound over the duration of the lease. These rent escalators may be based on fixed increases, a Consumer Price Index (“CPI”) or a combination thereof, and may also include a participation in the gross revenues of the property. We believe that this growth in the lease rate over time can mitigate the effects of inflation and capture anticipated increases in land values over time, as well as serving as a basis for growing our dividend.
Opportunity for Capital Appreciation: The opportunity for capital appreciation comes in two forms. First, as the ground rent grows over time, the value of the Ground Lease should grow under market conditions in which capitalization rates remain flat. Second, our residual right to regain possession of the land underlying the Ground Lease and take title to the buildings and other improvements thereon for no additional consideration creates additional potential value to our shareholders.
We generally target Ground Lease investments in which the initial cost of the Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon (the “Combined Property Value”) as if the Ground Lease did not exist. If the initial cost of a Ground Lease is equal to 35% of the Combined Property Value, the remaining 65% of the Combined Property Value represents potential excess value over the amount of our investment that would be turned over to us upon the reversion of the property, assuming no intervening change in the Combined Property Value. In our view, there is a strong correlation between inflation and commercial real estate values over time, which supports our belief that the value of our owned residual portfolio should increase over time as inflation increases, although our ability to recognize value in certain cases may be limited by the rights of our tenants under some of our Ground Leases, including tenant rights to purchase our land in certain circumstances and the right of one tenant to demolish improvements prior to the expiration of the lease. See “Risk Factors” in our Annual Report on Form 10-K for a discussion of these tenant rights.
Owned Residual Portfolio: We believe that the residual right is a unique feature distinguishing Ground Leases from other fixed income investments and property types. We track the unrealized capital appreciation in the value of our owned residual portfolio over our basis (“UCA”) because we believe it provides relevant information with regard to the
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three key investment characteristics of our Ground Leases: (1) the safety of our position in a tenant’s capital structure; (2) the quality of the long-term cash flows generated by our portfolio rent that increases over time; and (3) increases and decreases in the Combined Property Value of the portfolio that reverts to us pursuant to such residual rights.
We believe that, similar to a loan to value metric, tracking changes in the value of our owned residual portfolio is useful as an indicator of the quality of our cash flows and the safety of our position in a tenant’s capital structure, which, in turn, supports our objective to pay and grow dividends over time. Observing changes in our owned residual portfolio value also helps us monitor changes in the value of the real estate portfolio that reverts to us under the terms of the leases, either at the expiration or earlier termination of the lease. The value may be realized by us at the relevant time by entering into a new lease reflecting then current market terms and values, selling the building, selling the building with the land, or operating the building directly and leasing the spaces to tenants at prevailing market rates.
We have engaged an independent valuation firm to prepare: (a) initial reports of the Combined Property Value associated with our Ground Lease portfolio; and (b) periodic updates of such reports, which we use, in part, to determine the current estimated value of our owned residual portfolio. We calculate this estimated value by subtracting our original aggregate cost basis in the Ground Leases from our estimated aggregate Combined Property Value, based on estimates by the valuation firm and by management.
The table below shows the current estimated UCA in our owned residual portfolio as of June 30, 2021 and December 31, 2020 ($ in millions):(1)
| June 30, 2021 |
| December 31, 2020 | |||
Combined Property Value(2) | $ | 9,480 | $ | 8,637 | ||
Ground Lease Cost(2) |
| 3,483 |
| 3,177 | ||
Unrealized Capital Appreciation in Our Owned Residual Portfolio |
| 5,997 |
| 5,460 |
(1) | Please review our Current Report on Form 8-K filed on July 22, 2021 for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of UCA. See “Risk Factors-Certain tenant rights under our Ground Leases may limit the value and the UCA we are able to realize upon lease expiration, sale of our land and Ground Leases or other events” in our Annual Report on Form 10-K for a discussion of certain tenant rights and other terms of the leases that may limit our ability to realize value from the UCA. |
(2) | Combined Property Value includes our applicable percentage interests in our unconsolidated ventures and $149.4 million and $111.9 million related to transactions with remaining unfunded commitments as of June 30, 2021 and December 31, 2020, respectively. Ground Lease Cost includes our applicable percentage interests in our unconsolidated ventures and $22.3 million and $18.2 million of unfunded commitments as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, our gross book value as a percentage of combined property value was 40%. |
We formed a wholly-owned subsidiary called “CARET” that is structured to track and capture UCA to the extent UCA is realized upon expiration of our Ground Leases, sales of our land and Ground Leases or certain other specified events. Under a shareholder-approved plan, management was granted up to 15% of CARET units, which remain subject to time-based vesting.
Market Opportunity: We believe that there is a significant market opportunity for a dedicated provider of Ground Lease capital like us. We believe that the market for existing Ground Leases is fragmented with ownership comprised primarily of high net worth individuals, pension funds, life insurance companies, estates and endowments. However, while we intend to pursue acquisitions of existing Ground Leases, our investment thesis is predicated, in part, on what we believe is an untapped market opportunity to expand the use of Ground Leases to a broader component of the approximately $7.0 trillion institutional commercial property market in the U.S. We intend to capture this market opportunity by utilizing multiple sourcing and origination channels, including manufacturing new Ground Leases with third-party owners and developers of commercial real estate and originating Ground Leases to provide capital for development and redevelopment. We further believe that Ground Leases generally represent an attractive source of capital for our tenants and may allow them to generate superior returns on their invested equity as compared to utilizing alternative sources of capital. We draw on the extensive investment origination and sourcing platform of iStar, the parent company of our Manager, to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants.
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Our Portfolio
Our portfolio of properties is diversified by property type and region. Our portfolio is comprised of Ground Leases and a master lease (relating to five hotel assets that we refer to as our “Park Hotels Portfolio”) that has many of the characteristics of a Ground Lease. As of June 30, 2021, our estimated portfolio Ground Rent Coverage was 3.3x (see the “Risk Factors -Our estimated UCA, Combined Property Value and Ground Rent Coverage, may not reflect the full potential impact of the COVID-19 pandemic and may decline materially in future periods, -We rely on Property NOI as reported to us by our tenants, -Our estimates of Ground Rent Coverage for properties in development or transition, or for which we do not receive current tenant financial information, may prove to be incorrect” in our Annual Report on Form 10-K for a discussion of our estimated Ground Rent Coverage).
Below is an overview of the top 10 assets in our portfolio as of June 30, 2021 (based on gross book value and excluding unfunded commitments):(1)
Lease |
| ||||||||||
Property | Expiration / | Rent Escalation | % of Gross | ||||||||
Property Name |
| Type |
| Location |
| As Extended |
| Structure |
| Book Value | |
425 Park Avenue(2) |
| Office |
| New York, NY |
| 2090 / 2090 |
| Fixed with Inflation Adjustments |
| 9.9 | % |
135 West 50th Street |
| Office |
| New York, NY |
| 2123 / 2123 |
| Fixed with Inflation Adjustments |
| 8.4 | % |
195 Broadway |
| Office |
| New York, NY |
| 2118 / 2118 |
| Fixed with Inflation Adjustments |
| 8.1 | % |
Park Hotels Portfolio(3) |
| Hotel |
| Various |
| 2025 / 2035 |
| % Rent |
| 6.3 | % |
Alohilani |
| Hotel |
| Honolulu, HI |
| 2118 / 2118 |
| Fixed with Inflation Adjustments |
| 5.8 | % |
685 Third Avenue |
| Office |
| New York, NY |
| 2123 / 2123 |
| Fixed with Inflation Adjustments |
| 5.3 | % |
1111 Pennsylvania Avenue |
| Office |
| Washington, DC |
| 2117 / 2117 |
| Fixed with Inflation Adjustments |
| 4.3 | % |
32 Old Slip(2) |
| Office |
| New York, NY |
| 2114 / 2164 |
| Fixed Bumps |
| 2.6 | % |
Domain Tower |
| Office |
| Austin, TX |
| 2118 / 2118 |
| Fixed with Inflation Adjustments |
| 2.3 | % |
Anderson Drive |
| Multi-family |
| Fairfax, VA |
| 2082 / 2082 |
| Fixed with Inflation Adjustments |
| 2.2 | % |
(1) | Gross book value represents the historical purchase price plus accrued interest on sales-type leases. |
(2) | Gross book value for these properties represents our pro rata share of the gross book value of our unconsolidated ventures (refer to Note 6). |
(3) | The Park Hotels Portfolio consists of five properties and is subject to a single master lease. A majority of the land underlying one of these properties is owned by a third party and is ground leased to us through 2044 subject to changes in the CPI; however, our tenant at the property pays this cost directly to the third party. |
The following tables show our portfolio by region and property type as of June 30, 2021, excluding unfunded commitments:
% of Gross |
| ||
Region |
| Book Value | |
Northeast |
| 41 | % |
West |
| 22 | |
Mid Atlantic |
| 17 | |
Southeast |
| 10 | |
Southwest |
| 7 | |
Central |
| 3 |
% of Gross |
| ||
Property Type |
| Book Value | |
Office |
| 54 | % |
Multifamily |
| 28 | |
Hotel |
| 17 | |
Other |
| 1 |
Unfunded Commitments
In June 2021, we acquired from iStar a purchase option agreement for $1.2 million, which amount was equal to the deposit previously made by iStar under such option agreement, plus assumption of iStar’s out of pocket costs and expenses in connection with entering into such option agreement. Under the option agreement, we have the right to acquire for $215.0 million a property that is under a separate option for the benefit of a third party, whereby such third party has
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the right to enter into a Ground Lease and develop approximately 1.1 million square feet of office space. There can be no assurance that we will exercise our option to acquire the property.
In June 2021, we entered into an aggregate $17.0 million commitment to acquire land for $5.2 million and provide a $11.8 million leasehold improvement allowance for the Ground Lease tenant's development of a multi-family property. As of June 30, 2021, we had acquired the land and expect to fund the remaining commitment upon the completion of certain conditions.
In June 2021, we entered into two agreements pursuant to each of which we would acquire land and a related Ground Lease originated by iStar when certain construction related conditions are met by a specified time period. The purchase price to be paid for each is $42.0 million, plus an amount necessary for iStar to achieve the greater of a 1.25x multiple and a 9% return on its investment. In addition, each Ground Lease provides for a leasehold improvement allowance up to a maximum of $83.0 million, which obligation would be assumed by us upon acquisition. If certain construction conditions are not met within a specified time period, we will have no obligation to acquire the Ground Leases or fund the leasehold improvement allowances. There can be no assurance that the conditions to closing will be satisfied and that we will acquire the properties and Ground Leases from iStar.
In March 2021, we entered into an agreement pursuant to which, subject to certain conditions being met, we would acquire 100% of the limited liability company interests in the owner of a fee estate subject to a Ground Lease on which a multi-family project is currently being constructed. As consideration for the transfer, we will acquire the ground lessor from iStar for approximately $16.1 million plus any additional amounts funded by iStar pursuant to the Ground Lease documents prior to the transfer. The Ground Lease documents provide for future funding obligations of approximately $11.9 million of deferred purchase price and $52.0 million of leasehold improvement allowance upon achievement of certain milestones.
In January 2021, we entered into an aggregate $36.0 million commitment to acquire land for $18.0 million and provide a $18.0 million leasehold improvement allowance for the Ground Lease tenant’s conversion of an office property into a multi-family property. As of June 30, 2021, we had acquired the land and funded $7.5 million of the leasehold improvement allowance. We expect to fund the remaining commitment upon the completion of certain conditions.
Results of Operations for the Three Months Ended June 30, 2021 compared to the Three Months Ended June 30, 2020
| For the Three Months Ended |
|
| |||||||
June 30, | ||||||||||
2021 | 2020 | $ Change | ||||||||
(in thousands) | ||||||||||
Operating lease income | $ | 16,964 | $ | 17,113 | $ | (149) | ||||
Interest income from sales-type leases |
| 27,126 |
| 19,831 |
| 7,295 | ||||
Other income |
| 123 |
| 409 |
| (286) | ||||
Total revenues |
| 44,213 |
| 37,353 |
| 6,860 | ||||
Interest expense |
| 19,160 |
| 16,233 |
| 2,927 | ||||
Real estate expense |
| 722 |
| 536 |
| 186 | ||||
Depreciation and amortization |
| 2,385 |
| 2,355 |
| 30 | ||||
General and administrative |
| 8,074 |
| 6,369 |
| 1,705 | ||||
Other expense |
| 21 |
| 120 |
| (99) | ||||
Total costs and expenses |
| 30,362 |
| 25,613 |
| 4,749 | ||||
Loss on early extinguishment of debt |
| — |
| — |
| — | ||||
Earnings from equity method investments |
| 929 |
| 822 |
| 107 | ||||
Net income | $ | 14,780 | $ | 12,562 | $ | 2,218 |
Operating lease income decreased to $17.0 million during the three months ended June 30, 2021 from $17.1 million for the same period in 2020. The decrease was due primarily to the reversal of accrued operating lease income
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from a non-Ground Leased retail tenant that we do not expect to collect, partially offset by new Ground Leases acquired and classified as operating leases since July 1, 2020.
Interest income from sales-type leases increased to $27.1 million for the three months ended June 30, 2021 from $19.8 million for the same period in 2020. The increase was due primarily to the origination of Ground Leases classified as sales-type leases since July 1, 2020.
Other income for both the three months ended June 30, 2021 and 2020 includes $0.1 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. In addition, during the three months ended June 30, 2020, we recognized $0.1 million of interest income earned on our cash balances.
During the three months ended June 30, 2021 and 2020, we incurred interest expense from our debt obligations of $19.2 million and $16.2 million, respectively. The increase in 2021 was primarily the result of additional borrowings to fund our growing portfolio of Ground Leases.
Real estate expense was $0.7 million and $0.5 million during the three months ended June 30, 2021 and 2020, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense. In addition, during both the three months ended June 30, 2021 and 2020, we also recorded $0.1 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. The increase in 2021 was primarily the result of an increase in legal fees at certain of our properties.
Depreciation and amortization was $2.4 million and $2.4 million during the three months ended June 30, 2021 and 2020, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and the Buckler multi-family property and the amortization of in-place lease assets.
General and administrative expenses include management fees, stock-based compensation (primarily to our independent directors), costs of operating as a public company and an allocation of expenses to us from our Manager. The following table presents our general and administrative expenses for the three months ended June 30, 2021 and 2020 ($ in thousands):
For the Three Months Ended | |||||||
June 30, | |||||||
| 2021 |
| 2020 |
| |||
Management fees(1) | $ | 3,524 | $ | 3,190 | |||
Public company and other costs |
| 1,460 |
| 709 | |||
Expense reimbursements to the Manager(1) |
| 1,875 |
| 1,250 | |||
Stock-based compensation(2) |
| 1,215 |
| 1,220 | |||
Total general and administrative expenses | $ | 8,074 | $ | 6,369 |
(1) | Refer to Note 13. |
(2) | During the three months ended June 30, 2021 and 2020, $1.1 million and $1.0 million, respectively, of stock-based compensation represented compensation to our independent directors. |
During the three months ended June 30, 2021, other expense consists primarily of fees related to unsuccessful pursuit costs and fees related to our derivative transactions. During the three months ended June 30, 2020, other expense consists primarily of property appraisal fees.
During the three months ended June 30, 2021, earnings from equity method investments resulted from our $0.8 million pro rata share of income from a venture that we entered into with an existing shareholder that acquired the existing Ground Lease at 425 Park Avenue in New York City in November 2019 (refer to Note 6) and our $0.1 million pro rata share of income from an equity interest in a Ground Lease we acquired in June 2021 (refer to Note 6). During the three months ended June 30, 2020, earnings from equity method investments resulted from our pro rata share of income from the venture that we entered into in November 2019.
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Results of Operations for the Six Months Ended June 30, 2021 compared to the Six Months Ended June 30, 2020
| For the Six Months Ended |
|
| ||||||
June 30, | |||||||||
2021 | 2020 | $ Change | |||||||
(in thousands) | |||||||||
Operating lease income | $ | 34,374 | $ | 37,893 | $ | (3,519) | |||
Interest income from sales-type leases |
| 53,100 |
| 38,732 |
| 14,368 | |||
Other income |
| 246 |
| 893 |
| (647) | |||
Total revenues |
| 87,720 |
| 77,518 |
| 10,202 | |||
Interest expense |
| 36,327 |
| 31,381 |
| 4,946 | |||
Real estate expense |
| 1,319 |
| 1,335 |
| (16) | |||
Depreciation and amortization |
| 4,770 |
| 4,702 |
| 68 | |||
General and administrative |
| 14,729 |
| 11,622 |
| 3,107 | |||
Other expense |
| 391 |
| 160 |
| 231 | |||
Total costs and expenses |
| 57,536 |
| 49,200 |
| 8,336 | |||
Loss on early extinguishment of debt |
| (216) |
| — |
| (216) | |||
Earnings from equity method investments |
| 1,768 |
| 1,640 |
| 128 | |||
Net income | $ | 31,736 | $ | 29,958 | $ | 1,778 |
Operating lease income decreased to $34.4 million during the six months ended June 30, 2021 from $37.9 million for the same period in 2020. The decrease was due primarily to a decrease in percentage rent from our Park Hotels Portfolio resulting from a decline in 2020 hotel operating performance due to the COVID-19 pandemic.
Interest income from sales-type leases increased to $53.1 million for the six months ended June 30, 2021 from $38.7 million for the same period in 2020. The increase was due primarily to the origination of Ground Leases classified as sales-type leases.
Other income for both the six months ended June 30, 2021 and 2020 includes $0.2 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. In addition, during the six months ended June 30, 2020, we recognized $0.2 million of interest income earned on our cash balances.
During the six months ended June 30, 2021 and 2020, we incurred interest expense from our secured financings of $36.3 million and $31.4 million, respectively. The increase in 2021 was primarily the result of additional borrowings to fund our growing portfolio of Ground Leases.
Real estate expense was $1.3 million and $1.3 million during the six months ended June 30, 2021 and 2020, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense. In addition, during both the six months ended June 30, 2021 and 2020, we also recorded $0.2 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.
Depreciation and amortization was $4.8 million and $4.7 million during the six months ended June 30, 2021 and 2020, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and our ownership of the Buckler multi-family property. The slight increase in 2021 was due primarily to an increase in the amortization of in-place intangible assets resulting from new acquisitions with in-place intangible assets.
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General and administrative expenses include management fees, stock-based compensation (primarily to our independent directors), costs of operating as a public company and an allocation of expenses to us from our Manager. The following table presents our general and administrative expenses for the six months ended June 30, 2021 and 2020 ($ in thousands):
For the Six Months Ended | ||||||
June 30, | ||||||
| 2021 |
| 2020 | |||
Management fees(1) | $ | 6,996 | $ | 6,049 | ||
Public company and other costs |
| 2,584 |
| 1,707 | ||
Expense reimbursements to the Manager(1) |
| 3,750 |
| 2,500 | ||
Stock-based compensation(2) |
| 1,399 |
| 1,366 | ||
Total general and administrative expenses | $ | 14,729 | $ | 11,622 |
(1) | Refer to Note 13. |
(2) | During the six months ended June 30, 2021 and 2020, $1.1 million and $1.0 million, respectively, of stock-based compensation represented compensation to our independent directors. |
During the six months ended June 30, 2021, other expense consists primarily of fees related to public company filings. During the six months ended June 30, 2020, other expense consists primarily of property appraisal fees.
During the six months ended June 30, 2021, loss on early extinguishment of debt resulted from the replacement of our secured revolving credit facility with our new Unsecured Revolver (refer to Note 8).
During the six months ended June 30, 2021, earnings from equity method investments resulted from our $1.7 million pro rata share of income from a venture that we entered into with an existing shareholder that acquired the existing Ground Lease at 425 Park Avenue in New York City in November 2019 (refer to Note 6) and our $0.1 million pro rata share of income from an equity interest in a Ground Lease we acquired in June 2021 (refer to Note 6). During the six months ended June 30, 2020, earnings from equity method investments resulted from our pro rata share of income from the venture that we entered into in November 2019.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including to pay interest and repay borrowings, fund and maintain our assets and operations, complete acquisitions and originations of investments, make distributions to our shareholders and meet other general business needs. In order to qualify as a REIT, we are required under the Internal Revenue Code of 1986 to distribute to our shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly cash distributions to our shareholders sufficient to meet REIT qualification requirements.
In the first quarter 2021, we received investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+ and entered into a new unsecured revolver (refer to Note 8) with a total capacity of $1.0 billion (the “Unsecured Revolver”). In the second quarter 2021, we issued $400 million aggregate principal amount of 2.80% senior notes due 2031 (the “Notes”). The Notes were issued at 99.127% of par. As evidenced by our Unsecured Revolver and the Notes, we believe the strong credit profile we have established utilizing our modern Ground Leases and our investment grade credit ratings will further accelerate our ability to bring commercial real estate owners, developers and sponsors more efficiently priced capital.
Our Unsecured Revolver replaced our secured revolving credit facility. With its increased size of total capacity of $1.0 billion (which can be increased to $1.35 billion with the obtainment of additional lender commitments) and reduced cost, our new Unsecured Revolver allows us significant operational and financial flexibility and supports our ability to scale our Ground Lease platform. We also believe our Unsecured Revolver marked a strong first step towards our goal of unlocking opportunities from the unsecured capital markets to deliver lower cost, more efficient capital to our customers.
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In the first quarter 2021, we entered into an at-the-market equity offering (the “ATM”) pursuant to which we may sell shares of our common stock up to an aggregate purchase price of $250.0 million. As of June 30, 2021, we had $248.9 million of aggregate purchase price remaining under our ATM.
As of June 30, 2021, our liquidity position included $33.9 million of unrestricted cash and $965 million of undrawn capacity on our Unsecured Revolver. We refer to the combined $999 million of unrestricted cash and additional borrowing capacity on our Unsecured Revolver as our “equity” liquidity which can be used for general corporate purposes or leveraged to acquire new Ground Lease assets. Our primary sources of cash to date have been proceeds from equity offerings and private placements, proceeds from our initial capitalization by iStar and two institutional investors and borrowings from our debt facilities. Our primary uses of cash to date have been the acquisition/origination of Ground Leases, repayments on our debt facilities and distributions to our shareholders.
During the six months ended June 30, 2020, we recognized $3.6 million of percentage rent revenues from our Park Hotels Portfolio in respect of 2019 hotel operating performance. During the six months ended June 30, 2021, we did not recognize any percentage rent revenues from our Park Hotels Portfolio in respect of 2020 hotel operating performance impacted by the COVID-19 pandemic. Any decrease in percentage rent revenues, as well as any disruptions in the payment of future rents by our hotel or other tenants, would adversely impact our cash flows from operations, and any such impact could be material.
We expect our future liquidity requirements over the next 12 months and beyond to include debt service, distributions to our shareholders, working capital, acquisitions and originations of Ground Lease investments (including in respect of unfunded commitments), debt maturities and payments of fees under our management agreement to the extent we do not elect to pay the fees in common stock. Our primary sources of liquidity going forward will generally consist of cash on hand and cash flows from operations, new financings, unused borrowing capacity under our Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement) and common and/or preferred equity issuances. We expect that we will be able to meet our liquidity requirements over the next 12 months and beyond.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2020 Annual Report on Form 10-K.
New Accounting Pronouncements—For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market prices and interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. One of the principal market risks facing us is interest rate risk on our floating rate indebtedness.
Subject to qualifying and maintaining our qualification as a REIT for U.S. federal income tax purposes, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. Our primary objectives when undertaking hedging transactions will be to reduce our floating rate exposure and to fix a portion of the interest rate for anticipated financing and refinancing transactions. However, we can provide no assurances that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility on our portfolio. Our current portfolio is not subject to foreign currency risk.
Our objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows, and to lower our overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into hedging instruments such as interest rate swap agreements and interest rate cap agreements in order to mitigate our interest rate risk on a related floating rate financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.
As of June 30, 2021, we had $1.9 billion principal amount of fixed-rate debt outstanding and $35.0 million of floating-rate debt outstanding. The following table quantifies the potential changes in annual net income should interest rates decrease by 10 basis points or increase by 10, 50 and 100 basis points, assuming no change in our interest earning assets, interest bearing liabilities, derivative contracts or the shape of the yield curve (i.e., relative interest rates). The base interest rate scenario assumes the one-month LIBOR rate of 0.10% as of June 30, 2021. Actual results could differ significantly from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
Change in Interest Rates |
| Net Income (Loss) | |
-10 Basis Points | $ | 35 | |
Base Interest Rate |
| — | |
+10 Basis Points |
| (35) | |
+ 50 Basis Points |
| (175) | |
+100 Basis Points |
| (350) |
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Accounting Officer, who is currently performing the functions of the Company's principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has formed a disclosure committee that is responsible for considering the materiality of information and determining the disclosure obligations of the Company on a timely basis. The disclosure committee reports directly to the Company’s Chief Executive Officer and principal financial officer (whose functions are currently being performed by the Company's Chief Accounting Officer).
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the disclosure committee and other members of management, including its Chief Executive Officer and Chief Accounting Officer (performing the functions of the principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) or Rule 15d-15. Based upon
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that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes during the last fiscal quarter in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be party, or our properties may be subject to, various claims, lawsuits or other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial position, liquidity or results of operations if determined adversely to us.
Item 1A. Risk Factors
Our credit ratings will impact our borrowing costs and our access to debt capital markets.
Our borrowing costs on our Unsecured Revolver and our access to debt capital markets will depend significantly on our credit ratings, which are based on our operating performance, liquidity and leverage ratios, financial condition and prospects, and other factors. Our unsecured corporate credit ratings from major national credit rating agencies are currently investment grade. However, there can be no assurance that our credit ratings or outlook will not be lowered in the future in response to adverse changes in these metrics caused by our operating results or by actions that we take that may reduce our profitability or that require us to incur additional indebtedness. Any downgrade in our credit ratings will increase our borrowing costs on our Unsecured Revolver and could have a material adverse effect on our ability to raise capital in the debt capital markets, which could in turn have a material adverse effect on our business, liquidity and the market price of our common stock.
There were no other material changes from the risk factors previously disclosed in our 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the three months ended June 30, 2021.
The following table sets forth information with respect to purchases of our common stock made by iStar during the three months ended June 30, 2021. The purchases were made in open market transactions on an opportunistic basis and not as part of a publicly announced plan. The amounts do not reflect shares of our common stock issued to iStar, in its capacity as our Manager, in lieu of cash management fees.
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Dollar Value of Shares that May Yet be Purchased under the Plans | ||||
April 1 to April 30 | — | — | N/A | N/A | |||
May 1 to May 31 | 197,721 | $ 69.59 | N/A | N/A | |||
June 1 to June 30 | 151,113 | $ 74.03 | N/A | N/A |
Unregistered Sales of Equity Securities
In April 2021, we issued 50,418 shares of our common stock to our Manager as payment for the management fee for the three months ended March 31, 2021. These shares were not registered under the Securities Act in reliance upon exemption from registration provided by Section 4(a)(2) of the Securities Act. Such shares are subject to certain resale restrictions.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
INDEX TO EXHIBITS
Exhibit |
| Document Description |
4.1 | ||
4.2 | ||
31.0 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act. | |
32.0 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act. | |
101* | The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021 is formatted in iXBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets (unaudited) as of June 30, 2021 and December 31, 2020; (ii) the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2021 and 2020; (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2021 and 2020; (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three and six months ended June 30, 2021 and 2020; (v) the Consolidated Statements of Cash Flows (unaudited) for the three and six months ended June 30, 2021 and 2020; and (vi) the Notes to the Consolidated Financial Statements (unaudited). | |
104 | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) |
* | In accordance with Rule 406T of Regulation S-T, the iXBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Safehold Inc. | ||
Registrant | ||
Date: | July 22, 2021 | /s/ JAY SUGARMAN |
Jay Sugarman | ||
Chairman of the Board of Directors and Chief | ||
Executive Officer (principal executive officer) | ||
Safehold Inc. | ||
Registrant | ||
Date: | July 22, 2021 | /s/ GARETT ROSENBLUM |
Garett Rosenblum | ||
Chief Accounting Officer | ||
(principal financial officer) |
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Exhibit 31.0
CERTIFICATION
I, Jay Sugarman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safehold Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | July 22, 2021 | By: | /s/ JAY SUGARMAN | |
| | Name: | Jay Sugarman | |
| | Title: | Chief Executive Officer |
CERTIFICATION
I, Garett Rosenblum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Safehold Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | July 22, 2021 | By: | /s/ GARETT ROSENBLUM | |
| | Name: | Garett Rosenblum | |
| | Title: | Chief Accounting Officer (principal financial officer) |
Exhibit 32.0
Certification of Chief Executive Officer
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
The undersigned, the Chief Executive Officer of Safehold Inc. (the "Company"), hereby certifies on the date hereof, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the "Form 10-Q"), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: | July 22, 2021 | By: | /s/ JAY SUGARMAN | |
| | Name: | Jay Sugarman | |
| | Title: | Chief Executive Officer |
Certification of Principal Financial Officer
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
The undersigned, the principal financial officer of Safehold Inc. (the "Company"), hereby certifies on the date hereof, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the "Form 10-Q"), filed concurrently herewith by the Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: | July 22, 2021 | By: | /s/ GARETT ROSENBLUM | |
| | Name: | Garett Rosenblum | |
| | Title: | Chief Accounting Officer (principal financial officer) |