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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File No. 001-38122

Safehold Inc.

(Exact name of registrant as specified in its charter)

Maryland

30-0971238

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

1114 Avenue of the Americas

 

39th Floor

New York

,

NY

10036

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (212930-9400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

SAFE

 

NYSE

Indicate by check mark whether the registrant: (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

  

Accelerated filer

  

Non-accelerated filer

  

Smaller reporting company

  

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes     No 

As of October 28, 2022, there were 62,187,433 shares, $0.01 par value per share, of Safehold Inc. common stock outstanding.

Table of Contents

TABLE OF CONTENTS

 

 

Page

PART I

Consolidated Financial Information

Item 1.

Financial Statements:

Consolidated Balance Sheets (unaudited) as of September 30, 2022 and December 31, 2021

1

Consolidated Statements of Operations (unaudited)—For the three and nine months ended

September 30, 2022 and 2021

2

Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three and nine months ended September 30, 2022 and 2021

3

Consolidated Statements of Changes in Equity (unaudited)—For the three and nine months ended September 30, 2022 and 2021

4

Consolidated Statements of Cash Flows (unaudited)—For the nine months ended September 30, 2022 and 2021

6

Notes to Consolidated Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

PART II

Other Information

44

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

SIGNATURES

48

Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1.   Financial Statements

Safehold Inc.

Consolidated Balance Sheets(1)

(In thousands)

(unaudited)

September 30, 

December 31,

    

2022

    

2021

ASSETS

 

  

 

  

Net investment in sales-type leases

$

3,066,113

$

2,412,716

Ground Lease receivables

 

1,326,632

 

796,252

Real estate

 

  

 

  

Real estate, at cost

740,971

740,971

Less: accumulated depreciation

 

(32,864)

 

(28,343)

Real estate, net

 

708,107

 

712,628

Real estate-related intangible assets, net

 

219,469

 

224,182

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

 

927,576

 

936,810

Equity investments in Ground Leases

 

178,643

 

173,374

Cash and cash equivalents

 

35,574

 

29,619

Restricted cash

 

58,001

 

8,897

Deferred operating lease income receivable

 

141,005

 

117,311

Deferred expenses and other assets, net

 

58,330

 

40,747

Total assets

$

5,791,874

$

4,515,726

LIABILITIES AND EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other liabilities(2)

$

122,662

$

67,592

Real estate-related intangible liabilities, net

 

64,800

 

65,429

Debt obligations, net

 

3,458,905

 

2,697,503

Total liabilities

 

3,646,367

 

2,830,524

Commitments and contingencies (refer to Note 9)

 

  

 

  

Redeemable noncontrolling interests (refer to Note 3)

19,658

Equity:

 

  

 

  

Safehold Inc. shareholders' equity:

 

  

 

  

Common stock, $0.01 par value, 400,000 shares authorized, 62,187 and 56,619 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

622

 

566

Additional paid-in capital

 

1,981,155

 

1,663,324

Retained earnings

 

140,475

 

59,368

Accumulated other comprehensive loss

 

(8,420)

 

(40,980)

Total Safehold Inc. shareholders' equity

 

2,113,832

 

1,682,278

Noncontrolling interests

 

12,017

 

2,924

Total equity

 

2,125,849

 

1,685,202

Total liabilities, redeemable noncontrolling interests and equity

$

5,791,874

$

4,515,726

(1)Refer to Note 2 for details on the Company’s consolidated variable interest entities (“VIEs”).
(2)As of September 30, 2022 and December 31, 2021, includes $8.9 million and $6.2 million, respectively, due to related parties.

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

1

Table of Contents

Safehold Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

    

Revenues:

 

  

 

  

 

  

 

  

 

Interest income from sales-type leases(1)

$

54,736

$

30,145

$

146,014

$

83,244

Operating lease income

16,507

16,992

49,925

51,367

Other income

 

453

 

144

 

1,004

 

390

Total revenues

 

71,696

 

47,281

 

196,943

 

135,001

Costs and expenses:

 

  

 

  

 

  

 

  

Interest expense

 

35,463

 

20,932

 

91,050

 

57,259

Real estate expense

 

866

 

719

 

2,272

 

2,038

Depreciation and amortization

 

2,407

 

2,390

 

7,215

 

7,160

General and administrative(2)

 

9,551

 

6,658

 

29,203

 

21,388

Other expense

 

6,073

 

350

 

6,777

 

740

Total costs and expenses

 

54,360

 

31,049

 

136,517

 

88,585

Gain on sale of net investment in lease

55,811

55,811

Income from operations before other items

 

73,147

 

16,232

 

116,237

 

46,416

Loss on early extinguishment of debt

 

 

 

 

(216)

Earnings from equity method investments

 

2,244

 

2,244

 

6,772

 

4,012

Selling profit from sales-type leases

1,833

1,833

Net income

 

75,391

 

20,309

 

123,009

 

52,045

Net income attributable to noncontrolling interests

 

(9,314)

 

(105)

 

(9,381)

 

(201)

Net income attributable to Safehold Inc. common shareholders

$

66,077

$

20,204

$

113,628

$

51,844

Per common share data:

 

  

 

  

 

  

 

  

Net income

 

  

 

  

 

  

 

  

Basic

$

1.06

$

0.38

$

1.87

$

0.97

Diluted

$

1.06

$

0.38

$

1.87

$

0.97

Weighted average number of common shares:

 

  

 

  

  

Basic

 

62,150

 

53,498

 

60,776

 

53,347

Diluted

 

62,150

 

53,511

 

60,776

 

53,359

(1)For the three months ended September 30, 2021, the Company recorded $2.1 million of “Interest income from sales-type leases” in its consolidated statements of operations from its Ground Leases with iStar Inc. (“iStar”). For the nine months ended September 30, 2022 and 2021, the Company recorded $2.1 million and $6.2 million, respectively, of “Interest income from sales-type leases” in its consolidated statements of operations from its Ground Leases with iStar.
(2)For the three months ended September 30, 2022 and 2021, includes $8.5 million and $5.6 million, respectively, of general and administrative expenses incurred to related parties that includes management fees, expense reimbursements to the Company’s Manager and equity-based compensation. For the nine months ended September 30, 2022 and 2021, includes $25.8 million and $17.8 million, respectively, of general and administrative expenses incurred to related parties that includes management fees, expense reimbursements to the Company’s Manager and equity-based compensation.

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

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Table of Contents

Safehold Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(unaudited)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

    

Net income

$

75,391

$

20,309

$

123,009

$

52,045

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Reclassification of losses on derivatives into earnings

 

943

 

1,034

 

2,945

 

2,156

Unrealized gain on derivatives

 

18,587

 

 

29,615

 

13,290

Other comprehensive income (loss)

 

19,530

 

1,034

 

32,560

 

15,446

Comprehensive income

 

94,921

 

21,343

 

155,569

 

67,491

Comprehensive income attributable to noncontrolling interests

 

(9,314)

 

(105)

 

(9,381)

 

(201)

Comprehensive income attributable to Safehold Inc.

$

85,607

$

21,238

$

146,188

$

67,290

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

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Safehold Inc.

Consolidated Statements of Changes in Equity

(In thousands)

(unaudited)

  

Retained

Accumulated

Redeemable

Common

Additional

Earnings

Other

Noncontrolling

Stock at

Paid-In

(Accumulated

Comprehensive

Noncontrolling

Total

    

Interests(1)

    

    

Par

    

Capital

    

Deficit)

    

Income (Loss)

    

Interests

    

Equity

Balance at June 30, 2022

$

19,000

$

621

$

1,975,933

$

85,405

$

(27,950)

$

3,320

$

2,037,329

Net income

 

658

 

 

 

66,077

 

 

8,656

 

74,733

Issuance of common stock, net / amortization

 

 

1

 

5,222

 

 

 

52

 

5,275

Dividends declared ($0.177 per share)

 

 

 

 

(11,007)

 

 

 

(11,007)

Change in accumulated other comprehensive income (loss)

 

 

 

 

 

19,530

 

 

19,530

Distributions to noncontrolling interests

 

 

 

 

 

 

(11)

 

(11)

Balance at September 30, 2022

$

19,658

$

622

$

1,981,155

$

140,475

$

(8,420)

$

12,017

$

2,125,849

Balance at June 30, 2021

$

$

533

$

1,421,185

$

37,870

$

(43,049)

$

2,454

$

1,418,993

Net income

 

 

 

 

20,204

 

 

105

 

20,309

Issuance of common stock, net / amortization

 

 

33

 

237,787

 

 

 

132

 

237,952

Dividends declared ($0.17 per share)

 

 

 

 

(9,619)

 

 

 

(9,619)

Change in accumulated other comprehensive income (loss)

 

 

 

 

 

1,034

 

 

1,034

Distributions to noncontrolling interests

 

 

 

 

 

 

(12)

 

(12)

Balance at September 30, 2021

$

$

566

$

1,658,972

$

48,455

$

(42,015)

$

2,679

$

1,668,657

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Safehold Inc.

Consolidated Statements of Changes in Equity

(In thousands)

(unaudited)

Retained

Accumulated

Redeemable

Common

Additional

Earnings

Other

Noncontrolling

Stock at

Paid-In

(Accumulated

Comprehensive

Noncontrolling

Total

    

Interests(1)

Par

    

Capital

    

Deficit)

    

Income (Loss)

    

Interests

    

Equity

Balance at December 31, 2021

$

$

566

$

1,663,324

$

59,368

$

(40,980)

$

2,924

$

1,685,202

Net income

 

658

 

 

 

113,628

 

 

8,723

 

122,351

Issuance of common stock, net / amortization

 

 

56

 

318,002

 

 

 

385

 

318,443

Dividends declared ($0.524 per share)

 

 

 

 

(32,521)

 

 

 

(32,521)

Change in accumulated other comprehensive income (loss)

 

 

 

 

 

32,560

 

 

32,560

Contributions from noncontrolling interests, net

18,829

18

18

Distributions to noncontrolling interests

 

 

 

 

 

 

(33)

 

(33)

Additional paid in capital attributable to redeemable noncontrolling interests

171

(171)

(171)

Balance at September 30, 2022

$

19,658

$

622

$

1,981,155

$

140,475

$

(8,420)

$

12,017

$

2,125,849

Balance at December 31, 2020

$

$

532

$

1,412,107

$

23,945

$

(57,461)

$

2,180

$

1,381,303

Net income

 

 

 

 

51,844

 

 

201

 

52,045

Issuance of common stock, net / amortization

 

 

34

 

246,865

 

 

 

331

 

247,230

Dividends declared ($0.50224 per share)

 

 

 

 

(27,334)

 

 

 

(27,334)

Change in accumulated other comprehensive income (loss)

 

 

 

 

 

15,446

 

 

15,446

Distributions to noncontrolling interests

 

 

 

 

 

 

(33)

 

(33)

Balance at September 30, 2021

$

$

566

$

1,658,972

$

48,455

$

(42,015)

$

2,679

$

1,668,657

(1)Refer to Note 3.

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

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Safehold Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

For the Nine Months Ended

September 30, 

    

2022

    

2021

    

Cash flows from operating activities:

 

  

 

  

 

Net income

$

123,009

$

52,045

Adjustments to reconcile net income to cash flows from operating activities:

 

  

 

Depreciation and amortization

 

7,215

 

7,160

Stock-based compensation expense

 

1,518

 

1,574

Deferred operating lease income

 

(23,694)

 

(25,789)

Non-cash interest income from sales-type leases

 

(53,555)

 

(30,662)

Non-cash interest expense

 

8,806

 

8,895

Amortization of real estate-related intangibles, net

 

1,729

 

1,849

Gain on sale of net investment in lease

(55,811)

Loss on early extinguishment of debt

 

 

216

Earnings from equity method investments

 

(6,772)

 

(4,012)

Distributions from operations of equity method investments

 

1,510

 

1,397

Selling profit from sales-type leases

(1,833)

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

 

4,039

 

2,617

Non-cash management fees

 

14,950

 

10,594

Other operating activities

 

3,486

 

3,187

Changes in assets and liabilities:

 

  

 

Changes in deferred expenses and other assets, net

 

10,646

 

99

Changes in accounts payable, accrued expenses and other liabilities

 

15,071

 

(14,390)

Cash flows provided by operating activities

 

52,147

 

12,947

Cash flows from investing activities:

 

  

 

  

Origination/acquisition of net investment in sales-type leases and Ground Lease receivables

 

(1,210,274)

 

(542,269)

Contributions to equity method investments

(7)

(39,304)

Funding reserves received from Ground Lease tenant net of disbursements

30,071

Net proceeds from sale of net investment in lease

135,529

Deposits on Ground Lease investments

 

(2,250)

 

(27,617)

Other investing activities

 

(679)

 

1,892

Cash flows used in investing activities

 

(1,047,610)

 

(607,298)

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of common stock

 

309,160

 

243,345

Proceeds from debt obligations

 

1,770,000

 

896,508

Repayments of debt obligations

 

(1,005,000)

 

(550,000)

Payments for deferred financing costs

 

(5,110)

 

(9,511)

Dividends paid to common shareholders

 

(31,182)

 

(26,334)

Payment of offering costs

 

(5,190)

 

(8,390)

Payments for withholding taxes upon vesting of stock-based compensation

(970)

Distributions to noncontrolling interests

 

(33)

 

(33)

Contributions from redeemable noncontrolling interests

19,000

Other financing activities

 

(153)

 

Cash flows provided by financing activities

 

1,050,522

 

545,585

Changes in cash, cash equivalents and restricted cash

 

55,059

 

(48,766)

Cash, cash equivalents and restricted cash at beginning of period

 

38,516

 

96,467

Cash, cash equivalents and restricted cash at end of period

$

93,575

$

47,701

Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows

Cash and cash equivalents

$

35,574

$

43,870

Restricted cash

58,001

3,831

Total cash and cash equivalents and restricted cash

$

93,575

$

47,701

Supplemental disclosure of non-cash investing and financing activity:

 

  

 

  

Dividends declared to common shareholders

$

11,011

$

9,631

Accrued finance costs

 

 

248

Accrued offering costs

 

 

409

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

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Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1—Business and Organization

Business—Safehold Inc. (the “Company”) operates its business through one reportable segment by acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the landlord (the Company) and a tenant or leaseholder. The Company believes that it is the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon (“Ground Leases”). Under a Ground Lease, the tenant is generally responsible for all property operating expenses, such as maintenance, real estate taxes and insurance and is also responsible for development costs and capital expenditures. Ground Leases are typically long-term (base terms ranging from 30 to 99 years, often with tenant renewal options) and have contractual base rent increases (either at a specified percentage or consumer price index (“CPI”) based, or both) and sometimes include percentage rent participations. The Company’s CPI lookbacks are generally capped between 3.0% - 3.5%. In the event cumulative inflation growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation.

The Company intends to target investments in long-term Ground Leases in which: (i) the initial cost of its Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land (“Combined Property Value”); (ii) the ratio of property net operating income to the Ground Lease payment due the Company (“Ground Rent Coverage”) is between 2.0x to 4.5x, and for this purpose the Company uses estimates of the stabilized property net operating income if it does not receive current tenant information and for properties under construction or in transition, in each case based on leasing activity at the property and available market information, including leasing activity at comparable properties in the relevant market; and (iii) the Ground Lease contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. A Ground Lease lessor (the Company) typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon tenant default and the termination of the Ground Lease on account of such default. The Company believes that the Ground Lease structure provides an opportunity for potential value accretion through the reversion to the Company, as the Ground Lease owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from the Company.

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

Organization—The Company is a Maryland corporation and completed its initial public offering in June 2017. The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) 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 September 30, 2022, the Company owned 100% of the limited partner interests in the Operating Partnership and a wholly-owned subsidiary of the Company owned 100% of the general partner interests in the Operating Partnership. The UPREIT structure may afford the Company certain benefits as it seeks to acquire properties from third parties who may want to defer taxes by contributing their Ground Leases to the Company

Merger with iStar—On August 10, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with iStar. The Merger Agreement provides that, subject to the terms and conditions thereof, the Company will merge with and into iStar (the “Merger”). The surviving company of the Merger will be named Safehold

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Inc. (“New SAFE”) and its shares of common stock will trade on the New York Stock Exchange under the symbol “SAFE.” The Company expects that the Merger will close in the first quarter or second quarter of 2023.

 

As discussed further below, shortly before the closing of the Merger, iStar intends to separate its remaining legacy non-ground lease assets and businesses into a separate public company (“SpinCo”) by distributing to iStar’s stockholders, on a pro rata basis, the issued and outstanding equity interests of SpinCo (the “Spin-Off”).

Conditions to the Merger

 

The consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including: (i) the approval of the Company’s stockholders, (ii) the approval of iStar’s stockholders, (iii) completion of the Spin-Off, (iv) the approval of the shares of STAR Common Stock to be issued in the Merger for listing on the NYSE, (v) the effectiveness of a registration statement on Form S-4 registering the STAR Common Stock to be issued in the Merger, (vi) the absence of any temporary restraining order, injunction or other order of any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the reverse stock split or the Merger, (vii) generation of certain cash proceeds, (viii) the receipt of certain tax opinions by iStar and the Company that the Merger will qualify as a reorganization under the Internal Revenue Code and that iStar and the Company each qualifies as a REIT for federal income tax purposes, (ix) the accuracy of certain representations and warranties of iStar and the Company contained in the Merger Agreement and the compliance by the parties with the covenants contained in the Merger Agreement (subject to customary materiality qualifiers), and (x) other conditions specified in the Merger Agreement.

Conditions to the Spin-Off

Completion of the Spin-Off is subject to: (i) completion of the financing documents; (ii) the satisfaction or waiver of relevant conditions to the consummation of the Merger; (iii) effectiveness of a registration statement on Securities and Exchange Commission (“SEC”) Form 10; (iv) the absence of an injunction or law preventing the consummation of the Spin-Off, the distribution and the transactions related thereto; and (v) other customary closing conditions.

Other Merger related transactions

iStar has entered into an agreement (the “MSD Stock Purchase Agreement”) with MSD Partners, L.P. (“MSD Partners”) and the Company under which iStar has agreed to sell and MSD Partners has agreed to buy 5,405,406 shares of the Company’s common stock owned by iStar (the “MSD Stock Purchase”) shortly before the closing of the Merger. If the Merger Agreement is terminated for any reason, the parties’ obligations to consummate the purchase and sale will also terminate. In addition to customary closing conditions, MSD Partners’ obligations to purchase the Company’s common stock are subject to the condition that the closing of the MSD Caret Purchase (as defined below) will take place substantially concurrently with the closing of the MSD Stock Purchase. Upon closing of the transaction, MSD Partners will have a right to designate an observer to the board of directors of New SAFE, a preemptive right on future equity issuances (subject to certain exceptions) and registration rights. MSD Partners will be subject to a customary standstill and certain restrictions on sales of its New SAFE Common Stock.

 

MSD Partners has also subscribed to purchase 100,000 Caret Units (refer to Note 11) from the Company for an aggregate purchase price of $20.0 million (the “MSD Caret Purchase”), conditioned on the closing of the Spin-Off and the Merger. MSD Partners’ obligations to purchase the Caret units are also subject to the closing of the MSD Stock Purchase and the implementation by the Company of certain changes to its Caret program.

SpinCo will be capitalized in part with an 8.0%, four-year term loan from New SAFE having an initial principal amount of  $100.0 million or such other amount as the parties may agree prior to the closing of the Merger, as well as up

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Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

to $140.0 million of bank debt from Morgan Stanley Bank, N.A. which will be secured by $400.0 million in shares of the Company.

 

New SAFE will enter into a management agreement with SpinCo, under which it will continue to operate and pursue the orderly monetization of SpinCo’s assets. SpinCo will pay to New SAFE an annual management fee of $25.0 million in year one, $15.0 million in year two, $10.0 million in year three and $5.0 million in year four and 2.0% of the gross book value of SpinCo's assets, excluding shares of the Company’s common stock, for each annual term thereafter. New SAFE and SpinCo will also enter into a governance agreement that will place certain restrictions on the transfer and voting of the shares of New SAFE owned by SpinCo, and a registration rights agreement under which New SAFE will agree to register such shares for resale in accordance with applicable securities laws.

The Company and iStar have entered into a voting agreement pursuant to which iStar has agreed vote its shares representing 41.9% of the outstanding SAFE Common Stock to approve the Merger and take certain other actions, including voting against any alternative acquisition proposal or other proposal which could reasonably be expected to materially delay, postpone or materially adversely affect the consummation of the transactions contemplated by the Merger Agreement. In accordance with the terms of the existing stockholders’ agreement between SAFE and STAR, the remainder of the SAFE Common Stock owned by iStar will be voted in the same manner and proportion as the votes cast by the remaining shareholders of SAFE. The voting agreement and the obligations thereunder terminate upon the termination of the Merger Agreement in accordance with its terms.

As noted above, the Merger and related transactions are subject to a number of conditions, several of which are outside the Company's control; therefore, there can be no assurance that the Merger and related transactions will occur within the time frame currently expected by the parties, or at all. The foregoing descriptions of the Merger and the Merger Agreement and the related transactions and agreements do not purport to be complete and are subject to, and qualified in their entirety by, the full text of such agreements.  Please see the Company's filings with the SEC for additional information, including copies of such agreements.

iStar has covenanted to redeem all of its outstanding preferred stock at the liquidation preference per share plus accrued and unpaid dividends and to retire all of its senior unsecured notes in connection with the Merger. iStar’s trust preferred securities will remain outstanding at New SAFE.

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, 2021 (the “2021 Annual Report”).

The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

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

Principles of Consolidation—The consolidated financial statements include the accounts and operations of the Company, its wholly-owned subsidiaries and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of September 30, 2022, the total assets of these consolidated VIEs were $70.8 million and total liabilities were $30.0 million. The classifications of these assets are primarily within “Net investment in sales-type leases,” “Real estate, net,” “Real estate-related intangible assets, net” and “Deferred operating lease income receivable” on the Company’s consolidated balance sheets. The classifications of liabilities are primarily within “Debt obligations, net” and “Accounts payable, accrued expenses and other liabilities” on the Company’s consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE’s respective assets. The Company has provided no financial support to VIEs that it was not previously contractually required to provide and did not have any unfunded commitments related to consolidated VIEs as of September 30, 2022.

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.

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Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):

As of September 30, 2022

As of December 31, 2021

Carrying 

Fair

Carrying 

Fair

    

Value