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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

March 31, 2024

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. 001-15371

Safehold Inc.

(Exact name of registrant as specified in its charter)

Maryland

95-6881527

(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 May 6, 2024, there were 71,435,142 shares, $0.01 par value per share, of Safehold Inc. common stock outstanding.

TABLE OF CONTENTS

 

 

Page

PART I

Consolidated Financial Information

Item 1.

Financial Statements:

Consolidated Balance Sheets (unaudited) as of March 31, 2024 and December 31, 2023

1

Consolidated Statements of Operations (unaudited)—For the three months ended March 31, 2024 and 2023

2

Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three months ended March 31, 2024 and 2023

3

Consolidated Statements of Changes in Equity (unaudited)—For the three months ended March 31, 2024 and 2023

4

Consolidated Statements of Cash Flows (unaudited)—For the three months ended March 31, 2024 and 2023

5

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

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

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

50

PART II

Other Information

52

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

SIGNATURES

54

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1.   Financial Statements

Safehold Inc.

Consolidated Balance Sheets(1)

(In thousands)

(unaudited)

As of

    

March 31, 2024

    

December 31, 2023

ASSETS

 

  

 

  

Net investment in sales-type leases ($907 and $465 of allowances as of March 31, 2024 and December 31, 2023, respectively)

$

3,341,658

$

3,255,195

Ground Lease receivables, net ($692 and $369 of allowances as of March 31, 2024 and December 31, 2023, respectively)

 

1,661,063

 

1,622,298

Real estate

 

  

 

  

Real estate, at cost

743,423

744,337

Less: accumulated depreciation

 

(41,907)

 

(40,400)

Real estate, net

 

701,516

 

703,937

Real estate-related intangible assets, net

 

212,657

 

211,113

Real estate available and held for sale

10,625

9,711

Total real estate, net and real estate-related intangible assets, net and real estate available and held for sale

 

924,798

 

924,761

Loans receivable, net - related party ($2,392 and $2,429 of allowances as of March 31, 2024 and December 31, 2023, respectively)

112,179

112,111

Equity investments

 

275,295

 

310,320

Cash and cash equivalents

 

11,284

 

18,761

Restricted cash

 

27,891

 

27,979

Deferred tax asset, net

6,744

7,619

Deferred operating lease income receivable

 

187,750

 

180,032

Deferred expenses and other assets, net(2)

 

124,877

 

89,238

Total assets

$

6,673,539

$

6,548,314

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other liabilities

$

118,593

$

134,518

Real estate-related intangible liabilities, net

 

63,546

 

63,755

Debt obligations, net

 

4,142,878

 

4,054,365

Total liabilities

 

4,325,017

 

4,252,638

Commitments and contingencies (refer to Note 10)

 

  

 

  

Redeemable noncontrolling interests (refer to Note 3)

19,011

19,011

Equity:

 

  

 

  

Safehold Inc. shareholders' equity:

 

  

 

  

Common stock, $0.01 par value, 400,000 shares authorized, 71,435 and 71,077 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

 

714

 

711

Additional paid-in capital

 

2,190,671

 

2,184,299

Retained earnings

 

65,630

 

47,580

Accumulated other comprehensive income (loss)

 

26,458

 

(1,337)

Total Safehold Inc. shareholders' equity

 

2,283,473

 

2,231,253

Noncontrolling interests

 

46,038

 

45,412

Total equity

 

2,329,511

 

2,276,665

Total liabilities, redeemable noncontrolling interests and equity

$

6,673,539

$

6,548,314

(1)Refer to Note 2 for details on the Company’s consolidated variable interest entities (“VIEs”).
(2)As of March 31, 2024 and December 31, 2023, includes $6.6 million and $7.1 million, respectively, due from related parties.

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

March 31, 

    

2024

    

2023

Revenues:

 

  

 

  

Interest income from sales-type leases

$

63,218

$

57,062

Operating lease income

21,003

20,901

Interest income - related party(1)

2,357

Other income(2)

 

6,635

 

366

Total revenues

 

93,213

 

78,329

Costs and expenses:

 

  

 

  

Interest expense

 

48,631

 

40,873

Real estate expense

 

1,079

 

1,206

Depreciation and amortization

 

2,487

 

2,398

General and administrative(3)

 

15,628

 

15,067

Provision for credit losses

709

2,242

Other expense

 

91

 

14,089

Total costs and expenses

 

68,625

 

75,875

Income (loss) from operations before other items

 

24,588

 

2,454

Earnings from equity method investments

 

6,912

 

2,262

Net income (loss) before income taxes

 

31,500

 

4,716

Income tax expense

(471)

Net income (loss)

31,029

4,716

Net (income) attributable to noncontrolling interests

 

(301)

 

(34)

Net income (loss) attributable to Safehold Inc. common shareholders

$

30,728

$

4,682

Per common share data:

 

  

 

  

Net income (loss)

 

  

 

  

Basic

$

0.43

$

0.07

Diluted

$

0.43

$

0.07

Weighted average number of common shares:

 

  

 

  

Basic

 

71,170

 

63,672

Diluted

 

71,240

 

63,672

(1)Refer to Note 6.
(2)For the three months ended March 31, 2024, includes $5.5 million of management fees from related parties.
(3)For the three months ended March 31, 2023, includes $8.3 million of general and administrative expenses incurred to related parties that includes management fees and expense reimbursements to the Former Manager (refer to Note 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

March 31, 

    

2024

    

2023

Net income (loss)

$

31,029

$

4,716

Other comprehensive income:

 

  

 

  

Reclassification of (gains) losses on derivatives into earnings

 

(1,615)

 

943

Unrealized gain (loss) on derivatives

 

29,410

 

(28,424)

Other comprehensive income (loss):

 

27,795

 

(27,481)

Comprehensive income (loss)

 

58,824

 

(22,765)

Comprehensive (income) attributable to noncontrolling interests

 

(301)

 

(34)

Comprehensive income (loss) attributable to Safehold Inc.

$

58,523

$

(22,799)

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

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Table of Contents

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, 2023

$

19,011

$

711

$

2,184,299

$

47,580

$

(1,337)

$

45,412

$

2,276,665

Net income

 

 

 

30,728

 

 

301

 

31,029

Issuance of common stock, net / amortization

 

3

 

6,372

 

 

 

373

 

6,748

Dividends declared ($0.177 per share)

 

 

 

(12,678)

 

 

 

(12,678)

Change in accumulated other comprehensive income

 

 

 

 

27,795

 

 

27,795

Change in noncontrolling interests

123

123

Distributions to noncontrolling interests

 

 

 

 

 

(171)

 

(171)

Balance at March 31, 2024

$

19,011

$

714

$

2,190,671

$

65,630

$

26,458

$

46,038

$

2,329,511

Balance at December 31, 2022

$

19,011

$

624

$

1,986,417

$

151,226

$

3,281

$

4,056

$

2,145,604

Impact from adoption of new accounting standard

(640)

(640)

Net income

 

 

 

4,682

 

 

34

 

4,716

Issuance of common stock, net / amortization

 

3

 

10,476

 

 

 

9

 

10,488

Dividends declared ($0.177 per share)

 

 

 

(11,104)

 

 

 

(11,104)

Change in accumulated other comprehensive income

 

 

 

 

(27,481)

 

 

(27,481)

Contributions from noncontrolling interests, net

(1,443)

23,914

22,471

Distributions to noncontrolling interests

 

 

 

 

 

(515)

 

(515)

Merger consideration (refer to Note 1 and Note 3)

12

35,576

35,588

Balance at March 31, 2023

$

19,011

$

639

$

2,031,026

$

144,164

$

(24,200)

$

27,498

$

2,179,127

(1)Refer to Note 3.

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

4

Safehold Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

For the Three Months Ended

March 31, 

    

2024

    

2023

    

Cash flows from operating activities:

 

  

 

  

 

Net income (loss)

$

31,029

$

4,716

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

 

  

 

Depreciation and amortization

 

2,487

 

2,398

Stock-based compensation expense

 

4,765

 

4,680

Deferred operating lease income

 

(7,718)

 

(7,827)

Non-cash interest income from sales-type leases

 

(21,857)

 

(20,380)

Non-cash interest expense

 

2,878

 

3,026

Amortization of real estate-related intangibles, net

 

577

 

576

Provision for credit losses

709

2,242

Earnings from equity method investments

 

(6,912)

 

(2,262)

Distributions from operations of equity method investments

 

3,647

 

547

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

 

1,862

 

1,796

Non-cash management fees

 

 

5,199

Other operating activities

 

(1,877)

 

1,573

Changes in assets and liabilities:

 

  

 

Changes in deferred expenses and other assets, net

 

(1,992)

 

(3,586)

Changes in accounts payable, accrued expenses and other liabilities

 

(10,662)

 

489

Cash flows used in operating activities

 

(3,064)

 

(6,813)

Cash flows from investing activities:

 

  

 

  

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

 

(79,201)

 

(69,904)

Origination of loans receivable, net

(114,450)

Payment for merger consideration

(88,685)

Cash and cash equivalents acquired upon merger

3,213

Contributions to equity method investments

(9,192)

(140)

Distributions from equity method investments

19,465

Funding reserves received from Ground Lease tenant net of disbursements

(218)

Funding of cash collateral for debt obligations

(19,112)

Proceeds received from derivative transaction

9,687

Other investing activities

 

3,650

 

251

Cash flows used in investing activities

 

(74,703)

 

(269,933)

Cash flows from financing activities:

 

  

 

  

Proceeds from debt obligations

 

416,871

 

280,000

Repayments of debt obligations

 

(326,000)

 

Payments for deferred financing costs

 

(4,281)

 

(4,610)

Dividends paid to common shareholders

 

(12,572)

 

(22,144)

Payment of offering costs

 

(51)

 

Payments for withholding taxes upon vesting for stock-based compensation

(3,594)

Distributions to noncontrolling interests

 

(171)

 

(515)

Contributions from noncontrolling interests

 

 

23,914

Cash flows provided by financing activities

 

70,202

 

276,645

Changes in cash, cash equivalents and restricted cash

 

(7,565)

 

(101)

Cash, cash equivalents and restricted cash at beginning of period

 

46,740

 

48,390

Cash, cash equivalents and restricted cash at end of period

$

39,175

$

48,289

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

Cash and cash equivalents

$

11,284

$

20,335

Restricted cash

27,891

27,954

Total cash and cash equivalents and restricted cash

$

39,175

$

48,289

Supplemental disclosure of non-cash investing and financing activity:

 

  

 

  

Debt obligations assumed (refer to Note 3)

$

$

99,995

Issuance of common stock for acquisition of assets (refer to Note 3)

35,588

Dividends declared to common shareholders

12,672

2

Accruals for payments of withholding taxes upon vesting for stock-based compensation

1,465

Accrued finance costs

 

326

 

Accrued offering costs

 

 

1,443

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

5

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1—Business and Organization

Business—On March 31, 2023, Safehold Inc. (“Old SAFE”) merged with and into iStar (see Merger Transaction below), at which time Old SAFE ceased to exist and iStar continued as the surviving corporation and changed its name to “Safehold Inc.” (the “Merger”). References to iStar refer to iStar prior to the Merger. For accounting purposes, the Merger is treated as a “reverse acquisition” in which iStar is considered the legal acquirer and Old SAFE is considered the accounting acquirer. Unless context otherwise requires, references to the “Company” refer to the business and operations of Old SAFE and its consolidated subsidiaries prior to the Merger and to Safehold Inc. (formerly known as iStar) and its consolidated subsidiaries following the consummation of the Merger.

The Company operates its business through one reportable segment by acquiring, managing and capitalizing ground leases. The Company also manages entities focused on ground leases (refer to Note 7) and a wholly-owned subsidiary of the Company serves as external manager to Star Holdings (“Star Holdings”), a Maryland statutory trust that holds the legacy non-ground lease assets previously held by iStar. Ground leases are long-term contracts between the landlord (the Company) and a tenant or leaseholder. 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% and generally start between years 11 and 21 of the lease term. 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. As 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.

Prior to the Merger, Old SAFE was managed by SFTY Manager, LLC (the “Former Manager”), a wholly-owned subsidiary of iStar, pursuant to a management agreement. Old SAFE had no employees, as the Former Manager provided all services to it. Old SAFE relied on the extensive investment origination and sourcing platform of its Former Manager to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants. Subsequent to the Merger, the Company is internally managed.

Organization—The Company is a Maryland corporation and its common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “SAFE.” The Company (then known as iStar) elected to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with the tax year ended December 31, 1998.

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

As part of a restructuring in connection with the Merger (the “Caret Restructuring”), Safehold Operating Partnership LP converted into a Delaware limited liability company and renamed itself “Safehold GL Holdings LLC” (“Portfolio Holdings”), with the Company as its managing member. The Company conducts all of its business and owns all of its properties through Portfolio Holdings. In addition, holders of Caret units in Old SAFE’s subsidiary, Caret Ventures LLC (“Caret Ventures”), contributed their interests in Caret Ventures to Portfolio Holdings in return for Caret units issued by Portfolio Holdings. Following the restructuring, 100% of the equity interests in Caret Ventures is held by Portfolio Holdings. The Company, management of the Company, employees and former employees of the Company, affiliates of MSD Partners (as defined below) and other outside investors own the issued and outstanding equity of Portfolio Holdings.

Merger Transaction—On August 10, 2022, Old SAFE entered into an Agreement and Plan of Merger (the “Merger Agreement”) with iStar, and on March 31, 2023, the Merger was completed in accordance with the terms of the Merger Agreement. For accounting purposes, the Merger was accounted for as a business combination using the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) and treated as a “reverse acquisition” in which iStar is considered the legal acquirer and Old SAFE is considered the accounting acquirer. The Company considered the following relevant facts for this determination:

At the time of the Merger closing, Old SAFE shareholders, excluding the Old SAFE shares held directly by iStar, members of iStar management and Star Holdings, control a majority of the voting interests in the Company and the combined company operates under the name “Safehold Inc.;”

The composition of the combined company’s board of directors, which includes three directors from Old SAFE, two directors from iStar, and two management members of both Old SAFE and iStar;

Old SAFE was the larger entity by size when comparing the key metrics of total assets, total revenue and net income (loss) from continuing operations and allocable to common shareholders; and

Substantially all of the assets and liabilities of the Company consist of the historical assets and liabilities of Old SAFE, and the go-forward business plan of the Company is to conduct the Ground Lease business conducted by Old SAFE prior to the Merger.

As a result, the historical financial statements of Old SAFE become the historical financial statements of the Company.

 

Immediately before the closing of the Merger, iStar separated its remaining legacy non-ground lease assets and businesses, approximately $50.0 million of cash, exclusive of working capital reserves and restricted cash, and approximately 13.5 million shares of Old SAFE common stock into Star Holdings by distributing to iStar’s stockholders, on a pro rata basis, the issued and outstanding equity interests of Star Holdings (the “Spin-Off”).

Other Merger related transactions

On August 10, 2022, iStar entered into an agreement (the “MSD Stock Purchase Agreement”) with MSD Partners, L.P. (“MSD Partners”) pursuant to which MSD Partners agreed to purchase 5,405,406 shares of Old SAFE’s common stock then owned by iStar (the “MSD Stock Purchase”) for an aggregate purchase price of approximately $200 million, or $37.00 per share, payable in cash. MSD Partners’ rights and obligations under the MSD Stock Purchase Agreement were subsequently assigned to certain of its affiliates. The MSD Stock Purchase closed on March 31, 2023, shortly before the closing of the Merger. MSD Partners has the right to designate an observer to the board of directors of the Company, a top-up right on future equity issuances (subject to certain exceptions) and registration rights. MSD Partners is subject to a customary standstill and certain restrictions on sales of its shares of the Company’s common stock.

 

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

On August 10, 2022, MSD Partners also agreed to purchase 100,000 Caret units (refer to Note 12) from the Company for an aggregate purchase price of $20.0 million (the “MSD Caret Purchase”). MSD Partners received a credit against their purchase price for Caret units equal to the amount they would have received had they held Caret units at the time of a December 2022 distribution to other Caret unit holders, which was equal to $0.6 million. MSD Partners’ rights and obligations under the purchase agreement were subsequently assigned to certain of its affiliates. The closing of the MSD Caret Purchase took place in conjunction with the closing of the Merger on March 31, 2023.

Star Holdings was capitalized in part with an 8.0%, four-year term loan from the Company having an initial principal amount of $115.0 million, as well as SOFR plus 3.00% bank debt with an initial principal balance of $140.0 million from Morgan Stanley Bank, N.A. which is secured by approximately 13.5 million shares of the Company (refer to Note 6).

 

In connection with the Spin-Off, Safehold Management Services Inc. (“SpinCo Manager”), a Delaware corporation and a subsidiary of the Company, entered into a management agreement with Star Holdings effective as of March 31, 2023, pursuant to which SpinCo Manager will continue to operate and pursue the orderly monetization of Star Holding’s assets. Star Holdings paid SpinCo Manager an annual management fee of $25.0 million for the term ended March 31, 2024. The annual fee declines to $15.0 million, $10.0 million and $5.0 million, respectively, for each of the following annual terms, and adjusts to 2.0% of the gross book value of Star Holdings’ assets, excluding shares of the Company’s common stock, thereafter. The Company and Star Holdings also entered into a governance agreement that places certain restrictions on the transfer and voting of the shares of the Company owned by Star Holdings, and a registration rights agreement under which the Company agreed to register such shares for resale in accordance with applicable securities laws.

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, 2023 (the “2023 Annual Report”).

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

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

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

Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of March 31, 2024, the total assets of these consolidated VIEs were $74.5 million and total liabilities were $30.0 million. The

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

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 March 31, 2024.

Note 3—Summary of Significant Accounting Policies

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.

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

As of March 31, 2024

As of December 31, 2023

Carrying

Fair

Carrying 

Fair

    

Value

    

Value

    

Value

    

Value

Assets

Net investment in sales-type leases(1)

$

3,342

$

3,683

$

3,255

$

3,118

Ground Lease receivables(1)

 

1,661

 

1,867

 

1,622

 

1,603

Loans receivable, net - related party(1)

112

114

112

114

Cash and cash equivalents(2)

 

11

 

11

 

19

 

19

Restricted cash(2)

 

28

 

28

 

28

 

28

Liabilities

Debt obligations, net(1)

 

Level 1

1,034

914

739

617

Level 3

3,109

2,579

3,315

2,874

Total debt obligations, net

4,143

 

3,493

 

4,054

 

3,491

(1)The fair value of the Company’s net investment in sales-type leases, Ground Lease receivables and loans receivable, net – related party are classified as Level 3 within the fair value hierarchy. 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.
(2)The Company determined the carrying values of its cash and cash equivalents and restricted cash approximated their fair values and are classified as Level 1 within the fair value hierarchy.

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Redeemable Noncontrolling Interests—In February 2022, the Company sold 108,571 Caret units (refer to Note 12) for $19.0 million to third-party investors and received a commitment from an existing shareholder (which is affiliated with one of the Company’s independent directors) for the purchase of 28,571 Caret units for $5.0 million. As part of the sale, the Company agreed to use commercially reasonable efforts to provide public market liquidity for such Caret units by seeking to provide a listing of the Caret units, or securities into which they may be exchanged, within two years of the sale. Because public market liquidity was not achieved by February 2024, the investors in the February 2022 transaction have the right to cause their Caret units purchased in February 2022 to be redeemed by Portfolio Holdings at their original purchase price less the amount of distributions previously made on such units. During the three months ended March 31, 2024, the redemption option was extended to April 2024. In April 2024, all of the investors in the February 2022 transaction exercised this right and elected to have their Caret units redeemed at the original purchase price less the amount of distributions previously made on such units.

The Company classifies these redeemable Caret units in accordance with Accounting Standards Codification (“ASC”) 480: Distinguishing Liabilities from Equity. ASC 480-10-S99-3A requires that equity securities redeemable at the option of the holder be classified outside of permanent stockholders’ equity. The Company classifies redeemable Caret units as “Redeemable noncontrolling interests” in its consolidated balance sheets and consolidated statements of changes in equity. The redeemable noncontrolling interest’s carrying amount is equal to the higher of (i) the initial carrying amount, increased or decreased for the redeemable noncontrolling interest’s share of net income or loss and dividends; or (ii) the redemption value.

Acquisitions—The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under ASC 805, an acquisition does not qualify as a business when (i) substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets; (ii) the acquisition does not include a substantive process in the form of an acquired workforce; or (iii) there is an acquired contract that cannot be replaced without significant cost, effort or delay. Acquisitions of a business are accounted for as business combinations and other acquisition transactions are accounted for as asset acquisitions. Transaction costs related to asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs related to business combinations are expensed as incurred.

The Company’s acquisition of iStar in 2023 was accounted for as a business combination. For business combinations, the Company recognizes and measures identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the Company’s consolidated balance sheets. In a business combination, the difference, if any, between the purchase consideration and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. 

Fair values are based on available information including discounted cash flow analysis or similar fair value models. Fair value estimates are also made using significant assumptions such as capitalization rates, discount rates, fair market lease rates and other market data. The fair value of the Company’s interests in equity investments acquired is calculated using the fair value of the investments held by the venture, which are valued using methods as described above, and considers the Company’s economics in the venture.

The fair value of financial instruments, which could include loans receivable or net investment in sales-type leases, is based on current market conditions and loan or lease agreements in place. The fair value of tangible assets, which could include land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of right of use lease assets, above-market leases and in-place leases. As lessee, right of use lease assets and lease liabilities are measured at the present value of lease payments not yet paid, discounted at the implied rate charged by the lessor if that rate is readily determinable, or if that rate is not readily determinable, the Company's incremental borrowing rate, as of the date of the acquisition. As lessee, operating lease

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

right of use assets are included in “Deferred expenses and other assets, net” and operating lease liabilities are recorded in “Accounts payable, accrued expenses and other liabilities” on the Company’s consolidated balance sheets. As lessee, above-market operating lease intangibles and below-market lease assets are each recorded at their fair values and included in “Deferred expenses and other assets, net” on the Company’s consolidated balance sheets.

The table below shows the Company’s purchase consideration for the acquisition of iStar ($ in thousands):

Total Company shares as purchase price(1)

1,195,034

Stock price of the Company’s common stock(2)

$

29.78

Fair value of the Company's stock transferred

35,588

Cash consideration paid by the Company to iStar

88,685

Purchase consideration

$

124,273

(1)The total post-Merger shares of the Company to be held by iStar shareholders includes 12.7 million shares that were issued as consideration for the investment in Old SAFE previously held by iStar as of March 30, 2023 that were retired in connection with the Merger. Accordingly, these shares are excluded from the purchase consideration as they are reflected as a treasury stock repurchase and retirement by Old SAFE.
(2)Based on the closing price of Old SAFE’s common stock as of March 30, 2023, representing the final closing price prior to the effective time of the Merger.

The Merger was accounted for as a business combination pursuant to ASC 805 and all Merger related costs were expensed as incurred. The Company recorded $18.7 million of Merger expenses during the three months ended March 31, 2023, of which $13.9 million was recorded in “Other expense” and $4.8 million was recorded in “General and administrative” in the Company’s consolidated statements of operations. During the three months ended March 31, 2023, the Company also recorded $0.6 million of related non-recurring charges in “Other expense” and a provision for credit losses of $2.3 million on the Secured Term Loan Facility (refer to Note 6) which was originated at the time of the Merger in conjunction with the Spin-Off. Excluding $3.0 million of related non-recurring charges and the $2.3 million provision for credit losses on the Secured Term Loan Facility, through March 31, 2024, the Company has incurred $26.6 million of Merger expenses.

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Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table sets forth the preliminary allocation as of March 31, 2023 of the purchase consideration to the fair values of identifiable tangible and intangible assets acquired and liabilities assumed, recognized as a result of the acquisition described in Note 1 above, measurement period adjustments and a final allocation of the purchase consideration ($ in thousands):

Preliminary

Measurement

Final

Purchase Price
Allocation

Period
Adjustments

Purchase Price
Allocation

Cash and cash equivalents

$

3,213

$

$

3,213

Real estate

1,508

1,508

Equity investments(1)

61,247

61,247

Deferred tax asset(2)

6,292

6,292

Deferred expenses and other assets(2)(3)

25,442

6,480

31,922

Total assets acquired

91,410

12,772

104,182

Accounts payable, accrued expenses and other liabilities(2)(4)

(22,939)

(2,340)

(25,279)

Debt obligations(5)

(99,995)

(99,995)

Total liabilities assumed

(122,934)

(2,340)

(125,274)

Net identifiable (liabilities assumed) assets acquired

(31,524)

10,432

(21,092)

Purchase consideration

$

124,273

$

$

124,273

Add: net identifiable liabilities assumed

31,524

(10,432)

21,092

Goodwill(6)

155,797

(10,432)

145,365

(1)Equity investments were valued using discount rates between 7.2% and 13.9% and are classified as Level 3 within the fair value hierarchy.
(2)During the three months ended June 30, 2023, the Company recorded a deferred tax asset in the amount of $6.3 million, net of a valuation allowance in the amount of $2.8 million, and reduced goodwill by $6.3 million. The net deferred tax asset relates to net operating loss carryovers to which the Company’s taxable REIT subsidiary is a successor and were finalized upon filing tax returns subsequent to the Merger for periods prior to the Merger. During the three months ended September 30, 2023, the Company recognized $6.5 million of deferred expenses and other assets related to final state tax receivables and $2.3 million in accounts payable, accrued expenses and other liabilities as a result of finalizing its tax returns which produced additional information not available at the time of the Merger. The following table presents a rollforward of the Company’s goodwill:

Balance at December 31, 2022

$

Goodwill recognized at Merger

155,797

Reduction to goodwill resulting from measurement period adjustments

(10,432)

Impairment

(145,365)

Balance at December 31, 2023

$

(3)Deferred expenses and other assets includes $11.0 million attributable to operating lease right of use assets, $4.7 million attributable to prepaid expenses resulting from the settlement of iStar’s compensation plans, $2.1 million attributable to in-place prepaid contracts, $1.3 million attributable to office furniture and equipment and $6.3 million attributable to other receivables.
(4)Accounts payable, accrued expenses and other liabilities primarily includes a $14.2 million operating lease liability. In addition, under the Merger Agreement, iStar was required to fund its share of merger-related costs and to provide sufficient cash to fund any unresolved corporate obligations and accrued liabilities or costs yet-to-be incurred prior to the Merger. Accounts payable, accrued expenses and other liabilities includes approximately $8.7 million of obligations assumed from iStar, which are offset with corresponding amounts in cash and cash equivalents and amounts receivable in deferred expenses and other assets, net sufficient to settle such obligations.
(5)Debt obligations were valued using a discount rate of 6.7% and are classified as Level 3 within the fair value hierarchy.
(6)Goodwill is calculated as the excess of purchase consideration over the fair value of the net identifiable assets acquired and primarily relates to the acquisition of iStar’s workforce and future synergies expected to be realized after the completion of the Merger.

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Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table summarizes the Company's pro forma revenues and net income (loss) for the three months ended March 31, 2023 as if the Merger described in Note 1 was completed on January 1, 2022 ($ in thousands):(1)

Pro forma revenues

$ 97,256

Pro forma net income