What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-04-29 · 198 added, 167 removed, 175 unchanged (68% of the section changed)

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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 Item 1A—"Risk Factors" in our Annual Report on Form 10-K, all of which could affect our future results of operations, financial condition and liquidity.

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 Item 1A—"Risk Factors’’ in 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 iStar Inc.

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These historical financial statements may not be indicative of our future performance.

We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation.

Executive Overview

Our portfolio is well diversified by business, property type and geography.

Our portfolio includes investments in the entertainment/leisure (21.4% of gross book value) and hotel (4.9% of gross book value) sectors, which have been particularly stressed by the COVID-19 pandemic.

Our portfolio includes investments in the entertainment/leisure (22.6% of gross book value) and hotel (5.0% of gross book value) sectors, both of which have been particularly stressed by the COVID-19 pandemic.

We may experience disruptions and collections of rent and interest payments until more normalized business conditions resume.

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While we have seen conditions gradually improve, there can be no assurance that we will not increase our allowances in the future.

The COVID-19 pandemic has continued to impact the U.S.

and global economies.

financial markets have experienced disruption, with heightened stock market volatility and constrained credit conditions within most sectors, including real estate.

We are focused on ensuring the health and safety of our personnel and the continuity of business activities at iStar and SAFE, monitoring the effects of the pandemic on our and SAFE's customers, marshalling available liquidity at both companies, implementing appropriate cost containment measures and preparing for the eventual resumption of more normalized activities.

We will continue to monitor its effects on a daily basis and will adjust operations as necessary.

The COVID-19 pandemic has adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio for the time being, primarily because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions.

At this time, we cannot predict the full extent of the impacts of the COVID-19 pandemic on our or SAFE's business.

These conditions will adversely affect our strategy while they persist.

See the Risk Factors section of our Annual Report on Form 10-K for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic.

The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and materially scaling SAFE’s portfolio in 2020 and the first quarter of 2021, primarily because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions.

These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes.

At this time, however, we cannot predict with certainty the full extent of the impacts of the COVID-19 pandemic on our or SAFE’s business.

In addition, other macroeconomic factors such as inflation and the market reaction and response of government policy to inflation may impact our or SAFE’s business.

See the Risk Factors section of our Annual Report on Form 10-K for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and other factors.

Portfolio Overview

As of March 31, 2021, based on our gross book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):

Property/Collateral Types Net

Finance Operating Properties Land & Development Corporate Total % of

Office $ 938,297 $ 52,035 $ 53 $ — $ — $ 990,385 21.5 %

Entertainment / Leisure 969,135 — 16,203 — — 985,338 21.4 %

As of June 30, 2021, based on our gross book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):

Property/Collateral

Ground Leases

Industrial 291,586 — 97,663 — 75,402 464,651 9.9 %

Entertainment / Leisure

Industrial / Lab

Land and Development

Condominium — 138,479 15,707 98,045 — 252,231 5.5 %

Hotel — 140,718 83,229 — — 223,947 4.9 %

Multifamily 16,086 112,819 59,232 — — 188,137 4.0 %

Retail 57,348 59,391 34,578 8,271 — 159,588 3.5 %

Other Property Types

Total $ 3,255,025 $ 539,371 $ 306,665 $ 429,645 $ 83,301 $ 4,614,007 100.0 %

Percentage of Total

Geographic Region Net

Finance Operating Properties Land & Development Corporate Total % of

Northeast $ 927,689 $ 221,355 $ 93,681 $ 256,014 $ — $ 1,498,739 32.5 %

West 496,559 132,202 56,366 29,982 — 715,109 15.5 %

Mid-Atlantic 572,158 — 6,145 105,963 — 684,266 14.8 %

Central 429,928 65,019 44,707 31,500 — 571,154 12.4 %

Southwest 406,335 — 97,716 2,268 — 506,319 11.0 %

Southeast 412,914 28,599 8,050 3,918 — 453,481 9.8 %

Various 9,442 92,196 — — 83,301 184,939 4.0 %

Total $ 3,255,025 $ 539,371 $ 306,665 $ 429,645 $ 83,301 $ 4,614,007 100.0 %

_______________________________________________________________________________

Geographic Region

(1) For net lease, operating properties and land and development, gross book value is defined as the basis assigned to physical real estate property (land and building), net of any impairments taken after acquisition date and net of basis reductions associated with unit/parcel sales, plus our basis in equity method investments, plus lease related intangibles, capitalized leasing costs and excluding accumulated depreciation and amortization, and for equity method investments, excluding the effect of our share of accumulated depreciation and amortization.

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The net lease segment includes our Ground Lease investments made primarily through SAFE and our traditional net lease investments.

As of March 31, 2021, the gross book value of our consolidated net lease portfolio totaled $2.2 billion.

As of June 30, 2021, the gross book value of our consolidated net lease portfolio totaled $2.3 billion.

Our net lease portfolio, including the carrying value of our equity method investments in SAFE and Net Lease Venture II gross of accumulated depreciation, totaled $3.4 billion.

Subsequent to June 30, 2021, we announced that we intend to explore market interest for possible sales of our net lease assets.

There can be no assurance as to whether we will sell

some, all or none of our net lease assets, or as to the timing or terms of any sales.

The table below provides certain statistics for our net lease portfolio.

Wholly-Owned Net Lease Venture I Total

Real Estate (1)

Net Lease Venture II SAFE

Ownership % 100.0 % 51.9 % — 51.9 % 65.4 %

Gross book value (millions) (2)

$ 1,273 $ 908 $ 2,181 $ 323 $ 3,292

% Leased 99.0 % 100.0 % 99.3 % 100.0 % 100.0 %

Square footage (thousands) 9,875 5,749 15,624 3,302 N/A

Square footage (thousands)

Weighted average lease term (years) (3)

15.3 16.1 15.6 12.7 88.9

Weighted average yield (4)

7.6 % 8.2 % 7.8 % 8.9 % 4.4 %

_______________________________________________________________________________

(1) We own 51.9% of the Net Lease Venture which is consolidated in our GAAP financial statements (refer to Note 4).

(2) Consolidated Real Estate includes amounts recorded as net investment in leases (refer to Note 5) and financing receivables in loans and other lending investments (refer to Note 7).

SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment.

SAFE includes its pro rata share of its unconsolidated equity method investments.

(3) Weighted average lease term is calculated using GAAP rent and the initial maturity and does not include extension options.

SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment.

SAFE includes its pro rata share of its unconsolidated equity method investments.

(4) Yield for SAFE is calculated over the trailing twelve months and excludes management fees earned by us.

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We have an equity interest in the new venture of approximately 51.9%, which is accounted for as an equity method investment, and are responsible for managing the venture in exchange for a management fee and incentive fee.

The Net Lease Venture II's investment period expires on June 30, 2021.

In June 2021, Net Lease Venture II’s investment period was extended to December 31, 2021.

SAFE —SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive long-term risk-adjusted returns from its investments.

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We believe that these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments.

As of March 31, 2021, we owned approximately 65.4% of SAFE's common stock outstanding.

As of June 30, 2021, we owned approximately 66.0% of SAFE’s common stock outstanding.

We account for our investment in SAFE as an equity method investment (refer to Note 8).

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Real Estate Finance

Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions.

Our real estate finance portfolio consists of senior mortgage loans that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets, leasehold loans to Ground Lease tenants, including tenants of SAFE, and corporate/partnership loans, which represent mezzanine or subordinated loans to

entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets.

loans to mezzanine and preferred equity capital positions.

Our real estate finance portfolio includes loans on stabilized and transitional properties, Ground Leases and ground-up construction projects.

In addition, we have preferred equity investments and debt securities classified as other lending investments.

As of March 31, 2021, the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled $542.1 million, gross of general loan loss allowances.

As of June 30, 2021, the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled $461.5 million, gross of general loan loss allowances.

The portfolio, excluding securities and other lending investments, included $235.4 million of performing loans with a weighted average maturity of 2.3 years.

The tables below summarize our loans and the allowance for loan losses associated with our loans ($ in thousands):

March 31, 2021

Number of Loans Gross Book Value Allowance for

Loan Losses Net Book Value % of Total Allowance for Loan Losses as a % of Gross Book Value

June 30, 2021

Allowance for

Loan Losses as

Performing loans

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Other lending investments

Total 17 542,774 (9,058) 533,716 100.0% 1.7%

December 31, 2020

Number of Loans Gross Book Value Allowance for

Loan Losses Net Book Value % of Total Allowance for Loan Losses as a % of Gross Book Value

Allowance for

Loan Losses as

Performing loans

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Other lending investments

Total 20 745,500 (13,170) 732,330 100.0% 1.8%

Performing Loans —The table below summarizes our performing loans exclusive of allowances ($ in thousands):

March 31, 2021 December 31, 2020

June 30, 2021

December 31, 2020

Senior mortgages

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Subordinate mortgages

Total $ 322,783 $ 529,657

Weighted average LTV

Yield - year to date (1)

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(1) Yields presented are for the three months ended March 31, 2021 and 2020.

(1) Yields presented are for the six months ended June 30, 2021 and 2020 and represent the yields on performing loans and other lending investments.

Non-Performing Loans —We designate loans as non-performing at such time as:

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All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt.

As of March 31, 2021 and December 31, 2020, we had one non-performing loan with a carrying value of $55.7 million and $52.6 million, respectively.

As of June 30, 2021 and December 31, 2020, we had one non-performing loan with a carrying value of $56.0 million and $52.6 million, respectively.

We expect that our level of non-performing loans will fluctuate from period to period.

Allowance for Loan Losses —The allowance for loan losses was $9.1 million as of March 31, 2021, or 1.7% of total loans and other lending investments, compared to $13.2 million, or 1.8%, as of December 31, 2020.

Allowance for Loan Losses —The allowance for loan losses was $7.1 million as of June 30, 2021, or 1.5% of total loans and other lending investments, compared to $13.2 million, or 1.8%, as of December 31, 2020.

We expect that our level of allowance for loan losses will fluctuate from period to period.

Due to the volatility of the commercial real estate market, the

process of estimating collateral values and allowances requires the use of significant judgment.

Due to the volatility of the commercial real estate market, the process of estimating collateral values and allowances requires the use of significant judgment.

We currently believe there is adequate collateral and allowances to support the carrying values of the loans and other lending investments.

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An asset-specific allowance is established for an impaired loan when the estimated fair value of the loan’s collateral less costs to sell is lower than the carrying value of the loan.

As of March 31, 2021 and December 31, 2020, asset-specific allowances were $0.7 million and $0.7 million, respectively.

As of June 30, 2021 and December 31, 2020, asset-specific allowances were $0.6 million and $0.7 million, respectively.

We estimate the formula-based component based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market.

In addition, we use third-party market data that includes forecasted economic trends, including unemployment rates.

The general allowance decreased to $8.4 million, or 1.7%, of performing loans and other lending investments as of March 31, 2021, compared to $12.4 million, or 1.8%, of performing loans and other lending investments as of December 31, 2020.

The decrease was due primarily to the repayment of loans during the three months ended March 31, 2021 and an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

The general allowance decreased to $6.5 million, or 1.6%, of performing loans and other lending investments as of June 30, 2021, compared to $12.4 million, or 1.8%, of performing loans and other lending investments as of December 31, 2020.

The decrease was due primarily to the repayment of loans during the six months ended June 30, 2021 and an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

Operating Properties

Our operating properties represent a pool of assets across a broad range of geographies and property types including industrial, hotel, multifamily, retail, condominium, entertainment/leisure and office properties.

As of March 31, 2021, the gross book value of our operating property portfolio, including the carrying value of our equity method investments gross of accumulated depreciation, totaled $306.7 million.

Our operating properties represent a pool of assets across a broad range of geographies and property types including industrial, hotel, multifamily, retail, condominium and entertainment/leisure properties.

As of June 30, 2021, the gross book value of our operating property portfolio, including the carrying value of our equity method investments gross of accumulated depreciation, totaled $306.6 million.

Land and Development

The following table presents a land and development portfolio rollforward for the three months ended March 31, 2021.

The following table presents a land and development portfolio rollforward for the six months ended June 30, 2021.

Land and Development Portfolio Rollforward

(in millions)

Asbury Ocean Club and Asbury Park Waterfront Magnolia

Beginning balance (1)

$ 201.1 $ 101.3 $ 128.3 $ 430.7

Asset sales (2)

(20.7) (4.8) (2.5) (28.0)

Capital expenditures

Other — (0.6) — (0.6)

Ending balance (1)

$ 181.2 $ 99.8 $ 125.8 $ 406.8

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(1) As of March 31, 2021 and December 31, 2020, Total Segment excludes $12.1 million and $31.2 million, respectively, of equity method investments.

(1) As of June 30, 2021, and December 31, 2020, Total Segment excludes $13.6 million and $31.2 million, respectively, of equity method investments.

(2) Represents gross book value of the assets sold, rather than proceeds received.

Results of Operations for the Three Months Ended March 31, 2021 compared to the Three Months Ended March 31, 2020

For the Three Months Ended March 31,

2021 2020 $ Change

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

(in thousands)

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Interest income from sales-type leases

Other income 14,290 20,368 (6,078)

Land development revenue

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Interest expense

Real estate expenses

Land development cost of sales

Depreciation and amortization

General and administrative

(Recovery of) provision for loan losses

(Recovery of) provision for losses on net investment in leases

Impairment of assets

Other expense

Total costs and expenses

Income from sales of real estate

Earnings from equity method investments

Income tax expense

Revenue —Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $1.3 million to $45.5 million during the three months ended June 30, 2021 from $46.8 million for the same period in 2020.

The following table summarizes our operating lease income by segment ($ in millions).

Three Months Ended June 30,

Net Lease (1)

Operating Properties (2)

Land and Development

(1) Change primarily due to the sale of assets, partially offset by an increase in recovery income from tenants at certain of our properties.

(2) Change primarily due to the termination of certain leases at one of our operating properties.

The following table shows certain same store statistics for our consolidated Net Lease segment.

Same store assets are defined as assets we owned on or prior to April 1, 2020 and were in service through June 30, 2021 (Operating lease income in millions).

Three Months Ended June 30,

Operating lease income (1)

Rent per square foot

Occupancy (2)

(1) For the three months ended June 30, 2021 and 2020, includes $9.4 million and $9.1 million, respectively, of lease income from one net lease tenant that was recorded to “Interest income from sales-type leases” and “Interest income” in our consolidated statements of operations.

(2) Occupancy as of June 30, 2021 and 2020.

Interest income decreased to $9.0 million during the three months ended June 30, 2021 from $15.4 million for the same period in 2020.

The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $371 million for the three months ended June 30, 2021 and $755 million for the three months ended June 30, 2020.

The weighted average yield on our performing loans and other lending investments was 8.4% and 7.8%, respectively, for the three months ended June 30, 2021 and 2020.

Interest income from sales-type leases increased to $8.7 million for the three months ended June 30, 2021 from $8.3 million for the same period in 2020.

Other income decreased to $10.1 million during the three months ended June 30, 2021 from $10.3 million for the same period in 2020.

Other income during the three months ended June 30, 2021 consisted primarily of a management fees, income from our hotel properties, other ancillary income from our land and development projects and loan portfolio and interest income on our cash.

Other income during the three months ended June 30, 2020 consisted primarily of management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash.

Land development revenue and cost of sales —During the three months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $32.3 million which had associated cost of sales of $30.8 million.

During the three months ended June 30, 2020, we sold residential lots and units and recognized land development revenue of $15.6 million which had associated cost of sales of $16.3 million.

The increase in 2021 was primarily due to an increase in sales at our Asbury properties.

Costs and expenses —Interest expense decreased to $39.4 million during the three months ended June 30, 2021 from $42.0 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the three months ended June 30, 2021 compared to 4.7% for the three months ended June 30, 2020.

The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.44 billion for the three months ended June 30, 2021 from $3.55 billion for the same period in 2020.

Real estate expense increased $4.0 million to $18.3 million during the three months ended June 30, 2021 from $14.3 million for the same period in 2020.

The following table summarizes our real estate expenses by segment ($ in millions).

Three Months Ended June 30,

Operating Properties (1)

Land and Development (2)

Net Lease (3)

(1) Change primarily due to an increase in expenses at certain of our hotel operating properties that have increased operations from the prior year.

(2) Change primarily due to a decrease in taxes payable at one of our properties in the second quarter 2020.

(3) Change primarily due to an increase in common area expenses at certain properties.

Depreciation and amortization increased to $14.7 million during the three months ended June 30, 2021 from $14.3 million for the same period in 2020.

General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs.

General and administrative expenses increased to $30.4 million during the three months ended June 30, 2021 from $19.0 million for the same period in 2020.

The increase in 2021 was due primarily to an $11.5 million increase in performance-based compensation from 2020 .

Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these plans).

In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.

The recovery of loan losses was $2.3 million for the three months ended June 30, 2021 as compared to a provision for loan losses of $2.1 million for the same period in 2020.

The recovery of loan losses for the three months ended June 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the second quarter 2021 and from an improving macroeconomic forecast on commercial real estate markets since March 31, 2021.

The provision for loan losses for the three months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.

The recovery of losses on net investment in leases for the three months ended June 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets since March 31, 2021.

The provision for losses on net investment in leases for the three months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.

During the three months ended June 30, 2020, we recorded an aggregate impairment of $4.8 million on a real estate asset held for sale and a land and development asset.

Other expense was $0.2 million during the three months ended June 30, 2021 and $0.2 million for the same period in 2020.

Income from sales of real estate —During the three months ended June 30, 2021, we recorded $2.2 million of income from sales of real estate from the sale of net lease assets and residential condominiums.

During the three months ended June 30, 2020, we recorded $0.1 million of income from sales of real estate from the sale of units at a residential operating property.

Earnings from equity method investments —Earnings from equity method investments increased to $12.7 million during the three months ended June 30, 2021 from $2.6 million for the same period in 2020.

During the three months ended June 30, 2021, we recognized $9.7 million of income from our equity method investment in SAFE, $1.6 million from our equity method investment in Net Lease Venture II and $1.4 million of net aggregate income from our remaining equity method investments.

During the three months ended June 30, 2020, we recognized $8.2 million of income from our equity method investment in SAFE, which was partially offset by $5.6 million of net aggregate losses from our remaining equity method investments.

Income tax benefit (expense) —Income tax expense of $0.7 million was recorded for the three months ended June 30, 2021 and related primarily to a reduction in the amount of expected refund of alternative minimum taxes due us resulting from amended tax returns from prior periods net operating loss carrybacks.

Income tax expense of $28 thousand was recorded for the three months ended June 30, 2020 and related primarily to state margins taxes and other minimum state taxes.

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,

(in thousands)

Operating lease income

Interest income

Interest income from sales-type leases

Land development revenue

Total revenue

Interest expense

Real estate expense

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Earnings from equity method investments

Income tax benefit (expense) 665 (60) 725

Net income (loss) $ 7,989 $ (12,885) $ 20,874

Revenue —Operating lease income, which primarily includes income from net lease assets and commercial operating properties, increased $0.1 million to $47.4 million during the three months ended March 31, 2021 from $47.3 million for the same period in 2020.

Income tax expense

Revenue —Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $1.2 million to $93.0 million during the six months ended June 30, 2021 from $94.2 million for the same period in 2020.

The following table summarizes our operating lease income by segment ($ in millions).

Three Months Ended March 31,

2021 2020 Change

Six Months Ended June 30,

Net Lease (1)

$ 42.5 $ 41.5 $ 1.0

Operating Properties (2)

4.8 5.7 (0.9)

Land and Development

Total $ 47.4 $ 47.3 $ 0.1

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(1) Change primarily due to an increase in recovery income from tenants at certain of our properties.

(2) Change primarily due to rent abatements and a decrease in percentage rent at certain of our properties.

(1) Change primarily due to an increase in recovery income from tenants at certain of our properties, partially offset by the sale of assets.

(2) Change primarily due to asset sales and the termination of certain leases at one of our operating properties.

The following table shows certain same store statistics for our consolidated Net Lease segment.

Same store assets are defined as assets we owned on or prior to January 1, 2020 and were in service through March 31, 2021 (Operating lease income in millions).

Three Months Ended March 31,

Same store assets are defined as assets we owned on or prior to January 1, 2020 and were in service through June 30, 2021 (Operating lease income in millions).

Six Months Ended June 30,

Operating lease income (1)

$ 52.0 $ 49.1

Rent per square foot

Occupancy (2)

99.3 % 99.4 %

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(1) For the three months ended March 31, 2021 and 2020, includes $9.5 million and $9.2 million, respectively, of lease income from one net lease tenant that was recorded to "Interest income from sales-type leases" and "Interest income" in our consolidated statements of operations.

(2) Occupancy as of March 31, 2021 and 2020.

Interest income decreased $6.6 million, or 38%, to $10.7 million during the three months ended March 31, 2021 from $17.2 million for the same period in 2020.

The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $526 million for the three months ended March 31, 2021 and $792 million for the three months ended March 31, 2020.

The weighted average yield on our performing loans and other lending investments was 7.5% and 8.2%, respectively, for the three months ended March 31, 2021 and 2020.

Interest income from sales-type leases increased to $8.6 million for the three months ended March 31, 2021 from $8.4 million for the same period in 2020.

Other income decreased $6.1 million, or 30%, to $14.3 million during the three months ended March 31, 2021 from $20.4 million for the same period in 2020.

Other income during the three months ended March 31, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our land and development projects and loan portfolio, income from our hotel properties, lease termination fees and interest income on our cash.

Other income during the three months ended March 31, 2020 consisted primarily of a mark-to-market gain on an equity investment, income from our hotel properties, other ancillary income from our operating properties, land and development projects and loan portfolio and interest income on our cash.

Land development revenue and cost of sales —During the three months ended March 31, 2021, we sold residential lots and units and recognized land development revenue of $32.2 million which had associated cost of sales of $29.3 million.

During the three months ended March 31, 2020, we sold residential lots and units and recognized land development revenue of $80.2 million which had associated cost of sales of $77.1 million.

Costs and expenses —Interest expense decreased $3.8 million, or 9%, to $39.6 million during the three months ended March 31, 2021 from $43.4 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the three months ended March 31, 2021 compared to 4.9% for the three months ended March 31, 2020.

The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.47 billion for the three months ended March 31, 2021 from $3.57 billion for the same period in 2020.

Real estate expense decreased $5.6 million, or 25%, to $16.9 million during the three months ended March 31, 2021 from $22.5 million for the same period in 2020.

(1) For the six months ended June 30, 2021 and 2020, includes $18.9 million and $18.2 million, respectively, of lease income from one net lease tenant that was recorded to “Interest income from sales-type leases” and “Interest income” in our consolidated statements of operations.

(2) Occupancy as of June 30, 2021 and 2020.

Interest income decreased to $19.6 million during the six months ended June 30, 2021 from $32.7 million for the same period in 2020.

The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $445 million for the six months ended June 30, 2021 and $775 million for the six months ended June 30, 2020.

The weighted average yield on our performing loans and other lending investments for both the six months ended June 30, 2021 and 2020 was 8.0%.

Interest income from sales-type leases increased to $17.3 million for the six months ended June 30, 2021 from $16.7 million for the same period in 2020.

Other income decreased to $24.4 million during the six months ended June 30, 2021 from $30.7 million for the same period in 2020.

Other income during the six months ended June 30, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our land and development projects and loan portfolio, income from our hotel properties, lease termination fees and interest income on our cash.

Other income during the six months ended June 30, 2020 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash.

Land development revenue and cost of sales —During the six months ended June 30, 2021, we sold residential lots and units and recognized land development revenue of $64.6 million which had associated cost of sales of $60.1 million.

During the six months ended June 30, 2020, we sold residential lots and units and recognized land development revenue of $95.8 million which had associated cost of sales of $93.3 million.

Costs and expenses —Interest expense decreased to $79.0 million during the six months ended June 30, 2021 from $85.3 million for the same period in 2020 due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the six months ended June 30, 2021 compared to 4.8% for the six months ended June 30, 2020.

The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, increased to $3.46 billion for the six months ended June 30, 2021 from $3.53 billion for the same period in 2020.

Real estate expenses decreased to $35.2 million during the six months ended June 30, 2021 from $36.8 million for the same period in 2020.

The following table summarizes our real estate expenses by segment ($ in millions).

Three Months Ended March 31,

2021 2020 Change

Six Months Ended June 30,

Operating Properties (1)

$ 3.8 $ 7.7 $ (3.9)

Land and Development (2)

4.5 8.6 (4.1)

Net Lease (3)

Total $ 16.9 $ 22.5 $ (5.6)

______________________________________________________________

(1) Change primarily due to a decrease in expenses at certain operating properties due to COVID-19.

(1) Change primarily due to the recovery of bad debt expense at certain of our properties.

(2) Change primarily due to a decrease in real estate taxes and insurance costs at one property and asset sales.

(3) Change primarily due to an increase in recoverable common area maintenance expenses at certain properties.

Depreciation and amortization increased $1.0 million, or 7%, to $15.5 million during the three months ended March 31, 2021 from $14.5 million for the same period in 2020, primarily due to the full amortization of intangible assets associated with terminated leases.

(3) Change primarily due to an increase in common area expenses at certain properties.

Depreciation and amortization increased to $30.1 million during the six months ended June 30, 2021 from $28.8 million for the same period in 2020, primarily due to the full amortization of intangible assets associated with terminated leases and placing certain assets in service during 2021.

General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs.

General and administrative expenses decreased $12.8 million, or 37%, to $21.4 million during the three months ended March 31, 2021 from $34.3 million for the same period in 2020.

The decrease in 2021 was due primarily to a $11.9 million decrease in performance based compensation.

The recovery of loan losses was $3.8 million for the three months ended March 31, 2021 as compared to a provision for loan losses of $4.0 million for the same period in 2020.

The recovery of loan losses for the three months ended March 31, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the first quarter 2021 and from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

The provision for loan losses for the three months ended March 31, 2020 resulted from the adoption of a new accounting standard.

The recovery of losses on net investment in leases for the three months ended March 31, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

The provision for losses on net investment in leases for the three months ended March 31, 2020 resulted from the adoption of a new accounting standard.

During the three months ended March 31, 2020, we recorded an impairment of $1.7 million in connection with the sale of net lease assets.

Other expense increased to $0.3 million during the three months ended March 31, 2021 from $0.1 million for the same period in 2020.

Income from sales of real estate —During the three months ended March 31, 2021, we recorded $0.6 million of income from sales of real estate from the sale of residential condominiums.

Loss on early extinguishment of debt, net— During the three months ended March 31, 2020, we incurred losses on early extinguishment of debt of $4.1 million resulting from the repayment of senior notes prior to maturity.

Earnings from equity method investments —Earnings from equity method investments decreased to $12.8 million during the three months ended March 31, 2021 from $16.6 million for the same period in 2020.

During the three months ended March 31, 2021, we recognized $11.4 million of income from our equity method investment in SAFE, $1.0 million from our equity method investment in Net Lease Venture II and $0.4 million of net aggregate income from our remaining equity method investments.

During the three months ended March 31, 2020, we recognized $19.3 million of income from our equity method investment in SAFE, inclusive of a dilution gain of $7.9 million resulting from the dilution of our ownership in SAFE in connection with a SAFE equity offering in March 2020, offset by $2.7 million of aggregate losses from our remaining equity method investments.

Income tax benefit (expense) —Income tax benefit of $0.7 million was recorded for the three months ended March 31, 2021 and related primarily to refunds due us for alternative minimum taxes paid in prior periods.

Income tax expense of $0.1 million was recorded for the three months ended March 31, 2020 and related primarily to state margins taxes and other minimum state taxes.

General and administrative expenses decreased to $51.8 million during the six months ended June 30, 2021 from $53.3 million for the same period in 2020.

The decrease in 2021 was due primarily to a $1.5 million decrease in payroll and related costs and performance-based compensation .

Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these plans).

In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on the SEC’s website.

The recovery of loan losses was $6.1 million for the six months ended June 30, 2021 as compared to a provision for loan losses of $6.1 million for the same period in 2020.

The recovery of loan losses for the six months ended June 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full during the period and from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

The provision for loan losses for the six months ended June 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets.

The recovery of losses on net investment in leases for the six months ended June 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

The provision for losses on net investment in leases for the six months ended June 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets.

During the six months ended June 30, 2021, we recorded an aggregate impairment of $1.8 million in connection with the sale of net lease assets and residential condominiums .

During the six months ended June 30, 2020, we recorded an aggregate impairment of $6.5 million in connection with the sale of net lease assets and impairments on a real estate asset held for sale and a land and development asset.

Other expense increased to $0.5 million during the six months ended June 30, 2021 from $0.3 million for the same period in 2020.

Income from sales of real estate —During the six months ended June 30, 2021, we recorded $2.8 million of income from sales of real estate from the sale of net lease assets and residential condominiums.

During the six months ended June 30, 2020, we recorded $0.1 million of income from sales of real estate from the sale of units at a residential operating property.

Loss on early extinguishment of debt, net —During the six months ended June 30, 2020, we incurred losses on early extinguishment of debt of $4.1 million resulting from the repayment of senior notes prior to maturity.

Earnings from equity method investments —Earnings from equity method investments increased to $25.5 million during the six months ended June 30, 2021 from $19.2 million for the same period in 2020.

During the six months ended June 30, 2021, we recognized $21.1 million of income from our equity method investment in SAFE, $2.6 million from our equity method investment in Net Lease Venture II and $1.8 million of net aggregate income from our remaining equity method investments.

During the six months ended June 30, 2020, we recognized $27.6 million of income from our equity method investment in SAFE, which included a dilution gain of $7.9 million resulting from a SAFE equity offering in March 2020, offset by $8.4 million of net aggregate losses from our remaining equity method investments.

Income tax expense —Income tax benefit of $0.1 million was recorded during the six months ended June 30, 2020 and was due primarily to state margins taxes and other minimum state taxes.

Adjusted Earnings

In 2019, we announced a new business strategy that would focus our management personnel and our investment resources primarily on scaling our Ground Lease platform.

As part of this strategy, we accelerated the monetization of legacy assets, reducing our legacy portfolio to approximately 15% of our overall portfolio as of March 31, 2021, and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business.

Effective for the first quarter 2020, management determined that a modified non-GAAP earnings metric, designated "adjusted earnings," is the metric it uses to assess our execution of this strategy and the performance of our operations.

Adjusted earnings reflects impairment charges and loan provisions in the same period in which they are recognized in net income (loss) prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP"), rather than in a later period when the asset is sold.

We believe this change is appropriate as legacy asset sales have become less central to our business, even though sales may be material to particular periods when they occur.

As part of this strategy, we accelerated the monetization of legacy assets, reducing our legacy portfolio to approximately 14% of our overall portfolio as of June 30, 2021, and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business.

Adjusted earnings is a non-GAAP metric management uses to assess our execution of this strategy and the performance of our operations.

Adjusted earnings is used internally as a supplemental performance measure adjusting for certain items to give management a view of income more directly derived from operating activities in the period in which they occur.

Adjusted earnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, including our proportionate share of depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock ("Adjusted Earnings").

All prior periods have been calculated in accordance with this definition.

excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock (“Adjusted Earnings”).

Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations.

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It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

(in thousands)

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Depreciation and amortization

17,629 15,056

Stock-based compensation expense

Adjusted earnings (loss) allocable to common shareholders

For the Six Months Ended June 30,

(in thousands)

Adjusted Earnings

Net loss allocable to common shareholders

Depreciation and amortization

Stock-based compensation expense

Non-cash portion of loss on early extinguishment of debt

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Liquidity and Capital Resources

During the three months ended March 31, 2021, we invested an aggregate $105 million in new investments, prior financing commitments and real estate development.

Investments included $88 million in net lease, loan, and strategic investments, $12 million in the repurchase of our common stock and $5 million of capital expenditures on legacy assets.

These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments and includes $5 million of investments made within the Net Lease Venture II, of which we own 51.9%.

During the three months ended June 30, 2021, we invested an aggregate $163 million in new investments, prior financing commitments and real estate development.

Investments included $136 million in net lease (including $25 million in shares of SAFE common stock), loan, and strategic investments, $20 million in the repurchase of our common stock and $7 million of capital expenditures on legacy assets.

These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments.

The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):

For the Three Months Ended March 31,

For the Six Months Ended June 30,

Operating Properties

Net Lease 552 3,292

Total capital expenditures on real estate assets

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Total capital expenditures on land and development assets

As of March 31, 2021, we had unrestricted cash of $194 million and $350 million of borrowing capacity available under the Revolving Credit Facility.

The COVID-19 pandemic has for the time being adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio as its Manager.

These conditions will adversely affect our strategies while they persist.

As of June 30, 2021, we had unrestricted cash of $155 million and $342 million of borrowing capacity available under the Revolving Credit Facility.

The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and

materially scaling SAFE’s portfolio in 2020 and the first quarter of 2021.

These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes.

Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures, distributions to shareholders through dividends and share repurchases and funding ongoing business operations.

The amount we actually invest will depend on the full impact of the COVID-19 pandemic on our business and the pace of the economic recovery.

We had approximately $232 of maximum unfunded commitments associated with our investments as of March 31, 2021, of which we expect to fund the majority over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see "Unfunded Commitments" below).

We had approximately $214.8 million of maximum unfunded commitments associated with our investments as of June 30, 2021, of which we expect to fund the majority over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see “Unfunded Commitments” below).

We also have approximately $201.9 million principal amount of scheduled real estate finance asset maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers.

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To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base.

would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend.

We declared common stock dividends of $8.2 million, or $0.11 per share, for the three months ended March 31, 2021.

Under both the Senior Term Loan and the Revolving Credit Facility we are permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend.

We declared common stock dividends of $17.4 million, or $0.235 per share, for the six months ended June 30, 2021.

Derivatives —Our use of derivative financial instruments, if necessary, has primarily been limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes in foreign currencies.

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These arrangements are referred to as Strategic Investments.

As of March 31, 2021, the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):

Loans and Other Lending Investments Real Estate Other

Investments Total

As of June 30, 2021, the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):

Loans and Other

Performance-Based Commitments

Strategic Investments

Total $ 110,398 $ 69,734 $ 52,059 $ 232,191

Stock Repurchase Program —We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans.

During the three months ended March 31, 2021, we repurchased 0.7 million shares of our outstanding common stock for $12.4 million, for an average cost of $17.20 per share.

During the three months ended March 31, 2020, we repurchased 1.0 million shares of our outstanding common stock for $12.0 million, for an average cost of $12.51 per share.

In February 2021, our board of directors authorized an increase to the stock repurchase program to $50.0 million.

As of March 31, 2021, we had remaining authorization to repurchase up to $40.1 million of common stock under our stock repurchase program.

During the six months ended June 30, 2021, we repurchased 1.8 million shares of our outstanding common stock for $32.4 million, for an average cost of $17.57 per share.

During the six months ended June 30, 2020, we repurchased 2.5 million shares of our outstanding common stock for $27.8 million, for an average cost of $10.98 per share.

We are generally authorized to repurchase up to $50.0 million in shares of our common stock.

As of July 31, 2021, we had remaining authorization to repurchase up to $33.0 million of common stock under our stock repurchase program.

Our Board of Directors subsequently authorized an increase to the stock repurchase program to $50.0 million effective after the date of the filing of this report on Form 10-Q.

Critical Accounting Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis