What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 149 added, 141 removed, 232 unchanged (56% 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 2020 Annual Report, 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.

and its consolidated subsidiaries, unless the context indicates otherwise.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our Annual Report on Form 10-K.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our 2020 Annual Report.

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

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

In 2020, we increased our general allowance for loan losses reflecting the uncertainty related to the COVID-19 pandemic.

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 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.

These conditions improved in the second quarter of 2021 and continued into the third quarter 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.

See the Risk Factors section of our 2020 Annual Report for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and other factors.

Portfolio Overview

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):

As of September 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

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Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance).

We generally intend to hold our net lease assets for long-term investment.

However, we may dispose of assets if we deem the disposition to be in our best interests.

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

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

As of September 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 $3.5 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.

In July 2021, we announced that we intend to explore market interest for possible sales of our net lease assets.

The potential sale would be consistent with our stated corporate strategy which is to grow our Ground Lease and Ground Lease adjacent businesses and simplify our portfolio through

sales of other 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.

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

As of September 30, 2021, we owned approximately 63.6% 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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In addition, we have preferred equity investments and debt securities classified as other lending investments.

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.

As of September 30, 2021, the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled $411.2 million, gross of general loan loss allowances.

The portfolio, excluding securities and other lending investments, included $181.8 million of performing loans with a weighted average maturity of 2.9 years.

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

June 30, 2021

September 30, 2021

Allowance for

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

June 30, 2021

September 30, 2021

December 31, 2020

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Yield - year to date (1)

(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.

(1) Yields presented are for the nine months ended September 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 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.

As of September 30, 2021 and December 31, 2020, we had one non-performing loan with a carrying value of $58.2 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 $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.

Allowance for Loan Losses —The allowance for loan losses was $6.4 million as of September 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.

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

As of September 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 $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.

The general allowance decreased to $5.7 million, or 1.6%, of performing loans and other lending investments as of September 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 nine months ended September 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 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.

As of September 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 $192.1 million.

Land and Development

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

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

Land and Development Portfolio Rollforward

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Ending balance (1)

(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.

(1) As of September 30, 2021, and December 31, 2020, Total Segment excludes $0.5 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 June 30, 2021 compared to the Three Months Ended June 30, 2020

Results of Operations for the Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020

For the Three Months Ended

September 30,

(in thousands)

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(Recovery of) provision for loan losses

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

Provision for (recovery of) losses on net investment in leases

Impairment of assets

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Income from sales of real estate

Loss on early extinguishment of debt, net

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.

Income tax benefit (expense)

Revenue —Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $2.0 million to $44.4 million during the three months ended September 30, 2021 from $46.4 million for the same period in 2020.

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

Three Months Ended June 30,

Three Months Ended September 30,

Net Lease (1)

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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.

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

(2) Change primarily due to the sale of assets.

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,

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

Three Months Ended September 30,

Operating lease income (1)

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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.

(1) For the three months ended September 30, 2021 and 2020, includes $10.0 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 September 30, 2021 and 2020.

Interest income decreased to $8.0 million during the three months ended September 30, 2021 from $14.3 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 $323 million for the three months ended September 30, 2021 and $703 million for the three months ended September 30, 2020.

The weighted average yield on our performing loans and other lending investments was 7.8% and 7.6%, respectively, for the three months ended September 30, 2021 and 2020.

Interest income from sales-type leases increased to $9.6 million for the three months ended September 30, 2021 from $8.4 million for the same period in 2020.

The increase was due primarily to sales-type leases originated in 2021.

Other income increased to $40.2 million during the three months ended September 30, 2021 from $25.6 million for the same period in 2020.

Other income during the three months ended September 30, 2021 consisted primarily of mark-to-market gains on an equity investment, income from our hotel properties, lease termination fees, management fees, 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 September 30, 2020 consisted primarily of mark-to-market gains 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 three months ended September 30, 2021, we sold land parcels and residential lots and units and recognized land development revenue of $93.4 million which had associated cost of sales of $87.4 million.

During the three months ended September 30, 2020, we sold residential lots and units and recognized land development revenue of $20.5 million which had associated cost of sales of $21.4 million.

The increase in 2021 was primarily due to the sale of three land properties.

Costs and expenses —Interest expense decreased to $39.5 million during the three months ended September 30, 2021 from $42.4 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.5% for the three months ended September 30, 2021 compared to 4.8% for the three months ended September 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 September 30, 2021 from $3.47 billion for the same period in 2020.

Real estate expense increased $1.8 million to $18.7 million during the three months ended September 30, 2021 from $16.9 million for the same period in 2020.

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

Three Months Ended June 30,

Three Months Ended September 30,

Operating Properties (1)

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(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.

(2) Change primarily due to asset sales.

(3) Change primarily due to a lease amendment at one property that resulted in a change to recoverable expenses.

Depreciation and amortization increased to $14.9 million during the three months ended September 30, 2021 from $14.6 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).

General and administrative expenses decreased to $17.1 million during the three months ended September 30, 2021 from $19.9 million for the same period in 2020.

The decrease in 2021 was due primarily to a $1.8 million decrease in performance-based compensation and a $0.9 million decrease in payroll and related costs from 2020 .

Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 15 for more information on the iPIP 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,

The recovery of loan losses was $1.6 million for the three months ended September 30, 2021 as compared to a recovery of loan losses of $2.0 million for the same period in 2020.

The recovery of loan losses for the three months ended September 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the quarter.

The recovery of loan losses for the three months ended September 30, 2020 resulted from the reversal of CECL allowances on loans that repaid in full in the third quarter 2020 and a more favorable economic outlook on commercial real estate markets in the third quarter 2020 as compared to the second quarter 2020.

The provision for losses on net investment in leases for the three months ended September 30, 2021 resulted from a changing macroeconomic forecast on commercial real estate markets since June 30, 2021.

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

During the three months ended September 30, 2021, we recorded an aggregate impairment of $0.8 million resulting from the sale of net lease assets and a $0.4 million on an operating property held for sale.

Other expense was $2.0 million during the three months ended September 30, 2021 and $0.1 million for the same period in 2020.

Other expenses for the three months ended September 30, 2021 consisted primarily of legal costs.

Income from sales of real estate —During the three months ended September 30, 2021, we recorded $25.6 million of income from sales of real estate primarily from the sale of an operating property.

During the three months ended September 30, 2020, we recorded $6.1 million of income from sales of real estate from the sale of a Ground Lease to SAFE .

Loss on early extinguishment of debt, net— During the three months ended September 30, 2020, we incurred losses on early extinguishment of debt of $7.9 million resulting from the repayment of senior notes prior to maturity.

Earnings from equity method investments —Earnings from equity method investments increased to $89.2 million during the three months ended September 30, 2021 from $6.8 million for the same period in 2020.

During the three months ended September 30, 2021, we recognized $73.5 million of income from our equity method investment in SAFE (which included a dilution gain of $60.2 million – refer to Note 8), $1.4 million from our equity method investment in Net Lease

Venture II and $14.3 million of net aggregate income from our remaining equity method investments, which included $10.5 million from one of our equity method investments resulting from our share of income from land sales.

During the three months ended September 30, 2020, we recognized $9.3 million of income from our equity method investment in SAFE and $0.8 million from our equity method investment in Net Lease Venture II , which was partially offset by $3.3 million of net aggregate losses from our remaining equity method investments.

Income tax benefit (expense) —Income tax benefit of $6 thousand was recorded for the three months ended September 30, 2021.

Income tax expense of $0.1 million was recorded for the three months ended September 30, 2020 and related primarily to state margins taxes and other minimum state taxes.

Results of Operations for the Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

For the Nine Months Ended September 30,

(in thousands)

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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 $1.2 million to $93.0 million during the six months ended June 30, 2021 from $94.2 million for the same period in 2020.

Income tax benefit (expense)

Net income (loss)

Revenue —Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased to $137.4 million during the nine months ended September 30, 2021 from $140.5 million for the same period in 2020.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net Lease (1)

1 unchanged sentence

Land and Development

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

(1) Change primarily due to asset sales, partially offset by an increase in rent at certain of our properties.

(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 June 30, 2021 (Operating lease income in millions).

Six Months Ended June 30,

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

Nine Months Ended September 30,

Operating lease income (1)

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Occupancy (2)

(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.

(1) For the nine months ended September 30, 2021 and 2020, includes $28.9 million and $27.4 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 September 30, 2021 and 2020.

Interest income decreased to $27.6 million during the nine months ended September 30, 2021 from $46.9 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 $403 million for the nine months ended September 30, 2021 and $716 million for the nine months ended September 30, 2020.

The weighted average yield on our performing loans and other lending investments for both the nine months ended September 30, 2021 and 2020 was 7.9%.

Interest income from sales-type leases increased to $26.9 million for the nine months ended September 30, 2021 from $25.0 million for the same period in 2020.

The increase was due primarily to sales-type leases originated in 2021.

Other income increased to $64.5 million during the nine months ended September 30, 2021 from $56.2 million for the same period in 2020.

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

Other income during the nine months ended September 30, 2020 consisted primarily of mark-to-market gains 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 nine months ended September 30, 2021, we sold residential lots and units and recognized land development revenue of $157.9 million which had associated cost of sales of $147.5 million.

During the nine months ended September 30, 2020, we sold residential lots and units and recognized land development revenue of $116.3 million which had associated cost of sales of $114.7 million.

The increase in 2021 was primarily due to the sale of three land properties.

Costs and expenses —Interest expense decreased to $118.5 million during the nine months ended September 30, 2021 from $127.7 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 nine months ended September 30, 2021 compared to 4.8% for the nine months ended September 30, 2020.

The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.45 billion for the nine months ended September 30, 2021 from $3.51 billion for the same period in 2020.

Real estate expenses increased to $53.9 million during the nine months ended September 30, 2021 from $53.7 million for the same period in 2020.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Properties (1)

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Net Lease (3)

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

(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 real estate taxes and insurance costs at one property and asset sales.

(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.

(3) Change primarily due to an increase in legal costs and common area expenses at certain properties, partially offset by a lease amendment at one property that resulted in a change to recoverable expenses.

Depreciation and amortization increased to $45.0 million during the nine months ended September 30, 2021 from $43.4 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 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).

General and administrative expenses decreased to $69.0 million during the nine months ended September 30, 2021 from $73.1 million for the same period in 2020.

The decrease in 2021 was due primarily to a $2.1 million decrease in performance-based compensation and a $2.1 million decrease in payroll and related costs from 2020 .

Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 15 for more information on the iPIP 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.

The recovery of loan losses was $7.6 million for the nine months ended September 30, 2021 as compared to a provision for loan losses of $4.1 million for the same period in 2020.

The recovery of loan losses for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2021 resulted from asset sales and an improving macroeconomic forecast on commercial real estate markets since December 31, 2020.

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

During the nine months ended September 30, 2021, we recorded an aggregate impairment of $2.5 in connection with the sale of net lease assets and residential condominiums and a $0.4 million impairment on an operating property held for sale .

During the nine months ended September 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 $2.5 million during the nine months ended September 30, 2021 from $0.4 million for the same period in 2020.

The increase in 2021 was primarily due to an increase in legal costs.

Income from sales of real estate —During the nine months ended September 30, 2021, we recorded $28.4 million of income from sales of real estate from the sale of an operating property, net lease assets and residential condominiums.

During the nine months ended September 30, 2020, we recorded $6.1 million of income from sales of real estate primarily from the sale of a Ground Lease to SAFE.

Loss on early extinguishment of debt, net —During the nine months ended September 30, 2020, we incurred losses on early extinguishment of debt of $12.0 million resulting from the repayment of senior notes prior to maturity.

Earnings from equity method investments —Earnings from equity method investments increased to $114.7 million during the nine months ended September 30, 2021 from $26.0 million for the same period in 2020.

During the nine months ended September 30, 2021, we recognized $94.6 million of income from our equity method investment in SAFE (which included a dilution gain of $60.7 million – refer to Note 8), $4.0 million from our equity method investment in Net Lease Venture II and $16.1 million of net aggregate income from our remaining equity method investments, which included $13.3 million from one of our equity method investments resulting from our share of income from land sales .

During the nine months ended September 30, 2020, we recognized $36.9 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, and $1.6 million from our equity investment in Net Lease Venture II, which were partially offset by $12.5 million of net aggregate losses from our remaining equity method investments.

Income tax expense — Income tax benefit of $6 thousand was recorded during the nine months ended September 30, 2021.

Income tax expense of $0.2 million was recorded during the nine months ended September 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 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.

As part of this strategy, we accelerated the monetization of legacy assets, reducing our legacy portfolio to approximately 10% of our overall portfolio as of September 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 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”).

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.

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 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”).

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

Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders.

Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with generally accepted accounting principles in the United States of America (“GAAP”)), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders.

Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance.

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 June 30,

For the Three Months Ended September 30,

(in thousands)

Adjusted Earnings

Net loss allocable to common shareholders

Net income (loss) allocable to common shareholders

Depreciation and amortization

Stock-based compensation expense

Adjusted earnings (loss) allocable to common shareholders

For the Six Months Ended June 30,

Non-cash portion of loss on early extinguishment of debt

Adjusted earnings allocable to common shareholders

For the Nine Months Ended September 30,

(in thousands)

Adjusted Earnings

Net loss allocable to common shareholders

Net income (loss) allocable to common shareholders

Depreciation and amortization

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Liquidity and Capital Resources

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.

During the three months ended September 30, 2021, we invested an aggregate $175 million in new investments, prior financing commitments and real estate development.

Investments included $107 million in net lease (including $53 million

in shares of SAFE common stock), loan, and strategic investments, $60 million in the repurchase of our common stock and $8 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 Six Months Ended June 30,

For the Nine Months Ended September 30,

Operating Properties

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Total capital expenditures on land and development assets

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.

As of September 30, 2021, we had unrestricted cash of $299 million and $340 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 and third 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 $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).

Our $287.5 million aggregate principal amount of convertible notes mature in September 2022, and we must repay them in a combination of cash and shares of our common stock.

We also had approximately $118.4 million of maximum unfunded commitments associated with our investments as of September 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 $166.2 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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The Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x.

The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility.

The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the

borrowing base asset value remains at least 1.5x outstanding borrowings on the facility.

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

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.

We declared common stock dividends of $26.3 million, or $0.36 per share, for the nine months ended September 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 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):

As of September 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

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

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.

During the nine months ended September 30, 2021, we repurchased 4.2 million shares of our outstanding common stock for $91.9 million, for an average cost of $21.70 per share.

During the nine months ended September 30, 2020, we repurchased 3.7 million shares of our outstanding common stock for $41.4 million, for an average cost of $11.32 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.

As of September 30, 2021, we had remaining authorization to repurchase up to $30.9 million of common stock under our stock repurchase program.

Critical Accounting Estimates

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For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.

For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our Annual Report on Form 10-K.

For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2020 Annual Report.

New Accounting Pronouncements —For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements.

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