What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-02 · 132 added, 249 removed, 132 unchanged (74% of the section changed)

11 unchanged sentences

Executive Overview

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

Our portfolio includes investments in the entertainment/leisure (23.0% of gross book value) and hotel (4.2% 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.

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

Corporate Strategy .

We continue to execute 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.

In March 2022, we, through certain subsidiaries of ours and entities managed by us, sold our portfolio of net lease assets for an aggregate gross sales price of $3.07 billion (the “Net Lease Sale”).

The portfolio sold consisted of office, entertainment and industrial properties located in the United States comprising approximately 18.3 million square feet.

It included assets wholly-owned by us and assets owned by two joint ventures managed by us and in which we owned 51.9% interests.

At the time of the sale, the portfolio was encumbered by an aggregate of $702 million of mortgage indebtedness, including indebtedness of equity method investments, which was repaid with proceeds from the sale.

After repayment of the mortgage indebtedness and prepayment penalties, repayment of our Senior Term Loan (refer to Note 10 to the consolidated financial statements), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, we retained net cash proceeds of $1.2 billion from the transaction.

Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022.

Our net lease assets associated with our Ground Lease businesses were not included in the sale.

Portfolio Overview

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):

As of March 31, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):

Property/Collateral

Ground Leases

Entertainment / Leisure

Industrial / Lab

Land and Development

Entertainment / Leisure

Other Property Types

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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.

For real estate finance, gross book value is defined as principal funded including any deferred capitalized interest receivable, plus protective advances, exit fee receivables and any unamortized origination/modification costs, plus our basis in equity method investments, less purchase discounts and specific allowances.

This amount is not reduced for CECL allowances.

Real estate finance includes our $48 million pro rata share of loans held within an equity method investment.

Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on our properties.

We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine our capabilities in underwriting, lease structuring, asset management and build-to-suit construction.

Prior to the Net Lease Sale, our net lease business created stable cash flows through long-term net leases primarily to single tenants on our properties.

We targeted mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combined our capabilities in underwriting, lease structuring, asset management and build-to-suit construction.

Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis.

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).

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

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.

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.

After the Net Lease Sale, the net lease segment includes our Ground Lease investments made primarily through SAFE and our Ground Lease adjacent businesses.

As of March 31, 2022, our net lease portfolio consisted primarily of our equity method investments in SAFE and the Ground Lease Plus Fund.

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

Real Estate (1)

Gross book value (millions) (2)

Square footage (thousands)

Book value (millions) (1)

Weighted average lease term (years) (2)

Weighted average yield (3)

(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).

(1) Wholly-owned includes amounts recorded as net investment in leases (refer to Note 5 to the consolidated financial statements).

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

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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.

Net Lease Venture —In February 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets and gave a right of first refusal to the venture on all new net lease investments that met specified investment criteria (refer to Note 4 in our consolidated financial statements for more information on our Net Lease Venture).

The Net Lease Venture’s investment period expired on June 30, 2018 and the remaining term of the venture extends through February 13, 2022, subject to two, one-year extension options at the discretion of us and our partner.

We obtained control over the Net Lease Venture when the investment period expired on June 30, 2018 and consolidated the assets and liabilities of the venture, which had previously been accounted for as an equity method investment.

Net Lease Venture II —In July 2018, we entered into Net Lease Venture II with similar investment strategies as the Net Lease Venture (refer to Note 8).

The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by us.

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.

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

(3) Yield for SAFE is calculated over the trailing twelve months and excludes dilution gains (refer to Note 8 to the consolidated financial statements) and management fees earned by us.

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.

We believe its business has characteristics comparable to a high-grade fixed income investment business, but with certain unique advantages.

Relative to alternative fixed income investments generally, SAFE’s Ground Leases typically benefit from built-in growth derived from contractual rent increases, and the opportunity to realize value from residual rights to acquire the buildings and other improvements on its land at no additional cost.

Relative to alternative fixed income investments generally, SAFE’s Ground Leases typically benefit from built-in growth derived from contractual rent escalators that may compound over the duration of the lease.

These rent escalators may be based on fixed increases, a CPI lookback or a combination thereof, and may also include a participation in the gross revenues of the property.

SAFE also has the opportunity to realize value from its right to regain possession of the buildings and other improvements on its land upon expiration or earlier termination of the lease at no additional cost.

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 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).

As of March 31, 2022, we owned approximately 64.7% of SAFE’s common stock outstanding.

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

We act as SAFE’s external manager pursuant to a management agreement, and we have an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that we will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless we have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.

Ground Lease Plus Fund —The Company formed and manages an investment fund that targets the origination and acquisition of Ground Leases for commercial real estate projects that are in a pre-development phase (the “Ground Lease Plus Fund”).

We own a 53% noncontrolling interest in the Ground Lease Plus Fund.

We do not have a controlling interest in the Ground Lease Plus Fund due to the substantive participating rights of our partner and account for this investment as an equity method investment.

In addition, the Ground Lease Plus Fund has first look rights on qualifying pre-development projects through December 2023.

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.

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 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):

September 30, 2021

Our real estate finance portfolio consists of leasehold loans to Ground Lease tenants, including tenants of SAFE, 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, 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.

Our real estate finance portfolio includes Ground Leases, loans on stabilized and

transitional properties and ground-up construction projects.

In addition, we also own loans through equity method investments and have preferred equity investments and debt securities classified as other lending investments.

The tables below shows certain statistics for our real estate finance portfolio ($ in thousands):

March 31, 2022

Allowance for

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Other lending investments

(1) As of March 31, 2022, our performing loans had a weighted average maturity of 3.3 years and, excluding one performing loan with a maturity of September 2057, had a weighted average maturity of 0.4 years.

December 31, 2021

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

September 30, 2021

March 31, 2022

December 31, 2021

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Yield - year to date (1)

(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.

(1) Yields presented are for the three months ended March 31, 2022 and 2021 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 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.

As of March 31, 2022 and December 31, 2021, we had one non-performing loan with a carrying value of $59.1 million.

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 $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.

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

Allowance for Loan Losses —The allowance for loan losses was $4.9 million as of March 31, 2022, or 1.5% of total loans and other lending investments, compared to $4.8 million, or 1.4%, as of December 31, 2021.

We expect that our level of Expected Losses will fluctuate from period to period.

Due to the volatility of the commercial real estate market, the process of estimating collateral values and Expected Losses 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 September 30, 2021 and December 31, 2020, asset-specific allowances were $0.6 million and $0.7 million, respectively.

As of March 31, 2022 and December 31, 2021, asset-specific allowances were $0.6 million and $0.6 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 $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.

The Expected Loss increased to $4.3 million, or 1.6%, of performing loans and other lending investments as of March 31, 2022, compared to $4.2 million, or 1.5%, of performing loans and other lending investments as of December 31, 2021.

The increase was due primarily to the accretion on our held-to-maturity security.

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 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.

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

As of March 31, 2022, the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled $135.0 million.

Land and Development

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

The following table presents a land and development portfolio rollforward for the three months ended March 31, 2022.

Land and Development Portfolio Rollforward

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Ending balance (1)

(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.

(1) As of March 31, 2022, and December 31, 2021, Total Segment excludes $0.2 million and $1.1 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 September 30, 2021 compared to the Three Months Ended September 30, 2020

Results of Operations for the Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

For the Three Months Ended

September 30,

(in thousands)

5 unchanged sentences

Interest expense

Real estate expenses

Land development cost of sales

Depreciation and amortization

General and administrative

(Recovery of) provision for loan losses

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

Impairment of assets

Other expense

Total costs and expenses

Income from sales of real estate

Loss on early extinguishment of debt, net

Earnings from equity method investments

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 September 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 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 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)

Rent per square foot

Occupancy (2)

(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 September 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 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 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 $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)

Operating lease income

Interest income

Interest income from sales-type leases

Land development revenue

Total revenue

Interest expense

Real estate expense

2 unchanged sentences

General and administrative

(Recovery of) provision for loan losses

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

Provision for (recovery of) loan losses

Provision for losses on net investment in leases

Impairment of assets

4 unchanged sentences

Earnings from equity method investments

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).

Nine Months Ended September 30,

Net Lease (1)

Operating Properties (2)

Land and Development

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

Nine Months Ended September 30,

Operating lease income (1)

Rent per square foot

Occupancy (2)

(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).

Nine Months Ended September 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 real estate taxes and insurance costs at one property and asset sales.

(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.

Income tax (expense) benefit

Net income from discontinued operations

Revenue —Operating lease income, which primarily includes income from commercial operating properties, decreased to $3.1 million during the three months ended March 31, 2022 from $4.9 million for the same period in 2021.

The decrease was primarily due to the sale of assets, partially offset by an increase in rent at certain of our properties.

Interest income decreased to $4.9 million during the three months ended March 31, 2022 from $9.8 million for the same period in 2021.

The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was $279 million for the three months ended March 31, 2022 and $526 million for the three months ended March 31, 2021.

The weighted average yield on our performing loans and other lending investments was 7.1% and 7.5%, respectively, for the three months ended March 31, 2022 and 2021.

Interest income from sales-type leases was $0.4 million for the three months ended March 31, 2022 and resulted from the acquisition of a Ground Lease that was classified as a sales-type lease (refer to Note 5 to the consolidated financial statements).

Other income decreased to $8.6 million during the three months ended March 31, 2022 from $13.0 million for the same period in 2021.

Other income during the three months ended March 31, 2022 consisted primarily of management fees , income from our hotel properties and other ancillary income from our land and development projects and operating properties.

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 .

Land development revenue and cost of sales —During the three months ended March 31, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $14.9 million which had associated cost of sales of $14.5 million.

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.

Costs and expenses —Interest expense increased to $29.2 million during the three months ended March 31, 2022 from $28.8 million for the same period in 2021.

Our weighted average cost of debt was 4.7% for the three months ended March 31, 2022 compared to 4.5% for the three months ended March 31, 2021.

The average balance of our outstanding debt was $2.51 billion for the three months ended March 31, 2022 and $2.61 billion for the same period in 2021.

Real estate expense increased to $10.1 million during the three months ended March 31, 2022 from $8.7 million for the same period in 2021.

The increase was primarily due to an increase in expenses at certain of our hotel operating properties that have increased operations from the prior year, which was partially offset by asset sales.

Depreciation and amortization decreased to $1.4 million during the three months ended March 31, 2022 from $2.4 million for the same period in 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 $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).

General and administrative expenses decreased to $1.4 million during the three months ended March 31, 2022 from $21.4 million for the same period in 2021.

The decrease in 2022 was due primarily to a $19.3 million decrease in performance-based compensation.

Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 14 to the consolidated financial statements 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 $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.

The provision for loan losses was $0.1 million for the three months ended March 31, 2022 as compared to a recovery of loan losses of $3.6 million for the same period in 2021.

The provision for loan losses for the three months ended March 31, 2022 resulted from the accretion on our held-to-maturity security.

The recovery of loan losses for the three months ended March 31, 2021 resulted from the reversal of Expected Loss 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 losses on net investment in leases for the three months ended March 31, 2022 resulted from the macroeconomic forecast on commercial real estate markets.

Other expense was $0.9 million during the three months ended March 31, 2022 and $0.3 million for the same period in 2021.

Other expenses for the three months ended March 31, 2022 consisted primarily of legal costs.

Income from sales of real estate —During the three months ended March 31, 2022, we recorded $0.5 million of income from sales of real estate primarily from the sale of Ground Leases.

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, 2022, we incurred losses on early extinguishment of debt of $1.4 million resulting from the repayment of our senior term loan in connection with our Net Lease Sale (refer to Note 3 to the consolidated financial statements).

Earnings from equity method investments —Earnings from equity method investments increased to $25.0 million during the three months ended March 31, 2022 from $11.8 million for the same period in 2021.

During the three months ended March 31, 2022, we recognized $17.0 million of income from our equity method investment in SAFE and $8.0 million of net aggregate income from our remaining equity method investments.

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

Income tax (expense) benefit —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 .

Net income from discontinued operations —In March 2022, we closed on the sale of the majority of our net lease properties owned directly and through ventures.

Our net lease assets were comprised of office, entertainment and industrial properties located in the United States.

Our net lease assets associated with our Ground Lease businesses were not included in the sale.

Net income from discontinued operations represents the operating results from the net lease assets that are not

associated with our Ground Lease businesses (refer to Note 3 to the consolidated financial statements - Net Lease Sale and Discontinued Operations).

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 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.

As part of this strategy, we accelerated the monetization of legacy assets 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.

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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 September 30,

(in thousands)

Adjusted Earnings

Net income (loss) allocable to common shareholders

Depreciation and amortization

Stock-based compensation expense

Non-cash portion of loss on early extinguishment of debt

Adjusted earnings allocable to common shareholders

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(in thousands)

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Depreciation and amortization

Stock-based compensation expense

Stock-based compensation (income) expense

Non-cash portion of loss on early extinguishment of debt

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Liquidity and Capital Resources

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.

During the three months ended March 31, 2022, we received net proceeds from the Net Lease Sale of approximately $1.2 billion.

We invested an aggregate $247 million in new investments, prior financing commitments and real estate development.

Investments included $231 million in our Ground Lease businesses (including $202 million in shares of SAFE common stock) and $16 million of loan fundings and capital expenditures on legacy and strategic 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 Nine Months Ended September 30,

For the Three Months Ended March 31,

Operating Properties

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Total capital expenditures on land and development assets

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.

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.

As of March 31, 2022, we had unrestricted cash of $1.5 billion and $350 million of borrowing capacity available under the Revolving Credit Facility.

Our primary cash uses over the next 12 months are expected to be funding of investments in our Ground Lease and Ground Lease adjacent businesses, distributions to noncontrolling interests resulting from the Net Lease Sale (refer to Note 3 to the consolidated financial statements), repayment of debt obligations (refer to Note 10 to the consolidated financial statements), capital expenditures on legacy assets, distributions to shareholders through dividends and share repurchases and funding ongoing business operations, including operating lease payments (refer to Note 11 to the consolidated financial statements) .

The amount we actually invest will depend on the closing of asset sales, the continuing impact of the COVID-19 pandemic, inflation, interest rate increases, market volatility and other macroeconomic factors on our business.

In April 2022, we completed separate, privately-negotiated transactions with holders of $194 million aggregate principal amount of our 3.125% convertible notes (refer to Note 18 to the consolidated financial statements) in which the noteholders exchanged their convertible notes with us for 13.75 million newly issued shares of our common stock and aggregate cash payments of $14 million.

Our remaining $94 million aggregate principal amount of our 3.125% 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 $128.4 million of maximum unfunded commitments associated with our investments as of March 31, 2022, of which we expect to fund the majority of 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 $138.4 million principal amount of scheduled real estate finance maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers.

We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future.

Our capital sources to meet such cash requirements are expected to include cash on hand, Revolving Credit Facility borrowings, income from our portfolio, loan repayments from borrowers and proceeds from asset sales.

Our capital sources to meet such cash requirements are expected to include cash on hand, including proceeds from the Net Lease Sale, Revolving Credit Facility borrowings, income from our portfolio, loan repayments from borrowers and proceeds from asset sales.

We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due.

We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions.

We also have amounts due under our liability-classified and equity-classified iPIP Plans.

We currently estimate the total amount due under our iPIP Plans to be $219 million, assuming SAFE is valued at a price of $43.05 per share and our other assets perform with current underwriting expectations.

Of this amount, $114 million has been accrued in our financial statements (refer to Note 14 to the consolidated financial statements), of which $39 million will be paid in cash and shares of our common stock in the second quarter of 2022 resulting from the Net Lease Sale.

Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock;

provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans;

and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock.

Additional information on our iPIP Plans can be found in our 2021 Annual Report and our 2021 Proxy Statement, both of which are available on our website.

The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the three months ended March 31, 2022 and 2021 ($ in thousands):

For the Three Months Ended March 31,

Cash flows used in operating activities

Cash flows provided by investing activities

Cash flows used in financing activities

The decrease in cash flows provided by operating activities during 2022 was due primarily to a decrease in the collection of deferred interest on loans.

The increases in cash flows provided by investing activities and cash flows used in financing activities during 2022 was due primarily to the Net Lease Sale (refer to Note 3 to the consolidated financial statements).

Debt Covenants —Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.3x and a covenant restricting certain incurrences of debt based on a fixed charge coverage ratio.

If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.

The Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders.

In particular, the Senior Term Loan requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility.

The Revolving Credit Facility contains certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders.

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 $26.3 million, or $0.36 per share, for the nine months ended September 30, 2021.

Under 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 $8.7 million, or $0.125 per share, for the three months ended March 31, 2022.

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.

Refer to Note 12 to the consolidated financial statements.

Unfunded Commitments —We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria.

Unfunded Commitments —We generally fund construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria.

We refer to these arrangements as Performance-Based Commitments.

In addition, we have committed to invest capital in several real estate funds and other ventures.

In addition, we have

committed to invest capital in several real estate funds and other ventures.

These arrangements are referred to as Strategic Investments.

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):

As of March 31, 2022, 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 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 September 30, 2021, we had remaining authorization to repurchase up to $30.9 million of common stock under our stock repurchase program.

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.

We are generally authorized to repurchase up to $50.0 million in shares of our common stock and in February 2022, our board of directors authorized an increase to the stock repurchase program to $50.0 million.

As of March 31, 2022, we had remaining authorization to repurchase up to $50.0 million of common stock under our stock repurchase program.

Critical Accounting Estimates

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For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2021 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