Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are included with respect to, among other things, iStar Inc.’s (the “Company’s”) current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. 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 2021 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 2021 Annual Report. These historical financial statements may not be indicative of our future performance.
Executive Overview
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 $1.2 billion from the transaction. Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022. Our net lease assets associated with our Ground Lease businesses were not included in the sale.
39
Table of Contents
Portfolio Overview
As of March 31, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):
Property/Collateral
Net
Real Estate
Operating
Land &
% of
Types
Lease
Finance
Properties
Development
Corporate
Total
Total
Ground Leases
$
1,481,337
$
—
$
—
$
—
$
—
$
1,481,337
65.7
%
Land and Development
—
11,607
—
223,191
—
234,798
10.4
%
Hotel
—
108,362
67,712
—
—
176,074
7.8
%
Multifamily
—
72,151
38,837
—
—
110,988
4.9
%
Retail
—
61,807
13,600
8,340
—
83,747
3.7
%
Condominium
—
11,092
301
46,080
—
57,473
2.5
%
Office
—
46,583
—
—
—
46,583
2.1
%
Entertainment / Leisure
—
—
14,534
—
—
14,534
0.6
%
Other Property Types
—
24,863
—
—
24,747
49,610
2.2
%
Total
$
1,481,337
$
336,465
$
134,984
$
277,611
$
24,747
$
2,255,144
100.0
%
Percentage of Total
66%
15%
6%
12%
<1%
100%
Net
Real Estate
Operating
Land &
% of
Geographic Region
Lease
Finance
Properties
Development
Corporate
Total
Total
Northeast
$
567,442
$
91,039
$
77,831
$
173,058
$
—
$
909,370
40.3
%
West
359,451
108,463
32,374
8,970
—
509,258
22.6
%
Mid-Atlantic
217,016
—
4,841
95,393
—
317,250
14.1
%
Southeast
154,800
29,868
4,414
190
—
189,272
8.4
%
Southwest
140,891
—
—
—
—
140,891
6.2
%
Central
41,737
11,092
15,524
—
—
68,353
3.0
%
Various
—
96,003
—
—
24,747
120,750
5.4
%
Total
$
1,481,337
$
336,465
$
134,984
$
277,611
$
24,747
$
2,255,144
100.0
%
Net Lease
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).
After the Net Lease Sale, the net lease segment includes our Ground Lease investments made primarily through SAFE and our Ground Lease adjacent businesses.
40
Table of Contents
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.
Wholly-
Owned
SAFE
Ground Lease
Plus Fund
Ownership %
100.0
%
64.7
%
53.0
%
Book value (millions) (1)
$
28
$
1,389
$
65
% Leased
100.0
%
100.0
%
100.0
%
Weighted average lease term (years) (2)
98.9
90.9
105.0
Weighted average yield (3)
5.2
%
4.9
%
5.7
%
(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.
(2) Weighted average lease term is calculated using GAAP rent and the initial maturity and does not include extension options. SAFE includes its pro rata share of its unconsolidated equity method investments.
(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 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 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 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
41
Table of Contents
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
Gross
Allowance
Loan Losses as
Number
Book
for Loan
Net Book
% of
a % of Gross
of Loans
Value
Losses
Value
Total
Book Value
Performing loans (1)
7
$
153,846
$
(1,925)
$
151,921
45.8%
1.3%
Non-performing loans
1
59,642
(591)
59,051
17.8%
1.0%
Other lending investments
2
123,283
(2,416)
120,867
36.4%
2.0%
Total
10
$
336,771
$
(4,932)
$
331,839
100.0%
1.5%
(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
Allowance for
Gross
Allowance
Loan Losses as
Number
Book
for Loan
Net Book
% of
a % of Gross
of Loans
Value
Losses
Value
Total
Book Value
Performing loans
8
$
153,043
$
(1,888)
$
151,155
45.4%
1.2%
Non-performing loans
1
59,640
(576)
59,064
17.7%
1.0%
Other lending investments
2
124,930
(2,305)
122,625
36.8%
1.8%
Total
11
$
337,613
$
(4,769)
$
332,844
100.0%
1.4%
Performing Loans —The table below summarizes our performing loans exclusive of allowances ($ in thousands):
March 31, 2022
December 31, 2021
Senior mortgages
$
141,176
$
139,968
Corporate/Partnership loans
—
618
Subordinate mortgages
12,670
12,457
Total
$
153,846
$
153,043
Weighted average LTV
61%
60%
Yield - year to date (1)
7.1%
7.5%
(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: (1) interest payments become 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of March 31, 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 $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.
42
Table of Contents
The allowance for loan losses includes an asset-specific component and a formula-based component. An asset-specific allowance is established for an impaired loan when the estimated fair value of the loan’s collateral less costs to sell is lower than the carrying value of the loan. As of March 31, 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 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 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 three months ended March 31, 2022.
Land and Development Portfolio Rollforward
(in millions)
Asbury Ocean
Club and
Asbury Park
Magnolia
All
Total
Waterfront
Green
Others
Segment
Beginning balance (1)
$
137.8
$
95.8
$
53.2
$
286.8
Asset sales (2)
(9.7)
(3.4)
(0.5)
(13.6)
Capital expenditures
1.4
3.5
—
4.9
Other
—
(0.6)
(0.1)
(0.7)
Ending balance (1)
$
129.5
$
95.3
$
52.6
$
277.4
(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.
43
Table of Contents
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
March 31,
2022
2021
$ Change
(in thousands)
Operating lease income
$
3,109
$
4,931
$
(1,822)
Interest income
4,948
9,789
(4,841)
Interest income from sales-type leases
356
—
356
Other income
8,640
13,015
(4,375)
Land development revenue
14,900
32,249
(17,349)
Total revenue
31,953
59,984
(28,031)
Interest expense
29,243
28,809
434
Real estate expense
10,117
8,719
1,398
Land development cost of sales
14,496
29,323
(14,827)
Depreciation and amortization
1,357
2,401
(1,044)
General and administrative
1,375
21,439
(20,064)
Provision for (recovery of) loan losses
135
(3,642)
3,777
Provision for losses on net investment in leases
281
—
281
Impairment of assets
—
257
(257)
Other expense
930
253
677
Total costs and expenses
57,934
87,559
(29,625)
Income from sales of real estate
492
612
(120)
Loss on early extinguishment of debt, net
(1,428)
—
(1,428)
Earnings from equity method investments
25,032
11,768
13,264
Income tax (expense) benefit
(3)
698
(701)
Net income from discontinued operations
797,688
22,486
775,202
Net income
$
795,800
$
7,989
$
787,811
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.
44
Table of Contents
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 $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 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
45
Table of Contents
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 and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business. Adjusted earnings is a non-GAAP metric management uses to assess our execution of this strategy and the performance of our operations.
Adjusted earnings is used internally as a supplemental performance measure adjusting for certain items to give management a view of income more directly derived from operating activities in the period in which they occur. Adjusted earnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, including our proportionate share of depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock (“Adjusted Earnings”).
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 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 March 31,
2022
2021
(in thousands)
Adjusted Earnings
Net income (loss) allocable to common shareholders
$
610,855
$
(405)
Add: Depreciation and amortization
4,002
17,629
Add: Stock-based compensation (income) expense
(12,427)
5,508
Add: Non-cash portion of loss on early extinguishment of debt
5,109
—
Adjusted earnings allocable to common shareholders
$
607,539
$
22,732
Liquidity and Capital Resources
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 $16 million of loan fundings and capital expenditures on legacy and strategic assets. These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments.
46
Table of Contents
The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows for the three months ended March 31, 2022 and 2021, by segment ($ in thousands):
For the Three Months Ended March 31,
2022
2021
Operating Properties
$
239
$
96
Net Lease
502
552
Total capital expenditures on real estate assets
$
741
$
648
Land and Development
$
4,803
$
4,134
Total capital expenditures on land and development assets
$
4,803
$
4,134
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, 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 $39 million will be paid in cash and shares of our common stock in the second quarter of 2022 resulting from the Net Lease Sale. Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock; provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock. Additional information on our iPIP Plans can be found in our 2021 Annual Report and our 2021 Proxy Statement, both of which are available on our website.
47
Table of Contents
The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the three months ended March 31, 2022 and 2021 ($ in thousands):
For the Three Months Ended March 31,
2022
2021
Cash flows used in operating activities
$
(30,624)
$
(3,795)
Cash flows provided by investing activities
2,417,867
137,635
Cash flows used in financing activities
(1,229,992)
(36,414)
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 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. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. 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 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
48
Table of Contents
committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
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
Lending
Other
Investments
Real Estate
Investments
Total
Performance-Based Commitments
$
4,235
$
8,111
$
108,650
$
120,996
Strategic Investments
—
5,061
2,325
7,386
Total
$
4,235
$
13,172
$
110,975
$
128,382
Stock Repurchase Program —We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the three months ended March 31, 2021, we repurchased 0.7 million shares of our outstanding common stock for $12.4 million, for an average cost of $17.20 per share. 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
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. 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 2021 Annual Report.
49
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.