What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-04 · 128 added, 131 removed, 196 unchanged (57% of the section changed)

1 unchanged sentence

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.

Forward-looking statements are included with respect to, among other things, iStar Inc.’s (the “Company’s”) current business plan, including the Merger with Safehold Inc.

(“SAFE”) (refer to Note 1 to the consolidated financial statements), 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.

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Executive Overview

Merger with SAFE —In August 2022, we entered into a definitive agreement with SAFE for a tax-free, strategic combination that provides that, subject to the terms and conditions thereof, SAFE will merge with and into us (the “Merger”).

We expect that the Merger will accelerate SAFE’s market leadership in the Ground Lease industry and will make SAFE the only internally-managed, pure-play Ground Lease company in the public markets.

We expect that the Merger will close in the first quarter or second quarter of 2023.

Refer to Note 1 to the consolidated financial statements for more information on the Merger.

Corporate Strategy .

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

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 10 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.

The 3.125% Convertible Senior Notes received by us were retired.

We recognized a net increase in shareholders’ equity of $180.6 million inclusive of a $118.1 million loss on extinguishment of debt in connection with these transactions.

The exchanges will strengthen our balance sheet and allow us to save interest expense, preserve cash on hand, reduce our outstanding debt and mitigate volatility on the trading price of our common stock as we approach the maturity of the remaining outstanding 3.125% Convertible Notes in September 2022.

Portfolio Overview

As of June 30, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):

As of September 30, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):

Property/Collateral

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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 June 30, 2022, our net lease portfolio consisted primarily of our equity method investments in SAFE and the Ground Lease Plus Fund.

As of September 30, 2022, our net lease portfolio consisted of our equity method investments in SAFE and the Ground Lease Plus Fund.

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

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Weighted average yield (3)

(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.

(1) Represents the book value of our 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.

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), management fees earned by us and a gain recognized by SAFE in connection with the sale of a Ground Lease.

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

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

As of June 30, 2022, we owned approximately 64.7% of SAFE’s common stock outstanding.

As of September 30, 2022, we owned approximately 64.8% 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).

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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.

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):

June 30, 2022

September 30, 2022

Allowance for

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Other lending investments

(1) As of June 30, 2022, our performing loans had a weighted average maturity of 5.5 years and, excluding one performing loan with a maturity of September 2057, had a weighted average maturity of 0.4 years.

(1) As of September 30, 2022, our performing loans had a weighted average maturity of 5.7 years and, excluding one performing loan with a maturity of September 2057, had a weighted average maturity of 0.3 years.

December 31, 2021

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

June 30, 2022

September 30, 2022

December 31, 2021

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Yield - year to date (1)

(1) Yields presented are for the six months ended June 30, 2022 and 2021 and represent the yields on performing loans and other lending investments.

(1) Yields presented are for the nine months ended September 30, 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 June 30, 2022 and December 31, 2021, we had one non-performing loan with a carrying value of $59.5 million and $59.1 million, respectively.

As of September 30, 2022 and December 31, 2021, we had one non-performing loan with a carrying value of $60.4 million and $59.1 million, respectively.

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

Allowance for Loan Losses —The allowance for loan losses was $3.0 million as of June 30, 2022, or 1.5% of total loans and other lending investments, compared to $4.8 million, or 1.4%, as of December 31, 2021.

Allowance for Loan Losses —The allowance for loan losses was $2.9 million as of September 30, 2022, or 1.6% 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.

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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 June 30, 2022 and December 31, 2021, asset-specific allowances were $0.7 million and $0.6 million, respectively.

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, 2022 and December 31, 2021, asset-specific allowances were $0.7 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 decreased to $2.3 million, or 1.6%, of performing loans and other lending investments as of June 30, 2022, compared to $4.2 million, or 1.5%, of performing loans and other lending investments as of December 31, 2021.

The decrease was due primarily to the repayment of loans during the six months ended June 30, 2022.

The Expected Loss decreased to $2.2 million, or 1.8%, of performing loans and other lending investments as of September 30, 2022, compared to $4.2 million, or 1.5%, of performing loans and other lending investments as of December 31, 2021.

The decrease was due primarily to the repayment of loans during the nine months ended September 30, 2022.

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 June 30, 2022, the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled $129.9 million.

As of September 30, 2022, the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled $124.2 million.

Land and Development

The following table presents a land and development portfolio rollforward for the six months ended June 30, 2022.

The following table presents a land and development portfolio rollforward for the nine months ended September 30, 2022.

Land and Development Portfolio Rollforward

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Ending balance (1)

(1) As of June 30, 2022, and December 31, 2021, Total Segment excludes $0.3 million and $1.1 million, respectively, of equity method investments.

(1) As of December 31, 2021, Total Segment excludes $1.1 million of equity method investments.

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

Results of Operations for the Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021

Results of Operations for the Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021

For the Three Months Ended

September 30,

(in thousands)

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General and administrative

Provision for (recovery of) loan losses

Provision for losses on net investment in leases

Recovery of loan losses

Recovery of losses on net investment in leases

Impairment of assets

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Earnings from equity method investments

Income tax expense

Income tax (expense) benefit

Net income from discontinued operations

Revenue —Operating lease income, which primarily includes income from commercial operating properties, decreased to $3.2 million during the three months ended June 30, 2022 from $4.8 million for the same period in 2021.

Revenue —Operating lease income, which primarily includes income from commercial operating properties, decreased to $3.4 million during the three months ended September 30, 2022 from $3.7 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 $4.2 million during the three months ended June 30, 2022 from $8.1 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 $242 million for the three months ended June 30, 2022 and $371 million for the three months ended June 30, 2021.

The weighted average yield on our performing loans and other lending investments was 7.0% and 8.4%, respectively, for the three months ended June 30, 2022 and 2021.

Interest income from sales-type leases increased to $0.4 million for the three months ended June 30, 2022 from $0.2 million for the same period in 2021.

The increase 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 increased to $15.9 million during the three months ended June 30, 2022 from $8.9 million for the same period in 2021.

Other income during the three months ended June 30, 2022 consisted primarily of income from our hotel properties, management fees and other ancillary income from our land and development projects and operating properties.

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

Land development revenue and cost of sales —During the three months ended June 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $24.4 million which had associated cost of sales of $24.1 million.

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

Costs and expenses —Interest expense decreased to $24.1 million during the three months ended June 30, 2022 from $28.6 million for the same period in 2021.

Our weighted average cost of debt was 5.0% for the three months ended June 30, 2022 compared to 4.4% for the three months ended June 30, 2021.

The average balance of our outstanding debt was $1.92 billion for the three months ended June 30, 2022 and $2.58 billion for the same period in 2021.

Real estate expense increased to $13.0 million during the three months ended June 30, 2022 from $11.3 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 $1.3 million during the three months ended June 30, 2022 from $1.6 million for the same period in 2021.

Interest income decreased to $2.1 million during the three months ended September 30, 2022 from $7.0 million for the same period in 2021.

The decrease was due primarily to a decrease in our loans and other lending investments portfolio.

Interest income from sales-type leases decreased to $0.1 million for the three months ended September 30, 2022 from $0.5 million for the same period in 2021.

The decrease resulted from the sale of Ground Leases in 2022 (refer to Note 5 to the consolidated financial statements).

Other income decreased to $27.0 million during the three months ended September 30, 2022 from $39.0 million for the same period in 2021.

Other income during the three months ended September 30, 2022 consisted primarily of income from our hotel properties, management fees, gains on the sale of available-for-sale securities and other ancillary income from our land and development projects and operating properties.

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

Land development revenue and cost of sales —During the three months ended September 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $15.1 million which had associated cost of sales of $16.8 million.

During the three months ended September 30, 2021, we sold residential lots and units and recognized land development revenue of $93.4 million which had associated cost of sales of $87.4 million.

The decrease in 2022 was primarily due to a decrease in the size of our land and development portfolio.

Costs and expenses —Interest expense decreased to $22.7 million during the three months ended September 30, 2022 from $28.7 million for the same period in 2021.

The decrease in 2022 was primarily due to a decrease in the average balance of our outstanding debt as we repaid our Senior Term Loan and certain unsecured notes in 2022 (refer to Note 10 to the consolidated financial statements).

Real estate expense increased to $16.2 million during the three months ended September 30, 2022 from $13.4 million for the same period in 2021.

The increase was primarily due to an increase in expenses at certain of our operating properties that have increased operations from the prior year.

Depreciation and amortization decreased to $1.3 million during the three months ended September 30, 2022 from $1.7 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.

We recognized a net recovery of general and administrative expenses of ($5.2) million during the three months ended June 30, 2022 versus $30.4 million of expense for the same period in 2021.

The decrease in 2022 was due primarily to a $35.5 million decrease in performance-based compensation.

We recognized general and administrative expense $14.2 million during the three months ended September 30, 2022 versus $17.1 million of expense for the same period in 2021.

The decrease was due primarily to a $2.3 million decrease in performance-based compensation, which was partially offset by severance costs for terminated employees.

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 $22.6 million for the three months ended June 30, 2022 as compared to a recovery of loan losses of $2.2 million for the same period in 2021.

The provision for loan losses for the three months ended June 30, 2022 resulted primarily from a $25.0 million provision on our held-to-maturity security, which is now recorded at its expected repayment proceeds.

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

The provision for losses on net investment in leases for the three months ended June 30, 2022 resulted from the macroeconomic forecast on commercial real estate markets.

The provision for losses on net investment in leases for the three months ended June 30, 2021 resulted from the acquisition of two Ground Leases in June 2021 (refer to Note 5 to the consolidated financial statements).

During the three months ended June 30, 2022, we recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received.

Other expense was $1.5 million during the three months ended June 30, 2022 and $0.2 million for the same period in 2021.

The increase in other expenses for the three months ended June 30, 2022 was due primarily to legal costs.

Income from sales of real estate —During the three months ended June 30, 2021, we recorded $0.1 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 June 30, 2022, we incurred losses on early extinguishment of debt of $116.6 million resulting from the redemption of our unsecured notes (refer to Note 10 to the consolidated financial statements).

Earnings from equity method investments —Earnings from equity method investments increased to $19.4 million during the three months ended June 30, 2022 from $11.1 million for the same period in 2021.

During the three months ended June 30, 2022, we recognized $14.7 million of income from our equity method investment in SAFE, $4.3 million primarily from the settlement of our interest in a venture and $0.4 million of net aggregate income from our remaining equity method investments.

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

Income tax (expense) benefit —Income tax expense of $0.6 million was recorded for the three months ended June 30, 2021 and related primarily to a reduction in the amount of expected refund of alternative minimum taxes due us resulting from amended tax returns from prior periods net operating loss carrybacks.

The recovery of loan losses was $0.2 million for the three months ended September 30, 2022 as compared to a recovery of loan losses of $1.6 million for the same period in 2021.

The recovery of loan losses for the three months ended September 30, 2022 resulted primarily from reversal of Expected Loss allowances on loans that repaid in full in the third quarter 2022 .

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

The recovery of losses on net investment in leases for the three months ended September 30, 2022 resulted from the reversal of an allowance on a property that was sold during the three months ended September 30, 2022.

The recovery of 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.

During the three months ended September 30, 2021, we recorded an aggregate impairment of $0.4 million on an operating property held for sale.

Other expense was $4.2 million during the three months ended September 30, 2022 and $0.9 million for the same period in 2021.

The increase in other expenses for the three months ended September 30, 2022 was due primarily to legal and consulting costs in connection with our Merger with SAFE (refer to Note 1 to the consolidated financial statements).

Income from sales of real estate — During the three months ended September 30, 2022, we recorded $1.0 million of income from sales of real estate from the sale of a Ground Lease to SAFE.

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.

Loss on early extinguishment of debt, net— During the three months ended September 30, 2022, we incurred losses on early extinguishment of debt of $13.2 million resulting from the redemption of our unsecured notes (refer to Note 10 to the consolidated financial statements).

Earnings from equity method investments —Earnings from equity method investments decreased to $57.8 million during the three months ended September 30, 2022 from $87.8 million for the same period in 2021.

During the three months ended September 30, 2022, we recognized $42.8 million of income from our equity method investment in SAFE, $11.5 million primarily from the sale of a multifamily property at one of our ventures and $3.5 million of net aggregate income from our remaining equity method investments.

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) 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.

Income tax (expense) benefit —We recorded an income tax provision of $0.6 million for the three months ended September 30, 2022 due primarily to additional state and local taxes related to the sale of our net lease assets.

Income tax benefit of $39 thousand was recorded for the three months ended September 30, 2021.

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.

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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).

Results of Operations for the Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021

For the Six Months Ended June 30,

Results of Operations for the Nine months Ended September 30, 2022 compared to the Nine months Ended September 30, 2021

For the Nine Months Ended September 30,

(in thousands)

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Earnings from equity method investments

Income tax benefit (expense)

Income tax (expense) benefit

Net income from discontinued operations

Net income (loss)

Revenue —Operating lease income, which primarily includes income from commercial operating properties, decreased to $6.3 million during the six months ended June 30, 2022 from $9.7 million for the same period in 2021.

Revenue —Operating lease income, which primarily includes income from commercial operating properties, decreased to $9.7 million during the nine months ended September 30, 2022 from $13.5 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 $9.2 million during the six months ended June 30, 2022 from $17.9 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 $259 million for the six months ended June 30, 2022 and $445 million for the six months ended June 30, 2021.

The weighted average yield on our performing loans and other lending investments was 7.1% and 8.0%, respectively, for the six months ended June 30, 2022 and 2021.

Interest income from sales-type leases increased to $0.7 million for the six months ended June 30, 2022 from $0.2 million for the same period in 2021.

The increase 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 increased to $24.5 million during the six months ended June 30, 2022 from $21.9 million for the same period in 2021.

Other income during the six months ended June 30, 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 six months ended June 30, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our operating properties, 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 six months ended June 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $39.3 million which had associated cost of sales of $38.6 million.

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

Costs and expenses —Interest expense decreased to $53.4 million during the six months ended June 30, 2022 from $57.5 million for the same period in 2021.

Our weighted average cost of debt was 4.9% for the six months ended June 30, 2022 compared to 4.4% for the six months ended June 30, 2021.

The average balance of our outstanding debt was $2.20 billion for the six months ended June 30, 2022 and $2.60 billion for the same period in 2021.

Real estate expense increased to $23.1 million during the six months ended June 30, 2022 from $20.0 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 $2.7 million during the six months ended June 30, 2022 from $4.0 million for the same period in 2021.

Interest income decreased to $11.3 million during the nine months ended September 30, 2022 from $24.8 million for the same period in 2021.

The decrease was due primarily to a decrease in our loans and other lending investments portfolio.

Interest income from sales-type leases increased to $0.9 million for the nine months ended September 30, 2022 from $0.7 million for the same period in 2021.

The increase resulted from the acquisition of a Ground Lease that was classified as a sales-type lease which was partially offset by the sales of Ground Leases (refer to Note 5 to the consolidated financial statements).

Other income increased to $51.5 million during the nine months ended September 30, 2022 from $60.9 million for the same period in 2021.

Other income during the nine months ended September 30, 2022 consisted primarily of management fees , income from our hotel properties, gains on the sale of available-for-sale securities and other ancillary income from our land and development projects and operating properties.

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

Land development revenue and cost of sales —During the nine months ended September 30, 2022, we sold land parcels and residential lots and units and recognized land development revenue of $54.4 million which had associated cost of sales of $55.4 million.

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.

The decrease in 2022 was primarily due to a decrease in the size of our land and development portfolio.

Costs and expenses —Interest expense decreased to $76.1 million during the nine months ended September 30, 2022 from $86.1 million for the same period in 2021.

Real estate expense increased to $39.3 million during the nine months ended September 30, 2022 from $33.4 million for the same period in 2021.

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

Depreciation and amortization decreased to $4.0 million during the nine months ended September 30, 2022 from $5.7 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.

We recognized a net recovery of general and administrative expenses of ($3.9) million during the three months ended June 30, 2022 versus $51.8 million of expense for the same period in 2021.

The decrease in 2022 was due primarily to a $54.7 million decrease in performance-based compensation.

We recognized general and administrative expense of $10.4 million during the nine months ended September 30, 2022 versus $69.0 million of expense for the same period in 2021.

The decrease was due primarily to a $56.2 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 $22.7 million for the six months ended June 30, 2022 as compared to a recovery of loan losses of $5.8 million for the same period in 2021.

The provision for loan losses for the six months ended June 30, 2022 resulted primarily from a $25.0 million provision on our held-to-maturity security, which is now recorded at its expected repayment proceeds.

The recovery of loan losses for the six months ended June 30, 2021 resulted from the reversal of Expected Loss 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 losses on net investment in leases for the six months ended June 30, 2022 resulted from the macroeconomic forecast on commercial real estate markets.

During the six months ended June 30, 2022, we recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received.

During the six months ended June 30, 2021, we recorded an aggregate impairment of $0.3 million in connection with the sale of residential condominiums.

Other expense was $2.5 million during the six months ended June 30, 2022 and $0.5 million for the same period in 2021.

The increase in other expenses for the six months ended June 30, 2022 was due primarily to legal costs.

Income from sales of real estate —During the six months ended June 30, 2022, we recorded $0.5 million of income from sales of real estate primarily from the sale of Ground Leases.

During the six months ended June 30, 2021, we recorded $0.7 million of income from sales of real estate from the sale of residential condominiums.

Loss on early extinguishment of debt, net— During the six months ended June 30, 2022, we incurred losses on early extinguishment of debt of $118.0 million resulting from the redemption of our unsecured notes (refer to Note 3 and Note 10 to the consolidated financial statements) and the repayment of our senior term loan in connection with our Net Lease Sale.

Earnings from equity method investments —Earnings from equity method investments increased to $44.4 million during the six months ended June 30, 2022 from $22.9 million for the same period in 2021.

During the six months ended June 30, 2022, we recognized $31.7 million of income from our equity method investment in SAFE, $5.0 million primarily from the settlement of our interest in a venture and $7.7 million of net aggregate income from our remaining equity method investments.

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

Income tax (expense) benefit —Income tax benefit of $0.1 million was recorded for the six months ended June 30, 2021 and related primarily to refunds due us for alternative minimum taxes paid in prior periods .

The provision for loan losses was $22.6 million for the nine months ended September 30, 2022 as compared to a recovery of loan losses of $7.4 million for the same period in 2021.

The provision for loan losses for the nine months ended September 30, 2022 resulted primarily from a $25.0 million provision on our held-to-maturity security, which is now recorded at its expected repayment proceeds.

The recovery of loan losses for the nine months ended September 30, 2021 resulted from the reversal of Expected Loss 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 losses on net investment in leases for the nine months ended September 30, 2021 resulted from the macroeconomic forecast on commercial real estate markets.

During the nine months ended September 30, 2022, we recognized an impairment of $1.8 million on an operating property based on the expected cash flows to be received.

During the nine months ended September 30, 2021, we recorded an impairment of $0.7 million in connection with the sale of residential condominiums.

Other expense was $6.6 million during the nine months ended September 30, 2022 and $1.4 million for the same period in 2021.

The increase in other expenses for the nine months ended September 30, 2022 was due primarily to legal and consulting costs in connection with our Merger with SAFE.

Income from sales of real estate —During the nine months ended September 30, 2022, we recorded $1.4 million of income from sales of real estate primarily from the sale of Ground Leases.

During the nine months ended September 30,

2021, we recorded $26.3 million of income from sales of real estate from the sale of an operating property and residential condominiums.

Loss on early extinguishment of debt, net— During the nine months ended September 30, 2022, we incurred losses on early extinguishment of debt of $131.2 million resulting from the redemption of our unsecured notes (refer to Note 3 and Note 10 to the consolidated financial statements) and the repayment of our senior term loan in connection with our Net Lease Sale.

Earnings from equity method investments —Earnings from equity method investments decreased to $102.2 million during the nine months ended September 30, 2022 from $110.7 million for the same period in 2021.

During the nine months ended September 30, 2022, we recognized $74.5 million of income from our equity method investment in SAFE, $11.5 million primarily from the sale of a multifamily property at one of our venturers, $5.0 million primarily from the settlement of our interest in a venture and $11.2 million of net aggregate income from our remaining equity method investments.

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) 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 .

Income tax (expense) benefit —We recorded an income tax provision of $0.6 million for the nine months ended September 30, 2022 due primarily to state and local taxes related to the sale of our net lease assets.

Income tax benefit of $0.1 million was recorded for the nine months ended September 30, 2021.

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.

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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 June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(in thousands)

Adjusted Earnings

Net income (loss) allocable to common shareholders

Net income allocable to common shareholders

Depreciation and amortization

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Non-cash portion of loss on early extinguishment of debt

Adjusted earnings (loss) allocable to common shareholders

Adjusted earnings allocable to common shareholders

Liquidity and Capital Resources

As of June 30, 2022, we had unrestricted cash of $1.4 billion and $350.0 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, 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 10 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 $161.1 million of maximum unfunded commitments associated with our investments as of June 30, 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).

As of September 30, 2022, we had unrestricted cash of $1.3 billion.

Our primary cash uses over the next 12 months are expected to be repayment of our debt obligations (refer to Note 1 and Note 10 to the consolidated financial statements), redemption of our preferred stock (refer to Note 1 and Note 13 to the consolidated financial statements), funding of investments in our Ground Lease and Ground Lease adjacent businesses, capital expenditures on legacy assets, distributions to shareholders through dividends 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 the Merger with SAFE, asset sales, the continuing impact of the COVID-19 pandemic, inflation, interest rate increases, market volatility and other macroeconomic factors on our business.

Beginning in April 2022 and continuing through September 2022, we completed separate, privately-negotiated transactions with holders of our 3.125% convertible notes in which the noteholders exchanged their convertible notes with us for newly issued shares of our common stock and cash (refer to Note 10 to the consolidated financial statements).

We also repaid $0.5 million principal amount of our 3.125% convertible notes for cash at maturity.

We have covenanted to redeem all of our outstanding preferred stock at the liquidation preference per share plus accrued and unpaid dividends and to retire all of our remaining senior unsecured notes in connection with the Merger.

We also had approximately $156.5 million of maximum unfunded commitments associated with our investments as of September 30, 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 $105.2 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.

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 $84 million, assuming SAFE is valued at a price of $29.25 per share and our other assets perform with current underwriting expectations.

Of this amount, $60 million has been accrued in our financial

statements (refer to Note 14 to the consolidated financial statements).

Of this amount, $59 million has been accrued in our financial statements (refer to Note 14 to the consolidated financial statements).

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

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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 six months ended June 30, 2022 and 2021 ($ in thousands):

For the Six Months Ended June 30,

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, 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.

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 nine months ended September 30, 2022 and 2021 ($ in thousands):

For the Nine Months Ended September 30,

Cash flows provided by (used in) operating activities

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The increase in cash flows provided by operating activities during 2022 was due primarily to an increase in distributions of earnings from other investments in 2022, which was partially offset by iPIP Plan payments and a decrease in the amount of deferred interest on loans collected in 2022 versus 2021.

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).

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

The increase in 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) and settlements and repayments of our unsecured notes.

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 $19.2 million, or $0.25 per share, for the six months ended June 30, 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.

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These arrangements are referred to as Strategic Investments.

As of June 30, 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):

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

During the 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.

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 June 30, 2022, we had remaining authorization to repurchase up to $50.0 million of common stock under our stock repurchase program.

As of September 30, 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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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