Safehold Inc. 10-Q

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, 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. 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 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 . 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 $702.0 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 $1.2 billion from the transaction. Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022. Our net lease assets associated with our Ground Lease businesses were not included in the sale. 46 Table of Contents Portfolio Overview As of September 30, 2022, based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property/Collateral Net Real Estate Operating Land & ​ ​ ​ ​ % of Types ​ Lease ​ Finance ​ Properties ​ Development ​ Corporate ​ Total ​ Total Ground Leases ​ $ 1,525,564 ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 1,525,564 71.9 % Land and Development ​ — ​ — ​ — ​ 218,980 ​ — ​ 218,980 10.3 % Multifamily ​ — ​ 74,866 ​ 34,790 ​ — ​ — ​ 109,656 5.2 % Hotel ​ — ​ 44,720 ​ 62,308 ​ — ​ — ​ 107,028 5.0 % Retail ​ — ​ 60,442 ​ 12,481 ​ 8,340 ​ — ​ 81,263 3.8 % Condominium ​ — ​ 6,671 ​ 301 ​ 20,926 ​ — ​ 27,898 1.3 % Office ​ ​ — ​ ​ 14,274 ​ ​ — ​ ​ — ​ ​ — ​ ​ 14,274 0.7 % Other Property Types ​ — ​ — ​ 14,355 ​ — ​ 21,840 ​ 36,195 1.7 % Total ​ $ 1,525,564 ​ $ 200,973 ​ $ 124,235 ​ $ 248,246 ​ $ 21,840 ​ $ 2,120,858 100.0 % Percentage of Total ​ ​ 72% ​ ​ 9% ​ ​ 6% ​ ​ 12% ​ ​ 1% ​ ​ 100% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Real Estate Operating Land & ​ ​ ​ ​ % of Geographic Region ​ Lease ​ Finance ​ Properties ​ Development ​ Corporate ​ Total ​ Total Northeast ​ $ 590,357 ​ $ 87,446 ​ $ 76,663 ​ $ 150,145 ​ $ — ​ $ 904,611 42.7 % West ​ 373,833 ​ 45,733 ​ 31,933 ​ 8,950 ​ — ​ 460,449 21.7 % Mid-Atlantic ​ 196,624 ​ — ​ 1,335 ​ 89,151 ​ — ​ 287,110 13.5 % Southeast ​ 186,660 ​ 29,133 ​ — ​ — ​ — ​ 215,793 10.2 % Southwest ​ 138,898 ​ — ​ — ​ — ​ — ​ 138,898 6.5 % Central ​ 39,192 ​ 6,671 ​ 14,304 ​ — ​ — ​ 60,167 2.8 % Various ​ — ​ 31,990 ​ — ​ — ​ 21,840 ​ 53,830 2.5 % Total ​ $ 1,525,564 ​ $ 200,973 ​ $ 124,235 ​ $ 248,246 ​ $ 21,840 ​ $ 2,120,858 100.0 % ​ 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. ​ 47 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SAFE ​ Ground Lease Plus Fund Ownership % ​ ​ 64.8 % ​ 53.0 % Book value (millions) (1) ​ $ 1,459 ​ $ 66 ​ ​ ​ ​ ​ ​ ​ ​ ​ % Leased ​ 100.0 % 100.0 % Weighted average lease term (years) (2) ​ 91.7 ​ 104.6 ​ Weighted average yield (3) ​ 4.4 % 5.7 % (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. 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. 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 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). 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 53.0% 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 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. 48 Table of Contents The tables below shows certain statistics for our real estate finance portfolio ($ in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 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) ​ 4 ​ $ 85,416 ​ $ (1,225) ​ $ 84,191 47.7% ​ 1.4% ​ Non-performing loans ​ 1 ​ 61,159 ​ (717) ​ 60,442 34.2% ​ 1.2% ​ Other lending investments ​ 1 ​ 32,938 ​ (948) ​ 31,990 18.1% ​ 2.9% ​ Total ​ 6 ​ $ 179,513 ​ $ (2,890) ​ $ 176,623 100.0% ​ 1.6% ​ (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 ​ ​ ​ ​ ​ ​ ​ ​ ​ 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): ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 December 31, 2021 Senior mortgages ​ $ 72,309 ​ $ 139,968 ​ Corporate/Partnership loans ​ — ​ 618 ​ Subordinate mortgages ​ 13,107 ​ 12,457 ​ Total ​ $ 85,416 ​ $ 153,043 ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average LTV ​ 61% ​ 60% ​ Yield - year to date (1) ​ 6.9% ​ 8.4% ​ (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: (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 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 $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. 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. 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 49 Table of Contents 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 $2.2 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 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 nine months ended September 30, 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) ​ (35.6) ​ (16.6) ​ (0.6) ​ (52.8) Capital expenditures ​ 4.4 ​ 11.6 ​ — ​ 16.0 Other ​ — ​ (1.7) ​ (0.1) ​ (1.8) Ending balance (1) ​ $ 106.6 ​ $ 89.1 ​ $ 52.5 ​ $ 248.2 (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. ​ 50 Table of Contents 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, ​ ​ ​ ​ ​ 2022 2021 $ Change ​ ​ ​ (in thousands) ​ Operating lease income ​ $ 3,424 ​ $ 3,732 ​ $ (308) ​ Interest income ​ 2,093 ​ 6,972 ​ (4,879) ​ Interest income from sales-type leases ​ 129 ​ 526 ​ (397) ​ Other income ​ 27,024 ​ 39,033 ​ (12,009) ​ Land development revenue ​ 15,087 ​ 93,369 ​ (78,282) ​ Total revenue ​ 47,757 ​ 143,632 ​ (95,875) ​ Interest expense ​ 22,664 ​ 28,695 ​ (6,031) ​ Real estate expense ​ 16,204 ​ 13,369 ​ 2,835 ​ Land development cost of sales ​ 16,778 ​ 87,380 ​ (70,602) ​ Depreciation and amortization ​ 1,290 ​ 1,742 ​ (452) ​ General and administrative ​ 14,210 ​ 17,121 ​ (2,911) ​ Recovery of loan losses ​ (157) ​ (1,610) ​ 1,453 ​ Recovery of losses on net investment in leases ​ (380) ​ (315) ​ (65) ​ Impairment of assets ​ — ​ 421 ​ (421) ​ Other expense ​ 4,171 ​ 894 ​ 3,277 ​ Total costs and expenses ​ 74,780 ​ 147,697 ​ (72,917) ​ Income from sales of real estate ​ 951 ​ 25,611 ​ (24,660) ​ Loss on early extinguishment of debt, net ​ (13,209) ​ — ​ (13,209) ​ Earnings from equity method investments ​ 57,797 ​ 87,795 ​ (29,998) ​ Income tax (expense) benefit ​ (564) ​ 39 ​ (603) ​ Net income from discontinued operations ​ ​ — ​ 21,614 ​ ​ (21,614) ​ Net income ​ $ 17,952 ​ $ 130,994 ​ $ (113,042) ​ ​ 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 $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. 51 Table of Contents 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 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 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 52 Table of Contents 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. Our net lease assets were comprised of office, entertainment and industrial properties located in the United States. Our net lease assets associated with our Ground Lease businesses were not included in the sale. Net income from discontinued operations represents the operating results from the net lease assets that are not associated with our Ground Lease businesses (refer to Note 3 to the consolidated financial statements - Net Lease Sale and Discontinued Operations). 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, ​ ​ ​ ​ ​ 2022 2021 $ Change ​ ​ ​ (in thousands) ​ Operating lease income ​ $ 9,715 ​ $ 13,456 ​ $ (3,741) ​ Interest income ​ 11,262 ​ 24,846 ​ (13,584) ​ Interest income from sales-type leases ​ 861 ​ 683 ​ 178 ​ Other income ​ 51,545 ​ 60,950 ​ (9,405) ​ Land development revenue ​ 54,390 ​ 157,936 ​ (103,546) ​ Total revenue ​ 127,773 ​ 257,871 ​ (130,098) ​ Interest expense ​ 76,056 ​ 86,145 ​ (10,089) ​ Real estate expense ​ 39,337 ​ 33,404 ​ 5,933 ​ Land development cost of sales ​ 55,369 ​ 147,507 ​ (92,138) ​ Depreciation and amortization ​ 3,985 ​ 5,715 ​ (1,730) ​ General and administrative ​ 10,406 ​ 68,954 ​ (58,548) ​ Provision for (recovery of) loan losses ​ 22,556 ​ (7,411) ​ 29,967 ​ Provision for losses on net investment in leases ​ — ​ 465 ​ (465) ​ Impairment of assets ​ 1,768 ​ 679 ​ 1,089 ​ Other expense ​ 6,624 ​ 1,358 ​ 5,266 ​ Total costs and expenses ​ 216,101 ​ 336,816 ​ (120,715) ​ Income from sales of real estate ​ 1,443 ​ 26,319 ​ (24,876) ​ Loss on early extinguishment of debt, net ​ (131,200) ​ — ​ (131,200) ​ Earnings from equity method investments ​ 102,222 ​ 110,661 ​ (8,439) ​ Income tax (expense) benefit ​ (567) ​ 117 ​ (684) ​ Net income from discontinued operations ​ 797,688 ​ 69,415 ​ 728,273 ​ Net income ​ $ 681,258 ​ $ 127,567 ​ $ 553,691 ​ ​ 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 $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). 53 Table of Contents 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. 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 $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 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 $22.6 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, 54 Table of Contents 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. Our net lease assets were comprised of office, entertainment and industrial properties located in the United States. Our net lease assets associated with our Ground Lease businesses were not included in the sale. Net income from discontinued operations represents the operating results from the net lease assets that are not associated with our Ground Lease businesses (refer to Note 3 to the consolidated financial statements - Net Lease Sale and Discontinued Operations). Adjusted Earnings In 2019, we announced a new business strategy that would focus our management personnel and our investment resources primarily on scaling our Ground Lease platform. As part of this strategy, we accelerated the monetization of legacy assets 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”). 55 Table of Contents 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 September 30, ​ For the Nine Months Ended September 30, ​ ​ 2022 2021 2022 2021 ​ ​ ​ (in thousands) ​ Adjusted Earnings ​ ​ ​ ​ ​ ​ ​ Net income allocable to common shareholders ​ $ 12,131 ​ $ 121,856 ​ $ 484,501 ​ $ 101,908 ​ Add: Depreciation and amortization ​ 3,705 ​ 16,449 ​ 11,606 ​ 50,790 ​ Add: Stock-based compensation ​ (374) ​ 3,001 ​ (30,724) ​ 23,300 ​ Add: Non-cash portion of loss on early extinguishment of debt ​ 13,051 ​ — ​ 136,464 ​ — ​ Adjusted earnings allocable to common shareholders ​ $ 28,513 ​ $ 141,306 $ 601,847 ​ $ 175,998 ​ ​ Liquidity and Capital Resources 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 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, $59 million has been accrued in our financial statements (refer to Note 14 to the consolidated financial statements). Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock; provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock. Additional information on our iPIP Plans can be found in our 2021 Annual Report and our 2021 Proxy Statement, both of which are available on our website. 56 Table of Contents We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future. Our capital sources to meet such cash requirements are expected to include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions. The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the nine months ended September 30, 2022 and 2021 ($ in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended September 30, ​ ​ ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows provided by (used in) operating activities ​ $ 15,373 ​ $ (4,741) ​ Cash flows provided by investing activities ​ ​ 2,706,633 ​ ​ 373,722 ​ Cash flows used in financing activities ​ ​ (1,774,805) ​ ​ (164,620) ​ ​ 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 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. 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 57 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 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 ​ ​ ​ ​ ​ ​ ​ ​ Lending ​ ​ ​ ​ Other ​ ​ ​ ​ Investments ​ Real Estate Investments Total Performance-Based Commitments ​ $ 717 ​ $ 270 ​ $ 147,405 ​ $ 148,392 Strategic Investments ​ — ​ 3,161 ​ 4,907 ​ 8,068 Total ​ $ 717 ​ $ 3,431 ​ $ 152,312 ​ $ 156,460 ​ Stock Repurchase Program —We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the nine months ended September 30, 2021, we repurchased 4.2 million shares of our outstanding common stock for $91.9 million, for an average cost of $21.70 per share. 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 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 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. ​ 58 Table of Contents