What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-01 · 123 added, 94 removed, 282 unchanged (43% of the section changed)

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(formerly known as iStar Inc.) and its consolidated subsidiaries following the consummation of the Merger.

Periods presented prior to the Merger date of March 31, 2023 reflect the operations of Old SAFE and periods presented as of June 30, 2023 represent the financial statements of the Company.

Periods presented prior to the Merger date of March 31, 2023 reflect the operations of Old SAFE and periods presented as of September 30, 2023 represent the financial statements of the Company.

Additionally, in connection with the Merger, Safehold Operating Partnership LP converted from a Delaware limited partnership into a Delaware limited liability company and changed its name to “Safehold GL Holdings LLC” (“Portfolio Holdings”), with the Company as its managing member.

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the end of a Ground Lease, which may yield substantial value to us.

As of June 30, 2023, the percentage breakdown of the gross book value of our portfolio was 44% office, 37% multi-family, 12% hotels, 4% life science and 3% mixed use and other.

As of September 30, 2023, the percentage breakdown of the gross book value of our portfolio was 43% office, 37% multi-family, 12% hotels, 5% life science and 3% mixed use and other.

The diversification by geographic location, property type and sponsor in our portfolio further reduces risk and enhances potential upside.

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In 2022, the Consumer Price Index (“CPI”) rose to its highest rate in over 40 years.

Since then the Federal Reserve has raised interest rates multiple times and it has stated that it is likely it will raise rates again by the end of 2023.

Since then the Federal Reserve has raised interest rates multiple times and it has stated that it is likely it will raise rates again.

Any increase in interest rates may result in a reduction in the availability or an increase in costs of leasehold financing, which is critical to the growth of a robust Ground Lease market.

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We calculate this estimated value by subtracting our original aggregate cost basis in the Ground Leases from our estimated aggregate Combined Property Value, based on estimates by the valuation firm and by management.

The table below shows the current estimated UCA in our owned residual portfolio as of June 30, 2023 and December 31, 2022 ($ in millions):

June 30, 2023

The table below shows the current estimated UCA in our owned residual portfolio as of September 30, 2023 and December 31, 2022 ($ in millions):

September 30, 2023

December 31, 2022

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Unrealized Capital Appreciation in Our Owned Residual Portfolio

(1) Please review our Current Report on Form 8-K filed on August 1, 2023 for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of UCA.

(1) Please review our Current Report on Form 8-K filed on October 31, 2023 for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of UCA.

See “Risk Factors- Certain tenant rights under our Ground Leases may limit the value and the UCA we are able to realize upon lease expiration, sale of our land and Ground Leases or other events ” included in Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for a discussion of certain tenant rights and other terms of the leases that may limit our ability to realize value from the UCA.

(2) Combined Property Value includes one investment in our Ground Lease Plus Fund which has moved out of the pre-development stage and which, as a result, we are obligated to purchase when all conditions are satisfied (such conditions may or may not be satisfied), our applicable percentage interests in our unconsolidated Ground Lease ventures and $1,708.5 million and $1,653.2 million related to transactions with remaining unfunded commitments as of June 30, 2023 and December 31, 2022, respectively.

(2) Combined Property Value includes one investment in our Ground Lease Plus Fund which has moved out of the pre-development stage and which, as a result, we are obligated to purchase when all conditions are satisfied (such conditions may or may not be satisfied), our applicable percentage interests in our unconsolidated Ground Lease ventures and $1,647.3 million and $1,653.2 million related to transactions with remaining unfunded commitments as of September 30, 2023 and December 31, 2022, respectively.

Combined Property Value excludes the term loan to Star Holdings, the assets in the Leasehold Loan Fund, the remainder of the Ground Lease Plus Fund assets and amounts attributable to noncontrolling interests.

Ground Lease Cost includes one investment in our Ground Lease Plus Fund which has moved out of the pre-development stage and which, as a result, we are obligated to purchase when all conditions are satisfied (such conditions may or may not be satisfied), our applicable percentage interests in our unconsolidated Ground Lease ventures and $271.7 million (including amounts to be paid to the Ground Lease Plus Fund) and $308.2 million of unfunded commitments as of June 30, 2023 and December 31, 2022, respectively.

Ground Lease Cost includes one investment in our Ground Lease Plus Fund which has moved out of the pre-development stage and which, as a result, we are obligated to purchase when all conditions are satisfied (such conditions may or may not be satisfied), our applicable percentage interests in our unconsolidated Ground Lease ventures and $211.7 million (including amounts to be paid to the Ground Lease Plus Fund that we may be obligated to pay in order to purchase a certain investment) and $308.2 million of unfunded commitments as of September 30, 2023 and December 31, 2022, respectively.

Ground Lease Cost excludes the term loan to Star Holdings, the assets in the Leasehold Loan Fund, the remainder of the ground lease plus fund assets and amounts attributable to noncontrolling interests.

As of June 30, 2023, our gross book value as a percentage of combined property value was 42%.

As of September 30, 2023, our gross book value as a percentage of combined property value was 42%.

In 2018, Old SAFE established the Caret program (as defined below).

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Following the merger, 76,801 Caret units were awarded to executive officers and other employees under such plan that are subject to cliff vesting on the fourth anniversary of their grant date if our common stock has traded at an average price of $60.00 or more for at least 30 consecutive trading days during that four-year period.

As a result, as of June 30, 2023, vested and unvested Caret units beneficially owned by our officers and other employees represent approximately 15.41% of the outstanding Caret units and 12.50% of the authorized Caret units.

In addition to the Caret units awarded or reserved for issuance under our Caret Performance Incentive Plan, as of June 30, 2023, Old SAFE sold or contracted to sell an aggregate of 259,642 Caret units to third-party investors, including affiliates of MSD Partners and an entity affiliated with one of our independent directors.

As of June 30, 2023, the Company owns 82.2% of the outstanding Caret units.

As a result, as of September 30, 2023, vested and unvested Caret units beneficially owned by our officers and other employees represent approximately 15.41% of the outstanding Caret units and 12.50% of the authorized Caret units.

In addition to the Caret units awarded or reserved for issuance under our Caret Performance Incentive Plan, as of September 30, 2023, Old SAFE sold or contracted to sell an aggregate of 259,642 Caret units to third-party investors, including affiliates of MSD Partners and an entity affiliated with one of our independent directors.

As of September 30, 2023, the Company owns 82.2% of the outstanding Caret units.

In connection with the sale of 137,142 Caret units in February 2022 (28,571 of which were committed to be purchased at the time, but have not yet closed), Old SAFE agreed to use commercially reasonable efforts to provide public market liquidity for such Caret units by seeking to provide a listing of the Caret units (or securities into which they may be exchanged) on a public exchange within two years of the sale.

In the event market liquidity of the Caret units is not achieved within such two year period at a valuation not less than the purchase price for the Caret units purchased in February 2022, reduced by an amount equal to the amount of subsequent cash distributions made to investors on account of such Caret units, then the investors in the February 2022 transaction have the right to

cause their Caret units purchased in February 2022 to be redeemed by Portfolio Holdings at such purchase price as so reduced.

have the right to cause their Caret units purchased in February 2022 to be redeemed by Portfolio Holdings at such purchase price as so reduced.

On March 31, 2023, Old SAFE sold 100,000 Caret units to affiliates of MSD Partners for an aggregate purchase price of $20.0 million (refer to Note 1 to the consolidated financial statements) pursuant to a subscription agreement entered into on August 10, 2022 and sold an aggregate of 22,500 Caret units to third-party investors for an aggregate $4.5 million.

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Our portfolio is comprised of Ground Leases and a master lease (relating to five hotel assets that we refer to as our “Park Hotels Portfolio”) that has many of the characteristics of a Ground Lease.

As of June 30, 2023, our estimated portfolio Ground Rent Coverage was 3.7x (see the “Risk Factors - Our estimated UCA, Combined Property Value and Ground Rent Coverage, may not reflect the full potential impact of the COVID-19 pandemic and may decline materially in future periods , - We rely on Property NOI as reported to us by our tenants , - Our estimates of Ground Rent Coverage for properties in development or transition, or for which we do not receive current tenant financial information, may prove to be incorrect ” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for a discussion of our estimated Ground Rent Coverage).

Below is an overview of the top 10 assets in our portfolio as of June 30, 2023 (based on gross book value and excluding unfunded commitments):

As of September 30, 2023, our estimated portfolio Ground Rent Coverage was 3.7x (see the “Risk Factors - Our estimated UCA, Combined Property Value and Ground Rent Coverage, may not reflect the full potential impact of the COVID-19 pandemic and may decline materially in future periods , - We rely on Property NOI as reported to us by our tenants , - Our estimates of Ground Rent Coverage for properties in development or transition, or for which we do not receive current tenant financial information, may prove to be incorrect ” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for a discussion of our estimated Ground Rent Coverage).

Below is an overview of the top 10 assets in our portfolio as of September 30, 2023 (based on gross book value and excluding unfunded commitments):

Rent Escalation

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Park Hotels Portfolio (3)

Fixed with Inflation Adjustments

20 Cambridgeside

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Fixed with Inflation Adjustments

685 Third Avenue

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however, our tenant at the property pays this cost directly to the third party.

The following tables show our portfolio by top 10 markets and property type as of June 30, 2023, excluding unfunded commitments:

The following tables show our portfolio by top 10 markets and property type as of September 30, 2023, excluding unfunded commitments:

Manhattan (1)

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We have unfunded commitments to certain of our Ground Lease tenants related to leasehold improvement allowances that we expect to fund upon the completion of certain conditions.

As of June 30, 2023, we had $250.6 million of such commitments, excluding commitments to be funded by noncontrolling interests.

As of September 30, 2023, we had $190.6 million of such commitments, excluding commitments to be funded by noncontrolling interests.

We also have unfunded forward commitments related to agreements that we entered into for the acquisition of new Ground Leases or additions to existing Ground Leases if certain conditions are met (refer to Note 13 to the consolidated financial statements).

These commitments may also include leasehold improvement allowances that will be funded to the Ground Lease tenants upon the completion of certain conditions.

As of June 30, 2023, we had an aggregate

$271.2 million of such commitments.

As of September 30, 2023, we had an

aggregate $283.6 million of such commitments.

There can be no assurance that the conditions to closing for these transactions will be satisfied and that we will acquire the Ground Leases or fund the leasehold improvement allowances.

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We refer to these arrangements as performance-based commitments.

As of June 30, 2023, we had $127.7 million of such commitments.

Results of Operations for the Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

As of September 30, 2023, we had $118.9 million of such commitments.

Results of Operations for the Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022

For the Three Months Ended

September 30,

(in thousands)

7 unchanged sentences

General and administrative

Impairment of goodwill

Provision for credit losses

1 unchanged sentence

Total costs and expenses

Gain on sale of net investment in lease

Earnings from equity method investments

Net income before income taxes

Net income (loss) before income taxes

Income tax expense

Interest income from sales-type leases increased to $58.2 million for the three months ended June 30, 2023 from $48.2 million for the same period in 2022.

The increase was due primarily to the origination of new Ground Leases subsequent to June 30, 2022 and additional fundings on existing Ground Leases classified as sales-type leases and Ground Lease receivables.

Operating lease income increased to $16.8 million during the three months ended June 30, 2023 from $16.5 million for the same period in 2022.

The increase was due primarily to an increase in percentage rent at certain properties.

Interest income – related party was $2.4 million for the three months ended June 30, 2023 and relates to the Star Holdings Term Loan Facility.

Other income for the three months ended June 30, 2023 includes $7.2 million of management fees from Star Holdings.

In addition, other income for both the three months ended June 30, 2023 and 2022 includes $0.1 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

Other income for the three months ended June 30, 2023 and 2022 also includes $1.1 million and $0.1 million, respectively, of other ancillary income from our investments.

The increase in other ancillary income in 2023 as compared to 2022 was primarily due to sublease income, interest income on our cash balances, and management and other fees earned from the funds that we manage.

During the three months ended June 30, 2023 and 2022, we incurred interest expense from our debt obligations of $46.1 million and $30.3 million, respectively.

The increase in 2023 was primarily the result of issuances of unsecured notes to fund our growing portfolio of Ground Leases and additional borrowings on our 2021 Unsecured Revolver which accrued interest at higher rates in 2023 due to an increase in base interest rates.

Real estate expense was $1.0 million and $0.7 million during the three months ended June 30, 2023 and 2022, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense.

In addition, during both the three months ended June 30, 2023 and 2022, we also recorded $0.1 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

Net income (loss)

Interest income from sales-type leases increased to $59.1 million for the three months ended September 30, 2023 from $54.7 million for the same period in 2022.

The increase was due primarily to the origination of new Ground Leases subsequent to September 30, 2022 and additional fundings on existing Ground Leases classified as sales-type leases and Ground Lease receivables.

Operating lease income increased to $16.7 million during the three months ended September 30, 2023 from $16.5 million for the same period in 2022.

The increase was due primarily to an increase in recovery income at certain properties.

Interest income – related party was $2.4 million for the three months ended September 30, 2023 and relates to the Star Holdings Term Loan Facility.

Other income for the three months ended September 30, 2023 includes $6.0 million of management fees from Star Holdings.

In addition, other income for both the three months ended September 30, 2023 and 2022 includes $0.1 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

Other income for the three months ended September 30, 2023 and 2022 also includes $1.2 million and $0.3 million, respectively, of other ancillary income from our investments.

The increase in other ancillary income in 2023 as compared to 2022 was primarily due to sublease income, interest income on our cash balances, fees earned on amendments to our Ground Leases and management and other fees earned from the funds that we manage.

During the three months ended September 30, 2023 and 2022, we incurred interest expense from our debt obligations of $46.6 million and $35.5 million, respectively.

The increase in 2023 was primarily the result of additional borrowings on our 2021 Unsecured Revolver which also accrued interest at higher rates in 2023 due to an increase in base interest rates.

Real estate expense was $1.0 million and $0.9 million during the three months ended September 30, 2023 and 2022, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense.

In addition, during both the three months ended September 30, 2023 and 2022, we also recorded $0.1 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

The increase in 2023 was primarily the result of an increase in recoverable property taxes.

Depreciation and amortization was $2.5 million during the three months ended June 30, 2023 as compared to $2.4 million for the same period in 2022.

Depreciation and amortization primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property, the amortization of in-place lease assets, and beginning in the second quarter of 2023, depreciation on our corporate fixed assets.

Depreciation and amortization was $2.5 million during the three months ended September 30, 2023 as compared to $2.4 million for the same period in 2022.

Subsequent to the Merger closing on March 31, 2023, general and administrative expenses primarily includes public company costs such as compensation (including equity-based compensation), occupancy and other costs.

Prior to the Merger closing, general and administrative expenses included management fees, an allocation of expenses to us from our Former Manager, costs of operating as a public company and stock-based compensation (primarily to our non-management directors) .

The following table presents our general and administrative expenses for the three months ended June 30, 2023 and 2022 ($ in thousands):

The following table presents our general and administrative expenses for the three months ended September 30, 2023 and 2022 ($ in thousands):

For the Three Months Ended

September 30,

Public company and other costs (1)

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Total general and administrative expenses

(1) For the three months ended June 30, 2023, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

(1) For the three months ended September 30, 2023, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

(2) Refer to Note 13 to the consolidated financial statements.

During the three months ended June 30, 2023, we recorded a provision for credit losses of $0.1 million.

The provision was primarily the result of a declining macroeconomic forecast on commercial real estate markets since March 31, 2023.

During the three months ended June 30, 2023, other expense consists primarily of legal and consulting costs and costs incurred from the formation of a joint venture.

During the three months ended June 30, 2022, other expense consists primarily of legal costs, fees related to our derivative transactions, unsuccessful pursuit costs and state margin taxes .

The increase during the three months ended June 30, 2023 was primarily due to additional costs related to the Merger and costs incurred from the formation of a joint venture (refer to Note 4).

During the three months ended June 30, 2023, earnings from equity method investments resulted from our $0.9 million pro rata share of income from our 425 Park Avenue venture, our $1.4 million pro rata share of income from our 32 Old Slip venture, our $1.7 million pro rata share of income from the Ground Lease Plus Fund and our $2.8 million pro rata share of income from the Leasehold Loan Fund.

During the three months ended June 30, 2022, earnings from equity method investments resulted from our $0.8 million pro rata share of income from our 425 Park Avenue venture and our $1.4 million pro rata share of income from our 32 Old Slip venture.

During the three months ended June 30, 2023, we recorded income tax expense of $0.5 million.

The income tax expense was primarily the result of our taxable REIT subsidiary recording a current and deferred income tax expense of $0.4 million and $0.1 million respectively.

Results of Operations for the Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

For the Six Months Ended

During the three months ended September, 30, 2023, we recorded a full impairment of the goodwill that was recognized as a result of the Merger (refer to Note 3 to the consolidated financial statements).

During the three months ended September 30, 2023, we recorded a provision for credit losses of $0.3 million.

The provision was primarily the result of a declining macroeconomic forecast on commercial real estate markets since June 30, 2023.

D uring the three months ended September 30, 2023, other expense consists primarily of $1.9 million from the derecognition of previously-capitalized deal structuring costs and also includes legal and consulting costs .

During the three months ended September 30, 2022, other expense consists primarily of legal costs associated with our Merger with iStar (refer to Note 1 to the consolidated financial statements), fees related to our Caret units program, fees related to our derivative transactions and state margin taxes .

During the three months ended September 30, 2022, we sold a Ground Lease to a third-party for $136.0 million and recognized a gain on sale of net investment in lease of $55.8 million.

During the three months ended September 30, 2023, earnings from equity method investments resulted from our $0.9 million share of income from our 425 Park Avenue venture, our $1.4 million share of income from our 32 Old Slip venture, our $1.8 million share of income from the Ground Lease Plus Fund and our $3.3 million share of income from

the Leasehold Loan Fund.

During the three months ended September 30, 2022, earnings from equity method investments resulted from our $0.9 million share of income from our 425 Park Avenue venture and our $1.4 million share of income from our 32 Old Slip venture.

During the three months ended September 30, 2023, we recorded income tax expense of $0.1 million.

Our TRS recorded aggregate current federal and state income tax expense of $1.0 million for the three months ended September 30, 2023.

In addition, during the three months ended September 30, 2023, our TRS recorded a deferred tax benefit in the amount of $0.9 million.

The net deferred tax benefit relates primarily to equity-based compensation expense and net operating loss carryovers to which our TRS is a successor and which were finalized upon filing tax returns for periods prior to the Merger.

Results of Operations for the Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022

For the Nine Months Ended

September 30,

(in thousands)

7 unchanged sentences

General and administrative

Impairment of goodwill

Provision for credit losses

1 unchanged sentence

Total costs and expenses

Gain on sale of net investment in lease

Earnings from equity method investments

Net income before income taxes

Net income (loss) before income taxes

Income tax expense

Interest income from sales-type leases increased to $115.2 million for the six months ended June 30, 2023 from $91.3 million for the same period in 2022.

Net income (loss)

Interest income from sales-type leases increased to $174.4 million for the nine months ended September 30, 2023 from $146.0 million for the same period in 2022.

The increase was due primarily to the origination of new Ground Leases in 2022 and additional fundings on existing Ground Leases classified as sales-type leases and Ground Lease receivables.

Operating lease income increased to $37.7 million during the six months ended June 30, 2023 from $33.4 million for the same period in 2022.

Operating lease income increased to $54.4 million during the nine months ended September 30, 2023 from $49.9 million for the same period in 2022.

The increase was due primarily to a $3.1 million increase in percentage rent, which was primarily attributable to our Park Hotels Portfolio for which we recognized no percentage rent in 2022 and an increase in recovery income in 2023.

Interest income – related party was $2.4 million for the six months ended June 30, 2023 and relates to the Star Holdings Term Loan Facility.

Other income for the six months ended June 30, 2023 primarily includes $7.2 million of management fees from Star Holdings.

In addition, other income for the six months ended June 30, 2023 and 2022 includes $0.3 million and $0.2 million, respectively, of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

Other income for the six months ended June 30, 2023 and 2022 also includes $1.2 million and $0.3 million, respectively, of other ancillary income from our investments.

During the six months ended June 30, 2023 and 2022, we incurred interest expense from our debt obligations of $86.9 million and $55.6 million, respectively.

Real estate expense was $2.2 million and $1.4 million during the six months ended June 30, 2023 and 2022, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense.

In addition, during the six months ended June 30, 2023 and 2022, we also recorded $0.3 million and $0.2 million, respectively, of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

The increase in 2023 was primarily the result of an increase in recoverable property taxes.

Depreciation and amortization was $4.9 million and $4.8 million during the six months ended June 30, 2023 and 2022, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property, the amortization of in-place lease assets, and beginning in the second quarter of 2023, depreciation on our corporate fixed assets.

Interest income – related party was $4.8 million for the nine months ended September 30, 2023 and relates to the Star Holdings Term Loan Facility.

Other income for the nine months ended September 30, 2023 primarily includes $13.2 million of management fees from Star Holdings.

In addition, other income for the nine months ended September 30, 2023 and 2022 includes $0.4 million and $0.3 million, respectively, of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

Other income for the nine months ended September 30, 2023 and 2022 also includes $2.5 million and $0.7 million, respectively, of other ancillary income from our

During the nine months ended September 30, 2023 and 2022, we incurred interest expense from our debt obligations of $133.5 million and $91.1 million, respectively.

The increase in 2023 was primarily the result of issuances of unsecured notes to fund our growing portfolio of Ground Leases and additional borrowings on our 2021 Unsecured Revolver which also accrued interest at higher rates in 2023 due to an increase in base interest rates.

Real estate expense was $3.2 million and $2.3 million during the nine months ended September 30, 2023 and 2022, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense.

In addition, during the nine months ended September 30, 2023 and 2022, we also recorded $0.4 million and $0.3 million, respectively, of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease.

The increase in 2023 was primarily the result of an increase in recoverable property taxes and other recoverable expenses.

Depreciation and amortization was $7.4 million and $7.2 million during the nine months ended September 30, 2023 and 2022, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property, the amortization of in-place lease assets, and beginning in the second quarter of 2023, depreciation on corporate fixed assets acquired in the Merger.

The following table presents our general and administrative expenses for the six months ended June 30, 2023 and 2022 ($ in thousands):

For the Six Months Ended

The following table presents our general and administrative expenses for the nine months ended September 30, 2023 and 2022 ($ in thousands):

For the Nine Months Ended

September 30,

Public company and other costs (1)

3 unchanged sentences

Total general and administrative expenses

(1) For the six months ended June 30, 2023, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

(2) For the six months ended June 30, 2023, $4.7 million relates to the accelerated vesting of iStar’s equity-based compensation plans in connection with the Merger.

(1) For the nine months ended September 30, 2023, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

(2) For the nine months ended September 30, 2023, $4.7 million relates to the accelerated vesting of iStar’s equity-based compensation plans in connection with the Merger.

(3) Refer to Note 13 to the consolidated financial statements.

During the six months ended June 30, 2023, we recorded a provision for credit losses of $2.3 million.

During the nine months ended September, 30, 2023, we recorded a full impairment of the goodwill that was recognized as a result of the Merger (refer to Note 3 to the consolidated financial statements).

During the nine months ended September 30, 2023, we recorded a provision for credit losses of $2.6 million.

The provision was primarily the result of the adoption of a new accounting standard (refer to Note 3 to the consolidated financial statements) in 2023, which resulted in a $2.4 million provision on our loan receivable, net – related party.

During the six months ended June 30, 2023, other expense consists primarily of legal and consulting costs and transfer taxes associated with the Merger (refer to Note 1 to the consolidated financial statements).

During the six months ended June 30, 2022, other expense consists primarily of fees related to our derivative transactions .

The increase during the six months ended June 30, 2023 was primarily due to legal and consulting costs and transfer taxes incurred in connection with the Merger.

During the six months ended June 30, 2023, earnings from equity method investments resulted from our $1.7 million pro rata share of income from our 425 Park Avenue venture, our $2.8 million pro rata share of income from our 32 Old Slip venture, our $1.7 million pro rata share of income from the Ground Lease Plus Fund and our $2.8 million pro rata share of income from the Leasehold Loan Fund.

During the six months ended June 30, 2022, earnings from equity method investments resulted from our $1.7 million pro rata share of income from our 425 Park Avenue venture and our $2.8 million pro rata share of income from our 32 Old Slip venture.

During the six months ended June 30, 2023, we recorded income tax expense of $0.5 million.

The income tax expense was primarily the result of our taxable REIT subsidiary recording a current and deferred income tax expense of $0.4 million and $0.1 million respectively.

During the nine months ended September 30, 2023, other expense consists primarily of legal and consulting costs, transfer taxes associated with the Merger (refer to Note 1 to the consolidated financial statements) and $1.9 million from the derecognition of previously-capitalized deal structuring costs .

During the nine months ended September 30, 2022, other expense consists primarily of legal costs associated with our Merger with iStar (refer to Note 1 to the consolidated financial statements), fees related to our Caret units program, unsuccessful pursuit costs and fees related to our derivative

transactions .

The increase during the nine months ended September 30, 2023 was primarily due to legal and consulting costs and transfer taxes incurred in connection with the Merger.

During the nine months ended September 30, 2022, we sold a Ground Lease to a third-party for $136.0 million and recognized a gain on sale of net investment in lease of $55.8 million.

During the nine months ended September 30, 2023, earnings from equity method investments resulted from our $2.6 million share of income from our 425 Park Avenue venture, our $4.3 million share of income from our 32 Old Slip venture, our $3.5 million share of income from the Ground Lease Plus Fund and our $6.1 million share of income from the Leasehold Loan Fund.

During the nine months ended September 30, 2022, earnings from equity method investments resulted from our $2.5 million share of income from our 425 Park Avenue venture and our $4.2 million share of income from our 32 Old Slip venture.

During the nine months ended September 30, 2023, we recorded income tax expense of $0.6 million.

The income tax expense was primarily the result of current federal and state income tax expense in the amount of $1.4 million, which was partially offset by a deferred tax benefit in the amount of $0.9 million with respect to our TRS.

In addition, the Company recorded other state and local income taxes in the amount of $0.1 million during the nine months ended September 30, 2023.

Liquidity and Capital Resources

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We expect to make quarterly cash distributions to our shareholders sufficient to meet REIT qualification requirements.

In the first quarter 2021, we received investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+ and entered into an unsecured revolver (refer to Note 8 to the consolidated financial statements) with a total capacity of $1.35 billion (the “2021 Unsecured Revolver”).

In the first quarter 2021, we received investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+.

In October 2023, Moody’s Investors Services upgraded our credit ratings to A3 which reduced the interest rate on our unsecured revolvers (see below).

We believe the strong credit profile we have established utilizing our modern Ground Leases and our current investment-grade credit ratings from Moody's Investors Services of A3 and Fitch Ratings of BBB+ will accelerate our ability to bring commercial real estate owners, developers and sponsors more efficiently priced capital and allows us significant operational and financial flexibility and supports our ability to scale our Ground Lease platform.

In the first quarter 2021, we entered into an unsecured revolver (refer to Note 8 to the consolidated financial statements) with a total capacity of $1.35 billion (the “2021 Unsecured Revolver”).

In the second quarter 2021, the fourth quarter 2021, the first quarter 2022 and the second quarter 2022, we issued four tranches of unsecured notes with varying fixed-rates and maturities ranging from June 2031 to May 2052 (collectively the “Notes”).

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We also amended our 2021 Unsecured Revolver (refer to Note 8 to the consolidated financial statements) primarily to transition from LIBOR to Adjusted SOFR, as defined in the applicable agreement.

As evidenced by our 2023 Unsecured Revolver, our 2021 Unsecured Revolver and the Notes, we believe the strong credit profile we have established utilizing our modern Ground Leases and our current investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+ will further accelerate our ability to bring commercial real estate owners, developers and sponsors more efficiently priced capital and allows us significant operational and financial flexibility and supports our ability to scale our Ground Lease platform.

As of June 30, 2023, we had $14 million of unrestricted cash and an aggregate $802 million of undrawn capacity on our 2021 Unsecured Revolver and 2023 Unsecured Revolver.

We refer to this unrestricted cash and additional borrowing capacity on our 2021 Unsecured Revolver and 2023 Unsecured Revolver as our “equity” liquidity which can be used for general corporate purposes or leveraged to acquire or originate new Ground Lease assets.

In August 2023, we sold 6,500,000 shares of our common stock in a public offering for gross proceeds of $139.1 million.

Concurrently with the public offering, we sold $12.8 million in shares, or 599,983 shares, of our common stock to affiliates of MSD Partners in a private placement.

As of September 30, 2023, we had $11 million of unrestricted cash and an aggregate $847 million of undrawn capacity on our 2021 Unsecured Revolver and 2023 Unsecured Revolver.

We refer to this unrestricted cash and additional borrowing capacity on our 2021 Unsecured Revolver and 2023 Unsecured Revolver as our “equity” liquidity which can

be used for general corporate purposes or leveraged to acquire or originate new Ground Lease assets.

Our primary sources of cash to date have been proceeds from equity offerings and private placements, proceeds from our initial capitalization by iStar and two institutional investors and borrowings from our debt facilities, unsecured notes and mortgages.

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We expect that we will be able to meet our liquidity requirements over the next 12 months and beyond.

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, 2023 and 2022 ($ in thousands):

For the Six Months Ended

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, 2023 and 2022 ($ in thousands):

For the Nine Months Ended

September 30,

Cash flows (used in) provided by operating activities

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Cash flows provided by financing activities

The decrease in cash flows provided by operating activities during 2023 was primarily due to costs incurred in connection with the Merger, increased costs on our debt obligations in 2023 due to an increase in borrowings and interest rates and us receiving cash in connection with the termination of a derivative transaction in 2022, which were partially offset by an increase in percentage rent and rents collected in 2023 from new originations and acquisitions of Ground Leases throughout 2022.

The decrease in cash flows used in operating activities during 2023 was primarily due to costs incurred in connection with the Merger, increased costs on our debt obligations in 2023 due to an increase in borrowings and interest rates and us receiving cash in connection with the termination of derivative transactions in 2022, which were partially offset by an increase in percentage rent and rents collected in 2023 from new originations and acquisitions of Ground Leases throughout 2022 and 2023.

The decrease in cash flows used in investing activities during 2023 was due primarily to a decrease in new originations and acquisitions of Ground Leases, which was partially offset by the origination of the Star Holdings Term Loan Facility, consideration paid in connection with the Merger and an increase in contributions to equity method investments.

The decrease in cash flows provided by financing activities during 2023 was due primarily to the issuance of common stock in 2022 and the issuance of unsecured debt to fund our growing Ground Lease portfolio in 2022, which was partially offset by the issuance of common stock in 2023 and contributions from noncontrolling interests in 2023.

Supplemental Guarantor Disclosure

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We and Portfolio Holdings have filed a registration statement on Form S-3 with the SEC registering, among other securities, debt securities of Portfolio Holdings, which will be fully and unconditionally guaranteed by us.

As of June 30, 2023, Portfolio Holdings had issued and outstanding the Notes, which were registered on a Form S-3 filed by Old SAFE and Portfolio Holdings (then known as Safehold Operating Partnership LP).

As of September 30, 2023, Portfolio Holdings had issued and outstanding the Notes, which were registered on a Form S-3 filed by Old SAFE and Portfolio Holdings (then known as Safehold Operating Partnership LP).

The obligations of Portfolio Holdings to pay principal, premiums, if any, and interest on the Notes are guaranteed on a senior basis by us.

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ASU 2016-13 replaced the incurred loss impairment methodology in prior GAAP with a methodology that reflects expected credit losses over the life of the investment and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

We analyze historical unemployment rates and historical data provided by Trepp (“Trepp”) for single asset borrower loans including loan to value ratios, loss rates, timing of losses, vintage, property type and other statistics.

We utilize historical loss rates, timing of losses and unemployment rates and update our analysis for c urrent market conditions and reasonable and supportable forecasts of unemployment rates to develop an estimate of credit losses.

We analyze our portfolio of Ground Leases based on whether the property is

a stabilized property or a development project.

Our development properties are assigned a higher loss rate due to the more inherent risk of deals under construction.

We analyze historical data provided by Trepp (“Trepp”) for single asset borrower loans and considers comparable loan to value ratios, loss rates, timing of losses, vintage, property type and other statistics.

We update our analysis for c urrent market conditions and reasonable and supportable forecasts of unemployment rates to develop an estimate of credit losses.

We analyze our portfolio of Ground Leases in two categories, based on whether the underlying property is a stabilized property or a development project.

Our development properties are assigned a higher loss rate due to the higher inherent risk of deals under construction.

We perform a quarterly analysis of our loan receivable that incorporates management’s current judgments about credit quality based on all known and relevant internal and external factors that may affect collectability.

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(ii) the acquisition does not include a substantive process in the form of an acquired workforce;

or (iii) an acquired contract that cannot be replaced without significant cost, effort or delay.

or (iii) there is an acquired contract that cannot be replaced without significant cost, effort or delay.

Acquisitions of a business are accounted for as business combinations and other acquisition transactions are accounted for as asset acquisitions.

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Goodwill — Goodwill is calculated as the excess of purchase consideration over the fair value of the net identifiable assets acquired and primarily relates to the acquisition of iStar’s workforce and future synergies expected to be realized from the Merger.

Goodwill is not subject to amortization but is tested annually for impairment or more frequently should potential triggering events be identified that may indicate potential impairment.

Goodwill is not subject to amortization but is tested annually for impairment or more frequently should potential triggering events be identified that may indicate potential impairment, such as when a company’s market capitalization is below its book value.

During the three months ended September 30, 2023, we experienced a precipitous and sustained decline in the price per share of our common stock, which we identified as an indicator of goodwill impairment.

As a result, we performed an interim goodwill evaluation.

We determined that our current operations are carried out through a single reporting unit with a carrying value of approximately $2.4 billion.

Our estimated fair value was determined to be our market capitalization adjusted for a control premium estimated by us representing an amount a market participant would pay to obtain a controlling interest in us.

We determined that our carrying value exceeded our estimated fair value and therefore recorded an impairment of goodwill.

We recorded a $145.4 million full impairment of the goodwill recognized as a result of the Merger, which is recorded as a non-cash charge in “Impairment of goodwill” in our consolidated statements of operations.

We do not expect goodwill to have any tax impact on our financial statements.

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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