Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion of our consolidated operating results, financial condition and liquidity together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our discussion related to the results of operations and changes in financial condition for 2022 compared to 2021 is included in Part II, Item 7 of Old SAFE’s Annual Report on Form 10-K for the year ended December 31, 2022 . These historical financial statements may not be indicative of our future performance.
Merger Transaction
On August 10, 2022, Safehold Inc. (“Old SAFE”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with iStar Inc. (“iStar”), and on March 31, 2023, the Merger was completed in accordance with the terms of the Merger Agreement. For accounting purposes, the Merger was accounted for as a business combination using the acquisition method of accounting under Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) and treated as a “reverse acquisition” in which iStar is considered the legal acquirer and Old SAFE is considered the accounting acquirer. The Company considered the following relevant facts for this determination:
● At the time of the Merger closing, Old SAFE shareholders, excluding the Old SAFE shares held directly by iStar, members of iStar management and Star Holdings, controlled a majority of the voting interests in the Company and the combined company operates under the name “Safehold Inc.;”
● The composition of the combined company’s board of directors, which includes three directors from Old SAFE, two directors from iStar, and two management members of both Old SAFE and iStar;
● Old SAFE was the larger entity by size when comparing the key metrics of total assets, total revenue and net income (loss) from continuing operations and allocable to common shareholders; and
● Substantially all of the assets and liabilities of the Company consist of the historical assets and liabilities of Old SAFE, and the go-forward business plan of the Company is to conduct the Ground Lease business conducted by Old SAFE prior to the Merger.
As a result, the historical financial statements of Old SAFE became the historical financial statements of Safehold Inc. Unless the context otherwise requires, references to “iStar” refer to iStar prior to the Merger, and references to “we,” “our” and “the Company” refer to the business and operations of Old SAFE and its consolidated subsidiaries prior to the Merger and to Safehold Inc. (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 December 31, 2023 represent the financial statement of the Company.
Immediately before the closing of the Merger, iStar separated its remaining legacy non-ground lease assets and businesses, approximately $50.0 million of cash, exclusive of working capital reserves and restricted cash, and approximately 13.5 million shares of Old SAFE common stock into Star Holdings by distributing to iStar’s stockholders, on a pro rata basis, the issued and outstanding equity interests of Star Holdings (the “Spin-Off”).
Business Overview
We acquire, manage and capitalize Ground Leases and report our business as a single reportable segment. We believe owning a portfolio of Ground Leases affords our investors the opportunity for safe, growing income. Safety is derived from a Ground Lease’s senior position in the commercial real estate capital structure. Growth is realized through long-term leases with contractual periodic increases in rent. Capital appreciation is realized though appreciation in the value of the land over time and through our typical rights as landlord to acquire the commercial buildings on our land at the end of a Ground Lease, which may yield substantial value to us. As of December 31, 2023, the percentage breakdown of the gross book value of our portfolio was 42% office, 38% multi-family, 11% hotels, 6% 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.
Many of our Ground Leases have CPI lookbacks, generally starting between years 11 and 21 of the lease term, to mitigate the effects of inflation that are typically capped between 3.0% - 3.5%; however, in the event cumulative inflation
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growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation. 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 could 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. An increase in interest rates could also increase the leasehold financing costs of our Ground Lease tenants and their ability to obtain leasehold financing.
The COVID-19 pandemic is not currently materially impacting our new investment activity, but we continue to monitor its potential impact, which could slow new investment activity because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions, including leasehold loans. In addition, following the onset of the COVID-19 pandemic, the U.S. office sector has been adversely affected by office vacancies, the rise in interest rates and a decline in market liquidity, all of which could negatively impact our tenants, Ground Rent Coverages and estimated Combined Property Values. Moreover, certain office assets currently have material vacancies. If our Ground Lease tenants at such assets fail to re-tenant the building such Ground Leases may default and we may suffer losses. The rise in interest rates and increased investment spreads to treasury bonds in the Ground Lease market may attract new competitors, which may result in higher costs for properties, lower returns and impact our ability to grow. See the "Risk Factors" section of this 10-K for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and certain potential risks to our business related to competition and industry concentrations .
Our Portfolio
Our portfolio of properties is diversified by property type and region. 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 December 31, 2023, our estimated portfolio Ground Rent Coverage was 3.6x (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 " in this Form 10-K for a discussion of our estimated Ground Rent Coverage).
Below is an overview of the top 10 assets in our portfolio as of December 31, 2023 (based on gross book value and excluding unfunded commitments): (1)
Lease
Property
Expiration /
Rent Escalation
% of Gross
Property Name
Type
Location
As Extended
Structure
Book Value
425 Park Avenue (2)
Office
New York, NY
2090 / 2090
Fixed with Inflation Adjustments
5.7
%
135 West 50th Street
Office
New York, NY
2123 / 2123
Fixed with Inflation Adjustments
4.9
%
195 Broadway
Office
New York, NY
2118 / 2118
Fixed with Inflation Adjustments
4.7
%
20 Cambridgeside
Life Science
Cambridge, MA
2121 / 2121
Fixed with Inflation Adjustments
3.9
%
Park Hotels Portfolio (3)
Hotel
Various
2025 / 2035
% Rent
3.5
%
Alohilani
Hotel
Honolulu, HI
2118 / 2118
Fixed with Inflation Adjustments
3.4
%
685 Third Avenue
Office
New York, NY
2123 / 2123
Fixed with Inflation Adjustments
3.1
%
1111 Pennsylvania Avenue
Office
Washington, DC
2117 / 2117
Fixed with Inflation Adjustments
2.4
%
100 Cambridgeside
Mixed Use and Other
Cambridge, MA
2121 / 2121
Fixed with Inflation Adjustments
2.3
%
Columbia Center
Office
Washington, DC
2120 / 2120
Fixed with Inflation Adjustments
2.3
%
(1) Gross book value represents the historical purchase price plus accrued interest on sales-type leases.
(2) Gross book value for this property represents our pro rata share of the gross book value of our unconsolidated venture (refer to Note 7 to the consolidated financial statements).
(3) The Park Hotels Portfolio consists of five properties and is subject to a single master lease. A majority of the land underlying one of these properties is owned by a third party and is ground leased to us through 2044 subject to changes in the CPI; however, our tenant at the property pays this cost directly to the third party.
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The following tables show our portfolio by top 10 markets and property type as of December 31, 2023, excluding unfunded commitments:
% of Gross
Market
Book Value
Manhattan (1)
23
%
Washington, DC
11
Boston
8
Los Angeles
7
San Francisco
4
Denver
4
Honolulu
4
Nashville
4
Miami
3
Atlanta
3
(1) Total New York MSA including areas outside of Manhattan makes up 29% of gross book value.
% of Gross
Property Type
Book Value
Office
42
%
Multifamily
38
Hotel
11
Life Science
6
Mixed Use and Other
3
Unfunded Commitments
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 December 31, 2023, we had $115.0 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 14 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 December 31, 2023, we had an aggregate $283.1 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.
Through the Leasehold Loan Fund, we also 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. As of December 31, 2023, we had $111.1 million of such commitments.
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Results of Operations for the Year Ended December 31, 2023 compared to the Year Ended December 31, 2022
For the Years Ended December 31,
2023
2022
$ Change
(in thousands)
Interest income from sales-type leases
$
235,503
$
202,258
$
33,245
Operating lease income
71,287
66,817
4,470
Interest income - related party
7,143
—
7,143
Other income
38,645
1,238
37,407
Total revenues
352,578
270,313
82,265
Interest expense
181,011
128,969
52,042
Real estate expense
4,653
3,110
1,543
Depreciation and amortization
9,936
9,613
323
General and administrative (1)
68,569
38,614
29,955
Impairment of goodwill
145,365
—
145,365
Provision for credit losses
2,704
—
2,704
Other expense
17,862
10,189
7,673
Total costs and expenses
430,100
190,495
239,605
Gain on sale of Ground Leases
447
55,811
(55,364)
Earnings from equity method investments
24,229
9,055
15,174
Net income (loss) before income taxes
(52,846)
144,684
(197,530)
Income tax expense
(1,719)
—
(1,719)
Net income (loss)
$
(54,565)
$
144,684
$
(199,249)
(1) For the year ended December 31, 2023, general and administrative was partially offset by $19.4 million of management fees earned from Star Holdings, which are included in “Other income” in our consolidated statements of operations.
Interest income from sales-type leases increased to $235.5 million for the year ended December 31, 2023 from $202.3 million for the year ended December 31, 2022. The increase was due primarily to the origination of new Ground Leases and additional fundings on existing Ground Leases classified as sales-type leases and Ground Lease receivables.
Operating lease income increased to $71.3 million during the year ended December 31, 2023 from $66.8 million for the year ended December 31, 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 $7.1 million for the year ended December 31, 2023 and relates to the Star Holdings Term Loan Facility.
Other income for the year ended December 31, 2023 primarily includes $19.4 million of management fees from Star Holdings and $15.2 million of income due to a hedge forecasted for permanent debt that did not occur. Other income for the years ended December 31, 2023 and 2022 includes $0.5 million and $0.4 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 years ended December 31, 2023 and 2022 also includes $3.3 million and $0.8 million, respectively, of other ancillary income from our investments and interest income earned on our cash balances.
During the year ended December 31, 2023, we incurred interest expense from our debt obligations of $181.0 million compared to $129.0 million during the year ended December 31, 2022. 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 during the years ended December 31, 2023 and 2022 was $4.7 million and $3.1 million, respectively, and consisted primarily of the amortization of an operating lease right-of-use asset, property taxes, legal fees, property appraisal fees and insurance expense. In addition, during the years ended December 31, 2023 and 2022, we also recorded $0.5 million and $0.4 million, respectively, of real estate expense relating to a Ground Lease in which we are the
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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 expenses.
Depreciation and amortization was $9.9 million and $9.6 million during the years ended December 31, 2023 and 2022, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property , the amortization of in-place lease assets, and beginning in the second quarter of 2023, depreciation on corporate fixed assets acquired in the Merger. The increase in 2023 was due primarily to the depreciation on corporate fixed assets acquired in the Merger.
Subsequent to the Merger closing on March 31, 2023, general and administrative expenses primarily includes public company costs such as compensation (including equity-based compensation), occupancy and other costs. Prior to the Merger closing, general and administrative expenses included management fees, an allocation of expenses to us from our Former Manager, costs of operating as a public company and stock-based compensation (primarily to our non-management directors). The following table presents our general and administrative expenses for the years ended December 31, 2023 and 2022 ($ in thousands):
For the Years Ended
December 31,
2023
2022
Public company and other costs (1)
$
37,015
$
4,316
Stock-based compensation (2)
23,230
1,546
Management fees (3)
5,199
20,252
Expense reimbursements to the Former Manager (3)
3,125
12,500
Total general and administrative expenses (4)
$
68,569
$
38,614
(1) For the year ended December 31, 2023, public company and other costs primarily includes compensation, occupancy, audit, legal, insurance and other office related costs.
(2) For the year ended December 31, 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 14 to the consolidated financial statements.
(4) For the year ended December 31, 2023, general and administrative expenses were partially offset by $19.4 million of management fees earned from Star Holdings, which are included in “Other income” in our consolidated statements of operations.
During the year ended December 31, 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 year ended December 31, 2023, we recorded a provision for credit losses of $2.7 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 year ended December 31, 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 year ended December 31, 2022, other expense consists primarily of legal costs associated with our Merger with iStar (refer to Note 1 to the consolidated financial statements) as well as fees related to our Caret units program, unsuccessful pursuit costs and fees related to our derivative transactions.
During the year ended December 31, 2023, we sold a Ground Lease to a third-party for $4.2 million and recognized a gain on sale of Ground Leases of $0.4 million. During the year ended December 31, 2022, we sold a Ground Lease to a third-party for $136.0 million and recognized a gain on sale of Ground Leases of $55.8 million, or $46.3 million net of amounts attributable to noncontrolling interests and redeemable noncontrolling interests.
During the year ended December 31, 2023, earnings from equity method investments (refer to Note 7 to the consolidated financial statements) resulted from our $3.5 million share of income from our 425 Park Avenue venture, our $5.7 million share of income from our 32 Old Slip venture, our $5.4 million share of income from the Ground Lease Plus Fund and our $9.6 million share of income from the Leasehold Loan Fund. During the year ended December 31, 2022,
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earnings from equity method investments resulted from our $3.4 million pro rata share of income from the 425 Park Avenue venture and our $5.7 million pro rata share of income from our 32 Old Slip venture.
During the year ended December 31, 2023, we recorded income tax expense of $1.7 million. The income tax expense was primarily the result of current federal and state income tax expense in the amount of $3.1 million, which was partially offset by a deferred tax benefit in the amount of $1.3 million with respect to our TRS. In addition, we recorded other state and local income taxes in the amount of $0.7 million during the year ended December 31, 2023.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including to pay interest and repay borrowings, fund and maintain our assets and operations, complete acquisitions and originations of investments, make distributions to our shareholders and meet other general business needs. In order to qualify as a REIT, we are required under the Internal Revenue Code of 1986 to distribute to our shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. 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+. 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 9 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”). Our most recent issuance in May 2022 features a stairstep coupon structure (refer to Note 9 to the consolidated financial statements) that is unique in the unsecured and investment-grade market and will benefit key cash flow metrics. In January 2023, we closed on a new $500 million unsecured revolving credit facility (the “2023 Unsecured Revolver”). The 2023 Unsecured Revolver has a current borrowing rate of Adjusted SOFR, as defined in the applicable agreement, plus 0.90%, with a maturity of July 31, 2025. We also amended our 2021 Unsecured Revolver (refer to Note 9 to the consolidated financial statements) primarily to transition from LIBOR to Adjusted SOFR, as defined in the applicable agreement.
In April 2023, we entered into an at-the-market equity offering (the “ATM”) pursuant to which we may sell shares of our common stock up to an aggregate purchase price of $300.0 million. We may sell such shares in amounts and at times to be determined by us from time to time, but we have no obligation to sell any of the shares. Actual sales, if any, will depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of our common stock, capital needs, and our determinations of the appropriate sources of funding. As of December 31, 2023, we had not sold any shares under the ATM.
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 December 31, 2023, we had $19 million of unrestricted cash and an aggregate $733 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. Our
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primary uses of cash to date have been the acquisition/origination of Ground Leases, repayments on our debt facilities and distributions to our shareholders.
We expect our short-term liquidity requirements to include debt service on our debt obligations (refer to Note 9 to the consolidated financial statements), distributions to our shareholders, working capital, new acquisitions and originations of Ground Lease investments. We expect our long-term liquidity requirements to include debt service on our debt obligations (refer to Note 9 to the consolidated financial statements), distributions to our shareholders, working capital, new acquisitions and originations of Ground Lease investments (including in respect of unfunded commitments – refer to Note 10 to the consolidated financial statements) and debt maturities. Our primary sources of liquidity going forward will generally consist of cash on hand and cash flows from operations, new financings, funds from our joint venture partners, unused borrowing capacity under our 2021 Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement), our 2023 Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement) and common and/or preferred equity issuances. 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 years ended December 31, 2023 and 2022 ($ in thousands):
For the Years Ended
December 31,
2023
2022
Change
Cash flows provided by operating activities
$
15,391
$
64,852
$
(49,461)
Cash flows used in investing activities
(576,572)
(1,145,953)
569,381
Cash flows provided by financing activities
559,531
1,090,975
(531,444)
The decrease in cash flows provided by operating activities during 2023 was primarily due to costs incurred in connection with the Merger and increased costs on our debt obligations in 2023 due to an increase in borrowings and interest rates, 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.
Mortgages —Mortgages consist of asset specific non-recourse borrowings that are secured by our real estate and Ground Leases. As of December 31, 2023, our mortgages are full term interest only, bear interest at a weighted average interest rate of 3.99% and have maturities between April 2027 and November 2069.
Unsecured Notes —In May 2021, Portfolio Holdings, then known as Safehold Operating Partnership LP, (as issuer) and the Company (as guarantor), issued $400.0 million aggregate principal amount of 2.80% senior notes due June 2031 (the “2.80% Notes”). The 2.80% Notes were issued at 99.127% of par. We may redeem the 2.80% Notes in whole at any time or in part from time to time prior to March 15, 2031, at our option and sole discretion, at a redemption price equal to the greater of: (i) 100% of the principal amount of the 2.80% Notes being redeemed; and (ii) a make-whole premium calculated in accordance with the indenture, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date. If the 2.80% Notes are redeemed on or after March 15, 2031, the redemption price will be equal to 100% of the principal amount of the 2.80% Notes being redeemed, plus accrued and unpaid interest thereon to, but not including, the applicable redemption date.
In November 2021, Portfolio Holdings, then known as Safehold Operating Partnership LP, (as issuer) and us (as guarantor), issued $350.0 million aggregate principal amount of 2.85% senior notes due January 2032 (the “2.85% Notes”). The 2.85% Notes were issued at 99.123% of par. We may redeem the 2.85% Notes in whole at any time or in part from time to time prior to October 15, 2031, at our option and sole discretion, at a redemption price equal to the greater
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of: (i) 100% of the principal amount of the 2.85% Notes being redeemed; and (ii) a make-whole premium calculated in accordance with the indenture, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date. If the 2.85% Notes are redeemed on or after October 15, 2031, the redemption price will be equal to 100% of the principal amount of the 2.85% Notes being redeemed, plus accrued and unpaid interest thereon to, but not including, the applicable redemption date.
In January 2022, Portfolio Holdings, then known as Safehold Operating Partnership LP, (as issuer) and us (as guarantor), issued $475.0 million aggregate principal amount of privately-placed 3.98% senior notes due February 2052 (the “3.98% Notes”). Safehold Operating Partnership LP elected to draw these funds in March 2022. We may, at our option, prepay at any time all, or from time to time any part of, the 3.98% Notes, in an amount not less than 5% of the aggregate principal amount of the 3.98% Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the applicable make-whole amount calculated in accordance with the indenture, for such tranche determined for the prepayment date with respect to such principal amount; provided, that, so long as no default or event of default shall then exist, at any time on or after November 15, 2051, we may, at our option, prepay all or any part of the 3.98% Notes at 100% of the principal amount so prepaid, together with, in each case, accrued interest to the prepayment date, without any make-whole amount.
In May 2022, Portfolio Holdings, then known as Safehold Operating Partnership LP, (as issuer) and us (as guarantor), issued $150.0 million aggregate principal amount of privately-placed 5.15% senior notes due May 2052 (the “5.15% Notes”). The structure of the 5.15% Notes features a stairstep coupon rate in which we will pay cash interest at a rate of 2.50% in years 1 through 10, 3.75% in years 11 through 20, and 5.15% in years 21 through 30. The difference between the 5.15% stated rate and the cash interest rate will accrue in each semi-annual payment period and be paid in kind by adding such accrued interest to the outstanding principal balance, to be repaid at maturity in May 2052. We may, at our option, prepay at any time all, or from time to time any part of, the 5.15% Notes, in an amount not less than 5% of the aggregate principal amount of the 5.15% Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the applicable make-whole amount calculated in accordance with the indenture; provided, that, so long as no default or event of default shall then exist, at any time on or after February 13, 2052, we may, at our option, prepay all or any part of the 5.15% Notes at 100% of the principal amount so prepaid, together with, in each case, accrued interest to the prepayment date, without any make-whole amount.
2021 Unsecured Revolver —In March 2021, Portfolio Holdings, then known as Safehold Operating Partnership LP, (as borrower) and us (as guarantor), entered into an unsecured revolving credit facility with an initial maximum aggregate principal amount of up to $1.0 billion (the “2021 Unsecured Revolver”). In December 2021, we obtained additional lender commitments increasing the maximum availability to $1.35 billion. The 2021 Unsecured Revolver has an initial maturity of March 2024 with two 12-month extension options exercisable by us, subject to certain conditions, and accrued interest at an annual rate of applicable LIBOR plus 0.90%, subject to our credit ratings. The Company also pays a facility fee of 0.10%, subject to our credit ratings. In January 2023, we amended the 2021 Unsecured Revolver primarily to transition from LIBOR to Adjusted SOFR, as defined in the applicable agreement. As of December 31, 2023, there was $233.0 million of undrawn capacity on the 2021 Unsecured Revolver.
2023 Unsecured Revolver —In January 2023, Portfolio Holdings, then known as Safehold Operating Partnership LP (as borrower) and us (as guarantor) closed on a new $500 million unsecured revolving credit facility (the “2023 Unsecured Revolver”). The 2023 Unsecured Revolver has a current borrowing rate of Adjusted SOFR, as defined in the applicable agreement, plus 0.90%, subject to our credit ratings, with a maturity of July 31, 2025. As of December 31, 2023, there was $500.0 million of undrawn capacity on the 2023 Unsecured Revolver.
Trust Preferred Securities —We assumed trust preferred securities from iStar in connection with Merger. The trust preferred securities bear interest at three-month Adjusted Term SOFR plus 1.50% and mature in October 2035.
Debt Covenants —We are subject to financial covenants under the 2021 Unsecured Revolver and the 2023 Unsecured Revolver, including maintaining: (i) a ratio of total unencumbered assets to total unsecured debt of at least 1.33x; and (ii) a consolidated fixed charge coverage ratio of at least 1.15x, as such terms are defined in the documents governing the 2021 Unsecured Revolver and the 2023 Unsecured Revolver, as applicable. In addition, the 2021 Unsecured Revolver and the 2023 Unsecured Revolver contain customary affirmative and negative covenants. Among other things,
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these covenants may restrict our or certain of our subsidiaries’ ability to incur additional debt or liens, engage in certain mergers, consolidations and other fundamental changes, make other investments or pay dividends. Our 2.80% Notes, 2.85% Notes, 3.98% Notes and 5.15% Notes are subject to a financial covenant requiring a ratio of unencumbered assets to unsecured debt of at least 1.25x and contain customary affirmative and negative covenants. Our 3.98% Notes and 5.15% Notes contain a provision whereby they will be deemed to include additional financial covenants and negative covenants to the extent such covenants are incorporated into Portfolio Holdings’ and/or our existing or future material credit facilities, including the 2021 Unsecured Revolver and 2023 Unsecured Revolver, and to the extent such covenants are more favorable to the lenders under such material credit facilities than the covenants contained in the 3.98% Notes and 5.15% Notes. Our mortgages contain no significant maintenance or ongoing financial covenants. As of December 31, 2023, we were in compliance with all of our financial covenants.
Supplemental Guarantor Disclosure
In March 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The amendments became effective on January 4, 2021. 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 December 31, 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. The guarantee is full and unconditional, and Portfolio Holdings is a consolidated subsidiary of ours.
As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of Portfolio Holdings have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for Portfolio Holdings because the assets, liabilities and results of operations of Portfolio Holdings are not materially different than the corresponding amounts in our consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
Critical Accounting Estimates
Allowance for credit losses on net investment in sales-type leases, Ground Lease receivables and loan receivable – related party— Effective January 1, 2023, upon the adoption of ASU 2016-13, we implemented procedures to estimate our allowance for credit losses on net investment in sales-type leases and Ground Lease receivables, including unfunded commitments, using a quantitative analysis to estimate expected loss rates for our portfolio of net investment in sales-type leases and Ground Lease receivables. 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 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 – related party that incorporates management’s current judgments about credit quality based on all known and relevant internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, borrower financial resources and investment collateral, collateral type, project economics and geographical location as well as national and regional economic factors. We estimate
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our Expected Loss on our loans receivable (including unfunded commitments) based on relevant information including current market conditions and reasonable and supportable forecasts that affect the collectability of its investments. The estimate of our Expected Loss requires significant judgment. We calculated our Expected Loss through the use of third-party market data that provided current and future economic conditions that may impact the performance of the commercial real estate assets securing our investments.
Real estate — Real estate assets are recorded at cost less accumulated depreciation and amortization, as follows:
Acquisitions—We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under ASC 805, an acquisition does not qualify as a business when (i) substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets; (ii) the acquisition does not include a substantive process in the form of an acquired workforce; 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. Transaction costs related to asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs related to business combinations are expensed as incurred.
Our acquisition of iStar was accounted for as a business combination. For business combinations, we recognize and measure identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their fair values on our consolidated balance sheets. I n a business combination, the difference, if any, between the purchase consideration and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain.
Fair values are based on available information including discounted cash flow analysis or similar fair value models. Fair value estimates are also made using significant assumptions such as capitalization rates, discount rates, fair market lease rates and other market data. The fair value of our interests in equity investments acquired is calculated using the fair value of the investments held by the venture, which are valued using methods as described above, and considers our economics in the venture.
The fair value of financial instruments, which could include loans receivable or net investment in sales-type leases, is based on current market conditions and loan or lease agreements in place. The fair value of tangible assets, which could include land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of right of use lease assets, above-market leases and in-place leases. Right of use lease assets and lease liabilities are measured at the present value of lease payments not yet paid, discounted at the implied rate charged by the lessor if that rate is readily determinable, or if that rate is not readily determinable, our incremental borrowing rate, as of the date of the acquisition. Right of use assets are included in “Deferred expenses and other assets, net” and lease liabilities are recorded in “Accounts payable, accrued expenses and other liabilities” on our consolidated balance sheets. Above-market leases and in-place leases are each recorded at their fair values and included in “Deferred expenses and other assets, net” on our consolidated balance sheets. Intangible liabilities may also include below-market leases, which are recorded at their fair values and included in “Accounts payable, accrued expenses and other liabilities” on our consolidated balance sheets.
Impairments—We review real estate assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The value of a long-lived asset held for use is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) are less than its carrying value. Such estimate of cash flows considers factors such as expected future operating income trends, as well as the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the estimated fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate assets, if any, are recorded in "Impairment of assets" in our consolidated statements of operations.
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
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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, such as when a company’s market capitalization is below its book value.
During the third quarter of 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.
For a discussion of other critical accounting policies, refer to Note 3 to the consolidated financial statements.