What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-01 · 96 added, 200 removed, 205 unchanged (59% of the section changed)

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We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in “Risk Factors” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023, all of which could affect our future results of operations, financial condition and liquidity.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q, our 2022 Annual Report and our Current Report on Form 8-K filed with the SEC on April 4, 2023.

In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1A.

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”), all of which could affect our future results of operations, financial condition and liquidity.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our 2023 Annual Report.

These historical financial statements may not be indicative of our future performance.

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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 September 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 March 31, 2024 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.

The Company conducts all of its business and owns all of its properties through Portfolio Holdings.

In addition, holders of Caret units in Old SAFE’s subsidiary, Caret Ventures, contributed their interests in Caret Ventures to Portfolio Holdings in return for Caret units issued by Portfolio Holdings.

Following the restructuring, 100% of the equity interests in Caret Ventures is held by Portfolio Holdings, and Portfolio Holdings is owned by the Company, management, of the Company, employees and former employees of the Company, affiliates of MSD Partners, and other outside investors.

We believe that the Merger will accelerate our market leadership in the Ground Lease industry and make us the only internally-managed, pure-play Ground Lease company in the public markets.

Business Overview

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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 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.

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 March 31, 2024, the percentage breakdown of the gross book value of our portfolio was 42% office, 39% multi-family, 11% hotels, 6% life science and 2% mixed use

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.

Since then, the Federal Reserve has raised interest rates multiple times.

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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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.

See “Risk Factors” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for additional discussion of certain potential risks to our business arising from the COVID 19 pandemic.

Moreover, 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 “Risk Factors” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for additional discussion of certain potential risks to our business related to competition.

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 our 2023 Annual Report 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.

We have chosen to focus on Ground Leases because we believe they meet an important need in the real estate capital markets for our customers.

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We generally target Ground Lease investments in which the initial cost of the Ground Lease represents 30% to 45% of the Combined Property Value as if the Ground Lease did not exist.

If the initial cost of a Ground Lease is equal to

35% of the Combined Property Value, the remaining 65% of the Combined Property Value represents potential excess value over the amount of our investment that would be turned over to us upon the reversion of the property, assuming no intervening change in the Combined Property Value.

If the initial cost of a Ground Lease is equal to 35% of the Combined Property Value, the remaining 65% of the Combined Property Value represents potential excess

value over the amount of our investment that would be turned over to us upon the reversion of the property, assuming no intervening change in the Combined Property Value.

In our view, there is a strong correlation between inflation and commercial real estate values over time, which supports our belief that the value of our owned residual portfolio should increase over time as inflation increases, although our ability to recognize value in certain cases may be limited by the rights of our tenants under some of our Ground Leases, including tenant rights to purchase our land in certain circumstances and the right of one tenant to demolish improvements prior to the expiration of the lease.

See “Risk Factors” filed as Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on April 4, 2023 for additional discussion for a discussion of these tenant rights.

See “Risk Factors” in our 2023 Annual Report for additional discussion of these tenant rights.

Owned Residual Portfolio :

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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 September 30, 2023 and December 31, 2022 ($ in millions):

September 30, 2023

The table below shows the current estimated UCA in our owned residual portfolio as of March 31, 2024 and December 31, 2023 ($ in millions):

March 31, 2024

December 31, 2023

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Unrealized Capital Appreciation in Our Owned Residual Portfolio

(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 $1,647.3 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 $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 September 30, 2023, our gross book value as a percentage of combined property value was 42%.

(1) Please review our Current Report on Form 8-K filed on May 7, 2024 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 “Risk Factors” of our 2023 Annual Report 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 as of December 31, 2023 includes one investment in our Ground Lease Plus Fund (which we acquired from the Ground Lease Plus Fund in January 2024 - refer to Note 7 to the consolidated financial statements), and for both periods includes our applicable percentage interests in our unconsolidated Ground Lease ventures and $1,222.5 million and $1,357.4 million related to transactions with remaining unfunded commitments as of March 31, 2024 and December 31, 2023, respectively.

Combined Property Value excludes the term loan to Star Holdings, the assets in the Leasehold Loan Fund (refer to Note 7 to the consolidated financial statements), the assets in the Ground Lease Plus Fund and amounts attributable to noncontrolling interests.

Ground Lease Cost as of December 31, 2023 includes one investment in our Ground Lease Plus Fund (which we acquired from the Ground Lease Plus Fund in January 2024), and for both periods includes our applicable percentage interests in our unconsolidated Ground Lease ventures and $70.2 million and $135.6 million (including amounts paid to the Ground Lease Plus Fund in January 2024 to acquire the investment) of unfunded commitments as of March 31, 2024 and December 31, 2023, respectively.

Ground Lease Cost excludes the term loan to Star Holdings, the assets in the Leasehold Loan Fund, the assets in the Ground Lease Plus Fund and amounts attributable to noncontrolling interests.

As of March 31, 2024, our gross book value as a percentage of combined property value was 47%.

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

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Under the Original Caret Performance Incentive Plan, 1,500,000 Caret units were reserved for grants of performance-based awards to Original Caret Performance Incentive Plan participants, including certain executives of the Company, or its affiliates, directors of Old SAFE and service providers of Old SAFE.

Initial grants under the Original Caret Performance Incentive Plan were subject to graduated vesting based on time-based service conditions and hurdles of our common stock price, all of which were satisfied as of December 31, 2022, except with respect to approximately 850 Caret units scheduled to vest on December 31, 2023.

In connection with the Merger, certain of Old SAFE’s executive officers entered into re-vesting agreements pursuant to which the executives agreed to subject 25% of their previously vested Caret units to additional vesting conditions which will be satisfied on the second anniversary of the Merger, subject to the applicable executive’s continued employment through such date.

In connection with the Merger, each Award Agreement (as defined in the Original Caret Performance Incentive Plan) related to outstanding Caret unit awards was assigned to Portfolio Holdings, and Old SAFE amended and restated amended and restated the Original Caret Performance Incentive Plan (the “Caret Performance Incentive Plan”).

In connection with the Merger, each Award Agreement (as defined in the Original Caret Performance Incentive Plan) related to outstanding Caret unit awards was assigned to Portfolio Holdings, and Old SAFE amended and restated the Original Caret Performance Incentive Plan (the “Caret Performance Incentive Plan”).

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 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.

As a result, as of March 31, 2024, vested and unvested Caret units beneficially owned by our officers and other employees represent approximately 14.5% of the outstanding Caret units and 11.6% of the authorized Caret units, including 6.1% held directly and indirectly by Jay Sugarman, our Chairman and Chief Executive Officer.

In addition to the Caret units awarded or reserved for issuance under our Caret Performance Incentive Plan, as of March 31, 2024, 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 March 31, 2024, the Company owns 83.1% 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.

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.

Because public market liquidity was not achieved by February 2024, 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 less the amount of distributions previously made on such units.

In April 2024, all of the investors in the February 2022 transaction exercised this right and elected to have their Caret units redeemed at the original purchase price less the amount of distributions previously made on such units.

In September 2022, Old SAFE sold a Ground Lease in the Washington, D.C.

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In connection with the Merger, Old SAFE acquired iStar’s 53% interest in iStar’s two Ground Lease ecosystem funds, Ground Lease Plus Fund and Leasehold Loan Fund (refer to Note 7 to the consolidated financial statements).

The Ground Lease Plus Fund includes 3 assets and targets high quality projects in pre-construction development phase with institutional developers.

The Leasehold Loan Fund currently includes 4 assets and allows for customers to receive their full capital structure needs in one place.

The Ground Lease Plus Fund includes two assets and targets high quality projects in pre-construction development phase with institutional developers.

The Leasehold Loan Fund currently includes four assets and allows for customers to receive their full capital structure needs in one place.

Customers are able to receive a mortgage leasehold loan as well as a Ground Lease through us.

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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 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):

As of March 31, 2024, our estimated portfolio Ground Rent Coverage was 3.6x (see “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 our 2023 Annual Report for a discussion of our estimated Ground Rent Coverage).

Below is an overview of the top 10 assets in our portfolio as of March 31, 2024 (based on gross book value and excluding unfunded commitments):

Rent Escalation

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Fixed with Inflation Adjustments

Park Hotels Portfolio (3)

20 Cambridgeside

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Fixed with Inflation Adjustments

Park Hotels Portfolio (3)

Fixed with Inflation Adjustments

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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 September 30, 2023, excluding unfunded commitments:

The following tables show our portfolio by top 10 markets and property type as of March 31, 2024, 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 September 30, 2023, we had $190.6 million of such commitments, excluding commitments to be funded by noncontrolling interests.

As of March 31, 2024, we had $70.2 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 September 30, 2023, we had an

aggregate $283.6 million of such commitments.

As of March 31, 2024, we had an aggregate

$262.5 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 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

As of March 31, 2024, we had $105.9 million of such commitments.

Results of Operations for the Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023

For the Three Months Ended

September 30,

(in thousands)

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General and administrative (1)

Impairment of goodwill

Provision for credit losses

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Total costs and expenses

Gain on sale of net investment in lease

Earnings from equity method investments

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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.

Interest income from sales-type leases increased to $63.2 million for the three months ended March 31, 2024 from $57.1 million for the same period in 2023.

The increase was due primarily to acquisitions of Ground Leases and additional fundings on existing Ground Leases classified as sales-type leases and Ground Lease receivables.

Operating lease income increased to $21.0 million during the three months ended March 31, 2024 from $20.9 million for the same period in 2023.

The slight increase was due primarily to an increase in percentage rent, which was partially offset by a decrease in recovery income at certain properties.

Interest income – related party was $2.4 million for the three months ended March 31, 2024 and relates to the Star Holdings Term Loan Facility.

Other income for the three months ended March 31, 2024 includes $5.5 million of management fees from Star Holdings.

In addition, other income for both the three months ended March 31, 2024 and 2023 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 March 31, 2024 and 2023 also includes $1.0 million and $0.3 million, respectively, of other ancillary income from our investments.

The increase in other ancillary income in 2024 as compared to 2023 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 September 30, 2023 as compared to $2.4 million for the same period in 2022.

During the three months ended March 31, 2024 and 2023, we incurred interest expense from our debt obligations of $48.6 million and $40.9 million, respectively.

The increase in 2024 was primarily the result of additional borrowings on our 2021 Unsecured Revolver, which also accrued interest at higher rates in 2024 due to an increase in base interest rates, and interest expense on our trust preferred securities and our 6.10% Notes.

Real estate expense was $1.1 million and $1.2 million during the three months ended March 31, 2024 and 2023, 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 March 31, 2024 and 2023, 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 decrease in 2024 was primarily the result of a decrease in legal costs at certain of our properties and a decrease in recoverable property taxes.

Depreciation and amortization was $2.5 million during the three months ended March 31, 2024 as compared to $2.4 million for the same period in 2023.

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 corporate fixed assets acquired in the Merger.

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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 September 30, 2023 and 2022 ($ in thousands):

The following table presents our general and administrative expenses for the three months ended March 31, 2024 and 2023 ($ in thousands):

For the Three Months Ended

September 30,

Public company and other costs (1)

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Total general and administrative expenses (4)

(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 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)

Interest income from sales-type leases

Operating lease income

Interest income - related party

Total revenues

Interest expense

Real estate expense

Depreciation and amortization

General and administrative

Impairment of goodwill

Provision for credit losses

Other expense

Total costs and expenses

Gain on sale of net investment in lease

Earnings from equity method investments

Net income (loss) before income taxes

Income tax expense

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 $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 $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

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 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.

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.

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)

Stock-based compensation (2)

Management fees (3)

Expense reimbursements to the Manager (3)

Total general and administrative expenses

(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.

(1) For the three months ended March 31, 2024, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

(2) For the three months ended March 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.

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 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.

(4) For the three months ended March 31, 2024, general and administrative expenses were partially offset by $5.5 million of management fees earned from Star Holdings, which are included in “Other income” in our consolidated statements of operations.

During the three months ended March 31, 2024, we recorded a provision for credit losses of $0.7 million.

The provision was primarily the result of current market conditions, including an increase in our Ground Lease to cost value ratios on our Ground Lease portfolio.

During the three months ended March 31, 2023, we recorded a provision for credit losses of $2.2 million.

The provision was primarily the result of the adoption of a new accounting standard in 2023 which resulted in a $2.3 million provision on our loan receivable.

D uring the three months ended March 31, 2024, other expense consists primarily of costs related to our derivative transactions .

During the three months ended March 31, 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 three months ended March 31, 2024, 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 $0.9 million share of income from the Ground Lease Plus Fund and our $3.7 million share of income from the Leasehold Loan Fund.

During the three months ended March 31, 2023, 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 March 31, 2024, we recorded consolidated income tax expense of $0.5 million, of which $0.4 million was attributable to our taxable REIT subsidiary (“TRS”).

Included in our consolidated income tax expense, our TRS recorded a deferred tax expense in the amount of $0.9 million.

The net deferred tax expense relates

primarily to equity-based compensation expense and utilization of net operating loss carryovers to which our TRS is a successor.

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+.

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”).

Our most recent issuance in May 2022 features a stairstep coupon structure (refer to Note 8 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 100 basis points, with a maturity of July 31, 2025.

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.

In April 2024, we closed on a new $2.0 billion unsecured revolving credit facility (the “2024 Unsecured Revolver”), which replaces our 2021 Unsecured Revolver and 2023 Unsecured Revolver (refer to Note 9 to the consolidated financial statements).

The 2024 Unsecured Revolver has a borrowing rate of Adjusted SOFR, as defined in the applicable agreement, plus 0.85%, subject to our credit ratings, with an extended maturity date of May 1, 2029, which includes two six-month extension options.

The 2024 Unsecured Revolver replaces our nearest term maturities, reduces the overall facility cost and increases our liquidity by $150 million.

Additionally, we will gain greater financial flexibility through changes to certain financial covenants.

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.

Our primary uses of cash to date have been the acquisition/origination of Ground Leases, repayments on our debt facilities and distributions to our shareholders.

In the second quarter 2021, the fourth quarter 2021, the first quarter 2022, the second quarter 2022 and the first quarter of 2024, we issued five tranches of unsecured notes with varying fixed-rates and maturities ranging from June 2031 to May 2052 (collectively the “Notes”).

Our 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 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.

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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.

We expect our short-term liquidity requirements to include debt service on our debt obligations (refer to Note 8 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 8 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 9 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.

As of March 31, 2024, we had not sold any shares under the ATM.

As of March 31, 2024, we had $11 million of unrestricted cash.

We also have an aggregate $1.1 billion of undrawn capacity on our new 2024 Unsecured Revolver (refer to Note 15 to the consolidated financial statements).

We refer to this unrestricted cash and additional borrowing capacity on our 2024 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 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 and Note 15 to the consolidated financial statements), distributions to our shareholders, redemption of Caret units (refer to Note 3 and Note 15 to the consolidated financial statements) 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 and Note 15 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 2024 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 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

The following table outlines our cash flows provided by (used in) operating activities, cash flows used in investing activities and cash flows provided by financing activities for the three months ended March 31, 2024 and 2023 ($ in thousands):

For the Three Months Ended

Cash flows used in operating activities

Cash flows used in investing activities

Cash flows provided by financing activities

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.

The decrease in cash flows used in operating activities during 2024 was due primarily to the payment of Merger expenses during the three months ended March 31, 2023, which was partially offset by the payment of annual performance awards during the three months ended March 31, 2024.

The decrease in cash flows used in investing activities during 2024 was due primarily to the origination of the Star Holdings Term Loan Facility in 2023, consideration paid in connection with the Merger in 2023 and an increase in net distributions received from equity method investments in 2024, which was partially offset by an increase in the funding of Ground Leases in 2024.

The decrease in cash flows provided by financing activities during 2024 was due primarily to a decrease in net borrowings on debt obligations.

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 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).

As of March 31, 2024, 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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For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.

Allowance for credit losses on net investment in sales-type leases and Ground Lease receivables —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 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 our Expected Loss on our loans receivable 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.

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.

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, 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.

For a discussion of other critical accounting policies, refer to Note 3 to the consolidated financial statements and our 2022 Annual Report and our Current Report on Form 8-K filed with the SEC on April 4, 2023.

For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements of our 2023 Annual Report.

New Accounting Pronouncements —For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements.

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