Item 1. Business
Item 1. Business
Explanatory Note for Purposes of the "Safe Harbor Provisions" of Section 21E of the Securities Exchange Act of 1934, as amended
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are included with respect to, among other things, iStar Inc.’s (the “Company’s”) current business plan, including the planned Merger with Safehold Inc. (“SAFE”) and the Spin-Off and related transactions (refer to “Business – Overview” and Note 1 to the consolidated financial statements), business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that iStar Inc. believes might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. 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-K.
Overview
iStar Inc. (references to the "Company," "we," "us" or "our" refer to iStar Inc.) finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. The Company also manages entities focused on ground lease ("Ground Lease") investments. The Company has invested over $40 billion over the past two decades and is structured as a real estate investment trust ("REIT") with a diversified portfolio focused on larger assets located in major metropolitan markets. The Company’s primary reportable business segments are net lease (refer to note 3 to the consolidated financial statements), real estate finance, operating properties and land and development.
Merger with Safehold Inc. On August 10, 2022, we entered into an Agreement and Plan of Merger (the “ Merger Agreement ”) with Safehold Inc. (“SAFE”) pursuant to which SAFE will merge with and into the Company (the " Merger "), with the Company surviving the Merger and changing its name to Safehold Inc. (“ New SAFE ”). New SAFE's shares of common stock will trade on the New York Stock Exchange under the symbol “SAFE.” We currently expect that the Merger will close in the first half of 2023. In the Merger and related transactions, each outstanding share of common stock of SAFE will be converted into one share of common stock of New Safe. Each outstanding share of common stock of the Company will undergo a reverse split and will be converted into a fraction of a share of New Safe common stock based on the number of shares of Safe common stock held by the Company at the time of the reverse split, after giving effect to certain adjustments. Each outstanding share of preferred stock of the Company will be converted into a cash amount equal to the liquidation preference of the share plus accrued and unpaid dividends to and including the closing date of the Merger.
Shortly before the closing of the Merger, the Company intends to separate its remaining legacy non-ground lease assets and businesses into a separate public company (“ Star Holdings ”) by distributing to the Company’s stockholders, on a pro rata basis, the issued and outstanding equity interests of Star Holdings (the “ Spin-Off ”).
If the Merger, Spin-Off and related transactions are completed, the Company's business thereafter will be focused on its Ground Lease and Ground Lease-adjacent businesses. Completion of the Merger, Spin-Off and related transactions is subject to a number of conditions, some of which are outside of our control, including, without limitation, approval of the stockholders of each of the Company and SAFE, and there can be no assurance that they will close within our currently anticipated time frame or at all. See note 1 to the consolidated financial statements and "Risk Factors – Risks Related to the Merger and Related Transactions" for more information. In addition, the Company has filed a joint proxy
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statement/prospectus with the Securities and Exchange Commission with respect to the special meeting of the Company's stockholders to consider and approve the Merger.
The Company’s primary sources of revenues and earnings in 2022 were rent and reimbursements that tenants pay to lease the Company’s properties, interest that borrowers pay on loans, land development revenue from condo, lot and parcel sales, income from our operating properties, proceeds from asset sales and income from management fees and equity investments.
Our Portfolio. As of December 31, 2022, based on our book value, our total investment portfolio has the following property/collateral type characteristics ($ in thousands):
Property/Collateral
Net
Real Estate
Operating
Land &
% of
Types
Lease
Finance
Properties
Development
Corporate
Total
Total
Ground Leases
$
1,302,877
$
—
$
—
$
—
$
—
$
1,302,877
74.0
%
Land and Development
—
—
—
207,997
—
207,997
11.8
%
Multifamily
—
39,304
36,382
—
—
75,686
4.3
%
Hotel
—
12,893
61,863
—
—
74,756
4.2
%
Retail
—
37,650
371
8,784
—
46,805
2.7
%
Condominium
—
6,665
—
15,233
—
21,898
1.2
%
Office
—
15,183
—
—
—
15,183
0.9
%
Entertainment / Leisure
—
—
14,262
—
—
14,262
0.8
%
Other Property Types
—
—
—
—
11
11
—
%
Total
$
1,302,877
$
111,695
$
112,878
$
232,014
$
11
$
1,759,475
100.0
%
Percentage of Total
74%
6%
6%
13%
<1%
100%
Net Lease : In March 2022, we, through certain subsidiaries of ours and entities managed by us, sold our portfolio of net lease assets for an aggregate gross sales price of $3.07 billion (the “Net Lease Sale”). Refer also to Note 3 to the consolidated financial statements.
The portfolio sold consisted of office, entertainment and industrial properties located in the United States comprising approximately 18.3 million square feet. It included assets wholly-owned by us and assets owned by two joint ventures managed by us and in which we owned 51.9% interests. At the time of the sale, the portfolio was encumbered by an aggregate of $702.0 million of mortgage indebtedness, including indebtedness of equity method investments, which was repaid with proceeds from the sale. After repayment of the mortgage indebtedness and prepayment penalties, repayment of our Senior Term Loan (refer to Note 10 to the consolidated financial statements), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, we retained net cash proceeds of $1.2 billion from the transaction. Two net lease properties were not included in the sale but were sold to other third parties in the first quarter 2022. Our net lease assets associated with our Ground Lease businesses were not included in the sale.
Prior to the Net Lease Sale, our net lease business created stable cash flows through long-term net leases primarily to single tenants on our properties. We targeted mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combined our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance).
After the Net Lease Sale, the net lease segment includes our Ground Lease investments made primarily through Safehold Inc. ("SAFE"), a publicly traded REIT focused exclusively on Ground Leases that we launched in 2017 and manage pursuant to a management agreement, and our Ground Lease adjacent businesses. As of December 31, 2022, we owned approximately 54.3% of SAFE’s outstanding common stock.
Real Estate Finance : The real estate finance portfolio is comprised of leasehold loans (including leasehold loans to SAFE’s tenants) and senior and subordinated loans to business entities and may be either secured or unsecured. The
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Company’s loan portfolio includes whole loans and loan participations. The Company’s real estate loans may be either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers.
Operating Properties : The operating properties portfolio is comprised of commercial and residential properties, which represent a pool of assets across a range of geographies and property types. The Company generally seeks to reposition or redevelop its transitional properties with the objective of maximizing their value through the infusion of capital and/or concentrated asset management efforts. The commercial properties within this portfolio include hotel, multifamily, entertainment/leisure, retail and other property types. The residential properties within this portfolio are comprised of single-family homes that the Company intends to sell through retail channels.
Land & Development : The land and development portfolio is primarily comprised of land entitled for master planned communities and waterfront and urban infill land parcels located throughout the United States. Master planned communities represent large-scale residential projects that the Company will entitle, plan and/or develop and may sell through retail channels to homebuilders or in bulk ("MPCs"). The communities also typically have a smaller portion of their land reserved for future commercial development. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. The Company may develop these properties itself, or in partnership with commercial real estate developers, or may sell the properties.
Investment Strategy
Throughout our history, we have focused on providing capital to the commercial real estate sector in a differentiated way that emphasizes custom-tailored solutions over commoditized products. We have adjusted the allocation of our capital and resources from time to time based on market conditions. Our Ground Lease strategy is the most recent example of our approach. We believe that investment and financing opportunities in the Ground Lease sector currently offer more attractive risk adjusted returns than other investment opportunities, and should enable us to benefit from the unique insights and competitive advantages we have gained through SAFE.
We have been actively transitioning our portfolio to be primarily focused on Ground Lease and Ground Lease adjacent investments, held directly and through our investment in SAFE. In furtherance of this objective, we completed the Net Lease Sale in March 2022 and have significantly reduced the level of our "legacy assets," which refer primarily to properties that we took back from defaulting borrowers in the financial crisis. As we sell these assets, we expect to use the net proceeds primarily to make additional investments in our Ground Lease business, to repay indebtedness and for general corporate purposes.
Financing Strategy
We use leverage to enhance our return on assets. As of December 31, 2022 our principal financing sources are unsecured bonds issued in capital markets transactions and trust preferred securities. Beginning in April 2022 and continuing through September 2022, we completed separate, privately-negotiated transactions with holders of our 3.125% convertible notes in which the noteholders exchanged their convertible notes with us for newly issued shares of our common stock and cash (refer to Note 10 to the consolidated financial statements). We also repaid $0.5 million principal amount of our 3.125% convertible notes for cash at maturity.
We have covenanted to redeem all of our outstanding preferred stock at the liquidation preference per share plus accrued and unpaid dividends and to retire all of our remaining senior unsecured notes in connection with the Merger. A more detailed discussion of the Company’s current liquidity and capital resources is provided in Item 7—"Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Underwriting Process
The Company reviews investment opportunities with its investment professionals, as well as representatives from its legal, credit, risk management and capital markets departments. The Company has developed a process for screening potential investments called the Six Point Methodology sm . Through this proprietary process, the Company internally evaluates an investment opportunity by: (1) evaluating the source of the opportunity; (2) evaluating the quality of the collateral, corporate credit or lessee, as well as the market and industry dynamics; (3) evaluating the borrower equity,
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corporate sponsorship and/or guarantors; (4) determining the optimal legal and financial structure for the transaction given its risk profile; (5) performing an alternative investment test; and (6) evaluating the liquidity of the investment. The Company uses a similar screening methodology for leasehold loans to tenants of SAFE and related party transactions with SAFE. The Company maintains an internal investment committee, and certain investments, including related party transactions and leasehold loans to tenants of SAFE, are subject to the approval of the Board of Directors or a committee thereof.
Hedging Strategy
The Company finances its business with a combination of fixed-rate and variable-rate debt and its asset base consists of fixed-rate and variable-rate investments. Its variable-rate assets and liabilities are intended to be matched against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending assets and pays less on its variable-rate debt obligations. When the Company’s variable-rate debt obligations differ from its variable-rate lending assets, the Company may utilize derivative instruments to limit the impact of changing interest rates on its net income. The Company may also use derivative instruments to limit its exposure to changes in currency rates in respect of certain investments denominated in foreign currencies. The derivative instruments the Company uses are typically in the form of interest rate swaps, interest rate caps and foreign exchange contracts.
Investment Restrictions or Limitations
The Company does not have any prescribed allocation among investments or product lines. Instead, the Company focuses on corporate and real estate credit underwriting to develop an analysis of the risk/reward trade-offs in determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Company engages primarily in the non-investment company businesses of investing in, financing and developing real estate and real estate-related projects, generally through subsidiaries and affiliated companies, including SAFE. Subject to applicable limitations resulting from the Company’s intentions to continue to qualify as a REIT and remain exempt from registration as an investment company, the Company may make additional investments in the securities of other REITs, other entities engaged in real estate activities or other issuers, including for the purpose of exercising control over such entities.
Competition
The Company operates in a competitive market. See Item 1A—Risk factors—"We compete with a variety of financing and leasing sources for our customers," for a discussion of how we may be affected by competition.
Regulation
The operations of the Company are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates, finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; (5) set collection, foreclosure, repossession and claims-handling procedures and other trade practices; (6) govern privacy of customer information; and (7) regulate anti-terror and anti-money laundering activities. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans.
In the judgment of management, the Company’s compliance with existing statutes and regulations, including environmental regulations, is not currently expected to have a material effect on the Company’s capital expenditures, earnings and competitive position. It is not possible at this time to forecast the exact nature of any future legislation,
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regulations, judicial decisions, orders or interpretations, nor their impact upon the future capital expenditures, earnings or competitive position of the Company.
The Company has elected and expects to continue to qualify to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company must generally distribute at least 90% of its net taxable income, excluding capital gains, to its shareholders each year. In addition, the Company must distribute 100% of its net taxable income (including net capital gains) each year to eliminate U.S. corporate federal income taxes payable by it. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT qualification. These requirements include specific share ownership tests and asset and gross income tests. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its net taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes and to U.S. federal income tax and excise tax on its undistributed income.
Code of Conduct
The Company has adopted a code of conduct that sets forth the principles of conduct and ethics to be followed by our directors, officers and employees (the "Code of Conduct"). The purpose of the Code of Conduct is to promote honest and ethical conduct, compliance with applicable governmental rules and regulations, full, fair, accurate, timely and understandable disclosure in periodic reports, prompt internal reporting of violations of the Code of Conduct and a culture of honesty and accountability. A copy of the Code of Conduct has been provided to each of our directors, officers and employees, who are required to acknowledge that they have received and will comply with the Code of Conduct. A copy of the Company’s Code of Conduct has been previously filed with the SEC and is incorporated by reference in this Annual Report on Form 10-K as Exhibit 14.0. The Code of Conduct is also available on the Company’s website at www.istar.com . The Company will disclose to shareholders material changes to its Code of Conduct, or any waivers for directors or executive officers, if any, within four business days of any such event. As of December 31, 2022, there have been no amendments to the Code of Conduct and the Company has not granted any waivers from any provision of the Code of Conduct to any directors or executive officers.
Employees and Human Capital Resources
Central to our business strategy is attracting, developing and retaining a talented, diverse and engaged workforce to drive our success. As of December 31, 2022, the Company had 118 employees. The Company believes it has good relationships with its employees. Substantially all of our employees are full time employees and they are not represented by any collective bargaining agreements.
As we have transitioned the focus of our business to growing our Ground Lease platform, we have sought to recruit new talent and provide training to existing employees to support our business strategy. In our recruiting efforts, we generally strive to have a diverse group of candidates to consider for roles. We have designed a compensation structure, including an array of benefits, that we believe is attractive to current and prospective personnel. We also offer our professionals the opportunity to participate in a variety of development programs, including discussions led by outside speakers on topics of interest and a learning management tool that enables employees and their managers to select courses that enhance professional development.
In March 2022, we sold our net lease portfolio and in August 2022, we and SAFE announced the proposed Merger, Spin-Off and related transactions. In light of these transactions, we have reduced and may continue to reduce the number of our employees.
We maintain a number of health and wellness programs to support the welfare of our people. These programs include an employee assistance program that offers confidential assessment, counseling and referral services at no cost to the employee. We seek to provide a safe workplace for our employees. In addition to the safety protocols that we instituted in response to the pandemic, we have established emergency procedures that address emergency health and safety situations.
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Additional Information
We maintain a website at www.istar.com . The information on our website is not incorporated by reference in this report, and our web address is included only as an inactive textual reference. In addition to this Annual Report on Form 10-K, the Company files quarterly and special reports, proxy statements and other information with the SEC. Through the Company’s corporate website, www.istar.com , the Company makes available free of charge its annual proxy statement, annual reports to shareholders, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system via electronic means, including on the SEC’s homepage, which can be found at www.sec.gov .