What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-04-28 · 130 added, 61 removed, 246 unchanged (44% of the section changed)

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

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

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

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

As of March 31, 2023, the percentage breakdown of the gross book value of our portfolio was 44% office, 37% multi-family, 12% hotels, 4% life science and 3% mixed use and other.

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

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

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however, in the event cumulative inflation growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation.

In January 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 continue to raise interest rates in 2023.

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

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

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.

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.

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” 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.

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

March 31, 2023

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

June 30, 2023

December 31, 2022

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Unrealized Capital Appreciation in Our Owned Residual Portfolio

(1) Please review our Current Report on Form 8-K filed on April 26, 2023 for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of UCA.

(1) Please review our Current Report on Form 8-K filed on August 1, 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 our applicable percentage interests in our unconsolidated ventures and $1,375.4 million and $1,653.2 million related to transactions with remaining unfunded commitments as of March 31, 2023 and December 31, 2022, respectively.

Ground Lease Cost includes our applicable percentage interests in our unconsolidated ventures and $238.3 million and $308.2 million of unfunded commitments as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023, our gross book value as a percentage of combined property value was 42%.

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

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

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

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

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

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

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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 have entered into re-vesting agreements pursuant to which the executives have 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, 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”).

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 immediately following the Merger, 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 March 31, 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 a result, the Company currently owns the remaining 82.2% of the outstanding Caret units.

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

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

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

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.

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

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

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The transaction generated a net book gain for us of approximately $46.4 million.

After paying closing

costs, establishing reserves for Caret-related expenses and deducting the original $76.7 million cost basis to us, the remaining proceeds have been distributed approximately 84% to Old SAFE and approximately 16% to the minority holders of Caret units.

After paying closing costs, establishing reserves for Caret-related expenses and deducting the original $76.7 million cost basis to us, the remaining proceeds have been distributed approximately 84% to Old SAFE and approximately 16% to the minority holders of Caret units.

In addition, the affiliates of MSD Partners received a credit against their purchase price for Caret units equal to the amount they would have received had they held Caret units at the time of the distribution.

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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 March 31, 2023, our estimated portfolio Ground Rent Coverage was 3.9x (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 March 31, 2023 (based on gross book value and excluding unfunded commitments):

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

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

Rent Escalation

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Fixed with Inflation Adjustments

685 Third Avenue

Fixed with Inflation Adjustments

20 Cambridgeside

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Fixed with Inflation Adjustments

685 Third Avenue

Fixed with Inflation Adjustments

1111 Pennsylvania Avenue

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

The following tables show our portfolio by top 10 markets and property type as of March 31, 2023, excluding unfunded commitments:

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

Manhattan (1)

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

As of March 31, 2023, we had $238.3 million of such commitments.

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

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

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

As of March 31, 2023, we had an aggregate

As of June 30, 2023, we had an aggregate

$271.2 million of such commitments.

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We refer to these arrangements as performance-based commitments.

As of March 31, 2023, we had $139.8 million of such commitments.

Results of Operations for the Three Months Ended March 31, 2023 compared to the Three Months Ended March 31, 2022

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

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

For the Three Months Ended

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Operating lease income

Interest income - related party

Total revenues

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Earnings from equity method investments

Interest income from sales-type leases increased to $57.1 million for the three months ended March 31, 2023 from $43.0 million for the same period in 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 $20.9 million during the three months ended March 31, 2023 from $17.0 million for the same period in 2022.

The increase was due primarily to a $2.9 million increase in percentage rent, which was primarily attributable to our Park Hotels Portfolio for which we recognized no percentage rent in 2022.

Other income for both the three months ended March 31, 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 March 31, 2023 and 2022 also includes $0.3 million and $0.3 million, respectively, of interest income on our cash and other ancillary income from our investments.

During the three months ended March 31, 2023 and 2022, we incurred interest expense from our debt obligations of $40.9 million and $25.3 million, respectively.

Net income before income taxes

Income tax expense

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

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

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

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

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

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

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

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

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

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

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

Real estate expense was $1.2 million and $0.7 million during the three months ended March 31, 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 March 31, 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.

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

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

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

Depreciation and amortization was $2.4 million and $2.4 million during the three months ended March 31, 2023 and 2022, respectively, and primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property and the amortization of in-place lease assets.

General and administrative expenses include 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 March 31, 2023 and 2022 ($ in thousands):

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

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

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

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

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

For the Three Months Ended

Public company and other costs (1)

Stock-based compensation

Management fees (2)

Expense reimbursements to the Former Manager (2)

Total general and administrative expenses

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

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

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

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

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

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

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

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

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

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

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

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

For the Six Months Ended

(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

Provision for credit losses

Other expense

Total costs and expenses

Earnings from equity method investments

Net income before income taxes

Income tax expense

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the Six Months Ended

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 six months ended June 30, 2023, public company and other costs primarily includes compensation, legal, insurance and occupancy costs.

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

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

(2) For the three months ended March 31, 2023, relates primarily to the accelerated vesting of iStar’s equity-based compensation plans in connection with the Merger.

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 (refer to Note 3 to the consolidated financial statements) in 2023 which resulted in a $2.3 million provision on our loan receivable.

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, 2022, other expense consists primarily of fees related to our derivative transactions .

The increase during the three months ended March 31, 2023 was primarily due to legal and consulting costs and transfer taxes incurred in connection with the Merger.

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, 2022, earnings from equity method investments resulted from our $0.9 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 six months ended June 30, 2023, we recorded a provision for credit losses of $2.3 million.

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

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

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

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

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

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

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

Liquidity and Capital Resources

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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.

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”).

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

As of March 31, 2023, we had $20 million of unrestricted cash and an aggregate $880 million of undrawn capacity on our 2021 Unsecured Revolver and 2023 Unsecured Revolver.

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

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

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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, 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.

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 three months ended March 31, 2023 and 2022 ($ in thousands):

For the Three Months Ended

The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the six months ended June 30, 2023 and 2022 ($ in thousands):

For the Six Months Ended

Cash flows (used in) provided by operating activities

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Cash flows provided by financing activities

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

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 and consideration

paid in connection with the Merger.

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

The decrease in cash flows 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.

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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 March 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).

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

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 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.

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.

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

We analyze our portfolio of Ground Leases based on whether the property is a stabilized property or a development project.

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

a stabilized property or a development project.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis