UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
| (Mark One) | |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017 |
March 31, 2020 |
| OR |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File No. 1-15371
iStar Inc.
(Exact name of registrant as specified in its charter)
|
| | | | |
Maryland | | 95-6881527 |
| (State or other jurisdiction of incorporation or organization) | | 95-6881527
(I.R.S. Employer Identification Number) |
1114 Avenue of the Americas, 39th39th Floor | | |
New York | , | NY | | 10036 |
| (Address of principal executive offices) | | 10036
(Zip code) |
Registrant's telephone number, including area code: (212) (212) 930-9400
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | | | |
Large accelerated filer ýAccelerated Filer | | Accelerated Filer | | Accelerated filer oNon‑accelerated Filer
| | Smaller Reporting Company | | Emerging Growth Company |
| ☒ | | ☐
| | Non-accelerated filer o☐
(Do not check if a
smaller reporting company)
| | Smaller reporting company o
☐ | | Emerging growth company o
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | STAR | | New York Stock Exchange |
8.00% Series D Cumulative Redeemable Preferred Stock, $0.001 par value | | STAR-PD | | New York Stock Exchange |
7.65% Series G Cumulative Redeemable Preferred Stock, $0.001 par value | | STAR-PG | | New York Stock Exchange |
7.50% Series I Cumulative Redeemable Preferred Stock, $0.001 par value | | STAR-PI | | New York Stock Exchange |
As of November 1, 2017,April 28, 2020, there were 68,200,01576,494,506 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
TABLE OF CONTENTS
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
iStar Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
| | | | As of | As of |
| | September 30, 2017 (unaudited) | | December 31,
2016 | March 31,
2020 | | December 31,
2019 |
| ASSETS | | | | | | |
| Real estate | | | | | | |
| Real estate, at cost | $ | 1,687,318 |
| | $ | 1,740,893 |
| $ | 1,737,041 |
| | $ | 1,761,079 |
|
| Less: accumulated depreciation | (363,456 | ) | | (353,619 | ) | (235,952 | ) | | (233,860 | ) |
| Real estate, net | 1,323,862 |
| | 1,387,274 |
| 1,501,089 |
| | 1,527,219 |
|
| Real estate available and held for sale | 65,658 |
| | 237,531 |
| 34,391 |
| | 8,650 |
|
| Total real estate | 1,389,520 |
| | 1,624,805 |
| 1,535,480 |
| | 1,535,869 |
|
| Net investment in leases ($10,403 of allowances as of March 31, 2020) | | 409,976 |
| | 418,915 |
|
| Land and development, net | 861,507 |
| | 945,565 |
| 514,064 |
| | 580,545 |
|
| Loans receivable and other lending investments, net | 1,109,442 |
| | 1,450,439 |
| |
| Loans receivable and other lending investments, net ($33,264 and $28,634 of allowances as of March 31, 2020 and December 31, 2019, respectively) | | 850,835 |
| | 827,861 |
|
| Other investments | 289,037 |
| | 214,406 |
| 1,029,552 |
| | 907,875 |
|
| Cash and cash equivalents | 1,912,448 |
| | 328,744 |
| 371,293 |
| | 307,172 |
|
| Accrued interest and operating lease income receivable, net | 10,849 |
| | 11,254 |
| 10,036 |
| | 10,162 |
|
| Deferred operating lease income receivable, net | 87,696 |
| | 88,189 |
| 48,812 |
| | 54,222 |
|
| Deferred expenses and other assets, net | 134,720 |
| | 162,112 |
| 452,533 |
| | 442,488 |
|
| Total assets | $ | 5,795,219 |
| | $ | 4,825,514 |
| $ | 5,222,581 |
| | $ | 5,085,109 |
|
| LIABILITIES AND EQUITY | | | | | | |
| Liabilities: | | | | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 466,374 |
| | $ | 211,570 |
| $ | 441,324 |
| | $ | 424,374 |
|
| Liabilities associated with properties held for sale | | 61 |
| | 57 |
|
| Loan participations payable, net | 122,489 |
| | 159,321 |
| 37,767 |
| | 35,638 |
|
| Debt obligations, net | 4,278,954 |
| | 3,389,908 |
| 3,583,360 |
| | 3,387,080 |
|
| Total liabilities | 4,867,817 |
| | 3,760,799 |
| 4,062,512 |
| | 3,847,149 |
|
| Commitments and contingencies (refer to Note 11) | — |
| | — |
| |
| Redeemable noncontrolling interests | 3,513 |
| | 5,031 |
| |
| Commitments and contingencies (refer to Note 12) | |
|
| |
|
|
| Equity: | | | | | | |
| iStar Inc. shareholders' equity: | | | | | | |
| Preferred Stock Series D, E, F, G and I, liquidation preference $25.00 per share (refer to Note 13) | 12 |
| | 22 |
| |
| Convertible Preferred Stock Series J, liquidation preference $50.00 per share (refer to Note 13) | 4 |
| | 4 |
| |
| Common Stock, $0.001 par value, 200,000 shares authorized, 68,200 and 72,042 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 68 |
| | 72 |
| |
| Preferred Stock Series D, G and I, liquidation preference $25.00 per share (refer to Note 14) | | 12 |
| | 12 |
|
| Common Stock, $0.001 par value, 200,000 shares authorized, 77,059 and 77,810 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | | 77 |
| | 78 |
|
| Additional paid-in capital | 3,357,489 |
| | 3,602,172 |
| 3,275,055 |
| | 3,284,877 |
|
| Retained earnings (deficit) | (2,465,654 | ) | | (2,581,488 | ) | |
| Accumulated other comprehensive income (loss) (refer to Note 13) | (3,830 | ) | | (4,218 | ) | |
| Accumulated deficit | | (2,247,504 | ) | | (2,205,838 | ) |
| Accumulated other comprehensive loss (refer to Note 14) | | (59,522 | ) | | (38,707 | ) |
| Total iStar Inc. shareholders' equity | 888,089 |
| | 1,016,564 |
| 968,118 |
| | 1,040,422 |
|
| Noncontrolling interests | 35,800 |
| | 43,120 |
| 191,951 |
| | 197,538 |
|
| Total equity | 923,889 |
| | 1,059,684 |
| 1,160,069 |
| | 1,237,960 |
|
| Total liabilities and equity | $ | 5,795,219 |
| | $ | 4,825,514 |
| $ | 5,222,581 |
| | $ | 5,085,109 |
|
Note - Refer to Note 2 for details on the Company's consolidated variable interest entities ("VIEs").
The accompanying notes are an integral part of the consolidated financial statements.
iStar Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Revenues: | | | |
| Operating lease income | $ | 47,346 |
| | $ | 58,915 |
|
| Interest income | 17,216 |
| | 20,375 |
|
| Interest income from sales-type leases | 8,355 |
| | — |
|
| Other income | 20,368 |
| | 14,813 |
|
| Land development revenue | 80,176 |
| | 12,699 |
|
| Total revenues | 173,461 |
| | 106,802 |
|
| Costs and expenses: | | | |
| Interest expense | 43,392 |
| | 46,577 |
|
| Real estate expense | 22,498 |
| | 25,940 |
|
| Land development cost of sales | 77,059 |
| | 14,449 |
|
| Depreciation and amortization | 14,486 |
| | 15,668 |
|
| General and administrative | 34,271 |
| | 21,099 |
|
| Provision for (recovery of) loan losses | 4,003 |
| | (97 | ) |
| Provision for losses on net investment in leases | 1,292 |
| | — |
|
| Impairment of assets | 1,708 |
| | 3,851 |
|
| Other expense | 74 |
| | 508 |
|
| Total costs and expenses | 198,783 |
| | 127,995 |
|
| Income from sales of real estate | — |
| | 9,407 |
|
| Loss from operations before earnings from equity method investments and other items | (25,322 | ) | | (11,786 | ) |
| Loss on early extinguishment of debt, net | (4,115 | ) | | (468 | ) |
| Earnings (losses) from equity method investments | 16,612 |
| | 5,309 |
|
| Net loss before income taxes | (12,825 | ) | | (6,945 | ) |
| Income tax expense | (60 | ) | | (25 | ) |
| Net loss | (12,885 | ) | | (6,970 | ) |
| Net (income) attributable to noncontrolling interests | (2,691 | ) | | (2,471 | ) |
| Net loss attributable to iStar Inc. | (15,576 | ) | | (9,441 | ) |
| Preferred dividends | (5,874 | ) | | (8,124 | ) |
| Net loss allocable to common shareholders | $ | (21,450 | ) | | $ | (17,565 | ) |
| Per common share data: | | | |
| Net loss allocable to common shareholders: | | | |
| Basic | $ | (0.28 | ) | | $ | (0.26 | ) |
| Diluted | $ | (0.28 | ) | | $ | (0.26 | ) |
| Weighted average number of common shares: | | | |
| Basic | 77,444 |
| | 67,747 |
|
| Diluted | 77,444 |
| | 67,747 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues: | | | | | | | |
| Operating lease income | $ | 47,806 |
| | $ | 46,800 |
| | $ | 142,155 |
| | $ | 147,270 |
|
| Interest income | 25,442 |
| | 32,258 |
| | 83,145 |
| | 99,877 |
|
| Other income | 20,662 |
| | 13,442 |
| | 172,037 |
| | 35,079 |
|
| Land development revenue | 25,962 |
| | 31,554 |
| | 178,722 |
| | 74,389 |
|
| Total revenues | 119,872 |
| | 124,054 |
| | 576,059 |
| | 356,615 |
|
| Costs and expenses: | | | | | | | |
| Interest expense | 48,732 |
| | 55,105 |
| | 148,684 |
| | 168,173 |
|
| Real estate expense | 36,280 |
| | 35,243 |
| | 106,554 |
| | 104,815 |
|
| Land development cost of sales | 27,512 |
| | 22,004 |
| | 165,888 |
| | 50,842 |
|
| Depreciation and amortization | 11,846 |
| | 12,201 |
| | 37,297 |
| | 39,781 |
|
| General and administrative | 20,955 |
| | 19,666 |
| | 73,347 |
| | 62,433 |
|
| (Recovery of) provision for loan losses | (2,600 | ) | | (14,955 | ) | | (8,128 | ) | | (12,749 | ) |
| Impairment of assets | 595 |
| | 8,741 |
| | 15,292 |
| | 11,753 |
|
| Other expense | 2,704 |
| | 819 |
| | 20,849 |
| | 4,741 |
|
| Total costs and expenses | 146,024 |
| | 138,824 |
| | 559,783 |
| | 429,789 |
|
| Income (loss) before earnings from equity method investments and other items | (26,152 | ) | | (14,770 | ) | | 16,276 |
| | (73,174 | ) |
| Loss on early extinguishment of debt, net | (616 | ) | | (36 | ) | | (4,142 | ) | | (1,618 | ) |
| Earnings from equity method investments | 2,461 |
| | 26,540 |
| | 13,677 |
| | 74,254 |
|
| Income (loss) from continuing operations before income taxes | (24,307 | ) | | 11,734 |
| | 25,811 |
| | (538 | ) |
| Income tax (expense) benefit | 1,278 |
| | 8,256 |
| | (972 | ) | | 9,859 |
|
| Income (loss) from continuing operations | (23,029 | ) | | 19,990 |
| | 24,839 |
| | 9,321 |
|
| Income from discontinued operations | — |
| | 3,721 |
| | 4,939 |
| | 10,934 |
|
| Gain from discontinued operations | — |
| | — |
| | 123,418 |
| | — |
|
| Income tax expense from discontinued operations | — |
| | — |
| | (4,545 | ) | | — |
|
Income from sales of real estate(1) | 19,313 |
| | 34,444 |
| | 28,267 |
| | 88,387 |
|
| Net income (loss) | (3,716 | ) | | 58,155 |
| | 176,918 |
| | 108,642 |
|
| Net (income) loss attributable to noncontrolling interests | 160 |
| | 967 |
| | (4,450 | ) | | (6,915 | ) |
| Net income (loss) attributable to iStar Inc. | (3,556 | ) | | 59,122 |
| | 172,468 |
| | 101,727 |
|
| Preferred dividends | (30,974 | ) | | (12,830 | ) | | (56,634 | ) | | (38,490 | ) |
Net (income) loss allocable to Participating Security holders(2) | — |
| | — |
| | — |
| | (27 | ) |
| Net income (loss) allocable to common shareholders | $ | (34,530 | ) | | $ | 46,292 |
| | $ | 115,834 |
| | $ | 63,210 |
|
| Per common share data: | | | | | | | |
| Income (loss) attributable to iStar Inc. from continuing operations: | | | | | | | |
| Basic | $ | (0.48 | ) | | $ | 0.60 |
| | $ | (0.11 | ) | | $ | 0.70 |
|
| Diluted | $ | (0.48 | ) | | $ | 0.41 |
| | $ | (0.11 | ) | | $ | 0.57 |
|
| Net income (loss) attributable to iStar Inc.: | | | | | | | |
| Basic | $ | (0.48 | ) | | $ | 0.65 |
| | $ | 1.61 |
| | $ | 0.85 |
|
| Diluted | $ | (0.48 | ) | | $ | 0.44 |
| | $ | 1.61 |
| | $ | 0.66 |
|
| Weighted average number of common shares: | | | | | | | |
| Basic | 71,713 |
| | 71,210 |
| | 71,972 |
| | 74,074 |
|
| Diluted | 71,713 |
| | 115,666 |
| | 71,972 |
| | 118,590 |
|
| |
(1) | Income from sales of real estate represents gains from sales of real estate that do not qualify as discontinued operations. |
| |
(2) | Participating Security holders are non-employee directors who hold common stock equivalents ("CSEs") and restricted stock awards granted under the Company's Long Term Incentive Plans that are eligible to participate in dividends (refer to Note 14 and Note 15). |
The accompanying notes are an integral part of the consolidated financial statements.
iStar Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) | $ | (3,716 | ) | | $ | 58,155 |
| | $ | 176,918 |
| | $ | 108,642 |
|
| Other comprehensive income (loss): | | | | | | | |
Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(1) | 56 |
| | 112 |
| | (135 | ) | | 487 |
|
| Unrealized gains/(losses) on available-for-sale securities | (116 | ) | | (202 | ) | | 450 |
| | 263 |
|
| Unrealized gains/(losses) on cash flow hedges | (56 | ) | | 249 |
| | 338 |
| | (1,070 | ) |
| Unrealized gains/(losses) on cumulative translation adjustment | (36 | ) | | (249 | ) | | (265 | ) | | (259 | ) |
| Other comprehensive income (loss) | (152 | ) | | (90 | ) |
| 388 |
| | (579 | ) |
| Comprehensive income (loss) | (3,868 | ) | | 58,065 |
| | 177,306 |
| | 108,063 |
|
| Comprehensive (income) loss attributable to noncontrolling interests | 160 |
| | 967 |
| | (4,450 | ) | | (6,915 | ) |
| Comprehensive income (loss) attributable to iStar Inc. | $ | (3,708 | ) | | $ | 59,032 |
| | $ | 172,856 |
| | $ | 101,148 |
|
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Net loss | $ | (12,885 | ) | | $ | (6,970 | ) |
| Other comprehensive income (loss): | | | |
Reclassification of losses on cash flow hedges into earnings upon realization(1) | 1,314 |
| | 7 |
|
| Unrealized gains on available-for-sale securities | 203 |
| | 1,000 |
|
| Unrealized losses on cash flow hedges | (27,776 | ) | | (15,012 | ) |
| Other comprehensive loss | (26,259 | ) | | (14,005 | ) |
| Comprehensive loss | (39,144 | ) | | (20,975 | ) |
| Comprehensive (income) loss attributable to noncontrolling interests | 2,753 |
| | (790 | ) |
| Comprehensive loss attributable to iStar Inc. | $ | (36,391 | ) | | $ | (21,765 | ) |
| |
| (1) | ReclassifiedAmounts reclassified to "Interest expense" in the Company's consolidated statements of operations are $16 and $76 for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $202019 are $1,088 and $202 for the three and nine months ended September 30, 2016,$151, respectively. ReclassifiedAmounts reclassified to "Earnings (losses) from equity method investments" in the Company's consolidated statements of operations are $40 and $204 for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $922019 are $226 and $285 for the three and nine months ended September 30, 2016,$(144), respectively. |
The accompanying notes are an integral part of the consolidated financial statements.
iStar Inc.
Consolidated Statements of Changes in Equity
For the Nine Months Ended September 30, 2017 and 2016
(In thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | iStar Inc. Shareholders' Equity | | | | |
| | | Preferred Stock(1) | | Preferred Stock Series J(1) | | Common Stock at Par | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2016 | | $ | 22 |
| | $ | 4 |
| | $ | 72 |
| | $ | 3,602,172 |
| | $ | (2,581,488 | ) | | $ | (4,218 | ) | | $ | 43,120 |
| | $ | 1,059,684 |
|
| Dividends declared—preferred | | — |
| | — |
| | — |
| | — |
| | (38,490 | ) | | — |
| | — |
| | (38,490 | ) |
| Issuance of stock/restricted stock unit amortization, net | | — |
| | — |
| | — |
| | 2,248 |
| | — |
| | — |
| | — |
| | 2,248 |
|
Net income for the period(2) | | — |
| | — |
| | — |
| | — |
| | 172,468 |
| | — |
| | 5,785 |
| | 178,253 |
|
| Change in accumulated other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 388 |
| | — |
| | 388 |
|
| Repurchase of stock | | — |
| | — |
| | (4 | ) | | (45,924 | ) | | — |
| | — |
| | — |
| | (45,928 | ) |
| Issuance of senior unsecured convertible notes (refer to Note 10) | | — |
| | — |
| | — |
| | 22,487 |
| | — |
| | — |
| | — |
| | 22,487 |
|
Dividends declared and payable — Series E and Series F Preferred Stock
| | — |
| | — |
| | — |
| | — |
| | (1,830 | ) | | — |
| | — |
| | (1,830 | ) |
Redemption of Series E and F Preferred Stock
| | (10 | ) | | — |
| | — |
| | (223,676 | ) | | (16,314 | ) | | — |
| | — |
| | (240,000 | ) |
| Change in additional paid in capital attributable to redeemable noncontrolling interest | | — |
| | — |
| | — |
| | 182 |
| | — |
| | — |
| | — |
| | 182 |
|
| Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | 12 |
|
| Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,117 | ) | | (13,117 | ) |
| Balance as of September 30, 2017 | | $ | 12 |
| | $ | 4 |
| | $ | 68 |
| | $ | 3,357,489 |
| | $ | (2,465,654 | ) | | $ | (3,830 | ) | | $ | 35,800 |
| | $ | 923,889 |
|
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2015 | | $ | 22 |
| | $ | 4 |
| | $ | 81 |
| | $ | 3,689,330 |
| | $ | (2,625,474 | ) | | $ | (4,851 | ) | | $ | 42,218 |
| | $ | 1,101,330 |
|
| Dividends declared—preferred | | — |
| | — |
| | — |
| | — |
| | (38,490 | ) | | — |
| | — |
| | (38,490 | ) |
| Issuance of stock/restricted stock unit amortization, net | | — |
| | — |
| | — |
| | 1,675 |
| | — |
| | — |
| | — |
| | 1,675 |
|
Net income for the period(2) | | — |
| | — |
| | — |
| | — |
| | 101,727 |
| | — |
| | 10,908 |
| | 112,635 |
|
| Change in accumulated other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | (579 | ) | | — |
| | (579 | ) |
| Repurchase of stock | | — |
| | — |
| | (10 | ) | | (98,419 | ) | | — |
| | — |
| | — |
| | (98,429 | ) |
| Change in additional paid in capital attributable to redeemable noncontrolling interest | | — |
| | — |
| | — |
| | 124 |
| | — |
| | — |
| | — |
| | 124 |
|
| Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 513 |
| | 513 |
|
Change in noncontrolling interest(3) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,292 | ) | | (7,292 | ) |
| Balance as of September 30, 2016 | | $ | 22 |
| | $ | 4 |
| | $ | 71 |
| | $ | 3,592,710 |
| | $ | (2,562,237 | ) | | $ | (5,430 | ) | | $ | 46,347 |
| | $ | 1,071,487 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | iStar Inc. Shareholders' Equity | | | | |
| | | Preferred Stock(1) | | Preferred Stock Series J(1) | | Common Stock at Par | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Equity |
| Balance as of December 31, 2019 | | $ | 12 |
| | $ | — |
| | $ | 78 |
| | $ | 3,284,877 |
| | $ | (2,205,838 | ) | | $ | (38,707 | ) | | $ | 197,538 |
| | $ | 1,237,960 |
|
| Impact from adoption of new accounting standards (refer to Note 3) | | — |
| | — |
| | — |
| | — |
| | (12,382 | ) | | — |
| | — |
| | (12,382 | ) |
| Dividends declared—preferred | | — |
| | — |
| | — |
| | — |
| | (5,874 | ) | | — |
| | — |
| | (5,874 | ) |
| Dividends declared—common ($0.10 per share) | | — |
| | — |
| | — |
| | — |
| | (7,834 | ) | | — |
| | — |
| | (7,834 | ) |
| Issuance of stock/restricted stock unit amortization, net | | — |
| | — |
| | — |
| | 2,222 |
| | — |
| | — |
| | 727 |
| | 2,949 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | (15,576 | ) | | — |
| | 2,691 |
| | (12,885 | ) |
| Change in accumulated other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | (20,815 | ) | | (5,444 | ) | | (26,259 | ) |
| Repurchase of stock | | — |
| | — |
| | (1 | ) | | (12,044 | ) | | — |
| | — |
| | — |
| | (12,045 | ) |
| Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 163 |
| | 163 |
|
| Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,724 | ) | | (3,724 | ) |
| Balance as of March 31, 2020 | | $ | 12 |
| | $ | — |
| | $ | 77 |
| | $ | 3,275,055 |
| | $ | (2,247,504 | ) | | $ | (59,522 | ) | | $ | 191,951 |
| | $ | 1,160,069 |
|
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2018 | | $ | 12 |
| | $ | 4 |
| | $ | 68 |
| | $ | 3,352,225 |
| | $ | (2,472,061 | ) | | $ | (17,270 | ) | | $ | 201,137 |
| | $ | 1,064,115 |
|
| Dividends declared—preferred | | — |
| | — |
| | — |
| | — |
| | (8,124 | ) | | — |
| | — |
| | (8,124 | ) |
| Dividends declared—common ($0.09 per share) | | — |
| | — |
| | — |
| | — |
| | (6,210 | ) | | — |
| | — |
| | (6,210 | ) |
| Issuance of stock/restricted stock unit amortization, net | | — |
| | — |
| | — |
| | 2,661 |
| | — |
| | — |
| | 428 |
| | 3,089 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | (9,441 | ) | | — |
| | 2,471 |
| | (6,970 | ) |
| Change in accumulated other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | (12,324 | ) | | (1,681 | ) | | (14,005 | ) |
| Repurchase of stock | | — |
| | — |
| | (2 | ) | | (19,167 | ) | | — |
| | — |
| | — |
| | (19,169 | ) |
| Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,255 | ) | | (3,255 | ) |
| Balance as of March 31, 2019 | | $ | 12 |
| | $ | 4 |
| | $ | 66 |
| | $ | 3,335,719 |
| | $ | (2,495,836 | ) | | $ | (29,594 | ) | | $ | 199,100 |
| | $ | 1,009,471 |
|
| |
| (1) | Refer to Note 1314 for details on the Company's Preferred Stock. |
| |
(2) | For the nine months ended September 30, 2017 and 2016, net income (loss) shown above excludes $(1,335) and $(3,993) of net loss attributable to redeemable noncontrolling interests.
|
| |
(3) | Includes a payment to acquire a noncontrolling interest (refer to Note 5). |
The accompanying notes are an integral part of the consolidated financial statements.
iStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (12,885 | ) | | $ | (6,970 | ) |
| Adjustments to reconcile net loss to cash flows from operating activities: | | | |
| Provision for (recovery of) loan losses | 4,003 |
| | (97 | ) |
| Provision for losses on net investment in leases | 1,292 |
| | — |
|
| Impairment of assets | 1,708 |
| | 3,851 |
|
| Depreciation and amortization | 14,486 |
| | 15,668 |
|
| Non-cash interest income from sales-type leases | (1,570 | ) | | — |
|
| Stock-based compensation expense | 16,270 |
| | 4,249 |
|
| Amortization of discounts/premiums and deferred financing costs on debt obligations, net | 3,320 |
| | 3,616 |
|
| Amortization of discounts/premiums and deferred interest on loans, net | (8,404 | ) | | (9,853 | ) |
| Deferred interest on loans received | — |
| | 5,850 |
|
| Earnings from equity method investments | (16,612 | ) | | (5,309 | ) |
| Distributions from operations of other investments | 5,009 |
| | 1,389 |
|
| Deferred operating lease income | (3,618 | ) | | (4,222 | ) |
| Income from sales of real estate | — |
| | (9,407 | ) |
| Land development revenue in excess of cost of sales | (3,117 | ) | | 1,750 |
|
| Loss on early extinguishment of debt, net | 4,115 |
| | 468 |
|
| Other operating activities, net | (9,710 | ) | | (181 | ) |
| Changes in assets and liabilities: | | | |
| Changes in accrued interest and operating lease income receivable | 79 |
| | (954 | ) |
| Changes in deferred expenses and other assets, net | (3,039 | ) | | (1,512 | ) |
| Changes in accounts payable, accrued expenses and other liabilities | (12,324 | ) | | (44,869 | ) |
| Cash flows used in operating activities | (20,997 | ) | | (46,533 | ) |
| Cash flows from investing activities: | | | |
| Originations and fundings of loans receivable, net | (37,977 | ) | | (58,318 | ) |
| Capital expenditures on real estate assets | (4,008 | ) | | (5,184 | ) |
| Capital expenditures on land and development assets | (15,035 | ) | | (37,762 | ) |
| Acquisitions of real estate, net investments in leases and land assets | — |
| | (109,663 | ) |
| Repayments of and principal collections on loans receivable and other lending investments, net | 18,346 |
| | 157,915 |
|
| Net proceeds from sales of real estate | 7,493 |
| | 58,529 |
|
| Net proceeds from sales of land and development assets | 76,776 |
| | 11,455 |
|
| Distributions from other investments | 9,866 |
| | 46,778 |
|
| Contributions to and acquisition of interest in other investments | (118,991 | ) | | (260,297 | ) |
| Other investing activities, net | 769 |
| | (16,685 | ) |
| Cash flows provided by (used in) investing activities | (62,761 | ) | | (213,232 | ) |
| Cash flows from financing activities: | | | |
| Borrowings from debt obligations | 306,180 |
| | 63,500 |
|
| Repayments and repurchases of debt obligations | (113,634 | ) | | (379,797 | ) |
| Preferred dividends paid | (5,874 | ) | | (8,124 | ) |
| Common dividends paid | (7,797 | ) | | (6,127 | ) |
| Repurchase of stock | (18,153 | ) | | (15,328 | ) |
| Payments for debt prepayment or extinguishment costs | (3,316 | ) | | — |
|
| Payments for deferred financing costs | (2,382 | ) | | — |
|
| Payments for withholding taxes upon vesting of stock-based compensation | (1,984 | ) | | (1,842 | ) |
| Contributions from noncontrolling interests | 163 |
| | — |
|
Distributions to noncontrolling interests
| (3,724 | ) | | (3,255 | ) |
| Cash flows used in financing activities | 149,479 |
| | (350,973 | ) |
| Effect of exchange rate changes on cash | (25 | ) | | 8 |
|
| Changes in cash, cash equivalents and restricted cash | 65,696 |
| | (610,730 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 352,206 |
| | 974,544 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 417,902 |
| | $ | 363,814 |
|
iStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities: | | | |
| Net income | $ | 176,918 |
| | $ | 108,642 |
|
| Adjustments to reconcile net income to cash flows from operating activities: | | | |
| (Recovery of) provision for loan losses | (8,128 | ) | | (12,749 | ) |
| Impairment of assets | 15,292 |
| | 11,753 |
|
| Depreciation and amortization | 38,198 |
| | 42,184 |
|
| Non-cash expense for stock-based compensation | 12,730 |
| | 7,644 |
|
| Amortization of discounts/premiums and deferred financing costs on debt obligations, net | 9,793 |
| | 12,954 |
|
| Amortization of discounts/premiums on loans, net | (10,098 | ) | | (10,835 | ) |
| Deferred interest on loans, net | 1,162 |
| | (5,632 | ) |
| Gain from discontinued operations | (123,418 | ) | | — |
|
| Earnings from equity method investments | (13,677 | ) | | (74,254 | ) |
| Distributions from operations of other investments | 39,076 |
| | 44,893 |
|
| Deferred operating lease income | (4,870 | ) | | (7,340 | ) |
| Income from sales of real estate | (28,775 | ) | | (88,387 | ) |
| Land development revenue in excess of cost of sales | (12,834 | ) | | (23,547 | ) |
| Loss on early extinguishment of debt, net | 1,392 |
| | 1,618 |
|
Debt discount on repayments of debt obligations
| (6,634 | ) | | (5,369 | ) |
| Other operating activities, net | 12,210 |
| | 4,115 |
|
| Changes in assets and liabilities: | | | |
| Changes in accrued interest and operating lease income receivable, net | 2,533 |
| | 5,715 |
|
| Changes in deferred expenses and other assets, net | (8,271 | ) | | (14,194 | ) |
| Changes in accounts payable, accrued expenses and other liabilities | (5,792 | ) | | (11,773 | ) |
| Cash flows provided by (used in) operating activities | 86,807 |
| | (14,562 | ) |
| Cash flows from investing activities: | | | |
| Originations and fundings of loans receivable, net | (177,952 | ) | | (226,012 | ) |
| Capital expenditures on real estate assets | (24,891 | ) | | (55,385 | ) |
| Capital expenditures on land and development assets | (84,966 | ) | | (87,891 | ) |
| Acquisitions of real estate assets | — |
| | (4,740 | ) |
| Repayments of and principal collections on loans receivable and other lending investments, net | 491,680 |
| | 243,780 |
|
| Net proceeds from sales of real estate | 201,939 |
| | 412,335 |
|
| Net proceeds from sales of land and development assets | 174,979 |
| | 64,159 |
|
| Net proceeds from sales of other investments | — |
| | 39,810 |
|
| Distributions from other investments | 40,772 |
| | 25,795 |
|
| Contributions to and acquisition of interest in other investments | (181,279 | ) | | (45,635 | ) |
| Changes in restricted cash held in connection with investing activities | 5,491 |
| | (603 | ) |
| Other investing activities, net | 646 |
| | (14,265 | ) |
| Cash flows provided by investing activities | 446,419 |
| | 351,348 |
|
| Cash flows from financing activities: | | | |
| Borrowings from debt obligations and convertible notes | 1,903,643 |
| | 696,401 |
|
| Repayments and repurchases of debt obligations | (726,795 | ) | | (1,065,253 | ) |
| Proceeds from loan participations payable | — |
| | 22,844 |
|
| Preferred dividends paid | (38,490 | ) | | (38,490 | ) |
| Repurchase of stock | (45,928 | ) | | (99,335 | ) |
| Payments for deferred financing costs | (27,972 | ) | | (8,930 | ) |
| Payments for withholding taxes upon vesting of stock-based compensation | (511 | ) | | (1,203 | ) |
Distributions to noncontrolling interests
| (12,889 | ) | | (7,248 | ) |
| Other financing activities, net | (599 | ) | | 821 |
|
| Cash flows provided by (used in) financing activities | 1,050,459 |
| | (500,393 | ) |
| Effect of exchange rate changes on cash | 19 |
| | 16 |
|
| Changes in cash and cash equivalents | 1,583,704 |
| | (163,591 | ) |
| Cash and cash equivalents at beginning of period | 328,744 |
| | 711,101 |
|
| Cash and cash equivalents at end of period | $ | 1,912,448 |
| | $ | 547,510 |
|
| Supplemental disclosure of non-cash investing and financing activity: | | | |
Fundings and repayments of loan receivables and loan participations, net
| $ | (37,405 | ) | | $ | 31,030 |
|
| Accrual for redemption of preferred stock and preferred stock dividends | 241,830 |
| | — |
|
| Accounts payable for capital expenditures on land and development assets | 5,700 |
| | 3,187 |
|
| Accounts payable for capital expenditures on real estate assets | 2,574 |
| | — |
|
| Acquisitions of real estate and land and development assets through deed-in-lieu | — |
| | 9,083 |
|
| Developer fee payable | — |
| | 9,478 |
|
| Accrued financing costs | 3,031 |
| | — |
|
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Supplemental disclosure of non-cash investing and financing activity: | | | |
| Fundings and repayments of loan receivables and loan participations, net | $ | 2,110 |
| | $ | 2,502 |
|
| Contributions of land and development assets to equity method investments, net | — |
| | 4,073 |
|
| Accrued repurchase of stock | 250 |
| | 3,841 |
|
The accompanying notes are an integral part of the consolidated financial statements.
iStar Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1—Business and Organization
Business—iStar Inc. (the "Company"), doing business as "iStar," finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. The Company also provides management services for itsmanages entities focused on ground lease and net lease equity method investments (refer to Note 7)8). The Company has invested more than $35over $40 billion of capital 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, real estate finance, net lease, operating properties and land and development (refer to Note 17)18).
Organization—The Company began its business in 1993 through the management of private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new investments as well as throughand corporate acquisitions.
Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 20162019 (the "2016 Annual"Annual Report").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Company's consolidated financial statements and the related notes to conform to the current period presentation.
Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs")VIEs for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in "Operating lease income," "Interest income," "Earnings from equity method investments," "Real estate expense" and "Interest expense" in the Company's consolidated statements of operations. The Company has not provided no financial support to those VIEs that it was not previously contractually required to provide.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Consolidated VIEs—As of September 30, 2017, theThe Company consolidates VIEs for which it is considered the primary beneficiary. As of September 30, 2017, the total assets of these consolidated VIEs were $331.4 million and total liabilities were $74.2 million. The classifications of these assets are primarily within "Land and development, net" and "Real estate, net" on the Company's consolidated balance sheets. The classifications of liabilities are primarily within "Accounts payable, accrued expenses and other liabilities" and "debt obligations, net" on the Company's consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company did not have any unfunded commitments related to consolidated VIEs as of September 30, 2017.March 31, 2020. The following table presents the assets and liabilities of the Company's consolidated VIEs as of March 31, 2020 and December 31, 2019 ($ in thousands):
|
| | | | | | | |
| | As of |
| | March 31,
2020 | | December 31,
2019 |
| ASSETS | | | |
| Real estate | | | |
| Real estate, at cost | $ | 893,097 |
| | $ | 891,000 |
|
| Less: accumulated depreciation | (43,617 | ) | | (37,542 | ) |
| Real estate, net | 849,480 |
| | 853,458 |
|
| Land and development, net | 268,524 |
| | 273,617 |
|
| Other investments | 44 |
| | 45 |
|
| Cash and cash equivalents | 22,704 |
| | 19,112 |
|
| Accrued interest and operating lease income receivable, net | 552 |
| | 1,208 |
|
| Deferred operating lease income receivable, net | 22,064 |
| | 19,547 |
|
| Deferred expenses and other assets, net | 133,556 |
| | 134,117 |
|
| Total assets | $ | 1,296,924 |
| | $ | 1,301,104 |
|
| LIABILITIES | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 118,337 |
| | $ | 107,455 |
|
| Debt obligations, net | 487,445 |
| | 482,918 |
|
| Total liabilities | 605,782 |
| | 590,373 |
|
Unconsolidated VIEs—As of September 30, 2017, theThe Company has investments in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company's consolidated financial statements. As of September 30, 2017,March 31, 2020, the Company's maximum exposure to loss from these investments does not exceed the sum of the $65.8$123.8 million carrying value of the investments, which are classified in "Other investments" and "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets, and $80.7$14.7 million of related unfunded commitments.
Note 3—Summary of Significant Accounting Policies
The following paragraph describes the impact on the Company's consolidated financial statements from the adoption of Accounting Standards Updates ("ASUs") on January 1, 2020.
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), as amended, on January 1, 2020 using the modified retrospective approach method. Under the modified retrospective approach, the Company recorded a cumulative effect adjustment to retained earnings by increasing its allowance for loan losses and recording an initial allowance for losses on net investment in leases. Periods presented that are prior to the adoption date of January 1, 2020 will not be adjusted. ASU 2016-13 replaced the incurred loss impairment methodology with a methodology that reflects a current expected credit loss ("Expected Loss"). ASU 2016-13 impacted all of the Company’s investments held at amortized cost, which included its loans (including unfunded loan commitments), financing receivables, net investment in leases and held-to-maturity debt securities.Upon adoption of ASU 2016-13 on January 1, 2020, the Company recorded an increase to its allowance for loan losses of $3.3 million and an initial allowance for losses on net investment in leases of $9.1 million, both of which were recorded as a cumulative effect adjustment to retained earnings. Subsequent increases or decreases in the allowance for loan losses or the allowance for losses on net investment in leases will be charged to "Provision for (recovery of) loan losses" and "Provision for (recovery of) losses on net investment in leases," respectively, in the Company's consolidated statements of operations. Refer to "Significant Accounting Policies" below for more information on how the Company determines its allowance for loan losses and its allowance for losses on net investment in leases.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 3—Summary of Significant Accounting Policies
On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which was issued to simplify several aspects of the accountingAllowance for share-based payment transactions, including income tax, classification of awards as either equity or liabilitiesLoan Losses and classification on the statement of cash flows. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements.
As of September 30, 2017, the remainder of the Company's significant accounting policies, which are detailedNet Investment in the Company's 2016 Annual Report, have not changed materially.
New Accounting Pronouncements—In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"), to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. The amendments in ASU 2017-05 simplify GAAP by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The amendments in ASU 2017-05 require an entity to initially measure a retained noncontrolling interest in a nonfinancial asset at fair value consistent with how a retained noncontrolling interest in a business is measured. Also, if an entity transfers ownership interests in a consolidated subsidiary that is within the scope of ASC 610-20 and continues to have a controlling financial interest in that subsidiary, ASU 2017-05 requires the entity to account for the transaction as an equity transaction, which is consistent with how changes in ownership interests in a consolidated subsidiary that is a business are recorded when a parent retains a controlling financial interest in the business. ASU 2017-05 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted beginning January 1, 2017. Management is evaluating the impact of the guidance on the Company's consolidated financial statements and expects to adopt the retrospective approach, which would require the Company to recast revenue and expenses for all prior periods presented in the year of adoption of the new standard.Leases— The Company expects that transactions in assets and businesses in which the Company retains an ownership interest, such as the sale ofperforms quarterly a controlling interest in its GL business (refer to Note 4), will be impacted by this guidance. As a result, under the retrospective approach, in 2018, the Company expects to record an incremental gain of $55.5 million in its consolidated statements of operations for the nine months ended September 30, 2017, bringing the Company's full gain on the salecomprehensive analysis of its GL business to approximately $178.9 million.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), to provide a more robust framework to use in determining when a set of assetsloan and activities is a business. The amendments provide more consistency in applying the guidance, reduce the costs of application,sales-type lease portfolios and make the definition of a business more operable. The Company's real estate acquisitions have historically been accounted for as a business combination or an asset acquisition. Under ASU 2017-01, certain transactions previously accounted for as business combinations under the existing guidance would be accounted for as asset acquisitions under the new guidance. As a result, the Company expects more transaction costs to be capitalized under real estate acquisitionsassigns risk ratings that incorporate management's current judgments about credit quality based on all known and less transaction costs to be expensed under business combinations. ASU 2017-01 is effective for interimrelevant internal and annual reporting periods beginning after December 15, 2017. Early application is permitted. Management is evaluating the impact of the guidance on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"), which requiresexternal factors that restricted cash be included with cash and cash equivalents when reconciling beginning and ending cash and cash equivalents on the statement of cash flows. In addition, ASU 2016-18 requires disclosure of what is included in restricted cash. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's consolidated financial statements.
In August 2016, theFASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which was issued to reduce diversity in practice in how certain cash receipts and cash payments,
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
including debt prepayment or debt extinguishment costs, distributions from equity method investees, and other separately identifiable cash flows, are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's consolidated financial statements.
In June 2016, theFASB issued ASU 2016-13, Financial Instruments—Credit Losses:Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity. This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.may affect collectability. The Company currently records a general reserve that covers performingconsiders, among other things, payment status, lien position, borrower or tenant financial resources and investment collateral, collateral type, project economics and geographical location as well as national and regional economic factors. This methodology results in loans and reserves for loan losses are recorded when (i) available information assales-type leases being risk rated, with ratings ranging from "1" to "5" with "1" representing the lowest risk of each balance sheet date indicates that it is probable a loss has occurred inand "5" representing the portfolio and (ii) the amounthighest risk of the loss can be reasonably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment.loss. The Company estimates loss rates based on historical realized losses experienced within its portfolio and taketaking into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience.
Upon adoption of ASU 2016-13 on January 1, 2020, the Company estimates its Expected Loss on its loans (including unfunded loan commitments), held-to-maturity debt securities and net investment in leases based on relevant information including historical realized loss rates, current market conditions and reasonable and supportable forecasts that affect the collectability of its investments. The estimate of the Company's Expected Loss requires significant judgment and the Company analyzes its loan portfolio based upon its different categories of financial assets, which includes (i) loans and held-to-maturity debt securities; (ii) construction loans; and (iii) net investment in leases and financings that resulted from the acquisition of properties that did not qualify as a sale leaseback transaction and, as such, are accounted for as financing receivables (refer to Note 5).
For the Company's loans and held-to-maturity debt securities, the Company utilized a loan loss model developed by Trepp LLC ("Trepp") to estimate its Expected Loss allowance. The model is a loss forecasting tool that utilizes loan level data including each loans position in the capital structure, interest rates, maturity dates, unfunded commitments, debt service coverage ratios, etc. and also utilizes forward looking macroeconomic variables and pool-level mean loss rates to produce an Expected Loss over the life each loan. The Company utilized the model to estimate its Expected Loss for this category of loans after inputting its individual loan level data for this category of loans into the model.
For the Company's construction loans, the Company analyzed its historical realized loss experience on its construction loan portfolio to estimate its Expected Loss allowance. The Company also utilized third-party market data that included historical loss rates on commercial real estate loans and forecasted economic trends, including interest and unemployment rates. The Company utilized the third-party market data to support the Expected Loss the Company calculated using its historical realized loss experience.
For the Company's net investment in leases and financings that resulted from the acquisition of properties that did not qualify as sale leaseback transactions, the Company analyzed historical loss rates for lessors from tenants with a credit rating similar to the Company's tenant at these properties. The Company also utilized third-party market information as well as market data from Trepp which forecasted economic trends, including interest and unemployment rates, to assist in developing a probability of default and loss given default to calculate the Company's Expected Loss. The Company utilized the third-party market information to support the Expected Loss the Company calculated by analyzing the historical loss rates for lessors from tenants with a credit rating similar to the Company's tenant.
The Company considers a loan or sales-type lease to be non-performing and places it on non-accrual status at such time as: (1) it becomes 90 days delinquent; (2) it has a maturity default; or (3) management determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan or sales-type lease. Non-accrual loans or sales-type leases are returned to accrual status when they have become contractually current and management believes this general reserve componentall amounts contractually owed will be received. The Company will record a specific allowance if the Company determines that the collateral fair value less costs to sell is less than the carrying value of its totala collateral-dependent asset. The specific allowance is increased (decreased) through "Provision for (recovery of) loan loss reserves should minimize the impact of ASU 2016-13. ASU 2016-13 is effectivelosses" or "Provision for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management does not believe the guidance will have a material impactlosses on net investment in leases" in the Company's consolidated financial statements.
In February 2016,statements of operations and is decreased by charge-offs. During delinquency and the FASB issued ASU 2016-02, Leases ("ASU 2016-02"),foreclosure process, there are typically numerous points of negotiation with the borrower or tenant as the Company works toward a settlement or other alternative resolution, which requirescan impact the recognitionpotential for repayment or receipt of leasecollateral. The Company's policy is to charge off a loan when it determines, based on a variety of factors, that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at different times, including when the Company receives cash or other assets in a pre-foreclosure sale or takes control of the underlying collateral in full satisfaction of the loan upon foreclosure or deed-in-lieu, or when the Company has otherwise ceased significant collection efforts. The Company considers circumstances such as the foregoing to be indicators that the final steps in the loan collection process have occurred and lease liabilities by lessees for those leases classified as operating leases. For operating leases,that a lesseeloan is uncollectible. At this point, a loss is confirmed and the loan and related allowance will be required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (iii) classify all cash payments within operating activities in the statement of cash flows. For operating lease arrangements for which the Company is the lessee, primarily the lease of office space, the Company expects the impact of ASU 2016-02 to be the recognition of a right-of-use asset and lease liability on its consolidated balance sheets. The accounting applied by the Company as a lessor will be largely unchanged from that applied under previous GAAP. However, in certain instances, a new long-term lease of land subsequent to adoption could be classified as a sales-type lease, which could result in the Company derecognizing the underlying asset from its books and recording a profit or loss on sale and the net investment in the lease. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is evaluating the impact of the guidance on the Company's consolidated financial statements.charged off.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall:Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. Management is evaluating the impact of the guidance on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes existing industry-specific guidance, including ASC 360-20, Real Estate Sales. The new standard is principles-based and requires more estimates and judgment than current guidance. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. Although most of the Company's revenue is operating lease income generated from lease contracts and interest income generated from financial instruments, certain other of the Company's revenue streams will be impacted by the new guidance. The Company currently expects that income from the sale of residential condominiums, land development revenue and other income will be impacted by ASU 2014-09. The Company does not expect income from the sales of net lease or commercial operating properties to be impacted by ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted beginning January 1, 2017. Management is evaluating the impact of the guidance on the Company’s consolidated financial statements and expects to adopt the full retrospective approach, which would require the Company to recast revenue and expenses for all prior periods presented in the year of adoption of the new standard.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company made the accounting policy election to record accrued interest on its loan portfolio separate from its loans receivable and other lending investments and to exclude accrued interest from its amortized cost basis disclosures (refer to Note 7). As of March 31, 2020 and December 31, 2019, accrued interest was $4.8 million and $4.2 million, respectively, and is recorded in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheets. The Company places loans on non-accrual status once the loan becomes 90 days delinquent and reverses any accrued interest as a reduction to interest income at such time. As such, the Company elected the practical expedient to not record an allowance against accrued interest receivable. During the three months ended March 31, 2020, the Company did not reverse any accrued interest on its loan portfolio.
Restricted cash—The following table provides a reconciliation of the cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported in the consolidated statements of cash flows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 | | March 31, 2019 | | December 31, 2018 |
| Cash and cash equivalents | | $ | 371,293 |
| | $ | 307,172 |
| | $ | 315,407 |
| | $ | 931,751 |
|
Restricted cash included in deferred expenses and other assets, net(1) | | 46,609 |
| | 45,034 |
| | 48,407 |
| | 42,793 |
|
| Total cash, cash equivalents and restricted cash reported in the consolidated statements of cash flows | | $ | 417,902 |
| | $ | 352,206 |
| | $ | 363,814 |
| | $ | 974,544 |
|
| |
| (1) | Restricted cash represents amounts required to be maintained under certain of the Company's debt obligations, loans, leasing, land development, sale and derivative transactions. |
For the remainder of the Company's significant accounting policies, refer to the Company's Annual Report.
New Accounting Pronouncements—In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform ("ASU 2020-04"). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
|
| | | | | | | | | | | |
| | Net Lease(1) | | Operating Properties | | Total |
| As of March 31, 2020 | | | | | |
| Land, at cost | $ | 188,418 |
| | $ | 106,186 |
| | $ | 294,604 |
|
| Buildings and improvements, at cost | 1,333,766 |
| | 108,671 |
| | 1,442,437 |
|
| Less: accumulated depreciation | (221,008 | ) | | (14,944 | ) | | (235,952 | ) |
Real estate, net(1) | 1,301,176 |
| | 199,913 |
| | 1,501,089 |
|
Real estate available and held for sale(2) | 25,730 |
| | 8,661 |
| | 34,391 |
|
| Total real estate | $ | 1,326,906 |
| | $ | 208,574 |
| | $ | 1,535,480 |
|
| As of December 31, 2019 | | | | | |
| Land, at cost | $ | 199,710 |
| | $ | 106,187 |
| | $ | 305,897 |
|
| Buildings and improvements, at cost | 1,347,321 |
| | 107,861 |
| | 1,455,182 |
|
| Less: accumulated depreciation | (219,949 | ) | | (13,911 | ) | | (233,860 | ) |
Real estate, net(1) | 1,327,082 |
| | 200,137 |
| | 1,527,219 |
|
Real estate available and held for sale(2) | — |
| | 8,650 |
| | 8,650 |
|
| Total real estate | $ | 1,327,082 |
| | $ | 208,787 |
| | $ | 1,535,869 |
|
|
| | | | | | | | | | | |
| | Net Lease(1) | | Operating Properties | | Total |
| As of September 30, 2017 | | | | | |
| Land, at cost | $ | 223,764 |
| | $ | 209,068 |
| | $ | 432,832 |
|
| Buildings and improvements, at cost | 926,912 |
| | 327,574 |
| | 1,254,486 |
|
| Less: accumulated depreciation | (306,183 | ) | | (57,273 | ) | | (363,456 | ) |
| Real estate, net | 844,493 |
| | 479,369 |
| | 1,323,862 |
|
Real estate available and held for sale (2) | — |
| | 65,658 |
| | 65,658 |
|
| Total real estate | $ | 844,493 |
| | $ | 545,027 |
| | $ | 1,389,520 |
|
| As of December 31, 2016 | | | | | |
| Land, at cost | $ | 231,506 |
| | $ | 211,054 |
| | $ | 442,560 |
|
| Buildings and improvements, at cost | 987,050 |
| | 311,283 |
| | 1,298,333 |
|
| Less: accumulated depreciation | (307,444 | ) | | (46,175 | ) | | (353,619 | ) |
| Real estate, net | 911,112 |
| | 476,162 |
| | 1,387,274 |
|
Real estate available and held for sale (2) | 155,051 |
| | 82,480 |
| | 237,531 |
|
| Total real estate | $ | 1,066,163 |
| | $ | 558,642 |
| | $ | 1,624,805 |
|
| |
| (1) | In 2014, the Company partnered with a sovereign wealth fund to form a venture to acquireAs of March 31, 2020 and developDecember 31, 2019, real estate, net lease assets (the "Net Lease Venture")included $765.3 million and gave a right$768.6 million, respectively, of first refusal toreal estate of the Net Lease Venture on all new net lease investments (refer to Note 7 for more information on the Net Lease Venture). The Company is responsible for sourcing new opportunities and managing the Net Lease Venture and its assets in exchange for a promote and management fee.below). |
| |
| (2) | As of DecemberMarch 31, 2016, net lease includes the Company's ground lease ("GL") assets that were reclassified to "Real estate available and held for sale" (refer to "Dispositions" below). As of December 31, 2016, the carrying value of the Company's GL assets were previously classified as $104.5 million in "Real estate, net," $37.5 million in "Deferred expenses and other assets, net," $8.2 million in "Deferred operating lease income receivable, net" and $3.5 million in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheet. As of September 30, 20172020 and December 31, 2016,2019, the Company had $65.7$8.7 million and $82.5$8.6 million, respectively, of residential propertiescondominiums available for sale in its operating properties portfolio. |
Net Lease Venture—In the third quarter 2017, in conjunction with the modification of two master leases,February 2014, the Company exchanged real propertypartnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the "Net Lease Venture") and gave a right of first offer to the tenant.venture on all new net lease investments. The fair valueCompany and its partner had joint decision making rights pertaining to the acquisition of new investments. Upon the expiration of the property exchanged exceededinvestment period on June 30, 2018, the Company obtained control of the venture through its unilateral rights of management and disposition of the assets. As a result, the expiration of the investment period resulted in a reconsideration event under GAAP and the Company determined that the Net Lease Venture is a VIE for which the Company is the primary beneficiary. Effective June 30, 2018, the Company consolidated the Net Lease Venture as an asset acquisition under ASC 810. The Net Lease Venture had previously been accounted for as an equity method investment. The Company has an equity interest in the Net Lease Venture of approximately 51.9%. The Company is responsible for sourcing new opportunities and managing the venture and its assets in exchange for a management fee and incentive fee. Several of the Company's cost basis by approximately $1.5senior executives whose time is substantially devoted to the Net Lease Venture own a total of 0.6% equity ownership in the venture via co-investment. These senior executives are also entitled to an amount equal to 50% of any incentive fee received based on the 47.5% partner's interest.
The Company earned $0.4 million and $0.4 million, respectively, of management fees after the effect of eliminations during the three months ended March 31, 2020 and 2019 with respect to services provided to other investors in the Net Lease Venture, which will be deferred and amortizedwas recorded as a reduction to "Operating lease income""Net income attributable to noncontrolling interests" in the Company's consolidated statements of operations overoperations.
Acquisitions—During the remaining masterthree months ended March 31, 2019, the Company acquired a net lease terms.asset for $11.5 million. In addition, the Company acquired the leasehold interest in a net lease asset for $98.2 million, inclusive of closing costs, and simultaneously entered into a new 98-year Ground Lease with SAFE (refer to Note 8).
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Dispositions—During the three months ended March 31, 2020, the Company sold a net lease asset for net proceeds of $7.5 million and recognized an impairment of $1.7 million in connection with the sale. During the three months ended March 31, 2019, the Company sold 2 operating properties for net proceeds of $58.5 million and recognized $9.4 million in income from sales of real estate in its consolidated statements of operations.
Real Estate Available and Held for Sale—During the ninethree months ended September 30, 2017,March 31, 2020, the Company transferred onea net lease asset with aan aggregate carrying value of $0.9$25.7 million to held for sale due to an executed contract with SAFE. During the three months ended March 31, 2019, the Company transferred a portfolio of net lease assets with an aggregate carrying value of $218.1 million and associated liabilities to held for sale due to an executed contract with a third party. During the nine months ended September 30, 2016,In addition, the Company transferred one net lease asset with a carrying value of $0.7 million and one commercial operating property with a carrying value of $16.1$16.2 million to held for sale due tobased on an executed contracts with third parties. purchase and sale agreement. All of the properties transferred as of March 31, 2019 were ultimately sold.
Impairments—During the ninethree months ended September 30, 2016, the Company also acquired a residential operating property for $0.8 million that had no operations and was sold as of September 30, 2017.
During the nine months ended September 30, 2016, the Company acquired land for $3.9 million and simultaneously entered into a 99 year ground lease with the seller. This asset was one of the 12 properties comprising the Company's GL business that was disposed of in April 2017 (see "Disposition of Ground Lease Business" below).
Disposition of Ground Lease Business—In April 2017, institutional investors acquired a controlling interest in the Company's GL business through the merger of a Company subsidiary and related transactions (the "Acquisition Transactions"). The Company's GL business was a component of the Company's net lease segment and consisted of 12 properties subject to long-term net leases including seven GLs and one master lease (covering five properties). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. ("SAFE"). The carrying value of the Company's GL assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its GL assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounts for its investment in SAFE as an equity method investment (refer to Note 7). The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE (refer to Note 2 - Summary of Significant Accounting Policies). The carrying value of the 12 properties is classified in "Real estate available and held for sale" on the Company's consolidated balance sheet as of DecemberMarch 31, 2016 and the gain was recorded in "Gain from discontinued operations" in the Company's consolidated statements of operations.
Discontinued Operations—The transactions described above involving the Company's GL business qualified for discontinued operations and the following table summarizes income from discontinued operations for the three and nine months ended September 30, 2017 and 2016 ($ in thousands)(1)(2):
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | $ | — |
| | $ | 4,614 |
| | $ | 6,430 |
| | $ | 13,600 |
|
| Expenses | | — |
| | (893 | ) | | (1,491 | ) | | (2,666 | ) |
| Income from discontinued operations | | $ | — |
| | $ | 3,721 |
| | $ | 4,939 |
| | $ | 10,934 |
|
| |
(1) | The transactions closed on April 14, 2017 and revenues, expenses and income from discontinued operations excludes the period from April 14, 2017 to September 30, 2017. Revenues primarily consisted of operating lease income and expenses primarily consisted of depreciation and amortization and real estate expense. |
| |
(2) | For the nine months ended September 30, 2017, cash flows provided by operating activities and cash flows used in investing activities from discontinued operations was $5.7 million and $0.5 million, respectively. For the nine months ended September 30, 2016, cash flows provided by operating activities and cash flows used in investing activities from discontinued operations was $12.9 million and $5.6 million, respectively. |
Other Dispositions—During the nine months ended September 30, 2017 and 2016, the Company sold residential condominiums for total net proceeds of $21.8 million and $74.9 million, respectively, and recorded income from sales of real estate totaling $3.3 million and $23.3 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company received net proceeds related to net lease asset sales of $61.7 million and $108.5 million, respectively, resulting in gains of $25.0 million and $15.9 million, respectively. During the nine months ended September 30, 2016, the Company also sold commercial operating properties for net proceeds of $229.1 million resulting in gains of $49.2 million. The gains are recorded in "Income from sales of real estate" in the Company's consolidated statements of operations.
Impairments—During the nine months ended September 30, 2017,2020, the Company recorded an impairment of $4.4 million on a real estate asset held for sale due to shifting demand in the local condominium market along with a change in the Company's exit strategy and an impairment of $0.6$1.7 million in connection with the sale of a net lease asset. During the three months ended March 31, 2019, the Company recorded an outparcel located atimpairment of $3.2 million on a commercial operating property. During the nine months ended September 30, 2016, the Companyproperty based on an executed purchase and sale agreement and recorded $0.7 million of impairments of $7.9 million comprised of $3.0 million on a residential operating property resulting from a slowdown in the local condominium real estate market and $4.9 million onconnection with the sale of net lease assets.residential condominium units.
Other Developments—The Company identified properties that sustained damages associated with the recent hurricanes in the United States. The Company has insurance policies in place to cover damages in excess of the Company's deductibles. As of September 30, 2017, the Company has recorded approximately $1.2 million to "Real estate expense" in the Company's consolidated statements of operations to cover expected losses at the properties.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $6.1$5.9 million and $17.0$5.4 million for the three and nine months ended September 30, 2017, respectively. Tenant expense reimbursements were $6.2 millionMarch 31, 2020 and $18.4 million for the three and nine months ended September 30, 2016,2019, respectively. These amounts are included in "Operating lease income" in the Company's consolidated statements of operations.
Allowance for Doubtful Accounts—As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the allowance for doubtful accounts related to real estate tenant receivables was $1.2$1.1 million and $1.3$1.0 million, respectively, and the allowance for doubtful accounts related to deferred operating lease income was $1.1$1.0 million and $1.3$1.0 million as of September 30, 2017March 31, 2020 and December 31, 2016,
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
2019, respectively. These amounts are included in "Accrued interest and operating lease income receivable, net" and "Deferred operating lease income receivable, net," respectively, on the Company's consolidated balance sheets.
Note 5—Net Investment in Leases
In May 2019, the Company entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of 9 bowling centers for $56.7 million, of which 7 were acquired from the lessee for $44.1 million, and a commitment to invest up to $55.0 million in additional bowling centers over the next several years. The new centers were added to the Company's existing master leases with the tenant. In connection with this transaction, the maturities of the master leases were extended by 15 years to 2047.
As a result of the modifications to the leases, the Company classified the leases as sales-type leases and recorded $424.1 million in "Net investment in leases" on its consolidated balance sheet. The Company determined that the 7 bowling centers acquired did not qualify as a sale leaseback transaction and recorded $44.1 million in "Loans receivable and other lending investments, net" on its consolidated balance sheet (refer to Note 7). For the three months ended March 31, 2020, the Company recognized $6.9 million of cash interest income and $1.5 million of non-cash interest income in "Interest income from sales-type leases" in the Company's consolidated statements of operations.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company's net investment in leases were comprised of the following as of March 31, 2020 and December 31, 2019 ($ in thousands):
|
| | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| Total undiscounted cash flows | | $ | 1,035,128 |
| | $ | 1,042,019 |
|
| Unguaranteed estimated residual value | | 340,620 |
| | 340,620 |
|
| Present value discount | | (955,369 | ) | | (963,724 | ) |
| Allowance for losses on net investment in leases | | (10,403 | ) | | — |
|
Net investment in leases(1) | | 409,976 |
| | 418,915 |
|
| |
| (1) | As of March 31, 2020 and December 31, 2019, all of the Company's net investment in leases were current in their payment status and performing in accordance with the terms of the respective leases. As of March 31, 2020, the risk rating on the Company's net investment in leases was 1.5 (refer to Note 3). |
Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases, excluding lease payments that are not fixed and determinable, in effect as of March 31, 2020, are as follows by year ($ in thousands):
|
| | | | |
| | | Amount |
| 2020 (remaining nine months) | | $ | 20,674 |
|
| 2021 | | 28,062 |
|
| 2022 | | 30,549 |
|
| 2023 | | 30,549 |
|
| 2024 | | 30,549 |
|
| Thereafter | | 894,745 |
|
| Total undiscounted cash flows | | $ | 1,035,128 |
|
Allowance for Losses on Net Investment in Leases—Changes in the Company's allowance for losses on net investment in leases for the three months ended March 31, 2020 were as follows ($ in thousands):
|
| | | | |
Initial allowance recorded upon adoption of new accounting standard(1) | | $ | 9,111 |
|
Provision for losses on net investment in leases(2) | | 1,292 |
|
| Allowance for losses on net investment in leases at end of period | | $ | 10,403 |
|
| |
| (1) | The Company recorded an initial allowance for losses on net investment in leases of $9.1 million upon the adoption of ASU 2016-13 on January 1, 2020 (refer to Note 3). |
| |
| (2) | During thethree months ended March 31, 2020, the Company recorded a general allowance for losses on net investment in leases of $1.3 million due to the adoption of ASU 2016-13 (refer to Note 3). |
Note 6—Land and Development
The Company's land and development assets were comprised of the following ($ in thousands):
|
| | | | | | | |
| | As of |
| | March 31, | | December 31, |
| | 2020 | | 2019 |
| Land and land development, at cost | $ | 523,893 |
| | $ | 590,153 |
|
| Less: accumulated depreciation | (9,829 | ) | | (9,608 | ) |
| Total land and development, net | $ | 514,064 |
| | $ | 580,545 |
|
|
| | | | | | | |
| | As of |
| | September 30, | | December 31, |
| | 2017 | | 2016 |
Land and land development, at cost(1) | $ | 869,331 |
| | $ | 952,051 |
|
| Less: accumulated depreciation | (7,824 | ) | | (6,486 | ) |
| Total land and development, net | $ | 861,507 |
| | $ | 945,565 |
|
| |
(1) | During the nine months September 30, 2017, the Company funded capital expenditures on land and development assets of $85.0 million. |
Dispositions—During the ninethree months ended September 30, 2017,March 31, 2020 and 2019, the Company sold one land parcel totaling 1,250 acres (see following paragraph)parcels and residential lots and units and recognized land development revenue of $178.7$80.2 million from its land and development portfolio.$12.7 million, respectively. During the ninethree months ended September 30, 2016, the Company sold residential lots and units and recognized land development revenue of $74.4 million from its land and development portfolio. During the nine months ended September 30, 2017 and 2016, the Company recognized land development cost of sales of $165.9 million and $50.8 million, respectively, from its land and development portfolio.
In connection with the resolution of litigation involving a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland ("Bevard"), during the nine months ended September 30, 2017, the Company recognized $114.0 million of land development revenue and $106.3 million of land development cost of sales (refer to Note 11). In 2016, the Company acquired an additional 10.7% interest in Bevard for $10.8 million and owned 95.7% of Bevard at the time of resolution.
Impairments—During the nine months ended September 30, 2017, the Company recorded an impairment of $10.1 million on a land asset due to a change in the Company's exit strategy. During the nine months ended September 30, 2016, the Company recorded an impairment of $3.8 million equal to the carrying value on a land asset resulting from a change in business strategy.
Redeemable Noncontrolling Interest—The Company has a majority interest in a strategic venture that provides the third party minority partner an option to redeem their interest at fair value. The Company has reflected the partner's noncontrolling interest in this venture as a component of redeemable noncontrolling interest within its consolidated balance sheets. Changes in fair value are being accreted over the term from the date of issuance of the redemption option to the earliest redemption date using the interest method. As of September 30, 2017 and December 31, 2016, this interest had a carrying value of zero and $1.3 million, respectively. As of September 30, 2017 and December 31, 2016, this interest did not have a redemption value.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
ended March 31, 2020 and 2019, the Company recognized land development cost of sales of $77.1 million and $14.4 million, respectively, from its land and development portfolio.
Note 6—7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
|
| | | | | | | | |
| | | As of |
| | March 31,
2020 | | December 31,
2019 |
| Construction loans | | | | |
| Senior mortgages | | $ | 542,241 |
| | $ | 518,992 |
|
| Corporate/Partnership loans | | 99,702 |
| | 95,394 |
|
| Subtotal - gross carrying value of construction loans | | 641,943 |
| | 614,386 |
|
| Loans | | | | |
| Senior mortgages | | 53,319 |
| | 53,592 |
|
| Corporate/Partnership loans | | 23,321 |
| | 24,424 |
|
| Subordinate mortgages | | 11,063 |
| | 10,877 |
|
| Subtotal - gross carrying value of loans | | 87,703 |
| | 88,893 |
|
| Other lending investments | | | |
|
|
| Financing receivables (refer to Note 5) | | 44,445 |
| | 44,339 |
|
| Held-to-maturity debt securities | | 86,368 |
| | 84,981 |
|
| Available-for-sale debt securities | | 23,640 |
| | 23,896 |
|
| Subtotal - other lending investments | | 154,453 |
| | 153,216 |
|
| Total gross carrying value of loans receivable and other lending investments | | 884,099 |
| | 856,495 |
|
| Allowance for loan losses | | (33,264 | ) | | (28,634 | ) |
| Total loans receivable and other lending investments, net | | $ | 850,835 |
| | $ | 827,861 |
|
|
| | | | | | | |
| | As of |
| Type of Investment | September 30,
2017 | | December 31,
2016 |
| Senior mortgages | $ | 594,081 |
| | $ | 940,738 |
|
| Corporate/Partnership loans | 495,066 |
| | 490,389 |
|
| Subordinate mortgages | 9,335 |
| | 24,941 |
|
| Total gross carrying value of loans | 1,098,482 |
| | 1,456,068 |
|
| Reserves for loan losses | (76,189 | ) | | (85,545 | ) |
| Total loans receivable, net | 1,022,293 |
| | 1,370,523 |
|
| Other lending investments—securities | 87,149 |
| | 79,916 |
|
| Total loans receivable and other lending investments, net | $ | 1,109,442 |
| | $ | 1,450,439 |
|
ReserveAllowance for Loan Losses—Changes in the Company's reserveallowance for loan losses were as follows for the three months ended March 31, 2020 ($ in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | General Allowance | | | | |
| | | Construction Loans | |
Loans | | Held to Maturity Debt Securities | | Financing Receivables | | Specific Allowance | | Total |
| Allowance for loan losses at beginning of period | | $ | 6,668 |
| | $ | 265 |
| | $ | — |
| | $ | — |
| | $ | 21,701 |
| | $ | 28,634 |
|
Adoption of new accounting standard(1) | | (353 | ) | | 98 |
| | 20 |
| | 964 |
| | — |
| | 729 |
|
Provision for loan losses(2) | | 3,409 |
| | 323 |
| | 33 |
| | 136 |
| | — |
| | 3,901 |
|
| Allowance for loan losses at end of period | | $ | 9,724 |
|
| $ | 686 |
| | $ | 53 |
| | $ | 1,100 |
| | $ | 21,701 |
| | $ | 33,264 |
|
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Reserve for loan losses at beginning of period | | $ | 78,789 |
| | $ | 110,371 |
| | $ | 85,545 |
| | $ | 108,165 |
|
(Recovery of) provision for loan losses(1) | | (2,600 | ) | | (14,955 | ) | | (8,128 | ) | | (12,749 | ) |
| Charge-offs | | — |
| | — |
| | (1,228 | ) | | — |
|
| Reserve for loan losses at end of period | | $ | 76,189 |
| | $ | 95,416 |
| | $ | 76,189 |
| | $ | 95,416 |
|
| |
| (1) | ForOn January 1, 2020, the threeCompany recorded an increase to its allowance for loan losses of $3.3 million upon the adoption of ASU 2016-13 (refer to Note 3), of which $2.5 million related to expected credit losses for unfunded loan commitments and ninewas recorded in "Accounts payable, accrued expenses and other liabilities." |
| |
| (2) | During thethree months ended September 30, 2016,March 31, 2020, the Company recorded a provision for loan losses includes recoveries of previously$4.0 million due to the adoption of ASU 2016-13 (refer to Note 3), of which $0.1 million related to expected credit losses for unfunded loan commitments and was recorded asset-specific loan loss reserves of $11.7 million.in "Accounts payable, accrued expenses and other liabilities." |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest)and other lending investments and the associated reserveallowance for loan losses were as follows as of March 31, 2020 and December 31, 2019 ($ in thousands):
|
| | | | | | | | | | | |
| | Individually Evaluated for Impairment(1) | | Collectively Evaluated for Impairment(2) | | Total |
| As of September 30, 2017 | | | | | |
| Loans | $ | 238,155 |
| | $ | 865,953 |
| | $ | 1,104,108 |
|
| Less: Reserve for loan losses | (60,989 | ) | | (15,200 | ) | | (76,189 | ) |
Total(3) | $ | 177,166 |
| | $ | 850,753 |
| | $ | 1,027,919 |
|
| As of December 31, 2016 | | | | | |
| Loans | $ | 253,941 |
| | $ | 1,209,062 |
| | $ | 1,463,003 |
|
| Less: Reserve for loan losses | (62,245 | ) | | (23,300 | ) | | (85,545 | ) |
Total(3) | $ | 191,696 |
| | $ | 1,185,762 |
| | $ | 1,377,458 |
|
|
| | | | | | | | | | | |
| | Individually Evaluated for Impairment(1) | | Collectively Evaluated for Impairment | | Total |
| As of March 31, 2020 | | | | | |
Construction loans(2) | $ | — |
| | $ | 641,943 |
| | $ | 641,943 |
|
Loans(2) | 37,517 |
| | 50,186 |
| | 87,703 |
|
| Financing receivables | — |
| | 44,445 |
| | 44,445 |
|
| Held-to-maturity debt securities | — |
| | 86,368 |
| | 86,368 |
|
Available-for-sale debt securities(3) | — |
| | 23,640 |
| | 23,640 |
|
| Less: Allowance for loan losses | (21,701 | ) | | (11,563 | ) | | (33,264 | ) |
| Total | $ | 15,816 |
| | $ | 835,019 |
| | $ | 850,835 |
|
| As of December 31, 2019 | | | | | |
Construction loans(2) | $ | — |
| | $ | 614,386 |
| | $ | 614,386 |
|
Loans(2) | 37,820 |
| | 51,073 |
| | 88,893 |
|
| Financing receivables | — |
| | 44,339 |
| | 44,339 |
|
| Held-to-maturity debt securities | — |
| | 84,981 |
| | 84,981 |
|
Available-for-sale debt securities(3) | — |
| | 23,896 |
| | 23,896 |
|
| Less: Allowance for loan losses | (21,701 | ) | | (6,933 | ) | | (28,634 | ) |
| Total | $ | 16,119 |
| | $ | 811,742 |
| | $ | 827,861 |
|
| |
| (1) | The carrying value of these loans includethis loan includes an unamortized discounts, premiums, deferred fees and costs totaling net discountsdiscount of $0.7 million and $0.4$0.1 million as of September 30, 2017March 31, 2020 and December 31, 2016, respectively.2019. The Company's loansone loan individually evaluated for impairment primarily represent loansrepresents a loan on non-accrual status andstatus; therefore, the unamortized amountsamount associated with these loans arethis loan is not currently being amortized into income. |
| |
| (2) | The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net premiumsdiscounts of $6.2$0.2 million and $1.9$0.7 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. |
| |
| (3) | The Company's recorded investment in loans as of September 30, 2017 and December 31, 2016 includes accrued interest of $5.6 million and $6.9 million, respectively, which are included in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the total excludes $87.1 million and $79.9 million, respectively, ofAvailable-for-sale debt securities that are evaluated for impairment under ASC 320.326-30. |
Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments, which are inherently uncertain, and there can be no assurance that actual performance will be similar to current expectation. The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt.
The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
|
| | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Performing Loans | | Weighted Average Risk Ratings | | Performing Loans | | Weighted Average Risk Ratings |
| Senior mortgages | $ | 515,610 |
| | 2.47 |
| | $ | 859,250 |
| | 3.12 |
|
| Corporate/Partnership loans | 340,980 |
| | 2.76 |
| | 335,677 |
| | 3.09 |
|
| Subordinate mortgages | 9,363 |
| | 3.00 |
| | 14,135 |
| | 3.00 |
|
| Total | $ | 865,953 |
| | 2.59 |
| | $ | 1,209,062 |
| | 3.11 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company's recorded investmentamortized cost basis in performing senior mortgages, corporate/partnership loans, subordinate mortgages and financing receivables, presented by year of origination and by credit quality, as indicated by risk rating, as of March 31, 2020 were as follows ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year of Origination | | |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior to 2016 | | Total |
| Senior mortgages | | | | | | | | | | | | | | |
| Risk rating | | | | | | | | | | | | | | |
| 1 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 54,420 |
| | $ | — |
| | $ | — |
| | $ | 54,420 |
|
| 2 | | — |
| | — |
| | 84,662 |
| | 96,549 |
| | — |
| | — |
| | 181,211 |
|
| 3 | | — |
| | 12,803 |
| | 170,860 |
| | 47,859 |
| | 37,767 |
| | 4,524 |
| | 273,813 |
|
| 3.5 | | — |
| | — |
| | — |
| | 48,599 |
| | — |
| | — |
| | 48,599 |
|
Subtotal(1) | | $ | — |
| | $ | 12,803 |
| | $ | 255,522 |
| | $ | 247,427 |
| | $ | 37,767 |
| | $ | 4,524 |
| | $ | 558,043 |
|
| Corporate/partnership loans | | | | | | | | | | | | | | |
| Risk rating | | | | | | | | | | | | | | |
| 1 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,205 |
| | $ | — |
| | $ | — |
| | $ | 8,205 |
|
| 2 | | — |
| | 938 |
| | 17,708 |
| | — |
| | — |
| | — |
| | 18,646 |
|
| 3 | | — |
| | — |
| | 58,405 |
| | — |
| | 37,767 |
| | — |
| | 96,172 |
|
| Subtotal | | $ | — |
| | $ | 938 |
| | $ | 76,113 |
| | $ | 8,205 |
| | $ | 37,767 |
| | $ | — |
| | $ | 123,023 |
|
| Subordinate mortgages | | | | | | | | | | | | | | |
| Risk rating | | | | | | | | | | | | | | |
| 3 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11,063 |
| | $ | 11,063 |
|
| Subtotal | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11,063 |
| | $ | 11,063 |
|
| Financing receivables | | | | | | | | | | | | | | |
| Risk rating | | | | | | | | | | | | | | |
| 1.5 | | $ | — |
| | $ | 44,445 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44,445 |
|
| Subtotal | | $ | — |
| | $ | 44,445 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44,445 |
|
| Total | | $ | — |
| | $ | 58,186 |
| | $ | 331,635 |
| | $ | 255,632 |
| | $ | 75,534 |
| | $ | 15,587 |
| | $ | 736,574 |
|
| |
| (1) | As of March 31, 2020, excludes $37.5 million for one loan on non-accrual status. |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company's amortized cost basis in loans, aged by payment status and presented by class, was as follows ($ in thousands):
| | | | Current | | Less Than and Equal to 90 Days | | Greater Than 90 Days(1) | | Total Past Due | | Total | Current | | Less Than and Equal to 90 Days | | Greater Than 90 Days(1) | | Total Past Due | | Total |
| As of September 30, 2017 | | | | | | | | | | |
| As of March 31, 2020 | | | | | | | | | | |
| Senior mortgages | $ | 521,610 |
| | $ | — |
| | $ | 75,732 |
| | $ | 75,732 |
| | $ | 597,342 |
| $ | 558,043 |
| |
|
| | $ | 37,517 |
| | $ | 37,517 |
| | $ | 595,560 |
|
| Corporate/Partnership loans | 340,980 |
| | — |
| | 156,423 |
| | 156,423 |
| | 497,403 |
| 123,023 |
| | — |
| | — |
| | — |
| | 123,023 |
|
| Subordinate mortgages | 9,363 |
| | — |
| | — |
| | — |
| | 9,363 |
| 11,063 |
| | — |
| | — |
| | — |
| | 11,063 |
|
| Total | $ | 871,953 |
| | $ | — |
| | $ | 232,155 |
| | $ | 232,155 |
| | $ | 1,104,108 |
| $ | 692,129 |
| | $ | — |
| | $ | 37,517 |
| | $ | 37,517 |
| | $ | 729,646 |
|
| As of December 31, 2016 | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | |
| Senior mortgages | $ | 868,505 |
| | $ | — |
| | $ | 76,677 |
| | $ | 76,677 |
| | $ | 945,182 |
| $ | 534,765 |
| | $ | — |
| | $ | 37,820 |
| | $ | 37,820 |
| | $ | 572,585 |
|
| Corporate/Partnership loans | 335,677 |
| | — |
| | 157,146 |
| | 157,146 |
| | 492,823 |
| 119,818 |
| | — |
| | — |
| | — |
| | 119,818 |
|
| Subordinate mortgages | 24,998 |
| | — |
| | — |
| | — |
| | 24,998 |
| 10,877 |
| | — |
| | — |
| | — |
| | 10,877 |
|
| Total | $ | 1,229,180 |
| | $ | — |
| | $ | 233,823 |
| | $ | 233,823 |
| | $ | 1,463,003 |
| $ | 665,460 |
| | $ | — |
| | $ | 37,820 |
| | $ | 37,820 |
| | $ | 703,280 |
|
| |
| (1) | As of September 30, 2017,March 31, 2020 and December 31, 2019, the Company had four loans,1 loan which werewas greater than 90 days delinquent and werewas in various stages of resolution, including legal proceedings,and environmental concernsmatters, and foreclosure-related proceedings,was 10.8 years and ranged from 1.0 to 8.010.5 years outstanding. As of December 31, 2016, the Company had four loans, which were greater than 90 days delinquent, and were in various stages of resolution, including legal proceedings, environmental concerns and foreclosure-related proceedings, and ranged from 1.0 to 8.0 years outstanding.outstanding, respectively. |
Impaired Loans—The Company's recorded investment in impaired loans, presented by class,loan was as follows ($ in thousands)(1):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| With no related allowance recorded: | | | | | | | | | | | |
| Subordinate mortgages | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,862 |
| | $ | 10,846 |
| | $ | — |
|
| Subtotal | — |
| | — |
| | — |
| | 10,862 |
| | 10,846 |
| | — |
|
| With an allowance recorded: | | | | | | | | | | | |
| Senior mortgages | 81,732 |
| | 81,848 |
| | (48,518 | ) | | 85,933 |
| | 85,780 |
| | (49,774 | ) |
| Corporate/Partnership loans | 156,423 |
| | 145,849 |
| | (12,471 | ) | | 157,146 |
| | 146,783 |
| | (12,471 | ) |
| Subtotal | 238,155 |
| | 227,697 |
| | (60,989 | ) | | 243,079 |
| | 232,563 |
| | (62,245 | ) |
| Total: | | | | | | | | | | | |
| Senior mortgages | 81,732 |
| | 81,848 |
| | (48,518 | ) | | 85,933 |
| | 85,780 |
| | (49,774 | ) |
| Corporate/Partnership loans | 156,423 |
| | 145,849 |
| | (12,471 | ) | | 157,146 |
| | 146,783 |
| | (12,471 | ) |
| Subordinate mortgages | — |
| | — |
| | — |
| | 10,862 |
| | 10,846 |
| | — |
|
| Total | $ | 238,155 |
| | $ | 227,697 |
| | $ | (60,989 | ) | | $ | 253,941 |
| | $ | 243,409 |
| | $ | (62,245 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
| | Amortized Cost | | Unpaid Principal Balance | | Related Allowance | | Amortized Cost | | Unpaid Principal Balance | | Related Allowance |
| With an allowance recorded: | | | | | | | | | | | |
| Senior mortgages | $ | 37,517 |
| | $ | 37,618 |
| | $ | (21,701 | ) | | $ | 37,820 |
| | $ | 37,923 |
| | $ | (21,701 | ) |
| Total | $ | 37,517 |
| | $ | 37,618 |
| | $ | (21,701 | ) | | $ | 37,820 |
| | $ | 37,923 |
| | $ | (21,701 | ) |
| |
| (1) | All of the Company's non-accrual loans are considered impaired and included in the table above. |
| |
| (2) | The Company did not record any interest income on impaired loans for the three months ended March 31, 2020 and 2019. |
Other lending investments—Other lending investments includes the following securities ($ in thousands):
14 |
| | | | | | | | | | | | | | | | | | | |
| | Face Value | | Amortized Cost Basis | | Net Unrealized Gain | | Estimated Fair Value | | Net Carrying Value |
| As of March 31, 2020 | | | | | | | | | |
| Available-for-Sale Securities | | | | | | | | | |
| Municipal debt securities | $ | 20,680 |
| | $ | 20,680 |
| | $ | 2,960 |
| | $ | 23,640 |
| | $ | 23,640 |
|
| Held-to-Maturity Securities | | | | | | | | | |
| Debt securities | 100,000 |
| | 86,368 |
| | — |
| | 86,368 |
| | 86,368 |
|
| Total | $ | 120,680 |
| | $ | 107,048 |
| | $ | 2,960 |
| | $ | 110,008 |
| | $ | 110,008 |
|
| As of December 31, 2019 | | | | | | | | | |
| Available-for-Sale Securities | | | | | | | | | |
| Municipal debt securities | $ | 21,140 |
| | $ | 21,140 |
| | $ | 2,756 |
| | $ | 23,896 |
| | $ | 23,896 |
|
| Held-to-Maturity Securities | | | | | | | | | |
| Debt securities | 100,000 |
| | 84,981 |
| | — |
| | 84,981 |
| | 84,981 |
|
| Total | $ | 121,140 |
| | $ | 106,121 |
| | $ | 2,756 |
| | $ | 108,877 |
| | $ | 108,877 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Asof March 31, 2020, the contractual maturities of the Company's securities were as follows ($ in thousands):
|
| | | | | | | | | | | | | | | |
| | Held-to-Maturity Debt Securities | | Available-for-Sale Debt Securities |
| | Amortized Cost Basis | | Estimated Fair Value | | Amortized Cost Basis | | Estimated Fair Value |
| Maturities | | | | | | | |
| Within one year | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| After one year through 5 years | 86,368 |
| | 86,368 |
| | — |
| | — |
|
| After 5 years through 10 years | — |
| | — |
| | — |
| | — |
|
| After 10 years | — |
| | — |
| | 20,680 |
| | 23,640 |
|
| Total | $ | 86,368 |
| | $ | 86,368 |
| | $ | 20,680 |
| | $ | 23,640 |
|
Note 8—Other Investments
The Company's average recorded investment in impaired loansother investments and interest income recognized, presented by class,its proportionate share of earnings (losses) from equity method investments were as follows ($ in thousands):
|
| | | | | | | | | | | | | | | |
| | | | Equity in Earnings (Losses) |
| | Carrying Value as of | | For the Three Months Ended March 31, |
| | March 31, 2020 | | December 31, 2019 | | 2020 | | 2019 |
| Real estate equity investments | | | | | | | |
Safehold Inc. ("SAFE")(1) | $ | 834,351 |
| | $ | 729,357 |
| | $ | 19,338 |
| | $ | 7,316 |
|
| iStar Net Lease II LLC ("Net Lease Venture II") | 46,183 |
| | 30,712 |
| | 193 |
| | (86 | ) |
| Other real estate equity investments | 96,681 |
| | 104,553 |
| | (2,082 | ) | | (2,123 | ) |
| Subtotal | 977,215 |
| | 864,622 |
| | 17,449 |
| | 5,107 |
|
Other strategic investments(2) | 52,337 |
| | 43,253 |
| | (837 | ) | | 202 |
|
| Total | $ | 1,029,552 |
| | $ | 907,875 |
| | $ | 16,612 |
| | $ | 5,309 |
|
| |
| (1) | As of March 31, 2020, the Company owned 33.4 million shares of SAFE common stock which, based on the closing price of $63.23 on March 31, 2020, had a market value of $2.1 billion. For the three months ended March 31, 2020, equity in earnings includes a dilution gain of $7.9 million resulting from a SAFE equity offering in March 2020. |
| |
| (2) | During the three months ended March 31, 2020, the Company identified an observable price change in an equity security held by the Company as evidenced by an orderly private issuance of similar securities by the same issuer. In accordance with ASC 321, the Company remeasured its equity investment at fair value and recognized a mark-to-market gain of $9.9 million in "Other income" in the Company's consolidated statements of operations. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Average
Recorded
Investment | | Interest
Income
Recognized | | Average
Recorded
Investment | | Interest
Income
Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| With no related allowance recorded: | | | | | | | | | | | | | | | |
| Senior mortgages | $ | — |
| | $ | — |
| | $ | 4,608 |
| | $ | 114 |
| | $ | — |
| | $ | — |
| | $ | 4,575 |
| | $ | 226 |
|
| Subordinate mortgages | 5,501 |
| | 385 |
| | 11,567 |
| | — |
| | 8,227 |
| | 385 |
| | 5,784 |
| | — |
|
| Subtotal | 5,501 |
| | 385 |
| | 16,175 |
| | 114 |
| | 8,227 |
| | 385 |
| | 10,359 |
| | 226 |
|
| With an allowance recorded: | | | | | | | | | | | | | | | |
| Senior mortgages | 82,007 |
| | — |
| | 127,494 |
| | — |
| | 83,100 |
| | — |
| | 127,169 |
| | — |
|
| Corporate/Partnership loans | 156,399 |
| | — |
| | 81,108 |
| | — |
| | 156,811 |
| | — |
| | 43,339 |
| | — |
|
| Subtotal | 238,406 |
| | — |
| | 208,602 |
| | — |
| | 239,911 |
| | — |
| | 170,508 |
| | — |
|
| Total: | | | | | | | | | | | | | | | |
| Senior mortgages | 82,007 |
| | — |
| | 132,102 |
| | 114 |
| | 83,100 |
| | — |
| | 131,744 |
| | 226 |
|
| Corporate/Partnership loans | 156,399 |
| | — |
| | 81,108 |
| | — |
| | 156,811 |
| | — |
| | 43,339 |
| | — |
|
| Subordinate mortgages | 5,501 |
| | 385 |
| | 11,567 |
| | — |
| | 8,227 |
| | 385 |
| | 5,784 |
| | — |
|
| Total | $ | 243,907 |
| | $ | 385 |
| | $ | 224,777 |
| | $ | 114 |
| | $ | 248,138 |
| | $ | 385 |
| | $ | 180,867 |
| | $ | 226 |
|
In January 2019, the Company purchased 12.5 million newly designated limited partnership units (the "Investor Units") in SAFE's operating partnership ("SAFE OP"), at a purchase price of $20.00 per unit, for a total purchase price of $250.0 million. The purpose of the investment was to allow SAFE to fund additional Ground Lease acquisitions and originations. Each Investor Unit received distributions equivalent to distributions declared and paid on one share of SAFE's common stock. The Investor Units had no voting rights. They had limited protective consent rights over certain matters such as amendments to the terms of the Investor Units that would adversely affect the Investor Units. In May 2019, after the approval of SAFE's stockholders, the Investor Units were exchanged for shares of SAFE's common stock on a one-for-one basis. Following the exchange, the Investor Units were retired.
Securities—Other lending investments—securities include the following ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Face Value | | Amortized Cost Basis | | Net Unrealized Gain (Loss) | | Estimated Fair Value | | Net Carrying Value |
| As of September 30, 2017 | | | | | | | | | |
| Available-for-Sale Securities | | | | | | | | | |
| Municipal debt securities | $ | 21,230 |
| | $ | 21,230 |
| | $ | 875 |
| | $ | 22,105 |
| | $ | 22,105 |
|
| Held-to-Maturity Securities | | | | | | | | | |
| Debt securities | 65,007 |
| | 65,044 |
| | 1,158 |
| | 66,202 |
| | 65,044 |
|
| Total | $ | 86,237 |
| | $ | 86,274 |
| | $ | 2,033 |
| | $ | 88,307 |
| | $ | 87,149 |
|
| As of December 31, 2016 | | | | | | | | | |
| Available-for-Sale Securities | | | | | | | | | |
| Municipal debt securities | $ | 21,240 |
| | $ | 21,240 |
| | $ | 426 |
| | $ | 21,666 |
| | $ | 21,666 |
|
| Held-to-Maturity Securities | | | | | | | | | |
| Debt securities | 58,454 |
| | 58,250 |
| | 2,753 |
| | 61,003 |
| | 58,250 |
|
| Total | $ | 79,694 |
| | $ | 79,490 |
| | $ | 3,179 |
| | $ | 82,669 |
| | $ | 79,916 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 7—Other InvestmentsIn connection with the Company's purchase of the Investor Units, it entered into a Stockholder's Agreement with SAFE on January 2, 2019. The Stockholder's Agreement:
limits the Company's discretionary voting power to 41.9% of the outstanding voting power of SAFE's common stock until its aggregate ownership of SAFE common stock is less than 41.9%;
The Company's other investments and its proportionate share of earnings from equity method investments were as follows ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Equity in Earnings |
| | Carrying Value as of | | For the Three Months Ended September 30, | | For the Nine Months
Ended September 30, |
| | September 30, 2017 | | December 31, 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Real estate equity investments | | | | | | | | | | | |
| iStar Net Lease I LLC ("Net Lease Venture") | $ | 110,153 |
| | $ | 92,669 |
| | $ | 962 |
| | $ | 723 |
| | $ | 2,975 |
| | $ | 2,613 |
|
Safety, Income & Growth Inc. ("SAFE")(1) | 75,023 |
| | — |
| | 340 |
| | — |
| | 388 |
| | — |
|
| Marina Palms, LLC ("Marina Palms") | 5,369 |
| | 35,185 |
| | 494 |
| | 6,182 |
| | 4,794 |
| | 19,583 |
|
Other real estate equity investments(2) | 79,768 |
| | 53,202 |
| | 55 |
| | 16,289 |
| | 4,304 |
| | 43,187 |
|
| Subtotal | 270,313 |
| | 181,056 |
| | 1,851 |
| | 23,194 |
| | 12,461 |
| | 65,383 |
|
Other strategic investments(3) | 18,724 |
| | 33,350 |
| | 610 |
| | 3,346 |
| | 1,216 |
| | 8,871 |
|
| Total | $ | 289,037 |
| | $ | 214,406 |
| | $ | 2,461 |
| | $ | 26,540 |
| | $ | 13,677 |
| | $ | 74,254 |
|
| |
(1) | Equity in earnings is for the period from April 14, 2017 to September 30, 2017. |
| |
(2) | In June 2016, a majority-owned consolidated subsidiary of the Company sold its interest in a real estate equity method investment for net proceeds of $39.8 million and recognized a gain of $31.5 million, of which $10.1 million of the gain was attributable to the noncontrolling interest. In September 2016, the Company received a distribution from one of its real estate equity method investments and recognized equity in earnings during the three and nine months ended September 30, 2016 of $15.8 million and $11.6 million, respectively. |
| |
(3) | In conjunction with the sale of the Company's interests in Oak Hill Advisors, L.P. in 2011, the Company retained a share of the carried interest related to various funds. During the three and nine months ended September 30, 2016, the Company recognized $0.6 million and $4.3 million, respectively, of carried interest income. |
Net Lease Venture—In February 2014,requires the Company partnered with a sovereign wealth fund to formcast all of its voting power in favor of 3 director nominees to SAFE's board who are independent of each of the Net Lease VentureCompany and SAFE for three years;
subjects the Company to acquire and develop net lease assets and gave a rightcertain standstill provisions for two years;
restricts the Company's ability to transfer shares of first refusal to the Net Lease Venture on all new net lease investments. The Company has an equity interest in the Net Lease Venture of approximately 51.9%. The partners plan to contribute up to an aggregate $500 million of equity to acquire and develop net lease assets over time. The Company is responsible for sourcing new opportunities and managing the venture and its assetsSAFE common stock issued in exchange for a promote and management fee. SeveralInvestor Units, or "Exchange Shares," for one year after their issuance;
prohibits the Company from transferring shares of SAFE common stock representing more than 20% of the Company's senior executives whose time is substantially devotedoutstanding SAFE common stock in one transaction or a series of related transactions to the Net Lease Venture ownany person or group, other than pursuant to a total of 0.6% equity ownershipwidely distributed public offering, unless SAFE's other stockholders have participation rights in the venture via co-investment. These senior executives are also entitled to an amount equal to 50% of any promote payment received based on the 47.5% partner's interest. During the nine months ended September 30, 2017, the Net Lease Venture acquired industrial properties for $59.0 million. During the nine months ended September 30, 2017,transaction; and
provides the Company sold a net lease asset for proceeds of $6.2 million, which approximated its carrying value net of financing, to the Net Lease Venture and derecognized the associated $18.9 million financing. During the nine months ended September 30, 2017,certain preemptive rights.
In March 2020, the Company made contributions of $37.7 million to the Net Lease Venture and received distributions of $23.7 million from the Net Lease Venture. During the nine months ended September 30, 2016, the Net Lease Venture acquired two office properties and the Company made contributions to the Net Lease Venture of $35.6 million and received distributions of $3.9 million.
As of September 30, 2017 and December 31, 2016, the venture's carrying value of total assets was $635.1 million and $511.3 million, respectively. During the three and nine months ended September 30, 2017, the Company recorded management fees of $0.6 million and $1.5 million, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2016, respectively, from the Net Lease Venture which are included in "Other income" in the Company's consolidated statements of operations. This entity is not a VIE and the Company does not have controlling interest due to the substantive participating rights of its partner.
Safety, Income & Growth Inc.—The Company along with two institutional investors capitalized SIGI Acquisition, Inc. ("SIGI") on April 14, 2017 to acquire, manage and capitalize Ground Leases. The Company contributed $55.5 million for an initial
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
49% noncontrolling interest in SIGI and the two institutional investors contributed an aggregate $57.5 million for an initial 51% controlling interest in SIGI. A wholly-owned subsidiary of the Company that held the Company's GL business and assets merged with and into SIGI on April 14, 2017 with SIGI surviving the merger and being renamed Safety, Income & Growth Inc. ("SAFE"). Through this merger and related transactions, the institutional investors acquired a controlling interest in the Company's GL business. The Company's carrying value of the GL assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its GL assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE. The carrying value of the 12 properties are classified in "Real estate available and held for sale" on the Company's consolidated balance sheet as of December 31, 2016 and the gain was recorded in "Gain from discontinued operations" in the Company's consolidated statements of operations.
On June 27, 2017, SAFE completed its initial public offering (the "Offering") raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to the Company. In addition, the Company paid or accrued $18.9 million in organization and offering costs of the up to $25.0 million in organization and offering costs it has agreed to pay in connection with the Offering and concurrent private placement through September 30, 2017, including commissions payable to the underwriters and other offering expenses. The Company expensed the portion of offering costs that was attributable to other investors in "Other expense" in the Company's consolidated statements of operations and capitalized the portion of offering costs attributable to the Company's ownership interest in "Other investments" on the Company's consolidated balance sheets. Subsequent to the initial public offering, the Company purchased 1.31.7 million shares of SAFE's common stock in a private placement for $24.5 million, at an average cost of $19.20 per share, pursuant to a 10b5-1 plan in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended. As of September 30, 2017, the Company had utilized all of the availability authorized in the 10b5-1 Plan and owned approximately 34.6% of SAFE's common stock outstanding.$80.0 million.
In addition, subsequent to SAFE's initial public offering, trusts established by Jay Sugarman, the Company's Chairman and Chief Executive Officer, and Geoffrey Jervis, the Company's Chief Operating Officer and Chief Financial Officer, purchased 26 thousand shares in the aggregate of SAFE's common stock for an aggregate $0.5 million, at an average cost of $19.20 per share, pursuant to a 10b5-1 plan in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended. As of September 30, 2017, the trusts established by Jay Sugarman, the Company's Chairman and Chief Executive Officer, and Geoffrey Jervis, the Company's Chief Operating Officer and Chief Financial Officer, had utilized all of the availability authorized in the 10b5-1 Plan.
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee. In addition, the Company is also the external manager of a venture in which SAFE is a member. Following are the key terms of the management agreement:
The Company receives a fee payable solelyequal to 1.0% of total SAFE equity (as defined in the management agreement) up to $1.5 billion; 1.25% of total SAFE equity (for incremental equity of $1.5 billion - $3.0 billion); 1.375% of total SAFE equity (for incremental equity of $3.0 billion - $5.0 billion); and 1.5% of total SAFE equity (for incremental equity over $5.0 billion);
Fee to be paid in cash or in shares of SAFE'sSAFE common stock, equal toat the sum of 1.0%discretion of SAFE's total equityindependent directors;
The stock is locked up for two years, subject to $2.5 billion and 0.75% of SAFE's total equity in excess of $2.5 billion. The Companycertain restrictions;
There is not entitled to receive anyno additional performance or incentive compensation. fee;
The management agreement is non-terminable by SAFE through June 30, 2023, except for cause; and
Automatic annual renewals thereafter, subject to non-renewal upon certain findings by SAFE's independent directors and payment of termination fee equal to 3 times the prior year's management fee.
During the three months ended March 31, 2020 and 2019, the Company recorded $2.9 million and $1.5 million, respectively, of management fees pursuant to its management agreement with SAFE.
The Company is also entitled to receive certain expense reimbursements, payable solely in sharesincluding for the allocable costs of SAFE's common stock, for its personnel that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants otherwise would perform. The Company has agreedwaived or elected not to waive both the management fee andcharge in full certain of the expense reimbursements through June 30, 2018.while SAFE is growing its portfolio. For the three months ended March 31, 2020 and 2019, the Company recognized $1.3 million and $0.5 million, respectively, of expense reimbursements pursuant to its management agreement with SAFE.
The Company has an exclusivity agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
Following is a list of investments that the Company has transacted with SAFE, all of which were approved by the Company's and SAFE's independent directors, for the periods presented:
In August 2017, the Company committed to provide a $24.0 million loan to the ground lessee of a ground leaseGround Lease originated at SAFE. The loan has an initial term of one year and will be usedwas for the renovation of a medical office building in Atlanta, GA. $5.1The Company funded $18.4 million of the loan, which was fully repaid in August 2019. During the three months ended March 31, 2019, the Company recorded $0.5 million of interest income on the loan.
In October 2017, the Company closed on a 99-year Ground Lease and a $80.5 million construction financing commitment to support the ground-up development of a to-be-built luxury multi-family project in San Jose, CA. The transaction includes a combination of: (i) a newly created Ground Lease and a $7.2 million leasehold improvement allowance, which was fully funded
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
as of March 31, 2020; and (ii) a $80.5 million leasehold first mortgage. As of March 31, 2020, $48.1 million of the leasehold first mortgage was funded. During the three months ended March 31, 2020 and 2019, the Company recorded $0.7 million and $0.1 million, respectively, of interest income on the loan. The Company entered into a forward purchase contract with SAFE under which SAFE would acquire the Ground Lease in November 2020 for approximately $34.0 million.
In May 2018, the Company provided a $19.9 million leasehold mortgage loan to the ground lessee of a Ground Lease originated at SAFE. The loan was for the acquisition of 2 multi-tenant office buildings in Atlanta, GA. The loan was repaid in full in November 2019 and during the three months ended March 31, 2019, the Company recorded $0.6 million of interest income on the loan.
In January 2019, the Company committed to provide a $13.3 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan is for the conversion of an office building into a multi-family property in Washington, DC. As of March 31, 2020, $12.8 million of the loan was funded as of September 30, 2017.
Marina Palms—As of September 30, 2017,funded. During the three months ended March 31, 2020 and 2019, the Company ownedrecorded $0.3 million and $0.2 million, respectively, of interest income on the loan.
In February 2019, the Company acquired the leasehold interest in an office property and simultaneously entered into a 47.5%new 98-year Ground Lease with SAFE (refer to Note 4).
Net Lease Venture II—In July 2018, the Company entered into a new venture ("Net Lease Venture II") with an investment strategy similar to the Net Lease Venture. The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by the Company. Net Lease Venture II's investment period ends in June 2021. Net Lease Venture II is a voting interest entity and the Company has an equity interest in Marina Palms, a 468 unit, two tower residential condominium development in North Miami Beach, Florida.the venture of approximately 51.9%. The 234 unit north tower has one unit remaining for sale as of September 30, 2017. The 234 unit south tower is 85% sold or pre-sold (based on unit count) as of September 30, 2017. This entity is not a VIE and the Company does not have a controlling interest in Net Lease Venture II due to shared controlthe substantive participating rights of the entity with its partner. The Company accounts for its investment in Net Lease Venture II as an equity method investment and is responsible for managing the venture in exchange for a management fee and incentive fee.During the three months ended March 31, 2020 and 2019, the Company recorded $0.4 million and $0.4 million, respectively, of management fees from Net Lease Venture II.
In December 2019, Net Lease Venture II closed on a commitment to provide up to $150.0 million in net lease financing for the construction of 3 industrial centers and entered into a 25 year master lease with the tenant. As of September 30, 2017 andMarch 31, 2020, Net Lease Venture II had funded $47.8 million of its commitment.
In December 31, 2016,2019, Net Lease Venture II closed on the venture's carrying valueacquisition of total assets was $43.52 grocery distribution centers for $81.8 million, and $201.8inclusive of assumed debt. The properties are 100% leased with 2 separate coterminous leveraged leases with 6.0 years remaining on the lease terms.
In December 2018, Net Lease Venture II acquired 4 buildings comprising 168,636 square feet located in Livermore, CA. Net Lease Venture II acquired the buildings for $31.2 million respectively.which are 100% leased with 4 separate leases that expire in December 2028.
Other real estate equity investments—As of September 30, 2017,March 31, 2020, the Company's other real estate equity investments includedinclude equity interests in real estate ventures ranging from 20% to 95%, comprised of investments of $21.8$60.0 million in operating
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
properties and $57.9$36.7 million in land assets. As of December 31, 2016,2019, the Company's other real estate equity investments included $3.6$61.7 million in operating properties and $49.6$42.9 million in land assets.
In December 2016,August 2018, the Company soldprovided a landmezzanine loan with a principal balance of $33.0 million and development asset$33.0 million as of March 31, 2020 and December 31, 2019, respectively, to a newly formedan unconsolidated entity in which the Company owns a 50.0%50% equity interest. This entity is a VIE and the Company does not have a controlling interest due to shared controlAs of the entity with its partner. The Company and its partner each made a $7.0 million contribution to the venture and the Company provided financing to the entity in the form of a $27.0 million senior loan commitment, which had a carrying value of $24.3 million and $22.7 million as of September 30, 2017March 31, 2020 and December 31, 2016, respectively, and2019, the loan is included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets.sheet. During the three and nine months ended September 30, 2017,March 31, 2020 and 2019, the Company recorded $0.5$0.7 million and $1.4$0.7 million, respectively, of interest income respectively, on the seniormezzanine loan.
Other strategic investments—As of September 30, 2017,March 31, 2020 and December 31, 2019, the Company also had investments in real estate related funds and other strategic investments in several other entities that were accounted for under the equity method or cost method. Asreal estate entities.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Summarized investee financial information—The following table presents the investee level summarized financial information of the Company's equity method investments whichthat were significant subsidiaries for the nine months ended September 30, 2017 and 2016as of March 31, 2020 ($ in thousands):
|
| | | | | | | | | | | | |
| | | Revenues | | Expenses | | Net Income Attributable to Parent |
| For the Three Months Ended March 31, 2020 | | | | | | |
| SAFE | | $ | 40,165 |
| | $ | 23,587 |
| | $ | 17,347 |
|
| | |
| |
| | |
| For the Three Months Ended March 31, 2019 | |
| |
| | |
| SAFE | | $ | 21,820 |
| | $ | 10,683 |
| | $ | 6,619 |
|
|
| | | | | | | | | | | |
| | Revenues | | Expenses | | Net Income Attributable to Parent Entities |
| For the Nine Months Ended September 30, 2017 | | | | | |
| Marina Palms | $ | 37,668 |
| | $ | (24,209 | ) | | $ | 13,459 |
|
| | | | | | |
| For the Nine Months Ended September 30, 2016 | | | | | |
| Marina Palms | $ | 129,697 |
| | $ | (72,736 | ) | | $ | 56,961 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 8—9—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
|
| | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Intangible assets, net(1) | $ | 164,853 |
| | $ | 174,973 |
|
| Restricted cash | 46,609 |
| | 45,034 |
|
Finance lease right-of-use assets(2) | 144,839 |
| | 145,209 |
|
Operating lease right-of-use assets(2) | 52,295 |
| | 34,063 |
|
Other assets(3) | 17,315 |
| | 17,534 |
|
| Other receivables | 18,895 |
| | 16,846 |
|
Leasing costs, net(4) | 3,130 |
| | 3,793 |
|
Corporate furniture, fixtures and equipment, net(5) | 2,467 |
| | 2,736 |
|
| Deferred financing fees, net | 2,130 |
| | 2,300 |
|
| Deferred expenses and other assets, net | $ | 452,533 |
| | $ | 442,488 |
|
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
Intangible assets, net(1) | $ | 23,801 |
| | $ | 30,727 |
|
Other receivables(2) | 45,321 |
| | 52,820 |
|
| Other assets | 28,799 |
| | 35,189 |
|
| Restricted cash | 21,690 |
| | 25,883 |
|
Leasing costs, net(3) | 10,303 |
| | 11,802 |
|
Corporate furniture, fixtures and equipment, net(4) | 4,806 |
| | 5,691 |
|
| Deferred expenses and other assets, net | $ | 134,720 |
| | $ | 162,112 |
|
| |
| (1) | Intangible assets, net includes above market and in-place lease assets and lease incentives related to the acquisition of real estate assets. Accumulated amortization on intangible assets, net was $34.1$36.3 million and $31.9$33.4 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The amortization of above market leases and lease incentive assets decreased operating lease income in the Company's consolidated statements of operations by $0.5$0.4 million and $2.0$0.6 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $0.8 million and $3.0 million for the three and nine months ended September 30, 2016,2019, respectively. These intangible lease assets are amortized over the remaining term of the lease. The amortization expense for in-place leases was $0.3$2.7 million and $1.5$2.2 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $0.4 million and $1.5 million for the three and nine months ended September 30, 2016,2019, respectively. These amounts are included in "Depreciation and amortization" in the Company's consolidated statements of operations. As of March 31, 2020, the weighted average amortization period for the Company's intangible assets was approximately 17.3 years. |
| |
| (2) | As of September 30, 2017 and December 31, 2016, included $26.0 million of receivables relatedRight-of-use lease assets relate primarily to the constructionCompany's leases of office space and developmentcertain of an amphitheater.its ground leases. Right-of use lease assets initially equal the lease liability. The lease liability (see table below) equals the present value of the minimum rental payments due under the lease discounted at the rate implicit in the lease or the Company's incremental secured borrowing rate for similar collateral. For operating leases, lease liabilities were discounted at the Company's weighted average incremental secured borrowing rate for similar collateral estimated to be 5.1% and the weighted average lease term is 7.5 years. For finance leases, lease liabilities were discounted at a weighted average rate implicit in the lease of 5.5% and the weighted average lease term is 97.7 years. Right-of-use assets for finance leases are amortized on a straight-line basis over the term of the lease and are recorded in "Depreciation and amortization" in the Company's consolidated statements of operations. During the three months ended March 31, 2020 and 2019, the Company recognized $2.0 million and $0.4 million, respectively, in "Interest expense" and $0.4 million and $0.1 million, respectively, in "Depreciation and amortization" in its consolidated statement of operations relating to finance leases. For operating leases, rent expense is recognized on a straight-line basis over the term of the lease and is recorded in "General and administrative" and "Real estate expense" in the Company's consolidated statements of operations (refer to Note 3). During the three months ended March 31, 2020 and 2019, the Company recognized $1.0 million and $0.9 million, respectively, in "General and administrative" and $0.8 million and $1.1 million, respectively, in "Real estate expense" in its consolidated statement of operations relating to operating leases. |
| |
| (3) | Other assets primarily includes prepaid expenses and deposits for certain real estate assets. |
| |
| (4) | Accumulated amortization of leasing costs was $6.6$2.2 million and $6.7$3.3 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. |
| |
(4)(5) | Accumulated depreciation on corporate furniture, fixtures and equipment was $10.2$13.4 million and $9.0$13.1 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
|
| | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
Other liabilities(1) | $ | 83,833 |
| | 81,709 |
|
| Accrued expenses | 76,283 |
| | 83,778 |
|
| Finance lease liabilities (see table above) | 148,439 |
| | 147,749 |
|
Intangible liabilities, net(2) | 50,606 |
| | 51,223 |
|
| Operating lease liabilities (see table above) | 52,456 |
| | 34,182 |
|
| Accrued interest payable | 29,707 |
| | 25,733 |
|
| Accounts payable, accrued expenses and other liabilities | $ | 441,324 |
| | $ | 424,374 |
|
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
Redemption of Series E and Series F preferred stock payable(1) | $ | 240,000 |
| | $ | — |
|
Series E and Series F preferred stock dividend payable(1) | 1,830 |
| | — |
|
Other liabilities(2) | 78,000 |
| | 75,993 |
|
Accrued expenses(3) | 93,031 |
| | 72,693 |
|
| Accrued interest payable | 45,612 |
| | 54,033 |
|
Intangible liabilities, net(4) | 7,901 |
| | 8,851 |
|
| Accounts payable, accrued expenses and other liabilities | $ | 466,374 |
| | $ | 211,570 |
|
| |
| (1) | On September 19, 2017, the Company gave irrevocable notice to redeem allAs of its issuedMarch 31, 2020 and outstanding Series EDecember 31, 2019, other liabilities includes $26.6 million and Series F preferred stock, plus accrued$27.5 million, respectively, of deferred income. As of March 31, 2020 and unpaid dividends to the redemption date, on October 20, 2017 (refer to Note 13).December 31, 2019, other liabilities includes $20.7 million and $8.7 million, respectively, of derivative liabilities. As of March 31, 2020, other liabilities includes $2.6 million of expected credit losses for unfunded loan commitments. |
| |
| (2) | As of September 30, 2017 and December 31, 2016, other liabilities includes $24.0 million related to profit sharing arrangements with developers for certain properties sold. As of September 30, 2017 and December 31, 2016, includes $3.0 million and $1.2 million, respectively, associated with "Real estate available and held for sale" on the Company's consolidated balance sheets. As of September 30, 2017 and December 31, 2016, other liabilities also includes $7.1 million and $8.5 million, respectively, related to tax increment financing bonds which were issued by government entities to fund development within two of the Company's land projects. The amount represents tax assessments associated with each project, which will decrease as the Company sells units. |
| |
(3) | As of September 30, 2017 and December 31, 2016, accrued expenses includes $2.6 million and $1.7 million, respectively, associated with "Real estate available and held for sale" on the Company's consolidated balance sheets. |
| |
(4) | Intangible liabilities, net includes below market lease liabilities related to the acquisition of real estate assets. Accumulated amortization on below market lease liabilities was $7.6$5.6 million and $6.4$5.0 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The amortization of below market leases increased operating lease income in the Company's consolidated statements of operations by $0.2$0.6 million and $1.2$0.5 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $0.3 million and $0.9 million for the three and nine months ended September 30, 2016,2019, respectively. |
Deferred tax assets and liabilities of the Company's taxable REIT subsidiaries were as follows ($ in thousands):
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| Deferred tax assets (liabilities) | $ | 90,883 |
| | $ | 66,498 |
|
| Valuation allowance | (90,883 | ) | | (66,498 | ) |
| Net deferred tax assets (liabilities) | $ | — |
| | $ | — |
|
Note 9—10—Loan Participations Payable, net
The Company's loan participations payable, net were as follows ($ in thousands):
| | | | | Carrying Value as of | | Carrying Value as of |
| | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
Loan participations payable(1) | | $ | 122,846 |
| | $ | 160,251 |
| | $ | 37,892 |
| | $ | 35,656 |
|
| Debt discounts and deferred financing costs, net | | (357 | ) | | (930 | ) | |
| Debt premiums, discounts and deferred financing costs, net | | | (125 | ) | | (18 | ) |
| Total loan participations payable, net | | $ | 122,489 |
| | $ | 159,321 |
| | $ | 37,767 |
| | $ | 35,638 |
|
| |
| (1) | As of September 30, 2017,March 31, 2020 and December 31, 2019, the Company had two1 loan participationsparticipation payable with a weighted averagean interest rate of 6.2%. As of December 31, 2016, the Company had three loan participations payable with a weighted average interest rate of 4.8%.6.0% and 6.3%, respectively. |
Loan participations represent transfers of financial assets that did not meet the sales criteria established under ASC Topic 860 and are accounted for as loan participations payable, net. Asnet as of September 30, 2017March 31, 2020 and December 31, 2016,2019. As of March 31, 2020 and December 31, 2019, the corresponding loan receivable balances were $122.2$37.8 million and $159.1$35.6 million, respectively, and are included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets. The principal and interest due on these loan participations payable are paid from cash flows of the corresponding loans receivable, which serve as collateral for the participations.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 10—11—Debt Obligations, net
In September 2017, the Company completed a comprehensive set of capital markets transactions that addressed all parts of its capital structure, resulting in the Company having:
repaid or refinanced all of the Company's 2017 and 2018 corporate debt maturities, leaving no corporate debt maturities until July 2019;
extended its weighted average debt maturity by 1.5 years to 4.0 years;
reduced annual expenses;
lowered its cost of capital;
established new banking relationships; and
received upgrades to its corporate credit ratings from all three major ratings agencies.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company's debt obligations were as follows ($ in thousands):
|
| | | | | | | | | | | | |
| | Carrying Value as of | | Stated
Interest Rates | | Scheduled
Maturity Date |
| | September 30, 2017 | | December 31, 2016 | | |
| Secured credit facilities and mortgages: | | | | | | | |
| 2015 $325 Million Secured Revolving Credit Facility | $ | — |
| | $ | — |
| | LIBOR + 2.50% |
| (1) | September 2020 |
| 2016 Senior Secured Credit Facility | 400,000 |
| | 498,648 |
| | LIBOR + 3.00% |
| (2) | October 2021 |
| Mortgages collateralized by net lease assets | 223,182 |
| | 249,987 |
| | 4.851% - 7.26% |
| (3) | Various through 2026 |
| Total secured credit facilities and mortgages | 623,182 |
| | 748,635 |
| | |
| | |
| Unsecured notes: | | | | | | | |
| 5.85% senior notes | — |
| | 99,722 |
| | 5.85 | % | | March 2017 |
| 9.00% senior notes | — |
| | 275,000 |
| | 9.00 | % | | June 2017 |
4.00% senior notes(4) | 550,000 |
| | 550,000 |
| | 4.00 | % | | November 2017 |
7.125% senior notes(5) | 300,000 |
| | 300,000 |
| | 7.125 | % | | February 2018 |
4.875% senior notes(6) | 300,000 |
| | 300,000 |
| | 4.875 | % | | July 2018 |
5.00% senior notes(7) | 770,000 |
| | 770,000 |
| | 5.00 | % | | July 2019 |
6.50% senior notes(8) | 275,000 |
| | 275,000 |
| | 6.50 | % | | July 2021 |
6.00% senior notes(9) | 375,000 |
| | — |
| | 6.00 | % | | April 2022 |
4.625% senior notes(10) | 400,000 |
| | — |
| | 4.625 | % | | September 2020 |
5.25% senior notes(11) | 400,000 |
| | — |
| | 5.25 | % | | September 2022 |
3.125% senior convertible notes(12) | 250,000 |
| | — |
| | 3.125 | % | | September 2022 |
| Total unsecured notes | 3,620,000 |
| | 2,569,722 |
| | |
| | |
| Other debt obligations: |
| | | | | | |
| Trust preferred securities | 100,000 |
| | 100,000 |
| | LIBOR + 1.50% |
| | October 2035 |
| Total debt obligations | 4,343,182 |
| | 3,418,357 |
| | |
| | |
| Debt discounts and deferred financing costs, net | (64,228 | ) | | (28,449 | ) | | |
| | |
Total debt obligations, net(13) | $ | 4,278,954 |
| | $ | 3,389,908 |
| | |
| | |
|
| | | | | | | | | | | |
| | Carrying Value as of | | Stated
Interest Rates | | Scheduled
Maturity Date |
| | March 31, 2020 | | December 31, 2019 | | |
| Secured credit facilities and mortgages: | | | | | | | |
| Revolving Credit Facility | $ | 300,000 |
| | $ | — |
| | LIBOR + 2.00% | (1) | September 2022 |
| Senior Term Loan | 491,875 |
| | 491,875 |
| | LIBOR + 2.75% | (2) | June 2023 |
Mortgages collateralized by net lease assets(3) | 724,209 |
| | 721,118 |
| | 2.54% - 7.26% | (3) | |
| Total secured credit facilities and mortgages | 1,516,084 |
| | 1,212,993 |
| | | | |
| Unsecured notes: | | | | | | | |
6.00% senior notes(4) | — |
| | 110,545 |
| | 6.00% | | — |
5.25% senior notes(5) | 400,000 |
| | 400,000 |
| | 5.25% | | September 2022 |
3.125% senior convertible notes(6) | 287,500 |
| | 287,500 |
| | 3.125% | | September 2022 |
4.75% senior notes(7) | 775,000 |
| | 775,000 |
| | 4.75% | | October 2024 |
4.25% senior notes(8) | 550,000 |
| | 550,000 |
| | 4.25% | | August 2025 |
| Total unsecured notes | 2,012,500 |
| | 2,123,045 |
| | | | |
| Other debt obligations: |
| | | | | | |
| Trust preferred securities | 100,000 |
| | 100,000 |
| | LIBOR + 1.50% | | October 2035 |
| Total debt obligations | 3,628,584 |
| | 3,436,038 |
| | | | |
| Debt discounts and deferred financing costs, net | (45,224 | ) | | (48,958 | ) | | | | |
Total debt obligations, net(9) | $ | 3,583,360 |
| | $ | 3,387,080 |
| | | | |
| |
| (1) | The loanRevolving Credit Facility bears interest at the Company's election of eithereither: (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5%0.50% or (c) LIBOR plus 1.0% and subject to a margin ranging from 1.25%1.00% to 1.75%,1.50%; or (ii) LIBOR subject to a margin ranging from 2.25%2.00% to 2.75%2.50%. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through October 2021.September 2023. |
| |
| (2) | The loan bears interest at the Company's election of eithereither: (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5%0.50% or (c) LIBOR plus 1.0% and subject to a margin of 2.00%1.75%; or (ii) LIBOR subject to a margin of 3.00% with a minimum LIBOR rate of 0.75%2.75%. |
| |
| (3) | As of September 30, 2017 and DecemberMarch 31, 2016, includes a loan with a floating rate of LIBOR plus 2.0%. As of September 30, 2017,2020, the weighted average interest rate of these loans is 5.2%.4.4%, inclusive of the effect of interest rate swaps. |
| |
| (4) | The Company prepaidrepaid these senior notes in October 2017 without penalty.January 2020. |
| |
| (5) | The Company prepaid these senior notes in October 2017 and incurred a make whole premium of $5.25 million. |
| |
(6) | The Company prepaid these senior notes in October 2017 and incurred a make whole premium of $3.66 million. |
| |
(7) | The Company can prepay these senior notes without penalty beginning July 1, 2018. |
| |
(8) | The Company can prepay these senior notes without penalty beginning July 1, 2020. |
| |
(9) | The Company can prepay these senior notes without penalty beginning April 1, 2021. |
| |
(10) | The Company can prepay these senior notes without penalty beginning June 15, 2020. |
| |
(11) | The Company can prepay these senior notes without penalty beginning September 15, 2021. |
| |
(12)(6) | The Company's 3.125% senior convertible fixed rate notes due September 2022 ("3.125% Convertible Notes") are convertible at the option of the holders at a conversion rate of 64.36 shares per $1,000 principal amount of 3.125% Convertible Notes, which equals a conversion price of $15.54 per share, at any time prior to the close of business on the business day immediately preceding September 15, 2022. The conversion rate as of March 31, 2020 was 68.3420 shares per $1,000 principal amount of 3.125% Convertible Notes, which equals a conversion price of $14.63 per share. The conversion rate is subject to adjustment from time to time for specified events. Upon conversion, the Company will pay or deliver, as the case may be, a combination of cash and shares of its common stock. As such, atAt issuance in September 2017, the Company valued the liability component at $221.8 million, net of fees, and the equity component of the conversion feature at $22.5 million, net of fees, and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. In October 2017, the initial purchasers of the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes. At issuance, the Company valued the liability component at $34.0 million, net of fees, and the equity component of the conversion feature at $3.4 million, net of fees, and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. As of March 31, 2020, the carrying value of the 3.125% Convertible Notes was $270.2 million, net of fees, and the unamortized discount of the 3.125% Convertible Notes was $14.2 million, net of fees. As of December 31, 2019, the carrying value of the 3.125% Convertible Notes was $268.7 million, net of fees, and the unamortized discount of the 3.125% Convertible Notes was $15.5 million, net of fees. During the three months ended March 31, 2020 and 2019, the Company recognized $2.2 million and $2.2 million, respectively, of contractual interest and $1.3 million and $1.2 million, respectively, of discount amortization on the 3.125% Convertible Notes. The effective interest rate was 5.2%. |
| |
(13)(7) | The Company can prepay these senior notes without penalty beginning July 1, 2024. |
| |
| (8) | The Company can prepay these senior notes without penalty beginning May 1, 2025. |
| |
| (9) | The Company capitalized interest relating to development activities of $2.1$0.5 million and $6.1$3.0 million during the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $1.4 million and $4.2 million during the three and nine months ended September 30, 2016,2019, respectively. |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Future Scheduled Maturities—As of September 30, 2017March 31, 2020, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
|
| | | | | | | | | | | |
| | Unsecured Debt | | Secured Debt | | Total |
| 2020 (remaining nine months) | $ | — |
| | $ | — |
| | $ | — |
|
| 2021 | — |
| | 158,358 |
| | 158,358 |
|
| 2022 | 687,500 |
| | 347,624 |
| | 1,035,124 |
|
| 2023 | — |
| | 491,875 |
| | 491,875 |
|
| 2024 | 775,000 |
| | — |
| | 775,000 |
|
| Thereafter | 650,000 |
| | 518,227 |
| | 1,168,227 |
|
| Total principal maturities | 2,112,500 |
| | 1,516,084 |
| | 3,628,584 |
|
| Unamortized discounts and deferred financing costs, net | (37,915 | ) | | (7,309 | ) | | (45,224 | ) |
| Total debt obligations, net | $ | 2,074,585 |
| | $ | 1,508,775 |
| | $ | 3,583,360 |
|
|
| | | | | | | | | | | |
| | Unsecured Debt | | Secured Debt | | Total |
| 2017 (remaining three months) | $ | 550,000 |
| (1) | $ | — |
| | $ | 550,000 |
|
| 2018 | 600,000 |
| (1) | 9,523 |
| | 609,523 |
|
| 2019 | 770,000 |
| | 27,924 |
| | 797,924 |
|
| 2020 | 400,000 |
| | — |
| | 400,000 |
|
| 2021 | 275,000 |
| | 517,506 |
| | 792,506 |
|
| Thereafter | 1,125,000 |
| | 68,229 |
| | 1,193,229 |
|
| Total principal maturities | 3,720,000 |
| | 623,182 |
| | 4,343,182 |
|
| Unamortized discounts and deferred financing costs, net | (56,331 | ) | | (7,897 | ) | | (64,228 | ) |
| Total debt obligations, net | $ | 3,663,669 |
| | $ | 615,285 |
| | $ | 4,278,954 |
|
| |
(1) | Subsequent to September 30, 2017, the Company repaid the $550.0 million principal amount outstanding of the 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of the 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount outstanding of the 4.875% senior unsecured notes due July 2018. |
2017 Secured FinancingSenior Term Loan—In March 2017,June 2018, the Company (through wholly-owned subsidiaries conducting the Company's GL business) entered into a $227.0 million secured financing transaction (the "2017 Secured Financing") that accrued interest at 3.795% and matures in April 2027. The 2017 Secured Financing was collateralized by the 12 properties comprising the Company's GL business, including seven GLs and one master lease (covering the accounts of five properties). In connection with the 2017 Secured Financing, the Company incurred $7.3 million of lender and third-party fees, substantially all of which was capitalized in "Debt obligations, net" on the Company's consolidated balance sheets. In April 2017, the Company derecognized the 2017 Secured Financing when third parties acquired a controlling interest in the Company's GL business (refer to Note 4).
The Company is providing a limited recourse guaranty and environmental indemnity under the 2017 Secured Financing that will remain in effect until SAFE has achieved either an equity market capitalization of at least $500.0 million (inclusive of the initial portfolio that the Company contributed to SAFE) or a net worth of at least $250.0 million (exclusive of the initial portfolio that the Company contributed to SAFE), and SAFE or another replacement guarantor provides similar guaranties and indemnities to the lenders. The management agreement with SAFE provides that SAFE may not terminate the management agreement unless a successor guarantor reasonably acceptable to the Company has agreed to replace the Company as guarantor and indemnitor or has provided the Company with a reasonably acceptable indemnity for any losses suffered by the Company as guarantor and indemnitor. SAFE has generally agreed to indemnify the Company for any amounts the Company is required to pay, or other losses the Company may suffer, under the limited recourse guaranty and environmental indemnity.
2016 Secured Term Loan—In December 2016, the Company arranged a $170.0 million delayed draw securedamended its senior term loan (the "2016 Secured"Senior Term Loan"). In March 2017, to increase the Company allowed the 2016 Secured Term Loan to expire and replaced the 2016 Secured Term Loan with the 2017 Secured Financing. The 2016 Secured Term Loan was collateralized by the 12 properties that served as collateral for the 2017 Secured Financing.
2016 Senior Secured Credit Facility—In June 2016, the Company entered into a senior secured credit facility of $450.0 million (the "2016 Senior Secured Credit Facility"). In August 2016, the Company upsized the facility to $500.0 million. The initial $450.0 millionamount of the 2016 Senior Secured Credit Facility was issued at 99% of par andloan to $650.0 million, reduce the upsize was issued at par. In January 2017, the Company repriced the 2016 Senior Secured Credit Facilityinterest rate to LIBOR plus 3.75% with2.75% and extend its maturity to June 2023. The Senior Term Loan is secured by pledges of equity of certain subsidiaries that own a 1.00% LIBOR floor from LIBOR plus 4.50% with a 1.00% LIBOR floor. In September 2017, the Company reduced, repriced and extended the 2016 Senior Secured Credit Facility to $400.0 million priced at LIBOR plus 3.00% with a 0.75% LIBOR floor and maturing in October 2021. These transactions resulted in an aggregate 1.50% reduction in price.
The 2016 Senior Secured Credit Facility is collateralized 1.25x by a first lien on a fixeddefined pool of assets. Proceeds from principal repayments and salesThe Senior Term Loan permits substitution of collateral, are appliedsubject to amortizeoverall collateral pool coverage and concentration limits, over the 2016 Senior Secured Credit Facility. Proceeds received for interest, rent, lease payments and fee income are retained bylife of the Company.facility. The Company may also make optional prepayments, subject to prepayment fees, and is required to repay 0.25% of the principal amount on the first business day of each quarter.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Proceeds from the 2016 Senior SecuredRevolving Credit Facility together with cash on hand, were primarily used to repay other secured debt. —In connection with the 2016 Senior Secured Credit Facility,September 2019, the Company incurred $4.5 million of lender fees, substantially all of which was capitalized in "Debt obligations, net" on the Company's consolidated balance sheets. The Company also incurred $6.2 million in third party fees, of which $4.3 million was capitalized in “Debt obligations, net” on the Company's consolidated balance sheets and $1.9 million was recognized in “Other expense” in the Company's consolidated statements of operations. In connection with the repricing of the 2016 Senior Secured Credit Facility in January 2017, the Company incurred an additional $0.8 million in fees, substantially all of which was recognized in "Other expense" in the Company's consolidated statements of operations. In connection with the repricing of the 2016 Senior Secured Credit Facility in September 2017, the Company incurred an additional $2.6 million in fees, of which $1.5 million was recognized in "Other expense" in the Company's consolidated statements of operations and $1.1 million was capitalized in "Debt obligations, net" on the Company's consolidated balance sheets.
During the three and nine months ended September 30, 2017, repayments of the 2016 Senior Secured Credit Facility resulted in losses on early extinguishment of debt of $0.6 million and $0.8 million, respectively.
2015 Secured Revolving Credit Facility—In March 2015, the Company entered into aamended its secured revolving credit facility with a(the "Revolving Credit Facility") to increase the maximum capacity of $250.0to $350.0 million, (the "2015 Secured Revolving Credit Facility"). In September 2017, the Company upsized the 2015 Secured Revolving Credit Facility to $325.0 million, added additional lenders to the syndicate, extendedextend the maturity date to September 20202022 and mademake certain other changes. Outstanding borrowings under the Revolving Credit Facility are secured by a pledge of the equity interests in the Company's subsidiaries that own a defined pool of assets. Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon the Company's corporate credit rating. Anrating, ranging from 1.0% to 1.5% in the case of base rate loans and from 2.0% to 2.5% in the case of LIBOR loans. In addition, there is an undrawn credit facility commitment fee that ranges from 0.30%0.25% to 0.50%0.45%, based on corporate credit ratings each quarter.ratings. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2021. As2023. During the three months ended March 31, 2020, the Company borrowed $300.0 million on the Revolving Credit Facility and as of September 30, 2017,March 31, 2020, based on the Company's borrowing base of assets, had the Company had $325.0ability to draw $50.0 million of borrowing capacity available underwithout pledging any additional assets to the 2015 Secured Revolving Credit Facility.facility.
Unsecured Notes—In September 2017,2019, the Company issued $400.0$675.0 million principal amount of 4.625%4.75% senior unsecured notes due September 2020, $400.0 million principal amount of 5.25% senior unsecured notes due September 2022 and $250.0 million of 3.125% Convertible Notes due September 2022. The Company incurred approximately $17.4 million dollars in fees related to these offerings, all of which was capitalized in "Debt obligations, net" onOctober 2024. Proceeds from the Company's consolidated balance sheets. Subsequent to September 30, 2017, proceeds from these offerings,offering, together with cash on hand, were used to repay in full the $550.0$400.0 million principal amount outstanding of the 4.0%4.625% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of the 7.125% senior unsecured notes due February 2018September 2020 and the $300.0 million principal amount outstanding of the 4.875% senior unsecured notes due July 2018. In addition, subsequent to September 30, 2017, the initial purchasers of the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes.
In March 2017, the Company issued $375.0 million principal amount of 6.00% senior unsecured notes due April 2022. Proceeds from the offering were primarily used to repay in full the $99.7 million principal amount outstanding of the 5.85% senior unsecured notes due March 2017 and repay in full the $275.0 million principal amount outstanding of the 9.00% senior unsecured notes due June 2017 prior to maturity. In March 2016, the Company repaid its $261.4 million principal amount outstanding of the 5.875% senior unsecured notes at maturity using available cash. In addition, the Company issued $275.0 million principal amount of 6.50% senior unsecured notes due July 2021. In November 2019, the Company issued an additional $100.0 million principal amount of 4.75% senior unsecured notes due October 2024 at 102% of par, representing a yield to maturity of 4.29%.
In December 2019, the Company issued $550.0 million principal amount of 4.25% senior unsecured notes due August 2025. Proceeds from the offering were primarily used to repay in fullredeem the $265.0$375.0 million principal amount outstanding ($110.5 million was redeemed in January 2020) of the 6.00% senior unsecured notes due July 2016 andApril 2022, repay $5.0 milliona portion of the 2015 Secured Revolving Credit Facility.borrowings outstanding under the Senior Term Loan and pay related premiums and expenses in connection with the transaction.
During the ninethree months ended September 30, 2017, repayments of senior unsecured notes prior to maturity resulted in losses on early extinguishment of debt of $3.1 million. During the three and nine months ended September 30, 2016,March 31, 2020, repayments of unsecured notes prior to maturity resulted in losses on early extinguishment of debt of $0.1 million and $0.4 million, respectively. These amounts are included in "Loss on early extinguishment of debt, net" in the Company's consolidated statements of operations.$4.1 million.
In November 2016, in connection with the retirement of the Company's $200.0 million principal amount of 3.0% senior unsecured convertible notes due November 2016, the Company converted $9.6 million principal amount into 0.8 million shares of our common stock.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Encumbered/UnencumberedCollateral Assets—The carrying value of the Company's encumbered and unencumbered assets that are directly pledged or are held by subsidiaries whose equity is pledged as collateral to secure the Company's obligations under its secured debt facilities are as follows, by asset type are as follows ($ in thousands):
| | | | As of | As of |
| | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| | Encumbered Assets | | Unencumbered Assets | | Encumbered Assets | | Unencumbered Assets | Collateral Assets(1) | | Non-Collateral Assets | | Collateral Assets(1) | | Non-Collateral Assets |
| Real estate, net | $ | 841,570 |
| | $ | 482,292 |
| | $ | 881,212 |
| | $ | 506,062 |
| $ | 1,392,658 |
| | $ | 108,431 |
| | $ | 1,409,585 |
| | $ | 117,634 |
|
| Real estate available and held for sale | — |
| | 65,658 |
| | — |
| | 237,531 |
| — |
| | 34,391 |
| | — |
| | 8,650 |
|
Net investment in leases(2) | | 420,380 |
| | — |
| | 418,915 |
| | — |
|
| Land and development, net | 25,100 |
| | 836,407 |
| | 35,165 |
| | 910,400 |
| — |
| | 514,064 |
| | — |
| | 580,545 |
|
Loans receivable and other lending investments, net(1)(2) | 188,973 |
| | 813,447 |
| | 172,581 |
| | 1,142,050 |
| |
Loans receivable and other lending investments, net(3)(4) | | 234,612 |
| | 590,019 |
| | 233,104 |
| | 566,050 |
|
| Other investments | — |
| | 289,037 |
| | — |
| | 214,406 |
| — |
| | 1,029,552 |
| | — |
| | 907,875 |
|
| Cash and other assets | — |
| | 2,145,713 |
| | — |
| | 590,299 |
| — |
| | 882,674 |
| | — |
| | 814,044 |
|
| Total | $ | 1,055,643 |
| | $ | 4,632,554 |
| | $ | 1,088,958 |
| | $ | 3,600,748 |
| $ | 2,047,650 |
| | $ | 3,159,131 |
| | $ | 2,061,604 |
| | $ | 2,994,798 |
|
| |
| (1) | The Senior Term Loan and the Revolving Credit Facility are secured only by pledges of equity of certain of the Company's subsidiaries and not by pledges of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions on incurring new debt (subject to certain exceptions). As of September 30, 2017 and DecemberMarch 31, 2016,2020, Collateral Assets includes $428.5 million carrying value of assets held by entities whose equity interests are pledged as collateral for the amounts presented exclude general reserves for loan losses of $15.2 million and $23.3 million, respectively. Revolving Credit Facility. |
| |
| (2) | As of September 30, 2017March 31, 2020, the amount presented excludes a general allowance for net investment of leases of $10.4 million. |
| |
| (3) | As of March 31, 2020 and December 31, 2016,2019, the amounts presented exclude general allowance for loan losses of $11.6 million and $6.9 million, respectively. |
| |
| (4) | As of March 31, 2020 and December 31, 2019, the amounts presented exclude loan participations of $122.2$37.8 million and $159.1$35.6 million, respectively. |
Debt Covenants
The Company's outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.2x and a covenant not to incur additional indebtedness (except for incurrences of permitted debt), if on a pro forma basis the Company's consolidated fixed charge coverage ratio, determined in accordance with the indentures governing the Company's debt securities, is 1.5x or lower. If any of the Company's covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. If the Company's ability to incur additional indebtedness under the fixed charge coverage ratio is limited, the Company is permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.
The Company's 2016 Senior Secured Credit FacilityTerm Loan and the 2015 Secured Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the 2016 Senior Secured Credit FacilityTerm Loan requires the Company to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The 2015 Secured Revolving Credit Facility is secured by a borrowing base of assets and requires the Company to maintain both collateral coverageborrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The 2015 Secured Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the collateral coverageborrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, the Company has the option to pay down outstanding borrowings or substitute assets in the borrowing base. In addition, for so long asUnder both the Company maintains its qualification as a REIT, the 2016 Senior Secured Credit FacilityTerm Loan and the 2015 Secured Revolving Credit Facility permit the Company is permitted to distribute 100% ofpay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and the Company remains in compliance with its REIT taxable income on an annual basis (priorfinancial covenants after giving effect to deducting certain cumulative net operating loss ("NOL") carryforwards). The Company may not pay common dividends if it ceases to qualify as a REIT.the dividend.
The Company's 2016 Senior Secured Credit FacilityTerm Loan and the 2015 Secured Revolving Credit Facility contain cross default provisions that would allow the lenders to declare an event of default and accelerate the Company's indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company's unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company's indebtedness to them if the
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Company's other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 11—12—Commitments and Contingencies
Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.
As of September 30, 2017March 31, 2020, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
|
| | | | | | | | | | | | | | | |
| | Loans and Other Lending Investments(1) | | Real Estate(2) | | Other Investments | | Total |
| Performance-Based Commitments | $ | 183,608 |
| | $ | 81,718 |
| | $ | 53,122 |
| | $ | 318,448 |
|
| Strategic Investments | — |
| | — |
| | 17,351 |
| | 17,351 |
|
| Total | $ | 183,608 |
| | $ | 81,718 |
| | $ | 70,473 |
| | $ | 335,799 |
|
|
| | | | | | | | | | | | | | | |
| | Loans and Other Lending Investments(1) | | Real Estate | | Other Investments | | Total |
| Performance-Based Commitments | $ | 317,091 |
| | $ | 6,136 |
| | $ | 50,933 |
| | $ | 374,160 |
|
| Strategic Investments | — |
| | — |
| | 45,642 |
| | 45,642 |
|
| Total | $ | 317,091 |
| | $ | 6,136 |
| | $ | 96,575 |
| | $ | 419,802 |
|
| |
| (1) | Excludes $115.3$12.1 million of commitments on loan participations sold that are not the obligation of the Company. |
| |
| (2) | Includes a commitment to invest up to $55.0 million in additional bowling centers over the next several years (refer to Note 5). |
Other Commitments—Future minimum lease obligations under operating and finance leases as of March 31, 2020 are as follows ($ in thousands):
|
| | | | | | | |
| | Operating(1)(2) | | Finance(1) |
| 2020 (remaining nine months) | $ | 3,095 |
| | $ | 4,052 |
|
| 2021 | 3,624 |
| | 5,494 |
|
| 2022 | 6,561 |
| | 5,604 |
|
| 2023 | 6,190 |
| | 5,716 |
|
| 2024 | 6,080 |
| | 5,830 |
|
| Thereafter | 6,576 |
| | 1,573,771 |
|
| Total undiscounted cash flows | 32,126 |
| | 1,600,467 |
|
Present value discount(1) | (4,654 | ) | | (1,452,028 | ) |
Other adjustments(2) | 24,984 |
| | — |
|
| Lease liabilities | $ | 52,456 |
| | $ | 148,439 |
|
| |
| (1) | During the three months ended March 31, 2020 and 2019, the Company made payments of $1.1 million and $1.1 million, respectively, related to its operating leases and $1.3 million and $0.2 million, respectively, related to its finance leases. The weighted average lease term for the Company's operating leases, excluding operating leases for which the Company's tenants pay rent on its behalf, was 6.3 years and the weighted average discount rate was 5.1%. The weighted average lease term for the Company's finance leases was 97.7 years and the weighted average discount rate was 5.5%. |
| |
| (2) | The Company is obligated to pay ground rent under certain operating leases; however, the Company's tenants at the properties pay this expense directly under the terms of various subleases and these amounts are excluded from lease obligations. The amount shown above is the net present value of the payments to be made by the Company's tenants on its behalf. |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Future minimum lease obligations under non-cancelable operating and finance leases as of December 31, 2019 are as follows ($ in thousands):
|
| | | | | | | |
| | Operating(1)(2) | | Finance(1) |
| 2020 | $ | 4,167 |
| | $ | 5,386 |
|
| 2021 | 1,803 |
| | 5,494 |
|
| 2022 | 1,098 |
| | 5,604 |
|
| 2023 | 728 |
| | 5,716 |
|
| 2024 | 617 |
| | 5,830 |
|
| Thereafter | 1,447 |
| | 1,573,824 |
|
| Total undiscounted cash flows | 9,860 |
| | 1,601,854 |
|
Present value discount(1) | (1,057 | ) | | (1,454,105 | ) |
Other adjustments(2) | 25,379 |
| | — |
|
| Lease liabilities | $ | 34,182 |
| | $ | 147,749 |
|
| |
| (1) | The Company is obligated to pay ground rent under certain operating leases; however, the Company's tenants at the properties pay this expense directly under the terms of various subleases and these amounts are excluded from lease obligations. |
| |
| (2) | The Company is obligated to pay ground rent under certain operating leases; however, the Company's tenants at the properties pay this expense directly under the terms of various subleases and these amounts are excluded from lease obligations. The amount shown above is the net present value of the payments to be made by the Company's tenants on its behalf. |
Legal Proceedings—The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company's business as a finance and investment company focused on the commercial real estate industry, including loan foreclosure and foreclosure-related proceedings. In addition to such matters, the Company is a party to the following legal proceedings:
U.S. Home Corporation ("Lennar") v. Settlers Crossing, LLC, et al. (United States District Court for the District of Maryland, Civil Action No. DKC 08-1863)
This litigation involved a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland. Following a trial, in January 2015, the United States District Court for the District of Maryland (the District Court) entered judgment in favor of the Company, finding that the Company was entitled to specific performance of the purchase and sale agreement and awarding the Company the aggregate amount of: (i) the remaining unpaid purchase price; plus (ii) simple interest on the unpaid amount at a rate of 12% annually from 2008; plus (iii) real estate taxes paid by the Company; plus (iv) actual and reasonable attorneys' fees and costs incurred by the Company in connection with the litigation. Lennar appealed the District Court's judgment. On April 12, 2017, the United States Court of Appeals for the Fourth Circuit affirmed the judgment of the District Court in its entirety. Lennar’s petition for rehearing en banc was summarily denied.
On April 21, 2017, the Company and Lennar completed the transfer of the land, pursuant to which the Company conveyed the land to Lennar and received net proceeds of $234.1 million after payment of $3.3 million in documentary transfer taxes, consisting of $114.0 million of sales proceeds, $121.8 million of interest and $1.6 million of real estate tax reimbursements. The interest and real estate tax reimbursements are recorded in "Other income" in the Company's consolidated statements of operations. The amount of attorneys’ fees and costs to be recovered by the Company will be determined through further proceedings before the District Court. The Company has applied for attorney’s fees in excess of $17.0 million. A portion of the net proceeds received by the Company has been paid to the third party which holds a 4.3% participation interest in all proceeds received by the Company.
Lennar has filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of two specific issues previously decided in the Company's favor by the lower courts. The Company filed a brief in opposition to the petition. There can be no assurance as to the outcome of Lennar’s petition or, if it is accepted, any determination or redetermination by the U.S. Supreme Court affecting this matter.
On a quarterly basis, the Company evaluates developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company'sCompany’s consolidated financial statements.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 12—13—Derivatives
The Company's use of derivative financial instruments is primarilyhas historically been limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and foreign exchange rates. DerivativesThe Company may have derivatives that are not designated as hedges because they do not meet the strict hedge accounting requirements. Although not designated as hedges, such derivatives are not speculative and are usedentered into to manage the Company's exposure to interest rate movements foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.risks.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2020 and December 31, 2019 ($ in thousands)(1):
|
| | | | | | | | | | | | |
| | | Derivative Assets | | Derivative Liabilities |
| As of March 31, 2020 | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivatives Designated in Hedging Relationships | | | | |
| Interest rate swaps | | Deferred expenses and other assets, net | | $ | — |
| | Accounts payable, accrued expenses and other liabilities | | $ | 20,685 |
|
| Total | | | | $ | — |
| | | | $ | 20,685 |
|
| | | | Derivative Assets as of | | Derivative Liabilities as of | | Derivative Assets | | Derivative Liabilities |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | |
| As of December 31, 2019 | | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivatives Designated in Hedging Relationships | Derivatives Designated in Hedging Relationships | | | | | | | | | | | Derivatives Designated in Hedging Relationships | | | | |
| Foreign exchange contracts | N/A | | $ | — |
| | N/A | | $ | — |
| | Other Liabilities | | $ | 18 |
| | Other Liabilities | | $ | 8 |
| |
| Interest rate swaps | Other Assets | | 76 |
| | N/A | | — |
| | N/A | | — |
| | Other Liabilities | | 39 |
| | Deferred expenses and other assets, net | | $ | 114 |
| | Accounts payable, accrued expenses and other liabilities | | $ | 8,680 |
|
| Total | | | $ | 76 |
| | | | $ | — |
| | | | $ | 18 |
| | | | $ | 47 |
| | | | $ | 114 |
| | | | $ | 8,680 |
|
| | | | | | | | | | |
| Derivatives not Designated in Hedging Relationships | | | | | | | |
| Foreign exchange contracts | N/A | | $ | — |
| | Other Assets | | $ | 702 |
| | N/A | | $ | — |
| | N/A | | $ | — |
| |
| Interest rate cap | N/A | | — |
| | Other Assets | | 25 |
| | N/A | | — |
| | N/A | | — |
| |
| Total | | $ | — |
| | $ | 727 |
| | $ | — |
| | $ | — |
| |
_________________________________________________________
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
| |
| (1) | Over the next 12 months, the Company expects that $8.8 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive income (loss)" as an increase to interest expense. |
The tables below present the effect of the Company's derivative financial instruments, including the Company's share of derivative financial instruments at certain of its equity method investments, in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) ($ in thousands):
|
| | | | | | | | | | |
| Derivatives Designated in Hedging Relationships | | Location of Gain (Loss) When Recognized in Income | | Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings |
| For the Three Months Ended March 31, 2020 | | | | |
| Interest rate swaps | | Earnings from equity method investments | | $ | (15,172 | ) | | $ | (226 | ) |
| Interest rate swaps | | Interest expense | | (12,604 | ) | | (1,088 | ) |
| | | | | | | |
| For the Three Months Ended March 31, 2019 | | | | |
| Interest rate swaps | | Interest Expense | | (7,822 | ) | | (151 | ) |
| Interest rate swaps | | Earnings from equity method investments | | (7,190 | ) | | 144 |
|
|
| | | | | | | | | | |
| Derivatives Designated in Hedging Relationships | | Location of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Ineffective Portion) |
| For the Three Months Ended September 30, 2017 | | | | | | |
| Interest rate swaps | | Interest Expense | | 15 |
| | (16 | ) | | N/A |
| Interest rate cap | | Earnings from equity method investments | | (2 | ) | | (2 | ) | | N/A |
| Interest rate swap | | Earnings from equity method investments | | (69 | ) | | (38 | ) | | N/A |
| Foreign exchange contracts | | Earnings from equity method investments | | (1 | ) | | — |
| | N/A |
| For the Three Months Ended September 30, 2016 | | | | | | |
| Interest rate cap | | Earnings from equity method investments | | (1 | ) | | (1 | ) | | N/A |
| Interest rate swaps | | Interest Expense | | 126 |
| | (19 | ) | | N/A |
| Interest rate swap | | Earnings from equity method investments | | 124 |
| | (92 | ) | | N/A |
| Foreign exchange contracts | | Earnings from equity method investments | | (150 | ) | | — |
| | N/A |
| | | | | | | | | |
| For the Nine Months Ended September 30, 2017 | | |
| | |
| | |
| Interest rate swaps | | Interest Expense | | 439 |
| | 339 |
| | N/A |
| Interest rate cap | | Earnings from equity method investments | | (16 | ) | | (16 | ) | | N/A |
| Interest rate swap | | Earnings from equity method investments | | (85 | ) | | (188 | ) | | N/A |
| Foreign exchange contracts | | Earnings from equity method investments | | (371 | ) | | — |
| | N/A |
| | | | | | | | | |
| For the Nine Months Ended September 30, 2016 | | |
| | |
| | |
| Interest rate cap | | Interest Expense | | — |
| | (185 | ) | | N/A |
| Interest rate cap | | Earnings from equity method investments | | (2 | ) | | — |
| | N/A |
| Interest rate swaps | | Interest Expense | | (568 | ) | | (17 | ) | | N/A |
| Interest rate swap | | Earnings from equity method investments | | (500 | ) | | (284 | ) | | N/A |
| Foreign exchange contracts | | Earnings from equity method investments | | (199 | ) | | — |
| | N/A |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain (Loss) Recognized in Income |
| | | Location of Gain (Loss) Recognized in Income | | For the Three Months Ended September 30, | | For the Nine Months
Ended September 30, |
| Derivatives not Designated in Hedging Relationships | | 2017 | | 2016 | | 2017 | | 2016 |
| Interest rate cap | | Other Expense | | $ | — |
| | $ | (4 | ) | | $ | 6 |
| | $ | (1,059 | ) |
| Foreign exchange contracts | | Other Expense | | (199 | ) | | 65 |
| | (970 | ) | | 406 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Foreign Exchange Contracts—The Company is exposed to fluctuations in foreign exchange rates on investments it holds in foreign entities. The Company uses foreign exchange contracts to hedge its exposure to changes in foreign exchange rates on its foreign investments. Foreign exchange contracts involve fixing the U.S. dollar ("USD") to the respective foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The foreign exchange contracts are typically cash settled in USD for their fair value at or close to their settlement date.Note 14—Equity
For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of Accumulated Other Comprehensive Income into earnings when the hedged foreign entity is either sold or substantially liquidated. For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Company's consolidated statements of operations within "Other Expense." As of September 30, 2017,
Preferred Stock—In December 2019, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations that were designated ($ and Rs in thousands):
|
| | | | | | | | | | |
| Derivative Type | | Notional Amount | | Notional (USD Equivalent) | | Maturity |
| Sells Indian rupee ("INR")/Buys USD Forward | | ₨ | 350,000 |
| | $ | 5,339 |
| | October 2017 |
The Company marks its foreign investments each quarter based on current exchange rates and records the gain or loss through "Other expense" in its consolidated statements of operations for loan investments or "Accumulated other comprehensive income (loss)," on its consolidated balance sheets for net investments in foreign subsidiaries. The Company recorded net gains (losses) related to foreign investments of $0.1issued an aggregate 16.5 million and $0.2 million during the three and nine months ended September 30, 2017, respectively, and $0.1 million during the three and nine months ended September 30, 2016 in its consolidated statements of operations.
Interest Rate Hedges—For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income (Loss). The ineffective portion of the change in fair value of the derivatives is recognized directly in the Company's consolidated statements of operations. For derivatives not designated as cash flow hedges, the changes in the fair value of the derivatives are reported in the Company's consolidated statements of operations within "Other Expense."
Over the next 12 months, the Company expects that $0.1 million related to cash flow hedges will be reclassified from
"Accumulated other comprehensive income (loss)" into earnings.
As of September 30, 2017, the Company had the following outstanding interest rate swap that was used to hedge its variable rate debt that was designated as a cash flow hedge ($ in thousands):
|
| | | | | | | | | | | | |
| Derivative Type | | Notional Amount | | Variable Rate | | Fixed Rate | | Effective Date | | Maturity |
| Interest rate swap | | $ | 25,977 |
| | LIBOR + 2.00% | | 3.47% | | October 2012 | | November 2019 |
During the nine months ended September 30, 2017, the Company entered into and settled a rate lock swap in connection with the 2017 Secured Financing and a simultaneous rate lock swap with SAFE. As a result of the settlements, the Company initially recorded a $0.4 million unrealized gain in “Accumulated other comprehensive income” on the Company’s consolidated balance sheets and subsequently derecognized the gain when third parties acquired a controlling interest in the Company's GL business (refer to Note 4).
Credit Risk-Related Contingent Features—The Company has agreements with eachshares of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on anycommon stock upon conversion of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company reports derivative instruments on a gross basis in the consolidated financial statements. In connection with its foreign currency derivatives which were in a liability position as of September 30, 2017 and December 31, 2016, the Company has posted collateral of $1.0 million and $0.4 million, respectively, and is included in "Deferred expenses and other assets, net"
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
on the Company's consolidated balance sheets. The Company's net exposure under these contracts was zero as of September 30, 2017.
Note 13—Equity
Preferred Stock—The Company had the following series of Cumulative Redeemable and Convertible Perpetualoutstanding Series J Preferred Stock outstanding asat a conversion rate of September 30, 2017:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | Cumulative Preferential Cash Dividends(1)(2) |
| Series | | Shares Issued and Outstanding (in thousands) | | Par Value | | Liquidation Preference(3)(4) | | Rate per Annum | | Equivalent to Fixed Annual Rate (per share) |
| D | | 4,000 |
| | $ | 0.001 |
| | $ | 25.00 |
| | 8.00 | % | | $ | 2.00 |
|
| G | | 3,200 |
| | 0.001 |
| | 25.00 |
| | 7.65 | % | | 1.91 |
|
| I | | 5,000 |
| | 0.001 |
| | 25.00 |
| | 7.50 | % | | 1.88 |
|
| J (convertible) | | 4,000 |
| | 0.001 |
| | 50.00 |
| | 4.50 | % | | 2.25 |
|
| | | 16,200 |
| | |
| | | | |
| | |
|
On September 19, 2017, the Company gave irrevocable notice to redeem all4.125 shares of its issued and outstanding Series E and Series F preferredcommon stock on October 20, 2017. Each holderper each share of Series E and Series F preferred stock received cash in the amount of the liquidation preference of $25.00 per share, or $240.0 million in the aggregate, plus accrued and unpaid dividends to the redemption date of $0.191406 per Series E share and $0.189583 per Series F share, or $1.8 million in the aggregate.J Preferred Stock. The total carrying value of the Series E and Series F preferred stockJ Preferred Stock prior to redemption was $223.7$193.5 million, net of discounts and fees, and was recorded in "Additional paid-in-capital" and "Preferred"Convertible Preferred Stock Series D, E, F, G and I,J, liquidation preference $25.00$50.00 per share" on the Company's consolidated balance sheet as of December 31, 2016. The remaining liquidation premium of $16.3 million represents a return similar to a dividendprior to the holders of the Series E and Series F preferred stock and, as such, has been recorded in "Retained earnings (deficit)" on the Company's consolidated balance sheet as of September 30, 2017. As of September 30, 2017, the redemption and final dividend payable on the redemption of the Series E and Series F preferred stock are recorded in "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheet.conversion.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company had the following series of Cumulative Redeemable and Convertible Perpetual Preferred Stock outstanding as of March 31, 2020 and December 31, 2016:2019:
| | | | | | | | | Cumulative Preferential Cash Dividends(1)(2) | | | | | | Cumulative Preferential Cash Dividends(1)(2) | | |
| Series | | Shares Issued and Outstanding (in thousands) | | Par Value | | Liquidation Preference(3)(4) | | Rate per Annum | | Equivalent to Fixed Annual Rate (per share) | | Shares Issued and Outstanding (in thousands) | | Par Value | | Liquidation Preference(3)(4) | | Rate per Annum | | Annual Dividend Per Share | | Carrying Value (in thousands) |
| D | | 4,000 |
| | $ | 0.001 |
| | $25.00 | | 8.000 | % | | $ | 2.00 |
| | 4,000 |
| | $ | 0.001 |
| | $ | 25.00 |
| | 8.00 | % | | $ | 2.00 |
| | $ | 89,041 |
|
| E | | 5,600 |
| | $ | 0.001 |
| | $25.00 | | 7.875 | % | | $ | 1.97 |
| |
| F | | 4,000 |
| | $ | 0.001 |
| | $25.00 | | 7.8 | % | | $ | 1.95 |
| |
| G | | 3,200 |
| | $ | 0.001 |
| | $25.00 | | 7.65 | % | | $ | 1.91 |
| | 3,200 |
| | 0.001 |
| | 25.00 |
| | 7.65 | % | | 1.91 |
| | 72,664 |
|
| I | | 5,000 |
| | $ | 0.001 |
| | $25.00 | | 7.50 | % | | $ | 1.88 |
| | 5,000 |
| | 0.001 |
| | 25.00 |
| | 7.50 | % | | 1.88 |
| | 120,785 |
|
| J (convertible) | | 4,000 |
| | $ | 0.001 |
| | $50.00 | | 4.50 | % | | $ | 2.25 |
| |
| | | 25,800 |
| | |
| | |
| | |
| |
| Total | | | 12,200 |
| | |
| | | | |
| | |
| | $ | 282,490 |
|
| |
| (1) | Holders of shares of the Series D, E, F, G I and JI preferred stock are entitled to receive dividends, when and as declared by the Company's Board of Directors, out of funds legally available for the payment of dividends. Dividends are cumulative from the date of original issue and are payable quarterly in arrears on or before the 15th day of each March, June, September and December or, if not a business day, the next succeeding business day. Any dividend payable on the preferred stock for any partial dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record as of the close of business on the first day of the calendar month in which the applicable dividend payment date falls or on another date designated by the Company's Board of Directors for the payment of dividends that is not more than 30 nor less than 10 days prior to the dividend payment date. |
| |
| (2) | The Company declared and paid dividends of $6.0$2.0 million, $8.3 million, $5.9 million, $4.6$1.5 million and $7.0$2.3 million on its Series D, E, F, G and I Cumulative Redeemable Preferred Stock during the ninethree months ended September 30, 2017March 31, 2020 and 2016, respectively (see paragraph below for additional dividends declared on Series E and Series F preferred stock).2019, respectively. The Company declared and paid dividends of $6.8$2.3 million on its Series J Convertible Perpetual Preferred Stock during the ninethree months ended September 30, 2017 and 2016.March 31, 2019. The character of the 20162019 dividends was as follows: 47.30% was a100% capital gain distribution, of which 76.15% represents34.01% represented unrecaptured section 1250 gain and 23.85% long term capital gain, and 52.70% was ordinary income.gain. There are no0 dividend arrearages on any of the preferred shares currently outstanding. |
| |
| (3) | The Company may, at its option, redeem the Series E, F, G and I Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. |
| |
(4) | Each share of the Series J Preferred Stock is convertible at the holder's option at any time, initially into 3.9087 shares of the Company's common stock (equal to an initial conversion price of approximately $12.79 per share), subject to specified adjustments. The Company may not redeem the Series J Preferred Stock prior to March 15, 2018. On or after March 15, 2018, the Company may, at its option, redeem the Series J Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $50.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. |
Dividends—To maintain its qualification as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the REIT. The Company has recorded NOLs and may record NOLs in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company's obligation to pay dividends for such periods in order to maintain its REIT qualification. As of December 31, 2016,2018, the Company had $948.8$567.7 million of NOL carryforwards at the corporate REIT level that can generally be used to offset both ordinary taxable income and capital gain net income in future years. The NOL carryforwards will begin to expire beginning in 20292031 and throughwill fully expire in 2036 if unused. The amount of NOL carryforwards as of December 31, 2019 will be determined upon finalization of the Company's 2019 tax return. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and certain asset impairments), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. The 2016 Senior Secured Credit FacilityTerm Loan and 2015 Securedthe Revolving Credit Facility permit the Company to distribute 100% of its REIT taxable income on an annual basis (prior to deducting certain cumulative NOL carryforwards), aspay common dividends with no restrictions so long as the Company maintainsis not in default on any of its REIT qualification. The 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility restrict the Company from paying any common dividends if it ceases to qualify as a REIT.debt obligations. The Company did not declare or pay anydeclared common stock dividends of $7.8 million, or $0.10 per share, for the ninethree months ended September 30, 2017March 31, 2020 and 2016.$6.2 million, or $0.09 per share, for the three months ended March 31, 2019.
Stock Repurchase Program—In February 2016, after having substantially utilized the remaining availability previously authorized, the Company's Board of Directors authorized a new $50.0 million stockThe Company may repurchase program. After having substantially utilized the availability authorizedshares in February 2016, the Company's Board of Directors authorized an increase to the stock repurchase program to $50.0 million, effective August 4, 2016. The program authorizes the repurchase of common stock from time to time innegotiated transactions or open market and privately negotiated purchases,transactions, including pursuant tothrough one or more trading plans. In connectionDuring the three months ended March 31, 2020, the Company repurchased 1.0 million shares of its outstanding common stock for $12.0 million, for an average cost of $12.51 per share. During the three months ended March 31, 2019, the Company repurchased 2.3 million shares of its outstanding common stock for $19.2 million, for an average cost of $8.46 per share. As of March 31, 2020, the Company had remaining authorization to repurchase up to $22.1 million of common stock under its stock repurchase program.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
with the sale of the 3.125% Convertible Notes in September 2017 (refer to Note 10), the Company repurchased 4.0 million shares of its common stock for $45.9 million at an average cost of $11.51 per share in privately negotiated transactions with purchasers of the 3.125% Convertible Notes. During the nine months ended September 30, 2016, the Company repurchased 10.2 million shares of its outstanding common stock for $98.4 million, at an average cost of $9.67 per share. As of September 30, 2017, the Company had remaining authorization to repurchase up to $4.1 million of common stock available to repurchase under its stock repurchase program.
Accumulated Other Comprehensive Income (Loss)—"Accumulated other comprehensive income (loss)" reflected in the Company's shareholders' equity is comprised of the following ($ in thousands):
|
| | | | | | | |
| | As of |
| | March 31, 2020 | | December 31, 2019 |
| Unrealized gains on available-for-sale securities | $ | 2,959 |
| | $ | 2,756 |
|
| Unrealized losses on cash flow hedges | (58,282 | ) | | (37,264 | ) |
| Unrealized losses on cumulative translation adjustment | (4,199 | ) | | (4,199 | ) |
| Accumulated other comprehensive loss | $ | (59,522 | ) | | $ | (38,707 | ) |
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| Unrealized gains on available-for-sale securities | $ | 599 |
| | $ | 149 |
|
| Unrealized gains on cash flow hedges | 230 |
| | 27 |
|
| Unrealized losses on cumulative translation adjustment | (4,659 | ) | | (4,394 | ) |
| Accumulated other comprehensive income (loss) | $ | (3,830 | ) | | $ | (4,218 | ) |
Note 14—15—Stock-Based Compensation Plans and Employee Benefits
Stock-Based Compensation—The Company recorded stock-based compensation expense, including the effect ofexpense related to performance incentive plans (see below), of $2.9$16.3 million and $12.7$4.2 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $1.4 million and $7.6 million for the three and nine months ended September 30, 2016,2019, respectively, in "General and administrative" in the Company's consolidated statements of operations. As of September 30, 2017, there was $2.1 million of total unrecognized compensation cost related to all unvested restricted stock units ("Units") that are expected to be recognized over a weighted average remaining vesting/service period of 1.5 years.
Performance Incentive Plans—The Company's Performance Incentive PlanPlans ("iPIP") isare designed to provide, primarily to senior executives and select professionals engaged in the Company's investment activities, long-term compensation which has a direct relationship to the realized returns on investments included in the plan.plans. Awards vest over six years, with 40% being vested at the end of the second year and 15% each year thereafter.
2019-2020 iPIP Plan—The Company's 2019-2020 iPIP plan is an equity-classified award which is measured at the grant date fair value and recognized as compensation cost in "General and administrative" in the Company's consolidated statements of operations and "Noncontrolling interests" in the Company's consolidated statements of changes in equity over the requisite service period. Investments in the 2019-2020 iPIP plan will be held by a consolidated subsidiary of the Company that has 2 ownership classes, class A units and class B units. The Company owns 100% of the class A units and the class B units were issued to employees as long-term compensation. Except for certain clawback provisions, participants can retain vested class B units upon their termination of employment with the Company. The class B units are entitled to distributions from the net cash realized from the investments in the plan after the Company, through its ownership of the class A units, has received a specified return on its invested capital and a return of its invested capital. Distributions on the class B units are also subject to reductions under a total shareholder return ("TSR") adjustment. The fair value of pointsthe class B units was determined using a model that forecasts the underlying cash flows from the investments within the entity to which the class B units have ownership rights. During the three months ended March 31, 2020 and 2019, the Company recorded $0.7 million and $0.4 million, respectively, of expense related to the 2019-2020 iPIP plan. Distributions on the class B units will be 50% in cash and 50% in shares of the Company's common stock or in shares of SAFE's common stock owned by the Company.
2013-2018 iPIP Plans—The remainder of the Company's iPIP plans, as shown in the table below, are liability-classified awards and are remeasured each reporting period at fair value until the awards are settled. Certain employees will be granted awards that entitle employees to receive the residual cash flows from the investments in the plans after the Company has received a specified return on its invested capital and a return of its invested capital. Awards are also subject to reductions under a TSR adjustment. The fair value of awards is determined using a model that forecasts the Company's projected investment performance. iPIP is a liability-classified award whichSettlement of the awards will be remeasured each reporting period at fair value until50% in cash and 50% in shares of the awards are settled. Company's common stock or in shares of SAFE's common stock owned by the Company.
The following is a summary of grantedthe status of the Company’s liability-classified iPIP points.plans and changes during the three months ended March 31, 2020.
•In May 2014, |
| | | | | | | | |
| | iPIP Investment Pool |
| | 2013-2014 | | 2015-2016 | | 2017-2018 |
| Points at beginning of period | 81.17 |
| | 73.28 |
| | 77.27 |
|
| Granted | — |
| | — |
| | — |
|
| Forfeited | (1.00 | ) | | (1.13 | ) | | (0.93 | ) |
| Points at end of period | 80.17 |
| | 72.15 |
| | 76.34 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
During the three months ended March 31, 2020, the Company granted 73 iPIP pointsmade distributions to participants in the initial 2013-20142015-2016 investment pool. The iPIP participants received total distributions in the amount of $1.5 million as compensation, comprised of cash and 54,245 shares of the Company's common stock with a fair value of $14.51 per share, which are fully-vested and issued under the 2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 32,825 shares of the Company's common stock were issued.
In January 2015,
During the three months ended March 31, 2019, the Company granted an additional 10 iPIP pointsmade distributions to participants in the 2013-2014 investment pool and 34pool. The iPIP pointsparticipants received total distributions in the 2015-2016 investment pool.
In January 2016,amount of $7.4 million as compensation, comprised of cash and 389,545 shares of the Company granted an additional 10 iPIP points inCompany's common stock, with a fair value of $9.21 per share, which are fully-vested and issued under the 2013-2014 investment pool and an additional 40 iPIP points in2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 209,118 shares of the 2015-2016 investment pool.
In June 2016, the Company granted an additional 2.5 iPIP points in the 2015-2016 investment pool.
In February 2017, the Company granted an additional 5 iPIP points in the 2013-2014 investment pool, an additional 18 iPIP points in the 2015-2016 investment pool, and 44 iPIP points in the 2017-2018 investment pool.
Company's common stock were issued.As of September 30, 2017, 11.5 iPIP points from the 2013-2014 investment pool, 10.0 iPIP points from the 2015-2016 investment pool and 4.3 iPIP points from the 2017-2018 investment pool were forfeited.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the Company had accrued compensation costs relating to iPIP of $33.1$54.7 million and $22.4$41.9 million, respectively, which are included in "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets.
Long-Term Incentive Plan—The Company's 2009 Long-Term Incentive Plan (the "2009 LTIP") is designed to provide incentive compensation for officers, key employees, directors and advisors of the Company. The 2009 LTIP provides for awards of stock options, shares of restricted stock, phantom shares, restricted stock units, dividend equivalent rights and other share-based
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
performance awards. All awards under the 2009 LTIP are made at the discretion of the Company's Board of Directors or a committee of the Board of Directors. The Company's shareholders approved the 2009 LTIP in 2009 and approved the performance-based provisions of the 2009 LTIP, as amended, in 2014. In May 2019, the Company's shareholders approved an increase in the number of shares available for issuance under the 2009 LTIP from a maximum of 8.0 million to 8.9 million and extended the expiration date of the 2009 LTIP from May 2019 to May 2029.
As of September 30, 2017,March 31, 2020, an aggregate of 3.32.5 million shares remain available for issuance pursuant to future awards under the Company's 2009 LTIP.
Restricted Share Issuances—During the nine months ended September 30, 2017, the Company granted 97,967 shares of common stock to certain employees under the 2009 LTIP as part of annual incentive awards that included a mix of cash and equity awards. The shares are fully-vested and 62,704 shares were issued net of statutory minimum required tax withholdings. The employees are restricted from selling these shares for up to 18 months from the date of grant.
2017 Restricted Stock Unit Activity—DuringA summary of the nine months ended September 30, 2017, the Company granted newCompany’s stock-based compensation awards to certain employees in the form of long-term incentive awards comprised offor the following:three months ended March 31, 2020, is as follows (in thousands):
115,571 service-based Units granted on February 22, 2017, representing the right to receive an equivalent number of shares of the Company's common stock (after deducting shares for minimum required statutory withholdings) if and when the Units vest. The Units will cliff vest in one installment on December 31, 2019, if the employee remains employed by the Company on the vesting date, subject to certain accelerated vesting rights. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled. As of September 30, 2017, 111,642 of such service-based Units were outstanding. |
| | |
| Nonvested at beginning of period | 598 |
|
| Granted | 181 |
|
| Vested | (105 | ) |
| Forfeited | — |
|
| Nonvested at end of period | 674 |
|
As of September 30, 2017,March 31, 2020, there was $4.6 million of total unrecognized compensation cost related to all unvested restricted stock units that are expected to be recognized over a weighted average remaining vesting/service period of 1.7 years.
Directors' Awards—During the three months ended March 31, 2020, the Company had the following additional stock-based compensation awards outstanding:
60,000 service-based Units granted on June 15, 2016, representing the right to receive an equivalent number of shares of the Company'sissued 917 common stock (after deducting shares for minimum required statutory withholdings) if and when the Units vest. The Units will vest in equal annual installments over four years on each anniversary of the grant date, if the employee remains employed by the Company on the vesting date, subject to certain accelerated vesting rights. Upon vesting of these Units, the holder will receive shares of the Company's common stock in the amount of the vested Units, net of statutory minimum required tax withholdings. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled.
104,026 service-based Units granted on January 29, 2016, representing the right to receive an equivalent number of shares of the Company's common stock (after deducting shares for minimum required statutory withholdings) if and when the Units vest. The Units will cliff vest in one installment on December 31, 2018, if the employee remains employed by the Company on the vesting date, subject to certain accelerated vesting rights. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled.
37,514 target amount of performance-based Units granted on January 30, 2015, representing the right to receive an equivalent number of shares of the Company's common stock (after deducting shares for minimum required statutory withholdings) if and when the Units vest. The performance is based on the Company's TSR, measured over a performance period ending on December 31, 2017, which is the date the awards cliff vest. Vesting will range from 0% to 200% of the target amount of the awards, depending on the Company’s TSR performance relative to the NAREIT All REITs Index (one-half of the target amount of the award) and the Russell 2000 Index (one-half of the target amount of the award) during the performance period. The Company, as well as any companies not included in each index at the beginning and end of the performance period, are excluded from calculation of the performance of such index. To the extent Units vest based on the Company's TSR performance, holders will receive an equivalent number of shares of common stock (after deducting shares for minimum required statutory withholdings), if the employee remains employed by the Company on the vesting date, subject to certain accelerated vesting rights. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled. The fair values of the performance-based Units were determined by utilizing a Monte Carlo model to simulate a range of possible future stock prices for the Company's common stock. The assumptions used to estimate the fair value of these performance-based awards were 0.75% for risk-free interest rate and 28.14% for expected stock price volatility.
54,201 service-based Units granted on January 30, 2015, representing the right to receive an equivalent number of shares of the Company's common stock (after deducting shares for minimum required statutory withholdings) if and when the
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Units vest. The Units will cliff vest in one installment on December 31, 2017, if the employee remains employed by the Company on the vesting date, subject to certain accelerated vesting rights. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled.
4,751 service-based Units granted on various dates, representing the right to receive an equivalent number of shares of the Company's common stock (after deducting shares for minimum required statutory withholdings) if and when the Units vest. The Units have an original vesting term of three years. Upon vesting of these Units, holders will receive shares of the Company's common stock in the amount of the vested Units, net of statutory minimum required tax withholdings. Dividends will accrue as and when dividends are declared by the Company on shares of its common stock, but will not be paid unless and until the Units vest and are settled.
Directors' Awards—During the nine months ended September 30, 2017, the Company awarded to non-employee Directors 56,817 restricted shares of common stockequivalents ("CSEs") at a fair value of $9.45 per shareCSE in respect of $11.86 at the time of grant. The restricted shares have a vesting term of one year.dividend equivalents on outstanding CSEs. As of September 30, 2017,March 31, 2020, a combined total of 317,664153,431 CSEs and restricted shares of common stock granted to members of the Company's Board of Directors remained outstanding under the Company's Non-Employee Directors Deferral Plan, with an aggregate intrinsic value of $3.7$1.6 million.
401(k) Plan—The Company made gross contributions of $0.2$0.7 million and $1.0$0.6 million for the three and nine months ended September 30, 2017March 31, 2020 and $0.1 million and $0.9 million for the three and nine months ended September 30, 2016,2019, respectively.
Note 15—16—Earnings Per Share
Earnings per share ("EPS") is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity's capital structure includes either two or more classes of common stock or common stock and participating securities.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted EPSearnings per share ("EPS") calculations ($ in thousands, except for per share data):
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Net loss | $ | (12,885 | ) | | $ | (6,970 | ) |
| Net income attributable to noncontrolling interests | (2,691 | ) | | (2,471 | ) |
| Preferred dividends | (5,874 | ) | | (8,124 | ) |
| Net loss allocable to common shareholders for basic and diluted earnings per common share | $ | (21,450 | ) | | $ | (17,565 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Income (loss) from continuing operations | $ | (23,029 | ) | | $ | 19,990 |
| | $ | 24,839 |
| | $ | 9,321 |
|
| Income from sales of real estate | 19,313 |
| | 34,444 |
| | 28,267 |
| | 88,387 |
|
| Net (income) loss attributable to noncontrolling interests | 160 |
| | 967 |
| | (4,450 | ) | | (6,915 | ) |
| Preferred dividends | (12,830 | ) | | (12,830 | ) | | (38,490 | ) | | (38,490 | ) |
| Preferred dividends declared and payable | (1,830 | ) | | — |
| | (1,830 | ) | | — |
|
| Premium above book value on redemption of preferred stock | (16,314 | ) | | — |
| | (16,314 | ) | | — |
|
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders and Participating Security Holders for basic earnings per common share(1) | $ | (34,530 | ) | | $ | 42,571 |
| | $ | (7,978 | ) | | $ | 52,303 |
|
| Add: Effect of joint venture shares | — |
| | 3 |
| | — |
| | 5 |
|
| Add: Effect of 1.50% senior convertible unsecured notes | — |
| | 1,123 |
| | — |
| | 3,400 |
|
| Add: Effect of 3.00% senior convertible unsecured notes | — |
| | 1,785 |
| | — |
| | 5,346 |
|
| Add: Effect of Series J convertible perpetual preferred stock | — |
| | 2,250 |
| | — |
| | 6,750 |
|
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders and Participating Security Holders for diluted earnings per common share(1) | $ | (34,530 | ) | | $ | 47,732 |
| | $ | (7,978 | ) | | $ | 67,804 |
|
| |
(1) | For the nine months ended September 30, 2016, includes income from continuing operations allocable to Participating Security Holders of $27 and $21 on a basic and dilutive basis. |
34 |
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Earnings allocable to common shares: | | | |
| Numerator for basic and diluted earnings per share: | | | |
| Net loss allocable to common shareholders | $ | (21,450 | ) | | $ | (17,565 | ) |
| | | | |
| Denominator for basic and diluted earnings per share: | | | |
| Weighted average common shares outstanding for basic and diluted earnings per common share | 77,444 |
| | 67,747 |
|
| | | | |
| Basic and diluted earnings per common share: | | | |
| Net loss allocable to common shareholders | $ | (0.28 | ) | | $ | (0.26 | ) |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Earnings allocable to common shares: | | | | | | | |
| Numerator for basic earnings per share: | | | | | | | |
| Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders | $ | (34,530 | ) | | $ | 42,571 |
| | $ | (7,978 | ) | | $ | 52,280 |
|
| Income from discontinued operations | — |
| | 3,721 |
| | 4,939 |
| | 10,929 |
|
| Gain from discontinued operations | — |
| | — |
| | 123,418 |
| | — |
|
| Income tax expense from discontinued operations | — |
| | — |
| | (4,545 | ) | | — |
|
| Net income (loss) attributable to iStar Inc. and allocable to common shareholders | $ | (34,530 | ) | | $ | 46,292 |
| | $ | 115,834 |
| | $ | 63,209 |
|
| | | | | | | | |
| Numerator for diluted earnings per share: | | | | | | | |
| Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders | $ | (34,530 | ) | | $ | 47,732 |
| | $ | (7,978 | ) | | $ | 67,786 |
|
| Income from discontinued operations | — |
| | 3,721 |
| | 4,939 |
| | 10,931 |
|
| Gain from discontinued operations | — |
| | — |
| | 123,418 |
| | — |
|
| Income tax expense from discontinued operations | — |
| | — |
| | (4,545 | ) | | — |
|
| Net income (loss) attributable to iStar Inc. and allocable to common shareholders | $ | (34,530 | ) | | $ | 51,453 |
| | $ | 115,834 |
| | $ | 78,717 |
|
| | | | | | | | |
| Denominator for basic and diluted earnings per share: | | | | | | | |
| Weighted average common shares outstanding for basic earnings per common share | 71,713 |
| | 71,210 |
| | 71,972 |
| | 74,074 |
|
| Add: Effect of assumed shares issued under treasury stock method for restricted stock units | — |
| | 87 |
| | — |
| | 65 |
|
| Add: Effect of joint venture shares | — |
| | 298 |
| | — |
| | 298 |
|
| Add: Effect of 1.50% senior convertible unsecured notes | — |
| | 11,444 |
| | — |
| | 11,526 |
|
| Add: Effect of 3.00% senior convertible unsecured notes | — |
| | 16,992 |
| | — |
| | 16,992 |
|
| Add: Effect of series J convertible perpetual preferred stock | — |
| | 15,635 |
| | — |
| | 15,635 |
|
| Weighted average common shares outstanding for diluted earnings per common share | 71,713 |
| | 115,666 |
| | 71,972 |
| | 118,590 |
|
| | | | | | | | |
| Basic earnings per common share: | | | | | | | |
| Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders | $ | (0.48 | ) | | $ | 0.60 |
| | $ | (0.11 | ) | | $ | 0.70 |
|
| Income from discontinued operations | — |
| | 0.05 |
| | 0.07 |
| | 0.15 |
|
| Gain from discontinued operations | — |
| | — |
| | 1.71 |
| | — |
|
| Income tax expense from discontinued operations | — |
| | — |
| | (0.06 | ) | | — |
|
| Net income (loss) attributable to iStar Inc. and allocable to common shareholders | $ | (0.48 | ) | | $ | 0.65 |
| | $ | 1.61 |
| | $ | 0.85 |
|
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Diluted earnings per common share: | | | | | | | |
| Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders | $ | (0.48 | ) | | $ | 0.41 |
| | $ | (0.11 | ) | | $ | 0.57 |
|
| Income from discontinued operations | — |
| | 0.03 |
| | 0.07 |
| | 0.09 |
|
| Gain from discontinued operations | — |
| | — |
| | 1.71 |
| | — |
|
| Income tax expense from discontinued operations | — |
| | — |
| | (0.06 | ) | | — |
|
| Net income (loss) attributable to iStar Inc. and allocable to common shareholders | $ | (0.48 | ) | | $ | 0.44 |
| | $ | 1.61 |
| | $ | 0.66 |
|
| | | | | | | | |
TheFor the three months ended March 31, 2019, the following shares were not included in the diluted EPS calculation because they were anti-dilutive (in thousands)(1):
|
| | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Series J convertible perpetual preferred stock | 15,635 |
| | — |
| | 15,635 |
| | — |
|
| Joint venture shares | 298 |
| | — |
| | 298 |
| | — |
|
|
| | |
| Series J convertible perpetual preferred stock | 15,951 |
|
| |
| (1) | For the three and nine months ended September 30, 2017,March 31, 2019, the effect of 3 and 22 unvested time and performance-based Unitscertain of the Company's restricted stock awards were anti-dilutive, respectively. For the three and nine months ended September 30, 2016, the effect of 25 and 128 unvested time and performance-based Units were anti-dilutive, respectively.anti-dilutive. The Company will settle conversions of the 3.125% Convertible Notes (refer to Note 11) by paying the conversion value in cash up to the original principal amount of the notes being converted and shares of common stock to the extent of any conversion premium. The amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated for each trading day in a 40 consecutive day observation period. Based upon the conversion price of the 3.125% Convertible Notes, no shares of common stock would have been issuable upon conversion of the 3.125% Convertible Notes for the three and nine months ended September 30, 2017March 31, 2020 and 2019 and therefore the 3.125% Convertible Notes had no effect on diluted EPS for such periods.period. |
Note 16—17—Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Certain of the Company's assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are classified as being valued on a non-recurring basis.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The following fair value hierarchy table summarizes the Company's assets and liabilities recorded at fair value on a recurring and non-recurring basis by the above categories ($ in thousands):
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Using |
| | Total | | Quoted market prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| As of March 31, 2020 | | | | | | | |
| Recurring basis: | | | | | | | |
Derivative liabilities(1) | $ | 20,685 |
| | $ | — |
| | $ | 20,685 |
| | $ | — |
|
Available-for-sale securities(1) | 23,640 |
| | — |
| | — |
| | 23,640 |
|
| Non-recurring basis: | | | | | | | |
Other investments(2) | 44,882 |
| | — |
| | 44,882 |
| | — |
|
| | | | | | | | |
| As of December 31, 2019 | | | | | | | |
| Recurring basis: | | | | | | | |
Derivative assets(1) | $ | 114 |
| | $ | — |
| | $ | 114 |
| | $ | — |
|
Derivative liabilities(1) | 8,680 |
| | — |
| | 8,680 |
| | — |
|
Available-for-sale securities(1) | 23,896 |
| | — |
| | — |
| | 23,896 |
|
| Non-recurring basis: | | | | | | | |
Impaired land and development(3) | 40,000 |
| | — |
| | — |
| | 40,000 |
|
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Using |
| | Total | | Quoted market prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| As of September 30, 2017 | | | | | | | |
| Recurring basis: | | | | | | | |
Derivative assets(1) | $ | 76 |
| | $ | — |
| | $ | 76 |
| | $ | — |
|
Derivative liabilities(1) | 18 |
| | — |
| | 18 |
| | — |
|
Available-for-sale securities(1) | 22,105 |
| | — |
| | — |
| | 22,105 |
|
| | | | | | | | |
| As of December 31, 2016 | | | | | | | |
| Recurring basis: | | | | | | | |
Derivative assets(1) | $ | 727 |
| | $ | — |
| | $ | 727 |
| | $ | — |
|
Derivative liabilities(1) | 47 |
| | — |
| | 47 |
| | — |
|
Available-for-sale securities(1) | 21,666 |
| | — |
| | — |
| | 21,666 |
|
| Non-recurring basis: | | | | | | | |
Impaired loans(2) | 7,200 |
| | — |
| | — |
| | 7,200 |
|
Impaired real estate(3) | 3,063 |
| | — |
| | — |
| | 3,063 |
|
| |
| (1) | The fair value of the Company's derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2. The fair value of the Company's available-for-sale securities are based upon unadjusted third-party broker quotes and are classified as Level 3. |
| |
| (2) | The Company recorded a provision for loan losses on one loan with a fair value of $5.2 million using an appraisal based on market comparable sales. In addition,During the three months ended March 31, 2020, the Company recorded a recoveryidentified an observable price change in an equity security held by the Company as evidenced by an orderly private issuance of loan losses on one loan with a fair value of $2.0 million based on proceeds to be received.similar securities by the same issuer and, as such, classified such observable price change as Level 2. |
| |
| (3) | The Company recorded aggregate impairments of $5.3 million on 2 land and development assets with an impairment on one real estate asset with aestimated aggregate fair value of $3.1 million$40.0 million. The estimated fair values are based on a discount rate of 11% using discounted cash flows over a two year sellout period.expected sales proceeds. |
The following table summarizes changes in Level 3 available-for-sale securities reported at fair value on the Company's consolidated balance sheets for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 ($ in thousands):
|
| | | | | | | | |
| | | 2020 | | 2019 |
| Beginning balance | | $ | 23,896 |
| | $ | 21,661 |
|
| Repayments | | (459 | ) | | (46 | ) |
| Unrealized gains recorded in other comprehensive income | | 203 |
| | 1,000 |
|
| Ending balance | | $ | 23,640 |
| | $ | 22,615 |
|
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Beginning balance | | $ | 21,666 |
| | $ | 1,161 |
|
| Purchases | | — |
| | 4,366 |
|
| Repayments | | (10 | ) | | (10 | ) |
| Unrealized gains recorded in other comprehensive income | | 449 |
| | 263 |
|
| Ending balance | | $ | 22,105 |
| | $ | 5,780 |
|
Fair values of financial instruments—The Company's estimated fair values of its loans receivable and other lending investments and outstanding debt was $1.1$0.9 billion and $4.5$3.0 billion, respectively, as of September 30, 2017March 31, 2020 and $1.5$0.9 billion and $3.6 billion, respectively, as of December 31, 2016.2019. The Company determined that the significant inputs used to value its loans receivable and other lending investments and debt obligations fall within Level 3 of the fair value hierarchy. The carrying value of other financial instruments including cash and cash equivalents, restricted cash, accrued interest receivable, net investment in leases and accounts payable, approximate the fair values of the instruments. Cash and cash equivalents and restricted cash values are considered
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Level 1 on the fair value hierarchy. The fair value of other financial instruments, including derivative assets and liabilities, isare included in the fair value hierarchy table above.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
Note 17—18—Segment Reporting
The Company has determined that it has four4 reportable segments based on how management reviews and manages its business. These reportable segments include: Net Lease, Real Estate Finance, Net Lease, Operating Properties and Land and Development. The Net Lease segment includes the Company's activities and operations related to the ownership of properties generally leased to single corporate tenants and its investment in SAFE (refer to Note 8). The Real Estate Finance segment includes all of the Company's activities related to senior and mezzanine real estate loans and real estate related securities. The Net Lease segment includes the Company's activities and operations related to the ownership of properties generally leased to single corporate tenants. The Operating Properties segment includes the Company's activities and operations related to its commercial and residential properties. The Land and Development segment includes the Company's activities related to its developable land portfolio.
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
The Company evaluates performance based on the following financial measures for each segment. The Company's segment information is as follows ($ in thousands):
| | | | Real Estate Finance | | Net Lease | | Operating Properties | | Land and Development | | Corporate/Other(1) | | Company Total | Net
Lease | | Real Estate Finance | | Operating Properties | | Land and Development | | Corporate/Other(1) | | Company Total |
| Three Months Ended September 30, 2017: | | | | | | | | | | | |
| Three Months Ended March 31, 2020: | | | | | | | | | | | | |
| Operating lease income | $ | — |
| | $ | 31,503 |
| | $ | 16,048 |
| | $ | 255 |
| | $ | — |
| | $ | 47,806 |
| $ | 41,464 |
| | $ | — |
| | $ | 5,774 |
| | $ | 108 |
| | $ | — |
| | $ | 47,346 |
|
| Interest income | 25,442 |
| | — |
| | — |
| | — |
| | — |
| | 25,442 |
| 823 |
| | 16,393 |
| | — |
| | — |
| | — |
| | 17,216 |
|
| Interest income from sales-type leases | | 8,355 |
| | — |
| | — |
| | — |
| | — |
| | 8,355 |
|
| Other income | 1,298 |
| | 953 |
| | 14,097 |
| | 1,174 |
| | 3,140 |
| | 20,662 |
| 4,293 |
| | 306 |
| | 3,157 |
| | 624 |
| | 11,988 |
| | 20,368 |
|
| Land development revenue | — |
| | — |
| | — |
| | 25,962 |
| | — |
| | 25,962 |
| — |
| | — |
| | — |
| | 80,176 |
| | — |
| | 80,176 |
|
| Earnings from equity method investments | — |
| | 1,302 |
| | (399 | ) | | 948 |
| | 610 |
| | 2,461 |
| |
| Income from sales of real estate | — |
| | 18,765 |
| | 548 |
| | — |
| | — |
| | 19,313 |
| |
| Earnings (losses) from equity method investments | | 19,531 |
| | — |
| | (2,667 | ) | | 584 |
| | (836 | ) | | 16,612 |
|
| Total revenue and other earnings | 26,740 |
| | 52,523 |
| | 30,294 |
| | 28,339 |
| | 3,750 |
| | 141,646 |
| 74,466 |
| | 16,699 |
| | 6,264 |
| | 81,492 |
| | 11,152 |
| | 190,073 |
|
| Real estate expense | — |
| | (4,423 | ) | | (23,185 | ) | | (8,672 | ) | | — |
| | (36,280 | ) | (6,229 | ) | | — |
| | (7,663 | ) | | (8,606 | ) | | — |
| | (22,498 | ) |
| Land development cost of sales | — |
| | — |
| | — |
| | (27,512 | ) | | — |
| | (27,512 | ) | — |
| | — |
| | — |
| | (77,059 | ) | | — |
| | (77,059 | ) |
| Other expense | (261 | ) | | — |
| | — |
| | — |
| | (2,443 | ) | | (2,704 | ) | — |
| | (19 | ) | | — |
| | — |
| | (55 | ) | | (74 | ) |
| Allocated interest expense | (9,165 | ) | | (12,255 | ) | | (4,860 | ) | | (6,529 | ) | | (15,923 | ) | | (48,732 | ) | (24,478 | ) | | (6,199 | ) | | (2,259 | ) | | (4,570 | ) | | (5,886 | ) | | (43,392 | ) |
Allocated general and administrative(2) | (3,334 | ) | | (4,315 | ) | | (1,866 | ) | | (3,706 | ) | | (4,800 | ) | | (18,021 | ) | (6,989 | ) | | (2,097 | ) | | (789 | ) | | (2,819 | ) | | (5,307 | ) | | (18,001 | ) |
Segment profit (loss)(3) | $ | 13,980 |
| | $ | 31,530 |
| | $ | 383 |
| | $ | (18,080 | ) | | $ | (19,416 | ) | | $ | 8,397 |
| $ | 36,770 |
| | $ | 8,384 |
| | $ | (4,447 | ) | | $ | (11,562 | ) | | $ | (96 | ) | | $ | 29,049 |
|
| Other significant items: | | | | | | | | | | | | | | | | | | | | | | |
| Recovery of loan losses | $ | (2,600 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2,600 | ) | |
| Provision for loan losses | | $ | 137 |
| | $ | 3,866 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,003 |
|
| Provision for losses on net investment in leases | | 1,292 |
| | — |
| | — |
| | — |
| | — |
| | 1,292 |
|
| Impairment of assets | — |
| | — |
| | 595 |
| | — |
| | — |
| | 595 |
| 1,708 |
| | — |
| | — |
| | — |
| | — |
| | 1,708 |
|
| Depreciation and amortization | — |
| | 6,623 |
| | 4,343 |
| | 546 |
| | 334 |
| | 11,846 |
| 12,656 |
| | — |
| | 1,284 |
| | 243 |
| | 303 |
| | 14,486 |
|
| Capitalized expenditures | — |
| | 2,384 |
| | 7,644 |
| | 33,788 |
| | — |
| | 43,816 |
| 1,846 |
| | — |
| | 917 |
| | 12,027 |
| | — |
| | 14,790 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016: | | | | | | | | | | | |
| Three Months Ended March 31, 2019: | | | | | | | | | | | | |
| Operating lease income | $ | — |
| | $ | 32,287 |
| | $ | 14,407 |
| | $ | 106 |
| | $ | — |
| | $ | 46,800 |
| $ | 49,482 |
| | $ | — |
| | $ | 9,356 |
| | $ | 77 |
| | $ | — |
| | $ | 58,915 |
|
| Interest income | 32,258 |
| | — |
| | — |
| | — |
| | — |
| | 32,258 |
| — |
| | 20,375 |
| | — |
| | — |
| | — |
| | 20,375 |
|
| Other income | 1,052 |
| | 412 |
| | 10,793 |
| | 658 |
| | 527 |
| | 13,442 |
| 3,420 |
| | 2,189 |
| | 2,375 |
| | 3,447 |
| | 3,382 |
| | 14,813 |
|
| Land development revenue | — |
| | — |
| | — |
| | 31,554 |
| | — |
| | 31,554 |
| — |
| | — |
| | — |
| | 12,699 |
| | — |
| | 12,699 |
|
| Earnings from equity method investments | — |
| | 723 |
| | 630 |
| | 21,841 |
| | 3,346 |
| | 26,540 |
| |
| Income from discontinued operations | — |
| | 3,721 |
| | — |
| | — |
| | — |
| | 3,721 |
| |
| Earnings (losses) from equity method investments | | 7,230 |
| | — |
| | (2,410 | ) | | 287 |
| | 202 |
| | 5,309 |
|
| Income from sales of real estate | — |
| | 6,629 |
| | 27,815 |
| | — |
| | — |
| | 34,444 |
| — |
| | — |
| | 9,407 |
| | — |
| | — |
| | 9,407 |
|
| Total revenue and other earnings | 33,310 |
| | 43,772 |
| | 53,645 |
| | 54,159 |
| | 3,873 |
| | 188,759 |
| 60,132 |
| | 22,564 |
| | 18,728 |
| | 16,510 |
| | 3,584 |
| | 121,518 |
|
| Real estate expense | — |
| | (4,707 | ) | | (21,129 | ) | | (9,407 | ) | | — |
| | (35,243 | ) | (6,106 | ) | | — |
| | (11,033 | ) | | (8,801 | ) | | — |
| | (25,940 | ) |
| Land development cost of sales | — |
| | — |
| | — |
| | (22,004 | ) | | — |
| | (22,004 | ) | — |
| | — |
| | — |
| | (14,449 | ) | | — |
| | (14,449 | ) |
| Other expense | (794 | ) | | — |
| | — |
| | — |
| | (25 | ) | | (819 | ) | — |
| | (265 | ) | | — |
| | — |
| | (243 | ) | | (508 | ) |
| Allocated interest expense | (14,544 | ) | | (16,330 | ) | | (5,110 | ) | | (9,013 | ) | | (10,108 | ) | | (55,105 | ) | (21,766 | ) | | (8,413 | ) | | (2,918 | ) | | (5,127 | ) | | (8,353 | ) | | (46,577 | ) |
Allocated general and administrative(2) | (3,995 | ) | | (4,526 | ) | | (1,502 | ) | | (3,495 | ) | | (4,714 | ) | | (18,232 | ) | (5,678 | ) | | (2,209 | ) | | (761 | ) | | (3,257 | ) | | (4,945 | ) | | (16,850 | ) |
Segment profit (loss)(3) | $ | 13,977 |
| | $ | 18,209 |
| | $ | 25,904 |
| | $ | 10,240 |
| | $ | (10,974 | ) | | $ | 57,356 |
| $ | 26,582 |
| | $ | 11,677 |
| | $ | 4,016 |
| | $ | (15,124 | ) | | $ | (9,957 | ) | | $ | 17,194 |
|
| Other significant items: | | | | | | | | | | | | | | | | | | | | | | |
| Recovery of loan losses | $ | (14,955 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (14,955 | ) | $ | — |
| | $ | (97 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (97 | ) |
| Impairment of assets | — |
| | 4,829 |
| | 112 |
| | 3,800 |
| | — |
| | 8,741 |
| — |
| | — |
| | 3,851 |
| | — |
| | — |
| | 3,851 |
|
| Depreciation and amortization | — |
| | 7,829 |
| | 3,798 |
| | 298 |
| | 276 |
| | 12,201 |
| 13,561 |
| | — |
| | 1,557 |
| | 247 |
| | 303 |
| | 15,668 |
|
| Capitalized expenditures | — |
| | 934 |
| | 15,902 |
| | 25,938 |
| | — |
| | 42,774 |
| 2,756 |
| | — |
| | 416 |
| | 36,079 |
| | — |
| | 39,251 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Real Estate Finance | | Net Lease | | Operating Properties | | Land and Development | | Corporate/Other(1) | | Company Total |
| Nine Months Ended September 30, 2017: | | | | | | | | | | |
| Operating lease income | $ | — |
| | $ | 93,606 |
| | $ | 47,977 |
| | $ | 572 |
| | $ | — |
| | $ | 142,155 |
|
| Interest income | 83,145 |
| | — |
| | — |
| | — |
| | — |
| | 83,145 |
|
| Other income | 1,854 |
| | 2,009 |
| | 37,720 |
| | 125,430 |
| | 5,024 |
| | 172,037 |
|
| Land development revenue | — |
| | — |
| | — |
| | 178,722 |
| | — |
| | 178,722 |
|
| Earnings from equity method investments | — |
| | 3,363 |
| | 702 |
| | 8,396 |
| | 1,216 |
| | 13,677 |
|
| Income from discontinued operations | — |
| | 4,939 |
| | — |
| | — |
| | — |
| | 4,939 |
|
| Gain from discontinued operations | — |
| | 123,418 |
| | — |
| | — |
| | — |
| | 123,418 |
|
| Income from sales of real estate | — |
| | 24,977 |
| | 3,290 |
| | — |
| | — |
| | 28,267 |
|
| Total revenue and other earnings | 84,999 |
| | 252,312 |
| | 89,689 |
| | 313,120 |
| | 6,240 |
| | 746,360 |
|
| Real estate expense | — |
| | (13,062 | ) | | (67,356 | ) | | (26,136 | ) | | — |
| | (106,554 | ) |
| Land development cost of sales | — |
| | — |
| | — |
| | (165,888 | ) | | — |
| | (165,888 | ) |
| Other expense | (1,263 | ) | | — |
| | — |
| | — |
| | (19,586 | ) | | (20,849 | ) |
| Allocated interest expense | (31,561 | ) | | (41,659 | ) | | (15,472 | ) | | (21,769 | ) | | (38,223 | ) | | (148,684 | ) |
Allocated general and administrative(2) | (11,621 | ) | | (14,878 | ) | | (5,985 | ) | | (12,636 | ) | | (15,497 | ) | | (60,617 | ) |
Segment profit (loss)(3) | $ | 40,554 |
| | $ | 182,713 |
| | $ | 876 |
| | $ | 86,691 |
| | $ | (67,066 | ) | | $ | 243,768 |
|
| Other significant non-cash items: | | | | | | | | | | | |
| Recovery of loan losses | $ | (8,128 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8,128 | ) |
| Impairment of assets | — |
| | 219 |
| | 5,009 |
| | 10,064 |
| | — |
| | 15,292 |
|
| Depreciation and amortization | — |
| | 21,662 |
| | 13,305 |
| | 1,337 |
| | 993 |
| | 37,297 |
|
| Capitalized expenditures | — |
| | 4,071 |
| | 24,210 |
| | 90,666 |
| | — |
| | 118,947 |
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2016: | | | | | | | | | | |
| Operating lease income | $ | — |
| | $ | 95,636 |
| | $ | 51,317 |
| | $ | 317 |
| | $ | — |
| | $ | 147,270 |
|
| Interest income | 99,877 |
| | — |
| | — |
| | — |
| | — |
| | 99,877 |
|
| Other income | 2,672 |
| | 924 |
| | 25,351 |
| | 2,889 |
| | 3,243 |
| | 35,079 |
|
| Land development revenue | — |
| | — |
| | — |
| | 74,389 |
| | — |
| | 74,389 |
|
| Earnings from equity method investments | — |
| | 2,613 |
| | 31,564 |
| | 31,189 |
| | 8,888 |
| | 74,254 |
|
| Income from discontinued operations | — |
| | 10,934 |
| | — |
| | — |
| | — |
| | 10,934 |
|
| Income from sales of real estate | — |
| | 15,896 |
| | 72,491 |
| | — |
| | — |
| | 88,387 |
|
| Total revenue and other earnings | 102,549 |
| | 126,003 |
| | 180,723 |
| | 108,784 |
| | 12,131 |
| | 530,190 |
|
| Real estate expense | — |
| | (13,770 | ) | | (63,046 | ) | | (27,999 | ) | | — |
| | (104,815 | ) |
| Land development cost of sales | — |
| | — |
| | — |
| | (50,842 | ) | | — |
| | (50,842 | ) |
| Other expense | (1,634 | ) | | — |
| | — |
| | — |
| | (3,107 | ) | | (4,741 | ) |
| Allocated interest expense | (43,877 | ) | | (49,030 | ) | | (17,579 | ) | | (26,040 | ) | | (31,647 | ) | | (168,173 | ) |
Allocated general and administrative(2) | (11,612 | ) | | (13,135 | ) | | (5,010 | ) | | (10,092 | ) | | (14,940 | ) | | (54,789 | ) |
Segment profit (loss)(3) | $ | 45,426 |
| | $ | 50,068 |
| | $ | 95,088 |
| | $ | (6,189 | ) | | $ | (37,563 | ) | | $ | 146,830 |
|
| Other significant non-cash items: | | | | | | | | | | | |
| Recovery of loan losses | $ | (12,749 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (12,749 | ) |
| Impairment of assets | — |
| | 4,829 |
| | 3,124 |
| | 3,800 |
| | — |
| | 11,753 |
|
| Depreciation and amortization | — |
| | 23,857 |
| | 14,103 |
| | 997 |
| | 824 |
| | 39,781 |
|
| Capitalized expenditures | — |
| | 3,410 |
| | 44,145 |
| | 92,212 |
| | — |
| | 139,767 |
|
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
| | | | Real Estate Finance | | Net Lease | | Operating Properties | | Land and Development | | Corporate/Other(1) | | Company Total | Net
Lease | | Real Estate Finance | | Operating Properties | | Land and Development | | Corporate/Other(1) | | Company Total |
| | | | | | | | | | | | | |
| As of September 30, 2017 | | | | | | | | | | |
| |
| As of March 31, 2020 | | | | | | | | | | | |
|
| Real estate | |
| | |
| | |
| | |
| | |
| | | |
| | | | |
| | |
| | |
| | |
| Real estate, net | $ | — |
| | $ | 844,493 |
| | $ | 479,369 |
| | $ | — |
| | $ | — |
| | $ | 1,323,862 |
| $ | 1,301,176 |
| | $ | — |
| | $ | 199,913 |
| | $ | — |
| | $ | — |
| | $ | 1,501,089 |
|
| Real estate available and held for sale | — |
| | — |
| | 65,658 |
| | — |
| | — |
| | 65,658 |
| 25,730 |
| | — |
| | 8,661 |
| | — |
| | — |
| | 34,391 |
|
| Total real estate | — |
| | 844,493 |
| | 545,027 |
| | — |
| | — |
| | 1,389,520 |
| 1,326,906 |
| | — |
| | 208,574 |
| | — |
| | — |
| | 1,535,480 |
|
| Net investment in leases | | 409,976 |
| | — |
| | — |
| | — |
| | — |
| | 409,976 |
|
| Land and development, net | — |
| | — |
| | — |
| | 861,507 |
| | — |
| | 861,507 |
| — |
| | — |
| | — |
| | 514,064 |
| | — |
| | 514,064 |
|
| Loans receivable and other lending investments, net | 1,109,442 |
| | — |
| | — |
| | — |
| | — |
| | 1,109,442 |
| 43,344 |
| | 807,491 |
| | — |
| | — |
| | — |
| | 850,835 |
|
| Other investments | — |
| | 185,176 |
| | 21,828 |
| | 63,308 |
| | 18,725 |
| | 289,037 |
| 880,534 |
| | — |
| | 60,009 |
| | 36,672 |
| | 52,337 |
| | 1,029,552 |
|
| Total portfolio assets | $ | 1,109,442 |
| | $ | 1,029,669 |
| | $ | 566,855 |
| | $ | 924,815 |
| | $ | 18,725 |
| | 3,649,506 |
| $ | 2,660,760 |
| | $ | 807,491 |
| | $ | 268,583 |
| | $ | 550,736 |
| | $ | 52,337 |
| | 4,339,907 |
|
| Cash and other assets | | | | | | | | | | | 2,145,713 |
| | | | | | | | | | | 882,674 |
|
| Total assets |
|
| |
|
| |
|
| |
|
| |
|
| | $ | 5,795,219 |
|
|
| | | |
|
| |
|
| |
|
| | $ | 5,222,581 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | | |
| Real estate | |
| | |
| | |
| | |
| | |
| | | |
| | | | |
| | |
| | |
| | |
| Real estate, net | $ | — |
| | $ | 911,112 |
| | $ | 476,162 |
| | $ | — |
| | $ | — |
| | $ | 1,387,274 |
| $ | 1,327,082 |
| | $ | — |
| | $ | 200,137 |
| | $ | — |
| | $ | — |
| | $ | 1,527,219 |
|
| Real estate available and held for sale | — |
| | 155,051 |
| | 82,480 |
| | — |
| | — |
|
| 237,531 |
| — |
| | — |
| | 8,650 |
| | — |
| | — |
|
| 8,650 |
|
| Total real estate | — |
| | 1,066,163 |
| | 558,642 |
| | — |
| | — |
| | 1,624,805 |
| 1,327,082 |
| | — |
| | 208,787 |
| | — |
| | — |
| | 1,535,869 |
|
| Net investment in leases | | 418,915 |
| | — |
| | — |
| | — |
| | — |
| | 418,915 |
|
| Land and development, net | — |
| | — |
| | — |
| | 945,565 |
| | — |
| | 945,565 |
| — |
| | — |
| | — |
| | 580,545 |
| | — |
| | 580,545 |
|
| Loans receivable and other lending investments, net | 1,450,439 |
| | — |
| | — |
| | — |
| | — |
| | 1,450,439 |
| 44,339 |
| | 783,522 |
| | — |
| | — |
| | — |
| | 827,861 |
|
| Other investments | — |
| | 92,669 |
| | 3,583 |
| | 84,804 |
| | 33,350 |
| | 214,406 |
| 760,068 |
| | — |
| | 61,686 |
| | 42,866 |
| | 43,255 |
| | 907,875 |
|
| Total portfolio assets | $ | 1,450,439 |
| | $ | 1,158,832 |
| | $ | 562,225 |
| | $ | 1,030,369 |
| | $ | 33,350 |
| | 4,235,215 |
| $ | 2,550,404 |
| | $ | 783,522 |
| | $ | 270,473 |
| | $ | 623,411 |
| | $ | 43,255 |
| | 4,271,065 |
|
| Cash and other assets | | | | | | | | | | | 590,299 |
| | | | | | | | | | | 814,044 |
|
| Total assets |
|
| |
|
| |
|
| |
|
| |
|
| | $ | 4,825,514 |
|
|
| | | |
|
| |
|
| |
|
| | $ | 5,085,109 |
|
| |
| (1) | Corporate/Other represents all corporate level and unallocated items including any intercompany eliminations necessary to reconcile to consolidated Company totals. This caption also includes the Company's joint venture investments and strategic investments that are not included in the other reportable segments above. |
| |
| (2) | General and administrative excludes stock-based compensation expense of $2.9$16.3 million and $12.7$4.2 million for the three and nine months ended September 30, 2017 respectively,March 31, 2020 and $1.4 million and $7.6 million for the three and nine months ended September 30, 2016,2019, respectively. |
| |
| (3) | The following is a reconciliation of segment profit to net income (loss) ($ in thousands): |
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Segment profit | $ | 29,049 |
| | $ | 17,194 |
|
| Add/Less: (Provision for) recovery of loan losses | (4,003 | ) | | 97 |
|
| Less: Provision for losses on net investment in leases | (1,292 | ) | | — |
|
| Less: Impairment of assets | (1,708 | ) | | (3,851 | ) |
| Less: Stock-based compensation expense | (16,270 | ) | | (4,249 | ) |
| Less: Depreciation and amortization | (14,486 | ) | | (15,668 | ) |
| Less: Income tax expense | (60 | ) | | (25 | ) |
| Less: Loss on early extinguishment of debt, net | (4,115 | ) | | (468 | ) |
| Net loss | $ | (12,885 | ) | | $ | (6,970 | ) |
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Segment profit | $ | 8,397 |
| | $ | 57,356 |
| | $ | 243,768 |
| | $ | 146,830 |
|
| Less: Recovery of (provision for) loan losses | 2,600 |
| | 14,955 |
| | 8,128 |
| | 12,749 |
|
| Less: Impairment of assets | (595 | ) | | (8,741 | ) | | (15,292 | ) | | (11,753 | ) |
| Less: Stock-based compensation expense | (2,934 | ) | | (1,434 | ) | | (12,730 | ) | | (7,644 | ) |
| Less: Depreciation and amortization | (11,846 | ) | | (12,201 | ) | | (37,297 | ) | | (39,781 | ) |
| Less: Income tax (expense) benefit | 1,278 |
| | 8,256 |
| | (972 | ) | | 9,859 |
|
| Less: Income tax expense from discontinued operations | — |
| | — |
| | (4,545 | ) | | — |
|
| Less: Loss on early extinguishment of debt, net | (616 | ) | | (36 | ) | | (4,142 | ) | | (1,618 | ) |
| Net income (loss) | $ | (3,716 | ) | | $ | 58,155 |
| | $ | 176,918 |
| | $ | 108,642 |
|
Note 19—Subsequent Events
The coronavirus ("COVID-19") pandemic outbreak has rapidly and dramatically impacted the United States and global economies. Many countries, including the United States, have instituted quarantines, mandated business and school closures and restricted travel. The United States financial markets have experienced disruption, with heightened stock market volatility and constrained credit conditions within most sectors, including real estate. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. At this time, the Company cannot predict the extent of the impacts of the COVID-19 crisis on its business. The ultimate impact of COVID-19 on the Company's business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the extent of its impact on the global economy, which are uncertain and cannot be predicted at this time. See the Risk Factors section of this report for additional discussion of certain potential risks to the Company's business arising from the COVID-19 crisis.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 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. 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 Item 1A—"Risk Factors" in our 2016 Annual Report and in this Report, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
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 2016 Annual Report. These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation.
IntroductionExecutive Overview
The coronavirus (COVID-19) outbreak has rapidly and dramatically impacted the US and global economies. Many countries, including the United States, have instituted quarantines, mandated business and school closures and restricted travel. The US financial markets have experienced significant disruption, with heightened stock market volatility and highly constrained credit conditions within most sectors, including real estate. We are focused on ensuring the health and safety of our personnel and the continuity of business activities at iStar Inc., doingand SAFE, monitoring the effects of the crisis on our and SAFE's customers, marshalling available liquidity at both companies, implementing appropriate cost containment measures and preparing for the eventual resumption of more normalized activities. At this time, we cannot predict the extent of the impacts of the COVID-19 crisis on our or SAFE's business. We will continue to monitor its effects on a daily basis and will adjust operations as necessary
The crisis began to materially affect our business as "iStar," finances, invests in and develops real estate and real estate related projects asthe latter part of its fully-integrated investment platform. We also provide management services for our ground lease and net lease equity method investments. We have invested more than $35 billion over the past two decades and are structured as a real estate investment trust ("REIT") with a diversified portfolio focused on larger assets located in major metropolitan markets. Our primary business segments are real estate finance, net lease, operating properties and land and development.
Executive Overview
During the three months ended September 30, 2017, we received upgrades to our corporate credit ratings from all three major ratings agenciesfirst quarter when we completedand most of our tenants and borrowers began working from home and normal business operations at companies throughout the United States ceased. There are no reliable forecasts as to how long these conditions will persist. While our financial results for the first quarter of 2020 were generally in line with our expectations, we may experience a transformative set of capital markets transactions designed to enhancematerial decline in rent and interest payments received in the second quarter and thereafter until more normalized business conditions resume. We increased our capital structureallowance for loan losses in the first quarter and improve our earnings profile. Our capital markets transactionsexpect that we will allow us to continue to focus on our net lease and real estate finance businessesdo so in future quarters while the COVID-19 pandemic continues to find selective investment opportunities in these core businesses. We also continue to make significant additional progress in monetizing our commercial and residential operating properties as well as our land portfolio. In our continuing effort to find untapped investment opportunities in real estate, we recently conceived and ultimately launched a new, publicly traded REIT focused exclusively onmaterially affect the ground lease ("GL") asset class.
Capital Markets ActivityUS economy.
In September 2017,2019, we completed a comprehensive settook advantage of capital markets transactions that addressed all partsfavorable interest rate and liquidity conditions to refinance and pay down outstanding debt through the issuance of an aggregate of $1.325 billion of unsecured notes. The refinancings reduced our capital structure, resulting in us having:
repaid or refinanced all ofinterest costs and improved our 2017 and 2018 corporate debt maturities, leavingmaturity profile. We have no corporate debt maturities forthrough September 2022. In addition, in the next 21 months;
extended our weighted average debt maturity by 1.5 years to 4.0 years;
reduced annual expenses underlying earnings by approximately $37 million, or $0.43 per diluted share;
lowered our cost of capital by approximately 35 basis points;
established new banking relationships;
increased liquidity to pursue new investment opportunities; and
received upgrades in our corporate credit ratings fromfourth quarter 2019 substantially all three major ratings agencies, which we expect will positively impact the marginal cost of our future borrowings and broaden our set of investment opportunities.
The table below summarizes the components, sources and uses of the capital markets transactions (in millions) (refer also to Liquidity and Capital Resources):
|
| | | | | | | | | | | |
| Uses | | Amount | | | Sources | | Amount |
| Repay 2016 Senior Secured Credit Facility | | $ | 473 |
| | | Amended 2016 Senior Secured Credit Facility | | $ | 400 |
|
Repay 4.0% senior unsecured notes due November 2017(1) | | 550 |
| | | Issue 4.625% senior unsecured notes due September 2020 | | 400 |
|
Repay 7.125% senior unsecured notes due February 2018(1) | | 300 |
| | | Issue 5.25% senior unsecured notes due September 2022 | | 400 |
|
Repay 4.875% senior unsecured notes due July 2018(1) | | 300 |
| | | Issue 3.125% senior unsecured convertible notes due September 2022 | | 250 |
|
Redeem 7.875% series E preferred stock(2) | | 140 |
| | | Cash | | 510 |
|
Redeem 7.8% series F preferred stock(2) | | 100 |
| | | | | |
| Repurchase common stock | | 46 |
| | | | | |
| Fees, expenses, interest and dividends | | 51 |
| | | | | |
| Total uses | | $ | 1,960 |
| | | Total sources | | $ | 1,960 |
|
| |
(1) | We repaid the $550.0 million principal amount outstanding of our 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of our 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount outstanding of our 4.875% senior unsecured notes due July 2018 in October 2017. |
| |
(2) | We redeemed our Series E and Series FSeries J preferred stock at par in October 2017. |
As of September 30, 2017, we had $1.9 billion of cash, of which $1.4 billion was used to repay senior unsecured notes and redeem preferred equity subsequent to quarter end, and the remainder of which we expect to use primarily to fund future investment activities. In addition, we have additional borrowing capacity of $325.0 million at September 30, 2017.
Safety, Income & Growth Inc.
We believe that Safety, Income & Growth Inc. ("SAFE") is the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leasedconverted by the fee ownerholders thereof into approximately 16.5 million shares of our common stock, which increased our equity base. Subsequent to March 31, 2020, we repaid the land to the owners/operators of the real estate projects built thereon ("Ground Leases"). Ground Leases afford investors the opportunity for safe, growing income derived from (i) a Ground Lease's seniorRevolving Credit Facility in full and our liquidity position in the commercial real estate capital structure; (ii) long-term leases with periodic contractual increases in rent; and (iii) growth in the value of the ground over time. Capital appreciation is realized when, at the enddate of the lifethis report included approximately $85 million of the lease, the commercial real estate property reverts back to the lessor, as landlord,unrestricted cash and it is able to realize the value$350 million of the leasehold, which may be substantial. Ground Leases share similarities with triple net leases in that typically the lessor is not responsible for any operating or capital expenses over the life of the lease, making the management of a Ground Lease portfolio relatively simple, with limited working capital needs.
In April 2017, institutional investors acquired a controlling interest in our GL business through the merger of one of our subsidiaries and related transactions (the "Acquisition Transactions"). Our GL business was a component of our net lease segment and consisted of 12 properties subject to long-term net leases including seven GLs and one master lease (covering five properties). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. The carrying value of our GL assets was approximately $161.1 million. Shortly before the Acquisition Transactions, we completed the $227.0 million 2017 Secured Financingundrawn capacity on our GL assetsRevolving Credit Facility (refer to Note 10)11). We received all
The COVID-19 crisis may adversely affect our strategies of monetizing legacy assets and materially scaling SAFE's portfolio for the proceeds of the 2017 Secured Financing. We received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that we contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, we deconsolidated the 12 propertiestime being. Equity and the associated 2017 Secured Financing. We accountdebt financing for our investment in SAFE as an equity method investment (refer to Note 7). We accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of our retained interest in SAFE.
On June 27, 2017, SAFE completed its initial public offering raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to us, its largest shareholder. We paid organization and offering costs in connection with these transactions including commissions payable to the underwriters and other offering expenses. As of September 30, 2017, we owned 34.6% of SAFE and our investment had a market value of $117.4 million.generally is constrained. In addition, onethe crisis has made it more difficult to execute transactions as people are unable to visit properties, local governmental offices are closed and third parties such as survey, insurance, environmental and similar services have more limited capacities. These conditions may adversely affect our strategy while they persist. See the Risk Factors section of this report for additional discussion of certain potential risks to our wholly-owned subsidiaries is the external manager of SAFE, our Chairman and Chief Executive Officer is a director and the Chairman and Chief Executive Officer of SAFE and our other executive officers hold similarly titled positions with SAFE.
Bevard
In April 2017, we received a favorable judgmentbusiness arising from the U.S. Court of Appeals for the Fourth Circuit, affirming a prior district court judgment relating to a dispute with Lennar over the purchase and sale of Bevard, a master planned community located in Maryland. On April 21, we conveyed the property to Lennar and received $234.3 million of net proceeds after payment of $3.3 million in documentary transfer taxes, comprised of the remaining purchase price of $114.0 million and $123.4 million of interest and real estate taxes, net of costs. We have applied for attorney’s fees in excess of $17.0 million. A portion of the net proceeds received by us has been paid to the third party which holds a 4.3% participation interest in all proceeds received by us.
Lennar has filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of two specific issues previously decided in our favor by the lower courts. We have filed a brief in opposition to the petition. There can be no assurance as to the outcome of Lennar’s petition or, if it is accepted, any determination or redetermination by the U.S. Supreme Court affecting this matter.COVID-19 crisis.
Operating Results
During the three months ended September 30, 2017, three of our four business segments contributed positively to our earnings. We continue to work on repositioning or redeveloping our transitional operating properties and progressing on the entitlement and development of our land and development assets in order to maximize their value. We intend to continue these efforts, with the objective of increasing the contribution of these assets to our earnings in the future. For the three months ended September 30, 2017, we recorded a net loss allocable to common shareholders of $34.5 million, compared to net income of $46.3 million during the same period in the prior year. Adjusted income (loss) allocable to common shareholders for the three months ended September 30, 2017 was $(3.6) million, compared to $49.1 million during the same period in the prior year (see "Adjusted Income" for a reconciliation of adjusted income to net income).
Portfolio Overview
As of September 30, 2017,March 31, 2020, based on carrying valuesour gross of accumulated depreciation and general loan loss reserves, our $4.1 billion investment portfolio hasbook value, including the following characteristics:
(1)Represents the marketcarrying value of our equity method investment in SAFE.
As of September 30, 2017, based on carrying valuesinvestments gross of accumulated depreciation, and general loan loss reserves, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Property/Collateral Types | | Net Lease | | Real Estate Finance | | Operating Properties | | Land & Development | | Total | | % of
Total |
| Office / Industrial | | $ | 1,177,330 |
| | $ | 104,894 |
| | $ | 97,790 |
| | $ | — |
| | $ | 1,380,014 |
| | 28.9 | % |
| Entertainment / Leisure | | 933,689 |
| | — |
| | 16,162 |
| | — |
| | 949,851 |
| | 19.8 | % |
| Ground Leases | | 878,276 |
| | — |
| | — |
| | — |
| | 878,276 |
| | 18.3 | % |
| Land and Development | | — |
| | 97,324 |
| | — |
| | 400,817 |
| | 498,141 |
| | 10.4 | % |
| Condominium | | — |
| | 187,848 |
| | 20,937 |
| | 145,558 |
| | 354,343 |
| | 7.4 | % |
| Hotel | | — |
| | 172,965 |
| | 82,565 |
| | — |
| | 255,530 |
| | 5.3 | % |
| Multifamily | | — |
| | 162,343 |
| | 54,294 |
| | 5,896 |
| | 222,533 |
| | 4.6 | % |
| Retail | | 57,348 |
| | 68,939 |
| | 41,398 |
| | 8,295 |
| | 175,980 |
| | 3.7 | % |
| Other Property Types | | — |
| | 23,640 |
| | — |
| | — |
| | 23,640 |
| | 0.5 | % |
Strategic Investments(1) | | — |
| | — |
| | — |
| | — |
| | 52,337 |
| | 1.1 | % |
| Total | | $ | 3,046,643 |
| | $ | 817,953 |
| | $ | 313,146 |
| | $ | 560,566 |
| | $ | 4,790,645 |
| | 100.0 | % |
| Percentage of Total | | 64 | % | | 17 | % | | 7 | % | | 12 | % | | 100 | % | |
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Property/Collateral Types | | Real Estate Finance | | Net Lease | | Operating Properties | | Land & Development | | Total | | % of
Total |
| Land and Development | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 932,639 |
| | $ | 932,639 |
| | 22.9 | % |
| Office / Industrial | | 46,157 |
| | 719,364 |
| | 122,868 |
| | — |
| | 888,389 |
| | 21.8 | % |
| Entertainment / Leisure | | — |
| | 484,117 |
| | — |
| | — |
| | 484,117 |
| | 11.9 | % |
| Mixed Use / Mixed Collateral | | 260,424 |
| | — |
| | 186,542 |
| | — |
| | 446,966 |
| | 11.0 | % |
| Hotel | | 332,514 |
| | — |
| | 103,424 |
| | — |
| | 435,938 |
| | 10.7 | % |
| Condominium | | 263,721 |
| | — |
| | 65,674 |
| | — |
| | 329,395 |
| | 7.9 | % |
| Retail | | 26,029 |
| | 57,348 |
| | 136,859 |
| | — |
| | 220,236 |
| | 5.4 | % |
| Other Property Types | | 195,797 |
| | — |
| | 8,761 |
| | — |
| | 204,558 |
| | 5.0 | % |
Ground Leases(1) | | — |
| | 117,448 |
| | — |
| | — |
| | 117,448 |
| | 2.9 | % |
| Strategic Investments | | — |
| | — |
| | — |
| | — |
| | 18,725 |
| | 0.5 | % |
| Total | | $ | 1,124,642 |
| | $ | 1,378,277 |
| | $ | 624,128 |
| | $ | 932,639 |
| | $ | 4,078,411 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Geographic Region | | Real Estate Finance | | Net Lease | | Operating Properties | | Land & Development | | Total | | % of
Total |
| Northeast | | $ | 502,904 |
| | $ | 401,384 |
| | $ | 47,257 |
| | $ | 260,867 |
| | $ | 1,212,412 |
| | 29.7 | % |
| West | | 63,971 |
| | 296,348 |
| | 51,772 |
| | 368,088 |
| | 780,179 |
| | 19.1 | % |
| Southeast | | 180,265 |
| | 252,787 |
| | 148,881 |
| | 121,103 |
| | 703,036 |
| | 17.2 | % |
| Southwest | | 79,341 |
| | 161,341 |
| | 244,544 |
| | 22,412 |
| | 507,638 |
| | 12.4 | % |
| Central | | 204,068 |
| | 79,392 |
| | 76,962 |
| | 31,500 |
| | 391,922 |
| | 9.6 | % |
| Mid-Atlantic | | — |
| | 153,092 |
| | 44,572 |
| | 128,669 |
| | 326,333 |
| | 8.0 | % |
Various(2) | | 94,093 |
| | 33,933 |
| | 10,140 |
| | — |
| | 138,166 |
| | 3.5 | % |
Strategic Investments(2) | | — |
| | — |
| | — |
| | — |
| | 18,725 |
| | 0.5 | % |
| Total | | $ | 1,124,642 |
| | $ | 1,378,277 |
| | $ | 624,128 |
| | $ | 932,639 |
| | $ | 4,078,411 |
| | 100.0 | % |
| |
| (1) | Represents the marketStrategic Investments is comprised of $44.9 million of office/industrial and $7.4 million of other property types. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Geographic Region | | Net Lease | | Real Estate Finance | | Operating Properties | | Land & Development | | Total | | % of
Total |
| Northeast | | $ | 914,897 |
| | $ | 309,546 |
| | $ | 93,425 |
| | $ | 304,179 |
| | $ | 1,622,047 |
| | 33.9 | % |
| West | | 482,959 |
| | 262,353 |
| | 56,489 |
| | 38,809 |
| | 840,610 |
| | 17.5 | % |
| Mid-Atlantic | | 506,309 |
| | 12,803 |
| | — |
| | 123,763 |
| | 642,875 |
| | 13.4 | % |
| Central | | 419,506 |
| | 76,274 |
| | 45,642 |
| | 31,500 |
| | 572,922 |
| | 12.0 | % |
| Southwest | | 388,075 |
| | 15,385 |
| | 104,307 |
| | 43,611 |
| | 551,378 |
| | 11.5 | % |
| Southeast | | 325,435 |
| | 55,224 |
| | 13,283 |
| | 18,704 |
| | 412,646 |
| | 8.6 | % |
| Various | | 9,462 |
| | 86,368 |
| | — |
| | — |
| | 95,830 |
| | 2.0 | % |
| Strategic Investments | | — |
| | — |
| | — |
| | — |
| | 52,337 |
| | 1.1 | % |
| Total | | $ | 3,046,643 |
| | $ | 817,953 |
| | $ | 313,146 |
| | $ | 560,566 |
| | $ | 4,790,645 |
| | 100.0 | % |
Net Lease
Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on our properties. We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine 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). We generally intend to hold our net lease assets for long-term investment. However, we may dispose of assets if we deem the disposition to be in our best interests.
The net lease segment includes our Ground Lease investments made primarily through SAFE and our traditional net lease investments. As of March 31, 2020, our consolidated net lease portfolio totaled $2.1 billion. Our net lease portfolio, including the carrying value of our equity method investments in SAFE and Net Lease Venture II, exclusive of accumulated depreciation, totaled $3.0 billion. The table below provides certain statistics for our net lease portfolio.
|
| | | | | | | | | | | | |
| | | Consolidated Real Estate(1) | | Net Lease Venture II | | SAFE |
| Ownership % | | 100.0 | % | | 51.9 | % | | 65.4 | % |
Gross book value (millions)(2) | | $ | 2,146 |
| | $ | 175 |
| | $ | 2,705 |
|
| | | | | | | |
| % Leased | | 99.4 | % | | 100.0 | % | | 100.0 | % |
| Square footage (thousands) | | 15,738 |
| | 1,998 |
| | N/A |
|
Weighted average lease term (years)(3) | | 17.8 |
| | 6.5 |
| | 89.6 |
|
Weighted average yield(4) | | 8.0 | % | | 10.4 | % | | 4.4 | % |
(1)We own 51.9% of the Net Lease Venture which is consolidated in our GAAP financial statements (refer to Note 4).
| |
| (2) | Gross book value represents the acquisition cost of real estate and any additional capital invested into the property by us. Consolidated Real Estate includes amounts recorded as net investment in leases (refer to Note 5) and financing receivables in loans and other lending investments (refer to Note 7). SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment in SAFE.investment. |
| |
| (3) | Weighted average lease term is calculated using GAAP rent and the initial maturity and does not include extension options. SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment. |
(2)Combined, strategic(4)Yield for SAFE is calculated over the trailing twelve months and excludes management fees earned by us.
Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets and gave a right of first refusal to the venture on all new net lease investments that met specified investment criteria (refer to Note 4 in our consolidated financial statements for more information on our Net Lease Venture). The Net Lease Venture's investment period expired on June 30, 2018 and the various category include $9.0 millionremaining term of international assets.the venture extends through February 13, 2022, subject to two, one-year extension options at the discretion of us and our partner. We obtained control over the Net Lease Venture when the investment period expired on June 30, 2018 and consolidated the assets and liabilities of the venture, which had previously been accounted for as an equity method investment.
Net Lease Venture II—In July 2018, we entered into Net Lease Venture II with similar investment strategies as the Net Lease Venture (refer to Note 8). The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by us. We have an equity interest in the new venture of approximately 51.9%, which is accounted for as an equity method investment, and are responsible for managing the venture in exchange for a management fee and incentive fee.
SAFE—SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive long-term risk-adjusted returns from its investments. We believe its business has characteristics comparable to a high-grade fixed income investment business, but with certain unique advantages. Relative to alternative fixed income investments generally, SAFE's Ground Leases typically benefit from built-in growth derived from contractual rent increases, and the opportunity to realize value from residual rights to acquire the buildings and other improvements on its land at no additional cost. We believe that these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments. As of March 31, 2020, we owned approximately 65.4% of SAFE's common stock outstanding.
We account for our investment in SAFE as an equity method investment (refer to Note 8). We act as SAFE's external manager pursuant to a management agreement, and we have an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that we will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless we have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
Real Estate Finance
Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. Our real estate finance portfolio consists of senior mortgage loans that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets, leasehold loans to Ground Lease tenants, including tenants of SAFE, and corporate/partnership loans, which represent mezzanine or subordinated loans to entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. Our real estate finance portfolio includes loans on stabilized and transitional properties, Ground Leases and ground-up construction projects. In addition, we have preferred equity investments and debt securities classified as other lending investments.
As of September 30, 2017,March 31, 2020, our real estate finance portfolio, including securities and other lending investments, totaled $1.1 billion, gross$862.4 million, exclusive of general loan loss reserves.allowance. The portfolio, excluding securities and other lending investments, included $860.3$692.1 million of performing loans with a weighted average maturity of 1.4 years.
The tables below summarize our loans and the reservesallowance for loan losses associated with our loans ($ in thousands):
| | | | September 30, 2017 | March 31, 2020 |
| | Number of Loans | | Gross Carrying Value | | Reserve for Loan Losses | | Carrying Value | | % of Total | | Reserve for Loan Losses as a % of Gross Carrying Value | Number of Loans | | Gross Carrying Value | | Allowance for Loan Losses | | Carrying Value | | % of Total | | Allowance for Loan Losses as a % of Gross Carrying Value |
| Performing loans | 35 |
| | $ | 860,327 |
| | $ | (15,200 | ) | | $ | 845,127 |
| | 82.7% | | 1.8% | 22 |
| | $ | 692,129 |
| | $ | (11,563 | ) | | $ | 680,566 |
| | 97.7% | | 1.7% |
| Non-performing loans | 5 |
| | 238,155 |
| | (60,989 | ) | | 177,166 |
| | 17.3% | | 25.6% | 1 |
| | 37,517 |
| | (21,701 | ) | | 15,816 |
| | 2.3% | | 57.8% |
| Total | 40 |
| | $ | 1,098,482 |
| | $ | (76,189 | ) | | $ | 1,022,293 |
| | 100.0% | | 6.9% | 23 |
| | $ | 729,646 |
| | $ | (33,264 | ) | | $ | 696,382 |
| | 100.0% | | 4.6% |
| | | |
| |
| | | | | |
| |
| | | |
| | December 31, 2016 | December 31, 2019 |
| | Number of Loans | | Gross Carrying Value | | Reserve for Loan Losses | | Carrying Value | | % of Total | | Reserve for Loan Losses as a % of Gross Carrying Value | Number of Loans | | Gross Carrying Value | | Allowance for Loan Losses | | Carrying Value | | % of Total | | Allowance for Loan Losses as a % of Gross Carrying Value |
| Performing loans | 35 |
| | $ | 1,202,127 |
| | $ | (23,300 | ) | | $ | 1,178,827 |
| | 86.0% | | 1.9% | 22 |
| | $ | 665,460 |
| | $ | (6,933 | ) | | $ | 658,527 |
| | 97.6% | | 1.0% |
| Non-performing loans | 6 |
| | 253,941 |
| | (62,245 | ) | | 191,696 |
| | 14.0% | | 24.5% | 1 |
| | 37,820 |
| | (21,701 | ) | | 16,119 |
| | 2.4% | | 57.4% |
| Total | 41 |
| | $ | 1,456,068 |
| | $ | (85,545 | ) | | $ | 1,370,523 |
| | 100.0% | | 5.9% | 23 |
| | $ | 703,280 |
| | $ | (28,634 | ) | | $ | 674,646 |
| | 100.0% | | 4.1% |
Performing Loans—The table below summarizes our performing loans grossexclusive of reservesallowances ($ in thousands):
| | | | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| Senior mortgages | $ | 512,349 |
| | $ | 854,805 |
| $ | 558,043 |
| | $ | 534,765 |
|
| Corporate/Partnership loans | 338,643 |
| | 333,244 |
| 123,023 |
| | 119,818 |
|
| Subordinate mortgages | 9,335 |
| | 14,078 |
| 11,063 |
| | 10,877 |
|
| Total | $ | 860,327 |
| | $ | 1,202,127 |
| $ | 692,129 |
| | $ | 665,460 |
|
| | | | | | | |
| Weighted average LTV | 61 | % | | 64 | % | 60 | % | | 61 | % |
| Yield | 10.1 | % | | 8.9 | % | 8.2 | % | | 8.8 | % |
Non-Performing Loans—We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of September 30, 2017,March 31, 2020 and December 31, 2019, we had one non-performing loansloan with an aggregatea carrying value of $177.2$15.8 million compared to non-performing loans with an aggregate carrying value of $191.7and $16.1 million, as of December 31, 2016.respectively. We expect that our level of non-performing loans will fluctuate from period to period.
ReserveAllowance for Loan Losses—The reserveallowance for loan losses was $76.2$33.3 million as of September 30, 2017,March 31, 2020, or 6.9%4.6% of total loans, compared to $85.5$28.6 million, or 5.9%4.1%, as of December 31, 2016. For the nine months ended September 30, 2017, the recovery of loan losses included a reduction in the general reserve of $8.1 million due to an overall improvement in the risk ratings and a decrease in size of our loan portfolio.2019. We expect that our level of reserveallowance for loan losses will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and reservesallowances requires the use of significant judgment. We currently believe there is adequate collateral and reservesallowances to support the carrying values of the loans.
The reserveallowance for loan losses includes an asset-specific component and a formula-based component. An asset-specific reserveallowance is established for an impaired loan when the estimated fair value of the loan's collateral less costs to sell is lower than the carrying value of the loan. As of September 30, 2017, asset-specific reserves decreased to $61.0 million compared to $62.2 million as ofMarch 31, 2020 and December 31, 2016.2019, asset-specific allowances were $21.7 million.
The formula-based general reserveallowance is derived from estimated principal default probabilities and loss severities applied to groups of performing loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. During this assessment, we perform a comprehensive analysis of our loan portfolio and assign risk ratings
to loans that incorporate management's current judgments and future expectations about their credit quality based on all known and relevant factors that may affect collectability. We consider, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional
economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. We estimate loss rates based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience.
The general reserve decreasedallowance increased to $15.2$11.6 million or 1.8%1.7% of performing loans and other lending investments as of September 30, 2017,March 31, 2020, compared to $23.3$6.9 million or 1.9%1.0% of performing loans and other lending investments as of December 31, 2016.2019. The decreaseincrease was primarily attributabledue to a $0.7 million general allowance recorded upon the adoption of ASU 2016-13 on January 1, 2020 (refer to Note 3) and an overall improvementincrease in the risk ratings and a decrease in sizegeneral allowance of our loan portfolio.$3.9 million during the three months ended March 31, 2020.
Net LeaseOperating Properties
Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on ouroperating properties represent a pool of assets across a broad range of geographies and property types including office, retail, hotel and residential properties. We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. We invest in new net lease investments primarily through our Net Lease Venture, in which we hold a 51.9% interest. The Net Lease Venture has a right of first offer on any new net lease investments that we source. In February 2017, the Net Lease Venture's investment period was extended through February 1, 2018. The term of the Net Lease Venture extends through February 13, 2022, subject to two, one-year extension options at the discretion of the Company and its partner.
In April 2017, institutional investors acquired a controlling interest in our GL business through the merger of one of our subsidiaries and related transactions. Our GL business was a component of our net lease segment and consisted of 12 properties subject to long-term net leases including seven GLs and one master lease (covering five properties). As a result, we deconsolidated the 12 properties and associated liabilities and we began to record our investment in SAFE as an equity method investment.
On June 27, 2017, SAFE completed its initial public offering raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to us. Subsequent to the initial public offering, we purchased 1.3 million shares of SAFE's common stock for $24.5 million at an average cost of $19.20 per share. As of September 30, 2017, we owned approximately 34.6% of SAFE's common stock outstanding which had an estimated market value of $117.4 million. In addition, a wholly-owned subsidiary of ours is the external manager of SAFE andMarch 31, 2020, our Chief Executive Officer is the Chairman of SAFE's board of directors.
As of September 30, 2017, our consolidated net lease portfolio totaled $1.15 billion gross of $306.2 million of accumulated depreciation. Our net leaseoperating property portfolio, including the carrying value of our equity method investments in SAFEgross of accumulated depreciation, totaled $313.1 million.
Land and Development
The following table presents a land and development portfolio rollforward for the Net Lease Venture totaled $1.34 billion. The table below provides certain statistics for our net lease portfolio.three months ended March 31, 2020.
|
| | | | | | | | | | | | |
| | | Consolidated Real Estate | | SAFE | | Net Lease Venture |
| Ownership % | | 100.0 | % | | 34.6 | % | | 51.9 | % |
| Net book value (millions) | | $ | 844 |
| | $ | 492 |
| | $ | 575 |
|
| Accumulated depreciation (millions) | | 306 |
| | 5 |
| | 43 |
|
| Gross carrying value (millions) | | $ | 1,150 |
| | $ | 497 |
| | $ | 618 |
|
| | | | | | | |
| Occupancy | | 97.9 | % | | 100.0 | % | | 100.0 | % |
| Square footage (thousands) | | 11,486 |
| | 3,849 |
| | 4,005 |
|
| Weighted average lease term (years) | | 11.0 |
| | 66.5 |
| | 14.3 |
|
| Weighted average yield | | 8.9 | % | | 3.2 | % | | 8.5 | % |
Operating Properties
As of September 30, 2017, our operating property portfolio, including equity method investments, totaled $624.1 million, gross of $57.3 million of accumulated depreciation, and was comprised of $558.4 million of commercial and $65.7 million of residential real estate properties.
Commercial Operating Properties
Our commercial operating properties represent a diverse pool of assets across a broad range of geographies and collateral types including office, retail and hotel properties. We generally seek to reposition our transitional properties with the objective of
maximizing their values through the infusion of capital and/or intensive asset management efforts resulting in value realization upon sale.
The table below provides certain statistics for our commercial operating property portfolio.
|
| | | | | | | | | | | | | | | | | | | | |
| | Commercial Operating Property Statistics
|
| ($ in millions) |
| | Stabilized Operating(1) | | Transitional Operating(1) | | Total |
| | September 30, 2017 | December 31, 2016 | | September 30, 2017 | December 31, 2016 | | September 30, 2017 | December 31, 2016 |
Gross book value ($mm)(2) | $ | 401 |
| $ | 337 |
| | $ | 157 |
| $ | 189 |
| | $ | 558 |
| $ | 526 |
|
Occupancy(3) | 86 | % | 86 | % | | 56 | % | 54 | % | | 77 | % | 74 | % |
| Yield | 9.1 | % | 8.5 | % | | 1.5 | % | 1.5 | % | | 7.2 | % | 5.5 | % |
|
| | | | | | | | | | | | | | | | |
| Land and Development Portfolio Rollforward |
| (in millions) |
| | | Asbury Ocean Club and Asbury Park Waterfront | | Magnolia Green | | All Others | | Total Segment |
Beginning balance(1) | | $ | 234.6 |
| | $ | 112.9 |
| | $ | 233.0 |
| | $ | 580.5 |
|
Asset sales(2) | | (10.6 | ) | | (5.4 | ) | | (59.5 | ) | | (75.5 | ) |
| Capital expenditures | | 5.6 |
| | 5.6 |
| | 0.9 |
| | 12.1 |
|
| Other | | — |
| | (0.6 | ) | | (2.4 | ) | | (3.0 | ) |
Ending balance(1) | | $ | 229.6 |
| | $ | 112.5 |
| | $ | 172.0 |
| | $ | 514.1 |
|
| |
| (1) | Stabilized commercial properties generally have occupancy levels above 80% and/or generate yields resulting in a sufficient return based upon the properties’ risk profiles. Transitional commercial properties are generally those properties that do not meet these criteria.As of March 31, 2020 and December 31, 2019, Total Segment excludes $36.7 million and $42.9 million, respectively, of equity method investments. |
| |
| (2) | Gross carryingRepresents gross book value represents carrying value gross of accumulated depreciation. |
| |
(3) | Occupancy is as of September 30, 2017 and December 31, 2016.the assets sold, rather than proceeds received. |
Residential Operating Properties
As of September 30, 2017, our residential operating portfolio was comprised of 32 condominium units generally located within luxury projects in major U.S. cities. The table below provides certain statistics for our residential operating property portfolio (excluding fractional units).
|
| | | | | | | |
| Residential Operating Property Statistics |
| ($ in millions) |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Condominium units sold | 16 |
| | 80 |
|
| Proceeds | $ | 21.4 |
| | $ | 73.3 |
|
| Income from sales of real estate | $ | 3.3 |
| | $ | 23.3 |
|
Land and Development
As of September 30, 2017, our land and development portfolio, gross of accumulated depreciation and including equity method investments, totaled $932.6 million, with eight projects in production, eight in development and 13 in the pre-development phase. These projects are collectively entitled for approximately 13,000 lots and units. The following tables presents certain statistics for our land and development portfolio.
|
| | | | | | | |
| Land and Development Portfolio Rollforward |
| (in millions) |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Beginning balance(1) | $ | 945.6 |
| | $ | 1,002.0 |
|
Asset sales(2) | (160.4 | ) | | (40.0 | ) |
Asset transfers in (out)(3) | — |
| | (25.4 | ) |
| Capital expenditures | 91.7 |
| | 92.2 |
|
| Other | (15.4 | ) | | (6.7 | ) |
Ending balance(1) | $ | 861.5 |
| | $ | 1,022.1 |
|
(1)As of September 30, 2017 and December 31, 2016, excludes $63.3 million and $84.8 million, respectively, of equity method investments.
(2)Represents gross book value of the assets sold, rather than proceeds received.
(3)Assets transferred into land and development segment or out to another segment.
|
| | | | | | | |
| Land and Development Statistics |
| (in millions) |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Land development revenue | $ | 178.7 |
| | $ | 74.4 |
|
| Land development cost of sales | 165.9 |
| | 50.8 |
|
| Gross margin | $ | 12.8 |
| | $ | 23.6 |
|
| Earnings from land development equity method investments | 8.4 |
| | 31.2 |
|
| Total | $ | 21.2 |
| | $ | 54.8 |
|
Results of Operations for the Three Months Ended September 30, 2017March 31, 2020 compared to the Three Months Ended September 30, 2016March 31, 2019
| | | | For the Three Months Ended September 30, | | | | | For the Three Months Ended March 31, | | |
| | 2017 | | 2016 | | $ Change | | % Change | 2020 | | 2019 | | $ Change |
| | (in thousands) | | | (in thousands) |
| Operating lease income | $ | 47,806 |
| | $ | 46,800 |
| | $ | 1,006 |
| | 2 | % | $ | 47,346 |
| | $ | 58,915 |
| | $ | (11,569 | ) |
| Interest income | 25,442 |
| | 32,258 |
| | (6,816 | ) | | (21 | )% | 17,216 |
| | 20,375 |
| | (3,159 | ) |
| Interest income from sales-type leases | | 8,355 |
| | — |
| | 8,355 |
|
| Other income | 20,662 |
| | 13,442 |
| | 7,220 |
| | 54 | % | 20,368 |
| | 14,813 |
| | 5,555 |
|
| Land development revenue | 25,962 |
| | 31,554 |
| | (5,592 | ) | | (18 | )% | 80,176 |
| | 12,699 |
| | 67,477 |
|
| Total revenue | 119,872 |
| | 124,054 |
| | (4,182 | ) | | (3 | )% | 173,461 |
| | 106,802 |
| | 66,659 |
|
| Interest expense | 48,732 |
| | 55,105 |
| | (6,373 | ) | | (12 | )% | 43,392 |
| | 46,577 |
| | (3,185 | ) |
| Real estate expense | 36,280 |
| | 35,243 |
| | 1,037 |
| | 3 | % | 22,498 |
| | 25,940 |
| | (3,442 | ) |
| Land development cost of sales | 27,512 |
| | 22,004 |
| | 5,508 |
| | 25 | % | 77,059 |
| | 14,449 |
| | 62,610 |
|
| Depreciation and amortization | 11,846 |
| | 12,201 |
| | (355 | ) | | (3 | )% | 14,486 |
| | 15,668 |
| | (1,182 | ) |
| General and administrative | 20,955 |
| | 19,666 |
| | 1,289 |
| | 7 | % | 34,271 |
| | 21,099 |
| | 13,172 |
|
| (Recovery of) provision for loan losses | (2,600 | ) | | (14,955 | ) | | 12,355 |
| | (83 | )% | |
| Provision for (recovery of) loan losses | | 4,003 |
| | (97 | ) | | 4,100 |
|
| Provision for losses on net investment in leases | | 1,292 |
| | — |
| | 1,292 |
|
| Impairment of assets | 595 |
| | 8,741 |
| | (8,146 | ) | | (93 | )% | 1,708 |
| | 3,851 |
| | (2,143 | ) |
| Other expense | 2,704 |
| | 819 |
| | 1,885 |
| | >100% |
| 74 |
| | 508 |
| | (434 | ) |
| Total costs and expenses | 146,024 |
| | 138,824 |
| | 7,200 |
| | 5 | % | 198,783 |
| | 127,995 |
| | 70,788 |
|
| Income from sales of real estate | | — |
| | 9,407 |
| | (9,407 | ) |
| Loss on early extinguishment of debt, net | (616 | ) | | (36 | ) | | (580 | ) | | >100% |
| (4,115 | ) | | (468 | ) | | (3,647 | ) |
| Earnings from equity method investments | 2,461 |
| | 26,540 |
| | (24,079 | ) | | (91 | )% | 16,612 |
| | 5,309 |
| | 11,303 |
|
| Income tax (expense) benefit | 1,278 |
| | 8,256 |
| | (6,978 | ) | | (85 | )% | |
| Income from discontinued operations | — |
| | 3,721 |
| | (3,721 | ) | | (100 | )% | |
| Income from sales of real estate | 19,313 |
| | 34,444 |
| | (15,131 | ) | | (44 | )% | |
| Net (loss) income | $ | (3,716 | ) | | $ | 58,155 |
| | $ | (61,871 | ) | | >(100%) |
| |
| Income tax expense | | (60 | ) | | (25 | ) | | (35 | ) |
| Net loss | | $ | (12,885 | ) | | $ | (6,970 | ) | | $ | (5,915 | ) |
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, increaseddecreased $11.6 million, or 20%, to $47.8$47.3 million during the three months ended September 30, 2017March 31, 2020 from $46.8$58.9 million for the same period in 2016.2019. The following table summarizes our operating lease income by segment ($ in millions).
|
| | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | 2020 | | 2019 | | Change |
Net Lease(1) | | $ | 41.5 |
| | $ | 49.5 |
| | $ | (8.0 | ) |
Operating Properties(2) | | 5.7 |
| | 9.3 |
| | (3.6 | ) |
| Land and Development | | 0.1 |
| | 0.1 |
| | — |
|
| Total | | $ | 47.3 |
| | $ | 58.9 |
| | $ | (11.6 | ) |
| |
| (1) | Change primarily due to the reclassification of certain operating leases to sales-type leases in May 2019 (refer to Note 5) and asset sales, partially offset by new acquisitions. |
| |
| (2) | Change primarily due to asset sales. |
Operating lease income from net lease assets decreased to $31.5 million during the three months ended September 30, 2017 from $32.3 million for the same period in 2016. The decrease was due to the sale of net lease assets since October 1, 2016. Operating lease income fromfollowing table shows certain same store net leasestatistics for our consolidated Net Lease segment. Same store assets are defined as net lease assets we owned on or prior to JulyJanuary 1, 20162019 and were in service through September 30, 2017, increasedMarch 31, 2020 (Operating lease income in millions).
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Operating lease income | | $ | 40.3 |
| | $ | 39.7 |
|
| Rent per square foot | | $ | 10.81 |
| | $ | 10.53 |
|
Occupancy(1) | | 99.4 | % | | 99.9 | % |
| |
| (1) | Occupancy as of March 31, 2020 and 2019. |
Interest income decreased $3.2 million, or 16%, to $31.4$17.2 million during the three months ended September 30, 2017 and $30.1 million during the three months ended September 30, 2016. The increase was primarily due to an increase in rent per occupied square foot, which was $11.18 for the three months ended September 30, 2017 and $10.59 for the same period in 2016, and was partially offset by a decrease in the occupancy rate, which was 97.9% as of September 30, 2017 and 98.8% as of September 30, 2016.
Operating lease incomeMarch 31, 2020 from operating properties increased to $16.0 million during the three months ended September 30, 2017 from $14.4$20.4 million for the same period in 2016. The increase was primarily due to the execution of new leases. Operating lease income from same store commercial operating properties, defined as commercial operating properties, excluding hotels and marinas, which we owned on or prior to July 1, 2016 and were in service through September 30, 2017, increased to $11.9 million during the three months ended September 30, 2017 as compared to $11.6 million for the same period in 2016. The increase was due to an increase in occupancy rates, which were 75.8% as of September 30, 2017 and 71.0% as of September 30, 2016, partially offset by a decrease in rent per occupied square foot, which was $24.72 for the three months ended September 30, 2017 and $25.71 for the same period in 2016. Ancillary operating lease income from land and development assets was $0.3 million and $0.1 million during the three months ended September 30, 2017 and 2016, respectively.
Interest income decreased to $25.4 million during the three months ended September 30, 2017 from $32.3 million for the same period in 2016.2019. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which decreased
to $981.0was $792 million in 2017 from $1.42 billion in 2016.for the three months ended March 31, 2020 and $910 million for the three months ended March 31, 2019. The weighted average yield on our performing loans increased to 10.1%and other lending investments was 8.2% and 9.1%, respectively, for the three months ended September 30, 2017March 31, 2020 and 2019.
On January 1, 2019, we adopted new accounting standards and classified certain of our leases in 2019 as sales-type leases. Under sales-type leases, we accrue interest income from 9.1%sales-type leases under the effective interest method as opposed to recognition of operating lease income under the straight-line rent method for our leases that do not qualify as sales-type leases. Interest income from sales-type leases was $8.4 million for the same period in 2016.three months ended March 31, 2020.
Other income increased $5.6 million, or 38%, to $20.7$20.4 million during the three months ended September 30, 2017March 31, 2020 from $13.4$14.8 million for the same period in 2016.2019. Other income during the three months ended September 30, 2017March 31, 2020 consisted primarily of a gain we recognized in connection with an equity security, income from our hotel properties, other ancillary income from our operating properties, land and development projects and loan portfolio and interest income on our cash. Other income during the three months ended March 31, 2019 consisted primarily of income from our hotel properties, other ancillary income from our operating properties and land and development projects and interest income on our cash. Other income during the three months ended September 30, 2016 consisted ofThe increase in 2020 was due primarily of income from our hotel properties and otherto a $9.9 million gain we recognized in connection with an equity security, partially offset by a decrease in ancillary income from our operating properties. The increase in other income in 2017 from 2016 was due primarily to an increase in income at our hotel propertiesland and an increase in interest income earned on our cash.development projects.
Land development revenue and cost of sales—During the three months ended September 30, 2017,March 31, 2020, we sold residential lots and units and recognized land development revenue of $26.0$80.2 million which had associated cost of sales of $27.5$77.1 million. During the three months ended September 30, 2016,March 31, 2019, we sold residential lots and units and recognized land development revenue of $31.6$12.7 million which had associated cost of sales of $22.0$14.4 million. The increase in 2020 was primarily the result of $36.0 million in land development revenue from the sale of a master planned community in California with a corresponding increase in cost of sales.
Costs and expenses—Interest expense decreased $3.2 million, or 7%, to $48.7$43.4 million during the three months ended September 30, 2017March 31, 2020 from $55.1$46.6 million for the same period in 20162019 due primarily to a decrease in our weighted average cost of debt, which was 4.9% for the three months ended March 31, 2020 compared to 5.5% for the three months ended March 31, 2019. The balance of our average outstanding debt, whichinclusive of loan participations and lease liabilities associated with finance-type leases, decreased to $3.71$3.57 billion for the three months ended September 30, 2017March 31, 2020 from $3.96$3.60 billion for the same period in 2016. Our weighted average cost of debt for the three months ended September 30, 2017 and 2016 was 5.4% and 5.6%, respectively.2019.
Real estate expenses increaseddecreased $3.4 million, or 13%, to $36.3$22.5 million during the three months ended September 30, 2017March 31, 2020 from $35.2$25.9 million for the same period in 2016.2019. The increase was duefollowing table summarizes our real estate expenses by segment ($ in millions).
|
| | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | 2020 | | 2019 | | Change |
Operating Properties(1) | | $ | 7.7 |
| | $ | 11.0 |
| | $ | (3.3 | ) |
Land and Development(2) | | 8.6 |
| | 8.8 |
| | (0.2 | ) |
Net Lease(3) | | 6.2 |
| | 6.1 |
| | 0.1 |
|
| Total | | $ | 22.5 |
| | $ | 25.9 |
| | $ | (3.4 | ) |
| |
| (1) | Change primarily due to asset sales, partially offset by an asset beginning operations during 2019. |
| |
| (2) | Change primarily due to a decrease in legal and consulting costs. |
| |
| (3) | Change primarily due to new acquisitions, partially offset by asset sales. |
Depreciation and amortization decreased $1.2 million, or 8%, to an increase in expenses at commercial operating properties, which increased to $21.6 million in 2017 from $18.9 million in 2016, primarily resulting from an increase in costs at our hotel properties and losses incurred at properties impacted by the recent hurricanes that hit the United States. This increase was offset by a decrease in carry costs and other expenses on our land assets, which decreased to $8.7$14.5 million during the three months ended September 30, 2017March 31, 2020 from $9.4$15.7 million for the same period in 2016. Expenses for net2019, primarily due to asset sales and the reclassification of certain operating leases to sales-type lease assets decreased(refer to $4.4Note 5), partially offset by new acquisitions.
General and administrative expenses increased $13.2 million, or 62%, to $34.3 million during the three months ended September 30, 2017March 31, 2020 from $4.7$21.1 million for the same period in 2016. Expenses2019. Excluding performance based compensation, general and administrative expenses decreased to $13.3 million in 2020 from same store net lease assets was $4.3$13.7 million in 2019, which does not include $2.9 million and $3.7$1.5 million, respectively, in management fees earned from SAFE that we record in other income. General and administrative expenses net of performance based compensation and SAFE management fees was $10.4 million in 2020 and $12.2 million in 2019. The following table summarizes our general and administrative expenses for the three months ended September 30, 2017March 31, 2020 and 2016. Expenses from same store commercial operating properties, excluding hotels and marinas,2019 (in millions):
|
| | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | 2020 | | 2019 | | Change |
| Payroll and related costs | | $ | 8.3 |
| | $ | 8.5 |
| | $ | (0.2 | ) |
Performance based compensation(1) | | 21.0 |
| 5.0 |
| 7.4 |
| | 13.6 |
|
| Public company costs | | 1.9 |
| | 1.5 |
| | 0.4 |
|
| Occupancy costs | | 1.1 |
| | 1.1 |
| | — |
|
| Other | | 2.0 |
| | 2.6 |
| | (0.6 | ) |
| Total | | $ | 34.3 |
| | $ | 21.1 |
| | $ | 13.2 |
|
| |
| (1) | Includes performance based compensation related to our Performance Incentive Plans and Annual Incentive Plan. Please refer to Note 15 - Stock-Based Compensation Plans and Employee Benefits for a description of the Performance Incentive Plans. |
The provision for loan losses was $7.5 million and $7.6$4.0 million for the three months ended September 30, 2017 and 2016, respectively. Expenses associated with residential operating properties decreasedMarch 31, 2020 as compared to $1.6 million during the three months ended September 30, 2017 from $2.2a recovery of loan losses of $0.1 million for the same period in 2016 due to the sale of residential units since September 30, 2016.
Depreciation and amortization decreased to $11.8 million during2019. The provision for loan losses for the three months ended September 30, 2017March 31, 2020 resulted from $12.2 million for the same period in 2016, primarily dueadoption of ASU 2016-13 (refer to the sale of net lease and commercial operating properties in since October 1, 2016.
General and administrative expenses increased to $21.0 million during the three months ended September 30, 2017 from $19.7 million for the same period in 2016, primarily due to a an increase in compensation expense related to performance incentive plans.
The net recovery of loan losses was $2.6 million during the three months ended September 30, 2017 as compared to a net recovery of loan losses of $15.0 million for the same period in 2016.Note 3). The recovery of loan losses for the three months ended September 30, 2017March 31, 2019 was due to a reductiondecrease in the general reserve due toallowance of $0.6 million offset by an overall improvementincrease in the risk ratingsspecific allowance of our loan portfolio. $0.5 million
The provision for losses on net recovery of loan lossesinvestment in leases for the three months ended September 30, 2016March 31, 2020 included recoveriesa general allowance resulting from the adoption of specific reservesASU 2016-13 (refer to Note 3).
During the three months ended March 31, 2020, we recorded an impairment of $11.7$1.7 million in connection with the sale of a net lease asset. During the three months ended March 31, 2019, we recorded an impairment of $3.2 million in connection with the sale of a commercial operating property and a reduction$0.7 million of impairments in connection with the general reservesale of $15.8 million, partially offset by a provision on one non-performing loan of $12.5 million.residential condominium units.
Impairment of assets was $0.6Other expense decreased to $0.1 million during the three months ended September 30, 2017 and resultedMarch 31, 2020 from the sale of an outparcel of land located at a commercial operating property. During the three months ended September 30, 2016, we recorded an aggregate impairment of $8.7 million from the sale of net lease assets and a change in business strategy on one land asset.
Other expense increased to $2.7 million during the three months ended September 30, 2017 from $0.8$0.5 million for the same period in 2016. The increase was primarily2019.
Income from sales of real estate—During the resultthree months ended March 31, 2019, we recorded $9.4 million of costs incurredincome from sales of real estate in connection with the repricingsale of our 2016 Senior Secured Credit Facility (refer to Note 10).operating properties.
Loss on early extinguishment of debt, net—During the three months ended September 30, 2017,March 31, 2020 and 2019, we incurred losses on early extinguishment of debt of $0.6$4.1 million and $0.5 million, respectively, resulting from repaymentsthe repayment of our 2016 Senior Secured Credit Facility. During the three months ended September 30, 2016, we incurred losses on the early extinguishment of debt of $36 thousand related to repayments of secured facilities and unsecuredsenior notes prior to maturity.
Earnings from equity method investments—Earnings from equity method investments decreasedincreased to $2.5$16.6 million during the three months ended September 30, 2017March 31, 2020 from $26.5$5.3 million for the same period in 2016.2019. During the three months ended September 30, 2017,March 31, 2020, we recognized $1.0$19.3 million related to operations atof income from our Net Lease Venture, $0.9equity method investment in SAFE, which included a dilution gain of $7.9 million resulting from land development ventures and $0.6a SAFE equity offering in March 2020, offset by $2.7 million wasof aggregate incomelosses from our remaining equity method investments. During the three months ended September 30, 2016,March 31, 2019, we recognized $15.8$7.3 million from our equity method investment in SAFE offset by $2.0 million of earnings primarily from the distribution of non-recourse financing proceeds at one of our land equity method investments, $6.2 million related to sales activity on a land development venture, $0.7 million related to operations at our Net Lease Venture and $3.8 million was aggregate incomelosses from our remaining equity method investments.
Income tax (expense) benefitexpense—An incomeIncome tax benefitexpense of $1.3$0.1 million was recorded during the three months ended September 30, 2017March 31, 2020 as compared to an income tax benefitexpense of $8.3$0.1 million for the same period in 2016. The income tax benefit for the three months ended September 30, 2017 primarily resulted from a taxable loss incurred and the deduction for dividends paid to preferred shareholders (refer to Note 13). The income tax benefit for the three months ended September 30, 2016 primarily related to taxable losses generated by sales of certain taxable REIT subsidiary ("TRS") properties.
Discontinued Operations—In April 2017, institutional investors acquired a controlling interest in our GL business through the merger of one of our subsidiaries and related transactions. We received total consideration of $340.0 million, including $113.0 million in cash, including $55.5 million that we contributed to SAFE in its initial capitalization, and the proceeds from the $227.0 million 2017 Secured Financing (refer to Note 10). Income from discontinued operations represents the operating results from the 12 properties comprising our GL business.
Income from sales of real estate—During the three months ended September 30, 2017, we recognized gains due to sales of net lease assets and residential condominiums of $18.8 million and $0.5 million, respectively. During the three months ended September 30, 2016, we recognized gains due to sales of commercial operating properties of $23.4 million, net lease assets of $6.6 million and residential condominiums of $4.4 million.
Results of Operations for the Nine Months Ended September 30, 2017 compared to the Nine Months Ended September 30, 2016
|
| | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (in thousands) | | |
| Operating lease income | $ | 142,155 |
| | $ | 147,270 |
| | $ | (5,115 | ) | | (3 | )% |
| Interest income | 83,145 |
| | 99,877 |
| | (16,732 | ) | | (17 | )% |
| Other income | 172,037 |
| | 35,079 |
| | 136,958 |
| | >100% |
|
| Land development revenue | 178,722 |
| | 74,389 |
| | 104,333 |
| | >100% |
|
| Total revenue | 576,059 |
| | 356,615 |
| | 219,444 |
| | 62 | % |
| Interest expense | 148,684 |
| | 168,173 |
| | (19,489 | ) | | (12 | )% |
| Real estate expense | 106,554 |
| | 104,815 |
| | 1,739 |
| | 2 | % |
| Land development cost of sales | 165,888 |
| | 50,842 |
| | 115,046 |
| | >100% |
|
| Depreciation and amortization | 37,297 |
| | 39,781 |
| | (2,484 | ) | | (6 | )% |
| General and administrative | 73,347 |
| | 62,433 |
| | 10,914 |
| | 17 | % |
| (Recovery of) provision for loan losses | (8,128 | ) | | (12,749 | ) | | 4,621 |
| | (36 | )% |
| Impairment of assets | 15,292 |
| | 11,753 |
| | 3,539 |
| | 30 | % |
| Other expense | 20,849 |
| | 4,741 |
| | 16,108 |
| | >100% |
|
| Total costs and expenses | 559,783 |
| | 429,789 |
| | 129,994 |
| | 30 | % |
| Loss on early extinguishment of debt, net | (4,142 | ) | | (1,618 | ) | | (2,524 | ) | | >100% |
|
| Earnings from equity method investments | 13,677 |
| | 74,254 |
| | (60,577 | ) | | (82 | )% |
| Income tax (expense) benefit | (972 | ) | | 9,859 |
| | (10,831 | ) | | >(100%) |
|
| Income from discontinued operations | 4,939 |
| | 10,934 |
| | (5,995 | ) | | (55 | )% |
| Gain from discontinued operations | 123,418 |
| | — |
| | 123,418 |
| | 100 | % |
| Income tax expense from discontinued operations | (4,545 | ) | | — |
| | (4,545 | ) | | (100 | )% |
| Income from sales of real estate | 28,267 |
| | 88,387 |
| | (60,120 | ) | | (68 | )% |
| Net income | $ | 176,918 |
| | $ | 108,642 |
| | $ | 68,276 |
| | 63 | % |
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased to $142.2 million during the nine months ended September 30, 2017 from $147.3 million for the same period in 2016.
Operating lease income from net lease assets decreased to $93.6 million during the nine months ended September 30, 2017 from $95.6 million for the same period in 2016. The decrease was primarily due to the sale of net lease assets since October 1, 2016. Operating lease income from same store net lease assets, defined as net lease assets we owned on or prior to January 1, 2016 and were in service through September 30, 2017, increased to $90.1 million during the nine months ended September 30, 2017 from $88.6 million for the same period in 2016. This increase was primarily due to an increase in rent per occupied square foot to $10.68 for the nine months ended September 30, 2017 from $10.41 for the same period in 2016, partially offset by a decrease in the occupancy rate, which was 97.9% as of September 30, 2017 and 98.8% as of September 30, 2016.
Operating lease income from operating properties decreased to $48.0 million during the nine months ended September 30, 2017 from $51.3 million for the same period in 2016. The decrease was primarily due to commercial operating property sales since October 1, 2016, partially offset by the execution of new leases. Operating lease income from same store commercial operating properties, defined as commercial operating properties, excluding hotels and marinas, which we owned on or prior to January 1, 2016 and were in service through September 30, 2017, increased to $35.3 million during the nine months ended September 30, 2017 as compared to $34.2 million for the same period in 2016. This increase was primarily due to an increase in occupancy rates, which were 75.8% as of September 30, 2017 and 71.0% as of September 30, 2016, partially offset by a decrease in rent per occupied square foot, which was $24.47 for the nine months ended September 30, 2017 and $25.30 for the same period in 2016. Ancillary operating lease income from land and development assets was $0.6 million and $0.3 million during the nine months ended September 30, 2017 and 2016, respectively.
Interest income decreased to $83.1 million during the nine months ended September 30, 2017 from $99.9 million for the same period in 2016. The decrease was due primarily to a decrease in the average balance of our performing loans, which decreased to $1.15 billion in 2017 from $1.44 billion in 2016. The weighted average yield on our performing loans increased to 9.6% for the nine months ended September 30, 2017 from 8.9% for the same period in 2016.
Other income increased to $172.0 million during the nine months ended September 30, 2017 from $35.1 million for the same period in 2016. Other income during the nine months ended September 30, 2017 primarily consisted of interest income and real estate tax reimbursements resulting from the settlement of litigation involving a dispute over the purchase and sale of land (refer to Note11), income from our hotel properties and other ancillary income from our operating properties. Other income during the nine months ended September 30, 2016 consisted of income from our hotel properties, loan prepayment fees and property tax refunds.
Land development revenue and cost of sales—During the nine months ended September 30, 2017, we sold residential lots and units and one land parcel totaling 1,250 acres and recognized land development revenue of $178.7 million which had associated cost of sales of $165.9 million. During the nine months ended September 30, 2016, we sold residential lots and units and recognized land development revenue of $74.4 million which had associated cost of sales of $50.8 million. The increase in 2017 from 2016 was primarily due to the resolution of litigation involving a dispute over the purchase and sale of the approximately 1,250 acres of land in Prince George’s County, Maryland, which resulted in us recognizing $114.0 million of land development revenue and $106.3 million of land development cost of sales (refer to Note 11).
Costs and expenses—Interest expense decreased to $148.7 million during the nine months ended September 30, 2017 from $168.2 million for the same period in 2016 due to a decrease in the balance of our average outstanding debt, which decreased to $3.67 billion for the nine months ended September 30, 2017 from $4.09 billion for the same period in 2016. Our weighted average cost of debt for the nine months ended September 30, 2017 and 2016 was 5.6%.
Real estate expenses increased to $106.6 million during the nine months ended September 30, 2017 from $104.8 million for the same period in 2016. The increase was due to expenses for commercial operating properties, which increased to $62.3 million during the nine months ended September 30, 2017 from $56.1 million for the same period in 2016. This increase was primarily due to an increase in expenses at our hotel properties and losses incurred at properties impacted by the recent hurricanes that hit the United States, partially offset by property sales since October 1, 2016. This increase was partially offset by a decrease in carry costs and other expenses on our land assets, which decreased to $26.1 million during the nine months ended September 30, 2017 from $28.0 million for the same period in 2016. Expenses from same store commercial operating properties, excluding hotels and marinas, decreased to $22.4 million from $22.6 million for the same period in 2016. Expenses associated with residential operating properties decreased to $5.1 million during the nine months ended September 30, 2017 from $7.0 million for the same period in 2016 due to the sale of residential units since September 30, 2016. Expenses for net lease assets decreased to $13.1 million during the nine months ended September 30, 2017 from $13.8 million for the same period in 2016. Expenses from same store net lease assets was $12.1 million and $10.6 million, respectively, for the nine months ended September 30, 2017 and 2016.
Depreciation and amortization decreased to $37.3 million during the nine months ended September 30, 2017 from $39.8 million for the same period in 2016, primarily due to the sale of net lease and commercial operating properties in since October 1, 2016.
General and administrative expenses increased to $73.3 million during the nine months ended September 30, 2017 from $62.4 million for the same period in 2016, primarily due to a an increase in compensation expense related to performance incentive plans.
The net recovery of loan losses was $8.1 million during the nine months ended September 30, 2017 as compared to a net recovery of loan losses of $12.7 million for the same period in 2016. The recovery of loan losses for the nine months ended September 30, 2017 resulted from a reduction in the general reserve due to an overall improvement in the risk ratings of our loan portfolio. Included in the net recovery for the nine months ended September 30, 2016 were recoveries of specific reserves of $11.7 million and a reduction in the general reserve of $14.8 million, partially offset by provisions on two non-performing loans of $13.8 million.
Impairment of assets was $15.3 million during the nine months ended September 30, 2017 and resulted primarily from an impairment on a land and development asset due to a change in our exit strategy and an impairment on a real estate asset held for sale due to shifting demand in the local condominium market along with a change in our exit strategy. During the nine months ended September 30, 2016, we recorded impairmentsof $11.8 million comprised of $3.8 million on a land asset resulting from a change in business strategy, $3.0 million on a residential operating property resulting from unfavorable local market conditions and $4.8 million on the sale of net lease assets.
Other expense increased to $20.8 million during the nine months ended September 30, 2017 from $4.7 million for the same period in 2016. The increase was primarily the result of paying organization and offering costs associated with the initial public offering of SAFE (refer to Note 7) and costs incurred in connection with the repricing of our 2016 Senior Secured Credit Facility (refer to Note 10) recorded during the nine months ended September 30, 2017.
Loss on early extinguishment of debt, net—During the nine months ended September 30, 2017, we incurred losses on early extinguishment of debt of $4.1 million resulting from repayments of unsecured notes prior to maturity and the repricing of our 2016 Senior Secured Credit Facility. During the nine months ended September 30, 2016, we incurred losses on the early extinguishment of debt of $1.6 million related to repayments of secured facilities and unsecured notes prior to maturity.
Earnings from equity method investments—Earnings from equity method investments decreased to $13.7 million during the nine months ended September 30, 2017 from $74.3 million for the same period in 2016. During the nine months ended September 30, 2017, we recognized $3.8 million primarily from profit participations on a land development venture, $4.8 million related to sales activity on a land development venture, $3.0 million related to operations at our Net Lease Venture and $2.1 million was aggregate income from our remaining equity method investments. During the nine months ended September 30, 2016, we recognized $33.2 million primarily from the sale of an equity method investment in a commercial operating property, $11.6 million of earnings primarily from the distribution of non-recourse financing proceeds at one of our land equity method investments, $19.6 million related to sales activity on a land development venture, $2.6 million related to operations at our Net Lease Venture and $7.3 million was aggregate income from our remaining equity method investments.
Income tax (expense) benefit—An income tax expense of $1.0 million was recorded during the nine months ended September 30, 2017 as compared to an income tax benefit of $9.9 million for the same period in 2016.2019. The income tax expense for the ninethree months ended September 30, 2017March 31, 2020 and 2019 is related primarily related to federal alternativestate margins taxes and other minimum taxes on REIT taxable income generated by the settlement of litigation on the sale of a land parcel. The income tax benefit for the nine months ended September 30, 2016 primarily related to taxable losses generated by sales of certain TRS properties.
Discontinued Operations—During the nine months ended September 30, 2017, institutional investors acquired a controlling interest in our GL business through the merger of one of our subsidiaries and related transactions. We received total consideration of $340.0 million, including $113.0 million in cash, including $55.5 million that we contributed to SAFE in its initial capitalization, and the proceeds from the $227.0 million 2017 Secured Financing (refer to Note 10). We had a carrying value of approximately $161.1 million in our GL assets and recognized a gain from discontinued operations of $123.4 million, reflecting the aggregate gain less the fair value of our retained interest in SAFE. Income from discontinued operations represents the operating results from the 12 properties comprising our GL business.
Income from sales of real estate—During the nine months ended September 30, 2017, we recognized gains due to sales of net lease assets and residential operating properties of $25.0 and $3.3 million, respectively. During the nine months ended September 30, 2016, we recognized gains due to sales of commercial operating properties of $49.2 million, residential condominiums of $23.3 million and net lease assets of $15.9 million.state franchise taxes.
Adjusted IncomeEarnings
In addition2019, we announced a new business strategy that would focus our management personnel and our investment resources primarily on scaling our Ground Lease platform. As part of this strategy, we accelerated the monetization of legacy assets, reducing our legacy portfolio to approximately 16% of our overall portfolio as of March 31, 2020, and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business. Management has determined that, effective for the quarter ended March 31, 2020, a modified non-GAAP earnings metric, designated "adjusted earnings," is the metric it uses to assess our execution of this strategy and the performance of our operations. Adjusted earnings reflects impairment charges and loan provisions in the same period in which they are recognized in net income (loss) prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP"), we use adjusted income,rather than in a non-GAAP financial measure,later period when the asset is sold. We believe this change is appropriate as legacy asset sales become less central to measure our operating performance. business, even though sales may be material to particular periods when they occur.
Adjusted incomeearnings is used internally as a supplemental performance measure adjusting for certain non-cash GAAP measuresitems to give management a view of income more directly derived from currentoperating activities in the period activity.in which they occur. Adjusted incomeearnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, provision for (recovery of) loan losses, impairmentincluding our proportionate share of assets,depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of gain (loss)loss on early extinguishment of debt and is adjusted for the effect of gains or losses on charge-offs and dispositions on carrying value gross of loan loss reserves and impairments ("Adjusted Income"). In the third quarter 2017, we modified our presentation of Adjusted Income to exclude the effect of the amount of the liquidation preference that was recorded as a premium above book value on the redemption of preferred stock (refer to Note 13) and the imputed non-cash interest expense recognized for the conversion feature of our senior convertible notes (refer to Note 10)("Adjusted Earnings"). All prior periods have been calculated in accordance with this definition.
Adjusted IncomeEarnings should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations. Adjusted IncomeEarnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted IncomeEarnings indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted IncomeEarnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance while including the effect of gains or losses on investments when realized.performance. It should be noted that our manner of calculating Adjusted IncomeEarnings may differ from the calculations of similarly-titled measures by other companies.
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in thousands) |
| Adjusted Income | | | | | | | |
| Net income (loss) allocable to common shareholders | $ | (34,530 | ) | | $ | 46,292 |
| | $ | 115,834 |
| | $ | 63,210 |
|
Add: Depreciation and amortization(1) | 14,765 |
| | 15,598 |
| | 45,438 |
| | 50,107 |
|
| Add: (Recovery of) provision for loan losses | (2,600 | ) | | (14,955 | ) | | (8,128 | ) | | (12,749 | ) |
Add: Impairment of assets(2) | 595 |
| | 8,741 |
| | 15,292 |
| | 12,668 |
|
| Add: Stock-based compensation expense | 2,934 |
| | 1,434 |
| | 12,730 |
| | 7,644 |
|
| Add: Loss on early extinguishment of debt, net | 616 |
| | 36 |
| | 1,392 |
| | 1,618 |
|
| Add: Non-cash interest expense on senior convertible notes | 110 |
| — |
| — |
| | 110 |
| | — |
|
| Add: Premium on redemption of preferred stock | 16,314 |
| | — |
| | 16,314 |
| | — |
|
Less: Losses on charge-offs and dispositions(3) | (1,779 | ) | | (8,039 | ) | | (15,906 | ) | | (12,602 | ) |
| Less: Participating Security allocation | — |
| | — |
| | — |
| | (21 | ) |
| Adjusted income (loss) allocable to common shareholders | $ | (3,575 | ) | | $ | 49,107 |
| | $ | 183,076 |
| | $ | 109,875 |
|
|
| | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Adjusted Earnings | | | | | |
| Net income (loss) allocable to common shareholders | $ | (21,450 | ) | | $ | (17,565 | ) | | $ | 26,809 |
|
| Add: Depreciation and amortization | 15,056 |
| | 15,437 |
| | 16,767 |
|
| Add: Stock-based compensation expense | 16,270 |
| | 4,249 |
| | 9,091 |
|
| Add: Non-cash portion of loss on early extinguishment of debt | 799 |
| | 468 |
| | 372 |
|
| Adjusted earnings allocable to common shareholders | $ | 10,675 |
| | $ | 2,589 |
| | $ | 53,039 |
|
| |
(1) | Depreciation and amortization also includes our proportionate share of depreciation and amortization expense for equity method investments and excludes the portion of depreciation and amortization expense allocable to noncontrolling interests. |
| |
(2) | For the nine months ended September 30, 2016, impairment of assets includes impairments on equity method investments recorded in "Earnings from equity method investments" in our consolidated statements of operations. |
| |
(3) | Represents the impact of charge-offs and dispositions realized during the period. These charge-offs and dispositions were on assets that were previously impaired for GAAP and reflected in net income but not Adjusted Income. |
Liquidity and Capital Resources
During the three months ended September 30, 2017,March 31, 2020, we invested $140.4$182.9 million associated withinto new investments, prior financing commitments as well asand ongoing development during the quarter. Total investments included $57.9real estate development. This amount includes $42.5 million in lending and other investments, $34.5real estate finance, $15.6 million to develop our land and development assets, $124.0 million to invest in net lease assets inclusive of $105.5 million in SAFE, and $48.0$0.7 million of capital to reposition or redevelop our operating properties and invest$0.1 million in net lease assets.other investments. Also during the three months ended September 30, 2017,March 31, 2020, we generated $247.0$114.8 million of proceeds from loan repayments and asset sales within our portfolio, comprised of $137.7$18.2 million from real estate finance, $7.3$10.1 million from operating properties $61.4 million fromand net lease assets $32.1and $86.4 million from land and development assets and $8.5 million from other investments.assets. These amounts are inclusive of fundings and proceeds from both consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on real estateoperating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):
| | | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| | 2017 | | 2016 | 2020 | | 2019 |
| Operating Properties | $ | 22,308 |
| | $ | 33,367 |
| $ | 716 |
| | $ | 1,242 |
|
| Net Lease | 2,583 |
| | 2,307 |
| 3,292 |
| | 3,942 |
|
| Total capital expenditures on real estate assets | $ | 24,891 |
| | $ | 35,674 |
| $ | 4,008 |
| | $ | 5,184 |
|
| | | | | | | |
| Land and Development | $ | 84,966 |
| | $ | 58,961 |
| $ | 15,035 |
| | $ | 37,762 |
|
| Total capital expenditures on land and development assets | $ | 84,966 |
| | $ | 58,961 |
| $ | 15,035 |
| | $ | 37,762 |
|
AsSubsequent to March 31, 2020, we repaid the Revolving Credit Facility in full and as of September 30, 2017,the date of this report, we had unrestricted cash of $1.9 billion; however, we used approximately $1.4 billion subsequent to September 30, 2017 to redeem several series$85.0 million and $350.0 million of borrowing capacity available under the Revolving Credit Facility. The COVID-19 crisis has for the time being adversely affected our unsecured notesstrategies of monetizing legacy assets and preferred stock,materially scaling SAFE's portfolio as discussed above under "Executive Overview."its Manager. These conditions may adversely affect our strategies while they persist. Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures, distributions to shareholders and funding ongoing business operations. OverIn the next 12 months,near term we currently expectplan to fund inlimit cash expenditures to the range of approximately $175.0 million to $225.0 million of capital expenditures within our portfolio. The majority of these amounts relate to our land and development and operating properties business segments and include multifamily and residential development activities which are expected to include approximately $100.0 million in vertical construction.extent practicable. The amount spentwe actually invest will depend on the full impact of COVID-19 on our business and the pace of our development activities as well as the extent to which we strategically partner with others to complete these projects. As of September 30, 2017, weeconomic recovery. We also had approximately $419.8$284.4 million of maximum unfunded commitments associated with our investments of which we expect to fund the majority of over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see "Unfunded Commitments" below). We also have $472.7 million principal amount of scheduled real estate finance maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers. Our capital sources to meet cash uses through the next 12 months and beyond will primarily beare expected to include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales.
We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions. While economic trends have stabilized, it is not possible for us to predict whether these trends will continue or to quantify the impact of these or other trends on our financial results.
Contractual Obligations—The following table outlines the contractual obligations related to our long-term debt obligations, loan participations payable and operating lease obligations and accounts payable related to the redemption of our Series E and Series F preferred stock as of September 30, 2017March 31, 2020 (refer to Note 1011 to theour consolidated financial statements).
| | | | Amounts Due By Period | Amounts Due By Period |
| | Total |
| Less Than 1 Year |
| 1 - 3 Years |
| 3 - 5 Years |
| 5 - 10 Years |
| After 10 Years | Total |
| Less Than 1 Year |
| 1 - 3 Years |
| 3 - 5 Years |
| 5 - 10 Years |
| After 10 Years |
| | (in thousands) | (in thousands) |
Long-Term Debt Obligations: | |
| |
| |
| |
| |
| | |
| |
| |
| |
| |
| |
Unsecured notes(1) | $ | 3,620,000 |
|
| $ | 1,150,000 |
|
| $ | 1,170,000 |
|
| $ | 1,300,000 |
|
| $ | — |
|
| $ | — |
| $ | 2,012,500 |
|
| $ | — |
|
| $ | 687,500 |
|
| $ | 775,000 |
|
| $ | 550,000 |
|
| $ | — |
|
| Secured credit facilities | 400,000 |
|
| 4,000 |
|
| 8,000 |
|
| 388,000 |
|
| — |
|
| — |
| 491,875 |
|
| — |
|
| — |
|
| 491,875 |
|
| — |
|
| — |
|
| Revolving credit facility | | 300,000 |
| | — |
| | 300,000 |
| | — |
| | — |
| | — |
|
| Mortgages | 223,182 |
|
| 17,465 |
|
| 39,449 |
|
| 116,994 |
|
| 49,274 |
|
| — |
| 724,209 |
|
| 67,796 |
|
| 168,999 |
|
| 23,213 |
|
| 455,562 |
|
| 8,639 |
|
| Trust preferred securities | 100,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 100,000 |
| 100,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 100,000 |
|
| Total principal maturities | 4,343,182 |
|
| 1,171,465 |
|
| 1,217,449 |
|
| 1,804,994 |
|
| 49,274 |
|
| 100,000 |
| 3,628,584 |
|
| 67,796 |
|
| 1,156,499 |
|
| 1,290,088 |
|
| 1,005,562 |
|
| 108,639 |
|
Interest Payable(2) | 663,822 |
|
| 198,333 |
|
| 273,116 |
|
| 153,470 |
|
| 15,176 |
|
| 23,727 |
| |
Loan Participations Payable(3) | 122,846 |
| | 115,243 |
| | 7,603 |
| | — |
| | — |
| | — |
| |
| Operating Lease Obligations | 19,159 |
|
| 5,408 |
|
| 7,819 |
|
| 3,018 |
|
| 2,914 |
|
| — |
| |
Accounts Payable(4) | 241,830 |
| | 241,830 |
| | — |
| | — |
| | — |
| | — |
| |
Interest Payable(1) | | 670,250 |
|
| 150,591 |
|
| 268,213 |
|
| 168,966 |
|
| 64,927 |
|
| 17,553 |
|
Loan Participations Payable(2) | | 37,892 |
| | 37,892 |
| | — |
| | — |
| | — |
| | — |
|
Lease Obligations(3) | | 1,632,593 |
|
| 9,296 |
|
| 22,106 |
|
| 23,836 |
|
| 36,154 |
|
| 1,541,201 |
|
| Total | $ | 5,390,839 |
|
| $ | 1,732,279 |
|
| $ | 1,505,987 |
|
| $ | 1,961,482 |
|
| $ | 67,364 |
|
| $ | 123,727 |
| $ | 5,969,319 |
|
| $ | 265,575 |
|
| $ | 1,446,818 |
|
| $ | 1,482,890 |
|
| $ | 1,106,643 |
|
| $ | 1,667,393 |
|
| |
| (1) | Subsequent to September 30, 2017, we repaid the $550.0 million principal amount outstandingVariable-rate debt assumes one-month LIBOR of 0.99% and three-month LIBOR of 1.45% that were in effect as of March 31, 2020. Interest payable does not include payments that may be required under our 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of our 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount outstanding of our 4.875% senior unsecured notes due July 2018.interest rate derivatives. |
| |
| (2) | Variable-rate debt assumes 1-month LIBOR of 1.23% and 3-month LIBOR of 1.34% that were in effect as of September 30, 2017. Interest payable includes $36.3 million of aggregate interest payable on the $550.0 million principal amount of 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount of 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount of 4.875% senior unsecured notes due July 2018 that were all repaid in October 2018. |
| |
(3) | Refer to Note 910 to the consolidated financial statements. |
| |
(4)(3) | On September 19, 2017, we gave irrevocable noticeWe are obligated to redeem allpay ground rent under certain operating leases; however, our tenants at the properties pay this expense directly under the terms of our issuedvarious subleases and outstanding Series E and Series F preferred stock for the aggregate liquidation preference of $240.0 million, plus accrued and unpaid dividends of $1.8 million to the redemption date, on October 20, 2017 (refer to Note 13).these amounts are excluded from lease obligations. |
2017 Secured Financing—In March 2017, we (through wholly-owned subsidiaries conducting our GL business) entered into a $227.0 million secured financing transaction (the "2017 Secured Financing") that accrued interest at 3.795% and matures in April 2027. The 2017 Secured Financing was collateralized by the 12 properties comprising our GL business, including seven GLs and one master lease (covering the accounts of five properties). In connection with the 2017 Secured Financing, we incurred $7.3 million of lender and third-party fees, substantially all of which was capitalized in "Debt obligations, net" on our consolidated balance sheets. In April 2017, we derecognized the 2017 Secured Financing when third parties acquired a controlling interest in the Company's GL business (refer to Note 4).
2016 Secured Term Loan—In December 2016, we arranged a $170.0 million delayed draw secured term loan (the "2016 Secured Term Loan"). In March 2017, we allowed the 2016 Secured Term Loan to expire and replaced the 2016 Secured Term Loan with the 2017 Secured Financing. The 2016 Secured Term Loan was collateralized by the 12 properties that served as collateral for the 2017 Secured Financing.
2016 Senior Secured Credit Facility—In June 2016, we entered into a senior secured credit facility of $450.0 million (the "2016 Senior Secured Credit Facility"). In August 2016, we upsized the facility to $500.0 million. The initial $450.0 million of the 2016 Senior Secured Credit Facility was issued at 99% of par and the upsize was issued at par. In January 2017, we repriced the 2016 Senior Secured Credit Facility to LIBOR plus 3.75% with a 1.00% LIBOR floor from LIBOR plus 4.50% with a 1.00% LIBOR floor. In September 2017, we downsized, repriced and extended the 2016 Senior Secured Credit Facility to $400.0 million priced at LIBOR plus 3.00% with a 0.75% LIBOR floor and maturing in October 2021. These transactions resulted in an aggregate 1.50% reduction in price.
The 2016 Senior Secured Credit Facility is collateralized 1.25x by a first lien on a fixed pool of assets. Proceeds from principal repayments and sales of collateral are applied to amortize the 2016 Senior Secured Credit Facility. Proceeds received for interest, rent, lease payments and fee income are retained by us. We may also make optional prepayments, subject to prepayment fees, and are required to repay 0.25% of the principal amount on the first business day of each quarter.
2015 Secured Revolving Credit Facility—In March 2015, we entered into a secured revolving credit facility with a maximum capacity of $250.0 million (the "2015 Secured Revolving Credit Facility"). In September 2017, we upsized the 2015 Secured Revolving Credit Facility to $325.0 million, added additional lenders to the syndicate, extended the maturity date to September 2020 and made certain other changes. Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon our corporate credit rating. An undrawn credit facility commitment fee ranges from 0.30% to 0.50%, based on corporate credit ratings each quarter. At maturity, we may convert outstanding borrowings to a one-year term loan which matures in quarterly installments through September 2021. As of September 30, 2017, based on our borrowing base of assets, we had $325.0 million of borrowing capacity available under the 2015 Secured Revolving Credit Facility.
Unsecured Notes—In September 2017, our corporate credit rating was upgraded by Moody's, S&P and Fitch and we issued $400.0 million principal amount of 4.625% senior unsecured notes due September 2020, $400.0 million principal amount of 5.25% senior unsecured notes due September 2022 and $250.0 million of 3.125% Convertible Notes due September 2022. Subsequent to September 30, 2017, proceeds from these offerings, together with cash on hand, were used to repay in full the $550.0 million principal amount outstanding of our 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of our 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount outstanding of our 4.875% senior unsecured notes due July 2018. In addition, subsequent to September 30, 2017, the initial purchasers of the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes.
In March 2017, we issued $375.0 million principal amount of 6.00% senior unsecured notes due April 2022. Proceeds from the offering were primarily used to repay in full the $99.7 million principal amount outstanding of our 5.85% senior unsecured notes due March 2017 and repay in full the $275.0 million principal amount outstanding of our 9.00% senior unsecured notes due June 2017. In March 2016, we repaid the $261.4 million principal amount outstanding of our 5.875% senior unsecured notes at maturity using available cash. In addition, we issued $275.0 million principal amount of 6.50% senior unsecured notes due July 2021. Proceeds from the offering were primarily used to repay in full the $265.0 million principal amount outstanding of our senior unsecured notes due July 2016 and repay $5.0 million of the 2015 Secured Revolving Credit Facility.
Encumbered/UnencumberedCollateral Assets—The carrying value of our encumbered and unencumbered assets that are directly pledged or are held by subsidiaries whose equity is pledged as collateral to secure our obligations under our secured debt facilities are as follows, by asset type are as follows ($ in thousands):
| | | | As of | As of |
| | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| | Encumbered Assets | | Unencumbered Assets | | Encumbered Assets | | Unencumbered Assets | Collateral Assets(1) | | Non-Collateral Assets | | Collateral Assets(1) | | Non-Collateral Assets |
| Real estate, net | $ | 841,570 |
| | $ | 482,292 |
| | $ | 881,212 |
| | $ | 506,062 |
| $ | 1,392,658 |
| | $ | 108,431 |
| | $ | 1,409,585 |
| | $ | 117,634 |
|
| Real estate available and held for sale | — |
| | 65,658 |
| | — |
| | 237,531 |
| — |
| | 34,391 |
| | — |
| | 8,650 |
|
Net investment in leases(2) | | 420,380 |
| | — |
| | 418,915 |
| | — |
|
| Land and development, net | 25,100 |
| | 836,407 |
| | 35,165 |
| | 910,400 |
| — |
| | 514,064 |
| | — |
| | 580,545 |
|
Loans receivable and other lending investments, net(1)(2) | 188,973 |
| | 813,447 |
| | 172,581 |
| | 1,142,050 |
| |
Loans receivable and other lending investments, net(3)(4) | | 234,612 |
| | 590,019 |
| | 233,104 |
| | 566,050 |
|
| Other investments | — |
| | 289,037 |
| | — |
| | 214,406 |
| — |
| | 1,029,552 |
| | — |
| | 907,875 |
|
| Cash and other assets | — |
| | 2,145,713 |
| | — |
| | 590,299 |
| — |
| | 882,674 |
| | — |
| | 814,044 |
|
| Total | $ | 1,055,643 |
| | $ | 4,632,554 |
| | $ | 1,088,958 |
| | $ | 3,600,748 |
| $ | 2,047,650 |
| | $ | 3,159,131 |
| | $ | 2,061,604 |
| | $ | 2,994,798 |
|
| |
| (1) | The Senior Term Loan and the Revolving Credit Facility are secured only by pledges of equity of certain of our subsidiaries and not by pledges of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions on incurring new debt (subject to certain exceptions). As of September 30, 2017 and DecemberMarch 31, 2016,2020, Collateral Assets includes $428.5 million carrying value of assets held by entities whose equity interests are pledged as collateral for the amounts presented exclude general reserves for loan losses of $15.2 million and $23.3 million,Revolving Credit Facility. |
respectively.
| |
| (2) | As of September 30, 2017March 31, 2020, the amount presented excludes a general allowance for net investment of leases of $10.4 million. |
| |
| (3) | As of March 31, 2020 and December 31, 2016,2019, the amounts presented exclude general allowances for loan losses of $11.6 million and $6.9 million, respectively. |
| |
| (4) | As of March 31, 2020 and December 31, 2019, the amounts presented exclude loan participations of $122.2$37.8 million and $159.1$35.6 million, respectively. |
Debt Covenants—Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.2x and a covenant not to incur additional indebtedness (except for incurrences of permitted debt), if on a pro forma basis our consolidated fixed charge coverage ratio, determined in accordance with the indentures governing our debt securities, is 1.5x or lower. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the
bondholders. If our ability to incur additional indebtedness under the fixed charge coverage ratio is limited, we are permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.
The 2016 Senior Secured Credit FacilityTerm Loan and the 2015 Secured Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the 2016 Senior
Secured Credit Facility Term Loan requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The 2015 Secured Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both collateral coverageborrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The 2015 Secured Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the collateral coverageborrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. In addition, for so long as we maintain our qualification as a REIT,Under both the 2016 Senior Secured Credit FacilityTerm Loan and the 2015 Secured Revolving Credit Facility permit uswe are permitted to distribute 100%pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend. We declared common stock dividends of our REIT taxable income on an annual basis (prior to deducting certain cumulative NOL carryforwards).$7.8 million, or $0.10 per share, for the three months ended March 31, 2020.
Derivatives—Our use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes in foreign currencies. Refer to Note 1213 to the consolidated financial statements.
Off-Balance Sheet Arrangements—We are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in various unconsolidated ventures. Refer to Note 78 to the consolidated financial statements for further details of our unconsolidated investments. Our maximum exposure to loss from these investments is limited to the carrying value of our investments and any unfunded commitments (see below).
Unfunded Commitments—We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As of September 30, 2017March 31, 2020, the maximum amountsamount of the fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):
| | | | Loans and Other Lending Investments(1) | | Real Estate | | Other Investments | | Total | Loans and Other Lending Investments(1) | | Real Estate(2) | | Other Investments | | Total(3) |
| Performance-Based Commitments | $ | 317,091 |
| | $ | 6,136 |
| | $ | 50,933 |
| | $ | 374,160 |
| $ | 183,608 |
| | $ | 81,718 |
| | $ | 53,122 |
| | $ | 318,448 |
|
| Strategic Investments | — |
| | — |
| | 45,642 |
| | 45,642 |
| — |
| | — |
| | 17,351 |
| | 17,351 |
|
| Total | $ | 317,091 |
| | $ | 6,136 |
| | $ | 96,575 |
| | $ | 419,802 |
| $ | 183,608 |
| | $ | 81,718 |
| | $ | 70,473 |
| | $ | 335,799 |
|
| |
| (1) | Excludes $115.3$12.1 million of commitments on loan participations sold that are not our obligation. |
| |
| (2) | Includes a commitment to invest up to $55.0 million in additional bowling centers over the next several years (refer to Note 5). |
| |
| (3) | Subsequent to March 31, 2020, total unfunded commitments was reduced by approximately $51.4 million through fundings and loans with unfunded commitments being repaid. |
Stock Repurchase Program—In February 2016, after having substantially utilized the remaining availability previously authorized, our Board of Directors authorized a new $50.0 million stockWe may repurchase program. After having substantially utilized the availability authorizedshares in February 2016, our Board of Directors authorized an increase to the stock repurchase program to $50.0 million, effective August 4, 2016. The program authorizes the repurchase of common stock from time to time innegotiated transactions or open market and privately negotiated purchases,transactions, including pursuant tothrough one or more trading plans. In connection withDuring the sale of the 3.125% Convertible Notes in September 2017 (refer to Note 10 in the consolidated financial statements),three months ended March 31, 2020, we repurchased 4.01.0 million shares of our outstanding common stock for $45.9$12.0 million, atfor an average cost of $11.51$12.51 per share in privately negotiated transactions with purchasers of the 3.125% Convertible Notes.share. During the ninethree months ended September 30, 2016,March 31, 2019, we repurchased 10.22.3 million shares of our outstanding common stock for $98.4$19.2 million, atfor an average cost of $9.67$8.46 per share. As of September 30, 2017,March 31, 2020, we had remaining authorization to repurchase up to $4.1$22.1 million of common stock under our stock repurchase program.
Preferred Equity—Subsequent to September 30, 2017, we redeemed our Series E and Series F preferred stock at par for the aggregate liquidation preference of $240.0 million plus accrued and unpaid dividends in the amount of $1.8 million to the redemption date (refer to Note 13 in the consolidated financial statements).
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
On January 1, 2017, we adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation, ImprovementsFor a discussion of our critical accounting policies, refer to Employee Share-Based Payment Accounting, which simplified several aspects ofNote 3 to the accounting for share-based payment transactions, including income tax, classification of awards as either equity or liabilities and classification on the statement of cash flows. The adoption did not have a material impact on our consolidated financial statements.
As of September 30, 2017, the remainder ofstatements and our significant accounting policies, which are detailed in our 2016 Annual Report have not changed materially.on Form 10-K.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Our operating results will depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the financial markets will affect the spread between our floating rate assets and liabilities subject to the net amount of floating rate assets/liabilities and the impact of interest rate floors and caps. Any significant compression of the spreads between interest-earning assets and interest-bearing liabilities could have a material adverse effect on us.
In the event of a significant rising interest rate environment or economic downturn, defaults could increase and cause us to incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults would likely have a material adverse effect on the spreads between interest-earning assets and interest-bearing liabilities. In addition, an increase in interest rates could, among other things, reduce the value of our fixed-rate interest-bearing assets and our ability to realize gains from the sale of such assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. We monitor the spreads between our interest-earning assets and interest-bearing liabilities and may implement hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps, interest rate caps and other interest rate-related derivative contracts. Such strategies are designed to reduce our exposure, on specific transactions or on a portfolio basis, to changes in cash flows as a result of interest rate movements in the market. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in our credit risk or the credit risk of our borrowers.
While a REIT may utilize derivative instruments to hedge interest rate risk on its liabilities incurred to acquire or carry real estate assets without generating non-qualifying income, use of derivatives for other purposes will generate non-qualified income for REIT income test purposes. This includes hedging asset related risks such as credit and interest rate exposure on our loan assets. As a result our ability to hedge these types of risks is limited. There can be no assurance that our profitability will not be materially adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in annual net income, assuming no change in our interest earning assets or interest bearing liabilities, should interest rates increase by 10, 50 or 100 basis points or decrease by 10 or 50 basis points, assuming no change in the shape of the yield curve (i.e., relative interest rates). The base interest rate scenario assumes the one-month LIBOR rate of 1.23%0.99% as of September 30, 2017.March 31, 2020. Actual results could differ significantly from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
| | | Change in Interest Rates | | Net Income(1) | | Net Income(1) |
| -50 Basis Points | | | $ | 873 |
|
| -10 Basis Points | | $ | (2,048 | ) | | 145 |
|
| Base Interest Rate | | — |
| | — |
|
| +10 Basis Points | | 2,048 |
| | (145 | ) |
| +50 Basis Points | | 10,242 |
| | (707 | ) |
| +100 Basis Points | | 20,483 |
| | (1,081 | ) |
| |
| (1) | WeAs of March 31, 2020, we have an overall net variable-rate asset position, which results in an increase in net income when rates increase and a decrease in net income when rates decrease. Asposition. In addition, as of September 30, 2017, $451.5March 31, 2020, $425.2 million of our floating rate loans have a cumulative weighted average interest rate floor of 0.3%1.5% and $522.8$37.9 million of our floating rate debt hasobligations have a cumulative weighted average interest rate floor of 0.7%1.5%. |
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has formed a disclosure committee that is responsible for considering the
materiality of information and determining the disclosure obligations of the Company on a timely basis. The disclosure committee reports directly to the Company's Chief Executive Officer and Chief Financial Officer.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the disclosure committee and other members of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) or Rule 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act isis: (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and formsforms; and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes during the last fiscal quarter in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to itsthe Company's business as a finance and investment company focused on the commercial real estate and real estate related business activities,industry, including loan foreclosure and foreclosure-related proceedings. In addition to such matters, theThe Company believes it is not a party to, nor are any of its properties the followingsubject of, any pending legal proceedings:
U.S. Home Corporation ("Lennar") v. Settlers Crossing, LLC, et al. (United States District Court for the District of Maryland, Civil Action No. DKC 08-1863)
This litigation involvedproceeding that would have a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland. Following a trial, in January 2015, the United States District Court for the District of Maryland (the District Court) entered judgment in favor of the Company, finding that the Company was entitled to specific performance of the purchase and sale agreement and awarding the Company the aggregate amount of: (i) the remaining unpaid purchase price; plus (ii) simple interestmaterial adverse effect on the unpaid amount at a rate of 12% annually from 2008; plus (iii) real estate taxes paid by the Company; plus (iv) actual and reasonable attorneys' fees and costs incurred by the Company in connection with the litigation. Lennar appealed the District Court's judgment. On April 12, 2017, the United States Court of Appeals for the Fourth Circuit affirmed the judgment of the District Court in its entirety. Lennar’s petition for rehearing en banc was summarily denied.Company’s consolidated financial statements.
On April 21, 2017, we and Lennar completed the transfer of the land, pursuant to which we conveyed the land to Lennar and received net proceeds of $234.1 million after payment of $3.3 million in documentary transfer taxes, consisting of $114.0 million of sales proceeds, $121.8 million of interest and $1.6 million of real estate tax reimbursements. The amount of attorneys’ fees and costs to be recovered by us will be determined through further proceedings before the District Court. We have applied for attorney’s fees in excess of $17.0 million. A portion of the net proceeds received by us has been paid to the third party which holds a 4.3% participation interest in all proceeds received by us.
Lennar has filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of two specific issues previously decided in our favor by the lower courts. We have filed a brief in opposition to the petition. There can be no assurance as to the outcome of Lennar’s petition or, if it is accepted, any determination or redetermination by the U.S. Supreme Court affecting this matter.
Item 1a. Risk Factors
In addition to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, you should consider carefully the following in evaluating an investment in the Company's securities. Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and market price of the Company's common stock.
The current novel coronavirus, or COVID-19, pandemic or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our performance, financial condition, results of operations, stock price, cash flows and ability to pay distributions. Further, the pandemic has caused disruptions in the U.S. and global economies and financial markets and created widespread business continuity issues of an as yet unknown magnitude and duration.
The COVID-19 pandemic outbreak has rapidly and dramatically impacted the US and global economies. Many countries, including the United States, have instituted quarantines, mandated business and school closures and restricted travel. The US financial markets have experienced disruption, with heightened stock market volatility and constrained credit conditions within most sectors, including real estate. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. At this time, we cannot predict the extent of the impacts of the COVID-19 crisis on our business. We will continue to monitor its effects on a daily basis and will adjust our operations as necessary.
COVID-19 or another pandemic could have material and adverse effects on our ability to successfully operate due to, among other factors:
| |
| • | a complete or partial closure of, or other operational issues at, one or more of our operating properties resulting from government or tenant action; |
| |
| • | the reduced economic activity impacts our tenants' and borrowers' businesses, financial condition and liquidity and may cause one or more of our tenants or borrowers to be unable to meet their obligations to us in full, or at all; |
as of March 31, 2020, the entertainment/leisure and hotel sectors represented approximately 19.8% and 5.3%, respectively, of the gross book value of our investments. These sectors have been particularly stressed by the COVID-19 pandemic. One of our entertainment sector net lease tenants, representing approximately 0.7% of the gross book value of our investments as of March 31, 2020 and 0.4% of our revenues for the quarter, declared bankruptcy in April, which may result in the loss of all or a part of the future rent under this lease. There can be no assurance that additional tenant or borrower bankruptcies will not occur in these and other sectors;
the decline in real estate transaction activity and constrained credit conditions may adversely affect our strategies of monetizing legacy assets and scaling SAFE's portfolio as its Manager;
our earnings could be negatively impacted by increased allowances against potential future losses;
deteriorations in our financial condition may cause us to be unable to satisfy financial covenants in our debt obligations. If we are unable to meet our covenants, our lenders may declare us to be in default and require us to repay outstanding borrowings;
potential negative impact on the health of our employees, particularly if a significant number of them are impacted;
| |
| • | difficulty accessing debt and equity capital on attractive terms, or at all, and any disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants' and borrowers' access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants' or borrowers' ability to meet their obligations to us; and |
| |
| • | a deterioration in our and our tenants' or borrowers' ability to operate in affected areas or delays in the supply of products or services to us and our tenants or borrowers from vendors that are needed for our and our tenants' and borrowers' efficient operations. |
The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
There were no other material changes from the risk factors previously disclosed in the Company's 2016our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the information with respect to purchases made by us or on our behalf of the Company of itsour common stock during the three months ended September 30, 2017.March 31, 2020.
|
| | | | | | | | | | |
| | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans(1) |
| July 1 to July 31 | — |
| $ | — |
| — |
| $ | 50,000,000 |
|
| August 1 to August 31 | — |
| $ | — |
| — |
| $ | 50,000,000 |
|
| September 1 to September 30 | 3,990,300 |
| $ | 11.51 |
| 3,990,300 |
| $ | 4,071,647 |
|
|
| | | | | | | | | | |
| | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans(1) |
| January 1 to January 31 | 403,164 |
| $ | 14.39 |
| 403,164 |
| $ | 28,364,587 |
|
| February 1 to February 29 | 46,900 |
| $ | 15.93 |
| 46,900 |
| $ | 27,618,162 |
|
| March 1 to March 31 | 512,700 |
| $ | 10.72 |
| 512,700 |
| $ | 22,131,601 |
|
| |
| (1) | In August 2016, the Company's Board of Directors authorized an increase to $50.0 millionWe may repurchase shares in the stock repurchase program. The program authorizes the repurchase of common stock from time to time innegotiated transactions or open market and privately negotiated purchases,transactions, including pursuant tothrough one or more trading plans. There is no fixed expiration date to this stock repurchase program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
INDEX TO EXHIBITS
|
| |
Exhibit Number | Document Description |
10.1 | |
| 31.0 | |
| 32.0 | |
| 101* | The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2017March 31, 2020 is formatted in Inline XBRL ("eXtensible Business Reporting Language"): (i) the Consolidated Balance Sheets (unaudited) as of September 30, 2017 (unaudited)March 31, 2020 and December 31, 2016,2019, (ii) the Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, (v) the Consolidated Statements of Cash Flows (unaudited) for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 and (vi) the Notes to the Consolidated Financial Statements (unaudited). |
| |
| * | In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
| | | iStar Inc. Registrant |
| Date: | November 2, 2017April 30, 2020 | /s/ JAY SUGARMAN |
| | | Jay Sugarman Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) |
| | | |
| | | iStar Inc. Registrant |
| Date: | November 2, 2017April 30, 2020 | /s/ GEOFFREY G. JERVISJEREMY FOX-GEEN |
| | | Geoffrey G. JervisJeremy Fox-Geen
Chief Operating Officer and Chief Financial Officer (principal
(principal financial andofficer) |
| | |
| | iStar Inc. Registrant |
| Date: | April 30, 2020 | /s/ GARETT ROSENBLUM |
| | Garett Rosenblum Chief Accounting Officer (principal accounting officer) |
