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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2022

OR

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. 001-38122

Safehold Inc.

(Exact name of registrant as specified in its charter)

Maryland

30-0971238

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

1114 Avenue of the Americas

 

39th Floor

New York

,

NY

10036

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (212930-9400

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

 

SAFE

 

NYSE

Indicate by check mark whether the registrant: (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large Accelerated filer

  

Accelerated filer

  

Non-accelerated filer

  

Smaller reporting company

  

Emerging growth company

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. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes     No 

As of April 19, 2022, there were 61,941,758 shares, $0.01 par value per share, of Safehold Inc. common stock outstanding.

TABLE OF CONTENTS

 

 

Page

PART I

Consolidated Financial Information

Item 1.

Financial Statements:

Consolidated Balance Sheets (unaudited) as of March 31, 2022 and December 31, 2021

1

Consolidated Statements of Operations (unaudited)—For the three months ended

March 31, 2022 and 2021

2

Consolidated Statements of Comprehensive Income (Loss) (unaudited)—For the three months ended March 31, 2022 and 2021

3

Consolidated Statements of Changes in Equity (unaudited)—For the three months ended March 31, 2022 and 2021

4

Consolidated Statements of Cash Flows (unaudited)—For the three months ended March 31, 2022 and 2021

5

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II

Other Information

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

SIGNATURES

37

PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1.   Financial Statements

Safehold Inc.

Consolidated Balance Sheets(1)

(In thousands)

(unaudited)

March 31, 

December 31,

    

2022

    

2021

ASSETS

 

  

 

  

Net investment in sales-type leases

$

2,739,924

$

2,412,716

Ground Lease receivables

 

1,017,160

 

796,252

Real estate

 

  

 

  

Real estate, at cost

740,971

740,971

Less: accumulated depreciation

 

(29,850)

 

(28,343)

Real estate, net

 

711,121

 

712,628

Real estate-related intangible assets, net

 

222,504

 

224,182

Total real estate, net and real estate-related intangible assets, net

 

933,625

 

936,810

Equity investments in Ground Leases

 

175,119

 

173,374

Cash and cash equivalents

 

30,561

 

29,619

Restricted cash

 

125,708

 

8,897

Deferred operating lease income receivable

 

125,226

 

117,311

Deferred expenses and other assets, net

 

39,726

 

40,747

Total assets

$

5,187,049

$

4,515,726

LIABILITIES AND EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Accounts payable, accrued expenses and other liabilities(2)

$

177,022

$

67,592

Real estate-related intangible liabilities, net

 

65,219

 

65,429

Debt obligations, net

 

2,913,481

 

2,697,503

Total liabilities

 

3,155,722

 

2,830,524

Commitments and contingencies (refer to Note 9)

 

  

 

  

Redeemable noncontrolling interests (refer to Note 3)

19,000

Equity:

 

  

 

  

Safehold Inc. shareholders' equity:

 

  

 

  

Common stock, $0.01 par value, 400,000 shares authorized, 61,942 and 56,619 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

619

 

566

Additional paid-in capital

 

1,970,443

 

1,663,324

Retained earnings

 

73,711

 

59,368

Accumulated other comprehensive loss

 

(35,691)

 

(40,980)

Total Safehold Inc. shareholders' equity

 

2,009,082

 

1,682,278

Noncontrolling interests

 

3,245

 

2,924

Total equity

 

2,012,327

 

1,685,202

Total liabilities, redeemable noncontrolling interests and equity

$

5,187,049

$

4,515,726

(1)Refer to Note 2 for details on the Company’s consolidated variable interest entities (“VIEs”).
(2)As of March 31, 2022 and December 31, 2021, includes $7.6 million and $6.2 million, respectively, due to related parties.

The accompanying notes are an integral part of the consolidated financial statements.

1

Safehold Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

For the Three Months Ended

March 31, 

    

2022

    

2021

    

Revenues:

 

  

 

  

 

Interest income from sales-type leases(1)

$

43,031

$

25,974

Operating lease income

16,966

17,410

Other income

 

366

 

123

Total revenues

 

60,363

 

43,507

Costs and expenses:

 

  

 

  

Interest expense

 

25,321

 

17,167

Real estate expense

 

707

 

598

Depreciation and amortization

 

2,402

 

2,385

General and administrative(2)

 

9,194

 

6,655

Other expense

 

108

 

369

Total costs and expenses

 

37,732

 

27,174

Income from operations before other items

 

22,631

 

16,333

Loss on early extinguishment of debt

 

 

(216)

Earnings from equity method investments

 

2,276

 

839

Net income

 

24,907

 

16,956

Net income attributable to noncontrolling interests

 

(34)

 

(48)

Net income attributable to Safehold Inc. common shareholders

$

24,873

$

16,908

Per common share data:

 

  

 

  

Net income

 

  

 

  

Basic

$

0.43

$

0.32

Diluted

$

0.43

$

0.32

Weighted average number of common shares:

  

Basic

 

58,122

 

53,232

Diluted

 

58,123

 

53,244

(1)For the three months ended March 31, 2022 and 2021, the Company recorded $2.1 million and $2.2 million, respectively, of “Interest income from sales-type leases” in its consolidated statements of operations from its Ground Leases with iStar Inc. (“iStar”).
(2)For the three months ended March 31, 2022 and 2021, includes $7.9 million and $5.5 million, respectively, of general and administrative expenses incurred to related parties that includes management fees, expense reimbursements to the Company’s Manager and equity-based compensation.

The accompanying notes are an integral part of the consolidated financial statements.

2

Safehold Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(unaudited)

For the Three Months Ended

March 31, 

    

2022

    

2021

    

Net income

$

24,907

$

16,956

Other comprehensive income (loss):

 

  

 

  

Reclassification of losses on derivatives into earnings

 

1,033

 

358

Unrealized gain (loss) on derivatives

 

4,256

 

13,290

Other comprehensive income (loss)

 

5,289

 

13,648

Comprehensive income

 

30,196

 

30,604

Comprehensive income attributable to noncontrolling interests

 

(34)

 

(48)

Comprehensive income (loss) attributable to Safehold Inc.

$

30,162

$

30,556

The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

Safehold Inc.

Consolidated Statements of Changes in Equity

(In thousands)

(unaudited)

  

Retained

Accumulated

Redeemable

Common

Additional

Earnings

Other

Noncontrolling

Stock at

Paid-In

(Accumulated

Comprehensive

Noncontrolling

Total

    

Interests(1)

    

    

Par

    

Capital

    

Deficit)

    

Income (Loss)

    

Interests

    

Equity

Balance at December 31, 2021

$

$

566

$

1,663,324

$

59,368

$

(40,980)

$

2,924

$

1,685,202

Net income

 

 

 

 

24,873

 

 

34

 

24,907

Issuance of common stock, net / amortization

 

 

53

 

307,290

 

 

 

280

 

307,623

Dividends declared ($0.17 per share)

 

 

 

 

(10,530)

 

 

 

(10,530)

Change in accumulated other comprehensive income

 

 

 

 

 

5,289

 

 

5,289

Contributions from noncontrolling interests, net

18,829

18

18

Distributions to noncontrolling interests

 

 

 

 

 

 

(11)

 

(11)

Additional paid in capital attributable to redeemable noncontrolling interests

171

(171)

(171)

Balance at March 31, 2022

$

19,000

$

619

$

1,970,443

$

73,711

$

(35,691)

$

3,245

$

2,012,327

Balance at December 31, 2020

$

$

532

$

1,412,107

$

23,945

$

(57,461)

$

2,180

$

1,381,303

Net income

 

 

 

 

16,908

 

 

48

 

16,956

Issuance of common stock, net / amortization

 

 

1

 

4,476

 

 

 

143

 

4,620

Dividends declared ($0.16224 per share)

 

 

 

 

(8,645)

 

 

 

(8,645)

Change in accumulated other comprehensive loss

 

 

 

 

 

13,648

 

 

13,648

Distributions to noncontrolling interests

 

 

 

 

 

 

(10)

 

(10)

Balance at March 31, 2021

$

$

533

$

1,416,583

$

32,208

$

(43,813)

$

2,361

$

1,407,872

(1)Refer to Note 3.

The accompanying notes are an integral part of the consolidated financial statements.

4

Safehold Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

For the Three Months Ended

March 31, 

    

2022

    

2021

    

Cash flows from operating activities:

 

  

 

  

 

Net income

$

24,907

$

16,956

Adjustments to reconcile net income to cash flows from operating activities:

 

  

 

Depreciation and amortization

 

2,402

 

2,385

Stock-based compensation expense

 

282

 

184

Deferred operating lease income

 

(7,914)

 

(8,695)

Non-cash interest income from sales-type leases

 

(15,848)

 

(9,490)

Non-cash interest expense

 

3,058

 

3,077

Amortization of real estate-related intangibles, net

 

577

 

620

Loss on early extinguishment of debt

 

 

216

Earnings from equity method investments

 

(2,276)

 

(839)

Distributions from operations of equity method investments

 

531

 

442

Amortization of premium, discount and deferred financing costs on debt obligations, net

 

1,320

 

655

Non-cash management fees

 

4,457

 

3,472

Other operating activities

 

1,280

 

896

Changes in assets and liabilities:

 

  

 

Changes in deferred expenses and other assets, net

 

256

 

270

Changes in accounts payable, accrued expenses and other liabilities

 

11,567

 

(15,005)

Cash flows provided by (used in) operating activities

 

24,599

 

(4,856)

Cash flows from investing activities:

 

  

 

  

Origination/acquisition of net investment in sales-type leases and Ground Lease receivables

 

(532,268)

 

(80,901)

Funding reserves received from Ground Lease tenant

98,064

Deposits on Ground Lease investments

 

 

(4,667)

Other investing activities

 

(981)

 

593

Cash flows used in investing activities

 

(435,185)

 

(84,975)

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of common stock

 

309,160

 

1,065

Proceeds from debt obligations

 

940,000

 

40,000

Repayments of debt obligations

 

(720,000)

 

Payments for deferred financing costs

 

(4,455)

 

(5,594)

Dividends paid to common shareholders

 

(9,672)

 

(8,630)

Payment of offering costs

 

(4,731)

 

(218)

Payments for withholding taxes upon vesting of stock-based compensation

(970)

Distributions to noncontrolling interests

 

(11)

 

(10)

Contributions from noncontrolling interests

 

18

 

Contributions from redeemable noncontrolling interests

19,000

Cash flows provided by financing activities

 

528,339

 

26,613

Changes in cash, cash equivalents and restricted cash

 

117,753

 

(63,218)

Cash, cash equivalents and restricted cash at beginning of period

 

38,516

 

96,467

Cash, cash equivalents and restricted cash at end of period

$

156,269

$

33,249

Reconciliation of cash and cash equivalents and restricted cash presented on the consolidated statements of cash flows

Cash and cash equivalents

$

30,561

$

25,034

Restricted cash

125,708

8,215

Total cash and cash equivalents and restricted cash

$

156,269

$

33,249

Supplemental disclosure of non-cash investing and financing activity:

 

  

 

  

Dividends declared to common shareholders

$

10,530

$

8,645

Accrued finance costs

 

99

 

375

Accrued offering costs

 

545

 

716

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1—Business and Organization

Business—Safehold Inc. (the “Company”) operates its business through one reportable segment by acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the landlord (the Company) and a tenant or leaseholder. The Company believes that it 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 leased by the fee owner of the land to the owners/operators of the real estate projects built thereon (“Ground Leases”). Under a Ground Lease, the tenant is generally responsible for all property operating expenses, such as maintenance, real estate taxes and insurance and is also responsible for development costs and capital expenditures. Ground Leases are typically long-term (base terms ranging from 30 to 99 years, often with tenant renewal options) and have contractual base rent increases (either at a specified percentage or consumer price index (“CPI”) based, or both) and sometimes include percentage rent participations. The Company’s CPI lookbacks are generally capped between 3.0% - 3.5%. In the event cumulative inflation growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation.

The Company intends to target investments in long-term Ground Leases in which: (i) the initial cost of its Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land (“Combined Property Value”); (ii) the ratio of property net operating income to the Ground Lease payment due the Company (“Ground Rent Coverage”) is between 2.0x to 4.5x, and for this purpose the Company uses estimates of the stabilized property net operating income if it does not receive current tenant information and for properties under construction or in transition, in each case based on leasing activity at the property and available market information, including leasing activity at comparable properties in the relevant market; and (iii) the Ground Lease contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. A Ground Lease lessor (the Company) typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon tenant default and the termination of the Ground Lease on account of such default. The Company believes that the Ground Lease structure provides an opportunity for potential value accretion through the reversion to the Company, as the Ground Lease owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from the Company.

The Company is managed by SFTY Manager, LLC (the “Manager”), a wholly-owned subsidiary of iStar Inc. (“iStar”), the Company’s largest shareholder, pursuant to a management agreement. The Company has no employees, as the Manager provides all services to it. The Company draws on the extensive investment origination and sourcing platform of its Manager to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants.

Organization—The Company is a Maryland corporation and completed its initial public offering in June 2017. The Company’s common stock is listed on the New York Stock Exchange under the symbol “SAFE.” The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with the tax year ended December 31, 2017. The Company is structured as an Umbrella Partnership REIT (“UPREIT”). As such, all of the Company’s properties are owned through a subsidiary partnership, Safehold Operating Partnership LP (the “Operating Partnership”). As of March 31, 2022, the Company owned 100% of the limited partner interests in the Operating Partnership and a wholly-owned subsidiary of the Company owned 100% of the general partner interests in the Operating Partnership. The UPREIT structure may afford the Company certain benefits as it seeks to acquire properties from third parties who may want to defer taxes by contributing their Ground Leases to the Company.

Note 2—Basis of Presentation and Principles of Consolidation

Basis of Presentation—The accompanying unaudited condensed 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

6

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

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, 2021 (the “2021 Annual Report”).

The preparation of these consolidated 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.

Principles of Consolidation—The consolidated financial statements include the accounts and operations of the Company, its wholly-owned subsidiaries and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of March 31, 2022, the total assets of these consolidated VIEs were $69.3 million and total liabilities were $29.8 million. The classifications of these assets are primarily within “Net investment in sales-type leases,” “Real estate, net,” “Real estate-related intangible assets, net” and “Deferred operating lease income receivable” on the Company’s consolidated balance sheets. The classifications of liabilities are primarily within “Debt obligations, net” and “Accounts payable, accrued expenses and other liabilities” 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 has provided no financial support to VIEs that it was not previously contractually required to provide and did not have any unfunded commitments related to consolidated VIEs as of March 31, 2022.

Note 3—Summary of Significant Accounting Policies

Fair Values—The Company is required to disclose fair value information with regard to its financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practical to estimate fair value. The Financial Accounting Standards Board (“FASB”) guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on 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). The Company determines the estimated fair values of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant assumptions.

7

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table presents the carrying value and fair value for the Company’s financial instruments ($ in millions):

As of March 31, 2022

As of December 31, 2021

Carrying 

Fair

Carrying 

Fair

    

Value

    

Value

    

Value

    

Value

Assets

Net investment in sales-type leases(1)

$

2,740

$

3,107

$

2,413

$

2,704

Ground Lease receivables(1)

 

1,017

 

1,146

 

796

 

893

Cash and cash equivalents(2)

 

31

 

31

 

30

 

30

Restricted cash(2)

 

126

 

126

 

9

 

9

Liabilities

Debt obligations, net(1)

 

Level 1

738

661

738

741

Level 3

2,175

2,040

1,960

2,118

Total debt obligations, net

2,913

 

2,701

 

2,698

2,859

(1)The fair value of the Company’s net investment in sales-type leases and Ground Lease receivables are classified as Level 3 within the fair value hierarchy. The fair value of the Company’s debt obligations traded in secondary markets are classified as Level 1 within the fair value hierarchy and the fair value of the Company’s debt obligations not traded in secondary markets are classified as Level 3 within the fair value hierarchy.
(2)The Company determined the carrying values of its cash and cash equivalents and restricted cash approximated their fair values and are classified as Level 1 within the fair value hierarchy.

Redeemable Noncontrolling Interests—In February 2022, the Company sold 108,571 Caret Units (refer to Note 11) for $19.0 million to third-party investors and received a commitment from an existing shareholder (which is affiliated with one of the Company’s independent directors) for the purchase of 28,571 Caret Units for $5.0 million. As part of the sale, the Company is obligated to seek to provide a public market listing for the Caret Units, or securities into which they may be exchanged, within two years. If the Company is unable to provide public market liquidity within two years at a value in excess of the new investor’s basis, the investors have the right to cause the Company to redeem their Caret Units at their original purchase price.

The Company classifies these redeemable Caret Units in accordance with Accounting Standards Codification (“ASC”) 480: Distinguishing Liabilities from Equity. ASC 480-10-S99-3A requires that equity securities redeemable at the option of the holder be classified outside of permanent stockholders’ equity. The Company classifies redeemable Caret Units as “Redeemable noncontrolling interests” in its consolidated balance sheets and consolidated statements of changes in equity. The redeemable noncontrolling interest’s carrying amount is equal to the higher of (i) the initial carrying amount, increased or decreased for the redeemable noncontrolling interest’s share of net income or loss and dividends; or (ii) the redemption value. In the case of the Company’s redeemable Caret Units, the carrying amount equals both the initial carrying amount and the redemption value.

New Accounting PronouncementsIn June 2016, the FASB 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 new standard 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. For public entities such as the Company that qualified as smaller reporting companies prior to December 31, 2019, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption is permitted. Management is currently evaluating the impact of ASU 2016-13 on the Company’s consolidated financial statements.

8

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

In May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”) to clarify certain accounting topics from previously issued ASUs, including ASU 2016-13. ASU 2019-04 addresses certain aspects of ASU 2016-13, including but not limited to, accrued interest receivable, loan recoveries, interest rate projections for variable-rate financial instruments and expected prepayments. ASU 2019-04 provides alternatives that allow entities to measure credit losses on accrued interest separate from credit losses on the principal portion of a loan, clarifies that entities should include expected recoveries in the measurement of credit losses, allows entities to consider future interest rates when measuring credit losses and can elect to adjust effective interest rates used to discount expected cash flows for expected loan prepayments. ASU 2019-04 is effective upon the adoption of ASU 2016-13. Management is currently evaluating the impact of ASU 2019-04 on the Company’s consolidated financial statements.

Note 4—Net Investment in Sales-type Leases and Ground Lease Receivables

The Company classifies certain of its Ground Leases as sales-type leases and records the leases within “Net investment in sales-type leases” on the Company’s consolidated balance sheets and records interest income in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases with the seller. These Ground Leases qualify as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in “Ground Lease receivables” on the Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in “Interest income from sales-type leases” in the Company’s consolidated statements of operations.

In September 2021, the Company entered into a lease assignment and modification with one of its tenants under an operating lease. In connection with this transaction, the lease was assigned to a new tenant and the maturity of the lease was extended by 3.5 years to September 2120. As a result of the modification to the lease, the Company re-evaluated the lease classification and classified the lease as a sales-type lease and recorded $40.9 million in "Net investment in leases" and derecognized $11.4 million from "Real estate, net," $9.8 million from "Deferred operating lease income receivable" and $17.9 million from "Real estate-related intangible assets, net" on its consolidated balance sheet.

The Company’s net investment in sales-type leases were comprised of the following ($ in thousands):

    

March 31, 2022

    

December 31, 2021

Total undiscounted cash flows

$

26,395,478

$

23,707,424

Unguaranteed estimated residual value

 

2,636,521

 

2,319,761

Present value discount

 

(26,292,075)

 

(23,614,469)

Net investment in sales-type leases

$

2,739,924

$

2,412,716

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the three months ended March 31, 2022 and 2021 ($ in thousands):

Net Investment in

Ground Lease

    

Sales-type Leases

    

Receivables

    

Total

Three Months Ended March 31, 2022

 

  

 

  

 

  

Beginning balance

$

2,412,716

$

796,252

$

3,208,968

Origination/acquisition/fundings(1)

 

315,503

 

216,765

 

532,268

Accretion

 

11,705

 

4,143

 

15,848

Ending balance(2)

$

2,739,924

$

1,017,160

$

3,757,084

Net Investment in

Ground Lease

    

Sales-type Leases

    

Receivables

    

Total

Three Months Ended March 31, 2021

 

  

 

  

 

  

Beginning balance

$

1,305,519

$

577,457

$

1,882,976

Purchase price allocation adjustment

(182)

(182)

Origination/acquisition/fundings(1)

 

 

80,902

 

80,902

Accretion

 

6,503

 

2,987

 

9,490

Ending balance

$

1,311,840

$

661,346

$

1,973,186

(1)The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed estimated residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement.
(2)As of March 31, 2022, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was 5.1% and 5.3%, respectively. As of March 31, 2022, the weighted average remaining life of the Company’s 26 Ground Lease receivables was 99.0 years.

Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of March 31, 2022, are as follows by year ($ in thousands):

    

    

Fixed Bumps 

    

Fixed Bumps 

with 

with Inflation 

Fixed 

Percentage 

    

Adjustments

    

Bumps

    

Rent

    

Total

2022 (remaining nine months)

$

62,899

$

1,316

$

404

$

64,619

2023

 

86,230

 

2,229

 

586

 

89,045

2024

 

90,316

 

2,256

 

586

 

93,158

2025

 

91,969

 

2,283

 

586

 

94,838

2026

93,721

2,311

586

96,618

Thereafter

 

25,270,745

 

585,794

 

100,661

 

25,957,200

Total undiscounted cash flows

$

25,695,880

$

596,189

$

103,409

$

26,395,478

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Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

During the three months ended March 31, 2022 and 2021, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands):

Net Investment

Ground

in Sales-type

Lease

Three Months Ended March 31, 2022

    

Leases

    

Receivables

    

Total

Cash

$

19,825

$

7,358

$

27,183

Non-cash

 

11,705

 

4,143

 

15,848

Total interest income from sales-type leases

$

31,530

$

11,501

$

43,031

    

Net Investment

    

Ground

    

in Sales-type

Lease

Three Months Ended March 31, 2021

Leases

Receivables

Total

Cash

$

11,114

$

5,370

$

16,484

Non-cash

 

6,503

 

2,987

 

9,490

Total interest income from sales-type leases

$

17,617

$

8,357

$

25,974

11

Table of Contents

Safehold Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 5—Real Estate and Real Estate-Related Intangibles

The Company’s real estate assets consist of the following ($ in thousands):

As of

    

March 31, 2022

    

December 31, 2021

Land and land improvements, at cost

$

547,739

$

547,739

Buildings and improvements, at cost

 

193,232

 

193,232

Less: accumulated depreciation

 

(29,850)

 

(28,343)

Total real estate, net

$

711,121

$

712,628

Real estate-related intangible assets, net

 

222,504

 

224,182

Total real estate, net and real estate-related intangible assets, net

$

933,625

$

936,810

Real estate-related intangible assets, net consist of the following items ($ in thousands):

    

As of March 31, 2022

Gross 

Accumulated 

Carrying 

Intangible

Amortization

Value

Above-market lease assets, net(1)

$

186,002

$

(12,903)

$

173,099

In-place lease assets, net(2)

 

65,102

 

(16,415)

 

48,687

Other intangible assets, net

 

750

 

(32)

 

718

Total

$

251,854

$

(29,350)

$

222,504

As of December 31, 2021

Gross 

Accumulated 

Carrying 

    

Intangible

    

Amortization

    

Value

Above-market lease assets, net(1)

$

186,002

$

(12,119)

$

173,883

In-place lease assets, net(2)

 

65,102

 

(15,523)

 

49,579

Other intangible assets, net

 

750

 

(30)

 

720

Total

$

251,854

$

(27,672)

$

224,182

(1)Above-market lease assets are recognized during asset acquisitions when the present value of market rate rental cash flows over the term of a lease is less than the present value of the contractual in-place rental cash flows. Above-market lease assets are amortized over the non-cancelable term of the leases.
(2)In-place lease assets are recognized during asset acquisitions and are estimated based on the value associated with the costs avoided in originating leases comparable to the acquired in-place leases as well as the value associated with lost rental revenue during the assumed lease-up period. In-place lease assets are amortized over the non-cancelable term of the leases.

The expense from the amortization of real estate-related intangible assets had the following impact on the Company’s consolidated statements of operations for the three months ended March 31, 2022 and 2021 ($ in thousands):

Income Statement

For the Three Months Ended March 31, 

Intangible asset

    

Location

    

2022

    

2021

Above-market lease assets (decrease to income)

 

Operating lease income

$

784

$

827

In-place lease assets (decrease to income)

 

Depreciation and amortization