ISTAR INC. Please read the following discussion of our consolidated operating results, financial condition and liquidity together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our discussion related to the results of operations and changes in financial condition for 2021 compared to 2020 is included in Part II, Item 7 of our 2021 Annual Report on Form 10-K . Our historical results may not be indicative of our future performance. Certain prior year amounts have been reclassified in our consolidated financial statements and the related notes to conform to the current period presentation.
Executive Overview
Merger with SAFE-In
We expect that the Merger will accelerate SAFE's market leadership in the Ground Lease industry and will make SAFE the only internally-managed, pure-play Ground Lease company in the public markets. We currently expect that the Merger and related transactions will close in the first half of 2023, however, completion of the Merger and related transactions is subject to a number of conditions, some of which are outside of our control, including, without limitation, approval of the stockholders of each of the Company and SAFE, and there can be no assurance they will close within our currently anticipated timeframe or at all. Refer to "Business - Overview" and Note 1 to the consolidated financial statements for more information on the Merger. Corporate Strategy. We continue to execute our stated corporate strategy which is to grow our Ground Lease and Ground Lease adjacent businesses and simplify our portfolio through sales of other assets. InMarch 2022 , we, through certain subsidiaries of ours and entities managed by us, sold our portfolio of net lease assets for an aggregate gross sales price of$3.07 billion (the "Net Lease Sale"). If the Merger, Spin-Off and related transactions are completed our corporate strategy will be dedicated to growing our Ground Lease and Ground Lease - adjacent businesses. COVID-19 and Other Factors. The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio, primarily because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions. In addition, other macroeconomic factors such as interest rates, inflation and the market reaction and response of government policy to inflation may impact our or SAFE's business. See the Risk Factors section of this report for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic and other factors. 22 Table of Contents Portfolio Overview Our portfolio is diversified by business, property type and geography. As ofDecember 31, 2022 , based on our book value, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands): Property/Collateral Net Real Estate Operating Land & % of Types Lease Finance Properties Development Corporate Total Total Ground Leases$ 1,302,877 $ - $ - $ - $ -$ 1,302,877 74.0 % Land and Development - - - 207,997 - 207,997 11.8 % Multifamily - 39,304 36,382 - - 75,686 4.3 % Hotel - 12,893 61,863 - - 74,756 4.2 % Retail - 37,650 371 8,784 - 46,805 2.7 % Condominium - 6,665 - 15,233 - 21,898 1.2 % Office - 15,183 - - - 15,183 0.9 % Entertainment / Leisure - - 14,262 - - 14,262 0.8 % Other Property Types - - - - 11 11 - % Total$ 1,302,877 $ 111,695 $ 112,878 $ 232,014 $ 11 $ 1,759,475 100.0 % Percentage of Total 74% 6% 6% 13% <1% 100% Net Real Estate Operating Land & % of Geographic Region Lease Finance Properties
Development Corporate Total Total Northeast$ 497,301 $ 65,726 $ 76,124 $ 133,317 $ -$ 772,468 43.9 % West 318,016 10,206 18,462 8,939 - 355,623 20.2 % Mid-Atlantic 164,317 - 4,260 89,758 - 258,335 14.7 % Southeast 165,487 29,098 - - - 194,585 11.1 % Southwest 124,973 - - - - 124,973 7.1 % Central 32,783 6,665 14,032 - - 53,480 3.0 % Various - - - - 11 11 - % Total$ 1,302,877 $ 111,695 $ 112,878 $ 232,014 $ 11 $ 1,759,475 100.0 % Net Lease Prior to the Net Lease Sale, our net lease business created stable cash flows through long-term net leases primarily to single tenants on our properties. We targeted mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combined our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance).
After the Net Lease Sale, the net lease segment includes our Ground Lease investments made primarily through SAFE and our Ground Lease adjacent businesses.
SAFE-SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive long-term risk-adjusted returns. 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 base rent increases and the opportunity to realize value from SAFE's right to regain possession of the buildings and other improvements on its land upon expiration or earlier termination of the lease 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 ofDecember 31, 2022 , we owned approximately 54.3% of SAFE's common stock outstanding, subject to voting limitations described below. 23
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We account for our investment in SAFE as an equity method investment (refer to Note 8 to the consolidated financial statements). We act as SAFE's external manager pursuant to a management agreement. The management agreement generally provides for a base management fee that ranges from a minimum of 1.0% to a maximum of 1.5% as SAFE's Total Equity (as defined in the agreement) increases. The management fee is payable in cash or in shares of SAFE common stock at SAFE's election (as determined by SAFE's independent directors). The initial term of the management agreement ends onJune 30, 2023 during which the agreement is non-terminable, except for certain cause events. After the initial term, the agreement will be automatically renewed for additional one year terms, subject to certain rights of SAFE's independent directors to terminate the agreement based on the manager's materially detrimental long-term performance or, beginning with the seventh annual renewal term after the initial term, unfair management fees that the manager declines to renegotiate. SAFE will be obligated to pay the manager a termination fee equal to three times the annual management fee paid in respect of the last completed fiscal year prior to the termination. We are party to 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. We are also party to a shareholders agreement with SAFE that:
limits our discretionary voting power to 41.9% of the outstanding voting power
? of SAFE's Common Stock until our aggregate ownership of SAFE common stock is
less than 41.9%;
? subjects us to certain standstill provisions; and
? provides us certain preemptive rights.
The complete management agreement, exclusivity agreement and shareholder's agreement between SAFE and us, as amended, are incorporated by reference as exhibits to this Annual Report on Form 10-K.
Ground Lease Plus Fund-The Company formed and manages an investment fund that targets the origination and acquisition of Ground Leases for commercial real estate projects that are in a pre-development phase (the "Ground Lease Plus Fund "). We own a 53.0% noncontrolling interest in theGround Lease Plus Fund . We do not have a controlling interest in theGround Lease Plus Fund due to the substantive participating rights of our partner and account for this investment as an equity method investment. In addition, theGround Lease Plus Fund has first look rights on qualifying pre-development projects throughDecember 2023 .Net Lease Venture -InFebruary 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. We obtained control over the Net Lease Venture when the investment period expired onJune 30, 2018 and consolidated the assets and liabilities of the venture, which had previously been accounted for as an equity method investment. The Net Lease Venture was part of the Net Lease Sale. Net Lease Venture II-InJuly 2018 , we entered into Net Lease Venture II with similar investment strategies as the Net Lease Venture. The Net Lease Venture II had a right of first offer on all new net lease investments (excluding Ground Leases) originated by us. We had an equity interest in the venture of approximately 51.9%, which was accounted for as an equity method investment, and were responsible for managing the venture in exchange for a management fee and incentive fee. The Net Lease Venture II was part of the Net Lease Sale. 24
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As ofDecember 31, 2022 , our net lease portfolio consisted of our equity method investments in SAFE and theGround Lease Plus Fund . The table below provides certain statistics for our net lease portfolio. Ground Lease SAFE Plus Fund Ownership % 54.3 % 53.0 % Book value (millions)(1)$ 1,237 $ 66 % Leased 100.0 % 100.0 % Weighted average lease term (years)(2) 91.9 104.3 Weighted average yield(3) 4.2 % 5.7 %
(1) Represents the book value of our unconsolidated equity method investments.
Weighted average lease term is calculated using GAAP rent and the initial (2) maturity and does not include extension options. SAFE includes its pro rata
share of its unconsolidated equity method investments.
Yield for our investment in SAFE (refer to Note 8 to the consolidatedfinancial statements) is calculated over the trailing twelve months and (3) excludes dilution gains, the loss realized on our dividend of SAFE shares of
common stock to our shareholders, management fees earned by us and a gain
recognized by SAFE in connection with the sale of a Ground Lease.
Portfolio Activity- InMarch 2022 , we, through certain subsidiaries of and entities managed by us, closed on a definitive purchase and sale agreement to sell a portfolio of net lease properties owned and managed by such subsidiaries and entities to a third party for an aggregate gross sales price of approximately$3.07 billion and recognized a gain of$663.7 . We refer to this transaction as the "Net Lease Sale" in this report. The Net Lease Sale is consistent with the Company's stated corporate strategy which is to grow its Ground Lease and Ground Lease adjacent businesses (refer to Note 8) and simplify its portfolio through sales of other assets. The portfolio sold consisted of office, entertainment and industrial properties located inthe United States comprising approximately 18.3 million square feet. It included assets wholly-owned by the Company and assets owned by two joint ventures managed by the Company and in which it owned 51.9% interests. At the time of closing, the portfolio was encumbered by an aggregate of$702.0 million of mortgage indebtedness, including indebtedness from equity method investments, which was repaid with proceeds from the sale. After repayment of the mortgage indebtedness and prepayment penalties, a senior term loan secured by certain of the assets (refer to Note 10), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, the Company retained net cash proceeds of$1.2 billion from the transaction. In addition, as part of the transaction, the buyer sold three of the properties to SAFE for$122.0 million and entered into three Ground Leases with SAFE. Two net lease properties were sold to different third parties in the first quarter of 2022 and the Company's net lease assets associated with its Ground Lease businesses were not included in the sale. The Company received net cash proceeds of$33.9 million from the sale of the two net lease properties and recognized
a gain of$23.9 million . Real Estate Finance Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. Our real estate finance portfolio consists of leasehold loans to Ground Lease tenants, including tenants of SAFE, senior mortgage loans that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets and corporate/partnership loans, which represent mezzanine or subordinated loans to entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. Our real estate finance portfolio includes Ground Leases, loans on stabilized and transitional properties and ground-up construction projects. In addition, we also own loans through equity method investments and have preferred equity investments and debt securities classified as other lending investments. 25
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Our real estate finance portfolio included the following ($ in thousands):
As of December 31,
2022 2021
Total % of Total Total % of Total
Performing loans:
Senior mortgages $ 6,756 6.2 % $ 139,968 32.6 %
Corporate/partnership loans - - % 618 0.1 %
Subordinate mortgages 13,331 12.3 % 12,457 2.9 %
Subtotal 20,087 18.5 % 153,043 35.6 %
Non-performing loans:
Senior mortgages 29,493 27.2 % 59,640 13.9 %
Subtotal 29,493 27.2 % 59,640 13.9 %Total carrying value of loans 49,580 45.7 % 212,683 49.5 % Other lending investments - - % 124,930 29.1 % Total carrying value of loans and other lending investments 49,580 45.7 % 337,613 78.6 % Loans receivable held for sale 37,650 34.7 % 43,215 10.1 % Our share of loans held through equity method investments 21,685 20.0 % 48,862 11.4 % Specific Allowance (396) (0.4) % (576) (0.1) % Total gross carrying value of real estate finance portfolio$ 108,519 100.0 %
Portfolio Activity-During the year endedDecember 31, 2022 , the Company received net repayments and proceeds from sales of$310.0 million (including the receipt of previously capitalized deferred interest) from its real estate finance portfolio. Summary of Interest Rate Characteristics-Our loans receivable and other lending investments, excluding loans held through equity method investments, had the following interest rate characteristics ($ in thousands): As of December 31, 2022 2021 Weighted Weighted Average Average Carrying % Accrual Carrying % Accrual Value of Total Rate Value of Total Rate Fixed-rate loans and other lending investments$ 13,331 26.9 % 6.8 %$ 140,443 41.6 % 7.2 % Variable-rate loans(1) 6,756 13.6 % 9.6 % 137,530 40.7 % 5.1 % Non-performing loans(2) 29,493 59.5 % N/A 59,640 17.7 % N/A Total carrying value 49,580 100.0 % 337,613 100.0 % Allowance for loan losses (925)
(4,769)
Total loans receivable and other lending investments, net$ 48,655
As of
respectively.
(2) The non-performing loan as of
receivable held for sale as of December 31, 2022 .
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Summary of Maturities-As of
Number of
Loans Carrying
Year of Maturity(1) Maturing Value % of Total
2023 1 $ 6,756 13.6 %
2024 - - - %
2025 - - - %
2026 - - - %
2027 - - - %
2028 and thereafter (2) 1 13,331 26.9 %
Total performing loans 2 $ 20,087 40.5 %
Non-performing loans 1 29,493 59.5 %
Total carrying value 3 $ 49,580 100.0 %
Allowance for loan losses (925)
Total loans receivable, net $ 48,655 (1) Year of maturity for our performing loans represents the initial maturity and
does not include any extension options.
(2) The maturity for this loan is
The tables below summarize our loan portfolio and the allowances for loan losses associated with our loan portfolio ($ in thousands):
December 31, 2022
Allowance for
Gross Allowance Loan Losses as
Number Book for Loan Net Book % of a % of Gross
of Loans Value Losses Value Total Book Value
Performing loans 2 $ 20,087 $ (529) $ 19,558 40.2% 2.6%
Non-performing loans 1 29,493 (396) 29,097 59.8% 1.3%
Total 3 $ 49,580 $ (925) $ 48,655 100.0% 1.9%
December 31, 2021
Allowance for
Gross Allowance Loan Losses as
Number Book for Loan Net Book % of a % of Gross
of Loans Value Losses Value Total Book Value
Performing loans 8 $ 153,043 $ (1,888) $ 151,155 45.5% 1.2%
Non-performing loans 1 59,640 (576) 59,064 17.7% 1.0%
Other lending investments 2 124,930 (2,305) 122,625 36.8% 1.8%
Total 11 $ 337,613 $ (4,769) $ 332,844 100.0% 1.4%
Performing Loans-The table below summarizes our performing loans, excluding
loans held through equity method investments, gross of allowances ($in
thousands):
December 31, 2022 December 31, 2021
Senior mortgages $ 6,756 $ 139,968
Corporate/Partnership loans - 618
Subordinate mortgages 13,331 12,457
Total $ 20,087 $ 153,043
Non-Performing Loans-We designate loans as non-performing at such time as: (1) interest payments become 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 ofDecember 31, 2022 , we had 27 Table of Contents
two non-performing loans (one of which is classified as held for sale as ofDecember 31, 2022 ) which had an aggregate carrying value of$66.7 million . As ofDecember 31, 2021 , we had one non-performing loan which had a carrying value of$59.1 million . We expect that our level of non-performing loans will fluctuate from period to period. Allowance for Loan Losses-The allowance for loan losses was$0.9 million as ofDecember 31, 2022 , or 1.9% of total loans and other lending investments, compared to$4.8 million , or 1.4%, as ofDecember 31, 2021 . We expect that our level of Expected Losses (refer to Note 3 to the consolidated financial statements) will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and Expected Losses requires the use of significant judgment. We currently believe there is adequate collateral and allowances to support the carrying values of the loans and other lending investments. The allowance for loan losses includes an asset-specific component and a formula-based component. An asset-specific allowance 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 ofDecember 31, 2022 and 2021, asset-specific allowances were$0.4 million and$0.6 million , respectively.
We estimate the formula-based component based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market. In addition, we use third-party market data that includes forecasted economic trends, including unemployment rates.
The Expected Loss (refer to Note 3 to the consolidated financial statements) general allowance decreased to$0.5 million , or 2.6% of performing loans, as ofDecember 31, 2022 , compared to$4.2 million , or 1.5% of performing loans and other lending investments, as ofDecember 31, 2021 . The decrease was due primarily to the repayment of loans during the year endedDecember 31, 2022 .
Operating Properties
Our operating properties represent a pool of assets across a broad range of geographies and property types including hotel, multifamily, retail and entertainment/leisure properties. As ofDecember 31, 2022 , the book value of our operating property portfolio, including the carrying value of our equity method investments, totaled$112.9 million . Portfolio Activity-During the year endedDecember 31, 2022 , we sold a legacy commercial operating property with a carrying value of$14.1 million and recognized gains of$22.5 million and sold residential operating properties with a carrying value of$0.3 million and recognized gains of$2.6 million in "Income from sales of real estate" in our consolidated statements of operations.
Land and Development
As of
As of December 31,
2022 2021
Land and development, net $ 232,014 $ 286,810
Other investments - 1,096
Total $ 232,014 $ 287,906
Portfolio Activity-During the year ended December 31, 2022 , we sold land parcels
and residential lots and units and recognized $61.8 million in "Land development
revenue" and $63.4 million in "Land development cost of sales" in our
consolidated statement of operations.
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The following table presents a land and development portfolio rollforward for
the year ended
Land and Development Portfolio Rollforward
(in millions)
Asbury Park Magnolia All Total
Waterfront Green Others Segment
Beginning balance(1) $ 137.8 $ 95.8 $ 53.2 $ 286.8
Asset sales(2) (41.0) (18.9) (0.5) (60.4)
Capital expenditures 5.7 14.9 - 20.6
Other (0.1) (2.1) (12.8) (15.0)
Ending balance $ 102.4 $ 89.7 $ 39.9 $ 232.0 (1) As of
investments.
(2) Represents gross book value of the assets sold, rather than proceeds
received.
The following is a description of some of our major land and development projects that we are holding for further development. There can be no assurance that we will not change our current strategy for any of the projects described below: Asbury Park Waterfront iStar owns 30 acres of oceanfront property in theAsbury Park waterfront redevelopment area inAsbury Park, N.J. iStar serves as the master developer and its land holdings represent approximately 70% of the undeveloped land along the waterfront. Over the past several years, iStar has strategically developed a limited number of residential and commercial projects to re-establish the local housing market and drive momentum for future growth. The existing redeveloper agreement with the city permits up to approximately 2,500 additional units, comprised of for-sale residential homes, hotel keys and multi-family apartments. Future projects are positioned to be developed by iStar or in conjunction with joint venture partners. These individual land parcels could also be sold to third party developers.Asbury Ocean Club is a 16-story mixed-use project comprised of 130 residential condominium units, a 54-unit boutique hotel, 24,000 square feet of retail space, a 15,000 square foot spa, 26,000 square feet of outdoor amenity space and 410 structured parking spaces, located at1101 Ocean Avenue inAsbury Park, New Jersey .
Magnolia Green is an approximately 1,900 acre multi-generational master-planned residential community that is entitled for 3,550 single and multifamily dwelling units and approximately 193 acres of land for commercial development. The community is located 19 miles southwest ofRichmond, Virginia and offers distinct phases designed for people in different life stages, from first home buyers to empty nesters in single family and townhomes built by the area's top homebuilders. The project is anchored by theMagnolia Green Golf Club , a semi-private 18-hole Nicklaus Design championship golf course with full-service clubhouse and driving range. There are also numerous community amenities, including theAquatic Center , featuring multiple pools and a snack bar, Arbor Walk, featuring a junior Olympic competition pool, water slide and sports courts, the Tennis Center, featuring tennis and pickleball courts and a pro shop, and miles of paved trails. 29
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Results of Operations for the Year EndedDecember 31, 2022 compared to the Year EndedDecember 31, 2021 For the Year Ended December 31, 2022 2021 $ Change (in thousands) Operating lease income $ 12,859$ 16,824 $ (3,965) Interest income 12,415 31,229 (18,814) Interest income from sales-type leases 869 1,215 (346) Other income 70,155 70,259 (104) Land development revenue 61,753
189,103 (127,350)
Total revenue 158,051 308,630 (150,579)
Interest expense 98,051 115,400 (17,349)Real estate expense 51,614 45,994 5,620 Land development cost of sales 63,441 171,961 (108,520) Depreciation and amortization 5,470 7,072 (1,602) General and administrative 21,271 131,703 (110,432) Provision for (recovery of) loan losses 44,998
(8,085) 53,083
Impairment of assets 15,109 678 14,431
Other expense 8,913 8,114 799
Total costs and expenses 308,867 472,837 (163,970)Income from sales of real estate 26,629 26,319 310 Loss on early extinguishment of debt, net (131,200) - (131,200) Earnings from equity method investments 58,680 154,344 (95,664) Income tax benefit (expense) (567) 118 (685) Net income from discontinued operations 797,688
121,452 676,236
Net income (loss) $ 600,414 $ 138,026 $ 462,388
Revenue-Operating lease income, which primarily includes income from commercial
operating properties, decreased to $12.9 million in 2022 from $16.8 million in
2021. The decrease was primarily due to the sale of assets, partially offset by
an increase in rent of $1.2 million at certain of our properties.
Interest income decreased to $12.4 million in 2022 from $31.2 million in 2021.
The decrease in interest income was due primarily to a decrease in the average
balance of our performing loans and other lending investments due to loan sales
and the repayment of loans during 2022.
Interest income from sales-type leases decreased to $0.9 million in 2022 from
$1.2 million for the year ended December 31, 2021 and resulted from the sale of
Ground Leases in 2022 (refer to Note 5 to the consolidated financial
statements).
Other income decreased to $70.2 million in 2022 from $70.3 million in 2021.
Other income in 2022 consisted primarily of income from our hotel properties,
management fees, gains on the sale of available-for-sale securities, other
ancillary income from our land and development projects and operating properties
and interest income earned on our cash balances. Other income in 2021 consisted
primarily of mark-to-market gains on an equity investment, income from our hotel
properties, management fees from SAFE, lease termination fees and other
ancillary income from our land and development projects and loan portfolio.
Land development revenue and cost of sales- In 2022, we sold residential lots
and units and recognized land development revenue of $61.8 million which had
associated cost of sales of $63.4 million . In 2021, we sold residential lots and
units and recognized land development revenue of $189.1 million which had
associated cost of sales of $172.0 million . The decrease in land development
revenue in 2022 was due primarily to five bulk parcel sales in 2021 which
contributed $96.9 million to our revenues for the period and a decrease of $30.4
million in revenues from our Naples Reserve (fully sold out in 2022), Magnolia
Green and Asbury Park properties.
Costs and expenses-Interest expense decreased to $98.1 million in 2022 from
$115.4 million in 2021. The decrease in 2022 was primarily due to a decrease in
the average balance of our outstanding debt as we repaid our Senior Term Loan
and certain unsecured notes in 2022 (refer to Note 10 to the consolidated
financial statements). The balance of
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our average outstanding debt was
Real estate expense increased to$51.6 million in 2022 from$46.0 million in 2021. The increase was primarily due to an increase in expenses at certain of our hotel and retail operating properties that have increased operations from the prior year due to COVID-19. Depreciation and amortization was$5.5 million in 2022 and$7.1 million in 2021 and relates primarily to our operating properties portfolio. The decrease in 2022 was due primarily to a$1.3 million decrease in expense at one of our properties due to a lease termination in 2021. General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. General and administrative expense decreased to$21.3 million in 2022 from$131.7 million in 2021. The decrease in 2022 was due primarily to a$111.0 million decrease in performance-based compensation. Our primary forms of performance-based compensation are our iPIP Plans and our annual bonus pool (refer to Note 14 to the consolidated financial statements for more information on the iPIP Plans). In addition, illustrative examples of our iPIP Plans may be found in our 2021 definitive proxy statement which is publicly available on theSEC's website. The provision for loan losses was$45.0 million in 2022 as compared to a recovery of loan losses of$8.1 million in 2021. The provision for loan losses in 2022 resulted primarily from a$22.2 million provision on our held-to-maturity security, which was repaid inDecember 2022 and a$23.8 million provision on a loan prior to it being classified as held for sale. The recovery of loan losses for the year endedDecember 31, 2021 resulted from the reversal of Expected Loss (refer to Note 3 to the consolidated financial statements) allowances on loans that repaid in full during the year endedDecember 31, 2021 and from an improving macroeconomic forecast on commercial real estate markets sinceDecember 31, 2020 . During the year endedDecember 31, 2022 , we recognized an impairment of$12.7 million on a land property, a$1.8 million impairment on an operating property and a$0.6 million impairment on residential homes. The impairments were based on the expected cash flows to be received. During the year endedDecember 31, 2021 , we recorded an aggregate impairment of$0.7 million in connection with the sale of residential condominiums. Other expense increased to$8.9 million in 2022 from$8.1 million in 2021. The increase in 2022 was due primarily to legal and consulting costs in connection with our anticipated Merger with SAFE, which was partially offset by fees incurred from debt transactions in 2021. Income from sales of real estate-Income from sales of real estate increased to$26.6 million in 2022 from$26.3 million in 2021. During the year endedDecember 31, 2022 , we recorded$25.2 million income from sales of real estate from the sale of an operating property and$1.4 million from the sale of Ground Leases. During the year endedDecember 31, 2021 , we recorded$26.3 million of income from sales of real estate from the sale of an operating property and residential condominiums. Loss on early extinguishment of debt, net-During the year endedDecember 31, 2022 , we incurred losses on early extinguishment of debt of$131.2 million resulting primarily from the redemption of our unsecured convertible notes (refer to Note 3 and Note 10 to the consolidated financial statements) and the repayment of our senior term loan in connection with ourNet Lease Sale . Earnings from equity method investments-Earnings from equity method investments decreased to$58.7 million in 2022 from$154.3 million in 2021. In 2022, we recognized$38.9 million of income from our equity method investment in SAFE (which included a realized loss of$49.3 million on our distribution of SAFE shares of common stock to our shareholders at a fair value below our carrying value),$11.5 million primarily from the sale of a multifamily property at one of our venturers,$5.0 million primarily from the settlement of our interest in a venture and$3.3 million of net aggregate income from our remaining equity method investments. In 2021, we recognized$108.4 million of income from our equity method investment in SAFE (which included a dilution gain of$60.7 million - refer to Note 8 to the consolidated financial statements) and$45.9 million of net aggregate income from our remaining equity method investments, which included$18.6 million of income and gains from one equity method investment and$17.3 million from another of our equity method investments resulting from our share of income from land sales at the venture. 31 Table of Contents
Income tax expense-An income tax expense of
Net income from discontinued operations-InMarch 2022 , we closed on the sale of the majority of our net lease properties owned directly and through ventures. Our net lease assets were comprised of office, entertainment and industrial properties located inthe United States . Our net lease assets associated with our Ground Lease businesses were not included in the sale. Net income from discontinued operations represents the operating results from the net lease assets that are not associated with our Ground Lease businesses (refer to Note 3 to the consolidated financial statements -Net Lease Sale and Discontinued Operations).
Adjusted Earnings
In 2019, 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 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. Adjusted earnings is a non-GAAP metric management uses to
assess our execution of this strategy and the performance of our operations.
Adjusted earnings is used internally as a supplemental performance measure
adjusting for certain items to give management a view of income more directly
derived from operating activities in the period in which they occur. Adjusted
earnings is calculated as net income (loss) allocable to common shareholders,
prior to the effect of depreciation and amortization, including our
proportionate share of 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 loss on early extinguishment of debt and the liquidation preference recorded
as a premium above book value on the redemption of preferred stock ("Adjusted
Earnings").
Adjusted Earnings should be examined in conjunction with net income (loss) as
shown in our consolidated statements of operations. Adjusted Earnings should not
be considered as an alternative to net income (loss) (determined in accordance
with generally accepted accounting principles in the United States of America
("GAAP")), or to cash flows from operating activities (determined in accordance
with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative
of funds available to fund our cash needs or available for distribution to
shareholders. Rather, Adjusted Earnings 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. It should be noted that our manner of calculating Adjusted Earnings
may differ from the calculations of similarly-titled measures by other
companies.
For the Year Ended December 31,
2022 2021
(in thousands)
Adjusted Earnings
Net income (loss) allocable to common shareholders $ 397,792 $ 108,985
Add: Depreciation and amortization 15,359 66,629
Add: Stock-based compensation expense (27,664) 69,261
Add: Non-cash portion of loss on early extinguishment of debt
136,464 -
Adjusted earnings allocable to common shareholders $ 521,951
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had unrestricted cash of$1.4 billion . Our primary cash uses over the next 12 months are expected to be repayment of our debt obligations (refer to Note 1 and Note 10 to the consolidated financial statements), redemption of our preferred stock (refer to Note 1 and Note 13 to the consolidated financial statements), funding of investments in our Ground Lease and Ground Lease adjacent businesses, capital expenditures on legacy assets, distributions to shareholders through dividends and funding ongoing business operations, including operating lease payments (refer to Note 11 to the consolidated financial statements). The amount we actually invest will depend on the closing of the Merger with SAFE, asset sales, the continuing impact of the COVID-19 pandemic, inflation, interest rate increases, market volatility and other macroeconomic factors on our business. 32
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Beginning inApril 2022 and continuing throughSeptember 2022 , we completed separate, privately-negotiated transactions with holders of our 3.125% convertible notes in which the noteholders exchanged their convertible notes with us for newly issued shares of our common stock and cash (refer to Note 10 to the consolidated financial statements). We also repaid$0.5 million principal amount of our 3.125% convertible notes for cash at maturity. The Merger Agreement provides that we will cash out all of our outstanding preferred stock in the Merger at the liquidation preference per share plus accrued and unpaid dividends and contains a covenant that we retire all of our remaining senior unsecured notes in connection with the Merger. We had approximately$146.6 million of maximum unfunded commitments associated with our investments as ofDecember 31, 2022 , 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 approximately$36.1 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. We also have amounts due under our liability-classified and equity-classified iPIP Plans. We currently estimate the total amount due under our iPIP Plans to be$105 million , assuming SAFE is valued at a price of$32.11 per share and our other assets perform with current underwriting expectations. Of this amount,$60 million has been accrued in our financial statements (refer to Note 14 to the consolidated financial statements). Distributions on our iPIP Plans are expected to be 50% in cash and 50% in shares of our common stock; provided, however, that (a) the cash portion will be increased if we do not have sufficient shares available under shareholder approved equity plans; and (b) if the principal remaining material asset in a plan is unsold SAFE shares, we may elect to distribute SAFE shares in lieu of cash and our common stock. Additional information on our iPIP Plans can be found in Note 14 to the consolidated financial statements and our 2021 Proxy Statement, both of which are available on our website. We expect that we will be able to meet our liquidity requirements over the next 12 months and for the reasonably foreseeable future. Our capital sources to meet such cash requirements are expected to include cash on hand, income from our portfolio, loan repayments from borrowers, proceeds from asset sales and, additionally in connection with the Merger, proceeds from financings. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions. The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the years endedDecember 31, 2022 and 2021 ($ in thousands):
For the Years Ended December 31,
2022 2021 Change
Cash flows provided by (used in) operating
activities $ 47,667 $ (20,327) $ 67,994
Cash flows provided by investing activities 2,787,812 514,016 2,273,796
Cash flows used in financing activities (1,780,704) (250,135) (1,530,569)
The increase in cash flows provided by operating activities during 2022 was due primarily to proceeds received from the sale of a loan receivable held for sale and an increase in distributions of earnings from other investments in 2022, which was partially offset by iPIP Plan payments and a decrease in the amount of deferred interest on loans collected in 2022 versus 2021. The increases in cash flows provided by investing activities during 2022 was due primarily to the Net Lease Sale (refer to Note 3 to the consolidated financial statements). The increase in cash flows used in financing activities during 2022 was due primarily to the Net Lease Sale (refer to Note 3 to the consolidated financial statements) and settlements and repayments of our unsecured notes. Unsecured Notes- As ofDecember 31, 2022 , the Company has senior unsecured notes outstanding with varying fixed-rates and maturities ranging fromOctober 2024 toFebruary 2026 . The Company's senior unsecured notes are interest only, are generally redeemable at the option of the Company and contain certain financial covenants (see below). 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 1.3x and a covenant restricting certain incurrences of debt based on a fixed charge 33
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coverage ratio. 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.
Derivatives-Our use of derivative financial instruments, if necessary, has primarily been 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. See Item 8-"Financial Statements and Supplemental Data-Note 13" for further details.
Unfunded Commitments-We generally fund 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. We refer to these arrangements as Performance-Based Commitments. As ofDecember 31, 2022 , the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments are as follows (in thousands):
Other
Investments
Performance-Based Commitments $ 146,560
Stock Repurchase Program-We may repurchase shares in negotiated transactions or
open market transactions, including through one or more trading plans. We did
not repurchase any shares of our common stock during the year ended December 31,
2022 . During the year ended December 31, 2021 , we repurchased 5.5 million shares
of our outstanding common stock for $122.4 million , for an average cost of
$22.38 per share. During the year ended December 31, 2020 , we repurchased
4.2 million shares of our outstanding common stock for $48.4 million , for an
average cost of $11.48 per share. We generally maintain continuing authorization
to repurchase up to $50.0 million in shares of our common stock. As of
December 31, 2022 , we had remaining authorization to repurchase up to $50.0
million of our common stock under our stock repurchase program.
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.
During 2022, management reviewed and evaluated these critical accounting
estimates and believes they are appropriate. Our significant accounting policies
are described in Item 8-"Financial Statements and Supplemental Data-Note 3." The
following is a summary of accounting policies that require more significant
management estimates and judgments:
Allowance for loan losses and losses on net investment in leases-We perform a
quarterly comprehensive analysis of our loan and sales-type lease portfolios and
assign risk ratings that incorporate management's current judgments about credit
quality based on all known and relevant internal and external factors that may
affect collectability. We consider, among other things, payment status, lien
position, borrower 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 sales-type
leases being risk rated, with ratings ranging from "1" to "5" with "1"
representing the lowest risk of loss and "5" representing the highest risk of
loss.
We estimate our expected loss ("Expected Loss") on our loans (including unfunded
loan commitments), held-to-maturity debt securities and net investment in leases
based on relevant information including historical realized loss rates,
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current market conditions and reasonable and supportable forecasts that affect the collectability of our investments. The estimate of our Expected Loss requires significant judgment and we analyze our loan portfolio based upon our 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 to the consolidated financial statements). For our loans, held-to-maturity debt securities, construction loans, net investment in leases and financings that resulted from the acquisition of properties that did not qualify as sale leaseback transactions, we analyzed our historical realized loss experience to estimate our Expected Loss. We adjusted our Expected Loss through the use of third-party market data that provided current and future economic conditions that may impact the performance of the commercial real estate assets securing our investments. We consider a loan or sales-type lease to be non-performing and place it on non-accrual status at such time as: (1) interest payments become 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 all amounts contractually owed will be received. We will record a specific allowance on a non-performing loan or sales-type lease if we determine that the collateral fair value less costs to sell is less than the carrying value of the collateral-dependent asset. The specific allowance is increased (decreased) through "Provision for (recovery of) loan losses" or "Provision for losses on net investment in leases" in our consolidated statements of operations and is decreased by charge-offs. During delinquency and the foreclosure process, there are typically numerous points of negotiation with the borrower or tenant as we work toward a settlement or other alternative resolution, which can impact the potential for repayment or receipt of collateral. Our policy is to charge off a loan when we determine, 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 we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure or deed-in-lieu, or when we have otherwise ceased significant collection efforts. We consider circumstances such as the foregoing to be indicators that the final steps in the loan collection process have occurred and that a loan is uncollectible. At this point, a loss is confirmed and the loan and related allowance will be charged off.
The provision for (recovery of) loan losses for the years ended
Impairment or disposal of long-lived assets- We periodically review real estate to be held for use and land and development assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The asset's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Such estimate of cash flows considers factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate and land and development assets are recorded in "Impairment of assets" in our consolidated statements of operations. Estimating future cash flows and fair values is highly subjective and such estimates could differ materially from actual results. Real estate assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less costs to sell and are included in "Real estate available and held for sale" on our consolidated balance sheets. The difference between the estimated fair value less costs to sell and the carrying value will be recorded as an impairment charge. Impairment for real estate assets are included in "Impairment of assets" in our consolidated statements of operations. Once the asset is classified as held for sale, depreciation expense is no longer recorded. During the year endedDecember 31, 2022 , we recorded aggregate impairments on real estate and land and development assets of$15.1 million . During the year endedDecember 31, 2021 , we recorded an impairment of$0.7 million in connection with the sale of residential condominiums. During the year endedDecember 31, 2020 , we recorded an aggregate impairment of$5.8 million on a real estate asset held for sale and land and development assets. 35
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