ISTAR INC. 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 Annual Report on Form 10-K, 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 toiStar 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 Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance.
Executive Overview
Our portfolio is well diversified by business, property type and geography. Our portfolio includes investments in the entertainment/leisure (22.6% of gross book value) and hotel (5.0% of gross book value) sectors, both of which have been particularly stressed by the COVID-19 pandemic. We may experience disruptions and collections of rent and interest payments until more normalized business conditions resume. In 2020, we increased our general allowance for loan losses reflecting the uncertainty related to the COVID-19 pandemic. While we have seen conditions gradually improve, there can be no assurance that we will not increase our allowances in the future. The COVID-19 pandemic adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio in 2020 and the first quarter of 2021, primarily because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions. These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes. At this time, however, we cannot predict with certainty the full extent of the impacts of the COVID-19 pandemic on our or SAFE's business. In addition, other macroeconomic factors such as 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 our Annual Report on Form 10-K for additional discussion of certain potential risks to our business arising from the COVID-19 pandemic
and
other factors.
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Portfolio Overview
As of
Property/Collateral Net Real Estate Operating Land & % of Types Lease Finance Properties Development Corporate Total Total Ground Leases$ 1,122,334 $ - $ - $ - $ -$ 1,122,334 24.2 % Entertainment / Leisure 1,031,610 - 16,204 - - 1,047,814 22.6 % Office 817,852 52,162 - - - 870,014 18.7 % Industrial / Lab 414,938 - 96,796 - 75,402 587,136 12.6 % Land and Development - 11,893 - 318,192 - 330,085 7.1 % Hotel - 147,723 83,552 - - 231,275 5.0 % Multifamily - 118,933 59,357 - - 178,290 3.8 % Condominium - 41,859 15,862 79,650 - 137,371 3.0 % Retail - 59,521 34,799 8,436 - 102,756 2.2 % Other Property Types - 28,075 - - 11,265 39,340 0.8 % Total$ 3,386,734 $ 460,166 $ 306,570 $ 406,278 $ 86,667 $ 4,646,415 100.0 % Percentage of Total 72% 10% 7% 9% 2% 100% Net Real Estate Operating Land & % of Geographic Region Lease Finance Properties
Development Corporate Total Total Northeast$ 944,323 $ 151,256 $ 93,503 $ 235,632 $ -$ 1,424,714 30.7 % West 509,989 138,551 56,533 30,971 - 736,044 15.8 % Mid-Atlantic 568,252 - 5,941 104,295 - 678,488 14.6 % Southwest 489,287 - 96,796 2,200 - 588,283 12.7 % Central 429,563 47,418 45,440 31,500 - 553,921 11.9 % Southeast 435,827 29,264 8,357 1,680 - 475,128 10.2 % Various 9,493 93,677 - - 86,667 189,837 4.1 % Total$ 3,386,734 $ 460,166 $ 306,570 $ 406,278 $ 86,667 $ 4,646,415 100.0 %
For net lease, operating properties and land and development, gross book
value is defined as the basis assigned to physical real estate property (land
and building), net of any impairments taken after acquisition date and net of
basis reductions associated with unit/parcel sales, plus our basis in equity
method investments, plus lease related intangibles, capitalized leasing costs
and excluding accumulated depreciation and amortization, and for equity (1) method investments, excluding the effect of our share of accumulated
depreciation and amortization. For real estate finance, gross book value is
defined as principal funded including any deferred capitalized interest
receivable, plus protective advances, exit fee receivables and any
unamortized origination/modification costs, plus our basis in equity method
investments, less purchase discounts and specific allowances. This amount is
not reduced for CECL allowances. Real estate finance includes our
pro rata share of loans held within an equity method investment.
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 ofJune 30, 2021 , the gross book value of our consolidated net lease portfolio totaled$2.3 billion . Our net lease portfolio, including the carrying value of our equity method investments in SAFE and Net Lease Venture II gross of accumulated depreciation, totaled$3.4 billion . Subsequent toJune 30, 2021 , we announced that we intend to explore market interest for possible sales of our net lease assets. There can be no assurance as to whether we will sell 43
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some, all or none of our net lease assets, or as to the timing or terms of any
sales. The table below provides certain statistics for our net lease portfolio.
Total
Wholly- Net Lease Consolidated Net Lease
Owned Venture I Real Estate(1) Venture II SAFE
Ownership % 100.0 % 51.9 % - 51.9 % 66.0 %Gross book value (millions)(2)$ 1,367 $ 908 $
2,275
% Leased 98.9 % 100.0 % 99.3 % 100.0 % 100.0 % Square footage (thousands) 9,671 5,749 15,420 3,302 N/A Weighted average lease term (years)(3) 19.5 15.8
18.0 12.6 89.1
Weighted average yield(4) 7.4 % 8.1 % 7.7 % 9.1 % 4.4 %
(1) We own 51.9% of the Net Lease Venture which is consolidated in our GAAP
financial statements (refer to Note 4).
investments (refer to Note 7). SAFE includes its pro rata share of its
unconsolidated equity method investments.
Weighted average lease term is calculated using GAAP rent and the initial (3) maturity and does not include extension options. SAFE includes its pro rata
share of its unconsolidated equity method investments.
(4) Yield for SAFE is calculated over the trailing twelve months and excludes
management fees earned by us.
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 (refer to Note 4 in our consolidated financial statements for more information on ourNet Lease Venture ). The Net Lease Venture's investment period expired onJune 30, 2018 and the remaining term of the venture extends throughFebruary 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 onJune 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-InJuly 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. InJune 2021 , Net Lease Venture II's investment period was extended toDecember 31, 2021 . 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 ofJune 30, 2021 , we owned approximately 66.0% 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
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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 ofJune 30, 2021 , the gross book value of our consolidated real estate finance portfolio, including securities and other lending investments, totaled$461.5 million , gross of general loan loss allowances. The portfolio, excluding securities and other lending investments, included$235.4 million of performing loans with a weighted average maturity of 2.3 years.
The tables below summarize our loans and the allowance for loan losses associated with our loans ($ in thousands):
June 30, 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 12 $ 235,448 $ (3,258) $ 232,190 51.0% 1.4%
Non-performing loans 1 56,610 (590) 56,020 12.3% 1.0%
Other lending investments 3 170,037 (3,287) 166,750 36.7% 1.9%
Total 16 $ 462,095 $ (7,135) $ 454,960 100.0% 1.5%
December 31, 2020
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 16 $ 529,657 $ (8,184) $ 521,473 71.2% 1.5%
Non-performing loans 1 53,305 (742) 52,563 7.2% 1.4%
Other lending investments 3 162,538 (4,244) 158,294 21.6% 2.6%
Total 20 $ 745,500 $ (13,170) $ 732,330 100.0% 1.8%
Performing Loans-The table below summarizes our performing loans exclusive of
allowances ($ in thousands):
June 30, 2021 December 31, 2020
Senior mortgages $ 184,683 $ 432,350
Corporate/Partnership loans 38,723 85,667
Subordinate mortgages 12,042 11,640
Total $ 235,448 $ 529,657
Weighted average LTV 63% 57%
Yield - year to date(1) 8.0% 8.0%
(1) Yields presented are for the six months ended
represent the yields on performing loans and other lending investments.
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 ofJune 30, 2021 andDecember 31, 2020 , we had one non-performing loan with a carrying value of$56.0 million and$52.6 million , respectively. We expect that our level of non-performing loans will fluctuate from period to period. 45
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Allowance for Loan Losses-The allowance for loan losses was$7.1 million as ofJune 30, 2021 , or 1.5% of total loans and other lending investments, compared to$13.2 million , or 1.8%, as ofDecember 31, 2020 . We expect that our level of allowance 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 allowances 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 ofJune 30, 2021 andDecember 31, 2020 , asset-specific allowances were$0.6 million and$0.7 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 general allowance decreased to$6.5 million , or 1.6%, of performing loans and other lending investments as ofJune 30, 2021 , compared to$12.4 million , or 1.8%, of performing loans and other lending investments as ofDecember 31, 2020 . The decrease was due primarily to the repayment of loans during the six months endedJune 30, 2021 and an improving macroeconomic forecast on commercial real estate markets sinceDecember 31, 2020 .
Operating Properties
Our operating properties represent a pool of assets across a broad range of geographies and property types including industrial, hotel, multifamily, retail, condominium and entertainment/leisure properties. As ofJune 30, 2021 , the gross book value of our operating property portfolio, including the carrying value of our equity method investments gross of accumulated depreciation, totaled$306.6 million . Land and Development
The following table presents a land and development portfolio rollforward for
the six months ended
Land and Development Portfolio Rollforward
(in millions)
Asbury Ocean
Club and
Asbury Park Magnolia All Total
Waterfront Green Others Segment
Beginning balance(1) $ 201.1 $ 101.3 $ 128.3 $ 430.7
Asset sales(2) (40.2) (11.4) (5.2) (56.8)
Capital expenditures - 9.4 - 9.4
Other - (1.4) (0.2) (1.6)
Ending balance(1) $ 160.9 $ 97.9 $ 122.9 $ 381.7 (1) As of
million and
(2) Represents gross book value of the assets sold, rather than proceeds
received.
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Results of Operations for the Three Months Ended
For the Three Months Ended
June 30,
2021 2020 $ Change
(in thousands)
Operating lease income $ 45,544 $ 46,812 $ (1,268)
Interest income 8,973 15,439 (6,466)Interest income from sales-type leases 8,689
8,295 394 Other income 10,064 10,292 (228) Land development revenue 32,318 15,577 16,741 Total revenue 105,588 96,415 9,173 Interest expense 39,417 41,950 (2,533) Real estate expenses 18,289 14,276 4,013
Land development cost of sales 30,803 16,287 14,516 Depreciation and amortization 14,660 14,300 360 General and administrative 30,394 18,998 11,396 (Recovery of) provision for loan losses (2,263) 2,067 (4,330) (Recovery of) provision for losses on net investment in leases (265) 534 (799) Impairment of assets - 4,783 (4,783) Other expense 211 203 8 Total costs and expenses 131,246 113,398 17,848
Income from sales of real estate 2,210 62 2,148 Earnings from equity method investments 12,697
2,586 10,111 Income tax expense (665) (28) (637) Net loss$ (11,416) $ (14,363) $ 2,947 Revenue-Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased$1.3 million to$45.5 million during the three months endedJune 30, 2021 from$46.8 million for the same period in 2020. The following table summarizes our operating lease income by segment ($ in millions). Three Months Ended June 30, 2021 2020 Change Net Lease(1) $ 40.7 $ 41.5$ (0.8) Operating Properties(2) 4.7 5.2 (0.5) Land and Development 0.1 0.1 - Total $ 45.5 $ 46.8$ (1.3)
(1) Change primarily due to the sale of assets, partially offset by an increase
in recovery income from tenants at certain of our properties.
(2) Change primarily due to the termination of certain leases at one of our
operating properties.
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The following table shows certain same store statistics for our consolidated Net
Lease segment. Same store assets are defined as assets we owned on or prior to
April 1, 2020 and were in service through June 30, 2021 (Operating lease income
in millions).
Three Months Ended June 30,
2021 2020
Operating lease income(1) $ 50.2 $ 48.8
Rent per square foot $ 13.10 $ 12.61
Occupancy(2) 99.3 % 98.6 %
For the three months ended
was recorded to "Interest income from sales-type leases" and "Interest
income" in our consolidated statements of operations.
(2) Occupancy as of
Interest income decreased to$9.0 million during the three months endedJune 30, 2021 from$15.4 million for the same period in 2020. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was$371 million for the three months endedJune 30, 2021 and$755 million for the three months endedJune 30, 2020 . The weighted average yield on our performing loans and other lending investments was 8.4% and 7.8%, respectively, for the three months endedJune 30, 2021 and 2020.
Interest income from sales-type leases increased to
Other income decreased to$10.1 million during the three months endedJune 30, 2021 from$10.3 million for the same period in 2020. Other income during the three months endedJune 30, 2021 consisted primarily of a management fees, income from our hotel properties, other ancillary income from our land and development projects and loan portfolio and interest income on our cash. Other income during the three months endedJune 30, 2020 consisted primarily of management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash. Land development revenue and cost of sales-During the three months endedJune 30, 2021 , we sold residential lots and units and recognized land development revenue of$32.3 million which had associated cost of sales of$30.8 million . During the three months endedJune 30, 2020 , we sold residential lots and units and recognized land development revenue of$15.6 million which had associated cost of sales of$16.3 million . The increase in 2021 was primarily due to an increase in sales at our Asbury properties. Costs and expenses-Interest expense decreased to$39.4 million during the three months endedJune 30, 2021 from$42.0 million for the same period in 2020, due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the three months endedJune 30, 2021 compared to 4.7% for the three months endedJune 30, 2020 . The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, decreased to$3.44 billion for the three months endedJune 30, 2021 from$3.55 billion for the same period in 2020. Real estate expense increased$4.0 million to$18.3 million during the three months endedJune 30, 2021 from$14.3 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions). Three Months Ended June 30, 2021 2020 Change Operating Properties(1) $ 6.3 $ 4.5$ 1.8 Land and Development(2) 5.0 3.6 1.4 Net Lease(3) 7.0 6.2 0.8 Total $ 18.3 $ 14.3$ 4.0
(1) Change primarily due to an increase in expenses at certain of our hotel
operating properties that have increased operations from the prior year.
(2) Change primarily due to a decrease in taxes payable at one of our properties
in the second quarter 2020.
(3) Change primarily due to an increase in common area expenses at certain
properties.
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Depreciation and amortization increased to
General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. General and administrative expenses increased to$30.4 million during the three months endedJune 30, 2021 from$19.0 million for the same period in 2020. The increase in 2021 was due primarily to an$11.5 million increase in performance-based compensation from 2020. Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these 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 recovery of loan losses was$2.3 million for the three months endedJune 30, 2021 as compared to a provision for loan losses of$2.1 million for the same period in 2020. The recovery of loan losses for the three months endedJune 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full in the second quarter 2021 and from an improving macroeconomic forecast on commercial real estate markets sinceMarch 31, 2021 . The provision for loan losses for the three months endedJune 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets. The recovery of losses on net investment in leases for the three months endedJune 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets sinceMarch 31, 2021 . The provision for losses on net investment in leases for the three months endedJune 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets. During the three months endedJune 30, 2020 , we recorded an aggregate impairment of$4.8 million on a real estate asset held for sale and a land and development asset.
Other expense was
Income from sales of real estate-During the three months endedJune 30, 2021 , we recorded$2.2 million of income from sales of real estate from the sale of net lease assets and residential condominiums. During the three months endedJune 30, 2020 , we recorded$0.1 million of income from sales of real estate from the sale of units at a residential operating property. Earnings from equity method investments-Earnings from equity method investments increased to$12.7 million during the three months endedJune 30, 2021 from$2.6 million for the same period in 2020. During the three months endedJune 30, 2021 , we recognized$9.7 million of income from our equity method investment in SAFE,$1.6 million from our equity method investment in Net Lease Venture II and$1.4 million of net aggregate income from our remaining equity method investments. During the three months endedJune 30, 2020 , we recognized$8.2 million of income from our equity method investment in SAFE, which was partially offset by$5.6 million of net aggregate losses from our remaining equity method investments. Income tax benefit (expense)-Income tax expense of$0.7 million was recorded for the three months endedJune 30, 2021 and related primarily to a reduction in the amount of expected refund of alternative minimum taxes due us resulting from amended tax returns from prior periods net operating loss carrybacks. Income tax expense of$28 thousand was recorded for the three months endedJune 30, 2020 and related primarily to state margins taxes and other minimum state taxes.
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Results of Operations for the Six Months Ended
For the Six Months Ended June 30,
2021 2020 $ Change
(in thousands)Operating lease income $ 92,988 $ 94,158$ (1,170) Interest income 19,623 32,655 (13,032) Interest income from sales-type leases 17,316 16,650 666 Other income 24,354 30,660 (6,306) Land development revenue 64,567
95,752 (31,185)
Total revenue 218,848 269,875 (51,027)
Interest expense 78,980 85,341 (6,361)
Real estate expense 35,183 36,774 (1,591)Land development cost of sales 60,126 93,346 (33,220) Depreciation and amortization 30,115 28,786 1,329 General and administrative 51,833 53,270 (1,437) (Recovery of) provision for loan losses (6,057) 6,070 (12,127) (Recovery of) provision for losses on net investment in leases (1,866) 1,826 (3,692) Impairment of assets 1,785 6,491 (4,706) Other expense 464 277 187 Total costs and expenses 250,563 312,181 (61,618)
Income from sales of real estate 2,822 62 612 Loss on early extinguishment of debt, net - (4,115) 4,115 Earnings from equity method investments 25,466
19,198 6,268
Income tax expense - (88) 88
Net loss $ (3,427) $ (27,249) $ 23,822
Revenue-Operating lease income, which primarily includes income from net lease
assets and commercial operating properties, decreased $1.2 million to $93.0
million during the six months ended June 30, 2021 from $94.2 million for the
same period in 2020. The following table summarizes our operating lease income
by segment ($ in millions).
Six Months Ended June 30,
2021 2020 Change
Net Lease(1) $ 83.3 $ 83.0 $ 0.3
Operating Properties(2) 9.5 11.0 (1.5)
Land and Development 0.2 0.2 -
Total $ 93.0 $ 94.2 $ (1.2) (1) Change primarily due to an increase in recovery income from tenants at
certain of our properties, partially offset by the sale of assets.
(2) Change primarily due to asset sales and the termination of certain leases at
one of our operating properties.
The following table shows certain same store statistics for our consolidatedNet Lease segment. Same store assets are defined as assets we owned on or prior toJanuary 1, 2020 and were in service throughJune 30, 2021 (Operating lease
income in millions).
Six Months Ended June 30,
2021 2020
Operating lease income(1) $ 102.1 $ 97.9
Rent per square foot $ 13.33 $ 12.64
Occupancy(2) 99.3 % 98.6 %
For the six months ended
was recorded to "Interest income from sales-type leases" and "Interest
income" in our consolidated statements of operations.
(2) Occupancy as of
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Interest income decreased to$19.6 million during the six months endedJune 30, 2021 from$32.7 million for the same period in 2020. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was$445 million for the six months endedJune 30, 2021 and$775 million for the six months endedJune 30, 2020 . The weighted average yield on our performing loans and other lending investments for both the six months endedJune 30, 2021 and 2020 was 8.0%.
Interest income from sales-type leases increased to
Other income decreased to$24.4 million during the six months endedJune 30, 2021 from$30.7 million for the same period in 2020. Other income during the six months endedJune 30, 2021 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our land and development projects and loan portfolio, income from our hotel properties, lease termination fees and interest income on our cash. Other income during the six months endedJune 30, 2020 consisted primarily of a mark-to-market gain on an equity investment, management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash. Land development revenue and cost of sales-During the six months endedJune 30, 2021 , we sold residential lots and units and recognized land development revenue of$64.6 million which had associated cost of sales of$60.1 million . During the six months endedJune 30, 2020 , we sold residential lots and units and recognized land development revenue of$95.8 million which had associated cost of sales of$93.3 million . Costs and expenses-Interest expense decreased to$79.0 million during the six months endedJune 30, 2021 from$85.3 million for the same period in 2020 due primarily to a decrease in our weighted average cost of debt, which was 4.6% for the six months endedJune 30, 2021 compared to 4.8% for the six months endedJune 30, 2020 . The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, increased to$3.46 billion for the six months endedJune 30, 2021 from$3.53 billion for the same period in 2020. Real estate expenses decreased to$35.2 million during the six months endedJune 30, 2021 from$36.8 million for the same period in 2020. The following table summarizes our real estate expenses by segment ($ in millions). Six Months Ended June 30, 2021 2020 Change Operating Properties(1)$ 10.1 $ 12.2 $ (2.1) Land and Development(2) 9.5 12.2 (2.7) Net Lease(3) 15.6 12.4 3.2 Total$ 35.2 $ 36.8 $ (1.6)
(1) Change primarily due to the recovery of bad debt expense at certain of our
properties.
(2) Change primarily due to a decrease in real estate taxes and insurance costs
at one property and asset sales.
(3) Change primarily due to an increase in common area expenses at certain
properties.
Depreciation and amortization increased to$30.1 million during the six months endedJune 30, 2021 from$28.8 million for the same period in 2020, primarily due to the full amortization of intangible assets associated with terminated leases and placing certain assets in service during 2021. General and administrative expense includes payroll and related costs, performance-based compensation, public company costs and occupancy costs. General and administrative expenses decreased to$51.8 million during the six months endedJune 30, 2021 from$53.3 million for the same period in 2020. The decrease in 2021 was due primarily to a$1.5 million decrease in payroll and related costs and performance-based compensation. Our primary forms of performance-based compensation are our iPIP Plans and our 2009 LTIP (refer to Note 15 for more information on these 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. 51 Table of Contents
The recovery of loan losses was$6.1 million for the six months endedJune 30, 2021 as compared to a provision for loan losses of$6.1 million for the same period in 2020. The recovery of loan losses for the six months endedJune 30, 2021 resulted from the reversal of CECL allowances on loans that repaid in full during the period and from an improving macroeconomic forecast on commercial real estate markets sinceDecember 31, 2020 . The provision for loan losses for the six months endedJune 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets. The recovery of losses on net investment in leases for the six months endedJune 30, 2021 resulted from an improving macroeconomic forecast on commercial real estate markets sinceDecember 31, 2020 . The provision for losses on net investment in leases for the six months endedJune 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets. During the six months endedJune 30, 2021 , we recorded an aggregate impairment of$1.8 million in connection with the sale of net lease assets and residential condominiums. During the six months endedJune 30, 2020 , we recorded an aggregate impairment of$6.5 million in connection with the sale of net lease assets and impairments on a real estate asset held for sale and a land and development asset.
Other expense increased to
Income from sales of real estate-During the six months endedJune 30, 2021 , we recorded$2.8 million of income from sales of real estate from the sale of net lease assets and residential condominiums. During the six months endedJune 30, 2020 , we recorded$0.1 million of income from sales of real estate from the sale of units at a residential operating property.
Loss on early extinguishment of debt, net-During the six months ended
Earnings from equity method investments-Earnings from equity method investments increased to$25.5 million during the six months endedJune 30, 2021 from$19.2 million for the same period in 2020. During the six months endedJune 30, 2021 , we recognized$21.1 million of income from our equity method investment in SAFE,$2.6 million from our equity method investment in Net Lease Venture II and$1.8 million of net aggregate income from our remaining equity method investments. During the six months endedJune 30, 2020 , we recognized$27.6 million of income from our equity method investment in SAFE, which included a dilution gain of$7.9 million resulting from a SAFE equity offering inMarch 2020 , offset by$8.4 million of net aggregate losses from our remaining equity method investments. Income tax expense-Income tax benefit of$0.1 million was recorded during the six months endedJune 30, 2020 and was due primarily to state margins taxes
and other minimum state taxes. 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, reducing our legacy portfolio to approximately 14% of our overall portfolio as ofJune 30, 2021 , 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 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 inthe United States of America ("GAAP"). 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 52 Table of Contents
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 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 Three Months Ended June 30,
2021 2020
(in thousands)
Adjusted Earnings
Net loss allocable to common shareholders $ (19,543) $ (23,335)
Add: Depreciation and amortization 16,712 15,675
Add: Stock-based compensation expense 14,791 4,744
Adjusted earnings (loss) allocable to common shareholders $ 11,960 $ (2,916)
For the Six Months Ended June 30,
2021 2020
(in thousands)
Adjusted EarningsNet loss allocable to common shareholders$ (19,948) $ (44,786) Add: Depreciation and amortization 34,341 30,731 Add: Stock-based compensation expense 20,299 21,014 Add: Non-cash portion of loss on early extinguishment of debt - 799 Adjusted earnings allocable to common shareholders $ 34,692
$ 7,758
Liquidity and Capital Resources
During the three months endedJune 30, 2021 , we invested an aggregate$163 million in new investments, prior financing commitments and real estate development. Investments included$136 million in net lease (including$25 million in shares of SAFE common stock), loan, and strategic investments,$20 million in the repurchase of our common stock and$7 million of capital expenditures on legacy assets. These amounts are inclusive of fundings from our consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):
For the Six Months Ended June 30,
2021 2020
Operating Properties $ 338 $ 1,598
Net Lease 3,949 4,884
Total capital expenditures on real estate assets $ 4,287 $ 6,482
Land and Development $ 8,382 $ 25,028
Total capital expenditures on land and development assets $ 8,382 $
25,028
As of June 30, 2021 , we had unrestricted cash of $155 million and $342 million
of borrowing capacity available under the Revolving Credit Facility. The
COVID-19 pandemic adversely affected our strategies of monetizing legacy assets
and
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materially scaling SAFE's portfolio in 2020 and the first quarter of 2021. These conditions improved in the second quarter of 2021 and we expect them to continue to improve as more normalized activity resumes. Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures, distributions to shareholders through dividends and share repurchases and funding ongoing business operations. The amount we actually invest will depend on the full impact of the COVID-19 pandemic on our business and the pace of the economic recovery. We had approximately$214.8 million of maximum unfunded commitments associated with our investments as ofJune 30, 2021 , of which we expect to fund the majority 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$201.9 million principal amount of scheduled real estate finance asset maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers. 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, Revolving Credit Facility borrowings, 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. 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 restricting certain incurrences of debt based on a fixed charge 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. The Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, 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 Senior Term Loan requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing 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 Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing 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. Under both the Senior Term Loan and the Revolving Credit Facility we are permitted to 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$17.4 million , or$0.235 per share, for the six months endedJune 30, 2021 . 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. Refer to Note 13 to the consolidated financial statements. 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. 54 Table of Contents
As ofJune 30, 2021 , 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 and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands): Loans and Other Lending Other Investments Real Estate Investments Total
Performance-Based Commitments $ 94,398 $
71,702$ 33,790 $ 199,890 Strategic Investments - - 14,934 14,934 Total $ 94,398$ 71,702 $ 48,724 $ 214,824 Stock Repurchase Program-We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the six months endedJune 30, 2021 , we repurchased 1.8 million shares of our outstanding common stock for$32.4 million , for an average cost of$17.57 per share. During the six months endedJune 30, 2020 , we repurchased 2.5 million shares of our outstanding common stock for$27.8 million , for an average cost of$10.98 per share. We are generally authorized to repurchase up to$50.0 million in shares of our common stock. As ofJuly 31, 2021 , we had remaining authorization to repurchase up to$33.0 million of common stock under our stock repurchase program. Our Board of Directors subsequently authorized an increase to the stock repurchase program to$50.0 million effective after the date of the filing of this report on Form 10-Q.
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.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our Annual Report 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.
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