SAFEHOLD 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,Safehold 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 the Risk Factors section in our 2021 Annual Report on Form 10-K (the "2021 Annual Report"), all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer toSafehold 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 2021 Annual Report. These historical financial statements may not be indicative of our future performance.
Executive Overview
Many of our Ground Leases have CPI lookbacks to mitigate the effects of inflation that are typically capped between 3.0% - 3.5%; however, in the event cumulative inflation growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation. InJanuary 2022 , the Consumer Price Index ("CPI") rose to its highest rate in over 40 years. InMarch 2022 , theFederal Reserve raised interest rates for the first time since 2018 and then raised interest rates again inMay 2022 andJune 2022 . The rate increase inJune 2022 was the largest increase in 28 years. It is widely expected theFederal Reserve will continue to raise interest rates for the remainder of 2022 and into 2023. Although our new investment activity has been strong, any increase in interest rates may result in a reduction in the availability or an increase in costs of leasehold financing, which is critical to the growth of a robust Ground Lease market. We experienced a high level of new investment activity in the fourth quarter 2021 which continued into 2022. The COVID-19 pandemic is not currently materially impacting our new investment activity, but we continue to monitor its potential impact, which could slow new investment activity because of reduced levels of real estate transactions and constrained conditions for equity and debt financing for real estate transactions, including leasehold loans. If these conditions arise, they will adversely affect our growth prospects while they persist. See the Risk Factors section of our 2021 Annual Report for additional discussion of certain potential risks to our business arising from the COVID 19 pandemic. As ofJune 30, 2022 , the percentage breakdown of the gross book value of our portfolio was 46% office, 33% multi-family, 13% hotels, 5% life science and 3% mixed use and other. The COVID-19 pandemic continues to impact ourPark Hotels Portfolio, and we received no percentage rent revenues in 2022 in respect of 2021 hotel operating performance.
Business Overview
We acquire, manage and capitalize Ground Leases and report our business as a
single reportable segment. We believe owning a portfolio of Ground Leases
affords our investors the opportunity for safe, growing income. Safety is
derived from a Ground Lease's senior position in the commercial real estate
capital structure. Growth is realized through long-term leases with contractual
periodic increases in rent. Capital appreciation is realized though appreciation
in the
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value of the land over time and through our typical rights as landlord to
acquire the commercial buildings on our land at the end of a Ground Lease, which
may yield substantial value to us. The diversification by geographic location,
property type and sponsor in our portfolio further reduces risk and enhances
potential upside.
We have chosen to focus on Ground Leases because we believe they meet an
important need in the real estate capital markets for our customers. We also
believe Ground Leases offer a unique combination of safety, income growth and
the potential for capital appreciation for investors for the following reasons:
High Quality Long-Term Cash Flow: We believe that a Ground Lease represents a
safe position in a property's capital structure. The combined property value
subject to a Ground Lease typically significantly exceeds the Ground Lease
landlord's investment in the Ground Lease; therefore, even if the landlord takes
over the property following a tenant default or upon expiration of the Ground
Lease, the landlord is reasonably likely to recover substantially all of its
Ground Lease investment, and possibly amounts in excess of its investment,
depending upon prevailing market conditions. Additionally, the typical structure
of a Ground Lease provides the landlord with a residual right to regain
possession of its land and take ownership of the buildings and improvements
thereon upon a tenant default. The landlord's residual right provides a strong
incentive for a Ground Lease tenant or its leasehold lender to make the required
Ground Lease rent payments.
Income Growth: Ground Leases typically provide growing income streams through
contractual base rent escalators that may compound over the duration of the
lease. These rent escalators may be based on fixed increases, a CPI or a
combination thereof, and may also include a participation in the gross revenues
of the property. We believe that this growth in the lease rate over time can
mitigate the effects of inflation and capture anticipated increases in land
values over time, as well as serving as a basis for growing our dividend.
Opportunity for Capital Appreciation: The opportunity for capital appreciation
comes in two forms. First, as the ground rent grows over time, the value of the
Ground Lease should grow under market conditions in which capitalization rates
remain flat. Second, our residual right to regain possession of the land
underlying the Ground Lease and take title to the buildings and other
improvements thereon at lease expiration or earlier termination of the lease for
no additional consideration creates additional potential value to our
shareholders.
We generally target Ground Lease investments in which the initial cost of the
Ground Lease represents 30% to 45% of the combined value of the land and
buildings and improvements thereon (the "Combined Property Value") as if the
Ground Lease did not exist. If the initial cost of a Ground Lease is equal to
35% of the Combined Property Value, the remaining 65% of the Combined Property
Value represents potential excess value over the amount of our investment that
would be turned over to us upon the reversion of the property, assuming no
intervening change in the Combined Property Value. In our view, there is a
strong correlation between inflation and commercial real estate values over
time, which supports our belief that the value of our owned residual portfolio
should increase over time as inflation increases, although our ability to
recognize value in certain cases may be limited by the rights of our tenants
under some of our Ground Leases, including tenant rights to purchase our land in
certain circumstances and the right of one tenant to demolish improvements prior
to the expiration of the lease. See "Risk Factors" in our 2021 Annual Report for
a discussion of these tenant rights.
Owned Residual Portfolio: We believe that the residual right is a unique feature
distinguishing Ground Leases from other fixed income investments and property
types. We track the unrealized capital appreciation in the value of our owned
residual portfolio over our basis ("UCA") because we believe it provides
relevant information with regard to the three key investment characteristics of
our Ground Leases: (1) the safety of our position in a tenant's capital
structure; (2) the quality of the long-term cash flows generated by our
portfolio rent that increases over time; and (3) increases and decreases in the
Combined Property Value of the portfolio that reverts to us pursuant to such
residual rights.
We believe that, similar to a loan to value metric, tracking changes in the
value of our owned residual portfolio is useful as an indicator of the quality
of our cash flows and the safety of our position in a tenant's capital
structure, which, in turn, supports our objective to pay and grow dividends over
time. Observing changes in our owned residual portfolio value also helps us
monitor changes in the value of the real estate portfolio that reverts to us
under the terms of the leases, either at the expiration or earlier termination
of the lease. The value may be realized by us at the relevant time by entering
into a new lease reflecting then current market terms and values, selling the
building, selling the building with the land, or operating the building directly
and leasing the spaces to tenants at prevailing market rates.
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We have engaged an independent valuation firm to prepare: (a) initial reports of the Combined Property Value associated with our Ground Lease portfolio; and (b) periodic updates of such reports, which we use, in part, to determine the current estimated value of our owned residual portfolio. We calculate this estimated value by subtracting our original aggregate cost basis in the Ground Leases from our estimated aggregate Combined Property Value, based on estimates by the valuation firm and by management.
The table below shows the current estimated UCA in our owned residual portfolio
as of
June 30, 2022 December 31, 2021
Combined Property Value(2) $ 15,630 $ 12,725
Ground Lease Cost(2) 5,722 4,664
Unrealized Capital Appreciation in Our Owned Residual
Portfolio 9,908
8,061
Please review our Current Report on Form 8-K filed on July 21, 2022 for adiscussion of the valuation methodology used and important limitations and
qualifications of the calculation of UCA. See "Risk Factors-Certain tenant (1) rights under our Ground Leases may limit the value and the UCA we are able to
realize upon lease expiration, sale of our land and Ground Leases or other
events" in our 2021 Annual Report for a discussion of certain tenant rights
and other terms of the leases that may limit our ability to realize value
from the UCA.
Combined Property Value includes our applicable percentage interests in our
unconsolidated ventures and
transactions with remaining unfunded commitments as of
percentage interests in our unconsolidated ventures and
2021, respectively. As of
of combined property value was 40%.
We formed a subsidiary calledCaret Ventures LLC that is structured to track and capture UCA to the extent UCA is realized upon expiration of our Ground Leases, sales of our land and Ground Leases or certain other specified events. Under a shareholder-approved plan, management was granted up to 15% of Caret Units, some of which remains subject to time-based vesting. InFebruary 2022 , we sold 108,571 Caret Units for$19.0 million to third-party investors and received a commitment from an existing shareholder for the purchase of 28,571 Caret Units for$5.0 million (refer to Note 3 to the consolidated financial statements). Those 137,142 Caret Units equal 1.37% of the authorized Caret Units. As part of the sale, we are obligated to seek to provide a public market listing for the Caret Units, or securities into which they may be exchanged, within two years. If we are unable to provide public market liquidity within the two years at a value in excess of the new investors' basis, the investors have the right to cause us to redeem their Caret Units at their original purchase price. Market Opportunity: We believe that there is a significant market opportunity for a dedicated provider of Ground Lease capital like us. We believe that the market for existing Ground Leases is fragmented with ownership comprised primarily of high net worth individuals, pension funds, life insurance companies, estates and endowments. However, while we intend to pursue acquisitions of existing Ground Leases, our investment thesis is predicated, in part, on what we believe is an untapped market opportunity to expand the use of Ground Leases to a broader component of the approximately$7.0 trillion institutional commercial property market in theU.S. We intend to capture this market opportunity by utilizing multiple sourcing and origination channels, including manufacturing new Ground Leases with third-party owners and developers of commercial real estate and originating Ground Leases to provide capital for development and redevelopment. We further believe that Ground Leases generally represent an attractive source of capital for our tenants and may allow them to generate superior returns on their invested equity as compared to utilizing alternative sources of capital. We draw on the extensive investment origination and sourcing platform of iStar, the parent company of our Manager, to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants. Our Portfolio
Our portfolio of properties is diversified by property type and region. Our portfolio is comprised of Ground Leases and a master lease (relating to five hotel assets that we refer to as our "Park Hotels Portfolio") that has many of the characteristics of a Ground Lease. As ofJune 30, 2022 , our estimated portfolio Ground Rent Coverage was 3.8x (see the "Risk Factors -Our estimated UCA, Combined Property Value and Ground Rent Coverage, may not reflect the full potential impact of the COVID-19 pandemic and may decline materially in future periods, -We rely on Property NOI as 30
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reported to us by our tenants, -Our estimates of Ground Rent Coverage for properties in development or transition, or for which we do not receive current tenant financial information, may prove to be incorrect" in our 2021 Annual Report for a discussion of our estimated Ground Rent Coverage).
Below is an overview of the top 10 assets in our portfolio as of
Lease
Property Expiration / Rent Escalation % of Gross
Property Name Type Location As Extended Structure Book Value
425 Park Avenue(2) Office New York, NY 2090 / 2090 Fixed with Inflation Adjustments 6.4 %
135 West 50th Street Office New York, NY 2123 / 2123 Fixed with Inflation Adjustments 5.5 %
195 Broadway Office New York, NY 2118 / 2118 Fixed with Inflation Adjustments 5.2 %
Park Hotels Portfolio(3) Hotel Various 2025 / 2035 % Rent 4.0 %
Alohilani Hotel Honolulu, HI 2118 / 2118 Fixed with Inflation Adjustments 3.8 %
685 Third Avenue Office New York, NY 2123 / 2123 Fixed with Inflation Adjustments 3.4 %
20 Cambridgeside Life Science Cambridge, MA 2121 / 2121 Fixed with Inflation Adjustments 3.0 %
1111 Pennsylvania Avenue Office Washington, DC 2117 / 2117 Fixed with Inflation Adjustments 2.7 %
100 Cambridgeside Mixed Use Cambridge, MA 2121 / 2121 Fixed with Inflation Adjustments 2.5 %
Columbia Center Office Washington, DC 2120 / 2120 Fixed with Inflation Adjustments 2.5 %
(1) Gross book value represents the historical purchase price plus accrued
interest on sales-type leases.
Gross book value for this property represents our pro rata share of the gross (2) book value of our unconsolidated venture (refer to Note 6 to the consolidated
financial statements).
The Park Hotels Portfolio consists of five properties and is subject to asingle master lease. A majority of the land underlying one of these (3) properties is owned by a third party and is ground leased to us through 2044
subject to changes in the CPI; however, our tenant at the property pays this
cost directly to the third party.
The following tables show our portfolio by region and property type as of
% of Gross
Region Book Value
Northeast 40 %
West 25
Mid Atlantic 15
Southeast 11
Southwest 6
Central 3
% of Gross
Property Type Book Value
Office 46 %
Multifamily 33
Hotel 13
Life Science 5
Mixed Use and other 3
Unfunded Commitments
We have unfunded commitments to certain of our Ground Lease tenants related to leasehold improvement allowances that we expect to fund upon the completion of certain conditions. As ofJune 30, 2022 , we had$316.5 million of such commitments. We also have unfunded forward commitments related to agreements that we entered into for the acquisition of new Ground Leases or additions to existing Ground Leases if certain conditions are met (refer to Note 13 to the consolidated financial statements). These commitments may also include leasehold improvement allowances that will be funded to the Ground Lease tenants upon the completion of certain conditions. As ofJune 30, 2022 , we had an aggregate$436.7 million of such commitments. There can be no assurance that the conditions to closing for these transactions will be satisfied and that we will acquire the Ground Leases or fund the leasehold improvement allowances. 31
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Results of Operations for the Three Months Ended
For the Three Months Ended
June 30,
2022 2021 $ Change
(in thousands)Interest income from sales-type leases$ 48,247
$ 27,126 $ 21,121 Operating lease income 16,452 16,964 (512) Other income 185 123 62 Total revenues 64,884 44,213 20,671 Interest expense 30,266 19,160 11,106 Real estate expense 699 722 (23)
Depreciation and amortization 2,406 2,385 21 General and administrative 10,458 8,074 2,384 Other expense 596 21 575 Total costs and expenses 44,425 30,362 14,063 Earnings from equity method investments 2,252
929 1,323
Net income $ 22,711 $ 14,780 $ 7,931 Interest income from sales-type leases increased to
Operating lease income decreased to$16.5 million during the three months endedJune 30, 2022 from$17.0 million for the same period in 2021. The decrease was due primarily to an operating lease being reclassified to a sales-type lease in the third quarter 2021 (refer to Note 4 to the consolidated financial statements), which was partially offset by an increase in percentage rent at one of our properties. Other income for both the three months endedJune 30, 2022 and 2021 includes$0.1 million of other income relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. Other income for the three months endedJune 30, 2022 also includes$0.1 million of other ancillary income from our investments.
During the three months ended
Real estate expense was$0.7 million and$0.7 million during the three months endedJune 30, 2022 and 2021, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense. In addition, during both the three months endedJune 30, 2022 and 2021, we also recorded$0.1 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. Depreciation and amortization was$2.4 million during both the three months endedJune 30, 2022 and 2021 and primarily relates to our ownership of the Park Hotels Portfolio and a multi-family property and the amortization of in-place lease assets. 32 Table of Contents
General and administrative expenses include management fees, an allocation of
expenses to us from our Manager, costs of operating as a public company and
stock-based compensation (primarily to our non-management directors). The
following table presents our general and administrative expenses for the
three months ended
For the Three Months Ended
June 30,
2022 2021
Management fees(1) $ 5,209 $ 3,524
Expense reimbursements to the Manager(1) 3,125 1,875
Public company and other costs 940
1,460
Stock-based compensation 1,184
1,215
Total general and administrative expenses
Refer to Note 13 to the consolidated financial statements. Historically,
pursuant to the Manager's option under the management agreement, the Manager
has elected to not seek reimbursement for certain expenses. This historical (1) election is not a waiver of reimbursement for similar expenses in future
periods and the Manager has started to elect to seek, and may further seek in
the future, reimbursement of such additional expenses that it has not
previously sought, including, without limitation, rent, overhead and certain
personnel costs.
During the three months ended June 30, 2022 , other expense consists primarily of
legal costs, fees related to our derivative transactions, unsuccessful pursuit
costs and state margin taxes. During the three months ended June 30, 2021 , other
expense consists primarily of fees related to unsuccessful pursuit costs
and fees related to our derivative transactions.
During the three months ended June 30, 2022 , earnings from equity method
investments resulted from our $0.8 million pro rata share of income from a
venture that we entered into with an existing shareholder that acquired the
existing Ground Lease at 425 Park Avenue in New York City in November 2019
(refer to Note 6 to the consolidated financial statements) and our $1.4 million
pro rata share of income from an equity interest in a Ground Lease we acquired
in June 2021 (refer to Note 6 to the consolidated financial statements). During
the three months ended June 30, 2021 , earnings from equity method investments
resulted from our $0.8 million pro rata share of income from the 425 Park Avenue
venture and our $0.1 million pro rata share of income from the equity interest
we acquired in June 2021 .
Results of Operations for the Six Months Ended
For the Six Months Ended
June 30,
2022 2021 $ Change
(in thousands)Interest income from sales-type leases$ 91,278
$ 53,100 $ 38,178 Operating lease income 33,418 34,374 (956) Other income 551 246 305 Total revenues 125,247 87,720 37,527 Interest expense 55,586 36,327 19,259 Real estate expense 1,407 1,319 88 Depreciation and amortization 4,808 4,770 38 General and administrative 19,651 14,729 4,922 Other expense 705 391 314 Total costs and expenses 82,157 57,536 24,621
Loss on early extinguishment of debt - (216) 216 Earnings from equity method investments 4,528
1,768 2,760
Net income $ 47,618 $ 31,736 $ 15,882 Interest income from sales-type leases increased to
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Operating lease income decreased to$33.4 million during the six months endedJune 30, 2022 from$34.4 million for the same period in 2021. The decrease was due primarily to an operating lease being reclassified to a sales-type lease in the third quarter 2021 (refer to Note 4 to the consolidated financial statements), which was partially offset by an increase in percentage rent at one of our properties.
Other income for both the six months ended
During the six months endedJune 30, 2022 and 2021, we incurred interest expense from our debt obligations of$55.6 million and$36.3 million , respectively. The increase in 2022 was primarily the result of issuances of unsecured notes to fund our growing portfolio of Ground Leases and additional borrowings on our Unsecured Revolver. Real estate expense was$1.4 million and$1.3 million during the six months endedJune 30, 2022 and 2021, respectively, which consisted primarily of the amortization of an operating lease right-of-use asset, legal fees, property taxes and insurance expense. In addition, during both the six months endedJune 30, 2022 and 2021, we also recorded$0.2 million of real estate expense relating to a Ground Lease in which we are the lessee but our tenant at the property pays this expense directly under the terms of a master lease. The increase in 2022 was primarily the result of an increase in consulting fees and real estate taxes at certain of our properties. Depreciation and amortization was$4.8 million during both the six months endedJune 30, 2022 and 2021 and primarily relates to our ownership of thePark Hotels Portfolio and a multi-family property and the amortization of in-place lease assets.
General and administrative expenses include management fees, an allocation of
expenses to us from our Manager, costs of operating as a public company and
stock-based compensation (primarily to our non-management directors). The
following table presents our general and administrative expenses for the
six months ended
For the Six Months Ended
June 30,
2022 2021
Management fees(1) $ 9,666 $ 6,996
Expense reimbursements to the Manager(1) 6,250 3,750
Public company and other costs 2,270 2,584
Stock-based compensation 1,465 1,399
Total general and administrative expenses $ 19,651 $ 14,729 Refer to Note 13 to the consolidated financial statements. Historically,
pursuant to the Manager's option under the management agreement, the Manager
has elected to not seek reimbursement for certain expenses. This historical (1) election is not a waiver of reimbursement for similar expenses in future
periods and the Manager has started to elect to seek, and may further seek in
the future, reimbursement of such additional expenses that it has not
previously sought, including, without limitation, rent, overhead and certain
personnel costs.
During the six months endedJune 30, 2022 , other expense consists primarily of legal costs, unsuccessful pursuit costs and fees related to our derivative transactions. During the six months endedJune 30, 2021 , other expense consists primarily of fees related to public company filings, unsuccessful pursuit costs and fees related to our derivative transactions. During the six months endedJune 30, 2022 , earnings from equity method investments resulted from our$1.7 million pro rata share of income from the425 Park Avenue venture and our$2.8 million pro rata share of income from an equity interest in a Ground Lease we acquired inJune 2021 (refer to Note 6 to the consolidated financial statements). During the six months endedJune 30, 2021 , earnings from equity method investments resulted from our$1.7 million pro rata share of income from the425 Park Avenue venture and our$0.1 million pro rata share of income from the equity interest we acquired inJune 2021 . 34
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including to pay interest and repay borrowings, fund and maintain our assets and operations, complete acquisitions and originations of investments, make distributions to our shareholders and meet other general business needs. In order to qualify as a REIT, we are required under the Internal Revenue Code of 1986 to distribute to our shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly cash distributions to our shareholders sufficient to meet REIT qualification requirements. In the first quarter 2021, we received investment-grade credit ratings from Moody's Investors Services of Baa1 and Fitch Ratings of BBB+ and entered into an unsecured revolver (refer to Note 8 to the consolidated financial statements) with a total capacity of$1.35 billion (the "Unsecured Revolver"). In the second quarter 2021, the fourth quarter 2021, the first quarter 2022 and the second quarter 2022, we issued four tranches of unsecured notes with varying fixed-rates and maturities ranging fromJune 2031 toMay 2052 (collectively the "Notes"). Our most recent issuance inMay 2022 features a stairstep coupon structure (refer to Note 8 to the consolidated financial statements) that is unique in the unsecured and investment-grade market and will benefit key cash flow metrics. As evidenced by our Unsecured Revolver and the Notes, we believe the strong credit profile we have established utilizing our modern Ground Leases and our investment grade credit ratings will further accelerate our ability to bring commercial real estate owners, developers and sponsors more efficiently priced capital. Our Unsecured Revolver replaced our secured revolving credit facility in the first quarter 2021. With its increased size of total capacity of$1.35 billion and reduced cost, our Unsecured Revolver allows us significant operational and financial flexibility and supports our ability to scale our Ground Lease platform. We also believe our Unsecured Revolver marked a strong first step towards our goal of unlocking opportunities from the unsecured capital markets to deliver lower cost, more efficient capital to our customers.
In the first quarter 2021, we entered into an at-the-market equity offering (the
"ATM") pursuant to which we may sell shares of our common stock up to an
aggregate purchase price of
InMarch 2022 , we sold 2,000,000 shares of our common stock in a public offering for gross proceeds of$118.0 million . Concurrently with the public offering, we sold$191.2 million in shares, or 3,240,000 shares, of our common stock to iStar in a private placement. We incurred approximately$5.1 million of offering costs in connection with these transactions. As ofJune 30, 2022 , we had$25 million of unrestricted cash and$0.9 billion of undrawn capacity on our Unsecured Revolver. We refer to this unrestricted cash and additional borrowing capacity on our Unsecured Revolver as our "equity" liquidity which can be used for general corporate purposes or leveraged to acquire or originate new Ground Lease assets. Our primary sources of cash to date have been proceeds from equity offerings and private placements, proceeds from our initial capitalization by iStar and two institutional investors and borrowings from our debt facilities, unsecured notes and mortgages. Our primary uses of cash to date have been the acquisition/origination of Ground Leases, repayments on our debt facilities and distributions to our shareholders. We expect our short-term liquidity requirements to include debt service on our debt obligations (refer to Note 8 to the consolidated financial statements), distributions to our shareholders, working capital, new acquisitions and originations of Ground Lease investments, expense reimbursements to our Manager and payments of fees under our management agreement to the extent we do not elect to pay the fees in common stock (refer to Note 13 to the consolidated financial statements). Our primary sources of liquidity going forward will generally consist of cash on hand and cash flows from operations, new financings, unused borrowing capacity under our Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement) and common and/or preferred equity issuances. We expect that we will be able to meet our liquidity requirements over the next 12 months and beyond. We expect our long-term liquidity requirements to include debt service on our debt obligations (refer to Note 8 to the consolidated financial statements), distributions to our shareholders, working capital, new acquisitions and 35
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originations of Ground Lease investments (including in respect of unfunded commitments - refer to Note 9 to the consolidated financial statements), debt maturities, expense reimbursements to our Manager and payments of fees under our management agreement to the extent we do not elect to pay the fees in common stock (refer to Note 13 to the consolidated financial statements). Our primary sources of liquidity going forward will generally consist of cash on hand and cash flows from operations, new financings, unused borrowing capacity under our Unsecured Revolver (subject to the conditions set forth in the applicable loan agreement) and common and/or preferred equity issuances. The following table outlines our cash flows provided by operating activities, cash flows used in investing activities and cash flows provided by financing activities for the six months endedJune 30, 2022 and 2021 ($ in thousands): For the Six Months Ended June 30, 2022 2021 Change
Cash flows provided by operating activities
$ 45,576 Cash flows used in investing activities (850,693) (250,913)
(599,780)
Cash flows provided by financing activities 877,137 191,090
686,047
The increase in cash flows provided by operating activities during 2022 was due primarily to a net positive change in cash flows from hedges that resulted from us receiving$11.0 million from our hedges in 2022 versus payments on hedges of$19.9 million in 2021 (refer to Note 10 to the consolidated financial statements) and an increase in rents collected in 2022 from new originations and acquisitions of Ground Leases. The increase in cash flows used in investing activities during 2022 was due to an increase in new originations and acquisitions of Ground Leases. The increase in cash flows provided by financing activities during 2022 was due primarily to the issuance of common stock and the issuance of unsecured debt to fund our growing Ground Lease portfolio.
Supplemental Guarantor Disclosure
InMarch 2020 , theSecurities and Exchange Commission ("SEC") adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The amendments became effective onJanuary 4, 2021 . We and theOperating Partnership have filed a registration statement on Form S-3 with theSEC registering, among other securities, debt securities of theOperating Partnership , which will be fully and unconditionally guaranteed by us. As ofJune 30, 2022 , theOperating Partnership had issued and outstanding the Notes. The obligations of theOperating Partnership to pay principal, premiums, if any, and interest on the Notes are guaranteed on a senior basis by us. The guarantee is full and unconditional, and theOperating Partnership is a consolidated subsidiary of ours. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company's consolidated financial statements, the parent guarantee is "full and unconditional" and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of theOperating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for theOperating Partnership because the assets, liabilities and results of operations of theOperating Partnership are not materially different than the corresponding amounts in our consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
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
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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 2021 Annual Report.
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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