| Net Investment in Sales-type Leases, Ground Lease Receivables and Loans Receivable, net - Related Party |
Note 4—Net Investment in Sales-type Leases, Ground Lease Receivables and Loans Receivable, net – Related Party The Company classifies certain of its Ground Leases as sales-type leases and records the leases within “Net investment in sales-type leases” on the Company’s consolidated balance sheets and records interest income in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. In addition, the Company may enter into transactions whereby it acquires land and enters into Ground Leases directly with the seller. These Ground Leases qualify as sales-type leases and, as such, do not qualify for sale leaseback accounting and are accounted for as financing receivables in accordance with ASC 310 - Receivables and are included in “Ground Lease receivables” on the Company’s consolidated balance sheets. The Company records interest income from Ground Lease receivables in “Interest income from sales-type leases” in the Company’s consolidated statements of operations. In July 2022, the Company, pursuant to an agreement with iStar and upon certain construction related conditions being met, acquired an existing Ground Lease from iStar for $36.4 million inclusive of closing costs and was recorded in “Net investment in sales-type leases” and “Real estate-related intangible assets, net” on the Company’s consolidated balance sheet. In September 2022, the Company sold a Ground Lease to a third-party for $136.0 million and recognized a gain of $55.8 million in the Company’s consolidated statements of operations. $9.5 million of the gain was attributable to noncontrolling interests, of which $0.7 million was attributable to redeemable noncontrolling interests. In May 2023, the Company entered into a joint venture with a sovereign wealth fund, which is also an existing shareholder, focused on new acquisitions for certain Ground Lease investments. The Company committed approximately $275 million for a 55% controlling interest in the joint venture and the sovereign wealth fund committed approximately $225 million for a 45% noncontrolling interest in the joint venture. Each party’s commitment is discretionary. The joint venture is a voting interest entity and the Company consolidates the joint venture in its financial statements due to its controlling interest. The Company’s joint venture partners’ interest is recorded in “Noncontrolling interests” on the Company’s consolidated balance sheets. The Company receives a management fee, measured on an asset-by-asset basis, equal to 25 basis points on invested equity for such asset for the first five years following its acquisition, and 15 basis points on invested equity thereafter. The Company will also receive a promote of 15% over a 9% internal rate of return, subject to a 1.275x multiple on invested capital. The venture has first look rights on qualifying investments for 18 months. During the nine months ended September 30, 2023, the joint venture acquired two Ground Leases for an aggregate purchase price of $38.5 million, of which $14.5 million has been funded as of September 30, 2023. The Company’s net investment in sales-type leases were comprised of the following ($ in thousands): | | | | | | | | | September 30, 2023 | | December 31, 2022 | Total undiscounted cash flows(1) | | $ | 29,715,761 | | $ | 29,586,227 | Unguaranteed estimated residual value(1) | | | 2,915,013 | | | 2,900,218 | Present value discount | | | (29,447,714) | | | (29,379,846) | Allowance for credit losses | | | (468) | | | — | Net investment in sales-type leases(2) | | $ | 3,182,592 | | $ | 3,106,599 |
| (1) | As of September 30, 2023, total discounted cash flows were approximately $3,153 million and the discounted unguaranteed estimated residual value was $30.1 million. As of December 31, 2022, total discounted cash flows were approximately $3,077 million and the discounted unguaranteed estimated residual value was $29.1 million. |
| (2) | As of September 30, 2023, $6.5 million was attributable to noncontrolling interests. |
The following table presents a rollforward of the Company’s net investment in sales-type leases and Ground Lease receivables for the nine months ended September 30, 2023 and 2022 ($ in thousands): | | | | | | | | | | | | Net Investment in | | Ground Lease | | | | | | Sales-type Leases | | Receivables | | Total | Nine Months Ended September 30, 2023 | | | | | | | | | | Beginning balance | | $ | 3,106,599 | | $ | 1,374,716 | | $ | 4,481,315 | Impact from adoption of new accounting standard (refer to Note 3) | | | (351) | | | (199) | | | (550) | Origination/acquisition/fundings(1) | | | 33,400 | | | 170,194 | | | 203,594 | Accretion | | | 43,061 | | | 19,078 | | | 62,139 | Provision for credit losses | | | (117) | | | (119) | | | (236) | Ending balance(2) | | $ | 3,182,592 | | $ | 1,563,670 | | $ | 4,746,262 |
| | | | | | | | | | | | Net Investment in | | Ground Lease | | | | | | Sales-type Leases | | Receivables | | Total | Nine Months Ended September 30, 2022 | | | | | | | | | | Beginning balance | | $ | 2,412,716 | | $ | 796,252 | | $ | 3,208,968 | Sales | | | (76,701) | | | — | | | (76,701) | Origination/acquisition/fundings(1) | | | 691,305 | | | 515,618 | | | 1,206,923 | Accretion | | | 38,793 | | | 14,762 | | | 53,555 | Ending balance | | $ | 3,066,113 | | $ | 1,326,632 | | $ | 4,392,745 |
| (1) | The net investment in sales-type leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed or unguaranteed estimated residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. For newly originated or acquired Ground Leases, the Company’s estimate of residual value equals the fair value of the land at lease commencement. |
| (2) | As of September 30, 2023 and December 31, 2022, all of the Company’s net investment in sales-type leases and Ground Lease receivables were current in their payment status. As of September 30, 2023, the Company’s weighted average accrual rate for its net investment in sales-type leases and Ground Lease receivables was 5.1% and 5.4%, respectively. As of September 30, 2023, the weighted average remaining life of the Company’s 35 Ground Lease receivables was 98.3 years. |
Allowance for Credit Losses—Changes in the Company’s allowance for credit losses on net investment in sales-type leases and Ground Lease receivables for the three and nine months ended September 30, 2023 were as follows ($ in thousands): | | | | | | | | | | | | | | | Net investment in sales-type leases | | | Stabilized | | Development | | Unfunded | | | Three Months Ended September 30, 2023 | | Properties | | Properties | | Commitments | | Total | Allowance for credit losses at beginning of period | | $ | 259 | | $ | 77 | | $ | 1 | | $ | 337 | Provision for credit losses(1) | | | 110 | | | 22 | | | — | | | 132 | Allowance for credit losses at end of period(2) | | $ | 369 | | $ | 99 | | $ | 1 | | $ | 469 |
| | | | | | | | | | | | | | | Ground Lease receivables | | | Stabilized | | Development | | Unfunded | | | Three Months Ended September 30, 2023 | | Properties | | Properties | | Commitments | | Total | Allowance for credit losses at beginning of period | | $ | 94 | | $ | 127 | | $ | 60 | | $ | 281 | Provision for (recovery of) credit losses(1) | | | 40 | | | 57 | | | (3) | | | 94 | Allowance for credit losses at end of period(2) | | $ | 134 | | $ | 184 | | $ | 57 | | $ | 375 |
| | | | | | | | | | | | | | | Net investment in sales-type leases | | | Stabilized | | Development | | Unfunded | | | Nine Months Ended September 30, 2023 | | Properties | | Properties | | Commitments | | Total | Allowance for credit losses at beginning of period | | $ | — | | $ | — | | $ | — | | $ | — | Impact from adoption of new accounting standard (refer to Note 3)(3) | | | 280 | | | 71 | | | 6 | | | 357 | Provision for (recovery of) credit losses(1) | | | 89 | | | 28 | | | (5) | | | 112 | Allowance for credit losses at end of period(2) | | $ | 369 | | $ | 99 | | $ | 1 | | $ | 469 |
| | | | | | | | | | | | | | | Ground Lease receivables | | | Stabilized | | Development | | Unfunded | | | Nine Months Ended September 30, 2023 | | Properties | | Properties | | Commitments | | Total | Allowance for credit losses at beginning of period | | $ | — | | $ | — | | $ | — | | $ | — | Impact from adoption of new accounting standard (refer to Note 3)(3) | | | 102 | | | 97 | | | 84 | | | 283 | Provision for (recovery of) credit losses(1) | | | 32 | | | 87 | | | (27) | | | 92 | Allowance for credit losses at end of period(2) | | $ | 134 | | $ | 184 | | $ | 57 | | $ | 375 |
| (1) | During the three months ended September 30, 2023, the Company recorded a provision for credit losses on net investment in sales-type leases and Ground Lease receivables of $0.1 million and $0.1 million, respectively. The provision for credit losses was due primarily to a declining macroeconomic forecast since June 30, 2023. During the nine months ended September 30, 2023, the Company recorded a provision for credit losses on net investment in sales-type leases and Ground Lease receivables of $0.1 million and $0.1 million, respectively. The provision for credit losses on net investment in leases and Ground Lease receivables was due primarily to a declining macroeconomic forecast since December 31, 2022. |
| (2) | Allowance for credit losses on unfunded commitments is recorded in “Accounts payable and accrued expenses” on the Company’s consolidated balance sheets. |
| (3) | On January 1, 2023, the Company recorded an allowance for credit losses on net investment in sales-type leases of $0.4 million and an allowance for credit losses on Ground Lease receivables of $0.2 million upon the adoption of ASU 2016-13, of which an aggregate of $0.1 million related to expected credit losses for unfunded commitments and was recorded in "Accounts payable, accrued expenses and other liabilities." |
The Company’s amortized cost basis in Ground Lease receivables, presented by year of origination and by stabilized or development status, was as follows as of September 30, 2023 ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | Year of Origination | | | | | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Total | Ground Lease receivables | | | | | | | | | | | | | | | | | | | | | | Stabilized properties | | $ | 19,004 | | $ | 295,600 | | $ | 133,296 | | $ | 179,914 | | $ | 447,915 | | $ | — | | $ | 1,075,729 | Development properties | | | 1 | | | 345,220 | | | 143,038 | | | — | | | — | | | — | | | 488,259 | Total | | $ | 19,005 | | $ | 640,820 | | $ | 276,334 | | $ | 179,914 | | $ | 447,915 | | $ | — | | $ | 1,563,988 |
Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-type leases accounted for under ASC 842 - Leases, excluding lease payments that are not fixed and determinable, in effect as of September 30, 2023, are as follows by year ($ in thousands): | | | | | | | | | | | | | | | | | | | | | Fixed Bumps | | | | | | Fixed Bumps | | | | | with | | | | | | with Inflation | | Fixed | | Percentage | | | | | | Adjustments | | Bumps | | Rent | | Total | 2023 (remaining three months) | | $ | 24,735 | | $ | 561 | | $ | 146 | | $ | 25,442 | 2024 | | | 101,639 | | | 2,256 | | | 586 | | | 104,481 | 2025 | | | 103,607 | | | 2,283 | | | 586 | | | 106,476 | 2026 | | | 105,567 | | | 2,311 | | | 586 | | | 108,464 | 2027 | | | 107,475 | | | 2,339 | | | 586 | | | 110,400 | Thereafter | | | 28,577,374 | | | 583,455 | | | 99,669 | | | 29,260,498 | Total undiscounted cash flows | | $ | 29,020,397 | | $ | 593,205 | | $ | 102,159 | | $ | 29,715,761 |
During the three and nine months ended September 30, 2023 and 2022, the Company recognized interest income from sales-type leases in its consolidated statements of operations as follows ($ in thousands): | | | | | | | | | | | | Net Investment | | Ground | | | | | | in Sales-type | | Lease | | | | Three Months Ended September 30, 2023 | | Leases | | Receivables | | Total | Cash | | $ | 25,309 | | $ | 12,767 | | $ | 38,076 | Non-cash | | | 14,482 | | | 6,572 | | | 21,054 | Total interest income from sales-type leases | | $ | 39,791 | | $ | 19,339 | | $ | 59,130 |
| | | | | | | | | | | | Net Investment | | Ground | | | | | | in Sales-type | | Lease | | | | Three Months Ended September 30, 2022 | | Leases | | Receivables | | Total | Cash | | $ | 24,256 | | $ | 10,585 | | $ | 34,841 | Non-cash | | | 14,108 | | | 5,787 | | | 19,895 | Total interest income from sales-type leases | | $ | 38,364 | | $ | 16,372 | | $ | 54,736 |
| | | | | | | | | | | | Net Investment | | Ground | | | | | | in Sales-type | | Lease | | | | Nine Months Ended September 30, 2023 | | Leases | | Receivables | | Total | Cash | | $ | 75,355 | | $ | 36,856 | | $ | 112,211 | Non-cash | | | 43,061 | | | 19,078 | | | 62,139 | Total interest income from sales-type leases | | $ | 118,416 | | $ | 55,934 | | $ | 174,350 |
| | | | | | | | | | | | Net Investment | | Ground | | | | | | in Sales-type | | Lease | | | | Nine Months Ended September 30, 2022 | | Leases | | Receivables | | Total | Cash | | $ | 66,017 | | $ | 26,442 | | $ | 92,459 | Non-cash | | | 38,793 | | | 14,762 | | | 53,555 | Total interest income from sales-type leases | | $ | 104,810 | | $ | 41,204 | | $ | 146,014 |
Loans receivable, net – related party—On March 31, 2023, the Company, as lender and as administrative agent, and Star Holdings, as borrower, entered into a senior secured term loan facility in an aggregate principal amount of $115.0 million (the “Secured Term Loan Facility”) and an additional commitment amount of up to $25.0 million at Star Holding’s election (the “Incremental Term Loan Facility”, together with the Secured Term Loan Facility, the “Star Holdings Term Loan Facility”) (refer to Note 14). During the three and nine months ended September 30, 2023, the Company recorded $2.4 million and $4.8 million, respectively, of interest income on the Star Holdings Term Loan Facility, which is recorded in “Interest income – related party” in the Company’s consolidated statements of operations. As of September 30, 2023, the Star Holdings Term Loan Facility had a principal balance of $115.0 million and a carrying value of $112.1 million. The Star Holdings Term Loan Facility is a secured credit facility. Borrowings under the Star Holdings Term Loan Facility bear interest at a fixed rate of 8.00% per annum, which may increase to 10.00% per annum if any loans remain outstanding under the Incremental Term Loan Facility (refer to Note 14). The Star Holdings Term Loan Facility has a maturity date of March 31, 2027. The Star Holdings Term Loan Facility is secured by a first-priority perfected security pledge of all the equity interests in Star Holding’s primary real estate subsidiary. Starting the quarter that is nine months after closing, within five business days after Star Holdings has delivered its unaudited quarterly financial statements, Star Holdings will apply any unrestricted cash on its balance sheet in excess of the aggregate of (i) an operating reserve; and (ii) $50 million, to prepay its Star Holdings Term Loan Facility or alternatively, with the consent of the Company, Star Holdings may apply such cash to prepay its margin loan facility in lieu of any prepayment of the Star Holdings Term Loan Facility. The operating reserve will be calculated quarterly and is equal to the aggregate of projected operating expenses (including payments to the Star Holdings local property consultants but excluding management fees and public company costs), projected land carry costs, projected capital expenditure and projected interest expense on the margin loan facility and Star Holdings Term Loan Facility for the next twelve months; less the projected operating revenues for the next twelve months consistent with the operating budget approved by the Company. The Star Holdings Term Loan Facility contains certain customary covenants, including affirmative covenants on reporting, maintenance of property, continued ownership of interests in the Company as well as negative covenants relating to investments, indebtedness and liens, fundamental changes, asset dispositions, repayments, distributions and affiliate transactions. Furthermore, the Star Holdings Term Loan Facility contains customary events of default, including payment defaults, failure to perform covenants, cross-default and cross acceleration to other indebtedness, including the margin loan facility, impairment of security interests and change of control. During the three and nine months ended September 30, 2023, the Company recorded a provision for credit losses of $0.1 million and $2.4 million, respectively, on the Secured Term Loan Facility which was originated at the time of the Merger in conjunction with the Spin-Off.
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