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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2022

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Company’s consolidated financial statements and the related notes (refer to Note 3 – Net Lease Sale and Discontinued Operations) to conform to the current period presentation.

Principles of Consolidation

Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. The Company’s involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in “Net income from discontinued operations,” “Operating lease income,” “Interest income,” “Earnings from equity method investments,” “Real estate expense” and “Interest expense” in the Company’s consolidated statements of operations. The Company has provided no financial support to those VIEs that it was not previously contractually required to provide.

Net lease sale and discontinued operations

Net Lease Sale and Discontinued Operations—A discontinued operation represents: (i) a component of the Company or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition.

Net Lease Sale—In March 2022, the Company, through certain subsidiaries of and entities managed by the Company, closed on a definitive purchase and sale agreement to sell a portfolio of net lease properties owned and managed by such subsidiaries and entities to a third party for an aggregate gross sales price of approximately $3.07 billion and recognized a gain of $663.7 million in “Net income from discontinued operations” in the Company’s consolidated statements of operations. The Company refers to this transaction as the "Net Lease Sale" in this report. The Net Lease Sale is consistent with the Company’s stated corporate strategy which is to grow its Ground Lease and Ground Lease adjacent businesses (refer to Note 8) and simplify its portfolio through sales of other assets.

The portfolio sold consisted of office, entertainment and industrial properties located in the United States comprising approximately 18.3 million square feet. It included assets wholly-owned by the Company and assets owned by two joint ventures (see Net Lease Venture and Net Lease Venture II below) managed by the Company and in which it owned 51.9% interests. At the time of closing, the portfolio was encumbered by an aggregate of $702.0 million of mortgage indebtedness, including indebtedness from equity method investments, which was repaid with proceeds from the sale. After repayment of the mortgage indebtedness and prepayment penalties, a senior term loan secured by certain of the assets (refer to Note 10), payments to terminate derivative contracts, payments to joint venture partners, and payments of promotes, transaction expenses and amounts due under employee incentive plans, the Company retained net cash proceeds of $1.2 billion from the transaction. In addition, as part of the transaction, the buyer sold three of the properties

to SAFE for $122.0 million and entered into three Ground Leases with SAFE. Two net lease properties were sold to different third parties in the first quarter of 2022 and the Company’s net lease assets associated with its Ground Lease businesses were not included in the sale. The Company received net cash proceeds of $33.9 million from the sale of the two net lease properties and recognized a gain of $23.9 million in “Net income from discontinued operations” in the Company’s consolidated statements of operations.

Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the “Net Lease Venture”) and gave a right of first offer to the venture on all new net lease investments. The Company was responsible for sourcing new opportunities and managing the venture and its assets in exchange for a management fee and incentive fee. Several of the Company’s senior executives whose time was substantially devoted to the Net Lease Venture owned a total of 0.6% equity ownership in the venture via co-investment. These senior executives were also entitled to an amount equal to 50% of any incentive fee received based on the 47.5% external partner’s interest. Net Lease Venture was part of the Net Lease Sale. As of September 30, 2022, $3.1 million of “Noncontrolling interests” was attributable to the Net Lease Venture and represented proceeds from the Net Lease Sale that were not yet distributed to the Company’s partners in the venture as of September 30, 2022.

Net Lease Venture II—In July 2018, the Company entered into a new venture (the “Net Lease Venture II”) with an investment strategy similar to the Net Lease Venture. The Company was responsible for managing the venture in exchange for a management fee and incentive fee. During the nine months ended September 30, 2022, the Company recorded $0.4 million of management fees from Net Lease Venture II in “Net income from discontinued operations” in the Company’s consolidated statements of operations. During the three and nine months ended September 30, 2021, the Company recorded $0.4 million and $1.2 million, respectively, of management fees from Net Lease Venture II in “Net income from discontinued operations” in the Company’s consolidated statements of operations. Net Lease Venture II was part of the Net Lease Sale. As of September 30, 2022, $2.0 million of “Real estate and other assets available and held for sale and classified as discontinued operations” was attributable to the Net Lease Venture II and represented proceeds from the Net Lease Sale that were not yet distributed to the Company as of September 30, 2022.

Discontinued Operations—The Company’s net lease assets and liabilities associated with the Net Lease Sale and the Company’s other two net lease assets are classified as “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021. For the three months ended September 30, 2021 and the nine months ended September 30, 2022 and 2021, the operations of such assets are classified in “Net income from discontinued operations” in the Company’s consolidated statements of operations.

The following table presents the Company’s consolidated assets and liabilities recorded in “Real estate and other assets available and held for sale and classified as discontinued operations” and “Liabilities associated with real estate held for sale and classified as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021 ($ in thousands).


	As of
	September 30,		December 31,
	2022		2021
ASSETS
Real estate
Real estate, at cost	$	—	$	1,537,655
Less: accumulated depreciation		—		(271,183)
Total real estate, net		—		1,266,472
Net investment in leases		—		486,389
Loans receivable held for sale		—		48,675
Other investments		1,963		103,229
Finance lease right of use assets		—		150,099
Accrued interest and operating lease income receivable, net		491		2,997
Deferred operating lease income receivable, net		—		63,156
Deferred expenses and other assets, net		9,471		178,694
Total real estate and other assets available and held for sale and classified as discontinued operations	$	11,925	$	2,299,711

LIABILITIES
Accounts payable, accrued expenses and other liabilities	$	2,918	$	92,865
Finance lease liabilities		—		161,258
Debt obligations, net		—		714,296
Total liabilities associated with real estate held for sale and classified as discontinued operations	$	2,918	$	968,419

The transaction described above involving the Company's net lease business qualified for discontinued operations and the following table summarizes net income from discontinued operations for the three and nine months ended September 30, 2022 and 2021 ($ in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Operating lease income	$	—	$	40,660	$	35,596	$	123,925
Interest income		—		979		885		2,728
Interest income from sales-type leases		—		9,052		8,803		26,212
Other income		—		1,162		4,292		3,599
Total revenues		—		51,853		49,576		156,464
Costs and expenses:
Interest expense⁽¹⁾		—		10,776		7,484		32,306
Real estate expense		—		5,355		5,072		20,503
Depreciation and amortization⁽¹⁾		—		13,114		—		39,256
Provision for (recovery of) loan losses		—		54		—		(202)
Provision for (recovery of) losses on net investment in leases		—		446		—		(2,200)
Impairment of assets⁽²⁾		—		758		1,492		2,286
Other expense⁽³⁾		—		1,117		(5,669)		1,117
Total costs and expenses		—		31,620		8,379		93,066
Income from sales of real estate		—		—		683,738		2,114
Income from discontinued operations before earnings from equity method investments and other items		—		20,233		724,935		65,512
Earnings from equity method investments		—		1,414		127,129		4,014
Loss on early extinguishment of debt, net		—		—		(41,408)		—
Net income from discontinued operations before income taxes		—		21,647		810,656		69,526
Income tax expense		—		(33)		(12,968)		(111)
Net income from discontinued operations		—		21,614		797,688		69,415
Net (income) from discontinued operations attributable to noncontrolling interests		—		(3,254)		(179,089)		(8,092)
Net income from discontinued operations attributable to iStar Inc.	$	—	$	18,360	$	618,599	$	61,323

(1)

For the nine months ended September 30, 2022, the Company recorded $1.3 million of “Interest expense” in its consolidated statements of operations from its Ground Leases with SAFE. For the three and nine months ended September 30, 2021, the Company recorded $2.1 million and $6.2 million, respectively, of “Interest expense” and $0.4 million and $1.1 million, respectively, of “Depreciation and amortization” in its consolidated statements of operations from its Ground Leases with SAFE.

(2)	During the nine months ended September 30, 2022 and 2021, the Company sold assets and recognized aggregate impairments of $1.5 million and $2.3 million, respectively.

(3)	Represents the reversal of other expenses recognized in connection with the settlement of interest rate hedges during the nine months ended September 30, 2022.

The following table presents cash flows provided by operating activities and cash flows used in investing activities from discontinued operations for the nine months ended September 30, 2022 and 2021 ($ in thousands):


	For the Nine Months Ended September 30,
	2022		2021
Cash flows provided by operating activities	$	116,738	$	70,936
Cash flows provided by (used in) investing activities		2,660,531		(12,145)

New Accounting Pronouncements—In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-02, Financial Instruments—Credit Losses: Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 was issued to eliminate troubled debt restructuring recognition and measurement guidance and required disclosure of gross write-offs by vintage for public business entities. ASU 2022-02 is effective for annual reporting periods beginning after December 15, 2022. Early adoption is permitted. Management is currently evaluating the impact of ASU 2022-02 and does not expect ASU 2022-02 to have a material impact on the Company’s consolidated financial statements.

New accounting pronouncements


	For the Nine Months Ended September 30,
	2022		2021
Cash flows provided by operating activities	$	116,738	$	70,936
Cash flows provided by (used in) investing activities		2,660,531		(12,145)