S-11 1 a17-28708_1s11.htm S-11

Table of Contents

 

As filed with the Securities and Exchange Commission on December 21, 2017

Registration Statement No. 333-     

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-11

 


 

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 


 

Safety, Income & Growth Inc.

(Exact name of registrant as specified in governing instruments)

 


 

1114 Avenue of the Americas

New York, New York 10036

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

Jay Sugarman

Safety, Income & Growth Inc.

Chief Executive Officer

1114 Avenue of the Americas

New York, New York 10036

Tel (212) 930-9400

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

Copies to:

 

Kathleen L. Werner, Esq.

Clifford Chance US LLP

31 West 52nd Street

New York, New York 10019

Tel (212) 878-8000

Fax (212) 878-8375

 


 

Approximate date of commencement of proposed sale to the public:

 

As soon as practicable after the effective date of this registration statement.

 

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x
(Do not check if a
smaller reporting company)

Smaller reporting company o
Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

 

Title of securities to be registered

 

Amount to be
registered

 

Proposed
maximum
aggregate
offering price
per share(1)

 

Proposed
maximum
aggregate offering
price(1)

 

Amount of
registration fee

 

Common stock, $0.01 par value per share

 

2,885,000

 

$

18.195

 

$

52,492,575

 

$

6,535.33

 

(1)                                 Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The price per share and aggregate offering price are based on the average of the high and low price of the registrant’s common stock on December 18, 2017, as reported on the New York Stock Exchange.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 



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The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted.

 

PRELIMINARY PROSPECTUS

 

Subject to Completion

Preliminary Prospectus dated December 21, 2017

 

2,885,000 SHARES

 

 

 

SAFETY, INCOME & GROWTH INC.

Common Stock

 


 

This prospectus relates to the offer and sale from time to time of up to 2,885,000 shares of our common stock by the selling stockholders named in this prospectus or in supplements to this prospectus.  See “Principal and Selling Stockholders.”  The registration of the shares of our common stock to which this prospectus relates does not require the selling stockholders to offer or sell those shares.  We cannot predict when or in what amounts the selling stockholders may sell any of the shares offered by this prospectus.  We are filing the registration statement of which this prospectus is a part pursuant to contractual obligations that exist with the selling stockholders.

 

We are not offering for sale any shares of our common stock in the registration statement of which this prospectus is a part.  We will not receive any proceeds from the sale of our common stock by the selling stockholders, but will incur expenses.  The selling stockholders from time to time may offer and sell the shares held by them directly or through underwriters, agents or broker/dealers on terms to be determined at the time of sale, as described in more detail in this prospectus.  For more information, see “Plan of Distribution.”

 

Our common stock is listed on The New York Stock Exchange (the “NYSE”) under the symbol “SAFE.”  On December 20, 2017, the last sale price of our common stock as reported on the NYSE was $18.03 per share.

 

We intend to elect to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2017. Shares of our common stock are, with certain exceptions, subject to a 9.8% ownership limitation to, among other purposes, assist us in qualifying and maintaining our qualification as a REIT. In addition, our charter contains various other restrictions on the ownership and transfer of shares of our common stock. See “Description of Securities—Restrictions on Ownership and Transfer” beginning on page 119 of this prospectus.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, and are subject to reduced public company reporting requirements.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17 of this prospectus for a discussion of certain risk factors that you should consider before making a decision to invest in our common stock.

 

Neither the Securities and Exchange Commission nor any state or other securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is December     , 2017.

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

PROSPECTUS SUMMARY

1

THE COMPANY

1

RISK FACTORS

17

FORWARD-LOOKING STATEMENTS

44

USE OF PROCEEDS

46

MARKET PRICE OF OUR COMMON STOCK

47

CAPITALIZATION

48

SELECTED HISTORICAL CONSOLIDATED AND COMBINED AND UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA

49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

51

DESCRIPTION OF INDEBTEDNESS

63

BUSINESS AND PROPERTIES

67

OUR MANAGER AND THE MANAGEMENT AGREEMENT

86

MANAGEMENT

94

PRINCIPAL AND SELLING STOCKHOLDERS

101

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

103

STRUCTURE AND FORMATION OF OUR COMPANY

106

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

109

DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF SAFETY INCOME AND GROWTH OPERATING PARTNERSHIP LP

113

DESCRIPTION OF SECURITIES

119

CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND OUR CHARTER AND BYLAWS

124

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

130

ERISA CONSIDERATIONS

151

PLAN OF DISTRIBUTION

153

LEGAL MATTERS

155

EXPERTS

156

CHANGE IN ACCOUNTANTS

157

WHERE YOU CAN FIND MORE INFORMATION

158

INFORMATION INCORPORATED BY REFERENCE

159

INDEX TO FINANCIAL STATEMENTS

F-1

 

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You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us. We have not, and the selling stockholders have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. This prospectus does not constitute an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial position, cash flows, liquidity, results of operations and prospects may have changed since those dates.

 

Tenant Data

 

We provide information in this prospectus about our tenants and leases. This should not be construed to indicate that any of our tenants is a sponsor of any offering made hereunder or is otherwise responsible for the information contained in, or omitted from, this prospectus. Additionally, some of this information is based on financial information provided to us by our tenants pursuant to our leases and has not been independently investigated or verified by us.

 

Non-GAAP Financial Measures

 

We use non-GAAP financial measures in this prospectus. For definitions and reconciliations of these non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

Certain Defined Terms

 

Unless the context otherwise requires, the following terms used throughout this prospectus have the following meanings:

 

“Combined Property Value”

 

the combined value of the land, buildings and improvements relating to a commercial property, as if there were no GL on the land at the property, as such value is determined by us using one or more valuation methodologies that we consider appropriate.

“concurrent iStar placement”

 

the private placement to iStar of 2,250,000 shares of our common stock at the initial public offering price of $20.00 per share that occurred concurrently with our initial public offering.

“formation transactions”

 

the transactions described under “Structure and Formation of Our Company” that we consummated prior to or concurrently with the completion of our initial public offering.

“GAAP”

 

accounting principles generally accepted in the United States of America.

“GICRE”

 

SFTY Venture LLC, an affiliate of GIC (Realty) Private Limited.

“GL”

 

ground lease and any other lease that we determine has characteristics of a ground lease, including length of lease term, value relative to Combined Property Value, periodic rent escalations or percentage rent participations and triple net terms.

“Ground Rent Coverage”

 

with respect to a property subject to a GL, the ratio of the Underlying Property NOI to the base rental payment due to us under the GL for the initial twelve month period of the GL, or for such other period as may be specified in this prospectus. Underlying Property NOI is based on information reported to us by our tenants without any independent investigation or verification by us. We are prohibited from publicly disclosing the Underlying Property NOI at One Ally Center pursuant to a confidentiality agreement with the tenant. We have estimated the Ground Rent Coverage for One Ally Center based upon available market information.

“initial portfolio financing”

 

the $227 million secured financing that we entered into in March 2017, as more fully described in “Description of Indebtedness—The Initial Portfolio Financing.”

 

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“initial public offering”

 

Our initial public offering of 10,250,000 shares of our common stock at an initial public offering price of $20.00 per share that closed on June 27, 2017.

“iStar”

 

iStar Inc. (NYSE: STAR), a publicly-traded REIT and the parent company of our manager.

“LA”

 

SFTY VII-B, LLC an affiliate of Lubert-Adler, L.P.

“NYSE”

 

New York Stock Exchange.

“our manager”

 

SFTY Manager LLC, our external manager and a wholly-owned subsidiary of iStar.

“predecessor”

 

a combination of entities owned by iStar prior to the formation transactions that owned the 12 properties subject to long-term leases that comprised our initial portfolio acquired from iStar.

“selling stockholders”

 

GICRE and LA

“Underlying Property NOI”

 

with respect to a property, the net operating income of the commercial real estate being operated at the property without giving effect to any rent paid or payable under our GL. Net operating income is calculated as property-level revenues less property-level operating expenses as reported to us by the tenant. We rely on net operating income as reported to us by our tenants without any independent investigation or verification by us. We are prohibited from publicly disclosing the Underlying Property NOI at One Ally Center pursuant to a confidentiality agreement with the tenant; therefore, in this prospectus where we have provided information using an assumed Underlying Property NOI at One Ally Center, we have also presented the same information excluding all assumed Underlying Property NOI at One Ally Center. See “Risk Factors—Risks Related to Our Portfolio and Our Business—We rely on Underlying Property NOI as reported to us by our tenants.”

“we,” “our,” “us” and “our company”

 

(i) Safety, Income & Growth Inc., a Maryland corporation, together with its consolidated subsidiaries, including Safety Income and Growth Operating Partnership LP, a Delaware limited partnership, which we refer to in this prospectus as “our operating partnership,” after giving effect to the formation transactions and (ii) our predecessor before giving effect to the formation transactions.

 

Unless the context otherwise requires or indicates, the property and financial information contained in this prospectus is as of September 30, 2017.

 

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PROSPECTUS SUMMARY

 

Before making a decision to invest in our common stock, you should read the following summary together with the more detailed information regarding our company, including under the caption “Risk Factors,” as well as the historical combined and unaudited pro forma financial statements, including the related notes, appearing elsewhere in this prospectus.

 

THE COMPANY

 

Overview

 

We believe that we are the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases, or GLs. GLs generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon. GLs are typically “triple net” leases, meaning that the tenant is responsible for development costs, capital expenditures and all property operating expenses, such as maintenance, real estate taxes and insurance. GLs are typically long-term (base terms ranging from 30 to 99 years, often with tenant renewal options) and have contractual base rent increases (either at a specified percentage or consumer price index (CPI) based, or both) and sometimes include percentage rent participations.

 

We believe that a GL represents a safe position in a property’s capital structure. This safety is derived from the typical structure of a GL, which we believe creates a low likelihood of a tenant default and a low likelihood of a loss by the GL owner in the event of a tenant default. A GL lessor typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default, which provides a strong incentive for a GL tenant to make the required GL rent payments. Additionally, the Combined Property Value of a property subject to a GL typically exceeds the amount of the GL owner’s investment at the time it was made; therefore, even if the GL owner takes over the property following a tenant default or upon expiration of the GL, the owner is reasonably likely to recover substantially all of its GL investment, and possibly amounts in excess of its investment, depending upon prevailing market conditions.

 

We target GLs because we believe that rental income from GLs can provide us with a safe, secure and growing cash flow stream. We believe that GLs offer us the opportunity to realize superior risk-adjusted total returns when compared to certain other alternative commercial property debt and equity investments. We intend to target investments in long-term GLs in which: (i) the initial value of our GL represents 30% to 45% of the Combined Property Value; (ii) the Ground Rent Coverage of the GL is between 2.0x to 5.0x; and (iii) the GL contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. We believe that these target attributes will mitigate the effects of inflation, compensate for anticipated increases in land values over time and establish a conservative position in the case of defaults. We also believe that the GL structure provides an opportunity for future investment value accretion through the reversion to us, as the GL owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from us. We intend to construct a portfolio of GLs diversified by property type, geography, tenant and lease term.

 

We believe that there is a significant market opportunity for a dedicated provider of GL capital like us. We believe that the market for existing GLs is a fragmented market 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 GLs, our investment thesis is predicated, in part, on what we believe is an untapped market opportunity to expand the use of the GL structure to a broader component of the approximately $7.0 trillion institutional commercial property market in the United States. We intend to capitalize on this market opportunity by utilizing multiple GL sourcing and origination channels, including acquiring existing GLs, manufacturing new GLs with third-party owners of commercial real estate and originating GLs to provide capital for development and redevelopment. We further believe that GLs 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 intend to draw on the extensive investment origination and sourcing platform of iStar, the parent company of our manager, to actively promote the benefits of the GL structure to prospective GL tenants.

 

We have a diverse portfolio that is comprised of 15 properties located in major metropolitan areas, 12 of which were acquired or originated by iStar over the past 20 years. All of the properties in our portfolio are subject to long-term leases consisting of 10 GLs and one master lease (covering five properties) that provide for periodic contractual rental escalations or percentage rent participations in gross revenues generated at the relevant properties.

 

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We are externally managed by SFTY Manager LLC, a wholly-owned subsidiary of iStar. Although our manager was recently formed, iStar has been an active real estate investor for over 20 years and has executed transactions with an aggregate value in excess of $35.0 billion. iStar has an extensive network for sourcing investments, which includes relationships with brokers, corporate tenants and developers, that it has established over its long operating history. As of September 30, 2017, iStar had total assets of approximately $5.8 billion and approximately 190 employees in its New York City headquarters and its seven regional offices across the United States.

 

We have designed our management agreement with terms that we believe are beneficial to our stockholders. We will pay no management fee to our manager during the first year of the management agreement. Thereafter, our manager will be entitled to a management fee based on our total equity (as defined in our management agreement), which will be payable solely in shares of our common stock, but will not be entitled to receive any additional performance or incentive compensation. Our manager will be restricted from selling shares of our common stock paid to it as management fees for two years from the date such shares are issued, subject to certain exceptions. Our management agreement has an initial term of one year with annual renewals to be approved by a majority of the independent members of our board of directors. The management agreement may generally be terminated by us or our manager at the end of each annual term without the payment of a termination fee. We have no employees. See “Our Manager and the Management Agreement—Management Agreement” for more detail on our management agreement. Additionally, we have entered into an exclusivity agreement with iStar pursuant to which iStar agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a GL unless it has first offered that opportunity to us and a majority of our independent directors has declined the opportunity. See “Our Manager and the Management Agreement—Exclusivity.”

 

We intend to elect and qualify to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2017.

 

Business and Growth Strategies

 

Our primary investment objective is to construct a diversified portfolio of GLs that will generate attractive risk-adjusted returns and support stable and growing distributions to our stockholders. The strategies we intend to use to seek to achieve our objective include:

 

·                  Utilize Multiple GL Sourcing and Origination Channels.  We have identified several channels for pursuing GL investment opportunities:

 

·                  Acquire Existing GLs.  We will seek to acquire existing GLs that are marketed for sale and actively solicit potential sellers and related property brokers of existing GLs to engage in off-market transactions. Our structure as an UPREIT gives us the ability to acquire GLs from owners, particularly estates and high net worth individuals, using operating partnership units that may provide the seller with tax advantages, as well as liquidity, portfolio diversification and professional management.

 

·                  Manufacture a GL with a Third Party.  We will seek to pursue opportunities where a third party owner of a commercial property may be interested in utilizing a GL structure to facilitate its options with respect to its interests in the property. We will manufacture the GL by splitting ownership of the property into an ownership interest and GL on the land, and a separate leasehold interest of the building and improvements thereon. We will acquire the ownership interest and GL on the land from the third party.

 

·                  Originate GLs to Provide Capital For Development or Value-Add Redevelopment or Repositioning.  We will seek opportunities where we can purchase land and simultaneously lease it pursuant to a new GL to a tenant who plans to develop a new, or significantly improve an existing, commercial property on the land.

 

·                  Acquire a Commercial Real Estate Property to Create a GL.  We will seek in select instances to acquire commercial real estate properties that have the potential to be converted into an ownership structure that includes a GL retained by us and a leasehold interest that we will seek to sell to a third party.

 

·                  Finance Third Party GLs.  Combining our capital resources with iStar’s relationships and GL expertise (which is available to us through our manager), we will seek opportunities to generate attractive risk-adjusted returns by financing the acquisition of GLs by third parties.

 

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·                  Follow a Disciplined Investment Strategy.  We generally intend to target GLs that meet some or all of the following investment criteria:

 

·                  Underlying properties located in major metropolitan areas;

 

·                  Average remaining initial lease terms of 30 to 99 years;

 

·                  Periodic contractual rent escalators or percentage rent participations;

 

·                  Value of approximately 30% to 45% of the Combined Property Value at the commencement of the lease or the acquisition date;

 

·                  Ground Rent Coverage of approximately 2.0x to 5.0x for the initial twelve month period of the lease;

 

·                  First year cash return on asset of between 3.0% and 5.0%;

 

·                  Underlying properties that we believe are well located in markets with high barriers to entry and that have durable cash flow; and

 

·                  Transaction sizes ranging from $20 to $250 million.

 

·                  Leverage iStar’s Network and Expertise.  Through our manager, we have access to iStar’s fully-integrated real estate investment platform. iStar has an extensive network for sourcing investments, which includes relationships with brokers, corporate tenants and developers, that it has established over more than 20 years of operations. In particular, iStar has invested more than $5.0 billion in net leased assets over 15 years. As of September 30, 2017, iStar’s owned and managed net lease real estate portfolio (including properties comprising our portfolio and properties owned in its net lease joint venture) had a gross carrying value of approximately $2.3 billion. In addition, iStar has significant experience in the direct ownership of operating real estate as well as construction and land development.

 

·                  Maintain Access to Multiple Sources of Capital.  We intend to maintain sufficient capital resources to pursue our investment strategy through access to multiple capital sources, including our $300 million revolving credit facility, possible future secured debt, unsecured corporate debt and the potential issuance of equity securities. We will also have the ability to offer operating partnership units to sellers of properties as a potentially tax efficient acquisition currency. We believe that having access to multiple sources of capital, including the public capital markets, and the ability to offer operating partnership units to sellers of properties may provide us with a cost of capital advantage and an advantage in acquisitions relative to non-public competitors.

 

Investment Highlights

 

·                  Cash Flow Safety with Growth.  We generally seek to invest in GLs that have conservative Ground Rent Coverage of 2.0x to 5.0x for the first 12 month period of the lease and that have a value of between 30% and 45% of the Combined Property Value at the commencement of the lease or acquisition date. The periodic contractual rental escalations and, in some cases, percentage rent participations, structured in our leases create embedded revenue growth and are intended to mitigate the effects of inflation and compensate us for the anticipated increases in land values over time. In addition, GLs are typically triple net structures under which we have no responsibility for development costs, capital expenditures or any property operating expenses, such as maintenance, real estate taxes and insurance. We believe that the stability and growth prospects of our cash flows, combined with the relative safety of our assets, offer the opportunity to generate attractive risk-adjusted returns for our stockholders.

 

·                  Opportunity for Value Accretion Through Reversion Rights Embedded in GLs.  At the expiration or earlier termination of a typical GL, we regain possession of the land and take title to the buildings and other improvements thereon for no additional consideration. This reversion right creates additional potential value to our stockholders that may be realized by us at the end of the lease by entering into a new GL on then current market terms, selling the land and improvements thereon or operating the property directly and leasing the spaces to tenants at prevailing market rates. We intend to target GLs in which the initial value of the GL represents 30 to 45% of the Combined Property Value. The balance of the Combined Property Value is

 

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potential additional value that may revert to us at the end of the lease term, which we refer to as a value bank. As an example, if the initial value of a GL is equal to 35% of the Combined Property Value, the Combined Property Value balance of 65% represents potential value accretion to us upon the reversion of the property, assuming no intervening decline in the Combined Property Value. Furthermore, according to studies cited by RCG, there is a strong correlation between inflation and commercial real estate values over time, which supports our belief that the value of our reversionary interest should increase over time as inflation increases. Our ability to recognize value through reversion rights may be limited by the rights of our tenants under some of our GLs, including tenant rights to purchase our land in certain circumstances and the right of one tenant to level improvements prior to the expiration of the GL. These rights are described further in “Risk Factors—Risks Related to Our Portfolio and Our Business—The tenant under our GL relating to the One Ally Center property has the right to level the building before the expiration of the lease,” “—Our master lease relating to five hotel properties and our GL relating to the Lock Up Self Storage Facility provide the tenants with the right to purchase our hotel properties or land, as the case may be, in certain circumstances” and “—The tenants under the GLs relating to the One Ally Center, 3333 LifeHope, Northside Forsyth Hospital Medical Center, NASA/JPSS Headquarters and The Buckler Apartments properties have certain preemptive rights should we decide to sell the properties.”

 

·                  First Mover Advantage in Untapped Market.  We believe that the market for existing GLs is fragmented with ownership comprised primarily of high net worth individuals, pension funds, life insurance companies, estates and endowments. We also believe that there are significant opportunities to create and acquire GLs outside of the existing market, because we believe we can offer attractive capital to property owners. As the first publicly-traded company focusing primarily on GLs, we believe that we can offer property owners a unique opportunity to contribute their properties to a real estate focused, diversified and professionally managed company. In addition, we believe that our capital resources, including availability under our $300 million revolving credit facility, and potential access to both public and private capital markets, will give us a competitive advantage when seeking to acquire and originate GLs.

 

·                  Attractive Portfolio.  Our portfolio is comprised of 15 properties located in major metropolitan areas, 12 of which were acquired or originated by iStar over the past 20 years. All of the properties in our portfolio are subject to long-term leases that provide for periodic contractual rental escalations or percentage rent that participates in gross revenues generated at the properties. We intend, over time, to increase the diversity of our portfolio by property type, geography, tenant and lease term in an effort to further enhance the safety of our cash flow by limiting the risks of concentration.

 

·                  Revolving Credit Facility to Support Growth.  Our $300 million revolving credit facility is available to fund future investment activity. Our current strategy is to generally target overall leverage, resulting from indebtedness under this facility or otherwise, at an amount that is approximately 25% of the aggregate Combined Property Value of our portfolio, but not to exceed a ratio of 2:1 relative to our total equity. However, our organizational documents do not limit the amount of indebtedness that we may incur.

 

·                  Sponsorship by iStar.  We believe that our relationship with iStar will provide us with opportunities to source and originate GL transactions that may not otherwise be available to us. iStar currently has approximately 190 professionals dedicated to investment origination, underwriting, asset management, legal review, accounting and other disciplines that are available to us through our manager. As we seek to grow our business, we believe that we will benefit from iStar’s geographic reach and more than 20 years of experience sourcing, underwriting and executing investments in all major property types, through numerous real estate cycles and negotiating with major sponsors. We further believe that the terms of our management agreement, including the elimination of the management fee during its first year, payment of the management fees solely in shares of our common stock, restrictions on the manager’s ability to sell such shares for two years from the date such shares are issued (subject to certain exceptions) and the absence of any incentive compensation or termination fees significantly aligns iStar’s interests with ours. Additionally, iStar’s ownership of approximately 34.6% of our outstanding common stock as of September 30, 2017 further aligns iStar’s interests with ours.

 

Our Portfolio

 

Our portfolio is comprised of 15 properties located in 10 states with 11 tenants. Our portfolio is comprised of 10 GLs and a master lease (relating to five hotel assets that we refer to as our “Hilton Western Portfolio”) that has many of the characteristics of a GL, including length of lease term, percentage rent participations, triple net terms and strong Ground Rent

 

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Coverage.  We acquired 12 of our properties prior to the completion of our initial public offering, and we acquired the remainder of our portfolio after the completion of our initial public offering.

 

The weighted average Ground Rent Coverage of the portfolio as of September 30, 2017 was 4.64x, assuming that the Underlying Property NOI at the One Ally Center for the 12 months ended September 30, 2017 was 5.00x the annualized in place base rent payable under our One Ally Center GL, and 4.59x excluding One Ally Center from the weighted average Ground Rent Coverage calculation. We are prohibited from publicly disclosing the Underlying Property NOI at One Ally Center pursuant to a confidentiality agreement with the tenant.

 

The tables below present an overview of our portfolio as of September 30, 2017, unless otherwise indicated.

 

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Our Leases

 

 

 

 

 

 

 

 

 

Lease Terms

 

Rent(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual

 

Cash

 

GAAP

 

Property
Name

 

Tenant

 

Guarantor

 

Occupancy

 

Lease
Commencement
Date

 

Lease
Expiration
Date

 

Original
Term

 

Remaining
Term

 

Tenant
Extension
Options

 

Rent Escalations
or Percentage
Rent During
Initial Lease
Term

 

A
In Place Base
Rent
(Annualized)(2)

 

B
TTM
Percentage
Rent(3)

 

C
Total
(A + B)

 

D
Total
GAAP
Income(4)

 

Doubletree Seattle Airport(5)(6)

 

HLT Operate DTWC LLC

 

Park Intermediate Holdings LLC

 

100

%

8/1/1995

 

12/31/2025

 

30 yrs

 

8 yrs

 

2 × 5 yrs

 

% Rent

 

$

4.5

 

$

1.0

 

$

5.5

 

$

5.5

 

One Ally Center

 

500 Webward LLC

 

N/A

 

100

%

3/31/2015

 

3/31/2114

 

99 yrs

 

97 yrs

 

2 × 30 yrs

 

1.5% / p.a.; CPI Lookback(7)

 

2.6

 

N/A

 

2.6

 

5.3

 

Hilton Salt Lake(5)

 

HLT Operate DTWC LLC

 

Park Intermediate Holdings LLC

 

100

%

8/1/1995

 

12/31/2025

 

30 yrs

 

8 yrs

 

2 × 5 yrs

 

% Rent

 

2.7

 

0.6

 

3.3

 

3.3

 

6200 Hollywood (South)

 

Blvd 6200 Owner South, LLC

 

N/A

 

100

%

1/25/2005

 

1/25/2104

 

99 yrs

 

86 yrs

 

None

 

% CPI / 4 Years(8)

 

2.6

 

N/A

 

2.6

 

2.6

 

3333 LifeHope

 

3333 Alpharetta Lifehope 10 Acre Land, LLC

 

Individual principal at property developer(10)

 

100

%

8/31/2017

 

8/31/2116

 

99 yrs

 

99 yrs

 

2 x 30 yrs

 

2.0% / p.a.

 

0.9

 

N/A

 

0.9

 

2.6

 

6201 Hollywood (North)

 

Blvd 6200 Owner North, LLC

 

N/A

 

100

%

5/4/2012

 

1/25/2104

 

92 yrs

 

86 yrs

 

None

 

% CPI / 4 Years(9)

 

2.4

 

N/A

 

2.4

 

2.5

 

Doubletree Mission Valley(5)

 

HLT Operate DTWC LLC

 

Park Intermediate Holdings LLC

 

100

%

8/1/1995

 

12/31/2025

 

30 yrs

 

8 yrs

 

2 × 5 yrs

 

% Rent

 

1.1

 

0.7

 

1.8

 

1.8

 

Doubletree Durango(5)

 

HLT Operate DTWC LLC

 

Park Intermediate Holdings LLC

 

100

%

8/1/1995

 

12/31/2025

 

30 yrs

 

8 yrs

 

2 × 5 yrs

 

% Rent

 

0.9

 

0.3

 

1.2

 

1.2

 

Doubletree Sonoma(5)

 

HLT Operate DTWC LLC

 

Park Intermediate Holdings LLC

 

100

%

8/1/1995

 

12/31/2025

 

30 yrs

 

8 yrs

 

2 × 5 yrs

 

% Rent

 

0.7

 

0.4

 

1.1

 

1.1

 

Northside Forsyth Hospital Medical Center

 

Forsyth Physicians Center SPE 1, LLC

 

Individual principal at property developer(10)

 

100

%

4/25/2016

 

4/25/2115

 

99 yrs

 

98 yrs

 

2× 30 yrs 

 

1.5% / p.a.; CPI Lookback(11)

 

0.5

 

N/A

 

0.5

 

1.1

 

Dallas Market Center: Sheraton Suites

 

Dallas Suites RE, LLC

 

N/A

 

100

%

9/30/2015

 

9/30/2114

 

99 yrs

 

97 yrs

 

None

 

2.0% / p.a.(12)

 

0.4

 

N/A

 

0.4

 

1.0

 

The Buckler Apartments

 

CA/Phoenix 401 Property Owner, LLC

 

N/A

 

100

%

11/21/2014

 

11/30/2112

 

98 yrs

 

95 yrs

 

None

 

15% / 10yrs

 

0.3

 

N/A

 

0.3

 

1.0

 

NASA/JPSS Headquarters

 

DRV Greentec, LLC

 

N/A

 

100

%

10/31/2005

 

10/31/2075

 

70 yrs

 

58 yrs

 

2 × 15 yrs

 

3.0% / 5yrs

 

0.4

 

N/A

 

0.4

 

0.4

 

Lock Up Self Storage Facility

 

Lock Up-Evergreen Development Series, LLC / Bloomington Development Series

 

Evergreen Real Estate Partners, LLC(13)

 

100

%

9/19/2007

 

9/30/2037

 

30 yrs

 

20 yrs

 

None

 

3.5% / 2yrs

 

0.1

 

N/A

 

0.1

 

0.1

 

Dallas Market Center: Marriott Courtyard

 

ARC Hospitality Portfolio I DLGL Owner, LP

 

American Realty Capital Hospitality Trust, Inc.

 

100

%

2/21/1989

 

1/2/2026

 

37 yrs

 

8 yrs

 

4 × 10 yrs

 

% Rent

 

0.1

 

0.2

 

0.3

 

 

Total / Weighted Avg.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

20.2

 

$

3.2

 

$

23.4

 

$

29.5

 

 


(1)

 

For the avoidance of doubt, rent payments do not include any payments made by our tenants to us in respect of reimbursement expenses.

(2)

 

Annualized cash base rental income in place as of September 30, 2017.

(3)

 

Total percentage cash rental income during the 12 months ended September 30, 2017.

(4)

 

Column “D” represents column “C” adjusted for non-cash income, primarily consisting of straight-line rent, to conform with GAAP.

(5)

 

Property is part of the Hilton Western Portfolio and is subject to a master lease. In November 2016, the master lease governing the Hilton Western Portfolio was amended to change the look back period for which annual percentage rent is computed from the trailing twelve months ended September 30 to the trailing twelve months ended December 31. In March 2017, we recorded $0.5 million of income representing a one-time stub payment of percentage rent for the three months ended December 31, 2016, to account for the change in the look back period. The aggregate $3.0 million percentage rent shown above for the hotels comprising the Hilton Western Portfolio excludes the one-time $0.5 million stub period payment.

(6)

 

A majority of the land underlying this property is owned by a third party and is ground leased to us through 2044 for $0.4 million per year (subject to adjustment for changes in the CPI); however, we pass this cost on to our tenant under the terms of our master lease. See “Risk Factors—Risks Related to Our Portfolio and Our Business—We are the tenant of a GL underlying a majority of our Doubletree Seattle Airport property.”

(7)

 

During each 10th lease year, annual fixed rent is adjusted to the greater of (i) 1.5% over the prior year’s rent, or (ii) the product of the rent applicable in the initial year of the 10 year period multiplied by a CPI factor, subject to a cap on the increase of 20% of the rent applicable in that initial year.

(8)

 

Base rent is subject to increase every 4 years based on a percentage of growth in the CPI for the greater Los Angeles area, California in that time span. Rent increase capped at 12.0% from one rent period to the next. Next potential base increase is May 2018. Notwithstanding the foregoing, in 2058 and 2078, the annual base rent will be reset based on a calculation derived from the then fair market value of the land, but not less than the annual base rent that was in effect before the reset.

(9)

 

Base rent is subject to increase every 4 years based on a percentage of growth in the CPI for the greater Los Angeles area, California in that time span. Rent increase capped at 12.0% from one rent period to the next. Next potential base increase is February 2019. Notwithstanding the foregoing, in 2059 and 2079, the annual base rent will be reset based on a calculation derived from the then fair market value of the land, but not less than the annual base rent that was in effect before the reset.

(10)

 

Guarantee expires upon completion of construction.

(11)

 

During each 10th lease year, annual fixed rent is adjusted to the greater of (i) 1.5% over the prior year’s rent, or (ii) the product of the rent applicable in the initial year of the 10 year period multiplied by a CPI factor, subject to a cap on the increase of 20% of the prior year’s rent.

(12)

 

For the 51st through 99th years of the lease, the base rent is the greater of (i) the annual rent calculated based on 2.0% annual rent escalation throughout the term of the lease, and (ii) the fair market rental value of the property.

(13)

 

The individual principals’ guaranty covers tenant obligations to the extent not guaranteed by Evergreen Real Estate Partners, LLC.

 

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Table of Contents

 

Underlying Property and Tenant Information

 

 

 

Property

 

Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

Property Name

 

MSA

 

Address

 

Property Type

 

Year Built / Major
Renovation Date

 

Occupancy
as of
September
30,
2017(1)

 

Units /
Keys

 

Square Feet

 

Underlying
Property
NOI(2)

 

Ground Rent
Coverage(2)

 

Doubletree Seattle Airport(3)

 

Seattle-Tacoma-Bellevue

 

18740 International Blvd, Seattle, WA

 

Hotel

 

1969 / 2011

 

85

%

850

 

579,432

 

$14.8

 

3.3x

 

One Ally Center

 

Detroit-Warren-Dearborn

 

500 Woodward Ave, Detroit, MI

 

Office

 

1992

 

100

%

N/A

 

957,355

 

(3

)

>5.0x(4)

 

Hilton Salt Lake(3)

 

Salt Lake City

 

255 S. West Temple, Salt Lake City, UT

 

Hotel

 

1983 / 2012

 

73

%

499

 

425,000

 

10.0

 

3.7x

 

6200 Hollywood (South)

 

Los Angeles-Riverside-Orange County

 

6200 Hollywood Boulevard, Los Angeles, CA

 

Multi-Family

 

2018

 

 

 

500

(5)

143,151

 

>14.0(6)

 

>5.4x(6)

 

3333 LifeHope

 

Atlanta-Sandy Springs-Roswell

 

3333 Old Milton Parkway, Alpharetta, GA

 

Office

 

N/A

 

 

 

N/A

 

117,355

 

3.1(7)

 

3.6x

 

6201 Hollywood (North)

 

Los Angeles-Riverside-Orange County

 

6201 Hollywood Boulevard, Los Angeles, CA

 

Multi-Family

 

2016

 

 

 

535

(5)

183,802

 

>14.5(8)

 

>6.0x(8)

 

Doubletree Mission Valley(3)

 

San Diego-Carlsbad

 

7450 Hazard Center Dr., San Diego, CA

 

Hotel

 

1991 / 2012

 

87

%

300

 

236,745

 

6.7

 

6.0x

 

Doubletree Durango(3)

 

Durango

 

501 Camino Del Rio, Durango, CO

 

Hotel

 

1986 / 2009

 

75

%

159

 

132,384

 

2.9

 

3.3x

 

Doubletree Sonoma(3)

 

San Francisco-San Jose-Oakland

 

1 Doubletree Dr., Rohnert Park, CA

 

Hotel

 

1987 / 2016

 

76

%

245

 

213,000

 

3.6

 

4.9x

 

Northside Forsyth Hospital Medical Center

 

Atlanta-Sandy Springs-Marietta

 

4150 Deputy Bill Cantrell Memorial Rd, Cumming, GA

 

Medical Office Building

 

2017

 

95

%

N/A

 

92,573

(9)

1.5

 

3.0x

 

Dallas Market Center: Sheraton Suites

 

Dallas-Fort Worth-Arlington

 

2101 Stemmons Freeway, Dallas, TX

 

Hotel

 

1989 / 2017

 

77

%

251

 

178,331

 

2.1(10)

 

5.9x

 

The Buckler Apartments(3)

 

Milwaukee-Waukesha-West Allis

 

401 West Michigan Street, Milwaukee, WI

 

Multi-Family

 

1977 / 2016

 

79

%

207

 

206,712

 

2.3

 

9.2x

 

NASA/JPSS Headquarters

 

Washington-Arlington-Alexandria

 

7700 and 7720 Hubble Drive, Lanham, MD

 

Office

 

1994

 

100

%

N/A

 

120,000

 

2.1(11)

 

4.9x

 

Lock Up Self Storage Facility

 

Minneapolis-St. Paul-Bloomington

 

221 American Blvd W., Bloomington, MN

 

Self Storage

 

2008

 

84

%

812

 

104,000

 

0.8(10)

 

6.5x

 

Dallas Market Center: Marriott Courtyard

 

Dallas-Fort Worth-Arlington

 

2150 Market Center Blvd, Dallas, TX

 

Hotel

 

1989 / 2015

 

76

%

184

 

158,805

 

2.3(10)

 

18.5x

 

Total / Weighted Avg.

 

 

 

 

 

 

 

 

 

 

 

 

 

3,848,645

 

 

 

4.59x/4.64x(12)

 

 


(1)

 

The hotel occupancy rates shown are the average occupancy rates of the hotels for the 12 months ended September 30, 2017. Construction of Northside Forsyth Medical Center was completed on May 11, 2017 and occupancy reflects pre-leased percentage as of September 30, 2017. The Buckler Apartments property is currently in its lease-up phase and occupancy is as of September 30, 2017. The occupancy rate of Lock Up Self Storage Facility is the most recent mid-point of the occupancy range, provided to us by the tenant, which was June 30, 2016. We rely on the occupancy information reported to us by our tenants and do not independently investigate or verify the information supplied to us by our tenants.

(2)

 

Underlying Property NOI is defined as the net operating income of the commercial real estate being operated at the property without giving effect to any rent paid or payable under our GL. Net operating income is calculated as property-level revenues less property-level operating expenses as reported to us by the tenant. We rely on net operating income as reported to us by our tenants without any independent investigation or verification by us. Underlying Property NOI is shown for the 12 months ended September 30, 2017 unless otherwise noted. Ground Rent Coverage is defined as the ratio of the Underlying Property NOI to the base rental payment due to us under the GL.

(3)

 

We own the buildings and site improvements at these properties.

(4)

 

Underlying Property NOI information provided by our GL tenant is confidential. Company estimate is based on available market information.

(5)

 

Reflects the estimated number of apartments at 6201 Hollywood and to be constructed at 6200 Hollywood.

(6)

 

The property is currently under renovation. We currently expect renovation to be completed in April 2018. Represents our underwritten stabilized net operating income at the property upon stabilization. Our estimates are based on available market information, including leasing activity at comparable properties in the market.

(7)

 

The property is currently being renovated and converted into a class-A medical office building. We currently expect construction to be completed in 2018. Represents our underwritten stabilized net operating income at the property (which is 100% pre-leased) upon stabilization.

(8)

 

Construction was completed in 2016 and the property is currently in the lease up phase. A full year of property results is not yet available. Underlying Property NOI represents our underwritten stabilized net operating income at the property upon stabilization. Our estimates are based on leasing activity at the property and available market information, including leasing activity at comparable properties in the market.

(9)

 

Represents square footage of initial building. The site can accommodate an additional 115,100 square feet.

(10)

 

Based on available information, represents Underlying Property NOI for the 12 months ended June 30, 2017.

(11)

 

Does not reflect $0.2 million of legal expenses incurred by our GL tenant from January 1, 2017 to September 30, 2017.

(12)

 

The weighted average of the Ground Rent Coverage is calculated by dividing the Underlying Property NOI showin in this table by the in-place base rent of $20.2 million shown in the table titled “Our Leases” above. The 4.64x average assumes the Underlying Property NOI of One Ally Center was 5.00x the in-place base rent shown in the table above, and the 4.59x average excludes One Ally Center from the calculation.

 

7



Table of Contents

 

Great Oaks Purchase Commitment

 

In October 2017, we entered into a purchase agreement to acquire a GL for land on which a 301 unit, luxury multi-family project known as “Great Oaks” is currently being constructed in San Jose, California. Pursuant to the purchase agreement, we will purchase the GL on November 1, 2020 from iStar for $34.0 million. iStar is providing a $80.5 million construction loan to the developer. The GL expires in 2116 and provides for annual rent of $1.27 million with fixed escalations of 2.0% annually. We currently estimate that the Ground Rent Coverage at the time of stabilization will be in excess of 5.0x, assuming that construction is completed on or before November 1, 2020.

 

Summary Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with the additional risks described in “Risk Factors” and all other information contained in this prospectus, before making an investment decision to purchase our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial position, cash flows, liquidity, results of operations, the market price of our common stock, ability to service our indebtedness and our ability to make cash distributions to our stockholders, which could cause you to lose all or a significant part of your investment in our common stock.

 

·                  Our expectations as to the potential size of the market for GL transactions and the availability of investment opportunities are untested and may prove to be incorrect.

 

·                  If potential tenants are unable to secure financing for their leasehold interests, their appetite for GLs may diminish, which could materially and adversely affect our growth prospects. In addition, if our current tenants are unable to secure financing to continue to operate their businesses and pay us rent, we could be materially and adversely affected.

 

·                  The rental payments under our leases may not keep up with changes in market value and inflation.

 

·                  For the nine months ended September 30, 2017, we received approximately 48% of our total revenues from the tenant under our master lease relating to five hotels and approximately 24% of our total revenues from the tenant at One Ally Center in Detroit, Michigan.

 

·                  Hotel industry concentration in our portfolio exposes us to the financial risks of a downturn in the hotel industry generally, and in the hotel operations at our specific properties.

 

·                  We are the tenant of a GL underlying a majority of our Doubletree Seattle Airport property.

 

·                  Our manager’s liability is limited under the management agreement, and we have agreed to indemnify our manager against certain liabilities. As a result, we could experience poor performance or losses for which our manager would not be liable.

 

·                  We depend on our manager and our manager’s key personnel with long-standing business relationships. The loss of our manager or our manager’s key personnel could threaten our ability to operate our business successfully.

 

·                  Our management agreement was negotiated between related parties and its terms, including fees payable to our manager, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

 

·                  iStar and the selling stockholders collectively have significant ownership interests in us. In addition, iStar and LA have influence over our affairs as a result of their representation on our board of directors.

 

·                  Our manager manages our portfolio pursuant to our investment guidelines that are approved by our board of directors, but our board of directors will not approve each investment decision made by our manager, which may result in our manager making riskier investments on our behalf than would be specifically approved by our board of directors.

 

·                  There are various conflicts of interest in our relationship with iStar and its affiliates, including our manager, and our executive officers and/or directors who are also officers and/or directors of iStar, as well as with our selling stockholders, which could result in decisions that are not in the best interest of our stockholders.

 

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Table of Contents

 

·                  We are subject to interest rate risks, including that if interest rates rise faster or interest expense increases in greater amounts than any rent escalations or percentage rents under our leases, and we may not generate sufficient cash to make distributions to our stockholders, to finance new investments and to meet our debt obligations as they come due.

 

·                  We have only recently gone public and an active trading market may not be sustained or be liquid, which may cause the market price of our common stock to decline significantly and make it difficult for investors to sell their shares.

 

·                  Initial estimated cash available for distribution may not be sufficient to make distributions to our stockholders at expected levels, or at all.

 

·                  Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.

 

·                  The REIT distribution requirements could require us to borrow funds, issue equity or sell assets during unfavorable market conditions or subject us to tax, which may affect our ability to seize strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

 

Structure and Formation of Our Company

 

On or before April 14, 2017, (i) we acquired our initial portfolio of 12 assets from iStar, (ii) we completed the $227 million initial portfolio financing and distributed the proceeds therefrom to iStar, (iii) the selling stockholders acquired 2,875,000 shares of our common stock for $57.5 million in cash (representing a 51% ownership interest in our company at such time), and (iv) we issued 2,775,000 shares of our common stock (representing a 49% ownership interest in our company at such time) and paid $57.5 million in cash to iStar in consideration of its contribution of our initial portfolio to us subject to the indebtedness of the initial portfolio financing. The total value of the cash and stock paid to iStar in these transactions, which we refer to as our formation transactions, was $340 million, based on the initial public offering price per share.

 

Concurrently with the completion of our initial public offering on June 27, 2017, we sold to iStar 2,250,000 shares of our common stock in the concurrent iStar placement at the initial public offering price per share for an aggregate purchase price of $45.0 million.

 

Concurrently with the completion of our initial public offering, we and our operating partnership entered into a $300 million revolving credit facility to, among other things, fund future GL investments, which we refer to in this prospectus as “our revolving credit facility.”

 

Our Structure

 

We hold substantially all of our assets, and conduct substantially all of our operations, through our operating partnership, and we are the sole general partner of our operating partnership.

 

The following diagram depicts our ownership structure as of September 30, 2017.

 

9



Table of Contents

 

 


(1)                                 See “Principal and Selling Stockholders.”

 

Benefits to Related Parties

 

iStar, our directors and executive officers and the selling stockholders received material benefits in connection with our formation transactions, including the following:

 

·                  iStar received $340 million of consideration for our initial portfolio, comprised of (i) 2,775,000 shares of our common stock having an aggregate value of $55.5 million, based on the initial public offering price per share, (ii) the proceeds from our $227 million initial portfolio financing and (iii) $57.5 million of proceeds from our  sale of common stock to the selling stockholders in the formation transactions.

 

·                  iStar purchased 2,250,000 shares of our common stock in the concurrent iStar placement at the initial public offering price per share for an aggregate purchase price of $45.0 million.

 

·                  We entered into the management agreement with our manager, a wholly-owned subsidiary of iStar, pursuant to which our manager will be entitled to a management fee for its services and reimbursement of certain expenses.

 

·                  We entered into stockholder’s agreements with each of the selling stockholders under which (i) GICRE has the right to appoint a non-voting board observer, the right to purchase additional shares of our common stock up to an amount equal to 10.0% of future issuances of common stock by us, subject to certain exceptions, and a right of first offer to participate in co-investments when we seek coinvestment capital for investments, subject to certain exceptions; and (ii) LA has the right to designate one director as a nominee for election to our board and the right to purchase additional shares of our common stock up to an amount equal to 4.0% of future issuances of common stock by us, subject to certain exceptions. These rights are subject to the selling stockholders maintaining specified ownership interests in us.

 

·                  We entered into indemnification agreements with our directors, executive officers and board observer providing for the indemnification by us for certain liabilities and expenses incurred as a result of actions brought, or threatened to be brought, against (i) our directors, executive officers and board observer and (ii) our executive officers who are former members, managers, stockholders, directors, limited partners, general partners, officers, board observers, or controlling persons of our predecessor in their capacities as such.

 

·                  We entered into a registration rights agreement with iStar with respect to resales of shares of our common stock received as consideration for the sale of the initial portfolio to us, purchased in the concurrent iStar placement and received as management fees under the management agreement.

 

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Table of Contents

 

·                  We entered into a registration rights agreement with each of the selling stockholders with respect to resales of shares of our common stock purchased by them in the formation transactions and in the future pursuant to our stockholder’s agreements with each of the selling stockholders.  The registration statement of which this prospectus is a part has been filed pursuant to that registration rights agreement.

 

·                  iStar agreed to guaranty certain of our obligations to the lenders and indemnify our lenders under our initial portfolio financing, including with respect to customary environmental matters and recourse carveout matters, such as fraud, gross negligence, failure to pay taxes, triggering certain tenant rights and certain other items. We have agreed to indemnify iStar for any losses suffered by it under the guaranty and environmental indemnity other than as a result of iStar’s material breach of its obligations under the initial portfolio financing.

 

·                  We granted a waiver from the ownership limit contained in our charter to iStar to own up to 39.9%, and to GICRE to own up to 15.0%, of the outstanding shares our common stock in the aggregate.

 

·                  We adopted our equity incentive plan to provide equity incentive opportunities to members of our manager’s management team and employees who perform services for us, our directors, advisers, consultants and other personnel, and issued, in the aggregate, thereunder 40,000 shares of restricted common stock to our directors who are not officers or employees of our manager or iStar at the closing of our initial public offering. See “Management—Equity Incentive Plan” for further details.

 

Relationship with iStar

 

iStar owns approximately 34.6% of the outstanding shares of our common stock as of September 30, 2017 which we believe provides significant alignment of interest with us.

 

We entered into an exclusivity agreement with iStar pursuant to which iStar agreed that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a GL unless it has first offered that opportunity to us. The exclusivity agreement will not apply to opportunities that include only an incidental interest in GLs or opportunities to manufacture or otherwise create a GL from a property that has been owned by iStar’s existing net lease venture with GICRE for at least three years after the closing of our initial public offering. The existing net lease venture invests in single tenant properties leased to corporate entities under triple net leases. The venture had total assets of approximately $635 million at September 30, 2017. The investment period of the venture is scheduled to expire in February 2018 and the term of the venture is scheduled to end in February 2022 (subject to two one-year extensions), although both dates may be extended by joint agreement of the partners. iStar owns a 51.9% interest in, and manages the day to day operations of, the net lease venture and several of its executives whose time is substantially devoted to the venture own a 0.6% equity interest in the venture and are entitled to participate in promote payments made to iStar. The parties have committed a total of $500 million to the net lease venture, of which $221 million was drawn as of September 30, 2017. The exclusivity agreement has an initial term of one year and will automatically renew with each annual renewal of the management agreement. The exclusivity agreement will automatically terminate upon any termination of the management agreement and will not otherwise be terminable. See “Our Manager and the Management Agreement—Exclusivity.”

 

iStar paid $18.9 million of underwriting discounts and commissions payable to the underwriters in connection with our intial public offering, our other offering expenses and our expenses incurred in connection with the concurrent iStar placement, including legal, accounting, consulting, and regulatory filing expenses.

 

iStar agreed to provide the lenders under our initial portfolio financing with a limited recourse guaranty and indemnity of certain of our obligations with respect to environmental matters and customary recourse carveout matters, including fraud, gross negligence, failure to pay taxes, the triggering of certain tenant rights and certain other items. iStar’s limited recourse guaranty and environmental indemnity will remain in place until the first to occur of our equity market capitalization reaching at least $500 million or our net worth as of our most recent balance sheet reaching at least $250 million. We have agreed to indemnify iStar for any amounts it is required to pay, or other losses it suffers, under its limited recourse guaranty and environmental indemnity, other than as a result of iStar’s material breach of its obligations under the initial portfolio financing.

 

We have entered into a purchase agreement with iStar to acquire the Great Oaks GL.  See “Our Portfolio—Great Oaks Purchase Commitment.”

 

Management Agreement

 

We entered into a management agreement with our manager effective upon the completion of our initial public offering. We have designed our management agreement with terms that we believe are beneficial to us and our stockholders. Specifically, during the first year of the management agreement, we will pay no management fee to our manager. Thereafter, we will pay our manager a management fee, payable solely in shares of our common stock, equal to the sum of 1.0% of total equity up to $2.5 billion and 0.75% of total equity in excess of $2.5 billion. Our manager will not be entitled to receive any

 

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additional performance or incentive compensation. Our management agreement has an initial term of one year with annual renewals to be approved by a majority of the independent members of our board of directors. Additionally, the management agreement may be terminated by us or our manager at the end of each annual term without the payment of a termination fee; provided, however, that we may not terminate the management agreement unless a successor guarantor reasonably acceptable to iStar has (i) agreed to replace iStar under its limited recourse guaranty and environmental indemnity with respect to our initial portfolio financing or (ii) provided iStar with a reasonably acceptable indemnity for any losses suffered by iStar on its limited recourse guaranty and environmental indemnity after its termination as our manager.

 

The management fee will be paid solely in shares of our common stock valued at the greater of (i) the volume weighted average market price of our common stock during the quarter for which the fee is being calculated and (ii) the initial public offering price per share of our common stock set forth on the cover of this prospectus, before underwriting discounts and commissions. Our manager will be restricted from selling shares of our common stock paid to it as management fees for two years from the date such shares are issued, except that such restrictions will terminate at the effective date of the termination of the management agreement, and, for the avoidance of doubt, such restrictions will not apply to distributions of such shares to iStar in contemplation of a further distribution of such shares to iStar’s stockholders. We will also reimburse our manager for all operating expenses incurred by our manager in providing services under the management agreement, including expenses related to legal, accounting, due diligence and other services, except that our manager agreed not to seek reimbursement for certain personnel expense allocations during the first year of the management agreement. Expenses will be reimbursed in cash on a monthly basis.

 

Our manager will manage the day-to-day operations of our company in conformity with our investment guidelines, which may be modified or supplemented by our board of directors from time to time. For more information about the management agreement, see “Our Manager and the Management Agreement—Management Agreement.”

 

Conflicts of Interest

 

Conflicts of interest may exist or could arise in the future with iStar and its affiliates, including our executive manager, our officers and/or directors who are also officers and/or directors of iStar, and any limited partner of our operating partnership. Conflicts may include, without limitation: conflicts arising from the enforcement of agreements between us and iStar or our manager; conflicts in the amount of time that officers and employees of our manager will spend on our affairs versus iStar’s other affairs; conflicts in future transactions that we may pursue with iStar; and conflicts in pursuing transactions that could be structured as either a GL or as another type of transaction that is within iStar’s investment focus. We do not generally expect to enter into joint ventures with iStar, but if we do so, the terms and conditions of our joint venture investment will be subject to the approval of a majority of disinterested directors of our board of directors. As of September 30, 2017, iStar owned approximately 34.6% of the outstanding shares of our common stock and has registration rights for resales of shares of our common stock received as consideration for the sale of the initial portfolio to us, purchased in the concurrent iStar placement and received as management fees under the management agreement. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer. Our manager is a wholly-owned subsidiary of iStar. As a result of the foregoing relationships, iStar has significant influence over us. Additionally, although we entered into an exclusivity agreement with iStar, the agreement contains exceptions to iStar’s exclusivity for opportunities that include only an incidental interest in GLs and opportunities to manufacture or otherwise create a GL from a property that has been owned by iStar’s existing net lease venture with GICRE for at least three years after the closing of our initial public offering. Accordingly, the exclusivity agreement will not prevent iStar from pursuing certain GL opportunities directly or through the aforementioned net lease venture. See “Our Manager and the Management Agreement—Exclusivity.”

 

The terms of our formation transactions, our management agreement with our manager, our exclusivity and registration rights agreements with iStar and the purchase agreement for the Great Oaks GL were negotiated between related parties and may not be as favorable to us as if it had been negotiated at arm’s length with an unaffiliated third party. In addition, the obligations of our manager and its officers and other personnel to engage in other business activities at iStar may reduce the time that our manager and its officers and other personnel spend managing us.

 

Conflicts of interest may exist or could arise in the future with the selling stockholders and us in connection with the enforcement of the stockholders and registration rights agreements between us and the selling stockholders, and with iStar’s existing net lease joint venture and us in connection with future investment opportunities.

 

Our directors and executive officers have duties to our company under applicable Maryland law, and our executive officers and our directors who are also disinterested directors of our board of directors or officers of iStar also have duties to iStar under applicable Maryland law. Those duties may come in conflict from time to time. At the same time, we, as the

 

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general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its other partners under Delaware law. Our operating partnership agreement provides that in the event of a conflict in the duties owed by us to our stockholders and the fiduciary duties owed by us, in our capacity as general partner of our operating partnership, to those limited partners, we will fulfill our fiduciary duties to those limited partners by acting in the best interests of our company.

 

We adopted policies that are designed to reduce certain potential conflicts of interests. See “Policies with Respect to Certain Activities—Conflict of Interest Policies.”

 

Restrictions on Ownership of Our Capital Stock

 

Our charter generally prohibits, with certain exceptions, any stockholder from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or all classes and series of our capital stock. We have granted a waiver to iStar to own up to 39.9%, and to GICRE to own up to 15.0%, of the outstanding shares of our common stock in the aggregate.

 

Distribution Policy

 

We intend to make regular quarterly distributions to holders of shares of our common stock. We paid a pro rata initial distribution of $0.0066 with respect to the period commencing on the completion of our initial offering and ended on June 30, 2017, based on $0.15 per share for a full quarter. We paid a dividend of $0.15 per share in respect of the quarter ended September 30, 2017.  On an annualized basis, this distribution rate equates to $0.60 per share. We intend to maintain our initial distribution rate for the 12-month period following completion of our intitial public offering unless our actual or anticipated results of operations, cash flows or financial position, economic or market conditions or other factors differ materially from the assumptions used in our estimate. Any future distributions will be at the discretion of our board of directors and will be dependent upon a number of factors, including our actual and anticipated results of operations, cash flows and financial position, our qualification as a REIT, prohibitions or other restrictions under financing agreements, economic and market conditions, applicable law and other factors described herein.

 

Our Tax Status

 

We intend to elect and to qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2017. We believe we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and we intend to continue to operate in a manner that will enable us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2017. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding stock and the amount of our distributions. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. See “Certain U.S. Federal Income Tax Considerations.”

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other publicly-traded companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We have elected to utilize the exemption for auditor attestation requirements.

 

In addition, the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of this extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

Company Information

 

On October 20, 2017, we changed our name from Safety, Income and Growth, Inc. to Safety, Income & Growth Inc.  Our principal executive offices are located at 1114 Avenue of the Americas, New York, New York 10036. Our telephone number is (212) 930-9400. Our website address is www.safetyincomegrowth.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus.

 

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Selected Historical and Unaudited Pro Forma Financial and Other Data

 

The following table sets forth selected financial and other data on (i) a historical consolidated basis for our company and on a combined basis for our predecessor and (ii) a pro forma basis for our company giving effect to (a) the formation transactions, (b) our initial public offering and the concurrent iStar placement and the use of the net proceeds therefrom, (c) certain other transactions and (d) entry into our management agreement with our manager.

 

The selected historical combined balance sheet data as of December 31, 2016 and 2015 of our predecessor and selected historical combined operating data for the years ended December 31, 2016 and 2015 of our predecessor have been derived from the audited historical combined financial statements of our predecessor included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of September 30, 2017 and the selected historical consolidated and combined operating data for the period from Janaury 1, 2017 to April 13, 2017, the period from April 14, 2017 to September 30, 2017 and the nine months ended September 30, 2016 have been derived from the unaudited historical consolidated and combined financial statements included elsewhere in this prospectus. Our results of operations for the nine months ended September 30, 2017 are not necessarily indicative of our results of operations for the year ending December 31, 2017.

 

The accompanying historical combined financial data of our predecessor does not represent the financial position, results of operations and cash flows of one legal entity, but rather a combination of entities under common control that have been “carved out” from iStar’s historical consolidated financial statements. The historical combined financial statements of our predecessor include expense allocations of certain iStar corporate functions, including executive oversight, treasury, finance, human resources, tax planning, internal audit, financial reporting, information technology and investor relations. These allocations are not indicative of the actual expense that would have been incurred had our predecessor operated as an independent, publicly-traded, externally-managed company for the periods presented. We believe that the assumptions and estimates used in preparation of the underlying combined financial statements of our predecessor are reasonable. However, the combined financial statements herein do not necessarily reflect what our predecessor’s financial position, results of operations or cash flows would have been if it had been a standalone company during the periods presented, nor are they necessarily indicative of our future financial position, results of operations or cash flows.

 

The unaudited selected pro forma financial data for the nine months ended September 30, 2017 and for the year ended December 31, 2016 is presented as if: (i) our capitalization; (ii) the acquisition by the selling stockholders; (iii) our initial public offering, the concurrent iStar placement and the use of proceeds therefrom; (iv) entry into our management agreement with our manager; (v) the initial portfolio financing and (vi) other related transactions, each as more fully described in this prospectus, took place concurrently on January 1, 2016 for the operating data. The unaudited pro forma financial data are not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor do they purport to represent our future financial position or results of operations.

 

You should read the following selected financial data in conjunction with the historical consolidated and combined financial statements and the unaudited pro forma financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Pro Forma

 

Historical
Consolidated

 

Historical Combined

 

 

 

For the
Nine
Months
Ended
September 30,

 

For the
Year
Ended
December 31,

 

For the Period
from April 14,
2017 to
September 30,

 

For the Period
from January
1, 2017 to April

 

For the
Nine
Months
Ended
September 30,

 

For the
Years
Ended
December 31,

 

 

 

2017

 

2016

 

2017

 

13, 2017

 

2016

 

2016

 

2015

 

 

 

(In thousands)

 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ground and other lease income

 

$

18,759

 

$

27,363

 

$

10,374

 

$

5,916

 

$

14,005

 

$

21,664

 

$

18,558

 

Total revenues

 

18,845

 

27,363

 

10,460

 

6,024

 

14,037

 

21,743

 

18,565

 

Total costs and expenses

 

20,764

 

25,263

 

12,785

 

4,686

 

11,121

 

15,128

 

12,848

 

Net income (loss)

 

(1,411

)

2,100

 

(2,325

)

1,846

 

2,916

 

6,615

 

5,717

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO(1)

 

$

4,771

 

$

9,622

 

$

1,814

 

$

2,239

 

$

5,272

 

$

9,757

 

$

8,857

 

AFFO(1)

 

6,464

 

10,681

 

2,912

 

1,352

 

3,313

 

7,161

 

7,327

 

EBITDA(1)

 

12,046

 

18,319

 

6,127

 

5,179

 

11,344

 

17,999

 

16,086

 

 


(1)                                 See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a definition of this metric and a reconciliation to the most directly comparable GAAP number and a statement of why our management believes the presentation of the metric provides useful information to investors.

 

 

 

Historical Consolidated and
Combined

 

 

 

As of
September
30,

 

As of December 31,

 

 

 

2017

 

2016

 

2015

 

 

 

(In thousands)

 

BALANCE SHEET DATA:

 

 

 

 

 

 

 

Real estate, net

 

$

410,393

 

$

104,478

 

$

103,680

 

Real estate-related intangible assets, net(1)

 

140,069

 

32,680

 

33,109

 

Total assets

 

650,524

 

155,667

 

144,256

 

Total liabilities

 

292,293

 

1,576

 

227

 

Total equity

 

358,231

 

154,091

 

144,029

 

Total liabilities and equity

 

650,524

 

155,667

 

144,256

 

 


(1)                                 As of December 31, 2015, real estate-related intangible assets, net have been reclassed from deferred expenses and other assets, net.

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with all the other information contained in this prospectus, including the financial statements and the notes thereto, before making an investment decision to purchase our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial position, cash flows, liquidity, results of operations, the market price of our common stock, our ability to service our indebtedness and our ability to make cash distributions to our stockholders (including those necessary to qualify and maintain our qualification as a REIT), which could cause you to lose all or a significant part of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See the section entitled “Forward-Looking Statements.”

 

Risks Related to Our Portfolio and Our Business

 

Our expectations as to the potential size of the market for GL transactions and the availability of investment opportunities are untested and may prove to be incorrect.

 

We believe that we are the first public company that intends to invest primarily in GL assets and the achievement of our investment objectives depends, in part, on our ability to grow our portfolio. We cannot assure you that the size of the market for GLs will meet our estimates. Potential tenants may prefer to own the land underlying the improvements they intend to develop, rehabilitate or own. In addition, we have been in an extended period of historically low interest rates, and when rates increase, there may be less activity generally in real estate transactions, including leasing, development and financing and less financing available for potential tenants to finance their leasehold interests.

 

If potential tenants are unable to secure financing for their leasehold interests, their appetite for GLs may diminish, which could materially and adversely affect our growth prospects. In addition, if our current tenants are unable to secure financing to continue to operate their businesses and pay us rent, we could be materially and adversely affected.

 

A potential tenant’s interest in entering into a GL transaction as opposed to alternative financing, such as mortgage financing, will depend in part on such tenant’s ability to secure financing for a leasehold interest on attractive terms. If leasehold financing is not available on terms that are at least as favorable as available mortgage financing, we expect that potential tenants will be less likely to pursue GL transactions with us, which may materially adversely affect the market for our leases and our ability to grow and meet our investment objectives.

 

Additionally, many of our tenants rely on external sources of financing to operate their businesses. The U.S. may experience significant liquidity disruptions, resulting in the unavailability of financing for many businesses. If our current tenants are unable to secure financing necessary to continue to operate their businesses, they may be unable to meet their rent obligations to us or be forced to declare bankruptcy and reject their leases.

 

Unfavorable market and economic conditions in the United States and globally, in the specific markets or submarkets where our properties are located or in the markets and industries in which our tenants conduct business could materially and adversely affect the market value of our properties, the financial performance of our tenants, the availability of attractive investment and financing opportunities, the demand for GLs and our ability to sell, recapitalize or refinance our properties.

 

Unfavorable market and economic conditions in the United States and globally, especially in the markets or submarkets where our properties are located or in the markets and industries in which our tenants conduct business, may significantly affect the market value of our properties, the financial performance of our tenants, the availability of attractive investment and financing opportunities, the demand for GLs and our ability to strategically dispose, recapitalize or refinance our properties on economically favorable terms or at all. Our ability to originate GL transactions, lease our properties on favorable terms, obtain financing and re-let properties returned to us after lease expirations or earlier terminations is dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and unemployment levels, recession, market volatility and uncertainty about the future. We expect that any declines in our rental revenues would cause us to have less cash available to meet our operating requirements, including debt service, and to make distributions to our stockholders. Our business may be affected by the volatility and illiquidity in the financial and credit markets, a general global economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole. Factors that may affect our rental revenues, the Underlying Property NOI related to our properties and/or the market value of our properties include the following, among others:

 

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·                  downturns in global, national, regional and local economic conditions;

 

·                  declines in the financial position or liquidity of our tenants due to bankruptcy, competition, operational failures or other reasons, which may result in tenant defaults under our GLs;

 

·                  the inability or unwillingness of potential tenants to enter into GLs; and

 

·                  changes in the values of our leases.

 

Our operating performance and the market value of our properties are subject to risks associated with real estate assets and the real estate industry, which could materially and adversely affect us.

 

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may adversely affect our operating results and decrease cash available for distributions to our stockholders, as well as the market value of our properties. These events include, but are not limited to:

 

·                  adverse changes in international, national, regional or local economic and demographic conditions;

 

·                  vacancies or our inability to enter into GL transactions or re-let a property on favorable terms, including possible market pressures to offer tenants various incentives to sign or renew their leases;

 

·                  increases in market rental rates that we are unable to capture because our leases are long-term and any rent escalations under our leases may often be fixed;

 

·                  increases in inflation that exceed any rent adjustment clauses;

 

·                  adverse changes in the financial position or liquidity of tenants and buyers of properties;

 

·                  decreases in market rental rates at the end of our leases;

 

·                  our inability to collect rent from tenants;

 

·                  competition from other real estate investors with significant capital, including real estate operating companies, other publicly traded REITs, institutional investment funds, banks, insurance companies and individuals;

 

·                  fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of properties, to obtain financing on favorable terms or at all;

 

·                  civil disturbances, hurricanes and other natural disasters, or terrorist acts or acts of war, which may result in uninsured or underinsured losses; and

 

·                  changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws and governmental fiscal policies.

 

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in attractive investment opportunities or an increased incidence of defaults under our existing leases. As a result of the foregoing, there can be no assurance that we can achieve our investment objectives.

 

The rental payments under our leases may not keep up with changes in market value and inflation.

 

The master lease relating to the Doubletree Seattle Airport, Hilton Salt Lake, Doubletree Mission Valley, Doubletree Sonoma and Doubletree Durango and the lease relating to the Dallas Market Center: Marriott Courtyard also provide for percentage rent participations in operating revenues at the hotels located on the properties. The leases relating to the One Ally Center, Northside Forsyth Hospital Medical Center, 6201 Hollywood (North) and 6200 Hollywood (South) properties provide for a periodic resetting of the rent based on changes in the CPI, subject to a floor and a ceiling in both cases. These percentage rent participations and CPI adjustments may not keep up fully with changes in inflation. They may also not keep up fully with increases in market value. As a result, we may not capture the full value of the properties underlying our leases. Future leases that we enter into may contain similar or other limitations on rent increases, which may limit the appreciation in value of our properties and our net asset value.

 

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Multi-tenanted properties expose us to additional risks.

 

A property that is ground leased to a tenant that will operate a multi-tenant building will involve risks not typically encountered in properties that are ground leased to, and occupied by, a single tenant. Leasing land to operators of multi-tenant properties could expose us to the risk that a sufficient number of suitable tenants may not be found by our GL tenant to enable the property to operate profitably enough to pay rent under our GL. The risk may be compounded by the failure of multiple tenants to satisfy their obligations to our GL tenant due to various factors. Multi-tenant properties are also subject to tenant turnover and fluctuation in occupancy rates, which could affect our GL tenant’s ability to pay rent to us, and may lower our percentage rents, if any.

 

Some of our tenants do not operate their properties and rely on revenues from subtenants to cover operating expenses, ground rent, taxes, debt service and other costs associated with the property.

 

Some of our tenants do not operate their properties and instead enter into subleases with subtenants on the expectation that such subleases will generate sufficient income to cover the tenant’s operating expenses, ground rent, taxes on the property, leasehold mortgage debt service and other costs associated with the property. If the tenant is not able to enter into such subleases, or such subleases are not able to generate sufficient revenue, the tenant may not be able to pay rent to us or may pay less rent to us as a result of any percentage rent participations.

 

The ground rent we charge our tenants may exceed the rents our tenants collect from their subtenants.

 

The ground rent we charge typically increases periodically or participates in revenues from the operations of our tenants at the properties. However, the rents our tenants charge their subtenants may not increase at the same rate. As a result, the Ground Rent Coverage of our leases may decline and in some cases our tenants may be unable to meet their rental obligations under our lease.

 

We are the tenant of a GL underlying a majority of our Doubletree Seattle Airport property.

 

The sum of our annualized cash base rental income in place for our Doubletree Seattle Airport property as of September 30, 2017 and total percentage cash rental income during the twelve months ended September 30, 2017 for such property totaled an aggregate of $5.5 million, or approximately 23.5% of our entire portfolio, in each case excluding the one time $0.5 million stub period payment that we received in the first quarter of 2017 in respect of a change in the master lease governing the Hilton Western Portfolio. See “Business and Properties—Descriptions of Properties in our Portfolio—Doubletree Seattle Airport.” A majority of the land underlying our Doubletree Seattle Airport property is owned by a third party and is ground leased to us. We are obligated to pay the third-party owner of the GL $0.4 million, subject to adjustment for changes in the CPI, per year through 2044; however, we pass this cost on to our tenant under the terms of our master lease. We are currently in discussions with the third party owner to extend or restructure the GL; however, we can give no assurance that we will be successful in consummating any such extension or restructuring or that the terms of any extension or restructuring will be attractive to us. If we are unable to reach an agreement with the third-party owner of the GL, our GL and our right to sublease the property and generate revenues and cash flows therefrom would terminate in 2044 without any compensation for the building and improvements on the property.

 

As an owner primarily of land, our depreciation expenses are expected to be limited for financial and tax reporting purposes, with the result that we will be highly dependent on external capital sources to fund our growth.

 

As an owner of land, we expect to record limited depreciation expenses for either financial reporting or tax reporting purposes. As a result, we will not have significant depreciation expenses that will reduce our net taxable income and the payment ratio of our distributions to our cash available for distribution to our stockholders or other metrics is likely to be higher than at many other REITs. This also means that we will be highly dependent on external capital sources to fund our growth. If capital markets are experiencing disruption or are otherwise unfavorable, we may not have access to capital on attractive terms, or at all, which could prevent us from achieving our investment objectives.

 

Lease defaults, terminations or landlord-tenant disputes may reduce our revenue from our lease investments.

 

The creditworthiness of our tenants could be negatively impacted as a result of challenging economic conditions or otherwise, which could result in their inability to meet the terms of their leases with us. Lease defaults or terminations by one or more tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between us and a tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or possession of the building and improvements thereon. Upon a lease default, we may have limited or no recourse against a guarantor. Neither tenants nor any guarantors may have the ability to satisfy any judgments we may obtain in full or at all. We may also have duties to mitigate our losses and we may not be successful in that regard. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property.

 

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Tenant concentration may expose us to financial credit risk.

 

Concentrations of credit risks arise when we derive a significant percentage of our revenues from a particular tenant or credit party, or a number of our tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features, such that their ability to meet their contractual obligations, including those to us under our leases, could be similarly affected by changes in economic conditions. For the nine months ended September 30, 2017, the tenant under our master lease relating to five hotels accounted for approximately $7.9 million, or 48%, of our total revenues, and our tenant who leases the land on which the One Ally Center in Detroit, Michigan is located accounted for approximately $4.0 million, or 24%, of our total revenues. To the extent the Company has a significant concentration of ground and other lease income from any tenant, credit party, business or geography, we could be materially and adversely affected.

 

Hotel industry concentration exposes us to the financial risks of a downturn in the hotel industry generally, and the hotel operations at our specific properties.

 

Three of the tenants in our portfolio operate hotels at the leased properties. For the nine months ended September 30, 2017, 53% of our total revenues came from rent payments by these hotel tenants. The master lease relating to the Doubletree Seattle Airport, Hilton Salt Lake, Doubletree Mission Valley, Doubletree Sonoma and Doubletree Durango and the lease relating to the Dallas Market Center: Marriott Courtyard provide for percentage rent participations in operating revenues at the hotels located on the properties. Although both leases also provide for a fixed rent or a minimum rent (in addition to our right to receive percentage rent), declines in the operating revenues of these hotels, or a decline in the hotel industry generally, could materially reduce the percentage rent that we receive. The performance of the hotel industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. gross domestic product. It is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or terrorist activity can lower the revenues and profitability of our tenants participating in the hotel industry. As a result of our current concentration, we are particularly susceptible to adverse developments in the hotel industry.

 

Percentage rent payable under our master lease relating to the Hilton Western Portfolio is calculated on an aggregate portfolio-wide basis.

 

Our master lease relating to the five assets constituting the Hilton Western Portfolio obligates the tenant to pay us percentage rent equal to 7.5% of the positive difference between the aggregate annual operating revenues of the five hotels in the Hilton Western Portfolio for any year and the aggregate base revenues of the five hotels specified in the master lease of approximately $81.4 million. Accordingly, to the extent the aggregate operating revenues of the five hotels for any year do not exceed $81.4 million we will not be entitled to any percentage rent from any of those hotels. As a result, a deterioration in the operating performance at any of the hotels in the Hilton Western Portfolio would adversely affect our ability to earn percentage rent payable under any of the remaining hotels in the Hilton Western Portfolio, and it is possible that poor operating performance at one or more hotels in the Hilton Western Portfolio could reduce or eliminate percentage rent for any annual period notwithstanding stable or improving operating performance at other hotels included in the Hilton Western Portfolio.

 

We are subject to the risk of bankruptcy of our tenants.

 

The bankruptcy or insolvency of a tenant may materially and adversely affect the income produced by our properties or could force us to “take back” a property as a result of a default or a rejection of the lease by a tenant in bankruptcy, any of which could materially and adversely affect us. If any tenant becomes a debtor in a case under federal bankruptcy law, we cannot evict the tenant and assume ownership of the building and improvements thereon solely because of the bankruptcy if the tenant continues to comply with the terms of our lease. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the rent actually owed to us under the lease. Our claim for unpaid rent will be a general unsecured claim that would likely not be paid in full. We may also be unable to re-lease a terminated or rejected space or re-lease it on comparable or more favorable terms.

 

It is also possible that, if a tenant were to become subject to bankruptcy proceedings, a bankruptcy court could re-characterize the lease transactions as secured lending transactions depending on its interpretation of the terms of the lease, including, among other factors, the length of the lease relative to the useful life of the leased property. If a lease were judicially recharacterized as a secured lending transaction, we would not be treated as the owner of the property subject to the

 

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lease and could lose the legal as well as economic attributes of the owners of the property, which could have a material adverse effect on us.

 

In addition, one of our current leases is a multiple property master lease, and we may acquire additional master leases in the future. Bankruptcy laws afford certain protections to a tenant that may also affect the master lease structure. Subject to certain restrictions, a tenant under a master lease generally is required to assume or reject the master lease as a whole, rather than making the decision on a property-by-property basis. This prevents the tenant from assuming only the better performing properties and terminating the master lease with respect to the poorer performing properties. If these tenants are considering filing for bankruptcy protection, we may find it necessary to agree to amend their master leases to remove certain underperforming properties rather than risk the tenant rejecting the entire master lease in bankruptcy. Whether or not a bankruptcy court will require a master lease to be assumed or rejected as a whole depends upon a “facts and circumstances” analysis. A bankruptcy court will consider a number of factors, including the parties’ intent, the nature and purpose of the relevant documents, whether there was separate and distinct consideration for each property included in the master lease, the provisions contained in the relevant documents and applicable state law. If a bankruptcy court allows a master lease to be rejected in part, certain underperforming leases related to properties we own could be rejected by the tenant in bankruptcy, thereby adversely affecting payments derived from the properties. As a result, the bankruptcy of a tenant subject to a master lease could materially and adversely affect us.

 

Our future GLs may be subject to subordination clauses.

 

The lender of a leasehold financing may request a first security position against the land and buildings from the tenant. Although our existing GLs do not require us to agree to subordinate our interest in the land to any leasehold financings, there can be no assurance that we will not agree to do so in the future. If we agree to subordinate our interest in the GL to the lender’s interest, and if the tenant goes into default under the loan documents, we risk losing the land in addition to any rights to the building and improvements thereon.

 

We may be unable to renew GLs or re-lease the land on favorable terms or at all at the end of our GLs.

 

Above-market rental rates at some of the properties in our portfolio at the time of any GL renewal or re-lease may force us to renew some expiring leases or re-lease properties at lower rates. We cannot assure you existing tenants will exercise any extension options or that our expiring leases will be renewed or that our properties will be re-leased at rental rates equal to or above their then weighted average rental rates.

 

The tenant under our GL relating to the One Ally Center property has the right to level the building before the expiration of the lease.

 

Prior to the expiration of the GL relating to the One Ally Center property, the tenant has the right to level the building and improvements on the property, although it cannot do so during the last five years of the lease without our prior consent. Rent under our GL must continue to be paid through the end of the lease, even if the tenant levels the building and any improvements on the property. If the tenant elects to level the building and any improvements on the property, it will be more difficult for us to re-let the property, taking more time for us to find a replacement tenant willing to develop the property. Accordingly, no assurance can be given as to the commencement date of any future lease or the attractiveness of the future lease terms.

 

Our master lease relating to five hotel properties and our GL relating to the Lock Up Self Storage Facility provide the tenants with the right to purchase our hotel properties or land, as the case may be, in certain circumstances.

 

Our master lease gives the tenant the right to purchase one or more of the hotels at fair market value if the hotel suffers a major casualty or condemnation event, as defined under the master lease. The Lock Up Self Storage Facility lease gives the tenant the right to purchase our interest in the underlying land at fair market value as of the expiration of the lease in 2037. Additionally, we may enter into leases in the future that provide the tenants with purchase options. If a tenant exercises a purchase option, we would lose the right to future rent from the property. Furthermore, the purchase price we are entitled to receive may be less than the price we paid for the related property and we may not be able to reinvest the purchase price we receive in comparable investments that produce similar or better returns.

 

The tenants under the GLs relating to the One Ally Center, 3333 LifeHope, Northside Forsyth Hospital Medical Center, NASA/JPSS Headquarters and The Buckler Apartments properties have certain preemptive rights should we decide to sell the properties.

 

Each of the One Ally Center, 3333 LifeHope and Northside Forsyth Hospital Medical Center leases gives the tenant a right of first refusal to purchase the property before we can sell the property to a third party. Each of the NASA/JPSS Headquarters and The Buckler Apartments leases gives the tenant a right of first offer to purchase the property, i.e., we must first offer the property to the tenant before soliciting offers for the sale of the property to any other person. The existence of such preemptive rights could limit third-party offers for the property, inhibit our ability to sell a property or adversely affect

 

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the timing of any sale of any such property and affect our ability to obtain the highest price possible in the event that we decide to market or sell the property.

 

We typically agree to grant certain mortgagee protections to a permitted leasehold mortgagee, and there can be no assurance that we will not be materially and adversely affected by the exercise of such protections.

 

We typically permit tenants to obtain mortgage financing secured by their leasehold interest, and in connection with that financing, we permit the tenant to assign the lease and the tenant’s rights under the lease to the mortgagee as collateral. We also typically agree to grant certain mortgagee protections to a permitted leasehold mortgagee, including, without limitation, the right to receive notices and cure tenant defaults under the lease, the right to require us to enter into a new lease with a successor tenant on the same terms as the existing lease and the right to consent to certain actions. We may grant a leasehold mortgagee more time to cure certain non-monetary defaults than would be afforded to the tenant under the lease. We may also agree to defer certain remedies while the leasehold mortgagee is endeavoring to cure a default, such as terminating or giving notice of termination of the lease and bringing a proceeding and dispossessing the tenant or subtenants. In addition, some leasehold mortgage lenders may insist, should a casualty, loss or condemnation occur, upon using insurance proceeds to reduce the tenant’s debt to it rather than restoring or repairing the casualty, loss or condemnation, although the tenant would likely not be able to generate sufficient revenues from the resulting property to pay ground rent to us. As of September 30, 2017, the tenants at the One Ally Center, Dallas Market Center: Sheraton Suites, Northside Forsyth Hospital Medical Center, NASA/JPSS Headquarters, The Buckler Apartments, Dallas Market Center: Marriott Courtyard, Lock Up Self Storage, 6200 Hollywood and 6201 Hollywood properties had leasehold mortgage financing in place. There can be no assurance that we will not be materially and adversely affected by a leasehold mortgagee’s exercise of such mortgagee protections.

 

Our tenants generally do not have credit ratings.

 

Our tenants generally do not have credit ratings. To the extent a tenant has a credit rating, such rating is subject to ongoing evaluation by the rating agency assigning the rating, and we cannot assure you that such rating will not be lowered, reduced or withdrawn by the rating agency in the future if, in its judgment, circumstances warrant. If a rating agency assigns a lower than expected rating or reduces or withdraws, or indicates that it may reduce or withdraw, the credit rating of a tenant, the value of our investment in any properties leased to such tenant could significantly decline.

 

We rely on Underlying Property NOI as reported to us by our tenants.

 

We rely on Underlying Property NOI as reported to us by our tenants to, among other things, calculate Ground Rent Coverage and evaluate the security of the rent owed to us pursuant to a GL and the safety of our investment in a GL. We seek to invest in GLs that we believe will generate secure rental payments, with Ground Rent Coverage of 2.0x to 5.0x for the initial year of the lease. Similarly, we seek safety in our GL investments by typically limiting our investment in a GL to 30% to 45% of our estimate of the Combined Property Value as of the commencement of the lease or as of our acquisition of the GL. In evaluating Ground Rent Coverages and estimating Combined Property Values, we rely, to a significant degree, on Underlying Property NOI as reported to us by our tenants without independent investigation or verification on our part. Our tenants do not, nor do we expect that future tenants will, provide us with full financial statements prepared in accordance with GAAP, and the financial information provided to us by our tenants has not been, nor do we expect that future information will be, audited or reviewed by an independent registered public accounting firm. Our leases generally do not specify the detail upon which such financial information must be prepared. Our leases also generally do not require our approval for rent concessions or abatements given by our tenants to their subtenants, nor do our leases generally require our tenants to advise us of such concessions or abatements. Additionally, we do not independently investigate or verify the information supplied to us by our tenants, but rather assume the accuracy and completeness of such information and the appropriateness of the accounting methodology or principles, assumptions, estimates and judgments made by our tenants in preparing the information provided to us. Accordingly, no assurance can be given that the information provided to us by our tenants is accurate or complete, which could materially and adversely affect our underwriting decisions. Tenants may also restrict our ability to disclose publicly their Underlying Property NOI. For example, we are prohibited from publicly disclosing the Underlying Property NOI at One Ally Center pursuant to a confidentiality agreement with the tenant. The weighted average Ground Rent Coverage of the portfolio as of September 30, 2017 was 4.64x, assuming that the Underlying Property NOI at the One Ally Center for the 12 months ended September 30, 2017 was 5.00x the annualized in place base rent payable under our One Ally Center GL, and 4.59x excluding One Ally Center from the weighted average Ground Rent Coverage calculation. With respect to properties under development or renovation, the foregoing weighted averages reflect our estimated annual rent coverage at the expected stabilization or completion of renovation at the applicable property. There can be no assurance our estimates will prove to be correct.

 

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There can be no assurance that we will realize any incremental value from the “value bank” or that the market price of our common stock will reflect any value attributable thereto.

 

At the end of a GL, we regain possession of the land, pursuant to the typical terms of a GL, and generally take title to the building and any improvements thereon, without the payment of any additional consideration by us. Since we target GLs where the initial value of the GL represents between 30% and 45% of the Combined Property Value, we regard the difference between the initial GL value and the Combined Property Value as a value bank of incremental value that we may realize at the end of the lease through a releasing or sale transaction, or perhaps by operating the property directly. To the extent we choose to operate a property directly after the expiration or other termination of a GL, we will be subject to additional risks associated with leasing commercial real estate, including responsibility for property operating costs, such as taxes, insurance and maintenance, that previously were paid for by our tenant pursuant the GL. Additionally, the value bank may grow during the term of the GL in an amount equal to any appreciation in the Combined Property Value. Though we estimate Combined Property Value using one or more valuation methodologies that we consider appropriate, there can be no assurance that this estimate or the amount of any value bank is accurate at the time we invest in a GL. Even if we estimate that a value bank exists initially, we will generally not be able to realize that value through a near term transaction, as the property is leased to a tenant pursuant to a long-term lease. While the value of commercial real estate as a broad class has generally increased over extended periods of time and is believed by some to exhibit a positive correlation with rates of inflation, the value of a particular commercial real estate asset is primarily a function of its location, overall quality and the terms of relevant leases. Since our leases are typically long-term (base terms ranging from 30 to 99 years), it is possible that the value bank will increase in value, but over long periods of time. However, the Combined Property Value of a particular property at the end of a GL will be highly dependent on its unique attributes and there can be no assurance that it will exceed the amount of our initial investment in the GL. Moreover, no assurance can be given that the market price of our common stock will include any value attributable to the value bank. In addition, our ability to recognize value through reversion rights may be limited by the rights of our tenants under some of our GLs, including tenant rights to purchase the properties under certain circumstances and the right of the One Ally Center tenant to level the improvements prior to the expiration of the GL. See “—The tenant under our GL relating to the One Ally Center property has the right to level the building before the expiration of the lease,” “—Our master lease relating to five hotel properties and our GL relating to the Lock Up Self Storage Facility provide the tenants with the right to purchase our hotel properties or land, as the case may be, in certain circumstances” and “—The tenants under the GLs relating to the One Ally Center, 3333 LifeHope, Northside Forsyth Hospital Medical Center, NASA/JPSS Headquarters and The Buckler Apartments properties have certain preemptive rights should we decide to sell the properties.” Moreover, the market price of our common stock may not reflect any value ascribed to the value bank, as it is difficult and highly speculative to estimate the value of a commercial real estate portfolio that may be realized at a distant point in time.

 

We use our estimates of Combined Property Value when underwriting investments and monitoring our portfolio, which are based on various assumptions and information supplied to us by our tenants; accordingly, such estimated values may not be indicative of actual values.

 

We intend to target investments in long-term GLs in which the initial value of our GL represents between 30% and 45% of the Combined Property Value. When underwriting a potential investment and monitoring our portfolio, our estimate of Combined Property Value is based on expected lease terms, information supplied to us by our prospective tenant or tenant and numerous assumptions made by us. We do not independently investigate or verify the information provided to us by our tenants and no assurance can be given that the information is accurate. See “—We rely on Underlying Property NOI as reported to us by our tenants.” The use of different information or assumptions could result in valuations that are materially lower than those used in our underwriting and portfolio monitoring processes.

 

Our estimates of Combined Property Values represent our opinion and may not accurately reflect the current market value of the properties relating to our GLs. Such estimates are based on numerous estimates and assumptions and not on contractual sale terms or third-party appraisals and, therefore, are inherently uncertain, and no assurance can be given regarding the accuracy or appropriateness of such estimates and assumptions. The application of alternative estimates or assumptions could result in valuations, by us or others, that are materially lower than those used in our underwriting and portfolio monitoring processes.

 

GLs with developers expose us to risks associated with property development and redevelopment that could materially and adversely affect us.

 

One of our business strategies is to enter into GLs with developers looking to construct or rehabilitate a building. In GL transactions with developers, rent may not commence until construction is completed. Therefore, we will be subject to risks that the developer will be unable to complete the project and have it begin paying rent to us. Risks associated with development transactions include, without limitation: (i) the availability and pricing of financing for the developer on favorable terms or at all; (ii) the availability and timely receipt by the developer of zoning and other regulatory approvals; (iii) the potential for the fluctuation of occupancy rates and rents, which could affect any percentage rents that we may

 

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receive; (iv) development, repositioning and redevelopment costs may be higher than anticipated by the developer, which may cause the developer to abandon the project; and (v) cost overruns and untimely completion of construction (including due to risks beyond the developer’s control, such as weather or labor conditions, or material shortages). In addition, if our tenant has obtained leasehold financing to complete construction, and the construction lender forecloses on the mortgage following a default, there is a risk that the mortgagee or a new tenant may not have necessary or sufficient development experience to complete the project or to do so to the same standards as the original developer. These risks could result in substantial unanticipated delays or expenses and could prevent the initiation or the completion of development, repositioning or redevelopment activities, any of which could materially and adversely affect us.

 

We may directly own one or more commercial properties before we are able to execute a GL transaction, which will expose us to the risks of ownership of operating properties and require us to bear the costs of owning and operating the properties.

 

Certain of our business and growth strategies involve creating GLs from existing commercial properties by separating a property into an ownership interest in land that is ground leased to a tenant and an ownership interest in the buildings and improvements thereon that is retained by the original owner of the property or acquired by a third party. In pursuing such transactions, there may be instances where we take ownership of the commercial property for a period of time prior to the separation of the fee and leasehold interests. For example, if a proposed GL tenant fails to complete a GL transaction with us, we may nonetheless maintain or take ownership of the commercial property while we pursue an alternative transaction.

 

The ownership and operation of commercial properties will expose us to risks, including, without limitation,

 

·                  adverse changes in international, regional or local economic and demographic conditions;

 

·                  tenant vacancies and market pressures to offer tenant incentives to sign or renew leases;

 

·                  adverse changes in the financial position or liquidity of tenants;

 

·                  the inability to collect rent from tenants;

 

·                  tenant bankruptcies;

 

·                  higher costs resulting from capital expenditures and property operating expenses;

 

·                  civil disturbances, hurricanes and other natural disasters, or terrorist acts or acts of war, which may result in uninsured or underinsured losses;

 

·                  liabilities under environmental laws;

 

·                  risks of loss from casualty or condemnation; and

 

·                  changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws.

 

Upon taking ownership of a commercial property, we may be required to contribute ownership of the commercial property to a taxable REIT subsidiary (“TRS”), which would subsequently seek to sell a leasehold interest in such commercial property. Any gain from the sale of such leasehold interest would be subject to corporate income tax. See “—Tax Risks Related to Ownership of Our Shares—Our TRSs are subject to special rules that may result in increased taxes.”

 

Loans that we make to GL owners will be subject to delinquency, foreclosure and loss, which could result in losses to us.

 

Certain of our business and growth strategies involve financing the acquisition of GLs by third parties. The ability of a borrower to repay a loan secured by a GL typically is dependent primarily upon the successful operation of the commercial property by our borrower’s tenant, rather than upon the existence of independent income or assets of our borrower. If the net operating income of such commercial property is reduced, and our borrower’s tenant fails to pay the contractual rent to our borrower, our borrower’s ability to repay our loan may be impaired.

 

Loan defaults by one or more borrowers may reduce our revenues unless the default is cured. If a default is not cured, we will bear a risk of loss of principal to the extent of any deficiency between the value of the GL loan collateral and the principal and accrued interest of the loan. Upon a lease default, we may have limited or no recourse against a guarantor. Neither the borrower nor any guarantors may have the ability to satisfy any judgments we may obtain in full or at all.

 

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In the event of the bankruptcy of a GL loan borrower, the loan to that borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law if, for example, the bankruptcy trustee or debtor in possession determined that we did not properly perfect our lien. Foreclosure of a secured loan can be an expensive and lengthy process.

 

We may not be successful expanding into new markets.

 

We intend to explore acquisitions and originations of properties across the United States and, possibly, internationally. Each of the risks applicable to our ability to successfully acquire and integrate in our current markets is also applicable to our ability to successfully acquire and integrate properties in new markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could materially adversely affect our ability to grow and achieve our investment objectives.

 

Competition may adversely affect our ability to acquire and originate investments.

 

We compete with commercial developers, other REITs, real estate companies, financial institutions, such as banks and insurance companies, funds, and other investors, such as pension funds, private companies and individuals, for investment opportunities. Our competitors include both competitors seeking to originate or acquire GL transactions or acquire properties in their entirety and competitors offering debt financing as an alternative to a GL. Some of our competitors have greater financial and other resources and access to capital than we do. Due to our focus on GLs throughout the United States, and because most competitors are often locally and/or regionally focused, we do not always encounter the same competitors in each market.

 

We may be unable to identify and successfully complete acquisitions and originations and even if acquisitions and originations are identified and completed, the investments may not perform as expected.

 

One of our business strategies is to acquire and originate GL transactions and grow our portfolio. Our acquisition and origination activities and their success are subject to the following risks:

 

·                  we may be unable to acquire or originate a desired investment because of competition from other well capitalized real estate investors, including developers, other publicly traded REITs, institutional investment funds, banks, insurance companies and individuals, or because the seller of a property elects to obtain alternative capital rather than enter into a GL transaction with us;

 

·                  even if we enter into an agreement for a transaction, it is usually subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction, which may not be satisfied;

 

·                  even if we are able to acquire or originate a desired GL transaction, competition from other real estate investors may significantly increase the investment price;

 

·                  we may be unable to finance investments on favorable terms or at all;

 

·                  we may incur significant expenses in pursuing both consummated transactions and potential investment opportunities;

 

·                  acquired and originated properties may become subject to environmental liabilities of which we were unaware at the time we acquired the property despite any environmental testing; and

 

·                  new investments may fail to perform as expected.

 

Any delay or failure on our part to identify, negotiate, finance and consummate such acquisitions and originations in a timely manner and on favorable terms could also impede our growth and ability to achieve our investment objectives.

 

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Acquired and originated properties may expose us to unknown liabilities.

 

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon our current or prior ownership of those properties, we might have to pay substantial sums to settle or contest it. Unknown liabilities with respect to acquired properties might include:

 

·                  environmental liabilities, including for clean-up or remediation of environmental contamination;

 

·                  claims by tenants, vendors or other persons associated with the properties;

 

·                  liabilities incurred in the ordinary course of business or otherwise; and

 

·                  claims for indemnification by general partners, directors, officers and others entitled to indemnification.

 

As an owner of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.

 

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, as an owner of real property, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under the properties we own as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. These laws may impose liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances. This liability may be imposed on us in connection with the activities of an operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal or property damages, and our liability therefor, could be significant and could exceed the value of the property and have a material adverse effect on us. In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect our ability to sell or rent the affected property or to borrow using such property as collateral, which, in turn, would reduce our revenues and ability to satisfy our debt service obligations and to make distributions to our stockholders.

 

A property can also be adversely affected either through physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties.

 

Although our tenants are primarily responsible for any environmental damages and claims related to the properties, a tenant’s bankruptcy or inability to satisfy its obligations for these types of damages or claims could require us to satisfy such liabilities. In addition, we may be held directly liable for any such damages or claims irrespective of the provisions of any lease.

 

Our tenants may fail to maintain required insurance, and certain potential losses may not be fully covered by insurance.

 

Our leases generally require the tenant to maintain all insurance on the property, and the failure of the tenant to maintain the proper insurance could adversely impact our interest in a property in the event of a loss. Furthermore, there are certain types of losses, such as losses resulting from wars, terrorism or certain acts of God, that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a GL as well as the anticipated future revenues from a GL, while remaining obligated for any indebtedness we may have incurred related to the GL. Any loss of these types could materially and adversely affect us.

 

We may become subject to litigation.

 

In the future, we may become subject to litigation, including claims relating to our investments, equity or debt financings and otherwise in the ordinary course of our business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which may be uninsured or exceed insured levels. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage.

 

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We may acquire investments through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

 

We may acquire investments in exchange for operating partnership units in tax deferred contribution transactions. Generally, these units will be redeemable, at the option of the holder, for cash equal to the market value of an equal number of shares of our common stock at the time of redemption or, at our election, exchangeable for shares of our common stock on a one-for-one basis. The issuance and subsequent redemption or exchange of such units may result in stockholder dilution. Additionally, this acquisition structure may require us to protect the contributors’ ability to defer recognition of taxable gain by limiting our ability to dispose of the contributed properties and/or requiring us to maintain a minimum amount of nonrecourse partnership liabilities encumbering the contributed property. These restrictions could limit our ability to sell or refinance an asset at a time, or on terms, that would be favorable absent such restrictions.

 

Our business is highly dependent on information systems and communication systems; systems failures and other operational disruptions could significantly affect our business.

 

Our business is highly dependent on communication and information systems which may interfere with or depend on systems operated by third parties, including market counterparties, tenants and service providers. Any failure or interruption of these systems could cause delays or other problems in our activities, including in our investment activities.

 

Additionally, we rely heavily on financial, accounting and other data processing systems and operational risks arising from mistakes made in the closing of transactions, from transactions not being properly booked, evaluated or accounted for or other similar disruption in our operations may cause us to suffer financial loss, the disruption of our business, liability to third parties, regulatory intervention and reputational damage.

 

Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships.

 

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or unintentional event and could involve gaining unauthorized access to our or our manager’s information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to our business relationships. As reliance on technology has increased, so have the risks posed to both our and our manager’s information systems and those provided by third-party service providers. Our manager has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that we will not be materially and adversely affected by such an incident.

 

Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

 

Accounting rules for certain aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of our financial statements and the public reporting of this information. Furthermore, changes in accounting rules or in our accounting assumptions and/or judgments, such as asset impairments, could materially and adversely affect us.

 

Changes to lease accounting rules could affect our financial reporting.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 (“ASU 2016-02”), which updates the rules applicable to accounting for leases effective for reporting periods beginning after December 15, 2018. ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. However, in certain instances a long-term lease of land could be classified as a sales-type lease, resulting in our derecognizing the underlying asset from our books and recording a profit or loss on sale and the net investment in the lease. The implementation of ASU 2016-02 could result in a material change in income recognition from previous GAAP. Changes in our lease accounting could affect the comparability of our reported results with prior periods and could affect our ability to comply with financial covenants under our future debt instruments.

 

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If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be unable to accurately present our financial statements, which could materially and adversely affect us.

 

As a publicly-traded company, we are required to report our financial statements on a consolidated basis. Effective internal controls are necessary for us to accurately report our financial results. Section 404 of the Sarbanes-Oxley Act will require us to evaluate and report on our internal control over financial reporting. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. There can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, as we grow our business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal controls remain effective. We identified a significant deficiency in connection with the correction of the classification in the statement of cash flows of the funding we provided pursuant to the Forsyth GL from cash flows provided by operating activities to cash flows used in investing activities for the six months ended June 30, 2016. We have taken measures which we believe will remediate the deficiency. However, we cannot conclude that this significant deficiency has been fully remediated until we have sufficient data to properly test the remediation. Future deficiencies, including any material weakness, in our internal control over financial reporting which may occur could result in misstatements of our results of operations that could require a restatement, failing to meet our public company reporting obligations and causing investors to lose confidence in our reported financial information, which could materially and adversely affect us.

 

Risks Related to Our Relationship with Our Manager

 

We do not have a policy that expressly prohibits our directors, executive officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us.

 

We do not have a policy that expressly prohibits our directors, executive officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics contains a conflicts of interest policy that prohibits our directors and executive officers, as well as personnel of our manager or iStar who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us without the approval of a majority of our independent directors. In addition, our management agreement with our manager does not prevent our manager and its affiliates from engaging in additional management or investment opportunities, some of which could compete with us.

 

Our manager’s liability is limited under the management agreement, and we have agreed to indemnify our manager against certain liabilities. As a result, we could experience poor performance or losses for which our manager would not be liable.

 

Pursuant to the management agreement, our manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Under the terms of the management agreement, our manager, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our manager (including iStar) and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our manager are not liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. In addition, we have agreed to indemnify our manager, its officers, stockholders, members, managers, directors, personnel, any person or entity controlling or controlled by our manager and any of their officers, stockholders, members, managers, directors, employees, consultants and personnel, and any person providing advisory services to our manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in accordance with and pursuant to the management agreement.

 

Our manager’s failure to make investments on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time in the future would materially and adversely affect us.

 

Our ability to achieve our investment objectives depends on our ability to grow, which depends, in turn, on the management team of our manager and its ability to identify and to make investments on favorable terms that meet our investment strategy as well as on our access to financing on acceptable terms. Our ability to grow is also dependent upon our manager’s ability to successfully hire, train, supervise and manage new personnel. We may not be able to manage growth effectively or to achieve growth at all.

 

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Because we depend upon our manager and, through our manager, iStar to conduct our operations, any adverse events or developments affecting our manager or iStar or any adverse changes in our relationship with our manager could hinder our operating performance and ability to achieve our investment objectives.

 

We depend on our manager to manage our assets and operations. Any adverse events or developments affecting our manager or its parent, iStar, or any adverse changes in our relationship with our manager, could hinder our operating performance and ability to achieve our investment objectives.

 

We depend on our manager and our manager’s key personnel with long-standing business relationships. The loss of our manager or our manager’s key personnel could threaten our ability to operate our business successfully.

 

Our future success depends, to a significant extent, upon the continued services of our manager’s management team. In particular, the GL experience of the management team and the extent and nature of the relationships they have developed within the real estate industry and with financial institutions are critically important to the success of our business. The loss of services of one or more members of our manager’s management team, whether as a result of their departure from iStar or iStar’s unilateral decision to no longer make them available to our manager, could threaten our ability to operate our business successfully. Additionally, the management agreement does not require our manager to devote all of its resources or for its personnel to devote all of their business time to managing our affairs or for iStar to allocate any specific officers or employees to our manager for our benefit, and we don’t expect any of the officers or employees of our manager or iStar to be dedicated exclusively to us. The ability of our manager, iStar and their officers and employees to engage in other business activities may reduce the time our manager spends managing us.

 

Our formation transactions, management agreement, exclusivity agreement, iStar registration rights agreement and the purchase agreement for the Great Oaks GL were negotiated between related parties and their terms may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

 

Our formation transactions, management agreement, exclusivity agreement, iStar registration rights agreement and the Great Oaks GL were negotiated between related parties and their terms, including the consideration paid to iStar for our initial portfolio, fees payable to our manager, the terms of iStar’s exclusivity commitment and resale rights and the purchase price for the Great Oaks GL may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under agreements with iStar because of our desire to maintain our ongoing relationship with iStar and our manager.

 

iStar and the selling stockholders will collectively have significant ownership interests in us and, in addition, iStar and LA have influence over our affairs as a result of their representation on our board of directors.

 

As of September 30, 2017, iStar owns approximately 34.6% of the outstanding shares of our common stock, and the selling stockholders own approximately 15.8% of our outstanding common stock. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer, and a wholly-owned subsidiary of iStar is our manager under the management agreement. In addition, LA has the right to designate one director as a nominee for election to our board of directors. As a result of these relationships, iStar and the selling stockholders will collectively have significant influence over the outcome of voting matters presented to our stockholders, and, in addition, iStar and LA have influence over our affairs through their representation on our board of directors.

 

There are various conflicts of interest in our relationship with iStar and its affiliates, including our manager, and our executive officers and/or directors who are also officers and/or directors of iStar, as well as with our selling stockholders, which could result in decisions that are not in the best interest of our stockholders.

 

Conflicts of interest may exist or could arise in the future with iStar and its affiliates, including our manager, our executive officers and/or directors who are also directors or officers of iStar, and any limited partner of our operating partnership. Conflicts may include, without limitation: conflicts arising from the enforcement of agreements between us and iStar or our manager; conflicts in the amount of time that officers and employees of our manager will spend on our affairs versus iStar’s other affairs; conflicts in future transactions that we may pursue with iStar; and conflicts in pursuing transactions that could be structured as either a GL or as another type of transaction that is within iStar’s investment focus. While we do not generally expect to enter into joint ventures with iStar and if we do so, the terms and conditions of any such joint venture investment would be subject to the approval of a majority of our independent directors, there can be no assurance that such approval will be successful in achieving terms and conditions as favorable to us as would be available from a third party. In addition, if a potential investment transaction could be structured either as a GL or a financing within iStar’s investment focus, the transaction would meet the investment objectives of both iStar and us (including economic,

 

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diversification, geographic, maturity date, tenant and other investment objectives) and both we and iStar have the available capital to pursue the investment, iStar will present both a financing and a GL investment proposal to the property owner for potential selection by the owner; however, the terms of the proposal by iStar may be more favorable than the terms of our GL investment proposal. As of September 30, 2017, iStar owns approximately 34.6% of the outstanding shares of our common stock. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer. Our manager is a wholly-owned subsidiary of iStar. As a result of the foregoing relationships, iStar have significant influence over us. Additionally, although we entered into an exclusivity agreement with iStar, the agreement contains exceptions to iStar’s exclusivity for opportunities that include only an incidental interest in GLs and opportunities to manufacture or otherwise create a GL from a property that has been owned by iStar’s existing net lease venture with GICRE for at least three years after the closing of our initial public offering. Accordingly, the exclusivity agreement will not prevent iStar from pursuing certain GL opportunities directly or through the aforementioned net lease venture. See “Our Manager and the Management Agreement—Exclusivity.”

 

Conflicts of interest may exist or could arise in the future with the selling stockholders and us in connection with the enforcement of the stockholders and registration rights agreements between us and the selling stockholders, and with iStar’s existing net lease joint venture with an affiliate of GICRE and us in connection with future investment opportunities.

 

Our directors and executive officers have duties to our company under applicable Maryland law, and our executive officers and our directors who are also directors or officers of iStar also have duties to iStar under applicable Maryland law. Those duties may come in conflict from time to time. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its other partners under Delaware law. Our operating partnership agreement provides that in the event of a conflict in the duties owed by our directors and executive officers to our company and the fiduciary duties owed by us, in our capacity as general partner of our operating partnership, to those limited partners, we will fulfill our fiduciary duties to those limited partners by acting in the best interests of our company.

 

We have adopted policies that are designed to reduce certain potential conflicts of interests. See “Policies with Respect to Certain Activities—Conflict of Interest Policies.”

 

Our management agreement is short term and we may not be able to find a suitable replacement if it is terminated. The exclusivity agreement will terminate upon a termination of the management agreement.

 

Our management agreement with our manager has a one-year term and may be terminated by either party without payment of a termination fee at the end of each annual term; provided, however, that we may not terminate the management agreement unless a successor guarantor reasonably acceptable to iStar has (i) agreed to replace iStar under its limited recourse guaranty and environmental indemnity with respect to our initial portfolio financing or (ii) provided iStar with a reasonably acceptable indemnity for any losses suffered by iStar on its limited recourse guaranty and environmental indemnity after its termination as our manager. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan. We will also lose the benefits of the exclusivity agreement if our management agreement is terminated. iStar’s significant ownership interest in us may disincentivize a potential replacement manager to agree to manage us if we were to terminate the management agreement.

 

The manner of determining the management fee may not provide sufficient incentive to our manager to maximize risk-adjusted returns on our investment portfolio since it is based on our total equity (as defined in the management agreement) and not on other measures of performance.

 

Our manager is entitled to receive a management fee that is based on the amount of our total equity (as defined in the management agreement) at the end of each quarter, regardless of our performance. Our total equity for the purposes of calculating the management fee is not the same as, and could be greater than, the amount of total equity shown on our balance sheet. The possibility exists that significant management fees could be payable to our manager for a given quarter despite the fact that we could experience a net loss during that quarter. Our manager’s entitlement to such significant nonperformance-based compensation may not provide sufficient incentive to our manager to devote its time and effort to source and maximize risk-adjusted returns on our investment portfolio.

 

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Our manager manages our portfolio pursuant to our investment guidelines and our board of directors will not approve each investment decision made by our manager, which may result in our manager making riskier investments on our behalf than would be specifically approved by our board of directors.

 

Our manager is required to manage our business affairs in conformity with the policies and the investment guidelines approved by our board of directors. While our directors periodically review our policies, investment guidelines and our investment portfolio, they do not review all of our proposed investments, which may result in our manager making riskier investments on our behalf than would be specifically approved by our board of directors. In addition, in conducting periodic reviews, our directors may rely primarily on information provided to them by our manager. Furthermore, our manager may enter into complicated transactions that may be difficult or impossible to unwind by the time they are reviewed by our directors. Our manager has great latitude within the broad investment guidelines in determining the types of assets it may decide are proper investments for us, which could result in investment returns that are substantially below expectations or that result in losses. Decisions made and investments entered into by our manager may not fully reflect your best interests.

 

Our manager may change its investment process, or elect not to follow it, without stockholder approval at any time, which may adversely affect our investments.

 

Our manager may change its investment process without stockholder approval at any time. In addition, there can be no assurance that our manager will follow the investment process in relation to the identification and underwriting of prospective investments. Changes in our manager’s investment process may result in inferior due diligence and underwriting standards, which may adversely affect our investments.

 

Financing and Investment Risks

 

Our obligations under debt agreements will reduce cash available for distribution to our stockholders and may expose us to the risk of default under those debt agreements and may include covenants that prohibit or otherwise restrict our ability to make distributions to our stockholders.

 

Payments of principal and interest on borrowings may leave us with insufficient cash resources to fund investment activities or to make distributions currently contemplated or necessary for us to qualify or maintain our qualification as a REIT. If interest rates, and therefore, the costs of our debt rise faster and by greater amounts than any rent escalations and percentage rents under our leases, we may not generate sufficient cash to pay amounts due under our borrowings. Our level of debt, the costs of our debt relative to the cash flows from operations and the limitations imposed on us by our debt agreements could have significant adverse consequences, including, without limitation, the following:

 

·                  our cash flow may be insufficient to meet our required principal and interest payments;

 

·                  we may be unable to borrow additional funds as needed on favorable terms, or at all;

 

·                  we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

·                  increases in interest rates could materially increase our interest expense on outstanding variable debt or future fixed rate debt;

 

·                  we may be forced to dispose of one or more of our assets, possibly on disadvantageous terms;

 

·                  our revolving credit facility restricts our ability to pay distributions to our stockholders as described in “Description of Indebtedness—The Revolving Credit Facility;”

 

·                  certain defaults under our initial portfolio financing, such as a failure of a tenant to pay required taxes, may be triggered by the actions or omissions of our tenants who have substantial control over the activities conducted on the properties subject to our GLs, which may be difficult for us to address in a timely manner to avoid such defaults becoming an event of default under the initial portfolio financing;

 

·                  we may default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may accelerate our debt obligations, repossess on the properties, if any, that secure their loans and/or take control of our properties, if any, that secure their loans and collect rents and other property income; and

 

·                  our default under debt agreements could result in a default or acceleration of other indebtedness with cross-default or cross acceleration provisions.

 

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High interest rates and/or unavailability of debt financing for real estate transactions may make it difficult for us to finance or refinance investments, which could reduce the number of properties we can acquire or originate, our operating results, cash flows and the amount of cash distributions we can make to our stockholders.

 

If debt is unavailable at reasonable rates, we may not be able to finance the purchase or origination of GL investments. If we incur secured debt, we may be unable to refinance the investments when the debt becomes due, or to refinance the debt on favorable terms. If interest rates are higher when we refinance our investments, our operating results and cash flows could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

 

Our degree of leverage and the lack of a limitation on the amount of indebtedness in our organizational documents we may incur could materially and adversely affect us.

 

Our organizational documents do not contain any limitation on the amount of indebtedness we may incur. We have entered into the initial portfolio financing and our revolving credit facility and may incur additional debt in the future. A high ratio of debt-to-earnings or other metrics could be viewed negatively by investors. In addition, our degree of leverage could affect our ability to obtain additional financing for working capital, acquisitions, distributions or other general corporate purposes. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy generally. If we become highly leveraged in the future, the resulting increase in debt service requirements could cause us to default on our obligations.

 

If we use interest rate derivatives and fail to hedge interest rates effectively, such failure could have a material and adverse effect on us.

 

Subject to our qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired beneficial impact on our results of operations and cash flows. Should we desire to terminate a hedging arrangement, there could be significant costs and cash requirements involved to fulfill our initial obligation under the hedging arrangement.

 

When a hedging arrangement is required under the terms of a mortgage loan, it is often a condition that the hedge counterparty maintains a specified credit rating. If the credit rating of a counterparty were downgraded and we were unable to renegotiate the credit rating condition with the lender or find an alternative counterparty with acceptable credit rating, we would be in default under the loan and the lender could seize that property securing the loan through foreclosure.

 

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on partners’ or co-venturers’ financial position and liquidity and disputes between us and our co-venturers.

 

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. Under our stockholder’s agreement with GICRE, we have agreed that GICRE has the right to participate as a co-investor in real estate investments for which we are seeking joint venture partners. In a joint venture, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions as a result of their challenged financial position and liquidity or otherwise. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives, and they may have competing interests that could create conflict of interest issues. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. In addition, prior consent of our partners or co-venturers may be required for a sale or transfer to a third party of our interests in the partnership or joint venture, which would restrict our ability to dispose of our interest in the partnership or joint venture. If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity at an unfavorable price or time. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our executive officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result

 

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in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our partners or co-venturers. Our partnerships or joint ventures may be subject to debt and we could be forced to fund our partners’ or co-venturers’ share of such debt if they fail to make the required payments in order to preserve our investment. In addition, in any weakened credit market, the refinancing of such debt may require equity capital calls.

 

Risks Related to Our Organization and Structure

 

We are a holding company with no direct operations and will rely on funds received from our operating partnership to pay our obligations and make distributions to our stockholders.

 

We are a holding company and will conduct substantially all of our operations through our operating partnership. We will not have, apart from an interest in our operating partnership, any independent operations. As a result, we will rely on distributions from our operating partnership to make any distributions we declare on shares of our common stock. We will also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our operating partnership. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future creditors and preferred equity holders of our operating partnership and its subsidiaries. Therefore, in the event of a bankruptcy, insolvency, liquidation or reorganization of our operating partnership or its subsidiaries, assets of our operating partnership or the applicable subsidiary will be able to satisfy our claims to us as an equity owner therein only after all of their liabilities and preferred equity have been paid in full.

 

As of September 30, 2017, we own directly or indirectly 100% of the interests in our operating partnership. However, in connection with our future acquisition of GLs or otherwise, we may issue units of our operating partnership to third parties. Such issuances would reduce our ownership in our operating partnership. Because you will not directly own units of our operating partnership, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.

 

The concentration of our voting power may adversely affect the ability of new investors to influence our policies.

 

As of September 30, 2017, iStar owns approximately 34.6% of the outstanding shares and voting power of our common stock and the selling stockholders own approximately 15.8% of the outstanding shares and voting power of our common stock. Consequently, iStar and the selling stockholders have the ability to influence the outcome of matters presented to our stockholders, including the election of our board of directors and approval of significant corporate transactions, including business combinations, consolidations and mergers. Two directors of iStar also serve on our board of directors, including Jay Sugarman, who is the chief executive officer of iStar and our chief executive officer, and one representative of LA serves on our board of directors. Our directors, executive officers, iStar and the selling stockholders could exercise influence in a manner that is not in the best interest of our other stockholders. The concentration of voting power in iStar and the selling stockholders might also have the effect of delaying, deferring or preventing a change of control that our other stockholders may view as beneficial.

 

Certain provisions of Maryland law could inhibit changes in control of our company.

 

Certain “business combination” and “control share acquisition” provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Pursuant to the MGCL, our board of directors has by resolution exempted business combinations between us and any other person. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. However, there can be no assurance that these exemptions will not be amended or eliminated at any time in the future. Our charter and bylaws and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Removal of Directors,” “—Control Share Acquisitions” and “—Advance Notice of Director Nominations and New Business.”

 

Certain provisions in the partnership agreement of our operating partnership may delay, defer or prevent unsolicited acquisitions of us.

 

Provisions in the partnership agreement of our operating partnership may delay, defer or prevent unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

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·                  redemption rights of qualifying parties;

 

·                  transfer restrictions on operating partnership units;

 

·                  our ability, as general partner, in some cases, to amend the partnership agreement and to cause the operating partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of us or our operating partnership without the consent of the limited partners; and

 

·                  the right of the limited partners to consent to transfers of the general partnership interest and mergers or other transactions involving us under specified circumstances.

 

The partnership agreement of our operating partnership and Delaware law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest. See “Description of the Partnership Agreement of Safety Income and Growth Operating Partnership LP.”

 

Our charter contains stock ownership limits, which may delay, defer or prevent a change of control.

 

In order for us to qualify as a REIT for each taxable year commencing with our taxable year ending December 31, 2017, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, and at least 100 persons must beneficially own our stock during at least 335 days of a taxable year of 12 months, or during a proportionate portion of a shorter taxable year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts and some charitable trusts. To assist us in complying with these limitations, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of all classes and series of our capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. For further details regarding stock ownership limits, see “Description of Securities—Restrictions on Ownership and Transfer.”

 

Our charter’s constructive ownership rules are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding shares by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding shares and thus violate the share ownership limits. Our charter also provides that any attempt to own or transfer shares of our common stock or preferred stock (if and when issued) in excess of the stock ownership limits without the consent of our board of directors or in a manner that would cause us to be “closely held” under Section 856(h) of the Code (without regard to whether the shares are held during the last half of a taxable year) will result in the shares being automatically transferred to a trustee for a charitable trust or, if the transfer to the charitable trust is not automatically effective to prevent a violation of the share ownership limits or the restrictions on ownership and transfer of our shares, any such transfer of our shares will be null and void.

 

Our board of directors may change our strategies, policies or procedures without stockholder consent, which may subject us to different and more significant risks in the future.

 

Our investment, financing, leverage and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business and growth. In addition, the board of directors may change our policies with respect to conflicts of interest, provided that such changes are consistent with applicable legal requirements.

 

We may assume unknown liabilities in connection with the formation transactions, which, if significant, could materially and adversely affect us.

 

We acquired our assets subject to existing liabilities, some of which may be unknown at the date of this prospectus. Unknown liabilities might include claims of tenants, vendors or other persons dealing with such entities, tax liabilities, and accrued but unpaid liabilities incurred in the ordinary course of business. In connection with the formation transactions, we agreed to indemnify iStar, its directors, officers, stockholders and affiliates for certain claims with respect to our initial

 

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portfolio and with respect to actions or circumstances arising subsequent to April 14, 2017. Any unknown or unquantifiable liabilities that we assume in connection with the formation transactions for which we have no or limited recourse could materially and adversely affect us. See “Risks Related to Our Portfolio and Our Business—Acquired and originated properties may expose us to unknown liabilities” and “—As an owner of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination” as to the possibility of environmental conditions potentially affecting us.

 

Our rights and the rights of our stockholders to take action against our directors and executive officers are limited, which could limit your recourse in the event of actions not in your best interest.

 

Our charter limits the liability of our present and former directors and executive officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former directors and executive officers will not have any liability to us or our stockholders for money damages other than liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty by the director or executive officer that was established by a final judgment and is material to the cause of action. As a result, we and our stockholders have limited rights against our present and former directors and executive officers, which could limit your recourse in the event of actions not in your best interest. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Executive Officers’ Liability.”

 

Conflicts of interest exist or could arise in the future between the interests of our stockholders and the interests of holders of operating partnership units, which may impede business decisions that could benefit our stockholders.

 

Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and executive officers have duties to our company under applicable Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our fiduciary duties and obligations as general partner to our operating partnership and its partners may come into conflict with the duties of our directors and executive officers to our company. Our operating partnership agreement provides that in the event of a conflict in the duties owed by us to our stockholders and the fiduciary duties owed by us, in our capacity as general partner of our operating partnership, to those limited partners, we will fulfill our fiduciary duties to those limited partners by acting in the best interests of our company.

 

Additionally, the partnership agreement provides that we and our directors and executive officers will not be liable or accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we or such director or executive officer acted in good faith. The partnership agreement also provides that we will not be liable to the operating partnership or any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by the operating partnership or any limited partner, except for liability for our intentional harm or gross negligence. Moreover, the partnership agreement provides that our operating partnership is required to indemnify us and our directors and executive officers and authorizes our operating partnership to indemnify present and former members, managers, stockholders, directors, limited partners, general partners, officers or controlling persons of our predecessor and authorizes us to indemnify members, partners, employees and agents of us or our predecessor, in each case for actions taken by them in those capacities from and against any and all claims that relate to the operations of our operating partnership, except (i) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (ii) for any transaction for which the person received an improper personal benefit, in money, property or services or otherwise, in violation or breach of any provision of the partnership agreement or (iii) in the case of a criminal proceeding, if the person had reasonable cause to believe that the act or omission was unlawful. No reported decision of a Delaware appellate court has interpreted provisions similar to the provisions of the partnership agreement of our operating partnership that modify and reduce our fiduciary duties or obligations as the general partner or reduce or eliminate our liability for money damages to the operating partnership and its partners, and we have not obtained an opinion of counsel as to the enforceability of the provisions set forth in the partnership agreement that purport to modify or reduce the fiduciary duties that would be in effect were it not for the partnership agreement.

 

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We could increase or decrease the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval, which could prevent a change in our control and negatively affect the market price of our common stock.

 

Our board of directors, without stockholder approval, has the power under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the terms of such newly classified or reclassified shares. See “Description of Securities—Power to Reclassify Our Unissued Shares of Stock” and “—Power to Increase or Decrease Authorized Shares of Common Stock and Issue Additional Shares of Common and Preferred Stock.” As a result, we may issue series or classes of common stock or preferred stock with preferences, distributions, powers and rights, voting or otherwise, that are senior to the rights of holders of our common stock. Any such issuance could dilute our existing common stockholders’ interests. Although our board of directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest.

 

Our operating partnership may issue additional operating partnership units without the consent of our stockholders, which could have a dilutive effect on our stockholders.

 

Our operating partnership may issue additional operating partnership units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership and may have a dilutive effect on the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we may make to our stockholders. Any such issuances, or the perception of such issuances, could materially and adversely affect the market price of our common stock.

 

We are an “emerging growth company,” and we cannot be certain if the reduced Securities and Exchange Commission (“SEC”) reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors, which could make the market price and trading volume of our common stock be more volatile and decline significantly.

 

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. An attestation report by our auditor would require additional procedures by them that could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us to fail to meet reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a significant decline in the market price of our common stock. The JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act for complying with new or revised accounting standards. However, we have chosen to “opt out” of this extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active, liquid and/or orderly trading market for our common stock and the market price and trading volume of our common stock may be more volatile and decline significantly.

 

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Risks Related to Our Common Stock

 

We have only recently gone public and an active trading market may not be sustained or be liquid, which may cause the market price of our common stock to decline significantly and make it difficult for investors to sell their shares.

 

We have only recently gone public, and there can be no assurance that an active trading market will be sustained or be liquid. The market price of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops and is sustained for our common stock, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities of other entities (including securities issued by other real estate-based companies), our financial performance and prospects and general stock and bond market conditions.

 

The stock markets, including the NYSE on which shares of our common stock are listed, have from time to time experienced significant price and volume fluctuations. As a result, the market price of our common stock may be similarly volatile, and investors in shares of our common stock may from time to time experience a decrease in the market price of their shares, including decreases unrelated to our financial performance or prospects. The market price of shares of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this prospectus and others such as:

 

·                  our operating performance and the performance of other similar companies;

 

·                  actual or anticipated differences in our quarterly or annual operating results than expected;

 

·                  changes in our revenues or earnings estimates or recommendations by securities analysts;

 

·                  publication of research reports about us, the GL sector or the real estate industry;

 

·                  increases in market interest rates, which may lead investors to demand a higher distribution yield for shares of our common stock, and would result in increased interest expense on our debt;

 

·                  actual or anticipated changes in our and our tenants’ businesses or prospects;

 

·                  the current state of the credit and capital markets, and our ability and the ability of our tenants to obtain financing on favorable terms;

 

·                  conflicts of interest with iStar, including our manager, and the selling stockholders;

 

·                  the termination of our manager or additions and departures of key personnel of our manager;

 

·                  increased competition in the GL business in our markets;

 

·                  strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business or growth strategies;

 

·                  the passage of legislation or other regulatory developments that adversely affect us or our industry;

 

·                  adverse speculation in the press or investment community;

 

·                  actions by institutional stockholders;

 

·                  the concentration of our equity ownership by iStar and the selling stockholders and their influence over us;

 

·                  equity issuances by us (including the issuances of operating partnership units), or common stock resales by our stockholders, or the perception that such issuances or resales may occur;

 

·                  actual, potential or perceived accounting problems;

 

·                  changes in accounting principles;

 

·                  failure to qualify as a REIT;

 

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·                  failure to comply with the rules of the NYSE or maintain the listing of our common stock on the NYSE;

 

·                  terrorist acts, natural or man-made disasters or threatened or actual armed conflicts; and

 

·                  general market and local, regional and national economic conditions, including factors unrelated to our operating performance and prospects.

 

No assurance can be given that the market price of our common stock will not fluctuate or decline significantly in the future or that holders of shares of our common stock will be able to sell their shares when desired on favorable terms, or at all. From time to time in the past, securities class action litigation has been instituted against companies following periods of extreme volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

 

Initial estimated cash available for distribution may not be sufficient to make distributions to our stockholders at expected levels, or at all.

 

We intend to make distributions to holders of shares of our common stock and holders of operating partnership units. We intend to maintain our initial distribution rate for the 12-month period following completion of our initial public offering unless our actual or anticipated results of operations, cash flows or financial position, economic or market conditions or other factors differ materially from the assumptions used in our estimate. However, any future distributions will be made at the discretion of our board of directors and will depend on a number of factors, including our actual or anticipated results of operations, cash flows and financial position, our qualification as a REIT, prohibitions and other restrictions in our financing agreements, economic and market conditions, applicable law, and other factors as our board of directors may deem relevant from time to time. Our revolving credit facility restricts our ability to pay distributions to our stockholders. For the remainder of 2017, we will be permitted to make distributions based on an annualized distribution rate of 3.0% of the initial public offering price per share of our common stock. Beginning in 2018, we will be permitted to make annual distributions up to an amount equal to 110% of our adjusted funds from operations, as calculated in accordance with our revolving credit facility. In addition, we may make distributions to the extent necessary to maintain our qualification as a REIT. If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital or borrow funds or issue equity for such distribution, or eliminate or otherwise reduce the amount of such distribution. We currently expect that our operating cash flow will cover our initial distribution for the 12 months following completion of our initial public offering. We currently have no intention to make distributions using shares of our common stock. We cannot assure you that our estimated distributions will be achieved or sustained. Accordingly, any distributions we make in the future could differ materially from our current expectations.

 

The market price of our common stock could be adversely affected by our level of cash distributions.

 

We believe the market price of the equity securities of a REIT is based primarily upon the market’s perception of the REIT’s growth potential, its current and potential future cash distributions, whether from operations, sales or refinancing, and its management and governance structure, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flows for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. If we fail to meet the market’s expectations with regard to future operating results and cash distributions, the market price of our common stock could be adversely affected.

 

Increases in market interest rates may result in a decline in the market price of our common stock.

 

One of the factors that will influence the market price of our common stock will be the distribution yield on the common stock (as a percentage of the market price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our common stock to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease our cash available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline.

 

The number of shares and operating partnership units available for future sale could adversely affect the market price of our common stock.

 

We cannot predict whether future issuances of shares of our common stock or operating partnership units or the availability of shares for resale in the open market will decrease the market price of our common stock. As of September 30, 2017, iStar owns 6,300,832 shares and the selling stockholders beneficially own 2,885,000 shares

 

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of our common stock. See “Principal and Selling Stockholders.” We will pay management fees under our management agreement, beginning in the second year of our management agreement, in shares of our common stock valued at the greater of (i) the volume weighted average market price of our common stock during the quarter for which the fee is being calculated and (ii) the initial public offering price per share of our common stock set forth on the cover of this prospectus, before underwriting discounts and commissions. Although our manager will be restricted from selling such shares for two years from the date such shares are issued, these restrictions will terminate upon termination of the management agreement, and the restrictions will not apply to distributions of shares to iStar in contemplation of a further distribution of such shares to iStar’s stockholders. Under the terms of registration rights agreements, iStar and the selling stockholders have rights to have the shares of our common stock issued or to be isuued to iStar and the selling stockholders, as applicable, in the formation transactions, in the concurrent iStar placement and under the management agreement and our stockholder’s agreements with each of the selling stockholders registered for resale under the Securities Act. We may also issue shares of common stock or operating partnership units in connection with future property, portfolio or business acquisitions. Issuances or resales of substantial amounts of shares of our common stock (including shares of our common stock issued pursuant to our management agreement or our equity incentive plan) or operating partnership units, or upon exchange of operating partnership units, or the perception that such issuances or resales might occur could adversely affect the market price of our common stock. This potential adverse effect may be increased by the large number of shares of our common stock that are or will be owned by iStar and the selling stockholders to the extent that any of them resells, or there is a perception that any of them may resell, a significant portion of its holdings. In addition, future issuances of shares of our common stock may be dilutive to holders of shares of our common stock.

 

Future issuances of debt securities, which would rank senior to shares of our common stock upon our liquidation, and future issuances of equity securities (including preferred stock and operating partnership units), which would dilute the holdings of our then-existing common stockholders and may be senior to shares of our common stock for the purposes of making distributions, periodically or upon liquidation, may materially and adversely affect the market price of our common stock.

 

In the future, we may issue debt or equity securities or incur other borrowings. Upon liquidation, holders of our debt securities and other loans and shares of our preferred stock will receive a distribution of our available assets before holders of shares of our common stock. We are not required to offer any debt or equity securities to existing stockholders on a preemptive basis. Therefore, shares of our common stock that we issue in the future, directly or through convertible or exchangeable securities (including operating partnership units), warrants or options, will dilute the holdings of our then-existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. Our preferred stock, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could limit our ability to make distributions to holders of shares of our common stock. Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or impact of our future capital raising efforts. Thus, holders of shares of our common stock bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings may materially and adversely affect the market price of shares of our common stock and dilute their ownership in us.

 

A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes, which could reduce the basis of a stockholder’s investment in shares of our common stock.

 

A portion of our distributions to our stockholders may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a portion of our distributions will be treated as a return of capital for U.S. federal income tax purposes if the aggregate amount of our distributions for a year exceeds our current and accumulated earnings and profits for that year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. See “Certain U.S. Federal Income Tax Considerations—Taxation of Stockholders.”

 

The historical combined financial statements of our predecessor and our unaudited pro forma financial statements may not be representative of our financial statements as an independent public company.

 

The historical combined financial statements of our predecessor and our unaudited pro forma financial statements that are included in this prospectus do not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent public company during the periods presented. Furthermore, this financial information is not necessarily indicative of what our results of operations, financial position or cash flows will be in the future. It is impossible for us to accurately estimate all adjustments which may reflect all the significant changes that will occur in our cost structure, funding and operations as a result of our initial public offering, the concurrent iStar placement and

 

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the formation transactions, including potential increased costs associated with reduced economies of scale and increased costs associated with being a separate publicly-traded company. For additional information, see “Selected Historical Consolidated and Combined and Unaudited Pro Forma Financial and Other Data” and the historical combined financial statements of our predecessor and our unaudited pro forma financial statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

 

Tax Risks Related to Ownership of Our Shares

 

Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.

 

We believe we have been organized and operated and we intend to continue to operate in a manner that will enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2017. We have not requested and do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions and Treasury Regulations promulgated thereunder for which there are limited judicial and administrative interpretations. The complexity of these provisions and of applicable Treasury Regulations is greater in the case of a REIT that, like us, holds its assets through entities treated as partnerships for U.S. federal income tax purposes. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Our ability to satisfy these asset tests depends upon the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. In connection with such requirements, for so long as iStar or GICRE, either individually or together in the aggregate, holds 10% or more of the shares of our common stock, we will be deemed to own any tenant in which, iStar, GICRE or iStar and GICRE together own, at any time during a taxable year, a 10% or greater interest, applying certain constructive ownership rules, which could cause us to receive rental income from a related party tenant. We have put in place, together with iStar and GICRE, procedures to diligence whether we will directly or indirectly receive rental income of a related party tenant, including as a result of our constructive ownership of a tenant due to ownership of such tenant by iStar and/or GICRE, and, in the event we receive rental income from a tenant in which GICRE owns a greater than 10% interest that could reasonably cause us to fail to qualify as a REIT, iStar has agreed to purchase our common shares from GICRE in an amount necessary to reduce GICRE’s ownership interest in us below 10% on one occasion. However, due to the broad nature of the attribution rules of the Code, we cannot be certain that in all cases we will be able to timely determine whether we are receiving related party rental income in an amount that would cause us to fail the REIT gross income tests. To the extent we fail to satisfy a REIT gross income test as a result of receiving related party tenant income we could fail to qualify as a REIT or be subject to a penalty tax which could be significant in amount. See—“Certain U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Failure to Satisfy the Gross Income Tests.” Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we believe we have been organized and operated and intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. These considerations also might restrict the types of assets that we can acquire or services that we can directly provide to our tenants in the future.

 

If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to our stockholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of income tax would reduce significantly the amount of cash available for distribution to our stockholders. Furthermore, if we fail to qualify or maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to our stockholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. In addition, if we are treated as a “successor” of iStar (within the meaning of Treasury Regulations Section 1.856-8(c)(2)) and iStar’s REIT status were terminated or revoked, we would be prohibited from electing to be taxed as a REIT until the fifth calendar year following the year in which iStar Inc.’s qualification was lost.

 

Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments.

 

To qualify as a REIT, we must ensure that at least 75% of our gross income for each taxable year, excluding certain amounts, is derived from certain real property-related sources, and at least 95% of our gross income for each taxable year, excluding certain amounts, is derived from certain real property-related sources and passive income such as dividends and interest. In addition, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our total assets

 

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consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans, certain kinds of mortgage-backed securities and certain securities issued by other REITs. The remainder of our investment in securities (other than government securities, securities of corporations that are treated as TRSs and qualified REIT real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for tax years beginning after December 31, 2017) of the value of our total securities can be represented by securities of one or more TRSs, and, the aggregate value of debt instruments issued by public REITs held by us that are not otherwise secured by real property may not exceed 25% of the value of our total assets. See “Certain U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Asset Tests.” If we fail to comply with these asset requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.

 

To meet these tests, we may be required to take or forego taking actions that we otherwise would consider advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we may be required to forego investments that we otherwise would make. Furthermore, we may be required to liquidate from our portfolio otherwise attractive investments. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our income and cash available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our investment performance.

 

The REIT distribution requirements could require us to borrow funds, issue equity or sell assets during unfavorable market conditions or subject us to tax, which may affect our ability to seize strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

 

In order to qualify as a REIT, we must distribute to our stockholders, 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. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our net taxable income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to eliminate U.S. federal income tax and the 4% nondeductible excise tax.

 

Our taxable income may exceed our net income as determined by GAAP because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may incur nondeductible capital expenditures or be required to make debt or amortization payments. Also, certain GL transactions we enter into may be determined to have a financing component, which may result in a timing difference between the receipt of cash and the recognition of income for U.S. federal income tax purposes. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and we may incur U.S. federal income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to stockholders in that year. In that event, we may be required to use cash reserves, incur debt, issue equity or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution requirement and to eliminate U.S. federal income tax and the 4% nondeductible excise tax in that year.

 

To the extent we need to rely on third-party sources to fund our capital needs, we may not be able to obtain financing on favorable terms, in the time period we desire, or at all. Any additional debt we incur or any additional equity we issue may dilute our then-existing common stockholders will increase our leverage. Our access to third-party sources of capital depends, in part, on:

 

·                  general market conditions;

 

·                  the market’s perception of our growth potential;

 

·                  our current debt levels;

 

·                  our current and expected future earnings;

 

·                  our cash flow and cash distributions; and

 

·                  the market price of our common stock.

 

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If we cannot obtain capital from third-party sources, we may not be able to acquire, expand or develop properties when strategic opportunities exist, satisfy our principal and interest obligations or make the cash distributions to our stockholders necessary to qualify or maintain our qualification as a REIT.

 

If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.

 

Our operating partnership is currently treated as an entity disregarded from its owner for U.S. federal income tax purposes. If additional partners are admitted to our operating partnership, we intend for our operating partnership to be treated as a partnership for U.S. federal income tax purposes. No assurance can be provided, however, that the IRS will not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT and our operating partnership would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of income tax would reduce significantly the amount of cash available to our partnership to satisfy obligations to make principal and interest payments on its debt and to make distribution to its partners, including us.

 

Even if we qualify as a REIT, we may incur tax liabilities that reduce our cash flow.

 

Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes. See “Certain U.S. Federal Income Tax Considerations—Taxation of the Company—Taxation of REITs in General.” In addition, any TRSs we own will be subject to U.S. federal, state and local corporate income taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, we may hold some of our assets through taxable C corporations, including TRSs. Any taxes paid by such subsidiary corporations would decrease the cash available for distribution to our stockholders.

 

Our TRSs are subject to special rules that may result in increased taxes.

 

We may conduct certain activities or invest in assets through one or more TRSs. A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. Other than some activities relating to hotel and health care properties, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to U.S. federal income tax as a regular C corporation.

 

No more than 25% (20% for tax years beginning after December 31, 2017) of the value of a REIT’s total assets may consist of stock or securities of one or more TRSs. This requirement limits the extent to which we can conduct our activities through TRSs. The values of some of our assets, including assets that we hold through TRSs, may not be subject to precise determination, and values are subject to change in the future. Furthermore, if a REIT lends money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to the REIT, which could increase the tax liability of the TRS. In addition, as a REIT, we must pay a 100% penalty tax on certain payments that we receive if the economic arrangements between us and any of our TRSs are not comparable to similar arrangements between unrelated parties. We intend to structure transactions with any TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above; however, the IRS may successfully assert that the economic arrangements of any of our inter-company transactions are not comparable to similar arrangements between unrelated parties.

 

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from C corporations, which could adversely affect the value of our common stock.

 

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to

 

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be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

 

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

 

The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if: (i) the instrument (A) hedges interest rate risk or foreign currency exposure on liabilities used to carry or acquire real estate assets, (B) hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests or (C) hedges a position entered into pursuant to clause (A) or (B) after the extinguishment of such liability or disposition of the asset producing such income; and (ii) such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests. See “Certain U.S. Federal Income Tax Considerations—Requirements for Qualification—General—Gross Income Tests” and “—Hedging Transactions.” As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

 

The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences on our total return to our stockholders.

 

Our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the board determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our net taxable income and we generally would no longer be required to distribute any of our net taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

 

Legislative or regulatory tax changes related to REITs could materially and adversely affect us.

 

The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with retroactive effect.  No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in our common stock.

 

Most recently, on December 20, 2017, Congress passed the Tax Cuts and Jobs Act (H.R. 1, the “TCJA”). Assuming that the TCJA is signed into law, it will make significant changes to U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders, and may lessen the relative competitive advantage of operating as a REIT rather than as a C corporation.

 

Certain key provisions of the TCJA that could impact us and our shareholders, beginning in 2018, include:

 

·      temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate will be reduced from 39.6% to 37% (through taxable years ending in 2025);

 

·      reducing the maximum corporate income tax rate from 35% to 21%;

 

·      permitting a deduction for certain pass-through business income, including dividends received by our shareholders that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts, generally resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending in 2025);

 

·      reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

 

·      limiting our deduction for net operating losses to 80% of taxable income (prior to the application of the dividends paid deduction);

 

·      amending the limitation on the deduction of net interest expense for all businesses, other than certain electing businesses, including real estate businesses (which could adversely affect any TRS that we form); and

 

·      eliminating the corporate alternative minimum tax.

 

Prospective investors are urged to consult with their tax advisors regarding the effects of the TCJA or other legislative, regulatory or administrative developments on an investment in our common stock.

 

Your investment has various tax risks.

 

Although provisions of the Code generally relevant to an investment in shares of our common stock are described in “Certain U.S. Federal Income Tax Considerations,” you should consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. In particular, statements pertaining to our capital resources, portfolio performance and operating results contain forward-looking statements. Likewise, our unaudited pro forma financial statements and all our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and operating results are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions, events and other developments described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

·                  the factors included in this prospectus, including those set forth under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties”;

 

·                  changes in our industry and changes in the real estate markets in particular, either nationally or regionally;

 

·                  use of proceeds from our initial public offering and the concurrent iStar placement;

 

·                  general volatility of the capital and credit markets and the market price of our common stock;

 

·                  changes in our business and growth strategies;

 

·                  market demand for our GLs;

 

·                  the terms of our long-term leases, particularly the efficacy of the rent adjustment provisions in keeping up with changes in inflation and market values;

 

·                  defaults on, or non-renewal of, leases by tenants;

 

·                  bankruptcy or insolvency of a material tenant;

 

·                  the effects of interest rates on demand for GLs and our ability to service our debt obligations as they come due;

 

·                  declining real estate valuations;

 

·                  availability, terms and deployment of capital;

 

·                  our failure to obtain necessary outside financing, including our revolving credit facility;

 

·                  our leverage;

 

·                  the ability of tenants to obtain financing for their leasehold interests;

 

·                  our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

·                  difficulties in identifying and completing acquisitions and other investment opportunities on favorable terms;

 

·                  risks of real estate acquisitions, dispositions and development, including costs associated therewith;

 

·                  our projected operating results;

 

·                  our ability to manage our growth effectively;

 

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·                  estimates relating to our ability to make distributions to our stockholders in the future;

 

·                  impact of changes in governmental regulations, tax law and rates and similar matters;

 

·                  our failure to qualify, and maintain our qualification, as a REIT;

 

·                  a future terrorist event in the U.S.;

 

·                  environmental uncertainties and risks related to adverse weather conditions and natural disasters;

 

·                  lack or insufficient amounts of insurance by our tenants;

 

·                  financial market fluctuations;

 

·                  availability of, and our manager’s ability to attract, retain and make available to us, qualified personnel or the termination of our manager;

 

·                  conflicts of interest with iStar, including our manager, and the selling stockholders;

 

·                  our understanding of our competition; and

 

·                  our ability to comply with the laws, rules and regulations applicable to companies and, in particular, public companies.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this prospectus, except as required by applicable law. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section above entitled “Risk Factors.” You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us (or to third parties making the forward-looking statements).

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

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MARKET PRICE OF OUR COMMON STOCK

 

Our common stock has been listed on the NYSE under the symbol “SAFE” since June 27, 2017. Prior to that time, there was no public market for our common stock. The following table sets for the periods indicated, the high and low prices of our common stock, and the cash dividends per share of our common stock declared during the periods indicated.

 

 

 

Price Range

 

 

 

Year Ending December 31, 2017:

 

High

 

Low

 

Cash Dividends Declared per Share

 

Second Quarter (from June 27, 2017)

 

$

19.45

 

$

18.32

 

$

0.0066

 

Third Quarter

 

$

20.00

 

$

18.02

 

$

0.15

 

Fourth Quarter (through December 20, 2017)

 

$

19.02

 

$

17.27

 

$

0.15

 

 

On December 20, 2017, the closing price of our common stock on the NYSE was $18.03.  Computershare is the transfer agent and registrar for our common stock. On December 20, 2017, we had 7 holders of record of our common stock.  This figure does not represent the actual number of beneficial owners of our common stock because shares of our common stock are frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2017. You should read this table in conjunction with “Selected Historical Consolidated and Combined and Unaudited Pro Forma Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and our unaudited pro forma financial statements and related notes and the combined financial statements and related notes of our predecessor appearing elsewhere in this prospectus.

 

 

 

As of September 30, 2017

 

 

 

(amounts in thousands, except
share and per share data)

 

 

 

(unaudited)

 

Cash and cash equivalents

 

$

91,327

 

 

 

 

 

Debt

 

 

 

Revolving credit facility(1)

 

$

 

Initial portfolio financing

 

227,396

 

Predecessor equity / Stockholders’ equity

 

 

 

Predecessor equity

 

 

Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, none issued or outstanding

 

 

Common stock, $0.01 par value per share, 400,000,000 shares authorized, and 18,190,000 shares issued and outstanding (2)

 

182

 

Additional paid in capital

 

363,465

 

Retained earnings (deficit)

 

(5,173

)

Accumulated other comprehensive income (loss)

 

(243

)

Total equity

 

358,231

 

Total capitalization

 

$

585,627

 

 


(1)                                 Our $300 million revolving credit facility was undrawn as of September 30, 2017.

 

(2)                                 The common stock outstanding excludes 867,500 additional shares of our common stock available for future issuance under our equity incentive plan.

 

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SELECTED HISTORICAL CONSOLIDATED AND COMBINED AND UNAUDITED PRO FORMA FINANCIAL AND OTHER DATA

 

The following table sets forth selected financial and other data on (i) a historical consolidated basis for our company and a historical combined basis for our predecessor and (ii) a pro forma basis for our company giving effect to (a) the formation transactions, (b) our initial public offering and the concurrent iStar placement and the use of the net proceeds therefrom, (c) certain other transactions described in the unaudited pro forma financial statements beginning on page F-28 and (d) entry into our management agreement with our manager.

 

The selected historical combined balance sheet data as of December 31, 2016 and 2015 of our predecessor and selected historical combined operating data for the years ended December 31, 2016 and 2015 of our predecessor have been derived from the audited historical combined financial statements of our predecessor included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of September 30, 2017 and the selected historical consolidated and combined operating data for the period from Janaury 1, 2017 to April 13, 2017, the period from April 14, 2017 to September 30, 2017 and for the nine months ended September 30, 2016 have been derived from the unaudited historical consolidated and combined financial statements included elsewhere in this prospectus. Our results of operations for the nine months ended September 30, 2017 are not necessarily indicative of our results of operations for the year ending December 31, 2017.

 

The accompanying historical combined financial data of our predecessor does not represent the financial position, results of operations and cash flows of one legal entity, but rather a combination of entities under common control that have been “carved out” from iStar’s historical consolidated financial statements. The historical combined financial statements of our predecessor include expense allocations of certain iStar corporate functions, including executive oversight, treasury, finance, human resources, tax planning, internal audit, financial reporting, information technology and investor relations. These allocations are not indicative of the actual expense that would have been incurred had our predecessor operated as an independent, publicly-traded, externally-managed company for the periods presented. We believe that the assumptions and estimates used in preparation of the underlying combined financial statements of our predecessor are reasonable. However, the combined financial statements herein do not necessarily reflect what our predecessor’s financial position, results of operations or cash flows would have been if it had been a standalone company during the periods presented, nor are they necessarily indicative of our future financial position, results of operations or cash flows.

 

The unaudited selected pro forma financial data for the nine months ended September 30, 2017 and for the year ended December 31, 2016 is presented as if: (i) our capitalization; (ii) the acquisition by the selling stockholders; (iii) our initial public offering, the concurrent iStar placement and the use of proceeds therefrom; (iv) entry into our management agreement with our manager; (v) the initial portfolio financing and (vi) other related transactions, each as more fully described in this prospectus, took place concurrently on January 1, 2016 for the operating data. The unaudited pro forma financial data are not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor do they purport to represent our future financial position or results of operations.

 

You should read the following selected financial data in conjunction with the historical combined financial statements and the unaudited pro forma financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Pro Forma

 

Historical
Consolidated

 

Historical Combined

 

 

 

For the
Nine
Months
Ended
September 30,

 

For the
Year
Ended
December 31,

 

For the Period
from April 14,
2017 to
September 30,

 

For the Period
from January
1, 2017 to April
13,

 

For the
Nine
Months
Ended
September
30,

 

For the
Years
Ended
December 31,

 

 

 

2017

 

2016

 

2017

 

2017

 

2016

 

2016

 

2015

 

 

 

(In thousands)

 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ground and other lease income

 

$

18,759

 

$

27,363

 

$

10,374

 

$

5,916

 

$

14,005

 

$

21,664

 

$

18,558

 

Total revenues

 

18,845

 

27,363

 

10,460

 

6,024

 

14,037

 

21,743

 

18,565

 

Total costs and expenses

 

20,764

 

25,263

 

12,785

 

4,686

 

11,121

 

15,128

 

12,848

 

Net income (loss)

 

(1,411

)

2,100

 

(2,325

)

1,846

 

2,916

 

6,615

 

5,717

 

SUPPLEMENTAL DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO(1)

 

$

4,771

 

$

9,622

 

$

1,814

 

$

2,239

 

$

5,272

 

$

9,757

 

$

8,857

 

AFFO(1)

 

6,464

 

10,681

 

2,912

 

1,352

 

3,313

 

7,161

 

7,327

 

EBITDA(1)

 

12,046

 

18,319

 

6,127

 

5,179

 

11,344

 

17,999

 

16,086

 

 


(1)                                 See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a definition of this metric and a reconciliation to the most directly comparable GAAP number and a statement of why our management believes the presentation of the metric provides useful information to investors.

 

 

 

Historical Consolidated and
Combined

 

 

 

As of
September
30,

 

As of December 31,

 

 

 

2017

 

2016

 

2015

 

 

 

 

 

(In thousands)

 

 

 

BALANCE SHEET DATA:

 

 

 

 

 

 

 

Real estate, net

 

$

410,393

 

$

104,478

 

$

103,680

 

Real estate-related intangible assets, net(1)

 

140,069

 

32,680

 

33,109

 

Total assets

 

650,524

 

155,667

 

144,256

 

Total liabilities

 

292,293

 

1,576

 

227

 

Total equit

 

358,231

 

154,091

 

144,029

 

Total liabilities and equity

 

650,524

 

155,667

 

144,256

 

 

 


(1)                                 As of December 31, 2015, real estate-related intangible assets, net have been reclassed from deferred expenses and other assets, net.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in our forward-looking statements for many reasons, including the risks described in “Risk Factors” and included elsewhere in this prospectus. The accompanying historical combined financial data of our predecessor does not represent the financial position, results of operations and cash flows of one legal entity, but rather a combination of entities under common control that have been “carved out” from iStar’s consolidated financial statements. The historical financial position, results of operations and cash flows, as reflected in the accompanying historical combined financial statements of our predecessor and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our properties. You should read the following discussion together with “Forward-Looking Statements” and the combined financial statements and unaudited pro forma financial statements and, in each case, the related notes included elsewhere in this prospectus.

 

The historical operations of our predecessor were combined with our company. The following discussion and analysis should be read in conjunction with “Selected Historical Consolidated and Combined and Unaudited Pro Forma Financial and Other Data,” the audited combined financial statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, the unaudited combined and consolidated financial statements as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016 and the unaudited pro forma statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 and, in each case, the notes related thereto appearing elsewhere or incorporated by reference in this prospectus. Since our formation and through the completion of our initial public offering on June 27, 2017, we had no material corporate activity except through our predecessor. Accordingly, we believe a discussion of our results of operations for such period would not be meaningful, and, in lieu thereof, this Management’s Discussion and Analysis of Financial Condition and Results of Operations therefore discusses the historical operations of our predecessor.

 

Unless the context otherwise requires or indicates, references in this section to “we,” “our” and “us” refer to (i) our company and its consolidated subsidiaries (including our operating partnership) after giving effect to the formation transactions and (ii) our predecessor before giving effect to the formation transactions.

 

Introduction

 

Business

 

We believe that we are the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon (“Ground Leases”). Ground Leases are typically ‘‘triple net’’ leases, meaning that the tenant is responsible for development costs, capital expenditures and all property operating expenses, such as maintenance, real estate taxes and insurance. Ground Leases are typically long-term (base terms ranging from 30 to 99 years, often with tenant renewal options) and have contractual base rent increases (either at a specified percentage or consumer price index (“CPI”) based, or both) and sometimes include percentage rent participations.

 

We believe that a Ground Lease represents a safe position in a property’s capital structure. This safety is derived from the typical structure of a Ground Lease, which we believe creates a low likelihood of a tenant default and a low likelihood of a loss by the Ground Lease owner in the event of a tenant default. A Ground Lease lessor typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default, which provides a strong incentive for a Ground Lease tenant to make the required Ground Lease rent payments. Additionally, the value of a property subject to a Ground Lease typically exceeds the amount of the Ground Lease owner’s investment at the time it was made; therefore, even if the Ground Lease owner takes over the property following a tenant default or upon expiration of the Ground Lease, the owner 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.

 

We target Ground Leases because we believe that rental income from Ground Leases can provide us with a safe, secure and growing cash flow stream. We believe that Ground Leases offer us the opportunity to realize superior risk-adjusted total returns when compared to certain other alternative commercial property debt and equity investments. We intend to target investments in long-term Ground Leases in which: (i) the initial value of our Ground Lease represents 30% to

 

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45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land (“Combined Property Value”); (ii) the ratio of underlying property net operating income to the Ground Lease payment due us (“Ground Rent Coverage”) is between 2.0x to 5.0x; and (iii) the Ground Lease contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land. We believe that these target attributes will mitigate the effects of inflation, compensate for anticipated increases in land values over time and establish a conservative position in the case of defaults. We also believe that the Ground Lease structure provides an opportunity for future investment value accretion through the reversion to us, as the Ground Lease owner, of the buildings and improvements on the land at the expiration or earlier termination of the lease, for no additional consideration from us. We intend to construct a portfolio of Ground Leases diversified by property type, geography, tenant and lease term.

 

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 a fragmented market 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 the Ground Lease structure to a broader component of the approximately $7.0 trillion institutional commercial property market in the United States. We intend to capitalize on this market opportunity by utilizing multiple Ground Lease sourcing and origination channels, including acquiring existing Ground Leases, manufacturing new Ground Leases with third-party owners 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 are managed by SFTY Manager, LLC (the “Manager”), a wholly-owned subsidiary of iStar Inc. (“iStar”), our largest shareholder, pursuant to a management agreement. We have no employees, relying on our Manager to provide all services. We intend to 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.

 

Organization

 

Safety, Income & Growth Inc. (“Original Safety”) is a Maryland corporation that was formed as a wholly-owned subsidiary of iStar on October 24, 2016. iStar contributed a pre-existing portfolio of Ground Leases to Original Safety and sought third party capital to grow its Ground Lease business. A second entity, SIGI Acquisition, Inc. (“SIGI”) was capitalized on April 14, 2017 by iStar and two institutional investors. On April 14, 2017, Original Safety merged with and into SIGI with SIGI surviving the merger and being renamed Safety, Income & Growth Inc. References herein to us or we refer to Original Safety before such merger and to the surviving company of such merger thereafter. Through these and other formation transactions, we (i) acquired iStar’s entire Ground Lease portfolio consisting of 12 properties (the “Initial Portfolio”), all of which were wholly-owned as of September 30, 2017 and December 31, 2016, (ii) completed the $227 million 2017 Secured Financing (refer to Note 6) on March 30, 2017, (iii) issued 2,875,000 shares of our common stock to two institutional investors for $20.00 per share, or $57.5 million (representing a 51% ownership interest in us at such time), and 2,775,000 shares of our common stock to iStar for $20.00 per share, or $55.5 million (representing a 49% ownership interest in us at such time), and (iv) paid $340.0 million in total consideration to iStar for the Initial Portfolio.

 

On June 27, 2017, we completed our initial public offering raising $205.0 million in gross proceeds and concurrently completing a $45.0 million private placement with iStar. The initial public offering price was $20.00 per share. iStar paid organization and offering costs in connection with these transactions, including commissions payable to the underwriters and other offering expenses. iStar received no compensation for its payment of the organization and offering costs.

 

We intend to elect to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with the tax year ending December 31, 2017. We were structured as an Umbrella Partnership REIT (“UPREIT”). As such, all of our properties are owned by a subsidiary partnership, Safety Income and Growth Operating Partnership LP (the “Operating Partnership”), which is currently wholly-owned by us. The UPREIT structure may afford us with certain benefits as we seek to acquire properties from third parties who may want to defer taxes on the contribution of their Ground Leases to us.

 

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Executive Overview

 

We operate our business through one segment by acquiring, managing and capitalizing Ground Leases. 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 (i) long-term leases with periodic contractual increases in rent, and (ii) growth in the value of the ground over time. Capital appreciation is realized when, at the end of the life of the lease, the commercial real estate property reverts back to us, as landlord, and we are able to realize the value of the leasehold, which may be substantial. Our leases share similarities with triple net leases in that typically we are not responsible for any operating or capital expenses over the life of the lease, making the management of our portfolio relatively simple, with limited working capital needs.

 

Our Initial Portfolio was comprised of 12 properties located in major metropolitan areas that were acquired or originated by iStar over the past 20 years. All of the properties in our Initial Portfolio are subject to long-term leases consisting of seven Ground Leases and one master lease (covering five properties) that provide for periodic contractual rental escalations or percentage rent participations in gross revenues generated at the relevant properties.

 

In June 2017, we acquired two additional Ground Leases. The Ground Leases were purchased from third-party sellers for an aggregate purchase price of approximately $142.0 million. Both transactions are well located urban developments, and based upon our estimated net operating income at the properties upon stabilization, have significant coverage to the initial Ground Lease payment due under the leases, greater than 5.4x. We intend to grow our portfolio through future acquisitions and originations of Ground Leases and believe these transactions are indicative of some of the types of Ground Leases we are pursuing for acquisition and origination. We acquired the Ground Lease at 6200 Hollywood Boulevard, a 143,151 square foot land parcel subject to a long term Ground Lease located in Los Angeles, CA in the Hollywood neighborhood adjacent to the Hollywood/Vine metro station. The site is currently under construction; once completed, it will be improved with approximately 507 apartments, 56,100 square feet of retail space, 1,237 underground parking spaces, and signage facing Hollywood Boulevard. The Ground Lease has 87 years remaining on its term. We also acquired the Ground Lease at 6201 Hollywood Boulevard, a 183,802 square foot land parcel subject to a long term Ground Lease located in Los Angeles, CA in the Hollywood neighborhood adjacent to the Hollywood/Vine metro station. The land is improved with approximately 535 apartments, 71,200 square feet of retail space, 1,300 underground parking spaces, and signage facing Hollywood Boulevard. The Ground Lease has 87 years remaining on its term. Total development cost of these leasehold improvements is estimated to be $450 million, giving the projects a Combined Property Value of approximately $600 million. The $450 million of leasehold improvements reverts back to us as lessor at the end of the lease, which we refer to as the value bank (“Value Bank”).

 

In August 2017, we originated a Ground Lease at 3333 LifeHope in Atlanta, GA for a purchase price of $16.0 million. The property is being converted into a class-A medical office building. The building is 100% pre-leased to 23 subtenants with a weighted average lease term of 17.6 years. The Ground Lease has a term of 99 years and initial rent of $0.9 million, subject to annual increases of 2%, and based upon the anticipated net operating income at the property upon stabilization, has coverage of more than 3.5x to the initial Ground Lease payment due under the lease. In addition, the ground lessee will construct a 185-space parking deck adjacent to the building scheduled to be completed in 2018, which will be engineered to accommodate future development of the site. We have a right of first refusal to provide funding for up to 30% of the construction cost of an additional 160,000 square feet of development on terms consistent with the Ground Lease. iStar, our largest shareholder, committed to provide a $24.0 million construction loan to the ground lessee with an initial term of one year for the renovation of the property, of which $5.1 million was funded as of September 30, 2017.

 

Non-GAAP Financial Measures

 

In addition to net income (loss) prepared in conformity with GAAP, we use certain non-GAAP financial measures to measure our operating performance. We present below a discussion of funds from operations (“FFO”), and adjusted funds from operations (“AFFO”).

 

We present FFO and AFFO because we consider them to be important supplemental measures of our operating performance and believe that they are frequently used by management, securities analysts, investors and other interested parties in the evaluation of REITs. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs.

 

We compute FFO in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains or losses from sales of depreciable operating property, plus real estate-related depreciation and amortization. We compute AFFO by adding (or subtracting) to FFO the following items: straight-line rental income, the amortization of real estate-related intangibles, non-

 

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cash management fees and expense reimbursements, stock-based compensation, acquisition costs and the amortization of deferred financing costs and other expenses related to debt obligations.

 

We consider AFFO to be a useful metric when evaluating the key drivers of our long term operating performance, which are relatively straightforward. Our Ground Lease investments generate rental income and our tenants are typically responsible for all property level expenses. As a result, we incur minimal property level cash expenses that are not reimbursed. Furthermore, we subtract straight-line rent because it represents non-cash GAAP income, which creates a material difference between our GAAP rental income recorded and the cash rent we receive, particularly due to the very long duration of our leases. AFFO is presented prior to the impact of the amortization of lease intangibles, non-cash management fees and expense reimbursements, stock-based compensation, and other expenses which represent non-cash expenses. We also add back acquisition expenses incurred for the acquisition of Ground Leases due to the long-term nature of our Ground Lease business. Our Ground Lease assets typically have long-term leases (typically 30-99 years) and acquisition expenses will only affect our operations in periods in which Ground Leases are acquired.

 

In addition, we believe FFO and AFFO are useful to investors as they capture features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets.

 

Investors should review FFO and AFFO, along with GAAP net income (loss), when trying to understand the operating performance of an equity REIT like us. However, because FFO and AFFO exclude depreciation and amortization and do not capture the changes in the value of our properties that result from use or market conditions, which have real economic effect and could materially impact our results from operations, the utility of FFO and AFFO as measures of our performance is limited. There can be no assurance that FFO and AFFO as presented by us is comparable to similarly titled measures of other REITs. FFO and AFFO do not represent cash generated from operating activities and should not be considered as alternatives to net income (loss) (determined in accordance with GAAP) or to cash flow from operating activities (determined in accordance with GAAP). FFO and AFFO are not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions to our stockholders. Although FFO and AFFO are measures used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO and AFFO may vary from one company to another.

 

The following table presents a reconciliation of our pro forma and historical consolidated and combined net income (loss), the most directly comparable GAAP measure, to FFO and AFFO, for the periods presented:

 

 

 

Pro Forma

 

Historical
Consolidated

 

Historical Combined

 

 

 

For the Nine
Months Ended
September 30,

 

For the Year
Ended
December 31,

 

For the
Period
from April
14, 2017 to
September
30,

 

For the
Period
from
January
1, 2017
to April
13,

 

For the
Nine
Months
Ended
September
30,

 

For the Years Ended
December 31,

 

 

 

2017

 

2016

 

2017

 

2017

 

2016

 

2016

 

2015

 

 

 

(In thousands)

 

Funds from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,411

)

$

2,100

 

$

(2,325

)

$

1,846

 

$

2,916

 

$

6,615

 

$

5,717

 

Add: Depreciation and amortization

 

6,690

 

7,522

 

4,139

 

901

 

2,356

 

3,142

 

3,140

 

Less: Income from sales of real estate

 

(508

)

 

 

(508

)

 

 

 

FFO

 

$

4,771

 

$

9,622

 

$

1,814

 

$

2,239

 

$

5,272

 

$

9,757

 

$

8,857

 

Adjusted Funds from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO

 

$

4,771

 

$

9,622

 

$

1,814

 

$

2,239

 

$

5,272

 

$

9,757

 

$

8,857

 

Straight-line rental income

 

(3,788

)

(4,873

)

(2,422

)

(1,271

)

(3,261

)

(4,374

)

(2,902

)

Amortization of real estate-related intangibles, net

 

1,185

 

1,594

 

754

 

118

 

310

 

414

 

332

 

Stock-based compensation

 

1,012

 

364

 

766

 

246

 

250

 

364

 

331

 

Acquisition costs

 

 

381

 

381

 

 

 

 

 

 

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Table of Contents

 

 

 

Pro Forma

 

Historical
Consolidated

 

Historical Combined

 

 

 

For the Nine
Months Ended
September 30,

 

For the Year
Ended
December 31,

 

For the
Period
from April
14, 2017 to
September
30,

 

For the
Period
from
January
1, 2017
to April
13,

 

For the
Nine
Months
Ended
September
30,

 

For the Years Ended
December 31,

 

 

 

2017

 

2016

 

2017

 

2017

 

2016

 

2016

 

2015

 

 

 

(In thousands)

 

Non-cash management fees and expense reimbursements(1)

 

3,038

 

3,630

 

1,393

 

 

 

 

 

Non-cash interest expense

 

246

 

(37

)

226

 

20

 

742

 

1,000

 

709

 

AFFO

 

$

6,464

 

$

10,681

 

$

2,912

 

$

1,352

 

$

3,313

 

$

7,161

 

$

7,327

 

 


(1)         In 2017, we modified AFFO to be presented before non-cash management fees and expense reimbursements. The periods prior to 2017 have been recast to reflect such modification.

 

We present below a discussion of earnings before interest, depreciation and amortization, or EBITDA. We compute EBITDA as the sum of net income (loss) before interest expense and depreciation and amortization. We present EBITDA because we believe that EBITDA, along with cash flow from operating activities, investing activities and financing activities, provides investors with an additional indicator of our ability to incur and service debt. EBITDA should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), as an indication of our financial performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP), or as a measure of our liquidity.

 

The following table presents a reconciliation of our pro forma and historical combined net income (loss), the most directly comparable GAAP measure to EBITDA, for the periods presented:

 

 

 

Pro Forma

 

Historical
Consolidated

 

Historical Combined

 

 

 

For the Nine
Months Ended
September 30,

 

For the Year
Ended
December 31,

 

For the
Period from
April 14,
2017 to
September
30,

 

For the
Period
from
Janaury 1,
2017 to
April 13,

 

For the
Nine
Months
Ended
September
30,

 

For the Years Ended
December 31,

 

 

 

2017

 

2016

 

2017

 

2017

 

2016

 

2016

 

2015

 

 

 

(In thousands)

 

EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,411

)

$

2,100

 

$

(2,325

)

$

1,846

 

$

2,916

 

$

6,615

 

$

5,717

 

Add: Interest expense

 

6,767

 

8,697

 

4,313

 

2,432

 

6,072

 

8,242

 

7,229

 

Add: Depreciation and amortization

 

6,690

 

7,522