0001688852-18-000054.txt : 20181025 0001688852-18-000054.hdr.sgml : 20181025 20181025142339 ACCESSION NUMBER: 0001688852-18-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 67 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181025 DATE AS OF CHANGE: 20181025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Safety, Income & Growth, Inc. CENTRAL INDEX KEY: 0001688852 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 814253271 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38122 FILM NUMBER: 181138584 BUSINESS ADDRESS: STREET 1: 1114 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 212-930-9400 MAIL ADDRESS: STREET 1: 1114 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: Safety Income & Growth REIT, Inc. DATE OF NAME CHANGE: 20161031 10-Q 1 safe-0930201810q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission File No. 001-38122
_______________________________________________________________________________
Safety, Income & Growth Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
 
30-0971238
(I.R.S. Employer
Identification Number)
1114 Avenue of the Americas, 39th Floor
 
 
New York, NY
(Address of principal executive offices)
 
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No 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 definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer ý
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
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 13(a) of the Exchange Act. ý    
As of October 24, 2018, there were 18,230,000 shares, $0.01 par value per share, of Safety, Income & Growth Inc. common stock outstanding.
 



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 

 
 
 




PART I. CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
Item 1.    Financial Statements
Safety, Income & Growth Inc.
Consolidated Balance Sheets
(In thousands)
(unaudited)
 
As of
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
535,318

 
$
413,145

Less: accumulated depreciation
(8,756
)
 
(4,253
)
Total real estate, net
526,562

 
408,892

Real estate-related intangible assets, net
221,090

 
138,725

Total real estate, net and real estate-related intangible assets, net
747,652

 
547,617

Cash and cash equivalents
19,248

 
168,214

Restricted cash
757

 
1,656

Deferred ground and other lease income receivable, net
15,878

 
4,097

Deferred expenses and other assets, net
25,460

 
6,929

Total assets
$
808,995

 
$
728,513

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
9,247

 
$
7,545

Real estate-related intangible liabilities, net
57,776

 
57,959

Debt obligations, net
371,375

 
307,074

Total liabilities
438,398

 
372,578

Commitments and contingencies (refer to Note 7)


 


Equity:
 
 
 
Safety, Income & Growth Inc. shareholders' equity:
 
 
 
Common stock, $0.01 par value, 400,000 shares authorized, 18,230 and 18,190 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
182

 
182

Additional paid-in capital
369,625

 
364,919

Retained deficit
(10,053
)
 
(9,246
)
Accumulated other comprehensive income
8,978

 
80

Total Safety, Income & Growth Inc. shareholders' equity
368,732

 
355,935

Noncontrolling interests
1,865

 

Total equity
370,597

 
355,935

Total liabilities and equity
$
808,995

 
$
728,513

_______________________________________________________________________________
Note - Refer to Note 2 for details on the Company's consolidated variable interest entities ("VIEs").

The accompanying notes are an integral part of the consolidated and combined financial statements.

1


Safety, Income & Growth Inc.(1) 
Consolidated and Combined Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2018
 
For the Period from April 14, 2017 to September 30, 2017
 
For the Period from January 1, 2017 to April 13,
2017
 
 
 
 
 
Revenues:
The Company
 
Predecessor
Ground and other lease income
$
11,567

 
$
6,172

 
$
32,708

 
$
10,374

 
$
5,916

Other income
77

 
84

 
2,203

 
86

 
108

Total revenues
11,644

 
6,256

 
34,911

 
10,460

 
6,024

Costs and expenses:
 
 
 
 
 
 
 
 
 
Interest expense
3,747

 
2,445

 
10,378

 
4,313

 
2,432

Real estate expense(2)
456

 
472

 
1,208

 
897

 
210

Depreciation and amortization
2,290

 
2,266

 
6,836

 
4,139

 
901

General and administrative
2,779

 
1,672

 
8,103

 
2,821

 
1,143

Other expense
303

 
122

 
812

 
615

 

Total costs and expenses
9,575

 
6,977

 
27,337

 
12,785

 
4,686

Income (loss) from operations
2,069

 
(721
)
 
7,574

 
(2,325
)
 
1,338

Income from sales of real estate

 

 

 

 
508

Net income (loss)
2,069

 
(721
)
 
7,574

 
(2,325
)
 
1,846

Net (income) allocable to noncontrolling interests
(60
)
 

 
(142
)
 

 

Net income (loss) allocable to Safety, Income & Growth Inc. common shareholders
$
2,009

 
$
(721
)
 
$
7,432

 
$
(2,325
)
 
$
1,846

 
 
 
 
 
 
 
 
 
 
Per common share data:
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
 
 
Basic and diluted
$
0.11

 
$
(0.04
)
 
$
0.41

 
$
(0.18
)
 
N/A

Weighted average number of common shares:
 
 
 
 
 
 
 
 
 
Basic and diluted
18,230

 
18,190

 
18,204

 
12,731

 
N/A

 
 
 
 
 
 
 
 
 
 
Dividends declared per share
$
0.15

 
$
0.15

 
$
0.45

 
$
0.1566

 
N/A

_______________________________________________________________________________
(1)
The combined statements of operations prior to April 14, 2017 represent the activity of Safety, Income & Growth Inc. Predecessor.
(2)
For the three and nine months ended September 30, 2018, real estate expense includes the amortization of a below market lease asset at one of the Company's hotel properties of $0.2 million and $0.7 million, respectively. For the three months ended September 30, 2017 and the periods from April 14, 2017 to September 30, 2017 and January 1, 2017 to April 13, 2017, real estate expense includes reimbursable property taxes at one of the Company's properties of $0.1 million, $0.2 million and $0.2 million, respectively.


The accompanying notes are an integral part of the consolidated and combined financial statements.

2


Safety, Income & Growth Inc.(1) 
Consolidated and Combined Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
 
For the Three Months Ended September 30, 2018
 
For the Three Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2018
 
For the Period from April 14, 2017 to September 30, 2017
 
For the Period from January 1, 2017 to April 13,
2017
 
 
 
 
 
 
The Company
 
Predecessor
Net income (loss)
$
2,069

 
$
(721
)
 
$
7,574

 
$
(2,325
)
 
$
1,846

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Cumulative-effect adjustment for cash flow hedges (refer to Note 3)


 

 
41

 

 

Reclassification of gains on derivatives into earnings
(77
)
 

 
(99
)
 

 

Unrealized gain (loss) on derivatives
2,954

 
(117
)
 
8,956

 
(243
)
 
415

Other comprehensive income (loss)
2,877

 
(117
)
 
8,898

 
(243
)
 
415

Comprehensive income (loss)
4,946

 
(838
)
 
16,472

 
(2,568
)
 
2,261

Comprehensive (income) attributable to noncontrolling interest
(60
)
 

 
(142
)
 

 

Comprehensive income (loss) attributable to Safety, Income & Growth Inc.
$
4,886

 
$
(838
)
 
$
16,330

 
$
(2,568
)
 
$
2,261

_______________________________________________________________________________
(1)
The combined statements of comprehensive income prior to April 14, 2017 represent the activity of Safety, Income & Growth Inc. Predecessor.


The accompanying notes are an integral part of the consolidated and combined financial statements.

3


Safety, Income & Growth Inc.(1) 
Consolidated and Combined Statements of Changes in Equity
(In thousands)
(unaudited)



 
 
Safety, Income & Growth Inc. Predecessor Equity
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling Interests
 
Total
Equity
Predecessor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
154,091

 
$

 
$

 
$

 
$

 
$

 
$

Net income
 
1,846

 

 

 

 

 

 

Unrealized gain on cash flow hedge
 
415

 

 

 

 

 

 

Net transactions with iStar Inc.
 
(220,813
)
 

 

 

 

 

 

Balance as of April 13, 2017
 
(64,461
)
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$

 
$

 
$

 
$
(2,325
)
 
$

 
$

 
$
(2,325
)
Proceeds from issuance of common stock to initial investors
 

 
57

 
112,943

 

 

 

 
113,000

Proceeds from issuance of common stock in initial public offering
 

 
125

 
249,875

 

 

 

 
250,000

Contributions from iStar Inc.
 

 

 
20,113

 

 

 

 
20,113

Offering costs
 

 

 
(20,232
)
 

 

 

 
(20,232
)
Issuance of common stock to directors
 

 

 
766

 

 

 

 
766

Dividends declared
 

 

 

 
(2,848
)
 

 

 
(2,848
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 
(243
)
 

 
(243
)
Balance as of September 30, 2017
 
$

 
$
182

 
$
363,465

 
$
(5,173
)
 
$
(243
)
 
$

 
$
358,231

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$

 
$
182

 
$
364,919

 
$
(9,246
)
 
$
80

 
$

 
$
355,935

Net income
 

 

 

 
7,432

 

 
142

 
7,574

Contributions from iStar Inc.
 

 

 
2,581

 

 

 

 
2,581

Offering costs
 

 

 
1,347

 

 

 

 
1,347

Issuance of common stock to directors/amortization
 

 

 
778

 

 

 

 
778

Dividends declared
 

 

 

 
(8,198
)
 

 

 
(8,198
)
Cumulative-effect adjustment for cash flow hedges (refer to Note 3)

 

 

 

 
(41
)
 
41

 

 

Change in accumulated other comprehensive income
 

 

 

 

 
8,857

 

 
8,857

Contributions from noncontrolling interests
 

 

 

 

 

 
1,750

 
1,750

Distributions to noncontrolling interests
 

 

 

 

 

 
(27
)
 
(27
)
Balance as of September 30, 2018
 
$

 
$
182

 
$
369,625

 
$
(10,053
)
 
$
8,978

 
$
1,865

 
$
370,597

_______________________________________________________________________________
(1)The combined statements of changes in equity prior to April 14, 2017 represent the activity of Safety, Income & Growth Inc. Predecessor.
The accompanying notes are an integral part of the consolidated and combined financial statements.

4


Safety, Income & Growth Inc.(1) 
Consolidated and Combined Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Nine Months Ended September 30, 2018
 
For the Period from April 14, 2017 to September 30, 2017
 
For the Period from January 1, 2017 to April 13, 2017
 
 
 
 
The Company
 
Predecessor
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
7,574

 
$
(2,325
)
 
$
1,846

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
 
 
Depreciation and amortization
6,836

 
4,139

 
901

Non-cash stock-based compensation expense
778

 
766

 

Deferred ground and other lease income
(11,781
)
 
(2,422
)
 
(1,271
)
Income from sales of real estate

 

 
(508
)
Amortization of real estate-related intangibles, net
1,709

 
754

 
118

Amortization of premium and deferred financing costs on debt obligations, net

1,124

 
226

 
20

Management fees and non-cash expense reimbursements to the Manager
3,500

 
1,393

 

Other operating activities
(7
)
 
54

 
4

Changes in assets and liabilities:
 
 
 
 
 
Changes in ground and other lease income receivable, net

 
1,394

 
2,088

Changes in deferred expenses and other assets, net
(1,265
)
 
96

 
(576
)
Changes in accounts payable, accrued expenses and other liabilities
2,348

 
390

 
(13
)
Cash flows provided by operating activities
10,816

 
4,465

 
2,609

Cash flows from investing activities:
 
 
 
 
 
Acquisitions of real estate
(208,083
)
 
(270,734
)
 

Proceeds from sales of real estate

 

 
508

Deposits on ground lease investments

(9,043
)
 

 

Other investing activities
377

 
415

 
(1,042
)
Cash flows used in investing activities
(216,749
)
 
(270,319
)
 
(534
)
Cash flows from financing activities:
 
 
 
 
 
Net transactions with iStar Inc.

 

 
(220,813
)
Contribution from iStar Inc.

 
14,350

 

Proceeds from issuance of common stock

 
363,000

 

Proceeds from debt obligations
64,000

 

 
227,000

Payments for deferred financing costs
(1,056
)
 
(2,821
)
 
(7,217
)
Dividends paid to common shareholders
(8,192
)
 

 

Payment of offering costs
(407
)
 
(14,372
)
 
(779
)
Distributions to noncontrolling interests
(27
)
 

 

Contributions from noncontrolling interests
1,750

 

 

Cash flows provided by (used in) financing activities
56,068

 
360,157

 
(1,809
)
Changes in cash, cash equivalents and restricted cash
(149,865
)
 
94,303

 
266

Cash, cash equivalents and restricted cash at beginning of period
169,870

 

 

Cash, cash equivalents and restricted cash at end of period
$
20,005

 
$
94,303

 
$
266

Supplemental disclosure of non-cash investing and financing activity:
 
 
 
 
 
Contribution from iStar Inc.
$
2,581

 
$
5,763

 
$

Assumption of debt obligations

 
227,415

 

Dividends declared to common shareholders
2,735

 
2,828

 

Accrued finance costs
165

 
42

 
21

Offering costs
(1,336
)
 
1,567

 

_______________________________________________________________________________
(1)
The combined statements of cash flows prior to April 14, 2017 represent the activity of Safety, Income & Growth Inc. Predecessor.

The accompanying notes are an integral part of the consolidated and combined financial statements.

5

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements
(unaudited)





Note 1—Business and Organization

Business—Safety, Income & Growth Inc. (the "Company") operates its business through one reportable segment by acquiring, managing and capitalizing ground leases. Ground leases are long-term contracts between the landlord (the Company) and a tenant or leaseholder ("Ground Leases"). The Company believes that it is 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 are similar to "triple net" leases because the tenant is generally responsible for all property operating expenses, such as maintenance, real estate taxes and insurance and is also responsible for development costs and capital expenditures. 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.

The Company intends to target investments in long-term Ground Leases in which: (i) the cost of its Ground Lease represents 30% to 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 the Company ("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. A Ground Lease lessor (the Company) typically has the right to regain possession of its land and take ownership of the buildings and improvements thereon upon a tenant default and termination of the Ground Lease on account of such default. The Company believes that the Ground Lease structure provides an opportunity for future investment value accretion through the reversion to the Company, 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 the Company.

The Company is managed by SFTY Manager, LLC (the "Manager"), a wholly-owned subsidiary of iStar Inc. ("iStar"), the Company's largest shareholder, pursuant to a management agreement (refer to Note 11). The Company has no employees, as the Manager provides all services to it. The Company intends to draw on the extensive investment origination and sourcing platform of its Manager to actively promote the benefits of the Ground Lease structure to prospective Ground Lease tenants.

Organization—The Company is a Maryland corporation and completed its initial public offering in June 2017. The Company's common stock is listed on the New York Stock Exchange under the symbol "SAFE." The Company's predecessor ("Original Safety" or the "Predecessor") 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 the Company refer to Original Safety before such merger and to the surviving company of such merger thereafter. Through these and other formation transactions, the Company: (i) acquired iStar's entire Ground Lease portfolio consisting of 12 properties (the "Initial Portfolio"), all of which were wholly-owned; (ii) completed the $227.0 million 2017 Secured Financing (refer to Note 6) on March 30, 2017; (iii) issued 2,875,000 shares of the Company's common stock to two institutional investors for $20.00 per share, or $57.5 million (representing a 50.9% ownership interest in the Company at such time), and 2,775,000 shares of the Company's common stock to iStar for $20.00 per share, or $55.5 million (representing a 49.1% ownership interest in the Company at such time); and (iv) paid $340.0 million in total consideration to iStar for the Initial Portfolio.

On June 27, 2017, the Company completed its initial public offering raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement with iStar, its largest shareholder. The price per share paid in the initial public offering and the private placement was $20.00. iStar incurred a total of $18.9 million of organization and offering costs in connection with these transactions and received no reimbursement for its payment of the organization and offering costs. The payment of such costs were treated as capital contributions from iStar with an offsetting cost of capital in the Company's consolidated statements of changes in equity.

The Company elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with the tax year ended December 31, 2017. The Company is structured as an Umbrella Partnership REIT ("UPREIT"). As such, all of the Company's properties are owned through a subsidiary partnership, Safety Income and Growth Operating Partnership LP (the "Operating Partnership"), which is currently wholly-owned by the Company. The UPREIT structure may afford

6

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


the Company certain benefits as it seeks to acquire properties from third parties who may want to defer taxes by contributing their Ground Leases to the Company.

Note 2—Basis of Presentation and Principles of Combination and Consolidation
Basis of Presentation—For periods prior to April 14, 2017, the accompanying combined financial statements do not represent the financial position and results of operations of one legal entity, but rather a combination of entities under common control that have been ‘‘carved out’’ from iStar’s consolidated financial statements. For periods prior to April 14, 2017, these combined financial statements reflect the revenues and expenses of the Predecessor and include certain material assets and liabilities of iStar that are specifically identifiable and generated through, or associated with, an in-place lease, which have been reflected at iStar’s historical basis. For periods subsequent to April 14, 2017, the accompanying consolidated financial statements represent the consolidated financial statements of the Company. In addition, as a result of the Company's acquisition of the Initial Portfolio from iStar, the consolidated financial statements subsequent to April 14, 2017 are presented on a new basis of accounting pursuant to Accounting Standards Codification ("ASC") 805 (refer to Note 4).
The preparation of these consolidated and combined financial statements in conformity with generally accepted accounting principles in the United States of America (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. These combined financial statements for the periods prior to April 14, 2017 include an allocation of general and administrative expenses and interest expense to the Predecessor from iStar. General and administrative expenses include certain iStar corporate functions, including executive oversight, treasury, finance, human resources, tax compliance and planning, internal audit, financial reporting, information technology and investor relations. General and administrative expenses, including stock based compensation, represent a pro rata allocation of costs from iStar’s net lease and corporate business segments based on our average net assets as a percentage of iStar’s average net assets. Interest expense was allocated to the Predecessor by calculating its average net assets as a percentage of the average net assets in iStar’s net lease business segment and multiplying that percentage by the interest expense allocated to iStar’s net lease business segment (only for the number of days in the period in which the Predecessor did not have debt obligations outstanding—refer to Note 6). The Company believes the allocation methodology for the general and administrative expenses and interest expense is reasonable. Accordingly, the general and administrative expense allocation presented in our combined statements of operations for Predecessor periods does not necessarily reflect what our general and administrative expenses will be as a standalone public company for future reporting periods. In the opinion of management, the accompanying combined financial statements contain all adjustments consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. These unaudited consolidated and combined financial statements and related notes should be read in conjunction with the consolidated and combined financial statements and related notes included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2017.

For the periods prior to April 14, 2017, most of the entities included in the Predecessor financial statements did not have bank accounts for the periods presented, and most cash transactions for the Predecessor were transacted through bank accounts owned by iStar. For the periods prior to April 14, 2017, the combined statements of cash flows for the periods presented were prepared as if operating, investing and financing transactions for the Predecessor had been transacted through its own bank accounts.

Principles of Consolidation and Combination—For the periods prior to April 14, 2017, the combined financial statements include on a carve-out basis the historical balance sheets and statements of operations and cash flows attributed to the Predecessor. For the periods subsequent to April 14, 2017, the consolidated financial statements include the accounts and operations of the Company its wholly-owned subsidiaries and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. As of September 30, 2018, the total assets of these consolidated VIEs were $53.4 million and total liabilities were $0.2 million. The classifications of these assets are primarily within "Real estate, net" and "Real estate-related intangible assets, net" on the Company's consolidated balance sheets. The classifications of liabilities are primarily within "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company has provided no financial support to VIEs that it was not previously contractually required to provide and did not have any unfunded commitments related to consolidated VIEs as of September 30, 2018.

7

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Note 3—Summary of Significant Accounting Policies

The following paragraphs describe the impact on the Company's consolidated financial statements from the adoption of Accounting Standards Updates ("ASUs") in 2018.

ASU 2014-09ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. The Company adopted ASU 2014-09 using the modified retrospective approach and the adoption did not have a material impact on the Company's consolidated financial statements.
ASU 2016-01—ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), addressed certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The adoption of ASU 2016-01 did not have a material impact on the Company's consolidated financial statements.

ASU 2016-15—ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), was issued to reduce diversity in practice in how certain cash receipts and cash payments, including debt prepayment or debt extinguishment costs, distributions from equity method investees, and other separately identifiable cash flows, are presented and classified in the statement of cash flows. The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.

ASU 2016-18—ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"), requires that restricted cash be included with cash and cash equivalents when reconciling beginning and ending cash and cash equivalents on the statement of cash flows and requires disclosure of what is included in restricted cash. The adoption of ASU 2016-18 did not have a material impact on the Company's consolidated financial statements. The following table provides a reconciliation of the cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported in the Company's consolidated statements of cash flows (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
Cash and cash equivalents
 
$
19,248

 
$
168,214

 
$
91,327

Restricted cash(1)
 
757

 
1,656

 
2,976

Total cash, cash equivalents and restricted cash reported in the consolidated statements of cash flows
 
$
20,005

 
$
169,870

 
$
94,303

_______________________________________________________________________________
(1)
Restricted cash includes cash balances required to be maintained under certain of the Company's derivative transactions.

ASU 2017-01The adoption of ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), did not have a material impact on the Company's consolidated financial statements. Under ASU 2017-01, certain transactions previously accounted for as business combinations under the former accounting guidance will be accounted for as asset acquisitions under ASU 2017-01. The Company expects more transaction costs to be capitalized relating to real estate acquisitions as a result of ASU 2017-01.


8

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


ASU 2017-05ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"), simplifies GAAP by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The amendments in ASU 2017-05 require an entity to initially measure a retained noncontrolling interest in a nonfinancial asset at fair value consistent with how a retained noncontrolling interest in a business is measured. Also, if an entity transfers ownership interests in a consolidated subsidiary that is within the scope of ASC 610-20 and continues to have a controlling financial interest in that subsidiary, ASU 2017-05 requires the entity to account for the transaction as an equity transaction, which is consistent with how changes in ownership interests in a consolidated subsidiary that is a business are recorded when a parent retains a controlling financial interest in the business. The Company adopted ASU 2017-05 using the modified retrospective approach and the adoption did not have a material impact on the Company's consolidated financial statements.
ASU 2017-12ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company early adopted ASU 2017-12 on January 1, 2018. The impact upon adoption was the elimination of previously recorded hedge ineffectiveness for cash flow hedges by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding decrease to retained earnings of approximately $41,000.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation ("ASU 2018-07") which was issued to align the guidance on share-based payments for goods and services to non-employees with share-based payments to employees. ASU 2018-07 requires non-employee share-based payment awards (refer to Note 11 - Management Agreement) to be measured at the grant date fair value of the equity instruments that the entity is obligated to issue for the goods and services received and the awards are not remeasured. Grant date is generally defined as the date at which the grantor and grantee reach a mutual understanding of the terms and conditions of the share-based award. ASU 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted and the Company adopted ASU 2018-07 on July 1, 2018. The adoption of ASU 2018-7 did not have a material impact on the Company's consolidated financial statements.

Variable interest entities—The Company evaluates its investments and other contractual arrangements to determine if they constitute variable interests in a VIE. A VIE is an entity where a controlling financial interest is achieved through means other than voting rights. A VIE is consolidated by the primary beneficiary, which is the party that has the power to direct matters that most significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This overall consolidation assessment includes a review of, among other factors, which interests create or absorb variability, contractual terms, the key decision making powers, their impact on the VIE's economic performance, and related party relationships. Where qualitative assessment is not conclusive, the Company performs a quantitative analysis. The Company reassesses its evaluation of the primary beneficiary of a VIE on an ongoing basis and assesses its evaluation of an entity as a VIE upon certain reconsideration events.

Fair Values—The Company is required to disclose fair value information with regard to its financial instruments, whether or not recognized in the consolidated and combined balance sheets, for which it is practical to estimate fair value. The Financial Accounting Standards Board ("FASB") guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Company determines the estimated fair values of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant assumptions. The Company determined the carrying values of its cash and cash equivalents; restricted cash; ground and other lease income receivable; deferred ground and other lease income receivable, net; deferred expenses and other assets, net; and accounts payable, accrued expenses, and other liabilities approximated their fair values. The Company determined the fair value of its debt obligations, net as of September 30, 2018 was approximately $360.4 million and falls within Level 3 of the fair value hierarchy.

In connection with the Company's acquisition of the Initial Portfolio and its acquisition of two separate Ground Leases on June 28, 2017 (refer to Note 4), the Company was required to account for the acquisitions as business combinations pursuant to ASC 805. The Company utilized a third-party specialist to assist the Company in recognizing and measuring the identifiable assets acquired, the liabilities assumed, and estimating the remaining useful life of the identifiable assets acquired in accordance with ASC 350.

9

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)



Other—The Company is an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") and is 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. The Company has 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, 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, the Company has chosen to "opt out" of this extended transition period, and as a result, it 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. The Company's decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The Company 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 the Company's initial public offering; (iii) the date on which the Company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which the Company is deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended.
New Accounting PronouncementsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") which was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity. This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management does not believe the adoption of ASU 2016-13 will have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), and in July 2018, the FASB issued ASU 2018-11, Leases ("ASU 2018-11"), to address two requirements of ASU 2016-02. ASU 2016-02 and ASU 2018-11 are effective for interim and annual 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 or finance leases. Adoption of ASU 2016-02 may result in the lessor and lessee under a long term lease of land to record the lease as a financing transaction. The lessor under a long-term lease of land will likely classify its land as a sales-type lease and record the land as a net investment in the lease. For the Company's Ground Leases which are sales-type leases, lease payments received by the Company will be recorded as interest income and amortization of the net investment in the lease. The amount recorded as interest income in any given period will likely be different than the straight-line ground lease income that would have been recorded under the superseded guidance. Management currently expects to elect the practical expedient package that allows the Company: (a) to not reassess whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any expired or existing leases entered into prior to January 1, 2019; and (c) to not reassess initial direct costs for any expired or existing leases entered into prior to January 1, 2019.

Lessees under operating and finance leases will be required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its statement of financial position. Lessees under operating leases will be required to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight line basis, and classify all cash payments within operating activities in its statement of cash flows. Lessees under finance leases will be required to recognize interest expense on the lease liability (under the effective interest method) and amortization expense of the right-of-use asset (generally on a straight line basis), each reflected separately in the statement of operations.

ASU 2018-11 amends ASU 2016-02 so that: (i) entities may elect to not recast the comparative periods presented when transitioning to ASC 842 by allowing entities to change their initial application to the beginning of the period of adoption; and (ii) provides lessors with a practical expedient to not separate non-lease components from the associated lease component of the contractual payments if certain conditions are met. Management currently expects to elect both of these provisions.


10

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)



Note 4—Real Estate and Real Estate-Related Intangibles
The Company's real estate assets consist of the following ($ in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
Land and land improvements, at cost
$
342,922

 
$
220,749

Buildings and improvements, at cost
192,396

 
192,396

Less: accumulated depreciation
(8,756
)
 
(4,253
)
Total real estate, net
$
526,562

 
$
408,892

Real estate-related intangible assets, net
221,090

 
138,725

Total real estate, net and real estate-related intangible assets, net
$
747,652

 
$
547,617


Real estate-related intangible assets, net consist of the following items ($ in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
Above-market lease assets, net(1)
$
154,926

 
$
77,197

In-place lease assets, net(2)
40,376

 
35,744

Below-market lease asset, net(3)
25,043

 
25,784

Other intangible assets, net
745

 

Real estate-related intangible assets, net
$
221,090

 
$
138,725

_______________________________________________________________________________
(1)
Above-market lease assets are recognized during business combinations and asset acquisitions when the present value of market rate rental cash flows over the term of a lease is less than the present value of the contractual in-place rental cash flows. Accumulated amortization on above-market lease assets was $2.3 million and $0.9 million as of September 30, 2018 and December 31, 2017, respectively. The amortization of above-market lease assets decreased "Ground and other lease income" in the Company's consolidated statements of operations by $0.6 million and $1.4 million for the three and nine months ended September 30, 2018, respectively. The amortization of above-market lease assets decreased "Ground and other lease income" in the Company's consolidated statements of operations by $0.3 million and $0.6 million for the three months ended September 30, 2017 and the period from April 14, 2017 to September 30, 2017, respectively. Above-market lease assets are amortized over the term of the leases. The Company recorded $79.2 million of above-market lease assets in connection with 10 Ground Leases entered into during the nine months ended September 30, 2018.
(2)
In-place lease assets are recognized during business combinations and asset acquisitions and are estimated based on the value associated with the costs avoided in originating leases comparable to the acquired in-place leases as well as the value associated with lost rental revenue during the assumed lease-up period. Accumulated amortization on in-place lease assets was $4.5 million and $2.2 million as of September 30, 2018 and December 31, 2017, respectively. The amortization expense for in-place leases was $0.8 million and $2.3 million for the three and nine months ended September 30, 2018, respectively. The amortization expense for in-place leases was $0.8 million and $1.4 million for the three months ended September 30, 2017 and the period from April 14, 2017 to September 30, 2017, respectively. These amounts are included in "Depreciation and amortization" in the Company's consolidated statements of operations. In-place lease assets are amortized over the term of the leases.
(3)
Below-market lease asset, net resulted from the acquisition of the Initial Portfolio and relates to a property that is majority-owned by a third party and is ground leased to the Company. The Company is obligated to pay the owner of the property $0.4 million, subject to adjustment for changes in the CPI, per year through 2044; however, the Company's tenant at the property pays this expense directly under the terms of a master lease. Accumulated amortization on the below-market lease asset was $1.4 million and $0.7 million as of September 30, 2018 and December 31, 2017, respectively. The amortization expense for the Company's below-market lease asset was $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, respectively. The amortization expense for the Company's below-market lease asset was $0.2 million and $0.5 million for the three months ended September 30, 2017 and the period from April 14, 2017 to September 30, 2017, respectively. These amounts are included in "Real estate expense" in the Company's consolidated statements of operations. The below-market lease asset is amortized over the term of the lease.


11

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


The estimated expense from the amortization of real estate-related intangible assets for each of the five succeeding fiscal years is as follows ($ in thousands):(1) 
Year
 
Amount
2018 (remaining three months)
 
$
1,718

2019
 
6,872

2020
 
6,872

2021
 
6,872

2022
 
6,872

_______________________________________________________________________________
(1)
As of September 30, 2018, the weighted average amortization period for the Company's real estate-related intangible assets was approximately 72 years.

Real estate-related intangible liabilities, net consist of the following items ($ in thousands):(1) 
 
As of
 
September 30, 2018
 
December 31, 2017
Below-market lease liabilities(1)
$
57,776

 
$
57,959

Real estate-related intangible liabilities, net
$
57,776

 
$
57,959

_______________________________________________________________________________
(1)
Below-market lease liabilities are recognized during business combinations and asset acquisitions when the present value of market rate rental cash flows over the term of a lease exceeds the present value of the contractual in-place rental cash flows. Accumulated amortization on below-market lease liabilities was $0.9 million and $0.4 million as of September 30, 2018 and December 31, 2017, respectively. The amortization of below-market lease liabilities increased "Ground and other lease income" in the Company's consolidated statements of operations by $0.2 million and $0.5 million for the three and nine months ended September 30, 2018, respectively. The amortization of below-market lease liabilities increased "Ground and other lease income" in the Company's consolidated statements of operations by $0.2 million and $0.3 million for the three months ended September 30, 2017 and the period from April 14, 2017 to September 30, 2017, respectively.

Acquisitions—On April 14, 2017, the Company, through a merger and other formation transactions, acquired the Initial Portfolio from iStar and accounted for the acquisition as a business combination pursuant to ASC 805. On June 28, 2017, the Company separately acquired two additional Ground Leases (described below) from third party sellers for an aggregate purchase price of approximately $142.0 million and accounted for the acquisitions as business combinations pursuant to ASC 805.

The Company acquired the existing 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 Ground Lease had 87 years remaining on its term at the time of acquisition.
The Company acquired the existing 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 as a multi-family development with retail space and underground parking. The Ground Lease had 87 years remaining on its term at the time of acquisition.
    


12

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


The Company's purchase price allocations for the acquisitions described above are presented in the table below ($ in thousands):
 
 
Initial Portfolio
 
6200 Hollywood Blvd.
 
6201 Hollywood Blvd.
 
Total
Assets
 
 
 
 
Land and land improvements, at cost
 
$
73,472

 
$
68,140

 
$
72,836

 
$
214,448

Buildings and improvements, at cost
 
192,396

 

 

 
192,396

Real estate
 
265,868

 
68,140

 
72,836

 
406,844

Real estate-related intangible assets
 
124,017

 
5,500

 
3,258

 
132,775

Other assets
 
1,174

 

 

 
1,174

Total assets
 
$
391,059

 
$
73,640

 
$
76,094

 
$
540,793

 
 

 
 
 
 
 
 
Liabilities
 
 
 
 
Real estate-related intangible liabilities
 
$
50,644


$

 
$
7,734

 
$
58,378

Debt obligations
 
227,415

 

 

 
227,415

Total liabilities
 
278,059

 

 
7,734

 
285,793

Equity Purchase Price
 
$
113,000

(1) 
$
73,640

 
$
68,360

 
$
255,000

_______________________________________________________________________________
(1)
The Company paid $340.0 million in total consideration to iStar for the Initial Portfolio, including the assumption of the 2017 Secured Financing.

The following unaudited table summarizes the Company's pro forma revenues and net income (loss) for the three and nine months ended September 30, 2017 as if the acquisitions of these properties were completed on January 1, 2016 ($ in thousands):
Three Months Ended September 30, 2017
 
Pro forma revenues(1)
$
6,256

Pro forma net loss(1)(2)
(721
)
 
 
Nine Months Ended September 30, 2017
 
Pro forma revenues(1)
$
18,916

Pro forma net income(1)(2)
387

_______________________________________________________________________________
(1)
The pro forma revenues and net income are presented for informational purposes only and may not be indicative of what the actual results of operations of the Company would have been assuming the transaction occurred on January 1, 2016, nor do they purport to represent the Company’s results of operations for future periods.
(2)
The combined statements of operations prior to April 14, 2017 represented the activity of the Predecessor and earnings per share ("EPS") was not applicable.

In August 2017, the Company acquired land and simultaneously structured and entered into a Ground Lease at 3333 LifeHope in Atlanta, GA and accounted for the transaction as an asset acquisition. The Ground Lease has a term of 99 years. In addition, the ground lessee will construct a 185-space parking deck adjacent to the building scheduled to be completed in 2019, which will be engineered to accommodate future development of the site. The Company has a right of first refusal to provide funding for up to 30.0% of the construction cost of an additional 160,000 square feet of development on terms consistent with the Ground Lease. iStar, the Company's 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. This transaction was approved by the Company’s independent directors in accordance with the Company's policy with respect to transactions in which iStar is also a participant.
In October 2017, the Company entered into a purchase agreement to acquire land subject to a Ground Lease 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, the Company will acquire the Ground Lease on November 1, 2020 from iStar for $34.0 million. iStar committed to provide a $80.5 million construction loan to the ground lessee. The Ground Lease expires in 2116. This transaction

13

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


was approved by the Company’s independent directors in accordance with the Company's policy with respect to transactions in which iStar is also a participant.
In January 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Onyx on First, a multifamily building located in the Navy Yards neighborhood of Washington, D.C., one block away from the Navy Yards metro station. The Ground Lease has a term of 99 years.
In February 2018, the Company entered into two ventures in which it has majority and controlling interests, and the ventures acquired land and simultaneously structured and entered into two Ground Leases. The partners' noncontrolling interests in the ventures are recorded in "Noncontrolling interests" on the Company's consolidated balance sheets (refer to Note 9). The first Ground Lease was part of the recapitalization of a two-building office campus in Cary, NC. The second Ground Lease was part of the acquisition of an office building in midtown Atlanta. Both Ground Leases have terms of 99 years.
In May 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of 100 and 200 Glenridge Point, two multi-tenant office buildings in Atlanta, GA. The Ground Lease has a term of 99 years. In addition, iStar provided a $19.9 million loan to the ground lessee with an initial term of one year for the acquisition of the property. This transaction was approved by the Company’s independent directors in accordance with the Company's policy with respect to transactions in which iStar is also a participant.
In June 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Promenade Crossing, a 212-unit multi-family community located in the Baldwin Park submarket of Orlando, FL. The Ground Lease has a term of 99 years.
In June 2018, the Company acquired land and simultaneously structured two Ground Leases as part of the Ground Lease tenant's acquisition from iStar of two industrial facilities located in Miami, FL for $22.8 million. Both Ground Leases have a term of 99 years. This transaction was approved by the Company’s independent directors in accordance with the Company's policy with respect to transactions in which iStar is also a participant.
In July 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of The Madison, a 177,000 square foot Class-A office building located in Phoenix, AZ. The Ground Lease has a term of 99 years.
In July 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Balboa Executive Center, a 121,000 square foot office building located in San Diego, CA. The Ground Lease has a term of 99 years.
In August 2018, the Company acquired the existing Ground Lease at 1325 Wilson Blvd. in Rosslyn, VA. The Ground Lease expires in June 2035 and has four 10-year extension options through June 2075. The property is improved with a 318-unit, 16-story Hyatt Centric branded hotel.
In August 2018, the Company acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of the Jefferson Building, a 73,000 square foot office building located in Washington, DC. The Ground Lease has a term of 99 years.
In August 2018, the Company entered into a forward commitment to acquire land and provide a Ground Lease for the Ground Lease tenant's construction of a 315-unit multi-family property in Washington, DC (refer to Note 7). The Ground Lease will have a term of 99 years.
The Company accounted for the acquisitions made during the nine months ended September 30, 2018 as asset acquisitions and recorded an aggregate $122.2 million in "Real estate, net," an aggregate $86.9 million in "Real estate-related intangible assets, net" and an aggregate $0.3 million in "Real estate-related intangible liabilities, net" on its consolidated balance sheet.
During the nine months ended September 30, 2018, the Company received $1.5 million in connection with the termination of a purchase contract for the purchase of the leased fee interest in a property due to the exercise by another entity of a pre-existing pre-emptive right to acquire such property.

14

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Future Minimum Ground and Other Lease Payments—Future minimum Ground and Other Lease payments to be collected under non-cancelable leases, excluding percentage rent and other lease payments that are not fixed and determinable, in effect as of September 30, 2018, are as follows by year ($ in thousands):
Year
 
Leases with CPI Based Escalations
 
Leases with Fixed Escalations
 
Leases with Revenue Participation
 
Total
2018 (remaining three months)
 
$
1,278

 
$
3,130

 
$
2,520

 
$
6,928

2019
 
5,111

 
12,634

 
10,082

 
27,827

2020
 
5,111

 
12,832

 
10,082

 
28,025

2021
 
5,111

 
13,039

 
10,082

 
28,232

2022
 
5,111

 
13,242

 
10,082

 
28,435

Note 5—Deferred Expenses and Other Assets, Net and Accounts Payable, Accrued Expenses and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
Purchase deposits
$
11,900

 
$
2,855

Interest rate hedge assets
9,127

 
1,042

Deferred finance costs, net(1)
2,760

 
2,490

Other assets
1,236

 
450

Leasing costs, net
437

 
92

Deferred expenses and other assets, net
$
25,460

 
$
6,929

_______________________________________________________________________________
(1)
Accumulated amortization of deferred finance costs was $1.3 million and $0.5 million as of September 30, 2018 and December 31, 2017, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
September 30, 2018
 
December 31, 2017
Accrued expenses(1)
$
2,765

 
$
1,285

Dividends declared and payable
2,735

 
2,728

Other liabilities(2)
1,559

 
621

Interest payable
1,162

 
660

Management fee payable
919

 

Interest rate hedge liabilities
107

 
904

Accounts payable(3)

 
1,347

Accounts payable, accrued expenses and other liabilities
$
9,247

 
$
7,545

_______________________________________________________________________________
(1)
As of September 30, 2018 and December 31, 2017, accrued expenses primarily includes accrued legal expenses, audit expenses and deferred finance costs.
(2)
As of September 30, 2018, other liabilities includes $0.4 million reimbursable to the Manager for allocated expenses. As of December 31, 2017, other liabilities includes $0.1 million due to the Manager for costs it paid on the Company's behalf.
(3)
As of December 31, 2017, accounts payable includes accrued offering costs.


15

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Note 6—Debt Obligations, net

The Company's outstanding debt obligations consist of the following ($ in thousands):
 
As of
 
Stated
Interest Rate
 
Scheduled
Maturity Date
(1)
 
September 30, 2018
 
December 31, 2017
 
 
Secured credit financing:
 
 
 
 
 
 
 
2017 Secured Financing
$
227,000

 
$
227,000

 
3.795%
 
April 2027
2017 Hollywood Mortgage
71,000

 
71,000

 
One-Month LIBOR plus 1.33%
(2) 
January 2023
2017 Revolver
74,000

 
10,000

 
One-Month LIBOR plus 1.35%
 
June 2022
Total secured credit financing
372,000

 
308,000

 
 
 
 
Total debt obligations
372,000

 
308,000

 
 
 
 
Debt premium and deferred financing costs, net
(625
)
 
(926
)
 
 
 
 
Total debt obligations, net
$
371,375

 
$
307,074

 
 
 
 
_______________________________________________________________________________
(1)
Represents the extended maturity date for all debt obligations.
(2)
As of September 30, 2018, inclusive of the effect of an interest rate swap the effective interest rate is 3.04%.

2017 Secured Financing—In March 2017, the Company entered into a $227.0 million non-recourse secured financing transaction (the "2017 Secured Financing") that bears interest at a fixed rate of 3.795% and matures in April 2027. The 2017 Secured Financing was collateralized by the Initial Portfolio including seven Ground Leases and one master lease (covering the accounts of five properties). In connection with and prior to the closing of the 2017 Secured Financing, the Company entered into a $200 million notional rate lock swap, reducing the effective rate of the 2017 Secured Financing from 3.795% to 3.773% (refer to Note 8).
2017 Hollywood Mortgage—In December 2017, the Company entered into a $71.0 million non-recourse first mortgage on 6200 Hollywood Boulevard and 6201 Hollywood Boulevard (the "2017 Hollywood Mortgage"). The 2017 Hollywood Mortgage bears interest at a rate of one-month LIBOR plus 1.33%, matures in January 2023 and is callable without pre-payment penalty beginning in January 2021.
2017 Revolver—In June 2017, the Company entered into a recourse senior secured revolving credit facility with a group of lenders in the maximum aggregate initial original principal amount of up to $300.0 million (the "2017 Revolver"). The 2017 Revolver provides an accordion feature to increase, subject to certain conditions, the maximum availability up to $500.0 million. In July 2018, the Company added an additional lender to the 2017 Revolver bringing total capacity for the 2017 Revolver to $350.0 million. The 2017 Revolver has a term of three years with two 12-month extension options exercisable by the Company, subject to certain conditions, and bears interest at an annual rate of applicable LIBOR plus 1.35%. An undrawn credit facility commitment fee ranges from 0.15% to 0.25%, based on utilization each quarter. This fee was waived for the first six months after the closing date of June 27, 2017. The 2017 Revolver allows the Company to leverage Ground Leases up to a maximum of 67.0%. During the three months ended September 30, 2018, the Company increased borrowings on the 2017 Revolver by $64.0 million. As of September 30, 2018, there was $276.0 million of undrawn capacity on the 2017 Revolver and the Company had the ability to draw an additional $51.1 million without pledging any additional assets to the facility.
Debt Covenants—The Company is subject to financial covenants under the 2017 Revolver, including maintaining: (i) a limitation on total consolidated leverage of not more than 70%, or 75% for no more than 180 days, of the Company's total consolidated assets; (ii) a consolidated fixed charge coverage ratio of at least 1.45x; (iii) a consolidated tangible net worth of at least 75% of the Company's tangible net worth at the date of the 2017 Revolver plus 75% of future issuances of net equity; (iv) a consolidated secured leverage ratio of not more than 70%, or 75% for no more than 180 days, of the Company's total consolidated assets; and (v) a secured recourse debt ratio of not more than 5.0% of the Company's total consolidated assets (exclusive of amounts drawn on this facility). Additionally, the 2017 Revolver restricts the Company's ability to pay distributions to its stockholders. In 2018, the Company will be permitted to make annual distributions up to an amount equal to 110% of the Company's adjusted

16

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


funds from operations, as calculated in accordance with the 2017 Revolver. In addition, the Company may make distributions to the extent necessary to maintain the Company's qualification as a REIT. As of September 30, 2018, the Company was in compliance with all of its financial covenants.
Future Scheduled Maturities—As of September 30, 2018, future scheduled maturities of outstanding debt obligations, assuming all extensions that can be exercised at the Company's option, are as follows ($ in thousands):
 
2017 Secured Financing
 
2017 Hollywood Mortgage
 
2017
Revolver
 
Total
2018 (remaining three months)
$

 
$

 
$

 
$

2019

 

 

 

2020

 

 

 

2021

 

 

 

2022

 

 
74,000

 
74,000

Thereafter
227,000

 
71,000

 

 
298,000

Total principal maturities
227,000

 
71,000

 
74,000

 
372,000

Debt premium and deferred financing costs, net
 
 
 
 
 
 
(625
)
Total debt obligations, net
 
 
 
 
 
 
$
371,375

Note 7—Commitments and Contingencies

Unfunded Commitments—In October 2017, the Company entered into a commitment to acquire land subject to a Ground Lease on November 1, 2020 from iStar for $34.0 million (refer to Note 4).

In August 2018, the Company entered into an aggregate $30.0 million commitment to acquire land for $12.5 million and provide a $17.5 million leasehold improvement allowance for the Ground Lease tenant's construction of a 315-unit multi-family property in Washington, DC (refer to Note 4). The Company has a call option to purchase the land at any time and currently expects to acquire the land in September 2019. The Company expects to fund the leasehold improvement allowance in early 2020.
Legal Proceedings—The Company evaluates developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated and combined financial statements.

Note 8—Risk Management and Derivatives
In the normal course of its ongoing business operations, the Company encounters credit risk. Credit risk is the risk of default on the Company’s leases that result from a tenant’s inability or unwillingness to make contractually required payments.

Risk concentrations—Concentrations of credit risks arise when the Company has multiple leases with a particular tenant or credit party, or a number of the Company’s 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 contractual obligations, including those to the Company, could be similarly affected by changes in economic conditions.

Although the Company’s real estate assets are geographically diverse and the tenants operate in a variety of industries and property types, to the extent the Company has a significant concentration of ground and other lease income from any tenant, the inability of that tenant to make its payment could have a material adverse effect on the Company. During the nine months ended September 30, 2018, the Company’s two largest tenants accounted for approximately $10.7 million and $4.0 million, or 30.7% and 11.4%, respectively, of the Company’s revenues.

The gross carrying value of five hotels leased by the Company under a master lease guaranteed by Park Intermediate Holdings LLC represented 27.4% of the Company’s total assets as of September 30, 2018. Park Intermediate Holdings LLC is a subsidiary of Park Hotels & Resorts Inc., which is a public reporting company. According to Park Hotels & Resorts Inc.’s public

17

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Securities and Exchange Commission filings, Park Hotels & Resorts Inc. conducts substantially all of its business and holds substantially all of its assets through Park Intermediate Holdings LLC. For detailed financial information regarding Park Hotels & Resorts Inc., please refer to its financial statements, which are publicly available on the website of the Securities and Exchange Commission at http://www.sec.gov.

Derivative instruments and hedging activity—The Company's use of derivative financial instruments is associated with debt issuances and primarily limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure. The Company does not enter into derivatives for trading purposes.

The Company recognizes derivatives as either assets or liabilities on the Company's consolidated and combined balance sheets at fair value. Interest rate hedge assets are recorded in "Deferred expenses and other assets, net" and interest rate hedge liabilities are recorded in "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated and combined balance sheets. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability, a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.

For the Company's derivatives designated and qualifying as cash flow hedges, changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

For the Company's derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in "Interest expense" in the Company's consolidated statements of operations. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements.

The table below presents the Company's derivatives as well as their classification on the consolidated balance sheets as of September 30, 2018 and December 31, 2017 ($ in thousands):(1) 
 
 
September 30, 2018
 
December 31, 2017
 
 
Derivative Type
 
Fair
Value(2)
 
Balance Sheet
Location
Assets
 
 
 
 
 
 
Interest rate swaps
 
$
9,101

 
$
1,024

 
Deferred expenses and other assets, net
Interest rate cap(3)
 
26

 
18

 
Deferred expenses and other assets, net
 
 
$
9,127

 
$
1,042

 
 
Liabilities
 
 
 
 
 
 
Interest rate swaps
 
$
107

 
$
904

 
Accounts payable, accrued expenses and other liabilities
 
 
$
107

 
$
904

 
 
____________________________________________________________________________
(1)
For the three and nine months ended September 30, 2018, the Company recorded $3.0 million and $9.0 million, respectively, of unrealized gains in accumulated other comprehensive income (loss).
(2)
The fair value of the Company's derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2 within the fair value hierarchy. Over the next 12 months, the Company expects that $1.0 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive income (loss)" as a reduction to interest expense.
(3)
This derivative is not designated in a hedging relationship.
    
Credit Risk-Related Contingent Features—The Company reports derivative instruments on a gross basis in its consolidated financial statements. The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In connection with its interest rate derivatives which were in a liability position

18

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


as of September 30, 2018 and December 31, 2017, the Company posted collateral of $0.8 million and $1.7 million, respectively, which is included in "Restricted cash" on the Company's consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the Company would not have been required to post any additional collateral to settle these contracts had the Company been declared in default on its derivative obligations.

The tables below present the effect of the Company's derivative financial instruments in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 ($ in thousands):(1) 
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
For the Three Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
2,954

 
$
77

 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
8,956

 
$
99

____________________________________________________________________________
(1) For the period from April 14, 2017 to September 30, 2017, the Company recognized $(0.2) million in accumulated other comprehensive income (loss).
 
 
Location of Gain or
(Loss) Recognized in
Income
 
Amount of Gain or (Loss) Recognized in Income
Derivatives not Designated in Hedging Relationships
 
For the Three Months Ended September 30, 2018
 
 
 
 
Interest rate cap
 
Interest expense
 
$
(1
)
 
 
 
 
 
For the Nine Months Ended September 30, 2018
 
 
 
 
Interest rate cap
 
Interest expense
 
$
9

In February 2017, the Company entered into and settled a rate lock swap in connection with the 2017 Secured Financing (refer to Note 6). As a result of the settlement, the Company recorded a $0.4 million unrealized gain in other comprehensive income, which was recorded in "Safety, Income & Growth Inc. Predecessor equity" on the Company’s consolidated balance sheets. In connection with the Company's acquisition of the Initial Portfolio, the 2017 Secured Financing was recorded at fair value and the resulting premium is recorded as a reduction to interest expense over the term of the 2017 Secured Financing.


19

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Note 9—Equity

Common Stock—On April 14, 2017, two institutional investors acquired 2,875,000 shares of the Company's common stock for $57.5 million and iStar acquired 2,775,000 shares of the Company's common stock for $55.5 million.

On June 27, 2017, the Company sold 10,250,000 shares of its common stock in its initial public offering for proceeds of $205.0 million. Concurrently with the initial public offering, the Company sold $45.0 million in shares, or 2,250,000 shares, of its common stock to iStar in a private placement and issued a total of 40,000 fully-vested shares to its directors who are not employees of the Manager or iStar in consideration for their annual services as directors. On June 28, 2018, the Company issued a total of 40,000 fully-vested shares to its directors who are not employees of the Manager or iStar in consideration for their annual services as directors.

The following table presents a summary of the Company's ownership as of September 30, 2018:
Event
 
Date
 
Owner
 
# of shares
 
Price paid Per Share
Initial capitalization
 
April 14, 2017
 
Third parties
 
2,875,000

 
$
20.00

Initial capitalization
 
April 14, 2017
 
iStar
 
2,775,000

 
20.00

Initial public offering
 
June 27, 2017
 
Third parties
 
10,250,000

 
20.00

Concurrent iStar placement
 
June 27, 2017
 
iStar
 
2,250,000

 
20.00

Issuance of shares to directors
 
June 27, 2017
 
Directors
 
40,000

 

Issuance of shares to directors
 
June 28, 2018
 
Directors
 
40,000

 

Shares outstanding at September 30, 2018
 
 
 
 
 
18,230,000

 
 

Subsequent to the initial public offering, iStar purchased 2.2 million shares of the Company's common stock for $41.7 million, for an average cost of $18.67 per share, pursuant to two 10b5-1 plans (the “10b5-1 Plans") in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which it could buy shares of the Company's common stock in the open market. During the three months ended September 30, 2018, iStar purchased an additional 133,524 shares of the Company's common stock in private and open market transactions for $2.2 million, for an average cost of $16.39 per share. The Company's board of directors has approved iStar’s ownership of up to 41.9% of the Company's outstanding shares of common stock. As of September 30, 2018, iStar owned 40.5% of the Company's common stock.

Equity Plan—During the third quarter 2018, the Company adopted an equity incentive plan providing for grants of interests in a subsidiary of the operating partnership intended to constitute profits interests within the meaning of relevant Internal Revenue Service guidance. Grants under the plan are subject to graduated vesting based on time and hurdles of the Company's common stock price ranging from $25.00 to $35.00. The awards generally entitle plan participants to distributions, in the aggregate, of up to 15% of the capital appreciation above the Company's investment basis. If the hurdles are not achieved in three years, the awards automatically terminate. Awards with an aggregate fair value of $1.5 million were granted to employees of the Manager in the third quarter 2018, which will be recognized over a period of four years. During the three and nine months ended September 30, 2018, the Company recognized $13,000 in expense from the equity plan and it is recorded in "General and administrative expenses" in the Company's consolidated statements of operations.

Accumulated Other Comprehensive Income—Accumulated other comprehensive income consists of net unrealized gains (losses) on the Company's derivative transactions.

Noncontrolling Interests—Noncontrolling interests represent third-party equity interests in ventures that are consolidated in the Company's consolidated financial statements.

Safety, Income & Growth Inc. Predecessor Equity—For the periods prior to April 14, 2017, Safety, Income & Growth Inc. Predecessor Equity represents net contributions from and distributions to iStar. Most of the entities included in the Predecessor’s financial statements did not have bank accounts for the periods presented and most cash transactions for the Predecessor were transacted through bank accounts owned by iStar and are included in Safety, Income & Growth Inc. Predecessor Equity.


20

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Dividends—The Company elected to be taxed as a REIT beginning with its taxable year ended December 31, 2017. To qualify as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the REIT. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and other items), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. During the nine months ended September 30, 2018, the Company declared cash dividends on its common stock of $8.2 million, or $0.45 per share.
Note 10—Earnings Per Share

EPS is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares outstanding for the period. The following table presents a reconciliation of income (loss) from operations used in the basic and diluted EPS calculations ($ in thousands, except for per share data):(1) 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30, 2018
 
Period from April 14, 2017 to September 30,
2017
 
2018
 
2017
 
 
Income (loss) from operations
$
2,069

 
$
(721
)
 
$
7,574

 
$
(2,325
)
Net (income) attributable to noncontrolling interests
(60
)
 

 
(142
)
 

Income (loss) from operations attributable and allocable to common shareholders for basic and diluted earnings per common share
$
2,009

 
$
(721
)
 
$
7,432

 
$
(2,325
)
_______________________________________________________________________________
(1)
The combined statements of operations prior to April 14, 2017 represented the activity of the Predecessor and EPS was not applicable.

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
2018
 
April 14, 2017 to September 30,
2017
 
2018
 
2017
 
 
Earnings allocable to common shares:
 
 
 
 
 
 
 
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Income (loss) from operations attributable to Safety, Income & Growth Inc. and allocable to common shareholders
$
2,009

 
$
(721
)
 
$
7,432

 
$
(2,325
)
 
 
 
 
 
 
 
 
Denominator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic and diluted earnings per common share
18,230

 
18,190

 
18,204

 
12,731

 
 
 
 
 
 
 
 
Basic and diluted earnings per common share:
 
 
 
 
 
 
 
Net income (loss) attributable to Safety, Income & Growth Inc. and allocable to common shareholders
$
0.11

 
$
(0.04
)
 
$
0.41

 
$
(0.18
)
_______________________________________________________________________________
(1)
The combined statements of operations prior to April 14, 2017 represented the activity of the Predecessor and EPS was not applicable.

Note 11—Related Party Transactions

The Company is externally managed by an affiliate of iStar, the Company's largest shareholder. iStar has been an active real estate investor for over 20 years and has executed transactions with an aggregate value of approximately $40.0 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 June 30, 2018, iStar had total assets of approximately $5.4 billion and 186 employees in its New York City headquarters and its seven regional offices across the United States.


21

Safety, Income & Growth Inc.
Notes to Consolidated and Combined Financial Statements (Continued)
(unaudited)


Management Agreement

The Company has designed what it believes to be a management agreement with unique features that create alignment and incentives. A summary of the terms of the management agreement is below:
Manager
SFTY Manager, LLC, a wholly-owned subsidiary of iStar Inc.
Management Fee
Annual fee of 1.0% of total equity (up to $2.5 billion)
Annual fee of 0.75% of total equity (> $2.5 billion)
Management Fee Consideration
Payment will be made exclusively in the Company's common stock (valued at the greater of (i) the volume weighted average market price during the quarter for which the fee is being paid or (ii) the initial public offering price of $20.00 per share)
Lock-up
Restriction from selling common stock received for management fees for two years from the date of such issuance (restriction will terminate in the event of and effective with the termination of the management agreement)
Management Fee Waiver
No management fee was paid to the Manager during the first year (through June 30, 2018)
Incentive Fee
None
Term
1 year
Renewal Provision
Automatically renewed for additional one-year terms unless previously terminated by majority of independent directors or otherwise, as provided in the agreement

Termination Fee
None

For the three and nine months ended September 30, 2018, the Company recorded $0.9 million and $2.7 million, respectively, in management fees to the Manager. The Company will issue 45,941 shares of its common stock to the Manager for payment of the management fee for the three months ended September 30, 2018. For the three months ended September 30, 2017 and the period from April 14, 2017 to September 30, 2017, the Company recorded $0.9 million and $1.1 million, respectively, in management fees to the Manager. These management fees are recorded in "General and administrative expenses" in the Company's consolidated statements of operations. Prior to June 30, 2018, no management fees were paid to the Manager because such fees were waived during the first year of the agreement. The fees were accounted for as a non-cash capital contribution from iStar despite iStar not receiving any compensation for its services during the first year of the agreement.

Expense Reimbursements

The Company pays, or reimburses the Manager for, all of the Company's operating expenses, except those specifically required to be borne by the Manager under the management agreement. In addition, because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that third-party professionals or consultants otherwise would perform, the Manager is reimbursed, in cash or in shares of the Company's common stock, for the documented cost of performing such tasks.

For the three and nine months ended September 30, 2018, the Company was allocated $0.4 million and $1.1 million, respectively, in expenses from the Manager. For the period from the initial public offering on June 27, 2017 to September 30, 2017, the Company was allocated $0.3 million in expenses from the Manager. These expenses are recorded in "General and administrative expenses" in the Company's consolidated statements of operations. Prior to June 30, 2018, in accordance with the provisions of the management agreement, the reimbursement of expenses was waived by the Manager and, accordingly, these expenses were accounted for as a non-cash capital contribution from iStar despite iStar not receiving any reimbursement for these allocated expenses during the first year of the agreement.
Acquisitions

iStar has participated in certain of the Company's investment transactions, either as a seller of land or by providing financing to the Company's Ground Lease tenants. Refer to Note 4 for a description of such transactions.


22


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are included with respect to, among other things, Safety, Income & Growth Inc.'s (the "Company's") current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in the Risk Factors section in our Annual Report on Form 10-K/A, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to Safety, Income & Growth Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
The discussion below should be read in conjunction with our consolidated and combined financial statements and related notes in this quarterly report on Form 10-Q and our Annual Report on Form 10-K/A. These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated and combined financial statements of prior periods to conform to our current financial statements presentation.
Introduction

We believe that we are the first and only publicly-traded company focused primarily on ground leases. Ground leases generally represent the ownership of land underlying commercial real estate properties, which are leased on a long term basis (often 30 to 99 years) by the land owner (landlord) to a tenant that owns and operates the building on top of the land ("Ground Lease"). The property is generally leased on a triple net basis with the tenant generally responsible for taxes, maintenance and insurance as well as all operating costs and capital expenditures. Ground Leases typically provide that at the end of the lease term or upon tenant default and the termination of the Ground Lease on account of such default, the land, building and all improvements revert back to the landlord. We seek to become the industry leader in Ground Leases by demonstrating their value-added characteristics to real estate investors and expanding their use throughout major metropolitan areas.
We have a diverse portfolio of 26 properties located in major metropolitan areas, including our initial portfolio of 12 properties which were acquired prior to our initial public offering. All of the properties in our portfolio are subject to long-term leases consisting of 21 Ground Leases and one master lease (covering five properties) that provide for periodic contractual rent escalations or percentage rent participations in gross revenues generated at the relevant properties.
We have chosen to focus on Ground Leases because we believe they offer a unique combination of safety, income growth and the potential for capital appreciation. We believe that Ground Leases offer the opportunity to realize superior risk-adjusted total returns when compared to certain other alternative commercial real estate property investments.
Safety: 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 landlord in the event of a tenant default. A Ground Lease landlord 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 landlord's investment at the time it was made; therefore, even if the Ground Lease landlord takes over the property following a tenant default or upon expiration of the Ground Lease, the landlord is reasonably likely to recover substantially all of its Ground Lease investment, and possibly amounts in excess of its investment, depending upon prevailing market conditions.
Income Growth: Ground Leases typically provide growing income streams through contractual base rent escalators that may compound over the duration of the lease. These rent escalators may be based on fixed increases, a Consumer Price Index ("CPI") or a combination thereof, and may also include a participation in the gross revenues of the underlying property. We believe that this rental growth over time can mitigate the effects of inflation and compensate for anticipated increases in land values over time, as well as serving as a basis for growing our dividend.

23


Opportunity for Capital Appreciation: The opportunity for capital appreciation with Ground Leases comes in two forms. First, as the ground rent grows over time, the value of the Ground Lease should grow under market conditions in which capitalization rates remain flat. Second, at the expiration or earlier termination of our Ground Leases, we typically have the right to regain possession of the land underlying the Ground Lease 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 Ground Lease, either by entering into a new Ground Lease on the then current market terms, selling the land and improvements thereon or operating the property directly.
We generally target Ground Lease investments in which the initial cost of the Ground Lease represents 30% to 45% of the combined value of the land and buildings and improvements thereon as if there was no Ground Lease on the land ("Combined Property Value"). If the initial cost of a Ground Lease is equal to 35% of the Combined Property Value, the balance of 65% of the Combined Property Value represents potential value accretion to us upon the reversion of the property, assuming no intervening decline in the Combined Property Value. We refer to this potential value accretion as the "Value Bank," defined as the difference between the initial cost of the Ground Lease and the Combined Property Value. In our view, there is a strong correlation between inflation and commercial real estate values over time, which supports our belief that the value of our Value Bank 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 Ground Leases, 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 lease. See Risk Factors section in our Annual Report on Form 10-K/A for a discussion of these tenant rights.
We believe that the reversion right is a unique feature distinguishing Ground Leases from other property types. Accordingly, we periodically estimate the value of our Value Bank based in part on valuations of the Combined Property Value of our portfolio. We retain an independent valuation firm to prepare: (a) initial reports of the Combined Property Value associated with each Ground Lease in our portfolio; and (b) periodic updates of such reports. As reported in our Current Report on Form 8-K filed on October 25, 2018, as of September 30, 2018, our estimated Value Bank is $1,576.0 million in the aggregate and our estimated Value Bank per share is $86.46. Please review that 8-K for a discussion of the valuation methodology used and important limitations and qualifications of the calculation of Value Bank.
Market Opportunity: We believe that there is a significant market opportunity for a dedicated provider of Ground Lease capital like us. We believe that the market for existing Ground Leases is fragmented with ownership comprised primarily of high net worth individuals, pension funds, life insurance companies, estates and endowments. However, while we intend to pursue acquisitions of existing Ground Leases, our investment thesis is predicated, in part, on what we believe is an untapped market opportunity to expand the use of Ground Leases to a broader component of the approximately $7.0 trillion institutional commercial property market in the United States. We intend to capture this market opportunity by utilizing multiple sourcing and origination channels, including manufacturing new Ground Leases with third-party owners and developers of commercial real estate and originating Ground Leases to provide capital for development and redevelopment. We further believe that Ground Leases generally represent an attractive source of capital for our tenants and may allow them to generate superior returns on their invested equity as compared to utilizing alternative sources of capital. We 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; (ii) completed the $227.0 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 50.9% 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 49.1% 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 completed 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. iStar received no reimbursement for its payment of the organization and offering costs.


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We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with the tax year ended December 31, 2017. We are 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.
Executive Overview

We acquire, manage and capitalize Ground Leases and report our business as a single reportable segment. We believe owning a portfolio of Ground Leases affords our investors the opportunity for safe, growing income. Safety is derived from a Ground Lease's super senior position in the commercial real estate capital structure. Growth is realized through long-term leases with contractual periodic increases in rent. Capital appreciation is realized though growth in the value of the land over time and when, at the end 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 because 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 from iStar prior to our initial public offering. 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 contractual periodic 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 estimate of 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 existing 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 Ground Lease had 87 years remaining on its term at the time of acquisition. We also acquired the existing 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 as a multi-family development with retail space and underground parking. The Ground Lease had 87 years remaining on its term at the time of acquisition. Total development cost of these leasehold improvements is estimated to be $450 million, giving the projects a Combined Property Value of approximately $600 million.

In August 2017, we acquired land and simultaneously structured and entered into a Ground Lease at 3333 LifeHope in Atlanta, GA. The Ground Lease has a term of 99 years. In addition, the ground lessee will construct a 185-space parking deck adjacent to the building scheduled to be completed in 2019, which will be engineered to accommodate future development of the site. We have a right of first refusal to provide funding for up to 30.0% of the construction cost of an additional 160,000 square feet of development on terms consistent with the Ground Lease. iStar, our largest shareholder and Manager, 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.
In October 2017, we entered into a purchase agreement to acquire land subject to a Ground Lease 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 acquire the Ground Lease on November 1, 2020 from iStar for $34.0 million. iStar committed to provide a $80.5 construction loan to the ground lessee. The Ground Lease has a term of 99 years.
In January 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Onyx on First, a multifamily building located in the Navy Yards neighborhood of Washington, D.C., just one block away from the Navy Yards metro station. The Ground Lease has a term of 99 years.
In February 2018, we entered into ventures in which we have majority and controlling interests, and the ventures acquired land and simultaneously structured and entered into two Ground Leases. The first Ground Lease was part of the recapitalization of a two-building office campus in Cary, NC. The property is located between Raleigh-Durham and Chapel Hill and is currently undergoing a $6.0 million renovation to further enhance the space. The second Ground Lease was part of the acquisition of an office building in midtown Atlanta. Both Ground Leases have terms of 99 years.

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In May 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of 100 and 200 Glenridge Point, two multi-tenant office buildings in Atlanta, GA. The Ground Lease has a term of 99 years. In addition, iStar provided a $19.9 million loan to the ground lessee with an initial term of one year for the acquisition of the property.
In June 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Promenade Crossing, a 212-unit multi-family community located in the Baldwin Park submarket of Orlando, FL. The Ground Lease has a term of 99 years.
In June 2018, we acquired land and simultaneously structured two Ground Leases as part of the Ground Lease tenant's acquisition from iStar of two industrial facilities located in Miami, FL. Both Ground Leases have a term of 99 years.
In July 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of The Madison, a 177,000 square foot Class-A office building located in Phoenix, AZ. The Ground Lease has a term of 99 years.
In July 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of Balboa Executive Center, a 121,000 square foot office building located in San Diego, CA. The Ground Lease has a term of 99 years.
In August 2018, we acquired the existing Ground Lease at 1325 Wilson Blvd. in Rosslyn, VA. The Ground Lease expires in June 2035 and has 4 10-year extension options through June 2075. The property is improved with a 318-unit, 16-story Hyatt Centric branded hotel.
In August 2018, we acquired land and simultaneously structured and entered into a Ground Lease as part of the Ground Lease tenant's acquisition of the Jefferson Building, a 73,000 square foot office building located in Washington, DC. The Ground Lease has a term of 99 years.
In August 2018, we entered into a forward commitment to acquire land and provide a Ground Lease for our Ground Lease tenant's construction of a 315-unit multi-family property in Washington, DC. The Ground Lease will have a term of 99 years.
Our Portfolio

We have a portfolio of 26 properties that are diversified by property type and location. Our portfolio is comprised of 21 Ground Leases and a master lease (relating to five hotel assets that we refer to as our "Park Hotels Portfolio") that has many of the characteristics of a Ground Lease, including length of lease term, percentage rent participations, triple net terms and strong Ground Rent Coverage. We acquired the 12 properties in our Initial Portfolio 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.


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Below is an overview of our portfolio as of September 30, 2018:
Property
Name
 
Location
 
Property
Type
 
Lease Expiration / As Extended
 
Rent Escalation Structure
Hollywood Blvd - North
 
Los Angeles, CA
 
Multi-Family
 
2104 / 2104
 
CPI-Linked
Hollywood Blvd - South
 
Los Angeles, CA
 
Multi-Family
 
2104 / 2104
 
CPI-Linked
Onyx on First
 
Washington, DC
 
Multi-Family
 
2117 / 2117
 
Fixed with Future CPI Adjustments
The Buckler Apartments
 
Milwaukee, WI
 
Multi-Family
 
2112 / 2112
 
Fixed
Promenade Crossing
 
Orlando, FL
 
Multi-Family
 
2117 / 2117
 
Fixed
3333 LifeHope
 
Atlanta, GA
 
Medical Office
 
2116 / 2176
 
Fixed
Northside Forsyth Medical Center
 
Atlanta, GA
 
Medical Office
 
2115 / 2175
 
Fixed with Future CPI Adjustments
One Ally Center
 
Detroit, MI
 
Office
 
2114 / 2174
 
Fixed with Future CPI Adjustments
NASA/JPSS Headquarters
 
Washington, DC
 
Office
 
2075 / 2105
 
Fixed
Pershing Point
 
Atlanta, GA
 
Office
 
2117 / 2124
 
Fixed with Future CPI Adjustments
Regency Lakeview
 
Raleigh-Durham, NC
 
Office
 
2117 / 2122
 
Fixed with Future CPI Adjustments
Glenridge Point
 
Atlanta, GA
 
Office
 
2117 / 2117
 
Fixed with Future CPI Adjustments
Balboa Executive Center
 
San Diego, CA
 
Office
 
2117 / 2117
 
Fixed with Future CPI Adjustments
The Jefferson
 
Washington, DC
 
Office
 
2117 / 2117
 
Fixed with Future CPI Adjustments
The Madison
 
Phoenix, AZ
 
Office
 
2117 / 2117
 
Fixed with Future CPI Adjustments
Hyatt Centric
 
Washington, DC
 
Hotel
 
2035 / 2075
 
% Rent
Doubletree Seattle Airport(1)(2)
 
Seattle, WA
 
Hotel
 
2025 / 2035
 
% Rent
Hilton Salt Lake(1)
 
Salt Lake City, UT
 
Hotel
 
2025 / 2035
 
% Rent
Doubletree Mission Valley(1)
 
San Diego, CA
 
Hotel
 
2025 / 2035
 
% Rent
Doubletree Durango(1)
 
Durango, CO
 
Hotel
 
2025 / 2035
 
% Rent
Doubletree Sonoma(1)
 
San Francisco, CA
 
Hotel
 
2025 / 2035
 
% Rent
Dallas Market Center - Sheraton Suites
 
Dallas, TX
 
Hotel
 
2114 / 2114
 
Fixed
Dallas Market Center - Marriott Courtyard
 
Dallas, TX
 
Hotel
 
2026 / 2066
 
% Rent
Lock Up Self Storage Facility
 
Minneapolis, MN
 
Industrial
 
2037 / 2037
 
Fixed
Miami Airport I
 
Miami, FL
 
Industrial
 
2117 / 2117
 
Fixed with Future CPI Adjustments
Miami Airport II
 
Miami, FL
 
Industrial
 
2117 / 2117
 
Fixed with Future CPI Adjustments
Total / Weighted Average
 
 
 
 
 
61 / 76 yrs
 
 
_______________________________________________________________________________
(1)
Property is part of the Park Hotels Portfolio and is subject to a single master lease.
(2)
A majority of the land underlying this property is owned by a third party and is ground leased to us through 2044 subject to changes in the CPI; however, our tenant at the property pays this cost directly to the third party.


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Great Oaks Purchase Commitment

In October 2017, we entered into a commitment to acquire land subject to a Ground Lease 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 acquire the Ground Lease on November 1, 2020 from iStar for $34.0 million. iStar committed to provide a $80.5 million construction loan to the ground lessee. The Ground Lease has a term of 99 years.

Washington, DC Multi-Family Purchase Commitment

In August 2018, we entered into a commitment to acquire land and provide a Ground Lease for the Ground Lease tenant's construction of a 315-unit multi-family property in Washington, DC. The Ground Lease will have a term of 99 years. We have a call option to purchase the land at any time and expect to acquire the land in September 2019. We expect to fund the leasehold improvement allowance in early 2020.
Tenant Concentration

During the nine months ended September 30, 2018, the tenant under our Park Hotels Portfolio accounted for approximately $10.7 million, or 30.7%, of our total revenues, and the tenant who leases the land on which the One Ally Center in Detroit, Michigan is located accounted for approximately $4.0 million, or 11.4%, of our total revenues.

In addition, some of our tenants operate hotels at the leased properties. For the nine months ended September 30, 2018, 32.4% of our total revenues came from hotel properties.

Results of Operations for the Three Months Ended September 30, 2018 compared to the Three Months Ended September 30, 2017
 
For the Three Months Ended September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands)
 
 
 
The Company
 
 
 
 
Ground and other lease income
$
11,567

 
$
6,172

 
$
5,395

 
87
 %
Other income
77

 
84

 
(7
)
 
(8
)%
Total revenue
11,644

 
6,256

 
5,388

 
86
 %
Interest expense
3,747

 
2,445

 
1,302

 
53
 %
Real estate expense(1)
456

 
472

 
(16
)
 
(3
)%
Depreciation and amortization
2,290

 
2,266

 
24

 
1
 %
General and administrative
2,779

 
1,672

 
1,107

 
66
 %
Other expense
303

 
122

 
181

 
>100%