Letter to shareholders

2019 was an exceptional year for our company. We took bold steps to reshape our business and focus on a new strategy that could deliver higher returns to shareholders and better utilize iStar’s unique skills and history of innovation. Our goals were ambitious, and I am proud to share with you the significant success our team was able to deliver.

At the beginning of the year we announced that we would go “all-in” and put iStar’s full capabilities behind our first-of-its-kind ground lease company, Safehold. As its investment manager and largest shareholder, we firmly believed the opportunity to reinvent this sector held enormous potential, and despite the expected skepticism from traditional quarters, we became convinced its return potential far outweighed the risk-return profile of other available investment opportunities. Along the way, we also realized the scope of the opportunity required a more concerted effort on our part to knock down the prejudices of the past and share the very different vision we were pursuing. 2019 needed to be the year we put Safehold on the map and our ground lease revolution in front of as many people as possible. At the same time, we also knew we needed to highlight the embedded value of iStar’s existing portfolio of assets and make further progress reducing the legacy and non-core assets that were taking up valuable management time and attention.

The good news is we were able to make progress on all of the above. It’s worth reviewing each of these goals and our level of success in achieving them.

The next big thing

Our most important goal this year was to continue building “the next big thing” for iStar. We wanted to take our skills in finance, net lease and sale-leasebacks and accelerate our ground lease business, becoming the recognized expert in the field, and demonstrating to the market our ability to reach scale and create above-market returns. It was critical to capture the attention of both customers and investors in 2019, and our results show we were able to do both.

Safehold’s ground lease portfolio grew almost $1.8b to $2.7b, far above the targets we set, and shareholder returns were well over 100%, making Safehold the best-performing REIT in the industry. We worked with a wide range of customers, from local operating specialists to large-scale global investment funds, while also introducing the Safehold story to an increasing number of potential shareholders. Providing lower cost capital to customers and building one of the safest real estate portfolios for our shareholders proved to be a winning combination, and we see a virtuous circle developing where growth is driving a lower cost of capital and a lower cost of capital is driving growth.

During 2019 we also laid out a strong case for how best to value the growing portfolio of cash flows our ground leases throw off, and how to think about the overall value of the Safehold enterprise. We have more work to do to help investors understand the full value of what Safehold is building, but the past year has been characterized by very good progress.

Highlight portfolio value

While scaling Safehold was job one, we also wanted to demonstrate the increased value we had built up in parts of our existing business lines. To achieve this, we executed our plans to unlock the value in two of our largest assets, recognizing almost $400m in gains. Our Preferred Freezer portfolio represented one of the highest quality master leases in the cold storage space and we knew it had significant value in excess of what the market seemed to give us credit for. A sale to Lineage Logistics enabled us to monetize this asset and capture the sizable value created during our holding period. Our Bowlmor master leases also offered an opportunity to highlight value that wasn’t readily apparent on our balance sheet. By expanding and extending our relationship with the tenant, we were able to recognize some $180m in built up value and create a longer lease term for each of our master leases.

These transactions and others helped drive earnings to over $3.70 per share in 2019, and together with embedded gains in our SAFE investment, increased our adjusted book value by over 80%.

Simplify and strengthen

Lastly, we knew we needed to give investors a clearer and simpler way to see the potential value in our company and in our shares. This meant continuing to simplify the business by monetizing legacy assets and providing strong catalysts for the share price to grow. On the former, asset sales and accelerated marketing efforts reduced the percentage of legacy, non-core assets down to just 16% of the portfolio, with more progress on the horizon. For the latter, we raised our dividend by 11% and repurchased 9% of outstanding shares of common stock during the year.

Based on the successes above, we were also able to make several moves to strengthen the balance sheet. A growing equity base, strong earnings and a large pool of unencumbered assets enabled us to lengthen debt maturities, lower interest costs and reduce fixed charges, and ultimately earn an upgrade in our credit ratings from S&P. Each of these steps helped create a stronger foundation for the future.

What matters most

The result of this considerable progress was the result that matters most, a material increase in our share price, and shareholder returns of 64% that placed us among the top performing REITs in 2019. We know this is the ultimate scorecard, and we are pleased that the work put in over the past several years is now coming to fruition and generating increased value for our stakeholders. Our goal in 2020 is to continue redeploying capital out of legacy assets into Safehold’s lower risk, faster growing business and to continue to highlight the value in our Safehold platform. This should in turn increase the value of iStar’s current 31 million share position in Safehold and further demonstrate its significant value to iStar shareholders.

We deeply appreciate your support and look forward to continued progress in 2020.

Sincerely,

Jay Sugarman
Chairman & Chief Executive Officer

1. Safehold’s ground lease platform scaled

Building owners in over 30 key U.S. markets are validating our simple thesis: real estate investors targeting a 15%+ return on their equity shouldn’t own the underlying land at a 5% ROE.

• Safehold completed $1.8b of deals, representing 187% portfolio growth YOY

iStar’s unique skill sets and history of innovation have enabled us to unlock significant value in a misunderstood asset class. As Safehold’s founder, investment manager and largest shareholder (65.2% ownership as of YE ‘19), we are the biggest beneficiary of Safehold’s success and are poised to benefit as Safehold continues to scale.

2. Value highlighted

3. Business simplified and enhanced

With our human and financial capital highly focused, we will continue to scale our $2.7b ground lease platform, targeting a potential $7t addressable market.

For investors, the Safehold platform offers a unique combination of principal safety, growing income streams and unrealized capital appreciation. With a rapidly growing portfolio and the only institutional platform focused on modernized ground leases, we firmly believe the revolution has just begun.