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,iStar 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 Item 1A-"Risk Factors" in our Annual Report and in this Report, 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 toiStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise. The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our Annual Report. These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation. Executive Overview In 2019, we took advantage of favorable interest rate and liquidity conditions to refinance and pay down outstanding debt through the issuance of an aggregate of$1.325 billion of unsecured notes. The refinancings reduced our interest costs and improved our debt maturity profile. We have no corporate debt maturities throughSeptember 2022 . In addition, in the fourth quarter 2019 substantially all of our Series J preferred stock was converted by the holders thereof into approximately 16.5 million shares of our common stock, which increased our equity base. The coronavirus (COVID-19) outbreak has rapidly and dramatically impacted the US and global economies. Many countries, includingthe United States , have instituted quarantines, mandated business and school closures and restricted travel. The US financial markets have experienced significant disruption, with heightened stock market volatility and highly constrained credit conditions within most sectors, including real estate. We are focused on ensuring the health and safety of our personnel and the continuity of business activities at iStar and SAFE, monitoring the effects of the crisis on our and SAFE's customers, marshalling available liquidity at both companies, implementing appropriate cost containment measures and preparing for the eventual resumption of more normalized activities. At this time, we cannot predict the full extent of the impacts of the COVID-19 crisis on our or SAFE's business. We will continue to monitor its effects on a daily basis and will adjust operations as necessary The crisis began to materially affect our business in the latter part of the first quarter when we and most of our tenants and borrowers began working from home and normal business operations at companies throughoutthe United States ceased. There are no reliable forecasts as to how long these conditions will persist. Our portfolio is well diversified by business, property type and geography. SAFE reported that it received 100% of the ground rent due under its leases for the second quarter. Our portfolio includes investments in the entertainment/leisure (20.0% of gross book value) and hotel (5.5% of gross book value) sectors, which have been particularly stressed by the pandemic. During the quarter, we agreed with a tenant in the entertainment sector that we would apply$10 million of net proceeds that we received from recent sales of some of the tenant's facilities to the tenant's upcoming rent obligations to us. In exchange, our obligation under the lease to acquire an equal amount of new facilities for them or to reduce their rent in the future has been terminated. We collected 98% of the rent due from our other net lease tenants during the quarter, 94% of the interest payments due in our real estate finance portfolio and 80% of the rent due in our operating properties portfolio. We may continue to experience disruptions and collections of rent and interest payments until more normalized business conditions resume. We increased our allowance for loan losses and may continue to do so in future quarters while the COVID-19 pandemic continues to materially affect the US economy. The COVID-19 crisis has adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio for the time being. Equity and debt financing for real estate transactions generally is constrained. In addition, the crisis has made it more difficult to execute transactions as people are unable to visit properties, local governmental offices are closed and third parties such as survey, insurance, environmental and similar services have more limited capacities. These conditions 41 -------------------------------------------------------------------------------- Table of Contents will adversely affect our strategy while they persist. See the Risk Factors section of this report for additional discussion of certain potential risks to our business arising from the COVID-19 crisis. Portfolio Overview As ofJune 30, 2020 , based on our gross book value, including the carrying value of our equity method investments gross of accumulated depreciation, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands): Net Real Estate Operating Land & % of Property/Collateral Types Lease Finance Properties Development Total Total Office 937,414 51,128 127 - 988,669 20.8 % Entertainment / Leisure 938,569 - 16,181 - 954,750 20.0 % Ground Leases 886,555 - - - 886,555 18.6 % Land and Development - 99,668 - 400,560 500,228 10.5 % Industrial 259,544 - 97,663 - 357,207 7.5 % Condominium - 180,559 18,878 136,594 336,031 7.0 % Hotel - 179,203 82,552 - 261,755 5.5 % Multifamily - 166,821 53,322 6,304 226,447 4.7 % Retail 57,348 68,596 41,416 8,271 175,631 3.7 % Other Property Types - 24,611 - - 24,611 0.5 % Strategic Investments(1) - - - - 56,837 1.2 % Total$ 3,079,430 $ 770,586 $ 310,139 $ 551,729 $ 4,768,721 100.0 % Percentage of Total 65 % 16 % 7 % 12 % 100 %
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(1)Strategic Investments is comprised of
Net Real Estate Operating Land & % of Geographic Region Lease Finance Properties Development Total Total Northeast$ 910,379 $ 305,915 $ 93,497 $ 298,539 $ 1,608,330 33.8 % West 496,097 211,498 56,554 39,266 803,415 16.8 % Mid-Atlantic 503,172 13,071 - 121,170 637,413 13.4 % Central 422,783 77,566 45,677 31,500 577,526 12.1 % Southwest 396,462 15,890 104,338 43,470 560,160 11.7 % Southeast 341,274 58,891 10,073 17,784 428,022 9.0 % Various 9,263 87,755 - - 97,018 2.0 % Strategic Investments - - - - 56,837 1.2 % Total$ 3,079,430 $ 770,586 $ 310,139 $ 551,729 $ 4,768,721 100.0 % Net Lease Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on our properties. We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance). We generally intend to hold our net lease assets for long-term investment. However, we may dispose of assets if we deem the disposition to be in our best interests. 42 -------------------------------------------------------------------------------- Table of Contents The net lease segment includes our Ground Lease investments made primarily through SAFE and our traditional net lease investments. As ofJune 30, 2020 , our consolidated net lease portfolio totaled$2.2 billion . Our net lease portfolio, including the carrying value of our equity method investments in SAFE and Net Lease Venture II, exclusive of accumulated depreciation, totaled$3.1 billion . The table below provides certain statistics for our net lease portfolio. Consolidated Real Estate(1) Net Lease Venture II SAFE Ownership % 100.0 % 51.9 % 65.4 % Gross book value (millions)(2)$ 2,158 $ 238$ 2,798 % Leased 98.6 % 100.0 % 100.0 % Square footage (thousands) 15,705 2,273 N/A Weighted average lease term (years)(3) 17.5 13.1 89.2 Weighted average yield(4) 7.9 % 9.9 % 4.4 %
_______________________________________________________________________________ (1)We own 51.9% of the Net Lease Venture which is consolidated in our GAAP financial statements (refer to Note 4). (2)Gross book value represents the acquisition cost of real estate and any additional capital invested into the property by us.Consolidated Real Estate includes amounts recorded as net investment in leases (refer to Note 5) and financing receivables in loans and other lending investments (refer to Note 7). SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment. (3)Weighted average lease term is calculated using GAAP rent and the initial maturity and does not include extension options. SAFE includes its 54.8% pro rata share of its unconsolidated equity method investment. (4)Yield for SAFE is calculated over the trailing twelve months and excludes management fees earned by us.Net Lease Venture -InFebruary 2014 , the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets and gave a right of first refusal to the venture on all new net lease investments that met specified investment criteria (refer to Note 4 in our consolidated financial statements for more information on ourNet Lease Venture ). The Net Lease Venture's investment period expired onJune 30, 2018 and the remaining term of the venture extends throughFebruary 13, 2022 , subject to two, one-year extension options at the discretion of us and our partner. We obtained control over the Net Lease Venture when the investment period expired onJune 30, 2018 and consolidated the assets and liabilities of the venture, which had previously been accounted for as an equity method investment. Net Lease Venture II-InJuly 2018 , we entered into Net Lease Venture II with similar investment strategies as the Net Lease Venture (refer to Note 8). The Net Lease Venture II has a right of first offer on all new net lease investments (excluding Ground Leases) originated by us. We have an equity interest in the new venture of approximately 51.9%, which is accounted for as an equity method investment, and are responsible for managing the venture in exchange for a management fee and incentive fee. SAFE-SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive long-term risk-adjusted returns from its investments. We believe its business has characteristics comparable to a high-grade fixed income investment business, but with certain unique advantages. Relative to alternative fixed income investments generally, SAFE's Ground Leases typically benefit from built-in growth derived from contractual rent increases, and the opportunity to realize value from residual rights to acquire the buildings and other improvements on its land at no additional cost. We believe that these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when compared to certain alternative highly-rated investments. As ofJune 30, 2020 , we owned approximately 65.4% of SAFE's common stock outstanding. We account for our investment in SAFE as an equity method investment (refer to Note 8). We act as SAFE's external manager pursuant to a management agreement, and we have an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that we will not acquire, originate, invest in, or provide financing for a third party's acquisition of, a Ground Lease unless we have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity. Real Estate Finance Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. Our real estate finance portfolio consists of senior mortgage loans that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets, leasehold loans to Ground Lease tenants, including tenants of SAFE, and corporate/partnership loans, which represent mezzanine or subordinated loans to 43 -------------------------------------------------------------------------------- Table of Contents entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. Our real estate finance portfolio includes loans on stabilized and transitional properties, Ground Leases and ground-up construction projects. In addition, we have preferred equity investments and debt securities classified as other lending investments. As ofJune 30, 2020 , our real estate finance portfolio, including securities and other lending investments, totaled$815.6 million , exclusive of general loan loss allowance. The portfolio, excluding securities and other lending investments, included$642.6 million of performing loans with a weighted average maturity of 1.4 years.
The tables below summarize our loans and the allowance for loan losses associated with our loans ($ in thousands):
June 30, 2020 Allowance for Loan Losses as a % of Gross Carrying Allowance for Gross Carrying Number of Loans Value Loan Losses Carrying Value % of Total Value Performing loans 20$ 642,613 $ (13,911) $ 628,702 97.6% 2.2% Non-performing loans 1 37,307 (21,701) 15,606 2.4% 58.2% Total 21$ 679,920 $ (35,612) $ 644,308 100.0% 5.2% December 31, 2019 Allowance for Loan Losses as a % of Gross Carrying Allowance for Gross Carrying Number of Loans Value Loan Losses Carrying Value % of Total Value Performing loans 22$ 665,460 $ (6,933) $ 658,527 97.6% 1.0% Non-performing loans 1 37,820 (21,701) 16,119 2.4% 57.4% Total 23$ 703,280 $ (28,634) $ 674,646 100.0% 4.1% Performing Loans-The table below summarizes our performing loans exclusive of allowances ($ in thousands): June 30, 2020 December 31, 2019 Senior mortgages$ 512,300 $ 534,765 Corporate/Partnership loans 119,061 119,818 Subordinate mortgages 11,252 10,877 Total$ 642,613 $ 665,460 Weighted average LTV 61 % 61 % Yield 8.0 % 8.8 % Non-Performing Loans-We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As ofJune 30, 2020 andDecember 31, 2019 , we had one non-performing loan with a carrying value of$15.6 million and$16.1 million , respectively. We expect that our level of non-performing loans will fluctuate from period to period. Allowance for Loan Losses-The allowance for loan losses was$35.6 million as ofJune 30, 2020 , or 5.2% of total loans, compared to$28.6 million , or 4.1%, as ofDecember 31, 2019 . We expect that our level of allowance for loan losses will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and allowances requires the use of significant judgment. We currently believe there is adequate collateral and allowances to support the carrying values of the loans. The allowance for loan losses includes an asset-specific component and a formula-based component. An asset-specific allowance is established for an impaired loan when the estimated fair value of the loan's collateral less costs to sell is lower than the carrying value of the loan. As ofJune 30, 2020 andDecember 31, 2019 , asset-specific allowances were$21.7 million . 44
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We estimate the formula-based component based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market. We estimate the formula-based component on our construction loan portfolio based on historical realized losses experienced within our portfolio and third-party market data that includes historical loss rates on commercial real estate loans and forecasted economic trends, including interest and unemployment rates. We estimate the formula-based component on our other loans using a loan loss forecasting tool developed byTrepp LLC that utilizes loan level data including each loans position in the capital structure, interest rates, maturity dates, unfunded commitments, debt service coverage ratios, etc. which also utilizes forward looking macroeconomic variables and pool-level mean loss rates to produce an expected loss over the life each loan. The general allowance increased to$13.9 million or 2.2% of performing loans and other lending investments as ofJune 30, 2020 , compared to$6.9 million or 1.0% of performing loans and other lending investments as ofDecember 31, 2019 . The increase was due to a$0.7 million general allowance recorded upon the adoption of ASU 2016-13 onJanuary 1, 2020 (refer to Note 3) and an increase in the general allowance of$6.3 million during the six months endedJune 30, 2020 .
Operating Properties
Our operating properties represent a pool of assets across a broad range of geographies and property types including office, retail, hotel and residential properties. As ofJune 30, 2020 , our operating property portfolio, including the carrying value of our equity method investments gross of accumulated depreciation, totaled$310.1 million . Land and Development The following table presents a land and development portfolio rollforward for the six months endedJune 30, 2020 . Land and Development Portfolio Rollforward (in millions) Asbury Ocean Club and Magnolia All Total Asbury Park Waterfront Green Others Segment Beginning balance(1) $ 234.6$ 112.9 $ 233.0 $ 580.5 Asset sales(2) (21.1) (10.3) (59.5) (90.9) Capital expenditures 10.3 7.9 1.8 20.0 Other - (1.3) (3.7) (5.0) Ending balance(1) $ 223.8$ 109.2 $ 171.6 $ 504.6
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(1)As of
45 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Months EndedJune 30, 2020 compared to the Three Months EndedJune 30, 2019 For the Three Months Ended June 30, 2020 2019 $ Change (in thousands) Operating lease income $ 46,812$ 55,185 $ (8,373) Interest income 15,439 20,341 (4,902) Interest income from sales-type leases 8,295 3,817 4,478 Other income 10,292 10,050 242 Land development revenue 15,577 9,075 6,502 Total revenue 96,415 98,468 (2,053) Interest expense 41,950 43,752 (1,802) Real estate expense 14,276 22,038 (7,762) Land development cost of sales 16,287 9,236 7,051 Depreciation and amortization 14,300 13,718 582 General and administrative 18,998 27,303 (8,305) Provision for loan losses 2,067 110 1,957 Provision for losses on net investment in leases 534 - 534 Impairment of assets 4,783 1,102 3,681 Other expense 203 11,883 (11,680) Total costs and expenses 113,398 129,142 (15,744) Income from sales of real estate 62 220,523 (220,461) Earnings from equity method investments 2,586 3,640 (1,054) Selling profit from sales-type leases - 180,416 (180,416) Income tax expense (28) (214) 186 Net income (loss)$ (14,363) $ 373,691 $ (388,054) Revenue-Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased$8.4 million , or 15%, to$46.8 million during the three months endedJune 30, 2020 from$55.2 million for the same period in 2019. The following table summarizes our operating lease income by segment ($ in millions). Three Months Ended June 30, 2020 2019 Change Net Lease(1)$ 41.5 $ 48.7 $ (7.2) Operating Properties(2) 5.2 6.4 (1.2) Land and Development 0.1 0.1 - Total$ 46.8 $ 55.2 $ (8.4)
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(1)Change primarily due to the reclassification of certain operating leases to sales-type leases inMay 2019 (refer to Note 5) and asset sales, partially offset by new acquisitions. (2)Change primarily due to asset sales. 46 -------------------------------------------------------------------------------- Table of Contents The following table shows certain same store statistics for our consolidatedNet Lease segment. Same store assets are defined as assets we owned on or prior toApril 1, 2019 and were in service throughJune 30, 2020 (Operating lease income in millions). Three Months Ended June 30, 2020 2019 Operating lease income$ 43.3 $ 44.7 Rent per square foot$ 11.42 $ 11.33 Occupancy(1) 98.6 % 99.5 %
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(1)Occupancy as of
Interest income decreased$4.9 million , or 24%, to$15.4 million during the three months endedJune 30, 2020 from$20.3 million for the same period in 2019. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was$755 million for the three months endedJune 30, 2020 and$883 million for the three months endedJune 30, 2019 . The weighted average yield on our performing loans and other lending investments was 7.8% and 9.1%, respectively, for the three months endedJune 30, 2020 and 2019. OnJanuary 1, 2019 , we adopted new accounting standards and classified certain of our leases in 2019 as sales-type leases. Under sales-type leases, we accrue interest income from sales-type leases under the effective interest method as opposed to recognition of operating lease income under the straight-line rent method for our leases that do not qualify as sales-type leases. Interest income from sales-type leases increased to$8.3 million for the three months endedJune 30, 2020 from$3.8 million for the same period in 2019. The increase was due primarily to a full period of interest income for sales-type leases during the three months endedJune 30, 2020 (refer to Note 5). Other income increased$0.2 million , or 2%, to$10.3 million during the three months endedJune 30, 2020 from$10.1 million for the same period in 2019. Other income during the three months endedJune 30, 2020 consisted primarily of management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash. Other income during the three months endedJune 30, 2019 consisted primarily of income from our hotel properties, other ancillary income from our operating properties and land and development projects and interest income on our cash. Land development revenue and cost of sales-During the three months endedJune 30, 2020 , we sold residential lots and units and recognized land development revenue of$15.6 million which had associated cost of sales of$16.3 million . During the three months endedJune 30, 2019 , we sold residential lots and units and recognized land development revenue of$9.1 million which had associated cost of sales of$9.2 million . Costs and expenses-Interest expense decreased$1.8 million , or 4%, to$42.0 million during the three months endedJune 30, 2020 from$43.8 million for the same period in 2019 due primarily to a decrease in our weighted average cost of debt, which was 4.7% for the three months endedJune 30, 2020 compared to 5.5% for the three months endedJune 30, 2019 . The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, increased to$3.55 billion for the three months endedJune 30, 2020 from$3.39 billion for the same period in 2019. Real estate expenses decreased$7.7 million , or 35%, to$14.3 million during the three months endedJune 30, 2020 from$22.0 million for the same period in 2019. The following table summarizes our real estate expenses by segment ($ in millions). Three Months Ended June 30, 2020 2019 Change Operating Properties(1)$ 4.5 $ 8.3 $ (3.8) Land and Development(2) 3.6 8.0 (4.4) Net Lease(3) 6.2 5.7 0.5 Total$ 14.3 $ 22.0 $ (7.7)
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(1)Change primarily due to asset sales and a decrease in expenses at operating properties.. (2)Change primarily due to asset sales and a decrease in expenses at some of our properties. (3)Change primarily due to new acquisitions, partially offset by asset sales. 47 -------------------------------------------------------------------------------- Table of Contents Depreciation and amortization increased$0.6 million , or 4%, to$14.3 million during the three months endedJune 30, 2020 from$13.7 million for the same period in 2019, primarily due to new acquisitions, partially offset by asset sales and the reclassification of certain operating leases to sales-type lease (refer to Note 5). General and administrative expenses decreased$8.3 , or 30%, to$19.0 million during the three months endedJune 30, 2020 from$27.3 million for the same period in 2019. Excluding performance based compensation, general and administrative expenses decreased to$11.3 million in 2020 from$14.2 million in 2019, which does not include$3.2 million and$1.5 million , respectively, in management fees earned from SAFE that we record in other income. General and administrative expenses net of performance based compensation and SAFE management fees was$8.1 million in 2020 and$12.7 million in 2019. The following table summarizes our general and administrative expenses for the three months endedJune 30, 2020 and 2019 (in millions): Three Months Ended June 30, 2020 2019 Change Payroll and related costs$ 6.4 $ 9.0 $ (2.6) Performance based compensation(1) 7.7 13.1 (5.4) Public company costs 1.7 1.4 0.3 Occupancy costs 1.2 1.1 0.1 Other 2.0 2.7 (0.7) Total$ 19.0 $ 27.3 $ (8.3)
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(1)Includes performance based compensation related to our Performance Incentive Plans and Annual Incentive Plan. Please refer to Note 15 - Stock-Based Compensation Plans and Employee Benefits for a description of the Performance Incentive Plans. Our board of directors is considering an additional performance metric for the second half of 2020 to supplement its existing performance metrics in calculating performance based compensation, which would be intended to account for the fact that metrics established prior to the pandemic may not alone be appropriate benchmarks of performance during the pandemic. The provision for loan losses was$2.1 million for the three months endedJune 30, 2020 as compared to$0.1 million for the same period in 2019. The provision for loan losses for the three months endedJune 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets. The provision for losses on net investment in leases for the three months endedJune 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets. During the three months endedJune 30, 2020 , we recorded an aggregate impairment of$4.8 million on a real estate asset held for sale and a land and development asset. During the three months endedJune 30, 2019 , we recorded an impairment of$1.1 million on a land and development asset due to a change in business strategy. Other expense decreased to$0.2 million during the three months endedJune 30, 2020 from$11.9 million for the same period in 2019. The decrease was due primarily to expenses associated with derivative contracts that were terminated during the three months endedJune 30, 2019 . Income from sales of real estate-During the three months endedJune 30, 2020 , we recorded$0.1 million of income from sales of real estate from the sale of units at a residential operating property. During the three months endedJune 30, 2019 , we recorded$220.5 million of income from sales of real estate primarily from the sale of a portfolio of net lease assets. Earnings from equity method investments-Earnings from equity method investments decreased to$2.6 million during the three months endedJune 30, 2020 from$3.6 million for the same period in 2019. During the three months endedJune 30, 2020 , we recognized$8.2 million of income from our equity method investment in SAFE, which was partially offset by$5.6 million of net aggregate losses from our remaining equity method investments. During the three months endedJune 30, 2019 , we During the three months endedJune 30, 2019 , we recognized$3.8 million of income from our equity method investment in SAFE,$2.0 million from sales activity at a land development venture and$2.2 million was net aggregate losses from our remaining equity method investments. Selling profit from sales-type leases-During the three months endedJune 30, 2019 , we entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of nine bowling centers for$56.7 million and a commitment to purchase up to$55.0 million of additional bowling centers over the next several years. The new centers were added to our existing master leases with the tenant. In connection with this transaction, the maturities of the leases were 48 -------------------------------------------------------------------------------- Table of Contents extended by 15 years to 2047. As a result of the modifications to the leases, we accounted for the leases as sales-type leases and recognized$180.4 million in "Selling profit from sales-type leases" as a result of the transaction. Income tax expense-Income tax expense of$28 thousand was recorded during the three months endedJune 30, 2020 as compared to an income tax expense of$0.2 million for the same period in 2019. The income tax expense for the three months endedJune 30, 2020 and 2019 is related primarily to state margins taxes and other minimum state taxes. Results of Operations for the Six Months EndedJune 30, 2020 compared to the Six Months EndedJune 30, 2019 For the Six Months Ended June 30, 2020 2019 $ Change (in thousands) Operating lease income$ 94,158 $ 114,100 $ (19,942) Interest income 32,655 40,716 (8,061) Interest income from sales-type leases 16,650 3,817 12,833 Other income 30,660 24,863 5,797 Land development revenue 95,752 21,774 73,978 Total revenue 269,875 205,270 64,605 Interest expense 85,341 90,329 (4,988) Real estate expense 36,774 47,978 (11,204) Land development cost of sales 93,346 23,684 69,662 Depreciation and amortization 28,786 29,386 (600) General and administrative 53,270 48,402 4,868 Provision for loan losses 6,070 13 6,057 Provision for losses on net investment in leases 1,826 - 1,826 Impairment of assets 6,491 4,953 1,538 Other expense 277 12,391 (12,114) Total costs and expenses 312,181 257,136 55,045 Income from sales of real estate 62 229,930 (229,868) Loss on early extinguishment of debt, net (4,115) (468) (3,647) Earnings from equity method investments 19,198 8,949 10,249 Selling profit from sales-type leases - 180,416 (180,416) Income tax expense (88) (240) 152 Net income (loss)$ (27,249) $ 366,721 $ (393,970) Revenue-Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased$19.9 million to$94.2 million during the six months endedJune 30, 2020 from$114.1 million for the same period in 2019. The following table summarizes our operating lease income by segment ($ in millions). Six Months Ended June 30, 2020 2019 Change Net Lease(1)$ 83.0 $ 98.1 $ (15.1) Operating Properties(2) 11.0 15.9 (4.9) Land and Development 0.2 0.1 0.1 Total$ 94.2 $ 114.1 $ (19.9)
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(1)Change primarily due to the reclassification of certain operating leases to sales-type leases inMay 2019 (refer to Note 5) and asset sales, partially offset by new acquisitions. (2)Change primarily due to asset sales. 49 -------------------------------------------------------------------------------- Table of Contents The following table shows certain same store statistics for our consolidatedNet Lease segment. Same store assets are defined as assets we owned on or prior toJanuary 1, 2019 and were in service throughJune 30, 2020 (Operating lease income in millions). Six Months Ended June 30, 2020 2019 Operating lease income$ 80.8 $ 79.7 Rent per square foot$ 10.96 $ 10.38 Occupancy(1) 98.5 % 99.5 %
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(1)Occupancy as of
Interest income decreased$8.1 million to$32.7 million during the six months endedJune 30, 2020 from$40.7 million for the same period in 2019. The decrease was due primarily to a decrease in the average balance of our performing loans and other lending investments, which was$775 million for the six months endedJune 30, 2020 and$892 million for the six months endedJune 30, 2019 . The weighted average yield on our performing loans and other lending investments for the six months endedJune 30, 2020 and 2019 was 8.0% and 9.1%, respectively, OnJanuary 1, 2019 , we adopted new accounting standards and classified certain of our leases in 2019 as sales-type leases. Under sales-type leases, we accrue interest income from sales-type leases under the effective interest method as opposed to recognition of operating lease income under the straight-line rent method for our leases that do not qualify as sales-type leases. Interest income from sales-type leases increased to$16.7 million for the six months endedJune 30, 2020 from$3.8 million for the same period in 2019. The increase was due primarily to a full period of interest income for sales-type leases during the six months endedJune 30, 2020 (refer to Note 5). Other income increased$5.8 million to$30.7 million during the six months endedJune 30, 2020 from$24.9 million for the same period in 2019. Other income during the six months endedJune 30, 2020 consisted primarily of management fees, other ancillary income from our operating properties, land and development projects and loan portfolio, income from our hotel properties and interest income on our cash. Other income during the six months endedJune 30, 2019 consisted primarily of income from our hotel properties, other ancillary income from our operating properties and land and development projects and interest income on our cash. The increase in 2020 was due primarily to an increase in loan prepayment penalties and an increase in management fees from SAFE. Land development revenue and cost of sales-During the six months endedJune 30, 2020 , we sold residential lots and units and recognized land development revenue of$95.8 million which had associated cost of sales of$93.3 million . During the six months endedJune 30, 2019 , we sold residential lots and units and recognized land development revenue of$21.8 million which had associated cost of sales of$23.7 million . The increase in 2020 was due primarily to the sale of a 430 acre site inCalifornia for$36.0 million which had associated cost of sales of$35.4 million . Costs and expenses-Interest expense decreased$5.0 million to$85.3 million during the six months endedJune 30, 2020 from$90.3 million for the same period in 2019 due primarily to a decrease in our weighted average cost of debt, which was 4.8% for the six months endedJune 30, 2020 compared to 5.5% for the six months endedJune 30, 2019 . The balance of our average outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, increased to$3.53 billion for the six months endedJune 30, 2020 from$3.51 billion for the same period in 2019. Real estate expenses decreased$11.2 million to$36.8 million during the six months endedJune 30, 2020 from$48.0 million for the same period in 2019. The following table summarizes our real estate expenses by segment ($ in millions). Six Months Ended June 30, 2020 2019 Change Operating Properties(1)$ 12.2 $ 19.3 $ (7.1) Land and Development(2) 12.2 16.8 (4.6) Net Lease(3) 12.4 11.9 0.5 Total$ 36.8 $ 48.0 $ (11.2)
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(1)Change primarily due to asset sales and a decrease in expenses at our hotel properties, partially offset by an asset beginning operations during 2019. (2)Change primarily due to a decrease in legal and marketing costs at some properties and asset sales. (3)Change primarily due to new acquisitions, partially offset by asset sales. 50
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Depreciation and amortization decreased$0.6 million to$28.8 million during the six months endedJune 30, 2020 from$29.4 million for the same period in 2019, primarily due to asset sales and the reclassification of certain operating leases to sales-type lease (refer to Note 5), partially offset by new acquisitions. General and administrative expenses increased$4.9 million to$53.3 million during the six months endedJune 30, 2020 from$48.4 million for the same period in 2019. Excluding performance based compensation, general and administrative expenses decreased to$26.1 million in 2020 from$27.9 million in 2019, which does not include$6.0 million and$3.1 million , respectively, in management fees earned from SAFE that we record in other income. General and administrative expenses net of performance based compensation and SAFE management fees was$20.1 million in 2020 and$24.8 million in 2019. The following table summarizes our general and administrative expenses for the six months endedJune 30, 2020 and 2019 (in millions): Six Months Ended June 30, 2020 2019 Change Payroll and related costs$ 16.3 $ 17.6 $ (1.3) Performance based compensation(1) 27.2 20.5 6.7 Public company costs 3.6 2.9 0.7 Occupancy costs 2.2 2.2 - Other 4.0 5.2 (1.2) Total$ 53.3 $ 48.4 $ 4.9
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(1)Includes performance based compensation related to our Performance Incentive Plans and Annual Incentive Plan. Please refer to Note 15 - Stock-Based Compensation Plans and Employee Benefits for a description of the Performance Incentive Plans. Our board of directors is considering an additional performance metric for the second half of 2020 to supplement its existing performance metrics in calculating performance based compensation, which would be intended to account for the fact that metrics established prior to the pandemic may not alone be appropriate benchmarks of performance during the pandemic. The provision for loan losses was$6.1 million for the six months endedJune 30, 2020 as compared to$13.0 thousand for the same period in 2019. The provision for loan losses for the six months endedJune 30, 2020 resulted from the macroeconomic impact of COVID-19 on commercial real estate markets. The provision for losses on net investment in leases for the six months endedJune 30, 2020 included an allowance resulting from the macroeconomic impact of COVID-19 on commercial real estate markets.. During the six months endedJune 30, 2020 , we recorded an aggregate impairment of$6.5 million in connection with the sale of net lease assets and impairments on a real estate asset held for sale and a land and development asset. During the six months endedJune 30, 2019 , we recorded an aggregate impairment of$5.0 million which included an impairment of$3.3 million on a commercial operating property based on an executed purchase and sale agreement, a$1.1 million impairment on a land and development asset due to a change in business strategy and$0.6 million of impairments in connection with the sale of residential condominium units. Other expense decreased to$0.3 million during the six months endedJune 30, 2020 from$12.4 million for the same period in 2019. The decrease was due primarily to expenses associated with derivative contracts that were terminated during the six months endedJune 30, 2019 . Income from sales of real estate-During the six months endedJune 30, 2020 , we recorded$0.1 million of income from sales of real estate from the sale of units at a residential operating property. During the six months endedJune 30, 2019 , we recorded$229.9 million of income from sales of real estate primarily from the sale of a portfolio of net lease assets and operating properties. Loss on early extinguishment of debt, net-During the six months endedJune 30, 2020 and 2019, we incurred losses on early extinguishment of debt of$4.1 million and$0.5 million , respectively, resulting from the repayment of senior notes prior to maturity. Earnings from equity method investments-Earnings from equity method investments increased to$19.2 million during the six months endedJune 30, 2020 from$8.9 million for the same period in 2019. During the six months endedJune 30, 2020 , we recognized$27.6 million of income from our equity method investment in SAFE, which included a dilution gain of$7.9 million resulting from a SAFE equity offering inMarch 2020 , offset by$8.4 million of net aggregate losses from our remaining 51 -------------------------------------------------------------------------------- Table of Contents equity method investments. During the six months endedJune 30, 2019 , we recognized$11.1 million from our equity method investment in SAFE and$2.3 million from sales activity at a land development venture, which was partially offset by$4.5 million of net aggregate losses from our remaining equity method investments. Selling profit from sales-type leases-During the six months endedJune 30, 2019 , we entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of nine bowling centers for$56.7 million and a commitment to purchase up to$55.0 million of additional bowling centers over the next several years. The new centers were added to our existing master leases with the tenant. In connection with this transaction, the maturities of the leases were extended by 15 years to 2047. As a result of the modifications to the leases, we accounted for the leases as sales-type leases and recognized$180.4 million in "Selling profit from sales-type leases" as a result of the transaction. Income tax expense-Income tax expense of$0.1 million was recorded during the six months endedJune 30, 2020 as compared to an income tax expense of$0.2 million for the same period in 2019. The income tax expense for the six months endedJune 30, 2020 and 2019 is related primarily to state margins taxes and other minimum state taxes. Adjusted Earnings In 2019, we announced a new business strategy that would focus our management personnel and our investment resources primarily on scaling our Ground Lease platform. As part of this strategy, we accelerated the monetization of legacy assets, reducing our legacy portfolio to approximately 17% of our overall portfolio as ofJune 30, 2020 , and deployed a substantial portion of the proceeds into additional investments in SAFE and new loan and net lease originations relating to the Ground Lease business. Management has determined that, effective for the first quarter 2020, a modified non-GAAP earnings metric, designated "adjusted earnings," is the metric it uses to assess our execution of this strategy and the performance of our operations. Adjusted earnings reflects impairment charges and loan provisions in the same period in which they are recognized in net income (loss) prepared in conformity with generally accepted accounting principles inthe United States of America ("GAAP"), rather than in a later period when the asset is sold. We believe this change is appropriate as legacy asset sales become less central to our business, even though sales may be material to particular periods when they occur. Adjusted earnings is used internally as a supplemental performance measure adjusting for certain items to give management a view of income more directly derived from operating activities in the period in which they occur. Adjusted earnings is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, including our proportionate share of depreciation and amortization from equity method investments and excluding depreciation and amortization allocable to noncontrolling interests, stock-based compensation expense, the non-cash portion of loss on early extinguishment of debt and the liquidation preference recorded as a premium above book value on the redemption of preferred stock ("Adjusted Earnings"). All prior periods have been calculated in accordance with this definition. 52 -------------------------------------------------------------------------------- Table of Contents Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations. Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance. It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies.
For the Three Months Ended
2020 2019 2018 (in thousands) Adjusted Earnings Net income (loss) allocable to common shareholders$ (23,335) $ 362,715 $ 42,873 Add: Depreciation and amortization 15,675 14,305 15,511 Add: Stock-based compensation expense 4,744 9,705 3,503 Add: Non-cash portion of loss on early extinguishment of debt - - 2,164 Adjusted earnings (losses) allocable to common shareholders$ (2,916) $ 386,725 $ 64,051
For the Six Months Ended
2020 2019 2018 (in thousands) Adjusted Earnings Net income (loss) allocable to common shareholders$ (44,786) $ 345,150 $ 69,680 Add: Depreciation and amortization 30,731 29,740 32,279 Add: Stock-based compensation expense 21,014 13,954 12,593 Add: Non-cash portion of loss on early extinguishment of debt 799 468 2,536 Adjusted earnings allocable to common shareholders$ 7,758
Liquidity and Capital Resources
During the three months endedJune 30, 2020 , we invested$59.5 million into new investments, prior financing commitments and ongoing real estate development. This amount includes$24.9 million in real estate finance,$10.6 million to develop our land and development assets,$16.0 million to invest in net lease assets, and$2.2 million of capital to reposition or redevelop our operating properties and$5.8 million in other investments. Also during the three months endedJune 30, 2020 , we generated$99.5 million of proceeds from loan repayments and asset sales within our portfolio, comprised of$81.1 million from real estate finance,$3.1 million from operating properties and net lease assets and$15.3 million from land and development assets. These amounts are inclusive of fundings and proceeds from both consolidated investments and our pro rata share from equity method investments. The following table outlines our capital expenditures on operating properties, net lease and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands): For the Six Months Ended June 30, 2020 2019 Operating Properties $ 1,598$ 3,636 Net Lease 4,884 8,385 Total capital expenditures on real estate assets $ 6,482
Land and Development$ 25,028 $ 73,314 Total capital expenditures on land and development assets$ 25,028
53 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2020 , we had unrestricted cash of approximately$80.7 million and$350.0 million of borrowing capacity available under the Revolving Credit Facility. The COVID-19 crisis has for the time being adversely affected our strategies of monetizing legacy assets and materially scaling SAFE's portfolio as its Manager. These conditions will adversely affect our strategies while they persist. Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures, distributions to shareholders and funding ongoing business operations. In the near term we plan to limit non-investment cash expenditures to the extent practicable. The amount we actually invest will depend on the full impact of COVID-19 on our business and the pace of the economic recovery. We also had approximately$242.0 of maximum unfunded commitments associated with our investments of which we expect to fund the majority over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see "Unfunded Commitments" below). We also have$598.8 million principal amount of scheduled real estate finance maturities over the next 12 months, exclusive of any extension options that can be exercised by our borrowers. Our capital sources to meet cash uses through the next 12 months and beyond are expected to include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions. Contractual Obligations-The following table outlines the contractual obligations related to our long-term debt obligations, loan participations payable and operating lease obligations as ofJune 30, 2020 (refer to Note 11 to our consolidated financial statements). Amounts Due By Period Less Than 1 1 - 3 3 - 5 5 - 10 After 10 Total Year Years Years Years Years (in thousands) Long-Term Debt Obligations: Unsecured notes$ 2,012,500 $ -$ 687,500 $ 775,000 $ 550,000 $ - Secured credit facilities 491,875 - 491,875 - - - Mortgages 720,871 67,771 168,453 23,496 453,649 7,502 Trust preferred securities 100,000 - - - - 100,000 Total principal maturities 3,325,246 67,771
1,347,828 798,496 1,003,649 107,502 Interest Payable(1) 578,592 132,617 239,956 141,482 54,215 10,322 Loan Participations Payable(2) 40,165 40,165 - - - - Lease Obligations(3) 1,630,178 8,590 23,380 23,857 34,788 1,539,563 Total$ 5,574,181 $ 249,143 $ 1,611,164 $ 963,835 $ 1,092,652 $ 1,657,387
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(1)Variable-rate debt assumes one-month LIBOR of 0.16% and three-month LIBOR of 0.30% that were in effect as ofJune 30, 2020 . Interest payable does not include payments that may be required under our interest rate derivatives. (2)Refer to Note 10 to the consolidated financial statements. (3)We are obligated to pay ground rent under certain operating leases; however, our tenants at the properties pay this expense directly under the terms of various subleases and these amounts are excluded from lease obligations. 54 -------------------------------------------------------------------------------- Table of Contents Collateral Assets-The carrying value of our assets that are directly pledged or are held by subsidiaries whose equity is pledged as collateral to secure our obligations under our secured debt facilities are as follows, by asset type ($ in thousands): As of June 30, 2020 December 31, 2019 Collateral Non-Collateral Collateral Non-Collateral Assets(1) Assets Assets(1) Assets Real estate, net$ 1,388,395 $
107,673
- 32,163 - 8,650 Net investment in leases(2) 424,674 - 418,915 - Land and development, net - 504,577 - 580,545 Loans receivable and other lending investments, net(3)(4) 281,032 494,487 233,104 566,050 Other investments - 1,049,930 - 907,875 Cash and other assets - 584,419 - 814,044 Total$ 2,094,101 $ 2,773,249 $ 2,061,604 $ 2,994,798
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(1)The Senior Term Loan and the Revolving Credit Facility are secured only by pledges of equity of certain of our subsidiaries and not by pledges of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions on incurring new debt (subject to certain exceptions). As ofJune 30, 2020 , Collateral Assets includes$472.1 million carrying value of assets held by entities whose equity interests are pledged as collateral for the Revolving Credit Facility that is undrawn atJune 30, 2020 . (2)As ofJune 30, 2020 , the amount presented excludes a general allowance for net investment of leases of$10.9 million . (3)As ofJune 30, 2020 andDecember 31, 2019 , the amounts presented exclude a general allowance for loan losses of$13.9 million and$6.9 million , respectively. (4)As ofJune 30, 2020 andDecember 31, 2019 , the amounts presented exclude loan participations of$40.1 million and$35.6 million , respectively. Debt Covenants-Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.2x and a covenant not to incur additional indebtedness (except for incurrences of permitted debt), if on a pro forma basis our consolidated fixed charge coverage ratio, determined in accordance with the indentures governing our debt securities, is 1.5x or lower. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. If our ability to incur additional indebtedness under the fixed charge coverage ratio is limited, we are permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted general corporate purposes under the indentures. The Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the Senior Term Loan requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. Under both the Senior Term Loan and the Revolving Credit Facility we are permitted to pay dividends provided that no material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in compliance with our financial covenants after giving effect to the dividend. We declared common stock dividends of$16.3 million , or$0.21 per share, for the six months endedJune 30, 2020 . Derivatives-Our use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes in foreign currencies. Refer to Note 13 to the consolidated financial statements. Off-Balance Sheet Arrangements-We are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in various unconsolidated ventures. Refer to Note 8 to the consolidated financial statements for further details of our unconsolidated investments. Our maximum exposure to loss from these investments is limited to the carrying value of our investments and any unfunded commitments (see below). 55 -------------------------------------------------------------------------------- Table of Contents Unfunded Commitments-We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As ofJune 30, 2020 , the maximum amount of fundings we may be obligated to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and assuming that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands): Loans and Other Other Lending Investments(1) Real Estate(2) Investments Total Performance-Based Commitments$ 117,988 $ 70,131 $ 42,250 $ 230,369 Strategic Investments - - 11,601 11,601 Total$ 117,988 $ 70,131 $ 53,851 $ 241,970
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(1)Excludes$9.8 million of commitments on loan participations sold that are not our obligation. (2)Includes a commitment to invest up to$55.0 million in additional bowling centers over the next several years (refer to Note 5). Stock Repurchase Program-We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the six months endedJune 30, 2020 , we repurchased 2.5 million shares of our outstanding common stock for$27.8 million , for an average cost of$10.98 per share. During the six months endedJune 30, 2019 , we repurchased 6.2 million shares of our outstanding common stock for$58.3 million , for an average cost of$9.42 per share. As ofJune 30, 2020 , we had remaining authorization to repurchase up to$6.4 million of common stock under our stock repurchase program. InAugust 2020 , our board of directors authorized an increase to the stock repurchase program to$50.0 million . Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements and our Annual Report on Form 10-K.
New Accounting Pronouncements-For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements. 56
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