Safehold Inc. (SAFE) Earnings Call Transcript

Good afternoon, and welcome to Safehold's Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us today for Safehold's earnings call. On the call, we have Jay Sugarman, Chairman and Chief Executive Officer; Michael Trachtenberg, President; Brett Asnas, Chief Financial Officer; and Steve Wylder, Executive Vice President, Head of Investments. This afternoon, we plan to walk through a presentation that details our second quarter results. The presentation can be found on our website at safeholdinc.com by clicking on the Investors link. There will be a replay of this conference call beginning at 8:00 p.m. Eastern Time today. The dial-in for the replay is (877) 481-4010 with a confirmation code of 54312. In order to accommodate all those who want to ask question, we ask the participants limit themselves to 2 questions during Q&A. If you'd like to ask additional questions, you may reenter the queue. Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call, which are not historical facts, may be forward-looking. Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our SEC reports. Safehold disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Now with that, I'd like to turn it over to Chairman and CEO, Jay Sugarman. Jay?

Thanks, Pearse, and thanks to everyone joining us today. This quarter, Safehold further built on its market-leading position in the ground lease sector. We added new customers, new capital relationships, and new geographic markets and continue to believe we are building a very valuable and irreplaceable portfolio of ground leases in the top 30 to 40 markets in the country. These MSAs typically benefit from 2 large forces that have historically increased the value of land. First, the densification of economic activity in the top urban and infill markets; and second, the ongoing pursuit of the highest and best use of land by the entrepreneurial real estate communities in these same markets. The U.S. has added approximately 50 million people over the past 25 years and approximately 250 million people over the past 100 years. Our goal is to own well-located land in every major market in the United States and let the power of compounding and a growing economy drive value for us. In the meantime, we need to work hard to expand our business and overcome near-term market challenges, and we're fortunate to have a talented team doing that every day. With that, let me have Michael and Brett recap the quarter and take you through the details. Michael?

Thank you, Jay, and good afternoon, everyone. Let's begin on Slide 2. We had a strong second quarter for both new investments and capital markets activity. We originated 7 multifamily ground leases for an aggregate commitment of $150 million, our most productive quarter since 2022. These closings were all within Safehold's growing affordable housing subsector and included 6 California deals and 1 Texas deal with 1 new sponsor and 3 repeat sponsors. Credit metrics were in line with our portfolio targets with a GLTV of 35%, underwritten rent coverage of 3.0x and an economic yield of 7.4%. Moving to capital markets. We closed 2 bespoke private capital transactions during the quarter, including a $348 million joint venture with Brookfield on a portfolio of 7 ground leases and $225 million of 30-year step-rate unsecured notes. We were pleased to partner with Brookfield on this venture, which accomplished several goals, including adding a sophisticated partner to our platform, demonstrating demand and liquidity in our portfolio at an attractive valuation, deleveraging the balance sheet and creating incremental investment capacity at an attractive cost of equity, and retaining control of the assets and future flexibility to repurchase Brookfield's 49% interest. During the quarter, we also raised $225 million of 30-year private unsecured notes priced at an all-in coupon of 6.615% or a spread of T plus 162.5 basis points. Net of approximately $30 million in recently unwound hedge gains, the effective cost is approximately 5.83% or T plus 84 basis points. The starting cash interest rate on the notes is 4%, which will step up gradually over the next 30 years. We are pleased with this execution, which lengthens our debt maturity profile, further increases corporate liquidity, adds new high-quality debt investors to our business and the structure and demonstrates positive trends from our previous 30-year structured unsecured offerings, including adding more dollars and at a tighter spread. At quarter end, the total portfolio was $7.3 billion and UCA was estimated at $9.8 billion, up $260 million from last quarter, nearly $500 million year-to-date and nearly $1 billion since appraisal values bottomed in the first quarter of 2025. GLTV was 52% and rent coverage was 3.4x. We ended the quarter with approximately $1.4 billion of liquidity, which is further supported by the potential available capacity in our existing joint venture, the sovereign wealth fund. Slide 3 provides a snapshot of our portfolio growth. In the second quarter, we funded a total of $123 million, including $69 million of ground lease fundings on new originations, $49 million of ground lease fundings on preexisting commitments and $5 million of leasehold loan fundings. Our ground lease portfolio has 172 assets and has grown approximately 22x by both book value and estimated unrealized capital appreciation since our IPO. In total, the unrealized capital appreciation portfolio comprises approximately 39.4 million square feet of institutional quality commercial real estate. We have increasingly focused on opportunities within the broader multifamily sector, including market rate, student housing and affordable housing. Our multifamily segment now includes 111 assets with nearly 25,000 units that sit above our ground leases and represents approximately 65% of the portfolio by count and 61% of the value of our estimated unrealized capital appreciation. And with that, let me turn it over to Brett to go through the financials.

Thank you, Michael. Continuing on Slide 4, let me detail our quarterly earnings results. For the second quarter, GAAP revenue was $114.6 million, net income was $30.2 million and earnings per share was $0.42. Net income and earnings per share increased year-over-year, primarily driven by net accretion from asset fundings and new originations. On Slide 5, we detail our portfolio's yields. For GAAP earnings, the portfolio currently earns a 3.8% cash yield and a 5.5% annualized yield. Annualized yield includes noncash adjustments within rent as well as depreciation and amortization, driven primarily by accounting methodology on IPO assets, but excludes all future contractual variable rent, such as fair market value resets, percentage rent or CPI-based escalators, which are all significant economic drivers. On an economic basis, the portfolio generates a 6.0% economic yield, which is an IRR-based calculation, consistent with our underwriting methodology. This economic yield has additional upside, including periodic CPI lookbacks, which we have in 84% of our ground leases. Using the Federal Reserve's current long-term breakeven inflation rate of 2.23%, the 6.0% economic yield increases to a 6.2% inflation adjusted yield. That 6.2% inflation adjusted yield then increases to 7.4% after layering in an estimate for unrealized capital appreciation using Safehold's 84% ownership interest in Caret at management's most recent estimated valuation. We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today. Turning to Slide 6. We highlight the diversification of our portfolio by location and underlying property type. Our top 10 markets by gross book value are called out on the right, representing approximately 65% of the portfolio. We include key metrics such as rent coverage and GLTV for each of these markets, and we have additional detail at the bottom of the page by region and property type. Portfolio GLTV, which is based on annual asset appraisals from CBRE, rounded up slightly at 52% in Q2, and rent coverage on the portfolio was unchanged at 3.4x. Lastly, on Slide 7, we provide an overview of our capital structure. At quarter end, we had approximately $5.0 billion of debt comprised of $2.8 billion of unsecured debt, $1.3 billion of nonrecourse secured debt, $621 million drawn on our unsecured revolver and $270 million of our pro rata share of debt on ground leases, which we own in joint ventures. Our weighted average debt maturity is approximately 18 years with no significant maturities due until 2029. At quarter end, we had approximately $1.4 billion of cash and credit facility availability. We are rated A3 by Moody's, A- by S&P and A- by Fitch, all with stable outlook. We continued utilizing our share repurchase authorization in the second quarter, buying back approximately 850,000 shares of common stock at an average price of $15.17. Our limited floating rate borrowings are protected by a $500 million SOFR swap locked at 3% through April 2028, creating interest savings of approximately $820,000 for the second quarter. We recently terminated $225 million of long-term treasury locks for a cash gain of approximately $30 million, which will now be recognized as an offset to interest expense on the P&L. We currently have $25 million of long-term treasury locks outstanding at a mark-to-market gain of $3 million. We are levered 2.01x on a total debt-to-equity basis. The effective interest rate on permanent debt is 4.4%, and the portfolio's cash interest rate on permanent debt is 3.9%. So to conclude, it was a very productive quarter with investment growth, UCA growth, strong capital activity and solid earnings. The pipeline is active, the balance sheet is well positioned, and we look forward to continuing the momentum through the rest of the year. With that, let me turn it back to Jay.

Thanks, Brett. Let's go ahead and open it up for questions. Operator?

[Operator Instructions] Your first question for today is from Anthony Paolone with JPMorgan.

I was wondering if you could talk a bit more about the Brookfield joint venture and also whether are there any fees that you all are getting for the venture and also any implications with Caret with selling a stake in those?

Tony, it's Brett. The Brookfield transaction, we're quite excited by. Again, we set out some goals earlier in the year, talking about how to recycle capital within the portfolio, doing buybacks, continuing to scale our ground lease platform. And I think this transaction helps us in a multitude of ways. First, I would say, adding an institutional partner like Brookfield is a plus for us, certainly at an attractive valuation. Secondly, I would say, deleveraging the balance sheet, taking those proceeds, paying down debt and our revolving credit facility was a positive and certainly a better cost of capital than issuing common stock. Thirdly, I'd say that adding liquidity at a time where we find attractive opportunities in the ground lease space at the yields that we're talking about, we want to make sure we have capital to do that. And then the fourth, which you hit on in your question as well, is retaining flexibility at our option, which is we have the ability to buy back in their 49% share that we sold them. So it was a portfolio of 7 ground leases, diversified all across the United States, different sponsors, different markets. And we felt like this transaction showed folks that we have alternative capital sources, again, at an attractive valuation. In terms of fees, there are customary fees associated with the deal in terms of getting a joint venture like this done. Obviously, you've seen us do joint ventures in the past. We have one with our sovereign wealth partner. But I think the feature in this deal of being able to have that call option after 7 years is an important one for us as we continue to build and scale the platform and continue to grow our UCA account.

And then just can you talk to the investment pipeline and also how that ties in with just your runway for capital that you have now that you got some money back from the Brookfield joint venture?

Tony, it's Michael. So look, we were pleased to convert $150 million of our pipeline in the quarter, and we've continued to replenish it. We expect to continue to execute on our pipeline in the coming quarters. And additionally, we feel really good about the activity that we're seeing at the top of the funnel. I'll let Brett talk about capital.

Yes. From a capital perspective, at the moment, we have about $620 million drawn on our revolver at quarter end. So when we're looking at our funding profile of the existing ground lease commitments as well as new deals, obviously, a pretty active second quarter between stock buybacks and new investments in existing ground leases and leasehold loans, we put out nearly $135 million, $140 million worth. So I think that really was offset by the joint venture and $160 million, $170 million of proceeds coming in for that. But going forward here, clearly, our capital needs are going to be dependent mostly on creating new deals and looking at that pipeline and taking leverage down this past quarter has helped us get some runway here over the coming quarters, which we obviously don't see any equity need in the near future here.

Your next question is from Mitchell Germain with Citizens Bank.

Sorry about that. I guess I was on mute. Rent coverage across the multifamily sector down definitely from year-end. Is that something to do with just ramp of developments? Is there anything that's really contributing to that specifically?

Yes, there's a natural migration in the portfolio as you bring new deals on and particularly in some of the development deals, we underwrite pretty conservatively. So nothing material to look at.

I'm curious about just the ground lease sector in general. I guess published reports suggest there's a pretty big ground lease being marketed in Times Square. I'm not asking about your participation. I'm more curious, do you think that this could maybe raise the profile of the sector a bit given it's been a bit out of favor because of the backdrop?

Yes. Look, I think there's 2 things going on. One is we're trying to modernize the ground lease business, and there are a lot of ground leases out there that are on the opposite side of the table, I call them value destroying, not value enhancing. So we try to separate what you see in the market for modern versus old style. We think the more deals we do, the more modern ground lease transactions, people will see that it's just a natural part of making a more efficient capital market for owners of real estate. Some of these old deals, unfortunately, have a lot of weird provisions in them, and they actually -- it's a step back for us when we have to talk about those. So our focus is working with the most efficient capital in the market, the longest-term capital market and showing our customers how that can help them. And every once in a while, we'll stumble across an old one that we can help fix. That's a good opportunity as well. But a lot of times, these older ground leases have provisions we just -- we won't play in. And I think some of the old ones in New York, in particular, are very much the vintage ground leases that we are trying to modernize.

I guess last one for me is, are you guys somewhat open for business across multiple sectors at this point? I know that there was an emphasis on possibly just not allocating to the office sector. There's been pretty much an overallocation to multifamily. Is there anything that is off the table right now? Or depending upon the attractiveness of the transaction, are you back in business when it comes to office or other sectors?

Mitch, it's Michael. I would say that we've certainly talked about our focus on multifamily. We're going to continue to lean into multi as our core asset class going forward. We are not closed for business in other asset classes. We'll continue to evaluate those opportunities as they come across. And we'll say as you look across the spectrum of other asset classes, office will be the one that has the highest bar to clear to get us back to the table, but we are not closing the door on any particular asset class.

Your next question for today is from Jonathan Petersen with Jefferies.

I wanted to ask about your -- about affordable housing ground leases. So you got 1 done in Texas this quarter, which is exciting or a second one, excuse me. Can you talk about other progress you're making in other states to originate more affordable housing loans or affordable housing ground leases?

Sure. Jonathan, Steve Wylder. Yes, the team is working hard to expand outside of California. So California, I think, is going to continue to be a focus for us just given the size and importance of that market and the supply-demand imbalance that we see and established a strong presence there. So we're going to continue to be active, but we were really excited this quarter to close our second transaction in Texas. It's also an important market just in terms of the outsized population growth, long-term demand for housing. So that's going to be a continued area of focus now that we've established a precedent. And then we're working hard to open up other markets throughout the Southeast, the Sunbelt up in the Mid-Atlantic. It takes some time to study the regulatory regime and build a profile of customers. But I think in time, you'll see us continue to expand.

Okay. And then I'm curious if you have any thoughts about the new bill that went through Congress, the 21st Century ROAD to Housing Act. I think there were some provisions in there that were supposed to help with affordable housing and just residential development in general. Do you see any positive read-throughs to your business from that?

Yes. I would say we continue to see bipartisan support for the tax credit program, which is a big part of what fuels the investment activity that we're making inside of the affordable sector, so that's encouraging. And that's the support that we're looking for across these markets as our customers develop affordable product, ultimately work hard to meet the demand for affordable housing in these communities. So if anything, I would say it's a net positive to how we're investing into the sector and support of the programs that help get these projects built.

Okay. Maybe one last one for me. On the Brookfield JV, the call option, are there any like penalties around that or premiums you have to pay or time restrictions? Just any more details you can give us on how that works?

Yes. I think from -- it's Brett. I think from our perspective, we look at the price paid from a valuation perspective and the 49% that they bought it at, and as we disclosed, a low-4% cap rate or close to 4% as attractive capital here going forward. A lot of the total pricing if those call options are hit after year 7, if we so choose -- again there's no requirement, there's no put here -- we want to make sure that from a pricing perspective, based on those moments in time where the real estate markets are at, where the capital markets are at, that we have the option to buy that back in. So again, from our perspective, we think it's, again, pretty back-ended there and a good cost of capital, but exact details and terms are obviously confidential with our JV partner per our agreement.

Your next question is from Kenneth Lee with RBC Capital.