Safehold Inc. (SAFE) Earnings Call Transcript

Good morning, and welcome to Safehold's First Quarter 2025 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 Hoffman, Senior Vice President and Head of Corporate Finance. Please go ahead, sir.

Good morning, everyone. Thank you for joining us today for Safehold's earnings call. On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer; Brett Asnas, Chief Financial Officer; and Tim Doherty, Chief Investment Officer. This morning, we plan to walk through a presentation that details our first quarter 2025 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 2:00 p.m. Eastern Time today. The dial-in for the replay is (877) 481-4010 with a confirmation code of 52368. 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 good morning to everyone joining us today. While many of the deals we hope to close in the first quarter were way laid by market volatility, markets are beginning to adjust, and we are finding ways to provide capital our companies need to lock down their deals. Rates remain high relative to forward inflation expectations. It's hard to predict when markets will fully stabilize or when the rate backdrop will be more favorable. In the meantime, we're working closely with customers to find solutions to their needs and deploy capital that can represent attractive risk-adjusted returns to Safehold. We have 2 goals in mind as we continue to build the business. Retail that starts to unlock the full value of the business for shareholders and continue expanding the universe of customers who can benefit from the long-term lower cost capital and stability that a Safehold ground lease can provide. We need to be aggressive and tireless in these efforts and believe the payoff will be well worth the significant investment of time and resources we are committing. Let me turn it over to Brett to review the quarter and full year in more detail.

Thank you, Jay, and good morning, everyone. Let's begin on Slide 2. 2025 has been a challenging environment for new deals as the combination of interest rate volatility and market uncertainty has repriced capital and slow decision-making for our customers. This impacted Q1 investment activity as several transactions we expected to close during the quarter were delayed, resulting in no new originations for the quarter. That said, our team remains highly engaged with both new and existing customers. The pace of signed LOIs has picked up and our pipeline is further along today than at the same point last year. We have nonbinding LOIs totaling approximately $386 million for potential commitments across 11 ground leases and 4 loans. While certain of these transactions have closed in Q2, there can be no assurances that the rest of these transactions will close. Credit metrics are strong. At current base rates, we're expecting contractual returns in the low 7% range before factoring in CPI and CARET, which we believe is highly compelling. 6 of the 11 ground leases under LOI are in the affordable housing space, continuing our momentum in that sector, which we expect to be a meaningful growth contributor moving forward. We're working with 11 unique sponsors, 9 of which are new to our program, which not only demonstrates the reach of our product, but bodes well for our future business as roughly 40% of our portfolio is repeat business. At quarter end, the total portfolio was $6.8 billion, UCA was estimated at $8.9 billion, GLTV was 52% and rent coverage was 3.5x. We ended the quarter with approximately $1.3 billion of liquidity, which is further supported by the potential available capacity in our joint venture. Slide 3 provides a snapshot of our portfolio growth. In the first quarter, we funded a total of $20 million, which consisted of $16 million of ground lease fundings on pre-existing commitments that have a 6.7% economic yield and $4 million related to our share of the leasehold loan fund, which earned interest at a rate of SOFR plus 386 basis points. Our ground lease portfolio has 147 assets and has grown 20x by both book value and estimated unrealized capital appreciation since our IPO. We have 85 multifamily ground leases in the portfolio and have increased our exposure from 8% by count at IPO to 58% today. In total, the unrealized capital appreciation portfolio is comprised of approximately 36 million square feet of institutional quality commercial real estate, consisting of approximately 20,000 multifamily units, 12.5 million square feet of office, over 5,000 hotel keys, and 2 million square feet of life science and other property types. Continuing on Slide 4, let me detail our quarterly earnings results. For the first quarter, GAAP revenue was $97.7 million, net income was $29.4 million and earnings per share was $0.41. The decline in GAAP earnings year-over-year was primarily due to an increase in other expense, driven by a nonrecurring $1.9 million loss on a preferred equity investment in a Washington, D.C. office leasehold interest. The leasehold was being marketed for sale with a portion of property taxes under appeal. We advanced funds to cover those taxes as we believe any unpaid amounts would have been an overhang on the sale process. The leasehold successfully changed has recently, and we have a new tenant in place with a strong track record and fresh equity committed to the building. Safehold will provide additional financing for building upgrades and leasing and in return, we will receive equity participation in the leasehold should it outperform. We believe this solution is a long-term positive for the asset. A portion of the taxes paid may be recovered in the future, but given our lack of visibility and confidence in the appeal process, we decided to write off our preferred equity investment. Excluding this onetime nonrecurring loss, Q1 earnings per share increased slightly year-over-year, driven by higher net earnings on investment fundings and percentage rent, offset by an increase in our noncash general provision, primarily driven by higher GLTVs and lower earnings from equity method investments, primarily due to repayments in the leasehold loan fund. On Slide 5, we detail our portfolio's yields. For GAAP earnings, the portfolio currently earns a 3.7% cash yield and a 5.4% annualized yield. Annualized yield includes noncash adjustments within rent, depreciation and amortization, which is primarily from 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 5.8% economic yield, which is an IRR-based calculation that conforms with how we've underwritten these investments. This economic yield has additional upside, including periodic CPI lookbacks, which we have in 83% of our ground leases. Using the Federal Reserve's current long-term breakeven inflation rate of 2.2%, the 5.8% economic yield increases with 5.9% inflation-adjusted yield. That 5.9% 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 its most recent $2 billion 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 location and underlying property type. Our top 10 markets by gross book value are called out on the right, representing approximately 66% 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, increased quarter-over-quarter from 49% to 52%. This increase was not surprising as Q1 is our largest office revaluation quarter with approximately 2/3 of the office portfolio getting reappraised. We target low attachment points in our ground leases to avoid being impacted by these temporary fluctuations. Although property appraisals declined, rent coverage on the portfolio was unchanged quarter-over-quarter at 3.5x. We continue to believe that investing in well-located institutional quality ground leases in the top 30 markets that have attractive risk-adjusted returns will benefit the company and its stakeholders over long periods of time. Lastly, on Slide 7, we provide an overview of our capital structure. At year-end, we had approximately $4.7 billion of debt comprised of $2.2 billion of unsecured notes, $1.5 billion of nonrecourse secured debt, $0.7 billion drawn on our unsecured revolver, and $0.3 billion of our pro rata share of debt on ground leases, which we own in joint ventures. Our weighted average debt maturity is approximately 19 years, and we have no corporate maturities due until 2027. At quarter end, we had approximately $1.3 billion of cash and credit facility availability. We are rated A3 with stable outlook by Moody's, A- with stable outlook by Fitch and BBB+ with positive outlook by S&P. We have benefited from an active hedging strategy and remain well hedged on our limited floating rate borrowings. Of the $712 million revolver balance outstanding, $500 million is swapped to fixed SOFR at 3% through April 2028. We received swap payments on a current cash basis each month. And for the first quarter, that produced cash interest savings of approximately $1.7 million that flowed through the P&L. We also have $250 million of long-term treasury locks at a weighted average rate of approximately 4.0% and current gain position of approximately $30 million. Of this $250 million, $100 million notional was unwound in April and crystallized at a $13 million cash gain and the remaining $150 million notional is active and outstanding with mark-to-market gain of approximately $17 million. These treasury locks are mark-to-market instruments currently recognized on the balance sheet and not the P&L. They can be unwound for cash at any point through their designated term. However, only when they are applied to long-term debt, would they then be recognized in our P&L over time. We are levered 1.96x on a total debt-to-equity basis, which was flat versus last quarter. The effective interest rate on permanent debt is 4.2%, and the portfolio's cash interest rate on permanent debt is 3.8%. So to conclude, despite a difficult market, the team is finding success sourcing new deals and expanding our customer base. We expect these efforts to translate into increasing investment activity in the near term. And if markets remain choppy or there is a more significant downturn, we believe owning a diversified pool of ground leases is an attractive place to be. Growth has always been a driving force in our valuation. But at the current share price, we think it's worth highlighting what investors own because the discount to what we believe is fair value has grown so large. We have a balance sheet with no near-term maturities, valuable in-place hedges and significantly below market debt locked in for 19 years. At market discount rates, we believe there's approximately $10 or more of per share value in this debt on our balance sheet alone. On the asset side, we own a diverse pool of high-grade credit instruments, call protected and contractually compounding. We also typically own 8 to 9 free options on CPI in our leases, which will increase returns and protect value should inflation remain sticky, plus a free option on the future underlying real estate currently appraised at nearly $9 billion, which we believe over time will return many multiples of our invested basis. Part of the challenge in operating in a less traditional sector in the public market is there are no direct comps and investors typically have less experience with ground leases than they do other asset classes. At the current share price, we believe the portfolio is a mispriced asset. While scaling the business remains our top priority, we are actively evaluating opportunities to take advantage of what we believe is a public versus private valuation disconnect on the existing portfolio, and we look forward to keeping the market updated on our progress. And with that, let me turn it back to Jay.

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

[Operator Instructions] Our first question is coming from Ronald Kamdem with Morgan Stanley.

Just 2 quick questions. I think you talked about the pipeline a little bit here on the nonbinding LOIs. Just wondering if you could give a little bit more color just on the sponsors, the markets and just what your expectations on the ability to close this and in what time frame?

Sure. It's Tim. As you can see, there's a very robust pipeline here with the 11 deals. And we'd say that the majority are in multifamily. That includes existing deals that we're helping recap, construction deals on market rate, as well as affordable. As you heard from Brett, a lot of new clients here, also repeats, which we see a lot of from our existing portfolio. Location-wise, also very diverse. We have West Coast, Southeast, Northeast and Midwest, all in this pipeline. So from our standpoint, it's a great pipeline, and it shows that the diversity of deals we can close on.

And then my quick follow-up is just on the difference between the ground lease versus the leasehold loan value. Just maybe talk us through the benefits of that to you guys as well as the borrowers and how much capacity do you have to do these leasehold loan when you're doing the ground lease?

Yes. So as you know, we've selectively used leasehold loans in the past. We have relatively little dollars outstanding right now. But we think it can be a useful tool when the markets are volatile. And when we see an opportunity where certainty can win deals, it's certainly an arrow in our quiver. So we think it's a way to kickstart some transactions that are either sitting on the sidelines because they just can't line everything up. That's a great place for us to step in. We're going to keep it to a small percentage of the balance sheet, obviously, but we think it's a tool that our customers definitely benefit from knowing they've got a deal locked down as opposed to having to watch the market every day.

Our next question is coming from Caitlin Burrows with Goldman Sachs.

Maybe just a quick follow-up on the first part of Ron's question on the LOI deals. It sounds like some of those may have already closed. So I was wondering if you could quantify that and then give us an idea for expected timing. And to the extent that you don't want to comment on these exact deals, I guess, could you give some color around by the time a property generally enters the LOI stage, how long it could take to actually close?

Sure. I'll take the last one first. Time frame ranges on a construction deal versus a recap deal. Obviously, construction deals just take more time to put things together. And then on the recap deals, those are largely fairly quick. But our pipeline, what we expect is all these deals will close this year. But because of the timing with the construction versus stabilized deals, it will vary over the time frame of the quarter. But again, we feel great about what the buildup of the pipeline is.

And it sounds like then no comments on what has already been agreed upon or closed?

Yes. The earliest deals are starting to close. So we're hopeful that the momentum continues.

And then just at the end there, you guys mentioned the public versus private market disconnect. So wondering if you could comment on that a little bit more. Are you suggesting that you would consider potentially selling a ground lease or more to prove value or something else?

Yes, we mentioned on our last earnings call that for our 2025 goals, capital recycling was near the top of the list. We want to make sure that we are standing behind the stock and making sure that we are closing the gap. And we certainly believe that we are trading at a discount. And when we start thinking about the opportunity set of what we have within the existing portfolio, whether that mean selling assets, finding joint venture partners, et cetera, we're underway in processes to figure out how to create the best execution so that we can continue to deploy capital as well as stand behind the stock, and we'll continue to update the market accordingly as those processes unfold.

Our next question is coming from Haendel St. Juste with Mizuho.

I wanted to confirm whether everything that are in the nonbinding LOIs were related to multifamily or affordable housing.

Yes. As I mentioned, the majority of it is in multifamily, and it's a good mix of market rate construction, market rate recap as well as affordable, and we do have a hotel transaction as well. But majority is still multifamily.

And as you evaluate your current capital stack, what is the appetite to potentially source maybe another joint venture with a large institutional partner? Maybe that would help with the capital deployment.

Yes, Haendel, I think as I said in my opening remarks, the goal here is to scale. And right now, the scarcity of deals makes it more likely we're going to try to keep stuff for ourselves. But certainly, as deal flow ramps up and if our cost of capital isn't where we'd like it to be, that's an alternative we always consider as potentially one we can use. As Brett said, we have a couple of processes underway just to think about other sources of capital that could be more accretive to the company, but nothing to report right now.

And just one more here, and maybe it is a bit more big picture in nature. But like I understand the volatility with interest rates in the past and on the volatility with tariffs and the trade war. This has really impacted the acquisition side and the capital deployment opportunity. I think it's fair to say that the volatility will persist here for a little bit. I guess what are some of the deals you're looking to structure? And how are those maybe different than maybe what we're approaching in the past?

I would say that there has been some volatility, of course. I think the range of the volatility has tightened. If you look back over the last 24 months, we pay attention a lot to the 30-year treasury, the highs and the lows from 6 to 24 months back, now 6 months back only, that's allowed sponsors to start to have a clearer view of what their long-term capital costs are. So I think that's why you're also seeing the pipeline build up here. Sponsors are now able to make decisions on transactions. Sure, the latest noise is tariffs, which does impact transactions. We use a construction for an example. So deals that started to pencil some of those probably had to go pencils down. But look, in the high-quality markets with good growth and lower supply than others, which there's good examples of around the country, even with tariffs, those transactions can start to occur, which you're seeing come through in our pipeline.

One thing we've seen that I think is a little bit new is customers actually asking to lock rate early and/or have some floor and cap and not just have a floating spread all the way up until they close. So that's been one response we've seen from customers is they're looking for certainty, they need to put the stacks together. And at least with our piece, we can give them a little bit more certainty that has been helpful.

Our next question is coming from Mitch Germain with Citizens Capital Markets.

I wanted to circle back about some of the discussion around joint venture partners. And obviously, you can lock in some new capital for deals. But I think when Brett had suggested joint ventures as a way to unlock value of the portfolio, I'm assuming you would be contributing existing properties to a venture. Is that the way to think about creating some price discovery around the portfolio itself?