Q4 2019 Earnings Call

February 13, 2020

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Good morning, and welcome to see poets fiscal year and fourth quarter 920, 19 earnings Conference call. If you need assistance during today's call. Please press Star Zero as a reminder, today's conference is being recorded at this time for opening remarks, and introduction I would like to turn the conference over to our host Jason.

Books.

On your Vice President of Investor Relations and marketing. Please go ahead Sir.

Good morning, everyone and thanks for joining us today for C.

With me today, or Jay Sugarman, Chairman and Chief Executive Officer.

<unk>, President and Chief investment Officer.

This morning, we plan to walk through a presentation that details our fiscal year in fourth quarter 29 years old.

Presentation be found on our website at Stapleton Dot com.

On the Investor Relations.

There will be a replay of this conference call beginning at one PM Eastern time today.

For the replay is 866 choose zero 710 for one with a confirmation code.

095363.

Before I turn the call over to Jay I'd like to remind everyone. It's taking a concerns poetry historical facts, maybe forward looking for actual results may differ materially from these forward looking statements and the risk factors that could cause these differences or do you see reports staple disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.

No that election call over to our chairman and CEO Jay Sugarman Jay.

Jason.

2019 turned out to be an exceptional year for our company.

Earnings grew almost 40% the portfolio increased by over 1.5 billion.

Sure older returns were well north of 100%.

Most importantly, our new modern groundlings, enabling building owners to be more capital punishment more cost efficient and to achieve higher returns with lower maturity risk has now proven to be the right solution for a wide variety of high quality owners high quality real estate.

2019 also showed us how big this property opportunity could be and how much more work we have to do to capture its full potential.

We're still in the early stages are bringing about major change to commercial real estate ownership in the U.S., but we're excited by how much progress we've made during the course of last year.

Volume in the fourth quarter was substantially above our expectations.

Financing options continue to improve.

And shareholders have begun to recognize the significant value embedded in our company.

As I've said before we believe the safest story as one that can resonate with a wide variety of investors.

Making it industry more efficient, whether better product and better customer service.

As a strategy rewarded by investors in many industries that are being disrupted.

So we are an innovation play.

With earnings growth above 30% were also a growth story.

With intrinsic value are well above share price, we are value of stock.

And with the principal safety of a portfolio ground leases akin to the city for securities and portfolio cash flows that consistently grow overtime with little to no volatility, we aren't a sleep well stock.

Our job in 2020 is to continue bringing our value enhancing ground leases to customers across the country.

That's your continue highlighting the value of our business for shareholders across the investing spectrum.

With that let me turn it over to Mark has to go through the quarter in more detail our house.

Thank you Jay Good morning, everyone. Let me start by highlighting the year on slide four as Jay mentioned 2019 truly was a groundbreaking here for safe and close to 24 transactions. This year totaling 1.8 billion or 2.1 billion of originations. If you include 100% for 25 Mark.

For which we ended up bringing in a joint venture partner in Q4.

We grew our portfolio by 187% this year to over 2.7 billion.

As we continue to provide repeat customers increasingly larger institutions are reinvented modern rally solution.

Success with customers has yielded strong earnings results. This year in 88% revenue growth, 136% net income growth 39%, yes.

And we also made significant inroads with the investment community.

We broadened our shareholder base with a diverse set of institutional investors, who are beginning to recognize the value of our franchise.

In 2019 safe stock had a total return of 118%, making us the number one performing publicly traded read in the U.S.

In addition liquidity in our stock also saw meaningful improvement as our total daily dollar volume shares trading increased capex this year and our market cap has grown from approximately 300 million to 2.4 billion.

Nevertheless, theres still a large universe of both customers and investors not heard about.

We're not appreciate our value proposition, we've only scratched the surface of what is possible on both fronts and we're energized by the opportunities ahead.

Let me continue on slide five which summarizes our quarterly and full year earnings results for the full year earnings per share is 89 cents versus 64 cents in 2018 for the fourth quarter. We generated 25 cents of income per share versus 24 cents or the same quarter last year.

To note is that at the end of 2018, we're operating close to maximum efficiency in terms of having all of our capital deployed.

At the end of 2019, we still had about 600 million of capacity as a result of a recent equity rates, which had a dilutive effect on our fourth quarter earnings per share.

Slide six discussed this quarter's investment activity.

Fourth quarter proved to be very productive for us as we closed the number of large transactions that we had from pursuing for some time.

For the quarter, we closed 10 deals totaling 1.2 billion you can see the key investment metrics on the fourth quarter transaction at the bottom of the slide.

Based on our underwriting these deals have a weighted average effective yield.

5.3%, you underwritten yields relevant for old fashioned ground leases that we acquire sets for 25 Park Avenue, which at fair market value reset.

Excluding any assumptions and based solely on the contractual rent our new acquisitions have a weighted average effective yield of 4.9%, which does not take into account for potential increase and read the fair market value reset.

In addition, our sample ground leases typically include periodic CP I look back that can result in additional upside to our effective return.

The new acquisitions have 3.6 times of rent coverage and represent a ground lease to value 38%.

Moving to slide seven show our portfolio growth.

As we've noted in recent earnings calls our portfolio has grown rapidly today stands at just over 2.7 billion, which represents eight times the size of our portfolio. When we went public two and a half years.

On slide eight we highlight a few of the deals we closed during the during the quarter.

65 third Avenue in a newly originated single global Real estate fund manager, representing the fourth large transaction to close in Manhattan.

Very encouraged by our ability by our ability to win over some of the more sophisticated real estate investors with our capital solution and we look forward to following our customers into transactions and markets in 2020.

In addition, we've made good progress with multifamily owners in new markets as we closed our first deals in Sarasota, Tampa and continue to expand our geographic reach.

Slide nine shows a snapshot of our current capital structure.

In the fourth quarter April 2nd follow on equity offerings generated an additional 247 million in equity capital to support the funding of new transactions, we were particularly pleased with the breadth and depth of the investor interest in our public offering which was six times oversubscribed with highly sophisticated Likeminded Institute.

Additional investors and as a result, we upsized the offerings by 50%.

We currently have approximately one and a half billion dollars an outstanding debt, which includes our pro rata share of debt associated with our joint venture.

We've made significant progress this year enhancing our liabilities by lowering our cost of debt while at the same time materially extending our maturities today, our weighted average interest rate is 4% and our weighted average maturity profile is 31 years versus eight years at the end of 2018.

And while we fundamentally believe that the more important metrics are the effective yield of our ground leases and the effective interest rate of our debt are separate that structures means we currently paid cash rate of only 3.1%.

As we continue to enhance our liabilities, we expect to be able to pass on some of that increased efficiency to our customers in the form lower cost capital the continue to scale our business.

Our intention is to continue to maintain an approximate 100 basis points spread between our ground lease yields versus our cost of debt.

Slide 11 shows an overview of our portfolio.

As we focus on the largest markets in the U.S. you can see our math continue to fill in with New York and office now representing our largest geographic and property type exposures. After the large transactions we closed in the fourth quarter.

We expect this to ebb and flow over time as we build outs are diversified portfolio.

Slide 12 details the key metrics of our portfolio.

Portfolios rent coverage was at four times in our ground lease to value with a 38% both in line with our targets and consistent with our goal of creating a portfolio with AAA like credit metrics.

For the quarter annualized in place gap rent after depreciation and amortization was $147 million or a 5.6% yield on the portfolio.

Annualized in place cash rent was 93 million, including the trailing 12 months of actual percentage rent. This represents a 3.5% cash yields for the ground leases in our portfolio at quarter end.

Moving to slide 13, I'll finish up with VCA.

As we've discussed in previous earnings calls, we track the unrealized capital appreciation associated with our portfolio, where you see a representing the value of the building sitting on top of our land, which we inherit at the end of the leases based on contractually embedded diversionary rights.

At the end of the fourth quarter you CA stood at 4.8 billion approximately 11 times more than where it was when we went public as a reminder, stateful created a subsidiary called care, which tracks. This growth management has earned 15% of the carried on their share under a shareholder approved long term incentive plan after all.

Stock hurdles have been Matt.

His awards are still subject to time based testing.

And while we believe you see a represents a substantial store value. We also believe at today's stock price still is not attributed much if any value to use yet.

So in conclusion, we made a lot of important progress in 2019, taking samples from just a theory to a tangible growing business. While we're pleased with the momentum with both customers and investors. We still have a lot of work ahead of us.

Efficient market opportunity to tackle.

That I'll turn it back to Jay.

Thanks, Marcos just just a quick final thought.

One of our core beliefs as well as our portfolio grows through positive things will happen.

First as more building owners complete deals with us the benefit of our value enhancing ground lease becomes more apparent.

And our job changing the ground lease industry becomes easier.

We saw that in several cities last year and hope to create that dynamic in more markets in 2020.

Sorry.

We believe that as our portfolio scales the value of our business will become clearer to more investors and we'll be able to convincingly demonstrate that are growing portfolio ground leases become significantly more valuable the larger and more diversified it gets.

That makes us very optimistic about the future.

Okay with that operator, let's go ahead and open it up for questions.

Thank you today's question and answer session will be conducted electronically to ask a question. Please press one zero at this time.

We will take as many questions as time permits.

Once again, please press one zero to ask a question.

We will pause a moment to assemble the roster.

Our first question comes from rich.

Anderson with us.

See please go ahead.

Thanks, Good morning, everyone.

So.

One thing that wasn't mentioned.

But all the enthusiasm is anything that.

We can play so far this year in terms of your acquisition pipeline can you can you talk a little bit about what you're seeing in terms of the future pipeline on a go forward basis.

Yes, Thats the question.

Acreage is marcos.

So I think we remain.

Optimistic about the prospects in 2020.

If you think about the profile in 2019 some of these large transactions take a fair amount of time to put together.

So we expect some lumpiness throughout the year, but we're optimistic about the pipeline that we have built today and the entire year.

Okay.

Mentioned the.

Concentration in office in New York City.

How worrisome does that make you or does it even matter I guess, but.

Any time, you have a concentration draws my attention.

How how incentivize our you to.

Make those smaller numbers over time and sort of diversify the the leasehold.

Asset type.

Yes, it's a great question I think it's something we were.

Monitoring I think the reality as we sit at 38% of the value.

Across our portfolio. So we feel okay in insulated about some of these potential downturns that could occur in select markets.

The good thing about the customers that were doing transactions within New York City is their global or National Fund managers, and so we expect to travel with them into other markets in 2020.

But our goal is to continue to build a diversified portfolio.

Accessing every market.

Okay and then finally from me what are the timeline do you think that the Karen could actually start.

Loosing, some some amount of value.

And how might that happen will there be potentially some portfolio.

Management, where you sell some some assets and and by some with the proceeds and the gain goes into the carried or is there something else that might happen to start seeing some value in that in that program.

Sure as which Jay.

As we've talked before there is going to be increasingly important part of the story, but it's only one of three components or value.

The first being obviously the cash flows of existing portfolio. We felt we spent most of our time certainly in 2019, just trying to get people to understand.

That piece of the puzzle and I think we're starting to make some good progress there.

We're starting to see some third party research the.

It is confirming what we believe which is a large diversified poor ground leases creates ultra high quality cash flows.

A premium to where the the rest of the market true so.

Got to get back to you stung first.

I think second piece for us is to make sure that investors see the future of the same way redo. We think this is an enormous change.

Change potential for the seven trillion dollar commercial real estate industry. So.

Getting people to value what we've already done is great we'd like to be able to work with year to make sure. We're.

I understand the value of creating that same opportunity going forward.

And then the third piece will be charity care really becomes more visible as we scale as we build a larger more diversified portfolio, we were able to show people that value.

How we do that is still.

Something that we're thinking about as you saw this morning, we hired a new CFO, who I think is.

Perfectly sort of training to help us think about the best way to capture that value.

We think we can demonstrate that value on haven't reflected directly into save share price, but there are ways to really highlight at more explicitly.

That's something probably towards the later parts of this year, we'd want to think about as opposed to right now where we just want to people that understand the very basics of of investment opportunity and get people outside frankly, the real estate world to start really understanding of this consistent lots of different portfolios.

Our next question comes from Anthony Paolone from JP Morgan. Please go ahead.

Thank you and good morning, I'll start with the the carrots since kind of left off on that.

Looks like that bested you hit your hurdles can you tell us what the final dollar amount is that you'll be receiving for that.

Okay. There is no dollar amount per se.

Those are interest in the pool that is being built up in that use Carol.

Just in your best Challenge for US is still to get the market to recognize value there as Marcus.

Today, we have not seeing investors sign any value.

It's our job now to help them see potential there, we see and again as I keep saying I think as this business grows the scale of the opportunity grows we will be able to show some pretty interesting dynamics around that piece of the ground lease story right now I think the cash flow component.

It's imperative that people understand that piece of it the principal safety piece.

Ultra high grade nature.

These long term cash flows we think is unique in the marketplace.

But as that business grows and as back cash flow stream grows.

We think people start paying more attention to theres. Other assets. It's also building up in the background, which of these long term ownership positions and because we are already public company because weekend value that position every quarter and know exactly what it's worth.

We think there's a way to get that value recognize today, not 99 years ago.

Your next question comes from Cowen names with Raymond James. Please go ahead.

Thank you and good morning.

Yes, I just wanted to go back to your prepared remarks on the financing markets can you maybe just speak to the depth of that market. It looks like again, the weighted average maturity continues to to get longer at the same time, obviously the cash rate continued declines maybe just expand on your optimism on this front, particularly just given your comments that you hope to pass some of that savings along to your customers.

Yeah, our capital markets team led by brand has really done are remarkable job.

We continued to educate our equity investor base, but also work with our lender community.

We've made a lot of strives and continue to believe.

They will appreciate we appreciate about this.

Investment product, which is very long cash flows noncallable very predictable very safe.

In a world where that type of yield just doesn't exist in many places.

We're seeing more lenders come to us with the open mind about how to participate so.

Again over keep saying it's still early.

We're learning new things everyday we're sharing what we learn with both our.

Investment team, but also with our lenders and showing them why as this pool grows as we scale.

We're creating very attractive.

Places to put capital, whether youre, an equity investor whether youre lender to us.

But it really does depend on us continuing to grow the business.

So.

Our lenders are certainly interested in growing businesses that give them an opportunity to deploy capital profitably and we think more and more of them see say fold now is that kind of the company.

Okay, and then I wanted to go back to.

Rich's question, just on deal pipeline as well.

Maybe talk can you speak a little bit more to the mix. It in terms of kind of acquisition opportunities as opposed to again, you've had a lot of success on the origination France, maybe talk about that mix and maybe just as it relates to the overall mix of properties you've had some success on student housing and maybe just more broadly how are you thinking about.

Kind of property types outside of that obviously, the heavy mix towards the office and lodging as we.

Role in 2020 now.

So.

It's markets and as we've mentioned in the past the acquisition pipeline is highly episodic usually event driven.

To the extent.

Those assets and this ground leases come for sale and they fit our profile will obviously jump.

On those.

Again, I can't predict it will do one two or three.

2020 of those are very episodic we're focused on the growth engine, which is creating new singles.

As we think about the portfolio today in the portfolio going forward and we look at our pipeline.

We see continued success in student housing multifamily.

And office and selectively hospitality.

Okay I'll turn it over thank you Bob.

Your next question comes from Rich Anderson with SMBC. Please go ahead.

Okay.

I had a quick follow up you mentioned the adjustment for Fourq fair market reset Im curious how much of that is in the overall portfolio.

And is there any reason given you're building reputation for providing a differentiated ground lease is there any reason why a fair market reset type of model would would exist for forever or would you always be interested in.

Sort of resetting those situations to align more with your ground lease model.

Yes.

Core to our thinking rich.

The fair market value is they lose lose.

It creates uncertainty and ambiguity rich.

Buyers don't like lenders don't like.

It really doesn't do anybody any good we think we can improve on that model very materially. So in a few cases, where are we required ground leases that actually have that structure. We will obviously be looking to work with the customer to find a better solution.

Yeah, we've got plenty of time to do that with them. So they think about their business plans, we certainly can.

The a partner and thinking through how do we create the best ground lease.

For their capital structures and further ultimate business strategies.

Okay, Great that's all FX.

Our next question comes from Anthony Paolone from JP Morgan. Please go ahead.

Thanks, just a few follow ups.

First I think mortgage you mentioned 100 basis points spread being the bogey I missed was that on an effective yield versus the effective cost of your dad or is that going in cash on cash or how should we think about that.

It's on an effective basis Tony.

We're also looking for significant cash spread.

As well, but the way you should think about is on an effective basis.

Okay and can you.

Give us a little more specifics in terms of the debt availability, you're seeing with some of the.

Growth link ratcheted that that you all have taken down.

Where the duration is that you're able to achieve on those right now and and also kind of like borrowing spread.

Sure I think.

It's probably worth pointing out sort of our long term strategy here as to access the most effective capital I think.

From a standing start we've been trying to help educate.

Not only.

Our portfolio lenders, but everybody in the credit markets about where we fit in that world, whether you're an unsecured.

Lender or whether you're a secured lender I think that team is really focused initially on creating a proprietary and bespoke structure for.

Our assets that would give us this term that we need to match fund, which we think is in this 30 year 30 year plus context.

Our first big.

Success has been really moving out.

From what is typically a 10 year CMBS world through a much longer 30 year plus.

Liability structure that matches more carefully with the way restructure our asset deals.

I think that of the point at which were today I think its a.

Fantastic.

Fit with what we're doing today, but as this business scales and as we get larger and larger more diversification. We do think the unsecured side is interesting.

And we think we hope we have a dialogue with the rating agencies to begin having that thought process become part of the dialogue. So.

Today, I think when you think about what we're doing.

It is.

Group of life companies.

We know how long term liability structure that are trying to meet.

We're working with them on fits really nicely.

But as we grow I think you'll see you'll start to mix in as well.

Some thought around a long term unsecured strategy as well.

Okay.

And just.

Another question about follow up on on the care at the 15% than it sounds like it's a it's a bit of a moving target in terms of what you see a is over time in the realization, but is there going to be like an accounting charge or shares or something that we'll see in 20 warning and going.

Forward now that that its vested.

No there was the diminimus charge when they were granted.

Yeah, and a half two years ago.

Thats, just being amortized over the vesting period.

So it is a.

Because they are starting out the.

[music].

New thing, while others are relatively small charge.

That will be up for those.

Okay, because I think what's what's.

What strikes me as it's 15% and I'm looking at slide 13, and you're showing this $4.8 billion abuse, yet and so just intuitively it seems like Theres. This big piece of money, that's going to be moved.

To the participants in the program and just kind of want to understand that that's that's not kind of where things are today.

I think we and all shareholders should hope becomes true because that means shareholders may $4 billion that we don't think as reflected in the shares today.

Candidly, we think we have more work to get people to actually understand what we think is the right way to look at that value.

I think in all the reports we've seen on the company today almost.

Little to no value as ever been ascribe to that part of the business and.

For good reason I think when your small and Theres only a few assets in the portfolio Thats.

Probably the right way to think about it but as we get bigger as we continue to scale and diversify.

We think there's a fundamental disconnect between the value of an individual ground lease and the value of a growing portfolio ground leases that is diverse product by product type by sponsor by underlying tenancy.

So all that factors into that.

Valuation and again, we believe as we get larger we'll be able to sit with you and actually share why we believe that is.

Intrinsically very very valuable for shareholders.

But it isn't today.

Clearly not being reflected in the share price.

So we've got more work to do there but.

We want to keep tracking that number for you so that people can.

When we do have those conversations can look back and see where it's been where it is now and where it might go.

Okay last question.

Start continues we committed to its purchases of shares and safe and just wondering if we see anything happened between the two organizations and 2020 in terms of thinking through where that relationship ultimately goes.

Yes, again I think the architecture for today has been fantastic, it's given the resources the safest needs to make the impact that wants to make.

But long term we have.

Consistently said, we think the.

The people and the assets will want to be together, but I think thats still require waves in the future Tony.

Okay. Thank you.

Our next question comes from handle thank you from these please go ahead.

Hi, gentlemen, good morning.

Well I was hoping you could talk a bit more about the acquisition opportunity for for this year, but more so from a how it impacts you need to raise capital in keeping with certain Levered goals. You mentioned I think we'll leave 600 million of on your liquidity, how much buying power that give you probably need to raise more capital and then last year with let's say that year with nearly 2 billion of investments.

One thing if you care to given early read on that you think thats repeatable this year.

Sure I'm going.

Two things one.

Came into this year, a quite a bit of liquidity when we give you that number to pre we're giving you are buying power.

So.

Whether it's sitting on a undrawn revolver that we have access to or whether it's sitting in cash we try to be as efficient as possible, but right now, it's a little bit over half a billion dollars of buying power.

I think it in terms of.

What do we see the year laying out as I would tell you six months ago.

We had modeled a billion dollars as new deals for this year, obviously that feels low to us now.

But we'd like to see out everything shakes out in this first couple of quarters before we give you.

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