Q3 2020 Safehold Inc Earnings Call

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Good morning, and welcome to stay polled third quarter Twentytwenty, earning conference call. If you need assistance during todays call. Please press star zero.

If you would like to ask a question. Please press one zero, that's one zero to ask a question after.

As a reminder, today's conference is being recorded at this.

At this time for opening remarks, and introduction I would like.

I would like to turn the conference over to Jason food.

Senior Vice President of Investor Relations and marketing please.

Please go ahead Sir.

Good morning, everyone and thank you for joining us today for stapled third quarter 2020 earnings call.

On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Marcus, Colorado, President and Chief Investment Officer, and Jeremy Fox Dean Chief Financial Officer.

This morning, we plan to walk through a presentation that details our third quarter 2020 results. The presentation can be found on our website at staples Inc. dot com and by clicking on the investors like there will be a replay of this conference call beginning at one PM Eastern time today.

<unk> for the replay is 866 choose zero 710 for one with a confirmation code of 9919992.

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 when I see reports safe.

Shameful 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 the call over to our chairman and CEO Jay Sugarman Jay.

Thanks, Jason and thanks, everyone for joining us today.

Well transaction activity during the third quarter remains slow a bike and impacted by co bid we have begun to see some signs the market is beginning to fall.

And when he was the third quarter to focus on building a pipeline of transactions in our targeted asset classes in markets.

Well most of those efforts will show up in the fourth quarter and beyond.

We are pleased that our progress in penetrating deeper into the multifamily space.

Using innovative strength of our platform to create entry points into target markets like San Jose Seattle and Philadelphia.

It's been good to see everyone on our investment team busy engaging transactions again.

It's also been good to see the safety of our ground lease was once again highlighted with 100% rent received during the quarter.

And the strong growth in our earnings and revenue from the same quarter in 2019.

A stapled continues to expand its footprint across the country.

Further evidence that the low cost long term capital provided by our modern ground lease and unlock value for building owners in a wide variety of situations.

And low interest rates together with our growing scale and increasingly efficient balance sheet. I mean, we can continue to drive pricing and open up even more of the market.

Generating strong and attractive returns for shareholders.

With that as a backdrop, let me have Jeremy take you through earnings Jeremy.

Thank you Jay and good morning, everyone.

Please turn to slide three old <unk> earnings deck.

I like the quarter include strong year on year growth in all financial results, 100% ground rent collections and strong year to date share price performance.

We closed $105 million of investments since the end of Q2.

And we are encouraged by an increase in customer activity with.

With more than $200 million this potential new investments and that's fine.

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Moving to slide four let me detail this quarter's results revenues with $38 million for the quarter up 70% year on year.

Net income was $14.2 million.

159% year over year.

Earnings per share was 28 cents.

84% year over year.

For the nine months ending September 30 revenues were 115 million or 81% net income was 44 million up 96%.

<unk> share was 88 cents.

Slide five provides an overview of our investment activity.

Since the end of Q2, we closed a $105 million in new transactions $34 million during the quarter.

$71 million subsequent to quarter end in October.

These transactions have a weighted average effective yield of 5.2%.

Ground lease the value of 37% and rent coverage of 3.5 times all in line with all targeted investment criteria.

Slide six shows our portfolio growth.

At the end of the quarter, our portfolio stood at 2.9 billion, representing eight times growth since our IPO.

Pro forma for the deals closed in October our portfolio stands at 3 billion and why.

I'm one of course, there can be no assurance that we'll close any deals in our pipeline. We currently have over $200 million under signed letter of it.

Based on cash and availability on our revolver and a whole leverage targets or purchasing power to acquire ground leases is over $700 million.

On the next slide you can see the geographic breakdown of the portfolio as we continue to expand across the U.S. with a focus on the top 30 markets.

Slide eight presents the key metrics for our portfolio.

The weighted average rent coverage about portfolio was 3.7 times down from 4.0 times at the end of Q2.

The average ground lease to value was 39% up from 77% at the end of <unk>.

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As we previously mentioned, we expect our coverage ratios to moderate reflecting the ongoing impact of the economic slow down due to cold it on the real estate industry overall.

However, we continue to remain comfortable with our portfolio based upon senior position in the capital structure, a long term investment horizon and our geographic diversification.

For the quarter annualized GAAP rental and the depreciation and amortization was $157.4 million representing a 5.5%.

Annualized cash rent was $99.3 million, representing a 3.5% cash yield.

Our portfolio is 61% office, 19% hotel and 19% multi family and a weighted average lease term is 88.

Slide nine shows some detail on our capital structure.

Pretty market cap is $3.3 billion with $1.2 billion in book equity refresh.

We presently have $239 million of cash and revolver availability.

We are conservatively leveraged at 0.5 times the equity market capitalization of 1.4 times book equity.

We have $1.7 billion, a total debt at a weighted average interest rate about that it's <unk>.

Which is a 150 basis point spread to a 5.5% portfolio yield.

On a cash basis, the cash interest rate is 3.1%.

Our debt has a 31 year weighted average maturity.

Subsequent to quarter end, we received an additional 32.5 million dollar commitment to our revolving credit facility from a new banking relationship, bringing the total capacity of our revolver to $557.5 million.

Moving on to slide 10, the unrealized capital appreciation in our portfolio stood at $5.1 billion, representing 12 times growth since our IPO, but a sequential decline from $5.2 billion at the end of last quarter.

We determine you see a based largely on CBR reappraisals and.

And as each asset is typically appraised on an annual basis.

After it has acquired the decline represents part of the impact of the economic slow down due to co bid on the value of the property sitting on top of that.

In sum our portfolio has demonstrated its resilience despite the challenging economic conditions.

Although we are pleased to see growing activity in our pipeline and increased real estate transaction volumes.

With that let me turn it back to Jim.

Thanks, Jeremy.

The creators of the modern proudly some three years ago. We are now focused on demonstrating its benefits to more owners in more situations.

While we continue to educate the market on the growing number of ways or ground. These can enhance value for building owners.

We're also working to help more investors understand the compelling value created by our growing portfolio and our national scale multibillion dollar platform.

So despite some of its temporary drag on market activity and its impact on values in certain markets remain.

We remain quite happy with the progress we've made reinventing the ground lease sector.

And in establishing safe <unk>, the leader and standard bearer for the modern ground lease industry.

Okay, operator, let's open it up for questions.

Thank you todays question and answer session will be conducted over the phone to ask a question. Please press one zero at this time, we will take as many questions as time permits once again.

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

We will pause a moment to assemble the roster.

Our first question comes from Nate profit with Berenberg. Please go ahead.

Hey, good morning, guys.

I wanted to touch on investment activity on that on that and kind of dig into that 34 million in transactions in the quarter, maybe just let us know where those transaction, what where the property types.

I think you mentioned multifamily and then.

And then the effective yield 5.2% it was a bit below average again I'm just wondering if there's anything to note there.

Sure Nate Hi, Mark.

[laughter] well, let me take the last question and then markets will walk you through what's going on in the booking however, we're really pleased with.

Our our real penetration into this multi space as I mentioned in my remarks that you know we have become a lot more efficient and can start to really drive pricing here our law.

Our long term goal is to create a margin through our debt cost and with the overall cost of debt going down you know, we can drive pricing or being more efficient on our liability structure or being more efficient with our balance sheet, we're seeing the benefit of being able to pass some of those efficiencies onto our customers.

And so as long as the spreads and they are always are holding up well. We think VR away is is really dependent on where the interest rate complex is but its that spread to our cost of debt that really drives our business and with our cost of debt declining or we can pass along some of those savings to customers and.

Open up even more of the market.

Thanks, Jay made in both Jay and Jeremy alluded to this we're starting to see that the markets fall and customers start to engage with us pretty dramatically. So in the quarter and subsequent to the quarter end, we closed on three.

Brand New class a multifamily transactions, one in Seattle, Washington, Philadelphia, and one in San Jose that was closed in <unk> in the quarter.

All consistent with our you know methodology.

Methodology in the investment thesis.

Post quarter and to be Frank really since labor day, we've seen a dramatic pick up so when you think about the letters of intent that.

That are $200 million plus 80 per.

80% of those are multifamily transactions all the major markets across eight transactions in total and we.

And we feel optimistic about the next wave behind that so the team's done a really great job and we're taking advantage of this kind of the buying up the market.

Okay. That's helpful. And then the 200 million in letters of intent are we are you guys kind of expecting closing by year end there what you.

What should we be modeling for that I guess.

Yeah, I would say that we're we're highly optimistic that most of those transactions should close but as you know with letters of intent, we can't promise that the law.

Comment that the law close, but we feel pretty good that that number should close in Q4.

Okay, and just last question I mean, what the latest dialogue on the office properties.

Specifically, New York City.

As you know there's a lot of headlines.

And tenants are now, saying that they're in place can work from home permanently. So I'm just wondering what you guys are seeing on the ground.

Yeah, you know I think we had at our basis still remain very optimistic about the future of our position and I think we also remain extremely optimistic about the future of New York.

As the financial and cultural hub, we're certainly going through a rough period.

But when we believe in New York City long term and if you think about our basis said around two.

Around 200, $250, a profit its land value or below land value in some of our transaction. So there will be certainly some noise in the equity there certainly will be some noise reduction and valuable we feel really good about our position.

Hi, Nate.

You are.

Anecdotal evidence is more and more companies understand that.

Productivity and.

Frankly, cultural reasons for going to the office still exists.

I think you know in our own case, we felt.

We were in great shape going into Cove in.

We were able for their many many months to remain.

Tight knit, but.

But overtime, we just feel like having people.

Having people back together in an office environment.

Ups your energy ups your activity levels ups the productivity.

You know I'd be surprised if long term that are the giants systemic change here, but certainly patterns of behavior are going to change.

Transportation I think people can be more flexible when and how they commute. So there's some changes coming for sure and office.

But we think this idea that everybody's got to work from home you know that's not that's not the future of New York per Se.

I think this as Marco said this transition periods gonna be rough what our assets are some of the better assets in the marketplace.

Transportation was I think there's the physical proximity is still going to be important for many many companies. So oh, we're going to see some interesting dynamics come out of this some changes in the way.

And the way people think about nine to five Monday to Friday that made definitely got a tweak but.

But the idea that you know office is off so we're we're not a believer in.

Okay. Thank you guys.

Thanks Nate.

Our next question comes from Zack Silverberg with Mizuho. Please go ahead.

Hey, good morning, guys. Thanks for taking my question just a follow up to Nates, you guys provide a cap rate or effective yeah.

Year old range for the $200 million under LOI.

It's consistent with the transactions that we closed in Q3.

In Q3, and the pipeline so low to mid fives.

Okay. Thank you and I guess.

I guess just sticking with the investment pipeline how are the tone of your conversations with your potential partners today versus sort of the height of the fact that may occur. During the summer are you sensing any shift in tone or seeing anything that gives us encouragement for maybe even more transactions in the year ahead.

Yes, certainly so I think the team has done a good job while being frustrated during the beginning of the pandemic and the early summer we continue to hammer home to the brokerage community to our clients or potential new customers that the value of our.

Capital solution I think what we're seeing the benefit of that so.

I said before we feel optimistic about coming out of Q.

Q3 into Q4 and into 2021 that we're going to continue to grow.

Okay, and just one last one from me I'm, just any update or insight in terms of the special with some of your.

Ah Hotel partners and could you maybe provide any update on how comfortable.

Sales in your portfolio, you still feel about them long term.

Yeah, I think you know the hotel industry is definitely a right in the line of fire here, we have seen some recovery and in a number of the.

Sectors, but I think this is still a long road back for many hospitality assets.

Our largest asset is in Hawaii, which is tourism dependent.

Hawaii has been for the most part in Lockdown mode, a full quarantine mode, they've recently relaxed that a little bit.

We've talked to other major owners on the other islands in Hawaii, I think everybody remains optimistic that this is a a temporal issue and that for long term values of what Hawaii has always offered as a hospitality market will continue to be.

Come back with a vengeance when this.

Covert impact.

Eliminated so every day.

Everybody is so.

So far as you see from our rent payments everybody's paying waiting for a better day.

Marco said were safe enough in the capital stack that.

Unless this was to go on for 5678 years I don't think people are gonna throwing the towel based.

Based on 12 month operating results, but those 12 month operating results are not going to be good.

Yeah, and just great other data.

The data point on that.

Currently we're not in discussions and we haven't been with any tenants around and you sort of modification.

[music].

Gotcha, Thanks, guys I'll hop back in the queue.

Exactly.

Our next question comes from Rich Anderson with SMBC. Please go ahead, hey, good morning, everybody.

So I want to ask another question about the the multifamily sort of angle.

Is that coming at you kind of reverse.

Format or do you have some sort of specific interest in multifamily. So you are sort of leading the charge on that multifamily element to the to the pipeline.

Yeah as I think about the shape of our pipeline is it a lot of it is in the Sunbelt, Florida.

In Georgia, So think about it and what I would call active more liquid.

Better demographic long term growth prospects.

There's a tremendous amount of liquidity.

Actually surprised most of these are new.

New transactions.

There hasn't been much at that impact on for these high quality.

Quality assets on pricing, so pre and post kobin.

Or are there kind of enterprise value from where the equity is coming in so we've been focused on that because we think.

Our ground lease product is very additive to our customers. So it's a combination of us making outbound and then relationships that we cultivate cultivated over the last few years coming inbound. So we think thats going to continue to grow and scale and so is this is this largely a.

Listing owner of a multifamily assets coming to you or is it transactional where there's an asset that's trading hands and you're kind of getting your answer 13 player in that or how are these sort of coming together or is it sort of a combination of everything.

It's a combination really.

Really yes, okay.

The other question I have is on the rent coverage of 3.7 times I actually was a little afraid to that number would be much lower than that.

And I know, it's trending down for all the obvious reasons I was there anything though in that 3.7 calculation that is sort of like a.

And asked I know you have a footnote about certain estimates that you have to make but it seems to me hotels.

Centrally zero EBITDA in some cases, and that's 19% your portfolio I guess I just would have thought rent coverage would have been even lower I just I just want to sort of dive into that number how that was calculated a little bit more I could.

Yes. So if you think about Oh, sorry go ahead Jeremy.

And obviously markets feel free to chip in I mean, I'll rent coverage metrics largely based upon the latest available trailing 12 months and Hawaii right as reported by our properties. So as such the full impact of the economic slowdown due to Cobiz right, there's not yet fully reflected in this.

Metrics as we said we might expect this.

These metrics to continue to moderate as the impact of the slow down sort of flows through into those trailing figures that we have reported from our assets.

You also asked whether any of the estimated <unk> places in that I mean, we have a a formula and.

Formula and the rubric for calculating basic you think across the entirety of off about portfolio, we have fully.

Fully leased up stabilized assets. We also have some assets that are under development and so on some of those assets. We use our own underwritten estimates for example for coverage because they are not yet in a place to have those trailing 12 months reported so we follow the rubric and for the boss majority it's as repair.

Sorted by the properties that we have and we expect this metric continue to moderate as bad impact that flowed through into those okay.

Okay.

Last question for me mentioned 700 million of purchasing power.

What's what's the.

What's the wiggle room on that obviously, you're not going to go right up to 700, and then raise equity I imagine there are some number where you want to have that sort of buffer.

For absolutely hitting your debt sort of target. So I'm, just curious stocks up another 65% this year.

What you think about.

The the the practical amount of space that you want to have four you absolutely would need to raise some other form of equity.

Yes, I'll take that one rich I mean, I think in the past we have.

Tried to have at least a quarter of a billion dollars available at any moment in time.

Represents the size you know not only of the pipe.

The pipeline today, but some of the larger deals weve done in the past.

Oh, no we wouldn't want to see our purchasing power fall much below that but right now.

But right now we've got sufficient firepower to go everywhere, we want to go and the Guy.

The guys will continue to execute on that.

As we whittle that number down and start to think about 2021 needs, but we still feel like we've got plenty of dry powder right now.

Okay, Great really appreciate it thank you.

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

Thank you and good morning.

I think you've seen some of the loan officer survey showing more scrutiny on commercial real estate lending and just wondering can you talk about just what the lending market is like on on leasehold interest right now like are your sponsors able to get as much liquidity on on their leasehold.

As they were previously and is that having any impact on on what you're seeing are doing it's safe.

Al why don't I take that so I would say certainly there is an impact across both fee and leasehold liquidity I think there's a little bit of the haves and the have nots, which is why you see us focused on what I would call the habit so high quality sponsors.

High quality assets, there's liquidity, both fee and leasehold, if you're trying to lease up but a vacant office building or you know hotel asset with the zero or negative cash flow. Yeah. I think the stories are difficult both fee and leasehold. So for the transactions we're focused on there.

As a liquid active mark marcon from multiple different institutions. So we're still excited about the liquidity that sits in the space that helps our transactions ultimately get.

Gotcha. So I mean is that natural I guess is that one of the reasons I was pointing your more towards multifamily given that the GRC liquidity there.

Yeah, they've been so some of that is driven by the GFC, but there are some office in our pipeline of high quality long lease you know, we're looking at hospitality assets that we think.

All are compelling from our basis and there is liquidity.

Multi is it's been a good.

Good for you know Q3, Q4 prospects and will continue to be but we remain optimistic that you know for high quality assets, there wont be liquidity.

Got it in and in multifamily since it is a decent part of the pipeline and the deals you've been doing now you always think about the yields for the sponsors on Robert being in the fours. What is what is sort of the the return enhancement data sponsor gets doing.

It's where the safe structure with or without leasehold loan versus just the traditional straight up mortgage.

Yeah, that's the pitch, we thought we make our customer and we think they agree with it is on a current cash on cash basis, you you're increasing the return 100 to 200 basis points, depending on the lease hold leverage and ultimately your ire ours over a five to 10 year olds are 200 to 500 basis points higher so very compelling in a highly can.

Editing environment, even pre post.

Most of it.

Okay, and then last question.

You gave to the effective yields on the deals are basically that youve been doing.

And can you talk about I don't know if you originated any of a sort of a matched sort of like cash flow debt that you've done in the past on any of this and so I was wondering if you talk about just what the what the spreads look like on that right now.

Yeah, we're still still targeting about 150 basis point spread that Jeremy mentioned in his remarks.

Sometimes we do a little better than that sometimes to do little less than that but that is that's still the benchmark for us.

Okay. So that would be the you know again take pick hundred 50 off the five to roughly and that's kind of where your effective costs are on on the type of debt you all have been originating for last year or so.

Yeah, it depends on the a product type and Uh huh.

Particular lender, but you know that that's the.

Centering sort of spread that we're seeing.

Okay. Thank you.

Our next question comes from Ki bin Kim with Trust Securities. Please go ahead.

Thanks, just a couple of follow ups.

Give any kind of color or details you can provide for your.

Hotel tiny and that liquidity they had no <unk>.

Hawaii will come back at some point and all those things I'm. Just curious is the financial position is there for your attendance to actually I get through that period.

Why don't I take the sorry go ahead no go ahead <unk>.

I'll I'll use the Hawaii deal as an example, there's over $500 million of capital between.

Between debt and equity.

To me your and the equity is a European engine. So when we think about access to capital we feel highly confident that they will continue to support the asset.

I think that the matic, you know sort of capitalization flows through all of our assets.

Okay.

And in terms of your acquisition the 5.2% yield.

Excellent I ask this every quarter apologies, but that's not.

That's not the GAAP yield right that is the yield assuming.

Typically I think you added like percentage rent for.

That's different from multifamily, but is it really.

Is it really the GAAP yield or is that from other variable embedded in that number.

But this quarter its the GAAP yield.

Multi with multifamily there's no typically know percentage rent so it straight up GAAP right.

Okay.

What I figured and then.

And just last question.

You guys provided the CPV and you see a disclosure and 10-Q.

You know a lot of that paper to create both I'm just curious.

From a timing perspective. These appraisals are done like once a year so like how much of your portfolio have actually been afraid.

In this kind of post quoted air.

Yeah Yeah.

I think when you look at how its run since we started the IPO, we typically get about 15% to 20% done every quarter.

Because they are done as Jeremy said annually. After the date of closing so it's a rolling process.

Process.

Don't do everything in the portfolio and one day wait a year.

About 15% to 20% comes.

Comes up for renewal.

The portfolio grows we'll never will never have 100% of the stuff done in 112 month period, because theres, a bunch of new deals being done.

Feels like when we went back and looked at this number 15% to 20% a quarter feels like a number that are happening some core.

Having some quarters will be more than that some quarters it might be even a little tiny bit last but.

Call it 15% to 25% is kind of the range so it'll take.

So it will take four quarters, they got through most of the.

Previously existing portfolio, but obviously, the new deals coming on during that 12 month period have to go through their own cycle. So.

I would I would kind of say, 15% to 20% number feels like a good number to use.

Okay. Thank you.

As a reminder, if you'd like to ask a question. Please press one year at this time. Our next question comes from Stephen month with Raymond James. Please go ahead.

Hi, good morning.

Hey, I got a high to start with a another follow up on the pipeline, but just trying to look at maybe a optimistic or pessimistic economies. So I mean.

You know are there anything you're looking at that and falls the pipeline growth is it is it out.

Outlook on the next round of stimulus is it something to do with getting the election in the rear view mirror and having an idea of what policies are going to be pursued by by a whatever parties in the oval office and controls.

Controls Congress or are there other things on the the that you think will unlock are on fall kind of the pipeline and let that number build and you know and Conversely is there some type of distressed or anything you're looking at that that might cause an increase in borrowers with unencumbered assets coming to you to put a ground lease in place to provide.

Them, some liquidity to make it through.

You know three or six more months or what we may need to to get.

To get to a return to normal. So so maybe an anything you think on both the pipeline and than anybody Howard discussions going with borrowers that have assets that are currently unencumbered.

Well, let me, let mark was talking about some of the specifics you're mentioning I'll just tell you in terms of.

The topline growth is really going to be driven by real estate market activity picking back up in the air.

Multiple times, we feel that.

Feel part of that is just people getting back to work.

[laughter] I think earlier in the call you know.

You talked about what it was like earlier in the <unk> Co. good crisis.

I think to a person we can tell you we're trying to close real estate transactions remotely.

Lawyers on a remote.

We just don't have an ability to to close real estate deals remotely so.

So I think.

I think the fact that people are starting to get back into the flow is going to unlock real estate transactions and when real estate transactions unlock.

Ground leases can be a really important solution tool.

So that's the general drift that we feel is as as people start to.

Get back to work figure out how to work around the Cove. It impacts best they can we've always said, we will get our fair share of transactions and we're definitely seeing that dynamic.

With respect to what kind of transactions are happening all throw that to markers.

Yeah, you know I think this is you know, we're we're seeing things thaw.

Optimistic about the progress we've made I can tell you the dialogue.

Dialogue between our origination team and customers is certainly better than it was a couple months back and we feel good about the pipeline I think it is entirely situational. So there are certain equity owners, who are waiting for the election happened there certain equity owners are trying to make a decision I think certain asset class is still have to go.

We will a capitulation on what value is post cove, it and I think that hasn't necessarily occurred for a lot of but asset classes.

Office as an example in some of the major urban and urban markets or hospitality. So I think we're going to continue to get our fair share of what occurs but that sort of unlocking and capitulation hasn't truly happened.

Yeah, we're focused on groups of unencumbered asset bases were certainly a very very great cost alternatives.

But we are getting our fair share do you think about the transactions we've closed.

Along with the pipeline and you know that's on over a billion dollars of enterprise value a transaction. That's it's decent volume when you think about some of the slowdown and we see that picking up.

Great and to kind of piggyback on that I guess I want to jump to the competitive landscape just what you're seeing out there. It seems like you're the spreads youve referenced of that asset yield versus financing costs remaining relatively stable. You know is that in the face of increasing competition or are you really not seeing a significant increase in competition.

And yet I know you've got a number of advantages being a first mover here.

But can you talk about the competitive landscape you see in the market today.

Sure I mean, as we said.

Yeah. This is a business we had to invent from scratch. So we've enjoyed being the front runner with really very little competition.

I think as Weve showed people.

Show people the power of the concept why it is radically different than.

A lot of people used to think about the ground lease industry.

We certainly expect copycats to show up.

But what I'd tell you Steven there hasn't been a lot of transaction activity. So we don't.

We don't expect to see that competition still until there's a little bit more recovery yet in the market activity so right.

Right now yeah, we feel really good about the pipeline we're building but.

Its not like Theres billions of dollars of transactions lying around.

We're having to fight for each one so I think theres still a period of time here, where yeah, we'll see we'll see competition for sure and some.

Somebody's going to try to copycat us here, but.

We've learned a lot in three and a half years, but.

Not so easy to learn on your own and yeah, we keep a few secrets to ourselves so.

We'll keep pressing ahead.

Again, the more efficient we get the more we can provide.

Provide.

Benefits to our customers, including driving price.

That should keep us in a clear lead no matter who shows up.

Right. Thank Jay and then last question and again you may have covered it kind of given the lack of transactions, but you know when you think about the co financing with with five star and Safe Gold. You know are you. There are active discussions going on there and then I guess sort of picking back from that are there.

Are there.

Theory loans in the star portfolio.

Were originated prior to safe holds business that may be could be modified or refinanced into some type of combination that that would benefit all parties or is there any any type of refined modification options for a joint product that that may be available.

So, we certainly pitch or depending on the situation our one stop capital solution, it's not a perfect for every situation there either.

There is a.

As I said before there was a fair amount of liquidity in the market, which is great. So depending on the situation given our cost of capital we try to pick our spots and here and there we we pull off that transaction and we certainly mine our balance sheet for any situation that star that could potentially create.

People ground leases as we've done in the past.

Great I appreciate taking my questions have a great day.

Ladies and gentlemen, if youd like to ask a question. Please press one zero at that time.

One moment well wait for the question.

Our next question comes from Jade Rahmani.

KBW. Please go ahead.

Thank you very much good to hear from everybody just big picture.

Just a big picture question for Jay what the real estate market is going through a potentially a drawn out correction lot of price discovery needing to play out, particularly in the office sector, which is.

Which is what I'm, primarily focused on and.

And considering the downstream risk of potentially higher inflation do you think ground leases still represent the best risk adjusted investment today.

Just some color we've seen opportunistic real estate deals in the low to mid teens on a senior secured basis rescue capital situation that similar terms and higher.

At attractive bases, while at the same time people do expect the office sector and for a day of reckoning base.

Based on lower net effective rents in gateway markets, but also what we work I think showed the market is there's definitely a lot of anachronistic lease structures throughout the office sector and host Covance you might expect.

Less lessees be less willing to commit to 10 year leases and stuff. So.

The Big question is our ground lease is still the best risk adjusted returns and also could you anticipate similar to Steven's question I saw in sales in combination for assuming you are much more complex and structured nuance transactions, which is really what I started sports say historically was.

Sure Jade I mean, you've talked a lot in there. So let me see if I can unpack it a little bit.

You know there there's an election coming up it's going to have a major impact on some of the states and cities that you've <unk>. Yeah, you would think about us as a gateway markets.

In New York and.

Big California cities are going to be depend.

Dependent on some sort of help to really get back on their feet quickly. So we'll need to see which way that goes before we can give you a better sense of timeframe, but we're in a business that has very very long time frames and so when we look out.

Not in quarters not years, but decades or we continue to believe these are these are major cities with major economic and cultural reasons and financial reasons why they will remain in great cities and so our thinking is more focused on that.

Whether there's going to be some temporary changes were looking for long term systemic trends and again I think I said earlier, we don't believe the office segment. It is obsolete. We think there will be tweaks there will be changes there will be no.

Flexibility points, but.

But the gathering of human beings to be productive and exchange ideas. We don't think is obsolete and we.

And we don't think that.

Digital communications is completely made being in the same office something that's growing.

Something that's going away, so I guess I'm optimistic long term and obviously realistic short term.

There's going to be paying there's going to be changes buildings that are not able to provide what tenants want are going to suffer and so you are probably right. There's there's a change going on there.

Does that impact our our return profile.

So far not really we think ground leases do represent very attractive.

Capital to our customers and a growing ground lease portfolio represents a very attractive investment for all.

All kinds of investors here's here's the real question I think you're asking riches, we agree with you there are.

Spot opportunities right now that looked really tempting and believe me and I start we see a lot of those and it would be very easy to go try to make up 15% or one or two year investment and feel really good about it but.

But none of those are businesses and there is a very valuable thing embedded in ground leases, which is 99 year call protection. So.

So when we have a competitively advantaged platform that can put out money that is good.

That is good for our customers and very good for our investors and it stays in place for a long long time.

We would actually argue to you. It is still the best risk adjusted investment, we see what I'll call it risk and time adjusted investment.

Sure you can make a really good short term return right now in lots of places you can probably deployed some pretty good size chunks of capital what is almost certainly going to come back in a relatively short period of time when things normalize and then you got to either do it all over again or if there's no distress you may not be able to do.

Any of it and I.

And I think thats, where ground leases by being the one who reinvented the industry.

These early market.

Market opportunities you know we are the one setting the pace and setting the pricing and we think we've proven it's really good for customers and it's really good for investors and that hasn't changed so well keep doing what we do best.

Other people will make really good returns on some short term temporal opportunities.

But if you give.

That's a choice right now I think we continue to tell you we want to put capital into the ground lease ecosystem.

Thanks, very much and two quick follow ups somewhat related but not entirely directly number. One is do you still think that secured debt is the best financing strategy for safe balance sheet and number two is you know typically internalization transactions, we've seen a couple recently take place when the.

Manager RAIT eclipses, the market capitalization of around two and a half billion that tends to be the size that are rationalizing the absorption of the managers gnh structure or you know.

Warrants a pad of the contract.

You know if you could provide any comment on either of those are both of those two subjects that would be appreciated. Thanks very much for taking the questions.

Your first question is really insightful because we think.

Certainly the secured funding strategy has been the right one for us to date.

Again, we are [laughter], we're inventing a business from scratch or inventing the liability structures from scratch.

It's a difficult task to up the agencies on an unsecured basis to go first with no data and no real industry benchmarks to look out so the secured.

Financings that helped us start to create that benchmark dialogue. So they can see how private market participants are evaluating the risk the safety.

I think the fact that we've gone through coded with a 100% rent payments is also a helpful. Fact, so certainly part of our long term plans would be to continue to think about.

Think about unsecured as a it was a great.

Part of our liability strategy, but it was not really realistic coming out of the box.

As time passes and certainly three and a half years, then we certainly feel like that can be start that conversation.

You know as part of our.

Dialogue with the agencies.

Your second question was what again.

About a potential.

Oh, the internalization of the management contract yeah, yeah. So.

So look I mean, we certainly have said.

I said in the past that that May make.

May make a lot of sense I think you know two and a half.

Two and a half billion is not a magic number in our world. We're still building this business.

We still get a lot of value by having all the resources of I started not just financial resources, but their network the the capabilities that safe hold on its own could not replicate.

<unk> cost structure. It always stars not something its April could ever replicate right now.

Economically so there's still a lot of benefits to sharing resources, but you're right, there's going to be a moment, where that may not be as clear and.

I think both boards are you know open open minded and thoughtful about.

Ways to makes maximized value and if that's the way to maximize value. It will certainly be on the table. It isn't probably today a conversation that actually is going to maximize value. So.

<unk>.

Just tell you it's not it's not a it's not a conversation happening right now.

Thank you very much.

Our next question comes from Derek Hewett with Bank of America. Please go ahead.

Good morning, everyone. All of my questions were addressed but one quick housekeeping items that the 10-Q is not out yet so DNA expense was down about a million dollars quarter over quarter, what was driving that improvement.

That's just been one time board payments that are made around the annual meeting.

Okay all at once.

Okay. Thank you.

Mr. Food, we have no further questions.

Okay, great. Thanks for the lively discussion everyone. If you have any additional questions on today's earnings release. Please just feel free to contact me directly.

Tiffany would you mind, giving the replay instructions once again, thanks, absolutely. Thank you ladies and gentlemen, this conference will be available for replay after one PM Eastern time today through November 5th at Midnight, you May access 18th <unk> Executive replay system at any time by dialing 186 Nick.

207.

One zero for one.

Entering access code 9919992.

Those numbers again I want to pick six.

071 through four one.

An access code of 9919992 that does.

That does conclude our conference for today. Thank you for your participation and for using ATP conferencing.

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