Q4 2020 Safehold Inc Earnings Call
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Good morning, and welcome to safe holds fourth quarter and fiscal year, 'twenty and 'twenty earnings conference call if.
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If you'd like to ask a question. Please press one zero, that's one zero to ask a question.
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 Jason Fooks Senior Vice President of Investor Relations and marketing. Please go ahead Sir.
Good morning, everyone and thank you for joining us today for safe holds earnings call.
On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer.
Mr Alvarado, President and Chief investment Officer, and Jeremy Fox <unk>, Chief Financial Officer.
This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year 'twenty and 'twenty results.
That presentation can be found on our website at Staples, Inc. Dot com and by clicking on the investors like there'll be a replay of this conference call beginning at one P. M. Eastern time today and the dial and for that replay is 8662 zero 710 for one with a confirmation code of 12167.
93.
Now before I turn the call over to Jay I'd like to remind everyone that statements and 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.
Safe hold 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 chairman and CEO Jay Sugarman Jay.
Thanks, Jason and thanks for all of you for joining us today.
Sorry for the fourth quarter was a busy one and set us up very nicely for 'twenty and 'twenty one.
And the 13 separate ground lease transactions closing.
Able to provide a growing pool of customers have access to our value enhancing modern ground lease and further extend the ground lease ecosystem, we've been building over the past for years.
Our push into the multifamily space continued to bear fruit as well increasing multifamily as a percentage of our portfolio and enabling us to break into several new top markets deals and Denver, Dallas, and Atlanta complemented the multifamily transactions and Seattle, Philadelphia, and San Jose that we previewed in our third quarter call.
With the market's growing appreciation for the benefits of a modern ground lease we continue to look for ways to provide our customers with the most efficient capital possible and.
And we're very pleased to recently receive <unk>, one and triple B, plus corporate credit ratings from Moody's and Fitch respectively.
Investment grade ratings and enable us to be more efficient and more nimble and bring down our cost of capital.
We continue to target a spread to our cost of funds and the hundreds of 125 basis point range.
And should be able to access more of the market with the increased efficiency investment grade ratings create.
In addition, with our portfolio now surpassing 3 billion.
And the embedded capital appreciation, we call UCA exceeding $5 billion.
We've now reached the scale and diversity, where we can talk not only about the value of the long term rental screens of our portfolio but.
But also the value building and the portfolios long term real estate ownership interest.
During 2021, we hope to demonstrate our commitment to meeting our customer needs and new and innovative ways.
As well as demonstrating to investors for long term growth opportunity ahead of us and its value to our enterprise.
We're excited to have established modern ground leases as an important tool for real estate owners around the country.
And excited to make available to public shareholders. This unique and uniquely attractive asset class.
With that let's have Jeremy to take you through the quarter and your and numbers Jeremy.
Okay.
Thank you Jay and good morning, everyone.
Beginning with slide three with highlights for the quarter and the year.
2020 was a very strong year for safe hold we collected 100% of our ground rents. Despite the adverse economic impact of COVID-19, and stress testing the safety of the cash flows from our ground leases.
Earnings per share grew 31% year over year, as we accretively deployed capital and scale the business.
And save hold was the best performing they wheat stocks for the second consecutive year, reflecting our attractive combination and safety and growth.
And the fourth quarter was a very strong quarter.
Reflecting growing investment momentum.
As Jay said, we closed on 13 ground leases, our largest quarter to date by number of deals.
Totaling $331 million of new investment activity.
For the full year, we closed 21 ground leases totaling $503 million, bringing.
Bringing our portfolio to $3 2 billion.
And as we look ahead, we believe we are well positioned for growth and 2021.
We have recently been awarded investment grade credit ratings from Moody's and Fitch as Jay noted that will broaden our access to flexible and efficient capital.
And which we consider and important competitive advantage as we continue to scale our business.
As at quarter, and we had approximately $700 million and purchasing power and.
And we recently Upsized, our revolver to $600 million.
Moving onto slide for all detailed a quarters of results for the quarter revenue was $39 $9 million.
Is $29 $6 million for the fourth quarter last year.
35% increase.
Net income was $15 $3 million versus $11.2 million and the prior year period.
And increase of 37%.
And earnings per share was 29, and especially as 25 cents and the prior period.
For the year. This brought revenues to $155 $4 million up 66% net income and to $59 $5 million up 76% and.
And earnings to $1 17 up 31%.
Slide five provides an overview of our investment activity and portfolio growth for the quarter.
During the fourth quarter, we originated 331 million and 13 ground leases, we continue to grow customer awareness and adoption with eight new clients across a diverse set of geographic markets.
And nearly 80% of the capital invested this quarter was associated with multifamily properties.
The ground leases, we closed during the quarter have a weighted average underwritten and effective yield of five 1%, which assumes 2% long term growth for any acquired ground leases that have variable rent escalators.
And a weighted average for 0.7% effective yield on a GAAP basis, which does not include any growth from a quiet ground leases with variable rent escalators.
These transactions had a weighted average ground lease to value of 41%.
And underwritten rent coverage of three eight times.
All these new acquisition metrics are in line without publicly disclose targets.
And our portfolio and $3 2 billion represents 10 times growth since our IPO, three and a half years ago.
Okay.
On slide six you can see the geographic breakdown of the portfolio as we continue to diversify our footprint across the United States focusing on the top 30 markets.
Slide seven shows key metrics for our portfolio.
As at December 31, our in place portfolio generated an annualized yield of five 4% and.
And then annualized cash yield of three 5%.
The weighted average rent coverage and the portfolio was three four times down from three seven times at the end of Q3.
And the average ground lease to value was 40% up slightly from 39% and Q3.
As we've previously discussed and we expect these coverage ratios to evolve with the credit cycle and reflect the ongoing impact of COVID-19. Nevertheless, we continue to remain comfortable with our portfolio based upon a seniority and the capital structure.
Long duration investments and our broad geographic diversification.
With the new multifamily properties, which were added to the portfolio this quarter multifamily.
Multifamily increased to 26% of our portfolio up from 19% last quarter and office decreased to 56% from 61%.
And hospitality decreased to 17% from 19%.
Yeah.
And our weighted average lease term is 88 years.
Turning to slide eight during the quarter, we raised $121 million of common equity for a follow on offering at a price of $61 a share.
As I mentioned, we were the number one performing navy stock with a total shareholder return of 82% in 'twenty and 'twenty.
And a 47% annualized return since our IPO.
Okay.
On slide nine as Jay noted safe hold was awarded investment grade credit ratings earlier this week.
And by Moody's at B dub line, one and by Fitch and Triple B plus.
These agencies made these decisions based in part on the safe holds overall portfolio risk.
Long duration of compounding cash flow streams.
Our superior asset quality, and our scalable business model.
This was an important step for safe hold as we believe these ratings will be a meaningful competitive advantage by providing us increased financial flexibility and diversifying our funding sources with potential access to the deep investment grade unsecured bond market.
Slide 10 presents our capital structure.
And our equity market capitalization was $4 $3 billion with $1 $4 billion of book equity.
At quarter, and we had $233 million of cash and revolver availability.
And as at quarter, and we were leveraged 0.4 times debt to equity market capitalization.
And 1.2 times debt to book equity.
With $1 $7 billion and total debt.
The weighted average interest rate.
Of our debt is 4%.
Which is a 140 basis point spread to all five 4% portfolio yield.
On a cash basis for cash interest rate was three 1%.
Our debt has a 31 year weighted average maturity.
And during and subsequent to quarter, and we broke and two additional banking relationships into a revolving credit facility, bringing the total capacity up to $600 million.
And moving to slide 11.
And I'll finish with E C E.
At the end of the quarter and.
Realized capital appreciation accounts stood at $5 $5 billion up from $5 $1 billion from the third quarter, which represents 12 plant.
For the estimated value of the buildings, we are set to inherit at the end of our leases.
As well as a measure of the aggregate value of the subordinate capital protecting those leases.
Additionally, as the portfolio continues to scale and.
And you see a accounts continues to grow.
We believe that this is an important element of and investment in safe home.
And we intend to spend more time going forward highlighting its values.
In conclusion, it was a strong quarter marked by a record number of ground leases closed along with the new investment grade credit ratings positioning us well as we look ahead and we look forward to continuing to execute on our strategy in 'twenty and 'twenty, one and with that I'll turn it back to J J.
Thanks, Jeremy and what's that comprehensive overview I think I've kind of suggest for just go ahead and open it up for questions.
Operator.
And thank you today's 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, please press one zero to ask a question.
We will pause a moment to assemble the roster.
Our first question comes from Zach Silverberg with Mizuho. Please go ahead.
Hey, Hi, good morning, guys.
So first of all congratulations on the investment grade rating I, just wanted to dig into that and can you talk about the balance sheet, a little bit and how the investment grade rating.
And means to the enterprise as a ship to any strategy for.
For the firm moving forward and as I say to open any doors and might've been closed previously.
And that's not so great question and I'm going to throw it over to Jeremy and a second for what I would tell you is.
Investment grade and you know not only gives us from incremental pricing power.
Incremental financial flexibility as Jeremy pointed out but.
We've seen this and always star long ago. It really opens a bunch of doors. It makes us a more responsive to our customers.
It gives us certainty and speed of execution and.
So it is a big deal and and we have definitely and looking forward to being able to deploy and.
And not just for financially, but also and our ability to serve our customers. So we do think it's it's more than just the and financial issue. If it goes and it really enterprise wide, but let me flip it to Germany.
Jay. Thank you I think he said it all that it's you know it's it's a we feel great obviously happy and our investment grade rating enables us to broaden our access to the capital markets and as you expect we would be all forms of financing available to enable us to continue to prudently manage our balance sheet.
Our customers and in and grow our business.
I appreciate that one more for me just from the deals that closed in for Q. It seems like it was a bit of.
Bunch of smaller deals was a strategic decision on your part or is this just how the cards fell as a result of the pandemic and maybe.
Any.
Any color on the perceived a differential in pricing as a result of smaller deals.
Mark and it's why I throw that one for you.
Great question, Zach So yeah, I think they're they're smaller, but they're still high quality institutional deal. So if you think about you know ground leases and in and around $30 million. The average size, you're talking about $100 million assets, So high quality sponsors high quality.
Markets Youre.
And you're seeing us continue to push into the multifamily space.
As Jeremy noted, 80% of the transaction volume this quarter was in the multi space and as we look forward to 'twenty, one and we're going to continue to push that strategy.
Thanks for all you have a floor.
Our next question comes from Rich Anderson with S. M. D. C. Please go ahead. Thanks, good morning, everyone great quarter.
So let me go to the I G question or two here first.
So I understand it creates flexibility speed and and all those good things and and no ones no one would be complaining about getting the ratings but.
But does it not also risk your.
Your average lead your average term on your debt to come down and and how do you manage that because obviously matching assets to liabilities and an important part of this story as well.
Sure I mean, I think we haven't really changed our thought process around the longer term match funding approach on our liabilities.
And we can fill in.
You know some of the tenders are we think that's prudent as well and.
But you know our goal is to be a long term borrower, whether it's secured or unsecured and given the duration of our assets.
But certainly the ability to fill in some of the tenders and there's a good thing and you know we're going to see a price advantage here and we will see it and the revolver.
Likely see it and our ability to work those.
Sweet spots of the market.
And so I think you'll see US you know.
Continue the same liability strategy, but just be a little more fulsome and how we can think about it and really work well and just.
Just as hard on the liability side as we do them and.
Asset side, yeah, Okay, and and in terms of how you guys are structure, you've kind of had this target of two parts debt one part equity and it's not where you are now, but I'm curious how the rating agencies view debt and context with giving you the rating or were they able to see this as a very unique.
Business model and and kind of focused more on.
Where you are and the capital stack and the safety metrics and all of those things does that take you know significant more precedence and their mines and and getting over the hurdle.
Jeremy do you want to take that I know you worked long and hard with the agencies to give them a long term business model. So I'm wondering if you and fill in some color for rich.
Rich I'd look I think it's a great question and and as to specifics I think I'd have to defer you to the rating agencies and debt credit reports that day by the published and we'll be publishing soon which detailed that thinking.
And.
And the detail that thinking on this matter I mean, the rail we share with them as we have with you and the market as a whole the way, we think about our assets and the way. His jays largely just said the way we think about managing our balance sheet, we've shared with them our target investment criteria, we've shared with them our targets.
Oh target capital management criteria and strategy and this is the conclusion they've come to Okay fair enough and then last for me.
Talk a little bit about the you see a or I'm you know the carrot and in terms of the you know kind of the way.
You know you could be compensated or everyone could be compensated if and when that.
It gets monetized I'm wondering if 2021 will be the year will you really start to look to ways to.
Get some value out of that five plus billion dollar you know long term sort of.
And you know asset or security or whatever you want to call. It as well that'd be worked on to do that and sort of educate the market and that or is it still too soon as 5 billion plus still not enough to really start moving hard on that carrot issue.
And.
You know it is a.
Important part of the value proposition, that's very full but you've kind of watched us do this rich you've been there from the beginning you've seen us for three of the educate the market and the Cup.
Or understand the benefits of ground leases and.
And then we have to help educate the market on the rental streams.
And the benefits from the combination of long term call protection and safety.
Love market yields to maturity.
'twenty 'twenty, one will be the beginning of the education process on the next big piece.
Which really is this.
<unk> ownership interest.
But we know we can value today.
And we can have third parties tell us whats sitting on top of our land and today's dollars or we can tell you that generically what how fast do you think it's going to grow and we can tell you. What you know most real estate discount rates for diversified institutional portfolios all and so we think for all the building blocks are there, but there will be an education process.
And just like we went through and on the customer side and on the cash flow side and.
And we think this is a sort of a third leg of the stool.
But 'twenty and 'twenty one as is.
The starting point, we reset and the past until we get big enough and diversified enough for it and it will just track it for folks.
And we've been doing that for almost four years now and we think you know crossing the $5 billion, Mark is and sort of a mark a milestone and now lets us really.
And show Tangibly, what what we think is the next big piece of the puzzle.
Alright, great. Thanks, very much folks.
Our next question comes from Nate Crossett with Baird. Please go ahead.
And thanks for taking my question and.
Was wondering if you guys could give some color on what the current pipeline looks like and I think last quarter, you put your letters of intent and the debt and I didn't.
Anything this time, so I'm just curious what under Aloe line now and if anything and I know you guys and I'll get formal guidance, but what's kind of your expectation for transact and buy and I guess at least and that very fast as yet.
Marcos you want to take that one.
Sure.
So as you guys know historically the business has been relatively lumpy with large transactions periodically occurring and driving a specific quarter's volume.
And so we've stated that we look to double our portfolio over the next three years.
And internally I would tell you we'd be disappointed if we didn't hit that target.
With respect to the pipeline.
Legging off of Q4, we feel really optimistic about the growth prospects and the first half of this year and overall and 21.
Okay and is most of it still coming from multifamily or are you seeing some more opportunities from moffitt.
And even hotel.
Yeah, we're continuing to drive and the and the multifamily space and we're starting to see opportunities and the office and hospitality space selectively.
Okay.
What about maybe you can just comment on competition and you know we've seen a couple of other funds pop up and the last few months.
Just curious to get your guys' thoughts there and obviously, it's a really big opportunity and and.
Enough for you know probably everybody to play but are you seeing any type of.
Competition pressure when you are.
Competing I guess for trend.
Well I'll take that one and I made I think for when we created this business for years ago. The view was we wanted to become a mainstream part of the commercial real estate.
Market and.
And just like net lease have become and so.
So you know we always envisioned it as being a very large regular way part of the business, so new entrants spreading the gospel and and.
You're making a part of that mainstream.
Oh.
Component of how people think about capitalizing their deals.
And the natural evolution.
And we expected to see and if.
Frankly need to see to and know that we succeeded in making this for what it should be which is a valuable tool for owners around the country.
Well the truth is we havent seen a lot of competition in the past and we think you know people are starting to understand how we do what we do.
But I would tell you what they're shooting out is probably what we looked out a year ago and.
And you'll see us continue to be the innovator and the field and bring out ideas that.
You know bring this new more efficient capital for more places.
And the country and for more owners.
Owners developers and sponsors and so on.
I think for the next natural lag here is more and more adoption by the marketplace.
The modern ground lease has a value enhancing tool.
Further innovation and expansion by us.
Certainly the investment grade ratings gives us the chance to do that even more quickly and then for other people trying to fill in and.
Where we can't be and when.
Certainly I'm fine with that and we think actually having others.
It showed the benefits if they do it the right way and if they don't make the mistakes of the past and it'll all be a good thing.
Okay. That's helpful. Thank you guys.
Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, good morning and May.
Just looking back to that for a few acquisitions could you go through what it what were some of the events that drove those whether it was property being sold or otherwise and what made them a good fit for faithful.
Mark I'll take that one.
Sure Hey, Caitlin.
So at most of these were based on either a recapitalization refinance or a sale.
If you look at the 13 transactions that we closed five were with existing clients.
So eight of those were I call it organically sourced.
Versus repeat client business. If you look at the year overall of the 21 transactions we closed.
Three of those were marketed ground leases, so 18 of them were <unk>.
Organically sourced by the team.
And we see that sort of trend continuing.
As I mentioned before we're really pushing on the multifamily space, we're seeing a lot of traction and the sunbelt markets.
Selectively looking at office and hospitality.
Really really focused on quality and and long term stability of the markets.
I think you'll see a lot of similarities in Q1 Q2 from what we what we accomplished in Q4.
Got it and I know somebody kind of already asked about this before but in terms of the volume is going for I know you just mentioned similarity going for it but I think he might have been talking about type not necessarily volume, but I guess anything else you can add in terms of I mean, looking historically the volume of acquisitions that you guys have made.
I've been volatile. So do you think going forward debt, what you achieved in the fourth quarter could be indicative of some sort of normal or is it really hard to have a normal and we can continue to see the volatility that we've seen over the past few quarters.
And I think youre going to see some of that quarter to quarter volatility.
These large transactions that we pursue.
Pursue and have and our pipeline well and hit here and there.
I think that the bogey, we just put out there which is trying to double our business over the next three years is a good way to think about.
And I just want to make it clear we'd be disappointed if we didn't hit that target.
Got it okay.
And then maybe just moving topics to the G&A side I guess.
If I start wasn't managing faithfuls could you give some context to what the cost are faithful would be whereas that's not really the right way to think about it because we're not there yet when you think about the G&A load longer term and when.
And when and if the contract expires in 'twenty and 'twenty three.
Are you yet thinking about the impact that could have to faithfully and do you expect it to just renew or how should we and investors be thinking about that.
Let me just talk about the sort of the contract and some of the dynamics there and then Jeremy can fill in any things like this.
The view here was you know we're building a very long term business to give it back from you.
Ramping scale and potential.
Potential we've used all the resources, we could from our star.
Primarily on the growth side as you know our asset managing.
Ground leases and there's not a large expense item and there's tremendous tremendous operating leverage on that side of the business, but having the scale and scope of.
Our store and it's been really helpful getting stable to where it is today and stapled scales, though and ideas.
Shared with the market is somewhere.
It was the house its approach 5 billion you start to see a different dynamic.
And what are our contractors, a long term contract and her husband and a long.
And it certainly could have some provisions.
Provisions and it but it's we're not really looking at 'twenty three is that.
With the contract.
But we do think as we have about $5 billion and assets, let's say fold.
So we and I start will look up the architecture to see if there's a way to maximize value even further.
And we love. The fact that you know it was one of our largest larger shareholders. You always stars perfectly aligned anything that makes the share price higher is no benefits for them as well. So we think it's gonna be a good time to relocate the whole architecture.
We have been the beneficiaries of being able to put 10 20, 30% of somebody's time at all and store.
And not have to pay for the whole load because they've got other assets that they're working on and the all star universe.
I think eventually we will be able to give you a sort of a F.
The FTE number for what it takes to grow this business.
And then and it was likely to be a much smaller number to actually manage the existing assets and.
But I think we're still and that growth spurt katelyn were to tell you what the stabilized number is.
And guessing a little bit too much and.
But we certainly think say for us.
Growing and scale and at some point and the future of the resource allocation will be looked at and come up with a good decision.
Germany, Ireland, and if I'm mistaken.
A J look I covered you covered all of that Kate and you asked specifically about growth and the only thing I'd add to jay's highlighting the benefit of our external management is our ability to access that breadth and depth of expertise that would be challenging for us to support right now on a standalone basis, but looking.
For it in the near term I think we would expect G&A to continue to grow as the portfolio grows and pop given the management fee and how that structure and.
That said for 2020 revenue was up 66% and G&A was up 58% showing a current positive operating leverage that Jay referred to and over the medium term as our portfolio scales.
We would continue we would expect to achieve I think meaningful operating leverage over those expenses that all the management contract.
Got it okay. Thank you.
Our next question comes from Anthony <unk> with J P. Morgan. Please go ahead.
Okay. Thank you. My first question is on the yields and the quarter came down a little bit and I was wondering if that's more a function of either the market or the skewed toward multifamily or do smaller deals come with lower yields and I'm just trying to understand if there's any.
Relations and there that drove that.
Yeah.
And at a high level remember, we're trying to generate spreads over a base rate.
Our base rates throughout.
The euro were coming down and so we.
We were they're giving our customers the benefit of.
Our business model, which is we want to make a spread to our cost of funds and our cost of funds goes lower and we can.
And actually price and were tightly for our customers.
And that's that's all sort.
Sort of a generic answer or you know markers you can talk about.
What are the dynamic with for the multifamily space in particular, but you know I think I think top line you know as long as we maintain those spreads where we think we're creating significant value.
Yes, Tony I think we're still we're still consistent with what we've been able to accomplish and are underwritten yields.
Our north of a five and we acquired one ground lease that has a short duration. So it has a lower yield so.
Still.
You know.
Getting ROA is north of five still accomplishing our spread so I don't think I have to do anything with anything specific to what asset class for a market or a deal for us.
Okay, but is there when you originate these is there some sort of a pricing grid.
Where property type plays a role.
Perhaps proceeds like and net lease where if you went 30% of total total property value versus 40 does that change sort of pricing like and as that is that how this is done or no.
Yeah, and we are we try to be pretty scientific about this.
It's a function of asset class and we try and make our excess spread.
And the assets that are perceived as as riskier, maybe our attachment point is a little bit lower and the capital stack.
But we're also trying to take a long term view.
And so you know over the short term and there may be some volatility and office and hospitality, but we think you know over the long term and these are still fantastic pieces of land and buildings to be to be a part of.
Okay and then.
On the debt side.
Getting the unsecured credit rating I mean does that necessarily mean that you have to go out with say the more traditional 10 year type fixed rate bond or.
And the can you be creative and that market and do something either longer duration or which are with the ratcheted coupon or something like you've been able to do on the secured side.
And you have to you know, we're not gonna be conventional right.
Right.
And where you have or maybe the margin will want you to be I don't know.
Yeah.
And we think there's a place for tens twenties thirties forties and certainly our capital markets team has been at the front end of innovating on this stuff so.
You know your first debut issue has to probably be a little more regular way, but after that.
Once people understand and just as we saw in the secured market.
And the quality the diversity the safety embedded and our just our basic business model.
And we'll be talking to investors and sharing ways. We can work together to actually expand our market serve our customers better which in turn and when it makes us bigger and stronger for credit and so I think it's been a really good process on the secured SOG and we would expect for same sort of dynamic on the unsecured.
But yeah, we we will begin that engagement as.
Quickly as possible.
The team worked really hard with the agencies really walking them through.
And everything Jeremy said, the past the present and the future.
And certainly are our future outlook was if we cannot be a long term unsecured investment grade.
The borrower and the deepest and one of the deepest markets and the entire capital World.
That's gonna give us flexibility to really fine tune our business and.
And and we think it's a big competitive advantage.
Okay, and then just last one for me on the U C. A R or care. It is the idea there in terms of thinking about trying to demonstrate that value or monetize. It that you would you would go into the market and some way and say you're going to get these assets and 80 or 90 years.
And there'll be worth X, what we what would you pay for it today based on some discount rates and.
And in the meantime, safe pertains to the lease stream is that like the ideas.
And we're gonna help really.
Simplify this for folks so they can understand kind of just like the bond math, we went through which is it's a very long term flow of.
Cash over a 99 year period, but it's a relatively simple thing to see what the net present value of that is today.
We think this is not that much different and we just have to help people see given our scale and given our diversity given our growth rates.
Put that into a simple equation and say you know what if something like that worth in the world and we think there are a number of comparable things that people value every day and this is as you know and extraordinarily high quality portfolio of institutional real estate and top markets with great sponsorship.
You know and all the tools for value would do exist.
We just have to help people kind of sit down and and show them the inputs and show them why those inputs are relatively straightforward and what the output is from that.
Certainly believed when we got to scale that this is something that.
We'd be able to sit down with you and others and and share with them, but it hasn't really made sense until we got to scale till we proved out our growth rates till it look like a big diversified pool of high quality real estate around the country and now we think we can start doing that and you know it wont happen overnight and we're not going to force the issue we.
You don't know every quarter and we track them for value creation, taking place and.
And we think we've done it long enough now that we can sit with folks and <unk>.
Really share with them why we think there's another big leg and the value story building a playful.
Okay. Thanks for the time.
Our next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
You covered a lot of a couple of follow up questions on the <unk> activity as well as the pipeline so first with the.
13 leases are noted eight new clients I think in the past day, you've talked about kind of educating you know first time borrowers with ground leases can you talk about you know.
Getting those those new clients.
Clients on board and repeat business is this going to you.
You know as you continue to get more new clients and do additional loans with them at a shorter turnaround time, how should we think about the pipeline building are accelerating.
And as more clients get involved in this and.
And ground leases.
You know that the best thing I can say is the team is highly engaged you know we can kind of feel it and our organization and we've been back and the office.
Since September and you can just feel the energy. So I can tell you from a 30000 feet and where we're not just making calls anymore. We're also people are coming to us the client base is growing but market if that was a better sense on the ground.
You can kind of feel it and your fingertips and sometime.
And sometimes you know during COVID-19. It was like there's just no transactions nothing can happen.
We saw that shift after labor day and.
And now I'll, let him tell you what he's feeling and his fingertips.
Thanks Jay.
The customer education process seems to be shortening.
And what so what it is.
It's a combination of the traction over the last three years or so.
Our brand awareness market awareness.
Team's efforts.
And to expand.
And our reach product expansion.
Our simple view is that.
Our solution is perfect for.
Any lifecycle of an asset and any transaction form and.
And I think the market is starting to realize that.
The great thing about repeat business and what we've seen is once we get that first one done.
People come back and it did.
Institutions come back it doesn't mean, we necessarily to get a deal done and the next quarter or even in that year, but they're coming back for us as they're thinking about their.
Capital options capital solutions.
So I would tell you the amount of flow Ah and transaction volume that were involved and early on and the process is <unk>.
Significantly greater than it was before.
Great and as a follow up I guess, a complete understatement, but 2020, certainly wasn't a normal year.
When we think about it.
Seasonality things moving back to normal can you talk about seasonality and the and the pipeline as far as deals closing are there certain parts of the year, there that are stronger or weaker or are there any type of potential tax implications annual budgeting anything that might drive spikes in volume or slow periods, but we need to consider a sweep.
As we forecast portfolio growth.
2020.
Such an anomaly.
So you know we were working really really hard to lay the groundwork for Q4 and 21, but you know that.
The market just paused for.
For Oh call it five to six month period effectively.
And the transaction side.
So I hope we're through that I don't I don't see that continuing based on pulse we have I.
I think the Choppiness youll see from US is the larger transactions.
We did 13 and $330 million and Q4, you had one large deal for that mix and it's.
And I really different quarter and I think.
And youll start to see that evolution over and over the coming years.
Great appreciate the comments today.
Our next question comes from Rich Anderson with S. M. D. C. Please go ahead, yes, I just had a quick follow up for two if you don't mind.
So I.
And I, just got an email effortless ocean front living.
Ocean club and how about that.
It sounds lovely.
So.
The post pandemic era do you feel like Theres, a change in behaviors of your kind of your outreach to clients and customers.
And that maybe this period of time has caused them to look more fondly upon your offering or is that too much of a stretch.
I can't really speak to that market, so you're feeling anything like that.
I think it would be speculation rich I got it yeah, I think we've done that.
And the hard work to grow our market awareness.
And I think there is a larger market adoption, but I can't pinpoint and to anything specific.
Okay, and then do it.
A question earlier about G&A.
But I just I don't want to hold you to it but you know you get to a point.
Were you scaled the company.
Are you, saying that theres at least maybe a possibility that safe could one day be an internally managed entity or or where you're not saying that you know given the you know the opportunity set that is still exists and stars existence, and and you know the different things that you that stark and offer safe does that that does that have.
Have a longer tail to it then or could you actually see the two companies completely sort of separate from one another.
I think we're set and the past and we're certainly open to whatever maximizes value and we're certainly never foreclosed the possibility that you have.
The better structure would be and internalized structure, so and it was a bit of a moot point, when we were sort of ramping up.
We thought there was only one the optimal way to do that which was to lean and with everything we had and that really required us to have the scale and scope of our and our store.
And.
Soldiers on the ground all over the country.
But as we scale, we've said historically, we will relocate out or whether that is the best architecture for unlocking value.
I think we're still a little bit early and that conversation richer.
We still feel like we're at the starting line here.
And what we hope to be a very very big business.
But again as we get to the kind of about $5 billion of ground leases under and safe holds umbrella.
Yeah that would be a good time to start looking at that and say okay. Now it's.
I'll see if there's a better way to do this it will have the scale and scope at that point to make it a fruitful conversation and I can't tell you what the outcome would be but.
And certainly open to the possibility.
Hey.
And I wanted to clarify that point you made earlier, thanks very much.
Before we go to our next question and I would like to remind everyone. If you do have a question. Please press one zero at this time.
Our next question comes from Jade Rahmani with Keith BW. Please go ahead.
Thank you very much wanted to ask about the competitive landscapes have seen some new entrants, making announcements firms like Ares.
As well as Montgomery Street partners and I believe also some debt funds are studying this sector.
Are you seeing any changes and competitive dynamics and the market and how do you expect this to play out.
Well, we certainly thought Jay but you know the.
Uh huh.
Top accounts would come at some point, we've laid the tracks down and we've shown that.
And why this is a cash.
<unk> solution that probably should have been around and.
We continue to optimize it and innovated and so we definitely expect others to join them and as I said our goal is to make this a regular way part of our business and our seven trillion dollar capital industry. So there certainly should be more than one or two players.
But I think we've you know we've established for the business. We created you know a lot of the nomenclature a lot of them.
Ideas behind it.
And I think people are seeing the logic behind it and understanding.
This is something that my expense.
And the entire.
Commercial real estate ecosystem.
Hum.
I haven't seen that competition, but let's just play it out eventually.
Eventually there will be others and they will.
Begin to just to sit in front of customers not just you know I.
And I think markets are the ones that.
And I get marketed we certainly expect there to be other showing up at the table.
And the direct and organic originations, it's going to take them quite a bit of time to generate those.
But this is an evolving business, where we're in the early innings.
And so as long as they don't do anything dumb or you know muck up the works and by going back for the old ground lease mistakes.
And we think there's room for plenty of folks here, but we do hope that you know others and understand the lessons of the past, but we spent years studying to make sure that when we built the modern ground lease when we showed its benefits for customers that is the path and if you start doing.
Ground leases that are too big or with the ground leases that are too expensive.
Gonna go right back and the mud again so.
And our goals to be the leader and to really show the path and if others can help us expand the market great but.
Or are we hope is that they don't need for the same kind of mistakes that really pushed graduates was off to the side for for a long time.
And in terms of your views on real estate have you changed at all your attitude towards the office sector. J allows fourth quarter report, you're not not overly surprising showed record decline and leasing demand and Colliers research expects a 15% decline.
The pandemic and long term office demand with gateway markets are the so called Super City as being the most adversely impacted are you changing the ways in which you a target asset classes expect the portfolio mix to evolve and underwrite off sales.
Yeah.
Yeah, there's certainly some some cautionary signs out there Jay but.
And when we think about this with our long term hats on and we go back to history and study.
You know the ups and downs of these markets and you know.
Downturns are actually are the seeds for the rebirth and.
So if there is a downturn and rents come down and if things become more affordable and apartments are more affordable and there's more space to be creative inside of that.
And that that destruction of the very start of the next you know rebirth of these major cities. So.
Takes great leadership to shorten that timeframe and really accelerate it would seem that and cities.
So again with our long term hat on and hopefully you know.
35, 40% G L T V's.
And we try to help and that process and we shouldn't be the ones actually and the crosshairs all of it.
But you're right I think there'll be some really tough adjustments.
I think they will have three rehab and re adaptation and but we already see that starting you know.
And you can never count real estate developers that were seeing lots of requests for for new construction, taking advantage of what people see as the next wave of things for clients want and tenants want and travelers want and so this is an industry that constantly evolves and constantly changes itself and.
And particularly the gateway cities.
Yeah.
Path of destruction and rebirth is one we've seen dozens of times over the last hundred years, and we'll probably see it again going forward. So nothing nothing makes us grow while we'll never do another office deal, but that is not our mindset.
You know it will change our underwriting will change or.
And how we think about the proper size and pricing but.
And none of those reports at least at this point and tell us that.
Office has gone away and not coming back over.
Okay, and just lastly on karat or unrealized capital appreciation is it your expectation that and most ground leases that maturity you have typically what happens is the ground rent goes through a reset or otherwise theres, some kind of exchange of value and.
So generally speaking the ground lease would be renewed and so that you know just based on today's values. It wouldn't really achieved the full unrealized capital appreciation that is being shown you and.
And if something less in order to Incent, the building owner to stay and the deal.
Yeah.
You know I think there are a lot of a lot of ways towards true for envision that and it's a longer call than we should do here, but you know we have thought through and studied how it has worked and the past and.
If you have somebody who's doing a great job, creating value and are building youre right Theres no reason not to work with them and find a great capital solution that reflects the value proposition and each one is looking at.
Well, that's not the only case there could be cases, where there's a better use and a better.
And the opportunity and you.
I think we're gonna demonstrated again and again as we have and the finance world, but we will innovate we will be creative and we support people who create lots of value.
And and you know our view is this is a very long business with repeat customers being a core part of it so.
I think you know COVID-19.
The scenario, you're outlining is definitely a possibility but.
We can share more of our thoughts you know offline Jake and fields I think it's a it's a good question. It's one we've given the enormous thought through how do you build a customer business and that allows building owners to do what they do best at least manage design and market and once you do that well should be given the chance to continue to do it.
And so.
Thank you for taking the questions.
Mr. Fooks, we have no further question.
Okay, Great really appreciate the discussion and.
And anyone should have any additional questions on today's earnings release.
Please feel free to just contact me directly.
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