Q2 2021 Safehold Inc Earnings Call
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Good morning, and welcome to safe hold second quarter 2021 earnings conference call.
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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.
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, and Marcos Alvarado, President and Chief investment Officer.
This morning, we plan to walk through a presentation that details our second quarter results. The presentation can be found on our website at Staples, Inc. Dot com and by clicking on the investors link there'll be a replay of this conference call beginning at 1 P. M. Eastern time today and the dial and for the replay is 86620710 for 1 with the confirmation code of.
7260006.
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 say full disclaims any intent or obligation to update these forward looking statements, except as expressly required by law now without.
I'd like to turn the call over to chairman and CEO, Jay Sugarman, Jay Thanks, Jason and thank you all for joining us today the.
The second quarter saw a nice ramp up in and investing activity with both transactions closed and future deals and the pipeline growing strongly from the first quarter.
We continue to gain traction by providing long term well priced and well structured modern ground leases that unlocks significant value for our customers.
This quarter, we also expanded our ability to source high quality ground leases and major markets through our ground lease plus program.
Working together with I Star, we can create ground leases early and the development process for ISR funds, the pre development ground lease and safe hold commits to acquire the ground lease at a predetermined price once the development meet certain shovel ready criteria.
During the quarter I star closed on a pair of safe hold approved ground leases covering a full city block and downtown Austin, Texas, which safely committed to acquire once construction is ready to begin.
We also secured an option on a major site and the Seattle MSA.
Will be triggered once construction begins on and anticipated 1 million square foot development.
Together these 2 opportunities could generate between $300.500 million of irreplaceable ground leases and 2 of the top technology markets and the country.
Along with our progress on the customer front. We also began to highlight for investors the significant value building up and safe holds unrealized capital appreciation account and.
And provided a simple valuation formula for investors to understand the potential value of this asset as we continue to grow.
We've been quietly tracking this asset value for shareholders. Since we went public but now believe we have demonstrated both the track record and the scale to be a bit more vocal about the embedded value of that is being captured for shareholders.
As you saw and our earnings package, our unrealized capital appreciation asset grew by some $374 million and the quarter increasing to approximately $6 billion.
By consistently growing our ground lease portfolio and diversifying across top markets and major assets and the U S.
We believe this 6 billion asset will come into sharper focus on investors' minds and begin to be reflected and the value of our share price.
Okay, and with that let's have Marcos walk through the details of the quarter.
Marcos thank.
Thank you Jay and good morning, everyone.
Turning to slide 3.
We are pleased with the performance of our portfolio during the quarter as we continue to make steady progress scaling our business.
Highlights for the period include solid earnings results, increasing investment activity UCA growth and as Jay mentioned, we introduced a new origination channel to serve our customers across the lifecycle of an asset that I'll discuss in more depth shortly.
We utilized our recently awarded investment grade ratings to access the unsecured debt markets, which left us with a significant amount of dry powder at quarter and to take advantage of the expanding ground lease opportunity.
This inaugural offering is our first step towards educating the unsecured market about safe with a goal of innovating with our liability providers and driving down our cost of capital moves.
Moving to slide 4 let me walk you through this quarter's earnings results.
Revenues were $44.2 million for the second quarter, and 18% increase from the $37.4 million and the same period last year.
Net income was $14.7 million and 18% increase from the $12.5 billion. We earned from the prior year period and earnings per share was <unk> 28.
13% above the 24, we earned last year. Additionally.
Additionally, during the quarter the board of directors approved a 4.8% increase and our dividend to an annualized rate of <unk> 68 per share.
Slide 5 provides an overview of our investment activity.
During the quarter, we closed 6 new ground leases 5 multifamily and 1 office asset across 6 markets totaling $222 million of note. This quarter, we expanded into a new market and Jacksonville, Florida.
The investment metrics associated with these deals are in line with our with our targets.
With a weighted average effective yield of 4.9% ground lease to value of 39% and our rent coverage of 3.5 times.
In addition.
And we completed our first transactions under our ground leases plus product this quarter we.
We came to realize that our customers have a need for our efficient capital and the form of a properly sized properly structured ground lease to capitalize the acquisition of land for development.
Partnering with ISR safe develop the product to meet this market need.
Ground lease pluses and innovative origination channel that expands the use of ground leases to pre development assets that don't yet meet staples shovel ready criteria.
During the second quarter I Star closed on the first ground lease plus transactions with a new client and 2 adjacent tracks and downtown Austin, Texas, which had been zoned for mixed use development.
And these transactions I start used its balance sheet to originate the ground leases concurrently safely and committed to is start to purchase the ground leases. Once developer has assembled its capital stack and is prepared to go vertical and build the assets to.
The ground lease plus product allowed our customer to unlock value and high quality core CBD land by locking in low cost 99 year ground lease capital.
Net sales, we were able to obtain the right to acquire ground leases and meet our economic targets metrics and risk profile.
By innovating a ground lease product to meet our customers' needs earlier and an asset lifecycle, we continue to improve with the principle that as we create value for our customers, we create value for stakeholders well.
In addition to our transactions and Austin, our ground lease plus product unlocked and opportunity for safe hold to create a future ground lease and the Seattle MSA and 1 of the most attractive office markets and the country.
Safe hold acquired an option to purchase the ground lease when the development is shovel ready and meets our criteria.
This opportunity combined with the 2 Austin developments could allow safe to invest up to $488 million and what we consider to be trophy quality ground leases.
Slide 6 provides an overview of our portfolio expansion.
At the end of the quarter, our aggregate portfolio stood at $3.6 billion, representing 11 times growth since our IPO 4 years ago. This.
This amount does not include the ground lease plus transactions, we just discussed.
More portfolio metrics can be seen on slide 7.
As of June 30, our in place portfolio generated an annualized yield of 5.4%.
Portfolio's annualized cash yield was 3.4% with annualized in place cash rent of $118 million.
Our portfolio's weighted average ground lease to value was 40% and weighted average rent coverage was 3.3 times.
By property mix our portfolio consists of 45.
4% office, 28% multifamily and 17% hotel our weighted average lease term is 89 years.
On the next slide you can see the geographic breakdown of our portfolio as we continue to diversify across the us and focus on the top 30 markets.
Slide 9 provides an update on our capital structure.
During the quarter, we successfully closed on our debut unsecured debt offering issuing $400 million of $2, 8% senior notes, which are due in 2031.
At the end of the quarter, we had $2.2 billion of debt.
Price of approximately $1.5 billion of nonrecourse secured debt $400 million of unsecured notes and $272 million of our pro rata share of debt and ground leases, which we and partnership.
Our weighted average maturity is 26 years, which is down from the prior period, primarily due to the 10 year unsecured notes we issued this quarter.
In addition, we had $35 million drawn on our $1 billion unsecured revolver.
Combined with the $34 million of cash on hand, we have approximately $1 billion of liquidity. We are levered, 1.6 times on a book basis, and 5 times levered on a debt to equity market cap basis.
The effective interest rate on our non revolver debt is 3.7%.
163 basis points spread to the 5.4% yield and our portfolio.
The weighted average cash interest rate on our non revolver debt is 3.1% a positive spread to the 3.4% current cash yield on our portfolio.
Moving onto slide 10, we provide and update on <unk>.
With the addition of the 6 new properties. We closed this period there are highlighted on the right side of the page unrealized capital appreciation and our portfolio grew $374 million to 6 billion, representing an annualized growth rate of 27%.
As Jay alluded to we have been spending more time, highlighting this unique and valuable asset with the market and are encouraged with the initial feedback we've had from investors.
In conclusion, we continued to make steady progress as our pipeline expanse and remain optimistic about reaching our growth target of $6.4 billion by the end of 2023.
During the second quarter, we executed and important initial bond offering and launched new innovations, which should allow us to better serve our customers and drive down our cost of capital as we continue to scale, our business and modernize the ground lease industry.
With that let me turn it back to Jay.
Great. Thanks, Marcos so it feels like we're on track to finish the year strongly as we continue to find ways to provide our customers better and more efficient capital and if we can continue to executing on the customer side and the benefits to faithful should also be very strong as higher growth and higher unrealized capital appreciation and deliver a 100.
And 2 punch of earnings and value creation for our shareholders.
Now, let's go ahead and open it up for questions operator.
Thank you today's question and answer session will be conducted over the phone to ask a question. Please press 1 at this time, we will take as many questions as time permits.
And once again, please press 1 to ask a question.
We will pause a moment from bottom up.
Sure.
Our first question comes from Nate Crossett with Bahrenburg. Please go ahead.
Hey, guys and Keegan on from Nate Thanks for taking the questions I think to kick things off he was a little bit more detail on the origination volume and the quarter.
Net of Jacksonville, where were the other properties purchased and can you give us a little bit more detail specifically on the multifamily assets.
And Marcos once.
And given a little more detail.
And so we closed.
Brand, new multifamily asset in Denver, Jacksonville, as we mentioned.
2018 vintage deal and Portland.
Brand new <unk>.
<unk> family, and South, Florida, and the Fort Lauderdale area.
And.
And other multifamily asset in Atlanta, Georgia.
And an office asset and New York City.
Great and then.
I know you guys don't give any formal origination guidance, but can you remind us on the target over the next year or so and you are still comfortable saying double the portfolio and the next 3 years.
Yes.
And we've said in prior quarters, given the Lumpiness of our business, we don't provide quarterly or annual guidance I think we remain extremely optimistic that we'll hit our target of $6.4 billion by the end of 2023.
Okay, and just 1 final 1 could you guys speak to the current pipeline right now I mean do you guys have anything else under LOI and kind of what are the expectations.
The remainder of the year.
We don't disclose the amount of transactions under letter of intent I will tell you that we are busier than we've ever been.
We're seeing.
And this kind of thought that we've talked about really start to happen.
Awareness of our product our cost of capital.
Customer satisfaction and network effect so.
As Jay alluded to I think the second half of this year going into early next year feels feels really good right now.
Alright, it sounds good thank you.
Thanks.
Our next question comes from Rich Anderson with SMB CLEC. Please go ahead.
Good morning, everybody.
So on the ground lease plus program.
What's what's the what's the benefit to I start.
They buy the land.
And do you pay them a markup is there is there a return for ISR are they is it sort of uneven trade and Theyre just kind of doing this on behalf of Stifel and knowing what the.
The longer term intentions of <unk> and the ground lease business.
Hey, rich, yes, no you've got it.
I'll start putting out capital.
Market risk return, but it finds attractive.
We've actually had third party capital also interested in participating so theres a pretty.
Robust conversation around what's the appropriate risk reward for our store.
Commit capital.
And if it didn't make sense.
This is really 1 and another 1 of those places and the ground lease world, where 1 plus 1 equals more than 2 so.
So we think both are stark and benefit.
Make smart investments <unk> faithful so it's another way, we're leveraging the full power.
Power of what we've been building here to really help our customers Act.
Access capital Thats never been available to them before.
And we think there's a real possibility to continue to grow this idea.
So does safe though.
Our premium to what I start paid or is that how it works yes.
And based on based on a return times store, Okay got you.
And within I start today with a land and that it owns are there opportunities to sell existing parcels of land.
And 2 to safe for a similar execution.
Certainly could be we've got still got some very high quality assets inside of our star and again.
We are fundamental believers that this is the way to unlock the most value and certainly as I and store looks to monetize assets, we would continue and that belief and trying to maximize value by being ultra efficient and we think.
Certainly create and ground leases is 1 and <unk>.
And the best way to do that so.
Nothing recently, but that's certainly something we've done in the past and certainly something we will look like.
And again in the future, okay and not to make this about <unk>.
Kind of the same conversation.
You've kind of.
And testing the market on your net lease portfolio.
Is that just kind of a.
Exactly that or how close might you be to selling that portfolio, all or some of it and what does that say about your level of confidence about our pipeline of ground lease opportunities within safe hold is it telegraphing that theirs.
Growing.
Kind of pipeline out there because youre starting to investigate more formally the net lease portfolio.
I think everything is consistent with what we said.
Scaling safe hold has been a major focus.
Of both companies.
As Marco said are really starting to feel the markets reopen and our product really.
Reaching a new level of acceptance and desirability to a lot of different customers.
And we're also seeing lots of interest and <unk>.
<unk> assets and so I would say we're in the exploration phase rich.
<unk> definitive.
But we certainly believe all the.
Strategic initiatives that we set up Q3 years ago are certainly playing out the way we hoped and.
And so we're going to continue on this path.
And we think both eyes star and safe hold can deliver significant value and if we continue to execute on those plans.
And last 1 from me is there a is there a ceiling to how much you can do in terms of raising public debt because you have the <unk>.
Liability asset duration mismatch issue.
Understanding you put $400 million of the market, but.
How much can you really do.
While trying to preserve some level of duration on your on your debt.
Yes look this was our inaugural issue.
The 10 year was obviously, a sweet spot and the market, but we have significant reverse inquiry and much longer tenors.
And so we will continue to try to drive a book that has some of the longest maturities and the entire industry.
We've internally targeted sort of about 25% to 30 year, we're kind of and the 26 year range, even with a 10 year offering.
I don't think the strategy has really changed but this ability to tap the unsecured markets is going to make us faster bigger better as we serve our customers.
So we will find the right tenors to match fund the business, but.
But I think the and the opportunity to now access both unsecured and secured.
And just puts us way ahead of anybody else from the game.
Great. Thanks, very much and color I appreciate it.
Yeah.
Thank you. Our next question comes from Anthony <unk> with Jpmorgan. Please go ahead.
Thanks, and good morning.
So first question and I guess is on the.
Star and safe dynamic I guess, I would've thought that with star exploring and net lease sale and maybe that would accelerate.
Maybe some ultimate have had between star and safe, but now stars getting into this.
Pre development ground lease business and.
The thing to take away in terms of.
What these various initiatives at the store level.
Suggest in terms of something happening between store and shave ultimately.
No I wouldn't read too much into that again, our mission at star and safe is to grow this business be the dominant player. This is another piece of that puzzle I don't think it changes anything in our minds about thinking about the right architecture and long term for the business we've pub.
We said when we get past about $5 billion of assets.
And the appropriate to have a conversation and both companies about that architecture. This is just a piece of the puzzle that we sort of thought would work we mentioned it a while back.
And then the testing the hypothesis refining it and now we're starting to see some results.
We think theres plenty of capital and the world that would certainly be interested and that so I start is really good at helping launched this kind of new innovation, but it doesn't have to be.
Long term capital source of it doesn't want to be.
Okay, and then what is.
Specifically, the markup or the mechanism.
When star does 1 of these pre development land deals and then flip it over to Serge.
Yes, obviously both independent.
Boards have to approve every transaction so its really predicated on sort of market returns that are appropriate for the risk and the profile of the asset where it is and the stage of pre development.
Yes. It is a again, a 1 plus 1 equals more than 2 and each independent group of directors gets to see the entirety of the transaction and has to feel comfortable with it or we can't move forward.
There is a measure of equity that.
And we as management try to start with and.
And then there is a little bit of negotiation and <unk>.
To meet kind of market standards and it won't get done.
And so I guess, you have safe as doing deals at call. It.
And 5.
And what would that equivalent number be for per store.
Obviously, a very different duration tenor risk profile so.
Yes, the pre development World House capital that certainly and the double digits.
And thats not.
And unusual but when you look at what's safe hold is buying it.
Constructed 99 year contractual cash flow stream through 2 very fundamentally different instruments.
We know the market from the pre development world very well at the star side, and let's say fold knows the ground lease market very well from a long term ground lease side and was from pretty good benchmarks.
Our shared with both boards just to make sure that everything sort of.
In that range at guardrails of what we've seen and the market and feels appropriate.
Okay and.
And then just in terms of thinking about future commitments I think there were some of the deal flow and the quarter that.
You have yet to fund I think it was like $12 million and I think you've done some things like that and the past.
And then also you've got this $273 million now out of the ground lease plus program and just wondering just kind of help add up kind of whats like pending if you will that's pretty visible and at some point will go into shape.
Yes.
Sort of segmented into things that we have closed and are just funding up as <unk>.
Construction reaches and sort of full cycle on that single asset.
Numbers, probably in the $75 million to $100 million range.
The <unk> plus program is further out and that there are conditions that must be met cash.
Capital stack that I must be put together so.
Sort of bucket, the near term and 75 to 102 hundred 73, or the 488 that Marcos mentioned.
As further out and the future.
Okay got it and the 273 is just basically the on the 2 tracks and Austin and then for ADH when you add in Seattle, and so thats the right math on that.
Correct.
Okay, great. Thank you.
Our next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
And I wanted to follow up on your comments.
Mentioned, the and the prepared remarks, the ground lease plus what you.
Become involved much earlier.
And the ground lease business as a whole has become more competitive over the last 3 or 4 years since since you've started the company.
Can you talk about the competition and really that more early development are where <unk> is going to play and really what is more of the medium and long term opportunity. There. That's less competitive is that does that really and opportunity for outsized growth as we think about 2 and 3 years from now.
Yes, let me suggest that the competitive landscape overall for our business.
And I can tell you we still haven't seen anything that we wanted to do that we didn't do.
So our cost of capital advantage.
Our net.
Proven track record of.
And closing transactions and the flexibility we've we've received through this unsecured.
Issuance.
We are serving customers better than anybody else can and in the marketplace.
So we havent really felt.
Competitive pressures and.
And just our normal way ground lease business.
And we certainly compete with the fee financing markets, which are liquid and functioning as we as this market thaws.
Ground lease plus as a product is just another additive origination channel.
It allows us to capture the entire lifecycle of an asset.
And it allows us to capture capture of the entire investment.
Lifecycle of our customer more importantly, so they come to us for everything.
And given the risk profile this sort of 1 plus 1 equals more than 2 dynamic made all have a sense for us for <unk>.
And I start to take extra risk kind of earlier on and lifecycle and safe.
Be that natural takeout, which obviously creates future growth as Jay alluded to in the coming years.
Great. Thanks for the color there moving to the expense side can you talk about G&A, a little bit I do think Q2 is seasonally a little higher due to some stock based comp.
But can you talk about what else went into the increase sequentially for G&A.
Sure Yeah, we are a little bit of a quirk and that our directors get their full year pay and the second quarter.
And it is fully expense so that's quirky and.
We should be clear.
We are on a little bit over $1 billion. So.
But.
Youll see every second quarter, and maybe we can smoothed that out and the future, but right now that's the way we're handling it from accounting standpoint.
We do have some significant legal cost this quarter and.
Some of that will continue and these innovative products do take a bit of.
Expertise and intellectual property that we developed in house got a tremendous team of in house.
<unk> experts who work on this stuff. So every once in a while youll see that crop up and second quarter with GL plus doing our first deal. We did a lot of extra work to get it right.
And as we innovate we'll continue we think it's well worth it to spend that money book.
It's 1 time and <unk>, but and another we are trying to innovate what we hope is a trillion dollars business. So we think these are all really smart investments for.
And building out the full potential of this modern ground lease industry.
And so those were the 2 things that sort of push the expenses this quarter.
And certainly the directors' compensation will go away next quarter and.
The legal fees right now I would say this was a little bit on the high side.
Great. That's very helpful color Jay. Thanks, I appreciate you guys, taking my questions. This morning.
Thank you.
Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, Good morning, maybe just a quick follow up on that last topic, Jay could you just from those legal day 1.
Were included in the lion's share of expense reimbursement to the manager and alright.
No. They are actually at the same flow level, what line item guidance, but we have those G&A straight G&A.
Okay.
And so then I guess, if im looking at the expense reimbursed to the manager it looks like that was higher in the quarter Q is that something.
Oh.
Never mind that fall into that again, okay moving on and then just on that day.
And lease plus product.
And just talk about it sounds like the reasoning behind eyesight and <unk>.
And versus it being take hold from the beginning might be risks related. So just wondering how pre leasing and plays in and I get that.
It's just taking more value.
And leasing risk, but unsafe holds its only involved once the property is Lisa can you talk a little bit about that relationship.
Sure I think.
Easiest way to think about it as faithful wants to be and sort of 35% to 40% of the value of our capital stack.
And when it wants to know that there is a physical asset.
On the on the property, we're about to be on the property.
So when I started doing is obviously taking.
More risk theres, not theres, not a physical asset and there is not a shovel ready cash.
<unk> structure, or GMP or construction leasing and and of itself, obviously, depending on different products leasing happens at different points and that pre development cycle, but that's not really the standard. The standard is do you have your capital stack and as the project and get Bill do you have your Gmp's permits entitlements are you ready literally you can put a shovel.
And the ground and build the building and a pretty picture.
And you've shown your investors.
Net.
Let's say fold in that 35% to 40% GL TV zone. That's the moment is the Safeway deal.
Obviously these pre development deals don't lineup on that risk and or G LTV basis, and so they're really not appropriate yet.
But we think there is a great opportunity to really great land and the best markets with some of the best developers and we think onstar and return profile and and a third party capital. We also used for that.
Is going to benefit from.
Our ability to see those deals very early and provide the best combination of near term and long term capital and we think Theres real possibilities here and we've.
And we've only done a couple of deals.
So it's still early but I can tell you it's another.
Certainly arrow and the quiver when we're sitting with customers as Marco said, we're building relationships not on.
A single building or a single asset we're building them with customers and when they go places and do things and great markets and wonderful locations.
We don't want to say hey come back to US 2 years from now.
And we want to engage with them now we want to be the best capital source for them now we think our historic and can provide that capital and we think stakeholders. The best long term capital provider and we can give them 1 stop shopping and a way and we don't think very many others can.
Got it Okay, and then maybe just on the funding side for the <unk>.
And over $200 million of investments that you need and the quarter.
And b unsecured $400 million deal I guess, just thinking on the equity side. What are your plans for equity issuance. This year and what metrics are you looking at to decide when the right time to raise equity.
Yes.
I think we said we have about $1 billion of liquidity. So liquidity is certainly not a constraint.
We've also said I think in the past, we like to have about $500 million of.
And our liquidity lying around at any point in time so.
And the pipeline feels good marcos' team is fully engaged on all fronts and so we start knocking down these deals and.
And eat into that liquidity certainly those are the kind of metrics, we'll be thinking about.
Okay, and then maybe a last 1 just in terms of the acquisitions that were completed in the quarter wondering if on those 6.
Deals you could give him.
Detail on the timing of them, although I think 1 of them and they can actually claim but the timing of the deals that did close and the quota.
So all of them, except for 12 million and closed in the quarter.
Somewhat late in the quarter NAV.
And rather late in the quarter.
Yes, it's sort of June was a big month.
Got it.
Okay. Thank you.
Okay.
Our next question comes from handle thank you with Mizuho. Please go ahead.
Hey, good morning, Thanks for taking my questions.
And that there's been a lot on the ground plus already but I've got 1 more I guess I'm more curious how much of your pipeline proportionately and these ground lease deals represent or perhaps what level you'd be comfortable with and then maybe could you talk about the target returns and any key differences and the underwriting and east.
Types of investments versus your more traditional non leap assets. Thanks.
And I'll, let mark talk about the pipeline dynamics and again. This is 1 of many products we offer our customers so and it's a new product. So we don't want to overstate our certainty around those kind of numbers, but what I would tell you handle.
We think about the <unk>.
And <unk> to penetrate the very best markets and the very best locations and.
This is a powerful tool.
And we think it's 1 that allows us to get into markets on all the good metrics that we've talked about I mean, we know where.
We want to stop the price, we will know where we want it to be sort of net AAA slot.
So the real question is how do you how do you get into some of these really high quality markets. How do you work with some of these really high quality customers.
And then they're calling you all the time everywhere they go.
So they do the hard work tying up.
And if market deals.
We want to be available to them and whats.
What's in it for US is we're getting a shot at some assets that we probably wouldn't get a shot at if we showed up much later and the lifecycle. So it's a really powerful idea again don't want to overstate. It we've only done a couple book the reaction has been really positive book.
The caliber of the customers, we can't really talk about but it's extremely high and so this feels like right up our alley is sort of.
And safe hold <unk>.
And I star.
This is what we do really well.
And so mark what do you think the potential here is.
And as Jay alluded to.
And we're excited about capturing more of our customers.
Mindset.
And I think.
We're optimistic that.
Every quarter or every other quarter will hopefully announce a super high quality ground lease plus transaction, but as I think about our overall pipeline. The lion's share is ordinary course ground leases.
Our regular way business.
Is very engaged very active so.
And most of that most of the pipeline is just regular way business.
Got it thank you for that and.
Another question on the pipeline that Naveed I think you guys and.
Intimated about the potential for larger transactions were you alluding to these grand and these plus deals and Austin, and Seattle, where the other larger deals and the pop and that could come up here.
And now we're in a regular way business is.
Outside of the G. L plus transactions is what we're alluding to GL pluses, just additive future Super high quality growth.
And the conversations around some of these larger potential transactions continue and.
And the movement of sensors and the imminent.
Conclusion, or we're still just still waiting and doing them.
Ongoing conversation.
I would call it.
And some in.
And diligence and closing process ongoing conversations I think that's why we've been reticent to provide guidance because these lumpy transactions take some and some of them have been worked on for a year and a half as an example, so we can't predict exactly when they're going to close but we feel good about that.
The growth going forward.
Got it got it and 1 more I think you mentioned and global and in New York City Office asset and the quarter I'm curious, how you underwrite you and read that the yield and did you notice any meaningful change and the asset value and then I guess how comfortable you.
You are doing more office deals going forward.
Yes, certainly we bought and interest in New York City Office building Super high quality asset.
And the relevant.
<unk> is we're in the $200 foot range.
And at our basis. So we feel like we are below land value.
And we.
We do agree that there is some there's been some value deterioration from where the office asset traded in 2015, and what it was probably worth pre COVID-19.
And where it sits today and.
And so we took that into account and our analysis and.
And it's consistent with our metrics.
That reset basis.
Can you share just a ballpark estimate and what you feel that change and value.
15% down.
Okay.
Thank you.
Yes.
Our next question comes from Matthew Howlett with B Riley. Please go ahead.
Thanks, Thanks for taking my question.
Just back to the plus program does that start buying and the first mortgage and today and they sell diverse mortgage just curious how that works.
Yes, it's not it's not actually structured as a mortgage and structured as a ground lease.
Do they go and Theres always blending first mortgage with it or and then just just curious is it will go along with it.
Yeah at least in this case.
100% equity check.
So theres not.
And I stores not lending to itself if.
If we bring and third party capital and lay off some of the of the.
Total investment certainly the.
Entity could could go seek financing, but these are.
Our guess is 2 year kind of.
Pre development cycles.
It may not be worth it to try to go leverage them, we have partnerships that have significant capital they'd like to deploy.
And I star, so and capital shouldn't be a problem.
So we haven't really focused on trying to optimize the.
And 2 year hold period.
And I start at this point has plenty of liquidity and.
And is working closely with faithful to just create these 1 off opportunities to expand our presence, but something we can think about down the road.
Got it and then Jay the.
The Jacksonville getting into that expanding that market.
What do you think in terms of how many more markets you can get into.
Talk a little bit about what's interesting with Jacksonville and comparable markets like that.
Yes, I think were and 27 of the 30, we originally talked about Jacksonville is and NFL City, which was 1 of the original concepts, we kind of followed US go to the bigger cities with the bigger assets.
The SaaS is actually almost directly adjacent to <unk>.
Multiple stadiums and that market so.
I think our viewpoint is there are 30.30 ish top markets.
We did a deal and Portland this quarter.
Great market for multi and Atlanta.
Beautiful asset.
Fort Lauderdale asset beautiful asset.
Denver is a gorgeous asset these are all really high quality.
Physical properties and and <unk>.
Great locations, where the land has appreciated materially over time.
So really happy with the mix we're seeing.
There is there is a.
Steady flow of.
Business on the multifamily side that we're really happy about.
And then we've got some fairly large transactions, we're still we're still.
We're working on.
And so.
And I think our job is just to execute now on the pipeline ahead of us and.
And if we do that.
And these top cities.
Whether it's.
The San Antonio and Jacksonville, or whether it's a gateway city like.
Boston, New York, San Francisco, Chicago, and La <unk>.
We think these are exactly what we should be doing.
When you say you've been the busiest you've ever been and that just.
With the array of products, the more awareness and the products, but what's just what's driving it.
I think it's a combination of all.
Of all of that I think were busy because were in process of closing a lot.
Innovating, so there's different ways to talk with our customers.
Which requires an education process.
The brand awareness is at its peak.
And so we're involved and a lot of processes early on.
How would you guys look at this I'm thinking about selling and how would you guys look at this I thinking about refinancing and we used to not get those calls.
So we're cranking.
Great. Thanks, a lot.
Our next question comes from Kian, Kim with true it please.
Go ahead.
Thanks, Thanks, good morning and deploy.
And back to the ground lease plus strategy I'm, just curious side for these development pre development deals.
How how you're getting compensated for the inherent risk with development in terms of the yields that you're getting.
Yes look I.
I mean, Steve and I can make it really clear. So you have 2 investments here you have a ground lease during a pre development phase.
The stakeholders agreeing to take out.
2 to 3 years forward, depending on when the conditions are met.
Pre development phases, a risky phase.
The return profile of that in the marketplace is definitely double digit returns.
On an unlevered basis.
And so you know.
And we are.
We are competing with other sources of capital to provide that capital, but we also think that.
Saiful dynamic is 1 that again.
We want to be and these markets, we want to be and them long term, we know where the pricing is.
And we know where we want to be on a G LTV basis.
The benchmarks are out there in terms of we have to be alternative forms of capital.
Pink and the pre development that kind of capital should earn high single digits low double digits, maybe even a little bit higher depending on the risk reward profile.
And we think our safe holds ground lease needs to earn as we said this historically 100 to 125 basis points above its cost of funds.
Those benchmarks are pretty well established both boards are well aware of them.
The teams are out there competing with other sources of capital. So there is a.
Pretty liquid market.
Whereas this deal where should a trade what's the right risk reward equation.
But if you're asking simply was a pre development deal earn.
And again, depending on the asset type depending on the marketplace. It's high single digits mid double digits.
Mid teens and if it is.
Core central CBD.
Ground lease, it's going to be and that you know.
I don't know.
Our ROA targets have you seen in the past or kind of a 100 to 125 over sometimes they have been better.
But that's still the benchmark by which we.
Tried to set these deals up yes, I think the way to think about it from a sales perspective, as we're getting access to transactions, we probably wouldn't get access too by grabbing them earlier and the their lifecycle.
And economically and from a metric standpoint, they are consistent with the rest of our portfolio or even better.
Certain instances and the quality of the assets is just fantastic.
Now do you.
From a legal standpoint, right and more language and currency <unk>.
And <unk> doesn't deliver the yield expectations.
What kind of.
Safety parameters do you built in for yourself.
If any.
And if the product doesn't get built safe doesn't have to buy and so that's the starting point is if it doesn't meet those metrics that mark has talked about.
No. It was not a requirement for safer to buy and project that isn't.
Progressing and Thats, 1 safety measure.
And usually as you can imagine we build in and if the buildings are little bit bigger if the buildings are a little bit smaller if this eventuality happens if this 1 doesn't and so.
Our view is we are setting up saiful deals.
Feel and look and will be exactly like the rest of the book.
While recognizing that we don't know exactly.
When those conditions are going to be met.
And so this is a great way for us to.
Not only work with the customer when they're forming the transaction.
But also be their long term capital source.
Essentially forever.
Okay.
And just more of a macro question here and we've seen a lot of movements and treasuries and of course.
Concerns about inflation, but I'm curious from your business perspective.
And they're a certain scenario, where you see more inbound calls or more activity and your pipeline.
And again on interest rate scenario.
Yeah, I mean, we just have to be the lowest cost longer term most efficient capital whether rates are 100 basis points higher or 100 basis points lower our competition. In most cases is the regular way financing markets, which we think we have built a better mousetrap and more efficient mousetrap. So.
And our customers have responded to that.
They're not.
They're not doing anything more keeping them and looking at what their alternatives are and saying yours is better.
So that's really our goal.
And we saw the.
Reflation trade and people getting.
A little bit nervous they wanted to lock in long term rates that was a nice.
Storyline, but I don't think it drove the business at all and I think it's really just people beginning to understand how powerful a tool being efficient.
With your capital is.
And again this is.
This is a tried and true and the corporate.
World with their real estate, and we think it's going to become a tried and true tool and the commercial real estate world.
<unk> list of interest rates and.
And we are.
Helping shareholders understand that we are embedding inflation protections into our long term ground leases. So we feel like this is 1 of the better protected places for our capital.
And it has.
Yeah.
And protection CPI look backs. It has this long term asset that continues to grow at high rates.
So.
And thank you can feel comfortable whether the markets.
And are worried about reflation or deflation and we really haven't seen and impact the business.
Okay. Thank you.
Ladies and gentlemen to ask a question. Please press 1 zero at this time.
Our next question comes from Derek Hewett with Bank of America. Please go ahead.
Good morning, everyone. Most of my questions were addressed but.
Maybe some housekeeping issues first the portfolio yield was up about 10 basis points to 5.4% on a quarter over quarter basis.
While the second quarter investment activity yield was only 4.9% so what accounted for the overall portfolio.
Yield growth.
Yeah.
Yeah.
And I don't know if there are specific transactions, where the the bumps kicked in.
And we'll take a look at that they're just to see if theres any specific asset bump that caused that to happen but.
And 535452, there's just sort of moving around very small and small margins.
Could take it out to 2 or 3 decimals and.
Figure it out for you.
Okay, and then just in terms of the ECA.
It has all of the headwinds associated with Covid kind of flow through that calculation at this point.
We still have 10% to 15% of our assets being revalued each quarter just depends on how many new assets come in.
But I think by the end of this year Youll see it all flushed through.
Because most of the assets will happen.
<unk> looked at.
I think we're seeing what we kind of expected hospitality got pretty good knock office got a little bit of knock multifamily and some cases is actually up given rates falling.
And sort of a voracious bid for multifamily these days.
So we're still in.
And the process of getting those quarterly reports from our third party appraisers.
And I would say by the end of the year, we'll see that full impact, but right now its nothing that were not expecting and certainly new new growth is far more important variable right now.
Okay, great. Thank you.
Okay.
Okay.
And ladies and gentlemen, once again, if you have a question. Please press 1 zero. Our next question comes from Anthony <unk> with Jpmorgan. Please go ahead.
Thanks, and I just have a follow up around just how you're pricing things and the market between.
Current yield and bumps and when we think about something like Seattle.
Where the prospects for rent growth may be pretty strong given the tech element are you pricing.
That land differently are there and the structure, where there is higher than the 2% typical bombs or a different yield and comparison to say something like Jacksonville, or some other markets and maybe take us a bit into the pricing.
Alright and ticket the markets.
I'd say again that 100 to 125 basis point benchmark was.
Sort of a starting point for all of these thought processes.
And that puts you and kind of the.
Starting cash rate of 2 and 3 quarters, 2.3 and a quarter zone and depending on the transaction.
2% bumps that gets you into the kind of high fours roadways and.
And.
And I know Brett and the capital markets team are have a pretty good eye on where we can fund.
So we feel like we're comfortably meeting those benchmarks.
Spreads that we want but individual pricing is sort of the art markups from the team go through on every transaction, yes, I would say.
Super high quality very liquid.
And assets tons of institutional.
Demand.
And there's probably a slight pricing difference.
So we.
Say, a multifamily and Jacksonville, we probably make a little bit and a trophy.
Office building and.
Seattle MSA.
Across the portfolio, we're just trying to accomplish that spread over our cost of.
Net.
Got it so it's not changing much.
<unk>.
How much is the coupon versus the bump like Thats pretty the bumps are pretty standardized around back to still almost and receipt of the market.
We do I will tell you every new ground lease past, 2% bumps.
Occasionally there is some discussion around.
And certain bumper leaf and <unk>.
And we catch up later on but generally it's 2% bumps with our inflation effects.
Okay got it thank you.
Mr. <unk>, we have no further question.
Okay, great. Thanks, everyone for the good discussion if you have any additional questions on today's earnings release, please feel free to contact me directly.
Tiffany could you give the replay instructions again.
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