Q1 2022 Safehold Inc Earnings Call
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Good morning, and welcome to Safe holds first quarter 2022 earnings conference call. If you need assistance during todays call. Please press star zero, if you'd like to ask a question. Please press one zero. That's one zero task a question as a reminder, today's conference is being ripped.
Courted 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 hold earnings call.
On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Mark Silverado, President and Chief investment Officer, and bread assets, our Chief Financial Officer.
This morning, we plan to walk through a presentation that details our first quarter results. The 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 230 P. M. Eastern time today and the dialogue for the replay is 86620710.
Or what.
With the confirmation code of 9277384.
Before I turn the call over to Jay I'd like to remind everyone that statements in this earnings call, which are not historical facts may be forward looking our actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our SEC reports stable 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 welcome to everyone joining us today.
The first quarter of 2022 was a strong one for our modern ground lease business more customers more cities and more property types are benefiting from the more efficient capital a staple ground lease can provide.
Earnings grew substantially deal flow was very strong we crossed the $5 billion Mark in terms of portfolio size and we made important progress in accessing 30 year unsecured debt for the first time and closing our first round of caret investors.
Despite all this positive news the share prices, obviously underperformed as rates have risen and we want to spend some more time on this call, giving a clearer picture of what inflation means for our business and why we continue to think our business is worth quite a bit more than what we see on the screen.
One of the most important ideas embedded in Staples business plan is that compounding creates well go.
The higher the rate of compounding the better.
By creating a growing diversified portfolio of high quality ground leases. We believe we can harness that equation for investors in a unique way both in the rental income component and in the capital appreciation component of the portfolio.
Let's take a look at the rental income component given.
Given the principal safety and high grade credit metrics have ground leases. The concerns expressed to us are rarely about credit risk, but generally center on interest rate and duration risk.
Of course rising rates take a heavy toll on fixing fixed coupon bonds, particularly long term fixed coupon bonds.
But our ground leases are different than most fixed coupon bonds. In addition to base rents are typical ground lease includes fixed rent bumps of approximately 2% per year on average over their life.
Further almost all staple ground leases include some form of inflation protection with a majority of our ground lease structures, including a periodic upward rent adjustment in the form of cap CPI look backs when inflation stays above 2% for extended periods of time.
So it's important to calculate inflation adjusted yields for safe holds portfolio when inflation kicks up.
Ground lease economics.
We're in some respects more like tip securities and straight fixed income investments.
Our model show these potential inflation linked increases to our rents.
Mitigate interest rate and duration risk and in certain cases can actually increase the net present value multiple on the equity in our existing portfolio after taking into account in place leverage.
Potential inflation linked increases also create solid value multiples in new deals and make them substantially more attractive than most fixed coupon investments.
Similarly on the capital appreciation side compounding at higher rates is better than compounding at lower rates.
Increases in replacement costs have generally led to long term increases in value for well located real estate in major cities now.
And as a result higher inflation has generally led to higher replacement costs and higher values.
We've seen this dynamic in our research on many of the assets in our existing portfolio.
So Curt which is intended to capture the growing value of our portfolio of high quality institutional real estate.
Should directly benefit from higher replacement costs over the ground lease term.
Of course short term dynamics don't always follow the long term arc, but.
But we are comfortable that our business is well positioned to benefit in both high and low inflation markets.
And that each ground lease we execute is value additive for shareholders, even as rates have risen.
We can talk more about these dynamics, but let's go ahead and have markets for breath dig into the details of the quarter one.
Marcos.
Thank you Jay and good morning, everyone.
Let's start on slide three as Jay mentioned, we are pleased with the performance during the first quarter.
Eric drives by solid earnings results and strong investment activity.
<unk> debt and equity raised during the quarter provides us with a significant amount of dry powder to fund our growing pipeline.
And I'll, let Brett go over the earnings results shortly.
First let me provide an overview of our investment activity on slide four.
During the quarter, we originated 10, new ground leases totaling $677 million, marking our best first quarter ever for.
Are these new originations, we funded $519 million during the quarter with the remaining $158 million expected to be funded in the near term.
In addition, we funded $13 million associated with prior ground lease commitments set.
Separately, we also made a new $38 million ground lease plus commitment on a multifamily asset in Brooklyn, New York, Our fifth ground lease plus transactions since we introduced the program in the second quarter of last year.
The 10, new originations during the first quarter spend nine different markets and serving new customers.
The investment metrics associated with these deals are in line with our targets with a ground lease to value of 38% and rent coverage of three nine times under.
Under GAAP these assets generate a weighted average yield of four 8%. However, the weighted average inflation adjusted yield is five 1%.
As Jay mentioned, we believe that our inflation look backs to capture significant value for our business and are not understood by the market today.
I will discuss this topic in more depth shortly.
As we look back at Q1, the pricing for the transactions closed does not reflect the recent upward momentum in rates. The Q1 transactions were liability matched with the execution of our recent debt offering at.
As the rate environment has shifted we have moved our pricing upwards.
Getting floor cash yields approximately 50 to 60 basis points higher.
On an inflation adjusted basis return on assets that are 80 basis points higher based on current long term inflation expectations.
Taking into account our increased cost of capital. We believe that these adjusted ROE as we are still creating significant value for our shareholders and despite the increased cost of our products. Our clients have reacted positively and we continue to add to the pipeline.
Slide five provides an overview overview of our portfolio growth for the quarter originations. During the first quarter has driven our aggregate portfolio to approximately $5 5 billion at the end of the quarter, representing 16 times growth since our IPO nearly five years ago.
The 10 institutional quality ground leases originated during the period include five multifamily three office, one hotel and one life science asset we remain focused on targeting our investments in our current countries top msas and we're pleased to enter three new markets during the quarter.
On slide six you can see the geographic breakdown of the portfolio as we continue to expand our nationwide footprint with the inclusion of Boston, Baltimore and Sacramento This quarter with that let me turn it over to Brett conducted financials spreads.
Thank you Markus and good morning, everyone.
Moving on to slide seven let me switch gears and discuss our financial performance.
Revenues were $60 4 million for the first quarter, a 39% increase from $43 5 million in the same period last year.
Net income was $24 9 million or 47% increase from the $16 9 million, we earned in the prior year period.
And earnings per share was <unk> 43.
35% above the 32, we earned last year.
While year over year performance was driven primarily by revenue growth associated with new originations. This was partially offset by $2 5 million.
Of additional general and administrative expenses, which includes management fees from the equity raises over the last year, plus a $1 $25 million increase in reimbursable expenses that our managers charging.
Let me turn to our portfolio metrics on slide eight.
As of March 31, our portfolio's weighted average ground lease to value was 40% and weighted average rent coverage was three seven times, which is up sequentially as TTM hotel revenue at the properties is rebounding.
By property type our portfolio consists of 48% office, 34% multifamily, 14% hotel and 4% life Science.
Our weighted average lease term is 92 years.
Turning to slide nine we detail our portfolio's yield and how we are positioned in an inflationary environment.
The market prices, our cash flows relative to long duration high grade bonds.
But the reality is that our portfolio is meaningful embedded contractual income pickup from features that fixed rate bonds do not have.
The current portfolio generates a cash yield of three 3% and an annualized yield of five 1%.
These metrics assume a zero percent inflationary environment for the life of our leases.
That means no value to any CPI look backs CPI rent bumps annually or otherwise fair market value resets for percentage rent.
Historically because of the market's long term inflation expectation has hovered at approximately 2% the value of our CPI look backs, where frequently ignored by external parties since the minimum contractual escalators and our safe hold ground leases are also structured with a comparable 2% annual fixed rent increase.
However over the past months, we have seen a shift in the long term and the market's long term inflation expectation.
Longer 2%.
The Federal Reserve Bank of St. Louis publishes data on the 30 year inflation breakeven, which according to the St. Louis Fed represents quote what market participants expect inflation to be in the next 30 years on average and quote.
This market measure of long term inflation, which is calculated as the spread between 30 year treasuries and 30 year tips is up to 249%.
As long term inflation expectations have moved higher we think that it's important for all parties to understand the full value of the contractual inflation capture that is embedded in our portfolio.
We have inflation capture 96% of our portfolio, so with inflation moving higher it is a critical component and understanding our value.
Assuming the markets current long term inflation expectation of 249% our portfolio generates a yield of five 7%, which primarily includes the value captured by the CPI look backs and our safe whole ground leases.
While we think the current inflation breakeven is a fair base case, if we assume long term inflation settles back down at a flat too.
The facts are generally cap.
At between three to three 5% compound inflation over the look back period.
So if we apply the 249% inflation breakeven to our cash flow stream.
Our portfolio will generate a five 7% yield.
Utilizing today's benchmark century bond discount rate results in a significant increase in our cash flow value per share versus what the market seems to be assuming of no inflation capture in our portfolio.
The takeaway here is that inflation is rising and discount rates move upwards. So while our contractual cash flows as we are not just the simple fixed rate bond proxy.
Moving on to Slide 10, which provides an overview on our capital structure.
During the quarter, we closed and funded $475 million of 30 year unsecured notes, we also raised $309 million of equity at $59 per share.
At the end of the first quarter, we had $3 2 billion of debt comprised of approximately $1 5 billion of nonrecourse secured debt $1 2 billion of unsecured notes and $272 million of our pro rata share of debt on ground leases, which we own in partnership.
Our weighted average debt maturity is 24 years.
In addition, we had $235 million drawn on our unsecured revolver.
Bind with cash on hand, we had 115 billion of liquidity at quarter end.
We are levered, one six times on a total debt to book equity basis and.
And one one times levered on the debt to equity market cap basis.
The effective interest rate on our non revolver debt is three 7%, which is a 141 basis points spread to the five 1% annualized yield on our portfolio.
The weighted average cash interest rate on our non revolver debt is three 2%.
Positive spread to the three 3% current cash yield on our portfolio.
In line with my previous remarks about inflation and how it impacts our portfolio. We have added an additional disclosure on the slide which presents the inflation adjusted yield of five 7%, assuming current long term inflation market expectations of $2, 49%.
Because our long term debt is all fixed rate with no inflation adjustments.
Our portfolio generates a 205 basis point spread over our cost of debt.
Moving to slide 11.
We provide an overview on our caret transaction.
As we previously announced during the first quarter, we sold and received commitments to purchase a 137% interest in caret for.
For 24 million to six strategic investors at a valuation of $1 75 billion.
The $19 million sold during the first quarter was classified on our balance sheet as redeemable noncontrolling interests.
We believe that this transaction was an important step as we seek to unlock the full value potential of our platform.
We're quite pleased with the many encouraging conversations we have had within the investment community about the significant asset and its overall intrinsic value.
The sale is the first of many steps and we will continue to keep the market updated on carrier.
Lastly on slide 12, we presented updated.
Date on estimated UCA.
The estimated value of all the unrealized capital appreciation above our cost basis grew to an estimated $9 4 billion.
A $1 3 billion increase or 16% since our last update last quarter and significant growth since we negotiated the initial sale of our caret units at 175 billion valuation.
To give you a better sense of what encompasses that pool of assets. We have a total of nearly 30 million square feet of institutional quality commercial real estate located in the top markets throughout the country.
Price of $13 1 million square feet of multifamily 11, 6 million square feet of office.
$3 7 million square feet of hotels.
600000 square feet of life Science, and 300000 square feet of other property types.
In conclusion, it was a strong quarter for <unk> marked by solid earnings increased investments and we initiated a significant first step to unlock pirates value and.
In addition, we took several important capital market actions.
This quarter that should drive further efficiencies and give us competitive advantages to fund our growing pipeline continue to scale, our business and modernize the ground lease industry.
With that let me turn it back to Jay.
Thanks, Brad.
One other thing I wanted to touch on some investors have asked for an update on the corporate architecture questions with respect to ISR and internalization.
Nothing really to report yet, but as we've cleared the $5 billion portfolio Mark we believe that the independent directors of stakeholders are positioned to evaluate the external management structure and current corporate structure and determine how best to create shareholder value.
And as we've said before whatever makes say stock more valuable is good for both safe and star. So a good solution should be a good solution for both.
Now, let's go ahead and open it up for questions operator.
Thank you today's question and answer session will be conducted electronically to ask a question. Please plus 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'll pause a moment to assemble the roster.
Our first question comes from the line of Nate Crossett Sandburg. Please go ahead.
Hey, good morning, guys.
Alright.
I wanted to make sure I heard correctly, just on the pricing of new originations I think you said something like 50 to 60 basis points higher than that.
Kind of wanted to know the timing of the ramp like we see 50 basis points higher than <unk> or does it take time to kind of.
Flow that through and then just any color on are you getting any pushback from customers in terms of pricing or what are your what are their alternative pricing options look like right now relative to you.
Hey, Nate Marcus.
I think the overall market is going through a little bit of a sticker shock given the speed and the volatility in rates.
From the beginning of the year.
So I think the rack being not just to our increased pricing, but there it react into across the fee financing leasehold financing.
What does this do and how does it ripple through equity valuations.
Generally speaking our customers have been.
Responses.
To the.
The increased floor pricing.
So we've gone from call it high fours.
Low to mid fives on an inflation adjusted basis on an ROA standpoint.
And we can project that every transaction and our pipeline is going to close.
But if the transactions do closed you can start to see that come through in Q2.
Okay. That's helpful.
It seemed like you did more office deals this quarter than you've done in the last few quarters.
Just wanted to know is there anything changing in that area.
In terms of just like pick up of deal flow.
And just maybe comment on where the pipeline kind of waited for the next 90 days.
Yes.
Not sure where you're getting that from Nate we did large life science track transaction, which was about 40% of the volume for the quarter, 35% of the volume was multifamily and about 25% was office and hospitality.
Okay.
I'll leave it there thanks.
Our next question comes from Caitlin Burrows Goldman Sachs. Please go ahead.
Hi, there maybe just a follow up on the question about move in rates, how that impacts your business and maybe the pace of investments. It did look like this quarter's activity was higher than we were expecting especially given the year end 'twenty three targets that you guys had given so could you just talk about what led to the high volume this quarter and if you expect that to continue.
And what could make it potentially decelerate from here and whether investment spreads may play a role in that.
Yes, I think the high volume in Q1 was a little bit of a carryover from Q4, some stuff didn't get closed at the end of the year some of those transactions were.
<unk> brought in the shop early in 'twenty one.
So I don't expect us to.
Another almost $700 million quarter.
In Q2.
That being said, we've seen a positive reaction and we've continued to fill the pipeline for billing for the year going forward.
<unk> reset levels.
Okay got it so have you seen any impact on kind of your increase target.
Returns or yields on.
The amount is kind of acquisitions, you're able to do or the interest from potential tenants customers.
I would say modestly there's been there's been a shift I think Caitlin we remain cautious.
As you know our business is entirely contingent on the real estate capital markets being open and liquid.
To the extent there is a real repricing of equity we think there may be a pause broadly.
We think we're positioned well to take advantage of that opportunity in the long term, but in the short term kind of quarter to quarter, there may be some slowdown here or there.
Got it okay.
And then just in terms of the offering that you guys sit in March it looks like there was about 60% of that deal but back in September .
There.
Participation was under 30%. So just wondering if you could give some color on what drives the size of their participation. How we should expect that to be going forward.
Yes, I think as you saw the net lease sale over star create a lot of liquidity, obviously, we think.
The long term value of stakeholders actually.
Continues to be dramatically underrepresented in the share price. So so from an economics and liquidity standpoint.
That particular transaction made a lot of sense for star can't really predict going forward.
It'll be a sort of a facts and circumstances.
At the time.
We continue to be.
<unk> believers in the business plan so.
Yes, we will see how the year shakes out, but we wanted to put that liquidity in place. So we could continue to execute and expand this market, which is really the most important thing I think from both companies' perspective is we're building a new business that is creating very high long term compounding returns on the AAA.
Context, we have upside from inflation and Karen.
Still think that story is not fully appreciated.
Our stores have the benefit of five years of watching it and just stating it so.
Not surprised they continue and have an interest.
Got it okay. Thanks.
Our next question is from Rich Anderson S. MVC. Please go ahead.
Hey, Thanks, Good morning, maybe a follow on to that last question do you Jay.
Putting aside the participation in the equity.
From <unk> perspective, what we haven't seen much of is I stars.
Stars regular kind of investment.
And safe.
Similar sort of monthly weekly monthly basis or whatever it has been over the longer term and I'm curious as to why that that element of the of the ice star investment model has slowed down as of late.
Hey, Rich, yes look I think the.
$5 billion milestone was an important milestone it's April it's triggered some things we have.
As mentioned in previous calls about is there a better structure out there that can unlock value for both companies representing.
The majority of shareholders and stakeholders.
Thank you have to be a little bit cautious here given the.
We have.
We continue to believe there might be a better structure out there so I wouldn't read much into that other than <unk>.
Appropriate prudence.
When you described the board kind of looked at is time to start to evaluate the external management structure does that introduce any roadblocks to.
Trades happening.
Just by making that comment.
Yes, nothing that I'm not a lawyer, so I won't speak but as I said.
Sort of appropriate prudent given okay one.
One of the alternative paths, but we could certainly see ourselves on.
Okay.
Next question.
The investment in caret by the initial investors.
Aside from.
The opportunity cost of making the investment what risks did they really take on if they can get their money back if the securitization or whatever monetization it doesn't work out.
And as planned.
Yes look I think as Brett said this was the first step in a process to unlock an enormous store of value.
We believe and our board believes in.
Certain investors now believe in them.
This group of investors for US was really the right mix of investors to begin the process of educating the rest of the market as you know rich. It's one thing for us to say, it's another for others to.
Come from different worlds to also reinforce that message.
Our goal as we said on the last call was to get the right investors as quickly as possible make this really the first step.
And it has had the desired impact and that more and more of our conversations people are asking the right questions about caret now theyre starting to understand the dynamic.
As you see that page in the document.
Historically, not really had a chance to talk about what it means to grow from 400 million to $9 4 billion whatever you think of.
The dynamics in caret, that's that's a pretty powerful one and so having a group of investors who can take on the.
The intellectual challenge to actually come into a round, even though it is structured even though they've got to investor friendly discount to the then current.
UCA values.
It is a major step I think was an important step and it has begun the process that we have been wanting to talk about literally since our IPO.
Held ourselves back until we proved out a lot of the other pieces of the stapled story, So I wouldn't I wouldn't look at it so much in terms of value.
The structure I would say these are the kind of investors who don't.
And any time on things they don't see the potential for all of them I think confirm to us.
This was one of the most unique and interesting value creating opportunities out there exactly how it should be unlocked as is something we have strong thoughts on but they may have even been better thoughts. So we built an advisory committee, we have spoken to them. They have continued.
Continued to engage with us so I don't think.
Sort of.
Put it in the drawer and don't have to worry about it there's an engagement level there that suggests they see what we see.
Okay.
And then last for me.
In the.
Kind of the outline of inflation protection and what the adjusted returns or why is it or an increase of 2% inflation assumption from from five 1% yield to $5. Four if you're if your escalators are already 2% why why would there be any increase or is it not quite 2% on average is.
It's something just short of 2% as you have a little bit greater yield I, just want to make sure I understand that.
It's not quite that if you think about our portfolio about 80% of it is originated on staple forms about 20% in sort of non stapled forms which might be annual CPI might have percentage rent.
You just.
Pushing on the Delta between a.
Faithful form and some of the non non traditional ground leases we have purchased differ.
Different inflation capture mechanisms gotcha.
Got you okay. Thanks very much.
Our next question is from harsh Hemani Green Street. Please go ahead.
Thank you I just wanted to follow up on my first question on pricing, so 50% to 60 basis points above better.
When you look at the effective yield of four eight excluding inflation that you mentioned for the fourth quarter.
In fact all.
All else being equal.
Where do you think you end up on that at the end of the.
So I think on the.
Harsh on the go forward transactions.
At least at the floors were in the kind of five and a quarter range and those are obviously as rates move up floating upwards.
And then on an inflation adjusted basis, they're closer to the high <unk>.
Got it.
And then my second question is around <unk> plus program.
A couple of quarters ago. When this was launched Jay you mentioned that bill pay for lakes to be in the 35, 40% ground lease their broker value range.
The ground lease plus development really don't have that kind of security.
Probably not.
To put them in the portfolio from the get go.
Now I'll, let Dennis.
There is a high likelihood of north being the extraordinary manager and maybe even though combination between the two entities.
How do you think about the ground lease portfolio companies plus portfolio integrating into the faithful.
Oh, sorry, okay. So.
So harsh.
What we've decided we took kind of the initial steps here is we actually.
Set this up in a fund construct.
So we brought in a partner on these GL plus transactions at ISR.
To fund these initial GL plus transactions that we have a 53% partner.
In those transactions, our anticipation is to continue to potentially bring in other equity to fund. These transactions. So to the extent there is some sort of corporate transactions. The majority of the equity would not be on safe balance sheet.
And I guess after the after the combination potential combination you would find another partner to fund with ground.
Plus holdings.
Am I hearing.
Is that correct.
So we've already found a partner and I think long term the goal would be to find additional partners to fund that business line in that product.
Okay. That's helpful. Thank you.
Our next question comes from Rich Hill Morgan Stanley . Please go ahead, hey, good.
Good morning, guys. So when we think about the valuation of safe, we sort of separate and the three parks your existing portfolio, new originations and the value of the UCA.
So I wanted to focus on two questions first the value of these portfolio and then second new originations going forward.
On the existing portfolio as I think about your CPI look backs could you maybe give us some view of how many of your existing ground leases have CPI look backs that kick in over the next call. It three 510 years.
Yes.
Can you imagine the bulk of the 10 year CPI look backs that are in place in the portfolio don't really start to hit until the.
The 2029 2000 32031 period.
So in some respects, we think of it as the CPI Bank high CPI.
The interim we can kind of calculate going out, but it's still early for us to predict what over those first 10 year period, it will be but.
Think what we have.
Put in the book.
Page nine really says what if long term inflation is not to one of its 253.
What would those inflation adjusted returns look like obviously, the the liability side moves very quickly and is easy to so just look on the screen and see.
It's a little trickier to figure out what is the best proxy for long term inflation, we use a fair number.
Going through some people can use higher or lower so we've given a little bit of sensitivity around that number but that's that's kind of how we start with a sensitivity around the existing portfolio rich and.
So the math is pretty simple you can do the ROE as you can see where our in place debt as you can figure out a refinancing rate and do sort of NPV is and what we've done looking at that as well.
The existing portfolio and our band between sort of 2% and 3% inflation you actually can see the equity Npv's go up.
Because we have a fixed cost that for the first 25 30 years on most of the portfolio and then you have a revenue stream it's bumpy.
Bumping up faster than our models historically view because.
Candidly, we thought inflation of 2% was sort of the market's proxy now the market's proxy is likely to be higher we run those same models when we go what happened.
And on the existing portfolio certainly all Thats happened is you probably have a higher assumption for our rent streams and probably a slightly higher assumption on the refinancing cost 30 60 years from now when.
When you run that all through the model, it's actually one of the reasons, we love this business.
As you have quite a bit of inflation capture.
But youre not going to be sharing with your liabilities that are already in place.
Yes, so Phil look.
I think we've chatted a lot about this.
Our models are already assuming call it the 575% effective yield.
So I agree with you. It is just math so looking forward.
The cost of financing has risen a lot since the since the end of last year, we can debate how much it's risen.
I guess my question for you Jay is.
It can Europe effective yields over the medium to long term of your ground leases.
Rise one for one with that.
And financing cost again over the medium to long term. So let's just throw out numbers, let's assume <unk> costs are 100 basis points higher 200 basis points higher.
Will there be a time period in which your effective yields for your ground leases can also go up by that much or will there will be a slow bleed lower in.
Your spreads between your effective yields in your financing costs.
Let me give you my thoughts and then Mark can kind of tell you whats happening on the ground.
People have asked US is there a ceiling on.
The overall yields on ground leases and I would say, we again compete mostly with the rest of the capital markets.
And if our capital is better capital lower cost lower risk more efficient, we should always be able to move in tandem with the market, but if you ask us realistically I think Marcus was hinting at there are pockets of change that the market will adapt to slowly. So if you'd told me can you.
Guys go in rates.
Rocket another 150 basis points can you raise your cost.
So the customer 150 basis points I would say no.
The market will not accept radical change that quickly.
But over long medium and long periods of time, all we have to do is create a better solution than the alternatives.
If the market's out that why that probably means all other sources of capital available to the real estate industry are also out that wide and all we have to do is be a little better than that because we're already more efficient we're already more risk, reducing so yes medium and long term I think we will move in tandem with the alternative cost of <unk>.
<unk> complex available to real estate.
But I don't want to go so far as to say that happens on these short term dynamics and I think markets can probably give you a sense of <unk>.
Customers are accepting.
World is changing but I think if you just try to stick to.
Tibet methodologies if rates went up another 100 150 basis points I don't know what do you think market gives us.
A simple example.
Multifamily cap rates are still sub 4%.
Try to buy land at 4% there is no deal.
Just a illustrative example today.
I think it's both Jay and Brad and I have said that even at these reset levels 50, 60 wide of where we were.
At the beginning of the year, we're still creating a tremendous amount of value.
For shareholders, even at this increased cost of debt, obviously and to your point rich margins have decreased somewhat but not on an inflation adjusted basis and that's what we want people to take away from this and then when we look back kind of ended 2018 through 19.
And you look kind of at the rate environment, there not as volatile as the spread environment.
We were able to produce attractive rois.
And as we think about the opportunities on the liability side. When some of this volatility dissipates. We think we're going to continue to drive solid margins and create value for shareholders.
That's helpful and we can take it offline I just want to.
I think the market is sending a message that there's concerns about your ability to originate ground leases accretively.
In the future.
Financing costs are higher and ground lease effective yields don't rise in lockstep.
That doesn't really make sense to me for a variety of reasons and I think your history suggests that you've been able to maintain spread over various different rate regimes.
But look I mean, we are dealing with a 100 year asset.
That is very sensitive to assumptions. So if the market is saying well spreads down and discount rates higher.
We can all do that math.
So that's why I'm, just trying to unpack a little bit and Jay I recognize what you are saying and I think it's completely fair.
I just want to make sure that when we think about our models were not crushing free cash flow in stage, two which is long long stage, two and the discounting that at a higher rate because we all know what that does to about bond math. So we can catch up all offline. This has been helpful. Thank you for this.
Thanks, Ron.
I like the methodology of existing portfolio, new originations and caret too.
Out of three of those will benefit from.
Higher than 2% inflation assumptions up to a certain cap and then we can spend some time with you on our new origination math, which to us is still quite value accretive for shareholders.
That sounds great. Thanks, guys.
Our next question comes from the line of key Ben Kim Truest Securities. Please go ahead.
Thanks, Dan Good morning.
So I just wanted to go back to the question about yields.
I'm actually more curious about the.
The economic cash yield versus the cash expense on <unk> debt.
That spread has tightened.
Maybe for more obvious reasons.
But.
How do you see that.
Changing.
Over time and as.
As rates have risen.
What is your ability to actually originating new ground lease with the better going in cash yield versus effective yield or inflation adjusted yields. So that's no.
Can you it looks like a great but in the near term.
Understood.
Yes, so I think the hard part of our business or I should say the hardest part of our business is actually building the portfolio on the asset side of the ledger.
Our team is doing a great job of expanding across the country are expanding across product types, expanding our customer base.
Continue to see lots of repeat customers.
Following in that week is how do you create the right liability structure for what we think our exceptional portfolio returns.
And you've touched on something that's quite important to US we started with 10 year secured debt. We then went to 30 year secured debt. We then created 50 year secured debt. We then created structured.
But long term secured debt, which ultimately if you think about our revenue stream. It's an upward sloping curve. If you think about our liability costs, we were able to create a similarly structured liability stream. So we were able to make the cash to cash yield to yield.
They are pretty good over starting point and then over its life.
We've done a 10 year unsecured deal we've done a 30 year unsecured deal.
The liability side of this ultimately should match the revenue side, you shouldn't have any long upward sloping inflation protected revenue stream and a flat that stream. So your point is something we are quite focused on.
Sure you that it's imminent, but I would tell you look at our track record in the secured world. We're trying to replicate that in the unsecured world, which gives us the maximum ability to work with our customers to create these unique.
Long term investments that we think are some of the best we've seen in our 30 year finance net lease.
Subsets.
And I think what Youll see US do is continue to make the capital available to our customers.
And to create value for shareholders and it's not just the asset side. It's also the liability side.
Okay.
And just to.
Follow up on the.
The comment you made about upward drift on effective yield.
260 basis points I was wondering if I understand that clearly.
<unk>.
In previous quarters, the effective pre inflation yield of four eight going up to five in a quarter I was wondering if I understand it apples apples to apples comparison.
Yes.
Right I think if you think about cash yields high twos are now kind of three three to $3 35.
Our floor basis on a cash perspective and an ROA.
High fours to five in a quarter of $5 35.
Depending on where they come up.
Okay, and just last question because of the higher acquisition volumes this quarter and equity raises.
The timing element just curious about the all else equal EPS run rate going into <unk>.
Sorry give me that again Kevin.
Just because you guys close on a lot of deals this quarter and raise equity as well so.
Timing can matter in terms of what EPS looks like going forward.
So if you don't do any more deals we're raising any new equity what is the.
Ongoing EPS.
Run rate.
From the FERC Keybanc, Hey, Steven it's Brett So yes in the first quarter, obviously as you mentioned the timing of those originations and when we were earning is a valid point.
A lot of that was funded.
From our credit line.
And then the 30 year unsecured notes that we have price in January we had we had drawn our funded debt at the end of the quarter. So what youll see is.
Uptick in interest expense moving from the revolver to that permanent debt.
And then we also have.
One time.
For director fees that we pay in that quarter I think those are the two anomalies, but to your point the timing of.
When we close deals during the second quarter will matter, but I'd say those are the two.
Two differentiators when you look quarter over quarter.
Okay. Thank you.
And once again, ladies and gentlemen, if you have any questions or comments. Please first one zero.
Sure.
And our next question comes from the line of Matthew Howlett.
Please go ahead.
Hey, guys just what's the outlook on the term debt market in terms of accessing that market here in the next few months to pay off the revolver.
Yes look we're exploring a number of different options in terms of that we like.
Like to stay in that 2025 30 year duration so about.
Generally our focus but if we think rates are gapped out because of Ukraine.
Or short term factors, we want to be thoughtful about that as well so.
So we're still evaluating that don't have a fixed plan, yet and we'll see how fast.
The investment team is putting out money and make a decision when its the right time.
Yes.
It's Brett to piggyback off that we had $235 million drawn at quarter end. So I know we've remarked in the past that once we start to get to that have a $1 billion mark or so we will look to term out those borrowings with either debt or equity.
As Jay alluded to before in the long term debt markets.
Looking at the playbook of what we utilize back in 2017 through 2020, and what we've done since in the unsecured markets.
We are encouraged by the amount of providers, who are having dialogue with.
And hopefully we can continue to.
Create the best returns for our shareholders.
By using more innovation as well.
Got you and then on that note.
Capital like equity capital to.
Two questions first.
Private sale of the carrier.
Would you do that before let's just say a liquid trading markets establish and then.
Second I know in terms of a potential merger with <unk> and our balance sheet combination.
Is there a scenario where there would be.
Could you potentially significant capital freed up for safe to go reinvest.
Yes.
I think on the.
Merger conversation, it's too early to really get into that but I.
I don't I don't think there is suddenly a pot of gold.
To reinvest so I'm not seeing that scenario, yet, but again, we're still early in that process.
And the first question.
Karen on a second.
Absolutely.
The goal here is to create a liquid security.
But I think we're continuing to expand.
The knowledge network around what caret is and what it can be.
Far beyond just the real estate world. So I think it makes a ton of sense to us to look to.
To continue that.
Group of investors, who will help us expand that.
Knowledge network.
Timing wise, that's something we will definitely be focused on this year.
Would you look at that James if the equity markets are shut out as a source of non dilutive capital to to raise another round shell a piece of that to continue investing in new ground leases.
Would you rather just get your debt market established first at fair value and hold back.
No look.
I think it is a untapped source of capital, but obviously it helps on a number of fronts, but most importantly.
Again, you guys know our viewpoint is this asset is worth.
Dramatically more than we think it's being given credit for.
Begun the process to unlock value for shareholders.
You believe in the success of that exercise.
We're not talking about $2 five or $7 a share we're talking about.
Double triple of where the stock trades today, So I think that that dynamic is so powerful and so important to us that we want to pick the right next step.
<unk> investors to help us get to the final.
Really.
The expression of of caret and the markets.
Reading all of a dramatic impact on say fold in and its ability to raise capital at appropriate pricing. So it all kind of goes hand in hand, and I wish we could move faster, but we have the dominoes lined up we know which ones we need to push one.
There are periods, where we can move fast on things and there are periods, where we kind of have to wait things to sequence.
But you're hitting on a lot of the big themes that we've laid out in our strategy.
And just to default the strategic board as they've given you Jamie had been helpful Lynch.
Gimme ideas moving things closer are we talking.
Two year event were talking six months.
Well, we have a two year window.
We have engaged with.
That group to try to start to lay out some of our thoughts about where this could go.
Find its next.
Best step.
Yes, they've been really helpful in thinking that through and challenging us candidly on some of the ideas that we.
We think our the.
The right next step and they may have even better ones for us. So that's the dynamic dialogue.
Dennis.
I think it is paramount to understanding the stapled story.
So we are certainly encouraged by what we've heard so far and the number of investors who have come back to US and said tell me more.
That to US was the big difference from last year.
Now investors are saying tell me about this not hey, let me tell you about this new thing.
They are now coming to us and saying.
That's a real value it's tangible it's transparent it's growing really fast and represents.
Strawberry high quality diversified portfolio of real estate.
It actually doesn't sound that hard to go from I wasn't even paying attention to while this looks like it has real value tangible value fast growth.
But we don't want to be the only messenger in the world. So.
Give us some time to continue.
<unk> on the strength of <unk>.
Initial group of investors bring in additional investors and I think youll start to see the story really gained momentum.
Alright, Thanks kit.
We have a question from the line of Derek Hewett Bank of America. Please go ahead.
Good morning, everyone.
Could you talk a little bit more about the near term pipeline just given the higher I think you said 50 to 60 basis points of pricing.
And should we expect a material slowdown in the.
The second quarter, just given kind of as the market reacts to the new reality.
Yes, I don't I don't expect us to knock it out of the park like we did in Q1, but.
Client base has been pretty responsive both existing and new.
To our new pricing.
So we've done a.
Pretty good job of back filling.
Pipeline and working through the stuff that's in.
A letter of intent so we feel pretty optimistic about the growth going forward.
The caveat being that.
Transaction markets freeze like they have at pockets with this level of volatility.
There will be a slowdown, but it feels like a good mix of what we've been able to do in the past some more life science assets.
Kind of half the pipeline is multifamily.
And then the balance is a mix of office and mixed use.
Great. Thank you.
And at this time there are no further questions I will turn it back to you Mr. <unk>.
Okay, great if anyone should have any additional questions on today's earnings release, please feel free to contact me directly Roxanne when you give the conference call replay instructions again.
Certainly one moment.
You may contact Doug AT&T replay system by dialing 18662071041, and the access code is 9277384 again the numbers 8662071.
041, and the access code is 927738 for.
That concludes our conference for today you may now disconnect.
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