Q2 2022 Safehold Inc Earnings Call
Yes.
[music].
Yeah.
Good morning, and welcome to safe old second 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 to ask a question.
As a reminder, today's conference is being recorded at this time for opening remarks, and introductions I would like to turn the conference over to Jason Fooks Senior Vice President of Investor Relations and marketing. Please go ahead Sir.
Good morning, everyone and thank you for joining us today for Staples earnings call.
On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Mark of Silverado, President and Chief Investment Officer, and Brett <unk> Chief Financial Officer.
This morning, we plan to walk through a presentation that details our second quarter results presentation can be found on our website at <unk> dot com and by clicking on the investors like there'll be a replay of this conference call beginning today at 230 PM Eastern time and the dial in for the replay is 8662071041.
With a confirmation code of 743620 to.
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.
<unk> disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.
Lastly, I want to highlight that yesterday I Star filed an amended 13D disclosing with a special committee of the board of directors of Ice Star and a special Committee of the board of directors of Staples are in advanced discussions with respect to a potential strategic corporate transaction and that they are proceeding to negotiate definitive agreements.
However, because no definitive agreements have yet been executed and there can be no assurance that definitive agreement will be executed we won't be able to discuss the potential transaction on this call with that I would like to turn it over to chairman and CEO Jay Sugarman Jay.
Thanks, Jason Thanks to all of you for joining us today.
The second quarter was a busy one for say full.
Earnings and revenues continued to grow strongly engagement with customers remained high and conversations between our historic faithful regarding the future progressed significantly.
As Jason said, we won't be able to share details on those conversations until they are completed but hope to be able to do so in the near future.
For the quarter year over year earnings were up over 30% of.
New investment volumes remained strong at over $350 million.
Pricing has moved up with interest rates and inflation adjusted yields still feel quite compelling to us.
Transaction activity in commercial real estate has started to slow, but we'll need to watch how the overall market stabilized in the second half of the year.
We also continue to explore ways to align our long term contractual cash flows and long term liability structures.
And you'll hear from Brad about a recent stairstep coupon innovation that enabled us to access 30 year financing that more closely matches the growing cash flow streams of the company.
As we approach $6 billion in ground leases and $10 billion in UCA, we remain focused on three things <unk>.
Expanding the use of modern ground leases by providing low cost and attractive capital solutions for building owners and developers and pop cities around the country.
Simplifying our corporate structure, so more of a market can participate in our equity and debt offerings.
And importantly, getting the full value of the company's portfolio reflected in the share price.
Interest rates certainly play a part in that calculation, but soda inflation protection and carrots value and when we use the back half of the year to continue highlighting the sizable value of carrier inside stapled portfolio and the positive impact of inflation on our asset return.
The cost of capital we can provide to customers is tied to our success on these last two points.
So we will be working hard to help the market see the full valuable faithful to bill and the value. It can create a the continues to scale.
And with that let's turn it.
Over to Brent and Marcos Markups.
Thank you Jay and good morning, everyone.
Let's begin on slide four.
The second quarter was characterized by solid earnings results meaningful investment activity and continued UCA growth. Additionally, during the quarter, we raised fresh debt capital through a new innovative structure, which left us with ample liquidity.
Brent will get into the details of this quarter's earnings results first let me discuss our investment activity beginning on slide five.
During the quarter, we originated seven new ground leases totaling $381 million of which we funded $338 million during the quarter and expect to fund the 43 million balance in the coming quarters.
Additionally, we funded $37 million during the quarter associated with prior ground lease commitments.
These seven new originations spanned four different markets five new customers and across all five of the property types. We focus on as we continue to expand the utilization of ground leases throughout the major markets in the U S.
As we mentioned last quarter, we've increased our pricing as rates have moved the.
The new ground leases, we originated during the quarter generated a weighted average yield of five 5% assuming zero percent inflation.
Which is 70 basis points higher than the four 8% yield for the investments we made in the first quarter again under a zero percent inflationary scenario.
Of note two of the investments we made during the quarter totaling $49 million were the acquisition of existing ground leases that do not feature of the typical saiful fixed rent bumps with CPI look backs, but rather have rent escalators, primarily based on CPI for most of the life of the leases and as a result of the variable rent.
Component show, a much lower yield under GAAP.
Excluding these investments our yields for the quarter would be five 8% on the $332 million of originations, which is reflective of our pricing levels today.
We have previously discussed that we believe that the inflation protection built into our ground leases capture meaningful value for our portfolio that is not recognized by the market nor reflected under GAAP in our financial statements.
For example, assuming the St. Louis Fed latest 30 year inflation expectation of 222% the contractual inflation capture in our second quarter investments would result in a five 7% yield.
The credit metrics associated with the originations this quarter are in line with our targets with the ground lease to value of 38% and rent coverage of four six times.
Slide six provides a snapshot of our growth for the quarter at the end of the quarter. Our aggregate portfolio stood at approximately $5 9 billion, representing 17 times growth since our IPO just over five years ago.
Underscoring the widespread adoption of our modern ground lease product the seven high quality ground leases. We closed during the second quarter are comprised of five different property types, including multifamily office Hotel life science and mixed use.
Can see the quality of the assets we originated during the quarter on the right side of the slide.
Moving to slide seven we show a geographic breakdown of our portfolio as we continue to diversify across the U S. Focusing on the top 30 markets and with that let me turn it over to Brett to go through the financials right.
Thank you Marc and good morning, everyone.
Continuing on slide eight let me detail our quarterly earnings results.
Revenues were $64 9 million for the second quarter, a 47% increase from $44 2 million in the same period last year.
Net income was $22 7 million, 54% increase from $14 7 million, we earned in the prior year period.
And earnings per share was 37, 32% above the 2008 since we earned last year.
This quarter's results include the $1 1 million annual stock based compensation expense for our independent directors.
Additionally, during the quarter the board of directors approved a four 2% increase the common dividend to an annualized rate of <unk> 78 per share.
Additional portfolio metrics can be seen on slide nine.
At the end of the quarter, our portfolio's weighted average ground lease to value was 40% and weighted average rent coverage was three eight times.
By property type our portfolio consists of 46% office, 33% multifamily, 13% hotel, 5% life science and 3% mixed use another.
Our weighted average lease term is 92 years.
On slide 10, we detail our portfolio's yield under various inflation scenarios.
There's been a significant amount of discussion about inflation and how it impacts our portfolio.
The market largely values, our cash flows relative to long term high grade bonds and what we've seen year to date is a high correlation between our stock price and the yields on these long term high grade bonds.
However, as Mark has mentioned this tight correlation does not reflect the fact that our cash flows aren't fixed but are positively correlated with inflation as approximately 95% of our portfolio.
Some form of inflation protection built in.
The current portfolio generates a cash yield of three 3% and an annualized yield of five 1%.
However, these metrics assume a zero percent inflationary environment for the duration of our ground leases.
Take the St. Louis Fed the latest 30 year inflation expectations to two 2%.
Our inflation based rent bumps will drive the portfolio to yield five 6%.
If it settles back down to 2.0% for the next 99 years, our portfolio yield five 5%.
And if it ends up increasing to 3.0% of our portfolio with yields six 1%.
This additional yield is meaningful when compounded over 99 years and results in a materially different valuation that the market has not priced them and we believe this is essential for investors to understand.
Said another way it is true that higher inflation has led to higher rates, which means investors should apply a higher discount rate to our cash flows.
But in that scenario the cash flows that our portfolio generates will generate will also go up they are not fixed like the comparable long term bonds and so keeping the cash flow assumption static is not fair.
Slide 11 provides an overview on our capital structure at.
At the end of the second quarter, we had $3 6 billion of debt comprised of approximately $1 5 billion of non recourse secured debt $1 4 billion of unsecured notes and $272 million of debt, representing our proportionate share of the debt secured by ground leases, which we owned in partnerships.
Our weighted average debt.
Yes.
In addition, we had $445 million drawn on our unsecured revolver.
Combined with cash on hand, we had $930 million of liquidity at quarter end.
We are levered, one eight times on a total debt to book equity basis at one four times levered on a debt to equity market cap basis.
The effective interest rate on our non revolver debt is three 7%, which is 134 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%.
A positive spread to the three 3% current cash yield on our portfolio.
Also during the quarter and despite choppy markets say bolt continued to successfully innovate in the capital markets by raising long dated debt in an effort to best match, the cash flow profile of our long duration assets.
Specifically, we raised $150 million of 30 year structured unsecured notes at five 5% due 2052 with pricing of 30 year U S Treasury, plus 195 basis points.
Which was significantly inside of the spread of where our 10 year public bonds were trading.
Importantly, the financing features a unique stairstep coupon rate structure in which the company will pay cash interest at a rate of two 5% in years one through 10.
75% in years 11 through 25.
515% in years 21 through 30.
The difference between the 515% stated rate and cash interest rate will accrue to our principal balance after each semiannual payment period to be fully repaid at maturity in 2052.
In anticipation with this financing stapled entered into $150 million Treasury lock agreement at a 291% strike rate, resulting in a yield on the notes net of the hedge of $4 92%.
This novel transaction is another meaningful step for Saiful and demonstrates that credit investors are increasingly responsive to long dated accretive unsecured financing structures for our high quality assets as we continue to expand our footprint in the unsecured credit markets.
Lastly on slide 12, we provide an update on UCI.
As of June 30, the estimated value of all of the unrealized capital appreciation sitting above our land increased by $543 million to approximately $9 9 billion, an 86% compound annual growth over the past five years since we IPO.
In total the UCA portfolio is comprised of approximately 32 million square feet of institutional quality commercial real estate.
A listing of 14 million square feet of multifamily $13 1 million square feet of office $3 8 million square feet of hotels 700000 square feet of life Science, and 700000 square feet of mixed use and other property types.
So to conclude while it has been a very challenging year. So far in terms of stock performance. It was a strong quarter and we remain focused on expanding our leadership position in the ground lease industry.
With that let me turn it back to Jack.
Thanks, Brett lots.
Lots of good progress on the right side of the balance sheet. There. So let's just go ahead and turn it over to questions.
Many of you will want to ask about the <unk> conversation, but I hope you understand we can't say anything at this point, so we'll stick to questions about the business during Q&A.
Operator.
Thank you to ask a question. Please press one zero at this time, we will take as many questions as time permits.
Once again, please press one to ask a question.
Our first question comes from the line of Rich Anderson S. NBC. Please go ahead.
Okay, Jim chomping at the bit, but I'll try to play next year.
So.
On the liquidity you mentioned $930 million.
Yes.
Okay, Let's say you bring that out over the course of the next six to 12 months.
Do you feel in terms of Optionality to raise additional capital to grow the platform.
Might involve more in the way of joint ventures.
Perhaps Paul asset sales what would be the game plan, assuming we don't have kind of a reasonable recovery in the stock price going forward.
Yes, I think all of those.
Ideas are on the table.
We will try to find the best capital source, we still think the transactions, we're doing are very compelling and accretive.
But obviously not happy with the share price so.
There are other ways to bring capital and Theres been a lot of interest.
From third parties frankly.
We'd rather not give up any of the ground leases that we're creating but certainly there is the alternative if they are if they are better but we have access to.
And what about for for new.
Investments are newly created ground leases I know you have you talked a lot about the CPI protection, but investors do have to wait for that in terms of present day cash flow.
Is there any talk about maybe stepping up the question inflation protection.
Perhaps closer to the present day or is this going to be the model and youre, just going to sort of ride out the current macro environment as.
As you are currently running the business.
Well you know we are firm believers that inflation protection and very valuable over the life of the ground lease I think rather than sort of push our customers.
What you've seen breast in the capital markets team do is really try to lineup the liabilities to <unk>.
Look more and more like the same structure on the assets.
I think theres more opportunity there frankly than to go back to customers and try to push them into a different mindset.
We feel like we found the right balance right now of it gives us the benefit of that inflation protection, but also gives our customers a chance to execute their business plans.
Pretty good pretty strong certainty around what the cost of them.
<unk> will be with us so.
I don't see a lot of changes coming on that front, but I do see a lot of opportunity.
The liability side.
Okay last question from my end.
No.
To get too close to the to the discussions about collapsing the two companies but.
Star Wars.
Do you feel like you are in terms of getting through the things you want to get through at Star.
In terms of additional asset sales and the like.
Got it through the net lease platform.
What needs to be done in the next 12 months in your mind, just just from the point of view of <unk>.
Yes.
As you know, we're having a store call we think the net lease transaction.
Millstone transaction.
We can sort of talk about everything else rich I can't really talk about yet but.
We are excited about where this ground lease ecosystem is going and I think both safe hold amstar ultimately having created it will be the beneficiaries of our future success. So.
Where we can we will we will share those details, but we can't do that on this call.
Okay fair enough thanks very much.
Our next question comes from Adam Kramer Morgan Stanley . Please go ahead.
Hey, guys. Thanks, Thanks for the time appreciate it just wanted to kind of maybe drill in on.
On the kind of the new ground leases from this quarter right. So kind of ignoring kind of the total portfolio and just focusing on this quarter as new originations, maybe just kind of remind us and I know you disclosed kind of for the whole portfolio, but just kind of remind us kind of the spread between the yields on the new originations.
And then kind of the spread between that and your financing costs and how that spread kind of may compare to 234 quarters ago before kind of the run up in financing costs.
Hey, Adam.
So I think.
The way, we think about our portfolio. Our Q2's originations is kind of two buckets, we originated $381 million.
Of that.
About $50 million was existing ground lease portfolio, which is variable rent. So it doesn't get reflected in GAAP. So as I think about the balance of $332 million.
Our cash cap rates are about three 8%.
Our rois are about five 8% again, that's pre any inflation.
So pre inflation I think we're still getting kind of that 75 to 80 basis point spread versus our cost of debt today.
And then we obviously think about that inflation is significant.
Bonus of value.
That's super helpful guys. Thanks, So maybe just drilling down a little bit on.
That model of buying existing ground leases is that something that you don't kind of as the product matures I think there'll be more opportunities out there to kind of by your existing portfolio is rather than kind of new I guess kind of new ground leases hopefully you're kind of thinking the way you phrased.
Is that something where you know maybe more portfolios out there.
Okay.
It's been about 10% to 15% of our business over the last five years.
It's extremely episodic.
As you know these ground leases are extremely hard to create and therefore, the owners of existing ground leases very rarely sell it's usually an event.
Family somebody passes away.
For our municipal institution.
Selling for some other purpose, which was actually the case here. This was a university Shelly.
Selling selling some land.
So very episodic when those assets come for sale. We are obviously part of the process along as they fit our profile.
And then just a last one if I may and again, hopefully not kind of getting to clear to the too close to the to the topic, we can't talk about but.
So just kind of wanted to ask when you look at kind of safe stock today.
What are some of them maybe kind of the.
The reasons why.
Things that can be changed right, whether it's whether it's the flower I'm sure. It was one that you'd say, maybe other reasons that investors aren't thinking about things that could potentially change for the transaction and maybe kind of improve improve the stock room from a more technical perspective.
Yeah, I think you've hit on an important point as I mentioned, both on the equity side and the debt side, we've heard from investors consistently.
On the equity side, the external management structure of the controlled shareholder structure are not things that.
People.
Would naturally like to see it.
And in some cases, they've literally make it impossible for them to invest in April . So those were constraints, we laid out at the beginning of the year that we felt like if we could tackle.
With our historic both both parties would benefit.
So thats been a little bit of a north star in terms of thinking about the future how do we make it.
Faithful reach its full potential well those are two constraints, but we would hope to be able to eliminate because of the underlying business in our mind.
Hey, It was undervalued and B has tremendous potential and the last thing we wanted investors to be precluded from participating.
The corporate architecture.
Alright, Thanks again for the time guys.
Thank you. Our next question Im sorry, our next question comes from the line of Conor So risky Bahrenburg. Please go ahead.
Thanks for having me on the call are really really just one quick question, considering the forward rate curve and where.
Or the Dot plot is right now and the duration of some of these ground lease terms are you seeing in real time any upward drift in these kind of initial yields that youre seeing on potential acquisitions.
Yeah, absolutely I think if you look at Q1 to Q2.
That number has gone up 70 basis points on our GAAP effective yield and then if you exclude those those that $50 million of existing ground leases that we bought up that pricing has gone up 100 basis points. So we're seeing it live we're seeing it.
Positive reception that despite that increase from our customer base on the transactions, we closed in Q2 and positive reception in our pipeline going forward.
That being said I, just want to Echo Jay's comments.
There is clearly a slowdown occurring right now.
Our bid ask between what are what our asset values and so.
As we think about the second half of the year, we expect potentially some slowdown over the first two quarters.
Understood, but in the same context do you expect maybe more levered buyers might be stepping away from similar transactions opening up some more opportunities for you.
Yes, I think.
We sort of we look at our competitive advantage as what's the spread to using a ground lease versus your regular way financing and I think our product actually looks better.
Than it did at the end of last year.
I think the reality is we are part of a capital solution.
And today, there is still a bit pretty big bid ask on what our assets worth we're seeing some positive.
Momentum over the last couple of weeks, but.
But we do expect the transaction volume to slow down somewhat.
Understood. Thank you.
And our next question comes from the line of Stephen Laws Raymond James. Please go ahead.
Hi, good morning.
Okay.
I guess I wanted to start first I noticed I think in the deck that showed of the seven new deals in Q2 fiber with <unk>.
New clients can you talk about.
Kind of how things are transitioning now that you've got a more more of a track record you know when you do when you when you onboard a new client with their first ground lease how many eventually do a second third and fourth kind of how do you think about.
Building those relationships and it looks like it's been a pretty strong new client add here at the beginning of the year.
Hey, Stephen Yes, we're really excited especially with the quality of those clients they are large.
Domestic fund managers.
Across across the board so very very excited about the quality.
If you go back.
Last time, we did an equity raise in the stats are still pretty accurate, 65% of the people that do a transaction with us come back and show us another transaction and approximately 45% of those groups, we have done a second or more transactions.
Building the stable.
Has been extremely important that first deal.
We're getting better at it but sometimes its conversion.
Of getting a deal done with the client the first time takes almost two years.
But we're seeing immediate effects and our ability to kind of scale, our overall business and growth by creating that stable of existing clients.
I appreciate the color there Jay to touch base I'll stay away from the stores safe situation, but another big initiative I know you've talked about a lot.
Are the carrots, and providing some liquidity there I think we're now six months into a two year window.
From that February transaction to do some type of liquidity event or provide some liquidity can you maybe provide us some updates on.
Your current thoughts there and whats your outlook is on that.
Sure Steven.
It is a big focus because we see it.
An enormous catalyst and probably one of the most myths value things, we see in the marketplace.
<unk>.
Our initial goal was to bring investors to the table I think.
First round bid that we have a lot of <unk>.
Engagement that we're very positive on.
It certainly gives us comfort that more and more people are.
Looking in and trying to understand how analysis.
On a mark to market basis, we have been tracking for the last 20 quarters.
With the kind of growth rates and the tangibilitate value that.
Presses.
How do we capture that value and how can they be part of that.
So I think those dialogues are good positive and constructive.
Our goal ultimately as you know is to see that full value reflected.
That probably requires.
<unk> ability to eliminate any liquidity discounts.
That's getting ahead of ourselves a little bit.
We will start with the folks who are digging in now but long term our goal is to see that value reflected in staples stock.
To really get the full value I think we need to address the liquidity.
Around carrot.
We will be working on certainly next year.
Great. Thanks for the comments Jay.
Appreciate your time.
And our next question comes from the line of harsh Hemani Green Street. Please go ahead.
Hey, Thanks for taking my question.
So you mentioned that in the back half you expect transaction volume to slow down a little bit.
The bid ask in the market and ground leases.
All right and so.
Claiming that differently does it mean that if you were to try to increase acquisition volume.
That you couldn't achieve pricing that's as good as the 100 basis points.
The ground lease.
Goodbye safely.
Hey, harsh just a point of clarification when I mean bid ask I don't mean bid ask between our customers I mean bid ask.
Across that asset valuations broadly.
So as we've gone through this last six months of volatility.
I'll make a broad macro statement here that asset values are down.
And we are part of our capital solution when somebody is transaction transacting in making.
That decision to refinance recapitalize or buy or sell.
And so that is the bid ask I'm, referring to and why we anticipate potentially a little bit of a slowdown in the back half of the year.
It's not it's not a receptivity issue with our pricing on the ground lease side.
Understood.
If you were to try to increase volume you could still maintain the.
100 basis points by the pricing.
Yes, I think where we are today kind of this 75 to 80 basis point spread pre inflation feels feels pretty good.
Today.
Okay, and then just one more from me given that you are having more and more.
The transaction with your tenants.
And then what some conversation maybe.
Maybe given.
Some guidance in the future so that they can participate in this future growth.
Have you had any conversation with these.
It beats relationship tenants on this focus.
I Love the way you think the harsh, but it's a little premature to engage in that.
Hey demonstrates the value in <unk>.
A little bit more of liquidity around it.
But we still think thats, a very powerful idea couple.
A couple of steps away it's bill.
Okay. Thank you.
And our next question comes from the line of Keybanc Kim Truest. Please go ahead.
Hi, good morning.
Can we talk about the balance sheet for a little bit.
I noticed you guys raised.
$150 million of unsecured notes just curious.
Hi.
What is the GAAP interest rate on that because I know the stated coupon. It seems like it's 515, but when you look at the.
The cash bridge overtime.
Obviously, it's little bit different.
Sure, Yes, so on.
P&L, what will be booked as the 515% stated rate we did enter into a hedge prior to that transaction.
There is.
Offsetting game, which was close to $7 million that will be amortized over the life. So.
We are setting the remarks for 92%.
The effective rate that will flow through the P&L.
And then from a cash flow standpoint.
From cash flow from operations Youll see two 5%.
Good.
Over the first 10 years and then over the next 10 years go up to 375% and then the last 10 years go up to five 5%.
That's where it flows through in GAAP.
In terms of effective yield and cash.
And on your revolver and noticed the balance increased to 400, almost $150 million this quarter.
I guess couple of questions what is the rate on our revolver today I know that you put it in the Q, but it's just not out yet.
And any plans on refinancing that balance.
Yes, right now.
<unk> plus 100.
I think from our perspective.
Certainly like to term out some of those borrowings.
I want to make sure we maintain R.
Our margins so we will look to hedge at the appropriate times.
And we will look to the debt markets.
Going forward as Jay alluded to in his remarks.
I think there is.
Additional room and talking to lots of capital providers to continue this innovation.
Thats what were currently excited by.
We'll definitely look to make sure we're prudent with our leverage and prudent with our capital availability to continue to serve our customers.
And one last question on earnings.
I thought given the amount of volume that you just did in the quarter. Your EPS will be a little bit higher I was just curious if there were is there a timing element of when the deal is closed.
Or some other things that.
Where does not oil.
Yes, you hit the nail on the head there.
The average days outstanding for the quarter of 22 days.
Pretty back ended and the largest origination we had was.
Which closed on June 28th so Youll see youll.
Youll see that flip during the upcoming quarter, when we capture a full quarter's worth of rents or income.
Okay. Thank you.
And our next question is from the line of Matthew Howlett B Riley. Please go ahead.
<unk>.
Thanks. Good morning. Thanks for taking my question first question was there any one time ish expenses and the G&A from this strategic process.
For the second quarter and G&A, we have our annual stock based compensation for our independent directors.
And then there was some expense that flowed through.
Related to our announcement in the other expense line item.
Okay. So theres somebody hiring advisors and there are some some of that in the numbers.
Yes, some accrued legal tax and other fees that flow through other expense.
Okay, Great second question.
Jim when I look at long term originations I mean are we talking about a $1 billion a year $2 billion a year.
Can you talk you've had some big numbers in terms of the size of this market longer term.
When we get through sort of this part of the cycle. What are we how are you thinking about annual originations, let's just say in the next five years.
Yes, we put out a number to get to seven $5 billion by the end of 'twenty three.
Simple math that was about $1 1 billion for year, we felt quite comfortable with that I think that really the.
The variable we got to solve here is we think there is so much more opportunity on the equity and debt market side, but we're not capturing because of the corporate architecture, because we're still educating frankly.
<unk> parts of the market about what is the modern ground lease industry wise, it's so compelling.
So I would say, we feel very comfortable in that.
$1 billion five range with the constraints and if you take those constraints off obviously, we think we should be able to do more so.
So seven trillion dollars of commercial real estate in top 30 cities.
We think we are providing a very attractive capital solution across multiple property types.
Theres No reason this business can't grow substantially from here.
It's our job to continue to provide low cost capital to our customers and part of that is creating the best conditions in the debt and equity markets.
To drive down our own cost of capital and.
So that's been a big exercise this year and.
It should unleash additional potential.
Theoretically does the ground lease.
<unk> is it more advantageous to a borrower and higher interest rates given.
Given.
Given the wider mortgage spreads.
Is it more attractive to your clients today.
It definitely but I think as Marco said.
Customers, who are looking at transaction are seeing pretty wide bid ask when they bring their projects to market or when they're trying to develop.
Budget for building something so you're just seeing a little bit of uncertainty flow through the transaction market.
We're better wind markets are stabilized.
Youre right, we are getting calls.
From people, who probably had a solution not working.
They need the efficiency that are ground lease can provide so we are picking up some incremental conversation, but I would say macro we prefer a more stable market that are highly volatile market. It just means more real estate transactions happen.
And we have a better solution in many cases, so we'd like to see overall transaction volume and real estate it will be high and steady.
We'll get our fair share.
And right now we feel good about the engagement levels, but we definitely look forward and see some of our customers pulling back from doing anything.
<unk> seen that in the past and it's just a little bit harder for us.
Push on that string.
But I know our guys are all engaged in there are transactions happening and our team is continuing to spread the gospel and then finding a very receptive audience.
That makes a lot of sense and last question just very high level question.
The same store.
Relationship externally managed relationships.
It worked very well and we appreciate that.
Triple we did extremely well over three years, obviously, there has been a strategic.
Process being run it's been it sounds like a huge undertaken that youre undertaking and that you're still working on today can you just as the investment case.
Our strategic transaction does it still make sense for space given.
What you heard in the past was working quite well.
Yes, that's a great question.
We think long and hard about what is the future potential of this business.
We think this can be an enormous business. There is no question, an externally managed structure with the right structure to launch the business.
I think it's becoming pretty clear to us and to most investors that it is not the best structure long term to really capture the full potential of the business.
Whether it's today tomorrow at some point, it's just not the right structure so from our standpoint.
Managers, let's get along with that let's show the world clarity.
Let's point everybody in the direction, we are pointing theres so much good happening in the business.
We'd like to have fewer and fewer conversations about corporate architecture, and external management and controlled shareholder.
That's it.
Positive conversation Thats always feels like a bit of a constraint to us so.
I take your point I think it's actually a good one we do believe this architecture was the right architecture for the first five years.
As we look forward and say how do we go from $5 billion to 10 to 20 to 50.
We're pretty clear in our minds, but theres a better architecture, if both sides can come through an agreement on it.
Got you.
The official communications, you said near term that will have.
Some type of a conclusion to this process.
I'll, just say the sooner the better.
I appreciate that thank you.
And once again, ladies and gentlemen, if you have any questions or comments. Please press one zero.
We have a question from.
Line of Rich Anderson of MVC. Please go ahead.
Thanks.
Factual question I know that.
Termination of the management contract.
Involves a fee I think three times of the average annual management fee.
Is that first of all is that accurate and second is that subject to discussion or is that a is that a cost that would probably need to be.
Felt by April .
Just on the factual piece rich.
The contract can be terminated until later in 'twenty three I believe it is.
So it's going to be a conversation if it happens before then.
Can't really go into anything more than that.
Am I right about three times annual.
Average annual management fee.
The termination.
Post <unk>.
'twenty three there has to be other conditions before it can be terminated so I think for three times as is factually correct, but I don't think its the operative until seven more years.
Got you in terms of the only issue. So I think there is.
Yes.
I wouldn't I wouldn't fixate too much on that.
Okay fair enough thanks very much.
And at this time there are no other questions in queue.
Okay, great. Thank you everyone for joining us Rocco would you. Please give the conference call replay instructions again.
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