Q4 2022 Safehold Inc Earnings Call
Good morning and welcome to Safehold's fourth quarter in fiscal year 2022 earnings conference call. If you need assistance during today's call, please press star zero. If you'd like to ask a question, please press star one. That is star one 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 Pierce Hoffman, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.
Good morning everyone. Thank you for joining us today for Safe Holds earnings call.
On the call today we have Jay Sugarman, Chairman and Chief Executive Officer, Marco Salvarado, President and Chief Investment Officer, and Brett Asnist, Chief Financial Officer.
This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year, twenty, twenty two results.
The presentation can be found on our website at www.safeholdink.com by clicking on the Investors link.
There will be a replay of this conference call beginning at 2pm Eastern Time today. The dial-in for the replay is 877-481-4010 with a confirmation code 475-81.
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 made different materially from these forward-looking statements and the risk factors that could cause these differences are detailed in our SEC reports.
Safehold 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 it over to Chairman and CEO Jay Shrederman. Jay. Thanks, Pearce, and thanks to all of you for joining us today.
With the merger vote now set for March 9th, we're excited to begin the next phase of safeholds growth and continue building our position as the leader of the modern groundless industry.
While unfavorable market conditions and the constraints of the merger process hurt our share price and investment activity in the fourth quarter, 2022 overall included many positives for our company.
strong earnings and portfolio growth, increased dialogue with customers and brokers, and initial steps to highlight the value of Carrot are all important milestones in the execution of our long-term strategy.
With the benefit of a simpler, stronger, and better safehold post-merger, we look forward to getting back to work as markets restabilize, to delivering customers efficient capital solutions for their needs.
and to improving the broader market's recognition of our company's value and growth potential.
And with that, let's turn it over to Marcos and Brett to recap the quarter and the year. Marcos.
Thank you, Jay. Good morning, everyone. Let's begin on slide four.
2022 with another strong year for Sapeold as we continue to scale the business.
We close 26 new ground lease investments totaling 1.4 billion.
And at year end, our unrealized capital appreciation account for the portfolio stood at an estimated $10.5 billion.
We continue to have success across different property types and locations.
creating ground leases in 15 unique markets in 2022.
including four institutional life science assets in Boston and the Bay Area, and 15 multifamily assets across several markets including New York, Los Angeles, Nashville, Denver, and Miami.
Over the course of the year, as inflation, higher rates, and other macro shocks played out, the broader markets experience significant volatility across all asset classes.
These headwinds and limited liquidity have caused a revaluation of assets.
which in turn has led to a slowdown in overall transaction volume as buyers and sellers search for equilibrium.
As we mentioned last earnings call, we certainly are not immune to this slowdown as our customers are assessing their capital solutions in a repriced market while going through their own value discovery.
We remain cautiously optimistic, but expect this uncertainty around deal volume to persist here in the near term.
That said, we are well positioned and ready for the inevitable market rebound and have ample liquidity to fund new groundless transactions as those opportunities arise.
During 2022, we raised 934 million of new capital, consisting of 625 million of long-term, unsecured debt, and 309 million of equity.
Notably, these debt raises were our first 30-year issuances in the unsecured market.
Being able to enter the 30-year unsecured market with accretive financing only one year after receiving investment grade credit ratings underscores the high quality credit profile of our business.
We are very encouraged by the overall credit momentum, which is evidenced by the two positive outlook changes in the last six months.
putting us one step closer to that single A rating we're striving for.
As we previously announced, the forthcoming merger with I-Star is expected to have tangible benefits that set up Sapled for long-term success.
Internalizing brings management and all of Safehold's accumulated IP in-house.
And from an earnings perspective, this significantly lowers the long-term cost structure of the business relative to the current externally managed architecture.
Finally, on the investor front.
This is expected to enhance our access to new sources of capital in both the debt and equity markets, more than doubling our free float and diversifying our shareholder base.
Continuing on, let me discuss our investment activity on slide 5.
During the quarter, we originated three new ground leases totaling $79 million.
Among these, we fund 27 million during the quarter and expect to fund the 52 million of the unfunded balance in the coming quarters.
Additionally, we funded $41 million during the quarter associated with prior ground lease commitments.
These three new originations were all multifamily properties and span three different markets.
As we mentioned last quarter we've increased our pricing.
The new ground leases we originated during the quarter generate a weighted average yield of 6.9% as assuming 0% inflation.
which is over 100 basis points higher than the 5.8% yield for the investments we made in the third quarter.
The credit metrics associated with these deals are in line with our targets.
As rates and spreads move, we'll continue to examine pricing dynamics that work both for our customers and for our business.
is our belief that creating ground leases at these current levels will lead to significant long-term value creation for the company.
Slide six provides a snapshot of our portfolio growth during the quarter.
At the end of the quarter, our aggregate portfolio stood at approximately 6.2 billion, representing 18x growth since our IPO over 5.5 years ago.
We remain focused on targeting high quality assets. We were pleased to close transactions in three unique markets during the quarter.
And with that, let me turn it over to Brett to go through the financials. Brett?
And with that, let me turn it over to Brett to go through the financials. Brett, thank you, Markos, and good morning, everyone.
Continuing on to slide 7, let me detail our quarterly earnings results.
Revenues were 73.4 million for the fourth quarter, net income was 21.8 million, and earnings per share was 35 cents.
For the year, this brought revenue to $270.3 million, up 45 percent, net income to $135.4 million, up 85 percent, and earnings to $2.21 per share, up 64 percent.
However, it should be noted that the fourth quarter included certain one-time costs related to the merger and carrot.
excluding those items, net income for the fourth quarter would have been 25 million an increase of 17% versus the same period last year and earnings per share would have been 40 cents
7% above the 38 cents we earned in the prior year period.
For the year, net income excluding one-time items was 98.5 million, up 38% and earnings with the $1.61 per share, up 22%.
On flight 8, we detail our portfolios yield under various inflation scenarios.
As we previously discussed, the market largely values our cash flows relative to long-term high-grade bonds.
Particularly throughout the past year, we've seen a high correlation between our stock price and the yields on these bonds.
As discount rates move higher, there's been a corresponding decrease in the value of our contractual cash flows.
and consequently in our stock price.
Conversely, as rates have found their footing a bit more this year, we have seen an uptick in our stock price.
However, our cash flows are not fixed like these comparable long-term bonds. 95% of our portfolio has some form of inflation protection built in.
The current portfolio generates a cash yield of 3.4% and an annualized yield of 5.1%, which presumes a 0% inflationary environment for the duration of our ground leases.
If you take into account the latest long-term inflation expectations of 2.24%, our inflation-based rent increases.
will drive the portfolio to yield 5.7%.
If inflation steps back down to 2.0%, our portfolio will yield 5.6%.
And if it moves up to 3.0%, our portfolio will yield 6.2%.
This additional yield is consequential when compounded over the ultra-long duration of our ground leases.
I.
Additional portfolio metrics can be seen on slide 9.
At the end of the fourth quarter, our portfolio's weighted average ground lease to value is 40% and weighted average rent coverage is 3.9 times.
By property type, our portfolio consists of 45% office, 36% multifamily, 12% hotel, 4% life science, and 3% mixed use in other. Our weighted average extended lease term is 93 years.
Moving to slide 10, we show a geographic breakdown of our portfolio as we continue to expand our footprint in the nation's top markets.
New markets in 2022 included Boston, Baltimore and Sacramento, which combined for approximately 8% of the total portfolio at year end.
Slide 11.
provides an overview on our capital structure.
Subsequent to quarter-end, safehold closed an additional 500 million unsecured revolving credit facility, increasing the company's total unsecured credit lines to 1.85 billion.
These combined predelines provide significant operational and financial flexibility while strengthening our liquidity position at a time of market uncertainty.
Additionally, these capital commitments demonstrate both the strength for banking relationships and credit profile, positioning us well to fund new originations as opportunities present themselves.
At the end of the fourth quarter, we had 3.8 billion of debt comprised of approximately 1.5 billion of non-recourse secure debt, 1.4 billion of unsecured notes.
and 272 million of our Pro Rata share of debt on ground leases which we own with joint venture partners.
Our weighted average debt maturity is 24 years.
In addition, we had 690 million drawn on our unsecured revolver.
Combined with cash on hand and including the additional 500 million unsecured revolving predifacility close post quarter end, we had approximately 1.2 billion of available liquidity.
We are levered 1.8 times on a total debt to book equity basis.
The effective interest rate booked on our non-revolver debt is 3.7%, which is 138 basis point spread to the 5.1% annualized yield on our portfolio.
The portfolio's annualized cash yield is 3.4%, a 17 basis point spread to our 3.2% cash interest rate.
On slide 12 we provide an update on UCA.
As of year end, the estimated value of all of the unrealized capital appreciation sitting above our land increased by $16 million to approximately $10.5 billion, a 78% tager since IPF.
In total, the UCA portfolio is comprised of approximately 33 million square feet of institutional quality commercial real estate, consisting of 14.9 million square feet of multi-family, 13.2 million square feet of office.
3.8 million square feet of hotels.
700,000 square feet of life science.
and 700,000 square feet of mixed use and other property types.
And with that, let me turn it back to Jay to walk through slide 13, which provides an update on the progress we've made with Carrot in 2022.
Thanks, Brett.
We believe Carat is a powerful asset and an asset that remains misunderstood and misvalued in our stock price.
Slide 13 highlights the steps taken over the last year to push carrot forward and it's approved its value recognition for the enterprise.
As a reminder, CARES is intended to crystallize the value of the portfolio of future ownership rights that safehold controls.
While ownership occurs in the future, today's underlying values can be estimated on a regular basis.
and use to demonstrate the growing scale and breadth of the portfolio.
CARiT is integral to our modern ground lease model and a tremendous differentiator for SAFELd
And the safehold being carrots largest owner, safehold shareholders have the most of the gain by seeing carrots value reflected in the stock.
As a result, we're pleased to have offered two investment rounds in care in 2022.
The first in January to a group that included sophisticated family offices, prop tech funds, sovereign loan funds, and certain high net worth investors, who committed to invest $24 million at a $1.75 billion carrot enterprise value.
Those investors received a redemption option for their money back if certain liquidity conditions weren't met.
The second round will also raise $24 million.
We'll set at a $2 billion enterprise valuation and we'll close at the time of the merger.
And this department has led this round with a $20 million commitment.
and several of the first round participants will also invest in this round alongside MSD.
This round does not include a redemption right.
In connection with the merger and MSD negotiations, there were certain changes to the carrot documents proposed, which we believe enhanced the alignment between safe and carrot.
Clearly separate bond economics and capital appreciation economics in the portfolio.
and should help make the value of carrot clear for safehold shareholders.
Having carrots value reflected in the stock remains a priority. And we are optimistic that 2023 could be a turning point in the investment community's perception and appreciation of carrot. And we will continue to underscore its value in our many upcoming discussions with investors.
So with that operator, let's go ahead and open it up for questions.
Thank you. To ask a question, please press star one at this time.
We will take as many questions as time permits.
Once again, please press star 1 to ask a question.
We will pull up a moment to assemble the roster.
Your first question for today is coming from Stephen Lawis with Raymond James.
Hi, good morning.
Jay, what I'll follow up with a start with the carrots, which you ended with. Can you talk about the, you know,
pursuit of a listing there that needs to take place over the next 12 months is laid out under the terms and that first investment and kind of what are the different options that you're looking at and kind of what's the timing of how that should play out over the course of this year.
Hi Stephen, yeah, so first things first, we want to get this merger behind us, turn the rockets back on the investment side. We think the carrot storage is continues to gain interest with this potential closing of this next round. We're on the way.
The kind of names that are involved with it, we think it's a very powerful story, but we've got more work to do to spread. That story before we consider something like a listing, but you know certainly our view is the value is demonstrable, both privately and publicly, and so that remains part of our longer term plans.
Next, Jay. Mark, as you talked about low volume slightly in your term, given some volatility, other things which are in a price discovery in the market, what are the one or two things you're kind of looking for to kind of turn that back on on the origination side, especially given the available liquidity currently have?
Hey, Steven. So I would characterize Q4 as kind of a liquidity desert. It was pretty dry out there across the board and unless you absolutely had to do something, you didn't make a capital decision. I think the thing for us that we look at is kind of internal pipeline.
And it seems to have picked up as we sort of turned over into the new year. While liquidity is still scarce across the board, there are certain asset classes like multi-family that have started to reprice.
The agencies are still providing capital. You know, our team was out at the housing conference in Las Vegas a couple weeks ago and the amount of transaction and engagement that they had with customers out there gives me some optimism for the second half of this year that we'll start to see some transaction volume.
Right, appreciate the color and lastly Brett, can we give us an idea of how...
How much more expenses are left that are merger related that will be taken in the first quarter between now and close? What's left to expense?
Sure, absolutely.
As far as merger costs for last year, we took a shade under $8 million and we would expect that the remaining merger costs will be approximately $6 million.
And most of that will go through the P&L obviously on the merger closes. So dependent on the timeline that we...
that we have discussed, those should float through the PNL at the merger closing timing.
Great. I appreciate the comments this morning.
Your next question for today is coming from Matthew Howlett at B Riley.
Oh, hey, good morning. Thanks for taking my question. You first, if the vote does go through, I'm just curious how long you think it will take to close the transaction.
Hey, Matt, yeah, I think the goal is to close as expeditiously as possible. It'd be great to close at the end of a quarter that just makes everything easier. So that would be our initial target. Obviously, we don't control all the pieces of the puzzle, but...
We do feel pretty good that once the bus is done, we will push everything as fast as we can and hopefully be able to look at that end of a quarter as a target date.
Okay, end of first quarter. I would just be clear because I know there's some work that State Star has to do on its end to liquidate some assets and I know it starts earnings are coming up here but just you feel good that the pieces that you can control you can do it and close very soon after the vote it's a good rule.
You got it.
Great, great to hear and looking forward to that. Jade, just a lot of talk is on the office sector. Obviously, we get that a lot. You look at your portfolio, the trophy office building. That's just curious. You look at long term. Do you feel like, how do you feel about the office? First, I'd love to hear your view. Second, would you feel it?
They're going to be have to be converted at some point. It just took one term about the office sector in your portfolio.
I'm glad you said long term, Matt, because I know there's a lot of focus on what's going on near term. Look, real estate in urban markets is always about creative destruction, how we can find highest and best use.
well located land over long periods of time, you know, has been the beneficiary of that creative destruction, so, you know, I do think there's gonna be some challenges, but, you know, as more and more, uh,
space comes offline. It tends to tighten these markets up, and so I think there'll be an equilibrium out there. We're clearly not at it today. You know, supply demand feels out of whack. And so that's going to be a painful transition. Again, when you're sitting on top of major subway and transportation, you know, nexus. But just a moment of truth.
In major cities, we feel pretty good about that long term. We do think leadership in these cities is important to take the steps now to really reinvent themselves. You know, we are believers that these...
centers of culture and finance and technology and education are and will remain places people want to live and be. So office is going to have to adapt some other asset classes are going to have to adapt.
But when you...
say long term and again we spend a lot of time researching how cities grow and how values change You know we like the locations we're in and we think those
cities are going to be the long-term winners. So we'll have to write out whatever transition takes place and certainly office is going through that as we speak, but whether that's re-adaptation of specific buildings.
or whether it's just a lot of supply comes out of the market.
We've seen it happen many times in our careers and this will be another period where.
The real estate market will have to find that highest and best use. Fortunately, we don't have to be the ones to do that. We got a very attractive seat to watch it happen.
Thanks, look forward to the next update on the merger. Thank you.
Thank you.
Your next question for today is coming from Rich Anderson at SMBC.
Hey, thanks. Good morning, everyone.
It was said that any morcus that the internal pipeline is picked up.
You know, one thing you would see some life in your stock this year as inflation numbers have turned it down. You know, I think there's kind of an anticipation trade there going on, at least in the stock market. Would you extrapolate that to, you know, the conversations you're having? Okay.
with potential customers as well. Is that a part of it, that they're sort of seeing the light at the end of the tunnel from an inflationary point of view and can start to get more comfortable with engaging you on a ground lease? Is that the mentality that's out there?
You know, I think it goes asset class by asset class and customer by customer. So I think it's the, you know, this sort of psychology of where you are in the in the arc of re pricing. So I'll take one out of the spectrum, which is multi family.
As I mentioned before, there's liquidity, both V and leasehold liquidity. We're actively looking at transactions. That market seems to have reprised for sellers who are willing to sell in that market, and there seems to be decent demand on the buy side. So I expect some activity.
on those assets. And then obviously as Jay sort of alluded to on the other end of the spectrum, you have office where there's limited to no liquidity. And I think you're going to see a fair amount of distress, you know up at the equity level with assets being handed back to lenders. And that process is.
very early in its cycle.
very early in its cycle.
In one of the pages, I think it was page five of your...
your fly deck. You have a footnote there.
you have a footnote there discussing your...
protection against inflation and it's mentioned fair market reset is one inflation protection mechanism.
I know when you're buying existing ground leases.
You are making adjustments as you go and eliminate some of those.
You know, the vestiges of past ground leaf in
that you're purchasing. But are you more inclined to hold on to fair market resets now with this inflationary market still intact or are you still going down the road of eliminating a lot of those situations and taking a win-win for you?
So I would say we'll continue to be opportunistic when existing leases come to market that typically contain those fair market value or percentage rent provisions that you're referring to. You know, as I think about the last five years and the transition.
an effort to sort of reset and redefine an entire marketplace. Part of that is getting rid of that ambiguity. And I think we've proven out, you know, leasehold liquidity, financing liquidity, sales liquidity, and part of that is the design of this new modern ground lease.
So I think we would be taking a step back if we started to reintroduce those sorts of terms to our customers. So our current form of ground links reflects the same form that we've been using economically for the last few years.
Fair enough. And then last for me, on the carrot page, talk about revesting 25% in terms of senior management. What are the...
Besides just staying employed by safehold are there other investing conditions that would get you to that? I'm just curious that there's
are there other vesting conditions that would get you to that? I'm just curious if there's more to it than just.
Yeah, it just was really just a retention tool to make sure the team stays together. Over the next two years while we really ramp up the character side of the story. So really nothing more than a time vest on on carrots that had already been vested, but we wanted to show to the market.
and senior management committed to a revest on those to show how committed we are.
So it's another two years.
there two years. Yep.
Yeah, thank you
Your next question for today is coming from Harsh Menani at Green Street.
Thank you. So given the recent pullback in Treasury yields, I'm wondering if you are confident in your ability to preserve the high yields you were able to originate at in the fourth quarter. You mentioned the investment pipeline for the future is looking better. Linked to growth or you're improving? assessed speeches include developing growth and??, Internet and data. Find out more!
But perhaps there are these that you close in the back of this year, how confident are you in being able to originate at similar yields?
Hey, Harsh. So I'm going to make just a big macro call on our business. I think our belief here is that if we're creating these assets north of a 6% ROA, we will be rewarded. I think the balancing act is obviously managing our cost to capital.
both from a debt perspective and an equity perspective to make these transactions creative. I would say it's a balancing act. I think those kind of almost 7% yields. I wish I could tell you they were flowing in, but I don't expect those to continue. But I do think, you know, kind of low to mid-sixes.
in this sort of rate environment feels achievable for our business.
And I think long term will be rewarded for that.
That's helpful.
So, Charlotte, the authorized shares there, it increased from about 10 million to 12 and a half million. I understand that this time it's authorized shares and not yet issued, but what I'm going to confirm is, first of all,
Why the increase what's the philosophy behind that and and second when we shared in the shared issue I just want to confirm that the proceeds from those issuances would code a not make a series. Correct?
Yeah, so on the first part, the...
The goal with the MSD negotiations was to really build out carrot in a fully fleshed out form that will take us for many, many, many decades.
So, just changing the authorization a bit was to anticipate over the coming many, many, many years the ability to issue a modest amount for lots of different reasons.
Within the purview of the board, we wanted them to have the flexibility over the long term without having to keep going back. So that 20% increase is really anticipatory of the long term future of carrot, nothing imminent.
Second part, Mark. I think your question was if you raised proceed that saved it, that go to the groundless business and the answer is yes. So we would redeploy those to invest in groundless. Okay, thanks. And then last one from me for this quarter.
what proportion of them were originated by safe, what proportion of the acquisitions were originated by safe versus just acquiring existing ground leases. And also, could you touch on the rent coverage this quarter? I know it was in line with your investment targets, but closer to the low end and.
and it represented sort of a meaningful slow down, a meaningful down tick versus the previous few quarters. So maybe you could touch on why that was.
Sure thing. So 100% of the three assets were originated, so none were existing ground leases. And then our coverage construct for assets that are in transition or in development is we take a haircut to the sponsor's numbers typically and then we take an incremental haircut to that number.
just to be conservative. So the 2.3 times coverage level probably reflects almost a 20 to 25 percent discount to the sponsor underwriting.
God, thank you...
Your next question for today is coming from Keepen Kim at Truus. Thanks. I'm joined to call a little bit later. Sorry if you already answered this question. Just curious on the 4Q's deal volume at a 6.9 yield. I mean, it's pretty high. I mean, just...
kind of staying to obvious, but I'm curious about what special situation this was if it was at, and what kind of customer would transact on the ground needs of that type of yield.
even in this environment. Yeah, I would say those are opportunistic. You know, as I said before in the other question, I think, you know, generally we're kind of targeting low sixes to mid-sixes. You know, I'm hopeful that we continue to get stuff close to the 7% range.
But I would call these three originations sort of situational. But the sponsors are ultra high net worth family office.
Southeast operator that owns over 10,000 units and then another family office. So I think they looked at the situation and we were the most efficient capital solution available in the market in Q4 to get their transactions off the ground.
And I still think that dynamic plays forward in sort of Q1, Q2. So for the people who need to make decisions, we are still going to be the most efficient option out there.
And go to my tier comments about low to mid-sixes feeling achievable. I'm curious about how deep the market is at those type of yields or do you have to go sub-six for free to really hit your stride on a volume burst active.
You know, I think at those levels, when I look at the alternative options, I feel good. I think from a volume perspective, as I said, we're cautious. What we really need to have happen for us to kind of hit pace again from an origination standpoint is this impasse between buyers and sellers, this value impasse to sort of a
Okay, thank you.
Mr. Hoffman, we have no further questions.
Great, thank you. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Holly, could you please give the conference call replay instructions once again? Certainly. There will be a replay of this conference call beginning at 2 p.m. Eastern Time today.
The dial-in for the replay is 877-481-4010 with the confirmation code 475-81.