Q1 2023 Safehold Inc Earnings Call
Speaker 1: Good afternoon and welcome to Safe Holds first quarter 2023 earnings conference call. If you need assistance during today's call please press star 0.
Speaker 1: If you'd like to ask a question, please press star 1. That's star 1 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.
Speaker 2: Good afternoon everyone. Thank you for joining us today for Safehold's earnings call. On the call today we have Jay Sugarman, Chairman and Chief Executive Officer, Marcos Alvarado, President and Chief Investment Officer, and Brett Azenis, Chief Financial Officer.
Speaker 2: This afternoon, we plan to walk through a presentation of details our first quarter 2023 results. Presentation can be found on our website at sapoldink.com by clicking on the Investors link. There will be a replay of this conference call beginning at 8 p.m. Eastern Time today.
Speaker 2: The dial-in for the replay is 877-481-4010, the confirmation code of 48222.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: Safehold Disclames, 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 CEO Jay Sugarman. Jay? Thanks, Pierce. And thanks to everyone joining us today.
Speaker 3: The first quarter for SAFEL was mostly about getting our merger closed and setting the company up to continue building its leadership position in the modern groundless industry.
Speaker 3: Safehold continues to offer investors a unique way to participate in an asset class that has historically created significant wealth, and we can now do so with improved liquidity and an expanded shareholder base.
Speaker 3: While the merger was a positive development, the challenging market backdrop remained a drag on transaction activity in real estate as a whole and consequently on transaction activity in the groundless sector.
Speaker 3: On the other hand, with capital availability becoming more limited and debt maturities are growing concern, many owners are beginning to appreciate the value of the very long-term low-cost capital that a safehold ground least provides. And we look forward to being a part of the solutions the real state markets needs now.
Speaker 3: to help lower its risk profile and to create more resilient capital structures in the future.
Speaker 3: Our primary goal now must be to get the value of our ground least portfolio and our go-forward platform more widely understood.
Speaker 3: With three key areas of focus, one are growth potential and the very large addressable market opportunity. Two are long-term, low-risk, contractual cash flows with inflation kickers that generate superior returns to comparable long-term low-risk alternatives.
Speaker 3: And three, the size of a capital appreciation growing inside our portfolio, which we separate out and highlight through the sale of units and carrot.
Speaker 3: Adding in a strong balance sheet with attractive long-term debt, we believe the current price of our shares is well below the intrinsic value of our business.
Speaker 3: And we will work to make that readily apparent as the business begins to expand again and market stabilize.
Speaker 3: And with that background, let me turn it over to Marcos and Brett to recap the quarter. Marcos?
Speaker 4: Thank you, Jay. Good evening, everyone. With the merger behind us and a more investor-friendly corporate architecture now in place, Saefold is well positioned for its next phase of growth, as we navigate the volatile macro backdrop.
Speaker 4: In a moment, we'll touch upon what we're seeing in the transaction market, which has slowed to a crawl. But first, I want to recap the benefits of our recently completed merger.
Speaker 4: In a moment, we'll touch upon what we're seeing in the transaction market, which has slowed to a crawl. But first, I want to recap the benefits of our recently completed merger. Let's begin on slide four. The three
Speaker 4: Internalizing the platform created several important outcomes for the company.
Speaker 4: First, we brought management and all the competitive advantages created over the last six years in-house. Second, we replaced Safehold's external cost structure, which scaled upwards based on portfolio size.
Speaker 4: with a stable cost structure that should provide operating leverage over time as we scale.
Speaker 4: Third, we improved SAFELD's overall investor profile for both equity and debt investors.
Speaker 4: Since the merger, SAFE's free float has more than doubled, and we've also been placed on positive outlook at both Moody's and Fitch, putting us one step away from breaking into the single A ratings category.
Speaker 4: Additionally, we are pleased to officially welcome MSD partners as an investor in the business, as one of Safehold's largest common shareholders, and the largest third-party investor in care. We're excited to have formed a strong partnership with such a talented organization.
Speaker 4: On the capital front, we completed the previously announced round two sale of care units to a group of investors led by MSD, raising 24 and a half million at a $2 billion equity value for care.
Speaker 4: And subsequent to quarter end, we announced a $500 million joint venture with the sovereign wealth fund partner to pursue groundless investment opportunities.
Speaker 4: We expect to consolidate the joint ventures investments on our balance sheet, and as the general partner in the venture will learn a management fee on invested equity, with an opportunity for additional promote upside in the future.
Speaker 4: This partnership diversifies our capital sources in this dislocated and uncertain market environment.
Speaker 4: Regarding liquidity, at the end of the quarter, our cash and credit facility availability stood at 900 million.
Speaker 4: And with that, let me spend some time on customer engagement in Q1 and our portfolio. Overall transaction volume remains muted across the commercial real estate market. Just as we started seeing green shoots in early Q1 with pockets of deal flow emerging. baraise car.
Speaker 4: The ensuing bank challenges pulled liquidity from the markets and derailed sentiment.
Speaker 4: two multifamily transactions that we were closing process did not consummate as sponsors walked from these transactions. As disappointing as it was to have these opportunities pushed out in the short term, once liquidity re-emerges and transaction volume picks back up, we'll be ready to pursue the transactions out there and available, utilizing our liquidity on hand.
Speaker 4: along with the capital from our new joint venture.
Speaker 4: Looking at UCA during the first quarter, we had over 40% of our portfolio revalued by CBRE.
Speaker 4: As we have stated, our assets are appraised on a rolling annual basis. And in the coming quarters, we expect to see certain properties appraised at a lower value given the market environment.
Speaker 4: As a result, GLTV on the portfolio increased to 42% and rent coverage remained strong at 3.9 times.
Speaker 4: We remain insulated from the noise occurring at the equity and debt levels and believe that over long periods of time, our portfolio of well-located ground lease investments will be the beneficiary of the highest and best use dynamics in real estate and other economic forces that ultimately accrue to our company. We're steadfast in our belief that ground leases present one of the best risk adjustment
Speaker 4: loan to start holdings and 61 million of investments in the Brownlee's fund and loan fund vehicles, which reflect I-Star's ownership share in those vehicles that safe purchase didn't connection with the merger.
Speaker 4: We also funded $70 million associated with prior ground lease commitments.
Speaker 4: And our aggregate ground lease portfolio now stands at approximately $6.2 billion.
Speaker 4: The estimated value of the unrealized capital appreciation sitting above our ground leases was approximately $10 billion at quarter end.
Speaker 4: In total, the UCA portfolio is comprised of approximately 33 million square feet of institutional quality commercial real estate.
Speaker 4: consisting of over 16,500 units of multifamily, 13.2 million square feet of office, over 5,000 hotel keys, and approximately one and a half million square feet of life science and other property types.
Speaker 4: And with that, let me turn it over to Brett to go through the financials.
Speaker 5: Thank you, Marcos. Continuing on slide 6, let me detail our quarterly earnings results.
Speaker 5: Revenue with 78.3 million for the first quarter, net income was 4.7 million, and earnings per share with 7 cents.
Speaker 5: During the quarter, we earned approximately $2.8 million of percentage rent from our Park Hotels portfolio related to the full year 2022 performance, which is the most earned over the last few years. As referenced in past quarters, there were several one-time cash and non-cash charges.
Speaker 5: related to closing the merger that impacted the bottom line, totaling approximately $21.6 million.
Speaker 5: These charges are non-recurring and not indicative of run rate earnings for the company.
Speaker 5: These items include 9.4 million of one-time expenses and reserves, primarily related to legal, tax, accounting, and advisors.
Speaker 5: $6.9 million of one-time transfer taxes, and $5.3 million of one-time G&A expense, primarily related to the termination of pre-existing incentive plans at I-STAR plus other miscellaneous items.
Speaker 5: income for the first quarter was 26.3 million and earnings per share was 41 cents.
Speaker 5: The primary reason for the year over year decline in earnings relates to our increased interest expense on our outstanding borrowings under our revolving pred facility, which pays interest that adjusted so for plus a hundred basis points.
Speaker 5: While we put approximately 400 million of long-term hedges in place over the last few quarters to protect future finance things that will turn out these revolver borrowings, we faced higher interest charges from market rates in the short term. We recently executed 500 million floating-to-fix swabs.
Speaker 5: taking SOFR to approximately 3%.
Speaker 5: which will mitigate some of the adverse near-term earnings effects stemming from the substantial fed rate heights that have occurred.
Speaker 5: On slide 7, we detail our portfolio's yields.
Speaker 5: The left side of the page represents in-place cash and GAAP yields. The current portfolio generates a cash yield of 3.4% and an annualized yield of 5.2%.
Speaker 5: which presumes a 0% inflationary environment for the duration of our ground leases.
Speaker 5: In other words, any future rent based on CPI-only escalators for SenatureN or Fairmarket value resets is not included.
Speaker 5: The right side of the page looks at our yields on an economic basis, including today's market-based federal reserve long-term inflation expectation of 2.26 percent applied to the previously mentioned variable contractual base rent in addition to CPI lookbacks where applicable.
Speaker 5: This market expectation produces an inflation adjusted yield of 5.7%. And lastly, we are also beginning to track carat adjusted yield, which we believe is a helpful way to illustrate the impact of the value of the embedded capital appreciation in our portfolio.
Speaker 5: We calculate this metric by simply subtracting safeholds 82% ownership of carrot using its latest 2 billion valuation from today's groundless portfolio basis.
Speaker 5: This lower basis increases the inflation adjusted yield to approximately 7.2%.
Speaker 5: We will continue to track this metric moving forward as another way to see the relationship between our long-term cash flows and the value of CARIC.
Speaker 5: Moving to slide eight, we're now showing a more granular geographic breakdown of our portfolio by market and property type. The right side of the page includes information on the top 10 exposures, as we believe that our emphasis on top 30 MSAs is core to the long-term thesis that ground leases will benefit.
Speaker 5: from PICE to Invest Use Over Time.
Speaker 5: Today, approximately 70% of gross book value comprised of 68 of our 131 ground leases is diversified across the top 10 markets listed.
Speaker 5: On the bottom of the slide, we further underscore the diversification by count and gross book value of the portfolio by underlying property type across all regions. Notably, we have made significant inroads within the multifamily space across the country, which now represents over fifty percent of the portfolio by count.
Speaker 5: Slide 9 provides an overview on our capital structure.
Speaker 5: At the end of the first quarter, we had approximately 4.2 billion of debt comprised of 1.5 billion of unsecured notes, 1.5 billion of non-reports secured debt, 970 million drawn on our unsecured revolver, and 272 million of our pro-radar share of debt on ground leases which we own and join ventures.
Speaker 5: Our weighted average debt maturity is approximately 23 years, and we have no corporate maturities due until 2026, which is our unsecured revolver. As previously mentioned, during the quarter, we closed on a $500 million incremental unsecured revolver. We also closed on a $500 million incremental unsecured revolver.
Speaker 5: which increased our total revolving credit lines to $1.85 billion. At quarter end, we had approximately $900 million of cash and credit facility availability.
Speaker 5: Additionally, we are pleased that I have received a change in outlook to positive from pitch during the quarter.
Speaker 5: Moody's had previously placed us on positive outlook when the merger was announced last August .
Speaker 5: We remain committed to achieving a rating subgrade, and our merger closing and other actions have brought us one step closer to an A rating.
Speaker 5: We are levered 1.9 times on a total debt to book equity basis. The effective interest rate on permanent debt is 3.8%, which is 133 basis points spread to the 5.2% annualized yield on our portfolio.
Speaker 5: And the portfolio's cash interest rate on permanent debt is 3.3 percent, which is a 16 basis point spread to the 3.4 percent annualized cash yield.
Speaker 5: Overall, we believe that our capital structure is a significantly underappreciated component of the company's overall value story.
Speaker 5: We have 23 years of weighted average term. I would have significantly below market cost with no near term maturities, along with significant ratings momentum.
Speaker 5: We believe that unique combination, especially in a time of general market uncertainty, should be viewed as an asset by stakeholders evaluating our company. And lastly, on slide 10, we provide an update on CARiT.
Speaker 5: In connection with the merger closing, MSD partners and the other Series B investors officially closed on their commitments to invest approximately $24.5 million into CARET at a $2 billion valuation.
Speaker 5: Additionally, all of the amendments to carrot structure which we previously outlined are now effective. We believe these changes may carrot an overall more attractive and investable component of value for future investors.
Speaker 5: In conclusion, this quarter marks a significant milestone for the company and an otherwise challenge market.
Speaker 5: We are excited to put the merger process behind us and get back to conversations with stakeholders on the bright future of the business and the significant sum of the parts value components that we believe are currently underappreciated in the market.
Speaker 3: And with that, let me turn it back to Jack. Thanks, Brad. A lot of detail there. So why don't we go ahead and open it up for questions operator? Thank you. To ask a question, please press star one at this time.
Speaker 1: We will take as many questions as time permits. Once again, please press star one to ask a question. We will pause a moment to assemble the roster.
Speaker 1: The first question comes from Nate Crossett with BNP Paribus. Nate, please proceed.
Speaker 6: Okay, good evening. You mentioned there was a couple deals in the quarter that were pushed. I'm just curious, what were the sides of those?
Speaker 6: Is there a chance that maybe they could close Q2? Maybe you can also just speak to the activity outside of those deals.
Speaker 6: what sectors are you seeing activity right now?
Speaker 6: If you were to do DLs, what is the current pricing look like?
Speaker 4: Hey Nate, it's Marcos. So on those two specific transactions, there were over 100 million in ground lease deployment for us. I think sitting here today, I don't think our expectation is that those transactions get revived given this environment. Most of the engagement that the teams had is within the multi-family space.
Speaker 4: We've certainly gotten a fair amount of inbounds on the office side. We're having a hard time making sense of some of the valuations in that asset class, so it's been a little bit difficult for us. But I think over the longer term, we remain optimistic about some of the growth in the multifamily space.
Speaker 6: Okay, thank you. Can you just tell us how it will work?
Speaker 4: Like how is it decided what goes into the fund? And then I think you mentioned there's a management fee. I'm just curious what the fee is. Sure, our expectation is everything that we do going forward that hasn't already been committed to by SAFE will go into this venture. So think about it as the next 500 million of transactions.
Speaker 4: of which we will fund approximately 55% of, we'll go into this venture, we'll receive a base management fee of 25 basis points for the first five years, which steps down to 15 basis points thereafter, and we have a promote structure of 15 over nine.
Speaker 7: Hey, Nate.
Speaker 5: Yeah, I think from what we've been able to accomplish over the last couple of years since we've received investment for eight ratings, as we've been able to access both the public and private markets.
Speaker 5: So I think a diversified set of capital sources, especially in this market is important.
Speaker 5: and creating that access to capital, letting all the good work that's been done here over the last nine months since we announced the merger unfold here. Obviously, credit spreads are somewhat volatile in this market. So we could look to utilize different tenors, different structures in different markets.
Speaker 5: but feel like the cost of that capital.
Speaker 5: we'll find the right pocket to raise. And it's a creative versus the yields that we could achieve in today's marketplace.
Speaker 1: Okay, thank you. The next question comes from Anthony Palone with JP Morgan. Anthony, please proceed.
Speaker 5: Thanks. Just first one, just on the 70 million that you funded in the first quarter itself. Can you give us the caching gap yields on those? Sure. The cached yield was a...
Low to mid 3 percent, that's 3.3 percent. And the inflation adjusted yields, which we quote in our materials, is 5.5 percent.
Okay, great. And then can you talk about just like, I know some of the deals dropped out to maybe price discoveries more challenging right now, but just kind of where are you pricing transactions or where is that discussion today and has there been any change in terms of how you think of...
you know, what is typically I think historically been 35 to 40 percent of the total property values to been any change on that front. Hey Tony, no change on kind of our core metrics going in. So you were still, you know, trying to get into that 35 to 40 percent value range, which obviously has shifted over the last 12 months.
And there's a fair amount of debate about what value is today. Pricing today, I'd say our cash yields are consistent with where we've been recently so-called low-forced to mid-forced on a cash basis. You know, mid-sixes are away.
you know, almost high sixes on an inflation adjusted basis. Okay, and then on the financing side, I mean, I guess,
Just how should we think about that strategy in the joint venture? I guess will there just be property level debt within the venture and just trying to think about how that rolls up to thinking about doing unscored bonds and things like that at the corporate level for you?
So the venture is going to be unlevered and so we'll fund our share with a mix of equity and debt, but we don't intend to put asset level financing. The intent there is to maintain as much flexibility going forward with the potential exit of the venture.
Got it. Where do you see your most attractive debt funding costs right now? Would it be Lyme, Strait, bonds, some of those ratcheted deals you've done in the past? How are you thinking about?
what's most efficient at the moment.
Yeah, hey, Tony. Spread. Yeah, all those options are available to us. As previously mentioned, when looking at where credit spreads are at the moment, lots of the issuers are trying to find the right pockets. We're no different.
I think when looking at those different structures and tenors, you've seen us continue to build upon what we've done in the past and innovate. Whether it be lowering our cash rate, lowering our overall effective coupon, utilizing different tenors, those are all available options to us.
So again, to Marcos' comments, which was low to mid four cash yields, produce low to mid, 6% effective yields, plus CPI kicker, plus carrot.
That's still a creative to today's levels. And the last point I'll make is over the last few quarters, we've been very proactive in hedging our interest rate risk to those long-term treasury locks, as well as creating floating-to-fixed swaps for the line.
We'll help mitigate any interest expense and headline coupon going forward. So we think that's a net positive to our bottom one. Tony, just to add to that, we just got out of this merger. I think we all believe that we're taking the steps to hopefully get to the single a rating in the future.
And I think the overall volatility, you know, I look at our spreads one day and then suddenly, you know, you wake up the next morning and they're 25 to 50 basis points wider. And so I think we're going to continue the dialogue, continue to tell the story and be opportunistic on the death side. I think we are steadfast in our belief that the assets that we're creating in this environment.
once the markets open up are going to be creating significant value long term for the business.
Great, thank you. The next question comes from Handel St. Jusi with Mizzoujo. Please proceed. Hi, this is Ravi Vaidi on the line for Handel St. Jusi. Hope you guys are doing well. When you look at your geographical footprint, are there any markets that you're looking to increase?
market and asset class. I think that's you've seen us push into multifamily pretty hard and change that percentage of our portfolio pretty dramatically over the last few years. I think we want to sort of achieve that that seems sort of dynamic across markets. So I'd certainly like some more exposure in the southeast. I certainly like some more exposure up in Boston. The reality is some of the the size of the transactions and some of the
do see a pricing difference by asset class. Again, multi will probably be the tightest we will do and to the extent we are actually going to look at office or hospitality, it'll be wider than our core multifamily pricing.
Got it. That's helpful. Just one more here. Can you discuss the the CPI link nature of the ground leases? And what is the average in-place escalator across the portfolio today?
So, I believe it is, Brett, correct me if I'm wrong, about 96% of our portfolio has some sort of inflation protection, but our core construct is every 10 years on a safe ground lease, we look back at inflation over that period of time and catch up. And so when you look at our portfolio, I believe the weighted average number is approximately 3.2%. Is that right, Brett? That's right.
that arrangement, but I'm wondering is that a handshake or an obligation on the part of you guys?
It's an obligation. Okay. And on the revised down evaluation of the UCA, so I understand, it went from 10 and a half billion to 10, and that was based on 40% of the portfolio being putting in and around 15% in thebreaks of thatsn recalls on a
looked at by CBRA is that correct? That's correct. Okay, so if you were to extrapolate 40 to 100 percent, then maybe perhaps the number could be lower. This is not going to be a linear thing over the next 100 years. I just want to make sure I understood it. I agree. You got it. Okay.
Okay and so my question you know around that is do you have a sort of a watch list of the assets to the top your ground leases there are any that are jumping out as you know could
You know, there could be a BK or anything, you know, something, maybe not that dramatic, but something where you're kind of concerned about value is not just declining, but perhaps going away.
Yeah, Rich, you know the drill, you know, the markets get volatile. You start to hear conversations between leasehold lenders and borrowers. That process is, you know, we can tell is underway in a number of fronts.
By the time it gets to us, they've had to exhaust both their equity and
the debt conversations. So we're probably well away from that, but there's no question there are markets and assets right now that are going through a pretty significant shift in valuation. And so we're gonna get prepared to see how these things shake out. We may have a new customer.
Unfortunately.
You know, that's not something that bothers us, but we want to be prepared for that. So we'll do the preparatory work, go through the portfolio, got a great asset management team. At least at this point, you know, we think our underwriting will hold through thick and thin, but.
These are the kind of markets you want to be ahead of that curve. Yeah. And just to add to that, Rich, there's no current issues in the portfolio at all. Jay's just talking about us being prudent and getting ready to the extent something could occur.
Sure. Manhattan's the biggest part of your portfolio. No surprise there, expensive market. Is there anything about sort of the relative offering that you provide? Because I would imagine Manhattan's probably, you know, the worst example of legacy ground leases on the planet, maybe. And so you come in and you offer something much cleaner for customers.
Is that a marketing tool that's sort of specific to markets and perhaps explains why you've had some success in Manhattan or am I maybe thinking about it too much? You know, I think the history of Manhattan and ground leases, there have been a fair amount of them over time. So there was some acceptance. So if you think about the arc of our company, it was a little bit easier to crack.
Manhattan early on and it was much harder to crack the Atlanta's and the DC's where those ground leases weren't as prevalent and so But what we've seen is as we get into those other markets and we have some take-up You end up with this network effect and more traction So I think it was just the fact that there was some history with ground leases in Manhattan before
Yeah, okay. And last for me, and Brett and Pierce tried to explain this to me, but I'm going to ask maybe the bigger audience here. What should I take from the 7.2% carrot-adjusted yield? What does that number tell me?
Yeah, I guess, Rich, the easiest way to think about it is the two numbers on the left are based on contractual cash flows and no value allocated to carrots component.
i.e. you're really on the left side using zero inflation assumptions and zero value of carat, you know, we don't believe either one of those is a reasonable economic assumption. So the top right gives you an inflation assumption based on the Fed's 30-year expectation which they publish every month, is it?
So we just use what that gives us and reflect that for you to see once you add in inflation what would happen. Likewise on the bottom right, the carrot adjusted assumes that inflation and an allocation to carrot based on the last trade. So with the merger closed.
fully fleshed out rules, clean trades for carrot. We think it is actually gonna become a helpful to track for investors going forward. But the easy way to think about it is the ones on the left assume zero inflation assumption, zero value carrot. The right ones show you an economic model with inflation.
and with the value, the most recent indicated value of care extracted from the basis.
So it'll show you as time goes on sort of the relationship between the zero inflation, zero caret numbers, but for us economically, we're looking at that right hand side very carefully as an important measure for us.
So you're carving out carat from the denominator essentially.
Exactly. Okay. All right. Thank you. The next question comes from Matthew Howlett with B. Riley. Please proceed.
Thanks for taking the question. First, just bigger picture for you, Jamie. The bank lending environment, can you talk a little bit about the dynamic interplay between what the banks will eventually be doing in the mortgage market, pulling back, consuming, tightening credit in your business, the ground lease? Is there any sort of long-term impact? autleading Where do you think bumping up the Bernie
UC with the bank, what's going on with the bank, some potential regulation down the road.
I think as Mark has said, right now the best functioning market is the multifamily market because you've got the agency backstop on the lending side. Some of the other asset classes don't have the luxury of that kind of liquidity. So there's a huge emphasis, I think, onmith pricing, which has big levels of efficiency
The bank pullback definitely hurts a little bit. And we don't think we've seen the end of it. We're certainly hopeful that some of the steps that have been taken will mitigate the risk, but liquidity is important for real estate. We can't get around that. We've seen transaction activity.
really fall very materially. And I think until we see transaction activity pick up, liquidity right now is gonna be the key variable. It's hard to transact if you don't know exactly where.
the liquidity of and liabilities are going to come from in the banks have played a large role in that both regional and some of the money center banks so I think we've got a period of transition here.
I already see some new types of capital moving into the market. It's one of the great things about being part of the largest capital using industry in the marketplace is capital will find its way into this market. The banks have been a big part of that. The Lifecos. If you want to keep running your disc products keep painting and purchasing in October . Education tip number six, start your company based on the risk mental health benefits.
CMBS market, they're all adapting to this new market environment, the higher interest rate environment. But one thing is always proven true is eventually liquidity comes back in, transaction activity picks up. And we still believe, and this is really our fundamental thesis, we think ground leases make real estate safer and more resilient long term.
We've seen a lot of examples in our own portfolio where customers are really happy. They have long-term, predictable capital from us with no maturity.
And we think that should become an even stronger selling card coming out of this, you know, sort of liquidity hiccup.
Do you think you could see an increased demand for ground leases? Banks may not be as eager to lend and hire LDBs.
I think, you know, the proof is in the pudding. We think our capital structures are definitely more resilient, and I think it will allow more owners to see that, not having debt maturing, not having to work through some of the issues.
that I know some of the faster money creates. So we definitely think longer term, low cost, long term money is really powerful. And so yes, I do think more owners will seek that out. But we need a functioning credit market. We need liquidity from.
both the equity side of the world and the lending side of the world, to make those new capital structures. So we'd like to see the market stabilize here sooner rather than later.
Great, thanks for that. Next question, could you address, I think an ATM file that's safe and a registration of stock at the new iSTAR. Just could you address both those filings with the administrative in nature and what should investors think of the holdings at the legacy star?
Hey, Matt. It's Brett. Yeah, I think this was really to make sure that with the merger now complete, that we get a new shelf and get a new ATM in place. We couldn't roll the existing one over, so this was...
mechanical in nature and obviously we can use it over the coming years. And then from Star Holdings perspective, as you know, they own 13.5 million shares.
of safe and then any sales in the future would need to be approved by the safehold board as well. So there are there are limters on that and there's also a nine-month lockup on the on the start holding side of those safe shares.
Gotcha.
Just on that last question, the next quarter we'll see the first quarter of the fully internalized savings. Is there a high level, what can tell you on a high level basis the impact of the management agreement you're beginning in, the interest, net net is it a few cent positive every quarter in terms of the impact of the merger and the
the fees you're collecting and the interest expense you're paying. Yeah, I think, you know, what there's some noise in the first quarter, as you mentioned, from one-time cash and non-cash expenses moving forward without the external management structure of a management fee and reimbursables and other costs.
The new standalone structure will be helpful as time passes. Net net, you might see a couple million dollar pickup from the first quarter to the second quarter. And then over time, as we said in the past, there should be operating levers that this cost structure.
We believe that this is the cost structure that can work for an asset-based size that is a lot larger. So I think as quarters go by and as we grow, that operating leverage will be apparent. And I'd say from the first quarter to second quarter, eliminating the noise.
Right.
Mr. Hoffman, we have no further questions.
If you should have any other questions on today's release, please feel free to contact me directly. John , would you please give the conference call replay instructions again? Thank you.
Absolutely. There will be a replay of this conference call beginning at 8 p.m. Eastern time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 48222.