Q3 2023 Safehold Inc Earnings Call

Good morning, and welcome to shape hold the third quarter 20 twenty-three 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's 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 for joining us today for Safehold earnings call.

On the call today, we have J, Sugarman, Chairman and Chief Executive Officer, Marcos Alvarado, President and Chief investment Officer, and bright as in as Chief Financial Officer.

This morning, we plan to walk through a presentation of details are third quarter of 2023 results.

And can be found on our website at Staples, Inc. Dot com by clicking on the investors link there will be a replay of this conference call beginning at two P. M Eastern time today.

<unk> for the replay is 8774814010 with a confirmation code of 49301.

Before I turn the call over to J I'd like to remind everyone that statements and his earnings call, which are not historical facts may be forward looking actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our S. U C reports staple disclaims any intent or obligation to update these forward looking state.

<unk>, except as expressly required by law.

Now with that I'd like to turn it over to chairman and CEO Jay Sherman Okay.

Here's some thank you everyone for joining us today.

There's no way around it this has been a very difficult part of the interest rate cycle for us.

By some measures. This has been the worst market for fixed income investments on record and long day. The cash flows are obviously some of the most impacted when rates rise.

Heichel, then and we believe we have been through 90 95 per cent of the interest rate moves in this cycle.

Higher rates also mean are in place long dated liabilities are more valuable and are embedded inflation kickers should be more valuable as well.

What remains in our minds, a unique asset for safehold shareholders, but it's deeply undervalued.

So we continue to position safehold to be a winner when the cycle finally ends and to continue to look for ways to expand the modern greenlees ecosystem.

To find new ways to make real estate capital structures more efficient.

<unk>, they're more like other parts of the modern capital markets.

Without let's have Marcus and brought to take you through the quarter.

Thank you J and good morning, everyone.

Since our last earnings call, we've seen a number of macro and geopolitical events occur that have further increased volatility and uncertainty globally.

Nor market commercial real estate investment activity remains muted with a wide gap between buyers and sellers given.

Given the volatility and race the dearth of liquidity and the increased cost of that limited liquidity. There is great uncertainty about value.

However, we remain confident that we built an asset base and balance sheet that has durability.

And we will look to be opportunistic, but disciplined and capital allocation going forward.

As we navigate this choppy macro backdrop, we <unk>, we remain steadfast in our mission to own the ground lease ecosystem.

And could send you to explore other sources of capital and new product initiatives to take advantage of the current environment.

Let's begin on slide three.

The company raised 152 million of new equity at a gross price of $21.40 per share in early August.

M. S D partners, who has been a strong supporter and partner for the business anchored this transaction by participating at their pro rata ownership level of approximately 8.5%.

Along with management, who invested approximately $1.4 million.

This equity raise was not an easy decision given the headlines share price relative to our views on the underlying value of the business. However.

However, we decided that increasing liquidity in uncertain times deleveraging the balance sheet to pay off the relatively high cost revolver that.

And putting our best foot forward for ratings upgrade would provide long term benefits that outweigh the short term pain of the race.

This equity raise was viewed favorably by creditors and rating agencies as Moody's revised and upgraded our ratings from B double eight one to a three and a early October.

We are pleased with this recognition and outcome, which we expect to help achieve long term benefits and both cost and access to capital as we scale.

A quarter and the total portfolio was 6.4 billion you see a was 10 billion and G. L. T. V was 42 per cent and rent coverage was 3.7 times.

The portfolio credit metrics remained relatively unchanged from last quarter, and we're happy with how our thesis of investing in high quality assets and locations at low attachment points is unfolding as real estate prices.

On the capital front, we ended the quarter with 858 million of liquidity, which is further enhanced by the unused capacity in our joint venture, which is a valuable tool for us to pursue new investments and serve our customers well preserved capital.

Slide four provides a snapshot of our portfolio growth for the quarter.

During the third quarter, we originated one new multifamily ground lease for 19 million, which was fully funded at closing.

Credit metrics associated with this deal are in line with our portfolio targets with a G. L. T D a 43%.

Coverage of 3.2 times, and an economic yield of 7.1 per cent.

Subsequent to quarter, and we close to multifamily ground leases for $34 million.

These investments were also fully funded it closing with a G. L. T V. A 40% rent coverage of three times in an economic yield of 7.3 per cent.

The recent rate uptick has an impact on our pipeline.

Six letters of intent executed last quarter, we saw two not close to the buyers and sellers not agreeing on a change in price as rates rose.

And another to be delayed as our customers had to raise incremental capital to close these transactions.

And the third quarter, we funded a total of 88 million, earning a blended 6.6 per cent across three categories.

He basically mentioned 19 million Q3 origination, earning a 7.1 per cent economic yield.

And $60 million, a preexisting rallies commitments, earning 5.8%.

On these commitments we expect this yields the increase in future quarters is older commitments originated in a lower yield environment burnt off in favor of recently originated higher yielding investments.

And 9 million related to our 53 per cent share of the leasehold loan fund, earning approximately 11%.

Our ground lease portfolio now has 135 assets and the portfolio has grown 19 times since our I P O.

While the estimated unrealized capital appreciation sitting above ground leases hasbro's twenty-three times since our IPO.

In total do you see a portfolio is comprised of approximately 34 million square feet of institutional quality commercial real estate.

This thing of approximately 17600 units, a multifamily 12, and a half million square feet of office over 5000 Hotel keys, and 2 million square feet of life science and other property types.

And with that let me turn it over to Brett to go through the financials spread.

Thank you Marcus and good morning, everyone.

Continuing on slide five let me detail or quarterly earnings results.

The third quarter gap revenue was 85.6 million net income was negative $123.0 million in earnings per share it was negative $1.81.

On your back out the full impairment of goodwill we are taking this quarter along with merger and carrot related costs net income was positive $22.5 million in earnings per share was a positive 33 cents.

The goodwill asked that was created when we close the merger and was recorded on our balance sheet, but the value of the end of last quarter sitting at $145.4 million.

Goodwill, primarily represented future savings and synergies.

She ended with completing the merger and replacing our prior external management structure.

Goodwill assets are recorded under gas to be tested for impairment annually.

However, we also are required on an ongoing basis to determine if there are indicators of impairment and if so tests per impairment at such time.

We determined that the precipitous and sustained declines their stock price during the quarter was an indicator of impairment and then a full.

Full impairment of the <unk> that was required.

This is entirely in accounting driven a non-cash impairment and does not speak to the value of durability of our asset base and Safehold certainly still benefits from being an internally managed company.

Moving to Q3 EPS of 33 cents, excluding non-recurring items.

Want to highlight a few reasons for the decrease year over year.

First total G&A, none of the Star Holdings management fee was approximately 2 million higher than the same period last year.

This increase was expected and something we've highlighted to the market.

Over time, we expect our cost structure to provide meaningful operating leverage versus the previous growing and uncapped external management structure that would have had us paying higher management fees and reimburse the bulls today versus a year ago with that contract we're still in place.

Separately to note based on the previous two quarters results since merger closing, we're tracking to beat our net G&A targets for the year.

Second during the quarter, we terminated an option to purchase a 215 million Bromley underneath the Spect office development property in the greater Seattle area.

The net effect of this transaction, which also included writing off a nonrefundable option payment along with other crude deal costs, resulting in a one time net loss of $1.9 million.

Lastly, interest expense related to our revolver borrowings.

Higher due to elevated sopher and a larger average drawn balance.

Similar to us so many borrowers we have felt the effect that the rapid pace of rate increases.

Over the last year and a half we have mitigated the impact by putting in place 500 million floating to fix swaps fixing sofa nearly three per cent.

Additionally over that time, we purchased 400 million of longterm 30, or hedges that are currently in the money, but not yet flowing through the piano.

Walk through that shortly at the present rate environment continues to be an earnings headwind.

On slide six we detail our portfolios yields.

Our ground leases have two different components of value.

The first is a wrench scream of compounding cashflows, which is akin to a high grade bond with additional inflation protection on top the bonds do not provide and.

And the second is the future ownership rights in the buildings at least exploration.

Let's review the yields that we recognized on the bun like component of the business or cash flows.

The portfolio currently earns a three and a half per cent Castillo.

And a 5.2% annualized deal which is what we.

Nice for GAAP earnings.

Backed up annualized deal differs meaningfully from what we believe is a reasonable view on the economic reality of these ground leases.

Any ground lease with a variable ranked component such as fair market value resets percentage rent or CPI based escalators are penalised when looking at Yahoo, which assumed zero go forward economic value for those features.

When looking cross our ground. These investments 17 per cent of our ground leases are legacy acquired existing ground leases, which contains some form of variable rent and currently earn a 3.0% yield forget purposes.

Yet by using a standard 2.0% broker CPI assumption, we've underwritten those ground leases cashflows til 5.8%.

Simply put while gap recognizes zero growth zero inflation assumption for the entirety of our 99 year round leases, we believe the market does not.

This concept is the key piece in moving from the first box on the slide to the second.

The first boxes gap second box is simply an IRR calculation on our portfolio cash flows.

Assuming 2.0% CPI for any leases with a variable component.

For the majority of our ground leases, which have 2.0% annual fixed bumps and periodic CPI look backs. This.

<unk>, 2.0% growth on economic yields scenario is the same as gap.

However, it's important to distinguish 17% subset that as a component of variable rent I.

When you calculate of such you'll arrive at a 5.7 per cent total portfolio economic yield versus the 5.2 per cent downhill.

Moving on the third box is a continuation from the second box. The only difference is that instead of using a base case 2.0 per cent CPI scenario, we assumed the federal reserve current longterm breakeven rate of 2.34 per cent.

This is not only benefits the 17% segment of the <unk>.

Entire portfolio is we will pick up additional cash flow when our periodic inflation look back to kick in during the coming years and this results in a 5.9 per cent deal.

The second component of value in the portfolio is our future ownership rights, which is the unrealized capital appreciation we tracked quarterly.

Carrot is the subsidiary that owns you see I was safe shareholders owning 82 per cent of carrot.

The date, we've had two investment round selling small interest in character third parties, the last of which closed at 2 billion valuation.

This fourth box in room rates, the illustrative value and yield benefit from safe holds interest in carrot.

When using the 5.9 per cent inflation adjusted yield inbox, three rather than taking safe space in the ground leases as the initial cash flow.

Outflow in calculating the IRR, we instead after that basis by space interest in carrot, which is worth approximately 1.6 billion or 82 per cent of the 2 billion valuation, which produces a 7.4% caret adjusted deal.

This is an illustrative metric intended to highlight this important element of our value proposition and remains largely unrecognized by the market to that.

Turning to slide seven you show a geographic breakdown of our portfolio.

The slide underscores the portfolio diversification by location and underlying property type.

Top 10 markets by G. D. D are highlighted on the right representing approximately 70 per cent of the portfolio.

We include key credit metrics essentials, such as rent coverage and G. L. T V for each of these markets and we have additional detail at the bottom of the page separating the portfolio by region and property type.

We believe that investing in well located institutional quality ground leases in the top 30 Msas should appreciate in value over time.

Lastly on slide eight we provide an overview on our capital structure.

At the end of the third quarter, we had approximately 4.3 billion of debt.

Prized of 1.5 billion of unsecured notes 1.5 billion of non recourse secured debt.

1 billion drawn on our unsecured revolver and $272 million of our pro rata share of debt on ground leases would Fiona and joint ventures.

Are weighted average that maturity is approximately 22 and a half years and.

We have no corporate maturities due until 2026, which is our revolving credit facility.

A corner and we had approximately $858 million of cash and credit facility availability.

I want to spend a moment on the revolver in detail the fixed versus floating dynamic and hedges, we have put in place to mitigate interest rate risk.

Of the approximately 1 billion revolver balance outstanding.

$500 million, a swap to fix sopher at three per cent.

This is a five year swap that we executed in early Q2 of this year.

We received swap payments on our current cash basis each month.

Current rates produces cash interest savings of approximately 3 million per quarter that is currently flowing through the piano.

Of the remaining $500 million drawn we have $400 million of long term treasury locks at a weighted average rate of approximately 3.4%.

At current rates these are approximately $75 million in the money.

These hedges or mark to market, so no cash changes hands each month.

We do recognize these gains on our balance sheet.

Oh see I, they're not yet recognized in the piano.

While these hedges protect us through next year, they can be unwound for cast at any point.

As we look to turn out revolver borrowings with long term that we wouldn't want the hedges and attach the gain to the debt lowering the effective economic greatly pet.

The remaining unhedged exposure is largely offset by our higher yielding investments connected with the merger.

Including the floating rate income we receive on our leasehold loan fund interest.

The weighted average credit spread we earn on those loans exceed what we pay on our line by 392 basis points.

We are Levered 1.8 times on a total debt to book equity basis, the effective interest rate on permanent that is 3.8%, which is 136 basis points spread.

To the 5.2 per cent gap annualized deals on our portfolio.

The portfolios cash.

Cash interest rate on permanent that is 3.3 per cent.

Which is the 16th basis point spread to the 3.5% annualized Castillo.

Lastly, it's Marcos mentioned earlier after quarter N Safehold received a credit ratings upgrade from Moody's to eight three with a stable outlook.

Moody's upgrade which was issued at the time of overall market uncertainty.

Highlights the inherent credit strength of the assets capital structure and business, we've built and we expect this upgrade to be a long term benefit for the company.

And the immediate we've already seen a 12 and a half basis point decrease in a revolver costs based on the ratings.

We also remain engaged with fish will put us on positive outlook in the beginning of 20 twenty-three several months after Moody's had done so.

We believe we've addressed the number of their key criteria and targets and will continue to maintain an active dialogue with their team with the goal of gaining momentum to drive down our cost of capital.

So to conclude while the market backdrop remains challenged our asset performance remains strong we have ample liquidity and capital access and we had no near term maturities.

As we continue to push on improving our cost of capital will be patient, but opportunistic around new investments and look to continue to expand on our market leading position.

And with that let me turn it back to Jack.

Hello, Thanks bread.

Well, there's a lot of noise this year with the merger of the Macrobot backdrop and things like goodwill.

And with capital markets spreads moving faster than cap rates in the real estate transaction market.

Hard to generate the spreads we look forward to spite currently attractive acid economics that offer plus.

Plus or minus 100 basis points over the benchmark plus inflation characters, plus U C a and its potential carrot value.

While this side of the interest cycle has been rough we are preparing for the other side of the cycle.

Great seem near and one sentiment changes, we believe our existing portfolio will be seen in a new light in the capital markets should be in a better position to help us take advantage of the attractive acid economics in the ground lease market.

And without operator, let's go ahead and open it up for questions.

Thank you to ask a question. Please press star one at this time.

Take as many questions as time permits once again, please pass Taiwan to ask a question. Please pass them on that case handled the roster.

Yeah first question is coming from eight cross it with BNP. Please pose your question your line of sight.

Operator: Good morning and welcome to Safehold's third quarter, 2023 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's star one to ask a question. As a reminder, today's conference is being recorded.

Hey, good morning good.

I was wondering if you could talk about <unk> pipeline heading into the year are there any bills that are currently under LOI right now.

Pearse Hoffmann: At this time for opening remarks and introductions, I would like to turn the conference over to Hearst Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir. Good morning, everyone. Thank you for joining us today for Safehold's earnings call.

And then just.

Maybe on what you're seeing like if right to stabilize in the near term like do you perceive things.

Opening up quickly or is there more of an adjustment period.

Just some color their pipeline will be helpful.

Pearse Hoffmann: On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Marcos Alvarado, President and Chief Investment Officer, and Brett Asnas, Chief Financial Officer. This morning, we plan to walk through a presentation that details our third quarter 2023 results. The presentation can be found on our website at SafeholdInk.com by clicking on the investor's link.

So I think if you go back to the end of the second quarter, which feels like an attorney, but it's not really that long ago.

Tenure was it three eight.

And today, it's you know almost 100 basis points wider.

I think it's paralyzed the overall market, including our customers. So while we saw some traction sort of at the end of Q2 in the early months of the summer we've seen that sort of Peter off over the last you know a handful of months.

Operator: 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 a confirmation code of 49301.

So I think you know we have a few things in the pipeline that are progressing towards closing I'll tell you that we have a little bit less confidence in <unk>, but then we haven't had in the past and I sort of reference that in my remarks, we had a handful transaction that you know got the closing table with Dax done and and it fell apart.

Pearse Hoffmann: 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. Safehold disclaims any intent or obligation to update these forward-looking statements except is expressly required by law.

So I think you know Q4, it's gonna continue to remain spotty I think the psychology that you're sort of describing about when when do people.

Jay Sugarman: Now, with that, I'd like to turn it over to Chairman CEO Jay Sugarman, okay? Thanks, Pierce. Thank you, everyone, for joining us today.

People capitulate I I think it's it takes time you know if you think about the sort of rape movements, what what what's the impact on you know asset values are people willing to give up are you gonna see distress and as far as we can tell them that that appears to be going very very slow in today's environment.

Jay Sugarman: There's no way around that this has been a very difficult part of the interest rate cycle for us. By some measures, this has been the worst market for fixed-income investments on record, and long-data cash flows are obviously some of the most impacted when rates rise. But cycles end, and we believe we have been through 90-95% of the interest rate moves in this cycle. Higher rates also mean our in-place long-dated liabilities are more valuable, and our embedded inflation kickers should be more valuable as well. And care remains in our minds a unique asset for safehold shareholders that is deeply undervalued.

Okay I think he like you mentioned new products initiatives and the prepare my mindset is.

Is there anything to note there is there any like new type of product that you've been doing or contemplating just wanted to make sure I heard that right.

Yeah, we're always in the lab trying to brainstorm and think through different applications of of the product and so nothing that is far enough along to talk about yet, but we're excited about the potential things in the future.

Jay Sugarman: So we continue to position safehold to be a winner when the cycle finally ends, and to continue to look for ways to expand the modern green lease ecosystem, to find new ways to make real-state capital structures more efficient, more resilient, and more like other parts of the modern capital markets.

Okay days, maybe and then just one for breakfast and the upgrade on the credit rating.

Like how much that would hypothetically say, the one that costs versus where it was before the upgrade.

Marcos Alvarado: With that, let's have Marcus and Broadtake you through the quarter. Thank you, Jay. Good morning, everyone. Since our last earnings call, we've seen a number of macro and geopolitical events occur that have further increased volatility and uncertainty globally. Our market commercial real-estate investment activity remains muted with a wide gap between buyers and sellers. Given the volatility and rates, the dearth of liquidity, and the increased cost of that limited liquidity, there's great uncertainty about value. However, we remain confident that we've built an asset base and balance sheet that has durability, and we will look to be opportunistic but disciplined in capital allocation going forward.

So we right now we have a split rating with Moody's and Fitch, we've seen some some benefit and our spreads but I think the majority of that benefit will come when we have a secondary rating what we've typically seen across many borrowers in the a rating category.

Triple B most of them trade at a 30 to 50 basis point differential and some of the debt capital providers that we have regular dialogue with have indicated as such as well when you start to really think about.

Marcos Alvarado: As we navigate this choppy macro backdrop, we remain steadfast in our mission to own the Brownlee Seagulls. System, and continue to explore other sources of capital and new product initiatives to take advantage of the current environment.

Their ability to tap different pockets to deploy capital for a or better when you think about the capital charges that needs to be needed to take the exposures that there are limited or allowed to take as well those should all the benefits to us. So we're we're hoping that we can continue.

Marcos Alvarado: Let's begin on slide three. The company raised $152 million of new equity at a gross price of $21.40 per share in early August. MSD Partners, who has been a strong supporter and partner for the business, anchored this transaction by participating at their pro-rata ownership level of approximately eight and a half percent, along with management who invested approximately $1.4 million.

You to <unk>.

To prove and build that track record as we've done over the last year to get to that second day ratings. So we can get that benefit.

Okay I'll leave it there thank you.

Your next question is coming from Anthony.

J P. Morgan sees punch a question your line of sight.

Great. Thanks, Good morning, Uhm I guess.

Marcos Alvarado: This equity raise was not an easy decision given the headline share price relative to our views on the underlying value of the business. However, we decided that increasing liquidity in uncertain times, deleverging the balance sheet to pay off the relatively high cost revolver debt, and putting our best foot forward for a ratings upgrade would provide long-term benefits that outweigh the short-term pain of the race.

Historically it seemed like your value proposition to sponsors was it you know the combination of ground lease and least hold that would get them more proceeds and also at very attractive rates <unk> what is <unk>.

What do you think the real pitch is right now at higher rates that your delivery to two prospective sponsors when you're pitching ground with structures.

Marcos Alvarado: This equity raise was viewed favorably by creditors and rating agencies, as Moody's revised and upgraded our ratings from BWA1 to A3 in early October. We are pleased with this recognition and outcome, which we expect to help achieve long-term benefits in both cost and access to capital as we scale.

You know hey, Tony I I I think it's the same exact pitch as it was before on a relative basis, we're still the most efficient source of capital.

So if you go down the entire capital structure capital structure right Unlevered yields have blown out cost of dead is blown out whether that's fee simple or leasehold loans and obviously our cost of capital has changed.

Marcos Alvarado: At quarter end, the total portfolio was $6.4 billion, UCLA was $10 billion, and GLTV was 42% and rent coverage was 3.7 times. The portfolio credit metrics remained relatively unchanged from last quarter, and were happy with our thesis of investing in high-quality assets and locations at low attachment points as unfolding as real estate reprices. On the capital front, we ended the quarter with 858 million of liquidity, which is further enhanced by the unused capacity in our joint venture, which is a valuable tool for us to pursue new investments and serve our customers while preserved capital.

You know if I, if I look at a multifamily transaction, where there's at least a little bit of transaction volume you know the agencies are still providing fixed rate debt, but it's it's in the north of six per cent range at lower leverage levels. So we were stolen accretive source source of capital to our customers.

Okay and then on the.

Ah, Yes land to total property value I think that used to be 35% to 40%, it's crept up a little bit north of 40. It seems like do you think that the the new level or is.

Is that just maybe some of the more recent deals.

You know I think we've we've taken probably a more conservative approach than some of the the sponsors those new acquisitions are based on our actual appraisal Oh, sorry, our actual internal work they'll get appraised by CBRE.

Marcos Alvarado: Slide 4 provides a snapshot of our portfolio growth for the quarter. During the third quarter, we originated one new multi-family ground lease for 19 million, which was fully funded at closing. The credit metrics associated with this deal are in line with our portfolio targets with a GLTV of 43%, rent coverage of 3.2 times, and an economic yield of 7.1%. Up to quarter end, we closed two multi-family ground leases for 34 million. These investments were also fully funded at closing with a GLTV of 40% rent coverage of 3 times and an economic yield of 7.3%.

On a rolling annual basis, So I would say, we're just taking a more conservative view on the underwriting side, but the broadly the credit metrics remain consistent.

Okay, and then just last one for me on the leasehold loan fund yeah. It looks like that capital is getting extend it out at court, 11% thereabouts, what's the underlying there to support that yield and.

Is that current pay or is that a pig structure, which is kind of what's underneath there.

Marcos Alvarado: The recent rate-up tick has had an impact on our pipeline. Of the six letters of intent executed last quarter, we saw two not closed due to buyers and sellers not agreeing on a change in price as rates rose. And another two be delayed as our customers had to raise incremental capital to close these transactions. In the third quarter, we funded a total of 88 million earning a blended 6.6% across three categories.

Yeah, so each each loans different but typically a lotta those either have a a component of cash and a component pick or their current cash pay so.

Those will flow through the cash flow statement, but I think what we're what you see in the call. It earnings from equity method investments line is the combination of what were yielding on the asset as well as the purchase that we made at merger, which was at a discount based on work or.

Marcos Alvarado: The previously mentioned 19 million Q3 origination earning a 7.1% economic yield, and 60 million of pre-existing ground lease commitments earning 5.8%. On these commitments, we expect this yield to increase in future quarters as older commitments originated in a lower yield environment burn off in favor of recently originated higher yielding investments. Smith, and 9 million related to our 53% share of the lease hold loan fund, earning approximately 11%. Our ground lease portfolio now has 135 assets, and the portfolio has grown 19 times since our IPO.

[noise] rates were at that moment.

Right, but that like the 11 like I guess.

Just maybe remind me what what's kind of underneath is it development stuff or is it just current couch for assets, which supporting it.

Yeah. So there's one asset that was originally a construction loan it's actually built and and beginning lease up it's a brand new multifamily acid in Nashville, and then there is a trophy life science asset in Cambridge that it is a development deal and then the final deal is re.

Marcos Alvarado: While the estimated unrealized capital appreciation sitting above our ground lease has grown 23 times since our IPO. In total, the UCLA portfolio is comprised of approximately 34 million square feet of institutional quality commercial real estate, consisting of approximately 17,600 units of multi-family, 12.5 million square feet of office, over 5,000 hotel keys, and 2 million square feet of life science and other property types.

Positioning of a mixed use acid, which includes a life science component in Cambridge as well.

Okay.

Okay.

Oh, and then a small so I apologize, there's one more there's a small multifamily existing asset as well in Seattle stabilize.

Brett Asnas: And with that, let me turn it over to Brett to go through the financials. Brett, thank you, Marcos.

Got it okay. Thank you.

Brett Asnas: Good morning, everyone. Continuing on slide five, let me detail our quarterly earnings results. For the third quarter gap revenue was 85.6 million, net income was negative 123.0 million, and earnings per share was negative $1.81. When you back out the full impairment of Goodwill, we are taking this quarter, along with merger and carrot-related costs, net income was positive 22.5 million, and earnings per share was positive 33 cents. The Goodwill last that was created when we closed the merger and was recorded on our balance sheet, but the value at the end of last quarter sitting at 145.4 million.

Your next question is coming from.

Yep.

A great a couple quick ones just on the back to the originations are these so the the one deal on the corner and the two posts were those existing relationships.

And sort of when you were talking about the pipeline. Maybe you can you can you sort of Ah dissect that in terms of existing versus sort of new relationships. Thanks.

Those three were existing customers, so repeat transactions Ah, which is great to see and I would say the pipeline I'm looking at it right now is a mix of new an existing customers.

Brett Asnas: Goodwill primarily represented future savings and synergies associated with completing the merger and replacing our prior external management structure. Goodwill assets are recorded under gap to be tested for impairment annually. However, we also are required on an ongoing basis to determine if there are indicators of impairment, and if so, test for impairment at such time, we determined that the precipitous and sustained decline in safe stock price during the quarter was an indicator of impairment, and that a full impairment of the asset was required.

Great and then just looking at the caret. The revaluation was slightly down I you know I think 10 10 O from 10, one which it doesn't look like a big deal, but just wondering was there like one asset or what what sort of drove that this quarter.

Yeah. We're you know we're seeing the appraiser start to move cap rates up there drifting upwards on all property types and I think they're taking a little sharper pencil certainly to some of the underlying assumptions on the operating side. So.

Brett Asnas: This was entirely an accounting driven and non-cash impairment, and does not speak to the value or durability of our asset base, and safehold certainly still benefits from being an internally managed company. Moving to Q3, EPS of 33 cents, excluding non-recurring items, I want to highlight a few reasons for the decrease year over year. First, total G&A, net of the star holdings management fee, was approximately 2 million higher than the same period last year.

Appraisals don't move in and jumps steps they they can move in waves.

Definitely seeing.

The appraisal community begin to.

Push those cap rates up so.

So we're not surprised by what you expect more of it.

Yeah, we'll see the impacts without slowly.

But we're still gonna be in you know.

Tennis range it feels like with some.

Brett Asnas: This increase was expected, and something we've highlighted to the market. Over time, we expect our cost structure to provide meaningful operating leverage versus the previous growing and uncapped external management structure that would have had us paying higher management fees and reimbursicles today, versus a year ago if that contract were still in place. Separately to note, based on the previous two quarters results and merger closing, we are tracking to beat our net G&A targets for the year.

Yeah.

Parts of those the cycle like this where you're gonna get more down a downward adjustments went up or to judgments.

Great and then my last one if I may just on the income.

Statement the provision for credit losses, what was that related to the 336000 and I see here in any other sort of assets or anything like that that you guys are looking at for potential more provisions. Thanks. So much.

Brett Asnas: Second, during the quarter, we terminated an option to purchase a 215 million ground lease underneath a spec office development property in the greater Seattle area. The net effect of this transaction, which also included writing off a non-refundable option payment, along with other accrued deal costs, resulted in a one-time net loss of 1.9 million- Anderson. Lastly, interest expense related to our revolver borrowings was higher due to elevated sofa and a larger average drawn balance.

Of course, yeah, we we adopted Cecil this here so we would take a provision on amounts we fund based on the.

The relative risks there which is.

Let me take a host of factors and use the model to determine that but typically.

We've taken the range of call. It you know wanted to four basis points on new funding. So that's primarily the <unk>.

<unk>.

Alright, thanks, so much ironic.

Brett Asnas: Similar to many borrowers, we have felt the effect of the rapid pace of rate increases. Over the last year and a half, we have mitigated the impact by putting in place 500 million, floating to fixed swaps, fixing sofa at nearly 3%. Additionally, over that time, we purchased 400 million of long-term 30-year hedges that are currently in the money, but not yet flowing through the P&L.

<unk> no specific assets is shirley across the portfolio.

Got it okay helpful. Thank you.

Your next question is coming from Caitlin Perez with Goldman Sachs Police cause you a question your line of sight.

Hi, Good morning, everyone. Maybe you could just start with kind of the properties that did transact in the corner and October and the ones that are in the pipeline.

Brett Asnas: I'll walk through that shortly, as the present rate environment continues to be an earnings headwind.

From what we can see they were multifamily kind of some other details of maybe what made those properties.

Brett Asnas: On slide 6, we detail our portfolio's yields. Our ground leases have two different components of value. The first is a rent screen of compounding cash flows, which is akin to a high grade bond, with additional inflation protection on top that bonds do not provide, and the second is the future ownership rights in the buildings, at least expiration. Let's review the yields that we recognize in the bond-like component of the business, our cash flows.

The right ones and as you look forward and does it continue to be a multifamily okay.

Yeah, I you know as I go back to the remarks, the the lack of liquidity is really a driving force to get any sort of transaction done and there is a little bit of liquidity in the in the agency space in the in the housing space broadly. So I think we're gonna continue to push on on multi.

Brett Asnas: The portfolio currently earns a 3.5% cash yield and a 5.2% annualized yield, which is what we recognize for gap earnings. That gap annualized yield differs meaningfully from what we believe is a reasonable view on the economic reality of these ground leases. Any ground leases with a variable rent component, such as fair market value resets, percentage rent, or CPI based escalators, are penalized when looking at gap, which assumes zero-go-forward economic value for those features.

Believers and sort of the supply demand imbalances longterm and it's an asset class, we Wanna continue to scale and grow in if I think about the those particular transactions a couple of them were student housing assets.

We're seeing in our portfolio as well as on the specific assets some pretty incredible same store you know revenue growth.

Almost double digits and so I think you know customers.

Although cap rates are wider for student housing are able to underwrite a decent amount of growth and so that they can tolerate.

Brett Asnas: When looking across our ground leases investments, 17% of our ground leases are legacy-acquired existing ground leases, which contains some form of variable rent, and currently earn a 3.0% yield for gap purposes. Yet by using a standard 2.0% growth or CPI assumption, we've underwritten those ground leases cash flows yield 5.8%. Simply put, while gap recognized as a zero growth is zero inflation assumption for the entirety of our 99-year ground leases, we believe the market does not.

Capital structure that is more expensive.

And so that's probably the reason those transactions that have been successful.

Got it.

And then it looks like the originations in the corner in October at the economic yelled turn the low 7%. So I'm wondering if he can talk a little about how you think [noise].

About kind of in this environment today that you're making those deals.

But that their long term agreements and kind of how you balance that today versus 99 years.

Brett Asnas: This concept is the key piece in moving from the first box on the slide to the second. The first box is gap, the second box is simply an IRR calculation on our portfolio's cash flows, assuming 2.0% CPI for any leases with a variable component. The majority of our ground leases, which have 2.0% annual fixed bumps and periodic CPI lookbacks, this 2.0% growth on economic yield scenario is the same as gap. However, it's important to distinguish the 17% subset that as a component of variable rent, when you calculate a such, you'll arrive at a 5.7% total portfolio economic yield versus the 5.2% gap yield.

Yeah. We we you know I think the first premise for us as we always look at the longterm benchmarks and and where those our trading what that cost is today and they.

Have increased obviously over the last few.

Few quarters, but they're in the six per cent range and so our bogey is can we make 100 basis points spread above that and then obviously, we get the benefit of inflation and the benefit of carried on top of that so that's kind of how we generally think about our a leopard pricing bogey.

Got it and then just a quick one on the joint venture you went to how there's I think $462 million left total so could you just go through again kind of the benefits of having the JV structure and confirm that all investments will be done in the J V until that amount is kind of use that.

Brett Asnas: Moving on, the third box is a continuation from the second box. The only difference is that instead of using a base case 2.0% CPI scenario, we assume the Federal Reserve's current long-term break-even rate of 2.34%. This not only benefits the 17% segment, but the entire portfolio. As we will pick up additional cash flow when our periodic inflation lookbacks kick in during the coming years, and this results in a 5.9% Hill.

Yeah. So I think I've mentioned this on Ah Ah Ah prior call, they're a handful of transactions that are on the smaller side, where our partner will most likely not participate there's a decent amount of friction costs to setup those those adventures and so our expectation is.

That they will almost do every single transaction, but some of the smaller ones that we have conviction on they may they may end up on our balance sheet.

Brett Asnas: The second component of value in the portfolio is our future ownership rights, which is the unrealized capital appreciation we track quarterly. Carrot is the subsidiary that owns UCA with SafeShareholders owning 82% of Carrot. To date, we've had two investment rounds selling small interest and carrot to third parties, the last of which closed at a two-billion valuation. This fourth box enumerates the illustrative value and yield benefit from Safehold's interest in Carrot. When using the 5.9% inflation adjusted yield in box three, rather than taking safe spaces in the ground leases as the initial cash flow or outflow in calculating the IRR, we instead offset that basis by safe interest in Carrot, which is worth approximately 1.6 billion, or 82% of the two-billion valuation, which produces a 7.4% carrot adjusted yield. This is an illustrative metric intended to highlight this important element of our value proposition, and remains largely unrecognized by the market today.

We get a base management fee and promote structure and I'm blanking on it off the top of my head right. If you know what that is.

Over a 1275.

Okay, let let me get back to you on the base management fee and the 20th right. That's.

There you go Sir.

Got it so I guess, just you mentioned the smaller ones I guess they deal in the origination entry queue and the two since those all seemed pretty small so it it seemed like they would fall into the category of being just first of April.

Correct and just as they think about like funding going forward okay.

Mm Okay. That's all thanks.

Your next question is coming from Hush <unk> Green Street police such a question your line is fine.

Thank you just a quick one from me so the option that was stolen minute that this quarter to purchase a <unk> Oh, how many more of those options do you currently have on your balance sheet that could be out of the money just at current rates.

Brett Asnas: Turning to slide seven, we show a geographic breakdown of our portfolio. The slide underscores the portfolio's diversification by location and underlying property type. Our top 10 markets by GBV are highlighted on the right, representing approximately 70% of the portfolio.

There is one other option on our balance sheet currently.

That's helpful and then <unk>.

Oh.

Sorry go ahead.

And and <unk>, it's probably too early to determine whether the customer qualifies for that that option and if we actually have any P&L exposure on that payment.

Brett Asnas: We include key credit metrics such as rent coverage and GLTV for each of these markets, and we have additional detail at the bottom of the page separating the portfolio by region and property type. We believe that investing in well-located institutional quality ground leases in the top 30 MSAs should appreciate and value over time.

Okay. Thank.

Thank you.

The next question is coming from Kenneth sleep with RBC capital markets. Please pleasure question. Your line is five.

Hi, Good morning, Thanks for taking my question just on a liability sides, obviously know maturity's until 2026 wonder if could you share some thoughts as to what options could you look at it as as you look to refinance over time and would there be any change in approach just given where rates are or were rich.

Brett Asnas: Lastly, on slide eight, we provide an overview on our capital structure. At the end of the third quarter, we had approximately 4.3 billion of debt, comprised of 1.5 billion of unsecured notes, 1.5 billion of non-report secure debt, 1 billion drawn on our unsecured revolver, and 272 million of our pro-rata share of debt on ground leases which we own and join ventures. Our weighted average debt maturity is approximately 22.5 years, and we have no corporate venturities due until 2026, which is our revolving credit facility. At quarter end, we had approximately 858 million of cash and credit facility availability.

Could be <unk>.

They can you know I think I think our approach is the same we've we've.

Obviously, you have access to multiple parts of the capital markets.

What we've been able to exhibit over the past few years and growing are unencumbered asset base and being an unsecured borrower is really creating a footprint in the markets. We have access to both the public and private Ah at various tenors with various structures. So I think what we've been able to.

Brett Asnas: I want to spend a moment on the revolver and detail the fixed versus floating dynamic, and the hedges we have put in place to mitigate interest rate risk. Of the approximately 1 billion revolver balance outstanding, 500 million of swap to fix sofa at 3%. This is a five-year swap that we executed in early Q2 of this year. We received swap payments on a current cash basis each month, and at current rates it produces cash interest savings of approximately 3 million per quarter that is currently flowing through the PNL.

Exhibit and take action on over the last year's is continuing to.

Be creative and create liability screams that better match, the asset profile, but we've been able to create.

So that's really in our mind, while we're continuing to push along and I think some of the remarks I made earlier around.

Where rates currently are <unk>.

Your current credit spreads are in the appreciation of where the business is that in terms of its evolution.

Brett Asnas: Of the remaining 500 million drawn, we have 400 million of long-term treasury locks at a weighted average rate of approximately 3.4%. At current rates, these are approximately 75 million in the money. These hedges are marked to market, so no cash changes hands each month, and while we do recognize these gains on our balance sheet in OCI, they are not yet recognized in the PNL. Well, these hedges protect us through next year, they can be unwound for cash at any point.

We're going to let all of that good work and good progress and setup of the balance sheet. As you mentioned in your question of no no maturities over the coming years here work to our benefit and we do think that getting to that second a rating will provide even more pricing power for the business. So lots of lots of capital solutions, we Wanna be thoughts.

<unk> about you know walking in long-term capital, but we do have those hedges that are significantly and the money that should you know way down that net effective right for us.

Brett Asnas: As we look to term out revolver borrowings with long term debt, we would unwind the hedges and attach the gain to the debt, lowering the effective economic rate we pay. The remaining unhedged exposure is largely offset by our higher yielding investments connected with the merger, including the floating rate income we receive on our lethal loan fund interest. The weighted average credit spread we earn on those loans exceed what we pay on our line by 392 basis points.

Gotcha very helpful. There and then one follow up if I may.

Any updates around efforts to create public liquidity or liquid market for the <unk>.

Yeah, we're in contact with those first round carrot investors.

Some of them have certainly expressed the desire and willingness to.

Brett Asnas: We are levered 1.8 times on a total debt to book equity basis. The effective interest rate on permanent debt is 3.8%, which is a 136 basis point spread to the 5.2% gap annualized yield on our portfolio. The portfolio's cash interest rate on permanent debt is 3.3%, which is a 16 basis point spread to the 3.5% annualized cash yield.

Push that data out given their current capital market environment, but we're still working on that.

I think everybody's realistic about where the the <unk>.

Opportunity is today in today's capital markets or where it might be in the future. So we'll continue to have those conversations.

Gotcha very helpful. There. Thanks again.

Brett Asnas: Lastly, as Marcus mentioned earlier, after quarter end, Safehold received a credit ratings upgrade from Moody's to A3 with a stable outlook. Moody's upgrade, which was issued at a time of overall market uncertainty, highlights the inherent credit strengths of the assets capital structure and business we've built. And we expect to separate to be a long-term benefit for the company. In the immediate, we've already seen a 12.5 basis point decrease in our revolver costs based on the rating.

And next question is coming from Saint to use with Missoula Securities. Please pose your question your line of sight.

<unk> on the line for a <unk> I hope you guys are doing well I just wanted to talk about the rent coverage for the recent acquisitions, we noticed there about half a turn will get more than half of turned inside the portfolio average is this due to the fact that apartment rents apartment <unk> moderating right now or.

What's the what's the what's your minimum threshold when you evaluate different investment opportunities from our rent coverage standpoint.

Brett Asnas: We also remain engaged with Fitch who put up some positive outlook in the beginning of 2023, several months after Moody said done so. We believe we've addressed the number of their key criteria and targets, and will continue to maintain an active dialogue with their team with the goal of gaining momentum to drive down our cost to capital.

So I I would say, we take a more conservative approach in our underwriting process. Then what I would say reality is is probably a higher vacancy we underwrite out on the untrendy basis.

Brett Asnas: So to conclude, while the market backdrop remains challenged, our asset performance remains strong, we have ample liquidity and capital access, and we have no near-term securities. As we continue to push on improving our cost to capital, we'll be patient but opportunistic around new investments and look to continue to expand on our market leading position.

<unk> you are spot on where we are seeing a slowdown in and rent growth. You know I think this coverage metric is consistent with our policy. It's obviously on the lower end.

But you know I think the biggest driver as our cost of capital is more expensive, which is obviously pushing up the amount of ground rent infrastructure. So attachment point feels feels good from our leverage stamp from a leveraged standpoint look through L. T V.

Jay Sugarman: And with that, let me turn it back to Jack. Thanks, Brad. There's a lot of noise this year with the merger or the macro backdrop and things like Goodwill.

But the coverage is a little bit lower.

Jay Sugarman: And with capital market spreads moving faster than cap rates in the real estate transaction market, it's been hard to generate the spreads we look for, despite currently attractive asset economics that offer plus or minus 100 basis points over the benchmark, plus inflation kickers, plus UCA and its potential carrot value. While this side of the interest cycle has been rough, we are preparing for the other side of the cycle. He creates seam near and once sentiment changes, we believe our existing portfolio will be seen in a new light, and the capital market should be in a better position to help us take advantage of the attractive asset economics in the ground lease market.

Got it and just one more here.

With regards to the property type or be restricting ourselves to just multifamily last couple of quarters. It's been pretty much focus on that is there. Another asset class that you would look to explore the hopes of higher yields and how are you balancing no rent coverage yield and volume given where where rates are and go over your current cost of capital is.

There there are other asset classes in the pipeline you know I think those other asset classes had less liquidity options and then the housing space does and so they're a little bit more difficult to get across the finish line.

Operator: And 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.

But we certainly are are searching the markets to find exposure outside of multifamily.

Operator: We will take as many questions as time permits. Once again, please press star one to ask a question. We will pause the moment to assemble the roster.

Got it I appreciate the color guides.

Thanks.

The next question is coming from Rich Anderson with went the security police pleasure question your line of sight.

Nathan Crossett: Your first question is coming from Nate Crossett with B&P Paraba. Please pose your question. Your line is...

Thanks. Good morning first the first one observation I'm just looking at the quality of the sell side covering you guys and you should be.

Marcos Alvarado: Hey, good morning guys. I was wondering if you could talk about just the gale flow pipeline heading into the year. Are there any deals that are currently under L.O.I, right now? And then just maybe on what you're seeing, like if rates do stabilize in the near term, like do you foresee things opening up quickly or is there more of an adjustment period? Just some color there on pipeline would be awful. So I think if you go back to the end of the second quarter, which feels like an eternity, but it's not really that long ago, the 10 year was at 3.8.

I'd say proud of that knowing covering you guys. Since 220 17, that's impressive and so it's tough times right now, but you got people listening. That's good in terms of more because you. You mentioned you know behaviors of people just everyone's moving very slow in this environment understood, but wont wont there also be.

<unk> some events coming that will kind of force action you know regional.

Regional banks are cluttered with commercial real estate loans, and you know there's going to be events that will take place where are you that that maybe you can get involved with Ah you know in a small way with the with the liquidity that you have or do you think that the the tendency is for kicking the can down the road and for there to be sort of.

Marcos Alvarado: And today it's almost 100 basis points wider. I think it's paralyzed, the overall market, including our customers. So while we saw some traction, sort of at the end of Q2 in the early months of the summer. We've seen that sort of peter off over the last, you know, handful of months. So I think, you know, we have a few things in the pipeline that are progressing towards closing. I'll tell you that we have a little bit less confidence than we haven't had in the past.

A delay tactics taken so that maybe there won't be transactions that that will become available if it be forced upon you know real estate owners Ah anytime very soon.

Just curious what you think of that dynamic.

Mmm no. It's it's a little bit of a puzzle. We we are certainly pitching that as a a solution it as a as a product and we think we can you know help distress capital structures lived for another day, we're live for it for a new owner.

Marcos Alvarado: That's sort of reference that in my remark. We had a handful of transactions that got the closing table with docs done and fell apart. So I think Q4 is going to continue to remain spotty. I think the psychology that you're sort of describing about when, when do people capitulate? I think it takes time. If you think about these sort of rate moments, what's the impact on, you know, asset values are people willing to give up? Are you going to see distress? And as far as we can tell, that appears to be going very, very slow in today's environment. Okay.

But what we're actually seeing as those transactions are taking extremely long to get done if at all and so at least right now we're seeing a fair amount of kicking the can down the road I'm, not saying that that isn't going to change it could it could change as we crossover in the year.

But as of right now, we we don't see this kind of wave of distress.

Starting to hit.

Asked me my personal opinion I think it will come eventually it just is it's not there today okay.

Okay.

And bring you mentioned the the value or maybe it was J mentioned the value of your long dated liabilities is there a way to quantify that like if you were to mark to market. Your debt is there a number that you sort of monitor to sort of say.

Marcos Alvarado: I think you like you mentioned new product initiatives and the prepared remarks that is, is there anything to note there?

Marcos Alvarado: Is there any like new type of product that you've been doing or contemplating? Just wanted to make sure I heard that right. Yeah, we're always in the lab trying to brainstorm and think through different applications of the product. And so nothing that is far enough along to talk about yet, but we're excited about the potential things in the future. Okay. Thanks.

This is how it how much it's worth in this environment.

Yeah, I mean, that's that's precisely what we're trying to get across the folks witches and then we have this laid out in our in our corporate presentation.

When you start to think about our long dated liabilities running out those cash flows discounting them at an appropriate discount rate.

Brett Asnas: Maybe and then just one for Brad just on the upgrade on the credit rating. I'm just curious like how much that would hypothetically save you on that cost versus where it was before the rating upgrade. So we right now we have a split rating with moody and fit. We've seen some some benefit in our spreads, but I think the majority of that benefit will come when we have a second a rating.

Treating both sides of the balance sheet in a similar manner and fairly.

We think that that mark to market value today is quite meaningful right. It depends what discount rate you Wanna use but.

Like the middle of the road, even a half a billion dollars when you start thinking about that number.

At today's rates, even potentially even be greater than that that.

Brett Asnas: What we've typically seen across many borrowers in the hay rating category first triple B most of them trade at a 30 to 50 basis point differential and some of the death capital providers that we have regular dialogue with have indicated as such as well when you start to really think about their ability to cap different pockets to deploy capital for a or better. When you think about the capital charges that need to take the exposures that they're limited or allowed to take as well, those should all be benefits to us.

That's incremental value that we feel like the market is is not fully appreciating and I think part of the reason why also has a.

A lot of folks have.

Shorter maturity profile right. They have shorter assets and I think for US. When you are looking at 99, your cash flows and disk and that's counting them back at what we believe is a high grade risk.

So are those you know twenty-three years of weighted average maturity profile, we have a lot of a lot of pieces of that do and 30 to 50 years and we think that's a really important value components. So we tried to lay out that kind of net present value sensitivity for people because we think it's certainly under appreciated right now.

Brett Asnas: So we're hoping that we can continue to prove and build that track record as we've done over the last year to get to that second a rating so we can get that benefit.

Okay last for me $858 million of liquidity not including the.

Brett Asnas: Okay, I'll leave it there.

Brett Asnas: Thank you.

Anthony Paolone: Your next question is coming from Anthony Polone with JP Morgan. Please pose your question. Your line is live. Great. Thanks. Good morning. I guess, you know, historically it seemed like your value proposition to sponsors was, you know, the combination of ground lease and leasehold debt would get them more proceeds and also at very attractive rates.

Joint venture commitments, but you know and you kind of bit your tongue and and and raised equity. It worked for you from a ratings perspective and to lock up you know you know sort of the the financial profile. The company for now in a tough environment, but you know where where is it what is the trigger where you get to you know what's the.

Quiddity number that you get to where you say well, we gotta start thinking about raising more capital Ah you, obviously don't want that 850 to get anywhere near zero. So I'm I'm just wondering.

Jay Sugarman: You know, what is what do you think the real pitch is right now at higher rates that you're delivering to to prospective sponsors when you're pitching ground lease structures? You know, Hey, Tony, I think it's the same exact pitch as it was before on a relative basis. We're still the most efficient source of capital. So if you go down the entire capital structure, capital structure, right? Unlearned yields have blown out cost of debt is blown out, whether that's fee simple or leasehold loans and obviously our cost of capital has changed.

When you start thinking about it again.

Hopefully it does become a problem because you've you've deployed some of that liquidity, but I'm just curious.

Yeah that that's that's the.

Yeah. The real goal here is to be able to take advantage of some of these attractive asked that economics rich and.

Right now I'd say volume pretty muted just from a transaction standpoint in the real estate World and then they're getting our cost of funds to match up in a way that we're comfortable with logging in long term.

Jay Sugarman: You know, if I look at a multi family transaction, where there's at least a little bit of transaction volume, you know, the agencies are still providing fixed rate debt, but it's in the north of 6% range at lower leverage levels. So we are still in a creative source source of capital to our customers.

So we haven't we haven't really had to think too much about when when the trigger is but you know we'd like to have plenty of liquidity on hand, historically, we've said half a billion dollars feels comfortable so between the J V and the lines, we think we're well positioned for that.

Jay Sugarman: Okay. And then on the, you know, I guess land total property value, I think that used to be 35 to 40% it's crept up a little bit north of 40. It seems like do you think that's the new level or, you know, is that just maybe some of the more recent deals? You know, I think we've taken probably a more conservative approach than some of the sponsors, those new acquisitions are based on our actual appraisal, sorry, our actual internal work, they'll get appraised by CBRE on a rolling annual basis. So I would say we're just taking a more conservative view on the underwriting side, but the broadly the credit metrics remain consistent.

Candidly I think you know we're.

We're hoping we're almost at the end of the rate cycle and I think on the other side of it is a lot of opportunity for us and we we think there's plenty of places to pull.

Pull capital from once transaction volume picks up.

Okay, great. Thanks, everyone.

Mr. Hoffman, we have no further questions.

Thank you Kelly if you do have any other questions feel free to reach out to me directly could you. Please give the replay instructions once more.

Brett Asnas: Okay. And then just last one for me, on the leasehold loan fund, it looks like that capital is getting extended out at, you know, 11% thereabouts. What's the underlying there to support that yield? And, you know, is that current pay or is that a pickstructure? It's just kind of what's underneath there? Yeah. So each, each loans different, but typically a lot of those either have a component of cash and a component of pick or their current cash pay.

There will be a replay of this conference call beginning at two P. M. Eastern today the dial in for the replay is 8774814010 with the confirmation code is 49301.

This does conclude today's conference call you may disconnect. Your phone lines at this time and thank you for your participation have a wonderful day.

Brett Asnas: So those will flow through the cash flow statement, but I think what we're, what you see in the call of earnings from equity met an investment line is the combination of what we're yielding on the asset as well as the purchase that we made at merger, which was at a discount based on where current rates were at that moment. Right. But that like the 11, I guess just made me remind me what what's kind of underneath is it development stuff or is it just current cash flow assets?

Brett Asnas: Like what's supporting it? Yeah. So there's one asset that was originally construction loan. It's actually built and, and beginning lease up. It's a brand new multifamily asset in Nashville. And then there is a trophy life science asset. That in Cambridge that is a development deal. And then the final deal is a repositioning of a mixed use asset, which includes a life science component in in Cambridge.

Brett Asnas: Thank you very much for your time as well. Okay.

Brett Asnas: Yeah.

Brett Asnas: Oh, and then a small typology. There's one more. There's a small multi family existing asset as well in Seattle. They've lost. Got it. Okay.

Brett Asnas: Thank you. Those three were existing customers, so repeat transactions, which is great to see. And I would say the pipeline I'm looking at it right now is a mix of new and existing customers. Great.

Brett Asnas: And then just looking at the carrot, the revaluation was slightly down, you know, I think 1010101, which doesn't look like a big deal, but just wondering was there like one asset or what sort of drove that this quarter? Yeah, we're seeing the appraisers start to move, cap rates up. They're drifting upwards on all property types. And I think they're taking a little sharper pencil certainly to some of the underlying assumptions on the operating side.

Brett Asnas: So, you know, appraisals don't move in jump steps. They move in waves. And we definitely seeing the appraisal community begin to push those cap rates up. So, we're not surprised by we expect more of it. And you know, we'll see the impacts of that slowly, but we're still going to be in that, you know, tennis range.

Brett Asnas: It feels like with some, you know, parts of the cycle like this, where you're going to get more down the downward adjustments and upward adjustments. Great.

Brett Asnas: And then my last one, if I may, just on the income statement, the provision for credit loss is always that related to the 336,000 I see here and any other sort of assets or anything like that that you guys are looking at for potential more provisions. Thanks so much.

Brett Asnas: Of course, yeah, we adopted Cecil this year. So, we take a provision on amounts we fund based on, you know, the relative risk there, which is, you know, we take a host of factors and use a model to determine that. But typically, we take in the range of call it, you know, one to four basis points on new funding. That's primarily what drives it. Great. Thanks so much, Ron.

Brett Asnas: It's on, it's on no specific assets. It should be across the portfolio. Got it. Okay. Helpful.

Brett Asnas: Thank you.

Caitlin Burrows: Your next question is coming from Caitlin Burrows with Goldman Sachs. Please pose your question. Your line is live. Hi, good morning, everyone. Maybe you could just start with kind of the properties that did transact in the quarter and October and the ones that are in the pipeline. I know from what we can see, they were multi-family kind of some other details of maybe what made those properties. The right ones. And as you look forward, does it continue to be a multi-family focus?

Caitlin Burrows: Yeah, you know, as I go back to the remarks, the lack of liquidity is really a driving force to get any sort of transaction done and there is a little bit of liquidity in the agency space and the housing space broadly. So I think we're going to continue to push on multi-believers in sort of the supply demand and balance long-term. And it's an asset class we want to continue to scale and grow in.

Caitlin Burrows: If I think about those particular transactions, a couple of them were student housing assets, we're seeing in our portfolio as well as on these specific assets, some, you know, pretty incredible same store revenue growth, almost double digits. And so I think, you know, customers, although cap rates are wider for student housing, are able to underwrite a decent amount of growth. And so that they can tolerate a capital structure that is more expensive.

Caitlin Burrows: And so that's probably the reason those transactions have been successful. Got it. And then it looks like the originations in the quarter in October, the economic yields were in the low 7%. So I'm wondering if you can talk a little about how you think about kind of in this rate environment today that you're making those deals, but that they're long-term agreements and kind of how you balance that today. But today versus 99 years.

Caitlin Burrows: Yeah, we, you know, I think the first premise for us is we always look at the long-term benchmarks and where those are trading with that cost of today and they have increased obviously over the last few quarters, but they're in the 6% range. And so our bogey is, can we make 100 basis points bread above that? And then obviously we get the benefit of inflation and the benefit of carrot on top of that. So that's kind of how we generally think about our unlever pricing bogey. Got it.

Marcos Alvarado: And then just a quick one on the joint venture, you went through how there's I think $462 million left total.

Marcos Alvarado: So could you just go through again the kind of the benefits of having the JV structure and confirm that all investments will be done in the JV until that amount is kind of used up? Yeah, so I think I've mentioned this on a prior call. There are a handful of transactions that are on the smaller side where our partner will most likely not participate. There's a decent amount of friction costs to set up those ventures.

Marcos Alvarado: And so our expectation is that they will almost do every single transaction, but some of the smaller ones that we have conviction on they may end up on our balance sheet. We get a base management fee and a promote structure and I'm blanking on it on the top of my head bread if you know what that is. Over 1, 2, 7. Okay, let me get back to you on the base management fee and the 20.

Marcos Alvarado: There you go. Got it. So I guess just you mentioned the smaller ones. I guess the deal and the origination in 3Q and the two since those all seem pretty small. So would it seem like those fall into the category of being just for safe hold?

Marcos Alvarado: Correct. And just as we think about funding going forward, okay.

Marcos Alvarado: Okay, that's all, thanks.

Harsh Hemnani: Your next question is coming from Harsh Hemnani at Green Street. Please pose your question, your line is line. Thank you, just a quick one from me. So the option that was terminated at this quarter to purchase a ground lease, how many more of those options do you currently have on your balance sheet? I think that would be out of them when you just cut and trace. There is one other option on our balance sheet currently.

Marcos Alvarado: That's it. And then do you. Sorry, go ahead. And and and Harsh is probably too early to determine whether the customer qualifies for that, that option. And if we actually have any P and L exposure on that payment.

Harsh Hemnani: Okay, thank you.

Kenneth Lee: Your next question is coming from Kenisley with RBC capital markets. Please pose your question, your line is live. Hi, good morning. Thanks for taking my question. Just on the liability side, obviously no opportunities until 2026. One of good to share some thoughts as to what options could you look at as you look to refinance over time. And would there be any change in approach just given where rates are or where rates could be. Thanks.

Jay Sugarman: Hey, Ken. You know, I think I think our approach is the same. We we obviously have access to multiple parts of the capital markets. What we've been able to exhibit over the past few years in growing our unencumbered asset base and being an unsecured borrower is really creating a footprint in the markets. We have access to both the public and private at various centers with various structures. But I think what we've been able to exhibit and take action on over the last years is continuing to be creative and create liability streams that better match the asset profile.

Jay Sugarman: What we've been able to create. So that's really in our mind what we're continuing to push along. I think some of the remarks that made earlier around where rates currently are, where current credit spreads are. And the appreciation of where the business is at in terms of its evolution. We're going to let all of that good working good progress and set up with the balance sheet. As you mentioned in your question of no no maturities over the coming years here.

Jay Sugarman: Work to our benefit and we do think that getting to that second a rating will provide even more pricing power for the business. So lots of lots of capital solutions. We want to be thoughtful about, you know, locking in long term capital. But we do have those hedges that are significantly in the money that should, you know, weigh down that net effective rate for us.

Jay Sugarman: That's very helpful there.

Jay Sugarman: And then one follow up if I may. Any updates around efforts to create public liquidity or liquid market for the care units. Thanks. Yeah, we're in contact with those first round care investors. Some of them have certainly expressed the desire and willingness to push that data out given their current capital market environment. But we're still working on that. I think everybody's realistic about where that the opportunity is today. And today's capital markets are where it might be in the future. So we'll continue to have those conversations.

Jay Sugarman: Thank you very very helpful there.

Jay Sugarman: Thanks again.

Operator: Okay, next question is coming from Aundel, St.

Operator: Jude, with Mizzouho Securities.

Ravi Vaidya: Please pose your question to your line of thought. Ravi Vaidya, on the line for Aundel, I hope you guys are doing well. Just wanted to talk about the rent coverage for the recent acquisitions. We noticed there about half a turn, a little bit more than half a turn inside the portfolio average. Is this due to the fact that apartment rents, apartment rent growth are moderating right now or what's your minimum threshold when you evaluate different investment opportunities from a rent coverage standpoint?

Ravi Vaidya: So I would say we take a more conservative approach in our underwriting process than what I would say reality is, is probably a higher vacancy. We underwrite it on an untrended basis. You are spot on. We are seeing a slowdown in rent growth. I think this coverage metric is consistent with our policy. It's obviously on the lower end, but I think the biggest driver is our cost of capital is more expensive, which is obviously pushing up the amount of ground rent in the structure. So attachment point feels good from a leverage standpoint, look through LTV, but the coverage is a little bit lower.

Marcos Alvarado: Got it. And just one more here. With regards to property type, are we restricting ourselves to just multifamily and ask a couple quarters, is there much focus on that? Is there another asset class that you would look to explore the hopes of higher yields and how are you balancing, you know, rent coverage yield and volume given where rates are and given what are current cost of capital is? There are other asset classes in the pipeline.

Marcos Alvarado: You know, I think those other asset classes have less liquidity options than the housing space does. And so they're a little bit more difficult to get across the finish line, but we certainly are searching the markets to find exposure outside of more family.

Marcos Alvarado: Got it. I appreciate the color guys.

Marcos Alvarado: Thanks.

Richard Anderson: The next question is coming from Rich Anderson with Web Book Securities. Please pose your question. Your line is live. Thanks. Good morning. First person observation. I'm just looking at the quality of the cell side covering you guys. And you should be, I'd say proud of that knowing covering you guys since 2017. That's impressive. And so it's tough times right now, but you got people listening. That's good. In terms of, Marcus, you mentioned, you know, behaviors of people, just everyone's moving very slow in this environment understood, but won't there also be some events coming that will kind of force action, you know, regional banks are cluttered with commercial real estate loans and, you know, there's going to be events that will take place.

Richard Anderson: Or you that maybe you can get involved with, you know, in a small way with the liquidity that you have, or do you think that the tendency is for kicking the can down the road and for there to be sort of a delay tactics to take in so that maybe there won't be transactions that will become available. Be forced upon, you know, real estate owners anytime very soon, and just curious what you think of that dynamic.

Richard Anderson: No, it's a little bit of a puzzle. We are certainly pitching that as a solution and as a product, and we think we can, you know, help distrust capital structures live for another day or live for a new owner. But what we're actually seeing is those transactions are taking extremely long to get done if at all. And so at least right now, we're seeing a fair amount of kick-and-a-can down the road.

Richard Anderson: I'm not saying that that isn't going to change. It could change as we cross over in the year. But as of right now, we don't see this kind of wave of distress starting to hit. Asking my personal opinion, I think it will come eventually. It's not there today.

Brett Asnas: Okay. And Bren, you mentioned the value, or maybe was Jay mentioned the value of your long-dated liabilities. Is there a way to quantify that? Like, if you were to mark to market your debt, is there a number that you sort of monitored to sort of say this is how it's how much it's worth in this environment? Yeah, I mean, that's precisely what we're trying to get across to folks, which is, when we have this laid out in our corporate presentation, when you start to think about our long-dated liabilities, running out those cash flows, discounting them at an appropriate discount rate, treating both sides of the balance sheet in a similar manner and fairly.

Brett Asnas: We think that that mark to market value today is quite meaningful, right? It depends what discount rate you want to use, but take the middle of the road, even half a billion dollars when you start thinking about that number, at today's rates, even potentially even be greater than that, that's incremental value that we feel like the market is not fully appreciating. And I think part of the reason why also a lot of folks have shorter maturity profiles, right?

Brett Asnas: They have shorter assets, and I think for us, when you're looking at 99-year cash flows and discounting them back, what we believe is a high-grade risk. So are those 23 years of weighted average maturity profile. We have a lot of pieces of debt due in 30 to 50 years, and we think that's a really important value component. So we try to lay out that kind of net present value sensitivity for people, because we think it's certainly underappreciated right now.

Brett Asnas: Last for me, 858 million of liquidity, not including the joint venture commitments, but you kind of bit your tongue and raised equity. It worked for you from a ratings perspective and to lock up sort of the financial profile of the company for now in a tough environment. But where's the trigger where you get to what's the liquidity number that you get to, where you say, well, we got to start thinking about raising more capital.

Brett Asnas: You obviously don't want that 850 to get anywhere near zero, so I'm just wondering when you start thinking about it again, and hopefully it does become a problem because you've deployed some of that liquidity, but that just cares. Yeah, that's the real goal here is to be able to take advantage of some of these attractive asset economics rich and, you know, right now I'd say the volume's pretty muted just from a transaction standpoint in the real estate world and then getting our cost of funds to match up in a way that we're comfortable with locking in long term.

Brett Asnas: So we haven't really had to think too much about when the trigger is, but, you know, we'd like to have plenty of liquidity on hand. Historically, we've said, you know, half a billion dollars feels comfortable. So between the JV and the lines, we think we're well positioned for that. You know, candidly, I think, you know, we're hoping we're almost at the end of the rate cycle. And I think on the other side of it is a lot of opportunity for us. And we think there's plenty of places to pull capital from once transaction volume picks up.

Brett Asnas: Okay, great. Thanks, everyone.

Operator: Mr. Hoffman, we have no further questions.

Pearse Hoffmann: Thank you, Kelly. If you do have any other questions, feel free to reach out to me directly.

Operator: Kelly, could you please give the replay instructions once more? Certainly. There will be a replay of this conference call beginning at 2 p.m. Eastern today. The dial-in for the replay is 877-481-4010, with the confirmation code of 49301.

Operator: This does conclude today's conference call. You may disconnect your phone lines at this time, and thank you for your participation.

Operator: Have a wonderful day.