Q4 2023 Safehold Inc Earnings Call

Good morning, and welcome to Staples fourth quarter and fiscal year 'twenty twenty-three earnings conference call.

Operator: Good morning, and welcome to Safehold's fourth quarter and fiscal year 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 1; that's star 1 to ask a question.

If you need assistance during todays call.

Please press Star zero.

If you'd like to ask a question. Please press star one.

Thats Star one to ask a question.

As a reminder, today's conference is being recorded.

Operator: 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 Piers Hoffman, Senior Vice President of Capital Markets and Investor Relief. Please go ahead.

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.

Piers Hoffman: Good morning, everyone. Thank you for joining us today for Safehold's Earnings Call. On the call, we have Jay Sugarman, Chairman and Chief Executive Officer, Brett Asness, Chief Financial Officer, and Tim Daugherty, Chief Investment Officer. This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year 2023 results. The presentation can be found on our website at safeholdinc.com by clicking on the Investors link. There will be a replay of this conference call beginning at 2 p.m. Eastern Time today. The dial-in number for the replay is 877-481-4010 with a confirmation code of 49838.

Good morning, everyone. Thank you for joining us today for Staples earnings call.

On the call, we have Jay Sugarman, Chairman and Chief Executive Officer, Brett <unk>, Chief Financial Officer, and Tim Doherty Chief Investment Officer.

This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year 2023 results the.

The presentation can be found on our website at Staples, Inc. Dot com by clicking on the investors like.

There will be a replay of this conference call beginning at two P M Eastern time today.

The dial in for the replay is 870 74814010 with a confirmation code of 49838.

Piers Hoffman: In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A. If you'd like to ask additional questions, you may re-enter the queue. Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call that 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 report. Safehold disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Now, with that said, I'd like to turn it over to Chairman and CEO, Jay Sugarman. Jay?

In order to accommodate all those who want to ask questions. We ask that participants limit themselves to two questions during Q&A.

You'd like to ask additional questions you may reenter the queue.

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 are.

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 safely.

<unk> disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.

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

Jay Sugarman: Thanks, Pierce, and thank you to everyone for joining us today. It's a new year, and we want to make it a good one, with a clear focus and the expectation of a more favorable interest rate backdrop. If the consensus is correct, and rates finally fall this year, we're optimistic that we can return to solid growth in EPS. Restart the Deal in Capital Market Engine and recapture the interest that was building in carrots. As most of you know and experienced with us, 2023 was a frustrating year.

Thanks, Paris, and thank you to everyone for joining us today.

It's a new year and we want to make it a good one with a clear focus and the expectation of a more favorable interest rate backdrop.

The consensus is correct.

Rates begin to finally fall this year.

Optimistic that we can return to solid growth in EPS.

Start the deal in capital market engines, and recapture the interest that was building in carrot.

As most of you know an experienced with us wanting to.

23 was a frustrating year, we reached a lot of key milestones and added important long term positives for the company.

Jay Sugarman: We reached a lot of key milestones and added important long-term positives for the company, but rapidly rising interest rates overshadowed these positives, slowing deal flow and hurting our share price. But as you'll see in today's presentation, 2023's achievements have set the table for us going forward, as we wait for the headwinds we have been dealing with to begin to turn into tailwinds. Now, let's have Brett take you through the fourth quarter and the year. Thank you, Jay. Good morning, everyone.

But rapidly rising interest rates overshadowed these positives slowing deal flow and hurting our share price.

But as Youll see in todays presentation 2020, threes achievements have set the table for us going forward because.

As we wait for the headwinds we have been dealing with but begin to turn into a tailwind.

Now, let's have Brett take you through the fourth quarter and the year.

Thank you Jay and good morning, everyone.

Brett Asness: Let's begin on slide three. 2023 was an important year for Safehold. While the overall operating environment was challenged by rate uncertainty and volatility, both of which weighed on transaction activity and our stock price, we were able to achieve a number of positive outcomes that we believe have the company positioned for success as stability and growth return. Internalizing management simplified our corporate architecture, improved ownership dynamics, brought all competitive advantages in-house, meaningfully improved governance, and put a cost structure in place that we believe should achieve long-term synergies as we scale the business.

Let's begin on slide three.

2023 was an important year for example, while the overall operating environment was challenged by rate uncertainty and volatility both of which weighed on transaction activity and our stock price we were able to achieve a number of positive outcomes that we believe have the company positioned for success, a stability and growth to return.

Internalizing management simplified our corporate architecture improved ownership dynamics brought all competitive advantages in house meaningfully improved governance and put a cost structure in place that we believe should achieve long term synergies as we scale the business.

Brett Asness: On the investor front, we were pleased to add MSD Partners as a large investor in the business. Not only did they invest $200 million in our common stock when the internalization closed, but they also led our second carrot investment round at a $2 billion valuation. On the credit side, both Moody's and Fitch appreciated the cleaner corporate structure and consistency in our strategy, which led to positive action from both. Fitch changed our outlook to positive, and Moody's upgraded us to A3, which elevates our credit profile and is expected to result in improved cost and access to capital over the long term. On the capital raising front, we raised $152 million through the issuance of Common Equity to a diverse investor base, again led by MSD partners who participated at their pro rata ownership level.

On the Investor front, we were pleased that MST partners as a large investor in the business.

Not only did they invest $200 million into our common stock when the internalization closed, but they also let our second carried investment round at a 2 billion valuation.

On the credit side, both Moody's and Fitch appreciated the cleaner corporate structure and consistency in our strategy, which led to positive actions from both.

Fitch changed our outlook to positive and Moody's upgraded us to Ace III, which elevates our credit profile and is expected to result in improved cost and access to capital over the long term.

On the capital raising front, we raised 152 million through the issuance of common equity to a diverse investor base again led by MSP partners, who participated at their pro rata ownership level.

Brett Asness: We entered the bank market early in 2023, increasing the size of our revolving credit facilities to $1.85 billion, adding a new bank partner, and underscoring our deep relationships with our banking group. We also put in place a $500 million joint venture with a sovereign wealth fund partner that adds liquidity and flexibility to pursue new ground lease opportunities. At year-end, the total portfolio was $6.4 billion, UCA was estimated at $9.8 billion, GLTV was 44%, and rent coverage was 3.6 times. We ended the year with $752 million of liquidity, which is further enhanced by the unused capacity in our joint venture.

We access the bank market early in 2023, increasing the size of our revolving credit facilities to 185 billion, adding a new bank partner and underscoring our deep relationships with our banking group.

We also put in place a 500 million joint venture with a sovereign wealth fund partner that added liquidity and flexibility to pursue a new ground lease opportunities.

At year end. The total portfolio was $6 4 billion you see a was estimated at $9 8 billion G. L. T V was 44% and rent coverage was three six times.

We ended the year with $752 million of liquidity, which is further enhanced by the unused capacity in our joint venture.

Slide four provides a snapshot of our portfolio growth during.

Brett Asness: Slide four provides a snapshot of our portfolio growth. During the fourth quarter, we originated three new multi-family ground leases for $56 million. All three originations were fully funded at closed, Two of the originations are wholly owned, and one was done in a joint venture. The credit metrics associated with these deals are in line with our portfolio targets. GLTV of 39%, rent coverage of 2.8 times, and an economic yield of 7.4%. In the fourth quarter, we funded a total of $122 million across three categories.

During the fourth quarter, we originated three new multifamily ground leases for $56 million.

All three originations were fully funded at closing.

Two of the originations are wholly owned one was done in the joint venture.

The credit metrics associated with these deals are in line with our portfolio targets.

The LTV of 39% rent coverage of two eight times at an economic yield of seven 4%.

In the fourth quarter, we funded a total of 122 million across three categories.

Brett Asness: 46 million of Q4 new originations earning a 7.4% economic yield. That figure is net of our partners' 10 million JV interest in one deal. 68 million in ground lease funding on pre-existing commitments that have a 6.3% economic yield. And lastly, $8 million related to our 53% share of the Leasehold Loan Fund, which earned interest at a weighted average spread of SOFR plus 604 for the quarter. For the full year, we closed on seven multifamily ground leases for a gross commitment of $204 million, of which Safehold's share is $177 million, of which $63 million remains unfunded. The credit metrics associated with these deals are consistent with our portfolio target, with a weighted average GLTV of 34%, rent coverage of 2.7 times, and an economic yield of 7.4%. For the full year, we funded a total of $529 million across five categories.

$46 million of Q4, new originations, earning a seven 4% economic yield.

That figure is net of our partners 10 million JV interest in one deal.

$68 million, a ground lease fundings on preexisting commitments that have a six 3% economic yield.

And lastly, 8 million related to our 53% share of the leasehold loan fund, which earned interest at a weighted average spread of silver plus 604 for the quarter.

For the full year, we closed on seven multifamily ground leases for gross commitment of $204 million.

Safe hold shares of $177 million of which $63 million remains unfunded.

The credit metrics associated with these deals are consistent with our portfolio of targets with a weighted average LTV of 34% rent coverage of two seven times and an economic yield of seven 4%.

For the full year, we funded a total of 529 million across five categories.

Brett Asness: 114 million of new ground lease originations earning a 7.4% economic yield. 227 million of ground lease funding on pre-existing commitments that have a 5.6% economic yield. $43 million related to our 53% share of the leasehold loan fund, which earned interest at a weighted average spread of SOFR plus 508 for the year.

114 million of new ground lease originations, earning a seven 4% economic yield.

$227 million of ground lease fundings on preexisting commitments that have a five 6% economic yield.

$43 million related to our 53% share of the leasehold loan fund, which earned interest at a weighted average spread of sofa plus 508 for the year.

Brett Asness: $29 million related to our 53% share of the Ground Lease Plus Fund, which earns a 7.2% economic yield, and the $115 million Star Holdings term loan, earning 8%. Our ground lease portfolio now has 137 assets, and the portfolio has grown 19 times since IPO. While the estimated unrealized capital appreciation sitting above our ground leases has grown 22 times, in total, the UCA portfolio is comprised of approximately 35 million square feet of institutional quality commercial real estate, consisting of approximately 18,000 units of multifamily, 12.5 million square feet of office, over 5000 hotel keys, and 2 million square feet of life science and other property types. Continuing on slide five, let me detail our quarterly and annual earnings results. For the fourth quarter, gap revenue was $103 million, net income was $41.2 million, and earnings per share was $0.58.

29 million related to our 53% share of the ground lease plus fund.

Which earned a seven 2% economic yield.

The 115 million Star Holdings term loan, earning 8%.

Our ground lease portfolio now has 137 assets in the portfolio has grown 19 times since IPO while.

While the estimated unrealized capital appreciation sitting above our ground leases has grown 22 times.

In total the UCA portfolio is comprised of approximately 35 million square feet of institutional quality commercial real estate and <unk>.

Testing of approximately 18000 units of multifamily $12 5 million square feet of office over 5000 Hotel keys, and 2 million square feet of life science and other property types.

Continuing on slide five let me detail, our quarterly and annual earnings results.

For the fourth quarter GAAP revenue was 103 million net income was $41 2 million and earnings per share was <unk> 58 cents.

Brett Asness: For the full year, GAAP revenues were $352.6 million, net income was negative $55 million, and earnings per share were negative $0.82. 2023 was a noisy year for the P&L, with several non-recurring items, primarily merger-related, obscuring true run-rate earnings. After backing out one-time items, net income for the fourth quarter was $25.5 million, and earnings per share was $0.36. Making the same adjustments for the full year, along with backing out merger and care-related costs, which weren't incurred in Q4, net income was $96.8 million, and earnings per share was $1.45. I won't spend time on adjustments from Q3 that were discussed on previous calls but did want to highlight one notable non-recurring item in the fourth quarter. During the quarter, we realized a $15.2 million hedge gain through other income in our GAAP financials. We employ hedge accounting to reduce P&L volatility because it allows us to attach specific hedges to debt instruments and therefore recognize any gains or losses over the life of the debt rather than on a mark-to-market basis each quarter. However, in order to qualify for this accounting, we are required to attach the hedge to debt to a defined forecast.

For the full year GAAP revenues was $352 6 million net income was negative 55 million and earnings per share was negative 82 cents.

2023 was a noisy year for the P&L with several nonrecurring items, primarily merger related of scaring true run rate earnings.

After backing out onetime items net income for the fourth quarter was $25 5 million and earnings per share was 36 cents.

Making the same adjustments for the full year, along with backing out merger and carrier related costs, which were incurred in Q4.

Net income was $96 8 million and earnings per share was $1 45.

I won't spend time on adjustments from Q3 that were discussed on previous calls, but did want to highlight one notable nonrecurring item in the fourth quarter.

During the quarter, we realized a $15 2 million hedge gain through other income in our GAAP financials.

We employ hedge accounting to reduced P&L volatility because it allows us to attach specific hedges to debt instruments, and therefore recognize any gains or losses over the life of the debt rather than on a mark to market basis each quarter.

In order to qualify for this accounting we are required to attach the hedge to that through defined forecasted.

Brett Asness: In this case, we allowed a hedge forecast date to expire without attaching debt, and we're required to recognize the value of the gain on that hedge all at once. I'll provide more detail on our overall hedging shortly, but I want to be clear that this is strictly an accounting requirement and we remain economically hedged at an appropriate level. This scan has been excluded from our previously mentioned adjusted earnings.

In this case, we allowed to hedge forecast date to expire without attaching debt and we're required to recognize the value of the gain on that hedge all at once.

I'll provide more detail on our overall hedging shortly but I want to be clear that this is strictly an accounting requirement and we remain economically hedged at an appropriate level.

This gain has been excluded from our previously mentioned adjusted earnings.

Brett Asness: Moving to Q4 and full-year EPS, excluding non-recurring items, of $0.36 and $1.45, I will highlight a few reasons for the year-over-year decrease. First, total GNA net of the Star Holdings management fee was approximately $0.8 million higher in the fourth quarter 2023 and approximately $4.4 million higher for the full year 2023 than the same respective periods in 2022. This increase was expected and has been communicated to the market prior to and when we internalized. Over time, we expect our cost structure to provide meaningful savings versus the previous growing and uncapped external management structure. I will return to GNA after highlighting two more variants.

Moving to Q4 and full year EPS, excluding nonrecurring items of <unk> 36, and $1 45, I will highlight a few reasons for the year over year decreases.

First total G&A net of the Star Holdings management fee was approximately <unk> 8 million higher in the fourth quarter 2023, and approximately $4 4 million higher for the full year of 2023, then the same respective periods in 2022.

This increase was expected and has been communicated to the market prior to and when we internalized.

Over time, we expect our cost structure to provide meaningful savings versus the previous growing an uncapped external management structure.

Return to G&A after highlighting two more variances.

Next as we mentioned on the last quarter's earning call.

In the third quarter, we recognized the $1 9 million GAAP loss related to terminating an option to purchase a 215 million ground lease.

Brett Asness: Next, as we mentioned on the last quarter's earnings call, in the third quarter, we recognized a $1.9 million gap loss related to terminating an option to purchase a $215 million ground lease beneath a spec office development in the greater Seattle area. Lastly, interest expense for the fourth quarter and full year 2023 was higher due to elevated SOFR and a larger average drawn balance.

He is a spec office development in the greater Seattle area.

Lastly, interest expense for the fourth quarter and full year 2023 was higher due to elevated sofa and a larger average drawn balance.

Over the last 18 months, we have mitigated the impact of higher rates by putting in place 500 million floating to fixed swaps fixing sulfur at approximately 3% as well as legging into 400 million of long term hedges for permanent debt that are meaningfully in the money, but not yet flowing through the P&L.

Brett Asness: Over the last 18 months, we have mitigated the impact of higher rates by putting in place $500 million, voting to fix swaps, fixing SOFR at approximately 3%, as well as legging into $400 million of long-term hedges for permanent debt that is meaningfully in the money, but not yet flowing through the P&L. With that, let me now return to our cost structure and provide color on where we stand relative to our initial projections. We initially communicated at the time of internalization that the target GNA would be approximately $50 million per year, net of STHO management fees.

With that let me now return to our cost structure and provide color on where we stand relative to initial projections.

We initially message at the time of internalization that target G&A would be approximately 50 million per year net of Sth AUM management fees.

That cost structure was intended to support growth and benefit from strong operating leverage given the lack of variable costs required to manage our ground lease portfolio.

Over the course of 2023 cost trended better than projections post internalization results indicated that net G&A was approximately 10% lower than expectations.

Due to a pullback in overall real estate transaction activity, we have seen our origination volume slow accordingly.

Brett Asness: That cost structure was intended to support growth and benefit from strong operating leverage, given the lack of variable costs required to manage a ground lease portfolio. However, over the course of 2023, costs trended better than projected. Post-internalization results indicated that net GNA was approximately 10% lower than expectation.

While we believe that this is a temporary slowdown we are beholden to stakeholders and want to be responsive and how we manage items in our control, including taking a critical view of costs.

As such we made certain headcount reductions during the fourth quarter and areas that we believe we have grown to be more efficient then.

We expect additional savings from these changes.

Brett Asness: Due to a pullback in overall real estate transaction activity, we have seen our origination volume slow accordingly. While we believe that this is a temporary slowdown, we are beholden to stakeholders and want to be responsive in how we manage items in our control, including taking a critical view of cost. As such, we made certain headcount reductions during the fourth quarter in areas that we believe we have grown to be more efficient in.

We're expecting net G&A in 2024 to be reduced by approximately 5% from what we incurred in 2023.

While we are forecasting a lower cost structure, and we will be emphasizing efficiency. This in no way alters our growth ambitions, we will continue to invest in developing talent and growing productivity. Our goal remains to be the best in this large and underserved market and we have a fantastic team in place to get us there.

On slide six we detail our portfolio yields.

Brett Asness: We expect additional savings from these changes. We're expecting net GNA in 2024 to be reduced by approximately 5% from what we incurred in 2023. While we are forecasting a lower cost structure and will be emphasizing efficiency, this in no way alters our growth ambition.

Our ground leases have two different components of value.

The first is the rent stream of compounding cash flows.

Which is akin to a high grade bond, except our leases have additional inflation protection on top of that bonds.

Bonds do not provide.

The second value component is the future ownership rights in the building at lease expiration.

As we discussed in depth last quarter, there's a significant disconnect between what we recognized for GAAP versus what we underwrite and expect to earn economically.

Brett Asness: We will continue to invest in developing talent and growing productivity. Our goal remains to be the best in this large and underserved market, and we have a fantastic team in place to get us there.

On our $6 3 billion portfolio. This yield delta equates to real earnings power and we will continue to speak about this difference and highlight the value components within our business that are less apparent in the financials.

Brett Asness: On slide six, we detail our portfolio's yields. Our ground leases have two different components of value. The first is a rent stream of compounding cash flows, which is akin to a high-grade bond, except our leases have additional inflation protection on top of that, which bonds do not provide.

The portfolio currently earns a three 5% cash yield and a five 2% annualized yield for GAAP earnings.

That gap annualized yield as punitive for certain legacy style ground leases that we acquired that have a variable rent component such as the fair market value resets percentage rent or CPI based escalators.

Brett Asness: The second value component is the future ownership rights in the building at lease expiration. As we discussed in depth last quarter, there's a significant disconnect between what we recognize for the gap versus what we underwrite and expect to earn economically. On our $6.3 billion portfolio, this yield delta equates to real earnings power, and we will continue to speak about this difference and highlight the value components within our business that are less apparent in the financials. Our portfolio currently earns a 3.5% cash yield and a 5.2% annualized yield for GAAP That gap annualized yield is punitive for certain legacy-style ground leases that we acquired that have a variable rent component such as fair market value resets, percentage rent, or CPI-based escalators. For GAAP, we are required to assume zero go-forward growth and zero go-forward inflation for these components over the term of the lease.

For GAAP, we're required to assume zero go forward growth and zero go forward inflation for these components over the term of the lease.

As such we have a number of assets, earning unrealistic or a typically low yields relative to our underwriting.

To put a finer point on it approximately 17% of our portfolio earns a 3.0% for GAAP annualized yields although we expect to earn five 8% under standard, 2% CPI or growth assumption.

The second box utilizes basic Bonder IRR math, it applies conservative underwriting and standard growth expectations of 2%.

That approach generates an expected five 7% economic yield on the portfolio, which is in line with how we have underwritten these assets.

The 50 basis point Delta between the five 2% GAAP yield versus the five 7% economic yield on a $6 3 billion portfolio is a meaningful value component over time.

Brett Asness: As such, we have a number of assets earning unrealistically or atypically low yields relative to our underwriting. To put a finer point on it, approximately 17% of our portfolio earns a 3.0% GAAP annualized yield, although we expect to earn 5.8% under a standard 2% CPI or growth assumption. The second box utilizes basic bond or IRR math and applies conservative underwriting and standard growth expectations of 2%.

Our yields have further upside when you layer in our periodic CPI look backs.

Under the federal Reserve's current long term breakeven rate of $2 two 4%.

Our five 7% economic yield increases to a five 8% inflation adjusted yield.

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

Curt is a subsidiary that owns ECA and save shareholders own 82% of carrot.

Brett Asness: That approach generates an expected 5.7% economic yield on the portfolio, which is in line with how we have underwritten these assets. The 50 basis point delta between the 5.2% gap yield versus the 5.7% economic yield on a $6.3 billion portfolio is a meaningful value component over time. Our yields have further upside when you layer in our periodic CPI look back, under the Federal Reserve's current long-term break-even rate of 2.24%. Our 5.7% economic yield increases to a 5.8% inflation adjusted yield. 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, and Safe shareholders own 82% of Carrot.

Carat adjusted yield uses the inflation adjusted yield as a starting point.

And the numerator the estimated yield benefit from Stifel to 82% interest in card and it's the latest 2 billion valuation.

This adjustment produces a seven 4% carried adjusted yield.

Which is an illustrative metric intended to highlight this important value component that remains largely unrecognized by the market to that.

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

This slide highlights the portfolio's diversification by location and underlying property type.

Our top 10 markets by G. B V are highlighted on the right representing approximately 70% of the portfolio.

Brett Asness: The Carat Adjusted Yield uses the Inflation Adjusted Yield as a starting point and enumerates the estimated yield benefit from Safehold's 82% interest in-cart at its latest $2 billion valuation. This adjustment produces a 7.4% CARAT adjusted yield, which is an illustrative metric intended to highlight this important value component that remains largely unrecognized by the market today. Turning to slide 7, we show a geographic breakdown of our portfolio. This slide highlights 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. We include key 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 include key metrics, 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.

It is clear that office is in asset classes going through a period of structural change in revaluation and as a result, we are not surprised to see art office G Ltvs increase.

Based on the natural timing lag from the appraisal process. We would expect these figures to continue to increase over the coming quarters, even after certain assets reached their cyclical bottom.

Conversely, when certain assets begin to see more capital flows and better valuation prospects, we would expect a delay in recognizing that benefit.

We continue to believe that investing in well located institutional quality ground leases in the top 30 markets that have attractive risk adjusted returns will benefit the company and its stakeholders over long periods of time.

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

Brett Asness: It is clear that office as an asset class is going through a period of structural change and revaluation, and as a result, we are not surprised to see our office GLTVs increase. Based on the natural timing lag from the appraisal process, we would expect these figures to continue to increase over the coming quarters, even after certain assets reach their cyclical bottom. Conversely, when certain assets begin to see more capital flows and better valuation prospects, we would expect a delay in recognizing that benefit. However, we continue to believe that investing in well-located, institutional quality ground leases in the top 30 markets that have attractive risk-adjusted returns will benefit the company and its stakeholders over long periods of time. Lastly, on slide eight, we provide an overview of our capital structure.

At the end of the fourth quarter, we had approximately $4 4 billion of debt comprised of $1 5 billion of unsecured notes $1 5 billion of nonrecourse secured debt 1.1 billion drawn on our unsecured revolver and $272 million of our pro rata share of debt on ground leases, which we own in joint ventures.

Our weighted average debt maturity is approximately $22 two years and we have no corporate maturities due until 2026, which is our <unk> revolving credit facility.

At quarter end, we had approximately $752 million of cash and credit facility availability.

We look to manage interest rate risk on floating rate borrowings appropriately and I put a number of hedges in place to do so.

Of the approximately $1 1 billion revolver balance outstanding 500 million of swap to fixed so for at 3%.

Brett Asness: At the end of the fourth quarter, we had approximately $4.4 billion of debt comprised of $1.5 billion of unsecured notes, $1.5 billion of non-recourse secured debt, $1.1 billion drawn on our unsecured revolver, and $272 million of our pro-rata share of debt on ground leases, which we own in joint ventures. Our weighted average debt maturity is approximately 22.2 years, and we had no corporate maturities due until 2026, which is why we're a revolving credit facility. At quarter end, we had approximately $752 million in cash and credit facility availability.

This is a five year swap that we have protection on through April 2028 weeks.

We currently receive swap payments on our current cash basis, each month and at today's rates produces cash interest savings of approximately $3 million per quarter that is currently flowing through the P&L.

Of the remaining approximately 600 million drawn we have $400 million of long term treasury locks at a weighted average rate of approximately three 6%.

Today, our long term hedges are approximately 55 million in the money.

The outstanding hedges are mark to market, so no cash changes hands each months and while we do recognize these gains on our balance sheet and Aoc I, they're not yet recognized in the P&L.

Brett Asness: We look to manage interest rate risk on floating rate borrowings appropriately, and I've put a number of hedges in place to do so. For example, of the approximately $1.1 billion revolver balance outstanding, $500 million is swapped to fix SOFR at 3%. This is a five-year swap that we have protection on through April 2028. We currently receive swap payments on a current cash basis each month, and at today's rates, this produces cash interest savings of approximately $3 million per quarter that is currently flowing through the P&L. Of the remaining approximately 600 million drawn, we have 400 million in long-term treasury locks at a weighted average rate of approximately 3.6 percent.

While these hedges can be utilized through the end of 2025, they can be unwound for cash at any point prior.

As we look to term out revolver borrowings with long term debt, we may unwind, the hedges and attach the gain to the debt lowering the effective economic rate, we pay while amortizing the gain over a long period of time.

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

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

Weighted average credit spread we earn on those loans exceeds what we pay on our line by 405 basis points.

Brett Asness: Today, our long-term hedges are approximately $55 million in the money. The outstanding hedges are mark-to-market, so no cash changes hands each month, and while we do recognize these gains on our balance sheet in AOCI, they are not yet recognized in the P&L. While these hedges can be utilized through the end of 2025, they can be unwound for cash at any point prior.

We are levered, one nine times and a total debt to book equity basis.

The effective interest rate on permanent debt is three 9%, which is up 138 basis points spread to the five 2% GAAP annualized yield on the portfolio.

The portfolio's cash interest rate on permanent debt is three 3%, which is an 18 basis point spread to the three 5% annualized cash deal.

Brett Asness: As we look to replace revolver borrowings with long-term debt, we may unwind the hedges and attach the gain to the debt, lowering the effective economic rate we pay while amortizing the gain over a long period of time. The remaining unhedged exposure is largely offset by our higher yielding investments connected with the internalization, including the floating rate income we receive on our leasehold loan fund interest. The weighted average credit spread we earn on those loans exceeds what we pay on our line by 405 basis points. As a result, we are levered 1.9 times on a total debt-to-book equity basis. The effective interest rate on permanent debt is 3.9%, which is a 138 basis point spread to the 5.2% gap annualized yield on the portfolio.

On the credit ratings front, we have previously discussed the Moody's <unk> III upgrade which was a strong outcome at a difficult time that underscores the fundamental credit strength of the business and we believe it should have long term benefits for the company.

Subsequent to quarter end, Fitch, who had put us on positive outlook in the beginning of 2023 recently affirmed our positive outlook.

While we have accomplished numerous key drivers for an upgrade and the credit has improved in many important facets. We will continue to work with their team to accomplish our goal of reaching an a minus rating.

So to conclude 2023 was a busy year that brought its fair share of challenges, but we took a number of important steps to solidify the business and position ourselves for success as markets begin to stabilize and inevitably rebound.

Brett Asness: The portfolio's cash interest rate on permanent debt is 3.3%, which is an 18-basis point spread to the 3.5% annualized cash yield. On the credit ratings front, we have previously discussed the Moody's A3 upgrade, which was a strong outcome at a difficult time that underscores the fundamental credit strengths of the business, and we believe it should have long-term benefits for the company. Subsequent to quarter end, Fitch, who had put us on positive outlook in the beginning of 2023, recently affirmed our positive outlook. While we have accomplished numerous key drivers for an upgrade, and the credit has improved in many important facets. We will continue to work with their team to accomplish our goal of reaching an A- rating. So, to conclude, 2023 was a busy year that brought its fair share of challenges, but we took a number of important steps to solidify the business and position ourselves for success as markets began to stabilize and inevitably rebound. We remain focused on delivering value to our customers through our attractive capital solution and look forward to what 2024 has to offer.

We remain focused on delivering value to our customers through our attractive capital solution and look forward to what 2024 has to offer.

And with that let me turn it back to Jay.

Thanks, Brett.

<unk> mentioned organizationally, we've tightened a ship that's been working to run leaner and more efficiently.

We will of course add talented growth justifies it.

Very good with the team we have in place today.

Ultimately, serving our customers and seeking to generate strong risk adjusted returns for investors is the path forward.

So we will focus on these two missions to help get the value of our business more appropriately recognized in the marketplace.

And with that operator, let's open it up for questions.

Thank you.

To ask a question. Please press star one at this time.

We'll 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.

Thank you.

Our first question is coming from Nate Crossett with BNP Your line is life.

Hey, good morning.

Two questions first Jay maybe you can just speak to the pipeline right now.

Have you closed anything so far in Q1.

When do you think we should maybe expect more activity to ramp this year.

And then question for Brad you gave a lot of commentary on the balance sheet.

The revolver, specifically, how should we be thinking about when you may look to term that out and what would maybe pricing look like.

Hi, good morning.

Jay Sugarman: Thanks, Brad. As Brett mentioned, organizationally, we've tightened the ship and been working to run leaner and more efficiently. We will, of course, add talent as growth justifies it, but feel very good with the team we have in place today.

Yeah, I would say.

The pipeline I like what I'm, starting to see not not likely to see an impact until the second quarter.

But definitely it feels like a better well found.

[noise] Foundation to work from them, maybe the last couple.

Orders of last year, where I think the rate uncertainty was really hitting.

Jay Sugarman: Ultimately, serving our customers and seeking to generate strong risk-adjusted returns for investors is the path forward. So we will focus on these dual missions to help get the value of our business more appropriately recognized in the marketplace. And with that, Operator, let's open it up for questions. Thank you. To ask a question, please press star 1 at this time.

The pipeline, we have a lot of deals.

Almost get to the finish line, but one way or the other didn't get there so like the level of activity, we're seeing but.

It takes some time to build and turn those into real deals.

Our first quarter is definitely going to going to suffer in second quarter. I think we're going to start to see the benefits of all the work our guys are putting in.

Operator: We'll take as many questions as time permits. Once again, please press star 1 to ask a question. We will pause for a moment to assemble the roster. Thank you. Our first question is coming from Nays Crosses with BNP. Your line is live. Hey, good morning.

As far as it's Brett as far as the balance sheet and the revolver as I mentioned were drawn $1 1 billion.

We are appropriately hedged so.

The current Mark Mark to market and the money gains that we have are roughly $55 million.

So it feels like from a margin.

Nays Crosses: Two questions. First, Jay, maybe you can just speak to the pipeline right now. Have you closed anything so far in Q1? When do you think we should maybe expect more activity to ramp up this year? And then question two for Brett, it gave a lot of commentary on the balance. On the revolver specifically, how should we be thinking about when you may look to turn that out, and what would, maybe, pricing look like? Hey Nate, good morning.

From a margin standpoint that we're we're locked in but we certainly want to be able to term out some of those borrowings. The market. Obviously has been much more constructive to start the year versus when we were on our last earnings call. A few months ago. When the 30 year and the 10 year were both up about 5%.

So now we're sitting at a at a much better level, but we're gonna be opportunistic and think about what the right pocket is think about what the right structure is.

Jay Sugarman: Yeah, I found the pipeline. I like what I'm starting to see. Not likely to see an impact until the second quarter, but it definitely feels like a better foundation to work from than maybe the last couple quarters of last year, where I think the rate uncertainty was really hitting the pipeline. We had a lot of deals almost get to the finish line, but one way or the other didn't get there. So I like the level of activity we're seeing, but, you know, it's going to take some time to build and turn those into real deals. So the first quarter is definitely going to suffer, and second quarter, I think we're going to start to see the benefits of all the work our guys are putting in. Hey, it's Brett.

Different options when it comes to the tenor.

So we really need to be thoughtful about either a public or a private execution.

But we're hedged and we have ample liquidity of our revolver as well as the joint venture so feel pretty good about our capital position as well as our hedging.

Okay I'll leave it to Ed.

Thank you.

Our next question is coming from Anthony Pallone with JMP more R. J P. Morgan your line is life.

Great. Thank you good morning my.

My first question is I was wondering if you can maybe give us.

So either an example, or some color around what a ground lease.

Structure looks like for a multifamily sponsored today and.

Brett Asness: As far as the balance sheet and the revolver, as I mentioned, we've drawn $1.1 billion. We are appropriately hedged. The current mark to market on the money gains that we have is roughly $55 million. So it feels like from a margin, from a margin standpoint, that we're locked in, but we certainly want to be able to term out some of those borrowings. The market obviously has been much more constructive to start the year versus when we were on our last earnings call a few months ago, when the 30 year and the 10 year were both above 5 percent. So now we're sitting at a much better level, but we're going to be opportunistic and think about what the right pocket is. Think about what the right structure is. We have different options when it comes to tenor. So we really need to be thoughtful about either a public or a private execution.

What kind of leasehold proceeds they would get on GSE debt versus them just keeping.

The simple interest in their property and just trying to understand sort of value proposition that you all have been providing there.

Sure Anthony it's Tim Dougherty.

Yeah. So on the on the proposition for I guess, you used multifamily as an example.

Success, there in terms of a 70 plus multifamily transactions I think shows where we're able to provide there.

Some of these deals now that are being recapitalized, that's predominantly where the volumes coming in the multifamily side coming to us with our cost of capital. So we're typically in that 65 over the 30 year treasuries are somewhere.

Depending on where treasuries are that day in that period of time is somewhere around 5% and then they're going to the capital markets again that capitalized on the debt side getting a similar debt yield dynamics on our leasehold cash flow.

Brett Asness: But we're hedged, and we have ample liquidity on a revolver as well as the joint venture, so I feel pretty good about our capital position as well as our hedging. Okay, I'll leave it at that. Thank you.

And so the difference in capital on a traditional deal fee simple is somewhere in the 55% to 60% leverage.

Anthony Paolone: Our next question is coming from Anthony Paolone with J.P. Morgan. My first question is, I was wondering if you could maybe give us either an example or some color around what a ground lease structure looks like for a multi-family sponsor today and what kind of leasehold proceeds they would get on GSE debt versus them just keeping a fee simple interest in their property. I'm just trying to understand the value proposition that you all have been providing there. Sorry, Anthony, it's Tim Doherty.

And then with the ground lease providing approximately 30 ish percent of the capital stack leasehold that coming in.

Getting to roughly around the low sixties capitalization at a lower blended cost of capital. So that's the value proposition for.

Our clients that where we're talking to.

Okay. So five if I caught all of that right about five to 10 points of extra proceeds going the ground lease route.

Tim Daugherty: Yeah, so on the proposition for, I guess, you use multifamily as the example, you know, our success there in terms of 70 plus multifamily transactions shows what we're able to provide there with some of these deals now that are being recapitalized predominantly where the volume is coming from the multifamily side, coming to us with our cost of capital. So, you know, we're typically in that 65 over the 30 year treasury. So, depending on where treasuries are that day, that period of time is somewhere around 5%, and then they're going to the capital markets and getting that capitalized on the debt side, getting similar debt yield dynamics on the leasehold cash flow.

Slightly less maybe blended cash and then obviously you have the growth in the ground lease payments over time, that's the that's the sort of picture is that did I catch that all correct.

<unk> corrected on the so on the simple side Youre seeing the agencies are in the high hundreds to 200 spread.

This is where their pricing of their capital today is in.

In the mid sixes versus our capital closer to 5%.

The blend there.

Okay. Thanks, and then second.

Second question.

You commented about just the ground lease value to total kind of creeping up a little in office, but in general do you are there any of your lease holders where the equity is in default or can you talk about just the monitoring process just in terms of the underlying whats happening where there's there's dead on on the leasehold.

Tim Daugherty: And so the difference in capital on a traditional deal, fee simple, is somewhere in the 55 to 60% leverage range. And then with the ground lease providing approximately 30-ish percent of the capital stack, leasehold debt coming in, you're getting to roughly around the low 60s at a lower blended cost of capital. So, that's the value proposition for our clients that we're talking to. Okay, so five, if I caught all that right, about five to 10 points of extra proceeds going the ground lease route. Slightly less, maybe blended cash, and then obviously you have the growth and the ground lease payments over time. That's the sort of picture.

And what's happening with the sponsors there.

Yeah, I think obviously a take a step back I think all office markets are definitely in a recession the supply and demand are still somewhat out of whack.

So.

Leasing has not really recovered in many gateway cities.

And that won't really change until we see demand pick back up.

We have seen a few green shoots, particularly in New York City.

You think about the best buildings in the best locations, we've recently shop the market.

Tim Daugherty: Did I catch that all? Correct. Yeah. Yeah, correct.

Tim Daugherty: And so on the fee simple side, you're seeing that the agencies are in the high hundreds to 200 spread is where they're pricing, so their capital today is in the mid-sixes versus our capital closer to five, and that's the way you can get to the blend there. Okay, thanks. And then, second question, you know, you commented about just the ground lease value to total kind of creeping up a little in the office. But in general, do you, are there any of your leaseholders where the equity is in default? Or can you talk about just the monitoring process, just in terms of the underlying, you know, what's happening where there's debt on the leasehold and what's happening with the sponsors there? Yeah, I think obviously, take a step back. I think all office markets are definitely in a recession; the supply and demand is still somewhat out of whack. Anthony

Definitely have seen tightening.

It's not just also the very best buildings, it's location driven.

Yes, I would say anecdotally, we were in a 50 year old building with.

Yes, low ceilings, no amenities and we've seen our rates actually jumping a much higher so it is going to be a market by market situation, but we haven't seen that in the other gateway cities. So.

So our customers are obviously dependent on leasing activity.

It's the driver.

Reminds me a little bit of the.

Hotels in the Covid cycle, as we kind of have to watch the whole sector.

When a sector gets under pressure and under.

Yeah that kind of stress we're watching everything.

And definitely expect some of our customers you know I have a difficult time here that means theyre going to have conversations with her.

Jay Sugarman: And so, you know, leasing is not really recovered in many gateway cities, and that won't really change until we see demand pick back up. We have seen a few green shoots, particularly in New York City.

Capital providers.

We are here to be thoughtful and helpful. If somebody needs to do something and reposition that asset, but first and foremost it's their responsibility any other capital providers to them.

Jay Sugarman: You think about the best buildings and the best locations. We recently shopped the market, and we definitely have seen tightening. It's not just also the very best buildings; it's vocation driven.

So we're watching that dynamic.

Certainly think in 2024, we're going to see.

There are a lot of office come under that kind of stress so.

Something we do need to watch.

Okay. Thank you.

Thank you. Our next question is coming from Stephen laws with Raymond James Your line is live.

Jay Sugarman: I would say anecdotally, we're in a 50-year-old building with, Yeah, low ceilings, no amenities, and we've seen rates actually jump much higher, so it is going to be a market-by-market situation, but we haven't seen that in the other gateway cities. So our customers are obviously dependent on leasing activity, that's their driver. Reminds me a little bit of the..., you know, hotels in the COVID cycle, you know, we kind of have to watch the whole sector. When a sector gets under pressure and under, you know, that kind of stress, you know, we're watching everything. And I definitely expect some of our customers to have a difficult time here. That means they're going to have conversations with their capital providers. And, you know, we are here to be thoughtful and helpful.

Hi, good morning.

Follow up on <unk> question, I think Jay you mentioned in your remarks, some deals are getting close to the finish line, but we're quite getting over can you can talk about what what those were those deals get hung up or what the discussion points or is it uncertain outlook is it something at the property level from a valuation standpoint kind of whats preventing more.

So we're getting over the finish line.

Yeah, I would tell you that you know this interest rate.

Environment is volatile as I've ever seen.

We helped craft the capital stack with the leasehold lender with the equity sometimes they've got.

Either mezz or preferred in that stack everybody's kind of tracking along and rates moved 50 basis points and it just throws everything out of kilter some of those deals come back.

Jay Sugarman: If somebody needs to do something and reposition an asset, but first and foremost, it's their responsibility and any other capital providers to them. So we're watching that dynamic and certainly think in 2024, we're going to see a lot of offices come under that kind of stress, so it's something we didn't need to watch.

We're definitely working on deals that we've put our pens down on in rates.

At least early in the year started to look a little more favorable and those customers have come back so.

Tim has got a whole bunch of transactions that are going to be rate sensitive.

Anthony Paolone: Okay, thank you. Thank you. Our next question is coming from Stephen Lulz with Raymond James. Hi, good morning.

So we're watching.

No.

The information come through them.

Stephen Lulz: You know, to follow up on Nate's question, Jay, you mentioned in your remarks that some deals are getting close to the finish line but just weren't quite getting over it. Can you talk about where those deals get hung up or what the discussion points are? Is it an uncertain outlook? Is it something at the property level from a valuation standpoint?

This morning as it was.

Step back, but long term, we definitely see the trend turning more favorably.

Customers are definitely trying to activate more than they were last year.

But you don't get a deal across the finish line all of those pieces need to lineup.

So a little bit of help from the macro environment would certainly that'd be a positive.

Jay Sugarman: You know, kind of what's preventing more deals from getting over the finish line? Yeah, I would tell you that this interest rate environment is as volatile as I've ever seen. So we help craft a capital stack with the leasehold lender and the equity. Sometimes they've got either Mez or Preferred in that stack.

Thanks.

As a follow up on the round the new investment side.

You know all multifamily deals can you talk about what markets those were and where they are.

Previous borrowers coming back for additional loans on new assets with a new new borrowers that you haven't worked with before it can you give us a little more color on <unk>.

Jay Sugarman: Everybody's kind of tracking along, and rates moved up 50 basis points. And it just throws everything out of kilter. Eventually, some of those deals will come back. We're definitely working on deals that we put our pens down on. And rates have, at least early in the year, started to look a little more favorable. And those customers have come back, so Tim's got a whole bunch of transactions that are going to be rate sensitive. So we're watching.

On those three deals from Q4, and then kind of what the building pipeline looks like.

Any markets that appear more active than others.

Sure Hey, Tim.

The three deals we closed were in the student housing space and one of them was in <unk>.

Multifamily affordable deal.

So and then there's a good mix was an existing clients as well as new clients.

Jay Sugarman: You know, the information came through. And, you know, I know this morning is a step back, but long term, we definitely see the trend turning more favorably. Customers are definitely trying to activate more than they were last year.

And I would say look on the student housing side, we're always focused on top tier University systems and top schools within those systems are those were in the sunbelt, but that fit that bill.

Jay Sugarman: But you know, to get a deal across the finish line, all those pieces need to line up. So a little bit of help from the macro environment would certainly be positive. Thanks, and as a follow-up on the round, the new investment side, you know, all multifamily deals, can you talk about what markets those were in, you know, were they, you know, previous borrowers coming back for additional loans on new assets, were they new borrowers that you hadn't worked with before? Can you give us a little more color on those three deals from Q4, and then kind of what the building pipeline looks like, you know Sure. Hey Tim.

And then the.

Our multifamily deal is in the affordable space was out in California is super high barrier to entry market.

New client so that was existing in terms of the pipeline and where it is building.

Predominantly in the multifamily space both conventional.

Student housing agent income restricted is where we're seeing the most volume and also I would say is most actionable deal so back to your question on the.

Where the where the markets go and look at the capital markets are going to drive.

Tim Daugherty: The three deals we closed were in the student housing space, and one was a multifamily affordable deal, and then there was a good mix. It was existing clients as well as new clients. And I would say, look, on the student housing side, we're always focused on top-tier university systems and top schools within those systems. Those were in the Sun Belt that fit that bill.

The recovery in transaction volume and Youre seeing a desire for especially like in the sea MBS space is a good example are the agencies in the multifamily space, that's where liquidity is.

And so that's driving volume there.

Our focus is to go into areas that we see that are actionable and we actually can close on transactions that theres not much.

Tim Daugherty: And then the multifamily deal was in the affordable space, was out in California, a super high barrier to entry market, new client. So that was the existing. In terms of the pipeline and where it's building, it's predominantly in the multifamily space, both conventional student housing, age and income restricted, is where we're seeing the most volume and also, I would say, the most actionable deals. So back to your question on where the markets are going in, look, the capital markets are going to drive the recovery and transaction volume. And you're seeing a desire for, you know, especially in the CMBS space, a good example, or the agencies in the multifamily space. That's where the liquidity is. And so that's driving volume there.

Multiple speed bumps where.

You're dependent on other market factors other than just the capital market side.

So we're paying attention to all the other product types.

Per Jay's comments, you always have to keep an eye on them and understand where recoveries or lack thereof are occurring but again the pipeline I would say, it's predominantly on the multifamily side.

Great. Thanks, John I appreciate the comments this morning.

Thank you. Our next question is coming from Mitch Germain with citizens JMP. Your line is nice.

Thanks, a lot guys.

So it seems like rent coverage.

For new originations.

Dipped a little relative to the overall portfolio, what's driving that factor.

Stephen Lulz: And that's our focus is to go into areas that we see that are actionable, and we can actually close on transactions where there are not, you know, multiple speed bumps where you're dependent on other market factors other than just the capital market side. So we're paying attention to all the other product types, you know, per Jay's comments, you always have to keep an eye on them, understand where recoveries or lack thereof are occurring. But again, the pipeline, I would say, is predominantly on the multifamily side. Great Thanks, John.

Hi, This is Tim again.

Predominantly.

Rates impact the deals also our underwriting standards in terms of how we factor in coverage. When we we closed transaction I think Brad has alluded to.

Those factors that coverage is based on our underwriting versus actual performance on the development side in particular.

But look these are high quality transactions that some of them are going through.

Stabilization, so that's where you see some of these on I think some of the coverages in particular on the new investments.

Mitch Germain: I appreciate the comments this morning. Thank you. Our next question is coming from Mitch Germain. This is JMP. Your line is open. Thanks a lot, guys. So it seems like the level of risk coverage for new originations dipped a little relative to the overall portfolio. What's driving that fact?

So coverage will likely improve improve over time as the asset stabilizes is what you're implying.

Yeah, and I think the other other factor you're seeing too is on the multifamily transactions tend to be tighter coverages than the other asset classes. It's a market that has a lot of stability of embedded growth in terms of the macro economics of those.

Tim Daugherty: Hi, this is Tim again. Primarily, rates impact the deals. Also, our underwriting standards in terms of how we factor in coverage when we close transactions. I think Brett has alluded to those factors, comparing what coverage is based on our underwriting versus actual performance on the development side in particular.

Transactions in the markets we play in.

Versus other product types, so I think youre seeing a natural tightening with our portfolio.

Tim Daugherty: But look, these are high-quality transactions and some of them are going through stabilization. So that's where you see some of these on, I think, some of the coverage, in particular on the new investors. So coverage will likely improve over time as the asset stabilizes, is what you're implying. Yeah, I think the other factor you're seeing too is that multifamily transactions tend to have tighter coverage than the other asset classes. It's a market that has a lot of stability and embedded growth in terms of the macro economics of those transactions in the markets we play in compared to other product types.

Means heavier into multifamily space as well.

And does the slowdown in.

Overall development activity.

Really reduce in area, where you guys have had some successes in the past.

Sorry repeat the question again, just thinking about development activity volumes declining and it seems like that was an area where you guys had some success. After obviously, replacing the capital stack as deals were completed so is that an area, where you're not seeing as much activity. These days.

Our development pipelines are down across the country, it's hard to make those transactions work when there hasnt been enough volume on the sales side to see where people should transact. So again as as the transaction side in terms of investment sales picks up.

Mitch Germain: So I think you're seeing a natural tightening of our portfolio, leaning heavier into the multifamily space as well. And does the slowdown in overall development activity potentially reduce an area where you guys have had some success in the past? Sorry, I'll ask it again.

Those transactions that could work are being picked up on the development side Youre seeing a trickle of those come back in high quality markets, where.

Tim Daugherty: I'm just talking about development activity, you know, volumes declining. And it seems like that was an area where you guys had some success after, obviously, replacing the capital stack as, you know, deals were completed. So is that an area where you're not seeing as much activity these days? Development pipelines are down across the country.

People arent seen transactions like in the multifamily space Youll see trade it at wide cap rates are still tight and a lot of good high quality markets Youre seeing people pick up their patents on the development deals there so you're seeing some transactions in terms of our pipelines look we're always we're looking across the board from development to existing value.

Tim Daugherty: It's hard to make those transactions work when there hasn't been enough volume on the sales side to see where people should transact. So again, as the transaction side in terms of investment sales picks up, those transactions that could work are being picked up on the development side. You're seeing a trickle of those come back in high-quality markets where people aren't seeing transactions like in the multifamily space, or trade at wide cap rates. They're still tight in a lot of good, high-quality markets. You're seeing people pick up their pens on the development deals there.

Had transactions different product types. So.

Sure we have done some development transactions in the past when we feel that's the right place to be and that's where there's again actionable transactions. So there is some development deals, but as you can see from our the deals we close it's a solid mix.

Tim Daugherty: So you're seeing some transactions. In terms of our pipeline, look, we're looking across the board from development to existing value-add transactions, different product types. So, sure, we've done some development transactions in the past when we feel that's the right place to be.

Thank you.

Okay.

Thank you. Our next question is coming from Hirsch <unk> from Green Street. Your line is life.

Thank you.

Thinking through the pipeline.

On the pricing side, a lot of the deals in the fourth quarter, where price that wouldn't say early in October.

Her Manani: And that's where there are, again, actionable transactions. So there are some development deals, but as you can see from the deals we've closed, it's a solid mix. Thank you. Our next question is coming from her and Manani from Green Streets.

How good do you feel about.

Achieving <unk> in the mid Sevens.

Going forward thinking through 'twenty four.

Yeah.

Yeah.

We think anything in the high sixes not speaking as a very attractive yield are you just look back historically.

Her Manani: Thank you. You know, thinking through the pipeline, on the pricing side, a lot of the deals in the fourth quarter were priced, I want to say, early in October. How good do you feel about achieving yields in the mid sevens going forward, thinking through 2024? Hey, Horst.

That's where you'd like to play I think we got a little bit of a benefit in the fourth quarter.

Caught some.

The timing just right as I said these deals take time to put together, so but between where you start and where you finished theres a lot of moving parts. So I would always guide US right now to kind of what Tim said.

Jay Sugarman: Yeah, you know, look, we think anything in the high sixes, nominally speaking, is a very attractive yield. You just look back historically, and that's where you'd like to play. I think we got a little bit of a benefit in the fourth quarter, caught some, you know, timing just right. As I said, you know, these deals take time to put together. So between where you start and where you finish, there's a lot of moving parts. So I would always guide us, you know, right now to kind of what Tim said: T-plus 65 over the 30-year with the bump structures and the inflation kickers is still a sweet spot. So high 4s feels good nominally and sort of relatively.

T plus 65 over the 30 year with with the bumps structures and the inflation Kickers is still a sweet spot. So high fours feels good nominally and sort of relatively.

I don't I don't think sort of the mid Sevens is a target range where rates are today.

Okay.

Oh, Thanks for that and then I noticed there was a small gain on sale of an asset or about half a million dollars.

Oh boy.

Jay Sugarman: I don't think sort of the mid-7s is a target range where rates are today. Okay. Thanks for that.

What's the ground lease assets sold this quarter and then.

Her Manani: And then I noticed there was a small gain on sale of an asset, about half a million dollars. Was it a ground lease asset sold this quarter? And then, if so, could you provide, you know, the aggregate value of the sale, any sort of yield that you were able to receive on the sale? And whether there was any carrot implication associated with the sale?

If so could you provide the aggregate value of the sale of any sort of debt.

That you were able to receive on the sale.

And if there was any gathered implications associated with the sale.

Okay, Yes.

As small a situation that started to take up more time than it was worth so it wasn't really a strategic move it was a dual ground lease with two separate assets.

Jay Sugarman: A small situation that started to take up more time than it was worth, so it wasn't really a strategic move. It was a dual ground lease with two separate assets. We just, you know, decided it was more complicated than it needed to be and let one of those go so we could focus on the more stable of the assets. So not a big deal in terms of dollars, but it was taking up too much time, and we made a small profit and just moved on from that one. Do you have any other color breath?

Yeah.

Decided it was more complicated than it needs to be and let one of those goes so we could focus on.

The more stable of the assets so.

Not a big deal in terms of.

Dollars, but it was taken up too much time and made a small profit and just moved on from that one.

Do you have any other color Brett.

Yeah. It doesn't mean that this is a small smaller ground lease from years ago I'm, sorry, again, the size of the trade wars was pretty immaterial.

Brett Asness: So yeah, this is a small, small ground lease from years ago. So again, the size of the trade was pretty immaterial. Okay, thank you. Thank you. Our next question is coming from Rich Anderson with Wedbush. Your line is open. Thanks, good morning.

Uh huh.

Okay. Thank you.

Thank you. Our next question is coming from Rich Anderson with Wedbush Your line is life.

Good morning.

Richard Charles Anderson: On the topic of GNA, maybe you can, you know, I know you have to make some tough decisions in the fourth quarter and you're trending lower than you originally expected. What is the cadence of GNA, just so you can remind us, for this year? I believe the fees from Star Holdings come down, is it in April, from 25 to 15? I might have that wrong, but if you could give sort of like the...

On the topic of G&A, maybe you could and I know you had to make some tough decisions in the fourth quarter.

And you're trending lower than you than you had originally expected.

What is the cadence of G&A, just if you could remind us for this year.

I believe the fees from store holdings come down is it in April from 25 to 15, I might have that wrong, but if you could give us sort of like the sort of quarter by quarter.

Brett Asness: So the quarter-by-quarter sort of movement of GDP in 2024, as you... Hey Richard, it's Brett. So you're right, G&A has come down from last year to what we expect to occur this coming year. I think the quarter to quarter fluctuations will be a result of what you mentioned, which is the Star Holdings management fee that we received. So we received that after internalization from Q2 last year through Q1 of this year, and then it will continue to step down. The year 1 through year 4 amounts of $25 million, $15 million, $10 million, and $5 million are somewhat different for GAAP accrual.

Sort of movement of G&A.

In 2024 as you see it now.

Hey, rich it's Brett.

So youre right G&A has come down from last year to what we expect to occur this coming year I think the quarter to quarter fluctuations are will be a result of what you mentioned, which is the star holdings management fee that we receive.

So we received that after internalization from Q2 last year through Q1 of 'twenty four.

And then it will continue to step down.

Year, one through year $425 million 15 million 10 million $5 million.

Is.

Somewhat different for GAAP accrual.

Brett Asness: It's based on timesheets and time spent, so that amount could fluctuate quarter to quarter, but also concurrently, as part of the internalization, the LTIP will also be coming down, so it's somewhat of an offset. So, quarter to quarter, over the course of the year, it should continue to decline. We should see some of the efficiencies gained in the fourth quarter from that reduced headcount flow through in Q1 and thereafter. But, as I said in my remarks.

Based on time sheets and spent and time spent.

So that amount can fluctuate quarter to quarter.

But also concurrently as part of the internalization. The L. Tip will also be coming down so it's somewhat of an offset.

So quarter to quarter over the course of the year it should continue to decline.

We should see some of the efficiencies gained in the fourth quarter from that reduced head count flow through in Q1 and thereafter.

As I said in my remarks, it certainly feels like the opportunity to take.

Brett Asness: It certainly feels like the opportunity to take 24-inch DNA down another 5% from this past year is an achievable target for the year. But the 5% down isn't relative to 2023 because you didn't have the net number. You know. There's a lower, a component, or are you saying the L-tip more than offsets that? It actually less than offsets it, right?

24, it's G&A down another 5% from this past year.

It is an achievable target for the year.

The 5% down isn't relative to 2023, because you didn't have the net number.

You know is there is a lower.

Component or are you, saying the L tip more than offsets that so that ultimately.

Is is down 5% from 2023.

It actually less than offsets it right is the Star Holdings management fee comes down at a faster clip than the L tip accrual.

Brett Asness: Because the Star Holdings management fee comes down at a faster clip than that LTIP accrual. So we're actually picking up and benefiting even more from the reductions, because the LTIP is slower than the management fee decline. With Marcos's and Caret's ownership, and how does that change, I know you said Safehold, 82%, but will that number change slightly with his departure? Yeah, just Mark was forfeited by contract, approximately a quarter of his units.

So, we're actually picking up and benefiting even more from the reductions.

Because the <unk> is slower than that and then the management fee decline alright, okay. Thanks.

In terms of the carrot.

What happens with Marcos as a carrot ownership and how does that change I know you said, it's safe sold 82%, but will that number changed slightly with his departure.

Yeah just.

Mark was forfeited by contract approximately a quarter of his units.

Jay Sugarman: So let's go back to the company. The 82% that Safehold owns will go up because of the units coming back into the pot. You know, our long-term goal, Rich, is obviously to target long-term investors and put those in hands that can demonstrate the value.

So let's go back to.

To the company.

So.

The 82% of faithful Downs will go up.

Bye.

Units coming back into the pot.

Our long term goal rich is obviously too.

Target long term investors.

Put those in hands that can demonstrate the value so.

Jay Sugarman: Yeah, I think Safe's goal here really is to get that value realized. And so they have a little bit more flexibility now, just in terms of those units coming back. Okay. So does the 82 go to, it's just a nominal increase, or is it... It's a solid percent, solid percent.

Yeah, I think saves goal here earlier.

Get that value realized and so they are a little bit.

More flexibility now just in terms of those units coming back.

Understood. So does the 82 go to just a nominal increase or is it you know.

Can you share what that range of call it a percent.

Richard Charles Anderson: Okay, great. Thanks, everyone. Thank you. Our next question is coming from Kelly Kunath with Morgan Stanley. Your line is, Thank you. I just wanted to dig back into the GNA quickly.

Fair enough.

Okay, great. Thanks, everyone.

Thank you. Our next question is coming from Kelly <unk> with Morgan Stanley. Your line is nice.

Thank you and I just wanted to dig back into the G&A quickly is all of that 5% structural and ongoing savings are alright, there portion of that that needs to turn back on as origination volumes start to ramp back up.

Kelly Kunath: Is all of that 5% structural and ongoing savings, or is there a portion of that that needs to be turned back on, you know, as origination volumes start to ramp back up? Yeah, as I said in my remarks, we will definitely want to add some talent as we grow. We think this opportunity, you know, is going to be very, very big, but we feel great about the team as it is today.

Yeah as I said in my remarks, we will definitely want to add some talent as we grow.

I think this opportunity is going to be very very large, but we feel great about the team as it is today.

Jay Sugarman: So we've got the resources we need, but I wouldn't tell you this is a static number. Thank you. Thank you. Our next question is coming from Kenneth Lee with RBC Capital Markets. Your line is, Hey, good morning, thanks for taking my question.

We've got the resources, we need but I wouldn't tell you. This is a static number.

Thank you.

Okay.

Thank you. Our next question is coming from Kenneth Lee with RBC capital markets. Your line is life.

Hey, good morning, Thanks for taking my question, just one around capital position and leverage wondering if you could just talk a little bit more about how you expect leverage to trend over the near term. Thanks.

Kenneth S. Lee: Just one around capital position and leverage. I'm wondering if you could just talk a little bit more about how you expect leverage to trend over the near term. Thanks. Hey, Ken.

Hey, Ken.

Brett Asness: So from a leverage standpoint, we've always said that two times debt to equity on our ground lease position is how we want to be able to fund this business, two-thirds debt, one-third equity. Right now, we're creeping closer to that two times. We've always said there may be moments here and there where that could creep a touch above two times. When you think about our capital position, both on existing commitments, as well as having the joint venture, you know, on new deals that we do, ones that will go through that joint venture, we fund 55% of those dollars. So when you start thinking about the available capital we have, in addition to the pipeline that Tim and J-Paul spoke about, we still feel like that's the appropriate leverage target. I think it's also an important one that we're always monitoring when we think about ratings actions. As I mentioned in my remarks, Fitch recently affirmed our positive outlook.

So from a leverage standpoint.

We've always said that two times debt to equity on our ground lease position is how we want to be able to fund this business to third step one third equity.

Right now we're creeping closer to that two times, we've always said there may be moments here and there where.

That could creep, but a touch above two times.

When you think about our capital position, both on existing commitments as well as having the joint venture on new deals that we do ones that will go through that joint venture, we signed 55% of those dollars. So when you start thinking about the available capital. We have in addition to the pipeline that Tim and Jay Boyle spoke.

About.

So we feel still feel like that's the appropriate leverage target I think it's also an important one that we're always monitoring when we think about ratings actions as I mentioned in my remarks, Fitch recently affirmed our positive outlook.

Brett Asness: They would like to see us continue to maintain leverage around that two-times level. So we're cognizant of that, but we certainly have enough capital tools in the toolkit to be able to continue to deploy capital here over the coming quarter. So we'll monitor accordingly and think about how and when to turn out some of those borrowings on the revolver. Great. That's all I had.

I'd like to see us continue to maintain leverage around that two times level. So we're cognizant of that but we certainly have enough capital tools in the tool kit.

To be able to continue to deploy capital here over the coming quarters. So we'll monitor ordering with accordingly, and think about you know how and when to term out some of those borrowings on the revolver.

Great. That's all I had thank you very much.

Kenneth S. Lee: Thank you very much. Thank you. Our next question is coming from Matt Howlett with B Reilly. Your line is:

Thank you. Our next question is coming from Matthew Howlett with B Riley Your line is life.

Matthew Philip Howlett: Hey guys, thanks for taking my question. With the rally and your bond, maybe you talked about it, but are you looking at a 30-year public or private? On the term deal, what are you kind of looking at given the recent rally? Yeah, the start of the year here has been much more constructive than where we were a few months ago. It feels like the options that we have today are exactly what you point out, which is that it could be somewhere between 10 to 30 years.

Oh, Hey, guys. Thanks for taking my question with the rally in the in your bonds did I.

Maybe you talked about it but are you looking at a 30 year public or private.

On the term deal what do you kind of looking at it.

Given the given the recent rally.

Yeah. The start of the year here has been a much more constructive than where we were a few months ago.

Like the options that we have today.

Are exactly what you point to which is it could be somewhere between 10 to 30 years.

Brett Asness: We could execute in the public markets, the private markets, to do everything from, you know, flat fixed-rate debt to our stepped coupons. So we're continuing to monitor those options, and certainly we'll, you know, look at the appropriate time to term out some of those borrowings. As I mentioned earlier, too, we are hedged. We think that's a significant savings from what the headline cost will be when you start to factor in those mark-to-market gains and we unwind those hedges. So, to your point, we're going to actively look at those markets and see what the best execution is for both the short, medium, and long term. And that was my question.

We could execute in the public markets the private markets, you've seen us do everything from flat fixed rate debt to our step to coupons.

So we're continuing to monitor those options and certainly we'll look at the appropriate time to term out some of those borrowings as I mentioned earlier too we are hedged.

We think that's a significant saves.

Savings from what the headline cost will be when you start to factor in those mark to market gains when we unwind those hedges so.

To your point, we're going to actively look to those markets and see what the best execution is for both the short medium and long term.

And that was my my question want to recognize that cash is towards $50 million that would be is that going to be timed around the bond deal or when the fed starts cutting just missed significance just coming.

Brett Asness: To recognize that cash, it's over $50 million, is that going to be timed around the bond deal or when the Fed starts cutting? Just significant, that cash coming in. Can you give us any more color on when that may be?

Coming in can you give us any more color on when that may be.

Brett Asness: Yeah, it's hung up right now as mark-to-market on our balance sheet. And when we execute long-term debt, we would look to unwind the hedges at the same time. Just to give you an example, if we lock in 10-year or 30-year debt at a specific coupon and we unwind those hedges today, that could be 75 to 100 base points of savings versus the headline cost. That's material, right?

Yes, it's it's hung up right now is the mark to market on our balance sheet and when we execute long term that we would look to unwind the hedges would be at the same time simultaneously.

Just to give you an example.

We locked in 10 year 30 year debt at a specific coupon and we unwind those hedges today that could be 75 to 100 basis point savings versus the headline cost.

That's material right that's significant for our business both from a cash flow standpoint, we could use that cash to pay down the revolver from the headline cost versus the effective cost per paying.

Brett Asness: That's significant for our business, both from a cash flow standpoint—you know, we could use that cash to pay down the revolver from the headline cost versus the effective cost we're paying. And then we get to take those gains and amortize them over the life of the debt, which helps earnings going forward as well. Great, thank you. And then just one follow-up bigger picture question. You got a lot of off balance sheet items that aren't the gap doesn't recognize. Carrot, Fair Market Value leases. I mean, is there anything you can do big picture strategically? Do you have any of the purchase ground leases? Do you have anything coming due in the next 10 years?

And then also we got to take those gains and amortize them over the life of the debt, which helps earnings going forward as well.

Great. Thank you and then just one follow up bigger picture question, you've got a lot of.

<unk> balance sheet items that aren't GAAP does not recognize obviously carry it.

Yeah fair market value leases.

I mean is there anything you can do big picture strategically do you have any of the purchase ground leases do you have anything coming due like the next 10 years, you could kind of demonstrate to the market the value.

Jay Sugarman: You could kind of demonstrate to the market the value underneath it by selling some of these ground leases that GAAP doesn't give you full credit for. Just strategically, how can you get the market, maybe it's Jay, a bigger picture, to recognize the off-balance sheet value, the non-GAAP value in the company?

Underneath it.

Selling some of these ground leases at GAAP doesn't give you full credit for just strategically how can you get the market, maybe it's J a bigger picture to recognize the off balance sheet value of the non-GAAP value in the company.

Jay Sugarman: Thank you. Yeah, it's a great question. We're always looking to chip away at sort of what we think is a little bit of the misperception or misunderstanding of the value in the balance sheet that, you know, the biggest catalyst, obviously, is Carrot. In our minds, it's a multibillion-dollar asset that doesn't show up on our balance sheet. We think the best way to demonstrate that is to have smart third-party capital validate its intrinsic value. But there are also a lot of little things, like you point out, some assets that we think from a gap accounting probably don't show as well as we feel like economically they really are.

Thank you.

Yes.

Yeah. It's a great question, we're always looking to chip away at sort of a.

Well, we think there's a little bit of a misperception of misunderstanding of the value in the balance sheet.

The biggest catalyst obviously as carrot in our minds, it's a multibillion dollar asset that doesn't show up on our balance sheet. We think the best way to demonstrate that has to have.

Smart third party capital validated.

Uh huh.

<unk>.

Worth.

But theres also a lot of little things like you point out some assets that we think from a GAAP accounting, probably don't show as well as as we feel like economically they really are.

Jay Sugarman: I hate to sell stuff just to make a point, but sometimes that is the right decision. So we'll look at a couple things where we think that opportunity to really unlock value is worth it, and there's a fair economic deal to be made. I think you're right. Every one of those just helps to tell the story a little bit better. And clearly, you know, we need to sharpen the story on some of those assets. I think Brett's done a great job sort of putting out every quarter what we think the real underlying economic values are and yields are, but obviously, doing something in the real world is always helpful.

Hate to sell stuff just to make you know.

A point, but sometimes that is the right decision. So we will look at a couple of things.

Where we think that opportunity to really unlock value.

It is worth it.

There is a fair economic deal to do I think Youre right. Every one of those just helps to tell the story a little bit better.

And clearly we need to to sharpen the story on some of those assets I think Brett has done a great job sort of putting out every quarter. What we think the real underlying economic values are and yields are but.

Obviously doing something in the real world.

As always helpful.

Matthew Philip Howlett: I appreciate it. Thank you. Thank you. Mr. Hoffman, we have no further questions at this time. Great, thank you. If you should have more questions, please feel free to reach out to me directly. Polly, could you please give me the replay instructions once more? Yes, indeed. The dial-in for the replay is as follows: please call 877-481-4010, with the confirmation code of 49838. This will be available from 2 p.m. today. This concludes today's call, and we thank you for your participation.

I appreciate it thank you.

Thank you Mr. Hoffman, we have no further questions at this time.

Great. Thank you if you should have more questions. Please feel free to reach out to me directly.

Could you please give the replay instructions once more.

Okay.

Yes, indeed, the dial in for the replay is as follows.

Please call 877 for each 14010 with the confirmation code of 49838.

This will be available from two P M. Today.

This concludes today's call and we thank you for your participation.