Q4 2024 Safehold Inc Earnings Call
Good morning and welcome to Safeholz fourth quarter and fiscal year 2024 earnings conference call.
Speaker Change: If you need assistance during today's call, please press star zero. If you'd like to ask a question, please press star one. That's star one to ask a question.
As a reminder, today's conference is being recorded.
Speaker Change: At this time, for opening remarks and introductions, I would like to turn the conference over to Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.
Speaker Change: 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 Asnas, Chief Financial Officer, and Tim Daugherty, Chief Investments Officer.
Speaker Change: This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year 2024 results.
Speaker Change: The presentation can be found on our website at safeholdinc.com by clicking on the investors link.
Speaker Change: There will be a replay of this conference call beginning at 2 p.m. Eastern Time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 51963.
Speaker Change: In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A.
Speaker Change: If you'd like to ask additional questions, you may re-enter the queue.
Speaker Change: Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call which are not historical facts may be forward-looking.
Speaker Change: Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our SEC reports.
Speaker Change: Staple disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.
Speaker Change: Now with that, I'd like to turn it over to Chairman and CEO, Jay Sugarman. Jay?
Jay Sugarman: Thanks Pierce and good morning to everyone joining us today. The fourth quarter was in many ways a continuation of themes we have seen over the past 12 months.
Jay Sugarman: The prospect of lower rates early in the quarter helping to activate business and higher rates as the quarter went on reversing the equation.
Jay Sugarman: A relatively sharp increase in rates ended up posing headwinds for customers, upended many deals, and put upward pressure on discount rates and cap rates used for valuing our existing portfolio.
Jay Sugarman: While we can't control interest rates, we still believe that there are reasons to expect rates will come down over time, and that the current headwinds we're facing will become strong tailwinds, with more deals, higher values for our cash flows, and higher estimates of UCA.
Jay Sugarman: In the meantime, we'll work to counteract the impact of higher rates with two specific initiatives in 2025 to demonstrate value in the portfolio and build on the successes of 2024.
Jay Sugarman: The first initiative is continuing our momentum and penetration in the multifamily market, particularly the affordable sector.
Jay Sugarman: We like this market for its stable cash flows, high occupancy rates, compelling supply-demand dynamics, and the clear societal benefits that our ground lease provides.
Jay Sugarman: In 2025, we plan to double down on our efforts with the goal of doubling last year's affordable volume and expanding to at least two new states.
Jay Sugarman: Deal sizes are still on the smaller side, so expanding our footprint and customer relationships will be important to increasing volume.
Jay Sugarman: Second, we'll look to take advantage of what we view as significant undervaluation of our shares.
Jay Sugarman: To this end, our board has approved a new share buyback authorization up to $50 million.
Jay Sugarman: Any repurchases will be subject to market conditions and other factors that we deem appropriate.
Jay Sugarman: And our goal for this program is to be leverage neutral. We'll be looking for opportunities to recycle capital from the existing portfolio through asset sales, or JVs, or advantageous.
Jay Sugarman: As part of those efforts, our goal is to have CARIB become more accessible to third-party investors.
Jay Sugarman: In sum, 2025 will be about building on areas of progress from 2024 and continuing to look for ways to highlight the significant value of the portfolio and platform.
Jay Sugarman: All right, let me turn it over to Brett to review the quarter and the full year in more detail.
Jay Sugarman: Thank you, Jay, and good morning, everyone. Let's begin on slide two.
Jay Sugarman: 2024 was an important setup year for the business. While persistent rate volatility negatively impacted originations in our share price, we took significant steps forward building a more sustainable pipeline and balance sheet that has us well positioned for 2025 and beyond.
Jay Sugarman: Starting with the balance sheet, 2024 was a very strong year for us in the debt capital markets.
Jay Sugarman: We increased corporate liquidity through the bank and bond market, closing a new five-year $2 billion revolver, in addition to two 10-year unsecured notes offerings, totaling $700 million.
Jay Sugarman: We lowered cost of debt in three ways. First, our bond spreads have tightened as they outperformed investment grade benchmarks, compressing by sixty two and a half basis points from our February bond offering to our November bond offering.
Jay Sugarman: Third, we put in place a commercial paper program that has been saving approximately 60 basis points versus our revolver.
Jay Sugarman: We continued our ratings momentum in the fourth quarter by having S&P rate safehold, initiating a BBB-plus and positive outlook.
Jay Sugarman: We also received an upgrade in December from Fitch, moving from BBB plus to A minus.
Jay Sugarman: Fitch is now level with Moody's who rates us at A3. Our credit profile is one of the highest rated in all of real estate and specialty finance and a meaningful competitive advantage for us with our customers.
Jay Sugarman: In 2024, new origination activity was $225 million, including 10 new ground leases for $193 million and one leasehold loan for $32 million.
Jay Sugarman: All 10 new ground leases are in the broader multifamily category, including 6 in the affordable housing space, 3 student housing, 1 conventional multifamily asset.
Jay Sugarman: These investments are diversified across seven markets and six sponsors with a weighted average GLTV of 34%, rent coverage of 2.8 times, and an economic yield of 7.4%.
Jay Sugarman: Affordable housing has been a bright spot that we expect to be a meaningful component of future growth.
Jay Sugarman: We've made strong inroads with top sponsors that understand the value of efficient ground-lease capital.
Jay Sugarman: They're using our capital solution to deliver more affordable units to municipalities, which is a win-win for everyone involved.
Jay Sugarman: We will continue to seek out new channels where our product is a clear differentiator for our customers.
Jay Sugarman: A quarter end, the total portfolio was $6.8 billion, UCA was estimated at $9.1 billion, GLTV was 49%, and rent coverage was 3.5 times.
Jay Sugarman: We ended the quarter with approximately $1.3 billion of liquidity, which is further supported by the potential available capacity in our joint venture.
Slide three provides a snapshot of our portfolio growth.
Jay Sugarman: In the fourth quarter, we originated one multi-family ground lease for $22 million.
Jay Sugarman: We funded a total of $46 million, including $5 million of the new Q4 origination at a 7.4% economic yield, $41 million of ground lease fundings,
Jay Sugarman: on pre-existing commitments that have a 6.9% economic yield and $400,000 related to our 53% share of the leasehold loan fund, which earned interest at a rate of SOFR plus $271.
Jay Sugarman: For the full year, we funded a total of $319 million, including $148 million of new 2024 originations that have a 7.3% economic yield.
Jay Sugarman: $165 million of ground lease fundings on pre-existing commitments that have a 6.5% economic yield and $6 million related to our 53% share of the leasehold loan fund which earned interest at a rate of SOFR plus $579.
Jay Sugarman: Our ground lease portfolio has 147 assets and has grown 20 times since our IPO, while the estimated unrealized capital appreciation sitting above our ground leases has grown 21 times.
Jay Sugarman: We have 85 multifamily ground leases in the portfolio and have increased our exposure from 8% by count at IPO to 58% today.
Jay Sugarman: In total, the unrealized capital appreciation portfolio is comprised of approximately 36 million square feet of institutional quality commercial real estate, consisting of approximately 20,000 multifamily units.
Jay Sugarman: 12.5 million square feet of office over 5,000 hotel keys and 2 million square feet of life science and other property types
Jay Sugarman: Continuing on slide four, let me detail our quarterly and annual earnings results.
Jay Sugarman: For the fourth quarter, gap revenue was $91.9 million, net income was $26.0 million, and earnings per share was $0.36.
Jay Sugarman: The decline in GAAP earnings year over year was primarily driven by a one-time $15.2 million derivative hedge gain recognized in Q4 2023.
Jay Sugarman: Excluding this one-time derivative hedge gain, Q4 earnings per share increased approximately 1% year-over-year, driven by a $3.9 million net increase in asset-related revenue from investment fundings and rent growth, less additional interest expense on funding these ground leases.
Jay Sugarman: offset by a $1 million increase in our non-cash general provision and a $2.3 million decrease in earnings from equity method investments, primarily due to repayments in the unconsolidated leasehold loan fund.
Jay Sugarman: For the full year, gap revenue was $365.7 million, net income was $105.8 million, and earnings per share was $1.48.
Jay Sugarman: The increase in GAAP earnings year-over-year was primarily driven by the $145.4 million non-cash impairment of goodwill and $22.1 million of merger and care related costs taken in 2023, a $13.8 million net increase in asset related revenue, less additional interest expense,
Jay Sugarman: and $5.8 million in GNA savings net of the Starr Holdings management fee.
Jay Sugarman: offset by a $6.8 million increase in non-cash general provision and the aforementioned $15.2 million derivative hedge gain recognized in 2023.
Jay Sugarman: Adjusting for non-recurring and other reconciling items, full-year EPS increased approximately 8% year over year, from $1.45 to $1.57.
On slide 5, we detail our portfolio's yields.
Jay Sugarman: For GAAP earnings, the portfolio currently earns a 3.7% cash yield and a 5.3% annualized yield.
Jay Sugarman: Annualized yield includes non-cash adjustments within rent, depreciation, amortization, which is primarily from accounting methodology on IPO assets.
Jay Sugarman: but excludes all future contractual variable rent, such as fair market value resets, percentage rent, or CPI-based escalators, which are all significant economic drivers.
Jay Sugarman: On an economic basis, the portfolio generates a 5.8% economic yield, which is an IRR-based calculation that conforms with how we've underwritten these investments.
Jay Sugarman: This economic yield has additional upside, including periodic CPI lookbacks, which we have in 83% of our ground leases.
Jay Sugarman: Using the Federal Reserve's current long-term break-even inflation rate of 2.35%, the 5.8% economic yield increases to a 6.0% inflation-adjusted yield.
That 6.0% inflation-adjusted yield then increases to 7.5%.
Jay Sugarman: after layering in an estimate for unrealized capital appreciation using Safehold's 84% ownership interest in Carrot at its most recent $2 billion valuation.
Jay Sugarman: We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today.
Jay Sugarman: Turning to slide six, we highlight the diversification of our portfolio by location and underlying property type.
Jay Sugarman: Our top 10 markets by gross book value are called out on the right.
representing approximately 66% of the portfolio.
Jay Sugarman: 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 by region and property type.
Jay Sugarman: Portfolio GLTV, which is based on annual asset appraisals from CBRE, increased slightly in the fourth quarter, a modest appraisal declines.
Jay Sugarman: Rent coverage on the portfolio was unchanged quarter over quarter at 3.5 times.
Jay Sugarman: 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.
Jay Sugarman: Lastly, on slide 7, we provide an overview of our capital structure.
Jay Sugarman: At year-end, we had approximately $4.6 billion of debt comprised of $2.2 billion of unsecured notes, $1.5 billion of non-recourse secured debt.
Jay Sugarman: $689 million drawn on our unsecured revolver and $272 million of our pro-rata share of debt on ground leases which we own in joint ventures.
Jay Sugarman: Our weighted average debt maturity is approximately 19.2 years and we have no corporate maturities due until 2027.
Jay Sugarman: At quarter end, we had approximately $1.3 billion of cash and credit facility availability.
Jay Sugarman: We are rated A3 Stable Outlook by Moody's, A- Stable Outlook by Fitch, and BBB Plus Positive Outlook by S&P.
We remain well hedged on our limited floating rate borrowings.
of the $689 million revolver balance outstanding.
Jay Sugarman: $500 million is swapped to fix SOFR at 3% through April 2028. We receive swap payments on a current cash basis each month, and for the fourth quarter that produced cash interest savings of approximately $2.2 million that flowed through the P&L.
Jay Sugarman: We also have $250 million of long-term treasury locks at a weighted average rate of approximately 4.0%.
Jay Sugarman: Our current treasury rates, these are in a gain position of approximately $27 million.
Jay Sugarman: These treasury locks are mark-to-market instruments currently recognized on the balance sheet, but not the P&L.
Jay Sugarman: They can be unwound for cash at any point through their designated term and apply to long-term debt, at which point they would be recognized in our P&L overtime.
Jay Sugarman: Our hedging strategy has been effective in mitigating a higher-rate environment, resulting in $43 million in realized cash gains and proceeds, in addition to the unrealized current $27 million mark-to-market gain.
Jay Sugarman: We are levered 1.96 times on a total debt to equity basis, which was down slightly from last quarter.
Jay Sugarman: The effective interest rate on permanent debt is 4.2% and the portfolio's cash interest rate on permanent debt is 3.8%
Jay Sugarman: So to conclude, 2024 was a productive year on many fronts. 2025 has shown we're not yet out of the woods on interest rates.
Jay Sugarman: But, we've made significant strides setting up the business and balance sheet for the long term. We're reaching new markets and customers that we expect to translate into future growth and activity. And over the course of this year, we'll be working on the initiatives Jay laid out to create shareholder value.
And with that, let me turn it back to Jay.
Jay Sugarman: Thanks Brett. Let's go ahead and open it up for questions.
Jay Sugarman: Thank you. To ask a question please press star 1 at this time. We will take as many questions as time permits.
Once again, please press star 1 to ask a question.
We will pause a moment to assemble the roster.
Thank you.
Speaker Change: Our first question is coming from Ronald Camden with Morgan Stanley. Your line is live.
Ronald Camden: Hey, just a couple quick ones for me, just if you could talk a little bit more just about the pipeline.
Ronald Camden: I think you mentioned sort of the focus on the affordable housing product and that was going well. Maybe expand on that. And then just curious if any other verticals are starting to sort of perk up, you know, outside of the residential side. Thanks.
Tim Doherty: Hey, Ronald, it's Tim Doherty. Yeah, so I think that, as Jay mentioned, we are seeing some good activity on the affordable side. We saw in 2024, I think Q4, with the election and some rate volatility, we saw some things get pushed into 2025, but the activity...
Tim Doherty: Coming into 2025 in the last month and a half here has been quite good. I think you're hearing that across the board in different real estate companies, we're seeing the same.
The front of the funnel is quite good, obviously multifamily.
Tim Doherty: is ruling the roost here, where capital is flowing very, very well. Spreads are tightened. A lot of entrants into that market that were on the sidelines are now back in.
Tim Doherty: Pushing spreads down gives people more confidence and stability. So it's not just the affordable side, you're seeing the, you know, the market rate side and markets that are more supply constrained, you know, use some that aren't. Everyone always says the Sunbelt, but.
New York City, Boston, you know some in sub-markets and
Tim Doherty: Northern and Southern California, you're seeing, you know, good momentum there on the conventional side and
Tim Doherty: you know, even development and those tight supply constraint markets you're seeing as well. So it's not just the, you know, affordable side, the market rate side as well. We're seeing good activity.
Tim Doherty: And then on the other asset classes, you know, we see, look, we have a pretty good portfolio here. We can track actually real-time what's happening in these markets, not just from market info, we can see it from actual assets.
Tim Doherty: You know, office is seeing good, you know, fundamentals in some spots here in New York. You're seeing quite, you know, positive leasing activity, you know, non-existing lender assisted sales.
Tim Doherty: are occurring in these core markets, which is great to see. So you're seeing some basis reset.
Tim Doherty: happening. So that's a market we're paying attention to. And hospitality, similar with a stability of cost of capital, flows of capital can all go into multifamily. So you're seeing, you know, stable valuations there. So there's another area that we're, we're paying close attention to.
Speaker Change: Great, that's super helpful. And then if I could just ask about sort of the buyback announcement.
You know, obviously, plan to be leverage neutral.
Speaker Change: Just curious about sort of the pace, you know, where sort of the funding sources will come from and so forth to execute on that in a leveraged, neutral way. Thanks.
Speaker Change: So, you know, look, we think the stock is materially undervalued. You've heard us say that before.
And not just on
Speaker Change: a straight economics basis, but if you start thinking about the embedded inflation kickers.
Obviously what we believe, Carrie, is worth.
Speaker Change: It can get quite compelling down at these levels. So we've been looking through the portfolio and looking at some of the possibilities of ways to access capital to take advantage of that.
certainly particular asset sales, possible JVs.
Speaker Change: And we do think that this is the year we're going to find a way to unlock a carrot for more investors.
So there's certainly a multiple choice.
Speaker Change: for us to find the right capital to create the most accretive way to use that authorization. It's gonna take us a little bit of time to put all that together. But again, when we start the year with a significant undervaluation in our shares, we have to compare that against anything else we can do. And right now it looks really compelling.
Great. Super helpful. Thank you.
Thank you.
Speaker Change: Our next question is coming from Anthony Paolone with JP Morgan. Your line is live.
Anthony Paolone: Good morning. My first question relates to the affordable housing transactions you've been doing. I think we're all pretty familiar with the value proposition when you do ground lease deals on conventional assets, but can you maybe talk about just...
Speaker Change: Any differences in how this might work or how this, you know, what the sketch of a deal looks like for a sponsor when you do these LIHTC transactions?
Yes, sorry, I think it's him again.
Speaker Change: You know, the basics of all this is it's the same as conventional, right? Our cost of capital is the cheapest around, so it provides...
You know, low cost of capital into these cap stacks.
Speaker Change: Affordable is, you know, has a lot of differences to conventional the, you know, the sources of these transactions have, you know, anywhere from six to 10 different sources coming from federal, state, local loans, etc. And these transactions. So obviously, we did a lot of work to make sure we understood
Speaker Change: All the different players here make sure our structure works appropriately. But the biggest one is this is a gap filler, right? So that there's different costs of capital to all those and different providers. So our cost of capital is significantly cheaper than a lot of those other alternatives to those gap fillers. So that's one of the main keys.
And then, look, these developers are in this space.
Speaker Change: They're trying to get bond allocations, so if they can find any advantage.
Speaker Change: to help their capital stacks to do so. They love to do it. So I think that's where we're seeing a lot of traction in the buildup of new sponsors. As we've, you know, the first thing is you gotta execute and we've shown that to the market and that's helping us expand both on sponsor and now you're seeing on location.
Speaker Change: Okay and then just my follow-up here, can you maybe just give us a sense as to where you see overhead for 2025 both on a gross and net basis?
Yep, and it's Brett. So from a GNA perspective...
Speaker Change: We set out, when we internalized the company, that we thought it would take about $50 million a year to run this company. As you've seen, last year we were able to get that number down to the mid-$40 million range on a net basis that's net of the management fee. When you look at 2024,
Speaker Change: nicely beat our targets and continue to, you know, refine our overhead structure.
Speaker Change: Part of the calculus from this point going forward, and you rightly point out, is gross net, the management fee, and as the management fee comes down year to year, that'll be about a $5 million or so difference from 2024 to 2025.
Speaker Change: So if you take this year's, this past year's number plus $5 million, you're in the low $40 million dollar range. That's our
Speaker Change: our target for this year on a net basis. And that includes, obviously, the direct impact of the management fee, which for this year should be in the 10 million dollar to low teens type range. So that's the gross net figure for you.
Okay, great. Thank you
Speaker Change: Thank you. Our next question is coming from Handel St. Just with Mizzou. Your line is live.
Thank you.
Speaker Change: Hi there, this is Ravi Vaidya on the line for Handel. I hope you guys are doing well. I guess if we think about your various Apple deployment opportunities...
Speaker Change: How do you view buybacks versus new originations, and I guess what's the appetite for maybe more than the $50 million for buybacks if the stock here continues to lag, you know, sub $20?
Speaker Change: So, you know, our overarching theme is we need to scale this business. We think this is a very large opportunity and a lot of the unlock happens when you get the full scale. So that's still our main goal. But there are moments in time like today where we think the...
Speaker Change: share price undervalues the fair value by a sufficient margin that it's worth considering. So we're gonna start with this 50 million. We've got to create capital on a leverage neutral basis to use it. So this will be the first sort of tiering.
Speaker Change: What our real hope is, is as the market opens up, the opportunity set opens up, you know, the
Speaker Change: opportunity to scale. So I would say we're trying to do both. We're trying to take advantage of a below market
Speaker Change: share price, but we're also still eyes on the prize, which is
Speaker Change: This business, you know, we still believe has $25-$50 billion type sizing opportunity for a leader in the marketplace, which we want to be.
Speaker Change: So, the goal is not to shrink, it's really to grow, but when you're offered a fairly compelling way to capture value for shareholders, you know, we'd like to look at ways to take advantage of that.
Anthony Paolone: Thank you, that's helpful. Just one more here. You mentioned earlier in your prepared remarks regarding opening up another carrot to more investors. Can you please offer more color on that in terms of...
Speaker Change: maybe pricing or dollar value or timing and maybe what potentially uses of that capital could be. Thanks.
Sure.
Speaker Change: Look, over the past six months, we've talked to a number of interested investors. We've gotten their feedback.
Speaker Change: You know, the two main themes are, you know, the long-term liquidity and the growth prospects. Certainly, you have, you know, a strong viewpoint on the future growth prospects. The liquidity, the long-term liquidity is something we've been talking about internally and now we've begun working with our CARROT advisory board when we look at.
Speaker Change: other attractive but illiquid asset classes. How can we enhance the future liquidity? How can we expand this investor base?
Speaker Change: We still think this is a natural fit for lots of family offices and lots of different types of investors.
Speaker Change: But it will be an impediment if they can't see a path to liquidity over the long term.
Okay.
Speaker Change: Thank you. Our next question is coming from Caitlin Burrows with Goldman Sachs. Your line is live.
Caitlin Burrows: Hi, good morning everyone, maybe a follow-up to one of the questions from before on the affordable side Can you just go through the differences between traditional multifamily and affordable perhaps for now like why? Affordable is more active today and then long-term Is there any difference to say fold on traditional versus affordable like the yield lease coverage or anything else?
attractiveness.
Tim Doherty: Yes, sure, Caitlin. Look, I think that the key is all we all know, and read the headlines, that obviously there's a significant housing shortage in the U.S. and a lot of that's in the affordable side. So the stability of that
Tim Doherty: platform nationally is quite impressive. So the number of units that are delivered in 2024 was in the 70,000 range nationwide. That's consistent with what it was from
Tim Doherty: The last three years before that it was a slightly lower than that around 60 So you see even despite the volatility and rates and how the other you know more the market rate side is performed
Speaker Change: both on deliveries and just the performance of them. You're seeing the stability in both the delivery and then as Jay mentioned in his opening remarks.
Tim Doherty: the stability of the assets, right? High demand for these units.
They're very high occupancy.
Tim Doherty: and then stable growth with how their size in terms of the rent being paid based on
Tim Doherty: local AMI so it's all fixed so that that's been the sort of the
Tim Doherty: The pleasant thing to see is a sort of nice baseline of deals.
Speaker Change: of the characteristics of it versus a traditional one, are there any differences in like groundless value or anything like that that you target or would they be similar?
Speaker Change: Sure, similar I think is the quick answer. The stability though, I think you'll see some tighter coverages there because it's so stable. It's effectively, you know, a net lease because of the stability of a lot of these jurisdictions that we're going into. So, and then in terms of rates, you know, same as a high-end
Speaker Change: conventional multifamily, we're going into core markets with core sponsors. Again, with solid growth on the AMI side and demographics, that's what you're paying attention to in the affordable space, almost more so than anything else. So, we're seeing, again, the stability of that asset class helps.
us get comfortable as well.
Yeah, I'd add two things to that, Caitlin. One is...
Speaker Change: Unlike conventional multifamily, you know, these tax credits are limited, so there is a cap. It's allocated across states.
Speaker Change: And that's the pool of money to play with. And what ground leases do is help stretch that pool of money into more units, more affordable units. So we think there's a real market demand for affordable, and we can help developers meet that.
Speaker Change: So, very different in the sense that the pool of equity is limited, whereas in multifamily it's basically unlimited.
Speaker Change: And the other thing we see that's interesting is, you know, these are hard to put together, so ultimately our basis is a bigger discount to replacement costs, but because the...
Revenues are capped.
They have some similar metrics too.
Speaker Change: Traditional multifamily, but we know how hard these things are to put together.
Speaker Change: So there's a lot of compelling reasons. It's a hard business. It's a nuanced business. We've spent an enormous amount of time learning those ins and outs.
Speaker Change: We're going to have to do that state by state, but the team's done a really good job in California and now we're going to take that knowledge and sort of move eastward.
Speaker Change: Got it. And then switching gears, it sounds like in 2025 you might be, to the extent you're doing new investments, funding that with dispositions or JVs. When you do that, would you expect that there would be a positive spread, like acquiring or investing at a higher yield than the dispositions?
Speaker Change: Yeah, that's one of the metrics we obviously will be focused on. We look at the impact, you know, relative to the NAVs we see, relative to, again, as I mentioned, some of the embedded value that maybe the market doesn't see, but we certainly believe in and our board believes in. So there's a mix of metrics that we pay careful attention to. Again, long-term, we want to scale this business, but when the...
Speaker Change: The sources and uses line up and can be value-added for shareholders. We're going to find a way to take advantage of that.
Thanks.
Speaker Change: Thank you. Our next question is coming from Kenneth Lee with RBC Capital Markets. Your line is live.
Kenneth Lee: Hey, good morning. Thanks for taking my question. Just one follow-up on the affordable multifamily, the previous comments there.
Kenneth Lee: the returns being potentially more attractive than traditional. Fair to say that the economic yields associated with ground leases for affordable multifamily would be higher than the way you're seeing for other properties. Just want to get a little bit more color around that. Thanks.
Kenneth Lee: Yeah, if I understand the question correctly, it's what's our our cost of capital on those deals and I think the answer to that is they're the same. There's no difference between the our cost of capital on a conventional deal versus a affordable deal.
Kenneth Lee: Gotcha, very helpful there. And then just in terms of the share repurchase program, the potential usage there, and you mentioned being leverage neutral.
Kenneth Lee: But once again, I just want to get my understanding clarified there. Thanks.
Speaker Change: Yeah, look, we don't want to increase debt. We have a long-term goal there that we're going to stick to. But this is a moment where we need to look hard at the portfolio. Historically, we haven't really been interested in selling assets.
Speaker Change: Again, we're trying to scale the business not shrink the business. We think there's a you know
Speaker Change: a pot of gold at the end of reaching that scale that the market doesn't see yet. But this is, you know, a moment in time where we see possibilities and we want to go explore them and see if there's an opportunity to.
Speaker Change: make 1 plus 1 equal more than 2. There's some work to do, obviously.
Speaker Change: As everyone on this call has pointed out, you want this to be accretive, you want it to be value accretive, you want it to be earnings accretive.
Speaker Change: and you want it to be leverage neutral, so things do need to line up.
Speaker Change: But we've got the team sort of working on all fronts to find ways to create capital that either can be deployed in new transactions or can be used to take advantage of dislocations in our share price versus what we think fair value is.
Speaker Change: So, it's an ongoing process. It strikes us that, you know, there are opportunities in the portfolio to take advantage of. And so we're going to begin that process now and really figure out how we can create the kind of capital that can be a creator for shareholders.
Got you. Very helpful there. Thanks again.
I'm sorry, Mitch, you may be on mute, sir.
Speaker Change: I was. Thank you for that. I'm just curious if what the characteristics are for the types of assets that you might consider as sale candidates or JV candidates.
Speaker Change: You know, we have customers who have come back to us at various points in time. You know, generally if we can't redeploy the money more profitably, we have to tell them it's of no interest. If we do have attractive ways to redeploy it, that's a conversation, you know, worth having. I think we've only sold one asset in our history, so there's probably opportunities that, you know, we can take advantage of there, but...
Speaker Change: You know, I think the JVs we've done in the past have given us some comfort that there's a real interest in this asset class. It's hard to assemble a portfolio. It's hard to get diversification. So I think we'd look to take advantage of that dynamic.
Speaker Change: Larger and more diversified is probably better than one-off, but we'll be thoughtful across all the opportunities.
All right, and Jay, maybe while I have you...
Speaker Change: Obviously you're doing some structuring around the carrot it seems like. Does that preclude you from...
Speaker Change: selling a stake in the in the current carrot or is that off the table for now as you work on trying to find solutions to create you know some more enhanced liquidity and in the product?
Yeah, look, the carrot...
program was set up to anticipating future sales of unissued
Speaker Change: but authorized carrots. There's a fixed number, but there's plenty of room inside of that to meet the needs of enhancing liquidity, future liquidity, and expanding the investor base.
Speaker Change: So we think we've got the tools to achieve what we need to achieve.
We've gotten good investor feedback.
from Interested Parties who we think are the natural...
Speaker Change: parties who should own carrot and again it revolves around the two big drivers of carrot growth and you know how I don't I don't have a hundred year
Speaker Change: line of sight. How can I feel good about future long-term liquidity? So we've got some ideas on how to do that. We're not going to reinvent the wheel. There are other folks who've, you know, kind of figured this out. We're going to explore whether those can work for Carrot as well.
Thank you.
Thank you.
Speaker Change: Our next question is coming from Rich Anderson with Wedbush. Your line is live.
Speaker Change: Hey thanks, good morning. So just maybe a finer point on the buyback slash funding of that through perhaps asset sales and JVs. I assume
Speaker Change: A couple of things are going to happen perhaps simultaneously, which is you sell assets, you trigger potentially a carrot gain, you show off a path to liquidity, and you get investors.
Speaker Change: That way. Am I thinking about this right, that this could all sort of come together at the same time?
Speaker Change: Yeah, I think we have to have a high degree of comfort that we can access the right kind of capital. And again, I think it can come from a number of sources, Rich. I'm not sure it's...
Speaker Change: It has to be a large gain to make sense, given where the share price is, but it needs to be accretive on some of the key metrics that we track. So our goal will be first to find the source piece and then look at the share price at that moment.
Speaker Change: and make sure it works to create value for shareholders. But obviously, right now, that dynamic looks like it can happen.
Speaker Change: Yeah, okay. And then something that hasn't been brought up in this call yet.
Speaker Change: Closing in on the end of your master release with Park, wondering if you have any comment on what's going on there, if there's been any movement at all in terms of renegotiation of some sorts.
Speaker Change: Yeah, you know that's that's when we've had a dialogue for for quite a while. We continue to look for ways to maximize the opportunity and I think they're doing the same. We haven't we haven't come to a meeting of mine but you know clearly there's a dialogue as that one continues to tick.
Speaker Change: Okay, and if I could just sneak in one more. On this multifamily focus, is there a point where you get too invested in multifamily as a percentage of the total pie? Are you kind of keeping your eye on that, or are you kind of sort of agnostic at this point in terms of...
Speaker Change: You know getting to leverage leverage to the multifamily product that sits on top of your ground leases. Thanks
Speaker Change: It's the first time I've been asked that question before, is multi-family getting too big? Look, it's an asset class that we have strong beliefs in, but the fundamentals and stability there, and again, back to the affordable side too, the housing shortage isn't just in the affordable side, and obviously the cost of home ownership.
Speaker Change: is helping that trend even more so recently. So I wouldn't say that's a focus of ours to look at that percentage. We see that as a solid growth area. And we still start with the premise of all these good locations. Is this a, you know?
Speaker Change: infill, are there good supply-demand characteristics in the market overall demographics? So I think we're a little less agnostic to market share of, you know.
Speaker Change: multifamily as a percentage of the portfolio. The long-term dynamics of multifamily argue for us continuing to push on it, but again, as you know, we start with the land, we start with the dirt, we start with the location.
and so that'll keep we'll keep that front and center.
Okay, thanks very much everyone.
Speaker Change: Thank you. Our next question is coming from Key Bin Kim with Truist. Your line is live.
Speaker Change: Thank you. Good morning. I just want to go back to the previous topic about monetizing tariffs possibly. You mentioned that there might be a couple of examples in the marketplace that have vehicles that have liquidity and such a security. Can you just help educate us on what those examples might look like?
Speaker Change: Yeah, I think it's a little premature to talk about the specifics, you know, but there are other asset classes, illiquid asset classes that some of the large complexes have.
Speaker Change: Figured out how to create long-term liquidity for the types of shareholders and investors that, you know, we would obviously like to talk to. We can't really talk about it, but, you know, this is not something that hasn't been done before in different ways. And we'll look at all of those.
Speaker Change: Okay, and in 2025, I was curious, kind of on a steady state basis, will you be covering the dividend?
Thank you, Kevin. It's Brett.
Speaker Change: Yeah, our goal remains to, you know, effectively pay out our FFO or operating cash flow. I think what you've seen coming out of the internalization and the transition period along with a higher rate environment
Speaker Change: has created a situation over 2023 and 2024 that's starting to get to a more steady state.
So some of our goals for...
Speaker Change: various forms of capital one of them commercial paper to lower our costs another one is repricing our revolving credit facility lowering our costs
Another is going out to the long-term debt capital markets.
Speaker Change: and kind of getting back to those bespoke capital structures that we've...
exhibited over the years.
Speaker Change: reduce some of our cash costs from the liability side, so
Speaker Change: When we look at, you know, kind of the run rate or go forward, if you take all of those in combination, if all of those are working, that's certainly going to get us to a much better place, and that is our goal, to cover and be able to pay out all of the operating cash flow.
Okay, thank you guys
Thank you.
Speaker Change: We have a question from Harsh Hemlani with Green Street. Your line is live.
Harsh Hemlani: Thanks. So given the buyback program you've put in place, it sort of brings up the bigger picture question of how you're thinking of your cost of equity at this time. You know, what do you think is the appropriate spread over treasuries that makes for
Harsh Hemlani: an adequate discount rate for this company. And then, you know, maybe a second part to that is one of the reasons you outlined that your stock might be undervalued is the market not appreciating the value of Carrot.
Harsh Hemlani: But on the other side of that, you also mentioned that one of the ways you could keep all of your buybacks leverage neutral is to raise some proceeds from selling carrots.
Speaker Change: So, how do you, you know, help us think about how you're able to square selling carrots at these valuations and these prices to return capital to shareholders.
Thank you.
Uh huh
Speaker Change: So two things, Harsh. Let's talk about, you know, our core belief is if we can create higher returns.
Speaker Change: maturity comparable credit risk instruments in the market that we're adding value and we're creating real alpha. So, if you think about the 100-year bond complex that we track, it's in the mid-fives.
That includes, you know, a fairly diverse group of bonds.
Speaker Change: Yeah, we think that's the benchmark that's we got to beat that and our historical our goal is to beat that by a hundred basis points
on a yield to maturity basis or an IRR basis.
Speaker Change: And if you can beat, you know, a high-grade benchmark by 100 basis points and call protected for 99 years, we think you've added real value.
If you can then add inflation protection, which...
that complex of bonds does not have.
Speaker Change: You've added even more value, and if you can ensure a significant capital gain...
Speaker Change: in a diversified portfolio, which history tells us we might be able to do, then you've added even more value. So when we think about our cost of capital, we really benchmark where else can you buy the same sort of cashflow streams.
Speaker Change: The market tells us what that benchmark is, and then we try to create around that a leverage profile that helps us even enhance the value we're creating on the asset side.
Speaker Change: So that's how we start the premise of how do we create incremental value and what is the benchmark, what is effectively an unlevered cost of capital that we need to beat when we deploy capital in the ground lease space.
Speaker Change: The new deals we're doing are well north of 100 basis points wide, or just on a yield to maturity basis.
Speaker Change: also have inflation protection and have that upside potentially through the future reversion. So, still strikes us that there's a pretty wide spread between what the effective asset value we're creating and our cost of capital.
Speaker Change: And then in terms of care, do you want to follow on?
No, go ahead.
Okay, so, Carrot, let's talk about...
Speaker Change: Right now, you know, we don't think we're getting much value, obviously, given where the share price is.
Speaker Change: So, taking small steps to unlock value makes sense to us, even though, internally, I tell you we think the valuation that we did our last round with was below what we truly believe the stabilized, scaled value of Carrot will be.
Speaker Change: But it's not hard for us to sort of square the circle you talked about by saying if we're not getting any credit for it
Speaker Change: in the public market evaluation, how can we unlock something more than zero and potentially unlock a lot more than that? We think...
expanding the shareholder base.
Speaker Change: Creating the kind of investor names that people will understand have done a ton of work on Carrot and come to the conclusion they want to own it. We think that's, you know, maybe a quarter step backwards and five steps forward. So we don't see any conflict between.
Speaker Change: selling some carrots at a value that is substantially above where we think the public share price reflects.
Speaker Change: while it may be a little bit less than we would like and certainly a lot less than we think it will ultimately be worth.
Speaker Change: It's a major step forward for the company and a major step forward for shareholders to understand what they really own.
Speaker Change: So, no conflict there. In fact, you know, I think the opposite. I think the more people we can get involved and invested in Carrot, the quicker the share price will start to reflect the true value.
Speaker Change: Okay, that's fair. And you know, I agree with you. So at this point, if you believe that you can still create 100 basis points of spread, or over 100 basis points of spread over your cost of capital,
Speaker Change: at these equity prices, then why not continue to focus on growing the portfolio even in the near term? I know that's the long-term target, but even in the near term rather than focusing on buybacks.
Speaker Change: This is not a giant buyback program. It is reflective of the choices we have with capital. And as I said earlier, we want to do both. Our goal is to scale. Our goal is to be leverage neutral in any sort of buyback scenario. But it's fair to say for shareholders in 2025, if the share price isn't going to move,
Speaker Change: That needs to be on the table, and we were able to convince our board that we'll be judicious and prudent and thoughtful, but it is our job to figure out a way to take advantage of something we think is mispriced.
So, let's see where we go with this.
Speaker Change: Let's not be confused. We want to scale this business. We think our footprint growing in lots of different markets is value-enhancing long-term for shareholders, but we do need to make sure that our equity share price reflects
that value and right now we don't think it does.
Speaker Change: Okay, last one from me. On the affordable housing side where you're expanding investments, it seems like
Speaker Change: You know, going back maybe three, four years, it felt like the safehold target ground lease was almost under
Speaker Change: you know, definitely in the top 30 markets, but almost under trophy buildings.
Speaker Change: you know trophy buildings and top markets the sponsors will be incentivized to keep investing in those.
Speaker Change: and that over the long term will lead to sort of higher UCA, higher value for carrot and higher I guess value that will be captured by saypole when the ground lease eventually matures.
Speaker Change: How are you thinking of that in the context of affordable housing, where they might be in good markets, but they may not be in the center of those markets, they might not be as good submarkets, but the building also doesn't necessarily incentivize.
Speaker Change: ongoing equity investment in there. So, how are you thinking of the long-term UCA on these assets?
There was a bunch in there.
Jay Sugarman: I think the first thing is that we really focus on trophy locations. And Jay alluded that earlier, right? It's all about where the
Jay Sugarman: where the asset, any asset class, whether it be affordable, conventional office, hospitality, anything, location is key.
Jay Sugarman: So, in this infill location, good demographics could grow with all the things that we look at as 99-year holders.
Jay Sugarman: So, I think that's the key part, just to answer the macro, where we've been investing, if you look at our, you know, our assets and what we have, that's
Jay Sugarman: consistent theme. And then I think we brought up in the affordable space it's
Jay Sugarman: is probably more one that's a macro thought of where is affordable.
It's actually...
Jay Sugarman: next door. These assets are right next door to conventional assets in very high quality markets and very high quality locations.
Jay Sugarman: You know, and these are the ones that you've seen we transacted here, all these have been brand new builds in core, you know, trophy location type areas, and they're built just as they are for conventional. So if you're doing a
Transcription of interview with Jay Sugarman on November 20, 2013.
Jay Sugarman: Specs, right, because there's money coming from, you know, federal and state, so they're not going to...
Jay Sugarman: have an asset that's not high quality. So, and then, you know, I think the stability of this
Jay Sugarman: in terms of the need for it and cash being invested in it
Jay Sugarman: these assets up and running. You can't see this here in New York on anything that has affordability. You have to make sure that these assets are maintained appropriately for the clients inside of it. So I think those are all positives for us in terms of, again, location and then upkeep, because these are long-term holders. These are not.
Jay Sugarman: Merchant builders, these are people that hold these assets long term with high capital, sorry, human capital investment to make their returns and their business work. So it's, you know, very engaged sponsorship.
Jay Sugarman: Yeah, look, we're not going to sit here and tell you that everything is a trophy location. Certainly, downtown CBDs, you know, in great locations on top of transit would be a fantastic place to deploy all our capital. That's not possible. But as Tim said, there's a pretty thoughtful process around.
Jay Sugarman: locations of anything we do and including affordable where we're looking for those same dynamics.
Jay Sugarman: There's a slightly different viewpoint in terms of what's the long-term prospects. These are built, again, in our basis, significant discounts to replacement costs, so we don't think...
Jay Sugarman: You know, a new bill affordable is going to be torn down and a bigger one is going to be built tomorrow. That's not really the dynamic. You do see that in cities. You do see that in urban locations. But.
Jay Sugarman: Most of the underwriting feels very similar. What's the location? What are the demographics? What are the economic drivers? What's the supply-demand constraints on the supply and drivers of demand? And I think our team is very thoughtful about locational attributes.
Jay Sugarman: Even if, you know, it isn't a downtown or an urban location, there's still a lot of very positive real estate fundamentals that drive our decision making.
Got it, thank you.
Thank you. Mr. Hoffmann, we have no further questions.
Speaker Change: If you should have other questions on today's release, please feel free to contact me directly. Ali, would you please give the instructions once again? Thank you.
Speaker Change: Thank you. Ladies and gentlemen, there will be a replay of this conference today beginning at 2 p.m. Eastern Time. The dial-in for the replay is 877-481-4010 with the confirmation code of 51963.
Speaker Change: This will conclude today's conference. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.