Q3 2025 Safehold Inc Earnings Call
Speaker #2: Good afternoon and welcome to Safehold Inc. third quarter 2020 Earnings Conference Call . If you need assistance during today's call , please press star zero .
Speaker #2: 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 call is being recorded .
Speaker #2: At this time , for opening remarks and introductions , I would like to turn the conference over to Pearse Hoffmann Senior Vice President , head of Corporate Finance .
Speaker #2: Please go ahead , sir .
Speaker #4: Good afternoon everyone . Thank you for joining us today for Safehold Inc. earnings call . On the call today , we have Jay Sugarman , Chairman and Chief Executive Officer .
Speaker #4: Brett Chief Financial Officer And Tim Dougherty , Chief Investment officer . This afternoon , we plan to walk through a presentation that details our third quarter 2025 results .
Speaker #4: The presentation can be found on our website at Safehold Inc. . By clicking on the investors link . There will be a replay of this conference call beginning at 8 p.m.
Speaker #4: Eastern Time today . The dial in for the replay is (877) 481-4010 . With a confirmation code of 53142 . In order to accommodate all those who want to ask questions , we ask that participants limit themselves to two questions during Q&A .
Speaker #4: If 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 .
Speaker #4: 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 #4: Safe 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 .
Speaker #5: Thanks , With the recent decline in rates and a somewhat less steep yield curve helping to provide a more constructive backdrop . This was offset by deals needing longer time frames to close , and as a result , we expect more will likely close in the fourth quarter or first quarter of next year .
Speaker #5: Pierce , and thanks to all of you for joining us today . We saw steady activity in our ground lease business in the third quarter .
Speaker #5: The drop in rates has also helped boost the Nav of the existing portfolio and drive more activity in real estate markets . More generally .
Speaker #5: In terms of sectors , our modern ground lease continues to help customers trying to meet affordable housing needs and heavily populated markets throughout the country .
Speaker #5: And while deal sizes are smaller , we like the repeat customer dynamics . We are seeing in this area and we are investing resources accordingly , giving customers products that enable them to move quickly and adjust to market conditions remains a focus , and we will continue to innovate with ways to provide speed , certainty and flexibility around our core ground lease solution .
Speaker #5: One stop capital solutions custom pricing solutions and other enhancements will continue to expand the ground lease market for new and existing relationships , and it's important that we find ways to generate attractive asset returns for us , while also meeting our customers evolving needs .
Speaker #5: All right , let's turn it over to Bret to review the quarter . Bret .
Speaker #6: Thank you , Jay . And good afternoon , everyone . Let's begin on slide two . During the third quarter , we originated four multifamily ground leases for 42 million .
Speaker #6: In the fourth quarter . To date , we have originated an additional four multifamily ground leases for 34 million . These combined eight assets are all within our affordable housing subsegment .
Speaker #6: And located in the Los Angeles and San Diego markets . With credit metrics in line with portfolio targets and a weighted average economic yield of 7.3% .
Speaker #6: Six of these transactions were with a new customer added to our program . While the other two were within existing customer who has now originated a total of seven transactions with us since inception .
Speaker #6: We have additional signed with both customers for deals expected to close through year end , and into 2026 . We're pleased to see growing product adoption and repeat business in this sector as we expect it to be a meaningful growth channel for Safehold Inc. at quarter end .
Speaker #6: The total portfolio was 7 billion and UK was estimated at 9.1 billion . JLTV was 52% and rent coverage was 3.4 times . We ended the quarter with approximately 1.1 billion of liquidity , which is further supported by the potential available capacity in our joint venture .
Speaker #6: Slide three provides a snapshot of our portfolio growth , and the third quarter , we funded a total of 58 million , including 33 million of ground lease fundings on new originations that have a 7.4% economic yield , 15 million of ground lease fundings on pre-existing commitments that have a 7.5% economic yield and 10 million of existing leasehold loans that earn interest at an approximate rate of Sofr , plus 499 basis points at quarter end .
Speaker #6: Our ground lease portfolio had 155 assets , including 92 multifamily properties , and has grown 21 times by both book value and estimated unrealized capital appreciation .
Speaker #6: Since our IPO . In total , the unrealized capital appreciation portfolio is comprised of approximately 37,000,000ft² of institutional quality commercial real estate consisting of approximately 21,500 multifamily units , 12 point 6,000,000ft² of office , over 5000 hotel keys , and 2,000,000ft² of life science and other property types .
Speaker #6: Continuing on slide four , let me detail our quarterly earnings results for the third quarter . GAAP revenue was 96.2 million . Net income was 29.3 million , and earnings per share was $0.41 .
Speaker #6: The increase in GAAP earnings year over year was primarily due to a non-recurring 6.8 million non-cash general provision taken one year ago , excluding non-recurring items .
Speaker #6: Q3 earnings per share increased $0.04 year over year , or approximately 12% , primarily driven by new investment activity . On slide five , we detail our portfolio's yields for GAAP earnings .
Speaker #6: The portfolio currently earns a 3.8% cash yield , up slightly from last quarter due to our growth . Higher yields on new investments and a fair market value reset on one of our ground leases .
Speaker #6: Our annualized yield earns 5.4% and includes non-cash adjustments within rent , depreciation and amortization , which is primarily from accounting methodology on IPO assets 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 on an economic basis .
Speaker #6: The portfolio generates a 5.9% economic yield , which is an IRR based calculation that conforms with how we've underwritten these investments . This economic yield has additional upside , including periodic CPI look backs , which we have in 81% of our ground leases using the Federal Reserve's current long term break , even inflation rate of 2.25% .
Speaker #6: The 5.9% economic yield increases to a 6.0% inflation-adjusted yield. That 6.0% inflation-adjusted yield then increases to 7.5% after layering in an estimate for unrealized capital appreciation using staples. With an 84% ownership interest in Carat at its most recent $2 billion valuation, 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.
Speaker #6: Turning to slide six . We highlight the diversification of our portfolio by location and underlying property type . Our top ten markets by gross book value are called out on the right , representing approximately 65% of the portfolio .
Speaker #6: We include key metrics such as rent , coverage and JLTV . For each of these markets , and we have additional detail at the bottom of the page .
Speaker #6: By region and property type portfolio JLTV , which is based on annual asset appraisals from CBRE , remained flat quarter over quarter at 52% .
Speaker #6: Portfolio rent coverage declined very slightly quarter over quarter from rounding up to 3.5 times previously to now rounding down to 3.4 times . Lastly , on slide seven , we provide an overview of our capital structure at quarter end , we had approximately 4.8 billion of debt , comprised of 2.2 billion of unsecured notes , 1.5 billion of non-recourse secured debt , 881 million drawn on our unsecured revolver , and 270 million of our pro rata share of debt on ground leases , which we own in joint ventures .
Speaker #6: Our weighted average debt maturity is approximately 19 years , and we have maturities due until 2027 . At quarter end , we had approximately 1.1 billion of cash and credit facility availability .
Speaker #6: We are rated A3 stable outlook by Moody's A stable outlook by Fitch , and triple B+ . Positive outlook by S&P . We have benefited from an active hedging strategy and remain well hedged on our limited floating rate borrowings .
Speaker #6: Of the 881 million revolver balance outstanding , 500 million is swap to fixed sofr at 3% through April 2028 . We received swap payments on a current cash basis each month , and for the third quarter that produced cash interest savings of approximately 1.7 million that flowed through the PNL .
Speaker #6: We also have 250 million of long term Treasury locks at a weighted average rate of approximately 4.0% , and current gain position of approximately 29 million , which is currently recognized on the balance sheet but not the PNL .
Speaker #6: We are levered 2.0 times on a total debt to equity basis . The effective interest rate on permanent debt is 4.2% , and the portfolio's cash interest rate on permanent debt is 3.8% .
Speaker #6: So to conclude , we're encouraged by good traction in the affordable sector , which we believe will help buoy origination volume while other sectors work their way back into the pipeline .
Speaker #6: And we have a strong balance sheet and liquidity position that we'll look to take advantage of to be more offensive with our customers .
Speaker #6: And with that , let me turn it back to Jay .
Speaker #5: Thanks , Brett . I mentioned earlier our focus on finding ways to meet our customers needs . Of course , it's also important for our customers to live up to their obligations .
Speaker #5: So let me provide a brief update on the Park Hotel master lease . We recently sent this tenant a lease termination notice for all five hotels governed by the master lease , and will be pursuing all our contractual rights under the lease .
Speaker #5: We believe the tenant has breached the master lease covenants and has not upheld their contractual obligations under the lease , which include specific maintenance and operating standards .
Speaker #5: Because this is now active litigation , we are limited in what else we can say publicly . As I'm sure you understand , we can't provide assurance that we will prevail in litigation or that the future financial impacts will be positive .
Speaker #5: Okay , with that , let's go ahead and open it up for questions .
Speaker #2: Thank you . To ask a question , please press star one at this time we will take as many questions as time permits .
Speaker #2: Once again , please press star one to ask a question . We will pause a moment to assemble the roster . The first question comes from Ronald Camden with Morgan Stanley .
Speaker #2: Please proceed .
Speaker #7: Hey , great . Just two quick ones for me . Just starting with the originations . You know , I think they all multifamily .
Speaker #7: Looks like all on the West Coast . If I'm looking at this correctly , I , I , I did notice the rent coverage ticked down a little bit .
Speaker #7: I don't know , sort of if you could talk through that and maybe just while you're on that , just talk about sort of the , the appetite and the potential for more of these sort of affordable housing deals .
Speaker #7: Thanks .
Speaker #8: Hey , Ronald , it's Tim Doherty . Yeah . You see that the assets were out in California on the affordable side as Brett and Jay both mentioned , we're seeing great traction there in that space .
Speaker #8: On the affordable side , the team is doing a great job of expanding that throughout the country , which I think we'll see results in the quarters ahead .
Speaker #8: Right now , we've seen the great results on some of these sponsors . We have repeat sponsors in California . As for coverage , as you probably have seen in our transactions on development in particular , not only this is our underwriting and we take a haircut to actually our underwriting to show what that coverage is .
Speaker #8: So if you actually took the sponsors cash flows , those coverages are at are in line with our metrics , if not even a little bit above .
Speaker #8: If you take our underwriting without the haircut , it's probably more in line . So we're pretty conservative on the development deals since those are a little bit more time to get to stabilization .
Speaker #8: We just want to be able to show those as conservatively as possible . But in terms of the your question on , you know , transactions and deal flow , look , we're seeing great momentum .
Speaker #8: I think you're seeing that with the closings here . Even post quarter end . We're seeing great momentum even going forward with with more transactions under Loi currently .
Speaker #7: Great . That that's really helpful . And then my second one was just I appreciate you can't comment on anything on the Park Hotel any any color on just timing on , you know , how long these usually take to be resolved .
Speaker #7: High level . Thanks .
Speaker #5: Jay . Yeah . You know , I think it's unfortunate when things end up in litigation . We try pretty hard to find a solutions where both sides can win .
Speaker #5: But when we can't , obviously we need to enforce our contractual rights to protect shareholder value . And these things don't don't happen overnight .
Speaker #5: That's why we typically would try to avoid it . But in this case , we think it's the right thing to do for shareholder value protection .
Speaker #5: And we'll play it out . It's it's going to take a little bit of time .
Speaker #7: Great . That's it for me . Thank you .
Speaker #2: The next question comes from Anthony Paolone with JP Morgan . Please proceed .
Speaker #9: Great . Thanks . Just try to understand more . Just on Park Hotel understanding the sensitivity . But what exactly you know , did you you claim was was breached ?
Speaker #9: I assume there's paying rent or was there some change there ?
Speaker #5: It's not a rent issue , Anthony . It's a standard of care and maintenance . Can't really go into it . But , you know , we think we think the contract is clear and just couldn't find an agreement on that .
Speaker #9: Okay . And then just . More broadly on on your deal pipeline and so forth . You know , as we see office , industrial and other types of transactions start to come back to the market , are you seeing more of that and , you know , would you , would you do more of those types of transactions if those opportunities come around ?
Speaker #8: Anthony , it's Tim . Yes , definitely . We're actually seeing we track in front of the funnel all the way through . Of course , to closing .
Speaker #8: And when we look quarter over quarter , the opportunities we're seeing , it's pretty well diversified . Now , spreading out into the hospitality , retail , office side .
Speaker #8: In addition to the traction you're seeing on the affordable space , conventional multifamily construction and recapitalization , that's been there . So we're seeing opportunities there .
Speaker #8: And when the right ones come up , we're we're right on top of them . We think that , you know , as you're seeing from some of the other announcements and this quarter , you know , transaction flow is definitely increased .
Speaker #8: I think what Jay mentioned with the yield curve , not as steep , is starting to , you know , release some transactions , which is great for the market .
Speaker #8: And it just takes time to work those deals through the system . And for us to start to close on some of those .
Speaker #9: Okay . Thanks .
Speaker #2: The next question comes from Kenneth Lee with RBC Capital Markets . Please proceed .
Speaker #10: Hey , thanks for taking my question . I think you mentioned some of the economic yields ranged up to 7.5% on some of the more recent deals .
Speaker #10: There , wondering if you have any expectations for for economic yields going forward . I know that in the past you talked about , you know , long term bonds plus anywhere from 75 to 85 basis points .
Speaker #10: Any change there and more importantly , as potentially as short term rates move around , do you expect any kind of indirect impact to economic yields go forward ?
Speaker #10: Thanks .
Speaker #8: Kenneth . The those yields look , it depends on the timing of these closings . Right . We're based off the 30 year Treasury .
Speaker #8: So over the over the quarter you know it was a variable rate . There higher in the beginning . Towards the end . So those closing those closings happened earlier .
Speaker #8: Some of them happened towards the end . And then the ones that closed earlier this month or sorry last month . Now what we expect is , you know , yes , there's that spread to the the long term bond .
Speaker #8: But also , we expect now our treasuries are high sixes , low sevens is pretty , pretty consistent right now with where the Treasury seems to be to be at .
Speaker #8: So and the deals that were are in our pipeline are in that range .
Speaker #10: Gotcha . And one follow up , if I may . You touched upon within the prepared remarks , seeing some extended time frames , it sounds like to close some of the deals going into fourth quarter or even the first quarter .
Speaker #10: Any particular factors driving the extended out time frames ? Thanks .
Speaker #8: The extended time frames , a lot of these deals are development deals , so those do take a little bit more time to to close .
Speaker #8: You know , I think in the affordable space , a lot of those are development deals . Most of those are development deals .
Speaker #8: The conventional side . We closed a few in that space versus , you know , recap that could take , you know , four weeks to to eight weeks to close .
Speaker #8: So nothing abnormal in the market for those to take a little bit more time . But you know , we're seeing , you know , good momentum on that on that front .
Speaker #8: And pretty consistent deal flow in Loi's being signed .
Speaker #10: Gotcha . Thank you very much .
Speaker #2: The next question comes from half Hemnani with Green Street , please proceed .
Speaker #11: Thank you . Maybe just a clarification . Did I hear correctly that for the park litigation it's against all five of the hotels in the master lease ?
Speaker #11: Or is it just against the two that they planned on ? Not renewing ? And then second part is what's the sort of near-term financial impact of this is going to continue to pay rent during the period of time ?
Speaker #11: The legal battle goes on in the background ? Or is there going to be some near-term impact from that ?
Speaker #8: Hey .
Speaker #5: Yeah , the .
Speaker #8: The .
Speaker #5: The litigation is around all five hotels , not just the two . And , you know , we're obviously working to find a way to continue the hotels operations as smoothly as possible .
Speaker #5: So I don't have any more detail I can share on that. But, you know, that's certainly our goal.
Speaker #11: Okay . Then . So I guess is the goal here to try to treat the master lease as a package ? You know , all or nothing .
Speaker #5: Yeah , it is a master lease and the provisions are backed by a corporate entity . So we certainly treat it as a master lease .
Speaker #11: Got it . Okay . Last one from me . I guess maybe higher level on the transactions . Right . As you mentioned , sort of broader real estate transaction activities are broadly in line with call it pre 21 levels and at the same time , you know , rates haven't necessarily gone back to what it was in 21 and 22 .
Speaker #11: But we stabilized . Volatility has come down where in the low fours almost consistently do those bigger check size transactions start to come back .
Speaker #11: Are you seeing more of those or is it still , you know , smaller check size multifamily .
Speaker #8: I would agree with you on the consistency part . I think that is driving some of the market now . Everyone has a lot more visibility , so transactions are are getting done on the size , the affordable deals tend to be on the smaller side .
Speaker #8: So you saw all the deals that have closed , all the deals that closed in the third quarter , deals have closed quarter to date .
Speaker #8: Were affordable . They're on the smaller side . These are actually , I'd say on the smaller side of of those , even the larger transactions .
Speaker #8: You're you know , you're seeing a lot of trades now starting to happen on the on the larger deals . Our pipeline has , you know , some larger transactions in it than these affordable deals .
Speaker #8: But , you know , multifamily transactions on the conventional side tend to be somewhere between $40 million of total value to , you know , $85 million of value .
Speaker #8: So a third of those , you can kind of figure out what our ground leases are typically sized . And then , you know , office and hospitality tend to be a little bit bigger asset size than those .
Speaker #8: But again , you know , not much different from what you've seen in the past from quarters past what you were mentioning . 2021 .
Speaker #11: Quarter . Thank you .
Speaker #2: The next question is from Rich Anderson with Cantor Fitzgerald . Please proceed .
Speaker #12: Hey , good evening folks . Have you stated what this sort of forward pipeline ? It looks like in dollar terms ? You mentioned activity got pushed out , but I don't believe you sort of put a put a number on what the pipeline looks like on a go forward basis .
Speaker #12: If you were willing to share .
Speaker #8: Yeah , I guess the word share the exact number . But I guess to give you an idea of what we have , today under Loi that will close in the coming quarters , I would say it's over about over 15 deals and over $300 million of transactions .
Speaker #8: That will again close in the coming quarters . And it's , you know , mix between the affordable transactions and conventional multifamily .
Speaker #12: Okay , great . And as far as I'm not going to ask specifically about Park , I understand you can't talk about that .
Speaker #12: But just to be clear , a lease termination successfully completed means reversion rights . And you get the keys . That's one possible outcome .
Speaker #12: Speaking generally about how this works , is that correct ?
Speaker #5: That's correct . Chris . .
Speaker #12: Okay , I that's my second question . So I'll stop there . Thanks .
Speaker #2: The next question comes from Ravi Varma with Mizuho . Please proceed .
Speaker #13: Hi there . Hope you guys are doing well . Just wanted to ask another follow up on the Park Hotel litigation here . This is impact your potential interest and maybe pursuing hotel originations going forward .
Speaker #13: And are there any additional corporate costs that we should be considering here for the model? More legal fees or any other one-time costs?
Speaker #13: How should we think about Q4 and 26 ?
Speaker #5: Yeah , I'll take the first part and maybe Brett can take the second part . Look , this is an anomalous outcome . It's not what we expected .
Speaker #5: This is a . A master lease form that we didn't create 30 years ago when it was put in place . And , you know , I don't think it impacts our view on , on any , any , any part of the ground lease ecosystem that we're working in .
Speaker #5: So , you know , we'll get through it . And I don't I don't think you should think of this as an indicator of anything or a precedent for anything .
Speaker #14: Yeah . And on the , on the economic side , you know , or for the PNL , obviously , as Jay mentioned , you know , it's too early to tell where where this will head .
Speaker #14: Obviously , you know , we wanted to make this decision on behalf of our shareholders and make sure that we protect value . So I think over the coming quarter , we'll have , you know , better visibility and can certainly update you in the market as to what that looks like .
Speaker #14: But for the time being , you know , we feel like we're we're in a good spot in terms of the consistency of what we've been making .
Speaker #14: And then moving forward . As Jay mentioned , with the termination , any costs associated with that , etc. , will , we'll we'll be able to give the market better visibility .
Speaker #14: Just it's pretty early and premature at the moment .
Speaker #13: Got it . Appreciate the color there . Just one more . How do you guys think about the recent New York City mural ?
Speaker #13: Win yesterday and the impacts surrounding rent stabilization and broadly, how this could impact affordable housing? You guys have done a lot of deals with affordable housing and just wanted to see how this type of news and this type of language impacts the underwriting of deals.
Speaker #13: Thanks .
Speaker #5: Yeah . Look , I think we fundamentally follow supply and demand wherever it goes . And obviously if you reduce the incentives to create supply , you're going to choke off supply , which is in many cases just leads to even tighter market conditions .
Speaker #5: We're seeing that more generally across the market . Those those areas that didn't have supply are starting to recover . And there's not a lot of supply in the pipeline .
Speaker #5: And you see what happens . Rents start to move . So I'm not sure how the administration is thinking about that , but certainly our belief that the way to keep , you know , rents down is to have supply meet demand .
Speaker #5: So I'm not sure exactly how this is all going to play out , to be honest . We believe we have a solution for the affordable housing problems in this country .
Speaker #5: That's very powerful . We'd like to deploy it in more places . I will tell you a lot of the the friction costs are created by government regulations that , you know , we would just as soon help solve the problems quicker , faster and better .
Speaker #5: But we're kind of being held back a little bit by the, you know, nature of government regulations in that area.
Speaker #5: So , you know , we're hopeful that people recognize this is a problem that ground leases can be a major part of the solution .
Speaker #5: And creating new supply is long term in my mind , a better solution for most municipalities than trying to arbitrarily decide where rents should be .
Speaker #5: That just sounds like a tough , long term economic solution .
Speaker #13: Thank you .
Speaker #2: Okay , the next question comes from John Peterson with Jefferies . Please proceed .
Speaker #15: Great . Thanks . Can you remind us how much of your multifamily portfolio is affordable housing today ? I know it's 41% of gross book value .
Speaker #15: And then do you guys have a long term target or cap of where you'd want that number to be as a percent of your portfolio ?
Speaker #8: John , we'll get back to you on some more definitive number , but it's a pretty low number . Now we just the business really just began , you know , 18 months ago or so with the team being dedicated to it and getting deals closed after being in .
Speaker #8: So I would call the lab to learn more about the space . Prior to that . So the team is , as you can see , has great momentum going forward in terms of where we'd like it to be .
Speaker #8: Look , we're we're , we're growing a massive portfolio here . So the number on on how large it could be in dollars .
Speaker #8: You know , we're striving to make it very large , I guess I would say , without throwing a number out there on a percentage .
Speaker #8: You can see over time , you know , different asset classes are active at different times . So to say what percentage of the portfolio would be pretty difficult .
Speaker #8: But you're seeing that the housing sector of our portfolio , that's why we label it under all multifamily is , you know , majority of the assets that we've closed on the books to date .
Speaker #8: And we see that trend continuing in terms of the ratio of housing as part of our portfolio.
Speaker #15: Okay . And outside of California , like are there like I guess , which states do you do you think are most likely to see some of these affordable originations next .
Speaker #8: Well , the capital by the government is allocated by the size of the of the state . So California is being the largest is the one that allocates the most .
Speaker #8: It's actually the most efficient system , at least in our opinion . So we're seeing great traction . There is that system works quite well .
Speaker #8: And look I think the expansion there is into the larger , larger states . So a lot of those are in the Sunbelt and coastal .
Speaker #8: You see a lot there . So our team is working on all of them . So as as time goes on , I think in the coming quarters and year , you'll see us penetrate those markets as well .
Speaker #15: Okay . All right . Thank you .
Speaker #2: Up next is Chris Mueller with Citizens Capital Markets . Please proceed .
Speaker #16: Hey guys . Thanks for taking the questions . So I guess following up on that prior line of questioning , is any of your New York City multifamily exposure to rent stabilized units ?
Speaker #16: And if so , how would a rent freeze even play out given your contractual CPI escalators ? Would that burden just solely fall on the sponsors ?
Speaker #5: Can we haven't really cracked the New York nut yet , and that's you're asking one of the questions that , you know , we would have to grapple with the the goal is always is to put ourselves in a very safe position where we don't have to worry too much about , you know , the last dollar of risk or the even the middle of the capital stack .
Speaker #5: So that's what we love about the business is the safety and the predictability about it . You know , we have not seen that opportunity presented itself across the New York market .
Speaker #5: But , you know , look , there's got to be a solution . We think , you know , additional supply is is going to be needed .
Speaker #5: And ultimately we don't want to play , you know , in the equity part of that solution . We want to play in the land .
Speaker #5: Part of that solution , which we think goes a long way to helping stretch the subsidy dollars that are available . This is a big opportunity for efficiency to come to come to the for .
Speaker #5: And we think ground leases are can be a big part of that .
Speaker #16: Got it . And I guess changing gears a little bit , the 30 year Treasury rate increased from a recent low of 4.55 to a current 4.75 ish .
Speaker #16: There was a similar 20 basis point drop in rates during the third quarter . So my question is , is how sensitive is your guys pipeline to these types of moves ?
Speaker #16: Do you see a material change in demand from those two examples ? And then just a follow up on that is what level of the 30 year do you think would really get things moving for your business ?
Speaker #8: Yeah , it's a similar event that occurred last year , right where the Treasury dipped down somewhere around September or October , time frame , and it came back up in November .
Speaker #8: So it's sort of deja vu a little bit . The last couple days . What happened there ? And you saw the increase in just in terms of the market chatter of deals when the when the rates were going down , a lot of deals trying to close at the exact moment .
Speaker #8: I think a lot of people knowing that where rates are trending is , is , you know , is in this higher level for longer .
Speaker #8: So when it does dip down , people want to transact quickly , you know , so when it was there , it was the flow really , you know , in terms of the chatter because deals can't close in days .
Speaker #8: It can take weeks and months was heavier . So I think we're testing this last year and now this year where the ten year dips closer to four and the third year dips below 450 , you start to see a lot more transactions where it really flows .
Speaker #8: We don't know . We haven't seen it as a whole market . Right . We're acquisition flow really picks up . We pay a lot of attention to of that side of the market , not just Recapitalizations .
Speaker #8: People have to refinance their debt . It's really the acquisition flow that shows you the market's fully healed . And but when those rates were hitting those levels , you started to see a lot more talk about our sales and acquisitions .
Speaker #5: Just as a longer term perspective . When we started this business in 2017 , we said the sweet spot is sort of 3 to 5% .
Speaker #5: We've been at the lows , we've seen the highs . If you wanted to , you know , a true middle of the road , I think 4% on the 30 year is a great place for both sides to feel good about .
Speaker #5: I think this is as much about psychology as anything else . When the market thinks rates are , you know , topping and headed back down , it's harder to to want to lock in 99 year capital .
Speaker #5: If you have that belief . We think we've got some flexibility in terms of when customers can lock rates . That could be a useful tool for them to to maybe open that door a little wider for them to make a good decision , both in the near term and the long term .
Speaker #5: So, it's one of the things we're watching very carefully. It's, as I think Tim said, uncertainty is the worst thing of all.
Speaker #5: And when markets don't know which direction things are headed , that tends to put a freeze on things . What we're hoping for is a little more stability in 26 , a little bit lower rates , a little bit less steep yield curve .
Speaker #5: Those are all positive factors for us .
Speaker #16: Got it . It's all very helpful . Thanks for taking the questions .
Speaker #2: Okay . We have a follow up coming from Rich Anderson with Cantor Fitzgerald . Please proceed .
Speaker #12: I felt like I shortchanged myself , so I I'm gonna ask J . You a a a question . That I want you to sort of , sort of get your , get your take on a , a common criticism , I guess , of ground leases , you know , for everything that's good about them .
Speaker #12: As you close in at the to the end of the of the lease term , you can argue that the incentive of a of a leasehold owner is lessened to , you know , maintain a level of capital investment because they see , you know , you know , sort of the end of the road in terms of the lease .
Speaker #12: And one thing or two of two will happen . The the lease will expire , they'll get the keys back or they'll , they'll renew the lease and have to pay , you know , a big a bigger rent to you .
Speaker #12: So , you know , what's the what do you how do you take this as a sign of the criticism of ground leases , that the closer you get to the end of it , the less incentivized your customer is to invest , because they see the writing on the wall coming .
Speaker #12: I'm just curious how you would respond to that .
Speaker #5: Yeah , I think the the the fallacy and all that . For me , Rich , is we're always looking for solutions that can create value .
Speaker #5: So the market tells you what things are worth . And , you know , if somebody wants an extension , it's pretty easy to price the value of that .
Speaker #5: And that's certainly a if you like the assets you're running that that's always going to be a good solution . And I think the markets will reward longer term ground lease solutions for that leaseholder with the value increase that goes a long way to to creating a business deal between the landowner and the building owner that can extend for a new 99 years , so that's that's what we think most cases is , is a very likely solution is extensions .
Speaker #5: Good operators who are doing a good job and meeting the contractual terms of their leases. You know, there's a lot of places to create win-win solutions.
Speaker #5: So we're , you know , we're very careful in terms of our standard agreement has maintenance standards . But this is more about just doing smart business .
Speaker #5: We want to create long term customers . And we think we have lots of solutions at the end that will work for them .
Speaker #5: So again , as I said , I'm not sure the current condition we're in is is a precedent in any way . We've we've seen plenty of other situations , not end like this .
Speaker #5: So I still feel pretty confident that the economics of continuing to run a good property will always trump other sort of the that dynamic .
Speaker #5: You mentioned .
Speaker #12: Or if it's but if it's not a good property , then I'd be willing to walk and go through something like this . That's that's the point .
Speaker #12: I , I , I hear you , but if they fallen out of love with whatever they are running , perhaps you know , that's .
Speaker #12: Yeah. But anyway, we could talk about it another time. Thank you.
Speaker #2: Mr. Hoffman , we have no further questions .
Speaker #4: Thanks , everybody , for joining us today . If there are any additional questions on the release , please feel free to contact me directly .
Speaker #4: Operator , would you please give the conference call replay instructions once again , thank you .
Speaker #2: Absolutely . Thank you . There will be a replay of this conference call beginning at 8 p.m. eastern time today . The dial in for the replay is (877) 481-4010 , with the confirmation code of 53142 .