Safehold- A "Ground" Up Opportunity
Safehold (SAFE) went public in June 2017, with iStar as its manager and primary investor; recently, the two firms merged to form a single entity, notes Ben Reynolds, editor of Sure Dividend's Top 10 REITs.
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Safehold is a ground lease REIT that aspires to revolutionize the real estate industry by providing a more capital efficient way for businesses to own buildings for their businesses.
The trust engages in long-term sale and leasebacks of land underneath commercial properties across the United States and is the only REIT focused entirely on ground leases to support real estate investment and development.
Safehold is an early mover in the sale and leaseback ground lease sector. As such it currently benefits from offering innovative and unique lease products that give it a growth runway and attractive profit margins. However, we see few barriers to entry in the space and therefore see no durable competitive advantage for the company.
On the other hand, ground leases by their very nature are very conservative and Safehold’s approach is no exception. The terms are extremely long (sometimes up to 99 years long), rent coverage is over 3x, and the loan to value is at a conservative level.
As a result, Safehold is very recession resistant, and we expect its cash flows to remain stable through all economic environments. The dividend is also safe as the payout ratio is just 51%, which is low for a REIT.
Since the IPO six years ago, Safehold has grown its portfolio significantly and continues to have a robust growth pipeline. That said, elevated interest rates are weighing heavily on Safehold. Over the next five years, we forecast an annualized net asset value (NAV) per share growth rate of 3.2%. Further, we expect the dividend to grow slowly as management fuels cash flows into future growth projects.
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We assign a fair value Price to NAV multiple of 1x to Safehold. The current NAV multiple is just 0.67x. Valuation multiple expansion could add significantly to returns. All told, we expect total returns of 14.2% annually over the next 5 years from Safeguard, based on the current low valuation, conservative expected growth rate, and starting 3.5% dividend yield.
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