Safehold, Inc. -- Moody's assigns first-time Baa1 long-term issuer rating to Safehold Inc.; outlook stable

Rating Action: Moody's assigns first-time Baa1 long-term issuer rating to Safehold Inc.; outlook stableGlobal Credit Research - 08 Feb 2021New York, February 08, 2021 -- Moody's Investors Service, ("Moody's") assigned first-time issuer rating of Baa1 to Safehold Inc. (Safehold). The outlook is stable."Safehold has been making inroads modernizing ground leases in the US in the market that has historically been somewhat undeveloped and fragmented," said Ms. Inna Bodeck, a vice president at Moody's Investors Service. "Modernized ground leases' long-term nature as well as their substantial asset protection support Safehold's robust asset quality. In addition, the company's ability to invest at moderate leverage helps mitigate the credit challenges from the company's limited track record, and high geographic and property concentration."Assignments:..Issuer: Safehold Inc..... Issuer Rating, Assigned Baa1.... Outlook, Assigned StableRATINGS RATIONALESafehold's Baa1 long-term issuer rating reflects its substantial equity cushion (46% tangible common equity to tangible managed assets as of 30 September 2020) and strong asset quality supported by favorable characteristics of the underlying assets, as well as its innovative ground lease structuring and the long-term nature of lease contracts. Safehold invests primarily in the top 30 US Metropolitan Statistical Areas (MSAs) where real estate properties have historically shown moderate appreciation over a long period of time, lending to urbanization trends. These credit strengths are tempered by the risks to creditors resulting from Safehold's limited operating history and high geographic and properties concentration. Despite its substantial exposure to office and hotel properties on the East and West Coasts, Safehold has received all of the payments owed from its customers and has not experienced any delinquencies from the onset of the COVID-19 pandemic. Moody's believes that debt-to-equity leverage will moderately increase (from 1.1x at 30 September 2020) in the next 12 to 18 months as the company grows its asset base and considers that leverage could be vulnerable to swings if event risks materialize, given substantial portfolio concentration. Additional credit challenges include the relatively nascent nature of the modernized ground leases market in the US, as well as Safehold's close relationship with iStar and reliance for resources elevating the governance risk.The company's good liquidity position is supported by full availability of its $525 million revolving facility expiring in November 2022 (unrated) and absence of near term maturities.Safehold's exposure to environmental risks is moderate, suggesting that this risk could be material to credit quality over medium to long-term. However, the company conducts thorough due-diligence and seeks studies to ensure the viability of its current and prospective properties over the long-time horizon. Safehold faces low social risk as Moody's believes that Safehold maintains commitment to social issues relating to sustainability, diversity and compliance with applicable laws and regulations. Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Governance is highly relevant to Safehold as although it is a publicly traded company, iStar, its external manager, owns approximately 66% of the Safehold's shares with 41.9% voting capacity. Additionally, Safehold relies solely on iStar's employees for management of its operating and administrative functions, which is atypical for an investment grade company.The stable outlook reflects Moody's expectation that Safehold's profits and cash flow will continue to demonstrate resilience through the COVID-19 pandemic and that the company will continue to benefit from opportunities to grow its presence in the commercial real estate market. Moody's also anticipates the exposure to hotel real estate will impact only earnings related to percentage rents on hotel revenue (currently a small portion of revenue). The stable outlook also anticipates that debt/equity leverage will only moderately increase as the company continues to grow in the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe rating could be upgraded if the company: (1) reduces governance risk, following a reduction in control from iStar, that could be evidenced by a material decrease in ownership interest, (2) increases geographic and tenant diversification, (3) demonstrates a long-term track record of profitable growth without materially increasing debt-to-tangible common equity leverage; and, (4) maintains strong liquidity and profitability. Moody's will also consider the competitive environment and the company's sustained competitive advantage at the time.The ratings could be downgraded if: (1) profitability declines, for example, due to loss of market share or unexpected losses, (2) ground lease contracts structuring weakens, (3) asset quality deteriorates. Acquisitions, shareholder distributions or other actions that would result in a debt-to-equity leverage higher than 1.75x on a sustained basis, or a deterioration in liquidity could also result in a ratings downgrade. Due to the fact that iStar's personnel act as the manager of Safehold and iStar has voting control of 41.9%, material adverse impacts to such personnel or iStar generally, could negatively impact Safehold's ratings.Founded in 2017, Safehold (NYSE: SAFE) develops, acquires and manages ground leases in the major urban areas in the U.S. with the largest concentration in Northeast (45%) and West (23%). Structured as an umbrella partnership real estate investment trust (UPREIT), Safehold managed approximately $2.8 billion in assets at 30 September 2020. Safehold is externally managed by iStar (NYSE: STAR), a real estate investment trust (REIT) which finances, invests in and develops real estate projects.The principal methodology used in this rating was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Inna Bodeck Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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