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Safehold Inc (SAFE) Q1 2019 Earnings Call Transcript

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Safehold Inc  (NYSE: SAFE)
Q1 2019 Earnings Call
April 25, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Safehold's First Quarter Earnings Conference Call. (Operator Instructions). As a reminder, today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

Jason Fooks -- Senior Vice President of Investor Relations and Marketing

Thanks, Chris. Good morning, everyone and thank you for joining us today for Safehold's earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Andy Richardson, Chief Financial Officer; and Marcos Alvarado, President and Chief Investment Officer.

This morning we plan to walk through a presentation that details our first quarter 2019 results. The presentation can be found on our website at safeholding.com and by clicking on the Investor Relations link. There'll be a replay of this conference call beginning at 2:00 P.M. Eastern Time today and the dial-in for the replay is 1-800-585-8367 with a confirmation code of 7664015.

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. 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. Safehold disclaims any intent or obligation to update these forward-looking statements, except as expressed or required by law.

Now with that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman. Jay?

Jay Sugarman -- Chairman and Chief Executive Officer

Thanks, Jason. We kicked off 2019 with a strong quarter, showing significant growth in all our core metrics. Revenue was up almost 90% year-over-year, earnings per share jumped 80% year-over-year and the unrealized capital appreciation embedded in our own residual portfolio across the $2 billion mark. We entered three new target markets and grew the portfolio over 75% versus Q1 '18. While further cementing our powerful relationship with iStar and setting the stage for continued growth.

Our investment team is working across markets, property types, and transaction structures to bring our more advanced, more efficient ground lease capital to an increasing number of building owners who want to generate higher returns, reduced transaction costs and eliminate debt maturity risk on a large part of their capital structure. Importantly, we expanded our capabilities with our new SAFE/STAR program and can now offer a comprehensive capital solution for owners developing, recapitalizing or repositioning well located buildings, providing them with streamlined access to our lower cost capital and our flexible structuring options.

The first quarter saw the first two SAFE/STAR deals of the year and we now see this is a significant competitive advantage going forward. We also continue to make progress on our long-term financing structures, better matching our long-term effective yields with our long-term effective cost of debt. As our portfolio grows and diversifies, we continue to see opportunities to access attractive sources of capital that recognize the unique credit quality and stability of our assets. And we are pleased to see investors beginning to recognize the potential value of this misunderstood sector and look forward to further outreach to the many parts of the marketplace we think, we'll find this relatively unique combination of principal safety, income growth, and capital appreciation, a perfect fit for their investment needs.

So with that, let me turn it over to Andy to go through the quarter in more detail. Andy?

Andrew C. Richardson -- Chief Financial Officer

Thank you, Jay, and good morning, everyone. Let me begin on Slide 4. The first quarter of 2019 was highlighted by significant earnings growth year-over-year, as we continue to increase our portfolio. This year we also raised substantial liquidity to make new investments and closed on additional non-recourse long-term financings, further solidifying our balance sheet.

On Slide 5, we summarized our earnings results. Revenues for the first quarter of this year were $22 million, an 87% increase from the same period last year, while net income grew by nearly 200% to $11 million. On a per share basis, net income was $0.36, which includes in our share count to $12.5 million LP units issued for $250 million on January 2nd. As a reminder, the first quarter also includes the annual percentage rent from our Park Hotel portfolio. This year's percentage rent was $3.6 million or approximately $0.12 per share versus $3.3 million last year.

As we discussed in February, our earnings reflect a new lease accounting standards that became effective on January 1st, which treat ground leases entered into after 2018 as unlike investments rather than as real estate. On our balance sheet, we are recording most new ground lease transactions as a net investment in leases. And on our P&L, we're recording income on these new investments through interest income from sales type leases, based on the effective yield of our ground leases.

We believe that the new GAAP treatment of these leases capture as many of the fixed income like aspects of our business. The GAAP yields recorded on our sales-type leases are now consistent with the accounting for our debt obligations. And as a result, GAAP net income is more indicative of our operating performance as a high grade fixed income investment business. Additional information on the impact of the new accounting standards can be found in the appendix on Slide 19.

Let's turn to Slide 6 to discuss this quarter's investment activity. During the first quarter, we closed six new investment for $143 million, growing our aggregate portfolio to approximately $1.1 billion, a 76% increase year-over-year. You can see the key investment metrics on the transactions closed in Q1 toward the bottom half of the slide. We are earning a 5.86% effective yield with 4.61 times coverage and the gross book value equal to 37.7% of CPV or combined property value. These investments also include periodic CPI look back that could provide additional potential upside to our effective return.

Slide 7 shows this quarter's investments in some additional detail. It was a busy quarter as we introduce Safehold's in three new markets during the quarter. San Antonio, Philadelphia and New York with our Jersey City transaction. In addition, half of the deals this quarter came from repeat customers, which continues to confirm to us that our capital solution is helping customers generate better returns and win more deals. We also closed two transactions through our SAFE/STAR one stop capital program during the quarter.

Turning to Slide 8. We have also enhanced the right side of our balance sheet to help facilitate our growth. After the end of the quarter, we closed a $122.5 million of 30-year secured non-recourse fixed rate financings that were custom structured to the unique characteristics of our ground leases. The financings are full term interest only with a weighted average interest rate of debt of 4.25% and LTV of 64%. The ground leases that collateralized the financings have an unlevered yield of 5.73%, implying an ROE of over 8%. In addition, as we previously announced, we raised $250 million of cash equity from iStar at the beginning of the year. This investment provided us with fresh capital to pursue approximately $750 million of new deals, assuming our targeted 2 to 1 debt to equity ratio, and we presently have approximately $585 million of asset purchasing power.

We've also been pleased to see the stock react positively, Safe is one of the top performing REITs over the past six months, as more investors begin to recognize the opportunity, relative value and our growing momentum.

Slide 10 and 11 show the diversification in our portfolio. Washington DC remains our largest MSA and the map includes Safehold's expansion into the New York, Philadelphia and San Antonio MSAs. Our portfolio stratification continues to show attractive metrics, which we believe demonstrate the AAA credit quality of our ground leases.

Slide 12 details key metrics of our portfolio. Annualized GAAP rent after depreciation and amortization was $68 million or 6.7% yield on the portfolio. Annual cash flow of the buildings sitting on top of our land covers our annual cash rent by 4.5 to times and our current portfolio gross book value represents 35% of the combined property value.

On Slide 13, we have highlighted some metrics surrounding our own residual portfolio. Our ground leases typically include a residual right to acquire the buildings and other improvements on our lands for no consideration at the end of the lease. As of March 31st, our own residual portfolio had an estimated market value of $3.1 billion, comprised of nearly 9 million square feet of real estate, including 4 million square feet of office and industrial, 3,000 hotel rooms and over 2,700 multi-family units.

Moving to the next slide. We track changes in the excess of the current estimated value of our owned residual portfolio over our investment in the ground leases, as a measure of unrealized capital appreciation in the portfolio, which we previously called Value Bank. At March 31st, our aggregate cost basis in the land was $1.1 billion versus the estimated combined property value of $3.1 billion, indicating unrealized capital appreciation of approximately $2 billion. This unrealized capital appreciation grew by $245 million during the quarter, when compared to $1.8 billion at the end of the year.

Moving to Slide 16, I will review our debt and leverage. At the end of the quarter, we had $437 million of outstanding debt and an all-in effective rate of 3.94%. The figures on the slide are as of March 31st. Pro forma for the new 30-year financings, which closed after the end of the quarter, we had $516 million of debt with a 3.6% weighted average cash interest rate, and all-in weighted average effective rate of 4.1%, and leverage of 0.9 times. Our leverage levels are down from year-end and below our two times target due to the new equity raise at the beginning of the year.

Slide 17 outlines our interest rate hedges, which are sufficient to provide protected two times leverage on the existing portfolio.

In conclusion, we remain confident that our Safehold ground leases provide a better, more efficient capital solution for customers, that allow them to win more deals and make higher returns with less risk. And thereby helping create this efficiency, we believe that we will be able to continue to scale our portfolio. At the same time, we will continue to educate more investors across the broad spectrum of investment styles about the compelling combination of growth and excess returns embedded in our ground lease portfolio, relative to other AAA quality investments.

And with that, I will turn it back to Jay.

Jay Sugarman -- Chairman and Chief Executive Officer

Thanks, Andy. Couple of final comments. As I've said before, the true value of this business will only be apparent as we begin to reach scale. We believe we're making significant strides in providing our customers a better capital and see the impact most clearly in our growing portfolio and the number of repeat customers who continue to work with us on new opportunities. We expect the value of our company become more fully recognized as we build a highly diversified portfolio across all 30 of our target markets. And make our company's unique value proposition simple and understandable to investors well beyond the real estate world.

Our goal over the next 12 months is to push forward aggressively and make our innovative ground lease business a growing part of the real estate world and Safehold shares a core investment for a wide range of investors.

Operator, let's go ahead and open it up for questions.

Questions and Answers:

Operator

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from Nikita Bely of JP Morgan. Your line is open.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

Good morning, guys. Can you provide a little bit of color on the who the lenders were on the 30-year debt at 4.25% and also more broadly what is the depth of that pool, as you go forward to push this kind of financing?

Andrew C. Richardson -- Chief Financial Officer

The lenders on the long-term financings that we are doing are life company lenders. We're not going to give specific names as we've worked with -- now working with several groups of that site to continue to work on 30-year and even potentially longer financings. So we think that with the announcement of the first deal, few months ago that we are getting more and more inquiry. And so we think the depth of that market, we're just beginning to test it. But we think it is -- it's becoming sort of once you do the first one many others become more interested in it. So we think there is a relatively deep market there.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

And how likely that will be the key funding source in the future, going to that companies?

Andrew C. Richardson -- Chief Financial Officer

We believe it's going to be a key funding source, particularly on the long end. But we're continuing to explore other sources of capital as well, but we're very thrilled with the interest level that we have from that type of lender.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

And how does that compare currently to equity issuance, given the stock has rallied recently?

Andrew C. Richardson -- Chief Financial Officer

Our targeted leverage level in the company is about two times debt to equity, still have over $500 million of buying power, based on the liquidity that we have at the end of the quarter. So we're pleased with our stock price. But we also want to make sure that we balance out dilution with the excess -- with the liquidity that we have.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

Any color you can provide on just the cash yields in the quarter? Just trying to back into the number, I think it comes out to in and around about 3.7%? If you could maybe provide a little bit of details on that for the current deals?

Andrew C. Richardson -- Chief Financial Officer

The year-one cash yields are pretty consistent with what we've seen in prior quarters. So we're in the 3.5% to 4% range in general.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

And are you able to provide straight-line rents and intangible amortization for the quarter?

Andrew C. Richardson -- Chief Financial Officer

That's in our -- I think that's in the supplemental information in the back. So we recognized about $1 million of income from the investments that we did in the first quarter of which just less than $300,000 of it was non-cash income.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

And lastly, what can you give a little bit of deals on the pipeline of deals that you are looking at right now. In the near future that maybe you've already closed?

Marcos Alvarado -- President and Chief Investment Officer

Hi, it's Marcos Alvarado. We have two deals in contract, totaling approximately $81 million, and we have another approximately $255 million across six transactions under letter of intent. And the pipeline quarter-over-quarter, so from Q4 it's substantial -- substantially larger.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

And you said $251 million?

Marcos Alvarado -- President and Chief Investment Officer

$254 million, under LOI.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

$254 million. So there is a likely that they might close before second quarter or in second quarter I should say?

Marcos Alvarado -- President and Chief Investment Officer

Those transactions could close further into the year.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

Okay. So it might not have to be second quarter, correct?

Marcos Alvarado -- President and Chief Investment Officer

Correct.

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

Okay. Thank you.

Andrew C. Richardson -- Chief Financial Officer

Thanks.

Operator

Your next question comes from John Massocca of Ladenburg Thalmann. Your line is open.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Andrew C. Richardson -- Chief Financial Officer

Hi, John.

John Massocca -- Ladenburg Thalmann -- Analyst

Just quickly kind of following up on that pipeline question, what percentage roughly of the pipeline today is say Star?

Andrew C. Richardson -- Chief Financial Officer

Roughly 20%.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe kind of switching gears a little bit on the equity front, obviously, understand you guys have a decent runway to kind of continue to work through, but iStar obviously is viewed, Safe is kind of an attractive investment and with the financing in January has been kind of open to give you guys capital, but as you kind of get to a price today where more maybe attractively priced. I mean, how do you view additional equity from iStar versus equity from the public markets. Just as you kind of look out over the long term?

Jay Sugarman -- Chairman and Chief Executive Officer

I think we've publicly stated iStar wants to continue to be a significant investor in and around the ground lease innovation. So they will continue to provide capital as a meaningful ownership. But I think, we also recognize that building liquidity in the shareholder base is important as well. So we think, as Andy said, we still have about $0.5 billion of firepower to deploy. So we haven't really begun thinking about the next capital raise, but certainly we would expect iStar to participate and to help increase the liquidity of the public shares out there.

John Massocca -- Ladenburg Thalmann -- Analyst

And one last one on the debt. I mean, do you think kind of future kind of debt issuance is going to be more typical of what you did here in 2Q or the other piece of debt you raised, I believe, late last year, maybe early this year, where you had kind of bumps on the interest expense side of things or are they both kind of on the table?

Andrew C. Richardson -- Chief Financial Officer

Those two pieces of debt were very structure, very similarly. So both of them have bumps on the cash interest rate that closely mirror the bumps on the underlying collateral.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. So it's there -- very similar in the structuring. They both have bumps.

Andrew C. Richardson -- Chief Financial Officer

Yes.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, that's it from me. Thank you very much.

Jay Sugarman -- Chairman and Chief Executive Officer

Thanks.

Operator

Your next question comes from Paul Puryear of Raymond James. Your line is open.

Paul Puryear -- Raymond James Investment Services -- Analyst

Thanks, good morning. Collin is traveling today, but a couple of questions from us here. Could you just give us some thoughts on really looking at Slide 13, your thoughts on allocating capital among the different asset classes and where you see the greatest build in your pipeline and how you're thinking about escalation of land values across those different asset classes?

Jay Sugarman -- Chairman and Chief Executive Officer

Sure. I think one of the things we set out to do is show that this is simply better capital, more efficient capital, and it really applies to almost all markets and all property types. And I think you see that as the portfolio continues to scale, a significant increase in multifamily, significant increase in office and continued interest from the hospitality sector. So I think we start with the premise that the top 30 markets that we target have a lot of target rich property types that we continue to work with customers on. So we haven't really seen sort of a hard move one way or the other, we still see a relatively strong interest across the board. What I would say, we also stress that it works across the lifecycle of these properties. So bearing development we can be a very effective -- cost effective source of capital at the moment a recapitalization or at the moment of sale or purchase. Those are the three big moments where we think when you look at building a capital stack most efficiently, most cost effective to really generate the highest returns with the lease risk. The ground lease solution really stands out. And so I think, we are working across all those markets, all those moments, all these property types. And today, I wouldn't tell you, we see a hard move one way or the other, it's a big open marketplace, we're introducing a almost a revolutionary new way to look at the capitalization of these buildings in a way more effective -- cost effective way. And so the take-up has been I would say, pretty much across the board. As the portfolio gets bigger as we see what's most effective for us to work on where we can be most efficient with our time, and our effort, and our folks. You'll see us really try to be better and better at spending our time on things we know we have a competitive advantage in. But right now, it's just a big open playing field and across all the property types you see here we're seeing opportunities.

Marcos Alvarado -- President and Chief Investment Officer

Just to add two other things to that, if I think about the pipeline, it's two more of our core markets that we're not in today. So we're excited about that and then the quality of our customer base has dramatically improved over the last 12 months. So the traction we're getting in across the entire market...

Paul Puryear -- Raymond James Investment Services -- Analyst

And then one more question. So is the -- is the land lease market just more active or the way you're going about it and sort of the financing solution that you're providing is just creating more activity? And then I guess as part of that question, we continue to hear and track the inflation that cost to build, which of course is driving up values in several markets. And I'm curious, how you view that as it relates to the underlying land value. Because it's the construction cost it's putting pressure and the permitting cost that's putting pressure on the development pipelines today. So really if you could respond to both of those, that would be helpful? Thank you.

Jay Sugarman -- Chairman and Chief Executive Officer

Sure. I think, as you'll see in our public materials. We actually think we're revolutionizing the ground lease sector. So this is not an investment that's out there and just is got a lot of people executing it, we're the first and only public company doing it. We're doing most of the pioneering work in the brokerage community and with our customers. So I would say, we still believe we are inventing this business or reinventing the business. But we don't see a lot of similar types of ground leases being executed, and we have relatively little to no competition when we're doing this. When you think about the land component of projects, whether they'd be new developments or recapitalization. We think there is a slice of the capital structure that the land represents. Typically in our deals, it's somewhere in the third of the entire capital structure. The individual markets, I can't speak to, definitely price pressures. But what it all points to is, you need to be very, very efficient with your capital. You can't afford in a market where costs are rising and return expectations are still important to limited partners and capital providers, to not take advantage of a much more efficient way to build a capital structure. And that's what we're seeing across markets, whether it's a Nashville, or in New York, or San Diego. Our customers are looking to build the most efficient capital structure, generate the highest returns and minimize inefficiencies and maturity risk as much as possible. For some projects still won't pencil out, but what we're finding is, if they have a much better profile when they use all the efficiencies we can bring to them. And one of the things the SAFE/STAR program has done for us is, it allows to move very quickly to really provide these comprehensive capital solutions. So -- look we're still figure out exactly how to explain the benefits. But as you can hear, we started -- we're starting to see customers really gravitate to, it's more efficient, it's more cost effective, it's less friction, those are all good things in a market that people are competing for capital.

Paul Puryear -- Raymond James Investment Services -- Analyst

Okay, thank you. That's all for us.

Andrew C. Richardson -- Chief Financial Officer

Thanks.

Operator

Your next question comes from Jade Rahmani of KBW. Your line is open.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks very much and I apologize if you've already answered this, but can you give an update on the Park Hotels portfolio? And any discussions about potential extension of those leases?

Marcos Alvarado -- President and Chief Investment Officer

Hey. Jade. Yeah, look that portfolio continues to perform well. You see the percentage rent continues to increase nicely. Again, we think those are attractive assets, but we have not engaged in a substandard conversations with Park at this point.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Is there a timeframe in which...

Marcos Alvarado -- President and Chief Investment Officer

Yeah. We have about six years on its primary term and has 10 years of expansion. So 16 years fully extended at this point.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Is there a timeframe in which it would be reasonable to expect, discussions to HERA?

Marcos Alvarado -- President and Chief Investment Officer

We are delighted with their performance and certainly remain open and willing to have conversation, but to-date that just hasn't taken place.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

And in terms of the other assets in the portfolio that have extensions or maturities within, say over the next 16 years. Are there any other sort of near-term kind of low hanging fruit that could be means of establishing this the value bank that you talk about?

Marcos Alvarado -- President and Chief Investment Officer

There's nothing certainly on the magnitude of the Park Hotels portfolio, but again, I would stress to you that we think we can demonstrate the value without having actual execute a transaction. You'll see us as we continue to scale this portfolio, help folks understand why that value is concrete and tangible. We do have CBRE go out every -- annually and make sure that we have current marks on all the properties where we have a ground lease. And we think that demonstration of value is quite tangible and quite transparent and as the portfolio grows will become easier for people to see.

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks for taking the questions.

Jay Sugarman -- Chairman and Chief Executive Officer

Thanks, Jade.

Operator

(Operator Instructions) Your next question comes from Michael Nagin of Wells Fargo. Your line is open.

Michael Nagin -- Wells Fargo -- Analyst

Yeah. Hi, thanks. My question was on pipelines, it's been answered. Thank you.

Jay Sugarman -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

Mr. Fooks, we have no further questions.

Jason Fooks -- Senior Vice President of Investor Relations and Marketing

Okay, great. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Chris, would you give the conference call replay instructions once again. Thanks.

Operator

Yes, sir. In order to listen to a replay of this conference call beginning at 2:00 PM Eastern Time today. The dial-in for that replay is (800) 585-8367, with the confirmation code of 7664015. This concludes today's conference. You may now disconnect.

Duration: 30 minutes

Call participants:

Jason Fooks -- Senior Vice President of Investor Relations and Marketing

Jay Sugarman -- Chairman and Chief Executive Officer

Andrew C. Richardson -- Chief Financial Officer

Nikita Vyacheslav Bely -- JP Morgan -- Analyst

Marcos Alvarado -- President and Chief Investment Officer

John Massocca -- Ladenburg Thalmann -- Analyst

Paul Puryear -- Raymond James Investment Services -- Analyst

Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Michael Nagin -- Wells Fargo -- Analyst

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