Rating Action: Moody's affirms Safehold's Baa1 rating and revises its outlook to positiveGlobal Credit Research - 11 Aug 2022 New York, August 11, 2022 -- Moody's Investors Service ("Moody's") has affirmed Safehold Inc.'s (Safehold) Baa1 issuer rating and Safehold Operating Partnership LP's Baa1 issuer and backed long-term senior unsecured ratings. Moody's has also revised the rating outlooks for both entities to positive from stable. This follows the announcement by Safehold and iStar Inc. (iStar, Ba2, review for upgrade) that they have entered into an agreement to combine in a tax-free transaction with the combined entity having a strategic focus on the ground lease industry. Affirmations: ..Issuer: Safehold Inc. .... Issuer Rating, Affirmed Baa1..Issuer: Safehold Operating Partnership LP.... Issuer Rating, Affirmed Baa1....Backed Senior Unsecured Regular Bond/Debenture , Affirmed Baa1Outlook Actions:..Issuer: Safehold Inc.....Outlook, Changed To Positive From Stable..Issuer: Safehold Operating Partnership LP....Outlook, Changed To Positive From StableRATINGS RATIONALE Moody's affirmed Safehold's ratings and revised its outlook to positive based on the prospect of reduced corporate governance risks associated with its relationship with iStar, with such risks receding upon the combination of the two companies. The rating action also reflects Safehold's prospects for solid financial performance, partially offset by modestly negative effects on its asset quality as it assumes certain ground lease ecosystem investments (representing less than 2% of Safehold's total assets) that have a higher risk profile than Safehold's ground lease investments. Governance risks will decline upon consummation of the combination, including with respect to uncertainties concerning the nature, extent and magnitude of related party transactions and capital distributions between Safehold and iStar, and these risks historically have been a key constraint on Safehold's credit profile, in Moody's view. Under the terms of the transaction, Safehold will internalize iStar's management team and intellectual property, replacing Safehold's external management structure. Ownership of the combined company will remain largely proportionate to the ownership of Safehold immediately prior to consummating the transaction. Subsequent to the transaction, iStar shareholders will own 37% directly and 14% indirectly of the combined entity, while Safehold shareholders will own approximately 34%. Currently, iStar has an approximately 64.7% ownership interest in Safehold and an approximately 41.9% controlling interest through voting rights. In connection with the transaction, iStar will redeem its $1.8 billion senior unsecured notes (as at 30 June 2022) and preferred equity using cash on hand and proceeds from asset sales and loan collections. Safehold will assume iStar's $100 million trust preferred securities. Prior to the transaction, iStar will spin-off to its shareholders a new publicly traded company (SpinCo) that will be comprised of approximately $350 million of iStar's legacy non-ground lease assets and approximately $400 million of iStar's Safehold shares. The combined entity will manage SpinCo for a fee, with the intention of liquidating SpinCo's assets through sale or collection over time, and will also provide to SpinCo a $100 million four year 8% secured loan, with a low loan-to-value ratio. SpinCo will also obtain up to $140 million of bank financing secured by the $400 million of Safehold shares. The combination transaction is expected to close in late fourth quarter 2022 or first quarter 2023, subject to the approval of iStar and Safehold shareholders and completion of the spin-off. Assets not conveyed to Safehold and expected to be part of SpinCo consist of Asbury Park, a 35-acre oceanfront property in the Asbury Park, NJ waterfront redevelopment area with 70% undeveloped land, and Magnolia Green, a 3,500 unit multigenerational master planned community outside of Richmond, Virginia. These properties are currently still under development. Historically, iStar has collected land development revenues from these projects contributing to modest earnings. Development work remains a work-in-process and thus subject to higher risk, but Moody's believes that the values and income generating prospects are sufficient to mitigate collateral risks to Safehold as lender to iStar, given the overall low loan-to-value. Moody's expects that the combination will have a marginally negative impact on Safehold's asset quality. Included in the iStar assets that will be combined into Safehold is iStar's 53% interest in the Ground Lease Plus and Leasehold Loan funds, which Moody's believes are higher risk than Safehold's ground lease investments. However, the fund interests will represent less than 2% of the combined entity's pro forma assets. Furthermore, Safehold plans to sell down its interest to a smaller amount during the six-to-twelve months period following the close of the combination transaction. Moody's expects that Safehold's debt-to-equity leverage will increase only temporarily to around 2.0x by the end of 2022 through the early part of 2023 and will subsequently decline to approximately 1.75x in the second half of 2023. Safehold's target debt-to-equity leverage is 2.0x, which informs Moody's assessment of the company's capital strength. Additionally, Moody's expects that Safehold's profitability will moderately decline below the 2.1% net income/average assets level (annualized) achieved in the first quarter of 2022 and will potentially be more variable going forward, as the company's costs will reflect the internalization of corporate infrastructure expenses. Safehold's ratings continue to reflect the company's conservative leverage and strong asset quality, which is supported by the favorable credit and structural characteristics of its ground lease investments, including their senior priority relative to other capital components of the improved properties, strong asset coverage and the long terms of the lease contracts. Safehold's credit strengths are tempered by the company's limited operating history as a standalone entity and relatively high geographic and property concentrations, although Moody's expects that portfolio diversity and granularity will continue to improve as the company grows. Safehold's top-ten property concentrations declined to 39% at 30 June 2022 from 60% at 31 December 2020 of the total portfolio. Safehold's effective liquidity management is supported primarily by the availability under its $1.35 billion revolving credit facility as well as it growing balance of unencumbered assets and its extended debt maturity profile. Moody's said that there remains a key-person risk at Safehold associated with its reliance on Jay Sugarman, Chairman and Chief Executive Officer of Safehold and iStar, for operational management and customer relationships. Moody's believes, however, that the company has been able to develop a strong management team in recent years. Moody's affirmation of Safehold's ratings considers the company's governance as part of Moody's environmental, social and governance (ESG) considerations, and governance considerations were a key driver of Moody's rating action. Moody's expects that combination of Safehold and iStar will result in revisions to the combined entities' board of directors and governance structure. Furthermore, Moody's view is that the transaction will substantially reduce certain governance risks, such as conflict of interest and related party transactions, that relate to iStar's significant ownership and control of Safehold. Safehold Operating Partnership LP's Baa1 issuer rating is at the same level as its parent Safehold's Baa1 issuer rating because Moody's expects that, were Safehold to issue senior unsecured debt, the debt would be backed by subsidiary guarantees that effectively eliminate Safehold's structural subordination to its rated subsidiary. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Safehold's ratings could be upgraded if: (1) the combination with iStar closes and Safehold management and board of directors demonstrates a strong commitment to solid governance practices, (2) Safehold continues to pursue its ground lease investing strategy without venturing into riskier activities, (3) the company strengthens geographic and property diversification, (4) Safehold accumulates a further track record of profitable growth, maintains its competitive advantage and avoids materially increasing debt-to-tangible common equity leverage, (5) the company maintains strong liquidity, and (6) the market for ground leases continues to develop, underscoring Safehold's opportunities to reach larger scale and stronger financial performance. Safehold's ratings could be downgraded if: (1) the combination does not occur and the current governance-related risks associated with Safehold's relationship with iStar remain, with the consequent related possibility of a deterioration in Safehold's financial condition or future business prospects, (2) Safehold's profitability declines, for example due to loss of market share or unexpected operating losses, (3) ground lease contract structures materially weaken, (4) asset quality deteriorates, (5) the company engages in acquisitions, shareholder distributions or other actions that would result in a sustained debt-to-equity leverage higher than 2.0x or (6) liquidity deteriorates. The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology. Founded in 2017, Safehold acquires and manages ground leases in the major urban areas in the US with the largest concentration in the Northeast (40% of gross book value at 30 June 2022) and West (25%). Structured as an umbrella partnership real estate investment trust (UPREIT), Safehold managed approximately $5.5 billion in assets at 30 June 2022. Safehold is externally managed by iStar, a real estate investment trust (REIT) which finances, invests in and develops real estate projects. REGULATORY DISCLOSURES For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions. 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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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://ratings.moodys.com/documents/PBC_1288235.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 https://ratings.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 https://ratings.moodys.com. REFERENCES/CITATIONS Announcement by Safehold Inc.: (https://ir.safeholdinc.com/news-releases/news-release-details/safehold-and-istar-announce-business-combination) 11-Aug-2022Please see https://ratings.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 issuer/deal page on https://ratings.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. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Donald Robertson Associate Managing Director Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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