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Safehold Operating Partnership LP -- Moody's affirms Safehold's Baa1 senior unsecured rating; outlook remains stable

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Rating Action: Moody's affirms Safehold's Baa1 senior unsecured rating; outlook remains stableGlobal Credit Research - 22 Feb 2022New York, February 22, 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. Both companies outlooks' remain stable.The rating action follows Safehold's close affiliate and external manager iStar Inc.'s (iStar, Ba3, ratings on review for upgrade) announcement that it has entered into an agreement to sell its net lease asset portfolio for $3.07 billion. Moody's placed iStar's ratings on review for upgrade following the announcement. iStar expects the transaction to close in the first quarter of 2022. Affirmations: ..Issuer: Safehold Inc. .... Issuer Rating, Affirmed Baa1..Issuer: Safehold Operating Partnership LP.... Issuer Rating, Affirmed Baa1.... Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1 Outlook Actions: ..Issuer: Safehold Inc. ....Outlook, Remains Stable ..Issuer: Safehold Operating Partnership LP....Outlook, Remains StableRATINGS RATIONALEMoody's said that because of the close affiliation between Safehold and iStar, changes in iStar's activities, capital structure and creditworthiness have a bearing on Moody's assessment of Safehold's creditworthiness, and this consideration is becoming more pronounced because Safehold is becoming an increasingly significant component of iStar's investments.Moody's affirmed Safehold's ratings because it assesses that in the near- to medium-term Safehold will perform in line with its expectations, with potential for changes with respect to its future relationship with iStar, and iStar's future business activities. Part of this uncertainty relates to the use of net cash proceeds from iStar's sale of its net lease assets and the reduced predictability of cashflows that iStar's remaining business will generate, which may increase reliance on Safehold for business needs and liquidity, including capital distributions. Nonetheless, Moody's believes, that iStar, being the largest shareholder (64.6% share ownership and 41.9% voting rights) of Safehold, is also motivated to act in the best interest of Safehold, and both entities are publicly listed with related fiduciary responsibilities to their respective shareholders.Additionally, Safehold relies solely on iStar's employees who have substantial expertise in real estate investments and lending and access to a deal pipeline from which Safehold is able to benefit. The Chairman and The Chief Executive Officer of Safehold, Jay Sugarman, who also has the same roles at iStar, is instrumental to the company's success given his operating experience and customer relationships. Safehold and iStar have separate Boards of Directors (BoD) and Safehold's BoD consists of 6 individuals, four of whom are independent. Any transaction in which iStar and Safehold both participate must be approved by the independent directors. Such transactions, where iStar is either a lender or an equity investor, comprise less than 6% of Safehold's assets currently, but are likely to grow in volume and importance over time.Following iStar's disposition transaction and its repayment of all associated mortgage debt and intended full repayment of its secured term loan, Moody's expects that iStar will have almost $1.5 billion in cash relative to $2.1 billion of unsecured debt and $0.3 billion of preferred stock, with moderate near-term capital needs, and an improved unencumbered asset ratio.Moody's said there remains an element of governance and event risk in the close inter-relationships between Safehold and iStar, including key person risk associate with their common Chairman & Chief Executive Officer, who is the companies' strategic visionary and key franchise-builder.Safehold's ratings continue to reflect its substantial equity cushion (38% tangible common equity to tangible managed assets as of 31 December 2021) and strong asset quality supported by the favorable credit and structural characteristics of the ground leases, 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 invests primarily in the top 30 US Metropolitan Statistical Areas 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 Safehold's limited operating history as a standalone entity and current high geographic and property concentrations, although Moody's expects that portfolio diversity and granularity will improve as the company grows. The number of distinct ground leases in Safehold's portfolio has increased to 106 at 31 December 2021 from 74 one year prior.Despite its substantial exposure to office and hotel properties (65% of book value at 31 December 2021), Safehold has received all of the payments owed from its customers and has not experienced any delinquencies associated with the COVID-19 pandemic. Moody's believes that Safehold's debt-to-equity leverage will moderately increase (from 1.6x at 31 December 2021) in the next 12 to 18 months as the company grows its asset base, and that leverage could be vulnerable to swings if property-related event risks materialize, given the portfolio concentrations. Additional credit challenges include the relatively nascent nature of the modernized ground lease market in the US and the company's limited debt service coverage of approximately 1.9x EBITDA/interest for 2021.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, should Safehold issue senior unsecured debt, it would be backed by subsidiary guarantees that effectively eliminate Safehold's structural subordination to its rated subsidiary.Safehold's stable outlook reflects Moody's expectation that Safehold will remain profitable, generating net income-to-assets of approximately 2% on a consistent basis, and that the company will continue to benefit from opportunities in the current real estate market and will only moderately increase its leverage. The stable outlook also incorporates Moody's assessment that there will be no significantly adverse governance-related developments in Safehold's relationship with iStar.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if: (1) there is a sustained reduction in governance-related risks associated with Safehold's relationship with iStar that does not adversely affect Safehold's business activities and prospects, (2) there continues to be improvements in geographic and property diversification, (3) there is a demonstrated long-term track record of profitable growth and competitive advantage without materially increasing debt-to-tangible common equity leverage; and, (4) there is maintenance of strong liquidity and risk-adjusted profitability.The ratings could be downgraded if: (1) governance-related risks associated with Safehold's relationship with iStar materialize that could result in a deterioration in Safehold's financial condition or future business prospects, (2) profitability declines, for example, due to loss of market share or unexpected losses, (3) ground lease contract structuring weakens, (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 1.75x or (6) a deterioration in liquidity.Founded in 2017, Safehold develops, acquires and manages ground leases in the major urban areas in the US with the largest concentration in the Northeast (37%) and West (24%). Structured as an umbrella partnership real estate investment trust (UPREIT), Safehold managed approximately $4.5 billion in assets at 31 December 2021. Safehold is externally managed by iStar, a real estate investment trust (REIT) which finances, invests in and develops real estate projects.The principal methodology used in these ratings 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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=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 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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