Safehold : Transcript

Event ID:	138427059206
Event Name:	Q2 2021 Safehold Inc Earnings Call
Event Date:	2021-07-22T14:00:00 UTC

P: Operator;;

C: Jason Fooks;Safehold Inc.;SVP of IR

1. Jay S. Sugarman;Safehold Inc.;CEO & Chairman

1. Marcos Alvarado;Safehold Inc.;President & CIO

1. Anthony Paolone;JPMorgan Chase & Co, Research Division;Senior Analyst

1. Caitlin Burrows;Goldman Sachs Group, Inc., Research Division;Research Analyst

1. Derek Russell Hewett;BofA Securities, Research Division;VP

1. Haendel Emmanuel St. Juste;Mizuho Securities USA LLC, Research Division;MD of Americas Research & Senior Equity Research Analyst

1. Keegan Grant Carl;Joh. Berenberg, Gossler & Co. KG, Research Division;Research Analyst

1. Ki Bin Kim;Truist Securities, Inc., Research Division;MD

1. Matthew Philip Howlett; B. Riley Securities, Inc., Research Division;Senior Analyst

1. Richard Charles Anderson;SMBC Nikko Securities America, Inc., Research Division;Research Analyst

1. Stephen Albert Laws;Raymond James & Associates, Inc., Research Division;Research Analyst

+++ presentation

Operator^ Good morning, and welcome to Safehold's Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

At this time, for opening remarks and introduction, 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^ Good morning, everyone, and thank you for joining us today for Safehold's earnings call. On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer; and Marcos Alvarado, President and Chief Investment Officer.

This morning, we plan to walk through a presentation that details our second quarter results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investors link. There will be a replay of this conference call beginning at 1:00 p.m. Eastern Time today, and the dial-in for the replay is [phone], with the conformation code of 7260006.

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 expressly required by law.

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

Jay S. Sugarman^ Thanks, Jason, and thank you all for joining us today. The second quarter saw a nice ramp-up in investing activity with both transactions closed and future deals in the pipeline growing strongly from the first quarter. We continue to gain traction by providing long- term, well-priced and well-structured modern ground leases that unlock significant value for our customers.

This quarter, we also expanded our ability to source high-quality ground leases in major markets through our Ground Lease Plus program. Working together with iStar, we can create ground leases early in the development process, where iStar funds the pre-development ground lease and Safehold commits to acquire the ground lease at a predetermined price once the development meets certain "shovel-ready"criteria.

During the quarter, iStar closed on a pair of Safehold-approved ground leases covering a full city block in Downtown Austin, Texas, which Safehold committed to acquire once construction is ready to begin. We also secured an option on a major site in the Seattle MSA that will be triggered once construction begins on an anticipated 1 million square foot development. Together, these 2 opportunities could generate between $300 million and $500 million of irreplaceable ground leases in 2 of the top technology markets in the country.

Along with our progress on the customer front, we also began to highlight for investors the significant value building up in Safehold's Uunrealized Ccapital Aappreciation account and provided a simple valuation formula for investors to understand the potential value of this asset as we continue to grow. We've been quietly tracking this asset's value for shareholders since we went public, but now believe we have demonstrated both the track record and the scale to be a bit more vocal about the embedded value that is being captured for shareholders.

As you saw in our earnings package, our Uunrealized Ccapital

Aappreciation asset grew by some $374 million in the quarter, increasing to approximately $6 billion. By consistently growing our Ground Lease portfolio, and diversifying across top markets and major assets in the U.S., we believe this $6 billion asset will come into sharper focus in investors' minds and begin to be reflected in the value of our share price.

Okay. With that, let's have Marcos walk through the details of the quarter. Marcos?

Marcos Alvarado^ Thank you,Jay, and good morning,everyone. Turning to Slide 3. We are pleased with the performance of our portfolio during the quarter, as we continue to make steady progress scaling our business.

Highlights for the period include solid earnings results, increasing investment activity, UCA growth, and as Jay mentioned, we introduced a new origination channel to serve our customers across the life cycle of an asset that I'll discuss in more depth shortly.

We utilized our recently awarded investment-grade ratings to access the unsecured debt markets, which left us with a significant amount of dry powder at quarter end to take advantage of the expanding ground lease opportunity. This inaugural offering is our first step towards educating the unsecured market about SAFE with the goal of innovating with our liability providers and driving down our cost of capital.

Moving to Slide 4. Let me walk you through this quarter's earnings results. Revenues were $44.2 million for the second quarter, an 18% increase from the $37.4 million in the same period last year. Net income was $14.7 million, an 18% increase from the $12.5 million we earned in the prior year period. And earnings per share was $0.28, 13% above the $0.24 we earned last year. Additionally, during the quarter, the Board of Directors approved a 4.8% increase in our dividend to an annualized rate of $0.68 per share.

Slide 5 provides an overview of our investment activity. During the quarter, we closed 6 new ground leases, 5 multifamily and 1 office asset across 6 markets totaling $222 million. Of note, this quarter, we expanded into a new market in Jacksonville, Florida. The investment metrics associated with these deals are in line with our targets, with a weighted average effective yield of 4.9%, ground lease to value of 39% and a rent coverage of 3.5x.

In addition, we completed our first transactions under our Ground Lease Plus product this quarter. We came to realize that our customers have a need for our efficient capital in the form of a properly-sizedproperlysized, properly -structured ground lease to capitalize the acquisition of land for development. Partnering with iStar, SAFE developed the product to meet this market need. Ground Lease Plus is an innovative origination channel that expands the use of ground leases to predevelopment assets that don't yet meet Safehold's "shovel-ready"criteria.

During the second quarter, iStar closed on the first Ground Lease Plus transactions with a new client and 2 adjacent tracks in Downtown Austin, Texas, which have been zoned for mixed-use development. In these transactions, iStar used its balance sheet to originate the ground leases. Concurrently, Safehold committed to iStar to purchase the ground leases once the developer has assembled its capital stack and is prepared to go vertical and build the assets.

The Ground Lease Plus product allowed our customer to unlock value in high-quality core CBD land by locking in low-cost99-year ground lease capital. At SAFE, we were able to obtain the right to acquire ground leases that meet our economic targets, metrics and risk profile. By innovating a ground lease product to meet our customers' needs earlier in an asset's life cycle, we continue to prove the principle that as we create value for our customers, we create value for Safehold as well.

In addition to our transactions in Austin, our Ground Lease Plus product unlocked an opportunity for Safehold to create a future ground lease in the Seattle MSA in one of the most attractive office markets in the country. Safehold acquired an option to purchase the ground lease when the development is shovel-ready and meets our criteria. This opportunity,

combined with the 2 Austin developments, could allow SAFE to invest up to $488 million in what we consider to be trophy-quality ground leases.

Slide 6 provides an overview of our portfolio expansion. At the end of the quarter, our aggregate portfolio stood at $3.6 billion, representing 11x growth since our IPO 4 years ago. This amount does not include the Ground Lease Plus transactions we just discussed. More portfolio metrics can be seen on Slide 7.

As of June 30, our in-place portfolio generated an annualized yield of 5.4%. The portfolio's annualized cash yield was 3.4%, with annualized in- place cash rent of $118 million. Our portfolio's weighted average ground lease to value was 40% and weighted average rent coverage was 3.3x. By property mix, our portfolio consists of 45 --54% office, 28% multifamily and 17% hotel. Our weighted average lease term is 89 years.

On the next slide, you can see the geographic breakdown of our portfolio, as we continue to diversify across the U.S. and focus on the top 30 markets.

Slide 9 provides an update on our capital structure. During the quarter, we successfully closed on our debut unsecured debt offering, issuing $400 million of 2.8% senior notes, which are due in 2031. At the end of the quarter, we had $2.2 billion of debt comprised of approximately $1.5 billion of non-recourse secured debt, $400 million of unsecured notes and $272 million of our pro-rata share of debt on ground leases, which we owe in partnership.

Our weighted average maturity is 26 years, which is down from the prior period, primarily due to the 10-year unsecured notes we issued this quarter. In addition, we had $35 million drawn on our $1 billion unsecured revolver. Combined with the $34 million of cash on hand, we have approximately $1 billion of liquidity. We are levered 1.6x on a book basis and 0.5x levered on a debt-to-equity market cap basis.

The effective interest rate on our non-revolver debt is 3.7%, a 163 basis163-basispoint spread to the 5.4% yield on our portfolio. The weighted average cash interest rate on our non-revolver debt is 3.1%, a positive spread to the 3.4% current cash yield on our portfolio.

Moving on to Slide 10, we provide an update on UCA. With the addition of the 6 new properties we closed this period, that are highlighted on the right side of the page, unrealized capital appreciation in our portfolio grew $374 million to $6 billion, representing an annualized growth rate of 27%. As Jay alluded to, we have been spending more time highlighting this unique and valuable asset with the market and are encouraged with the initial feedback we've had from investors.

In conclusion, we continue to make steady progress as our pipeline expands and remain optimistic about reaching our growth target of $6.4 billion by the end of 2023. During the second quarter, we executed an important initial bond offering and launched new innovations, which should allow us to better serve our customers and drive down our cost of

capital as we continue to scale our business and modernize the ground lease industry.

With that, let me turn it back to Jay.

Jay S. Sugarman^ Great. Thanks, Marcos. SoSo,it feels like we're on track to finish the year strongly, as we continue to find ways to provide our customers better and more efficient capital. And if we can continue executing on the customer side, the benefits to Safehold should also be very strong, as higher growth and higher unrealized capital appreciation deliver a one-two punch of earnings and value creation for our shareholders.

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

+++ q-and-a

Operator^ (Operator Instructions) Our first question comes from Nate Crossett with Berenberg.

Keegan Grant Carl^ It's Keegan on for Nate. I think to kick things off, can you give us a little bit more detail on the origination volume in the quarter? Outside of Jacksonville, where were the other properties purchased? And can you give us a little bit more detail specifically on the multifamily assets?

Jay S. Sugarman^ Marcos, why don't you give a little more detail?

Marcos Alvarado^ So we closed brand-new multifamily asset in Denver, Jacksonville, as we mentioned; a 2018 vintage deal in Portland; a brand- new multifamily in South Florida in the Fort Lauderdale area; and another multifamily asset in Atlanta, Georgia, and an office asset in New York City.

Keegan Grant Carl^ Great. And I know you guys don't give any formal origination guidance. But can you remind us on the target over the next year or so? And do you think you're still comfortable saying you can double the portfolio in the next 3 years?

Marcos Alvarado^ Yes. As we've said in prior quarters, given the lumpiness of our business, we don't provide quarterly or annual guidance. I think we remain extremely optimistic that we'll hit our target of $6.4 billion by the end of 2023.

Keegan Grant Carl^ Okay. And just one final one. Can you guys speak to the current pipeline right now? I mean do you guys have anything else under LOI? Kind of what are the expectations for the remainder of the year?

Marcos Alvarado^ We don't disclose the amount of transactions under letter of intent. I will tell you that we are busier than we've ever been. We're seeing this kind of thought that we've talked about really start to happen, the awareness of our product, our cost of capital, customer satisfaction, network effect. So as Jay alluded to, I think the