Yahoo Finance Safehold Inc. (NYSE:SAFE) Q1 2024 Earnings Call Transcript
Safehold Inc. (NYSE:SAFE) Q1 2024 Earnings Call Transcript May 7, 2024
Safehold Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to Safehold’s First Quarter 2024 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 Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.
Pearse Hoffmann: Good morning, everyone. Thank you for joining us today for Safehold’s earnings call. On the call, we have Jay Sugarman, Chairman and Chief Executive Officer; Brett Asnas, Chief Financial Officer; and Tim Doherty, Chief Investment Officer. This morning, we plan to walk through a presentation that details our first quarter 2024 results. The presentation can be found on our website at safeholdinc.com by clicking on the Investors link. There will be a replay of this conference call beginning at 2:00 p.m. Eastern Time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 50475. In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A.
If you’d like to ask additional questions, you may re-enter the queue. 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 it over to Chairman and CEO, Jay Sugarman. Jay?
Jay Sugarman: Thanks, Pearse, and thank you to everyone joining us this morning. Safehold delivered solid earnings in the first quarter, highlighted by important progress on the right side of the balance sheet and continued efforts to run more efficiently and keep G&A under control. Deal activity in the first quarter was limited with higher interest rate headwinds slowing overall market activity though the pipeline has a good number of deals that should close in the second quarter. In terms of the overall market, CBRE continues to provide updated UCA value marks, reflecting higher cap rate assumptions and incorporating tougher office underwriting standards. The resulting lower building values are driving higher GLTV ratios, which makes sense given the current market environment.
Lastly, with respect to Caret, we received requests from the VC investors who participated in the first round to exercise the redemption option that was expiring this year. As a result, we decided to simply redeem the entire round and focused on future round investors. This will simplify our go forward structure while we work to position Caret for investment by the longer term family office type investors that participated in the second round and continue to express interest in Caret. And with that, let me turn it over to Brett to review the quarter in more detail. Brett?
Brett Asnas: Thank you, Jay, and good morning everyone. Let’s start with a summary of the quarter on Slide 2. First quarter was highlighted by strong capital markets executions and positive pipeline momentum. On the capital front during the quarter we issued $300 million of ten year unsecured notes at a 6.1% coupon. The net proceeds were used to repay outstanding revolver borrowings. In connection with the offering, we settled a portion of our outstanding hedges and realized cash gains of approximately $21 million. After applying those gains to the notes, the semi-annual yield to maturity decreased by more than 80 basis points to a 5.3% yield. We’ve been speaking about the value of our hedges for several quarters now and are pleased to highlight the realization of their value with this execution.
We currently have an additional $350 million of long term hedges outstanding at a significant current mark to market gain position of approximately $45 million, which are expected to provide a benefit to the true economic cost of future financings. After quarter end, we entered into a new $2 billion unsecured revolving credit facility, which replaces and upsizes our previous $1.85 billion aggregate facilities. Outstanding amounts under our previous facility were rolled over to the new facility. In addition to the immediate $150 million of incremental credit capacity, this facility resolves the company’s nearest term maturity with a fresh five year term, which includes two six month extension options, lowers the cost for drawn amounts to adjusted SOFR plus 85 basis points and improves overall financial flexibility for the company.
We were also able to add a commitment from a new banking relationship, which is a win in this environment. Overall, we are very thankful to all of our banking partners that see a significant opportunity for Safehold in both the near and long term. As a reminder, the facility benefits from in place hedges, including $500 million of SOFR swaps at a rate of approximately 3% for the next four years, which at current levels is saving the company approximately $3 million of cash interest per quarter. A particularly valuable swap, if higher for longer, is the new normal. Moving to the pipeline, we have seen customer engagement steadily pick up over the course of the year. That engagement is leading to tangible activity as we currently have eight LOIs signed for potential commitments of approximately $145 million.
These potential investments are all multi-family diversified across six markets and five sponsors, with credit metrics in line with portfolio targets, which are approximately 35% GLTV, approximately three times rent coverage and approximately 7.5% economic yield. We expect the majority to close in Q2, while others will occur over the remainder of the year. These are non-binding commitments with no assurances that they will close and are eligible for our joint venture, of which our partner owns 45%. We view this uptick as a positive signal that real estate operators are coming back to the table. At quarter end, the total portfolio was $6.5 billion, UCA was estimated at $9.1 billion; GLTV was 47% and rent coverage was 3.6 times. We ended the quarter with $1.1 billion of liquidity, which is further enhanced by the unused capacity in our joint venture.
Between liquidity and JV capacity, this is the most buying power Safehold has had since inception. And with no debt maturities until 2027, we’ll be focused on pursuing investment opportunities as current valuations and yields are attractive. Slide 3 provides a snapshot of our portfolio growth. In the first quarter we funded a total of $71 million, including $66 million of ground-lease fundings on pre-existing commitments that have a 6.7% economic yield and $5 million related to our 53% share of the Leasehold Loan Fund, which earned interest at a weighted average rate of SOFR plus 605 for the quarter. Our ground lease portfolio 137 assets and has grown 19 times since IPO, while the estimated unrealized capital appreciation sitting above our ground leases has grown 21 times.
Much of this growth has been driven by our focus on multifamily assets, which has increased from 8% of the portfolio at IPO seven years ago to now 55% of all ground leases by count. Post-COVID or over the last four years, as you can see in the chart, approximately 70% of new investments have been ground leases under multifamily assets. In total, the unrealized capital appreciation is comprised of approximately 35 million square feet institutional quality commercial real estate, consisting of approximately 18,100 multifamily units, 12.5 million square feet of office, over 5000 hotel keys and two million life science and other property types. Continuing on Slide 4, let me detail our quarterly earnings results. For the first quarter, revenue was $93.2 million; net income was $30.7 million; and earnings per share was $0.43.
The significant increase in GAAP earnings year-over-year is primarily due to $21.6 million of merger and Caret related costs that occurred in Q1 2023. There were no similar non recurring adjustments made in Q1 2024. On an apples-to-apples basis, excluding 2023’s non-recurring items, EPS was up $0.02 year-over-year, driven by an approximately $8.6 million increase in asset level revenues from new investments and rent growth, offset by approximately $7.8 million of additional interest expense. Same-store percentage rent was up approximately $850,000 versus last year, or a 23% increase, primarily due to strong performance at our Park Hotels assets, which is back to pre-COVID performance levels. As detailed in the past when we announced and closed the internalization, we believe G&A net of STHO management fees for the company would be approximately $50 million per year.
For 2023, we beat that expectation by approximately 10%. On the last earnings call, we said we hope to reduce net G&A by another 5% for 2024. For the first quarter of 2024, net G&A was approximately $10 million, which is approximately $40 million on an annualized basis, which means we are now revising our 5% reduction target upwards to a 10% reduction. We continue to find ways to reduce the cost structure of the company and look forward to continuing to update the market on these improvements that directly help the bottom line. On Slide 5, we detail our portfolio’s yields. As discussed in prior quarters, our portfolio yields differ between what we recognize for GAAP versus what we underwrite and assume to earn economically. To illustrate this point, we provided additional detail on the components that make up each yield.
For GAAP earnings, the portfolio currently earns a 3.6% cash yield and a 5.3% annualized yield. Annualized yield includes non-cash adjustments within rent, depreciation and amortization, primarily from accounting methodology on IPO assets, but this excludes all future contractual variable rent, such as fair market value resets, percentage rent or CPI-based escalators. Those variable rent features are significant value drivers and core to our investment thesis for each yield. As such, it is our view that GAAP annualized yield is not an accurate reflection of the true earnings power of the business. We believe the simplest and most accurate way to estimate the economics for these leases is to utilize basic bond or IRR math. Using this approach, our portfolio generates an expected 5.7% economic yield, which is in line with how we’ve conservatively underwritten these investments.
This economic yield has further upside when you include the periodic CPI look backs we have in leases, as well as the future ownership rights to the buildings and improvements above our land at no cost. Under the Federal Reserve’s current long-term breakeven rate of 2.35%, the 5.7% economic yield increases to a 5.9% inflation adjusted yield. The 5.9% inflation adjusted yield then increases to 7.5% after layering in an estimate for unrealized capital appreciation using Safehold’s 84% ownership interest in Caret at its most recent $2 billion valuation. We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today. Turning to Slide 6, we highlight the diversification of our portfolio by location and underlying property type.
Our top 10 markets by gross book value are called out on the right, representing approximately 70% of the portfolio. We include key metrics such as rent coverage and GLTV for each of these markets, and we have additional detail at the bottom of the page by region and property type. Office GLTVs increased modestly during the quarter. Notably, we’ve had approximately 80% of our office assets reappraised over the last two quarters. As a reminder, we have CBRE appraised the combined property value of our assets annually to help us highlight for the market, our mark-to-market attachment point and estimated unrealized capital appreciation in the assets across the portfolio. This approach is in contrast to other real estate finance companies that quote LTVs origination, despite any market shifts or knowing how much credit enhancement exists today.
Rent coverage on the portfolio remains stable quarter-over-quarter at 3.6x, underscoring strong operations at the property level, despite valuation headwinds. We continue to believe that investing in well located institutional quality ground leases in the top 30 markets that have attractive risk adjusted returns will benefit the company and its stakeholders over long periods of time. Lastly, on Slide 7, we provide an overview on our capital structure. At the end of the first quarter, we had approximately $4.5 billion of debt comprised of $1.8 billion of unsecured notes, $1.5 billion of non-recourse secured debt, $911 million drawn on our unsecured revolver and $272 million of our pro rata share of debt on ground leases, which we own in joint ventures.
Our weighted average debt maturity is approximately 21 years and we have no maturities due until 2027. Pro forma, the $150 million of incremental credit capacity from our new revolver closed after quarter-end. We have approximately $1.1 billion of cash and credit facility availability. Our credit ratings are A3 with stable outlook at Moody’s and BBB+ with positive outlook at Fitch. As discussed, we seek to appropriately manage interest rate risk on floating rate debt and have put hedges in place to do so. Of the approximately $911 million revolver balance outstanding, $500 million is swapped to fixed SOFR at 3%. This is a five-year swap that we have protection on through April 2028. We receive swap payments on a current cash basis each month, and at today’s rates, produces cash interest savings of approximately $3 million per quarter that is currently flowing through the P&L.
We also have $350 million of long-term treasury locks at a weighted average rate of approximately 3.7%. Today, our long-term hedges are approximately $45 million in the money. The outstanding hedges are mark-to-market so no cash changes hands each month. And while we do recognize these gains on our balance sheet and other comprehensive income, they are not yet recognized in the P&L. While hedges can be utilized through the end of their designated term, they can be unwound for cash at any point prior. As we look to term out revolver borrowings of long-term debt, we have the ability to unwind the hedges, which would then flow through the P&L thereafter. We are levered 1.9 times on a total debt to book equity basis. The effective interest rate on permanent debt is 4.0%, and the portfolio’s cash interest rate on permanent debt is 3.6%.
So to conclude, while the recovery in transaction volume has taken longer than we have liked, there are tangible signs of activity surfacing, both in our business and in real estate generally. We position the company with ample liquidity, no near-term maturities and hedges that are in the money, and look forward to thoughtfully putting our capital to work. And with that, let me turn it back to Jay.
Jay Sugarman: Thanks, Brett. While we still expect rates to stabilize and eventually start declining, we need to be prepared to wait out higher rates. We’ll use our strong balance sheet to take advantage of the very attractive risk return on deals that are in position to close and continue to engage with customers who will be ready to execute when rates ease back to lower levels. Okay. Operator, let’s open it up for questions.
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