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Safehold Inc (SAFE) Q2 2021 Earnings Call Transcript

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Safehold Inc (NYSE:SAFE)
Q2 2021 Earnings Call
Jul 22, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 FooksSenior Vice President Investor Relations and Marketing

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 (866) 207-1041, 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 SugarmanChairman and Chief Executive Officer

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 predevelopment 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 one million square foot development. Together, these two opportunities could generate between $300 million and $500 million of irreplaceable ground leases in two 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 unrealized capital appreciation 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 unrealized capital appreciation 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 AlvaradoPresident and Chief Investment Officer

Thank you, Jay, and good morning, everyone. Turning to slide three. 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 toward 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 four. 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 five provides an overview of our investment activity.

During the quarter, we closed six new ground leases, five multifamily and one office asset across six 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 3.5 times. 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 sized, 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 two 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-cost 99-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 two Austin developments, could allow SAFE to invest up to $488 million in what we consider to be trophy-quality ground leases.

Slide six provides an overview of our portfolio expansion. At the end of the quarter, our aggregate portfolio stood at $3.6 billion, representing 11 times growth since our IPO four years ago. This amount does not include the Ground Lease Plus transactions we just discussed. More portfolio metrics can be seen on slide seven. As of June 30, our in-place…

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