Safehold Inc. Q1 FY2022 Earnings Call

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; Marcos Alvarado, President and Chief Investment Officer; and Brett Asnas, our Chief Financial Officer. This morning, we plan to walk through a presentation that details our first 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 2:30 p.m. Eastern time today and the dial-in for the replay is (866) 207-1041, with the confirmation code of 9277384. 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?

Thanks, Jason, and welcome to everyone joining us today. The first quarter of 2022 was a strong one for our modern ground lease business; more customers, more cities, and more property types are benefiting from the more efficient capital that Safehold ground lease can provide. Earnings grew substantially. Deal flow was very strong. We crossed the $5 billion mark in terms of portfolio size, and we made important progress in accessing 30-year unsecured debt for the first time and closing our first round of Caret investors. Despite all this positive, net share price has obviously underperformed as rates have risen, and we want to spend some more time on this call giving a clear picture of what inflation means for our business and why we continue to think our business is worth quite a bit more than what we see on the screen. One of the most important ideas embedded in Safehold's business plan is that compounding creates wealth. The higher the rate of compounding, the better. By creating a growing diversified portfolio of high-quality ground leases, we believe we can harness that equation for investors in a unique way, both in the rental income component and in the capital appreciation component of the portfolio. Let's take a look at the rental income component. Given the principal safety and high-grade credit metrics of ground leases, the concerns expressed to us are rarely about credit risk, but generally centered on interest rate and duration risk. Of course, rising rates take a heavy toll on fixed coupon bonds, particularly long-term fixed coupon bonds. But our ground leases are different than most fixed coupon bonds. In addition to base rents, our typical ground lease includes fixed rent bumps of approximately 2% per year on average over their life. Further, almost all Safehold ground leases include some form of inflation protection with the majority of our ground lease structures including a periodic upward rent adjustment in the form of CPI lookbacks when inflation stays above 2% for extended periods of time. So it's important to calculate inflation-adjusted yields for Safehold's portfolio when inflation kicks up, given ground lease economics are in some respects, more like TIPS securities than straight fixed income investments. Our models show these potential inflation-linked increases to our rents, mitigate interest rate and duration risk and in certain cases, can actually increase the net present value multiple on the equity in our existing portfolio after taking into account in-place leverage. Potential inflation-linked increases also create solid value multiples in new deals and make them substantially more attractive than most fixed coupon investments. Similarly, on the capital appreciation side, compounding at higher rates is better than compounding at lower rates. Increases in replacement costs have generally led to long-term increases in value for well-located real estate in major cities. And as a result, higher inflation has generally led to higher replacement costs and higher values. We've seen this dynamic in our research on many of the assets in our existing portfolio. So Caret, which is intended to capture the growing value of a portfolio of high-quality institutional real estate, should directly benefit from higher replacement costs over the ground lease term. Of course, short-term dynamics don't always follow the long-term arc, but we are comfortable that our business is well positioned to benefit in both high and low inflation markets and that each ground lease we execute is value additive for shareholders even as rates have risen. We can talk more about these dynamics, but let's go ahead and have Marcos and Brett dig into the details of the quarter first. Marcos?

Thank you, Jay, and good morning, everyone. Let's start on Slide 3. As Jay mentioned, we are pleased with the performance during the first quarter, characterized by solid earnings results and strong investment activity. Fresh debt and equity raised during the quarter provide us with a significant amount of dry powder to fund our growing pipeline. And I'll let Brett go over the earnings results shortly. First, let me provide an overview of our investment activity on Slide 4. During the quarter, we originated 10 new ground leases totaling $677 million, marking our best first quarter ever. For these new originations, we funded $519 million during the quarter with the remaining $158 million expected to be funded in the near term. In addition, we funded $13 million associated with prior ground lease commitments. Separately, we also made a new $38 million Ground Lease Plus commitment on a multifamily asset in Brooklyn, New York, our fifth Ground Lease Plus transaction since we introduced the program in the second quarter of last year. The 10 new originations during the first quarter span 9 different markets and 7 new customers. The investment metrics associated with these deals are in line with our targets with a ground lease to value of 38% and rent coverage of 3.9x. Under GAAP, these assets generate a weighted average yield of 4.8%. However, the weighted average inflation-adjusted yield is 5.1%. As Jay mentioned, we believe that our inflation lookbacks capture significant value for our business and are not understood by the market today. Brett will discuss this topic in more depth shortly. As we look back at Q1, the pricing for the transactions closed does not reflect the recent upward momentum in rates. The Q1 transactions were liability matched with the execution of our recent debt offering. As the rate environment has shifted, we have moved our pricing upwards, targeting floor cash yields approximately 50 to 60 basis points higher and on an inflation-adjusted basis return on assets that are 80 basis points higher based on current long-term inflation expectations. Taking into account our increased cost of capital, we believe that these adjusted ROAs, we are still creating significant value for our shareholders. And despite the increased cost of our product, our clients have reacted positively, and we continue to add to the pipeline. Slide 5 provides an overview of our portfolio growth for the quarter. Originations during the first quarter have driven our aggregate portfolio to approximately $5.5 billion at the end of the quarter representing 16x growth since our IPO nearly 5 years ago. The 10 institutional quality ground leases originated during the period include 5 multifamily, 3 office, 1 hotel, and 1 life science asset. We remain focused on targeting our investments in the current country's top MSAs, and we're pleased to enter 3 new markets during the quarter, which include Boston, Baltimore, and Sacramento. With that, let me turn it over to Brett to go through the financials. Brett?

Thank you, Marcos, and good morning, everyone. I’d like to discuss our financial performance. Revenues for the first quarter reached $60.4 million, representing a 39% increase from $43.5 million during the same period last year. Our net income was $24.9 million, up 47% from $16.9 million in the prior year, and earnings per share were $0.43, which is 35% higher than last year's $0.32. This year-over-year performance primarily reflects revenue growth linked to new originations, although it was partially offset by $2.5 million in additional general and administrative expenses, which included management fees related to equity raises over the past year and a $1.25 million rise in reimbursable expenses charged by our managers. As of March 31, our portfolio's weighted average ground lease to value was 40%, and our weighted average rent coverage was 3.7x, which is an improvement as TTM hotel revenue at the properties is recovering. Our portfolio is composed of 48% office properties, 34% multifamily, 14% hotel, and 4% life science, with a weighted average lease term of 92 years. In terms of our portfolio's yield and positioning in an inflationary environment, the market evaluates our cash flows against long-duration high-grade bonds. However, our portfolio includes a significant embedded contractual income pickup that fixed-rate bonds do not have. Currently, our portfolio generates a cash yield of 3.3% and an annualized yield of 5.1%, based on a 0% inflationary assumption for the duration of our leases, which means there’s no value to any CPI lookbacks, CPI rent increases, market value resets, or percentage rent. Historically, the market discounted our CPI lookbacks, as the expected long-term inflation was about 2%, correlating with our minimum contractual escalators in Safehold ground leases of a 2% annual fixed rent increase. Recently, long-term inflation expectations have shifted above 2%. The Federal Reserve Bank of St. Louis publishes data on the 30-year inflation breakeven, and according to them, it indicates what market participants expect inflation to average over the next 30 years. This measure, calculated as the difference between 30-year treasuries and 30-year TIPS, is currently at 2.49%. As these long-term inflation expectations rise, it's crucial for everyone to recognize the full value of the contractual inflation capture in our portfolio, which has this feature in 96% of our assets. Assuming a long-term inflation expectation of 2.49%, our portfolio would yield 5.7%, which largely includes the value from CPI lookbacks in our Safehold ground leases. If we consider the current inflation breakeven as a reasonable base case, and if long-term inflation decreases, lookbacks are generally capped at 3% to 3.5% compounded inflation. Therefore, applying the 2.49% inflation breakeven to our cash flow stream results in a 5.7% yield for our portfolio. Using the benchmark century bond discount rate significantly increases our cash flow value per share compared to market assumptions that ignore inflation capture in our portfolio. In summary, as inflation increases and discount rates rise, so will our contractual cash flows, positioning us beyond just a standard fixed-rate bond proxy. Moving on to our capital structure, during the quarter, we issued and funded $475 million in 30-year unsecured notes and raised $309 million in equity at $59 per share. At the first quarter's end, our total debt stood at $3.2 billion, comprising approximately $1.5 billion in nonrecourse secured debt, $1.2 billion in unsecured notes, and $272 million of our proportional share of debt on ground leases owned in partnership. Our weighted average debt maturity is 24 years, with $235 million drawn from our unsecured revolver, giving us total liquidity of $1.15 billion at the end of the quarter. We are currently at a leverage ratio of 1.6x based on total debt to book equity and 1.1x based on debt to equity market cap. The effective interest rate on our non-revolving debt is 3.7%, representing a 141 basis point spread against the 5.1% annualized yield of our portfolio. The weighted average cash interest rate on our non-revolving debt is 3.2%, showing a positive variance compared to our current cash yield of 3.3%. In alignment with my earlier statements about inflation's impact on our portfolio, we've also included additional details on the slide regarding the inflation-adjusted yield of 5.7%, based on current long-term inflation market expectations of 2.49%. Since all our long-term debt is fixed rate without inflation adjustments, our portfolio generates a 205 basis point spread over our borrowing costs. Regarding our recent transaction, we sold a 1.37% interest in Caret for $24 million to six strategic investors at a valuation of $1.75 billion. The $19 million sold this quarter was categorized as redeemable non-controlling interest on our balance sheet. We view this sale as an essential move towards unlocking the full value potential of our platform. We're optimistic about the encouraging discussions we've had in the investment community regarding this significant asset's intrinsic value. This sale marks the first of multiple steps, and we will keep the market informed about Caret's progress. Lastly, the estimated value of all unrealized capital appreciation above our cost basis has increased to an estimated $9.4 billion, a $1.3 billion or 16% growth since our last quarter's update, marking considerable growth since we negotiated our initial sale of Caret units at a $1.75 billion valuation. To clarify what assets this figure represents, we have nearly 30 million square feet of institutional quality commercial real estate in prime markets across the country, which includes 13.1 million square feet of multifamily, 11.6 million square feet of office, 3.7 million square feet of hotels, 600,000 square feet of life science, and 300,000 square feet across other property types. In conclusion, we had a strong quarter at Safehold, characterized by solid earnings, increased investments, and significant initial steps to unlock Caret's value. We also made several important capital market moves this quarter that will enhance efficiencies and provide us with competitive advantages for funding our expanding pipeline and continuing to scale our business while modernizing the ground lease industry. Now, I’ll hand it back to Jay.

Thanks, Brett. One other thing I want to touch on, some investors have asked for an update on the corporate architecture questions with respect to iStar and internalization. There's nothing really to report yet. But as we've cleared the $5 billion portfolio mark, we believe that the independent directors of Safehold are positioned to evaluate the external management structure and current corporate structure and determine how best to create shareholder value. And as we've said before, whatever makes a stock more valuable is good for both SAFE and STAR. So a good solution should be a good solution for both. Now let's go ahead and open it up for questions. Operator?

Our first question comes from Nate Crossett from Berenberg.

I want to make sure I heard correctly just on the pricing of new originations. I think you said something like 50 to 60 basis points higher, and I just wanted to know the timing of the ramp, like do we see 50 basis points higher in 2Q? Or does it take time to kind of flow that through? And then just any color on are you getting any pushback from customers in terms of pricing? Or what are their alternative pricing options look like right now relative to you?

Nate, it's Marcos. I think the overall market is going through a little bit of a sticker shock given the speed and the volatility in rates from the beginning of the year. And so I think they're acting not just to our increased pricing, but they're reacting to the cost of fee financing, leasehold financing. What does this do? And how does it ripple through equity valuations. Generally speaking, our customers have been responsive to the increased floor pricing. And so we've gone from, call it, high 4s to kind of low to mid-5s on an inflation-adjusted basis on an ROA standpoint, and we can't project that every transaction in our pipeline is going to close. But if the transactions do close, you can start to see that come through in Q2.

Okay. That's helpful. It seems like you did more office deals this quarter than you've done in the last few quarters. Just wanted to know, is there anything changing in that area in terms of just like pickup of deal flow? And then just maybe comment on where the pipeline is kind of weighted for the next 90 days.

Yes, I'm not sure where you're getting that from, Nate. We did a large life science transaction, which was about 40% of the volume for the quarter, 35% of the volume was multifamily, and about 25% was office and hospitality.

Our next question comes from Caitlin Burrows, Goldman Sachs.

Maybe just a follow-up on the question about movement in rates, how that impacts your business. And maybe the pace of investments, it did look like this quarter's activity was higher than we were expecting, especially given the year-end '23 target that you guys had given. So could you just talk about what led to the high volume this quarter and if you expect that to continue or what could make it potentially decelerate from here and whether investment spreads may play a role in that?

Yes. I think the high volume in Q1 was a little bit of a carryover from Q4. Some stuff didn't get closed at the end of the year. Some of those transactions were brought in the shop early in '21. So I don't expect us to hit another almost $700 million quarter in Q2. That being said, we've seen a positive reaction and we've continued to fill the pipeline going forward at these reset levels.

Okay. Got it. So have you seen any impact on kind of your increased target returns or yields on the amount of kind of acquisitions you're able to do or the interest from your potential tenants customers?

I would say modestly, there's been a shift. I think, Caitlin, we remain cautious. As you know, our business is entirely contingent on the real estate capital markets being open and liquid. To the extent there is a real repricing of equity, we think there may be a pause broadly. We think we're positioned well to take advantage of that opportunity in the long term. But in the short term, kind of quarter-to-quarter, there may be some slowdown here or there.

Got it. Okay. And then just in terms of the offering that you guys did in March, it looked like iStar was about 60% of that deal. But back in September, the participation was under 30%. So just wondering if you could give some color on what drives the size of their participation, how we should expect that to be going forward?

Yes. The net lease sale over STAR generated significant liquidity. We believe that Safehold's long-term value is still greatly undervalued in the share price. From an economic and liquidity perspective, that transaction made a lot of sense for STAR. It's difficult to predict future transactions as they will depend on the circumstances at that time, but we remain strong supporters of the business plan. We’ll see how the year progresses, but we aimed to ensure liquidity to continue executing and expanding in this market. This is crucial for both companies as we are establishing a new business that is delivering very high long-term compounding returns in a AAA context, with potential upside from inflation and Caret. I believe that story is still not fully recognized, and iStar has had the advantage of observing it for five years, which is why I’m not surprised they continue to express interest.

Our next question is from Rich Anderson, SMBC.

Maybe a follow-on to that last question to you, Jay. Putting aside the participation in the equity offering from iStar's perspective, what we haven't seen much of is iStar's regular kind of investment in SAFE, sort of monthly, weekly, or whatever it has been over the longer term. I'm curious as to why that element of the iStar investment model has slowed down as of late?

Rich, yes, look, I think the $5 billion milestone was an important milestone at Safehold. It's triggered some things we have mentioned in previous calls about whether there's a better structure out there that can unlock value for both companies, representing the majority of shareholders in Safehold. I think you have to be a little bit cautious here, given that we have continue to believe there might be a better structure out there. So I wouldn't read much into that other than appropriate prudence.

When you described the Board kind of looked at it as time to start to evaluate the external management structure, does that introduce any roadblocks to trades happening just by making that comment?

Yes, nothing. I'm not a lawyer, so I won't speak. But as I said, sort of appropriate prudence given one of the alternative paths that we could certainly see ourselves on.

Okay. Next question. The investment in Caret by the initial investors aside from the opportunity cost of making the investment, what risks do they really take on if they can get their money back if the securitization or whatever monetization doesn't work out as planned?

Yes. Look, I think, as Brett said, this was the first step in a process to unlock an enormous store of value that we believe in, our Board believes in, certain investors now believe in. This group of investors for us was really the right mix of investors to begin the process of educating the rest of the market. As you know, Rich, it's one thing for us to say it. It's another for others who come from different worlds to also reinforce that message. Our goal, as we said on the last call, was to get the right investors as quickly as possible, make this really the first step and it's had the desired impact in that more and more of our conversations people are asking the right questions about Caret now. They're starting to understand the dynamic. I think as you see that page in the document, we have historically not really had a chance to talk about what it means to grow from $400 million to $9.4 billion. Whatever you think of the dynamics in Caret, that's a pretty powerful one. And so having a group of investors take on the intellectual challenge to actually come into a round, even though it is structured, even though they got an investor-friendly discount to the then current UCA values, I think it's a major step. I think it was an important step and it's begun the process that we have been wanting to talk about literally since our IPO, but held ourselves back until we proved out a lot of the other pieces of the Safehold story. So I wouldn't look at so much in terms of the value or the structure. I would say these are the kind of investors who don't spend any time on things they don't see the potential for. All of them, I think, confirm to us. This is one of the most unique and interesting value-creating opportunities out there. Exactly how it should be unlocked is something we have strong thoughts on, but they may have even better thoughts. So we built an advisory committee. We have spoken to them. They have continued to engage with us. So I don't think they sort of put it in the drawer and don't have to worry about it. There's an engagement level there that suggests they see what we see.

Okay. And then last for me. In the kind of the outline of inflation protection and what the adjusted returns are, why is there an increase at the 2% inflation assumption from 5.1% yield to 5.4%, if your escalators are already 2%, why would there be any increase? Or is it not quite 2% on average? Is it something just short of 2% as you have a little bit greater yield? I just want to make sure I understand that.

Yes, it’s a bit more complex than that. If you consider our portfolio, approximately 80% is based on Safehold forms, while about 20% consists of non-Safehold forms, which could be tied to annual CPI or include percentage rent. Therefore, you’re examining the difference between Safehold forms and some of the unconventional ground leases we own that utilize various mechanisms for capturing inflation.

Our next question comes from Harsh Hemnani, Green Street.

I just want to follow up on my first question on pricing. So 50 to 60 basis points above where it is today. So when you look at the effective yield of 4.8%, excluding inflation that you mentioned for the first quarter, how does that look all else being equal, where do you think you end up on that at the end of the year?

So I think, Harsh, on the go-forward transactions, at least at the floors, we're in the kind of 5.25% range. Those are obviously, as rates move up, floating upwards. And then on an inflation-adjusted basis, they're closer to the high 5s.

Got it. That's helpful. My second question is about the Ground Lease Plus program. A couple of quarters ago when this was launched, Jay mentioned that Safehold prefers to be in the 35 to 40 percent ground lease to total value range. These Ground Lease Plus developments don't have that level of security built in, so they probably haven't been considered for inclusion in the SAFE portfolio from the outset. Now that there's a strong possibility of iStar not being the external manager and potentially a combination between the two entities, how do you view the integration of the Ground Lease Plus portfolio into Safehold?

Sorry, go ahead, Jay.

So Harsh, what we've decided we took kind of the initial steps here is we actually set this up in a fund construct and so we brought in a partner on these GL+ transactions at iStar to fund these initial GL+ transactions. So we have a 53% partner in those transactions. Our anticipation is to continue to potentially bring in other equity to fund these transactions. So to the extent there is some sort of corporate transactions, the majority of the equity would not be on SAFE’s balance sheet.

After the combination or potential combination, would you seek another partner to finance those Ground Lease Plus holdings? Am I understanding that correctly?

So we've already found a partner, Harsh. I think long term, the goal would be to find additional partners to fund that business line and that product.

Our next question comes from Rich Hill, Morgan Stanley.

So when we think about the valuation of SAFE, we sort of separate it into 3 parts: your existing portfolio; new originations and the value of the UCA. So I want to focus on 2 questions. First, the value of the existing portfolio and then second, new originations going forward. So on the existing portfolio, as I think about your CPI lookbacks, could you maybe give us a view of how many of your existing ground leases have CPI look-backs that kick in over the next, call it, 3, 5, 10 years?

The majority of the 10-year CPI lookbacks in our portfolio won’t really come into effect until the 2029 to 2031 time frame. We see this as a sort of CPI bank; with high CPI in the meantime, we can project future outcomes. It's still early for us to determine what this initial 10-year period will yield. On Page 9 of our presentation, we explored scenarios where long-term inflation is above 2%, such as 2.5% or 3%, and what those inflation-adjusted returns might look like. The liability side adjusts rapidly, and while it's straightforward to see on a screen, identifying the best long-term inflation proxy can be challenging. We rely on a Fed figure, though some may prefer a higher or lower estimate. We've provided sensitivity around this figure, which serves as our starting point for the existing portfolio. The calculations are relatively simple; you can analyze ROAs, assess our current debt, estimate a refinancing rate, and calculate NPVs. For our existing portfolio, under 2% to 3% inflation, we actually observe increases in equity NPVs because we have fixed-rate debt for the first 25 to 30 years on most of our portfolio, alongside a revenue stream that is increasing faster than our historical models have predicted. Previously, we assumed 2% inflation was a market standard, but now that seems likely to be higher. Running those same models indicates that, for the existing portfolio, we may need to adjust our assumptions for rental incomes upward and slightly increase our refinancing cost projections for 30 to 60 years down the line. This analysis reaffirms our enthusiasm for this business, as we possess significant inflation leverage that won't be shared with our established liabilities.

Yes. So look, I think we've chatted a lot about this. Our models are already assuming, call it, the 5.75% effective yield. So I agree with you, it is just math. So looking forward, look, the cost of financing has risen a lot since the end of last year. We can debate how much it's risen, but I guess my question for you, Jay, is can your effective yields over the medium to long term of your ground leases rise one for one with that rise in financing cost, again, over the medium to long term? So let's just throw out numbers. Let's assume finance costs are 100 basis points higher, 200 basis points higher. Will there be a time period in which your effective yields for your ground leases can also go up by that much? Or will there be a slow bleed lower in your spreads between your effective yields and your financing costs?

Let me share my perspective, and then Marcos can update you on the situation. Some have inquired whether there is a limit to the overall yields on ground leases. My response is that we primarily compete with the broader capital markets. If our capital is of higher quality, with lower costs and risks, and more efficiency, we should always be able to align with market trends. However, if you ask whether we could adjust our costs to customers in alignment with a sudden increase of 150 basis points, the answer is no. The market will not accommodate such drastic changes quickly. Over the medium and long term, our goal is simply to provide a better option than what’s currently available. If the market is experiencing that level of change, it likely means that all other capital sources in the real estate sector are also facing similar shifts. We just need to be slightly better because we are already more efficient and reducing risks more effectively. Thus, I believe that over the medium and long term, we will adjust alongside the alternative funding costs in real estate. However, I want to be cautious about stating that this will apply to short-term dynamics. Marcos can probably offer more insight regarding customer acceptance and the evolving landscape, but adhering strictly to that methodology, if rates were to rise by an additional 100 or 150 basis points, I wonder what your thoughts are, Marcos?

Yes. I'll give a simple example. Multifamily cap rates are still sub 4%. If we try to buy land at 4%, there's no deal. It's just an illustrative example today. I think as both Jay and Brett and I have said that even at these reset levels, 50, 60 wide of where we were at the beginning of the year, we're still creating a tremendous amount of value for shareholders, even at this increased cost of debt. Obviously, to your point, Rich, margins have decreased somewhat, but not on an inflation-adjusted basis, and that's what we want people to take away from this. And then when we look back kind of end of '18 through '19 and you look kind of at the rate environment there, not as volatile as a spread environment. We were able to produce attractive ROAs, and as we think about the opportunities on the liability side when some of this volatility dissipates, we think we're going to continue to drive solid margins and create value for shareholders.

Yes, that's helpful, and we can discuss it further later. I believe the market is indicating concerns about your ability to originate ground leases profitably in the future if financing costs rise and effective yields on ground leases do not increase similarly. That perspective does not fully resonate with me for several reasons. Your track record shows that you've managed to maintain a spread across various rate environments. However, we are working with a century-long asset that is highly sensitive to assumptions. If the market is suggesting that spreads are decreasing while discount rates increase, we can calculate the implications of that. What I’m attempting to clarify is important. Jay, I understand your point, and I believe it is valid. I just want to ensure that in our models, we aren't negatively impacting free cash flow in Stage 2, which is an extended phase, and then applying a higher discount rate, as we all recognize the effects that has on the numbers. We can follow up on this later. This has been informative.

Thanks, Rich. I like the methodology of existing portfolio, new originations in Caret. Two out of three of those will benefit from higher than 2% inflation assumptions up to a certain cap. And then we can spend some time with you on our new origination math, which, to us, is still quite value accretive for shareholders.

Our next question comes from the line of Ki Bin Kim, Truist Securities.

I wanted to revisit the question regarding yields. I’m particularly interested in the difference between the economic cash yield and the cash expense related to your debt. It seems this spread has narrowed for more apparent reasons. How do you anticipate this will evolve over time? Additionally, as interest rates have increased, how does that impact your capacity to initiate a new ground lease that offers a better initial cash yield compared to the effective yield or yields adjusted for inflation? The long-term outlook appears promising, but the short-term aspect is also important.

Yes. So I think the hard part of our business or I should say, the hardest part of our business is actually building the portfolio on the asset side of the ledger. Our team is doing a great job of expanding across the country, expanding across product types, expanding our customer base, continue to see lots of repeat customers. Following in that wake is how do you create the right liability structure for what we think are exceptional portfolio returns. And you've touched on something, Ki Bin, that's quite important to us. We started with a 10-year secured debt. We then went to 30-year secured debt. We then created 50-year secured debt. We then created structured long-term secured debt, which ultimately, if you think about our revenue stream, it's an upward sloping curve. If you think about our liability costs, we were able to create a similarly structured liability stream. So we were able to make the cash-to-cash, yield-to-yield stay pretty good over starting point and then over its life. We've done a 10-year unsecured deal. We've done a 30-year unsecured deal. The liability side of this ultimately should match the revenue side. You shouldn't have a long upward sloping inflation-protected revenue stream and a flat debt stream. So your point is something we are quite focused on. Can I assure you that it's imminent, but I would tell you, look at our track record in the secured world, we are trying to replicate that in the unsecured world, which gives us the maximum ability to work with our customers to create these unique long-term investments that we think are some of the best we've seen in our 30-year finance net lease subsets. And I think what you'll see us do is continue to make the capital available to our customers and to create value for shareholders. And it’s not just the asset side; it’s also the liability side.

Okay. I want to follow up on your comment about the increase in effective yields, which you mentioned was between 50 to 60 basis points. I would like to clarify if you are referring to the effective pre-inflation yield increasing from 4.8% to 5.25% in the previous quarters. I'm looking to ensure I have a correct apples-to-apples comparison.

Yes, that's right. I think if you think about cash yields, high 2s are now kind of 3.30, 3.35 on a floor basis on a cash perspective and then ROAs are high 4s to 5.25, 5.35 and up depending on where they flow.

Okay. And just last question because of the high acquisition volumes this quarter and equity raises, there could be a timing element. Just curious about the all else equal EPS run rate going into 2Q.

Ki Bin, it's Brett. So yes, in the first quarter, obviously, as you mentioned, the timing of those originations and when we were earning is a valid point. A lot of that was funded from our credit line and then the 30-year unsecured notes that we had priced in January, we had drawn or funded that at the end of the quarter. So what you'll see is an uptick in interest expense moving from the revolver to that permanent debt. And then we also have one-time Board of Director fees that we pay in that quarter. I think those are the anomalies. But to point the timing of when we closed deals during the second quarter will matter. But I'd say those are the 2 differentiators when you look quarter-over-quarter.

And our next question comes from the line of Matthew Howlett, B. Riley.

Just what's the outlook on the term debt market in terms of accessing that market here in the next few months to pay off the revolver?

Yes. Look, we're exploring a number of different options in terms of that. We like to — I like to stay in that 20, 25, 30-year duration, so that is generally our focus. But if we think rates are gapped out because Ukraine or short-term factors, we want to be thoughtful about that as well. So we're still evaluating that. Don't have a fixed plan yet, and we'll see how fast the investment team is putting out money and make a decision when it's the right time.

Yes, just — it's Brett. To piggyback off that, we had $235 million drawn at quarter end. So I know we've remarked in the past that once we start to get to that $0.5 billion mark or so, we'll look to term out those borrowings with either debt or equity. And as Jay alluded to before in the long-term debt markets, looking at the playbook of what we utilized back in 2017 through 2020 and what we've done since in the unsecured markets. We're encouraged by the amount of providers who we are having dialogue with. And hopefully, we can continue to create the best returns for our shareholders by using more innovation as well.

Got you. And then on that note of capital like equity capital. Two questions. First, another private sale of the Caret, could you do that before, let's just say, a liquid trading markets established? And then second, I know in terms of a potential merger with iStar and a balance sheet combination, is there a scenario where there would be a potentially significant capital freed up for SAFE to go reinvest?

Yes. I think on the — merger conversation is too early to really get into that. But I don't think there's suddenly a pot of gold to reinvest. So I'm not seeing that scenario yet. But again, we're still early in that process. And the first question —

On the Caret, on a second round —

Absolutely. The goal here is to create a liquid security, but I think we're continuing to expand the knowledge network around what Caret is and what it can be far beyond just the real estate world. So I think it makes a ton of sense to us to look to continue that with a group of investors who will help us expand that knowledge network. Timing-wise, that's something we will definitely be focused on this year.

Would you look at that, Jay, if the equity markets are shut out as a source of nondilutive capital to raise another round, sell a piece of that to continue investing in new ground leases? Or would you rather just get your — that market established first at fair value and hold back?

No, look, I think it is a untapped source of capital that obviously helps on a number of fronts. But most importantly, again, you guys know our viewpoint is this asset is worth dramatically more than we think it's being given credit for. We've begun the process to unlock that for shareholders. If you believe in the success of that exercise. We're not talking about $2 or $5 or $7 a share. We're talking about double, triple of where the stock trades today. So I think that dynamic is so powerful and so important to us that we want to pick the right next step and the right investors to help us get to the final, really expression of Caret in the markets which we think has a dramatic impact on Safehold and its ability to raise capital at appropriate pricing. So it all kind of goes hand in hand. And I wish we could move faster, but we have the dominos lined up. We know which ones we need to push first. There are periods where we can move fast on things and there are periods where we kind of have to wait things to sequence. But you're hitting on a lot of the big themes that we've laid out in our strategy.

And just to follow up, the strategic board has been helpful in providing you, Jay, with ideas and getting things closer. Are we discussing a two-year timeline or a six-month one?

Well, we have a 2-year window. We have engaged with that group to try to start to lay out some of our thoughts about where this could find its next best step. And yes, they've been really helpful in thinking that through and challenging us candidly on some of the ideas that we think are the right next step, and they may have even better ones for us. So that's a dynamic dialogue. And again, it's — I think it's paramount to understanding the Safehold story. So we are certainly encouraged by what we've heard so far and the number of investors who have come back to us and said, tell me more. That to us was the big difference from last year. Now investors are saying, 'Tell me about this,' not 'Hey, let me tell you about this new thing.' They're now coming to us and saying, that's a real value. It's tangible. It's transparent. It's growing really fast. It represents an extraordinary high-quality diversified portfolio of real estate. It actually doesn't sound that hard to go from I wasn't even paying attention to, wow, this looks like it has real value, tangible value, fast growth. But we don't want to be the only messenger in the world. So give us some time to continue to lean on the strengths of that initial group of investors, bring in additional investors. And I think you'll start to see this story really gain momentum.

We have a question from the line of Derek Hewett, Bank of America.

Could you talk a little bit more about the near-term pipeline, just given the higher, I think you said 50 to 60 basis points of pricing. And should we expect a material slowdown in the second quarter just given, kind of as the market reacts to the new reality?

Yes. I don't expect us to knock it out of the park like we did in Q1, but the client base has been pretty responsive both existing and new to our new pricing. So we've done a pretty good job of backfilling the pipeline and working through the stuff that's in letter of intent. So we feel pretty optimistic about the growth going forward. The caveat being transaction markets freeze like they have at pockets with this level of volatility, there will be a slowdown. But it feels like a good mix of what we've been able to do in the past, some more life science assets, big — kind of half the pipeline is multifamily and then the balance is a mix of office and mixed use.

And at this time, there are no further questions. I'll turn it back to you, Mr. Fooks.

Okay, great. If anyone should have any additional questions on today's earnings release, please feel free to contact me directly. Roxane, would you give the conference call replay instructions again? Thanks.

Certainly, one moment. You may contact the AT&T replay system by dialing 1-866-207-1041 and the access code is 9277384. Again, the number is 1-866-207-1041 and the access code is 9277384. That concludes our conference for today. You may now disconnect.