Good morning. And welcome to Safehold’s Third Quarter 2023 Earnings Conference Call. 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.

Good morning, everyone. 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, Chief Financial Officer. This morning, we plan to walk through a presentation that details our third quarter 2023 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 p.m. Eastern time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 49301. 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?

Thanks, Pearse, and thank you, everyone, for joining us today. There’s no way around it. This has been a very difficult part of the interest rate cycle for us. By some measures, this has been the worst market for fixed income investments on record and long-dated cash flows are obviously some of the most impacted when rates rise. But cycles end and we believe we have been through 90%, 95% rate moves in this cycle. Higher rates also mean our in-place long-dated liabilities are more valuable and our embedded inflation kickers should be more valuable as well. And Caret remains, in our minds, a unique asset for Safehold shareholders that is deeply undervalued. So we continue to position Safehold to be a winner when the cycle finally ends and to continue to look for ways to expand the modern grand lease ecosystem, to find new ways to make real estate capital structures more efficient, more resilient and more like other parts of the modern capital markets. With that, let’s have Marcos and Brett take you through the quarter.

Thank you, Jay, and good morning, everyone. Since our last earnings call, we’ve seen a number of macro and geopolitical events occur that have further increased volatility and uncertainty globally. In our market, commercial real estate investment activity remains muted, with a wide gap between buyers and sellers. Given the volatility in rates, the dearth of liquidity and the increased cost of that limited liquidity, there is great uncertainty about value. However, we remain confident that we’ve built an asset base and balance sheet that has durability and we will look to be opportunistic but disciplined in capital allocation going forward. As we navigate this choppy macro backdrop, we remain steadfast in our mission to own the grand lease ecosystem and continue to explore other sources of capital and new product initiatives to take advantage of the current environment. Let’s begin on slide three. The company raised $152 million of new equity at a gross price of $21.40 per share in early August. MSD Partners, who has been a strong supporter and partner for the business, anchored this transaction by participating at their pro rata ownership level of approximately 8.5%, along with management, who invested approximately $1.4 million. This equity raise was not an easy decision given the headline share price relative to our views on the underlying value of the business. However, we decided that increasing liquidity in uncertain times, deleveraging the balance sheet to pay off the relatively high-cost revolver debt and putting our best foot forward for a ratings upgrade would provide long-term benefits that outweigh the short-term pain of the raise. This equity raise was viewed favorably by creditors and rating agencies, as Moody’s revised and upgraded our ratings from BAA1 to A3 in early October. We are pleased with this recognition and outcome, which we expect to help achieve long-term benefits in both cost and access to capital as we scale. At quarter end, the total portfolio was $6.4 billion, UCA was $10 billion and GLTV was 42%, and rent coverage was 3.7 times. The portfolio credit metrics remained relatively unchanged from last quarter and we’re happy with how our thesis of investing in high-quality assets and locations at low attachment points is unfolding as real estate reprices. On the capital front, we ended the quarter with $858 million of liquidity, which is further enhanced by the unused capacity in our joint venture, which is a valuable tool for us to pursue new investments and serve our customers while preserving capital. Slide four provides a snapshot of our portfolio growth for the quarter. During the third quarter, we originated one new multifamily ground lease for $19 million, which was fully funded at closing. The credit metrics associated with this deal are in line with our portfolio targets, with a GLTV of 43%, rent coverage of 3.2 times and an economic yield of 7.1%. Subsequent to quarter end, we closed two multifamily ground leases for $34 million. These investments were also fully funded at closing, with a GLTV of 40%, rent coverage of 3 times and an economic yield of 7.3%. The recent rate uptick has had an impact on our pipeline. Of the six letters of intent executed last quarter, we saw two not close due to buyers and sellers not agreeing on a change in price as rates rose and another two delayed as our customers had to raise incremental capital to close these transactions.

Thank you, Marcos, and good morning, everyone. Continuing on slide five, let me detail our quarterly earnings results. For the third quarter, GAAP revenue was $85.6 million, net income was negative $123.0 million and earnings per share was negative $1.81. When you back out the full impairment of goodwill we are taking this quarter, along with merger and Caret-related costs, net income was positive $22.5 million and earnings per share was positive $0.33. The goodwill asset was created when we closed the merger and was recorded on our balance sheet, with the value at the end of last quarter sitting at $145.4 million. Goodwill primarily represented future savings and synergies associated with completing the merger and replacing our prior external management structure. Goodwill assets are recorded under GAAP to be tested for impairment annually. However, we also are required on an ongoing basis to determine if there are indicators of impairment, and if so, test for impairment at such time. We determined that the precipitous and sustained decline in Safe stock price during the quarter was an indicator of impairment and that a full impairment of the asset was required. This is entirely an accounting-driven and non-cash impairment and does not speak to the value or durability of our asset base and Safehold certainly still benefits from being an internally managed company. Moving to Q3 EPS of $0.33, excluding non-recurring items. I want to highlight a few reasons for the decrease year-over-year. First, total G&A net of the star holdings management fee was approximately $2 million higher than the same period last year. This increase was expected and something we’ve highlighted to the market. Over time, we expect our cost structure to provide meaningful operating leverage versus the previous growing and uncapped external management structure that would have had us paying higher management fees and reimbursables today versus a year ago if that contract were still in place. Separately to note, based on the previous two quarters’ results since merger closing, we are tracking to beat our net G&A targets for the year. Second, during the quarter, we terminated an option to purchase a $215 million ground lease underneath a spec office development property in the Greater Seattle area. The net effect of this transaction, which also included writing off a non-refundable option payment along with other accrued deal costs, resulted in a one-time net loss of $1.9 million. Lastly, interest expense related to our revolver borrowings was higher due to elevated SOFR and a larger average drawn balance. Similar to many borrowers, we have felt the effect of the rapid pace of rate increases. Over the last year and a half, we have mitigated the impact by putting in place $500 million floating to fixed swaps, fixing SOFR at nearly 3%. Additionally, over that time, we purchased $400 million of long-term 30-year hedges that are currently in the money but not yet flowing through the P&L.

Thanks, Brett. There was a lot of noise this year with the merger, the macro backdrop and things like goodwill, and with capital market spreads moving faster than cap rates in the real estate transaction market, it’s been hard to generate the spreads we look for despite currently attractive asset economics that offer plus or minus 100 basis points over the benchmark, plus inflation kickers, plus UCA and its potential Caret value. While this side of the interest cycle has been rough, we are preparing for the other side of the cycle. PIC rates seem near and once sentiment changes, we believe our existing portfolio will be seen in a new light, and the capital market should be in a better position to help us take advantage of the attractive asset economics in the ground lease market. And with that, Operator, let’s go ahead and open it up for questions.

Thank you. Your first question is coming from Nate Crossett with BNP Paribas. Please pose your question. Your line is live.

Hey. Good morning, guys. I was wondering if you could talk about just the deal flow pipeline heading into the year. Are there any deals that are currently under LOI right now? And then just maybe on what you’re seeing, like if rates do stabilize in the near-term, do you foresee things opening up quickly or is there more of an adjustment period? Just some color there on the pipeline would be helpful.

Hey, Nate. So I think if you go back to the end of the second quarter, which feels like an eternity, but it’s not really that long ago. The 10-year was at 3.8 a bit and today it’s almost 100 basis points wider. I think it’s paralyzed the overall market, including our customers. So while we saw some traction sort of at the end of Q2 and the early months of the summer, we’ve seen that sort of heat off over the last handful of months. So I think we have a few things in the pipeline that are progressing towards closing. I’ll tell you that we have a little bit less confidence than we have had in the past and I sort of referenced that in my remark. We had a handful of transactions that got to the closing table with docs done and fell apart. So I think Q4 is going to continue to remain spotty. I think the psychology that you’re sort of describing about when do people capitulate, I think it takes time. If you think about these sort of rate movements, what’s the impact on asset values? Are people willing to give up? Are you going to see distress? And as far as we can tell, that appears to be going very, very slow in today’s environment.

Okay. I think you mentioned new product initiatives in the prepared remarks. Is there anything to note there? Is there any new type of product that you’ve been doing or contemplating? Just wanted to make sure I heard that right.

Yeah. We’re always in the lab trying to brainstorm and think through different applications of the product and so nothing that is far enough along to talk about yet, but we’re excited about some potential things in the future.

Okay. Thanks. I have a question for Brett regarding the upgrade in the credit rating. I'm curious about how much you could potentially save on debt costs compared to the previous rating.

We currently have a split rating from Moody’s and Fitch. We’ve noticed some improvement in our spreads, but we believe the majority of that improvement will materialize once we achieve a second A rating. Typically, borrowers in the A rating category trade at a differential of 30 to 50 basis points compared to BBB. Some of the debt capital providers we regularly communicate with have echoed this sentiment. When considering their ability to access various capital sources for A-rated or better, the capital charges they incur and their exposure limits should also be advantageous for us. We hope to continue demonstrating our track record as we have over the past year to attain that second A rating and realize those benefits.

Okay. I’ll leave it there. Thank you.

Your next question is coming from Anthony Paolone with JPMorgan. Please pose your question. Your line is live.

Great. Thanks. Good morning. Historically, your value proposition to sponsors seemed to be that the combination of ground lease and leasehold debt would yield them more proceeds at very attractive rates. What do you think the key selling point is right now, given the higher rates, when you are pitching ground lease structures to prospective sponsors?

Hey, Tony. I think it’s the same exact pitch as it was before. On a relative basis, we’re still the most efficient source of capital. So if you go down the entire capital structure, right, unlevered yields have blown out, cost of debt has blown out, whether that’s fee simple or leasehold loans, and obviously, our cost of capital has changed. If I look at a multifamily transaction where there’s at least a little bit of transaction volume, the agencies are still providing fixed-rate debt, but it’s in the north of 6% range at lower leverage levels. So we’re still an accretive source of capital to our customers.

Okay. And then on the, I guess, land to total property value, I think that used to be 35% to 40%. It’s crept up a little bit north of 40%, it seems, like, do you think that’s the new level or is that just maybe some of the more recent deals?

I think we’ve taken probably a more conservative approach than some of the sponsors. Those new acquisitions are based on our actual appraisal, sorry, our actual internal work. They’ll get appraised by CBRE on a rolling annual basis. So I would say we’re just taking a more conservative view on the underwriting side. But broadly, the credit metrics remain consistent.

Okay. And then just last one for me, on the leasehold loan fund, it looks like that capital is getting extended out at quote 11% thereabouts. What’s the underlying there to support that yield and is that current pay or is that a PIC structure, like, just kind of what’s underneath there?

Yeah. So each loan’s different. But typically, a lot of those either have a component of cash and a component of PIC or their current cash pay. So those will flow through the cash flow statement. But I think what you see in the earning from equity method investment line is the combination of what we’re yielding on the asset as well as the purchase that we made at merger, which was at a discount based on where current rates were at that moment.

Right. But like the 11, like, I guess, just maybe remind me what’s kind of underneath. Is it development stuff or is it just current cash flow assets, like, what’s supporting it?

Yeah. So there’s one asset that was originally a construction loan. It’s actually built and beginning lease up. It’s a brand new multifamily asset in Nashville. And then there is a Trophy Life Science asset in Cambridge that is a development deal. And then the final deal is a repositioning of a mixed-use asset, which includes a life science component in Cambridge as well. Oh! And then a small, I apologize. There’s one more. There’s a small multifamily existing asset as well in Seattle, it was.

Got it. Okay. Thank you.

Your next question is coming from Ron Kamdem with Morgan Stanley. Please put your question. Your line is live.

Great. A couple of quick ones just on back to the originations. Are these, so the one deal in the quarter and the two posts, were those existing relationships? And sort of when you were talking about the pipeline, maybe can you sort of dissect that in terms of existing versus sort of new relationships? Thanks.

Those three were existing customers. So repeat transactions, which is great to see. And I would say the pipeline I’m looking at it right now is a mix of new and existing customers.

Great. And then just looking at the Caret, the revaluation was slightly down. I think 10.0 from 10.1, which doesn’t look like a big deal, but just wondering, was there like one asset or what sort of drove that this quarter?

Yeah. We’re seeing the appraisers start to move cap rates up. They’re drifting upwards on all property types. And I think they’re taking a little sharper pencil certainly to some of the underlying assumptions on the operating side. So appraisals don’t move in jump steps, they move in waves and we’re definitely seeing the appraisal community begin to push those cap rates up. So we’re not surprised by it. We expect more of it and we’ll see the impacts of that slowly. But we’re still going to be in that 10-ish range, it feels like, with some parts of the cycle like this where you’re going to get more downward adjustments than upward adjustments.

Great. And then my last one, if I may, just on the income statement, the provision for credit loss, what was that related to, the $336,000 I see here and any other sort of assets or anything like that that you guys are looking at for potential more provisions? Thanks so much.

Of course. Yeah. We adopted CECL this year. So we take a provision on amounts we fund based on the relative risk there, which is we take a host of factors and use a model to determine that. But typically, we take in the range of, call it, 1 basis point to 4 basis points on new funding. So that’s primarily what drives it. And Ron, it’s on no specific assets. It’s just across the portfolio.

Your next question is coming from Caitlin Burrows with Goldman Sachs. Please pose your question. Your line is live.

Hi. Good morning, everyone. Maybe you could just start with kind of the properties that did transact in the quarter and October and the ones that are in the pipeline. I know from what we can see, they were multifamily, kind of some other details of maybe what made those properties the right ones. And as you look forward, does it continue to be a multifamily focus?

Yeah. As I go back to the remarks, the lack of liquidity is really a driving force to get any sort of transaction done and there is a little bit of liquidity in the agency space, in the housing space broadly. So I think we’re going to continue to push on multi. We’re believers in sort of the supply-demand imbalance long-term and it’s an asset class we want to continue to scale and grow in. If I think about those particular transactions, a couple of them were student housing assets. We’re seeing in our portfolio, as well as on these specific assets, some pretty incredible same-store revenue growth, almost double digits. And so I think customers, although cap rates are wider for student housing, are able to underwrite a decent amount of growth and so that they can tolerate a capital structure that is more expensive and so that’s probably the reason those transactions have been successful.

Got it. And then it looks like the originations in the quarter in October, the economic yields were in the low 7%. So I’m wondering if you can talk a little about how you think about kind of in this rate environment today that you’re making those deals, but that they’re long-term agreements and kind of how you balance that today versus 99 years.

We always focus on long-term benchmarks and evaluate their current trading costs, which have indeed increased over the past few quarters and are now around 6%. Our goal is to achieve a 100 basis point spread above that. Additionally, we benefit from inflation and Caret, which contributes to our overall strategy. This is our general approach when considering our unlevered pricing targets.

Got it. And then just a quick one on the joint venture. You went through how there’s I think $462 million left total. So could you just go through again kind of the benefits of having the JV structure and confirm that all investments will be done in the JV until that amount is kind of used up?

Yeah. So I think I’ve mentioned this on a prior call. There are hand functions that are on the smaller side where our partner will most likely not participate. There’s a decent amount of friction costs to set up those ventures. And so our expectation is that they will almost do every single transaction, but some of the smaller ones that we have conviction on, they may end up on our balance sheet. We get a base management fee and a promote structure, and I’m blanking on it off the top of my head, Brett, if you know what that is.

Over a 125.

There you go. Awesome.

Got it. So I guess just you mentioned the smaller ones. I guess the deal in the origination in 3Q and the Q2, since those all seem pretty small, so would it seem like those fall into the category of being just for safe hold?

Correct.

And just as we think about like funding going forward. Okay. Okay. That’s all. Thanks.

Your next question is coming from Harsh Hemnani at Green Street. Please pose your question. Your line is live.

Thank you. Just a quick one from me. So the option that was terminated this quarter to purchase a ground lease, how many more of those options do you currently have on your balance sheet that would be out of the money just at current rates?

There is one other option on our balance sheet currently.

That’s helpful. Please continue.

And Harsh, it’s probably too early to determine whether the customer qualifies for that option and if we actually have any P&L exposure on that payment.

Your next question is coming from Kenneth Lee with RBC Capital Markets. Please pose your question. Your line is live.

Hi. Good morning. Thanks for taking my question. Just on the liability side, obviously, no maturities until 2026. I wonder if you could just share some thoughts as to what options could you look at as you look to refinance over time and would there be any change in approach just given where rates are or where rates could be? Thanks.

Hey, Ken. I think our approach is the same. We obviously have access to multiple parts of the capital markets. What we’ve been able to exhibit over the past few years in growing our unencumbered asset base and being an unsecured borrower is really creating a footprint in the markets. We have access to both the public and private at various tenors with various structures. So I think what we’ve been able to exhibit and take action on over the last years is continuing to be creative and create liability streams that better match the asset profile of what we’ve been able to create. So that’s really, in our mind, what we’re continuing to push along. I think some of the remarks I made earlier around where rates currently are, where current credit spreads are and the appreciation of where the business is at in terms of its evolution, we’re going to let all of that good work and good progress and set up of the balance sheet. As you mentioned in your question of no maturities over the coming years here, work to our benefit and we do think that getting to that second A rating will provide even more pricing power for the business. So lots of capital solutions. We want to be thoughtful about locking in long-term capital, but we do have those hedges that are significantly in the money that should weigh down that net effective rate for us.

Got you. Very helpful there. And then one follow-up, if I may. Any updates around efforts to create public liquidity or liquid market for the Caret units? Thanks.

Yeah. We’re in contact with those first-round Caret investors. Some of them have certainly expressed the desire and willingness to push that data out, given their current capital market environment, but we’re still working on that. I think everybody’s realistic about where that opportunity is today and today’s capital market and where it might be in the future. So we’ll continue to have those conversations.

Your next question is coming from Haendel St. Juste with Mizuho. Please pose your question. Your line is live.

Hello. Good morning. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. Just wanted to talk about the rent coverage for the recent acquisitions. We noticed they’re about half a turn, a little bit more than half a turn inside the portfolio average. Is this due to the fact that apartment rents, apartment rent growth are moderating right now and what’s your minimum threshold when you evaluate different investment opportunities from a rent coverage standpoint?

So I would say we take a more conservative approach in our underwriting process than what I would say reality is. It’s probably a higher vacancy. We underwrite on an untrended basis. You are spot on. We are seeing a slowdown in rent growth. I think this coverage metric is consistent with our policy. It’s obviously on the lower end. But I think the biggest driver is our cost of capital is more expensive, which is obviously pushing up the amount of ground rent in the structure. So attachment point feels good from a leverage standpoint. Look through LTV. But the coverage is a little bit lower.

Got it. And just one more here. With regards to property type, are we restricting ourselves to just multifamily, last couple quarters, it’s been pretty much focused on that. Is there another asset class that you’d look to explore in the hopes of higher yields and how are you balancing rent coverage, yield and volume given where rates are and given recurring cost of capital is?

There are other asset classes in the pipeline. I think those other asset classes have less liquidity options than the housing space does and so they’re a little bit more difficult to get across the finish line. But we certainly are searching the markets to find exposure outside of multifamily.

Thanks. Good morning. First, an observation, I’m just looking at the quality of the sell side covering you guys and you should be, I’d say, proud of that, covering you guys since 2017. That’s impressive and so it’s tough times right now. But you got people listening. That’s good. In terms of, Marcos, you mentioned, behaviors of people, just everyone’s moving very slow in this environment. Understood, but won’t there also be some events coming that will kind of force action? Regional banks are cluttered with commercial real estate loans and there’s going to be events that’ll take place or that maybe you can get involved with in a small way with the liquidity that you have or do you think that the tendency is for kicking the can down the road and for there to be sort of a delay tactics taken so that maybe there won’t be transactions that will become available or be forced upon real estate owners anytime very soon? Just curious what you think of that dynamic.

No. It’s a little bit of a puzzle. We are certainly pitching that as a solution and as a product and we think we can help distressed capital structures live for another day or live for a new owner. But what we’re actually seeing is those transactions are taking extremely long to get done, if at all. And so at least right now, we’re seeing a fair amount of kicking the can down the road. I’m not saying that that isn’t going to change. It could change as we cross over in the year. But as of right now, we don’t see this kind of wave of distress starting to hit. If you’re asking my personal opinion, I think it will come eventually. It’s just it’s not there today.

Yeah. I mean, that’s precisely what we’re trying to get across to folks, which is, and we have this laid out in our corporate presentation. When you start to think about our long-dated liabilities, running out those cash flows, discounting them at an appropriate discount rate, treating both sides of the balance sheet in a similar manner and fairly, we think that that mark-to-market value today is quite meaningful, right? It depends what discount rate you want to use. But I think the middle of the road, even $0.5 billion, when you start thinking about that number at today’s rates, even could potentially even be greater than that, that’s incremental value that we feel like the market is not fully appreciating. And I think part of the reason why also, a lot of folks have shorter maturity profiles, right? They have shorter assets and I think for us, when you’re looking at 99-year cash flows and discounting them back at what we believe is high-grade risk, so are those, 23 years of weighted average maturity profile. We have a lot of pieces of debt due in 30 years to 50 years and we think that’s a really important value component. So we try to lay out that kind of net present value sensitivity for people, because we think it’s certainly underappreciated right now.

You mentioned having $858 million in liquidity, excluding joint venture commitments. You managed to raise equity, which benefited your ratings and secured the company's financial position during a challenging environment. However, I'm curious about the liquidity threshold that would prompt you to consider raising additional capital. You surely want to avoid letting that $850 million decline close to zero. When do you start contemplating this issue again? Hopefully, it won't come to that because you've utilized some of that liquidity, but I'm interested in your thoughts.

Yeah. That’s the real goal here is to be able to take advantage of some of these attractive asset economics, Rich, and right now, I’d say, the volume is pretty muted just from a transaction standpoint in the real estate world and then they’re getting our cost of funds to match up in a way that we’re comfortable with locking in long-term. So we haven’t really had to think too much about when the trigger is. But we like to have plenty of liquidity on hand. Historically, we’ve said, $0.5 billion feels comfortable. So between the JV and the lines, we think we’re well positioned for that. Candidly, I think we’re hoping we’re almost at the end of the rate cycle and I think on the other side of it is a lot of opportunity for us and we think there’s plenty of places to pull capital from once transaction volume picks up.

Okay. Great. Thanks, everyone.

Mr. Hoffmann, we have no further questions. Thank you, Kelly. If you do have any other questions, feel free to reach out to me directly. Kelly, could you please give the replay instructions once more?

Certainly. There will be a replay of this conference call beginning at 2 p.m. Eastern today. The dial in for the replay is 877-481-4010 with a confirmation code of 49301. This does conclude today’s conference call. You may disconnect your phone lines at this time and thank you for your participation. Have a wonderful day.