Earnings Call Transcript - SAFE Q4 2024

Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations

Good morning. And welcome to Safehold's Fourth Quarter and Fifth Fiscal Year 2024 Earnings Conference Call. If you need assistance during today's call, please press star zero. If you'd like to ask a question, 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, we have Jay Sugarman, Chairman and Chief Executive Officer, Brett Asnas, Chief Financial Officer, and Tim Doherty, Chief Investments Officer. This morning, we plan to walk through a presentation that details our fourth quarter and fiscal year 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 PM Eastern Time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 51963. 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 reenter 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, Chairman and Chief Executive Officer

Thanks, Pearse, and good morning to everyone joining us today. The fourth quarter was, in many ways, a continuation of themes we have seen over the past twelve months. The prospect of lower rates early in the quarter helped to activate business, and higher rates as the quarter went on reversed the equation. A relatively sharp increase in rates ended up posing headwinds for customers, upended many deals, and put upward pressure on discount rates and cap rates used for valuing our existing portfolio. While we can't control interest rates, we still believe that there are reasons to expect rates will come down over time. And that the current headwinds we're facing will become strong tailwinds with more deals, higher values for our cash flows, and higher estimates of UCA. In the meantime, we'll work to counteract the impact of higher rates with two specific initiatives in 2025, to demonstrate value in the portfolio and build on the successes of 2024. The first initiative is continuing our momentum and penetration in the multifamily market, particularly the affordable sector. We like this market for its stable cash flows, high occupancy rates, compelling supply and demand dynamics, and the clear societal benefits that our ground lease provides. In 2025, we plan to double down on our efforts with the goal of doubling last year's affordable volume and expanding to at least two new states. Fuel sizes are still on the smaller side, so expanding our footprint and customer relationships will be important to increasing volume. Second, we'll look to take advantage of what we view as significant undervaluation of our shares. To this end, our board has approved a new share buyback authorization of up to $50 million. Any repurchases will be subject to market conditions and other factors that we deem appropriate. And our goal for this program is to be leverage neutral. We'll be looking for opportunities to recycle capital from the existing portfolio through asset sales or JVs where advantageous. We'll also focus on bridging the gap with Carrot, as we believe it is a significant source of long-term value for shareholders not currently recognized in the share price. As part of those efforts, our goal is to have Carrot become more accessible to third-party investors. In sum, 2025 will be about building on areas of progress from 2024, and continuing to look for ways to highlight the significant value of the portfolio and platform. Alright. Let me turn it over to Brett to review the quarter and the full year in more detail. Brett?

Brett Asnas, Chief Financial Officer

Thank you, Jay, and good morning, everyone. Let's begin on slide two. 2024 was an important setup year for the business. While persistent rate volatility negatively impacted originations and our share price, we took significant steps forward building a more sustainable pipeline and balance sheet. That has us well positioned for 2025 and beyond. Starting with the balance sheet, 2024 was a very strong year for us in the debt capital markets. We increased corporate liquidity through the bank and bond market, closing a new five-year $2 billion revolver in addition to two ten-year unsecured notes offerings totaling $700 million. We lowered the cost of debt in three ways. First, our bond spreads have tightened as they outperformed investment-grade benchmarks, compressing by 62.5 basis points from our February bond offering to our November bond offering. Second, we recognized $43 million of cash hedge gains and proceeds that reduced the effective yield to maturity on the $700 million of unsecured notes by approximately 65 basis points. Third, we put in place a commercial paper program that has been saving approximately 60 basis points versus our revolver. We continued our ratings momentum in the fourth quarter by having S&P rate Safehold initiating a triple B plus rating with a positive outlook. We also received an upgrade in December from Fitch moving from triple B plus to A minus. Fitch is now level with Moody's, which rates us at A3. Our credit profile is one of the highest rated in all of real estate and specialty finance, and a meaningful competitive advantage for us with our customers. In 2024, new origination activity was $225 million, including ten new ground leases for $193 million, and one leasehold loan for $32 million. All ten new ground leases are in the broader multifamily category, including six in the affordable housing space, three student housing, and one conventional multifamily asset. These investments are diversified across seven markets and six sponsors, with a weighted average GLTV of 34% and rent coverage of 2.8 times, and an economic yield of 7.4%. Affordable housing has been a bright spot that we expect will be a meaningful component of future growth. We've made strong inroads with top sponsors that understand the value of efficient ground lease capital. They're using our capital solution to deliver more affordable units to municipalities, which is a win-win for everyone involved. We will continue to seek out new channels where our product is a clear differentiator for our customers. At quarter end, the total portfolio was $6.8 billion with UCA estimated at $9.1 billion, GLTV was 49%, and rent coverage was 3.5 times. We ended the quarter with approximately $1.3 billion of liquidity, which is further supported by the potential available capacity in our joint venture. Slide three provides a snapshot of our portfolio growth. In the fourth quarter, we originated one multifamily ground lease for $22 million. We funded a total of $46 million, including $5 million of the new Q4 origination at a 7.4% economic yield, $41 million of ground lease fundings on preexisting commitments that have a 6.9% economic yield, and $400,000 related to our 53% share of the leasehold loan fund, which earned interest at a rate of SOFR plus 271. For the full year, we funded a total of $319 million, including $148 million of new 2024 originations that have a 7.3% economic yield, $165 million of ground lease fundings on preexisting commitments that have a 6.5% economic yield, and $6 million related to our 53% share of the leasehold loan fund which earned interest at a rate of SOFR plus 579. Our ground lease portfolio has 147 assets and has grown twenty times since our IPO. While the estimated unrealized capital appreciation sitting above our ground leases has grown twenty-one times. We have eighty-five multifamily ground leases in the portfolio and have increased our exposure from 8% by count at IPO to 58% today. In total, the unrealized capital appreciation portfolio is comprised of approximately thirty-six million square feet of institutional quality commercial real estate consisting of approximately twenty thousand multifamily units, twelve point five million square feet of office, over five thousand hotel keys, and two million square feet of life science and other property types. Continuing on slide four, let me detail our quarterly and annual earnings results. For the fourth quarter, GAAP revenue was $91.9 million, net income was $26.0 million, and earnings per share was $0.36. The decline in GAAP earnings year over year was primarily driven by a one-time $15.2 million derivative hedge gain recognized in Q4 2023. Excluding this one-time derivative hedge gain, Q4 earnings per share increased approximately 1% year over year, driven by a $3.9 million net increase in asset-related revenue from investment fundings and rent growth, less additional interest expense on funding these ground leases, offset by a $1 million increase in our non-cash general provision and a $2.3 million decrease in earnings from equity method investments primarily due to repayments in the unconsolidated leasehold loan fund. For the full year, GAAP revenue was $365.7 million. Net income was $105.8 million, and earnings per share was $1.48. The increase in GAAP earnings year over year was primarily driven by the $145.4 million non-cash impairment of goodwill and $22.1 million of merger and Carrot-related costs taken in 2023, a $13.8 million net increase in asset-related revenue less additional interest expense, and $5.8 million in G&A savings net of the Star Holdings management offset by a $6.8 million increase in non-cash general provision and the aforementioned $15.2 million derivative hedge gain recognized in 2023. Adjusting for nonrecurring and other reconciling items, full year EPS increased approximately 8% year over year from $1.45 to $1.57.

Tim Doherty, Chief Investments Officer

Hey, Rob. It's Tim Doherty. Yeah. So I think as Jay mentioned, we are seeing some good activity on the affordable side we saw in 2024 and Q4 with the collections and rate volatility. Saw some things get pushed into 2025, but the activity coming into 2025 in the last month and a half year has been quite good. I think you're hearing that across the board in different real estate companies. We're seeing the same. The front of the funnel is quite good. Obviously, multifamily is willing to roost here, where capital is flowing very, very well. Spreads are tightened. A lot of interest into that market. That were on the sidelines are now back in. Pushing spreads down gives people more confidence and stability. So not just the affordable side. You're seeing the market rate side and markets that are more supply constrained. You know, use some that aren't. Everyone always says the sunbelt, but New York City, Boston, you know, some in submarkets in Northern and Southern California. You're seeing good momentum there on the conventional side and, you know, even development in those tight supply constrained markets you're seeing as well. So it's not just the affordable side, the market rate side as well. We're seeing good activity. And then on the other asset classes, we see look. We have a pretty good portfolio here. We can track actually real-time what's happening in these markets, not just from market info, we can see it from actual assets. You know, office is seeing good, you know, fundamentals. In some spots here in New York, you're seeing quite, you know, positively.

Jay Sugarman, Chairman and Chief Executive Officer

Aaron, it's Jay. So look, we think the stock is materially undervalued. You've heard us say that before. It's not just on a straight economic basis, but if you start thinking about the embedded inflation kickers, obviously, what we believe Carrot is worth can get quite compelling down at these levels. So we've been looking through the portfolio and looking at some of the possibilities of ways to access capital to take advantage of that. Certainly, particular asset sales are possible JVs, and we do think that this is the year we're going to find a way to unlock Carrot for more investors, so there's certainly a multiple choice equation for us to find the right capital to create the most accretive way to use that authorization. Gonna take us a little bit of time to put all that together, but again, when we start the year with a significant undervaluation in our shares, we have to compare that against anything else we can do and right now it looks really compelling.

Anthony Paolone, Analyst

Yeah. Thanks. Good morning. My first question relates to the affordable housing transactions you've been doing. I think we're all pretty familiar with the value proposition when you do ground lease deals on conventional assets. Can you talk about just any differences in how this might work or what the sketch of a deal looks like for a sponsor when you do these affordable transactions?

Tim Doherty, Chief Investments Officer

Yes. Sorry. I think it's Tim again. You know, the basics of all this is it's the same as convention. Right? Our cost of capital is the cheapest around. So it provides, you know, the low cost of capital into these cap stacks. Affordable has a lot of differences to conventional that the sources of these transactions know, anywhere from six to ten different sources coming from federal, state, local, loans, etcetera, and these transactions. So obviously, we did a lot of work to make sure we understood all the different players here, make sure our structure works appropriately. But the biggest one is this is a gap filler. Right? So there's different cost of capital to all those and different providers. So our cost of capital is significantly cheaper. There are other alternatives for those gap fillers. So that's one of the main keys. And then, look, these developers are in the space they're trying to get bond allocations. So if they can find any advantage to help their capital stacks to do so, they love to do it. So I think that's where we're seeing a lot of traction and the build-up of new sponsors as we've executed, and we've got to show that to the market, and that's helping us expand both on sponsor and now you're seeing on location.

Brett Asnas, Chief Financial Officer

Yep. And then it's Brett. So from a G&A perspective, we set out when we internalized the company that we thought it'd take about $50 million a year to run this company. As you've seen last year, we were able to get that number down to mid $40 million range. On a net basis, that's net of the management fee. When you look at 2024, we were able to come in at around $37, $38 million. So we were able to nicely beat our targets and continue to refine our overhead structure. You know, part of the calculus from this point going forward, and you rightly point out, is you know, gross to net, the management fee, and as the management fee comes down year to year, that'll be about a $5 million or so difference from 2024 to 2025. So if you take this past year's number plus $5 million, you're in the low $40 million range. That's our target for this year. On a net basis, and that includes, obviously, the direct impact of the management fee. Which for this year should be in the $10 million to low teens type range. So that's the gross to net figure for you.

Ravi Vaidya, Analyst

Hi there. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. I guess if we think about your various capital deployment opportunities, how do you view buybacks versus risk new originations and guess what's the appetite for maybe more than the $50 million for buybacks of the stock here continues to lag you know, sub twenty bucks?

Jay Sugarman, Chairman and Chief Executive Officer

Hey, Ravi. So, you know, our overarching theme is we need to scale this business. We think this is a very large opportunity, and a lot of the unlock happens when you get to full scale. So that's still our main goal, but there are moments in time like today where we think the share price undervalues the fair value by a sufficient margin that it's worth considering. So we're gonna start with this $50 million. We've got to create capital on a leverage neutral basis to use it. So this will be the first sort of tiering. What our real hope is, is as the market opens up, the opportunity set opens up, you know, the opportunity to scale. So I would say we're trying to do both. We're trying to take advantage of a below-market share price, but we're also still eyes on the prize, which is this business, you know, we still believe has a $25 billion to $50 billion type sizing opportunity for the leader in the marketplace, which we want to be. So the goal is not to shrink, it's really to grow, but when you're offered a fairly compelling way to capture value for shareholders, you know, we'd like to look at ways to take advantage of that. Sure. Look, over the past six months, we've talked to a number of interested investors. We've gotten their feedback. The two main themes are, you know, the long-term liquidity and the growth prospects. Certainly, you have a strong viewpoint on the future growth prospects. The liquidity, the long-term liquidity is something we've been talking about in term and now we've begun working with our Carrot Advisory Board when we look at other attractive but illiquid asset classes. How can we enhance the future liquidity? How can we expand this investor base? We still think this is a natural fit for lots of family offices and lots of different types of investors. But it will be an impediment if they can't see a path to liquidity over the long term. So we're working on some ideas on that front. Again, early stages on that, but I think we have some track internally in terms of ideas. So that's definitely a goal for 2025, and I would be really disappointed if, you know, this year we didn't make some progress on that front.

Caitlin Burrows, Analyst

Hi. Good morning, everyone. Maybe a follow-up to one of the questions from before on the affordable side. Can you just go through the differences between traditional multifamily and affordable? Perhaps for now, like, why affordable is more active today? And then long term, is there any difference to Safehold on traditional versus affordable? Like, the yield lease coverage or anything else? Attractiveness?

Tim Doherty, Chief Investments Officer

Yeah. Sure, Caitlin. Look, I think the key is all we all know and the headlines that obviously, there's a significant housing shortage in the US, and then a lot of that's in the affordable side. So the stability of that platform nationally is quite impressive. So the number of units that are delivered in 2024 was in the seventy thousand range nationwide. That's consistent with where it was from the last three years before that. It was slightly lower than that, around sixty. So you see, even despite the volatility in rates and how the other, you know, more the market rate side has performed, both on deliveries and just the performance of them, you're seeing stability in both the delivery and then as Jay mentioned in his opening remarks, the stability of the assets. Right? High demand for these units, very high occupancy, and then stable growth with how they're sized in terms of the rent being paid based on local AMI. So it's all fixed. So that's then the sort of the pleasant thing to see is a sort of nice baseline of deals even when there's market volatility. So I think that was the part that attracted to us. Obviously, we had to learn all the different players in that market. Make sure that, you know, we fit in nicely there.

Jay Sugarman, Chairman and Chief Executive Officer

Yeah. I'd add two things to that, Caitlin. One is unlike conventional multifamily, these tax credits are limited. So there is a cap. It's allocated across states, and that's the pool of money to play with. And what ground leases do is help stretch that pool of money into more units, more affordable units. So we think there's a real market demand for affordable, and we can help developers meet that. So very different in the sense that the pool of equity is limited whereas in multifamily, it's basically unlimited. The other thing we see that's interesting is, you know, these are hard to put together. So, ultimately, our basis is a bigger discount to replacement cost. But because the revenues are capped, they have some similar metrics to traditional multifamily, but we know how hard these things are to put together. And on a replacement cost basis, it's actually more attractive than traditional multifamily. So there's a lot of compelling reasons. It's a hard business. It's a nuanced business. We spent an enormous amount of time learning those ins and outs. We're gonna have to do that state by state. But the teams have done a really good job in California; now we're gonna take that knowledge and sort of move it.

Kenneth Lee, Analyst

Hey. Good morning. Thanks for taking my question. Just one follow-up on affordable multifamily. The previous comments there, the returns being potentially more attractive than traditional. It fair to say that the economic yields associated with ground leases for affordable multifamily would be higher than what you're seeing for other properties. Just want to get a little bit more color on that. Thanks.

Tim Doherty, Chief Investments Officer

Yeah. If I understand the question correctly, it's what's our cost to capital on those deals and the answer to that is they're the same. There's no difference between the cost of capital on a conventional deal versus an affordable.

Jay Sugarman, Chairman and Chief Executive Officer

Yeah. Look. We don't wanna increase that. Have a long-term goal there that we're gonna stick to. But this is a moment where we need to look hard at the portfolio. Historically, we haven't really been interested in selling assets. Again, we're trying to scale the business, not shrink the business. We think there's a pot of gold at the end of reaching that scale that the market doesn't see yet. But this is a moment in time where we see possibilities and we wanna go explore them and see if there's an opportunity to make one plus one equal more than two. There's some work to do, obviously, as everyone on this call has pointed out, you want this to be accretive, you want it to be value accretive, you want it to be earnings accretive. You want it to be leverage neutral. So things do need to line up. But we've got the team sort of working on all fronts to find ways to create capital that either can be deployed in new transactions or can be used to take advantage of dislocations in our share price versus what we think fair value is. So it's an ongoing process. It strikes us that, you know, there are opportunities in the portfolio to take advantage of. And so we're gonna begin that process now and really figure out how we can create kind of capital that can be accretive for shareholders.

Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations

If you should have other questions on today's release, please feel free to contact me directly. Ollie, would you please give the instructions once again? Thank you.