Earnings Call Transcript - SAFE Q4 2021

Operator, Operator

Ladies and gentlemen, good morning and welcome to Safehold's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. Now, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

Jason Fooks, Senior Vice President of Investor Relations and Marketing

Good morning, everyone and thank you for joining us 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 fourth quarter and fiscal year 2021 results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investors link. There'll be a replay of the conference call beginning at 12:30 PM Eastern Time today. The dial-in for the replay is 866-207-1041 with the confirmation code of 1185612. Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call which are not historical facts may be forward-looking. Our actual results may differ materially from these forward-looking statements and the risk factors that could cause these differences are detailed in our SEC reports. Safehold disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Now with that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman. Jay?

Jay Sugarman, Chairman and Chief Executive Officer

Thanks, Jason, and I appreciate everyone joining us today. The fourth quarter of 2021 was a very strong one for Safehold and capped off a successful year for our Company. We reached a number of important milestones during the fourth quarter and have continued that momentum into 2022. So we have quite a bit of information to share on this call. Let me start by recapping some of the key highlights for you. In the fourth quarter, we closed a record number of ground leases, adding another 17 to our growing portfolio and reaching a key goal with over 100 ground leases now in our portfolio. $777 million in transaction volume in the quarter was our second highest ever and increased our portfolio to $4.8 billion. For the full year, we closed over $1.5 billion of ground leases and broke into several new markets, while continuing to focus on top locations and well-positioned properties. We remain very pleased with the strong growth of our modern ground lease solution and its demonstrated ability to help building owners generate higher returns with less risk and more efficiency. Along with the growing portfolio came strong growth in earnings, with fourth quarter earnings per share up about 29% year-over-year. For the full year, earnings reached $1.35, up 15% year-over-year, held back somewhat by reduced percentage rent on the Park Hotels portfolio. While earnings primarily reflect the positive impact of the long-term rent streams added to the portfolio, the mark-to-market value of the assets sitting on our lands also showed impressive growth. UCA reflecting this value grew by an estimated $1.4 billion in the fourth quarter. What this means is that the measurable capital appreciation embedded in the portfolio stands at an estimated $8.1 billion at the end of 2021 compared to $5.5 billion at the end of last year. Watching this account increase by an estimated $2.6 billion is another indicator of the value delivered to shareholders in 2021. There was also meaningful progress on the right side of the balance sheet. During the fourth quarter, we upsized our revolver by an incremental $350 million to $1.35 billion, giving us excellent flexibility to serve our customers and expanded our access to the 10-year secured market in a separate transaction. That momentum has continued into 2022. As we reported earlier this year, we recently completed our first 30-year unsecured debt placement with a very strong group of investors. The offering was for $475 million in bonds due 2052 and priced at 3.98%. And lastly, news I know many of you have been waiting for, we began taking steps to monetize UCA by completing a private placement with several well-known investors. As a reminder, we think about our portfolio of ground leases generating two distinct pools of value. The ground lease rents and the return of the initial investment basis at the end of the lease represent a high-quality inflation-protected cash flow stream that we believe will generate above-market returns relative to comparable term comparable credit cash flow streams in the bond world. This is one valuable part of our business. We have also been building a second valuable asset that combines the long-term reversionary interest in our ground leases with the ongoing growth engine at Safehold. By tracking the quarterly mark-to-market value of everything sitting on top of our land, we have been highlighting this value and the growth of this second asset. We've called this mark-to-market value UCA or unrealized capital appreciation, since it is an indicator of the value building up for shareholders and on the growing credit enhancement for our creditors. It has grown from an estimated $400 million at IPO 4.5 years ago to an estimated $8.1 billion today and we view it as one of the most valuable components of our modern ground lease business. You'll also remember we had previously set up a vehicle called Caret to help us capture the value of UCA. This initial offering of Caret units for private investors should accelerate investor focus on this unique asset and help us advance two of our long-term customer goals. One, lowering our cost of capital to customers over time; and two, enabling customers to participate in our success. On the first goal, once our share price more fully reflects the value of both assets in our portfolio, our cost of capital should be lower and we would be able to share with customers the benefit of that lower cost of capital. On the second goal, we also believe we may be able to use Caret to create additional customer benefits and rewards in the future. We created the modern ground lease to deliver customers the benefits of more efficient capital, lower friction costs, and less maturity risk. With Caret, we intend to explore a way to deliver customers a unique way to participate in Safehold's long-term success and directly benefit as our modern ground lease portfolio expands. Now in terms of the actual Caret transaction. Our strategy for this initial step was to engage with a small group of sophisticated investors that we felt were well-positioned to understand the unique investment potential and upside Caret represents. While the offering was small and the offering terms are intentionally attractive, we were pleased by the reaction we received. Investors in this round include family offices, sovereign wealth funds, and leading venture capital firms focused on FinTech and prop tech opportunities. The offering was priced at $1.75 billion, a sizable discount to the estimated mark-to-market value of the portfolio and has a liquidity requirement that we pursue listing Caret on a public exchange in the next two years. If we do not successfully list Caret units publicly in the next two years, investors will have the ability to redeem their units at par. With the expected growth in the underlying portfolio valuation over time and the positive reaction from investors to date, we think two years is sufficient time to get the units listed and for the market to recognize a sizable value of Caret. All in all, you can tell we're quite excited to begin making Caret an asset that investors can separately have a chance to purchase and trade, tighten our relationship with customers, and whose value Safehold shareholders will see reflected in SAFE share price. Alright, there's a lot there, so let's have Marcos walk through some more of the details. Marcos?

Marcos Alvarado, President and Chief Investment Officer

Thank you, Jay, and good morning everyone. Before we jump into the details, let me first say that we are excited to announce Brett Asnas' promotion to Chief Financial Officer. Many of you already know Brett since he has been with Safehold since day one, most recently as our Head of Capital Markets. When we started this business, there was a lot we didn't know, especially how we were going to capitalize a 99-year enterprise. Brett and his team's highly innovative Capital Solutions have enabled us to scale and we're excited to see him build upon that success. In addition, we promoted Theresa Ulyatt to Chief People Officer, reflecting the significant contributions she and her team have made in helping shape and drive a winning culture. Safehold is a highly entrepreneurial business and our people are our most important asset. Theresa has been pushing on key initiatives to maximize our firm's engagement so that we can deliver not just for our customers and shareholders, but also for our employees. I'd also like to underscore the very exciting news that Jay discussed regarding the initial sale of Caret Units we announced this morning. Safehold has always been and will continue to be a customer-first business. It's how we began our business and that's how we will continue to scale our business. This initial sale of Caret Units is core to our principal mission of providing our customers with the most efficient capital in the marketplace. And while today is just the first step towards that path, we have already begun thinking about and have received authorization to utilize Caret Units in innovative ways to enable our customers to join us on this journey. I'll spend a little bit more time on the Caret transaction shortly, but now let me turn to our earnings deck and begin with Slide 3. As Jay mentioned, we had a very productive fourth quarter, which concluded a strong year for Safehold. As the quarter progressed, we saw accelerating momentum in our investment activity and closed a record number of ground leases for any quarter-to-date since the Company's inception. For the full year, we originated $1.5 billion of transaction volume and this progress combined with our current momentum has positioned us to raise our target for year end 2023 to a $7.5 billion portfolio versus our prior guidance of $6.4 billion. Additionally, UCA increased by an estimated $2.6 billion in 2021 and is reaching meaningful scale, quality and diversity. Moving on to Slide 4, let me detail this quarter's earnings results. For the quarter, revenues were up 30% to $52 million versus the fourth quarter last year. Net income was up 39% to $21.3 million and earnings per share were up 29% to $0.38. For the year, this brought revenue to $187 million, up 20%, net income to $73.1 million, up 23%, and earnings per share to $1.35, up 15%. As a reminder, these earnings do not include any percentage rent from our Park Hotels portfolio. While it is still too early in the year to predict how that portfolio may perform, we have seen some rebound in occupancy and revenues over the past six months. Slide 5 provides an overview of our investment activity. We were particularly pleased with the level of customer engagement during the fourth quarter, as we originated a record 17 ground lease transactions for $777 million representing our second best quarter-by-dollar amount ever and our best quarter since the beginning of the pandemic. Of that amount, $686 million was funded during the quarter, with an additional $20 million of fundings with prior investments. Separate and apart from these origination stats, we also closed our fourth Ground Lease Plus transaction on a multifamily property in Brooklyn, New York, which could be up to an incremental $91 million in our future pipeline. In total, through Ground Lease Plus and option contracts from that program, we have created forward opportunities totaling approximately $580 million. The investment metrics associated with originations this quarter are in line with our targets, with a weighted average underwritten effective yield of 4.9%, a weighted average effective yield of 4.7%, a ground lease to value of 41%, and rent coverage of 3.7 times. Important to note, we added nine new customers as we continue to broaden the adoption of our Ground Lease product. Slide 6 provides an overview of our portfolio growth for the quarter. At the end of the quarter, our aggregate portfolio stood at approximately $4.8 billion, continuing the growth trajectory since our IPO 4.5 years ago. You can see the quality of the assets we closed over the quarter on the right side of the Slide. We're constantly thinking about how to drive value for our customers. One innovative structure we launched this quarter, which we call SAFE sold, was on a transaction we closed in San Francisco. Oftentimes, we're helping our customers acquire property more efficiently. However, in this case, working with the selling broker, we helped our customer sell their property and drive value. The repeat customer was looking to sell one of its assets. They had a broker estimate a value on where it could trade and they were interested in knowing if a Safehold ground lease could help unlock value for them. We proposed a $65 million ground lease, which suggested they market a newly created 99-year leasehold. The combined proceeds they receive from selling the land and the building separately ended up being more than 7% higher than their market estimate selling the property fee simple. Meaning an incremental $12 million of additional proceeds in our customers' pocket. We have also continued to monitor our customer success and we were pleased to see another customer selling their leasehold position at a similar cap rate as fee simple properties in the market, which generated a strong return over their investment period. We've also had eight customers refinance their leaseholds to date, all at very attractive terms with a diverse set of lenders, demonstrating the growing traction of our product. More portfolio metrics can be seen on slide 7. As of December 31st, Safehold generated an annualized yield of 5.1%, with annualized in-place cap rent of $236 million. The portfolio's annualized cash yield was 3.3%, with annualized in-place cash rent of $148 million. Our portfolio's weighted average ground lease to value was 40% and weighted average rent coverage was 3.5 times. By property type, our portfolio consists of 50% office, 34% multifamily, and 16% hotel and other. Our weighted average lease term is 91 years. Turning to Slide 8. There's been a lot of discussion about inflation and how it impacts our portfolio. While you certainly heard us talk about the bond-like cash flow stream that our Ground Lease produces, the truth is that our Safehold modern ground leases have some strong inflation protection provisions built in, which is far better than any of the high-grade bonds we benchmark ourselves to. For the Safehold ground leases we originate, that inflation protection generally comes in the form of a CPI lookback. Let me take a moment to explain how the mechanics of our lookbacks work and why they create a meaningful amount of inflation protection. Our Safehold ground leases typically have 2% fixed annual rent escalators, with a 10-year CPI lookback capped between 3% to 3.5% per annum inflation growth. That 2% escalator is the minimal contractual rent we will receive. So if inflation averages less than 2% over a 10-year period, we will still get our 2% contractual bumps and our rent growth outpaces inflation in that scenario. However, if inflation averages more than 2% over a 10-year period, our CPI lookbacks provide for our rent to step up to what rent would have been if it had tracked inflation on a compounded basis the entire period subject to a cap. For example, if the cap is set at 3%, that means our CPI lookback will capture cumulative CPI growth for that lookback period, typically 10 years, up to a 3% compounded annual inflation growth. However, if CPI growth during that lookback period exceeded 3%, we would not capture that excess growth above the 3%. That being said, when we analyze historical periods of inflation, it's very rare to see inflation run above 3% for extended periods of time. Following a rent increase for the CPI lookback, the subsequent rent will continue to grow 2% off the higher base until the next CPI lookback. So what it means that if inflation were to trend at 3% for the next 99 years or 100 basis points above our rent bumps, in this illustrative example, our CPI lookbacks would allow us to capture approximately 80 basis points or 80% of that inflation in our ROA. Further, if you consider that we borrow with long-term fixed-rate debt that doesn't have any inflation protection, you can see that we are advantaged as the benefits of our typical CPI lookbacks are allocable to the equity. And finally, with respect to the value of the buildings on top of our leases, generally real estate is positively correlated with inflation and so inflation is positive when it comes to UCA, but we'll talk about that more shortly. First on Slide 9, you can see the geographic breakdown of the portfolio as we continue to expand into top markets with the inclusion of Chicago this quarter. Slide 10 provides an overview on our capital structure. It was a busy quarter regarding capital markets activity. Working with our bank group, we upsized our revolver by $350 million to $1.35 billion. Additionally, we issued $350 million of 10-year 2.85% unsecured notes, our second unsecured notes issuance after getting our debut credit ratings just one year ago. At the end of the fourth quarter, we had $3 billion of debt comprised of approximately $1.5 billion of nonrecourse secured debt, $750 million of unsecured notes, and $272 million of debt on ground leases which we own in partnership, which represents our share. Our weighted average debt maturity is 23 years. In addition, we had $490 million drawn on our unsecured revolver, and so combined with cash on hand, we had approximately $900 million of liquidity at the end of the year. Subsequent to the end of the year, we were very pleased to have been able to do a private placement of our first 30-year unsecured notes issuance, $475 million of 3.98% unsecured notes due in 2052, which priced at a 180 basis point spread to the then-30-year treasury rate. Proceeds from this transaction were used to pay down our unsecured revolving credit facility, as well as general corporate purposes, which may include the funding of additional investments in ground leases. Moving on to Slide 11, we provide an update on estimated UCA. The estimated value of all the unrealized capital appreciation above our cost basis grew to an estimated $8.1 billion, a $1.4 billion increase since our update last quarter. This estimated pool of value has grown by a 90% CAGR since the IPO. To give you a better sense of what encompasses that pool of assets, we have a total of approximately 26.4 million square feet of institutional quality commercial real estate located in the top markets throughout the country, comprised of 11.6 million square feet of multifamily, 11 million square feet of office, 3.5 million square feet of hotels, and 300,000 square feet of other property types. And while we have been tracking this value every quarter since the IPO, we have now taken the first but significant step towards unlocking a portion of that value for shareholders and customers through a transaction we announced this morning, which we highlight on Slide 13. Caret is an extension of our meticulous focus on the customer value proposition. By working to unlock the full value of our platform, we can serve our customers in more ways and deliver increasingly lower cost, more efficient capital solutions. As disclosed in the press release, we sold a 1.37% interest in Caret to a group of leading private equity, institutional, and high net-worth investors for $24 million at a valuation of $1.75 billion. You can see some of the firms that we partnered with on the Slide. Venture capital firms like Ribbit Capital and Fifth Wall, a leading sovereign wealth fund, high net-worth investors including Michael Rubin's Family Office and Kevin Durant. While we've always believed that there were significant amounts of value building up in our UCA pool, but for many investors, liquidity was equally as important. Our focus over the next two years will be to provide liquidity for Caret and we formed an Advisory Board with some of the new Caret investors to help forge that path forward. If we don't provide more liquidity for Caret at a value in excess of these investors' basis within two years, they have the option to cause us to redeem their investment at their original purchase price. So on Slide 13, you can see the ownership structure illustrated. Safehold will continue to receive all the rents from its portfolio and its original cost basis as well as certain other cash flows. The Caret Units are generally entitled to the capital appreciation above our cost basis in both the existing portfolio and all future ground leases we originate under specified circumstances. You can see Safehold owns 83.63% of the Caret Units, the new investors own 1.3% and Management owns approximately 15%, which was earned after achieving all of the performance hurdles in a shareholder-approved long-term incentive plan. In conclusion, it was a strong year for Safehold ending with a strong quarter marked by a record number of ground leases closed. As we expand our leadership position in this growing industry, we felt confident to raise our guidance and target scaling our portfolio to at least $7.5 billion by the end of 2023. In addition, we've taken a first step to unlocking a portion of value in UCA through the sale of Caret Units. Our focus is to continue to grow our portfolio, which will in turn continue to grow the value in UCA, as we seek to unlock the full value potential within the platform, for both shareholders and customers. When we began this journey 4.5 years ago, we set out on a mission to revolutionize real estate ownership by providing a new and better way for owners to capitalize the real estate. As we continue to innovate and unlock the full value of our platform, we hope to be able to deliver our customers the lowest cost, longest term, most flexible capital in the market. And with that, let me turn it back to Jay.

Jay Sugarman, Chairman and Chief Executive Officer

Thanks, Marcos. Obviously, the market got off to a tough start to the year and our shares were hit pretty hard. On the other hand, I think you can see that we've been very busy executing on our business strategy and delivering the roadmap for the future. We remain firmly convinced that this industry will become very large and that we are creating valuable efficiencies for customers and unique investments that many investors will want in their portfolios. Delivering that opportunity to as many customers and as many investors as possible and figuring out how best to do that will be a big part of the Safehold story in 2022. So, let's go ahead and open it up for questions, Operator.

Operator, Operator

And our first question is from Nate Crossett with Berenberg. One moment please. Your line is open.

Nate Crossett, Analyst

Good morning guys, and congrats on a strong quarter. A few questions. I was wondering maybe you can just give us a sense of how things have carried over year-to-date, what was the deal flow like so far, how much have you closed? Maybe give us a little color on the pipeline in terms of mix. Is it still weighted mostly towards residential or is there more office kind of embedded in the portfolio now? And I think even last time you mentioned you were looking at a life science opportunity; I'm curious if there is an update there. And then I had just a question on pricing and yield. I think the yields in the quarter were essentially unchanged quarter-over-quarter. And maybe you can just give us some color on kind of your outlook for pricing this year, given what REITs have done.

Jay Sugarman, Chairman and Chief Executive Officer

Yes, Nate. So let me let Marcos talk about how the pipeline feels and some of the pricing dynamics. But just in terms of the market feels like we continue to bring that momentum in from the fourth quarter into 2022. We're not going to talk about specific dollars yet this early in the quarter, but a lot of progress along the lines we've laid out previously. So look forward to talking more fully about that on our next earnings call.

Marcos Alvarado, President and Chief Investment Officer

Yes, Nate, just to add to what Jay said, I think there’s a fair amount of confidence in our ability to continue to scale the portfolio. Obviously, that was reflected in our raising guidance $1.1 billion for the end of 2023. As you think about the mix, there's a few life science assets in the pipeline, a good amount of multifamily and high-quality office. So consistent with what we've done in the past. And as it relates to pricing, if I look at the pipeline, it's consistent with last quarter from an effective yield standpoint.

Nate Crossett, Analyst

Okay. That's helpful. Maybe you can just give us an updated thinking on the potential kind of combination of iStar and SAFE. Now that the net lease portfolio has been sold, how should the market be thinking about the timing and the mix of how a potential combination might look?

Jay Sugarman, Chairman and Chief Executive Officer

Sure. Just one point of clarification. We've announced the signing of an agreement on net lease; it hasn't actually closed yet, but still a lot of work going on to get that done. So just want to make sure you understood that. Nate, you've heard us say before that once SAFE reaches scale, we think the independent Directors of Safehold's Board can look at the external management structure, the current architecture of Safehold, and determine how best to create shareholder value. And while I wouldn't want to speculate at this time because it's still too early and the two companies have not had any conversations with each other yet, it is possible these discussions could take place at some point this year and we'll update the market as appropriate.

Operator, Operator

Next we have a question from Rich Anderson with SMBC. Please go ahead.

Richard Anderson, Analyst

So, Marcos, I don't know if you said this explicitly, but you talked about utilizing Caret Units in innovative ways with customers. So could you envision, I don't know, purchasing ground leases or getting inbound ground lease investments by using the units as your source of money to – is that like sort of like a down REIT structure type of thing, is that what you're talking about?

Marcos Alvarado, President and Chief Investment Officer

No, I think we as Management see a tremendous amount of value in Caret today and in the long term. And as we think about where we want to ultimately be as a business from a scale standpoint, we want to partner with our customers as part of that solution. So I think figuring out innovative ways for them to share in some of the value that we've created is the way we're thinking about it.

Richard Anderson, Analyst

Okay. And what is the role of the Advisory Board? What will they actually do to forward the Caret business?

Marcos Alvarado, President and Chief Investment Officer

If you think about the investor makeup, Rich, it was a highly curated process from a bunch of different avenues of the world. We're not entirely sure what form Caret will take. And we think this group of investors will be able to offer us insight and expertise that we don't have to ultimately get us on our path.

Richard Anderson, Analyst

Okay. And now, one of the investors, Zigg Capital, is founded by one of your Board members, Dave Eisenberg. Can you talk about some of the safeguards that you put in place, if any, to address any even perception of a conflict, and if you could just kind of touch on that for me, please? Thanks.

Jay Sugarman, Chairman and Chief Executive Officer

Yes. I think it rolls into kind of what Marcos was saying. We've always thought Caret is uniquely valuable and will be attractive to a wide range of investors and we also thought it had some pretty unique attributes that could open up some really interesting possibilities in the future. One of the reasons I think Dave joined the iStar Board is certainly the opportunity set that we think we're creating and has a very future-minded way of thinking about possibilities that we think is definitely going to help us in the Caret process. So we're really pleased to have someone like him. He has also had the benefit of watching us up close build Safehold and Caret, has seen its potential and I think there is a nice group of investors in the Advisory Board that will help us on a lot of the ideas we've been sort of cooking up in the lab over the past year or so. In terms of conflicts, we have pretty strict protocols on both forward in terms of independent Directors and Council is all over any perceived conflict issues. Don't see any challenges there, Rich, in terms of what Council has been sharing with us. But both independent Directors at STAR and Safehold are very much on their toes on this topic right now.

Richard Anderson, Analyst

Okay. Last one from me, you talked about the eight refinancings that happened. Can you talk about where they were in the lifecycle of the expiration and what happened to the rents? Could you give some color about how they were adjusted presumably upwards?

Marcos Alvarado, President and Chief Investment Officer

Yes. So these were ground leases that were put on over the last 4.5 years. So they're all pretty new ground leases. The point being that our customers executed on their business plan and were able to recapitalize the leasehold positions behind us successfully.

Operator, Operator

And our next question is from Ki Bin Kim with Truist. Please go ahead.

Ki Bin Kim, Analyst

Good morning and congratulations on the Caret transaction. Just a couple more questions around that. What was the value of the UCA at the time of the deal? Is that the $8.1 billion still?

Marcos Alvarado, President and Chief Investment Officer

It was when we started the conversations with the investors; it was that after last quarter, so it was $6.7 billion.

Ki Bin Kim, Analyst

Okay. And the transaction, is it tied to a subset of assets within that UCA bucket or is it the totality?

Marcos Alvarado, President and Chief Investment Officer

The totality.

Ki Bin Kim, Analyst

Okay, great. And as you march toward a public listing or some type of liquidity event for the Caret, is it realistic to assume that there is another interim transaction to monetize the Caret further, to show - demonstrate value as it would lead up to the monetization event or is it pretty much the only event we should think about?

Jay Sugarman, Chairman and Chief Executive Officer

Yes. I think there are several different paths we're working with some third-party advisors to help us think through that give insight. I think there's a lot of interest and we've got a group of investors who really span some of the groups we knew or certainly believed would have a lot of interest, whether you're a sovereign wealth fund, whether you are a family office or whether you are seeing the potential to build an exponentially growing pool of value. I think we've got a lot of interesting choices ahead of us and certainly one could be additional private offerings, but we're going to do this very thoughtfully as we work our way through 2022 and continue to execute on the business.

Ki Bin Kim, Analyst

Just a couple more questions. Is there any anti-dilution clause in this first transaction, meaning if you did another private transaction, is there a certain minimum the valuation has to meet?

Jay Sugarman, Chairman and Chief Executive Officer

No. As you know, Caret has a fixed number of Units. So we will have a lot of thought going into how to make Caret absolutely unlock the most value, and part of our Advisory Board's role with us is to really help us figure that out, think that through, but there is no specific provision.

Operator, Operator

And our next question is from Spenser Allaway with Green Street. Please go ahead.

Spenser Allaway, Analyst

Yes. Thank you. So look, I realize in your press release this morning, you mentioned that the goal is ultimately to maximize the value of Caret and that makes a lot of sense given SAFE owns 85%. But can you just talk about how much of the Caret valuation should ultimately accrue to SAFE if the end goal is ultimately just to have a liquidity event and spin it off?

Jay Sugarman, Chairman and Chief Executive Officer

So I think two things, one, we see this as definitely one of the two major assets of Safehold. So I'd anticipate Safehold being a major owner of Caret long term, and that's certainly our thinking at this point. But creating that liquidity, seeing its full value reflected in the share price is important for a number of reasons. We talked about the customer opportunities that will open up for us. We also think from a shareholder standpoint, the share price simply doesn't reflect the value we've created and are creating every day. So we're going to work on multiple fronts. But the ultimate beneficiary or the majority beneficiary should be the Safehold shareholder.

Spenser Allaway, Analyst

Okay. And then just going back again to the - maybe a follow-up on the last question. So, you mentioned in regards to the recent Caret investors, that if there isn't a return beyond the cost basis for these investors that are able to redeem their Units. So when you have a liquidity event, have you guys negotiated a specific hurdle rate for that investor pool?

Jay Sugarman, Chairman and Chief Executive Officer

Yes. We kind of think of it in terms of, we have strong belief and believe they have the same strong belief in the value, but the liquidity for a fund to invest in something like Caret with a long life underlying it, liquidity is really important. So we want to get this investment into as many hands as possible, that requires us to create a liquid instrument. We are very much aligned. We want that, they want that, was important to how they thought about it. In terms of value, you're going to see and hear us continue to talk about the increase in the value of Caret not only historically, but prospectively in terms of the opportunity set. We don't think that's going to be a big challenge, but we need to make this the security and give us the liquidity to really open up this market as soon as possible. So I don't think two years is a problem, but we've got a lot of work to do.

Operator, Operator

Next we have a question from Rich Hill with Morgan Stanley. Please go ahead.

Richard Hill, Analyst

A long-time listener, first-time caller here. I wanted to - thought so you guys might enjoy that. I wanted to talk about the rising interest rate environment, but maybe not the question you think I'm going to ask. As I think about interest rate environments, it's really easy for commercial real estate owners to make money in falling interest rate environments and hopefully this isn't a loaded question, because it's really about what you're hearing from your tenants. But isn't there a scenario in a rising interest rate environment where owners of real estate have to be more, even more efficient in their capital structure, and while your cost of capital might go up depending upon how efficient you can be, is there a scenario where there is actually even more demand for ground leases in a rising rate environment?

Marcos Alvarado, President and Chief Investment Officer

Yes. Rich, I think we think about that environment a fair amount. As we've said on prior calls, our competition is really the regular way of financing real estate, and obviously in a higher raising environment that cost of capital will move up dramatically. And so, as we continue to try to drive down our cost of capital, we think there is a potential opportunity even in a rising rate environment to capture more share.

Richard Hill, Analyst

And maybe as a follow-up question to that, you've always been super successful originating a lot of ground leases, particularly in 4Q, '21. But as I look at your portfolio, it's not often the largest owners of commercial real estate that I think would be household names. What are you hearing from those large, call it institutional investors, and I'm not suggesting you're not working with institutional investors, but the big REITs of the world. Do you think there is an opportunity to eventually expand to them and maybe even over the near term?

Marcos Alvarado, President and Chief Investment Officer

Yes. Richard, sometimes I wish it would happen overnight and I joke with our guys that these conversations sometimes can take two, three years. I can tell you that the team overall feels a tremendous amount of confidence in our ability to scale going forward. And as I think about the quality of who we are engaging with, it looks very different than it did even six months ago. So, for example, yesterday, one of the largest owners of real estate in the world, we spent a good time with them going through their portfolio and talking about the SAFE sell concept.

Richard Hill, Analyst

Okay. Great. Am I allowed one annoying sell-side question about internalization, and Jay, you can say - you can tell me no comment. But here is my question, were shareholders being notified when this starts? I think Jay, you mentioned when there is something - when it is time to say something, you will say something, but that's part one. And then part number two, can you maybe just walk through how you'd consider evaluation framework to value the manager, just if there are any comments there, that would be really helpful.

Jay Sugarman, Chairman and Chief Executive Officer

Yes. I wish we could talk more about it Rich, but I think it is too early to try to lay out all the different paths. This could take candidly, we are executing our business as far and fast as we can and that will obviously make those conversations more fruitful for both sides. So let us do our work and when it's an appropriate time, I'm sure the announcements will come when they're necessary. But right now we're just focused on continuing to build the business.

Marcos Alvarado, President and Chief Investment Officer

Thanks, Rich.

Jay Sugarman, Chairman and Chief Executive Officer

Thanks, Rich.

Operator, Operator

Next we go to Jade Rahmani with KBW. Please go ahead.

Jade Rahmani, Analyst

Thank you very much. Just curious about the underlying building owners in the SAFE portfolio. How would you characterize their duration? And could you give any color as to perhaps what percentage are the managers of funds versus what percentage are traditional real estate owners and families?

Marcos Alvarado, President and Chief Investment Officer

Jade, it's Marcos. I think it's a pretty broad mix of owners and operators, families and fund managers. I can say, for the most part, the investment time horizon of our clients probably sits in the kind of 5 to 10 year bucket?

Jade Rahmani, Analyst

Okay. Thank you for that. Any changes in behavior or underwriting that the underlying investor you're targeting are making as a result of the evolving interest rate outlook?

Jay Sugarman, Chairman and Chief Executive Officer

We certainly in multifamily, there continues to be a very strong bid regardless of rates. I think the rental growth, particularly in some of the core markets we're in, has been historic and I think people still feel very good about those markets. But I think higher interest rates overall in the near term are going to require an adjustment. We think efficiency is only going to get more important when rates rise, and as we continue to say, we think we are providing a more efficient source of capital for lots of different opportunity sets, whether it's multifamily, office, hospitality, or life science. We think we've got a solution that will become even more important as rates rise, maybe returns get squeezed a little bit. But right now at least in the most active part of the market we play in which is multifamily, the bidders are still quite aggressive. We haven't seen a pullback based on rates yet, but obviously the rate move is relatively recent.

Jade Rahmani, Analyst

And finally, the investors that you're speaking with that are contemplating a transaction with SAFE, is there an alternative another ground lease provider or is it whether to the whole financing in a first mortgage and perhaps some other part of the capital stack, mezzanine capital, etc., or is there something else at play? Are you competing primarily with mortgage lenders?

Marcos Alvarado, President and Chief Investment Officer

Yes. Our primary competition is still the regular way fee financing mortgage mezz market that is extremely efficient. Our job is to convince customers that this is a more efficient way to capitalize their real estate and as I alluded to, sometimes those conversations take very long periods of time. But once we get customers over the line, we see a tremendous amount of repeat business. So it's still the regular way of financing markets.

Operator, Operator

And we have a follow-up from Ki Bin Kim with Truist. Please go ahead.

Ki Bin Kim, Analyst

Thank you again. Just going back to the Caret monetization strategy, I'm just curious like to list the securities, what's the biggest hurdle that you guys face? Is it a legal thing, is that a financial engineering issue? Just because we haven't seen something like this before, I'm just curious like internally how - what the biggest hurdles are.

Jay Sugarman, Chairman and Chief Executive Officer

Yes. I think the biggest hurdle for us is to make sure we get it right. We have lots of ideas about how this can play out. We figured out most of that, 90% of that when we started this process years and years ago. But the market has evolved, our business has evolved. We want to make sure we get this right. So we just want to give ourselves the time to work with our new investors and really think about the potential and where we should take this in terms of who are the most likely investors to maximize its value for near-term and long term. So we give ourselves that chance to make sure we've got it right. And then there is really no legal obstacles. It's just getting it in the right hands, so that it trades the way we think it should, which you've heard us talk about, what we think the value components are here, growth, the discount rate. We think we're putting in place all the pieces of the puzzle financially. I'm sure our teams are able to put in all the pieces from a listing requirement. So really this is more of a strategic period where we just want to make sure we've got it absolutely synced and then we will hopefully have the market respond the way we'd like.

Ki Bin Kim, Analyst

Okay. Great. And on the balance sheet, I'm just curious on your - how you're thinking about your equity needs going forward and I'm curious if you raised any equity in 4Q?

Jay Sugarman, Chairman and Chief Executive Officer

Yes. It feels like the pipeline is strong, but we had a lot of capital at year-end. I think Marcos mentioned $900 million. So we'll look at the pipeline. We've got this dynamic. You guys have heard us talk about before, we have some whales and then we have the flow business. The flow business, we can kind of predict. The whales are harder. And so I think the timing of any equity deal will be really dependent on when do the whales hit and certainly a lot of good activity. But nothing we can talk about just yet.

Ki Bin Kim, Analyst

And has there been any equity issuance in 4Q or quarter-to-date?

Jay Sugarman, Chairman and Chief Executive Officer

No.

Operator, Operator

And next we have a question from Harsh Hemnani with Green Street. Please go ahead.

Harsh Hemnani, Analyst

Thank you. Just going back to the sale of the Caret Units, there was an investment Advisory Board that was formed for Caret and I think this is probably the first Board, so to speak for Caret. So I just want to ask, what will the role of this Board be? How much control will they have in eventually deciding what happens with Caret? And then also, can you touch on if there might be any conflict of interest given some of these investors are only invested in Caret and not in SAFE?

Jay Sugarman, Chairman and Chief Executive Officer

Yes. Hey, Harsh. It's only an Advisory Board, so it has no formal voting role in terms of Safehold or Caret. But it is an Advisory Board we respect and what their thoughts on. So there is no conflict per se. They don't have control. They don't have beta right. So it's really an Advisory Board, it does exactly what the name says. It's going to help us think through how to unlock the full potential of this the most quickly from a number of different investor perspectives. And again, we're excited and delighted to have the caliber of people available to us who saw what we see, see that potential, and can actually take us places that would have taken us a long time to get to on our own and we now have people who interface with exactly the parts of the market that we think will find Caret unique and increasingly valuable.

Operator, Operator

And we have a follow-up from Rich Anderson with SMBC. Please go ahead.

Richard Anderson, Analyst

The first, Jay, is there any economic possibility that a combined Company would not be a REIT?

Jay Sugarman, Chairman and Chief Executive Officer

Just way too early to talk, Rich.

Richard Anderson, Analyst

Okay.

Jay Sugarman, Chairman and Chief Executive Officer

I think again, we're just going to try to maximize value. I can't talk about specific tax or anything like that.

Richard Anderson, Analyst

Okay. My question I got back on was, again on this customer opportunity. When you say customers, I assume you're talking about your ground lease customers and is perhaps selling them a Unit of Caret a way to address the anxiety that a real estate owner would feel about losing control over their assets when their ground lease expires? So if you own a Caret, it's almost like, or some Units of Carets, you can hedge against that event and hence your customers could actually be among the ultimate owners of the Caret entity. Is that something you're thinking about?

Marcos Alvarado, President and Chief Investment Officer

Yes. I think what we're trying to accomplish is just deliver our customers the lowest and most efficient form of capital. If that's a combination of ground lease and Caret Units and that will maybe makes them feel like partners, it could be an interesting idea.

Operator, Operator

And Mr. Fooks, we have no further questions.

Jason Fooks, Senior Vice President of Investor Relations and Marketing

Great. It's great to hear all the interest in the story and if anyone has additional questions on today's earnings release, please feel free to contact me directly. Lois, would you please give the conference call replay instructions once again? And thanks to everyone for joining us.

Operator, Operator

Certainly. Ladies and gentlemen, you may access the replay after 2:30 PM Eastern Time today until March 1st at midnight. You may access the replay by calling 1-866-207-1041 and entering the access code of 1185612. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.