Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Safehold Inc (SAFE, Financial) reported solid earnings for the second quarter of 2024, driven by new originations and efficient business operations.
- The company originated six multifamily ground leases totaling $98 million, with a focus on affordable housing and student housing.
- Safehold Inc (SAFE) announced a new $2 billion unsecured revolving credit facility, enhancing credit capacity and financial flexibility.
- The company closed on a $750 million unsecured commercial paper program, which is expected to provide interest savings compared to the revolver.
- Safehold Inc (SAFE) has a robust hedging strategy in place, saving approximately $3 million of cash interest per quarter at current rates.
Negative Points
- New originations were limited by smaller deal sizes and allocations to a Sovereign Wealth partner under an existing joint venture.
- Valuations from CBRE for the UCA estimate were impacted by higher cap rate assumptions and tougher office market fundamentals.
- The multifamily sector remains the primary focus, with limited opportunities in other asset types.
- The company's legal team restructuring led to a reduction in G&A expenses, but it may raise concerns about the efficiency of outsourced legal services.
- The commercial paper program, while providing interest savings, does not add incremental liquidity as it has a full dollar-for-dollar revolver backstop.
Q & A Highlights
Q: What does the pipeline look like right now, and what are your expectations for the next three to six months? Is it still mostly multifamily?
A: (Tim Doherty, Chief Investment Officer) We closed six of the eight deals announced last quarter, with the other two closing this quarter. Activity is picking up, and we are optimistic about the market. Yes, it's predominantly multifamily due to current market activity and liquidity.
Q: How much is left on the JV, and what are the rate savings on the commercial paper program versus the revolver?
A: (Brett Asnas, Chief Financial Officer) At quarter end, there was $353 million left in the JV, with our partner's share being $159 million. The commercial paper program offers about 50 basis points savings compared to our revolver.
Q: At what point might you get interested in other property types beyond multifamily?
A: (Tim Doherty, Chief Investment Officer) We are seeing activity in other asset classes like hospitality. We are ready to go on various asset classes but are waiting for the right opportunities and increased transaction flow.
Q: What is the downside risk if a property like 135 West 50th is sold for a low dollar amount or returned to the lender?
A: (Jay Sugarman, Chairman and CEO) A low dollar price does not impact us directly, but we focus on long-term value preservation. We are watching the process closely to maximize long-term value.
Q: Where is your most attractive longer-term debt capital right now, and what is the duration and rate?
A: (Brett Asnas, Chief Financial Officer) We utilize both public and private debt markets. Our recent bonds trade close to 6%, and 30-year bonds would be in the mid-6s. We focus on locking in margins and creating accretion for our earnings profile.
Q: Can you talk about the types of multifamily deals you are doing? Are they mostly affordable, development, or Class B?
A: (Tim Doherty, Chief Investment Officer) We are active across all multifamily types, focusing on location and demographic drivers. We see activity in development, recapitalization, and acquisitions, providing positive momentum in multifamily.
Q: How do you decide which acquisitions go on balance sheet and which go into the JV?
A: (Jay Sugarman, Chairman and CEO) The JV has first look, and there are no specific exclusions. Metrics and market conditions determine if a deal fits the JV.
Q: How do you weigh the risk and opportunity of pursuing affordable multifamily ground leases versus traditional ones?
A: (Tim Doherty, Chief Investment Officer) Our underwriting remains largely the same, focusing on cash flow generation and location. Affordable multifamily has high occupancy and slightly lower loan-to-cost ratios.
Q: How quickly could potential rate reductions catalyze real estate transaction activity?
A: (Jay Sugarman, Chairman and CEO) Visibility and clarity produce transaction flow. Rate cuts provide confidence for executing transactions, and we expect increased activity as the market gains clarity on rates.
Q: What is the outlook for new origination economic yields?
A: (Tim Doherty, Chief Investment Officer) Recent deals had a 7.5% yield, but with current rates, new originations would be slightly lower, still close to 7%. We base our rates on the 30-year treasury, aiming for low-7% yields.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
