Safehold's Q3 earnings show growth in multifamily ground leases and strong liquidity as they navigate challenges in affordable housing litigation.

OPERATOR - (00:00:00)

Accordingly, giving customers products that enable them to move quickly and adjust to market conditions remains a focus and we will continue to innovate with ways to provide speed, certainty and flexibility around our core ground lease solution. One Stop Capital Solutions, custom pricing solutions and other enhancements will continue to expand the ground lease market for new and existing relationships and it's important that we find ways to generate attractive asset level returns for us while also meeting our customers evolving needs. All right, let's turn it over to Brett to review the quarter.

Brett - (00:00:37)

Brett thank you Jay and good afternoon everyone. Let's begin on slide 2. During the third quarter we originated four multifamily ground leases for $42 million. In the fourth quarter to date, we originated an additional four multifamily ground leases for 34 million. These combined eight assets are all within our affordable housing subsegment and located in the Los Angeles and San Diego markets with credit metrics in line with portfolio targets and a weighted average economic yield of 7.3%. Six of these transactions were with a new customer added to our program, while the other two were with an existing customer who has now originated a total of seven transactions with us since inception. We have additional LOIs signed with both customers for deals expected to close through year end and into 2026. We're pleased to see growing product adoption and repeat business in this sector as we expect it to be a meaningful growth channel for safehold. At quarter end the Total portfolio was 7 billion and UCA was estimated at 9.1 billion. GLTV was 52% and rent coverage was 3.4 times. We ended the quarter with approximately $1.1 billion of liquidity, which is further supported by the potential available capacity in our joint venture. Slide 3 provides a snapshot of our portfolio growth. In the third quarter we funded a total of 58 million including 33 million of ground lease fundings on new originations that have a 7.4% economic yield, 15 million of ground lease fundings on pre existing commitments that have a 7.5% economic yield and 10 million of existing leasehold loans that earn interest at an approximate rate of SOFR +499 basis points. @ quarter end, our ground lease portfolio had 155 assets including 92 multifamily properties and has grown 21 times by both book value and estimated unrealized capital appreciation since our ipo. In total, the Unrealized Capital Appreciation Portfolio is comprised of approximately 37 million square feet of of institutional quality commercial real estate consisting of approximately 21,500 multifamily units, 12.6 million square feet of office, over 5,000 hotel keys and 2 million square feet of life science and other property types. Continuing on Slide 4, let me detail our quarterly earnings results for the third quarter. GAAP revenue was 96.2 million, net income was 29.3 million and earnings per share was $0.41. The increase in GAAP earnings year over year was primarily due to A non recurring 6.8 million non cash general provision taken one year ago. Excluding non recurring items. Q3 earnings per share increased $0.04 year over year or approximately 12%, primarily driven by new investment activity. On slide 5 we detail our portfolio's yields for GAAP earnings. The portfolio currently earns a 3.8% cash yield, up slightly from last quarter due to organic growth, higher yields on new investments and a fair market value reset on one of our ground leases. Our annualized yield earns 5.4% and includes non cash adjustments within rent, depreciation and amortization, which is primarily from accounting methodology on IPO assets but excludes all future contractual variable rent such as fair market value resets, percentage rent or CPI based escalators which are all significant economic drivers. On an economic basis, the portfolio generates a 5.9% economic yield which is an IRR based calculation that conforms with how we've underwritten these investments. This economic yield has additional upside including periodic CPI lookbacks which we have in 81% of our ground leases. Using the Federal Reserve's current long term breakeven inflation rate of 2.25%, the 5.9% economic yield increases to a 6.0% inflation adjusted yield. That 6.0% inflation adjusted yield then increases to 7.5% after layering in an estimate for unrealized capital appreciation using Safehold's 84% ownership interest in Carat at its most recent 2 billion valuation. We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today. Turning to slide 6, we highlight the diversification of our portfolio by location and underlying property type. Our top 10 markets by gross book value are called out on the right representing approximately 65% of the portfolio. We include key metrics such as rent coverage and GLTV for each of these markets and we have additional detail at the bottom of the page by region and property type. Portfolio GLTV, which is based on annual asset appraisals from CBRE, remained flat quarter over quarter at 52%. Portfolio rent coverage declined very slightly quarter over quarter from rounding up to 3.5 times previously to now rounding down to 3.4 times. Lastly, on slide 7 we provide an overview of our capital structure. At quarter end we had approximately $4.8 billion of debt comprised of $2.2 billion of unsecured notes, $1.5 billion of non recourse secured debt, $881 million drawn on our unsecured revolver and $270 million of our pro rata share of debt on ground leases which we own in joint ventures. Our weighted average debt maturity is approximately 19 years and we have no maturities due until 2027. At quarter end we had approximately $1.1 billion of cash and credit facility availability. We are rated a 3 stable outlook by Moody's, a stable outlook by Fitch and BBB, plus positive outlook by S and P. We have benefited from an active hedging strategy and remain well hedged on our limited floating rate borrowings. Of the $881 million revolver balance outstanding, $500 million is swap to fix SOFR at 3%. Through April 2028. We received swap payments on a current cash basis each month and for the third quarter that produced cash interest savings of approximately 1.7 million that flowed through the P and L. We also have 250 million of long term treasury locks at a weighted average rate of approximately 4.0% and current gain position of approximately 29 million which is currently recognized on the balance sheet but not the P and L. We are levered 2.0 times on a total debt to equity basis. The effective interest rate on permanent debt is 4.2% and the portfolio's cash interest rate on permanent debt is 3.8%. So to conclude, we're encouraged by good traction in the affordable sector which we believe will help buoy origination volume while other sectors work their way back into the pipeline. And we have a strong balance sheet and liquidity position that we'll look to take advantage of to be more offensive with our customers. And with that, let me turn it back to Jay Thanks Brett.

Jay - (00:07:46)

I mentioned earlier our focus on finding ways to meet our customers needs. Of course it's also important for our customers to live up to their obligations. So let me provide a brief update on the Park Hotel Master Lease. We recently sent this tenant a lease termination notice for all five hotels governed by the Master Lease and will be pursuing all our contractual rights under the lease. We believe the tenant has breached the master lease covenants and has not upheld their contractual obligations under the lease, which include specific maintenance and operating standards. Because this is now active litigation, we are limited in what else we can say publicly. As I'm sure you understand. We can't provide assurance that we will prevail in litigation or that the future financial impacts will be positive. Okay with that, let's go ahead and open it up for questions.

OPERATOR - (00:08:38)

Thank you. To ask a question, Please press star 1. At this time, we will take as many questions as time permits. Once again, Please press star 1 to ask a question. We will pause a moment to assemble the roster. The first question comes from Ronald Camden with Morgan Stanley. Please proceed. Hey, great. Just two quick ones for me, just starting with the originations. You know, I think they all multifamily looks like all on the west coast.

Ronald Camden - Analyst - (00:09:21)

If I'm looking at this correctly. I did notice the rent coverage ticked down a little bit. I don't know, sort of. If you could talk through that and maybe just while you're on that, just. Talk about sort of the appetite and the potential for more of these sort of affordable housing deals.

Tim Daugherty - (00:09:39)

Thanks. Hey, Ronald, it's Tim Daugherty. You see that the assets were out in California on the affordable side, as Brett and Jay both mentioned, seeing great traction there in that space. On the affordable side, the team's doing a great job of expanding that throughout the country, which I think we'll see results in the quarters ahead. Right now, we've seen the great results on some of these sponsors. We have repeat sponsors in California. As for coverage, as you probably have seen in our transactions on development in particular, not only this is our underwriting, then we take a haircut to actually our underwriting to show what that coverage is. So if you actually took the sponsor's cash flows, those coverages are in line with our metrics, if not even a little bit above. If you take our underwriting without the haircut, it's probably more in line. So we're pretty conservative on the development deals since those are a little bit more time to get to stabilization. We just want to be able to show those as conservatively as possible. But in terms of your question on transactions and deal flow, but we're seeing great momentum. I think you're seeing that with the closings here, even post quarter end. We're seeing great momentum even going forward with more transactions under LOI currently.

Ronald Camden - Analyst - (00:11:03)

Great, that's really helpful. And then my second one was just, I appreciate you can't comment on anything on the Park Hotel, any color on just timing on how long these usually take to be resolved? take to be resolved at a high level? Thanks.

Jay - (00:11:23)

Hey Ron, it's Jay. Yeah, I think it's unfortunate when things end up in litigation. We try pretty hard to find the solutions where both sides can win. But when we can't, obviously we need to enforce our contractual rights to protect shareholder value. And these things don't happen overnight. That's why we typically would try to avoid it. But in this case, we think it's the right thing to do for shareholder value protection and it will play it out. It's going to take a little bit of time.

Ronald Camden - Analyst - (00:11:54)

Great. That's it for me. Thank you.

OPERATOR - (00:11:58)

The next question comes from Anthony Pallone with JP Morgan.

Anthony Pallone - Analyst - (00:12:02)

Please proceed. Great. Just try to understand more just on Park Hotel, understanding the sensitivity, but what exactly did you claim was breached? Did you claim was breached? I assume they're still paying rent or. Was there some change there?

Jay - (00:12:20)

It's not a rent issue, Anthony. It's a standard of care and maintenance. Can't really go into it, but we think, we think the contract is clear and just couldn't find an agreement on that.

Anthony Pallone - Analyst - (00:12:35)

Okay. And then just more broadly on your. Deal pipeline and so forth, as we see like office, industrial and other types of transactions start to come back to the market. Are you seeing more of that and. Would you do more of those types of transactions if those opportunities come around, Jordan?

Tim - (00:13:00)

Tim? Yes, definitely. We're actually see we track front of the funnel all the way through of course to closing. And when we look quarter over quarter, the opportunities we're seeing, it's pretty well diversified now spreading out into the hospitality, retail, office side. In addition to the traction you're seeing on the affordable space, conventional multifamily construction and recapitalization that's been there. So we're seeing opportunities there and when the right ones come up, we're right on top of them. We think that as you're seeing from some of the other announcements in this quarter, the transaction flow has definitely increased. I think what Jay mentioned with the yield curve not as steep is starting to release some transactions which is great for the market and it just takes time to work those deals through the system and for us to start to close on some of those.

Anthony Pallone - Analyst - (00:13:55)

Okay, thanks.

OPERATOR - (00:13:58)

The next question comes from Kenneth Lee with RBC Capital Markets. Please proceed.

Kenneth Lee - Analyst - (00:14:04)

Hey, thanks for taking my question. I think you mentioned some of the economic yields ranged up to 7.5% on some of the more recent deals there. Wondering if you have any expectations for economic yields going forward. I know that in the past you talked about long term bonds plus anywhere from 75 to 85 basis points. Any change There. And more importantly, as potentially short term rates move around, do you expect any kind of indirect impact to economic yields go forward? Thanks.

Tim - (00:14:44)

Sure, Kenneth. Those yields, look, it depends on the timing of these closings. We're based off the 30 year Treasury. So over the quarter, you know, it was a variable rate there, higher in the beginning, towards the end. So those closing, those closings happened earlier, some of them happened towards the end and then the ones that closed earlier this month or, sorry, last month. Now what we expect is, you know, yes, there's that spread to the long term bond, but also we expect now where Treasuries are high sixes, low sevens is pretty, pretty consistent right now with where the treasury seems to be to be at. And the deals that are in our pipeline are in that range.

Kenneth Lee - Analyst - (00:15:31)

Gotcha. And one follow up, if I may, you touched upon within the prepared remarks seeing some extended time frames, it sounds like to close some of the deals going to fourth quarter or even the first quarter. Any particular factors driving the extended out time frames?

Tim - (00:15:51)

Thanks. The extended time frames. A lot of these deals are development deals. So those do take a little bit more time to close. You know, I think in the affordable space, a lot of those are development deals. Most of those are development deals. The conventional side closed a few in that space base versus a recap that could take four weeks to eight weeks to close. So nothing abnormal in the market for those to take a little bit more time. But we're seeing good momentum on that front and pretty consistent deal flow. And Lois being signed.

Kenneth Lee - Analyst - (00:16:30)

Gotcha. Thank you very much.

OPERATOR - (00:16:34)

The next question comes from Harp Hamnani with Green Street. Please proceed.

Harp Hamnani - Analyst - (00:16:40)

Thank you. Maybe just a clarification right here correctly, that for the park litigation, it's against all five of the hotels in the master lease or is it just against the two that they planned on not renewing? And then second part is, what's the sort of near term financial impact of this? Is park going to continue to pay rent during the period of time the legal battle goes on in the background or is there going to be some near term impact from that?

Jay - (00:17:16)

Yeah, the litigation is around all five hotels, not just the two. And we're obviously working to find a way to continue the hotel's operations as smoothly as possible. So I don't have any more detail I can share on that, but you know, that's certainly our goal.

Harp Hamnani - Analyst - (00:17:39)

Okay, fair. So I guess is the goal here to try to treat the master lease as a package, you know, all or nothing?

Jay - (00:17:52)

Yeah, it is a master lease. And the provisions are backed by a corporate entity. So we certainly treat it as a master lease.

Harp Hamnani - Analyst - (00:18:04)

Got it. Okay, last one from me, I guess maybe higher level on the transactions. Right. As you mentioned, sort of broader real estate transaction activities are broadly in line with call it 2021 levels. And at the same time, you know, rates haven't necessarily gone back to what it was in 21 and 22, but we stabilized volatility has come down. Where in the low fours almost consistently do those bigger check size transactions start to come back? Are you seeing more of those or is it still, you know, smaller check size multifamily? I agree with you on the consistency part. I think that is driving some of the market now. Everyone has a lot more visibility so transactions are, are getting done on the size. The affordable deals tend to be on the smaller side. So you saw all the deals that have closed, all the deals that closed in the third quarter. The deals that closed quarter to date were affordable. They're on the smaller side. These are actually, I'd say on the smaller side of those. Even the larger transactions, you're seeing a lot of trades now starting to happen on the larger deals. Our pipeline has some larger transactions in it than these affordable deals. But multifamily transactions on the conventional side tend to be somewhere between $40 million of total value to 85ish million dollars of value. So a third of those, you can kind of figure out what our ground leases are typically sized. And then office and hospitality tend to be a little bit bigger asset size than those. But again not much different from what you've seen in the past, from quarters past what you were mentioning. 2021. Pardon. Thank you. The next question is from Rich Anderson with Cantor Fitzgerald. Please proceed. Hey, good evening folks. Have you stated what this sort of.

Rich Anderson - Analyst - (00:20:12)

Forward pipeline, it looks like in dollar terms, you mentioned activity got pushed out, but I don't believe you sort of put a number on what the pipeline looks like on a go forward basis. If you were willing to share.

Tim - (00:20:27)

Yeah, I guess we wouldn't share the exact number. But I guess to give you an idea of what we have today under LOI that will close in the coming quarters, I would say it's over 15 deals and over $300 million of transactions that will again close in the coming quarters. And it's a mix between the affordable transactions and conventional multifamily.

Rich Anderson - Analyst - (00:20:52)

Okay, great. And as far as I'm not going to ask specifically about parking, I understand you can't talk about that. But just to be clear, a lease termination successfully Completed means reversion rights and you get the keys. That's one possible outcome. Speaking generally about how this works, is that correct?

Jay - (00:21:17)

That's correct, Rich.

Rich Anderson - Analyst - (00:21:19)

Okay, that's my second question, so I'll stop there.

OPERATOR - (00:21:23)

Thanks. The next question comes from Ravi Vadma with Mizuho. Please proceed. Hi there.

Ravi Vadma - Analyst - (00:21:34)

Hope you guys are doing well. Just wanted to ask another follow up on the Park Hotel litigation here. Does this impact your potential interest in maybe pursuing hotel originations going forward? And is there any additional corporate costs that we should be considering for the model, more G and A legal fees or any other one timers as we think about Q4 and 26?

Jay - (00:22:03)

Yeah, I'll take the first part and maybe Brett can take the second part. Look, this is an anomalous outcome. It's not what we expected. This is a master lease form that we didn't create 30 years ago when it was put in place. And I don't think it impacts our view on any part of the ground lease ecosystem that we're working in. So we'll get through it. And. I don't think you should think of this as indicator of anything or a precedent for anything.

Brett - (00:22:39)

Yeah. And on the, on the economic side, you know, or for the P and L, obviously, as Jay mentioned, you know, it's too early to tell where this will head. Obviously, you know, we wanted to make this decision on behalf of our shareholders and make sure that we protect value. So I think over the coming quarter we'll have better visibility and can certainly update you in the market as to what that looks like. But for the time being, we feel like we're in a good spot in terms of the consistency of what we've been making. And then moving forward, as Jay mentioned, with the termination, any costs associated with that, et cetera, will be able to give the market better visibility. It's pretty early and premature at the moment. Got it. Appreciate the color there. Just one more. How do you guys think about the recent New York City Merrill win yesterday and the impacts surrounding rent stabilization and maybe broadly how this could impact affordable housing? You guys have done a lot of deals with affordable housing and just wanted to see how, you know, this type of news and this type of language impacts the underwriting of this deal. Thanks.

Jay - (00:24:04)

Look, I think we fundamentally follow supply and demand wherever it goes. And obviously if you reduce the incentives to create supply, you're going to choke off supply, which is in many cases just leads to even tighter market conditions. We're seeing that more generally across the market. Those, those areas that didn't have supply are starting to recover and there's not a lot of supply in the pipeline. And you see what happens. Rents start to move. So I'm not sure how the administration is thinking about that, but it's certainly our belief that the way to keep, you know, rents down is to have supply meet demand. So I'm not sure exactly how this is all going to play out, to be honest. We believe we have a solution for the affordable housing problems in this country that's very powerful. We'd like to deploy it in more places. I will tell you, a lot of the friction costs are created by government regulations that we would just assume help solve the problems quicker, faster and better. But we're kind of being held back a little bit by the nature of government regulations in that area. So we're hopeful that people recognize this is a problem, that ground leases can be a major part of the solution. And creating new supply is long term, in my mind, a better solution for most municipalities than trying to arbitrarily decide where rent should be. That just sounds like a tough long term economic solution.

Ravi Vadma - Analyst - (00:25:53)

Thank you.

OPERATOR - (00:25:55)

Okay, the next question comes from John Peterson with Jefferies. Please proceed. Great, thanks. Can you remind us how much of.

John Peterson - Analyst - (00:26:03)

Your multifamily portfolio is affordable housing today? I know it's 41% of gross book value. And then do you guys have a long term target or cap of where. You'D want that number to be as a percent of your portfolio?

Tim - (00:26:22)

John, we'll get back to you on some more definitive number. But it's a pretty low number now. The business really just began 18 months ago or so with the team being dedicated to it and getting deals closed after being in. So I would call the lab to learn more about the space prior to that. So the team is, as you can see, has great momentum going forward in terms of where we'd like it to be. Look, we're growing a massive portfolio here, so the number on how large it could be in dollars, we're striving to make it very large. I guess I would say without throwing a number out there on a percentage. You can see over time different asset classes are active at different times. So to say what percentage of the portfolio would be pretty difficult. But you're seeing that the housing sector of our portfolio, that's why we label it under all multifamily, is a majority of the assets that we've closed on the books to date. And we see that trend continuing in terms of the ratio of housing as. A part of our portfolio.

John Peterson - Analyst - (00:27:27)

Okay. And outside of California, I guess, which states do you think are most likely. To see some of these affordable originations next?

Tim - (00:27:42)

Well, the capital by the government is allocated by the size of the state. So California being the largest is the one that allocates the most. It's actually the most efficient system, at least in our opinion. So we're seeing great traction there is that system works quite well. And look, I think the expansion there is into the larger, larger states. So a lot of those are in the Sun Belt and Coastal. You see a lot there. So our team is working on all of them as time goes on. I think in the coming quarters and year you'll see us penetrate those markets as well.

John Peterson - Analyst - (00:28:22)

Okay.

OPERATOR - (00:28:22)

All right, thank you. Up next is Chris Muller with Citizens Capital Markets. Please proceed. Hey guys, thanks for taking the questions. So I guess following up on that prior line of questioning, is any of your New York City multifamily exposure to rent stabilized units and if so, how would a rent freeze even play out? Given your contractual CPI escalators, would that.

Chris Muller - Analyst - (00:28:47)

Burden just solely fall on the sponsors?

Jay - (00:28:53)

And we haven't really cracked the New York nut yet. And that's. You're asking one of the questions that you know, we would have to grapple with. The goal as always is to put ourselves in a very safe position where we don't have to worry too much about, you know, the last dollar risk or the, even the middle of the capital stack. So that's what we love about the business is the safety and the predictability about it. We have not seen that opportunity present itself across the New York market. But look, there's got to be a solution. We think additional supply is going to be needed and ultimately we don't want to play in the equity part of that solution. We want to play in the land part of that solution which we think goes a long way to helping stretch the subsidy dollars that are available. This is a big opportunity for efficiency to come to the fore and we think ground leases can be a big part of that.

Chris Muller - Analyst - (00:30:03)

Got it. And I guess changing gears a little bit, the 30 year treasury rate increased from a recent low of 455 to current 475ish. There was a similar 20 basis point drop in rates during the third quarter. So my question is, how sensitive is your guys pipeline to these types of moves? Do you see a material change in. Demand from those two examples? And then just follow up on that is what level of the 30 year do you think would really get things. Moving for your business?

Tim - (00:30:33)

It's a similar event that occurred last year where the treasury dipped down somewhere around September, October time frame and it came back up in November. So it's sort of dated deja vu a little bit the last couple days of what happened there. And you saw the increase in, you know, just in terms of the market chatter of deals when the, when the rates were going down, a lot of deals trying to close at that exact moment. I think a lot of people knowing that where rates are trending is, you know, is in this higher level for longer. So when it does dip down, people want to transact quickly, you know. So when it was there, it was the flow really, you know, in terms of the chatter because deals can't close in days, it could take weeks and months was heavier. So I think we're testing this last year and now this year where the 10 year dips closer to 4 and the 30 year dips below 450, you start to see a lot more transactions where it really flows. We don't know, we haven't seen it as a whole market. Right. Where acquisition flow really picks up. We paid a lot of attention to.