Safehold Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 21, 2022

Key Takeaways

  • Positive Sentiment: Safehold posted a 39% revenue increase and 47% net income growth year-over-year in Q1, driven by the origination of 10 new ground leases totaling $677 million.
  • Positive Sentiment: The company’s portfolio surpassed $5.5 billion—a 16× increase since IPO—and expanded into three new markets (Boston, Baltimore and Sacramento).
  • Positive Sentiment: Safehold issued $475 million of 30-year unsecured notes and raised $309 million of equity, boosting liquidity to $1.15 billion to fund its growing pipeline.
  • Positive Sentiment: Its ground leases feature 2% annual rent bumps and CPI lookbacks, lifting inflation-adjusted portfolio yields from 4.8% to 5.7% under a 2.49% long-term inflation outlook.
  • Negative Sentiment: Despite solid fundamentals, the share price underperformed amidst rising rates, and origination activity could slow if market volatility intensifies.
AI Generated. May Contain Errors.
Earnings Conference Call
Safehold Q1 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning, and welcome to Safehold's First Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

Speaker 1

Good morning, everyone, and thank you for joining us today for Safehold's earnings Call.

Speaker 2

On the

Speaker 1

call today, we have Jay Sugarman, Chairman and Chief Executive Officer Mark Salvorado, President and Chief Investment Officer and Brett Asness, our Chief Financial Officer. This morning, we plan to walk through a presentation that details our Q1 results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investors link. There will be a replay of this conference call beginning at 2:30 pm Eastern Time today And the dial in for the replay is 866-207-1041 with the confirmation code of 92 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.

Speaker 1

Stable 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.

Speaker 3

Thanks, Jason, and welcome to everyone joining us today. The Q1 of 2022 was a strong one for our modern ground lease business. More customers, more cities and more property types are benefiting from the more efficient capital a Statefold ground lease can provide. Earnings grew substantially. Deal flow was very strong.

Speaker 3

We crossed the $5,000,000,000 mark in terms of portfolio size, And we made important progress in accessing 30 year unsecured debt for the first time and closing our first round of Carrot Investors. Despite all this positive news, the share price has obviously underperformed as rates have risen, and we want to spend some more time on this call giving a clearer picture What inflation means for our business and why we continue to think our business is worth quite a bit more than what we see on the screen. One of the most important ideas embedded in Safehold's business plan is that compounding creates wealth. The higher the rate of compounding, the better. By creating a growing diversified portfolio of high quality ground leases, We believe we can harness that equation for investors in a unique way, both in the rental income component and in the capital appreciation component of the portfolio.

Speaker 3

Let's take a look at the rental income component. Given the principal safety and high grade credit metrics of ground leases, The concerns expressed to us are rarely about credit risk, but generally center on interest rate and duration risk. Of course, rising rates take a heavy toll on fixed coupon bonds, particularly long term fixed coupon bonds. But our ground leases are different than most fixed coupon bonds. In addition to base rents, our typical ground lease includes fixed Rent bumps of approximately 2% per year on average over their life.

Speaker 3

Further, almost all Safehold ground leases include some form of inflation protection, where the majority of our ground lease structures, including a periodic upward rent adjustment in the form of CAPP CPI look backs when inflation stays above 2% for extended periods of time. So it's important to calculate inflation adjusted yields for Safehold's portfolio when inflation kicks up, given ground lease economics Can actually increase the net present value multiple on the equity in our existing portfolio after taking into account in place leverage. Potential inflation linked increases also create solid value multiples in new deals and make them substantially more attractive than most fixed coupon investments. Similarly, on the capital appreciation side, compounding at higher rates is better than compounding at lower rates. Increases in replacement costs have generally led to long term increases in value for well located real estate in major cities.

Speaker 3

And as a result, higher inflation has generally led to higher replacement costs and higher values. We've seen this dynamic in our research on many of the assets in our existing portfolio. So Carat, which is intended to capture the growing value of a portfolio of high quality institutional real estate should directly benefit from higher replacement costs over the ground lease term. Of course, short term dynamics don't always follow the long term arc, but we are comfortable that our business is well positioned to benefit in both high and low inflation markets and that each ground lease we execute is value additive for shareholders even as rates have risen. We can talk more about these dynamics, but let's go ahead and have Marcos and Brett dig into the details of the quarter first.

Speaker 3

Marcos?

Speaker 2

Thank you, Jay, and good morning, everyone. Let's start on Slide 3. As Jay mentioned, we are pleased with the performance during the Q1, characterized by solid earnings results and strong investment Fresh debt and equity raised during the Q1 provides us with a significant amount of dry powder to fund our growing pipeline. And I'll let Brett go over the earnings results shortly. First, let me provide an overview of our investment activity on Slide 4.

Speaker 2

During the quarter, we originated 10 new ground leases totaling $677,000,000 marking our best first quarter ever. For these new originations, we funded $519,000,000 during the quarter with the remaining $158,000,000 expected to be funded in the near term. In addition, we funded $13,000,000 associated with prior ground lease commitments. Separately, We also made a new $38,000,000 ground lease plus commitment on a multifamily asset in Brooklyn, New York, our 5th ground lease plus transaction Since we introduced the program in the Q2 of last year. The 10 new originations during the Q1 spanned 9 different markets percent and rent coverage of 3.9 times.

Speaker 2

Under GAAP, these assets generate a weighted average yield of 4.8%. However, the weighted average inflation adjusted yield is 5.1%. As Jay mentioned, we believe that our inflation look backs capture significant value for our business and are not understood by the market today. Brett will discuss this topic in more depth shortly. As we look back at Q1, the pricing for the transactions closed does not reflect the recent upward momentum in rates.

Speaker 2

The Q1 transactions were liability matched with the execution of our recent debt offering. As the rate environment shifted, we have moved our pricing upwards, Taking into account our increased cost of capital, we believe that these adjusted ROAs, we are still creating significant value for our shareholders. And despite the increased cost of our product, our clients have reacted positively, and we continue to add to the pipeline. Slide 5 provides an overview of our portfolio growth for the quarter. Originations during the Q1 has driven our aggregate portfolio to approximately $5,500,000,000 at the end of the quarter, representing 16 times growth since our IPO nearly 5 years ago.

Speaker 2

The 10 institutional quality ground leases originated during the period include 5 multifamily, 3 office, 1 hotel and 1 life science asset. We remain focused on targeting our investments in the current country's top MSAs and we're pleased to enter 3 new markets during the quarter. On Slide 6, you can see the geographic breakdown of the portfolio as we continue to expand our nationwide footprint with the inclusion of Boston, Baltimore and Sacramento this quarter. With that, let me turn it over to Brett for the financials. Brett?

Speaker 4

Thank you, Marcos, and good morning, everyone. Moving on to Slide 7, let me switch gears and discuss our financial performance. Revenues were $60,400,000 for the Q1, A 39% increase from $43,500,000 in the same period last year. Net income was $24,900,000 a 47% increase From the $16,900,000 we earned in the prior year period and earnings per share was $0.43 35 percent above the $0.32 we earned While year over year performance was driven primarily by revenue growth associated with new originations, This was partially offset by $2,500,000 of additional general and administrative expenses, which includes management fees from the equity raises over the last Plus a $1,250,000 increase in reimbursable expenses that our manager is charging. Let me turn to our portfolio metrics on Slide 8.

Speaker 4

As of March 31, our portfolio's weighted average ground lease to value was 40% And weighted average rent coverage was 3.7 times, which is up sequentially as TTM hotel revenue at the properties is rebounding. By property type, our portfolio consists of 48% office, 34% multifamily, 14% hotel and 4% life science. Our weighted average lease term is 92 years. Turning to Slide 9. We detail our portfolio's yields and how we're positioned in an inflationary environment.

Speaker 4

The market prices our cash flows relative to long duration high grade bonds. But the reality is that our portfolio has meaningful embedded contractual income pickup from features that fixed rate bonds do not have. The current portfolio generates a cash yield of 3.3% And an annualized yield of 5.1%. These metrics assume a 0% inflationary environment for the life of our leases. That means no value to any CPI effects, CPI rent bumps annually or otherwise, fair market value resets or percentage rent.

Speaker 4

Historically, because the market's long term inflation expectation has hovered at approximately 2%, The value of our CPI look backs were frequently ignored by external parties since the minimum contractual escalators in our Safehold ground leases the market's long term inflation expectation. It's no longer 2%. Federal Reserve Bank of St. Louis publishes data on the 30 year inflation breakeven, Which according to the St. Louis Fed represents what market participants expect inflation to be in the next 30 years on average.

Speaker 4

This market measure of long term inflation, which is calculated as the spread between 30 year treasuries and 30 year TIPS, is up to 2.49%. As long term inflation expectations have moved higher, we think that it's important for all parties to understand the full value Of the contractual inflation capture that is embedded in our portfolio. We have inflation capture 96% of our portfolio. So with inflation moving higher, it is a critical component in understanding our value. Assuming the market's current long term inflation expectation 2.49%, our portfolio generates a yield of 5.7%, which primarily includes the value captured by the CPI lookbacks And our Safehold ground leases.

Speaker 4

While we think the current inflation breakeven is a fair base case, if we assume long term inflation settles back down at a flat 2 Look backs are generally capped at between 3% to 3.5%, Compounded inflation over the look back period. So if we apply the 2.49% inflation breakeven to our cash flow stream, Our portfolio will generate a 5.7 percent yield. Utilizing today's benchmark Century Bond discount rate results in a significant increase in our cash flow value per share versus what the market seems to be assuming of no inflation capture in our portfolio. The takeaway here is that inflation is rising and discount rates move upwards, so will our contractual cash flows, as we are not just a simple fixed rate bond proxy. Moving on to Slide 10, which provides an overview on our capital structure.

Speaker 4

During the quarter, we closed and funded $475,000,000 of 30 year unsecured notes. We also raised $309,000,000 of equity at $59 per share. At the end of the Q1, we had $3,200,000,000 of debt, Comprised of approximately $1,500,000,000 of non recourse secured debt, dollars 1,200,000,000 of unsecured notes And $272,000,000 of our pro rata share of debt on ground leases, which we own in partnership. Our weighted average debt maturity is 24 years. In addition, we had $235,000,000 drawn on our unsecured revolver.

Speaker 4

Combined with cash on hand, we had $1,150,000,000 of liquidity at quarter end. We are levered 1.6 times on a total debt to book equity basis and 1.1 times levered on a debt to equity market cap basis. The effective interest rate on our non revolver debt is 3.7%, which is a 141 basis point spread to the 5.1% annualized yield on our portfolio. The weighted average cash interest rate on our non revolver debt is 3.2%, A positive spread to the 3.3% current cash yield on our portfolio. In line with my previous remarks about and how it impacts our portfolio.

Speaker 4

We have added an additional disclosure on the slide, which presents the inflation adjusted yield of 5.7 percent, assuming current long term inflation market expectations of 2.49%. Because our long term debt is all fixed Great. With no inflation adjustments, our portfolio generates a 205 basis point spread over our cost of debt. Moving to Slide 11, we provide an overview on our Carrot transaction. As we previously announced, During the Q1, we sold and received commitments to purchase a 1.37 percent interest in for $24,000,000 to 6 strategic investors at a valuation of $1,750,000,000 The $19,000,000 sold during the Q1 Was classified on our balance sheet as redeemable non controlling interest.

Speaker 4

We believe that this transaction was an important step as we seek The investment community about this significant asset and its overall intrinsic value. The sale was the first of many steps We will continue to keep the market updated on Carrot. Lastly, on Slide 12, we present an Update on estimated UCA. The estimated value of all the unrealized capital appreciation above our cost basis grew to an estimated $9,400,000,000 a $1,300,000,000 increase or 16% since our last update last quarter And significant growth since we negotiated the initial sale of our Carrot units at $1,750,000,000 valuation. To give you a better sense of what encompasses that pool of assets, we have a total of nearly 30,000,000 square feet of institutional quality commercial real estate Located in the top markets throughout the country comprised of 13,100,000 square feet of multifamily, 11,600,000 square feet of office, 3,700,000 Square Feet of Hotels, 600,000 Square Feet of Life Science and 300,000 Square Feet of Other Property Types.

Speaker 4

In conclusion, it was a strong quarter for Safehold marked by solid earnings, increased investments And we initiated a significant first step to unlock Carrot's value. In addition, we took several important capital market actions this quarter That should drive further efficiencies and give us competitive advantages to fund our growing pipeline, continue to scale our business and modernize the ground lease industry. With that, let me turn it back to Jay.

Speaker 3

Thanks, Brad. One other thing I want to touch on, some investors have asked for an update on the corporate architecture questions with respect to Istar and internalization. There's nothing really to report yet, but as we've cleared the $5,000,000,000 portfolio mark, we believe that the independent directors of Safehold are Our position to evaluate the external management structure and current corporate structure and determine how best to create shareholder value. And as we said before, whatever makes SAFE stock more valuable is good for both SAFE and STAR. So a good solution should be a good solution for both.

Speaker 3

Now let's go ahead and open it up for questions. Operator?

Operator

Thank you. Today's question and answer session will be conducted electronically. Our first question comes from the line of Nate Crossett, Berenberg. Please go ahead.

Speaker 5

Hey, good morning guys.

Speaker 6

Good morning.

Speaker 5

Hey, I wanted to make sure I heard correctly just on the pricing of New originations, I think you said something like 50 to 60 basis points higher. And I just kind of wanted to know the timing of the ramp like do we see 50 basis points higher in 2Q or does it take time to kind of Flow that through. And then just any color on are you getting any pushback from customers in terms of pricing? What are their alternative pricing options look like right now relative to you?

Speaker 2

Hey, Nate, Marcos. I think the overall market is going through a little bit of a sticker shock, given the Speed and the volatility in rates from the beginning of the year. And so I think they're reacting not just to our increased pricing, But they're reacting to the cost of fee financing, leasehold financing, what does this do and how does it ripple through equity valuations. Generally speaking, our customers have been responsive to the increased floor pricing. And so we've gone from, call it, high 4s to kind of low to mid-5s on an inflation adjusted basis on ROA standpoint, and we can't project that every transaction in our pipeline is going to close.

Speaker 2

But if the transactions do close, you can start to see that come through in Q2.

Speaker 5

Okay. That's helpful. It seems like you did more office deals this quarter than you've done in the last few quarters. Just wanted to know, is there anything changing in that area In terms of just like pick up of deal flow and then just maybe comment on where the pipeline is kind of weighted for the next 90 days.

Speaker 2

Yes. I'm not sure where you're getting that from Nate. We did large life science transaction, is about 40% of the volume for the quarter, 35% of the volume was multifamily, and about 25% was office and hospitality.

Speaker 5

Okay. I'll leave it there. Thanks.

Operator

Our next question comes from Caitlin Burrows, Goldman Sachs, please go ahead.

Speaker 7

Hi, there. Maybe just a follow-up on the question about movement rates, how that impacts your business And maybe the pace of investments, it did look like this quarter's activity was higher than we were expecting, especially given the year end 'twenty three target that you guys had given. So could you just talk about what led to the high volume this quarter and if you expect that to continue or what could make it potentially decelerate from here and whether investment spreads

Speaker 2

Yes. I think the high volume in Q1 was a little bit of a carryover from Q4. Stuff didn't get closed at the end of the year. Some of those transactions were brought in the shop Early in 2021. So I don't expect us to hit another almost $700,000,000 quarter in Q2.

Speaker 2

That being said, we've seen a positive reaction, and we've continued to fill, the pipeline for the year going forward At these reset levels.

Speaker 7

Okay, got it. So have you seen any impact on kind of your increased

Speaker 2

I would say modestly there's been a shift. I think, Caitlin, we remain cautious. As you know, our business is entirely Contingent on the real estate capital markets being open and liquid. And to the extent there is a real repricing Equity, we think there may be a pause broadly. We think we're positioned well to take advantage of that opportunity in the long term.

Speaker 2

But in the short term, kind of quarter to There may be some slowdown here or there.

Speaker 7

Got it. Okay. And then just in terms of the offering that you guys did in March, It looks like Istar was about 60% of that deal, but back in September, their participation was under 30%. So just wondering if you could give some color And what drives the size of their participation? How we should expect that to be going forward?

Speaker 3

Yes. I think as you saw the net lease sale over Star created a lot of liquidity. Obviously, we think The long term value of Safehold is actually continues to be dramatically underrepresented in the share price. So just from an economics and liquidity standpoint, That particular transaction made a lot of sense for STAAR. Can't really predict going forward.

Speaker 3

It'll be sort of facts and circumstances at the time, but they continue to be Strong believers in the business plan. So, we'll see how the year shakes out, but we wanted to put that liquidity in place so we could continue to Execute and expand this market, which is really the most important thing, I think, from both companies' perspective is We're building a new business that is creating very high long term compounding returns in a AAA context With upside from inflation and Carrot, I still think that story is not fully appreciated and iStar has had the benefit of 5 years of watching it and gestating it. So I'm not surprised they continue to have an interest.

Speaker 7

Got it. Okay, thanks.

Operator

Our next question is from Rich Anderson, SMBC. Please go ahead.

Speaker 8

Good morning. Maybe a follow on to that last question to you Jay. Putting aside the participation in the equity Offering from Istar's perspective, what we haven't seen much of is Istar's regular kind of investment In SAFE, on somewhat sort of monthly, weekly, monthly basis or whatever has been over the longer term. And I'm curious as to why that element of the Istar investment model has slowed down as of late.

Speaker 3

Hey, Rich. Yes, look, I think the $5,000,000,000 milestone was an important milestone at Safehold. It's triggered some things we have mentioned in previous calls about is there a better structure out there that can unlock value for both companies Representing the majority of shareholders in Safehold, I think you have to be a little bit cautious here given that we have Continue to believe there might be a better structure out there. So I wouldn't read much into that other than appropriate prudence.

Speaker 8

When you described the Board kind of looked at it as time to start to evaluate the external management structure, does that Introduce any roadblocks to trades happening just by making that comment.

Speaker 3

Yes. Nothing that I'm not a lawyer, so I won't speak, but as I said, sort of appropriate prudence given One of the alternative paths that we could certainly see ourselves on.

Speaker 8

Okay. Next question, The investment in carat by the initial investors, aside from the opportunity cost Making the investment, what risks did they really take on if they can get their money back if the securitization or whatever monetization doesn't work out As planned.

Speaker 3

Yes. Look, I think as Brett said, this was the first step in a process to unlock an enormous value that we believe in, our Board believes in, certain investors now believe in. This group of investors for us was really the right mix of investors to begin the process of educating the rest of the market. As you know, Rich, it's one thing for us to say it, it's another for others who come from different worlds to also reinforce that message. Our goal, as we said on the last call, was to get the right investors as quickly as possible, make this really the first step.

Speaker 3

And it's had the desired impact in that more and more of our conversations, people are asking the right questions about Carrot now. They're starting to understand the dynamic. I think as you see that page in the document, we have historically not really had a chance Talk about what it means to grow from $400,000,000 to $9,400,000,000 Whatever you think of The dynamics in Carrot, that's a pretty powerful one. And so having a group of investors take on The intellectual challenge to actually come into a round, even though it is structured, even though they got an investor that we have been wanting to talk about literally since our IPO, but held ourselves back until we proved out a lot of the other pieces of the Safehold Sorry. So I wouldn't look at so much in terms of the value or the structure.

Speaker 3

I would say these are the kind of investors who don't And interesting value creating opportunities out there. Exactly how it should be unlocked is something we have strong thoughts on, but they may have even better thoughts. So we built an advisory committee. We have spoken to them. They have continued to Engage with us.

Speaker 3

So I don't think they sort of put it in a drawer and don't have to worry about it. There's an engagement level there that suggests they see what we see.

Speaker 8

Okay. And then last for me, in the kind of the outline of inflation protection and what the adjusted Returns are why is there an increase at a 2% inflation assumption from 5.1% yield to 5.4 If your escalators are already 2%, why would there be any increase or is it not quite 2% on average? Is it something just Short of 2% HEX, you have a little bit greater yield. I just want to make sure I understand that.

Speaker 3

Yes. It's not quite that. It's if you think about our portfolio, about 80% of it is originated On Safehold forms, about 20% is sort of non Safehold forms, which might be annual CPI, it might have percentage rent. So you're just you're pushing on the delta between a Safehold form and some of the Non traditional ground leases we have purchased and that's different inflation capture mechanisms.

Speaker 8

Got you. Okay. Thanks very much.

Operator

Our next question is from Harsh Harmani, Green Street. Please go ahead.

Speaker 9

Thank you. I just want to follow-up on my first question on pricing. So 50 to 60 basis points above where it is today. So When you look at the effective yield of 4.8%, excluding inflation that you mentioned for the Q1, How does that look, all else being equal, where do you think you end up on that at the end of the year?

Speaker 2

So I think on the Harsh, on the go forward transactions, at least at the floors, we're in the kind of 5.25 range and those are obviously as rates move up floating upwards. And then on an inflation adjusted basis, they're closer to the high fives.

Speaker 9

Got it. That's helpful. And then my second question is around the ground lease plus program. Now A couple of quarters ago when this was launched, Jay, you mentioned that PayFold likes to be in the 35%, 40% ground lease to total value range. And these ground lease plus developments really don't have that kind of security built in.

Speaker 9

So it's probably not asked Put them in the safe portfolio from the get go. Now that there is some there is a high likelihood of I started not being the external manager and maybe even a combination between the two entities. How does the how do you think about the ground lease portfolio Ground lease plus portfolio integrating into the Safehold company.

Speaker 2

Sorry, go ahead, Chad. So, Harsh, what we've decided, we took kind of the initial steps here, is we actually set this up in a fund construct. And so we brought in a partner on these GL Plus transactions at Istar, to fund these initial GL Plus transaction, so we have a 53% partner in those transactions. Our anticipation is to continue to potentially bring in other equity to fund these transactions. So to the extent, there is some sort of corporate transactions, the majority of the equity would not be on safe balance sheet.

Speaker 9

You would find another partner to fund the ground lease plus holdings. Am I hearing that correctly?

Speaker 2

So we've already found a partner, Harsh. And I think long term, the goal would be to find additional partners to fund that business line and that product.

Speaker 9

Great. That's helpful. Thank you.

Operator

Our next question comes from Rich Hill, Morgan Stanley. Please go ahead.

Speaker 10

Hey, good morning, guys. So when we think about

Speaker 2

the valuation of SAFE, we

Speaker 10

sort of separate into 3 parts, your existing portfolio, New originations and the value of the UCA. So I want to focus on 2 questions. First, the value of the existing And then second, new originations going forward. So on the existing portfolio, as I think about your CPI look backs, could you maybe give us a view How many of your existing ground leases have CPI look backs that kick in over the next, call it, 3, 5, 10 years?

Speaker 3

Yes. You can imagine the bulk of the 10 year CPI look backs that are in place in the portfolio don't really start to hit until that 2029, 2030, 2001 period. So in some respects, we think of it as a CPI bank, high CPI In the interim, we can kind of calculate going out, but it's still early for us to predict whatever this 1st 10 year period it will be. But I think what we put in the book, the deck was Page 9 really says, what if long term inflation is not 2, what if it's 2.5 or what if it's 3? What would those inflation adjusted returns look like?

Speaker 3

Obviously, the liability side moves very quickly and it's easy to just look on the screen and see. It's a little trickier to figure out what is the best proxy for long term inflation. We use a Fed number. Obviously, some people can use higher or lower, so given a little bit of sensitivity around that number. But that's kind of how we start with a sensitivity around the existing portfolio, Rich.

Speaker 3

And the math is pretty simple. You can do the ROAs. You And see where our in place debt is. You can figure out a refinancing rate and do So the NPVs and what we've done looking at that is the existing portfolio in a band between sort of 2% 3% inflation, You actually can see the equity NPVs go up because we have fixed cost debt for the 1st 25, 30 years On most of the portfolio and then you have a revenue stream that's bumping up faster than our models historically have used because Candidly, we thought inflation at 2% was sort of the market's proxy. Now the market's proxy is likely to be higher.

Speaker 3

We run those same models What happened? And on the existing portfolio, certainly, all that's happened is you probably have a higher assumption for our rent streams And probably a slightly higher assumption on the refinancing costs 30 60 years from now. When you run that all through the model, It's actually one of the reasons we love this business is you have quite a bit of inflation capture That you're not going to be sharing with your liabilities that are already in place.

Speaker 10

Yes. So look, I think we've chatted a lot about this. We're you know our models are already assuming, call it, the 5.75 percent effective yield.

Speaker 2

So I agree

Speaker 10

with you. It is just math. So looking forward, look, the cost of financing has risen a lot Since the end of last year, we can debate how much it's risen. But I guess my question for you Jay is, Can your effective yields over the medium to long term of your ground leases rise one for 1 with that Rise in financing costs, again, over the medium to long term. So let's just throw out numbers.

Speaker 10

Let's assume finance costs are 100 basis points higher, 200 basis points higher. Will there be a time period in which your effective yields for your ground leases can also go up by that much? Or will there be Slow bleed lower in your spreads between your effective yields and your financing costs.

Speaker 3

Let me give you my thoughts, then Marcus can kind of tell you what's happening on the ground. Some people have asked this, is there a ceiling on Sort of the overall yields on ground leases. And I would say, we again compete mostly with the rest of the capital markets. And if our capital is better capital, lower cost, lower risk, more efficient, We should always be able to move in tandem with the market. But if you ask us realistically, and I think Marcus was hinting at this, there are pockets of change that the market will adapt to slowly.

Speaker 3

So if you told me, can you guys go and rates rock at another 150 basis points, can you raise your Costs to the customer 150 basis points, I would say no. The market will not accept radical change that quickly. But over long, medium and long periods of time, all we have to do is create a better solution than the alternatives. If the market is out that wide, it probably means all other sources of capital available to the real estate industry are also out that wide. And all we have to do is be a little better than that because we're already more efficient, We're already more risk reducing.

Speaker 3

So yes, medium and long term, I think we will move in tandem with the alternative cost of funds complex available to real estate. But I don't want to go so far as to say that happens on the short term dynamics and I think Marcus probably give you a sense of customers are accepting, world is changing, but I think if you just try to stick To that kind of methodology, if rates went up another 100 basis points, 150 basis points, I don't know. What do you think, Marco?

Speaker 2

Yes. I'll use a simple example. Multifamily cap rates are still sub 4%. If we try to buy the land at 4%, there's no deal. Just an illustrative example today.

Speaker 2

I think as both Jay and Brett and I have said that even at these reset levels, 50, 60 wide of where we were at the beginning of the year, we're still creating a tremendous amount of value for shareholders even at this increased Cost of debt, obviously, to your point, Rich, margins have decreased somewhat, but not on an inflation adjusted basis, and that's what we want people to take away And then when we look back kind of end of 2018 through 2019, and you look kind of at the rate environment there, not as volatile as a Spread environment, we were able to produce attractive ROAs. And as we think about the opportunities on the liability side, when some of this Volatility dissipates. We think we're going to continue to drive solid margins and create value for shareholders.

Speaker 10

Yes. I mean that's helpful and we can take it offline. I just want to I think the market is sending a message That there's concerns about your ability to originate ground leases accretively in the future. If financing costs are higher and ground lease effective yields don't rise in lockstep. That doesn't really make sense to me And I think your history suggests that you've been able to maintain spread over various different rate regimes.

Speaker 10

But look, we are dealing with a 100 year asset That is very sensitive to assumptions. So if the market is saying well spreads down and discount rates higher, we can all do that math. So that's what I'm trying to unpack a little bit. And Jay, I recognize what you're saying and I think it's completely fair. I just want to make sure that when we think about our models, we're not crushing free cash flow in stage 2, Which is a long, long stage 2 and then discounting that at a higher rate because we all know what that does to bond math.

Speaker 10

So we can catch up offline. This has been helpful.

Speaker 3

Thanks, Rich. I just I like the methodology of existing portfolio new originations in Carat. 2 out of 3 of those will benefit from higher than 2% inflation assumptions up to a certain cap. And Then we can spend some time with you on our new origination math, which to us is still quite value accretive for shareholders.

Speaker 10

That sounds great. Thanks, guys.

Operator

Our next question comes from the line of Ki Bin Kim, Truist Securities. Please go ahead.

Speaker 6

Thanks, and good morning. So I just wanted to go back to the question about yields. I'm actually more curious about The economic cash yield versus the cash expense on your debt, that spread has tightened Maybe for more obvious reasons, but how do you see that changing over time? And As rates have risen, what is your ability to actually originate new ground lease With a better going in cash yield versus effective yield or inflation adjusted yields, because that's Tenure looks like a great, but I mean in the near term that matters too.

Speaker 3

Yes. So I think the hard part of our business or I The hardest part of our business is actually building the portfolio on the asset side of the ledger. Our team is doing a great job of expanding across the country, expanding across product types, expanding our customer base, Continue to see lots of repeat customers. Following in that wake is how do you create the right liability structure for What we think are exceptional portfolio returns. And you've touched on something, Ki Bin, that's quite important to us.

Speaker 3

We started with 10 year secured debt. We then went to 30 year secured debt. We then created 50 year secured debt. We then created structured Long term secured debt, which ultimately, if you think about our revenue stream, it's an upward sloping curve. If you think about our liability costs, We were able to create a similarly structured liability stream.

Speaker 3

So we were able to make the cash to cash, yield to yield That's pretty good over starting point and then over its life. We've done a 10 year Unsecured deal. We've done a 30 year unsecured deal. The liability side of this ultimately should match the revenue side. You shouldn't have a Long upward sloping inflation protected revenue stream and a flat debt stream.

Speaker 3

So your point is something we are quite focused Sean, can assure you that it's imminent, but I would tell you look at our track record in the secured world. We are trying to replicate that in the unsecured world, which gives us the maximum ability to work with our customers to create these unique Long term investments that we think are some of the best we've seen in our 30 year finance net lease subsets. And I think what you'll see us do is continue to make the capital available to our customers and to create value for shareholders. And it's not just the asset side, it's also the liability side.

Speaker 6

Okay. And just to follow-up on the comment you made about upward drift on effective yields of, I think, you said 50 to 60 basis points. I want to make sure I understand that clearly. Are you talking about in the previous quarters the effective pre inflation Yield of 4.8 going up to 5.25. I just want to make sure I understand the apples to apples comparison.

Speaker 2

Yes, that's right. I think if you think about cash yields, high-2s are now kind of 3.3%, 3.35% on floor basis on a cash perspective and then ROAs are high 4s to 5.25percent, 5.35 percent and up depending on where they flow.

Speaker 6

Okay. And just last question, because of the high acquisition volumes this quarter and equity raises, there could be a timing element. Just curious about All else equal EPS run rate going into 2Q.

Speaker 3

Sorry, give me that again, Ki Bin.

Speaker 6

Just because you guys closed on a lot of deals this quarter and raised equity as well. So Timing can matter in terms of what EPS looks like going forward. So if you don't do any more deals or raise any new equity, what is the Ongoing EPS run rate from

Speaker 4

the 4th 3 quarters. Hey, Ki Bin, it's Brett. So yes, in the Q1, obviously, as you mentioned, the timing of those originations and when we were earning is a valid point. Lot of that was funded from our credit line. And then the 30 year unsecured notes that we have priced in January, We had drawn or funded that at the end of the quarter.

Speaker 4

So what you'll see is an uptick in interest expense Moving from the revolver to that permanent debt. And then we also have one time for director fees that we pay in that quarter. I think those are the 2 anomalies. But to your point, the timing of When we close deals during the Q2, will matter, but I'd say those are the 2 differentiators when you look quarter over quarter.

Speaker 6

Okay. Thank you.

Operator

And our next question comes from the line of Matthew Howlett, B. Riley. Please go ahead.

Speaker 11

Thanks. Hey, guys, just what's the outlook on the term debt market in terms of accessing that market here in the next few months to pay off the revolver?

Speaker 3

Yes. Look, we're exploring a number of different options in terms of that. We I'd like to stay in that 20, 25, 30 year duration. So that is generally our focus. But if we think rates are gapped out because of Ukraine Or short term factors, we want to be thoughtful about that as well.

Speaker 3

So we're still evaluating that. Don't have a fixed plan yet and we'll see how fast The investment team is putting out money and make a decision when it's the right time.

Speaker 4

Yes. Just to pig it's Brett. To piggyback off that, we $235,000,000 drawn at quarter end. So I know we've remarked in the past that once we start to get to that $500,000,000 mark or so, We'll look to term out those borrowings with either debt or equity. And as Jay alluded to before, in the long term debt markets, Looking at the playbook of what we utilized back in 2017 through 2020 and what we've done since in the unsecured markets, We're encouraged by the amount of providers who we're having dialogue with, and hopefully, we can continue to create the best returns for our shareholders By using more innovation as well.

Speaker 11

Got you. And then on that note of capital, like equity capital, Two questions. First, another private sale of the carrot. I mean, could you do that before, let's just say, a liquid trading It's established. And then second, I know in terms of a potential merger with Istar and a balance sheet combination, Is there a scenario where there would be potentially significant capital freed up or SAFE

Speaker 3

Yes. I think on the Merger conversation is too early to really get into that, but I don't think there's Certainly a pot of gold to reinvest. So I'm not seeing that scenario yet, but again, we're still early in that process. And the first question

Speaker 11

On the carry on the second round?

Speaker 3

Yes. Absolutely. The goal here is The knowledge network around what Carrot is and what it can be far beyond just the real estate world. So I think it makes a ton of sense to us to look to continue that with a group of investors who will help us expand that Knowledge Network, timing wise, that's something we will definitely be focused on this year.

Speaker 11

Would you look at that, Jay, if the equity markets are shut out as a source of non dilutive capital To raise another round sell a piece of that to continue investing in new ground leases or would you rather just get your that market established first at fair value and

Speaker 3

Now look, I think it is an untapped source of capital That obviously helps on a number of fronts, but most importantly, again, you guys know our viewpoint is This asset is worth dramatically more than we think it's being given credit for. We've begun the process to unlock that for shareholders. If you believe in the success of that exercise, we're not talking about $2 or $5 or $7 a share. We're talking about Double, triple of where the stock trades today. So I think that dynamic is so powerful and so important to us that we want to pick the right Next step and the right investors to help us get to the final really expression of carrot in the markets, Which we think of a dramatic impact on Safehold and its ability to raise capital at appropriate pricing.

Speaker 3

So it all kind of goes hand in hand. I wish we could move faster, but we have the dominoes lined up. We know which ones we need to push first. There are periods where we can move fast on things There are periods where we kind of have to wait things to sequence, but you're hitting on a lot of the big themes that we've laid out in our strategy.

Speaker 11

And just to default, the strategic board, as they've given you, Jim, they've been helpful in giving you ideas, moving things closer, or maybe we're talking 2 year event, are we talking 6 months?

Speaker 3

Well, we have a 2 year window. We have engaged with That group to try to start to lay out some of our thoughts about where this could find its next best step. And yes, they've been really helpful in thinking that through and challenging us candidly on some of the ideas that we think are the right next Steph and they may have even better ones for us. So that's a dynamic dialogue. And again, it's I think it's paramount to understanding the Safehold story.

Speaker 3

So we are certainly encouraged by what we've heard so far and the number of investors who have come back and said tell me more. That to us was the big difference from last year. Now investors are saying tell me about this, Hey, let me tell you about this new thing. They're now coming to us and saying That's a real value. It's tangible.

Speaker 3

It's transparent. It's growing really fast. It represents extraordinary high quality diversified portfolio of real estate, it actually doesn't sound that hard to go from I wasn't even paying attention to, wow, this looks like it has real value, tangible value, fast growth, but We don't want to be the only messenger in the world. So give us some time to continue to lean on the strengths of that Initial group of investors bring in additional investors and I think you'll start to see this story really gain momentum.

Speaker 6

Great. Thanks, Jade.

Operator

We have a question from the line of Derek Hewett, Bank of America. Please go ahead.

Speaker 2

Good morning, everyone. Could you talk a little bit more about the near term pipeline just given the higher, I think you said 50 to 60 basis points of pricing? And should we expect a material slowdown in the Q2 just given kind of as the market reacts to the new reality? Yes, I don't expect us to knock it out of the park like we did in Q1, but the client base It's been pretty responsive both existing and new to our new pricing. So we've done a pretty good job of Backfilling the pipeline and working through the stuff that's in letter of intent.

Speaker 2

So we feel pretty optimistic about the growth going forward. The caveat being transaction markets freeze like they have at pockets with this level of volatility, There will be a slowdown, but it feels like a good mix of what we've been able to do in the past, some more life science assets, Big kind of half the pipeline is multifamily, and then the balance is a mix of office and mixed use.

Operator

And at this time, there are no further questions. I'll turn it back to you, Mr. Fooks. Okay, great. If anyone should

Speaker 1

have any additional questions on today's earnings release, please feel free to contact me directly. Roxanne, would you give the conference call replay instructions again? Thanks.

Operator

Certainly one moment. You may contact the AT and T replay system by dialing 1-eight Again, the number is 866-207-1041 and the access code

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