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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to Safehold's Fiscal Year and Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded.
At this time, for opening remarks and introductions, I’d like to turn the conference over to our host, Jason Fooks, Senior Vice President of Investor Relations & Marketing. Please go ahead, sir.
Good morning, everyone. And thank you for joining us today for Safehold’s earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; and Marcos Alvarado, President and Chief Investment Officer.
This morning, we plan to walk through a presentation that details our fiscal year and fourth quarter 2019 results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investor Relations link. There will be a replay of this conference call beginning at 1.00 pm Eastern Time today, and the dial-in for the replay is 866-207-1041 with a confirmation code of 8095363.
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 expressed or required by law.
Now, with that, I’d like to turn the call over to our Chairman and CEO, Jay Sugarman. Jay?
Thanks, Jason. 2019 turned out to be an exceptional year for our company. Earnings grew almost 40%, the portfolio increased by over $1.5 billion and shareholder returns were well north of 100%.
Most importantly, our new modern ground lease, enabling building owners to be more capital efficient, more cost efficient and to achieve higher returns with lower maturity risk, is now proven to be the right solution for a wide variety of high quality owners of high quality real estate.
2019, also showed us how big this opportunity could be, and how much more work we have to do to capture its full potential. We are still in the early stages of bringing about major change to commercial real estate ownership in the U.S., but we're excited by how much progress we've made during the course of last year.
Volume in the fourth quarter was substantially above our expectations. Our financing options continued to improve, and shareholders have begun to recognize the significant value embedded in our company.
As I've said before, we believe the Safehold story is one that can resonate with a wide variety of investors. Making an industry more efficient with a better product and better customer service, is a strategy rewarded by investors in many industries that are being disrupted. So, we are in innovation play.
With earnings growth above 30%, were also a growth story. With intrinsic value well above share price, we are a value stock. And with the principal safety of a portfolio ground leases, akin to the safer securities, and portfolio cash flows that consistently grow over time with little to no volatility, we are asleep well stock.
Our job in 2020, is to continue bringing our value enhancing ground leases to customers across the country, and to continue highlighting the value of our business for shareholders across the investing spectrum.
With that let me turn it over to Marcos to go through the quarter in more detail. Marcos?
Thank you, Jay, and good morning, everyone. Let me start by highlighting the year on Slide 4. As Jay mentioned, 2019 truly was a groundbreaking year for Safe, we closed 24 transactions this year totaling $1.8 billion, or $2.1 billion of originations if you include a 100% of 425 Park Avenue, for which we ended up bringing in a joint venture partner in Q4.
We grew our portfolio by 187% this year to over $2.7 billion, as we continue to provide repeat customers an increasingly larger institutions our reinvented modern ground lease solution. Success with customers has yielded strong earnings results this year, with 88% revenue growth, 136% net income growth and 39% EPS growth. And we also made significant inroads with the investment community, as we broadened our shareholder base with a diverse set of institutional investors who are beginning to recognize the value of our franchise.
In 2019, SAFE stock had a total return of 118%, making us the number one performing publicly traded REIT in the U.S. In addition, liquidity in our stock also saw a meaningful improvement, as our total daily dollar volume of shares trading increased 10x this year, and our market cap has grown from approximately $300 million to $2.4 billion.
Nevertheless, there's still a large universe of both customers and investors who have not heard of us, or do not appreciate our value proposition. We've only scratched the surface of what is possible on both fronts and we're energized by the opportunities ahead.
Let me continue on Slide 5, which summarizes our quarterly and full year earnings results. For the full year earnings per share was $0.89 versus $0.64 in 2018. For the fourth quarter, we generated $0.25 of income per share versus $0.24 for the same quarter last year. Thing to note, is that at the end of 2018, we were operating close to maximum efficiency in terms of having all of our capital deployed. At the end of 2019, we still had about $600 million of capacity as a result of a recent equity rates, which had to dilutive effect on our fourth quarter earnings per share.
Slide 6, discusses this quarters investment activity. The fourth quarter proved to be very productive for us as we closed the number of large transactions that we had from pursuing for some time. For the quarter, we closed 10 deals totaling $1.2 billion. You can see the key investment metrics on the fourth quarter transactions at the bottom of the slide.
Based on our underwriting, these deals have a weighted average effective yield of 5.3%. The underwritten yield is relevant for old fashioned ground leases that we acquired such as 425 Park Avenue, which have fair market value resets. Excluding any assumptions and based solely on the contractual rent our new acquisitions have a weighted average effective yield of 4.9%, which does not take into account the potential increase in rent, via these fair market value reset.
In addition our Safehold ground leases typically include periodic CPI look back that can result in additional upside to our effective return. The new acquisitions have 3.6 times of rent coverage and represent a ground lease to value of 38%.
Moving to Slide 7, we show our portfolio growth. As we've noted in recent earnings calls our portfolio has grown rapidly. Today it span to just over $2.7 billion, which represents 8 times the size of our portfolio when we went public 2.5 years ago.
On Slide 8, we highlight a few of the deals we closed during the quarter. 685 Third Avenue is a newly originated Safehold with a global real estate fund manager, representing the fourth large transaction we closed in Manhattan. We're very encouraged by our ability to win over some of the more sophisticated real estate investors with our capital solution. And we look forward to following our customers into transactions and markets in 2020. In addition, we've made good progress with multifamily owners in new markets as we closed our first deals in Sarasota and Tampa, and continue to expand our geographic reach.
Slide 9, shows a snapshot of our current capital structure. In the fourth quarter Safehold second follow-on equity offering generated an additional $247 million in equity capital to support the funding of new transactions. We were particularly pleased with the breadth and depth of the investor interest in our public offering, which was 6 times oversubscribed, with highly sophisticated, likeminded institutional investors. And as a result, we upside the offering by 50%.
We currently have approximately $1.5 billion of outstanding debt, which includes our pro rata share of debt associated with our joint venture. We've made significant progress this year enhancing our liabilities by lowering our cost of debt, while at the same time materially extending our maturities. Today, our weighted average interest rate is 4%, and our weighted average maturity profile is 31 years, versus eight years at the end of 2018.
And while we fundamentally believe that the more important metrics are the effective yield of our ground leases, and the effective interest rate of our debt, our step rate debt structures means we currently pay a cash rate of only 3.1%. As we continue to enhance our liabilities, we expect to be able to pass on some of that increased efficiency to our customers in the form of lower cost capital, to continue to scale our business. Our intention is to continue to maintain an approximate 100 basis point spread between our ground lease deals, versus our cost of debt.
Slide 11, shows an overview of our portfolio. As we focus on the largest markets in the U.S. you can see our map continue to fill in with New York and office now representing, our largest geographic and property type exposures, after the large transactions to be closed in the fourth quarter. We expect this to ebb and flow over time as we build out our diversified portfolio.
Slide 12, details the key metrics of our portfolio. Our portfolios rent coverage was at 4 times and our ground lease to value was up 38%, both in line with our targets and consistent with our goal of creating a portfolio with AAA like credit metrics. For the quarter annualized in place GAAP rent after depreciation and amortization was $147 million or a 5.6% yield on the portfolio. Annualized in place, cash rent was $93 million, including the trailing 12 months of actual percentage rent. This represents a 3.5% cash yield for the ground leases in our portfolio at quarter end.
Moving to Slide 13, I'll finish up with UCA. As we've discussed in previous earnings calls, we track the unrealized capital appreciation associated with our portfolio or UCA, representing the value of the building sitting on top of our land, which we inherit at the end of the lease is based on contractually embedded reversionary rights. At the end of the fourth quarter, UCA stood at $4.8 billion, approximately 11 times more than where it was when we went public.
As a reminder, Safehold created a subsidiary called CARET, which tracks this growth. Management has earned 15% of the CARET, under a shareholder approved long-term incentive plan after all five stock hurdles have been met. These awards are still subject to time based investing. And while we believe UCA represents a substantial store of value, we also believe that today's stock price still is not attributed much in any value to UCA.
So in conclusion, we've made a lot of important progress in 2019, taking Safehold from just a theory, to a tangible growing business. While we're pleased with the momentum with both customers and investors, we still have a lot of work ahead of us, a significant market opportunity to tackle.
And with that, I'll turn it back to Jay.
Thanks, Marcos. Just a quick final thought. One of our core beliefs is that as our portfolio grows, two positive things will happen. First, as more building owners’ complete deals with us, the benefit of our value enhancing ground lease becomes more apparent, and our job changing the ground lease industry becomes easier. We saw that in several cities last year, and hope to create that dynamic in more markets in 2020.
Second, we believe that as our portfolio scales, the value of our business will become clear to more investors, and we'll be able to convincingly demonstrate that a growing portfolio of ground leases, become significantly more valuable, the larger and more diversified it gets. And makes us very optimistic about the future.
Okay with that operator, let's go ahead and open it up for questions.
Thank you. Today's question-and-answer session will be conducted electronically. [Operator Instructions]. Our first question comes from Rich Anderson with SMBC. Please go ahead.
Thanks. Good morning, everyone. So, one thing that wasn't mentioned despite all the enthusiasm is anything that is taking place so far this year, in terms of your acquisition pipeline. Can you talk a little bit about what you're seeing in terms of the future pipeline on a go forward basis? Yes, that's the question.
Hey Rich, it's Marcos. So, I think, we remain optimistic about the prospects of 2020. And if you think about the profile of 2019, some of these large transactions take a fair amount of time to put together. And so, we expect some lumpiness throughout the year, but we're optimistic about the pipeline that we have built today and the entire year.
Okay. You mentioned the concentration in office in New York City. How worrisome does that make you or does it even matter, I guess? But any time you have a concentration, it draws my attention. How incentivized are you to make those smaller numbers over time and sort of diversify the lease hold asset type?
Yes, it's a great question. I think it's something we were monitoring. I think, the reality is we sit at 38% of the value across our portfolio, so we feel okay, and insulated about some of these potential downturns that could occur in select markets. The good thing about the customers that we're doing transactions within New York City is their global or national fund managers. And so, we expect to travel with them into other markets in 2020. But our goal is to continue to build a diversified portfolio accessing every market.
Okay. And then finally from me. What is the timeline do you think that the CARET could actually start producing some amount of value? And how might that happen? Will there be potentially some portfolio management where you sell some assets and buy some with the proceeds and the gain goes into the CARET, or is there something else that might happen to start seeing some value in that program?
Sure, Rich, it's Jay. As we've talked before, CARET is going to be an increasingly important part of the story, but, it's only one of the three components of value. The first being obviously, the cash flows of the existing portfolio we built. We spent most of our time certainly in 2019, just trying to get people to understand that piece of the puzzle and I think we're starting to make some good progress there. We're starting to see some third party research that is confirming what we believe, which is a large diversified pool of ground leases creates ultrahigh quality cash flows at a premium to where the rest of the market trade. So, we got to get that piece done first.
I think, second piece for us is to make sure that investors see the future the same way we do. We think this is an enormous change potential for the $7 trillion commercial real estate industry. So, getting people to value what we've already done is great, we'd like to be able to work with you to make sure, we understand the value of creating that same opportunity going forward.
And then the third piece will be CARET, and CARET really becomes more visible as we scale, as we build a larger, more diversified portfolio, we will be able to show people that value. How we do that, is still something that we're thinking about. As you saw this morning, we hired a new CFO, who I think is perfectly sort of trained to help us think about the best way to capture that value.
We think, we can demonstrate that value and have it reflected directly into SAFE share price. But there are ways to really highlight it more explicitly that's something probably towards the later parts of this year, we'd want to think about as opposed to right now, where we just want to get people to understand the very basics of the investment opportunity. And get people outside, frankly, the real estate world to start really understanding that this can fit in lots of different portfolios.
Our next question comes from Anthony Paolone from JPMorgan. Please go ahead.
Thank you and good morning. I'll start with the CARET since kind of left off on that. It looks like that vested, you hit your hurdles. Can you tell us what the final dollar amount is that you'll be receiving for that?
There's no dollar amount per se. Those are interest in the pool that has been built up in that UCA account. Obviously, the challenge for us is still to get the market to recognize value there. As Marcos said, to-date we have not seen investors assign any value. It's our job now to help them see the potential there that we see. And again, as I keep saying, I think as this business grows, and as the scale of the opportunity grows, we will be able to show some pretty interesting dynamics around that piece of the ground lease story.
Right now, I think the cash flow component, it's imperative that people understand that piece of it, the principal safety piece, the ultra-high grade nature of these long-term cash flows, we think is unique in the marketplace. But, as that business grows and as that cash flow stream grows, we think people will start paying more attention to this other assets, it's also building up in the background, which is a long-term ownership position. And because, we are a public company, because we can value that position every quarter, and know exactly what it's worth, we think there's a way to get that value recognized today, not 99 years from now.
Your next question comes from Collin Mings with Raymond James. Please go ahead.
Thank you, and good morning. Jay, I just want to go back to your prepared remarks on the financing markets, can you just speak to the depth of that market? It looks like again, the weighted average maturity continues to get longer, at the same time, obviously the cash rate continues to decline. So, maybe just expand on your optimism on this front, particularly just given your comments that you hope to pass some of that savings along to your customers.
Yes, our capital markets team led by Brad has really done a remarkable job. We continue to not only educate our equity investor base, but also work with our lender community. And we've made a lot of strides and continue to believe that they will appreciate what we appreciate about this investment product, which is very long cash flows, non-callable, very predictable, very safe. In a world where that type of yield just doesn't exist in many places, we're seeing more lenders come to us with open mind about how to participate.
So, again, as we keep saying, it's still early, we're learning new things every day, we're sharing, what we learned with both our investment team but also with our lenders and showing them why, as this pool grows, as we scale, we think we're creating very attractive places to put capital, whether you're an equity investor, whether you're a lender to us, but it really does depend on us continuing to grow the business.
So, our lenders are certainly interested in growing businesses that give them an opportunity to deploy capital profitably. And we think more and more than see Safehold now is that kind of company.
Okay. And then I wanted to go back to Rich’s question just on deal pipeline as well. Can you just maybe speak a little bit more to the mix in terms of kind of acquisition opportunities as opposed to again, you've had a lot of success on the origination fronts, maybe talk about that mix. And maybe just as it relates to the overall mix of properties, you've had some success on student housing? And maybe just more broadly, how are you thinking about kind of property types outside of obviously, the heavy mix towards the office and lodging as we grow into 2020 now?
It's Marcos. As we've mentioned in the past, the acquisition pipeline is highly episodic, usually event driven. To the extent, those assets and those grand leases come for sale and they fit our profile, we will obviously jump in pounds on those. But again, I can't predict if we'll do one, two, or three, in 2020, as those are very episodic. We're focused on the growth engine, which is creating new signals.
As we think about the portfolio today and the portfolio going forward, and we look at our pipeline, we see continued success in student housing, multifamily and office and selectively hospitality.
Okay, I'll turn it over. Thank you both.
Our Next question comes from Rich Anderson with SMBC. Please go ahead.
Oh, that was fast. Okay. I just had a quick follow-up. You mentioned the adjustment for fair market resets. I'm curious how much of that is in the overall portfolio. And is there any reason given your building reputation for providing a differentiated ground lease? Is there any reason why a fair market reset type of model would exist for forever or would you always be interested in sort of resetting those situations to align more with your ground lease model?
Now this quarter, our thinking Rich is - the fair market value is a lose-lose. It creates uncertainty and ambiguity which, buyers don't like, lenders don't like. And that really doesn't do anybody any good. We think we can improve on that model, very materially. So, in the few cases where we've acquired ground leases that actually have that structure, we will obviously be looking to work with the customer to find a better solution.
We’ve got, plenty of time to do that with them. So, as they think about their business plans, we certainly can be a partner in thinking through, how do we create the best ground lease for their capital structures and further ultimate business strategies.
Okay, great. That's all I have. Thanks.
Our next question comes from Anthony Paolone with. JPMorgan. Please go ahead.
Thanks. Just a few follow-ups. First, I think Marcos, you mentioned 100 basis points spread being the bogie, I missed. Was that on an effective yield versus the effective cost of your debt or is that going in cash on cash, or how should we think about that?
It's on an effective basis, Tony. We're also looking for a significant cash spread as well, but the way you should think about it is on an effective basis.
Okay. And can you just give us a little more specifics in terms of the debt availability you're seeing with some of the growth link ratcheted debt that you all have taken down? Like, where the duration is that you're able to achieve on those right now, and also, kind of like all in spread?
Sure. I think, it's probably worth pointing out sort of our long-term strategy here is to access the most effective capital. I think, from a standing start we've been trying to help educate not only our portfolio lenders, but everybody in the credit markets about where we fit in that world, whether you're an unsecured lender or whether you're a secured lender.
I think the team has really focused initially on creating a proprietary and bespoke structure for our assets that would give us this term that we need to match fund, which we think is in this 30 year, 30 year plus context. So, our first big success has been really moving out from what is typically at 10 year CMBS world to a much longer 30 year plus, liability structure that matches more carefully with the way we structure our asset deals. So, I think that is the point at which we're today. I think it's a fantastic fit with what we're doing today, but as this business scales, and as we get larger and larger and with more diversification, we do think the unsecured side is interesting. And we think, we will hopefully have a dialogue with the rating agencies to begin having that thought process become part of the dialogue.
So, today, I think when you think about what we're doing, it is with a group of life companies that we know have long-term liability structures, they're trying to meet and what we're working with them on that and fits that really nicely. But, as we grow, I think you'll see us start to mix in as well, some thought around the long-term unsecured strategy as well.
Okay. And just another question about follow-up on the CARET. The 15%, then it sounds like it's a bit of a moving target in terms of what the UCA is overtime in the realization. But, is there going to be like an accounting charge or shares or something that we'll see in 2020 and going forward now that it's vested?
No, there was a de minimis charge when they were granted a year and a half, two years ago. That's just being amortized over the vesting period. Because they starting out as a new thing, there's a relatively small charge. And that'll be up for those.
Okay. Because, I think what's striking me is its 15% and I'm looking at Slide 13, and you're showing this $4.8 billion of UCA. And so, just intuitively, it seems like there's this big piece of money that's going to be moved due to the participants in the program and just kind of want to understand like that that's if not kind of where things are today?
Well, I think we and all shareholders should hope that becomes true, because that means shareholders made $4 billion that we don't think is reflected in the shares today. Candidly, we think we have more work to do to get people to actually understand what we think is the right way to look at that value. I think, in all the reports we've seen on the company today, almost little to no value has ever been ascribed to that part of the business. For good reason, I think when you're small, and there's only a few assets in the portfolio that's probably the right way to think about it.
But as we get bigger, as we continue to scale and diversify, we think there's a fundamental disconnect between the value of an individual ground lease and the value of a growing portfolio of ground leases that is diversified by product type, by sponsor, by underlying tenancy. So, all that factors into that valuation.
And again, we believe as we get larger, we'll be able to sit with you and actually share why we believe that is intrinsically very, very valuable for shareholders. But it isn't today, it's clearly not being reflected in the share price. So, we've got more work to do there. But we want to keep tracking that number for you so that people can - when we do have those conversations can look back and see where it's been, where it is now and where it might go.
Okay. And last question, the iStar continues to be committed to its purchases of shares in SAFE. And just wondering, if we see anything happened between the two organizations in 2020 in terms of thinking through where that relationship ultimately goes?
Yes. Again, I think the architecture for today has been fantastic, it's given the resources that Safehold needs to make the impact it wants to make. But, long-term, we have consistently said we think the people and the assets will want to be together. But I think that's still quite a way in the future, Tony.
Okay, thank you.
Our next question comes from Haendel St. Juste from Mizuho. Please go ahead.
Hey, gentlemen. Good morning. So, I was hoping you could talk a bit more about the acquisition opportunity for this year, but more so from - how it impacts your need to raise capital then keeping with certain leverage goals you mentioned? I think, you will need $600 million of bond held liquidity. How much buying power does that give you before you need them to raise more capital? And then last year was - within that year with nearly $2 billion of investments. I'm wondering if you could give an early read on if you think that's repeatable this year.
Sure. I mean, two things. One, we came into this year with quite a bit of liquidity. When we give you that number, typically we're giving you our buying power. So, whether it's sitting on undrawn revolver that we have access to or whether it's sitting in cash. We try to be as efficient as possible. But, right now, it's a little bit over $0.5 billion of buying power.
I think in terms of what do we see in the year laying out is, I would tell you six months ago, we had modeled $1 billion of new deals for this year. Obviously, that feels low to us now. But we'd like to see how everything shakes out in this first couple quarters before we give you a more firm number.
But again, we're going to try to use all the tools the lower cost of capital on the debt side, the expanded relationships coming from the deal teams, to continue to grow the business. What the actual dollar size of an individual deal is, it's somewhat out of our control. So, we don't want to overpromise here. But, obviously, we had a lot of success last year and we hope to keep building on that.
Thank you for that. And we've seen you when you talked about expanding the different investment types that you are acquiring, pursuing, but they've largely been commercial and residential. I'm curious what other potentially asset types beyond those two are you considering or currently concentrating doing deals in?
So, we got some success toward the end of last year and as we look at our pipeline in student housing, we're going to continue to push on the progress we've made. And as you mentioned, office and multifamily, on the hospitality side, if I take a look at our pipeline, there are a few assets sprinkled there as well. So, I would say, those will be the major asset classes selectively. We will look at some industrial to the extent the real estate and the land is highly valuable, and today, most likely for the future we will stay away from retail.
Got it. One last one. Just curious on the emergence perhaps of any new competitors, you certainly have done quite a few deals, the institutional awareness is picking up here. I'm curious if that's brought in any new competitors or if you are seeing signs of increased competition or cap rate compression?
Today, still no competitors on the institutional side. So selectively, when an acquisition of a ground lease comes up, we'll see an ultra-high net worth, or an insurance company - but usually, it's a small bidding pool on those assets show up. And the creation of new Safehold's or new ground leases, today there's some, I would call small non-institutional competition. But, as you mentioned, it's something we keep in the back of our mind with our continued success at some point competition could occur.
Thank you.
[Operator Instructions] Mr. Fooks, we have no further questions.
Okay, great. Thank you for your time. If you should have any additional question on today's earnings release, please feel free to contact me directly. Thank you.
Ladies and gentlemen, this conference will be available for replay after 1:00 PM. Eastern today, through February 28th at midnight. You may access AT&T teleconference replay system at any time by dialing 1-866-207-1041 and entering access code 8095363. International participants may dial 402-970-0847. Those numbers again, are 1-866-207-1041 and 402-970-0847, access code 8095363. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.