Safehold Inc

Good morning and welcome to Safehold's first quarter 2022 earnings conference call. If you need assistance during today's call, please press star zero. If you'd like to ask a question, please press one zero. That's one zero to ask a question. 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 Fuchs, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today for Safehold's earnings call. On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer, Marcus Alvarado, President and Chief Investment Officer, and Brett Asness, our Chief Financial Officer. This morning, we plan to walk through a presentation that details our first quarter 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 p.m. Eastern Time today, and the dial-in for the replay is 866-207-1041, with the confirmation code of 9277384. 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. SAFEL disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Now, with that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman.

Jay? Thanks, Jason, and welcome to everyone joining us today. The first quarter 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 safehold ground lease can provide. Earnings grew substantially. Deal flow was very strong. We crossed the $5 billion 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 of 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. 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 percent per year on average over their life. Further, almost all safehold ground leases include some form of inflation protection, with a majority of our ground lease structures including a periodic upward rent adjustment in the form of capped CPI lookbacks when inflation stays above 2 percent for extended periods of time. So, it's important to calculate inflation-adjusted yields for Safehold's portfolio when inflation kicks up, given Groundly's economics are in some respects more like tip securities than straight fixed-income investments. Our models show these potential inflation-linked increases to our rents mitigate interest rate and duration risk, and in certain cases 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. 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.