Safehold Inc

Good morning and welcome to Safehold's second 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, Chief Financial Officer. This morning, we plan to walk through a presentation that details our second 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 today at 2.30 p.m. Eastern Time, and the dial-in for the replay is 866-207-1041, with a confirmation code of 743-6202. Before I turn the call over to Jay, I'd like to remind everyone that statements in the centering call which are not historical facts may be forward-looking, or 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 expressly required by law. Lastly, I want to highlight that yesterday, ISTAR filed an amended 13D disclosing that a special committee of the Board of Directors of ISTAR and a special committee of the Board of Directors of Safehold are in advanced discussions with respect to a potential strategic corporate transaction and that they are proceeding to negotiate definitive agreements. However, because no definitive agreements have yet been executed and there can be no assurance that definitive agreements will be executed, we won't be able to discuss the potential transaction on this call. With that, I'd like to turn it over to Chairman and CEO Jay Sugarman.

Jay? Thanks, Jason. Thanks to all of you for joining us today. The second quarter was a busy one for Safehold. Earnings and revenues continued to grow strongly, engagement with customers remained high, and conversations between I-Star and Safehold regarding the future progressed significantly. As Jason said, we won't be able to share details in those conversations until they are completed, but hope to be able to do so in the near future. For the quarter, year-over-year earnings were up over 30 percent, and new investment volumes remained strong at over $350 million. Pricing has moved up with interest rates, and inflation-adjusted yields still feel quite compelling to us. Transaction activity in commercial real estate has started to slow, so we'll need to watch how overall markets stabilize in the second half of the year. We also continue to explore ways to align our long-term contractual cash flows and long-term liability structures. And you'll hear from Brett about a recent stair-step coupon innovation that enabled us to access 30-year financing that more closely matches the growing cash flow streams of the company. As we approach $6 billion in ground leases and $10 billion in UCA, We remain focused on three things, expanding the use of modern ground leases by providing low-cost and attractive capital solutions for building owners and developers in top cities around the country, simplifying our corporate structure so more of the market can participate in our equity and debt offerings, and importantly, getting the full value of the company's portfolio reflected in the share price. Interest rates certainly play a part in that calculation, But so do inflation protection and CARAT's value. And when we use the back half of the year to continue highlighting the sizable value of CARAT inside Safehold's portfolio and the positive impact of inflation on our asset returns. The cost of capital we can provide to customers is tied to our success on these last two points. So, we'll be working hard to help the market see the full value of what Safehold has built and the value it can create as it continues to scale. And with that, let's turn it over to Brett and Marcos. Marcos?

Thank you, Jay, and good morning, everyone. Let's begin on slide four. The second quarter was characterized by solid earnings results, meaningful investment activity, and continued UCA growth. Additionally, during the quarter, we raised fresh debt capital through a new innovative structure, which left us with ample liquidity. Brett will get into the details of this quarter's earnings results. First, let me discuss our investment activity. beginning on slide five. During the quarter, we originated seven new ground leases totaling $381 million, of which we funded $338 million during the quarter and expect to fund the $43 million balance in the coming quarters. Additionally, we funded $37 million during the quarter associated with prior ground lease commitments. These seven new originations span four different markets, five new customers, and across all five of the property types we focus on as we continue to expand the utilization of ground leases throughout the major markets in the U.S. As we mentioned last quarter, we've increased our pricing as rates have moved. The new ground leases we originated during the quarter generated a weighted average yield of 5.5%, assuming 0% inflation. which is 70 basis points higher than the 4.8% yield for the investments we made in the first quarter, again, under a 0% inflationary scenario. Of note, two of the investments we made during the quarter, totaling $49 million, were the acquisition of existing ground leases that do not feature the typical safehold fixed rent bumps with CPI lookbacks, but rather have rent escalators primarily based on CPI for most of the life of the leases. and as a result of the variable rent component, show a much lower yield under GAAP. Excluding these investments, our yield for the quarter would be 5.8 percent on the $332 million of originations, which is reflective of our pricing levels today. We have previously discussed that we believe that the inflation protection built into our ground leases capture meaningful value for our portfolio that is not recognized by the market nor reflected under GAAP in our financial statements. For example, assuming the St. Louis Fed's latest 30-year inflation expectation of 2.22 percent, the contractual inflation capture in our second quarter investments would result in a 5.7 percent yield. The credit metrics associated with the originations this quarter are in line with our targets, with the ground lease to value of 38 percent and rent coverage of 4.6 times. Slide six provides a snapshot of our growth for the quarter. At the end of the quarter, our aggregate portfolio stood at approximately $5.9 billion, representing 17 times growth since our IPO just over five years ago. Underscoring the widespread adoption of our modern ground lease product, the seven high-quality ground leases we closed during the second quarter are comprised of five different property types, including multifamily, office, hotel, life science, and mixed use. You can see the quality of the assets we originated during the quarter on the right side of the slide. Moving to slide seven, we show a geographic breakdown of our portfolio as we continue to diversify across the U.S., focusing on the top 30 markets. And with that, let me turn it over to Brett to go through the financials.

Brett? Thank you, Marcos. Good morning, everyone. Continuing on slide eight, let me detail our quarterly earnings results. Revenues were $64.9 million for the second quarter, a 47% increase from $44.2 million in the same period last year. Net income was $22.7 million, a 54% increase from the $14.7 million we earned in the prior year period. And earnings per share was $0.37, 32% above the $0.28 we earned last year. This quarter's results include the $1.1 million annual stock-based compensation expense for independent directors. Additionally, during the quarter, the board of directors approved a 4.12% increase, the common dividend to an annualized rate of 70.8 cents per share. Additional portfolio metrics can be seen on slide nine. At the end of the quarter, our portfolio's weighted average grand lease to value was 40%, and weighted average rent coverage was 3.8 times. By property type, our portfolio consists of 46% office, 33% multifamily, 13% hotel, 5% life science, and 3% mixed use and other. Our weighted average lease term is 92 years. On slide 10, we detail our portfolio's yield under various inflation scenarios. There's been a significant amount of discussion about inflation and how it impacts our portfolio. The market largely values our cash flows relative to long-term high-grade bonds, and what we've seen year to date is a high correlation between our stock price and the yields on these long-term high-grade bonds. However, as Marcos mentioned, this tight correlation does not reflect the fact that our cash flows aren't fixed but are positively correlated with inflation, as approximately 95% of our portfolio has some form of inflation protection built in. The current portfolio generates a cash yield of 3.3% and an annualized yield of 5.1%. However, these metrics assume a 0% inflationary environment for the duration of our ground leases. If you take the St. Louis Fed's latest 30-year inflation expectations, 2.22%, our inflation-based rent bumps will drive the portfolio to yield 5.6%. If it settles back down to 2.0% for the next 99 years, our portfolio would yield 5.5%. And if it ends up increasing to 3.0%, our portfolio would yield 6.1%. This additional yield is meaningful when compounded over 99 years and results in a materially different valuation that the market has not priced in. And we believe this is essential for investors to understand. Said another way, it is true that higher inflation has led to higher rates, which means investors should apply a higher discount rate to our cash flows. But in that scenario, the cash flows that our portfolio generates will also go up. They're not fixed like the comparable long-term bonds. And so keeping the cash flow assumption static is not fair. Slide 11 provides an overview on our capital structure. At the end of the second quarter, we had $3.6 billion of debt comprised of approximately $1.5 billion of non-recourse secured debt, $1.4 billion of unsecured notes, and $272 million of debt representing our proportionate share of the debt secured by ground leases, which we own in partnership. Our weighted average debt in addition, we had $445 million drawn on our unsecured revolver. Combined with cash on hand, we had $930 million of liquidity at quarter end. We are levered 1.8 times on a total debt to book equity basis and 1.4 times levered on a debt to equity market cap basis. The effective interest rate on our non-revolver debt is 3.7%, which is 134 basis points 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. Also, during the quarter and despite choppy markets, Safehold continued to successfully innovate in the capital markets by raising long-dated debt in an effort to best match the cash flow profile of our long-duration assets. Specifically, it raised $150 million of 30-year structured unsecured notes at 5.15% due to 2052, with pricing of 30-year U.S. Treasury plus 195 basis points, which was significantly inside of the spread of where our 10-year public bonds were trading. Importantly, the financing features a unique stair-step coupon rate structure in which the company will pay cash interest at a rate of 2.5% in years 1 through 10, 3.75% in years 11 through 20, and 5.15% in years 21 through 30. The difference between the 5.15% stated rate and cash interest rate will accrue to our principal balance after each semiannual payment period to be fully repaid at maturity in 2052. In anticipation with this financing, Safehold entered into a $150 million treasury lock agreement at a 2.91% strike rate, resulting in a yield on the notes net of the hedge of 4.92%. This novel transaction is another meaningful step for Safehold and demonstrates that credit investors are increasingly responsive to long-dated, creative, unsecured financing structures for our high-quality assets as we continue to expand our footprint in the unsecured credit markets. Lastly, on slide 12, we provide an update on UCI. As of June 30th, the estimated value of all of the unrealized capital appreciation sitting above our land increased by $543 million to approximately $9.9 billion, an 86% compound annual growth over the past five years since we IPO'd. In total, the UCA portfolio is comprised of approximately 32 million square feet of institutional quality commercial real estate, consisting of 14 million square feet of multifamily, 13.1 million square feet of office, 3.8 million square feet of hotels, 700,000 square feet of life science, and 700,000 square feet of mixed use and other property types. So to conclude, while it has been a very challenging year so far in terms of stock performance, it was a strong quarter, and we remain focused on expanding our leadership position in the ground lease industry. With that, let me turn it back to Chad.

Thanks, Brett. Lots of good progress on the right side of the balance sheet there. So let's just go ahead and turn it over to questions. I know many of you will want to ask about the Safehold I-STAR conversations, but I hope you understand we can't say anything at this point, so we'll stick to questions about the business during Q&A. Operator?

Thank you. To ask a question, please press 1-0 at this time. We will take as many questions as time permits. Once again, please press 1-0 to ask a question. Our first question comes from the line of Rich Anderson, SMBC. Please go ahead.

Okay, Jay, I'm chomping at the bit, but I'll try to play nice here. So on the liquidity you mentioned, 930 million dollars, You know, okay, let's say you ring that out over the course of the next six to 12 months. Do you feel in terms of optionality to raise additional capital to grow the platform might involve more in the way of joint ventures, perhaps full asset sales? You know, what would be the game plan assuming, you know, we don't have, you know, kind of a reasonable recovery in the stock price going forward?

Rich, yeah, I think all those ideas are on the table. We'll try to find the best capital source. We still think the transactions we're doing are very compelling and accretive, but obviously not happy with the share price. So there are other ways to bring capital in. There's been a lot of interest from third parties. Frankly, we would rather not give up any of the grant leases that we're creating, but Certainly there's alternatives if they're better that we have access to.

And what about for new investments or newly created ground leases? I know you talked a lot about the CPI protection, but investors do have to wait for that in terms of present day cash flow. Is there any talk about maybe stepping up the inflation protection to have it be perhaps closer to the present day, or is this going to be the model and you're just going to sort of ride out the current macro environment as you're currently running the business?

Well, you know, we are firm believers that inflation protection is very valuable over the life of the ground lease. I think rather than sort of push our customers, what you've seen, you know, Brett and the capital markets team do is really try to line up the liabilities to look more and more like the same structure on the asset. So, I think there's more opportunity there, frankly, than to go back to customers and try to push them into a different, you know, mindset. We feel like we've found the right balance right now that gives us the benefit of that inflation protection, but also gives our customers a chance to execute their business plans, you know, with pretty strong certainty around what their cost of rent will be with us. I don't see a lot of changes coming on that front, but I do see a lot of opportunity with the liability side.

Okay, last question for me. And, you know, not to get too close to the discussions about collapsing the two companies, but at STAR, where do you feel like you are in terms of getting through the things you want to get through at iSTAR? in terms of additional asset sales and the like. We've gotten through the net lease platform. What needs to be done in the next 12 months in your mind, just from the point of view of I-Star?

Yeah, look, as you know, we're having an I-Star call. We think the net lease transaction was a milestone transaction. That's something we can sort of talk about. Everything else, Rich, I can't really talk about yet, but You know, we are excited about where this ground lease ecosystem is going. And I think, you know, both Safehold and STAR ultimately, having created it, will be the beneficiaries of our future success. So, you know, where we can, you know, we will share those details, but we can't do that on this call.

Okay, fair enough. Thanks very much.

Our next question comes from Adam Kramer, Morgan Stanley. Please go ahead.

Hey, guys. Thanks for the time. Appreciate it. Just want to kind of maybe drill in on kind of the new ground leases from this quarter, right? So kind of ignoring kind of the total portfolio and just focusing on this quarter's new originations. Maybe just kind of remind us, and I know you disclosed kind of for the whole portfolio, but just kind of remind us kind of the spread between the yields on the new originations And then, you know, kind of the spread between that and your financing costs and how that spread kind of may compare to, you know, two, three, four quarters ago before kind of the run-up in financing costs.

Hey, Adam. So I think the way we think about our portfolio or Q2's originations is kind of that is two buckets. We originated $381 million. Of that, about $50 million was an existing ground lease portfolio. which has variable rent, so it doesn't get reflected in GAAP. So as I think about the balance of $332 million, our cash cap rates are about 3.8%. And our ROAs are about 5.8%. Again, that's pre-any inflation. So pre-inflation, I think we're still getting kind of that 75-80 basis point spread versus our cost of debt today. And then we obviously think about that inflation as a significant component of value.

That's super helpful, guys. Thanks. And so maybe just drilling down a little bit on... you know, kind of that model of, you know, of buying existing ground leases. Is that something that, you know, kind of as the product matures, you think there'll be more opportunities out there to kind of buy, you know, existing portfolios rather than kind of new, I guess kind of new ground leases, hopefully kind of saying it the way you phrased it. Is that something where, you know, maybe more portfolios out there?

You know, it's been about 10% to 15% of our business over the last five years. It's extremely episodic. As you know, these ground leases are extremely hard to create, and therefore the owners of existing ground leases very rarely sell. It's usually an event in a family. Somebody passes away or a municipal institution is selling for some other purpose, which was actually the case here. This was a university event. selling some land. So very episodic. When those assets come for sale, we are obviously part of the process so long as they fit our profile.

Awesome. And just the last one, if I may, and again, hopefully not kind of getting too clear to the, too close to the topic we can't talk about, but did just kind of want to ask, you know, when you look at kind of safe stock today, what are some of maybe kind of the, you know, the reasons, right, why, you know, things that could be changed, right, whether it's the flow, I'm sure is one that you'd cite, maybe other reasons that investors aren't thinking about, things that could potentially change with a transaction and maybe, you know, kind of improve the stock from a more technical perspective.

Yeah, I think you've hit on an important point, as I mentioned. Both on the equity side and the debt side, we've heard from investors consistently that A float on the equity side, the external management structure, the controlled shareholder structure are not things that people would naturally like to see. And in some cases, they literally make it impossible for them to invest in Safehold. So those were constraints we laid out at the beginning of the year that we felt like if we could tackle with ISTAR, both parties would benefit. So that's been a little bit of the North Star in terms of thinking about the future. How do we make, you know, Safehold reach its full potential? Well, those are two constraints that we would hope to be able to eliminate because the underlying business in our minds, A, is undervalued, and B, has tremendous potential. And the last thing we want is investors to be precluded from participating because of corporate architecture.

All right, thanks again for the time, guys.

Thank you. Our next question, I'm sorry, our next question comes from the line of Connor Sversky, Barenburg. Please go ahead.

Thanks for having me on the call. Really just one quick question. Considering the forward rate curve and where the dot plot is right now and the duration of some of these ground lease terms, are you seeing in real time any upward drift in these kind of initial yields that you're seeing on potential acquisitions?

Yeah, absolutely. I think if you look at Q1 to Q2, that number's gone up 70 basis points on our kind of gap effective yield. And then if you exclude that 50 million of existing ground leases that we bought up, that pricing's gone up 100 basis points. So we're seeing it live. We're seeing a positive reception despite that increase from our customer base. on the transactions we closed in Q2 and positive reception in our pipeline going forward. That being said, I just want to echo Jay's comments. There is clearly a slowdown occurring right now, a bid-ask between what are asset values. And so as we think about the second half of the year, we expect potentially some slowdown over the first two quarters.

Understood. But in the same context, do you expect maybe more levered buyers might be stepping away from similar transactions, opening up some more opportunities for you?

Yeah, I think we sort of we look at our competitive advantage as what's the spread to using a ground lease versus your regular way fee financing. And I think our product actually looks better than it did at the end of last year. I think the reality is we are part of a capital solution, and today there's still a pretty big bid ask on what our asset's worth. We're seeing some positive momentum over the last couple weeks, but we do expect the transaction volume to slow down somewhat.

Understood. Thank you.

And our next question comes from the line of Stephen Laws, Raymond James. Please go ahead.

Hi, good morning. Um, hey, I guess I wanted to start first, I noticed, I think, in the deck, it showed the seven new deals in q2 five or with new clients, you know, can you talk about, you know, kind of how things are transitioning, now that you've got a more of a track record, you know, when you do when you when you onboard a new client with their first ground leads, how many eventually do a second, third and fourth kind of how do you think about building those relationships, and it looks like it's been a pretty strong new client ad here at the beginning of the year.

Hey, Steven. Yeah, we're really excited, especially the quality of those clients. They are large domestic fund managers across the board, so very, very excited about the quality. If you go back, last time we did an equity raise, and these stats are still pretty accurate, 65% of the people that do a transaction with us come back and show us another transaction. And approximately 45% of those groups, we have done a second or more transaction. So building the stable has been extremely important. That first deal, you know, we're getting better at it, but sometimes it's conversion, you know, getting a deal done with a client the first time takes, you know, almost two years. But we're seeing immediate effects and our ability to kind of scale our overall business and growth by creating that stable of existing clients.

Appreciate the color there. Jay, to touch base, I'll stay away from the Star Safe situation, but another big initiative I know you've talked about a lot, or the carrots and providing some liquidity there. I think we're now six months into a two-year window from that February transaction to do some type of liquidity event or provide some liquidity. Can you maybe provide us some updates on your current thoughts there and what your outlook is on that?

Sure, Steven. You know, it is a big focus because we see it as an enormous catalyst and probably one of the most misvalued things we see in the marketplace. Our initial goal was to bring investors to the table. I think the first round did that. We have a lot of engagement that we're very positive on. It certainly gives us comfort that more and more people are digging in and trying to understand how an asset On a mark-to-mark basis, you know, we have been tracking for the last 20 quarters with the kind of growth rates and the tangibility of value that it, you know, expresses. How do we capture that value, and how can they be part of that? So, I think those dialogues are good, positive, and constructive. Our goal, ultimately, as you know, is to see that full value reflected. that probably requires an ability to eliminate any liquidity discounts. That's getting ahead of ourselves a little bit. We'll start with the folks who are digging in now. But long-term, our goal is to see that value reflected in safehold stock. And to really get the full value, I think we need to address the liquidity around a carrot, and it's something we'll be working on certainly next year.

Great. Thanks for the comments, Jay, and I appreciate your time as well.

And our next question comes from the line of Harsh Hamani, Green Street. Please go ahead.

Hey, thanks for taking my question. So you mentioned that in the back half, you expect transaction volume to slow down a little bit, and the bid-ask in the market on ground leases has So just framing that differently, does it mean that if you were to try to increase acquisition volume that you couldn't achieve pricing that's as good as, say, 100 basis points on just the ground lease originated by Safehold?

Hey, Harsh. Just a point of clarification. When I mean bid-ask, I don't mean bid-ask between our customers. I mean bid-ask across the asset valuations broadly. So as we've gone through this last six months of volatility, you know, I'll make a broad macro statement here that asset values are down and we are part of a capital solution when somebody is transacting and making a decision to refinance, recapitalize, buy or sell. And so that's the bid ask I'm referring to and why we anticipate potentially a little bit of a slowdown in the back half of the year. It's not a receptivity issue with our pricing on the groundless side.

Understood. So if you were to try to increase volume, you could still maintain the, you know, 100 basis points spread of pricing today?

Yeah, I think where we are today, kind of this 75 to 80 basis point spread pre-inflation feels pretty good today.

Great. And then just one more from me. Given that you're having more and more repeat transactions with your tenants, and there was some conversation of maybe giving tenants some carrots in the future so that they can participate in this future growth. Have you had any conversation with these repeat relationship tenants on this topic?

I love the way you're thinking, Harsh, but it's a little premature to engage in that until we, A, demonstrate the value and, B, create a little bit more liquidity around it. But we still think that's a very powerful idea. A couple steps away still.

Good. Thank you.

And our next question comes from the line of Kim Truist. Please go ahead.

Hi, good morning. Can we talk about the balance sheet for a little bit? I noticed you guys raised some 150 million of unsecured notes. Just curious, you know, what is the gap interest rate on that? Because I know the stated coupon seems like it's 515, but when you look at the cash bridge over time, obviously it's a little bit different.

Sure. Yeah. So on our P&L What will be booked is the 5.15% stated rate. We did enter into a hedge prior to that transaction. So there's an offsetting game, which was close to $7 million. That will be amortized over the life. So as we said in the remarks, 4.92% is the effective rate that will flow through the P&L. And then from a cash flow standpoint, From cash flow from operations, you'll see 2.5% paid over the first 10 years, and then over the next 10 years go up to 3.75%, and then in the last 10 years go up to 5.15%. So that's where it flows through and gap in terms of effective yield in cash.

And on your revolver, notice the balance increased to almost $450 million this quarter. I guess a couple questions. What is the rate on the revolver today? I know that you put it in the queue, but it's just not out yet. And any plans on refinancing that balance?

Yeah, right now it's LIBOR plus 100. I think from our perspective, we certainly like to term out some of those borrowings. I want to make sure we maintain our margins, so we'll look to hedge at the appropriate times. And we'll look to the debt markets going forward. As Jay alluded to in his remarks, I think there's additional room in talking to lots of capital providers to continue this innovation. And that's what we're currently excited by. We'll definitely look to make sure we're prudent with our leverage and prudent with our capital availability to continue to serve our customers.

And one last question on earnings. You know, I thought given the amount of volume that you just did in the quarter, your EPS will be a little bit higher. I was just curious if there were, is there a timing element of when the deal is closed or some other things that we're just not aware of?

Yeah, you hit the nail on the head there. The average day is outstanding for the quarter of 22 days. So it's pretty back-ended. and the largest origination we had was closed on June 28th. So you'll see that flow through in the upcoming quarter when we capture a full quarter's worth of rent for income.

Okay, thank you.

Our next question is from the line of Matthew Howlett, B. Riley. Please go ahead.

Thanks. Good morning. Thanks for taking my question. First question, Was there any one-time-ish expenses in the GNA from this strategic process?

For the second quarter in GNA, we have our annual stock-based compensation for our independent directors, and then there was some expense that flowed through related to our announcement in the other expense line item.

Okay, so there's some hiring advisors. There's some of that in the numbers.

Yeah, some accrued legal tax and other fees that flow through other expense. Okay, great.

Second question. Jay, when I look at long-term originations, I mean, are we talking about a billion dollars a year, two billion a year? You know, obviously you've had some big numbers in terms of the size of this market longer term. Just, you know, when we get through sort of this part of the cycle, how are you thinking about annual originations? Let's just say in the next five years.

Yeah, we put out a number to get to $7.5 billion by the end of 23. You know, simple math, that was about $1.3 billion, $1.4 billion a year. We felt quite comfortable with that. I think, Matt, really the variable we got to solve here is we think there's so much more opportunity on the equity and debt market side that we're not capturing because of the corporate architecture. because we're still educating, frankly, meaningful parts of the market about what is the modern ground lease industry, why is it so compelling. So I would say we feel very comfortable in that billion, billion and a half range with the constraints. And if you take those constraints off, obviously we think we should be able to do more. So $7 trillion of commercial real estate in the top 30 cities, You know, we think we are providing a very attractive capital solution across multiple property types. There's no reason this business can't grow substantially from here. And, you know, it's our job to continue to provide low-cost capital to our customers. And part of that is creating the best conditions in the debt and equity markets to drive down our own cost of capital. And that's been a big exercise this year and it should unleash additional potential.

Theoretically, does the ground lease investment, is it more advantageous to a borrower in higher interest rates given wider mortgage spreads? Theoretically, is it more attractive to your clients today?

Definitely, but I think as Marco said, customers who are looking at transactions are seeing pretty wide bid-ask when they bring their projects to market or when they're trying to develop a budget for building something. So you're just seeing a little bit of uncertainty flow through the transaction market. We're better when markets are stabilized. You're right, we are getting calls from people who probably had a solution, it's not working. They need the efficiency that a ground lease can provide. So we are picking up some incremental conversations, but I'd say macro, we prefer a more stable market than a highly volatile market. It just means more real estate transactions happen, and we have a better solution in many cases. So we'd like to see overall transaction volume in real estate, you know, be high and steady. We will get our fair share. And, you know, right now we feel good about the engagement levels, but we definitely look forward and see some of our customers pulling back from doing anything. And we've seen that in the past and it's just a little bit harder for us to, you know, push on that string. But, you know, I know our guys are all engaged and there are transactions happening and our team is continuing to spread the gospel and it's finding a very receptive audience.

Gotcha. Makes a lot of sense. And last question, just a very high level question. The sort of the safe star of you know, relationship, extremely managed relationship. I mean, it worked very well. I mean, for SAFE, you know, the stock tripled. I mean, it did extremely well over three years. Obviously, there's been a strategic process being run. It sounds like a huge undertaking that you're still working on today. Is the investment case of a strategic transaction, does it still make sense for SAFE, given what you had in the past was working quite well?

Yeah, it's a great question. I mean, we think long and hard about what is the future potential of this business. And, you know, as we said, we think this can be an enormous business. There's no question an externally managed structure with the right structure to launch the business. I think it's becoming pretty clear to us and to most investors that it is not the best structure long term. to really capture the full potential of the business. Whether it's today, tomorrow, at some point, it's just not the right structure. So from our standpoint, you know, as managers, let's get on with it. Let's show the world clarity. Let's point everybody in the direction we're pointing. There's so much good happening in this business. We'd like to have fewer and fewer conversations about, you know, corporate architecture and external management and controlled shareholder. You know, that's not a positive conversation. That always feels like a bit of a constraint to us. So I take your point. I think it's actually a good one. We do believe this architecture was the right architecture for the first five years. As we look forward and say, how do we go from $5 billion to $10 to $20 to $50, we're pretty clear in our minds that there's a better architecture if both sides can come to an agreement on it.

Gotcha. And the official communication, as you said, near term that will have some type of conclusion to this process?

I'll just say the sooner the better.

I appreciate that. Thank you, Jay.

And once again, ladies and gentlemen, if you have any questions or comments, please press 1 then 0. And we have a question from the line of Rich Anderson, SMBC. Please go ahead.

Thanks. Just a factual question. I know that termination of the management contract involves a fee, I think, three times of the average annual management fee. Is that, first of all, is that accurate? And second, is that subject to discussion or is that a cost that would probably need to be, you know, felt by

Just on the factual piece, Rich, the contract can't be terminated until later in 23, I believe that is. So it's going to be a conversation if it happens before then and can't really go into anything more than that.

Am I right about the three times average annual management fee as a termination?

Post 23, there has to be other conditions before it can be terminated. So I think the three times is factually correct, but I don't think it's operative until, I think, seven more years in terms of the only issue. So I think there's, you know, I wouldn't fixate too much on that.

Okay. Fair enough. Thanks very much.

And at this time, there are no other questions in queue.

Okay, great. Thank you, everyone, for joining us. Roxanne, would you please give the conference call replay instructions again? Thanks.

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