Safehold Inc

Good morning and welcome to Safehold's second quarter 2024 earnings conference call. If you need any assistance during today's call, please press star zero on your phone. If you'd like to ask a question, please press star one. That's star one 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 Piers Hoffman, Senior Vice President of Capital Markets and Investor Relations. 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, Rhett Asness, Chief Financial Officer, and Tim Daugherty, Chief Investment Officer. This morning, we plan to walk through a presentation that details our second quarter 2024 results. The presentation can be found on our website at safeholdinc.com by clicking on the Investors link. There will be a replay of this conference call beginning at 2 p.m. Eastern time today. The dial-in for the replay is 877-481-4010. with a confirmation code of 50921. In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A. If you'd like to ask additional questions, you may re-enter the queue. 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 expressly required by law. Now, with that, I'd like to turn it over to Chairman and CEO Jay Sugarman. Jay?

Jay Sugarman Thanks, Pierce, and thanks to all of you for joining us this morning. The second quarter was highlighted by solid earnings, attractive deals, and progress on G&A. New originations improved, but the smaller dollar size and allocations to our sovereign wealth partner under our existing JV limited the net origination number. That said, we were pleased to see activity pick up and with the overall level of customer engagement. Earnings were helped by further efforts to run the business as efficiently as possible. Not sure how much more we can do on that front, but we've made good progress against our targets so far. In terms of the market environment, the potential for lower rates later this year should help overall real estate markets and transaction activity. The multifamily sector remains our focus, with opportunities in other asset types more limited. Lastly, valuations from CBRE for our UCA estimate were again impacted by higher cap rate assumptions and tougher office market fundamentals, somewhat offset by UCA additions from new originations. leaving overall UCA little change for the quarter. With that, let me turn it over to Brett to review the quarter in more detail.

Thank you, Jay, and good morning, everyone. Let's start with a summary of the quarter on slide two. During the quarter, we originated six multifamily ground leases for $98 million. Of the six new deals, five were in the affordable housing space and one was student housing, and they spanned across four markets and three sponsors. Credit metrics are in line with our portfolio targets, with a GLTV of 33 percent, rent coverage of 2.8 times, and an economic yield of 7.5 percent. We are pleased to have converted most of our previously announced LOIs into closings, particularly at what we believe are very attractive risk-adjusted returns. We are optimistic that a clearer path on interest rates, as well as increasing liquidity and price discovery in the market, will stimulate broader transaction volume in which we can participate. On the capital front, we announced in April our new $2 billion unsecured revolving credit facility, which replaced and upsized our previous $1.85 billion aggregate facilities. This recast had several strong positive outcomes for the company, immediately increasing credit capacity $150 million, lowering borrowing costs, extending our nearest term maturities with a fresh five-year term, which includes two six-month extension options, and further improving overall financial flexibility. In June, we closed on a new $750 million unsecured commercial paper program. We view commercial paper as a short-term funding alternative to our revolver and not incremental liquidity, as the program has a full dollar-for-dollar revolver backstop. We have not yet utilized the program, but may do so in the near term, which would help us recognize interest savings versus the revolver on amounts issued. We continue to benefit from an active hedging strategy. The company has $500 million of SOPR swaps in place until April 2028 at a rate of approximately 3%, saving approximately $3 million of cash interest per quarter at current rates. Additionally, we have $350 million of long-term treasury locks in place at a current mark-to-market gain position of approximately $37 million, which is expected to provide a benefit to the true economic cost of future long-term financings. At quarter end, the total portfolio was $6.5 billion. UCA was estimated at $9.1 billion. GLTV was 48%, and rent coverage was 3.6 times. We ended the quarter with approximately $1.1 billion of liquidity, which is further enhanced by the potential available capacity in our joint venture. Slide three provides a snapshot of our portfolio growth. In the second quarter, we funded a total of $78 million, including $37 million of new Q2 originations, that have a 7.5% economic yield and 41 million of ground lease fundings on preexisting commitments that have a 6.4% economic yield. Of the six new ground lease originations in Q2, five closed into our joint venture. Safehold's commitment is 59 million and our JV partner's commitment is 39 million. Our ground lease portfolio has 143 assets and has grown 19 times since our IPO. while the estimated unrealized capital appreciation sitting above our ground leases has grown 21 times. We continue to emphasize ground leases under multifamily assets and have increased our exposure from 8% of the portfolio by count at IPO to 57% today. In total, the unrealized capital appreciation portfolio is comprised of approximately 35 million square feet of institutional quality commercial real estate. consisting of approximately 19,200 multifamily units, 12.5 million square feet of office, over 5,000 hotel keys, and 2 million square feet of life science and other property types. Continuing on slide four, let me detail our quarterly earnings results. For the second quarter, revenue was 89.9 million, net income was 29.7 million, and earnings per share was 42 cents. EPS was up 7 cents year over year, driven by approximately $7 million increase in asset-related revenue from new investments and rent growth, as well as approximately $3.8 million savings in G&A, net of Star Holdings management fee, offset by approximately $3.1 million of additional interest expense. The second quarter's G&A savings were a result of reorganizing our legal team structure to better fit what our business has seasoned into. Certain members of the legal team transitioned from in-house to external counsel, where the same firm and team will continue to provide asset and corporate legal services to Safehold, but in a more flexible and cost-effective manner. On last quarter's call, we said that the annualized net G&A target for 2024 was approximately 40 million. As a result of this legal transition, we're now revising this expectation to 38 million. We've made great progress recently in finding efficiencies, and we'll continue to be thoughtful in aligning our cost structure to the business environment. On slide five, we detail our portfolio's yields. For gap earnings, the portfolio currently earns a 3.6% cash yield and a 5.3% annualized yield. Annualized yield includes non-cash adjustments within rent, depreciation and amortization, which is primarily from accounting methodology and IPO assets, but excludes all future contractual variable rent, such as fair market value resets, percentage rent, or CPI-based escalators, which are all significant economic drivers. On an economic basis, the portfolio generates a 5.8% economic yield, which is an IRR-based calculation that conforms with how we've underwritten these investments. This economic yield has additional upside, including periodic CPI lookbacks, which we have in 83% of our ground leases. Using the Federal Reserve's current long-term break-even inflation rate of 2.27%, the 5.8% economic yield increases to a 5.9% inflation-adjusted yield. That 5.9% inflation-adjusted yield then increases to 7.5% after layering in an estimate for unrealized capital appreciation using Safehold's 84% ownership interest in CARAT at its most recent $2 billion valuation. We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today. Turning to slide six, we highlight the diversification of our portfolio by location and underlying property type. Our top 10 markets by gross book value are called out on the right, representing approximately 70% of the portfolio. We include key metrics such as rent coverage and GLTV for each of these markets and we have additional detail at the bottom of the page by region and property type. Portfolio GLTV, which is based on annual asset appraisals from CBRE, stabilized in the second quarter after several quarters of increases. Rent coverage on the portfolio also remained stable quarter over quarter at 3.6 times. We continue to believe that investing in well-located institutional quality ground leases in the top 30 markets that have attractive risk-adjusted returns will benefit the company and its stakeholders over long periods of time. Lastly, on slide seven, we provide an overview of our capital structure. At the end of the second quarter, we had approximately $4.5 billion of debt comprised of $1.8 billion of unsecured notes, $1.5 billion of non-recourse secured debt, $956 million on our new unsecured revolver, and $272 million of our pro rata share of debt on ground leases which we own in joint ventures. Our weighted average debt maturity is approximately 21 years, and we have no maturities due until 2027. At quarter end, we had approximately $1.1 billion of cash and credit facility availability. Our credit ratings are A3 with stable outlook at Moody's and BBB Plus with positive outlook at Fitch. As mentioned earlier, we have several hedges in place to manage interest rate risk and our limited floating rate borrowings. Of the $956 million revolver balance outstanding, $500 million is swapped to fix SOFR at 3% through April 2028. We receive swap payments on a current cash basis each month, and at today's rates, that produces cash interest savings of approximately $3 million per quarter that is currently flowing through the P&L. We also have $350 million of long-term treasury locks at a weighted average rate of approximately 3.67%, which at current treasury rates is in a gain position of approximately $37 million. These treasury locks are mark-to-market instruments, so no cash changes hands each month. And while we do recognize these gains on our balance sheet and other comprehensive income, they are not yet recognized in the P&L. While hedges can be utilized through the end of their designated term, they can be unwound for cash at any point prior. As we look to term out revolver borrowings with long-term debt, we have the ability to unwind the hedges, which would then flow through the P&L thereafter. We are levered 1.89 times on a total debt-to-equity basis. The effective interest rate on permanent debt is 4.0%, and the portfolio's cash interest rate on permanent debt is 3.6%. So to conclude, we're encouraged to see transaction activity begin to pick up, and we expect rate cuts to be beneficial for our business, both in terms of opportunities and valuation. The balance sheet is well positioned, and we'll look to harness our ample liquidity to deliver value to our customers. And with that, let me turn it back to Jay.

Thanks, Brett. Let's go ahead and open it up for questions. Operator?

Thank you. Ladies and gentlemen, to ask a question, please press star 1 at this time. We will take as many questions as time permits. Once again, please press star 1 to ask a question.

We will pause a moment to assemble the roster. Thank you.

Our first question is coming from Nate Crossett with BMP Paribas. Your line is live.

Hey, good morning. Maybe you could just talk through, like, what does the pipeline look like right now? Maybe what are your expectations for the next three to six months based on the conversations you're having? And I think you mentioned it's still mostly multifamily. Is that right? Yep.

Tim, why don't you go ahead?

Yeah, hey, it's Tim. Yeah, as you saw, we closed six of the eight deals we announced last quarter. The other two are closing this quarter. Activity, you know, quarter to quarter can vary. We were actually pretty optimistic on what we're seeing in the market, both on just general activity and then the conversion to LOIs. There's been additional LOIs signed up that will close likely later this year. And yes, it's predominantly multifamily. I think the reason for that is that's predominantly where the activity and liquidity is right now in the market. It's pretty competitive, obviously starting with the agencies, but also in the banks, the debt funds, life codes, even CMBS. But the good news there we're seeing is that spreads are tightening, competition is increasing. That's pushing capital into other asset classes. So we're seeing activity pick up. On those, it's mostly front end right now, but we're pretty optimistic with the clarity and visibility in the market and increased transaction flow.

Okay. And then just in terms of funding the deal flow, can you guys remind us how much is left on the JV? And then also I just wanted to know on the commercial paper program, what's the rate savings versus if you just put it on the revolver?

Hey, Nate, it's Brett. In the joint venture at quarter end, there was $353 million, so our partner's share was $159 million remaining. That will go towards future investments here over the coming quarters. In terms of commercial paper, we put the program in place at the end of June. There were a couple days left in the quarter. Now we've hit earnings, so here in the near term, we would hope to utilize that in a judicious manner. The savings will probably be close to 50 basis points versus our line costs. Right now we pay adjusted SOFR plus 85 basis points on our revolving credit facility. So in the commercial paper landscape, depending on the tenor of what we issue, I'd say the average net savings will probably be around that number.

Okay, I'll leave it there. Thanks.

Thank you. Our next question is coming from Caitlin Burrows with Goldman Sachs. Your line is live.

Hi, everyone. Maybe just a follow-up on the pipeline. I know you guys have obviously been focused on multifamily recently. Just wondering if you could comment on kind of at what point you might get interested in other property types, what they could be, because I feel like the size of the multifamily deals ends up being relatively limited, although maybe there's portfolio deals or something you could do. But yeah, just talking about the types of deals and then the stickiness of those kind of cap rates or yields that you expect.

Sure. Hey, Caitlin. It's Tim again. So, as I said earlier, there is activity beginning in those other asset classes, hospitality probably being the one that's leading the rest of them. We're paying attention to all of them, right? Office, hospitality, retail, you know, tracking what's going on in the fundamentals there, obviously what's going on in the capital markets and the capital being provided there. Transaction flow on the investment sales side remains pretty low in those areas, which is sort of the key to the, you know, capitulation of the transaction flow. But again, we're starting to see more activity as the capital markets open up for all the other asset classes. So we're ready and to go on a lot of those. We're just waiting for the right opportunities and the transaction float increase.

Got it. Okay. And then we noticed that 135 West 50th, a property where you have a ground lease is being auctioned. So whether specific to that asset or if you don't want to talk specifics, maybe just in general, I realize the best case scenario would be if a property sells for like a reasonable cap rate, there's a new owner and no change to safehold. But just trying to understand what's the downside risk. So for example, if a property is sold for For a low dollar amount, is there any impact to Safehold, or if it's returned to lender like the lender, how does that end up impacting you guys?

Okay, Lynn, it's Jay. So obviously the sponsor is running a process there. You know, the building has benefited from a lot of investment, and we do think the New York Midtown market is recovering pretty well. So let's see how that process plays out. I think it's fair to say our ground lease should be viewed as very effective capital. by an owner, but it's premature to speculate exactly how that one will end up. A low dollar price does not impact us, but obviously we're more focused on long-term value preservation. So, you know, as we do with all ground leases, we're looking to maximize long-term value. So, we're watching that process closely.

Got it. Okay, thanks.

Thank you. Our next question is coming from Anthony Pallone with JP Morgan, your line is live.

Yeah, thanks. Good morning. Can you just talk about just on the incremental debt side where your most attractive just longer-term debt capital would be right now and sort of that duration and rate if you had to go into the market?

Sure. Hey, it's Brett. So right now you saw us, as we talked about earlier, put in the commercial paper program. That's really just an alternative to our revolver program. We do not view that as incremental capital, and that's not how we're funding the business long-term. I think on a long-term basis, what you've seen us do over the years is go to the public and private debt markets. So right now, our bonds that we issued back in February, we did that at a spread of 200. Those have tightened about 20 to 25 basis points. So we've seen some of the benefits of all the hard work that everyone's doing here flow through. We're still focused on getting Fitch over the hump to get that second A rating. We think that will provide additional benefit as well. Right now, those 10-year bonds trade close to 6%. If you looked at where the 30-year would be in terms of both where the Treasury market is as well as from a spread basis, that gets you into the mid-6s. And where you've seen us originate here recently, over a 7% yield, we're creating some nice accretion. So I think it'll be a mix again of both public and private markets. It could be flat coupons. It could be the step three coupons that you've seen us do in the past. But right now, you know, it certainly feels like where the, where the curve has been and the steepening that's existed, which, you know, when we look to the two year and 10 year at year end versus today, you know, that, that certainly has come down a bunch. It was 40 basis points difference at the year end. Today it's about 20 basis points, and I think that is also going to be very important as we move forward and think about our hedging strategy. So we're constantly thinking about locking in margins and creating some nice accretion for our earnings profile.

Okay, got it. Thank you. And then just a follow-up question is, as it relates to just these multifamily transactions you seem to be doing a lot of, Can you talk about just, you know, it sounded like a bunch were affordable, but just kind of where the sweet spot is. Is it with more affordable type projects or is it terming out a lot of the development that's getting delivered these days in multifamily or is it class B? Just trying to understand where your, you know, cap stack solution fits most.

Yeah, this is Tim again. Look, it spans all multifamily, whether it be, you know, The age of these is really based on location of those multifamily and the drivers of where demographics are moving. So you see us closing deals right now a lot in the Sunbelt. That's where a lot of transactions are occurring out west. The benefits of the ground lease, as you're seeing across, whether it be market rate, affordable, or any other multifamily, remains the same, right? It's low cost of capital that we provide, incremental proceeds that you know, increase the liquidity for the sponsor as well as blended cost of capital goes down. So, you know, we're seeing activity both on the development side, recapitalization side, and even acquisitions in the multifamily space. So, you know, very positive momentum in that multifamily.

All right. So, I mean, where does the sponsor, like what are proceeds to the sponsor on their leasehold debt?

So, you know, typically, you know, the people that are coming to us are going to, are staying with, you know, banks or the agencies to finance their project, depending on what, where it is in its life cycle. And those institutions, when they see that, you know, the safehold, modern ground lease there are, you know, sizing based on credit metrics they would use for fee simple cash flows, because they know that, you know, our lease provides them, the lender also with liquidity to be able to be recapitalized in the transaction. So that's one of the The benefits that we brought to the market here is spending a lot of time with everyone in the cap stack, in this case the lenders, to make sure that they have everything that they need that provides them the liquidity that they require. Therefore, the credit metrics they can provide to the sponsor.

Okay, thank you. Thank you.

Our next question is from Mitch Germain with Citizens JMP. Your line is live.

Good morning. I'm curious about the new sponsors that you did deals with this quarter, and how long did it take from introduction for the relationship to harvest into a transaction?

Hey, Mitch. It's Tim. Great question. That's something we pay attention a lot to as we try to expand our customer base. It varies, right? I mean, it depends on what the sponsor is, where they are in the cycle of some of their pipeline themselves. We reach out to a lot of different clients and there are different parts of their investing window. But look, it can range. Some of these relationships we've started from five plus years ago and we're getting transactions done with now. You know, some of this is clients that have heard what we've done with other ones of their peers and they want to come in and see how it can work. And those relationships tend to bear fruit a little bit quicker. You're starting to see that window narrow as obviously we've I've done over 140 transactions. You're starting to see that window of time from initial conversation to execution of a first transaction. So it varies quite a bit, but I would say it's narrowed as we've matured as well.

Thank you. Thank you.

Our next question is coming from Harsh Hemnani with Green Street. Your line is live. Thank you.

Just following up on the pipeline for a second. So you mentioned a lot of the activity and the liquidity continues to be multifamily. And, you know, against that backdrop of maybe tightening cap rates in the space, rates incrementally coming down, you know, it feels like origination yields on multifamily could come in a little bit. Against that backdrop, maybe if you were to underwrite some other property types, you mentioned hospitality and office. How much additional yield do you think you could pick up on those property types? Could that help sustain sort of the mid sevens all in yields that you're seeing now?

Yes, I think that the large part is that, you know, our cost of capital still remains the cheapest in the cap stack, no matter which asset class you're discussing, right? From the multifamily side, obviously, hospitality and office cap rates are much wider. historically and definitely now in the cap rate levels. The spreads have compressed in the multifamily space in terms of the cost of debt. However, you're still seeing cap rates in the mid-fives, if not drifting higher, on a consistent basis. Yes, there's a couple spots where you've seen some tighter. There's usually an instance of why that occurred. So we're still, as you see, capturing the spreads on the multifamily hospitality and office. Sure, there'll be a little extra spread there. However, for us, it's really the attachment point and the coverage that we're really focused on on every transaction, but those transactions, making sure that we're providing an efficient cost of capital, but also the right attachment point for ourselves.

Got it. And then could you maybe elaborate a little bit on the thoughts behind the legal reorganization of the legal team? It seems like that was a big part of helping Safehold grow to this point in terms of having a standardized ground lease contract, bringing in leasehold lenders and making them comfortable with the terms. Any thought process behind maybe such a big driver of helping the company scale to where it is today and taking that function and outsourcing it? Any thoughts behind that?

Sure, Harsh. It's Jay.

So as you know, we had a lot of work to do to really build this industry, and we wanted to be the leader. So we spent a lot of time getting the legal structures right and helping – the market get comfortable with this modern ground lease format. But I think what we realized is we could run that a little more efficiently now that we're a more mature company and we're running more of a steady state business. We've kept a lot of those resources in-house, but we've also been able to get the same benefit with a little less expense by sharing some of those resources and outsourcing them. So I think it kept the best of both worlds. We got the intellectual property and kept that in-house, but we also have the resources of some outside firms now that can leg in when we need them, but not sit on our P&L 100% of the time.

Gordon, thank you.

Thank you. Our next question is coming from Hindle Sanjus with Mizuho. Your line is live.

Hi, good morning. This is Ravi Vaidya on the line for Handel. I hope you guys are doing well. Just wanted to follow up on another question that was asked earlier. How do you weigh the risk and opportunity of pursuing affordable multi-heading ground leases versus traditional ones? Are you requiring a higher return, and is there any noticeable difference in any of the deal terms or market rates? any bridge market rate multifamily.

Hey, Robbie, it's Tim. I guess the quick answer is there's not that big of a difference, right, in terms of how we're underwriting those transactions. At the end of the day, we're looking at what the cash flow that can be generated from those assets, again, the location of those assets and the path of growth of the area those are in. Um, you know, these are, are, are infill well-located assets, um, that, you know, as you probably know, you know, affordable is needed across the country. Um, and you know, the, the cash flows of these can generate, allow us to come in and help the sponsor to, um, provide the ground with the low cost capital. So I think that the short answer here is that our, you know, our underwriting remains largely the same. There are nuances. to every asset class in structuring. But at the end of the day, you know, we're focused on the cash flow generation and what percentage of that cash flow should be utilized to pay the ground rent.

I think it's fair to say occupancy, obviously, very high in that asset class. And I would say generically loan to cost is a little bit lower than straight multifamily.

Thank you, that's helpful.

Just one more here. Can you remind us again about how do you guys decide which acquisitions go on balance sheet and which one goes into the JV? Are there any asset classes or transactions that are restricted when partnering up with your JV?

Yeah, the construct was originally put in place where the JV has first look, so that construct is still in place here for another quarter or so. There's nothing specific excluded. There are some metrics, though, where if they don't fit those metrics, they're probably not going to get into JV. But I think those were market dependent, and so far it's been a really good relationship.

Got it. Thank you. Thank you.

Our next question is coming from Stephen Lowes with Raymond James. Your line is live.

Hi, good morning. Can you talk a little bit about, you know, does the commercial paper program change anything with regards to, you know, where you'll operate from a leverage standpoint? And given the capacity in the JV, you know, running at one nine kind of debt to equity here, how do you think about your total investment capacity before you need to rate additional equity capital?

Hey, Steven, it's Brett. So from a commercial paper standpoint, we really don't think of it as additional leverage or additional liquidity. It has a full dollar for dollar backstop from the revolver. So we're really looking at it as an alternative from a cost savings perspective. So instead of paying a higher spread on our credit line, If we're able to utilize that market and see the depth of that market and issue at different tenors, we'll see what our success is moving forward, but we think there's incremental savings there. So from a strategy standpoint, there is no change. We just view it as an alternative. In terms of our leverage profile, we ended the quarter at 1.89 times. You're right in terms of the joint venture and the dollars that are deployed. Right now, based on our math, It's about every $100 million is about 0.05 turns of leverage. So that takes us through another couple hundred million dollars of deployment. Obviously, there's other levers that we have in terms of being able to utilize both the debt and equity markets. So we're going to look to the pipeline, look to our current liquidity, and continue to figure out how best to fund the business. We do think that the rate environment and what the Fed has indicated here recently. Obviously, meeting tomorrow as well is really important, but it feels like, you know, the market's pricing and cuts beginning in September. And I think from a hedging standpoint, over the last year or two, we've put in some really valuable economic hedges. But moving forward as we, you know, enter the second half of the year here and then into 2025, I think, you know, rate cuts, should be a benefit for our business, both from an earnings profile standpoint, originations and pipeline, and just from a valuation standpoint, as people get clarity on where the right environment is.

Thanks for that. And as a follow-up, Jay, could you give us an update on the carrots? You know, any update there as far as potential investors or liquidity event, or is that really something that you're looking to promote? you know, accelerate originations, get the UCA moving higher again before you look to do anything with the carrot side of the business.

Yeah, that's spot on, Stephen. It's really going to follow the growth of the origination side. That external growth component is obviously a big component of carrot's future value. And so I think once we have a really solid story there and it feels like we're moving To a better environment, I think you'll see us pick up our activity on the carrot side. We've had quite a bit of interest. We have not really pursued until we can tell the whole story the way we want to tell it. But it's a when, not if. So it will come as soon as we feel like the origination side is delivering a really clear picture of how this business is going to grow over time.

Great. Appreciate the comments this morning.

Thank you. Our next question is coming from Kenneth Lee with RBC Capital Markets. Your line is live.

Hey, good morning. Thanks for taking my question. Somewhat of a follow-up from the previous question. At a higher level, just given the outlook for potential rate reductions, how quickly do you think this could potentially further catalyze real estate transaction activity in the markets?

Thanks.

I would say, look, visibility and clarity produce transaction flow, and that's what we're seeing. I think in the last couple weeks, as some of the reports have come out and people have a lot more visibility, Brett's comment about rate reductions coming in the market that are pretty high probability at this point, that provides people with the confidence to go out and execute on transactions, both on the debt and the equity side. What are indicators? We make sure we keep in constant dialogue with the market and all the participants. It feels like there's a good swell of transaction flow starting up.

It's sort of a three-part cycle. They stop raising, then they say they're going to cut, and then they actually do cut. And so I think everybody wants to see that last piece fall into place. But as Tim said, definitely – A shift in mentality has taken place, but I think there's one more shoe to drop here before we really see the markets begin to accept the opportunity ahead of them. And so we'll see if that comes in September.

Gotcha. Very helpful there. And then in terms of the new origination economic yields, saw that you got the 7.5% on the recent deals. Any change to the potential outlook or the spread that you could expect over risk-free rates there? Thanks.

Sure. As you probably can guess, the second quarter had some pretty decent peaks in rates when we closed some of those transactions. So if you adjusted to where rates are today, those would originate slightly lower numbers, still close to over 7%. as we're based off the 30-year treasury. So if you're using roughly somewhere in the 75 to 85 over the 30-year treasuries on average, that's where we'd be originating. And then obviously with our 2% bumps, you can get to the ROAs there. So right today, if you close a transaction, you'd be in the low sevens.

Gotcha. Very helpful there. Thanks again.

Thank you. Our next question is coming from Kelly Kunath with Morgan Stanley. Your line is live.

Thanks, and hi, everyone. I know we've spoken about pipeline and rates a good bit here, but I was just curious. I know we've seen a few bits that start with respect to the CRE transaction recovery this year. Curious if you could speak to the importance of macroeconomic conditions, rate cuts, et cetera, to your current pipeline versus a more forward-looking larger recovery.

Yeah, Kelly, this is Tim. I think it kind of goes along with what our responses have been on the previous questions. It all is helpful. And as, again, people are starting to see the potential for rate reductions, they're just getting more confident in how they can invest, which is leading to more transactions flow. I think in terms of rate reductions, you know, you're seeing a lot on the debt side of people Going on the floating rate side, it's a little more flexibility, both on prepayment and then potential rate reductions. But for us, the translation, I think where people are seeing long-term rates settle, that our capital is very attractive.

Got it. Thank you.

Thank you. Our next question is coming from Matt Howlett with B. Riley. Your line is live.

Yeah, hey, thanks. Just to follow up on, I mean, with the talk of all these new sponsors, remind us just again, you know, why your structure is so favorable to a syndicator or a real estate investor. I mean, the GSEs lend up to about 75, 80%. Then you're talking about, you know, your product versus taking on a MES product, which is an M18. Just walk me through that again. So, we can hear what the pitch is to the new sponsors.

Yes, Matt, Tim. Yeah, the agencies are largely debt service coverage restricted right now. So typically, I think they're ending up like the banks as well. I think everyone's really in the debt service coverage restriction level now versus LTC or V. So you're seeing those usually come to around 60%, give or take 5% right now. on a fee simple transaction. With us coming in on a normal way transaction, typically we're going to be somewhere, as you see, in that, you know, 35-ish percent of a capital stack. So the leasehold position, then they'll go to the market for the debt. They're going to receive, as you heard earlier, same credit metrics on the debt side. So typically they're going to get around that 65% or so on the leasehold position. which then reduces their level of equity in the transaction. So from that transaction, the total for versus 65% in the fee simple, now they're closer to 75, approaching 80. So now they're putting in about 20% equity into the transaction versus on the fee simple, they were putting in 35%. So that reduces their need for MES, PREF, and then reduces their level of LP equity they need. And then in turn, due to our cost of capital and the senior cost of capital blended, is a lower cost than just the fee-simple debt, and they also have the incremental proceeds to benefit their stack. Go ahead.

Let's just say we also always point out that our capital has no maturity, so it looks quite different in the capital stack than debt. And so I think you see a lot of customers who've now watched the volatility in the market over the past 10 or 15 years. That long term, low priced, very consistent capital is a benefit in markets like this where rates have moved up pretty quickly and volatility gets added. This is the part of the capital structure that's very long term and very stable. So that's also a benefit that I think people are now starting to realize is worth quite a bit.

It just seems like such an attractive product. Where is Mez? I've seen pitch books around on Mez or preferred financing on apartments. Where are rates today? I know it varies, but are they generally below teens or something? Yeah.

Yeah, it depends on the asset class. Multifamily has, again, been pressed down pretty far. So you're seeing low double digits there. And then if you go into other asset classes or development deals, you'll start to see it go into the teens. and match, you know, closer to where PREF and LP Capital is looking to get returns in the mid-teens to upper teens.

No, really just incredible. And this leads me to a bigger picture question. I've asked it before and it's directed to you, Jay, but in terms of, I run my model looking at sort of 10 years, the origination forecast, annual originations, you know, assuming 65, you know, sort of 35 debt equity mix, you know, when commercial real estate prices and their clearing levels are established, what do you think the annual origination volume run rate is for Safehold? Are we talking a billion, billion and a half, two billion plus? I mean, you know, just give me some help with plugging in that number, you know, 10 years out.

Yeah, look, we built the company to do a billion plus a year. So we certainly have the resources and good years have been north of that. And obviously right now transaction activity in the market is less than we'd like. But, you know, if you're plugging in long term, we think, you know, certainly the billion dollar level growing over time is the number we're shooting for internally. This is a big market. This is a big market opportunity. I've used the analogy before between what happened in corporate real estate where triple net lease, you know, efficiencies have created a multi-trillion dollar industry. Those same efficiencies we think should be available to all commercial real estate owners, not just corporate real estate owners. And so we think this is an opportunity to make the entire industry better and more efficient and give them longer-term, more stable capital. So I think if we really can break through on all product types and all the markets we've been doing business in, certainly a billion dollars feels... you know, like the minimum we would want to be shooting for as the business stable, you know, matures and stabilizes. But right now, you know, we're still building this business. The biggest opportunities are still ahead of us. And so, you know, we're patient, but we're not patient. So we'd like to get back to what I know our team can do. We've seen it before. And when the market picks up, I think you'll see us, you know, pick up with it.

Great. With all your advantages, have you seen any competition? I know there was a few guys several years ago, but with Demote around your business, have you seen anyone try to get into this?

We're still obviously the only public company. We have seen some smaller private players. It's been a struggle because if you don't have the investment grade ratings and you don't have the access to capital we have, it's a different business. But There will be niches that others can fill. Certainly, as you heard Tim say, we try to stick to our underwriting standards as best we can. Some others could certainly take more risk and get higher yields. That's not our play today. But right now, I think we really like our position. We've spent an awful lot of capital really building intellectual property. And I think just scale in this business matters. So We think the public format with investment grade ratings serves our customers best, and we want to really continue to pursue that path and have the market get back to where we saw it when we started the business, which is this should be a very large business.

Great. Thank you.

Thank you. Mr. Hoffman, we have no further questions.

Great. If you do have any additional questions on today's earnings release, please feel free to reach out to me directly. Operator, would you please give the conference call replay instructions once again? Thanks.

Thank you, sir. The dial-in information for the replay is 877-481-4010 with the confirmation code of 50921. This concludes today's conference and you may disconnect your lines at this time. And we thank you for your participation.