Good afternoon, and welcome to Safehold’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us today for Safehold’s earnings call. On the call today, we have Jay Sugarman, Chairman and Chief Executive Officer; Marcos Alvarado, President and Chief Investment Officer; and Brett Asnas, Chief Financial Officer. This afternoon, we plan to walk through a presentation that details our second quarter 2023 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 8:00 p.m. Eastern Time today. The dial-in for the replay is 877-481-4010 with a confirmation code of 48759. 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?

Thanks, Pearse, thanks to everyone for joining us today. With the merger now behind us the second quarter was an opportunity to begin focusing on the capital needs of our customers and begin building a deal pipeline in this higher rate environment. The market remains tougher than normal with liquidity from banks still constrained and higher rates and higher cap rates, making transactions more difficult. But we continue to look for ways to help our customers access our modern ground lease capital across all our product lines. And with that short introduction, let’s have Marcos and Brett take us through the quarter in more detail. Marcos?

Thank you Jay, and good afternoon everyone. Let’s begin on Slide 3. During the second quarter, we started to see a slight uptick in new investments activity and portfolio growth. While overall, the real estate capital markets remain dislocated with volumes far off the highs. We’re beginning to see pockets where our ground lease is a constructive capital solution in this difficult environment and we’re encouraged by the momentum in our pipeline. We’re also pleased to see positive developments broadly in the Fed’s fight against inflation. While we’ll continue to highlight the inflation capture in our lease structure, the value of our long-term liabilities and Caret, our stock price has been hit hard over the past 18 months. As investors respond to near-term headwinds without regard to our long-term value components of our portfolio. We believe Safehold could be a beneficiary at the end of this historic tightening cycle and as we start to see stability in rates, we expect our customers will accelerate their delayed capital decisions. The overall portfolio remains steady with significant amounts of subordinate leasehold debt and equity capital supporting our principal and income. The tenants on top of our assets continue to perform. And as of today, we’re not engaged with our customers about any restructuring of our leases. The key credit metrics that we track are well within our target criteria with a weighted average GLTV of 42%, and rent coverage of 3.7 times. On the capital front, we ended the quarter with more than $800 million of liquidity, and in addition have greater ability to invest capital through our previously announced $500 million joint venture, which we have started to deploy. As a reminder, we owned 55% of the venture with a leading sovereign wealth fund, and in addition to our share of…

Thank you, Marcos, and good afternoon, everyone. Continuing on Slide 5, let me detail our quarterly earnings results. For the second quarter, revenue was $85.7 million, and net income was $22.1 million. Earnings per share was $0.35, both with or without one-time merger costs. Overall, the financials looked similar to pre-merger safe with a few differences I will highlight. First, I’ll begin with the balance sheet changes, which now includes the $115 million term loan to Star Holdings accounted for as a loan receivable and presented net of an approximately $2.3 million total reserve. In the first quarter, we recorded an approximately $150 million goodwill asset, which represents the excess of purchase price over the fair value of the assets received and will be tested per GAAP rules moving forward. The ground lease plus and leasehold loan fund interests are accounted for as equity method investments and had a balance of approximately $83 million at quarter end. Approximately a $100 million trust preferred unsecured debt assumed as part of the closing sits within consolidated net debt. Now moving to the income statement. Revenue for the quarter included approximately $7.2 million in management fees earned from Star Holdings, which is an offset to the way we discussed G&A though included in other income in the GAAP income statement. As we previously disclosed, the contract is structured to pay Safehold $25 million in fees during year one, which will step down annually over the four-year term. In accordance with GAAP, we accrue income quarterly based on services provided, which for Q2 included setup work post-merger. We anticipate a lower run rate based on our forecast and expect to recognize approximately $18 million over the next three quarters, which would approximate contractual cash we receive per the management agreement. We earned approximately $2.4…

Thanks for that detail, Brett. What’s striking to me is as we enter this next phase of growth is really how early we still are in the development of the modern ground lease industry. There’s still a lot of work to do to accelerate adoption among customers and investors, but ground leases have certainly begun to carve-out a place in the mainstream real estate markets and we look forward to helping push that adoption even faster. And operator with that, why don’t we go ahead and open it up for questions?

Absolutely. Thank you. [Operator Instructions] The first question is from Nate Crossett with BNP Paribas. Please proceed.

Hey, thank you. Good evening. It’s nice to see activity picking up a bit. We just curious if you could speak to, what does the pipeline look like right now? Have you closed anything so far in 3Q and then just on sub sectors, it sounds like it was all multifamily this quarter, what sectors are in the pipeline? Are there any other areas you’re looking at? I think at Nareit you may have mentioned subsidized housing. Just curious to get your comments there.

Hey, Nate. So I think, we’ve been pretty encouraged over the last six weeks or so. There’s a handful of transactions that are in the closing process. They’re all in the housing space, so a mix of multifamily and student housing. And we did get our first affordable deal under LOI as well. So we’re encouraged by the recent momentum as I look kind of at the next leg of the pipeline, which isn’t signed up today, it is predominantly housing as well, so mostly multifamily and there is one hospitality asset, but there seems to be a thawing in some of these asset classes. Student housing as an example is under supplied. I think there’s some conviction from owners about rent growth that they can underwrite. And our capital solution is accretive as there, recapitalizing transactions or pursuing new acquisitions.

Okay, that’s helpful. And then just the pricing on what’s in the pipeline, is it similar to that 7.2% that you guys quoted this quarter, or how should we think about that?

Yes, I would say the, the 7.2%, we’re really excited about that overall yield. I think we did better this quarter than I would say expected. Our target pricing today is still sort of in that 6.5% range. And I would say the pipeline sort of sits between the 6.5% and the 7.2%.

Okay, thank you. And then just one on the balance sheet, just on the revolver, how should we be thinking about when you may look to term that out? Like how long do the current hedges last? I think you said the swaps are good for five years, so just how should we think about that and then maybe where you could do 30-year money today? If I wanted to talk about just in terms of debt, what you’re feeling?

Absolutely, yeah. As you know Nate, the line has been drawn over the course of the merger discussions and since the merger’s closed, it’s nice to get back out on the road and educate folks. I think what we’re encouraged by is meeting with a lot of new investors that’s both on the equity and debt side. So as this, ground lease market continues to evolve and open up there are definitely a lot more interested parties. I think, when we look at our leverage level and think about our rating and think about capital allocation, we’re looking across the board at all of those opportunities on the equity side and debt side. And we’ll continue to try to figure out what the best cost of capital in that moment is, as well as what can help us kind of get to that next lily pad. That’s I would say the goal from our end. And then the last piece is on the hedging, which I think is an important one that, we’re trying to make clearer. We put in our deck this quarter as well, which is, half of the line is already fixed. And then the other half we have 30-year hedges that are today, 60 basis points plus in the money. So that is a significant gain that will that gain will be amortized over the life of any debt instrument that we do respective of, if it’s a 10-year deal, a 30-year deal if it’s different structures as we’ve talked about in the past. So we’re continuing to try to be thoughtful about how to allocate capital and turn out those borrowings.

Okay. Thank you. That’s it.

The next question is from Haendel St. Juste with Mizuho. Please proceed.

Hey, good evening. First question is on I guess the investments in the quarter. Can you guys, I guess, discuss the process of how the new investments are allocated on a wholly-owned versus via your recent JV? Looks like most of the activity was on balance sheet instead of JV. I think we were under the impression that the first $500 million or so would likely be through the JV given your higher cost of capital here. So maybe some elaboration on that, please.

There was a pre-existing commitment through our GL Plus Fund. And so that predated the execution of the venture. And so, and that was a relatively large transaction for the quarter was $90 million. And so that’s why it was not closed in the venture. The way we look at the venture going forward is it will most likely close all the transactions until we fill that $500 million bucket. I would say if I’m forecasting, there may be some smaller transactions where friction costs for setting up, individual REITs within the fund may fall out. But the way you should think about is going forward now, the next $500 million will go in the venture.

Thanks for that. And remind us just regarding the JV; does your partner have veto rights? I guess I’m curious if they’re only interested in multifamily here and if there’s any asset classes that they’ve redlined.

Yes, so it’s a collaborative process. They do have discretion over the capital. We both do obviously. So it’s a collaborative process as we start to build our pipeline. I think most of the product we’re seeing is in the residential space. We have shown them a few deals that ultimately didn’t get to the finish line that were in other asset classes, and they’re, as I mentioned, there’s something in the hospitality space that they’re supportive of as well. So, we’re not just going to do residential, we’ll do what the market sort of gives us. And that happens to be a fair amount of resi, which we’re excited about.

Okay. The next question is from Anthony Paolone with JPMorgan. Please proceed.

Yes, thanks. First, just a couple clarifying ones, I just want to make sure I understand. In terms of Safehold’s cash out the door in 2Q, is that the $73 million or does that include also some JV partner money?

The exact number?

$73 is us.

$73 is us, and that includes $12 million from the leasehold loan fund, so $61 million in ground leases for our share and $12 million in the leasehold loan fund.

Okay. And then in the $129 million, the new sort of commitments, I guess some of that was funded and is in the $73 million already, but in that $129 million, your share of that is the $112 million. I'm just trying to reconcile what you committed, what you spent at your share.

You got it. $112 million is the number.

Okay, got it. And do you – and what's kind of unspent but committed right now at Safehold's share? Just to kind of understand like what could go out the rest of the year or just baseline?

So on a gross basis, it is approximately $460 million, so we'd be 55% of that number.

55% of the $460 million. Okay. Yes, and just you talked about the pipeline picking up just, I mean, what do you think the next few quarters could hold in terms of pace? Like do you think the $129 million gross is doable from what you could tell? Or is – are things still spotty?

I would say things are spotty, right? These markets are extremely volatile. If I'm – if you give me a snapshot today, yes, I do think the $129 million is doable. But as we've seen over the past year, you can wake up the next morning and things dramatically change. So, I don't want to put a number out there from a quarter-to-quarter basis, but we're very encouraged by the recent momentum.

Okay. And then just one last one on the financials, the $6.8 million in JV income in the quarter, I mean, you talked about like why that's higher, but is that like a good run rate? Or is it just a big move up given everything that's happened and just want to try to understand if there's anything in there?

Yes, that's probably a good run rate, Tony. If you recall right at merger closing, we acquired those GLX assets. So there's our existing unconsolidated JV assets that we've done in the past, but now the funds go through this line item as well. So it feels like that's probably a decent run rate. There were some initial costs in there, so maybe a touch higher going forward, but that's probably a good run rate.

Okay. That’s all I've got. Thank you.

The next question is from Harsh Hemnani with Green Street. Please proceed.

Thank you. So of course, the 7.1% is a great lead and it's nice to see their transaction market open back up. I think you mentioned you saw a couple hospitality deals in there, so in that range that you sort of provided 6.5% to call it 7.1%, 7.2%would it be fair to say that hospitality shakes out on the higher end of that range? Any guidance that you could give us there? And then have you seen any office type deals on the market? And if you were pricing some of those, where would you be comfortable acquiring an office ground lease today?

Hey, Harsh. So yes, on the hotel deals in our pipeline, they are at the wider end of the range, so closer to 7%. And we've seen a fair amount of office given the capital constraints. And to date, nothing has sort of fit our box. I would say it's not an issue with just our proceeds level. I think a lot of those assets that we've seen have a fair amount of existing leverage and us as a ground lease solution in isolation doesn't solve their problem. And so we're continuing to monitor. We'd like to own some of the office assets that we see in our pipeline, but we're being very selective.

Okay. That's helpful. And then spending two minutes on Caret, I guess, there've been two private rounds done. It seems like the first round investors wanted to exercise their option to reinvest in the second round. Have you gotten any more inbounds from these investors as to interest in Caret? Do you think there'll be more sort of private rounds in the near term? Any conversations around that would be helpful?

Yes, I think we've been more focused on the pipeline at this point, Harsh, but I would say we've had reverse inquiry on Caret, which has been right along the lines we had hoped, which is the kind of long-term, wealth creating invest – investment seekers. So that continues to be something we will push once we've rebuilt the pipeline and can show that kind of growth again. But I think the concept of Caret is getting more and more familiar which is what we hoped coming out of the merger.

Okay. Thank you.

Okay. Up next we have Ki Bin Kim with Truist. Please proceed Ki.

Thank you. Quick question on the originations this quarter, the 7.2% yield inflation adjusted is 7.1% the GAAP yield that you're booking the deals at?

Yes, that's correct.

Oh, okay. I would've thought there would've been a bigger gap [ph] between the two numbers.

Yes, there's a little bit of rounding in that 7.1% and that's 7.2%. And the long-term Fed assumption from quarter-to-quarter went down a little bit since it's a 2.23%, so there's not that much lift up in the inflation adjusted yield.

Okay. And can you remind us where your fixed charge coverage ratio is today, per your covenant calculations and the unsecured asset versus unsecured debt where that is today versus the covenants?

Sure. From an unencumbered asset to unsecured debt coverage standpoint we're touch under one and a half times. So obviously as you know the, as the numerator and denominator grow and we look to equitize as well as raise debt in the future that cushion will grow. And then from a FCCR standpoint we're in the mid-ones, mid-twos, and that's from an EBITDA cushion standpoint it's about $15 million of EBITDA cushion, which again is – it's declined here over the past quarters, but as we equitize and look to the long-term debt markets, that will go back up as well, that will usually sit in a run rate of, call it 1.3 times to 1.4 times, and it's super, super stable. And as you know, we also hedged some of our revolving line borrowings this past quarter. So I'd say on a FCCR 1.3 times to 1.4 times would be our run rate of where we typically are. And from a UAUD [ph] perspective, I'd call it 1.5 times to 1.6 times staying within both of those corridors.

Okay. So given those where those covenants are today, not the covenants, I mean, where you are in terms of FCCR and the 1.9 times debt-to-equity, it doesn't seem like there’s a lot of cushion left on the equity side to do more deals. And also I’m not sure exactly how much cash flow we’re retaining each quarter. So just high level, how are you thinking about equity needs over the next year or so? And I know your stock price isn’t exactly where it needs to be or where you want it to be, but I guess what are the avenues that how you would address the equity?

Ki Bin, I guess, the things we’ve said in the past are it’s typically tied to our pipeline and what we see in the future. We always want to have sufficient liquidity and buying power to be able to be aggressive in the markets when we want to be. You’ve seen us lean in on third party capital when it makes sense. That’s certainly been part of the equation for us, and we’ll look at the mix between primary and third party capital and make sure we’re out ahead of the game. So that’s how we’ve been thinking about it over the last 12 months. And certainly, the market’s finally beginning to break a little bit. So we’ve got a very large partner who has been very helpful on the third party capital side.

And on your line of credit, you have about $802 million of capacity. But I’m curious, can you actually, from a practical standpoint use all that? Or would that actually press you up against the covenants?

Yes. We’ve got headroom still, we’re being cognizant. Markets are finally at least on the deal side, starting to present us with the kind of opportunities we think are creative and we’ll start looking at different choices here and get the mix right. But as Brett said, we’ve got a debt plan, we’ve got an equity plan over the next 12 months that will keep us out ahead of the capital needs we see.

Okay. Thank you.

The next question is from Matthew Howlett with B. Riley. Please proceed, Matthew.

Yes, thanks. Thanks for taking my question. Just on the UCA went up, obviously by the amount of your originations, any – was any movement in between on the appraisals you do on the properties, any significant changes in the quarter?

Yes, look, we’re in that part of the cycle where appraisers are starting to catch up to some of the cap rate expansion. Some of the fundamentals obviously in office in particular are starting to bleed. So we’ve seen a degradation in the appraisals on a number of the assets. But that is meant to be a long-term indication of value. So over time, we expect that stuff to stabilize out, but right now we’re certainly in the downward slope. Some of the multi-families actually done better than expected. So it’s not all a one way story, but I think the biggest piece of the puzzle is obviously turning back on the origination machine and starting to add in that external growth to offset whatever weakness there is on just sort of the fundamental appraisal cap rate catch up that we’re seeing.

Yes, the GLTV was stable at 42% and you were clear that there was – there’s no property that you’re in discussion with in terms of any restructuring. I mean, we see headlines obviously every day on the office market in major cities, but you’re saying is your portfolio, you’re not seeing anything that would suggest that there could be something on the horizon?

Yes, today that’s an accurate statement. Certainly offices is obviously under pressure and we’re engaged with our tenants where there is rollover potentially some future cash flow issues and today there is no conversation going on.

Got you. Okay. And then Jay, talk about the – you talked about it with the bank, the new bank lending environment, they’re obviously pulling back from commercial market. Talk about the interplay between your ground lease solution and the banks. If they do, they are pulling back, are we talking about they’re going to come in on LTVs or not do certain product types and you’re going to be the solution for the real estate owners to do I mean, you could offer a product that could be the solution for them to get the acquired leverage they need. Just talk a little bit about the interplay between the banks pulling back and your ground and your modern ground lease?

Yes, it’s a little bit of good news, bad news in terms of banks have been one of the sources of capital for the leasehold side of our business. We typically pair up with a third party capital source. Sometimes it’s banks, sometimes it’s CMBS, sometimes it’s money center bank, regional bank that we’ve probably worked with what 50, 60 leasehold lenders at this point. So there are still pockets of capital. Certainly, the agencies in the multifamily space are still there. But it definitely constraints our ability to help our customers put their capital stack together when the leasehold lending market is pulling back. So that’s not great news. The positive side of that is, capital is more valuable than ever. Long term low cost capital from a ground lease helps stabilize capital structures and make them more resilient. So we definitely think we are part of the solution to a more volatile marketplace. But we do need a functioning financing market to be at our best. So a pullback is fine. A complete red line of commercial real estate would not be good.

Got you. Thanks for taking my questions, Jay.

Mr. Hoffmann, we have no further questions in queue.

Thanks. If you should have additional questions on today’s release, please feel free to contact me directly. John, would you mind giving me conference call replay instructions once more?

Absolutely. There will be a replay of this conference call beginning at 8:00 p.m. Eastern time today. The dial in for the replay is 877-481-4010 with the confirmation code of 48759. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.