Safehold Inc. (NYSE: SAFE), the pioneering real estate investment trust (REIT) in the ground lease industry, has delivered another quarter of solid financial performance, showcasing the strength and resilience of its unique business model. Despite the ongoing market volatility, the company has continued to navigate the challenges adeptly, positioning itself for long-term success.
Financials
In the first quarter of 2024, Safehold reported revenue of $93.2 million, a testament to the company's ability to generate consistent and growing income streams. The net income for the quarter stood at $30.7 million, or $0.43 per share, a significant improvement from the previous year's results, which were impacted by non-recurring items.
Capital Markets Execution
One of the standout achievements in the quarter was Safehold's successful capital markets execution. The company issued $300 million of 10-year unsecured notes at a 6.1% coupon, using the net proceeds to repay outstanding revolver borrowings. Importantly, the company was able to settle a portion of its outstanding hedges, realizing cash gains of approximately $21 million. After applying these gains to the notes, the semi-annual yield to maturity decreased by more than 80 basis points to a 5.3% yield. This strategic move not only strengthened Safehold's balance sheet but also highlighted the value of its prudent hedging strategy.
Furthermore, the company entered into a new $2 billion unsecured revolving credit facility, replacing and upsizing its previous $1.85 billion aggregate facilities. This new facility provides Safehold with $150 million of incremental credit capacity, resolves the company's nearest-term maturity with a fresh five-year term, and lowers the cost for drawn amounts to adjusted SOFR plus 85 basis points. These enhancements to Safehold's capital structure further solidify its financial flexibility and position the company to capitalize on attractive investment opportunities.
Investment Pipeline
The company's pipeline of potential investments also showed promising signs of recovery, with eight letters of intent (LOIs) signed for potential commitments of approximately $145 million. These potential investments are primarily in the multifamily sector, diversified across six markets and five sponsors, with credit metrics in line with Safehold's portfolio targets. The company expects the majority of these deals to close in the second quarter, a positive indicator of the market's gradual return to normalcy.
Business Overview
Safehold's portfolio continued to demonstrate resilience, with the total portfolio reaching $6.5 billion and the estimated unrealized capital appreciation (UCA) growing to $9.1 billion. The portfolio's weighted average ground lease-to-value (GLTV) ratio stood at 47%, and the rent coverage ratio remained stable at 3.6 times. These metrics underscore the strength and quality of Safehold's ground lease investments, which have proven to be a reliable source of safe, growing income and long-term capital appreciation for the company's shareholders.
Liquidity
In terms of the company's capital structure, Safehold ended the quarter with approximately $1.1 billion of liquidity, further enhanced by the unused capacity in its joint venture. With no debt maturities until 2027 and a weighted average debt maturity of approximately 21 years, the company is well-positioned to weather any near-term market volatility and selectively deploy capital into attractive investment opportunities.
Risk Management
Safehold's focus on managing interest rate risk is also evident in its hedging strategy. The company has $500 million of SOFR swaps at a rate of approximately 3% for the next four years, which is currently saving the company approximately $3 million of cash interest per quarter. Additionally, Safehold has $350 million of long-term treasury locks at a weighted average rate of approximately 3.7%, with a current mark-to-market gain of approximately $45 million.
Outlook
While the recovery in transaction volume has taken longer than the company would have liked, Safehold's management team remains cautiously optimistic about the future. CEO Jay Sugarman noted that there are tangible signs of activity surfacing, both in Safehold's business and in the real estate market generally. The company is well-positioned to take advantage of the attractive risk-return profiles of deals that are in a position to close, while also continuing to engage with customers who will be ready to execute when rates ease back to lower levels.
Safehold's focus on maintaining a strong balance sheet, prudent risk management, and disciplined capital allocation has positioned the company well to navigate the current market environment. The company's unique ground lease model, which provides a safe and growing income stream, coupled with the potential for long-term capital appreciation, continues to resonate with real estate owners and developers.
Looking ahead, Safehold remains committed to its strategic priorities of scaling its platform, delivering safe and growing income to shareholders, and unlocking the value of the Caret program. The company's management team is confident in its ability to capitalize on the significant market opportunity in the ground lease space and drive long-term value creation for its stakeholders.
Conclusion
In conclusion, Safehold's first quarter 2024 results demonstrate the resilience and adaptability of its business model. The company's strong financial position, disciplined capital management, and focus on strategic execution position it well to navigate the current market challenges and emerge as an even stronger industry leader. Investors should closely monitor Safehold's progress as the company continues to execute on its growth plans and capitalize on the significant opportunities in the ground lease market.