Safehold Inc. (NYSE: SAFE) is a real estate investment trust (REIT) that has pioneered the modern ground lease industry, offering a unique and transformative approach to real estate ownership. Founded in 2017, the company has rapidly grown to become the industry leader, providing property owners with a new and better way to unlock the value of the land beneath their buildings.
Business Overview and History
Safehold Inc. was formed in 2017 as the first publicly-traded company focused primarily on acquiring, managing, and capitalizing ground leases. The company completed its initial public offering in June 2017, with its common stock beginning to trade on the New York Stock Exchange under the symbol "SAFE". Safehold elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes, commencing with the tax year ended December 31, 2017. The company is structured as an Umbrella Partnership REIT (UPREIT), with all of its properties owned through a subsidiary partnership.
In the early years following its IPO, Safehold concentrated on expanding its ground lease portfolio, leveraging its Manager's extensive real estate investment origination and sourcing platform to actively promote the benefits of the ground lease structure to prospective tenants. By the end of 2021, the company had successfully grown its ground lease portfolio to 117 assets, totaling over $4 billion in gross book value.
The year 2021 presented some challenges for Safehold, particularly due to the impact of the COVID-19 pandemic on its Park Hotels portfolio, which accounted for a significant portion of the company's revenue at the time. As a result of the decreased operating performance of these assets during the pandemic, Safehold received no percentage rent payments from the Park Hotels portfolio in 2021. The company worked closely with its Park Hotels tenant during this period to navigate the challenges posed by the unprecedented circumstances.
Since its inception, Safehold has grown its portfolio to 147 ground lease assets totaling $6.8 billion in gross book value as of December 31, 2024. The company's portfolio is diversified across various property types, including multifamily (58% of the portfolio), office, hotel, life science, and mixed-use. Geographically, Safehold's assets are primarily located in the top 30 metropolitan areas across the United States, with its largest concentrations in the Northeast (39%), West (26%), and Southeast (13%) regions.
Financial Performance and Metrics
Financials
Safehold's financial performance has been impressive, with the company reporting strong revenue and earnings growth in recent years. In fiscal year 2024, the company generated total revenue of $365.7 million, a 3.7% increase from the previous year. Net income attributable to common shareholders was $105.8 million, or $1.48 per diluted share, representing an 8% year-over-year increase in earnings per share when excluding non-recurring items.
For the fourth quarter of 2024, Safehold reported revenue of $91.9 million, a 5% increase compared to the same period in the previous year. Net income for Q4 2024 was $26 million, representing a substantial 34% year-over-year growth. The company's operating cash flow for the full year 2024 was $37.9 million, which was also its free cash flow for the period.
Liquidity
The company's balance sheet remains solid, with $4.6 billion in total debt as of December 31, 2024. Safehold's weighted average debt maturity is approximately 19.2 years, and it maintains an investment-grade credit profile, with ratings of A3 from Moody's, A- from Fitch, and BBB+ from S&P Global Ratings. This strong financial position provides the company with ample liquidity and flexibility to continue executing its growth strategy.
As of Q4 2024, Safehold had a debt-to-equity ratio of 1.96x and $20.1 million in cash and cash equivalents. The company also maintained $660 million of undrawn capacity on its $1.35 billion unsecured revolving credit facility. Safehold's current ratio and quick ratio both stood at 18.56, indicating a strong ability to meet short-term obligations.
One of the key metrics Safehold tracks is its portfolio's Ground Lease to Value (GLTV) ratio, which stood at 49% as of the end of 2024. This relatively low GLTV highlights the safety and conservatism of the company's ground lease investments, as its basis typically represents only 30% to 45% of the combined value of the land and buildings. Additionally, Safehold's portfolio generates a weighted average rent coverage of 3.5x, indicating the substantial financial cushion its tenants have to cover the ground lease payments.
Safehold's Management and Strategy
Safehold is externally managed by SFTY Manager, LLC, a wholly-owned subsidiary of iStar Inc. (NYSE: STAR), the company's largest shareholder. iStar is an experienced real estate investor with a long history of sourcing and underwriting ground lease transactions, which has been instrumental in Safehold's rapid growth and success.
The company's strategic focus is to continue expanding its presence in the ground lease industry, with a particular emphasis on the multifamily sector, especially the affordable housing segment. In 2024, Safehold closed 10 new ground leases, six of which were for affordable multifamily properties. Management believes the affordable housing market presents a compelling opportunity, as the sector benefits from stable cash flows, high occupancy rates, and strong supply-demand dynamics.
For 2025, Safehold plans to double down on its efforts in the affordable multifamily sector, with a goal of doubling its affordable volume from 2024 and expanding to at least two new states. The company's board has also approved a new $50 million share buyback authorization, with the goal of being leverage neutral.
Safehold is also actively exploring ways to unlock the value of its owned residual portfolio, which represents the potential upside from owning the land and improvements at the end of its ground leases. This includes evaluating potential asset sales, joint ventures, and other strategies to maximize the return on its investments for shareholders. The company plans to explore opportunities to recycle capital from the existing portfolio through asset sales or joint ventures, in order to create capital that can be used for new transactions or to take advantage of the perceived undervaluation of their stock.
Additionally, Safehold plans to work on making Carrot, their unrealized capital appreciation platform, more accessible to third-party investors, as they believe it is a significant source of long-term value for shareholders that is currently not recognized in the share price.
Portfolio Performance and Composition
Safehold's portfolio is well-diversified across different property types and geographic markets. As of December 31, 2022, the percentage breakdown of the gross book value of Safehold's portfolio was 45% office, 36% multi-family, 12% hotels, 4% life science, and 3% mixed-use and other. This diversification by property type, geographic location, and sponsor in the portfolio further reduces risk and enhances potential upside.
Many of Safehold's Ground Leases have CPI lookbacks, generally starting between years 11 and 21 of the lease term, to mitigate the effects of inflation. However, these are typically capped between 3% - 3.5%, and in the event cumulative inflation growth for the lookback period exceeds the cap, these rent adjustments may not keep up fully with changes in inflation.
As of December 31, 2022, Safehold's estimated portfolio Ground Rent Coverage was 3.0x. Ground Rent Coverage is defined as the ratio of the Property's NOI to the annualized rental payment due to Safehold. This strong coverage ratio demonstrates the financial stability of Safehold's tenants and the conservative nature of its ground lease investments.
Recent Performance and Originations
In 2024, Safehold's new origination activity totaled $225 million, including 10 new ground leases for $193 million and 1 leasehold loan for $32 million. The investments made in 2024 had a weighted average GLTV of 34%, rent coverage of 2.8x, and an economic yield of 7.4%. For the full year 2024, Safehold funded a total of $319 million, including $148 million of new 2024 originations at a 7.3% economic yield, $165 million of ground lease fundings on pre-existing commitments at a 6.5% economic yield, and $6 million related to their 53% share of the leasehold loan fund.
Risks and Challenges
While Safehold's business model and growth trajectory have been impressive, the company faces several risks and challenges that investors should be aware of:
1. Interest Rate Sensitivity: As a capital-intensive business, Safehold is exposed to fluctuations in interest rates, which can impact the cost of its debt financing and the overall attractiveness of ground leases compared to alternative investment options.
2. Tenant Concentration: A significant portion of Safehold's revenue is derived from a limited number of large tenants, particularly in the hotel and multifamily sectors. The inability of these tenants to make lease payments could have a material adverse effect on the company's financial performance.
3. Regulatory Changes: Safehold's business is subject to various laws and regulations, including those related to real estate, taxation, and environmental matters. Changes in these regulations could impact the company's operations and financial results.
4. Competition: The ground lease industry, while still relatively nascent, is attracting increased attention from both traditional and alternative real estate investors. Safehold faces competition in sourcing and acquiring new ground lease investments, which could impact its growth and profitability.
5. Valuation of Owned Residual Portfolio: Accurately estimating the value of Safehold's owned residual portfolio, which represents the potential upside from owning the land and improvements at the end of its ground leases, is crucial but inherently challenging due to the long-term nature of these investments.
Conclusion
Safehold has emerged as the pioneer and industry leader in the modern ground lease space, offering a unique and compelling value proposition to commercial real estate owners and developers. The company's innovative business model, diversified portfolio, strong financial position, and experienced management team have positioned it for continued growth and success.
While Safehold faces certain risks and challenges, the company's relentless focus on expanding its ground lease platform, particularly in the attractive affordable housing sector, and its efforts to unlock the value of its owned residual portfolio suggest that the company is well-positioned to capitalize on the significant untapped potential in the ground lease market. As Safehold continues to execute on its strategic initiatives, investors may find the company's long-term growth story increasingly compelling.