Good morning, and welcome to Safehold's Second Quarter 2019 Earnings Conference Call. 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 Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.
Thank you. Good morning, everyone, and thanks for joining us today for Safehold's earnings call. With me today are Jake Sugarman, Chairman and Chief Executive Officer and Marcos Alvarado, President and Chief Investment Officer. This morning, we plan to walk through a presentation that details our Q2 2019 results. The presentation will be found on our website atfaithholdinc.com and by clicking on the Investor Relations link.
There will be a replay of the conference call beginning at 12 p. M. Eastern Time today. And the dial in for the replay is 1-eight hundred-five eighty five-eight thousand three hundred and sixty seven with the confirmation code of 9,345,669. 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 any 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 the call over to Chairman and CEO, Jay Sherman.
Jay? Thanks, Jason. We continue to make excellent progress during the Q2, setting us up for a strong second half of the year. Core metrics advanced with revenue up 70% year over year, earnings per share up over 80% year over year and the quality of our pipeline continuing to increase. Our message is clear and simple.
A Safehold ground lease enables building owners to be more capital efficient and more cost efficient, enabling them to achieve higher returns with lower risk. Making a very large industry more efficient and delivering a better customer experience and better customer results has been a consistent theme for some of the biggest and most successful companies in the country, And we believe we can join their ranks by delivering a nationally scaled professionally managed platform that focuses on reinventing the ground lease industry and meeting the needs of today's real estate owners in a way never done before. Based on what we've seen over the first half of the year, we feel confident the message is breaking through. And as a result, we are raising our investment guidance to $1,000,000,000 for 20 19, a 33% increase from our guidance at the beginning of the year. We hope to keep expanding to all the top 30 markets in the country and look forward to locking down many of the deals in our pipeline to demonstrate the range of our capabilities.
And while we're very focused on growing the investment side of our business, we are also importantly continuing to refine our capabilities on the capital side of the business, raising more efficient debt to fund our portfolio and expanding the number and type of equity investors who we think will be attracted to what we are building. We believe the combination of principal safety, premium asset returns and the sizable capital gains potential embedded in our stock will prove attractive to a wide range of investors well beyond the real estate world. And we've begun planning to share with them our story as it reaches scale. With that, let me turn it over to Marcos to go through the quarter in more detail. Marcos?
Thank you, Jay, and good morning, everyone. Let me start with Slide 4. Q2 of 2019 was highlighted by strong year over year earnings growth of 2 37% as Safehold continues to gain traction with customers and penetrate a significant market opportunity. As Jay mentioned, we're raising our investment target from $750,000,000 to $1,000,000,000 Additionally, we've continued to improve the right side of our balance sheet as we've recently closed on several asset financings that have meaningfully extended our debt maturity profile, along with increasing the commitments on our revolving credit facility by 100,000,000 dollars Slide 5 summarizes our earnings results. Revenues for the Q2 of this year jumped to $20,000,000 a 70% increase from the same period last year, while quarterly earnings per share grew 80%.
At the end of the quarter, our aggregate portfolio stood at $1,100,000,000 and the unrealized capital appreciation in our own residual portfolio, representing the value of the bricks and mortar sitting on top of our land, grew to $2,200,000,000 a 60% increase from the same period last year. Slide 6 is a review of our investment activity. During the Q2, we signed up 5 new Safeholds totaling $186,000,000 of which $43,000,000 closed during the quarter. The balance is signed, committed and expected to close in the coming weeks. You can see the key investment metrics on these transactions on the bottom half of the slide, which are consistent with our strategy of creating AAA equivalent risk.
These assets have a 5.7% effective yield with a 3.6x coverage and a weighted average gross book value representing 39% of combined property value. Moving to Slide 7, we illustrate the growth of our pipeline. As we continue to gain momentum, our pipeline is growing nicely. We are encouraged by the deal flow we are seeing as we expand into new markets, reaching new high quality customers and educating them on the Safehold value proposition. This growth in our pipeline has given us the confidence to increase our full year investment target by $250,000,000 to $1,000,000,000 assuming the economic conditions remain consistent with today.
You can see some of the key metrics associated with our pipeline on this slide that are consistent with our existing portfolio. Slide 8 provides a summary of our debt. We continue to improve the right side of our balance sheet to help facilitate the scale of Safehold. During the Q2 and subsequent to quarter end, we closed $287,000,000 of long term debt across 5 separate non recourse financings customized to the unique characteristics of our Safeholds. The combined weighted averages of the financings this quarter have an initial cash interest rate of 3.1 percent and a 4.2% interest rate over the term of the debt, which has a weighted average maturity of 38 years.
As it stands today, we have approximately $600,000,000 of debt outstanding. Based on our recent activity, we have extended our weighted average debt maturity from 7 years at the end of last quarter to 23 years, giving us a clear runway with no mortgage maturities for 8 years. Presently, our debt has a 3.5% weighted average cash interest rate and a weighted average interest rate of 4.1% over the term of the debt. Leverage stands at 1x debt to equity. Subsequent to the quarter end, we expanded our bank group and upsized our revolver capacity by $100,000,000 to $450,000,000 to supplement the growth of our franchise.
Our revolver is currently undrawn. Moving to Slide 9. During the Q2, the unrealized capital appreciation in our owned residual portfolio grew to $2,200,000,000 increasing nearly fivefold since our IPO in June of 2017. As a reminder, this metric represents today's estimated market value of the buildings on top of our land. In conclusion, it was a strong quarter underscored by solid earnings, a larger pipeline, continued market penetration and an improved capital structure that should allow us to continue to scale the franchise.
We're certainly pleased to see the stock performance over the last few months as we believe investors are starting to recognize the opportunity and growing momentum. That being said, we believe we are only in the early stages of what we are building at Safehold. We will continue to educate a broad range of investors about the compelling combination of excess returns and growth embedded in our company. With that, I'll turn it back to Jay.
Thanks, Marcos. Let me just finish with a few finishing comments. We continue to believe we're at the beginning of an extraordinary Safehold the go to name wherever a value enhancing ground lease is needed. Safehold the go to name wherever a value enhancing ground lease is needed. We look forward to telling our story and explaining how our making the pie bigger approach can create compelling returns for our customers and for our shareholders.
Okay, operator, let's go ahead and open it up for questions.
Thank you. Your first question comes from Anthony Paolone from JPMorgan. Your line is open.
Thank you and good morning. Just a couple of questions on the deal volume and deal activity first. The $1,000,000,000 that you've moved guidance up to, do you think that's money that's actually spent this year? Or do you think that will be commitments as well?
Yes. I think, Anthony, as we said in the past, we can't control the timing. In fact, we've had a couple of customers ask us to delay closings well beyond when we actually had a deal signed, sealed and delivered. So we're comfortable saying we will close and fund $1,000,000,000 this year based on what we see in the pipeline today.
Okay. And these delays in terms of is it just timing because the customer wants to just push it off a couple of months? Or for instance, the volume that you did $186,000,000 a quarter, is that commitments that could take several quarters before the capital is actually put out the door?
Yes. No, it's 2 relatively idiosyncratic reasons, but it saved our customers money to just delay them slightly, and we're in a customer business. So we were happy to accommodate them.
Okay. And then how are yields holding up given what's happened to interest rates the last several months?
It's a great question. Again, I think our goal is to deliver better returns with lower risk to our customers. We think there's a lot of cost efficiency and a lot of capital efficiency that gives us a pricing umbrella inside where alternative financing is available to our customers. So we've seen a little bit of tightening in the overall financing markets, but probably not as dramatic as you've seen in sort of base rates. We'll see where the market goes, but I think we continue to be a better alternative in lots of situations in our core kind of we haven't seen a lot of erosion in that yet.
Okay. And then we haven't seen a lot of erosion in that yet. Okay.
And with the larger pipeline that's emerging and stock has done well, how are you thinking about funding between equity and also having your capacity to get to your target leverage level? And then the additional element we'd love to hear about is just how
to think about
Istar's just consistent purchases of the equity and where that goes over time?
Yes. Look, I think we started the year with sufficient capital to meet our original guidance. After that, it's all pretty much pipeline driven, how fast the deals are closing, what's the amount of volume. We do think and you heard both Marcus and I mentioned that scale is critical for our business. So we're a little less focused on exactly how things come in quarter by quarter, but we're very focused on reaching scale.
So at least at this point, it will be driven by the closing of transactions. We continue to believe the stock represents compelling value and certainly are sensitive to that. But our end game here is to reach scale to be the dominant player in a what is really a revolutionary idea. So we'll see how the pipeline plays out and that will dictate some of our capital decisions. In terms of Istar's desires to continue acquiring as much of Safehold as it can at these prices, That is something that Istar's Board came to the conclusion.
This was one of the most attractive businesses it's seen. It made the large investment in January. And so long as the stock doesn't reflect what we think is full value, they continue to be an interested acquirer of shares. So it's a relatively small amount in the open market, but they do have the right to participate up to their pro rata share of any future capital raises. So that will be the means through which it probably acquires significant amounts in the future.
Okay. And then just last question, more detail on the G and A popped up from 1Q to 2Q. Can you just comment on what that number is likely to be around as a sort of a run rate go forward figure?
Yes. Just in terms of the jump there, at our annual meeting, our Board members do receive a share grant that we expensed in the quarter. So that's not a recurring item. You'll see that every year for around our annual meeting. Run rate, I think you're going to start to see it stabilize.
We think we're as we scale, we get real economies of scale. So we don't see G and A dramatically scaling with the business. But where it's been on an annual basis is probably a good starting point.
So the 1Q number is probably a little bit more of the baseline in 2Q, just that happens once a year kind of thing?
Yes. We will be we do make the director grants every year. So that we'll you should factor that in as a it's a onetime event, just spread it over 4 quarters, so you could add a quarter of that for the Q1. And we do have legal costs as we continue to do R and D around the actual structures we're using. Again, as we get bigger, we think a lot of those costs become smaller and smaller.
There is still a little bit of innovation costs that we're incurring, things that we're still learning how to do better, make more efficient. But I think if you look at the run rate over the last 12 months, that's probably a better way to think about it than any individual quarter annualized.
Okay, great. Thank you.
Your next question comes from Rich Anderson from SMBC. Your line is open.
Thanks. Good morning, everyone. So on the financings, the 287,000,000 dollars what was the range when you said 38 years on average? How high did you get at the top end of that range? 50 years.
Okay. And is that sufficient in your mind? Or could you see yourself going even higher if the opportunity presented itself? The way we think about our financing is the cash flow yields at the maturity are so high. So whether it was 30 years of duration or 50 years of duration, we don't think we have any real refinance risk.
So that was an opportunistic execution, a longer duration financing. Okay. In terms of the escalators, 55% are fixed with inflation adjustments, call it 60% total fixed bumps. Do you see that percentage of fixed bump math going higher as a percentage of the total over time? We do.
All of our newly created Safeholds have a relatively consistent structure of a 2% annual bump. And so as we continue to scale our business with new originations and new safeholds, that will become a bigger piece of the portfolio. Okay. Maybe one for Jay here. There other opportunities out there where you are purchasing an existing ground lease that is, let's call it, sketchy in its structure, some sort of landmark to market that creates some problems for the leasehold, that you can buy and restructure on behalf of the leasehold and thereby really make your point drive your point home about how Safehold is attempting to sort of reengineer this industry in kind of right where the rubber meets the road.
Is that something that's out there as a possibility in terms of the pipeline?
Yes. I think that's excellent insight, Rich. We have done that already on a smaller deal, and we think it's a tool that will become something we can use more often going forward as people start to understand the differences between these archaic ground leases and how inefficient they are in the modern capital markets versus what Safehold is doing. So it's definitely a tool in our toolbox. We've only been able to deploy it a little bit so far, but we definitely see opportunities to do it on a bigger scale.
Okay, great. Rich, it's just got the reverse inquiry from existing leasehold owners to us about exactly what you're talking about has dramatically picked up over the last 6 months. Okay. Good sign. And when do you when are you willing to accept an effective yield or cap rate or a coverage ratio that's below what one might think of as your kind of target.
So coverage for the deals in the Q2 was below 4, 3, I think 3.6. Not making a big deal of that, but what is it about the deals that were announced that allowed you to accept a rent coverage that was somewhat below your target?
Yes. I mean, it's a little bit idiosyncratic as you might suspect. The variables are quality, location, CPV percentage. So we're taking all those factors into account and trying to make all these become very attractive investments that UI and iStar and our shareholders would all like to own. So it's hard to tell you exactly what circumstances drive each individual pricing decision.
But I can tell you when we close a deal, we feel like we have created a lot of value for shareholders. So that's the most consistent theme I can give you. But certainly higher quality gateway markets, we're going to want to be a lot more thoughtful about how to craft that deal. And if it requires us to go a little higher in the CPV calculation or a little low in coverage, that's going to be fine depending on the other qualitative factors. We also have some assets that clearly we think have the potential to continue to grow their revenue streams.
There may be repositioning opportunities. So we're looking at that entire set of variables. And ultimately, the conclusion has to be when we close this deal, we think we've made significant value for shareholders the day we close. And that's really driving the business right now more than a set of rules that, again, in a customer focused business, we do have core sort of return parameters. But there are a lot of other factors in real estate, as you know, and we've got a lot of experts in the field making those real time judgments.
Okay. And then last quick question. Why did book equity decline 2nd quarter versus Q1?
I'll take a look at it. But I think, again, we did have some one time costs in the Q2. I'd have to look for it or switch.
Not a big deal.
I did
let you know. It's something I noticed. Okay. Thanks, Steve. That's all for me.
Your next question comes from Marni Georges from Raymond James. Your line is open.
Thanks. Good morning. First question to me, how should we be thinking about the type of different assets that you'll be targeting in the pipeline on a go forward, the multifamily versus the office and industrial, for example? Just how are you thinking about that?
So this past quarter, we closed our 1st student housing deal, which we're excited about. When I look at the pipeline, it is consistent with the portfolio that exists today, a lot of office, a lot of multifamily. We sprinkled in a few student housing transactions as well and a hotel transaction. So generally consistent with the existing pipeline. I will tell you the quality of the assets and the quality of our customers has improved in the pipeline, which is exciting for us as a franchise.
Awesome. That's good to hear. And then just looking at MSAs, was there anything specific driving the decision to go into the Oregon market this quarter? Are there any specific MSAs that you would be targeting in the near term or any that you're looking to deepen your presence within?
Yes. Portland is a fantastic growth market. We were able to get our first deal done in Portland. We actually, as a franchise, have some lending experience in that market. So we'll look to continue to grow in Portland.
As Jay mentioned, we have a target of getting into the 30 major MSAs. Great. A few mortgage costs.
Definitely. And then one more for me. Just other income this quarter came in a little higher than we've been expecting. Was there anything to that or anything on a go forward that we should be aware of?
I wouldn't think so. There may be some anomalies in there, but there shouldn't be major changes in there.
Great. Thanks so much. I'll turn it back over.
Your next question comes from Jade Rahmani from KBW. Your line is open.
Thanks very much. I wanted to ask a specific question about the portfolio. The Park Hotels assets. How soon would be reasonable to expect conversations to commence between safe and depart hotels about potential renegotiations?
Hey, Jade. Yes, we're delighted with the performance of the portfolio, but we have not heard from the tenant. They do have a renewal right, which will extend them out to 2,035. And until it's on their radar, it's not really something we can push and drive. But we're very happy with the performance of that asset.
And in terms of the economics that you're currently the company is currently receiving from those assets, is it just some base level of rent right now of, I think, approximately $13,000,000 annualized? And if the negotiation was not successful, would Safe receive the entire amount of NOI that those properties generate?
Yes. Look, those properties are making somewhere in the $30,000,000 to $40,000,000 range, and our rent is, I think, dollars 10,000,000 base and the rest is a small percentage rent that was about $3,000,000 $3,500,000 last year. So there's significant delta between what the properties make and what we get paid. That usually creates an opportunity to have a conversation with a tenant, but it will happen on the tenant's timetable. And each year as we get closer to the maturity, we'll start taking a very hard look at the alternatives available to them and frankly to us.
Okay. And in terms of the pipeline, can you give a sense for the average transaction size? Just given the originations that have been completed so far, I would assume that there's potentially some large outsized transactions in there?
Yes. Look, we haven't been shy about targeting some of the bigger cities and some of the bigger assets. Again, they tend to be the ones that take much longer to get done, but we've definitely made progress on that front. And as Marco said, we're penetrating some new product types like student housing that will have lower balances. Multifamily typically has been somewhat smaller.
But it feels good at least after the 1st 6 months of the year, good enough for us to want to raise our guidance. So you can tell we're feeling positive that we're making progress on those fronts.
Just on the refinancing that you completed this quarter, what kinds of lenders participated in those? Were those foreign banks, insurance companies or some other lending type?
We're exploring as I said, we're trying to make the right side of the balance sheet as efficient as possible as well. So we're exploring conversations with a wide range of lenders. I think the life company world is certainly one that understands the product. So that's been a good place to go. But we will continue to probe a wide range of providers of capital because we think this ultra safe credit profile is one that's attractive to a lot of people.
And just last question. Can you specify what the going in cap rate is on the $186,000,000 of deals that you put under contract this quarter?
Yes. I mean, our model is mid-threeone yield, mid-5s return on asset, effectively IRRs. They were all pretty consistent with that.
Thank you.
Your next question comes from John Massocca from Ladenburg Thalmann. Your line is open.
Good morning. Hey, good morning.
Good morning. Can you maybe provide some additional color on the acquisitions closed or broad under PSA in the quarter? You gave some detail earlier on property type and transaction size, but maybe with regards to location beyond the Portland transaction and also kind of specifically how are these acquisitions being sourced? How many are safe ground leases versus maybe purchased existing ground leases?
They're all Safehold, so newly created. As we mentioned, student housing asset, 1st asset in Portland. There's a brand new multifamily in the Orlando market, office building in the New York City MSA and an office building in Austin, Texas. So all great markets,
great quality assets. Very helpful. And then maybe can you give us some additional color on trends with regards to rent coverage in the existing portfolio that was kind of in place at the beginning of the quarter. It seems like the overall coverage declined a little bit by kind of 0.2 turns. Some of that probably was the additional acquisitions you made, but was there anything that was going on in the existing portfolio?
The existing portfolio is performing consistent with our expectations. It was the new acquisitions that were at a slightly lower coverage that pulled that down.
And I always kind of mentioned it too is because the number of assets with over 5x coverage came down by 8%. It seems like bigger than maybe what could be explained by the 2 transactions. Is there anything kind of in the super kind of high coverage range that had kind of its underlying income covering your rent come down a little bit?
No. We'll double check.
Mr. Fooks, we have no other questions.
Okay, great. So if anyone else should have any additional questions on today's earnings release, please feel free to contact me directly. Jacqueline, would you please give the conference call replay instructions once again? Thanks.
Thank you for participating in today's Safeholders 2nd Quarter 2019 Earnings Conference Call. This call will be available for replay beginning at 1 p. M. Eastern Standard Time today through 11:59 p. M.
Eastern Standard Time on August 9, 2019. The conference ID number for the replay is 9 345,669. Again, the conference ID number for the replay is 9,344, 5669. And the number to dial out for the replay is 1-eight hundred-five 85 8367. Again, 800-five eighty five-eight thousand three hundred and sixty seven.
This concludes today's conference call. You may now disconnect.