Good morning, welcome to Safehold's Q4 and fiscal year 2018 earnings conference call. If you need assistance during today's call, please press star zero. 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, Vice President of Investor Relations and Marketing. Please go ahead, sir.
Good morning, everyone, thank you for joining us today on Safehold's earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Andrew Richardson, Chief Financial Officer; and Marcos Alvarado, President and Chief Investment Officer. This morning, we plan to walk through a presentation that details our results for the Q4 and fiscal year 2018. The corresponding presentation can be found on our new website at safeholdinc.com and by clicking on the Investor Relations link. There'll be a replay of this conference call beginning at 1:00 P.M. Eastern Time today. Dial-in for the replay is 800-585-8367 with a confirmation code of 4794594. 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. With that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman. Jay?
Thanks, Jason. 2018 was an important year for our company. We grew our portfolio by almost 80%. We expanded into six new markets, and we accelerated our efforts to get our message out to the market. As pioneers in reinventing the ground lease sector, we continue to find attractive new markets to explore and multiple ways to deliver the benefits of our more efficient capital to our customers, whether they are acquiring properties, building properties, or recapitalizing properties. In 2019, our goal is simple and clear: to revolutionize real estate ownership in this country. A modern ground lease that is tailored to be leasehold lender friendly and cap rate neutral can increase a building owner's returns and reduce their maturity and interest rate risk. This is no longer a theory.
It is proving a powerful competitive advantage in the marketplace and is leading to significant repeat customer business in the office and multifamily sectors, and interest from across all property types. Recognizing the importance of this moment, we are taking several steps to accelerate our progress. First, we are making clear our mission to revolutionize real estate ownership by giving our customers a new and better way to unlock the value of the land beneath their buildings. We are reaching out and explaining these benefits to everyone in our extensive network. That includes top brokers, a wide range of real estate financing sources, and specifically the owners, operators, and developers of high-quality real estate around the country who have the most to gain from our innovative strategy. Second, we are changing our name. We are now Safehold. It is what we are and what we do.
While our previous name emphasized the very real benefits our business can deliver to shareholders, our new name better explains what we can do for our customers, create a safe and efficient way to unlock the value of their land and hold it quietly and securely while they execute the business plan for their building. The bottom line is, a well-structured modern ground lease, what we call a safehold, gives property owners an opportunity to maximize the returns while reducing their risk. We also have a new logo graphically showing how we are breaking out of the box of limited conventional thinking by reinventing what ground leases are and giving owners a more modern, more efficient way to capitalize their properties. Third, we are expanding our relationship with our largest shareholder and investment manager, iStar.
We believe the combination of iStar's historical strength in finance and net lease, together with our growing ground lease expertise, can create a unique one-stop shop offering that will prove superior in many situations and help accelerate our growth. We have already seen this SafeStar combination create new opportunities to land attractive transactions. We also closed another round of equity capital from iStar, giving us the firepower to expand our pipeline and our resources for pursuing deals. Raising $250 million at a premium to the screen demonstrated both sides' significant belief in the future growth prospects of Safehold. A new management agreement better aligns incentives for reaching our aggressive growth targets. The capital support of iStar ensures we can scale while we continue to educate our future shareholder base of what we are building.
Each of these steps positions us to execute our strategy on a bigger scale across more markets and help more property owners access our modern capital solution. Fourth and finally, we are also expanding our outreach to the shareholder and lending communities. As Andy will outline, we continue to make progress highlighting our high-grade asset base and its superior credit metrics to lenders. With the new accounting rules more accurately portraying the lifetime economics of our income streams, we believe GAAP income will become a simple and far easier way to share our economic model with investors across a range of investment styles and disciplines and help call attention to our significant growth rates. As we've said before, we think this is a business that pays a very safe dividend, can grow earnings at high rates, and can capture long-term value in a unique way.
It's our job to help others see what we see. All these steps should help us do that. Now let me turn it over to Andy to go through the quarter and year-end results. Andy?
Thank you, Jay. Good morning, everyone. Let me continue with slide six. For the quarter, net income was $0.24 per share versus a loss of $0.07 for the Q4 last year. FFO was $0.36 per share versus $0.05 in the prior year period. AFFO was $0.09 per share versus $0.06 in the prior year period. For the year, this brought net income to $0.64 per share, FFO to $1.15 per share, and AFFO to $0.63 per share. Because we formed the company midway through 2017, the full year-over-year comparison is not meaningful. Our quarter was highlighted by strong quarter-over-quarter investment volume and an investment of new equity capital from our manager received after year-end that provides us with runway for growth. Let's turn to slide seven to discuss this quarter's investment activity.
For the quarter, we closed $178 million of new investments, growing our aggregate portfolio to $948 million, a 23% increase from the Q3 , and almost tripling in size since our IPO. You can see the key investment metrics on the safeholds we originated in Q4 toward the bottom half of the slide. We are earning a 5.6% effective yield with triple A-like credit metrics of 3.2x coverage and a cost basis of 41% of the combined property value. These investments also included periodic CPI look-backs to provide additional potential upside to our effective return. Slide eight describes this quarter's investments in some additional detail. Most noteworthy, we originated a safehold on 1111 Pennsylvania Avenue in Washington, D.C., a trophy office building that is fully occupied by global law firm Morgan, Lewis & Bockius.
This $150 million investment represents the largest single asset into the portfolio and further demonstrates that a safehold can provide better capital to its customers on any scale. Washington, D.C. continues to be a strong MSA for us, with approximately $300 million of deals closed in the market to date. Our second investment for the quarter expanded Safehold's geographic footprint with our first deal in Nashville. We created a Safehold underlying a 275-unit Class A multifamily building located in Novel Music Row, a vibrant submarket of Nashville, marking the second deal we have completed with this customer. We remained enthusiastic about our continued ability to penetrate the multifamily segment while continuing to expand in the new core markets. Moving to slide nine. Along with announcing Safe's rebrand, we are also introducing the SafeStar One Stop Capital program that is a direct result of Safehold's aligned relationship with iStar.
This platform combines iStar's 25 years of financing expertise and innovative thinking, along with Safehold's unique product, in order to provide our customers with a one-stop capital solution. With both companies operating in tandem, this powerful program delivers an efficient capital structure to customers seeking flexibility and simplicity. An excellent example of the SafeStar program is a deal we recently closed in Washington, D.C., shown on the slide. Safehold provided the capital to create a new ground lease on the property, and iStar provided the first mortgage leasehold loan. With this structure, we can deliver to customers an efficient capital solution with the certainty and ease of having the whole envelope structured in one place, significantly expediting the pathway to closing. Turning to slide 10.
As previously announced, on January 2nd, iStar made an additional $250 million equity investment in Safehold, valued at a price equivalent to $20 per share, an attractive premium to the market price of our stock. This investment provides Safehold with fresh capital to pursue approximately $750 million of new deals, assuming our targeted 2: 1 debt-to-equity ratio. The investment was structured as a purchase of $12.5 million limited partnership units that will be exchanged for common stock on a one-for-one basis, subject to shareholder approval. iStar's ownership now represents approximately 65% of our total equity. It should be noted that iStar's discretionary voting power will be capped at 41.9%. In conjunction with this investment, our independent directors approved an amendment to the management agreement with iStar. The key changes to the agreement, which we believe creates increased alignment with our manager, are summarized on the slide.
Lastly, Safe's board approved iStar's request to increase its common stock ownership limitation to 43.9% from 41.9%, allowing it to make additional open market purchases of up to 366,000 shares. Slides 12 and 13 show the diversification in our portfolio. Washington, D.C. has now become our largest MSA, and the map includes Safehold's expansion into Nashville. Slide 14, we have highlighted the portfolio properties for which we own the ground lease. Our ground leases underlie nearly 7.2 million sq ft of real estate, including over 2,800 hotel rooms and 2,600 multifamily units. Slide 15 details key metrics of our portfolio. Annualized GAAP revenue, which takes into account straight-line rent, totaled $70.6 million at the end of the Q4 . Net of depreciation and amortization, our portfolio yields 6.9% on a GAAP basis.
Annual cash flow of the building sitting on top of our land covers our annual cash rent by 4.5x . Our total cost basis represents about 35% of the combined property value, which we believe to be compelling measures of safety in our investments. Comparatively, the average triple A loan-to-value in commercial mortgage-backed securities is approximately 38%-42%. Slide 16 delivers an update on Value Bank. During the Q4 , Value Bank grew to $1.8 billion, representing a 15% increase from the Q3 and 65% from a year ago. As a reminder, Value Bank represents today's estimated market value of the buildings that we may receive in the future, because typically embedded in our investments are reversionary rights of the buildings and improvements at the lease expiration. Moving to slide 18, I will review our debt and leverage.
During the Q4 , we closed a 10-year, $79 million non-recourse senior secured loan that was tailored to meet the unique attributes of our assets. The loan has an initial effective rate of 3.91%, which increases 2% annually, in line with the rent bumps of the investments that collateralize it. The all-in effective rate is 4.25% and is interest only for the entire 10-year term. It was collateralized by seven assets and represents a 60% advance rate against Safehold investment basis in the collateral. In addition, it provides for asset addition and substitution flexibility. In addition, we continue to have $227 million of long-term fixed rate debt due in 2027, secured by our initial $340 million portfolio and $71 million of asset-specific debt against our Hollywood investments.
We drew $96 million on our revolver during the quarter to fund investment activity, bringing the outstanding balance on our revolver to $170 million at December 31st. The revolver was fully repaid after year-end using the proceeds from iStar's equity investment. Slide 19 continues to outline the interest rate hedges sufficient to allow protected 2x leverage on the existing portfolio. Finally, on slide 20, I would like to discuss how we will be reporting our metrics going forward. We expect that after the adoption of new lease accounting standards beginning January 1st of this year, nearly all of our newly originated safeholds will be classified as sales-type leases rather than operating leases. These leases will be recorded on our balance sheet as a net investment in lease rather than as land.
We will recognize income from these leases in a revenue line item called interest income from sales-type leases. This amount will be computed similar to how an effective interest or effective yield is computed on a bond, using contractual future cash flows and a residual value equal to our cost of the land. The difference between the effective yield, or what GAAP refers to as the rate implicit in the lease, and current period cash received is recorded as amortization, which increases or decreases the net investment in lease balance sheet account. We believe that the GAAP treatment of these leases under the new accounting standards captures many of the fixed income-like aspects of our business, such that AFFO and FFO will be of less utility as supplemental measures going forward. Already under GAAP, we use a similar method to record interest expense on our debt.
Consequently, we believe the new GAAP yields recorded on our assets and debt obligations will be more comparable and that GAAP net income will be more indicative of our operating performance as a high-grade fixed income investment business. In conclusion, we are encouraged and confident based on the progress we've made to date, but as we roll out the new brand, we are even more excited about the possibilities ahead. With that, I'll turn it back to Jay.
Thanks, Andy. I know there's a lot there to unpack, we're just going to go ahead and open it up for questions. Operator?
Thank you. Today's question-and-answer session will be conducted electronically. To ask a question, please press star one at this time. We will take as many questions as time permits. Once again, please press star one to ask a question. We will pause a moment to assemble the roster. Your first question comes from Anthony Paolone with JPMorgan. Your line is open.
Yeah, thanks. Good morning.
Morning.
I guess jump into some of this accounting, I think that's interesting. If we think about that effective yield, is that I mean, if your residual is the same as your basis, is that effectively like the straight line yield that we've been accustomed to in the past? Is there much difference there?
Anthony, it's really more like a bond where we assume we do receive par back at the end, so we're not increasing the back end values at all. It's really capturing the cash flow stream, and assuming your investment in and your principal receipt at the end out is the same number. It really is very much like bond accounting.
I'm sorry, Anthony, did you say it was like an IRR?
Yes.
Yes, that's correct. That's exactly what it is.
Okay. Will you still be able to provide us some sense of going in cash on cash, and will the GAAP accounting allow us to see what those cash numbers are, just to understand things like liquidity and dividend coverage and so forth?
We will talk about cash yield as well. Again, I think what we like about the effective interest, effective yield is that given the high quality of the assets, it's very much like a triple A bond that you can buy at a discount. The effective yield really does capture the true value. We'll also provide a running cash yield as well.
Okay. Going to a GAAP EPS type number, does it also mean there won't be any adjustments for non-cash compensation or the amortization of debt costs and so forth?
We're going to make it really simple for you. No adjustments.
Okay, got it. Perhaps maybe on a more economic side, can you talk a little bit about the pipeline cadence of deal flow, maybe to expect the next few quarters, and returns on those?
Sure. I think that our goal right now is, as you heard throughout today's comments, is to really accelerate the growth. In some respects, we're really through the beta phase of the business, and we're now really in the execution phase. I think generically, we have targets this year of $750 million in new ground leases and up. That's a good number to be thinking about as we try to work our way through these early quarters and then really build towards a much faster growth rate. Look, right now we feel like getting our message out into new markets across top 25 target markets is really critical. We've got people in the field working on building those relationships. We feel pretty good about what we see in the pipeline.
Right now we are still having to educate in some of the new markets, but in markets we've already executed in, we're starting to take calls from people who've seen what we're doing, have seen their peers and competitors, frankly, win deals by using this structure. We do think the pipeline feels pretty good in terms of the number of calls we're fielding and the number of places we're engaged.
Okay. This last question on the SafeStar One Stop Program, I know it's pretty customized per deal, but can you maybe give us a rough sketch as to what does that mean to a sponsor in terms of thinking about total proceeds versus maybe going after more conventional financing? What is the blended sort of carry or rate, if you will, if you were to combine the ground lease plus whatever financing package iStar may provide, again, in comparison to something a bit more traditional?
Yeah, I like the way you put that. It is a flexible structure. What we're seeing is folks who are a little bit hedging on where interest rates are going. They like the fixed rate nature of the ground lease. They also are willing to work on the leasehold on a floating rate basis if they have a shorter term hold period, so they can kind of custom tailor what they need for their business plan. What we find interesting is we don't walk in and say, "This is what we do." We walk in and say, "What is your business plan and what are your financing alternatives?" We think we can beat them.
We can either provide the same proceeds in a better structure, lower cost, less maturity risk, or in some cases, we can provide more proceeds so they can generate higher returns on whatever capital plans they have. Again, it's really a customer-centric business, which is the key. I don't think anybody ever thinks of the ground lease business as customer-centric. We're going to build a business that, much like the other businesses we've built in our past at iStar, really respond to what the customers need and create a better alternative for them. Sometimes it'll be lower cost capital, sometimes it'll be lower cost and more proceeds, sometimes it'll be more proceeds. It gives them the ability to really match their capital needs in a way more efficient way than just taking down a single sort of conventional financing.
Okay. Thank you.
Your next question comes from Collin Mings with Raymond James. Your line is open.
Thank you. Good morning, guys.
Morning.
Morning.
First, just going back to the announcement last month, can you just discuss in a bit more detail the trade-offs the board contemplated taking more capital from iStar with making the management agreement more complicated and higher cost to Safehold?
Yeah, I think it was a little bit of two independent decisions. One, from a capital standpoint, it was attractively priced capital, obviously, given where the public screen was and where our advisors thought you could do execution in a more widely distributed fashion. We had a nice meeting of the minds. iStar believes strongly in the business, and SAFE has a pipeline that represents what we think is a very attractive future business opportunity. That piece of the trade made a lot of sense for both parties. On the management agreement, we start with the fundamental premise of what do we want to achieve? What is the incentive we want to create? If scale is the critical factor, and we fundamentally believe once we reach scale, people will start to see what we see.
We wanted to create proper incentives to invest now, far beyond what the management fees themselves would justify, to create this future of a much bigger, much more scaled business. We would argue that the cost upfront here need to be viewed as investments, and they need to be some prospect of over-investing early and seeing the returns later. We're spending a lot of time, effort upfront to make this business grow, we wanted to create a management agreement that is aligned with that scaling growth target. I actually think it's a better-aligned management agreement. It has no impact unless we scale. Unless we can get the equity base of this company above 1.5 billion , there's really no change.
It's really meant to help us do what we laid out this morning, which is take this new, more efficient capital structure to the market in as many places as we can, as fast as we can, and have all the resources available to us to do that, both capital resources and intellectual property resources.
Okay. That's helpful color there. Going back to Anthony's question just on the deal pipeline. I may have missed it, but I didn't see the pipeline slide that you've included in prior quarters. Can you maybe put a finer point on kind of quantifying where the pipeline stands? Maybe any sort of notable property mix shifts since last quarter, just as you look at kind of what you're going through right now, either through LOI or some level of negotiations.
Sure. Hey, it's Marcos Alvarado. In Q1 already, we've closed four transactions totaling $62 million in safeholds. We have another approximately $160 million across three transactions, or excuse me, $95 million that totals approximately $160 million that we expect to close in Q1. The cumulative pipeline is approximately $300 million.
Okay. That's helpful. Just as far as the property type mix, any sort of bias? I know obviously there's been momentum, if you will, with the company with trying to do a little bit more on the multifamily side, just if you can kind of walk us through where that mix stands as you think about the pipeline now.
It's consistent with our strategy of creating a diversified asset base in broader markets. One of the closings that already occurred is in a new top 25 market, which we're excited about. There's a few office assets and a few multifamily assets and one hospitality asset.
Okay. Very helpful color. One last one, I'll turn it over. Just maybe a little bit bigger picture, just as we think about today's announcement and the accounting changes and the decision to move away from communicating a FFO or AFFO metric. How do the potential reception from the REIT community and just having kind of a different metrics, if you will, for this company, factor into your thinking of kind of moving away from that decision?
Well, in many respects, we're a very different company than anything else in the sector. We fundamentally believe it's not only appropriate for our real estate followers to understand the business and what it does, but also a much wider range growth in income, the financials sector should all be paying attention because we think we offer a combination of very safe dividends, very high growth rate potential, very large market opportunity. We think the strategies and disciplines that will be attracted to that combination go well beyond just the REIT sector. That's our tax classification.
We do think there's a much wider audience that will be attracted to those unique benefits. We'll try to continue to communicate within the real estate community why this is so special. It's really unlike anything that we've seen but also expand that well beyond just dedicated core real estate investors to a much wider audience that's looking for growth, that's looking for safety, that's looking for long-term capital appreciation. We continue to believe this is a unique opportunity for lots of different types of investors, to really find something that we hear very often from shareholders that they're looking for.
Okay. I'll turn it over. I appreciate the thoughts there.
Your next question comes from Jade Rahmani with KBW. Your line is open.
Thanks very much. In terms of the accounting change, does it effectively incorporate future anticipated rent growth and smooth it over time to calculate an effective yield?
Hey, Jade. It only uses contractual growth that's built into the leases. It would not include anything that is not estimable or contractually stipulated in the lease.
Okay. Will dividend policy be based on cash flow or GAAP earnings?
Primarily cash. We think the economic model will support more flexibility than being 100% rigid to that metric. Right now, you'll see it track cash.
Okay. What are your expectations for Safe's dividend growth? Will it track rent escalations that are contractual in the portfolio, it's reasonable to anticipate some growth in 2019?
I would tell you it's not our core metric. Unfortunately, we're old bond guys and fixed income investors. If we can take our money and reinvest it at high rates of return, we think that if you're creating excess return on a credit quality that we think we're creating, we want to keep that money working and compounding at those high rates of return. Our metric is, are we creating a lot of value above and beyond a market level for our credit exposure? As long as we do that, dividend growth will happen, but it won't be our primary emphasis.
Okay. If cash is less than GAAP, will you finance the difference through leverage? Will that ultimately depress book value to the extent that dividends run ahead of cash?
Yeah, as I said, I think dividends will track cash. We don't expect any material situation like you're outlining.
Okay. Looking at the balance sheet, there's some accumulated depreciation, and I don't believe land is depreciated. What's the source of that?
That's primarily related to the hotel portfolio, the Park Hotel portfolio.
We actually own the overlying buildings and get that depreciation.
Okay. Finally, in your view, why do you think Safe's stock price didn't react more positively to iStar's investment at a material premium to where SAFE was then and is now trading?
Right now, we don't think the stock really has any information in it. It's trading de minimis volumes. We have a number of very large shareholders who have reached their limits, just by our bylaws. We really view 2019 as the year we start telling our story and expanding the reach of the company into the shareholder community, into the lending communities. Right now, we just don't think the stock actually reflects any of the information that some of our people who are following the company closely now understand.
Okay. Thanks very much for taking the questions.
Take care.
Your next question comes from Joshua Dennerlein with Bank of America Merrill Lynch. Your line is open.
Hey, good morning, guys.
Morning.
I'm just still trying to wrap my head around effective yield versus the old way of using cap rates. It might be helpful. For the Q4 deals that you closed, it looks like there's a 5.6% effective yield. How would GAAP and cash cap rates compare to that effective yield?
Think about it, if you were buying a Treasury bond that had a 5.6% effective yield. You know you're going to get that yield because it's AAA credit quality. If you're getting cash of 3.5%-4% upfront, and the rest of that yield over time, that gets constantly reinvested at that rate. Our view is, if you can make excess returns to AAA level credit risk and compound it continually, that's a really great place to be from a fixed income investor standpoint, from an equity investor standpoint. You're recreating that alpha every time you roll over a portion of that. That's really what's happening here, is think of it as a bond, think of it as a AAA bond or a Treasury bond.
Part of it, of your return, is paid in cash every year, and part of it is rolled over and compounds at that same rate going forward. If your cash yield year one is 3.5%-4% and you've got bumps of 2%, over time, you're going to make a 5.5% effective yield. There's no if here because of the quality where we are sitting in the capital structure. It's not like maybe an equity deal where you can't really predict whether you'll ever get that future accrued amount. Here, we're starting at, as I think Andy said, 35% LTV. You're gonna get the amount. What's best about it is you're actually gonna compound at these high rates of return that we're creating that really are not replicable anywhere else in the market.
It's a little bit of a different mentality, and it's one that comes naturally to us, given our fixed income and lending backgrounds. We look at this as a way to create very attractive long-term returns, long-term compounding returns. We think the cash-on-cash yields out of the box are attractive in and of themselves relative to the marketplace. What's really driving the business is much more of this effective yield relative to other effective yields for similar credit quality instruments.
Okay. It assumes that you're taking the cash flows and reinvesting them at kind of the market rate or the internal rate?
If you think about if you get 4% of your 5.5% in cash, the other 1.5% is in effect gonna compound. That's how effective interest is calculated. What is the constant return that will create the stream of income that we contractually have over the life of the instrument, assuming you receive par at the end and pay par at the beginning? That is standard bond math. Effective yield and effective interest is really what the accountants are now trying to create out of lease streams, particularly long-dated lease streams. They look at them, and they try to understand the economic reality. We think that is the long-term economic reality. Now, if we were at 90% of the capital structure, or 80%, or 100%, we would not use this methodology because those future cash flows are not assured.
When you start in a de facto AAA credit quality location in the capital structure, and as you build a diversified portfolio, these credit metrics are exactly what we've been doing our entire careers here, trying to find long-duration, non-callable cash flows that create above-market returns, that create alpha every time you create them. If you can let them run and compound and not have them get repaid on you, those are really good businesses. We've seen tremendous success in the last two decades when we found those businesses.
We think Safehold has the ability, because of its unique skill sets, because of the financial support and personnel support from iStar, to really start telling this story, both for our customers about why this is a better, more efficient capital structure for them, and now for shareholders, and frankly, for lenders, why a diversified scaled portfolio of these assets starts to look very much like some of the businesses we've built in the past. We try not to look at any single individual deal as the way to think about our company. You have to think about it as a growing, scaling business, generating what we think are these attractive risk-adjusted returns, and evaluate whether you think we can continually repeat that and build an ever larger business. We certainly believe it. We believe iStar believes it. We have repeat customers who I think believe it.
We now need to bring that message to the broader market.
Okay, thanks. Just so we're prepared for the Q1 release, what are you guys going to show? I'm assuming it'll look very similar to just page 22. You'll kind of get rid of page 23 of your presentation. I don't know, is there anything else that we should kind of focus in on for our models already for kind of the new accounting change?
Well, I think that the old, the pre-January 1st amounts and presentation will stay exactly the same and a ll the new deals will be recorded under the new accounting that we described earlier. Which is the revenues will be recorded as interest income from sales-type lease, which is effectively the IRR implicit in the lease cash flow stream. The amount that we paid for the asset will be recorded as investment in lease on the balance sheet. We will report straight net income.
Okay. All right. Thank you. Appreciate that.
Again, it is star one to ask a question. Your next question comes from John Massocca with Ladenburg Thalmann. Your line is open.
Morning, this is Brandon Travis. I am with John.
Sorry.
On your purchase of the existing ground lease in San Antonio, can you discuss the terms of that transaction and what made it an attractive asset?
We won't discuss the specific terms and the yields on it. The reason we like the transaction is it's on the River Walk in a central location. The coverage exceeds our metrics, and the cash yield we're getting exceeds the metrics in our portfolio plus i t got us into a market that we have not been in before.
Okay, thanks. How big is the market for third-party ground lease acquisitions in non-top five MSAs?
When you say acquisition, you mean of existing ground leases or the ability to create them in these markets?
Existing ground leases.
Yeah. There are more ground leases than you might think out there, but they don't trade very often. It will be a part of our business, but we don't think it's the driver of the business.
Okay. That's helpful. Thank you.
Your next question comes from Collin Mings with Raymond James. Your line is open.
Thanks. Just to follow up, going back to really the last question, that I recognize you don't want to provide maybe the specifics on the San Antonio deal. Just more broadly, can you talk a little bit more about asset pricing and then just benchmarking, as you think about, obviously, there's been some moves in the interest rate environment, just as far as benchmarking deals and kind of from a deal flow perspective, where pricing stands.
We're credit-dependent, depending on the market, depending on the quality of the asset, depending on the capital structure, these numbers can bounce around. I think when we first gave metrics to the market, we gave a range, and I think those ranges are still reasonable. We've seen coverage ratios that we still like to see in the three to five times range. Depending on how good all those other factors are, initial cash yields have been in the 3.5-4 is kind of the centering number. The effective yields on those type of assets will be in the five to six range. As Andy has explained, I think our financing costs, we think are in the 4.5-ish range for a diversified pool of assets.
The metrics you'll see going forward from a GAAP income statement are driven by those inputs, and they're still pretty consistent. We think there are opportunities to grow this business very fast. The rules are somewhat flexible in terms of there are markets we want to be in, and there are asset qualities that are at the very high end. We have flexibility on both sides of that equation. Those metrics are still kind of the ones we want. We want to be in that 35%- 40% of the total value of the property. I think that's the appropriate optimal space that allows us to be leasehold lender friendly and cap rate neutral. We don't like to move above that, and we don't like to move below three times coverage.
Other than that, we price against the market and try to create a better alternative for our customers. As the markets move for capitalizing real estate, we'll move with them.
Okay. I appreciate the detail there. It doesn't sound like that kind of moves in the 10-year one way or the other have really had an impact in terms of the pricing you're able to achieve. Is that a fair takeaway?
I would say, on the pipeline, we try to be very disciplined and take a look at, obviously, the moves in treasuries. We have floors in our term sheets. We price off the treasury. It is deal dependent. If I take a look at the cash cap rates that we've closed already in Q1, I would say that they fall within the outline that Jay gave you. We're getting better pricing in what I would call outside of the top five markets, and you're getting pricing on the lower end of the range in the more core markets. Again, those cash cap rates we think are strong, but the weighted average effective yield is what we're really focused on.
Understood. All right. Very helpful. Thanks, guys.
Mr. Fooks, we have no further questions.
Okay, great. Thanks for joining us, everyone. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Operator, would you give the conference call replay instructions once again?
Certainly. To access the replay for today's call, you may dial 1-800-585-8367 or 1-855-859-2056 and enter passcode 4794594. Again, to access the replay for today's call, you may dial 1-800-585-8367 or 1-855-859-2056 and enter the passcode 4794594. The replay will be available approximately two hours from now. Thank you and have a good day.