Good morning, and welcome to Safety Income and Growth third quarter 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 introduction, I would like to turn the conference over to Jason Fooks, Vice President of Investor Relations and Marketing. Please go ahead, sir.
Thanks, Lisa. Good morning, everyone. Thank you for joining us to review SAFE's third quarter 2018 earnings. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Andy Richardson, Chief Financial Officer; and Marcos Alvarado, President and Chief Investment Officer. This morning we plan to walk through a presentation that details our third quarter 2018 results. The corresponding presentation can be found on our website at safeholdinc.com in the investor relations section. There will be a replay of this conference call beginning at 1:00 P.M. Eastern Time today. Dial-in for the replay is 855-859-2056, with a confirmation code of 8496197. 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.
SAFE's actual results may differ materially from these forward-looking statements. The risk factors that could cause these differences are detailed in our SEC reports. SAFE disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. Now with that, let's turn the call over to our Chairman and CEO, Jay Sugarman. Jay?
Thanks, Jason. During the third quarter, we saw growing interest in our modern ground lease structure from both new and repeat customers. With an increasing recognition that working with SAFE can lead to more efficient capital structure and reduce levels of interest rate and maturity risk. With markets getting choppy, SAFE's market-leading expertise, customer-focused approach, and committed sponsorship from iStar have enabled us to grow our footprint and begin expanding across more markets as we continue to grow and diversify the portfolio. Deals this quarter included office, multi-family, and hospitality ground leases in three of our target markets, Washington, D.C., San Diego, and Phoenix. We have a strong pipeline going into the end of the year and into the first quarter of next year.
We've also been working on several new approaches to help us capture the largest market share possible and further demonstrate the superior returns our customers enjoy by making their capital structures more efficient. Because we believe the market will begin to understand the power and value of our platform as our portfolio reaches scale, we have spent most of our time working on building our business and getting in front of potential customers. With our portfolio approaching $1 billion in assets and Value Bank approaching the $2 billion mark, we should be able to better demonstrate the significant value of the company as it reaches scale. This value is driven by the high-quality cash flows thrown off by our ground leases and the significant capital appreciation potential embedded in the future residual interests.
As you can see in our earnings deck, quarterly cash rents have grown over 30% year-over-year, and our future capital appreciation potential has reached almost $1.6 billion. With that, I'll turn it over to Andy to walk through the quarter in more detail. Andy?
Thank you, Jay, and good morning, everyone. My remarks this morning will refer to the slides from the earnings deck that we posted on our website earlier today. Let me begin with slide three. Over the past year, our focus has been working to create solutions that unlock value for our customers and enable them to make higher returns. During that time, we have worked with customers, advisors, lenders, and brokers to understand their unique needs and address their concerns. As Jay mentioned, now we are ready to shift our emphasis towards scaling the business. For the quarter, net income was $0.11 per share versus a loss of $0.04 for the third quarter last year. FFO was $0.24 per share versus $0.08 in the prior-year period, and AFFO was $0.07 per share versus $0.11 in the prior-year period.
AFFO this quarter includes $0.05 of costs from investments in growth and efficiency, which I will discuss later. Also, if the annual Park Hotel participation payment received during the first quarter was recognized ratably during the year, we would have recognized an additional $0.05 of earnings during the third quarter. Adjusting for these items, AFFO would've been $0.17. In addition, AFFO this quarter now includes the reimbursable expenses owed to our manager that had been waived in prior periods. Year-to-date, net income was $0.41 per share, FFO was $0.78 per share, and AFFO was $0.53 per share. In terms of investment activity, this quarter we closed $106 million of new ground leases comprised of four fully funded investments and one forward funding commitment, which brought our aggregate portfolio to $770 million.
At the end of the quarter, Value Bank was $1.6 billion, or $86 per share. Furthermore, we hired an experienced investment professional, Tye Palonen, to focus on West Coast expansion and added a new bank to our revolving credit facility, sizing it by $50 million to $350 million. We also made additional investments in marketing and R&D, all of which should help facilitate growth. Currently, our pipeline has over $400 million of deals under LOI. Slide four shows our portfolio rent growth. For the third quarter, quarterly cash rent was $7.6 million, up 34% from a year ago. Quarterly cash rent shown on this slide allocates the Park Hotel annual percentage rent on a pro rata basis to each quarter. At September 30th, our annualized in-place cash rent, which gives full quarter credit to the ground leases we closed in the middle of the quarter, stood at $31.2 million.
Slide five details our G&A for the quarter. As a reminder, iStar previously waived all management fees and reimbursable expenses owed through June 30, 2018. This quarter, we began to pay iStar quarterly management fee equal to 1% of total equity per annum in the form of SAFE stock. For the third quarter, the fee equated to approximately 46,000 shares, which will be issued in the fourth quarter. G&A this quarter includes approximately $0.02 of costs related to having our current auditors, Deloitte & Touche, issue audit opinions on financial statements for the years prior to 2018, which were previously audited by PricewaterhouseCoopers. We believe this upfront investment will result in future cost savings and efficiencies when accessing the capital markets. We also invested $0.03 per share on R&D targeted towards scaling the business.
Separately, the board granted iStar a waiver to increase its ownership limit from 39.9% to 41.9%. iStar subsequently purchased an additional 130,000 shares of SAFE in the open market, bringing its current ownership to 40.5%. Moving ahead to slide six, which shows our dividend payments. For the third quarter, we paid a $0.15 per share dividend for a total of $0.60 over the trailing 12 months. Our target is to pay out between 95% and 100% of AFFO. As we continue to invest and scale the portfolio, we expect to be able to grow the dividend. Let's turn to our new portfolio investments on slide eight.
The third quarter consisted of $106 million of investment activity that was comprised of four new ground lease investments that totaled $76 million and one forward purchase commitment for $30 million, bringing our aggregate portfolio to $770 million, a 16% sequential increase, and more than double what it was when we went public. The aggregate portfolio includes $706 million of ground lease investments that we currently own, and $64 million of deals we have closed as forward purchase commitments. Creating a Safehold ground lease on a to-be built development project is one of the innovative ways we've been able to help developers reduce their risk and increase their returns. This new structure provides a portion of the capital required for development, resulting, upon completion, in a brand new building securing our ground lease position. Slide nine describes the metrics for the quarter's investments.
$72 million of the investment activity this quarter related to new Safehold ground leases that we originated. These generally had metrics and structures in line with our targets, such as a weighted average going-in cap rate of 4.1%, with weighted average fixed annual rent escalations of 2%, and periodic CPI look-backs to provide additional inflation protection. Ground rent to underlying property NOI coverage of 4.4 times, and our basis as a percentage of combined property value is 30.7%. These leases all have 99-year terms. In addition, we purchased an existing ground lease in Washington, D.C. for $34 million. What is particularly attractive about this investment is that it includes a rent reset in seven years based on 8% of the fair market value of the land, and a similar reset every 10 years thereafter until 2075. Slides 10 and 11 provide some detail on the deals we closed.
The Balboa Executive Center is a five-story Class A office building and Safehold's second ground lease in the San Diego MSA. We've also seen nice demand in Washington, D.C. MSA and now have five ground leases in the market, including the third quarter investment in ground leases under the Hyatt Centric Hotel and The Jefferson, and our forward purchase commitment on a ground lease underlying a multi-family asset in the area. Lastly, we expanded our geographic footprint with The Madison, a Class A office building and our first ground lease in the Phoenix market. Slides 12 and 13 detail the diversification in our portfolio. Slides show that we doubled our investment in Washington, D.C. and expanded our ground lease offering into Phoenix. Slide 14 highlights some of the key credit metrics that we believe demonstrate the safety embedded in the portfolio.
Just a few things that I would like to note. Our annualized cash rent, including percentage rent, is $31.2 million or 4.4% return on our basis. When you include straight line rent, our annualized GAAP rent is $51 million. All of our leases have some form of rent escalators embedded in their structure, such as fixed rent bumps, CPI-linked bumps, percentage rent, or a combination of these. Of the leases with fixed bumps, the average annual bump is 1.8%. The safety derived from our ground leases is highlighted in the credit metrics shown on the bottom part of the slide. Annual cash flow from the properties sitting on top of our land covers our annual cash rent by 4.7 times, and our cost basis represents 34% of the combined property value. For comparison, the average AAA loan to value in commercial mortgage-backed securities is approximately 42%.
Moving to slide 15, which presents our pipeline. Our near-term pipeline consists of $853 million of deals, including $408 million of deals with signed LOIs, compared to $141 million under LOI at the end of last quarter. We're very encouraged by the growth in the pipeline. The deals under LOI, assuming they are completed, are expected to close during the fourth quarter this year through the first quarter next year. Slide 16 provides an update on Value Bank. Value Bank grew 16% during the third quarter to $1.6 billion or $86 per share. Recall, at the expiration of a ground lease, the building and all improvements revert to Safehold. Since our investment was only the cost of the ground, the value of the building, less our cost basis in the land, is what we refer to as Value Bank.
To calculate Value Bank, we rely in part on annual independent appraisals from CBRE on our properties, and we use our underwritten total development cost on forward purchases. In effect, we use Value Bank to track the embedded capital appreciation potential at lease maturity, which should grow with every ground lease we originate or acquire. On to slide 18. Let me discuss our debt and leverage. Our debt is straightforward. $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 upsized our revolver by $50 million, increasing total capacity to $350 million. We drew down the revolver facility by $64 million during the quarter to partially fund origination activity, bringing the revolver to an outstanding balance of $74 million at the end of the quarter.
Based on our 2 to 1 leverage target, $15 million of cash on hand, and undrawn excess borrowing capacity on our credit facility as of September 30th, we have a little over $200 million of dry powder for additional investments. Finally, let me provide an update on our interest rate protection. We put in place interest rate protection covering all of our ground leases that are not yet financed or that are financed with floating rate debt. This includes deals for which we have forward purchase commitments. Our interest rate protection consists of both long-term fixed-rate debt and long-term rate-locked hedges that afford more than 10 years of interest rate protection, sufficient to allow protected two times leverage on the existing portfolio. In sum, this was a solid quarter as we further expanded the portfolio through the pipeline and brought in new talent and resources.
SAFE continues to educate the marketplace on a better way to invest, own, and operate real estate. With that, I'll turn it back to Jay.
Thanks, Andy. I want to point out that one of the benefits of having a company with iStar's sizable resources as both our manager and largest shareholder, is our ability to utilize and leverage off of iStar's scale as the SAFE platform scales. We continue to see places where the companies can work together and provide solutions that are mutually beneficial for both companies. This is another reason we are convinced SAFE will be able to grow successfully into a very large business and begin to see its significant value recognized by the marketplace. Now let's 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'll pause for a moment to assemble the roster. Our first question comes from the line of Collin Mings from Raymond James. Your line is open.
Hey, good morning.
Morning.
First question from me, just you mentioned roughly $200 million of dry powder, just given kind of where the debt levels stand. Just in context of the $400 million under LOI, just share with us how you're thinking about your current cost of equity at this point to fund additional growth, and then just the potential for iStar to continue to grow its ownership.
Sure. Thanks. Yeah, we're very pleased that the pipeline continues to grow. On the capital side, I'd also make three points. One is, as you saw, we remain under-leveraged relative to our targets. Need more diversity to get best execution, so a bigger portfolio will get us better execution, which will get us closer to our leverage targets. Two, I would agree with you, iStar has a lot of firepower. Has obviously demonstrated an interest in acquiring more, as evidenced by their open market purchases. That's been certainly a supportive feature. Fundamentally, we believe there's a larger pool of investors who've expressed interest in providing capital once we reach some of our scaling milestones. We believe that's sort of a double-barrelled thing.
When we reach scale, not only do we have a lot more investors interested, but it comes at a much higher, hopefully, price that recognizes the value of the platform. In terms of cost of capital right now, we're more focused on building the business and bringing in the types of investors who understand where the value exists inside the portfolio. We do have capacity across a number of different fronts.
Okay. Just as we're talking about the LOI or the deals under LOI and the fact that, again, you're very focused on growing that pipeline, just can you share with us what that mix between originations and acquisitions is as you think about that pipeline funnel that you referenced?
Yeah. I think we've said in the past, the business is very much about creating ground leases, not just buying them. We do have a couple interesting acquisition opportunities on the table in the pipeline. By number of transactions, it's materially weighted towards new ground leases. By dollar volume, it really depends on the size of the things we think we can acquire attractively. You'll see a mix. Again, by number, you'll see more time, effort, and execution around new ground leases. By dollar, we'll continue to acquire things, but that tends to be a little more episodic.
Okay. Just maybe on the acquisition front, and recognize that you put some details out in a prior press release as well as touched on it a bit in the slides, can you just expand on that opportunity you see with the Hyatt ground lease in D.C., obviously a low initial cap rate, how much that was a function of the reset feature, or is that also maybe a little indicative of the cap rates you're seeing as you're pursuing some high-quality acquisition opportunities?
I guess two things. One, we're driven mostly by LTV coverage, quality of land, quality of operators and buildings, markets. If we can acquire something long-term that we think has very strong metrics, we think that's a good place for Safehold to play. This one had some unusual, obviously, lease dynamics. It's a relatively short-term lease. It's only got 56 years left. The next big bump and reset takes place in about seven years. You have a sponsor that has significant amount of capital invested junior to us, and an institutional lender with significant capital invested junior to us. That was a one-off in terms of an unusual combination of metrics that we kind of liked. More often than not, the stuff we create is longer and a little more similar in nature.
I wouldn't tell you in the acquisition side, we can give you specific guard posts around where things are. When we look at the IRR, we look at the LTV, we look at the coverage, we look at the amount of capital in the leasehold envelope. It kind of lines up with everything else we've been trying to do.
I guess maybe just one more from me. Jay, kind of looking at some of the interview that you did with like, REIT Magazine and some of the talking points there, just more broadly, just talk on the education process and how the reception to this ground lease platform is being received, just given as you continue to connect your outreach and education efforts.
Look, I think that is a critical part of this path for us. As I said, we've been spending a lot of time really in an education phase, even knowing full well that some of these education processes would not lead to deals, but we felt it was worth the time and effort to go out and really help people understand the very basic logic of splitting two fundamentally different investments apart. It's a logic that is endemic to every other part of the investment world. Somehow, in real estate, we've continued to require people to own fundamentally different investments, one high return, a 5- to 10-year holding period, very actively managed, together with a much lower return, passive, very long-term hold period asset. I think that message is getting through. We feel pretty good about that.
One of the things that we're doing, and we'll continue to try, and I mentioned some new approaches, is to try to simplify the process for folks, so that once they understand the merits and the logic, it becomes relatively easy for them to execute with us. We're looking at some of these one-stop-shop capabilities that we can put together with iStar that really minimize the variables in a deal. Andy talked about this pre-construction commitment to get in earlier in the process. We're not trying to educate people at the end of a process, but very early in the game. The deal we did on that multi-family transaction in D.C. was a good indicator of how we like to get in, explain it, and then actually put our stake in early.
We don't mind closing a ground lease one year from now or two years from now if the whole capital structure's already been put together and we know the construction is taking place. There's a lot of ways we can actually take that education component and amplify it by making the process simpler, easier, earlier for customers. I think you'll continue to see us try to push deeper into the marketplace with that kind of thinking. That should open up more and more of the opportunity based, again, on this logic and merit that we see people grasping relatively quickly.
All right. I appreciate the extra color there. I'll turn it over.
Our next question comes from the line of Rich Anderson from Mizuho Securities. Your line is open.
Thanks. Good morning. Jay, on the forward commitments, $64 million currently in the portfolio. I think you just kind of said that they could be extend out to one or two years. Is that sort of the timeframe you're thinking about on those?
Yeah.
Okay.
Depends on the construction period on the West Coast. The approval processes are longer. On the East Coast, it's a little bit shorter.
You're not recognizing any rent or are you in your cash flow or your rent numbers that you describe in the press release here?
No.
Okay.
We try to highlight for you in the portfolio composition, which are how many assets are on that forward commit basis.
Yep. Okay. On the $0.05 in AFFO, is there anything about particularly the $0.03 of R&D spend, is anything about that recurring, or is that all like a one-time event type of thing for the third quarter?
The expenses, I would describe it as a one-time in nature, it may extend over a couple of periods. We have some interesting ideas that we need to do the state-by-state legal work and really understand what we can achieve. If we're able to come up with these new approaches, we want to be able to sit in front of customers and say, "We've worked through all the pieces. This is how it works. This is the document you'll be looking at." You don't want to show up and go, "We're figuring this out with you." We're putting in the time and money up front to make sure we've really thought through all the iterations for our customers. When we show up and say, "This is an executable idea," we're not trying to play catch up.
Right. Make it easy for them to smooth out the process.
Got it.
If I can get back to the dry powder question. You said you have a bunch of different opportunities once you get past the $200 million of remaining dry powder to raise some form of equity. Could that include private equity coming in through a joint venture channel, something of that sort? Can you describe some of the alternatives, or is it not appropriate this time to get into some of your strategies to keep the engine going?
Yeah, I think you can imagine the full range of things we'd consider. We're just looking for the best execution for the business. I feel good about the number of people who have expressed interest in the business.
Okay.
I like the fact that we're under-levered right now. I like the fact that there's a lot of firepower sitting at our sponsor and largest shareholder. If we're fortunate enough to be able to put money out faster and actually get this diversification and scale that we've been really trying hard to reach, I think that'll give us a lot of good options.
Okay. Last from me, I was just looking back at the second quarter, and you had $141 million under letter of intent. Is it safe to assume that all of the $106 million came from that bucket, or is there ever a time where you can move so fast where it circumvents the LOI bucket and becomes a hard investment in the following quarter, or is it all from that $141?
I wish it were true more often that we can move really quickly with a customer. So far, what's proven out is it does take a little bit of time. Yes, you're right, most of those deals came from the preexisting bucket. I will tell you, as the word spreads and as more and more people use this to really create better capital structures with less risk and demonstrate the higher IRRs they're going to deliver, I think the time frames will shorten. Right now, there's definitely a cycle of education, working through the documents, getting the deals done. Even now, we're starting to feel with some of our repeat customers, we're seeing deals get done in 30 days.
I would just tell you, it feels like the funnel, as it gets bigger, will start to include deals where everything's already in place, and they can close much quicker.
30 days being the short end of that range, is it a year for the longer end once you begin a discussion, or is it something smaller than that?
Good morning, it's Marcos. I think the groundwork that we've laid over the past year has helped educate the market. I would say a year is definitely not the case. It's probably 3-4 months on the outside case. I think what gives me a lot of excitement as we move forward, the last nine transactions we've closed, eight have been organic. Five of those have been with repeat customers. On those repeat customer transactions, it's basically step and repeat because we use the same docs. Their legal bills are $10,000. It is a much more efficient closing process than closing a financing. We're excited about the prospects going forward.
Sounds great. Thanks very much.
Our next question comes from the line of Anthony Paolone from JPMorgan. Your line is open.
Thanks. Good morning. Just would like to go back to the overhead. Just want to make sure I understand. In the quarter, you had G&A of the $2.8 million on the income statement and then another $300,000 of other expenses. Where was the $0.03, I think, that you talked about that you called out? How did it divvy up among those two lines?
The $0.03 is in the public company and other costs, the $1.5 million.
Uh-
If that's your question. The reimbursables, that line item is primarily people's costs.
I was just looking at the appendix of the deck, I'm just seeing the General and Administrative of $2,779,000 and then other expenses of $303-
All of that is in the $2,779.
Okay. If I look at those combined, basically, I guess think about those two lines being your overhead. It's a little over $3 million, you added back $932,000, the non-cash piece of it and so forth. The net hit of overhead to AFFO, it's a little over $2 million. I guess what I'm trying to understand is what does that look like on a normalized basis, like 4Q and going into next year? I understand investing in the platform and doing some hiring and stuff, just trying to understand where it lands.
Yeah, I'd say, basically what we're trying to telegraph here is that $800,000 plus or minus, $300,000 of that, $350,000 of that is not going to recur anymore. The other $500,000 was related to R&D. As Jay said, we could have a portion of that come through also in the fourth quarter. Ultimately, I would say that if you were running an expectation, I would expect that there'd be a limited amount of that every quarter going forward. I can't tell you if that's $200,000 or $300,000 or $100,000, but I would eliminate from this run rate about at least a half a million dollars based on what we know today.
Okay. As you start to look out into next year, the overhead that impacts your AFFO should run somewhere in the $1.5 million-ish range quarterly?
Yes. If you take the $2.8 million, right, less the management fee, which is just over $900,000, all right? You're kind of in the range, $1.5 million, $1.3 million to $1.5 million.
Just that other expense item on the income statement, the $303,000, that kind of stays about the same going forward?
Yeah, those are primarily deal pursuit costs.
Okay.
As we scale the business, that number could increase a little bit, but it is just on a deal-by-deal basis. If we don't close a transaction that we are pursuing, we have to expense the cost associated with that in the quarter that the deal dies, effectively.
Got it. Okay. Then, shift over to some other stuff then. As you start to look to the balance of this year, just to button that up, it sounds like the forwards are a little bit further out into the future. Do you think you are going to close much in 4Q and actually get some capital out the door?
Yeah, look, we are pleased with what we see just in terms of number of dialogues, number of LOIs, number of people proceeding a pace to use the ground lease as part of their capital stacks. We are a customer-centric business, so we work on their timeframes, not our ideal timeframe. Some of those will definitely close in the fourth quarter. Some of them, as I said, I think we have a nice pipeline even going into the first quarter next year. Hopefully that LOI gives us a pretty steady stream of business closing from now till the end of the first quarter. We will probably be adding to that pile as the dialogues freshen across the country. We are now in 10 or 12 markets. Our target market size is approximately 20 to 25.
We're putting conversations and seeds into a lot of new markets, and we certainly hope to be able to harvest those. Can't give you exact timing, but yeah, there'll definitely be some sizable growth in the near term.
In the near term, when we think about yields, where do you see those trending? I guess with the idea being, it seems like you have in the mix some of these deals like the Washington, D.C. one where the going-in yields are pretty low because you've got some other circumstances at play.
Yeah, that deal is somewhat of a one-off, but I would say, we consistently talk about the trophy-type gateway city assets still are in the three and a half-ish range, and the more flow business, solid citizen stuff is more in the four and a quarter, four and a half range. That continues to be the general AAA quality alternative that we can play pretty comfortably in. You'll see some anomalies, some that'll be hopefully higher and some where there's unique underlying lease characteristics that allow us to take a lower yield initially because the IRRs are compelling.
Last question on that. As you look at IRRs, how did something like the D.C. hotel IRR compare to, say, the other deals in the quarter when you think through what that reset might look like and the Value Bank there versus the other ones? What are those levels of IRRs to what you're underwriting today?
I'm going to give you an answer just on a general approach on our lower-yielding acquisitions. As we look out in the future and try to project what those resets will be, we make sure we have a cushion, so we're adequately compensated for the risk of taking that lower yield up front. We think, as we go forward, that those yields in the future will be additive to an organic origination of an example building that's immediately adjacent to that asset. Generally on those deals, we are at lower leverage points, at lower land basis. We feel we're getting compensated for the low initial yield.
Okay. Do you think the deals, just broadly speaking, you're underwriting IRRs that are 6, 7, 8, like which order of magnitude?
I think if you take our baseline, it's a 4% kind of initial cash-on-cash return on an unlevered basis, and the bump structures on average have been around 2% on a long-term growth basis. That math is pretty straightforward. These reset deals, it's a little trickier, but as Marcos said, we're lining up side by side and going, "Can we get a similar or in fact better return with reasonable assumptions?" If we can get both a risk profile we like and an IRR profile that matches a 4 plus 2 kind of number, we feel pretty good about that.
Got it. Okay, thanks for the time.
Thanks, Andrew.
Your next question comes from the line of Joshua Dennerlein from Bank of America Merrill Lynch. Your line is open.
Hey, good morning, guys. I noticed it seemed like you had a lot of office ground lease acquisitions this quarter, and it looks like your pipeline on the office front grew. What's driving that? There's something that's becoming more attractive to office users with the ground lease or were you actively kind of reaching out for office deals?
Yeah, I guess at this point, we're again, going where our customers need us, and we're seeing a lot of opportunities to work with players who have long-term hold ideas and need long-term capital. That's just this quarter, multifamily and office seem to be the two that we've been spending the most time with. It was not a proactive decision on our part. We certainly like the asset class in the right markets, in the right locations, where we think there's a lot of attributes that protect the long-term value. If you're asking, did we go out actively to seek that? No, we didn't.
Okay. I guess it looks like you hired someone to run kind of the West Coast side of the business. How do you think that kind of increases your pipeline going forward? What's the overall strategy there? There are certain new markets that you'll be looking at or just kind of a bit bigger presence out there is just better?
Yeah, look, as we've said, this is an idea that can be used by almost any owner of a high-quality institutional asset, that means kind of plus $30 million and above, to really maximize their returns and hopefully reduce their interest rate and maturity risk. Almost every type of product works. Multifamily. We're seeing a lot of take up from office hospitality. We've done some industrial. Getting out into more markets of our 25 targets, you can see we've closed deals in Miami and Orlando and Atlanta and D.C. and Raleigh, Durham, and L.A. and San Diego and Phoenix and San Jose. We want to cover the map as effectively as we can. Because we're somewhat East Coast-centric, New York-centric, we need to have a strong presence on the West Coast.
We've got a great team out there. We wanted to add additional resources that could really push our ground lease business further and faster. We'd like to be in Portland. We'd like to do more in Seattle, San Francisco markets. We'd like to be San Diego and L.A., core markets for us. Tye will really help us create a constant presence up and down the coast together with our existing team that is already starting to use their network and their relationships to bring deal flow. He's got a slightly different network and relationships, definitely expect to see a pick up in activity out there.
Got it. Thank you.
Thank you.
-wraps that up for me.
Again, if you'd like to ask a question, that's star one on your telephone keypad. Our next question comes from John Massocca from Ladenburg Thalmann. Your line is open.
Good morning.
Hey.
I know you've talked in the past about kind of like sizable whale-type transactions that maybe exist outside the pipeline. Are those type of transactions still floating out there? Would those typically be on existing kind of ground leases or would they be done with kind of the Safehold ground lease format?
As Jay's discussed in the past, those are come few and far between and are episodic. I think fortunately for us, as we look at our pipeline, we have two of those transactions. One of them is organic, we created on an acquisition with a new sponsor. The other one is an existing ground lease. I would say it's a combination of both strategies that we deploy.
Okay. Then maybe kind of on the financing side, I know you're under-levered at this point and have a lot of capacity in the revolver, so maybe this is not top of mind right now. What are some of kind of the long-term debt financing solutions you're looking at as the portfolio continues to grow?
Yeah, on the financing front, it's actually interesting, right? Because this business, we talk about how unique it is, and on the right side of the balance sheet, we're also actually thinking it's a priority on developing longer-term financing solutions for these assets. Our capital markets group is actually working with a lender right now and documenting a transaction, a financing that we think is going to be unique in the marketplace that's at a very attractive rate. It also has an interesting feature in that the interest rate will actually step and mirror the underlying rent bumps in the collateral that's going to go in there. That's something we'll talk about more in the fourth quarter. Those are the types of things that we're also working on so that the financing matches the investments that we're doing.
I would say more longer term, Andy touched upon this, when you look through LTV to our portfolio in the low 30s and you look at AAA CMBS bonds in the low 40s range, we think as we get to scale, those sort of securitization options will lead to very accretive financing solutions.
Understood. Is some of that kind of looking into those type of debt financings part of the R&D spend that's been happening or is that separate from that?
Yes. The R&D bucket covers the left and right side of the balance sheet.
Okay. That's it for me. Thank you guys very much.
Mr. Fooks, we have no further questions.
Okay. Thank you. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Lisa, would you please give the conference call replay instructions once again? Thanks.
Thank you for participating in today's Safehold Inc. Third Quarter 2018 Earnings Conference Call. This call will be available for replay beginning at 1:00 P.M. Eastern time today through 11:59 P.M. Eastern time on November 8th. The conference ID number for the replay is 8496197. Again, the conference ID number for the replay is 8496197. The number to dial for the replay is 1-855-859-2056. Again, 855-859-2056. This concludes today's conference call. You may now disconnect.