Good morning, and welcome to Safety Income and Growth Third Quarter 2018 Earnings Conference Call. 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 Fuchs, Vice President of Investor Relations and Marketing. Please go ahead, sir.
Thanks, Lisa. Good morning, everyone, and thank you for joining us to review SAFE's Q3 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 Q3 2018 results. The corresponding presentation can be found on our website atsafetyincomegrowth.com in the Investor Relations section.
There will be a replay of this conference call beginning at 1 p. M. Eastern Time today. Data for the replay is 855-859-2056 with a confirmation code of 849-6197. 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, and 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 Q3, 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 reduced 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, multifamily and hospitality ground leases in 3 of our target markets, Washington DC, San Diego and Phoenix. And we have a strong pipeline going into the end of the year and into the Q1 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've spent most of our time working on building our business getting in front of potential customers. With our portfolio approaching $1,000,000,000 in assets and Value Bank approaching the $2,000,000,000 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 $1,600,000,000 So 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 3. 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 Q3 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 Hotels participation payment received during the Q1 was recognized ratably during the year, we would have recognized an additional $0.05 of earnings during the Q3.
Adjusting for these items, AFFO would have been 0 point 17 dollars 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 $106,000,000 of new ground leases comprised of 4 fully funded investments and one forward funding commitment, which brought our aggregate portfolio to $770,000,000 And at the end of the quarter, Value Bank was $1,600,000,000 or $86 per share. Furthermore, we hired an experienced investment professional, Kai Halonen, to focus on West Coast expansion and added a new bank to our revolving credit facility, sizing it by $50,000,000 to $350,000,000 We also made additional investments in marketing and R and D, all of which should help facilitate growth. Currently, our pipeline has over $400,000,000 of deals under LOI.
Slide 4 shows our portfolio rent growth. For the 3rd quarter, quarterly cash rent was $7,600,000 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. And at September 30, 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 31,200,000 dollars Slide 5 details our G and 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 Q3, the fee equated to approximately 46,000 shares, which will be issued in the 4th quarter. G and A this quarter includes approximately $0.02 of costs related to having our current auditors, Deloitte and 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 and D targeted towards scaling the business.
Separately, the Board granted Istar waiver to increase its ownership limit from 39.9 percent to 41.9 percent and 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 6, which shows our dividend payments. For the Q3, 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% 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 8. The Q3 consisted of $106,000,000 of investment activity that was comprised of 4 new ground lease investments that totaled $76,000,000 and one forward purchase commitment for $30,000,000 bringing our aggregate portfolio to $770,000,000 16% sequential increase and more than double what it was when we went public. The aggregate portfolio includes $706,000,000 of ground lease investments that we currently own and $64,000,000 of deals we have closed as forward purchase commitments. Creating a safe 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 9 describes the metrics for the quarter's investments. $72,000,000 of the investment activity this quarter related to new safe 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 was 30.7%. These leases all have 99 year terms.
In addition, we purchased an existing ground lease in Washington DC for $34,000,000 What is particularly attractive about this investment is that it includes a rent reset in 7 years based on 8% of the fair market value of the land and a similar reset every 10 years thereafter until 2,075. Slides 1011 provide some detail on the deals we closed. The Balboa Executive Center is a 5 story Class A office building and SAFE's 2nd ground lease in the San Diego MSA. We've also seen nice demand in Washington DC MSA and now have 5 ground leases in the market, including the 3rd quarter investment in ground leases under the Hyatt Centric Hotel and the Jefferson and our forward purchase commitment on a ground lease underlying a multifamily 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 1213 detail the diversification in our portfolio. Slides show that we doubled our investment in Washington DC 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 $31,200,000 or 4.4 percent return on our basis.
When you include straight line rent, our annualized GAAP rent is 51,000,000 dollars 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 percent 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 $853,000,000 of deals, including $408,000,000 of deals with signed LOI compared to $141,000,000 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 Q4 this year through the Q1 next year. Slide 16 provides an update on Value Bank.
Value Bank grew 16% during the Q3 to $1,600,000,000 or $86 per share. Recall at the expiration of a ground lease, the building and all improvements revert to safe. Since our investment was only the cost of the ground, the value of the building, our cost basis in the land is what we refer to as value bank. 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. $227,000,000 of long term fixed rate debt due in 2027 secondured by our initial $340,000,000 portfolio and $71,000,000 of asset specific debt against our Hollywood investments. We upsized our revolver by $50,000,000 increasing total capacity to $350,000,000 We drew down the revolver facility by $64,000,000 during the quarter to partially fund origination activity, bringing the revolver to an outstanding balance of $74,000,000 at the end of the quarter. Based on our 2:one leverage target, dollars 15,000,000 of cash on hand and undrawn excess borrowing capacity on our credit facility as of September 30, we have a little over $200,000,000 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 rates at. 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 2 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.
Faith continues to educate the marketplace on a better way to invest, own and operate real estate. And 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 our ability to utilize and leverage off of Istar's scale as the SAFE platform scales. And 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 a significant value recognized by the marketplace. So now let's go ahead and open it up for questions.
Operator?
Thank you. Our first question comes from the line of Collin Mings from Raymond James. Your line is open.
Hey, good morning.
Good morning.
First question from me, just you mentioned roughly $200,000,000 of dry powder just given kind of where the debt level stand. But just in context of the $400,000,000 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. Yes, we're very pleased that the pipeline continues to grow. On the capital side, I guess I'd make 3 points. 1, as you saw, we remain under leverage relative to our targets, need more diversity to get best execution.
So bigger portfolio will get us better execution, which will get us closer to our leverage targets. 2, 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. So that's been certainly a supportive feature. And then then fundamentally, we believe there's a larger pool of investors who have expressed interest in providing capital once we reach some of our scaling milestones. We believe that's sort of a double barreled 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. So 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, but we do have capacity across a number of different fronts.
Okay. And then 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?
Yes. 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 of interesting acquisition opportunities on the table in the pipeline. But by a number of transactions, it's materially weighted towards new ground leases. But by dollar volume, it really depends on the size of the things we think we can acquire attractively.
So you'll see a mix. Again, by number, you'll see more time, effort and execution around new ground leases. And by dollar, we'll continue to acquire things, but that tends to be a little more episodic.
Okay. And just maybe on the acquisition front and recognize that you put some details out in the prior press release as well as touched on it a bit in the slides. But can you just expand on that opportunity you see with the high ground lease in DC, obviously a low initial cap rate? How much that was a function of kind 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? Yes. I guess two things. 1, we're driven mostly by LTV coverage, quality of land, quality of operators and buildings markets. So if we can acquire something long term that we think has very strong metrics, we think that's a good place for safe 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 7 years. And you have a sponsor that has significant amount of capital invested junior to us and an institutional lender with significant capital effect junior to us.
So 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. So I wouldn't tell you in the acquisition side, we can give you specific guard posts around where things are. But when we look at the IRR, we look at the LTV, we look at the coverage, we look at the amount of capital in those sold envelope, it kind of lines up with everything else we've been trying to do.
Okay. And then just I guess maybe just one more from me. Just Jay, kind of looking at some of the interview that you did with 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 kind of your outreach and education efforts?
Yes. 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 process 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 2 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, 1 high return, 5 to 10 year holding period, very actively managed together with a much lower return, passive, very long term hold period asset.
And 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. So 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. So we're not trying to educate people at the end of a process, but very early in the game. And the deal we did on that multifamily transaction in DC 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 a year from now or 2 years from now if the whole capital structure has 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. And I think you'll continue to see us try to push deeper into the marketplace with that kind of thinking.
And 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. So Jay, on the forward commitments, dollars 64,000,000 currently in the portfolio, how I think you just kind of said they could be extend out to 1 or 2 years. Is that sort of the timeframe you're thinking about on those?
Yes. Okay. It depends on the construction period on the West Coast. The approval processes are longer. On the East Coast, it's a little bit shorter.
But are you you're not recognizing any rent or are you in your cash flow or your rent numbers that you described in the press release here?
No, no. But we try to highlight for you in the portfolio composition, which are how many assets are on that forward commit basis.
Yes. Okay. On the $0.05 in AFFO, is that there anything about particularly the $0.03 of R and D spend, is anything about that recurring or is that all like a one time event type of thing for the
Q3? The expenses, I would describe it as a onetime in nature, but 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 kind of 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.
So we're putting in the time and money upfront to make sure we've really thought through all the iterations for our customers. So when we show up and say, this is an executable idea, we're not trying to play catch up.
Right. Make it easy for him to smooth out the process.
If I
can get back to the dry powder question, you said you have a bunch of different opportunities once you get past the $200,000,000 of remaining dry powder to raise some form of equity. Could that include sort of like private equity coming in through joint venture channel or something of that sort? Or can you describe some of the alternatives? Or is it not appropriate this time to sort of get into some of your strategies to keep the engine
going? Yes.
I think you can imagine the full range of things we consider. We're just looking for the best execution for the business. But I feel good about the number of people who've expressed interest in the business. 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 shareholders.
So 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 will give us a lot of good options.
Okay. And then last for me, I was just looking back at the Q2 and you had $141,000,000 under letter of intent. Is it safe to assume that all of the $106,000,000 came from that bucket? Or is there ever a time where you can move so fast where it moves it circumvents the LOI bucket and gets 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, it's proven out as it does take a little bit of time. So yes, you're right, most of those deals came from the pre existing bucket. But 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 timeframes will shorten. But right now, there's definitely a cycle of education, working through So I would just tell you, it feels like the funnel as it gets bigger, we'll start to include deals where everything's already in place and they can close much quicker.
So 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?
Hey, good morning. It's Marcos. I think the groundwork that we've laid over the past year has helped educate the market. So I would say a year is definitely not the case. It's probably 3 months to 4 months on the outside case.
I think what gives me a lot of excitement as we move forward, The last 9 transactions we closed, 8 have been organic. 5 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 And so it is a much more efficient closing process than closing a financing. So 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 like to go back to the overhead, just want to make sure I understand. So in the quarter, you had G and A of the $2,800,000 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, like how did it give you up among those two lines?
The $0.03 is in the public company and other costs, the 1.05 dollars That's your question. The reimbursables are that line item is primarily people's costs?
I was just looking at the appendix of the deck and I'm just seeing the general and administrative of $2,779,000 and then other expenses of $305,000,000
Yes, all of that is in the $2,779,000
Okay. And so then if I look at those combined, I guess, think about those 2 on screen, your overhead is a little over $3,000,000 and then you added back 932, dollars so like sort of the non cash piece of it and so forth. So the net like hit of overhead to AFFO, it's like a little over $2,000,000 So I guess what I'm trying to understand is like what does that look like on a normalized basis like 4Q and going into next year? Because I understand investing in the platform and doing some hiring stuff, trying to understand where it lands?
Yes. I'd say like basically what we're trying to telegraph here is that $800,000 plus or minus, dollars 300,000 of that $350,000,000 of that is not going to recur anymore. The other $500,000,000 was related to R and D. As Jay said, that could we could have a portion of that come through also in the Q4. But 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 $500,000 based on what we know today.
Okay. So then as you start to look out into next year, the overhead that impacts your AFFO seems should run somewhere in the $1,500,000 ish range quarterly?
So if you take the $2,800,000 right less the management fee, right, which is over just over $900,000 all right. And you're kind of in the range $1,500,000 $1,300,000 to 1.5
$1,500,000 And just that other expense item on the income statement, the $303,000,000 that kind of stays about the same going forward or
Yes, those are primarily deal pursuit costs.
Okay.
So as we scale the business that number could increase a little bit, but it's just on a deal by deal basis. If we don't close a transaction that we're pursuing, we have to expense the costs associated with that in the quarter that the deal dies effectively.
Got it. Okay. And then shift over to some other stuff then. 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're going to close much in 4Q and actually get some capital out the door?
Yes. Look, we're 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 time frame. Some of those will definitely close in the 4th quarter. Some of them, as I said, I think we have a nice pipeline even going into the Q1 of next year.
So hopefully that LOI gives us a pretty steady stream of business closing from now till the end of Q1. And we'll probably be adding to that pile as these dialogues freshen across the country. We're now in 10 or 12 markets. Our target market size is approximately 20 to 25. So we're putting conversations and seeds into a lot of new markets and we certainly hope to be able to harvest those.
So can't give you exact timing, but yes, there will be definitely be some sizable growth in the near term.
And in the near term, when you think about yields, how much where do you see those trending? And I guess idea being, it seems like you have in the mix some of these deals like the Washington DC one where the going in yields are pretty low because you've got some other circumstances at play?
Yes. 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 3.5ish range and the more flow business, solid citizen stuff is more in the 4.25%, 4.5% range. That continues to be the general AAA quality alternative that we can play pretty comfortably in. You'll see some anomalies, some that will be hopefully higher and somewhere there's unique underlying lease characteristics that allow us to take a lower yield initially because the IRRs are compelling.
And then last question then on that. As you look at IRRs, how did something like the DC Hotel IRR compared 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 like what are those levels of IRRs to which 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 upfront. So 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. And generally on those deals, we are at lower leverage points, at lower land basis. So we feel, we're getting compensated for the low initial yield.
Okay. I mean, do you think the deals just broadly speaking, you're underwriting TiRs that are 6%, 7%, 8%, like what's order of magnitude?
Well, 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. So 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 and 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. It looks like your pipeline on the office front grew. What's driving that? Is there something that's coming more attractive to office users with the ground lease or were you actively kind of reaching out for office deals?
Yes. 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. And that's just this quarter multifamily and office seem to be the 2 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.
But if you're asking, do we go out actively to seek that? No, we didn't.
Okay. And then, 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? And what's the overall strategy there? Are there certain new markets that you'll be looking at or just kind of a bit bigger presence out there is just better?
Yes. Look, as we've said, this is a idea that can be used by almost any owner of a high quality institutional asset that means kind of plus $30,000,000 and above to really maximize their returns and hopefully reduce their interest rate maturity risk. So almost every type of product works, multifamily. We're seeing a lot of take up from office, hospitality. We've done some industrial.
So getting out into more markets of our 25 targets, you can see we've closed deals in Miami and Orlando and Atlanta and DC and Raleigh Durham and LA and San Diego and Phoenix and San Jose. So we want to cover the map as effectively as we can. And 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 and 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 LA, core markets for us. So, Ty 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. So definitely expect to see a pickup in activity out there.
Got it. Thank you. I think that's that's it for me.
Our next question comes from John Massocca from Ladenburg Thalmann. Your line is open.
Good morning. Hey. So I know you've talked in the past about kind like sizable whale type transactions that maybe exist outside the pipeline. Are those type of transactions still floating out there? And would those typically be on existing kind of ground leases or would they be done with kind of the safe ground lease format?
So, as Jay has discussed in the past, those are few and far between and are episodic. I think fortunately for us as we look at our pipeline, we have 2 of those transactions. 1 of them is organic, we created on an acquisition with a new sponsor and the other one is an existing Brownleece. So I would say it's a combination of both strategies that we deploy.
Okay. And 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?
Yes. 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 top of 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 financing that we think is going to be unique in the marketplace. That's at a very attractive rate and 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. So that's something we'll talk about more in the Q4.
But that's the type of thing those are the types of things that we're also working on so that the financing matches the investments that we're doing.
And I would say more longer term, Andy touched upon this, when you look at the 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. And then is some of that kind of looking into those type of debt financings part of the R and D spend that's been happening or is that separate from that?
Yes. The R and 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. And 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 Safety Income and Growth Third Quarter 2018 Earnings Conference Call. This call will be available for replay beginning at 1 p. M. Eastern Time today through 11:59 p. M.
Eastern Time on November 8. The conference ID number for the replay is 849 6,197. Again, the conference ID number for the replay is 8,496,197. The number to dial for the replay is 1-eight fifty five-eight fifty nine-two thousand and fifty six. Again, 8558592056.
This concludes today's conference call. You may now disconnect.