Safehold Inc. Annual Report - A Deep Dive for Investors

For investors seeking a deeper understanding of Safehold Inc.'s performance and strategic direction, this summary provides a comprehensive overview of the company's year ended December 31, 2023. We will explore Safehold's business model, financial health, key achievements, potential risks, and future outlook.

1. Business Overview

Safehold Inc. specializes in ground leases, a unique real estate investment strategy. The company acquires land beneath significant commercial properties—such as offices, apartments, and hotels—and then leases that land back to the building owners for extended periods, typically 99 years. This model generates a highly predictable and stable income stream. Safehold structures its leases for built-in growth, incorporating features like fixed rent increases at set intervals, inflation adjustments tied to economic indicators, and sometimes percentage rent, which is a share of the building's revenue. These mechanisms help ensure income growth and protect against inflation.

A pivotal event this past year was the reverse merger with iStar Inc. on March 31, 2023. This strategic consolidation streamlined Safehold's corporate structure, eliminated external management fees, and integrated iStar's valuable ground lease portfolio directly into Safehold. This significantly expanded Safehold's scale and operational efficiency. The company now operates as a "single reportable segment," focusing entirely on ground leases. These leases are categorized into "stabilized properties," which are already generating income, and "development properties," new projects that will produce income upon completion. The iStar merger largely fueled this year's substantial growth, expanding the company's portfolio and establishing a foundation for future income.

2. Financial Performance

Safehold reported a strong financial year for 2023. Total revenue increased by 22% to $285 million, and net income attributable to common stockholders rose 18% to $115 million. These results reflect the expanded portfolio and efficient operations following the merger.

Funds From Operations (FFO) per share, a key metric for real estate investment trusts (REITs), reached $1.65. Adjusted Funds From Operations (AFFO) per share was $1.30, demonstrating healthy cash flow generation after accounting for recurring capital expenditures. The total ground lease portfolio grew substantially, reaching $6.8 billion in fair value across 205 ground leases by year-end, up from $4.5 billion and 150 leases before the merger. This growth resulted from both the iStar portfolio integration and new acquisitions. The company also maintained a stable quarterly dividend of $0.175 per share, equating to an annualized dividend yield of approximately 2.5% based on recent stock prices.

3. Risk Factors

Investors should be aware of several key risks:

• Interest Rate Risk: While Safehold employs hedging strategies, sustained increases in interest rates could still raise borrowing costs, impact property valuations, and reduce the attractiveness of ground lease investments.
• Real Estate Market Downturns: A significant decline in commercial real estate values or rental income could affect the value of the underlying properties and, indirectly, the security of Safehold's ground leases.
• Tenant Credit Risk: Although ground leases hold a senior position in the capital structure, a major default by a building owner could lead to complex legal processes and potential delays in rent collection.
• Competition: Increased competition for prime ground lease opportunities could compress yields or make new asset acquisitions more challenging.
• Regulatory Changes: Changes in zoning laws, property taxes, or other real estate regulations could impact the profitability of Safehold's ground leases.

4. Management Discussion and Analysis (MD&A) Highlights

The MD&A provides a detailed explanation of Safehold Inc.'s financial condition and operational results, offering investors insight into the company's performance, liquidity, and capital resources.

• Results of Operations: The significant financial performance, including the 22% revenue increase and 18% net income growth, primarily stemmed from the transformative reverse merger with iStar Inc. on March 31, 2023. This strategic move not only expanded the ground lease portfolio to $6.8 billion but also brought management in-house, eliminating external fees and better aligning incentives. The company successfully executed $750 million in new ground lease originations (new ground lease investments) and formed a $1 billion joint venture with a leading Sovereign Wealth Fund, further contributing to portfolio growth and future income streams.
• Liquidity and Capital Resources: As detailed in the Financial Health section, Safehold maintains a robust liquidity position with $180 million in cash and a largely undrawn $1.0 billion revolving credit facility. The company actively manages its debt structure, which includes unsecured senior notes and secured mortgages. Safehold uses interest rate swaps to hedge approximately 70% of its variable-rate debt, mitigating interest rate risk. The joint venture further enhances capital resources for future acquisitions.
• Operating Environment and Challenges: The company navigated a challenging macroeconomic environment characterized by rising interest rates and economic uncertainty. While higher rates can impact borrowing costs, Safehold's long-term, inflation-protected leases offer some insulation. Integrating iStar's operations presented operational complexities, which management addressed to ensure a seamless transition and realize synergies. Increased competition for high-quality ground lease assets also required strategic focus.
• Strategic Direction and Leadership: The iStar merger represented a strategic pivot, consolidating all ground lease operations and fully internalizing management. This change, coupled with the Amended Caret Performance Incentive Plan, aims to streamline decision-making and align executive compensation with long-term shareholder value creation.
• Market Trends: Safehold benefits from market trends such as the demand from developers for flexible capital solutions and the natural hedge its inflation-adjusted leases provide in an inflationary environment. Higher interest rates, while a challenge, can also make ground lease financing a more attractive alternative to traditional debt. The company also monitors the growing focus on Environmental, Social, and Governance (ESG) factors in real estate.

5. Financial Health

Safehold maintains a strong financial position. As of December 31, 2023, the company held $180 million in cash and cash equivalents and had total debt of approximately $3.2 billion. Its debt structure includes $1.5 billion in unsecured senior notes with staggered maturities: $500 million due in 2034, $500 million in 2035, and $500 million in 2052. Safehold also utilizes secured debt, primarily mortgages, totaling $1.7 billion.

Liquidity is further supported by an unsecured revolving credit facility of $1.0 billion, which was largely undrawn at year-end. This facility, maturing in 2029, provides ample flexibility for future investments and working capital needs. Safehold actively manages interest rate risk through interest rate swaps, hedging approximately 70% of its variable-rate debt, which helps stabilize interest expenses amidst market fluctuations.

6. Future Outlook

Safehold is well-positioned for continued growth, with a clear strategy focused on:

• Aggressive Portfolio Expansion: Leveraging the $1 billion joint venture and its own capital, Safehold aims to significantly increase its ground lease portfolio, targeting $1.0 - $1.5 billion in new ground lease investments in the coming year.
• Diversification into High-Growth Sectors: The company continues to focus on acquiring ground leases for life science office properties, mixed-use developments, and student housing, which offer attractive long-term growth prospects.
• Leveraging the Caret Platform: Safehold plans to further enhance its proprietary ground lease product, "Caret," to attract more developers and property owners seeking efficient, long-term capital solutions.
• Operational Synergies: The company expects to realize the full benefits of the iStar merger, including cost efficiencies and enhanced operational capabilities.

7. Competitive Position

Safehold operates in a specialized, yet growing, niche within real estate finance. Its competitive advantages include:

• First-Mover Advantage & Scale: As a pioneer and leading provider of modern ground leases, Safehold benefits from significant scale and expertise, making it a preferred partner for developers and property owners.
• Proprietary 'Caret' Structure: Its innovative ground lease product, known as 'Caret,' offers unique benefits such as long-term fixed rent growth, inflation protection, and a clear path to value creation for both Safehold and its tenants.
• Strong Balance Sheet & Access to Capital: The company's financial strength and ability to attract institutional partners, like the Sovereign Wealth Fund joint venture, provide a significant edge in acquiring and funding large-scale ground lease opportunities.
• Diversified Portfolio: A growing portfolio across various property types (office, multifamily, industrial, life science, hospitality) and geographies reduces concentration risk.