{"id":65716,"date":"2023-09-26T15:34:12","date_gmt":"2023-09-26T19:34:12","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/safehold-playing-the-duration-risk-via-reit-vehicle-nysesafe\/"},"modified":"2023-09-26T15:34:21","modified_gmt":"2023-09-26T19:34:21","slug":"safehold-playing-the-duration-risk-via-reit-vehicle-nysesafe","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=65716","title":{"rendered":"Safehold: Playing The Duration Risk Via REIT Vehicle (NYSE:SAFE)"},"content":{"rendered":"
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Safehold (NYSE:SAFE<\/span>) is a pure-play ground lease REIT with a market cap of around $1.2 billion. SAFE is very unique since there are no direct peers (at least in the public capital market space) that operate in the same economic segment.<\/span><\/p>\n

Namely, the underlying business model of SAFE is based on relaxing the need for CapEx for property developers and \/ or owners (e.g., other private or public REITs) by taking positions in the land and leasing them out long-term.<\/p>\n

For the property developers such a construct not only decreases the immediate need of capital, but also enhances the return profile of the investment. For example, given that there is a decreased need for equity, the ROE and IRR metrics get improved. Plus, the refinancing risk is mitigated by having to roll over smaller amounts of capital.<\/p>\n

In other words, SAFE offers its customers the opportunity to reduce the required CapEx upfront and instead distributes this amount typically over ~100 years with rent escalators and mark-ups attached.<\/p>\n

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Safehold investor relations<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Historically, SAFE has been successful in attracting and retaining customers that find this solution beneficial in the context of their capital allocation strategy.<\/p>\n

According to Marcos Alvarado’s (President and Chief Investment Officer) comments during the Q2, 2023 earnings call, new deal pipeline is strong for SAFE:<\/p>\n

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While overall, the real estate capital markets remain dislocated with volumes far off the highs. We’re beginning to see pockets where our ground lease is a constructive capital solution in this difficult environment and we’re encouraged by the momentum in our pipeline.<\/p>\n<\/blockquote>\n

This is not that common for other equity REITs as elsewhere the property cap rates have not yet moved enough to provide meaningful spread from the cost of capital.<\/p>\n

The key reason for this (i.e., increased demand for SAFE’s offering) is the high interest rate environment, which has rendered capital expensive and less accessible. Hence, there is a more clear merit of decreasing the CapEx need upfront.<\/p>\n

As of now, SAFE carries a relatively diversified portfolio of ground leases.<\/p>\n

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Safehold investor relations<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

It has $6.1 billion of ground lease portfolio spread across 134 assets and 5 property segments. This is a remarkable growth considering that in 2017 when the IPO was made, SAFE had only 12 assets.<\/p>\n

Investment case<\/h2>\n

Now, there are several factors, which have got me interested in SAFE.<\/p>\n

First<\/strong>, the stock has now reverted back to its IPO level despite the presence of diversification, stronger capital structure and, in general, better momentum in the business.<\/p>\n

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YCharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

If we measured the performance starting from late 2021, we would arrive at a 66% loss (via price depreciation component, excluding the collected dividends).<\/p>\n

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YCharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Compared to the overall REIT market, SAFE’s performance looks very depressing.<\/p>\n

Second<\/strong>, the aforementioned decline has been largely driven by multiple contractions.<\/p>\n

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YCharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

We can see here that the earnings have gone up, while the multiple has followed the same trajectory as the share price.<\/p>\n

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YCharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Granted, during this time SAFE has assumed incrementally more debt than what has been accumulated in the equity book value, thereby increasing the overall risk profile of the entity. However, as I will elaborate below, I believe SAFE’s capital and funding structures are in a very safe territory.<\/p>\n

Third<\/strong>, is that SAFE’s business operations provide ultra reliable cash flows closely resembling bond-like characteristics. The inherent durability and stability of SAFE’s cash flows stem from the following aspects:<\/p>\n