Going into 2020, Safehold was poised for a big year. The iStar-managed ground lease real estate investment trust had just recorded a blockbuster fourth quarter that saw it break into Manhattan’s pricey office market. But the coronavirus pandemic has hit pause on those plans.
Total investment in the first quarter of 2020 came out to just $77 million for ground leases under two multifamily properties and one office building, Safehold executives said on Thursday morning’s earnings call. That compared to $1.2 billion in investment activity in the last three months of 2019.
“We entered this year confident in our strategy, and excited to continue building on our successes in 2019,” CEO Jay Sugarman said in his opening remarks. “Our pipeline looked to be growing nicely and our teams were engaged with customers across the country.” But by the end of March, he added, “it was clear that most transactions were being halted or postponed until things become more settled.”
Meanwhile, Safehold’s income from existing ground leases has held steady, and the firm has collected 100 percent of ground rent due in April, with less than 2 percent of leasehold tenants having made inquiries about possible relief.
While the company gave “due consideration” to relief requests, it reminded customers that “one of the reasons we can provide low-cost capital for them is the steady performance of our ground lease portfolio in circumstances like these,” he said.
The REIT recorded $40.2 million in revenue in the first quarter, representing an 84-percent increase from the same period a year ago from its larger portfolio. Net income rose for the same reason — 54 percent year-over-year to $17.4 million — while earnings per share stayed flat at $0.36 per share, as Safehold issued another $150 million worth of new shares in the quarter in anticipation of big transactions.
Hotels hit hard
The most immediate impact to Safehold’s revenue is in the hotel sector, which makes up 19 percent of the company’s portfolio. In particular, the REIT owns a master lease for five hotels operated by Park Hotels & Resorts, where percentage rent is dependent on the performance of those properties. Revenue from that portfolio accounted for 14.9 percent of Safehold’s total revenue in 2019.
“We’re certainly concerned that the hospitality industry is going to struggle to come back as quickly,” said Sugarman. “Some of these assets are in very good markets, but reading the tea leaves from all the hospitality folks we talk to, it’s not going to be a snap back here.”
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Safehold’s stock has outperformed the broader market amid the coronavirus crisis, and as of Thursday was trading 27 percent higher than it was at the start of the year. The Dow Jones Industrial Average has fallen 17 percent over the same period.
While the pandemic is expected to have a negative impact on Safehold’s portfolio in the coming quarter, CFO Jeremy Fox-Geen, who joined the firm from McKinsey at the end of March, said the company had a “long-term view on our properties and are less focused on quarterly fluctuations.”
While uncertainty in the markets has put ongoing deals on hold, it may also be opening up new opportunities for the company as more investors see the benefits of Safehold’s stable, low-risk cash flows.
“There has been a ton of new engagement with new customers who are looking at their liquidity options,” said president Marcos Alvarado, noting the REIT has had discussions with large fund owners, public companies, and non-real estate companies that own high-quality real estate. “We’re taking advantage of the current dislocation and pushing our story across asset classes and across a broader and more diversified customer base.”
Meanwhile, the company’s vision — to revolutionize commercial real estate by using ground leases as a form of super-long-term financing — is unchanged. To illustrate that, Sugarman deployed some maritime references.
“We’re sitting well below the surface of the waves, and while things certainly are choppy and could take a while to get back to where they were, it doesn’t really change our viewpoint in terms of where we sit, in terms of safety,” Sugarman said.