Safehold was founded in 2017 for the purpose of reinventing the ground lease to make it value-enhancing for building owners. Since creating the modern ground lease, the company has grown its portfolio to nearly $4 billion in more than 30 major markets in the U.S. Safehold Chairman and CEO Jay Sugarman recently spoke to Commercial Observer about how the company is responding to an evolving ground lease landscape.
Commercial Observer: How has the ground lease market changed since Safehold pioneered the modern ground lease just over four years ago?
Jay Sugarman: The first and most important thing we did was to turn the ground lease business into a customer business. We understand what building owners need and how we can best provide them the lowest cost, longest term, most efficient capital. This type of modern ground lease capital has never been available before, and we’re seeing increasing adoption as we educate the market about its benefits. From a customer’s perspective, then, one of the biggest changes in the market is that ground leases can be customer-friendly and value-creating as part of the capital structure, in contrast to the landlord-friendly, value-destroying structures of the past.
Another thing that’s happened is multifamily has become one of the asset classes where modern ground leases are being used more and more often. In fact, our customer base right now is mostly urban office and multifamily. There was initially skepticism as to whether we could break into multifamily, particularly in gateway cities and fast-growing Southern cities. As we have established ourselves in top cities across the country — like D.C., New York, Austin, L.A., and Nashville — the perception around the applicability of this new modern ground lease has changed.
At what stages of an asset’s life cycle does Safehold engage with its customer base?
Most of our transactions occur at one of three points in time: when a property is about to be built, sold, or refinanced. We’ve recently added another component, our Ground Lease Plus program, which begins even earlier, when somebody buys land. What we’re now seeing is the ability to add value during the entire life cycle of a property. Any time a customer controls, or is in the process of controlling, a high-quality piece of land, that’s a good time to talk to Safehold.
What advantages does Safehold’s first-in-category status give the company today, and how do they translate to value for Safehold’s ground lease tenants?
We’re the only public company doing this, which means we have permanent capital for what is essentially a very long-lived business. We’re also the only investment grade platform, which gives us a cost of capital advantage that we pass on to our customers. And we’re the only national platform with 75 to 100 people working on this business every day. All of these factors enable us to take advantage of the economies of scale that are built into this business.
How would you categorize Safehold’s position in the ground lease market today?
We have, by far, the largest market share, the biggest platform and, we believe, the most credibility. That counts when you’re trying to revolutionize an industry.
What are some ways Safehold has evolved as the ground lease ecosystem has progressed?
Getting to an investment grade rating was an important milestone that has allowed us to serve our customers faster with even lower cost capital. We’ve also built a growing in-house team of industry experts, so we can share with our customers the best and latest knowledge about how ground leases can improve a capital structure.
How did the company fare over the course of the pandemic?
We’ve come through COVID with 100 percent payment on our ground leases, despite the difficult economic conditions. That was proof of the concept that ground leases are one of the safest investments you can make in the real estate world. We think that on a portfolio basis, they have the same characteristics as AAA-quality bonds, and our portfolio’s performance during this pandemic further supported that thesis.
On the growth front, COVID paused the markets for several quarters, but we had a very strong pipeline of deals develop in the post-Labor Day period last year, and our pipeline is continuing to grow rapidly.
From a shareholder perspective, we have benefitted from a combination of principal safety, a high growth rate, and significant financial performance in terms of [earnings per share] growth and value creation. While our share price has begun to catch up with some of our success, we believe there’s a massive opportunity yet to be tapped.
Talk about Safehold’s portfolio and how investors should think about modern ground leases as a new asset class.
Our typical asset is somewhere around 35 to 40 percent of the capital stack, sitting in the most senior position. We think that lines up very nicely with the AAA [commercial mortgage-backed securities] world.
In terms of financial performance, we have very strong, ultra-high-grade credit. When we compare the credit quality, the maturity of our portfolio and its returns with other investments in the market that have similar credit, quality and maturity, we’re generating significantly above-market returns. We’re building a portfolio that’s completely unique. It’s the first time investors have had a chance to invest in these ultra-high-quality land positions in the best markets. We’re still in the early innings of changing this industry, but investors are starting to take notice and we believe they will view this as an important sector to be invested in as we scale.
How does using a modern ground lease affect future liquidity for leaseholders?
This is an important issue. When we look back at the old ground leases, we saw that not only did they impair the ability to put leverage on a building, they had a material impact on the ultimate value when the owner went to sell.
Many of the old ground leases were written in such a way that the rent was uncertain and the terms under various outcomes were ambiguous. So, we stripped out all the provisions that made it hard to underwrite the future. We made sure we were sizing our ground leases at an appropriate size, pricing them at the lowest price possible, and structuring them in the clearest and simplest way.
When you do those three things, both the leasehold financing market and the future buyer market suddenly see this as very attractive capital. A properly structured, properly priced, properly sized modern ground lease not only helps you today, it allows that asset to trade efficiently in the future.