100-year outlook driving Safehold’s business strategy
You joined Safehold as Chief Financial Officer at the end of March 2020, immediately facing considerable challenges posed by COVID-19. What are your takeaways from a tumultuous year?
First off, there are a terrific bunch of people at Safehold and iStar. Joining right at the onset of the pandemic, we learned very, very quickly that the teams we had built were strong enough to seamlessly move to a work-from-home environment without impacting our business in any meaningful way. On the support side, if you think about accounting, tax and other parts of our operations, we didn't miss a beat or compromise our control environment. On the business side, there were disruptions due to the fact that people couldn’t travel to properties to investigate and underwrite them properly. There were industry-wide challenges closing deals in the heart of the pandemic because it wasn’t possible to conduct inspections—and we were slowed down as well—but we really didn’t miss a beat from a people perspective. And as soon as the market started to open, we started driving business again
What attracted you to join Safehold after your previous role as CFO and co-COO of McKinsey & Co., North America?
Safehold is almost uniquely positioned to be doing something very, very different in the commercial real estate industry. It’s unusual to have the opportunity to be part of something like that. Safehold is convincing the entire world of real estate, which has done something one way for a very long time, to think about its business differently. And not just differently, but in a way that creates value for customers and investors. That’s even more rare. All too often, products that create value for customers don't create value for investors, and vice versa. Really good businesses do both, and the nature of Safehold’s business model allows for value creation on both sides.
Talk a little more about how Safehold was positioned for the pandemic and how the business has fared since.
We take a longer-term perspective than many, as we have a 100-year investment horizon. We expect to see many business disruptions in that time, and many business cycles, for sure. Our business is not predicated on the ups and downs of the business cycle. It's predicated on a core idea that creates value for customers and investors over that 100-year view I mentioned before.
From an operational perspective, as I said, we didn't really miss a beat. That's a testament to the team we built it. From a financial perspective, we manage our balance sheet prudently, as befits a company with a 100-year through-cycle mindset. We do not take excessive risk. Therefore, as the pandemic unfolded, we were very secure from a financial perspective. We were fully expecting our customers to continue paying their ground rent. And they did. We received, as of year end 2020, 100% of ground rents payable during this pandemic. Our entire business is built with a view that we will experience many stress situations and credit cycles over time.
What elements of Safehold’s business are most important for the market to understand?
It's critical for investors to understand three components to get a full sense of the potential of our business. The first is to understand our customer value proposition. Second is to understand the size of our target market. Third is to understand the value to investors of the business that we're building.
The modern ground lease, which Safehold created, has proven to be particularly beneficial for many different customer types, as evidenced by our early success and our track record of customers coming back to us. Safehold’s ground lease enables customers to generate greater returns on their own business and it significantly reduces their risk. That's a truly valuable product.
And we're only just beginning. We estimate a total addressable market of $7 billion for ground leases on institutional quality properties in the top 30 U.S. markets. As of today, our portfolio stands at $3.2 billion. So, we have a terrific value proposition for our customers and an awful lot of customers to go get. We have a very long runway ahead of us and excellent growth prospects, as we've demonstrated in our limited history.
Safehold’s business is also valuable for investors. We’re building a rapidly growing and diversified portfolio of ground leases, which removes any idiosyncratic risk that you might find in a single asset. We believe that such a portfolio should be valued like AAA 100-year credit, and we believe that investors have begun to appreciate this value, reflected in significant share price appreciation over the last two years.
One area we’re just beginning to talk to investors about is the value of our portfolio’s Unrealized Capital Appreciation, which currently stands at $5.5 billion, or approximately $100 per share. To date, we don't think the market has attributed meaningful value to this core part of the Safehold story. We think this is very valuable indeed. We will spend a significant amount of time in 2021 and beyond educating investors as to how valuable we view this asset.
You serve on the ESG Advisory Council and the Cultural Equity Council, two groups formed in late 2020, for Safehold and its manager iStar. What roles do each council play?
As is being increasingly recognized across the public and private markets, ESG matters are critical for the long-term success and health of any enterprise. As a business with a 100-year investment horizon, environmental, social and governance concerns are also critical to Safehold’s success. Therefore, ESG concerns are at the heart of how we run our business.
As for the specific councils, the ESG Advisory Council is a governing body containing representatives from many of our business functions, whose job it is to think across those business functions and consider ESG impacts for the company as a whole. The group serves as both an oversight body and an advisory body to senior management and the Board of Directors, to ensure that we are appropriately considering and taking actions against ESG risks and opportunities. It’s also critical to be transparent, both internally and externally, about the work we do and the policies we implement. Transparency breeds trust, an essential component of any highly functioning institution.
The Cultural Equity Council, which we also formed within the last year, is charged with helping us sustain and evolve our culture so that we are as equitable and inclusive as we can be. While there has been significant growth in the number of conversations around diversity, equity and inclusion in recent times, these issues should be at the heart of every well run business – as they are core to enabling our people to work at their very best.
How do you view ESG and DEI in the context of Safehold’s business?
As investors with a 100-year time horizon, long-term environmental impacts are an important part of our underwriting process. It's difficult to assess exactly what those risks are in a world that does not have accurate, long-range climate and environmental forecasting. There is much public debate over climate models, but any modeler will tell you the range of outcomes is wide. However, we make the best assessments we can using the best predictive tools available. One question we get asked a lot is about investing in coastal areas and we’re especially thoughtful about these investments. We're also starting to consider the role we can play as stewards of a growing portfolio of land, a proposition we’re eager to explore further.
From a social perspective, inequities can take many forms and historically have been directed against many different individuals and groups. The lived experience of our Black colleagues deserves our focused attention, as does the experience of every group that has historically been disadvantaged. We should all be vested in creating a culture where people can be themselves and bring their best. At iStar and Safehold, we’re committed to doing just that, not only because it is right but because it is the only way to create a high-performance culture, one that gets the best out of its people and creates the best business outcomes.
DEI is not an adjunct to what we do, it is at the heart of everything we do. Everyone should be valued based on their contributions, not on any other factor. When a company allows microaggressions to go unchecked or doesn’t provide the support and training necessary for its employees to understand how DEI dynamics play out in the workforce, you risk diminishing or losing good people, in turn limiting your potential as a company. Ultimately, we’re focused on creating a company and a culture we’re all proud to work within, one with high aspirations for ourselves and our society.