Safehold’s Ground Lease Remains Most Efficient Capital Solution Despite Headwinds

In the midst of a tumultuous year for the markets, Safehold (SAFE) closed over $1.3 billion of ground leases through the first three quarters of 2022. Partner Insights spoke to Marcos Alvarado, Safehold’s president and chief investment officer, about the company’s progress in 2022, the impact of the current environment, and how the perception of ground leases has shifted over the past five years.

Commercial Observer: Safehold’s modern ground lease portfolio recently surpassed $6 billion, and you’ve closed over $1.3 billion in 2022. Talk a bit about Safehold’s investment activity in 2022.

Marcos Alvarado: 2022 has been a tumultuous year. I don’t think any of us anticipated the reaction to inflation and how that’s rippled through to the capital markets, and our investment arc has tracked that trajectory. Our business works very well when we have functioning capital markets. Over the last few months, those markets have been dysfunctional. When you look at our investment trajectory, at the beginning of 2022 we saw really solid volumes, and we’ve seen those taper off since. I don’t think that’s a reflection on our ground lease product, but a reflection on the broader macro environment. We closed almost $300 million in transactions in Q3 in the middle of that volatility. In Q4, we’ve announced a handful of transactions. We’re active, but we’re being cautious.

What factors have enabled Safehold to continue growing and building momentum despite the market headwinds?

When customers need a capital solution, we are still the most efficient capital in the market, and our customers realize that. We’ve been really focused on maintaining that cost of capital advantage on the liability side of our business, and we’ve been able to translate that back to our customers.

Have these problems with the economy forced Safehold to change the way it does business at all?

Since the beginning of the year, our cost of capital has become more expensive along with the broader market, and correspondingly our ground lease cost has increased for our customers. That being said, when customers look at their alternatives from a capital solution standpoint, they are probably 200 to 250 basis points out. So, we still believe we’re the lowest-cost, most efficient capital solution available to our customers today.

Has this experience been consistent across your customer base? How is it impacting deals?

Yes. We’re all going through this. If you’re a multifamily owner who 12 months ago thought your asset was worth $100, let’s say it’s worth $80 today. They’re going through the psychological impact of, I used to borrow at X, but now I borrow at Y and now my asset is worth less. If you have a view that this is a short-term event, in these volatile moments you may not want to sell or recapitalize your asset. Our customers are going through those sorts of decisions now. But if they decide to, then we’re here to provide them with the most efficient capital solution available.

Safehold has worked hard to educate the industry on the advantages of a modern ground lease relative to traditional capital sources. How would you characterize the understanding and perception of ground leases today?

It’s night and day from where we stood when we started the business. We were a niche and misunderstood product. I think we’re no longer misunderstood, but we’re certainly still in our early stages of adoption. That’s what excites us about the opportunity for our business. We’re seeing it in repeat customers, in the growth of our customer base, in the quality of our customers, and in the quality of our assets. All are trending in the right direction, which gives us tremendous excitement that when we come out of this period, we’ll be able to continue to scale.

What type of feedback do you get from Safehold’s customer base?

The best feedback is proof of concept. I look at how many building owners have done two, three, four, five transactions with us. I also look at our coverage map three years ago and compare it to today — it has dramatically expanded. We’re penetrating new markets. The proof of concept is in the growth. Going from $300 million to north of $6 billion in assets shows you that this is an accretive source of capital.

What’s also encouraging is that customers we transacted with two, three, four years ago are selling and refinancing their assets, and they’re making money. They’re realizing the dream we pitched them a handful of years ago when we put the product in place, and they’re coming back to us. We’re seeing that liquidity being demonstrated even in today’s market, which is extremely difficult, as there’s a dearth of capital across the market.

What are your expectations for Safehold in 2023 and beyond, and what do you see as the company’s biggest strengths and challenges for the new year?

We have ambitions to grow the portfolio substantially, and we’re at $6 billion today. We fundamentally believe in the product. We’re solving both ends of the spectrum. We’re innovating on the liability side of our business, and we’re figuring out new ways to innovate across the way we interact with our customers and the way we capitalize our business. We believe the best is still ahead for Safehold.

Our biggest strengths are our people and the intellectual capital we’ve built up from creating a new market sector and working closely with our customers and partners. The biggest challenge is just the overall market. This is an environment where you must be patient, so we’re going to be.

What message would you share with building owners who have yet to consider a ground lease as a means of executing their business plan?

At a high level, this is not the ground lease of your past, so don’t dismiss it out of hand. Take the time to sit with our team, see what we’ve done, and see the liquidity that’s been demonstrated in the marketplace. There’s no reason not to consider Safehold as an alternative capital solution when thinking about capitalizing your project.