Better capital and better returns for owners, developers and Operators of high quality commercial real estate.
To our valued investors, customers, employees and friends:
Every revolution starts with the firing of a first shot. On June 21, 2017, Safehold fired the first shot in a revolutionary new approach to real estate ownership.
Like many revolutions, this one was born out of a desire to make things better — to create a better, more efficient way for building owners to unlock the value of the land beneath their buildings, enabling them to earn higher returns with less risk. Our rallying cry was a challenge to the status quo: “Why would the investor in a building also want to be the investor in the land underneath it, when the two investments represent completely different skill sets, business strategies and expected returns?” And our method was clear and simple — modernize the archaic ground lease structure historically used to separate these investments and make it leasehold lender friendly, cap rate neutral, and most importantly, value creating for our customers, the owners of high quality commercial real estate.
Looking back on 2018, I am happy to report significant progress in our mission and strong growth in our portfolio. Our collection of ground leases has grown from $350 million at IPO to $1.0 billion as of the end of February 2019, a CAGR of over 80%. We now have ground leases in many of the top markets in the country and are poised to enter several new markets during 2019. We have shown how our modern ground lease works with all different property types — multifamily, office, hospitality, industrial — and provides better capital at many different points in a property’s life cycle — at construction, at recapitalization or refinancing, or when a sale or purchase is planned. The strongest indication that we are succeeding? Many of our building owners, having done their first deal with us, turn around and want to do more. In fact, we completed 10 deals last year involving customers who have done more than one ground lease with us.
It should come as no surprise that if you deliver a better product (better capital) that enhances returns and lowers risk, customers will want to do more business with you. We are especially pleased to see this dynamic play out in one of our earliest target markets, Washington, D.C. Beginning with the structuring of a Safehold ground lease on a newly built, Class A multifamily asset in January, we saw steady interest from property investors looking to unlock the value of their land. All told, we closed 5 new deals in D.C. through the course of 2018, culminating in a new $150 million Safehold ground lease closed in December on a trophy office building on Pennsylvania Avenue, located in close proximity to the White House, the Washington Monument and the Capitol.
Bottom line, Safehold ground leases are better designed, work better with today’s real estate finance and investment markets, and have the potential to be a significant new value enhancing tool for real estate owners of all kinds.
The Safehold Difference
We often get asked what makes a Safehold ground lease different from an old fashioned ground lease. Both separate the land from the building, and give the building owner an ultra long lease term to profit from the building operations and future sales. But at Safehold Inc., we work to carefully create a properly sized, properly structured ground lease to unlock the most potential value possible for the building owner, and believe this customer-centric approach is so different from most traditional ground leases that we have given our structure a completely new name — a Safehold. Here are some other differences:
The biggest issue with ground leases in the past has been a disconnect between the interests of the landowner and the building owner, usually leading to the ground lease having provisions that impaired the value of the building, rather than enhancing it. We have studied all the value destroying provisions in old ground leases and eliminated them — no fair market value resets, no ambiguous provisions, no hidden fees or costs. We have worked with a diverse group of leading market lending sources to make sure leasehold lenders are more than comfortable providing market competitive terms when a Safehold ground lease is in place; and we have built a knowledge base demonstrating that buildings on a Safehold ground lease trade at the same or similar cap rates to buildings still tied to the land. Bottom line, Safehold ground leases are better designed, work better with today’s real estate finance and investment markets, and have the potential to be a significant new value enhancing tool for real estate owners of all kinds.
The iStar Advantage
When you have a better product, you want to get it into the market as fast as possible and in front of as many people as possible. This requires both capital and human resources and we are fortunate iStar is both our largest shareholder as well as our investment manager, so we can both target the same goal — get Safehold to scale as quickly as we can. The capital support iStar can provide, as evidenced by its $250 million investment in January 2019, and the extensive resources and network it can tap into to get our strategy in front of top real estate owners around the country, give us a significant head start on reaching our goal of building a multibillion dollar portfolio.
We also have the benefit of being able to harness iStar’s two decades of expertise in the finance and net lease world in other ways as well. Recently, we announced our SAFE/STAR program where the two companies can provide both Safehold ground leases and either leasehold mortgage or leasehold equity capital in the same transaction. We are already seeing the benefit this brings and the incremental deal flow we can capture, having closed three SAFE/STAR transactions to date.
The Final Frontier
In some respects, we are not only reinventing the ground lease concept, but also reinventing how investors look at this unique and not-well-understood investment opportunity. Because it has typically been an investment sector dominated by high net worth families, monarchies, hospitals, churches and universities, most of the investing world has never had the opportunity to benefit from the singular combination of safety, income and growth that a diversified portfolio of ground leases can provide. Through Safehold, we will bring these desirable attributes to the much wider world of investors who seek them, and as we build scale and diversity in our portfolio, enable our shareholders to benefit from the value we believe is embedded in this unique investment strategy.
Thank you for your interest and support of our revolutionary new business.