Safehold Inc. (SAFE) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to Safehold Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. At this time, for opening remarks and introductions, I’d like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations & Marketing. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today for Safehold’s earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; and Marcos Alvarado, President and Chief Investment Officer. This morning, we plan to walk through a presentation that details our third quarter 2019 results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investor Relations link. There will be a replay of this conference call beginning at 12.00 pm Eastern Time today, and the dial-in for the replay is 1800-585-8367 with a confirmation code of 6795893. Before I turn the call over to Jay, I’d like to remind everyone that statements in this earnings call, which are not historical facts, may be forward-looking. Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our SEC reports. Safehold disclaims any intent or obligation to update these forward-looking statements, except as expressed or required by law. Now, with that, I’d like to turn the call over to our Chairman and CEO, Jay Sugarman. Jay?

Thanks, Jason. As you saw in our earnings deck this morning, this was an outstanding quarter for Safehold with record investment volumes and growing engagement with high-quality building owners. We introduced our new SAFE x SWAP Program to bring our modern ground lease capital solution to more customers. And with the deals we’ve already announced that are under contract, we set the table for our fourth quarter that is shaping up to be even more impressive, and another record breaking quarter in terms of investment activity. For customers, our message remains clear and simple, Safehold ground lease enables building owners to be more capital efficient and more cost efficient, enabling them to achieve higher returns with lower maturity risk. For investors, this quarter was also a dramatic step forward. As we’ve said before, our goal is to make this very large commercial real estate industry more efficient, provide a better mousetrap and a better user experience to customers, and deliver strong shareholder returns as we scale the business. That has been a consistent theme for many of the biggest and most successful companies in the country, and we believe we are delivering on this promise through our innovative nationally-scaled platform that is seeing accelerating growth and demonstrating that the value of a diversified portfolio of modern ground leases is far more than just the value of any individual ground lease. With several high-profile deals now under contract, we are once again raising our investment guidance for the year with an estimate of $1.5 billion. This is well above our guidance of $750 million at the beginning of the year, and the increased guidance of $1 billion announced last quarter. We’re also continuing to make significant progress on the capital side of the business. Our capital markets team has created a long-dated funding strategy that locks in attractive financing rates custom tailored to our asset cash flows and captures the benefits of match funding. Our weighted average debt maturity is now 25 years, and we expect it to reach 30 years in the near future. Our equity investor outreach also continues to grow and our team has begun highlighting Safehold’s unique position in the market, combining very strong growth metrics and a very safe investment strategy to generate an intrinsic value that we believe is well above today’s share price. With the successful $265 million equity raise in August, a market cap now well above a $1 billion and trading volume and shares increasing significantly, we are confident more investors will find the above benefits to be quite appealing. With all of that, let me turn it over to Marcos to go through the quarter in more detail. Marcos?

Thank you, Jay, and good morning, everyone. Jay highlighted many of the significant milestones we’ve achieved this quarter. So, let’s begin on slide five to drill down into some of the details. Revenues for the third quarter grew to $22.3 million, nearly doubling from the same period last year, while net income grew to $5.4 million, 170% increase year-over-year. These results were driven largely from the substantial growth in our portfolio. Earnings per share for the third quarter were $0.15, representing a 36% growth from the same period last year. Of note, third quarter earnings included a $2 million charge associated with the prepayment of short-term financing, which was replaced with 50-year financing, as well as approximately $800,000 of joint venture costs associated with the for 425 Park Avenue transaction, which is expected to close in the fourth quarter. Refinancing allowed us to pull out $50 million of incremental proceeds to deploy into new investments, highlighting the value embedded in our assets. Excluding these charges, earnings this quarter would have been $0.23 per share and $0.72 per share year-to-date. Additionally, per share results were impacted by the timing of our $265 million equity offering, which was not fully invested at the end of the quarter. Slide six highlights our significant investment activity over the quarter. We signed and closed a total of $1.3 billion of new ground leases, a record quarter, demonstrating the increased market adoption as customers continue to recognize the benefits of our solution. You can see the key investment metrics on these transactions on the bottom half of the slide. Some of the ground leases we acquired this quarter contained archaic provisions like fair market value resets. Because fair market value resets are unknowable, GAAP attributes no value to them. However, these fair market value resets can be extremely valuable to SAFE. Our underwriting is based on the assumption that land value grows 2% annually. When attributing value to fair market value resets using this assumption, the investments have an effective yield of 5.3%. Rent coverage and the percentage of combined property value are 4.2x and 36% respectively, consistent with our strategy of creating low-risk cash flows. On slide seven, we feature four large ground leases we recently announced as a Safehold breaks into a new tier of asset quality with an established institutional customer base. These four assets, which include ground leases under 425 Park Avenue, and 135 West 50th Street in Midtown Manhattan, 195 Broadway in Downtown Manhattan, and the Alohilani Beach Resort represent trophy assets in key markets, totaling approximately $1.1 billion in assets, net of our joint venture interest in 425 Park Avenue. After announcing these three large Manhattan transactions, we have seen a nice pick up in reverse inquiries from global institutions interested in learning how Safehold can help structure value-enhancing capital solutions. Turning to slide eight, I’d like to walk through the Alohilani transaction in more detail and how it led to the creation of our SAFE x SWAP Program, which should feel further growth. As some background, Alohilani Resort is located along Waikiki Beach in a well-located strip of beachfront hotels in Honolulu, Hawaii. The program is centered around customers who are subject to existing archaic ground leases that are either on the market for sale or which the customer has an option to buy. In this case, the customer reached out to see if they could create a better, more modern structure for them in connection with the ground lease becoming available for sale. We partnered with our customer and were able to purchase the ground lease and simultaneously swap out uncertain and ambiguous provisions for a transparent Safehold lease with known fixed economics. The creation of this program illustrates how Safehold is continuously finding innovative ways to deliver better capital, creating value for our customers, and unlocking new avenues of growth for shareholders. Moving to slide nine, we illustrate our portfolio growth. As we have noted in each recent earnings call, our portfolio continues to grow rapidly. Pro forma for the $934 million of transactions expected to close in the fourth quarter, our portfolio stands at just $2.5 billion, which represents 7x growth, since we went public. Last quarter, we updated our 2019 investment target from $750 million to $1 billion, and as Jay mentioned, we expect to exceed that in the fourth quarter. Safehold’s platform now spans across 24 markets across the U.S., including our expansion into Austin, Texas; and Honolulu this quarter. Each day, our investments team continues to make significant strides in educating the marketplace and growing our brand’s footprint. Slide 10 shows a snapshot of our current capital structure. In the third quarter, Safehold’s follow-on equity offering generated an additional $265 million in equity capital to support the funding of new deals, creating $845 million of total book equity at quarter-end. We currently have approximately $775 million outstanding debt, inclusive of our financing on the Alohilani that closed subsequent to the end of the quarter. During the quarter, we refinanced short-term debt with a new 50-year financing that included our custom tailored structure. As I previously mentioned, we were able to pull out an additional $50 million of equity through the debt origination, which when levered to 2:1, provided an incremental $150 million of purchasing power. This financing transaction demonstrates our continuous improvement on the liability side of our balance sheet, along with the value embedded in our portfolio. Today, our weighted average cost of debt is 4%. And while we fundamentally believe that the more important metrics are the effective yield of our ground leases versus the effective interest rate of our debt, our step rate debt structures mean we currently pay a cash rate of 3.4% versus the cash rate on our ground leases of 4%. Our recent financings have extended our weighted average debt maturity to 25 years, substantially reducing interest rate risk. We’ve also lined up and rate locked long-term financings for all of our announced deals. As a result, we currently have sufficient capital to close all of the pro forma deals through the year-end and our timing for raising additional capital will be largely predicated on how our pipeline shapes up. Separately, based on the commitments we have received, we expect to amend and expand our revolver capacity in the fourth quarter to $525 million from $350 million with the addition of two new banks to further fuel our growth. Moving to slide 11. I’d like to take a moment to explain in a little more detail the separate components of value in our ground lease portfolio. The first component of value is the bottom line cash flow our portfolio generates, which includes all of the rent payments over the life of the lease as well as the cost basis or par. Secondly, we track the unrealized capital appreciation or UCA, which represents the value of the bricks and mortar on top of our land, based on the reversionary right at the end of the ground lease. Pro forma for the deals we’ve announced, UCA stands at approximately $4.5 billion, which is more than 10 times where we stood when we went public. As disclosed in our 2018 proxy, the Company created a wholly-owned subsidiary called CARET that houses a component. While we believe this represents a substantial store value for shareholders, stock price is not yet attributed much, if any value to UCA. Accordingly, the Board introduced a shareholder approved management incentive plan last year with the goal of aligning management with shareholders in order to deliver both, significant stock price appreciation and to crystallize the value of UCA. Under this plan, management can earn up to 15% of UCA, based on achieving share price hurdles ranging from $25 to $35 per share. These hurdles represented approximately 45% to 90% appreciation above where the stock price was trading when the awards were granted. Based on the share price appreciation through the end of the quarter, management invested 7.5% of UCA, a portion of which remains subject to forfeiture based on time-based service conditions. Safehold shareholders continue to own all of the remaining UCA that management has not earned. And while we are pleased with the gains in our share price, we have much work to do in order to unlock and crystallize the substantial store value for our shareholders. In conclusion, this was a breakthrough quarter for Safehold. On the investments end, we achieved record originations, accelerated our portfolio growth, we’re unlocking new opportunities with SAFE x SWAP and have attracted adoption from large scale world class customers seeking a better way to unlock the value of their land beneath their buildings. On the liability side, we are breaking through with longer debt maturities that are accretive on a cash-on-cash and effective yield basis. And with investors, we successfully completed our first follow-on equity offering and the stock continues to be one of the top performing REITs year-to-date. Looking ahead, we anticipate the fourth quarter to be strong as we close these announced deals, and continue our mission of revolutionizing the way real estate should be owned. With that. I’ll turn it back to Jay.

Thanks, Marcos. Just a few couple final comments for me. There is a lot of missed information out in the world regarding ground leases. The old archaic ground lease business has almost no relation to what Safehold is doing. We continue to educate the market and are pleased with our progress to-date. Likewise, we’re continuing to educate the market on how to best value the business we are building. While our business is unique, the investment ideas at its core are time tested and proven, and the intrinsic value calculation for the cash flows on a diversified ground lease portfolio is relatively straightforward and demonstrates quite powerfully the value we are creating for shareholders. What’s also exciting is the potential capital appreciation we are banking for shareholders every time we add an asset to our portfolio. This portfolio effect is one that will come into greater focus as we scale. And as Marcos pointed out, we’re committed to figuring out how to capture and crystallize this value, so it can be reflected in the share price. If we can do that successfully, we think shareholders will be very happy. And with that, operator, let’s go ahead and open it up for questions.

Thank you. [Operator instructions] Your first question comes from the line of Zach Silverman from [indiscernible]. Your line is open.

Hi. Thanks, guys. Can you give some more color on the SAFE x SWAP Program? I mean, specifically, you mentioned the fair market value reset, and what kind of other language do you guys look forward to replace? And how does the rent bump structure compared to originated ground lease?

So, a couple of things, starting from the biggest issue, obviously, fair market value resets create probably the most difficulty for modern financial markets and future buyers to get their hands around. So, that’s an easy one. But, anything that was created or written 30, 40, 50 years ago, probably doesn’t fit in the modern insurance markets, so, casualty and condemnation type provisions. There’s just a whole litany of modernization that needs to take place in ground leases. So, what SAFE x SWAP can do is, not only fix some of the bigger obvious issues, but a lot of the more subtle and nuance issues that we as a lender and we as a buyer and seller of real estate, realize are holding back the potential of this better capital solution. So, it’s not just one or two things, there’s a whole bunch of them. But, our legal team works with lenders and buyers and sellers every day, and we’re continually improving some of the ground lease provisions that we think we can make fit very naturally and very easily in today’s markets.

As it relates to the economics, what we seek to create is consistent with our portfolio. So, 5.5% ROAs on 99-year duration assets.

Okay, great. And switching gears, I guess, after the Honolulu deal, it’s about 13.5%, 14% of your NOI. How do you guys think about this market, when you eventually reach a critical mass?

For which market?

Honolulu. Sorry.

Honolulu? Okay. Yes. Look, I think, a couple of things. From a real state perspective, continue to be one of the strongest hospitality markets in the country, constrained supply, very high occupancy rates. We are seeing great elevation as more and more properties are going through the same thing that Alohilani did, which is really meeting the needs of the customers of today and tomorrow. So, we think, it’s one of the stronger hospitality markets from a supply-demand standpoint. And long-term, we’ve done a lot of studies on its ability to be protected in any sort of climate change outcomes, and we’re comfortable that there are sufficient long-term protections in place.

And on a pro forma basis, the transaction should be closer to 7.5% of our net income, fourth quarter.

Okay, great. And then, after three or so years of operations and being in the ground lease market, do you notice an influx of competitors, or do you see any momentum in terms of potential clients approaching you to execute the ground lease with you guys?

Look, on the competition front, this is not an easy business to launch. We spent significant time and candidly a lot of capital, a lot of money to figure out how to launch it to spend the time to educate the market, understand those nuances, those subtleties to work with dozens and dozens of institutional lenders to understand their particular needs and nuances. So, we have not yet to-date seen anyone really begin to focus and certainly no one on a nationally scaled type platform. Individual ground leases that do come up for sale, which represent part of our business, we do see some competition. But again, it tends to be one-off and it tends not to even sort of be thinking about it as a business and looking at it as simply a one-off investment. What we are setting out to do is demonstrate the difference between the value of a single asset and the value of a business that can actually deliver this capital on the de novo basis to all building owners. And I think it’s just a fundamentally different mindset that we have not yet seen any competitive alternatives really show up.

Your next question comes from a line of Collin Mings from Raymond James. Your line is open.

First question for me, just as far as asset pricing, I mean, just given the 10 years dipped a bit since this summer, how has that impacted negotiation on potential deals? I know, in the past, you’ve highlighted, you got about 3.5% as a typical starting yield. But, just as you’re working on transactions right now, do you see revenue that could actually be below that in the current pipeline?

No. I think, the 3.5% benchmark that Jay has laid out in the past is consistent with what we’re achieving today. Our primary competition is the fee financing market, and ultimately, at the cost of our liabilities has dropped somewhat as well. So, we maybe selectively would drop below 3.5% for the right high quality asset, but keeping pretty consistent with that.

Yes. I think if you look at our basic construct, it was, can we create 5.5% ROAs and fund them on a long-term basis at 4.5%. So, we create 100 basis points spread and lever 2 to 1. That simple math for us was really compelling, given the AAA nature of the cash flows we’re creating. What we’ve seen is an opportunity to actually do better than that on our debt side and we do try to pass on some of the value we’re creating as we scale the portfolio and get the economies of scale on the debt side in the form of attractive financing for them. So, as Marcos said, as long as we’re beating that 100 basis-point benchmark and creating a better alternative to their fee financing solutions, we’re able to attract some of these high-quality customers with what we think is just a better mousetrap.

Got it. Also, as it relates to deal flow and a potential future activity, just given maybe the success of 425 Park, when that JV is set to close in the fourth quarter, are you seeing very many other opportunities on the JV side, moving forward?

Look, we don’t want to give any of the deals we’re doing away. So, the nature of 425 is just such a large asset that we felt it was prudent for shareholders and for our portfolio diversification to bring in one of our longstanding partners and give them a look. I think the quality of the asset speaks for itself and the fact that they’ve invested several hundred million dollars side-by-side with us, certainly a validation. But, we didn’t need that validation. We know these ground leases are very, very valuable. And so, I don’t think you’ll see us do that unless transactions are very, very large or create some level of concentration that we prefer prudently to just pare back. So, it’s not a core part of the business, but it’s certainly nice to know we have co-investors who are very, very interested in participating with us.

Okay. And then, moving to just kind of the capital front, just in the prepared remarks, if I understood them correctly, you believe you have the capacity to close on the roughly $900 million of properties under PSA. Is that correct?

Correct.

Okay. And then just maybe in context of that, just maybe remind us of your leverage target, any sort of potential capacity that you would see beyond what’s under PSA, just given your current cap structure?

Yes. Look, I think, when we did the raise in August and raised our guidance, we felt comfortable continuing to accelerate the machine, and we put enough capital weight to do that as the team is out and building the 2020 pipeline, obviously at some point we’re going to prefund that. So, it’s going to be a little bit data dependent, a little bit of pipeline dependent. But, I think the punch line for us is, keep the team going as fast as they can. We think, they’re creating enormous value by doing smart deals with really smart customers. And so, we don’t want to ever slow them down. So, we’ll figure out an appropriate time to make sure that we have the capital to fund our 2020 plan as well.

Okay. I appreciate that, Jay. I’ll turn it over.

Thanks.

Your next question comes from the line of Rich Anderson from SMBC. Your line is open.

Thanks. Good morning, everyone. Hey. So, on the fair market value situation where you estimated 2% growth in the land, and then in reference to the SWAP program, why would you not or do you plan to change the structure of those inherited fair market value situations like you did in Hawaii?

You’re way ahead of us. So, the four large transactions on the page two were new originations, completely de novo ground leases. Two certainly have the potential to be SAFE x SWAPs, one was really our first large-scale SAFE x SWAP, but it definitely sets the template for doing it again. We have an interested customer for 25 Park and creating optimal maximal value for themselves. And certainly a SAFE x SWAP could make a lot of sense there. But, we can’t really have the conversation, until we’re deeper into the closing process.

Fair enough. Thanks very much for that. So, you mentioned getting some reverse inquiries, now you’re getting more high-profile deals done, particularly in Manhattan. Are any REITs coming to you, or public companies?

I would say, the REITs are somewhat more selective given their leverage targets. So, it has been more on the private funds side, so large global institutions, core opportunistic fund vehicles.

Okay. The effective yield, absent the fair market value situations below 5 for the activity in the quarter, obviously below your target, is that just a function of the scale of these deals and you expect -- you are not kind of resetting your effective yield math on a go forward basis, or are you?

No. That’s just a function of the large transaction that has the fair market value reset.

Okay.

So, the way we think about it internally is it’s really a 5.3 on those new acquisitions, new originations, not a 4.9.

Okay. Last for me, on the LTIP program. I know you’re trying to unlock the value and get it into the stock of the unrealized capital appreciation, but are you saying just incentivizing management, vis-à-vis the UCA is kind of the dotted line between the stock price and the unrealized capital appreciation or is there more that I’m -- about that program that I’m missing in terms of why you guys getting paid will create more stock price appreciation? I’m not being tongue in cheek. I just want make sure I understand the mindset.

Yes. Look, I think, Marcos laid out in his comments that we don’t think we’re getting or shareholders are getting any benefit right now from the value we think is being created. A lot of people -- again, you probably heard us talk about this, the value of a single residual 99 years in the future is not the proper way to think about the value of UCA. But, we’re going to have to convince the market and show them results that enable us to crystallize that value. That is probably one of the biggest structural incentives that we have for shareholders to generate the most value. It’s our job everyday to try to figure out how to do that. And we think, we’ve made an enormous amount of progress. But, first and foremost, it was make the shareholders win. And as a combination of both the share price targets that were mentioned, which were 50% to 100% above where the stock was trading but also this opportunity to capture the second component of value in a way frankly we don’t think the market understands and to create a directly aligned incentive, I would say, if you can turn that into a very meaningful number, the incentive pool will be 15% of whatever you can turn it into. If it’s zero, then the incentive pool is zero. But, if it turns into something really valuable for shareholders, you can participate in that value-creation. We think that kind of aligning structure was very well thought out by the independent directors with a very specific target incentive tied to share price performance and really revolutionizing how people think about the value that can be created through these ground lease and ground lease future ownership positions. So, it’s a big task ahead of us. We do think the results that you see are beginning to give people some sense of why we think shareholders have an enormous store of value that most if not all are kind of looking past because the cash flow component is so compelling here, you don’t really have to value the ownership residual positions. But, trust us, we are going to focus very hard on helping people understand what we believe. And we don’t think these are worth zero. If they are, we failed ourselves and we failed shareholders. But, if we succeed, boy, will shareholders win.

Your next question comes from the line of Nikita Bely from JPMorgan. Your line is open.

Can you talk about what drove the $1.1 million of other income in this quarter, and is that recurring?

Let’s take other income. We had a lot of cash sitting on the balance sheet from the rays. So, you’re actually starting to see some decent with interest rates and the LIBOR in the 2% range. We actually made some interest income there. I think, that’s probably the bulk of the change.

What’s the interest rate that you’re getting on the cash balances, curious?

I’m looking around the room. 2% is my guess. But, I don’t know

Okay, got it. And I want to understand a little bit about the depth of the market for the growth-linked debt that matches your lease cash flows. Can you talk a little bit about it?

Look, we think, our capital markets team continues to create really innovative, bespoke structures with a range of capital providers, right now, all domestic. We’ve not yet reached out to either the Asian markets or the European markets, where we think we’ll get the same kind of reception. Remember, we are offering long-term, call-protected, high-quality cash flows that really in our minds represent almost AAA risk. And so, to have inflation protected cash flow streams, because they actually increase over time, to have that AAA safety at 65% of our basis, which we think represents AAA safety. This is pretty interesting instrument for a lot of long-dated capital providers, whether that’s insurance companies or pension funds or pick your long-dated provider. Right now, I think, the goal has been to work all the kinks out. And what we’ve seen in the last couple quarters is an expanding roster of people interested in having this conversation, understanding what we’re building. Again, not just looking at single assets and going, is this all we’re doing, but understanding we’re building a revolutionary new way to think about capitalizing real estate. And I think that is starting to draw those conversations in from more and more people. So, I know Brett’s [ph] really pleased with the number of conversations he has going, number of transactions we’ve closed with different providers, but we’re still early stages. As we get bigger, as we scale, I think, you’ll see us go well beyond what we’re talking, the group we’re talking to today.

And on this type of debt, I mean, what are some of the current terms in terms of like the duration, LTV? Maybe, if you could comment on the going-in spreads and then the average spreads to U.S. treasury that you’ve done right now?

Yes. Look, I think, you’ll see as we come out of the fourth quarter, and this next series of financings, a statistically significant sort of set of new and real time financings. So, I think, you’ll get a really good sense of that. But as we mentioned in this quarter, our average maturity right now is 25 years, it’s headed to 30. When we close those deals, we will give you some specific metrics at the end of the fourth quarter. We are increasing the average maturity of the new financings. So, most of them will be over 30 years. You’ll see cash cost in year one be as much as 50 to 100 basis points lower than the overall cost of the debt. Those are the kind of metrics that I can share with you. And in terms of LTVs against the value of the building and the land together, they’re going to represent 20% to 25%, maybe a little higher as we get more scaled and more diversified. That represents about 2:1 leverage against our 0% to 35% position. So, that math also works together to create a very low LTV for our lenders, a long-term financing strategy that should eventually be 30 years plus, all-in cost of debt that we try to make sure is 100 basis points inside our all-in return on our assets, and a customized cash flow structure that matches our assets by starting at year one cost and then slowly increasing.

And then, if I could for one more in -- on the recent deals that you’ve done, are there any material changes that you see in the next 5 to 10 years in terms of your rent bump schedules? Like, is anything happening differently in the out years versus some of the other stuff that you’ve done?

It’s consistent on the newly created Safehold product, it’s 2%, annual bumps.

I think, we should point out there, when we talk about our ROAs and our yields to maturity, we don’t include the CPI look back bumps that we have in a lot of our transactions. So, if CPI was actually greater than 2% in those outer years, we’re understating all the numbers we’re giving you. On the asset side, our financings do not have that provision. So, just, we don’t want to try to guess and we don’t try to estimate what that might be worth. I just want to point out that we’re not calculating the benefit of our CPI look-backs in any of the numbers we’re sharing on the assets.

So, it’s 2% on a minimum. And then, if there’s significant inflation in the out years, you will also pack to point out to that?

Yes, correct.

So, it doesn’t create uncertainty around the duty that causes problems, but we do have a nice pick up, if inflation were to be higher.

Your next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is open.

So, with regards to the joint venture on 425 Park, is there any color you can give on the structure at this time? Is this going to be a pure 55-45 split or is there some kind of promote structure to you guys? Any color there that would be helpful.

It’s a pure 55-45 split.

And then, with the CARET program, what’s really the nominal impact of that today and how should that impact G&A going forward?

There’s no impact, there’s no cost. So, it is a pure incentive plan that says if you can create value for shareholders, you can participate. I think. When we created the program, there was a de minimis charge that’s probably flowing through. But, it was quite small and it’s over, forget how many years, four years, I think. So, as we grow, it’s going to be just the de minimis number. I’m sure, our guys can give you the actual numbers.

And then, one last one with the kind of -- I know you highlighted New York transaction and the Honolulu transaction. But, can you maybe give some more color on some of the smaller transactions, Austin? So, I think when you close, but there’s also some of the prior press releases mention of a potential deal in Phoenix. Just the relative size of those and maybe what kind of percentage of featured deal flow do you expect is going to be kind of smaller one-off deals and what percentage is going to be some of these bigger kind of central business district type transactions?

Probably -- because we have such success with some of the Manhattan deals, we probably are giving short shrift to the rest of the third quarter transactions, we are really excited by. Austin as a market we really like, both near-term and long-term. The transaction there is in a very dynamic market, the new up and coming tech location for most of the Fortune 10 companies that are moving into Austin. So, that’s a brand new building with a 15-year A credit in there, across from a lot of development. So, we probably should make you guys aware that the rest of the deals we are doing are also once we’re quite excited by. The Arizona deal is with a new customer, we’re really excited to be in business with, in a great location, again another new asset. This is a student housing asset. That’s a business that I think there’s opportunity in. And Marcos, you’re seeing it every day.

Yes. Just to echo what Jay said, the Austin asset is brand new, student housing asset sits on ASU’s campus, brand new asset. We did a large office building in New York, MSA as well this quarter. We also did a smaller student housing deal in Riverside, California, high-quality as well. So, the quality assets and the quality of customers, although they are smaller than the large transactions, it’s the same strategy.

We do try to think about the businesses as sort of a gateway city, trophy assets, but the flow business is equally important, and the teams are out there constantly mining. And again, we think this business is really built on the customer proposition. We’re making the pie bigger. We’re making returns better. We’re lowering risk. And that’s a proposition we can take a lot of different places.

Understood. That’s it for me. Thank you very much.

[Operator Instructions] Your next question comes from the line of Jade Ramani from KBW. Your line is open.

Thanks very much. I wanted to see, if you could comment as to whether SAFE would require additional common equity to execute the deals currently under contract?

No.

Yes. I think, as we answered earlier, Jade, the pipeline is really going to dictate, when we need capital and how much we need. And we’re just beginning to put together our 2020 plan and will be thoughtful about how to fund that plan and the 2019, we feel comfortable we’ve put that capital in place.

Okay. Have you seen any compression in the market with respect to ground leases? And a follow-up to that, is it reasonable to assume lower yields on some of the trophy assets that you’ve been entering into?

It’s interesting. The two de novo asset we did are right down the middle. I think that’s kind of ROAs in the 5.4% range. The SAFE x SWAP assets, again customers are coming in with an existing cost structure. So, we don’t have quite as much flexibility. We try to reach the same ROA targets, but we try to get there in a slightly different way, just so we don’t change the rent structure overnight and in a dramatic fashion. But, again, the business is really about creating these 100 to 125 basis points spread to our debt. And I look to our capital markets team as much as to the third-party financing world to understand where values are and what we need to achieve to make our shareholders what we think are enormously excess returns for the risk we’re taking. So, we can move on a trophy asset in terms of our ROA targets if Brett and the team tell us that they think the financing will also be commensurately higher. So that’s really the driver. But, I would tell you, on the two non-SAFE x SWAP type assets that we just created, they are right sort of down the middle of our core targets.

And with respect to the New York office deals completed or under contract, with respect to the underlying tendencies, can you comment as to whether there is any WeWork or Coworking exposure, and if that was part of the lease-up strategy that the underlying sponsors had in mind?

There is no WeWork exposure in those transactions. But, again, I think, it’s important to understand where we sit in the capital stack, at 35% of value, whether there’s Coworking or not, we feel very secure. Our basis per foot in these New York assets is below land value.

Okay. And then, turning to the financing of the Company, it’s good to see the duration of the liability structure continue to extend. You’re covering a variety of finance companies; duration gap is definitely something I’ve always been watchful of. How do you get comfortable with that duration gap between the least maturity profile and your debt maturity profile, considering we could be through multiple interest rate cycles and then, in turn grants that the ground lease rents are going to continue to increase?

Yes. Look, we run a lot of sensitivities around where match funding is most efficient. And we think the 30-year eliminates a lot of the interest rate risk. Our typical models run the refinancing profiles at hundreds of basis points above today’s rates. The impact on the value-creation is really quite small after 30 years. So, you can stress that pretty hard. And you’re not really impacting the value we’re creating for shareholders. So, I would tell you, run the numbers, happy to share with you our sensitivities. But, if you can get your weighted average maturity out for 30 years, the NPVs that you will run off our cash flows, using almost any consistent refinancing assumptions, conservative refinancing assumptions, that’s not really the risk factor. I think, it’s the companies that take short-term debt or take risk in the very near term or intermediate term where that can be a real problem. If we can move our liability structure out for 30 years, we do not have that problem.

Okay. And just also wanted to ask about the CARET. Does iStar’s actual investment in SAFE, purchases of SAFE stock as well as ownership interest in the Company qualify under iStar’s iPIP program, the iStar long-term incentive program?

At iStar, if we make investments of iStar’s capital, it goes into an iStar program. And stock price incentives at Safehold are different. They were created by Safehold’s Board.

Okay. But, iStar’s capital investments into SAFE’s stock would qualify for the iStar asset, assuming the positive return above the minimum target?

Correct.

Okay. And then, lastly, given that the growth in SAFE’s market capitalization and your bullish outlook for the business, at what size point for SAFE’s common equity market cap would some kind of internalization, recombination transaction makes sense, do you think, or is it really a function of iStar’s legacy assets being runoff and that dynamic playing out?

Let’s be clear what the mission here is, it’s to revolutionize the $7 trillion industry. We think that will create by far the most value for shareholders across Safehold and iStar. So, they are very aligned at this point in trying to figure out how to build a big, powerful, market changing business. So, we haven’t spent a tone of time worrying about how to change the architecture today that is succeeding. And what we’ve said in the past is, there will come a time where we think that conversation could take place. It is not taking place today. And you’re right that iStar would have to see a lot of legacy assets be eliminated and a lot more capital market flexibility before that would be something that would make any economic sense. But, Jade, what I would continue to focus you on is the business that we are building is dramatically undervalued in our minds. Everything else is around the edges. Nothing else matters. If we scale this business and people understand the intrinsic values, that is where the pot of gold for shareholders lies. And that’s our mission critical focus, both for iStar and SAFE. And I think that this quarter represented for us a really breakthrough quarter. On ideas that we had and expressed that people said, can you really do it, can you really generate a results? I hope you’d look at the results of this year and next quarter and determine whether you think that’s taking place.

Okay. Well, thanks very much for taking the questions.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Great. Thank you, everyone. Thanks for your participation. If you should have any additional questions on today’s earnings release, please feel free to contact me directly. Can you give the conference call replay instructions once again? Thanks.

As a reminder, the recording for this call will be available at 12 o’clock Eastern Standard Time. Please dial in 1800-585-8367, and use conference ID 6795893 to listen. This recording will be available until November 7th.