Safehold Inc (SAFE) 2017 Q3 法說會逐字稿

Good morning, and welcome to Safety, Income & Growth Third Quarter 2017 Earnings Conference Call. (Operator Instructions) At this time, for opening remarks and introduction, I would like to turn the conference over to Jason Fooks, Vice President of Investor Relations and Marketing. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today to review SAFE's third quarter 2017 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; and Geoff Jervis, our Chief Operating Officer and Chief Financial Officer. This morning, we plan to walk through a presentation that details our third quarter results. That presentation can be found on our website at safetyincomegrowth.com in the Investor Relations section. There’ll be a replay of the presentation beginning at 1 p.m. Eastern Time today.

Before I turn it over to Jay, let me point you to our forward-looking statements disclaimer on Slide 1. I’d like to remind everyone that statements made on our conference call, which are not historical facts may be forward-looking. SAFE's actual results may differ materially from these forward-looking statements and the risk factors that could cause these differences are detailed on this slide as well as in our SEC reports. SAFE disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law.

Now let me turn the call over to our Chairman and CEO, Jay Sugarman. Jay?

Thanks, Jason, and good morning. During the third quarter, we expanded our efforts to get in front of key parts of the real estate transaction world and demonstrate how ground leases can and should be a part of many real estate capital structures. Meeting with the top brokerage firms, active developers and multiple real estate investment firms, supported our belief that we can revolutionize the way ground leases are thought about and employed in providing highly efficient capital to owners, operators and developers alike.

While the pipeline is quite active as the result of our outreach, we are seeing long lead times on getting deals closed due to the education process involved. We definitely expect to see increased investment volumes as our deal teams continue to penetrate the top 20 markets throughout the country.

As I mentioned before, we see 2 main approaches to building the business. The first involves acquiring existing ground leases in whole or part with cash on OP units. The second involves creating new ground leases in conjunction with the sale or financing of existing properties or in conjunction with the development of new properties. And while the second quarter was highlighted by the acquisition of a large existing ground lease, what we are seeing now is that the larger opportunity may very well be in SAFE's active creation of ground leases.

The 2 deals closed since our last call both represent interesting examples of the types of investment we believe we create robust growth going forward. One with an existing relationship and one is part of a new construction project. Both deals benefited from iStar's range of relationships and capabilities and demonstrate pockets of the market we think SAFE should have a significant competitive advantage in going forward.

I'll talk more about how we see the business developing in a minute, but let's have Geoff walk through the quarter in more detail first. Geoff?

Thank you, Jay, and good morning, everyone. My remarks this morning will refer to slides from our earnings release that was posted to our website earlier this morning.

Starting on Slide 3. When we evaluate performance at Safety, we look not only at GAAP net income, but also at non-GAAP financial measures such as funds from operation or FFO and adjusted funds from operation or AFFO. For the quarter, net income was a loss of $721,000, FFO was positive $1.5 million and AFFO was $2 million or $0.11 per share. As we discussed last quarter, our largest asset is the master lease with Hilton covering 5 properties. Our ground lease not only provides for base rent, but also provides for percentage rent, which was $3 million last year. The entirety of percentage rent is booked in the first quarter of every year when Hilton reports the figure to us, leading to lumpy earnings. If we straight line 2017's percentage rent over the entire year, this quarter's earnings would have been higher by $750,000 or approximately $0.04 per share. Net income would have been breakeven per share, FFO $0.12 per share and AFFO $0.15 per share.

Staying on income-related topics, as we promised during the IPO roadshow, this quarter, we paid our first dividend of $0.1566 per share. This includes $0.0066 per share from the shortened prior quarter and $0.15 per share for this quarter's regular dividend. We expect to consistently grow the dividend as we continue to invest the proceeds from the IPO.

Turning to Slide 5. This slide shows a reconciliation of GAAP net income to both FFO and AFFO. For Safety, FFO is simply net income of negative $721,000, adjusted to eliminate $2.3 million of real estate-related depreciation and amortization, resulting in a $1.5 million of positive FFO for Q3.

AFFO is also an important metric for us. AFFO is a metric we use to assess long-term operating performance and is used internally when considering operating performance, debt coverage as well as dividend sustainability and when formulating corporate goals and strategies. As you can see, we have eliminated a $1.4 million benefit from straight-line rent, as well as adding back noncash and/or nonrecurring expenses. As a result, our Q3 AFFO is $2 million or roughly $0.11 per share based on the 18.2 million shares that were outstanding at September 30. With the aforementioned Hilton adjustment, as I mentioned earlier, AFFO would have been $0.15 per share for the quarter.

On to Slide 6. Slide 6 is a simple roll forward of our portfolio, starting with the $481 million 14 asset portfolio at the end of Q2 and adding the periods origination, the $16 million LifeHope ground lease.

Turning to Slide 7 for more details. The first transaction we closed, we referred to as LifeHope. This deal represents a repeat ground lease customer for SAFE and involved a fully pre-leased medical office building in an affluent and growing submarket of Atlanta. The developer is repositioning of former regional headquarters building as part of a larger medical complex and had secured leases ensuring full occupancy on a long-term basis prior to settling on a capital structure.

SAFE presented a 33% of cost, 99-year ground lease and iStar offered a 75% LTV leasehold bridge loan to enable the owner to complete the TI and building improvements prior to accessing permanent leasehold financing. The going-in cap rate on our ground lease was 5.5%, with 2% annual bumps. This is the second deal between SAFE and this developer, and each includes a SAFE ROFO on adjacent developable land.

On to Slide 8. The second deal that we referred to as Great Oaks closed shortly after the quarter end. This transaction also represents an innovative approach that can potentially lead to significant future business. SAFE and iStar again provided a one-stop capital solution to a top-tier developer of multi-family in Norther California. In this one, iStar had entitled land and offered a combination of ground lease and leasehold construction financing to fast-track the purchasing and development of 300 units of Class A multi-family by Fairfield Development and its large institutional partner in the rapidly developing South San Jose market. This 25% of cost ground lease should enjoy greater than 5x coverage upon completion.

SAFE will fund its ground lease in 36 months at the end of the estimated construction period. The cap rate at closing will be 3.75% with 2% annual bumps and 10-year CPI lookbacks beginning in year 20. This transaction and LifeHope are both affiliate transactions, as iStar was the former owner of the Great Oaks site and is the leasehold lender for both LifeHope and Great Oaks. We have a well-defined and strict policy for affiliate transactions, including the requirement to have all affiliate transactions approved by the independent members of each of SAFE's and iStar's Boards of Directors. Both of these transactions received approval from both sets of independent directors.

Moving to Slides 9 and 10. As we grow, we will endeavor to design a portfolio that is well diversified by what we believe to be the most important characteristic of a ground lease, location. As you can see on the map, our largest exposure is to the Los Angeles MSA, and we expect this map to be heavily concentrated in top markets in the United States going forward.

Slide 10 includes 5 additional portfolio metrics that we believe are important, property type, lease duration, exposure to combined property value, rent escalators and cash flow coverage. For all of these metrics, we believe that all of the current statistics are in line with our expectations.

Moving to Slide 11. Slide 11 gives a snapshot of our pipeline of potential new investments that Tim Doherty, our Head of Ground Lease Investments, and his team are pursuing.

As you can see, our pipeline stands at $1.1 billion, with $278 million in active negotiations. The majority of these transactions involve creating new ground leases, an avenue we continue to find rich in opportunity. From a location standpoint, the pipeline is mostly in the top MSAs in the country, and office and multi-family dominate the property type.

On to Slide 12. On Slide 12, we have expanded our Value Bank disclosure. As we introduced last quarter, Value Bank represents a meaningful component of value embedded in our ground leases. It stems from our right as the landlord to gain control of the building at the end of the term of the ground lease. We calculate Value Bank simply as the combined property value or the simple value, less our historical cost in the ground lease. In the past, we provided our own estimate of Value Bank. But as promised, we engaged CBRE to provide expertized third-party appraisals for the combined property value of each of the assets in our portfolio. In total, CBRE appraised the combined property value of our portfolio at $1.5 billion. Taking that value and subtracting our ground lease basis, results in a Value Bank of $993 million or $54.56 per share.

Of course, this Value Bank is just the spot price as of today. Who knows what Value Bank will be worth when the leases expire. For some assets, it will go up, and for others, it will go down. However, we believe that a diversified portfolio of real estate over long periods will track or exceed inflation. If we are right, the Value Bank will provide exceptional inflation index capital appreciation. When you put it all together, we believe that the combination of the SAFE growing and mispriced cash flows of our ground lease plus the land value and the appreciation of the land plus the Value Bank and the appreciation of the Value Bank will equate to extraordinary relative value for our shareholders.

Flipping to Slide 13 that shows our credit metrics. The left-hand table shows that we continue to be conservatively levered at 0.6x debt-to-equity at the corporate level, and our debt represents only 15.2% of the combined property value of the portfolio. The table on the right shows our fixed charge coverage ratio, which stood at 2.1x, and on a look-through basis to the underlying properties at 9.5x.

Slide 14 lays out our existing debt and hedge positions. Our debt is very straightforward. A $300 million undrawn revolver plus a fully funded $227 million 10-year secured nonrecourse financing on an initial portfolio -- on our initial portfolio of assets. As we move forward, we intend to develop a well-laddered long-term financing model for our long-duration assets. Our interest rate hedging strategy seeks to provide us with short and medium-term protection from rising interest rates. In the long run, we believe that our rental bumps will exceed inflation, and therefore, we focus on short- and medium-term protection. Specifically, we have a policy of entering into 13-year hedges against any debt we incur or expect to incur on any assets we acquire.

Lastly, as we mentioned on the IPO roadshow as well as last quarter in the earnings call, we encourage shareholders to let us know if they would like any additional information in our disclosures, as we have committed to providing best-in-class transparent disclosures to the market.

And with that, I'll turn it back to Jay.

Thanks, Geoff. I mentioned our education efforts at the start of the call, and it's worth spending a minute on how we are going to go about that. Education for us is on many fronts. On the deal front, means making sure all owners and intermediaries involved in the sale of existing ground leases are going to make us one of their first calls. I think we've done a good job on this front. It means making sure all brokers in major markets know how ground leases can be used to create a highly efficient capital structure for their clients looking to finance their properties or acquire new properties. We are well into this effort. And it means working with developers in the top markets to show them how ground leases can provide both attractive development capital and be an attractive long-term component of their capital structure. Repeat business will be the reward for the effort we are putting in here.

Education also relates to the investment community. We believe SAFE's unique combination of safety principle, growing income and yield and sizable capital appreciation potential should be a perfect fit in both institutional and retail investor portfolios. We have continued our efforts to highlight what makes this investment class a new and natural part of investors' portfolios, and we will continue to work to expand our reach on this front.

Based on our own conviction, iStar, Geoff and I, purchased $25 million of SAFE stock during the quarter, and we'll work to make sure others understand the compelling valuation of SAFE shares as the business grows.

And with that, let's go ahead and open it up for questions. Operator?

(Operator Instructions) And our first question comes from Rich Anderson from Mizuho Securities.

So on the $25 million stock purchases you mentioned at the close there, that exhausts your allotment. Is there any discussion about expanding that further into the future?

Yes, we continue to look at ways to deploy capital at iStar, and certainly, we think this is one of the most attractive investments out there. So that will be a dialogue once we come out of blackout.

Okay. Second question, in terms of the pipeline, I'm curious what your appetite is for distressed situations, meaning a property owner having some difficulty and uses a ground lease as a way to monetize and recover to some degree. Do you see that type of opportunity out there? And if so, to what degree do you think it'll be a part of the game plan going forward?

Well, I guess, I'd start with where we are in the curve, there are not many high-quality assets in distress, so it's not been a big part of the pipeline as we see it today. I think when you think about what we're trying to achieve, if we find good real estate at a bad capital structure, iStar is pretty good at figuring how to solve those problems for borrowers. And so I'd start with the premise of good real estate, good sponsorship, bad capital structure is something that we could probably find a good solution for.

Okay. And as far as meeting your sort of growth hurdles for this year, is it -- would it be typical for deals to get announced late in the year as sellers sort of punch prior to year end? Is that a typical expect -- or a typical way of the business transacting in a given year?

I think it is true in almost all parts of the market. This is our first year to have the full resource of the company focused on ground leases. We'll see if that dynamic exist here as well. I would say the pipeline's pretty active. None of the players we're involved with seem to have a hard deadline of year end. So I wouldn't say we're seeing a lot of people make that part of the conversation. But it is a natural goal to get a lot of deals in under the fiscal year for a lot of people, so we do expect to have some significant activity in these next 2 months.

Great. And then on the escalators, Geoff, you mentioned 2.8 or showed 2.9 on your Slide 10 as sort of the average right now. We went in thinking 1.5% as a kind of long-term run rate. Is -- are we short on that? Should we be thinking something greater? Or as percentage rent sort of declines as a piece of the pie that maybe 1.5% is the -- a reasonable number to be thinking about?

We see 1.5% to 2% as sort of the sweet spot in the market. So I think our original IPO models had about 1.75%. So we think that still is the long-term reality.

Okay. And my last question is, I see in the AFFO calculation you have the $1.2 million sort of add back management fee noncash. My understanding was there will be 0 management fee for the first year. Can you just explain that to me why there is a cost there, even though it's noncash?

Absolutely. So you're absolutely right, that fee is waived for the first year. GAAP, however, requires us to show it. And the adjustments are made in equity. So it is noncash. It will always be noncash in that when we do start to pay a management fee in the third quarter of next year, it'll be paid in stock as you recall. Between now and then, you'll see the entry, but there will be no cash, stock or other expense associated with it because the management has agreed to waive it for the first year of operations.

Okay. So next quarters we have -- maybe I just blanked out on that, so should we have that number in there for calculating AFFO sort of through the beginning part of next year?

There will be no management fee in AFFO for the first year. We'll back it out for the first year because it's waived. So there is no payment due to the manager. After that, the payment will be made 100% in stock, and it will continue to be added back to AFFO.

I guess, maybe we can take this offline, but will that one -- because the GAAP require you to show it today despite the fact there was no payment, I just want to make sure we have the modeling right, we should not -- that number should be 0 in the next couple of quarters until you start getting paid in stock. Is that right?

It'll be 0. Yes, it will be 0 in AFFO next year.

And Rich, just to clarify, from a GAAP perspective, it will show up in the GAAP financials but it's trued up on the equity account. So we -- it gets kind of refunded on the equity account.

And our next question comes from Collin Mings from Raymond James.

To start, can you just maybe talk a little bit more about if you expect additional forward commitment transactions as you look at the deals in your pipeline. Or was this a really unique deal as far as the forward commitment aspect of it?

Yes, it was a pretty unique one. The piece of land is actually part of a much larger master plan community and so, the infrastructure, some of the improvements, you can't really separate this project out from those until it's completed. So the way we did it was to create a forward. iStar will continue to work with the developer on all the different parcels in the community to build the infrastructure to do some of the commitments. We have guarantees from iStar on some of these completion items. And then when that's all settled and done, it makes a clean transaction for SAFE. I think that's a pretty unusual one, pretty unique one. I wouldn't expert to use that structure going forward very often. So wherever possible, we want SAFE to have the ground lease as soon as it's created, and we'll use the forward structure only those circumstances where it makes it very difficult for them to do that. In this case, they just literally physically couldn't deliver on the obligations needed.

Okay. And then especially given the goal of doubling the initial portfolio by year end, can you maybe just give us a little bit more color on the composition of that bucket that you're under active negotiations on, that $278 million? I appreciate all of the detail about the overall pipeline, but just maybe a little bit more color on this specific, what appears to be near-term opportunities. Is it a lot of smaller deals? Is there one large deal that's making up that $278 million? What are the cap rate ranges? Just additional color there would be helpful.

Yes, look, I think, we're trying to give as much transparency as we can. I think your question is, its multiple deals and factors, a lot of small deals and some we're trying to aggregate into portfolios as opposed to just doing a one-off. So they could combine, be a reasonably large deal. But it's -- no, it's not one deal, it's a bunch of deals. And then, of course, we're always pursuing some relatively large transactions. But the composition of that active negotiation pile is relatively diversified.

And then in terms of pricing, should we think about something, again, maybe consistent with somewhere in the mid-3s to mid-5s, something like that?

Yes, look, I think, we've shown a grid depending on where coverage is and depending on quality of the geographic location. We think the highest quality stuff is going to be in that 3.5 to 4 range. We think the slightly less quality markets probably deserve a 50 basis points premium. So you'll that 4, 4.5 maybe. And then if it's got a development aspect or a particularly complicated structure, we're going to be in the higher ranges. So that's how we kind of break it down. I think for the majority of the stuff we see in the multi-family and office good markets, certainly that 3.5 to 4.5 range is going to cover the vast majority of deals we're going to look at.

Okay. That's helpful. And one last one from me and I'll turn it over. Just beyond the formal pipeline, are you seeing or making any progress towards any sort of larger deals or opportunities where it would make sense to involve GIC?

We have -- we have had that dialogue. I think the -- those are the deals, I think, the lead times have proven to be quite long. What I can say is, we've not lost any deals where we bid on a ground lease. So it's more of the deals that we're creating from scratch have a lot of moving parts. And when they're -- particularly, when they're quite large, they're going to take time to get done. That's where we'll bring a sovereign wealth partner into the equation to give ourselves the most flexibility to design what our customer or property owner needs. We think they're going to be a great partner for that.

Your next question comes from Anthony Paolone from JPMorgan.

Just want to start following up on Rich's G&A questions. So was under the understanding that just putting aside the management fee that kicks in next year, just your G&A for now is going to run about $900,000 a quarter, thereabouts. What is that number currently running? And what is it going to be?

So G&A exclusive of the management fee, is that what you're asking?

Yes.

So G&A this quarter, exclusive of the management fee, was around $700,000 -- $700,000 to $800,000. So I think that we're in the range.

And is that a cash number or a GAAP number? Is there any difference there for that piece of it?

Only $350,000 of that is cash. So that's -- the accrual of the accounting fees, the legal fees, corporate insurance, our -- all of our -- the cost associated with being a public company, stock exchange fees, et cetera. So some of those are paid in a single period and amortized over the entire year, which is why there is a disconnect between cash and GAAP.

Okay. And would you actually add back the noncash piece of that? Just -- I mean, even though it's just an accrual timing matter for FFO?

No. Really, the big thing -- the big adjustment in AFFO is straight line.

Right. And so on a go-forward basis, the $700,000 to $800,000, does that trend up to, I think, the thinking was around the IPO, closer to $900,000, thereabouts, or there is going to be just a lower level?

I don't think we've changed our expectation from IPO.

Okay. And then in terms of just understand this GAAP accounting and the add back and what you intend to do going forward. The add back, is it going to be -- is it just going to be the noncash accounting stuff that is going to be added back for AFFO? Or if you just pay that bill with stock, you're going to add that back as well. Look, is there a difference there?

You're right. There will be -- looking at the major components, obviously, depreciation and amortization is coming out of FFO. And then in the AFFO line, it's straight line. But the other major item will be the management fee because the management fee will be paid in stock, and therefore, it's not a cash expense. So right now, we're not charging a management fee, but GAAP requires us to show one. Going forward, we will charge a management fee. GAAP will require us to show the management fee, but because it's paid in cash, it will not -- I mean, in stock, it will not show up in AFFO. It will be an add back to AFFO.

Okay. All right. Understand then. In the fourth quarter, just to understand kind of the implicit sort of volume guidance for deals. You said you went double the initial portfolio of $340 million. Does that include the $34 million forward in that thinking?

Yes, look, I think the team worked really hard on the deal. We certainly include it as part of the pipeline that is closed. It's a $30-plus million deal, so it's not really going to change our calculus. We want to get to around $700 million of assets invested by the end of the year. We certainly have a pipeline that suggests we're going to get there. Whether I'll gets there in December or January, I'm a little less worried about. What we're happy about right now is it looks like the pipeline is growing every day as the team goes out there and penetrate these markets, meets with brokers, meets with owners. We're trying to change the paradigm a little so it's taking a long time to get all these pieces moving in the same direction. But we do feel very strongly that what we've seen so far suggests there's a big opportunity here. And putting on an additional $150 million, $200 million of assets over the next couple of months certainly is well within reason. And if it slips by a month, so be it. But what we're seeing suggests we can certainly double this portfolio and then focus on doubling it again.

Got it. But just thinking through that, just try to understand whether it hits in December or January, whatever, it seems like about $150 million, you think, of the pipeline is kind of where you're getting pretty close?

Yes.

Okay. And then you may have touched on this, but I could have missed it, but you had some deals around the time of the IPO that were kicking around. Are those still in the pipeline? Or did those drop out? I think you had some office and a couple of other things in the mix, some retail?

Yes, some of those are still kicking around, and we actually made quite a bit of progress on them. The one deal that I think we called out was underneath an Apple campus in Sunnyvale. And it looks like a neighboring strategic is likely going to be the acquirer, which means we won't have a ground lease opportunity underneath that one. But -- yes, so the deals that we have been pursuing, for the most part, are still active. We probably backed off a little bit on the retail pieces just because of what we've seen in the market environment and just couldn't get comfortable with. But overall, we're still seeing traction on most of the stuff we started down the road on.

And then in terms of the competitive landscape, it seems like the debt markets for commercial real estate have opened up in the last few months. Have you seen that as increased competition for this product?

Interesting question. I mean, the one thing I would say is, as we develop and educate the market, we're also doing the same on the leasehold financing side. I think there are big opportunities to work within the existing financing world to help people understand why 1 plus 1 can be better than 2 for all parties involved. That includes ground lease owner, the leasehold lender and the property owner. So the market has become a little more fluid in terms of thinking about risk and reward. That's good for us. At the same time, if the market gets too heated, yes, you're right, it could impact the number situations where we have the best, most highly efficient provider of capital. Haven't seen that be a driving dynamic just yet, but obviously we're watching it closely. I don't think a couple of basis points here or there really changes the calculus.

Okay. And then just last question on the forward. How do you think about what if any premium the cap rate reflects for doing a forward versus maybe a spot? I think it's the 375, like, is it -- any translation there as to if you're able to put the money out today?

Yes, we actually look at the forward curve and try to equilibrate owning it 3 years from now versus owning it today. We do put a forward hedge in place on those forwards so that we know what the base rate for the financing that we will put in place 3 years from now will be. So we're really looking at the spread based on today's marketplace, and then adding the forward curve premium that we're going to have to incur to put on a 3-year forward 10-year financing hedge. So that's the science behind the delta. Picking what it's worth today, obviously, takes into account the market, the product type. We think that Northern California multi-family cap rates on the equity are in the 4, low-4s range up to around 5. So we think 375 cap rate is quite attractive.

Your next question comes from Dan Donlan from Ladenburg Thalmann.

Most of the questions have been answered. Was just curious though, the composition of the pipeline looks like the transactions that you're originating looks kind of 80% of the pipeline from the 60% range. We're just kind of curious if that's kind of an area you think it's going to stay at? Is that going to kind of oscillate up and down depending upon the pipeline? And just curious in general, you've also had a deal you've done, the Hollywood deal, (inaudible) seems like there's a change in the asset's composition in the Hollywood deal, it's still being developed. Is that kind of when you guys -- like, is that the sweet spot for you guys, when you do and originate these deals, is it kind of in and around development and/or redevelopment?

Yes, I think the -- as I said in the beginning, the 2 main vectors here are, buy something that exists. That market is unpredictable. We saw the Hollywood deal. We jumped on it. We've had a couple other things come to market that actually just haven't traded for whatever reason. So we can't really control that flow. But it will almost certainly be sporadic. There's not 10 of these come into market every quarter. So on that one, we'll just take them as they come. On the create side, anytime there's a transaction, we can put our foot in the door. That can be sale of a property, it can be a financing of a property, it can be buying a partner out, it can be trying to access capital on a long-term fixed-rate basis as opposed to taking on floater. And it can happen when there's new development or repositioning. So transactions are a critical entry point for us because we can put something creative and perhaps better on the table when a borrower, customer, owner, developer is just in the process of trying to figure out what is the right strategy. And once we know what their real business plan is, we're pretty good at crafting some sort of custom-tailored set of variables that work for them. So yes, you're going to see us work in those places where transactions are taking place. That can be an existing property or it can be a development repositioned property. But it's that moment of truth where we can walk in and compare apples-to-apples what we think ground leases can do for them versus their other alternatives, and in more and more cases, we think the ground lease combination with a leasehold financing is the better structure for folks. And the more opportunities we get to tell that story, we think the more that message is going to get out there.

Okay. And then just you talked a little bit about education. What is, you think, the biggest hurdle or maybe the largest misconception that you've found that potential sellers, or given that maybe you're looking to originate these things, have that -- you think you -- that they just can't seem to get past?

Look, it's a range of things. But if I had to just give you a quick summary, I'd say, people in the real estate business all have a horror story from 30 years ago about a ground lease that didn't work out right. And we've tried to be really clear that ground leases that are inappropriately structured, ground leases that represent too big a piece of the capital structure, ground leases that are not thought of as long-term components of the capital structure but are used for the wrong reasons, that's not what we do at SAFE. And that's not how you create a giant business and change the paradigm. So we have to show that whatever 20 years, 30 years, 15 years ago created this negative impression, has nothing really to do with what we're talking about. And so there are lots of "ground leases", that we don't really consider anywhere close to what we're doing, they're either too high in the capital structure, they have provisions in them that really don't work for the owner operators or the leasehold lenders. And you just out to strip all of that baggage away and say, "Well, let's look at what we're really talking about." And then you certainly get a much more interesting conversation. Because people do see the validity, they do see the benefits, they do see why it can create real value for them as owners and operators and developers. But you have to get past that first step of, "Oh, I had a friend or I knew somebody who had one and it didn't work out."

Your next question comes from Joshua Dennerlein from Bank of America Merrill Lynch.

Most of my questions have been answered. Just curious on the [Old Mill] and Parkway acquisition, it was a cap rate of 5.5, rent coverage I guess was at 4x from year 2. It seems high just given kind of the framework you laid out. Anything special on that deal that got the cap rate higher (inaudible) just given the ground rent coverage.

Yes, look, a big part of our business has always been repeat customers, and this is somebody who was very comfortable that we could move at the speed and certainty they needed. We had documents off the shelf because we had done a prior transaction. I think they see an opportunity to do more deals with us so there wasn't a lot of quibbling about the specific terms. The borrower expects to make a lot of money here. And we provided a capital solution for them that allows them to move forward on the time frame necessary to have all these leases be -- stay in place. So it's kind of a perfect example of what we try to do is create win-win solutions for our customers, meet their business needs. So we're not talking about who can provide the last basis point savings, we're trying to help them earn very significant returns on their capital. And we can charge a little bit of a premium there if we do our jobs well.

And Mr. Fooks, we have no further questions.

Thank you, and thanks, everyone, for joining us this morning. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Would you please give the conference call replay instructions once again.

If you would like to listen to the replay, please press -- please dial (855) 859-2056 or (404) 537-3406, and reference conference ID number 93767388. The replay will be available at 1:00 p.m. You may me now disconnect.