Safehold Inc (SAFE) 2018 Q4 法說會逐字稿

Good morning, and welcome to Safehold's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Jason Fooks, Vice President of Investor Relations and Marketing. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today on Safehold's earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Andy Richardson, Chief Financial Officer; and Marcos Alvarado, President and Chief Investment Officer.

This morning, we plan to walk through a presentation that details our results for the fourth quarter and fiscal year 2018. Corresponding presentation can be found on our website -- at our new website at safeholdinc.com and by clicking on the Investor Relations link. There will be a replay of this conference call beginning at 1:00 p.m. Eastern Time today. Dial in for the replay is (800) 585-8367 with the confirmation code of 4794594.

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 expressly required by law.

Now with that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman. Jay?

Thanks, Jason. 2018 was an important year for our company. We grew our portfolio by almost 80%. We expanded into 6 new markets, and we accelerated our efforts to get our message out to the market. As pioneers in reinventing the ground lease sector, we continue to find attractive new markets to explore and multiple ways to deliver the benefit of more efficient capital to our customers, whether they are acquiring properties, building properties, or recapitalizing properties.

In 2019, our goal is simple and clear, to revolutionize real estate ownership in this country. In modern ground lease, that is tailored to be leasehold lender friendly and cap rate neutral, can increase the building owners' returns and reduce their maturity and interest rate risk. This is no longer a theory, it is proving a powerful competitive advantage in the marketplace, and is leading to significant repeat customer business in the office and multifamily sectors and interest from across all property types.

Recognizing the importance of this moment, we are taking several steps to accelerate our progress. First, we are making clear our mission to revolutionize real estate ownership by giving our customers a new and better way to unlock the value of the land beneath their buildings. We are reaching out and explaining these benefits to everyone in our extensive network that includes top brokers, a wide range of real estate financing sources, and specifically, the owners, operators and developers of high-quality real estate around the country, who have the most to gain from our innovative strategy.

Second, we are changing our name. We are now Safehold. It is what we are and what we do. While our previous name emphasized the very real benefits our business can deliver to shareholders, our new name better explains what we can do for our customers, create a safe and efficient way to unlock the value of their land, and hold it quietly and securely while they execute the business plan for their building. The bottom line is, a well-structured modern ground lease, what we call a Safehold, gives property owners an opportunity to maximize the returns while reducing the risk. We also have a new logo, graphically showing how we are breaking out of the box of limited, conventional thinking by reinventing what ground leases are and giving owners a more modern, more efficient way to capitalize their properties.

Third, we are expanding our relationship with our largest shareholder and investment manager, iStar. We believe the combination of iStar's historical strength in finance and net lease together with our growing ground lease expertise can create a unique one-stop shop offering that will prove superior in many situations and help accelerate our growth. We've already seen this SAFE/STAR combination create new opportunities to land attractive transactions.

We also closed another round of equity capital from iStar, giving us the firepower to expand our pipeline and our resources for pursuing deals. Raising $250 million at a premium to the screen demonstrated both sides' significant belief in the future growth prospects of Safehold, and the new management agreement better aligns incentives for reaching our aggressive growth targets. The capital support of iStar ensures we can scale, while we continue to educate our future shareholder base of what we are building.

Each of these steps positions us to execute our strategy on a bigger scale across more markets and help more property owner's access our modern capital solution. Fourth and finally, we are also expanding our outreach to the shareholder and lending communities. As Andy will outline, we continue to make progress highlighting our high-grade asset base and its superior credit metrics to lenders. And with the new accounting rules more accurately portraying the lifetime economics of our income streams, we believe GAAP income will become a simple and far easier way to share our economic model with investors across a range of investment styles and disciplines and help call attention to our significant growth rates.

As we've said before, we think this is a business that pays a very safe dividend, can grow earnings at high rates and can capture long-term value in a unique way. It's our job to help others see what we see, and all of these steps should help us do that.

So now let me turn it over to Andy to go through the quarter and year-end results. Andy?

Thank you, Jay, and good morning, everyone. Let me continue with Slide 6.

For the quarter, net income was $0.24 per share versus a loss of $0.07 for the fourth quarter last year. FFO was $0.36 per share versus $0.05 in the prior year period, and AFFO was $0.09 per share versus $0.06 in the prior year period. For the year, this brought net income to $0.64 per share, FFO to $1.15 per share and AFFO to $0.63 per share. Because we formed the company midway through 2017, the full year-over-year comparison is not meaningful. Our quarter was highlighted by strong quarter-over-quarter investment volume and an investment of new equity capital from our manager received after year-end that provides us with runway for growth.

Let's turn to Slide 7 to discuss this quarter's investment activity. For the quarter, we closed $178 million of new investments, growing our aggregate portfolio to $948 million, a 23% increase from the third quarter, and almost tripling in size since our IPO. You can see the key investment metrics on the Safeholds we originated in Q4 toward the bottom half of the slide. We are earning a 5.6% effective yield with AAA-like credit metrics of 3.2x coverage and a cost basis of 41% of the combined property value. These investments also included periodic CPI look backs to provide additional potential upside to our effective return.

Slide 8 describes this quarter's investments in some additional detail. Most noteworthy, we originated a Safehold on 1111 Pennsylvania Avenue in Washington, D.C, a trophy office building that is fully occupied by global law firm, Morgan, Lewis & Bockius. This $150 million investment represents the largest single asset into the portfolio and further demonstrates that Safehold can provide better capital to its customers on any scale. Washington, D.C. continues to be a strong MSA for us with approximately $300 million of deals closed in the market to date.

Our second investment for the quarter expanded Safehold's geographic footprint with our first deal in Nashville. We created a Safehold underlying a 275-unit Class-A multifamily building located in Novel Music Row, a vibrant submarket of Nashville, marking the second deal we have completed with this customer. We remain enthusiastic about our continued ability to penetrate the multifamily segment, while continuing to expand in the new core markets.

Moving to Slide 9. Along with announcing SAFE's rebrand, we're also introducing the SAFE/STAR One-Stop Capital Program that is a direct result of Safehold's aligned relationship with iStar. This platform combines iStar's 25 years of financing expertise and innovative thinking along with Safehold's unique product in order to provide our customers with a one-stop capital solution. With both companies operating in tandem, this powerful program delivers an efficient capital structure to customers seeking flexibility and simplicity. An excellent example of the SAFE/STAR program is the deal we recently closed in Washington, D.C., shown on the slide.

Safehold provided the capital to create a new ground lease on the property and iStar provided the first mortgage leasehold loan. With this structure, we can deliver to customers an efficient capital solution with the certainty and ease of having the whole envelope structured in one place, significantly expediting the pathway to closing.

Turning to Slide 10. As previously announced, on January 2, iStar made an additional $250 million equity investment in Safehold, valued at a price equivalent to $20 per share, an attractive premium to the market price of our stock. This investment provide Safehold with fresh capital to pursue approximately $750 million of new deals, assuming our targeted 2:1 debt-to-equity ratio. The investment was structured as a purchase of 12.5 million limited partnership units that will be exchanged for common stock on a one-for-one basis subject to shareholder approval.

IStar's ownership now represents approximately 65% of our total equity. However, it should be noted that iStar's discretionary voting power will be capped at 41.9%.

In conjunction with this investment, our independent directors approved an amendment to the management agreement with iStar. The key changes to the agreement, which we believe creates increased alignment with our manager, are summarized on the slide.

Lastly, SAFE's board approved iStar's request to increase its common stock ownership limitation to 43.9% from 41.9%, allowing it to make additional open market purchases of up to 366,000 shares.

Slides 12 and 13 show the diversification in our portfolio. Washington, D.C. has now become our largest MSA and the map includes Safehold's expansion into Nashville.

In Slide 14, we've highlighted the portfolio of properties for which we own the ground lease. Our ground leases underlie nearly 7.2 million square feet of real estate including over 2,800 hotel rooms and 2,600 multifamily units.

Slide 15 details key metrics of our portfolio. Annualized GAAP revenue, which takes into account straight-line rent, totaled $70.6 million at the end of the fourth quarter. Net of depreciation and amortization, our portfolio yield 6.9% on a GAAP basis. Annual cash flow of the building sitting on top of our land covers our annual cash rent by 4.5x, and our total cost basis represents about 35% of the combined property value, which we believe to be compelling measures of safety in our investments. Comparatively, the average AAA loan to value in commercial mortgage-backed securities is approximately 38% to 42%.

Slide 16 delivers an update on Value Bank. During the fourth quarter, Value Bank grew to $1.8 billion, representing a 15% increase from the third quarter and 65% from a year ago. As a reminder, Value Bank represents today's estimated market value of the buildings that we may receive in the future because typically embedded in our investments are reversionary rights of the buildings and improvements at the lease expiration.

Moving to Slide 18. I will review our debt and leverage. During the fourth quarter, we closed a 10-year, $79 million nonrecourse senior secured loan that was tailored to meet the unique attributes of our assets. The loan has an initial effective rate of 3.91%, which increases 2% annually, in line with the rent bumps of the investments that collateralize it. The all-in effective rate is 4.25% and is interest-only for the entire 10-year term. It was collateralized by 7 assets and represents a 60% advance rate against SAFE's investment basis in the collateral. In addition, it provides for asset addition and substitution flexibility.

In addition, we continue to have $227 million of long-term fixed-rate debt due in 2027, secured by our initial $340 million portfolio and $71 million of asset-specific debt against our Hollywood investments. We drew $96 million on our revolver during the quarter to fund investment activity, bringing the outstanding balance on our revolver to $170 million at December 31. The revolver was fully repaid after year-end using the proceeds from iStar's equity investment. Slide 19 continues to outline the interest rate hedges sufficient to allow protected 2x leverage on the existing portfolio.

Finally, on Slide 20, I would like to discuss how we will be reporting our metrics going forward. We expect that after the adoption of new lease accounting standards beginning January 1 of this year, nearly all of our newly originated Safeholds will be classified as sales type leases rather than operating leases. These leases will be recorded on our balance sheet as a net investment in lease, rather than as land. We will recognize income from these leases in a revenue line item called interest income from sales type leases. This amount will be computed similar to how an effective interest or effective yield is computed on a bond using contractual future cash flows and a residual value equal to our cost of the land. The difference between the effective yield for what GAAP refers to as the rate implicit in the lease and current period cash received is recorded as amortization, which increases or decreases the net investment in lease balance sheet account. We believe that the GAAP treatment of these leases under the new accounting standard captures many of the fixed income like aspects of our business, such that AFFO and FFO will be of less utility as supplemental measures going forward. Already under GAAP, we use a similar method to record interest expense on our debt. Consequently, we believe the new GAAP yields recorded on our assets and debt obligations will be more comparable and that GAAP net income will be more indicative of our operating performance as a high-grade fixed income investment business.

In conclusion, we are encouraged and confident based on the progress we've made to date. But as we roll out the new brand, we are even more excited about the possibilities ahead.

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

Thanks, Andy. I know there's a lot there to unpack, so we're just going to go ahead and open it up for questions. Operator?

(Operator Instructions) Your first question comes from Anthony Paolone with JPMorgan.

I guess, jump into some of this accounting. So I think that's interesting. The -- if we think about that effective yield, is that -- I mean, if your residual is the same as your base, is that effectively like the straight-line yield that we've been accustomed to in the past? Is there much difference there?

Yes. Anthony, it's really more like a bond where we assume we do receive par back at the end, so we're not increasing the back-end values at all. So it's really capturing the cash flow stream. I'm assuming your investment and your principal received at the end out is the same number. That really is very much like bond accounting.

I'm sorry, Anthony, did you say it was like an IRR?

Yes.

Yes, that's correct, that's exactly what it is.

Okay. And so will you still be able to provide us like some sense of going in cash on cash and will the GAAP accounting allows us to see what those cash numbers are just to understand things like liquidity and dividend coverage and so forth?

Yes, we will talk about cash yield as well, but again, I think, what we like about the effective interest -- effective yield is it -- given the high quality of the assets, it's very much like a AAA bond that you can buy at a discount. So the effective yield really does capture the true value, but will also provide a running cash yield as well.

Okay. And so then going to GAAP EPS-type number, so it also mean there won't be any adjustments for noncash compensation or the amortization of debt cost and so forth?

We're going to make it really simple for you. No adjustments.

Okay, got it. And then, perhaps may be on a more economic side, can you talk a little bit about the pipeline cadence of deal flow maybe, to expect the next few quarters and returns on those?

Sure. I think that our goal right now, as you heard throughout today's comments, is to really accelerate the growth. In some respects, we're really through the beta phase of the business and we're now really in the execution phase. I think, generically, we have targets this year of about $750 million in new ground leases and up. So that's a good number to be thinking about as we try to work our way through these early quarters and then really build towards a much faster growth rate. Look, right now, we feel like getting our message out into new markets across top 25 target markets is really critical. And so we've got people on the field working on building those relationships, but we feel pretty good about what we see in the pipeline. Right now, we are still having to educate in some of the new markets, but in markets we have already executed in, we're starting to take calls from people who've seen what we're doing, have seen their peers and competitors, frankly, win deals by using the structure. So we do think the pipeline feels pretty good in terms of the number of calls we're fielding and the number of places we're engaged.

Okay. And then just last question on the SAFE/STAR One-Stop Program. I know it's pretty customized per deal, but can -- maybe give us a rough sketch as to what does that mean to a sponsor in terms of thinking about total proceeds versus maybe going after more conventional financing, and also maybe like what is the blended sort of carry rate, if you will, if you were to combine the ground lease plus whatever financing package Star may provide again in comparison to something a bit traditional?

Yes. I like the way you put that. It is a flexible structure. So what we're seeing is folks who are little bit hedging on where interest rates are going, they like the fixed rate nature of the ground lease. They're also willing to work on the leasehold on a floating rate basis if they have shorter-term hold period, so they can kind of custom tailor what they need for their business plan. What we find interesting is, we don't walk in and say this is what we do. We walk in and say, what is your business plan and what are your financing alternatives? We think we can beat them. We can either provide the same proceeds in a better structure, lower cost, less maturity risk, or in some cases, we can provide more proceeds, so they can generate higher returns on whatever capital plans they have. Again, it's really a customer-centric business, which is the key. I don't think anybody ever thinks of the ground lease business as customer centric. We're going to build the business that much like the other businesses we've built in our past at iStar really respond to what the customers need and create a better alternative for them. But sometimes it will be lower cost capital, sometimes it will be lower cost and more proceeds, sometimes it will be more proceeds, but it gives them the ability to really match their capital needs in a way more efficient way than just taking down a single sort of conventional financing.

Your next question comes from Collin Mings with Raymond James.

First, just going back to the announcement last month. Can you just discuss in a bit more detail the trade-offs that the board contemplated taking more capital from iStar with making the management agreement more complicated and higher cost to Safety?

Yes. I think, there's little bit of 2 independent decisions. One, from a capital standpoint, it was attractively priced capital, obviously, given where the public screen was and where our advisers thought you could do execution in a more widely distributed fashion. So we had a nice meeting of the minds. iStar believes strongly in the business and SAFE has the pipeline that represents what we think is a very attractive future business opportunity. So that piece of the trade made a lot of sense for both parties. On the management agreement, here we start with the fundamental premise of what do we want to achieve? What is the incentive we want to create? And so if scale is the critical factor and we fundamentally believe once we reach scale, people will start to see what we see. We wanted to create proper incentives to invest now far beyond what the management fees themselves would justify to create this future of a much bigger, much more scaled business. We would argue that the cost up front here need to be viewed as investments and they need to be some prospect of over investing early and seeing the returns later. So we're spending a lot of time, effort upfront to make this business grow. We wanted to create a management agreement that is aligned with that scaling growth target. So I actually think it's a better aligned management agreement. It has no impact unless we scale. Once we can get the equity base of this company above $1.5 billion, there's really no change. So it's really meant to help us do what we laid out this morning, which is take this new, more efficient capital structure to the market in as many places as we can, as fast as we can and have all the resources available to us to do that, both capital resources and intellectual property resources.

Okay. That's helpful color there. And then going back to Anthony's question just on the deal pipeline. I may have missed it, but I didn't see the pipeline slide that you've included in prior quarters. But can you maybe put a finer point on kind of quantifying where the pipeline stands? And then maybe any sort of notable property mix shift since last quarter just as you look at kind of what way you're going through right now, either through LOI or some level negotiations?

Sure. It's Marcos Alvarado. So we in Q1 already we've closed 4 transactions totaling $62 million in Safeholds. We have another 100 -- approximately $160 million across 3 transactions -- excuse me, $95 million, that totals approximately $160 million that we expect to close in Q1. And the cumulative pipeline is approximately $300 million.

Okay, that's helpful. And then just as far as the property-type mix, any sort of bias? I know, obviously, there's been momentum, if you will, with the company. We're trying to do a little bit more on the multifamily side. But just if you can kind of walk us through where that mix stands as you think about the pipeline now?

It's consistent with our strategy of creating a diversified asset base in broader markets. One of the closings that already occurred in the new top 25 markets, which we're excited about. There's a few office assets and a few multifamily assets and 1 hospitality asset.

Okay, very helpful color. One last one and I'll turn it over. Just -- maybe just a little bit bigger picture, just as we think about today's announcement in the accounting changes and the decision to move away from communicating a FFO or AFFO metric. How do you think -- how does the potential reception from the REIT community in just having kind of a different metrics, if you will, for this company factor into your thinking of kind of moving away from that decision?

Well, in many respects, we're a very different company than anything else in this sector, and so we fundamentally believe it's not only appropriate for our real estate followers to understand the business and what it does, but also a much wider range growth, growth in income, the financial sector should all be paying attention because we think we offer a combination of very safe dividends, very high growth rate potential, very large market opportunity. So we think the strategies and disciplines that will be attracted to that combination go well beyond just the REIT sector, that's our tax classification, but we do think there's a much wider audience that will be attracted to those unique benefits. And so we'll try to continue to communicate within the real estate community why this is so special, which really unlike anything that we've seen, but also expand that well beyond just dedicated core real estate investors to a much wider audience that's looking for growth, that's looking for safety, that's looking for long-term capital appreciation. We continue to believe this is a unique opportunity for lots of different types of investors to really find something that we hear very often from shareholders that they're looking for.

Your next question comes from Jade Rahmani with KBW.

In terms of the accounting change, does it effectively incorporate future anticipated rent growth and move it over time to calculate an effective yield?

Jade, it only uses contractual growth that spill into the leases. So we would not include anything that is not estimable or contractually stipulated in the lease.

Okay. And so will dividend policy be based on cash flow or GAAP earnings?

Primarily, cash. We think the economic model will support more flexibility than being 100% rigid to that metric. But right now, you'll see it attract cash.

Okay. And what are your expectations for SAFE's dividend growth? Will it attract rent escalations that are contractual in the portfolio, and so it's reasonable to ancipitate some growth in 2019?

I would tell you it's not our core metric. Unfortunately, we're old bond guys and fixed income investors. If we can take our money and reinvest it at high rates of return, we think that if you're creating excess return on a credit quality that we think we are creating, we want to keep that money working and compounding at those high rates of return. So our metric is, are we creating a lot of value above and beyond a market level for our credit exposure. And as long as we do that, dividend growth will happen, but it won't be our primary emphasis.

Okay. And if cash is less than GAAP, will you finance the difference through leverage? Will that ultimately depress book value to the extent that dividends run ahead of cash?

Yes, as I said, I think cash will -- dividends will attract cash. So we don't expect any material situation like you're outlining.

Okay. Looking at the balance sheet, there's some accumulated depreciation, and I don't believe land is depreciated. What's the source of that?

That's primarily related to the hotel portfolio, the Park Hotel portfolio.

We actually own the overlying buildings and get that depreciation.

Okay. And finally, in your view, why do you think SAFE's stock price didn't react more positively to iStar's investment at material premium to where SAFE was then and is now trading?

Right now, we don't think the stock really has any information in it. It's trading de minimis volumes. We have a number of very large shareholders who have reached their limits just by our bylaws. And so we really view 2019 as the year we start telling our story and expanding the reach of the company into the shareholder community, into the lending communities. So right now, we just don't think the stock actually reflects any of the information that some of our people who are following the company closely now understand.

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

I'm just still trying to wrap my head around effective yield versus like kind of the old way of using cap rate. It might be helpful. For the 4Q, deals that you closed, it looks like there's a 5%, 6% effective yield. How would like GAAP and cash cap rates compare to that effective yield?

Yes. I mean, think about it as you're buying a treasury bond that had a 5%, 6% effective yield. You know you're going to get that yield because it's AAA credit quality. If you're getting cash of 3.5%, 4% upfront and the rest of that yield over time that gets constantly reinvested at that rate, our view is if you can make excess returns to AAA level of credit risk and compound it continually, that's a really great place to be from a fixed income investor standpoint. From an equity investor standpoint, you're recreating that alpha every time you roll over a portion of that. That's really what's happening here. Think of it as a bond, think of it as a AAA bond or a treasury bond. Part of it -- of your return is paid in cash every year and part of it is rolled over and compounds at that same rate going forward. So if your cash yield year 1 is 3.5% to 4%, and you've got bumps of 2%, over time, you're going to make a 5.5% effective yield. And there is no if here because of the quality where we are sitting in the capital structure. It's not like a -- maybe an equity deal, where you can't really predict whether you'll ever get that future accrued amount. Here we're sort of starting at it, I think Andy said, 35% LTV, you're going to get the amount. What's best about it is you're actually going to compound at these high rates of return that we're creating that really are not replicable anywhere else in the market. But there is a little bit of a difference in mentality and it's one that comes naturally to us given our fixed income and lending backgrounds. We look at this as a way to create very attractive long-term returns, long-term compounding returns. And we think the cash-on-cash yields out of the box are attractive in and out of themselves relative to the marketplace. What's really driving the business is much more of this effective yield relative to other effective yields for similar credit quality instruments.

Okay. So it assumes that you're taking the cash flows and reinvesting them at into the market rate or the internal rate...

If you think about -- if you get 4% of your 5.5% in cash, the other 1.5% is in effect going to compound. That's how effective interest is calculated. What is the constant return that will create the stream of income that we contractually have over the life of the instrument, assuming you receive par at the end and pay par at the beginning. That is standard bond math. Effective yield and effective interest is really what the accountants are now trying to create out of lease streams, particularly long-dated lease streams. They look at them and they try to understand the economic reality. We think that is the long-term economic reality. If we were at 90% of the capital structure, 80% or 100%, that we would not use this methodology because those future cash flows are not assured. But when you start at a de facto AAA credit quality location in a capital structure, and as you build a diversified portfolio, these credit metrics are exactly what we've been doing our entire careers here, trying to find long-duration, noncallable cash flows that create above market returns, they create alpha every time you create them. And if you can let them run and compound and not have them get repaid on you, those are really good businesses. We've seen tremendous success in the last 2 decades when we found those businesses. So we think Safehold has the ability because of its unique skill sets, because of the financial support and personnel support from iStar to really start telling the story both for our customers about why this is a better, more efficient capital structure for them and now for shareholders, and frankly for lenders, why a diversified scaled portfolio of these assets starts to look very much like some of the businesses we've built in the past. So we try not to look at any single individual deal as the way to think about our company. You have to think about it as a growing scaling business generating what we think are these attractive risk-adjusted returns and evaluate whether you think we can continually repeat that and build an ever larger business. And we certainly believe it. We believe iStar believes it. We have repeat customers who, I think, believe it. We now need to bring that message to the broader market.

Okay. And just so we're prepared for the 1Q release, what are you guys going to show? I'm assuming like they look very similar to just Page 22, you'll kind of get rid of Page 23 of your presentation. I don't know if there is anything else that we should kind of focus on, so our models are ready for kind of the new accounting change?

Well, I think that, the old -- the pre-January 1 amounts and presentation will stay exactly the same. And all the new deals will be recorded under the new accounting that we described earlier, which is the revenues will be recorded as interest income from sales-type lease, which is effectively the IRR implicit in the lease, cash flow stream, and the amount that we paid for the asset will be recorded as investment in lease on the balance sheet. And we will report straight net income.

(Operator Instructions) Your next question comes from John Massocca with Ladenburg Thalmann.

This is Brandon Travis on with John. On your purchase of the existing ground lease in San Antonio, can you discuss the terms of that transaction? And what made it an attractive asset?

We won't discuss the specific terms and the yields on it. The reason we like that transaction is it's on the River Walk in a central location. The coverage exceeds our metrics and the cash yield we're getting exceeds the metrics in our portfolio, plus it got us into a market that we've not been in before.

Okay. And then how big is the market for third-party ground lease acquisitions in non-top 5 MSAs?

When you say acquisitions, you mean of existing ground leases or the ability to create them in these markets?

Existing ground leases.

Yes. I mean, there are more ground leases than you might think out there, but they don't trade very often. So it will be a part of our business, but we don't think it's the driver of the business.

Your next question comes from Collin Mings with Raymond James.

Just a follow-up going back to really the last question there. I recognize you don't want to provide maybe the specifics on the San Antonio deal. But just more broadly, can you talk a little bit more about asset pricing and then just benchmarking as you think about, obviously, there's been some moves in the interest rate environment just as far as benchmarking deals and kind of from a deal flow perspective where pricing stands?

Again, we're credit dependent. So depending on the market, depending on the quality of the asset, depending on the capital structure, these numbers can bounce around. I think when we first gave metrics to the market, we gave a range, and I think those ranges are still reasonable. We've seen coverage ratios that we still like to see in the 3x to 5x range and depending on how good all those other factors are, initial cash yields have been in the 3.5% to 4% is kind of the centering number. The effective yields on those type of assets will be in the 5% to 6% range. And as Andy explained, I think, our financing costs, we think are in 4.5-ish range for diversified pool of assets. So the metrics you'll see going forward from a GAAP income statement are driven by those inputs and they are still pretty consistent. We think there are opportunities to grow this business very fast. So the rules are somewhat flexible in terms of we -- there are markets we want to be in and there are asset qualities that are at the very high end. And so we have flexibility on both sides of that equation. But those metrics are still kind of the ones we want. We want to be in that 35% -- 30% to 40% of the total value of the property. I think that's the appropriate optimal space that allows us to be leasehold-lender friendly and cap rate neutral. So we don't like to move above that, and we don't like to move below 3x coverage. Other than that, we price against the market and try to create a better alternative for our customers. So as the markets move for capitalizing real estate, we'll move with them.

Okay. I appreciate the detail there. I guess -- but it doesn't sound like that kind of moves in the [tenure] one way or the other have really had an impact in terms of the pricing we are able to achieve. Is that a fair takeaway?

I would say, on the pipeline, we try to be very disciplined and take a look at obviously, the moves in treasuries, we have floors in our term sheets. We price off the treasury. It is deal dependent. If I take a look at the cash cap rates that we've closed already in Q1, I would say that they fall within the outline that Jay gave you. We're getting better pricing in what I would call outside of the top 5 markets and you're getting pricing on the lower end of the range in the more core markets. But we -- again, those cash cap rates, we think are strong, but the weighted average, effective yield is what we're really focused on.

Mr. Fooks, we have no further questions.

Okay. Great. Thanks for joining us, everyone. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Operator, would you give the conference call replay instructions once again?

Certainly. To access the replay for today's call, you may dial 1 (800) 585-8367 or 1 (855) 859-2056 and enter passcode 4794594. The replay will be available approximately 2 hours from now. Thank you, and have a good day.