Safehold - Q1 2024

Transcript

Operator (participant)

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 Pearse Hoffmann, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

Pearse Hoffmann (SVP of Capital Markets and Investor Relations)

Good morning, everyone. Thank you for joining us today for Safehold's earnings call. On the call today we have Jay Sugarman, Chairman and Chief Executive Officer, Brett Asnas, Chief Financial Officer, and Tim Doherty, Chief Investment Officer. This morning we plan to walk through a presentation that details our first quarter 2024 results. The presentation can be found on our website at safeholdinc.com by clicking on the investors link. There will be a replay of this conference call beginning at 2:00 P.M. Eastern Time today. The dial-in for the replay is 877-481-4010 with the confirmation code of 50475. In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A. If you'd like to ask additional questions, you may re-enter the queue.

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 it over to Chairman and CEO Jay Sugarman. Jay?

Jay Sugarman (Chairman and CEO)

Thanks, Pearse, and thank you to everyone joining us this morning. Safehold delivered solid earnings in the first quarter, highlighted by important progress on the right side of the balance sheet and continued efforts to run more efficiently and keep G&A under control. Deal activity in the first quarter was limited, with higher interest rate headwinds slowing overall market activity, though the pipeline has a good number of deals that should close in the second quarter. In terms of the overall market, CBRE continues to provide updated UCA value marks, reflecting higher cap rate assumptions and incorporating tougher office underwriting standards. The resulting lower building values are driving higher GLTV ratios, which makes sense given the current market environment. Lastly, with respect to CARET, we received requests from the VC investors who participated in the first round to exercise the redemption option that was expiring this year.

As a result, we decided to simply redeem the entire round and focus on future round investors. This will simplify our go-forward structure while we work to position CARET for investment by the longer-term family office type investors that participated in the second round and continue to express interest in CARET. With that, let me turn it over to Brett to review the quarter in more detail. Brett?

Brett Asnas (CFO)

Thank you, Jay. Good morning, everyone. Let's start with the summary of the quarter on slide 2. First quarter was highlighted by strong capital markets executions and positive pipeline momentum. On the capital front, during the quarter we issued $300 million of 10-year unsecured notes at a 6.1% coupon. The net proceeds were used to repay outstanding revolver borrowings. In connection with the offering, we settled a portion of our outstanding hedges and realized cash gains of approximately $21 million. After applying those gains to the notes, the semiannual yield to maturity decreased by more than 80 basis points to a 5.3% yield. We've been speaking about the value of our hedges for several quarters now and are pleased to highlight the realization of their value with this execution.

We currently have an additional $350 million of long-term hedges outstanding at a significant current mark-to-market gain position of approximately $45 million, which are expected to provide a benefit to the true economic cost of future financings. After quarter end, we entered into a new $2 billion unsecured revolving credit facility, which replaces and upsizes our previous $1.85 billion aggregate facilities. Outstanding amounts under our previous facility were rolled over to the new facility. In addition to the immediate $150 million of incremental credit capacity, this facility resolves the company's nearest term maturity with a fresh 5-year term, which includes two 6-month extension options, lowers the costs for drawn amounts to adjusted SOFR plus 85 basis points, and improves overall financial flexibility for the company. We were also able to add a commitment from a new banking relationship, which is a win in this environment.

Overall, we are very thankful to all of our banking partners that see a significant opportunity for Safehold in both the near and long term. As a reminder, the facility benefits from in-place hedges, including $500 million of SOFR swaps at a rate of approximately 3% for the next 4 years, which at current levels is saving the company approximately $3 million of cash interest per quarter, a particularly valuable swap if higher for longer is the new normal. Moving to the pipeline, we have seen customer engagement steadily pick up over the course of the year. That engagement is leading to tangible activity as we currently have 8 LOIs signed for potential commitments of approximately $145 million.

These potential investments are all multifamily, diversified across 6 markets and 5 sponsors, with credit metrics in line with portfolio targets, which are approximately 35% GLTV, approximately 3x rent coverage, and approximately 7.5% economic yield. We expect a majority to close in Q2, while others will occur over the remainder of the year. These are non-binding commitments with no assurances that they will close and are eligible for our joint venture, of which our partner owns 45%. We view this uptick as a positive signal that real estate operators are coming back to the table. At quarter end, the total portfolio was $6.5 billion, UCA was estimated at $9.1 billion, GLTV was 47%, and rent coverage was 3.6 times. We enter the quarter with $1.1 billion of liquidity, which is further enhanced by the unused capacity in our joint venture.

Between liquidity and JV capacity, this is the most buying power Safehold has had since inception, and with no debt maturities until 2027, we'll be focused on pursuing investment opportunities as current valuations and yields are attractive. Slide 3 provides a snapshot of our portfolio growth. In the first quarter, we funded a total of $71 million, including $66 million of ground lease fundings on pre-existing commitments that have a 6.7% economic yield and $5 million related to our 53% share of the leasehold loan fund, which earned interest at a weighted average rate of SOFR +605 for the quarter. Our ground lease portfolio has 137 assets and has grown 19x since IPO, while the estimated unrealized capital appreciation sitting above our ground leases has grown 21x.

Much of this growth has been driven by our focus on multifamily assets, which has increased from 8% of the portfolio at IPO seven years ago to now 55% of all ground leases by count. Post-COVID or over the last four years, as you can see in the chart, approximately 70% of new investments have been ground leases under multifamily assets. In total, the unrealized capital appreciation is comprised of approximately 35 million sq ft of institutional quality commercial real estate, consisting of approximately 18,100 multifamily units, 12.5 million sq ft of office, over 5,000 hotel keys, and 2 million sq ft of life science and other property types. Continuing on slide 4, let me detail our quarterly earnings results. For the first quarter, revenue was $93.2 million, net income was $30.7 million, and earnings per share was $0.43.

The significant increase in GAAP earnings year-over-year is primarily due to $21.6 million of merger and CARET-related costs that occurred in Q1 2023. There were no similar non-recurring adjustments made in Q1 2024. On an apples-to-apples basis, excluding 2023's non-recurring items, EPS was up $0.02 year-over-year, driven by an approximately $8.6 million increase in asset-level revenues from new investments and rent growth, offset by approximately $7.8 million of additional interest expense. Same-store percentage rent was up approximately $850,000 versus last year, or a 23% increase, primarily due to strong performance at our Park Hotels assets, which is back to pre-COVID performance levels. As detailed in the past when we announced and closed the internalization, we believed G&A net of STHO management fee for the company would be approximately $50 million per year. For 2023, we beat that expectation by approximately 10%.

On the last earnings call, we said we hoped to reduce net G&A by another 5% for 2024. For the first quarter of 2024, net G&A was approximately $10 million, which is approximately $40 million on an annualized basis, which means we are now revising our 5% reduction target upwards to a 10% reduction. We continue to find ways to reduce the cost structure of the company and look forward to continuing to update the market on these improvements that directly help the bottom line. On slide 5, we detail our portfolio's yields. As discussed in prior quarters, our portfolio yields differ between what we recognize for GAAP versus what we underwrite and assume to earn economically. To illustrate this point, we provided additional detail on the components that make up each yield. For GAAP earnings, the portfolio currently earns a 3.6% cash yield and a 5.3% annualized yield.

Annualized yield includes non-cash adjustments within rent, depreciation and amortization, primarily from accounting methodology on IPO assets, but this excludes all future contractual variable rent, such as fair market value resets, percentage rent, or CPI-based escalators. Those variable rent features are significant value drivers and core to our investment thesis for each deal. As such, it is our view that GAAP annualized yield is not an accurate reflection of the true earnings power of the business. We believe the simplest and most accurate way to estimate the economics for these leases is to utilize basic bond or IRR math. Using this approach, our portfolio generates an expected 5.7% economic yield, which is in line with how we've conservatively underwritten these investments.

This economic yield has further upside when you include the periodic CPI lookbacks we have in leases, as well as the future ownership rights to the buildings and improvements above our land at no cost. Under the Federal Reserve's current long-term breakeven rate of 2.35%, the 5.7% economic yield increases to a 5.9% inflation-adjusted yield. The 5.9% inflation-adjusted yield then increases to 7.5% after layering in an estimate for unrealized capital appreciation using Safehold's 84% ownership interest in CARET at its most recent $2 billion valuation. We believe unrealized capital appreciation in our assets to be a significant source of value for the company that remains largely unrecognized by the market today. Turning to slide 6, we highlight the diversification of our portfolio by location and underlying property type. Our top 10 markets by gross book value are called out on the right, representing approximately 70% of the portfolio.

We include key metrics such as rent coverage and GLTV for each of these markets, and we have additional detail at the bottom of the page by region and property type. Office GLTVs increased modestly during the quarter. Notably, we've had approximately 80% of our office assets reappraised over the last two quarters. As a reminder, we have CBRE appraised the combined property value of our assets annually to help us highlight for the market our mark-to-market attachment point and estimated unrealized capital appreciation in the assets across the portfolio. This approach is in contrast to other real estate finance companies that quote LTVs at origination despite any market shifts or knowing how much credit enhancement exists today. Rent coverage on the portfolio remained stable quarter-over-quarter at 3.6x, underscoring strong operations at the property level despite valuation headwinds.

We continue to believe that investing in well-located institutional quality ground leases in the top 30 markets that have attractive risk-adjusted returns will benefit the company and its stakeholders over long periods of time. Lastly, on slide 7, we provide an overview on our capital structure. At the end of the first quarter, we had approximately $4.5 billion of debt comprised of $1.8 billion of unsecured notes, $1.5 billion of non-recourse secured debt, $911 million drawn on our unsecured revolver, and $272 million of our pro-rata share of debt on ground leases, which we own in joint ventures. Our weighted average debt maturity is approximately 21 years, and we have no maturities due until 2027. Pro forma the $150 million of incremental credit capacity from our new revolver closed after quarter end, we have approximately $1.1 billion of cash and credit facility availability.

Our credit ratings are A3 with stable outlook at Moody's and BBB plus with positive outlook at Fitch. As discussed, we seek to appropriately manage interest rate risk on floating rate debt and have put hedges in place to do so. Of the approximately $911 million revolver balance outstanding, $500 million is swapped to fix SOFR at 3%. This is a 5-year swap that we have protection on through April 2028. We receive swap payments on a current cash basis each month, and at today's rates, produces cash interest savings of approximately $3 million per quarter that is currently flowing through the P&L. We also have $350 million of long-term treasury locks at a weighted average rate of approximately 3.7%. Today, our long-term hedges are approximately $45 million in the money. The outstanding hedges are marked to market, so no cash changes hands each month.

While we do recognize these gains on our balance sheet in other comprehensive income, they are not yet recognized in the P&L. While hedges can be utilized through the end of their designated term, they can be unwound for cash at any point prior. As we look to term out revolver borrowings with long-term debt, we have the ability to unwind the hedges, which would then flow through the P&L thereafter. We are levered 1.9x on a total debt-to-book equity basis. The effective interest rate on permanent debt is 4.0%, and the portfolio's cash interest rate on permanent debt is 3.6%. To conclude, while the recovery and transaction volume has taken longer than we have liked, there are tangible signs of activity surfacing, both in our business and in real estate generally.

We position the company with ample liquidity, no near-term maturities, and hedges that are in the money, and look forward to thoughtfully putting our capital to work. And with that, let me turn it back to Jay.

Jay Sugarman (Chairman and CEO)

Thanks, Brett. While we still expect rates to stabilize and eventually start declining, we need to be prepared to wait out higher rates. We'll use our strong balance sheet to take advantage of the very attractive risk return on deals that are in position to close and continue to engage with customers who will be ready to execute when rates ease back to lower levels. Okay, operator, let's open it up for questions.

Operator (participant)

Thank you. To ask a question, please press star 1 at this time. We will take as many questions as time permits. Once again, please press star 1 to ask a question. We will pause a moment to assemble the roster. Thank you. Our first question is coming from Nate Crossett with BNP. Your line is live.

Hey, good morning. Maybe a quick one. I was wondering if you could just speak to the funnel outside of the $145 million that you disclosed in the deck this morning. What are your kind of current expectations for maybe the next 90 days based on the conversations you guys are having? And then just on the funding side, if you can just articulate how you're going to fund the deal flow. I'm assuming the JV will be part of that, but if you can just confirm that, that'd be great. Thanks.

Timothy Doherty (Chief Investment Officer)

Yeah, I'll answer the question on the pipeline. As you can see, there's been a good pickup. We're encouraged by how the pipeline's been this entire year versus last year. And you see the LOIs that are signed here. With the volatility still in the market, we're hesitant on what the next three, six, nine months could be. It all depends on the stability and visibility of rates, but very encouraged by the activity in the market and what we're seeing on our own pipeline.

Jay Sugarman (Chairman and CEO)

Nate, on the capital side, as you heard, Brett and the team have done a great job setting us up very nicely on the right side of the balance sheet. What I'd say is it's an excellent time to invest, so we love that. But the JV is not the best way for us to take advantage of those opportunities, but it's the best way for us right now. Minimizes the capital needs. But we'd like to move beyond that and really start taking advantage of opportunities on our own.

Okay, that's helpful. Just on the activity, is it solely multifamily still at this point?

Timothy Doherty (Chief Investment Officer)

What we're looking at is we always approach the market and find where it's actionable. Right now, multifamily is the most actionable property type. You're seeing the majority of our deals and all the LOI deals are in that space. We're looking at everything else, keeping our eye on all the other property types. But in terms of the deals that actually pencil well for the clients in the market and all the participants, it's been in the multifamily space.

Okay, I'll leave it there. Thanks.

Operator (participant)

Thank you. Our next question is coming from Anthony Paolone with JPMorgan. Your line is live.

Anthony Paolone (Executive Director)

Yeah, thanks. Jay, I think you finished off your opening remarks with something about just rates coming down and maybe bringing the activity back a bit here in the offing. Can you talk a bit about kind of where you think cash-on-cash going-in yields need to be to kind of see more folks sort of take the ground lease option and just how far away from that you might be right now?

Brett Asnas (CFO)

Yeah, thanks, Anthony. So if you think about the end of last year, we started to see a pretty pronounced move down in rates. I can tell you the team was very busy. So we know customers, there is elasticity here. It's not just our pricing, but also the leasehold lender pricing. So it's kind of a double benefit when they go down and a double hit when they go up. I would say that last 50 basis point move that started in late first quarter is definitely having a little bit of a chilling effect on some of the deals we thought would get to the finish line. So if rates did fall back 50 basis points, I think you'd see a fairly pronounced change. 10, 20 basis points, markets adjust. 50 basis points, it seems like the market struggles to adjust.

So 30-year today is in the 450-470 range. I think 4.25 would be a stable sort of good launching pad for a whole new set of customers. And certainly when rates look like they were headed to 4, market looked like it had some momentum. So can't predict when that'll happen. We fundamentally believe this market is reaching a point where the next move will be down in rates, but we just don't know when that will be.

Anthony Paolone (Executive Director)

Okay, thanks for that. Then just my second one. You'd commented on G&A, and so just was hoping to maybe flush that out a bit more to think through the rest of the year because I think your management fees stepped down, I believe, here in the second quarter. So just trying to understand gross and net G&A over the next few quarters, maybe if you could help with that a little bit.

Brett Asnas (CFO)

Yep. Hey, Anthony. It's Brett. So when we think about G&A, as you saw for the first quarter, net of the management fee from Star Holdings is about $10 million. If you annualize that, you would get to about a $40 million number. To your point, each of those line items, such as the management fee, will start to decline. The accrual is based on timesheets, as we've talked about. So you'll start to see a decline each quarter as the assets are monetized and less time is spent. I think from a regular way G&A perspective on the P&L, again, we continue to find ways to create efficiencies both in personnel as well as services, vendor costs, just overall expenses. So as I mentioned on the last earnings call, we were targeting a 5% cut of G&A from 2023 to 2024.

I think sitting here today, it feels like a 10% cut from last year to this year and being at a $40 million number is appropriate. Again, it'll have a little bit of volatility quarter to quarter based on the management fee. On an annual basis, $40 million is our target.

Anthony Paolone (Executive Director)

Okay. So we should expect what was the sort of $15 million or $16 million of total G&A on the P&L in the first quarter, that should trend down over the year then, it sounds like, to keep that net about constant.

Brett Asnas (CFO)

Yeah, that's about right. There's one-time items. We have Board of Director costs that hit in the second quarter each year. So I would say outside of that one-time item as well as that steady decline, that's probably appropriate in terms of what you said.

Anthony Paolone (Executive Director)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is coming from Haendel St. Juste with Mizuho. Your line is live.

Ravi Vaidya (VP)

Hi, good morning, guys. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. Just thinking broadly here, from a modeling perspective, how do we think about acquisitions going forward on a run-rate basis? Would you say—I mean, I understand there's volatility and it's kind of tough to pin down, but would you say $100 million-$150 million a quarter is fair given what you have in your current pipeline?

Jay Sugarman (Chairman and CEO)

Yeah, I think as an annual goal, that's probably a pretty good goal for a market as choppy as this one. Again, I think we're a little bit disappointed. We came into the year feeling really good. That last 50 basis points knocked a few deals that hopefully will come back if the market's settled down. But these deals typically have a little bit of margin error. They don't have 50 basis points of cost on their debt margin of error. So it's going to come down a little bit to how the market sentiment around future rates is. And we see that reflected in the 10-year and 30-year almost every day now. So I know Tim and the team, we're going to build our way back towards the kind of volumes we're used to, but it's going to take some time.

And $100 million a quarter as a base would be a good starting point to start building back.

Ravi Vaidya (VP)

Got it. That's helpful. Just one more here. Can we assume that all these acquisitions are going to come in through the JV? How much capacity do you have left in that JV? And are there any accordion options that we should be aware of?

Jay Sugarman (Chairman and CEO)

Yeah, I mean, right now, there's about $200 million of third-party capital from our sovereign wealth partner that we can tap into. Yes, they are actively looking at the deal flow. So we expect, other than some relatively small deals, that they'll play. As I said, it's not the best thing for us. We think today is one of the best investment environments for what we do in a long time. So we'd like to put out more capital. But given where equity cost of capital is right now, I think the JV is still a valuable piece of the story.

Ravi Vaidya (VP)

Understood. Thank you.

Operator (participant)

Thank you. Our next question is coming from Mitch Germain with Citizens. Your line is live.

Mitch Germain (Managing Director)

Thank you. Can I get some details around the redemption? Do I understand that it was done at a discount to what the purchase was at?

Jay Sugarman (Chairman and CEO)

Yeah. So let's take a step back on that one. That first round was really to get some people involved who we think understood how CARET could play out. Some of them were venture capital type investors who had a very short-term timeframe and wanted to see if monetization would happen quickly. Unfortunately, the market hasn't really developed as quickly as we'd hoped. We have had some success with the ultra-high net worth families, and that's really where we think the future lies in terms of CARET and building a book of investors that can really show the value of that asset. We gave them a redemption option. After two years, they did decide to use it. So that first round was going to be mostly redeemed, and we just decided it's probably we gotten all the benefit from that round.

We should just clean it up entirely and not have a couple dribs and drabs still out there. So we've redeemed that round so you can stop thinking about it. But the redemption price was the original purchase price less any distributions. And we had a CARET event in the interim, so they got their original purchase price minus the distributions they'd already received.

Mitch Germain (Managing Director)

That's helpful. Long-term capital plan, you're at 1.9x leverage. I think you're approaching 2x. Would you guys consider any ground lease sales as a means to raise some liquidity?

Jay Sugarman (Chairman and CEO)

Yeah. Look, I think the strength of the balance sheet and the JV partner has given us a little bit of flexibility here to look at some alternatives. Sales don't take place quickly, so it's not something you turn on and off. But we certainly think there is some small portion of the portfolio that maybe we can redeploy into higher rates. So we'll look at a couple of those alternatives. I don't think that's the long-term capital solution, but you're right. We could squeeze some money out and extend the runway here.

Mitch Germain (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question is coming from Rich Anderson with Wedbush. Your line is live.

Rich Anderson (Managing Director and Senior Equity Research Analyst)

Thanks. Just a follow-up on the CARET, Jay. To what degree does the redemption sort of impact your future efforts around selling CARET, securitizing CARET, or whatever? Is there no change, or would you say you look at the rationale behind the redemption and makes maybe for a more difficult sell going forward? I'm just curious where your mind is now at the CARET with this event happening.

Jay Sugarman (Chairman and CEO)

Yeah. Hey, Rich. I will tell you, the biggest driver of CARET at this point is getting the deal flow back turned on. Lots of questions around that. That seems to be the major driver. The first round, I think everybody understood it was a first step towards a much bigger game. We do think after two years, we really have identified this ultra-high net worth family network as the perfect investor. So I don't think anybody is too worried about a couple venture capital firms that had different timeframes. I would say, again, the number one variable that I look to and I think is really the key to monetizing CARET is getting the growth rate turned back on.

Rich Anderson (Managing Director and Senior Equity Research Analyst)

Yep. Okay. And then in terms of the growth rate, I know it slowed down quite a bit, but is there perhaps a larger element or a changing element of the types of deals, whether it's originations for some type of transaction that happens? But are you seeing more in the way of pre-existing ground leases that are becoming available that you might consider as part of a bigger part of the overall pipeline going forward? Or has that not changed sort of the makeup of the pipeline?

Timothy Doherty (Chief Investment Officer)

Hey, Rich. It's Tim. The makeup of the pipeline stayed relatively the same. I mean, you see the focus on multifamily. In terms of existing ground leases, with over our history, we've bought a number of them. They don't come to the market very often. It's a pretty spotty market, and that remains the case. So we see those opportunities and are the right person to play in those. But the bulk of the pipeline is new originations.

Rich Anderson (Managing Director and Senior Equity Research Analyst)

Okay. Thanks, Brett.

Operator (participant)

Thank you. Our next question is coming from Kenneth Lee with RBC. Your line is live.

Kenneth Lee (VP and Senior Equity Analyst)

Hey, good morning. Thanks for taking my question. In regards to your confidence in closing some of those or majority of the 8 LOIs in the second quarter, just wondering if you could just further flesh that out. What factors are driving this confidence for closing these deals? Thanks.

Timothy Doherty (Chief Investment Officer)

Yes. Those are all moving towards closing. Our confidence is the last couple of weeks, these deals have continued to move forward, which with the rate rise was a comfortable piece of it. However, look, they're not closed yet, so there's no guarantees. But we're pretty confident where they sit in the process of closing that the vast majority, if not all, will get there.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha. Very helpful there. And just one follow-up. In terms of the economic yields, it looks like the economic yields on the LOIs were around 7.5%. Is this sort of a good range? I know that historically, you've talked about expecting about 100 basis points above risk-free rates, but just want to get your sense of how economic yields are shaping up for some of the newer originations. Thanks.

Jay Sugarman (Chairman and CEO)

Yeah. Obviously, this is a new territory. These are the highest yields we've been able to generate. So customers are adapting to a marketplace that continues to shift. We've seen cap rates back up. That's starting to make deals possible. But as Tim said, it's still a little bit touch and go. When rates get this high, you lose a number of customers who I think will come back to the trough when there's an opportunity to lock in rates a little bit lower than this. So we think 7.5% is great. But honestly, as long as we're meeting our benchmark, a little bit lower rates would be better.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

Thank you. Our next question is coming from Harsh Hemnani with Green Street. Your line is live.

Harsh Hemnani (Senior Analyst)

Thank you. Going back to the CARET redemption, what was the conversation around that redemption with the outside investors? Was their sense that the valuation of CARET today was well below the $1.75 billion that they paid for two years ago? Or was it mostly a liquidity hurdle because CARET was not listed on the public market? They just needed some liquidity. Any sense around that conversation would be helpful.

Jay Sugarman (Chairman and CEO)

Yeah. I don't want to speak for them, but there was no conversation with the VCs around value. It was entirely liquidity and what are the prospects in the near term of monetization. And we were candid with them until that growth rate kicks up. That was not something near-term that they should expect. And I don't think we're disappointed. We understood the trade they were making. I think with high net worth families, it was a different conversation. It's much more focused on future rounds and what kind of scale we will shoot for. So that's a better conversation. That's the right conversation. And that one, I'm sure there will be a valuation component too as we think about future investors. But with the VCs, it was entirely about, "Hey, we jumped in here.

We thought there was a chance this would be recognized very quickly and you guys be able to monetize it. You've done a good job. But if there's no near-term prospect, this isn't exactly what we do for a living.

Harsh Hemnani (Senior Analyst)

Okay. That's fair. I'll leave it there. Thank you.

Operator (participant)

Thank you. Our next question is coming from Stephen Laws with Raymond James. Your line is live.

Stephen Laws (Head of Real Estate Finance and Fixed Income Capital Markets)

Hi. Good morning. Jay, a lot covered on the pipeline, but one follow-up. How quickly can it build? If rates were to go back to 4.25 or 4%, does it take six weeks to ramp? Does it take six months? How quickly would you expect borrowers to step in and take advantage of that? How quickly can you guys move to ramp that up?

Jay Sugarman (Chairman and CEO)

Let me take it to Tim. I mean, it can move quickly. Whether the deals can close quickly is a different question. But in terms of interest levels, Tim, you saw some elasticity last time rates fell.

Timothy Doherty (Chief Investment Officer)

Right. I think, look, you see it with what Jay mentioned earlier with the rate drop at the end of last year. Relative, I guess, short-term stability and visibility was there. You saw a big ramp-up in the deal flow of the entire market, right? Because this is about the macro market, not just us. And I think that's a good starting point for the length of time some of these take because it took time for those to get to market to start putting the cap stacks together. So typical real estate, you're seeing deals that are short-term, 2 months to get from start to finish, and normal way, 3-4 months. So once the market shifts and people see that and get that confidence of the visibility and stability, that's usually about the timeframe you'll see.

That's why you see the fluctuation in quarter to quarter in normal markets, right? It takes time to ramp up a pipeline for the entire market, not just capital providers such as ourselves.

Stephen Laws (Head of Real Estate Finance and Fixed Income Capital Markets)

Great. As a follow-up on it, switch to the UCA. I think the marks on office assets make sense. And given annual appraisals, I guess it's been coming for a few quarters, to be expected. Can you talk about the tail there? If you look at the worst office, where are those attached? And kind of what's the cushion there when you look at your most risky situations in office? And then I noticed the other property types, the LTVs really haven't changed materially. So those valuations held in, or will we have a markdown in those valuations as we roll forward? Because it does seem like values across all property types are down. And I'm just curious kind of how those other property types have held in.

Jay Sugarman (Chairman and CEO)

Yeah. Generically, I would say the cap rate assumptions that our CBRE uses have definitely gone up. So that will impact all asset classes. But we've seen rent growth in some of the certainly multifamily offset that to a great degree. So that's the dynamic sort of in the multifamily space is how fast rents are moving versus how fast cap rates are adjusting upwards. Office is different. It's tougher in terms of there's excess supply in a lot of markets. So I do think the LTVs going up faster is reflective of higher rates and tougher fundamentals. You're not seeing the same dynamics we're seeing in multifamily. I think, Brett, you said 80% of the office book has now gone through a CBRE reappraisal in the last two quarters. So we'll see where the last 20% of that comes out.

This is a market that's going to have to adjust and adapt. Certainly here too, lower rates would be helpful, probably provide some confidence that today we're not seeing.

Stephen Laws (Head of Real Estate Finance and Fixed Income Capital Markets)

Great. Appreciate the comments this morning, Jay. Thanks.

Operator (participant)

Thank you. Our next question is coming from Kelly Kunath with Morgan Stanley. Your line is live.

Kelly Kunath (VP)

Hi. Thank you for the question. Just a quick one back on CARET. Is there a threshold that you feel like you need to cross before the focus kind of goes back to CARET? Maybe it's stringing together a couple of series of positive quarters in the origination front or something. Thank you.

Jay Sugarman (Chairman and CEO)

Yeah. I think that is probably the biggest variable right now is when does growth kick back in? And I think that's a function of external growth in terms of new deals and also just stability in the existing book, UCA. So a couple of quarters would do it. But this is a long-term investment. People are trying to center on a growth rate. We're still relatively new as a company. So putting a couple of new strong quarters on the board, I think, is really what people are waiting for, to be honest.

Kelly Kunath (VP)

Thank you.

Operator (participant)

Thank you. Our next question is coming from Matthew Howlett with B. Riley. Your line is live.

Mathew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Oh, hi. Good morning. Thanks for taking my question. Hey, what's the update on Fitch and their review? I know they reaffirmed it a few months ago. And then just remind me again what the interest cost savings could be if you have the dual single A minus.

Brett Asnas (CFO)

Hey, Matt. It's Brett. So when we think about our conversations that we've had with Fitch over the last couple of years, I think what we've outlined for them is that the credit looks materially different than when we were first rated. Obviously, the asset base today versus early 2021 is doubled. The revenues and net income have doubled. The unencumbered asset base has grown fivefold, right? We have $4 billion of unencumbered assets. I think the big piece of the puzzle was a year ago when we closed the internalization that changed a lot of the governance aspects that they evaluated us by. I think from a liquidity perspective, our revolver is now 3.5x the size of what it was three years ago. We've been able to prove out public and private capital raising in the debt markets. We've played across the curve.

I think we've gotten our cost structure in line. I think we've prudently hedged. You take the combination of all that, and it feels like we're a different credit today than we were a few years ago. I think when we ask, "What is it that we need to do to get there?" a lot of it's continue to do what you're doing. We obviously are a newer company in the IG space. Building that track record and building that operating history is important. So they want to continue to see us do that. So we're having constructive conversations with them, and we're going to continue to push there. I think from an interest cost savings perspective, we obviously have seen some of the flow-through from the Moody's upgrade in the fourth quarter.

Even today, when you look at the bonds that we just issued back in February, they're trading 15-20 basis points tighter on a spread basis. So we've seen some of the flow-through there. But I would expect to see another 20+ basis points of incremental savings if we get that second A rating. I know it'll be certainly helpful to both the public and private side. And that remains our objective. And we're going to continue to do what we can to control that aspect for us.

Mathew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Well, you said 20, 30 basis points. That could be significant for new 30-year unsecured debt.

Brett Asnas (CFO)

Absolutely. Yeah. I know as Tim and Jay have spoken about, on the origination side, I think the pass-through to our customers and being able to provide the best cost of capital for them to be able to get deals over the hump, we want to make the appropriate margins for this business. I think a lot of the hedging that we've done will start to flow through as we procure long-term debt and pay down our revolver borrowings. But we're sitting here today, and we have ample liquidity. We're hedged.

At the end of the day, we want to make sure all the good work that we've been able to exhibit over the last few years to the agencies and creditors flows through to what we feel is today, great relative value for investors, but we're going to continue to look to tighten that gap versus other investment grade names.

Mathew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Great. And then maybe one bigger picture question for you, Jay. When you get to a normalized market, let's just look out whether it's a year or two. Do you still feel it's $1 billion-$1.5 billion in annual originations? And when I run my model, should I still run it 60% debt, 40% equity? And I guess the question is, over time, given just the low risk that's in these ground leases, can you take leverage up? It just seems like over time, when I run my that leverage over time will go up just given the risk-adjusted returns here on that asset.

Jay Sugarman (Chairman and CEO)

Yeah. We certainly built the business to do $1 billion-plus a year. We think the market size of the opportunity makes that very doable in a normalized market. So I think that number feels right to us. We're just not seeing that right now. And that's a function of, I think, the volatility and uncertainty in the market and just the nominal rates relative to cap rates isn't lining up great in a lot of areas. I don't think we've changed our mind right now in terms of where we think the right leverage levels are. But this business was meant to scale to a much larger number, and I think that's really our goal. We're not anywhere close to what I think the true size and scale of this business should be. And that's a time we could certainly try to refine our thinking on leverage.

But right now, we're just trying to get the scale. That has always been our goal. The markets are going up. Markets are going down. There's stresses here. There's stresses there. But our goal has to be to get to scale because I think you're going to see some of the dynamics on CARET, some of the dynamics in terms of overhead as a percentage of assets and as a percentage of revenue all start to fall down into our long-term goals. And we're just not there yet. So before we do something on the right side of the balance sheet in terms of changing mix, I think we need to get a little bit bigger and a little bit closer to our goals, and then we can relook at that.

Mathew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Great. Thanks, Jay.

Jay Sugarman (Chairman and CEO)

Great.

Operator (participant)

Thank you. Mr. Hoffmann, we have no further questions.

Pearse Hoffmann (SVP of Capital Markets and Investor Relations)

Great. Thank you.