Safehold - Earnings Call - Q3 2017
October 26, 2017
Transcript
Speaker 0
Good morning and welcome to Safety Income and Growth Third Quarter twenty seventeen Earnings Conference Call. At this time, for opening remarks and introductions, I would like to turn the conference over to Jason Fook, Vice President of Investor Relations and Marketing. Please go ahead, sir.
Speaker 1
Thank you. Good morning, everyone, and thank you for joining us today to review SAFE's third quarter twenty seventeen earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer and Jeff 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 safetyincreamegrowth.com in the Investor Relations section.
There'll be a replay of the presentation beginning at one p. M. Eastern Time today. Before I turn it over to Jay, let me point you to our forward looking statements disclaimer on Slide one. I'd like to remind everyone that statements made on our conference call which are not historical facts may be forward looking.
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, I'd like to turn the call over to our Chairman and CEO, Jay Sugarman. Jay?
Speaker 2
Thanks, Jason, 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. Meetings with top brokerage firms, active developers, and multiple real estate investment firms have 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 a 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 we've mentioned before, we see two main approaches to building the business. The first involves acquiring existing ground leases in whole or part with cash or 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 two deals closed since our last call both represent interesting examples of the types of investment we believe will create robust growth going forward, one with an existing relationship and one as 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 Jeff walk through the quarter in more detail first. Jeff? Thank you, Jay, and good morning, everyone.
Speaker 3
My remarks this morning will refer to slides from our earnings release that was posted to our website earlier this morning. Starting on slide three, 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 $1,500,000 and AFFO was $2,000,000 or $0.11 per share. As we discussed last quarter, our largest asset is the master lease with Hilton covering five properties. Our ground lease not only provides for base rent, but also provides for percentage rent, which was $3,000,000 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 twenty seventeen's percentage rent over the entire year, this quarter's earnings would have been higher by $750,000 or approximately $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 $0.01 $5.06 $6 per share. This includes $0.66 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 five. 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 $2,300,000 of real estate related depreciation and amortization, resulting in 1,000,000 point dollars 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 the $1,400,000 benefit from straight line rent as well as adding back non cash and or non recurring expenses. As a result, our Q3 AFFO was $2,000,000 or roughly zero one one dollars per share based on the 18,200,000.0 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 six.
Slide six is a simple roll forward of our portfolio, starting with the $481,000,000 14 asset portfolio at the end of Q2 and adding the periods origination, the $16,000,000 Lifehope ground lease. Turning to slide seven for more details. The first transaction we closed we refer 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 a 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 ninety nine 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 eight. The second deal that we refer 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 multifamily in Northern California. In this one, iStar had entitled land and offered a combination of ground lease and leasehold construction financing to fast track the purchase and development of 300 units of Class A multifamily 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 five times coverage upon completion. SAFE will fund its ground lease in thirty six months at the end of the estimated construction period.
The cap rate at closing will be 3.75% with 2% annual bumps and 10 CPI look backs beginning in year 2020. 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 SAFES and iStar's Boards of Directors. Both of these transactions received approval from both sets of independent directors. Moving to Slides nine and ten.
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 five 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 Dougherty, our Head of Ground Lease Investments and his team are pursuing. As you can see, our pipeline stands at $1,100,000,000 with $278,000,000 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 multifamily 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 fee simple value less our historical cost in the ground lease. In the past, we provided our own estimate of Value Bank, 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 $1,500,000,000 Taking that value and subtracting our ground lease basis results in a value bank of $993,000,000 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, 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 a 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 0.6 times 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 2.1 times and on a look through basis to the underlying properties at 9.5 times.
Slide 14 lays out our existing debt and hedge positions. Our debt is very straightforward, a $300,000,000 undrawn revolver plus a fully funded $227,000,000 ten year secured non recourse financing 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 medium term protection.
Specifically,
Speaker 4
we have
Speaker 3
a policy of entering into thirteen 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 will turn it back to Jay.
Speaker 2
Thanks, Jeff. I mentioned our education efforts to start 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, it means making sure all owners and intermediaries involved in the sale of existing ground leases know 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 of principal, 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, Jeff and I purchased $25,000,000 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?
Speaker 0
And our first question comes from Rich Anderson from Mizuho Securities. Please go ahead. Your line is open.
Speaker 5
Thanks. Good morning. So on the $25,000,000 stock purchases you mentioned at the close there that exhausts your allotment. Is there any discussion about expanding that further into the future?
Speaker 2
Yes. We continue to look at ways to deploy capital at iStar. And certainly, we think this is one of the attractive investments out there. So that will be a dialogue once we come out of blackout.
Speaker 5
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?
Speaker 2
Well, 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 and a bad capital structure, iStar is pretty good at figuring out how to solve those problems for borrowers. 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.
Speaker 5
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 typical way of the business transacting in a given year?
Speaker 2
I think it is true in almost all parts of the market. This is our first year to have the full resources of the company focused on ground leases. We'll see if that dynamic exists 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 two months.
Speaker 5
Great. And then on the escalators, Jeff, you mentioned 2.8 or showed 2.8 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. 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 reasonable number to be thinking about?
Speaker 3
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 it's the long term reality.
Speaker 5
Okay. And my last question is, I see in the AFFO calculation you have the 1,200,000.0 sort of add back management fee non cash. My understanding was that there would be a zero management fee for the first year. Can you just explain that to me why there's a cost there even though it's non cash?
Speaker 3
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 non cash.
It will always be non cash 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 recall. But between now and then, you'll see the entry, but there will be no cash stock or other expense associated with it because the manager has agreed to waive it for the first year of operations.
Speaker 5
Okay. So next quarter should we have maybe I just blanked out on it. So should we have that number in there for calculating AFFO sort of through the beginning part of next year?
Speaker 3
There will be no management fee in AFFO for the first year. Back it out for the first year because it's waived. So there's 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.
Speaker 5
I guess maybe you can take this offline, but will that one because the GAAP required you to show 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 zero in the next couple of quarters until you start getting paid in stock. Is that right?
Speaker 3
It'll be zero. Yes, it will be zero in AFFO next year.
Speaker 1
Rich, to clarify from the GAAP perspective, it will show up in the GAAP financials, it's trued up on the equity account. So it gets kind of refunded on the equity account.
Speaker 5
Understood. Thanks for clarifying and thank you very much.
Speaker 0
And our next question comes from Collin Nings from Raymond James. Please go ahead.
Speaker 6
Hey, good morning.
Speaker 3
Good morning. Good morning.
Speaker 1
To start, can you just maybe talk a little
Speaker 6
bit more about if you expect additional forward commitment transactions as you look at the deals in your pipeline? Or was this really a really unique deal as far as the forward commitment aspect of it?
Speaker 2
Yeah, 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 expect to use that structure going forward very often. Wherever possible, we want SAFE to have the ground lease as soon as it's created.
And we'll use the forge structure only in 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.
Speaker 6
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 $278,000,000 Appreciate all 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 $278,000,000 What are the cap rate ranges? Additional color there would be helpful.
Speaker 2
Yeah, look, I think we're trying to give as much transparency as we can. I think your question is it's multiple deals. In fact, there's 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 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.
Speaker 6
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?
Speaker 2
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 four range. We think the slightly less quality markets probably deserve a 50 basis points premium. So you'll see that four, four point five maybe.
And then if it's got a development aspect or 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 multifamily 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.
Speaker 6
Okay, that's helpful. And one last one for 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?
Speaker 2
We have. We've had that dialogue. I think 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 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 our property owner needs. We think they're going to be a great partner for that.
Speaker 6
Okay. I appreciate the color. I'll turn it over. Thanks.
Speaker 0
Your next question comes from Anthony Paolone from JPMorgan. Please go ahead.
Speaker 4
Thanks and good morning. Just want to start following up on Rich's G and A questions. So I was under the understanding that just putting aside the management fee that kicks in next year, just your G and 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?
Speaker 2
So G
Speaker 3
and A exclusive of the management fee, is that what you're asking?
Speaker 4
Yes.
Speaker 3
So G and A this quarter exclusive of the management fee was around $700,000 700 to $800,000 So I think that we're in the range.
Speaker 4
And is that like a cash number or a GAAP number? Is is there any difference there for that piece of it?
Speaker 3
Only $350,000 of that is cash. So that's the accrual of the accounting fees, legal fees, corporate insurance, all of our costs associated with being a public company, stock exchange fees, etcetera. So some of those are paid in a single period and amortized over the entire year which is why there's a disconnect between cash and GAAP.
Speaker 4
Okay, and would you actually add back the non cash piece of that, I mean, even though it's just an accrual timing matter for AFFO?
Speaker 3
No. The big thing, the big adjustment in AFFO is straight line.
Speaker 4
Right. And so on a go forward basis, the 700 to $800,000 is that going to trend up to where I think the thinking was around the IPO closer to $900,000 thereabouts? Or is it to be at just a lower level?
Speaker 3
I don't think we've changed our expectation from IPO.
Speaker 4
Okay. And then in terms of just to understand this GAAP accounting and the add back and what you intend to do going forward, the add back, is it just going to be the non cash 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? Is there a difference there?
Speaker 3
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 in stock, it will not show up in AFFO. It will be an add back to AFFO.
Speaker 7
Okay.
Speaker 4
All right. I understand then. In the fourth quarter, just to understand kind of the implicit sort of volume guidance for deals, said you want to double the initial portfolio of $340,000,000 does that include the $34,000,000 forward in that thinking?
Speaker 2
Yeah, look, I think the team worked really hard on that deal. We certainly included 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 $700,000,000 of assets invested by the end of the year. We certainly have a pipeline that suggests we're going get there.
Whether it all 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 penetrates 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 150,000,200 million dollars of assets over the next couple 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.
Speaker 4
Just thinking through that, just trying to understand whether it hits in December, January, whatever. Seems like about $150,000,000 you think of the pipeline is kind of where you're getting pretty close?
Speaker 2
Yeah.
Speaker 4
Okay. And then you may have touched on this and 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? You had some office and a couple other things in the mix, some retail.
Speaker 2
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 the deals that we have been pursuing for the most part are still active. We've 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.
Speaker 4
Okay. 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?
Speaker 2
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 one plus one can be better than two for all parties involved. That includes ground lease owner, the leasehold lender, and the property owner. 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, yeah, you're right, could impact a number of situations where we are 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 basis points here or there really changes the calculus.
Speaker 4
Okay. 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 deal? I think it's the $3.75. Any translation there as to if you were able to put the money out today?
Speaker 2
Yeah, we actually look at the forward curve and try to equilibrate owning it three 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 three 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 three year forward ten 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 multifamily cap rates on the equity are in the low 4s range, up to around five, so we think $3.75 cap rate's quite attractive.
Speaker 4
Okay, got it. Thank you.
Speaker 0
Your next question comes from Dan Donlin from Ladenburg Thalmann. Please go ahead.
Speaker 7
Yes. Most of the questions have been answered. We're just curious though the composition of the pipeline. It looks like the transactions that you're originating moved kind of the 80% of 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, Alpharetta deal you've done, the Hollywood deal, Alpharetta seems like there's a change in the assets 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 originate these deals, is it kind of in and around development and or redevelopment?
Speaker 2
Dan, think as I said in the beginning, the two 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 coming to market every quarter. On that one, we'll just take them as they come. On the create side, any time there's a transaction, we can put our foot in the door. That can be a 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 yeah, 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.
Speaker 7
Okay. And then just you talked a little bit about education. What is, do think, the biggest hurdle or maybe the largest misconception that you found that potential sellers or people that maybe are looking to originate these things have that you think that they just can't seem to get past?
Speaker 2
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 thirty 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 to show that whatever twenty years, thirty years, fifteen 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, I'll put that in quotes, 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 lease hold lenders. And you just have 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.
Speaker 7
Okay, thanks. That's very, very helpful. Appreciate it.
Speaker 0
Your next question comes from from Bank of America Merrill Lynch. Please go ahead.
Speaker 8
Good morning, guys. Most of my questions have been answered. Just curious on the Old Milton Parkway acquisition, was a cap rate of 5.5, current coverage I guess goes to four times in year two. It seems high just given kind of the framework you laid out. Anything special in that deal that got the cap rate higher that would have expected just given the current run coverage?
Speaker 2
Yeah, 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 these 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 timeframe necessary to have all these leases 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 of 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.
Speaker 8
Okay. Thank you.
Speaker 0
And Mr. Fuchs, we have no further questions.
Speaker 1
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? Thanks.
Speaker 0
Certainly. If you would like to listen to the replay, please dial (855) 859-2056 or (404) 537-3406 and reference conference ID number 9376788. The replay will be available at 1PM. You may now