Safehold Inc.
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Operator:]

Good morning and welcome to Safehold's Second Quarter 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time for opening remarks and introduction, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.

[Jason Fooks:]

Good morning, everyone, and thank you for joining us today for Safehold's earnings call. On the call today we have Jay Sugarman, Chairman and Chief Executive Officer and Marcos Alvarado, President and Chief Investment Officer. This morning, we plan to walk through a presentation that details our second quarter results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investors link. There will be a replay of this conference call beginning at 1

[Jay Sugarman:]

Thanks, Jason, and thank you all for joining us today. The second quarter saw a nice ramp-up in investing activity with both transactions closed and future deals in the pipeline growing strongly from the first quarter. We continue to gain traction by providing long-term, well-priced, and well-structured modern ground leases that unlock significant value for our customers. This quarter, we also expanded our ability to source high-quality ground leases in major markets through our Ground Lease Plus program. Working together with iStar, we can create ground leases early in the development process where iStar funds the pre-development ground lease and Safehold commits to acquire the ground lease at a predetermined price once the development meets certain shovel-ready criteria. During the quarter, iStar closed on a pair of Safehold approved ground leases, covering a full city block in downtown Austin, Texas, which Safehold committed to acquire once construction is ready to begin. We also secured an option on a major site in the Seattle MSA that will be triggered once construction begins on an anticipated 1 million square foot development. Together, these two opportunities could generate between $300 million and $500 million of irreplaceable ground leases in two of the top technology markets in the country. Along with our progress on the customer front, we also began to highlight for investors the significant value building up in Safehold's unrealized capital appreciation account and provided a simple valuation formula for investors to understand the potential value of this asset as we continue to grow. We've been quietly tracking this asset value for shareholders since we went public, but now believe we have demonstrated both the track record and the scale to be a bit more vocal about the embedded value that is being captured for shareholders. As you saw in our earnings package, our unrealized capital appreciation asset grew by some $374 million in the quarter, increasing to approximately $6 billion. By consistently growing our ground lease portfolio and diversifying across top markets and major assets in the US, we believe this $6 billion asset will come into sharper focus in investors' minds and begin to be reflected in the value of our share price.

[Marcos Alvarado:]

Thank you, Jay, and good morning, everyone. Turning to Slide 3, we are pleased with the performance of our portfolio during the quarter as we continue to make steady progress scaling our business. Highlights for the period include

[Jay Sugarman:]

Great. Thanks, Marcos. So it feels like we're on track to finish the year strongly as we continue to find ways to provide our customers better and more efficient capital. And if we can continue executing on the customer side, the benefits to Safehold should also be very strong as higher growth and higher unrealized capital appreciation deliver a one, two punch of earnings and value creation for our shareholders. Now, let's go ahead and open it up for questions. Operator?

[Operator:]

Thank you. Our first question comes from Nate Crossett with Berenberg. Please go ahead.

[Unidentified Analyst:]

Hey, guys, it's Keegan on for Nate. Thanks for taking the questions. I think to kick things off, can you give us a little bit more detail on the origination volume in the quarter? Outside of Jacksonville, where were the other properties purchased and if you could give us a little bit more detail specifically on the multifamily assets?

[Jay Sugarman:]

Yes, Marcos, why don't you give a little more detail.

[Marcos Alvarado:]

So we closed a brand new multifamily asset in Denver, Jacksonville as we mentioned, a 2018 vintage deal in Portland, a brand new multifamily in South Florida, in the Fort Lauderdale area, and another multifamily asset in Atlanta, Georgia, and an office asset in New York City.

[Unidentified Analyst:]

Great. And I know you guys don't give any formal origination guidance, but can you remind us on the target over the next year or so and do you think you're still comfortable saying we can double the portfolio in the next three years.

[Marcos Alvarado:]

Yes. As we've said in prior quarters, given the lumpiness of our business, we don't provide quarterly or annual guidance. I think we remain extremely optimistic that we'll hit our target of $6.4 billion by the end of 2023.

[Unidentified Analyst:]

Okay. And just one final one. Can you guys speak to the current pipeline right now? I mean, do you guys have anything else under LOI, kind of what are the expectations for the remainder of the year?

[Marcos Alvarado:]

We don't disclose the amount of transactions under letter of intent. I will tell you that we are busier than we've ever been. We're seeing this kind of thought that we've talked about really start to happen, the awareness of our product, our cost of capital, customer satisfaction, network effect. So as Jay alluded to, I think the second half of this year, going into early next year feels really good right now.

[Unidentified Analyst:]

All right. Sounds good. Thank you.

[Jay Sugarman:]

Thanks.

[Operator:]

Our next question comes from Rich Anderson with SMBC. Please go ahead.

[Rich Anderson:]

Thanks. Good morning, everybody. So on the Ground Lease Plus program, what's the benefit to iStar in this? They buy the land and do you pay them a markup? Is there a return for iStar or are they -- is it sort of an even trade and they are just kind of doing this on behalf of Safehold knowing what the longer-term intentions of iStar in the ground lease business?

[Jay Sugarman:]

Rich, yes. No, you've got it. iStar is putting out capital market risk returns that it finds attractive. We've actually had third-party capital also interested in participating. So there is a pretty robust conversation around what's the appropriate risk-reward for iStar. They would not commit capital if it didn't make sense. But this is really another one of those places in the ground lease world where one plus one equals more than two. So we think both iStar can benefit and make smart investments here as can Safehold. So it's another way we're leveraging the full power of what we've been building here to really help our customers access capital that's never been available to them before and we think there is a real possibility to continue to grow this idea.

[Rich Anderson:]

So just SAFE, though, pay a premium to what iStar paid, is that how it works?

[Jay Sugarman:]

Yes. It's based on the return to iStar.

[Rich Anderson:]

Okay, got you. Within iStar today, with the land that it owns, are there opportunities to sell existing parcels of land to SAFE for a similar execution?

[Jay Sugarman:]

[Rich Anderson:]

Okay. And not to make this about iStar, but it's kind of the same conversation. You're kind of testing the market on your net lease portfolio. Is that just kind of a -- exactly that or how close might you be to selling that portfolio all or some of it and what does that say about your level of confidence about a pipeline of ground lease opportunities within Safehold? Is it telegraphing that there is a growing kind of pipeline out there, because you are starting to investigate more formally the net lease portfolio?

[Jay Sugarman:]

I think everything is consistent with what we've said. Scaling Safehold has been a major focus of both companies. We, as Marcos said, are really starting to feel the markets reopen and our product really reaching a new level of acceptance and desirability to a lot of different customers. We're also seeing lots of interest in iStar assets. And so I would say, we're in the exploration phase, Rich. Nothing definitive. But we certainly believe all the strategic initiatives that we set up two, three years ago are certainly playing out the way we hoped. And so we're going to continue on this path. We think both iStar and Safehold can deliver significant value if we continue to execute on those plans.

[Rich Anderson:]

Okay. Last one for me. Is there a ceiling to how much you can do in terms of raising public debt, because you have the liability asset duration mismatch issue? So understanding you put $400 million into the market, but how much can you really do while trying to preserve some level of duration on your debt?

[Jay Sugarman:]

Yes, look, this was our inaugural issue. The 10 year was obviously a sweet spot in the market, but we had significant reverse inquiry at much longer tenors, so we will continue to try to drive a book that has some of the longest maturities in the entire industry. We've internally targeted sort of that 25 to 30 year. We're kind of in the 26 year range even with that 10 year offering. So I don't think the strategy has really changed. But this ability to tap the unsecured markets is going to make us faster, bigger, better as we serve our customers. So we'll find the right tenors to match fund the business, but I think the opportunity to now access both unsecured and secured just puts us way ahead of anybody else in the game.

[Rich Anderson:]

Great. Thanks very much for the color. Appreciate it.

[Operator:]

Thank you. Our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

[Anthony Paolone:]

Thanks. Good morning. So first question I guess is on the Star and SAFE dynamic. I guess I'd have thought that with Star exploring the net lease sale maybe that would accelerate maybe some ultimate events between Star and SAFE. But now Star getting into this pre-development ground lease business. So, I mean, anything to take away in terms of what these various initiatives at the Star level suggest in terms of something happening between Star and SAFE ultimately?

[Jay Sugarman:]

No, I wouldn't read too much into that. Again, our mission at Star and SAFE is to grow this business, be the dominant player. This is another piece of that puzzle. I don't think it changes anything in our minds about thinking about the right architecture long term for the business. We've publicly said, when we get past about $5 billion of assets, it will be appropriate to have a conversation of both companies about that architecture. This is just a piece of the puzzle that we sort of thought would work. We mentioned it a while back. We've been testing the hypothesis, refining it, and now we're starting to see some results. We think there's plenty of capital in the world that would certainly be interested in that. So iStar is really good at helping launch this kind of new innovation, but it doesn't have to be the long-term capital source if it doesn't want to be.

[Anthony Paolone:]

Okay. And then, what is specifically the markup or the mechanism when Star does one of these pre-development land deals and then flips it over to SAFE?

[Jay Sugarman:]

Yes. Obviously, both independent Boards have to approve every transaction; so it's really predicated on sort of market returns that are appropriate for the risk and the profile of the asset where it is in the stage of pre-development. It is, again, a one plus one equals more than two and each independent group of directors gets to see the entirety of the transaction and has to feel comfortable with it or we can't move forward. So there is a measure of equity that we as management try to start with and then there is a little bit of negotiation and has to meet kind of market standards or won't get done.

[Anthony Paolone:]

And so, I guess if SAFE is doing deals let's call it a five, what would that equivalent number be for Star?

[Jay Sugarman:]

Obviously a very different duration tenor risk profile. So, the pre-development world has capital that's certainly in the double digits and that's not unusual, but when you look at what Safehold is buying, it's a constructed 99-year contractual cash flow streams of two very fundamentally different instruments. We know the market from the pre-development world very well at the iStar side and Safehold knows the ground lease market very well from the long-term ground lease side. And there is some pretty good benchmarks that are shared with both Boards just to make sure that everything sort of in that range that guardrails of what we've seen in the market and feels appropriate.

[Anthony Paolone:]

Okay. And then, just in terms of thinking about future commitments, I think there were some of the deal flow in the quarter that you have yet to fund. I think it was like $12 million and I think you've done some things like that in the past. And then also, you've got this $273 million now out of the Ground Lease Plus program. Just wondering just kind of help add up kind of what's like pending, if you will, that's pretty visible that at some point will go into SAFE.

[Jay Sugarman:]

Yes, I would sort of segment it into things that we have closed and are just funding up as construction reaches sort of full cycle on that single asset. That number is probably in the $75 million to $100 million range. The GL Plus program is further out than that. There are conditions that must be met. Capital stack that must be put together. So I would sort of bucket the near term s $75 million to $100 million and the $273 million or the $448 million that Marcos mentioned is further out in the future.

[Anthony Paolone:]

Okay, got it. The $273 million is just basically the two tracks in Austin and then the $448 million when you add in Seattle. Is that the right math on that?

[Jay Sugarman:]

Correct.

[Anthony Paolone:]

Okay, great. That's all I got. Thank you.

[Operator:]

Our next question comes from Stephen Laws with Raymond James. Please go ahead.

[Stephen Laws:]

Hi, good morning. Marcos, I wanted to follow up on your comments. You mentioned in the prepared remarks Ground Lease Plus that you've become involved much earlier and the ground lease business as a whole has become more competitive over the last three or four years since you've started the company. Can you talk about the competition and really that more early development or where Star is going to play and really what is more the medium and long-term opportunity there? Is that less competitive, is that really an opportunity for outsized growth as we think about two and three years from now?

[Marcos Alvarado:]

Yes. Let me address the competitive landscape overall for our business. I can tell you, we still haven't seen anything that we wanted to do that we didn't do. So our cost of capital advantage or the proven track record of closing transactions, the flexibility we've received through this unsecured issuance, I think we are observing customers better than anybody else can in the marketplace. So we haven't really felt competitive pressures on just our normal way ground lease business. We certainly compete with the fee financing markets which are liquid and functioning as we -- as this market does. Ground Lease Plus as a product is just another additive origination channel. It allows us to capture the entire life cycle of an asset, it allows us to capture the entire investment lifecycle of our customer more importantly. So they come to us for everything. And given the risk profile, this sort of one plus one equals more than two dynamic made all the sense for us for iStar to take extra risk, kind of early on in the lifecycle and face -- be that natural takeout, which obviously creates future growth as Jay alluded to in the coming years.

[Stephen Laws:]

Great. Thanks for the color there. Moving to the expense side, can you talk about G&A a little bit. I do think Q2 is seasonally a little higher due to some stock-based comp, but can you talk about what else went into the increase sequentially for G&A?

[Jay Sugarman:]

Sure. Yes, we have a little bit of a quirk in that our directors get their full-year pay in the second quarter and it is fully expensed. So that's quirky and we should be clear on, that's a little bit over $1 million. So that you will see every second quarter and maybe we can smooth that out in the future, but right now, that's the way we're handling it from an accounting standpoint. We do have some significant legal costs this quarter and some of that will continue. These innovative products do take a bit of expertise and intellectual property that we develop in-house. Got a tremendous team of in-house legal experts who work on this stuff. So every once in a while, you'll see that crop up in second quarter. With GL Plus, doing our first deal, we did a lot of extra work to get it right. And as we innovate, we will continue -- we think it's well worth it to spend that money, but it's one-time and in one sense, but in another, we are trying to innovate a, what we hope is a trillion dollar business. So, we think these are all really smart investments for building out the full potential of this modern ground lease industry. So those were the two things that sort of pushed the expenses this quarter and certainly the directors' compensation will go away next quarter and the legal fees right now, I would say, this was a little bit on the high side.

[Stephen Laws:]

Great. That's very helpful color, Jay. Thanks. I appreciate you guys taking my questions this morning.

[Jay Sugarman:]

Thank you.

[Operator:]

Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

[Caitlin Burrows:]

Hi, good morning. Maybe just to start a quick follow-up on that last topic. Jay, could you just confirm those legal costs? They were included in the line for expense reimbursement to the manager, is that right?

[Jay Sugarman:]

No, they are actually at the Safehold level. What line item guys that we have those under? Just straight G&A.

[Caitlin Burrows:]

Okay. So then, I guess, if I'm looking at the expense reimbursed to the manager, it looks like that was higher in the quarter two. Is that something -- you know what, never mind. I will look into that again. Okay. Moving on, then just on the Ground Lease Plus product, could you just talk about, it sounds like the reasoning behind iStar's involvement versus it being Safehold from the beginning might be risk-related. So just wondering how pre-leasing plays in and is it that iStar is just taking more of that leasing risk, but then Safehold is only involved once the property is leased-up or can you talk a little bit about that relationship?

[Jay Sugarman:]

Yes, I think the easiest way to think about it is, Safehold wants to be in sort of 35% to 40% of the value of our capital stack and wants to know that there is a physical asset on the property or about to be on the property. So what iStar is doing is obviously taking more risk. There is not a physical asset and there is not a shovel-ready capital structure or G&P or construction. Leasing in and of itself obviously depending on different products, leasing happens at different points in that pre-development cycle, but that's not really the standard. The standard is, do you have your capital stack and is the project going to get built, do you have your G&Ps, permits, entitlements, are you ready literally to put a shovel in the ground and build the building and the pretty picture that you've shown your investors, that puts Safehold in that 35% to 40% GLTV zone. That's the moment it's a Safehold deal. Obviously, these pre-development deals don't line-up on that risk and/or GLTV basis and so they are really not appropriate yet. But we think there is a great opportunity to tie-up really great land in the best markets with some of the best developers. And we think iStar return profile and any third-party capital we also use for that is going to benefit from our ability to see those deals very early, provide the best combination of near-term and long-term capital. And we think there is real possibilities here. We've only done a couple of deals. So, it's still early, but I can tell you, it's another certainly arrow in the quiver when we're sitting with customers. As Marcos said, we're building relationships not on single building or single asset. We're building them with customers and when they go places and do things in great markets and wonderful locations, we don't want to say, hey, come back to us two years from now. We want to engage with them now. We want to be the best capital source for them now. We think iStar can provide that capital and we think Safehold is the best long-term capital provider and we can give them one-stop shopping in a way that we don't think very many others can.

[Caitlin Burrows:]

Got it, okay. And then, maybe just on the funding side for the investments that -- over $200 million of investments that you made in the quarter. You did the unsecured $400 million deal. I guess, just thinking on the equity side, what are your plans for equity issuance this year and what metrics are you looking at to decide when the right time to raise equity is?

[Jay Sugarman:]

Yes, I think we said we have about $1 billion of liquidity. So, liquidity is certainly not a constraint. We've also said I think in the past we like to have about $500 million of liquidity lying around at any point in time. So the pipeline feels good. Marcos' team is fully engaged on all fronts and so if we start knocking down these deals and eat into that liquidity, certainly those are the kinds of metrics we will be thinking about.

[Caitlin Burrows:]

Okay. And then, maybe a last one just in terms of the acquisitions that were completed in the quarter. Wondering if on those six deals, you could give some detail on the timing of them, although actually I think one of them isn't actually closed, but the timing of the deals that did close in the quarter.

[Marcos Alvarado:]

So, all of them, except for $12 million closed in the quarter.

[Jay Sugarman:]

Somewhat late in the quarter.

[Caitlin Burrows:]

Okay. Rather late in the quarter?

[Jay Sugarman:]

Yes, sort of -- June was a big month.

[Caitlin Burrows:]

Got it. Okay, thank you.

[Operator:]

Our next question comes from Haendel St. Juste with Mizuho. Please go ahead.

[Haendel St. Juste:]

Hey, good morning. Thanks for taking my questions. I know there has been a lot on the Ground Plus already, but I've got I guess one more. I guess I'm more curious, how much of your pipeline proportionally could use Ground Lease Plus deals represent or perhaps what level you'd be comfortable with? And then maybe could you talk about the target returns and any key differences in the underwriting of these types of investments versus your more traditional ground lease assets? Thanks.

[Jay Sugarman:]

I'll let Marcus talk about the pipeline dynamics. Again, this is one of many products we offer our customers, so -- and it's a new product. So we don't want to overstate our certainty around those kind of numbers, but what I would tell you, Haendel, is, when we think about the opportunity to penetrate the very best markets in the very best locations, this is a powerful tool. And we think it's one that allows us to get into markets on all the good metrics that we've talked about. I mean, we know where we want to stop the price, we know where we want it to be sort of in that AAA slot. So the real question is, how do you get into some of these really high quality markets, how do you work with some of these really high quality customers so that they are calling you all the time, everywhere they go. So they do the hard work tying up off-market deals, we want to be available to them. And what's in it for us is, we're getting a shot at some assets that we probably wouldn't get a shot at if we showed up much later in the life cycle. So it's a really powerful idea. Again, don't want to overstate it. We've only done a couple, but the reaction has been really positive. The caliber of the customers, we can't really talk about, but it's extremely high. And so this feels like right up our alley of sort of a Safehold/iStar fit. This is what we do really well. And so, Marcus, what you think the potential here is?

[Marcos Alvarado:]

As Jay alluded to, we're excited about capturing more of our customers' mindset. And I think we're optimistic that every quarter or every other quarter, we will hopefully announce a super high-quality Ground Lease Plus transaction. But as I think about our overall pipeline, the lion's share is ordinary course ground leases. Our regular way business is very engaged, very active. So most of the pipeline is just regular way business.

[Haendel St. Juste:]

Got it. Thank you for that. Another question on the pipeline. At NAREIT, I think you guys intimated about the potential for larger transactions. Were you alluding to these Ground Lease Plus deals in Austin, Seattle or were they other larger deals in the pipeline that could represent some upside here?

[Jay Sugarman:]

No, regular way business is outside of the GL Plus transactions is what we're alluding to. So the GL Plus is just additive future super high-quality growth.

[Haendel St. Juste:]

So then, the conversations around some of these larger potential transactions continue, any movement or sense of -- any sense of imminent conclusion or we're still just still waiting and doing them on -- is this ongoing conversation?

[Marcos Alvarado:]

I would call it, some could -- in diligence and closing process, ongoing conversations, I think that's why we've been reticent to provide guidance because these lumpy transactions take some -- some of them have been worked on for a year and a half, as an example. So we can't predict exactly when they are going to close, but we feel good about the growth going forward.

[Haendel St. Juste:]

Got it. And one more. I think you mentioned you closed on a New York City office asset in the quarter. I'm curious how you underwrote that, the yield and did you notice any meaningful change in the asset value and then I guess how comfortable you are doing more office deals going forward?

[Jay Sugarman:]

Yes, certainly. We bought an interest in a New York City office building, super high-quality asset. I think the relevant metric is, we're in the $200 foot range at our basis. So we feel like we're below land value. We do agree that there is some -- there has been some value deterioration from where the office asset traded in 2015, where it was probably worth pre-COVID and where it sits today. And so we took that into account in our analysis and it's consistent with our metrics at a reset basis.

[Haendel St. Juste:]

Can you share just a ballpark estimate of what you feel that change in value has been?

[Marcos Alvarado:]

15% down.

[Haendel St. Juste:]

Okay, thank you. Appreciate it.

[Operator:]

Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

[Matthew Howlett:]

Thanks. Thanks for taking my question. Just back to the Plus program, does the iStar find the first mortgage and do they sell the first mortgage, just curious how that works?

[Jay Sugarman:]

Yes, it's not actually structured as a mortgage, it's structured as a ground lease.

[Matthew Howlett:]

Do they have corresponding first mortgage with it or, I mean, just curious as it will go along with it?

[Jay Sugarman:]

Yes. At least, in this case, it's just a 100% equity check. So there's not -- iStar is not lending to itself. If we bring in third-party capital and lay off some of the total investment, certainly, the entity could go seek financing. But these are probably -- our guess is two-year kind of predevelopment cycles, it may not be worth it to try to go leverage them. We have partnerships that have significant capital they would like to deploy with iStar. So capital shouldn't be a problem. So we haven't really focused on trying to optimize the two year hold period. Certainly, iStar at this point has plenty of liquidity and is working closely with Safehold to just create these one-off opportunities to expand our presence, but something we can think about down the road.

[Matthew Howlett:]

Got it. And then, the Jacksonville getting into that, expanding that market, what do you think in terms of how many more markets you can get into? Talk a little bit about what's interesting with Jacksonville and comparable markets like that?

[Marcos Alvarado:]

Yes, I think we're in 27 of the 30 we originally talked about. Jacksonville is an NFL city, which was one of the original concepts we kind of followed is go to the bigger cities with the bigger assets. This asset is actually almost directly adjacent to multiple stadiums in that market. So I think our viewpoint is there are 30-ish top markets. We did a deal in Portland this quarter. It's a great market for multi. Atlanta, beautiful asset. The Fort Lauderdale asset, beautiful asset. Denver is a gorgeous asset. These are all really high quality physical properties in great locations where the land has appreciated materially over time. So really happy with the mix we are seeing. There is a steady flow of business on that multifamily side that we're really happy about. And then we've got some fairly large transactions we are still working on. So, I think the -- our job is just to execute now on the pipeline ahead of us. And if we do that in these top cities, whether it's San Antonio or Jacksonville or whether it's a gateway city like a Boston, New York, San Francisco, Chicago, LA, we think these are exactly what we should be doing.

[Matthew Howlett:]

When you say you've been the busiest you've ever been, is that just with the array of products, the more awareness of the products, what's just -- what's driving it?

[Marcos Alvarado:]

I think it's a combination of all that. I think we're busy because we're in the process of closing a lot. We're innovating. So there's different ways to talk with our customers, which requires an education process. I think the brand awareness is at its peak. And so we're involved in a lot of processes early on. How would you guys look at this? I'm thinking about selling it. How would you guys look at this? Are you thinking about refinancing? And we used to not get those calls. So we're cranking.

[Matthew Howlett:]

Great. Thanks a lot.

[Operator:]

Our next question comes from Ki Bin Kim with Truist. Please go ahead.

[Ki Bin Kim:]

Thanks. Good morning. Just going back to the Ground Lease Plus strategy, I'm just curious for pre-development deals, like how are you getting compensated for the inherent risk of development, in terms of the yields that you're getting?

[Jay Sugarman:]

Yes. Look, I mean, see if I can make it really clear. So you have two investments here. You have a ground lease during a pre-development phase that Safehold is agreeing to take out two, three years forward depending on when the conditions are met. The pre-development phase is a risky phase. The return profile of that in the marketplace is definitely double-digit returns on an unlevered basis. And so we are competing with other sources of capital to provide that capital. But we also think that the Safehold dynamic is one that -- again, we want to be in these markets, we want to be in them long term. We know where the pricing is. We know where we want to be on a GLTV basis. So the benchmarks are out there in terms of we have to beat alternative forms of capital. We think in the pre-development that kind of capital should earn high single digits, low double digits, maybe even a little bit higher depending on the risk-reward profile. And we think us, Safehold's ground lease needs to earn, as we've said, it's historically 100 to 125 basis points above its cost of funds. So those benchmarks are pretty well established. Both Boards are well aware of them. The teams are out there competing with other sources of capital. So there is a pretty liquid market of, hey, where is this deal, where should it trade, what's the right risk-reward equation. But if you are asking simply, what does the pre-development deal earn, again, depending on the asset type, depending on the marketplace, it's high single digits to mid-double digits -- mid-teens. And if it's a core central CBD ground lease, it's going to be in that, I don't know -- our ROA targets, as you've seen in the past, are kind of 100 to 125. However, sometimes they've been better. But that's still the benchmark by which we try to set these deals up.

[Marcos Alvarado:]

Yes. I think the way to think about it from SAFE's perspective is, we are getting access to transactions we probably wouldn't get access to by grabbing them earlier in their life cycle. And economically and from a metric standpoint, they are consistent with the rest of our portfolio or even better in certain instances and the quality of the assets is fantastic.

[Ki Bin Kim:]

Now do you, from a legal standpoint, write in more language in terms of if the project doesn't deliver the yield expectation, what kind of safety parameters do you build in for yourself, if any?

[Jay Sugarman:]

If the project doesn't get built, SAFE doesn't have to buy. And so that's -- the starting point is, if it doesn't meet those metrics that Marcos talked about, it is not a requirement for Safehold to buy a project that isn't progressing. So that's one safety measure. Usually, as you can imagine, we build in -- if the building is a little bit bigger, if the building is a little bit smaller, if this eventuality happens, if this one doesn't. So I think our view is, we are setting up Safehold deals that feel and look and will be exactly like the rest of the book, while recognizing that we don't know exactly when those conditions are going to be met. And so this is a great way for us to not only work with the customer when they are forming the transaction, but also beat our long-term capital source essentially forever.

[Ki Bin Kim:]

Okay. And just more of a macro question here. We've seen a lot of movements in treasuries and of course, concerns about inflation. But I'm curious from your business perspective, is there a certain scenario where you see more inbound calls or more activity in your pipeline -- interest rate scenario?

[Jay Sugarman:]

Yes. I mean, we just have to be the lowest cost, longest term, most efficient capital, whether rates are 100 basis points higher or 100 basis points lower. Our competition in most cases is the regular way financing markets, which we think we have built a better mousetrap, a more efficient mousetrap. So our customers have responded to that. They are not doing anything more, Ki bin, than looking at what their alternatives are and saying yours is better. So that's really our goal. We saw the sort of reflation trade and people getting a little bit nervous. They wanted to lock in long-term rates. That was a nice storyline, but I don't think it drove the business at all. I think it's really just people beginning to understand how powerful a tool being efficient with your capital is. And again, this is tried and true in the corporate world with their real estate. We think it's going to become a tried and true tool in the commercial real estate world regardless of interest rates. And we are helping shareholders understand that we are embedding inflation protections into our long-term ground leases. So, we feel like this is one of the better protected places for our capital, given it has protection CPI look backs. It has this long-term asset that continues to grow at high rates with UCA. So I think you can feel comfortable whether the markets are worried about reflation or deflation. We really haven't seen it impact the business.

[Ki Bin Kim:]

Okay, thank you.

[Operator:]

Our next question comes from Derek Hewett with Bank of America. Please go ahead.

[Derek Hewett:]

Good morning, everyone. Most of my questions were addressed, but maybe some housekeeping issues. First, the portfolio yield was up about 10 basis points to 5.4% on a quarter-over-quarter basis, while the second quarter investment activity yield was only 4.9%. So what accounted for the overall portfolio yield growth?

[Jay Sugarman:]

I don't know if there are specific transactions where the bumps kicked in. We'll take a look at that, Derek, just to see if there's any specific asset bump that caused that to happen. But 5.3%, 5.4%, 5.2%, they are just sort of moving around very small margins. We probably could take it out to 2 or 3 decimals and figure it out for you.

[Derek Hewett:]

Okay. And then, just in terms of the UCA, has all of the headwinds associated with COVID kind of flowed through that calculation at this point?

[Jay Sugarman:]

We still have 10% to 15% of our assets being revalued each quarter. It just depends on how many new assets come in. But I think by the end of this year, you'll see it all flush through because most of the assets will have been relooked at. I think we are seeing what we kind of expected. Hospitality got pretty good knock. Office got a little bit of knock. Multifamily, in some cases, is actually up, given rates falling and sort of a voracious bid for multifamily these days. So we're still in the process of getting those quarterly reports from our third-party appraisers. And I would say, by the end of the year, we'll see that full impact. But right now, it's nothing that we are not expecting and certainly, new growth is far more important variable right now.

[Derek Hewett:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

[Anthony Paolone:]

Thanks. I just have a follow-up around just how you are pricing things in the market between current yield and bumps. When we think about something like Seattle where the prospects for rent growth may be pretty strong given the tech element, are you pricing that land differently or the structure where there's higher than the 2% typical bumps or a different yield in comparison to, say, something like Jacksonville or some other markets or maybe take us a bit into the pricing?

[Jay Sugarman:]

I'm going to kick it to Marcos, but I'd say, again, 100 to 125 basis point benchmark was sort of a starting point for all these thought processes. That puts you in kind of the starting cash rate of to 2.75% to 3.25% zone, depending on the transaction with 2% bumps that gets you into the kind of high 4s ROAs. And Brett and the capital markets team, I have a pretty good eye on where we can fund. So we feel like we are comfortably meeting those benchmark spreads that we want. But individual pricing is sort of the art that Marcos and the team go through on every transaction.

[Marcos Alvarado:]

Yes. I would say, super high quality, very liquid assets, tons of institutional demand. There's probably a slight pricing difference. So I'll say, a multifamily in Jacksonville would probably make a little bit more than a trophy office building in Seattle MSA. But across the portfolio, we are just trying to accomplish that spread over our cost of debt.

[Anthony Paolone:]

Got it. So it's not changing much the -- how much is the coupon versus the bump? Like that's pretty -- the bumps are pretty standardized around that too still, almost irrespective of the market?

[Marcos Alvarado:]

I will tell you, every new ground lease has 2% bumps. Occasionally, there's some discussion around certain bump relief initially and we catch up later on, but generally, it's 2% bumps with our inflation lookbacks.

[Anthony Paolone:]

Okay, got it. Thank you.

[Operator:]

Mr. Fooks, we have no further questions.

[Jason Fooks:]

Okay, great. Thanks, everyone, for the good discussion. If you should have any additional questions on today's earnings release, please feel free to contact me directly. Tiffany, could you give the replay instructions again?

[Operator:]

Absolutely. Thank you. Ladies and gentlemen, this conference will be available for replay after 1