iStar Inc.
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

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

[Jason Fooks:]

Thank you, John and good morning, everyone. Thank you for joining us today to review iStar's first quarter 2018 earnings results. With me today are Jay Sugarman, Chairman and Chief Executive Officer; and Andy Richardson, our Chief Operating Officer and President of our Land portfolio. Before getting into our quarterly results, I just want to highlight that we changed the earnings release format to present our result to slides. The deck we published this morning combines a narrative of our traditional earnings release with our supplemental into one package. We believe this provides better communication and understanding of our business given feedback we received from the investment community. The call this morning will refer to the slides which can be found on our website at istar.com in the Investor section. There will be a replay of the call beginning at 12

[Jay Sugarman:]

Thanks, Jason. iStar's first quarter saw a strong performances in all three focus areas we highlighted last quarter. Focus area number one was to continue generating strong earnings and earnings in the first quarter were exceptionally strong, with solid returns from our finance and leased businesses, top off with sizable gains from property sales in the quarter and previously unrecognized gains from transactions in prior quarters. Focus area number two was to increase our annual investment pace. The first quarter investment volume was well ahead of first quarter of 2017, and meaningfully ahead of last year’s quarterly average. We remain somewhat cautious on the market and still are sitting on sizable liquidity and cash balances, but are pleased to see our investment teams engaged in a wide range of off market opportunities. Focus area number three, execute near and long-term strategies for legacy assets. After a review of various alternatives involving our legacy land and operating property portfolios, we have determined the most time efficient and cost efficient way to create liquidity and extract value from this portfolio is to accelerate monetization plans on a sizable percentage of the portfolio over the next 12 to 24 months. And to accelerate development plans on longer term land assets under the leadership of Andy Richardson. We are already implementing these plans and sold several times intensive assets this quarter to generate over $275 million of proceeds and ample profit. For more on our execution in these areas let me turn it over to Andy. Andy?

[Andrew Richardson:]

Thanks Jay and good morning everyone. I’m very pleased to be joining you today. As Jason mentioned, my remarks this morning will refer to the slides from our earnings new earnings deck format, that we posted on our website earlier today. With that let me begin with highlights from the quarter on Slide 4. For the quarter, we recorded net income of $27 million of $0.35 per diluted common share versus a loss of $27 million or $0.38 per share for the first quarter of last year. Our first quarter adjusted income was $132 million or a $1.61 per diluted common share versus a loss of $12 million or $0.16 per share in the prior year period. This quarter’s results include a $76 million increase to retained earnings and $79 million of adjusted income associated with previously unrecognized gains as a result of the new accounting standard. It was a strong quarter for new investment activity as we originated $328 million of new loan and net lease deal. We also made material progress in reducing legacy assets, with legacy asset sales totaling $287 million and generating $70 million of profit. On Slide 5, you can see the impact that our efforts have had on common equity value per share year-over-year. Common equity value per share increased by over 100% for $3.60 over the past year and now stands at $7.01 per share. Adjusted common equity value per share grew by 33% or $3.38 to $13.57 as of March 31st. Adjusted common equity value is computed by adding accumulated depreciation and general reserve back to common equity. On Slide 6 let me provide some additional details on the impact from the new accounting standard that became effective at the beginning of the year. This new standard impacts previously unrecognized gains on the partial sale of non-financial assets. In prior periods, when we sold a portion of a real estate asset such as a sale to a joint venture in which we held a non-controlling interest, only the gain on the pro rata portion of the asset sold to a third-party could be recognized. In connection with the adoption of the new rule, on January 1st, we wrote up the balance of our investment in SAFE as well as several other deals to reflect these previously unrecognized gains. We included these previously unrecognized gains in our adjusted income this quarter. Moving on to Slide 7. Let me switch gears and discuss our investment activity during the quarter. We continued the investment momentum from last quarter starting the year with 328 million in originations within our core Real Estate Finance and Net Lease business segments driven by a combination of loan commitments and net lease acquisition and additional open market purchases of Safety, Income & Growth stock. Safety itself had $91 million of ground lease investment volume during the first quarter, not included in our volume stats. In addition, we repurchased 813,000 shares of iStar’s stock over the quarter for $8.3 million. We continue to believe our Company is undervalued and we will buy back additional shares opportunistically when market conditions are beneficial. Looking ahead, we expect to continue to focus on growing loan and net lease portfolios and between our cash and available capacity on the revolving credit facility, we have nearly 700 million of dry powder to pursue investment opportunities. On Slide 8, I would like to discuss our portfolio. Our total portfolio at the end of the quarter was 4.6 billion including cash and excluding accumulated depreciation and general reserves. In our Real Estate Finance business, we originated 270 million of new loans and funding 171 million. The performing loan portfolio is yielding an unlevered 9.4% return on a weighted average basis and our performing loan book currently stands at 1.2 billion. On the net lease side, we provide stats around three separate portfolios. Our wholly-owned portfolio represents the net lease assets we have owned for some time and for which we generally own a 100% of the interest. The portfolio had a gross book value of 1.1 billion and comprised 11.3 million square feet of real estate. These assets generated an 8.9% unlevered yield for the quarter and had a weighted average remaining lease term of 13.8 years. The second portfolio in our net lease venture in which has a 51.9% equity interest or $132 million. This portfolio comprised 5.4 million square feet with several gross assets of 766 million at the end of the quarter including the $50 million industrial property we purchased during the first quarter. The portfolio had a 9% unlevered yield and a weighted average lease term of just under 19 years. With regard to SAFE, we are gaining traction in our efforts to educate real estate owners that SAFE ground leases can provide smart well structured capital to the commercial real estate world. We believe the opportunity is substantial and have increased our ownership to 39.9% on shares outstanding for a $142 million. During the first quarter, SAFE continued to build momentum and increased its grand lease portfolio 18% growing to $588 million and value bank increased 21% to $1.2 billion or $66 per share. In our operating property segment, commercial properties had a weighted average unlevered yield of 6.9% up from 5.5% in the prior quarter. Since our legacy asset sale strategy includes monetizing operating properties we generate proceeds of $46 million in the first quarter generating a gain of $17 million. The operating property segment totaled $651 million or 14% of our overall portfolio at March 31st. the $4 million impairment charge this quarter relates to our decision to sell the final condominium units and a condo development in the northwest in raw conditions rather than finishing out the units. On sale, we expect to generate approximately 6 million of proceeds. Within the land and development portfolio. We sold assets for $240 million which was largely comprised of the Highpark in Great Oaks assets which I will discuss shortly. In total, we recognized a $53 million in profit from the sales of land assets and had reduce the portfolio size by nearly 20% from $993 million to $765 million at March 31. Which brings me to the broader subject of our legacy asset progress and strategy on Slide 9. I would like to spend a few minutes on the details of the legacy asset portfolio which totaled just over $1.7 billion at the end of 2017. These assets consist of land held for commercial development, residential master plan communities or in tract developments, residential condominium units and stabilized and unstabilized commercial operating properties. There can be movement between these categories such as when commercial land we own is developed. For example, this quarter the Ford Amphitheater at Coney Island had moved some land into the operating property category which is the main driver behind the increase in operating properties from the end of last year. We also have $171 million of non-performing legacy loans at the end of the first quarter. In last quarter's results, we indicated that iStar was working with JP Morgan to assist in evaluating alternatives for the legacy portfolio. The work done convinced us that one, there is a relatively near-term path for selling a significant portion of the legacy assets. Two, the remaining group will ultimately be small enough relatively overall size of our Company and three, with the right leadership the assets can be developed without being a distraction to senior management and our constituents or having an adverse impact on our cost of capital. We concluded after winning that potential benefits and risks of several options that acceleration was a better option and separation. Our goal is to significantly reduce the legacy portfolio to less than 15% of our total portfolio value and to reinvest the cash proceeds from legacy asset sales into our core businesses which produce recurring and predictable cash flow stream. To that end, we saw legacy assets for $287 million in the first quarter including Great Oaks and Highpark. Two master plan communities in California an estimate another $700 million to $1 billion of sales over the next 12 to 24 months some of which are already on the market and for which we are negotiating LOIs or purchase and sale agreements. Both of the master plan communities we sold this quarter exemplify how we think about value in our development projects and timing for monetization. In the case of Great Oaks and Highpark, we have been lenders and investors in residential real estate in California for more than 15 years through cycles and so, we have a deep understanding of that market based on data and experience. For Great Oaks, when we changed the business plan from industrial use in 2013 we saw the backdrop of strong housing appreciation in the Silicon Valley market and had the in-house resources necessary to execute a residential and commercial master plan development strategy that would add significant value to the investment. This plan included the design and development of public and private infrastructure, commercial lots, multi-family rental and for-sale residential. We sold off the commercial lots and multi-family pad in prior years and we continue to add value securing incremental approvals and investing in infrastructure. Over the past year, we were able to position the for-sale residential parcels as fully entitled partially improved pads. This put us in a very strong position as a seller allowing us to attract strong interest and to sell the property at a significant premium over offers we received a year earlier. Similarly at Highpark, we believed a large in-fill residential site in Los Angeles with entitlements in hand would attract a wide range of potential buyers. We capture the full benefit of our position. It was necessary to complete creating, develop significant horizontal improvements and install infrastructure before bringing this asset to market. While we have interest in the asset from purchasers who wanted individual parcels, we decided to work with a single buyer of all seven phases rather than invest the time, resources and capital that would be required for a parcel-by-parcel sell down plan. Within the legacy portfolio, there is a group of assets which we believe further development is necessary to create liquidity and extract value. Larger examples included Asbury Park Waterfront and Asbury Park New Jersey which is a 35 acre urban master plan development and Magnolia Green, a 1,900 acre master plan community outside of Richmond, Virginia. We also have well located land in other areas of the U.S. and we may ultimately decide a joint venture with a capital or development partner, or accelerate monetization. iStar has the expertise in-house to evaluate each of these opportunities and redevelop if that is a direction we decide to go. My focus is to work with our teams to evaluate plans for these assets, make recommendations to senior management and our Board and to provide leadership to ensure that our plans for these longer term assets are executed and realized. There will be more to come over the coming quarters as this process moves forward. I want to point out one aspect of land development that creates attention between execution and disclosure, especially in urban areas. But we are in the predevelopment period for commercial land and potential seeking entitlement, permits and other approvals from various constituencies what we are able to publicly say maybe limited, so it’s not to jeopardize our negotiating positions. We will work to find an appropriate balance. Finally, I will address our corporate infrastructure. Many of our legacy assets are required a large investment and human and financial capital over the years in order to recover our basis and to realize positive returns through monetization, much more than is required of a performing loan and net lease portfolio. More importantly, the shrinking of our legacy portfolio means we can redeploy investment professionals to origination activities in the real estate finance, net lease and ground lease businesses. There will also be more to come on this front in future quarters. But the end result should be annual G&A savings and more fire power for new investment originations. And with that, I will turn it back to Jay.

[Jay Sugarman:]

Thanks Andy. So to sum up, an exceptional earnings quarter, continued strong originations, accelerated strategies for both near-term and longer term legacy assets and a key hire to help push us forward as we reset the business for the future. Operator, let’s open it up for questions.

[Operator:]

Certainly [Operator Instructions] and our first question is from Steve Delaney with JMP Securities. Please go ahead.

[Steven Delaney:]

Good morning everyone and thanks for taking the question. Jay you have previously stated that and looking at the CRE finance market, that you are really not interested in generic LIBOR plus 300 bridge loans that you know dozens of people are offering. $270 million was a good lending growth for the quarter. I was just wondering if you could give us a little color on where you found opportunities in terms of property types and loan structures? Thank you.

[Jay Sugarman:]

Yes, Steve thanks. No real themes going through the book other than maybe going back to what we used to call TRAC loans which are Transitional Repositioning Acquisition or Construction. That was a general category where we think most inefficiencies are right now but it's going back through our relationships having our deal teams freeing up from some of the tougher time intensive legacy assets allowed us to spend more time digging through. The stuff we see as you stated perfectly which we are turning away a lot of stuff that we just think the risk reward doesn't make sense and we are a little bit cautious here we are seeing the market continue to grind tighter takes on some risk reward propositions that we don't think are all that good. But we are going to find our own way and we try to be a little bit outside that you know mainstream more commodity like stuff.

[Steven Delaney:]

Great. And you brought Marcus on I think to lead that effort of deploying that capital. I'm curious if the staff that you have on board, obviously a lot of people have been focused on workouts but do you feel that you have the team if you will out there to cover the country from origination standpoint or should we expect that there may be some recruiting effort going on to strengthen the team?

[Jay Sugarman:]

I can tell you we think we have an exceptionally talented team that covers the market that we want to play in very well. But as we spool up the investment origination side particularly with respect to ground lease, talent is very valuable to us and as long as it's highly efficient highly productive. We certainly will keep deploying that wherever it can generate the best return.

[Steven Delaney:]

Okay. And just sort of thinking about the Company and you know how we should guide investors to think about use the term core, you really get us there to your adjusted income and your adjusted book value. If I look at the quarter and I see the $1.61 maybe we should consider the $1.16 and previous unrecognized as a onetime non-recurring, but taking that away I get $0.45 annualize at a $80 and you have got $13.67. It looks to me like the adjusted or core return is about a 13% return in the quarter. I’m curious if you guys look at the Company and look at your results in a similar way or if I maybe off somewhere?

[Jay Sugarman:]

No I think that’s an interesting metric. We try to shoot for a mid teens ROE business. We think that’s a business that should trade at a multiple of book. So that’s always a good thing to probably drill down to. I will tell you, we are a little bit frustrated with the accounting. These are real gains, it’s real money to shareholders depending on how you view the converts. We have 68 million shares out. You can see how many dollars we made and you can do that math. And you get to a pretty darn attractive number as we did last year. So we feel like the story may not be quite presented in certainly a GAAP way. It’s easily understood. But with a little digging, you can see the value proposition if you are one of those 68 million shareholders. There has been quite a lot of gains, a lot of interest income, a lot of net lease income. I think Andy went through some of the unlevered yields in these books. Those are certainly not commodity return and we think they are deserving a multiple that reflects the hard work that has to go into create that kind of excess return. So you will see us do a little bit more work trying to highlight, isolate and put a spotlight on the returns to these shareholders and that’s really what we are going to have to do to get some of these things recognized. But I think gains are gains, that’s real value created for those shareholders. We are not paying it out, so if you have been a shareholder you have benefited from the last couple of years of earnings and certainly this first quarter earnings are real.

[Steven Delaney:]

Yes, no question. We will go once there through the income statement, however we want to create them, they are rocks in the boxes as far as your $13.67 book value and the street is today valuing that at about 75% which seems absurd, so progress underway for sure. And then the final thing and I will hop off here. Andy you were talking faster than I could, write? Could you just please restate the buyback activity in the first quarter? Thanks.

[Andrew Richardson:]

Sure. I think it was about 813,000 shares.

[Steven Delaney:]

Okay. Yes, and I had like 8.3 million somewhere in there I think.

[Andrew Richardson:]

Yes, an 8.3 million you are right.

[Steven Delaney:]

Okay thank you both for your comments.

[Jay Sugarman:]

Thanks Steve.

[Operator:]

Our next question is from [Stephen Veils] (Ph) with Raymond James. Please go ahead.

[Unidentified Analyst:]

Hi good morning. Following up on the pipeline question, it looks like you had some strong net lease investments during the quarter. Can you talk about the opportunities you are seeing there as you guys look to recycle this capital from the monetization that have taken place?

[Jay Sugarman:]

We obviously still have a joint venture partner in that business that we have been very happy with. That’s coming up to its investment period end. So we are looking at the go forward business opportunities with them which we should have more news on later in the year. With respect to the book that’s been built there, it’s a really good book. We are going to figure how we can capture that value, both for shareholders but also so the bottom market understand how that business does create value for us and for our joint venture partner. So we are doing some work on that as we speak. The business itself is a really good business. It’s just again much like our finance business a bit one off at this point. Again the commodity stuff not so interested in which means we have to pick our spots carefully. A lot of these deals are things our net lease team has seen in their prior lives or during their careers. And we are going to see a second bite at the apple and so we have an inside track because we have done a lot of work already either with specific assets involved, you have the corporate credit involved or sometimes just the owner group. So we are trying to lean on those relationships we are trying to lean on the network a little more heavily to stay out of the traffic. But it's still you know it's a business we'd like to grow. Fundamentally it's always been a great business for us. It's a tough market where capital looking for yield a lot of players have moved into that space so we have to be pretty off market to find the risk return we like.

[Unidentified Analyst:]

Okay. I appreciate the color there. And shifting to the land and development portfolio and I appreciate all the comments Jay and Andy as well on the progress which seems to be significant here in the last quarter. You know just trying to reconcile and I may have missed it through the comments, but you know you talked on page nine about accelerating development longer duration assets but then I look at page 27 it looks like the in-development portion was the main sequential change. Is that just a pause as you re-evaluated all of these assets and updated your plan moving forward and we will see that grow, can you maybe reconcile those two pages?

[Jay Sugarman:]

I will take the first crack and then Andy can jump in. Our strategy all through this has been to look for assets that are reaching the end of their business plans or getting to a place where we feel like it makes sense for the Company to either exit or somehow monetize. And there is a big pool of those assets that I think 2018 and 2019 will see the ultimate realization of that work that capital redeploy back into the more core businesses. But as we have said before there is still a pool of assets that we think is longer term in nature really doesn't have the liquidity today to really have a reasonable prospect of monetization. But some of them are quite attractive and with continued effort we think we will be able to deliver the kind of returns you have seen on the things we sold to date. We want to make that portfolio as small and as targeted as possible. So we are moving as rapidly as we can to really focus it into these two buckets those things we think are near term call that 12 to 24 months and those things we think are longer than that. And that's the pool that I think Andy has you know pretty relevant experience on taking a hard look at. And it’s the right answer is from a time cost efficiency corporate organization standpoint to do a JV, to bring in a third party developer, we may accelerate those conversations, we have obviously had interest in many of these. But frankly I think there is a much more intense focus now that Andy is in-charge of it to say okay let’s go to all our options one more time. And so we are taking a look at that stuff and I think what we are hoping you will see is that portfolio will be less than 15% of the total portfolio value once we get through these near term monetization and we will come out the other side with some really interesting stories that should create a lot of value for shareholders. But it won't be such a large part of the book that people will struggle to understand how to frame our earnings and frame the idea that you know we think we should trade at a multiple of book not a discount.

[Unidentified Analyst:]

Great. And one final question, just with respect to use of capital outside of investments. Can you may be talk about, you have obviously repurchased some iStar shares, you are repurchasing SAFE or just not repurchase, you are buying, you are increasing your ownership of SAFE. Can you talk about how you view one option versus the other, or you simply have liquidity that you want to be active on both of those? And then maybe any general comments towards - thoughts around a dividend even if a nominal amount just given the gains you are generating. I know you have NOLs that prevents you from having distribution requirement. But just any general thoughts around the dividend as you look going forward that might appeal to more of an income focused investor?

[Jay Sugarman:]

Sure. First question, we like mixed pricing, we like to buy them. We have seen that in both of our securities. I think the story of SAFE obviously is one of growth and potential explosive growth there. So that purchase is an anticipation of building a business. We think the iStar shares are mispriced against an existing pool of that assets so that reflect more of a value arbitrage. But we will continue to deploy capital when we have it and think of the best use of funds. The second part of the question, dividend. So I would tell you, yes, we have an NOL, yes we don’t have to pay one. We think we have come to a point where the future is again clearer and clearer which makes the conversation around dividends more fruitful. We will be having conversations with our Board about the possibility and why it make sense for us to do that sooner rather than later. Obviously we have a full flexibility given the NOL. But I agree with you, I think we have made enough progress. The earnings have been strong enough. The go forward pipeline looks strong enough. The dividends should certainly be a topic going forward.

[Unidentified Analyst:]

Great. Thanks for the color on that. Io appreciate it.

[Operator:]

Our next question is from Jade Rahmani with KBW. Please go ahead.

[Jade Rahmani:]

Thanks. Considering the Company’s leverage ratio, but particularly relative to common equity and given the financing preference to your debt as well as ratings agency considerations, what is the likelihood and viability a meaningful further common stock repurchases as well as preferred stock repurchases as opposed to allocating capital to new investments to generate near term cash flows?

[Jay Sugarman:]

Hi, Jade. Yes I think the mantra here is a little bit more about growth right now. We think we have interesting opportunities throughout the book. We would like to use our capital as much as possible to be building the book as opposed to shrinking the size of the Company. We think there is certain threshold in terms of the size in the public markets to create liquidity if necessary. If the discount is still compelling there is certainly opportunity to do that. I think with the preferred, we did take out a big chunk of the preferred. We have a big chunk that’s in the form of a convert. We certainly would like to see a share price increase materially and that would impact the convertability of that piece of the cap stack and turn it into common. So there is a few variables in there as we think about either growing that base or shrinking that base that are really dependent on where we see the share price. Right now it’s pretty compelling to buy but as you said we are cognizant of the bigger and longer game here which is to put iStar platform back at the forefront of the industry. And you just don't want to become beholden to the agencies or such a small equity base that you can't get there. So we have to balance all of those things as we go through it. Again, we like mispriced things we will buy mispriced things including our stock but there is a lot of considerations right now about how do we build a market leading Company that can trade at a meaningful multiple.

[Jade Rahmani:]

Thanks, and I agree with the key longer game, but iStar’s platform I think the key for a higher stock price is recognition of the value of that platform's ability to generate recurring earnings. And just in terms of getting back to core profitability excluding gains you know what kind of timeframe do you anticipate is that similar to the legacy asset monetization timeframe of the next 12 to 24 months.

[Jay Sugarman:]

Yes there is certainly a correlation there as more money comes out of both either cash or some of the assets that don't really contribute to earnings as we can become more efficient more productive with some of our resources. I think you will see those move hand-in-hand more core earnings, less time attention and capital focused on legacy assets. That's part of the virtuous circle we are trying to get into here over the next 12 to 24 months.

[Jade Rahmani:]

In terms of the quarterly loan originations, can you tell us what the average size was or the number of loans and give some sense of the mix between construction loans first mortgage loans and mezzanine loans and perhaps some color on LTV and blended yield?

[Jay Sugarman:]

Like it was a diversified quarter, and clearly the average loan size was in the 40-ish million dollar range. Mix the top markets, New York being the largest, the West Coast stuff, and stuff down in the South. The LTVs right still look pretty good to us. I think our blended LTVs this quarter was in the mid to low 60s and the rates were in the [mid six] (Ph) on a floating rate basis over LIBOR. So generally stuff that fits our model. As I think a former caller Steve said, you know we are not Neil plus for three of four business we are looking for higher returns in that but we are looking to stay in that you know 60%, 65% zone. One of that first mortgages are mezzanine you know the blend usually comes out there. Certainly on the mezzanine it's going to be a little bit higher in the first mortgages that can be somewhat lower.

[Jade Rahmani:]

And were those primarily construction loans or condo inventory loans, what was the type of loan and property mix?

[Jay Sugarman:]

No condo inventory loans this quarter. There were some construction loans and there were some repositioning loans and one or two have special situation loans we do two entities.

[Jade Rahmani:]

And just the $4 million impairment and this $4.3 million loss on charge offs and dispositions. Can you give any color on those two items.

[Andrew Richardson:]

The $4 million dollar impairment which I think I mentioned in my script was were basically down to the final handful of units at a condo in the Northwest and we can send people out there to finish them out. We could spend a lot more time finishing them out, getting them ready for sales but it was an opportunity to basically close out that asset and sell the space to a buyer who was willing to pay what we thought was a fair price relative to all the effort that we have to put into it going forward.

[Jade Rahmani:]

Okay. And the loss on charge-offs and dispositions?

[Andrew Richardson:]

The charge-off was basically a hotel asset that we reclosed on and we moved that over I guess it was into the lands category.

[Jade Rahmani:]

Okay. And just a question around Safety, I’m just trying to understand the business model but what is the main difference between a Safety ground lease and old fashioned ground lease? I’ve heard to say that quite a lot so.

[Jay Sugarman:]

Yes, long drafted question. Yes I was just reading a lease from 1955 I can tell you that the modern finance and buyer market hates uncertainty, it hates ambiguity, really wants a relationship where phase are going to be worked out in a thoughtful way, a fair way. We have 27 points as a checklist that make SAFE ground lease market-friendly, cap rate-friendly, lender-friendly. You will find very few of those things in an old fashion lease. And frankly nobody has really looked at the marketplace and tried to mesh it with what we see in the modern corporate credit markets, the modern capital markets or the modern real estate finance markets. And that’s what SAFE really is doing, it’s taking all the things we have learned from our lending practice, all the things we have learned from our real estate ownership practice and trying to create a lease that adds value, that creates value, where one plus one equals more than two. Whereas I will tell you a lot of old fashion leases clearly the story value and a lot of the litigation you see, a lot of bad horror stories you hear about ground leases are almost always a result of leases drafted long ago that didn’t really anticipate or reflect what is going on in the world of real estate finance and equity. So it’s a fundamentally different thing and it really does add value we think to a very wide range of properties around the country. This one plus one equal to more than two idea is very powerful when we get a chance to sit with owners. And we have been able to execute. It’s just so many people have experiences with old fashioned ground leases that has really poisoned the well for the concept in a way that we think we can change. And once we change it, we think the doors are open to a very big market.

[Jade Rahmani:]

And is the central attention the underlying motivation to take ownership of an asset through a confrontational negotiation or I’m still trying to understand what that main difference is?

[Jay Sugarman:]

No, the simplest thing is we do have a fair market value reset in net lease, a lot of those provisions become touch points for types. We just want to be a long-term owner of the land and let the person who does the leasing, managing, marketing, design, construction, selling, do their thing. And if they do it well, they will make much higher returns with a SAFE ground leasing or capital structure and they will if they use typical financing avenues that exist right now. The math is really compelling. We happen to sit down and show it you. We are walking through with a lot of very top tier owners and I can tell you if you have the credibility and if you have the reputation that’s hopefully we have built over 25 years of, we are trying to help them make more money. We are trying to create long-term relationships win-win relationships where both sides come out of it with something that's attractive that's a great business to be and that's the business we want to be in. We are not in the business of trying to create fights and trying to harm value, we are in the business of enhancing value it's something we have been doing for 25 years and it's a little bit different approach to the business than we have seen anywhere else. But it's fundamentally what we think will be the winning hand and we think we are fairly unique in that it's something we have been trying to do in the finance and that lease holds for over two decades.

[Jade Rahmani:]

Thanks so much.

[Operator:]

Our next question is from Ben Zucker with BTIG. Please go ahead.

[Benjamin Zucker:]

Good morning and thanks for taking my question. This is one of the most active quarters in quite some time we saw some new loan commitments and at least acquisitions and also a good amount of sales and corresponding gains. So Jay, what does the market feel like right now from your view, it seems like despite the rate move there is still a lot of activity getting done on all sides of the fence. I’m just interested in your comments there.

[Jay Sugarman:]

Yes not an easy market. I think bringing on the talent we have brought on with Marcos having some of our resources freed up as we begin to wind down some of these time intensive assets that have acquired our top investment people to be involved to get them to the finish line. You are going to see us be able to go back to what we really like to do which is to get into proprietary situations where we can use the strength of the platform, two decades of knowledge and experience across almost every property type, all types of solutions that we have created for people in the past that we can create for our customers going forward. We feel like we are getting closer to the day where when we can put that that back at the forefront of the platform and that one-on-one relationship that let us help you solve a problem that creates value because that's a much less cost sensitive conversation than just here is 10 guys bidding who wants to win. So that's allowing us to do what we do well a little bit more often. We still have a lot of cash sitting on the sidelines. We still have right now preference for doing shorter term floating rate debt. So we can respond to some of the interest rate changes we see going on. And we are still looking for to expand the ground lease business with people who understand what we are doing and want to do it again and again and again with us we want to commit more resources there, because we see the power of it once people understand it and separated it from the old fashion ground lease business they seem to get very excited by the potential to fundamentally change the return profile of their own business. So I think it's a tough market, you have got to pick your spots and we have chosen a path that's a little different we are not an asset under management Company we are trying to make returns that we want to put our own money into. And you know that discipline will serve us well, but we are seeing a chance to put our skills to work in more places not necessarily in an overnight way, but slowly but surely we see the tide turning a little bit where people do need what we do and treat us a little bit differently than others.

[Benjamin Zucker:]

And following up on that. In your remarks you referenced being cautious at this point in the cycle and pointed to your sizable dry powder at quarter end. And we have also spoken about your preference for growing assets rather than stock repurchases right now. And then just to hear you say get back to what you guys were doing in the past and I'm thinking about some acquisitions. So while there is some market volatility how do you guys feel about potential M&A activity. It just seems like using that more just to make a splash could be a really nice way to grow your revenue generating assets meaningfully.

[Jay Sugarman:]

Yes. To be honest, I really don’t want to distract the path we are on right now. We are always looking at things that might fit in, but I can tell you we feel pretty good about the path we have laid out over the last year or so and the progress we have made and the people we have brought on board. So I think our first goal right now is three things I mentioned. We think we have got a path to do all three. But if something came along, sure we would be interested. But right I don’t really want to distract ourselves with low probability thing. We are really focused on the high probability. I won’t call it low hanging fruit because it’s also darn hard to do what we are doing. But I think that path feels pretty good right now. Be innovative, be off market, be unconventional, stay out of the stream of excess capital that’s flowing through the part of the market and stay where we have always had a competitive advantage.

[Benjamin Zucker:]

That’s helpful. And lastly, could you just provide an update on the 171 million NPLs in your loan portfolio? I think a portion of that was related to a bankruptcy case, but if you could just help jog my memory that would be great?

[Jay Sugarman:]

Yes, look it’s almost all one big asset. There is a smaller asset that just got ongoing struggle around government agency. But the big one is going through a bankruptcy process. It looks like this is the year it will finally come to an end. So we are hopeful the resolution there will at least give us clarity if not a significant amount of capital to redeploy somewhere else. That’s been a non-contributing asset for quite a while. And again that’s one that’s just chewing up huge amount of time here as we try to get it resolved. So this is the year we hope to get pass that one and in whatever form we end up with, whatever security we end up with, we want to just get back to resources we have been deploying in some of the money.

[Benjamin Zucker:]

Well that’s it for me and thanks for taking my questions and look forward to following the legacy assets sales throughout the year. Thanks guys.

[Jay Sugarman:]

Thanks.

[Operator:]

And Mr. Fooks, we have no further questions.

[Jason Fooks:]

Thank you and thanks everyone for joining us this morning. As a reminder, we have our Annual Meeting of Shareholders coming up on May 16 at the Harvard Club in New York City at 9

[Operator:]

Certainly. Ladies and gentlemen, the conference replay starts today at 12