Monetizing CARET And Multifamily Expansion Will Unlock Long-Term Value

Key Takeaways

• Safehold's expansion into affordable multifamily housing and strategic partnerships is expected to boost volume, revenue, and stability across market cycles.
  
• The monetization of CARET and share buybacks aim to unlock value and enhance EPS, leveraging stable cash flows and strong credit profile.
  
• Rate volatility and economic shifts challenge revenue growth and earnings stability, with liquidity risks potentially constraining long-term growth and revenue generation.

Catalysts

Safehold Inc. (NYSE: SAFE) is revolutionizing real estate ownership by providing a new and better way for owners to unlock the value of the land beneath their buildings.

• Safehold's planned expansion in the Multifamily market, especially in the affordable housing sector, is expected to increase volume and revenue by leveraging stable cash flows, high occupancy rates, and compelling supply-demand dynamics.
  
• The company announced a new $50 million share buyback authorization to take advantage of the perceived undervaluation of its shares. This initiative aims to enhance earnings per share (EPS) through leverage-neutral repurchases funded by asset sales or joint ventures.
  
• Safehold's success in the debt capital markets in 2024 resulted in the reduction of its cost of debt, which is anticipated to improve net margins. This includes a new $2 billion revolver and tightening bond spreads.
  
• The potential monetization of CARET and its increased accessibility to third-party investors are expected to unlock significant long-term value, increasing revenue and earnings not currently recognized in the share price.
  
• The company's strong pipeline and credit profile, with new origination activity focusing on strategic partnerships and diversification, are expected to support future growth and revenue stability across market cycles.

Safehold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Safehold's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.2% today to 33.6% in 3 years time.
• Analysts expect earnings to reach $149.3 million (and earnings per share of $1.68) by about March 2028, up from $105.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $122.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Specialized REITs industry at 28.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.11%, as per the Simply Wall St company report.

Safehold Future Earnings Per Share Growth

Risks

• Rate volatility has negatively impacted originations and the share price, presenting challenges to revenue growth and earnings stability.
  
• Sharp increases in discount rates and cap rates pose headwinds for valuing the existing portfolio, potentially affecting the net income and perceived asset values.
  
• A new share buyback program, while aiming to leverage neutrality, might constrain potential capital deployment, impacting long-term growth opportunity and revenue generation.
  
• The specific economic conditions supporting affordable housing may not always align with broader real estate trends, potentially impacting cash flows and overall earnings if market conditions shift.
  
• Dependencies on external financing and the need to sell assets or joint ventures to fund buybacks indicate potential liquidity and leverage risks, which could affect cash flow management and net margins.

Valuation

• The analysts have a consensus price target of $24.333 for Safehold based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $444.4 million, earnings will come to $149.3 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $19.05, the analyst price target of $24.33 is 21.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.