Why This Goldman Sachs Analyst Gives Safehold A Buy Rating

Goldman Sachs analyst Caitlin Burrows initiated coverage on Safehold Inc. SAFE with a Buy rating and a price target of $25.

The analyst expected Safehold to realize an average annual EPS growth rate of 10.6% between 2024 and 2025.

Acquisition volume, yield, and debt and equity costs to be the primary drivers of SAFE's future earnings growth, Burrows noted.

The analyst also stated that Safehold's business benefits from repeat business, as 40% of its customers have multiple deals with the company. 

As interest rates stabilize and GDP expectations improve, Burrows' model implies industry transaction volumes will exceed $100 billion per quarter in 2024 and $125 billion per quarter in 2025.

The analyst mentioned this level of industry transactions would be consistent with ~$300 million of acquisitions per quarter in 2024 and ~$330 million per quarter in 2025 by SAFE. 

The company's cash flows were also stable as payments are fixed and have contractual rent increases (typically in line with inflation, with a 2% floor), notes the analyst. 

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Safehold's business structure mitigated its credit risk relative to other REITs as the company is focused on long-term leases, and tenant bankruptcy risk was low.

Burrows forecasted $144 million/$240 million of equity issuance in 2023/2024, which would represent approximately 7 million/11 million shares issued each year.

However, Safehold's internal growth — or same property growth — is expected to be minimal as ground leases have multi-decade lease terms.

The analyst's 2023 EPS estimate is 1.7% above FactSet consensus and the 2024 EPS estimate is 1.2% above consensus. 

Burrows also expected Safehold to continue funding its acquisition pipeline with 2/3 debt and 1/3 equity.

SAFE Price Action: Safehold shares are trading higher by 1.23% to $20.62 on the last check Wednesday. 

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