IPO article: Safety, Income and Growth

On April 10, 2017, Safety, Income and Growth (Pending:SAFE) filed for an S-11/A (IPO) with the SEC, seeking to raise $215.3 million.

The company plans to offer 10.25 million shares with 1.5 million shares as an over-allotment option for underwriters at a price range of between $19 to $21. iStar Inc., plans to purchase $45 million worth of shares at the IPO price at the time of the offering, representing a 27.6% stake in the company.

Assuming SAFE prices at the mid-point of its proposed price range it would commend a fully diluted market cap value of $363.8M. The company is expected to IPO on Thursday (6.22).

Underwriters for the IPO include: Barclays, JP Morgan, Bank of America Merrill Lynch, Raymond James and Associates, Mizuho Securities USA and Citigroup. The company plans to use approximately $142 million of its total proceeds from the offering to purchase the acquisition GNLs.

Safety, Income and Growth is one of three REITs expected to IPO this week.

Company Overview

New York-based Safety, Income and Growth was founded in 2017 with the objective of acquiring, owning, managing, financing and capitalizing on ground net leases (GNLs). GNLs involves leasing land, typically for a long period of time (ranging from 30 to 99 years), to a tenant for the purpose of building real estate on the property and are most often "triple net" leases, which means the tenant is responsible for costs including: development costs, capital expenditures and all property operating expenses.

The objective in creating the GNL provide a safe, secure and growing cash flow stream in the form of rental income. GNL lists the following criteria for properties: (i) the initial value of the GNL represents 30% to 45% of the Combined Property Value; (ii) the Ground Rent Coverage of the GNL is between 2.0x to 5.0x; and (iii) the GNL contains contractual rent escalation clauses or percentage rent that participates in gross revenues generated by the commercial real estate on the land.

Currently its portfolio consists of 12 properties located in major metropolitan areas that were identified by iStar. It intends to acquire two additional GNLs shortly after the closing of the offering.

After the IPO, SAFE will be externally managed by SFTY Manager LLC, a wholly-owned subsidiary of iStar. iStar has been an real estate investor for over 20 years. Based in New York, New York, it has $5.3 billion in total assets seven regional offices across the US.

Although SAFE believes it's the first publicly-traded company formed to acquire and manage GNLs, it faces tough competition both for tenants as well as investment opportunities from other investors, financial institutions, real estate companies and numerous commercial developers for both tenants and investment opportunities.

Executive Management

Jay Sugarman has served as the Chief Executive Officer and Chairman of the Board of iStar Inc. since 1997. Previously, he founded and acted as Co-General Partner of Starwood Mezzanine Investors LP, a private investment partnership that specializes in structured real estate finance. Mr. Sugarman graduated summa cum laude from Princeton University and completed his Master of Business Administration degree at Harvard Business School.

Nina B. Matis serves as chief investment officer since October 2016, as well as iStar's executive vice president, chief legal officer and chief investment officer, positions she has held since 2008. Ms. Matis previously served as a partner in the law firm of Katten Muchin Rosenman LLP, one of iStar's principal outside law firms. She received a B.A. degree, with honors, from Smith College and a J.D. degree from New York University School of Law.

Financial Details

SAFE has strong revenue growth. Revenue generated was: $18.5M, and 21.6M in 2015 and 2016, respectively, representing YOY growth of 17%. Interest expense has remained relatively consistent as a percentage of revenue. Interest expense was equal to 38% of revenue in 2016. Other expenses included real estate expense, depreciation and amortization, and general administration. The company has generated profits each year of $5.71M and $6.6M in 2015 and 2016, respectively.

As of its IPO, SAFE has total assets of $155.6M and total debt obligations of $221.3M.

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(S-11/A)

Conclusion: Consider A Modest Investment

SAFE's revenue growth, experienced management team, and relationship with iStar boosts our optimism it this deal.

We also like that ground net leases offer greater certainty that tenants will make rent payments, due to the fact that if a tenant default, the GNL lessor typically has the right to regain possession of the land as well as take ownership of the building. This provides a strong incentive for tenants to make payments.

Although rising interest rates and stiff competition in the real estate space add risk, we are bullish on the deal and recommend investors looking for increased exposure to the space consider a small investment.

We hear the book continues to build.