Goldman Sachs says buy this little-known real estate name with 20% upside
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Real estate investment trust Safehold is trading at attractive levels, and investors need to scoop up the stock, according to Goldman Sachs. Analyst Caitlin Burrows initiated coverage on the stock with a buy rating. Her price target of $25 implies 22.7% upside from Tuesday’s close. “Over time (as restructuring activity picks up in the near term, and as refinancing and transaction activity recovers over the medium term), we expect SAFE’s earnings and value growth will be driven by investment volumes (and yield),” Burrows said in a Wednesday note. The company owns, acquires and originates ground leases, and has stable cash flows through fixed payments and contractual rent increases. The average lease term for the ground leases are 92 years. Safehold is primarily exposed to land underlying offices, multifamily and hotel properties, the analyst noted. Unlike its other real estate investment trust peers, Safehold’s primary earnings metric is per-share earnings, rather than funds from operations per share. Goldman Sachs forecasts Safehold to realize 10.6% annual earnings per share growth between 2024 and 2025. As a result, there is little upside from marking leases to market; rather, internal growth should track rent bumps, according to Burrows. “At the end of the ground lease term, or in the event of a default (i.e.,the property owner does not pay the ground lease rent), SAFE will own the building on top of the leased land,” Burrows said. “The company originates ground leases at conservative 35-40% LTVs (versus the value of the land and the building). We believe these terms limit downside risk to SAFE’s cash flows.” To be sure, Burrows noted that transactions and investment volumes have “slowed meaningfully” due to rising interest rates. Nonetheless, “our analysis of CRE transaction volumes (based on GS expectations for long term rates and real GDP) implies that industry-wide transaction volumes should begin to improve, and accordingly we also expect SAFE’s investment volumes to gradually ramp in coming quarters. We expect this to be a positive catalyst,” Burrows said. The stock has tumbled more than 26% for the year. —CNBC’s Michael Bloom contributed to this report.
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