Safehold: the moat beneath the moat

In the world of commercial real estate (CRE), we tend to focus on buildings much more than land.

To a large degree, that makes sense. After all, there’s a far smaller pool of people who will pay for properties with nothing constructed on them.

CRE tends to cater to people looking for places to live in, shop at, and work from. And every bit of that requires more than mere sod.

At the same time, consider how problematic those eye-catching constructions can be. Thanks to the natural wear-and-tear state of life, buildings end up deteriorating, roofs leak, and HVAC systems fail. Tenants move out, and consumer preferences change.

In short, buildings require significant investment to maintain, much less increase their worth. Yet the land itself is far more durable, especially when it’s well-located.

This is a lesson I learned decades ago, though the concept dates back far before I got a clue. Individuals, tribes, and rulers have fought over land since the dawn of time. They recognized its value regardless of whether anything was built on it or not.

Likewise, some of today’s wealthiest families have built their fortunes over generations by accumulating property… then allowing others to develop on it to their exact specifications. This setup is called a ground lease, and it usually involves very long-term contracts of anywhere from 50 to 99 years.

Once that time is up, the landowner takes possession of the structures as well.

This setup might sound odd. But it works well for certain tenants, who want to limit their upfront expenditures and increase their yields on cost. Meanwhile, landowners don’t have to worry about building maintenance – which is a very big deal.

These landlords understand that the strongest CRE position to hold isn’t always owning a structure. Sometimes, it’s the ground underneath that counts the most.

One of the first shopping centers I ever developed was built on a 50-year ground lease. So I knew right from the beginning that it would one day become the landowner’s property.

But I took the development risk anyway, putting in the time, effort, and money necessary to build on it. Considering what I was constructing and the multiple tenants I was able to sign, I knew the numbers would work out well for me over the long-term.

Then again, I also fully realized this wasn’t a zero-sum game. Those numbers would work out nicely for the property holder as well through the predictable contractual rent payments I’d be making – all while he avoided most of the operating headaches of building ownership but retained ultimate claim on any improvements.

There’s nothing fast or furious about the profits such property arrangements bring in. In many ways, it’s the ultimate form of patient capital.

But it’s patient capital that works, even improving over time under the right tenant.

I know I mentioned before how much of a hassle maintaining buildings can be. But wise and well-positioned property keepers – owners or otherwise – make it work anyway. In fact, they often end up improving on the original structures to stay competitive.

They know it pays to do so.

As such, the structure or structures’ value should increase right alongside the land its built on. And, as we’ve already established, those assets eventually become the landlord’s to either sell or lease out again.

This additional value is called unrealized capital appreciation, or UCA. It’s a long-term wealth creation mechanism that quietly compounds beneath the surface; and it’s the reason why so much generational wealth stays generational.

It’s hard for children and grandchildren to squander wealth that’s wrapped up in such nice, neat rental projects – bows and all.

That same principle is why Safehold (SAFE) is such a reliable real estate investment trust, or REIT.

The company has developed an exceptionally sophisticated ground-lease platform through standardized, financeable structures that are attractive for everyone involved: itself, its tenants, its lenders, and its investors alike.

Safehold buys land beneath high-quality properties across a wide range of sectors, from apartments to hotels, life-science facilities, mixed-use projects and office buildings. So it’s natural how observers tend to focus only on the rent those subsequent tenants bring in.

But management believes the company’s UCA is just as important, especially after it created CARET. This subsidiary program is, as stated in its May 2026 Investor Presentation, “designed to help recognize the value of” its properties’ “capital appreciation above Safehold’s investment basis.”

As of the first quarter, Safehold estimated its portfolio contained approximately $9.5 billion of UCA. And while it does sell minority interests in CARET to investors, it still holds the bulk of it – just one more incentive for it to make its overall system work.

This is what makes Safehold such a fascinating portfolio possibility: because it’s not just collecting rent or getting paid to wait. It’s making the most out of both aspects of the ground-lease arrangement at the same time.

Safehold also just announced a major joint venture with Brookfield, one of the world’s largest and most respected real estate investors. According to the deal, Brookfield will hold a 49% interest in a diversified collection of ground leases at a gross valuation of about $348 million.

This particular portfolio generates around $14 million of annualized cash rent. And Safehold can, should it so choose, repurchase Brookfield’s position after year seven.

In the meantime, the transaction helps to deleverage Safehold’s balance sheet with capital that’s priced below its current equity costs. Plus, it validates the ground-lease system on an institutional level, which could prompt even more investments from here.

It should be stated that Safehold was an attractive investment prospect even before Brookfield’s vote of confidence. That shows clearly in the REIT’s total portfolio worth of about $7.1 billion, complete with:

That’s pretty much a picture of a fortress balance sheet, allowing Safehold the luxury of acting when and where it so chooses. And in Q1, as we now know, it chose to close on four more contracts worth approximately $68 million together.

Safehold generated generally accepted accounted principles (GAAP) revenue of $110.9 million for the quarter. Net income was $28.9 million. And earnings per share (EPS) came in at $0.40.

That last measurement did fall $0.04 short of expectations. But that was largely due to two Park Hotels properties moving from ground leases to fee simple ownerships, where its rental agreements ended and it took entire ownership of the assets involved.

This technically reduced its net income by about $3.5 million, or $0.05 per share.

Both hotels – plus another three under the same master lease – have been under dispute since last year. As Safehold Chairman and CEO Jay Sugarman explained in November, “We believe the tenant has breached the master lease covenants and has not upheld their contractual obligations under the lease, which includes specific maintenance and operating standards.”

A lawsuit, which should be settled by early next year, has since been filed over the ensuing disagreements – a dispute that’s been weighing on the stock. But I view it as an opportunity more than a concern, all things considered.

I believe that shares are worth buying anywhere below 10x… and they’re currently trading at 9.6x with a dividend yield of 4.5%. In my book, that’s a solid opening for a solid company.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

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