Navigating Safehold's Near-Term Obstacles: Analyst On How 4Q23 Could Mark A Turnaround In Origination Volumes

B. Riley Securities analyst Matt Howlett reiterated a Buy rating on Safehold Inc. SAFE, lowering the price target to $40 from $44.

Following continued challenges in the general CRE sector and expected lower near-term transaction volume, Howlett nudged down EPS estimates from $1.56 to $1.47 in FY23, from $1.70 to $1.60 in FY24, and introduced an FY25 estimate of $1.75.

The analyst notes that the estimate revision also accounts for an expense drag from the STAR merger.

The analyst does not think the long-term operating environment has changed intrinsically for SAFE.

Also Read: Why This Goldman Sachs Analyst Gives Safehold A Buy Rating

Howlett cautions of a dramatic shift in the commercial real estate space, higher (for longer) interest rates, and an expected slower ramp-up in transaction volume through 2H23.

On the positive side, the analyst views 4Q23 as a potential inflection point for originations, as management was upbeat about future demand for originations as sponsors look to re-work their capital structure.

Howlett expects SAFE's annual origination volume to exceed $1 billion in 2024, reflecting a more normalized run-rate.

In fact, the analyst remains bullish on SAFE's modern ground lease solution, which can potentially disrupt a $7T+ CRE industry that will likely need to rely on new capital sources in the aftermath of the regional banking crisis and expected higher capital rules.

The analyst believes the pipeline is up modestly since the SAFE 2Q23 earnings conference call, and Howlett's model projects that SAFE will be able to sustain about a $100 million- $150 million quarterly origination pace in 3Q23. 

The analyst forecasts that originations should increase to the $200 million-$250 million range by 4Q23.

Price Action: SAFE shares are trading lower by 2.17% to $18.93 on the last check Wednesday.