Morgan Stanley Downgrades Safehold (SAFE) to Underweight

Morgan Stanley analyst Ronald Kamdem downgraded Safehold (NYSE: SAFE) from Equalweight to Underweight with a price target of $14.00 (from $16.00).

The analyst comments "Why are we downgrading to UW? 1. Muted origination activity. From 2019-2023, SAFE net investment in ground leases averaged ~$1.0bn a year, but this trend has notably slowed down to $0.20-0.25bn in 24a/25e. During that time period, CRE transaction activity average $624bn in 19a-23a with a slow down to $440-550bn in 24a/25a. While we are bullish on a CRE transaction recovery in 26e and expect $600bn of transactions, we expect SAFE's ground lease investment to remain muted at $0.20-0.25bn given the elevated rate environment and a potential elongated sales cycle for this unique financing solution. Indeed we prefer to get exposure to rising transation activity through the commercial real estate services companies (see Rising Penetration of CRE Services). Our conversation with management at NAREIT in December suggests activity remains muted, especially against this interest rate backdrop. We focus on the long bond treasury trading at 4.87% as a notable headwind. 2. Elevated dividend payout ratio. In a muted origination environment the dividend may become more of a focus. SAFE pays a quarterly dividend of $0.177 per share, implying a ~4.75% yield. The AFFO payout ratio is above 100% and in a muted origination environment we think it may be more difficult to grow earnings fast enough to bring the dividend payout ratio below 100%. Indeed we expect ~$42mn of operating cash flow in 26e to be below dividend payments of $51mn. At $250mn of annual origination our model suggests that operating cash flow may be below dividend payments until 28e. In order to preserve cash flow and reduce debt in a low origination environment we see risk of -35% dividend cut in 27e; this would lower the payout ratio to ~70%, which is more in-line with other REITs. If origination recover faster than anticipated, then we think it's unlikely the company reduces the dividend as it can more easily grow earnings to reduce to payout ratio. We reflect this scenario in our bull case. 3. Pending litigation with tenant. On October 22, 2025, SAFE sent the tenant under the Park Hotels master lease a termination notice for all five hotels and commenced litigation against the tenant and Park Intermediate Holdings LLC (the guarantor) for certain breaches related to the maintenance and operations of the hotels. Near-term financial impacts remain unclear as management has not commented on potential costs or expect rent payments by Park Hotels during legal proceedings. We highlight tenant maintenance capex requirements as an important consideration to the ground lease business model toward the end of the term. We continue to monitor the potential resolution of this litigation. 4. Star Holding fee income headwinds. SAFE receives management fee income that declines on a predetermined schedule. Star Holdings paid SAFE an annual management fee of $25.0 million for the term ended March 31, 2024 and $15.0 million for the term ended March 31, 2025. The annual fee declines to $10.0 million and $7.5 million, respectively, for each of the following annual terms, and adjusts to 2.0% of the gross book value of Star Holdings’ assets, excluding shares of the Company’s common stock held by Star Holdings, thereafter. This creates a modest earnings headwind. See additional details from 10Q below. 5. Limited visibility on unlocking Caret value. SAFE shareholders owns ~84% of CARET units. The most recent appraisal suggest a $9.1bn valuation for the real estate on top of the ground leases SAFE owns but the timing and certainty of realization remain unclear and could extend many years. Efforts to create public liquidity for Caret units, like the planned February 2022 exchange listing, were unsuccessful."

For an analyst ratings summary and ratings history on Safehold click here. For more ratings news on Safehold click here.

Shares of Safehold closed at $14.98 yesterday.

You May Also Be Interested In

• ICON plc (ICLR) PT Raised to $150 at BofA Securities
• Raymond James Starts Tonix Pharma (TNXP) at Strong Buy
• Hyperscale Data reschedules investor call to June 26