Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now, welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
For most of the last year when I've been in New York City, my commute to the corner of Wall and Broad Streets, an area once bustling with business types, residents, tourists, and passersby, was a lonely one. The sidewalks were empty, much like the office buildings towering above me, making vivid the real impact of the COVID-19 pandemic on the city's once-burgeoning real estate market. Now, after nearly a year and a half, Mayor Bill de Blasio said this week that New York is set to fully reopen by July 1st. It won't be soon enough to get my daughter back into her middle school class five days a week, but it sure feels like the city's professional class is beginning to gravitate back from its safe spaces and will soon trickle back into their offices, bringing the cornerstone of the Big Apple's economy back to life.
Josh King:
And while the vagaries of office occupancy worry those who have to pay rent on an empty cubicle, and the developers and building managers who want to make sure that those leases get renewed, the land on which the building sits doesn't move a fraction of an inch. It'll be there just as it was pre-pandemic and post-pandemic. Someone's got to pay for it. And if the ground is leased for 99 years, somebody's going to make a tidy return on the deal.
Josh King:
Though the pandemic battered parts of the real estate market, our guest today continued to bet on ground leases, highlighting their predictable nature in the midst of a very unpredictable year. And despite this volatile period for the markets generally, the stock of Jay Sugarman's latest venture, Safehold, that's NYSE ticker symbol S-A-F-E, or SAFE, has seen its share price jump nearly 84% in a little over a year since March 2020, when the pandemic first began. Our conversation with Jay Sugarman, the chairman and CEO of iStar, on transforming the commercial real estate industry, the impact of the COVID-19 pandemic, and what's next for iStar and Safehold. That's all coming up right after this.
Speaker 3:
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Speaker 3:
20 years ago, we saw an opportunity to create a market driven by customer needs. Today, our markets create endless opportunity for participants around the world, and our team is focused more than ever before to ensure the markets continue to function properly. On behalf of my colleagues around the globe, thank you from Intercontinental Exchange.
Josh King:
Our guest today, Jay Sugarman, is chairman and CEO of iStar. That's NYSE ticker symbol S-T-A-R, or STAR. In 2017, Jay launched Safehold, with a ticker symbol SAFE, the first public company to focus exclusively on ground leases to offer real estate owners and developers a better way to unlock the value of the land beneath their buildings. Jay, welcome Inside the ICE House.
Jay Sugarman:
Josh, good to be here.
Josh King:
Jay, the COVID-19 pandemic has certainly drawn attention to the broader real estate market and the transformations taking place. We're going to get to the ground lease aspect of that revolution and iStar's role in it a little later in our conversation. But to set the stage with some of your thought leadership about the real estate industry as a whole, as you take stock of those unoccupied cubicles and depopulated lobbies that we've been seeing over the past year, what are the major real estate trends that you've been watching as an industry insider?
Jay Sugarman:
Well, we take a pretty long-term view of what has happened in the real estate world, not just over the last couple years, but over the decades, and I think what you see is that it is an industry of renewal and adaptation. Things change, but you've got an industry of incredibly smart entrepreneurs who are always trying to think, "What's around the corner? What's next? How do we create a better experience?"
Jay Sugarman:
I have no doubt, despite all the challenges, that this industry will come back bigger, better, stronger. It's starting to incorporate technology in a way that I think the pandemic certainly has accelerated. Ultimately, it's a customer business, whether you're in the hotel business or the office business or the multifamily business. How could you make people's living experience, guest experience, work environment better and more engaging? That is something that, as you go around this country, people are always coming up with new and better ways to fulfill that promise to their customers.
Jay Sugarman:
Real estate is really no different. It is a customer business at the end of the day. And I have no doubts this is an industry that continues to figure out ways to move the ball forward, to make progress as society makes progress. So it'll be here today; it'll be here tomorrow. As you said, we're not going anywhere, and the industry is not going anywhere.
Josh King:
You've seen a lot of booms and busts in the real estate cycle since you started, I guess, with Starwood in the 1990s, just out of HBS. What comparisons are worth making to different periods? You say you've been here in tough times in the past, and you'll be here in tough times in the future, but is there a corollary, particularly, to the last 18 months that we've been witnessing?
Jay Sugarman:
Yeah, I guess. I got involved almost by accident in the real estate world back in 1990. I was working for a high-net-worth family right out of business school and didn't know a lot about commercial real estate, but really saw a disconnect that didn't make much sense. The Wall Street Journal said real estate is never going to come back. Brand-new buildings that cost $100 million to build are suddenly only worth $50 million. People were writing the epitaph for the entire commercial real estate world.
Jay Sugarman:
My partner and I at the time were pretty good contrarians, ended up seeing this as a big opportunity, "Gee, wouldn't it be a good time to start a real estate investment business when everybody else in the world thinks it's the worst business to be in?" We ended up putting Barry Sternlicht and Bobby Faith in business, who have ended up being two of the most successful people in the industry.
Jay Sugarman:
But back then it was, "What are you thinking? Real estate is a terrible business." And I see a little bit of that now. "New York is never going to come back. New York's finished." I just fundamentally don't believe that. I found New York as a college student 40 years ago, and it hooked me right away. And the things that hooked me, crazy people doing crazy things, brilliant people doing brilliant things, none of that has changed.
Jay Sugarman:
I'm a believer this is a city that somebody is pushing the envelope in every corner of our existence beyond where it should be pushed. And when you get together, and art and music and fashion and the street are all banging into each other, good things happen, and I think that's going to happen again. Lower rents, lower economic activity is an opportunity as much as it is a challenge, and new things will come out of that. New people will be able to thrive. So I'm a believer in the future and in progress. I try not to focus on the downside. I always look for, "Where can we take this now? How can we make things better?"
Josh King:
You mentioned Barry Sternlicht. Certainly, I've followed his career, probably since you were with him in the early '90s, and I watch him on CNBC periodically when he shows up. He's also an optimist, also a creative thinker. What was it like to watch that guy at work at the heyday of Starwood?
Jay Sugarman:
Yeah, I think everybody has a different way about them. Barry has built a great business. I didn't know a lot about real estate in the early '90s, but Barry and Bobby would come every Saturday night and say, "We need more money. We have great deals," so I had to learn pretty fast. Both had a very strong view of what the future could be. And I think Barry, more than most, had a chip on his shoulder about building something big and important.
Jay Sugarman:
It's really interesting. This is a seven-plus-trillion-dollar industry. I've seen very different people succeed in very different ways. So you start to learn lessons about who you are and how you think about doing business. It's been great to see lots of successful people choose their own lane and do it their own way.
Josh King:
Along that road, you pick up a lot of stuff. I think you and I share a fondness for ephemera. For me, this past year has afforded more home office time than I ever thought possible, surrounded by my stamp collection, my platoon of Uncle Sam statues, and a grid of die-cast NASCAR cars. As we slowly make our way back to our offices, the tail end of the pandemic, I think I see you in your office on West 42nd street. It looks like a bowling ball is behind you. I think you've got a collection of bowling pins and romance comic books. I got to ask, what drew you to all that stuff?
Jay Sugarman:
I'm one of those people who's always learning, always like things that are a little bit off the beaten track, a little bit unconventional. Romance comics, I love the whole '60s era, but the artwork on these things is brilliant. That's what hooked me.
Jay Sugarman:
Here's this amazing pop art and graphic art that nobody wanted back in the 1990s and 2000s. It didn't make sense to me, so I started buying every copy I could find. I would go into the comic book shows and ask if they had any DC romance, and they would always give me this strange look. Confused, they'd point me to some dusty box sitting on the floor and say, "I don't know. We might have some in there."
Jay Sugarman:
And the more I collected, I wanted to build something really special, because I thought this was an era that was unique in America's history. The innocence of the storylines was boy meets girl, girl breaks boy's heart, boy breaks girl's heart. It was kind of a perfect ideal of life and what's important. Things like that, I get interested in, and I start to think, "Why isn't anybody else interested?" Now, that comic era now has become very, very much in demand.
Josh King:
You can create a whole NFT company just around your collection.
Jay Sugarman:
I'm telling you, it's stunning how things that people ignore for a long period of time suddenly become very, very much en vogue. Bowling, I think, is a little bit of the same. I bowled in a money league at Madison Square Garden when I first got to New York. It was one of those hustlers' leagues, where you'd go home, change out of your suit, put on a torn T-shirt and jeans, convince people that was your last $200, and then you go hustle them.
Josh King:
My old boss Frank Bisignano, now chairman and CEO of Fiserv, started making his first bucks as a bowling hustler in Brooklyn.
Jay Sugarman:
That era has changed as well. We ended up, halfway through my career, having an opportunity to become the largest owner of bowling alleys. It was a business most people would run away from and had very little knowledge of, but when you dug beneath the surface, you said, "Email is going to change this business. Some of the technology is going to change this business. There's going to be a winner. There's going to be somebody who reaches scale and can do things that have never been done before." The technology side of it just had never been exploitable.
Jay Sugarman:
So we made a big investment back 15, 16 years ago, and I've watched that company continue to evolve, now, by far, the largest company in the industry. And we own more bowling alleys across the country than I think anybody else, certainly in this country, and probably in the world. We had to understand all the pieces. We had to put it all together, and not just accept the knee-jerk conventional wisdom that, "Bowling's bad. Who bowls? And why is it interesting?" Those kind of things always, when I see dots that I can connect, that maybe haven't been connected before, by looking out over a very broad range of interests, that's when this has business is fun.
Josh King:
I considered myself fortunate, Jay, to grow up and live in the same house outside of Boston in the '70s and '80s until I left for college. I think Sammy White's and Fairway were our two go-to bowling alleys, one for candlepin, one for 10-pin. But I think you went to nine schools in 10 years. What did your parents do that kept you so much on the move?
Jay Sugarman:
I think they've probably passed that gene on to me, that interest in new things and challenging yourself and finding better ways to do things. My dad was the first one in his family to go to college. He went off to sea to get a scholarship to be able to afford college. He got into the oil business, started off working on a tanker, and we moved around quite a bit when we were young. Didn't know that wasn't what everybody did. So each new school was a new challenge, a new opportunity. You kind had to figure out, "Who am I in this world, in this environment?" So when I got to New York, it was kind of the first time I put down roots, and I'm glad I found it, because it's been my home for the last 30, 40 years.
Josh King:
Before you got to New York, you went on to get your undergraduate degree from Princeton, the same school that my old boss Mike McCurry went to. McCurry took his diploma and went right to Washington, D.C. So what did the valedictorian of the class of 1984 and the recipient of the Paul Volcker Award do when your college years came to an end?
Jay Sugarman:
Yeah. Well, let me correct you. I thought it would have been cool to graduate first in my class at undergraduate and graduate school, but I didn't pull it off. I was nominated for valedictorian at Princeton, so not as good a story as I'd hoped.
Jay Sugarman:
But Princeton does open doors, and I was able to get a good job in New York City. That was the time of Area, Warhol and Basquiat. It was just a fantastic time to be a kid in a new city. And I will tell you, the work environment back then was really difficult, working until all hours of the night, so I don't really remember or reminisce about that too much. But the opportunity to just see the world through that moment in time in New York was fascinating. I still remember some of the crazy stuff that happened in the two years before I went to business school, and it definitely shaped the rest of my life.
Josh King:
Well, after those first two years, like so many folks did in the 1980s, the analyst programs and then applying to business schools, like my brother, you found yourself at HBS. You were a Baker Scholar, no less, named for George F. Baker, one of the early titans of Wall Street and a founding stockholder of what's now Citigroup, which is NYSE ticker symbol C, was a time when these newly minted MBAs thought they could all follow in the footsteps of Bud Fox, with Oliver Stone's Wall Street coming out in 1987. What did you sense was the opportunity when you left Cambridge as opposed to leaving Princeton?
Jay Sugarman:
Business school for me was a chance to see how I thought and my mind worked versus a lot of other very smart and ambitious people. I saw that I thought about the world in a slightly different way and had the ability to connect dots in a slightly different, more unconventional way.
Jay Sugarman:
Didn't want to go back to Wall Street, but was fortunate to meet a guy named Richard Rainwater, who had done some spectacular things for a high-net-worth family he worked for. I teamed up with somebody from my class, and we went and tried to do the same thing for two high-net-worth families in New York who, for whatever reason, were willing to entrust to us that we could build interesting investment concepts for them. Out of that came Starwood. Out of that came some really interesting companies in the convertible arbitrage and hedge fund space.
Jay Sugarman:
So it was a time of learning. It was a time of working with people who have gone on to great success, and a lot of challenges too. Made a lot of mistakes. Half the time, you don't really know what you're doing. You just looked for guidance from others who had been successful. I'm still learning. So here we are today, and I think a lot of the lessons learned throughout my career have finally gelled into one big idea that I think will become probably the most important thing I've certainly done in my professional career.
Josh King:
Years ago, I think you were reading the Wall Street Journal, and for several weeks in a row, you noticed that every headline read something like Real Estate is the Worst Business. You then naturally decided you needed to start a real estate business. Walk us through your thought process from where you were, working with the burdens to recognizing that the opportunity in the industry was right in front of your face when maybe other people couldn't see it.
Jay Sugarman:
One of the benefits of private capital or family capital is they can take a long-term view. Certainly, investing in real estate in 1990 required that kind of patience and long-term belief, so it fit nicely with our view of trying to get into businesses that had a contrarian bent, had an opportunity to enter at an advantageous time, Real estate is such a big industry that when you get a chance to enter at a bottom, you're probably going to do pretty well.
Jay Sugarman:
Built a team, provided the capital. Interesting to me is that, as I watched that business grow and got more immersed in it, I couldn't figure out why the real estate finance markets were so far behind the corporate finance markets. You'd go into an investment bank and you'd ask where the real estate group is, and they'd go, "Well, it's down the hall and to the right. There's a couple desks and offices back there." And you'd go, "Why isn't it next to the trading floor? Why isn't it next to the corporate finance folks?" It was really treated as a completely different, separate business with its own rules.
Jay Sugarman:
One of the things I've learned throughout, not just my business career, but in a lot of other areas, is when people tell you that the rules are different, and this is different, you won't understand why, usually that's an opportunity. So we took a hard look at the real estate world, and I kind of started to push on the question of, why doesn't its finance markets look a lot more like the corporate finance markets? Why aren't there different layers with different risk rewards offered to different investors to make this business more efficient?
Jay Sugarman:
The answers were, "Well, this is the way we've always done it. It's always been a first mortgage, or it's always been done this way." And boy, that's like fresh meat in front of me when somebody says, "That's because that's the way we do it." That's usually an opportunity to go, "Okay, wait a second. I need to understand this better and see if there's a better way to do it."
Josh King:
You wrote an article recently on the investment genius of Ben Franklin, Albert Einstein, and Warren Buffett. A share of Berkshire A was probably about $7,100 on June 1st, 1990, back at the time you were starting all this. Today, you can buy one of those shares for $418,000. Did Franklin, Einstein, and Buffett all seem like role models for you, even on those early days?
Jay Sugarman:
I think one of the problems with being young and thinking you know what you actually don't know that much, so looking back, I wish I had taken more time to really study all the examples of people who had taken long views and really figured out how to change the world. All three of them figured out that compounding is this incredible power, that if you can harness, whether it's in science or in investing or for the good society, it can be one of the most powerful forces of all.
Jay Sugarman:
We certainly now learn that lesson multiple times in the iStar history. Safehold is, again, another idea that I wish I'd had 30 years ago, but it takes all of your life lessons, all those dots, all those disparate things that you learn, before you can actually be ready to do that. I'm still learning, still trying to find examples that I can bring into our business, and have nothing to do with real estate. You pull things from other worlds. It just makes what you're doing even more interesting.
Josh King:
I saw that iStar reported its first quarter yesterday, adjusted earnings per share of $22.7 million, or 30 cents per common diluted share. Jay, as the stock opened today, I think you're north of $70 a share. A year ago, $52. If you're talking to millennials with a trust fund loaded into their Robinhood app, what's the pitch to get them to buy and hold SAFE and STAR rather than GME and AMC?
Jay Sugarman:
Yeah, I think the opportunity at both companies is pretty exceptional. If I had to boil it down, I would tell you Safehold is revolutionizing one of the largest businesses in our country. Safehold is a growth stock. It's a value stock. It is the first time, really, you as an investor have been able to invest in a public company form into one of the greatest wealth-creating asset classes over the past five, six centuries. We think about the monarchies that have owned land in London and Hawaii, and the churches like Trinity Church, or Columbia University or MIT, that have owned land. They have built enormous fortunes, but you as a retail investor, even an institutional investor, have never been able to invest in this asset class. So we've democratized access to this very powerful asset class.
Jay Sugarman:
But I'll be honest with you, Josh, we've made it better. We've made it liquid by putting it in a public company form on the New York Stock Exchange. No plug there. We've tried to build a machine that would make building owners higher returns with less risk. So we actually have a build machine that's actually growing its portfolio every quarter.
Jay Sugarman:
We're not fortunate enough to be sitting on tons of land and just deciding, when people want to build on it, we'll start a ground lease company. We have to actually create a customer product. Our customer is building owners. We've taken everything we've learned in the finance business and the net lease business over the past 20 years, and we've really built the first customer-friendly value-enhancing ground lease product and put it in a nationally scaled, institutional-quality platform on a major exchange and given people a chance to invest in it.
Jay Sugarman:
That is breakthrough on a number of fronts. It's breakthrough for our customers, the building owners. It's breakthrough investors who've never had a chance to invest in it, and it's breakthrough because the thing they're investing in, while it was already pretty special, we just made more unique and enhanced it and made it more valuable. So it's an exciting time for us. We can talk for hours on this business, because we've really created it from scratch and have been creating the logic, the nomenclature, the concepts behind it, and every day I come to work even more excited.
Josh King:
People can go and find your appearances on REITweek or listen to the replay of your quarterly call from yesterday, Jay, but just to break down at the beginning, what is a ground lease for our listeners, and how has iStar gone about reinventing the ground lease sector?
Jay Sugarman:
Ground lease is a pretty simple idea. A property is a building and the land it sits on. We've always said markets want to be efficient. So when you think about a property, it's really two investments. It's the building investment, and that's typically pretty actively managed. You've got to lease it, manage it, market it, build it, finance it, sell it. You're designing and repositioning and working with your customers, which are your tenants or your guests or your renters. Then the land is a passive asset. It basically just sits there. It's much more like a bond. It is a very different investment, different long-term hold profile.
Jay Sugarman:
So think about that. You've got an asset that's higher return, very actively managed. Typically, people buy and sell it much more frequently. Then you have the land, which is a much lower-return asset, lower beta, lower risk. Typically, it shouldn't trade very frequently. Two very different investments, different risk profiles, different return profiles. Yet I would tell you this is the only place in the entire capital markets that if you want to buy one, you have to buy the other. So when you buy a share of Apple, if you want to buy the stock, you don't have to buy the bonds too.
Jay Sugarman:
We look at commercial real estate, and we say you shouldn't have to buy the stock and the bond every time you want to make an investment. We want to give people the choice. If you want to buy the building because you think you have a great operator or changing market conditions, fantastic. You should be able to put your capital there, receive the highest returns with the lowest risk profile possible. And if you want to own long-term ownership interest in great cities around the country and let building owners do their thing on top of your land, you should be able to invest in that separately.
Jay Sugarman:
What we find is when you let the markets be really efficient, when you give them the different choices, one plus one ends up equaling more than two. So we think we're going to increase the value of all real estate across the country. We think it's just a better mouse trap. It's more efficient.
Jay Sugarman:
We're still early days. Yes, we've grown tenfold since we started, but if you think about it in the context of what net lease did for corporations... So corporations figured out, "Hey, we have an operating business and we have a bunch of fixed-asset real estate that we need to run the business, but those are two different businesses. Our operating business is running a cell phone company. We don't need to own the cell towers. Let's split it apart, do a net lease or a sale lease back," and that business has become a trillion-dollar business.
Jay Sugarman:
Well, let's go over into the commercial real estate world and say the separation between buildings and land is exactly the same. That analogy of an operating business and a lower-return fixed asset piece of real estate is exactly the same. Let's split them apart. And shouldn't the modern ground lease, the new customer-friendly, value-enhancing ground lease, shouldn't that also be a trillion-dollar business? We think it will be.
Josh King:
You think it will be. Still early days for Safehold. Still early days for this episode of Inside the ICE House. After the break, Jay Sugarman, the chairman and CEO of iStar, and I will dive deeper into ground leases and his expectations for the REIT space in the months and years ahead. Then we're going to veer a little farther south from Wall Street and take a visit to Asbury Park and Subaru Park, home of the Philadelphia Union. That's all coming up right after this.
Speaker 5:
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Josh King:
Welcome back. Before the break, Jay Sugarman, chairman and CEO of iStar, and I were discussing his early days in finance and real estate, and the evolution of iStar and Safehold. Jay, in 2017, iStar launched Safehold. It was the first public company to focus exclusively on ground leases. It marked a significant shift in your business strategy. Why at that point was it time for the pivot?
Jay Sugarman:
Yeah, I fall into the camp that thinks it's better to fail at originality than succeed at imitation. After the financial crisis, we felt like we couldn't be the leader in some of our historically strong businesses, so we started looking around for something new. We wanted something that we could create and we could be the best at.
Jay Sugarman:
The idea for Safehold literally came to me in the middle of an investor meeting. It was like, all of a sudden, all the dots lined up in a single moment. It turned out that was the easy part. Had to go out and hire a top team, figure out how to launch it as a separate pure-play company, get the market to understand why this is such a big breakthrough, and how it could change commercial real estate for the better.
Jay Sugarman:
We've been out in front of folks now for four years, really telling them why this is a revolution, an opportunity to make a giant industry more efficient, to deliver a better customer experience. We look at other successful companies, and it seems to us that those are the two hallmarks. When you look at these big, giant companies, they are making industries more efficient and they're delivering something the customer wants, and doing it in a better way. We're trying to do that for our customers, the $7 trillion of building owners.
Jay Sugarman:
It was really an opportunity to start something and know that we could, first of all, be the first to do it, but then look at our history and say, "Wow, we're perfectly positioned to do this. We know what the finance markets need and want. We know what buyers of real estate need and want. We know the flaws in the old ground lease business that has held it back. We should be the ones to fix this. We should be the ones to make this change for the industry."
Jay Sugarman:
It's been a little over three and a half, almost four years now, and we're still innovating. We're still finding bigger and bigger opportunities to make this really become a mainstream product for the industry, and I would say we're more excited today even than we were four years ago.
Josh King:
Why did ground leases originally have somewhat of a negative reputation?
Jay Sugarman:
Yeah, it's funny. When we started the business, we went back and looked at almost every ground lease we could get our hands on, going back almost hundreds of years. There's some great books we found, one from 1928, one from 1887, talking about ground leases, and they always talked about it, really, from the vantage point of the owner of the land. They never talked about the building owner, and how they were the customer, and that it was important to make sure that they could do what was optimal for them, what the leasehold lender or the first mortgage lender on the building, what would be optimal for them.
Jay Sugarman:
So we saw this opportunity to just change the entire industry from landowner focused to building owner focused. It's this idea of efficiency that you've heard me talk about that I saw in the real estate finance world. I saw it in the net lease world. Just by changing people's perceptions by moving slightly some of the key variables, you can suddenly open a whole new industry up.
Jay Sugarman:
I think in ground lease, it was this idea that to fit in the modern real estate finance world, modern real estate investment world, you needed a ground lease that was predictable. You needed a ground lease that was straightforward. You needed a ground lease that was seamless, with all the other provisions that any lender or any buyer of real estate is dealing with, whether that's insurance or casualty or condemnation, all the provisions. We wanted to get rid of all the ambiguity, all the uncertainty, because that's what the modern financial markets demand. We're learning things about what our customers want, how to make these modern ground leases really unlock value and become a seamless part of the industry, that I don't think have ever really been thought about before.
Jay Sugarman:
It's exciting. We've got a top-tier legal team in-house who is constantly thinking of ways to make it better for our customers. We've got a top-tier capital markets team that's figuring out, how can we drive down our cost of funds so we can drive down the cost to our customers? We've got a great investment team that's out all over the country spreading the gospel, showing why this is going to be a better capital solution, generate higher returns with less risk for building owners. So it not only takes a village; it takes 100 really talented, hardworking people to really change an industry's mindset.
Josh King:
You've said, and I'm going to quote you, Jay, "Traditional ground leases often ignored the building owners' and the leasehold lenders' needs, and had provisions that simply destroyed, rather than enhanced, the building's value." I'm curious, how does a building's value get destroyed, to use your term?
Jay Sugarman:
The classic example, and this is something we had to overcome, is people will point to a couple high-profile buildings in New York, Chrysler Building, for example, or Lever House. These are iconic buildings that were on land, on a ground lease that was probably done on a typewriter 50 years ago. Didn't anticipate any of the current dynamics in the real estate world. Had provisions that were based on what probably sounded like really good ideas 50 years ago. In the year 2020, let's set the rent based on what could be built on the building today, not what's standing there. There's an office building sitting there. We'll value the land as if you could build maybe a condominium building, and then we'll charge you rent based on that.
Jay Sugarman:
Well, you can see how that could end up in a real problem, typically litigation. The owner of the building, rather than focused on making that building worth more every day, is kind of looking over their shoulder going, "This is terrible. I'm running the best office building I can, and I'm going to be paying rents like this is a condominium building." That makes no sense.
Jay Sugarman:
That's just one example of probably 10 we found, where, whether you're a lender or whether you're a building owner, we want you to focus on the things you do really well. The ground lease should be just this quiet, very predictable, no-drama part of the capital structure. It can't be the thing that you wake up every day going, "What am I going to do with this ground leases?" And that just was a complete flip from how people were perceiving the ground lease relationship with the building owners. Because, look, if you are fortunate enough to own that land on 50th Street and Park Avenue, you can ask for whatever you want. Somebody wants to build on your land, it's your prerogative.
Jay Sugarman:
We can point to every other part of the capital market and say there is no other part of the capital markets where the bonds and the stock has to be traded as a pair. There's a reason for that. It's inefficient. It makes no sense. It creates unnecessary friction costs. It doesn't allow the markets to do what they do well, which is value individual components at their maximum value.
Jay Sugarman:
Safehold will be the highest, best buyer of land. We will pay a higher price than it is worth to the existing building owner, so we're unlocking value for them. We're creating an opportunity for the whole industry to unlock value, and I would call that progress. If we can make the whole industry worth 10% more than it was yesterday, we've done something pretty special.
Josh King:
You mentioned the Chrysler Building and Lever House, Park Avenue, Jay. As early as two years ago, 2019, Safehold didn't have a single ground lease in New York's five boroughs. Since then, it's expanded rapidly. Now about 40% of your portfolio is about 75 ground leases located in the Northeast U.S. How critical is this market to the success of your business?
Jay Sugarman:
New York is still the economic center of our country. We want to be in the top 30 markets. The gateway cities, I think, will always be great cities in our country, but we're also in the Nashvilles and the Austins and the Orlandos and the Phoenixes, San Diegos. We're big believers long term in the country, and particularly in these top 30 markets. So our view is great, well-located land with really smart building owners and an industry that is constantly trying to figure out how to create even higher and better use for all these locations in these major markets. That's a great business to be in.
Jay Sugarman:
New York is the epicenter of that dynamic, always adapting, always reinventing itself, attracting the best and brightest to culture and art and music and business. So owning land in transit centers of New York City or Midtown locations in New York City, history is a good guide for us. I think if you could have owned land in London a thousand years ago, you'd be very happy today. We think owning land in New York today is a very similar proposition.
Josh King:
We've been talking about how Safehold has been such a pioneer in this space. Up until the last several months, you were really the only player, as we've been talking about. But in 2020, investment manager Ares Management Corp. and London-based Regis Group have joined forces to launch Haven Capital, a private ground lease investment vehicle. How do you feel about the competition?
Jay Sugarman:
If our goal is to make it a mainstream product, there's definitely going to be plenty of room for others to follow us. I think we've built some sizable competitive advantages to remain the creator and leader of the business, but there's plenty of room for others to come and help us spread the word. Certainly, I think having folks with the reputations that an Ares does to come into our market says a lot about what they think of what we've created and where this industry is going.
Jay Sugarman:
We've got a few more tricks up our sleeve. We just announced what we think is the next big thing at Safehold. So there is a lot of opportunity ahead of us, and certainly opportunity for others as well.
Josh King:
What's the next big thing?
Jay Sugarman:
This one's going to get a lot of attention, because it sounds hard to grasp, but when you break it down, it's really a simple idea. A ground lease at its end of the term means that you get the building on top, or whatever's on top, if your land comes back to us as the landowner. People have historically said, "Well, that's so far out in the future. I have no idea how to value it. I'm not going to really pay attention to it."
Jay Sugarman:
But here's this other opportunity to say, "Wait a second. You're telling me things that grow and have value in the future can't be valued today? I'm going to say that makes no sense." We do it everywhere else. We value things in the future that are growing all the time. You mentioned Berkshire Hathaway. He's probably the first one to tell you, "If you tell me what things are going to do in the future, I can tell you what I think they're worth today." It's a discount rate. It's a growth rate.
Jay Sugarman:
We think ownership interest in buildings at the end of a ground lease out in the future, it's not something the average investor has ever had to think about, but we're growing a portfolio of ground leases that is increasing in size every day, which means those ownership interests, that asset is growing in size every day. We think it's going to be pretty simple to show people the value, just using the present value formula we all know and love. We're not doing anything that hasn't been done 1,000 times over.
Jay Sugarman:
Again, it's this thing where you have to connect the dots for people, because at first blush, yeah, it's easy to go, "A building 100 years from now? Come on, Jay, that can't be worth anything in present value terms." And you go, "Well, wait, it's not a single building. It's a company that adds building interests every day, so it has an internal growth rate and an external growth rate. And it's just a collection of very high-quality institutional assets, so we kind of know what the discount rate is and we know what its value is today. Gee, if I know what its value is today, and I know what its growth rate is, and I know what its discount rate is, I think I could tell you what its present value is."
Jay Sugarman:
That simple logic, this is the recurring theme, I think, in a lot of my career, if you can break it down into easily understandable components, if you can show the simple logic... It's great to have the vision, it's great to have the creativity, but then you need to be able to break it down analytically so that everyone can understand it. They may disagree with your assumptions, but they'll see your vision. They'll have the tools to understand it.
Jay Sugarman:
I think we're getting to that point at Safehold. We're not there yet. We just began to talk to people about this second source of value that I think most people have just been ignoring, and the reaction is great to watch. People are going, "Wait a second. That does make sense. That could be an extremely valuable asset. That is something I want to own." So we'll see how we do. So far, so good.
Josh King:
Beyond the opportunities and potential of ground leases, Jay, iStar also jumped in, in 2009, to acquire 35 acres, or about 70% of the buildable land, in Asbury Park, New Jersey. When Jon Landau saw Bruce Springsteen play the Harvard Square Theater in 1974, he wrote for Boston's Real Paper that, "I saw rock and roll future, and its name is Bruce Springsteen." Jay, we know what Dolly Parton has done with Dollywood and the Great Smoky Mountains. Could iStar be on the verge of creating Bosswood on the Jersey Shore with the Stone Pony Roller Coaster? Tell us about your vision for Asbury Park and the waterfront and where the project stands now.
Jay Sugarman:
I'll go back to the simple things we talked about, things that are obvious in retrospect, but somehow you look at them and go, "Why isn't this happening?" Asbury Park is an hour from New York City. It's got a great beach, a great boardwalk. It's surfable. It's walkable. Public transportation to one of the great cities in the world an hour away. It has this beautiful architecture surrounding it. It's got three lakes. It really has been one of the great cities on the East Coast in its past, and it just sort of fell off the map.
Jay Sugarman:
I think Bruce and others have brought some attention to it, not always in a way that burnished its reputation. It kind of looked like a lost city for a while. But if you ask any real estate investor, if you could own 35 acres on the ocean an hour from New York City, surrounded by beautiful architecture of Ocean Grove, affluence in Deal to the north... It's just this blank slate, but you have a city that is cool and interesting, and has a restaurant and a music culture at night and a beach culture in the day. You think about every startup and every entrepreneur you talk to. They want the lifestyle. They want the walkability. They want the clash of cultures that sparks new ideas.
Jay Sugarman:
This was a community that had kind of fallen in a very bad way. It was financially relying on the state, couldn't actually pay its own bills. We had to make a big bet at iStar. As I said, we look for new things that we can be really good at. We connect dots. Asbury Park seemed a place, not only where we could do well, but we could do good. We could help a community that I thought could regain its position as one of the most important cities on the East Coast, a real magnet for entrepreneurs and startup businesses. It was an opportunity zone.
Jay Sugarman:
I fell in love with it just walking around. There's one of the best pinball museums on the East Coast right on the water. How crazy is that? It's right on the beach.
Jay Sugarman:
I went and got the best designer I knew, had worked for Ian Schrager for decades, and her eye is brilliant, a woman named Anda Andrei. I said, "Anda, we're going to build this together. We're going to make people see what we see." And again, a lot of stops and starts, a lot of tough challenges, but that's a city that has come back extraordinarily successfully. We still have a lot of work to do. We need to lift the whole community up. We're just trying to reset the people's perceptions.
Jay Sugarman:
But we have seen these 35 empty acres go from abandoned, broken sidewalks, broken street lights, weed-strewn lots, and there's a vibrancy there now. You can see the opportunity. You can see the future. The mix of people there is spectacular. It is everything you'd want in a city, but it happens to be on the ocean. And it happens to be an hour from New York. And it happens to be one of the coolest cities in terms of its history and its people and its restaurant culture, music culture.
Jay Sugarman:
Bruce is still a big part of that city, brings a lot of cachet to it, but I think there's a whole bunch of new parts to that city that I hope people will go and sample and realize what we think it is, which is this jewel box on the ocean that, if I had a choice, I'd live there, I'd work there, I'd play there, and be very happy.
Josh King:
Jay, as we wrap up, among your many other interests, you are the managing owner of Keystone Sports and the Philadelphia Union MLS soccer team. We've all spent the last few weeks talking about the influence of U.S. owners on European soccer. But the Union took a page out of European soccer's playbook with the YSC Academy to help the Union become a budding powerhouse in MLS. What's the growth potential for the business side of American soccer, you think?
Jay Sugarman:
I have to say, the building of the Philadelphia Union is definitely a key part of what keeps me going every day. I thought from a macro perspective that the internet was shrinking the world, and the sport of the world is soccer or football, so that the U.S. opportunity in soccer was going to be enormous. And the opportunity to build a team from scratch in Philadelphia, one of the best sports markets in the country, that was just too good to pass up.
Jay Sugarman:
From a business perspective, I love sports, and I love building businesses, so what could be better than building a sports team from scratch, helping build a league at the same time? As you said, soccer is still up and coming in the U.S., but, man, over the past 25 years, tremendous progress. You see the urban stadiums that are being built in every market now to house the local teams, so I think the opportunity ahead of us is enormous. I think technology continues to connect the world on a closer and closer real-time basis.
Jay Sugarman:
I wouldn't be surprised when the World Cup comes around in '26, that people are talking about Major League Soccer as one of the top leagues in the world. We certainly have the opportunity to create some of the top players. You've seen that. Our academy was unconventional and innovative at its time, but more and more teams understand that the American soccer player has always been talented enough and good enough; they just never really had an environment that trained them quickly enough to really compete on an international stage. That's starting to change, and you're starting to see a lot of young kids come out of the U.S. being successful in Europe. We think our academy, which was recently ranked number one in the country, is a real competitive advantage. Richie Graham and his family have done extraordinary things to help get that up and running.
Jay Sugarman:
And the Union is, hopefully, going to be one of the most innovative teams in our league in the long term, because that's just the way our DNA is. Again, we don't like to copy others. We like to try to do things in a unique way, bring things together that maybe have never been combined before, and I think we've got, again, a great team. Even when you've got the idea and the vision, you've got to go get the right team. If you've met Ernst Tanner, our sporting director, Jim Curtin, our coach, Tim McDermott, who's our head of business, Tommy Wilson, who's head of our academy, those are the guys driving the success. I can lay out what I think is important to compete against a lot of brilliant owners, and frankly, far more wealthy owners than I am, but like every business, if you get the right people and you give them the right vision, good things happen.
Jay Sugarman:
We've had a little bit of success. Took five years to make every mistake you could possibly make as an owner, and then I finally figured out this is like every other business. It's about finding your competitive advantage, finding that competitive vision. We're in a community that, again, we think we can help the entire community be better. We're cleaning up a lot of the stuff around us so that it's more attractive for the community. We're helping support businesses that have needed support through the pandemic. These are drivers of the future. These are drivers of impact.
Jay Sugarman:
I couldn't be happier to be involved. I will tell you, financially owning a sports team is something I always wanted to do. I didn't think I'd ever be able to afford a New York sports team. So I'm really happy I got in when I did, and now I'm watching the league just explode. So we'll continue to work on being better and better, but so far, the Union is on a really good trajectory.
Josh King:
Last summer, the Union announced that one of the NBA greats, Kevin Durant, had joined the club's ownership group as an investor and a community partner. What's it like to work with athletes like KD, and does cross-sports cooperation help grow the game, you think?
Jay Sugarman:
Almost bizarrely, the Nets now have four MLS owners, Steve Nash, the coach, is an owner of Vancouver. Joe Tsai, the owner of the Nets, is an owner of LAFC. James Harden is owner of Houston. And Kevin has now joined us in Philadelphia. So I can't imagine what the conversations are in that group. But the NBA and soccer are the two sports that really transcend geography. They really go around the world. I'm happy to see that nexus start to form.
Jay Sugarman:
For me, Kevin is a fantastic addition to the ownership group. He and his partner, Rich Kleiman, bring a totally different perspective. Kevin is an extraordinary athlete, and I've already realized that there's a bond between athletes that I'll never have with him. But it's great to be able to sit with somebody who's doing what he's doing and seeing how he's been so successful. He will tell you it's all about the work. You got to put in the work. And I think that's a good message for all of our employees, "You got to do the work."
Josh King:
I was telling my son and daughter last night, "It's all about the work." There's probably not a better piece of philosophy that you can impart, either to those that are working with you, for you, or even under your roof at your household. Jay, as we wrap up and reflect on this long journey that we've taken, over the horizon, what do you think your legacy will be?
Jay Sugarman:
It's too early to talk about legacies, Josh. My real legacy is my two sons, who give me joy every day. But look, you've heard, a lot of the things we're working on have the potential to have a big impact. We're still working on Asbury Park. We're still working on the Union. We're still working on Safehold. I'm part of a behavioral economics group at Princeton that's trying to bring some of the tools of the behavioral sciences to fix some of the big problems in society. We're going to run a competition that'll try to use the best and brightest ideas to solve one problem a year.
Jay Sugarman:
All those things fascinate me because I see how much more we can achieve in the future. And when we get to the end of that, then we can talk about legacies. But right now, it's still putting our heads down and trying to find ways to move all these balls forward as fast as we can. And if we do that well, then I'm going to be very happy at the end to look back and say, "Gee, we actually had a really positive impact."
Josh King:
Well, moving all the balls forward as fast as you can, that's certainly what you're doing at iStar and Safehold. Jay, thanks so much for joining us Inside the ICE House.
Jay Sugarman:
Josh, it's been a pleasure.
Josh King:
And that's our conversation for this week. Our guest was Jay Sugarman, chairman and CEO of iStar. If you like what you heard, please rate us on iTunes, so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected], or tweet at us @ICEHousePodcast.
Josh King:
Our show is produced by Kearney Ferguson, with production assistance from Ken Abel, Stephen Romanchik, and Ian Wolff. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
