Star Holdings (STHO) (~$225MM implied market cap) is the upcoming spinoff of the merger of iStar (STAR) and Safehold (SAFE) focused to be accomplished on 3/31/23. Just like different actual property spinoffs, STHO will probably be filled with legacy property with a acknowledged technique to monetize the portfolio over time and return sale proceeds to shareholders.
iStar was a business mREIT previous to the nice recession, throughout ’08-’09 a lot of their business mortgage loans went dangerous and the corporate ended up foreclosing on varied property sorts throughout the nation. Within the years since, they’ve run off a lot of that legacy portfolio (I beforehand owned it for the legacy property) after which a number of years again launched a brand new floor lease technique beneath the Safehold (SAFE) banner, a REIT that’s externally managed by iStar. Because the SAFE technique succeeded within the low fee setting (a floor lease is often 99 years, concerning the longest period asset you may discover) and iStar’s legacy portfolio ran off, there was no need to keep up two separate public firms with associated social gathering preparations. iStar with its administration contract and SAFE shares was mainly an asset backed monitoring inventory of SAFE. Final August, iStar and SAFE introduced a merger transaction the place SAFE would internalize administration and iStar would spinoff its non-ground lease property into STHO. Just like different actual property spins (SMTA, RVI, and so forth), the brand new mixed SAFE would be the exterior supervisor of STHO.
As standard in spinoffs now, iStar will probably be receiving a dividend again from STHO, using funds is to pay down iStar’s debt and depart primarily simply SAFE shares to then swap for brand new SAFE. With a view to facilitate that dividend, STHO is receiving $400MM in SAFE shares that they may then take a $140MM margin mortgage out in opposition to and ship that, plus a $115MM time period mortgage collateralized by all of STHO’s property again to iStar. The time period mortgage will amortize down rapidly as all money above $50MM will sweep to pay down principal and the margin mortgage will probably be in place no less than 9 months per a lockup settlement on STHO’s SAFE shares. The proforma STHO appears to be like one thing like this (notice, the STHO share rely will probably be roughly 13.3 million, or 0.153 shares for each STAR share):
The legacy portfolio is a mixture of property, the 2 largest ones that account for roughly half of the e-book worth are smaller grasp plan communities, one is Asbury Park Waterfront (a set of developed and pre-development combined use properties) on the Jersey Shore and Magnolia Inexperienced (a golf course centered 1900 acre single household dwelling group) simply exterior of Richmond. STHO may also have some legacy business actual property loans and a parcel of land in Coney Island NY, they anticipate it should take 3-4 years to monetize a lot of the legacy property.
The trickier, and probably scarier a part of STHO is the SAFE shares, as talked about, its mainly a perpetual bond masquerading as an working firm. However with the speed curve considerably inverted, the market is pricing in fairly just a few fee cuts that may be helpful to SAFE shares.
On March seventeenth, iStar put out a press launch estimating the consolidation ratio with SAFE (will probably be finalized instantly previous to the merger utilizing a VWAP calculation) at 0.15 shares of SAFE for every share of STAR. Utilizing that ratio we will again into the implied worth of STHO:
At as we speak’s shut, until I made a dumb error (at all times potential), STHO shares are buying and selling at roughly 40% of e-book worth. Shares might probably get even cheaper after the spinoff happens, STAR is a REIT and included in REIT indices, STHO will probably be a c-corp and can seemingly get offered by any REIT index funds (though the biggest ones like VNQ now embody non-REIT actual property firms as properly) and it will not pay a dividend. Proudly owning actual property proper now’s a bit scary, however STHO’s chunkier legacy property are tied extra to residential markets and we proceed to have a scarcity of housing on this nation.
The administration settlement can also be value calling out right here, they’ve designed it to be a set price versus a bps price on property, with the fastened quantity taking place every year to mirror the intention to liquidate over a 4ish 12 months interval. Many externally managed entities will commerce at a large low cost as a result of the property contained in the holdco won’t ever make it again to the shareholders, right here the low cost ought to slim time beyond regulation because the property are monetized and proceeds are used to both paydown debt or distribute again to shareholders.
Administration Charges and Expense Reimbursements
We don’t keep an workplace or make use of personnel. As a substitute, we depend on the amenities and sources of our supervisor to conduct our day-to-day operations.
We pays our supervisor an annual administration price fastened at $25.0 million, $15.0 million, $10.0 million and $5.0 million in every of the primary 4 annual phrases of the settlement, and a pair of.0% of the gross e-book worth of our property thereafter, excluding the Protected Shares, as of the tip of every fiscal quarter as reported in our SEC filings. The administration price is payable in money quarterly, in arrears. If we would not have ample web money proceeds available from gross sales of our property or different obtainable sources to pay the administration price in full by the unique due date of the administration price, we pays the utmost quantity obtainable to us by the unique due date and the remaining shortfall will probably be carried ahead and be paid inside 10 days after ample web proceeds have been generated by subsequent asset gross sales to cowl such shortfall in full; offered that in no occasion might such shortfall in respect of any fiscal quarter stay unpaid by the 12 month anniversary of the unique due date.
I went synthetically lengthy STHO this week by shorting out 0.15 shares of SAFE for every share of STAR. You might additionally go one step additional and brief out the SAFE shares that STHO will personal.
Disclosure: I personal shares of STAR and brief shares of SAFE (synthetically lengthy STHO)