Star Holding (STHO) Spin-off Notes

June 23, 2023 Update

Good VIC Star Holdings (STHO) Write-up (must create free account to access)

  • I agree that STHO looks interesting, but I would want to short SAFE exposure given that it represents such a large percentage of STHO’s value.

May 12, 2023 Update

Some comments from a recent investor letter on Star Holding:

STHO is a recent spinoff of a liquidating portfolio from the STAR/SAFE merger. As a quick back story,
STAR was a financial business and REIT that made some poorly timed investments prior to the Great
Financial Crisis. The business and stock eventually recovered, and the company spent the bulk of the
2010s cleaning up the prior mess and searching for new business ideas. During this time, the company
started a business focused on ground leases, which eventually was IPOed under ticker SAFE with STAR
retaining a majority ownership in SAFE and operating as its third-party manager. As SAFE successfully
executed and grew, the value of SAFE eclipsed that of all STAR’s other assets and the decision was made
to merge the entities and internalize the manager. However, a small portfolio of workout assets from
STAR’s prior businesses remained, and STAR spun these assets out prior to the merger to clean up
SAFE’s balance sheet. That portfolio of workout assets is STHO. However, complicating matters, the
workout assets may have some capital needs, and STHO has agreed to effectively cover the cost of
SAFE’s internalized manager for the first three years, which means STHO has modest cash needs initially.
As STAR had minimal assets beyond its significant holdings in SAFE, management decided to capitalize
STHO with a small cash buffer and a significant number of SAFE shares.

I believe STHO’s odd structure has a resulted in an opportunity to buy an orphaned security at an
attractive price. While STHO’s history is convoluted, its current assets are straight forward. For every
one share of STHO, we own one share of SAFE, $360MM in book value real estate, and $250MM in
“effective” net debt. At current prices for STHO and SAFE, that implies STHO’s NAV is ~$35/sh.
compared to STHO’s current price of $16. We have hedged some of our position by shorting SAFE
shares, partially locking in this spread.

Going forward, STHO plans to liquidate over the next four years, which at current prices implies an ~22%
annualized yield. I believe there are a few ways in which our return could be better, and a few which
could hurt us. First, STHO could return cash and/or SAFE shares earlier than expected. Second, the
marks on STHO’s liquidating real estate are old and could prove conservative. Almost half of STHO’s
liquidating real estate is its investment in 30 acres of waterfront Asbury Park real estate, a growing
“hipster” area of the Jersey Shore I am familiar with and think has potential. Third, SAFE is a portfolio of
low-risk leases with exceptionally long duration, which makes SAFE extremely sensitive to interest rates.
If inflation comes under control and/or if the Fed must pivot as the economy weakens, I believe SAFE
shares could rally significantly. However, STHO is modestly levered, and the liquidation could take longer
than expected. Balancing these risks, the fund has built a modest position, but I could see increasing it
going forward.

August 19, 2022 Update

Safehold and iStar are merging, but before the merger iStar is spinning off it’s non-ground lease assets and $400 million of SAFE stock. Later on the merged company will manage SpinCo for a fee.