Description

Star Holdings (STHO) was spun out of the recently merged iStar and Safehold (SAFE) in March this year. The company comprises 13.6mn SAFE shares (valued at $359mn at the current price of $26.41), $50mn in cash, real estate worth $89mn (book value) and $248mn in land development assets (book value). The company’s debt stands at $238mn, including a $139mn margin loan and a $99mn senior secured term loan.

Star Holdings was created to hold the non-ground lease related commercial real estate assets once held by iStar. Unlike a traditional business it has no employees. Instead its mandate is to monetize its holdings through development or asset sales. iStar manages the company under a management agreement. The initial $50mn in balance sheet cash is intended to cover four years’ worth of expenses related to this agreement.

To value the company I exclude the cash since I expect it to be consumed by iStar through the management agreement. If iStar succeeds in monetizing the property assets over the next four years at book value then STHO is worth $34 per share vs. today’s share price of $15.62 (~120% upside over four years).

What do you have to believe about the value of the property assets to invest in this stock? They need to be worth at least $6.7 per share to ensure you don’t lose money. Here’s the math: the value of SAFE ($26.41/sh) minus net debt ($17.5/sh) equals $8.91/sh. Subtracting $8.91 from STHO’s price of $15.62 gives us $6.70/sh. This “no-loss” valuation requires the properties to be monetized at 27% of book value, a significant discount.

What could the land be worth in an upside case? I’ll admit, I’m not entirely sure. Here’s a brief discussion of the assets which shows why they might be worth at least, if not more than, book value given their locations, existing developments, current sale prices, room rates and future development potential.

The two primary assets, accounting for 80% of the property value, are Asbury Park ($180mn book value) and Magnolia Green ($89mn). 

Asbury Park is ~30 acres of oceanfront land in Asbury Park, NJ. Located on the Jersey Shore, the site consists of the following:

• Asbury Ocean Club Surfside Resort and Residences, a mixed-use project with 130 residential condominium units, a luxury boutique hotel with 5 keys, 24,000 sq ft of retail space, 410 structured parking spaces and 15,000 sq ft gym and spa. The property, completed in 2019, is managed by a third party. A cursory review of their website shows only two units available for sale, each listed at $1.5mn. The hotel room rates vary between $400-$1,000/night.

• Asbury boutique hotel, an independent hotel with 100 keys, completed in 2016 and managed by a third party. A king bed with an ocean view starts at $300/night.

• Asbury Lanes, a 12,000 sqft music and entertainment venue, completed in 2018 and managed by a third party. 

• 18 development sites planned for sale to third parties for residential development, three of which are under contract.

Magnolia Green is a ~1,900-acre master-planned residential community located near Richmond, VA. It's entitled for 3,550 single and multi-family dwelling units and ~193 acres of commercial development land. As of September 30, 2022, 1,771 residential lots have been sold to homebuilders, ~51 lots are under contract for sale, 181 lots are under horizontal development (with 148 of them under contract to be sold to homebuilders).

Risks

• Mark-to-market risk in value of SAFE shares which can be mitigated by shorting SAFE as a hedge

• STHO is unable to monetize its real estate at book value or at all

• Interest rates continue to rise which impair the value of STHO’s real estate and land holdings

• Inflated book value of properties

Catalyst

• The market begins to better appreciate this recently-spun, peculiar security

• The company monetizes assets at or above book value earlier than or on schedule