Guest Pitch: Star Holdings (STHO)

Liquidation — 50%+ Upside (at $6.45/share)

This idea was shared by value9.

SSI board might find this liquidation setup interesting. It was once a well-known name but has recently been completely orphaned. The key variable is the timeline — the wind-down could extend for three years or longer. However, by my count, STHO is currently trading 40%+ below the expected liquidating distributions, providing a wide margin of safety.

Star Holdings (STHO) is a non-core asset spin-off from Safehold REIT (SAFE), completed in early 2023. Right from the start, STHO has been structured as a liquidation vehicle, aiming to sell off real estate and wind up operations by Q1 2027.

At the time of the spin, STHO attracted considerable investor attention (e.g. VIC, Clark Street Value), but the stock was quickly forgotten. Last year’s note from Koneko Research, which offers a more detailed asset breakdown and unique insights from an on-site visit, put STHO on my radar. The 50% price decline in the last six months has made the situation attractive.

STHO assets primarily consist of land lots that are gradually getting sold to third-party developers, as well as $216m of publicly traded SAFE shares.

The table below details my calculations for liquidating distributions under 3-year and 5-year timelines.

There is significant cash burn from STHO hotel operations, management fees and various other expenses. This cash outflow will keep adding up the longer the liquidation drags on. The numbers are not fully transparent in the financial statements, but excluding land development revenue/expenses, $10m of dividend income from SAFE shares and $4m in depreciation, the losses from operations currently sum up to ~$40m per annum. Part of this might be non-cash, but let’s stay on conservative side. A half of this $40m cash burn is asset management fee paid to SAFE and the other half seem to be mostly losses from hotel and retail operating properties + some additional overheads (disclosures are not clear on this). Both figures are set to decline with the sell-down of assets and contractual reduction in the asset management fee paid to SAFE. In the table above I have indicated these expenses separately: $30m in annual cash burn from operations of hotel and retail properties (i.e. higher than currently), whereas asset management fees are indicated as per contract.

The ongoing cash burn is partially offset by the dividend income from SAFE stock (~$10m/year). However, I haven’t included that in the calculations as hedging STHO’s SAFE exposure would effectively cancel it out.

Given the substantial cash burn, timeline is clearly the key variable in this setup. The original liquidation deadline was set for Q1 2027. While there haven’t been any specific updates, the current pace of asset sales suggests that the wind-down might take longer. Management seems to agree as it recently extended maturity dates of Star Holdings’ two debt facilities to March 2028 (from Mar’26 and Mar’27 previously). Still, I don’t expect the liquidation to drag far beyond the original deadline. The outcome will likely fall somewhere between the two scenarios outlined above.

The main argument for that are incentives of STHO’s external manager, SAFE. The management fee agreement is tiered to discourage delay: SAFE receives declining fees of $25m, $15m, $10m, and $5m over the first four years, ending in Q1 2027. In other words, the longer this drags on, the less the external manager gets paid. After that, the compensation stays at 2% of STHO’s gross asset value, excluding the value of SAFE shares held. With the current portfolio, that would amount to $7m/year.

The agreement includes an additional safeguard for the external manager: a substantial $55m termination fee if the agreement is ended without cause before March 2027. Once this provision expires, however, Star Holdings could become a viable target for activist investors, who may push to replace the external manager if performance disappoints. Roughly 23% of STHO is currently held by small- to mid-sized hedge funds and asset managers:

• Cowen Overseas Investment holds 9.8%, having increased its stake last fall from previous 7.3%.
• Oaktree Capital previously owned 7.5% but exited in November. That stake appears to have been picked up by FourSixThree Capital, which reported a 7.1% position around the same time. FourSixThree is a small New York–based hedge fund with a concentrated portfolio, “opportunistic” strategy and recent backing from Millennium Capital.
• Highbridge Capital owns 5.6%.
• Activist investor Saba Capital owns 5.2%.

The discount to my estimated liquidating distributions should gradually narrow as assets are monetized and debt is paid down. Notably, $89m of debt is secured by SAFE shares. Once that’s repaid, the shares can be distributed to shareholders, which would help to close the discount even quicker.

STHO Asset Portfolio

Given the complex mix of properties (developed/undeveloped land, mixed-use properties, hotels, etc.), getting a precise valuation is challenging. The available disclosures are also very limited. However, asset sales over the last few years suggest that carrying value could actually be a decent proxy:

• 2024: $60m of assets were sold compared to $48.7m book value.
• 2023: $72.4m in disposals compared to $62.7m BV.
• 2022: $61.8m sold compared to BV at $63.4m.
• 2021: $189m sold compared to BV at $172m.

The company has been consistently selling assets above book value.

A quick breakdown of the assets is provided below:

Safehold shares: $216m market value – STHO holds 13.5m of Safehold shares. SAFE is a ground lease REIT. This is the most valuable asset in the portfolio, accounting for 40% of the total. SAFE has a $1.3bn market cap and the stock is very liquid. The exposure can be easily and cheaply hedged (at 0.4% annual fee). SAFE shares were injected into STHO during the spin-off in 2023. This allowed the SpinCo to secure a margin loan and issue a substantial cash dividend back to its former parent. Essentially, Safehold used the spin-off to raise cash and tidy up its balance sheet, while offloading debt alongside a chunk of stock onto STHO. SAFE also became the external manager of the SpinCo. This structure/approach is quite similar to other RE spin-offs.

Monetizing Portfolio: $120m carrying value – These include assets that STHO expects to monetize primarily through asset sales, loan repayments, or active asset management. The monetizing portfolio consists of:

• Loans: Three loans with a combined carrying value of $34.9m, plus seven available-for-sale debt securities totaling $15.4m.
• Land: Two land assets with a combined carrying value of $15m. On top of that, there’s a property in Asbury Park held through a joint venture, to which STHO has provided a loan and credit guarantees. The property interest is carried at $51.8m.
• Other: Two short-term leases with a combined carrying value of $3.2m.

Asbury Park: $131m carrying value – 30 acres of prime oceanfront property located in Jersey Shore, two hours by train from New York City. The property includes hotels, retail spaces, entertainment venues, an ocean club, and more. While some parts, such as the hotels and entertainment venues, have already been developed and are operational (managed by third parties), a significant amount of undeveloped land remains. Some parcels have already assigned projects, including condos, townhouse units, a beach club, and a surf house. STHO plans to monetize this remaining land while fulfilling obligations under a redevelopment agreement with the municipality. Land disposals have been slow so far, with only a few parcels sold over the last year.

Magnolia Green: $48m carrying value – A master-planned community near Richmond with 3,550 single and multifamily units. The project is anchored by Magnolia Green Golf Club, a semi-private 18-hole golf field. STHO has been selling off lots steadily, albeit slowly. So far, 2,108 lots have been sold to homebuilders, though only 283 have been sold since the spin-off. Project development has progressed well, with most of the infrastructure already completed. Koneko Research provided a more detailed walkthrough in this post.

Cash: $45.5m – Includes cash and cash equivalents, as well as restricted cash  ($11m) as of Q4’24.

Risks and Other Details

The main risk is that, aside from the declining management fees, the external manager has limited financial incentives to keep pushing with the liquidation. External manager owns just 3.7% of the equity. Some properties still require years of development, giving SAFE a potential excuse to delay liquidation rather than sell assets as-is on the original timeline. Until there’s more meaningful progress with the asset sales, the discount to NAV will likely remain wide.

There is some ongoing development capex, but it’s relatively modest. At the time of the spin-off, Lazard (the advisor) estimated total capex through liquidation to be around $45m, front-loaded over the first two years ($29m in 2023 and $21.2m in 2024) and then dropping to just $3.5m in 2025. Actual spend was $14m in 2023 and $36m in 2024, roughly in line with expectations when combined.

Alongside the debt maturity extension, management has quietly bumped the management fee for the fourth year from $5m to $7.5m (for the year ending Q1 2027) in the latest 8-K. It’s a small change, but, obviously, not what you’d hope to see.