Star Holdings — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless noted, figures below are in millions. Star Holdings became an independent public company on March 31, 2023, after receiving iStar’s remaining legacy non-ground-lease assets and Safehold shares. The 2022 comparative periods and 2023 pre-spin-off results are carve-out financials; management cautions they may not represent standalone performance.
Business context
The company’s stated strategy is to realize shareholder value primarily through asset management, asset sales, and loan repayments. Its portfolio includes development and operating properties, loans, and a substantial investment in Safehold (Safe).
Financial performance and position
- Revenue: Q2 revenue was $25.5 million, down from $40.7 million; first-half revenue was $42.3 million, down from $67.6 million. Lower lease, interest, and land-development revenue was partly offset by higher other income, primarily Safe dividends.
- Profit: Q2 net loss was $89.9 million versus $20.9 million; first-half net loss was $180.7 million versus $21.4 million. Loss per share was $6.75 for Q2 and $13.56 for the first half, compared with $1.57 and $1.61, respectively, in 2022.
- Major non-cash item: The company recorded a $76.3 million Q2 and $166.9 million first-half unrealized loss on its Safe investment as its accounting changed after the spin-off to fair value through earnings. Safe shares were valued at $320.9 million at June 30.
- Margins and expenses: Land-development revenue was $11.8 million in Q2 against $12.4 million of related cost of sales; for the first half, revenue was $21.4 million against $22.3 million of cost. Standalone general and administrative expense includes Safe management fees; $7.2 million was recorded in Q2.
- Cash flow: First-half operating cash flow was negative $4.7 million, versus negative $19.2 million in 2022. Investing activities provided $128.9 million, while financing activities used $73.9 million. Cash and cash equivalents were $54.9 million at June 30; cash, cash equivalents, and restricted cash totaled $57.8 million.
- Debt and liquidity: Debt principal totaled $230.0 million ($227.4 million net of discounts and financing costs): a $115 million Safe facility due 2027 at a stated 8% rate and a $115 million margin loan due 2026 at SOFR plus 3%. The margin loan is secured by Safe shares. Total liabilities were $271.7 million and equity was $430.7 million.
- Asset base: Total assets were $702.4 million, down from $1,005.4 million at December 31, 2022. Cash increased from $4.2 million; other investments declined to $321.2 million, principally reflecting the Safe investment and portfolio liquidations.
Changes, outlook, and risks
- Compared with 2022, revenue declined as properties and loans were sold or repaid and fewer development sales were recognized. Management expects land-development revenue to decline further as remaining assets are sold; timing and amounts are uncertain.
- The company expects liquidity to depend largely on asset-sale proceeds, which are difficult to predict. It does not expect to pay regular dividends, though it may distribute available cash from time to time.
- Management’s asset plans include selling remaining Asbury Park condominium units and pursuing strategic monetization of its operating assets and development sites. At Magnolia Green, it anticipates selling remaining residential lots over the next three years, potentially longer, and selling golf-course operations after lot sellout. No assurance is given that sales will be completed.
- Safe shares are subject to a nine-month transfer restriction and collateralize the margin loan. A significant portion of the shares may become a liquidity source after the restriction expires and the loan is repaid, subject to market conditions and agreement restrictions.
- The Safe management agreement provides fixed annual fees of $25 million, $15 million, $10 million, and $5 million for its first four annual terms, plus expense reimbursements. Early termination may trigger significant fees.
- Risks include asset-sale timing and pricing, commercial real estate conditions, interest-rate exposure, credit losses, and debt covenant or collateral requirements. The margin facility may require repayment or additional collateral in specified circumstances. The filing reports ordinary-course litigation and no material change in previously disclosed risk factors.
- No specific earnings or revenue guidance is provided. Management says macroeconomic uncertainty, including inflation, rate increases, market volatility, and financing availability, makes the impact on results and liquidity difficult to quantify. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Safe’s share price and the resulting mark-to-market swings materially affect reported earnings and the value available to support debt.
- Debt terms, covenant compliance, collateral thresholds, potential margin-loan demands, and restrictions on selling or voting Safe shares.
- Actual proceeds, timing, and costs of planned asset sales, and the impact of continued portfolio runoff on recurring revenue and cash flow.
- The full costs and termination provisions of the Safe management agreement, including fees and reimbursements.
- How much cash is unrestricted and available for operations and debt service; the filing reports $54.9 million in cash and $2.9 million in restricted cash.
- Comparability of results: 2022 and pre-March 31, 2023 amounts reflect carve-out allocations, while post-spin-off expenses and financing arrangements are standalone.