Star Holdings — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Star Holdings is a real estate and investment company focused on realizing value from legacy loans, operating properties and land through asset management, repayments and sales. Its largest investment is its 13.5 million Safehold Inc. shares.
Key financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $25.4 million | $16.8 million |
| Net loss | $49.0 million | $90.7 million |
| Loss per share, basic and diluted | $3.68 | $6.81 |
| Cash used in operating activities | $14.2 million | $0.6 million |
| Cash provided by investing activities | $9.6 million | $116.8 million |
- Revenue growth primarily reflected land development revenue of $16.6 million, up from $9.6 million, chiefly from bulk lot sales at Magnolia Green. Associated cost of sales was $12.3 million, for approximately $4.3 million of land development gross profit; the comparable 2023 period had approximately $0.4 million of land development costs in excess of revenue.
- The $49.0 million net loss included a $37.9 million unrealized loss on Safe shares. The loss was smaller than the $90.7 million Safe-share-related unrealized loss in Q1 2023. The prior-year period also included $30.0 million of equity-method earnings, largely from property sales, which did not recur.
- At March 31, total assets were $622.9 million, including $278.6 million of Safe shares, and total equity was $384.7 million. The Safe-share value used the March 28 closing price of $20.60.
- Cash and cash equivalents were $45.7 million; restricted cash was an additional $10.4 million. Total debt was $198.7 million principal ($195.0 million, net of discounts and financing costs): $115.0 million under the Safe Credit Facility and $83.7 million under the floating-rate Margin Loan Facility. Debt maturities are March 2026 and March 2027, respectively.
- Margins and operating profit are not especially comparable or representative because fair-value changes in Safe shares materially affect earnings. Comparisons are also affected by the 2023 Spin-Off and pre-spin allocations of costs from iStar.
Changes versus the prior comparable period
- Net loss narrowed by $41.7 million, principally because the Safe-share unrealized loss was smaller. This improvement was partly offset by the absence of $30.0 million of prior-year equity-method earnings.
- General and administrative expense decreased to $7.4 million from $14.1 million, while interest expense decreased overall compared with the prior-year allocated iStar costs. Q1 2024 included $2.1 million of related-party interest expense on the Safe Credit Facility and $6.3 million of management fees to Safe’s subsidiary Manager.
- Operating cash use increased to $14.2 million. Investing cash inflow fell substantially, mainly because the prior-year quarter included loan repayments and sales and distributions from investments. Q1 2024 investing inflows included $16.6 million of land-sale proceeds, partly offset by development capital expenditures.
Outlook, risks and unusual items
- Management’s strategy is to monetize assets through sales, loan repayments and active management. It expects Magnolia Green lot sales over the next two years, though they could take substantially longer; it also plans to sell remaining Asbury Park residential units and selectively monetize development sites and operating assets. The filing gives no earnings or revenue guidance and cautions that sale timing and proceeds are uncertain.
- The company does not expect to pay regular dividends. Distributions, if any, depend primarily on asset-sale proceeds after debt repayment and other needs.
- Liquidity depends substantially on cash on hand and asset-sale proceeds. Management identifies development spending, debt service, management fees and operating expenses as uses of cash; it also cites macroeconomic and commercial real estate uncertainty.
- The Safe shares secure the Margin Loan Facility. Further declines in their market value could require additional prepayments or collateral. The company elected to pay $1.8 million of Q1 Margin Loan interest in kind, increasing principal; PIK elections also increase the facility margin by 25 basis points for the following interest period. Incremental Safe Credit Facility borrowings, if used, bear 10% interest while outstanding.
- A subsidiary provided a completion and carry guaranty for an $80.0 million Asbury Park construction loan. The venture had not drawn the loan at quarter-end; the guaranty requires the subsidiary to maintain minimum net worth and liquidity. The filing does not quantify a probable loss from this contingency.
- The Management Agreement’s annual fee declined from $25 million to $15 million beginning March 31, 2024, with further scheduled step-downs. Early termination without cause may trigger a termination fee, subject to the agreement’s terms.
- Management reported ordinary-course litigation, including foreclosure-related proceedings, and did not expect pending proceedings to have a material adverse effect. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- How Safe’s share price and the Margin Loan’s collateral and prepayment terms affect Star Holdings’ liquidity and equity value.
- Actual timing, pricing and net proceeds from planned asset sales, especially Magnolia Green and Asbury Park, and the capital required to complete development.
- Debt servicing capacity and the cost of any PIK interest or incremental borrowing; confirm covenant compliance and maturities.
- Management fees, related-party payments and any termination-fee exposure under the Safe management arrangement.
- The potential exposure under the Asbury Park completion and carry guaranty and the venture’s ability to repay its mezzanine loan.
- Comparability of year-over-year results: the 2023 quarter includes pre-Spin-Off carve-out allocations and different investment-accounting and asset-sale effects.