Star Holdings (Nasdaq: STHO) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Star Holdings became an independent public company on March 31, 2023 after its spin-off from iStar. It seeks to realize value primarily through active management and sales of legacy loans, operating properties, and land and development assets. Comparisons with 2022 and the pre-spin-off portion of 2023 are not necessarily indicative of standalone performance.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $43.6 million | $38.4 million | $85.8 million | $106.0 million |
| Net income (loss) | $(81.8) million | $17.6 million | $(262.4) million | $(3.9) million |
| Operating cash flow | Not separately presented for the quarter | $(13.0) million | $(18.2) million |
- Revenue mix and change: Q3 land development revenue rose to $24.8 million from $15.1 million; operating lease income fell to $1.9 million from $3.4 million, and interest income fell to $0.2 million from $2.1 million. Nine-month revenue declined 19%, mainly reflecting lower lease and interest income and reduced land development sales.
- Major earnings driver: The company recorded an $80.2 million Q3 and $247.1 million nine-month unrealized loss on its Safehold share investment. This mark-to-market loss is the principal reason for the reported net losses. Safehold dividends are included in other income.
- Other notable items: Q3 equity-method earnings were $0.2 million versus $29.0 million a year earlier. Nine-month earnings were $30.4 million versus $50.5 million. The 2023 nine-month period included a $1.5 million loss on early debt extinguishment and a $1.7 million loan-loss provision; the comparable 2022 period included a $22.6 million loan-loss provision and $1.8 million asset impairment.
- Cash flows: Nine-month investing cash inflow was $145.9 million, including proceeds from loan and land sales and distributions from investments. Financing cash outflow was $89.2 million, including net transactions with iStar and debt repayments. Cash, cash equivalents and restricted cash ended at $51.2 million, of which $45.6 million was unrestricted cash.
- Balance sheet at September 30: Total assets were $604.3 million, total liabilities $255.5 million and total equity $348.8 million. Debt principal was $215.0 million ($212.8 million net of discounts and financing costs), versus no debt reported at December 31, 2022. Principal maturities are $100 million in 2026 and $115 million in 2027.
- Portfolio and liquidity: The 13.5 million Safehold shares were valued at $240.7 million, or about 19% of Safehold, and secure the $100 million floating-rate margin loan. Land and development assets were $198.3 million. Loan and other lending investments, net, were $20.2 million. Conventional operating margin or EBITDA figures are not provided.
Material changes, outlook and risks
- The company’s investment accounting for Safehold changed after the spin-off: it now marks the shares to market through earnings rather than recording equity-method earnings. Accordingly, reported results are particularly sensitive to Safehold’s share price.
- Debt at quarter-end comprised a $115 million Safe credit facility bearing 8% and a $100 million margin loan bearing SOFR plus 3%. The margin loan is secured by Safehold shares; falling share prices may require additional collateral or mandatory prepayment. After quarter-end, amendments lowered the margin-loan share-price trigger from $14 to $10 and adjusted collateral requirements. Star repaid a further $19.8 million of margin-loan principal after September 30.
- An amendment to the Safe credit facility permits use of up to $25 million of incremental capacity to replenish funds used for voluntary margin-loan prepayments. The filing says incremental borrowing would raise the applicable Safe facility rate to 10% while such borrowing remains outstanding. Safe facility interest may no longer be paid in kind under the amendment.
- The company expects liquidity to rely substantially on asset-sale proceeds, which are uncertain in amount and timing. It does not expect to pay regular dividends; distributions may depend on asset-sale proceeds remaining after debt repayment and other needs. Management expects land development revenue to decline as assets are sold. Magnolia Green lot sales are anticipated over roughly three years, but may take substantially longer; completion of sales is not assured.
- Management fees to Safe’s manager were $13.5 million for the nine months, including $6.3 million in Q3; $7.2 million was payable at quarter-end. The agreement sets fixed annual fees of $25 million, $15 million, $10 million and $5 million for its first four annual terms, plus expense reimbursements.
- Risks include commercial real estate market and financing conditions, interest-rate and credit exposure, asset-sale execution, dependence on the Safehold share value and associated collateral requirements, and management-fee obligations. The filing reports ordinary-course litigation and no proceedings expected to materially affect the financial statements; it reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Safehold share price, valuation changes, dividend payments, transfer restrictions and the effect of the shares’ pledged-collateral status on liquidity.
- Current margin-loan principal, collateral thresholds and repayment requirements, alongside any incremental Safe facility borrowing and its higher interest cost.
- Cash available for operations and debt service, asset-sale proceeds and the timing and pricing of planned portfolio monetizations.
- Whether management fees, reimbursements and other standalone costs remain consistent with the company’s cash-generation and liquidation plans.
- Comparability of reported results: 2022 and pre-March 31, 2023 figures include carved-out iStar assets, allocations and accounting that differ from standalone reporting.