About a year ago, we decided to switch our position from Safehold (SAFE) to Star Holdings (STHO).
There were two main reasons for this decision.
First, it allowed us to realize a tax loss on SAFE, which we could use to offset other large gains.
Second, and more importantly, we thought that STHO would likely outperform SAFE going forward because it offered exposure to SAFE at a steep discount.
So far, this has proven correct. STHO has materially outperformed SAFE since then, and we believe that it could continue to do so as the liquidation progresses and the market slowly recognizes the value embedded in STHO.
As a reminder, STHO was created in 2023 as a spin-off from SAFE to manage the liquidation of certain legacy assets that no longer fit SAFE’s pure-play ground lease strategy.
But STHO was not just seeded with legacy assets. It also received 13.5 million shares of SAFE, and this is what makes the opportunity so interesting.
At the time of our investment, the value of STHO’s stake in SAFE was worth far more than STHO’s entire market cap. In other words, by buying STHO, we were getting indirect exposure to SAFE at a much lower valuation, and then getting the legacy assets on top of that for free.
The complication is that STHO also has a lot of debt and management costs. Therefore, the key questions have always been:
Are the legacy assets valuable enough to cover the debt?
How long will it take to monetize these assets?
Will shareholders ultimately be left with meaningful value after the liquidation is completed?
Those questions are difficult to answer because the assets are complex, local, and illiquid. They are not simple stabilized apartment communities or grocery-anchored shopping centers with easy comps.
This is why we were very grateful to find the research of Koneko Research, who has done significant work on these assets, including local property-level research that we could not realistically replicate ourselves.
We want to give full credit to them for this work. We do not have boots on the ground in Asbury Park or Magnolia Green, and we are very grateful that he has done this amount of work and shared it publicly. The following update relies heavily on his observations, but the investment conclusion is our own.
Before going into this update, I recommend first reading our investment thesis in case you are not familiar with STHO by clicking here.
