Megastar Holdings (STHO) (~$225MM implied marketplace cap) is the upcoming derivative of the merger of iStar (STAR) and Safehold (SAFE) centered to be finished on 3/31/23.  Very similar to different actual property spinoffs, STHO might be filled with legacy belongings with a mentioned way to monetize the portfolio over the years and go back sale proceeds to shareholders.  

iStar was once a business mREIT previous to the nice recession, all through ’08-’09 many in their business loan loans went unhealthy and the corporate ended up foreclosing on more than a few belongings varieties around the nation.  Within the years since, they have run off a lot of that legacy portfolio (I up to now owned it for the legacy belongings) after which a number of years again introduced a brand new floor rent technique beneath the Safehold (SAFE) banner, a REIT this is externally controlled by way of iStar.  Because the SAFE technique succeeded within the low fee surroundings (a floor rent is generally 99 years, concerning the longest period asset you’ll be able to to find) and iStar’s legacy portfolio ran off, there was once little want to deal with two separate public firms with comparable celebration preparations.  iStar with its control contract and SAFE stocks was once principally an asset sponsored monitoring inventory of SAFE.  Ultimate August, iStar and SAFE introduced a merger transaction the place SAFE would internalize control and iStar would derivative its non-ground rent belongings into STHO.  Very similar to different actual property spins (SMTA, RVI, and so forth), the brand new blended SAFE would be the exterior supervisor of STHO.

As standard in spinoffs now, iStar might be receiving a dividend again from STHO, the usage of price range is to pay down iStar’s debt and depart essentially simply SAFE stocks to then change for brand spanking new SAFE.  As a way to facilitate that dividend, STHO is receiving $400MM in SAFE stocks that they’re going to then take a $140MM margin mortgage out in opposition to and ship that, plus a $115MM time period mortgage collateralized by way of all of STHO’s belongings again to iStar.  The time period mortgage will amortize down briefly as all money above $50MM will sweep to pay down important and the margin mortgage might be in position no less than 9 months consistent with a lockup settlement on STHO’s SAFE stocks.  The proforma STHO appears to be like one thing like this (word, the STHO percentage rely might be roughly 13.3 million, or 0.153 stocks for each and every STAR percentage):

The legacy portfolio is a mixture of belongings, the 2 biggest ones that account for more or less part of the guide worth are smaller grasp plan communities, one is Asbury Park Waterfront (a selection of evolved and pre-development blended use homes) at the Jersey Shore and Magnolia Inexperienced (a golfing direction targeted 1900 acre unmarried circle of relatives house neighborhood) simply out of doors of Richmond.  STHO may even have some legacy business actual property loans and a parcel of land in Coney Island NY, they look ahead to it’s going to take 3-4 years to monetize lots of the legacy belongings.

The trickier, and most likely scarier a part of STHO is the SAFE stocks, as discussed, its principally a perpetual bond masquerading as an working corporate.  However with the velocity curve considerably inverted, the marketplace is pricing in fairly a couple of fee cuts that may be really helpful to SAFE stocks.

On March seventeenth, iStar put out a press free up estimating the consolidation ratio with SAFE (it’s going to be finalized instantly previous to the merger the use of a VWAP calculation) at 0.15 stocks of SAFE for each and every percentage of STAR.  The usage of that ratio we will again into the implied worth of STHO:

At these days’s shut, until I made a dumb error (at all times conceivable), STHO stocks are buying and selling at more or less 40% of guide worth.  Stocks may probably get even less expensive after the derivative happens, STAR is a REIT and incorporated in REIT indices, STHO might be a c-corp and can most probably get bought by way of any REIT index price range (despite the fact that the most important ones like VNQ now come with non-REIT actual property firms as smartly) and it may not pay a dividend.  Proudly owning actual property at this time is a bit of frightening, however STHO’s chunkier legacy belongings are tied extra to residential markets and we proceed to have a scarcity of housing on this nation.

The control settlement could also be value calling out right here, they have designed it to be a hard and fast price as opposed to a bps price on belongings, with the fastened quantity happening each and every yr to replicate the aim to liquidate over a 4ish yr duration.  Many externally controlled entities will business at a large bargain for the reason that belongings within the holdco won’t ever make it again to the shareholders, right here the bargain must slender extra time because the belongings are monetized and proceeds are used to both paydown debt or distribute again to shareholders.

Control Charges and Expense Reimbursements

We don’t deal with an place of business or make use of staff. As a substitute, we depend at the amenities and sources of our supervisor to habits our daily operations.

We will be able to pay our supervisor an annual control price fastened at $25.0 million, $15.0 million, $10.0 million and $5.0 million in each and every of the primary 4 annual phrases of the settlement, and a pair of.0% of the gross guide worth of our belongings thereafter, except the Secure Stocks, as of the top of each and every fiscal quarter as reported in our SEC filings. The control price is payable in money quarterly, in arrears. If we do not need enough internet money proceeds readily available from gross sales of our belongings or different to be had assets to pay the control price in complete by way of the unique due date of the control price, we can pay the utmost quantity to be had to us by way of the unique due date and the remainder shortfall might be carried ahead and be paid inside of 10 days after enough internet proceeds had been generated by way of next asset gross sales to hide such shortfall in complete; only if in no tournament would possibly such shortfall in recognize of any fiscal quarter stay unpaid by way of the 12 month anniversary of the unique due date.

I went synthetically lengthy STHO this week by way of shorting out 0.15 stocks of SAFE for each and every percentage of STAR.  You need to additionally pass one step additional and quick out the SAFE stocks that STHO will personal.