This is a pretty ridiculous name/logo right? It's pretty clear the target market is yield hungry dividend investors who are looking "to sleep well at night".
This week, iStar filed the registration statement for a new REIT, Safety, Income & Growth Inc (SFTY), they've been kicking around quietly since last August. According to the filing, it would be the first REIT targeted at ground net leases, a structure where the company would own the land, but not the building/improvements, and enter into very long term leases (30-99 years) with the building owner. The safety part comes from the ground net lease structure, in the event of a default, despite only owning the land, the lessor can foreclose on both the land and the structure built on it. The leasee and the mortgage lender (if there is one) on the property have every incentive to make the lease payment. In effective, there's a significant overcollateralization built into the lease, the value of the lease is worth 30-45% of the combined value of the land/buildings, so often times in a foreclosure scenario a ground net lessor can make more than a full recovery.
At first I thought this was a public listing of the net lease JV iStar has setup with a sovereign wealth fund (GIC), however it appears to be a separate portfolio, but with investors in that fund participating in the SFTY IPO. Safety, Income & Growth Inc will start out life with 12 assets from iStar's net lease portfolio, all 12 are either ground leases or at least look/function similarly if you squint. The two primary assets will be One Ally Center which is the largest office building in Michigan, leased out to Ally Financial and PwC, and a portfolio of 5 Hilton branded hotels leased to the recent spinoff, Park Hotels & Resorts.
iStar will be the external manager of SFTY, it'll have one of the more unique external management agreements I've seen: 1) waiving their fee altogether for the first year, 2) no incentive fee or termination fee, 3) base management fee of 1% on equity up to $2.5B and 0.75% above, 4) the management fee will be paid in stock. Granted, there's little work in managing a lease that expires in 2114 (doesn't even look like a valid year), but it's another reason this entity should be an easy to sell to the masses.
Safety, Income & Growth is paying about a 5% cap rate for iStar's assets (combination of cash and stock), the company argues that ground net leases should trade even lower than that:
We're still waiting on an IPO date, but again, I think this has potential to do well and gather a decent amount of assets.
What does this all mean for iStar?
At year end, they had a $1.5B net lease portfolio (includes accumulated depreciation added back) that generated an NOI yield of 9.1%, in my initial post last summer I argued the net lease portfolio should be valued at 6.5% cap rate, which adds about $600MM mark-to-market above the carrying value on iStar's balance sheet. It's probably incorrect to assign a 5% cap rate to the entire portfolio, but that would produce a $1.2B mark-to-market gain, quite significant for a company with a market cap of $1B. But now iStar monetizes some assets at an attractive valuation by putting them in a simpler vehicle the market will be able to digest and assign a higher multiple to -- all while earning a (small) carry on their remaining investment going forward. It's hard to argue iStar is anything but very cheap, hopefully they use some of the proceeds to buyback stock.
Thanks to the commenter in the original iStar post for bringing this deal to my attention.
Disclosure: I own shares of STAR
When you say that iStar is the manager of the new entity, are we referring to our REIT iStar, or to the external manager of that entity. In other words, does this management fee accrue to us or to Jay Sugarman?ReplyDelete
iStar is an internally managed REIT, the new entity will be managed by iStar, so the management fee accrues to iStar the company, not Jay Sugarman personally.Delete
you waste no time! I have been following iStar as I consider Sugarman a master of sorts with out he managed capital allocation through the crisis. I still struggle to see a favorable risk / reward on the STAR business given liquidity/leverage levels but this newco is interesting. It is a way to sort of revalue a portion of the book to a higher multiple while receiving cash flows to delever but struggling to quantify benefit at Star. Any thoughts? See analysis hereReplyDelete
You view STAR as a forced seller? Seems harsh or a mischaracterization of their situation in my mind. I do like that they're a seller generally, seems like the right time in the cycle and would help unveil the value. But given they have access to the capital markets -just recently refinanced their term facility like everyone else - I think they can be more opportunistic.Delete
Maybe forced seller is too harsh a word but liquidity this year is tight while timing of cash flows from development book is lumpy. Interest expense alone consumes up nearly their entire cash income from the "stable" assets including pref. payments. Cash G&A adds another $80 million plus guided capex of $100M+. I realize prefs can be deferred but still looks harsh. The gap needs to come from land production, remaining condos, and asset monetizations from its existing stable book (e.g. net leases).ReplyDelete
Agree maturities this year are a concern and will require some monetizations but should be manageable.ReplyDelete
This should help a bit:
Plus, sale of Apple Silicon Valley GNL for total of $75-$100 million in total (~$35 million GNL to SFTY) should also help.
any idea when istar will reinstate dividends? and how much?ReplyDelete
No, but I would be surprised if it was any time soon.Delete
any idea with all the recent transations, settlements and spin off, what's the leftover NOLs carrying over? And do iStar shareholders get any new shares for the GNL?ReplyDelete
The latest NOL number in the 10-K was $902.9MM.Delete
Shareholders won't get shares directly, its not a true spinoff, iStar has created a new entity and is selling some of their assets into SFTY. As part of the transaction, iStar is receiving some stock in SFTY, so shareholders will indirectly benefit that way if its well received by the market. There's a part of me that is interested in SFTY if it trades cheaply initially, might take a little time for the market to warm up to the idea.
Hey MDC, I love the write-ups. Very interesting stuff. Any new thoughts on DFIN? Thanks!ReplyDelete
I'm still holding DFIN, it's pretty clear they were completely unprepared for the spinoff and operating separately, management has been all over the place on expense guidance and that Form 10 bothers me a bit, misleading how much of their revenue was really recurring in nature. But the IPO market seems to be picking back up, so maybe they have a bounce back year on the transactional side of the business, its cheap and all of the near term cash flow is earmarked at debt reduction which I view as a positive. Thanks for reading.Delete
isn't istar's leverage low? 2x? many reits out there are way more leveraged. and they are profitable, no? a bit confused from comments. If it wasn't for their NOL's, they would be paying dividends now? they only issue now is the remaining land porfolio which has improved a lot.ReplyDelete
The 2x headline number includes the preferred stock as equity, if you buy the common shares, its more effectively debt so the leverage is a lot higher. I think the others are bringing up the near term maturities more than the absolute level of leverage.Delete
So happy to have stumbled onto this blog. STAR is one of my largest long-term holdings (along with BBXT, RDNT, Fincantieri...). Have you ever taken a look at BRT? Pretty plain vanilla middling REIT at this point, with NOLs likely to be exhausted in the next 2 years or so and a dividend reinstated unless they find some creative way to avoid or blow up. Gould Investors, their external manager, is something I've been meaning to spend some time on as well.ReplyDelete
Thanks for the blog--great stuff!
Not familiar with BRT, thanks for the idea, I'll add to my research list.Delete
I thought management accomplished a lot so far this year, but market doesn't seem convinced since the stock hasn't moved. Litigation's settled, upcoming debt refi'd (lower rates, longer terms, better rating), continued progress on land and transitional properties, shown some value with SAFE, bought back a bit of stock, added info to the quarterly supplemental, etc.ReplyDelete
Do you think this is going to trade at a big discount to NAV until they start issuing a dividend? What else could cause of the gap to narrow?
Also - for RSO, do you think it's stuck < 12.50ish until dividend as well, because of the convertible debt and expensive prefs (w mgmt fee)?
Thanks as always!
It's a little frustrating. I agree with you that they've made significant progress this year, the new CFO seems to be more transparent than the previous, and still just stuck in the mud. The capital structure is much cheaper now, yes they bought back shares (but probably to avoid the converts shorting the stock in the open market? same effect anyway), demonstrated that their assets are marked below market with the SAFE transaction, all those things I agree on, but until it shows up dramatically in an easy to benchmark number (FFO, NAV, CAD, Book Value, Dividend Yield), I don't know what else it would take for the market to notice?Delete
RSO - Here its all about the dividend being bump up in my opinion, it'll trade off of the dividend yield when the portfolio recycling plan is completed. I was a little disappointed on the call today to hear them hedge a bit on when that will be done, now more looking like a mid-2018 timeframe since they went back and stated that they really didn't start working on selling non-core assets until March of this year. Seemed like a way to still claim victory if it drags until the back half of 2018. The convertible debt is an interesting strategy to eventually build equity, its an equity raise in disguise right now, but we knew they'd have to do it one way or another. And it sounds like they'll address the preferred shares soon too.
Thanks for the comment, still a big believer in both STAR and RSO.
Believer in both as well. Think I might get out of STAR for a few months since the gap to NAV likely won't close anytime soon (unless they spin out the land but doubtful). Think you're right about the simple benchmark number being a catalyst. Nice that industrial real estate values have generally only increased over the last 12 months.Delete
Think one of the best ideas on your blog might be CZR. I glossed over it at first - congrats on getting in early and being up >25% already. Still working on it but it looks like it might be a $20-$25 stock in a few years. Should have good cash flow growth even if the multiple doesn't move soon. MGM seems cheap at first glance as well.
Thanks. If you like CZR, STAR and RSO, take a look at VCCP. That's the Caesars REIT, I'm doing some more digging but high level: 1) REIT that's OTC and doesn't pay a dividend (although it has sophisticated owners) 2) CZR's is well collateralized, the REIT is senior to essentially all other debt; 3) should trade a pretty tight cap rate but doesn't yetDelete
Might have just switched to the ticker VICI, either way it's VICI PropertiesDelete
Thanks - I'll take a look. Checks the boxes for being an undervalued reit based on your summary.Delete
A couple of names I've also just added to my research list:
Hyatt going asset-light: https://skift.com/2017/11/02/hyatt-shifts-strategy-in-plan-to-sell-1-5-billion-in-hotel-real-estate-over-next-3-years/
EMGC (would have to be sized appropriately): http://www.evermoreglobal.com/media/pdfs/Evermore%20-%20Commentary%20-%20Q3%202017.pdf
I saw your reply in early November and that you remain bullish. Any updated commentary on what you think the stock is worth and why? I'm not sure the best way to value it at this point in time.ReplyDelete
Hard to pinpoint a number, but I'd say $20-30. You need to mark-to-market the net lease business, the operating assets, and the land piece, all of these assets are being carried well below their market value yet the stock trades close to book value + accumulated depreciation. When does the market give it credit? Who knows.Delete