STAR

Publicly traded companies mentioned herein: iStar Inc (STAR), Safehold Inc (SAFE)

Highlights

The presenter is long shares of iStar Inc (STAR), a diversified commercial real estate REIT that’s focused on reinventing the ground lease sector. STAR’s management team viewed the ground lease market as inefficient, noting that real estate investors looking to buy or build buildings historically have needed to buy the land underneath the existing structure in addition to the structure itself. The inclusion of the land negatively impacts the overall return for multiple reasons: these teams are generally skilled in the development and marketing of commercial buildings, as opposed to the management of land; land is a lower-return asset (~5% ROE according to STAR management), which drags down the 15% – 20% ROE these real estate investors are targeting from the buildings; and additional capital is required in order to purchase both assets. According to management, this is the only industry that hasn’t separated exceptionally different assets. These assets have been separated outside the US (e.g., Germany and the UK), but within the US this has yet to occur. Therefore, STAR saw the potential to disrupt the >$500B ground lease market by partnering with real estate investors. The investor can buy an asset (i.e., the building) without the land and therefore requires less capital upfront (while receiving the capital at a cheaper cost than otherwise). Safehold Inc (SAFE), a publicly traded entity STAR created and maintains ~67% ownership of, enters into a 99-year ground lease with the partner, creating a steady stream of cash flow for the duration of the lease. While the presenter believes SAFE’s stream of cash flows is undervalued due to underappreciated stability and step ups in the lease payments, he thinks the real value is the residual values of the properties. After the 99-year ground lease expires (or if the building owner defaults on the land lease payments), the ownership of the building reverts to SAFE. Shares of STAR are trading at ~$13 per share, but he thinks that the investment community has yet to realize the opportunity that has been created. As the real estate community continues to buy into this concept and SAFE’s book of business grows, the fair value of STAR has the potential to be higher by multiples.