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Why I Tripled Down On iStar


  • iStar has more than doubled in value over the past year.
  • Even then, it remains deeply discounted due to the rapid growth of its ground lease venture.
  • It could be the (insert successful tech company name) of the REIT industry and priced at just around half of its NAV, the shares are still a steal.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Learn More »

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We first invested in iStar (NYSE:STAR) at ~$11.50 per share in August 2020.

We then doubled down at ~$17.50 per share in March 2021.

Will we triple down at $24 per share?


The answer is yes.

Generally, such a large and

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This article was written by

Jussi Askola, CFA profile picture

Jussi Askola is the President of Leonberg Capital, a value-oriented investment boutique that consults hedge funds, family offices, and private equity firms on REIT investing. He has authored award-winning academic papers on REIT investing, has passed all three CFA exams, and has built relationships with many top REIT executives.

He is the leader of the investing group High Yield Landlord, where he shares his real-money REIT portfolio and transactions in real-time. Features of the group include: three portfolios (core, retirement, international), buy/sell alerts, and a chat room with direct access to Jussi and his team of analysts to ask questions. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of STAR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (103)

Am I the only one seeing SA getting buggy when it comes to updates on comments for articles? The email they send me shows a *bunch* of added comments for past articles I commented on, but when I click the link it takes me to top of article (not the comment section), and then when I scroll down to comment section it doesn't show any new comments at all!

This one though it worked it shows 7 new comments, but a whole bunch of others seem glitched out
jara-mill profile picture
@clrodrick - Nope you're not the only one.
@jaramill Sorry it is affecting you and others too. It's weird, sometimes SA shows an article has no new comments when I scroll down yet clearly there are they are just not highlighted in green like they should be. Hope SA fixes this
guyb1 profile picture
Would love an update....is it time to quadruple down?
R. Paul Drake profile picture
@guyb1 also @comei@comeinvestwithme The price of STAR has presumably been dragged down by the massive drawdown in the price of SAFE. This seems to me to be an extreme over-reaction to fear of interest rate increases. It would take increases far larger than seem likely to have a big impact, and even then the continuing ability of SAFE to create massive new value would be a counterweight.

18 months ago STAR was massively undervalued compared to the value of its holdings in SAFE. Today that undervaluation is 28%, taking the value from STAR of the other assets. This includes the impact of some convertible bonds. There is uncertainty in the value of the STAR assets, which will be resolved as they sell. The higher-risk, higher-reward play is to hold STAR. The lower-risk play, which I expect to also produce high rewards, is to hold SAFE.

We have provided detailed analysis and discussed this in much more depth with our members at High Yield Landlord.

Best wishes... Paul
@R. Paul Drake would you suggest to sfap STAR for SAFE at this moment?
R. Paul Drake profile picture
@danirak Not familiar with sfap. Which to hold is personal, higher reward, higher risk holding STAR.
STAR had a nice run, but then tanked - a lot more than the market. What happened? Is the thesis still valid?
jara-mill profile picture
@comeinvestwithme - I'm actually wondering myself. I'm sure Jussi will look into it. But remember the market tanked in general and now with the Fed signalling they are going to raise rates today just before the closing bell, the markets will react tomorrow morning.
R. Paul Drake profile picture
Getting lots of questions about the big drop in the price of STAR this morning. I know of no fundamental reason why there should be a big change in price. My best estimate is that it was still undervalued, even at the recent peak above $27. Best guess is that the computers over-reacted.
jara-mill profile picture
@R. Paul Drake - I go with your "best guess" :)
I find the STAR story very interesting, but need a better understanding about structure. If the ground leases provide a first lien on the property/structure being build on the land, how does that coordinate with the permanent financing provider also needing a first lien on the property being financed. Both can't have a first lien. Is the ground lease subordinate in the event of a default?
R. Paul Drake profile picture
@goodsense1 The landowner has the senior position. But the lender for the structures has specified rights to notification with time to cover any default by the ground-lease tenant. Part of making ground leases practical has been developing clauses that create acceptable protection for all parties.
Best wishes... Paul
Rob G. in Vegas profile picture
@R. Paul Drake Paul - any opinion on the big sell-off in STAR today (down 8%). I don't own any common (I do own two of the STAR preferreds) and am thinking of buying STAR after doing more research.
I've continued to add IStar on price dips - I believe it will continue to gradually catch up to SAFE, and close the valuation gap between the two.
I also hold (and continue to accumulate) Agree Realty (ADC). They are making a point of increasing their Ground Leases, recently around 13% of their portfolio. Paul or Jussi, any opinion on ADC accumulation in light of their increasing Ground Lease focus?
R. Paul Drake profile picture
@DGI Dude The ADC ground leases are not much like the SAFE ones, being for much shorter terms. That said, there is a great deal to like about ADC. Our fellow author CashFlow Capitalist is a big fan and has produced several public articles. I personally am long STOR and NNN, but if I wanted three net lease REITs they would probably be the third one.
FringDook profile picture
Huge $SAFE offering ... Sometimes I find it disconcerting how every time $SAFE does a capital raise (quite often) $STAR gobbles up shares. It seems to make the relationship and correlating stock prices more opaque... a bit fishy. just my 2cents
R. Paul Drake profile picture
@FringDook iStar has consistently held 2/3 of the SAFE shares and is limited to 42% of the voting REITs. I would expect them to buy accordingly. To support the goal of Safehold to do $1B in new ground leases and sustain a debt ratio of 2/3, they would need to issue more shares than we see here. Though I have forgotten how much dry powder they brought into 2021.
FringDook profile picture
@R. Paul Drake do you think the fact that $star owns so many $safe shares drives the PPS of $safe up artificially ?
R. Paul Drake profile picture
@FringDook iStar has mostly been a neutral player in the liquid market for SAFE shares. They take 2/3 of the equity and hold it. They have made some open market purchases, mystifyingly, but that is small potatoes.
LasVegasInvestor profile picture
Are the concrete rumors about a merger with SAFE outside of B. Riley? I would assume STAR to benefit from such a merger as the CEO holds STAR not SAFE shares personally. What is your 12 months price target?
R. Paul Drake profile picture
@LasVegasInvestor When questioned directly about this, what the STAR and SAFE management has had to say to me about this is along these lines: The time for a discussion of alternatives is when SAFE is large enough that it could afford to internalize management. What the managers are doing is trying to create that situation, and to present a range of possible options to the independent boards of the two firms.

My thoughts: There certainly could be a merger of some sort, but there is also a great deal to be said for keeping SAFE simple. A lot may depend on what is left of iStar at that time.

OptUndrWrtr profile picture
@Jussi Askola @R. Paul Drake it seems like iStar formed SAFE because at the time they were a mortgage REIT that reposessed their deliquent loans and inadvertently expanded into being a net lease reit on the side. SAFE then was another new side biz. You mention in the article that they intend to sell off the net lease assets and just focus on the ground lease business. Since SAFE is no longer the side business but the main biz now, makes me think it would help their investment story if they just merged SAFE and STAR.

Or does it serve a purpose having 2 separate entities? Is it more that iStar is still a mortgage REIT that offers a ground lease option for financing, that separates land from improvements? So the borrower is purchasing the building and not the land (SAFE owns the land, and buys it/ leases it back to the building owner while STAR finances just the building?)
R. Paul Drake profile picture
@OptUndrWrtr Safehold is simple and secure by design, with the intent of being clearly understood and perceived by the market. In contrast, if you look at all their businesses, iStar is a complex mess as a result of their history. iStar does offer financing of buildings coordinated with financing of ground leases by Safehold, but that remains a small fraction of the total ground leases that Safehold does.
John Windelborn profile picture
I hopped back into STAR this morning after it dipped. Looking forward to this as a solid buy and hold. Thanks Jussi and Paul!
albertciampi profile picture
Great, timely pick. STAR up today.
This is such an interesting article as I had lost touch with what iStar is up to. I have fond memories of them back in 2009 when I was buying up their preferred share at a huge discount along with NRF. Those two investments really helped propel my portfolio forward to where I stand today. Sadly though I forgot about iStar after that but will now take a much closer look!
Jussi Askola, CFA profile picture
@clrodrick I am glad to hear that you enjoyed the article. Please note that we have published several exclusive interviews of Jay Sugarman, CEO of iStar to the 2,000+ members of High Yield Landlord. Feel free to join us for a 2-week free trial to access all our research: seekingalpha.com/...
Confused Capitalist profile picture
Also, as a long time commercial real estate appraiser, I fail to see what is so unique about SAFEs ground lease approach. Here's what I routinely see in ground leases:
1. Long duration lease, check;
2. Escalators in rent over the duration, check;
3. Turn over of the entire asset at lease completion or upon rental default, check;
4. Protection of sorts to the lender for the building, allowing expanded time remedies against default (I.e. the mortgage lender can make good on the ground lease payment), check.

So I don't understand what is thought to be the "special sauce" that SAFE is promoting that's purportedly so different from other ground lease situations. Or is it just that "... we are the only REIT dedicated to this concept"??)
R. Paul Drake profile picture
@Confused Capitalist Paraphrasing what Jay Sugarman told me when we talked, iStar had accumulated experience with ground leases in all four roles -- landowner, their lender, building owner, and their lender. They found traditional ground leases unsatisfactory from all four perspectives. His claim is that the provisions in their "modern ground lease" address the deficiencies they experienced. Now perhaps they really did invent a much better mousetrap, or perhaps they are just really good at marketing. But either one can help you conquer the world of business and the financial advantages of ground leases ARE compelling for building owners.
Best wishes... Paul
vekk profile picture
@Confused Capitalist you know the Dave Ramsey story? He basically built — and lost— his first million following the Robert kiyosaki method of leverage and income property.
Out of the ashes— the Dave Ramsey baby steps were born— the safest, most sure-fire path to financial peace there is.

I believe this is the path of STAR and SAFE— if you look at STAR’s history as one of the largest mortgage REITS with a highly leveraged and high risk/reward business profile— then the headlong plunge into ground leases— where the operator has more to lose (cost of capital in building) than the leaser— I think it just makes sense.

Many other REITS offer ground leases— they just don’t focus their business on them. Perhaps SAFE’s structure is different— better even, but I’m not sure how— I’m sure Jussi can enlighten us though.

I am long STAR, PINE, PW
Confused Capitalist profile picture
@R. Paul Drake I guess that's fine to say they found deficiencies from all 4 points of view, but how does this knowledge (change in their process vs conventional) specifically create value for SAFE?

I read your other articles, and I'm struggling with the so-called "bond math" concepts, like:

1. Why should the value of the ground lease discounted at their cost of interest - 2.8% you say (whereas their filings say 3.99%), which the discount rate of an equity holder has to be higher than the interest rate ... (or the world is upside down);
2. If the longer term interest rate is held by Sugarman as stated to be 6% (at some indeterminate renewal point) then why isn't the value of the remaining number of years THEN simultaneously at THAT point in time discounted at that rate, (6%) plus, say, 150 basis points for equity vs debt?

I think there's a lot that's being floated here that doesn't pass muster. I agree and completely understand that land deserves a lower discount rate, particularly where there's some inflation protection, BUT, nevertheless, that rate cannot logically be below the corporate or typical borrowing rate UNLESS the escalators are perceived to be wildly in excess of likely inflation OR borrowing rates are thought to be falling considerably into the future. Neither of which seem to be the case here ...
albertciampi profile picture
Great article. Thank you.
Confused Capitalist profile picture
The other thing, in addition to my other comment, is SAFE expecting a 2% annual escalator ATOP an inflation adjustment seems unlikely. I'm sure the lessee can figure out that a 2% annual increase ATOP an inflation adjustment means his rent will be 40% more in real terms in 20 years, and 80% more in 40 years, and ... and ... etc. I'm very suspicious they've been able to routinely achieve this in their lease mechanisms, without some other distortion along the value equation (e.g lower base rent to start).

In fact, accordingly to the SAFE annual report, their rent escalators are CPI linked, not CPI linked plus additional escalator(s) (source: SAFES December 2020 10K annual report, page 8. They actually state that their rents MAY NOT keep up with inflation or market rents ...)
vekk profile picture
@Confused Capitalist a lot of these leases end up a base escalation OR CPI.. maybe it’s 2% or CPI— whichever is greatest. 1-2% seems fairly standard
R. Paul Drake profile picture
@Confused Capitalist The CPI lookback increase in the Safehold leases replaces the 2% escalator if CPI averages more than 2% over each decade, and is capped at a total of 30% (average of 3%). So there is a lag and there are limits. See the current investor presentation on the Safehold website. They have a nice illustrative slide.
Best wishes... Paul
Jussi Askola, CFA profile picture

Thanks for reading!

We recently published our monthly portfolio review for members of High Yield Landlord. You can read a portion of it for free here: seekingalpha.com/...
Have a great day!

SFBay Investor profile picture

Thanks for the article. Any thoughts on why the CEO of STAR stated in the recent earnings report that they had bought back shares of both STAR and SAFE over the quarter? I guess I don’t see any reason why anyone would buy SAFE at this point when you could buy STAR and get more SAFE for your money. This essentially appears to be the thesis of your article. If this is true, then why is management literally making this error seemingly?

Also, isn’t a plausible “bearish” argument for STAR potentially that SAFE at something like 60-80 times FFO is extremely overvalued, and accordingly, that STAR’s position is potentially overvalued as well? I get that SAFE is a great company with great growth, but valuation seems extremely high for a REIT. If SAFE can’t grow fast enough to meet its extreme Price/FFO valuation, then it would seem to me that this is a risk as well for STAR shareholders. In your article, you compare SAFE to high growth tech firms, which is maybe appropriate. I am thinking here that if someone told me: “Zach, buy Widget Co., and get shares of Tesla half-off indirectly,” I still might not want any, if that resulted in effectively buying shares of Tesla at a P/E of 800, instead of 1,600, both of which I think are absurdly expensive given potential growth in earnings of the company.

Thanks for taking my questions and I look forward to hearing your thoughts if you have time to share them.

Best, Zach
Jussi Askola, CFA profile picture
@SFBay Investor Hi Zach,

Thank you for your question. Note that we have discussed the buybacks with the CEO in exclusive interviews which you can find at High Yield Landlord with the 2-week free trial: seekingalpha.com/...

Concerning the valuation: we actually think that SAFE is undervalued. You cannot value ground leases with a P/FFO ratio.
jara-mill profile picture
I loaded up more on STAR after the exited position of IRT based on the Trade Alert. It's now my 2nd largest holding behind STOR.
Rob G. in Vegas profile picture
@jaramill Obviously the sale recommendation of IRT was a mistake, as the stock is now at $25+. I held onto most of mine, but it sure does look pricey.

How high can these apartment REIT stocks go? They aren't tech stocks....
jara-mill profile picture
@Rob Grande - I did hold when Jussi issued the trade alert as it went down too much for me and wanted to get back in. Yes I agree on IRT, and had I not sold it all, I'd be at the $25/range. I think @Jussi Askola would recommend exiting....and reallocate to another apt REIT...AHH which I have initiated a small position.
jgrever621 profile picture

Well, I am also long STAR with a full position (at least), and likely to add IF we ever see dips.
However, ground leases are not mainstream, have limited history (that I can find anyway), and thus have possibly unknown risks. While not a full negative, sure needs consideration.

Even thinking this, I have been adding, and expect to hold for some time.

With this reservation, I agree with you on the value of this stock.
R. Paul Drake profile picture
@jgrever621 I've been quite pleased to see two private operations -- ARES is one of them -- start up ground lease offshoots during the past year or so. Both were talking initial numbers in the billions.
vekk profile picture
@jgrever621 ground leases have been around for nearly as long as ground has. As far as I know STAR / SAFE is a first mover in the public REIT space market with this focus though.

Not a lot new with ground leases, just new at scale. Very safe for the land owner as the “tenant” has so much more invested. It is typical to offer lease extensions and “re-financing” on these leases— in effect, never actually surrendering the property asset to the land owner.

Jussi Askola, CFA profile picture
@vekk I would also note that the SAFE ground leases are quite different from your usual ground lease.
@Jussi Askola - Double check your first paragraph. Do you mean you first purchased in August of 2019?
Jussi Askola, CFA profile picture
@Delivery boy Thanks for picking the typo. We first bought in Aug 2020, but double down in March 2021*.
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