Interesting assets that Ive been following for some time. Two questions on valuation... what confidence to you have in SAFE's valuation? The fundamentals and chart are not comforting. Any risk of a margin call on STHO as SAFE is in free fall?
Second, should you be capitalizing the development and operating costs to ready these assets for sale? Last I looked at these assets they were burning significant capital each quarter in excess of the management fee. Do you expect this to change?
I don’t have any unique insight on SAFE’s valuation so I default to the market price. The ground leases have a low current yield for a super-senior capital position, plus inflation protection, plus long-term land appreciation. Minor changes in assumptions about discount rates can have a big impact on valuation.
STHO’s “Capital Expenditures on land and development assets” were $48mm in 9M25 and $35mm for FY24, BUT this reflects consolidation of the Surfhouse venture which probably cost $80mm so far. Aside from the $10mm mezz loan, Surfhouse has not drawn any cash from STHO. I don’t see any way to estimate how much capital was devoted to preparing other STHO assets for sale, but it’s only permitting and marketing. STHO is not building anything else, and if that does not change then I think cash flows will turn positive from confirmed and likely sales (The Views, Delta, MG luxury apartment site, Mezz loan payoff).
I guess I would push back a bit here... net of management fees in G&A, it looks like $1-2mn per quarter of cost. So let's say its total $20mn of just overhead from audit, reimbursement to 3rd parties, etc.
Then we need to back out interest which is a real cost and PIK accrual right now e.g. its compounding the liability... this is $80mn+ of cash cost into 2030.
Quarterly capex ranged from $2-$22mn since inception... assume this mostly levels off now its still >0. Maybe $10mn per year to maintain properties and some prep work.
All in that would be $140-150mn in expense to liquidate. I dont feel like Im being overly conservative here (in fact I might be being generous...). Capitalizing these expenses gives us a slim margin of safety particularly given mgmt, workout portfolio uncertainty, and uncertainty around SAFE intrinsic value.
Would absolutely love to know where Im wrong here though?
The margin loan facility has a PIK option that was used in 2024, but not used in 2025.
The debt proceeds are invested in assets that generate lease income ($5.5mm in 9M25), interest income ($3.4mm), and "other Income" ($17mm including SAFE dividends, but deducting hotel revenues and legal settlement). I don't see the interest expense as a liquidation cost.
I hope we are at an inflection point in the liquidation process where STHO has begun realizing positive cash flow without funding any new development. I think that's why they began the share buybacks. The company should be in a position to begin paying down its debt and reducing its interest expense.
Overhead, yes.
Capex, your $10mm/year is completely made up. You can see photos of the AP properties in my first article. They are shovel-ready.
Minimal disclosures make it difficult to forecast, but I believe there is upside to liquidation proceeds above current carrying values. The hotels should be worth more than depreciated cost. Magnolia Green is over 200 acres of zoned land carried at only $28mm.
Right agree with a lot of this. I should have included the dividend and revenue from the hotels as offsets to cost of liquidation. I dont see where youre coming from on interest not being a cost. Its cash out the door and it's payment is coming out of shareholders pockets. That said, if we net the interest cost against dividends that offsets more or less. Seems like the operating assets are negative cashflow when accounting for overhead fwiw. Maybe positive excluding general costs...
I hear you on the capex number being made up, but would argue its a fine guess based on depreciation schedules, historic reporting, and the likely need to do something between now and liquidation. We can agree to disagree though, I might be totally wrong.
To your point, it looks like very recently, CFO burn has come down although FCF remains negative and one quarter may not make a trend... All in all, appreciate the answer! Maybe worth revisiting now. Can always short SAFE any way to remove that risk.
Interesting assets that Ive been following for some time. Two questions on valuation... what confidence to you have in SAFE's valuation? The fundamentals and chart are not comforting. Any risk of a margin call on STHO as SAFE is in free fall?
Second, should you be capitalizing the development and operating costs to ready these assets for sale? Last I looked at these assets they were burning significant capital each quarter in excess of the management fee. Do you expect this to change?
I don’t have any unique insight on SAFE’s valuation so I default to the market price. The ground leases have a low current yield for a super-senior capital position, plus inflation protection, plus long-term land appreciation. Minor changes in assumptions about discount rates can have a big impact on valuation.
STHO’s “Capital Expenditures on land and development assets” were $48mm in 9M25 and $35mm for FY24, BUT this reflects consolidation of the Surfhouse venture which probably cost $80mm so far. Aside from the $10mm mezz loan, Surfhouse has not drawn any cash from STHO. I don’t see any way to estimate how much capital was devoted to preparing other STHO assets for sale, but it’s only permitting and marketing. STHO is not building anything else, and if that does not change then I think cash flows will turn positive from confirmed and likely sales (The Views, Delta, MG luxury apartment site, Mezz loan payoff).
I guess I would push back a bit here... net of management fees in G&A, it looks like $1-2mn per quarter of cost. So let's say its total $20mn of just overhead from audit, reimbursement to 3rd parties, etc.
Then we need to back out interest which is a real cost and PIK accrual right now e.g. its compounding the liability... this is $80mn+ of cash cost into 2030.
Quarterly capex ranged from $2-$22mn since inception... assume this mostly levels off now its still >0. Maybe $10mn per year to maintain properties and some prep work.
All in that would be $140-150mn in expense to liquidate. I dont feel like Im being overly conservative here (in fact I might be being generous...). Capitalizing these expenses gives us a slim margin of safety particularly given mgmt, workout portfolio uncertainty, and uncertainty around SAFE intrinsic value.
Would absolutely love to know where Im wrong here though?
The margin loan facility has a PIK option that was used in 2024, but not used in 2025.
The debt proceeds are invested in assets that generate lease income ($5.5mm in 9M25), interest income ($3.4mm), and "other Income" ($17mm including SAFE dividends, but deducting hotel revenues and legal settlement). I don't see the interest expense as a liquidation cost.
I hope we are at an inflection point in the liquidation process where STHO has begun realizing positive cash flow without funding any new development. I think that's why they began the share buybacks. The company should be in a position to begin paying down its debt and reducing its interest expense.
Overhead, yes.
Capex, your $10mm/year is completely made up. You can see photos of the AP properties in my first article. They are shovel-ready.
Minimal disclosures make it difficult to forecast, but I believe there is upside to liquidation proceeds above current carrying values. The hotels should be worth more than depreciated cost. Magnolia Green is over 200 acres of zoned land carried at only $28mm.
Right agree with a lot of this. I should have included the dividend and revenue from the hotels as offsets to cost of liquidation. I dont see where youre coming from on interest not being a cost. Its cash out the door and it's payment is coming out of shareholders pockets. That said, if we net the interest cost against dividends that offsets more or less. Seems like the operating assets are negative cashflow when accounting for overhead fwiw. Maybe positive excluding general costs...
I hear you on the capex number being made up, but would argue its a fine guess based on depreciation schedules, historic reporting, and the likely need to do something between now and liquidation. We can agree to disagree though, I might be totally wrong.
To your point, it looks like very recently, CFO burn has come down although FCF remains negative and one quarter may not make a trend... All in all, appreciate the answer! Maybe worth revisiting now. Can always short SAFE any way to remove that risk.