10-Q 1 sfi-03312013x10q.htm 10-Q SFI-03.31.2013-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission File No. 1-15371
_______________________________________________________________________________
iSTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
 
95-6881527
(I.R.S. Employer
Identification Number)
1114 Avenue of the Americas, 39th Floor
 
 
New York, NY
(Address of principal executive offices)
 
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
As of May 3, 2013, there were 85,053,521 shares of Common Stock outstanding, $0.001 par value per share, of iStar Financial Inc. ("Common Stock") outstanding.
 



iStar Financial Inc.
Index to Form 10-Q
 
 
Page
 
 
 
 
 
 



PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
 
As of
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
3,190,343

 
$
3,226,648

Less: accumulated depreciation
(405,539
)
 
(427,625
)
Real estate, net
$
2,784,804

 
$
2,799,023

Real estate available and held for sale
599,061

 
635,865

 
$
3,383,865

 
$
3,434,888

Loans receivable, net
1,582,656

 
1,829,985

Other investments
403,759

 
398,843

Cash and cash equivalents
468,394

 
256,344

Restricted cash
28,478

 
36,778

Accrued interest and operating lease income receivable, net
14,253

 
15,226

Deferred operating lease income receivable
87,414

 
84,735

Deferred expenses and other assets, net
108,299

 
93,990

Total assets
$
6,077,118

 
$
6,150,789

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
117,227

 
$
132,460

Debt obligations, net
4,494,637

 
4,691,494

Total liabilities
$
4,611,864

 
$
4,823,954

Commitments and contingencies

 

Redeemable noncontrolling interests
13,162

 
13,681

Equity:
 
 
 
iStar Financial Inc. shareholders' equity:
 
 
 
Preferred Stock Series D, E, F, G and I, liquidation preference $25.00 per share (see Note 11)
22

 
22

Convertible Preferred Stock Series J, liquidation preference $50.00 per share (see Note 11)
4

 

High Performance Units
9,800

 
9,800

Common Stock, $0.001 par value, 200,000 shares authorized, 143,969 issued and 85,052 outstanding at March 31, 2013 and 142,699 issued and 83,782 outstanding at December 31, 2012
144

 
143

Additional paid-in capital
4,019,850

 
3,832,780

Retained earnings (deficit)
(2,403,291
)
 
(2,360,647
)
Accumulated other comprehensive income (loss) (see Note 11)
(1,464
)
 
(1,185
)
Treasury stock, at cost, $0.001 par value, 58,917 shares at March 31, 2013 and December 31, 2012
(241,969
)
 
(241,969
)
Total iStar Financial Inc. shareholders' equity
$
1,383,096

 
$
1,238,944

Noncontrolling interests
68,996

 
74,210

Total equity
$
1,452,092

 
$
1,313,154

Total liabilities and equity
$
6,077,118

 
$
6,150,789

The accompanying notes are an integral part of the consolidated financial statements.

2


iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2013
 
2012
Revenues:
 
 
 
Operating lease income
$
58,473

 
$
53,123

Interest income
24,667

 
37,203

Other income
11,393

 
10,756

Total revenues
$
94,533

 
$
101,082

Costs and expenses:
 
 
 
Interest expense
$
71,566

 
$
85,344

Real estate expense
37,916

 
35,068

Depreciation and amortization
17,389

 
16,168

General and administrative
21,848

 
22,845

Provision for loan losses
10,206

 
17,500

Impairment of assets

 
749

Other expense
5,625

 
453

Total costs and expenses
$
164,550

 
$
178,127

Income (loss) before earnings from equity method investments and other items
$
(70,017
)
 
$
(77,045
)
Gain (loss) on early extinguishment of debt, net
(9,541
)
 
1,704

Earnings from equity method investments
21,678

 
34,786

Income (loss) from continuing operations before income taxes
$
(57,880
)
 
$
(40,555
)
Income tax expense
(4,075
)
 
(1,271
)
Income (loss) from continuing operations(1)
$
(61,955
)
 
$
(41,826
)
Income (loss) from discontinued operations
961

 
(13,361
)
Gain from discontinued operations
5,044

 
2,406

Income from sales of residential property
23,697

 
6,733

Net income (loss)
$
(32,253
)
 
$
(46,048
)
Net (income) loss attributable to noncontrolling interests
189

 
(25
)
Net income (loss) attributable to iStar Financial Inc.
$
(32,064
)
 
$
(46,073
)
Preferred dividends
(10,580
)
 
(10,580
)
Net (income) loss allocable to HPU holders and Participating Security holders(2)(3)
1,381

 
1,861

Net income (loss) allocable to common shareholders
$
(41,263
)
 
$
(54,792
)
Per common share data(1):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
Basic
$
(0.56
)
 
$
(0.54
)
Diluted
$
(0.56
)
 
$
(0.54
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
Basic
$
(0.49
)
 
$
(0.66
)
Diluted
$
(0.49
)
 
$
(0.66
)
Weighted average number of common shares—basic
84,824

 
83,556

Weighted average number of common shares—diluted
84,824

 
83,556

Per HPU share data(1)(2):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
Basic
$
(105.01
)
 
$
(100.07
)
Diluted
$
(105.01
)
 
$
(100.07
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
Basic
$
(92.07
)
 
$
(124.07
)
Diluted
$
(92.07
)
 
$
(124.07
)
Weighted average number of HPU shares—basic and diluted
15

 
15

Explanatory Notes:
_______________________________________________________________________________
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. for the three months ended March 31, 2013, and 2012 was $(61.8) million and $(41.9) million, respectively. See Note 13 for details on the calculation of earnings per share.
(2)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program (see Note 11).
(3)
Participating Security holders are Company employees and directors who hold unvested restricted stock units, restricted stock awards and common stock equivalents granted under the Company's Long Term Incentive Plans that are eligible to participate in dividends (see Note 12 and Note 13).
The accompanying notes are an integral part of the consolidated financial statements.

3


iStar Financial Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)

 
For the Three Months Ended March 31,
 
2013
 
2012
Net income (loss)
$
(32,253
)
 
$
(46,048
)
Other comprehensive income (loss):
 
 
 
Reclassification of (gains)/losses on cash flow hedges into earnings upon realization
74

 
(5
)
Unrealized gains/(losses) on available-for-sale securities
225

 
157

Unrealized gains/(losses) on cash flow hedges
37

 
(571
)
Unrealized gains/(losses) on cumulative translation adjustment
(615
)
 
(391
)
Other comprehensive income (loss)
$
(279
)
 
$
(810
)
Comprehensive income (loss)
$
(32,532
)
 
$
(46,858
)
Net (income) loss attributable to noncontrolling interests
189

 
(25
)
Comprehensive income (loss) attributable to iStar Financial Inc.
$
(32,343
)
 
$
(46,883
)
The accompanying notes are an integral part of the consolidated financial statements.

4


iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2013
(In thousands)

 
iStar Financial Inc. Shareholders' Equity
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
HPU's
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock at
cost
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2012
$
22

 
$

 
$
9,800

 
$
143

 
$
3,832,780

 
$
(2,360,647
)
 
$
(1,185
)
 
$
(241,969
)
 
$
74,210

 
$
1,313,154

Issuance of Preferred Stock

 
4

 

 

 
193,506

 

 

 

 

 
193,510

Dividends declared—preferred

 

 

 

 

 
(10,580
)
 

 

 

 
(10,580
)
Issuance of stock/restricted stock amortization, net

 

 

 
1

 
(4,692
)
 

 

 

 

 
(4,691
)
Net loss for the period(2)

 

 

 

 

 
(32,064
)
 

 

 
330

 
(31,734
)
Change in accumulated other comprehensive income (loss)

 

 

 

 

 

 
(279
)
 

 

 
(279
)
Additional paid-in capital attributable to redeemable noncontrolling interest(4)

 

 

 

 
(1,744
)
 

 

 

 

 
(1,744
)
Contributions from noncontrolling interests(3)

 

 

 

 

 

 

 

 
11,079

 
11,079

Distributions to noncontrolling interests(4)

 

 

 

 

 

 

 

 
(16,623
)
 
(16,623
)
Balance at March 31, 2013
$
22

 
$
4

 
$
9,800

 
$
144

 
$
4,019,850

 
$
(2,403,291
)
 
$
(1,464
)
 
$
(241,969
)
 
$
68,996

 
$
1,452,092

Explanatory Notes:
_______________________________________________________________________________
(1)
See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)
For the three months ended March 31, 2013 net loss shown above excludes $519 of net loss attributable to redeemable noncontrolling interests.
(3)
Includes $11.1 million of operating property assets contributed by a noncontrolling partner (see Note 4).
(4)
Includes $8.8 million payment to redeem a noncontrolling member's interest.
The accompanying notes are an integral part of the consolidated financial statements.

5


iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(32,253
)
 
$
(46,048
)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Provision for loan losses
10,206

 
17,500

Impairment of assets

 
17,807

Depreciation and amortization
17,354

 
17,238

Payments for withholding taxes upon vesting of stock-based compensation
(9,894
)
 
(11,657
)
Non-cash expense for stock-based compensation
5,202

 
4,666

Amortization of discounts/premiums and deferred financing costs on debt
5,000

 
8,698

Amortization of discounts/premiums and deferred interest on loans
(6,853
)
 
(11,773
)
Earnings from equity method investments
(21,678
)
 
(34,786
)
Distributions from operations of equity method investments
6,109

 
11,358

Deferred operating lease income
(3,592
)
 
(2,516
)
Income from sales of residential property
(23,697
)
 
(6,733
)
Gain from discontinued operations
(5,044
)
 
(2,406
)
(Gain) loss on early extinguishment of debt, net
9,541

 
(1,704
)
Repayments and repurchases of debt - debt discount and prepayment penalty(1)
(20,057
)
 
(6,248
)
Other operating activities, net
1,537

 
1,679

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable, net
973

 
1,581

Changes in deferred expenses and other assets, net
(12,420
)
 
(14,326
)
Changes in accounts payable, accrued expenses and other liabilities
(4,125
)
 
5,793

Cash flows from operating activities
$
(83,691
)
 
$
(51,877
)
Cash flows from investing activities:
 
 
 
Investment originations and fundings
$
(22,111
)
 
$
(8,376
)
Capital expenditures on real estate assets
(16,314
)
 
(11,080
)
Contributions to unconsolidated entities
(1,448
)
 
(3,570
)
Repayments of and principal collections on loans
193,288

 
146,242

Net proceeds from sales of loans
37,703

 

Net proceeds from sales of real estate assets
107,192

 
57,859

Distributions from unconsolidated entities
13,024

 
13,655

Changes in restricted cash held in connection with investing activities
(56
)
 
(492,854
)
Other investing activities, net
199

 
57

Cash flows from investing activities
$
311,477

 
$
(298,067
)
Cash flows from financing activities:
 
 
 
Borrowings under secured credit facilities
$
658,700

 
$
864,750

Repayments under secured credit facilities
(844,766
)
 
(88,896
)
Repayments under unsecured credit facilities

 
(244,046
)
Repayments under secured term loans
(1,796
)
 
(2,138
)
Repayments under unsecured notes

 
(169,383
)
Repurchases and redemptions of secured and unsecured notes

 
(214,194
)
Payments for deferred financing costs
(1,227
)
 
(14,584
)
Preferred dividends paid
(10,580
)
 
(10,580
)
Net proceeds from issuance of preferred shares
193,510

 

Other financing activities, net
(9,577
)
 
(952
)
Cash flows from financing activities
$
(15,736
)
 
$
119,977

Changes in cash and cash equivalents
$
212,050

 
$
(229,967
)
Cash and cash equivalents at beginning of period
256,344

 
356,826

Cash and cash equivalents at end of period
$
468,394

 
$
126,859

Explanatory Note:
_______________________________________________________________________________
(1)
$3.0 million represents the portion of debt repayments and repurchases made during the period related to the original issue discount ("OID"). Although these amounts do not reflect contractual interest payments made during the period, the OID is considered an operating cash flow in accordance with GAAP. In addition, $17.1 million represents prepayment penalty paid in connection with the October 2012 Secured Credit Facility refinancing.
The accompanying notes are an integral part of the consolidated financial statements.

6

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)




Note 1—Business and Organization
Business—iStar Financial Inc., or the "Company," is a fully-integrated finance and investment company focused on the commercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estate and invests directly across a range of real estate sectors. The Company, which is taxed as a real estate investment trust, or "REIT," has invested more than $35 billion over the past two decades. The Company's primary business segments are real estate finance, net leasing, operating properties and land.
Organization—The Company began its business in 1993 through private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions.
Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited Consolidated Financial Statements and related Notes should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.
Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related Notes to conform to the 2013 presentation.
During the interim periods ended June 30, 2012 and September 30, 2012, the Company changed the classification within its cash flow statement for certain transactions involving the repurchase of its debt that was initially issued at a discount, as well as certain payments involving the potential acquisition of real estate. The Company believes the new classification is a more meaningful reflection of these transactions (collectively the “Reclassification”) and changed the Company's cash flows from the initially reported amounts as follows:
 
 
As Previously Reported
 
Change
 
As Reclassified
Cash flows from operations:
 
 
 
 
 
 
Three months Ended March 31, 2012
 
$
(35,770
)
 
$
(16,107
)
 
$
(51,877
)
Six months Ended June 30, 2012
 
$
(57,196
)
 
$
(9,859
)
 
$
(67,055
)
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Three months Ended March 31, 2012
 
$
(307,926
)
 
$
9,859

 
$
(298,067
)
Six months Ended June 30, 2012
 
$
206,147

 
$
9,859

 
$
216,006

 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
Three months ended March 31, 2012
 
$
113,729

 
$
6,248

 
$
119,977


7

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



The above changes to the amounts for the six months ended June 30, 2012 will be classified in connection with the Company's filing on Form 10-Q for the six months ended June 30, 2013. These reclassifications were also reflected in the Company's 2012 Form 10-K for the year ended December 31, 2011 to change the presentation for the items previously discussed. As a result, cash flows from operations and financing activities increased by $3.2 million and $7.0 million, while cash flows from investing decreased by $10.2 million. Additionally, within its 2012 Form 10-K, the Company corrected immaterial errors in the amount of $1.5 million in its December 31, 2010 statement of cash flows, which increased cash flows from operations and decreased cash flows from financing activities by $1.5 million.
Principles of Consolidation—The Consolidated Financial Statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs") for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Consolidated VIEs—As of March 31, 2013, the Company consolidated five VIEs for which the Company is considered the primary beneficiary. The assets and liabilities of the consolidated VIEs are included in the Company's Consolidated Balance Sheets. The Company's total unfunded commitments related to consolidated VIEs is $62.1 million as of March 31, 2013.
Unconsolidated VIEs—As of March 31, 2013, 27 of the Company's other investments were in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company's Consolidated Financial Statements. As of March 31, 2013, the Company's maximum exposure to loss from these investments does not exceed the sum of the $149.5 million carrying value of the investments and $8.2 million of related unfunded commitments.
Note 3—Summary of Significant Accounting Policies
As of March 31, 2013, the Company's significant accounting policies, which are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, have not changed materially.
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This guidance is the culmination of the board's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The standard requires that companies present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements in a single note or on the face of the financial statements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2012. The Company has adopted this ASU beginning with the reporting period ending March 31, 2013, which did not have a material impact on the financial statements.

8

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)




Note 4—Real estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease
Assets
 
Operating
Properties
 
Land
 
Total
As of March 31, 2013
 
 
 
 
 
 
 
Land and land improvements
$
342,221

 
$
132,028

 
$
793,356

 
$
1,267,605

Buildings and improvements
1,285,058

 
637,680

 

 
1,922,738

Less: accumulated depreciation and amortization
(318,479
)
 
(84,504
)
 
(2,556
)
 
(405,539
)
Real estate, net
$
1,308,800

 
$
685,204

 
$
790,800

 
$
2,784,804

Real estate available and held for sale
9,766

 
409,579

 
179,716

 
599,061

Total real estate
$
1,318,566

 
$
1,094,783

 
$
970,516

 
$
3,383,865

As of December 31, 2012
 
 
 
 
 
 
 
Land and land improvements
$
344,239

 
$
132,028

 
$
786,114

 
$
1,262,381

Buildings and improvements
1,295,081

 
669,186

 

 
1,964,267

Less: accumulated depreciation and amortization
(315,699
)
 
(109,634
)
 
(2,292
)
 
(427,625
)
Real estate, net
$
1,323,621

 
$
691,580

 
$
783,822

 
$
2,799,023

Real estate available and held for sale

 
454,587

 
181,278

 
635,865

Total real estate
$
1,323,621

 
$
1,146,167

 
$
965,100

 
$
3,434,888

Real estate available and held for sale—As of March 31, 2013 and December 31, 2012, the Company had $353.2 million and $374.1 million, respectively, of residential properties available for sale in its operating properties portfolio. The Company is actively marketing and selling condominium units in these projects. During the three months ended March 31, 2013 and 2012, the Company sold condominium units for total net proceeds of $75.2 million and $49.5 million, respectively, and recorded income from sales of residential properties totaling $23.7 million and $6.7 million, respectively.
Real estate assets held for sale included $179.7 million of land assets, $56.4 million of commercial operating properties and $9.8 million of net lease assets as of March 31, 2013 and $181.3 million of land assets and $80.5 million of commercial operating properties as of December 31, 2012.
Acquisitions—During the three months ended March 31, 2013, through a newly formed joint venture, the Company acquired, via foreclosure, title to a property previously serving as collateral on a loan receivable. The Company owns 63% of the newly formed joint venture and based on the control provisions in the partnership agreement consolidates the joint venture and reflects the partner's share of the equity in "Noncontrolling interests" on the Company's Consolidated Balance Sheets. The acquisition was accounted for at fair value whereby the assets acquired were $27.2 million which approximated the Company's previous loan balance and non-controlling partner's interest in the venture. No gain or loss was recorded in conjunction with this transaction.
During the three months ended March 31, 2012, the Company acquired title to properties previously serving as collateral on its loan receivables with a total fair value of $140.4 million at the time of foreclosure. These properties included $139.1 million of residential operating properties and $1.3 million of commercial operating properties.
Dispositions—During the three months ended March 31, 2013, the Company sold a net lease asset with a carrying value of $0.9 million for proceeds that approximated carrying value. During the same period the Company sold a commercial operating property with a carrying value of $24.1 million resulting in a net gain of $5.0 million and land assets with a carrying value of $1.9 million for proceeds that approximated carrying value.
During the three months ended March 31, 2012, the Company sold a net lease asset with a carrying value of $4.1 million, resulting in a net gain of $2.4 million. During 2012, the Company also sold a commercial operating property with a carrying value of $1.2 million and land assets with a carrying value of $0.9 million for proceeds that approximated carrying value.

9

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Discontinued Operations—The following table summarizes income (loss) from discontinued operations for the three months ended March 31, 2013 and 2012 ($ in thousands):
 
For the
Three Months Ended
March 31,
 
2013
 
2012
Revenues
$
1,938

 
$
4,903

Total expenses
(1,009
)
 
(2,989
)
Impairment of assets
32

 
(15,275
)
Income (loss) from discontinued operations
$
961


$
(13,361
)
Impairments—During the three months ended March 31, 2013, the Company recorded no impairments on real estate assets. During the three months ended March 31, 2012, the Company recorded impairments on real estate assets totaling $16.1 million. Of this amount, $15.3 million has been reclassified to discontinued operations due to the assets being sold or classified as held for sale as of March 31, 2013.
Intangible assets—As of March 31, 2013 and December 31, 2012 the Company had $56.9 million and $59.9 million, respectively, of unamortized finite lived intangible assets primarily related to the acquisition of real estate assets. The total amortization expense for these intangible assets was $3.0 million and $3.1 million for the three months ended March 31, 2013 and 2012, respectively.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements for the three months ended March 31, 2013 and 2012 were $7.7 million and $7.5 million, respectively, and are included in “Operating lease income” on the Company's Consolidated Statements of Operations.
Note 5—Loans Receivable, net
The following is a summary of the Company's loans receivable by class ($ in thousands):
 
As of
Type of Investment
March 31,
2013
 
December 31,
2012
Senior mortgages
$
1,580,632

 
$
1,751,256

Subordinate mortgages
113,754

 
152,737

Corporate/Partnership loans
410,065

 
450,491

Total gross carrying value of loans(1)
$
2,104,451

 
$
2,354,484

Reserves for loan losses
(521,795
)
 
(524,499
)
Total loans receivable, net
$
1,582,656

 
$
1,829,985

Explanatory Note:
_______________________________________________________________________________
(1)
The Company's recorded investment in loans as of March 31, 2013 and December 31, 2012, was $2.11 billion and $2.36 billion, respectively, which consists of total gross carrying value of loans plus accrued interest of $8.5 million and $9.8 million, for the same two periods, respectively.
During the three months ended March 31, 2013, the Company funded $13.3 million of loans and received principal repayments of $193.3 million. During the same period, the Company sold loans with a total carrying value of $38.3 million, for which it recorded net realized losses of $0.6 million. Gains and losses on sales of loans are reported in "Other income" on the Company's Consolidated Statements of Operations.
During the three months ended March 31, 2013, through a newly formed joint venture, the Company acquired, via foreclosure, title to a property previously serving as collateral on a loan receivable. The acquisition was accounted for at fair value whereby the assets acquired were $27.2 million which approximated the Company's previous loan balance and non-controlling partner's

10

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



interest in the venture. This property was recorded as "Real estate available and held for sale" on the Company's Consolidated Balance Sheets (see Note 4).
Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
 
For the Three Months Ended March 31,
 
2013
 
2012
Reserve for loan losses at beginning of period
$
524,499

 
$
646,624

Provision for loan losses
10,206

 
17,500

Charge-offs
(12,910
)
 
(96,945
)
Reserve for loan losses at end of period
$
521,795

 
$
567,179

The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest) and the associated reserve for loan losses were as follows ($ in thousands):
 
Individually
Evaluated for
Impairment(1)
 
Collectively
Evaluated for
Impairment(2)
 
Loans Acquired
with Deteriorated
Credit Quality(3)
 
Total
As of March 31, 2013
 
 
 
 
 
 
 
Loans
$
1,041,847

 
$
1,055,342

 
$
15,574

 
$
2,112,763

Less: Reserve for loan losses
(486,379
)
 
(30,900
)
 
(4,516
)
 
(521,795
)
Total
$
555,468

 
$
1,024,442

 
$
11,058

 
$
1,590,968

As of December 31, 2012
 
 
 
 
 
 
 
Loans
$
1,095,957

 
$
1,210,077

 
$
58,281

 
$
2,364,315

Less: Reserve for loan losses
(472,058
)
 
(33,100
)
 
(19,341
)
 
(524,499
)
Total
$
623,899

 
$
1,176,977

 
$
38,940

 
$
1,839,816

Explanatory Notes:
_______________________________________________________________________________
(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $3.5 million and $4.0 million as of March 31, 2013 and December 31, 2012, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status and therefore, the unamortized amounts associated with these loans are not currently being amortized into income.
(2)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $4.1 million and $3.8 million as of March 31, 2013 and December 31, 2012, respectively.
(3)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.1 million and $0.1 million as of March 31, 2013 and December 31, 2012, respectively. These loans had cumulative principal balances of $15.9 million and $58.8 million, as of March 31, 2013 and December 31, 2012, respectively.
Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
 
As of
 
March 31, 2013
 
December 31, 2012
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
823,869

 
2.70

 
$
840,593

 
2.75

Subordinate mortgages
61,236

 
3.07

 
99,698

 
2.27

Corporate/Partnership loans
403,016

 
3.61

 
444,772

 
3.69

Total
$
1,288,121

 
3.00

 
$
1,385,063

 
3.01


11

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



As of March 31, 2013, the Company's recorded investment in loans, aged by payment status and presented by class, were as follows ($ in thousands):
 
Current
 
Less Than
and Equal
to 90 Days
 
Greater
Than
90 Days
 
Total
Past Due
 
Total
Senior mortgages
$
840,666

 
$
3,138

 
$
740,800

 
$
743,938

 
$
1,584,604

Subordinate mortgages
61,236

 

 
53,797

 
53,797

 
115,033

Corporate/Partnership loans
403,016

 

 
10,110

 
10,110

 
413,126

Total
$
1,304,918

 
$
3,138

 
$
804,707

 
$
807,845

 
$
2,112,763

Impaired Loans—The Company's recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
 
As of March 31, 2013
 
As of December 31, 2012
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
18,711

 
$
18,591

 
$

 
$
108,077

 
$
107,850

 
$

Corporate/Partnership loans
10,110

 
10,160

 

 
10,110

 
10,160

 

Subtotal
$
28,821

 
$
28,751

 
$

 
$
118,187

 
$
118,010

 
$

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
903,190

 
$
902,077

 
$
(442,256
)
 
$
918,975

 
$
918,496

 
$
(442,760
)
Subordinate mortgages
53,797

 
53,260

 
(39,579
)
 
53,979

 
53,679

 
(39,579
)
Corporate/Partnership loans
61,556

 
61,674

 
(9,060
)
 
63,096

 
63,246

 
(9,060
)
Subtotal
$
1,018,543

 
$
1,017,011

 
$
(490,895
)
 
$
1,036,050

 
$
1,035,421

 
$
(491,399
)
Total:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
921,901

 
$
920,668

 
$
(442,256
)
 
$
1,027,052

 
$
1,026,346

 
$
(442,760
)
Subordinate mortgages
53,797

 
53,260

 
(39,579
)
 
53,979

 
53,679

 
(39,579
)
Corporate/Partnership loans
71,666

 
71,834

 
(9,060
)
 
73,206

 
73,406

 
(9,060
)
Total
$
1,047,364

 
$
1,045,762

 
$
(490,895
)
 
$
1,154,237

 
$
1,153,431

 
$
(491,399
)
Explanatory Note:
_______________________________________________________________________________
(1)
All of the Company's non-accrual loans are considered impaired and included in the table above. In addition, as of March 31, 2013 and December 31, 2012, certain loans modified through troubled debt restructurings with a recorded investment of $222.7 million and $175.0 million, respectively, are also included as impaired loans in accordance with GAAP although they are performing and on accrual status.

12

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



The Company's average recorded investment in impaired loans and interest income recognized, presented by class, were as follows ($ in thousands):
 
For the Three Months Ended March 31,
 
2013
 
2012
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
$
63,394

 
$
844

 
$
212,803

 
$
407

Corporate/Partnership loans
10,110

 
120

 
10,110

 

Subtotal
$
73,504

 
$
964

 
$
222,913

 
$
407

With an allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
$
911,082

 
$
506

 
$
1,147,091

 
$
1,240

Subordinate mortgages
53,888

 

 
50,345

 

Corporate/Partnership loans
62,326

 
78

 
62,959

 
80

Subtotal
$
1,027,296

 
$
584

 
$
1,260,395

 
$
1,320

Total:
 
 
 
 
 
 
 
Senior mortgages
$
974,476

 
$
1,350

 
$
1,359,894

 
$
1,647

Subordinate mortgages
53,888

 

 
50,345

 

Corporate/Partnership loans
72,436

 
198

 
73,069

 
80

Total
$
1,100,800

 
$
1,548

 
$
1,483,308

 
$
1,727

Troubled Debt Restructurings—During the three months ended March 31, 2013 and 2012, the Company modified loans that were determined to be troubled debt restructurings. The recorded investment in these loans was impacted by the modifications as follows, presented by class ($ in thousands):
 
For the Three Months Ended March 31,
 
2013
 
2012
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Senior mortgages
1

 
$
72,674

 
$
65,000

 
5

 
$
305,780

 
$
260,307

During the three months ended March 31, 2013, the Company restructured one non-performing loan with a recorded investment of $72.7 million. The Company received a $13.3 million paydown and accepted a discounted payoff option on this loan, with final payment expected to be made in July 2013, subject to conditional extension options, and the loan was reclassified from non-performing to performing status as the Company believes the borrower can perform under the modified terms of the agreement.
Troubled debt restructurings that occurred during the three months ended March 31, 2012 included the modifications of performing loans with a combined recorded investment of $58.1 million. The modified terms of these loans granted maturity extensions ranging from three months to one year and included conditional extension options in certain cases dependent on borrower-specific performance hurdles. In each case, the Company believes the borrowers can perform under the modified terms of the loans and continues to classify these loans as performing.
Non-performing loans with a combined recorded investment of $247.7 million were also modified during the three months ended March 31, 2012 and continued to be classified as non-performing subsequent to modification. Included in this balance was a loan with a recorded investment of $181.5 million prior to modification, for which the Company agreed to reduce the outstanding principal balance and recorded charge-offs totaling $45.5 million, and also reduced the loan's interest rate. The remaining non-

13

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



performing loans were granted maturity extensions ranging from one month to seven months and the interest rate was reduced on one loan.
Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by troubled debt restructurings whereby loans that have gone through troubled debt restructurings are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under troubled debt restructurings that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of March 31, 2013, the Company had $21.5 million of unfunded commitments associated with modified loans considered troubled debt restructurings.
Note 6—Other Investments
The Company's other investments and its proportionate share of results from equity method investments were as follows ($ in thousands):
 
Carrying Value as of
 
Equity in earnings for the Three Months Ended March 31,
 
March 31, 2013
 
December 31, 2012
 
2013
 
2012
LNR
$
221,912

 
$
205,773

 
$
14,746

 
$
12,137

Madison Funds
56,245

 
56,547

 
2,259

 
9,498

Oak Hill Funds
26,794

 
29,840

 
1,157

 
3,374

Real estate equity investments
40,560

 
47,619

 
1,763

 
6,771

Other equity method investments
48,489

 
47,939

 
1,753

 
3,006

Total equity method investments
$
394,000

 
$
387,718

 
$
21,678

 
$
34,786

Other
9,759

 
11,125

 
 
 
 
Total other investments
$
403,759

 
$
398,843

 
 
 
 
Equity Method Investments
LNR—On July 29, 2010, the Company acquired an ownership interest of approximately 24% in LNR Property Corporation ("LNR"). LNR is a servicer and special servicer of commercial mortgage loans and CMBS and a diversified real estate investment, finance and management company. In the transaction, the Company and a group of investors, including other creditors of LNR, acquired 100% of the common stock of LNR in exchange for cash and the extinguishment of existing senior notes of LNR's parent holding company (the "Holdco Notes"). The Company contributed $100.0 million aggregate principal amount of Holdco Notes and $100.0 million in cash in exchange for an equity interest of $120.0 million.
Subsequent to quarter end, the Company completed the sale of its 24% equity interest in LNR and received $220.3 million in net proceeds (see Note 16—Subsequent Events), which approximated the carrying value at March 31, 2013.

14

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



The following table represents the latest available investee level summarized financial information for LNR ($ in thousands)(1):
 
For the Three Months Ended December 31,
 
2012
 
2011
Income Statements
 
 
 
Total revenue(2)
$
77,780

 
$
77,360

Other Income
$
164,582

 
$
20,936

Income tax expense
$
279

 
$
1,837

Net income attributable to LNR
$
189,249

 
$
50,621

iStar's ownership percentage
24
%
 
24
%
Subtotal
$
45,420

 
$
12,137

Basis difference(3)
$
(30,674
)
 
$

iStar's equity in earnings from LNR
$
14,746

 
$
12,137

 
As of December 31,
 
As of September 30,
 
2012
 
2012
Balance Sheets
 
 
 
Total assets(2)
$
1,610,143

 
$
1,384,337

Total debt(2)
$
468,355

 
$
398,912

Total liabilities(2)
$
553,150

 
$
517,088

Noncontrolling interests
$
1,588

 
$
1,560

LNR Property LLC equity
$
1,055,405

 
$
865,689

iStar's ownership percentage
24
%
 
24
%
iStar's equity in LNR
$
221,912

 
$
205,773

Explanatory Notes:
_______________________________________________________________________________
(1)
The Company records its investment in LNR on a one quarter lag, therefore, amounts in the Company's financial statements for the three months ended March 31, 2013 and 2012 are based on balances and results from LNR for the three months ended December 31, 2012 and 2011.
(2)
LNR consolidates certain commercial mortgage-backed securities and collateralized debt obligation trusts that are considered VIEs (and for which it is the primary beneficiary), that have been excluded from the amounts presented above. As of December 31, 2012 and September 30, 2012, the assets of these trusts, which aggregated approximately $91.06 billion and $97.52 billion, respectively, were the sole source of repayment of the related liabilities, which aggregated approximately $90.74 billion and $97.21 billion, respectively, and are non-recourse to LNR and its equity holders, including the Company. In addition, total revenue presented above includes $29.3 million and $28.7 million for the three months ended December 31, 2012, and 2011, respectively, of servicing fee revenue that is eliminated upon consolidation of the VIE's at the LNR level. This income is then added back through consolidation at the LNR level as an adjustment to income allocable to noncontrolling entities and has no net impact on net income attributable to LNR.
(3)
The Company has limited its recognition of its proportionate share of earnings in LNR for the three months ended March 31, 2013 to the amounts of proceeds it anticipates receiving from the sale.
Madison Funds—As of March 31, 2013, the Company owned a 29.52% interest in Madison International Real Estate Fund II, LP, a 32.92% interest in Madison International Real Estate Fund III, LP and a 29.52% interest in Madison GP1 Investors, LP (collectively, the "Madison Funds"). The Madison Funds invest in ownership positions of entities that own real estate assets. The Company determined that all of these entities are variable interest entities and that the Company is not the primary beneficiary.
Oak Hill Funds—As of March 31, 2013, the Company owned a 5.92% interest in OHA Strategic Credit Master Fund, L.P. ("OHASCF"). OHASCF was formed to acquire and manage a diverse portfolio of assets, investing in distressed, stressed and undervalued loans, bonds, equities and other investments. The Company determined that this entity is a variable interest entity and that the Company is not the primary beneficiary.

15

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Real estate equity investments—As of March 31, 2013, the Company's real estate equity investments included equity interests in real estate ventures ranging from 31% to 70%, comprised of investments of $16.4 million in net lease assets, $20.3 million in operating properties and $3.9 million in land assets. As of December 31, 2012, the Company's real estate equity investments included $16.4 million in net lease assets, $25.7 million in operating properties and $5.5 million in land assets. One of the Company's equity investments in operating properties represents a 33% interest in residential property units. During the three months ended March 31, 2013 and 2012, the Company's earnings from its interest in this property includes income from sales of residential units of $2.5 million and $8.0 million, respectively.
Other Equity Method Investments—The Company also had smaller investments in several other entities that were accounted for under the equity method. Several of these investments are in real estate related funds or other strategic investment opportunities within niche markets.
Note 7—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
March 31, 2013
 
December 31, 2012
Deferred financing fees, net(1)
$
23,721

 
$
26,629

Leasing costs, net(2)
19,322

 
20,205

Other receivables
12,907

 
11,517

Derivative asset
10,522

 

Prepaid expenses
10,404

 
5,218

Corporate furniture, fixtures and equipment, net(3)
7,248

 
7,537

Other assets
24,175

 
22,884

Deferred expenses and other assets, net
$
108,299

 
$
93,990

Explanatory Notes:
_______________________________________________________________________________
(1)
Accumulated amortization on deferred financing fees was $2.6 million and $4.1 million as of March 31, 2013 and December 31, 2012, respectively.
(2)
Accumulated amortization on leasing costs was $5.0 million and $6.6 million as of March 31, 2013 and December 31, 2012, respectively.
(3)
Accumulated depreciation on corporate furniture, fixtures and equipment was $6.0 million and $6.2 million as of March 31, 2013 and December 31, 2012, respectively.

16

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
March 31, 2013
 
December 31, 2012
Accrued interest payable
$
43,691

 
$
29,521

Accrued expenses
34,643

 
50,467

Property taxes payable
10,802

 
8,206

Unearned operating lease income
10,631

 
11,294

Security deposits and other investment deposits(1)
4,593

 
13,717

Derivative liabilities
455

 
3,435

Other liabilities
12,412

 
15,820

Accounts payable, accrued expenses and other liabilities
$
117,227

 
$
132,460

Explanatory Note:
_______________________________________________________________________________
(1)
During the three months ended March 31, 2013, $8.9 million of restricted cash collateralizing a letter of credit related to one of the Company's loan investments was disbursed.
Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
 
As of
 
March 31, 2013
 
December 31, 2012
Deferred tax assets(1)
$
50,968

 
$
40,800

Valuation allowance
(50,968
)
 
(40,800
)
Net deferred tax assets (liabilities)
$

 
$

Explanatory Note:
_______________________________________________________________________________
(1)
Deferred tax assets as of March 31, 2013, include real estate basis differences of $36.3 million, net operating loss carryforwards of $6.7 million and investment basis differences of $7.9 million. Deferred tax assets as of December 31, 2012, include real estate basis differences of $31.2 million, net operating loss carryforwards of $10.8 million and investment basis differences of $(1.2) million.

17

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)




Note 8—Debt Obligations, net
As of March 31, 2013 and December 31, 2012, the Company's debt obligations were as follows ($ in thousands):
 
Carrying Value as of
 
 
 
 
 
March 31,
2013
 
December 31,
2012
 
Stated
Interest Rates
 
Scheduled
Maturity Date
Secured credit facilities and term loans:
 
 
 
 
 
 
 
2012 Tranche A-1 Facility
$
60,309

 
$
169,164

 
LIBOR + 4.00%

(1
)
March 2016
2012 Tranche A-2 Facility
470,000

 
470,000

 
LIBOR + 5.75%

(1
)
March 2017
October 2012 Secured Credit Facility

 
1,754,466

 
LIBOR + 4.50%

(2
)
February 2013 Secured Credit Facility
1,673,414

 

 
LIBOR + 3.50%

(3
)
October 2017
Term loans collateralized by net lease assets
263,489

 
264,432

 
4.851% - 7.68%

 
Various through 2026
Total secured credit facilities and term loans
$
2,467,212

 
$
2,658,062

 
 

 
 
Unsecured notes:
 
 
 
 
 
 
 
8.625% senior notes
$
96,801

 
$
96,801

 
8.625
%
 
June 2013
5.95% senior notes
448,453

 
448,453

 
5.95
%
 
October 2013
5.70% senior notes
200,601

 
200,601

 
5.70
%
 
March 2014
6.05% senior notes
105,765

 
105,765

 
6.05
%
 
April 2015
5.875% senior notes
261,403

 
261,403

 
5.875
%
 
March 2016
3.0% senior convertible notes(4)
200,000

 
200,000

 
3.0
%
 
November 2016
5.85% senior notes
99,722

 
99,722

 
5.85
%
 
March 2017
9.0% senior notes
275,000

 
275,000

 
9.0
%
 
June 2017
7.125% senior notes
300,000

 
300,000

 
7.125
%
 
February 2018
Total unsecured notes
$
1,987,745

 
$
1,987,745

 
 

 
 
Other debt obligations:
 
 
 
 
 
 
 
Other debt obligations
$
100,000

 
$
100,000

 
LIBOR + 1.5%

 
October 2035
Total debt obligations
$
4,554,957

 
$
4,745,807

 
 

 
 
Debt discounts, net
(60,320
)
 
(54,313
)
 
 

 
 
Total debt obligations, net
$
4,494,637

 
$
4,691,494

 
 

 
 
Explanatory Notes:
_______________________________________________________________________________
(1)
These loans each have a LIBOR floor of 1.25%. As of March 31, 2013, inclusive of the floors, the 2012 Tranche A-1 Facility and 2012 Tranche A-2 Facility loans incurred interest at a rate of 5.25% and 7.00%, respectively.
(2)
This loan had a LIBOR floor of 1.25%.
(3)
This loan has a LIBOR floor of 1.00%. As of March 31, 2013, inclusive of the floor, the February 2013 Secured Credit Facility incurred interest at a rate of 4.50%.
(4)
The Company's senior convertible fixed rate notes due November 2016 ("Convertible Notes") are convertible at the option of the holders, into 85.0 shares per $1,000 principal amount of Convertible Notes, at any time prior to the close of business on November 14, 2016.

18

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Future Scheduled Maturities—As of March 31, 2013, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
 
Unsecured Debt
 
Secured Debt
 
Total
2013 (remaining nine months)
$
545,254

 
$

 
$
545,254

2014
200,601

 
853

 
201,454

2015
105,765

 

 
105,765

2016
461,403

 
60,309

 
521,712

2017
374,722

 
2,143,414

 
2,518,136

Thereafter
400,000

 
262,636

 
662,636

Total principal maturities
$
2,087,745

 
$
2,467,212

 
$
4,554,957

Unamortized debt discounts, net
(17,358
)
 
(42,962
)
 
(60,320
)
Total long-term debt obligations, net
$
2,070,387

 
$
2,424,250

 
$
4,494,637

February 2013 Secured Credit Facility—On February 11, 2013, the Company entered into a $1.71 billion senior secured credit facility due October 15, 2017 (the “February 2013 Secured Credit Facility”) that amended and restated its $1.82 billion senior secured credit facility, dated October 15, 2012 (the “October 2012 Secured Credit Facility”). The February 2013 Credit Facility amended the October 2012 Secured Credit Facility by: (i) reducing the interest rate from LIBOR plus 4.50%, with a 1.25% LIBOR floor, to LIBOR plus 3.50%, with a 1.00% LIBOR floor; and (ii) extending the call protection period for the lenders from October 15, 2013 to December 31, 2013.
Borrowings under the February 2013 Secured Credit Facility are collateralized by a first lien on a fixed pool of assets, with required minimum collateral coverage of not less than 125% of outstanding borrowings. If collateral coverage is less than 137.5% of outstanding borrowings, 100% of the proceeds from principal repayments and sales of collateral will be applied to repay outstanding borrowings under the February 2013 Secured Credit Facility. For so long as collateral coverage is between 137.5% and 150% of outstanding borrowings, 50% of proceeds from principal repayments and sales of collateral will be applied to repay outstanding borrowings under the February 2013 Secured Credit Facility and for so long as collateral coverage is greater than 150% of outstanding borrowings, the Company may retain all proceeds from principal repayments and sales of collateral. The Company retains proceeds from interest, rent, lease payments and fee income in all cases.
In connection with the February 2013 Secured Credit Facility transaction, the Company incurred $17.1 million of lender fees and $3.8 million in third party fees, of which the lender fees were capitalized in "Debt Obligations, net" on the Company's Consolidated Balance Sheets, and $3.6 million of third party fees were recognized in “Other expense” on the Company's Consolidated Statements of Operations, as it related primarily to the portion of lenders from the original facility that modified their debt under the new facility. The remaining $0.2 million of third party fees were recorded in “Deferred expenses and other assets, net” on the Company's Consolidated Balance Sheets, as it related to the new lenders.
The February 2013 Secured Credit Facility contains certain covenants relating to the collateral, among other matters, but does not contain corporate level financial covenants. For so long as the Company maintains its qualification as a REIT, it is permitted to distribute 100% of its REIT taxable income on an annual basis. In addition, the Company may distribute to its stockholders real estate assets, or interests therein, having an aggregate equity value not to exceed $200 million, that are not collateral securing the borrowings under the February 2013 Secured Credit Facility. Except for the distribution of real estate assets described in the preceding sentence, the Company may not pay common dividends if it ceases to qualify as a REIT.
Through March 31, 2013, the Company has made cumulative amortization repayments of $33.6 million on the February 2013 Secured Credit Facility. Repayments of the February 2013 Secured Credit Facility prior to the scheduled maturity date have resulted in losses on early extinguishment of debt of $0.8 million for the three months ended March 31, 2013 related to the acceleration of discounts and unamortized deferred financing fees on the portion of the facility that was repaid.
October 2012 Secured Credit Facility—On October 15, 2012, the Company entered into a $1.82 billion senior secured credit agreement due October 15, 2017 (the “October 2012 Secured Credit Facility”). The October 2012 Secured Credit Facility bears interest at a rate of LIBOR + 4.50%, with a 1.25% LIBOR floor, and was issued at 99.0% of par. Proceeds from the October

19

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



2012 Secured Credit Facility were used to refinance the remaining outstanding balances of the Company’s existing 2011 Secured Credit Facilities.
The October 2012 Secured Credit Facility was refinanced by the February 2013 Secured Credit Facility. Prior to refinancing, through March 31, 2013, the Company made cumulative amortization repayments of $113.0 million on the October 2012 Secured Credit Facility, which resulted in losses on early extinguishment of debt of $0.8 million for the three months ended March 31, 2013 related to the acceleration of discounts and unamortized deferred financing fees on the portion of the facility that was repaid.
At the time of the refinancing, the Company had $30.5 million of unamortized discounts and financing fees related to the October 2012 Secured Credit Facility. In connection with the refinancing, the Company recorded a loss on early extinguishment of debt of $4.9 million, related primarily to the portion of lenders in the original facility that did not participate in the new facility. The remaining $25.6 million of unamortized fees and discounts will continue to be amortized to interest expense over the remaining term of the February 2013 Secured Credit Facility.
March 2012 Secured Credit Facilities—In March 2012, the Company entered into an $880.0 million senior secured credit agreement providing for two tranches of term loans: a $410.0 million 2012 A-1 tranche due March 2016, which bears interest at a rate of LIBOR + 4.00% (the "2012 Tranche A-1 Facility"), and a $470.0 million 2012 A-2 tranche due March 2017, which bears interest at a rate of LIBOR + 5.75% (the "2012 Tranche A-2 Facility," together the "March 2012 Secured Credit Facilities"). The 2012 A-1 and A-2 tranches were issued at 98.0% of par and 98.5% of par, respectively, and both tranches include a LIBOR floor of 1.25%. Proceeds from the March 2012 Secured Credit Facilities were used to repurchase and repay at maturity $606.7 million aggregate principal amount of the Company's convertible notes due October 2012, to fully repay the $244.0 million balance on the Company's unsecured credit facility due June 2012, and to repay, upon maturity, $90.3 million outstanding principal balance of its 5.50% senior unsecured notes.
The March 2012 Secured Credit Facilities are collateralized by a first lien on a fixed pool of assets. Proceeds from principal repayments and sales of collateral are applied to amortize the March 2012 Secured Credit Facilities. Proceeds received for interest, rent, lease payments and fee income are retained by the Company. The 2012 Tranche A-1 Facility requires amortization payments of $41.0 million to be made every six months beginning December 31, 2012. After the 2012 Tranche A-1 Facility is repaid, proceeds from principal repayments and sales of collateral will be used to amortize the 2012 Tranche A-2 Facility. The Company may make optional prepayments on each tranche of term loans, subject to prepayment fees.
Through March 31, 2013, the Company made cumulative amortization repayments of $349.7 million on the 2012 Tranche A-1 Facility, which exceeds all required amortization payments through December 31, 2014. Repayments of the 2012 Tranche A-1 Facility prior to scheduled amortization dates have resulted in losses on early extinguishment of debt of $3.0 million for the three months ended March 31, 2013 related to the acceleration of discounts and unamortized deferred financing fees on the portion of the facility that was repaid.
2011 Secured Credit Facilities—In March 2011, the Company entered into a $2.95 billion senior secured credit agreement providing for two tranches of term loans: a $1.50 billion 2011 A-1 tranche due June 2013, bearing interest at a rate of LIBOR + 3.75% (the "2011 Tranche A-1 Facility"), and a $1.45 billion 2011 A-2 tranche due June 2014, bearing interest at a rate of LIBOR + 5.75% (the "2011 Tranche A-2 Facility," together the "2011 Secured Credit Facilities"). The 2011 A-1 and A-2 tranches were issued at 99.0% of par and 98.5% of par, respectively, and both tranches include a LIBOR floor of 1.25%. The 2011 Secured Credit Facilities were refinanced by the October 2012 Secured Credit Facility.

20

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Unencumbered/Encumbered Assets—As of March 31, 2013, the carrying value of the Company's unencumbered and encumbered assets by asset type are as follows ($ in thousands):
 
As of
 
March 31, 2013
 
December 31, 2012
 
Encumbered Assets
 
Unencumbered Assets
 
Encumbered Assets
 
Unencumbered Assets
Real estate, net
$
1,649,658

 
$
1,135,146

 
$
1,794,198

 
$
1,004,825

Real estate available and held for sale
252,354

 
346,707

 
141,673

 
494,192

Loans receivable, net(1)
1,076,080

 
537,476

 
1,197,373

 
665,712

Other investments
34,130

 
369,629

 
43,545

 
355,298

Cash and other assets

 
706,838

 

 
487,073

Total
$
3,012,222

 
$
3,095,796

 
$
3,176,789

 
$
3,007,100

Explanatory Note:
_______________________________________________________________________________
(1)
As of March 31, 2013 and December 31, 2012, the amounts presented exclude general reserves for loan losses of $30.9 million and $33.1 million, respectively.
Debt Covenants
The Company's outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness of at least 1.2x and a restriction on debt incurrence based upon the effect of the debt incurrence on the Company's fixed charge coverage ratio. If any of the Company's covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. While the Company expects that its ability to incur new indebtedness under the fixed charge coverage ratio will be limited for the foreseeable future, it will continue to be permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.
The Company's March 2012 Secured Credit Facilities and February 2013 Secured Credit Facility are collectively defined as the "Secured Credit Facilities." The Company's Secured Credit Facilities contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the Company is required to maintain collateral coverage of 1.25x outstanding borrowings. In addition, for so long as the Company maintains its qualification as a REIT, the Secured Credit Facilities permit the Company to distribute 100% of its REIT taxable income on an annual basis and the February 2013 Secured Credit Facility permits the Company to distribute to its shareholders real estate assets, or interests therein, having an aggregate equity value not to exceed $200 million, so long as such assets are not collateral for the February 2013 Secured Credit Facility. The Company may not pay common dividends if it ceases to qualify as a REIT (except that the February 2013 Secured Credit Facility permits us to distribute certain real estate assets as described in the preceding sentence).
The Company's Secured Credit Facilities contain cross default provisions that would allow the lenders to declare an event of default and accelerate the Company's indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company's unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company's indebtedness to them if the Company's other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.
Note 9—Commitments and Contingencies
Business Risks and Uncertainties—The Company's business continues to recover from the recent economic recession, as commercial real estate values and the availability of liquidity have improved. The Company raised approximately $3.51 billion through secured and unsecured debt transactions in 2012, the proceeds of which were used to repay and/or refinance a significant portion of its debt that was due to mature before 2017. The Company's three unsecured senior notes transactions in 2012 marked the first time that the Company accessed the unsecured debt markets since 2008 and, following an upgrade in the Company's

21

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



corporate credit ratings, the Company saw a material improvement in the interest rates associated with its unsecured senior notes issued in the latter half of 2012, as compared to the notes issued in the first half of the year. In 2013, the Company was able to further reduce the interest costs associated with its October 2012 Secured Credit Facility by amending and restating that facility to reduce the interest rate and floor. In addition, the Company raised $194.0 million in net proceeds from its Series J Convertible Preferred Stock offering to provide liquidity for new investment originations and general corporate purposes.
While the Company has benefited from generally improving conditions in the economy and real estate markets, it nonetheless continues to be impacted by the effects of the recent financial crisis. Non-performing assets and the carrying costs of owned real estate negatively impact the Company's earnings. The Company continues to work on resolving its remaining non-performing loans and stabilizing and extracting value from its owned real estate. Continued improvement in the Company's financial condition and operating results and its ability to continue to generate sufficient liquidity at market rates are dependent on a sustained economic recovery, which cannot be predicted with certainty.
As of March 31, 2013, the Company had $545.3 million of debt maturities due before December 31, 2013, with a majority of that amount due in October 2013. The Company's capital sources to meet its debt maturities throughout 2013 will primarily include cash on hand, as well as debt refinancings, proceeds from unencumbered asset sales and loan repayments from borrowers, and may include equity capital raising transactions. As of March 31, 2013, the Company had unencumbered assets with a carrying value of approximately $3.10 billion. As further described in Note 16, in April 2013 the Company sold its interest in LNR for net proceeds of $220.3 million.
The Company will adjust its plans as appropriate in response to changes in its expectations and changes in market conditions. However, it is not possible for the Company to predict whether improving economic trends will continue, or to quantify the impact of these or other trends on its financial results. If the Company fails to repay its obligations as they become due, it would be an event of default under the relevant debt instruments, which could result in a cross-default and acceleration of the Company's other outstanding debt obligations, all of which would have a material adverse effect on the Company.
Unfunded Commitments—As of March 31, 2013, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments, that it approves all Discretionary Fundings and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
 
Loans
 
Real Estate
 
Strategic
Investments
 
Total
Performance-Based Commitments
$
39,411

 
$
33,064

 
$

 
$
72,475

Discretionary Fundings
125

 

 

 
125

Strategic investments

 

 
47,040

 
47,040

Total
$
39,536

 
$
33,064

 
$
47,040

 
$
119,640

Legal Proceedings—The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company's business as a finance and investment company focused on the commercial real estate industry, including loan foreclosure and foreclosure-related proceedings.
On June 4, 2012, the Company reached an agreement in principle with the plaintiffs' Court-appointed representatives in the previously reported Citiline class action to settle the litigation. Settlement payments will be primarily funded by the Company's insurance carriers, with the Company contributing $2.0 million to the settlement, which was included in "Other expense" on the Consolidated Statement of Operations for the year ended December 31, 2012. On April 5, 2013, the Court approved the settlement, entered a Final Judgment and Order of Dismissal With Prejudice and the Citiline Action was concluded. See "Part II. Item 1. Legal Proceedings" for further details and for other disclosures related to legal proceedings.
The Company evaluates, on a quarterly basis, developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company's consolidated financial condition.


22

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



Note 10—Risk Management and Derivatives
The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate hedges and foreign exchange hedges. The principal objective of such hedges is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to foreign exchange rates. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 ($ in thousands):
 
Derivative Assets as of
 
Derivative Liabilities as of
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
Derivative
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign exchange contracts
Other Assets
 
$
10,522

 
N/A
 
$

 
N/A
 
$

 
Other Liabilities
 
$
2,855

Cash flow interest rate swap
N/A
 

 
N/A
 

 
Other Liabilities
 
455

 
Other Liabilities
 
580

Total
 
 
$
10,522

 
 
 
$

 
 
 
$
455

 
 
 
$
3,435

The tables below present the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion)
 
Amount of Gain (Loss) Recognized in Earnings (Ineffective Portion)
For the Three Months Ended March 31, 2013
 
 
 
 

 
 

 
 
Cash flow interest rate swap
 
Interest Expense
 
$
37

 
$
74

 
N/A
For the Three Months Ended March 31, 2012
 
 
 
 

 
 

 
 
Cash flow interest rate swap
 
Interest Expense
 
$
(205
)
 
$
(5
)
 
N/A
 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on Derivative
 
 
Location of Gain or
(Loss) Recognized in
Income on Derivative
 
For the Three Months Ended March 31,
Derivatives not Designated in Hedging Relationships
 
2013
 
2012
Foreign Exchange Contracts
 
Other Expense
 
$
10,156

 
$
(8,859
)
The Company utilizes foreign exchange derivatives to limit its exposure to changes in exchange rates on certain assets denominated in foreign currencies. The Company marks its foreign investments to market each quarter based on current exchange rates and records the gain or loss through “Other expense” on its Consolidated Statements of Operations for loan investments or “Accumulated comprehensive income,” on its Consolidated Balance Sheets for net investments in foreign subsidiaries. Gains or losses on the related foreign exchange derivatives are recorded in “Other Expense,” as noted in the table above, and offset the marks taken on the assets. During the three months ended March 31, 2013 and 2012, the Company recorded net losses related to foreign investments of $0.1 million and $0.1 million, respectively, in its Consolidated Statements of Operations.

23

iStar Financial Inc.
Notes to Consolidated Financial Statements
(unaudited)



The following table presents the Company's foreign currency derivatives outstanding as of March 31, 2013 ($ in thousands):
Derivative Type
 
Notional
Amount
 
Notional
(USD Equivalent)
 
Maturity