10-Q 1 star-03312014x10q.htm 10-Q STAR-03.31.2014-10Q
 
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, 2014
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 (§232.405 of this chapter) 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 1, 2014, there were 84,854,672 shares of common stock, $0.001 par value per share, of iStar Financial Inc. ("Common Stock") outstanding.
 



TABLE OF CONTENTS
 
 
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,
2014
 
December 31,
2013
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
3,147,119

 
$
3,220,634

Less: accumulated depreciation
(433,149
)
 
(424,453
)
Real estate, net
2,713,970

 
2,796,181

Real estate available and held for sale
334,691

 
360,517

 
3,048,661

 
3,156,698

Loans receivable and other lending investments, net
1,476,490

 
1,370,109

Other investments
205,097

 
207,209

Cash and cash equivalents
409,598

 
513,568

Restricted cash
50,593

 
48,769

Accrued interest and operating lease income receivable, net
15,745

 
14,941

Deferred operating lease income receivable
94,911

 
92,737

Deferred expenses and other assets, net
186,620

 
237,980

Total assets
$
5,487,715

 
$
5,642,011

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
112,195

 
$
170,831

Debt obligations, net
4,102,050

 
4,158,125

Total liabilities
4,214,245

 
4,328,956

Commitments and contingencies

 

Redeemable noncontrolling interests
11,353

 
11,590

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

 
4

High Performance Units
9,800

 
9,800

Common Stock, $0.001 par value, 200,000 shares authorized,145,471 issued and 84,855 outstanding at March 31, 2014 and 144,334 issued and 83,717 outstanding at December 31, 2013
145

 
144

Additional paid-in capital
4,013,303

 
4,022,138

Retained earnings (deficit)
(2,549,079
)
 
(2,521,618
)
Accumulated other comprehensive income (loss) (see Note 11)
(5,672
)
 
(4,276
)
Treasury stock, at cost, $0.001 par value, 60,617 shares at March 31, 2014 and December 31, 2013
(262,954
)
 
(262,954
)
Total iStar Financial Inc. shareholders' equity
1,205,569

 
1,243,260

Noncontrolling interests
56,548

 
58,205

Total equity
1,262,117

 
1,301,465

Total liabilities and equity
$
5,487,715

 
$
5,642,011

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

1


iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended
March 31,
 
2014
 
2013
Revenues:
 
 
 
Operating lease income
$
62,108

 
$
58,015

Interest income
27,914

 
24,667

Other income
14,584

 
11,393

Land sales revenue
4,143

 

Total revenues
108,749

 
94,075

Costs and expenses:
 
 
 
Interest expense
57,456

 
71,566

Real estate expense
42,613

 
37,808

Land cost of sales
3,654

 

Depreciation and amortization
18,613

 
17,324

General and administrative
19,788

 
21,848

Provision for (recovery of) loan losses
(3,400
)
 
10,206

Impairment of assets
2,979

 

Other expense
221

 
5,625

Total costs and expenses
141,924

 
164,377

Income (loss) before earnings from equity method investments and other items
(33,175
)
 
(70,302
)
Loss on early extinguishment of debt, net
(1,180
)
 
(9,541
)
Earnings from equity method investments
3,177

 
21,678

Income (loss) from continuing operations before income taxes
(31,178
)
 
(58,165
)
Income tax (expense) benefit
507

 
(4,075
)
Income (loss) from continuing operations(1)
(30,671
)
 
(62,240
)
Income (loss) from discontinued operations

 
1,246

Gain from discontinued operations

 
5,044

Income from sales of residential property
16,494

 
23,697

Net income (loss)
(14,177
)
 
(32,253
)
Net (income) loss attributable to noncontrolling interests
(454
)
 
189

Net income (loss) attributable to iStar Financial Inc. 
(14,631
)
 
(32,064
)
Preferred dividends
(12,830
)
 
(10,580
)
Net (income) loss allocable to HPU holders and Participating Security holders(2)(3)
889

 
1,381

Net income (loss) allocable to common shareholders
$
(26,572
)
 
$
(41,263
)
Per common share data(1):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
Basic and diluted
$
(0.31
)
 
$
(0.56
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
Basic and diluted
$
(0.31
)
 
$
(0.49
)
Weighted average number of common shares—basic and diluted
84,819

 
84,824

Per HPU share data(1)(2):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
Basic and diluted
$
(59.27
)
 
$
(105.61
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
Basic and diluted
$
(59.27
)
 
$
(92.07
)
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, 2014 and 2013 was $(31.3) million and $(62.1) 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.
(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.

2


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

 
For the Three Months Ended
March 31,
 
2014
 
2013
Net income (loss)
$
(14,177
)
 
$
(32,253
)
Other comprehensive income (loss):
 
 
 
Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(1)
135

 
74

Unrealized gains/(losses) on available-for-sale securities
68

 
225

Unrealized gains/(losses) on cash flow hedges
(1,762
)
 
37

Unrealized gains/(losses) on cumulative translation adjustment
163

 
(615
)
Other comprehensive income (loss)
(1,396
)
 
(279
)
Comprehensive income (loss)
(15,573
)
 
(32,532
)
Net (income) loss attributable to noncontrolling interests
(454
)
 
189

Comprehensive income (loss) attributable to iStar Financial Inc. 
$
(16,027
)
 
$
(32,343
)
Explanatory Note:
_______________________________________________________________________________

(1)
Included in "Interest expense" on the Company's Consolidated Statements of Operations.


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

3


iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2014 and 2013
(In thousands)
(unaudited)

 
 
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, 2013
 
$
22

 
$
4

 
$
9,800

 
$
144

 
$
4,022,138

 
$
(2,521,618
)
 
$
(4,276
)
 
$
(262,954
)
 
$
58,205

 
$
1,301,465

Dividends declared—preferred
 

 

 

 

 

 
(12,830
)
 

 

 

 
(12,830
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 
1

 
(8,589
)
 

 

 

 

 
(8,588
)
Net loss for the period(2)
 

 

 

 

 

 
(14,631
)
 

 

 
938

 
(13,693
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
(1,396
)
 

 

 
(1,396
)
Additional paid in capital attributable to redeemable noncontrolling interest
 

 

 

 

 
(246
)
 

 

 

 

 
(246
)
Distributions to noncontrolling interests
 

 

 

 

 

 

 

 

 
(2,595
)
 
(2,595
)
Balance at March 31, 2014
 
$
22

 
$
4

 
$
9,800

 
$
145

 
$
4,013,303

 
$
(2,549,079
)
 
$
(5,672
)
 
$
(262,954
)
 
$
56,548

 
$
1,262,117



4


iStar Financial Inc.
Consolidated Statements of Changes in Equity (Continued)
For the Three Months Ended March 31, 2014 and 2013
(In thousands)
(unaudited)

 
 
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 unit 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, 2014 and 2013, net loss shown above excludes $484 and $519, respectively, of net loss attributable to redeemable noncontrolling interests.
(3)
Includes $9.4 million of operating property assets contributed by a noncontrolling partner (see Note 4).
(4)
Includes an $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,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(14,177
)
 
$
(32,253
)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Provision for (recovery of) loan losses
(3,400
)
 
10,206

Impairment of assets
2,979

 

Depreciation and amortization
18,613

 
17,354

Land cost of sales
3,654

 

Payments for withholding taxes upon vesting of stock-based compensation
(13,456
)
 
(9,894
)
Non-cash expense for stock-based compensation
2,075

 
5,202

Amortization of discounts/premiums and deferred financing costs on debt
4,668

 
5,000

Amortization of discounts/premiums and deferred interest on loans
(12,527
)
 
(6,853
)
Earnings from equity method investments
(3,177
)
 
(21,678
)
Distributions from operations of equity method investments
8,630

 
6,109

Deferred operating lease income
(2,691
)
 
(3,592
)
Income from sales of residential property
(16,494
)
 
(23,697
)
Gain from discontinued operations

 
(5,044
)
Loss on early extinguishment of debt, net
1,180

 
9,541

Repayments and repurchases of debt—debt discount and prepayment penalty
(660
)
 
(20,057
)
Other operating activities, net
1,205

 
1,537

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable, net
(804
)
 
973

Changes in deferred expenses and other assets, net
6,418

 
(12,420
)
Changes in accounts payable, accrued expenses and other liabilities
(42,714
)
 
(4,125
)
Cash flows from operating activities
(60,678
)
 
(83,691
)
Cash flows from investing activities:
 
 
 
Investment originations and fundings
(193,943
)
 
(13,321
)
Acquisitions of and capital expenditures on real estate assets
(30,314
)
 
(25,104
)
Repayments of and principal collections on loans
102,928

 
193,288

Net proceeds from sales of loans

 
37,703

Net proceeds from sales of real estate
157,090

 
107,192

Distributions from other investments
19,558

 
13,024

Contributions to other investments
(22,978
)
 
(1,448
)
Other investing activities, net
(1,023
)
 
143

Cash flows from investing activities
31,318

 
311,477

Cash flows from financing activities:
 
 
 
Borrowings from debt obligations
2,067

 
658,700

Repayments of debt obligations
(60,863
)
 
(846,562
)
Preferred dividends paid
(12,830
)
 
(10,580
)
Proceeds from issuance of preferred stock

 
193,510

Other financing activities, net
(2,984
)
 
(10,804
)
Cash flows from financing activities
(74,610
)
 
(15,736
)
Changes in cash and cash equivalents
(103,970
)
 
212,050

Cash and cash equivalents at beginning of period
513,568

 
256,344

Cash and cash equivalents at end of period
$
409,598

 
$
468,394


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 lease, operating properties and land (see Note 15).

Organization—The Company began its business in 1993 through the management of 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, 2013.
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 2014 presentation.
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. The Company's involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in "operating lease income," "earnings from equity method investments," "other income," "real estate expense" and "interest expense" in the Company's Consolidated Statements of Operations. The Company has not provided financial support to these VIEs that it was not previously contractually required to provide.
    
Consolidated VIEs—As of March 31, 2014, the Company consolidated 5 VIEs for which the Company is considered the primary beneficiary. At March 31, 2014, the total assets of these consolidated VIEs were $212.9 million and total liabilities were $34.1 million. The classifications of these assets are primarily within "real estate, net," "loans receivable and other lending investments, net" and "other investments" on the Company's Consolidated Balance Sheets. The classifications of liabilities are primarily within "debt obligations, net," and "accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company's total unfunded commitments related to consolidated VIEs was $38.8 million as of March 31, 2014.

Unconsolidated VIEs—As of March 31, 2014, 27 of the Company's 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, 2014, the Company's maximum exposure to loss from these investments does not exceed the sum of the $157.0 million carrying value of the investments, which are classified in "other investments" on the Company's Consolidated Balance Sheets, and $29.4 million of related unfunded commitments.


7

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

Note 3—Summary of Significant Accounting Policies

As of March 31, 2014, 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, 2013, have not changed materially other than the policies described below.
Real estate
Capitalization—For real estate projects, the Company begins to capitalize qualified development and construction costs, including interest, real estate taxes, compensation and certain other carrying costs incurred which are specifically identifiable to a development project once activities necessary to get the asset ready for its intended use have commenced. If specific allocation of costs is not practicable, the Company will allocate costs based on relative fair value prior to construction or relative sales value, relative size or other value methods as appropriate during construction. The Company ceases capitalization on the portions substantially completed and ready for their intended use.

Dispositions—Revenues from sales of land are recognized in accordance with Accounting Standards Codification ("ASC") 360-20, Real Estate Sales. Sales of land are recognized for full profit recognition upon closing of the sale transactions, when the profit is determinable, the earnings process is virtually complete, the parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions for closing have been performed. Revenues from sales of land are included in "Land sales revenue" and costs of land sales are included in "Land cost of sales" on the Company’s Consolidated Statements of Operations.

New Accounting Pronouncements
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). This guidance requires disposals of a component of an entity or group of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results to be reported as discontinued operations. Assets and liabilities of a disposal group that includes a discontinued operation must be presented separately in asset and liability sections, respectively, of the Company's Consolidated Balance Sheets for each comparative period. Expanded disclosures about the assets, liabilities, revenues and expenses of discontinued operations are also required. For individually significant disposals that do not qualify as discontinued operations, disclosure of pre-tax income is required. ASU 2014-08 is effective for interim and annual periods beginning on or after December 15, 2014. Early adoption is permitted for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. The Company has elected to early adopt ASU 2014-08 beginning with disposals and classifications of assets as held for sale that occurred after December 31, 2013.

8

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

Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease
 
Operating
Properties
 
Land
 
Total
As of March 31, 2014
 
 
 
 
 
 
 
Land and land improvements
$
328,143

 
$
132,934

 
$
809,517

 
$
1,270,594

Buildings and improvements
1,283,103

 
593,422

 

 
1,876,525

Less: accumulated depreciation and amortization
(343,294
)
 
(86,173
)
 
(3,682
)
 
(433,149
)
Real estate, net
$
1,267,952

 
$
640,183

 
$
805,835

 
$
2,713,970

Real estate available and held for sale

 
204,653

 
130,038

 
334,691

Total real estate
$
1,267,952

 
$
844,836

 
$
935,873

 
$
3,048,661

As of December 31, 2013
 
 
 
 
 
 
 
Land and land improvements
$
350,817

 
$
132,934

 
$
803,238

 
$
1,286,989

Buildings and improvements
1,346,071

 
587,574

 

 
1,933,645

Less: accumulated depreciation and amortization
(338,640
)
 
(82,420
)
 
(3,393
)
 
(424,453
)
Real estate, net
$
1,358,248

 
$
638,088

 
$
799,845

 
$
2,796,181

Real estate available and held for sale

 
228,328

 
132,189

 
360,517

Total real estate
$
1,358,248

 
$
866,416

 
$
932,034

 
$
3,156,698


Real estate available and held for sale—As of March 31, 2014 and December 31, 2013, the Company had $197.7 million and $221.0 million, respectively, of residential properties available for sale in its operating properties portfolio.

Acquisitions—During the three months ended March 31, 2013, the Company acquired, via foreclosure, title to a residential operating property, which previously served as collateral for a loan receivable held by the Company. The Company contributed the residential operating property which had a fair value of $25.5 million, to an entity of which it owns 63%. Based on the control provisions in the partnership agreement, the Company consolidates the entity and reflects its partner's 37% share of equity in "Noncontrolling interests" on the Company's Consolidated Balance Sheets. The acquisition was accounted for at fair value. No gain or loss was recorded in conjunction with this transaction.

Dispositions—During the three months ended March 31, 2014 and 2013, the Company sold residential condominiums for total net proceeds of $47.7 million and $75.2 million, respectively, and recorded income from sales of residential properties totaling $16.5 million and $23.7 million, respectively. During the three months ended March 31, 2014, the Company sold residential lots from two of our master planned community properties for proceeds of $4.1 million and which had cost of sales of $3.7 million. During the same period, the Company also sold properties with a carrying value of $6.7 million for proceeds that approximated carrying value.
During the three months ended March 31, 2014, the Company sold a net lease asset for net proceeds of $93.7 million which approximated carrying value to a newly formed unconsolidated entity in which the Company has a noncontrolling equity interest of 51.9% (see Note 6).
Additionally, during the three months ended March 31, 2014, the Company sold a net lease asset for net proceeds of $7.8 million. The Company recorded an impairment loss of $3.0 million in connection with the sale.
During the three months ended March 31, 2013, the Company sold a commercial operating property with a carrying value of $24.1 million resulting in a net gain of $5.0 million. The gain was recorded as "Gain from discontinued operations" on the Company's Consolidated Statements of Operations.
Discontinued Operations—The Company has elected to early adopt ASU 2014-08 beginning with disposals and classifications of assets as held for sale that occurred after December 31, 2013. During the three months ended March 31, 2014, there were no disposals or assets classified as held for sale which were individually significant or represented a strategic shift that

9

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

has (or will have) a major effect on the Company's operations and financial results. For the three months ended March 31, 2013, income (loss) from discontinued operations was $1.2 million, which includes revenues of $2.4 million and expenses of $1.2 million.
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, 2014 and 2013 were $8.5 million and $7.7 million, respectively, and are included in “Operating lease income” on the Company's Consolidated Statements of Operations.
Allowance for doubtful accounts—As of March 31, 2014 and December 31, 2013, the allowance for doubtful accounts related to real estate tenant receivables was $2.4 million and $3.4 million, respectively and the allowance for doubtful accounts related to deferred operating lease income was $2.1 million and $2.5 million, respectively.
Note 5—Loans Receivable and Other Lending Investments, net

The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
 
As of
Type of Investment
March 31,
2014
 
December 31,
2013
Senior mortgages
$
1,103,471

 
$
1,071,662

Subordinate mortgages
61,764

 
60,679

Corporate/Partnership loans
527,865

 
473,045

Total gross carrying value of loans
$
1,693,100

 
$
1,605,386

Reserves for loan losses
(370,076
)
 
(377,204
)
Total loans receivable, net
$
1,323,024

 
$
1,228,182

Other lending investments—securities
153,466

 
141,927

Total loans receivable and other lending investments, net(1)
$
1,476,490

 
$
1,370,109


Explanatory Note:
_______________________________________________________________________________

(1)
The Company's recorded investment in loans as of March 31, 2014 and December 31, 2013 also includes accrued interest of $7.6 million and $6.5 million, respectively, which are included in "Accrued interest and operating lease income receivable, net" on the Company's Consolidated Balance Sheets.

During the three months ended March 31, 2013, the Company sold loans with total carrying values of $38.3 million, which resulted in a net realized loss of $0.6 million. Gains and losses on sales of loans are included in "Other income" on the Company's Consolidated Statements of Operations.

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,
 
2014
 
2013
Reserve for loan losses at beginning of period
$
377,204

 
$
524,499

Provision for (recovery of) loan losses(1)
(3,400
)
 
10,206

Charge-offs
(3,728
)
 
(12,910
)
Reserve for loan losses at end of period
$
370,076

 
$
521,795


Explanatory Note:
_______________________________________________________________________________
(1)
For the three months ended March 31, 2014 and 2013, the provision for loan losses includes recoveries of previously recorded loan loss reserves of $5.2 million and $4.6 million, respectively.

10

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

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, 2014
 
 
 
 
 
 
 
Loans
$
687,812

 
$
1,003,264

 
$
9,586

 
$
1,700,662

Less: Reserve for loan losses
(339,076
)
 
(31,000
)
 

 
(370,076
)
Total
$
348,736

 
$
972,264

 
$
9,586

 
$
1,330,586

As of December 31, 2013
 
 
 
 
 
 
 
Loans
$
752,425

 
$
849,613

 
$
9,889

 
$
1,611,927

Less: Reserve for loan losses
(348,004
)
 
(29,200
)
 

 
(377,204
)
Total
$
404,421

 
$
820,413

 
$
9,889

 
$
1,234,723


Explanatory Notes:
_______________________________________________________________________________

(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $0.2 million and a net premium of $0.5 million as of March 31, 2014 and December 31, 2013, 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 $7.6 million and $4.6 million as of March 31, 2014 and December 31, 2013, respectively.
(3)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.4 million and $0.4 million as of March 31, 2014 and December 31, 2013, respectively. These loans had cumulative principal balances of $9.9 million and $10.2 million, as of March 31, 2014 and December 31, 2013, 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. Risk ratings are based on judgments which are inherently uncertain and there can be no assurance that actual performance will not be different than current expectation.

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, 2014
 
December 31, 2013
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
624,044

 
2.69

 
$
591,145

 
2.50

Subordinate mortgages
62,449

 
3.40

 
61,364

 
3.37

Corporate/Partnership loans
494,012

 
3.66

 
438,831

 
3.88

  Total
$
1,180,505

 
3.14

 
$
1,091,340

 
3.11


As of March 31, 2014, 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
$
658,085

 
$

 
$
448,737

 
$
448,737

 
$
1,106,822

Subordinate mortgages
62,449

 

 

 

 
62,449

Corporate/Partnership loans
531,391

 

 

 

 
531,391

Total
$
1,251,925

 
$

 
$
448,737

 
$
448,737

 
$
1,700,662



11

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

Impaired Loans—The Company's recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
 
As of March 31, 2014
 
As of December 31, 2013
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
94,013

 
$
93,286

 
$

 
$
3,012

 
$
2,992

 
$

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
505,745

 
$
502,319

 
$
(297,173
)
 
$
650,337

 
$
645,463

 
$
(304,544
)
Corporate/Partnership loans
88,054

 
88,027

 
(41,903
)
 
99,076

 
99,067

 
(43,460
)
Subtotal
$
593,799

 
$
590,346

 
$
(339,076
)
 
$
749,413

 
$
744,530

 
$
(348,004
)
Total:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
599,758

 
$
595,605

 
$
(297,173
)
 
$
653,349

 
$
648,455

 
$
(304,544
)
Corporate/Partnership loans
88,054

 
88,027

 
(41,903
)
 
99,076

 
99,067

 
(43,460
)
Total
$
687,812

 
$
683,632

 
$
(339,076
)
 
$
752,425

 
$
747,522

 
$
(348,004
)

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, 2014 and December 31, 2013, certain loans modified through troubled debt restructurings with a recorded investment of $167.7 million and $231.8 million, respectively, are also included as impaired loans in accordance with GAAP although they are performing and on accrual status.

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,
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
$
48,512

 
$
501

 
$
63,394

 
$
844

Corporate/Partnership loans

 

 
10,110

 
120

Subtotal
$
48,512

 
$
501

 
$
73,504

 
$
964

With an allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
$
578,041

 
$
53

 
$
911,082

 
$
506

Subordinate mortgages

 

 
53,888

 

Corporate/Partnership loans
93,565

 
65

 
62,326

 
78

Subtotal
$
671,606

 
$
118

 
$
1,027,296

 
$
584

Total:
 
 
 
 
 
 
 
Senior mortgages
$
626,553

 
$
554

 
$
974,476

 
$
1,350

Subordinate mortgages

 

 
53,888

 

Corporate/Partnership loans
93,565

 
65

 
72,436

 
198

Total
$
720,118

 
$
619

 
$
1,100,800

 
$
1,548


Troubled Debt Restructurings—During the three months ended March 31, 2014 the Company did not modify loans that were determined to be troubled debt restructurings. During the three months ended March 31, 2013, the Company modified one loan that was determined to be a troubled debt restructuring.


12

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

The recorded investment in this loan was impacted by the modification as follows, presented by class ($ in thousands):
 
For the Three Months Ended March 31,
 
2014
 
2013
 
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


During the three months ended March 31, 2013, the Company restructured one non-performing loan with a recorded investment of $72.7 million in which the Company received a $13.3 million paydown and accepted a discounted payoff option on this loan. At the time of the restructuring, the Company reclassified the loan from non-performing to performing status as the Company believed the borrower would perform under the modified terms of the agreement. The loan was repaid in January 2014 at the discounted payoff amount.
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, 2014, the Company had $6.7 million of unfunded commitments associated with modified loans considered troubled debt restructurings.
 
Securities—As of March 31, 2014, other lending investments—securities includes the following ($ in thousands):
 
Face Value
 
Amortized Cost Basis
 
Net Unrealized Gain (Loss)
 
Estimated Fair Value
 
Net Carrying Value
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
1,040

 
$
1,040

 
$
47

 
$
1,087

 
$
1,087

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Corporate debt securities
149,176

 
152,379

 

 
152,379

 
152,379

Total
$
150,216

 
$
153,419

 
$
47

 
$
153,466

 
$
153,466


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, 2014
 
December 31, 2013
 
2014
 
2013
Real estate equity investments
$
82,546

 
$
62,205

 
$
245

 
$
1,763

Other equity method investments
46,605

 
45,954

 
1,036

 
1,753

Madison Funds
45,520

 
67,782

 
(402
)
 
2,259

Oak Hill Funds
20,810

 
21,366

 
2,298

 
1,157

LNR

 

 

 
14,746

Total equity method investments
$
195,481

 
$
197,307

 
$
3,177

 
$
21,678

Other
9,616

 
9,902

 
 
 
 
Total other investments
$
205,097

 
$
207,209

 
 
 
 

13

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

LNR—In July 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.

Beginning in September 2012, the Company and other owners of LNR entered into negotiations with potential purchasers of LNR. After an extensive due diligence and negotiation process, the LNR owners entered into a definitive contract to sell LNR in January 2013 at a fixed sale price which, from the Company's perspective, reflected in part the Company's then-current expectations about the future results of LNR and potential volatility in its business. The definitive sale contract provided that LNR would not make cash distributions to its owners during the fourth quarter of 2012 through the closing of the sale. Notwithstanding the fixed terms of the contract, our investment balance in LNR increased due to equity in earnings recorded which resulted in our recognition of other than temporary impairment on our investment during the year ended December 31, 2013. In April 2013, the Company completed the sale of its 24% equity interest in LNR and received $220.3 million in net proceeds. Approximately $25.2 million of net proceeds were placed in escrow for potential indemnification obligations, which was released to the Company in April 2014.
The following table represents investee level summarized financial information for LNR ($ in thousands)(1):
 
For the Three Months
Ended December 31,
 
2012
Income Statements
 
Total revenue(2)
$
77,780

Income tax (expense) benefit
$
(279
)
Net income attributable to LNR
$
189,249

iStar's ownership percentage
24
%
iStar's equity in earnings from LNR(3)
$
45,375


Explanatory Notes:
_______________________________________________________________________________

(1)
The Company recorded its investment in LNR, which was sold in April 2013, on a one quarter lag. Therefore, the amounts in the Company's financial statements for the three months ended March 31, 2013 were based on balances and results from LNR for the three months ended December 31, 2012.
(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 included in the amounts presented above. For the three months ended December 31, 2012, total revenue presented above includes $29.3 million 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)
During the three months ended March 31, 2013, the Company recorded an other than temporary impairment of $30.9 million.

The following table reconciles the activity related to the Company's investment in LNR for the three months ended March 31, 2013 ($ in thousands):
 
For the Three Months Ended March 31, 2013
 
 
Carrying value of LNR at beginning of period
$
205,773

 
 
Equity in earnings of LNR for the period
$
45,375

 
(a)
Balance before other than temporary impairment
$
251,148

 
 
Other than temporary impairment
$
(30,867
)
 
(b)
Carrying value of LNR at end of period
$
220,281

 
 
For the three months ended March 31, 2013, the amount that was recognized as income in the Company's Consolidated Statements of Operations is the sum of items (a) and (b), or $14.7 million.

14

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

Madison Funds—As of March 31, 2014, 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 these entities are variable interest entities and that the Company is not the primary beneficiary.
Oak Hill Funds—As of March 31, 2014, 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.
Real estate equity investments—During the three months ended March 31, 2014, the Company sold a net lease asset for net proceeds of $93.7 million to a newly formed unconsolidated entity in which the Company contributed $17.7 million for a noncontrolling equity interest of approximately 51.9%. The Company partnered with a sovereign wealth fund to form the venture in which the partners plan to contribute up to an aggregate $500 million of equity to acquire and develop net lease assets over time. The Company is responsible for sourcing new opportunities and managing the venture and its assets in exchange for a promote and management fee. Several of the Company's senior executives whose time is substantially devoted to the net lease venture own a total of 0.6% equity ownership in the venture via co-investment. These executives are also entitled to an amount equal to 50% of any promote payment received based on the 47.5% partner's interest. As of March 31, 2014, the Company had a recorded equity interest of $17.1 million.

In addition, as of March 31, 2014, the Company's other real estate equity investments included equity interests in real estate ventures ranging from 31% to 76%, comprised of investments of $16.4 million in net lease assets, $15.8 million in operating properties and $33.3 million in land assets. As of December 31, 2013, the Company's real estate equity investments included $16.4 million in net lease assets, $16.0 million in operating properties and $29.8 million in land assets. One of the Company's equity investments in operating properties represents a 33% interest in residential property units. For the three months ended March 31, 2013, the Company's earnings from its interest in this property includes income from sales of residential units of $2.5 million.

Other investments—The Company also had smaller investments in real estate related funds and other strategic investments in several other entities that were accounted for under the equity method or cost method.


15

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

Note 7—Other Assets and Other Liabilities

Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
March 31, 2014
 
December 31, 2013
Intangible assets, net(1)
$
60,014

 
$
100,652

Other receivables
25,939

 
34,655

Deferred financing fees, net(2)
31,048

 
33,591

Leasing costs, net(3)
22,240

 
21,799

Corporate furniture, fixtures and equipment, net(4)
6,190

 
6,557

Other assets
41,189

 
40,726

Deferred expenses and other assets, net
$
186,620

 
$
237,980


Explanatory Notes:
_______________________________________________________________________________

(1)
Intangible assets, net are primarily related to the acquisition of real estate assets. Accumulated amortization on intangible assets was $34.6 million and $38.1 million as of March 31, 2014 and December 31, 2013, respectively. The amortization of above market leases decreased operating lease income on the Company's Consolidated Statements of Operations by $2.3 million and $1.6 million for the three months ended March 31, 2014 and 2013, respectively. The amortization expense for other intangible assets was $2.5 million and $2.5 million for the three months ended March 31, 2014 and 2013, respectively. These amounts are included in “Depreciation and amortization” on the Company's Consolidated Statements of Operations.
(2)
Accumulated amortization on deferred financing fees was $11.5 million and $9.9 million as of March 31, 2014 and December 31, 2013, respectively.
(3)
Accumulated amortization on leasing costs was $7.0 million and $7.1 million as of March 31, 2014 and December 31, 2013, respectively.
(4)
Accumulated depreciation on corporate furniture, fixtures and equipment was $6.4 million and $6.2 million as of March 31, 2014 and December 31, 2013, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
March 31, 2014
 
December 31, 2013
Accrued expenses
$
31,230

 
$
58,840

Accrued interest payable
29,378

 
40,015

Intangible liabilities, net(1)
13,619

 
26,223

Other liabilities
37,968

 
45,753

Accounts payable, accrued expenses and other liabilities
$
112,195

 
$
170,831


Explanatory Note:
_______________________________________________________________________________

(1)
Intangible liabilities, net are primarily related to the acquisition of real estate assets. Accumulated amortization on intangible liabilities was $4.5 million and $4.6 million as of March 31, 2014 and December 31, 2013, respectively. The amortization of intangible liabilities increased operating lease income on the Company's Consolidated Statements of Operations by $0.7 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively.

Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
 
As of
 
March 31, 2014
 
December 31, 2013
Deferred tax assets(1)
$
56,801

 
$
55,962

Valuation allowance
(56,801
)
 
(55,962
)
Net deferred tax assets (liabilities)
$

 
$

Explanatory Note:
_______________________________________________________________________________
(1)
Deferred tax assets as of March 31, 2014 include real estate basis differences of $33.3 million, net operating loss carryforwards of $16.0 million and investment basis differences of $7.5 million. Deferred tax assets as of December 31, 2013 include real estate basis differences of $33.0 million, net operating loss carryforwards of $14.9 million and investment basis differences of $8.1 million.


16

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

Note 8—Debt Obligations, net

As of March 31, 2014 and December 31, 2013, the Company's debt obligations were as follows ($ in thousands):
 
Carrying Value as of
 
 
 
 
 
March 31,
2014
 
December 31,
2013
 
Stated
Interest Rates
 
Scheduled
Maturity Date
Secured credit facilities and term loans:
 
 
 
 
 
 
 
2012 Tranche A-2 Facility
$
418,145

 
$
431,475

 
LIBOR + 5.75%

(1)
March 2017
February 2013 Secured Credit Facility
1,333,372

 
1,379,407

 
LIBOR + 3.50%

(2)
October 2017
Term loans collateralized by net lease assets
278,726

 
278,817

 
4.851% - 7.26%

(3)
Various through 2026
Total secured credit facilities and term loans
$
2,030,243

 
$
2,089,699

 
 

 
 
Unsecured notes:
 
 
 
 
 
 
 
6.05% senior notes
105,765

 
105,765

 
6.05
%
 
April 2015
5.875% senior notes
261,403

 
261,403

 
5.875
%
 
March 2016
3.875% senior notes
265,000

 
265,000

 
3.875
%
 
July 2016
3.0% senior convertible notes(4)
200,000

 
200,000

 
3.0
%
 
November 2016
1.50% senior convertible notes(5)
200,000

 
200,000

 
1.50
%
 
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
4.875% senior notes
300,000

 
300,000

 
4.875
%
 
July 2018
Total unsecured notes
$
2,006,890

 
$
2,006,890

 
 

 
 
Other debt obligations:

 
 
 
 
 
 
Other debt obligations
$
100,000

 
$
100,000

 
LIBOR + 1.50%

 
October 2035
Total debt obligations
$
4,137,133

 
$
4,196,589

 
 

 
 
Debt discounts, net
(35,083
)
 
(38,464
)
 
 

 
 
Total debt obligations, net
$
4,102,050

 
$
4,158,125

 
 

 
 

Explanatory Notes:
_______________________________________________________________________________

(1)
These loans each have a LIBOR floor of 1.25%. As of March 31, 2014, inclusive of the floor, the 2012 Tranche A-2 Facility loan incurred interest at a rate of 7.00%.
(2)
This loan has a LIBOR floor of 1.00%. As of March 31, 2014, inclusive of the floor, the February 2013 Secured Credit Facility incurred interest at a rate of 4.50%.
(3)
Includes a loan with a floating rate of LIBOR plus 2.00% and a loan with a floating rate of LIBOR plus 2.75%.
(4)
The Company's 3.0% senior convertible fixed rate notes due November 2016 ("3.0% Convertible Notes") are convertible at the option of the holders, into 85.0 shares per $1,000 principal amount of 3.0% Convertible Notes, at any time prior to the close of business on November 14, 2016.
(5)
The Company's 1.50% senior convertible fixed rate notes due November 2016 ("1.50% Convertible Notes") are convertible at the option of the holders, into 57.8 shares per $1,000 principal amount of 1.50% Convertible Notes, at any time prior to the close of business on November 14, 2016.


17

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

Future Scheduled Maturities—As of March 31, 2014, future scheduled maturities of outstanding long-term debt obligations are as follows ($ in thousands):
 
Unsecured Debt
 
Secured Debt
 
Total
2014 (remaining nine months)
$

 
$
23,603

 
$
23,603

2015
105,765

 

 
105,765

2016
926,403

 

 
926,403

2017
374,722

 
1,751,517

 
2,126,239

2018
600,000

 
16,611

 
616,611

Thereafter
100,000

 
238,512

 
338,512

Total principal maturities
$
2,106,890

 
$
2,030,243

 
$
4,137,133

Unamortized debt discounts, net
(10,430
)
 
(24,653
)
 
(35,083
)
Total long-term debt obligations, net
$
2,096,460

 
$
2,005,590

 
$
4,102,050


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. At March 31, 2014, the Company's collateral coverage on the February 2013 Secured Credit Facility exceeded 137.5%.
In connection with the February 2013 Secured Credit Facility transaction, the Company incurred $17.1 million of lender fees, of which $14.4 million was capitalized in "Debt Obligations, net" on the Company's Consolidated Balance Sheets and $2.7 million was recorded as a loss in "Gain (loss) on early extinguishment of debt, net" on the Company's Consolidated Statements of Operations as it related to the lenders who did not participate in the new facility. The Company also incurred $3.8 million in third party fees, of which $3.6 million was recognized in “Other expense” on the Company's Consolidated Statements of Operations, as it related primarily to those lenders from the original facility that modified their debt under the new facility, and $0.2 million was recorded in “Deferred expenses and other assets, net” on the Company's Consolidated Balance Sheets, as it related to the new lenders.
Through March 31, 2014, the Company has made cumulative amortization repayments of $373.6 million on the February 2013 Secured Credit Facility bringing the outstanding balance to $1.33 billion. Repayments of the February 2013 Secured Credit Facility prior to the scheduled maturity date have resulted in losses on early extinguishment of debt of $0.9 million for the three months ended March 31, 2014 related to the accelerated amortization of discounts and unamortized deferred financing fees on the portion of the facility that was repaid. The remaining $25.6 million of unamortized fees and discounts from the October 2012 Secured Credit Facility outstanding at the time of refinancing will continue to be amortized into 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, together with cash on hand, were used to repurchase and repay

18

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

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 required amortization payments of $41.0 million to be made every six months beginning December 31, 2012. The 2012 Tranche A-1 Facility was fully repaid in August 2013. 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. Repayments of the 2012 Tranche A-1 Facility prior to scheduled amortization dates resulted in losses on early extinguishment of debt of $3.0 million during the three months ended March 31, 2013 related to the accelerated amortization of discounts and unamortized deferred financing fees on the portion of the facility that was repaid.

Additionally, through March 31, 2014, the Company made cumulative amortization repayments of $51.9 million on the 2012 Tranche A-2 Facility. For the three months ended March 31, 2014, repayments of the 2012 Tranche A-2 Facility prior to maturity resulted in losses on early extinguishment of debt of $0.3 million related to the accelerated amortization of discounts and unamortized deferred financing fees on the portion of the facility that was repaid.

Encumbered/Unencumbered Assets—As of March 31, 2014 and December 31, 2013, the carrying value of the Company's encumbered and unencumbered assets by asset type are as follows ($ in thousands):
 
As of
 
March 31, 2014
 
December 31, 2013
 
Encumbered Assets
 
Unencumbered Assets
 
Encumbered Assets
 
Unencumbered Assets
Real estate, net
$
1,589,847

 
$
1,124,123

 
$
1,644,463

 
$
1,151,718

Real estate available and held for sale
129,005

 
205,686

 
152,604

 
207,913

Loans receivable and other lending investments, net(1)
836,572

 
670,918

 
860,557

 
538,752

Other investments
21,034

 
184,063

 
24,093

 
183,116

Cash and other assets

 
757,467

 

 
907,995

Total
$
2,576,458

 
$
2,942,257

 
$
2,681,717

 
$
2,989,494


Explanatory Note:
_______________________________________________________________________________

(1)
As of March 31, 2014 and December 31, 2013, the amounts presented exclude general reserves for loan losses of $31.0 million and $29.2 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, which may put limitations on its ability to make new investments, 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

19

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

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 the Company 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

Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company sometimes establishes a maximum amount of additional funding which it will make available to a borrower or tenant for an expansion or addition to a project if it approves of the expansion or addition in its sole discretion. The Company refers to these arrangements as Discretionary Fundings. Finally, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.

As of March 31, 2014, 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 and Other Lending Investments
 
Real Estate
 
Strategic
Investments
 
Total
Performance-Based Commitments
$
233,015

 
$
51,759

 
$

 
$
284,774

Discretionary Fundings

 

 

 

Strategic Investments

 

 
46,382

 
46,382

Total
$
233,015

 
$
51,759

 
$
46,382

 
$
331,156


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. In addition to such matters, the Company is a party to the following legal proceeding:

On March 7, 2014, a shareholder action purporting to assert derivative, class and individual claims was filed in the Circuit Court for Baltimore City, Maryland naming the Company, a number of our current and former senior executives (including our chief executive officer) and current and former directors as defendants.  The complaint seeks unspecified damages and other relief and alleges breach of fiduciary duty, breach of contract and other causes of action arising out of shares of our common stock issued by the Company to our senior executives pursuant to restricted stock unit awards granted in December 2008 and modified in July 2011. We believe the claims have no merit and we intend to defend the action vigorously.

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 Statements.


20

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

Note 10—Derivatives

The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and 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, 2014 and December 31, 2013 ($ in thousands):
 
Derivative Assets as of
 
Derivative Liabilities as of
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
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
 
$
1,467

 
Other Assets
 
$
1,418

 
Other Liabilities
 
$
1,623

 
Other Liabilities
 
$
1,653

Interest rate swap
Other Assets
 
488

 
Other Assets
 
650

 
N/A
 

 
N/A
 

Interest rate cap
Other Assets
 
8,144

 
Other Assets
 
9,107

 
N/A
 

 
N/A
 

Total
 
 
$
10,099

 
 
 
$
11,175

 
 
 
$
1,623

 
 
 
$
1,653

The tables below present the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013 ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
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, 2014
 
 
 
 

 
 

 
 
Interest rate cap
 
Interest Expense
 
$
(962
)
 
$

 
N/A
Interest rate swap
 
Interest Expense
 
$
(348
)
 
$
135

 
N/A
Foreign exchange contracts
 
Other Expense
 
$
(452
)
 
$

 
N/A
For the three months ended March 31, 2013
 
 
 
  

 
  

 
 
Interest rate swap
 
Interest Expense
 
$
37

 
$
74

 
N/A
Foreign exchange contracts—The Company is exposed to fluctuations in foreign exchange rates on investments it holds in foreign entities. The Company uses foreign exchange contracts to hedge its exposure to changes in foreign exchange rates on its foreign investments. Foreign exchange contracts involve fixing the U.S. dollar ("USD") to the respective foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The foreign exchange contracts are typically cash settled in USD for their fair value at or close to their settlement date.
For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of Accumulated Other Comprehensive Income into earnings when the hedged net investment is either sold or substantially liquidated. During the three months ended March 31, 2014, the Company entered into a foreign exchange contract to hedge its exposure in a subsidiary whose functional currency is Indian rupee ("INR").  The foreign exchange contract replaced an existing contract which matured in January 2014.

21

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

As of March 31, 2014, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations that were designated ($ in thousands):
Derivative Type
 
Notional
Amount
 
Notional
(USD Equivalent)
 
Maturity
Sells INR/Buys USD Forward
 
456,000

 
$
7,614

 
June 2015
For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Consolidated Statements of Operations within other expense. As of March 31, 2014, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations that were not designated ($ in thousands):
Derivative Type