10-Q 1 star-06302014x10q.htm 10-Q STAR-06.30.2014-10Q
 
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 June 30, 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 July 31, 2014, there were 85,153,226 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
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
3,184,770

 
$
3,220,634

Less: accumulated depreciation
(443,380
)
 
(424,453
)
Real estate, net
2,741,390

 
2,796,181

Real estate available and held for sale
354,814

 
360,517

 
3,096,204

 
3,156,698

Loans receivable and other lending investments, net
1,456,407

 
1,370,109

Other investments
241,561

 
207,209

Cash and cash equivalents
356,513

 
513,568

Restricted cash
24,147

 
48,769

Accrued interest and operating lease income receivable, net
14,335

 
14,941

Deferred operating lease income receivable
97,170

 
92,737

Deferred expenses and other assets, net
187,148

 
237,980

Total assets
$
5,473,485

 
$
5,642,011

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
136,850

 
$
170,831

Debt obligations, net
4,082,511

 
4,158,125

Total liabilities
4,219,361

 
4,328,956

Commitments and contingencies

 

Redeemable noncontrolling interests
11,433

 
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, 145,770 issued and 85,153 outstanding at June 30, 2014 and 144,334 issued and 83,717 outstanding at December 31, 2013
146

 
144

Additional paid-in capital
4,009,462

 
4,022,138

Retained earnings (deficit)
(2,565,828
)
 
(2,521,618
)
Accumulated other comprehensive income (loss) (see Note 11)
(3,747
)
 
(4,276
)
Treasury stock, at cost, $0.001 par value, 60,617 shares at June 30, 2014 and December 31, 2013
(262,954
)
 
(262,954
)
Total iStar Financial Inc. shareholders' equity
1,186,905

 
1,243,260

Noncontrolling interests
55,786

 
58,205

Total equity
1,242,691

 
1,301,465

Total liabilities and equity
$
5,473,485

 
$
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 June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Operating lease income
$
60,967

 
$
57,112

 
$
123,075

 
$
115,128

Interest income
35,127

 
29,682

 
63,041

 
54,349

Other income
29,262

 
13,125

 
43,846

 
24,544

Land sales revenue
4,487

 

 
8,630

 

Total revenues
129,843

 
99,919

 
238,592

 
194,021

Costs and expenses:
 
 
 
 
 
 
 
Interest expense
56,530

 
69,157

 
113,986

 
140,723

Real estate expense
40,554

 
36,981

 
83,167

 
74,815

Land cost of sales
3,611

 

 
7,265

 

Depreciation and amortization
18,822

 
17,330

 
37,435

 
34,653

General and administrative
26,623

 
20,876

 
46,411

 
42,723

Provision for (recovery of) loan losses
(2,792
)
 
5,020

 
(6,192
)
 
15,226

Impairment of assets
3,300

 

 
6,279

 

Other expense
4,690

 
146

 
4,911

 
5,770

Total costs and expenses
151,338

 
149,510

 
293,262

 
313,910

Income (loss) before earnings from equity method investments and other items
(21,495
)
 
(49,591
)
 
(54,670
)
 
(119,889
)
Loss on early extinguishment of debt, net
(23,587
)
 
(15,242
)
 
(24,767
)
 
(24,784
)
Earnings from equity method investments
24,093

 
8,323

 
27,270

 
30,001

Income (loss) from continuing operations before income taxes
(20,989
)
 
(56,510
)
 
(52,167
)
 
(114,672
)
Income tax (expense) benefit
215

 
(429
)
 
722

 
(4,504
)
Income (loss) from continuing operations(1)
(20,774
)
 
(56,939
)
 
(51,445
)
 
(119,176
)
Income (loss) from discontinued operations

 
(57
)
 

 
1,186

Gain from discontinued operations

 
8,279

 

 
13,323

Income from sales of residential property
17,180

 
34,319

 
33,674

 
58,016

Net income (loss)
(3,594
)
 
(14,398
)
 
(17,771
)
 
(46,651
)
Net (income) loss attributable to noncontrolling interests
(325
)
 
311

 
(779
)
 
500

Net income (loss) attributable to iStar Financial Inc. 
(3,919
)
 
(14,087
)
 
(18,550
)
 
(46,151
)
Preferred dividends
(12,830
)
 
(12,780
)
 
(25,660
)
 
(23,360
)
Net (income) loss allocable to HPU holders and Participating Security holders(2)(3)
542

 
866

 
1,431

 
2,247

Net income (loss) allocable to common shareholders
$
(16,207
)
 
$
(26,001
)
 
$
(42,779
)
 
$
(67,264
)
Per common share data(1):
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
Basic and diluted
$
(0.19
)
 
$
(0.40
)
 
$
(0.50
)
 
$
(0.95
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
Basic and diluted
$
(0.19
)
 
$
(0.31
)
 
$
(0.50
)
 
$
(0.79
)
Weighted average number of common shares—basic and diluted
84,916

 
85,125

 
84,868

 
84,975

Per HPU share data(1)(2):
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
Basic and diluted
$
(36.13
)
 
$
(75.41
)
 
$
(95.40
)
 
$
(181.07
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
Basic and diluted
$
(36.13
)
 
$
(57.74
)
 
$
(95.40
)
 
$
(149.81
)
Weighted average number of HPU shares—basic and diluted
15

 
15

 
15

 
15

Explanatory Notes:
_______________________________________________________________________________

(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. was $(21.1) million and $(52.2) million for the three and six months ended June 30, 2014, respectively, and $(56.6) million and $(118.7) million for the three and six months ended June 30, 2013, 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 June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(3,594
)
 
$
(14,398
)
 
$
(17,771
)
 
$
(46,651
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of (gains)/losses on available-for-sale securities into earnings upon realization(1)

 
(603
)
 

 
(593
)
Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(2)
3,595

 
79

 
3,730

 
151

Realization of (gains)/losses on cumulative translation adjustment into earnings upon realization(1)
968

 
(1,310
)
 
968

 
(1,310
)
Unrealized gains/(losses) on available-for-sale securities
43

 
(496
)
 
111

 
(281
)
Unrealized gains/(losses) on cash flow hedges
(2,842
)
 
1,188

 
(4,604
)
 
1,226

Unrealized gains/(losses) on cumulative translation adjustment
161

 
240

 
324

 
(374
)
Other comprehensive income (loss)
1,925

 
(902
)

529

 
(1,181
)
Comprehensive income (loss)
(1,669
)
 
(15,300
)
 
(17,242
)
 
(47,832
)
Net (income) loss attributable to noncontrolling interests
(325
)
 
311

 
(779
)
 
500

Comprehensive income (loss) attributable to iStar Financial Inc. 
$
(1,994
)
 
$
(14,989
)
 
$
(18,021
)
 
$
(47,332
)
Explanatory Notes:
_______________________________________________________________________________

(1)
Included in "Earnings from equity method investments" on the Company's Consolidated Statements of Operations.
(2)
For the three and six months ended June 30, 2014, $3,634 is included in "Other expense" on the Company's Consolidated Statements of Operations (see Note 10). Included in "Interest expense" on the Company's Consolidated Statements of Operations are $(39) and $96 for the three and six months ended June 30, 2014, respectively, and $79 and $151 for the three and six months ended June 30, 2013, respectively.


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

3


iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 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
 

 

 

 

 

 
(25,660
)
 

 

 

 
(25,660
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 
2

 
(12,024
)
 

 

 

 

 
(12,022
)
Net loss for the period(2)
 

 

 

 

 

 
(18,550
)
 

 

 
1,588

 
(16,962
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
529

 

 

 
529

Additional paid in capital attributable to redeemable noncontrolling interest
 

 

 

 

 
(652
)
 

 

 

 

 
(652
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 

 

 
472

 
472

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 

 
(4,479
)
 
(4,479
)
Balance at June 30, 2014
 
$
22

 
$
4

 
$
9,800

 
$
146

 
$
4,009,462

 
$
(2,565,828
)
 
$
(3,747
)
 
$
(262,954
)
 
$
55,786

 
$
1,242,691


Explanatory Notes:
_______________________________________________________________________________

(1)
See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)
For the six months ended June 30, 2014, net loss shown above excludes $809 of net loss attributable to redeemable noncontrolling interests.


4


iStar Financial Inc.
Consolidated Statements of Changes in Equity (Continued)
For the Six Months Ended June 30, 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
 

 

 

 

 

 
(23,360
)
 

 

 

 
(23,360
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 
1

 
(5,119
)
 

 

 

 

 
(5,118
)
Net loss for the period(2)
 

 

 

 

 

 
(46,151
)
 

 

 
927

 
(45,224
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
(1,181
)
 

 

 
(1,181
)
Additional paid in capital attributable to redeemable noncontrolling interest(4)
 

 

 

 

 
(1,744
)
 

 

 

 

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

 

 

 

 

 

 

 

 
9,687

 
9,687

Distributions to noncontrolling interests(4)
 

 

 

 

 

 

 

 

 
(20,404
)
 
(20,404
)
Balance at June 30, 2013
 
$
22

 
$
4

 
$
9,800

 
$
144

 
$
4,019,423

 
$
(2,430,158
)
 
$
(2,366
)
 
$
(241,969
)
 
$
64,420

 
$
1,419,320


Explanatory Notes:
_______________________________________________________________________________

(1)
See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)
For the six months ended June 30, 2013, net loss shown above excludes $1,427 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 Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(17,771
)
 
$
(46,651
)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Provision for (recovery of) loan losses
(6,192
)
 
15,226

Impairment of assets
6,279

 
550

Depreciation and amortization
37,435

 
34,750

Land cost of sales
7,265

 

Payments for withholding taxes upon vesting of stock-based compensation
(18,266
)
 
(13,790
)
Non-cash expense for stock-based compensation
5,271

 
9,921

Amortization of discounts/premiums and deferred financing costs on debt
9,030

 
10,403

Amortization of discounts/premiums and deferred interest on loans
(30,129
)
 
(16,858
)
(Gain) loss from sales of loans
(18,995
)
 
596

Earnings from equity method investments
(27,270
)
 
(30,001
)
Distributions from operations of equity method investments
10,939

 
10,211

Deferred operating lease income
(4,950
)
 
(6,477
)
Income from sales of residential property
(33,674
)
 
(58,016
)
Gain from discontinued operations

 
(13,323
)
Loss on early extinguishment of debt, net
24,767

 
13,270

Repayments and repurchases of debt—debt discount and prepayment penalty
(14,387
)
 
(20,394
)
Other operating activities, net
6,848

 
4,109

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable, net
606

 
5,763

Changes in deferred expenses and other assets, net
3,042

 
4,702

Changes in accounts payable, accrued expenses and other liabilities
(23,325
)
 
(10,527
)
Cash flows from operating activities
(83,477
)
 
(106,536
)
Cash flows from investing activities:
 
 
 
Investment originations and fundings
(319,938
)
 
(89,328
)
Acquisitions of and capital expenditures on real estate assets
(63,858
)
 
(56,450
)
Repayments of and principal collections on loans
162,032

 
298,633

Net proceeds from sales of loans
56,404

 
79,671

Net proceeds from sales of real estate
204,236

 
260,937

Net proceeds from sale of other investments

 
220,281

Distributions from other investments
23,186

 
20,437

Contributions to other investments
(30,561
)
 
(3,248
)
Changes in restricted cash held in connection with investing activities
25,779

 
(23,133
)
Other investing activities, net
1,411

 
908

Cash flows from investing activities
58,691

 
708,708

Cash flows from financing activities:
 
 
 
Borrowings from debt obligations
1,323,822

 
1,232,259

Repayments of debt obligations
(1,408,935
)
 
(1,519,101
)
Preferred dividends paid
(25,660
)
 
(23,360
)
Proceeds from issuance of preferred stock

 
193,510

Payments for deferred financing costs
(17,491
)
 
(12,857
)
Other financing activities, net
(4,005
)
 
(13,061
)
Cash flows from financing activities
(132,269
)
 
(142,610
)
Changes in cash and cash equivalents
(157,055
)
 
459,562

Cash and cash equivalents at beginning of period
513,568

 
256,344

Cash and cash equivalents at end of period
$
356,513

 
$
715,906


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 investments, 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," "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 June 30, 2014, the Company consolidated 5 VIEs for which the Company is considered the primary beneficiary. At June 30, 2014, the total assets of these consolidated VIEs were $204.4 million and total liabilities were $36.7 million. The classifications of these assets are primarily within "Real estate, 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 June 30, 2014.

Unconsolidated VIEs—As of June 30, 2014, 29 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 June 30, 2014, the Company's maximum exposure to loss from these investments does not exceed the sum of the $190.1 million carrying value of the investments, which are classified in "Other investments" on the Company's Consolidated Balance Sheets, and $26.8 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 June 30, 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.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") which supersedes existing industry-specific guidance, including ASC 360-20, Real Estate Sales. The new standard is principles-based and requires more estimates and judgment than current guidance. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. Management is evaluating the impact of the guidance on the Company's Consolidated Financial Statements.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12") which requires a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition in accordance with Topic 718, Compensation—Stock Compensation. ASU 2014-12 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not believe the guidance will have a significant impact on the Company's Consolidated Financial Statements.

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 June 30, 2014
 
 
 
 
 
 
 
Land and land improvements
$
328,143

 
$
152,332

 
$
829,112

 
$
1,309,587

Buildings and improvements
1,283,303

 
591,880

 

 
1,875,183

Less: accumulated depreciation and amortization
(352,418
)
 
(86,747
)
 
(4,215
)
 
(443,380
)
Real estate, net
1,259,028

 
657,465

 
824,897

 
2,741,390

Real estate available and held for sale

 
232,771

 
122,043

 
354,814

Total real estate
$
1,259,028

 
$
890,236

 
$
946,940

 
$
3,096,204

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 June 30, 2014 and December 31, 2013, the Company had $225.8 million and $221.0 million, respectively, of residential properties available for sale in its operating properties portfolio.

During the six months ended June 30, 2014, the Company reclassified land with a carrying value of $6.5 million from held for sale to held for investment due to a change in the Company's strategy and its plan to re-entitle the property. The asset is included in "Real estate, net" on the Company's Consolidated Balance Sheets. There were no operations to reclassify on the Company's Consolidated Statements of Operations as a result of this change. During the same period, the Company reclassified units with a carrying value of $56.7 million to held for sale due to the conversion of hotel rooms to residential units to be sold.

Acquisitions—During the six months ended June 30, 2014, the Company acquired, via deed-in-lieu, title to three commercial operating properties and a land asset, which had a total fair value of $77.9 million and previously served as collateral for loans receivable held by the Company. No gain or loss was recorded in connection with this transaction. The following table summarizes the Company's pro forma revenues and net income for the three and six months ended June 30, 2014, as if the acquisition of the properties acquired during the six months ended June 30, 2014 was completed on January 1, 2013 ($ in thousands):
 
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
Pro forma total revenues
 
131,038

 
103,175

 
242,892

 
200,072

Pro forma net income (loss)
 
(3,614
)
 
(14,531
)
 
(18,001
)
 
(47,177
)
From the date of acquisition through June 30, 2014, $1.8 million in total revenues and $0.6 million in net loss of the acquiree were included in the Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2014. The pro forma revenues and net income are presented for informational purposes only and may not be indicative of what the actual results of operations of the Company would have been assuming the transaction occurred on January 1, 2013, nor do they purport to represent the Company’s results of operations for future periods.
During the six months ended June 30, 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

9

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

Company's Consolidated Balance Sheets. The acquisition was accounted for at fair value. No gain or loss was recorded in connection with this transaction.

Dispositions—During the six months ended June 30, 2014 and 2013, the Company sold residential condominiums for total net proceeds of $94.8 million and $164.1 million, respectively, and recorded income from sales of residential properties totaling $33.7 million and $54.6 million, respectively. During the six months ended June 30, 2014, the Company sold residential lots from two of our master planned community properties for proceeds of $8.6 million which had associated cost of sales of $7.3 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 six months ended June 30, 2014, the Company sold a net lease asset for net proceeds of $93.7 million which approximated carrying value and contributed land with a carrying value of $9.5 million to newly formed unconsolidated entities. (See Note 6.)
Additionally, during the six months ended June 30, 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 six months ended June 30, 2013, the Company sold land for net proceeds of $21.4 million to a newly formed unconsolidated entity in which the Company also received a preferred partnership interest and a 47.5% equity interest. The Company recognized a gain of $3.4 million, reflecting the proportionate share of the sold interest, which was recorded as "Income from sales of residential property" in the Company's Consolidated Statements of Operations.
Additionally, during the six months ended June 30, 2013, the Company sold three net lease assets with a carrying value of $13.5 million resulting in a net gain of $3.4 million. During the same period, the Company sold three commercial operating properties with a carrying value of $43.2 million resulting in a net gain of $9.9 million. These gains were recorded as "Gain from discontinued operations" in the Company's Consolidated Statement of Operations. The Company also sold other land assets with a carrying value of $5.5 million for proceeds that approximated carrying value.
Discontinued Operations—The Company has elected to early adopt ASU 2014-08 beginning with disposals and classifications of assets as held for sale that occurred after December 31, 2013. During the six months ended June 30, 2014, there were no disposals or assets classified as held for sale which were individually significant or represented a strategic shift that has (or will have) a major effect on the Company's operations and financial results.
The following table summarizes income (loss) from discontinued operations for the three and six months ended June 30, 2013 ($ in thousands):
 
For the Three Months Ended June 30, 2013
 
For the Six Months Ended June 30, 2013
Revenues
$
1,282

 
$
3,677

Total expenses
(912
)
 
(2,096
)
Impairment of assets
(427
)
 
(395
)
Income (loss) from discontinued operations
$
(57
)
 
$
1,186

Impairments—During the six months ended June 30, 2014, the Company recorded impairments on real estate assets totaling $6.3 million, of which $3.3 million resulted from a change in business strategy for a residential property and $3.0 million resulting from the sale of a net lease asset.
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 were $7.0 million and $15.6 million for the three and six months ended June 30, 2014, respectively, and $7.9 million and $15.7 million for the three and six months ended June 30, 2013, respectively. These amounts are included in "Operating lease income" on the Company's Consolidated Statements of Operations.
Allowance for Doubtful Accounts—As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts related to real estate tenant receivables was $2.6 million and $3.4 million, respectively and the allowance for doubtful accounts related to deferred operating lease income was $2.2 million and $2.5 million, respectively.

10

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

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
June 30,
2014
 
December 31,
2013
Senior mortgages
$
851,307

 
$
1,071,662

Subordinate mortgages
71,696

 
60,679

Corporate/Partnership loans
489,988

 
473,045

Total gross carrying value of loans
1,412,991

 
1,605,386

Reserves for loan losses
(137,904
)
 
(377,204
)
Total loans receivable, net
1,275,087

 
1,228,182

Other lending investments—securities
181,320

 
141,927

Total loans receivable and other lending investments, net(1)
$
1,456,407

 
$
1,370,109


Explanatory Note:
_______________________________________________________________________________

(1)
The Company's recorded investment in loans as of June 30, 2014 and December 31, 2013 also includes accrued interest of $7.7 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 six months ended June 30, 2014, the Company sold loans with total carrying values of $30.8 million, which resulted in a realized gain of $19.0 million. During the six months ended June 30, 2013, the Company sold loans with total carrying values of $80.3 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 June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Reserve for loan losses at beginning of period
$
370,076

 
$
521,795

 
$
377,204

 
$
524,499

Provision for (recovery of) loan losses(1)
(2,792
)
 
5,020

 
(6,192
)
 
15,226

Charge-offs
(229,380
)
 
(46,989
)
 
(233,108
)
 
(59,899
)
Reserve for loan losses at end of period
$
137,904

 
$
479,826

 
$
137,904

 
$
479,826


Explanatory Note:
_______________________________________________________________________________
(1)
For the three and six months ended June 30, 2014, the provision for loan losses includes recoveries of previously recorded loan loss reserves of $2.4 million and $7.6 million, respectively. For the three and six months ended June 30, 2013, the provision for loan losses includes recoveries of previously recorded loan loss reserves of $6.4 million and $11.0 million, respectively.

11

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 June 30, 2014
 
 
 
 
 
 
 
Loans
$
323,145

 
$
1,097,581

 
$

 
$
1,420,726

Less: Reserve for loan losses
(107,304
)
 
(30,600
)
 

 
(137,904
)
Total
$
215,841

 
$
1,066,981

 
$

 
$
1,282,822

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 $2.0 million and a net premium of $0.5 million as of June 30, 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 $8.3 million and $4.6 million as of June 30, 2014 and December 31, 2013, respectively.
(3)
The carrying value of the loan includes unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.4 million as of December 31, 2013. The loan had a cumulative principal balance of $10.2 million as of December 31, 2013. The loan was repaid during the six months ended June 30, 2014.

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
 
June 30, 2014
 
December 31, 2013
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
674,018

 
2.07

 
$
591,145

 
2.50

Subordinate mortgages
72,444

 
2.68

 
61,364

 
3.37

Corporate/Partnership loans
493,578

 
3.80

 
438,831

 
3.88

  Total
$
1,240,040

 
2.80

 
$
1,091,340

 
3.11


As of June 30, 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
$
640,441

 
$
67,335

 
$
146,928

 
$
214,263

 
$
854,704

Subordinate mortgages
72,444

 

 

 

 
72,444

Corporate/Partnership loans
493,578

 

 

 

 
493,578

Total
$
1,206,463

 
$
67,335

 
$
146,928

 
$
214,263

 
$
1,420,726



12

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 June 30, 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
$
81,270

 
$
80,669

 
$

 
$
3,012

 
$
2,992

 
$

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
203,645

 
202,112

 
(104,248
)
 
650,337

 
645,463

 
(304,544
)
Corporate/Partnership loans
38,230

 
38,242

 
(3,056
)
 
99,076

 
99,067

 
(43,460
)
Subtotal
241,875

 
240,354

 
(107,304
)
 
749,413

 
744,530

 
(348,004
)
Total:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
284,915

 
282,781

 
(104,248
)
 
653,349

 
648,455

 
(304,544
)
Corporate/Partnership loans
38,230

 
38,242

 
(3,056
)
 
99,076

 
99,067

 
(43,460
)
Total
$
323,145

 
$
321,023

 
$
(107,304
)
 
$
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 June 30, 2014 and December 31, 2013, certain loans modified through troubled debt restructurings with a recorded investment of $142.5 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 June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
87,642

 
$
186

 
$
16,561

 
$
8,212

 
$
59,432

 
$
687

 
$
47,067

 
$
9,057

Corporate/Partnership loans

 

 
10,051

 
320

 

 

 
10,070

 
440

Subtotal
87,642

 
186

 
26,612

 
8,532

 
59,432

 
687

 
57,137

 
9,497

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
354,695

 
70

 
878,381

 
450

 
453,242

 
123

 
891,912

 
956

Subordinate mortgages

 

 
53,966

 

 

 

 
53,971

 

Corporate/Partnership loans
63,142

 
52

 
61,945

 
80

 
75,120

 
117

 
62,329

 
157

Subtotal
417,837

 
122

 
994,292

 
530

 
528,362

 
240

 
1,008,212

 
1,113

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
442,337

 
256

 
894,942

 
8,662

 
512,674

 
810

 
938,979

 
10,013

Subordinate mortgages

 

 
53,966

 

 

 

 
53,971

 

Corporate/Partnership loans
63,142

 
52

 
71,996

 
400

 
75,120

 
117

 
72,399

 
597

Total
$
505,479

 
$
308

 
$
1,020,904

 
$
9,062

 
$
587,794

 
$
927

 
$
1,065,349

 
$
10,610



13

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

During the six months ended June 30, 2013, the Company recorded interest income of $8.0 million related to the resolution of a non-performing loan. Interest income was not previously recorded while the loan was on non-accrual status. There was no interest income related to the resolution of non-performing loans recorded during the six months ended June 30, 2014.

Troubled Debt Restructurings—During the six months ended June 30, 2014 the Company did not modify any loans that would be troubled debt restructurings. During the three and six months ended June 30, 2013, 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 June 30, 2013
 
For the Six Months Ended June 30, 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
2

 
$
71,758

 
$
71,758

 
3

 
$
144,432

 
$
136,758


During the three months ended June 30, 2013, the Company restructured one performing loan with a recorded investment of $3.2 million to grant a maturity extension of one year. The Company also extended a payoff option on a loan with a recorded investment of $68.6 million that was classified as non-performing.
During the six months ended June 30, 2013, the Company restructured three loans that were considered troubled debt restructurings. In addition to the loans modified during the three months ended June 30, 2013 that are described above, the Company also 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 June 30, 2014, the Company had $3.5 million of unfunded commitments associated with modified loans considered troubled debt restructurings.
 
Securities—As of June 30, 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

 
$
92

 
$
1,132

 
$
1,132

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Corporate debt securities
175,000

 
180,188

 

 
180,188

 
180,188

Total
$
176,040

 
$
181,228

 
$
92

 
$
181,320

 
$
181,320




14

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

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
 
June 30, 2014
 
December 31, 2013
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
 
 
 
2014
 
2013
 
2014
 
2013
Real estate equity investments
$
98,204

 
$
62,205

 
$
1,442

 
$
957

 
$
1,687

 
$
2,721

Other equity method investments(1)
70,067

 
45,954

 
23,882

 
(127
)
 
24,918

 
1,626

Madison Funds
43,531

 
67,782

 
(1,989
)
 
4,865

 
(2,391
)
 
7,124

Oak Hill Funds
20,275

 
21,366

 
758

 
909

 
3,056

 
2,065

LNR

 

 

 
1,719

 

 
16,465

Total equity method investments
232,077

 
197,307

 
$
24,093

 
$
8,323

 
$
27,270

 
$
30,001

Other
9,484

 
9,902

 
 
 
 
 
 
 
 
Total other investments
$
241,561

 
$
207,209

 
 
 
 
 
 
 
 

Explanatory Note:
_______________________________________________________________________________

(1)
For the three and six months ended June 30, 2014, the Company recognized $23.4 million of earnings from equity method investments resulting from asset sales by one of its equity method investees.

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, which were placed in escrow for potential indemnification obligations, were released to the Company in April 2014.

15

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

The following table represents investee level summarized financial information for LNR ($ in thousands)(1):
 
For the Three Months
Ended March 31, 2013
 
For the Six Months
Ended March 31, 2013
Income Statements
 
 
 
Total revenue(2)
$
68,779

 
$
146,579

Income tax (expense) benefit
(1,121
)
 
(1,401
)
Net income attributable to LNR
42,452

 
231,701


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 and six months ended June 30, 2013 were based on balances and results from LNR for the three and six months ended March 31, 2013.
(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 and six months ended March 31, 2013, total revenue presented above includes $21.1 million and $50.4 million, 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.

The following table reconciles the activity related to the Company's investment in LNR for the three months ended March 31, 2013 and June 30, 2013 and for the six months ended June 30, 2013 ($ in thousands):
 
For the Three Months Ended March 31, 2013
 
For the Three Months Ended June 30, 2013
 
For the Six Months Ended June 30, 2013
 
Carrying value of LNR at beginning of period
$
205,773

 
$
220,281

 
$
205,773

 
Equity in earnings of LNR for the period(1)
45,375

 

 
45,375

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

 
220,281

 
251,148

 
Other than temporary impairment(1)
(30,867
)
 

 
(30,867
)
(b)
Sales proceeds pursuant to contract

 
(220,281
)
 
(220,281
)
 
Carrying value of LNR at end of period
220,281

 

 

 
Explanatory Note:
_______________________________________________________________________________

(1)
During the six months ended June 30, 2013, the Company recorded an other than temporary impairment of $30.9 million. Subsequent to the sale of the Company's interest in LNR, LNR reported a reduction in their earnings of $66.2 million related to a purchase price allocation adjustment. The reduction was reflected in LNR's operations for the three months ended March 31, 2013, which resulted in a net loss for the period. Because the Company recorded its investment in LNR on a one quarter lag, the adjustment was reflected in the quarter ended June 30, 2013. There was no net impact on the Company's previously reported equity in earnings as the Company limited its proportionate share of earnings from LNR pursuant to the definitive sale agreement as described above.

For the six months ended June 30, 2013, the amount that was recognized as income in the Company's Consolidated Statements of Operations is the sum of items (a) and (b), and $1.7 million of income recognized for the release of other comprehensive income related to LNR upon sale, or $16.5 million.
Madison Funds—As of June 30, 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 VIEs and that the Company is not the primary beneficiary.
Oak Hill Funds—As of June 30, 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 VIE and that the Company is not the primary beneficiary.

16

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

Real Estate Equity Investments—During the six months ended June 30, 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 June 30, 2014, the Company had a recorded equity interest of $17.3 million.

During the six months ended June 30, 2014, the Company contributed land to a newly formed unconsolidated entity in which the Company received an initial equity interest of 85.7%. This entity is a VIE and the Company does not have controlling interest due to shared control of the entity with its partner. As of June 30, 2014, the Company had a recorded equity interest of $9.5 million. Additionally, the Company committed to provide $45.7 million of mezzanine financing to the entity. As of June 30, 2014, the loan balance was $1.9 million and was included in "Loans receivable and other lending investments, net" on the Company's Consolidated Balance Sheets.

In addition, as of June 30, 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, $15.1 million in operating properties and $39.9 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 six months ended June 30, 2014 and 2013, the Company's earnings from its interest in this property includes income from sales of residential units of $0.3 million and $4.0 million, respectively.

Other Investments—As of June 30, 2014, 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.

17

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
 
June 30, 2014
 
December 31, 2013
Intangible assets, net(1)
$
57,060

 
$
100,652

Deferred financing fees, net(2)
42,519

 
33,591

Leasing costs, net(3)
22,609

 
21,799

Other receivables
22,548

 
34,655

Corporate furniture, fixtures and equipment, net(4)
5,917

 
6,557

Other assets
36,495

 
40,726

Deferred expenses and other assets, net
$
187,148

 
$
237,980


Explanatory Notes:
_______________________________________________________________________________

(1)
Intangible assets, net are primarily related to the acquisition of real estate assets. Accumulated amortization on intangible assets was $37.6 million and $38.1 million as of June 30, 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 $1.4 million and $3.6 million for the three and six months ended June 30, 2014, respectively, and $1.6 million and $3.2 million for the three and six months ended June 30, 2013. The amortization expense for other intangible assets was $1.7 million and $4.2 million for the three and six months ended June 30, 2014, respectively, and $2.5 million and $5.1 million for the three and six months ended June 30, 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 $9.9 million and $9.9 million as of June 30, 2014 and December 31, 2013, respectively.
(3)
Accumulated amortization on leasing costs was $7.8 million and $7.1 million as of June 30, 2014 and December 31, 2013, respectively.
(4)
Accumulated depreciation on corporate furniture, fixtures and equipment was $6.6 million and $6.2 million as of June 30, 2014 and December 31, 2013, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
June 30, 2014
 
December 31, 2013
Accrued expenses
$
42,931

 
$
58,840

Accrued interest payable
35,971

 
40,015

Intangible liabilities, net(1)
12,798

 
26,223

Other liabilities
45,150

 
45,753

Accounts payable, accrued expenses and other liabilities
$
136,850

 
$
170,831


Explanatory Note:
_______________________________________________________________________________

(1)
Intangible liabilities, net are primarily related to the acquisition of real estate assets. Accumulated amortization on intangible liabilities was $5.3 million and $4.6 million as of June 30, 2014 and December 31, 2013, respectively. The amortization of intangible liabilities increased operating lease income on the Company's Consolidated Statements of Operations by $0.9 million and $1.6 million for the three and six months ended June 30, 2014, respectively, and $1.1 million and $2.2 million for the three and six months ended June 30, 2013, respectively.

Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
 
As of
 
June 30, 2014
 
December 31, 2013
Deferred tax assets(1)
$
55,661

 
$
55,962

Valuation allowance
(55,661
)
 
(55,962
)
Net deferred tax assets (liabilities)
$

 
$

Explanatory Note:
_______________________________________________________________________________
(1)
Deferred tax assets as of June 30, 2014 include real estate basis differences of $39.8 million, investment basis differences of $8.5 million, net operating loss carryforwards of $5.0 million and other differences of $2.3 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.

18

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

Note 8—Debt Obligations, net

As of June 30, 2014 and December 31, 2013, the Company's debt obligations were as follows ($ in thousands):
 
Carrying Value as of
 
 
 
 
 
June 30,
2014
 
December 31,
2013
 
Stated
Interest Rates
 
Scheduled
Maturity Date
Secured credit facilities and term loans:
 
 
 
 
 
 
 
2012 Tranche A-2 Facility
$
391,938

 
$
431,475

 
LIBOR + 5.75%

(1)
March 2017
February 2013 Secured Credit Facility

 
1,379,407

 
LIBOR + 3.50%

(2)
Term loans collateralized by net lease assets
278,261

 
278,817

 
4.851% - 7.26%