iStar Financial
2004 Annual Repor t
l
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ABOUT iSTAR FINANCIAL 1
A PLAN FOR GROW TH…
A STRATEGY FOR SUCCESS 4
CHAIRMAN’S LE T TER 7
PORTFOLIO HIGHLIGHTS 18
FINANCIAL INFORMATION 19
1
about
iStar
Financial
iStar Financial is the leading publicly traded financial
services company dedicated to providing capital
to the high-end commercial real estate markets.
We create shareholder value by tailoring loans,
mortgages and corporate sale / leaseback financing
for private and corporate owners and developers
of signature office buildings, prestigious multifamily
developments, hotels and other multimillion-dollar
properties nationwide.
We are traded on the New York Stock Exchange
under the ticker “SFI” and are professionally
managed by a team of industr y veterans. We have
a diversified asset and customer base with a
strong record of profitability and customer service.
At iStar, we seek to deliver a growing dividend
and superior risk-adjusted returns on equity to our
shareholders. We have consistently grown
our revenue and asset base, increased our annual
dividend per share, and demonstrated growing
returns on shareholder equit y since becoming a
public company in 1998.
2
iStar
Financial
2004
We work hard to reward our cus-
tomers with fast, flexible and highly
customized capital solutions for all
their real estate needs. That strat-
egy has rewarded our shareholders
with superior double-digit returns
on equity, increased dividends and
helped us build a $5 billion plus
equity market capitalization at the
end of fiscal 2004.
What do we do?
Our goal is to achieve superior returns
by providing sophisticated cus-
tomers with custom-tailored capital.
We have six product lines including
senior mortgage loans, junior
mortgage loans, construction
loans, mezzanine loans, corporate
loans and corporate sale / lease-
back financing.
We earn money on both the interest
we charge on our loans and on
the rents we collect from our build-
ing and property leases.
Currently, we operate our business
primarily in asset-rich major
metropolitan markets throughout
the United States including New
York, Atlanta, Boston, Dallas, San
Francisco and Chicago. Our
in-house loan-servicing center is
based in Hartford, Connecticut,
and our Corporate Headquarters
is located in New York City.
iStar Financial: Creative
Capital Solutions
When did we begin our business?
We began our business in 1993
and operated as part of a private
company for the next five years.
During that time, we raised over
$750 million in equity capital from
leading institutional and high-
net worth investors such as the
IBM, DuPont and GM pension
funds, as well as the Ziff, Pritzker
and Burden (Vanderbilt) families.
From 1998 through 2000, we
completed a number of strategic
corporate acquisitions to
complement our organic growth
and enhance our business
franchise. The company began
trading on the New York Stock
Exchange on November 4, 1999.
As of December 31, 2004, we
had approximately $7.1 billion
in diverse loan and lease assets
under management.
Who guides our company?
Our management group is deep,
with a proven record through many
market and interest rate cycles.
Our team of professionals has
extensive experience and industry
expertise in corporate credit,
real estate and capital markets.
We think of ourselves as a “private
banker” to the high-end corporate
real estate market, building
our business on trust, integrity and
dedication to our customers,
employees and shareholders.
What makes us different?
Since our inception, we have struc-
tured and originated over $12 billion
of real estate financing transactions,
with approximately 55% of these
transactions coming from repeat
customers who value the iStar
experience. We believe we have
established superior relationships
with our customers, with a
consistent record of solving their
complicated real estate issues.
We earned these valued relation-
ships with creative, custom-tailored
financing solutions…competitive
pricing…speed…f lexibility…and
a dedication to providing the
highest level of customer service
with professionalism and integrity.
Unlike most of our competition, we
keep all of our financings on our
balance sheet. We of fer complete
in-house service and support to
our customers from an integrated
team of professionals both pre- and
post-financing. This team provides
our customers access to market
intelligence and is comprised of
financing experts, asset managers,
construction engineers and loan
servicers. This means our customers
have a responsive, single point
of contact for questions on their loan
or lease. Our deep and experienced
team also plays an important role in
protecting the company’s assets
and helps ensure that iStar finances
the best opportunities.
We hold “investment grade” status
at Moody’s, Standard & Poor’s and
Fitch, the three major rating agen-
cies. We operate as a Real Estate
Investment Trust or REIT, which
means we do not pay corporate
federal income taxes. However, we
are dif ferent from many of the
traditional REITs who are focused
on property investment.
3
about
iStar
Financial
Think of us as a premium finance
company focusing on the high-end
commercial real estate markets –
markets where customers expect
first-class service and support.
It is a segment of the market
where customers require large-
scale, innovative, custom-tailored
financing alternatives…iStar
Financial’s specialty.
We believe this high-service,
high-quality strategy yields supe-
rior results. In a world of commodity
providers of financing, we offer
an alternative: custom-tailored
financing from an experienced
team of professionals that is one
call away for the life of the loan
or corporate lease.
“It has been our pleasure
to work repeatedly with
the real estate financing
experts at iStar Financial.
Their team of professionals
continues to impress us
with their speed, flexibility
and creative custom-
tailored solutions. Our
experience has clearly
had a positive impact on
our business.”
Mark Schlossberg
Managing Director
Southwest Value Partners
How strong is our balance sheet?
With over $2 billion of tangible book
equity, an equity market cap in excess
of $5 billion and one of the lowest
loss ratios in the financing industry,
we clearly have one of the strongest
balance sheets in the sector.
Our risk management team contin-
ually monitors and fine-tunes
our growing and diverse portfolio of
assets to mitigate risk. We seek to
minimize any interest rate exposure
so that our earnings are shielded
from changes in interest rates. This
means we try to match our fixed
and floating rate assets (loans and
leases) with our fixed and floating
rate liabilities (corporate debt) with
similar maturity profiles.
From a credit perspective, we are
currently rated “investment grade”
by all three major rating agencies.
Why might you consider an
investment in iStar?
We have a consistent record of pro-
ducing growing dividends and
returns on equity in the 15% – 20%
range. We have an experienced and
growing management team that
is clearly aligned with shareholder
interests. We have a portfolio
of high-value investments in major
assets across the country.
We believe you will find the long-
term prospects of our company
attractive, having proven our ability
for over a decade to consistently
identify favorable market opportu-
nities, attract new customers,
build long-term business relation-
ships, and deliver consistent value
to our shareholders.
Revenues
dollars in millions
04
03
02
01
00
Total Assets
dollars in millions
04
03
02
01
00
$694
$573
$494
$441
$434
$7,220
$6,661
$5,612
$4,381
$4,035
Equity Market Capitalization
dollars in millions
04
03
02
01
00
$3,134
$2,562
$2,070
$5,608
$4,630
Five-Year Total Cumulative Shareholder Returns
(including dividends)
308 %
238 %
04
03
02
01
00
124 %
82 %
32%
iStar Financial
A Plan for Growth…
A Strategy for Success
Phase 1
Foundation
We began our company in 1993
to capture what we believed were
significant opportunities in the
underserved segments of the high-
end real estate market. As a private
company for our first five years, we
built a solid foundation for iStar.
We added marquee clients, many
of whom are still our customers
today. We learned many important
lessons about the high-end
marketplace, formed our views on
many markets and asset classes
and developed our competitive
advantages, namely our ability to
cross over seamlessly between the
real estate markets, capital markets
and corporate finance markets. We
also began identifying those cus-
tomers who were most interested in
iStar’s highly personalized, high-
integrity approach to the business.
Our mission remains the same
today as it was at our inception: to
be the premier provider of flexible
financing solutions to underserved
segments of the high-end real
estate market while delivering
attractive risk-adjusted returns
to our valued shareholders. And
we have not changed the core
values that guide the way we do
business, operating with a high
degree of integrity, honesty and
customer service.
Phase 2
Expansion
Phase 3
Evolution
4
iStar
Financial
2004
Today, we continue to look at the
various changes in the market and
make what we believe are prudent,
strategic decisions to better position
and realign the company to adjust
to these dynamics. We are going to
utilize the same type of forward
thinking that served us so well in
phases one and two, while
remaining true to the strengths and
market position we have clearly
staked out with our customers. We
are executing our plans to move
the business forward with what we
believe is a natural evolution of
our business. Over the next five
years, we expect to focus on
expanding our market-leading plat-
forms, adding key personnel,
building strategic relationships and
working on delivering the most
comprehensive capital solutions
to the marketplace.
iStar
core >
values
Moving into the public markets
kicked off phase two, which began
in earnest with the $1.5 billion
acquisition of TriNet Corporate
Realty Trust, which was then
the largest triple net lease company
in the public markets.
Success led to a natural expansion
of our business as we established
the company’s reach with our cus-
tomers. We focused on educating
the market on iStar’s unique
approach to real estate financing,
clearly differentiating our model
from the more prevalent syndica-
tion, securitization and commercial
finance models that then existed.
We made a number of other stra-
tegic corporate acquisitions to
complement our organic growth
and extend our business franchise
during this phase. We took
a number of important steps that
have helped make iStar Financial
the leading publicly traded finance
company focused on the commer-
cial real estate industry. In 2004,
we received “investment grade”
ratings from all three major rating
agencies, significantly strength-
ening our cost advantage in the
marketplace. At the end of 2004,
we had approximately $7.1 billion
in diverse loan and lease assets
under management.
Our financial results during this
phase have been excellent, demon-
strating our commitment to our
shareholders. For example, we grew
our revenues by 168%, increased
our total assets by approximately
90% and delivered total cumulative
shareholder returns, including divi-
dends, of 308%.
5
a plan
for growth
…a strategy
for success
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6
iStar
Financial
2004
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7
Chairman’s
letter
To Our Valued Shareholders:
2004 marked the final year of a highly successful
five-year period for iStar Financial and its shareholders.
During 2004, iStar’s revenues and originations
reached record levels with shareholder returns
exceeding 20% for the fifth consecutive year. These
strong results capped a five-year period in which
iStar’s total revenue increased by 168%, net
investment income increased by 144%, total equity
market value surpassed $5 billion and cumulative
shareholder returns exceeded 300%.
By challenging conventional thinking about the real
estate finance world and bringing a range of new
ideas to bear for our high-end customers, we were
able to convincingly meet the ver y high goals
we set for ourselves when we first laid out the iStar
stor y to the public markets in late 1999.
But markets rarely stand still and we have begun
to see change affect our markets. Having worked for
years to convince others that iStar’s real estate
finance transactions represented some of the best
risk-adjusted returns in the entire capital markets,
we were not altogether surprised that the rest of the
8
iStar
Financial
2004
capital markets finally reached the same conclusion
during 2004.This was evidenced by dramatic capital
inflows into the sector and increasingly tighter
spreads during the year. Working with our deep
customer base, we continued to lead the market,
while realizing the time was approaching when we
would need to expand our capabilities and once
again position ourselves ahead of the market and
apart from the conventional thinking that usually
governs the majority of capital.
As a result, we have launched a series of initiatives
in order to maintain our leading position in the high-
end of the market for real estate finance, and have
set ambitious goals for our company for the coming
five years. I want to use this letter to outline those
goals and to give you our views on how the market
and iStar will evolve over that time period.
The Next Five Years
Our objective over the next five years is ambitious and
wide-ranging – to build a world-class commercial real
estate finance platform with market-leading expertise
in the real estate arena, in the corporate finance
sector and in the capital markets pricing of risk.
9
Chairman’s
letter
Given the nearly $200 billion estimated market size
of the high-end real estate finance market, we believe
this platform will enable us to access a broad spectrum
of market opportunities and to grow our business
over this period at ver y attractive rates. To achieve
this goal, we will not need to operate differently, but
rather, we will continually build on the foundation we
have established since our inception.
As those of you who have followed our company
know, over the years we have started almost ever y
presentation of our company with the diagram you
see to the right – a diagram that captures much of
our thinking about our business.
Two important concepts can be found in this simple
diagram. First, our belief that the most attractive
investment areas, and often the ones most overlooked
or least understood, stand at the intersection of
markets – in transactions that do not necessarily fit
neatly into any simple categor y, but combine
elements of several different markets. iStar has a
long histor y of combining expertise from multiple
markets to deliver faster, better, more creative capital
solutions to customers who fall into these zones.
Real
Estate
Markets
Corporate
Credit
Markets
Capital
Markets
Crossover
Market Strategy
10
iStar
Financial
2004
Second, our belief that real estate is not a separate
asset class with different investment rules than
the general market, but one that is inextricably tied
to what is going on in the corporate credit and
capital markets.
To identify good real estate investments, we need to
be watching the entire spectrum of investments
taking place in the capital markets and understand
trends developing throughout the corporate
credit markets – only then can we truly identify
“better than market” opportunities. For our
shareholders, our expertise in real estate, corporate
credit analysis and capital market pricing has
consistently enabled us to identify favorable
transactions that offer better than market returns
with substantially less risk.
Both of these concepts have driven our strategy
since the beginning and each will play a key role
in our strategy over the next five years. After much
analysis, we have concluded the most important
step for iStar during 2005 is to significantly expand
our knowledge base in each of our core disciplines,
positioning us to increasingly mine the crossover
sectors that have historically yielded the richest
financing opportunities.
11
Chairman’s
letter
Key Initiatives
Recently, we announced several key initiatives that
will go a long way to helping us expand our information
platforms in each of the crossover sectors we are
targeting. As you can see in the expanded diagram
to the right, these initiatives show the natural
evolution of our core business strategy as we push
further into the crossover sectors.
AutoStar /
Falcon Financial
Real
Estate
Markets
Corporate
Credit
Markets
Let me explain these initiatives in detail.
Blackacre /
Cerberus / LNR
Capital
Markets
Oak Hill
Advisors
Expanded Crossover
Market Strategy
First, it has always been one of our goals to have a
world-class corporate credit ability as part of iStar.
We have been building a strong in-house credit group
for many years to support our existing sale/leaseback
and lending platforms. However, as we sought
to expand our capabilities to meet our customers’
needs, it became clear that the opportunities
were going to outstrip our in-house resources. The
goal we set out as part of our five-year plan was
to link up with an existing powerhouse credit platform
in a way that would deliver both the reach and
expertise we sought, but not fundamentally change
our business or the management of our business.
12
iStar
Financial
2004
The solution we recently announced was to acquire
a substantial minority interest in what we believe
is one of the oldest, strongest and most respected
corporate credit investors in the market, Oak
Hill Advisors.
Oak Hill Advisors met the extensive criteria we set
out for the right partner in the corporate credit
field, including a senior management team of highly
motivated individuals, a leading position in the
field and a wealth of corporate information flows. The
firm currently has over $5 billion in assets under
management and has a long histor y covering over
$25 billion of investments in the corporate credit
world. Finally, and most importantly, Oak Hill Advisors’
corporate culture and investment philosophy were
nearly identical to iStar’s.
We believe Oak Hill Advisors’ long-standing strategic
relationship with the Robert Bass organization
and the other Oak Hill partnerships will lead to further
opportunities to extend our reach with one of
the leading investment platforms in the countr y. Our
goal is to have at our fingertips a deep and highly
knowledgeable network of experts in a variety of fields
via our Oak Hill Advisors relationship, and the
capability to better capture opportunities that fall in
13
Chairman’s
letter
the crossover between the corporate finance and
real estate arenas. Given that Oak Hill Advisors has
invested in over 400 different corporate credits
in its histor y, we know this investment can quickly
enhance our underwriting capabilities on a wide
range of transactions.
A second major initiative that will mark the coming
years involves large niche businesses where the
operating side of a business is inextricably tied to a
large real estate investment. The target customer
in these sectors needs a finance source that not only
can understand its real estate, but also can
understand its unique operating business – with
the necessar y crossover expertise significantly
narrowing the field of competitors.
Just as importantly, ver y few finance providers can
then go the additional step and of fer a fully
customized suite of finance products to meet almost
any capital need the customer might have. We are
targeting such markets with a new series of “iStar”
branded platforms, each with three major criteria:
I. The ability to reach $1 billion in assets within a
three-year time frame
II. The existence of high-end customers who will
have significant capital needs in the coming years
14
iStar
Financial
2004
III. The absence of any qualified full-ser vice
provider today who can equal iStar in the range
of products offered
The most visible of our projected platforms is
AutoStar, a platform that combines iStar’s capital
and financing expertise with the nuts and bolts
automotive retailing expertise of the Staubach
organization and the automotive industr y
capital markets knowledge of Presidio Capital.
Why AutoStar? Well, let’s look at the three criteria
we set out for our “iStar” branded platforms:
$1 billion potential? The Staubach organization
estimates that over $50 billion of real estate is tied
up in auto dealerships, so we think our $1 billion
goal is a ver y realistic one.
Existence of high-end customers with significant
capital needs in the years ahead? We believe the
auto-retailing sector has a large proportion of high-
net-worth owners who are now faced with capital-
intensive imaging upgrade campaigns from most
of the major automakers. There is no question that
the industry is beginning a period of major capital
deployment, and dealers will be looking for new and
creative capital solutions.
15
Chairman’s
letter
No one-stop provider of choice? While various firms
of fer one or more pieces of the capital puzzle
for auto dealers, we have not been able to identify
anyone truly of fering the range of long and
short-term capital that iStar can provide, as well
as the range of advisor y services the Staubach
organization can deliver. Together, we think we offer
a compelling package to the auto dealer community.
In order to accelerate our penetration in this market,
we recently announced the acquisition of Falcon
Financial, a public company that has provided financing
to the auto dealer world for the last seven years. We
believe that under the iStar umbrella, we can bring a
fundamentally better mousetrap to the Falcon
business and, together with the AutoStar platform,
begin to make a meaningful impact on this $50
billion-plus market. While AutoStar is the first of our
“iStar” branded platforms, we expect over the
next five years to create other businesses that fit this
same profile.
16
iStar
Financial
2004
Lastly, as more real estate finance flows throughout
the commercial mortgage backed securities
(CMBS) world, we think it is important to have a
window into that world to round out our market
leading information flows and to keep close tabs on
the ongoing interaction of the real estate and
capital markets. While not a core market for us, we are
working to make sure we have an understanding of
this marketplace and we were pleased to announce
a third key initiative at the beginning of 2005.
iStar customer Blackacre Capital and its parent
Cerberus Capital, one of the most active investors in
the investment world today, recently acquired LNR
Property Corporation, a company long recognized
as having one of the largest platforms in the CMBS
and special servicing world. Recognizing both the
opportunity and potential that Blackacre / Cerberus
will have after acquiring the LNR platform, we moved
quickly to become the lead investor in the acquisition
financing put in place by the new owners, taking
leading positions in the senior debt, the mezzanine
debt and corporate level debt, as well as taking a
17
Chairman’s
letter
small equity position alongside Blackacre / Cerberus.
Knowing both Blackacre and LNR quite well, we
believe Blackacre / Cerberus will materially expand
the LNR platform in the years to come and we
believe iStar will be well-positioned to provide them
with custom-tailored capital when the need arises.
With these initiatives in place, we are making the
investments necessar y to strengthen the position of
our company for the next five years. We believe
our expanded strategy is a natural evolution of our
business and one that will help us continue to deliver
solid and consistent returns to our shareholders. We
thank you for your continued support.
Sincerely,
Jay Sugarman
Chairman and Chief Executive Officer
iStar Financial: Portfolio Highlights
Product Line
as of 12/31/04
44% Corporate Tenant Leasing (CTL)
18
iStar
Financial
2004
Geographic Diversification of Assets
as of 12/31/04
Property Type
as of 12/31/04
25% Structured Finance
15% Portfolio Finance
10% Corporate Finance
6% Loan Acquisitions
26% West
22% Northeast
16% Southeast
10% Mid-Atlantic
8% Central
7% South
4% North Central
3% Various
2% Northwest
2% Southwest
23% Office (CTL)
16%
Industrial / R&D
12% Office (Lending)
11% Entertainment / Leisure
9% Hotel (Lending)
7% Apartment / Residential
7% Mixed Use / Mixed Collateral
7% Retail
4% Hotel (Investment Grade CTL)
3% Other
1% Conference Center
19
iStar
Financial
2004
FINANCIAL REPORT
SELECTED FINANCIAL DATA 20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKE T RISK 36
MANAGEMENT’S REPORT ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING 38
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 39
CONSOLIDATED BALANCE SHEE TS 40
CONSOLIDATED STATEMENTS OF OPERATIONS 41
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY 42
CONSOLIDATED STATEMENTS OF CASH FLOWS 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46
COMMON STOCK PRICE AND DIVIDENDS 72
SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in conjunction
with the discussions set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Certain prior year amounts have been
reclassified to conform to the 2004 presentation.
For the Years Ended December 31,
2004
2003
2002
2001
2000
(In thousands, except per share data and ratios)
20
iStar
Financial
2004
Operating Data:
Interest income
Operating lease income
Other income
Total revenue
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation
Provision for loan losses
Loss on early extinguishment of debt
Total costs and expenses
Income before equity in earnings from joint ventures and unconsolidated
subsidiaries, minority interest and other items
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries
Minority interest in consolidated entities
Cumulative effect of change in accounting principle(1)
Income from continuing operations
Income from discontinued operations
Gain from discontinued operations
Net income
Preferred dividend requirements
Net income allocable to common shareholders and HPU holders(2)
Basic earnings per common share(3)
Diluted earnings per common share(3)(4)
Dividends declared per common share(5)
Supplemental Data:
Adjusted diluted earnings allocable to common
shareholders and HPU holders(6)(8)
EBITDA(7)(8)
Ratio of EBITDA to interest expense
Ratio of EBITDA to combined fixed charges(9)
Ratio of earnings to fixed charges(10)
Ratio of earnings to fixed charges and preferred stock dividends(10)
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Cash flows from:
$ 353,799
286,389
54,236
694,424
231,027
22,417
64,541
47,912
109,676
9,000
13,091
497,664
196,760
2,909
(716)
–
198,953
18,119
43,375
$ 260,447
(51,340)
$ 209,107
1.87
$
1.83
$
2.79
$
$ 270,946
$ 561,849
2.41x
1.98x
1.84x
1.51x
110,205
112,464
$ 304,391
232,043
36,677
573,111
192,296
11,553
50,626
38,153
3,633
7,500
–
303,761
269,350
(4,284)
(249)
–
264,817
22,173
5,167
$ 292,157
(36,908)
$ 255,249
2.52
$
2.43
$
2.65
$
$ 255,631
210,033
27,993
493,657
184,932
6,735
42,579
30,449
17,998
8,250
12,166
303,109
190,548
1,222
(162)
–
191,608
22,945
717
$ 215,270
(36,908)
$ 178,362
1.98
$
1.93
$
2.52
$
$ 341,777
$ 543,235
2.79x
2.34x
2.39x
2.01x
100,314
104,101
$ 262,786
$ 448,673
2.42x
2.02x
2.05x
1.71x
89,886
92,649
$ 254,119
155,980
30,921
441,020
169,585
5,198
30,645
24,151
3,574
7,000
1,620
241,773
199,247
7,361
(218)
(282)
206,108
22,659
1,145
$ 229,912
(36,908)
$ 193,004
2.24
$
2.19
$
2.45
$
$ 254,095
$ 435,675
2.56x
2.10x
2.18x
1.80x
86,349
88,234
$ 268,011
148,144
17,902
434,057
173,143
5,811
29,913
25,706
2,864
6,500
705
244,642
189,415
4,796
(195)
–
194,016
20,622
2,948
$ 217,586
(36,908)
$ 180,678
2.11
$
2.10
$
2.40
$
$ 230,371
$ 425,991
2.45x
2.02x
2.11x
1.74x
85,441
86,151
Operating activities
Investing activities
Financing activities
$ 363,132
(532,395)
177,595
$ 338,262
(974,354)
700,248
$ 348,793
(1,149,070)
800,541
$ 293,260
(349,525)
49,183
$ 219,868
(193,805)
(37,719)
21
iStar
Financial
2004
For the Years Ended December 31,
2004
2003
2002
2001
2000
Balance Sheet Data:
Loans and other lending investments, net
Corporate tenant lease assets, net
Total assets
Debt obligations
Minority interest in consolidated entities
Shareholders’ equity
Supplemental Data:
Total debt to shareholders’ equity
Explanatory Notes:
(In thousands, except per share data and ratios)
$3,946,189
2,877,042
7,220,237
4,605,674
19,246
2,455,242
$3,702,674
2,535,885
6,660,590
4,113,732
5,106
2,415,228
$3,050,342
2,291,805
5,611,697
3,461,590
2,581
2,025,300
$2,377,763
1,781,565
4,380,640
2,495,369
2,650
1,787,778
$2,227,083
1,592,087
4,034,775
2,131,967
6,224
1,787,885
1.9x
1.7x
1.7x
1.4x
1.2x
(4)
(5)
(6)
(7)
(8)
Represents one-time effect of adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as of January 1, 2001.
(1)
(2) HPU holders are Company employees who purchased high performance Common Stock units under the Company’s High Performance Unit Program.
(3)
For the 12 months ended December 31, 2004, net income used to calculate earnings per basic and diluted common share excludes $3,314 and $3,265 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2003, net income used to calculate earnings per basic and diluted common share excludes $2,066 and $1,994 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004 and 2003, net income used to calculate earnings per diluted common share includes joint venture income of $3 and $167, respectively.
The Company generally declares common and preferred dividends in the month subsequent to the end of the quarter.
Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, amortization, gain from discontinued operations, extraordinary
items and cumulative effect of change in accounting principle. For the year ended December 31, 2004, adjusted earnings includes a $106.9 million charge related to performance-based vesting of
100,000 restricted shares granted under the Company’s long-term incentive plan to the Chief Financial Officer, the vesting of 2.0 million phantom shares on March 30, 2004 to the Chief Executive Officer, the
one-time award of Common Stock with a value of $10.0 million to the Chief Executive Officer, the vesting of 155,000 restricted shares granted to several employees and the Company’s share of taxes associated
with these transactions. For the year ended December 31, 2002, adjusted earnings includes the $15.0 million charge related to the performance based vesting of restricted shares granted under the Company’s
long-term incentive plan. For years ended December 31, 2004, 2003, 2002, 2001 and 2000, adjusted diluted earnings includes approximately $9.6 million, $0, $4.0 million, $1.0 million and $317,000 of cash
paid for prepayment penalties associated with early extinguishment of debt. (See reconciliation in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
EBITDA is calculated as net income plus the sum of interest expense and depreciation and amortization (which includes the interest expense and depreciation and amortization reclassed to income from
discontinued operations).
For the Years Ended December 31,
2004
2003
2002
2001
2000
Net income
Add: Interest expense(1)
Add: Depreciation and amortization(2)
EBITDA
Explanatory Notes:
$260,447
232,919
68,483
$561,849
$292,157
194,999
56,079
$543,235
(In thousands)
$215,270
185,362
48,041
$448,673
$229,912
170,121
35,642
$435,675
$217,586
173,891
34,514
$425,991
(1)
(2)
For the years ended December 31, 2004, 2003, 2002, 2001 and 2000, interest expense includes $1,892, $2,703, $430, $536 and $748 of interest expense reclassed to discontinued operations.
For the years ended December 31, 2004, 2003, 2002, 2001 and 2000, depreciation and amortization includes $3,942, $5,453, $5,462, $4,997 and $4,601 of depreciation and amortization
reclassed to discontinued operations.
Each of adjusted earnings and EBITDA should be examined in conjunction with net income as shown in the Consolidated Statements of Operations. Neither adjusted earnings nor EBITDA should be considered
as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company’s performance, or to cash flows from operating activities (determined in accordance with GAAP) as a
measure of the Company’s liquidity, nor is either measure indicative of funds available to fund the Company’s cash needs or available for distribution to shareholders. Rather, adjusted earnings and EBITDA are
additional measures the Company uses to analyze how its business is performing. Its should be noted that the Company’s manner of calculating adjusted earnings and EBITDA may differ from the calculations
of similarly-titled measures by other companies.
Combined fixed charges comprise interest expense (including amortization of original issue discount) and preferred stock dividend requirements.
(9)
(10) For the purposes of calculating the ratio of earnings to fixed charges, “earnings” consist of income from continuing operations before adjustment for minority interest in consolidated subsidiaries, or income or
loss from equity investees, income taxes and cumulative effect of change in accounting principle plus “fixed charges” and certain other adjustments. “Fixed charges” consist of interest incurred on all indebted-
ness related to continuing and discontinued operations (including amortization of original issue discount) and the implied interest component of the Company’s rent obligations in the years presented.
22
iStar
Financial
2004
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is in the business of providing custom-tailored
financing solutions to high-end private and corporate owners of real estate.
Depending upon market conditions and the Company’s views about the
economy generally and real estate markets specifically, the Company will
adjust its investment focus from time to time and emphasize certain prod-
ucts, industries and geographic markets over others.
The Company began its business in 1993 through private invest-
ment funds formed to take advantage of the underserved segments of the
commercial real estate financing markets and what it felt were a lack of well-
capitalized lenders capable of servicing the needs of customers in its markets.
In March 1998, these private investment funds contributed their approxi-
mately $1.1 billion of assets to the Company’s predecessor in exchange for a
controlling interest in that public company. In November 1999, the Company
acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. (“TriNet” or
the “Leasing Subsidiary”), which was then the largest publicly-traded company
specializing in corporate sale/leaseback financing for office and industrial
facilities (the “TriNet Acquisition”). Concurrent with the TriNet Acquisition,
the Company also acquired its former external advisor in exchange for shares
of its Common Stock and converted its organizational form to a Maryland
corporation. The Company’s Common Stock began trading on the New York
Stock Exchange under the symbol “SFI” in November 1999.
The Company has experienced significant growth since becoming a
public company in 1998, having made a number of strategic acquisitions to
complement its organic growth and extending its business franchise. Trans-
action volume for the fiscal year ended December 31, 2004 was $2.8 billion,
compared to $2.2 billion in 2003 and $1.7 billion in 2002. The Company
completed 53 financing commitments in 2004, compared to 60 in 2003 and
41 in 2002. Repeat customer business has become a key source of trans-
action volume for the Company, accounting for approximately 55% of the
Company’s cumulative volume through the end of 2004. Based upon feed-
back from its customers, the Company believes that greater recognition of
the Company and its reputation for completing highly structured trans-
actions in an efficient manner, have contributed to increases in its transaction
volume. The benefits of higher investment volumes were mitigated to
an extent by the extremely low interest rate environment in 2002, 2003
and 2004. Low interest rates benefit the Company in that its borrowing
costs decrease, but similarly, earnings on its variable-rate lending invest-
ments also decrease.
During the difficult economic and real estate market conditions of
2002 and 2003, the Company focused its investment activity on lower risk
investments such as first mortgages and CTL transactions that met its risk
adjusted return standards. The Company has experienced minimal losses on
its lending investments. In 2003, the Company also focused on re-leasing
space at its CTL facilities under longer-term leases in an effort to reduce the
impact of lease expirations on the Company’s earnings. As of December 31,
2004, the weighted average lease term on the Company’s CTL portfolio was
11.2 years and the portfolio was 95% leased.
The Company has continued to broaden its sources of capital and
was particularly active in the capital markets over the past two years. The
Company’s strong performance and the low interest rate environment
enabled the Company to issue preferred equity and debt securities on attrac-
tive pricing terms. The Company used the proceeds from the issuances to
repay secured indebtedness, to refinance higher cost capital and to fund
additional investments. In 2004, the Company continued to make progress
on migrating its debt obligations from secured debt towards unsecured debt.
While the Company considers it prudent to have a broad array of sources of
capital, including secured financing arrangements, the Company will continue
to seek to reduce its use of secured debt and increase its use of unsecured
debt. As a result of its shift to unsecured debt and its strong credit and oper-
ating history, in October of 2004 the Company’s senior unsecured debt
rating was upgraded to investment grade by Standard & Poor’s (“S&P”) and
Moody’s Investors Service (“Moody’s”). As an investment grade issuer, the
Company believes that it will have greater access to the unsecured debt
markets and a reduced cost of debt capital.
Beginning in 2003, and throughout 2004, the commercial real
estate industry attracted large amounts of investment capital. The Company
intends to maintain its disciplined approach to underwriting its investments
and will adjust its focus away from markets and products where the
Company believes that the available pricing terms do not fairly reflect the
risks of the investments. As a result of increased investment activity in both
the public and private commercial real estate markets, many of the
Company’s borrowers were able to prepay loans with proceeds from initial
public offerings, asset sales or refinancings. As a consequence, the Company
experienced a higher level of prepayments in 2004 than in previous years. If
interest rates remain low in 2005, the Company expects to see continued
levels of high prepayments. The Company’s loans generally have some form
of call protection, so many of the prepayments generated significant pre-
payment penalties. Increased prepayment penalties will result in higher current
“Other income” on the Company’s Consolidated Statements of Operations,
which will be offset by reduced “Interest income” on the Company’s
Consolidated Statement of Operations. In 2004, the Company took advan-
tage of the strong real estate sales market by selectively selling certain non-
core CTL assets. Sales of assets will result in a reduction in “Operating lease
income” on the Company’s Consolidated Statements of Operations and
will also result in “Gains from discontinued operations” on the Company’s
Consolidated Statements of Operations.
The Company continues to see strong capital inflows into the real
estate sector as interest rates remain at historical low levels and as most
markets continue to show improved underlying fundamentals. This increased
capital has resulted in a highly competitive real estate financing environment
with reduced financing spreads. Despite this trend, the Company will con-
tinue to maintain its disciplined investment strategy and deploy its capital
to those opportunities that demonstrate the most attractive returns. The
Company’s lower cost of funds, due to its senior unsecured debt rating
upgrade to investment grade by S&P and Moody’s in October 2004, should
enable the Company to increase the velocity of its originations by making
attractive investments that the Company was previously unable to compete
effectively for due to its higher cost of capital. In response to these market
trends and as part of the continued expansion of its existing real estate,
23
iStar
Financial
2004
corporate credit and capital markets capabilities, the Company is investing in
several new acquisitions and strategic business relationships which should
enable it to offer new financing products and to bring its custom-tailored
financing approach to several new markets. (See Note 17 – Subsequent
Events to the Company’s Consolidated Financial Statements.)
Results of Operations
The Company’s earnings for the 12 months ended December 31,
2004, reflect the following charges from the first quarter of 2004:
•
•
•
A $106.9 million stock-based compensation charge relating to the full
vesting of: (1) 2.0 million incentive shares awarded to its Chief
Executive Officer under his March 2001 employment agreement;
(2) 236,167 shares of Common Stock awarded to its Chief Executive
Officer that are restricted from sale for five years unless performance
thresholds in the Company ’s Common Stock price are met ;
(3) 100,000 restricted performance shares awarded to its Chief
Financial Officer when she joined the Company in 2002; and
(4) 155,000 shares of Common Stock awarded to several employees
during 2002;
An $11.5 million charge relating to the redemption of $110.0 million
of the Company’s 8.75% Senior Notes due 2008 at a redemption price
of 108.75% of the principal amount of the notes being redeemed; and
A $9.0 million charge to net income allocable to common shareholders
and HPU holders relating to the redemption of all the Company’s out-
standing 9.375% Series B and 9.200% Series C Cumulative Redeemable
Preferred Stock.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Interest income – Interest income increased by $49.4 million to
$353.8 million for the 12 months ended December 31, 2004 from
$304.4 million for the same period in 2003. This increase was primarily due to
$106.4 million of interest income on new originations or additional fundings,
offset by a $56.1 million decrease from the repayment of loans and other lend-
ing investments. This increase was also due to an increase in interest income on
the Company’s variable-rate lending investments as a result of higher average
one-month LIBOR rates of 1.50% in 2004, compared to 1.21% in 2003.
Operating lease income – Operating lease income increased by
$54.4 million to $286.4 million for the 12 months ended December 31,
2004 from $232.0 million for the same period in 2003. Of this increase,
$63.7 million was attributable to new CTL investments and the consolidation
of Sunnyvale in March 2004 and ACRE Simon in November 2004. This
increase was partially offset by $9.2 million of lower operating lease income
due to vacancies and lower rental rates on certain CTL assets.
Other income – Other income generally consists of prepayment
penalties and realized gains from the early repayment of loans and other
lending investments, financial advisory and asset management fees, lease
termination fees, mortgage servicing fees, loan participation payments and
dividends on certain investments. During the 12 months ended December 31,
2004, other income included realized gains on sale of lending investments of
$8.3 million, income from loan repayments and prepayment penalties of
$37.2 million, lease termination, asset management, mortgage servicing and
other fees of approximately $6.3 million and other miscellaneous income such
as dividend payments of $2.4 million.
During the 12 months ended December 31, 2003, other income
included realized gains on sale of lending investments of $16.3 million, income
from loan repayments and prepayment penalties of $17.3 million, asset
management, mortgage servicing and other fees of approximately $2.6 mil-
lion and other miscellaneous income such as dividend payments of $489,000.
Interest expense – For the 12 months ended December 31, 2004,
interest expense increased by $38.7 million to $231.0 million from $192.3 mil-
lion for the same period in 2003. This increase was primarily due to higher aver-
age borrowings on the Company’s unsecured debt obligations. This increase was
also due to higher average one-month LIBOR rates, which averaged 1.50% in
2004 compared to 1.21% in 2003, on the unhedged portion of the Company’s
variable-rate debt and by a $3.0 million increase in amortization of deferred
financing costs on the Company’s debt obligations in 2004 compared to the
same period in 2003.
Operating costs – corporate tenant lease assets – For the 12 months
ended December 31, 2004, operating costs increased by approximately
$10.8 million to $22.4 million from $11.6 million for the same period in
2003. This increase is primarily related to new CTL investments and higher
unrecoverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortization – Depreciation and amortization
increased by $13.9 million to $64.5 million for the 12 months ended
December 31, 2004 from $50.6 million for the same period in 2003. This
increase is primarily due to depreciation on new CTL investments.
General and administrative – For the 12 months ended December 31,
2004, general and administrative expenses increased by $9.7 million to
$47.9 million, compared to $38.2 million for the same period in 2003. This
increase is primarily due to an increase in payroll related and other costs
resulting from employee growth and the consolidation of iStar Operating.
General and administrative – stock-based compensation – General
and administrative – stock-based compensation increased by $106.1 million
to $109.7 million for the 12 months ended December 31, 2004 compared
to $3.6 million for the same period in 2003. In the first quarter 2004, the
Company recognized a charge of approximately $106.9 million composed of
$4.1 million for the performance-based vesting of 100,000 restricted
shares granted under the Company’s long-term incentive plan to the Chief
Financial Officer, $86.0 million for the vesting of 2.0 million phantom shares on
March 30, 2004 granted to the Chief Executive Officer, $10.1 million for the
one-time award of Common Stock to the Chief Executive Officer and $6.7 mil-
lion for the vesting of 155,000 restricted shares granted to several employees.
Provision for loan losses – The Company’s charge for provision for
loan losses increased to $9.0 million for the 12 months ended December 31,
2004 compared to $7.5 million in the same period in 2003. As more fully
discussed in Note 4 to the Company’s Consolidated Financial Statements,
the Company has experienced minimal actual losses on its loan investments
to date. The Company considers it prudent to reflect provisions for loan losses
on a portfolio basis based upon the Company’s assessment of general market
conditions, the Company’s internal risk management policies and credit risk
rating system, industry loss experience, the Company’s assessment of the
likelihood of delinquencies or defaults, and the value of the collateral underly-
ing its investments. Accordingly, since its first full quarter operating its current
business as a public company (the quarter ended June 30, 1998), manage-
ment has reflected quarterly provisions for loan losses in its operating results.
24
iStar
Financial
2004
Loss on early extinguishment of debt – During the 12 months ended
December 31, 2004, the Company incurred $755,000 of losses on early
extinguishment of debt associated with the amortization of deferred financ-
ing costs related to the early repayment of the Company’s $48.0 million term
loan which had an original maturity of July 2008. The Company also incurred
a loss of $251,000 associated with the amortization of deferred financing
costs related to the early termination of the Company’s $300.0 million unse-
cured credit facility maturing July 2004. In addition, the Company had
$11.5 million of losses on early extinguishment of debt associated with the
prepayment penalties and amortization of deferred financing costs related to
the redemption of $110.0 million of the Company’s 8.75% Senior Notes due
2008. In addition, the Company incurred $428,000 of losses associated
with the amortization of deferred financing costs related to the early repay-
ment of the Company’s $60.0 million term loan which had an original matu-
rity of June 2004. The Company also incurred a loss of $287,000 associated
with amortization of deferred financing costs related to the early repayment
of the Company’s $193.0 million term loan which had an original maturity of
July 2004. The Company also incurred a gain of $87,000 associated with the
write off of the premium related to the early repayment of the Company’s
$9.8 million term loan which had an original maturity of June 2005. All of
these activities related to the Company’s strategies of migrating its borrow-
ings toward more unsecured debt and taking advantage of lower cost refi-
nancing opportunities.
During the 12 months ended December 31, 2003, the Company
had no losses on early extinguishment of debt.
Equity in earnings (loss) from joint ventures and unconsolidated
subsidiaries – For the 12 months ended December 31, 2004, equity in earn-
ings (loss) from joint ventures and unconsolidated subsidiaries increased by
$7.2 million to $2.9 million from $(4.3) million for the same period in 2003.
This increase is primarily due to certain lease terminations in 2003 and the
conveyance by one of the Company’s CTL joint ventures of its interest in two
buildings and the related property to the mortgage lender in exchange for sat-
isfaction of its obligations of the related loan in the first quarter of 2004.
In addition, the increase is due to the consolidation of iStar Operating and is
partially offset by vacancies, the sale of one of the Company’s CTL joint venture
interests in five buildings in September 2004, the consolidation of Sunnyvale
in March 2004 and the consolidation of ACRE Simon in November 2004
(see Note 6 to the Company’s Consolidated Financial Statements).
Income from discontinued operations – For the 12 months ended
December 31, 2004 and 2003, operating income earned by the Company
on CTL assets sold (prior to their sale) and assets held for sale of approxi-
mately $18.1 million and $22.2 million, respectively, is classified as “discon-
tinued operations,” even though such income was recognized by the
Company prior to the asset dispositions or classification as “Assets held for
sale” on the Company’s Consolidated Balance Sheets.
Gain from discontinued operations – During 2004, the Company
disposed of 22 CTL assets for net proceeds of $279.6 million, and recog-
nized a gain of approximately $43.4 million.
During 2003, the Company disposed of nine CTL assets for net pro-
ceeds of $47.6 million, and recognized a gain of approximately $5.2 million.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Interest income – Interest income increased by $48.8 million
to $304.4 million for the 12 months ended December 31, 2003 from
$255.6 million for the same period in 2002. This increase was primarily due
to $102.3 million of interest income on new originations or additional fund-
ings, offset by a $51.2 million decrease from the repayment of loans and
other lending investments. This increase was partially offset by a decrease in
interest income on the Company’s variable-rate lending investments as the
result of lower average one-month LIBOR rates of 1.21% in 2003, compared
to 1.77% in 2002.
Operating lease income – Operating lease income increased by
$22.0 million to $232.0 million for the 12 months ended December 31,
2003 from $210.0 million for the same period in 2002. Of this increase,
$33.8 million was attributable to new CTL investments. This increase was
partially offset by $7.0 million of lower operating lease income due to vacan-
cies on certain CTL assets.
Other income – Other income generally consists of prepayment
penalties and realized gains from the early repayment of loans and other
lending investments, financial advisory and asset management fees, lease
termination fees, mortgage servicing fees, loan participation payments
and dividends on certain investments. During the 12 months ended
December 31, 2003, other income included realized gains on sale of lending
investments of $16.3 million, income from loan repayments and prepayment
penalties of $17.3 million, asset management, mortgage servicing and other
fees of approximately $2.6 million and other miscellaneous income such as
dividend payments of $489,000.
During the 12 months ended December 30, 2002, other income
included prepayment penalties and realized gains on sale of lending invest-
ments of $12.6 million, asset management, mortgage servicing fees and
other fees of approximately $9.0 million, lease termination fees of $2.9 mil-
lion, loan participation payments of $3.3 million and other miscellaneous
income such as dividend payments and insurance claims of $994,000.
Interest expense – For the 12 months ended December 31, 2003,
interest expense increased by $7.4 million to $192.3 million from
$184.9 million for the same period in 2002. This increase was primarily due to
the higher average borrowings on the Company’s debt obligations, term loans
and secured notes. This increase was partially offset by lower average one-
month LIBOR rates, which averaged 1.21% in 2003 compared to 1.77% in
2002 on the unhedged portion of the Company’s variable-rate debt and by a
$4.5 million decrease in amortization of deferred financing costs on the
Company’s debt obligations in 2003 compared to the same period in 2002.
Operating costs – corporate tenant lease assets – For the 12 months
ended December 31, 2003, operating costs increased by approximately
$4.9 million to $11.6 million from $6.7 million for the same period in 2002.
This increase is primarily related to new CTL investments and higher unre-
coverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortization – Depreciation and amortization
increased by $8.0 million to $50.6 million for the 12 months ended
December 31, 2003 from $42.6 million for the same period in 2002. This
increase is primarily due to depreciation on new CTL investments.
25
iStar
Financial
2004
General and administrative – For the 12 months ended December 31,
2003, general and administrative expenses increased by $7.8 million to
$38.2 million, compared to $30.4 million for the same period in 2002. This
increase is primarily due to the consolidation of iStar Operating and the result of
compensation expense recognized for dividends paid on the Chief Executive
Officer’s contingently vested phantom shares (see Note 10 to Company’s
Consolidated Financial Statements).
General and administrative – stock-based compensation – General
and administrative – stock-based compensation decreased by $14.4 million
for the 12 months ended December 31, 2003 compared to the same period
in 2002. In 2002, the Company recognized a charge of approximately
$15.0 million related to the performance-based vesting of 500,000 restricted
shares granted under the Company’s long-term incentive plan and tied to
overall shareholder performance (see Note 10 to the Company’s Consolidated
Financial Statements).
Provision for loan losses – The Company’s charge for provision for
loan losses decreased to $7.5 million for the 12 months ended December 31,
2003 compared to $8.3 million for the same period in 2002. As more fully
discussed in Note 4 to the Company’s Consolidated Financial Statements,
the Company has experienced minimal actual losses on its loan investments
to date. The Company considers it prudent to reflect provisions for loan losses
on a portfolio basis based upon the Company’s assessment of general market
conditions, the Company’s internal risk management policies and credit risk
rating system, industry loss experience, the Company’s assessment of the likeli-
hood of delinquencies or defaults, and the value of the collateral underlying its
investments. Accordingly, since its first full quarter operating its current busi-
ness as a public company (the quarter ended June 30, 1998), management
has reflected quarterly provisions for loan losses in its operating results.
Loss on early extinguishment of debt – During the 12 months ended
December 31, 2003, the Company had no losses on early extinguishment of debt.
During the 12 months ended December 31, 2002, the Company
had $12.2 million of losses on early extinguishment of debt associated
with the prepayment penalties and amortization of deferred financing fees
related to the repayment of the STARs, Series 2000-1 bonds. This loss of
$12.2 million represented approximately $8.2 million in unamortized
deferred financing costs and approximately $4.0 million in prepayment
penalties. In accordance with SFAS No. 145 these costs were reclassified from
“Extraordinary loss on early extinguishment of debt” into continuing opera-
tions for comparative purposes for financial statements for periods after
January 1, 2003.
Equity in earnings (loss) from joint ventures and unconsolidated sub-
sidiaries – During the 12 months ended December 31, 2003, equity in earn-
ings (loss) from joint ventures and unconsolidated subsidiaries decreased by
$5.5 million to $(4.3) million from $1.2 million for the same period in 2002.
This decrease is primarily due to certain lease terminations in one of the
Company’s CTL joint venture investments (see Note 6 to the Company’s
Consolidated Financial Statements).
Income from discontinued operations – For the 12 months ended
December 31, 2003 and 2002, operating income earned by the Company
on CTL assets sold (prior to their sale) and assets held for sale of approxi-
mately $22.2 million and $22.9 million, respectively, is classified as “discon-
tinued operations,” even though such income was recognized by the
Company prior to the asset dispositions or classification as “Assets held for
sale” on the Company’s Consolidated Balance Sheets.
Gain from discontinued operations – During 2003, the Company
disposed of nine CTL assets for net proceeds of $47.6 million, and recog-
nized a gain of approximately $5.2 million.
During 2002, the Company disposed of one CTL asset for net pro-
ceeds of $3.7 million, and recognized a gain of approximately $595,000. In
addition, one of the Company’s customers exercised an option to terminate
its lease on 50.00% of the land leased from the Company. In connection with
this termination, the Company realized $17.5 million in cash lease termina-
tion payments, offset by a $17.4 million impairment charge in connection
with the termination, resulting in a net gain of approximately $123,000.
Adjusted Earnings
The Company measures its performance using adjusted earnings in
addition to net income. Adjusted earnings represents net income allocable to
common shareholders and HPU holders computed in accordance with GAAP,
before depreciation, amortization, gain (loss) from discontinued operations,
extraordinary items and cumulative effect of change in accounting principle.
Adjustments for unconsolidated partnerships and joint ventures reflect the
Company’s share of adjusted earnings calculated on the same basis.
The Company believes that adjusted earnings is a helpful measure
to consider, in addition to net income, because this measure helps the
Company to evaluate how its commercial real estate finance business is per-
forming compared to other commercial finance companies, without the
effects of certain GAAP adjustments that are not necessarily indicative of cur-
rent operating performance. The most significant GAAP adjustments that the
Company excludes in determining adjusted earnings are depreciation and
amortization. As a commercial finance company that focuses on real estate
lending and corporate tenant leasing, the Company records significant depre-
ciation on its real estate assets and amortization of deferred financing costs
associated with its borrowings. These items do not affect the Company’s daily
operations, but they do impact financial results under GAAP. By measuring its
performance using adjusted earnings and net income, the Company is able to
evaluate how its business is performing both before and after giving effect to
recurring GAAP adjustments such as depreciation and amortization and, in the
case of adjusted earnings, after including earnings from its joint venture inter-
ests on the same basis and excluding gains or losses from the sale of assets
that will no longer be part of its continuing operations.
Adjusted earnings is not an alternative or substitute for net income
in accordance with GAAP as a measure of the Company’s performance.
Rather, the Company believes that adjusted earnings is an additional measure
that helps analyze how its business is performing. This measure is also used
to track compliance with covenants in the Company’s borrowing arrange-
ments because several of its material borrowing arrangements have
covenants based upon this measure. Adjusted earnings should not be viewed
as an alternative measure of either the Company’s liquidity or funds available
for its cash needs or for distribution to its shareholders. In addition, the
Company may not calculate adjusted earnings in the same manner as other
companies that use a similarly titled measure.
For the Years Ended December 31,
2004
2003
2002
2001
2000
(In thousands, unaudited)
Adjusted earnings:
Net income allocable to common shareholders and HPU holders
Add: Joint venture income
Add: Depreciation
Add: Joint venture depreciation and amortization
Add: Amortization of deferred financing costs
Less: Gains from discontinued operations
Add: Cumulative effect of change in accounting principle(1)
$209,107
166
67,853
3,544
33,651
(43,375)
–
$255,249
593
55,905
7,417
27,180
(5,167)
–
$178,362
991
48,041
4,433
31,676
(717)
–
$193,004
965
35,642
4,044
21,303
(1,145)
282
$180,678
937
34,514
3,662
13,528
(2,948)
–
26
iStar
Financial
2004
Adjusted diluted earnings allocable to
common shareholders and HPU holders(2)(3)(4)(5)
Weighted average diluted common shares outstanding(6)
Explanatory Notes:
$270,946
112,537
$341,177
104,248
$262,786
93,020
$254,095
88,606
$230,371
86,523
(1)
(2)
(3)
(4)
(5)
(6)
Represents one-time effect of adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as of January 1, 2001.
For the years ended December 31, 2004 and 2003, adjusted diluted earnings allocable to common shareholders and HPU holders includes $4,261 and $2,659 of adjusted earnings allocable to HPU holders, respectively.
For years ended December 31, 2004, 2003, 2002, 2001 and 2000, adjusted diluted earnings allocable to common shareholders includes approximately $9.6 million, $0, $4.0 million, $1.0 million and
$317,000 of cash paid for prepayment penalties associated with early extinguishment of debt.
For the year ended December 31, 2004, adjusted diluted earnings allocable to common shareholders includes a $106.9 million charge related to performance-based vesting of 100,000 restricted shares
granted under the Company’s long-term incentive plan to the Chief Financial Officer, the vesting of 2.0 million phantom shares on March 30, 2004 granted to the Chief Executive Officer, the one-time award of
Common Stock with a value of $10.0 million to the Chief Executive Officer, the vesting of 155,000 restricted shares granted to several employees and the Company’s share of taxes associated with all transactions.
For the year ended December 31, 2002, adjusted diluted earnings allocable to common shareholders includes a $15.0 million charge related to performance-based vesting of restricted shares granted under
the Company’s long-term incentive plan.
In addition to the GAAP defined weighted average diluted shares outstanding these balances include an additional 73,000 shares, 147,000 shares, 371,000 shares, 372,000 shares and 372,000 shares for
the years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively, relating to the additional dilution of joint venture shares.
Risk Management
First Dollar and Last Dollar Exposure – One component of the
Company’s risk management assessment is an analysis of the Company’s first
and last dollar loan-to-value percentage with respect to the facilities or
companies the Company finances. First dollar loan-to-value represents the
weighted average beginning point for the Company’s lending exposure in
the aggregate capitalization of the underlying facilities or companies it
finances. Last dollar loan-to-value represents the weighted average ending
point for the Company’s lending exposure in the aggregate capitalization of
the underlying facilities or companies it finances.
Loans and Other Lending Investments Credit Statistics – The table
below summarizes the Company’s loans and other lending investments that
are more than 90 days past due in scheduled payments and details the
provision for loan losses associated with the Company’s lending investments
for the 12 months ended December 31, 2004 and 2003 (in thousands):
As of December 31,
2004
2003
$
%
$
%
Carrying value of loans past due
90 days or more/
As a percentage of total assets $27,526 0.38%
0.69%
As a percentage of total loans
$27,480 0.41%
0.74%
Provision for loan losses/
As a percentage of total assets
As a percentage of total loans
42,436 0.59%
1.06%
33,436 0.50%
0.89%
Net charge-offs/
As a percentage of total assets
As a percentage of total loans
– 0.00%
0.00%
3,314 0.05%
0.09%
27
iStar
Financial
2004
Non-Performing Loans – Non-performing loans includes all loans on
non-accrual status and repossessed real estate collateral. The Company
transfers loans to non-accrual status at such time as: (1) the loan becomes
90 days delinquent; (2) the loan has a maturity default; or (3) the net realiz-
able value of the loan’s underlying collateral approximates the Company’s
carrying value of such loan. Interest income is recognized only upon actual
cash receipt for loans on non-accrual status. As of December 31, 2004, the
Company’s non-performing loans included two non-accrual loans with an
aggregate carrying value of $27.5 million, or 0.38% of total assets, com-
pared to 0.41% at December 31, 2003, and no repossessed real estate col-
lateral. Management believes there is adequate collateral to support the book
values of the assets.
Watch List Assets – The Company conducts a quarterly compre-
hensive credit review, resulting in an individual risk rating being assigned to
each asset. This review is designed to enable management to evaluate and
proactively manage asset-specific credit issues and identify credit trends on
a portfolio-wide basis as an “early warning system.” As of December 31,
2004, the Company had two assets on its credit watch list, excluding those
assets included in non-performing loans above, with an aggregate carrying
value of $64.1 million, or 0.89% of total assets.
Liquidity and Capital Resources
The Company requires significant capital to fund its investment
activities and operating expenses. The Company has sufficient access to
capital resources to fund its existing business plan, which includes the expan-
sion of its real estate lending and corporate tenant leasing businesses.
The Company’s capital sources include cash flow from operations, borrow-
ings under lines of credit, additional term borrowings, unsecured corporate
debt financing, financings secured by the Company’s assets, and the issuance
of common, convertible and/or preferred equity securities. Further, the
Company may acquire other businesses or assets using its capital stock, cash
or a combination thereof.
The distribution requirements under the REIT provisions of the
Code limit the Company’s ability to retain earnings and thereby replenish or
increase capital committed to its operations. However, the Company believes
that its access to significant capital resources and financing will enable the
Company to meet current and anticipated capital requirements.
The Company believes that its existing sources of funds will be
adequate for purposes of meeting its short- and long-term liquidity needs.
The Company’s ability to meet its long-term (i.e., beyond one year) liquidity
requirements is subject to obtaining additional debt and equity financing. Any
decision by the Company’s lenders and investors to provide the Company
with financing will depend upon a number of factors, such as the Company’s
compliance with the terms of its existing credit arrangements, the
Company’s financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders’ and
investors’ resources and policies concerning the terms under which they
make capital commitments and the relative attractiveness of alternative
investment or lending opportunities.
The following table outlines the contractual obligations related to the Company’s long-term debt agreements and operating lease obligations as of
December 31, 2004. There are no other long-term liabilities of the Company that would constitute a contractual obligation.
Long-Term Debt Obligations:
Unsecured notes
iStar Asset Receivables secured notes(2)
Unsecured revolving credit facilities
Secured term loans(3)
Secured revolving credit facilities
Total
Operating Lease Obligations:(4)
Total
Principal Payments Due By Period(1)
Total
Less Than
1 Year
2–3
Years
$2,125,000
932,914
840,000
686,408
78,586
4,662,908
12,868
$4,675,776
$
–
113,309
–
76,670
–
189,979
2,871
$192,850
$250,000
–
–
132,164
78,586
460,750
5,688
$466,438
4–5
Years
(In thousands)
$ 775,000
202,052
840,000
289,199
–
2,106,251
3,784
$2,110,035
6–10
Years
After 10
Years
$1,000,000
617,553
–
98,306
–
1,715,859
525
$1,716,384
$100,000
–
–
90,069
–
190,069
–
$190,069
Explanatory Notes:
(1)
(2)
(3)
(4)
Assumes exercise of extensions on the Company’s long-term debt obligations to the extent such extensions are at the Company’s option.
Based on expected proceeds from principal payments received on loan assets collateralizing such notes.
The Company also has a $6.6 million letter of credit outstanding as additional collateral for one of its secured term loans.
The Company also has a $1.0 million letter of credit outstanding as security for its primary corporate office lease.
28
iStar
Financial
2004
The Company’s primary credit facility is an unsecured credit facility
totaling $1,250.0 million which bears interest at LIBOR + 0.875% per annum
and matures in April 2008. At December 31, 2004, the Company had
$840.0 million drawn under this facility (see Note 7 to the Company’s
Consolidated Financial Statements). The Company also has four LIBOR-
based secured revolving credit facilities with an aggregate maximum capacity
of $1.8 billion, of which $78.6 million was drawn as of December 31, 2004.
Availability under these facilities is based on collateral provided under a bor-
rowing base calculation.
The Company’s debt obligations contain covenants that are both
financial and non-financial in nature. Significant financial covenants include
limitations on the Company’s ability to incur indebtedness beyond specified
levels and a requirement to maintain specified ratios of unsecured indebted-
ness compared to unencumbered assets.
Significant non-financial covenants include a requirement in its
publicly-held debt securities that the Company offer to repurchase those
securities at a premium if the Company undergoes a change of control. As of
December 31, 2004, the Company believes it is in compliance with all finan-
cial and non-financial covenants on its debt obligations.
Unencumbered Assets/Unsecured Debt – The Company has made
and will continue to make progress in migrating its balance sheet towards
more unsecured debt, which generally results in a corresponding reduction of
secured debt and an increase in unencumbered assets. The exact timing in
which the Company will issue or borrow unsecured debt will be subject to
market conditions. The following table shows the ratio of unencumbered
assets to unsecured debt at December 31, 2004 and 2003 (in thousands):
Total Unencumbered Assets
Total Unsecured Debt(1)
Unencumbered Assets/Unsecured Debt
As of December 31,
2004
$4,687,044
$2,965,000
158%
2003
$2,167,388
$1,315,000
165%
Explanatory Note:
(1)
See Note 7 to the Company’s Consolidated Financial Statements for a more detailed description of
the Company’s unsecured debt.
Capital Markets Financings – The Company was an active issuer in
the capital markets in the year ended December 31, 2004. The continued
strength of the Company’s operating performance and the low interest rate
environment provided the Company with the opportunity to issue preferred
equity and unsecured debt securities on attractive pricing terms. During the
12 months ended December 31, 2004, the Company issued $850.0 million
aggregate principal amount of fixed-rate Senior Notes bearing interest at
annual rates ranging from 4.875% to 5.700% and maturing between 2009
and 2014, and $200.0 million of variable-rate Senior Notes bearing interest
at an annual rate of three-month LIBOR + 1.25% and maturing in 2007. The
Company issued 8.3 million shares of preferred stock in two series with
cumulative annual dividend rates of 7.50%.
During the 12 months ended December 31, 2003, the Company
issued $685.0 million aggregate principal amount of fixed-rate Senior Notes
bearing interest at annual rates ranging from 6.00% to 7.00% and maturing
between 2008 and 2013. The Company issued 12.8 million shares of
preferred stock in three series with cumulative annual dividend rates ranging
from 7.650% to 7.875%. All of the shares of preferred stock have a liquidation
preference of $25.00 per share. The Company also issued 5.0 million shares
of Common Stock in 2003 at a price to the public of $38.50 per share.
The Company primarily used the proceeds from the issuances of
securities described above to repay secured indebtedness as it migrates its
balance sheet towards more unsecured debt and to refinance higher yielding
obligations. During the 12 months ended December 31, 2004, the Company
redeemed approximately $110.0 million aggregate principal amount of its
outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of par. In
connection with this redemption, the Company recognized a charge to
income of $11.5 million included in “Loss on early extinguishment of debt” on
the Company’s Consolidated Statements of Operations. The Company also
retired its 3.3 million shares of Series H Variable Rate Cumulative Redeemable
Preferred Stock. In addition, the Company redeemed all of its 2.0 million
shares of 9.375% Series B Cumulative Redeemable Preferred Stock and all of
its 1.3 million shares of 9.200% Series C Cumulative Redeemable Preferred
Stock. In connection with this redemption, the Company recognized a charge
to net income allocable to common shareholders and HPU holders of approx-
imately $9.0 million included in “Preferred dividend requirements” on the
Company’s Consolidated Statements of Operations.
During the 12 months ended December 31, 2003, the Company
retired all of its 4.0 million shares of 9.50% Series A Cumulative Redeemable
Preferred Stock and the 6.75% Dealer Remarketable Securities of its
Leasing Subsidiary.
On November 14, 2002, the Company completed an under-
written public offering of 8.0 million primary shares of the Company’s
Common Stock. The Company received approximately $202.9 million from
the offering and used these proceeds to repay a portion of its secured debt.
Unsecured/Secured Credit Facilities Activity – On July 20, 2004, one
of the Company’s $500.0 million secured facilities was amended to reduce
the maximum amount available to $350.0 million, to extend the final matu-
rity to August 2005 and to reduce the stated interest rate on first mortgage
collateral to LIBOR + 1.50%.
On April 19, 2004, the Company completed a new $850.0 million
unsecured revolving credit facility with 19 banks and financial institutions.
The new facility has a three-year initial term with a one-year extension at the
Company’s option. The facility bears interest, based upon the Company’s
current credit ratings, at a rate of LIBOR + 0.875% and a 17.5 basis point
annual facility fee decreased from LIBOR + 1.00% and 25 basis points,
respectively, due to an upgrade in the Company’s senior unsecured debt rat-
ing to investment grade by S&P. On December 17, 2004, the commitment
on this facility was increased to $1,250.0 million and the accordion feature
was amended to increase the facility to $1.5 billion in the future if necessary.
This new facility replaced a $300.0 million unsecured credit facility with a
scheduled maturity of July 2004.
On March 12, 2004, one of the Company’s $700.0 million secured
facilities was amended to reduce the maximum amount available to
$250.0 million, to shorten the maturity to March 2005 and to reduce the
stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and
on subordinate and mezzanine lending investments to LIBOR + 2.05%.
29
iStar
Financial
2004
On January 13, 2004, the Company closed $200.0 million of
term financing that is secured by certain corporate bond investments and
other lending securities. A number of these investments were previously
financed under existing credit facilities. The new facility bears interest at
LIBOR + 1.05% – 1.50% and has a final maturity date of January 2006.
On January 27, 2003, the Company extended the maturity on one
of its $700.0 million secured facilities to January 2007, which includes a
one-year “term-out” at the Company’s option.
On September 30, 2002, the Company closed a $500.0 million
secured revolving credit facility with a leading financial institution. The facility
had a three-year term and bears interest at LIBOR + 1.50% to 2.25%,
depending upon the collateral contributed to the borrowing base. The facility
accepts a broad range of structured finance and CTL assets and has a final
maturity of September 2005. On November 4, 2003, this facility was
amended to include subordinate and mezzanine lending investments as
collateral at stated interest rates of LIBOR + 2.15% – 2.25%
Other Financing Activity – During the 12 months ended December 31,
2004, the Company purchased the remaining interest in the ACRE Simon
joint venture from the former ACRE Simon external member for $40.1 mil-
lion. Upon purchase of the interest, the ACRE Simon joint venture became
fully consolidated for accounting purposes and approximately $31.8 million
of secured term debt is reflected on the Company’s Consolidated Balance
Sheets. The term loans bear interest at rates of 7.61% to 8.73% and mature
between 2005 and 2011. In addition, the Company repaid a total of
$314.6 million in term loan financing, $9.8 million of which was part of the
ACRE Simon acquisition.
During the 12 months ended December 31, 2003, the Company
closed an aggregate of $233.0 million in secured term debt bearing interest
at rates ranging from LIBOR + 0.60% – 2.125% and maturing between
2003 to 2008. In addition, the Company repaid $125.0 million of term loan
financing, $50.0 million of which had been closed during the same year.
In addition, during the 12 months ended December 31, 2003, a
wholly-owned subsidiary of the Company issued iStar Asset Receivables
(“STARs”), Series 2003-1, the Company’s proprietary match funding pro-
gram, consisting of $645.8 million of investment-grade bonds secured by
the subsidiary’s structured finance and CTL assets, which had an aggregate
outstanding carrying value of approximately $738.1 million at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating-rate basis,
was approximately LIBOR + 0.47% at inception. For accounting purposes,
this transaction was treated as a secured financing; the underlying assets and
STARs liabilities remained on the Company’s Consolidated Balance Sheets,
and no gain on sale was recognized.
During the 12 months ended December 31, 2002, the Company
purchased the remaining interest in the Milpitas joint venture from the
Milpitas external member for $27.9 million. Upon purchase of the interest,
the Milpitas joint venture became fully consolidated for accounting purposes
and approximately $79.1 million of secured term debt is reflected on the
Company’s Consolidated Balance Sheets. This term loan bears interest at
6.55% and matures in 2005. In addition, the Company closed a $61.5 million
term loan financing with a leading institution to fund a portion of an
$82.1 million CTL investment. The non-recourse loan is fixed rate and bears
interest at 6.412%, matures in 2013 and amortizes over a 30-year schedule.
In addition, during the 12 months ended December 31, 2002, the
Company repaid the then remaining $446.2 million of bonds outstanding
under its STARs, Series 2000-1 financing. Simultaneously, a wholly-owned
subsidiary of the Company issued STARs, Series 2002-1, consisting of
$885.1 million of investment-grade bonds secured by the subsidiary’s struc-
tured finance and CTL assets, which had an aggregate outstanding carrying
value of approximately $1.1 billion at inception. Principal payments received
on the assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The weighted average inter-
est rate on the bonds, on an all-floating-rate basis, was approximately
LIBOR + 0.56% at inception. For accounting purposes, this transaction was
treated as a secured financing: the underlying assets and STARs liabilities
remained on the Company’s Consolidated Balance Sheets, and no gain on sale
was recognized.
Hedging Activities – The Company has variable-rate lending assets
and variable-rate debt obligations. These assets and liabilities create a natural
hedge against changes in variable interest rates. This means that as interest
rates increase, the Company earns more on its variable-rate lending assets
and pays more on its variable-rate debt obligations and, conversely, as inter-
est rates decrease, the Company earns less on its variable-rate lending
assets and pays less on its variable-rate debt obligations. When the amount
of the Company’s variable-rate debt obligations exceeds the amount of its
variable-rate lending assets, the Company utilizes derivative instruments to
limit the impact of changing interest rates on its net income. The Company
has a policy in place, that is administered by the Audit Committee, which
requires the Company to enter into hedging transactions to mitigate the
impact of rising interest rates on the Company’s earnings. The policy states
that a 100 basis point increase in short-term rates cannot have a greater
than 2.50% impact on quarterly earnings. The Company does not use deriv-
ative instruments to hedge assets or for speculative purposes. The derivative
instruments the Company uses are typically in the form of interest rate
swaps and interest rate caps. Interest rate swaps effectively change variable-
rate debt obligations to fixed-rate debt obligations. Interest rate caps effec-
tively limit the maximum interest rate on variable-rate debt obligations.
In addition, when appropriate the Company enters into interest
rate swaps that convert fixed-rate debt to variable rate in order to mitigate
the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company’s use of derivative instru-
ments are the risks that a counterparty to a hedging arrangement could
default on its obligation and the risk that the Company may have to pay cer-
tain costs, such as transaction fees or breakage costs, if a hedging arrange-
ment is terminated by the Company. As a matter of policy, the Company
enters into hedging arrangements with counterparties that are large, credit-
worthy financial institutions typically rated at least “A” by S&P and “A2” by
Moody’s. The Company’s hedging strategy is approved and monitored by the
Company’s Audit Committee on behalf of its Board of Directors and may be
changed by the Board of Directors without shareholder approval.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of December 31, 2004. All hedges are cur-
rently effective and no ineffectiveness exists. The net value (liability) associated with these hedges is reflected on the Company’s Consolidated Balance
Sheets (in thousands).
30
iStar
Financial
2004
Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
Total Estimated Value
Notional
Amount
$125,000
125,000
67,000
67,000
66,000
200,000
105,000
100,000
100,000
100,000
100,000
50,000
50,000
45,000
345,000
135,000
Strike Price or
Swap Rate
2.885%
2.838%
4.659%
4.659%
4.660%
4.381%
3.678%
4.345%
3.878%
3.713%
3.686%
3.810%
4.290%
3.684%
8.000%
6.000%
Trade
Date
1/23/03
2/11/03
12/09/04
12/09/04
12/09/04
12/17/03
1/15/04
12/17/03
11/27/02
1/15/04
1/15/04
11/27/02
12/17/03
1/15/04
5/22/02
9/29/03
Maturity
Date
6/25/06
6/25/06
3/31/15
3/31/15
3/31/15
12/15/10
1/15/09
12/15/10
8/15/08
1/15/09
1/15/09
8/15/08
12/15/10
1/15/09
5/28/14
10/15/06
Estimated
Value at
December 31,
2004
$ 544
632
217
217
208
(55)
(1,339)
(219)
1,030
(1,128)
(1,239)
389
(256)
(562)
4,465
19
$ 2,923
Between January 1, 2003 and December 31, 2004, the Company also had outstanding the following cash flow hedges that have expired or been
settled (in thousands):
Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
LIBOR Cap
LIBOR Cap
Explanatory Note:
(1)
Acquired in connection with the TriNet Acquisition (see Note 1).
Notional
Amount
$235,000
200,000
200,000
125,000
125,000
100,000
100,000
100,000
75,000
50,000
50,000
75,000
35,000
Strike Price or
Swap Rate
1.135%
1.144%
1.144%
7.058%
7.055%
4.139%
4.643%
4.484%
5.580%
4.502%
4.500%
7.750%
7.750%
Trade
Date
3/11/04
3/11/04
3/11/04
6/15/00
6/15/00
9/29/03
9/29/03
1/16/04
11/4/99(1)
1/16/04
1/16/04
11/4/99(1)
11/4/99(1)
Maturity
Date
9/15/04
9/15/04
9/15/04
6/25/03
6/25/03
1/2/11
1/2/14
5/1/14
12/1/04
5/1/14
5/1/14
12/1/04
12/1/04
31
iStar
Financial
2004
On December 9, 2004, the Company entered into three forward-
starting swaps all with ten-year terms and rates of 4.659%, 4.659% and
4.660% and notional amounts of $67.0 million, $67.0 million and $66.0 mil-
lion, respectively, and are being used to lock-in swap rates related to a por-
tion of planned future corporate unsecured fixed-rate bond issuances. These
three swaps were settled on March 1, 2005 in connection with the
Company’s issuance of $700.0 million of seven-year Senior Notes (see Note
17 to the Company’s Consolidated Financial Statements).
On March 11, 2004, the Company entered into three pay-fixed inter-
est rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144%
and notional amounts of $235.0 million, $200.0 million and $200.0 million,
respectively. These three swaps matured on September 15, 2004.
On January 16, 2004, the Company entered into three forward-
starting swaps all with ten-year terms and rates of 4.484%, 4.502%
and 4.500% and notional amounts of $100.0 million, $50.0 million and
$50.0 million, respectively, and were used to lock-in swap rates related to a
portion of planned future corporate unsecured fixed-rate bond issuances.
These three swaps were settled in connection with the Company’s issuance
of $250.0 million of ten-year Senior Notes in March 2004.
On January 15, 2004, in connection with the Company’s fixed-
rate corporate bonds, the Company entered into four pay-floating interest
rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional
amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million,
respectively, and maturing on January 15, 2009. The Company pays six-
month LIBOR and receives the stated fixed rate in return. These swaps miti-
gate the risk of changes in the fair value of $350.0 million of five-year Senior
Notes attributable to changes in LIBOR. For accounting purposes, the differ-
ence between the fixed rate received and the LIBOR rate paid on the notional
amount of the swap is recorded as “Interest expense” on the Company’s
Consolidated Statements of Operations. In addition, the Company adjusts
the value of the swap to its fair value and adjusts the carrying amount of the
hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward-
starting swaps each having a $100.0 million notional amount. These pay-
fixed swaps which were effective in September 2003, had rates of 4.139%
and 4.643%, had seven-year and ten-year terms, respectively, and were
used to lock-in swap rates related to a portion of planned future corporate
unsecured fixed-rate bond issuances. These two swaps were settled in con-
nection with the Company’s issuance of $350.0 million of seven-year Senior
Notes and $150.0 million of ten-year Senior Notes. In addition, effective in
September 2003, the Company entered into a $135.0 million cap with a rate
of 6.00% to hedge the Company’s current outstanding floating-rate debt.
This cap has a three-year term. Further, the Company entered into two
$125.0 million forward-starting swaps in the first quarter 2003 that
became effective in June 2003. These forward-starting swaps replaced the
two $125.0 million pay-fixed swaps that expired in June 2003. The two new
pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company’s fixed-
rate corporate bonds, the Company entered into three pay-floating interest
rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with
notional amounts of $200.0 million, $100.0 million and $50.0 million, respec-
tively, and maturing on December 15, 2010 and also entered into two
pay-floating interest rate swaps in November 2002 struck at 3.8775% and
3.81% with notional amounts of $100.0 million and $50.0 million, respec-
tively, and maturing on August 15, 2008. The Company pays six-month
LIBOR on the swaps entered into in December 2003 and one-month LIBOR
on the swaps entered into in November 2002 and receives the stated fixed
rate in return. These swaps mitigate the risk of changes in the fair value of
$350.0 million of seven-year Senior Notes and $150.0 million of ten-year
Senior Notes attributable to changes in LIBOR. For accounting purposes, the
difference between the fixed rate received and the LIBOR rate paid on the
notional amount of the swap is recorded as “Interest expense” on the
Company’s Consolidated Statements of Operations. In addition, the Company
adjusts the value of the swap to its fair value and adjusts the carrying amount
of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the
Company entered into a LIBOR interest rate cap struck at 6.95% in the
notional amount of $270.6 million, and simultaneously sold a LIBOR interest
rate cap with the same terms. Since these instruments do not change the
Company’s net interest rate risk exposure, they do not qualify as hedges and
changes in their respective values are charged to earnings. As the terms of
these arrangements are substantially the same, the effects of a revaluation
of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the
Company entered into a LIBOR interest rate cap struck at 8.00% in the
notional amount of $345.0 million. The Company utilizes the provisions of
SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that
the up-front fees paid on option-based products such as caps should be
expensed into earnings based on the allocation of the premium to the
affected periods as if the agreement were a series of “caplets.” These allo-
cated premiums are then reflected as a charge to income (as part of interest
expense) in the affected period. On May 28, 2002, in connection with the
STARs, Series 2002-1 transaction, the Company paid a premium of
$13.7 million for this interest rate cap. Using the “caplet” methodology dis-
cussed above, amortization of the cap premium is dependent upon the actual
value of the caplets at inception.
During the year ended December 31, 1999, the Company refi-
nanced its $125.0 million term loan maturing March 15, 1999 with a
$155.4 million term loan maturing March 5, 2009. The term loan bears inter-
est at 7.44% per annum, payable monthly, and amortizes over an approxi-
mately 22-year schedule. The term loan represented forecasted transactions
for which the Company had previously entered into U.S. Treasury-based
hedging transactions. The net $3.4 million cost of the settlement of such
hedges has been deferred and is being amortized as an increase to the effec-
tive financing cost of the term loan over its effective ten-year term.
Off-Balance Sheet Transactions – The Company is not dependent on
the use of any off-balance sheet financing arrangements for liquidity. As of
December 31, 2004, the Company did not have any CTL joint ventures
accounted for under the equity method, which had third-party debt.
The Company’s STARs securitizations are all on-balance sheet financings.
The Company has certain discretionary and non-discretionary
unfunded commitments related to its loans and other lending investments
32
iStar
Financial
2004
that it may need to, or choose to, fund in the future. Discretionary commit-
ments are those under which the Company has sole discretion with respect
to future funding. Non-discretionary commitments are those that the
Company is generally obligated to fund at the request of the borrower or
upon the occurrence of events outside of the Company’s direct control. As
of December 31, 2004, the Company had 25 loans with unfunded com-
mitments totaling $678.9 million, of which $202.5 million was discretionary
and $476.4 million was non-discretionary. In addition, the Company
has $32.8 million of non-discretionary unfunded commitments related to
two existing customers. These commitments generally fall into two categories:
(1) pre-approved capital improvement projects; and (2) new or additional
construction costs. Currently, the Company has committed $18.1 million in
pre-approved capital improvement projects and $14.7 million in new
construction costs. Further, the Company had one equity investment with
unfunded non-discretionary commitments of $5.0 million.
Ratings Triggers – The $1,250.0 million unsecured revolving credit
facility that the Company has in place at December 31, 2004, bears interest at
LIBOR + 0.875% per annum based on the Company’s senior unsecured credit
ratings of BBB- from S&P, Baa3 from Moody’s and BBB- from Fitch Ratings.
This rate was reduced from LIBOR + 1.00% due to the Company achieving an
investment grade senior unsecured debt rating from S&P in October 2004.
There are no other ratings triggers in any of the Company’s debt instruments or
other operating or financial agreements at December 31, 2004.
On October 6, 2004, Moody’s upgraded the Company’s senior
unsecured debt ratings to Baa3, with a stable outlook, up from Ba1. The
upgraded rating reflects the shift towards unsecured debt and the resulting
increase in unencumbered assets, the continued profitable growth in iStar’s
business franchise, the strong quality of both the structured finance and CTL
business and the active management of those businesses.
On October 5, 2004, the Company’s senior unsecured credit rat-
ing was upgraded to an investment-grade rating of BBB- from BB+ by S&P
as a result of the Company’s positive track record of improving performance
through a slightly difficult real estate cycle, its strong underwriting and serv-
icing capabilities, the increase in capital base, the shift towards unsecured
debt to free up assets and the staggering of maturities on secured debt.
On July 30, 2002, the Company’s senior unsecured credit rating was
upgraded to an investment-grade rating of BBB- from BB+ by Fitch Ratings.
Transactions with Related Parties – The Company has an investment
in iStar Operating Inc. (“iStar Operating”), a taxable subsidiary that, through
a wholly-owned subsidiary, services the Company’s loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred stock and a 95.00% economic interest in iStar Operating. The
common shareholder, an entity controlled by a former director of the
Company, is the owner of all the voting common stock and a 5.00% eco-
nomic interest in iStar Operating. As of December 31, 2004, there have
never been any distributions to the common shareholder, nor does the
Company expect to make any in the future. At any time, the Company has
the right to acquire all of the common stock of iStar Operating at fair market
value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT sub-
sidiary for purposes of maintaining compliance with the REIT provisions of
the Code. Prior to July 1, 2003 it was accounted for under the equity method
for financial statement reporting purposes and was presented in
“Investments in and advances to joint ventures and unconsolidated sub-
sidiaries” on the Company’s Consolidated Balance Sheets. As of July 1, 2003,
the Company consolidates this entity as a VIE (see Note 3 to the Company’s
Consolidated Financial Statements) with no material impact. Prior to its con-
solidation, the Company charged an allocated portion of its general overhead
expenses to iStar Operating based on the number of employees at iStar
Operating as a percentage of the Company’s total employees. These general
overhead expenses were in addition to the direct general and administrative
costs of iStar Operating. As of December 31, 2004, iStar Operating had no
debt obligations.
In addition, the Company had an investment in TriNet Management
Operating Company, Inc. (“TMOC”), an entity originally formed to make a
$2.0 million investment in the convertible debt securities of a real estate
company which trades on the Mexican Stock Exchange. This investment was
made by TriNet prior to its acquisition by the Company in 1999. On June 30,
2003, the $2.0 million investment was fully repaid and during the third quar-
ter 2003, the entity was liquidated.
As more fully described in Note 10 to the Company’s Consolidated
Financial Statements certain affiliates of Starwood Opportunity Fund IV, L.P.
and the Company’s Executive Officer have reimbursed the Company for the
value of restricted shares awarded to the Company’s former President in
excess of 350,000 shares.
DRIP/Stock Purchase Plan – The Company maintains a dividend
reinvestment and direct stock purchase plan. Under the dividend reinvest-
ment component of the plan, the Company’s shareholders may purchase
additional shares of Common Stock without payment of brokerage commis-
sions or service charges by automatically reinvesting all or a portion of their
Common Stock cash dividends. Under the direct stock purchase component
of the plan, the Company’s shareholders and new investors may purchase
shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess
of $10,000 per month pursuant to the direct purchase component are at
the Company’s sole discretion. Shares issued under the plan may reflect a
discount of up to 3.00% from the prevailing market price of the Company’s
Common Stock. The Company is authorized to issue up to 8.0 million shares
of Common Stock pursuant to the dividend reinvestment and direct stock
purchase plan. During the 12 months ended December 31, 2004 and 2003,
the Company issued a total of approximately 427,000 and 2.6 million shares
of its Common Stock, respectively, through the direct stock purchase com-
ponent of the plan. Net proceeds during the 12 months ended December 31,
2004 and 2003 were approximately $17.6 million and $89.1 million,
respectively. There are approximately 3.1 million shares available for issuance
under the plan as of December 31, 2004.
Stock Repurchase Program – The Board of Directors approved, and
the Company has implemented, a stock repurchase program under which the
Company is authorized to repurchase up to 5.0 million shares of its Common
Stock from time to time, primarily using proceeds from the disposition of
assets or loan repayments and excess cash flow from operations, but also
using borrowings under its credit facilities if the Company determines that it
33
iStar
Financial
2004
is advantageous to do so. As of December 31, 2004, the Company had
repurchased a total of approximately 2.3 million shares at an aggregate cost
of approximately $40.7 million. The Company has not repurchased any
shares under the stock repurchase program since November 2000.
Critical Accounting Policies
The Company’s Consolidated Financial Statements include the
accounts of the Company and all majority-owned and controlled subsidiaries.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements. In preparing these financial statements, management has made
its best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The Company does not
believe that there is a great likelihood that materially different amounts
would be reported related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates.
Management has the obligation to ensure that its policies and
methodologies are in accordance with GAAP. During 2004, management
reviewed and evaluated its critical accounting policies and believes them to
be appropriate. The Company’s accounting policies are described in Note 3 to
the Company’s Consolidated Financial Statements. Management believes the
more significant of these to be as follows:
Revenue Recognition – The most significant sources of the
Company’s revenue come from its lending operations and its CTL operations.
For its lending operations, the Company reflects income using the effective
yield method, which recognizes periodic income over the expected term of
the investment on a constant yield basis. For CTL assets, the Company recog-
nizes income on the straight-line method, which effectively recognizes con-
tractual lease payments to be received by the Company evenly over the term
of the lease. Management believes the Company’s revenue recognition poli-
cies are appropriate to reflect the substance of the underlying transactions.
Provision for Loan Losses – The Company’s accounting policies
require that an allowance for estimated credit losses be reflected in the finan-
cial statements based upon an evaluation of known and inherent risks in its
private lending assets. While the Company and its private predecessors have
experienced minimal actual losses on their lending investments, management
considers it prudent to reflect provisions for loan losses on a portfolio basis
based upon the Company’s assessment of general market conditions, the
Company’s internal risk management policies and credit risk rating system,
industry loss experience, the Company’s assessment of the likelihood of delin-
quencies or defaults, and the value of the collateral underlying its investments.
Actual losses, if any, could ultimately differ from these estimates.
Allowance for Doubtful Accounts – The Company’s accounting pol-
icy requires a reserve on the Company’s accrued operating lease income
receivable balances and on the deferred operating lease income receivable
balances. The reserve covers asset specific problems (e.g., bankruptcy) as
they arise, as well as, a portfolio reserve based on management’s evaluation
of the credit risks associated with these receivables.
Impairment of Long-Lived Assets – CTL assets represent “long-
lived” assets for accounting purposes. The Company periodically reviews
long-lived assets to be held and used in its leasing operations for impairment
in value whenever any events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In management’s
opinion, based on this analysis, CTL assets to be held and used are not carried
at amounts in excess of their estimated recoverable amounts.
Risk Management and Financial Instrument – The Company has his-
torically utilized derivative financial instruments only as a means to help to
manage its interest rate risk exposure on a portion of its variable-rate debt
obligations (i.e., as cash flow hedges). Some of the instruments utilized are
pay-fixed swaps or LIBOR-based interest rate caps which are widely used in
the industry and typically with major financial institutions. The Company’s
accounting policies generally reflect these instruments at their fair value with
unrealized changes in fair value reflected in “Accumulated other comprehen-
sive income (losses)” on the Company’s Consolidated Balance Sheets.
Realized effects on the Company’s cash flows are generally recognized cur-
rently in income.
However, when appropriate the Company enters into interest rate
swaps that convert fixed-rate debt to variable rate in order to mitigate the
risk of changes in fair value of its fixed-rate debt obligations. The Company
reflects these instruments at their fair value and adjusts the carrying amount
of the hedged liability by an offsetting amount.
Income Taxes – The Company’s financial results generally do not
reflect provisions for current or deferred income taxes. Management
believes that the Company has and intends to continue to operate in a man-
ner that will continue to allow it to be taxed as a REIT and, as a result, does
not expect to pay substantial corporate-level taxes. Many of these require-
ments, however, are highly technical and complex. If the Company were to
fail to meet these requirements, the Company would be subject to Federal
income tax.
Executive Compensation – The Company’s accounting policies gen-
erally provide cash compensation to be estimated and recognized over the
period of service. With respect to stock-based compensation arrangements,
as of July 1, 2002 (with retroactive application to the beginning of the
calendar year), the Company has adopted the fair value method allowed
under SFAS No. 123 on a prospective basis, which values options on the date
of grant and recognizes an expense equal to the fair value of the option mul-
tiplied by the number of options granted over the related service period. Prior
to the third quarter 2002, the Company elected to use APB 25 accounting,
which measured the compensation charges based on the intrinsic value of
such securities when they become fixed and determinable, and recognized
such expense over the related service period. These arrangements are often
complex and generally structured to align the interests of management with
those of the Company’s shareholders. See Note 10 to the Company’s
Consolidated Financial Statements for a detailed discussion of such arrange-
ments and the related accounting effects.
During 2002 the Company entered into a three-year employment
agreement with its Chief Financial Officer. In addition, during 2004 the
Company entered into a three-year employment agreement with its
34
iStar
Financial
2004
President. See Note 10 to the Company’s Consolidated Financial Statements
for a more detailed description of these employment agreements.
On April 29, 2002, the 500,000 unvested restricted shares awarded
to the former President became contingently vested as the total shareholder
return exceeded 60.00% and became fully-vested on September 30, 2002 as
all employment contingencies were met. The Company incurred a charge of
approximately $15.0 million related to these vested shares, recognized ratably
over the service period from the date of contingent vesting through
September 30, 2002.
On February 11, 2004, the Company entered into a new employ-
ment agreement with its Chief Executive Officer that took effect upon the
expiration of the old agreement. The new agreement has an initial term of
three years and provides for the following compensation:
•
•
•
an annual salary of $1.0 million;
a potential annual cash incentive award of up to $5.0 million if perfor-
mance goals set by the Compensation Committee of the Board of
Directors in consultation with the Chief Executive Officer are met; and
a one-time award of Common Stock with a value of $10.0 million at
March 31, 2004 (based upon the trailing 20-day average closing price
of the Common Stock); the award will be fully-vested when granted
and dividends will be paid on the shares from the date of grant, but the
shares cannot be sold for five years unless the price of the Common
Stock during the 12 months ending March 31 of each year increases by
at least 15.00%, in which case the sale restrictions on 25.00% of the
shares awarded will lapse in respect of each 12-month period. In con-
nection with this award the Company recorded a $10.1 million charge in
“General and administrative – stock-based compensation expense” on
the Company’s Consolidated Statements of Operations. The Chief
Executive Officer notified the Company that subsequent to this award
he contributed an equivalent number of shares to a newly established
charitable foundation.
In addition, the Chief Executive Officer purchased an 80.00%
interest in the Company’s 2006 High Performance Unit Program for directors
and executive officers. This performance program was approved by the
Company’s shareholders in 2003 and is described in detail in the Company’s
2003 annual proxy statement. The purchase price to be paid by the Chief
Executive Officer will be based upon a valuation prepared by an independent
investment-banking firm. The interests purchased by the Chief Executive
Officer will only have nominal value to him unless the Company achieves total
shareholder returns in excess of those achieved by peer group indices, all as
more fully described in the Company’s 2003 annual proxy statement.
New Accounting Standards
In December 2004, the FASB released Statement of Financial
Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment.”
This standard requires issuers to measure the cost of equity-based service
awards based on the grant-date fair value of the award. That cost will be rec-
ognized over the period during which an employee is required to provide serv-
ice in exchange for the award or the requisite service period (typically the
vesting period). No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. The Company will ini-
tially measure the cost of liability based service awards based on their current
fair value. The fair value of that award will be remeasured subsequently at
each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar instru-
ments will be estimated using option-pricing models adjusted for the unique
characteristics of those instruments. If an equity award is modified after the
grant date, incremental compensation cost will be recognized in an amount
equal to the excess of the fair value of the modified award over the fair value
of the original award immediately before the modification. Companies can
comply with FASB No. 123R using one of three transition methods: (1) the
modified prospective method; (2) a variation of the modified prospective
method; or (3) the modified retrospective method. The provisions of this
statement are effective for interim and annual periods beginning after
June 15, 2005, however, in the third quarter 2002, in anticipation of
this new literature, the Company adopted the second transition method
(with retroactive application of fair-value accounting to the beginning of
the calendar year), which did not have a significant financial impact on the
Company’s Consolidated Financial Statements.
In December 2003, the SEC issued Staff Accounting Bulletin
No. 104 (“SAB 104”), “Revenue Recognition” which supercedes SAB 101,
“Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is
to rescind the accounting guidance contained in SAB 101 related to multiple
element revenue arrangements, superceded as a result of the issuance of
EITF 00-21. The Company adopted the provisions of this statement imme-
diately, as required, and it did not have a significant impact on the Company’s
Consolidated Financial Statements.
EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables,” issued during the third quarter of 2003, provides guidance on
revenue recognition for revenues derived from a single contract that contain
multiple products or services. EITF 00-21 also provides additional require-
ments to determine when these revenues may be recorded separately for
accounting purposes. The Company adopted EITF 00-21 on July 1, 2003,
as required, and it did not have a significant impact on the Company’s
Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (“SFAS No. 150”), “Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity.” This standard
requires issuers to classify as liabilities the following three types of free-
standing financial instruments: (1) mandatorily redeemable financial instru-
ments; (2) obligations to repurchase the issuer ’s equity shares by
transferring assets; and (3) certain obligations to issue a variable number of
35
iStar
Financial
2004
shares. The FASB recently issued FASB Staff Position (“FSP”) 150-3, which
defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as
they apply to mandatorily redeemable noncontrolling interests associated
with finite-lived entities. The Company adopted the provisions of this state-
ment, as required, on July 1, 2003, and it did not have a significant financial
impact on the Company’s Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46
(“FIN 46”), “Consolidation of Variable Interest Entities,” an interpretation of
ARB 51. FIN 46 provides guidance on identifying entities for which control is
achieved through means other than through voting rights (a “variable interest
entity” or “VIE”), and how to determine when and which business enterprise
should consolidate a VIE. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a VIE
make additional disclosures. The transitional disclosure requirements took
effect immediately and were required for all financial statements initially
issued or modified after January 31, 2003. Immediate consolidation is
required for VIEs entered into or modified after February 1, 2003 in which the
Company is deemed the primary beneficiary. For VIEs in which the Company
entered into prior to February 1, 2003 FIN 46 was deferred to the quarter
ended March 31, 2004. In December 2003, the FASB issued a revised FIN 46
that modifies and clarifies various aspects of the original Interpretation. FIN 46
applies when either: (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest; (2) the equity invest-
ment at risk is insufficient to finance that entity’s activities without additional
subordinated financial support; or (3) the equity investors have voting rights
that are not proportionate to their economic interest. The adoption of the
additional consolidation provisions of FIN 46 did not have a material impact on
the Company’s Consolidated Financial Statements.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-
Based Compensation – Transition and Disclosure,” an amendment of FASB
Statement No. 123 (“SFAS No. 123”). This statement provides alternative
transition methods for a voluntary change to the fair value basis of account-
ing for stock-based employee compensation. However, this Statement does
not permit the use of the original SFAS No. 123 prospective method of tran-
sition for changes to the fair value based method made in fiscal years begin-
ning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation, description of transition method
utilized and the effect of the method used on reported results. The Company
adopted SFAS No. 148 with retroactive application to grants made subse-
quent to January 1, 2002 with no material effect on the Company’s
Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45
(“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” an
interpretation of Statement of Financial Accounting Standards No. 5 (“SFAS
No. 5”), “Accounting for Contingencies,” Statement of Financial Accounting
Standards No. 57, “Related Party Disclosures,” Statement of Financial
Accounting Standards No. 107, “Disclosures about Fair Value of Financial
Instruments” and rescinds FASB Interpretation No. 34, “Disclosure of Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5.” It
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that guarantee
regardless if the Company receives separately identifiable consideration (e.g.,
a premium). The disclosure requirements are effective December 31, 2002.
The adoption of FIN 45 did not have a material impact on the Company’s
Consolidated Financial Statements, nor is it expected to have a material
impact in the future.
In September 2002, the FASB issued Statement of Financial
Accounting Standards No. 147 (“SFAS No. 147”), “Acquisitions of Certain
Financial Institutions,” an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the
accounting for the acquisitions of financial institutions, except those acquisi-
tions between two or more mutual enterprises. SFAS No. 147 removes acqui-
sitions of financial institutions from the scope of both FASB No. 72,
“Accounting for Certain Acquisitions of Banking or Thrift Institutions,” and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, “When a
Savings and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method,” and requires that those
transactions be accounted for in accordance with SFAS No. 141 and SFAS
No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-
term, customer-relationship intangible assets of financial institutions such as
depositor-relationship and borrower-relationship intangible assets and credit
cardholder intangible assets. The Company adopted the provisions of this
statement, as required, on October 1, 2002, and it did not have a significant
financial impact on the Company’s Consolidated Financial Statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (“SFAS No. 146”), “Accounting for Exit or Disposal
Activities,” to address significant issues regarding the recognition, measure-
ment, and reporting of costs that are associated with exit and disposal activi-
ties, including restructuring activities that are currently accounted for pursuant
to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in
EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring).” The scope of SFAS No. 146 also includes: (1) costs related to
terminating a contract that is not a capital lease; and (2) termination benefits
received by employees involuntarily terminated under the terms of a one-time
benefit arrangement that is not an on-going benefit arrangement or an individ-
ual deferred-compensation contract. The Company adopted the provisions of
SFAS 146 on December 31, 2002, as required, and it did not have a material
effect on the Company’s Consolidated Financial Statements.
36
iStar
Financial
2004
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risks
Market risk is the exposure to loss resulting from changes in inter-
est rates, foreign currency exchange rates, commodity prices and equity
prices. In pursuing its business plan, the primary market risk to which the
Company is exposed is interest rate risk. Consistent with its liability man-
agement objectives, the Company has implemented an interest rate risk
management policy based on match funding, with the objective that variable-
rate assets be primarily financed by variable-rate liabilities and fixed-rate
assets be primarily financed by fixed-rate liabilities.
The Company’s operating results will depend in part on the differ-
ence between the interest and related income earned on its assets and the
interest expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a
decrease in the interest rate earned on the Company’s interest-bearing
assets, which the Company may not be able to offset by obtaining lower
interest costs on its borrowings. Changes in the general level of interest rates
prevailing in the financial markets may affect the spread (the difference in
the principal amount outstanding) between the Company’s interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets and interest-bearing liabilities could
have a material adverse effect on the Company. In addition, an increase in
interest rates could, among other things, reduce the value of the Company’s
interest-bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in interest rates could reduce the average life of the
Company’s interest-earning assets.
A substantial portion of the Company’s loan investments are sub-
ject to significant prepayment protection in the form of lock-outs, yield
maintenance provisions or other prepayment premiums which provide sub-
stantial yield protection to the Company. Those assets generally not subject
to prepayment penalties include: (1) variable-rate loans based on LIBOR,
originated or acquired at par, which would not result in any gain or loss upon
repayment; and (2) discount loans and loan participations acquired at dis-
counts to face values, which would result in gains upon repayment. Further,
while the Company generally seeks to enter into loan investments which pro-
vide for substantial prepayment protection, in the event of declining interest
rates, the Company could receive such prepayments and may not be able to
reinvest such proceeds at favorable returns. Such prepayments could have an
adverse effect on the spreads between interest-earning assets and interest-
bearing liabilities.
Interest Rate Risks
While the Company has not experienced any significant credit
losses, in the event of a significant rising interest rate environment and/or
economic downturn, defaults could increase and result in credit losses to the
Company which adversely affect its liquidity and operating results. Further,
such delinquencies or defaults could have an adverse effect on the spreads
between interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including gov-
ernmental monetary and tax policies, domestic and international economic
and political conditions, and other factors beyond the control of the
Company. As more fully discussed in Note 9 to the Company’s Consolidated
Financial Statements, the Company employs match funding-based hedging
strategies to limit the effects of changes in interest rates on its operations,
including engaging in interest rate caps, floors, swaps, futures and other
interest rate-related derivative contracts. These strategies are specifically
designed to reduce the Company’s exposure, on specific transactions or on a
portfolio basis, to changes in cash flows as a result of interest rate move-
ments in the market. The Company does not enter into derivative contracts
for speculative purposes nor as a hedge against changes in credit risk of its
borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract
between the Company and a third party (the “counterparty”). When the
Company purchases a cap or floor contract, the Company makes an up-front
payment to the counterparty and the counterparty agrees to make pay-
ments to the Company in the future should the reference rate (typically
one- or three-month LIBOR) rise above (cap agreements) or fall below (floor
agreements) the “strike” rate specified in the contract. Each contract has a
notional face amount. Should the reference rate rise above the contractual
strike rate in a cap, the Company will earn cap income. Should the reference
rate fall below the contractual strike rate in a floor, the Company will earn
floor income. Payments on an annualized basis will equal the contractual
notional face amount multiplied by the difference between the actual refer-
ence rate and the contracted strike rate. The Company utilizes the provisions
of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides
that the up-front fees paid on option-based products such as caps be
expensed into earnings based on the allocation of the premium to the
affected periods as if the agreement were a series of “caplets.” These allo-
cated premiums are then reflected as a charge to income and are included in
“Interest expense” on the Company’s Consolidated Statements of Operations
in the affected period.
37
iStar
Financial
2004
Interest rate swaps are agreements in which a series of interest
rate flows are exchanged over a prescribed period. The notional amount on
which swaps are based is not exchanged. The Company’s swaps are either
“pay fixed” swaps involving the exchange of variable-rate interest payments
from the counterparty for fixed interest payments from the Company or “pay
floating” swaps involving the exchange of fixed-rate interest payments from
the counterparty for variable-rate interest payments from the Company,
which mitigates the risk of changes in fair value of the Company’s fixed-rate
debt obligations.
Interest rate futures are contracts, generally settled in cash, in
which the seller agrees to deliver on a specified future date the cash equiva-
lent of the difference between the specified price or yield indicated in the
contract and the value of the specified instrument (i.e., U.S. Treasury securi-
ties) upon settlement. Under these agreements, the Company would gener-
ally receive additional cash flow at settlement if interest rates rise and pay
cash if interest rates fall. The effects of such receipts or payments would
be deferred and amortized over the term of the specific related fixed-rate
borrowings. In the event that, in the opinion of management, it is no longer
probable that a forecasted transaction will occur under terms substantially
equivalent to those projected, the Company would cease recognizing such
transactions as hedges and immediately recognize related gains or losses
based on actual settlement or estimated settlement value.
While a REIT may freely utilize derivative instruments to hedge
interest rate risk on its liabilities, the use of derivatives for other purposes,
including hedging asset-related risks such as credit, prepayment or interest
rate exposure on the Company’s loan assets, could generate income which is
not qualified income for purposes of maintaining REIT status. As a conse-
quence, the Company may only engage in such instruments to hedge such
risks on a limited basis.
There can be no assurance that the Company’s profitability will not
be adversely affected during any period as a result of changing interest rates.
In addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of hedg-
ing contracts and the risk that unanticipated and significant changes in inter-
est rates will cause a significant loss of basis in the contract. With regard to
loss of basis in a hedging contract, indices upon which contracts are based
may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The counter-
parties to these contractual arrangements are major financial institutions
with which the Company and its affiliates may also have other financial rela-
tionships. The Company is potentially exposed to credit loss in the event of
nonperformance by these counterparties. However, because of their high
credit ratings, the Company does not anticipate that any of the counter-
parties will fail to meet their obligations. There can be no assurance that the
Company will be able to adequately protect against the foregoing risks and
that the Company will ultimately realize an economic benefit from any hedg-
ing contract it enters into which exceeds the related costs incurred in con-
nection with engaging in such hedges.
The following table quantifies the potential changes in net invest-
ment income and net fair value of financial instruments should interest rates
increase or decrease 50, 100 or 200 basis points, assuming no change in the
shape of the yield curve (i.e., relative interest rates). Net investment income
is calculated as revenue from loans and other lending investments and oper-
ating leases (as of December 31, 2004), less related interest expense and
operating costs on CTL assets, for the year ended December 31, 2004. Net
fair value of financial instruments is calculated as the sum of the value of
derivative instruments and the present value of cash in-flows generated
from interest-earning assets, less cash out-flows in respect to interest-
bearing liabilities as of December 31, 2004. The cash flows associated with
the Company’s assets are calculated based on management’s best estimate
of expected payments for each loan based on loan characteristics such as
loan-to-value ratio, interest rate, credit history, prepayment penalty, term
and collateral type. Most of the Company’s loans are protected from prepay-
ment as a result of prepayment penalties, yield maintenance fees or contrac-
tual terms which prohibit prepayments during specified periods. However, for
those loans where prepayments are not currently precluded by contract, declines
in interest rates may increase prepayment speeds. The base interest rate scenario
assumes the one-month LIBOR rate of 2.40% as of December 31, 2004.
Actual results could differ significantly from those estimated in the table.
Net fair value of financial instruments in the table below does not
include CTL assets (approximately 40% of the Company’s total assets) and
certain forms of corporate finance investments but includes debt associated
with the financing of these CTL assets. Therefore, the table below is not a
meaningful representation of the estimated percentage change in net fair
value of financial instruments with change in interest rates.
The estimated percentage change in net investment income does
include operating lease income from CTL assets and therefore is a more
accurate representation of the impact of changes in interest rates on net
investment income.
Change in Interest Rates
–100 Basis Points
–50 Basis Points
Base Interest Rate
+100 Basis Points
+200 Basis Points
Estimated Percentage Change In
Net Investment
Income
2.30%
0.68%
0.00%
(0.23)%
(0.43)%
Net Fair Value
of Financial
Instruments
24.65%
12.68%
0.00%
(5.63)%
(10.02)%
38
iStar
Financial
2004
MANAGEMENT’S REPORT ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING
Evaluation of Disclosure Controls and Procedures – The Company has
established and maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such informa-
tion is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. The Company has
formed a disclosure committee that is responsible for considering the materi-
ality of information and determining the disclosure obligations of the Company
on a timely basis. The disclosure committee reports directly to the Company’s
Chief Executive Officer and Chief Financial Officer. The Chief Financial Officer
is currently a member of the disclosure committee.
Based upon their evaluation as of December 31, 2004, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
under the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”)) are effective in recording, processing, summarizing and reporting, on a
timely basis, information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company’s Exchange Act filings.
Management’s Report on Internal Controls Over Financial Reporting –
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the disclosure committee
and other members of management, including the Chief Executive Officer and
Chief Financial Officer, management carried out its evaluation of the effec-
tiveness of the Company’s internal control over financial reporting based on
the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based
on the Company’s evaluation under the framework in Internal Control –
Integrated Framework, management has concluded that its internal control
over financial reporting was effective as of December 31, 2004.
Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
Changes in Internal Controls Over Financial Reporting – There have
been no significant changes during the last fiscal quarter in the Company’s
internal controls identified in connection with the evaluation required by
paragraph (d) of Rules 13a-15 or 15d-15 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
39
iStar
Financial
2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of iStar Financial Inc.:
We have completed an integrated audit of iStar Financial Inc.’s
2004 consolidated financial statements and of its internal control over finan-
cial reporting as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, shareholders’ equity and cash
flows present fairly, in all material respects, the financial position of iStar
Financial Inc. and its subsidiaries (collectively, the “Company”) at December 31,
2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in confor-
mity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these state-
ments in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial state-
ments includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting princi-
ples used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits pro-
vide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting, that the Company maintained effective internal control over
financial reporting as of December 31, 2004 based on criteria established in
Internal Control – Integrated Framew or k issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria. Furthermore, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control – Integrated Framework issued by the COSO.
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express opin-
ions on management’s assessment and on the effectiveness of the
Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of inter-
nal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in
the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and proce-
dures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accor-
dance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) pro-
vide reasonable assurance regarding prevention or timely detection of unau-
thorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
New York, New York
March 14, 2005
CONSOLIDATED BALANCE SHEETS
As of December 31,
Assets
Loans and other lending investments, net
Corporate tenant lease assets, net
Investments in and advances to joint ventures and unconsolidated subsidiaries
Assets held for sale
Cash and cash equivalents
Restricted cash
Accrued interest and operating lease income receivable
Deferred operating lease income receivable
Deferred expenses and other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
Debt obligations
Total liabilities
Commitments and contingencies
Minority interest in consolidated entities
Shareholders’ equity:
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
0 and 2,000 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
0 and 1,300 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
4,000 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
5,600 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
4,000 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
3,200 shares issued and outstanding at December 31, 2004 and 2003, respectively
Series I Preferred Stock, $0.001 par value, liquidation preference $25.00 per share,
5,000 and 0 shares issued and outstanding at December 31, 2004 and 2003, respectively
High Performance Units
Common Stock, $0.001 par value, 200,000 shares authorized, 111,432 and
107,215 shares issued and outstanding at December 31, 2004 and 2003, respectively
Warrants and options
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive income (losses) (See Note 12)
Treasury stock (at cost)
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of the financial statements.
40
iStar
Financial
2004
2004
2003
(In thousands, except per share data)
$3,946,189
2,877,042
5,663
–
88,422
39,568
25,633
62,092
175,628
$7,220,237
$3,702,674
2,535,885
25,019
24,800
80,090
57,665
26,076
51,447
156,934
$6,660,590
$ 140,075
4,605,674
4,745,749
–
19,246
$126,524
4,113,732
4,240,256
–
5,106
–
–
4
6
4
3
2
1
4
6
4
3
5
7,828
–
5,131
111
6,458
2,840,062
(349,097)
(2,086)
(48,056)
2,455,242
$7,220,237
107
20,695
2,678,772
(242,449)
1,008
(48,056)
2,415,228
$6,660,590
41
iStar
Financial
2004
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Revenue:
Interest income
Operating lease income
Other income
Total revenue
Costs and expenses:
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation expense
Provision for loan losses
Loss on early extinguishment of debt
Total costs and expenses
Income before equity in earnings from joint ventures and unconsolidated subsidiaries,
minority interest and other items
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries
Minority interest in consolidated entities
Income from continuing operations
Income from discontinued operations
Gain from discontinued operations
Net income
Preferred dividend requirements
Net income allocable to common shareholders and HPU holders(1)
Basic earnings per common share(2)
Diluted earnings per common share(3)(4)
Explanatory Notes:
2004
2003
2002
(In thousands, except per share data)
$353,799
286,389
54,236
694,424
231,027
22,417
64,541
47,912
109,676
9,000
13,091
497,664
196,760
2,909
(716)
198,953
18,119
43,375
260,447
(51,340)
$209,107
1.87
$
1.83
$
$304,391
232,043
36,677
573,111
192,296
11,553
50,626
38,153
3,633
7,500
–
303,761
269,350
(4,284)
(249)
264,817
22,173
5,167
292,157
(36,908)
$255,249
2.52
$
2.43
$
$255,631
210,033
27,993
493,657
184,932
6,735
42,579
30,449
17,998
8,250
12,166
303,109
190,548
1,222
(162)
191,608
22,945
717
215,270
(36,908)
$178,362
1.98
$
1.93
$
(1) HPU holders are Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program.
(2)
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,314, $2,066 and $0 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,265, $1,994 and $0 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, includes $3, $167 and $0 of joint venture income, respectively.
(3)
(4)
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
42
iStar
Financial
2004
Series B
Series A
Series I
Series E
Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred
Stock
Series G
Series D
Series H
Series C
Series F
Stock
Stock
Stock
Stock
Stock
Stock
Stock
Stock
Balance at December 31, 2001
Exercise of options
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Contributions from significant shareholder
Issuance of stock – DRIP plan
Purchase of treasury shares
Net income for the period
Change in accumulated other comprehensive income (losses)
Balance at December 31, 2002
Exercise of options
Net proceeds from preferred offering/exchange
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU’s
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Issuance of stock – DRIP/Stock purchase plan
Net income for the period
Change in accumulated other comprehensive income (losses)
Balance at December 31, 2003
Exercise of options and warrants
Net proceeds from preferred offering/exchange
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU’s
Restricted stock units granted to employees
High performance units sold to employees
Issuance of stock – DRIP/Stock purchase plan
Contribution from significant shareholder
Net income for the period
Change in accumulated other comprehensive income (losses)
Balance at December 31, 2004
The accompanying notes are an integral part of the financial statements.
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–
–
$ –
–
5
–
–
–
–
–
–
–
–
–
–
$ 5
(continued)
43
iStar
Financial
2004
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
Balance at December 31, 2001
Exercise of options
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Contributions from significant shareholder
Issuance of stock – DRIP plan
Purchase of treasury shares
Net income for the period
Change in accumulated other comprehensive
income (losses)
Balance at December 31, 2002
Exercise of options
Net proceeds from preferred offering/exchange
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU’s
Restricted stock units granted to employees
Options granted to employees
High performance units sold to employees
Issuance of stock – DRIP/Stock purchase plan
Net income for the period
Change in accumulated other comprehensive
income (losses)
Balance at December 31, 2003
Exercise of options and warrants
Net proceeds from preferred offering/exchange
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU’s
Restricted stock units granted to employees
High performance units sold to employees
Issuance of stock – DRIP/Stock purchase plan
Contribution from significant shareholder
Net income for the period
Change in accumulated other comprehensive
income (losses)
Balance at December 31, 2004
$
HPU’s
–
–
–
–
–
–
–
1,359
–
–
–
–
–
$ 1,359
–
–
–
–
–
–
–
–
3,772
–
–
–
$ 5,131
–
–
–
–
–
–
–
2,697
–
–
–
–
$7,828
The accompanying notes are an integral part of the financial statements.
Common Warrants
and
Options
Stock
at Par
Additional
Paid-in
Capital
Accumulated
Other
Retained Comprehensive
Income
Earnings
(Losses)
(Deficit)
Treasury
Stock
Total
(In thousands)
$ 87 $20,456 $ 1,997,931 $ (174,874)
–
–
(36,908)
(231,257)
–
–
–
–
–
–
215,270
16,170
202,891
330
–
19,048
–
–
506
44,426
334
–
(443)
–
–
–
–
309
–
–
–
–
–
2
8
–
–
–
–
–
–
1
–
–
$(15,092) $ (40,741)
–
–
–
–
–
–
–
–
–
(7,315)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 98 $20,322 $ 2,281,636 $ (227,769)
–
–
–
(36,908)
(267,785)
(2,144)
–
–
–
–
292,157
27,754
87,900
190,931
195
–
–
1,339
82
–
88,935
–
373
–
–
–
–
–
–
–
–
–
–
1
–
5
–
–
–
–
–
–
3
–
–
–
–
–
$ 107 $20,695 $ 2,678,772 $ (242,449)
–
–
–
(51,340)
(310,744)
(5,011)
–
–
–
–
260,447
4 (14,237)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
41,501
202,743
(155,959)
–
–
–
53,351
–
17,719
1,935
–
12,791
–
$ (2,301) $ (48,056)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,309
–
$ 1,008 $ (48,056)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 1,787,778
15,729
202,899
(36,578)
(231,257)
19,048
309
1,359
506
44,427
(6,981)
215,270
12,791
$ 2,025,300
28,128
87,909
190,936
(36,713)
(267,785)
(2,144)
1,339
82
3,772
88,938
292,157
3,309
$ 2,415,228
27,268
202,751
(155,965)
(51,340)
(310,744)
(5,011)
53,351
2,697
17,719
1,935
260,447
–
–
$111 $6,458 $2,840,062 $(349,097)
–
–
(3,094)
(3,094)
$ (2,086) $(48,056) $2,455,242
–
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash flows provided by operating activities:
Minority interest in consolidated entities
Non-cash expense for stock-based compensation
Depreciation and amortization
Depreciation and amortization from discontinued operations
Amortization of deferred financing costs
Amortization of discounts/premiums, deferred interest and costs on lending investments
Discounts, loan fees and deferred interest received
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries
Distributions from operations of joint ventures
Loss on early extinguishment of debt
Deferred operating lease income receivable
Gain from discontinued operations
Provision for loan losses
Change in investments in and advances to joint ventures and unconsolidated subsidiaries
Changes in assets and liabilities:
Changes in accrued interest and operating lease income receivable
Changes in deferred expenses and other assets
Changes in accounts payable, accrued expenses and other liabilities
Cash flows from operating activities
Cash flows from investing activities:
New investment originations
Add-on fundings under existing loan commitments
Net proceeds from sale of corporate tenant lease assets
Net proceeds from lease termination payments
Repayments of and principal collections on loans and other lending investments
Investments in and advances to unconsolidated joint ventures
Capital improvements for build-to-suit projects
Capital improvement projects on corporate tenant lease assets
Other capital expenditures on corporate tenant lease assets
Cash flows from investing activities
44
iStar
Financial
2004
2004
2003
2002
(In thousands)
$ 260,447
$ 292,157
$ 215,270
716
54,403
64,541
3,942
30,189
(59,466)
40,373
(2,909)
5,840
13,144
(18,075)
(43,375)
9,000
–
(1,018)
21,599
(16,219)
363,132
249
3,781
50,626
5,453
27,180
(54,799)
36,063
4,284
2,839
–
(15,366)
(5,167)
7,500
(2,877)
(647)
(20,690)
7,676
338,262
(2,058,732)
(255,321)
279,575
–
1,591,015
–
–
(7,124)
(14,846)
(465,433)
(2,086,890)
(46,164)
47,569
–
1,119,743
–
–
(3,487)
(5,125)
(974,354)
162
18,059
42,579
5,462
23,460
(33,086)
36,714
(1,222)
5,802
12,166
(15,265)
(717)
8,250
(6,598)
3,809
1,763
32,185
348,793
(1,812,993)
(21,619)
3,702
17,500
671,965
(127)
(1,064)
(2,277)
(4,157)
(1,149,070)
(continued)
45
iStar
Financial
2004
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31,
Cash flows from financing activities:
Borrowings under secured revolving credit facilities
Repayments under secured revolving credit facilities
Borrowings under unsecured revolving credit facilities
Repayments under unsecured revolving credit facilities
Borrowings under term loans
Repayments under term loans
Borrowings under unsecured bond offerings
Repayments under unsecured notes
Borrowings under secured bond offerings
Repayments under secured bond offerings
Borrowings under other debt obligations
Repayments under other debt obligations
Contribution from minority interest partner
Changes in restricted cash held in connection with debt obligations
Prepayment penalty on early extinguishment of debt
Payments for deferred financing costs
Distributions to minority interest in consolidated entities
Net proceeds from preferred offering/exchange
Redemption of preferred stock
Common dividends paid
Preferred dividends paid
Dividends on HPUs
HPUs issued
Purchase of treasury stock
Proceeds from equity offering
Contribution from significant shareholder
Proceeds from exercise of options and issuance of DRIP/Stock purchase shares
Cash flows from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
2004
2003
2002
(In thousands)
$ 2,680,416
(3,298,421)
3,945,500
(3,235,500)
160,181
(403,231)
1,032,442
(110,000)
–
(378,400)
–
(10,148)
3,340
18,757
(9,769)
(13,131)
(1,054)
203,048
(165,000)
(310,744)
(41,908)
(5,011)
2,697
–
–
1,935
44,634
110,633
8,332
80,090
88,422
$
$ 1,643,552
(2,220,715)
130,000
–
233,000
(107,723)
526,966
–
645,822
(210,876)
25,251
(7,064)
2,522
(17,454)
–
(35,609)
(159)
87,909
–
(267,785)
(36,713)
(2,144)
3,772
–
190,936
–
116,760
700,248
64,156
15,934
80,090
$
$ 2,496,200
(2,122,994)
–
–
115,099
(18,279)
–
–
885,079
(475,679)
1,094
(1,668)
–
(22,359)
(3,950)
(45,702)
(231)
–
–
(231,257)
(36,578)
–
1,359
(6,981)
202,899
506
63,983
800,541
264
15,670
15,934
$
Cash paid during the period for interest, net of amount capitalized
$ 191,205
$ 165,757
$ 157,618
The accompanying notes are an integral part of the financial statements.
46
iStar
Financial
2004
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Business and Organization
Business – iStar Financial Inc. (the “Company”) is the leading
publicly-traded finance company focused on the commercial real estate
industry. The Company provides custom-tailored financing to high-end pri-
vate and corporate owners of real estate, including senior and junior mortgage
debt, senior and mezzanine corporate capital, and corporate net lease financ-
ing. The Company, which is taxed as a real estate investment trust (“REIT”),
seeks to deliver strong dividends and superior risk-adjusted returns on equity
to shareholders by providing the highest quality financing to its customers.
•
•
•
•
The Company’s primary product lines include:
Structured Finance. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million. These loans
may be either fixed or variable rate and are structured to meet the spe-
cific financing needs of the borrowers, including the acquisition or
financing of large, quality real estate. The Company offers borrowers a
wide range of structured finance options, including first mortgages,
second mortgages, partnership loans, participating debt and interim
facilities. The Company’s structured finance transactions have maturi-
ties generally ranging from three to ten years. As of December 31,
2004, based on gross carrying values, the Company’s structured
finance assets represented 25% of its assets.
Portfolio Finance. The Company provides funding to regional and national
borrowers who own multiple facilities in geographically diverse port-
folios. Loans are cross-collateralized to give the Company the benefit of
all available collateral and underwritten to recognize inherent portfolio
diversification. Property types include multifamily, suburban office,
hotels and other property types where individual property values are
less than $20 million on average. Loan terms are structured to meet the
specific requirements of the borrower and typically range in size from
$25 million to $150 million. The Company’s portfolio finance trans-
actions have maturities generally ranging from three to ten years. As
of December 31, 2004, based on gross carrying values, the Company’s
portfolio finance assets represented 15% of its assets.
Corporate Finance. The Company provides senior and subordinated capi-
tal to corporations engaged in real estate or real estate-related busi-
nesses. Financings may be either secured or unsecured and typically
range in size from $20 million to $150 million. The Company’s corporate
finance transactions have maturities generally ranging from five to
ten years. As of December 31, 2004, based on gross carrying values,
the Company’s corporate finance assets represented 10% of its assets.
Loan Acquisition. The Company acquires whole loans and loan participa-
tions which present attractive risk-reward opportunities. Loans are
generally acquired at a small discount to the principal balance outstand-
ing. Loan acquisitions typically range in size from $5 million to $100 million
and are collateralized by all major property types. The Company’s loan
acquisition transactions have maturities generally ranging from three to
ten years. As of December 31, 2004, based on gross carrying values, the
Company’s loan acquisition assets represented 6% of its assets.
•
Corporate Tenant Leasing. The Company provides capital to corporations
and borrowers who control facilities leased to single creditworthy cus-
tomers. The Company’s net leased assets are generally mission-critical
headquarters or distribution facilities that are subject to long-term leases
with public companies, many of which are rated corporate credits and
which provide for all expenses at the facility to be paid by the corporate
customer on a triple net lease basis. Corporate tenant lease (“CTL”)
transactions have terms generally ranging from ten to 20 years and typ-
ically range in size from $20 million to $150 million. As of December 31,
2004, based on gross carrying values, the Company’s CTL assets
(including investments in and advances to joint ventures and unconsoli-
dated subsidiaries and assets held for sale) represented 44% of its assets.
The Company’s investment strategy targets specific sectors of the
real estate credit markets in which it believes it can deliver the highest qual-
ity, flexible financial solutions to its customers, thereby differentiating its
financial products from those offered by other capital providers.
•
•
•
•
•
The Company has implemented its investment strategy by:
Focusing on the origination of large, structured mortgage, corporate
and lease financings where customers require flexible financial solutions
and “one-call” responsiveness post-closing.
Avoiding commodity businesses in which there is significant direct competi-
tion from other providers of capital such as conduit lending and investment
in commercial or residential mortgage-backed securities.
Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.
Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.
Taking advantage of market anomalies in the real estate financing mar-
kets when the Company believes credit is mispriced by other providers
of capital, such as the spread between lease yields and the yields on
corporate customers’ underlying credit obligations.
Organization – The Company began its business in 1993 through
private investment funds formed to capitalize on inefficiencies in the real
estate finance market. In March 1998, these funds contributed their approx-
imately $1.1 billion of assets to the Company’s predecessor in exchange for a
controlling interest in that company. Since that time, the Company has grown
by originating new lending and leasing transactions, as well as through corpo-
rate acquisitions.
Specifically, in September 1998, the Company acquired the loan
origination and servicing business of a major insurance company, and in
December 1998, the Company acquired the mortgage and mezzanine loan
portfolio of its largest private competitor. Additionally, in November 1999,
the Company acquired TriNet Corporate Realty Trust, Inc. (“TriNet” or the
“Leasing Subsidiary”), then the largest publicly-traded company specializing
in corporate sale/leaseback transactions for office and industrial facilities
(the “TriNet Acquisition”). The TriNet Acquisition was structured as a stock-
for-stock merger of TriNet with a subsidiary of the Company.
47
iStar
Financial
2004
Concurrent with the TriNet Acquisition, the Company also acquired
its former external advisor in exchange for shares of the Company’s common
stock (“Common Stock”) and converted its organizational form to a Maryland
corporation. As part of the conversion to a Maryland corporation, the
Company replaced its former dual class common share structure with a single
class of Common Stock. The Company’s Common Stock began trading on
the New York Stock Exchange on November 4, 1999. Prior to this date, the
Company’s common shares were traded on the American Stock Exchange.
Note 2 – Basis of Presentation
The accompanying audited Consolidated Financial Statements
have been prepared in conformity with generally accepted accounting princi-
ples in the United States of America (“GAAP”) for complete financial state-
ments. The Consolidated Financial Statements include the accounts of the
Company, its qualified REIT subsidiaries, its majority-owned and controlled
partnerships and other entities that are consolidated under the provisions of
FASB Interpretation No. 46 (“FIN 46”) (see Note 6).
Certain other investments in partnerships or joint ventures which
the Company does not control are accounted for under the equity method
(see Note 6). All significant intercompany balances and transactions have
been eliminated in consolidation.
Note 3 – Summary of Significant Accounting Policies
Loans and other lending investments, net – As described in Note 4,
“Loans and Other Lending Investments” includes the following investments:
senior mortgages, subordinate mortgages, corporate/partnership loans,
other lending investments-loans and other lending investments-securities.
Management considers nearly all of its loans and other lending investments
to be held-to-maturity, although a small number of investments may be clas-
sified as available-for-sale. Items classified as held-to-maturity are reflected
at amortized historical cost. Items classified as available-for-sale are reported
at fair values with unrealized gains and losses included in “Accumulated other
comprehensive income (losses)” on the Company’s Consolidated Balance
Sheets and are not included in the Company’s net income.
Corporate tenant lease assets and depreciation – CTL assets are
generally recorded at cost less accumulated depreciation. Certain improve-
ments and replacements are capitalized when they extend the useful life,
increase capacity or improve the efficiency of the asset. Repairs and mainte-
nance items are expensed as incurred. Depreciation is computed using the
straight-line method of cost recovery over the shorter of estimated useful
lives or 40.0 years for facilities, five years for furniture and equipment, the
shorter of the remaining lease term or expected life for tenant improvements
and the remaining life of the facility for facility improvements.
CTL assets to be disposed of are reported at the lower of their car-
rying amount or fair value less costs to sell and are included in “Assets held for
sale” on the Company’s Consolidated Balance Sheets. The Company also
periodically reviews long-lived assets to be held and used for an impairment
in value whenever events or changes in circumstances indicate that the car-
rying amount of such assets may not be recoverable. In management’s opinion,
CTL assets to be held and used are not carried at amounts in excess of their
estimated recoverable amounts.
Regarding the Company’s acquisition of facilities, purchase costs
are allocated to the tangible and intangible assets and liabilities acquired
based on their estimated fair values. The value of the tangible assets, con-
sisting of land, buildings, building improvements and tenant improvements,
are determined as if vacant, that is, at replacement cost. Intangible assets
including the above-market or below-market value of leases, the value of
in-place leases and the value of customer relationships are recorded at their
relative fair values.
Above-market and below-market in-place lease values for owned
CTL assets are recorded based on the present value (using a discount rate
reflecting the risks associated with the leases acquired) of the difference
between: (1) the contractual amounts to be paid pursuant to the leases
negotiated and in-place at the time of acquisition of the facilities; and
(2) management’s estimate of fair market lease rates for the facility or
equivalent facility, measured over a period equal to the remaining non-
cancelable term of the lease. The capitalized above-market (or below-
market) lease value is amortized as a reduction of (or, increase to) operating
lease income over the remaining non-cancelable term of each lease plus any
renewal periods with fixed rental terms that are considered to be below-
market. The Company generally engages in sale/leaseback transactions and
typically executes leases simultaneously with the purchase of the CTL asset
at market-rate rents. Because of this, no above-market or below-market
lease value is ascribed to these transactions.
The total amount of other intangible assets are allocated to
in-place lease values and customer relationship intangible values based on
management’s evaluation of the specific characteristics of each customer’s
lease and the Company’s overall relationship with each customer.
Characteristics to be considered in allocating these values include the nature
and extent of the existing relationship with the customer, prospects for
developing new business with the customer, the customer’s credit quality
and the expectation of lease renewals among other factors. Factors consid-
ered by management’s analysis include the estimated carrying costs of the
facility during a hypothetical expected lease-up period, current market con-
ditions and costs to execute similar leases. Management also considers infor-
mation obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost operating lease income at
market rates during the hypothetical expected lease-up periods, based on
management’s assessment of specific market conditions. Management
estimates costs to execute leases including commissions and legal costs to
the extent that such costs are not already incurred with a new lease that has
been negotiated in connection with the purchase of the facility. Manage-
ment’s estimates are used to determine these values. These intangible assets
are included in “Deferred expenses and other assets” on the Company’s
Consolidated Balance Sheets.
48
iStar
Financial
2004
The value of above-market or below-market in-place leases are
amortized to expense over the remaining initial term of each lease. The value
of customer relationship intangibles are amortized to expense over the initial
and renewal terms of the leases, but no amortization period for intangible
assets will exceed the remaining depreciable life of the building. In the event
that a customer terminates its lease, the unamortized portion of each intan-
gible, including market rate adjustments, lease origination costs, in-place
lease values and customer relationship values, would be charged to expense.
Capitalized interest – The Company capitalizes interest costs
incurred during the construction period on qualified build-to-suit projects for
corporate tenants, including investments in joint ventures accounted for
under the equity method. No interest was capitalized during the 12 months
ended December 31, 2004 and 2003.
Cash and cash equivalents – Cash and cash equivalents include cash
held in banks or invested in money market funds with original maturity terms
of less than 90 days.
Restricted cash – Restricted cash represents amounts required to
be maintained in escrow under certain of the Company’s debt obligations,
leasing and derivative transactions.
Revenue recognition – The Company’s revenue recognition policies
are as follows:
Loans and other lending investments – Management considers
nearly all of its loans and other lending investments to be held-to-maturity,
although a small number of investments may be classified as available-for-
sale. The Company reflects held-to-maturity investments at historical cost
adjusted for allowance for loan losses, unamortized acquisition premiums or
discounts and unamortized deferred loan fees. Unrealized gains and losses on
available-for-sale investments are included in “Accumulated other compre-
hensive income (losses)” on the Company’s Consolidated Balance Sheets and
are not included in the Company’s net income. On occasion, the Company
may acquire loans at generally small premiums or discounts based on the
credit characteristics of such loans. These premiums or discounts are recog-
nized as yield adjustments over the lives of the related loans. Loan origination
or exit fees, as well as direct loan origination costs, are also deferred and rec-
ognized over the lives of the related loans as a yield adjustment. If loans with
premiums, discounts, loan origination or exit fees are prepaid, the Company
immediately recognizes the unamortized portion as a decrease or increase in
the prepayment gain or loss which is included in “Other income” in the
Company’s Consolidated Statements of Operations. Interest income is rec-
ognized using the effective interest method applied on a loan-by-loan basis.
A small number of the Company’s loans provide for accrual of
interest at specified rates that differ from current payment terms. Interest is
recognized on such loans at the accrual rate subject to management’s deter-
mination that accrued interest and outstanding principal are ultimately col-
lectible, based on the underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from bor-
rowers are recognized as additional income when received. Certain of the
Company’s loan investments provide for additional interest based on the
borrower’s operating cash flow or appreciation of the underlying collateral.
Such amounts are considered contingent interest and are reflected as income
only upon certainty of collection.
Leasing investments – Operating lease revenue is recognized on
the straight-line method of accounting from the later of the date of the origi-
nation of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized
evenly over the term of the lease. The cumulative difference between lease
revenue recognized under this method and contractual lease payment term-
sis recorded as “Deferred operating lease income receivable” on the
Company’s Consolidated Balance Sheets.
Provision for loan losses – The Company’s accounting policies
require that an allowance for estimated loan losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in
the portfolio, considers adequate to provide for loan losses. In establishing
loan loss provisions, management periodically evaluates and analyzes the
Company’s assets, historical and industry loss experience, economic
conditions and trends, collateral values and quality, and other relevant fac-
tors. Specific valuation allowances are established for impaired loans in the
amount by which the carrying value, before allowance for estimated losses,
exceeds the fair value of collateral less disposition costs on an individual loan
basis. Management considers a loan to be impaired when, based upon cur-
rent information and events, it believes that it is probable that the Company
will be unable to collect all amounts due according to the contractual terms
of the loan agreement on a timely basis. Management carries these impaired
loans at the fair value of the loans’ underlying collateral less estimated dispo-
sition costs. Impaired loans may be left on accrual status during the period
the Company is pursuing repayment of the loan; however, these loans are
placed on non-accrual status at such time as: (1) management determines
the borrower is incapable of, or has ceased efforts toward, curing the cause
of the impairment; (2) the loans become 90 days delinquent; (3) the loan
has a maturity default; or (4) the net realizable value of the loan’s underlying
collateral approximates the Company’s carrying value of such loan. While on
non-accrual status, interest income is recognized only upon actual receipt.
Impairment losses are recognized as direct write-downs of the related loan
with a corresponding charge to the provision for loan losses. Charge-offs
occur when loans, or a portion thereof, are considered uncollectible and of
such little value that further pursuit of collection is not warranted. Manage-
ment also provides a loan portfolio reserve based upon its periodic evaluation
and analysis of the portfolio, historical and industry loss experience, economic
conditions and trends, collateral values and quality, and other relevant factors.
The Company’s loans are generally secured by real estate assets or
are corporate lending arrangements to entities with significant rental real
estate operations (e.g., an unsecured loan to a company which operates resi-
dential apartments or retail, industrial or office facilities as rental real estate).
While the underlying real estate assets for the corporate lending instruments
may not serve as collateral for the Company’s investments in all cases, the
Company evaluates the underlying real estate assets when estimating loan
loss exposure because the Company’s loans generally have preclusions as to
49
iStar
Financial
2004
how much senior and/or secured debt the customer may borrow ahead of
the Company’s position.
Allowance for doubtful accounts – The Company’s accounting poli-
cies require a reserve on the Company’s accrued operating lease income
receivable balances and on the deferred operating lease income receivable
balances. The reserve covers asset specific problems (e.g., bankruptcy) as
they arise, as well as a portfolio reserve based on management’s evaluation
of the credit risks associated with these receivables.
Accounting for derivative instruments and hedging activity – In
accordance with Statement of Financial Accounting Standards No. 133
(“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging
Activities” as amended by Statement of Financial Accounting Standards
No. 137 “Accounting for Derivative Instruments and Hedging Activity –
Deferral of the Effective Date of FASB 133,” Statement of Financial
Accounting Standards No. 138 “Accounting for Certain Derivative Instruments
and Certain Hedging Activities – an Amendment of FASB Statement 133”
and Statement of Financial Accounting Standards No. 149 “Amendment of
Statement 133 on Derivative Instrument and Hedging Activities,” the
Company recognizes all derivatives as either assets or liabilities in the state-
ment of financial position and measures those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure
to variable cash flows of a forecasted transaction; or (3) in certain circum-
stances, a hedge of a foreign currency exposure.
Accounting for the impairment or disposal of long-lived assets – In
accordance with the Statement of Financial Accounting Standards No. 144
(“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived
Assets” the Company presents current operations prior to the disposition of
CTL assets and prior period results of such operations in discontinued opera-
tions in the Company’s Consolidated Statements of Operations.
Reclassification of extraordinary loss on early extinguishment of debt –
In accordance with the Statement of Financial Accounting Standards No. 145
(“SFAS No. 145”), “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections,” the
Company can no longer aggregate the gains and losses from the early extin-
guishment of debt and, if material, classify them as an extraordinary item.
The Company is not prohibited from classifying such gains and losses as
extraordinary items, so long as they meet the criteria in paragraph 20 of
Accounting Principles Board Opinion No. 30 (“APB 30”), “Reporting the
Results of Operations – Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions”; however, due to the nature of the Company’s operations, such
treatment may not be available to the Company. Any gains or losses on early
extinguishments of debt that were previously classified as extraordinary
items in prior periods presented that do not meet the criteria in APB 30 for
classification as an extraordinary item are reclassified to income from contin-
uing operations.
Income taxes – The Company is subject to federal income taxation
at corporate rates on its “REIT taxable income;” however, the Company is
allowed a deduction for the amount of dividends paid to its shareholders,
thereby subjecting the distributed net income of the Company to taxation at
the shareholder level only. In addition, the Company is allowed several other
deductions in computing its “REIT taxable income,” including non-cash items
such as depreciation expense. These deductions allow the Company to shel-
ter a portion of its operating cash flow from its dividend payout requirement
under federal tax laws. The Company intends to operate in a manner consis-
tent with and to elect to be treated as a REIT for tax purposes. iStar
Operating Inc. (“iStar Operating”) and TriNet Management Operating
Company, Inc. (“TMOC”), the Company’s taxable REIT subsidiaries, are not
consolidated for federal income tax purposes and are taxed as corporations.
For financial reporting purposes, current and deferred taxes are provided for
in the portion of earnings recognized by the Company with respect to its
interest in iStar Operating and TMOC. Accordingly, except for the Company’s
taxable REIT subsidiaries, no current or deferred taxes are provided for in the
Consolidated Financial Statements. During the third quarter 2003, TMOC
was liquidated. See Note 6 for a detailed discussion on the ownership struc-
ture and operations of iStar Operating and TMOC.
Earnings per common share – In accordance with the Statement of
Financial Accounting Standards No. 128 (“SFAS No. 128”), “Earnings per
Share,” the Company presents both basic and diluted earnings per share
(“EPS”). Basic earnings per share (“Basic EPS”) is computed by dividing net
income allocable to common shareholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share (“Diluted
EPS”) reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock, where such exercise or conversion would result in a lower earnings per
share amount.
Use of estimates – The preparation of financial statements in con-
formity with GAAP requires management to make estimates and assump-
tions 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.
New accounting standards – In December 2004, the FASB released
Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”),
“Share-Based Payment.” This standard requires issuers to measure the cost
of equity-based service awards based on the grant-date fair value of the
award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award or the req-
uisite service period (typically the vesting period). No compensation cost is
50
iStar
Financial
2004
recognized for equity instruments for which employees do not render the
requisite service. The Company will initially measure the cost of liability based
service awards based on their current fair value. The fair value of that award
will be remeasured subsequently at each reporting date through the settle-
ment date. Changes in fair value during the requisite service period will be
recognized as compensation cost over that period. The grant-date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments. If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. Companies can comply with FASB
No. 123R using one of three transition methods: (1) the modified prospective
method; (2) a variation of the modified prospective method; or (3) the modi-
fied retrospective method. The provisions of this statement are effective for
interim and annual periods beginning after June 15, 2005, however, in the third
quarter 2002, in anticipation of this new literature, the Company adopted the
second transition method (with retroactive application of fair-value accounting
to the beginning of the calendar year), which did not have a significant financial
impact on the Company’s Consolidated Financial Statements.
In December 2003, the SEC issued Staff Accounting Bulletin
No. 104 (“SAB 104”), “Revenue Recognition” which supercedes SAB 101,
“Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is
to rescind the accounting guidance contained in SAB 101 related to multiple
element revenue arrangements, superceded as a result of the issuance of
EITF 00-21. The Company adopted the provisions of this statement imme-
diately, as required, and it did not have a significant impact on the Company’s
Consolidated Financial Statements.
EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables,” issued during the third quarter of 2003, provides guidance on
revenue recognition for revenues derived from a single contract that contain
multiple products or services. EITF 00-21 also provides additional require-
ments to determine when these revenues may be recorded separately for
accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as
required, and it did not have a significant impact on the Company’s
Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (“SFAS No. 150”), “Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity.” This standard
requires issuers to classify as liabilities the following three types of free-
standing financial instruments: (1) mandatorily redeemable financial instru-
ments; (2) obligations to repurchase the issuer ’s equity shares by
transferring assets; and (3) certain obligations to issue a variable number of
shares. The FASB recently issued FASB Staff Position (“FSP”) 150-3, which
defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as
they apply to mandatorily redeemable noncontrolling interests associated
with finite-lived entities. The Company adopted the provisions of this state-
ment, as required, on July 1, 2003, and it did not have a significant financial
impact on the Company’s Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
“Consolidation of Variable Interest Entities,” an interpretation of ARB 51. FIN
46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights (a “variable interest entity” or
“VIE”), and how to determine when and which business enterprise should con-
solidate a VIE. In addition, FIN 46 requires that both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE make addi-
tional disclosures. The transitional disclosure requirements took effect imme-
diately and were required for all financial statements initially issued or modified
after January 31, 2003. Immediate consolidation is required for VIEs entered
into or modified after February 1, 2003 in which the Company is deemed the
primary beneficiary. For VIEs in which the Company entered into prior to
February 1, 2003, FIN 46 was deferred to the quarter ended March 31,
2004. In December 2003, the FASB issued a revised FIN 46 that modifies and
clarifies various aspects of the original Interpretation. FIN 46 applies when
either: (1) the equity investors (if any) lack one or more of the essential char-
acteristics of controlling financial interest; (2) the equity investment at risk is
insufficient to finance that entity’s activities without additional subordinated
financial support; or (3) the equity investors have voting rights that are not
proportionate to their economic interest. The adoption of the additional
consolidation provisions of FIN 46 did not have a material impact on the
Company’s Consolidated Financial Statements (see Note 6).
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-
Based Compensation – Transition and Disclosure,” an amendment of FASB
Statement No. 123 (“SFAS No. 123”). This statement provides alternative
transition methods for a voluntary change to the fair value basis of account-
ing for stock-based employee compensation. However, this Statement does
not permit the use of the original SFAS No. 123 prospective method of
transition for changes to the fair value-based method made in fiscal years
beginning after December 15, 2003. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation, description of transition method
utilized and the effect of the method used on reported results. The Company
adopted SFAS No. 148 with retroactive application to grants made subse-
quent to January 1, 2002 with no material effect on the Company’s
Consolidated Financial Statements.
51
iStar
Financial
2004
SFAS No. 148 disclosure requirements, including the effect on net
income and earnings per share if the fair value-based method had been
applied to all outstanding and unvested stock awards in each period, are pre-
sented below (in thousands except per share amounts):
For the Years Ended December 31,
2004
Basic EPS
2003
Basic EPS
2002
Basic EPS
Net income allocable to
common shareholders
and HPU holders,
as reported(1)
Total stock-based
compensation expense
determined under fair
value-based method
for all awards, net of
related tax effects
Pro forma net income
allocable to common
shareholders and
HPU holders
Earnings per share:
$209,107
$255,249
$178,362
–
(96)
(188)
$209,107
$255,153
$178,174
Basic – as reported(2)
Basic – pro forma(2)
Diluted – as reported(3)(4)
Diluted – pro forma(3)(4)
$
$
$
$
1.87
1.87
1.83
1.83
2.52
2.52
2.43
2.43
$
$
1.98
1.98
1.93
1.92
Explanatory Notes:
(1) HPU holders are Company employees who purchased high performance common stock units
(2)
(3)
(4)
under the Company’s High Performance Unit Program.
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,314, $2,066 and
$0 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,265, $1,994 and
$0 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, includes $3, $167 and $0 of
joint venture income, respectively.
In November 2002, the FASB issued FASB Interpretation No. 45
(“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,” an inter-
pretation of Statement of Financial Accounting Standards No. 5 (“SFAS No. 5”),
“Accounting for Contingencies,” Statement of Financial Accounting Standards
No. 57, “Related Party Disclosures,” Statement of Financial Accounting
Standards No. 107, “Disclosures about Fair Value of Financial Instruments” and
rescinds FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of
Indebtedness of Others, an Interpretation of SFAS No. 5.” It requires that, upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee regardless if the
Company receives separately identifiable consideration (e.g., a premium). The
disclosure requirements became effective December 31, 2002. The adoption
of FIN 45 did not have a material impact on the Company’s Consolidated
Financial Statements.
In September 2002, the FASB issued Statement of Financial
Accounting Standards No. 147 (“SFAS No. 147”), “Acquisitions of Certain
Financial Institutions,” an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the
accounting for the acquisitions of financial institutions, except those acquisi-
tions between two or more mutual enterprises. SFAS No. 147 removes
acquisitions of financial institutions from the scope of both FASB No. 72,
“Accounting for Certain Acquisitions of Banking or Thrift Institutions,” and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, “When a
Savings and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method,” and requires that those
transactions be accounted for in accordance with SFAS No. 141 and SFAS
No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-
term, customer-relationship intangible assets of financial institutions such as
depositor-relationship and borrower-relationship intangible assets and credit
cardholder intangible assets. The Company adopted the provisions of this
statement, as required, on October 1, 2002, and it did not have a significant
financial impact on the Company’s Consolidated Financial Statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (“SFAS No. 146”), “Accounting for Exit or Disposal Activities,”
to address significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the guidance
that the Emerging Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3,
“Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The
scope of SFAS No. 146 also includes: (1) costs related to terminating a contract
that is not a capital lease; and (2) termination benefits received by employees
involuntarily terminated under the terms of a one-time benefit arrange-
ment that is not an on-going benefit arrangement or an individual deferred-
compensation contract. The Company adopted the provisions of SFAS 146 on
December 31, 2002, as required, and it did not have a material effect on the
Company’s Consolidated Financial Statements.
Note 4 – Loans and Other Lending Investments
The following is a summary description of the Company’s loans and other lending investments (in thousands)(1):
52
iStar
Financial
2004
Principal
Number of
Borrowers
Balances
In Class Outstanding
48
2004
$2,373,178 $2,334,662
Carrying Value as of
Effective
December 31, December 31, Maturity
Dates
2005
to 2022
2003
$2,106,791
Type of
Investment
Senior
Mortgages(4)
Underlying
Property Type
Office/Residential/
Retail/Industrial, R&D/
Conference Center/
Mixed Use/Hotel/
Entertainment,
Leisure/Other
Subordinate
Mortgages
Office/Residential/
Retail/Mixed Use/Hotel
20
578,525
579,322
550,572
Corporate/
Partnership
Loans(7)
Office/Residential/
Retail/Industrial, R&D/
Mixed Use/Hotel/
Entertainment,
Leisure/Other
28
944,530
912,756
710,469
Other Lending Office/Mixed Use/
Investments – Other
Loans
Other Lending
Industrial, R&D/
Investments – Entertainment,
Securities(8)
Leisure/Other
3
7
4,261
4,036
23,767
158,383
157,849
344,511
Gross Carrying Value
Provision for Loan Losses
Total, Net
Explanatory Notes:
$3,988,625
(42,436)
$3,946,189
$3,736,110
(33,436)
$3,702,674
2005
to 2013
2005
to 2013
2005
to 2008
2005
to 2013
Contractual
Interest
Payment
Rates(2)(3)
Fixed:
7.03% to 18.20%
Variable:
LIBOR + 2.90% to
LIBOR + 7.50%
Fixed:
7.00% to 18.00%
Variable:
LIBOR + 4.00% to
LIBOR + 7.02%
Fixed:
6.00% to 15.00%
Variable:
LIBOR + 2.50% to
LIBOR + 9.25%
Prin- Partici-
pation
cipal
Fea-
Amorti-
tures
zation
Yes(5)
Yes(6)
Contractual
Interest
Accrual
Rates(2)(3)
Fixed:
7.03% to 18.20%
Variable:
LIBOR + 2.90% to
LIBOR + 7.50%
Yes(5)
No
Yes(5)
Yes(6)
Fixed:
7.32% to 18.00%
Variable:
LIBOR + 4.00% to
LIBOR + 7.02%
Fixed:
7.33% to 17.50%
Variable:
LIBOR + 2.50% to
LIBOR + 9.25%
Fixed: 9.00%
Fixed: 9.00%
No
Yes(6)
Fixed:
8.27% to 10.00%
Variable:
LIBOR + 2.82% to
LIBOR + 5.00%
Fixed:
8.27% to 10.00%
Variable:
LIBOR + 2.82% to
LIBOR + 5.00%
Yes(5)
No
(1) Details (other than carrying values) are for loans outstanding as of December 31, 2004.
(2)
Substantially all variable-rate loans are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR on December 31, 2004 was 2.40%. As of December 31, 2004, four loans with a combined carrying
value of $73.0 million have a stated accrual rate that exceeds the stated pay rate; one of these loans, with a carrying value of $27.1 million, has been placed on non-accrual status and therefore is considered
a non-performing loan (see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management) and the Company is only recognizing income based on cash received
for interest.
As of December 31, 2004, the Company has 47 loans and other lending investments with LIBOR floors ranging from 1.00% to 3.00%.
Includes a participation interest in a first mortgage.
The loans require fixed payments of principal and interest resulting in partial principal amortization over the term of the loan with the remaining principal due at maturity.
Under some of the loans, the Company may receive additional payments representing additional interest from participation in available cash flow from operations of the underlying real estate collateral.
Includes one unsecured loan with a carrying value of $7.5 million as of December 31, 2004.
(7)
(8) Generally consists of term preferred stock or debt interests that are specifically originated or structured to meet customer financing requirements and the Company’s investment criteria. These investments
(3)
(4)
(5)
(6)
do not typically consist of securities purchased in the open market or as part of broadly-distributed offerings.
53
iStar
Financial
2004
During the 12 months ended December 31, 2004 and 2003,
respectively, the Company and its affiliated ventures originated or acquired an
aggregate of approximately $1,596.4 million and $1,735.4 million in loans
and other lending investments, funded $255.3 million and $46.1 million under
existing loan commitments, and received principal repayments of $1,591.0
million and $1,120.0 million.
As of December 31, 2004, the Company had 25 loans with
unfunded commitments. The total unfunded commitment amount was
approximately $678.9 million, of which $202.5 million was discretionary and
$476.4 million was non-discretionary.
A portion of the Company’s loans and other lending investments
are pledged as collateral under either the iStar Asset Receivables secured
notes, the secured revolving credit facilities or secured term loans (see
Note 7 for a description of the Company’s secured and unsecured debt).
The Company has reflected provisions for loan losses of approxi-
mately $9.0 million, $7.5 million and $8.3 million in its results of operations
during the 12 months ended December 31, 2004, 2003 and 2002, respec-
tively. These provisions represent loan portfolio reserves based on manage-
ment’s evaluation of general market conditions, the Company’s internal risk
management policies and credit risk ratings system, industry loss experience,
the likelihood of delinquencies or defaults and the credit quality of the under-
lying collateral. During the 12 months ended December 31, 2003, the
Company took a $3.3 million direct impairment on a $30.4 million partner-
ship loan lowering the book value of the asset to $27.1 million. In
August 2003, the borrower stopped making its debt service payments due
to insufficient cash flow caused by vacancies at the property. After taking
the impairment charge management believes there is adequate collateral to
support the book value of the asset as of December 31, 2004.
Changes in the Company’s provision for loan losses were as follows:
Provision for loan losses, December 31, 2001
Additional provision for loan losses
Provision for loan losses, December 31, 2002
Additional provision for loan losses
Impairment on loans
Provision for loan losses, December 31, 2003
Additional provision for loan losses
Provision for loan losses, December 31, 2004
$ 21,000
8,250
29,250
7,500
(3,314)
$ 33,436
9,000
$42,436
Note 5 – Corporate Tenant Lease Assets
During the 12 months ended December 31, 2004 and 2003,
respectively, the Company acquired an aggregate of approximately $513.0 mil-
lion (which includes the Company’s acquisition of the remaining interest in its
ACRE Simon, LLC joint venture – See Note 6) and $351.4 million in CTL
assets and disposed of CTL assets for net proceeds of approximately
$279.6 million and $47.6 million. In relation to the CTL assets acquired dur-
ing the 12 months ended December 31, 2004, the Company allocated
approximately $18.4 million of purchase costs to intangible assets based on
their estimated fair values (see Note 3). As of December 31, 2004 and
2003, the Company had unamortized purchase related intangible assets of
approximately $41.2 million and $24.9 million, respectively, and included
these in “Deferred expenses and other assets” on the Company’s Consolidated
Balance Sheets.
The Company’s investments in CTL assets, at cost, were as follows
(in thousands):
Facilities and improvements
Land and land improvements
Direct financing lease
Less: accumulated depreciation
Corporate tenant lease assets, net
December 31,
2004
$2,431,649
672,238
–
(226,845)
$2,877,042
December 31,
2003
$2,210,592
468,708
35,472
(178,887)
$2,535,885
The Company’s CTL assets are leased to customers with initial term
expiration dates from 2005 to 2026. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in
effect at December 31, 2004, are approximately as follows (in thousands):
Year
2005
2006
2007
2008
2009
Thereafter
Amount
$ 281,266
271,697
248,539
238,848
234,397
2,079,328
Under certain leases, the Company is entitled to receive additional
participating lease payments to the extent gross revenues of the corporate
customer exceed a base amount. The Company did not earn any such addi-
tional participating lease payments on these leases in the 12 months ended
December 31, 2004, 2003 and 2002. In addition, the Company also receives
reimbursements from customers for certain facility operating expenses includ-
ing common area costs, insurance and real estate taxes. Customer expense
reimbursements for the 12 months ended December 31, 2004, 2003 and
2002 were approximately $31.1 million, $27.1 million and $25.5 million,
respectively, and are included as a reduction of “Operating costs – corporate
tenant lease assets” on the Company’s Consolidated Statements of Operations.
The Company is subject to expansion option agreements with two
existing customers which could require the Company to fund and to construct
up to 161,000 square feet of additional adjacent space on which the Company
would receive additional operating lease income under the terms of the option
agreements. In addition, upon exercise of such expansion option agreements,
the corporate customers would be required to simultaneously extend their
existing lease terms for additional periods ranging from six to ten years.
In addition, the Company has $32.8 million of non-discretionary
unfunded commitments related to two existing customers. These commit-
ments generally fall into two categories: (1) pre-approved capital improve-
ment projects; and (2) new or additional construction costs. Currently, the
Company has committed $18.1 million in pre-approved capital improvement
projects and $14.7 million in new construction costs. Upon funding the
Company would receive additional operating lease income from the customer.
During the 12 months ended December 31, 2004, 2003 and
2002, the Company sold 22 CTL assets (to six different buyers), nine CTL
assets and one CTL asset for net proceeds of approximately $279.6 million,
$47.6 million and $3.7 million, and net realized gains of approximately
$43.4 million, $5.2 million and $595,000, respectively.
54
iStar
Financial
2004
As of December 31, 2003, there was one CTL asset with a book
value of $24.8 million classified as “Asset held for sale” on the Company’s
Consolidated Balance Sheets. During the first quarter 2004, this CTL asset
was reclassified as held for use.
On September 30, 2002, one of the Company’s customers exer-
cised an option to terminate its lease on 50.00% of the land leased from the
Company. In connection with this termination, the Company realized
$17.5 million in cash lease termination payments, offset by a $17.4 million
impairment charge in connection with the termination, resulting in a net gain
of approximately $123,000. In the fourth quarter of 2002, the customer
completed a recapitalization transaction that significantly enhanced its credit.
In connection with this recapitalization, the Company agreed to amend the
customer’s lease, effective October 1, 2002. In the lease amendment, the
Company received $12.5 million in cash as prepaid lease payments and
the customer agreed to fixed minimum increases on future lease payments.
In exchange, the Company agreed to reduce the customer’s lease obligations
for a period not to exceed nine quarters. Following the reduction period, the
customer was required to make additional lease payments over a ten-year
period sufficient to reimburse the Company for a portion of the temporary
reduction in lease payments. However, due to increased liquidity, the cus-
tomer has prepaid all additional lease payments related to the reduction period
as of December 31, 2004. These lease payments total approximately $1.8 mil-
lion and are included in “Accounts payable, accrued expenses and other liabilities”
on the Company’s Consolidated Balance Sheets.
The results of operations from CTL assets sold or held for sale in the
current and prior periods are classified as “Income from discontinued opera-
tions,” on the Company’s Consolidated Statements of Operations even though
such income was actually recognized by the Company prior to the asset sale.
Gains from the sale of CTL assets are classified as “Gain from discontinued
operations” on the Company’s Consolidated Statements of Operations.
Note 6 – Joint Ventures, Unconsolidated Subsidiaries and Minority Interest
Income or loss generated from the Company’s joint venture investments and unconsolidated subsidiaries is included in “Equity in earnings (loss) from
joint ventures and unconsolidated subsidiaries” on the Company’s Consolidated Statements of Operations.
The Company’s ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, the Company’s pro rata
share of its ventures’ third-party, non-recourse debt as of December 31, 2004 and its respective income (loss) for the year ended December 31, 2004 are
presented below (in thousands):
Unconsolidated Joint Ventures:
ACRE Simon
CTC
Sunnyvale
Total
Ownership
%
Equity
Investment
JV Income
(Loss) for the
Year Ended
December 31,
2004
Pro Rata
Share of
Third-Party
Non-Recourse
Debt
20.00%
50.00%
44.70%
$
–
5,663
–
$5,663
$ (190)
3,025
74
$2,909
$ –
–
–
$ –
Third-Party Debt
Interest Rate
Scheduled
Maturity Date
N/A
N/A
N/A
N/A
N/A
N/A
Investments in and advances to unconsolidated joint ventures: At
December 31, 2004, the Company had an investment in Corporate
Technology Centre Associates, LLC (“CTC”), whose external member is
Corporate Technology Centre Partners, LLC. This venture was formed for the
purpose of operating, acquiring and, in certain cases, developing CTL facilities.
At December 31, 2004, the venture held one facility. The
Company’s investment in this joint venture at December 31, 2004 was
$5.7 million. The joint venture’s carrying value for the one facility owned at
December 31, 2004 was $17.9 million. The joint venture had total assets of
$19.7 million and total liabilities of $66,000 as of December 31, 2004 and
net income of $6.3 million for the year ended December 31, 2004. The
Company accounts for this investment under the equity method because the
Company’s joint venture partner has certain participating rights giving them
shared control over the venture.
Company now owns 100.00% of this joint venture and therefore, as of
November 23, 2004, consolidates it for financial statement purposes.
On September 27, 2004, CTC Associates I L.P., a wholly-owned
subsidiary of the Company’s CTC joint venture, sold its interest in five buildings
to a third-party investor and the mortgage lender accepted the proceeds in
full satisfaction of the obligation. This transaction resulted in a net loss of
approximately $950,000 allocable to the Company.
On March 30, 2004, CTC Associates II L.P., a wholly-owned sub-
sidiary of the Company’s CTC joint venture, conveyed its interest in two
buildings and the related property to the mortgage lender in exchange for
satisfaction of the entity’s obligations of the related loan. Prior to the con-
veyance of the buildings, early lease terminations resulted in one-time
income allocable to the Company of approximately $3.5 million during the
first quarter of 2004.
On November 23, 2004, the Company acquired the remaining
80.00% share of its joint venture partner’s interest in the ACRE Simon, LLC
joint venture. The total net purchase price was $40.1 million of which
$14.6 million was paid in cash and $25.5 million reflected the assumption
of the joint venture partner’s share of the debt of the partnership. The
On March 31, 2004, the Company began accounting for its
44.70% interest in TriNet Sunnyvale Partners, L.P. (“Sunnyvale”) as a VIE (see
Note 3) because the limited partners of Sunnyvale have the option to put
their interest to the Company for cash; however, the Company may elect to
deliver 297,728 shares of Common Stock in lieu of cash. Therefore, the
55
iStar
Financial
2004
Company consolidates this partnership for financial statement reporting pur-
poses. Prior to its consolidation, the Company accounted for this joint ven-
ture under the equity method for financial statement reporting purposes and
it was presented in “Investments in and advances to joint ventures and
unconsolidated subsidiaries,” on the Company’s Consolidated Balance Sheets
and earnings from the joint venture were included in “Equity in earnings (loss)
from joint ventures and unconsolidated subsidiaries” in the Company’s
Consolidated Statements of Operations.
On July 2, 2002, the Company paid approximately $27.9 million in
cash to the former member of TriNet Milpitas Associates (“Milpitas”) joint
venture in exchange for its 50.00% ownership interest. Pursuant to the
terms of the joint venture agreement, the former external member had the
right to convert its interest into 984,476 shares of Common Stock of the
Company at any time during the period February 1, 2002 through January 31,
2003. On May 2, 2002, the former Milpitas external member exercised this
right. Upon the external member’s exercise of its conversion right, the
Company had the option to acquire the partner’s interest for cash, instead
of shares, for a payment equal to the value of 984,476 shares of Common
Stock multiplied by the ten-day average closing stock price as of the trans-
action date. The Company made such election and, as of July 2, 2002, owns
100.00% of Milpitas, and therefore consolidates these assets for accounting
purposes. The Company accounted for the acquisition of the external interest
using the purchase method.
On April 1, 2002, the former Sierra Land Ventures (“Sierra”) joint
venture partner assigned its 50.00% ownership interest in Sierra to a wholly-
owned subsidiary of the Company. There was no cash or shares exchanged in
this transaction. As of April 1, 2002, the Company owns 100.00% of the
CTL asset previously held by Sierra and therefore consolidates this asset for
accounting purposes.
Investments in and advances to unconsolidated subsidiaries: The
Company has an investment in iStar Operating, a taxable REIT subsidiary
that, through a wholly-owned subsidiary, services the Company’s loans and
certain loan portfolios owned by third parties. The Company owns all of the
non-voting preferred stock and a 95.00% economic interest in iStar
Operating. The common shareholder, an entity controlled by a former direc-
tor of the Company, is the owner of all the voting common stock and a
5.00% economic interest in iStar Operating. As of December 31, 2004,
there have never been any distributions to the common shareholder, nor
does the Company expect to make any in the future. At any time, the
Company has the right to acquire all of the common stock of iStar Operating
at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT sub-
sidiary for purposes of maintaining compliance with the REIT provisions of
the Code and prior to July 1, 2003 was accounted for under the equity
method for financial statement reporting purposes and was presented in
“Investments in and advances to joint ventures and unconsolidated sub-
sidiaries” on the Company’s Consolidated Balance Sheets. As of July 1, 2003,
the Company consolidates this entity as a VIE (see Note 3) with no material
impact. Prior to its consolidation, the Company charged an allocated portion
of its general overhead expenses to iStar Operating based on the number of
employees at iStar Operating as a percentage of the Company’s total
employees. These general overhead expenses were in addition to the direct
general and administrative costs of iStar Operating. As of December 31,
2004, iStar Operating had no debt obligations.
In addition, the Company had an investment in TMOC, an entity
originally formed to make a $2.0 million investment in the convertible debt
securities of a real estate company which trades on the Mexican Stock
Exchange. This investment was made by TriNet prior to its acquisition by the
Company in 1999. On June 30, 2003, the $2.0 million investment was fully
repaid and during the third quarter 2003, the entity was liquidated.
Minority Interest: Income or loss allocable to external partners in
consolidated entities is included in “Minority interest in consolidated entities”
on the Company’s Consolidated Statements of Operations.
On June 8, 2004, AutoStar Realty Operating Partnership, L.P. (the
“Operating Partnership”) was created to provide real estate financing solutions
to automotive dealerships and related automotive businesses. The Operating
Partnership was capitalized with initial contributions of $9,500 (0.50%) from
AutoStar Realty GP LLC (the “GP”) and $1.9 million (99.50%) from AutoStar
Investors Partnership LLP (the “LP”). The GP is funded and owned 93.33% by
iStar Automotive Investments, LLC, a wholly-owned subsidiary of the
Company, and 6.67% by CP AutoStar, LP, an entity owned and controlled by
two entities unrelated to the Company. The LP is funded and owned 93.33%
by iStar Automotive Investments, LLC and 6.67% by CP AutoStar Co-Investors,
LP, an entity controlled by two entities unrelated to the Company. This joint
venture qualifies as a VIE and the Company is the primary beneficiary.
Therefore, the Company consolidates this partnership for financial statement
purposes and records the minority interest of the external partner in “Minority
interest in consolidated entities” on the Company’s Consolidated Balance
Sheets. At December 31, 2004, the venture held 25 net leased facilities. The
venture’s carrying value for the 25 facilities owned at December 31, 2004
was $170.4 million. The venture had total assets of $173.5 million and total
liabilities of $121.7 million as of December 31, 2004 and net income of
$1.9 million for the period ended December 31, 2004.
As discussed above, on March 31, 2004, the Company began
accounting for its 44.70% interest in the Sunnyvale joint venture as a VIE and
therefore consolidates this partnership for financial statement purposes and
records the minority interest of the external partner in “Minority interest in
consolidated entities” on the Company’s Consolidated Balance Sheets.
On September 29, 2003 the Company acquired a 96.00% interest
in iStar Harborside LLC, an infinite life partnership, with the external partner
holding the remaining 4.00% interest. The Company consolidates this part-
nership for financial statement purposes and records the minority interest of
the external partner in “Minority interest in consolidated entities” on the
Company’s Consolidated Balance Sheets.
The Company also holds a 98.00% interest in TriNet Property
Partners, L.P with the external partners holding the remaining 2.00% inter-
est. As of August 1999, the external partners have the option to convert
their partnership interest into cash; however, the Company may elect to
deliver 72,819 shares of Common Stock in lieu of cash. The Company con-
solidates this partnership for financial statement purposes and records the
minority interest of the external partner in “Minority interest in consolidated
entities” on the Company’s Consolidated Balance Sheets.
Note 7 – Debt Obligations
As of December 31, 2004 and 2003 the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):
56
iStar
Financial
2004
Secured revolving credit facilities:
Line of credit
Line of credit
Line of credit
Line of credit
Unsecured revolving credit facilities:
Line of credit(3)
Line of credit
Total revolving credit facilities
Secured term loans:
Secured by CTL asset
Secured by CTL asset
Secured by CTL asset
Secured by CTL assets
Secured by CTL assets
Secured by corporate bond investments
Secured by corporate lending investment
Secured by corporate lending investment
Secured by corporate lending investment
Total term loans
Less: debt (discount)/premium
Total secured term loans
iStar Asset Receivables secured notes:
STARs Series 2002-1:
Class A1
Class A2
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K
Total STARs Series 2002-1
Less: debt discount
STARs Series 2003-1:
Class A1
Class A2
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K
Total STARS Series 2003-1
Total iStar Asset Receivables secured notes
Maximum
Amount
Available
Carrying Value as of
December 31,
2004
December 31,
2003
Stated
Interest
Rates(1)
Scheduled
Maturity
Date
$ 250,000
700,000
350,000
500,000
$
–
67,775
10,811
–
$
88,640
310,364
117,211
180,376
LIBOR + 1.50% – 2.05%
LIBOR + 1.40% – 2.15%
LIBOR + 1.50% – 2.25%
LIBOR + 1.50% – 2.25%
March 2005
January 2007(2)
August 2006(2)
September 2005
1,250,000
–
$3,050,000
840,000
–
$918,586
–
130,000
$ 826,591
LIBOR + 0.875%
LIBOR + 2.125%
April 2008
July 2004
76,670
136,512
135,000
–
148,600
129,446
60,180
–
–
686,408
7,065
693,473
–
202,052
39,955
26,637
21,310
42,619
26,637
21,309
26,637
26,637
26,637
460,430
(3,734)
77,938
140,440
135,000
193,000
92,876
–
60,874
60,000
48,000
808,128
(128)
808,000
40,011
381,296
39,955
26,637
21,310
42,619
26,637
21,309
26,637
26,637
26,637
679,685
(4,090)
113,309
225,227
16,744
18,418
11,720
13,395
13,395
11,720
11,721
13,394
23,441
472,484
$929,180
235,808
248,206
18,452
20,297
12,916
14,762
14,762
12,916
12,916
14,761
25,833
631,629
$1,307,224
6.55%
7.44%
LIBOR + 1.75%
LIBOR + 1.85%
6.80% – 8.80%
LIBOR + 1.05% – 1.50%
6.41%
LIBOR + 2.50%
LIBOR + 2.125%
December 2005
April 2009
October 2008
July 2006
Various through 2026(4)
January 2006
January 2013
June 2004
July 2008
LIBOR + 0.26%
LIBOR + 0.38%
LIBOR + 0.65%
LIBOR + 0.75%
LIBOR + 0.85%
LIBOR + 1.235%
LIBOR + 1.335%
LIBOR + 1.435%
6.35%
6.35%
6.35%
LIBOR + 0.25%
LIBOR + 0.35%
LIBOR + 0.55%
LIBOR + 0.65%
LIBOR + 0.75%
LIBOR + 1.05%
LIBOR + 1.10%
LIBOR + 1.25%
4.97%
5.07%
5.56%
June 2004(5)
December 2009(5)
April 2011(5)
May 2011(5)
January 2012(5)
January 2012(5)
January 2012(5)
January 2012(5)
January 2012(5)
May 2012(5)
May 2012(5)
October 2005(6)
August 2010(6)
July 2011(6)
April 2012(6)
October 2012(6)
May 2013(6)
June 2013(6)
June 2013(6)
June 2013(6)
June 2013(6)
June 2013(6)
57
iStar
Financial
2004
Unsecured notes:
LIBOR + 1.25% Senior Notes
4.875% Senior Notes
5.125% Senior Notes
5.70% Senior Notes
6.00% Senior Notes
6.50% Senior Notes
7.00% Senior Notes
7.70% Notes(7)(8)
7.95% Notes(7)(8)
8.75% Notes
Total unsecured notes
Less: debt discount
Plus: impact of pay-floating swap agreements(9)
Total unsecured notes
Other debt obligations
Total debt obligations
Explanatory Notes:
Carrying Value as of
December 31,
2004
December 31,
2003
Stated
Interest
Rates(1)
Scheduled
Maturity
Date
$ 200,000
350,000
250,000
250,000
350,000
150,000
185,000
100,000
50,000
240,000
2,125,000
(56,913)
(3,652)
2,064,435
–
$4,605,674
$
–
–
–
–
350,000
150,000
185,000
100,000
50,000
350,000
1,185,000
(47,921)
690
1,137,769
34,148
$4,113,732
LIBOR + 1.25%
4.875%
5.125%
5.70%
6.00%
6.50%
7.00%
7.70%
7.95%
8.75%
March 2007
January 2009
April 2011
March 2014
December 2010
December 2013
March 2008
July 2017
May 2006
August 2008
Various
Various
Substantially all variable-rate debt obligations are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR rate on December 31, 2004 was 2.40%.
(1)
(2) Maturity date reflects a one-year “term-out” extension at the Company’s option.
(3) On October 5, 2004 the interest rate and facility fees were reduced to LIBOR + 0.875% (from LIBOR + 1.00%) and 17.5 basis points, (from 25 basis points), due to an upgrade in the Company’s senior
unsecured debt rating to investment grade by S&P. On December 17, 2004 the commitment on this facility was increased to $1,250.0 million and the accordion feature was amended to increase the facility
to $1.5 billion in the future if necessary. As of December 31, 2004, $7.6 million of the maximum amount available under this facility is utilized for two letters of credit. Maturity date reflects a one-year
extension at the Company’s option.
(6)
(5)
(4) On November 23, 2004, the Company purchased the remaining interest in the ACRE Simon joint venture from the former ACRE Simon external member for $40.1 million. Upon purchase of the interest, the
ACRE Simon joint venture became fully consolidated for accounting purposes and approximately $31.8 million of secured term debt was reflected on the Company’s Consolidated Balance Sheets. On
December 9, 2004, the Company repaid one of the term loans with a balance of $9.8 million and an original maturity date of June 2005.
Principal payments on these bonds are a function of the principal repayments on loan or CTL assets which collateralize these obligations. The dates indicated above represent the expected date on which the
final payment would occur for such class based on the assumptions that the loans which collateralize the obligations are not voluntarily prepaid, the loans are paid on their effective maturity dates and no
extensions of the effective maturity dates of any of the loans are granted. The final maturity date for the underlying indenture on class A1 is May 28, 2017 and the final maturity date for classes A2, B, C, D,
E, F, G, H, J and K is May 28, 2020.
Principal payments on these bonds are a function of the principal repayments on loan or CTL assets which collateralize these obligations. The dates indicated above represent the expected date on which the
final payment would occur for such class based on the assumptions that the loans which collateralize the obligations are not voluntarily prepaid, the loans are paid on their effective maturity dates and no
extensions of the effective maturity dates of any of the loans are granted. The final maturity date for the underlying indenture is August 28, 2022.
The Notes are callable by the Company at any time for an amount equal to the total of principal outstanding, accrued interest and the applicable make-whole prepayment premium. On March 1, 2005, the
7.70% Notes were exchanged for 5.70% Series B Senior Notes due 2014 (see Note 17 for further discussion).
These obligations were assumed as part of the acquisition of TriNet. As part of the accounting for the purchase, these fixed-rate obligations were considered to have stated interest rates which were below the
then-prevailing market rates at which the Leasing Subsidiary could issue new debt obligations and, accordingly, the Company ascribed a market discount to each obligation. Such discounts are amortized as an
adjustment to interest expense using the effective interest method over the related term of the obligations. As adjusted, the effective annual interest rates on these obligations were 9.51% and 9.04% for the
7.70% Notes and 7.95% Notes, respectively.
(8)
(7)
(9) On January 15, 2004, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 mil-
lion and $45.0 million, respectively, and maturing on January 15, 2009. On December 17, 2003, the Company entered into three pay-floating interest rate swaps struck at 4.381%, 4.345% and 4.29% in the
notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively. On November 27, 2002, the Company entered into two pay-floating interest rate swaps struck at 3.8775% and 3.81% in
the notional amounts of $100.0 million and $50.0 million, respectively. These swaps are intended to mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes, $350.0 million of
seven-year Senior Notes and $150.0 million of ten-year Senior Notes, respectively, attributable to changes in LIBOR. For accounting purposes, quarterly the Company adjusts the value of the swap to its fair
value and adjusts the carrying amount of the hedged liability by an offsetting amount.
The Company’s primary source of short-term funds is a $1,250.0 mil-
lion unsecured revolving credit facility. Under the facility the Company is
required to meet certain financial covenants. As of December 31, 2004,
there is approximately $402.4 million available to draw under the facility.
In addition, the Company has four secured revolving credit facilities of which
availability is based on percentage borrowing base calculations. Certain debt
obligations, including the unsecured and secured lines of credit, contain
covenants. These covenants are both financial and non-financial in nature.
Significant financial covenants include limitations on the Company’s ability to
incur indebtedness beyond specified levels, and a requirement to maintain
specified ratios of unsecured indebtedness compared to unencumbered
assets. Significant non-financial covenants include a requirement in its publicly-
held debt securities that the Company offer to repurchase those securities at a
premium if the Company undergoes a change of control. As of December 31,
2004, the Company believes it is in compliance with all financial and non-
financial covenants on its debt obligations.
Capital Markets Activity – During the 12 months ended December 31,
2004, the Company issued $850.0 million aggregate principal amount of
58
iStar
Financial
2004
fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875%
to 5.70% and maturing between 2009 and 2014 and $200.0 million of
variable-rate Senior Notes bearing interest at an annual rate of three-month
LIBOR + 1.25% and maturing 2007. The proceeds from these transactions
were used to repay secured indebtedness and to fund new investment activ-
ity. In addition, the Company redeemed $110.0 million aggregate principal
amount of its outstanding 8.75% Senior Notes due 2008 at a price of
108.75% of par. In connection with this redemption, the Company recognized
a charge to income of $11.5 million included in “Loss on early extinguishment
of debt” on the Company’s Consolidated Statements of Operations.
During the 12 months ended December 31, 2003, the Company
issued $535.0 million aggregate principal amount of fixed-rate Senior Notes
bearing interest at annual rates ranging from 6.00% to 7.00% and maturing
between 2008 and 2013. In addition, the Company retired the 6.75%
Dealer Remarketable Securities of its Leasing Subsidiary by exchanging those
securities for newly issued $150.0 million 7.00% Senior Notes due March 2008.
Unsecured/Secured Credit Facilities Activity – On July 20, 2004, one
of the Company’s $500.0 million secured facilities was amended to reduce
the maximum amount available to $350.0 million, to extend the final matu-
rity to August 2005 and to reduce the stated interest rate on first mortgage
collateral to LIBOR + 1.50%.
On April 19, 2004, the Company completed a new $850.0 million
unsecured revolving credit facility with 19 banks and financial institutions.
The new facility has a three-year initial term with a one-year extension at the
Company’s option. The facility bears interest, based upon the Company’s
current credit ratings, at a rate of LIBOR + 0.875% and a 17.5 basis point
annual facility fee decreased from LIBOR + 1.00% and 25 basis points,
respectively, due to an upgrade in the Company’s senior unsecured debt rat-
ing to investment grade by S&P. On December 17, 2004, the commitment
on this facility was increased to $1,250.0 million and the accordion feature
was amended to increase the facility to $1.5 billion in the future if necessary.
This new facility replaced a $300.0 million unsecured credit facility with a
scheduled maturity of July 2004.
On March 12, 2004, one of the Company’s $700.0 million
secured facilities was amended to reduce the maximum amount available to
$250.0 million, to shorten the maturity to March 2005 and to reduce the
stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and
on subordinate and mezzanine lending investments to LIBOR + 2.05%.
On January 13, 2004, the Company closed $200.0 million of
term financing that is secured by certain corporate bond investments and
other lending securities. A number of these investments were previously
financed under existing credit facilities. The new facility bears interest at
LIBOR + 1.05% – 1.50% and has a final maturity date of January 2006.
On January 27, 2003, the Company extended the maturity on one
of its $700.0 million secured facilities to January 2007, which includes a
one-year “term-out” at the Company’s option.
On September 30, 2002, the Company closed a $500.0 million
secured revolving credit facility with a leading financial institution. The facility
had a three-year term and bears interest at LIBOR + 1.50% to 2.25%,
depending upon the collateral contributed to the borrowing base. The facility
accepts a broad range of structured finance and CTL assets and has a final
maturity of September 2005. On November 4, 2003, this facility was
amended to include subordinate and mezzanine lending investments as col-
lateral at stated interest rates of LIBOR + 2.15% – 2.25%.
Other Financing Activity – During the 12 months ended December 31,
2004, the Company purchased the remaining interest in the ACRE Simon
joint venture from the former ACRE Simon external member for $40.1 mil-
lion. Upon purchase of the interest, the ACRE Simon joint venture became
fully consolidated for accounting purposes and approximately $31.8 million
of secured term debt is reflected on the Company’s Consolidated Balance
Sheets. The term loans bear interest at rates of 7.61% to 8.43% and mature
between 2005 and 2011. In addition, the Company repaid a total of
$314.6 million in term loan financing, $9.8 million of which was part of the
ACRE Simon acquisition.
During the 12 months ended December 31, 2003, the Company
closed an aggregate of $233.0 million in secured term debt bearing interest
at rates ranging from LIBOR + 0.60% – 2.125% and maturing between 2003
to 2008. In addition, the Company repaid $125.0 million of term loan financ-
ing, $50.0 million of which had been closed during the same year.
In addition, during the 12 months ended December 31, 2003, a
wholly-owned subsidiary of the Company issued iStar Asset Receivables
(“STARs”), Series 2003-1, the Company’s proprietary match funding pro-
gram, consisting of $645.8 million of investment-grade bonds secured by
the subsidiary’s structured finance and CTL assets, which had an aggregate
outstanding carrying value of approximately $738.1 million at inception.
Principal payments received on the assets will be utilized to repay the most
senior class of the bonds then outstanding. The maturity of the bonds match
funds the maturity of the underlying assets financed under the program. The
weighted average interest rate on the bonds, on an all-floating rate basis,
was approximately LIBOR + 0.47% at inception. For accounting purposes,
this transaction was treated as a secured financing: the underlying assets and
STARs liabilities remained on the Company’s Consolidated Balance Sheets,
and no gain on sale was recognized.
During the 12 months ended December 31, 2002, the Company
purchased the remaining interest in the Milpitas joint venture from the Milpitas
external member for $27.9 million. Upon purchase of the interest, the Milpitas
joint venture became fully consolidated for accounting purposes and approxi-
mately $79.1 million of secured term debt is reflected on the Company’s
Consolidated Balance Sheets. This term loan bears interest at 6.55% and
matures in 2005. In addition, the Company closed a $61.5 million term loan
financing with a leading institution to fund a portion of an $82.1 million CTL
investment. The none-recourse loan is fixed rate and bears interest at 6.412%,
matures in 2012 and amortizes over a 30-year schedule.
In addition, during the 12 months ended December 31, 2002, the
Company repaid the then remaining $446.2 million of bonds outstanding
under its STARs, Series 2000-1 financing. Simultaneously, a wholly-owned
subsidiary of the Company issued STARs, Series 2002-1, consisting of
$885.1 million of investment-grade bonds secured by the subsidiary’s struc-
tured finance and CTL assets, which had an aggregate outstanding carrying
value of approximately $1.1 billion at inception. Principal payments received
on the assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The weighted average inter-
est rate on the bonds, on an all-floating rate basis, was approximately
LIBOR + 0.56% at inception. For accounting purposes, this transaction was
treated as a secured financing: the underlying assets and STARs liabilities
remained on the Company’s Consolidated Balance Sheets, and no gain on sale
was recognized.
59
iStar
Financial
2004
During the 12 months ended December 31, 2004, 2003 and
2002 the Company incurred an aggregate net loss on early extinguishment
of debt of approximately $13.1 million, $0 and $12.2 million, respectively, as
a result of the early retirement of certain debt obligations.
proceeds from the offering of $121.0 million to redeem approximately
$110.0 million aggregate principal amount of its outstanding 8.75% Senior
Notes due 2008 at a price of 108.75% of their principal amount plus
accrued interest to the redemption date.
As of December 31, 2004, future expected/scheduled maturities
of outstanding long-term debt obligations are as follows (in thousands)(1):
2005
2006
2007
2008
2009
Thereafter
Total principal maturities
Net unamortized debt discounts
Impact of pay-floating swap agreement
Total debt obligations
$ 189,979
190,257
270,493
1,400,000
706,251
1,905,928
4,662,908
(53,582)
(3,652)
$4,605,674
Explanatory Note:
(1)
Assumes exercise of extensions to the extent such extensions are at the Company’s option.
Note 8 – Shareholders’ Equity
The Company’s charter provides for the issuance of up to
200.0 million shares of Common Stock, par value $0.001 per share, and
30.0 million shares of preferred stock. The Company has 4.0 million shares of
8.00% Series D Cumulative Redeemable Preferred Stock, 5.6 million shares of
7.875% Series E Cumulative Redeemable Preferred Stock, 4.0 million shares
of 7.80% Series F Cumulative Redeemable Preferred Stock, 3.2 million shares
of 7.65% Series G Cumulative Redeemable Preferred Stock and 5.0 million
shares of 7.50% Series I Cumulative Redeemable Preferred Stock. The Series
D, E, F, G, and I Cumulative Redeemable Preferred Stock are redeemable with-
out premium at the option of the Company at their respective liquidation
preferences beginning on October 8, 2002, July 18, 2008, September 29,
2008, December 19, 2008 and March 1, 2009, respectively.
In February 2004, the Company redeemed 2.0 million outstanding
shares of its 9.375% Series B Cumulative Redeemable Preferred Stock and
1.3 million outstanding shares of its 9.20% Series C Cumulative Redeemable
Preferred Stock. The redemption price was $25.00 per share, plus accrued
and unpaid dividends to the redemption date of $0.46 and $0.45 for the
Series B and C Preferred Stock, respectively. In connection with this redemp-
tion, the Company recognized a charge to net income allocable to common
shareholders and HPU holders of approximately $9.0 million included in
“Preferred dividend requirements” on the Company’s Consolidated
Statements of Operations.
In February 2004, the Company completed an underwritten public
offering of 5.0 million shares of its 7.50% Series I Cumulative Redeemable
Preferred Stock, having a liquidation preference of $25.00 per share and
a redemption date beginning March 1, 2009. The Company used the net
In January 2004, the Company completed a private placement of
3.3 million shares of its Series H Variable Rate Cumulative Redeemable
Preferred Stock, having a liquidation preference of $25.00 per share and
redeemable at par at any time from the purchase date through the first
four months. The Company specifically used the proceeds from this offering
to redeem the Series B and C Cumulative Redeemable Preferred Stock on
February 23, 2004. On January 27, 2004, the Company redeemed all Series
H Preferred Stock using excess liquidity from its secured credit facilities.
In December 2003, the Company completed an underwritten
public offering of 5.0 million primary shares of the Company’s Common
Stock. The Company received approximately $191.1 million from the offer-
ing and used these proceeds to repay a portion of secured indebtedness.
In December 2003, the Company redeemed 1.6 million shares of
the Company’s 9.50% Series A Cumulative Redeemable Preferred Stock, having
a liquidation preference of $50.00 per share by exchanging those securities for
newly issued 3.2 million shares of 7.65% Series G Cumulative Redeemable
Preferred Stock, having a liquidation preference of $25.00 per share and a
redemption date beginning on December 19, 2008. Immediately following this
transaction the Company no longer had any Series A Preferred Stock outstand-
ing. The Company did not receive any cash proceeds from the offering.
In September 2003, the Company completed an underwritten pub-
lic offering of 4.0 million shares of its 7.80% Series F Cumulative Redeemable
Preferred Stock, having a liquidation preference of $25.00 per share and a
redemption date beginning on September 29, 2008. The Company used
the proceeds from the offering to repay a portion of secured indebtedness.
In July 2003, the Company redeemed 2.8 million shares of the
Company’s 9.50% Series A Cumulative Redeemable Preferred Stock, having a
liquidation preference of $50.00 per share by exchanging those securities for
newly issued 5.6 million shares of 7.875% Series E Cumulative Redeemable
Preferred Stock, having a liquidation preference of $25.00 per share and a
redemption date beginning on July 18, 2008. The Company did not receive
any cash proceeds from the offering.
On November 14, 2002, the Company completed an underwritten
public offering of 8.0 million primary shares of the Company’s Common Stock.
The Company received approximately $202.9 million from the offering and
used these proceeds to repay a portion of secured indebtedness.
On December 15, 1998, the Company issued warrants to acquire
6.1 million shares of Common Stock, as adjusted for dilution, at $34.35 per
share. The warrants were exercisable on or after December 15, 1999 at a
price of $34.35 per share and expired on December 15, 2005. On April 8,
2004, all 6.1 million warrants were exercised on a net basis and the Company
subsequently issued approximately 1.1 million shares.
DRIP/Stock Purchase Plan – The Company maintains a dividend
reinvestment and direct stock purchase plan. Under the dividend reinvest-
ment component of the plan, the Company’s shareholders may purchase
additional shares of Common Stock without payment of brokerage commissions
60
iStar
Financial
2004
or service charges by automatically reinvesting all or a portion of their
Common Stock cash dividends. Under the direct stock purchase component
of the plan, the Company’s shareholders and new investors may purchase
shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess
of $10,000 per month pursuant to the direct purchase component are at
the Company’s sole discretion. Shares issued under the plan may reflect a
discount of up to 3.00% from the prevailing market price of the Company’s
Common Stock. The Company is authorized to issue up to 8.0 million shares
of Common Stock pursuant to the dividend reinvestment and direct stock
purchase plan. During the 12 months ended December 31, 2004 and 2003,
the Company issued a total of approximately 427,000 and 2.6 million shares
of its Common Stock, respectively, through the direct stock purchase com-
ponent of the plan. Net proceeds during the 12 months ended December 31,
2004 and 2003, were approximately $17.6 million and $89.1 million,
respectively. There are approximately 3.1 million shares available for issuance
under the plan as of December 31, 2004.
Stock Repurchase Program – The Board of Directors approved, and
the Company has implemented, a stock repurchase program under which the
Company is authorized to repurchase up to 5.0 million shares of its Common
Stock from time to time, primarily using proceeds from the disposition of
assets or loan repayments and excess cash flow from operations, but also
using borrowings under its credit facilities if the Company determines that it
is advantageous to do so. As of December 31, 2004, the Company had
repurchased a total of approximately 2.3 million shares at an aggregate cost
of approximately $40.7 million. The Company has not repurchased any
shares under the stock repurchase program since November 2000.
Note 9 – Risk Management and Use of Financial Instruments
Risk management – In the normal course of its ongoing business
operations, the Company encounters economic risk. There are three main
components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities mature or reprice at different speeds, or different bases,
than its interest-earning assets. Credit risk is the risk of default on the
Company’s lending investments that results from a property’s, borrower’s or
corporate tenant’s inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of loans due to changes
in interest rates or other market factors, including the rate of prepayments of
principal and the value of the collateral underlying loans and the valuation of
CTL facilities held by the Company.
Use of derivative financial instruments – The Company’s use of
derivative financial instruments is primarily limited to the utilization of inter-
est rate agreements or other instruments to manage interest rate risk expo-
sure. The principal objective of such arrangements is to minimize the risks
and/or costs associated with the Company’s operating and financial structure
as well as to hedge specific anticipated transactions. The counterparties to
these contractual arrangements are major financial institutions with which
the Company and its affiliates may also have other financial relationships.
The Company is potentially exposed to credit loss in the event of non-
performance by these counterparties. However, because of their high credit
ratings, the Company does not anticipate that any of the counterparties will
fail to meet their obligations. The Company does not use derivative instru-
ments to hedge credit/market risk or for speculative purposes.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of December 31, 2004. All hedges are
currently effective and no ineffectiveness exists. The net value (liability) associated with these hedges is reflected on the Company’s Consolidated
Balance Sheets (in thousands).
Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
Total Estimated Value
Notional
Amount
$125,000
125,000
67,000
67,000
66,000
200,000
105,000
100,000
100,000
100,000
100,000
50,000
50,000
45,000
345,000
135,000
Strike Price or
Swap Rate
2.885%
2.838%
4.659%
4.659%
4.660%
4.381%
3.678%
4.345%
3.878%
3.713%
3.686%
3.810%
4.290%
3.684%
8.000%
6.000%
Trade Date
1/23/03
2/11/03
12/09/04
12/09/04
12/09/04
12/17/03
1/15/04
12/17/03
11/27/02
1/15/04
1/15/04
11/27/02
12/17/03
1/15/04
5/22/02
9/29/03
Maturity Date
6/25/06
6/25/06
3/31/15
3/31/15
3/31/15
12/15/10
1/15/09
12/15/10
8/15/08
1/15/09
1/15/09
8/15/08
12/15/10
1/15/09
5/28/14
10/15/06
Estimated
Value at
December 31,
2004
$ 544
632
217
217
208
(55)
(1,339)
(219)
1,030
(1,128)
(1,239)
389
(256)
(562)
4,465
19
$ 2,923
61
iStar
Financial
2004
Between January 1, 2003 and December 31, 2004, the Company also had outstanding the following cash flow hedges that have expired or been
settled (in thousands):
Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
LIBOR Cap
LIBOR Cap
Explanatory Note:
Notional
Amount
$235,000
200,000
200,000
125,000
125,000
100,000
100,000
100,000
75,000
50,000
50,000
75,000
35,000
Strike Price or
Swap Rate
1.135%
1.144%
1.144%
7.058%
7.055%
4.139%
4.643%
4.484%
5.580%
4.502%
4.500%
7.750%
7.750%
Trade Date
3/11/04
3/11/04
3/11/04
6/15/00
6/15/00
9/29/03
9/29/03
1/16/04
11/4/99(1)
1/16/04
1/16/04
11/4/99(1)
11/4/99(1)
Maturity Date
9/15/04
9/15/04
9/15/04
6/25/03
6/25/03
1/2/11
1/2/14
5/1/14
12/1/04
5/1/14
5/1/14
12/1/04
12/1/04
(1)
Acquired in connection with the TriNet Acquisition (see Note 1).
On December 9, 2004, the Company entered into three forward-
starting swaps all with ten-year terms and rates of 4.659%, 4.659% and
4.660% and notional amounts of $67.0 million, $67.0 million and $66.0 mil-
lion, respectively, and are being used to lock-in swap rates related to a portion
of planned future corporate unsecured fixed-rate bond issuances. These three
swaps were settled on March 1, 2005 in connection with the Company’s
issuance of $700.0 million of seven-year Senior Notes (see Note 17).
On March 11, 2004, the Company entered into three pay-fixed inter-
est rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144%
and notional amounts of $235.0 million, $200.0 million and $200.0 million,
respectively. These three swaps matured on September 15, 2004.
On January 16, 2004, the Company entered into three forward-
starting swaps all with ten-year terms and rates of 4.484%, 4.502%
and 4.500% and notional amounts of $100.0 million, $50.0 million and
$50.0 million, respectively, and were used to lock-in swap rates related to a
portion of planned future corporate unsecured fixed-rate bond issuances.
These three swaps were settled in connection with the Company’s issuance
of $250.0 million of ten-year Senior Notes in March 2004.
On January 15, 2004, in connection with the Company’s fixed-
rate corporate bonds, the Company entered into four pay-floating interest
rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional
amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million,
respectively, and maturing on January 15, 2009. The Company pays
six-month LIBOR and receives the stated fixed rate in return. These swaps
mitigate the risk of changes in the fair value of $350.0 million of five-year
Senior Notes attributable to changes in LIBOR. For accounting purposes, the
difference between the fixed rate received and the LIBOR rate paid on the
notional amount of the swap is recorded as “Interest expense” on the
Company’s Consolidated Statements of Operations. In addition, the Company
adjusts the value of the swap to its fair value and adjusts the carrying amount
of the hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward-
starting swaps each having a $100.0 million notional amount. These pay-
fixed swaps which were effective in September 2003, had rates of 4.139%
and 4.643%, had seven-year and ten-year terms, respectively, and were
used to lock in swap rates related to a portion of planned future corporate
unsecured fixed-rate bond issuances. These two swaps were settled in con-
nection with the Company’s issuance of $350.0 million of seven-year Senior
Notes and $150.0 million of ten-year Senior Notes. In addition, effective in
September 2003, the Company entered into a $135.0 million cap with a rate
of 6.00% to hedge the Company’s current outstanding floating-rate debt.
This cap has a three-year term. Further, the Company entered into two
$125.0 million forward-starting swaps in the first quarter 2003 that
became effective in June 2003. These forward-starting swaps replaced the
two $125.0 million pay-fixed swaps that expired in June 2003. The two new
pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company’s fixed-
rate corporate bonds, the Company entered into three pay-floating interest
rate swaps in December 2003 struck at 4.381%, 4.345% and 4.290%
with notional amounts of $200.0 million, $100.0 million and $50.0 million,
62
iStar
Financial
2004
respectively, and maturing on December 15, 2010 and also entered into two
pay-floating interest rate swaps in November 2002 struck at 3.8775% and
3.810% with notional amounts of $100.0 million and $50.0 million, respec-
tively, and maturing on August 15, 2008. The Company pays six-month
LIBOR on the swaps entered into in December 2003 and one-month LIBOR
on the swaps entered into in November 2002 and receives the stated fixed
rate in return. These swaps mitigate the risk of changes in the fair value of
$350.0 million of seven-year Senior Notes and $150.0 million of ten-year
Senior Notes attributable to changes in LIBOR. For accounting purposes, the
difference between the fixed rate received and the LIBOR rate paid on the
notional amount of the swap is recorded as “Interest expense” on the
Company’s Consolidated Statements of Operations. In addition, the Company
adjusts the value of the swap to its fair value and adjusts the carrying amount
of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the
Company entered into a LIBOR interest rate cap struck at 6.95% in the
notional amount of $270.6 million, and simultaneously sold a LIBOR interest
rate cap with the same terms. Since these instruments do not change the
Company’s net interest rate risk exposure, they do not qualify as hedges and
changes in their respective values are charged to earnings. As the terms of
these arrangements are substantially the same, the effects of a revaluation
of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the
Company entered into a LIBOR interest rate cap struck at 8.00% in the
notional amount of $345.0 million. The Company utilizes the provisions of
SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that
the up-front fees paid on option-based products such as caps should be
expensed into earnings based on the allocation of the premium to the
affected periods as if the agreement were a series of “caplets.” These allo-
cated premiums are then reflected as a charge to income (as part of interest
expense) in the affected period. On May 28, 2002, in connection with the
STARs, Series 2002-1 transaction, the Company paid a premium of
$13.7 million for this interest rate cap. Using the “caplet” methodology dis-
cussed above, amortization of the cap premium is dependent upon the actual
value of the caplets at inception.
During the year ended December 31, 1999, the Company refi-
nanced its $125.0 million term loan maturing March 15, 1999 with a
$155.4 million term loan maturing March 5, 2009. The term loan bears
interest at 7.44% per annum, payable monthly, and amortizes over an
approximately 22-year schedule. The term loan represented forecasted
transactions for which the Company had previously entered into U.S.
Treasury-based hedging transactions. The net $3.4 million cost of the settle-
ment of such hedges has been deferred and is being amortized as an increase to
the effective financing cost of the term loan over its effective ten-year term.
Credit risk concentrations – Concentrations of credit risks arise
when a number of borrowers or customers related to the Company’s invest-
ments are engaged in similar business activities, or activities in the same
geographic region, or have similar economic features that would cause their
ability to meet contractual obligations, including those to the Company, to be
similarly affected by changes in economic conditions. The Company regularly
monitors various segments of its portfolio to assess potential concentrations
of credit risks. Management believes the current portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company’s CTL assets (including those held
by joint ventures) and loans and other lending investments are collateralized
by facilities located in the United States, with significant concentrations
(i.e., greater than 10.00%) as of December 31, 2004 in California (19.49%).
As of December 31, 2004, the Company’s investments also contain greater
than 10.00% concentrations in the following asset types: office-CTL
(23.13%), industrial (16.17%), office-lending (12.43%) and entertainment/
leisure (10.71%).
The Company underwrites the credit of prospective borrowers and
customers and often requires them to provide some form of credit support
such as corporate guarantees, letters of credit and/or cash security deposits.
Although the Company’s loans and other lending investments and corporate
customer lease assets are geographically diverse and the borrowers and cus-
tomers operate in a variety of industries, to the extent the Company has a
significant concentration of interest or operating lease revenues from any
single borrower or customer, the inability of that borrower or customer to
make its payment could have an adverse effect on the Company. As of
December 31, 2004, the Company’s five largest borrowers or corporate
customers collectively accounted for approximately 15.08% of the
Company’s aggregate annualized interest and operating lease revenue of
which no single customer accounts for more than 4.45%.
Note 10 – Stock-Based Compensation Plans and Employee Benefits
The Company’s 1996 Long-Term Incentive Plan (the “Plan”) is
designed to provide incentive compensation for officers, other key employ-
ees and directors of the Company. The Plan provides for awards of stock
options and shares of restricted stock and other performance awards. The
maximum number of shares of Common Stock available for awards under the
Plan is 9.00% of the outstanding shares of Common Stock, calculated on a
fully diluted basis, from time to time, provided that the number of shares of
Common Stock reserved for grants of options designated as incentive stock
options is 5.0 million, subject to certain antidilution provisions in the Plan.
All awards under the Plan, other than automatic awards to non-employee
directors, are at the discretion of the Board of Directors or a committee of
the Board of Directors. At December 31, 2004, a total of approximately
10.1 million shares of Common Stock were available for awards under the
Plan, of which options to purchase approximately 1.3 million shares of
Common Stock were outstanding and approximately 411,000 shares of
restricted stock were outstanding. A total of approximately 914,000 shares
remain available for awards under the Plan as of December 31, 2004.
63
iStar
Financial
2004
Changes in options outstanding during each of the fiscal 2002, 2003 and 2004 are as follows:
Options outstanding, December 31, 2001
Granted in 2002
Exercised in 2002
Forfeited in 2002
Options outstanding, December 31, 2002
Granted in 2003
Exercised in 2003
Forfeited in 2003
Transferred in 2003(1)
Options outstanding, December 31, 2003
Granted in 2004
Exercised in 2004
Forfeited in 2004
Options outstanding, December 31, 2004
Employees
3,645,058
–
(488,674)
(16,907)
3,139,477
15,500
(843,624)
(2,300)
–
2,309,053
–
(1,316,070)
(83,730)
909,253
Number of Shares
Non-Employee
Directors
583,532
80,000
(190,650)
(4,600)
468,282
–
(235,746)
(13,850)
(63,692)
154,994
–
(36,600)
(14,600)
103,794
Other
896,676
–
(164,683)
–
731,993
–
(389,594)
–
63,692
406,091
–
(98,527)
–
307,564
Weighted
Average
Strike Price
$18.98
$27.83
$18.63
$24.87
$18.77
$14.72
$18.99
$26.14
$27.15
$18.59
–
$19.23
$17.14
$17.99
Explanatory Note:
(1)
Transfer of shares due to the down-size of Board of Directors on June 2, 2003.
The following table summarizes information concerning outstand-
ing and exercisable options as of December 31, 2004:
Exercise Price
$14.72
$16.88
$17.38
$19.69
$20.94
$24.13
$24.94
$26.09
$26.97
$27.00
$28.54
$29.82
$55.39
Options Outstanding
Options
Outstanding
486,214
406,461
16,667
231,783
25,000
6,900
40,000
13,800
2,000
25,000
3,396
58,296
5,094
1,320,611
Remaining
Contractual
Life
4.12
5.01
5.21
6.00
5.68
0.42
6.38
1.41
6.45
6.48
3.34
7.41
4.42
4.98
Options
Exercisable
Currently
Exercisable
475,881
406,461
16,667
231,783
25,000
6,900
40,000
13,800
2,000
25,000
3,396
58,296
5,094
1,310,278
In the third quarter 2002 (with retroactive application to the
beginning of the calendar year), the Company adopted the fair value method
for accounting for options issued to employees or directors, as allowed under
Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”),
“Accounting for Stock-Based Compensation.” Accordingly, the Company rec-
ognizes a charge equal to the fair value of these options at the date of grant
multiplied by the number of options issued. This charge will be amortized over
the related remaining vesting terms to individual employees as additional
compensation. There were 15,500 options issued during the year ended
December 31, 2003 with a strike price of $14.72.
If the Company’s compensation costs had been determined using
the fair value method of accounting for stock options issued under the Plan
to employees and directors prescribed by SFAS No. 123 prior to 2002, the
Company’s net income for the fiscal years ended December 31, 2004, 2003
and 2002, would have been reduced on a pro forma basis by approximately
$0, $96,000 and $188,000 respectively. This would not have significantly
impacted the Company’s earnings per share
Expected life (in years)
Risk-free interest rate
Volatility
Dividend yield
Weighted average grant date
fair value
2004
N/A
N/A
N/A
N/A
N/A
2003
5
3.13%
17.64%
9.57%
2002
5
4.38%
16.23%
8.45%
$5.26
$1.38
Future charges may be taken to the extent of additional option
grants, which are at the discretion of the Board of Directors.
During the year ended December 31, 2004, the Company granted
36,205 restricted shares to employees that vest proportionately over
three years on the anniversary date of the initial grant of which 34,280
remain outstanding. In addition, in connection with the Chief Executive
Officer’s employment agreement 236,167 restricted shares were issued on
March 31, 2004 (see detailed information below).
64
iStar
Financial
2004
During the year ended December 31, 2003, the Company granted
40,600 restricted shares to employees that vest proportionately over three
years on the anniversary date of the initial grant of which 21,604 remain
outstanding as of December 31, 2004.
During the year ended December 31, 2002, the Company granted
199,350 restricted shares to employees. Of these shares, 44,350 will vest
proportionately over three years on the anniversary date of the initial grant. Of
the 44,350 shares granted, 10,030 remain outstanding as of December 31,
2004. The balance of 155,000 restricted shares granted to several employ-
ees vested on March 31, 2004 due to the satisfaction of the following
circumstances: (1) the employee remained employed until that date; and
(2) the 60-day average closing price of the Company’s Common Stock
equaled or exceeded a set floor price as of such date. The market price of the
stock was $42.30 on March 31, 2004; therefore, the Company incurred a
one-time charge to earnings of approximately $6.7 million (the fair market
value of the 155,000 shares at $42.30 per share plus the Company’s share
of taxes). During the year ended December 31, 2002, the Company also
granted 208,980 restricted shares to its Chief Financial Officer (see detailed
information below).
For accounting purposes, the Company measures compensation
costs for these shares, not including the contingently issuable shares, as of
the date of the grant and expenses such amounts against earnings, either at
the grant date (if no vesting period exists) or ratably over the respective vest-
ing/service period. Such amounts appear on the Company’s Consolidated
Statements of Operations in “General and administrative – stock-based
compensation expense.”
During the year ended December 31, 2004, the Company entered
into a three-year employment agreement with its new President. This initial
three-year term, and any subsequent one-year renewal term, will automati-
cally be extended for an additional year, unless earlier terminated by prior
notice from the Company or the President. Under the agreement, the
President receives an annual base salary of $350,000, subject to an annual
review for upward (but not downward) adjustment. Beginning with the fiscal
year ending December 31, 2005, he will receive a target bonus of
$650,000, subject to annual review for upward adjustment. For the year
ended 2004, the President received a target bonus of $650,000, but pro-
rated to reflect the portion of the year during which he was employed. In
addition, the President purchased a 20.00% interest in both the Company’s
2005 and 2006 high performance unit program for directors and executive
officers. The President will also have the option to buy 25.00%, 30.00% and
35.00% in the Company’s 2007, 2008, and 2009 high performance unit
program for directors and executive officers. The President shall also receive
an allocation of 25.00% of the interests in the Company’s proposed New
Business Crossed Incentive Compensation Program, which is a program that
is intended to provide incentive compensation based upon the performance
of new business lines to be identified by the Company.
During the year ended December 31, 2002, the Company entered
into a three-year employment agreement with its new Chief Financial Officer.
Under the agreement, the Chief Financial Officer receives an annual base
salary of $225,000. She may also receive a bonus, which is targeted to be
$325,000, subject to an annual review for upward or downward adjustment.
In addition, the Company granted the Chief Financial Officer 108,980 contin-
gently vested restricted stock awards. These awards become vested on
December 31, 2005 if the executive’s employment with the Company has
not terminated before such date. Dividends will be paid on the restricted
shares as dividends are paid on shares of the Company’s Common Stock.
These dividends are accounted for in a manner consistent with the Company’s
Common Stock dividends, as a reduction to retained earnings. For accounting
purposes, the Company is currently taking a total charge of approximately
$3.0 million related to the restricted stock awards, which is being amortized
over the period from November 6, 2002 through December 31, 2005. This
charge is reflected on the Company’s Consolidated Statements of Operations
in “General and administrative – stock-based compensation.”
Further, the Company granted the Chief Financial Officer
100,000 restricted shares which became fully-vested on January 31, 2004
as a result of the Company achieving a 53.28% total shareholder rate of return
(dividends since November 6, 2002 plus share price appreciation from
January 2, 2003). The Company incurred a one-time charge to earnings dur-
ing the three months ended March 31, 2004 of approximately $4.1 million
(the fair market value of the 100,000 shares at $40.02 per share plus the
Company’s share of taxes). For accounting purposes, the employment
arrangement described above was treated as a contingent, variable plan until
January 31, 2004.
On February 11, 2004, the Company entered into a new employ-
ment agreement with its Chief Executive Officer which took effect upon the
expiration of the old agreement. The new agreement has an initial term of
three years and provides for the following compensation:
•
•
•
an annual salary of $1.0 million;
a potential annual cash incentive award of up to $5.0 million if perform-
ance goals set by the Compensation Committee of the Board of
Directors in consultation with the Chief Executive Officer are met; and
a one-time award of Common Stock with a value of $10.0 million at
March 31, 2004 (based upon the trailing 20-day average closing price
of the Common Stock); the award was fully-vested when granted and
dividends will be paid on the shares from the date of grant, but the
shares cannot be sold for five years unless the price of the Common
Stock during the 12 months ending March 31 of each year increases by
at least 15.00%, in which case the sale restrictions on 25.00% of the
shares awarded will lapse in respect to each 12-month period. In con-
nection with this award the Company recorded a $10.1 million charge
in “General and administrative – stock-based compensation expense”
on the Company’s Consolidated Statements of Operations. The Chief
Executive Officer notified the Company that subsequent to this award
he contributed an equivalent number of shares to a newly established
charitable foundation.
In addition, the Chief Executive Officer purchased an 80.00%
interest in the Company’s 2006 high performance unit program for directors
and executive officers. This performance program was approved by the
Company’s shareholders in 2003 and is described in detail in the Company’s
2003 annual proxy statement. The purchase price paid by the Chief
Executive Officer was based upon a valuation prepared by an independent
investment-banking firm. The interests purchased by the Chief Executive
Officer will have no value to him unless the Company achieves total share-
holder returns in excess of those achieved by peer group indices, all as more
fully described in the Company’s 2003 annual proxy statement.
65
iStar
Financial
2004
The February 2004 employment agreement with the Company’s
Chief Executive Officer replaced a prior employment agreement dated
March 30, 2001 that expired at the end of its term. The compensation
awarded to the Company’s Chief Executive Officer under this prior agree-
ment included a grant of 2.0 million unvested phantom shares. The phantom
shares vested on a contingent basis in installments of 350,000 shares,
650,000 shares, 600,000 shares and 400,000 shares when the average
closing price of the Company’s Common Stock achieved performance targets
of $25.00, $30.00, $34.00 and $37.00, respectively, which were set at the
commencement of the agreement in March 2001. The phantom shares
became fully-vested at the expiration of the term of the agreement on March 30,
2004. The market price of the Common Stock on March 30, 2004 was
$42.40 and the Company incurred a one-time charge to earnings during the
three months ended March 31, 2004 of approximately $86.0 million (the
fair market value of the 2.0 million shares at $42.40 per share plus the
Company’s share of taxes).
Upon the phantom share units becoming fully-vested, the
Company delivered to the executive 728,552 shares of Common Stock and
$53.9 million of cash, the total of which is equal to the fair market value of
the 2.0 million shares of Common Stock multiplied by the closing stock price
of $42.40 on March 30, 2004. Prior to March 30, 2004, the executive
received dividends on shares that were contingently vested and were not
forfeited under the terms of the agreement, when the Company declared
and paid dividends on its Common Stock. Because no shares had been issued
prior to March 30, 2004, dividends received on these phantom shares were
reflected as compensation expense by the Company. For accounting pur-
poses, this arrangement was treated as a contingent, variable plan and no
additional compensation expense was recognized until the shares became
irrevocably vested on March 30, 2004, at which time the Company reflected
a charge equal to the fair value of the shares irrevocably vested.
In addition, during the year ended December 31, 2001, the
Company entered into a three-year employment agreement with its former
President. Under the agreement, in lieu of salary and bonus, the Company
granted the executive 500,000 restricted shares. These shares became
fully-vested on September 30, 2002 as a result of the Company achieving a
60.00% total shareholder rate of return (dividends plus share price apprecia-
tion) since January 1, 2001. Upon the restricted shares becoming fully-
vested, the Company withheld 250,000 of such shares from the executive
to cover the tax obligations associated with the vesting of such shares. These
shares are reflected as “Treasury stock”, at a cost of approximately $7.4 mil-
lion, on the Company’s Consolidated Statements of Changes in Shareholders’
Equity. For accounting purposes, the employment arrangement described
above was treated as a contingent, variable plan until the April 29, 2002
contingent vesting date. The Company incurred a total charge of approxi-
mately $15.0 million related to the vesting of the shares, recognized ratably
over the period from April 29, 2002 through September 30, 2002. The
executive received dividends on the share grant from the date of the agree-
ment as and when the Company declared and paid dividends on its Common
Stock. For financial statement purposes, such dividends were accounted for
in a manner consistent with the Company’s normal Common Stock dividends,
as a reduction to retained earnings.
Certain affiliates of Starwood Opportunity Fund IV, LP (“SOFI IV”)
and the Company’s Chief Executive Officer previously agreed to reimburse
the Company for the value of restricted shares awarded to the former
President in excess of 350,000 shares, net of tax benefits realized by the
Company or its shareholders on account of compensation expense deduc-
tions. The reimbursement obligation arose once the restricted share award
became fully-vested on September 30, 2002. The Company’s Chief
Executive Officer fulfilled his reimbursement obligation through the delivery
of shares of the Company’s Common Stock owned by him. As of March 31,
2004, the SOFI IV affiliates fulfilled their obligation through the payment of
approximately $2.4 million in cash. These reimbursement payments are
reflected as “Additional paid-in capital” on the Company’s Consolidated
Balance Sheets, and not as an offset to the charge referenced above.
High Performance Unit Program
In May 2002, the Company’s shareholders approved the iStar
Financial High Performance Unit (“HPU”) Program. The program, as more fully
described in the Company’s annual proxy statement dated April 8, 2002, is a
performance-based employee compensation plan that only has material
value to the participants if the Company provides superior returns to its
shareholders. The program entitles the employee participants (“HPU hold-
ers”) to receive distributions in the nature of Common Stock dividends if the
total rate of return on the Company’s Common Stock (share price apprecia-
tion plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002 plan,
the 2003 plan, and the 2004 plan. Each plan has 5,000 shares of High
Performance Common Stock associated with it. Each share of High
Performance Common Stock carries 0.25 votes per share.
For these three plans, the Company’s performance is measured
over a one-, two-, or three-year valuation period, beginning on January 1,
2002 and ending on December 31, 2002, December 31, 2003 and
December 31, 2004, respectively. The end of the valuation period (i.e., the
“valuation date”) will be accelerated if there is a change in control of the
Company. The High Performance Common Stock has a nominal value unless
the total rate of shareholder return for the relevant valuation period exceeds
the greater of: (1) 10.00%, 20.00%, or 30.00% for the 2002 plan, the
2003 plan and the 2004 plan, respectively; and (2) a weighted industry
index total rate of return consisting of equal weightings of the Russell 1000
Financial Index and the Morgan Stanley REIT Index for the relevant period.
If the total rate of return on the Company’s Common Stock
exceeds the threshold performance levels for a particular plan, then distribu-
tions will be paid on the shares of High Performance Common Stock related
to that plan in the same amounts and at the same times as distributions are
paid on a number of shares of the Company’s Common Stock equal to the
following: 7.50% of the Company’s excess total rate of return (over the
higher of the two threshold performance levels) multiplied by the weighted
average market value of the Company’s common equity capitalization during
the measurement period, all as divided by the average closing price of a share
of the Company’s Common Stock for the 20 trading days immediately pre-
ceding the applicable valuation date.
If the total rate of return on the Company’s Common Stock does
not exceed the threshold performance levels for a particular plan, then the
66
iStar
Financial
2004
shares of High Performance Common Stock related to that plan will have only
nominal value. In this event, each of the 5,000 shares will be entitled to divi-
dends equal to 0.01 times the dividend paid on a share of Common Stock, if
and when dividends are declared on the Common Stock.
Regardless of how much the Company’s total rate of return
exceeds the threshold performance levels, the dilutive impact to the
Company’s shareholders resulting from distributions on High Performance
Common Stock in each plan is limited to the equivalent of 1.00% of the aver-
age monthly number of fully diluted shares of the Company’s Common Stock
outstanding during the valuation period.
The employee participants have purchased their interests in High
Performance Common Stock through a limited liability company at purchase
prices approved by the Company’s Board of Directors. The Company’s Board
of Directors has established the prices of the High Performance Common
Stock based upon, among other things, an independent valuation from a
major securities firm. The aggregate initial purchase prices were set on
June 25, 2002 and were approximately $2.8 million, $1.8 million and
$1.4 million for the 2002, 2003 and 2004 plans, respectively. No employee
is permitted to exchange his or her interest in the LLC for shares of High
Performance Common Stock prior to the applicable valuation date.
The total shareholder return for the valuation period under the
2002 plan was 21.94%, which exceeded both the fixed performance
threshold of 10.00% and the industry index return of (5.83%). As a result of
this superior performance, the participants in the 2002 plan are entitled to
receive distributions equivalent to the amount of dividends payable on
819,254 shares of the Company’s Common Stock, as and when such divi-
dends are paid. Such dividend payments began with the first quarter 2003
dividend. The Company will pay dividends on the 2002 plan shares in the
same amount per equivalent share and on the same distribution dates that
shares of the Company’s Common Stock are paid. The Company has the
right, but not the obligation, to repurchase at cost 50.00% of the interests
earned by an employee in the 2002 plan if the employee breaches certain
non-competition, non-solicitation and confidentiality covenants through
January 1, 2005.
The total shareholder return for the valuation period under the
2003 plan was 78.29%, which exceeded the fixed performance threshold of
20.00% and the industry index return of 24.66%. The plan was fully funded
and was limited to 1.00% of the average monthly number of fully diluted
shares of the Company’s Common Stock during the valuation period. As a
result of the Company’s superior performance, the participants in the 2003
plan are entitled to receive distributions equivalent to the amount of divi-
dends payable on 987,149 shares of the Company’s Common Stock, as and
when such dividends are paid. Such dividend payments began with the first
quarter 2004 dividend. The Company will pay dividends on the 2003 plan
shares in the same amount per equivalent share and on the same distribution
dates that shares of the Company’s Common Stock are paid.
The total shareholder return for the valuation period under the
2004 plan was 115.47%, which exceeded the fixed performance threshold
of 30.00% and the industry index return of 55.05%. The plan was fully
funded and was limited to 1.00% of the average monthly number of fully
diluted shares of the Company’s Common Stock during the valuation period.
As a result of the Company’s superior performance, the participants in the
2004 plan are entitled to receive distributions equivalent to the amount of
dividends payable on 1,031,875 shares of the Company’s Common Stock, as
and when such dividends are paid. Such dividend payments will begin with
the first quarter 2005 dividend. The Company will pay dividends on the
2004 plan shares in the same amount per equivalent share and on the same
distribution dates that shares of the Company’s Common Stock are paid.
A new 2005 plan has been established with a three-year valuation
period ending December 31, 2005. Awards under the 2005 plan were
approved on January 14, 2003. The 2005 plan has 5,000 shares of High
Performance Common Stock with an aggregate initial purchase price of
$617,000. As of December 31, 2004 the Company has received a net
contribution of $586,000 under this plan. The purchase price of the High
Performance Common Stock was established by the Company’s Board of
Directors based upon, among other things, an independent valuation from a
major securities firm. The provisions of the 2005 plan are substantially the
same as the prior plans.
A new 2006 plan has been established with a three-year valuation
period ending December 31, 2006. Awards under the 2006 plan were
approved on January 23, 2004. The 2006 plan had 5,000 shares of High
Performance Common Stock with an aggregate initial purchase price of
$715,000. As of December 31, 2004 the Company has received a net con-
tribution of $687,000 under this plan. The purchase price of the High
Performance Common Stock was established by the Company’s Board of
Directors based upon, among other things, an independent valuation from a
major securities firm. The provisions of the 2006 plan are substantially the
same as the prior plans.
A new 2007 plan has been established with a three-year valuation
period ending December 31, 2007. Awards under the 2007 plan were
approved in January 2005. The 2007 plan had 5,000 shares of High
Performance Common Stock with an aggregate initial purchase price of
$643,000. The purchase price of the High Performance Common Stock was
established by the Company’s Board of Directors based upon, among other
things, an independent valuation from a major securities firm. The provisions
of the 2007 plan are substantially the same as the prior plans.
The additional equity from the issuance of the High Performance
Common Stock is recorded as a separate class of stock and included within
shareholders’ equity on the Company’s Consolidated Balance Sheets. Net
income allocable to common shareholders will be reduced by the HPU hold-
ers’ share of dividends paid and undistributed earnings, if any.
401(k) Plan
Effective November 4, 1999, the Company implemented a sav-
ings and retirement plan (the “401(k) Plan”), which is a voluntary, defined
contribution plan. All employees are eligible to participate in the 401(k) Plan
following completion of three months of continuous service with the
Company. Each participant may contribute on a pretax basis up to the maxi-
mum percentage of compensation and dollar amount permissible under
Section 402(g) of the Internal Revenue Code not to exceed the limits of
Code Sections 401(k), 404 and 415. At the discretion of the Board of
Directors, the Company may make matching contributions on the participant’s
behalf of up to 50.00% of the first 10.00% of the participant’s annual compen-
sation. The Company made gross contributions of approximately $523,000,
$424,000 and $356,000 for the 12 months ended December 31, 2004,
2003 and 2002, respectively.
67
iStar
Financial
2004
Note 11 – Earnings Per Share
The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the years ended
December 31, 2004, 2003 and 2002, respectively (in thousands, except per share data):
Numerator:
Income from continuing operations
Preferred dividend requirements
Income allocable to common shareholders and HPU holders before income from
discontinued operations and gain from discontinued operations(1)
Income from discontinued operations
Gain from discontinued operations
Net income allocable to common shareholders and HPU holders(1)
Denominator:
Weighted average common shares outstanding for basic earnings per common share
Add: effect of assumed shares issued under treasury stock method for stock options,
restricted shares and warrants
Add: effect of contingent shares
Add: effect of joint venture shares
Weighted average common shares outstanding for diluted earnings per common share
Basic earnings per common share:
Income allocable to common shareholders before income from discontinued operations and
gain from discontinued operations(2)
Income from discontinued operations
Gain from discontinued operations
Net income allocable to common shareholders(2)
Diluted earnings per common share:
Income allocable to common shareholders before income from discontinued operations and
gain from discontinued operations(3)(4)
Income from discontinued operations
Gain from discontinued operations
Net income allocable to common shareholders(3)(4)
Explanatory Notes:
2004
2003
2002
$198,953
(51,340)
$264,817
(36,908)
$191,608
(36,908)
147,613
18,119
43,375
$209,107
227,909
22,173
5,167
$255,249
154,700
22,945
717
$178,362
110,205
100,314
89,886
1,322
639
298
112,464
1,897
1,667
223
104,101
1,645
1,118
–
92,649
$
$
$
$
1.31
0.17
0.39
1.87
1.28
0.16
0.39
1.83
$
$
$
$
2.25
0.22
0.05
2.52
2.17
0.21
0.05
2.43
$
$
$
$
1.72
0.25
0.01
1.98
1.67
0.25
0.01
1.93
(1) HPU holders are Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program.
(2)
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,314, $2,066 and $0 of net income allocable to HPU holders, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, excludes $3,265, $1,994 and $0 of net income allocable to HPU holders diluted, respectively.
For the 12 months ended December 31, 2004, 2003 and 2002, includes $3, $167 and $0 of joint venture income, respectively.
(3)
(4)
For the years ended December 31 2004, 2003, and 2002 the
Note 12 – Comprehensive Income
following shares were antidilutive:
For the Years Ended December 31,
Stock options
Joint venture shares
Warrants
2004
5,000
73,000
–
2003
5,000
–
–
2002
167,000
371,000
6,100,000
Statement of Financial Accounting Standards No. 130 (“SFAS
No. 130”), “Reporting Comprehensive Income” requires that all components
of comprehensive income shall be reported in the financial statements in the
period in which they are recognized. Furthermore, a total amount for com-
prehensive income shall be displayed in the financial statements. Total com-
prehensive income was $257.4 million, $295.5 million and $228.1 million
68
iStar
Financial
2004
for the 12 months ended December 31, 2004, 2003 and 2002, respec-
tively. The primary components of comprehensive income, other than net
income, consist of amounts attributable to the adoption and continued appli-
cation of SFAS No. 133 to the Company’s cash flow hedges and changes in
the fair value of the Company’s available-for-sale investments.
For the Years Ended December 31,
2004
2003
2002
Net income
Other comprehensive income:
Reclassification of gains
on securities into
earnings upon
realization
Reclassification of gains/
losses on qualifying
cash flow hedges
into earnings
Unrealized gains on available-
for-sale investments
Unrealized losses on
cash flow hedges
Comprehensive income
$260,447
$292,157
$215,270
(In thousands)
(6,743)
(12,031)
–
6,212
12,601
16,299
2,075
8,103
7,601
(4,638)
$257,353
(5,364)
$295,466
(11,109)
$228,061
Unrealized gains on available-for-sale investments and cash flow
hedges are recorded as adjustments to shareholders’ equity through
“Accumulated other comprehensive income (losses)” on the Company’s
Consolidated Balance Sheets and are not included in net income unless realized.
As of December 31, 2004 and 2003, accumulated other compre-
hensive income (losses) reflected in the Company’s shareholders’ equity is
comprised of the following (in thousands):
As of December 31,
2004
2003
Unrealized gains on available-for-
sale investments
Unrealized losses on cash flow hedges
Accumulated other comprehensive
$ 4,694
(6,780)
$ 9,362
(8,354)
income (losses)
$(2,086)
$ 1,008
Over time, the unrealized gains and losses held in other compre-
hensive income will be reclassified to earnings in the same period(s) in which
the hedged items are recognized in earnings. The current balance held in
other comprehensive income is expected to be reclassified to earnings over
the lives of the current hedging instruments, or for the realized losses on
forecasted debt transactions, over the related term of the debt obligation, as
applicable. The Company expects that $3.0 million will be reclassified into
earnings as an increase in interest expense over the next 12 months.
Note 13 – Dividends
In order to maintain its election to qualify as a REIT, the Company
must currently distribute, at a minimum, an amount equal to 90.00% of its
taxable income and must distribute 100.00% of its taxable income to avoid
paying corporate federal income taxes. The Company anticipates it will dis-
tribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues and
expenses (such as depreciation), in certain circumstances, the Company may
generate operating cash flow in excess of its dividends or, alternatively, may
be required to borrow to make sufficient dividend payments.
For the year ended December 31, 2004, total dividends declared
by the Company aggregated $310.7 million, or $2.79 per share on Common
Stock consisting of quarterly dividends of $0.6975 which were declared on
April 1, 2004, July 1, 2004, October 1, 2004 and December 1, 2004. For tax
reporting purposes, the 2004 dividends were classified as 49.15% ($1.3713)
ordinary income, 2.20% ($0.0613) 15.00% capital gain, 7.45% ($0.0278)
25.00% Section 1250 capital gain and 41.20% ($1.1496) return of capital
for those shareholders who held shares of the Company for the entire year.
The Company also declared and paid dividends aggregating $8.0 million,
$11.0 million, $7.8 million, $6.1 million and $7.4 million, respectively, on its
Series D, E, F, G and I preferred stock, respectively, during the 12 months ended
December 31, 2004.
In connection with the redemption of the Series H preferred stock
on January 27, 2004 the Company paid a dividend of $87,656 represent-
ing unpaid dividends of $0.49 per share for the 5 days the preferred stock
was outstanding.
In connection with the redemption of the Series B preferred stock
on February 23, 2004 the Company paid a final dividend of $920,000 rep-
resenting unpaid dividends of $0.46 per share for the 70 days from the prior
dividend payment on December 15, 2003. Upon redemption, the Company
recognized a charge to net income allocable to common shareholders and
HPU holders of $5.5 million included in “Preferred dividend requirements” on
the Company’s Consolidated Statements of Operations.
In connection with the redemption of the Series C preferred stock
on February 23, 2004 the Company paid a final dividend of $585,000 rep-
resenting unpaid dividends of $0.45 per share for the 70 days from the prior
dividend payment on December 15, 2003. Upon redemption, the Company
recognized a charge to net income allocable to common shareholders and
HPU holders of $3.5 million included in “Preferred dividend requirements” on
the Company’s Consolidated Statements of Operations.
Holders of shares of the Series D preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash divi-
dends at the rate of 8.00% per annum of the $25.00 liquidation preference,
equivalent to a fixed annual rate of $2.00 per share. Dividends are cumula-
tive from the date of original issue and are payable quarterly in arrears on or
before the 15th day of each March, June, September and December or, if not
69
iStar
Financial
2004
a business day, the next succeeding business day. Any dividend payable on
the Series D preferred stock for any partial dividend period will be computed
on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as of the close of business on
the first day of the calendar month in which the applicable dividend payment
date falls or on another date designated by the Board of Directors of the
Company for the payment of dividends that is not more than 30 nor less than
ten days prior to the dividend payment date.
Holders of shares of the Series E preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash divi-
dends at the rate of 7.875% per annum of the $25.00 liquidation prefer-
ence, equivalent to a fixed annual rate of $1.97 per share. The remaining
terms relating to dividends of the Series E preferred stock are substantially
identical to the terms of the Series D preferred stock described above.
Holders of shares of the Series F preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash divi-
dends at the rate of 7.80% per annum of the $25.00 liquidation preference,
equivalent to a fixed annual rate of $1.95 per share. The remaining terms
relating to dividends of the Series F preferred stock are substantially identical
to the terms of the Series D preferred stock described above.
Holders of shares of the Series G preferred stock are entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, cumulative preferential cash divi-
dends at the rate of 7.65% per annum of the $25.00 liquidation preference,
equivalent to a fixed annual rate of $1.91 per share. The remaining terms
relating to dividends of the Series G preferred stock are substantially identical
to the terms of the Series D preferred stock described above.
Holders of the Series I preferred stock are entitled to receive, when
and as declared by the Board of Directors, out of funds legally available for
the payment of dividends, cumulative preferential cash dividends at the rate
of 7.50% per annum of the $25.00 liquidation preference, equivalent to a
fixed annual rate of $1.88 per share. The remaining terms relating to divi-
dends of the Series I preferred stock are substantially identical to the terms
of the Series D preferred stock described above.
The 2002, 2003 and 2004 High Performance Unit Program
reached their valuation dates on December 31, 2002, 2003 and 2004,
respectively. Based on the Company’s 2002, 2003 and 2004 total rate of
return, the participants are entitled to receive dividends on 819,254 shares,
987,149 shares and 1,031,875 shares, respectively, of the Company’s
Common Stock. The Company will pay dividends on these units in the same
amount per equivalent share and on the same distribution dates as shares of
the Company’s Common Stock. Such dividend payments for the 2002 plan
began with the first quarter 2003 dividend, such dividends for the 2003 plan
began with the first quarter 2004 dividend and such dividends for the 2004
plan will begin with the first quarter 2005 dividend. All dividends to HPU
holders will reduce net income allocable to common shareholders when paid.
Additionally, net income allocable to common shareholders will be reduced by
the HPU holders’ share of undistributed earnings, if any.
The exact amount of future quarterly dividends to common share-
holders will be determined by the Board of Directors based on the Company’s
actual and expected operations for the fiscal year and the Company’s overall
liquidity position.
Note 14 – Fair Values of Financial Instruments
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”
(“SFAS No. 107”), requires the disclosure of the estimated fair values of finan-
cial instruments. The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Quoted market prices, if avail-
able, are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Company’s financial
instruments, the fair values of such instruments have been derived based on
management’s assumptions, the amount and timing of future cash flows and
estimated discount rates. The estimation methods for individual classifications
of financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable values
could be materially different from the estimates presented below. The provi-
sions of SFAS No. 107 do not require the disclosure of the fair value of non-
financial instruments, including intangible assets or the Company’s CTL assets.
In addition, the estimates are only indicative of the value of individ-
ual financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.
Short-term financial instruments – The carrying values of short-
term financial instruments including cash and cash equivalents and short-
term investments approximate the fair values of these instruments. These
financial instruments generally expose the Company to limited credit risk and
have no stated maturities, or have an average maturity of less than 90 days
and carry interest rates which approximate market.
Loans and other lending investments – For the Company’s interests
in loans and other lending investments, the fair values were estimated by dis-
counting the future contractual cash flows (excluding participation interests
in the sale or refinancing proceeds of the underlying collateral) using esti-
mated current market rates at which similar loans would be made to borrow-
ers with similar credit ratings for the same remaining maturities.
Marketable securities – Securities held for investment, securities
available for sale, loans held for sale, trading account instruments, long-term
debt and trust preferred securities traded actively in the secondary market
have been valued using quoted market prices.
Other financial instruments – The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.
Debt obligations – A portion of the Company’s existing debt obliga-
tions bear interest at fixed margins over LIBOR. Such margins may be higher
or lower than those at which the Company could currently replace the related
financing arrangements. Other obligations of the Company bear interest at
fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company’s debt obligations were estimated by
discounting current debt balances from December 31, 2004 and 2003 to
maturity using estimated current market rates at which the Company could
enter into similar financing arrangements.
Interest rate protection agreements – The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company
would receive or pay to terminate these agreements at the reporting date,
taking into account current interest rates and current creditworthiness of the
respective counterparties.
70
iStar
Financial
2004
The book and fair values of financial instruments as of December 31, 2004 and 2003 were (in thousands):
Financial assets:
Loans and other lending investments
Marketable securities
Provision for loan losses
Financial liabilities:
Debt obligations
Interest rate protection agreements
2004
Book
Value
Fair
Value
2003
Book
Value
Fair
Value
$3,988,625
9,494
(42,436)
$4,272,749
9,494
(42,436)
$3,736,110
20,265
(33,436)
$3,978,715
20,265
(33,436)
4,605,674
2,923
4,805,055
2,923
4,113,732
6,506
4,253,279
6,506
Note 15 – Segment Reporting
Statement of Financial Accounting Standard No. 131 (“SFAS
No. 131”) establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected financial information
about operating segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending
and Corporate Tenant Leasing. The Company does not have any foreign
operations. The accounting policies of the segments are the same as those
described in Note 3. The Company has no single customer that accounts for
more than 3.85% of annualized total revenues (see Note 9 for other infor-
mation regarding concentrations of credit risk).
The Company evaluates performance based on the following financial measures for each segment:
2004:
Total revenues(2):
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:
2003:
Total revenues(2):
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:
2002:
Total revenues(2):
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries:
Total operating and interest expense(3):
Net operating income(4):
Total long-lived assets(5):
Total assets:
Real Estate
Lending
Corporate
Tenant
Leasing
Corporate/
Other(1)
Company
Total
(In thousands)
$ 399,669
–
57,673
341,996
3,946,189
4,022,729
$ 291,942
2,909
140,933
153,918
2,877,042
3,068,242
$ 2,813
–
299,058
(296,245)
N/A
129,266
$ 694,424
2,909
497,664
199,669
6,823,231
7,220,237
$
$
338,566
–
90,648
247,918
3,702,674
3,810,679
279,157
–
94,273
184,884
3,050,342
3,126,219
$
$
234,303
(2,019)
114,387
117,897
2,535,885
2,729,716
214,824
5,081
92,903
127,002
2,291,805
2,442,087
$
242
(2,265)
98,726
(100,749)
N/A
120,195
$
(324)
(3,859)
115,933
(120,116)
N/A
43,391
$
$
573,111
(4,284)
303,761
265,066
6,238,559
6,660,590
493,657
1,222
303,109
191,770
5,342,147
5,611,697
Explanatory Notes:
(1)
(2)
(3)
Corporate and Other represents all corporate level items, including general and administrative expenses and any intercompany eliminations necessary to reconcile to the consolidated Company totals. This
caption also includes the Company’s servicing business, which is not considered a material separate segment.
Total revenues represents all revenues earned during the period from the assets in each segment. Revenue from the Real Estate Lending business primarily represents interest income and revenue from the
Corporate Tenant Leasing business primarily represents operating lease income.
Total operating and interest expense represents provision for loan losses and loss on early extinguishment of debt for the Real Estate Lending business and operating costs on CTL assets for the Corporate
Tenant Leasing business, as well as interest expense specifically related to each segment. Interest expense on unsecured notes, general and administrative expense and general and administrative-stock-based
compensation is included in Corporate and Other for all periods. Depreciation and amortization of $64.5 million, $50.6 million and $42.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively, are included in the amounts presented above.
(4) Net operating income represents income before minority interest, income (loss) from discontinued operations and gain from discontinued operations.
Total long-lived assets is comprised of Loans and other lending investments, net and Corporate tenant lease assets, net, for each respective segment.
(5)
71
iStar
Financial
2004
Note 16 – Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for the Company (in thousands, except per share amounts).
2004:
Revenue
Net income (loss)
Net income (loss) allocable to common shares
Net income (loss) per common share – basic
Weighted average common shares outstanding – basic
2003:
Revenue
Net income
Net income allocable to common shares
Net income per common share – basic
Weighted average common shares outstanding – basic
December 31,
September 30,
June 30,
March 31,
Quarter Ended
$186,387
127,442
114,997
1.03
111,402
$
$ 155,806
79,580
68,835
0.67
102,603
$
$173,262
85,102
73,331
0.66
111,230
$
$ 143,582
74,878
66,082
0.66
100,687
$
$173,751
83,019
71,276
0.64
110,695
$
$ 139,858
69,746
60,025
0.60
99,445
$
$161,024
(35,116)
(53,811)
(0.50)
107,468
$
$ 133,865
67,953
58,241
0.59
98,472
$
Note 17 – Subsequent Events
Acquisition of Falcon Financial – On January 20, 2005, the Company
signed a definitive agreement to acquire Falcon Financial Investment Trust, an
independent finance company dedicated to providing long-term capital to
automotive dealers throughout the United States. Falcon Financial was a bor-
rower of the Company at the time of signing the definitive agreement. Under
the terms of the agreement, the Company commenced a cash tender offer
to acquire all of Falcon Financial’s outstanding shares at a price of $7.50 per
share for an aggregate equity purchase of approximately $120.0 million. The
offer expired on February 28, 2005 and as of the expiration approximately
15.6 million common shares of beneficial interest, representing approxi-
mately 97.7% of Falcon Financial’s issued and outstanding shares, had been
tendered and not withdrawn. On March 3, 2005, the Company completed a
merger of Falcon Financial with an acquisition subsidiary of the Company. As
a result of the merger, all outstanding shares of Falcon Financial not pur-
chased by the Company in the tender were converted into the right to
receive $7.50 per share, without interest and the Company acquired 100%
ownership of Falcon Financial.
Acquisition of Substantial Minority Interest in Oak Hill Advisors – On
February 15, 2005, the Company signed a definitive agreement to make a
substantial minority investment in Oak Hill Advisors, a premier asset man-
agement firm that focuses on corporate credit-oriented investment strate-
gies for institutional investors. The Company agreed to issue approximately
$49 million of its shares of Common Stock to the selling partners as part of
the consideration for this investment. In addition, the Company agreed to
appoint one of the selling partners to its Board of Directors. The Company
expects to account for this transaction under the equity method. The trans-
action is expected to close in the first half of 2005.
Investment in Acquisition of LNR Property Corporation – The
Company provided debt and equity to Blackacre/Cerberus Capital
Management, L.P. and senior executives of LNR Property Corporation in con-
nection with their acquisition and subsequent privatization of LNR Property
Corporation. LNR is a diversified company that owns a portfolio of operating
real estate assets, development properties and real estate securities, and is
the largest special servicer in the CMBS market.
TriNet Bond Exchange – On March 1, 2005, the Company
exchanged its TriNet 7.70% Senior Notes due 2017 for iStar Financial 5.70%
Series B Senior Notes due 2014 in accordance with the exchange offer
and consent solicitation issued on January 25, 2005. For each $1,000 prin-
cipal amount of TriNet Notes tendered, holders received approximately
$1,171 principal amount of iStar Notes. A total of $117.0 million aggregate
principal amount of iStar Notes were issued. The iStar Notes issued in the
exchange offer form part of the series of iStar Financial 5.70% Series B Notes
due 2014 issued on March 9, 2004.
Capital Market and Hedging Transactions – On March 1, 2005, the
Company issued $700.0 million of fixed rate 5.15% Senior Notes due 2012
and $400.0 million of Senior Floating Rate Notes due 2008 which will bear
interest equal to three-month LIBOR + 0.39%. The Company used the pro-
ceeds to repay outstanding balances on its revolving credit facilities. In connec-
tion with the $700.0 million seven-year bond issuance the Company settled
three forward-starting swaps that were entered into in December 2004.
COMMON STOCK PRICE AND DIVIDENDS (UNAUDITED)
The high and low sales prices per share of Common Stock are set
The following table sets forth the dividends paid or declared by the
forth below for the periods indicated.
Company on its Common Stock:
72
iStar
Financial
2004
Quarter Ended
High
Low
2003
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003
2004
March 31, 2004
June 30, 2004
September 30, 2004
December 31, 2004
$ 29.90
$ 36.60
$ 38.95
$ 40.00
$42.95
$42.75
$41.23
$45.57
$ 27.05
$ 29.68
$ 35.00
$ 37.25
$38.60
$34.50
$37.03
$41.32
On March 1, 2005, the closing sale price of the Common Stock as
reported by the NYSE was $42.75. The Company had 3,236 holders of
record of Common Stock as of March 1, 2005.
Quarter Ended
2003(1)
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003
2004(2)
March 31, 2004
June 30, 2004
September 30, 2004
December 31, 2004
Explanatory Notes:
Shareholder Record Date
Dividend/Share
April 15, 2003
July 15, 2003
October 15, 2003
December 15, 2003
April 15, 2004
July 15, 2004
October 15, 2004
December 15, 2004
$ 0.6625
$ 0.6625
$ 0.6625
$ 0.6625
$0.6975
$0.6975
$0.6975
$0.6975
(1)
(2)
For tax reporting purposes, the 2003 dividends were classified as 68.90% ($1.8258) ordinary
income, 2.46% ($0.0651) 20.00% capital gain, 1.90% ($0.0503) 15.00% capital gain (post
May 5, 2003), 2.67% ($0.0709) 25.00% Section 1250 capital gain and 24.08% ($0.6380)
return of capital for those shareholders who held shares of the Company for the entire year.
For tax reporting purposes, the 2004 dividends were classified as 49.15% ($1.3713) ordinary
income, 2.20% ($0.0613) 15.00% capital gain, 7.45% ($0.0278) 25.00% Section 1250 capital
gain and 41.20% ($1.1496) return of capital for those shareholders who held shares of the
Company for the entire year.
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DIRECTORS
Jay Sugarman (3)
Chairman and
Chief Executive Officer,
iStar Financial Inc.
Willis Andersen, Jr. (1) (4)
Principal,
REIT Consulting Services
Robert W. Holman, Jr. (3)
Chairman and
Chief Executive Officer,
National Warehouse
Investment Company
Robin Josephs (1) (2)
President,
Ropasada, LLC
John G. McDonald (2) (4)
Stanford Investors Professor,
Stanford University
Graduate School of Business
George R. Puskar (3) (4)
Former Chairman and
Chief Executive Officer,
Equitable Real Estate
Investment Management
Jeffrey A. Weber (1) (2)
President,
York Capital Management, LP
(1) Audit Committee
(2) Compensation Committee
Investment Committee
(3)
(4) Nominating and Governance
Committee
OFFICERS
Jay Sugarman
Chairman and
Chief Executive Officer
Jay S. Nydick
President
Catherine D. Rice
Chief Financial Officer
Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer
Nina B. Matis
Executive Vice President and
General Counsel
Barbara Rubin
President – iStar Asset Services
EXECUTIVE VICE PRESIDENTS
EMPLOYEES
Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Chase S. Curtis, Jr.
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Andrew C. Richardson
SENIOR VICE PRESIDENTS
Jeffrey N. Brown
Philip S. Burke
James D. Burns
Geoffrey M. Dugan
Peter K. Kofoed
John F. Kubicko
Elizabeth B. Smith
Erich J. Stiger
Colette J. Tretola
Cynthia M. Tucker
HEADQUARTERS
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494
SUPER-REGIONAL OFFICES
One Embarcadero Center,
33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6259
3480 Preston Ridge Road,
Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101
180 Glastonbury Blvd.,
Suite 201
Glastonbury, CT 06033
tel: (860) 815-5900
fax: (860) 815-5901
REGIONAL OFFICES
175 Federal Street,
8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322
525 West Monroe Street,
20th Floor
Chicago, IL 60661
tel: (312) 612-4212
fax: (312) 902-1061
6565 North MacArthur Blvd.,
Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078
As of March 14, 2005, the Company
had 167 employees.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
New York, NY
REGISTRAR AND
TRANSFER AGENT
EquiServe Trust
Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
tel: (800) 756-8200
http://www.equiserve.com
DIVIDEND REINVESTMENT AND
DIRECT STOCK PURCHASE PLAN
Registered shareholders may
reinvest dividends and may also
purchase stock directly from
the Company through the Company’s
Dividend Reinvestment and Direct
Stock Purchase Plan. For more
information, please call the Transfer
Agent or the Company’s
Investor Relations Department.
ANNUAL MEETING OF
SHAREHOLDERS
May 25, 2005, 9:00 a.m. ET
Harvard Club of New York City
35 West 44 Street
New York, NY 10036
INVESTOR INFORMATION
SERVICES
iStar Financial is a listed company
on the New York Stock Exchange and
is traded under the ticker “SFI”. The
Company has submitted a Section 12(a)
CEO Certification to the NYSE last
year. In addition, the Company has filed
with the SEC the CEO/CFO certification
required under Section 302 of the
Sarbanes-Oxley Act as an exhibit to
our most recently filed Form 10-K.
For help with questions about the
Company, or to receive additional
corporate information, please contact:
INVESTOR RELATIONS
DEPARTMENT
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail:
investors@istarfinancial.com
iStar Financial Website
http://www.istarfinancial.com