5
9918 472 6 413 0 9 5 2 4 8 0 2
2005
2006
2007
2008
iStar Financial Annual Report > 2009
2180W1.indd 1
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2
the numbers
letter from the chairman
highlights
01
08
12
results
16
2180W1.indd 1
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the numbers
1
ISMAV1 23 109
$ 8 9 3 , 2 8 4 ,19 6
ISTRYE123109
$ 10 , 412 , 4 91 , 68 4
ISTCR070107123109
ISTE123109
ISTFFC070107123109
12 .8 %
ISIRR031898123109
letter from the chairman
8
sfi 2009
To our valued Investors,
To our valued Investors,
2010 is going to be a pivotal year for the company.
2010 is going to be a pivotal year for the company.
On one hand, we have made a lot of progress in stripping down our portfolio
On one hand, we believe we have made a lot of progress in stripping
and working down our forward commitments. On the other hand, we still have
down our portfolio and working down our forward commitments.
some big obstacles we need to get past before we can start feeling we’ve
On the other hand, we still have some big obstacles we need to
turned the corner.
get past before we can start feeling we’ve turned the corner.
I have been using the analogy of trying to swim across a raging river. We have
I have been using the analogy of trying to swim across a raging
made it about three quarters of the way across while many others have already
been swept away—but if we don’t make it all the way across, then all our good
river. We are still making our way across while many others have
work to date won’t really matter.
already been swept away—but if we don’t make it all the way
across, then all our good work to date won’t really matter.
So 2010 is about making it across, and we are going to have to work hard on
both the asset side of our business and the liability side of our business to do
So 2010 is about making it across, and we are going to have to
that. Every day and every move will count and everyone at iStar knows what is
work hard on both the asset side of our business and the liability
at stake. We must succeed.
side of our business to do that. Every day and every move will count
This year’s annual report is a reminder of why success is worth fighting for.
and everyone at iStar knows what is at stake. We must succeed.
Over the past 17 years we built our company to be a leader in providing capital
We have been working hard to navigate the company through
in an entrepreneurial, creative and honest fashion. We broke new ground in
this financial crisis, and with more work to be done, we remind
our business, finding holes in the market and filling them even when common
ourselves there is still a large and valuable franchise to protect
wisdom suggested otherwise. We grew and adapted as markets changed and
at iStar.
competition increased. And when markets overheated, we moved away from
our historical strengths and worked to find ways to continue standing apart
This year’s annual report is a reminder of why success is worth
from the pack. It almost worked.
fighting for.
What can you do as a lender when capital gets priced at extremely favorable
levels for borrowers? You figure out how to borrow at those levels as well. In a
perfect world, you borrow long and lend short and wait for the market to correct.
In 2006 and 2007 we focused on investing in short term loans, including
purchasing the Fremont portfolio, with the goal of raising long term capital to
9
9
fund them. We liked the future position this would leave us in when markets
$14,525,061,647
reversed course and lending became attractive again—as short term loans
Managed assets at December 31, 2009. That’s the total assets
were repaying while our long term capital stayed in place, we expected to be
we still control, giving us a wide ranging view of all major property
able to redeploy that repaid capital in a much less competitive environment.
types and major markets. While smaller, the portfolio still includes
Unfortunately, accounting delays at Fremont prevented us from getting into
over $10 billion in loans, $4 billion in sale-leasebacks and
the market and raising the necessary long term capital immediately after
$1 billion of owned real estate. By product type, $2 billion in
the transaction and that delay proved lethal. With markets effectively closed
in the summer of 2007 we found ourselves long the assets and short the
office, $1 billion in hotels, $1 billion in retail, $1 billion in industrial,
capital to fund them—not a good place to be heading into the financial storm
$2 billion in land and $4 billion in condominiums.
of the new century.
$893,284,196
Having spent the last 30 months digging out of that hole, and with still more
Revenue for 2009. While non-performing loans and repositioning
work to do, we remind ourselves there is still a large and valuable franchise to
assets contributed almost nothing to revenue, we collected just
protect at iStar.
under $900 million in revenue to help cover operating costs and
$14,525,061,647
meet all funding commitments and debt obligations in 2009.
That’s the total assets we still control, giving us a wide ranging view of all major
property types and major markets. While smaller, the portfolio still includes over
$10,412,491,684
$10 billion in loans, $4 billion in sale leasebacks, $1 billion of owned real estate.
Capital returned over the past 30 months. While many assets
By product type, $2 billion in office, $1 billion in hotels, $1 billion in retail, $1
have been extended, over $10 billion in capital has been returned
billion in industrial, $2 billion in land and $4 billion in condominiums.
to us through loan repayments, loan sales and asset sales.
$893,284,196
Unfortunately, this has mostly been used to fund commitments
Revenue for 2009. While non-performing loans and repositioning assets are
and repay liabilities and has not provided any excess capital to
contributing almost nothing to revenue, we continue to collect just under $900
take advantage of new opportunities in the marketplace.
million in revenue to cover operating costs and continue to meet obligations.
$1,656,117,796
$10,412,491,684
Total equity at December 31, 2009. Protecting book value is our
Capital returned over the past 30 months. While many assets have had to
focus right now. Until losses abate and fundamentals stabilize,
be extended, over $10 billion in capital has been returned through loan
this is the most important thing we can do. Book value per share
repayments, loan sales and asset sales. Unfortunately this has mostly been
will be a metric we come back to in the future.
used to offset the missed capital raise and repay liabilities, and has not provided
any excess capital to take advantage of opportunities in the marketplace.
sfi 2009
sfi 2009
10
10
$1,656,117,796
$6,632,954,557
Total Equity at Dec 31, 2009. Protecting book value is our focus right now. Until
Fundings over the past 30 months. Some had questioned whether
losses abate and fundamentals stabilize, this is the most important thing we
we would be able to meet our $7 billion in future fundings under
can do. Book value per share will be a metric we come back to in the future.
loan agreements in place in July 2007, following the Fremont
transaction. This number provides the answer. With future fundings
$6,632,954,557
now estimated to be below $500 million, we have met our funding
Fundings over the past 30 months. Some had questioned whether we would
commitments in every instance and expect to continue to do so.
be able to meet our $7 billion in future fundings under loan agreements in
place in July 2007. This number provides the answer. With future fundings now
12.8%
estimated to be below $500 million, we have met our commitments in every
instance and will continue to do so.
11 year IRR on cash flows generated for shareholders since the
$15 per share contribution by our original investors. The collapse
13.9%
in our share price is devastating. And the road back is still
11 year IRR on cash flows generated for shareholders since the $15 per share
uncertain. But our long-term record remains strong, even with
contribution by our original investors. The collapse in our share price is devastating.
the share price where it is, and we still believe we have an ability
And the road back is still uncertain. But our long term record remains strong,
to make returns that are compelling on a risk-adjusted basis. We
even with the share price where it is, and we still believe we have an ability to
make returns that are compelling on a risk adjusted basis. We hope to do that
hope to do that again soon.
again soon.
Jay Sugarman
As always, I thank you for your continued support.
Chairman and Chief Executive Officer
Jay Sugarman
Chairman and Chief Executive Officer
11
11
highlights
12
sfi 2009
$1.74
$893
$932
$749
$11,060
$8,532
$3.60
$3.08
$2.93
$1,354
$1,404
13
$12,811
$15,297
$15,848
dividend
dollars per common share
2009
$0.00
2008
2007
2006
2005
revenues
dollars in millions
2009
2008
2007
2006
2005
total assets(1)
dollars in millions
2009
2008
2007
2006
2005
(1) As defined by GAAP.
enterprise value(1)
dollars in millions
2009
2008
2007
2006
2005
book value
dollars per common share
2009
2008
2007
2006
2005
$11,476
$12,768
$16,308
$14,325
$10,320
$11.57
$18.05
$18.07
$19.52
$17.06
(1) Enterprise value represents market value of common equity plus book value of preferred equity,
debt and minority interest minus cash.
sfi 2009
portfolio security type(1)
as of December 31, 2009
25.0% corporate tenant leases
59.1% first mortgages/senior loans
6.0%
other real estate owned
5.5% mezzanine/subordinated debt
3.0% real estate held for investment
1.4% all other investments
portfolio collateral type(1)
as of December 31, 2009
15.4% land
13.3% office
9.4% industrial/R&D
8.2%
retail
6.5%
entertainment/leisure
6.3%
hotel
5.5%
mixed use/mixed collateral
5.2%
corporate—real estate
3.1%
other
27.1% apartment/residential
(1) Based on carrying value of the Company’s total investment portfolio, gross of loan loss reserves
and accumulated depreciation.
results
16
sfi 2009
Selected Financial Data 18 Management’s
Dis cussion and Analysis of Financial Condition
and Results of Operations 20 Quantitative and
Qualitative Disclosures about Market Risk 34
Management’s Report on Internal Control Over
Financial Reporting 36 Report of Independent
Registered Public Account ing Firm 37 Con-
solidated Balance Sheets 38 Consoli dated
Statements of Operations 39 Consolidated State -
ments of Changes in Share holders’ Equity
40 Consol idated State ments of Cash Flows 42
Notes to Con soli dated Financial State ments
44 Common Stock Price and Dividends (unau-
dited) 75 Direc tors and Offi cers 76 Corporate
Information 77
17
SELECTED FINANCIAL DATA
The following table sets forth selected fi nancial 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 reclassifi ed to conform to the 2009 presentation.
For the Years Ended December 31,
(In thousands, except per share data and ratios)
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
Provision for loan losses
Impairment of other assets
Impairment of goodwill
Other expense
Total costs and expenses
Income (loss) before earnings from equity method investments,
minority interest and other items
Gain (loss) on early extinguishment of debt
Gain on sale of joint venture interest
Earnings from equity method investments
Income (loss) from continuing operations
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss)
Net (income) loss attributable to noncontrolling interests
Gains attributable to noncontrolling interests
Net income (loss) attributable to iStar Financial Inc.
Preferred dividend requirements
Net income (loss) attributable to iStar Financial Inc. and
allocable to common shareholders, HPU holders
and Participating Security holders(1)
Per common share data(2):
Income (loss) attributable to iStar Financial Inc.
from continuing operations:
Basic
Diluted(3)
Net income (loss) attributable to iStar Financial Inc.:
Basic
Diluted(3)
Per HPU share data(2):
Income (loss) attributable to iStar Financial Inc.
from continuing operations:
Basic
Diluted(3)
Net income (loss) attributable to iStar Financial Inc.:
Basic
Diluted(3)
Dividends declared per common share(4)
2009
2008
2007
2006
2005
$ 557,809
305,007
30,468
893,284
481,116
23,467
97,869
127,044
1,255,357
122,699
4,186
104,795
2,216,533
(1,323,249)
547,349
–
5,298
(770,602)
(11,671)
12,426
(769,847)
1,071
–
(768,776)
(42,320)
$ 947,661
308,742
97,851
1,354,254
666,706
23,059
94,726
143,902
1,029,322
295,738
39,092
37,234
2,329,779
(975,525)
393,131
280,219
6,535
(295,640)
22,415
91,458
(181,767)
991
(22,249)
(203,025)
(42,320)
$ 998,008
306,513
99,938
1,404,459
629,260
27,915
83,690
156,534
185,000
144,184
–
8,927
1,235,510
168,949
225
–
29,626
198,800
29,970
7,832
236,602
816
–
237,418
(42,320)
$575,598
285,555
70,824
931,977
429,613
22,159
66,258
95,358
14,000
5,683
–
874
633,945
298,032
–
–
12,391
310,423
41,384
24,227
376,034
(1,207)
–
374,827
(42,320)
$406,668
262,625
80,133
749,426
312,806
20,622
61,609
61,971
2,250
–
–
2,014
461,272
288,154
(46,004)
–
3,016
245,166
37,373
6,354
288,893
(980)
–
287,913
(42,320)
$ (811,096)
$ (245,345)
$ 195,098
$332,507
$245,593
$ (7.89)
$ (7.89)
$ (2.68)
$ (2.68)
$ 1.19
$ 1.18
$ 2.25
$ 2.23
$ (7.88)
$ (7.88)
$ (1.85)
$ (1.85)
$ 1.48
$ 1.47
$ 2.81
$ 2.78
$ (1,503.13)
$ (1,503.13)
$ (505.47)
$ (505.47)
$ 224.40
$ 223.27
$ 425.60
$ 422.07
$ (1,501.73)
$ (1,501.73)
$ –
$ (349.87)
$ (349.87)
$ 1.74
$ 279.53
$ 278.07
$ 3.60
$ 530.94
$ 526.47
$ 3.08
$ 1.75
$ 1.74
$ 2.13
$ 2.11
$ 331.00
$ 327.73
$ 402.73
$ 398.73
$ 2.93
18
sfi 2009
For the Years Ended December 31,
2009
2008
2007
2006
2005
(In thousands, except per share data and ratios)
Supplemental Data:
Adjusted diluted earnings (loss) attributable to iStar Financial, Inc.
and allocable to common shareholders and HPU holders(5)(6) $ (708,595)
$ (168,362)
EBITDA(6)(7)
Ratio of earnings to fi xed charges(8)
Ratio of earnings to fi xed charges and preferred stock dividends
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Weighted average HPU shares outstanding – basic and diluted
Cash fl ows from:
$ (359,295)
$ 612,325
0.6x
0.6x
131,153
131,153
15
$ 355,707
$ 1,013,087
1.3x
1.3x
126,801
127,542
15
$ 429,922
$ 904,537
1.7x
1.6x
115,023
116,057
15
$ 391,884
$ 687,571
1.8x
1.6x
112,513
113,668
15
(0.5)x
(0.5)x
100,071
100,071
15
Operating activities
Investing activities
Financing activities
Balance Sheet Data:
Loans and other lending investments, net
Corporate tenant lease assets, net
Total assets
Debt obligations, net
Redeemable noncontrolling interests
Total equity
Explanatory Notes:
$ 76,276
726,221
(1,074,402)
$ 418,529
(27,943)
1,444
$ 561,337
(4,745,080)
4,182,299
$ 431,224
(2,529,260)
2,088,617
$ 515,919
(1,406,121)
917,150
$ 7,661,562
2,885,896
12,810,575
10,894,903
7,444
1,656,118
$10,586,644
3,044,811
15,296,748
12,486,404
9,190
2,446,662
$10,949,354
3,309,866
15,848,298
12,363,044
17,773
2,972,170
$ 6,799,850
3,084,794
11,059,995
7,833,437
9,229
3,016,372
$ 4,661,915
3,115,361
8,532,296
5,859,592
9,228
2,470,954
(1) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program. Participating
Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company’s Long-Term Incentive Plan.
(2) See Note 14 of the Company’s Notes to the Consolidated Financial Statements.
(3) For the years ended December 31, 2007, 2006 and 2005, net income used to calculate earnings per diluted common share and HPU share includes joint venture income of $85, $115,
and $28, respectively.
(4) The Company generally declares common dividends in the month subsequent to the end of the quarter. During 2009, no common dividends were declared. During 2008, no common divi-
dends were declared for the three-month periods ended September 30, 2008 and December 31, 2008. In December of 2007, the Company declared a special $0.25 dividend due to higher
taxable income generated as a result of the Company’s acquisition of Fremont CRE.
(5) Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from
discontinued operations, ineffectiveness on interest rate hedges, impairment of goodwill and intangible assets, extraordinary items and cumulative effect of change in accounting principle.
(See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a reconciliation of adjusted earnings to net income).
(6) Both adjusted earnings and EBITDA should be examined in conjunction with net income (loss) as shown in the Company’s Consolidated Statements of Operations. Neither adjusted earnings
nor EBITDA should be considered as an alternative to net income (loss) (determined in accordance with GAAP) as an indicator of the Company’s performance, or to cash fl ows from operat-
ing 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 avail-
able for distribution to shareholders. Rather, adjusted earnings and EBITDA are additional measures the Company uses to analyze how its business is performing. As a commercial fi nance
company that focuses on real estate lending and corporate tenant leasing, the Company records signifi cant depreciation on its real estate assets and amortization of deferred fi nancing costs
associated with its borrowings. It 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.
(7) EBITDA is calculated as net income (loss) attributable to iStar Financial Inc. plus the sum of interest expense, income taxes, depreciation, depletion and amortization.
19
For the Years Ended December 31,
Net income (loss) attributable to iStar Financial Inc.
Add: Interest expense(1)
Add: Income taxes
Add: Depreciation, depletion and amortization(2)
Add: Joint venture depreciation, depletion and amortization
EBITDA
2009
$(769,847)
481,116
4,141
98,238
17,990
$(168,362)
2008
$(181,767)
666,706
10,175
102,745
14,466
$ 612,325
2007
$ 236,602
629,260
6,972
99,427
40,826
$1,013,087
2006
$376,034
429,613
891
83,058
14,941
$904,537
2005
$288,893
312,806
2,014
75,574
8,284
$687,571
Explanatory Notes:
(1) For the years ended December 31, 2007, 2006 and 2005, interest expense includes $12, $194, and $247, respectively, of interest expense reclassifi ed to discontinued operations.
(2)
For the years ended December 31, 2009, 2008, 2007, 2006, and 2005, depreciation, depletion and amortization includes $1,419, $6,717, $10,677, $12,567, and $11,461, respectively,
of depreciation, depletion and amortization reclassifi ed to discontinued operations.
(8) This ratio of earnings to fi xed charges is calculated in accordance with GAAP. The Company’s bank credit facilities and senior notes both have fi xed charge coverage covenants, however, each is
calculated differently in accordance with the terms of the respective agreements. In addition, the fi xed charge covenant in the bank credit facilities is a maintenance covenant while the covenant
in the senior notes is an incurrence covenant. The fi xed charge coverage ratios for the bank credit facilities and senior notes were 2.4x and 2.3x, respectively, as of December 31, 2009.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
who require a high level of fl exibility and service. Our two primary
lines of business are lending and corporate tenant leasing.
Certain statements in this report, other than purely histori-
cal information, including estimates, projections, statements relating
to our business plans, objectives and expected operating results,
and the assumptions upon which those statements are based, are
“forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are included with respect to, among
other things, iStar Financial Inc.’s (the “Company’s”) current business
plan, business strategy, portfolio management and liquidity. These
forward-looking statements generally are identifi ed by the words
“believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,”
“plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely
result,” and similar expressions. Forward-looking statements are
based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results or outcomes
to differ materially from those contained in the forward-looking state-
ments. Important factors that the Company believes might cause
such differences are discussed in the section entitled, “Risk Factors”
in Part I, Item 1A of this Form 10-K or otherwise accompany the
forward-looking statements contained in this Form 10-K. We under-
take no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. In assessing all forward-looking statements, readers are
urged to read carefully all cautionary statements contained in this
Form 10-K. For purposes of Management’s Discussion and Analysis
of Financial Condition and Results of Operations, the terms “we,” “our”
and “us” refer to iStar Financial Inc. and its consolidated subsidiaries,
unless the context indicates otherwise.
This discussion summarizes the signifi cant factors affect-
ing our consolidated operating results, fi nancial condition and liquid-
ity during the three-year period ended December 31, 2009. This
discussion should be read in conjunction with our consolidated
fi nancial statements and related notes for the three-year period ended
December 31, 2009 included elsewhere in this annual report on
Form 10-K. These historical fi nancial statements may not be indicative
of our future performance. We reclassifi ed certain items in our con-
solidated fi nancial statements of prior years to conform to our current
year’s presentation.
Introduction
iStar Financial Inc. is a publicly traded fi nance company
focused on the commercial real estate industry. We primarily provide
customer-tailored fi nancing to high-end private and corporate own-
ers of real estate, including senior and mezzanine real estate debt,
senior and mezzanine corporate capital, as well as corporate net
lease fi nancing and equity. We are taxed as a real estate investment
trust, or “REIT” and provide innovative and value-added fi nancing
solutions to our customers. We deliver customized fi nancial products
to sophisticated real estate borrowers and corporate customers
The lending business is primarily comprised of senior
and mezzanine real estate loans that typically range in size from
$20 million to $150 million and have original terms generally ranging
from three to ten years. These loans may be either fi xed rate (based
on the U.S. Treasury rate plus a spread) or variable rate (based on
LIBOR plus a spread) and are structured to meet the specifi c fi nanc-
ing needs of the borrowers. We also provide senior and subordinated
capital to corporations, particularly those engaged in real estate
or real estate related businesses. These fi nancings may be either
secured or unsecured, typically range in size from $20 million to
$150 million and have initial maturities generally ranging from three
to ten years. As part of the lending business, we also acquire whole
loans, loan participations and debt securities which present attrac-
tive risk-reward opportunities.
Our corporate tenant leasing business provides capital
to corporations and other owners who control facilities leased to
single creditworthy customers. Our net leased assets are gener-
ally mission critical headquarters or distribution facilities that are
subject to long-term leases with public companies, many of which
are rated corporate credits. Most of the leases provide for expenses
at the facility to be paid by the corporate customer on a triple net
lease basis. Corporate tenant lease, or “CTL,” transactions have initial
terms generally ranging from 15 to 20 years and typically range in
size from $20 million to $150 million.
Our primary sources of revenues are interest income,
which is the interest that borrowers pay on loans, and operating
lease income, which is the rent that corporate customers pay to
lease our CTL properties. We primarily generate income through the
“spread” or “margin,” which is the difference between the revenues
generated from loans and leases and interest expense and the cost
of CTL operations.
We began our business in 1993 through private investment
funds and became publicly traded in 1998. Since that time, we have
grown through the origination of new lending and leasing transac-
tions, as well as through corporate acquisitions, including the acqui-
sition of TriNet Corporate Realty Trust, Inc. in 1999, the acquisitions of
Falcon Financial Investment Trust and of a signifi cant non-controlling
interest in Oak Hill Advisors, L.P. and affi liates in 2005, and the acqui-
sition of the commercial real estate lending business and loan port-
folio which we refer to as the “Fremont CRE,” of Fremont Investment
and Loan, or “Fremont,” a division of Fremont General Corporation,
in 2007.
Executive Overview
The fi nancial market conditions that began in late 2007,
including the economic recession and tightening of credit markets,
continued to signifi cantly impact the commercial real estate mar-
ket and fi nancial services industry in 2009. The severe economic
downturn led to a decline in commercial real estate values, which,
combined with a lack of available debt fi nancing for commercial and
20
sfi 2009
residential real estate assets, limited borrowers’ ability to repay or
refi nance their loans. Further, the ability of many of our borrowers
to sell units in residential projects has been adversely impacted
by current economic conditions and the lack of end loan fi nancing
available to residential unit purchasers. The combination of these
factors adversely affected our business, financial condition and
operating performance in 2009, resulting in signifi cant additions to
non-performing assets, increases in the related provision for loan
losses and a reduction in the level of liquidity available to fi nance our
operations. These economic factors and their effect on our opera-
tions have resulted in increases in our fi nancing costs, a continuing
inability to access the unsecured debt markets, depressed prices for
our Common Stock, the continued suspension of quarterly Common
Stock dividends and has narrowed our margin of compliance with
debt covenants.
During the year ended 2009, we incurred a net loss of
$(768.8) million on $893.3 million of revenue. These fi nancial results
primarily resulted from a provision for loan losses of $1.26 billion
and impairments of other assets of $141.0 million, which were rec-
ognized during the year. The provision for loan losses was driven
by an increase in non-performing loans to $4.21 billion, or 45.3%
of Managed Loan Value (as defi ned below in “Risk Management”) as of
December 31, 2009, compared to $3.46 billion, or 27.5% of Managed
Loan Value at December 31, 2008. The increase in non-performing
loans resulted from the continued deterioration in the commer-
cial and residential real estate markets and weakened economic
conditions impacting our borrowers, who continue to have diffi culty
servicing their debt and refi nancing or selling their projects in order
to repay their loans in a timely manner. In addition, the balance of
our real estate held for investment (“REHI”) and other real estate
owned (“OREO”) assets have increased from $242.5 million as of
December 31, 2008 to $1.26 billion as of December 31, 2009, as we
have obtained title to properties through foreclosure or through
deed-in-lieu of foreclosure as part of our effort to resolve non-
performing loans. The losses were partially offset by the repurchase
of $1.31 billion par value of senior unsecured notes resulting in the
recognition of $439.4 million in net gains on the early extinguishment
of debt.
Our primary recourse debt instruments include our secured
and unsecured bank credit facilities and our secured and unsecured
public debt securities. We believe we are in full compliance with all
the covenants in those debt instruments as of December 31, 2009;
however, our recent fi nancial results have put pressure on our abil-
ity to maintain compliance with certain of the debt covenants in our
secured bank credit facilities. In particular, our tangible net worth at
December 31, 2009 is not signifi cantly above the fi nancial covenant
minimum requirement. We intend to operate our business in order
to remain in compliance with the covenants in our debt instruments;
however, there can be no assurance that we will be able to do so.
A failure by us to satisfy a fi nancial covenant in a debt instrument
could trigger a default under that debt instrument and could give
the lenders the ability to accelerate the debt if the default is not
waived or cured. Most of our recourse debt instruments contain
cross default and/or cross-acceleration provisions that may be
triggered by defaults or accelerations of our recourse debt above
specifi ed thresholds.
From a liquidity perspective, we expect to continue to expe-
rience signifi cant uncertainty with respect to our sources of funds.
Our cash fl ow may be affected by a variety of factors, many of which
are outside our control, including volatility in the fi nancial markets,
our borrowers’ ability to repay their obligations and other general
business conditions. As of December 31, 2009, we had $224.6 mil-
lion of unrestricted cash. For the upcoming year, we will require
signifi cant capital to repay $586.8 million of our 2010 debt maturi-
ties and to fund our investment activities and operating expenses,
including approximately $430.0 million of unfunded commitments
primarily associated with our construction loan portfolio. In addition,
under the terms of our First Priority Credit Agreement, if we do not
pay down the outstanding balance of that loan by $500 million by
September 30, 2010, payments of principal and net sale proceeds
received by us in respect of assets constituting collateral for our
obligations under this agreement must be applied toward the man-
datory prepayment of the loan and commitment reductions under
the agreement.
We expect to need additional liquidity over the coming year
to supplement expected loan repayments and cash generated from
operations in order to meet our debt maturities and funding obliga-
tions. During 2009, we utilized our unencumbered assets to gener-
ate additional liquidity through secured fi nancing transactions and a
secured note exchange transaction, and also sold various assets. In
addition, we have signifi cantly curtailed our asset origination activi-
ties, reduced operating expenses and focused on asset management
in order to maximize recoveries from existing asset resolutions. We
intend to utilize all available sources of funds in today’s fi nancing
environment, which could include additional fi nancings secured by
our assets, increased levels of asset sales, joint ventures and other
third-party capital to meet our liquidity requirements. There can be
no assurance that we will possess suffi cient liquidity to meet all of
our debt service requirements in 2010. In addition we are exploring
various alternatives to enable us to meet our signifi cant 2011 debt
maturities. The failure to execute such alternatives successfully prior
to debt maturities would have material adverse consequences on us.
We have reacted to market conditions and liquidity and
debt covenant pressures by implementing various initiatives that
we believe will guide us through the diffi cult business conditions
which we expect to persist through 2010. Our public debt securities
continue to trade at signifi cant discounts to par. We have been able
to partially mitigate the impact of the decline in operating results
through the recognition of gains associated with the repurchase and
retirement of debt at a discount, which has contributed to our ability
to maintain compliance with our debt covenants and has enabled
us to reduce outstanding indebtedness at discounts to par. We
expect to continue to use available funds and other strategies to seek
to retire our debt at a discount; however, there can be no assurance
that our efforts in this regard will be successful.
Our plan is dynamic and we expect to adjust our plan as
market conditions change. If we are unable to successfully implement
our plan, our cash fl ows, debt covenant compliance, fi nancial position
and results of operations would be materially adversely affected.
21
Results of Operations for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
For the Years Ended December 31,
2009
2008
$ Change
% Change
(In thousands)
Interest income
Operating lease income
Other income
Total revenue
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of other assets
Impairment of goodwill
Other expense
Total costs and expenses
Gain on early extinguishment of debt
Gain on sale of joint venture interest
Earnings from equity method investments
Income (loss) from discontinued operations
Gain from discontinued operations
Net loss
$ 557,809
305,007
30,468
893,284
481,116
23,467
97,869
127,044
1,255,357
122,699
4,186
104,795
2,216,533
547,349
–
5,298
(11,671)
12,426
$ (769,847)
$ 947,661
308,742
97,851
1,354,254
666,706
23,059
94,726
143,902
1,029,322
295,738
39,092
37,234
2,329,779
393,131
280,219
6,535
22,415
91,458
$ (181,767)
$(389,852)
(3,735)
(67,383)
(460,970)
(185,590)
408
3,143
(16,858)
226,035
(173,039)
(34,906)
67,561
(113,246)
154,218
(280,219)
(1,237)
(34,086)
(79,032)
$(588,080)
(41)%
(1)%
(69)%
(34)%
(28)%
2%
3%
(12)%
22%
(59)%
(89)%
>100%
(5)%
39%
(100)%
(19)%
>(100)%
(86)%
>100%
22
Revenue – The signifi cant decline in interest income year
over year is primarily a result of a 40.0% decrease in the carrying
value of performing loans to $4.91 billion at the end of 2009 from
$8.18 billion at the end of 2008. In addition to having assets move
from performing to non-performing status (see “Risk Management”
for additional discussion of non-performing loans), we also had loan
repayments and sales that contributed to the decline in income gen-
erating loans. Lower interest rates also contributed to the decline
in interest income with one-month LIBOR averaging 0.33% in 2009
versus 2.68% in 2008. The impact of declining rates on loans has
been tempered by interest rate fl oors, resulting in a weighted average
interest rate of 3.86% in effect on approximately $1.87 billion of loans
at December 31, 2009.
The year over year change in other income was primarily
driven by certain one-time transactions in 2008 including $44.2 mil-
lion of income recognized from the redemption of a participation
interest in a lending investment and $12.0 million of income recog-
nized when we exchanged a cost method equity investment for a loan
receivable. Additionally, other loan related income, such as prepay-
ment penalties, declined by $27.5 million from 2009 to 2008. Slightly
offsetting this increase were $15.0 million of realized and unrealized
gains on trading securities held in our other investment portfolio.
Operating lease income from our CTL assets has remained
relatively consistent year over year.
Costs and expenses – Increases in provisions for loan losses
and other expenses were more than offset by fewer asset impair-
ments and lower interest expense and general and administrative
expenses to result in an overall decrease in costs and expenses.
As noted above and discussed further in “Risk Management”
and “Executive Overview”, increases in our provisions for loan losses
were caused by the continued deterioration in the commercial
real estate market and weakened economic conditions that have
negatively impacted our borrowers’ ability to service their debt and
refi nance their loans at maturity. This has resulted in additional
asset-specifi c reserves due to the increasing level of non-performing
loans within the portfolio along with declining values of real estate
collateral that secure such loans.
Impairment charges relating to certain of our securities and
equity investments were $182.3 million lower in 2009 as compared
to 2008. These assets include available-for-sale and held-to-maturity
investments that were determined to be other-than-temporarily
impaired based on having trading prices below our carrying values.
Also included in 2008 were $21.5 million of impairments of fi nite-lived
intangible assets, to reduce their carrying values to their revised
estimated fair values. These decreases were offset by $21.9 million
of higher CTL impairments (of which $14.1 million was reclassifi ed
to income from discontinued operations) caused by deteriorating
sub-market conditions and lower than expected rents in certain
areas. Impairments of OREO assets also increased by $22.9 million
to reduce certain assets to their revised estimated fair values less
costs to sell.
Deteriorating market conditions also led to impairment
charges related to goodwill. In 2008, we recorded a $39.1 million
impairment charge to eliminate the goodwill in our real estate lending
reporting unit. In 2009, we recorded $4.2 million further impairments
to reduce the goodwill related to our corporate tenant leasing report-
ing unit to zero.
sfi 2009
The signifi cant decline in interest expense year over year
is primarily a result of reducing our outstanding debt balances from
repurchases and repayments. In an effort to generate gains on
certain of our debt securities which have traded at discounts to par,
as discussed further below, we repurchased $1.31 billion par value
of our senior unsecured notes during 2009 and we also repaid an
additional $628.3 million at maturity. In addition, we completed
an exchange of senior unsecured notes for new second-lien senior
secured notes in May 2009, further described in “Liquidity and Capital
Resources”. This exchange resulted in a $262.7 million deferred gain
refl ected as a premium to the new notes which is being amortized as
a reduction to interest expense over the terms of the new notes. In
2009, we recognized $35.1 million in amortization of this premium as
a reduction to interest expense. Lower LIBOR rates also contributed
to our decrease in interest expense, with our average borrowing
rates decreasing to 4.15% in 2009 from 5.02% in 2008.
General and administrative expenses decreased primarily
due to lower payroll and employee related costs from reductions
in headcount.
Other expense was higher primarily due to a $42.4 million
charge incurred during 2009 pursuant to a settlement agreement
under which we terminated a long-term lease for new headquarters
space and settled all disputes with a landlord. The remaining increase
in other expense primarily relates to additional holding costs associ-
ated with the increasing number of OREO and REHI properties during
the year.
Gain on early extinguishment of debt – In 2009, we retired $1.31 bil-
lion par value of our senior unsecured notes though open market
repurchases at discounts to par and recognized $439.4 million in
gain on early extinguishment of debt. Additionally we completed our
secured note exchange transactions and purchased $12.5 million
of our outstanding senior fl oating rates notes in a cash tender offer,
which resulted in an aggregate net gain on early extinguishment
of debt of $107.9 million. During 2008, we retired $900.7 million par
value of our senior unsecured notes through open market repur-
chases at discounts to par which resulted in an aggregate net gain on
early extinguishment of debt of $393.1 million.
Gain on sale of joint venture interest – In April 2008, we closed on
the sale of our TimberStar Southwest joint venture for a gross sales
price of $1.71 billion, including the assumption of debt. We received
net proceeds of $417.0 million for our interest in the venture and
recorded a gain of $280.2 million.
Income (loss) from discontinued operations – Income (loss) from
discontinued operations in 2009 included impairment charges of
$14.1 million on CTL assets sold during the year or held-for-sale
at the end of the year. In 2008, income (loss) from discontinued
operations included higher operating results for CTL and TimberStar
assets sold or classifi ed as held-for-sale in 2008 and 2009.
Gain from discontinued operations – During 2009, we sold four
CTL assets and recognized gains of $12.4 million. During 2008,
we sold several CTL assets and our Maine timber property for gains
of $91.5 million.
Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
For the Years Ended December 31,
2008
2007
$ Change
% Change
(In thousands)
Interest income
Operating lease income
Other income
Total revenue
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of other assets
Impairment of goodwill
Other expense
Total costs and expenses
Gain on early extinguishment of debt
Gain on sale of joint venture interest
Earnings from equity method investments
Income from discontinued operations
Gain from discontinued operations
Net income (loss)
$ 947,661
308,742
97,851
1,354,254
666,706
23,059
94,726
143,902
1,029,322
295,738
39,092
37,234
2,329,779
393,131
280,219
6,535
22,415
91,458
$ (181,767)
$ 998,008
306,513
99,938
1,404,459
629,260
27,915
83,690
156,534
185,000
144,184
–
8,927
1,235,510
225
–
29,626
29,970
7,832
$ 236,602
$ (50,347)
2,229
(2,087)
(50,205)
37,446
(4,856)
11,036
(12,632)
844,322
151,554
39,092
28,307
1,094,269
392,906
280,219
(23,091)
(7,555)
83,626
$ (418,369)
23
(5)%
1%
(2)%
(4)%
6%
(17)%
13%
(8)%
>100%
>100%
100%
>100%
89%
>100%
100%
(78)%
(25)%
>100%
>(100)%
Revenue – We experienced a decline in interest income in
2008 as compared to 2007 primarily relating to increased non-
performing loans, which was partially offset by the inclusion of a
full year of interest income in 2008 from the loans acquired from
Fremont, compared to only six months of income in 2007. At the
end of 2008, the carrying value of performing loans declined 18%
to $8.18 billion from $10.00 billion at the end of 2007, primarily as a
result of assets moving to non-performing status. This was a result
of the deterioration in the commercial real estate market and weak-
ened economic conditions impacting our borrowers, who had dif-
fi culty servicing their debt and refi nancing or selling their projects
in order to repay their loans in a timely manner. Lower interest rates
also contributed to the decline in interest income with an average
one-month LIBOR of 2.68% in 2008 versus 5.25% in 2007.
While other income was relatively fl at year over year, cer-
tain one-time transactions in 2008 resulted in higher income offset
by a decrease in other loan related income, such as prepayment
penalties. In 2008 we recognized $44.2 million of income from the
redemption of a participation interest in a lending investment and
$12.0 million when we exchanged a cost method equity investment
for a loan receivable.
Operating lease income from our CTL assets has remained
relatively consistent year over year.
Costs and expenses – Total costs and expenses increased pri-
marily due to signifi cant provisions for loan losses and other asset
impairment charges.
The increase in our provision for loan losses was primar-
ily due to additional asset-specifi c reserves that were required as
a result of the signifi cant increase in non-performing loans during
2008. This signifi cant increase, particularly in our residential land
development and condominium construction portfolios, was driven
by the weakening economy and the dislocation of the credit markets,
which adversely impacted the ability of our borrowers to service
their debt and refi nance their loans at maturity.
Impairment charges relating to certain of our securities
and equity investments were $207.0 million in 2008 as compared to
$144.2 million in 2007. These assets include available-for-sale and
held-to-maturity investments that were determined to be other-
than-temporarily impaired based on having trading prices below
our carrying values. Other asset impairments in 2008, which
did not occur in the prior year, included $55.6 million on OREO
assets, $21.5 million on fi nite-lived intangible assets (including assets
acquired in the Fremont acquisition), and $11.6 million on CTL
assets. OREO and CTL asset impairments were also caused by dete-
riorating sub-market conditions and lower-than-expected rents in
surrounding areas. Deteriorating market conditions also led to the
$39.1 million impairment charge to eliminate goodwill in our real
estate lending reporting unit in 2008.
Interest expense increased primarily due to higher average
outstanding borrowings during 2008, partially offset by decreased
interest rates on our borrowings. Our average outstanding debt
balance increased to $12.83 billion in 2008 from $10.05 billion in
2007 through new bond issuances in 2007 and 2008, increased
borrowings on our unsecured and secured revolving credit facili-
ties as well as the new secured term loans. Higher borrowings were
partially offset by lower average rates, which decreased to 5.02% in
2008 as compared to 5.85% in 2007, primarily as a result of lower
LIBOR rates.
In relation to our CTL portfolio, depreciation and amortiza-
tion increased as a result of the acquisition and construction of new
CTL assets in 2007 while operating costs – corporate tenant lease
assets decreased primarily due to increased property expense
recoveries from tenants leasing our properties.
Other expense in 2008 included $12.8 million primarily
related to ineffectiveness associated with our various derivative
instruments. The remaining $9.3 million related to costs associated
with OREO properties that we took title to through foreclosure or
deed in lieu of foreclosure in 2008 and 2007.
The decrease in General and administrative expenses is pri-
marily due to lower payroll and employee related costs resulting from
a reduction in headcount from 327 as of December 31, 2007 to 267 as
of December 31, 2008.
Gain on early extinguishment of debt – During the year ended
December 31, 2008, we retired $900.7 million par value of our senior
unsecured notes through open market repurchases at discounts to
par, resulting in an aggregate net gain on early extinguishment of debt
of approximately $393.1 million.
Gain on sale of joint venture interest – In April 2008, we closed on
the sale of our TimberStar Southwest joint venture for a gross sales
price of $1.71 billion, including the assumption of debt. We received
net proceeds of approximately $417.0 million for our interest in the
venture and recorded a gain of $280.2 million.
Earnings from equity method investments – During 2008, losses
were recorded on several of our equity method investments due
to volatility in the financial markets and deteriorating economic
conditions. This was partially offset by the sale of our TimberStar
Southwest joint venture, as described above. Our share of losses
from this venture prior to the sale were $3.5 million for the year
ended December 31, 2008 compared to losses of $14.5 million during
the same period in 2007.
Income from discontinued operations – For the years ended
December 31, 2008 and 2007, operating results for CTL and
TimberStar assets sold during the period through December 31,
2009 or assets held-for-sale at the end of 2009 are classifi ed as
discontinued operations. The decrease in income from discontinued
operations is primarily due to the inclusion of more income in 2007
for CTL and TimberStar assets sold in 2007, 2008 and 2009.
Gain from discontinued operations – During the year ended
December 31, 2008, we sold a portfolio of 32 CTL assets to one buyer
and also seventeen CTL assets to different buyers for net aggregate
proceeds of $424.1 million, and recognized gains of approximately
$64.6 million. In addition, we also closed on the sale of our Maine
Timber property for net proceeds of $152.7 million resulting in a gain
of $27.0 million.
24
sfi 2009
Adjusted Earnings
We measure our performance using adjusted earnings in
addition to net income. Adjusted earnings represent net income
attributable to iStar Financial Inc. and allocable to common share-
holders, HPU holders and Participating Security holders computed
in accordance with GAAP, before depreciation, depletion, amortiza-
tion, gain from discontinued operations, ineffectiveness on inter-
est rate hedges, impairments of goodwill and intangible assets and
extraordinary items. Adjustments for joint ventures refl ect our share
of adjusted earnings calculated on the same basis.
We believe that adjusted earnings is a helpful measure to
consider, in addition to net income, because this measure helps us
to evaluate how our commercial real estate fi nance business is per-
forming compared to other commercial fi nance companies, without
the effects of certain GAAP adjustments that are not necessarily
indicative of current operating performance.
The most signifi cant GAAP adjustments that we exclude in
determining adjusted earnings are depreciation, depletion, amortiza-
tion and impairments of goodwill and intangible assets, which are
typically non-cash charges. We do not exclude non-cash impairment
charges on tangible assets or provisions for loan loss reserves. As a
commercial fi nance company that focuses on real estate lending and
corporate tenant leasing, we record signifi cant depreciation on our
real estate assets, and amortization of deferred fi nancing costs asso-
ciated with our borrowings. Depreciation, depletion and amortization
do not affect our daily operations, but they do impact fi nancial results
under GAAP. Adjusted earnings is not an alternative or substitute
for net income in accordance with GAAP as a measure of our per-
formance. Rather, we believe that adjusted earnings is an additional
measure that helps us analyze how our business is performing.
Adjusted earnings should not be viewed as an alternative measure of
either our operating liquidity or funds available for our cash needs or
for distribution to our shareholders. In addition, we may not calculate
adjusted earnings in the same manner as other companies that use a
similarly titled measure.
For the Years Ended December 31,
(In thousands)
Adjusted earnings:
Net income (loss)
Add: Depreciation, depletion and amortization
Add: Joint venture income
Add: Joint venture depreciation, depletion and amortization
Add: Amortization of deferred fi nancing costs
Add: Impairment of goodwill and intangible assets
Less: Hedge ineffectiveness, net
Less: Gain from discontinued operations
Less: Gain on sale of joint venture interest
Less: Net loss attributable to noncontrolling interests
Less: Preferred dividend requirement
Adjusted diluted earnings (loss) attributable to iStar Financial, Inc. and
allocable to common shareholders and HPU holders(1)
Weighted average diluted common shares outstanding
2009
2008
2007
$(769,847)
98,238
–
17,990
(5,487)
4,186
–
(12,426)
–
1,071
(42,320)
$(181,767)
102,745
–
14,466
50,222
60,618
7,427
(91,458)
(280,219)
991
(42,320)
$236,602
99,427
92
40,826
29,907
–
(239)
(7,832)
(1,572)
816
(42,320)
$(708,595)
100,071
$(359,295)
131,153
$355,707
127,542
25
Explanatory Notes:
(1)
HPU holders are current or former Company employees who purchased high performance common stock units under our High Performance Unit Program. Participating Security holders are
Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under our Long-Term Incentive Plan. For the years ended December 31,
2009, 2008 and 2007, adjusted diluted earnings (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders includes $(19,748),
$(7,661) and $7,666, respectively, of adjusted earnings (loss) allocable to HPU holders.
(2) For the years ended December 31, 2008 and 2007, amounts exclude $2,393 and $3,545, respectively, of dividends paid to Participating Security holders.
Risk Management
Loan Credit Statistics – The table below summarizes our non-performing loans and details the reserve for loan losses associated with
our loans:
As of December 31,
(In thousands)
Non-performing loans
Carrying value
Participated portion
Managed Loan Value(1)
As a percentage of Managed Loan Value of total loans(2)
Watch list loans
Carrying value
Participated portion
Managed Loan Value(1)
As a percentage of Managed Loan Value of total loans(2)
Reserve for loan losses
As a percentage of Managed Loan Value of total loans(2)
As a percentage of Managed Loan Value of non-performing loans
Other real estate owned
Carrying value
Real estate held for investment, net
Carrying value
2009
2008
$3,910,922
298,333
$4,209,255
$3,108,798
349,359
$3,458,157
45.3%
27.5%
$ 697,138
20,561
$ 717,699
$1,026,446
238,450
$1,264,896
7.7%
10.1%
$1,417,949
$ 976,788
15.3%
33.7%
7.8%
28.2%
$ 839,141
$ 242,505
$ 422,664
$ –
Explanatory Notes:
(1)
(2)
Managed Loan Value of a loan is computed by adding our carrying value of the loan and the participation interest sold on the Fremont CRE portfolio. The participation receives 70% of all loan
principal payments including principal that we have funded. Therefore we are in the fi rst loss position and we believe that presentation of the Managed Loan Value is more relevant than a
presentation of our carrying value when discussing our risk of loss on the loans in the Fremont CRE Portfolio.
Managed Loan Value of total loans was $9,289,975 and $12,584,723 as of December 31, 2009 and 2008, respectively.
As of December 31, 2009, non-performing loans and OREO and REHI assets had the following collateral and property types
26
($ in thousands):
Collateral/Property Type
Land
Condo:
Construction – Completed
Construction – In Progress
Conversion
Mixed Use/Mixed Collateral
Entertainment/Leisure
Retail
Multifamily
Hotel
Offi ce
Corporate – Real Estate
Industrial/R&D
Other
Gross carrying value
Non-performing
Loans
$1,218,108
OREO &
REHI
$ 402,252
848,439
210,165
74,664
348,491
267,399
243,915
238,089
234,005
107,554
61,754
52,817
5,522
$3,910,922
487,718
–
114,400
19,761
–
41,587
86,936
83,300
7,384
–
–
18,467
$1,261,805
Total
$1,620,360
1,336,157
210,165
189,064
368,252
267,399
285,502
325,025
317,305
114,938
61,754
52,817
23,989
$5,172,727
% of
Total
31.3%
25.8%
4.1%
3.7%
7.1%
5.2%
5.5%
6.3%
6.1%
2.2%
1.2%
1.0%
0.5%
100.0%
sfi 2009
Non-Performing Loans – We designate loans as non-performing
at such time as: (1) the loan becomes 90 days delinquent; (2) the loan
has a maturity default; or (3) management determines it is probable
that it will be unable to collect all amounts due according to the con-
tractual terms of the loan. All non-performing loans are placed on
non-accrual status and income is only recognized in certain cases
upon actual cash receipt. As of December 31, 2009, we had non-
performing loans with an aggregate carrying value of $3.91 billion
and an aggregate Managed Loan Value of $4.21 billion, or 45.3% of
the Managed Loan Value of total loans. Our non-performing loans
increased during 2009, particularly in our residential land develop-
ment and condominium construction portfolios, due to the weak-
ened economy and the continued disruption in the credit markets,
which adversely impacted the ability of many of our borrowers
to service their debt and refi nance our loans at maturity. Due to
the continued deterioration of the commercial real estate market, the
process of estimating collateral values and reserves will continue
to require signifi cant judgment on the part of management, which is
inherently uncertain and subject to change. Management currently
believes there is adequate collateral and reserves to support the car-
rying values of the loans.
Watch List Assets – We conduct a quarterly credit review,
resulting in an individual risk rating being assigned to each asset
in our portfolio. This review is designed to enable management to
evaluate and manage asset-specifi c credit issues and identify credit
trends on a portfolio-wide basis. As of December 31, 2009, we had
assets on the watch list, (excluding non-performing loans), with an
aggregate carrying value of $697.1 million and an aggregate Managed
Loan Value of $717.7 million, or 7.7% of total Managed Loan Value.
Reserve for Loan Losses – During the year ended December 31,
2009, the reserve for loan losses increased $441.2 million, which
was the result of $1.26 billion of provisioning for loan losses reduced
by $814.2 million of charge-offs. The reserve is increased through
the provision for loan losses, which reduces income in the period
recorded and the reserve is reduced through charge-offs.
The reserve for loan losses includes an asset-specifi c com-
ponent and a formula-based component. An asset-specifi c reserve is
established for an impaired loan when the estimated fair value of the
loan’s collateral less costs to sell is lower than the carrying value of
the loan. As of December 31, 2009, we had asset-specifi c reserves
of $1.24 billion or 29.5% of non-performing loans compared to asset-
specifi c reserves of $799.6 million or 23.1% of non-performing loans
at December 31, 2008. The increase in asset-specifi c reserves during
the year ended December 31, 2009 was primarily due to the increase
in non-performing loans as previously discussed. The increase was
also due to additional reserves required for existing non-performing
loans further impacted by the continued deterioration in the com-
mercial real estate market.
The formula-based general reserve is derived from esti-
mated probabilities of principal loss and loss given default severities
assigned to the portfolio during our quarterly internal risk rating
assessment. Probabilities of principal loss and severity factors are
based on industry and/or internal experience and may be adjusted
for significant factors that, based on our judgment, impact the
collectability of the loans as of the balance sheet date. The gen-
eral reserve was $174.9 million or 3.4% of performing loans as of
December 31, 2009 compared to $177.2 million or 1.9% of performing
loans at December 31, 2008.
Real Estate Held for Investment, net and Other Real Estate Owned –
During the year ended December 31, 2009, we received title to prop-
erties in full or partial satisfaction of non-performing mortgage loans
with a carrying value of $1.88 billion, for which the properties had
served as collateral, and recorded charge-offs totaling $573.6 mil-
lion related to these loans. Of this total, we recorded properties
with a carrying value of $399.6 million to REHI and $904.2 million
to OREO based on our strategy to either hold the properties over
a longer period or to market them for sale. During the year ended
December 31, 2009, we sold OREO assets for net proceeds of
$270.6 million and recorded impairment charges totaling $78.6 mil-
lion due to changing market conditions, which were included in
“Impairment of other assets” on our Consolidated Statements
of Operations.
Tenant Credit Characteristics – As of December 31, 2009, our
CTL assets had 95 different tenants, of which 66% were public
companies and 34% were private companies. In addition, 36% of the
tenants were rated investment grade by one or more national rating
agencies, 35% were rated non-investment grade and the remaining
tenants were not rated.
Liquidity and Capital Resources
For the upcoming year, we will require signifi cant capital
to repay $586.8 million of our 2010 debt maturities and to fund our
investment activities and operating expenses, including approxi-
mately $430.0 million of unfunded commitments primarily associated
with our construction loan portfolio. However, the timing of fund-
ing these commitments and the amounts of the individual fundings
are largely dependent on construction projects meeting certain
milestones, and therefore they are diffi cult to predict with certainty.
In addition, under the terms of our First Priority Credit Agreement,
(as discussed below), if we do not pay down the outstanding balance
of that loan by $500 million by September 30, 2010, payments of
principal and net sale proceeds received by us in respect of assets
constituting collateral for our obligations under this agreement must
be applied toward the mandatory prepayment of the loan and com-
mitment reductions under the agreement.
27
Our capital sources in today’s financing environment
include repayments from our loan assets, asset sales, fi nancings
secured by our assets, cash fl ow from operations and potential
joint ventures. From a liquidity perspective, we expect to continue
to experience signifi cant uncertainty with respect to our sources of
funds. Historically we have also issued unsecured corporate debt,
convertible debt and preferred and common equity; however, current
market conditions have effectively eliminated our access to these
sources of capital in the near term.
In March 2009, we obtained additional fi nancing and con-
summated a restructuring of our existing unsecured revolving credit
facilities by entering into new secured credit facilities (the “Secured
Credit Facilities Transaction”). In connection with this transaction, we
entered into a $1.00 billion First Priority Credit Agreement maturing
in June 2012 that is secured by a pool of collateral consisting of loan
assets, corporate tenant lease assets, securities and other assets.
We also entered into a $1.70 billion Second Priority Credit Agreement
maturing in June 2011 and a $950.0 million Second Priority Credit
Agreement maturing in June 2012 with the same lenders participat-
ing in the First Priority Credit Agreement, who have a second lien on
the same collateral pool. Refer to the Credit Facilities Restructuring
section below for further details on these transactions.
In May 2009, we completed a series of private offers
through which $1.01 billion aggregate principal amount of our senior
unsecured notes of various series were exchanged for $634.8 mil-
lion aggregate principal amount of new second-lien senior secured
notes issued by us and guaranteed by certain of our subsidiaries.
The new second lien notes have a second lien on the same collateral
pool as the First and Second Priority Credit Agreements described
above. Concurrent with the exchange offer, we repurchased for cash
$12.5 million par value of our outstanding senior fl oating rate notes
due September 2009 pursuant to a cash tender offer.
During 2009, we received gross principal repayments from
borrowers of $1.85 billion and $1.06 billion in proceeds from strategic
asset sales. We funded $1.22 billion of loan commitments during the
year and repaid outstanding debt of $1.32 billion partially offset by
new borrowings of $1.00 billion. We also repurchased $1.31 billion
par value of senior unsecured notes resulting in the recognition of
$439.4 million in net gains on the early extinguishment of debt during
the year. To date, we have been able to partially mitigate the impact
of increased expenses associated with our loan loss reserves on
some of our fi nancial covenants through the recognition of gains
associated with the discounted extinguishment of debt. We may
from time to time seek to retire or repurchase additional outstanding
debt through cash purchases and/or exchanges, which may take the
form of open market purchases, privately negotiated transactions or
otherwise, however, there can be no assurance that the Company’s
efforts in this regard can be successful.
As of December 31, 2009, we had $224.6 million of unre-
stricted cash. We will need additional liquidity over the coming year
to supplement loan repayments and cash generated from opera-
tions in order to meet our debt maturities and funding obligations.
We actively manage our liquidity and continually work on initiatives
to address both our debt covenants compliance and our liquidity
needs. We expect proceeds from asset sales to supplement loan
repayments and intend to continue to analyze additional asset sales,
secured fi nancing alternatives and other strategic transactions in
order to maintain adequate liquidity. During the fi rst quarter of 2010,
we began exploring a sale or other transaction involving a portfolio of
34 corporate tenant leased assets totaling approximately 12 million
square feet and representing approximately 40% of the Company’s
total corporate tenant leased net operating income. The portfolio is
encumbered by secured, non-recourse term debt that matures in
April 2011. Any decision by us to sell or otherwise dispose of some
or all of the portfolio will be based primarily on the pricing terms
offered by interested parties. There can be no assurance that any
trans action involving all or part of the portfolio will be consummated.
Under the terms of our credit agreements, we can issue a total of
up to $1.00 billion of second priority secured notes in exchange or
refi nancing transactions involving our unsecured notes. After giv-
ing effect to the private exchange offers in May 2009, described
above, we can issue up to $365.2 million of new notes in exchange
or refi nancing transactions. Our liquidity plan is dynamic and we
expect to monitor the markets and adjust our plan as market condi-
tions change. There is a risk that we will not be able to meet all of our
funding and debt service obligations or maintain compliance with
our debt covenants. Management’s failure to successfully imple-
ment our liquidity plan could have a material adverse effect on our
fi nancial position and covenant compliance, results of operations and
cash fl ows.
Compliance with our debt covenants will also impact our
ability to obtain additional debt and equity fi nancing. In addition, any
decision by our lenders and investors to provide us with additional
fi nancing may depend upon a number of other factors, such as our
compliance with the terms of existing credit arrangements, our fi nan-
cial performance, our credit ratings, industry or market trends, the
general availability of and rates applicable to fi nancing trans actions,
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.
28
sfi 2009
The following table outlines the contractual obligations related to our long-term debt agreements and operating lease obligations as of
December 31, 2009. We have no other long-term liabilities that would constitute a contractual obligation.
Principal and Interest Payments Due by Period
Total
Less Than
1 Year
2–3
Years(1)
4–5
Years
6–10
Years
After 10
Years
(In thousands)
Long-Term Debt Obligations:
Unsecured notes
Secured notes
Convertible notes
Unsecured revolving credit facilities
Secured term loans(2)
Secured revolving credit facility
Trust preferred
Total principal maturities
Interest Payable(3)
Operating Lease Obligations
Total(4)
Explanatory Notes:
$ 3,478,885
634,801
787,750
748,601
3,999,342
959,426
100,000
10,708,805
1,414,140
47,279
$12,170,224
$ 553,294
–
–
–
33,478
–
–
586,772
442,681
6,095
$1,035,548
$1,208,311
155,253
787,750
748,601
3,703,921
959,426
–
7,563,262
567,621
11,097
$8,141,980
$1,250,390
479,548
–
–
55,941
–
–
1,785,879
237,571
8,744
$2,032,194
$466,890
–
–
–
21,520
–
–
488,410
126,207
17,987
$632,604
$ –
–
–
–
184,482
–
100,000
284,482
40,060
3,356
$327,898
(1) Future long-term debt obligations due during the years ended December 31, 2011 and 2012 are $4.02 billion and $3.54 billion, respectively.
(2)
As further discussed in Debt Covenants below, if we do not pay down the outstanding balance of our $1.00 billion First Priority Credit Agreement by $500 million by September 30, 2010,
payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligation under this agreement must be applied towards the mandatory
prepayment of the loan and commitment reductions under the agreement. This amount has been included in years 2–3 based on its contractual maturity.
(3) All variable-rate debt assumes a 30-day LIBOR rate of 0.23% (the 30-day LIBOR rate at December 31, 2009).
(4) See “Off-Balance Sheet Transactions” below, for a discussion of certain unfunded commitments related to our lending and CTL business.
Credit Facilities Restructuring – In March 2009, we entered
into a $1.00 billion First Priority Credit Agreement with participat-
ing members of our existing bank lending group. The First Priority
Credit Agreement will mature in June 2012. Borrowings bear interest
at the rate of LIBOR + 2.50% per year, subject to adjustment based
upon our corporate credit ratings (see Ratings Triggers below) and
are collateralized by a fi rst-priority lien on a pool of collateral con-
sisting of loans, debt securities, corporate tenant lease assets and
other assets pledged under the First and Second Priority Credit
Agreements and the Second Priority Secured Exchange Notes (see
below). As of December 31, 2009, the First Priority Credit Agreement
was fully drawn with $1.00 billion of secured term loans outstanding.
We also restructured our two unsecured revolving credit
facilities by entering into two Second Priority Credit Agreements,
with $1.70 billion maturing in 2011 and $950.0 million maturing
in 2012, with the same lenders participating in the First Priority
Credit Agreement. Such lenders’ commitments under the Company’s
unsecured facilities have been terminated and replaced by their com-
mitments under the Second Priority Credit Agreements. Under these
agreements, the participating lenders have a second priority lien on
the same collateral pool securing the First Priority Credit Agreement
and the Second Priority Secured Exchange Notes (see Unsecured/
Secured Notes Exchange below). As of December 31, 2009, out-
standing borrowings under the Second Priority Credit Agreements
include $625.2 million and $334.2 million of revolving loans due in
June 2011 and June 2012, respectively, as well as $1.06 billion and
$621.2 million of term loans due in June 2011 and June 2012, respec-
tively. Borrowings bear interest at the rate of LIBOR + 1.50% per year,
subject to adjustment based upon our corporate credit ratings (see
Ratings Triggers below). As of December 31, 2009 there was approxi-
mately $2.1 million that was immediately available to draw under the
Second Priority Credit Agreement.
At December 31, 2009, the total carrying value of assets
pledged as collateral under the First and Second Priority Credit
Agreements and the Second Priority Secured Exchange Notes was
$5.73 billion.
29
Concurrently, we entered into amendments to our $2.22 bil-
lion and $1.20 billion unsecured revolving credit facilities. As of
December 31, 2009, after giving effect to the amendments, outstand-
ing balances on the unsecured credit facilities were $504.3 million,
which will expire in June 2011, and $244.3 million, which will expire
in June 2012. The amendments eliminated certain covenants and
events of default. The unsecured revolving credit facilities may not
be repaid prior to maturity while the First and Second Priority Credit
Agreements remain outstanding. These facilities remain unsecured
and no changes were made to the pricing terms of these facilities in
connection with these amendments.
Unsecured/Secured Notes Exchange – In May 2009, we com-
pleted a series of private offers in which we issued $155.3 million
aggregate principal amount of our 8.0% second priority senior
secured guaranteed notes due 2011 (“2011 Notes”) and $479.5 mil-
lion aggregate principal amounts of our 10.0% second priority senior
secured guaranteed notes due 2014 (“2014 Notes” and together with
the 2011 Notes, the “Second Priority Secured Exchange Notes”) in
exchange for $1.01 billion aggregate principal amount of our senior
unsecured notes of various series. The Second Priority Secured
Exchange Notes are collateralized by a second priority lien on the
same pool of collateral pledged under the First and Second Priority
Credit Agreements. In conjunction with the exchange, we also pur-
chased $12.5 million par value of our outstanding senior fl oating rate
notes due September 2009 in a cash tender offer. As a result of the
secured note exchange, we recorded a gain on early extinguishment
of debt of $107.9 million at the time of the transaction as well as a
deferred gain of $262.7 million, refl ected as a premium on the new
secured notes which will be amortized to interest expense over the
terms of the secured notes.
Note Repurchases – During the year ended December 31,
2009, we repurchased, through open market and private trans-
actions, $1.31 billion par value of our senior unsecured notes with
various maturities ranging from January 2009 to March 2017. In con-
nection with these repurchases, we recorded an aggregate net gain
on early extinguishment of debt of $439.4 million for the year ended
December 31, 2009.
Debt Covenants – Our ability to borrow under our secured
credit facilities depends on maintaining compliance with various
covenants, including a minimum tangible net worth covenant and
specifi ed fi nancial ratios, such as fi xed charge coverage, unencum-
bered assets to unsecured indebtedness, eligible collateral coverage
and leverage. Our recent fi nancial results have put pressure on our
ability to maintain compliance with certain of the debt covenants in
our secured bank credit facilities. In particular, our tangible net worth
at December 31, 2009 was approximately $1.7 billion, which is not
signifi cantly above the fi nancial covenant minimum requirement in
our secured credit facilities of $1.5 billion. We intend to operate our
business in order to remain in compliance with the covenants in
our debt instruments; however, there can be no assurance that
we will be able to do so. Further loan loss reserves and impair-
ment charges will adversely impact our tangible net worth. All of
these covenants on our facilities are maintenance covenants and,
if breached could result in an acceleration of our facilities if a waiver
or modifi cation is not agreed upon with the requisite percentage
of the unsecured lending group and lenders on our other facilities.
Our secured credit facilities also impose limitations on repayments,
repurchases, refi nancings and optional redemptions of our existing
unsecured notes or secured exchange notes issued pursuant to our
exchange offer, as well as limitations on repurchases of our Common
Stock. For so long as we maintain our qualifi cation as a REIT, the
secured credit facilities permit us to distribute 100% of our REIT
taxable income on an annual basis. We may not pay common divi-
dends if we cease to qualify as a REIT.
Our publicly held debt securities also contain covenants
that include fi xed charge coverage and unencumbered assets to
unsecured indebtedness ratios and our secured debt securities
have an eligible collateral coverage requirement. The fi xed charge
coverage ratio in our publicly held securities is an incurrence test.
If we do not meet the fi xed charge coverage ratio, our ability to incur
additional indebtedness will be restricted. The unencumbered assets
to unsecured indebtedness covenant and the eligible collateral cov-
erage covenant are maintenance covenants and, if breached and not
cured within applicable cure periods, could result in acceleration
of our publicly held debt unless a waiver or modifi cation is agreed
upon with the requisite percentage of the bondholders. Based on
our unsecured credit ratings at December 31, 2009, the fi nancial cov-
enants in our publicly held debt securities, including the fi xed charge
coverage ratio and maintenance of unencumbered assets to unse-
cured indebtedness ratio, are operative.
Our secured credit facilities and our public debt securities
contain cross default provisions that would allow the lenders and the
bondholders to declare an event of default and accelerate our indebt-
edness to them if we fail to pay amounts due in respect of our other
recourse indebtedness in excess of specifi ed thresholds. In addition,
our secured credit facilities, unsecured credit facilities and the inden-
tures governing our public debt securities provide that the lenders
and bondholders may declare an event of default and accelerate
our indebtedness to them if there is a non-payment default under our
other recourse indebtedness in excess of specifi ed thresholds and,
if the holders of the other indebtedness are permitted to accelerate,
in the case of the secured credit facilities, or accelerate, in the case
of our unsecured credit facilities and the bond indentures, the other
recourse indebtedness.
The First and Second Priority Credit Agreements and the
indentures governing the Second Priority Secured Exchange Notes
contain a number of covenants, including that we maintain collat-
eral coverage of at least 1.3x the aggregate borrowings and letters
of credit outstanding under the First Priority Credit Agreement,
the Second Priority Credit Agreements and the Second Priority
Secured Exchange Notes. Under certain circumstances, the First
and Second Priority Credit Agreements require that payments of
principal and net sale proceeds received by us in respect of assets
constituting collateral for our obligations under these agreements
be applied toward the mandatory prepayment of loans and commit-
ment reductions under them. We would be required to make such
prepayments (i) during any time that the ratio of our EBITDA to fi xed
charges, as defi ned under the agreements, is less than 1.25 to 1.00,
(ii) if, after receiving a payment of principal or net sale proceeds in
respect of collateral, the Company has insuffi cient eligible assets
available to pledge as replacement collateral or (iii) if, and for so
long as, the aggregate principal amount of loans outstanding under
the First Priority Credit Agreement exceeds $500 million at any
time on or after September 30, 2010, or zero at any time on or after
March 31, 2011.
We believe we are in full compliance with all the covenants
in our debt instruments as of December 31, 2009.
30
sfi 2009
Ratings Triggers – Our First and Second Priority Secured
Credit Agreements and unsecured credit agreements bear inter-
est at LIBOR-based rates plus an applicable margin which varies
between the Credit Agreements and is determined based on our
corporate credit ratings. Our ability to borrow under our credit facili-
ties is not dependent on the level of our credit ratings. Based on our
current credit ratings, further downgrades in our credit ratings will
have no effect on our borrowing rates under these facilities.
Off-Balance Sheet Transactions – We are not dependent on the
use of any off-balance sheet fi nancing arrangements for liquidity.
Unfunded commitments – We generally fund construction and
development loans and build outs of CTL space over a period of time
if and when the borrowers and tenants meet established milestones
and other performance criteria. We refer to these arrangements
as Performance-Based Commitments. In addition, we sometimes
establish a maximum amount of additional funding which we will
make available to a borrower or tenant for an expansion or addi-
tion to a project if we approve of the expansion or addition in our
sole discretion. We refer to these arrangements as Discretionary
Fundings. Finally, we have committed to invest capital in several
real estate funds and other ventures. These arrangements are
referred to as Strategic Investments. As of December 31, 2009,
the maximum amounts of the fundings we may make under each
category, assuming all performance hurdles and milestones are
met under Performance-Based Commitments, that we approve all
Discretionary Fundings and that 100% of our capital committed to
Strategic Investments is drawn down are as follows (in thousands):
Performance-Based
Commitments
Discretionary Fundings
Strategic Investments
Total
`
Loans
CTL
Total
$616,400
137,685
N/A
$754,085
$13,074
–
N/A
$13,074
$629,474
137,685
73,139
$840,298
Transactions with Related Parties – We have substantial invest-
ments in non-controlling interests of Oak Hill Advisors, L.P., Oak
Hill Credit Alpha MGP, OHSF GP Partners II, LLC, Oak Hill Credit
Opportunities MGP, LLC, OHSF GP Partners (Investors), LLC, OHA
Finance MGP, LLC, OHA Capital Solutions MGP, LLC, OHA Strategic
Credit GenPar, LLC, OHA Leveraged Loan Portfolio GenPar, LLC,
OHA Structured Products MGP, LLC, Oakhill Credit Opp Fund, LP
and Oak Hill Credit Partners II, Limited (see Note 7 to the Company’s
Notes to Consolidated Financial Statements). In relation to our
investment in these entities, we appointed to our Board of Directors
a member that holds a substantial investment in these same nine
entities. As of December 31, 2009, the carrying value in these ven-
tures was $181.1 million. We recorded equity in earnings from these
investments of $22.7 million for the year ended December 31, 2009.
We have also invested directly in six funds managed by Oak Hill
Advisors, L.P., which have a cumulative carrying value of $0.6 mil-
lion as of December 31, 2009 and for which we recorded income of
$0.2 million for the year ended December 31, 2009. In addition, we
have paid $0.1 million to certain of these entities representing man-
agement fees as well as advisory service related fees in conjunction
with our debt repurchase transactions.
Stock Repurchase Program – On March 13, 2009, our Board of
Directors authorized the repurchase of up to $50 million of Common
Stock from time to time in open market and privately negotiated pur-
chases, including pursuant to one or more trading plans. During the
year ended December 31, 2009, we repurchased 11.8 million shares
of our outstanding Common Stock for approximately $29.9 million,
at an average cost of $2.54 per share, and the repurchases were
recorded at cost. As of December 31, 2009, we had $21.5 million of
Common Stock available to repurchase under the authorized stock
repurchase programs.
Critical Accounting Estimates
The preparation of fi nancial statements in accordance with
GAAP requires management to make estimates and judgments in
certain circumstances that affect amounts reported as assets, liabili-
ties, revenues and expenses. We have established detailed policies
and control procedures intended to ensure that valuation methods,
including any judgments made as part of such methods, are well con-
trolled, reviewed and applied consistently from period to period. We
base our estimates on historical corporate and industry experience
and various other assumptions that we believe to be appropriate
under the circumstances. For all of these estimates, we caution that
future events rarely develop exactly as forecasted, and, therefore,
routinely require adjustment.
During 2009, management reviewed and evaluated these
critical accounting estimates and believes they are appropriate.
Our signifi cant accounting policies are described in Note 3 to our
Consolidated Financial Statements. The following is a summary of
accounting policies that require more signifi cant management esti-
mates and judgments:
Reserve for loan losses – The reserve for loan losses is a valu-
ation allowance that refl ects management’s estimate of loan losses
inherent in the loan portfolio as of the balance sheet date. The
reserve is increased through the “Provision for loan losses” on our
Consolidated Statements of Operations and is decreased by charge-
offs when losses are confi rmed through the receipt of assets such
as cash in a pre-foreclosure sale or via ownership control of the
underlying collateral in full satisfaction of the loan upon foreclosure
or when signifi cant collection efforts have ceased. The reserve for
loan losses includes a general, formula-based component and an
asset-specifi c component.
The general, formula-based reserve component covers
performing loans and provisions for loan losses are recorded when
(i) available information as of each balance sheet date indicates that
it is probable a loss has occurred in the portfolio and (ii) the amount
of the loss can be reasonably estimated. Required reserve bal-
ances for the performing loan portfolio are derived from estimated
31
probabilities of principal loss and loss given default severities.
Estimated probabilities of principal loss and loss severities are
assigned to each loan in the portfolio during our quarterly internal
risk rating assessment. Probabilities of principal loss and severity
factors are based on industry and/or internal experience and may be
adjusted for signifi cant factors that, based on our judgment, impact
the collectability of the loans as of the balance sheet date.
The asset-specifi c reserve component relates to reserves
for losses on impaired loans. We consider a loan to be impaired
when, based upon current information and events, we believe that
it is probable that we will be unable to collect all amounts due under
the contractual terms of the loan agreement. A reserve is estab-
lished when the present value of payments expected to be received,
observable market prices, or the estimated fair value of the collateral
(for loans that are dependent on the collateral for repayment) of an
impaired loan is lower than the carrying value of that loan. A loan is
also considered impaired if its terms are modifi ed in a troubled debt
restructuring (“TDR”). A TDR occurs when the Company grants a
concession to a borrower in fi nancial diffi culty by modifying the origi-
nal terms of the loan. Each of our non-performing loans (“NPL’s”) and
TDR loans are considered impaired and are evaluated individually to
determine required asset-specifi c reserves.
The provision for loan losses for the years ended
December 31, 2009, 2008 and 2007 were $1.26 billion, $1.03 bil-
lion and $185.0 million, respectively. The increase in the provi-
sion for loan losses was primarily due to increased asset-specifi c
reserves required as a result of the increase in impaired loans.
The total reserve for loan losses at December 31, 2009 and 2008,
included asset-specifi c reserves of $1.24 billion and $799.6 million,
respectively, and general reserves of $174.9 million and $177.2 mil-
lion, respectively.
Impairment of available-for-sale and held-to-maturity debt securities –
For held-to-maturity and available-for-sale debt securities held
in “Loans and other lending investments,” management evaluates
whether the asset is other-than-temporarily impaired when the fair
market value is below carrying value. We consider debt securities
other-than-temporarily impaired if (1) we have the intent to sell the
security, (2) it is more likely than not that we will be required to sell
the security before recovery, or (3) we do not expect to recover the
entire amortized cost basis of the security. If it is determined that
an other-than-temporary impairment exists, the portion related
to credit losses, where we do not expect to recover our entire
amortized cost basis, will be recognized as an “Impairment of other
assets” on the our Consolidated Statements of Operations. If we do
not intend to sell the security and it is more likely than not that we
will be required to sell the security, but the security has suffered a
credit loss, the impairment charge will be separated. The credit loss
component of the impairment will be recorded as an “Impairment of
other assets” on our Consolidated Statements of Operations, and the
remainder will be recorded in “Accumulated other comprehensive
income” on our Consolidated Balance Sheets.
During the years ended December 31, 2009, 2008 and
2007, we determined that unrealized credit related losses on cer-
tain held-to-maturity and available-for-sale debt securities were
other-than-temporary and recorded impairment charges total-
ing $11.7 million, $120.0 million and $134.9 million, respectively,
in “Impairment of other assets” on the Consolidated Statements
of Operations. There are no other-than-temporary impairments
recorded in “Accumulated other comprehensive income” on our
Consolidated Balance Sheet as of December 31, 2009.
Other real estate owned – OREO consists of properties acquired
through foreclosure or by deed-in-lieu of foreclosure in full or partial
satisfaction of non-performing loans that we intend to market for
sale in the near term. OREO is recorded at the estimated fair value
less costs to sell. The excess of the carrying value of the loan over
the fair value of the property less estimated costs to sell is charged-
off against the reserve for loan losses when title to the property
is obtained. Signifi cant property improvements may be capitalized
to the extent that the carrying value of the property does not exceed
the estimated fair value less costs to sell. The gain or loss on fi nal
disposition of an OREO is recorded in “Impairment of other assets”
on our Consolidated Statements of Operations, and is considered
income (loss) from continuing operations as it represents the fi nal
stage of our loan collection process.
We review the recoverability of an OREO asset’s carrying
value when events or circumstances indicate a potential impair-
ment of a property’s value. If impairment exists a loss is recorded to
the extent that the carrying value exceeds the estimated fair value
of the property less cost to sell. These impairments are recorded
in “Impairment of other assets” on the Consolidated Statements
of Operations.
During the years ended December 31, 2009, 2008 and 2007,
we received titles to properties in satisfaction of senior mortgage
loans with cumulative carrying values of $1.88 billion, $419.1 mil-
lion and $152.4 million, respectively, for which those properties had
served as collateral, and recorded charge-offs totaling $573.6 million,
$102.4 million and $23.2 million, respectively, related to these loans.
Subsequent to taking title to the properties, we determined certain
OREO assets were impaired due to changing market conditions, and
recorded impairment charges of $78.6 million and $55.6 million dur-
ing the year ended December 31, 2009 and 2008.
Real estate held for investment, net – REHI consists of properties
acquired through foreclosure or through deed-in-lieu of foreclosure
in full or partial satisfaction of non-performing loans that manage-
ment intends to hold, operate or develop for a period of at least
twelve months. REHI assets are initially recorded at their estimated
fair value. The excess of the carrying value of the loan over the fair
value of the property is charged-off against the reserve for loan
losses when title to the property is obtained. Upon acquisition, tangi-
ble and intangible assets and liabilities acquired are recorded at their
estimated fair values. We consider REHI assets to be long-lived and
periodically review them for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Impairment of REHI assets is mea-
sured in the same manner as long-lived assets as described below.
Long-lived assets impairment test – CTL assets to be disposed
of are reported at the lower of their carrying amount or estimated
fair value less costs to sell and are included in “Assets held-for-sale”
32
sfi 2009
on our Consolidated Balance Sheets. The difference between the
estimated fair value less costs to sell and the carrying value will
be recorded as an impairment charge and included in “Income
from discontinued operations” on the Consolidated Statements of
Operations. Once the asset is classifi ed as held-for-sale, deprecia-
tion expense is no longer recorded and historical operating results
are reclassifi ed to “Income from discontinued operations” on the
Consolidated Statements of Operations.
We periodically review long-lived assets to be held and
used for impairment in value whenever events or changes in circum-
stances indicate that the carrying amount of such assets may not be
recoverable. A held for use long-lived asset’s value is impaired only
if management’s estimate of the aggregate future cash fl ows (undis-
counted and without interest charges) to be generated by the asset
(taking into account the anticipated holding period of the asset) is
less than the carrying value. Such estimate of cash fl ows considers
factors such as expected future operating income, trends and pros-
pects, as well as the effects of demand, competition and other eco-
nomic factors. To the extent impairment has occurred, the loss will
be measured as the excess of the carrying amount of the property
over the fair value of the asset and refl ected as an adjustment to the
basis of the asset. Impairments of CTL and REHI assets are recorded
in “Impairment of other assets,” on our Consolidated Statements
of Operations.
During the years ended December 31, 2009 and 2008,
we recorded impairment charges of $19.4 million and $11.6 million,
respectively, due to changes in market conditions.
Due to an overall deterioration in conditions within the
commercial real estate market, we recorded impairment charges of
$4.2 million during 2009 and $39.1 million during 2008 to write-off the
goodwill allocated to the CTL and Real Estate Lending reporting seg-
ments, respectively. These charges were recorded in “Impairment of
goodwill” on our Consolidated Statements of Operations.
During the year ended December 31, 2008, we also
recorded non-cash charges of $21.5 million to reduce the carrying
value of certain intangible assets related to the Fremont CRE acqui-
sition and other acquisitions, based on their revised estimated fair
values. These charges were recorded in “Impairment of other assets”
on our Consolidated Statements of Operations.
Consolidation – Variable Interest Entities – We invest in many entities
in which we either own a minority interest or may have a majority
interest, but do not have voting control of the entity. We must evaluate
these types of interests to determine if the entity is a variable interest
entity (“VIE”), and if we are the primary benefi ciary. There is a sig-
nifi cant amount of judgment required to determine if an entity is con-
sidered a VIE and if we are the primary benefi ciary, we fi rst perform
a qualitative analysis, which requires certain subjective decisions
regarding our assessment, including, but not limited to, the nature
and structure of the entity, the variability of the economic interests
that the entity passes along to its interest holders, the rights of the
parties and the purpose of the arrangement. An iterative quantitative
analysis is required if our qualitative analysis proves inconclusive as
to whether the entity is a VIE or we are the primary benefi ciary and
consolidation is required.
Identified intangible assets and goodwill – We record intangible
assets acquired at their estimated fair values separate and apart
from goodwill. We determine whether such intangible assets have
fi nite or indefi nite lives. As of December 31, 2009, all such acquired
intangible assets have fi nite lives. We amortize fi nite-lived intangible
assets based on the period over which the assets are expected to
contribute directly or indirectly to the future cash fl ows of the busi-
ness acquired. We review fi nite-lived intangible assets for impairment
whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. If we determine the car-
rying value of an intangible asset is not recoverable we will record
an impairment charge to the extent its carrying value exceeds
its estimated fair value. Impairments of intangibles are recorded
in “Impairment of other assets” on our Consolidated Statements
of Operations.
Fair value of assets and liabilities – The degree of management
judgment involved in determining the fair value of assets and liabili-
ties is dependent upon the availability of quoted market prices or
observable market parameters. For financial and non-financial
assets and liabilities that trade actively and have quoted market
prices or observable market parameters, there is minimal subjectiv-
ity involved in measuring fair value. When observable market prices
and parameters are not fully available, management judgment is nec-
essary to estimate fair value. In addition, changes in market condi-
tions may reduce the availability of quoted prices or observable data.
For example, reduced liquidity in the capital markets or changes in
secondary market activities could result in observable market inputs
becoming unavailable. Therefore, when market data is not available,
we would use valuation techniques requiring more management
judgment to estimate the appropriate fair value measurement.
The excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired (including identifi ed intan-
gible assets) and liabilities assumed is recorded as goodwill. Goodwill
is not amortized but is tested for impairment on an annual basis, or
more frequently if events or changes in circumstances indicate that
the asset might be impaired. The impairment test is done at a level of
reporting referred to as a reporting unit. If the fair value of the report-
ing unit is less than its carrying value, an impairment loss is recorded
to the extent that the fair value of the goodwill within the reporting
unit is less than its carrying value.
See Note 16 of the Notes to Consolidated Financial
Statements for a complete discussion on our use of fair valuation
of fi nancial and non-fi nancial assets and fi nancial liabilities and the
related measurement techniques.
New Accounting Standards
For a discussion of the impact of new accounting pro-
nouncements on our fi nancial condition or results of operations, see
Note 3 to the Notes to the Consolidated Financial Statements.
33
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risks
Market Risks
Market risk is the exposure to loss resulting from changes
in interest rates, foreign currency exchange rates, commodity prices
and equity prices. In pursuing our business plan, the primary market
risk to which we are exposed is interest rate risk. Consistent with our
liability management objectives, we have implemented an interest
rate risk management policy based on match funding, with the objec-
tive that variable-rate assets be primarily fi nanced by variable-rate
liabilities and fi xed-rate assets be primarily fi nanced by fi xed-rate lia-
bilities. We also seek to match fund our foreign denominated assets
with foreign denominated debt so that changes in foreign currency
exchange rates will have a minimal impact on earnings.
Our operating results will depend in part on the difference
between the interest and related income earned on our assets
and the interest expense incurred in connection with our interest-
bearing liabilities. Competition from other providers of real estate
fi nancing may lead to a decrease in the interest rate earned on our
interest-bearing assets, which we may not be able to offset by obtain-
ing lower interest costs on our borrowings. Changes in the general
level of interest rates prevailing in the fi nancial markets may affect
the spread between our interest-earning assets and interest-bearing
liabilities. Any signifi cant compression of the spreads between inter-
est-earning assets and interest-bearing liabilities could have a mate-
rial adverse effect on us. In addition, an increase in interest rates
could, among other things, reduce the value of our interest-bearing
assets and our ability to realize gains from the sale of such assets,
and a decrease in interest rates could reduce the average life of our
interest-earning assets if borrowers refi nance our loans.
Approximately 10.3% of our loan investments are subject to
prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial
yield protection to us. Those assets generally not subject to pre-
payment 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 discounts to face values, which would result in gains upon
repayment. Further, while we generally seek to enter into loan invest-
ments which provide for substantial prepayment protection, in the
event of declining interest rates, we 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.
In the event of a signifi cant rising interest rate environment
or further economic downturn, defaults could increase and cause
additional credit losses to us which adversely affect our 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, includ-
ing governmental monetary and tax policies, domestic and interna-
tional economic and political conditions, and other factors beyond
our control. As fully discussed in Note 12 of the Company’s Notes
to Consolidated Financial Statements, we seek to employ match
funding-based fi nancing and hedging strategies to limit the effects
of changes in interest rates on our operations, including engaging in
interest rate caps, swaps and other interest rate-related derivative
contracts. These strategies are specifi cally designed to reduce our
exposure, on specifi c transactions or on a portfolio basis, to changes
in cash fl ows as a result of interest rate movements in the market.
We do not enter into derivative contracts for speculative purposes
or as a hedge against changes in our credit risk or the credit risk of
our borrowers.
While a REIT may utilize derivative instruments to hedge
interest rate risk on its liabilities incurred to acquire or carry real
estate assets without generating non-qualifying income, use of
derivatives for other purposes will generate non-qualifi ed income for
REIT income test purposes. This includes hedging asset-related risks
such as credit, foreign exchange and prepayment or interest rate
exposure on our loan assets. As a result our ability to hedge these
types of risks is limited.
There can be no assurance that our profi tability 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 hedging contracts and the risk that unanticipated
and signifi cant changes in interest rates will cause a signifi cant loss
of basis in the contract. With regard to loss of basis in a hedging con-
tract, 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 counterpar-
ties to these contractual arrangements are major fi nancial institu-
tions with which we and our affi liates may also have other fi nancial
relationships. We are potentially exposed to credit loss in the event
of non-performance by these counterparties. However, because of
34
sfi 2009
their high credit ratings, we do not anticipate that any of the coun-
terparties will fail to meet their obligations. There can be no assur-
ance that we will be able to adequately protect against the foregoing
risks and that we will ultimately realize an economic benefi t from
any hedging contract we enter into which exceeds the related costs
incurred in connection with engaging in such hedges.
The following table quantifies the potential changes in
net investment income should interest rates increase by 100 or
200 basis points and decrease by 10 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 operating leases and earnings from equity
method investments, less interest expense, operating costs on CTL
assets and gain on early extinguishment of debt, for the year ended
December 31, 2009. The base interest rate scenario assumes the
one-month LIBOR rate of 0.23% as of December 31, 2009. Actual
results could differ signifi cantly from those estimated in the table.
Estimated Percentage Change In
Change in Interest Rates
–10 Basis Points(1)
Base Interest Rate
+100 Basis Points
+200 Basis Points
Explanatory Note:
Net Investment Income(1)
0.49%
–%
(4.86)%
(9.67)%
(1)
We have a net fl oating rate debt exposure resulting in an increase in net investment
income when rates decrease and vice versa. In addition, interest rate fl oors on certain of
our loan assets further increase net investment income as rates decrease and vice versa.
As of December 31, 2009, $1.87 billion of our fl oating rate loans have a weighted average
interest rate fl oor of 3.86%.
35
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management is responsible for establishing and maintain-
ing adequate internal control over fi nancial reporting, as defi ned
in Exchange Act Rule 13a-15(f). Under the supervision and with
the participation of the disclosure committee and other mem-
bers of management, including the Chief Executive Officer and
Chief Financial Offi cer, management carried out its evaluation of
the effectiveness of the Company’s internal control over fi nancial
reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Based on management’s assessment under the framework
in Internal Control – Integrated Framework, management has con-
cluded that its internal control over fi nancial reporting was effective
as of December 31, 2009.
The Company’s internal control over fi nancial reporting as of
December 31, 2009, has been audited by PricewaterhouseCoopers LLP,
an independent registered public accounting fi rm, as stated in their
report which appears on page 37.
36
sfi 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
To the Board of Directors and Shareholders
of iStar Financial Inc.:
of iStar Financial Inc.:
In our opinion, the accompanying consolidated balance
In our opinion, the consolidated fi nancial statements listed
in the accompanying index present fairly, in all material respects,
sheets and the related consolidated statements of operations, of
changes in equity and of cash fl ows present fairly, in all material
the financial position of iStar Financial Inc. and its subsidiaries
(collectively, the “Company”) at December 31, 2009 and 2008, and
respects, the fi nancial position of iStar Financial Inc. and its subsid-
the results of their operations and their cash fl ows for each of the
iaries (collectively, the “Company”) at December 31, 2009 and 2008,
three years in the period ended December 31, 2009 in conformity
and the results of their operations and their cash fl ows for each of
with accounting principles generally accepted in the United States of
the three years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the fi nancial statement sched-
ules listed in the accompanying index present fairly, in all material
America. Also in our opinion, the Company maintained, in all mate-
respects, the information set forth therein when read in conjunc-
rial respects, effective internal control over fi nancial reporting as of
tion with the related consolidated fi nancial statements. Also in our
December 31, 2009, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring
opinion, the Company maintained, in all material respects, effec-
Organizations of the Treadway Commission (COSO). The Company’s
tive internal control over fi nancial reporting as of December 31,
2009, based on criteria established in Internal Control – Integrated
management is responsible for these fi nancial statements, for main-
Framework issued by the Committee of Sponsoring Organizations
taining effective internal control over fi nancial reporting and for its
of the Treadway Commission (COSO). The Company’s management
assessment of the effectiveness of internal control over fi nancial
reporting, included in the accompanying Management’s Report on
is responsible for these fi nancial statements and fi nancial statement
schedules, for maintaining effective internal control over fi nancial
Internal Control over Financial Reporting. Our responsibility is to
reporting and for its assessment of the effectiveness of internal
express opinions on the fi nancial statements, and on the Company’s
control over financial reporting, included in the accompanying
internal control over fi nancial reporting based on our integrated
audits. We conducted our audits in accordance with the standards
Management’s Report on Internal Control over Financial Reporting.
of the Public Company Accounting Oversight Board (United States).
Our responsibility is to express opinions on these fi nancial state-
ments, on the fi nancial statement schedules, and on the Company’s
Those standards require that we plan and perform the audits to
internal control over fi nancial reporting based on our integrated
obtain reasonable assurance about whether the fi nancial state-
audits. We conducted our audits in accordance with the standards
ments are free of material misstatement and whether effective
internal control over fi nancial reporting was maintained in all material
of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
respects. Our audits of the fi nancial statements included examining,
obtain reasonable assurance about whether the fi nancial state-
on a test basis, evidence supporting the amounts and disclosures in
ments are free of material misstatement and whether effective
the fi nancial statements, assessing the accounting principles used
and signifi cant estimates made by management, and evaluating the
internal control over fi nancial reporting was maintained in all material
overall fi nancial statement presentation. Our audit of internal control
respects. Our audits of the fi nancial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in
over fi nancial reporting included obtaining an understanding of inter-
the fi nancial statements, assessing the accounting principles used
nal control over fi nancial reporting, assessing the risk that a material
and signifi cant estimates made by management, and evaluating the
weakness exists, and testing and evaluating the design and oper-
ating effectiveness of internal control based on the assessed risk.
overall fi nancial statement presentation. Our audit of internal control
over fi nancial reporting included obtaining an understanding of inter-
Our audits also included performing such other procedures as we
nal control over fi nancial reporting, assessing the risk that a material
considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
weakness exists, and testing and evaluating the design and operating
As discussed in Note 3 to the consolidated fi nancial state-
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we con-
ments, the Company changed the manner in which it accounts for
sidered necessary in the circumstances. We believe that our audits
convertible debt instruments that may be settled in cash upon con-
version in 2009.
provide a reasonable basis for our opinions.
A company’s internal control over fi nancial reporting is a
As discussed in Note 3 to the Consolidated Financial Statements,
the Company changed the manner in which it accounts for convertible
process designed to provide reasonable assurance regarding the
debt instruments that may be settled in cash upon conversion.
reliability of fi nancial reporting and the preparation of fi nancial state-
ments for external purposes in accordance with generally accepted
A company’s internal control over fi nancial reporting is a
accounting principles. A company’s internal control over fi nancial
process designed to provide reasonable assurance regarding the
reporting includes those policies and procedures that (i) pertain to
reliability of fi nancial reporting and the preparation of fi nancial state-
ments for external purposes in accordance with generally accepted
the maintenance of records that, in reasonable detail, accurately
accounting principles. A company’s internal control over fi nancial
and fairly refl ect the transactions and dispositions of the assets of
reporting includes those policies and procedures that (i) pertain to
the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of fi nancial state-
the maintenance of records that, in reasonable detail, accurately
and fairly refl ect the transactions and dispositions of the assets of
ments in accordance with generally accepted accounting principles,
the company; (ii) provide reasonable assurance that transactions
and that receipts and expenditures of the company are being made
are recorded as necessary to permit preparation of fi nancial state-
only in accordance with authorizations of management and directors
ments in accordance with generally accepted accounting principles,
of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors
disposition of the company’s assets that could have a material effect
of the company; and (iii) provide reasonable assurance regarding
on the fi nancial statements.
prevention or timely detection of unauthorized acquisition, use, or
Because of its inherent limitations, internal control over
fi nancial reporting may not prevent or detect misstatements. Also,
disposition of the company’s assets that could have a material effect
on the fi nancial statements.
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of
Because of its inherent limitations, internal control over
fi nancial reporting may not prevent or detect misstatements. Also,
changes in conditions, or that the degree of compliance with the poli-
cies or procedures may deteriorate.
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the poli-
cies or procedures may deteriorate.
New York, New York
February 26, 2010
New York, New York
February 26, 2010
37
37
CONSOLIDATED BALANCE SHEETS
As of December 31,
(In thousands, except per share data)
Assets
Loans and other lending investments, net
Corporate tenant lease assets, net
Other investments
Real estate held for investment, net
Other real estate owned
Assets held-for-sale
Cash and cash equivalents
Restricted cash
Accrued interest and operating lease income receivable, net
Deferred operating lease income receivable
Deferred expenses and other assets, net
Total assets
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
Debt obligations, net
Total liabilities
Commitments and contingencies
Redeemable noncontrolling interests
Equity:
iStar Financial Inc. shareholders’ equity:
Preferred Stock Series D, E, F, G and I, liquidation preference $25.00 per share (see Note 11)
High Performance Units
Common Stock, $0.001 par value, 200,000 shares authorized, 137,868 issued and 94,216 outstanding at
December 31, 2009 and 137,352 issued and 105,457 outstanding at December 31, 2008
Additional paid-in capital
Retained earnings (defi cit)
Accumulated other comprehensive income (see Note 15)
Treasury stock, at cost, $0.001 par value, 43,652 shares at December 31, 2009 and
31,895 shares at December 31, 2008
Total iStar Financial Inc. shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
38
The accompanying notes are an integral part of the consolidated fi nancial statements.
2009
2008
$ 7,661,562
2,885,896
433,130
422,664
839,141
17,282
224,632
39,654
54,780
122,628
109,206
$12,810,575
$10,586,644
3,044,811
447,318
–
242,505
–
496,537
155,965
87,151
116,793
119,024
$15,296,748
$ 252,110
10,894,903
11,147,013
–
7,444
$ 354,492
12,486,404
12,840,896
–
9,190
22
9,800
22
9,800
138
3,791,972
(2,051,376)
6,145
137
3,768,772
(1,240,280)
1,707
(151,016)
1,605,685
50,433
1,656,118
$12,810,575
(121,159)
2,418,999
27,663
2,446,662
$15,296,748
sfi 2009
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
(In thousands, except per share data)
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
Provision for loan losses
Impairment of other assets
Impairment of goodwill
Other expense
Total costs and expenses
Income (loss) before earnings from equity method investments and other items
Gain on early extinguishment of debt
Gain on sale of joint venture interest
Earnings from equity method investments
Income (loss) from continuing operations
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss)
Net loss attributable to noncontrolling interests
Gain on sale of joint venture interest attributable to noncontrolling interests
Gain from discontinued operations attributable to noncontrolling interests
Net income (loss) attributable to iStar Financial Inc.
Preferred dividends
2009
2008
2007
.
$ 557,809
305,007
30,468
893,284
$ 947,661
308,742
97,851
1,354,254
$ 998,008
306,513
99,938
1,404,459
481,116
23,467
97,869
127,044
1,255,357
122,699
4,186
104,795
2,216,533
(1,323,249)
547,349
–
5,298
(770,602)
(11,671)
12,426
(769,847)
1,071
–
–
(768,776)
(42,320)
666,706
23,059
94,726
143,902
1,029,322
295,738
39,092
37,234
2,329,779
(975,525)
393,131
280,219
6,535
(295,640)
22,415
91,458
(181,767)
991
(18,560)
(3,689)
(203,025)
(42,320)
629,260
27,915
83,690
156,534
185,000
144,184
–
8,927
1,235,510
168,949
225
–
29,626
198,800
29,970
7,832
236,602
816
–
–
237,418
(42,320)
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders,
HPU holders and Participating Security holders(1)(2)(3)
$ (811,096)
$ (245,345)
$ 195,098
Per common share data:(3)
Income (loss) attributable to iStar Financial Inc. from continuing operations:
Basic
Diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic
Diluted
Weighted average number of common shares – basic
Weighted average number of common shares – diluted
Per HPU share data:(1)(3)
Income (loss) attributable to iStar Financial Inc. from continuing operations:
Basic
Diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic
Diluted
Weighted average number of HPU shares – basic and diluted
$ (7.89)
$ (7.89)
$ (2.68)
$ (2.68)
$ 1.19
$ 1.18
$ (7.88)
$ (7.88)
100,071
100,071
$ (1.85)
$ (1.85)
131,153
131,153
$ 1.48
$ 1.47
126,801
127,542
39
$ (1,503.13)
$ (1,503.13)
$ (505.47)
$ (505.47)
$ 224.40
$ 223.27
$ (1,501.73)
$ (1,501.73)
15
$ (349.87)
$ (349.87)
15
$ 279.53
$ 278.07
15
Explanatory Notes:
(1) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program (see Note 11).
(2)
Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company’s Long-Term
Incentive Plans (see Notes 13 and 14).
(3) See Note 14 for amounts attributable to iStar Financial Inc. for income (loss) from continuing operations and further details on the calculation of earnings per share.
The accompanying notes are an integral part of the consolidated fi nancial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended
December 31, 2009, 2008, 2007
(In thousands)
Balance at December 31, 2006
Exercise of options
Net proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU
Repurchase of stock
Restricted stock unit amortization,
net of shares withheld
Issuance of stock – DRIP/stock purchase plan
Redemption of HPUs
Net income for the period(2)
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Sale/purchase of certain
noncontrolling interests
Adoption of ASC 470-20-65-1
(see Notes 3 and 9)
Change in accumulated other
Preferred
Stock(1) HPUs
Common
Stock
at Par
Additional
Paid-In
Capital
Accumulated
Retained
Other
Earnings Comprehensive
Income (Loss)
(Defi cit)
Treasury Noncon-
trolling
Stock
at cost
Interests Total Equity
$22
–
–
–
–
–
–
$9,800
–
–
–
–
–
–
$127 $3,465,925
2,888
217,926
–
–
–
–
–
8
–
–
–
–
$(479,695)
–
–
(42,320)
(459,253)
(10,130)
–
$ 16,956
–
–
–
–
–
–
$(26,272) $29,509 $3,016,372
2,888
217,934
(42,320)
(459,253)
(10,130)
(30,947)
–
–
–
–
–
(30,947)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,116
2,518
1,105
–
–
–
–
38,054
–
–
–
237,418
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(948)
17,688
(3,704)
11,116
2,518
1,105
236,470
17,688
(3,704)
(6,370)
(6,370)
–
38,054
(19,251)
(19,251)
$ (2,295) $(57,219) $36,175 $2,972,170
–
–
comprehensive income (loss)
Balance at December 31, 2007
–
$22
–
$9,800
–
–
$135 $3,739,532
–
$(753,980)
40
sfi 2009
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)
For the Years Ended
December 31, 2009, 2008, 2007
(In thousands)
Balance at December 31, 2007
Exercise of options
Dividends declared – preferred
Dividends declared – common
Dividends declared – HPU
Repurchase of stock
Restricted stock unit amortization,
net of shares withheld
Issuance of stock – DRIP/stock purchase plan
Redemption of HPUs
Net loss for the period(2)
Convertible Note repurchase
Gain attributable to noncontrolling interests
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Sale/purchase of certain
noncontrolling interests
Change in accumulated other
comprehensive income (loss)
Balance at December 31, 2008
Dividends declared – preferred
Repurchase of stock
Restricted stock unit amortization,
net of shares withheld
Net loss for the period(2)
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Change in accumulated other
Preferred
Stock(1) HPUs
Common
Stock
at Par
Additional
Paid-In
Capital
Accumulated
Retained
Other
Earnings Comprehensive
Income (Loss)
(Defi cit)
Treasury Noncon-
trolling
Stock
at cost
Interests Total Equity
$22
–
–
–
–
–
$9,800
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$22
–
–
–
$9,800
–
–
$135 $3,739,532 $ (753,980)
–
–
–
–
–
1
1
–
–
–
–
–
–
–
5,868
–
–
–
–
20,746
1,887
1,400
–
(661)
–
–
–
(42,320)
(236,052)
(4,903)
–
–
–
–
(203,025)
–
–
–
–
–
–
$(2,295) $ (57,219) $ 36,175 $2,972,170
5,868
(42,320)
(236,052)
(4,903)
(63,940)
–
–
–
–
(63,940)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,707)
22,249
171
(25,048)
20,747
1,888
1,400
(204,732)
(661)
22,249
171
(25,048)
(4,177)
(4,177)
–
–
–
$137 $3,768,772 $(1,240,280)
(42,320)
–
–
–
–
–
–
4,002
4,002
$ 1,707 $(121,159) $ 27,663 $2,446,662
(42,320)
(29,857)
–
(29,857)
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
23,200
–
–
–
–
(768,776)
–
–
–
–
–
–
–
–
–
–
–
(1,065)
26,487
(2,652)
23,201
(769,841)
26,487
(2,652)
comprehensive income (loss)
Balance at December 31, 2009
–
$22
–
$9,800
–
–
–
$138 $3,791,972 $(2,051,376)
4,438
4,438
$ 6,145 $(151,016) $ 50,433 $1,656,118
–
–
Explanatory Notes:
(1) See Note 11 for details on the Company’s Cumulative Redeemable Preferred Stock.
(2)
For the years ended December 31, 2009, 2008 and 2007, net income (loss) for the period included $(6), $716 and $132 of net income (loss) attributable to redeemable noncontrolling interests.
41
The accompanying notes are an integral part of the consolidated fi nancial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(In thousands)
Cash fl ows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash fl ows from operating activities:
2009
2008
2007
$ (769,847)
$ (181,767)
$ 236,602
Provision for loan losses
Non-cash expense for stock-based compensation
Impairment of goodwill
Impairment of other assets
Depreciation, depletion and amortization
Amortization of discounts/premiums and deferred fi nancing costs on debt
Amortization of discounts/premiums, deferred interest and costs on lending investments
Discounts, loan fees and deferred interest received
Earnings from equity method investments
Distributions from operations of equity method investments
Deferred operating lease income receivable
Gain from discontinued operations
Gain on early extinguishment of debt
Gain on sale of joint venture interest
Provision for deferred taxes
Other non-cash adjustments
Changes in assets and liabilities:
Changes in accrued interest and operating lease income receivable, net
Changes in deferred expenses and other assets, net
Changes in accounts payable, accrued expenses and other liabilities
Cash fl ows from operating activities
Cash fl ows from investing activities:
New investment originations
Add-on fundings under existing loan commitments
Purchase of securities
Repayments of and principal collections on loans
Cash paid for acquisitions
Net proceeds from sales of loans
Net proceeds from sales of discontinued operations
Net proceeds from sales of other real estate owned
Net proceeds from sale of joint venture interest
Net proceeds from repayments and sales of securities
Contributions to unconsolidated entities
Distributions from unconsolidated entities
Capital improvements for build-to-suit facilities
Capital expenditures and improvements on corporate tenant lease assets
Capital expenditures and improvements on real estate held for investment
Other investing activities, net
Cash fl ows from investing activities
42
1,255,357
23,592
4,186
136,832
99,287
(12,025)
(117,527)
11,921
(5,298)
27,973
(13,926)
(12,426)
(547,349)
–
3,772
(4,928)
31,767
6,140
(41,225)
76,276
–
(1,224,593)
(31,535)
951,202
–
720,770
64,566
270,621
–
27,060
(34,272)
9,459
(7,152)
(7,739)
(5,860)
(6,306)
726,221
1,029,322
23,079
39,092
295,738
104,453
44,326
(196,519)
29,403
(6,535)
48,197
(20,043)
(91,458)
(393,131)
(280,219)
6,040
(7,385)
36,528
(18,599)
(41,993)
418,529
(32,044)
(3,276,502)
(29)
1,822,587
–
394,293
576,857
169,600
416,970
51,407
(50,636)
27,292
(79,090)
(23,802)
–
(24,846)
(27,943)
185,000
17,743
–
144,184
100,123
28,373
(234,944)
66,991
(29,468)
41,796
(23,816)
(7,832)
(225)
–
1,318
(4,968)
(26,147)
(1,151)
67,758
561,337
(2,900,301)
(2,955,395)
(28,815)
2,660,080
(1,891,571)
–
70,227
–
–
311,432
(69,184)
167,975
(88,613)
(26,442)
–
5,527
(4,745,080)
(continued)
sfi 2009
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended December 31,
(In thousands)
Cash fl ows from fi nancing activities:
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Borrowings under interim fi nancing
Repayments under interim fi nancing
Borrowings under secured term loans
Repayments under secured term loans
Borrowings under unsecured notes
Repayments under unsecured notes
Repurchases of unsecured notes
Contributions from/(distributions to) noncontrolling interests, net
Changes in restricted cash held in connection with debt obligations
Payments for deferred fi nancing costs/proceeds from hedge settlements, net
Common dividends paid
Preferred dividends paid
Purchase of treasury stock
Net proceeds from equity offering
Other fi nancing activities, net
Cash fl ows from fi nancing activities
Changes 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 fl ow information:
Cash paid during the period for interest, net of amount capitalized
The accompanying notes are an integral part of the consolidated fi nancial statements.
2009
2008
2007
$ 134,741
(371,798)
–
–
1,000,000
(318,431)
–
(628,366)
(885,055)
(2,630)
121,116
(51,801)
–
(42,320)
(29,858)
–
–
(1,074,402)
(271,905)
496,537
$ 224,632
$ 11,451,167
(10,464,322)
–
(1,289,811)
1,307,776
(109,262)
740,506
(620,331)
(501,518)
(31,029)
(118,762)
11,221
(269,827)
(42,320)
(63,940)
–
1,896
1,444
392,030
104,507
$ 496,537
$ 28,255,242
(26,548,594)
1,900,000
(610,189)
18,522
(166,411)
1,818,184
(200,000)
(14,775)
13,753
1,419
(130)
(425,479)
(42,320)
(30,947)
218,189
(4,165)
4,182,299
(1,444)
105,951
$ 104,507
$ 531,858
$ 645,413
$ 585,233
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Business and Organization
Business – iStar Financial Inc., or the “Company,” is a pub-
licly traded fi nance company focused on the commercial real estate
industry. The Company primarily provides customer-tailored fi nanc-
ing to high-end private and corporate owners of real estate, includ-
ing senior and mezzanine real estate debt, senior and mezzanine
corporate capital, as well as corporate net lease fi nancing and equity.
The Company, which is taxed as a real estate investment trust, or
“REIT,” provides innovative and value-added fi nancing solutions to its
customers. The Company delivers customized fi nancing products to
sophisticated real estate borrowers and corporate customers who
require a high level of fl exibility and service. The Company’s two pri-
mary lines of business are lending and corporate tenant leasing.
Organization – The Company began its business in 1993
through private investment funds and became publicly traded in
1998. Since that time, the Company has grown through the origi-
nation of new lending and leasing transactions, as well as through
corporate acquisitions, including the acquisition of TriNet Corporate
Realty Trust, Inc. in 1999, the acquisitions of Falcon Financial Investment
Trust and of a signifi cant non-controlling interest in Oak Hill Advisors,
L.P. and affi liates in 2005, and the acquisition of the commercial real
estate lending business and loan portfolio which we refer to as the
“Fremont CRE,” of Fremont Investment and Loan, or “Fremont,” a divi-
sion of Fremont General Corporation, in 2007.
Note 2 – Basis of Presentation and Principles of Consolidation
Basis of Presentation – T he accompany ing audited
Consolidated Financial Statements have been prepared in conformity
with generally accepted accounting principles in the United States
of America (“GAAP”) for complete fi nancial statements. The prepa-
ration of fi nancial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, disclosure of contingent
assets and liabilities at the dates of the fi nancial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassifi ed in the
Consolidated Financial Statements and the related notes to conform
to the current period presentation. In addition, the Company adopted
three new accounting standards on January 1, 2009 which required
retroactive application for presentation of prior periods’ Consolidated
Financial Statements (see Notes 3, 9, 11, and 14).
Principles of Consolidation – The Consolidated Financial
Statements include the fi nancial statements of the Company, its
wholly owned subsidiaries, controlled partnerships and variable
interest entities (“VIEs”) for which the Company is the primary ben-
efi ciary. The Company consolidated the following VIEs:
opportunistically invest capital following a period of credit market
dislocation. As of December 31, 2009, OHA SCF had $40.3 million of
total assets, no debt and $0.1 million of noncontrolling interest. The
investments held by this entity are presented in “Other investments”
on the Company’s Consolidated Balance Sheets. As of December 31,
2009, the Company had a total unfunded commitment of $26.8 million
to this entity.
During 2007, the Company made a €100.0 million commit-
ment to Moor Park Real Estate Partners II, L.P. Incorporated (“Moor
Park”). Moor Park is a third-party managed fund that was created to
make investments in European real estate as a 33% investor along-
side a sister fund. As of December 31, 2009, Moor Park had $13.0 mil-
lion of total assets, no debt and $0.1 million of noncontrolling interest.
The investments held by this entity are presented in “Other invest-
ments” on the Company’s Consolidated Balance Sheets.
During 2006, the Company made an investment in Madison
Deutsche Andau Holdings, LP (“Madison DA”). Madison DA was cre-
ated to invest in mortgage loans secured by real estate in Europe. As
of December 31, 2009, Madison DA had $63.2 million of total assets,
no debt and $9.5 million of noncontrolling interest. The investments
held by this entity are presented in “Loans and other lending invest-
ments” on the Company’s Consolidated Balance Sheets.
All signifi cant intercompany balances and transactions have
been eliminated in consolidation.
Note 3 – Summary of Signifi cant Accounting Policies
Loans and other lending investments, net – Loans and other
lending investments, net includes the following investments: senior
mortgages, subordinate mortgages, corporate/partnership loans
and other lending investments-securities. Management considers
nearly all of its loans and debt securities to be held-for-investment
or held-to-maturity, although certain investments may be classifi ed as
held-for-sale or available-for-sale.
Loans and other lending investments designated for sale
are classifi ed as held-for-sale and are carried at lower of amortized
historical cost or fair value. The amount by which carrying value
exceeds fair value is recorded as a valuation allowance. Subsequent
changes in the valuation allowance are included in the determination
of net income in the period in which the change occurs.
Items classifi ed as held-for-investment or held-to-maturity
are reported at their outstanding unpaid principal balance, and
include unamortized acquisition premiums or discounts and unam-
ortized deferred loan costs or fees. These items also include accrued
and paid-in-kind interest and accrued exit fees that the Company
determines are probable of being collected. Debt securities classifi ed
as available-for-sale are reported at fair value with temporary unreal-
ized gains and losses included in “Accumulated other comprehensive
income” on the Company’s Consolidated Balance Sheets.
During 2008, the Company made a $49.0 million commit-
ment to OHA Strategic Credit Fund Parallel I, LP (“OHA SCF”). OHA
SCF was created to invest in distressed, stressed and undervalued
loans, bonds, equities and other investments. The Fund intends to
For held-to-maturity and available-for-sale debt securities
held in “Loans and other lending investments, net,” management eval-
uates whether the asset is other-than-temporarily impaired when
the fair market value is below carrying value. The Company considers
44
sfi 2009
debt securities other-than-temporarily impaired if (1) the Company
has the intent to sell the security, (2) it is more likely than not that
it will be required to sell the security before recovery, or (3) it does
not expect to recover the entire amortized cost basis of the security.
If it is determined that an other-than-temporary impairment exists,
the portion related to credit losses, where the Company does not
expect to recover its entire amortized cost basis, will be recognized
as an “Impairment of other assets” on the Company’s Consolidated
Statements of Operations. If the Company does not intend to sell the
security and it is more likely than not that the entity will be required
to sell the security, but the security has suffered a credit loss, the
impairment charge will be separated. The credit loss component of
the impairment will be recorded as an “Impairment of other assets”
on the Company’s Consolidated Statements of Operations, and the
remainder will be recorded in “Accumulated other comprehensive
income” on the Company’s Consolidated Balance Sheets.
Corporate tenant lease assets and depreciation – CTL assets are
generally recorded at cost less accumulated depreciation. Certain
improvements and replacements are capitalized when they extend
the useful life, increase capacity or improve the effi ciency of the
asset. Repairs and maintenance 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 years for
facilities, fi ve years for furniture and equipment, the shorter of the
remaining lease term or expected life for tenant improvements and
the remaining useful life of the facility for facility improvements.
CTL assets to be disposed of are reported at the lower of
their carrying amount or estimated fair value less costs to sell and
are included in “Assets held-for-sale” on the Company’s Consolidated
Balance Sheets. If the estimated fair value less costs to sell is less
than the carrying value, the difference will be recorded as an impair-
ment charge and included in “Income from discontinued operations”
on the Company’s Consolidated Statements of Operations. Once an
asset is classifi ed as held-for-sale, depreciation expense is no longer
recorded and historical operating results are reclassifi ed to “Income
from discontinued operations” on the Company’s Consolidated
Statements of Operations. As of December 31, 2009, there were
two CTL assets with an aggregate book value of $17.3 million clas-
sified as “Assets held-for-sale” on the Company’s Consolidated
Balance Sheets.
The Company periodically reviews long-lived assets to be
held and used for impairment in value whenever events or changes
in circumstances indicate that the carrying amount of such assets
may not be recoverable. The value of a long-lived asset held for use
is impaired only if management’s estimate of the aggregate future
cash fl ows (undiscounted and without interest charges) to be gener-
ated by the asset (taking into account the anticipated holding period
of the asset) is less than the carrying value. Such estimate of cash
fl ows considers factors such as expected future operating income,
trends and prospects, as well as the effects of demand, competition
and other economic factors. To the extent impairment has occurred,
the loss will be measured as the excess of the carrying amount of the
property over the fair value of the asset and refl ected as an adjust-
ment to the basis of the asset. Impairments of CTL assets that are
not held-for-sale are recorded in “Impairment of other assets,” on the
Company’s Consolidated Statements of Operations.
The Company accounts for its acquisition of facilities by
allocating the purchase price to the tangible and intangible assets
and liabilities acquired based on their estimated fair values. The value
of the tangible assets, consisting of land, buildings, building improve-
ments and tenant improvements is determined as if these assets are
vacant, that is, at replacement cost. Intangible assets may include
above-market or below-market value of in-place leases and the value
of customer relationships, which are each recorded at their relative
fair values.
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 fi xed rental terms that are considered
to be below-market. The Company generally engages in sale/lease-
back transactions and typically executes leases with the occupant
simultaneously with the purchase of the CTL asset at market-rate
rents. As such, no above-market or below-market lease value is
ascribed to these transactions.
Real estate held for investment, net – Real estate held for
investment, net (“REHI”) consists of properties acquired through
foreclosure or through deed-in-lieu of foreclosure in full or partial
satisfaction of non-performing loans that the Company intends to
hold, operate or develop for a period of at least twelve months. REHI
assets are initially recorded at their estimated fair value. The excess
of the carrying value of the loan over the fair value of the property
acquired is charged-off against the reserve for loan losses when
title to the property is obtained. Additionally, upon acquisition of a
property, tangible and intangible assets and liabilities acquired are
recorded at their estimated fair values and depreciation is com-
puted in the same manners as described in “Corporate tenant lease
assets and depreciation” above. Subsequent to acquisition, qualifi ed
development and construction costs are capitalized. Revenues and
expenses related to REHI assets are recorded as “Other income”
and “Other expense,” respectively, on the Company’s Consolidated
Statements of Operations.
The Company considers REHI assets to be long-lived and
periodically reviews them for impairment in value whenever events
or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. The Company measures
impairments for REHI assets in the same manner as CTL assets, as
described in “Corporate tenant lease assets and depreciation” above.
Impairments of REHI assets are recorded in “Impairment of other
assets,” on the Company’s Consolidated Statements of Operations.
Other real estate owned – OREO consists of properties
acquired through foreclosure or by deed-in-lieu of foreclosure in
full or partial satisfaction of non-performing loans that the Company
intends to market for sale in the near term. OREO is recorded at
the estimated fair value less costs to sell. The excess of the car-
rying value of the loan over the fair value of the property less
estimated costs to sell is charged-off against the reserve for loan
losses when title to the property is obtained. Net revenues and
costs of holding the property are recorded as “Other expense” in
45
the Company’s Consolidated Statements of Operations. Signifi cant
property improvements may be capitalized to the extent that the
carrying value of the property does not exceed the estimated fair
value less costs to sell. The gain or loss on fi nal disposition of an
OREO is recorded in “Impairment of other assets” on the Company’s
Consolidated Statements of Operations, and is considered income/
(loss) from continuing operations as it represents the fi nal stage of
the Company’s loan collection process.
The Company reviews the recoverability of an OREO asset’s
carrying value when events or circumstances indicate a potential
impairment of a property’s value. If impairment exists, a loss is
recorded to the extent that the carrying value exceeds the estimated
fair value of the property less costs to sell. These impairments
are recorded in “Impairment of other assets” on the Company’s
Consolidated Statements of Operations.
Equity and cost method investments – Purchased equity inter-
ests that are not publicly traded and/or do not have a readily deter-
minable fair value are accounted for pursuant to the equity method
of accounting if the Company can signifi cantly infl uence the operating
and fi nancial policies of an investee. This is generally presumed to
exist when ownership interest is between 20% and 50% of a corpo-
ration, or greater than 5% of a limited partnership or limited liability
company. The Company’s periodic share of earnings and losses in
equity method investees is included in “Earnings (loss) from equity
method investments” on the Consolidated Statements of Operations.
When the Company’s ownership position is too small to provide such
infl uence, the cost method is used to account for the equity interest.
Equity and cost method investments are included in “Other invest-
ments” on the Company’s Consolidated Balance Sheets.
The Company periodically reviews equity method invest-
ments for impairment in value whenever events or changes in cir-
cumstances indicate that the carrying amount of such investments
may not be recoverable. The Company will record an impairment
charge to the extent that the estimated fair value of an investment is
less than its carrying value and the Company determines the impair-
ment is other-than-temporary. Impairment charges are recorded
in “Impairment of other assets” on the Company’s Consolidated
Statements of Operations.
Timber and timberlands – Timber and timberlands, are stated
at cost less accumulated depletion. The cost of timber and timber-
lands typically is allocated between the timber and the land acquired,
based on estimated relative fair values. Timber carrying costs, such
as real estate taxes, insect and wildlife control and timberland man-
agement fees, are expensed as incurred. Net carrying value of the
timber and timberlands is used to compute the gain or loss in con-
nection with timberland sales. Timber and timberlands are included
in “Other investments” on the Company’s Consolidated Balance
Sheet (see Note 7).
is established by dividing book cost of timber by estimated standing
merchantable inventory. Changes in the assumptions and/or estima-
tions used in these calculations may affect the Company’s results,
in particular depletion costs. Factors that can impact timber volume
include weather changes, losses due to natural causes, differences
in actual versus estimated growth rates and changes in the age when
timber is considered merchantable.
On January 19, 2005, TimberStar Operating Partnership,
L.P. (“TimberStar”) was created to acquire and manage a diversifi ed
portfolio of timberlands. During 2008, the Company sold all of its tim-
berland investments. The Company consolidated this partnership for
fi nancial statement purposes and records the noncontrolling interest
of an external partner in “Noncontrolling interests” on the Company’s
Consolidated Balance Sheets. TimberStar’s operating results for
2008 and 2007 have been reclassifi ed and are presented in “Income
(loss) from discontinued operations” on its Consolidated Statements
of Operations.
TimberStar also owned a 46.7% interest in TimberStar
Southwest Holdco LLC ( “TimberStar Southwest” ), which the
Company accounted for under the equity method. In April 2008,
the Company sold its joint venture interest and recorded a gain
in “Gain on sale of joint venture interest” and “Gain on sale of joint
venture interest attributable to noncontrolling interests” on its
Consolidated Statements of Operations (see Note 7).
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 and OREO, leasing and derivative transactions.
Variable interest entities – The Company reviews its invest-
ments and other contractual arrangements to determine if they con-
stitute variable interests in variable interest entities (or “VIE’s”). A VIE
is an entity where a controlling fi nancial interest is achieved through
means other than voting rights. A VIE is consolidated by the primary
benefi ciary, which is the party that will receive a majority of the VIE’s
anticipated losses, a majority of the VIE’s expected residual returns,
or both. The Company determines if it is the primary benefi ciary of
a VIE by fi rst performing a qualitative analysis of the VIE’s expected
losses and expected returns. This analysis includes a review of,
among other factors, the VIE’s capital structure, contractual terms,
which interests create or absorb variability, related party relation-
ships and the design of the VIE. Where qualitative analysis is not con-
clusive, the Company performs a quantitative analysis. The Company
reassesses its initial evaluation of an entity as a VIE and its initial
determination of whether the Company is the primary benefi ciary of
a VIE upon the occurrence of certain reconsideration events.
Depletion relates to the Company’s investment in timber-
land assets. Assumptions and estimates are used in the recording of
depletion. An annual depletion rate for each timberland investment
Deferred expenses – Deferred expenses include leasing costs
and fi nancing fees. Leasing costs include brokerage, legal and other
costs which are amortized over the life of the respective leases.
46
sfi 2009
External fees and costs incurred to obtain long-term fi nancing have
been deferred and are amortized over the term of the respective
borrowing using the effective interest method. Amortization of leas-
ing costs and deferred fi nancing fees are included in the Company’s
“Depreciation and amortization” and “Interest expense,” respectively,
on the Company’s Consolidated Statements of Operations.
Identifi ed intangible assets and goodwill – Upon the acquisition of
a business, the Company records intangible assets acquired at their
estimated fair values separate and apart from goodwill. The Company
determines whether such intangible assets have fi nite or indefi nite
lives. As of December 31, 2009, all such intangible assets acquired
by the Company have fi nite lives. The Company amortizes fi nite-lived
intangible assets based on the period over which the assets are
expected to contribute directly or indirectly to the future cash fl ows
of the business acquired. The Company reviews fi nite-lived intan-
gible assets for impairment whenever events or changes in circum-
stances indicate that their carrying amount may not be recoverable.
If the Company determines the carrying value of an intangible asset
is not recoverable it will record an impairment charge to the extent
its carrying value exceeds its estimated fair value. Impairments of
intangibles assets are recorded in “Impairment of other assets” on
the Company’s Consolidated Statements of Operations.
During the year ended December 31, 2008, the Company
recorded non-cash charges of $21.5 million to reduce the carrying
value of certain intangible assets related to the Fremont CRE acqui-
sition and other acquisitions, based on their revised estimated fair
values. These charges were recorded in “Impairment of other assets”
on the Company’s Consolidated Statements of Operations.
As of December 31, 2009 and 2008, the Company had
$55.9 million and $61.2 million, respectively, of unamortized fi nite-
lived intangible assets primarily related to the acquisition of prior
CTL facilities and REHI. The total amortization expense for these
intangible assets was $12.2 million, $13.7 million and $9.2 million for
the years ended December 31, 2009, 2008 and 2007, respectively. The
estimated aggregate amortization costs for each of the fi ve succeed-
ing fi scal years are as follows (in thousands):
2010
2011
2012
2013
2014
Total
$10,471
8,709
5,063
3,624
3,265
$31,132
The excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired (including identifi ed intan-
gible assets) and liabilities assumed is recorded as goodwill. Goodwill
is not amortized but is tested for impairment on an annual basis, or
more frequently if events or changes in circumstances indicate that
the asset might be impaired. The impairment test is done at a level
of reporting referred to as a reporting unit. If the fair value of the
reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the fair value of the goodwill within the
reporting unit is less than its carrying value. Fair values for goodwill
and other fi nite-lived intangible assets are determined using the mar-
ket approach, income approach or cost approach, as appropriate.
Due to an overall deterioration in conditions within the
commercial real estate market, the Company recorded impairment
charges of $4.2 million during 2009 and $39.1 million during 2008 to
write off the goodwill allocated to the CTL and Real Estate Lending
reporting segments, respectively. These charges were recorded in
“Impairment of goodwill” on the Company’s Consolidated Statements
of Operations.
Revenue recognition – The Company’s revenue recognition
policies are as follows:
Loans and other lending investments: Interest income on loans and
other lending investments is recognized on an accrual basis using
the interest method.
On occasion, the Company may acquire loans at premi-
ums or discounts. These discounts and premiums in addition to any
deferred costs or fees, are typically amortized over the contractual
term of the loan using the interest method. Exit fees are also recog-
nized over the lives of the related loans as a yield adjustment, if man-
agement believes it is probable that such amounts will be received.
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” on the Company’s Consolidated
Statements of Operations.
The Company considers a loan to be non-performing and
places loans on non-accrual status at such time as: (1) the loan
becomes 90 days delinquent; (2) the loan has a maturity default; or
(3) management determines it is probable that it will be unable to col-
lect all amounts due according to the contractual terms of the loan.
While on non-accrual status, based on the Company’s judgment as
to collectability of principal, loans are either accounted for on a cash
basis, where interest income is recognized only upon actual receipt
of cash, or on a cost-recovery basis, where all cash receipts reduce a
loan’s carrying value.
Certain of the Company’s loans provide for accrual of inter-
est at specifi ed rates that differ from current payment terms. Interest
is recognized on such loans at the accrual rate subject to manage-
ment’s determination that accrued interest and outstanding princi-
pal are ultimately collectible, based on the underlying collateral and
operations of the borrower.
Prepayment penalties or yield maintenance payments from
borrowers 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 fl ow or appreciation
of the underlying collateral. Such amounts are considered contingent
interest and are refl ected as income only upon certainty of collection.
47
Leasing investments: Operating lease revenue is recognized on
the straight-line method of accounting, generally from the later of the
date the lessee takes possession of the space and it is ready for its
intended use or the date of acquisition of the facility subject to exist-
ing leases. Accordingly, contractual lease payment increases are
recognized evenly over the term of the lease. The periodic difference
between lease revenue recognized under this method and contrac-
tual lease payment terms is recorded as “Deferred operating lease
income receivable” on the Company’s Consolidated Balance Sheets.
Allowance for doubtful accounts – The allowance for doubtful
accounts refl ects management’s estimate of losses inherent in the
accrued operating lease income receivable and deferred operating
lease income receivable balances as of the balance sheet date. The
reserve covers asset-specifi c problems (e.g., tenant bankruptcy) as
they arise, as well as a general, formula-based reserve based on
management’s evaluation of the credit risks associated with these
receivables. At December 31, 2009 and 2008, the total allowance for
doubtful accounts was $2.8 million and $5.3 million, respectively.
Reserve for loan losses – The reserve for loan losses refl ects
management’s estimate of loan losses inherent in the loan port-
folio as of the balance sheet date. The reserve is increased through
the “Provision for loan losses” on the Company’s Consolidated
Statements of Operations and is decreased by charge-offs when
losses are confi rmed through the receipt of assets such as cash
in a pre-foreclosure sale or via ownership control of the underly-
ing collateral in full satisfaction of the loan upon foreclosure or
when signifi cant collection efforts have ceased. The reserve for
loan losses includes a general, formula-based component and an
asset-specifi c component.
The general, formula-based reserve component covers
performing loans and reserves for loan losses are recorded when
(i) available information as of each balance sheet date indicates that
it is probable a loss has occurred in the portfolio and (ii) the amount
of the loss can be reasonably estimated. Required reserve balances
for the performing loan portfolio are derived from estimated prob-
abilities of principal loss and loss given default severities. Estimated
probabilities of principal loss and loss severities are assigned to each
loan in the portfolio during the Company’s quarterly internal risk rat-
ing assessment. Probabilities of principal loss and severity factors are
based on industry and/or internal experience and may be adjusted for
signifi cant factors that, based on management’s judgment, impact the
collectability of the loans as of the balance sheet date.
The asset-specifi c reserve component relates to reserves
for losses on impaired loans. The Company considers a loan to
be impaired when, based upon current information and events, it
believes that it is probable that the Company will be unable to col-
lect all amounts due under the contractual terms of the loan agree-
ment. A reserve is established when the present value of payments
expected to be received, observable market prices, or the estimated
fair value of the collateral (for loans that are dependent on the col-
lateral for repayment) of an impaired loan is lower than the carry-
ing value of that loan. A loan is also considered impaired if its terms
are modifi ed in a troubled debt restructuring (“TDR”). A TDR occurs
when the Company grants a concession to a borrower in fi nancial
diffi culty by modifying the original terms of the loan. Each of the
Company’s non-performing loans (“NPL’s”) and TDR loans are con-
sidered impaired and are evaluated individually to determine required
asset-specifi c reserves.
Derivative instruments and hedging activity – The Company rec-
ognizes derivatives as either assets or liabilities on the Company’s
Consolidated Balance Sheets at fair value. If certain conditions are
met, a derivative may be specifi cally designated as a hedge of the
exposure to changes in the fair value of a recognized asset or liability,
a hedge of a forecasted transaction or the variability of cash fl ows to
be received or paid related to a recognized asset or liability.
Derivatives, such as foreign currency hedges and interest
rate caps, that are not designated hedges are considered economic
hedges, with changes in fair value reported in current earnings
in “Other expense” on the Company’s Consolidated Statements
of Operations. The Company does not enter into derivatives for
trading purposes.
Stock-based compensation – The Company has service-based
restricted stock awards which are valued based on the grant-date
market value of the award and market-condition based restricted
stock awards which are valued based on (a) the grant-date mar-
ket value of the award for equity-based awards or (b) the period-
end market value for liability-based awards. Market value for the
market-condition based awards is determined using a Monte Carlo
simulation model to simulate a range of possible future stock prices
for the Company’s Common Stock. Compensation costs related to
restricted stock awards are recognized ratably over the applicable
vesting/service period and recorded in “General and administrative”
on the Company’s Consolidated Statements of Operations.
Disposal of long-lived assets – The results of operations from
CTL and timber assets that were sold or held-for-sale in the current
and prior periods are classifi ed 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 and timber assets
are classifi ed as “Gain from discontinued operations” and “Gain from
discontinued operations attributable to noncontrolling interests” on
the Company’s Consolidated Statements of Operations.
Income taxes – The Company has elected to be qualifi ed
and taxed as a REIT under section 856 through 860 of the Internal
Revenue Code of 1986, as amended (the “Code”). The Company is
subject to federal income taxation at corporate rates on its REIT tax-
able income, however, the Company is allowed a deduction for the
48
sfi 2009
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 deduc-
tions in computing its REIT taxable income, including non-cash items
such as depreciation expense and certain specifi c reserve amounts
that the Company deems to be uncollectable. These deductions
allow the Company to shelter a portion of its operating cash fl ow
from its dividend payout requirement under federal tax laws. The
Company intends to operate in a manner consistent with and to elect
to be treated as a REIT for tax purposes.
The Company can participate in certain activities from
which it was previously precluded in order to maintain its qualifi ca-
tion as a REIT, as long as these activities are conducted in entities
which elect to be treated as taxable subsidiaries under the Code,
subject to certain limitations. As such, the Company, through its
taxable REIT subsidiaries (“TRSs”), is engaged in various real estate
related opportunities, including but not limited to: (1) managing cor-
porate credit-oriented investment strategies; (2) certain activities
related to the purchase and sale of timber and timberlands; (3) serv-
icing certain loan portfolios; and (4) managing activities related to
certain foreclosed assets. The Company will consider other invest-
ments through TRS entities if suitable opportunities arise. The
Company’s TRS entities are not consolidated for federal income
tax purposes and are taxed as corporations. For fi nancial reporting
purposes, current and deferred taxes are provided for in the portion
of earnings recognized by the Company with respect to its interest
in TRS entities. For the years ended December 31, 2009, 2008 and
2007, the Company recorded total income tax expense of $4.1 mil-
lion, $10.2 million and $7.0 million, respectively, which was included
in “Other expense” on the Company’s Consolidated Statements of
Operations. The Company also recognizes interest expense and
penalties related to uncertain tax positions, if any, as income tax
expense, included in “Other expense” on the Company’s Consolidated
Statements Operations.
Deferred income taxes refl ect the net tax effects of tem-
porary differences between the carrying amount of assets and
liabilities for fi nancial reporting purposes and the amounts used for
income tax purposes, as well as operating loss and tax credit car-
ryforwards. At December 31, 2009 and 2008, the Company had net
deferred tax liabilities of $9.3 million and $6.9 million, respectively,
included in “Accounts payable, accrued expenses and other liabilities”
on the Company’s Consolidated Balance Sheets. These deferred tax
liabilities are primarily due to timing differences relating to an equity
method investment. At December 31, 2009 and 2008, the Company
had net deferred tax assets of $0.1 million and $1.4 million, respec-
tively, included in “Deferred expenses and other assets, net” on the
Company’s Consolidated Balance Sheets. At December 31, 2009 and
2008, deferred tax assets of $19.0 million and $12.1 million, respec-
tively, consisted primarily of expenses not currently deductible
and net operating loss carryforwards, and were offset by valuation
allowances of $18.9 million and $10.8 million, respectively. These
valuation allowances were established based on the Company’s
conclusion that it is more likely than not that the deductions and car-
ryforwards will not be utilized during the carryforward periods.
Earnings per share – The Company uses the two-class
method in calculating EPS when it issues securities other than
common stock that contractually entitle the holder to participate in
dividends and earnings of the company when, and if, the company
declares dividends on its common stock. Vested HPU shares are
entitled to dividends of the Company when dividends are declared.
Basic earnings per share (“Basic EPS”) for the Company’s Common
Stock and HPU shares are computed by dividing net income allocable
to common shareholders and HPU holders by the weighted average
number of shares of Common Stock and HPU shares outstanding
for the period, respectively. Diluted earnings per share (“Diluted
EPS”) is calculated similarly, however, it refl ects the potential dilu-
tion that could occur if securities or other contracts to issue com-
mon stock were exercised or converted into common stock, where
such exercise or conversion would result in a lower earnings per
share amount.
Unvested share-based payment awards that contain non-
forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are deemed a (“Participating Security”) and are
included in the computation of earnings per share pursuant to the
two-class method. The Company’s unvested restricted stock units
with rights to dividends and common stock equivalents issued
under its Long-Term Incentive Plans are considered participating
securities and have been included in the two-class method when
calculating EPS.
New Accounting Standards
In June 2009, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 168, “The FASB Accounting
Standards Codifi cation™ and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162”
(“ASC 105-10-65-1”). This guidance requires the FASB Accounting
Standards Codification™ (“Codification” or “ASC”) to become the
single official source of authoritative, nongovernmental GA AP.
The Codifi cation is effective for interim and annual periods end-
ing on or after September 15, 2009. The Company has adopted
ASC 105-10-65-1 for the period ended September 30, 2009, as
required, and has included references to the Codifi cation, as appro-
priate, in the Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments
to FASB Interpretation No. 46(R)” (“ASC 810-10-65-2”), which elimi-
nates the exemption for qualifying special purpose entities, creates
a new approach for determining who should consolidate a variable
interest entity and requires an ongoing reassessment to determine
if a Company should consolidate a variable interest entity. In addition,
49
troubled debt restructurings will no longer be exempt from reconsid-
eration events. The standard is effective through a cumulative-effect
adjustment (with a retroactive option) at adoption and is effective for
interim and annual periods beginning after November 15, 2009. The
Company will adopt SFAS No. 167 on January 1, 2010, as required. As
a result of implementing this new accounting standard, certain VIEs
that are currently consolidated may be deconsolidated and certain
VIEs that are currently not consolidated may be consolidated. The
Company is currently evaluating the impact of this adoption on its
Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting
for Transfers of Financial Assets – an amendment of FASB Statement
No. 140” (“ASC 860-10-65-3”), which eliminates the qualifying spe-
cial-purpose entity concept, creates a new unit of account defi nition
that must be met for transfers of portions of fi nancial assets to be
eligible for sale accounting, clarifi es and changes the de-recognition
criteria for a transfer to be accounted for as a sale, changes the
amount of recognized gain or loss on a transfer of fi nancial assets
accounted for as a sale when benefi cial interests are received by
the transferor and requires new disclosures. The new standard is
effective prospectively for transfers of fi nancial assets occurring
in interim and annual periods beginning after November 15, 2009.
The Company will adopt ASC 860-10-65-3 on January 1, 2010, as
required, and is currently evaluating the impact of this adoption on its
Consolidated Financial Statements.
In April 2009, the FASB issued FSPs FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (“ASC 320-10-65-1”), which changes the method
for determining whether an other-than-temporary impairment
exists for debt securities and the amount of impairment charge
to be recorded in earnings. To determine whether an other-than-
temporary impairment exists, an entity will assess the likelihood
of selling the security prior to recovering its cost basis, a change
from the current requirements where an entity assesses whether it
has the intent and ability to hold a security to recovery. If the crite-
ria is met to assert that an entity has the positive intent to hold and
it is more likely than not it will not have to sell the security before
recovery, impairment charges related to credit losses would be rec-
ognized in earnings, while impairment charges related to non-credit
loss (e.g., liquidity risk) would be refl ected in other comprehensive
income. Upon adoption, changes in assertions may require cumula-
tive effect adjustments to the opening balance of retained earnings.
ASC 320-10-65-1 is effective for interim and annual reporting peri-
ods ending after June 15, 2009. The Company adopted the stan-
dard in the period ended June 30, 2009, as required, and it did not
have a signifi cant impact on the Company’s Consolidated Financial
Statements. See Note 4 for additional disclosures required by the
adoption of this standard.
In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting
for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (“ASC 805-10-65-1”),
which amends provisions related to the initial recognition and mea-
surement, subsequent measurement and disclosures of assets and
liabilities arising from contingencies in a business combination. The
amendment carries forward the requirements for acquired contin-
gencies under ASC 805, “Business Combinations,” which recognizes
contingencies at fair value on the acquisition date, if fair value can be
reasonably estimated during the allocation period. In addition, the
amendment eliminates the requirement to disclose an estimate of
the range of outcomes for recognized contingencies at the acquisi-
tion date. This guidance is effective for all business combinations on
or after January 1, 2009. The Company adopted ASC 805-10-65-1 on
January 1, 2009, as required, and it did not have a signifi cant impact
on the Company’s Consolidated Financial Statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities” (“ASC 260-10-65-2”). This guidance
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, there-
fore, need to be included in the earnings allocation in calculating
earnings per share under the two-class method. Under this guid-
ance, unvested share-based payment awards that contain non-
forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class
method. This guidance is effective for fi nancial statements issued for
fi scal years beginning after December 15, 2008, and interim periods
within those years. All prior-period EPS data presented shall be
adjusted retrospectively (including interim fi nancial statements) to
conform to the provisions of this FSP. The Company adopted this
standard on January 1, 2009, as required. See Note 14 for further
details on the impact of the adoption of this Staff Position.
In May 2008, the FASB issued FSP APB 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement)” (“ASC 470-20-65-1”).
This guidance requires the initial proceeds from convertible debt
that may be settled in cash be bifurcated between a liability com-
ponent and an equity component. The objective of the guidance is
to require the liability and equity components of convertible debt to
be separately accounted for in a manner such that the interest
expense recorded on the convertible debt would not equal the
contractual rate of interest on the convertible debt, but instead
would be recorded at a rate that would refl ect the issuer’s conven-
tional non-convertible debt borrowing rate at the date of issuance.
This is accomplished through the creation of a discount on the
debt that would be accreted using the effective interest method as
additional non-cash interest expense over the period the debt is
50
sfi 2009
expected to remain outstanding. The provisions of this guidance will
be applied retrospectively to all periods presented for fi scal years
beginning after December 31, 2008. Upon adoption, on January 1,
2009, the Company adjusted its Consolidated Balance Sheet as of
December 31, 2007 (inception of the Convertible Note) by reducing
the carrying value of the debt and increasing additional paid-in capital
by $36.5 million which represented the value of the conversion fea-
ture. The Consolidated Statements of Operations for the years ended
December 31, 2008 and 2007 were retroactively adjusted to include
an additional $6.4 million and $1.5 million, respectively, of interest
expense from the adoption of the guidance. See Notes 9 and 14 for
further details on the impact of the adoption of this guidance.
In April 2008, the FASB issued FSP FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“ASC 350-30-65-1”). This
guidance will remove the requirement for an entity to consider
whether the intangible asset can be renewed without substantial
cost or material modifi cations to the existing terms and conditions
associated with the intangible asset when determining the useful
life of an acquired intangible asset. The standard replaces the previ-
ous useful-life assessment criteria with a requirement that an entity
considers its own experience in renewing similar arrangements.
If the entity has no relevant experience, it would consider market
participant assumptions regarding renewal. This guidance is effective
prospectively for fi nancial statements issued for fi scal years beginning
after December 15, 2008, and interim periods within those fi scal years.
Early adoption was prohibited. The Company adopted this guidance on
January 1, 2009, as required, and it did not have a signifi cant impact
on the Company’s Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities – an amend-
ment of FASB Statement No. 133” (“ASC 815-10-65-1”). This guid-
ance requires companies to provide enhanced disclosures regarding
derivative instruments and hedging activities. It requires companies
to better convey the purpose of derivative use in terms of the risks
that the Company is intending to manage. Disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for, and (c) how
derivative instruments and related hedged items affect a company’s
fi nancial position, fi nancial performance, and cash fl ows are required.
This guidance is effective for fi scal years and interim periods begin-
ning after November 15, 2008 and does not require comparative
period disclosures in the year of adoption. The Company adopted
ASC 815-10-65-1 on January 1, 2009, as required, and it did not
have a signifi cant impact on the Company’s Consolidated Financial
Statements. Throughout 2008 and 2009, the Company has signifi -
cantly reduced its derivative activities.
In February 2008, the FASB issued FSP 157-2, “Effective
Date of FASB Statement No. 157” (“ASC 820-10-65-1”). This guidance
provided a one-year deferral of the effective date of fair value mea-
surements and disclosures for all non-fi nancial assets and non-
fi nancial liabilities, except those that are recognized or disclosed
at fair value in the fi nancial statements on a recurring basis. These
non-fi nancial items include assets and liabilities such as reporting
units measured at fair value in a goodwill impairment test and non-
fi nancial assets acquired and liabilities assumed in a business combi-
nation. The Company adopted the provisions of ASC 820-10-65-1 on
January 1, 2009, as required. See Note 16 for additional disclosures
required by the adoption of this standard.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations” (“ASC 805-10-65-1”). ASC 805-10-65-1
expands the defi nition of transactions and events that qualify as busi-
ness combinations, requires that the acquired assets and liabilities,
including contingencies, be recorded at the fair value determined on
the acquisition date and changes thereafter are refl ected in revenue,
not goodwill; changes the recognition timing for restructuring costs,
and requires acquisition costs to be expensed as incurred. Adoption
of this guidance is required for combinations made in annual report-
ing periods on or after December 15, 2008. Early adoption and retro-
active application of ASC 805-10-65-1 to fi scal years preceding the
effective date are not permitted. The Company adopted this guidance
on January 1, 2009, as required, and it did not have a signifi cant
impact on the Company’s Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements an
amendment of ARB No. 51” (“ASC 810-10-65-1”). This guidance
re-characterizes minority interests in consolidated subsidiaries
as noncontrolling interests and requires the classifi cation of minority
interests as a component of equity. Under this guidance, a change in
control is measured at fair value, with any gain or loss recognized
in earnings. The effective date for this guidance is for annual periods
beginning on or after December 15, 2008. Early adoption and retro-
active application of ASC 810-10-65-1 to fi scal years preceding the
effective date are not permitted. The Company adopted this standard
on January 1, 2009, as required, and reclassifi ed the carrying value
of certain noncontrolling interests (previously referred to as minority
interests) from the mezzanine section of the balance sheet to equity.
Net income on the Consolidated Statements of Operations now
includes the operating results of both the Company and its related
noncontrolling interest holders. In accordance with ASC 480-10,
“Distinguishing Liabilities and Equity,” subsidiaries where the noncon-
trolling interest holder has certain redemption rights have been clas-
sifi ed as “Redeemable noncontrolling interests” on the Consolidated
Balance Sheets and their related operating income or loss have been
included in “Net (income) loss attributable to noncontrolling inter-
ests” on the Consolidated Statements of Operations. See Note 11 for
additional disclosures required by the adoption of this standard.
51
Note 4 – Loans and Other Lending Investments, net
The following is a summary description of the Company’s loans and other lending investments ($ in thousands):
Type of
Investment(1)
Senior Mortgages
Subordinate Mortgages
Corporate/Partnership Loans
Managed Loan Value(3)
Participated portion of loans(3)
Total Loans
Reserves for loan losses
Total Loans, net
Other lending
investments – securities
Total Loans and other
lending investments, net
Explanatory Notes:
Loan Performing
Count
108 $3,791,633
401,532
887,555
144 5,080,720
(174,936)
$4,905,784
17
19
As of December 31, 2009
Non-
performing
Loan
Loans Count
Total Count
Loan Performing
Loan
Loans Count
As of December 31, 2008
Non-
performing
4
6
Loans(2)
73 $ 4,049,300 $ 7,840,933
491,413
957,629
9,289,975
(473,269)
8,816,706
(1,417,949)
7,398,757
89,881
70,074
83 4,209,255
(298,333)
$ 3,910,922
20
37
257
200 $7,195,752
575,942
1,354,872
9,126,566
(948,585)
$8,177,981
3
3
73
Loans(2)
Total
67 $3,363,464 $10,559,216
589,566
1,435,941
12,584,723
(1,297,944)
11,286,779
(976,788)
10,309,991
13,624
81,069
3,458,157
(349,359)
$3,108,798
262,805
$ 7,661,562
276,653
$10,586,644
(1)
(2)
(3)
Loans and other lending investments are presented net of unearned income, unamortized discounts and premiums and net unamortized deferred fees and costs. In total, these amounts
represented a net discount of $97.0 million and $109.8 million as of December 31, 2009 and 2008, respectively.
Non-performing loans have been determined to be impaired in accordance with the Company’s policy and are on non-accrual status (see Note 3). As of December 31, 2009 and 2008, the
Company had non-accrual loans with a total carrying value of $4.13 billion and $3.11 billion, respectively, which included non-performing loans and certain loans that were restructured
in troubled debt restructurings.
Managed Loan Value represents the Company’s carrying value of a loan and the outstanding participation interest on loans in the Fremont CRE portfolio (see Fremont Participation below).
The structure of the participation puts the Company in the fi rst loss position on these participated loans and Managed Loan Value is the most relevant measure of the Company’s exposure to
risk of loss on loans in the Fremont CRE portfolio.
Changes in the Company’s reserve for loan losses were as
follows (in thousands):
Reserve for loan losses, December 31, 2006
Provision for loan losses
Charge-offs
Reserve for loan losses, December 31, 2007
Provision for loan losses
Charge-offs
Reserve for loan losses, December 31, 2008(1)
Provision for loan losses
Charge-offs
Reserve for loan losses, December 31, 2009(1)
52
$ 52,201
185,000
(19,291)
217,910
1,029,322
(270,444)
976,788
1,255,357
(814,196)
$1,417,949
Explanatory Note:
(1)
Total reserve for loan losses at December 31, 2009 and 2008, included asset-specifi c
reserves of $1.24 billion and $799.6 million, respectively, and general reserves of
$174.9 million and $177.2 million, respectively (see Note 3).
During the year ended December 31, 2009, the Company
funded $1.22 billion under existing loan commitments and received
gross principal repayments of $1.85 billion, a portion of which was
allocable to the Fremont Participation (as defi ned below). During the
same period, the Company sold loans with a total carrying value of
$875.8 million, for which it recognized charge-offs of $155.1 million.
In addition, during 2009 the Company received title to properties in
full or partial satisfaction of non-performing mortgage loans with a
carrying value of $1.88 billion for which the properties had served as
collateral, and recorded charge-offs totaling $573.6 million, related to
these loans. These properties were recorded as OREO and REHI on
the Company’s Consolidated Balance Sheets (see Note 5).
The carrying value of impaired loans was $4.20 billion and
$3.26 billion as of December 31, 2009 and 2008, respectively. As of
December 31, 2009, the Company assessed each of the impaired
loans for specifi c impairment and determined that non-performing
loans with a carrying value of $3.38 billion required specifi c reserves
totaling $1.24 billion and that the remaining impaired loans did not
require any specifi c reserves. The average carrying value of total
impaired loans was approximately $4.04 billion and $1.65 billion dur-
ing the years ended December 31, 2009 and 2008, respectively. The
Company recorded interest income on cash payments from impaired
loans of $14.3 million, $5.3 million and $4.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Fremont Participation – On July 2, 2007, the Company com-
pleted the acquisition of the commercial real estate lending business
and $6.27 billion commercial real estate loan portfolio from Fremont
sfi 2009
Investment & Loan, a subsidiary of Fremont General Corporation,
pursuant to a defi nitive purchase agreement dated May 21, 2007.
Concurrently, the Company completed the sale of a $4.20 billion par-
ticipation interest (“Fremont Participation”) in the same loan portfolio
to Fremont Investment and Loan pursuant to a defi nitive loan partici-
pation agreement dated July 2, 2007.
The Company accounted for the business combination
under the purchase method. Under the purchase method, the assets
acquired and liabilities assumed were recorded at their fair values as
of the acquisition date. The excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and was
allocated to the Real Estate Lending reporting unit. The goodwill was
subsequently written off during 2008 (see Note 3 for further detail).
As of the date of the acquisition total loan principal purchased was
$6.27 billion with net loan discounts of $265.8 million and the total
loan participation interest sold was $4.20 billion.
Changes in the outstanding acquired loan portfolio partici-
pation balance were as follows (in thousands):
Loan participation, July 2, 2007
Principal repayments(1)
Loan participation, December 31, 2007
Principal repayments(1)
Loan participation, December 31, 2008
Principal repayments(1)
Loan participation, December 31, 2009
$ 4,201,208
(1,220,970)
2,980,238
(1,682,294)
1,297,944
(824,675)
$ 473,269
Explanatory Note:
(1)
Includes $66.8 million, $138.0 million, $191.9 million of principal repayments received
by the Company as of December 31, 2009, 2008 and 2007, respectively, that had not
yet been remitted to the Fremont Participation holder and are refl ected as a pay-
able in “Accounts payable, accrued expenses and other liabilities” on the Company’s
Consolidated Balance Sheets.
Under the terms of the loan participation agreement, the
Company is responsible for funding unfunded loan commitments
associated with the portfolio over the next several years. The bal-
ance of unfunded loan commitments required to be funded under the
participation was $198.1 million as of December 31, 2009. In addition,
the Company will pay 70% of all principal collected from the pur-
chased loan portfolio, including principal collected from the unfunded
loan commitments, to the holder of the Fremont Participation, until
the original $4.20 billion principal amount of the loan participation
interest is repaid. The participation interest pays fl oating interest at
LIBOR + 1.50% and the Company accounted for the issuance of the
participation as a sale in accordance with ASC 860.
Loans acquired with deteriorated credit quality – The Company
holds certain loans initially acquired at a discount, for which it
was probable, at acquisition, that all contractually required pay-
ments would not be received. As of December 31, 2009 and 2008,
these loans had cumulative principal balances of $168.6 million
and $208.8 million, respectively, and cumulative carrying values of
$148.3 million and $175.1 million, respectively. The Company does not
have a reasonable expectation about the timing and amount of cash
fl ows expected to be collected on these loans and is recognizing
income when cash is received or applying cash to reduce the carry-
ing value of the loans. The majority of these loans were acquired in
the acquisition of Fremont CRE.
Securities – As of December 31, 2009, Other lending investments-securities included the following (in thousands):
Description
Available-for-Sale Securities
Corporate debt securities
Held-to-Maturity Securities
Corporate debt securities
Commercial mortgage-backed securities
Total
Face Value
Amortized
Cost Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Net
Carrying
Value
$ 10,000
$ 2,594
$4,206
$ –
$ 6,800
$ 6,800
238,671
24,098
$272,769
238,103
17,902
$258,599
–
–
$4,206
(3,473)
(575)
$(4,048)
234,630
17,327
$258,757
238,103
17,902
$262,805
53
During the years ended December 31, 2009, 2008 and 2007, the Company determined that unrealized credit related losses on certain
held-to-maturity and available-for-sale debt securities were other-than-temporary and recorded impairment charges totaling $11.7 million,
$120.0 million and $134.9 million, respectively, in “Impairment of other assets” on the Consolidated Statements of Operations. There are no
other-than-temporary impairments recorded in “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheet
as of December 31, 2009.
As of December 31, 2009, the contractual maturities of the Company’s securities were as follows (in thousands):
Maturities
1 though 5 years
5 through 10 years
10 years and thereafter
Total
`
Available-for-sale securities
Held-to-maturity securities
Amortized
Cost
$ –
2,594
–
$2,594
Estimated
Fair Value
$ –
6,800
–
$6,800
Amortized
Cost
$220,591
35,132
282
$256,005
Estimated
Fair Value
$220,016
31,659
282
$251,957
Encumbered Loans – As of December 31, 2009 and 2008,
loans and other lending investments with a carrying value of
$4.39 billion and $1.18 billion, respectively, were pledged as collateral
under the Company’s secured indebtedness.
Note 5 – Real Estate Held for Investment, Net and Other Real Estate Owned
During the years ended December 31, 2009 and 2008, the
Company received title to properties in full or partial satisfaction
of non-performing mortgage loans, with an estimated fair value of
$1.30 billion and $316.7 million, respectively. Of the properties
received in 2009, properties with a value of $399.6 million was clas-
sifi ed as REHI and $904.2 million as OREO based on management’s
strategy to either hold the properties over a longer period or to
market them for sale. All properties received in 2008 were classifi ed
as OREO.
Real estate held for investment, net – REHI consisted of the fol-
lowing (in thousands):
Land held for investment
and development
Other operating properties
Less: accumulated depreciation
and amortization
Real estate held for
investment, net
As of December 31,
2009
2008
$290,283
135,281
(2,900)
$422,664
$ –
–
–
$ –
The Company recorded operating income of $5.8 million
and operating expenses of $12.5 million related to REHI for the year
ended December 31, 2009.
Other real estate owned – The Company’s OREO consisted of
the following property types (in thousands):
Condo Construction – Completed
Condo Conversion
Land
Multifamily
Retail
Hotel
Mixed Use/Mixed Collateral
Gross carrying value
As of December 31,
2009
$487,718
114,400
111,969
68,467
41,587
15,000
–
$839,141
2008
$ 69,951
71,602
8,468
53,579
13,532
–
25,373
$242,505
As a result of deteriorating market conditions, the Company
recorded impairment charges to OREO properties totaling $78.6 mil-
lion and $55.6 million, for the years ended December 31, 2009 and
2008, respectively. In addition, during the years ended December 31,
2009, 2008 and 2007, the Company recorded expenses related to
holding costs for OREO properties of $28.4 million, $9.3 million and
$0.5 million, respectively.
Encumbered OREO and REHI assets – As of December 31, 2009,
OREO assets with a carrying value of $232.7 million and REHI assets
with a carrying value of $27.1 million were pledged as collateral for
the Company’s secured indebtedness.
Note 6 – Corporate Tenant Lease Assets, net
The Company’s investments in CTL assets, at cost, were as
follows (in thousands):
Facilities and improvements
Land and land improvements
Less: accumulated depreciation
Corporate tenant lease assets, net
As of December 31,
2009
$2,761,083
639,581
(514,768)
$2,885,896
2008
$2,828,747
669,320
(453,256)
$3,044,811
During the year ended December 31, 2009, the Company
disposed of CTL assets for net proceeds of $64.6 million, which
resulted in gains of $12.4 million. In addition, during 2009 the
Company recorded impairment charges of $19.4 million on CTL
assets as the result of deteriorating market conditions.
During the years ended December 31, 2008 and 2007,
respectively, the Company acquired an aggregate of $2.0 million and
$314.9 million of CTL assets and disposed of CTL assets for net pro-
ceeds of $424.1 million and $70.2 million, respectively, which resulted
in gains of $64.5 million and $7.8 million, respectively. During 2008,
the Company recorded impairment charges of $11.6 million on CTL
assets as the result of changing market conditions.
The Company receives reimbursements from customers
for certain facility operating expenses including common area costs,
insurance and real estate taxes. Customer expense reimburse-
ments for the years ended December 31, 2009, 2008 and 2007 were
$36.1 million, $37.4 million and $34.5 million, respectively, and are
included as a reduction of “Operating costs – corporate tenant lease
assets” on the Company’s Consolidated Statements of Operations.
54
sfi 2009
Future minimum operating lease payments – Future minimum
operating lease payments under non-cancelable leases, excluding
customer reimbursements of expenses, in effect at December 31,
2009, are as follows (in thousands):
Note 7 – Other Investments
Other investments consist of the following items (in thousands):
Year
2010
2011
2012
2013
2014
Thereafter
$ 285,215
283,136
274,920
265,176
257,079
1,987,671
Equity method investments
CTL in-place lease intangibles, net(1)
Marketable securities at fair value
Cost method investments
Other investments
As of December 31,
2009
$339,002
48,751
38,454
6,923
$433,130
2008
$326,248
58,499
8,083
54,488
$447,318
Encumbered CTL assets – As of December 31, 2009 and 2008,
CTL assets with a net book value of $2.59 billion and $1.52 billion,
respectively, were encumbered with mortgages or pledged as col-
lateral for the Company’s debt.
Equity method investments
Explanatory Note:
(1)
Accumulated amortization on CTL intangibles was $33.1 million and $24.1 million as of
December 31, 2009 and 2008, respectively.
The Company’s equity method investments and its proportionate share of their results were as follows (in thousands):
Oak Hill
Madison Funds
TimberStar Southwest
Other
Total
Carrying value at
December 31,
Equity in earnings
for the years ended December 31,
2009
$180,372
75,096
93
83,441
$339,002
2008
$182,638
60,355
6,167
77,088
$326,248
2009
$ 21,745
(5,620)
(255)
(10,572)
$ 5,298
2008
$20,644
(7,392)
(3,499)
(3,218)
$ 6,535
2007
$ 25,980
2,804
(14,460)
15,302
$ 29,626
Oak Hill – As of December 31, 2009, the Company owned
47.5% interests in Oak Hill Advisors, L.P., Oak Hill Credit Alpha
MGP, LLC, Oak Hill Credit Opportunities MGP, LLC, OHA Finance MGP,
LLC, OHA Capital Solutions MGP, LLC, OHA Strategic Credit Fund, LLC,
OHA Leveraged Loan Portfolio GenPar, LLC, Oak Hill Credit OPP
Fund, LP, OHA Structured Products MGP, LLC, and 48.1% interests
in OHSF GP Partners II, LLC and OHSF GP Partners (Investors),
LLC, (collectively, “Oak Hill”). The Company appointed to its Board of
Directors a member that holds a substantial investment in Oak Hill.
As such Oak Hill is a related party of the Company. Oak Hill engages
in investment and asset management services. The Company has
determined that all of these entities are variable interest entities and
that an external member is the primary benefi ciary. Upon acqui-
sition of the original interests in Oak Hill, there was a difference
between the Company’s carrying value of its equity investments and
the underlying equity in the net assets of Oak Hill of $200.2 million.
The Company allocated this value to identifi able intangible assets of
$81.8 million and goodwill of $118.4 million. The unamortized balance
related to intangible assets for these investments was $45.3 million
and $51.2 million as of December 31, 2009 and 2008, respectively.
Madison Funds – As of December 31, 2009, the Company
owned a 29.52% interest in Madison International Real Estate Fund II,
LP, a 32.92% interest in Madison International Real Estate Fund III, LP
and a 29.52% interest in Madison GP1 Investors, LP (collectively, the
“Madison Funds”). The Madison Funds invest in illiquid ownership
positions of entities that own real estate assets.
Other equity method investments – The Company also had
smaller investments in several other entities that were accounted
for under the equity method where the Company has ownership
interests up to 50.0%. Several of these investments are in real estate
related funds or other strategic investment opportunities within
niche markets.
During the year ended December 31, 2009, the Company
recorded a non-cash out-of-period charge of $9.4 million to recog-
nize additional losses from an equity method investment as a result
of additional depreciation expense that should have been recorded at
the equity method entity. This adjustment was recorded as a reduc-
tion to “Other investments” on the Company’s Consolidated Balance
Sheets and a decrease to “Earnings from equity method invest-
ments,” on the Company’s Consolidated Statements of Operations.
The Company concluded that the amount of losses that should have
been recorded in periods beginning in July 2007 were not material
to any of its previously issued fi nancial statements. The Company
also concluded that the cumulative out-of-period charge was not
material to the fi scal year in which it has been recorded. As such,
55
the charge was recorded in the Company’s Consolidated Statements
of Operations for the year ended December 31, 2009, rather than
restating prior periods.
loan receivable, which resulted in a net gain of $12.0 million. The gain
was recorded in “Other income” on the Consolidated Statements
of Operations.
TimberStar Southwest – Prior to selling its interest, the
Company owned a 46.7% interest in TimberStar Southwest Holdco
LLC (“TimberStar Southwest”), through its majority-owned subsid-
iary TimberStar. The Company accounted for this investment under
the equity method due to the venture’s external partners having
certain participating rights giving them shared control. In April 2008,
the Company closed on the sale of TimberStar Southwest for a
gross sales price of $1.71 billion, including the assumption of debt.
The Company received net proceeds of $417.0 million for its interest
in the venture and recorded a gain of $280.2 million, which includes
$18.6 million attributable to noncontrolling interests. The amounts
were recorded in “Gain on sale of joint venture interest” and “Gain on
sale of joint venture interest attributable to noncontrolling interests”
on the Company’s Consolidated Statements of Operations.
Timber and timberlands
On June 30, 2008, the Company closed on the sale of its
Maine timber property for net proceeds of $152.7 million, resulting in
a total gain of $27.0 million, which includes $3.7 million attributable to
noncontrolling interests. These gains are included in “Gain from dis-
continued operations” and “Gain from discontinued operations attrib-
utable to noncontrolling interests” on the Company’s Consolidated
Statements of Operations. The Company reflected net income
from the operations of its Maine timber property of $2.3 million and
$3.3 million in “Income (loss) from discontinued operations” for the
years ended December 31, 2008 and 2007, respectively.
Note 8 – Other Assets and Other Liabilities
CTL in-place lease intangible assets, net
Deferred expenses and other assets, net, consist of the fol-
As of December 31, 2009 and 2008, the Company had
$48.8 million and $58.5 million, respectively, of unamortized fi nite-
lived intangible assets primarily related to the prior acquisition of
CTL facilities. Amortization expense for these intangible assets
was $9.6 million, $8.9 million and $7.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Marketable securities at fair value
As of December 31, 2009 and 2008, marketable securities
included trading securities with a fair market value of $38.2 million
and $7.9 million, respectively. Trading securities are recorded at their
fair market value with gains and losses included in “Other income”
on the Company’s Consolidated Statements of Operations. For the
years ended December 31, 2009 and 2008, the Company recognized
gains (losses) of $15.5 million, and $(0.9) million, respectively, from
trading securities.
56
Cost method investments
The Company has investments in several real estate related
funds or other strategic investment opportunities that are accounted
for under the cost method. During the years ended December 31,
2009, 2008 and 2007, the Company determined that unrealized
losses on certain of its cost method investments were other-
than-temporary and recorded impairment charges of $7.5 million,
$87.0 million and $9.3 million, respectively.
During the year ended December 31, 2008, the Company
redeemed its interest in a profi ts participation that was originally
received as part of a prior lending investment and carried as a cost
method investment prior to redemption. As a result of the trans-
action, the Company received cash of $44.2 million and recorded
an equal amount of income in “Other income” on the Company’s
Consolidated Statements of Operations. In addition, during 2008,
the Company also exchanged an investment with a carrying value
of $97.4 million, net of noncontrolling interest, for a $109.0 million
lowing items (in thousands):
Deferred fi nancing fees, net(1)
Other receivables
Leasing costs, net(2)
Corporate furniture, fi xtures and
equipment, net(3)
Goodwill
Other assets
Deferred expenses and other assets, net
As of December 31,
2009
$ 41,959
15,235
14,830
14,550
–
22,632
$109,206
2008
$ 25,387
29,036
16,072
16,640
4,186
27,703
$119,024
Explanatory Notes:
(1)
(2)
(3)
Accumulated amortization on deferred fi nancing fees was $30.3 million and $24.1 million
as of December 31, 2009 and 2008, respectively.
Accumulated amortization on leasing costs was $11.2 million and $8.7 million as of
December 31, 2009 and 2008, respectively.
Accumulated depreciation on corporate furniture, fi xture and equipment was $9.4 million
and $7.2 million as of December 31, 2009 and 2008, respectively.
Accounts payable, accrued expenses and other liabilities
consist of the following items (in thousands):
As of December 31,
2009
Fremont Participation payable (see Note 4) $ 67,711
49,697
Accrued interest payable
37,388
Accrued expenses
24,763
Security deposits from customers
17,153
Unearned operating lease income
9,336
Deferred tax liabilities
5,211
Property taxes payable
Other liabilities
40,851
Accounts payable, accrued expenses
2008
$141,717
87,057
41,745
17,550
21,659
6,900
5,187
32,677
and other liabilities
$252,110
$354,492
sfi 2009
Note 9 – Debt Obligations, net
Note 9 – Debt Obligations, net
As of December 31, 2009 and 2008, the Company’s debt obligations were as follows (in thousands):
As of December 31, 2009 and 2008, the Company’s debt obligations were as follows (in thousands):
Secured revolving credit facilities:
Secured revolving credit facilities:
Line of credit(1)
Line of credit(1)
Line of credit
Line of credit
Line of credit
Line of credit
Unsecured revolving credit facilities:
Unsecured revolving credit facilities:
Line of credit
Line of credit
Line of credit
Line of credit
Total revolving credit facilities
Total revolving credit facilities
Secured term loans:
Secured term loans:
Collateralized by investments in corporate debt
Collateralized by investments in corporate debt
Collateralized by CTLs
Collateralized by CTLs
Collateralized by loans, CTLs, REHI and OREO
Collateralized by loans, CTLs, REHI and OREO
Collateralized by loans, CTLs, REHI and OREO(4)
Collateralized by loans, CTLs, REHI and OREO(4)
Collateralized by loans, CTLs, REHI and OREO
Collateralized by loans, CTLs, REHI and OREO
Collateralized by CTLs
Collateralized by CTLs
Collateralized by CTLs and OREO(3)
Collateralized by CTLs and OREO(3)
Total secured term loans
Total secured term loans
Secured notes:
Secured notes:
8.0% senior notes(4)
8.0% senior notes(4)
10.0% senior notes(4)
10.0% senior notes(4)
Total secured notes
Total secured notes
Unsecured notes:
Unsecured notes:
4.875% senior notes
4.875% senior notes
LIBOR + 0.55% senior notes
LIBOR + 0.55% senior notes
LIBOR + 0.34% senior notes
LIBOR + 0.34% senior notes
LIBOR + 0.35% senior notes
LIBOR + 0.35% senior notes
5.375% senior notes
5.375% senior notes
6.0% senior notes
6.0% senior notes
5.80% senior notes
5.80% senior notes
5.125% senior notes
5.125% senior notes
5.650% senior notes
5.650% senior notes
5.15% senior notes
5.15% senior notes
5.500% senior notes
5.500% senior notes
LIBOR + 0.50% senior convertible notes
LIBOR + 0.50% senior convertible notes
8.625% senior notes
8.625% senior notes
5.95% senior notes
5.95% senior notes
6.5% senior notes
6.5% senior notes
5.70% senior notes
5.70% senior notes
6.05% senior notes
6.05% senior notes
5.875% senior notes
5.875% senior notes
5.850% senior notes
5.850% senior notes
Total unsecured notes
Total unsecured notes
Other debt obligations
Other debt obligations
Total debt obligations
Total debt obligations
Debt premiums/(discounts), net(4)
Debt premiums/(discounts), net(4)
Total debt obligations, net
Total debt obligations, net
Explanatory Notes:
Explanatory Notes:
Carrying Value as of
Carrying Value as of
2009
2009
2008
2008
Stated
Stated
Interest Rates
Interest Rates
Scheduled
Scheduled
Maturity Date
Maturity Date
$ –
$ –
625,247
625,247
334,180
334,180
$ 306,867
$ 306,867
–
–
–
–
504,305
504,305
244,295
244,295
1,708,027
1,708,027
–
–
947,862
947,862
1,055,000
1,055,000
621,221
621,221
1,000,000
1,000,000
114,279
114,279
260,980
260,980
2,122,904
2,122,904
1,158,369
1,158,369
3,588,140
3,588,140
300,000
300,000
947,862
947,862
–
–
–
–
–
–
117,371
117,371
241,094
241,094
3,999,342
3,999,342
1,606,327
1,606,327
155,253
155,253
479,548
479,548
634,801
634,801
–
–
–
–
–
–
158,699
158,699
143,509
143,509
251,086
251,086
192,890
192,890
175,168
175,168
286,787
286,787
406,996
406,996
146,470
146,470
787,750
787,750
508,701
508,701
459,453
459,453
75,635
75,635
206,601
206,601
105,765
105,765
261,403
261,403
99,722
99,722
4,266,635
4,266,635
100,000
100,000
10,708,805
10,708,805
186,098
186,098
$10,894,903
$10,894,903
–
–
–
–
–
–
249,627
249,627
176,550
176,550
465,000
465,000
480,000
480,000
245,000
245,000
334,820
334,820
239,500
239,500
241,150
241,150
461,595
461,595
603,768
603,768
230,700
230,700
787,750
787,750
697,293
697,293
795,227
795,227
128,715
128,715
295,099
295,099
201,880
201,880
407,748
407,748
189,530
189,530
7,230,952
7,230,952
100,000
100,000
12,525,419
12,525,419
(39,015)
(39,015)
$12,486,404
$12,486,404
–
–
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 0.85%(2)
LIBOR + 0.85%(2)
LIBOR + 0.85%(2)
LIBOR + 0.85%(2)
–
–
Greater of 6.25% or
Greater of 6.25% or
LIBOR + 3.40%
LIBOR + 3.40%
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 1.50%(2)
LIBOR + 2.50%
LIBOR + 2.50%
11.438%
11.438%
LIBOR + 1.65%
LIBOR + 1.65%
–
–
June 2011
June 2011
June 2012
June 2012
June 2011
June 2011
June 2012
June 2012
–
–
April 2011
April 011
June 2011
June 2011
June 2012
June 2012
June 2012
June 2012
December 2020
December 2020
6.4%–8.4% Various through 2029
6.4%–8.4% Various through 2029
8.0%
8.0%
10.0%
10.0%
March 2011
March 2011
June 2014
June 2014
–
–
–
–
–
–
LIBOR + 0.35%
LIBOR + 0.35%
5.375%
5.375%
6.0%
6.0%
5.80%
5.80%
5.125%
5.125%
5.650%
5.650%
5.15%
5.15%
5.500%
5.500%
LIBOR + 0.50%
LIBOR + 0.50%
8.625%
8.625%
5.95%
5.95%
6.5%
6.5%
5.70%
5.70%
6.05%
6.05%
5.875%
5.875%
5.850%
5.850%
–
–
–
–
–
–
March 2010
March 2010
April 2010
April 2010
December 2010
December 2010
March 2011
March 2011
April 2011
April 2011
September 2011
September 2011
March 2012
March 2012
June 2012
June 2012
October 2012
October 2012
June 2013
June 2013
October 2013
October 2013
December 2013
December 2013
March 2014
March 2014
April 2015
April 2015
March 2016
March 2016
March 2017
March 2017
LIBOR + 1.5%
LIBOR + 1.5%
October 2035
October 2035
57
57
This credit line was fully repaid and terminated in 2009.
This credit line was fully repaid and terminated in 2009.
(1)
(1)
(2) These revolving and term loan commitments have an annual commitment fee of 0.20%.
(2) These revolving and term loan commitments have an annual commitment fee of 0.20%.
(3)
(3)
(4)
(4)
Includes the balance of a $35.2 million non-recourse senior secured term loan which the Company recorded in 2009 in conjunction with taking ownership of a property that was previously
Includes the balance of a $35.2 million non-recourse senior secured term loan which the Company recorded in 2009 in conjunction with taking ownership of a property that was previously
fi nanced by a mezzanine loan funded by the Company and by a senior secured term loan of a third-party lender.
fi nanced by a mezzanine loan funded by the Company and by a senior secured term loan of a third-party lender.
As of December 31, 2009, debt premiums/(discounts), net includes debt premiums of $221.3 million associated with the secured notes and resulted from the unsecured/secured note
As of December 31, 2009, debt premiums/(discounts), net includes debt premiums of $221.3 million associated with the secured notes and resulted from the unsecured/secured note
exchange transactions completed in May 2009 (see below). In addition, amount includes debt discounts related to unsecured convertible notes of $32.7 million and other premiums and
exchange transactions completed in May 2009 (see below). In addition, amount includes debt discounts related to unsecured convertible notes of $32.7 million and other premiums and
discounts on other debt obligations.
discounts on other debt obligations.
Future Scheduled Maturities – As of December 31, 2009, future
scheduled maturities of outstanding long-term debt obligations, net
are as follows (in thousands):
Triggers below). As of December 31, 2009, there was approximately
$2.1 million that was immediately available to draw under the Second
Priority Credit Agreement.
2010
2011
2012(1)
2013
2014
Thereafter
Total principal maturities
Unamortized debt premiums, net
Total long-term debt obligations, net
$ 586,772
4,022,349
3,540,912
1,099,730
686,149
772,893
10,708,805
186,098
$10,894,903
Explanatory Note:
(1)
As further discussed in Debt Covenants below, although due in 2012, as presented
above, if the Company does not pay down the outstanding balance of its $1.00 billion
First Priority Credit Agreement by $500 million by September 30, 2010, payments of
principal and net sale proceeds received by the Company in respect of assets constituting
collateral for its obligation under this agreement must be applied towards the mandatory
prepayment of the loan and commitment reductions under the agreement.
Signifi cant debt transactions in 2009:
Credit Facilities Restructuring – In March 2009, the Company
entered into a $1.00 billion First Priority Credit Agreement with
participating members of its existing bank lending group. The First
Priority Credit Agreement will mature in June 2012. Borrowings
bear interest at the rate of LIBOR + 2.50% per year, subject to adjust-
ment based upon the Company’s corporate credit ratings (see
Ratings Triggers below) and are collateralized by a fi rst-priority lien
on a pool of collateral consisting of loans, debt securities, corpo-
rate tenant lease assets and other assets pledged under the First
and Second Priority Credit Agreements and the Second Priority
Secured Exchange Notes (see below). As of December 31, 2009, the
First Priority Credit Agreement was fully drawn with $1.00 billion of
secured term loans outstanding.
Also in March 20 09, the Company restructured its
two unsecured revolving credit facilities by entering into Second
Priority Credit Agreements, with $1.70 billion maturing in 2011 and
$950.0 million maturing in 2012, with the same lenders participating
in the First Priority Credit Agreement. Such lenders’ commitments
under the Company’s unsecured facilities have been terminated and
replaced by their commitments under the Second Priority Credit
Agreements. Under these agreements, the participating lenders
have a second priority lien on the same collateral pool securing the
First Priority Credit Agreement and the Second Priority Secured
Exchange Notes (see Unsecured/Secured Note Exchange below).
As of December 31, 2009, outstanding borrowings under the Second
Priority Credit Agreements include $625.2 million and $334.2 million
of revolving loans as well as $1.06 billion and $621.2 million of term
loans due in June 2011 and June 2012, respectively. Borrowings bear
interest at the rate of LIBOR + 1.50% per year, subject to adjustment
based upon the Company’s corporate credit ratings (see Ratings
At December 31, 2009, the total carrying value of assets
pledged as collateral under the First and Second Priority Credit
Agreements and the Second Priority Secured Exchange Notes was
$5.73 billion.
Concurrently with entering into the First and Second
Priority Credit Agreements, the Company entered into amend-
ments to its $2.22 billion and $1.20 billion unsecured revolving credit
facilities. As of December 31, 2009, after giving effect to the amend-
ments, outstanding balances on the unsecured credit facilities were
$504.3 million, which will expire in June 2011, and $244.3 million,
which will expire in June 2012. The amendments eliminated certain
covenants and events of default. The unsecured revolving credit facil-
ities may not be repaid prior to maturity while the First and Second
Priority Credit Agreements remain outstanding. These facilities
remain unsecured and no changes were made to the pricing terms of
these facilities in connection with these amendments.
Unsecured/Secured Notes Exchange – On May 8, 2009, the
Company completed a series of private offers in which the Company
issued $155.3 million aggregate principal amount of its 8.0% second
priority senior secured guaranteed notes due 2011 (“2011 Notes”)
and $479.5 million aggregate principal amounts of its 10.0% second
priority senior secured guaranteed notes due 2014 (“2014 Notes”
and together with the 2011 Notes, the “Second Priority Secured
Exchange Notes”) in exchange for $1.01 billion aggregate principal
amount of its senior unsecured notes of various series. The Second
Priority Secured Exchange Notes are collateralized by a second
priority lien on the same pool of collateral pledged under the First
and Second Priority Credit Agreements. In conjunction with the
exchange, the Company also purchased $12.5 million par value of its
outstanding senior fl oating rate notes due September 2009 in a cash
tender offer.
The Company has accounted for the issuance of the 2014
Notes in exchange for various series of senior unsecured notes as
a troubled debt restructuring. As such, the Company recognized a
gain on the exchange to the extent that the prior carrying value of
the senior unsecured notes exceeded the total future contractual
cash payments of the 2014 Notes, consisting of both principal and
interest. The issuance of the 2011 Notes in exchange for senior
unsecured notes was considered a modifi cation of the original debt
resulting in adjustments to the carrying amounts for any new pre-
miums or discounts. As a result of these transactions, including the
purchase of $12.5 million of outstanding senior fl oating notes due
September 2009 in a cash tender offer, the Company recognized
a $107.9 million gain on early extinguishment of debt, net of closing
costs of $11.8 million, and recorded a deferred gain of $262.7 million
which is refl ected as premiums to the par value of the new debt.
These premiums are being amortized over the terms of the 2011
Notes and the 2014 Notes as a reduction to interest expense. As of
58
sfi 2009
December 31, 2009, the remaining premiums to be amortized are
$215.8 million for the 2014 Notes and $5.5 million for the 2011 Notes.
In addition, in connection with the exchange for the 2011 Notes, the
Company incurred $4.3 million of direct costs which were recorded
in “Other expense” on its Consolidated Statements of Operations.
Note Repurchases – During the year ended December 31,
2009, the Company repurchased, through open market and private
transactions, $1.31 billion par value of its senior unsecured notes
with various maturities ranging from January 2009 to March 2017.
In connection with these repurchases, the Company recorded an
aggregate net gain on early extinguishment of debt of $439.4 million
for the year ended December 31, 2009.
Convertible Notes – As discussed in Note 3, the Company
adopted the provisions of ASC 470-20-65-1 on January 1, 2009, as
required. ASC 470-20-65-1 requires the Company to account for
proceeds from the issuance of convertible notes separately between
the liability component and the conversion option (or the equity com-
ponent). This standard is applicable to the Company’s $800.0 mil-
lion aggregate principal amount of convertible senior fl oating rate
notes due October 2012 (“Convertible Notes”). The Convertible Notes
are convertible at the option of the holders, into 22.2 shares per
$1,000 principal amount of Convertible Notes, on or after August 15,
2012, or prior to that date if (1) the price of the Company’s Common
Stock trades above 130% of the conversion price for a specifi ed dura-
tion, (2) the trading price of the Convertible Notes is below a certain
threshold, subject to specifi ed exceptions, (3) the Convertible Notes
have been called for redemption, or (4) specifi ed corporate trans-
actions have occurred. None of the conversion triggers have been
met as of December 31, 2009.
As of December 31, 2009, the carrying value of the addi-
tional paid-in-capital, or equity component of the Convertible Notes,
was $37.4 million. As of December 31, 2009, the principal outstand-
ing of the Convertible Notes was $787.8 million, the unamortized
discount was $32.7 million and the net carrying amount of the
liability was $755.1 million. As required, the adoption was applied
retrospectively to all periods presented for fi scal years beginning
before December 31, 2008. For the years ended December 31, 2009,
2008 and 2007, the Company recognized interest on the Convertible
Notes of $21.0 million, $42.3 million and $12.1 million, respectively, in
“Interest expense” on its Consolidated Statements of Operations, of
which $10.0 million, $9.5 million and $2.3 million, respectively, related
to the amortization of the debt discount (see Note 14 for details on
the impact of earnings per share due to the adoption).
Signifi cant debt transactions in 2008:
Secured Term Loans – During 2008, the Company closed
on a $947.9 million secured term fi nancing maturing in April 2011.
This fi nancing is collateralized by 34 properties in the Company’s
Corporate Tenant Lease portfolio and bears interest at the greater of
6.25% or LIBOR + 3.40%.
Note Repurchases – During the year ended December 31,
2008, the Company repurchased, through open market and private
transactions $900.7 million par value of its senior unsecured notes
with various maturities ranging from January 2009 to March 2017.
In connection with these repurchases, the Company recorded an
aggregate net gain on early extinguishment of debt $393.1 million for
the year ended December 31, 2008.
Senior Note Issuances – In May 2008, the Company issued
$750.0 million aggregate principal amount of senior unsecured
notes bearing interest at an annual rate of 8.625% and maturing in
June 2013. The Company used the proceeds from the issuance of
these securities primarily to repay outstanding indebtedness under
its unsecured revolving credit facility. Simultaneous with the issu-
ance of this debt, the Company also entered into interest rate swap
agreements to swap the fi xed interest rate on the $750.0 million
senior unsecured notes for a variable interest rate. During the year
ended December 31, 2008, the Company terminated the swaps asso-
ciated with these notes (see Note 12 for further details).
Debt Covenants
The Company’s ability to borrow under its secured credit
facilities depends on maintaining compliance with various covenants,
including a minimum tangible net worth covenant and specifi ed fi nan-
cial ratios, such as fi xed charge coverage, unencumbered assets
to unsecured indebtedness, eligible collateral coverage and lever-
age ratios. All of these covenants on the facilities are maintenance
covenants and, if breached could result in an acceleration of the
Company’s facilities if a waiver or modifi cation is not agreed upon
with the requisite percentage of the unsecured lending group and
lenders on the other facilities (see Business Risks and Uncertainties
in Note 10). The Company’s secured credit facilities also impose
limitations on repayments, repurchases, refi nancings and optional
redemptions of its existing unsecured notes or secured exchange
notes issued pursuant to the Company’s exchange offer, as well as
limitations on repurchases of its Common Stock. For so long as the
Company maintains its qualifi cation as a REIT, the secured credit
facilities permit the Company to distribute 100% of its REIT taxable
income on an annual basis. The Company may not pay common divi-
dends if it ceases to qualify as a REIT.
The Company’s publicly held debt securities also contain
covenants that include fi xed charge coverage and unencumbered
assets to unsecured indebtedness ratios and its secured debt secu-
rities have an eligible collateral coverage requirement. The fi xed
charge coverage ratio is an incurrence test. If the Company does
not meet the fi xed charge coverage ratio, its ability to incur addi-
tional indebtedness will be restricted. The unencumbered assets to
unsecured indebtedness covenant and the eligible collateral cover-
age covenant are maintenance covenants and, if breached and not
cured within applicable cure periods, could result in acceleration of
the Company’s publicly held debt unless a waiver or modifi cation
is agreed upon with the requisite percentage of the bondholders.
59
Note 10 – Commitments and Contingencies
Business Risks and Uncertainties – The fi nancial market condi-
tions that began in late 2007, including the economic recession and
tightening of credit markets, continued to signifi cantly impact the
commercial real estate market and fi nancial services industry in
2009. The severe economic downturn led to a decline in commer-
cial real estate values, which combined with a lack of available debt
fi nancing for commercial and residential real estate assets, limited
borrowers’ ability to repay or refi nance their loans. Further, the abil-
ity of many of the Company’s borrowers to sell units in residential
projects has been adversely impacted by current economic condi-
tions and the lack of end loan fi nancing available to residential unit
purchasers. The combination of these factors adversely affected
our business, fi nancial condition and operating performance, result-
ing in signifi cant additions to non-performing assets, increases in
the related provision for loan losses and a reduction in the level of
liquidity available to fi nance our operations. These economic factors
and their effect on our operations have resulted in increases in our
fi nancing costs, a continuing inability to access the unsecured debt
markets, depressed prices for our Common Stock, the continued
suspension of quarterly Common Stock dividends and has narrowed
the Company’s margin of compliance with debt covenants.
The Company’s primary recourse debt instruments include
its secured and unsecured bank credit facilities and its secured and
unsecured public debt securities. The Company believes it is in full
compliance with all the covenants in those debt instruments as of
December 31, 2009, however, the Company’s recent fi nancial results
have put pressure on the Company’s ability to maintain compliance
with certain of the debt covenants in its secured bank credit facilities.
In particular, the Company’s tangible net worth at December 31, 2009
was approximately $1.7 billion, which is not signifi cantly above the
fi nancial covenant minimum requirement in the Company’s secured
credit facilities of $1.5 billion. The Company intends to operate
its business in order to remain in compliance with the covenants
in its debt instruments; however, it is possible that the Company will
not be able to do so. A failure by the Company to satisfy a fi nancial
covenant in a debt instrument could trigger a default under that debt
instrument and could give the lenders the ability to accelerate the
debt if the default is not waived or cured. Most of the Company’s
recourse debt instruments contain cross default and/or cross accel-
eration provisions which may be triggered by defaults or accelera-
tions of the Company’s recourse debt above specifi ed thresholds.
From a liquidity perspective, the Company expects to
continue to experience signifi cant uncertainty with respect to its
sources of funds. The Company’s cash fl ow may be affected by a
variety of factors, many of which are outside of its control, including
Based on the Company’s unsecured credit ratings at December 31,
2009, the fi nancial covenants in its publicly held debt securities,
including the fi xed charge coverage ratio and maintenance of unen-
cumbered assets to unsecured indebtedness ratio, are operative.
The Company’s secured credit facilities and its public debt
securities contain cross default provisions that would allow the lend-
ers and the bondholders to declare an event of default and acceler-
ate the Company’s indebtedness to them if the Company fails to pay
amounts due in respect of its other recourse indebtedness in excess
of specifi ed thresholds. In addition, the Company’s secured credit
facilities, unsecured credit facilities and the indentures governing
its public debt securities provide that the lenders and bondholders
may declare an event of default and accelerate its indebtedness to
them if there is a non-payment default under the Company’s other
recourse indebtedness in excess of specifi ed thresholds and, if the
holders of the other indebtedness are permitted to accelerate, in
the case of the secured credit facilities, or accelerate, in the case
of its unsecured credit facilities and the bond indentures, the other
recourse indebtedness.
Under certain circumstances, the First and Second Priority
Credit Agreements require that payments of principal and net sale
proceeds received by the Company in respect of assets constitut-
ing collateral for the Company’s obligations under these agreements
be applied toward the mandatory prepayment of loans and com-
mitment reductions under them. The Company would be required
to make such prepayments (i) during any time that the ratio of its
EBITDA to fi xed charges, as defi ned under the agreements, is less
than 1.25 to 1.00, (ii) if, after receiving a payment of principal or net
sale proceeds in respect of collateral, the Company has insuffi cient
eligible assets available to pledge as replacement collateral or (iii) if,
and for so long as, the aggregate principal amount of loans outstand-
ing under the First Priority Credit Agreement exceeds $500 million
at any time on or after September 30, 2010, or zero at any time
on or after March 31, 2011. The First and Second Priority Credit
Agreements and indentures governing the Second Priority Secured
Exchange Notes contain a number of covenants, including that the
Company maintain collateral coverage of at least 1.3x the aggregate
borrowings and letters of credit outstanding under the First Priority
Credit Agreement, the Second Priority Credit Agreements and the
Second Priority Secured Exchange Notes.
The Company believes it is in full compliance with all the
covenants in its debt obligations as of December 31, 2009.
Ratings Triggers
The Company’s First and Second Priority Secured Credit
Agreements and unsecured credit agreements bear interest at
LIBOR-based rates plus an applicable margin which varies between
the Credit Agreements and is determined based on the Company’s
corporate credit ratings. The Company’s ability to borrow under
its credit facilities is not dependent on the level of its credit ratings.
Based on the Company’s current credit ratings, further downgrades
in the Company’s credit ratings will have no effect on its borrowing
rates under these facilities.
sfi 2009
60
volatility in the fi nancial markets, the Company’s borrowers’ ability to
repay their obligations and other general business conditions. As of
December 31, 2009, the Company had $224.6 million of unrestricted
cash. The Company expects to need additional liquidity over the
coming year to supplement expected loan repayments and cash gen-
erated from operations in order to meet its debt maturities and fund-
ing obligations. During 2009, the Company utilized its unencumbered
assets to generate additional liquidity through secured fi nancing
transactions and a secured note exchange transaction, and also sold
various assets. In addition, the Company has signifi cantly curtailed
its asset origination activities, reducing operating expenses and
focused on asset management in order to maximize recoveries from
existing asset resolutions. The Company intends to utilize all avail-
able sources of funds in today’s fi nancing environment, which could
include additional fi nancings secured by its assets, increased levels
of asset sales, joint ventures and other third-party capital to meet its
liquidity requirements. There can be no assurance that the company
will possess suffi cient liquidity to meet all of its debt service require-
ments in 2010. The failure to execute such alternatives successfully
prior to debt maturity would have material adverse consequences on
the Company. In addition the Company is exploring various alterna-
tives to enable it to meet its signifi cant 2011 debt maturities.
The Company has reacted to the adverse market conditions
and liquidity and debt covenant pressures by implementing various
initiatives, including the sale of assets and repurchases of its debt at
a discount to par, which it believes will guide it through the diffi cult
business conditions the Company expects to persist through 2010.
The Company’s public debt securities continue to trade at signifi cant
discounts to par. The Company has been able to partially mitigate the
impact of the decline in operating results through the recognition
of gains associated with the repurchase and retirement of debt at a
discount, which has enabled it to maintain compliance with its debt
covenants and to reduce outstanding indebtedness at discounts to
par. The Company expects to continue to use available funds and
other strategies to seek to retire its debt at a discount; however,
there can be no assurance that the Company’s efforts in this regard
will be successful.
The Company’s plans are dynamic and it expects to adjust
its plans as market conditions change. If the Company is unable to
successfully implement its plans, this would have material adverse
consequences on the Company.
Unfunded Commitments – The Company has certain off-
balance sheet unfunded commitments. The Company generally
funds construction and development loans and build outs of CTL
space over a period of time if and when the borrowers and tenants
meet established milestones and other performance criteria. The
Company refers to these arrangements as Performance-Based
Commitments. In addition, the Company will sometimes establish a
maximum amount of additional fundings which it will make available
to a borrower or tenant for an expansion or addition to a project if
it approves of the expansion or addition at its sole discretion. The
Company refers to these arrangements as Discretionary Fundings.
Finally, the Company has committed to invest capital in several real
estate funds and other ventures. These arrangements are referred
to as Strategic Investments. As of December 31, 2009, the maxi-
mum amounts of the fundings the Company may make under each
category, assuming all performance hurdles and milestones are
met under Performance-Based Commitments, that it will approve
all Discretionary Fundings and that 100% of its capital committed to
Strategic Investments is drawn down are as follows (in thousands):
Performance-Based
Commitments
Discretionary Fundings
Strategic Investments
Total
Loans
CTL
Total
$616,400
137,685
N/A
$754,085
$13,074
–
N/A
$13,074
$629,474
137,685
73,139
$840,298
Other Commitments – As a result of the Company’s decision to
remain in its current space that is leased through 2021, the Company
entered into a settlement agreement with a landlord regarding a
separate long-term lease for new headquarters space dated May 22,
2007 (as amended and restated, the “Lease”). Under the settlement,
the Company agreed to pay the landlord a $42.4 million settlement
payment in order to settle all disputes between the Company and the
landlord relating to the Lease and the landlord agreed among other
things, to terminate the Lease. For the year ended December 31,
2009, the Company recognized a $42.4 million lease termina-
tion expense in “Other expense” on the Company’s Consolidated
Statements of Operations.
Total operating lease expense for the years ended
December 31, 2009, 2008 and 2007 were $13.3 million, $7.9 million
and $7.1 million, respectively. Future minimum lease obligations
under non-cancelable operating leases are as follows (in thousands):
61
2010
2011
2012
2013
2014
Thereafter
$ 6,095
5,945
5,152
4,558
4,186
21,343
Note 11 – 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. As of December 31, 2009, 137.9 million common shares were issued and 94.2 million common shares
were outstanding.
The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of December 31, 2009 and 2008:
Shares Authorized Issued and
Outstanding (in thousands)
4,000
5,600
4,000
3,200
5,000
21,800
Cumulative Preferential Cash Dividends(1)(2)
Rater per Annum of the
$25.00 Liquidation Preference
8.00%
7.875%
7.8%
7.65%
7.50%
Equivalent to Fixed
Annual Rate (per share)
$2.00
$1.97
$1.95
$1.91
$1.88
Par Value
$0.001
$0.001
$0.001
$0.001
$0.001
Series
D
E
F
G
I
Explanatory Notes:
(1)
Holders of shares of the Series D, E, F, G and I preferred stock are entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for the payment
of dividends. Dividends are cumulative 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
a business day, the next succeeding business day. Any dividend payable on the 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 fi rst 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.
(2) There are no dividend arrearages on any of the preferred shares currently outstanding.
The Series D, E, F, G, and I Cumulative Redeemable Preferred
Stock are redeemable without 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.
High Performance Unit Program
In May 2002, the Company’s shareholders approved the
iStar Financial High Performance Unit (“HPU”) Program. The pro-
gram entitled employee participants (“HPU Holders”) to receive dis-
tributions if the total rate of return on the Company’s Common Stock
(share price appreciation plus dividends) exceeded certain perfor-
mance thresholds over a specifi ed valuation period. The Company
established seven HPU plans that had valuation periods ending
between 2002 and 2008 and the Company has not established any
new HPU plans since 2005. HPU Holders purchased their interests
in High Performance Common Stock for aggregate initial purchase
prices of approximately $2.8 million, $1.8 million, $1.4 million, $0.6 mil-
lion, $0.7 million, $0.6 million and $0.8 million for the 2002, 2003,
2004, 2005, 2006, 2007 and 2008 plans, respectively.
The 2002, 2003 and 2004 plans all exceeded their perfor-
mance thresholds and are entitled to receive distributions equivalent
to the amount of dividends payable on 819,254 shares, 987,149 shares
and 1,031,875 shares, respectively, of the Company’s Common
Stock as and when such dividends are paid on the Company’s
Common Stock. Each of these three plans has 5,000 shares of High
Performance Common Stock associated with it, which is recorded
as a separate class of stock within shareholders’ equity on the
Company’s Consolidated Balance Sheets. High Performance Common
Stock carries 0.25 votes per share. Net income allocable to com-
mon shareholders is reduced by the HPU holders’ share of earnings.
The remaining four plans that had valuation periods which
ended in 2005, 2006, 2007 and 2008, did not meet their required
performance thresholds and none of the plans were funded. As a
result, the Company redeemed the participants’ units for approxi-
mately $1,700 resulting in the unit holders losing $2.4 million of
aggregate contributions.
In addition to these plans, a high performance unit program
for executive offi cers was established with plans having three-year
valuation periods which ended December 31, 2005, 2006, 2007 and
2008. The provisions of these plans were substantially the same
as the high performance unit programs for employees. The Chief
Executive Offi cer and former President collectively purchased 100%
interests in the Company’s 2005, 2006, 2007 and 2008 high perfor-
mance unit program for senior executive offi cers for an aggregate
purchase price of $1.5 million. These plans did not meet the required
performance thresholds and were not funded, resulting in the Chief
Executive Officer and former President losing $0.9 million and
$0.6 million in total contributions, respectively.
62
sfi 2009
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% of its taxable income and must distribute 100%
of its taxable income to avoid paying corporate federal income taxes.
The Company has recorded net operating losses and may record
signifi cant net operating losses in the future, which may reduce its
taxable income in future periods and lower or eliminate entirely the
Company’s obligation to pay dividends for such periods in order to
maintain its REIT qualifi cation. Because taxable income differs from
cash fl ow from operations due to non-cash revenues and expenses
(such as depreciation and certain asset impairments), in certain
circumstances, the Company may generate operating cash fl ow in
excess of its dividends or, alternatively, may be required to borrow
to make suffi cient dividend payments. The Company’s secured credit
facilities permits the Company to distribute 100% of its REIT taxable
income on an annual basis, for so long as the Company maintains
its qualifi cation as a REIT. The secured credit facilities restrict the
Company from paying any common dividends if it ceases to qualify
as a REIT. The Company did not declare or pay any Common Stock
dividends for the year ended December 31, 2009.
For tax reporting purposes:
Ordinary Dividend
15% Capital Gain
25% Section 1250 Capital Gains
Total dividends
declared
in thousands)(1)
–
$236,052
$459,253
Dividends
per share
–
$1.74
$3.60
Percentage
of dividends
per share
–
10.8%
90.7%
Percentage
of dividends
per share
–
76.1%
8.0%
Percentage
of dividends
per share
–
13.1%
1.3%
Per share
–
$0.2270
$0.0453
Per share
–
$1.3244
$0.2875
Per share
–
$0.1886
$3.2622
Year
2009
2008
2007
Explanatory Note:
(1)
For the years ended December 31, 2008 and 2007, 25.6% ($0.0483) and 2.6% ($0.0850), respectively of the ordinary dividend qualify as a qualifying dividend for those shareholders who held
shares for the Company for the entire year,
Stock Repurchase Program – On March 13, 2009, the Company’s Board of Directors authorized the repurchase of up to $50 million of
Common Stock from time to time in open market and privately negotiated purchases, including pursuant to one or more trading plans.
During the year ended December 31, 2009, the Company repurchased 11.8 million shares of its outstanding Common Stock for
approximately $29.9 million, at an average cost of $2.54 per share, and the repurchases were recorded at cost. As of December 31, 2009, the
Company had $21.5 million of Common Stock available to repurchase under authorized stock repurchase programs.
Noncontrolling Interest – The following table presents amounts attributable to iStar Financial Inc. and allocable to common share-
holders, HPU holders and Participating Security holders (in thousands):
Amounts attributable to iStar Financial Inc. and allocable to common shareholders,
HPU holders and Participating Security holders
Income (loss) from continuing operations
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss)
Preferred dividends
Net income (loss) allocable to common shareholders, HPU holders and Participating Security holders
For the Years Ended December 31,
2009
2008
2007
63
$(769,531)
(11,671)
12,426
(768,776)
(42,320)
$(811,096)
$(294,649)
3,855
87,769
(203,025)
(42,320)
$(245,345)
$199,616
29,970
7,832
237,418
(42,320)
$195,098
Note 12 – Risk Management and Derivatives
Derivatives
Risk management
In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main com-
ponents 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 points
in time and potentially at different bases, than its interest-earning
assets. Credit risk is the risk of default on the Company’s lending
investments that result from a borrower’s or corporate tenant’s
inability or unwillingness to make contractually required payments.
Market risk refl ects changes in the value of loans and other lending
investments 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, the valuation of CTL facilities held by
the Company and changes in foreign currency exchange rates.
Credit risk concentrations – Concentrations of credit risks
arise when a number of borrowers or customers related to the
Company’s investments are engaged in similar business activities,
or activities in the same geographic region, or have similar eco-
nomic 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 monitors vari-
ous segments of its portfolio to assess potential concentrations of
credit risks. Management believes the current portfolio is reasonably
well diversifi ed and does not contain any unusual concentration of
credit risks.
Substantially all of the Company’s CTL assets and assets
collateralizing its loans and other lending investments are located in
the United States, with California 15.3%, New York 11.7%, and Florida
11.6% representing the only signifi cant concentrations (greater than
10.0%) as of December 31, 2009. These assets also contain signifi -
cant concentrations in the following asset types as of December 31,
2009: apartment/residential 27.1%, land 15.4% and office 13.3%.
Additionally, 10.6% of the Company’s asset base is comprised of
loans collateralized by in-progress condo construction assets. These
percentages are based on the gross carrying value of the assets in
proportion to the total gross carrying value of the Company’s total
investment portfolio.
The Company underwrites the credit of prospective bor-
rowers 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 CTL assets are geographically diverse
and the borrowers and customers operate in a variety of industries,
to the extent the Company has a signifi cant 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, 2009,
the Company’s fi ve largest borrowers or CTL tenants collectively
accounted for approximately 14.8% of the Company’s aggregate
annualized interest and operating lease revenue, of which no single
customer accounts for more than 5.0%.
The Company’s use of derivative fi nancial instruments is pri-
marily limited to the utilization of interest rate hedges or other instru-
ments to manage interest rate risk exposure and foreign exchange
hedges to manage market risk exposure. The principal objective of
such hedges are to minimize the risks and/or costs associated with
the Company’s operating and fi nancial structure as well as to hedge
specifi c anticipated debt issuances and to manage its exposure to
foreign exchange rate movements. Derivatives not designated as
hedges are not speculative and are used to manage the Company’s
exposure to interest rate movements, foreign exchange rate move-
ments, and other identifi ed risks, but may not meet the strict hedge
accounting requirements.
At December 31, 2009 and 2008, respectively, derivatives
with a fair value of $0.8 million and $3.9 million, respectively, were
included in “Deferred expenses and other assets, net” and deriva-
tives with a fair value of $0.3 million and $0.1 million, respectively,
were included in “Accounts payable, accrued expenses and other
liabilities” on the Company’s Consolidated Balance Sheets. During the
years ended December 31, 2008 and 2007, the Company recorded a
net loss of $16.7 million and net gains of $0.2 million, respectively,
related to ineffectiveness of interest rate swaps.
2009 hedging activity – During the year ended December 31,
2009, the Company did not have any signifi cant hedging activity.
2008 hedging activity – During the year ended December 31,
2008, the Company had the following signifi cant hedging activity:
• The Company paid $11.1 million to terminate forward starting
swap agreements with a notional amount of $250.0 million. The
Company determined the forecasted transaction was not prob-
able of occurring and recorded $8.2 million of losses that are
recorded in “Other expense” on the Company’s Consolidated
Statements of Operations for the year ended December 31, 2008.
• The Company entered into two pay fl oating interest rate swap
agreements, designated as fair value hedges, with notional
amounts totaling $750.0 million. These swap agreements were
entered into in order to exchange the 8.625% fi xed-rate inter-
est payments on the Company’s $750.0 million senior notes
due in 2013 for variable-rate interest payments based on three-
month LIBOR + 3.84%. These swaps were terminated in 2008, as
described in the following paragraph.
• The Company terminated $1.76 billion of pay fl oating interest
rate swaps that were designated as fair value hedges of certain
unsecured notes. As a result of the terminations, the Company
received $51.1 million of cash, recorded a receivable of $19.0 mil-
lion and recorded premiums to the respective unsecured notes of
$65.7 million. The premiums amortize over the lives of the respec-
tive debt as an offset to “Interest expense” on the Company’s
Consolidated Statements of Operations. During the years ended
December 31, 2008 and 2007, the Company recorded a net loss
64
sfi 2009
of $16.7 million and net gains of $0.2 million, respectively, related
to ineffectiveness on interest rate swaps. In addition, for the year
ended December 31, 2008, the Company recognized a net loss
of $1.4 million for interest rate swaps not designated as hedges.
All of these amounts were recorded in “Other expense” on the
Company’s Consolidated Statements of Operations.
Note 13 – Stock-Based Compensation Plans and Employee Benefi ts
On May 27, 2009, the Company’s shareholders approved the
Company’s 2009 Long-Term Incentive Plan (the “2009 LTIP”) which is
designed to provide incentive compensation for offi cers, key employ-
ees, directors and advisors of the Company. The 2009 LTIP provides
for awards of stock options, shares of restricted stock, phantom
shares, restricted stock units, dividend equivalent rights and other
share-based performance awards. A maximum of 8,000,000 shares
of Common Stock may be awarded under the 2009 LTIP, plus up to an
additional 500,000 shares to the extent that a corresponding num-
ber of equity awards previously granted under the Company’s 1996
Long-Term Incentive Plan expire or are cancelled or forfeited. All
awards under the 2009 LTIP are made at the discretion of the Board
of Directors or a committee of the Board of Directors. The awards of
the 10.2 million restricted stock units granted on December 19, 2008
are required to be settled on a net, after-tax basis (after deducting
shares for minimum required statutory withholdings); therefore, the
actual number of shares issued will be less than the gross amount of
the awards. As of December 31, 2009, 2.1 million shares remain avail-
able for awards under the 2009 LTIP.
The Company’s 2006 Long-Term Incentive Plan (the “2006
LTIP”) is designed to provide equity-based incentive compensation
for offi cers, key employees, directors, consultants and advisers of
the Company. The 2006 LTIP provides for awards of stock options,
shares of restricted stock, phantom shares, dividend equivalent
rights and other share-based performance awards. A maximum
of 4,550,000 shares of Common Stock may be subject to awards
under the 2006 LTIP provided that the number of shares of Common
Stock reserved for grants of options designated as incentive stock
options is 1.0 million, subject to certain anti-dilution provisions in
the 2006 LTIP. All awards under this Plan are at the discretion of the
Board of Directors or a committee of the Board of Directors. As of
December 31, 2009, 1.4 million shares remain available for awards
under the 2006 LTIP.
The Company’s 20 07 Incentive Compensation Plan
(“Incentive Plan”) was approved and adopted by the Board of
Directors in 2007 in order to establish performance goals for
selected offi cers and other key employees and to determine bonuses
that will be awarded to those offi cers and other key employees
based on the extent to which they achieve those performance goals.
Equity-based awards may be made under the Incentive Plan, subject
to the terms of the Company’s equity incentive plans.
The Company recorded $23.6 million, $23.4 million and
$18.2 million of stock-based compensation expense in “General
and administrative” on the Company’s Consolidated Statements
of Operations for the years ended December 31, 2009, 2008 and
2007, respectively.
Stock Options – Changes in options outstanding during the year ended December 31, 2009, are as follows (amounts in thousands, except for weighted
average strike price):
Options Outstanding, December 31, 2008
Forfeited in 2009
Options Outstanding, December 31, 2009
Number of Shares
Non-Employee
Directors
86
(2)
84
Employees
396
(4)
392
Weighted
Average
Strike Price
$19.43
40.01
$19.08
Other
47
(3)
44
Aggregate
Intrinsic
Value
$ –
65
The following table summarizes information concern-
ing outstanding and exercisable options as of December 31, 2009
(options, in thousands):
Exercise Price
$16.88
$17.38
$19.69
$24.94
$27.00
$29.82
Options
Outstanding and
Exercise Price
364
14
47
40
11
44
520
Remaining
Contractual
Life (Years)
0.01
0.21
1.01
1.38
1.48
2.41
0.45
The Company has not issued any options since 2003.
During the year ended December 31, 2009, no options were exer-
cised. Cash received from option exercises during the years ended
December 31, 2008 and 2007 was $5.2 million and $2.9 million,
respectively. The intrinsic value of options exercised during the
years ended December 31, 2008 and 2007 was $2.0 million and
$3.5 million, respectively.
Restricted Stock Units – Changes in non-vested restricted
stock units during the year ended December 31, 2009 are as follows
(in thousands, except per share amounts):
Non-Vested Shares
Non-vested at
December 31, 2008
Granted
Vested
Forfeited
Non-vested at
December 31, 2009
Weighted Average
Grant Date
Fair Value
Per Share
Number
of Shares
Aggregate
Intrinsic
Value
14,987
2,000
(637)
(2,279)
$3.32
2.37
31.41
2.94
14,071
$3.62
$36,022
On May 27, 2009, the Company’s shareholders approved
the grant of 2,000,000 market-condition based restricted stock units
which were contingently awarded, subject to shareholder approval,
to its Chairman and Chief Executive Offi cer as a special retention
award on October 9, 2008. These units will cliff vest in one install-
ment on October 9, 2011 only if the total shareholder return on the
Company’s Common Stock is at least 25% per year (compounded
at the end of the three-year vesting period, including dividends).
Total shareholder return will be based on the average NYSE closing
prices for the Company’s Common Stock for the 20 days prior to:
(a) the date of the award on October 9, 2008 (which was $3.38);
and (b) the vesting date (which must be at least $6.58 if no dividends
are paid). No dividends will be paid on these units prior to vesting.
These units are required to be settled on a net, after-tax basis (after
deducting shares for minimum required statutory withholdings);
therefore the actual number of shares issued will be less than the
gross amount of the award. The Company measured the fair value
of the grant on May 27, 2009 and will record compensation expense
based on this fair value ratably over the remaining vesting period.
As of December 31, 2009, there were 9,159,000 market-
condition based restricted stock units (“Units”) outstanding, which
were granted to executives and other officers of the Company
on December 19, 2008. The Units will vest only if specifi ed price
targets for the Company’s Common Stock are achieved and if the
employee is thereafter employed on the vesting date, as follows:
(a) if the Common Stock achieves a price of $4.00 or more (average
NYSE closing price over 20 consecutive trading days) during the
fi rst year following the grant date (i.e., prior to December 19, 2009),
the Units will vest in three equal installments on January 1, 2010,
January 1, 2011, and January 1, 2012; (b) if the Units do not achieve
the price target in the fi rst year, but the Common Stock achieves
a price of $7.00 or more (average NYSE closing price over 20 con-
secutive trading days) prior to December 19, 2010, the Units will
vest in two equal installments on January 1, 2011 and January 1,
2012; and (c) if the Units do not achieve the price target in the fi rst
or second year, but the Common Stock achieves a price of $10.00 or
more (average NYSE closing price over 20 consecutive trading days)
prior to December 19, 2011, the Units will vest in one installment on
January 1, 2012. The $4.00 price target for the initial period ended
December 19, 2009 was not achieved, therefore only the $7.00 and
$10.00 price targets remain applicable. If an applicable price target
has been achieved, the Units will thereafter be entitled to dividend
equivalent payments as dividends are paid on the Company’s
Common Stock. Upon vesting of the Units, holders will receive
shares of the Company’s Common Stock in the amount of the vested
Units, net of statutory minimum tax withholdings. On May 27, 2009,
the Company’s shareholders approved the 2009 LTIP, which autho-
rized additional shares of the Company’s Common Stock to be avail-
able for awards under the Company’s equity compensation plans
including for settlement of the Units. The approval converted the
Company’s accounting for the Units from liability-based to equity-
based, and accordingly, the Company reclassifi ed its liability recorded
in “Accounts Payable, accrued expenses and other liabilities” to
“Additional paid-in capital” on the Consolidated Balance Sheets. The
aggregate fair value of the grants on May 27, 2009 was approximately
$27.0 million, which is being recognized as compensation expense
ratably over the vesting period.
As of December 31, 2009, there were 389,277 market-
condition based restricted stock units outstanding that were granted
to employees on January 18, 2008 and cliff vest on December 31,
2010, only if the total shareholder return on the Company’s Common
Stock is at least 20% (compounded annually, including dividends)
from the date of the award through the end of the vesting period.
Total shareholder return will be based on the average NYSE clos-
ing prices for the Company’s Common Stock for the 20 days prior
to (a) the date of the award on January 18, 2008 (which was $25.04)
and (b) the vesting date. No dividends will be paid on these units
unless and until they are vested.
On October 9, 2008, the Company granted 2,000,000 restricted
stock units as special retention incentive awards to certain offi-
cers which will cliff vest in one installment on October 9, 2011, if the
RSU holders are employed on the vesting date. The unvested units
are entitled to receive dividend equivalent payments as dividends are
paid on shares of the Company’s Common Stock. As of December 31,
2009, 1,850,000 of these restricted stock units remain outstanding.
Also on October 9, 2008, the Company awarded 1,000,000 restricted
stock units as a special retention incentive award to the Company’s
President which were forfeited during the year ended December 31,
2009, due to his resignation from the Company.
As of December 31, 2009, there were 672,984 unvested
service-based restricted stock units outstanding that are entitled to
be paid dividends as dividends are paid on shares of the Company’s
Common Stock and these dividends are accounted for as a reduc-
tion to retained earnings in a manner consistent with the Company’s
Common Stock dividends.
The fair values of the market-condition based restricted
stock units, including the Units, were determined by utilizing a Monte
66
sfi 2009
Carlo model to simulate a range of possible future stock prices for
the Company’s Common Stock. The following assumptions were
used to estimate the fair value of market-condition based awards:
approximately $1.3 million, $1.5 million and $1.1 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
Valued as of
Note 14 – Earnings Per Share
Risk-free interest rate
Expected stock
January 18,
2008
2.39%
May 27,
May 27,
2009(1)
1.16%
2009(2)
1.28%
price volatility
27.46%
152.03%
145.45%
Expected annual dividend
–
–
–
Explanatory Notes:
(1) Contingent equity-based restricted stock units awarded on October 9, 2008 were mea-
sured on May 27, 2009, the date the Company’s shareholders approved the grant of the award.
(2) The Units granted on December 19, 2008 were re-measured on May 27, 2009 when they
became equity-based awards in accordance with ASC 718-20-55-135 to 138.
The total fair value of restricted stock units vested during
the years ended December 31, 2009, 2008 and 2007 was $1.4 million,
$10.1 million and $10.6 million, respectively. As of December 31, 2009,
there was $28.2 million of total unrecognized compensation cost
related to non-vested restricted stock units. That cost is expected
to be recognized over the remaining vesting/service period for the
respective grants.
Common Stock Equivalents – Non-employee directors are
awarded common stock equivalents (“CSEs”) at the time of the
annual shareholders meeting in consideration for their services on
the Company’s Board of Directors. The CSEs generally vest at the
time of the next annual shareholders meeting and pay dividends
in an amount equal to the dividends paid on an equivalent number
of shares of the Company’s Common Stock from the date of grant,
as and when dividends are paid on the Common Stock. During the
year ended December 31, 2009, the Company awarded to Directors
169,814 CSEs at a weighted average fair value per share of $3.18 at
the time of grant. The CSE awards are classifi ed as liability-based
awards due to the fact that they can be settled in shares of stock or
cash at the Directors’ option. During the year ended December 31,
2009, the Company issued 73,147 shares of Common Stock to
Directors at fair value per share of $2.23 to settle vested CSEs out-
standing. At December 31, 2009, 197,385 CSEs, with an aggregate
intrinsic value of $0.5 million were outstanding.
401(k) Plan
The Company has a savings and retirement plan (the “401(k)
Plan”), which is a voluntary, defi ned 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 partici-
pant may contribute on a pretax basis up to the maximum percent-
age 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% of the fi rst 10% of the participant’s
annual compensation. The Company made gross contributions of
EPS is calculated using the two-class method, which allo-
cates earnings among common stock and participating securities
to calculate EPS when an entity’s capital structure includes either
two or more classes of common stock or common stock and par-
ticipating securities. HPU holders are current and former Company
employees who purchased high performance common stock units
under the Company’s High Performance Unit (HPU) Program (see
Note 12). These HPU units have been treated as a separate class of
common stock. In addition, the Company adopted ASC 260-10-65-2
on January 1, 2009. Upon adoption, the Company’s unvested
restricted stock units which are entitled to receive dividends and
CSEs issued under the Long-Term Incentive Plans are considered
participating securities and have been included in the two-class
method when calculating EPS. ASC 260-10-65-2 has been applied
retroactively to all prior periods presented (see Note 3).
The following table presents a reconciliation of income
(loss) from continuing operations used in the basic and diluted EPS
calculations (in thousands, except for per share data):
For the Years Ended December 31,
2009
2008
2007
Income (loss) from
continuing operations
$(770,602)
$(295,640)
$198,800
Net loss attributable to
noncontrolling
interests
Gain on sale of joint
venture interest
attributable to
noncontrolling
interests
Preferred dividends
Dividends paid
to Participating
Security holders(1)
Income (loss) from
continuing operations
attributable to iStar
Financial Inc. and
allocable to common
shareholders and
HPU holders
1,071
991
816
–
(42,320)
(18,560)
(42,320)
–
(42,320)
67
–
(2,393)
(3,545)
$(811,851)
$(357,922)
$153,751
Explanatory Note:
(1)
In accordance with ASC 260-10-65-1, “Application of the Two-Class Method under
FASB Statement No. 128 to Master Limited Partnerships,” (“ASC 260-10-65-1”) the total
dividends paid to Participating Security holders during the period have been deducted
from income (loss) from continuing operations, because total dividends distributed by the
Company exceeded earnings for the period.
Earnings allocable to common shares:
Numerator for basic earnings per share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders(1)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
Numerator for diluted earnings per share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders(1)(2)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
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 and restricted shares
Add: effect of joint venture shares
Weighted average common shares outstanding for diluted earnings per common share
Basic earnings per common share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders(1)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
Diluted earnings per common share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders(1)(2)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
For the Years Ended December 31,
2009
2008
2007
$(789,304)
(11,349)
12,083
$(788,570)
$(350,340)
21,940
85,910
$(242,490)
$(789,304)
(11,349)
12,083
$(788,570)
$(350,340)
21,940
85,910
$(242,490)
$150,385
29,313
7,661
$187,359
$150,487
29,317
7,662
$187,466
100,071
131,153
126,801
–
–
100,071
–
–
131,153
480
261
$127,542
$ (7.89)
(0.11)
0.12
$ (7.88)
$ (2.68)
0.17
0.66
$ (1.85)
$ (7.89)
(0.11)
0.12
$ (7.88)
$ (2.68)
0.17
0.66
$ (1.85)
$ 1.19
0.23
0.06
$ 1.48
$ 1.18
0.23
0.06
$ 1.47
Explanatory Notes:
68
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders has been adjusted for net (income) loss attributable to noncontrolling
interests and preferred dividends. In addition, for the years ended December 31, 2008 and 2007, income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to
common shareholders has been adjusted to exclude dividends paid to Participating Security holders (see preceding table).
(2) For the year ended December 31, 2007, amount includes the allocable portion of $85 of joint venture income.
sfi 2009
Earnings allocable to High Performance Units:
Numerator for basic earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders(1)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
Numerator for diluted earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders(1)(2)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
Denominator (basic and diluted):
Weighted average High Performance Units outstanding for basic and diluted earnings per share
Basic earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders(1)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
Diluted earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders(1)(2)
Income (loss) from discontinued operations
Gain from discontinued operations, net of noncontrolling interests
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
For the Years Ended December 31,
2009
2008
2007
$ (22,547)
(322)
343
$ (22,526)
$ (22,547)
(322)
343
$ (22,526)
$ (7,582)
475
1,859
$ (5,248)
$ (7,582)
475
1,859
$ (5,248)
$ 3,366
656
171
$ 4,193
$ 3,349
652
170
$ 4,171
15
15
15
$(1,503.13)
(21.47)
22.87
$(1,501.73)
$(1,503.13)
(21.47)
22.87
$(1,501.73)
$(505.47)
31.67
123.93
$(349.87)
$(505.47)
31.67
123.93
$(349.87)
$224.40
43.73
11.40
$279.53
$223.27
43.47
11.33
$278.07
Explanatory Notes:
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to High Performance Units has been adjusted for net (income) loss attributable to noncontrolling
interests and preferred dividends. In addition, for the years ended December 31, 2008 and 2007, income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to
High Performance Units has been adjusted to exclude dividends paid to Participating Security holders (see preceding table).
(2) For the year ended December 31, 2007, amount includes the allocable portion of $85 of joint venture income.
For the years ended December 31, 2008 and 2007, basic and diluted net income allocable to common shareholders and HPU hold-
ers per share were retroactively adjusted to refl ect the adoption of ASC 260-10-65-2. The Company reduced its diluted weighted average
common shares outstanding for each reporting period by unvested restricted stock units that are entitled to receive dividends and common
stock equivalents deemed to be Participating Securities. In addition, pursuant to ASC 260-10-65-1, as a result of dividends paid in excess of
earnings during the years ended December 31, 2008 and 2007, the Company allocated $2.4 million and $3.5 million, respectively, of earnings
from common shares and HPU shares to Participating Securities. This adoption, along with the adoption of ASC 470-20-65-1 (see Notes 3
and 9) changed basic and diluted earnings per share as follows: (a) for the year ended December 31, 2008, basic and diluted net income
allocable to common shareholders decreased by $0.07 per share, and basic and diluted net income allocable to HPU holders decreased by
$13.54 per share; and (b) for the year ended December 30, 2007, basic and diluted net income allocable to common shareholders decreased
by $0.04 per share, and basic and diluted net income allocable to HPU holders decreased by $8.40 and $6.93 per share, respectively.
69
For the years ended December 31, 2009, 2008 and 2007, the following shares were anti-dilutive (in thousands):
Joint venture shares
Stock options
Restricted stock units
For the Years Ended December 31,
2009
298
520
11,548
2008
298
529
10,633
2007
88
5
–
Note 15 – Comprehensive Income (Loss)
The statement of comprehensive income (loss) attributable to iStar Financial, Inc. is as follows (in thousands):
Net income (loss)
Other comprehensive income:
Reclassifi cation of (gains)/losses on available-for-sale securities into earnings upon realization
Reclassifi cation of (gains)/losses on cash fl ow hedges into earnings upon realization
Unrealized gains/(losses) on available-for-sale securities
Unrealized gains/(losses) on cash fl ow hedges
Unrealized gains/(losses) on cumulative translation adjustment
Comprehensive income (loss)
Net loss attributable to noncontrolling interests
Gain on sale of joint venture interest attributable to noncontrolling interests
Gain from discontinued operations attributable to noncontrolling interests
Comprehensive income (loss) attributable to iStar Financial Inc.
For the Years Ended December 31,
2009
$(769,847)
2008
$(181,767)
2007
$236,602
2,727
(4,357)
6,515
(30)
(416)
$(765,408)
1,071
–
–
$(764,337)
4,967
3,401
(5,797)
2,986
(1,554)
$(177,764)
991
(18,560)
(3,689)
$(199,022)
(2,566)
(943)
(6,023)
(9,719)
–
$217,351
816
–
–
$218,167
Unrealized gains/(losses) on available-for-sale securities,
cash flow hedges and foreign currency translation adjustments
are recorded as adjustments to shareholders’ equity through
“Accumulated other comprehensive income” on the Company’s
Consolidated Balance Sheets and are not included in net income
unless realized. As of December 31, 2009 and 2008, accumulated
other comprehensive income refl ected in the Company’s share-
holders’ equity is comprised of the following (in thousands):
Unrealized gains/(losses) on
available-for-sale securities
Unrealized gains on cash fl ow hedges
Unrealized losses on cumulative
translation adjustment
Accumulated other comprehensive income
70
As of December 31,
2009
2008
$ 3,959
4,156
(1,970)
$ 6,145
$(5,283)
8,544
(1,554)
$ 1,707
Note 16 – Fair Values
Fair value represents the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The follow-
ing fair value hierarchy prioritizes the inputs used in valuation tech-
niques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2: Quoted prices in markets that are not active, or
inputs which are observable, either directly or indirectly, for substan-
tially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs
that are both signifi cant to the fair value measurement and unob-
servable (i.e., supported by little or no market activity).
Certain of the Company’s assets and liabilities are recorded
at fair value on a recurring or non-recurring basis as of December 31,
2009 and 2008. Assets required to be marked-to-market and
reported at fair value every reporting period are classifi ed as being
valued on a recurring basis. Other assets not required to be recorded
at fair value every period may be recorded at fair value if a specifi c
provision or other impairment is recorded within the period to mark
the carrying value of the asset to market as of the reporting date.
Such assets are classifi ed as being valued on a non-recurring basis.
sfi 2009
The following table summarizes the Company’s assets and liabilities recorded at fair value on a recurring and non-recurring basis by
the above categories (in thousands):
As of December 31, 2009:
Recurring basis:
Financial Assets:
Derivative assets
Other lending investments – available-for-sale debt securities
Marketable securities at fair value
Financial Liabilities:
Derivative liabilities
Non-recurring basis:
Financial Assets:
Impaired loans
Non-fi nancial Assets:
Impaired OREO
Impaired assets held-for-sale
Impaired CTL assets
As of December 31, 2008:
Recurring basis:
Financial Assets:
Derivative assets
Other lending investments – available-for-sale securities
Marketable securities
Financial Liabilities:
Derivative liabilities
Non-recurring basis:
Financial Assets:
Quoted market
prices in
active markets
(Level 1)
Total
Signifi cant
other
observable
inputs
(Level 2)
Signifi cant
unobservable
inputs
(level 3)
800
$
$
6,800
$ 38,454
$
–
$ 6,800
$ 254
$ 800
$
–
$ 38,200
$
254
$
–
$ 254
$
$
$
$
–
–
–
–
$ 1,167,498
$ 181,540
$ 17,282
$ 48,000
$
$
$
$
–
–
–
–
$
$
$
$
–
–
–
–
$ 1,167,498
$ 181,540
$ 17,282
$ 48,000
$
$
$
$
3,872
10,856
8,083
–
$
$ 10,856
$ 8,083
$ 3,872
–
$
–
$
131
$
–
$ 131
$
$
$
$
–
–
–
–
Impaired loans
Impaired other lending investments – held-to-maturity securities
Impaired cost method investments
$ 1,821,012
10,128
$
3,888
$
$
–
$ 10,128
–
$
$
$
$
–
–
–
$ 1,821,012
–
$
3,888
$
In addition to the Company’s disclosures regarding assets and liabilities recorded at fair value in the fi nancial statements, it is
also required to disclose the estimated fair values of all fi nancial instruments, regardless of whether they are recorded at fair value in the
fi nancial statements.
71
The book and estimated fair values of fi nancial instruments were as follows (in thousands):(1)
Financial assets:
Loans and other lending investments, net
$ 7,661,562
$6,638,840
$10,586,644
$9,279,946
As of December 31, 2009
As of December 31, 2008
Book Value
Fair Value
Book Value
Fair Value
Financial liabilities:
Debt obligations, net
Explanatory Note:
$10,894,903
$8,115,023
$12,486,404
$6,277,177
(1)
The carrying values of other fi nancial instruments including cash and cash equivalents, restricted cash, accrued interest receivable, accounts payable, accrued expenses and other
liabilities approximate the fair values of the instruments. The fair value of other fi nancial instruments, including derivative assets and liabilities and marketable securities are included in the
previous table.
Given the nature of certain assets and liabilities, clearly
determinable market-based valuation inputs are often not available;
therefore, these assets and liabilities are valued using internal valu-
ation techniques. Subjectivity exists with respect to these internal
valuation techniques, therefore, the fair values disclosed may not
equal prices the Company may ultimately realize if the assets were
sold or the liabilities were settled with third parties. The methods the
Company used to estimate the fair values presented in the two tables
are described more fully below for each type of asset and liability.
Derivatives – The Company uses interest rate swaps, inter-
est rate caps and foreign currency derivatives to manage its interest
rate and foreign currency risk. The valuation of these instruments
is determined using discounted cash fl ow analysis on the expected
cash fl ows of each derivative. This analysis refl ects the contractual
terms of the derivatives, including the period to maturity, and uses
observable market-based inputs, including interest rate curves,
foreign exchange rates, and implied volatilities. The Company incor-
porates credit valuation adjustments to appropriately refl ect both its
own non-performance risk and the respective counterparty’s non-
performance risk in the fair value measurements. In adjusting the fair
value of its derivative contracts for the effect of non-performance
risk, the Company has considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresh-
olds, mutual puts, and guarantees. The Company has determined
that the signifi cant inputs used to value its derivatives fall within
Level 2 of the fair value hierarchy.
Securities – All of the Company’s available-for-sale and
impaired held-to-maturity debt and equity securities are actively
traded and have been valued using quoted market prices. The
Company’s traded marketable securities are valued using market
quotes, to the extent they are available, or broker quotes that fall
within Level 2 of the fair value hierarchy.
Impaired loans – The Company’s loans identifi ed as being
impaired are collateral dependent loans and are evaluated for impair-
ment by comparing the estimated fair value of the underlying col-
lateral, less costs to sell, to the carrying value of each loan. Due to
the nature of the individual properties collateralizing the Company’s
loans, the Company generally uses the income approach through
internally developed valuation models to estimate the fair value of the
collateral. This approach requires the Company to make signifi cant
judgments in respect to discount rates, capitalization rates and the
timing and amounts of estimated future cash fl ows that are all con-
sidered Level 3 inputs. These cash fl ows include costs of completion,
operating costs, and lot and unit sale prices.
Impaired OREO – The Company periodically evaluates its
OREO assets to determine if events or changes in circumstances
have occurred during the reporting period that may have a sig-
nifi cant adverse effect on their fair value. Due to the nature of the
individual properties in the OREO portfolio, the Company uses
the income approach through internally developed valuation models
to estimate the fair value of the assets. This approach requires the
Company to make signifi cant judgments with respect to discount
rates, capitalization rates and the timing and amounts of estimated
future cash fl ows that are all considered Level 3 inputs. These cash
fl ows include costs of completion, operating costs, and lot and unit
sale prices.
Impaired assets held-for-sale – The estimated fair value of
impaired assets held-for-sale is determined using observable market
information, typically including bids from prospective purchasers.
Impaired CTL assets – If the Company determines a CTL asset
is impaired it records an impairment charge to mark the asset to
its estimated fair market value (see Note 3). Any such assets that
have been impaired based on their estimated fair value as of the
Company’s reporting date are considered to be reported at fair value
on a non-recurring basis and are included in the fi rst table above.
Due to the nature of the individual properties in the CTL portfolio,
the Company uses the income approach through internally devel-
oped valuation models to estimate the fair value of the assets. This
approach requires the Company to make significant judgments
with respect to discount rates, capitalization rates and the timing
and amounts of estimated future cash fl ows that are all considered
Level 3 inputs. These cash fl ows are primarily based on expected
future leasing rates and operating costs.
Cost method investments – The Company periodically evalu-
ates its cost method investments to determine if events or changes
in circumstances have occurred in that period that may have a sig-
nifi cant adverse effect on the fair value of an investment. Many of the
Company’s cost method investments are in managed funds and
the Company estimates the fair value of these investments using its
ratable share of the net asset value of the impaired funds.
Short-term financial instruments – The carrying values of
short-term fi nancial instruments including cash and cash equiva-
lents and short-term investments approximate the fair values of
these instruments. These fi nancial 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
interest in performing loans and other lending investments, the
fair values were determined using a discounted cash fl ow meth-
odology. This method discounts future estimated cash fl ows using
rates management determined best refl ect current market inter-
est rates that would be offered for loans with similar characteristics
and credit quality. The valuation of non-performing loans is dis-
cussed in impaired loans above.
Debt obligations, net – For debt obligations traded in second-
ary markets, the Company uses market quotes, to the extent they
are available to determine fair value. For debt obligations not traded
in secondary markets, the Company determines fair value using the
discounted cash fl ow methodology, whereby contractual cash fl ows
are discounted at rates that the Company determined best refl ect
current market interest rates that would be charged for debt with
similar characteristics and credit quality.
72
sfi 2009
Note 17 – Segment Reporting
The Company has determined that it has two reportable operating segments: Real Estate Lending and Corporate Tenant Leasing. The
reportable segments were determined based on the management approach, which looks to the Company’s internal organizational structure.
These two lines of business require different support infrastructures. The Real Estate Lending segment includes all of the Company’s activi-
ties related to senior and mezzanine real estate debt and corporate capital investments, OREO and REHI. The Corporate Tenant Leasing seg-
ment includes all of the Company’s activities related to the ownership and leasing of corporate facilities.
The Company evaluates performance based on the following fi nancial measures for each segment (in thousands):
2009:
Total revenues(3)
Earnings from equity method investments
Total operating and interest expense(4)
Net operating income (loss)(5)
Total long-lived assets(6)
Total assets(7)(8)
2008:
Total revenues(3)
Earnings from equity method investments
Total operating and interest expense(4)
Net operating income (loss)(5)
Total long-lived assets(6)
Total assets(7)(8)
2007:
Total revenues(3)
Earnings from equity method investments
Total operating and interest expense(4)
Net operating income (loss)(5)
Total long-lived assets(6)
Total assets(7)(8)
Explanatory Notes:
Real Estate
Corporate
Lending(1) Tenant Leasing
Corporate/
Other(2)
Company
Total
$ 569,670
–
1,392,234
(822,564)
$ 8,923,367
8,999,558
$ 306,364
2,500
232,124
76,740
$2,903,178
3,149,783
$ 17,250
2,798
592,175
(572,127)
$ –
661,234
$ 893,284
5,298
2,216,533
(1,317,951)
$11,826,545
12,810,575
$ 1,024,906
–
1,299,832
(274,926)
$10,829,149
11,037,624
$ 1,088,323
–
334,410
753,913
$11,077,912
11,282,123
$ 312,365
2,520
187,127
127,758
$3,044,811
3,330,907
$ 307,470
7,347
123,539
191,278
$3,384,201
3,703,339
$ 16,983
4,015
842,820
(821,822)
$ –
928,217
$ 8,666
22,279
777,561
(746,616)
$ 128,720
862,836
$ 1,354,254
6,535
2,329,779
(968,990)
$13,873,960
15,296,748
$ 1,404,459
29,626
1,235,510
198,575
$14,590,833
15,848,298
(1) Real Estate Lending includes the Company’s OREO and REHI assets and related operating revenue and expenses.
(2)
Corporate/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 timber operations, non-CTL related joint venture investments, strategic investments and marketable securities, which are not considered
material separate segments.
Total revenue represents all revenue earned during the period from the assets in each segment. Revenue from the Real Estate Lending segment primarily represents interest income and
revenue from the Corporate Tenant Leasing segment primarily represents operating lease income.
Total operating and interest expense primarily includes provision for loan losses for the Real Estate Lending business and operating costs on CTL assets for the Corporate Tenant Leasing
business, as well as interest expense specifi cally related to each segment. Interest expense on secured and unsecured notes, the interim fi nancing facility, unsecured and secured revolving
credit facilities and general and administrative expense are included in Corporate/Other for all periods. Depreciation and amortization of $97.9 million, $94.7 million and $83.7 million for the
years ended December 31, 2009, 2008 and 2007 respectively, are included in the amounts presented above.
Net operating income (loss) represents income attributable to iStar Financial Inc. before gain on early extinguishment of debt, gain on sale of joint venture interest, income (loss) from discon-
tinued operations and gain from discontinued operations.
Total long-lived assets are comprised of Loans and other lending investments, net, REHI and OREO for the Real Estate Lending segment, and Corporate tenant lease assets, net and Assets
held-for-sale are included for the Corporate Tenant Leasing segment and timber and timberlands are included in Corporate/other.
Intangible assets included in Real Estate Lending at December 31, 2007 were $17.4 million. Intangible assets included in Corporate Tenant Leasing at December 31, 2009, 2008 and 2007
were $48.8 million, $58.5 million and $69.9 million, respectively. Intangible assets included in Corporate/Other at December 31, 2009, 2008 and 2007 were $1.1 million, $2.7 million and
$11.3 million, respectively.
(3)
(4)
(5)
(6)
(7)
(8) Goodwill included in Real Estate Lending at December 31, 2007 was $39.1 million. Goodwill included in Corporate Tenant Leasing at December 31, 2008 and 2007 was $4.2 million.
73
Note 18 – Quarterly Financial Information (Unaudited)
Note 18 – Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly fi nancial data for the Company (in thousands, except per share amounts).
The following table sets forth the selected quarterly fi nancial data for the Company (in thousands, except per share amounts).
December 31,
December 31,
September 30,
September 30,
June 30,
June 30,
March 31,
March 31,
For the Quarters Ended
For the Quarters Ended
2009:(1)
2009:(1)
Revenue
Revenue
Net loss
Net loss
Net loss attributable to iStar Financial Inc. and allocable to common shareholders
Net loss attributable to iStar Financial Inc. and allocable to common shareholders
Net loss attributable to iStar Financial Inc. per common share – basic and diluted
Net loss attributable to iStar Financial Inc. per common share – basic and diluted
Weighted average common shares outstanding – basic and diluted
Weighted average common shares outstanding – basic and diluted
Net loss attributable to iStar Financial Inc. and allocable to HPU holders
Net loss attributable to iStar Financial Inc. and allocable to HPU holders
Net loss attributable to iStar Financial Inc. per HPU share – basic and diluted
Net loss attributable to iStar Financial Inc. per HPU share – basic and diluted
Weighted average HPU shares outstanding – basic and diluted
Weighted average HPU shares outstanding – basic and diluted
2008:(2)
2008:(2)
Revenue
Revenue
Net income (loss)
Net income (loss)
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Financial Inc. per common share – basic and diluted
Net income (loss) attributable to iStar Financial Inc. per common share – basic and diluted
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Weighted average common shares outstanding – diluted
Net income (loss) attributable to iStar Financial Inc. allocable to HPU holders
Net income (loss) attributable to iStar Financial Inc. allocable to HPU holders
Net income (loss) attributable to iStar Financial Inc. per HPU share – basic
Net income (loss) attributable to iStar Financial Inc. per HPU share – basic
Net income (loss) attributable to iStar Financial Inc. and per HPU share – diluted
Net income (loss) attributable to iStar Financial Inc. and per HPU share – diluted
Weighted average HPU shares outstanding – basic and diluted
Weighted average HPU shares outstanding – basic and diluted
$ 199,834
$ 199,834
(153,359)
(153,359)
(159,177)
(159,177)
$ (1.65)
$ (1.65)
96,354
96,354
(4,689)
(4,689)
$ (312.60)
$ (312.60)
15
15
$ 287,443
$ 287,443
(13,890)
(13,890)
(23,993)
(23,993)
$ (0.20)
$ (0.20)
122,809
122,809
122,809
122,809
555
555
$ (37.00)
$ (37.00)
$ (37.00)
$ (37.00)
15
15
$ 210,088
$ 210,088
(247,442)
(247,442)
(251,308)
(251,308)
$ (2.55)
$ (2.55)
98,674
98,674
(7,229)
(7,229)
$ (481.93)
$ (481.93)
15
15
$ 337,202
$ 337,202
(303,883)
(303,883)
(308,655)
(308,655)
$ (2.32)
$ (2.32)
133,199
133,199
133,199
133,199
6,577
6,577
$ (438.47)
$ (438.47)
$ (438.47)
$ (438.47)
15
15
$ 224,282
$ 224,282
(281,973)
(281,973)
(284,197)
(284,197)
$ (2.85)
$ (2.85)
99,769
99,769
(8,085)
(8,085)
$ (539.00)
$ (539.00)
15
15
$ 318,894
$ 318,894
50,975
50,975
18,526
18,526
$ 0.14
$ 0.14
134,399
134,399
134,399
134,399
(391)
(391)
$ 26.07
$ 26.07
$ 26.07
$ 26.07
15
15
$259,080
$259,080
(87,072)
(87,072)
(93,886)
(93,886)
$ (0.89)
$ (0.89)
105,606
105,606
(2,523)
(2,523)
$ (168.20)
$ (168.20)
15
15
$ 410,716
$ 410,716
85,029
85,029
71,609
71,609
$ 0.53
$ 0.53
134,262
134,262
134,843
134,843
(1,514)
(1,514)
$ 100.94
$ 100.94
$ 100.47
$ 100.47
15
15
Explanatory Notes:
Explanatory Notes:
(1)
(1)
(2)
(2)
During the quarter ended December 31, 2009, the Company recorded Provision for loan losses of $216.4 million, Impairment of other assets of $61.8 million and Gain on early extinguishment
During the quarter ended December 31, 2009, the Company recorded Provision for loan losses of $216.4 million, Impairment of other assets of $61.8 million and Gain on early extinguishment
of debt of $100.4 million.
of debt of $100.4 million.
During the quarter ended June 30, the Company recorded gains of $285.1 million on the sales of TimberStar Southwest and Maine timber properties. During the quarter ended December 31,
During the quarter ended June 30, the Company recorded gains of $285.1 million on the sales of TimberStar Southwest and Maine timber properties. During the quarter ended December 31,
2008, the Company recorded Provision for loan losses of $252.0 million, Impairment of other assets of $150.0 million and Gain on early extinguishment of debt of $323.2 million.
2008, the Company recorded Provision for loan losses of $252.0 million, Impairment of other assets of $150.0 million and Gain on early extinguishment of debt of $323.2 million.
74
74
Performance Graph
74
74
The following graph compares the total cumulative share-
holder returns on our Common Stock from December 31, 2004 to
December 31, 2009 to that of: (1) the Standard & Poor’s 500 Index (the
“S&P 500”); and (2) the Standard & Poor’s 500 Financials Index (the
“S&P 500 Financials”). Our prior comparative index, the Russell 1000
Financial Services Index, was discontinued on October 1, 2009.
$100.0
$106.5
$104.9
$84.9
$127.0
$122.6
$121.5
$128.2
$103.5
$73.9
$102.1
$54.3
$80.7
$46.3
$7.2
$8.3
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
iStar Financial
S&P 500
S&P 500 Financials
sfi 2009
sfi 2009
COMMON STOCK PRICE AND DIVIDENDS (UNAUDITED)
The high and low closing prices per share of Common Stock
are set forth below for the periods indicated.
Quarter Ended
High
Low
2008
March 31, 2008
June 30, 2008
September 30, 2008
December 31, 2008
2009
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
$27.66
$22.06
$13.67
$ 3.34
$ 2.99
$ 3.98
$ 3.37
$ 3.08
$13.76
$13.21
$ 1.75
$ 0.97
$ 0.76
$ 2.51
$ 2.04
$ 2.09
On February 16, 2010, the closing sale price of the Common
Stock as reported by the NYSE was $2.94. The Company had
3,078 holders of record of Common Stock as of February 16, 2010.
At December 31, 2009, the Company had fi ve series of pre-
ferred stock outstanding: 8.000% Series D Preferred Stock, 7.875%
Series E Preferred Stock, 7.8% Series F Preferred Stock, 7.65% Series G
Preferred Stock and 7.50% Series I Preferred Stock. Each of the
Series D, E, F, G and I preferred stock is publicly traded.
Dividends
The Board of Directors has not established any minimum
distribution level. In order to maintain its qualifi cation as a REIT,
the Company intends to pay dividends to its shareholders that, on
an annual basis, will represent at least 90% of its taxable income
(which may not necessarily equal net income as calculated in accor-
dance with GAAP), determined without regard to the deduction for
dividends paid and excluding any net capital gains. The Company
has recorded net operating losses and may record signifi cant net
operating losses in the future, which may reduce its taxable income
in future periods and lower or eliminate entirely the Company’s
obligation to pay dividends for such periods in order to maintain its
REIT qualifi cation.
Holders of Common Stock, vested High Performance Units
and certain unvested restricted stock units and common share
equivalent will be entitled to receive distributions if, as and when the
Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders
of preferred stock, when preferred stock is issued and outstand-
ing. In addition, the Company’s secured credit facilities permit the
Company to distribute 100% of its REIT taxable income on an annual
basis, for so long as the Company maintains its qualifi cations as a
REIT. The secured credit facilities restrict the Company from paying
any common dividends if it ceases to qualify as a REIT. In any liquida-
tion, dissolution or winding up of the Company, each outstanding
share of Common Stock and HPU share equivalents will entitle its
holder to a proportionate share of the assets that remain after the
Company pays its liabilities and any preferential distributions owed to
preferred shareholders.
The following table sets forth the dividends paid or declared
by the Company on its Common Stock:
Quarter Ended
Shareholder Record Date
Dividend/Share
2008(1)
March 31, 2008
June 30, 2008
September 30, 2008(2)
December 31, 2008(2)
2009
March 31, 2009(2)
June 30, 2009(2)
September 30, 2009(2)
December 31, 2009(2)
March 17, 2008
July 15, 2008
–
–
–
–
–
–
$0.8700
$0.8700
–
–
–
–
–
–
Explanatory Notes:
(1)
For tax reporting purposes, the 2008 dividends were classifi ed as 10.8% ($0.1886) ordi-
nary dividend, 76.1% ($1.3244) 15% capital gain and 13.1% ($0.2270) 25% Section 1250
capital gain. Of the ordinary dividend, 25.6% ($0.0483) qualifi es as a qualifying dividend for
those shareholders who held shares of the Company for the entire year.
(2) No dividends were declared or paid.
The Company declared and paid dividends aggregating
$8.0 million, $11.0 million, $7.8 million, $6.1 million and $9.4 million on
its Series D, E, F, G, and I preferred stock, respectively, for the year
ended December 31, 2009. There are no dividend arrearages on any
of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as
ordinary income, although a portion of such dividends may be des-
ignated by the Company as capital gain or may constitute a tax-free
return of capital. The Company annually furnishes to each of its
shareholders a statement setting forth the distributions paid during
the preceding year and their characterization as ordinary income,
capital gain or return of capital.
75
No assurance can be given as to the amounts or tim-
ing of future distributions, as such distributions are subject to the
Company’s taxable income after giving effect to its net operating
loss carryforwards, fi nancial condition, capital requirements, debt
covenants, any change in the Company’s intention to maintain its
REIT qualifi cation and such other factors as the Company’s Board of
Directors deems relevant. In addition, based upon recent guidance
announced by the Internal Revenue Service, the Company may elect
to satisfy some of its 2010 REIT distribution requirements, if any,
through stock dividends.
DIRECTORS AND OFFICERS
DIRECTORS AND OFFICERS
Directors
Directors
Jay Sugarman (3)
Jay Sugarman (3)
Chairman and
Chairman and
Chief Executive Offi cer,
Chief Executive Offi cer,
iStar Financial Inc.
iStar Financial Inc.
Glenn R. August
Glenn R. August
President,
President,
Oak Hill Advisors, LP
Oak Hill Advisors, LP
Robert W. Holman, Jr. (1) (2)
Robert W. Holman, Jr. (1) (2) (3)
Chairman and
Chairman and
Chief Executive Offi cer,
Chief Executive Offi cer,
National Warehouse
National Warehouse
Investment Company;
Investment Company
Managing Director,
Robin Josephs (1) (2) (4)
Group Holman
President,
Robin Josephs (1) (2) (4)
Ropasada, LLC
Lead Independent Director,
iStar Financial Inc.
John G. McDonald (3) (4)
John G. McDonald (3) (4)
Stanford Investors Professor,
Stanford Investors Professor,
Stanford University
Stanford University
Graduate School of Business
Graduate School of Business
George R. Puskar (1) (3)
George R. Puskar (1) (3)
Former Chairman and
Former Chairman and
Chief Executive Offi cer,
Chief Executive Offi cer,
Equitable Real Estate
Equitable Real Estate
Investment Management
Investment Management
Dale Anne Reiss (1)
Dale Anne Reiss (1) (3)
Senior Consultant,
Senior Consultant,
Global Real Estate Center
Global Real Estate Center
Global & Americas Director of
Global & Americas Director of
Real Estate,
Real Estate,
Ernst & Young, LLP (Retired)
Ernst & Young, LLP (Retired)
Jeffrey A. Weber (2) (4)
Jeffrey A. Weber (2) (4)
President,
President,
York Capital Management
York Capital Management
(1) Audit Committee
(1) Audit Committee
(2) Compensation Committee
(2) Compensation Committee
Investment Committee
Investment and
(3)
(3)
Asset Management Committee
Nominating and Governance Committee
(4)
Nominating and Governance Committee
(4)
Executive Offi cers
Executive Offi cers
Executive Vice Presidents
Executive Vice Presidents
Jay Sugarman
Jay Sugarman
Chairman and
Chairman and
Chief Executive Offi cer
Chief Executive Offi cer
Nina B. Matis
Nina B. Matis
Chief Legal Offi cer and
Chief Legal Offi cer and
Chief Investment Offi cer
Chief Investment Offi cer
James D. Burns
James D. Burns
Chief Financial Offi cer
Chief Financial Offi cer
Steven R. Blomquist
Steven R. Blomquist
Investments
Investments
Chase S. Curtis, Jr.
Chase S. Curtis, Jr.
Credit
Credit
R. Michael Dorsch III
R. Michael Dorsch III
Investments
Investments
Barclay Jones III
Barclay Jones III
Investments
Investments
Michelle MacKay
Michelle MacKay
Investments
Investments
Barbara Rubin
Barbara Rubin
iStar Asset Services, Inc.
iStar Asset Services, Inc.
Vernon B. Schwartz
Vernon B. Schwartz
Autostar & Europe
Autostar & Europe
76
76
sfi 2009
sfi 2009
CORPORATE INFORMATION
Headquarters
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: 212.930.9400
fax: 212.930.9494
Regional Offices
3480 Preston Ridge Road
Suite 575
Alpharetta, GA 30005
tel: 678.297.0100
fax: 678.297.0101
800 Boylston Street
33rd Floor
Boston, MA 02199
tel: 617.292.3333
fax: 617.423.3322
2727 East Imperial Highway
Brea, CA 92821
tel: 714.961.4700
fax: 714.961.4701
525 West Monroe Street
20th Floor
Chicago, IL 60661
tel: 312.577.8549
fax: 312.612.4162
Employees
Annual Meeting of Shareholders
One Galleria Tower
13355 Noel Road
Suite 900
Dallas, TX 75240
tel: 972.506.3131
fax: 972.501.0078
180 Glastonbury Boulevard
Suite 201
Glastonbury, CT 06033
tel: 860.815.5900
fax: 860.815.5901
5 Park Plaza
Suite 1450
Irvine, CA 92614
tel: 949.567.2400
fax: 949.567.2411
One Sansome Street
30th Floor
San Francisco, CA 94104
tel: 415.391.4300
fax: 415.391.6259
2425 Olympic Boulevard
Suite 520E
Santa Monica, CA 90404
tel: 310.315.7019
fax: 310.315.7017
As of March 9, 2010, the
Company had 236 employees.
Independent Auditors
PricewaterhouseCoopers LLP
New York, NY
Registrar and Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
tel: 800.756.8200
www.computershare.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.
May 26, 2010, 9:00 a.m. ET
Harvard Club of New York City
35 West 44th 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 filed all
required Annual Chief Executive
Officer Certifications with the
NYSE. In addition, the Company
has filed with the SEC the certi-
fications of the Chief Executive
Officer and Chief Financial Officer
required under Section 302 and
Section 906 of the Sarbanes-Oxley
Act of 2002 as exhibits to our
most recently filed Annual Report
on Form 10-K. For help with ques-
tions about the Company, or
to receive additional corporate
information, please contact:
Investor Relations
Andrew G. Backman
Senior Vice President
Investor Relations & Marketing
1114 Avenue of the Americas
New York, NY 10036
tel: 212.930.9450
e-mail: investors@istarfinancial.com
iStar Financial Website:
www.istarfinancial.com
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