iStar Financial Annual Report 2013
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LOOKBACKLOOKFORWARDLOOKBACKLOOKFORWARD
LETTER FROM
THE CHAIRMAN
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LOOK BACK
LOOK FORWARD
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CORPORATE INFORMATION
HEADQUARTERS
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
525 West Monroe Street
Suite 1900
Chicago, IL 60661
Tel: 312.577.8549
Fax: 312.612.4162
One Galleria Tower
13727 Noel Road
Suite 150
Dallas, TX 75240
Tel: 972.506.3131
Fax: 972.646.6398
180 Glastonbury Boulevard
Suite 201
Glastonbury, CT 06033
Tel: 860.815.5900
Fax: 860.815.5901
1777 Ala Moana Boulevard
Suite 142-33
Honolulu, HI 96815
Tel: 212.405.4537
Fax: 808.944.6322
10960 Wilshire Boulevard
Suite 1260
Los Angeles, CA 90024
Tel: 310.315.7019
Fax: 310.315.7017
4350 Von Karman Avenue
Suite 225
Newport Beach, CA 92660
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
EMPLOYEES
INVESTOR INFORMATION SERVICES
As of January 31, 2014,
the Company had 175 employees.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
New York, NY
REGISTRAR AND TRANSFER AGENT
Computershare Trust
Company, NA
PO Box 43078
Providence, RI 02940-3078
Tel: 800.756.8200
www.computershare.com
ANNUAL MEETING OF SHAREHOLDERS
May 22, 2014, 9:00 a.m. ET
Sofitel Hotel
45 West 44th Street, 2nd Floor
New York, NY 10036
iStar Financial is a listed company on
the New York Stock Exchange and is
traded under the ticker “STAR.” The
Company has filed all required Annual
Chief Executive Officer Certifications
with the NYSE. In addition, the
Company has filed with the SEC the
certifications 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 questions about
the Company, or to receive additional
corporate information, please contact:
INVESTOR RELATIONS
Jason Fooks
Vice President
Investor Relations & Marketing
1114 Avenue of the Americas
New York, NY 10036
Tel: 212.930.9484
Email:
investors@istarfinancial.com
iStar Financial Website:
www.istarfinancial.com
FINANCIALS
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TO OUR VALUED INVESTORS,
After more than 20 years in the real estate finance and
investment business, 15 of those as a public company, iStar
is one of the oldest and most experienced companies in the
sector. With over $35 billion invested in real estate during that
time, we have worked through many cycles, been involved in
almost every asset type and transacted in almost every major
market in the U.S.
Our goal now, in what we are calling iStar 3.0, is to put that
knowledge, experience and hard-won (and sometimes
expensively-learned) wisdom to work for shareholders.
Well aware that those who ignore real estate history are doomed
to repeat it, we are taking a hard look at the innovative ideas
and successes that made us a leader in our business for over a
decade, as well as the mistakes that cost us deeply during the
financial crisis.
Now it’s time to begin anew, building on our core philosophies —
that the most inefficient sectors in real estate involve the
intersection of real estate, corporate credit and capital markets,
and that each investment must be considered as carefully as
personal capital.
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We should also highlight a few of the important accomplishments
we’ve already made. Our residential operating strategy has
proven quite successful, recording $177 million of gains
since the beginning of 2012 and $87 million of gains in 2013
alone. The credit profile of our real estate finance portfolio has
also continued to improve, evidenced through the resolution
of 60% of our NPLs over the past year as well as a 90%
reduction in loan loss provisions in 2013. In addition, we
made meaningful progress on a number of our land projects,
as we won key approvals, entered into strategic ventures and
began development.
We plan to build on this momentum, growing investment
originations, positioning our land for meaningful income
contribution in the future, and lowering our cost of capital and
improving our credit profile. A combination of hard work, talent
and experience should be a successful formula going forward.
Thanks for your continued support.
Jay Sugarman
Chairman and Chief Executive Officer
LOOK
BACK
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LOOK
FORWARD
LOOK BACK
From our pioneering work in mezzanine finance, whole envelope
financing, in-house servicing, and custom-tailored structuring
and flexibility, iStar has sought better ways to provide capital
to the real estate world. Our goal in searching out innovative
and non-commodity investment themes has been to generate
above-market returns with below-market risk by providing
what the capital markets don’t or can’t provide.
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REAL ESTATE FINANCE
$1.4 Billion
7
LOOK FORWARD
With CMBS and traditional sources of capital flowing back into
the real estate markets, our focus is on finding good, or even
great, real estate that doesn’t naturally fit in the standardized
structures of those capital sources.
One recent example is a transaction we closed earlier this
year in which we committed to provide 50% of an $815
million financing for a ground-up construction project in
New York City. The project comprises a 40-story EDITION
hotel, six levels of retail space, and high-visibility, wraparound
LED signage situated in the heart of Times Square. EDITION
is a new hotel brand created in partnership by Marriott
International and Ian Schrager.
iStar’s relationships with many members of the equity group,
and our ability to rapidly analyze and structure a multilayered
capital stack, provided an opportunity to participate in a deal
not widely understood. Coupled with our deep knowledge of
the Times Square sub-market, we were able to assemble a
financing that was custom-tailored to the borrower’s needs.
LOOK BACK
Net lease has been a core part of iStar’s business for more
than 15 years. At its heart, the net lease business is a
combination of corporate credit, capital market pricing and
real estate. iStar’s platform has emphasized the intersection
of these three disciplines and has made net lease a highly
successful business, with over $4 billion of transactions
completed across office, industrial, retail, hotel, entertainment
and other property types. Our in-house capabilities in
underwriting, lease structuring, asset management and build-
to-suit construction serve as competitive advantages as we
seek out attractive risk-adjusted opportunities.
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NET LEASE
$1.7 Billion
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LOOK FORWARD
Leveraging our proven capabilities and broad platform, iStar
recently entered into a venture with a sovereign wealth
fund to jointly acquire net lease assets. iStar and its partner
will contribute an aggregate of up to $500 million to acquire
or develop up to $1.25 billion of net lease assets. We will
be responsible for sourcing new opportunities and managing
the venture and its assets in exchange for a management
fee and promote.
Our first investment in the fund was a $93 million property net
leased to AT&T for 12 years. Situated on 33 acres just outside
of Washington, DC, and right off of Interstate 66, the 400,000
square foot property includes a three-story office building
and data center.
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OPERATING PROPERTIES
$1 Billion
LOOK BACK
A good real estate finance business should have at its foundation
a strong understanding of and capability in the underlying real
estate operations. Owning and operating a large, diversified
portfolio of operating properties has further honed our skills
and will make us stronger and smarter as we go forward.
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LOOK FORWARD
iStar has many years of experience working through transitional
real estate properties to maximize their values. The successful
repositioning and recent sale of Sotelo, a 170-unit multi-family
asset in Tempe, AZ, provides a good example of iStar’s strategy.
When we took ownership of Sotelo, only its first phase had been
completed, including two of six buildings, podium structures
for the other four buildings, the garages and common area
amenities. Instead of selling it as a half-built condominium,
iStar launched a highly successful rental marketing program
and leased all of the completed units at market rents within
four months. Seeing the longer-term potential, we worked to
ensure all building plans and permits were maintained to retain
the optionality of a quick and efficient completion of the project.
As the market recovered, iStar used its in-house capabilities to
quickly move forward with construction of the remaining four
buildings, at an upgraded finish quality, selling the stabilized
project for a 37% gain above book value.
LOOK BACK
Our entry into the land development business was not by
design. Trying to lend at low levels relative to projected sell-out
cash flows seemed to make sense when all asset values were
inflated beyond fair value. Unfortunately, we learned the hard
way how far land values can fall when a historical financial and
economic disruption occurs.
And yet, as we saw in the residential condominium space,
lessons learned at the bottom of the market lead to new
insights and new knowledge that can become the basis for
attractive returns and new opportunities.
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LAND
$1 Billion
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LOOK FORWARD
In 2013, we cleared critical hurdles on a number of assets.
Our focus this year is to build on that momentum and continue
to push our projects forward.
One example of a project that has benefitted from our
efforts to enhance value is our waterfront development in
Asbury Park, NJ.
We saw something special in Asbury Park — the beginning of
a broader resurgence of a cultural icon — and made a long-
term commitment to the waterfront redevelopment. Our
beliefs were confirmed when we developed our first project,
a town-home community called Vive, which sold out each
phase in just one day.
With multiple projects on the drawing board in Asbury Park
and elsewhere, iStar’s land portfolio should see increased
activity in 2014 and increased opportunity for value creation.
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FINANCIALS
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Selected
Financial Data
Management’s
Discussion and Analysis
of Financial Condition
and Results of Operations
Quantitative and
Qualitative Disclosures
about Market Risk
Management’s Report
on Internal Control over
Financial Reporting
Report of Independent
Registered Public
Accounting Firm
Consolidated
Balance Sheets
Consolidated Statements
of Operations
Consolidated Statements
of Comprehensive
Income (Loss)
18
20
35
35
36
37
38
39
Consolidated Statements
of Changes in Equity
Consolidated Statements
of Cash Flows
Notes to
Consolidated Financial
Statements
Performance Graph
Common Stock
Price and Dividends
(Unaudited)
Directors and Officers
Corporate Information
40
41
42
76
77
78
79
SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read
in conjunction with the discussions set forth in ”Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Certain
prior year amounts have been reclassified to conform to the 2013 presentation.
For the Years Ended December 31,
(In thousands, except per share data and ratios)
Operating Data:
Operating lease income
Interest income
Other income
Total revenue
Interest expense
Real estate expense
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of assets
Other expense
Total costs and expenses
Income (loss) before earnings from equity method investments
and other items
Gain (loss) on early extinguishment of debt, net
Earnings from equity method investments
Loss on transfer of interest to unconsolidated subsidiary
Income (loss) from continuing operations before income taxes
Income tax (expense) benefit
Income (loss) from continuing operations
Income (loss) from discontinued operations
Gain from discontinued operations
Income from sales of residential property
Net income (loss)
18
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to iStar Financial Inc.
Preferred dividends
Net (income) loss allocable to HPU holders and
Participating Security holders(1)
Net income (loss) allocable to common shareholders
Per common share data(2):
Income (loss) attributable to iStar Financial Inc.
from continuing operations:
Basic and diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic and diluted
Per HPU share data(2):
Income (loss) attributable to iStar Financial Inc.
from continuing operations:
Basic and diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic and diluted
Dividends declared per common share
2013
2012
2011
2010
2009
133,410
47,838
226,871
39,722
108,015
48,208
$ 234,567 $ 216,291 $ 195,872 $ 183,443 $ 183,207
364,094 557,809
32,343
51,069
$ 390,790 $ 397,539 $ 462,465 $ 598,606 $ 773,359
$ 266,225 $ 355,097 $ 342,186 $ 313,766 $ 411,790
81,421
121,036
56,668
57,189
109,526 124,152
331,487 1,255,357
12,809 114,117
62,329
16,055
$ 613,174 $ 768,965 $ 714,751 $ 961,347 $ 2,106,355
157,441
71,266
92,114
5,489
12,589
8,050
138,714
58,091
105,039
46,412
13,239
11,070
151,458
68,770
80,856
81,740
13,778
17,266
$ (222,384)
(33,190)
41,520
(7,373)
$ (221,427)
659
$ (220,768)
644
22,233
86,658
$ (371,426)
(37,816)
103,009
–
$ (306,233)
(8,445)
$ (314,678)
(17,481)
27,257
63,472
$ (111,233)
(718)
$ (111,951)
(49,020)
$ (241,430)
1,500
$ (239,930)
(42,320)
$ (252,286)
101,466
95,091
–
$ (55,729)
4,719
$ (51,010)
(5,514)
25,110
5,721
$ (25,693)
3,629
$ (22,064)
(42,320)
$ (362,741)
–
$ (201,910)
(7,023)
$ (208,933)
$ (1,332,996)
108,923 547,349
5,298
51,908
–
$ (780,349)
(4,141)
$ (784,490)
2,217
12,426
–
$ (769,847)
1,071
$ (768,776)
(42,320)
18,757
270,382
–
$ 80,206
(523)
$ 79,683
(42,320)
5,202
9,253
$ (272,997)
1,997
$ (62,387)
(1,084)
$ 36,279
22,526
$ (788,570)
$ (155,769)
$
(2.09)
$
(3.37)
$
(0.91)
$
(2.62)
$
(8.02)
$
(1.83)
$
(3.26)
$
(0.70)
$
0.39
$
(7.88)
$ (396.07)
$ (638.27)
$ (173.66)
$ (497.13)
$ (1,528.67)
$ (346.80)
–
$
$ (616.87)
–
$
$ (133.13)
–
$
$
$
72.27
–
$ (1,501.73)
–
$
For the Years Ended December 31,
2013
2012
2011
2010
2009
(In thousands, except per share data and ratios)
Supplemental Data:
Adjusted Income(3)
Adjusted EBITDA(3)
Ratio of Adjusted EBITDA to interest expense and preferred dividends(3)
Ratio of earnings to fixed charges(4)
Ratio of earnings to fixed charges and preferred dividends(4)
Weighted average common shares outstanding – basic and diluted
Weighted average HPU shares outstanding – basic and diluted
Cash flows from:
$
(53,847)
$ (21,677)
$ 298,833 $ 349,754
0.9x
–
–
83,742
15
0.9x
–
–
84,990
15
(3,316)
$
$ 376,464
1.0x
–
–
88,688
15
$ 360,525
$ 767,663
2.0x
–
–
93,244
15
$ 155,324
$ 686,267
1.3x
–
–
100,071
15
Operating activities
Investing activities
Financing activities
$ (191,932)
$ (180,465)
$ 893,447 $ 1,267,047
$ (1,175,597)
$ (455,758)
$
(28,577)
$ 1,461,257
$ (1,580,719)
$
(45,883)
$ 3,738,823
$ (3,412,707)
$
77,795
$ 724,702
$ (1,074,402)
As of December 31,
2013
2012
2011
2010
2009
(In thousands)
Balance Sheet Data:
Real estate, net
Real estate available and held for sale
Loans receivable and other lending investments, net
Total assets
Debt obligations, net
Total equity
Explanatory Notes:
$ 2,796,181 $ 2,739,099 $ 2,893,482 $ 2,599,203 $ 3,302,584
$ 360,517 $ 635,865
$ 746,081 $ 856,422
$ 677,458
$ 1,370,109 $ 1,829,985 $ 2,860,762 $ 4,587,352 $ 7,661,562
$ 5,642,011 $ 6,159,999 $ 7,523,083 $ 9,175,681 $ 12,811,885
$ 4,158,125 $ 4,691,494 $ 5,837,540 $ 7,345,433 $ 10,894,903
$ 1,301,465 $ 1,313,154 $ 1,573,604 $ 1,694,659 $ 1,656,118
(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, restricted stock awards and common stock equivalents granted
under the Company’s Long Term Incentive Plans.
(2) See Note 13 of the Notes to Consolidated Financial Statements.
(3) Adjusted income and Adjusted EBITDA should be examined in conjunction with net income (loss) as shown in our Consolidated Statements of Operations. Adjusted income and
Adjusted EBITDA should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), as an indicator of our performance, or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor are Adjusted income and Adjusted EBITDA indicative of funds available to fund our cash
needs or available for distribution to shareholders. Rather, Adjusted income and Adjusted EBITDA are additional measures for us to use to analyze how our business is performing. It
should be noted that our manner of calculating Adjusted income and Adjusted EBITDA may differ from the calculations of similarly- titled measures by other companies. See computa-
tion of Adjusted income and Adjusted EBITDA on pages 32 and 33.
(4) This ratio of earnings to fixed charges is calculated in accordance with SEC Regulation S- K Item 503. The Company’s unsecured debt securities have a fixed charge coverage cov-
enant which is calculated differently in accordance with the terms of the agreements governing such securities. For the years ended December 31, 2013, 2012, 2011, 2010 and 2009,
earnings were not sufficient to cover fixed charges by $240,912, $305,450, $65,842, $221,634 and $749,144, respectively, and earnings were not sufficient to cover fixed charges and
preferred dividends by $289,932, $347,770, $108,162, $263,954 and $791,464, respectively.
19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and
Section 21E of the Exchange Act. Forward- looking statements are
included with respect to, among other things, the Company’s current
business plan, business strategy, portfolio management, prospects
and liquidity. These forward- looking statements generally are identi-
fied 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 statements. Important factors that the Company believes might
cause such differences are discussed in the section entitled, “Risk
Factors” in Part I, Item 1a of iStar Financial’s Form 10-K or otherwise
accompany the forward- looking statements contained in this Annual
Report. We undertake 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 Annual Report. For purposes of this 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 sub-
sidiaries, unless the context indicates otherwise.
This discussion summarizes the significant factors affect-
ing our consolidated operating results, financial condition and liquidity
during the three- year period ended December 31, 2013. This discussion
should be read in conjunction with our consolidated financial statements
and related notes for the three- year period ended December 31, 2013
included elsewhere in this Annual Report. These historical financial
statements may not be indicative of our future performance. We have
reclassified certain items in our consolidated financial statements from
prior years in order to conform to our current year presentation (see
Note 2 of the Notes to Consolidated Financial Statements).
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Introduction
iStar Financial Inc. is a fully- integrated finance and investment
company focused on the commercial real estate industry. We provide
custom- tailored investment capital to high- end private and corporate
owners of real estate and invest directly across a range of real estate
sectors. We are taxed as a real estate investment trust, or “REIT,” and
have invested more than $35 billion over the past two decades. Our
primary business segments are real estate finance, net lease, operating
properties and land.
Our real estate finance portfolio is comprised of senior and
mezzanine real estate loans that may be either fixed- rate or variable-
rate and are structured to meet the specific financing needs of
borrowers. Our portfolio also includes preferred equity investments
and senior and subordinated loans to corporations, particularly those
engaged in real estate or real estate related businesses, and may be
either secured or unsecured. Our loan portfolio includes whole loans
and loan participations.
Our net lease portfolio is primarily comprised of properties
owned by us and leased to single creditworthy tenants where the prop-
erties are subject to long- term leases. Most of the leases provide for
expenses at the facility to be paid by the tenant on a triple net lease
basis. The properties in this portfolio are diversified by property type
and geographic location.
Our operating properties portfolio is comprised of commer-
cial and residential properties which represent a diverse pool of assets
across a broad range of geographies and property types. We gener-
ally seek to reposition or redevelop these assets with the objective of
maximizing their value through the infusion of capital and/or intensive
asset management efforts. The commercial properties within this port-
folio include office, retail and hotel properties. The residential properties
within this portfolio are generally luxury condominium projects located
in major U.S. cities where our strategy is to sell individual condominium
units through retail distribution channels.
Our land portfolio primarily consists of 11 master planned
community projects, 10 urban infill land parcels and 6 waterfront land
parcels located throughout the United States. Master planned communi-
ties represent large- scale residential projects that we will entitle, plan
and/or develop and may sell through retail channels to home builders
or in bulk. We currently have entitlements at these projects for more
than 25,000 lots. The remainder of the Company’s land includes infill and
waterfront parcels located in and around major cities that the Company
will develop, sell to or partner with commercial real estate developers.
Waterfront parcels are generally entitled for residential projects and
urban infill parcels are generally entitled for mixed- use projects. These
projects are currently entitled for approximately 6,000 residential units,
and select projects include commercial, retail and office uses. As of
December 31, 2013, we had 5 land projects in production, 11 in develop-
ment and 11 in the pre- development phase.
Executive Overview
We have made significant progress over the past two years
in strengthening our balance sheet and positioning the Company for
the future. During this period, our credit ratings were upgraded and we
executed several capital markets transactions across a broad spectrum
of debt products that have satisfied all of our significant near term debt
maturities and meaningfully extended our debt maturity profile. These
transactions have included five unsecured note issuances at declining
interest rates, a refinancing of our largest secured credit facility at a
reduced interest rate and the issuance of convertible preferred stock.
These transactions, along with fundamental improvements in the overall
economy and real estate markets, have allowed us to reduce our overall
cost of capital while maintaining lower leverage.
As conditions in the economy and financing markets have
improved, we have been increasing our originations of new lending
and net lease investments, repositioning or redeveloping our operat-
ing properties and progressing on the entitlement and development of
our land assets. We intend to continue these efforts, with the objective
of having these assets contribute positively to earnings in the future.
During the year, we resolved a number of non- performing loans includ-
ing loans that were repaid, sold, returned to performing status and
foreclosed on. Non- performing loans, net of specific reserves, declined
60% from $503.1 million at December 31, 2012 to $203.6 million at
December 31, 2013.
During the year ended December 31, 2013, our performing
loans, net lease assets and sales of our residential operating proper-
ties contributed positively to our earnings. However, the performance of
nonperforming loans, transitional commercial operating properties and
the sizable carrying costs associated with our land assets continued to
negatively impact our earnings. In addition, we realized less earnings
from equity method investments as a result of the sale of our invest-
ment in LNR Property Corporation (“LNR”) during 2013. For the year
ended December 31, 2013, we recorded a net loss allocable to common
shareholders of $(155.8) million, compared to a loss of $(273.0) million
during 2012. Adjusted income (loss) allocable to common shareholders
for 2013 was $(21.7) million, compared to $(53.8) million for 2012.
With respect to liquidity, we originated and funded investments
totaling $483.7 million and received $1.40 billion of proceeds from our
portfolio during 2013. As of December 31, 2013, we had satisfied all of
our significant near term debt maturities. We had $513.6 million of cash
at that date, a portion of which we have since used to fund new invest-
ments, and we expect similarly to use the remainder to primarily fund
investment activities.
21
Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
For the Years Ended December 31,
(in thousands)
Operating lease income
Interest income
Other income
Total revenue
Interest expense
Real estate expenses
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of assets
Other expense
Total costs and expenses
Loss on early extinguishment of debt, net
Earnings from equity method investments
Loss on transfer of interest to unconsolidated subsidiary
Income tax (expense) benefit
Income (loss) from discontinued operations
Gain from discontinued operations
Income from sales of residential property
Net income (loss)
2013
2012
$ Change
% Change
$ 234,567
108,015
48,208
$ 390,790
$ 266,225
157,441
71,266
92,114
5,489
12,589
8,050
$ 613,174
$ (33,190)
41,520
(7,373)
659
644
22,233
86,658
$ 216,291
133,410
47,838
$ 397,539
$ 355,097
151,458
68,770
80,856
81,740
13,778
17,266
$ 768,965
$ (37,816)
103,009
–
(8,445)
(17,481)
27,257
63,472
$ (111,233)
$ (241,430)
$ 18,276
(25,395)
370
(6,749)
$
$ (88,872)
5,983
2,496
11,258
(76,251)
(1,189)
(9,216)
$ (155,791)
$
4,626
(61,489)
(7,373)
9,104
18,125
(5,024)
23,186
$ 130,197
8%
(19)%
1%
(2)%
(25)%
4%
4%
14%
(93)%
(9)%
(53)%
(20)%
(12)%
(60)%
100%
>100%
>100%
(18)%
37%
(54)%
22
Revenue – Operating lease income, which includes income from
net lease assets and commercial operating properties, increased to
$234.6 million during the year ended December 31, 2013 from $216.3 mil-
lion for the same period in 2012.
originations that increased our weighted average effective yield and our
interest income. For the year ended December 31, 2013, performing
loans generated a weighted average effective yield of 7.6% as compared
to 7.5% in 2012.
Operating lease income from commercial operating properties
increased to $86.4 million in 2013 from $65.7 million in 2012. For the year
ended December 31, 2013, the commercial operating properties gener-
ated a weighted average effective yield of 4.7% compared to 2.9% during
the same period in 2012 based on gross carrying value. We acquired title
to additional commercial operating properties at the end of 2012, which
contributed $15.0 million to the increase in operating lease income in
2013. The net impact of new leases and other leasing related activi-
ties within the portfolio contributed $7.9 million to the year over year
increase. Lease terminations and other leasing related activities offset
the increase by $1.9 million period over period. As of December 31, 2013,
commercial operating properties, excluding hotels, were 61.1% leased
compared to 58.1% leased as of December 31, 2012.
Operating lease income from net lease assets decreased
to $147.3 million in 2013 from $149.1 million in 2012 primarily due to
lease expirations which were partially offset by new leases since
December 31, 2012. As of December 31, 2013, net lease assets were
94.4% leased compared to 94.8% leased as of December 31, 2012. For
the year ended December 31, 2013, the net lease portfolio generated a
weighted average effective yield of 7.2% compared to 7.5% during the
same period in 2012 based on gross carrying value.
Other income increased to $48.2 million in 2013 as compared
to $47.8 million in 2012. The increase was due to $4.0 million received for
the settlement of a property- related lawsuit and $3.5 million recognized
for the termination of certain leases. Other income includes revenue
related to hotel properties included in the operating property portfolio,
which decreased to $29.3 million in 2013 from $32.6 million in 2012 due
to a reduction in ancillary revenue related to a hotel property and the
conversion of some hotel rooms to condo units within one property. In
addition, there was a decline of $3.9 million in loan related income due
primarily to the sale of a loan in 2012.
Costs and expenses – Interest expense decreased $88.9 million
to $266.2 million in 2013 as compared to $355.1 million in 2012 due to a
lower average outstanding debt balance and a lower weighted average
cost of debt. The average outstanding balance of our debt declined to
$4.46 billion in 2013 from $5.49 billion in 2012. Due to an upgrade in our
credit ratings in late 2012 and strong credit markets in 2013, we refi-
nanced our largest senior secured credit facility to a lower interest rate
in February 2013 and refinanced higher rate senior unsecured notes
with lower rate senior unsecured notes during 2013. As a result, our
weighted average effective cost of debt decreased to 5.9% during 2013
as compared to 6.5% during 2012.
Interest income declined to $108.0 million in 2013 as compared
to $133.4 million in 2012 primarily due to a decrease in the average bal-
ance of performing loans to $1.23 billion in 2013 from $1.67 billion in 2012.
The decrease in performing loans was primarily due to loan repayments
received during the period. Offsetting the decline were new investment
Real estate expenses increased to $157.4 million in 2013 as
compared to $151.5 million in 2012. Expenses for commercial operating
properties increased to $81.1 million in 2013 from $73.7 million in 2012,
primarily driven by a property to which we took title at the end of 2012,
offset by a reduction in ancillary expenses related to a hotel property.
Carrying costs and other expenses on our land assets increased to
$33.8 million in 2013 from $27.3 million in 2012, primarily related to
increased pre- development activities. The increases were offset by
a decrease in costs associated with residential units to $19.8 million
in 2013 from $26.6 million in 2012 due to continued unit sales, which
reduced our homeowners’ association fees and other related expenses.
Additionally, operating expenses for net lease assets decreased to
$22.7 million in 2013 from $23.9 million in 2012 due primarily to improve-
ments in collectability of receivables in 2013.
Depreciation and amortization increased to $71.3 million in
2013 from $68.8 million in 2012 primarily due to the acquisition of addi-
tional operating properties in late 2012 and during 2013.
General and administrative expenses increased to $92.1 mil-
lion in 2013 as compared to $80.9 million in 2012 primarily due to an
increase in compensation related costs pertaining to annual perfor-
mance based bonuses.
Provisions for loan losses declined by $76.3 million to $5.5 mil-
lion in 2013 as compared to $81.7 million in 2012 as less specific
reserves were required on a lower balance of non- performing loans.
Included in the provision for the year ended December 31, 2013 were
specific reserves totaling $72.5 million which were established on non-
performing loans offset by recoveries of previously recorded loan loss
reserves of $63.1 million.
Impairment of assets for the year ended December 31, 2013
resulted from changes in local market conditions and business strategy
for certain assets and consisted of $14.4 million related to real estate
properties. Of these amounts, $1.8 million of impairments related to real
estate assets held for sale or sold and were therefore included in dis-
continued operations for the year ended December 31, 2013. For the
year ended December 31, 2012, we recorded impairments of $27.7 mil-
lion on operating properties and $7.7 million on net lease assets, which
resulted from changes in local market conditions and business strategy
for certain assets. Of these amounts, $22.6 million related to real estate
assets held for sale or sold and therefore, were included in discontinued
operations for the year ended December 31, 2012.
Other expense decreased to $8.1 million in 2013 as com-
pared to $17.3 million in 2012 due primarily to $8.1 million of third party
expenses incurred in 2012 in connection with the refinancing of our
2011 Secured Credit Facilities with our October 2012 Credit Facility (see
Liquidity and Capital Resources below).
Loss on early extinguishment of debt, net – During 2013, we
incurred losses on the early extinguishment of debt due to acceler-
ated amortization of discounts and fees of $7.7 million relating to the
refinancing of our October 2012 Secured Credit Facility in February
2013 and $13.2 million relating to accelerated amortization of discount
and fees associated with repayments on our 2012 and 2013 Secured
Credit Facilities. We also redeemed our 5.95% senior unsecured notes
due October 2013 and our 5.70% senior unsecured notes due March
2014 prior to maturity and incurred $12.3 million of losses related to a
prepayment penalty and the acceleration of amortization of discounts
(see Liquidity and Capital Resources below).
During 2012, net losses on the early extinguishment of debt
included a $14.9 million prepayment fee on the early redemption of our
8.625% Senior Unsecured Notes due in June 2013 as well as $12.1 mil-
lion related to the accelerated amortization of discounts and fees in
connection with the refinancing of our 2011 Secured Credit Facilities
in October 2012 (see Liquidity and Capital Resources below). We also
recorded $13.8 million of losses in 2012 related to the accelerated amor-
tization of discounts and fees in connection with amortization payments
that we made on our 2011 and 2012 Secured Credit Facilities. These
losses were partially offset by gains on the repurchases of unsecured
notes during 2012.
Earnings from equity method investments – Earnings from equity
method investments decreased to $41.5 million in 2013 as compared to
$103.0 million in 2012. For one of our real estate equity investments, our
equity in earnings decreased to $4.3 million in 2013 from $25.2 million
in 2012 due to lower income from sales of residential property units
for a building that is approaching complete sell- out. Our equity in earn-
ings from LNR decreased to $47.3 million in 2013 from $60.7 million in
2012 due to the sale of our interest in LNR in April 2013. Our equity in
earnings in 2013 was offset by an other than temporary impairment
of $30.9 million arising from the terms of the sale of the Company’s
investment in LNR. The Company and other owners of LNR entered into
negotiations with potential purchasers of LNR beginning in September
2012. After an extensive due diligence and negotiation process, the LNR
owners entered into a definitive contract to sell LNR in January 2013
at a fixed sale price which, from the Company’s perspective, reflected
in part the Company’s then- current expectations about the future
results of LNR and potential volatility in its business. The definitive sale
contract provided that LNR would not make cash distributions to its
owners during the fourth quarter of 2012 through the closing of the sale.
Notwithstanding the fixed terms of the contract, our investment balance
in LNR increased due to equity in earnings recorded which resulted in
our recognition of other than temporary impairment on our investment
during 2013.
Loss on transfer of interest to unconsolidated subsidiary – During
2013, we entered into a venture with a national homebuilder to jointly
develop residential lots in the first phase of Spring Mountain Ranch, a
1,400-lot master planned community. We contributed the initial phase
of land, which had a carrying value of $24.1 million, to the venture in
exchange for a retained interest of $16.7 million, resulting in a $7.4 mil-
lion loss.
Income tax (expense) benefit – Income taxes are primarily gen-
erated by assets held in our taxable REIT subsidiaries (“TRS’s”). Income
taxes decreased to a net benefit of $0.7 million in 2013 as compared to a
net expense of $8.4 million in 2012 due primarily to a tax benefit gener-
ated by certain property level expenses as well as lower taxable income
from LNR, which was sold in April 2013.
Discontinued operations – During 2013, we sold commercial
operating properties with a total carrying value of $72.6 million which
resulted in a gain of $18.6 million and net lease assets with a total car-
rying value of $18.7 million which resulted in a net gain of $2.2 million.
During 2012, we sold net lease assets with a carrying value of $115.5 mil-
lion and recorded gains of $27.3 million.
23
Income (loss) from discontinued operations includes operat-
ing results from net lease assets and commercial operating properties
held for sale or sold as of December 31, 2013. For the years ended
December 31, 2013 and 2012, income (loss) from discontinued
operations includes impairment of assets of $1.8 million and $22.6 mil-
lion, respectively.
Income from sales of residential property – During 2013 and 2012,
we sold residential condominiums for total net proceeds of $269.7 mil-
lion and $319.3 million, respectively, that resulted in income from sales
of residential properties totaling $82.6 million and $63.5 million, respec-
tively. During 2013, we also sold land for proceeds of $36.7 million that
resulted in income of $4.0 million.
Results of Operations for the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
(in thousands)
Operating lease income
Interest income
Other income
Total revenue
Interest expense
Real estate expenses
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of assets
Other expense
Total costs and expenses
Gain (loss) on early extinguishment of debt, net
Earnings from equity method investments
Income tax (expense) benefit
Income (loss) from discontinued operations
Gain from discontinued operations
Income from sales of residential property
Net income (loss)
24
2012
2011
$ Change
% Change
$ 216,291
133,410
47,838
$ 397,539
$ 355,097
151,458
68,770
80,856
81,740
13,778
17,266
$ 768,965
$ (37,816)
103,009
(8,445)
(17,481)
27,257
63,472
$ 195,872
226,871
39,722
$ 462,465
$ 342,186
138,714
58,091
105,039
46,412
13,239
11,070
$ 714,751
$ 101,466
95,091
4,719
(5,514)
25,110
5,721
$ 20,419
(93,461)
8,116
$ (64,926)
$ 12,911
12,744
10,679
(24,183)
35,328
539
6,196
$ 54,214
$ (139,282)
7,918
(13,164)
(11,967)
2,147
57,751
$ (241,430)
$ (25,693)
$ (215,737)
10%
(41)%
20%
(14)%
4%
9%
18%
(23)%
76%
4%
56%
8%
>100%
8%
>100%
>100%
9%
>100%
>100%
Revenue – Operating lease income, which includes income from
net lease assets and commercial operating properties, increased to
$216.3 million during the year ended December 31, 2012 from $195.9 mil-
lion for the same period in 2011.
Operating lease income from commercial operating properties
increased to $65.7 million in 2012 from $51.2 million in 2011. We acquired
title to additional commercial operating properties at the end of 2011 and
during 2012, which contributed $20.6 million in operating lease income
in 2012. The impact of certain lease terminations offset this increase
by $6.3 million year over year. As of December 31, 2012, commercial
operating properties, excluding hotels, were 58.1% leased compared to
41.0% leased as of December 31, 2011.
Operating lease income from net lease assets increased to
$149.1 million in 2012 from $144.5 million in 2011 primarily due to new
leasing activity. As of December 31, 2012, net lease assets were 94.8%
leased compared to 94.4% leased as of December 31, 2011. For the year
ended December 31, 2012, the net lease portfolio generated a weighted
average effective yield of 7.5% compared to 7.3% during the same period
in 2011 based on gross carrying value.
as well as performing loans moving to non- performing status. For the
year ended December 31, 2012, performing loans generated a weighted
average effective yield of 7.5% as compared to 7.2% in 2011.
Other income increased to $47.8 million in 2012 as compared
to $39.7 million in 2011. Other income includes revenue related to hotel
properties included in the operating property portfolio, which was
$32.6 million in 2012 compared to $32.5 million in 2011. For the year
ended December 31, 2012, other income also includes $8.6 million of
loan income related to the prepayment and sales of loans as compared
to $2.9 million for the year ended December 31, 2011.
Costs and expenses – Interest expense increased to $355.1 mil-
lion in 2012 as compared to $342.2 million in 2011 primarily due to a
higher weighted average cost of debt offset by a lower average out-
standing balance. Our weighted average effective cost of debt increased
to 6.49% for the year ended December 31, 2012 as compared to 5.34%
during 2011 primarily due to the refinancing of existing debt in 2011 and
the first half of 2012 at higher rates. The average outstanding balance of
our debt declined to $5.49 billion for the year ended December 31, 2012
from $6.47 billion for the year ended December 31, 2011.
Interest income declined to $133.4 million in 2012 as compared
to $226.9 million in 2011 primarily due to a decrease in the average bal-
ance of performing loans to $1.67 billion in 2012 from $2.58 billion in 2011.
The decrease in performing loans was primarily due to loan repayments
Real estate expenses increased to $151.5 million in 2012 as
compared to $138.7 million in 2011 primarily driven by additional prop-
erties to which we took title in 2012 and late 2011 through resolution
of non- performing loans. Expenses for operating properties were
$100.2 million in 2012 as compared to $92.0 million in 2011, which
includes carrying costs on our residential operating properties totaling
$26.6 million in 2012 and $24.4 million in 2011. Operating expenses for
net lease assets declined slightly to $23.9 million in 2012 from $25.1 mil-
lion in 2011. Carrying costs and other expenses on our land assets
increased to $27.3 million in 2012 from $21.6 million in 2011, primarily
related to acquiring title to assets in resolution of non- performing loans
as well as increased legal and consulting expenses.
Depreciation and amortization increased to $68.8 million in
2012 from $58.1 million in 2011 primarily due to the acquisition of addi-
tional operating properties in late 2011 and 2012.
General and administrative expenses decreased primarily
due to lower stock- based compensation expense, lower payroll and
employee related costs and decreased legal expenses. Stock- based
compensation expense declined to $15.3 million in 2012 from $29.7 mil-
lion in 2011, primarily resulting from the recognition of incremental
expense in 2011 associated with the modification of certain restricted
stock units. Payroll and employee related costs declined due to staff-
ing reductions, while legal expenses declined due to the settlement of
litigation in June 2012.
Provisions for loan losses totaled $81.7 million in 2012 and
included higher specific reserves on non- performing loans, offset by a
reduction in the general reserve primarily due to a reduction in the bal-
ance of performing loans outstanding during the current year.
Impairment of assets for the year ended December 31, 2012
resulted from changes in local market conditions and business strategy
for certain assets and consisted of $27.7 million on operating properties
and $7.7 million on net lease assets. Of these amounts, $22.6 mil-
lion of impairments related to real estate assets held for sale or sold
and were therefore included in discontinued operations for the year
ended December 31, 2012. For the year ended December 31, 2011, we
recorded impairments of $22.4 million related to operating properties
which resulted from changing market conditions and changes in busi-
ness strategy for certain assets. Of this amount, $9.1 million relates to
real estate assets held for sale or sold and therefore, were included in
discontinued operations for the year ended December 31, 2011.
Other expense for 2012 increased primarily due to $8.1 million
of third party expenses incurred in connection with the refinancing of
our 2011 Secured Credit Facilities with our October 2012 Credit Facility
(see Liquidity and Capital Resources below).
Gain (loss) on early extinguishment of debt, net – During 2012, net
losses on the early extinguishment of debt included a $14.9 million pre-
payment fee on the early redemption of our 8.625% Senior Unsecured
Notes due in June 2013 as well as $12.1 million related to the accelerated
amortization of discounts and fees in connection with the refinancing
of our 2011 Secured Credit Facilities in October 2012 (see Liquidity and
Capital Resources below). We also recorded $13.8 million of losses in
2012 related to the accelerated amortization of discounts and fees in
connection with amortization payments that we made on our 2011 and
2012 Secured Credit Facilities. These losses were partially offset by
gains on the repurchases of unsecured notes during 2012.
During the same period in 2011, we fully redeemed the
$312.3 million remaining principal balance of our 10% senior secured
notes due June 2014 which resulted in a $109.0 million gain on early
extinguishment of debt primarily related to the recognition of deferred
gain that resulted from a previous debt exchange. This was offset by
losses on extinguishment of debt related to the accelerated amortization
of discounts and fees in connection with amortization payments that we
made on our secured credit facilities, including the A-1 Tranche of the
2011 Secured Credit Facilities.
Earnings from equity method investments – Earnings from equity
method investments increased to $103.0 million in 2012 as compared
to $95.1 million in 2011, primarily due to $26.0 million of equity in earn-
ings recognized from income from sales of residential property units
recorded by one of our real estate equity investments. These increases
were partially offset by the impact of the sale of Oak Hill Advisors, L.P.
and related entities in October 2011, which contributed $38.4 million to
earnings, including a pre- tax gain of $30.3 million during the year ended
December 31, 2011.
Income tax (expense) benefit – Income taxes are primarily gener-
ated by assets held in our taxable REIT subsidiaries, and increased to an
expense of $8.4 million in 2012 as compared to a benefit of $4.7 million
in 2011. During the years ended December 31, 2012 and 2011, TRS-
generated taxable income was partially offset by the utilization of net
operating loss carryforwards, resulting in current tax expense. In addi-
tion, in 2011, we recognized a non- cash deferred tax benefit that resulted
from the reversal of a deferred tax liability related to our Oak Hill invest-
ments that were sold in October of 2011, which resulted in a net benefit
for the year then ended.
Discontinued operations – During 2012, we sold net lease assets
with a carrying value of $115.5 million and recorded gains of $27.3 mil-
lion. During the 2011, we realized a $22.2 million gain from discontinued
operations previously deferred as part of the June 2010 sale of 32 net
lease assets.
25
Income (loss) from discontinued operations includes operat-
ing results from net lease assets and commercial operating properties
held for sale or sold as of December 31, 2012. For the years ended
December 31, 2012 and 2011, income (loss) from discontinued
operations includes impairment of assets of $22.6 million and $9.1 mil-
lion, respectively.
Income from sales of residential property – During 2012 and 2011,
we sold residential condominiums for total net proceeds of $319.3 million
and $154.0 million, respectively, that resulted in income from sales of
residential properties totaling $63.5 million and $5.7 million, respectively.
Adjusted Income and Adjusted EBITDA
In addition to net income (loss), we use Adjusted income and
Adjusted EBITDA to measure our operating performance. Adjusted
income represents net income (loss) allocable to common sharehold-
ers, prior to the effect of depreciation and amortization, provision for
loan losses, impairment of assets, loss on transfer of interest to uncon-
solidated subsidiary, stock- based compensation expense, and the
non- cash portion of gain (loss) on early extinguishment of debt. Adjusted
EBITDA represents net income (loss) plus the sum of interest expense,
income taxes, depreciation and amortization, provision for loan losses,
impairment of assets, stock- based compensation expense and loss on
transfer of interest to unconsolidated subsidiary, adjusted for gain (loss)
on early extinguishment of debt.
We believe Adjusted income and Adjusted EBITDA are useful
measures to consider, in addition to net income (loss), as they may help
investors evaluate our core operating performance prior to certain non-
cash items.
Adjusted income and Adjusted EBITDA should be examined
in conjunction with net income (loss) as shown in our Consolidated
Statements of Operations. Adjusted income and Adjusted EBITDA
should not be considered as an alternative to net income (loss) (deter-
mined in accordance with GAAP), as an indicator of our performance,
or to cash flows from operating activities (determined in accordance
with GAAP) as a measure of our liquidity, nor are Adjusted income and
Adjusted EBITDA indicative of funds available to fund our cash needs
or available for distribution to shareholders. Rather, Adjusted income
and Adjusted EBITDA are additional measures for us to use to analyze
how our business is performing. It should be noted that our manner of
calculating Adjusted income and Adjusted EBITDA may differ from the
calculations of similarly- titled measures by other companies.
For the Years Ended December 31,
2013
2012
2011
2010
2009
(in thousands)
Adjusted income
Net income (loss) allocable to common shareholders
Add: Depreciation and amortization(1)
Add: Provision for loan losses
Add: Impairment of assets(2)
Add: Loss on transfer of interest to unconsolidated
subsidiary
Add: Stock- based compensation expense
Add: (Gain) loss on early extinguishment of debt, net(3)
Less: HPU/Participating Security allocation
Adjusted income (loss) allocable to common shareholders
$ (155,769)
$ (272,997)
$ (62,387)
72,439
5,489
14,353
70,786
81,740
36,354
63,928
46,412
22,386
$ 36,279
70,786
331,487
22,381
$ (788,570)
98,238
1,255,357
141,018
7,373
19,261
19,655
(4,478)
$ (21,677)
–
–
–
15,293
22,405
(7,428)
$ (53,847)
29,702
(101,466)
(1,891)
(3,316)
$
19,355
(110,075)
(9,688)
$ 360,525
–
23,593
(547,349)
(26,963)
$ 155,324
Explanatory Notes:
(1) For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, depreciation and amortization includes $264, $2,016, $5,837, $14,117 and $42,099, respectively, of depreciation
and amortization reclassified to discontinued operations. Depreciation and amortization also includes our proportionate share of depreciation and amortization expense for equity
method investments and excludes the portion of depreciation and amortization expense allocable to noncontrolling interests.
(2) For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, impairment of assets includes $1,764, $22,576, $9,147, $9,572 and $26,901, respectively, of impairment of assets
reclassified to discontinued operations.
(3) For the years ended December 31, 2013, 2012 and 2010, (gain) loss on early extinguishment of debt excludes the portion of losses paid in cash of $13,535, $15,411 and $1,152, respectively.
26
For the Years Ended December 31,
2013
2012
2011
2010
2009
(in thousands)
Adjusted EBITDA
Net income (loss)
Add: Interest expense(1)
Less: Income tax expense (benefit)
Add: Depreciation and amortization(2)
EBITDA
Add: Provision for loan losses
Add: Impairment of assets(3)
Add: Loss on transfer of interest to unconsolidated
subsidiary
Add: Stock- based compensation expense
Add: (Gain) loss on early extinguishment of debt, net(4)
Adjusted EBITDA(5)
Explanatory Notes:
$ (111,233)
269,921
(659)
74,673
$ 232,702
5,489
14,353
7,373
19,261
19,655
$ 298,833
$ (241,430)
$ (25,693)
356,161
8,445
70,786
$ 193,962
81,740
36,354
345,914
(4,719)
63,928
$ 379,430
46,412
22,386
$ 80,206
346,500
7,023
70,786
$ 504,515
331,487
22,381
–
–
–
15,293
22,405
$ 349,754
29,702
(101,466)
$ 376,464
19,355
(110,075)
$ 767,663
$ (769,847)
481,116
4,141
98,238
$ (186,352)
1,255,357
141,018
–
23,593
(547,349)
$ 686,267
(1) For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, interest expense includes $0, $1,064, $3,728, $32,734 and $69,326, respectively, of interest expense reclassified
to discontinued operations. Interest expense also includes our proportionate share of interest for equity method investments.
(2) For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, depreciation and amortization includes $264, $2,016, $5,837, $14,117 and $42,099, respectively, of depreciation
and amortization reclassified to discontinued operations. Depreciation and amortization also includes our proportionate share of depreciation and amortization expense for equity
method investments.
(3) For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, impairment of assets includes $1,764, $22,576, $9,147, $9,572 and $26,901, respectively, of impairment of assets
reclassified to discontinued operations.
(4) For the years ended December 31, 2013, 2012 and 2010, (gain) loss on early extinguishment of debt excludes the portion of losses paid in cash of $13,535, $15,411 and $1,152,
respectively.
(5) Prior period presentation has been adjusted to conform to current year presentation.
The reserve for loan losses includes an asset- specific com-
ponent and a formula- based component. An asset- specific 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, 2013, asset- specific reserves decreased to
$348.0 million compared to $491.4 million at December 31, 2012, pri-
marily due to charge- offs on loans where we took title to properties
serving as collateral in full or partial satisfaction of such loans or loans
that were sold. The decrease was partially offset by additional reserves
established on new non- performing loans.
The formula- based general reserve is derived from estimated
principal default probabilities and loss severities applied to groups of
performing loans based upon risk ratings assigned to loans with simi-
lar risk characteristics during our quarterly loan portfolio assessment.
During this assessment, we perform a comprehensive analysis of our
loan portfolio and assign risk ratings to loans that incorporate man-
agement’s current judgments about their credit quality based on all
known and relevant factors that may affect collectability. We consider,
among other things, payment status, lien position, borrower financial
resources and investment in collateral, collateral type, project econom-
ics and geographical location as well as national and regional economic
factors. This methodology results in loans being segmented by risk clas-
sification into risk rating categories that are associated with estimated
probabilities of default and principal loss. We estimate loss rates based
on historical realized losses experienced within our portfolio and take
into account current economic conditions affecting the commercial real
estate market when establishing appropriate time frames to evaluate
loss experience.
The general reserve decreased to $29.2 million or 2.7% of the
gross carrying value of performing loans as of December 31, 2013, com-
pared to $33.1 million or 2.4% of the gross carrying value of performing
loans at December 31, 2012. This reduction is primarily attributable
to the reduction in the balance of performing loans offset by a slight
increase in the weighted average risk ratings of performing loans to 3.11
as of December 31, 2013 compared to 3.01 as of December 31, 2012.
27
Risk Management
Loan Credit Statistics – The table below summarizes our non-
performing loans and the reserves for loan losses associated with our
loans ($ in thousands):
As of December 31,
2013
2012
Non- performing loans
Carrying value(1)
As a percentage of total carrying value of loans
Reserve for loan losses
Impaired loan asset- specific reserves for
loan losses
As a percentage of gross carrying
value of impaired loans
Total reserve for loan losses
$ 203,604 $ 503,112
27.5%
16.6%
$ 348,004 $ 491,399
46.3%
42.6%
$ 377,204 $ 524,499
As a percentage of total loans before
loan loss reserves
23.5%
22.3%
Explanatory Note:
(1) As of December 31, 2013 and 2012, carrying values of non- performing loans are
net of asset- specific reserves for loan losses of $317.0 million and $476.1 million,
respectively.
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 contractual
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, 2013, we had non- performing loans with an
aggregate carrying value of $203.6 million compared to non- performing
loans of $503.1 million at December 31, 2012. Our non- performing loans
significantly decreased during year ended December 31, 2013, primarily
due to paydowns received on non- performing loans, reclassification of
certain non- performing loans to performing status and receiving title
to properties serving as collateral in full or partial satisfaction of such
loans. We expect that our level of non- performing loans will fluctuate
from period to period.
Reserve for Loan Losses – The reserve for loan losses was
$377.2 million as of December 31, 2013, or 23.5% of the gross carrying
value of total loans, compared to $524.5 million or 22.3% at December 31,
2012. The change in the balance of the reserve was the result of
$5.5 million of net provisioning for loan losses, reduced by $152.8 mil-
lion of charge- offs during the year ended December 31, 2013. During the
year ended December 31, 2013, the provision for loan losses includes
recoveries of previously recorded loan loss reserves of $63.1 million
as compared to $4.6 million for the year ended December 31, 2012. We
expect that our level of reserve for loan losses will fluctuate from period
to period. Due to the volatility of the commercial real estate market, the
process of estimating collateral values and reserves requires the use
of significant judgment. In addition, the process of estimating values and
reserves for our European loan assets (which had a carrying value of
$118.8 million as of December 31, 2013), is subject to additional risks
related to the economic uncertainty in the Eurozone. We currently
believe there are adequate collateral and reserves to support the car-
rying values of the loans.
Risk concentrations – As of December 31, 2013, based on current gross carrying values, the Company’s total investment portfolio has the
following characteristics ($ in thousands)(1):
Property/Collateral Types
Land
Office
Industrial/R&D
Entertainment/Leisure
Hotel
Mixed Use/Mixed Collateral
Retail
Condominium
Other Property Types
Strategic Investments
Total
Geographic Region
Northeast
West
Southeast
Mid- Atlantic
Southwest
Central
Northwest
International(2)
Various
Strategic Investments(2)
Total
28
Explanatory Notes:
Real Estate
Finance
$ 152,992
9,889
96,283
77,427
246,180
237,161
208,990
107,975
262,412
–
Net Lease
–
$
484,535
550,413
475,437
136,080
–
57,348
–
9,483
–
Operating
Properties
–
$
293,928
52,258
–
96,708
169,120
129,604
223,250
–
–
Land
$ 965,192
–
–
–
–
–
–
–
–
–
$ 1,399,309
$ 1,713,296
$ 964,868
$ 965,192
Real Estate
Finance
$ 391,967
142,029
264,100
160,091
171,815
87,390
50,118
121,733
10,066
–
Net Lease
$ 374,478
427,052
237,433
193,735
220,714
102,755
80,858
–
76,271
–
Operating
Properties
$ 152,779
190,356
229,504
158,148
179,806
47,332
6,943
–
–
–
Land
$ 193,055
351,374
86,472
183,102
122,160
9,500
19,529
–
–
–
$ 1,399,309
$ 1,713,296
$ 964,868
$ 965,192
Total
$ 1,118,184
788,352
698,954
552,864
478,968
406,281
395,942
331,225
271,895
145,004
$ 5,187,669
Total
$ 1,112,279
1,110,811
817,509
695,076
694,495
246,977
157,448
121,733
86,337
145,004
$ 5,187,669
% of Total
21.6%
15.2%
13.5%
10.7%
9.2%
7.8%
7.6%
6.4%
5.2%
2.8%
100.0%
% of Total
21.4%
21.4%
15.8%
13.4%
13.4%
4.8%
3.0%
2.3%
1.7%
2.8%
100.0%
(1) Based on the carrying value of our total investment portfolio gross of accumulated depreciation and general loan loss reserves.
(2) Strategic investments include $47.0 million of international assets. Additionally, international and strategic investments include $118.8 million of European assets, including $79.8 mil-
lion in Germany and $39.0 million in the United Kingdom.
Concentrations of credit risks arise when a number of bor-
rowers or tenants related to our investments are engaged in similar
business activities, or activities in the same geographic region, or have
similar economic features that would cause their ability to meet contrac-
tual obligations, including those to us, to be similarly affected by changes
in economic conditions.
Substantially all of our real estate as well as assets collat-
eralizing our loans receivable are located in the United States. As of
December 31, 2013, the only state with a concentration greater than
10.0% was California with 15.1%.
We underwrite the credit of prospective borrowers and ten-
ants and often require them to provide some form of credit support
such as corporate guarantees, letters of credit and/or cash security
deposits. Although our loans and real estate assets are geographically
diverse and the borrowers and tenants operate in a variety of industries,
to the extent we have a significant concentration of interest or operating
lease revenues from any single borrower or tenant, the inability of that
borrower or tenant to make its payment could have an adverse effect
on us. As of December 31, 2013, our five largest borrowers or tenants
collectively accounted for approximately 25% of our aggregate annual-
ized interest and operating lease revenue, of which no single customer
accounts for more than 8%.
Liquidity and Capital Resources
During the year ended December 31, 2013, we funded invest-
ments totaling $483.7 million. Also during 2013, we received $1.40 billion
of proceeds from our portfolios, comprised of $703.3 million from
repayments and sales of loans, $376.5 million from sales of operat-
ing properties, $239.9 million from sales and distributions from other
investments, and $83.6 million from sales of land and net lease assets.
Included in the proceeds from other investments are net proceeds of
$220.3 million from the sale of our interest in LNR. The transaction pro-
vided us with additional liquidity for new investment activities which
should contribute positively to our earnings; however, those investments
may not fully replace the earnings contributed by LNR (see Note 6 to the
Consolidated Financial Statements). In addition, we raised $194.0 mil-
lion in net proceeds from our Series J Preferred Stock issuance to
provide liquidity for new investment originations and general corpo-
rate purposes. As of December 31, 2013, we had unrestricted cash of
$513.6 million, a portion of which we have since used to fund new invest-
ments, and we expect similarly to use the remainder to primarily fund
investment activities.
As of December 31, 2013, we had $21.7 million of debt maturi-
ties due before December 31, 2014. Over the next 12 months, we
currently expect to fund in the range of $275 million to $350 million of
capital expenditures within our portfolio. The majority of these amounts
relate to our land portfolio and the amount spent will depend on the pace
of our land development activities. Our capital sources to meet expected
cash uses through the next 12 months will primarily include cash on
hand, loan repayments from borrowers, proceeds from unencumbered
asset sales and raising capital through debt refinancings or equity capital
transactions. As of December 31, 2013, we had unencumbered assets
with a carrying value of approximately $3.0 billion.
We cannot predict with certainty the specific transactions we
will undertake to generate sufficient liquidity to meet our obligations as
they come due. We will adjust our plans as appropriate in response to
changes in our expectations and changes in market conditions. While
economic trends have been improving, it is not possible for us to predict
whether the improving trends will continue or to quantify the impact of
these or other trends on our financial results.
Contractual Obligations – The following table outlines the contractual obligations related to our long- term debt agreements and operating
lease obligations as of December 31, 2013 (see Note 8 of the Notes to the Consolidated Financial Statements).
(in thousands)
Long- Term Debt Obligations:
Secured credit facilities
Unsecured notes
Secured term loans
Other debt obligations
Total principal maturities
Interest Payable(1)
Operating Lease Obligations
Total(2)
Explanatory Notes:
Total
Less Than
1 Year
1–3 Years
3–5 Years
5–10 Years
After 10 Years
Amounts Due by Period
$ 1,810,882
2,006,890
278,817
100,000
$ 4,196,589
857,356
37,403
$ 5,091,348
$
–
–
29,917
–
$ 29,917
226,279
5,797
$ 261,993
–
$
1,032,168
17,978
$ 1,810,882
974,722
26,916
–
–
$ 1,050,146
414,401
10,695
$ 1,475,242
$ 2,812,520
158,971
9,202
$ 2,980,693
$
–
–
200,613
–
$ 200,613
36,152
9,523
$ 246,288
$
–
–
3,393
100,000
$ 103,393
21,553
2,186
$ 127,132
(1) All variable- rate debt assumes a 3-month LIBOR rate of 0.24% and 1-month LIBOR rate of 0.17%.
(2) We also have issued letters of credit totaling $3.7 million in connection with four of our investments. See Unfunded Commitments below, for a discussion of certain unfunded commit-
ments related to our lending and net lease businesses.
February 2013 Secured Credit Facility – On February 11, 2013, we
entered into a $1.71 billion senior secured credit facility due October 15,
2017 (the “February 2013 Secured Credit Facility”) that amended and
restated our $1.82 billion senior secured credit facility, dated October 15,
2012 (the “October 2012 Secured Credit Facility”). The February 2013
Credit Facility amended the October 2012 Secured Credit Facility by:
(i) reducing the interest rate from LIBOR plus 4.50%, with a 1.25% LIBOR
floor, to LIBOR plus 3.50%, with a 1.00% LIBOR floor; and (ii) extend-
ing the call protection period for the lenders from October 15, 2013 to
December 31, 2013.
Borrowings under the February 2013 Secured Credit Facility
are collateralized by a first lien on a fixed pool of assets, with required
minimum collateral coverage of not less than 125% of outstanding
borrowings. If collateral coverage is less than 137.5% of outstanding bor-
rowings, 100% of the proceeds from principal repayments and sales
of collateral will be applied to repay outstanding borrowings under the
February 2013 Secured Credit Facility. For so long as collateral coverage
is between 137.5% and 150% of outstanding borrowings, 50% of pro-
ceeds from principal repayments and sales of collateral will be applied
to repay outstanding borrowings under the February 2013 Secured
Credit Facility and for so long as collateral coverage is greater than 150%
of outstanding borrowings, we may retain all proceeds from principal
repayments and sales of collateral. We retain proceeds from interest,
rent, lease payments and fee income in all cases.
In connection with the February 2013 Secured Credit Facility
transaction, we incurred $17.1 million of lender fees, of which $14.4 mil-
lion was capitalized in “Debt Obligations, net” on our Consolidated
Balance Sheets and $2.7 million was recorded as a loss in “Gain (loss)
on early extinguishment of debt, net” on our Consolidated Statements
of Operations as it related to the lenders who did not participate in the
new facility. We also incurred $3.8 million in third party fees, of which
$3.6 million was recognized in “Other expense” on our Consolidated
Statements of Operations, as it related primarily to those lenders from
the original facility that modified their debt under the new facility, and
$0.2 million was recorded in “Deferred expenses and other assets, net”
on our Consolidated Balance Sheets, as it related to the new lenders.
The February 2013 Secured Credit Facility contains certain
covenants relating to the collateral, among other matters, but does not
contain corporate level financial covenants. For so long as we maintain
our qualification as a REIT, we are permitted to distribute 100% of our
REIT taxable income on an annual basis. In addition, we may distribute
to our stockholders real estate assets, or interests therein, having an
aggregate equity value not to exceed $200 million, that are not collat-
eral securing the borrowings under the February 2013 Secured Credit
Facility. Except for the distribution of real estate assets described in the
preceding sentence, we may not pay common dividends if we cease to
qualify as a REIT.
29
Through December 31, 2013, we have made cumulative
amortization repayments of $327.6 million on the February 2013
Secured Credit Facility bringing the outstanding balance to $1.38 billion.
Repayments of the February 2013 Secured Credit Facility prior to the
scheduled maturity date have resulted in losses on early extinguishment
of debt of $7.0 million for the year ended December 31, 2013 related to
the accelerated amortization of discounts and unamortized deferred
financing fees on the portion of the facility that was repaid.
October 2012 Secured Credit Facility – On October 15, 2012,
we entered into the October 2012 Secured Credit Facility. Proceeds
from the October 2012 Secured Credit Facility were used to refinance
the remaining outstanding balances of our then existing 2011 Secured
Credit Facilities.
During the year ended December 31, 2012, in connection
with the October 2012 Secured Credit Facility transaction, we incurred
$14.8 million in third party fees, of which $8.1 million was recognized
in “Other expense” on our Consolidated Statements of Operations as
it related to the portion of lenders from the original facility that modi-
fied their debt under the new facility. The remaining $6.6 million of fees
were recorded in “Deferred expenses and other assets, net” on our
Consolidated Balance Sheets, as they related to the portion of lenders
that were new to the facility.
The October 2012 Secured Credit Facility was refinanced by
the February 2013 Secured Credit Facility. Prior to refinancing, we made
cumulative amortization repayments of $113.0 million on the October
2012 Secured Credit Facility, which resulted in losses on early extin-
guishment of debt of $0.8 million and $1.2 million during the year ended
December 31, 2013 and 2012, respectively, related to the accelerated
amortization of discounts and unamortized deferred financing fees on
the portion of the facility that was repaid.
30
At the time of the refinancing, we had $30.5 million of unamor-
tized discounts and financing fees related to the October 2012 Secured
Credit Facility. During the year ended December 31, 2013, in connec-
tion with the refinancing, we recorded a loss on early extinguishment
of debt of $4.9 million, related primarily to the portion of lenders in the
original facility that did not participate in the new facility. The remain-
ing $25.6 million of unamortized fees and discounts will continue to be
amortized into interest expense over the remaining term of the February
2013 Secured Credit Facility.
March 2012 Secured Credit Facilities – In March 2012, we entered
into an $880.0 million senior secured credit agreement providing for two
tranches of term loans: a $410.0 million 2012 A-1 tranche due March
2016, which bears interest at a rate of LIBOR + 4.00% (the “2012 Tranche
A-1 Facility”), and a $470.0 million 2012 A-2 tranche due March 2017,
which bears interest at a rate of LIBOR + 5.75% (the “2012 Tranche A-2
Facility,” together the “March 2012 Secured Credit Facilities”). The 2012
A-1 and A-2 tranches were issued at 98.0% of par and 98.5% of par,
respectively, and both tranches include a LIBOR floor of 1.25%. Proceeds
from the March 2012 Secured Credit Facilities, together with cash on
hand, were used to repurchase and repay at maturity $606.7 million
aggregate principal amount of our convertible notes due October 2012,
to fully repay the $244.0 million balance on our unsecured credit facility
due June 2012, and to repay, upon maturity, $90.3 million outstanding
principal balance of our 5.50% senior unsecured notes.
The March 2012 Secured Credit Facilities are collateralized by
a first lien on a fixed pool of assets. Proceeds from principal repay-
ments and sales of collateral are applied to amortize the March 2012
Secured Credit Facilities. Proceeds received for interest, rent, lease
payments and fee income are retained by us. The 2012 Tranche A-1
Facility required amortization payments of $41.0 million to be made
every six months beginning December 31, 2012. After the 2012 Tranche
A-1 Facility is repaid, proceeds from principal repayments and sales of
collateral will be used to amortize the 2012 Tranche A-2 Facility. We may
make optional prepayments on each tranche of term loans, subject to
prepayment fees.
During the year ended December 31, 2013, we repaid the
remaining outstanding balance of the 2012 Tranche A-1 Facility.
Repayments of the 2012 Tranche A-1 Facility prior to scheduled amor-
tization dates have resulted in losses on early extinguishment of debt
of $4.4 million and $8.1 million during the years ended December 31,
2013 and 2012, respectively, related to the accelerated amortization of
discounts and unamortized deferred financing fees on the portion of the
facility that was repaid.
Additionally, during the year ended December 31, 2013, we
made cumulative amortization repayments of $38.5 million on the 2012
Tranche A-2 Facility prior to maturity have resulted in losses on early
extinguishment of debt of $1.0 million related to the accelerated amor-
tization of discounts and unamortized deferred financing fees on the
portion of the facility that was repaid during the year.
2011 Secured Credit Facilities – In March 2011, we entered into a
$2.95 billion senior secured credit agreement providing for two tranches
of term loans: a $1.50 billion 2011 A-1 tranche due June 2013, bearing
interest at a rate of LIBOR + 3.75% (the “2011 Tranche A-1 Facility”), and
a $1.45 billion 2011 A-2 tranche due June 2014, bearing interest at a rate
of LIBOR + 5.75% (the “2011 Tranche A-2 Facility,” together the “2011
Secured Credit Facilities”). The 2011 A-1 and A-2 tranches were issued
at 99.0% of par and 98.5% of par, respectively, and both tranches include
a LIBOR floor of 1.25%.
The 2011 Secured Credit Facilities were refinanced by the
October 2012 Secured Credit Facility. Prior to refinancing, we made
cumulative amortization repayments of $1.07 billion on the 2011 Secured
Credit Facilities, which resulted in losses on early extinguishment of
debt of $4.5 million and $12.0 million for the years ended December 31,
2012 and 2011, respectively, related to the accelerated amortization of
discounts and unamortized deferred financing fees on the portion of the
facility that was repaid.
At the time of the refinancing, we had $21.2 million of unam-
ortized discounts and financing fees related to the 2011 Secured Credit
Facilities. In connection with the refinancing, we recorded a loss on early
extinguishment of debt of $12.1 million, related primarily to the portion
of lenders in the original facility that did not participate in the new facil-
ity. The remaining $9.0 million of unamortized fees and discounts will
continue to be amortized to interest expense over the remaining term
of the October 2012 Secured Credit Facility.
Secured Term Loans – In October 2012, a consolidated sub-
sidiary of the Company entered into a $28.0 million secured term loan
maturing in November 2019, bearing interest at a rate of LIBOR + 2.00%.
Simultaneously with the financing, we entered into an interest rate swap
to exchange our variable rate on the loan for a fixed interest rate (see
Note 10).
the accelerated amortization of discounts, which was recorded in
“Gain (loss) on early extinguishment of debt, net” on our Consolidated
Statements of Operations for the year ended December 31, 2013.
In September 2012, we refinanced two secured term loans
with an aggregate outstanding principal balance of $53.3 million, bearing
interest at rates of 5.3% and 8.2% and maturing in January 2013 with
a new $54.5 million secured term loan. The new loan bears interest at
4.851%, matures in October 2022 and is collateralized by the same net
lease asset as the original term loan. In connection with the refinanc-
ing, we incurred $0.5 million of losses related to a prepayment penalty,
which was recorded in “Gain (loss) on early extinguishment of debt,
net” on our Consolidated Statements of Operations for the year ended
December 31, 2012.
In addition, during the year ended December 31, 2012, in con-
junction with the sale of a portfolio of 12 net lease assets, we repaid
the $50.8 million outstanding balances of our LIBOR + 4.50% secured
term loans due in 2014 and terminated the related interest rate swaps
associated with the loans (see Note 10).
Unsecured Credit Facility – During the year ended December 31,
2012, we repaid the $243.7 million remaining principal balance of our
LIBOR + 0.85% unsecured credit facility due June 2012. In connection
with the repayment, we recorded a loss on early extinguishment of debt
of $0.2 million related to the accelerated amortization of discounts and
unamortized deferred financing fees on the portion of the facility that
was repaid.
Secured Notes – In January 2011, we redeemed the $312.3 mil-
lion remaining principal balance of our 10% 2014 secured exchange
notes and recorded a gain on early extinguishment of debt of $109.0 mil-
lion primarily related to the recognition of deferred gain premiums that
resulted from a previous debt exchange.
Unsecured Notes – In November 2013, we issued $200.0 mil-
lion aggregate principal of 1.50% convertible senior unsecured notes
due November 2016. Proceeds from the transaction, together with
cash on hand, were used to fully repay the remaining $200.6 million
of outstanding 5.70% senior unsecured notes due March 2014. In con-
nection with the repayment of the 5.70% senior unsecured notes, we
incurred $2.8 million of losses related to a prepayment penalty and
In May 2013, we issued $265.0 million aggregate principal of
3.875% senior unsecured notes due July 2016 and issued $300.0 million
aggregate principal of 4.875% senior unsecured notes due July 2018. Net
proceeds from these transactions, together with cash on hand, were
used to fully repay the remaining $96.8 million of outstanding 8.625%
senior unsecured notes due June 2013 and the remaining $448.5 million
of outstanding 5.95% senior unsecured notes due in October 2013. In
connection with the repayment of the 5.95% senior unsecured notes,
we incurred $9.5 million of losses related to a prepayment penalty
and the accelerated amortization of discounts, which was recorded in
“Gain (loss) on early extinguishment of debt, net” on our Consolidated
Statements of Operations for the year ended December 31, 2013.
In November 2012, we issued $300.0 million aggregate prin-
cipal of 7.125% senior unsecured notes due February 2018 and issued
$200.0 million aggregate principal of 3.00% convertible senior unsecured
notes due November 2016. Proceeds from these transactions were
used to fully repay $67.1 million of the 6.5% senior unsecured notes
due December 2013 and partially repay $404.9 million of the 8.625%
senior unsecured notes due June 2013. In connection with these repur-
chases, we paid a $14.9 million prepayment penalty which was reflected
in “Gain (loss) on early extinguishment of debt, net” on our Consolidated
Statements of Operations for the year ended December 31, 2012.
In May 2012, we issued $275.0 million aggregate principal of
9.0% senior unsecured notes due June 2017 that were sold at 98.012%
of their principal amount.
During the year ended December 31, 2012, we repaid, upon
maturity, the $460.7 million outstanding principal balance of our LIBOR +
0.50% senior unsecured convertible notes, the $169.7 million outstanding
principal balance of our 5.15% senior unsecured notes and the $90.3 mil-
lion outstanding principal balance of our 5.50% senior unsecured notes.
In addition, we repurchased $420.4 million par value of senior unse-
cured notes with various maturities ranging from March 2012 to October
2012. In connection with these repurchases, we recorded aggregate
gains on early extinguishment of debt of $3.2 million, for the year ended
December 31, 2012.
Encumbered/Unencumbered Assets – As of December 31, 2013, the carrying value of our encumbered and unencumbered assets by asset
type are as follows ($ in thousands):
As of December 31,
2013
2012
31
Real estate, net
Real estate available and held for sale
Loans receivable, net(1)
Other investments
Cash and other assets
Total
Explanatory Note:
Encumbered
Assets
$ 1,644,463
152,604
860,557
24,093
–
$ 2,681,717
Unencumbered
Assets
$ 1,151,718
207,913
538,752
183,116
907,995
$ 2,989,494
Encumbered
Assets
$ 1,640,005
263,842
1,197,403
43,545
–
$ 3,144,795
Unencumbered
Assets
$ 1,099,094
372,023
665,682
355,298
556,207
$ 3,048,304
(1) As of December 31, 2013 and 2012, the amounts presented exclude general reserves for loan losses of $29.2 million and $33.1 million, respectively.
Debt Covenants – Our outstanding unsecured debt securities
contain corporate level covenants that include a covenant to maintain
a ratio of unencumbered assets to unsecured indebtedness of at least
1.2x and a restriction on debt incurrence based upon the effect of the
debt incurrence on our fixed charge coverage ratio. If any of our cov-
enants are breached and not cured within applicable cure periods, the
breach could result in acceleration of our debt securities unless a waiver
or modification is agreed upon with the requisite percentage of the
bondholders. While we expect that our ability to incur new indebtedness
under the fixed charge coverage ratio will be limited for the foreseeable
future, which may put limitations on our ability to make new invest-
ments, we will continue to be permitted to incur indebtedness for the
purpose of refinancing existing indebtedness and for other permitted
purposes under the indentures.
Our March 2012 Secured Credit Facilities and February 2013
Secured Credit Facility are collectively defined as the “Secured Credit
Facilities.” Our Secured Credit Facilities contain certain covenants,
including covenants relating to collateral coverage, dividend payments,
restrictions on fundamental changes, transactions with affiliates, mat-
ters relating to the liens granted to the lenders and the delivery of
information to the lenders. In particular, we are required to maintain
collateral coverage of 1.25x outstanding borrowings. In addition, for
so long as we maintain our qualification as a REIT, the Secured Credit
Facilities permit us to distribute 100% of our REIT taxable income on an
annual basis and the February 2013 Secured Credit Facility permits us
to distribute to our shareholders real estate assets, or interests therein,
having an aggregate equity value not to exceed $200 million, so long as
such assets are not collateral for the February 2013 Secured Credit
Facility. We may not pay common dividends if we cease to qualify as
a REIT (except that the February 2013 Secured Credit Facility permits
us to distribute certain real estate assets as described in the preced-
ing sentence).
Our Secured Credit Facilities contain cross default provisions
that would allow the lenders to declare an event of default and acceler-
ate our indebtedness to them if we fail to pay amounts due in respect of
our other recourse indebtedness in excess of specified thresholds or if
the lenders under such other indebtedness are otherwise permitted to
accelerate such indebtedness for any reason. The indentures governing
our unsecured public debt securities permit the bondholders to declare
an event of default and accelerate our indebtedness to them if our other
recourse indebtedness in excess of specified thresholds is not paid at
final maturity or if such indebtedness is accelerated.
Derivatives – Our use of derivative financial instruments is pri-
marily limited to the utilization of interest rate swaps, interest rate caps
or other instruments to manage interest rate risk exposure and foreign
exchange contracts to manage our risk to changes in foreign currencies
(see Note 10 of the Notes to the Consolidated Financial Statements). In
2013, we entered into a $500 million notional interest rate cap agree-
ment to reduce exposure to expected increases in future interest rates
and the resulting payments associated with variable interest rate debt.
The agreement is effective in July 2014, matures in July 2017 and caps
our LIBOR interest rates at 1.00% for the notional amount.
Off- Balance Sheet Arrangements – We are not dependent on the
use of any off- balance sheet financing arrangements for liquidity. We
have made investments in various unconsolidated ventures. See Note 6
of the Notes to the Consolidated Financial Statements for further details
of our unconsolidated investments. Our maximum exposure to loss from
these investments is limited to the carrying value of our investments and
any unfunded commitments (see below).
Unfunded Commitments – We generally fund construction and
development loans and build- outs of space in net lease assets over a
period of time if and when the borrowers and tenants meet established
milestones and other performance criteria. We refer to these arrange-
ments 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 addition to a proj-
ect 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, 2013, the maximum amounts of the fundings we
may make under each category, assuming all performance hurdles
and milestones are met under the Performance- Based Commitments,
that we approve all Discretionary Fundings and that 100% of our capi-
tal committed to Strategic Investments is drawn down, are as follows
(in thousands):
Loans
and Other
Lending
Investments
Real
Estate
Strategic
Investments
Total
Performance- Based
Commitments
Discretionary Fundings
Strategic Investments
Total
$ 19,436 $ 53,164
–
–
$ 19,436 $ 53,164
–
–
$
– $ 72,600
–
–
46,591 46,591
$ 46,591 $ 119,191
Transactions with Related Parties – We previously held an equity
interest of approximately 24% in LNR and two of our executive officers
formerly served on LNR’s board of managers. In April 2013, we sold our
interest in LNR for net proceeds of $220.3 million.
Stock Repurchase Programs – Our Board of Directors has
approved a stock repurchase program that authorizes repurchases
of our 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, 2013, we repurchased
1.7 million shares of our outstanding Common Stock for approximately
$21.0 million, at an average cost of $12.35 per share. During the year
ended December 31, 2012, we repurchased 0.8 million shares of our
outstanding Common Stock for approximately $4.6 million, at an aver-
age cost of $5.69 per share. As of December 31, 2013, we had remaining
authorization to repurchase up to $29.0 million of Common Stock out of
the $50.0 million authorized by our Board in 2013.
Subsequent Events – In February 2014, we partnered with a
sovereign wealth fund to form a venture in which the partners plan
to contribute up to an aggregate $500 million of equity to acquire and
develop up to $1.25 billion of net lease assets over time. We own approxi-
mately 52% of the venture and will be responsible for sourcing new
opportunities and managing the venture and its assets in exchange for
a promote and management fee. The venture’s first investment was
32
acquired by us for $93.6 million during 2013 and was subsequently sold
to the venture.
economic conditions affecting the commercial real estate market when
establishing appropriate time frames to evaluate loss experience.
Critical Accounting Estimates
The preparation of financial statements in accordance with
GAAP requires management to make estimates and judgments in cer-
tain circumstances that affect amounts reported as assets, liabilities,
revenues and expenses. We have established detailed policies and con-
trol procedures intended to ensure that valuation methods, including any
judgments made as part of such methods, are well controlled, reviewed
and applied consistently from period to period. We base our estimates on
historical corporate and industry experience and various other assump-
tions 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 2013, management reviewed and evaluated these
critical accounting estimates and believes they are appropriate. Our
significant accounting policies are described in Note 3 of the Notes to
the Consolidated Financial Statements. The following is a summary of
accounting policies that require more significant management estimates
and judgments:
Reserve for loan losses – The reserve for loan losses reflects
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 confirmed 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 significant collection efforts have ceased. We have
one portfolio segment, represented by commercial real estate lending,
whereby we utilize a uniform process for determining our reserves for
loan losses. The reserve for loan losses includes a general, formula-
based component and an asset- specific component.
The general 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 esti-
mated. The formula- based general reserve is derived from estimated
principal default probabilities and loss severities applied to groups of
loans based upon risk ratings assigned to loans with similar risk char-
acteristics during our quarterly loan portfolio assessment. During this
assessment, we perform a comprehensive analysis of our loan portfolio
and assign risk ratings to loans that incorporate management’s current
judgments about their credit quality based on all known and relevant
internal and external factors that may affect collectability. We consider,
among other things, payment status, lien position, borrower financial
resources and investment in collateral, collateral type, project econom-
ics and geographical location as well as national and regional economic
factors. This methodology results in loans being segmented by risk clas-
sification into risk rating categories that are associated with estimated
probabilities of default and principal loss. Ratings range from “1” to “5”
with “1” representing the lowest risk of loss and “5” representing the
highest risk of loss. We estimate loss rates based on historical realized
losses experienced within our portfolio and take into account current
The asset- specific 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. This assessment is made on a loan- by-loan basis
each quarter based on such factors as payment status, lien position,
borrower financial resources and investment in collateral, collateral type,
project economics and geographical location as well as national and
regional economic factors. A reserve is established for an impaired loan
when the present value of payments expected to be received, observ-
able market prices, or the estimated fair value of the collateral (for loans
that are dependent on the collateral for repayment) is lower than the
carrying value of that loan.
Substantially all of our impaired loans are collateral dependent
and impairment is measured using the estimated fair value of collat-
eral, less costs to sell. We generally use the income approach through
internally developed valuation models to estimate the fair value of the
collateral for such loans. In more limited cases, we obtain external “as
is” appraisals for loan collateral, generally when third party participa-
tions exist. Valuations are performed or obtained at the time a loan is
determined to be impaired and designated non- performing, and they are
updated if circumstances indicate that a significant change in value has
occurred. In limited cases, appraised values may be discounted when
real estate markets rapidly deteriorate.
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring (“TDR”). A TDR occurs when we grant a con-
cession to a debtor that is experiencing financial difficulties. Impairments
on TDR loans are generally measured based on the present value of
expected future cash flows discounted at the effective interest rate of
the original loan.
33
The provisions for loan losses for the years ended
December 31, 2013, 2012 and 2011 were $5.5 million, $81.7 mil -
lion and$46.4 million, respectively. The total reserve for loan losses
at December 31, 2013 and 2012, included asset specific reserves of
$348.0 million and $491.4 million, respectively, and general reserves of
$29.2 million and $33.1 million, respectively.
Acquisition of real estate – We generally acquire real estate
assets through cash purchases or through foreclosure or deed- in-lieu
of foreclosure in full or partial satisfaction of non- performing loans.
When we acquire assets through foreclosure or deed in lieu of foreclo-
sure, based on our strategic plan to realize the maximum value from the
collateral received, these properties are classified as “Real estate, net”
or “Real estate available and held for sale” on our Consolidated Balance
Sheets. When we intend to hold, operate or develop the property for a
period of at least 12 months, assets are classified as “Real estate, net,”
and when we intend to market these properties for sale in the near
term, assets are classified as “Real estate available and held for sale.”
Assets classified as real estate are initially recorded at their estimated
fair value and assets classified as assets held for sale are recorded at
their estimated fair value less costs to sell. The excess of the carrying
value of the loan over these amounts is charged- off against the reserve
for loan losses. In both cases, upon acquisition, tangible and intangible
assets and liabilities acquired are recorded at their estimated fair values.
During the years ended December 31, 2013, 2012 and 2011 we
received title to properties in satisfaction of senior mortgage loans with
fair values of $31.1 million, $267.5 million and $502.5 million, respectively,
for which those properties had served as collateral.
Impairment or disposal of long- lived assets – Real estate 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 “Real estate held
for sale” 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 (loss) from
discontinued operations” on the Consolidated Statements of Operations.
Once the asset is classified as held for sale, depreciation expense is
no longer recorded and historical operating results are reclassified
to “Income (loss) 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 circumstances indi-
cate 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 flows (undiscounted and with-
out 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 flows 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 reflected as an adjustment to the basis of the asset. Impairments
of real estate assets are recorded in “Impairment of assets,” on our
Consolidated Statements of Operations.
During the years ended December 31, 2013, 2012 and 2011,
we recorded impairment charges on real estate assets of $14.4 mil-
lion, $35.4 million and $22.4 million, respectively, due to changes in local
market conditions and business strategy. Of these amounts, $1.8 million,
$22.6 million and $9.1 million, respectively, were included in “Income
(loss) from discontinued operations.”
Identified intangible assets and liabilities – We record intangible
assets and liabilities acquired at their estimated fair values separate and
apart from goodwill. We determine whether such intangible assets and
liabilities have finite or indefinite lives. As of December 31, 2013, all such
acquired intangible assets and liabilities have finite lives. We amortize
finite lived intangible assets and liabilities based on the period over which
the assets and liabilities are expected to contribute directly or indirectly
to the future cash flows of the business acquired. We review finite lived
intangible assets for impairment whenever events or changes in circum-
stances indicate that their carrying amount may not be recoverable. If
we determine the carrying 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 assets” on our Consolidated Statements of Operations.
Valuation of deferred tax assets – Deferred income taxes reflect
the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, as well as operating loss and
tax credit carryforwards. We evaluate the realizability of our deferred
tax assets and recognize a valuation allowance if, based on the available
evidence, both positive and negative, it is more likely than not that some
portion or all of our deferred tax assets will not be realized. When evalu-
ating the realizability of our deferred tax assets, we consider, among
other matters, estimates of expected future taxable income, nature of
current and cumulative losses, existing and projected book/tax differ-
ences, tax planning strategies available, and the general and industry
specific economic outlook. This realizability analysis is inherently sub-
jective, as it requires us to forecast our business and general economic
environment in future periods. Changes in estimate of deferred tax asset
realizability, if any are included in “Income tax (expense) benefit” on the
Consolidated Statements of Operations.
While certain entities with net operating losses (“NOLs”) may
generate profits in the future, which may allow us to utilize the NOLs,
we continue to record a full valuation allowance on the net deferred tax
asset due to the history of losses and the uncertainty of the entities’
ability to generate such profits. We recorded a full valuation allow-
ance of $56.0 million and $40.8 million as of December 31, 2013 and
2012, respectively.
Variable interest entities – We evaluate our investments and
other contractual arrangements to determine if our interests constitute
variable interests in a variable interest entity (“VIE”) and if we are the
primary beneficiary. There is a significant amount of judgment required
to determine if an entity is considered a VIE and if we are the primary
beneficiary. We first perform a qualitative analysis, which requires cer-
tain subjective decisions regarding our assessment, including, but not
limited to, which interests create or absorb variability, the contractual
terms, the key decision making powers, impact on the VIE’s economic
performance and related party relationships. 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 beneficiary and
consolidation is required.
Fair value of assets and liabilities – The degree of management
judgment involved in determining the fair value of assets and liabilities is
dependent upon the availability of quoted market prices or observable
market parameters. For financial and nonfinancial assets and liabili-
ties that trade actively and have quoted market prices or observable
market parameters, there is minimal subjectivity involved in measuring
fair value. When observable market prices and parameters are not fully
available, management judgment is necessary to estimate fair value.
In addition, changes in market conditions 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.
See Note 14 of the Notes to the Consolidated Financial
Statements for a complete discussion on how we determine fair value of
financial and non- financial assets and financial liabilities and the related
measurement techniques and estimates involved.
34
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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. 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 con-
nection with our interest-bearing liabilities. Changes in the general level
of interest rates prevailing in the financial markets will affect the spread
between our floating rate assets and liabilities subject to the net amount
of floating rate assets/liabilities and the impact of interest rate floors
and caps. Any significant compression of the spreads between inter-
est-earning assets and interest-bearing liabilities could have a material
adverse effect on us.
In the event of a significant rising interest rate environment
or economic downturn, defaults could increase and cause us to incur
additional credit losses which would adversely affect our liquidity and
operating results. Such delinquencies or defaults would likely have an
adverse effect on the spreads between interest-earning assets and
interest-bearing liabilities. In addition, an increase in interest rates could,
among other things, reduce the value of our fixed-rate interest-bearing
assets and our ability to realize gains from the sale of such assets.
Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international
economic and political conditions, and other factors beyond our control.
We monitor the spreads between our interest-earning assets and inter-
est-bearing liabilities and may implement hedging strategies to limit the
effects of changes in interest rates on our operations, including engaging
in interest rate swaps, interest rate caps and other interest rate-related
derivative contracts. Such strategies are designed to reduce our expo-
sure, on specific transactions or on a portfolio basis, to changes in cash
flows 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 inter-
est 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-qualified income for REIT income test
purposes. This includes hedging asset related risks such as credit, for-
eign 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 profitability will not be adversely
affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in net
income should interest rates increase by 50 or 100 basis points and
decrease by 10 basis points, assuming no change in the shape of the
yield curve (i.e., relative interest rates). The base interest rate scenario
assumes the one-month LIBOR rate of 0.17% as of December 31, 2013.
Actual results could differ significantly from those estimated in the table.
Estimated Percentage Change in Net Income
Change in Interest Rates
-10 Basis Points
Base Interest Rate
+50 Basis Points
+100 Basis Points
Explanatory Note:
Net Income(1)
(0.59)%
—
2.93%
3.86%
(1) We have an overall net variable-rate debt exposure. However, this is negated by
interest rate floors that cause the debt to act as fixed rate until such time as market
interest rates move above the floor minimums. As such, we are effectively in a net
variable-rate asset exposure, which results in an increase in net income when
rates increase and a decrease in net income when rates decrease. A 10 basis point
decrease in interest rates would decrease net income by $0.7 million. A 50 and
100 basis increase in interest rates would increase net income by $3.3 million and
$4.3 million, respectively. As of December 31, 2013, $117.9 million of our floating rate
loans have a cumulative weighted average interest rate floor of 3.24% and $1.81 billion
of our floating rate debt has a cumulative weighted average interest rate floor of 1.06%.
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of
the disclosure committee and other members of management, includ-
ing the Chief Executive Officer and Chief Financial Officer, management
carried out its evaluation of the effectiveness of the Company’s inter-
nal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued in 1992 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 concluded
that its internal control over financial reporting was effective as of
December 31, 2013.
The Company’s internal control over financial reporting as
of December 31, 2013, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report which appears on page 36.
35
A company’s internal control over financial reporting is a pro-
cess designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reason-
able assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, pro-
jections 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 policies or pro-
cedures may deteriorate.
New York, New York
February 28, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of iStar Financial Inc.:
In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of income, com-
prehensive income (loss), changes in equity and cash flows present
fairly, in all material respects, the financial position of iStar Financial
Inc. and its subsidiaries (collectively, the “Company”) at December 31,
2013 and 2012, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2013 in
conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial report-
ing as of December 31, 2013, based on criteria established in Internal
Control—Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements,
for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Company’s internal control over finan-
cial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included exam-
ining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over finan-
cial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis
for our opinions.
36
CONSOLIDATED BALANCE SHEETS
As of December 31,
(In thousands, except per share data)
Assets
Real estate
Real estate, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale
Loans receivable and other lending investments, net
Other investments
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)
Convertible Preferred Stock Series J, liquidation preference $50.00 per share (see Note 11)
High Performance Units
Common Stock, $0.001 par value, 200,000 shares authorized, 144,334 issued and 83,717 outstanding at
December 31, 2013 and 142,699 issued and 83,782 outstanding at December 31, 2012
Additional paid- in capital
Retained earnings (deficit)
Accumulated other comprehensive income (loss) (see Note 11)
Treasury stock, at cost, $0.001 par value, 60,617 shares at December 31, 2013 and
58,917 shares at December 31, 2012
Total iStar Financial Inc. shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
2013
2012
(424,453)
360,517
$ 3,220,634 $ 3,117,405
(378,306)
$ 2,796,181 $ 2,739,099
635,865
$ 3,156,698 $ 3,374,964
1,829,985
398,843
256,344
36,778
15,226
84,735
163,124
$ 5,642,011 $ 6,159,999
1,370,109
207,209
513,568
48,769
14,941
92,737
237,980
4,158,125
$ 170,831 $ 141,670
4,691,494
$ 4,328,956 $ 4,833,164
–
13,681
11,590
–
22
4
9,800
22
–
9,800
144
4,022,138
(2,521,618)
(4,276)
143
3,832,780
(2,360,647)
(1,185)
37
(262,954)
(241,969)
$ 1,243,260 $ 1,238,944
74,210
$ 1,301,465 $ 1,313,154
$ 5,642,011 $ 6,159,999
58,205
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
(In thousands, except per share data)
Revenues:
Operating lease income
Interest income
Other income
Total revenues
Costs and expenses:
Interest expense
Real estate expense
Depreciation and amortization
General and administrative
Provision for loan losses
Impairment of assets
Other expense
Total costs and expenses
Income (loss) before earnings from equity method investments and other items
Gain (loss) on early extinguishment of debt, net
Earnings from equity method investments
Loss on transfer of interest to unconsolidated subsidiary
Income (loss) from continuing operations before income taxes
Income tax (expense) benefit
Income (loss) from continuing operations(1)
Income (loss) from discontinued operations
Gain from discontinued operations
Income from sales of residential property
Net income (loss)
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to iStar Financial Inc.
38
Preferred dividends
Net (income) loss allocable to HPU holders and Participating Security holders(2) (3)
Net income (loss) allocable to common shareholders
Per common share data(1):
Income (loss) attributable to iStar Financial Inc. from continuing operations:
Basic and diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic and diluted
Weighted average number of common shares – basic and diluted
Per HPU share data(1)(2):
Income (loss) attributable to iStar Financial Inc. from continuing operations:
Basic and diluted
Net income (loss) attributable to iStar Financial Inc.:
Basic and diluted
Weighted average number of HPU shares – basic and diluted
2013
2012
2011
$ 234,567
108,015
48,208
$ 390,790
$ 216,291
133,410
47,838
$ 397,539
$ 195,872
226,871
39,722
$ 462,465
$ 266,225
157,441
71,266
92,114
5,489
12,589
8,050
$ 613,174
$ (222,384)
(33,190)
41,520
(7,373)
$ (221,427)
659
$ (220,768)
644
22,233
86,658
$ (111,233)
(718)
$ (111,951)
(49,020)
$ 355,097
151,458
68,770
80,856
81,740
13,778
17,266
$ 768,965
$ (371,426)
(37,816)
103,009
–
$ (306,233)
(8,445)
$ (314,678)
(17,481)
27,257
63,472
$ (241,430)
1,500
$ (239,930)
(42,320)
5,202
9,253
$ (155,769)
$ (272,997)
$ 342,186
138,714
58,091
105,039
46,412
13,239
11,070
$ 714,751
$ (252,286)
101,466
95,091
–
$ (55,729)
4,719
$ (51,010)
(5,514)
25,110
5,721
$ (25,693)
3,629
$ (22,064)
(42,320)
1,997
$ (62,387)
$
(2.09)
$
(3.37)
$
(0.91)
$
(1.83)
84,990
$
(3.26)
83,742
$
(0.70)
88,688
$ (396.07)
$ (638.27)
$ (173.66)
$ (346.80)
15
$ (616.87)
15
$ (133.13)
15
Explanatory Notes:
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. for the years ended December 31, 2013, 2012 and 2011 was $(221.5) million, $(313.2) million and
$(47.4) million, respectively. See Note 13 for details on the calculation of earnings per share.
(2) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program (see
Note 11).
(3) Participating Security holders are Company employees and directors who hold unvested restricted stock units, restricted stock awards and common stock equivalents granted
under the Company’s Long Term Incentive Plans that are eligible to participate in dividends (see Note 12 and Note 13).
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31,
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Reclassification of (gains)/losses on available- for-sale securities into earnings upon
realization(1)
Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(2)
Reclassification of (gains)/losses on cumulative translation adjustment into earnings
upon realization(3)
Unrealized gains/(losses) on available- for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) on cumulative translation adjustment
Other comprehensive income (loss)
Comprehensive income (loss)
Net (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to iStar Financial Inc.
2013
2012
2011
$ (111,233)
$ (241,430)
$ (25,693)
(859)
310
(1,310)
(302)
(255)
(675)
$
(3,091)
$ (114,324)
(718)
$ (115,042)
–
(44)
–
278
(1,335)
244
$
(857)
$ (242,287)
1,500
$ (240,787)
–
(180)
–
391
(1,191)
(957)
$ (1,937)
$ (27,630)
3,629
$ (24,001)
Explanatory Notes:
(1) For the year ended December 31, 2013, $266 and $593 are included in “Other income” and “Earnings from equity method investments,” respectively, on the Company’s Consolidated
Statements of Operations.
Included in “Interest expense” on the Company’s Consolidated Statements of Operations.
Included in “Earnings from equity method investments” on the Company’s Consolidated Statements of Operations.
(2)
(3)
The accompanying notes are an integral part of the consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended
December 31, 2013, 2012 and 2011
Preferred
Preferred
Stock
Stock(1)
Series J(1) HPU’s
Common
Stock at
Par
Additional
Paid- In
Capital
Retained
Earnings
(Deficit)
Accumulated
Other Com-
prehensive
Income
(Loss)
Treasury
Stock at
Cost
Non-
controlling
Interests
Total
Equity
iStar Financial Inc. Shareholders’ Equity
(In thousands)
Balance at December 31, 2010
Dividends declared – preferred
Issuance of stock/restricted stock
amortization, net
Net loss for the period(2)
Change in accumulated other
comprehensive income (loss)
Repurchase of stock
Contributions from noncontrolling
interests
Distributions to noncontrolling
interests
Balance at December 31, 2011
Dividends declared – preferred
Repurchase of stock
Issuance of stock/restricted stock
unit amortization, net
Net loss for the period(2)
Change in accumulated other
comprehensive income (loss)
Repurchase of convertible notes
Additional paid in capital
attributable to redeemable
noncontrolling interest
Contributions from noncontrolling
interests(3)
Distributions to noncontrolling
interests
Balance at December 31, 2012
Issuance of Preferred Stock
Dividends declared – preferred
Repurchase of stock
Issuance of stock/restricted stock
unit amortization, net
Net loss for the period(2)
Change in accumulated other
40
Additional paid in capital
attributable to redeemable
noncontrolling interest(4)
Contributions from noncontrolling
interests(5)
Distributions to noncontrolling
interests(4)
Balance at December 31, 2013
Explanatory Notes:
$ 22
–
$ – $ 9,800
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 22
–
–
–
–
–
–
–
–
$ – $ 9,800
–
–
–
–
–
–
–
–
–
–
–
–
$ 138 $ 3,809,071 $ (2,014,013)
(42,320)
–
–
$ 1,609 $ (158,492) $ 46,524 $ 1,694,659
(42,320 )
–
–
–
2
–
25,389
–
–
(22,064)
–
–
–
–
–
(3,603)
25,391
(25,667 )
–
–
–
–
–
–
–
–
–
–
–
–
(1,937)
–
– (78,849)
–
–
(1,937 )
(78,849 )
–
–
3,917
3,917
–
–
–
$ 140 $ 3,834,460 $ (2,078,397)
(42,320)
–
–
–
–
–
$
3
–
2,705
–
–
(239,930)
–
–
–
(2,728)
–
–
(1,590)
(1,590 )
(328) $ (237,341) $ 45,248 $ 1,573,604
(42,320 )
(4,628 )
–
(4,628)
–
–
–
–
–
–
(857)
–
–
–
–
–
–
–
–
–
2,708
(688) (240,618 )
–
–
(857 )
(2,728 )
–
(1,657 )
–
32,654
32,654
–
–
–
–
–
–
–
–
(1,657)
–
–
–
–
–
–
$ 22
–
–
–
–
–
–
–
$ – $ 9,800
–
–
–
4
–
–
–
–
–
$ 143 $ 3,832,780 $ (2,360,647)
–
(49,020)
–
– 193,506
–
–
–
–
–
–
(3,004)
(3,004 )
$ (1,185) $ (241,969) $ 74,210 $ 1,313,154
– 193,510
(49,020 )
–
(20,985 )
–
–
–
–
–
– (20,985)
–
–
–
–
1
–
(1,376)
–
–
(111,951)
–
–
–
–
–
–
(2,772)
–
–
–
–
–
–
–
–
–
–
$ 22
–
–
$ 4 $ 9,800
–
–
$ 144 $ 4,022,138 $ (2,521,618)
–
–
(30,106 )
$ (4,276) $ (262,954) $ 58,205 $ 1,301,465
(30,106)
–
–
–
–
–
–
(1,375 )
3,837 (108,114 )
–
(3,091 )
–
(2,772 )
–
10,264
10,264
comprehensive income (loss)
–
–
–
–
–
–
(3,091)
(1) See Note 11 for details on the Company’s Cumulative Redeemable Preferred Stock.
(2) For the years ended December 31, 2013, 2012 and 2011, net loss shown above excludes $(3,119), $(812) and $(26), respectively, of net loss attributable to redeemable
noncontrolling interests.
Includes $27.3 million of land assets contributed by a noncontrolling partner (see Note 4).
Includes an $8.8 million payment to redeem a noncontrolling member’s interest.
Includes $9.4 million of operating property assets contributed by a noncontrolling partner (see Note 4).
(3)
(4)
(5)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2013
2012
2011
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Provision for loan losses
Impairment of assets
Loss on transfer of interest to unconsolidated subsidiary
Depreciation and amortization
Payments for withholding taxes upon vesting of stock- based compensation
Non- cash expense for stock- based compensation
Amortization of discounts/premiums and deferred financing costs on debt
Amortization of discounts/premiums and deferred interest on loans
Earnings from equity method investments
Distributions from operations of equity method investments
Deferred operating lease income
Deferred income taxes
Income from sales of residential property
Gain from discontinued operations
(Gain) loss on early extinguishment of debt, net
Repayments and repurchases of debt – debt discount and prepayment penalty
Other operating activities, net
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 flows from operating activities
Cash flows from investing activities:
Investment originations and fundings
Acquisitions of and capital expenditures on real estate assets
Repayments of and principal collections on loans
Net proceeds from sales of loans
Net proceeds from sales of real estate
Net proceeds from sale of other investments
Distributions from other investments
Contributions to other investments
Changes in restricted cash held in connection with investing activities
Other investing activities, net
Cash flows from investing activities
Cash flows from financing activities:
Borrowings from debt obligations
Repayments of debt obligations
Payments for deferred financing costs
Preferred dividends paid
Proceeds from issuance of preferred stock
Purchase of treasury stock
Other financing activities, net
Cash flows from financing 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 flow information:
$ (111,233)
$ (241,430)
$
(25,693)
5,489
14,507
7,373
71,530
(14,098)
19,261
20,915
(36,787)
(41,520)
17,252
(12,077)
–
(86,658)
(22,233)
19,655
(24,001)
6,917
2,310
(23,012)
5,945
81,740
38,077
–
70,786
(12,589)
15,293
31,981
(47,279)
(103,009)
105,586
(11,812)
–
(63,472)
(27,257)
22,405
(74,712)
9,427
1,337
1,271
11,725
$ (180,465)
$ (191,932)
$
46,412
22,386
–
63,928
(6,273)
29,702
32,345
(62,194)
(95,091)
85,766
(9,390)
(13,729)
(5,721)
(25,110)
(97,742)
(5,748)
6,492
4,793
20,580
5,710
(28,577)
$
(47,603)
(92,820)
728,657
56,998
562,705
$ (257,600)
(211,767)
613,615
81,614
437,817
220,281
36,918
(12,784)
(19,388)
$ (120,333)
(64,169)
1,208,403
95,859
215,930
–
188,467
(41,820)
(20,042)
(1,038)
$ 893,447 $ 1,267,047 $ 1,461,257
78,238
(10,640)
(5,127)
(3,361)
4,741
–
3,498,794
1,444,565
(4,608,133)
(1,984,102)
(21,662)
(17,539)
(42,320)
(49,020)
–
193,510
(4,628)
(20,985)
2,352
(22,187)
$ (1,175,597)
$ (455,758)
$ 257,224 $ (100,482)
3,037,825
(4,464,254)
(35,545)
(42,320)
–
(78,849)
2,424
$ (1,580,719)
$ (148,039)
504,865
$ 513,568 $ 256,344 $ 356,826
256,344
356,826
41
Cash paid during the period for interest, net of amount capitalized
$ 237,457 $ 329,546 $ 322,601
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Business and Organization
Business – iStar Financial Inc., or the “Company,” is a fully-
integrated finance and investment company focused on the commercial
real estate industry. The Company provides custom- tailored investment
capital to high- end private and corporate owners of real estate and
invests directly across a range of real estate sectors. The Company,
which is taxed as a real estate investment trust, or “REIT,” has invested
more than $35 billion over the past two decades. The Company’s pri-
mary business segments are real estate finance, net lease, operating
properties and land.
Organization – The Company began its business in 1993
through the management of private investment funds and became pub-
licly traded in 1998. Since that time, the Company has grown through the
origination of new lending and leasing transactions, as well as through
corporate acquisitions.
Note 2 – Basis of Presentation and Principles of Consolidation
Basis of Presentation – The accompanying audited Consolidated
Financial Statements have been prepared in conformity with gener-
ally accepted accounting principles in the United States of America
(“GAAP”) for complete financial statements. The preparation of financial
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 financial 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 reclassified in the
Consolidated Financial Statements and the related notes to conform to
the current period presentation.
Principles of Consolidation – The Consolidated Financial
Statements include the financial statements of the Company, its wholly
owned subsidiaries, controlled partnerships and variable interest
entities (“VIEs”) for which the Company is the primary beneficiary. All
significant intercompany balances and transactions have been elimi-
nated in consolidation. The Company’s involvement with VIEs affects
its financial performance and cash flows primarily through amounts
recorded in “operating lease income,” “interest income,” “earnings from
equity method investments,” “real estate expense” and “interest expense”
in the Company’s Consolidated Statements of Operations. The Company
has not provided financial support to these VIEs that it was not previ-
ously contractually required to provide.
Consolidated VIEs – As of December 31, 2013, the Company
consolidated five VIEs for which the Company is considered the primary
beneficiary. At December 31, 2013, the total assets of these consoli-
dated VIEs were $216.1 million and total liabilities were $33.9 million.
The classifications of these assets are primarily within “real estate,
net,” “loans receivable and other lending investments, net” and “other
investments” on the Company’s Consolidated Balance Sheets. The
classifications of liabilities are primarily within “debt obligations, net,”
and “accounts payable, accrued expenses and other liabilities” on the
Company’s Consolidated Balance Sheets. The liabilities of these VIEs
are non- recourse to the Company and can only be satisfied from each
VIE’s respective assets. The Company’s total unfunded commitments
related to consolidated VIEs was $38.8 million as of December 31, 2013.
Unconsolidated VIEs – As of December 31, 2013, 28 of the
Company’s other investments were in VIEs where it is not the primary
beneficiary and accordingly the VIEs have not been consolidated in the
Company’s Consolidated Financial Statements. As of December 31,
2013, the Company’s maximum exposure to loss from these invest-
ments does not exceed the sum of the $179.2 million carrying value
of the investments, which are classified in “other investments” on the
Company’s Consolidated Balance Sheets, and $29.6 million of related
unfunded commitments.
Note 3 – Summary of Significant Accounting Policies
Real estate – Real estate assets are recorded at cost less accu-
mulated depreciation and amortization, as follows:
Capitalization and depreciation – Certain improvements and
replacements are capitalized when they extend the useful life of the
asset. Qualified development and construction costs, including inter-
est and certain other carrying costs incurred during the construction
and/or renovation periods are also capitalized and charged to opera-
tions through depreciation over the asset’s estimated useful life. The
Company ceases capitalization on the portions substantially com-
pleted and capitalizes only those costs associated with the portions
under development. Repairs and maintenance items are expensed as
incurred. Depreciation is computed using the straight- line method of
cost recovery over the estimated useful life, which is generally 40 years
for facilities, five years for furniture and equipment, the shorter of the
remaining lease term or expected life for tenant improvements and the
remaining useful life of the facility for facility improvements.
Purchase price allocation – Upon acquisition of real estate, the
Company determines whether the transaction is a business com-
bination, which is accounted for under the acquisition method, or an
acquisition of assets. For both types of transactions, the Company rec-
ognizes and measures identifiable assets acquired, liabilities assumed
and any noncontrolling interest in the acquiree based on their relative
fair values. For business combinations, the Company recognizes and
measures goodwill or gain from a bargain purchase, if applicable, and
expenses acquisition- related costs in the periods in which the costs
are incurred and the services are received. For acquisitions of assets,
acquisition- related costs are capitalized and recorded in “Real estate,
net” on the Company’s Consolidated Balance Sheets.
The Company accounts for its acquisition of properties by
recording the purchase price of tangible and intangible assets and
liabilities acquired based on their estimated fair values. The value of
the tangible assets, consisting of land, buildings, building improvements
and tenant improvements is determined as if these assets are vacant.
Intangible assets may include the value of above- market leases, in- place
leases and the value of customer relationships, which are each recorded
at their estimated fair values and included in “Deferred expenses and
other assets, net” on the Company’s Consolidated Balance Sheets.
Intangible liabilities may include the value of below- market leases, which
are recorded at their estimated fair values and included in “Accounts
payable, accrued expenses and other liabilities” on the Company’s
42
Consolidated Balance Sheets. In- place leases and customer relation-
ships are amortized over the remaining non- cancelable term and the
amortization expense is included in “Depreciation and amortization”
on the Company’s Consolidated Statements of Operations. The capi-
talized above- market (or below- market) lease value is amortized as a
reduction of (or, increase to) operating lease income over the remaining
non- cancelable term of each lease plus any renewal periods with fixed
rental terms that are considered to be below- market. The Company
also engages in sale/leaseback transactions and typically executes
leases with the occupant simultaneously with the purchase of the net
lease asset.
Impairments – 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 flows (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 flows
considers factors such as expected future operating income trends, 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 estimated
fair value of the asset and reflected as an adjustment to the basis of
the asset. Impairments of real estate assets that are not held for sale
are recorded in “Impairment of assets” on the Company’s Consolidated
Statements of Operations.
Real estate available and held for sale – The Company reports real
estate assets to be disposed of at the lower of their carrying amount
or estimated fair value less costs to sell and classifies them as “Real
estate available and 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 impairment
charge and included in “Income (loss) from discontinued operations”
on the Company’s Consolidated Statements of Operations. Once a real
estate asset is classified as held for sale, depreciation expense is no
longer recorded and historical operating results, including impairments,
are reclassified to “Income (loss) from discontinued operations” on the
Company’s Consolidated Statements of Operations.
If circumstances arise that were previously considered unlikely
and, as a result the Company decides not to sell a property previously
classified as held for sale, the property is reclassified as held and
used and included in “Real estate, net” on the Company’s Consolidated
Balance Sheets. The Company measures and records a property that
is reclassified as held and used at the lower of (i) its carrying amount
before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property
been continuously classified as held and used, or (ii) the estimated fair
value at the date of the subsequent decision not to sell.
The Company reports residential property units to be disposed
of at the lower of their carrying amount or estimated fair value less
costs to sell and classifies them as “Real estate available and 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 impairment charge and included in “Impairment
of assets” on the Company’s Consolidated Statements of Operations.
The net carrying costs for residential property units are recorded in
“Real estate expense” on the Company’s Consolidated Statements
of Operations.
Dispositions – Sales and the associated gains or losses on
real estate assets, including residential property, are recognized in
accordance with Accounting Standards Codification (“ASC”) 360-20,
Real Estate Sales. Sales and the associated gains for residential prop-
erty are recognized for full profit recognition upon closing of the sale
transactions, when the profit is determinable, the earnings process is
virtually complete, the parties are bound by the terms of the contract,
all consideration has been exchanged, any permanent financing for
which the seller is responsible has been arranged and all conditions
for closing have been performed. The Company uses the relative sales
value method to allocate costs. Profits on sales of residential property
are included in “Income from sales of residential property” and gains
on sales of net lease assets or commercial operating properties are
recorded in “Gains from discontinued operations” on the Company’s
Consolidated Statements of Operations.
Loans receivable and other lending investments, net – Loans
receivable and other lending investments, net includes the following
investments: senior mortgages, subordinate mortgages, corporate/
partnership loans and preferred equity investments. Management con-
siders nearly all of its loans to be held- for-investment, although certain
investments may be classified as held- for-sale or available- for-sale.
Loans receivable classified as held- for-investment and debt
securities classified as held- to-maturity are reported at their out-
standing unpaid principal balance, and include unamortized acquisition
premiums or discounts and unamortized deferred loan costs or fees.
These loans and debt securities also include accrued and paid- in-kind
interest and accrued exit fees that the Company determines are prob-
able of being collected. Debt securities classified as available- for-sale
are reported at fair value with unrealized gains and losses included in
“Accumulated other comprehensive income (loss)” on the Company’s
Consolidated Balance Sheets.
Loans receivable and other lending investments designated
for sale are classified as held- for-sale and are carried at lower of
amortized historical cost or estimated fair value. The amount by which
carrying value exceeds fair value is recorded as a valuation allow-
ance. Subsequent changes in the valuation allowance are included
in the determination of net income (loss) in the period in which the
change occurs.
For held- to-maturity and available- for-sale debt securities held
in “Loans receivable and other lending investments, net,” management
evaluates whether the asset is other- than-temporarily impaired when
the fair market value is below carrying value. The Company considers
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 assets” on
43
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 not be required to sell the security, but the security has suf-
fered a credit loss, the impairment charge will be separated. The credit
loss component of the impairment will be recorded as an “Impairment of
assets” on the Company’s Consolidated Statements of Operations, and
the remainder will be recorded in “Accumulated other comprehensive
income (loss)” on the Company’s Consolidated Balance Sheets.
The Company acquires properties through foreclosure or by
deed- in-lieu of foreclosure in full or partial satisfaction of non- performing
loans. Based on the Company’s strategic plan to realize the maximum
value from the collateral received, property is classified as “Real estate,
net” or “Real estate available and held for sale” at its estimated fair value
when title to the property is obtained. Any excess of the carrying value
of the loan over the estimated fair value of the property (less costs to
sell for assets held for sale) is charged- off against the reserve for loan
losses as of the date of foreclosure.
Equity and cost method investments – Equity interests are
accounted for pursuant to the equity method of accounting if the
Company can significantly influence the operating and financial policies
of an investee. This is generally presumed to exist when ownership
interest is between 20% and 50% of a corporation, or greater than
5% of a limited partnership or certain limited liability companies. The
Company’s periodic share of earnings and losses in equity method
investees is included in “Earnings from equity method investments” on
the Consolidated Statements of Operations. When the Company’s own-
ership position is too small to provide such influence, the cost method
is used to account for the equity interest. Equity and cost method
investments are included in “Other investments” on the Company’s
Consolidated Balance Sheets.
To the extent that the Company contributes assets to an
unconsolidated subsidiary, the Company’s investment in the subsidiary
is recorded at the Company’s cost basis in the assets that were contrib-
uted to the unconsolidated subsidiary. To the extent that the Company’s
cost basis is different from the basis reflected at the subsidiary level,
the basis difference is amortized over the life of the related assets and
included in the Company’s share of equity in net (loss) income of the
unconsolidated subsidiary. The Company recognizes gains on the con-
tribution of real estate to unconsolidated subsidiaries, relating solely to
the outside partner’s interest, to the extent the economic substance
of the transaction is a sale. The Company recognizes a loss when it
contributes property to an unconsolidated subsidiary and receives a
disproportionately small interest in the subsidiary based on a compari-
son of the carrying amount of the property with the cash and other
consideration contributed by the other investors.
The Company periodically reviews equity method investments
for impairment in value whenever events or changes in circumstances
indicate that the carrying amount of such investments may not be recov-
erable. 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 impairment is other- than-temporary.
Impairment charges are recorded in “Earnings from equity method
investments” on the Company’s Consolidated Statements of Operations.
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 under certain of the Company’s debt obligations, loans,
leasing, land development, sale and derivative transactions.
Variable interest entities – The Company evaluated its invest-
ments and other contractual arrangements to determine if they
constitute variable interests in a VIE. A VIE is an entity where a control-
ling financial interest is achieved through means other than voting rights.
A VIE is consolidated by the primary beneficiary, which is the party that
has the power to direct matters that most significantly impact the activi-
ties of the VIE and has the obligation to absorb losses or the right to
receive benefits of the VIE that could potentially be significant to the VIE.
This overall consolidation assessment includes a review of, among other
factors, which interests create or absorb variability, contractual terms,
the key decision making powers, their impact on the VIE’s economic
performance, and related party relationships. Where qualitative assess-
ment is not conclusive, the Company performs a quantitative analysis.
The Company reassesses its evaluation of the primary beneficiary of a
VIE on an ongoing basis and assesses its evaluation of an entity as a VIE
upon certain reconsideration events.
The Company has investments in certain funds that meet the
deferral criteria in Accounting Standards Update (“ASU”) 2010-10 and
will continue to assess consolidation of these entities under the overall
guidance on the consolidation of VIEs in ASC 810-10. The consolidation
evaluation is similar to the process noted above, except that the primary
beneficiary 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. In addi-
tion, for entities that meet the deferral criteria, the Company reassesses
its initial evaluation of the primary beneficiary and whether an entity is a
VIE upon the occurrence of certain reconsideration events.
Deferred expenses – Deferred expenses include leasing costs
and financing fees. Leasing costs include brokerage, legal and other
costs which are amortized over the life of the respective leases. External
fees and costs incurred to obtain long- term financing have been deferred
and are amortized over the term of the respective borrowing using the
effective interest method or the straight line method, as appropriate.
Amortization of leasing costs is included in “Depreciation and amortiza-
tion” and amortization of deferred financing fees is included in “Interest
expense” on the Company’s Consolidated Statements of Operations.
Identified intangible assets and liabilities – Upon the acquisi-
tion of a business, the Company records intangible assets or liabilities
acquired at their estimated fair values separate and apart from goodwill.
The Company determines whether such intangible assets or liabilities
have finite or indefinite lives. As of December 31, 2013, all such intangible
assets and liabilities acquired by the Company have finite lives. Intangible
assets are included in “Deferred expenses and other assets, net” and
intangible liabilities are included in “Accounts payable, accrued expenses
and other liabilities” on the Company’s Consolidated Balance Sheets. The
Company amortizes finite lived intangible assets and liabilities based on
the period over which the assets are expected to contribute directly
or indirectly to the future cash flows of the business acquired. The
Company reviews finite lived intangible assets for impairment whenever
44
events or changes in circumstances 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 intangible assets are recorded in “Impairment of assets”
on the Company’s Consolidated Statements of Operations.
Revenue recognition – The Company’s revenue recognition poli-
cies are as follows:
Operating lease income: The Company’s leases have all been
determined to be operating leases based on an analysis performed in
accordance with ASC 840. Operating lease income 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 existing
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 contractual lease payment
terms is recorded as “Deferred operating lease income receivable,” on
the Company’s Consolidated Balance Sheets.
The Company also recognizes revenue from certain tenant
leases for reimbursements of all or a portion of operating expenses,
including common area costs, insurance, utilities and real estate taxes
of the respective property. This revenue is accrued in the same periods
as the expense is incurred and is recorded as “Operating lease income”
on the Company’s Consolidated Statements of Operations. Revenue is
also recorded from certain tenant leases that is contingent upon tenant
sales exceeding defined thresholds. These rents are recognized only
after the defined threshold has been met for the period.
Management estimates losses within its operating lease
income receivable and deferred operating lease income receivable bal-
ances as of the balance sheet date and incorporates an asset- specific
component, as well as a general, formula- based reserve based on
management’s evaluation of the credit risks associated with these
receivables. At December 31, 2013 and 2012, the total allowance for
doubtful accounts related to tenant receivables, including deferred
operating lease income receivable, was $5.9 million and $5.6 mil-
lion, respectively.
Interest Income: Interest income on loans receivable is recog-
nized on an accrual basis using the interest method.
On occasion, the Company may acquire loans at premiums 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 recognized over the
lives of the related loans as a yield adjustment, if management believes it
is probable that such amounts will be received. If loans with premiums,
discounts, loan origination or exit fees are prepaid, the Company imme-
diately recognizes the unamortized portion, 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) manage-
ment determines it is probable that it will be unable to collect 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. Non- accrual
loans are returned to accrual status when a loan has become contrac-
tually current and management believes all amounts contractually owed
will be received.
Certain of the Company’s loans contractually provide for
accrual of interest at specified rates that differ from current payment
terms. Interest is recognized on such loans at the accrual rate subject
to management’s determination that accrued interest and outstanding
principal 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 flow or appreciation of the underlying
collateral. Such amounts are considered contingent interest and are
reflected as interest income only upon receipt of cash.
The Company holds certain loans initially acquired at a dis-
count, for which it was probable, at acquisition, that all contractually
required payments would not be received. The Company does not have
a reasonable expectation about the timing and amount of cash flows
expected to be collected on these loans and recognizes income when
cash is received.
Other income: Other income includes revenues from hotel oper-
ations, which are recognized when rooms are occupied and the related
services are provided. Revenues include room sales, food and beverage
sales, parking, telephone, spa services and gift shop sales.
45
Reserve for loan losses – The reserve for loan losses reflects
management’s estimate of loan losses inherent in the loan portfolio as of
the balance sheet date. The reserve is increased through “Provision for
loan losses” on the Company’s Consolidated Statements of Operations
and is decreased by charge- offs when losses are confirmed through
the receipt of assets such as cash in a pre- foreclosure sale or via own-
ership control of the underlying collateral in full satisfaction of the loan
upon foreclosure or when significant collection efforts have ceased. The
Company has one portfolio segment, represented by commercial real
estate lending, whereby it utilizes a uniform process for determining its
reserve for loan losses. The reserve for loan losses includes a general,
formula- based component and an asset- specific component.
The general 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 esti-
mated. The formula- based general reserve is derived from estimated
principal default probabilities and loss severities applied to groups of
loans based upon risk ratings assigned to loans with similar risk char-
acteristics during the Company’s quarterly loan portfolio assessment.
During this assessment, the Company performs a comprehensive analy-
sis of its loan portfolio and assigns risk ratings to loans that incorporate
management’s current judgments about their credit quality based on
all known and relevant internal and external factors that may affect col-
lectability. The Company considers, among other things, payment status,
lien position, borrower financial resources and investment in collateral,
collateral type, project economics and geographical location as well as
national and regional economic factors. This methodology results in
loans being segmented by risk classification into risk rating categories
that are associated with estimated probabilities of default and principal
loss. Ratings range from “1” to “5” with “1” representing the lowest risk
of loss and “5” representing the highest risk of loss. The Company esti-
mates loss rates based on historical realized losses experienced within
its portfolio and takes into account current economic conditions affect-
ing the commercial real estate market when establishing appropriate
time frames to evaluate loss experience.
The asset- specific 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 collect all amounts due
under the contractual terms of the loan agreement. This assessment
is made on a loan- by-loan basis each quarter based on such factors as
payment status, lien position, borrower financial resources and invest-
ment in collateral, collateral type, project economics and geographical
location as well as national and regional economic factors. A reserve is
established for an impaired loan 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) is lower than the carrying value of that loan.
Substantially all of the Company’s impaired loans are collateral
dependent and impairment is measured using the estimated fair value
of collateral, less costs to sell. The Company generally uses the income
approach through internally developed valuation models to estimate the
fair value of the collateral for such loans. In more limited cases, the
Company obtains external “as is” appraisals for loan collateral, gener-
ally when third party participations exist. Valuations are performed or
obtained at the time a loan is determined to be impaired and designated
non- performing, and they are updated if circumstances indicate that
a significant change in value has occurred. In limited cases, appraised
values may be discounted when real estate markets rapidly deteriorate.
A loan is also considered impaired if its terms are modified in
a troubled debt restructuring (“TDR”). A TDR occurs when the Company
has granted a concession and the debtor is experiencing financial diffi-
culties. Impairments on TDR loans are generally measured based on the
present value of expected future cash flows discounted at the effective
interest rate of the original loan.
Gain or loss on debt extinguishments – The Company recognizes
the difference between the reacquisition price of debt and the net car-
rying amount of extinguished debt currently in earnings. Such amounts
may include prepayment penalties or the write- off of unamortized debt
issuance costs, and are recorded in “Gain (loss) on early extinguishment
of debt, net” on the Company’s Consolidated Statements of Operations.
Derivative instruments and hedging activity – The Company’s use
of derivative financial instruments is primarily limited to the utilization of
interest rate swaps, interest rate caps or other instruments to manage
interest rate risk exposure and foreign exchange contracts to manage
our risk to changes in foreign currencies.
The Company recognizes derivatives as either assets or lia-
bilities on the Company’s Consolidated Balance Sheets at fair value. If
certain conditions are met, a derivative may be specifically 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 flows to be received or paid related to a recognized asset or liability.
For derivatives designated as net investment hedges, the effec-
tive portion of changes in the fair value of the derivatives are reported in
Accumulated Other Comprehensive Income as part of the cumulative
translation adjustment. The ineffective portion of the change in fair value
of the derivatives is recognized directly in earnings. Amounts are reclas-
sified out of Accumulated Other Comprehensive Income into earnings
when the hedged net investment is either sold or substantially liquidated.
Derivatives that are not designated hedges are considered
economic hedges, with changes in fair value reported in current earn-
ings in “Other expense” on the Company’s Consolidated Statements
of Operations. The Company does not enter into derivatives for trad-
ing purposes.
Stock- based compensation – Compensation cost for stock- based
awards is measured on the grant date and adjusted over the period of
the employees’ services to reflect (i) actual forfeitures and (ii) the out-
come of awards with performance or service conditions through the
requisite service period. The Company recognizes compensation cost
for performance- based awards if and when the Company concludes
that it is probable that the performance condition will be achieved.
Compensation cost for market condition- based awards is determined
using a Monte Carlo model to simulate a range of possible future stock
prices for the Company’s Common Stock, which is reflected in the
grant date fair value. All compensation cost for market- condition based
awards in which the service conditions are met is recognized regard-
less of whether the market condition is satisfied. Compensation costs
are recognized ratably over the applicable vesting/service period and
recorded in “General and administrative” on the Company’s Consolidated
Statements of Operations.
Income taxes – The Company has elected to be qualified 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 taxable income,
however, the Company is allowed a deduction for the amount of divi-
dends paid to its shareholders, thereby subjecting the distributed net
income of the Company to taxation at the shareholder level only. While it
must distribute at least 90% of its taxable income in order to maintain its
REIT status, the Company typically distributes all of its taxable income,
if any, in order to minimize any tax on undistributed taxable income. In
addition, the Company is allowed several other deductions in computing
its REIT taxable income, including non- cash items such as deprecia-
tion expense and certain specific reserve amounts that the Company
deems to be uncollectable. These deductions allow the Company to
reduce its dividend payout requirement under federal tax laws. In addi-
tion, the Company has made foreclosure elections for certain properties
acquired through foreclosure which allows the Company to operate
these properties within the REIT but subjects them to certain tax obli-
gations. The carrying value of assets with foreclosure elections as of
December 31, 2013 is $1.12 billion. The Company intends to operate in a
46
manner consistent with and its election to be treated as a REIT for tax
purposes. As of December 31, 2012, the Company had $634.2 million of
net operating loss carryforwards at the corporate REIT level, which can
generally be used to offset both ordinary and capital taxable income in
future years and will expire through 2032 if unused. The amount of net
operating loss carryforwards as of December 31, 2013 will be subject
to finalization of the Company’s 2013 tax return. The Company recog-
nizes interest expense and penalties related to uncertain tax positions,
if any, as “Income tax (expense) benefit” on the Company’s Consolidated
Statements of Operations.
The Company can participate in certain activities from which
it would be otherwise precluded in order to maintain its qualification
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 sub-
sidiaries (“TRSs”), is engaged in various real estate related opportunities,
primarily related to managing activities related to certain foreclosed
assets, as well as managing various investments in equity affiliates. As
of December 31, 2013, $633.9 million of the Company’s assets were
owned by TRS entities. The Company’s TRS entities are not consolidated
for federal income tax purposes and are taxed as corporations. For
financial reporting purposes, current and deferred taxes are provided
for on the portion of earnings recognized by the Company with respect
to its interest in TRS entities.
recognizes a valuation allowance if, based on the available evidence, both
positive and negative, it is more likely than not that some portion or all
of its deferred tax assets will not be realized. When evaluating the realiz-
ability of its deferred tax assets, the Company considers, among other
matters, estimates of expected future taxable income, nature of cur-
rent and cumulative losses, existing and projected book/tax differences,
tax planning strategies available, and the general and industry specific
economic outlook. This realizability analysis is inherently subjective, as
it requires the Company to forecast its business and general economic
environment in future periods. Based on an assessment of all factors,
including historical losses and continued volatility of the activities within
the TRS entities, it was determined that full valuation allowances were
required on the net deferred tax assets as of December 31, 2013 and
2012, respectively. Changes in estimate of deferred tax asset realizability,
if any are included in “Income tax (expense) benefit” on the Consolidated
Statements of Operations.
Deferred tax assets and liabilities of the Company’s TRS enti-
ties were as follows ($ in thousands):
As of December 31,
Deferred tax assets(1)
Valuation allowance
Net deferred tax assets (liabilities)
2013
2012
$ 55,962 $ 40,800
(40,800)
–
(55,962)
–
$
$
47
The following represents the Company’s TRS income tax
Explanatory Note:
expense ($ in thousands):
For the Years Ended December 31,
Current tax (expense) benefit
Deferred tax (expense) benefit
Total income tax (expense) benefit
2013
$ 659
–
$ 659
2012
$ (8,445)
–
$ (8,445)
2011
$ (9,010)
13,729
$ 4,719
During the year ended December 31, 2013, the Company’s TRS
entities generated a taxable loss of $1.8 million, resulting in current tax
benefit of $0.7 million. During the year ended December 31, 2012, the
Company’s TRS entities generated taxable income of $42.2 million which
was partially offset by the utilization of net operating loss carryforwards,
resulting in current tax expense of $8.4 million. During the year ended
December 31, 2011, the Company’s TRS entities generated taxable
income of $75.8 million, which was partially offset by the utilization of
net operating loss carryforwards, resulting in tax expense of $9.0 million.
In addition, during the year ended December 31, 2011, the Company sold
its investment in Oak Hill Advisors L.P. (see Note 6) and recognized a
deferred tax benefit resulting from the reversal of a deferred tax liability
associated with the investment.
Total cash paid for taxes for the years ended December 31,
2013, 2012 and 2011, was $9.2 million, $5.5 million and $8.5 mil -
lion, respectively.
Deferred income taxes reflect the net tax effects of tempo-
rary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes, as well as operating loss and tax credit carryforwards.
The Company evaluates the realizability of its deferred tax assets and
(1) Deferred tax assets as of December 31, 2013, include real estate basis differences
of $33.0 million, net operating loss carryforwards of $14.9 million and investment
basis differences of $8.1 million. Deferred tax assets as of December 31, 2012, include
real estate basis differences of $31.2 million, net operating loss carryforwards of
$10.8 million and investment basis differences of $(1.2) million.
Earnings per share – The Company uses the two- class method
in calculating EPS when it issues securities other than common stock
that contractually entitle the holder to participate in dividends and earn-
ings of the Company when, and if, the Company declares dividends on
its common stock. Vested HPU shares are entitled to dividends of the
Company when dividends are declared. Basic earnings per share (“Basic
EPS”) for the Company’s Common Stock and HPU shares are computed
by dividing net income allocable to common shareholders and HPU
holders by the weighted average number of shares of Common Stock
and HPU shares outstanding for the period, respectively. Diluted earn-
ings per share (“Diluted EPS”) is calculated similarly, however, it reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock,
where such exercise or conversion would result in a lower earnings
per share amount.
Unvested share- based payment awards that contain non-
forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are deemed a “Participating Security” and are included in the
computation of earnings per share pursuant to the two- class method.
The Company’s unvested restricted stock units and restricted stock
awards with rights to dividends and common stock equivalents issued
under its Long- Term Incentive Plans are considered Participating
Securities and have been included in the two- class method when cal-
culating EPS.
Note 4 – Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
Net Lease
Operating
Properties
Land
Total
As of December 31, 2013
Land and land improvements
Buildings and improvements
Less: accumulated depreciation and amortization
Real estate, net
Real estate available and held for sale
Total real estate
As of December 31, 2012
Land and land improvements
Buildings and improvements
Less: accumulated depreciation and amortization
Real estate, net
Real estate available and held for sale
Total real estate
$ 350,817
1,346,071
(338,640)
$ 1,358,248
–
$ 1,358,248
$ 344,239
1,282,571
(310,605)
$ 1,316,205
–
$ 1,316,205
$ 132,934
587,574
(82,420)
$ 638,088
228,328
$ 866,416
$ 132,028
572,453
(65,409)
$ 639,072
454,587
$ 1,093,659
–
(3,393)
$ 803,238 $ 1,286,989
1,933,645
(424,453)
$ 799,845 $ 2,796,181
360,517
$ 932,034 $ 3,156,698
132,189
–
(2,292)
$ 786,114 $ 1,262,381
1,855,024
(378,306)
$ 783,822 $ 2,739,099
635,865
$ 965,100 $ 3,374,964
181,278
48
Real estate available and held for sale – As of December 31,
2013 and 2012, the Company had $221.0 million and $374.1 million,
respectively, of residential properties available for sale in its operating
properties portfolio.
During the year ended December 31, 2013, the Company
reclassified two land properties with a carrying value of $49.7 mil-
lion from held for sale to held for investment due to changes in the
Company’s business plan for the properties. These assets are included
in “Real estate, net” on the Company’s Consolidated Balance Sheets.
There were no operations to reclassify on the Company’s Consolidated
Statement of Operations as a result of this change. During the same
period, the Company reclassified three land assets with a carrying value
of $31.8 million and a net lease asset with a carrying value of $9.8 mil-
lion to held for sale due to executed contracts with third parties. The
net lease asset was disposed of for a gain of $3.6 million during the
year ended December 31, 2013. The gain was recorded in “Gain from
discontinued operations” on the Company’s Consolidated Statements of
Operations. The results of operations for the net lease assets that were
reclassified are included in “Income (loss) from discontinued operations”
on the Company’s Consolidated Statements of Operations for all periods
presented (see table below). The three land properties were sold during
the year ended December 31, 2013 for a gain of $0.6 million. These gains
were recorded in “Income from residential property” on the Company’s
Consolidated Statements of Operations.
During the year ended December 31, 2012, the Company had
a change in its business plans to sell two commercial operating proper-
ties previously considered held for sale. As of December 31, 2012, the
carrying amount of these assets was $49.8 million and was recorded in
Real Estate, net. The assets were reclassified back to real estate held
and used at their carrying value prior to classification as held for sale
and adjusted for depreciation expense of $3.3 million during the held
for sale period, which was lower than the assets’ fair value at the time
of the change in plans to sell. In connection with the reclassification of
these assets to held and used, the Company reclassified their results of
operations for each of the periods presented, as follows:
For the Years Ended December 31,
Other income
Real estate expenses
2012
$ 21,148
$ (22,603)
2011
$ 21,663
$ (24,297)
Acquisitions – During the year ended December 31, 2013, the
Company acquired a net lease asset, which was leased back to the
seller, for a purchase price of $93.6 million, including intangible assets of
$36.1 million, intangible liabilities of $11.9 million and acquisition- related
costs of $0.2 million. The Company concluded that the transaction was
a real estate asset acquisition and capitalized the acquisition- related
costs. The intangible assets are included in “Deferred expenses and
other assets, net” and the intangible liabilities are included in “Accounts
payable, accrued expenses and other liabilities” on the Company’s
Consolidated Balance Sheets. The lease is classified as an operat-
ing lease.
During the year ended December 31, 2013, the Company
acquired, via foreclosure, title to a residential operating property and
two land properties, each of which previously served as collateral on
loans receivable held by the Company. The total fair value of the land
properties was $15.6 million. The Company contributed the residen-
tial operating property, which had a fair value of $25.5 million, to an
entity, of which it owns 63%. Based on the control provisions in the
partnership agreement, the Company consolidates the entity and
reflects its partner’s 37% share of equity in “Noncontrolling interests”
on the Company’s Consolidated Balance Sheets. The acquisition was
accounted for at fair value. No gain or loss was recorded in conjunction
with these transactions.
During the year ended December 31, 2012, the Company
acquired, via foreclosure, title to properties, which previously served as
collateral on loan receivables held by the Company with a total fair value
of $269.1 million at the time of foreclosure. These properties included
$172.4 million of residential operating properties, $63.4 million of com-
mercial operating properties and $33.3 million of land assets.
During the year ended December 31, 2012, the Company also
acquired land and other assets with a fair value of $27.3 million from
a third party to form a new venture related to one of the Company’s
commercial operating properties. The third party contributed land into
the venture in a non- cash exchange for a non- controlling interest and
the Company continues to consolidate the subsidiary. In conjunction
with the formation of this new venture, the venture contributed land
with a recorded value of $11.6 million in a non- cash exchange for a 40%
noncontrolling equity interest in a separate new venture. The Company
did not recognize any gains or losses associated with these transactions.
In addition, during 2012, the Company acquired land and other
assets with a fair value of $11.5 million from a third party to form a new
strategic venture related to one of the Company’s active land devel-
opment projects. The third party contributed land into the venture in
a non- cash exchange for a non- controlling interest and the Company
continues to consolidate the subsidiary. The Company did not recognize
any gains or losses associated with the transaction. Based upon certain
rights held by the minority partner in this land venture that provide it
with an option to redeem its interest at fair value after seven years,
the Company has reflected the partner’s non- controlling interest in this
venture as a redeemable non- controlling interest within its Consolidated
Balance Sheets. As it is probable that the interest will become redeem-
able, subsequent changes in fair value are being accreted over the seven
year period from the date of issuance to the earliest redemption date
using the interest method. As of December 31, 2013 and 2012, the esti-
mated redemption value of the redeemable non- controlling interest was
$17.4 million and $17.9 million, respectively.
Dispositions – During the years ended December 31, 2013,
2012, and 2011, the Company sold residential condominiums for total
net proceeds of $269.7 million, $319.3 million and $154.0 million, respec-
tively, and recorded income from sales of residential properties totaling
$82.6 million, $63.5 million and $5.7 million, respectively.
During the year ended December 31, 2013, the Company sold
land for net proceeds of $21.4 million to a newly formed unconsolidated
entity in which the Company also received a preferred partnership
interest and a 47.5% equity interest. The Company recognized a gain
of $3.4 million, reflecting the proportionate share of our sold interest,
which was recorded as “Income from sales of residential property” on
the Company’s Consolidated Statements of Operations. The Company
also sold land with a carrying value of $18.9 million for proceeds that
approximated carrying value.
During the year ended December 31, 2013, the Company
contributed land with carrying value of $24.1 million to a newly formed
unconsolidated entity in which the Company received an equity inter-
est of 75.6%. As a result of the transfer, the Company recognized a
$7.4 million loss, which was recorded as “Loss on transfer of interest to
unconsolidated subsidiary” on the Company’s Consolidated Statements
of Operations. In addition, during the year ended December 31, 2013,
the Company contributed land with a carrying value of $2.8 million to a
newly formed unconsolidated entity in which the Company also received
a 50.0% equity interest. No gain or loss was recorded in conjunction
with the transaction.
Additionally, during the year ended December 31, 2013, the
Company sold five net lease assets with a carrying value of $18.7 mil-
lion resulting in a net gain of $2.2 million. During the same period the
Company sold six commercial operating properties with a carrying value
of $72.6 million resulting in a net gain of $18.6 million. These gains were
recorded as “Gain from discontinued operations” on the Company’s
Consolidated Statements of Operations. The Company also sold a land
asset with a carrying value of $14.8 million resulting in a gain of $0.6 mil-
lion, which was included in “Income from sales of residential property”
on the Company’s Consolidated Statements of Operations.
Also, during the year ended December 31, 2013, the Company
transferred title of net lease assets with a carrying value of $8.7 million
to its tenant for consideration that approximated our carrying value.
During the year ended December 31, 2012, the Company sold
a portfolio of 12 net lease assets with an aggregate carrying value of
$105.7 million and recorded a gain of $24.9 million resulting from the
transaction. Certain of the properties were subject to secured term
loans with a remaining principal balance of $50.8 million that were repaid
in full at closing (see Note 8). In addition to this portfolio sale, during 2012,
the Company sold net lease assets with a carrying value of $9.8 mil-
lion, resulting in a net gain of $2.4 million. These gains were recorded
as “Gain from discontinued operations” on the Company’s Consolidated
Statements of Operations. During the year ended December 31, 2012,
the Company sold commercial operating properties with an aggregate
carrying value of $29.3 million and land assets with a carrying value of
$72.1 million for proceeds that approximated carrying value.
49
Note 5 – Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable
and other lending investments by class ($ in thousands):
As of December 31,
2013
2012
Type of Investment
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total gross carrying value
of loans
Reserves for loan losses
Total loans receivable, net
Other lending investments – securities
Total loans receivable
and other lending
investments, net(1)
$ 1,071,662
60,679
473,045
$ 1,751,256
152,737
450,491
$ 1,605,386
(377,204)
$ 1,228,182
141,927
$ 2,354,484
(524,499)
$ 1,829,985
–
$ 1,370,109
$ 1,829,985
Explanatory Note:
(1) The Company’s recorded investment in loans as of December 31, 2013 and 2012
also includes accrued interest of $6.5 million and $9.8 million, respectively, which
are included in “Accrued interest and operating lease income receivable, net” on the
Company’s Consolidated Balance Sheets.
During the years ended December 31, 2013, 2012 and 2011, the
Company sold loans with total carrying values of $95.1 million, $53.9 mil-
lion and $144.9 million, respectively, which resulted in a net realized loss
of $0.6 million, a net gain of $6.4 million and no gain or loss, respectively.
Gains and losses on sales of loans are included in “Other income” on the
Company’s Consolidated Statements of Operations.
Reserve for loan losses – Changes in the Company’s reserve for
loan losses were as follows ($ in thousands):
2013
2012
2011
For the Years Ended December 31,
Reserve for loan losses at
beginning of period
Provision for loan losses(1)
Charge- offs
$ 524,499 $ 646,624 $ 814,625
46,412
(214,413)
5,489
(152,784)
81,740
(203,865)
Reserve for loan losses at end
of period
$ 377,204 $ 524,499 $ 646,624
Explanatory Note:
(1) For the years ended December 31, 2013, 2012 and 2011, the provision for loan losses
includes recoveries of previously recorded loan loss reserves of $63.1 million,
$4.6 million and $23.6 million, respectively.
During the year ended December 31, 2011, the Company sold
net lease assets with carrying values of $34.1 million, resulting in a net
gain of $3.2 million, which was recorded in “Gain from discontinued
operations” on the Company’s Consolidated Statements of Operations.
During 2011, the Company also sold commercial operating properties
with an aggregate carrying value of $17.9 million and land assets with a
carrying value of $9.5 million for proceeds that approximated carrying
value. In addition, during 2011, the Company realized $22.2 million of a
gain previously deferred resulting from the sale of a portfolio of 32 net
lease assets in 2010. The gain was recorded in “Gain from discontinued
operations” on the Company’s Consolidated Statements of Operations
during the year ended December 31, 2011.
Discontinued Operations – The following table summarizes
income (loss) from discontinued operations for the years ended
December 31, 2013, 2012 and 2011, respectively ($ in thousands):
For the Years Ended December 31,
Revenues
Total expenses
Impairment of assets
Income (loss) from discontinued
2013
2012
2011
$ 5,545 $ 14,132 $ 23,090
(19,457)
(9,147)
(9,037)
(22,576)
(3,138)
(1,763)
50
operations
$ 644 $ (17,481)
$ (5,514)
Impairments – During the years ended December 31, 2013, 2012
and 2011 the Company recorded impairments on real estate assets
totaling $14.4 million, $35.4 million and $22.4 million, respectively, result-
ing from changes in local market conditions and business strategy for
certain assets. Of these amounts, $1.8 million, $22.6 million and $9.1 mil-
lion for the years ended December 31, 2013, 2012 and 2011, respectively,
have been recorded in “Income (loss) from discontinued operations”
on the Company’s Consolidated Statements of Operations due to the
assets being sold or classified as held for sale as of December 31, 2013
(see above).
Tenant Reimbursements – The Company receives reimburse-
ments from tenants for certain facility operating expenses including
common area costs, insurance, utilities and real estate taxes. Tenant
expense reimbursements for the years ended December 31, 2013, 2012
and 2011 were $31.8 million, $30.9 million and $29.4 million, respec-
tively, and are included in “Operating lease income” on the Company’s
Consolidated Statements of Operations.
Future Minimum Operating Lease Payments – Future minimum
operating lease payments under non- cancelable leases, excluding cus-
tomer reimbursements of expenses, in effect at December 31, 2013, are
as follows ($ in thousands):
Year
2014
2015
2016
2017
2018
Net Lease
Assets
$132,996
$133,272
$131,738
$125,142
$123,464
Operating
Properties
$53,283
$48,851
$46,476
$44,516
$37,979
The Company’s recorded investment in loans (comprised of a loan’s carrying value plus accrued interest) and the associated reserve for
loan losses were as follows ($ in thousands):
As of December 31, 2013
Loans
Less: Reserve for loan losses
Total
As of December 31, 2012
Loans
Less: Reserve for loan losses
Total
Explanatory Notes:
Individually
Evaluated for
Collectively
Evaluated for
Impairment(1)
Impairment(2)
Loans
Acquired with
Deteriorated
Credit Quality(3)
Total
$ 752,425
(348,004)
$ 404,421
$ 849,613
(29,200)
$ 820,413
$ 9,889 $ 1,611,927
(377,204)
$ 9,889 $ 1,234,723
–
$ 1,095,957
(472,058)
$ 623,899
$ 1,210,077
(33,100)
$ 1,176,977
$ 58,281 $ 2,364,315
(524,499)
$ 38,940 $ 1,839,816
(19,341)
(1) The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.5 million and a net discount of $4.0 million as
of December 31, 2013 and 2012, respectively. The Company’s loans individually evaluated for impairment primarily represent loans on non- accrual status and therefore, the unamor-
tized amounts associated with these loans are not currently being amortized into income.
(2) The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $4.6 million and $3.8 million as of December 31,
2013 and 2012, respectively.
(3) The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.4 million and $0.1 million as of December 31,
2013 and 2012, respectively. These loans had cumulative principal balances of $10.2 million and $58.8 million, as of December 31, 2013 and 2012, respectively.
Credit Characteristics – As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio
assessment and assigns risk ratings to each of its performing loans. Risk ratings are based on judgments which are inherently uncertain and there
can be no assurance that actual performance will not be different than current expectation.
The Company’s recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as fol-
lows ($ in thousands):
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total
51
As of
December 31, 2013
December 31, 2012
Performing
Loans
$ 591,145
61,364
438,831
$ 1,091,340
Weighted
Average
Risk Ratings
2.50
3.37
3.88
3.11
Performing
Loans
$ 840,593
99,698
444,772
$ 1,385,063
Weighted
Average
Risk Ratings
2.75
2.27
3.69
3.01
As of December 31, 2013, the Company’s recorded investment in loans, aged by payment status and presented by class, were as follows
($ in thousands):
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total
Current
$ 625,267
61,364
476,211
$ 1,162,842
Less Than
and Equal to
90 Days
$ –
–
–
$ –
Greater Than
90 Days
$ 449,085
Total Past Due
$ 449,085
–
–
–
–
$ 449,085
$ 449,085
Total
$ 1,074,352
61,364
476,211
$ 1,611,927
Impaired Loans – The Company’s recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
With no related allowance recorded:
Senior mortgages
Corporate/Partnership loans
Subtotal
With an allowance recorded:
Total:
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Subtotal
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total
Explanatory Note:
As of December 31, 2013
As of December 31, 2012
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$ 3,012
$ 2,992
–
–
$ 3,012
$ 2,992
$
$
–
–
–
$ 108,077
10,110
$ 118,187
$ 107,850
10,160
$ 118,010
$
$
–
–
–
$ 650,337
$ 645,463
–
–
99,076
$ 749,413
99,067
$ 744,530
$ 653,349
$ 648,455
–
–
99,076
$ 752,425
99,067
$ 747,522
$ (304,544)
–
(43,460)
$ (348,004)
$ (304,544)
–
(43,460)
$ (348,004)
$ 918,975
53,979
63,096
$ 1,036,050
$ 918,496
53,679
63,246
$ 1,035,421
$ 1,027,052
53,979
73,206
$ 1,154,237
$ 1,026,346
53,679
73,406
$ 1,153,431
$ (442,760)
(39,579)
(9,060)
$ (491,399)
$ (442,760)
(39,579)
(9,060)
$ (491,399)
(1) All of the Company’s non- accrual loans are considered impaired and included in the table above. In addition, as of December 31, 2013 and 2012, certain loans modified through
troubled debt restructurings with a recorded investment of $231.8 million and $175.0 million, respectively, are also included as impaired loans in accordance with GAAP although they
are performing and on accrual status.
The Company’s average recorded investment in impaired loans and interest income recognized, presented by class, were as follows
($ in thousands):
52
With no related allowance recorded:
Senior mortgages
Corporate/Partnership loans
Subtotal
With an allowance recorded:
Total:
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Subtotal
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total
For the Years Ended December 31,
2013
2012
2011
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$ 31,409
8,062
$ 39,471
$ 9,269
6,050
$ 15,319
$ 162,093
10,110
$ 172,203
$ 2,765
160
$ 2,925
$ 309,079
10,110
$ 319,189
$ 794,247
32,382
77,661
$ 904,290
$ 825,656
32,382
85,723
$ 943,761
$ 1,976
–
323
$ 2,299
$ 1,064,045
52,208
62,248
$ 1,178,501
$ 3,865
–
312
$ 4,177
$ 1,608,486
19,477
66,087
$ 1,694,050
$ 11,245
–
6,373
$ 17,618
$ 1,226,138
52,208
72,358
$ 1,350,704
$ 6,630
–
472
$ 7,102
$ 1,917,565
19,477
76,197
$ 2,013,239
$ 31,799
680
$ 32,479
$ 7,187
–
332
$ 7,519
$ 38,986
–
1,012
$ 39,998
During the years ended December 31, 2013, 2012 and 2011, the Company recorded interest income of $13.3 million, $0.0 million and
$26.3 million, respectively, related to the resolution of certain non- performing loans. Interest income was not previously recorded while the loans
were on non- accrual status.
Troubled Debt Restructurings – During the years ended December 31, 2013 and 2012, the Company modified loans that were determined
to be troubled debt restructurings. The recorded investment in these loans was impacted by the modifications as follows, presented by class
($ in thousands):
Senior mortgages
For the Years Ended December 31,
2013
Pre-
Modification
Outstanding
Recorded
Investment
$179,030
Post-
Modification
Outstanding
Recorded
Investment
$154,278
2012
Pre-
Modification
Outstanding
Recorded
Investment
$319,667
Post-
Modification
Outstanding
Recorded
Investment
$272,753
Number
of Loans
8
Number
of Loans
6
Troubled debt restructurings that occurred during the year
ended December 31, 2013 included the modification of two performing
loans with a combined recorded investment of $4.6 million. The modi-
fied terms of these loans granted maturity extensions of one year. In
each case, the Company believes the borrowers can perform under
the modified terms of the loans and continues to classify these loans
as performing.
Non- performing loans with a combined investment of
$174.5 million were also modified during the year ended December 31,
2013. Included in this balance were two loans with a combined recorded
investment of $98.3 million in which the Company received $15.4 mil-
lion of paydowns and accepted discounted payoff options on these
loans, with final payments expected to be made in January 2014 and
July 2014 and the loans were reclassified from non- performing to per-
forming status as the Company believes the borrowers can perform
under the modified terms of the agreements. The remaining loans were
granted payoff option extensions ranging from one year to three years.
These loans continued to be classified as non- performing subsequent
to modification.
Troubled debt restructurings that occurred during the year
ended December 31, 2012 included the modifications of performing
loans with a combined recorded investment of $64.1 million. The modi-
fied terms of these loans granted maturity extensions ranging from
one year to three years and included conditional extension options in
certain cases dependent on borrower- specific performance hurdles.
In each case, the Company believes the borrowers can perform under
the modified terms of the loans and continues to classify these loans
as performing.
Non- performing loans with a combined recorded investment
of $255.6 million were also modified during the year ended December 31,
2012 and continued to be classified as non- performing subsequent to
modification. Included in this balance was a loan with a recorded invest-
ment of $181.5 million prior to modification, for which the Company
agreed to reduce the outstanding principal balance and recorded
charge- offs totaling $45.5 million, and also reduce the loan’s interest
rate. The remaining non- performing loans were granted maturity exten-
sions ranging from one month to seven months and the interest rate
was reduced on one loan.
Generally when granting concessions, the Company will seek
to protect its position by requiring incremental pay downs, additional
collateral or guarantees and in some cases lookback features or equity
kickers to offset concessions granted should conditions impacting the
loan improve. The Company’s determination of credit losses is impacted
by troubled debt restructurings whereby loans that have gone through
troubled debt restructurings are considered impaired, assessed for
specific reserves, and are not included in the Company’s assessment
of general loan loss reserves. Loans previously restructured under
troubled debt restructurings that subsequently default are reassessed
to incorporate the Company’s current assumptions on expected cash
flows and additional provision expense is recorded to the extent nec-
essary. As of December 31, 2013, the Company had $13.3 million of
unfunded commitments associated with modified loans considered
troubled debt restructurings.
53
Troubled debt restructurings that subsequently defaulted during the period were as follows ($ in thousands):
Senior mortgages
For the Years Ended December 31,
2013
2012
Number
of Loans
1
Outstanding
Recorded
Investment
$26,693
Number
of Loans
1
Outstanding
Recorded
Investment
$18,511
Securities – As of December 31, 2013, Other lending investments – securities includes the following ($ in thousands):
Available- for-Sale Securities
Municipal debt securities
Held- to-Maturity Securities
Corporate debt securities
Total
Face Value
Amortized
Cost Basis
Net Unrealized
Gain (Loss)
Estimated
Fair Value
Net Carrying
Value
$ 1,055
$ 1,055
$ (18)
$ 1,037
$ 1,037
139,842
$ 140,897
140,890
$ 141,945
–
$ (18)
140,890
$ 141,927
140,890
$ 141,927
During the year ended December 31, 2013, the Company originated a mandatorily redeemable preferred equity investment, which has an
initial term of three years with two 12-month extensions. At December 31, 2013, the Company’s investment was $140.9 million and the unfunded
commitment was $6.2 million. The investment is classified as a held- to-maturity debt security as the Company has the ability and intent to hold
the investment until maturity.
As of December 31, 2013, the contractual maturities of the Company’s securities were as follows ($ in thousands):
Maturities
Within one year
After one year through 5 years
After 5 years through 10 years
After 10 years
Total
Note 6 – Other Investments
Held- to-Maturity Securities
Available- for-Sale Securities
Amortized
Cost Basis
Estimated
Fair Value
Amortized
Cost Basis
Estimated
Fair Value
–
$
140,890
–
$
140,890
–
–
–
–
$ 140,890
$ 140,890
$
–
–
–
1,055
$ 1,055
$
–
–
–
1,037
$ 1,037
54
The Company’s other investments and its proportionate share of results from equity method investments were as follows ($ in thousands):
LNR
Madison Funds
Oak Hill Funds
Real estate equity investments
Other equity method investments(1)
Total equity method investments
Other
Total other investments
Explanatory Note:
Carrying Value
Equity in Earnings
As of December 31,
For the Years Ended December 31,
2013
–
$
67,782
21,366
62,205
45,954
$ 197,307
9,902
$ 207,209
2012
$ 205,773
56,547
29,840
47,619
47,939
$ 387,718
11,125
$ 398,843
2013
$ 16,465
14,796
4,174
2,753
3,332
$ 41,520
2012
$ 60,669
10,246
5,844
21,636
4,614
$ 103,009
2011
$ 53,861
3,641
1,918
(5,273)
40,944
$ 95,091
(1) For the year ended December 31, 2011, equity in earnings includes $38.4 million of earnings related to Oak Hill Advisors, L.P. and related entities that were sold in October 2011.
For the
Period from
October 1, 2012
to April 19,
For the Years
Ended September 30,
2013
2012
2011
$ (127,075)
$ (85,909)
$ 170,703
$ (36,543)
$ (55,686)
$ 45,488
$ 217,241 $ 229,634 $ (123,506)
$ 53,623 $ 88,039 $ 92,685
$ 61,179 $ 73,916
$
24%
–
24%
24%
–
14,690
17,722
Cash Flows
Operating cash flows
Cash flows from investing
activities
Cash flows from financing
activities
Net cash flows
Cash distributions
iStar’s ownership percentage
Cash distributions received
by iStar
Explanatory Notes:
(1) The Company recorded its investment in LNR, which was sold in April 2013, on a one
quarter lag, therefore, amounts in the Company’s financial statements for the year
ended December 31, 2013 are based on balances and results from LNR for the period
from October 1, 2012 to April 19, 2013. The amounts in the Company’s financial state-
ments for the year ended December 31, 2012 and 2011 are based on balances and
results from LNR for the years ended September 30, 2012 and 2011, respectively.
(2) LNR consolidates certain commercial mortgage- backed securities and collateralized
debt obligation trusts that are considered VIEs (and for which it is the primary benefi-
ciary), that have been included in the amounts presented above. As of September 30,
2012, the assets of these trusts, which aggregated $97.52 billion, were the sole source
of repayment of the related liabilities, which aggregated $97.21 billion and are non-
recourse to LNR and its equity holders, including the Company. Excluding the amounts
related to VIEs, as of September 30, 2012, total assets were $1.38 billion , total debt
was $398.9 million, and total liabilities were $517.1 million. In addition, total revenue
presented above includes $55.5 million, $95.4 million, and $119.0 million for the period
from October 1, 2012 to April 19, 2013 and for the years ended September 30, 2012
and 2011, respectively, of servicing fee revenue that is eliminated upon consolidation
of the VIE’s at the LNR level. This income is then added back through consolidation at
the LNR level as an adjustment to income allocable to noncontrolling entities and has
no net impact on net income attributable to LNR.
(3) During the year ended December 31, 2011, LNR recorded an income tax benefit from
the settlement of certain tax liabilities.
(4) Subsequent to the sale of the Company’s interest in LNR, LNR reported a reduction in
their earnings of $66.2 million related to a purchase price allocation adjustment. The
reduction was reflected in LNR’s operations for the three months ended March 31,
2013, which resulted in a net loss for the period. Because the Company recorded its
investment in LNR on a one quarter lag, the adjustment was reflected in the quarter
ended June 30, 2013. There was no net impact on the Company’s previously reported
equity in earnings as the Company limited its proportionate share of earnings from
LNR as described above.
(5) LNR reported a net loss for the period from April 1, 2013 to April 19, 2013 which
had already been considered in the Company’s other than temporary impairment
assessment. As such, no equity in earnings was recorded during the quarter ended
September 30, 2013. The total equity in earnings recognized for LNR was $45.4 million
for the year ended December 31, 2013.
(6) Represents the Company’s investment in LNR at December 31, 2013 and 2012,
respectively.
55
LNR – In July 2010, the Company acquired an ownership inter-
est of approximately 24% in LNR Property Corporation (“LNR”). LNR is a
servicer and special servicer of commercial mortgage loans and CMBS
and a diversified real estate investment, finance and management com-
pany. In the transaction, the Company and a group of investors, including
other creditors of LNR, acquired 100% of the common stock of LNR in
exchange for cash and the extinguishment of existing senior notes of
LNR’s parent holding company (the “Holdco Notes”). The Company con-
tributed $100.0 million aggregate principal amount of Holdco Notes and
$100.0 million in cash in exchange for an equity interest of $120.0 million.
Beginning in September 2012, the Company and other owners
of LNR entered into negotiations with potential purchasers of LNR.
After an extensive due diligence and negotiation process, the LNR
owners entered into a definitive contract to sell LNR in January 2013
at a fixed sale price which, from the Company’s perspective, reflected
in part the Company’s then- current expectations about the future
results of LNR and potential volatility in its business. The definitive sale
contract provided that LNR would not make cash distributions to its
owners during the fourth quarter of 2012 through the closing of the
sale. Notwithstanding the fixed terms of the contract, our investment
balance in LNR increased due to equity in earnings recorded which
resulted in our recognition of other than temporary impairment on our
investment during the year ended December 31, 2013. In April 2013,
the Company completed the sale of its 24% equity interest in LNR and
received $220.3 million in net proceeds. Approximately $25.2 million of
net proceeds were placed in escrow for potential indemnification obliga-
tions through April 2014. The Company is not currently aware that any
material indemnification claims are probable of occurring.
The following table represents investee level summarized
financial information for LNR ($ in thousands)(1):
For the
Period from
October 1, 2012
to April 19,
For the Years
Ended September 30,
2013
2012
2011
Income Statements
Total revenue(2)
Income tax (expense) benefit(3)
Net income attributable to LNR(4)
iStar’s ownership percentage
iStar’s equity in earnings from
LNR(5)
Balance Sheets
Total assets(2)
Total debt(2)
Total liabilities(2)
Noncontrolling interests
LNR Property LLC equity
iStar’s ownership percentage
iStar’s equity in LNR(6)
$ 179,373 $ 332,902 $ 327,032
$ 76,558
$ (6,731)
$ (2,137)
$ 113,478 $ 253,039 $ 225,190
24%
24%
24%
$ 45,375 $ 60,669 $ 53,861
As of September 30,
2013
2012
$ – $ 98,513,452
$ – $ 97,521,520
$ – $ 97,639,696
$ – $
8,067
$ – $ 865,689
24%
$ – $ 205,773
–%
The following table reconciles the activity related to the Company’s investment in LNR for the three months ended March 31, 2013 and
June 30, 2013, the six months ended December 31, 2013 and for the year ended December 31, 2013 ($ in thousands):
Carrying value of LNR at beginning of period
Equity in earnings of LNR for the period(1)
Balance before other than temporary impairment
Other than temporary impairment(1)
Sales proceeds pursuant to contract
Carrying value of LNR at end of period
Explanatory Note:
$ 205,773
$ 45,375
$ 251,148
$ (30,867)
$
–
$ 220,281
For the Three
Months Ended
March 31, 2013
For the Three
Months Ended
June 30, 2013
For the Six
Months Ended
December 31, 2013
$ –
$ –
$ –
$ –
$ –
$ –
For the
Year Ended
December 31, 2013
$ 205,773
$ 45,375(a)
$ 251,148
$ (30,867)(b)
$ (220,281)
–
$
–
$ 220,281
$
$ 220,281
$
–
$ (220,281)
–
$
(1) Subsequent to the sale of the Company’s interest in LNR, LNR reported a reduction in their earnings of $66.2 million related to a purchase price allocation adjustment. The reduction
was reflected in LNR’s operations for the three months ended March 31, 2013, which resulted in a net loss for the period. Because the Company recorded its investment in LNR on a
one quarter lag, the adjustment was reflected in the quarter ended June 30, 2013. There was no net impact on the Company’s previously reported equity in earnings as the Company
limited its proportionate share of earnings from LNR as described above.
For the year ended December 31, 2013, the amount that was
recognized as income in the Company’s Consolidated Statements of
Operations is the sum of items (a), (b) and $1.7 million of income rec-
ognized for the release of other comprehensive income related to LNR
upon sale, or $16.5 million.
Madison Funds – As of December 31, 2013, the Company
owned a 29.52% interest in Madison International Real Estate Fund II,
LP, a 32.92% interest in Madison International Real Estate Fund III, LP
and a 29.52% interest in Madison GP1 Investors, LP (collectively, the
“Madison Funds”). The Madison Funds invest in ownership positions
of entities that own real estate assets. The Company determined that
these entities are variable interest entities and that the Company is not
the primary beneficiary.
56
Oak Hill Funds – As of December 31, 2013, the Company owned
a 5.92% interest in OHA Strategic Credit Master Fund, L.P. (“OHASCF”).
OHASCF was formed to acquire and manage a diverse portfolio of
assets, investing in distressed, stressed and undervalued loans, bonds,
equities and other investments. The Company determined that this
entity is a variable interest entity and that the Company is not the pri-
mary beneficiary.
Real estate equity investments – During the year ended
December 31, 2013, the Company sold land for net proceeds of $21.4 mil-
lion to a newly formed unconsolidated entity in which the Company
had a preferred partnership interest and a 47.5% equity interest. The
Company’s proportionate share of the assets retained on a carryover
basis on the date of sale was $10.6 million. The Company held a pre-
ferred partnership interest of $6.6 million, which was repaid and no
longer outstanding at December 31, 2013. As of December 31, 2013, the
Company had a recorded equity interest of $5.5 million.
During the year ended December 31, 2013, the Company
contributed land to a newly formed unconsolidated entity in which the
Company received an equity interest of 75.6%. As of December 31, 2013,
the Company had a recorded equity interest of $18.0 million. In addition,
during the year ended December 31, 2013, the Company contributed
land to a newly formed unconsolidated entity in which the Company also
received a 50.0% equity interest. As of December 31, 2013, the Company
had a recorded equity interest of $3.5 million.
In addition, as of December 31, 2013, the Company’s other
real estate equity investments included equity interests in real estate
ventures ranging from 31% to 70%, comprised of investments of
$16.4 million in net lease assets, $16.0 million in operating properties
and $2.7 million in land assets. As of December 31, 2012, the Company’s
real estate equity investments included $16.4 million in net lease assets,
$25.7 million in operating properties and $5.5 million in land assets. One
of the Company’s equity investments in operating properties represents
a 33% interest in residential property units. During the years ended
December 31, 2013 and 2012, the Company’s earnings from its inter-
est in this property includes income from sales of residential units of
$4.7 million and $26.0 million, respectively.
Oak Hill Advisors – In October 2011, the Company sold a sub-
stantial portion of its interests in Oak Hill Advisors, L.P. and related
entities for $183.7 million of net cash proceeds, which resulted in a net
gain of $30.3 million that was recorded in “Earnings from equity method
investments” on the Company’s Consolidated Statements of Operations.
Glenn R. August, a former director of the Company and the president
and senior partner of Oak Hill Advisors, L.P., participated in the transac-
tion as a purchaser. In conjunction with the sale of its interests in Oak
Hill Advisors, L.P., the Company retained interests in its share of certain
unearned incentive fees of various funds. These fees are contingent on
the future performance of the funds and the Company will recognize
income related to these fees if and when the amounts are realized.
Other investments – The Company also had smaller invest-
ments in real estate related funds and other strategic investments in
several other entities that were accounted for under the equity method
or cost method.
Summarized financial information – The following table presents
the investee level summarized financial information of the Company’s
equity method investments, excluding LNR ($ in thousands):
Accounts payable, accrued expenses and other liabilities con-
sist of the following items ($ in thousands):
For the Years Ended December 31,
2013
2012
2011
Income Statements
Revenues
Net income attributable to
parent entities
$ 284,513 $ 401,870 $ 198,340
$ 206,198 $ 304,960 $ 97,066
As of December 31,
Accrued expenses
Accrued interest payable
Intangible liabilities, net(1)
Other liabilities
Accounts payable, accrued expenses and
2013
2012
$ 58,840 $ 50,467
29,521
9,210
52,472
40,015
26,223
45,753
other liabilities
$ 170,831 $ 141,670
As of December 31,
Balance Sheets
Total assets
Total liabilities
Noncontrolling interests
Total equity
2013
2012
Explanatory Note:
$ 2,980,737 $ 2,758,889
$ 303,100 $ 170,997
2,253
333 $
$
$ 2,677,304 $ 2,585,639
(1)
Intangible liabilities, net are primarily related to the acquisition of real estate assets.
Accumulated amortization on intangible liabilities was $4.6 million and $2.2 million as
of December 31, 2013 and 2012, respectively. The amortization of intangible liabili-
ties increased operating lease income on the Company’s Consolidated Statements
of Operations by $2.8 million, $1.4 million and $0.6 million for the years ended
December 31, 2013, 2012 and 2011, respectively.
Note 7 – Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the follow-
Intangible assets and liabilities – The estimated aggregate amor-
tization costs for each of the five succeeding fiscal years are as follows
($ in thousands):
2014
2015
2016
2017
2018
$ 10,530
$ 7,886
$ 7,122
$ 6,145
$ 4,295
57
ing items ($ in thousands):
As of December 31,
Intangible assets, net(1)
Other receivables
Deferred financing fees, net(2)
Leasing costs, net(3)
Corporate furniture, fixtures and
equipment, net(4)
Other assets
Deferred expenses and other assets, net
2013
2012
$ 100,652 $ 69,134
11,517
26,629
20,205
34,655
33,591
21,799
6,557
40,726
7,537
28,102
$ 237,980 $ 163,124
Explanatory Notes:
(1)
Intangible assets, net are primarily related to the acquisition of real estate assets.
Accumulated amortization on intangible assets was $38.1 million and $51.5 million
as of December 31, 2013 and 2012, respectively. The amortization of above market
leases decreased operating lease income on the Company’s Consolidated Statements
of Operations by $7.0 million, $5.8 million and $2.7 million for the years ended
December 31, 2013, 2012 and 2011, respectively. The total amortization expense
for intangible assets was $8.2 million, $7.0 million and $7.7 million for the years
ended December 31, 2013, 2012 and 2011, respectively. These amounts are included
in “Depreciation and amortization” on the Company’s Consolidated Statements
of Operations.
(2) Accumulated amortization on deferred financing fees was $9.9 million and $4.1 million
as of December 31, 2013 and 2012, respectively.
(3) Accumulated amortization on leasing costs was $7.1 million and $6.6 million as of
December 31, 2013 and 2012, respectively.
(4) Accumulated depreciation on corporate furniture, fixtures and equipment was
$6.2 million and $6.2 million as of December 31, 2013 and 2012, respectively.
Note 8 – Debt Obligations, net
As of December 31, 2013 and 2012, the Company’s debt obligations were as follows ($ in thousands):
Secured credit facilities and term loans:
2012 Tranche A-1 Facility
2012 Tranche A-2 Facility
October 2012 Secured Credit Facility
February 2013 Secured Credit Facility
Term loans collateralized by net lease assets
Total secured credit facilities and term loans
Unsecured notes:
8.625% senior notes
5.95% senior notes
5.70% senior notes
6.05% senior notes
5.875% senior notes
3.875% senior notes
3.0% senior convertible notes(5)
1.50% senior convertible notes(6)
5.85% senior notes
9.0% senior notes
7.125% senior notes
4.875% senior notes
Total unsecured notes
Other debt obligations:
Other debt obligations
Total debt obligations
Debt discounts, net
Total debt obligations, net
58
Explanatory Notes:
Carrying Value as of December 31,
2013
2012
Stated
Interest Rates
Scheduled
Maturity Date
$
431,475
–
–
1,379,407
278,817
$ 2,089,699
$
–
–
–
105,765
261,403
265,000
200,000
200,000
99,722
275,000
300,000
300,000
$ 2,006,890
$ 169,164
470,000
1,754,466
–
264,432
$ 2,658,062
$
96,801
448,453
200,601
105,765
261,403
–
200,000
–
99,722
275,000
300,000
–
$ 1,987,745
$ 100,000
$ 4,196,589
(38,464)
$ 4,158,125
$ 100,000
$ 4,745,807
(54,313)
$ 4,691,494
LIBOR + 4.00%(1)
LIBOR + 5.75%(1)
LIBOR + 4.50%(2)
LIBOR + 3.50%(3)
4.851% – 7.26%(4)
–
March 2017
–
October 2017
Various through 2026
8.625%
5.95%
5.70%
6.05%
5.875%
3.875%
3.0%
1.50%
5.85%
9.0%
7.125%
4.875%
–
–
–
April 2015
March 2016
July 2016
November 2016
November 2016
March 2017
June 2017
February 2018
July 2018
LIBOR + 1.50%
October 2035
(1) These loans each have a LIBOR floor of 1.25%. As of December 31, 2013, inclusive of the floor, the 2012 Tranche A-2 Facility loan incurred interest at a rate of 7.00%.
(2) This loan has a LIBOR floor of 1.25%.
(3) This loan has a LIBOR floor of 1.00%. As of December 31, 2013, inclusive of the floor, the February 2013 Secured Credit Facility incurred interest at a rate of 4.50%.
(4)
(5) The Company’s 3.0% senior convertible fixed rate notes due November 2016 (“3.0% Convertible Notes”) are convertible at the option of the holders, into 85.0 shares per $1,000 prin-
Includes a loan with a floating rate of LIBOR plus 2.00% and a loan with a floating rate of LIBOR plus 2.75%.
cipal amount of 3.0% Convertible Notes, at any time prior to the close of business on November 14, 2016.
(6) The Company’s 1.50% senior convertible fixed rate notes due November 2016 (“1.50% Convertible Notes”) are convertible at the option of the holders, into 57.8 shares per $1,000
principal amount of 1.50% Convertible Notes, at any time prior to the close of business on November 14, 2016.
Future Scheduled Maturities – As of December 31, 2013, future
scheduled maturities of outstanding long- term debt obligations are as
follows ($ in thousands):
2014
2015
2016
2017
2018
Thereafter
Total principal maturities
Unamortized debt discounts, net
Total long- term debt
Unsecured
Debt
Secured
Debt
$
Total
– $ 21,657 $ 21,657
105,765
926,403
2,185,604
617,052
340,108
$ 2,106,890 $ 2,089,699 $ 4,196,589
(38,464)
105,765
926,403
374,722
600,000
100,000
–
–
1,810,882
17,052
240,108
(11,081)
(27,383)
obligations, net
$ 2,095,809 $ 2,062,316 $ 4,158,125
February 2013 Secured Credit Facility – On February 11, 2013,
the Company entered into a $1.71 billion senior secured credit facil-
ity due October 15, 2017 (the “February 2013 Secured Credit Facility”)
that amended and restated its $1.82 billion senior secured credit facility,
dated October 15, 2012 (the “October 2012 Secured Credit Facility”). The
February 2013 Credit Facility amended the October 2012 Secured Credit
Facility by: (i) reducing the interest rate from LIBOR plus 4.50%, with a
1.25% LIBOR floor, to LIBOR plus 3.50%, with a 1.00% LIBOR floor; and
(ii) extending the call protection period for the lenders from October 15,
2013 to December 31, 2013.
Borrowings under the February 2013 Secured Credit Facility
are collateralized by a first lien on a fixed pool of assets, with required
minimum collateral coverage of not less than 125% of outstanding
borrowings. If collateral coverage is less than 137.5% of outstanding bor-
rowings, 100% of the proceeds from principal repayments and sales
of collateral will be applied to repay outstanding borrowings under the
February 2013 Secured Credit Facility. For so long as collateral coverage
is between 137.5% and 150% of outstanding borrowings, 50% of pro-
ceeds from principal repayments and sales of collateral will be applied to
repay outstanding borrowings under the February 2013 Secured Credit
Facility and for so long as collateral coverage is greater than 150% of
outstanding borrowings, the Company may retain all proceeds from
principal repayments and sales of collateral. The Company retains pro-
ceeds from interest, rent, lease payments and fee income in all cases.
In connection with the February 2013 Secured Credit Facility
transaction, the Company incurred $17.1 million of lender fees, of which
$14.4 million was capitalized in “Debt Obligations, net” on the Company’s
Consolidated Balance Sheets and $2.7 million was recorded as a loss
in “Gain (loss) on early extinguishment of debt, net” on the Company’s
Consolidated Statements of Operations as it related to the lenders
who did not participate in the new facility. The Company also incurred
$3.8 million in third party fees, of which $3.6 million was recognized
in “Other expense” on the Company’s Consolidated Statements of
Operations, as it related primarily to those lenders from the original facil-
ity that modified their debt under the new facility, and $0.2 million was
recorded in “Deferred expenses and other assets, net” on the Company’s
Consolidated Balance Sheets, as it related to the new lenders.
The February 2013 Secured Credit Facility contains certain
covenants relating to the collateral, among other matters, but does not
contain corporate level financial covenants. For so long as the Company
maintains its qualification as a REIT, it is permitted to distribute 100%
of its REIT taxable income on an annual basis. In addition, the Company
may distribute to its stockholders real estate assets, or interests therein,
having an aggregate equity value not to exceed $200 million, that are not
collateral securing the borrowings under the February 2013 Secured
Credit Facility. Except for the distribution of real estate assets described
in the preceding sentence, the Company may not pay common dividends
if it ceases to qualify as a REIT.
Through December 31, 2013, the Company has made cumu-
lative amortization repayments of $327.6 million on the February 2013
Secured Credit Facility bringing the outstanding balance to $1.38 billion.
Repayments of the February 2013 Secured Credit Facility prior to the
scheduled maturity date have resulted in losses on early extinguishment
of debt of $7.0 million for the year ended December 31, 2013 related to
the accelerated amortization of discounts and unamortized deferred
financing fees on the portion of the facility that was repaid.
October 2012 Secured Credit Facility – On October 15, 2012,
the Company entered into the October 2012 Secured Credit Facility.
Proceeds from the October 2012 Secured Credit Facility were used to
refinance the remaining outstanding balances of the Company’s then
existing 2011 Secured Credit Facilities.
During the year ended December 31, 2012, in connection with
the October 2012 Secured Credit Facility transaction, the Company
incurred $14.8 million in third party fees, of which $8.1 million was recog-
nized in “Other expense” on the Company’s Consolidated Statements of
Operations as it related to the portion of lenders from the original facility
that modified their debt under the new facility. The remaining $6.6 mil-
lion of fees were recorded in “Deferred expenses and other assets, net”
on the Company’s Consolidated Balance Sheets, as they related to the
portion of lenders that were new to the facility.
The October 2012 Secured Credit Facility was refinanced
by the February 2013 Secured Credit Facility. Prior to refinancing, the
Company made cumulative amortization repayments of $113.0 million
on the October 2012 Secured Credit Facility, which resulted in losses
on early extinguishment of debt of $0.8 million and $1.2 million during
the year ended December 31, 2013 and 2012, respectively, related to
the accelerated amortization of discounts and unamortized deferred
financing fees on the portion of the facility that was repaid.
At the time of the refinancing, the Company had $30.5 million
of unamortized discounts and financing fees related to the October 2012
Secured Credit Facility. During the year ended December 31, 2013, in
connection with the refinancing, the Company recorded a loss on early
extinguishment of debt of $4.9 million, related primarily to the portion
of lenders in the original facility that did not participate in the new facil-
ity. The remaining $25.6 million of unamortized fees and discounts will
continue to be amortized into interest expense over the remaining term
of the February 2013 Secured Credit Facility.
59
March 2012 Secured Credit Facilities – In March 2012, the
Company entered into an $880.0 million senior secured credit agree-
ment providing for two tranches of term loans: a $410.0 million 2012 A-1
tranche due March 2016, which bears interest at a rate of LIBOR + 4.00%
(the “2012 Tranche A-1 Facility”), and a $470.0 million 2012 A-2 tranche
due March 2017, which bears interest at a rate of LIBOR + 5.75% (the
“2012 Tranche A-2 Facility,” together the “March 2012 Secured Credit
Facilities”). The 2012 A-1 and A-2 tranches were issued at 98.0% of par
and 98.5% of par, respectively, and both tranches include a LIBOR floor of
1.25%. Proceeds from the March 2012 Secured Credit Facilities, together
with cash on hand, were used to repurchase and repay at maturity
$606.7 million aggregate principal amount of the Company’s convertible
notes due October 2012, to fully repay the $244.0 million balance on the
Company’s unsecured credit facility due June 2012, and to repay, upon
maturity, $90.3 million outstanding principal balance of its 5.50% senior
unsecured notes.
The March 2012 Secured Credit Facilities are collateralized by
a first lien on a fixed pool of assets. Proceeds from principal repayments
and sales of collateral are applied to amortize the March 2012 Secured
Credit Facilities. Proceeds received for interest, rent, lease payments
and fee income are retained by the Company. The 2012 Tranche A-1
Facility required amortization payments of $41.0 million to be made
every six months beginning December 31, 2012. After the 2012 Tranche
A-1 Facility is repaid, proceeds from principal repayments and sales of
collateral will be used to amortize the 2012 Tranche A-2 Facility. The
Company may make optional prepayments on each tranche of term
loans, subject to prepayment fees.
60
During the year ended December 31, 2013, the Company
repaid the remaining outstanding balance of the 2012 Tranche A-1
Facility. Repayments of the 2012 Tranche A-1 Facility prior to scheduled
amortization dates have resulted in losses on early extinguishment of
debt of $4.4 million and $8.1 million during the years ended December 31,
2013 and 2012, respectively, related to the accelerated amortization of
discounts and unamortized deferred financing fees on the portion of the
facility that was repaid.
Additionally, during the year ended December 31, 2013, the
Company made cumulative amortization repayments of $38.5 million on
the 2012 Tranche A-2 Facility prior to maturity have resulted in losses
on early extinguishment of debt of $1.0 million related to the accelerated
amortization of discounts and unamortized deferred financing fees on
the portion of the facility that was repaid during the year.
2011 Secured Credit Facilities – In March 2011, the Company
entered into a $2.95 billion senior secured credit agreement providing
for two tranches of term loans: a $1.50 billion 2011 A-1 tranche due June
2013, bearing interest at a rate of LIBOR + 3.75% (the “2011 Tranche
A-1 Facility”), and a $1.45 billion 2011 A-2 tranche due June 2014, bear-
ing interest at a rate of LIBOR + 5.75% (the “2011 Tranche A-2 Facility,”
together the “2011 Secured Credit Facilities”). The 2011 A-1 and A-2
tranches were issued at 99.0% of par and 98.5% of par, respectively, and
both tranches include a LIBOR floor of 1.25%.
The 2011 Secured Credit Facilities were refinanced by the
October 2012 Secured Credit Facility. Prior to refinancing, the Company
made cumulative amortization repayments of $1.07 billion on the 2011
Secured Credit Facilities, which resulted in losses on early extin-
guishment of debt of $4.5 million and $12.0 million for the years ended
December 31, 2012 and 2011, respectively, related to the accelerated
amortization of discounts and unamortized deferred financing fees on
the portion of the facility that was repaid.
At the time of the refinancing, the Company had $21.2 million of
unamortized discounts and financing fees related to the 2011 Secured
Credit Facilities. In connection with the refinancing, the Company
recorded a loss on early extinguishment of debt of $12.1 million, related
primarily to the portion of lenders in the original facility that did not par-
ticipate in the new facility. The remaining $9.0 million of unamortized fees
and discounts will continue to be amortized to interest expense over the
remaining term of the October 2012 Secured Credit Facility.
Secured Term Loans – In October 2012, a consolidated sub-
sidiary of the Company entered into a $28.0 million secured term loan
maturing in November 2019, bearing interest at a rate of LIBOR + 2.00%.
Simultaneously with the financing, the subsidiary entered into an inter-
est rate swap to exchange its variable rate on the loan for a fixed interest
rate (see Note 10).
In September 2012, the Company refinanced two secured term
loans with an aggregate outstanding principal balance of $53.3 million,
bearing interest at rates of 5.3% and 8.2% and maturing in January 2013
with a new $54.5 million secured term loan. The new loan bears interest
at 4.851%, matures in October 2022 and is collateralized by the same net
lease asset as the original term loan. In connection with the refinancing,
the Company incurred $0.5 million of losses related to a prepayment
penalty, which was recorded in “Gain (loss) on early extinguishment of
debt, net” on the Company’s Consolidated Statements of Operations for
the year ended December 31, 2012.
In addition, during the year ended December 31, 2012, in con-
junction with the sale of a portfolio of 12 net lease assets, the Company
repaid the $50.8 million outstanding balances of its LIBOR + 4.50%
secured term loans due in 2014 and terminated the related interest rate
swaps associated with the loans (see Note 10).
Unsecured Credit Facility – During the year ended December 31,
2012, the Company repaid the $243.7 million remaining principal balance
of its LIBOR + 0.85% unsecured credit facility due June 2012. In con-
nection with the repayments, the Company recorded a loss on early
extinguishment of debt of $0.2 million related to the accelerated amor-
tization of discounts and unamortized deferred financing fees on the
portion of the facility that was repaid.
Secured Notes – In January 2011, the Company redeemed
the $312.3 million remaining principal balance of its 10% 2014 secured
exchange notes and recorded a gain on early extinguishment of debt
of $109.0 million primarily related to the recognition of deferred gain
premiums that resulted from a previous debt exchange.
Unsecured Notes – In November 2013, the Company issued
$200.0 million aggregate principal of 1.50% convertible senior unsecured
notes due November 2016. Proceeds from the transaction, together
with cash on hand, was used to fully repay the remaining $200.6 mil-
lion of outstanding 5.70% senior unsecured notes due March 2014. In
connection with the repayment of the 5.70% senior unsecured notes,
the Company incurred $2.8 million of losses related to a prepayment
penalty and the accelerated amortization of discounts, which was
recorded in “Gain (loss) on early extinguishment of debt, net” on the
Company’s Consolidated Statements of Operations for the year ended
December 31, 2013.
In November 2012, the Company issued $300.0 million aggre-
gate principal of 7.125% senior unsecured notes due February 2018
and issued $200.0 million aggregate principal of 3.00% convertible
senior unsecured notes due November 2016. Proceeds from these
transactions were used to fully repay $67.1 million of the 6.5% senior
unsecured notes due December 2013 and partially repay $404.9 million
of the 8.625% senior unsecured notes due June 2013. In connection
with these repurchases, the Company paid a $14.9 million prepayment
penalty which was reflected in “Gain (loss) on early extinguishment of
debt, net” on the Company’s Consolidated Statements of Operations for
the year ended December 31, 2012.
In May 2013, the Company issued $265.0 million aggregate
principal of 3.875% senior unsecured notes due July 2016 and issued
$300.0 million aggregate principal of 4.875% senior unsecured notes
due July 2018. Net proceeds from these transactions, together with
cash on hand, were used to fully repay the remaining $96.8 million of
outstanding 8.625% senior unsecured notes due June 2013 and the
remaining $448.5 million of outstanding 5.95% senior unsecured notes
due in October 2013. In connection with the repayment of the 5.95%
senior unsecured notes, the Company incurred $9.5 million of losses
related to a prepayment penalty and the accelerated amortization of
discounts, which was recorded in “Gain (loss) on early extinguishment
of debt, net” on the Company’s Consolidated Statements of Operations
for the year ended December 31, 2013.
In May 2012, the Company issued $275.0 million aggregate
principal of 9.0% senior unsecured notes due June 2017 that were sold
at 98.012% of their principal amount.
During the year ended December 31, 2012, the Company
repaid, upon maturity, the $460.7 million outstanding principal balance of
its LIBOR + 0.50% senior unsecured convertible notes, the $169.7 million
outstanding principal balance of its 5.15% senior unsecured notes and
the $90.3 million outstanding principal balance of its 5.50% senior unse-
cured notes. In addition, the Company repurchased $420.4 million par
value of senior unsecured notes with various maturities ranging from
March 2012 to October 2012. In connection with these repurchases, the
Company recorded aggregate gains on early extinguishment of debt of
$3.2 million, for the year ended December 31, 2012.
Encumbered/Unencumbered Assets – As of December 31, 2013, the carrying value of the Company’s encumbered and unencumbered
assets by asset type are as follows ($ in thousands):
As of December 31,
2013
2012
61
Real estate, net
Real estate available and held for sale
Loans receivable, net(1)
Other investments
Cash and other assets
Total
Explanatory Note:
Encumbered
Assets
$ 1,644,463
152,604
860,557
24,093
–
$ 2,681,717
Unencumbered
Assets
$ 1,151,718
207,913
538,752
183,116
907,995
$ 2,989,494
Encumbered
Assets
$ 1,640,005
263,842
1,197,403
43,545
–
$ 3,144,795
Unencumbered
Assets
$ 1,099,094
372,023
665,682
355,298
556,207
$ 3,048,304
(1) As of December 31, 2013 and 2012, the amounts presented exclude general reserves for loan losses of $29.2 million and $33.1 million, respectively.
Debt Covenants
The Company’s outstanding unsecured debt securities contain
corporate level covenants that include a covenant to maintain a ratio
of unencumbered assets to unsecured indebtedness of at least 1.2x
and a restriction on debt incurrence based upon the effect of the debt
incurrence on the Company’s fixed charge coverage ratio. If any of the
Company’s covenants are breached and not cured within applicable cure
periods, the breach could result in acceleration of its debt securities
unless a waiver or modification is agreed upon with the requisite per-
centage of the bondholders. While the Company expects that its ability
to incur new indebtedness under the fixed charge coverage ratio will
be limited for the foreseeable future, which may put limitations on its
ability to make new investments, it will continue to be permitted to incur
indebtedness for the purpose of refinancing existing indebtedness and
for other permitted purposes under the indentures.
The Company’s March 2012 Secured Credit Facilities and
February 2013 Secured Credit Facility are collectively defined as the
“Secured Credit Facilities.” The Company’s Secured Credit Facilities
contain certain covenants, including covenants relating to collateral
coverage, dividend payments, restrictions on fundamental changes,
transactions with affiliates, matters relating to the liens granted to the
lenders and the delivery of information to the lenders. In particular, the
Company is required to maintain collateral coverage of 1.25x outstand-
ing borrowings. In addition, for so long as the Company maintains its
qualification as a REIT, the Secured Credit Facilities permit the Company
to distribute 100% of its REIT taxable income on an annual basis and the
February 2013 Secured Credit Facility permits the Company to distrib-
ute to its shareholders real estate assets, or interests therein, having
an aggregate equity value not to exceed $200 million, so long as such
assets are not collateral for the February 2013 Secured Credit Facility.
The Company may not pay common dividends if it ceases to qualify as
a REIT (except that the February 2013 Secured Credit Facility permits
the Company to distribute certain real estate assets as described in the
preceding sentence).
The Company’s Secured Credit Facilities contain cross default
provisions that would allow the lenders to declare an event of default
and accelerate the Company’s indebtedness to them if the Company
fails to pay amounts due in respect of its other recourse indebtedness in
excess of specified thresholds or if the lenders under such other indebt-
edness are otherwise permitted to accelerate such indebtedness for
any reason. The indentures governing the Company’s unsecured public
debt securities permit the bondholders to declare an event of default
and accelerate the Company’s indebtedness to them if the Company’s
other recourse indebtedness in excess of specified thresholds is not
paid at final maturity or if such indebtedness is accelerated.
Note 9 – Commitments and Contingencies
Unfunded Commitments – The Company generally funds con-
struction and development loans and build- outs of space in net lease
assets over a period of time if and when the borrowers and tenants meet
established milestones and other performance criteria. The Company
refers to these arrangements as Performance- Based Commitments. In
addition, the Company sometimes establishes a maximum amount of
additional funding which it will make available to a borrower or tenant
for an expansion or addition to a project if it approves of the expan-
sion or addition in its sole discretion. The Company refers to these
arrangements as Discretionary Fundings. Finally, the Company has com-
mitted to invest capital in several real estate funds and other ventures.
These arrangements are referred to as Strategic Investments. As of
December 31, 2013, the maximum amount of fundings the Company
may be required to make under each category, assuming all perfor-
mance hurdles and milestones are met under the Performance- Based
Commitments, that it approves all Discretionary Fundings and that 100%
of its capital committed to Strategic Investments is drawn down, are as
follows ($ in thousands):
Loans
and Other
Lending
Investments
Real
Estate
Strategic
Investments
Total
Performance- Based
Commitments
Discretionary Fundings
Strategic Investments
Total
$ 19,436 $ 53,164
–
–
$ 19,436 $ 53,164
–
–
$
– $ 72,600
–
–
46,591 46,591
$ 46,591 $ 119,191
62
Other Commitments – Total operating lease expense for the years
ended December 31, 2013, 2012 and 2011 were $6.1 million, $6.5 million
and $7.2 million, respectively. Future minimum lease obligations under
non- cancelable operating leases are as follows ($ in thousands):
2014
2015
2016
2017
2018
Thereafter
$ 5,797
$ 5,287
$ 5,408
$ 5,023
$ 4,179
$ 11,709
The Company also has issued letters of credit totaling $3.7 mil-
lion in connection with its investments.
Legal Proceedings – The Company and/or one or more of its
subsidiaries is party to various pending litigation matters that are consid-
ered ordinary routine litigation incidental to the Company’s business as a
finance and investment company focused on the commercial real estate
industry, including loan foreclosure and foreclosure- related proceedings.
On June 4, 2012, the Company reached an agreement in princi-
ple with the plaintiffs’ Court- appointed representatives in the previously
reported Citiline class action to settle the litigation. Settlement payments
will be primarily funded by the Company’s insurance carriers, with the
Company contributing $2.0 million to the settlement, which was included
in “Other expense” on the Consolidated Statement of Operations for the
year ended December 31, 2012. On April 5, 2013, the Court approved
the settlement, entered a Final Judgment and Order of Dismissal With
Prejudice and the Citiline Action was concluded.
The Company evaluates, on a quarterly basis, developments
in legal proceedings that could require a liability to be accrued and/or
disclosed. Based on its current knowledge, and after consultation with
legal counsel, the Company believes it is not a party to, nor are any of
its properties the subject of, any pending legal proceeding that would
have a material adverse effect on the Company’s consolidated finan-
cial condition.
Note 10 – Risk Management and 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 or leases
that result from a borrower’s or tenant’s inability or unwillingness to
make contractually required payments. Market risk reflects 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 valua-
tion of real estate assets by the Company as well as changes in foreign
currency exchange rates.
Risk concentrations – Concentrations of credit risks arise when
a number of borrowers or tenants related to the Company’s investments
are engaged in similar business activities, or activities in the same geo-
graphic region, or have similar economic features that would cause their
ability to meet contractual obligations, including those to the Company,
to be similarly affected by changes in economic conditions.
Substantially all of the Company’s real estate as well as assets
collateralizing its loans receivable are located in the United States.
As of December 31, 2013, the only state with a concentration greater
than 10.0% was California with 15.1%. As of December 31, 2013, the
Company’s portfolio contains concentrations in the following asset
types: land 21.6%, office 15.2%, industrial/R&D 13.5% and entertainment/
leisure 10.7%.
The Company underwrites the credit of prospective bor-
rowers and tenants 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 real
estate assets are geographically diverse and the borrowers and ten-
ants operate in a variety of industries, to the extent the Company has a
significant concentration of interest or operating lease revenues from
any single borrower or tenant, the inability of that borrower or tenant
to make its payment could have an adverse effect on the Company. As
of December 31, 2013, the Company’s five largest borrowers or tenants
collectively accounted for approximately $99.8 million of the Company’s
aggregate annualized interest and operating lease revenue, of which no
single customer accounts for more than 8%.
Derivatives
The Company’s use of derivative financial instruments is
primarily limited to the utilization of interest rate swaps, interest rate
caps and foreign exchange contracts. The principal objective of such
financial instruments is to minimize the risks and/or costs associated
with the Company’s operating and financial structure and to manage its
exposure to interest rates and foreign exchange rates. Derivatives not
designated as hedges are not speculative and are used to manage the
Company’s exposure to interest rate movements, foreign exchange rate
movements, and other identified risks, but may not meet the strict hedge
accounting requirements.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated
Balance Sheets as of December 31, 2013 and 2012 ($ in thousands):
Derivative Assets as of December 31,
Derivative Liabilities as of December 31,
2013
2012
2013
2012
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Other Assets
Other Assets
Other Assets
$ 1,418
650
9,107
$ 11,175
N/A
N/A
N/A
Other Liabilities
N/A
N/A
$–
–
–
$–
$1,653
–
–
$1,653
Other Liabilities
Other Liabilities
N/A
$2,855
580
–
$3,435
63
Derivative
Foreign exchange
contracts
Interest rate swap
Interest rate cap
Total
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for
the years ended December 31, 2013 and 2012 ($ in thousands):
Derivatives Designated in Hedging Relationships
For the Year Ended December 31, 2013
Interest rate cap
Interest rate swap
Foreign exchange contracts
For the Year Ended December 31, 2012
Interest rate swap
For the Year Ended December 31, 2011
Interest rate swap
Location of Gain (Loss)
Recognized in Income
Interest Expense
Interest Expense
Other Expense
Interest Expense
Interest Expense
Amount of Gain
(Loss) Recognized in
Accumulated Other
Comprehensive Income
(Effective Portion)
Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive Income
into Earnings
(Effective Portion)
Amount of Gain (Loss)
Recognized in Earnings
(Ineffective Portion)
$ (1,517)
$ 869
$ 393
$ (968)
$ (1,553)
$
–
$ 310
–
$
$ (44)
$ (180)
N/A
N/A
N/A
N/A
N/A
Foreign exchange contracts – The Company is exposed to fluc-
tuations in foreign exchange rates on investments it holds in foreign
entities. The Company uses foreign exchange contracts to hedge its
exposure to changes in foreign exchange rates on its foreign invest-
ments. Foreign exchange contracts involve fixing the USD to the
respective foreign currency exchange rate for delivery of a specified
amount of foreign currency on a specified date. The foreign exchange
contracts are typically cash settled in US dollars for their fair value at or
close to their settlement date.
For derivatives designated as net investment hedges, the
effective portion of changes in the fair value of the derivatives are
reported in Accumulated Other Comprehensive Income as part of
the cumulative translation adjustment. The ineffective portion of the
change in fair value of the derivatives is recognized directly in earnings.
Amounts are reclassified out of Accumulated Other Comprehensive
Income into earnings when the hedged net investment is either sold
or substantially liquidated. In June 2013, the Company entered into a
foreign exchange contract to hedge its exposure in a subsidiary whose
functional currency is INR. As of December 31, 2013, the Company had
the following outstanding foreign currency derivatives that were used
to hedge its net investments in foreign operations that were designated
($ in thousands):
Derivative Type
Sells INR/Buys USD
Forward
Notional
Amount
Notional (USD
Equivalent)
Maturity
Rs 456,000
$7,379
January 2014
For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Consolidated
Statements of Operations within other expense. As of December 31, 2013, the Company had the following outstanding foreign currency derivatives
that were used to hedge its net investments in foreign operations that were not designated ($ in thousands):
Derivative Type
Sells EUR/Buys USD Forward
Sells GBP/Buys USD Forward
Sells CAD/Buys USD Forward
Notional Amount
€80,500
£3,800
C$41,500
Notional (USD
Equivalent)
$ 110,696
$ 6,295
$ 39,036
Maturity
January 2014
January 2014
January 2014
64
Derivatives not Designated in Hedging Relationships
Foreign Exchange Contracts
Location of
Gain or (Loss)
Recognized in
Income
Other Expense
Amount of Gain or (Loss) Recognized in Income
For the Years Ended December 31,
2013
$880
2012
$(8,920)
2011
$17,406
The Company marks its foreign investments to market each quarter based on current exchange rates and records the gain or loss through
“Other expense” on its Consolidated Statements of Operations for loan investments or “Accumulated other comprehensive income (loss),” on its
Consolidated Balance Sheets for net investments in foreign subsidiaries. During the years ended December 31, 2013, 2012 and 2011, the Company
recorded net losses related to foreign investments of $2.0 million, $0.7 million and $2.3 million, in its Consolidated Statements of Operations.
Qualifying cash flow hedges – In August 2013, the Company entered into an interest rate cap agreement to reduce exposure to expected
increases in future interest rates and the resulting payments associated with variable interest rate debt. In October 2012, the Company entered
into an interest rate swap to convert its variable rate debt to fixed rate on a $28.0 million secured term loan maturing in 2019. The following table
presents the Company’s qualifying cash flow hedges outstanding as of year ended December 31, 2013 ($ in thousands).
Derivative Type
Interest Rate Cap
Interest Rate Swap
Notional Amount
$ 500,000
$ 27,958
Variable Rate
LIBOR
LIBOR + 2.00%
Fixed Rate
1.00%
3.47%
Effective Date
July 2014
October 2012
Maturity
July 2017
November 2019
During the year ended December 31, 2012, the Company ter-
minated its previously outstanding interest rate swaps in conjunction
with the early repayment of its secured term loans (see also Note 8).
Over the next 12 months, the Company expects that $0.4 mil-
lion will be reclassified to interest expense from cash flow hedges and
$0.4 million will be reclassified to income related to terminated cash
flow hedges from “Accumulated other comprehensive income (loss)”
into earnings.
Credit risk- related contingent features – The Company has agree-
ments with each of its derivative counterparties that contain a provision
where if the Company either defaults or is capable of being declared
in default on any of its indebtedness, then the Company could also be
declared in default on its derivative obligations.
In connection with its foreign currency derivatives, as of
December 31, 2013 and December 31, 2012, the Company has posted
collateral of $7.2 million and $9.6 million, respectively, which is included
in “Restricted cash” on the Company’s Consolidated Balance Sheets.
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, 2013, 144.3 million common shares were issued and 83.7 million common shares
were outstanding.
Preferred Stock – The Company had the following series of Cumulative Redeemable Preferred Stock outstanding:
Series
D
E
F
G
I
J
Series
D
E
F
G
I
Shares Issued and
Outstanding (in thousands)
4,000
5,600
4,000
3,200
5,000
4,000
25,800
Shares Issued and
Outstanding (in thousands)
4,000
5,600
4,000
3,200
5,000
21,800
For the Year Ended December 31, 2013
Cumulative Preferential Cash Dividends(1)(2)
Par Value
$0.001
$0.001
$0.001
$0.001
$0.001
$0.001
Liquidation
Preference
$25.00
$25.00
$25.00
$25.00
$25.00
$50.00
Rate per Annum
8.000%
7.875%
7.8%
7.65%
7.50%
4.50%
Equivalent to Fixed Annual
Rate (per share)
$2.00
$1.97
$1.95
$1.91
$1.88
$2.25
For the Year Ended December 31, 2012
Par Value
$0.001
$0.001
$0.001
$0.001
$0.001
Cumulative Preferential Cash Dividends(1)(2)
Liquidation
Preference
$25.00
$25.00
$25.00
$25.00
$25.00
Rate per Annum
8.000%
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
65
Explanatory Notes:
(1) Holders of shares of the Series D, E, F, G, I and J 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 first day of the calendar month in which the appli-
cable 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 10 days
prior to the dividend payment date.
(2) The Company declared and paid dividends of $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, during each of
the years ended December 31, 2013 and 2012. The Company also declared and paid dividends of $6.7 million on its Series J preferred stock during the year ended December 31, 2013.
All of the dividends qualified as return of capital for tax reporting purposes. There are no dividend arrearages on any of the preferred shares currently outstanding.
In March 2013, the Company completed a public offering of
$200.0 million of its 4.5% Series J Cumulative Convertible Perpetual
Preferred Stock, having a liquidation preference of $50.00 per share.
Each share of the Series J Preferred Stock is convertible at the hold-
er’s option at any time, initially into 3.9087 shares of the Company’s
common stock (equal to an initial conversion price of approximately
$12.79 per share), subject to specified adjustments. The Company may
not redeem the Series J Preferred Stock prior to March 15, 2018. On
or after March 15, 2018, the Company may, at its option, redeem the
Series J Preferred Stock, in whole or in part, at any time and from time
to time, for cash at a redemption price equal to 100% of the liquidation
preference of $50.00 per share, plus accrued and unpaid dividends, if
any, to the redemption date.
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.
High Performance Unit Program
In May 2002, the Company’s shareholders approved the iStar
Financial High Performance Unit (“HPU”) Program. The program enti-
tled employee participants (“HPU Holders”) to receive distributions if
the total rate of return on the Company’s Common Stock (share price
appreciation plus dividends) exceeded certain performance thresholds
over a specified 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 interests in the High Performance Common Stock
for an aggregate initial purchase price of $9.8 million. The remaining four
plans that had valuation periods which ended in 2005, 2006, 2007 and
2008, did not meet their required performance thresholds, none of the
plans were funded and the Company redeemed the participants’ units.
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 common shareholders is reduced by the HPU
holders’ share of earnings.
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, excluding net capital gains, and must dis-
tribute 100% of its taxable income (including net capital gains) to avoid
paying corporate federal income taxes. The Company has recorded net
operating losses and may record net operating losses in the future,
which may reduce its taxable income in future periods and lower or elim-
inate entirely the Company’s obligation to pay dividends for such periods
in order to maintain its REIT qualification. As of December 31, 2012,
the Company had $634.2 million of net operating loss carryforwards at
the corporate REIT level that can generally be used to offset both ordi-
nary and capital taxable income in future years and will expire through
2032 if unused. The amount net of operating loss carryforwards as of
December 31, 2013 will be subject to finalization of the 2013 tax returns.
Because taxable income differs from cash flow from operations due to
non- cash revenues and expenses (such as depreciation and certain
asset impairments), in certain circumstances, the Company may gener-
ate operating cash flow in excess of its dividends or, alternatively, may
need to make dividend payments in excess of operating cash flows. The
Company’s 2013 and 2012 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 qualification as a REIT. The 2013 and
2012 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 years ended
December 31, 2013 and 2012.
Stock Repurchase Programs – On May 15, 2012, the Company’s
Board of Directors approved a stock repurchase program that autho-
rized the repurchase of up to $20.0 million of its Common Stock from
time to time in open market and privately negotiated purchases, includ-
ing pursuant to one or more trading plans. In September 2013, the
Company’s Board of Directors approved an increase in the repurchase
limit to $50.0 million from the $16.0 million that remained from the previ-
ously approved program.
During the year ended December 31, 2013, the Company
repurchased 1.7 million shares of its outstanding Common Stock for
approximately $21.0 million, at an average cost of $12.35 per share.
During the year ended December 31, 2012, the Company repurchased
0.8 million shares of its outstanding Common Stock for approximately
$4.6 million, at an average cost of $5.69 per share. As of December 31,
2013, the Company had remaining authorization to repurchase up to
$29.0 million of Common Stock out of the $50.0 million authorized by
its Board in 2013.
Accumulated Other Comprehensive Income (Loss) – ”Accumulated
other comprehensive income (loss)” reflected in the Company’s share-
holders’ equity is comprised of the following ($ in thousands):
As of December 31,
Unrealized gains (losses) on
available- for-sale securities
Unrealized gains on cash flow hedges
Unrealized losses on cumulative
translation adjustment
Accumulated other comprehensive
income (loss)
2013
2012
$ (294)
662
$ 867
607
(4,644)
(2,659)
$ (4,276)
$ (1,185)
Note 12 – Stock- Based Compensation Plans and Employee Benefits
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 officers, 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 number of equity
awards previously granted under the Company’s 1996 Long- Term
Incentive Plan expire or are canceled 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 Company’s 2006 Long- Term Incentive Plan (the “2006
LTIP”) is designed to provide equity- based incentive compensation
for officers, key employees, directors, consultants and advisors 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.
The Company’s 2007 Incentive Compensation Plan (“Incentive
Plan”) was approved and adopted by the Board of Directors in 2007 in
order to establish performance goals for selected officers and other
key employees and to determine bonuses that will be awarded to those
officers 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.
As of December 31, 2013, an aggregate of 4.0 million shares
remain available for issuance pursuant to future awards under the
Company’s 2006 and 2009 Long- Term Incentive Plans.
66
Stock- based Compensation – The Company recorded stock-
based compensation expense of $19.3 million, $15.3 million and
$29.7 million for the years ended December 31, 2013, 2012 and
2011, respectively, in “General and administrative” on the Company’s
Consolidated Statements of Operations. As of December 31, 2013, there
was $4.3 million of total unrecognized compensation cost related to all
unvested restricted stock units that are expected to be recognized over
a weighted average remaining vesting/service period of 0.34 years. As of
December 31, 2013, approximately $5.2 million of stock- based compen-
sation was included in “Accounts payable, accrued expenses and other
liabilities” on the Company’s Consolidated Balance Sheets.
Restricted Stock Units
Changes in non- vested restricted stock units during the year
ended December 31, 2013 were as follows ($ in thousands, except per
share amounts):
Weighted
Average Grant
Date Fair Value
Per Share
Number of
Shares
5,276
795
(3,271)
(21)
$ 5.24
$ 11.88
$ 6.33
$ 4.94
Aggregate
Intrinsic Value
$ 43,000
2,779
$ 5.85
$ 39,659
Non- vested at
December 31, 2012
Granted
Vested
Forfeited
Non- vested at
December 31, 2013
The total fair value of restricted stock units vested during
the years ended December 31, 2013, 2012 and 2011 was $31.6 million,
$29.1 million and $15.5 million, respectively.
2013 Activity – During the year ended December 31, 2013,
3,271,272 restricted stock units vested, resulting in the issuance of
1,678,961 shares of Common Stock to employees, net of statutory mini-
mum required tax withholdings. These vested restricted stock units
were primarily comprised of (a) 1,719,304 Amended Units which vested
in January 2013 (see below), (b) 185,720 service- based restricted stock
units granted to employees in February 2011 that cliff vested in February
2013, (c) 164,685 of annual incentive restricted shares granted to
employees and vested in February 2013 (see below), (d) 313,334 service-
based restricted stock units granted to employees in March 2011 that
cliff vested in March 2013, (e) 600,000 service- based restricted stock
units granted to the Company’s Chairman and Chief Executive Officer
in October 2011 that vested in June 2013, and (f) 195,588 performance
based restricted stock units granted to employees in February 2013 that
vested in December 2013 (see below).
During the year ended December 31, 2013, the Company made
stock- based compensation awards to certain employees in the form of
annual incentive awards and long- term incentive awards:
Effective February 1, 2013, the Company granted 164,685
shares of our Common Stock in connection with annual incentive
awards. The shares are fully- vested and were issued to certain employ-
ees, net of statutory minimum required tax withholdings. The employees
are restricted from selling these shares for up to two years from the
date of grant.
Effective February 1, 2013, the Company also granted service-
based restricted stock units, or Units, representing the right to receive
an equivalent number of shares of our Common Stock (after deducting
shares for minimum required statutory withholdings) if and when the
Units vest. The Units will cliff vest in one installment three years from the
grant date, if the employee remains employed by the Company on the
vesting date, subject to certain accelerated vesting rights. Dividends will
accrue but will not be paid unless and until the Units vest and are settled.
As of December 31, 2013, 196,902 units were outstanding.
Effective February 1, 2013, the Company also granted
performance- based Units based on the Company’s total shareholder
return, or TSR, measured over the one- year and two- year performance
periods ending on the vesting dates, respectively. Vesting will range
from 0% to 200% of the target amount of the awards, depending on
the Company’s TSR performance relative to the NAREIT All REITs Index
(one- half of the target amount of the award) and the Russell 2000 Index
(one- half of the target amount of the award). The Company and any
companies not included in the index at the beginning and end of the
performance period are excluded from calculation of the performance
of such index. To the extent Units vest based on the Company’s TSR
performance, holders will receive an equivalent number of shares of our
Common Stock (after deducting shares for minimum required statutory
withholdings), if the employee remains employed by the Company on the
vesting date, subject to certain accelerated vesting rights. Dividends will
accrue but will not be paid unless and until the Units vest and are set-
tled. The fair values of the performance- based Units, were determined
by utilizing a Monte Carlo model to simulate a range of possible future
stock prices for the Company’s Common Stock. The assumptions used
to estimate the fair value of these performance- based awards were
0.26% for risk- free interest rate and 50.44% for expected stock price
volatility. As of December 31, 2013, 195,547 units measured over the
two- year performance period with a vesting date on December 31, 2014
were outstanding. The units measured over the one- year performance
period vested, and met the 200% target amount of the original awards,
and 195,588 shares were issued.
67
Directors’ Awards – Non- employee directors are awarded
common stock equivalents (“CSEs”) or restricted shares at the time
of the annual shareholders’ meeting in consideration for their services
on the Company’s Board of Directors. The CSEs and restricted shares
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, 2013, the Company
awarded to Directors 33,474 CSEs and restricted shares at a fair value
per share of $12.30 at the time of grant. These CSEs and restricted
shares have a one year vesting period and pay dividends in an amount
equal to the dividends paid on the equivalent number of shares of
the Company’s Common Stock from the date of grant, as and when
dividends are paid on Common Stock. In addition, during the year
ended December 31, 2013, the Company issued 51,091 shares to a
former director in settlement of previously vested CSE awards. As of
December 31, 2013, there were 367,134 CSEs and restricted shares
granted to members of the Company’s Board of Directors that remained
outstanding with an aggregate intrinsic value of $5.2 million.
401(k) Plan – The Company has a savings and retirement plan
(the “401(k) Plan”), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401(k) Plan following comple-
tion of three months of continuous service with the Company. Each
participant may contribute on a pretax basis up to the maximum per-
centage 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 first 10% of the participant’s annual com-
pensation. The Company made gross contributions of approximately
$0.9 million, $0.9 million and $0.9 million for each of the years ended
December 31, 2013, 2012 and 2011, respectively.
As of December 31, 2013, the Company had the following addi-
tional restricted stock awards outstanding:
– 600,000 service- based restricted stock units granted to
the Company’s Chairman and Chief Executive Officer that
will vest on June 15, 2014. Upon vesting of these units, the
holder will receive shares of the Company’s Common Stock
in the amount of the vested units, net of statutory minimum
required tax withholdings. These awards carry dividend
equivalent rights that entitle the holder to receive dividend
payments prior to vesting, if and when dividends are paid
on shares of the Company’s Common Stock.
– 1,696,053 restricted stock units originally granted to execu-
tives and other officers of the Company on December 19,
2008 (the “Original Units”) and subsequently modified in
July 2011 (the “Amended Units”). The number of Amended
Units is equal to 75% of the Original Units granted to an
employee less, in the case of each executive level employee,
the number of restricted stock units granted to the execu-
tive in March 2011. The remaining Amended Units will
vest on January 1, 2014, so long as the employee remains
employed by the Company on the vesting dates, subject to
certain accelerated vesting rights in the event of termination
of employment without cause. Upon vesting of these units,
holders will receive shares of the Company’s Common
Stock in the amount of the vested units, net of statutory
minimum required tax withholdings. These awards carry
dividend equivalent rights that entitle the holders to receive
dividend payments prior to vesting, if and when dividends
are paid on shares of the Company’s Common Stock. The
fair values of the market- condition based restricted stock
units, were determined by utilizing a Monte Carlo model
to simulate a range of possible future stock prices for the
Company’s Common Stock. The assumptions used to esti-
mate the fair value of these market- condition based awards
were 0.092% for risk- free interest rate and 57.75% for
expected stock price volatility. The modified December 19,
2008 market- condition based restricted stock units were
measured on July 1, 2011, the date the Company’s Board of
Directors’ approved the modification of the award.
– 90,666 service- based restricted stock units granted to
employees with an original vesting term of three years.
Upon vesting of these units, holders will receive shares of
the Company’s Common Stock in the amount of the vested
units, net of statutory minimum required tax withholdings.
These awards carry dividend equivalent rights that entitle
the holders to receive dividend payments prior to vesting,
if and when dividends are paid on shares of the Company’s
Common Stock.
68
Note 13 – Earnings Per Share
EPS is calculated using the two- class method, which allocates 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 participating securities. HPU hold-
ers are current and former Company employees who purchased high performance common stock units under the Company’s High Performance
Unit (HPU) Program (see Note 11). These HPU units are treated as a separate class of common stock.
The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted earnings per share
calculations ($ in thousands, except for per share data):
For the Years Ended December 31,
Income (loss) from continuing operations
Net (income) loss attributable to noncontrolling interests
Income from sales of residential property
Preferred dividends
Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common
2013
$ (220,768)
(718)
86,658
(49,020)
2012
$ (314,678)
1,500
63,472
(42,320)
2011
$ (51,010)
3,629
5,721
(42,320)
shareholders, HPU holders and Participating Security Holders
$ (183,848)
$ (292,026)
$ (83,980)
For the Years Ended December 31,
Earnings allocable to common shares:
Numerator for basic and diluted earnings per share:
2013
2012
2011
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
$ (177,907)
623
21,515
$ (155,769)
$ (282,452)
(16,908)
26,363
$ (272,997)
$ (81,375)
(5,343)
24,331
$ (62,387)
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic and diluted earnings per common share
84,990
83,742
88,688
Basic and diluted earnings per common share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to common shareholders
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders
$
$
(2.09)
0.01
0.25
(1.83)
$
$
(3.37)
(0.20)
0.31
(3.26)
$
$
(0.91)
(0.06)
0.27
(0.70)
69
For the Years Ended December 31,
Earnings allocable to High Performance Units:
Numerator for basic and diluted earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
Denominator for basic and diluted earnings per HPU share:
2013
2012
2011
$ (5,941)
21
718
$ (5,202)
$ (9,574)
(573)
894
$ (9,253)
$ (2,605)
(171)
779
$ (1,997)
Weighted average High Performance Units outstanding for basic and diluted earnings per share
15
15
15
Basic and diluted earnings per HPU share:
Income (loss) from continuing operations attributable to iStar Financial Inc. and
allocable to HPU holders
Income (loss) from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders
$ (396.07)
1.40
47.87
$ (346.80)
$ (638.27)
(38.20)
59.60
$ (616.87)
$ (173.66)
(11.40)
51.93
$ (133.13)
For the years ended December 31, 2013, 2012 and 2011 the following shares were anti- dilutive ($ in thousands):
For the Years Ended December 31,
Joint venture shares
Stock options
3.00% convertible senior unsecured notes
Series J convertible perpetual preferred stock
1.50% convertible senior unsecured notes
2013
298
–
16,992
15,635
11,567
2012
298
–
–
–
–
2011
298
44
–
–
–
Note 14 – 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 following fair value
hierarchy prioritizes the inputs to be used in valuation techniques 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 substantially the
full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and unobservable (i.e.,
supported by little or no market activity).
Certain of the Company’s assets and liabilities are recorded at
fair value either on a recurring or non- recurring basis. Assets required
to be marked- to-market and reported at fair value every reporting period
are classified as being valued on a recurring basis. Assets not required
to be recorded at fair value every period may be recorded at fair value if
a specific 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 classified as being valued on a non- recurring basis.
The following fair value hierarchy 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):
70
As of December 31, 2013
Recurring basis:
Derivative assets
Derivative liabilities
Non- recurring basis:
Impaired loans(1)
Impaired real estate(2)
As of December 31, 2012
Recurring basis:
Derivative liabilities
Non- recurring basis:
Impaired loans
Impaired real estate
Explanatory Notes:
Fair Value Using
Quoted market
prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$ 11,175
$ 1,653
$ 115,423
$ 35,680
$ 3,435
$ 57,201
$ 31,597
$ –
$ –
$ –
$ –
$ –
$ –
$ –
$ 11,175
$ 1,653
$
–
$ 5,744
$
$
–
–
$ 115,423
$ 29,936
$ 3,435
$
–
–
$
$ 7,649
$ 57,201
$ 23,948
(1) The Company recorded a recovery of loan losses on one loan with a fair value of $55.5 million based on the loan’s remaining loan term of 2.6 years and interest rate of 4.7% using
discounted cash flow analysis. In addition, the Company recorded a recovery of loan losses on one loan with a fair value of $53.6 million based upon a letter of intent executed by the
borrower as well as recorded an impairment on one loan with a fair value of $6.3 million based upon a settlement agreement executed by the borrower.
(2) The Company recorded the fair value of two impaired real estate assets with a total fair value of $29.9 million based on a discount rate of 13.0%, average annual rent growth of 4.0% and
remaining inventory sell out period with a range of 3.5 to 4.6 years using discounted cash flows.
Fair values of financial instruments – The Company’s estimated
fair values of its loans receivable and other lending investments and
debt obligations were $1.4 billion and $4.5 billion, respectively, as of
December 31, 2013 and $1.9 billion and $4.9 billion, respectively, as
of December 31, 2012. The Company determined that the significant
inputs used to value its loans receivable and other lending investments
and debt obligations fall within Level 3 of the fair value hierarchy. The
carrying value of other financial instruments including cash and cash
equivalents, restricted cash, accrued interest receivable and accounts
payable, approximate the fair values of the instruments. Cash and cash
equivalents and restricted cash values are considered Level 1 on the fair
value hierarchy. The fair value of other financial instruments, including
derivative assets and liabilities, are included in the fair value hierarchy
table above.
Given the nature of certain assets and liabilities, clearly deter-
minable market based valuation inputs are often not available, therefore,
these assets and liabilities are valued using internal valuation techniques.
Subjectivity exists with respect to these internal valuation techniques,
therefore, the fair values disclosed may not ultimately be realized by the
Company 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 three tables above are described more fully below for
each type of asset and liability.
include lot and unit sales that are based on current observable market
rates and estimates for annual market rate growth, operating costs and
costs of completion and the remaining inventory sell out periods. The
Company will also consider market comparables if available. In more
limited cases, the Company obtains external “as is” appraisals for real
estate assets and appraised values may be discounted when real estate
markets rapidly deteriorate. The Company has determined that signifi-
cant inputs used in its internal valuation models and appraisals fall within
Level 3 of the fair value hierarchy. Additionally, in certain cases, if the
Company is under contract to sell an asset, it will mark the asset to the
contracted sales price less costs to sell. The Company considers this to
be a Level 2 input under the fair value hierarchy.
Loans receivable and other lending investments – The Company
estimates the fair value of its performing loans and other lending
investments using a discounted cash flow methodology. This method
discounts estimated future cash flows using rates management deter-
mines best reflect current market interest rates that would be offered
for loans with similar characteristics and credit quality. The Company
determined that the significant inputs used to value its loans and other
lending investments fall within Level 3 of the fair value hierarchy. For
certain lending investments, the Company uses market quotes, to the
extent they are available, or broker quotes that fall within Level 2 of the
fair value hierarchy.
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 sec-
ondary markets, the Company determines fair value using a discounted
cash flow methodology, whereby contractual cash flows are discounted
at rates that management determines best reflect current market inter-
est rates that would be charged for debt with similar characteristics
and credit quality. The Company has determined that the inputs used to
value its debt obligations under the discounted cash flow methodology
fall within Level 3 of the fair value hierarchy.
Note 15 – Segment Reporting
The Company has determined that it has four reportable seg-
ments based on how management reviews and manages its business.
These reportable segments include: Real Estate Finance, Net Lease,
Operating Properties and Land. The Real Estate Finance segment
includes all of the Company’s activities related to senior and mezzanine
real estate loans and real estate related securities. The Net Lease seg-
ment includes all of the Company’s activities related to the ownership
and leasing of corporate facilities. The Operating Properties segment
includes all of the Company’s activities and operations related to its
commercial and residential properties. The Land segment includes the
Company’s activities related to its developable land portfolio.
71
Derivatives – The Company uses interest rate swaps, inter-
est rate caps and foreign exchange contracts to manage its interest
rate and foreign currency risk. The valuation of these instruments is
determined using discounted cash flow analysis on the expected cash
flows of each derivative. This analysis reflects 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 incorporates credit valuation
adjustments to appropriately reflect 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 col-
lateral postings, thresholds, mutual puts and guarantees. In addition,
upon adoption of ASU 2011-04, the Company made an accounting policy
election to measure derivative financial instruments subject to master
netting agreements on a net basis. The Company has determined that
the significant inputs used to value its derivatives fall within Level 2 of
the fair value hierarchy.
Impaired loans – The Company’s loans identified as being
impaired are nearly all collateral dependent loans and are evaluated
for impairment by comparing the estimated fair value of the underly-
ing collateral, 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 a discounted cash flow methodol-
ogy through internally developed valuation models to estimate the fair
value of the collateral. This approach requires the Company to make
judgments in respect to significant unobservable inputs, which may
include discount rates, capitalization rates and the timing and amounts
of estimated future cash flows. For income producing properties, cash
flows generally include property revenues, operating costs and capital
expenditures that are based on current observable market rates and
estimates for market rate growth and occupancy levels. For other real
estate, cash flows may include lot and unit sales that are based on cur-
rent observable market rates and estimates for annual revenue growth,
operating costs and costs of completion and the remaining inventory
sell out periods. The Company will also consider market comparables
if available. In more limited cases, the Company obtains external “as is”
appraisals for loan collateral, generally when third party participations
exist, and appraised values may be discounted when real estate markets
rapidly deteriorate. The Company has determined that significant inputs
used in its internal valuation models and appraisals fall within Level 3 of
the fair value hierarchy.
Impaired real estate – If the Company determines a real estate
asset available and held for sale is impaired, it records an impairment
charge to adjust the asset to its estimated fair market value less costs to
sell. Due to the nature of individual real estate properties, the Company
generally uses a discounted cash flow methodology through internally
developed valuation models to estimate the fair value of the assets. This
approach requires the Company to make judgments with respect to
significant unobservable inputs, which may include discount rates, capi-
talization rates and the timing and amounts of estimated future cash
flows. For income producing properties, cash flows generally include
property revenues, operating costs and capital expenditures that are
based on current observable market rates and estimates for market
rate growth and occupancy levels. For other real estate, cash flows may
The Company evaluates performance based on the following financial measures for each segment. The Company’s segment information
is as follows ($ in thousands):
For the Year Ended December 31, 2013
Operating lease income
Interest income
Other income
Total revenue
Earnings (loss) from equity method investments
Income from sales of residential property
Net operating income from discontinued operations(2)
Gain from discontinued operations
Revenue and other earnings
Real estate expense
Other expense
Allocated interest expense(2)
Allocated general and administrative(3)
Segment profit (loss)(4)
Other significant non- cash items:
Provision for loan losses
Impairment of assets(2)
Loss on transfer of interest to
unconsolidated subsidiary
Depreciation and amortization(2)
Capitalized expenditures
As of December 31, 2013
Real estate
72
Real estate, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale
Total real estate
Loans receivable and other lending investments, net
Other investments
Total portfolio assets
Cash and other assets
Total assets
$
$
$
$
$
$
$
$
Real Estate
Finance
–
$
Net Lease
$ 147,313
108,015
4,748
–
250
$ 112,763 $ 147,563
2,699
–
1,484
3,395
$ 112,763 $ 155,141
–
–
–
–
–
(1,625)
(74,377)
(13,186)
(22,565)
–
(80,034)
(14,330)
$ 23,575 $ 38,212
Operating
Properties
$ 86,352
–
38,164
$ 124,516
5,546
82,603
1,251
18,838
$ 232,754
(101,044)
–
(49,114)
(9,189)
$ 73,407
$
Land
902
–
1,474
$ 2,376
(5,331)
4,055
–
–
$ 1,100
(33,832)
–
(30,368)
(12,365)
$ (75,465)
Corporate/
$
38,606
3,572
Other(1)
–
–
Company
Total
$ 234,567
108,015
48,208
$ 3,572 $ 390,790
41,520
86,658
2,735
22,233
$ 42,178 $ 543,936
(157,441)
(8,050)
(266,225)
(72,853)
$ 39,367
–
(6,425)
(32,332)
(23,783)
$ (20,362)
–
–
–
5,489 $
$
–
–
1,176
$
$ 12,449
–
$
$
–
728
$
$
–
–
$
5,489
$ 14,353
–
$
$ 38,582
$ 34,076
–
$
$ 30,599
$ 41,131
$ 7,373
$ 1,105
$ 36,346
–
$
$
7,373
$ 1,244 $ 71,530
$ 111,553
$
–
$ 1,696,888
(338,640)
$ 1,358,248
–
$ 1,358,248
$ 720,508
(82,420)
$ 638,088
228,328
$ 866,416
$ 803,238
(3,393)
$ 799,845
132,189
$ 932,034
–
1,370,109
–
–
16,408
$ 1,370,109 $ 1,374,656
–
16,032
$ 882,448
29,765
$ 961,799
$
$
$
–
–
–
–
–
–
$ 3,220,634
(424,453)
$ 2,796,181
360,517
$ 3,156,698
1,370,109
207,209
$ 145,004 $ 4,734,016
907,995
$ 5,642,011
145,004
–
–
–
–
–
–
–
–
For the Year Ended December 31, 2012(5)
Operating lease income
Interest income
Other income
Total revenue
Real Estate
Finance
–
$
133,410
8,613
$ 142,023
Earnings (loss) from equity method investments
Income from sales of residential property
Net operating income from discontinued operations(2)
Gain from discontinued operations
–
–
–
–
Revenue and other earnings
Real estate expense
Other expense
Allocated interest expense(2)
Allocated general and administrative(3)
Segment profit (loss)(4)
Other significant non- cash items:
Provision for loan losses
Impairment of assets(2)
Depreciation and amortization(2)
Capitalized expenditures
As of December 31, 2012
Real estate
Real estate, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale
Total real estate
Loans receivable and other lending investments, net
Other investments
Total portfolio assets
Cash and other assets
Total assets
Net Lease
$ 149,058
–
–
$ 149,058
2,632
–
7,289
27,257
$ 186,236
(23,886)
–
(92,579)
(10,618)
$ 59,153
Operating
Properties
$ 65,706
–
32,615
$ 98,321
25,142
63,472
886
–
$ 187,821
(100,258)
–
(69,259)
(7,572)
$ 10,732
$ 142,023
–
(4,775)
(111,898)
(14,263)
$ 11,087
$ 81,740
$
$
$
–
–
–
–
$
$
6,670
$ 39,250
$ 10,994
–
$
$ 28,501
$ 28,450
$ 51,579
Land
$ 1,527
–
2,635
$ 4,162
(6,138)
–
–
–
$ (1,976)
(27,314)
–
(44,125)
(7,405)
$ (80,820)
–
$
$
205
$ 1,276
$ 20,497
Corporate/
$
Other(1)
–
–
3,975
$ 3,975
81,373
–
–
–
$ 85,348
–
(12,491)
(38,300)
(25,705)
$ 8,852
Company
Total
$ 216,291
133,410
47,838
$ 397,539
103,009
63,472
8,175
27,257
$ 599,452
(151,458)
(17,266)
(356,161)
(65,563)
9,004
$
–
$
$
978
$ 1,810
$
–
$ 81,740
$ 36,354
$ 70,786
$ 83,070
$
$
–
–
–
–
–
$ 1,626,810
(310,605)
$ 1,316,205
–
$ 1,316,205
$ 704,481
(65,409)
$ 639,072
454,587
$ 1,093,659
–
–
$ 786,114
(2,292)
$ 783,822
181,278
$ 965,100
–
$
1,829,985
–
$ 1,829,985
16,380
$ 1,332,585
25,745
$ 1,119,404
5,493
$ 970,593
$
$
–
–
–
–
–
–
351,225
$ 351,225
$
$ 3,117,405
(378,306)
$ 2,739,099
635,865
$ 3,374,964
1,829,985
398,843
$ 5,603,792
556,207
$ 6,159,999
73
For the Year Ended December 31, 2011(5)
Operating lease income
Interest income
Other income
Total revenue
Real Estate
Finance
–
$
226,871
3,176
$ 230,047
Earnings (loss) from equity method investments
Income from sales of residential property
Net operating income from discontinued operations(2)
Gain from discontinued operations
–
–
–
–
Revenue and other earnings
Real estate expense
Other expense
Allocated interest expense(2)
Allocated general and administrative(3)
Segment profit (loss)(4)
Other significant non- cash items:
Provision for loan losses
Impairment of assets(2)
Depreciation and amortization(2)
Capitalized expenditures
Explanatory Notes:
$ 230,047
–
(2,866)
(156,163)
(19,934)
$ 51,084
$ 46,412
$
$
$
–
–
–
Net Lease
$ 144,548
Operating
Properties
$ 51,153
$
–
–
$ 144,548
2,566
–
14,135
25,110
$ 186,359
(25,054)
–
(75,844)
(9,681)
$ 75,780
–
$
$
668
$ 42,080
$ 8,699
–
32,538
$ 83,691
(626)
5,721
(937)
–
$ 87,849
(92,012)
–
(52,774)
(6,737)
$ (63,674)
–
$
$ 21,030
$ 18,169
$ 38,477
Land
171
–
1,637
$ 1,808
(7,213)
–
–
–
$ (5,405)
(21,648)
–
(40,480)
(6,959)
$ (74,492)
–
$
$
(184)
$ 1,534
$ 16,993
Corporate/
$
Other(1)
–
–
2,371
$ 2,371
100,364
–
–
–
$ 102,735
–
(8,204)
(20,653)
(32,026)
$ 41,852
Company
Total
$ 195,872
226,871
39,722
$ 462,465
95,091
5,721
13,198
25,110
$ 601,585
(138,714)
(11,070)
(345,914)
(75,337)
$ 30,550
–
$
$
872
$ 2,145
$
–
$ 46,412
$ 22,386
$ 63,928
$ 64,169
(1) Corporate/Other represents all corporate level and unallocated items including any intercompany eliminations necessary to reconcile to consolidated Company totals. This caption
also includes the Company’s joint venture investments and strategic investments that are not related to the other reportable segments above, including the Company’s equity invest-
ment in LNR of $205.8 million as of December 31, 2012 and the Company’s share of equity in earnings from LNR of $16.5 million, $60.7 million and $53.9 million for the years ended
December 31, 2013, 2012 and 2011, respectively. See Note 6 for further details on the Company’s investment in LNR and summarized financial information of LNR.
Includes related amounts reclassified to discontinued operations on the Company’s Consolidated Statements of Operations.
(2)
(3) General and administrative excludes stock- based compensation expense of $19.3 million, $15.3 million and $29.7 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
(4) The following is a reconciliation of segment profit (loss) to net income (loss) ($ in thousands):
74
For the Years Ended December 31,
Segment profit (loss)
Less: Provision for loan losses
Less: Impairment of assets(2)
Less: Loss on transfer of interest to unconsolidated subsidiary
Less: Stock- based compensation expense
Less: Depreciation and amortization(2)
Less: Income tax (expense) benefit(2)
Add: Gain (loss) on early extinguishment of debt, net
Net income (loss)
2013
$ 39,367
(5,489)
(14,353)
(7,373)
(19,261)
(71,530)
596
(33,190)
$ (111,233)
2012
9,004
$
(81,740)
(36,354)
–
(15,293)
(70,786)
(8,445)
(37,816)
$ (241,430)
2011
$ 30,550
(46,412)
(22,386)
–
(29,702)
(63,928)
4,719
101,466
$ (25,693)
(5) The prior periods’ presentation have been conformed for the change in the methodology of allocating interest expense and general and administrative expenses to each seg-
ment based on gross carrying value of assets. The allocation was previously based on carrying value of assets net of accumulated depreciation and amortization and general loan
loss reserves.
Note 16 – Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for the Company ($ in thousands, except per share amounts).
For the Quarters Ended
2013:
Revenue(1)
Net income (loss)
Earnings per common share data:
December 31,
September 30,
June 30,
March 31,
$ 101,073
$ (45,992)
$ 95,696
$ (18,590)
$ 99,919
$ (14,398)
$ 94,102
$ (32,253)
Net income (loss) attributable to iStar Financial Inc.
Basic and diluted earnings per share
Weighted average number of common shares – basic and diluted
$ (47,043)
(0.68)
$
84,617
$ (18,757)
(0.36)
$
85,392
$ (14,087)
(0.31)
$
85,125
$ (32,064)
(0.49)
$
84,824
Earnings per HPU share data:
Net income (loss) attributable to iStar Financial Inc.
Basic and diluted earnings per share
Weighted average number of HPU shares – basic and diluted
2012(2):
Revenue(1)
Net income (loss)
Earnings per common share data:
$ (1,939)
$ (129.26)
$ (1,016)
$ (67.73)
$
(866)
$ (57.74)
15
15
15
$ (1,381)
$ (92.07)
15
$ 96,421
$ (79,948)
$ 93,462
$ (64,306)
$ 106,886
$ (51,129)
$ 100,770
$ (46,048)
Net income (loss) attributable to iStar Financial Inc.
Basic and diluted earnings per share
Weighted average number of common shares – basic and diluted
$ (79,810)
(1.04)
$
83,674
$ (63,640)
(0.86)
$
83,629
$ (50,407)
(0.70)
$
84,113
$ (46,073)
(0.66)
$
83,556
Earnings per HPU share data:
Net income (loss) attributable to iStar Financial Inc.
Basic and diluted earnings per share
Weighted average number of HPU shares – basic and diluted
$
(2,966)
$ (197.73)
15
$
(2,436)
$ (162.40)
$
(1,991)
$ (132.73)
15
15
$
(1,861)
$ (124.07)
15
Explanatory Notes:
(1) All periods have been adjusted to reflect the impact of properties sold during 2013 and 2012 and properties classified as held for sale as of December 31, 2013, which are reflected in
“Income (loss) from discontinued operations” on the Consolidated Statements of Operations.
(2) During the quarter ended December 31, 2012, the Company recorded a loss on early extinguishment of debt of $31.0 million primarily related to a prepayment penalty on the early
repayment of 8.625% Senior Notes, as well as a loss due to the acceleration of unamortized fees and discounts related to the refinancing of the 2011 Secured Credit Facilities (see
Note 8). The Company also recorded $27.9 million related to Income from sales of residential property. During the quarter ended March 31, 2012, the Madison Funds recorded a signifi-
cant gain related to the sale of an investment for which the Company recorded its $13.7 million proportionate share.
75
Note 17 – Subsequent Events
Performance Graph
In February 2014, the Company partnered with a sovereign
wealth fund to form a venture in which the partners plan to contribute
up to an aggregate $500 million of equity to acquire and develop up to
$1.25 billion of net lease assets over time. The Company owns approxi-
mately 52% of the venture and will be responsible for sourcing new
opportunities and managing the venture and its assets in exchange for
a promote and management fee. The venture’s first investment was
acquired by the Company for $93.6 million during 2013 and was subse-
quently sold to the venture.
The following graph compares the total cumulative share-
holder returns on our Common Stock from December 31, 2008 to
December 31, 2013 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”).
$635.82
$348.43
$363.13
$235.70
$100.0
$114.80
$146.97
$150.05
$127.72
$117.15
$131.36
$108.95
$230.39
$194.39
$174.04
$140.26
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
iStar Financial
S&P 500
S&P 500 Financials
76
S&P 500 Financials
S&P 500
SFI
SFI
S&P 500
S&P 500 Fin
100
100
100
114.80
127.72
117.15
348.43
146.97
131.36
235.70
150.05
108.95
363.13
174.04
140.26
635.82
230.39
194.39
COMMON STOCK PRICE AND DIVIDENDS (UNAUDITED)
Beginning December 19, 2013, the Company’s Common Stock
trades on the New York Stock Exchange (“NYSE”) under the symbol
“STAR.” Prior to that date, the Company’s Common Stock previously
traded under the symbol “SFI.” The high and low sales prices per share
of Common Stock are set forth below for the periods indicated.
Quarter Ended
December 31
September 30
June 30
March 31
2013
2012
High
$14.65
$12.25
$12.55
$11.00
Low
$11.57
$10.20
$ 9.99
$ 8.26
High
$9.09
$8.82
$7.52
$7.89
Low
$7.12
$6.39
$5.37
$5.43
On February 21, 2014, the closing sale price of the Common
Stock as reported by the NYSE was $15.69. The Company had 2,281
holders of record of Common Stock as of February 21, 2014.
At December 31, 2013, the Company had six 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, 7.50% Series I Preferred Stock and 4.50% Series
J Preferred Stock. Each of the Series D, E, F, G and I preferred stock
is listed on the NYSE. The Series J Preferred Stock is not listed on
an exchange.
Dividends
The Board of Directors has not established any minimum
distribution level. In order to maintain its qualification 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 accordance with GAAP),
determined without regard to the deduction for dividends paid and
excluding any net capital gains. The Company has recorded net oper-
ating losses and may record 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 qualification.
Holders of Common Stock, vested High Performance Units
and certain unvested restricted stock units and common share equiva-
lents 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 outstanding. In addition, the
Company’s Secured Credit Facilities (see Note 8 of the Notes to the
Consolidated Financial Statements) permit the Company to distrib-
ute 100% of its REIT taxable income on an annual basis, for so long as
the Company maintains its qualification as a REIT. The Secured Credit
Facilities generally restrict the Company from paying any common divi-
dends if it ceases to qualify as a REIT. In any liquidation, dissolution or
winding up of the Company, each outstanding share of Common Stock
and HPU share equivalent 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 Company did not declare or pay dividends on its Common
Stock for the years ended December 31, 2013 and 2012. The Company
declared and paid dividends of $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, during each of the years ended December 31, 2013 and
2012. During the year ended December 31, 2013, the Company also
declared and paid dividends of $6.7 million on its Series J preferred
stock, which was issued in March 2013. All of the dividends qualified
as return of capital for tax reporting purposes. There are no dividend
arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as
ordinary income, although all or a portion of such distributions may
be designated 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.
77
No assurance can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company’s
taxable income after giving effect to its net operating loss carryforwards,
financial condition, capital requirements, debt covenants, any change
in the Company’s intention to maintain its REIT qualification and such
other factors as the Company’s Board of Directors deems relevant. The
Company may elect to satisfy some of its REIT distribution requirements,
if any, through qualifying stock dividends.
DIRECTORS AND OFFICERS
DIRECTORS
Jay Sugarman
Chairman & Chief Executive Officer,
iStar Financial Inc.
Robert W. Holman, Jr. (1) (2) (4)
Chairman & Chief Executive Officer,
National Warehouse
Investment Company
Robin Josephs (2) (4)
Lead Director, iStar Financial Inc.
John G. McDonald (2) (3) (4)
Stanford Investors Professor,
Stanford University Graduate School
of Business
Dale Anne Reiss (1) (3)
Senior Consultant,
Global Real Estate Center
Global & Americas Director of Real
Estate, Ernst & Young, LLP (Retired)
Barry W. Ridings (1) (2) (3)
Vice Chairman of
US Investment Banking
Lazard Freres & Co. LLC
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating & Governance Committee
EXECUTIVE OFFICERS
Jay Sugarman
Chairman &
Chief Executive Officer
Nina B. Matis
Executive Vice President,
Chief Investment Officer &
Chief Legal Officer
David M. DiStaso
Chief Financial Officer
EXECUTIVE VICE PRESIDENTS
Chase S. Curtis, Jr.
Credit
Karl Frey
Land
Barclay G. Jones III
Investments
Michelle M. MacKay
Investments / Head of
Capital Markets
Steven Magee
Land
Barbara Rubin
iStar Asset Services, Inc.
Vernon B. Schwartz
Investments
78
LETTER FROM
THE CHAIRMAN
02
LOOK BACK
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04
CORPORATE INFORMATION
HEADQUARTERS
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
525 West Monroe Street
Suite 1900
Chicago, IL 60661
Tel: 312.577.8549
Fax: 312.612.4162
One Galleria Tower
13727 Noel Road
Suite 150
Dallas, TX 75240
Tel: 972.506.3131
Fax: 972.646.6398
180 Glastonbury Boulevard
Suite 201
Glastonbury, CT 06033
Tel: 860.815.5900
Fax: 860.815.5901
1777 Ala Moana Boulevard
Suite 142-33
Honolulu, HI 96815
Tel: 212.405.4537
Fax: 808.944.6322
10960 Wilshire Boulevard
Suite 1260
Los Angeles, CA 90024
Tel: 310.315.7019
Fax: 310.315.7017
4350 Von Karman Avenue
Suite 225
Newport Beach, CA 92660
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
EMPLOYEES
INVESTOR INFORMATION SERVICES
As of January 31, 2014,
the Company had 175 employees.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
New York, NY
REGISTRAR AND TRANSFER AGENT
Computershare Trust
Company, NA
PO Box 43078
Providence, RI 02940-3078
Tel: 800.756.8200
www.computershare.com
ANNUAL MEETING OF SHAREHOLDERS
May 22, 2014, 9:00 a.m. ET
Sofitel Hotel
45 West 44th Street, 2nd Floor
New York, NY 10036
iStar Financial is a listed company on
the New York Stock Exchange and is
traded under the ticker “STAR.” The
Company has filed all required Annual
Chief Executive Officer Certifications
with the NYSE. In addition, the
Company has filed with the SEC the
certifications 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 questions about
the Company, or to receive additional
corporate information, please contact:
INVESTOR RELATIONS
Jason Fooks
Vice President
Investor Relations & Marketing
1114 Avenue of the Americas
New York, NY 10036
Tel: 212.930.9484
Email:
investors@istarfinancial.com
iStar Financial Website:
www.istarfinancial.com
FINANCIALS
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iStar Financial Annual Report 2013
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